SIE Unit 3
An investor owns 300 shares of a Silicon Valley high tech firm whose shares are quoted on the Nasdaq Stock Market. A month prior to the company's annual meeting, the broker-dealer holding the stock in street name forwarded the voting proxy to the client. As it happens, the investor had to be at a business meeting in San Francisco that ended the day before the annual meeting. If the investor took advantage of the proximity to attend the meeting
the voting proxy would be revoked and only the vote at the meeting would count -A proxy is automatically revoked if the stockholder attends the shareholder meeting and votes.
A 73-year old client in the 25% income tax bracket withdraws $20,000 from her traditional IRA. Based on her life expectancy, the withdrawal should have been $30,000. How much tax will she owe?
$10,000 -Failure to meet the required minimum distribution results in a 50% penalty tax on the shortfall. In this case, she took $20,000 when she should have taken $30,000 so there will be a 50% tax on the $10,000 difference ($5000 penalty tax). In addition to that $5,000 penalty tax, the ordinary income tax on the amount withdrawn must also be paid (25% × $20,000 = $5,000). Total tax liability on the withdrawal equals $10,000 ($5,000 penalty tax plus $5,000 ordinary income tax).
A new client of the member firm has just opened a margin account. After account approval, the client's initial trade is an order to purchase 100 shares of LMN common stock at $25. With Regulation T at 50%, in order to be in compliance with all regulations, the client would need to deposit
$2,000 -No borrowing can take place in a margin account without at least $2,000 in equity. It is only necessary to pay in full when the purchase is less than $2,000. It is only necessary to deposit more than $2,000 when the trade exceeds $4,000.
A client and his spouse own shares in the KAPCO Fund as tenants in common. He has a 60% ownership interest in the account and the spouse has the balance. If the client dies, what happens to the shares in the account?
40% of the shares would belong to his spouse and the remaining balance would be distributed to his estate -In a TIC account, securities owned by the decedent pass to the deceased owner's estate—in this case, 60% of the assets. The 40% belonging to the spouse is retained by the spouse.
A client entering a sell limit order at 43 would accept which of the following trades?
44 -A sell limit at 43 means the investor will only accept a price of 43 or better (higher). Certainly, if you are willing to sell at 43, you're even happier to receive 44.
An investor has her registered representative enter a sell stop limit order at 50. Following the order entry, trades occur at 52, 50, 49, 51, and 53. The investor would receive
51 -This is really 2 orders. The first is to "stop" at 50. That is, once the stock trades at 50 or lower, the order is elected (triggered) and becomes a live working order. That order is to sell at 50 or better. Therefore, the first time the stock hits 50 (or less), is the trade at 50. That triggers the sell limit order to sell at 50 or better. The next trade is at 49 and that is not an acceptable price given we have a limit order at 50. The following price however at 51, is the next acceptable price after the order is triggered and that is where the order would be executed.
Alan and Barbara Collins have three minor children; Dan, Ellen, and Frank. Which of the following UTMA accounts could be opened?
Barbara Collins as custodian for Ellen Collins -In an UTMA account, one adult is custodian for one minor. There is no such thing as joint custodians or joint beneficiaries.
Regarding the dividend disbursement process, there are 4 dates of consequence. There are 3 that are determined by the issuing corporation's board of directors. Which is the one determined by FINRA or the exchange that the security trades on?
Ex-dividend date -The declaration, record, and payment dates are determined by the board of directors (BOD). FINRA or the exchange determines the ex-dividend date.
Which of the following would be likely to be a red flag leading to the generation of an exception report? I.activity in the account of a deceased person II.a street address matching a city or zip code provided III.a trade for 300 shares when the customer ordered 200 IV.receipt of a written complaint from a customer
I and III -Deceased persons do not trade so seeing a trade in that account would raise a red flag. A trade for an amount in excess of the customer's order is an improper activity and would need to be investigated. It is only when the numbers on the address don't match that we have a red flag. A single complaint would not generate an exception report; it is excessive complaints that would lead to initiation of investigation.
A customer of a broker-dealer sells 300 shares of stock at $50 per share and leaves the proceeds in the account. This would be considered I.a free credit balance II.a debit balance III.available to the customer on demand IV.funds that must be reinvested within 30 days
I and III -Proceeds from a sale that are not reinvested and held in the account at the broker-dealer are considered a free credit balance. The "free" means that the funds are available to the customer on demand (freely available).
Features of the Roth IRA include I.there are no minimum required distributions after age 70½ with a Roth IRA II.higher contribution limits to a Roth IRA than to a traditional IRA III.withdrawal of earnings in the Roth IRA may be made without any taxation as long as a Roth IRA has been open for a minimum of one years and the participant is age 59 IV.the ability to contribute to both a Roth IRA and a traditional IRA
I and IV -One of the primary benefits to the Roth IRA is that reaching age 70½ does not trigger the required minimum distributions found in other retirement plans. Probably the biggest benefit is that all earnings grow tax-deferred, and may be withdrawn free of any tax, as long as there has been an open Roth IRA for at least 5 years AND the participant is at least 59½. One may contribute to both types of IRA, but the combined contribution may not exceed that annual maximum for a single plan.
An investor receives a quote of 32—32.15 for XYZ common stock. This means that I.purchasing the stock will cost $32 per share II.purchasing the stock will cost $32.15 per share III.the spread is $.15 IV.the investor will receive $32.15 per share if selling
II and III -A quote always represents the bid and the ask (offer) price. Investors pay the current ask price when purchasing and receive the current bid price when selling. The spread is the difference between the bid and the ask.
A client phones his registered representative in September and informs the rep that he will studying abroad in Europe for the balance of the year. The client wants the firm to hold his mail. What action should the rep take?
The rep must instruct the client that the request must be made in writing. -FINRA rules require that all requests to hold mail must be made through written instructions from the customer. The instruction must include the time period during which the mail hold is requested. If the requested time period included in the instructions is longer than three consecutive months), the customer's instructions must include an acceptable reason for the request (e.g., safety or security concerns).
Encouraging a customer to purchase mutual fund shares in an amount just under the next dollar volume bracket (which entitles the customer to a reduction in sales charges) or remaining silent on the matter is called
a breakpoint sale - In a breakpoint sale, a customer unknowingly buys investment company shares in an amount just under a dollar bracket that would qualify for reduced sales charges. As a result, the registered representative receives a somewhat higher commission but the customer pays higher sales charges, reducing the number of shares purchased and resulting in a higher cost per share.
RJN common stock is currently listed on the New York Stock Exchange. Poor operating results over the past several years have led to a sharp decline in RJN's stock price putting the company at risk for failing to meet the minimum price requirements to remain listed on the NYSE. The most likely corporate action to be taken to preserve the listing would be
a reverse split -Reverse splits are a favored way of increasing a company's share price. If, for example, the stock price had fallen to $2 per share, a 1 for 10 reverse split would immediately increase the stock's price to approximately $20 per share, a much more respectable amount. Of course, there would be no real change in total value to the shareholders because now they would own 1/10th as many shares with a value 10 times per share greater.
A company's board of directors has voted to divest of all shares of a subsidiary to create a new company. This is a type of corporate action best characterized as
a spinoff -A type of divestiture where a parent company sells all of the shares of a subsidiary or distributes new shares of a company or division it owns to create a new company is known as a spinoff.
A customer has an account with a broker-dealer who provides a group of services, such as asset allocation, portfolio management, trade executions, and administration, for a single fee. This is known as
a wrap account - Wrap accounts are accounts for which firms provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee rather than charging commissions for individual transactions. Wrap accounts are generally investment advisory accounts and can be cash accounts, margin accounts, discretionary accounts, or nondiscretionary accounts.
There are rules regarding customer statements. All of the following statements reflect those rules EXCEPT
activity limited to stock splits or stock dividends only do not require monthly statements be sent -Any activity in an account such as purchases and sales, dividends and interest, and stock splits and stock dividends will trigger the requirement to send a monthly statement. If there is no activity, statements are only required quarterly, unless the account contains penny stocks in which case a statement is required for any month penny stocks are in the account. All statements sent require notice that inaccurate information be reported promptly.
Some securities are sold without a physical certificate. In those instances, evidence of ownership is kept on record at a central agency. One example of those securities would be
all government securities issued by the U.S. Treasury -While paper certificates evidencing ownership can still exist for many different types of securities, all government securities issued by the U.S. Treasury are issued in book-entry form, meaning that no physical securities (paper certificates) exist.
Persons who enter trades at or near the same time in the same security as a person who has inside information are known as
contemporaneous traders -The simple definition of contemporaneous is: existing, occurring, or originating during the same time. Contemporaneous traders may sue persons that have violated insider trading regulations, and suits may be initiated up to five years after the violation has occurred.
Issuers are not required by the Securities Exchange Commission (SEC) to give notice of corporate actions to shareholders for such actions as
interest on the issuer's bonds - Because the payment of bond interest is an obligation of a stated amount (the coupon rate) on a stated date (the 2 semi-annual payment dates), notice to the markets is not required. Reverse splits and warrants are not regular happenings and, even though some companies have paid regular quarterly dividends for more than 100 years, those dividends can vary in amount or could be halted and therefore require notification to the marketplace.
A registered representative handling a fiduciary account must be aware of the fact that
investment decisions must be made in accordance with the prudent investor rule - The Uniform Prudent Investor Act of 1994 (UPIA) spells out most of the requirements for handling fiduciary accounts. Speculative positions, such as selling short or writing uncovered call options, are almost always prohibited. Margin trading is only permitted if the fiduciary can produce documentation giving evidence that such is authorized. Fiduciaries may charge a reasonable fee for their services, but may not be compensated as a share of the profits.
A suspicious activity report would probably be triggered if the broker-dealer suspects that a transaction involves funds derived from illegal activity and
involves at least $5,000 in funds or other assets - The triggering amount for a suspicious activity report (SAR) is at least $5,000. Do not confuse this with a currency transaction report (CTR) which is triggered by an amount greater than $10,000.
A client of a member broker-dealer has just found a new job requiring relocation with a salary paying 50% more than the old job. The client should
notify the broker-dealer of the change within 30 days -When there are significant changes to the client's status, such as this type of change to employment, the client should notify the firm within 30 days.
Which of the following is considered a standard corporate action where adjustments made to cost basis for outstanding shares are standardized?
Stock split -The most common corporate actions—dividend declarations (both cash and stock), stock splits (both forward and reverse), and the issuance of rights and warrants—are standardized regarding any adjustments to cost basis for outstanding shares. Some corporate actions are unique, and thus standardized adjustments would not be applicable. These would include, but not be limited to, the following: mergers and acquisitions (M&A), takeovers, spinoffs, tender offers, and buybacks.
A broker-dealer may extend credit under Reg. T for which of the following transactions?
A Closed-end investment company purchased on the NYSE - Reg. T governs customer payment and the extension of credit to clients in margin accounts. A closed-end fund is an existing listed security and is eligible for purchase on credit. IPOs and other new issues such as mutual fund purchases may only receive loan value (and credit) after 30 days from issuance. Variable annuity may not be purchased with margined funds. These products are hybrid insurance/investment contracts that must be fully funded at time of purchase.
An investor has a long position in ABC Chemical Corp. (ABCCC) with a substantial unrealized loss. Wishing to use that loss to offset realized gains, the investor sells the stock. In reinvesting the proceeds of the sale, the investor could avoid violating the wash sale rule by purchasing
ABCCC put options -In order to avoid violations of the wash sale rule, investors selling a stock at a loss cannot purchase that same, or substantially identical, security within a 30 day period prior to or following the sale incurring the loss. Substantially identical would include anything that is exercisable or convertible into the same shares of stock; rights, warrants, call options, or a convertible bond. Note that when put options are exercised the owner now has the right to sell the stock, not purchase it. Therefore buying puts in no way violates the wash-sale rule.
A customer was charged a $35 commission on a recent stock trade. The firm acted in what capacity on this transaction?
Agency -A firm that acts as a broker (agent) is acting as a middleman (agent) to help its client execute a trade. If a client wants to buy, the firm will try to find a willing seller. On the other hand, if a client wants to sell, the firm will try to find willing buyer. If successful in finding a match, the broker dealer earns a commission for its efforts. If no match can be found, and a trade is not executed, no commission is earned. The commission is a separate dollar amount that must be noted on the client's confirmation.
An investor purchased 100 shares of MJS on June 19, 2015 at a price of $40 per share. On June 1, 2016, MJS declared a 25% stock dividend. On July 1, 2016, the investor sold 50 shares of the MJS at $50 per share. Which of the following statements are correct? I.The adjusted cost basis of the shares is $30 II.The adjusted cost basis of the shares is $32 III.There is a short-term capital gain on 25 shares, long-term gain on the other 25 shares IV.There is a long-term capital gain on all of the shares sold
II and IV - When a company declares a stock dividend, the cost basis per share is always reduced. The computation is the original total cost ($4,000) divided by the new number of shares. 100 × .25 = 25 additional shares for a total of 125. $4000 / 125 shares equals a new cost basis per share of $32. When any of the shares are sold, including those received in the stock dividend, the holding period for capital gain or loss, is always the original purchase date. In this case, that was more than 12 months ago so any gains are long-term.
Many investors like to put a "transfer on death" (TOD) designation on their brokerage accounts. Among the benefits of doing so are I.the TOD designation avoids estate taxes II.the TOD designation avoids probate III.the account holder is relieved of decision making in the account IV.flexibility to change beneficiaries as conditions dictate
II and IV -The transfer on death (TOD) designation allows the account holder to name a specific beneficiary (or beneficiaries) to receive the account's assets upon death. Those named persons may be changed whenever the account holder wishes. Although this bypasses probate, it does not avoid estate taxes. TOD has nothing to do with giving investment discretion.
