SIE FINAL EXAM 01
All of the following persons are permitted to be named as a trusted contact person for a senior investor, EXCEPT:
A law firm To be a trusted contact person for a senior investor, the only requirements are that the person must be a natural person (not a law firm) and be at least 18 years old.
A 529A or ABLE account is permitted for which of the following persons?
A person who has a significant disability Similar to 529 college savings plans, 529 ABLE (or simply referred to as 529A) accounts are savings accounts that are created and administered by states under the Achieving a Better Life Experience (ABLE) Act. These accounts are designed to supplement the support of persons who are disabled or who meet the government's definition of disabled and are receiving Social Security disability, Medicaid, or private insurance payments.
If a broker-dealer's trading desks purchases a large block of stock during the last minutes of trading in an effort to drive up the price, it is:
A prohibited practice that's referred to as marking-the-close The execution of a series of trades at or near the opening or closing of trading in an effort to influence the price of a security is a form of manipulation that's referred to as marking-the-opening or marking-the-close. Traders can execute customer orders or change the amount of securities they own to have securities available for customers; however, buying or selling the security to influence its price is considered manipulative.
When a broker-dealer sells a security to a client and charges a commission on the transaction, it is acting as the client's:
Agent A broker-dealer that buys securities from or sells securities to a client without owning the securities is acting as the client's agent or broker. The broker-dealer does not have any risk and the client pays a commission on this type of transaction. When acting in a principal capacity, the client is charged a markup or markdown.
Government-sponsored enterprise securities are comparable to direct government obligations with regard to all of the following statements, EXCEPT:
All are government guaranteed Government-sponsored enterprise securities are not guaranteed by the government. The other statements are true.
A French company would like to have its stock traded in the U.S. securities markets. This would most likely be accomplished through the issuance of:
American Depositary Receipts American Depositary Receipts (ADRs) facilitate U.S. investment in foreign securities. The foreign securities are deposited in a branch of a U.S. bank located in that country. A receipt for those securities is then issued and traded in the U.S. as if it were the foreign security itself. A Global Depository Receipt (GDR) is incorrect because it trades in foreign markets, not in the U.S.
Which of the following may NOT occur during the waiting period of the securities registration process?
An RR accepts a cash deposit for the offering from an interested customer During the waiting period (cooling-off-period), RRs may send customers the preliminary prospectus (red herring), discuss the issue with them, and accept (nonbinding) indications of interest. However, no part of the purchase price can be accepted until on or after the effective date.
Which of the following transactions involving a registered representative (RR) is a violation of industry rules that FINRA established regarding private securities transactions?
An RR selling securities in private transactions without the supervision and prior written consent of her employing broker-dealer - Selling away is a violation that occurs when a registered representative (RR) engages in a securities transaction that's outside of her regular duties and without her FINRA member firm's consent. Guaranteeing a customer from losses is prohibited, but doesn't involve private securities transactions. - Speculative investments made in outside brokerage accounts are permitted as long as the RR has her firm's permission to open the outside account. - Splitting commissions is also permitted if the RRs who are splitting commissions are registered with the same broker-dealer.
Which of the following is classified as a joint account?
An account shared between two brothers. In a joint account, all participants are considered part owners of the account.
A husband and wife have combined earnings of greater than $300,000 in each of the last two years. If it's reasonably expected that this level of income will remain the same, the couple is considered:
An accredited investor - Accredited investors have a net worth of $1 million (excluding their primary residence) or annual income of $200,000 in each of the last two years. For married couples to be considered an accredited investor, they need to have income of at least $300,000. - A qualified institutional buyer (QIB) must be institution with $100 million in assets under management (AUM), but is NOT a natural person.
In which of the following funds is the percentage that's invested in each of the various asset categories adjusted as financial markets change?
An asset allocation fund Asset allocation funds hold diversified portfolios of stocks, bonds, and money-market instruments. The percentage of the portfolio invested in each of these categories is shifted by the fund manager from time to time, often according to computer models.
A company has announced a tender offer for its shares at $50. The issuer wants to purchase a minimum of 100,000 shares, up to a maximum of 1,000,000 shares. If 80,000 shares are tendered, how much will an investor receive if he has tendered 1,000 shares?
$0 Since the tender offer has a minimum of 100,000 shares and only 80,000 shares have been tendered by investors (i.e., put up for sale), the company will not buy any shares. If the tender had crossed over the minimum of 100,000, then the investor would have tendered all of his shares and received $50,000. If the tender had gone over the maximum, the investor's tender would be filled on a pro-rata basis.
A Treasury bond is quoted 105.04 - 105.24. The purchase price that a customer would expect to pay would be:
$1,057.50 U.S. Treasury notes and bonds are quoted in 32nds of a point. When purchasing the bond, the customer would pay the offering price of 105.24. To convert 105.24 into a dollar price: Step 1: 105.24 is equal to 105 24/32 Step 2: convert 24/32 into a decimal, which is .75 Step 3: convert 105.75% into a dollar price (105.75% x $1,000 = 1.0575 x $1,000 = $1,057.50) The customer would pay $1,057.50.
ABC Corporation's Quarterly Dividend Dividend: $0.15 Declaration Date: 3rd Ex-dividend Date: 27th Record date: 28th Payment date: 31st Based on the information above, if a customer purchased 1,000 shares on the 25th, what's the cash amount of dividends she receives?
$150 Since the investor purchased the shares on the 25th, which is before the ex-dividend date of the 27th, she will be an owner of record and receive the dividend. The company is paying $0.15 per share and the investor owns 1,000 shares; therefore, she will receive $150 in dividends ($0.15 x 1,000 shares)
A 5% $1,000 par value bond sells at $900 and matures in 10 years. What is the amount of each interest payment?
$25 Bonds pay interest every six months (semiannually). The dollar amount of interest payments is computed as a percentage of the par value. In this example, the coupon rate is 5%. The annual interest payment is $50 (5% of $1,000 par value). Each interest payment is one-half of that amount, or $25.00.
A U.S. Treasury bond is selling in the market at 95.18. The dollar value of this bond is:
$955.62 U.S. Treasury bonds are quoted in full points and 32nds of a point. A T-bond quote of 95.18 represents 95 18/32. By converting the fraction to a decimal, the quote becomes 95.5625 percent of the par value of $1,000. $1,000 x 95.5625% = $955.62.
A U.S. government bond is selling in the market at 95.28. The dollar value of this bond is:
$958.75 U.S. government bonds are quoted as a percentage of par with a fraction in 32nds of a point. Therefore, a T-bond quoted at 95.28 is equal to 95 28/32. By converting the fraction to a decimal, the quote becomes which is 95.875% of the par value of $1,000. $1,000 x 95.875% = $958.75.
All of the following statements concerning hedge funds are TRUE, EXCEPT the funds:
- Hedge funds are investments that resemble mutual funds, but are typically only offered to wealthy investors. Hedge funds often employ aggressive financial strategies such as short selling, the use of leverage (borrowed funds), and placing large bets on individual companies or sectors of the market. - These funds are not generally required to register with the SEC due to the accredited status of their investors. - Must register under the Investment Company Act of 1940 if offered to U.S. residents
A company wants to buy back some of its shares from existing shareholders through a tender offer. The company offers to buy up to a maximum of 5 million shares at $15 per share, but sets no minimum number of shares to purchase. A shareholder wants to sell 3,000 shares. If 4.9 million shares have been tendered, how many of the investor's shares will the company buy?
3,000 Since there's no minimum set on the tender offer and the company hasn't reached the maximum of 5 million shares, the company will buy all 3,000 shares from the investor. If the tender had a minimum threshold and the minimum had not yet been reached, the company would not buy any of the investor's shares (i.e., 0 shares). If the tender was oversubscribed (i.e., shareholders wanted to sell more than 5 million), then the investor would've been able to sell a pro rata or proportionate number of her shares back to the company.
The current yield on a municipal bond with a coupon rate of 4.50%, purchased at par and currently trading at $1,055, is:
4.26% The current yield is found by dividing the yearly interest payment of $45 by the market price of $1, 055. This equals 4.26%. The fact that the bond was purchased at par is not relevant.
An investor purchases a 20-year 5.30% bond at par value that will yield 5.75% if called at the first call date in five years. The yield to maturity on the bond is:
5.30% The bond has a coupon rate (nominal yield) of 5.30%. If the bond is purchased at its par value and is not called, but held to maturity, the bond's yield will be the same as the coupon rate, which is 5.30%.
A company has $50,000,000 par value convertible bonds outstanding. The coupon rate is 8%. The bonds are currently selling at 96. What is the current yield?
8.3% To find the current yield of the bonds, divide the yearly interest paid on the bonds by the current market value of the bonds. The yearly interest is $80. The market value of a bond is $960. Therefore, the current yield equals 8.3% ($80 divided by $960 equals 8.3%). The fact that these are convertible bonds is not relevant.
Which of the following statements is TRUE concerning periodic payment variable annuities?
A client's number of annuity units never changes During the pay-in period of a variable annuity, the client is continually purchasing accumulation units. These accumulation units are then exchanged for a fixed number of annuity units when the payout period begins. The monthly payout is determined actuarially and is based on the performance of the separate account.
Jamie has inherited 500 shares of an investment company. She calls her broker to redeem the shares and is informed that the kind of investment company she owns makes no provision for future purchases or redemptions. What kind of investment company does she own?
A closed-end fund A closed-end fund makes no provision for future purchases or redemptions from the issuing fund. Shares are bought and sold in the open market in the same manner as the common stock of corporations. All of the other types of funds listed do provide for future purchases to and redemptions from the fund.
Which of the following is the likely result of persistent deflation?
A decrease in interest rates Deflation is considered a reduction in the general level of prices. Deflation leads to lower interest rates, which results in higher bond prices. Equities tend to perform well during periods of inflation, not deflation.
Which of the following persons can a registered representative either make a loan to or borrow money from without providing notification to her employer?
An institution that's in the business of borrowing or lending funds - Registered representatives can borrow money from or loan money to a customer that regularly provides loans (e.g., a bank) without permission. - However, for an RR to borrow from other employees, friends, and business partners, she's required to obtain permission from her employer.
A full-service broker-dealer is required to conduct a test of its anti-money laundering procedures at least:
Annually Anti-money laundering (AML) rules ensure that executing (i.e., full service) broker-dealers are auditing and testing their internal procedures once per year (i.e., annually). Under the rules, broker-dealers must also ensure that their staff has been properly trained on the firm's AML procedures.
Which of the following statements is TRUE if interest rates rise?
Both bond and bond fund prices will fall. Bond prices and interest rates move in the opposite direction. When interest rates rise, bond prices will fall and vice versa. Bond funds are simply mutual funds that invest in bonds. Bond fund prices will also move in the opposite direction as interest rates fluctuate.
If a market maker has a current quote of 50.00 - 50.05 (15 x 20), this indicates that the firm is willing to:
Buy 1,500 shares at $50.00 and sell 2,000 shares at $50.05 When reading a quote, the bid is always listed first (i.e., $50.00 in this question) and the offer/ask (i.e., $50.05 in this question) is listed second. The market maker willing to buy shares at $50.00 and sell them for $50.05. The numbers in parentheses or brackets refer to the number of shares represented by the bid and offer. Unless specified otherwise, it's assumed that the size is in round lots of 100 shares. Therefore, the market maker is willing to buy up to 1,500 (15 lots x 100 shares) at $50.00 and sell 2,000 (20 lots x 100 shares) at $50.05.
As it relates to the sale of variable contracts, which of the following is NOT considered non-cash compensation under FINRA rules?
Commissions FINRA has specific rules for both "cash" and "non-cash" compensation when selling variable annuities and variable life insurance. According to FINRA, "cash" compensation includes discounts, concessions, fees, service fees, commissions, asset-based sales charges, loans, overrides, or cash benefits received. "Non-cash" compensation includes merchandise, gifts and prizes, as well as expenses for travel, meals, and lodging.
Which of the following choices would NOT be subject to the holding period restriction under Rule 144?
Control stock acquired through an open-market purchase There is a required holding period of six months for all restricted stock. Restricted stock is unregistered stock that was acquired as a result of a private placement. There is no required holding period for control stock. However, if an affiliate (control person) acquires stock as a result of a private placement, this stock would be considered restricted stock rather than control stock and would be subject to the holding period. Control stock acquired as a result of an open-market purchase is exempt from the holding period.
During a period of stable interest rates, which type of preferred stock tends to be the most volatile?
Convertible Convertible preferred stock may be converted into a fixed number of common shares of the same issuer. For that reason, if the common stock into which the preferred stock may be converted has appreciated above the parity price, the value of the convertible preferred will also rise. During a period of stable interest rates, the other types of preferred stock tend to remain stable.
A stock that typically performs in parallel to the changes in the economy is referred to as a:
Cyclical stock The performance of a cyclical stock normally runs parallel to changes in the economy. Examples of cyclical stocks include machine tool companies, construction firms, as well as transportation and energy companies.
The investments in a Coverdell Education Savings Account (CESA) are:
Determined by the investor Investments in a CESA are self-directed, which allows investors to buy and sell virtually any and all types of securities. Conversely, Section 529 plans are not self-directed; instead, the investments are determined by the entity that manages the plan.
A firm is the managing underwriter of a follow-on offering of a security that's listed on the NYSE. The aftermarket prospectus delivery rule:
Does not require the firm to deliver a prospectus - If an issuer was subject to the reporting requirements of the Securities Exchange Act of 1934 prior to the filing of the registration statement, there's no aftermarket prospectus delivery requirement for dealers. An issuer that's listed on the NYSE or Nasdaq is required to file reports with the SEC (a reporting issuer). If the issuer was filing for an IPO (a non-reporting issuer) and the securities will be subsequently listed on the NYSE or Nasdaq, the firm is required to deliver a prospectus to any purchaser in the aftermarket within 25 days of the effective date. - A follow-on offering (FPO) is an issuance of stock shares following a company's initial public offering (IPO). There are two types of follow-on offerings: diluted and non-diluted. A diluted follow-on offering results in the company issuing new shares after the IPO, which causes the lowering of a company's earnings per share (EPS).
Which of the following statements BEST describes exchange-traded notes (ETNs)?
ETNs are debt instruments linked to the performance of a commodity, currency, or index Exchange-traded notes (ETNs) are a type of unsecured debt security. This type of debt security differs from other types of fixed-income securities since ETN returns are linked to the performance of a commodity, currency, or index minus applicable fees. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity.
A corporation will be paying a cash dividend to its shareholders. On what date will the market price of the stock be reduced?
Ex-date The ex-date is the first day that a stock trades without its dividend included in its price. On the ex-date, the stock's price is reduced by the amount of (or enough to cover) the dividend.
Which of the following risks does NOT apply to both foreign and domestic debt instruments?
Exchange - Exchange (rate) risk could result in investors suffering losses due to a foreign currency losing value against the U.S. dollar. Since foreign debt instruments pay interest and principal in a foreign currency, foreign debt instruments have exchange risk. - However, an investor who buys U.S. dollar denominated (domestic) debt is not subject to exchange risk. - Interest rate risk is experienced when interest rates rise and prices of bonds fall, which impacts both foreign and domestic bonds. - Repayment risk is an issue that impacts both foreign and domestic debt, since both foreign and U.S.-based issuers could default. Political risk could also impact both foreign and U.S.
When interest rates are trending upward, the economy will normally be in which phase of the business cycle?
Expansion Increasing interest rates, along with increased costs and lower unemployment, are frequently associated with an expanding economy where there is an increasing demand for goods. As demand overtakes supply, prices begin to rise due to the scarcity of goods. This rise in prices is known as inflation. The Federal Reserve will look to raise interest rates in an attempt to curb demand and combat inflation.
The SEC rules regarding the record retention generally require that records be kept in an easily accessible location for the:
First two years The SEC rules regarding record retention generally require that records be kept in an easily accessible location for the first two years. Records must generally be kept in total for either three years, six years, or the life of the firm depending on the specific record.
Final arbitration awards against registered representatives and/or firms are reported on which of the following forms?
Form U6 - Form U6 is used to report disciplinary actions against RR's and firms as well as final arbitration awards against individuals or firms. - Form U4 is filed with FINRA when a person is applying for securities registration. - Form U5 is filed with FINRA when a person's registration is terminated. - Form BD is filed by brokerage firms to register with FINRA, the SEC, and states.
A previously registered person was convicted of a felony 14 years ago and has served out his sentence in federal prison. If he's now seeking employment as a registered representative, he should be informed that:
He may be hired as a registered representative A convicted felon is barred from the securities business for 10 years from the time of conviction. This type of ban is referred to as a statutory disqualification. Since the conviction was more than 10 years ago, the person may be hired as a registered representative. There are no special restrictions concerning registration and compensation of the person who was previously subject to statutory disqualification.
All of the following characteristics would be associated with a growth company, EXCEPT that it has a:
High dividend payout ratio Growth companies will normally retain most of their earnings to enable them to continue their growth. They would typically have low dividend payout ratios, high research and development expenses, and high price/earnings ratios, as well as a wide trading range for the stock.
What tax advantage is available with a real estate investments trust (REIT) investment?
If 90% of the income is distributed, only the shareholders pay taxes, thereby avoiding corporate taxes. REITs are not taxed on their income if they distribute 90% of their investment income to their investors. Investors are taxed on the income they receive at their ordinary income rate, not the 20% dividend tax rate. A REIT largely avoids paying taxes (i.e., pass-through) which means that it's typically better for investors than dividends received from a corporation. Corporate dividends are taxed at the corporate rate and then at the dividend rate of 20% (i.e., double taxed).
Three business partners have opened a brokerage account as Joint Tenants with Right of Survivorship (JTWROS). All of the following statements are TRUE, EXCEPT:
If one partner dies, his interest in the account will pass to his estate - An account that is established under the JTWROS, the interest of a deceased owner will pass to the surviving owners of the account. - If the account had been opened under the Tenants-in-Common form of ownership, the deceased partner's portion would flow to their estate.
A registered person has purchased two tickets to attend a basketball game with a client. If the tickets cost $85 each, which of the following statements is NOT TRUE?
If the registered person did not attend the game and gave one of the tickets to the client, it is a violation. Under FINRA rules, member firms and their associated persons may not provide gifts that exceed $100 per year to employees of other firms when the gift is in relation to the securities business of the recipient's employer. The underlying concern is that excessive gifts could cause the recipient to act contrary to the interests of the broker-dealer and/or clients. Exempt from the $100 limit are occasional meals, tickets to sporting and cultural events, reminder advertising (e.g., boxes of pens, key chains), and expenses related to legitimate business travel. For an activity to be considered an expense, the associated person of a broker-dealer must attend the event with the client. This type of activity is considered a legitimate expense. Since one ticket is valued at $85, it may be given to the client. On the other hand, two tickets being given to the client exceeds the $100 limit. Although approval by a principal is not required, a member firm should have this type of activity included in its policies and procedures manual.
A broker-dealer must establish information barriers between which two departments?
Investment banking and trading Information barriers must be maintained at firms to prevent the flow of certain information between different departments at the firm. Much of the focus is on preventing the free flow of information between investment banking and other departments. In fact, most of the communication between investment banking and other departments is made through compliance. Notice that compliance must be in direct communication with all departments of a broker-dealer.
A registered representative is sending an email to five clients. Which of the following statements is TRUE?
It is considered correspondence and subject to review by a principal - It is considered correspondence and subject to review by a principal. Correspondence is defined as any written or electronic message that a member firm distributes or makes available to 25 or fewer retail investors within a 30-calendar-day period. - On the other hand, retail communication is defined as any written or electronic communication that a member firm distributes or makes available to more than 25 retail investors within a 30-calendar-day period. - A retail investor is considered any person who does not meet the definition of an institutional investor. Retail communications are generally subject to pre-approval; however, correspondence and institutional communications are subject to review and supervision.
Which of the following statements is TRUE regarding Form 10-K?
It must be filed at the end of an issuer's fiscal year. - A Form 10-K must be filed within 60 days of a company's fiscal year-end. - A Form 10-Q (not a Form 10-K) is filed within 40 days of the end of a firm's fiscal quarter. - Proxies contain information about corporate elections and must be sent to owners before a vote is conducted.
Which of the following statements is NOT TRUE about a fidelity bond?
It protects customers in the event their broker-dealer goes bankrupt. A fidelity bond does not protect customers in the event of broker-dealer bankruptcy; that's the role of SIPC. Instead, a fidelity bond is insurance that protects a broker-dealer in case of fraud such as forgery or counterfeit currency. The bond covers securities that are held at the brokerage firm as well as those in transit. FINRA must be notified if the bond is cancelled or substantially modified.
Which types of investments have historically shown a great deal of sensitivity to regulatory risk?
Limited partnerships - Regulatory risk is the possibility that changes in regulations can have an adverse impact on the value of investments. This is very similar to legislative risk, which is the risk associated with changes in laws. - Although all kinds of investments can be subject to regulatory and legislative risk, limited partnerships have historically been particularly vulnerable. For example, adverse changes in the tax laws can cause the value of many limited partnerships to decline.
If investor wants to receive immediate execution, he should enter a:
Market order Market orders provide immediate execution. On the other hand, limit orders, stop orders, and stop limit orders require a certain price to be reached before they are activated and/or executed.
An investor has a portfolio in which 25% is invested in an oil company, 35% is invested in a pharmaceutical stock, 30% is invested in an exchange-traded fund that tracks the S&P 500 Index, and the final 10% is invested in money-market funds. Which of the following risks is inherent in the portfolio?
Non-systematic - Non-systematic risk is specific to one company and can be diversified away by diversifying a portfolio. Since the investor has put 60% of her portfolio into only two stocks, she's not diversified and is exposed to a large amount of non-systematic risk. - Credit risk is typically associated with bonds and is the risk that an issuer cannot repay its interest and/or principal. - Liquidity risk is the inability to sell an asset easily, which is not a concern in this portfolio since exchange-traded stocks are typically liquid. - Political risk is associated with politicians making decisions that will impact an investment.
A registered representative persuades a customer to purchase a security by assuring her that, should it fall in value, the representative will make up the difference in the account. This practice is:
Not permitted Guaranteeing a customer against a loss is prohibited regardless of the relationship.
The main difference between closed-end and open-end investment companies is that closed-end investment companies:
Offer a fixed number of shares - Closed-end investment company securities are initially sold in an IPO with a fixed number of shares. After the initial offering, the shares trade on an exchange. Since the shares are traded on an exchange, they can be purchased on margin. - Open-end management company shares are purchased directly from the mutual fund and only priced once per day. Since mutual fund shares are not exchange traded, they cannot be purchased on margin.
On the payment date
On the payment date - A company will pay its shareholders a dividend on the payment date. - The record date is the date that an investor must own the stock to be entitled to the dividend. - The ex-dividend date is the first day that an investor can buy stock without receiving the dividend. - The declaration date is the date on which the company announced that it will pay a dividend.
If a temporary hold has been placed on an account, it may be extended:
Once for 10 days, then again for 30 days, if customer is still at risk of being exploited If a temporary hold is placed on the account of a specified adult, it will initially expire 15 business days after it was placed on the account. The temporary hold may be extended twice by the firm. The first extension is 10 business days and the second extension is for 30 additional business days. In all, broker-dealers can place a hold for a total of 55 business days (15 days initially + 10-day extension + 30-day extension).
If a company is utilizing statutory voting, how many votes will a common shareholder receive per vacant seat on the board?
One vote for each share that the stockholder owns When using the statutory voting method, a shareholder is given one vote, per share, per open seat on the board. For example, if an investor owns 1,000 shares and there are three openings on the board, she's able to cast 1,000 votes for the three open seats. If she chooses not to use all of her 1,000 votes per open seat, she cannot transfer them to another candidate. If the company utilized a cumulative voting system, a shareholder is able to multiply the number of shares owned by the number of open seats on the board. With this method, the stockholder is able to be very selective in how to cast her votes. For example, a stockholder may choose to use all of her votes on only one candidate, thereby making it more likely that her candidate will gain a seat on the board.
The current market value of a stock is below the strike price of a call option. This situation is referred to as:
Out-of-the-money Call options are in-the-money when the current market value of the underlying stock is above the option's strike price. However, if the stock's market price is below the strike price of a call, the option is out-of-the-money. Out-of-the-money and at-the-money options have no intrinsic value.
An investor shifted the allocation of corporate bonds in his portfolio to foreign equities. As a result, he will be more exposed to:
Political risk Political risk is the risk that foreign investments will lose money as a result of changes in a foreign country's government or regulatory environment. An investor that sells U.S. corporate bonds and buys foreign stocks will be increasing their political risk. Many investments are subject to liquidity risk and its not clear if bonds or foreign equities are more liquid. Credit and interest-rate risk are usually associated with bond investments, rather than stock.
When discussing the purchase of a variable annuity with a client, the RR is not required to disclose:
Probate fees - Probate fees and costs are associated with establishing the validity of a will, which is not a disclosure item for annuities. - However, surrender, mortality, and administrative fees must be disclosed.
A variable annuity contract holder dies during the accumulation period. Which of the following is TRUE regarding the tax consequences?
Proceeds in excess of cost are taxable as ordinary income to the beneficiary. When a variable annuity contract holder dies during the accumulation period, the proceeds in excess of cost are taxable to the beneficiary as ordinary income.
A broker-dealer is acting as a distribution participant in a public offering of stock. To entice customer purchases, the firm pledges to repurchase shares sold in the offering from its customers at a price that's higher than the original public offering price (POP). This type of pledge is:
Prohibited, fraudulent, and manipulative - This question relates to a tie-in arrangement, which may be used to artificially increase the price of a stock in the secondary market. - These prearranged purchases are prohibited because they're manipulative and harm other market participants. - Underwriters are prohibited from prearranging purchase orders which guarantee the clients a profit (i.e., buying shares back at a price that's equal to or higher than the POP).
A registered representative has recently passed the Series 7 Examination. If the RR conducts business in five states, she is required to:
Register in all five states In addition to ensuring that RRs are properly registered under FINRA rules, RRs also need to be properly registered as agents in each state in which they conduct business. State registration rules are contained within the Uniform Securities Act.
A unit investment trust (UIT):
Represents an undivided interest in a fixed account Unit investment trusts (UITs) sell shares of beneficial interest (SBIs) that represent an undivided interest in a fixed portfolio of securities. UITs typically assess an initial sales charge (load) along with operating fees. Since UITs are non-managed investment companies, they don't include management fees.
If a customer purchases securities and fails to pay for them by the payment date, the brokerage firm will:
Sell out the securities and freeze the account When a customer purchases securities and fails to pay by the Reg T payment date (within two business days following settlement), the brokerage firm will sell out the securities and freeze the account for 90 days.
An equity inverse exchange-traded fund (ETF) is most similar to:
Selling stock short An equity inverse ETF is designed to deliver the opposite of the performance of an index or other benchmark. Similarly, a customer who sells stock short is anticipating a decline in the price of the equity securities. For example, an inverse ETF that's based on the DJIA seeks to deliver the opposite performance of that index. Therefore, if the DJIA rises by 1%, an inverse ETF's value should decrease by 1%. Conversely, if the DJIA falls by 1%, the inverse ETF's value should increase by 1%.
A registered employee is required to disclose which of the following activities to her employing broker-dealer?
Serving as a director for a profit-based firm Registered employees must disclose all outside business activities to their employers. Volunteering or playing sports don't require disclosure since the registered representative is not receiving compensation.
When do options trades settle?
T + 1 Options trades typically settle within one business day (T + 1). However, if equity options are exercised, the settlement of the stock transactions occurs on the second business day (T + 2).
The main disadvantage of 529 Prepaid Tuition Plans compared to 529 Savings Plans is that:
The account owner may lose financially if the student does not attend a public school in that state The main disadvantage of a prepaid tuition plan is that the investor may suffer financially if the beneficiary attends an out-of-state or private college. Unlike 529 Savings Plans, prepaid tuition plans do not have distributions. Instead, the account owner purchases credits toward tuition at a state university or college. Prepaid tuition plans generally may not be used to save money for other educational expenses such as room and board. The advantage of a prepaid tuition plan is that the investor is guaranteed a certain number of credits toward the beneficiary's tuition.
If a customer exceeds SIPC limits:
The customer is a general creditor If a customer's claim exceeds SIPC limits, he becomes a general creditor.
Which of the following events will have a positive effect on the U.S. balance of payments?
The government of China buying U.S. Treasury securities The balance of payments is the money going out of a country versus the money flowing into a country. A favorable balance of payments is when the net balance of payments results in more money coming into a country. The only transaction that results in money flowing into the U.S. is the Chinese government (or any foreign investor) buying securities in the United States. Foreign investors selling U.S. stocks and a U.S. corporation moving its headquarters both result in cash leaving the United States. U.S. taxpayers paying taxes to the U.S. government doesn't change the balance of payments since money is neither entering nor leaving the United States.
Who is responsible for creating the official statement for a municipal bond offering?
The issuer Although assistance may be provided by others, the issuer is ultimately responsible for creating the official statement. If created, the underwriting syndicate is responsible for providing the official statement to investors who purchase the new offering.
Obtaining best execution includes all the following factors, EXCEPT:
The number of market makers for the security For purposes of obtaining best execution. the factors considered include price and volatility of the security, general character of the market, size and type of transaction, and the locations and accessibility of the member organization to primary markets. However, the number of market makers for the security is not a factor.
Which of the following is found in a preliminary prospectus?
The number of shares being issued A preliminary prospectus (i.e., red herring) can be used by an issuer of stocks and/or bonds during its cooling-off period. These documents typically have most of the information that's found in a final prospectus, including the number of shares being issued by the company, its business, financial statements, risk disclosures, and ownership structure. However, the SEC doesn't permit an issuer to include the effective date or a definitive public offering price (POP) in a preliminary prospectus. Instead, an issuer may include a price range for the offering (e.g., from $20 to $25) in the red herring. Since the securities have not yet been offered, there's no fee disclosure that's required.
A registered representative previously operated a sole proprietorship and requested protection from bankruptcy. The representative did not disclose her affiliation with the proprietorship when she filed Form U4. Which of the following statements regarding the application is TRUE?
The registered representative has filed a statement with false or misleading statements. Bankruptcies that have occurred in the last 10 years is a disclosure event on Form U4. If an applicant failed to disclose that she was involved in an insolvent business that filed for bankruptcy, the application is false and misleading. The Form U4 is required to be updated immediately and FINRA could reject the application for having filed misleading information.
Who keeps track of the shareholders of a mutual fund?
The transfer agent - The mutual fund's transfer agent is responsible for keeping track of all of the current owners of a mutual fund. - Custodian banks provide for the safekeeping of the fund's securities and cash. - The fund's portfolio is managed by the investment adviser.
Which of the following is TRUE if a mutual fund investor chooses to implement a systematic withdrawal plan from the fund?
The withdrawals may result in a reduction of capital. The only true statement is that the plan may result in the reduction of capital if the dividends and capital gains that are generated from the fund are NOT sufficient to make the payments and because the shares will need to eventually be redeemed to make payments. Systematic withdrawal plans provide an investor with regular payments. These payments can be structured as fixed-dollar, fixed-percentage, or fixed-time. The option chosen determines whether the payments will remain the same or whether they will cease on a specific date. Payments will first come from dividends and capital gains that are generated from the fund, but after those funds are no longer sufficient, shares will be redeemed to provide the payments.
Which of the following descriptions characterizes leveraged exchange-traded funds (ETFs)?
They are designed to deliver a multiple of the performance of an index or other benchmark A leveraged ETF is designed to deliver a multiple of the performance of an index or other benchmark. For example, a 3X leveraged ETF based on the DJIA seeks to deliver three times the performance of that index. So, if the DJIA rises or falls by 1%, a leveraged ETF would increase or decrease by 3% before fees and expenses. The other choices include a regular ETF which equals the performance, an inverse ETF which seeks to deliver the opposite of what it is tracking, and a leveraged inverse ETF designed to deliver a multiple of the opposite direction.
Which of the following statements is TRUE concerning electronic communication networks (ECNs)?
They can be used by investors who want to trade anonymously. Electronic communication networks (ECNs) are securities trading systems that are designed to anonymously match buyers with sellers. These systems can be used by both institutional and retail investors. One of the benefits of their use is immediate automatic execution if a matching buy or sell order can be found on the system. ECNs do not allow investors to trade directly with one another; however, they do allow subscribers (e.g., broker-dealers) to use these systems to execute orders that they receive from their clients.
Which of the following is subject to the LEAST amount of credit risk?
U.S. Treasury bonds Credit risk, also referred to as default risk, is the risk that a bond issuer will not make interest and/or principal payments on its bonds. Since U.S. Treasury bonds are backed by the U.S. government, they are considered to have no credit risk.
What's the maximum profit for the buyer of a call option?
Unlimited The maximum gain for the buyer of a call option is unlimited. A buyer of a call option will realize a profit if the underlying stock rises above the breakeven point. Since a stock's increase is unlimited, so too is the potential profit for the buyer of a call. On the other hand, if the stock doesn't rise and instead falls below the strike price (i.e., the option is out-of-the-money), the buyer's maximum loss is the premium paid.
When is an underwriting broker-dealer able to accept payment from an investor for the purchase of a new issue?
When the registration is declared effective. Broker-dealers can only accept payment for a new issue after a security's registration is declared effective. The red herring is also referred to as the preliminary prospectus and is given to investors before the effective date. The cooling-off period lasts between the date on which an issuer files its registration statement with the SEC and the effective date of the offering. During the cooling-off period, no sales can be confirmed and no payment can be accepted.
In judging the fairness of a firm's markup, industry rules would NOT consider:
Whether the client was a retail or institutional customer Among the relevant factors that a member may consider in determining a fair markup or commission are the following. - The type of security involved (Common stock would normally demand a higher markup than debt.) - The availability of the security in the market (actively or inactively traded) - The price of the security - The amount of money involved in the transaction - Disclosure (made prior to the execution of the transaction may be relevant) - The pattern of markups - The nature of the member firm's business (What type of services does the member provide to the customer?) The type of client is not specifically mentioned in the rules as determining whether the markup or commission is fair and reasonable.
Who creates the Options Disclosure Document?
the OCC - the Options Clearing Corporation The Options Disclosure Document that's provided to options clients is created by the Options Clearing Corporation (OCC).
