Unit 5

What is ACT?

* Automated Confirmation Transaction Service *Operated by FINRA/Nasdaq * Web base system that compares trade information submitted by ACT Participants * All reported by ACT have been locked in and sent to NSCC are considered firm obligations * Not an order system

What appears in TRACE?

* Date & time * Quantity * price * yield * commission * special settlemets or conditions that affected the price * Whethe it was reported late

TRACs what is it?

* Provides a trade comparisson service which compares trade data from participants * Dual status market makes in Nasdaq and ADF have the option to eport trades to TRACS or ACTs

Prohibted trading activities

* Recomending - a non suitable tade based on customers suitability * Purchasing w/o cust consent * Switching trades fo no reason * Misrep - failing to disclosue * removing - w/o cust consent * Charging excessive mark ups * Guaranting * Trading ahead - placing order before cust (front runnint) * not disclosing breaking points

Over the counter trade repoting facility (ORF)

* Service of FINRA tha suppots online trade repoting of OTC equity securities * Trade matching and fowading to NSCC for clearing

Problems with trading after market hours

* react to late breaking news * volume is low * high volatility * Stocks can make large movements * Spreads are wide

Trading rules

* report within 10 secs * if outside of business hours must report within 8:15 trade date * .T = Outside of market hours but reported on same day * As of = outside market hours but reported next day * No was = trade is a correction report, must be made by 8pm on the day of tade.

What is TRACE?

* reporting system fo OTC primary and secondary market transactions * Municipal securities are not traced eligible securities. * A trading reporting system only! It does not accept quotations nor does it provide settlement and clearance functions * Both sides must report (dual reporting) * Trades must be reported within 15 mins of execution. * Once FINRA receives this info. It shows it to the public

A firm executes a customer order by selling 500 shares of XYZ at $21.57 to a CQS market maker. At the time of order entry, 1,000 shares of XYZ were being bid on the NYSE floor at $21.60. This is an example of interpositioning. a trade-through. something which is generally prohibited. something which is generally permitted.

2 & 3 A trade-through occurs when a firm executes a customer order at a price when a better price is available. In the above case, the firm traded through the best price available and disadvantaged its customer by three cents per share. A trade-through is generally prohibited.

A registered representative may share in the profits of an account only when profit or loss is shared proportionately to the capital contributed by each party. profit or loss is shared by family members. the arrangement is approved by a principal. the arrangement is profitable. A) I and III B) II and III C) II and IV D) I and IV

A

FINRA members may deal with nonmembers A) on the same terms and conditions accorded to the public. B) without restriction. C) in underwritings only. D) under no circumstances.

A

If an OTC market maker provides a firm quote to another broker-dealer and then refuses to buy or sell at the price quoted, the market maker is said to be A) backing away. B) freeriding. C) interpositioning. D) crossing quotes.

A

If a registered representative wants to share in the profit or loss of a customer's account, all of the following statements are true except A) FINRA Division of Market Regulation must be notified by electronic means within 24 hours. B) sharing is permitted without regard to the proportion contributed if there is an immediate family relationship between the parties. C) sharing is permitted only in proportion to the capital contributed by each party. D) the account must be approved by a principal.

A All accounts must be approved by a principal, but FINRA is never notified regarding the opening of accounts. In a joint account involving a customer and a registered representative, profit and loss must be shared in proportion to the capital contributed by each party. The proportion test does not apply if there is an immediate family relationship between the two.

A branch manager, in reviewing the prior day's trade blotter, notes a $400,000 purchase of shares of the Acme Fund. The representative bought Class C shares, and the transaction involved an IRA transfer that was effected on a trustee-to-trustee basis. The manager should A) determine if the customer was advised of the potential benefit of buying the fund on a front-end or back-end loaded basis. B) determine if the transaction was in compliance with the 60-day rollover rule. C) sign off on the trade. D) cancel the trade.

A Rather than having the invested returns reduced each year by 12b-1 fees, it might be more beneficial to take a onetime charge up front (which should be small because of the size of the trade) or to take a back-end loaded charge (which might be nonexistent if the shares are held long enough, which is likely because the trade was for a retirement account).

If a registered representative wishes to open a joint account with his sister, who is a client of his, which of the following rules would not apply? A) The sharing in profits and losses in the account must be proportional to each party's investment in the account. B) The account can be opened as joint tenants with right of survivorship (JTWROS). C) The representative's principal must approve the opening of the account. D) The Conduct Rules.

A If a registered representative is opening a joint account with an immediate family member, the sharing of profits and losses need not be proportional to each party's investment in the account. Although it would be most common for the account to be opened as tenants in common (TIC), there is nothing that requires it and the siblings could open as JTWROS if they desired.

Which of the following statements best describes a breakpoint sale? A) Sale of fund shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions B) Sale of investment company shares in anticipation of a distribution scheduled to be paid shortly C) All of these D) Compensation paid to a registered representative and generated by commissions from a client who reached another breakpoint after the registered representative stopped working for the member

A) A breakpoint sale is a violation of the Conduct Rules. It occurs when a broker counsels a client to purchase shares immediately below the amount that would qualify the client for a discounted sales charge.

Under TRACE rules, secondary market transactions in corporate bonds must be reported to FINRA within how many minutes? A) 30 minutes. B) 15 minutes. C) 75 minutes. D) 45 minutes.

B

All customer purchase orders executed on an exchange floor are completed A) at the highest asking price. B) on an agency basis. C) as a principal transaction. D) at the lowest bid.

B All customer trades executed on an exchange floor are done on an agency basis—the firm executing the trade on behalf of the customer acts as a broker, charging the customer a commission. Acting as a broker means finding a buyer for a seller and vice versa. A principal transaction would require the exchange member to buy or sell for themselves, placing the firm before the customer, which is a violation unless the price to the customer is better by so doing. The best execution price to the customer would be the highest bid or the lowest ask.

Two factors which are critical to the term best execution are found in which of the following? Price to the customer Availability of the correct number of shares Execution quality Trading capacity of the firm A) I and IV B) I and III C) II and III D) II and IV

B Best execution means more than best price; execution quality (which includes speed of execution, fill rates, price improvement, and so forth) is also important. Member firms are required to have procedures in place to monitor their trade executions and to take action where appropriate.

If a registered representative wishes to open a joint account with his sister, who is a client of his, which of the following rules would not apply? A) The representative's principal must approve the opening of the account. B) The sharing in profits and losses in the account must be proportional to each party's investment in the account. C) The Conduct Rules. D) The account can be opened as joint tenants with right of survivorship (JTWROS).

B If a registered representative is opening a joint account with an immediate family member, the sharing of profits and losses need not be proportional to each party's investment in the account. Although it would be most common for the account to be opened as tenants in common (TIC), there is nothing that requires it and the siblings could open as JTWROS if they desired.

All of the following activities in a customer's mutual fund account may be considered a violation of the Conduct Rules except A) excessive activity in the customer's account. B) granting of discretionary authority to a new registered representative. C) switching of Class A shares between fund families. D) short-term trading in mutual fund shares.

B Mutual funds are considered a long-term investment. Thus, switching Class A shares of funds, short-term trading of funds, and excessive activity in a customer's account very likely indicate that the registered representative is churning. There is nothing unlawful about granting discretionary authority to a new registered representative.

A typical quote may be seen as 28 - 28.07. Based on those prices it can be seen that A) the price of 28 is the best execution price for buying shares. B) the highest bid is 28.07. C) the best bid is 28. D) all quotes must allow for a markup for an agency transaction.

c The lowest asking price is shown in this quote is $28.07. That's the best price anyone is willing to offer the stock. There are two sides to every transaction, a buyer and a seller. Someone is wanting to sell to another who wants to buy. They need to get together on the price. In the previous quote, the asking price of $28.07 is the lowest anyone who owns the stock is willing to accept as payment. The bid price of $28 is the highest price anyone who wants the stock is willing to pay. The difference of .07 is called the spread. There will not be a markup on an agency transaction. Markups are for principal or dealer trades.

A registered representative would be permitted to share a disproportionate amount of the profit and loss in a customer account

if there is an immediate family relationship between the two. Generally, if there is a joint account between a customer and a registered representative, profit and loss must be shared in proportion to the capital contributed by each party. However, if there is an immediate family relationship between the two, the proportionate test does not apply.

When referring to a stock, the term spread refers to

the difference between the bid and asked prices. * The term spread refers to the difference between the bid and asked prices.

As a general business practice, FINRA's Conduct Rules permit selling concessions and discounts to

to member broker-dealers engaged in the investment banking or securities business. FINRA's Conduct Rules permit member broker-dealers to allow concessions and discounts only to other members.

Quotations

Current bis = highest the dealer will buy Current offer = lowest the dealer will sell

A TRACE report will display all of the following information except A) execution date and time. B) price and yield. C) whether the trade was reported late. D) names of the dealers involved.

D A TRACE report includes execution date and time, quantity, price and yield, and whether the trade was reported late. Last sale information does not include the names of the dealers involved. Note that both sides report the trade to TRACE.

Which of the following statements regarding interdealer trades in Nasdaq securities are true? The trade must be reported within 10 seconds of execution. The trade must be reported immediately after the transaction's completion. The selling broker-dealer must report the trade. The buying broker-dealer must report the trade. A) II and IV B) II and III C) I and IV D) I and III

D All trades must be reported to the ACT within 10 seconds of execution. In addition, the sell side reports except when the buying dealer is a market maker and the selling dealer is not.

TRACE provides trade reporting information on all of the following except A) foreign government debt. B) noninvestment grade corporate bonds. C) investment-grade corporate bonds. D) municipal bonds.

D Exempt securities—such as U.S. government and municipal bonds—are not reported on the TRACE system. Municipal debt trades are reported through EMMA.

If an associated person enters into an investment joint venture or shared trading profit arrangement with a customer, which of the following statements is true? A) The arrangement must be between family members. B) This is a violation of FINRA's Conduct Rules. C) The express prior approval of FINRA is required. D) The profit split must be in proportion to each party's capital contribution unless the account is held jointly by two or more family members.

D Joint accounts between associated persons and clients are permitted, provided a principal approves and profits and losses are shared in direct proportion to each party's capital contribution. The proportionate test does not apply to joint accounts between associated persons and their immediate family members.

FINRA rules require that the reporting of trades in non-Nasdaq securities be made A) between the hours of 4:00 pm and 6:30 pm on the trade date or between 7:30 am and 9:00 am on the next business day. B) before the close. C) weekly. D) through the ACT.

D Reporting for non-Nasdaq securities is done through the ACT.

Qualified institutional buyers can execute Rule 144A transactions through which of the following systems? A) TRACS B) ORF C) TRACE D) TRF

D Rule 144A requires that restricted securities report to the ORF no later than 8:00 pm ET. The OTC Reporting Facility (ORF) replaced the old PORTAL trade reporting requirements.

Trades executed through the Alternate Display Facility by unlinked ECNs are reported to which of the following systems? A) CQS B) EMMA C) ACT D) TRACS

D The ADF shows Nasdaq quotes from ECNs not participating in the Book. Trades executed through the ADF are reported through the trade reporting and comparison service called TRACS.

TRACE can best be described as

a trade reporting system. TRACE is a trade reporting system. Subscribers can access last sale information on corporate bond transactions in the OTC market.

A registered representative (RR) knows that a large block trade to buy shares of XYZ stock for one of her institutional accounts will be executed shortly. The RR enters small orders to buy 100 shares of XYZ for each of her retail discretionary accounts prior to the block trade. This action is

a violation known as front-running. Having knowledge that is not public knowledge of an order's pending execution and placing an order before it occurs, so as to benefit in price movement after it is executed, is a violation known as front-running. * FINRA Rule 5270

Under the Conduct Rules, a registered representative may share in an account if approved by A) FINRA, and the registered representative bears all of the losses. B) FINRA, and there is proportionate sharing in both gains and losses. C) a principal and there is proportionate sharing in both gains and losses. D) a principal, as long as it is stated in writing that the registered representative is not responsible for losses.

C A registered representative may share in an account if it is approved in writing by a principal of the firm. There must be proportionate sharing of both gains and losses, unless the customer is a member of the immediate family of the representative.

As a general business practice, FINRA's Conduct Rules permit selling concessions and discounts A) to anyone who deals in securities transactions. B) to no one. C) to member broker-dealers engaged in the investment banking or securities business. D) as consideration for services rendered by nonmember broker-dealers in obtaining business.

C FINRA's Conduct Rules permit member broker-dealers to allow concessions and discounts only to other members.

In an interdealer trade of a corporate bond, TRACE rules require that A) the selling dealer report the trade (single side reporting). B) the market maker report the trade. C) both sides report the trade (dual side reporting). D) the buying dealer report the trade (single side reporting).

C TRACE requires that both sides report the trade to FINRA.

A registered representative tells a customer that by investing in government bonds, he is guaranteed to make money. Under the Conduct Rules, which of the following statements is true? A) This is ethical because government bonds carry no risk. B) This is a violation because it constitutes a guarantee against market risk. C) This is a violation if the customer loses money but not if he at least breaks even. D) This is ethical if the government bonds mature in less than one year.

Government bonds are guaranteed to pay interest and principal, but they do carry market risk. It is fraudulent to indicate to a client that he is guaranteed against loss.

Which of the following quotations are expressions of firm quotes? "It is 30-31." "Last I saw was 30-31." "We can trade it 30-31." "30-31 work out."

Examples of firm quotes include: "It is 30-31," "We can trade it 30-31," "The market is 30-31," and "We will do it 30-31."