SIE Final Prac Exam

Under Rule 415, which permits *seasoned* corporate issuers to file a "shelf" registration statement for securities offerings, the filing covers a period of:

3 Years SEC Rule 415, the "shelf registration rule" allows "seasoned issuers" to file a blanket registration statement with the SEC, covering a period of 3 years, for any securities that the issuer may wish to sell. It is only available to "seasoned" companies that already have completed a registered IPO, that have been registered for 1 year, and that have a minimum market capitalization of $75 million. If the seasoned issuer wishes to sell any securities during this 3 year period, it simply files a notification with the SEC that it is selling under that registration statement. This procedure avoids the "20 day cooling" off period, and allows seasoned issuers to enter the market quickly (such as when interest rates have dipped) to sell their securities.

Which of the following securities is NOT exempt from the Securities Act of 1933? A. Industrial Company issues B. Benevolent Association issues C. Small Business Investment Company issues D. Common Carrier issues

A Industrial companies are not exempt from the Securities Act of 1933. Common carriers, small business investment companies, and benevolent associations are all exempt.

To smooth out cash flow, a municipality will issue all of the following EXCEPT: A. BAN B. RAN C. TAN D. TRAN

A Municipalities issue BANs (Bond Anticipation Notes) to "pull forward" funds that will be collected from a later permanent bond sale. These are isolated events, since municipalities do not sell bonds every day (unlike collecting taxes and revenues). For example, a municipality expects to float a 20 year bond issue in 6 months. It can get the funds today by issuing 6 month BANs now. When the bond issue is floated, the proceeds are used to pay off the BANs.

The minimum price at which an open end fund share can be purchased is: A. Net Asset Value B. Net Asset Value plus a commission C. Market Price D. Market Price plus a commission

A Mutual fund (open-end management company) shares are newly issued by the fund to any purchaser. *The purchaser pays the next computed Net Asset Value* plus a sales charge if the fund imposes a "sales load." For a "no load" fund, the customer would simply pay Net Asset Value - this is the minimum price for an open-end fund. This contrasts to a closed end fund, where the fund is traded in the market like any other stock. Any purchaser would pay the prevailing market price (which can be below, at, or above Net Asset Value) and would have to pay a commission to have the trade executed. Thus, a closed-end fund share is purchased at the prevailing market price plus a commission.

All of the following terms apply to mutual fund shares EXCEPT: A. continuously issued B. tradeable C. redeemable D. non-negotiable

B Mutual fund shares do not trade; they are non-negotiable. The shares are redeemed by the fund at Net Asset Value. The fund continuously issues and redeems its shares.

On the same day in a margin account, a customer sells short 100 shares of ABC at $46 and buys 1 ABC Jan 45 Call @ $2.50. The customer will break even at:

$43.50 per share

An investor's securities portfolio has *depreciated* by $6,000 this year. How much of the loss can the investor deduct on this year's tax return?

0 An investor cannot deduct depreciation of an asset that is currently held as a capital loss. To recognize the loss for tax purposes, he or she must first sell those securities. Investors *can only deduct $3,000 of net realized capital losses per year*.

XYZZ ADR represents* 10%* of the value of an XYZZ ordinary share. The ordinary shares trade on the London Stock Exchange, where the current price is *400 *British Pounds (BP). The current exchange rate for the British Pound against the U.S. Dollar is *$1.40.* The ordinary share pays an annualized dividend of 12 BP. The XYZZ ADR is listed on the NYSE. If a customer places an order to buy *$560,000* of the ADR on the NYSE, the customer will buy how may shares of the ADR?

10,000 Because the XYZZ ordinary share trades for 400 BP in London, and the BP is worth $1.40, each ordinary share is worth 400 x $1.4 = $560. The ADR created for the U.S. market is 1/10th of this amount, or $56 per U.S. ADR. A customer who invests $560,000 will buy $560,000 / $56 = 10,000 ADR shares.

For an institutional investor to qualify as a "QIB" under Rule 144A, the institution must have at least:

100,000,000 of assets that it invests on a discretionary basis

A registered representative gives a speech to 30 retail clients about investing in mutual funds, and shows a chart that compares the growth of the fund to the Standard and Poor's 500 average. This action is: A. not appropriate, since comparisons between the growth of the fund and the return of the Standard and Poor's 500 average can't be made B. allowed as long as a copy of the visual is distributed to the audience C. allowed as long as the speech content is approved by the firm's compliance officer or principal D. not allowed

C

The nominal yield of a bond: A. increases as bond market prices decline B. decreases as bond market prices increase C. is unaffected by changes in market interest rates D. will vary with the earnings of the issuer

C

Which of the following is NOT required to be retained on file by a broker-dealer? A. Customer complaints B. Trade confirmations C. IPO prospectuses D. Correspondence

C

Which statement is FALSE regarding RMDs (Required Minimum Distributions) from IRA accounts? A. The RMD is based on the life expectancy of the account beneficiary B. RMDs must start on April 1st of the year after reaching age 70 1/2 C. The RMD is taxable at capital gains tax rates D. If the RMD is not taken, a penalty tax of 50% is applied

C Distributions from IRAs are *taxable at ordinary income tax rates*, not at lower capital gains tax rates. The penalty applied for not taking required minimum distributions from a qualified plan starting at age 70 1/2 is 50% of the under-distribution. There is an incentive to take the money out (and pay tax on it, which is what the Treasury is really looking for)! The IRS creates tables that lay out the required minimum distribution amount each year; and these are based on life expectancy.

Stock options trade on the: A. NASDAQ B. CME C. CBOE D. CBOT

C The CBOE trades stock options and index options. NASDAQ trades stocks, it does not trade options. The CME - Chicago Mercantile Exchange and CBOT - Chicago Board of Trade - are not securities exchanges, rather they are futures markets.

ll of the following statements are true regarding the Official Statement EXCEPT that the Official Statement is: A. not required by the Securities Act of 1933 because municipal issues are exempt securities B. required to be delivered to all purchasers of a new municipal issue at or prior to settlement, if available C. required to be prepared by issuers by the Municipal Securities Rulemaking Board for all new issue municipal bonds D. requested by underwriters to satisfy the disclosure requirements of new issue purchasers

C The Official Statement for a new municipal issue is not required under the Securities Act of 1933 since municipal issues are exempt, nor is it required to be prepared by issuers by the MSRB, since the MSRB has no authority over municipal issuers. It is requested by underwriters to help sell the new issue and the MSRB states that if one is available, it must be given to purchasers at or prior to settlement of the transaction.

Which statement is FALSE about the VIX option? A. The VIX option is traded on the CBOE B. VIX values are based on the implied volatility of the Standard and Poor's 500 Index C. VIX valuation moves in parallel with movements of the Standard and Poor's 500 Index D. Exercise settlement of the VIX is European style

C The VIX is an extremely successful index option traded on the CBOE that is commonly called the "fear gauge." The VIX is an index that tracks S&P 500 Index volatility. VIX values have ranged from a low of about 10 to a high of about 80 since the product was introduced in 2006. Increased volatility occurs in falling markets, so VIX values increase when the market is falling - the index moves counter to the general market. Therefore, in a falling market, volatility increases and VIX calls become more valuable as the VIX rises; while in a rising market, VIX values tend to fall. Like virtually all index options introduced after the OEX, the VIX is a European style option.

Which of the following can be purchased on margin?

Closed End Funds trading on the NYSE New issues are not marginable. Every issue of a mutual fund (open-end management company) share is a "new issue" as is the original offering of a closed-end fund. Both are made with a prospectus. However, once closed-end fund shares trade in the market, they are marginable like any other listed stock.

Non-Tax Qualified

Contributions are made with After Tax Dollars Distributions are not taxed

Unless specific authorization is given, all of the following accounts cannot be opened as margin accounts EXCEPT a: A. Trust Account B. Custodian Account C. Guardian Account D. Joint Tenants Account

D Fiduciary accounts cannot be opened as margin accounts unless the account documentation specifically authorizes the opening of such an account. For example, if a Trust document does not authorize the opening of the Trust account as a margin account, then it must be opened as a cash account. Fiduciary accounts include Trust accounts, Custodian accounts, and Guardian accounts - in each of these there is a Third Party managing the assets in the account for the beneficiary.. A Joint Tenants account is not a fiduciary account - each tenant is a direct account owner and can manage the account (place orders) directly.

Which type of account is NOT required to follow the "Prudent Investor" rule? A. Trust account B. Custodian account C. Pension fund D. Joint account

D Fiduciary accounts must follow the Prudent Investor Rule - these include trust accounts, guardian accounts, custodian accounts and executor accounts. Retirement plan accounts are a type of trust account - there is a plan trustee that oversees the operations of the plan. Joint accounts are not a fiduciary account.

Which of the following statements are TRUE when comparing preferred stock to common stock: I Preferred dividends are paid before common II Preferred dividends are paid after common III Preferred shareholders have a prior claim to assets upon liquidation before common shareholders IV Common shareholders have a prior claim to assets upon liquidation before preferred shareholders

I III Preferred stock has preference over common as to the payment of dividends and as to assets upon liquidation. Preferred dividends are, in most cases, paid semi-annually, as compared to common stock dividends that are paid quarterly.

Under MSRB rules, which of the following are prohibited? I Guaranteeing a customer account against loss II Recommending the purchase of a put option to the customer as protection against loss III Agreeing to repurchase bonds from a customer personally at a preset price IV Recommending the use of a repurchase agreement to the customer as a means of protecting against loss

I III It is prohibited to agree to repurchase bonds from a customer personally at a preset price since this is a guarantee against loss to the customer that is prohibited. Guaranteeing a customer's account against loss is prohibited. Recommending the use of put options or repurchase agreements to protect against loss are both valid strategies and are permitted under MSRB rules.

A *primary offering* of $*200,000,000* of ACME Corporation 10% debentures with a 20 year maturity would be regulated under the: I Securities Act of 1933 II Securities Exchange Act of 1934 III Trust Indenture Act of 1939 IV Investment Company Act of 1940

I III New corporate bond issues are non-exempt securities under the Securities Act of 1933 and thus must be registered and sold under a prospectus. In addition, corporate bond offerings in excess of $50,000,000 fall under the Trust Indenture Act of 1939, requiring that the bonds be sold under a Trust Indenture. The Securities Exchange Act of 1934 regulates the trading markets (secondary market) - not the primary market. Investment companies fall under the Investment Company Act of 1940; regular corporate securities are not subject to this Act.

Which of the following are *NOT* depletable? I Machinery II Timberland III Real Estate IV Coal

I III Only natural resources, such as coal, timber, oil, gas, gravel, etc., are depletable. Machinery and real estate are depreciable assets.

When opening an options account which of the following statements are TRUE? I The Options Disclosure Document must be sent at, or prior to, opening the account II The Options Disclosure Document must be sent to the customer at account opening, and must be signed and returned within 15 days III The Options Agreement must be sent at, or prior to, opening the account IV The Options Agreement must be sent to the customer at account opening, and must be signed and returned within 15 days

I IV

Which of the following statements are TRUE when describing the "build-up" in a variable annuity separate account during the accumulation phase? I All interest, dividends, and capital gains from the securities in the account are automatically reinvested to buy more accumulation units II All interest, dividends, and capital gains from the securities in the account can either be paid to the contract holder or can be automatically reinvested to buy more accumulation units III All interest, dividends, and capital gains from the securities in the account are taxable IV All interest, dividends, and capital gains from the securities in the account are tax deferred

I IV

When a variable annuity contract is "annuitized," which statements are TRUE? I The number of annuity units is fixed II The number of annuity units is variable III The annuity unit value is fixed IV The annuity unit value is variable

I IV When a variable annuity contract is annuitized, the *accumulation units are converted into a fixed number of annuity units*. This calculation is based on the dollar value of the accumulation units, the annuity option chosen, and the customer's expected mortality. The fixed number of annuity units times the unit *value (which varies with the performance of the mutual fund held in the separate account)* determines the monthly payment.

The Trust Indenture Act of 1939 applies to which of the following offerings? I $100,000,000 of Sewer Revenue Bonds sold interstate II $100,000,000 of Corporate Debentures sold interstate III $10,000,000 of Corporate Debentures sold interstate IV $100,000,000 of 30 day commercial paper sold interstate

II The Trust Indenture Act of 1939 applies solely to non-exempt interstate securities offerings over $50,000,000. Sewer revenue bonds are exempt, as is commercial paper. Corporate debentures are non-exempt, but only the $100,000,000 offering is subject to the Act. The $10,000,000 corporate debt offering is under the $50,000,000 limit.

LGIPs marketed by broker-dealers are: I defined as a type of investment company II defined as a municipal fund security III regulated by the MSRB IV regulated by the SEC

II III

A new issue has a Public Offering Price of $21 per share. Which of the following are likely stabilizing bids? I $22.00 II $21.00 III $20.88 IV $20.00

II III .Stabilizing bids are permitted at, or below the Public Offering Price - never above. When placing the bid, the manager will not drop the price by much below the Public Offering Price, so the likely stabilizing bids are $21 and $20.88. A bid of $22 is prohibited because it is higher than the $21 Public Offering Price; *a bid of $20 is too far below the $21 Public Offering Price.*

Series Bonds

Issued at different times matures at the same time

Serial Bond

Issued at the same time mature at different times

Two unrelated women are interested in opening a brokerage account. Each one wants to be able to enter trades in the account, but one of the women does not intend to make an investment in the account and is concerned about tax implications if her name is on the account. The BEST recommendation would be for the account to be opened as a(n):

individual account in the name of the woman making the investment with that person signing a third party trading authorization naming the other woman

The Options Disclosure Document

must be sent at, or prior to, opening the account

The Options Agreement

must be sent to the customer at account opening, and must be signed and returned within 15 days an agreement drawn up after a customer is approved for options trading that reconfirms the suitability information given by the customer; and which states the types and levels of options transactions that the customer can perform in the account based upon that suitability determination. It also states that the customer agrees to abide by the rules and regulations of the OCC.

The manager of an unregistered hedge fund is typically compensated by a fee based on a:

percentage of assets under management plus a performance fee based on profits

A bond issue where every bond has the same issue date, interest rate, and maturity is a: A term bond offering B series bond offering C serial bond offering D combined serial and term bond offering

A

To obtain short term funds in anticipation of a subsequent long term debt financing, a municipality will issue a: A BAN B TAN C RAN D TRAN

A A *BAN is a Bond Anticipation Note* - a short term note that will be retired by a later long term bond sale.

All of the following are considered to be "insiders" EXCEPT: A. an investor holding 11% of ABC preferred stock B. the in-house counsel of ABC Corporation C. the spouse of ABC Corporation's President D. ABC Corporation's Chief Executive Officer

A An insider is defined as an officer, director, 10% *common shareholder* or "affiliated person." The Chief Executive officer of the corporation is an officer; the President's spouse is an "affiliated person." Court decisions have extended the definition of an insider to include almost anyone who has "material non-public information" about the company. Because of this, an in-house lawyer is considered an "insider." An investor who holds non-convertible bonds or preferred stock of the company is not an insider - he or she is not in a position to get non-public information.

Customer securities held in margin accounts: A. can be commingled with other customer margin securities and used as collateral for a loan by the brokerage firm B. can be commingled with fully paid customer securities and used as collateral for a loan by the brokerage firm C. must be held in custody of the customer D. must be segregated and placed in safekeeping

A Brokerage firms can hold fully paid customer securities as long as the positions are segregated from other margin securities and are kept in safekeeping. Customer margin securities are pledged as collateral for the margin loan. The broker is permitted to commingle ("mix-up") these securities with those of other margin customers (but not with fully paid customer securities), and it is these margin securities that may be pledged to a bank for a loan.

What is the main objective of investing in Equity REITs? A. Income and growth B. Capital appreciation and stability C. Tax deductions and tax credit D. Speculation and aggressive gains

A Equity REIT investments typically generate good dividend income, because the REIT distributes most of the net rental income to shareholders. In addition, if real estate prices appreciate, there can be capital gains. Thus, Choice A is the best one offered.

A company that has issued first mortgage bonds is *declared in default* by the trustee. Which statement is TRUE? A. The bondholders have legal claim to the property backing the bond; and may sell that property to satisfy the unpaid obligation B. The bondholders have legal claim to all property of the failed company; and may attach and sell any, or all, of that property C. The bondholders have first claim to all assets of the failed company that have not been pledged D. The bondholders are general creditors of the failed company

A First mortgage bondholders have been granted a "first mortgage lien" on any "real" properties (real estate - land and buildings) that are pledged by the issuer as backing for the bond issue. *If a default occurs, the bondholders have the legal right to sell the pledged property, and to use the proceeds to satisfy the outstanding debt.* The value of the pledged property is always well in excess of the outstanding loan amount; so if the property is sold for less than book value, there should still be enough proceeds to satisfy the debt. Mortgage bondholders do not have claim to all property of the failed company (such as cash in bank accounts; accounts receivable; inventory; etc.); they only have claim to the real property pledged. *If the bondholders' claims are not satisfied from the sale of the real property, then they become general creditors for the balance due*

A change in each of the following is a coincident economic indicator EXCEPT: A. Money Supply as measured by M-2 B. Personal income levels C. Index of industrial production D. Employment levels

A The money supply level as measured by M-2 *is a leading economic indicator*, since if the money supply is rising, there is easy credit, encouraging spending. Personal income levels, the index of industrial production, and employment levels all show current activity and are coincident indicators.

A government securities dealer quotes a 3 month *Treasury Bill* at 5.00 Bid - 4.90 Ask. A customer who wishes to *buy* 1 Treasury Bill will pay: A. a dollar price quoted to a 4.90 basis B. a dollar price quoted to a 5.00 basis C. $4,900 D. $5,000

A Treasury Bills are quoted on a yield basis. From the basis quote, the dollar price is computed. A customer who wishes to buy will pay the "Ask" of 4.90. This means that the dollar price will be computed by deducting a discount of 4.90 percent from the minimum par value of $100. This is the discount earned over the life of the instrument

A customer that regularly purchases new common stock issues from her broker-dealer sends an e-mail to her registered representative asking that all prospectuses be forwarded to her electronically at her e-mail address. Which statement is TRUE? A. The registered representative can follow the customer's instructions by forwarding the request to the member firm's operations department B. The registered representative must inform the customer that all prospectuses must be sent in hard-copy form to the customer's physical mailing address C. The registered representative must advise the customer that the firm will charge an extra fee for this service D. The registered representative must forward the e-mail to the branch manager for handling

A Under the "access equals delivery" rule, prospectuses can be delivered electronically to customers as long as the member firm knows that the customer has internet access. Since this customer made the request by e-mail, we know that the customer has internet access and the firm can follow the customer's instructions.

All of the following securities are eligible for trading by the Federal Reserve EXCEPT: A. Treasury Bills B. Bond Anticipation Notes C. U.S. Government Bonds D. Federal Home Loan Bank Bonds

B

A securities firm does a trade for a customer and charges a mark-up. In what capacity did the firm act? A. Agent B. Dealer C. Broker D. Middleman

B A FINRA member firm can do securities transactions in one of two ways. It can act as a *broker*, routing the order to the best market, *charging a commission* for this service. This is called an *agency trade*, and the firm is acting as a *middleman* in the transaction. The other way to do the trade is to act as a *dealer*. Here, the firm maintains an inventory of the security, and acts as a *principal*, buying the security into inventory from the customer; or selling to the customer out of inventory. When acting as a principal, the firm *earns a mark-up* when selling to the customer out of inventory; or a *mark-down* when buying into inventory. Also note that the firm can only act in one capacity in a given transaction - either as a broker or as a dealer. Thus, it could not charge both a commission and a mark-up in the same transaction.

Callable preferred stock is likely to be redeemed by the issuer if: A. interest rates rise B. interest rates fall C. the common stock price rises D. the common stock price falls

B If interest rates fall, issuers can "call in" old high rate preferred and replace it by selling new preferred at the lower current rates. Thus, calls take place when interest rates have fallen.

A put is assigned just *after the ex date* for a cash dividend. The customer: A. will receive the dividend B. will not receive the dividend C. must pay the dividend D. is not required to pay the dividend

B If the put is "assigned," it means that the OCC (Options Clearing Corporation) has selected that put writer to receive the exercise notice (because a holder of that contract has chosen to exercise), obligating the writer of the put to buy the stock in a regular way trade. Because the writer of the put is assigned *after the ex date*, the writer is buying the stock after the last date to get the dividend. Thus, the writer would not get the dividend.

A registered representative takes an order from a customer to buy 100 shares of PSSS stock at $40 and writes the order ticket for processing. The registered representative fails to include the number of shares to be purchased on the ticket. Which statement is TRUE? A. The order will be processed for a round lot of 100 shares by default B. The order will be returned to the representative for entry of the order amount C. The order will be referred to the member firm's compliance department for resolution D. The order will be canceled without any further action taken

B Incomplete order information on an order ticket will result in the ticket not being processed. It will be returned to the representative for entry of all of the required information.

Which statement is FALSE about stabilizing bids? A. A stabilizing bid is placed by the syndicate manager B. Stabilization is permitted during the 20-day cooling off period C. Only 1 stabilizing bid is permitted at any time D. Stabilization is permitted under Regulation M

B Stabilization of new issue prices in the aftermarket is permitted under Regulation M. The bid cannot be placed until the effective date; it is not permitted during the 20-day cooling off period. Only 1 stabilizing bid is permitted at any time. The manager of the syndicate places the stabilizing bid on behalf of the syndicate.

If the *credit rating of an issuer is downgraded* by Moodys' or Standard and Poor's, which product would suffer the greatest loss of value? A. Exchange Traded Fund B. Exchange Traded Note C. Variable Annuity Separate Account D. Mutual Fund

B The key thing to know about an ETN - "Exchange Traded Note" - is that it is a synthetic security created by an investment bank that is "bond-like" - but it is not a bond. It gives a return tied to an equity index, subject to a cap and a floor. However, there are no physical securities backing the instrument/ It is only as good as the investment bank's ability to pay - and *if the investment bank's credit rating is lowered, the value of the ETN drops. So the main risk of investing in an ETN is credit risk.* In contrast, mutual funds, exchange traded funds and separate accounts (which buy designated mutual fund shares) hold a diversified portfolio of securities. If one issuer held in the portfolio has its credit rating lowered, that will have a very small impact on the NAV of the portfolio.

A customer buys 200 shares of ABC at $68 and sells 2 ABC May 70 Calls @ $3. The maximum potential loss is: A. $6,800 B. $13,000 C. $13,200 D. $13,800

B The worst case is that the stock becomes worthless. The customer paid $68 per share, reduced by $3 in collected premiums, for a net cost of $65. As the market drops, the calls will expire "out the money." The customer can lose all $65 per share x 200 shares = $13,000.

If a callable bond is purchased at a premium, and is then called at par which of the following is TRUE? A. The yield to call is higher than the nominal yield B. The yield to call is lower than the nominal yield C. The yield to call is the same as the nominal yield D. The yield to call moves inversely to the nominal yield

B The yield to call will be lower than the yield to maturity if the bond was purchased at a premium (which will be lost faster if the bond is called early). Since the bond is purchased at a premium, both yield to call and yield to maturity must be lower than the nominal yield. YTC YTM Nominal Yield

What type of DPP is eligible for tax credits? A. Raw land program B. Low income housing program C. Exploratory oil and gas program D. Existing housing program

B To promote the building of low income housing, which generates lower than market rents, the government subsidizes these programs by offering tax credits to those builders.

A company's common stock is selling in the market at a "multiple of 10". If the market price of the common stock is currently $10, which statement is TRUE? A. The company has paid dividends of $1 per share this year B. The company has earnings per share of $1 this year C. The company has paid dividends of $100 per share this year D. The company has earnings per share of $100 this year

B When a stock is selling at a "multiple" of 10, *this means that the market price is 10 times the current earnings per share*. The "multiple" refers to the Price/Earnings Per Share ratio.

Two business partners open a joint account at a broker-dealer as Tenants in Common, with each one owning 50% of the account. If one of the business partners dies, what claim, if any does his wife have on the account? A. The wife will be the beneficiary of the deceased owner's 50% interest in the account B. The wife will be the beneficiary of the deceased owner's 50% interest if he bequeathed it to her in his will C. The wife will be the beneficiary of the deceased owner's 50% interest only if the other business partner in the joint account disclaims his interest D. The wife will not be the beneficiary of the deceased owner's 50% interest, since the account must be closed upon death one of the owners

B When one party dies in a Tenants in Common account, his or her ownership interest in the account goes into his or her estate and is passed by will. If the customer dies, the wife will get the 50% ownership interest only if the husband bequeathed it to her in his will.

Which of the following is NOT defined as an "investment company" under the Investment Company Act of 1940? A. Face Amount Certificate Company B. Real Estate Investment Trust C. Management Company D. Unit Investment Trust

B The Investment Company Act of 1940 defines 3 types of investment companies; face amount certificate companies, unit investment trusts, and management companies. Real Estate Investment Trusts are not defined under the Investment Company Act of 1940 because they do not invest in securities; rather, they make real estate investments.

A customer places an order to buy 1,000 shares of ABC stock at the market in his cash account. The order is executed and, when reporting the trade back to the customer, the registered representative notices that the trade was executed in the customer's margin account. Which statement is TRUE? The registered representative can move the trade to the customer's cash account: A. to correct the error without needing to take any additional action since these accounts are related to each other B. as long as a signed statement requesting the transfer is obtained from the customer C. as long as a cancel/rebill record is created that documents the reasons for the account designation change and the manager approves in writing D. as long as FINRA is sent a quarterly report detailing all account designation changes whenever transactions were placed in incorrect customer accounts

C FINRA requires that anytime there is a change of account name or designation relating to an executed order, a written record must be made of the change. This is called a "Cancel-Rebill" record. A branch manager or compliance officer must know the reasons for the change and must approve the change in writing. Such a record must be created for any change of account designation - even for something as minor as moving a trade from a customer's cash account to the same customer's margin account.

You are in the middle of a discussion with an institutional client over the phone, where you recommend that the client buy 100,000 shares of ABC stock. It looks like the client may be interested in making the purchase. *Your cubicle is within earshot of the neighboring cubicle*. Just before your client tells you take the order to buy, you overhear your colleague, the representative in the neighboring cubicle, selling 10,000 shares of ABC stock to his client. Which statement is TRUE about this situation? A. The colleague has not committed a violation because your order was not imminent B. The colleague has not committed a violation if information barriers are in place C. The colleague has committed a violation because your customer's order could move the price of ABC stock D. The colleague has committed a violation because he was eavesdropping

C In this scenario, the colleague overhead the representative making the buy recommendation for a large block of shares to his institutional client and then rushed to tell his customer to buy the stock (since the market price could be moved by the large purchase) before the institutional client placed that order. This is front running and is a prohibited practice.

Preferred stock market valuation is based primarily upon: A. future earnings expectations for the issuer B. short term market interest rate levels C. long term market interest rate levels D. future dividend payment expectations for the issuer

C Preferred stock prices are based on market interest rates. Preferred stock is a fixed income security, and hence, when market interest rates move, the yield on the security adjusts to the market rate. When interest rates rise, preferred stock prices fall, increasing the yield on the security; and when interest rates fall, preferred stock prices rise, decreasing the yield on the security.

A customer has purchased 1,000 shares of ABC stock at $30 per share, paying a commission of $1 per share for the transaction. ABC stock declares a 5% stock dividend. When the dividend is paid, the tax status of the investment is: A. 1,000 shares held at a cost basis of $30 per share B. 1,000 shares held at a cost basis of $31 per share C. 1,050 shares held at a cost basis of $29.52 per share D. 1,050 shares held at a cost basis of $30 per share

C There is no tax due when a stock dividend is paid; instead the investor gets more shares; with each share worth proportionately less. The payment of a stock dividend increases the number of shares held by the investor and the cost basis must be reduced accordingly, since each share is theoretically worth less after the stock dividend is paid. The customer will have 1,000 shares x 1.05 = 1,050 shares after the dividend. Each share originally had a cost basis of $31 ($30 price plus $1 commission).* After the dividend is paid, the cost basis is adjusted to $31/1.05 = $29.52.*

Which of the following customer actions could be an indicator of money laundering? A. Depositing $50,000 of registered stock into the account and directing that it be transferred into street name B. Buying a security in advance of the ex date and selling after the record date in order to receive a cash dividend C. Buying and selling the same security over a short period of time, incurring significant commission costs D. Buying a security and selling short an equivalent convertible security to lock in a price difference

C A potential money laundering indicator is buying and selling the same security over a short time frame, while incurring significant commission costs - after all, why would a logical person do this?

Which of the following meets the definition of insider trading? A. A registered representative knows of an institutional order that is about to be placed to buy 5,000,000 shares of XYZ stock at the market and immediately places an order to buy 1,000 shares of XYZ at the market for his wife's account B. A registered representative with discretion places orders to buy 1,000 shares of XYZ at the market in a client account; later that day places an order to sell 800 shares of XYZ at the market in that account; and finally, towards the end of the day, places an order to buy 600 shares of XYZ at the market in that account C. A registered representative has been told by his client, the Vice-President of DEF Corporation, that this quarter is looking bad and the representative immediately places an order to sell 1,000 shares of DEF at the market for his wife's account D. A registered representative enters a 1,000,000 share order to buy DEF at the market without a valid account number and when the execution report comes back, the representative allocates the order to her customer accounts based on each customer account profile

C Insider trading requires that an individual be in possession of material non-public information, and that the individual trades on the information - and this is the situation in Choice C. It makes no difference that the trade was done in the wife's account - the trade was done (or directed) by the registered representative who had the material non-public information. Choice A is prohibited front running; Choice B is prohibited churning; and Choice D is simply prohibited - all orders placed must have a valid account number at the time of sending the order for execution.

All of the following tools are used by the Federal Reserve to control the money supply EXCEPT: A. open market operations B. setting the discount rate C. setting the federal funds rate D. setting reserve requirements

C Monetary policy tools of the Fed include setting reserve requirements, open market operations, setting the discount rate, and setting margin rates. The federal funds rate is the charge for overnight loans of reserves from bank to bank. It responds to Fed actions, but is not set by the Fed. To memorize the 4 tools of the Fed, remember "DORM." D is Discount rate; O is Open Market Operations; R is Reserve Requirements; and M is Margin on securities.

All of the following terms apply to publicly traded fund shares EXCEPT: A. one-time issuance B. managed C. redeemable D. negotiable

C Publicly traded fund shares represent an undivided interest in a portfolio of securities that is managed to meet an investment objective. A publicly traded fund has a 1-time stock issuance and then "closes" its books to new investment and then lists its stock on an exchange or NASDAQ. The stock then trades like any other common stock, except the company is in the business of making investments; instead of say, making cars, beer, or computers. Thus, this type of fund is "closed end."

The *conversion price* of a convertible debenture is set at issuance at $5 per share. The common stock is now trading at $3.50 while the *bond* is trading at 110. In order for the common stock to be trading at parity to the current market price of the bond, the stock price would be: A. $4.50 B. $5.00 C. $5.50 D. $7.50

C Since the bond is now trading at 110 ($1,100 per bond) and each bond is convertible into 200 common shares ($1,000 par / $5 conversion price = 200:1 conversion ratio), the parity price of the common is $1,100 / 200 = $5.50. Since the common is currently trading at $3.50, it is below parity and it does not pay to convert. It only makes sense to convert if the common is trading above parity.

The only call provision that must be considered when determining the purchase price of a municipal bond trade effected on a yield basis is a(n): A. extraordinary optional call B. extraordinary mandatory call C. optional call D. mandatory call

C The best answer is C. When a municipal dealer gives a basis quote, he or she is promising the purchaser a certain yield on the bond. MSRB rules require that when the actual dollar price is determined, that the dollar price be computed to the lowest dollar amount of yield to call or yield to maturity. The only calls that are considered are optional calls, meaning the issuer has the option of calling in the entire issue at preset dates and prices, as set forth in the bond contract. Mandatory calls are not considered - an example of a mandatory call is a "sinking fund" call. In such a call, the issuer is obligated to deposit monies annually to a sinking fund, and then use the funds to call in bonds on a random pick method at specified dates. It is the luck of the draw as to whether a given bond is called or not. Since there is no reasonable certainty of a specific bond being called, this type of call is not considered when pricing municipal bonds. Extraordinary calls (such as catastrophe calls, or calls of bonds backed by mortgages due to mortgage prepayments) are not considered, again because of the lack of any certainty as to their actually happening.

As the first trade in a new cash account, a customer buys $4,000 of securities. The customer mails a check for $3,000. When this is received by the broker, the customer is called and asked "Where is the other $1,000?" The customer responds that the check is in the mail. 2 business days later, the check does not arrive. The registered representative should: A. do nothing, since the account is over the 50% initial margin requirement B. sell out all of the securities in the account C. sell enough securities to cover the $1,000 shortfall and freeze the account for 90 days D. lend the customer $1,000 until the monies are received

C The customer has not paid in full for the position in a cash account. Regulation T requires that if the customer does not pay promptly, but no later than "Settlement + 2" business days, then the unpaid position must be liquidated and the account frozen for 90 days. During the freeze period, all purchases must be paid in advance.

Which statement is TRUE about accrued interest? A. Both municipal bonds and Treasury bonds accrue interest on a 30/360 basis B. Both municipal bonds and Treasury bonds accrue interest on an actual/actual basis C. Municipal bonds accrue interest on a 30/360 basis while Treasury bonds accrue interest on an actual/actual basis D. Municipal bonds accrue interest on an actual/actual basis while Treasury bonds accrue interest on a 30/360 basis

C When a bond is traded, because interest payments are made only 2 times a year, the buyer must pay the seller any "accrued interest" due for the period that the seller held the bond between those interest payment dates. Interest accrues from the date of the last interest payment made, up until, but not including, settlement date (which is the date that the money changes hands). For corporate and municipal bonds, the method of accruing interest is "standardized" so that each month only counts 30 days. Thus, for corporates and municipals, interest accrues on a "30 day month/360 day year" basis. In contrast, U.S. Treasury obligations accrue interest on an "actual day month/actual day year" basis.

The "AIR" (Assumed Interest Rate) stated in a variable annuity prospectus is a: A. guaranteed fixed interest rate for the annuity B. guaranteed minimum interest rate for the annuity C. conservative illustration of an interest rate for the annuity D. guaranteed maximum interest rate for the annuity

C The Assumed Interest Rate shown in a variable annuity prospectus illustrates the annuity that will be available if the separate account performs at that rate. It is conservatively estimated, but is no guarantee of a specific return.

The interest rate charged from commercial banks to their *best customers *is the: A. Discount Rate B. Federal Funds Rate C. Broker Loan Rate D. Prime Rate

D The lowest rate is the Federal Funds Rate. This is the rate on overnight loans of reserves from *bank to bank.* The next highest rate is the Discount Rate. This is the rate that the Federal Reserve charges member *banks for borrowing reserves from the Fed.* The next highest rate is the Broker Loan Rate. This is the rate that brokerage firms can borrow from *banks using securities as collateral.* The highest rate is the Prime Rate. This is the rate for *unsecured borrowing from banks by the best corporate customers.*

An order ticket to sell may be marked "long" in all of the following circumstances EXCEPT the customer: A. is long a call on that stock that *has been exercised* B. is short a put on that stock that *has been exercised* C. holds fully-paid convertible preferred stock of that issuer and has given instructions to convert D. holds fully paid warrants to buy the underlying stock in custody of the broker-dealer

D *A customer is "long" if the customer owns an option, right or warrant on that stock* *and has exercised* (so we know that the stock is actually coming in). Similarly, if a customer is short a put and it has been exercised, we know that the customer will be receiving the stock - so the customer is "long." A customer is "long" if the customer owns a convertible security (into that stock) and has given irrevocable instructions to convert. *If a customer simply owns a right, call, or warrant; is short a put; or owns a convertible; this is not considered to be "long"* the underlying stock until the action is taken to turn that instrument into that stock.

A customer sells short 100 shares of PDQ at $49 and sells 1 PDQ Sep 50 Put @ $6. The customer will have a loss at which of the following market prices for PDQ? A. $42 B. $43 C. $55 D. $56

D A customer with a short stock / short put position loses if the market rises. The customer sold the stock at $49 and collected $6 in premiums, for a total of $55. To break even, the stock must be bought for this amount. If the stock is bought for more than $55, the customer loses. Therefore, a loss is experienced at $56. To summarize, the formula for breakeven for a short stock / short put position is: Short Sale Price + Premium

Which call covenant MUST be considered when computing the dollar price of a municipal premium bond quoted on a yield basis? A. Catastrophe call B. Extraordinary optional call C. Sinking fund call D. In whole call

D MSRB rules require that if a premium bond is quoted on a yield basis, that the dollar price that is computed be the lower of the price computed to any call dates or maturity. This usually means that the price is computed to give the yield to the near term call date, since the premium is lost in the fastest time. The only calls that must be considered are those that have a "reasonable" certainty of occurring. An "in whole" call means the issue or maturity is callable in whole at predetermined dates. These call dates must be considered. Sinking fund calls are chosen on a random order basis - since we don't know which bonds will be selected for call, there is not a "reasonable" certainty. Extraordinary optional calls, such as a mortgage revenue bond issue calling in bonds if mortgages are prepaid, also is not considered. Finally, a catastrophe call (for example, bonds are called if a facility is destroyed) does not have a "reasonable" certainty and is not considered.

Which of the following customer actions would NOT be an indicator of potential money laundering? A. Deposits of bearer bonds to a margin account followed by immediate withdrawals of funds B. Extensive wire activity with accounts in countries with stringent bank secrecy laws C. Frequent deposits or withdrawals of cash in amounts just under $10,000 D. Frequent trades of securities of issuers headquartered outside the United States

D Money laundering is typically characterized by extensive deposits or withdrawals of cash, money orders, traveler's checks, bearer bonds. and wire transfers - especially to overseas accounts in countries with tight bank secrecy laws. Frequent trading of securities of issuers headquartered outside the United States sounds just fine to us!

Under Regulation M, which statement is FALSE regarding stabilizing bids entered by market makers? A. Only the syndicate manager placed a stabilizing bid B. There is no time limitation on the period that a stabilizing bid can be maintained C. A stabilizing bid cannot be placed unless a "Notice of Stabilization" is included in the prospectus D. A stabilizing bid can be placed at any price that is reasonably related to the market

D Only 1 stabilizing bid, placed by the manager, is permitted at any time after registration becomes effective. *The stabilizing bid is placed at, or just below the Public Offering Price.* It can never be placed above the P.O.P. There is no time limitation on the period that a stabilizing bid can be maintained under Regulation M. However, stabilization must cease when the syndicate is broken by the manager. A "Notice of Stabilization" must be included in the prospectus (on the inside front cover) that details the fact that the manager can start and stop stabilizing at any time and that when stabilization stops, the price of the issue may drop.

ABC corporation announces a 5:4 stock split to holders of record on Wednesday, November 15th, payable on November 30th. NASDAQ has set the ex date at December 1st. What is the first day that the stock will trade without a due bill attached? A. November 10th B. November 15th C. November 30th D. December 1st

D This is a hard question. The ex date for stock splits and stock dividends is unusual because it is set at the business day after the payable date. The record date to receive the extra shares is typically a month before the payable date. Someone who buys the shares settling after the record date will not get the extra shares. Yet on ex date the price is reduced, and that customer has the same number of shares, now worth less per share. The customer can claim the extra shares he deserves with a due bill. As of the morning of the ex date, any new purchaser buys at the reduced price and a due bill is not needed.

Initial approval of options accounts is performed by the: I Branch Office Manager II General Principal III Registered Options Principal IV Financial and Operations Principal

I III Initial approval of each options account is either performed by the Branch Office Manager (Series 9/10 license - the Series 9 covers options rules) or the Series 4 Registered Options Principal. The General Principal (Series 24 license) cannot approve options accounts - there is no options content on that exam. The Financial and Operations Principal (Series 27) is for the firm's supervising accountant.

Buy limit orders are: I placed below the current market value II placed above the current market value III executed if the market falls IV executed if the market rises

I III

In order to sell restricted stock under the provisions of Rule 144, the stock must be: I fully paid II either properly margined or fully paid III held for at least 6 months IV held for at least 1 year

I III

A customer buys 100 shares of ABC at $50 and buys 1 ABC Jan 50 Put @ $5. This position results in a profit when the market: I rises II falls III is stable

I If the market falls, the customer will exercise his put which he purchased for a premium of $5. He bought the stock at $50 and bought the right to sell the shares at $50. The loss would be the $5 per share ($500 total) premium paid. If the market remains stable, the put expires "at the money" and the customer loses the $500 premium. If the market rises, the long put expires "out the money." However, the stock can be sold at the higher market price creating a profit. The maximum potential gain comes from the stock position and is unlimited - the put would expire and the stock could be sold at the higher market price. The maximum potential loss is $500 - the premium paid in this case. Breakeven is at $55 - the customer has paid $5 in premiums and $50 per share for the stock, for a total outlay of $55 per share. The stock must be sold for this amount to breakeven.

A mutual fund's *expense ratio* has been increasing over the last 4 years. Which of the following may have caused the increase? I Higher management fees II Higher redemptions III Higher dividend distributions IV Higher capital gains distributions

I II Expense Ratio= Fund operating Expense / Total Net Assets If expenses rise (such as a higher management fee), or assets fall (caused by increased redemptions), the ratio will rise. Distributions made by the fund have no bearing on the ratio.

Industrial development bonds are backed by: I the lease obligating the private user to rent the facility for the life of the bond issue II the unconditional guarantee of the private user III securities pledged as collateral by the private user IV the faith and credit of the governmental issuer

I II An industrial development bond is backed by the rents paid by a corporation using the facility built with the proceeds of the offering, and the guarantee of that corporation. However, there is no actual collateral pledged to back the issue. If the corporation defaults, the bondholders cannot claim any assets to satisfy the debt. Industrial bonds are not backed by G.O. (full faith and credit of a governmental issuer) pledge.

Approval of new accounts for MSRB member firms can be performed by the: I Branch Office Manager II Municipal Securities Principal III General Securities Principal IV Financial and Operations Principal

I II III

Which of the following statements are TRUE regarding repurchase agreements? I Repurchase agreements typically mature in 1 to 90 days II Repurchase agreements are used by the Federal Reserve to influence money supply levels III Investors in repurchase agreements have no price risk IV Investors in repurchase agreements have no interest rate risk

I II III

Which of the following securities are marginable? I Municipal bonds II U.S. Government bonds III Agency Bonds IV Listed Common Stocks

I II III IV Any security listed on an exchange or on NASDAQ is marginable under Reg. T. Pink Sheet (non-NASDAQ OTC issues) are too small and thinly traded to be marginable. The market for limited partnership units is illiquid, so these are not marginable either. Regarding exempt securities such as U.S. Governments, Agencies, and Municipals - these are marginable securities - however, Regulation T. does not apply because they are exempt. Rather, the margins for exempt securities are set by FINRA.

Which of the following are standardized for listed option contracts? I Contract size II Expiration date III Strike price interval IV Expiration time

I II III IV Exchange traded option contracts have standardized *contract sizes* (e.g., 100 shares of stock), standardized *expiration date* and *time* (11:59 PM Eastern Standard Time on the 3rd Friday of the month), and standardized *strike price intervals* (generally 5 point intervals). The premium or "price" of the option is determined minute by minute in the trading market.

The trust indenture of a bond would include which of the following information? I Interest rate II Maturity III Collateral backing the issue IV Call provisions

I II III IV A corporate bond is issued under a bond contract. The contract spells out the interest rate, maturity, collateral, call or put provisions, and all other relevant features of the bonds. To ensure that these covenants are followed, a trustee is appointed to monitor the issuer's compliance with all of these promises. This document is the trust indenture.

A customer places an order to buy bonds. The order reads "Buy 5M ABC 9s M '45 @ 90 Stop GTC." After the order is elected, at which of the following prices may the order be executed? I 89 II 90 III 91 IV 92

I II III IV The customer places a stop order to buy 5M - or 5 $1,000 par bonds at 90% of par. Buy stop orders are placed at a price that is higher than the current market. If the market price rises to 90 or higher, the buy stop order is elected (at 90% of par or higher), and the order is executed at the next available price - either at, above, or below the stop price. Thus, the order can be executed at any of the listed prices.

When opening a new account, a registered representative is required to obtain which of the following information? I Customer birthdate II Social security number of the customer III Occupation of the customer IV Whether the customer is an employee of another broker/dealer or financial institution

I II III IV To open a cash account, the registered representative must complete a new account form which includes the customer's birthdate. The Social Security number of the customer (tax I.D. number) must be obtained so that the IRS gets its 1099 reports of income earned in the account; and the customer's occupation and employer because if the customer is employed by another brokerage firm, special procedures must be followed. The registered representative and the manager (principal) must sign the form. By signing, the registered representative indicates that the information is written as stated by the customer; and the manager is signing that the information has been reviewed prior to accepting the account for the firm.

A customer has opened a margin account and has signed both the hypothecation agreement and the loan consent agreement. The brokerage firm can do which of the following with the customer's securities? I Commingle the customer's securities with those of other customers II Lend the stock to another customer who wishes to effect a short sale III Commingle the customer's securities with securities owned by the brokerage firm IV Pledge the customer's securities to a bank for a loan

I II IV When a customer signs a margin account agreement, he or she allows the brokerage firm to keep the securities in street name; to commingle them with other customers' margin securities; and to pledge those securities to a bank for a loan. The brokerage firm cannot commingle customer securities with its own stock positions. When the loan consent agreement is signed by the customer, the customer allows the securities in the account to be loaned out on short sales.

Which of the following statements are TRUE about the Net Asset Value per share for a mutual fund? I *If the securities* in the portfolio make dividend distributions, the Net Asset Value per share will increase II *If the securities* in the portfolio make dividend distributions, the Net Asset Value per share is unaffected III *If the mutual* fund makes dividend distributions to shareholders, the Net Asset Value per share will decrease IV *If the mutual* fund makes dividend distributions to shareholders, the Net Asset Value per share is unaffected

II III If a fund distributes a dividend to shareholders, the Fund shares are reduced by the value of the distribution. If the securities in the fund portfolio pay dividends, these are received by the Fund. The receipt of these monies into the Fund increases NAV per share. However, because the shares were reduced by the exchange for the dividend where they were traded on the ex date, the net effect of the dividend receipt to the fund is "0" (tricky, huh!).

During the accumulation phase of a variable annuity: I funds can be distributed to unit holders II funds cannot be distributed to unit holders III as interest, dividends, and capital gains are received, the investor has the option of reinvesting in more shares IV as interest, dividends, and capital gains are received, these must be reinvested in more accumulation units

II IV

Which of the following statements are TRUE regarding Roth IRA? I Contributions are tax deductible II Contributions are not tax deductible III Distributions are taxable IV Distributions are not taxable

II IV

Exchange rate risk is a factor to consider when investing in debt issues: I within the U.S. II outside the U.S. III that are denominated in U.S. dollars IV that are denominated in a foreign currency

II IV When an investment is made outside the U.S. that is denominated in a foreign currency, the investor assumes exchange rate risk. This is the risk that the foreign currency weakens against the U.S. dollar (which is the same as the U.S. dollar strengthening).

The term "Funded Debt" applies to: I Short term debt II Long term debt III Money market debt instruments IV Capital market debt instruments

II IV "Funded debt" is a term that applies to long term corporate obligations. This debt is "funded," indicating that the monies are a source of long term funding and do not have to be repaid shortly. Such long term debts are part of the capital market - the market for long term bonds and equity financings. Contrast this to a money market instrument, which is a debt with a maturity of 1 year or less. This is an "unfunded" debt that must be repaid shortly.

Sell stop orders are: I placed above the current market II placed below the current market III triggered as the market rises IV triggered as the market falls

II IV Sell stop orders are placed below the market and are triggered as the market falls. If there is a large pool of sell stop orders at a certain price, when the market hits that level, they are triggered and become market orders to sell - accelerating the decline in the market.

A customer buys 100 shares of ABC stock at $51 and sells 1 ABC Jan 50 Call @ $4. The market rises to $55 and the call is exercised. The customer has a:

If the market rises to $55, the short call is exercised. The stock which was bought for $51 must be delivered for $50 per share (short call strike price) for a $100 loss. However, the writer earns the $4 ($400) premium collected. Thus, the *net gain is $300.*

On December 1st, an officer of ABC Corporation wishes to sell stock under Rule 144. ABC has 20,000,000 shares outstanding. The previous weeks' trading volumes are: Week Ending Volume Nov 28 100,000 shares Nov 21 220,000 shares Nov 14 230,000 shares Nov 7 210,000 shares Oct 180,000 shares If the Form 144 is filed today, the maximum sale is:

The best answer is B. Rule 144 allows the sale of the greater of 1% of the outstanding shares or the weekly average of the preceding 4 weeks trading volume every 90 days. 1% of 20,000,000 shares = 200,000 shares. The last 4 weeks' trading volumes are: 100,000 shares 220,000 shares 230,000 shares 210,000 shares 760,000 shares/ 4 weeks = 190,000 share average The greater amount is 1% of the outstanding shares, or 200,000 shares.