QBank unit 15
A carrying member—after receiving account transfer instructions from the receiving member—must validate the positions in the account within how many business days of receipt? A) 1 day B) 5 days C) 7 days D) 4 days
A) 1 day Within 1 business day following receipt of the transfer instruction form (TIF), the carrying firm must validate the positions in the account and return the transfer instruction to the receiving member with an attachment showing all securities positions eligible for transfer through the Automated Customer Account Transfer Service (ACATS).
Under the USA PATRIOT Act of 2001, member firms must maintain records of reports of currency transactions involving more than $10,000 for A) 5 years. B) 6 years. C) 3 years. D) 1 year.
A) 5 years. The USA PATRIOT Act of 2001 requires that all currency transactions involving more than $10,000 be reported on a Form 112 Currency Transaction Report and that these forms be maintained for 5 years.
The Municipal Securities Rulemaking Board (MSRB) has rules regarding quotations on callable municipal bonds. For which of the following would the customer confirmation be required to show the yield to call? A) 9s of 35 with a basis quote of 7.0% B) 8s of 38 with a basis quote of 8.0% C) 6s of 37 with a basis quote of 7.5% D) 7s of 35 with a basis quote of 9.5%
A) 9s of 35 with a basis quote of 7.0% MSRB Rule G-15 deals with customer confirmations. Under that rule, callable bonds sold on a yield basis must reflect the lower of the yield to maturity (YTM) or the yield to call. When a bond is selling at a premium, the YTC is always going to be the lower yield. No calculations are necessary for this question because there is only one bond selling at a premium—the bonds with a 9% coupon maturing in 2035. We know this because whenever the basis (the YTM) is lower than the coupon, the bond must be selling at a premium. The 8% bonds yielding 8% are at par, and the other two choices are selling at a discount because their yields are higher than their coupons.
Which of the following statements regarding a death in a tenants in common (TIC) account are true? The decedent's interest in the account goes to his estate. The decedent's interest in the account goes to the remaining tenant. The member firm must freeze both the account and acceptance of orders until the required documents are presented. The member may immediately accept orders from the remaining tenant. A) I and III B) II and IV C) I and IV D) II and III
A) I and III If one party in a TIC account dies, the decedent's interest in the account goes to his estate, not to any other party to the account. The member firm must freeze the account and acceptance of all orders until the required documents are presented.
Which of the following records is to be kept for the life of the firm? A) Minutes of the directors' meetings B) Customer new account form C) Daily journals D) The general ledger
A) Minutes of the directors' meetings The stock certificate book, articles of incorporation or partnership agreement, and minutes of the directors' meetings are to be kept on file and accessible for the life of the firm.
Under Municipal Securities Rulemaking Board (MSRB) rules, which of the following yields for a callable bond would be shown on a confirmation? A) Yield based on nearest in-whole call B) Yield based on in-part call C) Yield based on farthest in-whole call D) Yield based on catastrophe call
A) Yield based on nearest in-whole call MSRB rules require that yield to call based on the nearest (near-term) entire issue (in-whole call) be disclosed on a customer's confirmation. With a partial call, the bond being purchased may or may not be included in the call, and with a catastrophe call provision, a call would only occur if an unpredictable event requires the issuer to call the bonds.
FINRA rules require broker-dealers to conduct anti-money laundering training A) on an ongoing basis. B) biannually. C) annually. D) quarterly.
A) on an ongoing basis. Rather than set a fixed schedule, FINRA rules require that anti-money laundering training be conducted on an ongoing basis.
A couple opens a joint account with your firm. It is registered as JTWROS. If one of the couple passes away, FINRA rules require that account records be kept for a minimum of A) six years after the surviving person closes the account or passes away. B) three years after the surviving person closes the account or passes away. C) six years after the death of the initial person. D) three years after the death of the initial person.
A) six years after the surviving person closes the account or passes away. FINRA and MSRB rules require that customer account records be kept for at least six years after the account is closed. Because the assets in a JTWROS account remain intact after the death of a co-owner, the recordkeeping requirements extend until the account is finally closed. Even though, technically, the account is retitled in the name(s) of the surviving owner(s), the information from the original account is kept for that entire period.
All of the following are required by the Municipal Securities Rulemaking Board on customer confirmations except A) the price the dealer originally paid for the bond. B) the source of any commission received on an agency transaction. C) the amount of any commission received on an agency transaction. D) the amount of markdown or markup on a principal transaction.
A) the price the dealer originally paid for the bond. The dealer's cost of a bond sold to a customer is not required to be disclosed.
If a customer buys bonds that have already been called, the confirmation must disclose all of the following except A) the yield to original maturity. B) the yield to redemption. C) the redemption price. D) the redemption date.
A) the yield to original maturity. A customer who has purchased a called bond has probably purchased one that has been prerefunded. The yield to original maturity is no longer a factor.
If a bond is sold to a customer at par, under Municipal Securities Rulemaking Board rules, all of the following must be disclosed to the customer on his confirmation except A) yield to maturity. B) information on call features. C) total monies due. D) number of bonds purchased.
A) yield to maturity. Information on call features, total monies due, and the number of bonds purchased are all important disclosure items for a confirmation. For a bond sold at par, there is no requirement to show yield because the yield is equal to the coupon. What about if the bond is callable? Doesn't the confirmation have to show the lower of yield to call (YTC) or yield to maturity (YTM)? Yes, it does, but this bond is sold at par, and bonds are never called below par. That means the YTC could never be below the YTM. Indeed, because most bonds are called at a premium, the YTC would be the highest yield.
Records relating to terminated representatives must be retained for how many years? A) 6 years B) 3 years C) 1 year D) 5 years
B) 3 years Records generated by and about terminated representatives are among those records retained for 3 years.
Customer account information must be updated at least every A) 24 months. B) 36 months. C) 48 months. D) 12 months.
B) 36 months. Customer account information must be updated at least every 36 months. This ensures that up-to-date information for suitability requirements and potential red flags.
Customer account records (such as the new account form) must be maintained for not less than A) 3 years commencing from the date the account is opened. B) 6 years commencing from the date the account is closed. C) 6 years commencing from the date the account is opened. D) 3 years commencing from the date the account is closed.
B) 6 years commencing from the date the account is closed. Customer account records (such as the new account form) are 6-year records. The six years toll from when the account is closed. Think about this logically. A firm has a customer for 20 years. Were the account records discarded 14 years ago? As long as the account is open, the records must be on file. Similarly, do you throw away your income tax returns after you've filed?
When the broker-dealer is acting in a principal capacity, which of the following does the Municipal Securities Rulemaking Board (MSRB) require on customer confirmations? A) The source of the bond if the broker-dealer did not have an inventory of the bond B) Amount of markdown or markup C) The bond's current yield D) The current credit rating of the issuer
B) Amount of markdown or markup MSRB rules require that customer confirmations provide the name, address, and telephone number of the broker-dealer and the capacity of the firm in the trade (agent or principal). The amount of commission is required if the firm acted as agent, and the markup or markdown if the firm acted as principal.
FINRA requires a member firm to develop, implement, and monitor anti-money laundering programs designed to achieve compliance the Bank Secrecy Act and related regulations. Which of the following is required of a broker-dealer's anti-money laundering program? A) Filing of the firm's AML program with FINRA B) Designating to FINRA an anti-money laundering compliance officer C) Approval of the firm's AML program by the SEC D) Updating the program every 36 months
B) Designating to FINRA an anti-money laundering compliance officer FINRA's Rule 3130 on anti-money laundering requires members to designate to FINRA an individual or individuals responsible for implementing and monitoring the day-to-day operations and internal controls of the program. The AML program is neither filed with nor approved by the SEC or FINRA. However, when an examiner from either of these bodies pays a surprise visit to the firm, there had better be a well-detailed program available to show. There is no specific schedule for updating. Updating and training of personnel is an ongoing project.
A retail customer purchases a municipal bond from your firm. According to Municipal Securities Rulemaking Board rules, the confirmation must disclose which of the following? Where your firm acquired the bonds Whether your firm acted as agent or principal Your firm's address The price your firm paid for the bonds A) I and IV B) II and III C) II and IV D) I and III
B) II and III The broker-dealer must always disclose the capacity in which it acted (principal or agent). The confirmation must show the name of the person for whom the trade was executed (the customer). The name, address, and telephone number of the broker-dealer must be shown so the customer may easily contact the firm. The settlement date is also required. The broker-dealer is not required to disclose where it acquired the bonds or the price it paid.
Under SEC rules, which of the following events require a broker-dealer to furnish a copy of the account record to a customer? Change of broker-dealer's address Change of customer's name or address Change of customer's investment objectives Change in registered representative assigned to the account A) I and III B) II and III C) II and IV D) I and IV
B) II and III Any change in a customer's status, particularly those that may affect the suitability of recommendations, requires a broker-dealer to update the customer account record and furnish it to the customer within 30 days of receipt of the change notice.
One of your clients contacts you to let you know she will be on a temporary job assignment that will have her out of the country for about 2 months. No one will be at her home address to receive any mail. What is the FINRA rule regarding her issue? A) FINRA rules prohibit holding customer mail. B) If she requests it in writing, you will be able to hold her mail for up to 3 months. C) Customer mail cannot be held more than 30 days. D) The client must temporarily change her address for those 2 months.
B) If she requests it in writing, you will be able to hold her mail for up to 3 months. FINRA rules permit member firms to hold mail for a customer (e.g., statements and confirmations) who will not be receiving mail provided that the member firm receives written instructions that include the time period the request is being made, for up to three months.
If an order is executed for a customer and the registered representative later notices that she entered the wrong account number on the order ticket, what action must she take? A) Transfer the stock into the correct account B) Inform a principal, who will take or direct any action needed to correct the error C) Transfer the stock into her own account and pay for the purchase D) Contact that account's owner and ask if he wants to buy the stock
B) Inform a principal, who will take or direct any action needed to correct the error The representative should report the mistake and not take any action to remedy the mistake without the approval of a principal.
Which of the following records must kept for the life of a broker-dealer organized as a corporation? A) Customer new account forms B) Minutes of the board of directors' meetings C) The general ledger D) Complaint records
B) Minutes of the board of directors' meetings The stock certificate book, articles of incorporation or partnership agreement, and minutes of the directors' meetings are to be kept on file and accessible for the life of the firm. The new account form and the general ledger are six-year records, and the complaint file is the only record with a four-year retention requirement.
A new customer of the broker-dealer submits a completed transfer initiation form (TIF). The principal at the delivering firm receives the instruction data through the ACATS and may promptly reject the instruction for which of the following reasons? A) The registered representative owes money against the account. B) The account is not recognized. C) A cash dividend and other residual credits are due. D) The account holder contains restricted securities.
B) The account is not recognized. An account not recognized would be a cause for rejection. The delivering firm is obligated to state the reason for the rejection back to the NSCC (or other appropriate clearing firm) and the clearing firm then forwards the reject notification on to the receiver. ACATS provides for the transfer of credits, such as cash or stock dividends, automatically even following the account transfer. If there are restricted securities in the account, they can be transferred along with the rest of the account and maintain their restricted status.
A customer purchases $50,000 of bonds at a discount in the secondary market. The bonds mature in 10 years and are callable in five years at par. Under industry rules, the customer's confirmation will show A) both the YTM and YTC. B) YTM C) either the YTM or YTC. D) YTC.
B) YTM With callable bonds, the confirmation must show the lower of the yield to maturity (YTM) or yield to call (YTC). For a bond bought at a discount, the YTM is lower than YTC. On the exam, you will never encounter a call on a bond selling at a discount—it is less expensive to purchase the bond in the open market than pay the call price (which is always at least par).
A registered representative left ABC Securities in order to work for MNO Securities. Six months later, the representative contacted a former client in an attempt to gain the client's business at MNO Securities. MNO A) must provide educational materials to the customer if the contact was made in writing. B) does not need to provide educational materials about the transfer. C) must provide educational materials regardless of contact method. D) may not continue further contact with ABC's customer.
B) does not need to provide educational materials about the transfer. Educational material only needs to be provided if contact is made with the customer within three months of the representative's employment with the new firm.
When a member firm sells municipal bonds to a customer out of its inventory, it must A) disclose its cost basis in the bond. B) indicate the amount of markup on the customer's confirmation. C) disclose the amount of commission on the customer's confirmation. D) indicate compliance with the 5% markup policy.
B) indicate the amount of markup on the customer's confirmation. In a principal transaction (out of its inventory), the markup must be disclosed on a confirmation, and because it is a principal transaction, commissions would not apply. The 5% markup policy does not cover exempt securities. The firm does not disclose what it paid for the bond. That price could be higher or lower than the current market and is not relevant to computing the markup on inventoried securities.
Funds for Life (FFL) is an SEC registered broker-dealer. The only securities business done by the firm is the sale of redeemable investment company securities. If FFL should go into bankruptcy proceedings, SIPC would A) offer protection up to $500,000 per customer. B) not offer protection to any of the customers. C) offer protection up to $250,000 per customer. D) protect any losses up to $250,000 in cash.
B) not offer protection to any of the customers. SIPC, the Securities Investor Protection Corporation, is a nonprofit membership organization. SIPC members pay assessments into a general insurance fund that is used to meet customer claims in the event of a broker-dealer's bankruptcy. All registered brokers or dealers, by law, automatically become SIPC members, except for those persons whose business as a broker or dealer consists exclusively of the distribution of shares of registered open-end investment companies or unit investment trusts (redeemable securities). Therefore, FFL would not be a member of SIPC, and its customers would not have SIPC protection. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
A client's account shows no activity other than some dividends received. Based on this information, statements must be sent A) monthly. B) quarterly. C) semiannually. D) annually.
B) quarterly. All customer accounts, other than those containing penny stocks, receive account statements quarterly. For statement purposes, the term activity includes the receipt of dividends or interest, but that does not change the quarterly requirement.
The Municipal Securities Rulemaking Board (MSRB) and FINRA rules requiring uniformity of business practices by member firms may be altered or modified by a mutual agreement between the broker-dealers concerned. There is, however, an exception to modifying the rules when it comes to the rules regarding A) the terms of delivery. B) the content of confirmations. C) the payment of shipping costs. D) the price and date of delivery.
B) the content of confirmations. The contents of confirmations are specified in SEC Rule 10b-10 and followed by the MSRB and FINRA. They cannot be altered by a mutual agreement.
Under SEC rules, firms must do all of the following except A) create a record containing the dated signature of each customer granting discretionary authority. B) update customer account records within 36 months of a change in investment objectives. C) provide a customer with an updated customer account record within 30 days of a change in investment objectives. D) create a record for each written agreement entered into with a client.
B) update customer account records within 36 months of a change in investment objectives. Under SEC rules, firms must provide a customer an updated account record reflecting any change in investment objectives within 30 days of the change. Firms must create a record for each written agreement entered into with a client and a record containing the dated signature of each customer granting discretionary authority.
A customer's confirmation for a municipal bond callable at par and quoted higher than the nominal yield would show A) coupon yield. B) yield to maturity (YTM). C) current yield. D) yield to call (YTC).
B) yield to maturity (YTM). Because the quoted yield is higher than the nominal yield, the bond is offered at a discount; the lower of YTM or YTC is the bond's yield to maturity.
Which of the following transactions would have to be reported on a Currency Transaction Report? A) A 60-year-old customer directs his registered representative to liquidate $40,000 worth of growth mutual funds in his account and use the proceeds to purchase shares in a long-term bond fund. B) An investor purchases $40,000 worth of speculative and other low-grade bonds with a personal check. C) An investor purchases $12,000 worth of securities with twelve $1,000 postal money orders. D) A new customer brings $40,000 worth of securities in to his broker-dealer firm for deposit into his account.
C) An investor purchases $12,000 worth of securities with twelve $1,000 postal money orders. A currency transaction totaling more than $10,000 on a single business day must be reported on a Currency Transaction Report. Included as currency are cash, postal money orders, and traveler's checks.
A new customer has given you written authorization to transfer the holdings in her account at another broker-dealer to her new account at your broker-dealer. Under the Uniform Practice Code, using the automated customer account transfer system form, the carrying broker-dealer would have how many days to validate the positions and how many days to complete the transfer after validation? One business day to validate Two business days to validate Two business days to transfer after validation Three business days to transfer after validation A) II and III B) I and III C) I and IV D) II and IV
C) I and IV Under the Uniform Practice Code, the carrying broker-dealer has one business day to validate positions and three business days to transfer to the receiving broker-dealer after validation.
You received a signed broker-to-broker transfer initiation form (TIF) from an established customer desiring to transfer a specifically designated part of his account to your firm, which is eligible to use the Automated Customer Account Transfer Service (ACATS). Your firm is obligated to submit the transfer instruction to the carrying member by establishing the instruction in the ACATS A) within 3 business days. B) within 1 business day. C) Immediately. D) within 2 business days.
C) Immediately. FINRA's Uniform Practice Code requires that the receiving member firms immediately forward the TIF to the firm currently carrying the account. A customer may transfer all or part of the securities held in the account.
One of your customers calls for an explanation of the net amount due showing on a confirmation of a recent purchase transaction. The customer has multiplied the number of shares times the price per share, and that is lower than the amount the confirmation says is due. You would explain that the net amount is determined by A) subtracting the markdown from the principal amount. B) adding the spread to the principal amount. C) adding the commission and any firm-added fees to the principal amount. D) adding the interest to the principal amount.
C) adding the commission and any firm-added fees to the principal amount. The net amount due on purchases is determined by adding expenses (commissions and fees added by the firm) to the principal amount (or subtracting them from the principal amount if a sale). FINRA has levied fines for mischaracterizing or disguising increased commissions by improperly describing them as handling or postage fees. Interest is added to the principal amount when bonds are traded with accrued interest. The question refers to shares, so the purchase must be of an equity security. A broker-dealer acting in a principal capacity buys securities from a customer with a markdown (and sells with a markup). **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
All of the following information must be disclosed on a municipal bond confirmation of sale except A) in-whole call dates. B) the source of revenue backing a municipal revenue bond. C) the dated date on a municipal bond that has been outstanding for two years. D) the name of the guaranteeing corporation in an industrial development revenue bond issue.
C) the dated date on a municipal bond that has been outstanding for two years. On the dated date, new issue interest starts to accrue. Once the issue makes its first interest payment to bond holders, the dated date is no longer used to compute accrued interest because there is a prior interest payment date.
If a customer buys callable municipal bonds, Municipal Securities Rulemaking Board (MSRB) rules state that the confirmation sent to the customer must disclose A) the yield that would result if the bonds were called midway between the date they become eligible to be called and their maturity date. B) the higher of either the yield to call or yield to maturity. C) the lower of either the yield to call or yield to maturity. D) the nominal yield only.
C) the lower of either the yield to call or yield to maturity. MSRB Rule G-15 states that the confirmation must indicate the lowest possible yield.
A confirmation sent to a customer must include all of the following except A) the amount of any commission. B) markup or markdown if the member acted as a principal in a Nasdaq security. C) the name of the registered representative handling the account. D) whether the member acted as an agent or principal.
C) the name of the registered representative handling the account. There is no requirement to provide identifying information for the registered representative. A customer confirmation must disclose the amount of markup for a principal transaction in a Nasdaq security, whether the member acted in an agency or principal capacity, and the amount of commission if the member acted as an agent.
A bond with 25 years to maturity, 7% coupon, quoted on a 6.25% basis is callable in 10 years at 103, 15 years at 102, and 20 years at par. On the customer's confirmation, the dollar price quoted must be based on A) 15 years to call. B) 20 years to call. C) 25 years to maturity. D) 10 years to call.
D) 10 years to call. This is a premium bond. With premiums, the years to call will be lower than the years to maturity. The question becomes which call date should be used. As a rule of thumb, always use the near-term (first) in-whole call date.
A customer contacted her registered representative requesting that her account be updated with her new residential address. The member firm must send a copy of the updated account record to the customer within A) 15 days. B) 45 days. C) 60 days. D) 30 days.
D) 30 days. Whenever a change is made to a customer record, a copy of that record must be sent to the customer within 30 days.
Trade confirmations must show yield to call on which of the following callable bonds? A) 6.5%, at par, maturing 2042 B) 6.5%, 7% basis, maturing 2038 C) 5.5%, at par, maturing 2038 D) 5.5%, 5% basis, maturing 2038
D) 5.5%, 5% basis, maturing 2038 Bond confirmations must disclose the lower of the yield to maturity or yield to call. On a bond selling at a premium, the yield to call is the lower of the two. The 5.5% bond with a 5% basis is the only bond trading at a premium. We know that because the yield to maturity (or basis) is lower than the coupon.
A summary statement of all interest and dividends credited to a customer's account must be sent to the primary accountholder each year in A) April. B) December. C) July. D) January.
D) January. Member firms must provide an IRS Form 1099 to the primary account holder of all the interest and dividends credited to the account in January. This form is used in the customer's tax return preparation.
Which of the following is not a requirement to be included on a customer confirmation by the Municipal Securities Rulemaking Board (MSRB)? A) Whether the trade was made as an agency transaction B) Whether the sale was made from the dealer's inventory C) The amount of the dealer's markup or markdown D) The accrued interest on a when issued security
D) The accrued interest on a when issued security Because the settlement date on a when issued security is unknown, it is impossible to compute the accrued interest. MSRB rules require that all confirmations include the firm's capacity in the trade (agent/principal). The amount of the dealer's markup or markdown on a principal trade must be disclosed. The commission on an agency trade must be disclosed.
When a customer of a broker-dealer dies, all of the following documents may be required to release the decedent's assets except A) an inheritance tax waiver. B) an affidavit of domicile. C) a certified copy of the death certificate. D) a power of attorney.
D) a power of attorney. The power of attorney is the only document not required. If the decedent had executed a power of attorney, it would have become invalid upon death. An affidavit of domicile and an inheritance tax waiver may be required. A certified copy of the death certificate is always required.
All of the following records must be retained for 3 years except A) copies of retail communication. B) fingerprint cards for terminated personnel. C) audio tapes of orders handled by the trading room. D) customer statements.
D) customer statements. Customer statements must be retained for 6 years. The other choices are all 3-year records.
A large amount of cash deposits into an account may indicate that a customer is engaged in A) dividend reinvestment. B) straddling. C) arbitrage. D) money laundering.
D) money laundering. Although depositing cash into a brokerage account is not illegal, a large number of these transactions indicate the possibility that the customer is engaged in money laundering. If the amount deposited exceeds $10,000, a Form 112 CTR must be filed. If the deposits are smaller than that, but appear to be part of a plan to avoid the filing of the CTR, it is likely structuring and is a red flag that requires further investigation.
A confirmation of each customer trade must be given or sent A) before the settlement date. B) before the trade date. C) on the trade date. D) on or before the settlement date.
D) on or before the settlement date. A confirmation must be sent to a customer on or before the completion of the transaction (the settlement date).
Customer statements must be sent at least A) semiannually. B) monthly. C) annually. D) quarterly.
D) quarterly. The SEC and FINRA require member firms to send customer account statements at least once per calendar quarter. There is an exception when the account contains penny stocks. In that case, the frequency is monthly.
Customer account statements must request that customers A) acknowledge receipt of the statement within 10 business days. B) report changes in their investor profile. C) report promptly any changes in their investment objectives. D) report promptly any discrepancies or inaccuracies.
D) report promptly any discrepancies or inaccuracies. Each customer account statement must request that customers promptly report any discrepancies or inaccuracies. This allows the member firm to ensure that trades are correctly reported on the statement and in the customer's account.
A registered representative recently changed firms and is meeting with former customers to see if they will move their accounts to the representative's new firm. Under FINRA Rule 2273, the representative must disclose all of the following except A) whether the representative may have a financial conflict of interest. B) some assets may not be directly transferrable. C) differences of products and services between the two firms. D) that the customers must have their identity confirmed as part of the new firm's customer identification program.
D) that the customers must have their identity confirmed as part of the new firm's customer identification program. FINRA Rule 2273 requires that educational material be provided to customers about potential conflicts of interest, the transferability of assets, differences in products and services, and potential costs of the transfer. Customers do not need to have their identity revalidated by a receiving firm, because the carrying firm has already complied with anti-money-laundering requirements.
All of the following records must be retained for three years except A) trial balances. B) fingerprint card. C) order tickets. D) the trade blotter.
D) the trade blotter. Under SEC Rule 17a-4, blotters and ledgers must be kept for six years.