Series 7 Unit 17

An investor wishes to purchase a new issue municipal bond. Which of the following terms describe the form of the bond? Bearer Registered as to principal only Fully registered Book entry A) III and IV B) I and III C) II and IV D) I and II

A

Regular way settlement for U.S. government bonds is A) next business day. B) three business days. C) same day. D) two business days.

A

The Trade Reporting and Compliance Engine (TRACE) is a trade reporting system used to report certain bond trades to the public. Trade details must be reported to FINRA via TRACE no later than A) 15 minutes after the trade execution. B) 15 minutes after the order entry. C) 10 seconds after the order entry. D) 10 seconds after the trade execution.

A

A New York Stock Exchange designated market maker has all of the following responsibilities except A) preventing the stock price from falling. B) handling odd-lot market orders. C) providing liquidity. D) acting as broker for orders placed on the book. Explanation

A Although designated market makers buy and sell as principals to maintain a fair and orderly market and provide liquidity, they are not obligated nor do they have a responsibility to prevent a decline in price.

A customer holding 450 shares of XYZ common stock in registered form turns in a sell order on Monday for regular way delivery. Who has the initial responsibility to ensure that the security is in good deliverable form? A) The registered representative B) The customer C) The broker-dealer D) The transfer agent

A Although the final arbiter of deciding the good delivery status of certificates is that of the transfer agent, it is the registered representative's responsibility to communicate the requirements to the customer. Those include a reasonable expectation that the certificates will be delivered on time and in the proper form.

When a registered representative submits a customer order, all of the following information would be shown except A) the price of a market order. B) the stock symbol. C) the number of shares. D) a time stamp.

A Price would not be included on a ticket for a market order because that is unknown. When a customer enters a market order, it will be executed at the best prevailing price in the market. On the other hand, price would be on the ticket for a limit, stop, or stop limit order.

Regular way settlement must occur on the second business day after the trade date for all of the following transactions except A) a broker-dealer buying a Treasury bond for its own account. B) a customer selling a municipal bond through a broker-dealer. C) a broker-dealer buying a corporate bond from another dealer. D) a customer buying closed-end fund shares through a broker-dealer.

A Regular way settlement for U.S. government bonds occurs on the business day after the trade date (T+1). Corporate bonds and closed-end funds settle regular way (T+2). Municipal Securities Rulemaking Board rules also require two-day settlement (T+2) of municipal bond secondary transactions.

A brokerage order ticket must contain all the following except A) the price and time limits, if any. B) the date the account was opened. C) the discretionary authority exercised. D) the account number for which the order is entered.

B

A client places a sell stop order good for the day only. Under NYSE rules, you must A) write an order ticket upon receipt of the order. B) write an order ticket only if the order is executed. C) partially write an order ticket and complete only upon execution. D) partially write an order ticket and complete the ticket before market close.

B

With ABC stock selling for $49, a client sells one ABC 50 Nov call option in his cash account with your firm. One week later, ABC is now at $51 per share and his spouse sells two ABC 50 Nov calls in her account. In early November, ABC is selling for $62 per share and the spouse is assigned an exercise notice on one of the calls. The client calls and asks you, "Why was the exercise notice assigned to my spouse and not me?" You should respond: A) The OCC assigns exercise notices based on LIFO. B) The OCC uses random allocation when assigning exercise notices. C) The OCC assigns exercise notices based on the larger position. D) The OCC assigns exercise notices based on the market price at the time the option was written.

B

When a customer enters a sell order and is in possession of the certificates, a broker-dealer must determine all of the following except A) whether the securities are in deliverable form. B) whether the transfer agent has accepted the securities. C) the location of the securities. D) whether the client can make delivery promptly.

B A firm must make an affirmative determination and be reasonably sure the client can make prompt delivery. It isn't until after delivery (after the sell order has been accepted and the trade has taken place) that the transfer agent receives the certificates.

When a stock or bond certificate is delivered, it must be in good transferable form. If the certificate is badly mutilated, it must be authenticated. Authentication can be done by A) the buyer of the security. B) the member firm delivering the security. C) the seller of the security. D) the issuer of the security.

B Authentication of a mutilated certificate may be done only by a party with access to certain corporate records. That would certainly be the issuer, but it could also be the transfer agent or registrar

A customer entered an order to sell 300 shares of ABC at $25. When the trade executed at $25.30, the customer's registered representative erroneously reported the trade to the customer as being sold at only $25. The trade should be A) run through the member firm's error account. B) booked into the customer's account at $25.30. C) booked into the customer's account at $25. D) canceled.

B Reporting a trade incorrectly does not invalidate the trade. The trade was executed at $25.30, which was within the order's parameters. The customer, therefore would receive the executed price of $25.30.

Which of the following statements regarding TRACE is correct? A) TRACE-eligible securities include corporate bonds but exclude U.S. government and agency securities. B) To ensure proper audit trail requirements, trades are reported by both sides of the transaction. C) The participant representing the selling side of the transaction reports within 5 minutes of trade execution. D) Municipal securities that are TRACE-eligible must report within 15 minutes of execution.

B The Trade Reporting and Compliance Engine (TRACE) requires both the reporting party as buyer and the reporting party as seller to enter the trade information into the system. This is done to ensure that a proper audit trail is established for the entry. TRACE-eligible securities include corporate bonds, treasury securities and CMOs, but do not include municipal securities. During market hours, trades are reported within 15 minutes of execution. LO 17.b

A registered principal must approve all orders A) prior to entry. B) within one business day. C) by the end of the trading day. D) prior to execution.

C

In an interdealer trade, if the seller delivers before the settlement date, which of the following statements is true? A) The buyer must accept delivery. B) The buyer must only accept delivery if the seller gave advance notice of his intention. C) The buyer may accept the stock or refuse it without prejudice. D) The seller has violated the Uniform Practice Code.

C

The Nasdaq quotation system offers several different levels of service depending on the needs of the user. Which of those levels would be used by a FINRA member firm making a market in 15 different stocks? A) Level 1 B) Level 4 C) Level 3 D) Level 2

C

When a broker-dealer makes a market, it is acting as A) an agent. B) an underwriter. C) a principal. D) a broker.

C As a new registered representative, there is much industry jargon to learn. If you overheard your manager discussing a stock power, it would be in reference to A) a power of attorney granted from a client to a third party. B) good delivery of a stock certificate. C) authorization to sell stock in a discretionary account. D) the firm's technical analyst reporting a breakout on a stock.

A certificate in the name of Smith & Company may be signed A) Smith & Company, a.k.a. SmithCo. B) Smith & Company. C) Smith & Company, Smith & Co., or Smith and Company. D) Smith & Company or Smith & Co.

C Corporate signers are the exception to the general rule that endorsement of a certificate must match exactly the name on the front. The word and may be substituted with an ampersand (&) and the word company may be abbreviated.

An order memorandum or ticket must be prepared A) by the settlement date. B) by the close of business on T+1. C) prior to order execution. D) by the close of business on the trade date.

C Order tickets must be prepared prior to order execution. Please read the question carefully. Preparation is the first step and that must be done before the order can be sent for execution. After the execution report, the order ticket is completed with the execution information

Which of the following are excluded from the Trade Reporting and Compliance Engine (TRACE) reporting requirements? A) Government agency bonds B) Asset-backed securities (ABSs) C) Money market securities D) Collateralized mortgage obligations (CMOs)

C TRACE is the FINRA-approved trade reporting system for corporate, government agency, and Treasury securities trading in the over-the-counter (OTC) secondary market. While most corporate debt securities, ABS, and CMOs are TRACE-eligible, there are exclusions, such as debt of foreign governments, money market instruments, and debt securities that are not Depository Trust Company eligible.

The name of the FINRA system that tracks both NYSE and NASDAQ transactions is A) DMM (Designated Market Maker). B) TRACE (Trade Reporting and Compliance Engine). C) TRF (Trade Reporting Facilities). D) OATS (Order Audit Trail System).

C The TRF is the only FINRA system that tracks transactions on the NYSE and Nasdaq, including OTC (over-the-counter) transactions. OATS only tracks Nasdaq transactions. TRACE tracks corporate and government agency bond transaction in the OTC market. DMM's are the specialists who work at each of the trading posts on the NYSE. They are responsible for maintaining a liquid and orderly market for stocks

An investor purchases 100 shares of Affiliated Grain Processors (AGP) common stock at $62 per share. The FINRA member firm handling the transaction has a commission rate of $0.02 per share. How is the trade reported on the consolidated tape? A) $62.02 B) $61.98 C) $62 D) $64.

C The consolidated tape is a high-speed, electronic system that reports the latest price and volume data on sales of exchange-listed stocks. The price shown does not include commission or other charges.

Which of the following securities cannot be purchased in the third market? A) Shares of preferred stock B) Closed-end investment company shares C) Open-end investment company shares D) Shares of common stock

C The third market is defined as the trade of exchange-listed stocks OTC. Because mutual funds are never listed on the exchanges, this would not apply to their shares. In addition, the third market represents secondary market trading and there is no secondary market for mutual funds. Please note: Most exchange-traded funds are structured as open-end investment companies, and they, obviously, trade on exchanges. On the exam, any questions about open-end investment companies will be exclusively dealing with mutual funds unless some mention is made of ETFs.

After receiving and accepting securities from another firm, a broker-dealer discovers that the securities received were not in good deliverable form. Recourse for the broker-dealer is to A) buy in the securities. B) sell out the securities. C) cancel the trade and file a complaint. D) file a reclamation.

D

The opening quote for issues listed on the NYSE is set by A) the exchange. B) the third-market makers. C) the floor brokers based on the level of opening orders. D) the designated market maker.

D

Broker-to-broker confirmations must be sent no later than A) the trade date plus two business days. B) the end of day on the date of the trade. C) the regular way settlement date. D) the next business day.

D Confirmations between brokers (broker-to-broker confirms) must be sent no later than the next business day following the transaction (T+1).

One of your customers mentions that she heard a friend say that whenever she buys stock, she has her registered representative use the DRS program. When the customer asks you for an explanation, you would reply that the DRS is A) the Dow-rating system where all listed stocks are assigned a rating based on expected future performance. B) the Direct Reporting System, where execution of transactions is reported simultaneously to the firm and the customer. C) the dividend reporting service where the dates of all upcoming dividends are reported to the investor. D) the Direct Registration System, where the customer's name as owner is recorded in book-entry form at the issuer or its transfer agent.

D DRS stands for Direct Registration System. It is a program that began in the mid-1990s as an alternative to "street name" registration for customer securities. Like street name, DRS is based on electronic bookkeeping. In direct registration, a stock is registered in an investor's name, but the company that issued the stock (or its transfer agent) is the one that holds the security in book-entry form, instead of a broker-dealer. All the other choices are made-up distractors. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

A trade for 325 shares may be settled by all of the following deliveries except A) 325 one-share certificates B) one certificate for 300 shares and 5 certificates for 5 shares C) 3 certificates for 90 shares, 3 for 10 shares, and one for 25 shares D) 4 certificates for 80 shares and one for 5 shares

D The Uniform Practice Code requires that deliveries be made in certificates that can be aggregated into lots of 100s or multiples of 100. There is no way to take the 80s and the 5 and make a lot of 100. With 325 one-share certificates (like paying a bill with pennies), you can make three separate stacks of 100 and then one of 25. The 90s and 10s can be aggregated and give three stacks of 100 with the final 25 being in one certificate. The 300-share certificate is a multiple of 100, and the remaining certificates add up to the odd lot of 25 shares.

A transaction made for regular way settlement occurs on Thursday. The following Monday is President's Day, when the stock markets are closed. The buying broker-dealer is domestic, while the selling broker-dealer is foreign based. The trade took place on the Nasdaq Stock Market. Settlement between the broker-dealers would take place A) on Monday, because the seller is foreign based. B) on Friday, the business day preceding the holiday. C) on the date specified as a seller's option. D) on Tuesday, the next business day following the holiday.

D The transaction would settle on Tuesdaythe business day following the holiday. This question includes distracting information. The key elements describe a transaction that uses regular way settlement (T+2). The first day is Friday and the next business day is Tuesday. The description of the selling broker-dealer as foreign based has no bearing on regular way settlement provisions. Had a seller's option been specified at the time of the trade between the broker-dealers, the Uniform Practice Code permits delivery at an agreed date after T+2.

Which of the following interdealer trades does not settle in clearinghouse funds? A) General obligation bonds B) Over-the-counter stocks C) Corporate bonds D) U.S. government bonds

D Trades in securities backed by the federal government are settled in federal funds, not clearinghouse funds

Which department in a brokerage firm handles payments for securities transactions? A) Purchases and sales B) Trading C) Reorganization D) Cashiering

D Yes, there will be questions this simple on the real exam. When you go shopping, who takes your payment? The cashier. It is the same concept here. Students miss questions like this because they think there is a trick.