SIE Unit 18 Qbank

Which of the following would be required in discretionary accounts? A) Securities and Exchange Commission (SEC) approval to open the account B) Financial Industry Regulatory Authority (FINRA) approval to open the account C) Prior approval by a principal before each discretionary trade is placed D) Prompt approval by a principal following each discretionary trade

Prompt approval by a principal following each discretionary trade The SEC and FINRA do not approve accounts approval of the trade is required promptly afterwards by a principal not before.

Which of the following are required in discretionary accounts? A) Prompt approval by a principal following each discretionary trade B) SEC approval to open the account C) Prior approval by a principal before each discretionary trade is placed D) FINRA approval to open the account

Prompt approval by a principal following each discretionary trade The SEC and FINRA do not approve accounts. Approval of the trade is required promptly afterwards by a principal, not before.

The locate requirement is an element of which of the following transactions? A) Buy to close B) Sell to open C) Buy to open D) Sell to close

Sell to open When selling short (selling to open), shares must be borrowed from the dealer. The dealer finding those shares that can be loaned to the seller is part of the locate requirement.

Which of the following transactions has the most risk? A) Short against the box B) Selling short C) Buying to open D) Selling to close

Selling short Short against the box is when a customer owns the shares she wants to sell, but borrows some additional shares, sells the borrowed shares, and then covers the short position with shares already owned. Historically it was a tax strategy, but it doesn't work as well anymore with the tax law change. There is no loss potential. Buying to open can cause a loss of the amount invested; selling short has unlimited loss potential.

Selling long is equivalent to which of the following? A) Selling short B) Selling to close C) Selling to open then buying to close D) Selling to open

Selling to close When a customer owns a position and then sells that position that is referred to as selling long or selling to close.

Which of the following transactions has the least risk? A) Selling to open B) Short against the box C) selling short D) Buying to open

Short against the box Short against the box is when a customer owns the shares she wants to sell but borrows some additional shares, sells the borrowed shares, and then covers the short position with shares already owned. Historically it was a tax strategy, but it doesn't work as well anymore with the tax law change. There is no loss potential. Buying to open can cause a loss of the amount invested; selling short and selling to open have unlimited loss potential.

Your customer opens a position at 45 and then closes it later at 47. This represents A) a 2-point gain. B) a 2-point loss. C) a 47-point gain. D) a 2-point gain or loss.

a 2-point gain or loss. Because we do not know if the opening transaction was a buy or a sell from what we are told, this could be either a 2-point gain or loss. If the opening transaction was a buy, this represents a gain (bought at 45, sold at 47). But if the opening transaction was a sell, this represents a 2-point loss (sold at 45, bought back at 47).

Two weeks ago representative Pete introduced his customer Neil to the Windmill Growth Fund in response to Neil's interest in growth funds. Today the customer calls Pete to place a trade to invest $10,000 in the Windmill Growth Fund. This is A) a solicited trade B) a discretionary trade C) an unsolicited trade D) an unclassified trade

a solicited trade As the representative introduced the security to the customer, this is a solicited trade. The customer provided the three key elements of the order (action, asset, amount) it is not a discretionary trade.

Your customer purchased 300 shares of XYZ stocks six months ago and sold the shares last week. The actions your customer took in relation to XYZ were to A) buy long and sell short. B) buy long and sell long. C) buy short and sell short. D) buy short and sell long.

buy long and sell long. The purchase of the stock is a long buy. The subsequent sale of the long position is a long sale.

Shares to sell short have been located in order to be borrowed. Once sold short, these shares will be known as A) uncovered. B) naked. C) closed. D) covered.

covered. Selling short requires borrowing or locating the shares to be borrowed first. These shares, because they have already been located to be borrowed, are known to be covered.

An opening transaction can be A) either a buy or a sell. B) a buy only. C) a sell only. D) a short sale only.

either a buy or a sell. An opening transaction can be either a buy or a sell. Which one will determine the investor's market attitude—bullish when buying to open a position and bearish when selling to open a position (selling short).

Short sellers have A) unlimited profit and loss potential. B) limited profit and loss potential. C) unlimited profit potential and limited loss potential. D) limited profit potential and an unlimited loss potential.

limited profit potential and an unlimited loss potential. Short sellers are bearish—wanting to see the stock go down in value. Because stock could only go down as far as zero, the profit for a short seller is limited to the difference between the price the stock was shorted at and zero. By contrast, the risk for a short seller is that the stock goes up in value and there is no limit to how high the stock might rise, giving the short seller potentially unlimited losses.

Before executing a short sale the broker-dealer must first A) have the customer deposit funds sufficient the cover the potential loss. B) locate the shares to be borrowed. C) do all of these. D) check to see if the customer already owns the shares.

locate the shares to be borrowed. The locate requirement mandates that the broker-dealer have located the share to be borrowed before the order is executed. If the customer already owns the shares then this would be a short against the box, and still requires the broker-dealer locate the shares. As this is an unlimited risk position it would be impossible to deposit sufficient funds to cover the potential loss.

Shares must be borrowed in order to A) buy to open a position. B) sell short to close a position. C) sell short to open a position. D) buy to close a position.

sell short to open a position. When selling short, an investor is opening a position (a short position). Selling short means selling shares not yet owned. In order to do so, the shares must be borrowed first.

When investors open a position by going long the security, they can close the position by A) selling the security. B) buying the security. C) selling the security short. D) opening a new position in the security.

selling the security. Going long a security means that it was purchased. If a position was opened by purchasing the security, it would be closed by selling it.

When investors open a position by going long the security, they can close the position by A) selling the security. B) selling the security short. C) buying the security. D) opening a new position in the security.

selling the security. Going long a security means that it was purchased. If a position was opened by purchasing the security, it would be closed by selling it.

All of the following would be required for a discretionary account except A) the customer must authorize discretion. B) a principal at the firm must authorize discretion. C) all trades must be promptly approved by a principal at the firm. D) the account must receive Financial Industry Regulatory Authority (FINRA) approval prior to the first trade.

the account must receive Financial Industry Regulatory Authority (FINRA) approval prior to the first trade.

With a discretionary account A) the customer may refuse any trades done by the party given the discretion. B) churning is permitted by the party given the discretion. C) the customer may still enter orders. D) a full power of attorney is needed on file to grant discretion. Explanation

the customer may still enter orders.

A customer called his registered representative to place a trade to buy 100 shares of ABC. The customer wants to put a limit on the order, but is unsure what would be an appropriate price. At the suggestion of the registered representative, the customer enters the order with a limit of $30. This trade was A) discretionary. B) solicited. C) not held. D) unsolicited.

unsolicited. The customer, independent of the registered representative, placed the order, making it unsolicited. While the rep did advise on what an appropriate limit price would be, the customer ultimately placed the order instructions with the limit, and would not be considered discretionary.

A customer has an account with a broker-dealer who provides a group of services, such as asset allocation, portfolio management, trade executions, and administration, for a single fee. This is known as a A) discretionary account. B) margin account. C) wrap account. D) commission-based account.

wrap account. Wrap accounts are accounts for which firms provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee rather than charging commissions for individual transactions. Wrap accounts are generally investment advisory accounts and can be cash accounts, margin accounts, discretionary accounts, or nondiscretionary accounts.

Which of the following orders can be used to close a short position in CDT stock that consists of 1,000 shares? A) Write 10 CDT call options B) Buy 10 CDT call options C) Sell 1,000 shares of CDT D) Buy 1,000 shares of CDT

Buy 1,000 shares of CDT To close a short position consisting of 1,000 shares of CDT stock, one would need to purchase 1,000 shares—buy 1,000 shares of CDT. Buying the call options would not close the position, but once owned, they could be exercised with the purchased shares then used to close the short position.

Which of the following best describe a wrap account? The firm offering the account would need to be registered as both a broker-dealer and an investment advisor The account fee covers both transactions and advice The wrap fee for the account covers only where the firm acts as a broker or acts as a dealer The firm may only be registered as a broker or dealer

I and II The fee covers both the advice and any transaction; the firm must be registered as both a broker-dealer and an investment advisor.

Which of the following choices would a registered representative be able to make for a customer in a nondiscretionary account? The time of execution of the trade Which security to buy How much of the security to buy At what price to execute the trade

I and IV If the registered representative chooses the asset, the action, or the amount, it must be placed in a discretionary account. The registered representative can choose the time or price without needing to place the trade in a discretionary account.

The trade would need to be placed in a discretionary account if the registered representative chooses which of the following? The time of execution of the trade Which security to buy How much of the security to buy At what price to execute the trade

II and III If the registered representative chooses the asset, the action, or the amount, it must be placed in a discretionary account. The registered representative can choose the time or price without the needing to place the trade in a discretionary account.

A client calls a registered representative and states that they live in New York City and that they are looking for a bond that would be triple tax free in New York. The registered representative tells the client that his firm has some bonds in inventory that are from the Albany, NY, school district that would be triple tax free for the client. Which of the following would be the registered representative's best course of action? A) Determine suitability prior to placing the trade and mark the trade solicited. B) Determine suitability prior to the trade and mark the trade unsolicited. C) No suitability determination is required because these bonds will be tax free for the client and mark the trade unsolicited. D) No suitability determination is required becasue the bonds will be tax free for the client and mark the trade solicited.

Determine suitability prior to placing the trade and mark the trade solicited. For a trade to be unsolicited the client would need to specifically identify the bonds they wanted to purchase instead the registered representative is the one who recommended these bonds making the trade solicited. Suitability must be determined on solicited trades.

A registered representative is explaining discretionary and nondiscretionary accounts to a customer. Only one of the following statements is accurate and can be made by the registered representative. Which is it? A) I decide if the account should be set up as discretionary or nondiscretionary, but must do so in your best interest. B) In a discretionary account you will have the opportunity to approve any order I want to enter before I enter it. C) If I decide that the account should be a discretionary one you will no longer be able to enter orders yourself. D) In a nondiscretionary account no order can be entered without your prior approval.

In a nondiscretionary account no order can be entered without your prior approval. In a nondiscretionary account no order can be entered without the customer's prior approval. In a discretionary account the customer's prior approval is not required. Only the customer can decide if the account should be a discretionary one and grants that discretion with a limited power of attorney giving trading authorization to the registered representative. Even in a discretionary account the customer may still enter their own orders.

A registered representative placing trades in a customer account must have discretionary authority if they choose which of the following aspects of the trade? A) The action to be taken, the asset to be traded, or the amount of the trade B) The action to be taken and the asset to be traded. C) The action to be taken, the asset to be traded, and the amount of the trade. D) The asset to be traded and the amount of the trade.

The action to be taken, the asset to be traded, or the amount of the trade In order for a trade to be considered discretionary the representative needs to choose any one or more of the three aspects of the trade (asset, action, or amount). It does not require more than one aspect, so the best response to the question is Action, Asset, or Amount. Any response that includes "and" suggests more than one of the "A"s needs to be controlled and is not accurate.

Who must grant permission for a representative to have discretionary trading authority on an account? A) The customer and the representative B) The customer, the principal, and the representative C) The customer and a principal of the broker-dealer D) The representative and a principal

The customer and a principal of the broker-dealer