Unit 8 SIE Exam

Which of the following is not part of the secondary markets? A)Mutual fund market B)The exchanges C)Over-the-counter market D)Third market

A)Mutual fund market Mutual funds, as open-end investment companies, do not trade in the secondary markets.

Both the individual and institutional investor are able to easily buy and sell securities to meet their objectives through A)secondary markets. B)primary markets. C)biennial markets. D)outdoor malls.

A. secondary markets This is the primary purpose of the secondary markets

A central, physical, marketplace where securities are traded through a designated market maker is A)the OTC. B)an exchange. C)the pit. D)the third market.

B)an exchange. This description most aligns with the exchange model where securities are traded in a central location through a designated market maker.

All of the following are benefits of using a prime broker except A)research. B)consolidation of records. C)cost savings. D)multiple executing brokers.

A. research An institutional investor may select one firm (the prime broker) to provide custody and financing of securities while other firms, called executing brokers, handle all trades placed by the customer. It is not unusual for large companies to use dozens of executing broker-dealers. Trade confirmations from the many executing broker-dealers are consolidated and are provided along with account statements by the prime broker. Prime brokerage is efficient and saves the customer time and money. Research is not associated with prime brokerage accounts.

A firm designated as self-clearing can 1.act in a back-office capacity for an introducing firm. 2.not act in a back-office capacity for an introducing firm. 3. clear and settle transactions executed by other firms. 4. only clear transactions it executed. A)I and IV B)I and III C)II and IV D)II and III

B)I and III Self-clearing firms not only clear and settle their own executions (transactions) but can clear the executions of other firms that would be considered introducing or fully disclosed firms. In this light, fully disclosed firms are those that introduce their business to clearing firms. Clearing and settling transactions includes providing any back-office functions needed.

A clearing corporation agent or depository for securities transactions A)can never be a corporation. B)can be a commercial bank. C)can be a bank or corporation only if they are also a broker-dealer. D)must be a broker-dealer.

B)can be a commercial bank. A clearing agent can be a broker-dealer but doesn't have to be. In addition to broker-dealers, commercial banks can act as clearing agencies and depositories, as can corporations that are set up specifically to clearing securities transactions and taking custody of funds and securities.

Secondary markets exist to do all of these except A)allow individual investors easy access to investment vehicles. B)decrease liquidity in the national markets. C)allow investors to easily liquidate securities. D)support the existence of primary markets.

B)decrease liquidity in the national markets. Secondary markets are focused on providing, not decreasing liquidity. Ultimately, a fair and orderly secondary market makes securities more attractive, supporting the functioning of the primary

Having been told that a firm incorporates proprietary trading in its business model buying and selling securities into and out of its own inventory you would know that it is A)an executing for commissions only. B)a market maker. C)a fully disclosed broker-dealer. D)a clearing agent.

B. a market maker Broker-dealers who incorporate proprietary trading into their business model are known as market makers. As a market maker the broker-dealer trades in their own account attempting to profit. A firm making markets may be a carrying firm or a fully disclosed firm. Commissionable transactions are those done by brokers for customer accounts, not proprietary trades.

A broker-dealer that accepts funds and securities from customers and its correspondent member firms would most likely be which of the following? A)An investment company B)A depository trust C)A carrying firm D)A fully disclosed introducing firm

C)A carrying firm Most firms choose to introduce their customers to another member firm known as a clearing or carrying firm to handle back-office tasks, such as clearing trades, sending trade confirmations, settlement and reporting compliance, trade execution, and custody of customer funds and securities.

Which of these broker-dealers would most likely have correspondent firms? A)An introducing broker-dealer B)A market maker C)A self-clearing firm D)A fully disclosed broker-dealer

C)A self-clearing firm A self-clearing (or carrying) firm holds funds and securities of the fully-disclosed or introducing firm's customers and performs related functions, such as sending confirmations and statements for them. Those firms, for whom the carrying firm performs those services, are known as its correspondents.

A broker-dealer's business model allows for only the purchase and sale of securities for retail customer accounts. It does not execute, settle, or clear its customer's transactions, nor does it tend to any back-office functions such as sending trade confirmations or forwarding proxies. This broker-dealer would best be described as what type of firm? A)Market making B)Clearing agent/carrying agent C)Introducing/fully disclosed D)Full service

C)Introducing/fully disclosed A fully disclosed introducing broker-dealer is what the word implies—it introduces its customer's business to a clearing firm. Clearing firms (often called carrying firms or agents) hold funds and securities and settle transactions (clear and process) for their correspondent introducing firms. Essentially, the clearing firm acts as the

A broker-dealer that executes trades and settles transactions for another broker-dealer is called A)a limited broker-dealer. B)an introducing firm. C)a carrying firm. D)a fully disclosed firm.

C)a carrying firm. Carrying firms, also known as clearing firms, execute trades, clear and settle transactions, take custody of customer funds and securities, and handle all back-office tasks such as sending trade confirmations and statements for themselves as well as for other broker-dealers classified as introducing or fully disclosed firms.

All of the following are associated with being a carrying firm except A)accepting customer securities. B)being able to clear customer transactions. C)being a fully disclosed firm. D)accepting customer funds.

C)being a fully disclosed firm. A carrying firm has the capability to do trade executions, clear and settle transactions, and take custody of customer funds and securities. A fully disclosed firm is one that introduces its customer business to another firm for the purpose of clearing and settling transactions.

A business entity that performs the function of receiving and delivering payments and securities on behalf of both parties to a securities transaction is called a A)broker-dealer. B)depository. C)clearing agency. D)transfer agent.

C)clearing agency. This is the function of a clearing agency. Although there are some broker-dealers that do act as clearing agents, being a broker-dealer does not always include providing the services of a clearing agent. The broker-dealer would need to meet all of the requirements of being a clearing agent.

All of the following are acceptable choices to function as a depository and intermediary for transactions between buyers and sellers of securities except A)carrying firms. B)the Depository Trust Company (DTC). C)credit unions. D)the National Securities Clearing Corporation (NSCC).

C)credit unions. Credit unions cannot serve as a depository or clearing facility for securities transactions.

A broker-dealer that accepts the risk of holding a particular security in its account to facilitate trading and provide liquidity in that security is best described as A)a holding company. B)a clearing corporation. C) a market maker D) a direct partnership program

C. a market maker Market makers can be individuals or broker-dealers with a line of business to stand ready to buy or sell securities (make markets) with the view of being profitable by buying low and selling high or selling high and buying low (short selling). Market making is risky. Firms that do this must demonstrate to Financial Industry Regulatory Authority (FINRA) that they can manage the operational and financial risk.

An individual who purchases securities for a personal account is called A)an accredited investor. B)an institutional investor. C)a retail investor. D)a market maker.

C. a retail investor An individual who makes investments such as the purchase of securities for his account rather than for an organization is a retail investor. This investor may be accredited, but there is no way to know for sure given the limited information.

A broker-dealer has a line of business restricted solely to the purchase and sale of securities with trade executions being handled by another member firm. Which of the following would best describe this type of firm? A)Prime/executing B)Clearing/carrying C)Market making D Introducing/fully disclosed

D Introducing/fully disclosed A fully disclosed introducing broker-dealer is what the word implies—it introduces its customers to a clearing firm. Clearing firms (often referred to as carrying firms) hold their customer's funds and securities as well as those of their correspondent introducing firms. Essentially, the clearing firm acts as the introducing firm's back office. Because the risk associated with holding customer funds and securities is not present, net capital requirements are much lower for introducing firms than they are for self-clearing or carrying broker-dealers.

A firm that functions for the purpose of receiving and delivering payments and securities on behalf of both buyer and seller in a securities transaction is A)a broker-dealer. B)a depository. C)a transfer agent. D)a clearing agent.

D)a clearing agent. A clearing agent is an intermediary between the buy and sell sides of a transaction that receives and delivers payments and securities on behalf of both parties. While some broker-dealers are self clearing (act as their own clearing agent), simply being a broker-dealer doesn't always include being able to provide the services of a clearing agent.

When a firm engages in proprietary trading, buying into and selling out of its own inventory for profit, it is acting as A)an agent. B)an investment banker. C)an underwriter. D)a market maker.

D)a market maker. When a broker-dealer buys and sells securities into and out of its own account as for the purpose of making a profit it is engaged in proprietary trading and is acting as a market maker (making markets in those securities). Investment banking and underwriting both primarily involve assisting issuers with bringing new securities issues to public investors. Agents act on behalf of others in the marketplace, such as a broker-dealer buying or selling for one of its customers.

All of the following are acceptable choices to function as a depository and intermediary for transactions between buyers and sellers of securities except A)the National Securities Clearing Corporation (NSCC). B)carrying firms. C)the Depository Trust Company (DTC). D)credit unions.

D)credit unions Credit unions cannot serve as a depository or clearing facility for securities transactions.

An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another who has been legally appointed to provide these services is best described as A)a prime broker. B)an investment advisor. C)a market maker. D)a trustee.

D. a trustee A trustee is legally appointed to manage as a fiduciary assets in a trust.

A stock's market value is directly determined by which of the following? A)Vote of the stockholders B)Company's financial condition C)Board of directors D)Supply and demand

D. supply and demand The market value of stock is directly determined by supply and demand and only indirectly by the remaining choices, such as a company's financial condition.

Which of the following is true regarding a member firm operating under Financial Industry Regulatory Authority (FINRA) membership or the membership of another self-regulatory organization (SRO)? A)Member firms can offer all types of investment products, such as stocks, bonds, mutual funds, options, and others or limit the products they offer to only a few. B)Member firms are required to be full-service broker-dealers. C)Member firms must always accommodate dealing with retail investors and not limit business to that done with other industry professionals. D)Member firms may never incorporate proprietary trading into their business model.

A)Member firms can offer all types of investment products, such as stocks, bonds, mutual funds, options, and others or limit the products they offer to only a few. Member firms can offer all types of investment products such as stocks, bonds, mutual funds, and derivatives like options and others (be full service) or limit the products they offer to only a few. They need not adopt proprietary trading into their business model but can if they wish to. Likewise, they need not accommodate doing business with retail customers if they wish to deal only with other industry professionals, such as institutional investors.

The transfer agent for a corporation is responsible for each of the following except A)acting as an intermediary between the buy and sell sides of a transaction. B)ensuring that its securities are issued in the correct owner's name. C)canceling old and issuing new certificates. D)maintaining records of ownership.

A)acting as an intermediary between the buy and sell sides of a transaction. The transfer agent (often a bank) for a corporation is responsible for ensuring that its securities are issued in the correct owner's name, canceling old and issuing new certificates, maintaining records of ownership, and handling problems relating to lost, stolen, or destroyed certificates. Acting as an intermediary in a trade is the function of the clearing corporation.

An institutional investor selects a single Financial Industry Regulatory Authority (FINRA)/NYSE member firm to provide for financing and custody of securities while orders to buy or sell are placed with executing brokers. This is an example of A)an investment advisory account. B)an omnibus clearing arrangement. C)a prime brokerage account. D)a managed account.

A)an investment advisory account. A prime brokerage account is one in which a customer (an institution) selects one member to provide custody and financing of securities and executes trades with other firms known as executing brokers.

A broker-dealer designated as a clearing firm would be expected to do all of the following except A)maintain a lower net capital than noncarrying broker-dealers. B)perform back-office functions such as sending trade confirmations to customers. C)clear transactions for customer accounts. D)take custody of customer funds and securities.

A)maintain a lower net capital than noncarrying broker-dealers. A firm carrying customer funds and securities assumes certain risks, and is therefore required to maintain levels of net capital higher than that of firms who do not accept custody of funds or securities (noncarrying firms).

Great Plains Securities, an OTC market maker, holds inventory and provides liquidity for Modulux Homes, an NYSE listed company. This is an example of A)the third market. B)the force market. C)the primary market. D)the fourth market.

A)the third market. When an exchange-listed security trades in the OTC market, it is being traded in the third market. The fourth market is composed of electronic communication networks and is primarily used by institutional investors. Primary markets are for raising capital.

An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another is known as A)a custodian. B)a fully disclosed firm. C)a unit investment trust. D)an investment company.

A. a custodian A person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another is known as a custodian, for example, the custodian for the account of a minor. This is different than a trustee who is a legally appointed entity. By contrast, anyone can open a custodial account for a minor as long as they are themselves an adult.

Secondary market transactions would include all of the following except A)sale of $10 million of municipal bonds by a broker-dealer acting as a market maker. B)sale of $10 million of corporate bond by a broker-dealer acting as an underwriter. C)sale of $10 million of U.S. Treasury bonds by a broker-dealer acting as a market maker. D)sale of $10 million of corporate stock by a broker-dealer acting as a market maker.

B)sale of $10 million of corporate bond by a broker-dealer acting as an underwriter. sale of $10 million of corporate bond by a broker-dealer acting as an underwriter. Market makers are broker-dealer who sell out of their own account in the secondary market. Underwriters are broker-dealers who help issuers bring their securities to market in the primary market.

A market in which exchange-listed securities are traded in the over-the-counter (OTC) market would best be described as A)the First Market. B)the Third Market. C)the Fourth Market. D)the Second Market.

B)the Third Market. Broker-dealers registered as OTC market makers in exchange-listed securities may execute transactions in the Third Market. All securities listed on the NYSE and most securities listed on the regional exchanges are eligible for OTC trading as long as the trades are reported to the Consolidated Tape within 10 seconds of

Electronic market centers designed primarily for institutional investors describes A)the third market. B)the fourth market. C)the exchanges. D)the OTC market.

B)the fourth market. The market centers that operate through electronic communication networks are known as the fourth market. These centers were created to serve large institutional investors like mutual funds and pension plans. The fourth market reduces the transparency of trading activity by these organizations and allows them to trade more efficiently.

A market maker A)acts as an agent to buy and sell for public customers who will hold their own securities. B)trades in a proprietary account to facilitate trading of a security and provide liquidity. C)trades in a customer's account standing ready to buy or sell at their own discretion. D)can only be an institution doing proprietary trading.

B)trades in a proprietary account to facilitate trading of a security and provide liquidity. Any entity, individual or institution, willing to accept the risk of holding a particular security in its own account to facilitate trading and provide liquidity in that security is known as a market maker or trader.

Your broker-dealer, rather than clear its own securities transactions, chooses to introduce its business to another firm that will clear, processes and handle all back-office operations for it. The firm receiving the business is known as A) fully disclosed firm. B)a receivership. C)a depository trust. D)a carrying firm.

D)a carrying firm. A firm that chooses to introduce its customers' business to another firm to clear and process transactions, as well as handle all back-office tasks such as sending trade confirmations and taking custody of customer funds and securities, is known as an introducing or fully disclosed firm. The firm receiving the business is known as the carrying or clearing firm.

A corporation enlists the services of a transfer agent, who would be expected to handle all of the following functions except A)replacing lost or destroyed stock certificates. B)maintaining records of shareholder ownership. C)canceling old certificates and issuing new ones. D)filing an S-1 registration statement.

D)filing an S-1 registration statement. The transfer agent for a corporation is responsible for ensuring that its securities are issued in the correct owner's name; canceling old certificates and issuing new ones; maintaining records of ownership; and handling problems relating to lost, stolen, or destroyed certificates. It is the registrar—a separate entity—who is responsible for registering the corporation's securities with the state.

When investors buy and sell securities to and from one another, these transactions occur A)in the primary market. B)on exchanges only. C)in the over-the-counter (OTC) market only. D)in the secondary market.

D)in the secondary market. Primary market transactions involve the issuer or someone acting on behalf of the issuer, such as an underwriter. Secondary markets are where investors can buy and sell securities to and from one another. The secondary market includes exchanges and the OTC market.

An institutional customer, such as a hedge fund, utilizes the services of a broker-dealer who provides custody of securities, as well as other back-office functions, while allowing the customer to establish relationships with other broker-dealers for the purpose of executing orders. This account would be known as a A)clearing account. B)self-clearing account. C)fully-disclosed account. D)prime account.

D)prime account A broker-dealer that provides custody of securities and other back-office functions but allows the customer to maintain relationships with other broker-dealers who will provide execution services is known as a prime broker-dealer. The account, known as a prime account, is maintained with the prime broker rather than with any executing brokers.

In a prime brokerage account, the prime broker A)subcontracts out all services to other brokers. B)provides custody and clearing, but no margin financing. C)provides execution services only, while another broker clears transactions and provides any other account services required. D)provides custody and clearing services, as well as margin loans.

D)provides custody and clearing services, as well as margin loans. In a prime brokerage account, the prime broker provides custody and clearing services (including margin loans). The prime broker may provide some execution services and contract with other brokers to provide additional execution services.

A corporation enlists the services of a transfer agent, who would be expected to handle all of the following functions except A)canceling old certificates and issuing new ones. B)maintaining records of shareholder ownership. C)replacing lost or destroyed stock certificates. D)registering the corporation's securities with the state.

D)registering the corporation's securities with the state. The transfer agent for a corporation is responsible for ensuring that its securities are issued in the correct owner's name; canceling old certificates and issuing new ones; maintaining records of ownership; and handling problems relating to lost, stolen, or destroyed certificates. It is the registrar—a separate entity—who is responsible for registering the corporation's securities with the state.

All of the following would be secondary market transactions except A)securities sold on both the OTC and NYSE. B)securities bought and sold on the NYSE. C)securities bought and sold on the OTC. D)securities sold to the public by the issuer.

D)securities sold to the public by the issuer. Exchanges (like the NYSE and the OTC market) are part of the secondary market. The primary market is the issuer selling to the public.