SIE Exam III

An investor buys 100 shares of ABC at $50 per share and also sells 1 ABC April 45 call for 8. In the event that the investor is assigned an exercise notice and ABC is at 60, the trader's gain or loss on a per share basis would be:

$3 per share Premiums Stock Trans. buys 100 shares of ABC at $50 (B - 5,000) sells 1 ABC April 45 call for 8 (S + 800) assigned an exercise notice (S + 4,500) (-5000+800+4500) = + 300 the trader's profit or loss per share 300 / 100 shares = $3 per share profit

An investor writes a May 50 put @ 6 in February and the put is exercised on May 7. Eight weeks later the investor sells the stock @ $52 a share. The investor's profit or loss is?

$800 capital gain Premiums Stock Trans. writes a May 50 put @6 (S + 600) the put is exercised (B - 5,000) sells the stock at 52 (S + 5,200) (5200 + 600 -5000) = + 800 profit

One of your clients comes in for a consultation and is excited that his wife just recently gave birth to their first child. His wife is adamant that they send the child to private school and they hope to see the child go to college. The investor asks for the best option for their situation and tells you that they can afford to contribute about $1,000-2,000 per year. He was hoping for low set-up costs and some investment flexibility when it comes to the various funds available. He also wants to avoid taxes related to the account in terms of earnings and withdrawals. Which of the following would be the best recommendation for your client? [A] a Coverdell Education Savings Account [B] a UGMA/UTMA account in the child's name [C] a Pass Book Savings account at a local bank [D] a trust, set up in the child's name.

[A] - A Coverdell Education Savings Account can be set up with little initial cost and proceeds of the account can be used for expenses related to education at ANY level. - The maximum contribution per year is $2,000, and these plans offer flexibility in terms of investments and funds/families of funds. - Contributions are not tax-deductible, but earnings grow tax-free and qualified distributions for education purposes are also tax-free. The UGMA would not provide tax-free withdrawals. A trust does not accomplish the goals set forth by the client since it does not provide for low set up costs. The Pass Book Savings account would not provide for the growth that would be needed.

Economic analysts have found that over the past six months, there has been an overall decline in the following: - GDP (Gross Domestic Product) - Equity Prices - Employment Statistics - Business Activity Which of the following terms is most often used to describe this scenario? [A] This would be labelled an economic recession. [B] This would be labelled an economic depression. [C] This would be labelled a period of high inflation. [D] This would be lablelled a period of high deflation.

[A] - A recession is defined as a six-month consecutive decline in: - stock prices, - business activity, - employment, - and GDP. periods of high inflation or high deflation would not automatically be associated with this 6-month decline.

When considering a possible investment in a Roth IRA, which of the following would NOT be an advantage? [A] Until the funds are withdrawn during retirement, all contributions and earnings are tax-deferred. [B] Contributions to the account can continue to be made after the account owner reaches age 70 1/2. [C] Qualified distributions of principal and earnings are tax-free when they are withdrawn. [D] If individuals are actively enrolled in an employer's retirement plan, this fact alone does not place restriction on the eligibility of the individual to contribute to a Roth IRA.

[A] - All choices are advantages except for "A" because - contributions to a Roth IRA are made with AFTER-TAX dollars. - Earnings grow tax-deferred and if withdrawals are qualified, they will be tax-free.

When an RR is opening an account for a new mutual fund customer which of the following is NOT necessary? [A] Estate value and overall net worth [B] Social security number [C] Whether the customer is employed by another FINRA member firm [D] The name and address of the customer's employer

[A] - An RR would not need to know the customer's estate value to open the account.

The public offering price of a bond is $1,000 and the bond has a coupon of 5%. If interest rates remain unchanged, what could you expect regarding the price of the bond? [A] The bond would remain at par value. [B] The bond would trade at a premium. [C] The bond would trade at a discount. [D] The bond price would be depreciated.

[A] - Bonds that trade for $1,000 are said to trade at "par." - Bonds that trade for a price above $1,000 are said to trade at a premium. - Bonds that trade below $1,000 are said to trade at a discount. - Depreciation refers to an accounting practice for physical assets, such as equipment.

An investor who trades a closed-end fund would receive which of the following prices? [A] The current market price [B] The price is based on the closing market price of the day [C] The current NAV of the shares [D] The value of the NAV from the previous trading day

[A] - Closed-end funds trade on an exchange like common stock; therefore, the investor would buy or sell his shares for the current market price of the shares.

Common stockholders could take which of the following actions with regard to the corporation's business activities? (i) Vote on a stock split (ii) Inspect the minutes from the Board of Directors meetings (iii) Attend the annual shareholders meeting (iv) Vote on a cash dividend [A] I and III [B] II and III [C] I, II and III [D] I, II, III and IV

[A] - Common stockholder would do I and III. II is not allowed since stockholders do not attend the meetings of the Board of Directors. IV is not done because common stockholders do not vote on the type or amount of dividends; that is done by the Board of Directors.

Which of the following is a characteristic of a variable annuity? [A] Investment risk is assumed by the annuitant. [B] Annuity payments are fixed. [C] The investment account portfolio consists primarily of debt securities. [D] Interest payments are guaranteed.

[A] - In a variable annuity, the hope is that the equity securities will keep pace with inflation but the annuitant assumes the investment risk of the plan.

Preferred stock has which of the following characteristics? (i) One can typically expect a dividend at a specific rate. (ii) Voting rights typically do not accompany preferred stock. (iii) Historically, preferred stock exhibits more appreciation potential than common stock. (iv) Dividends are paid only after dividends have already been paid on common stock from the same issuer. [A] I and II [B] II and III [C] I and IV [D] III and IV

[A] - Preferred stock typically comes with a specific or fixed dividend rate. Preferred also does not come with voting privileges, though it is possible. Preferred receives dividends ahead of common, which is one of the reasons that it is "preferred."

Which of the following regulations govern distributions of new issues? [A] Securities Act of 1933 [B] Securities Act of 1934 [C] Maloney Act of 1938 [D] Trust Indenture Act of 1939

[A] - The Securities Act of 1933 regulates the issuance of new equity securities. (preferred stock and common stock.)

A mutual fund's net asset value has increased from $22.00 to $23.50 over the last few months. The cause for the increase would be due to [A] an appreciation in the value of the portfolio [B] the fund manager deciding to increase the number of shares it issues [C] an increasing demand for the fund [D] the decision by the fund manager to reduce the fund's expense ratio

[A] - The increase in the net asset value would be directly related to an increase in the value of the underlying securities held in the fund's portfolio.

The shares of a growth fund fluctuate in value based on the [A] changing values of the securities in the portfolio. [B] Dow Jones Industrial Average. [C] market as a whole. [D] current interest rates.

[A] - The value of a growth fund will fluctuate daily based on changing value of the securities held in the fund's portfolio.

S & P 100 index options when exercised are settled by the use of which of the following? [A] Cash [B] stocks from the S & P 500 index [C] Treasury Securities [D] ETF shares on the index

[A] - When any index option is traded or exercised, settlement is made by the delivery of CASH.

A bond's par value represents the bond's [A] market price and guaranteed payout on the bond. [B] face value and the amount of principal that the issuer is expected to repay at maturity of the bond. [C] value as a sum of all interest payments that will be made on the bond over its lifetime. [D] total impact as a liability on the balance sheet of the issuing entity.

[B] - A bond's par value = the bond's face/principal value, (This is the amount that the issuer is expected to repay at maturity of the bond.)

Which of the following BEST describes a call feature? [A] This is a feature of a bond that allows the bond to be converted to common stock at the option of the issuer. [B] A feature that allows the issuer of a bond to redeem the bond ahead of the final maturity date, typically including a premium above face value of the bond and most commonly used when interest rates have decreased. [C] This is a feature of a bond that allows the bond's coupon rate to be adjusted upward or downward in relation to interest rates in the current market. [D] A feature that forces the issuer to redeem a bond ahead of schedule at the option of the bondholder.

[B] - A call feature allows the issuer of a bond to redeem or call in the bond ahead of the bond's final maturity date.

A corporation has a pre-emptive rights clause which requires that rights be offered to existing shareholders prior to the issuance of new shares. This corporation decides to issue new securities and a rights offering takes place. Once existing shareholders have these rights in hand, which of the following is something that they are NOT permitted to do with them? [A] Holders of rights are permitted to gift the rights to another investor. [B] Holders of rights are permitted to bring the rights back to the issuing corporation and redeem the rights for cash. [C] Holders of rights are permitted to sell the rights in the secondary market. [D] Holders of rights are permitted to exercise their rights and purchase shares of the new issue.

[B] - A pre-emptive rights clause requires a corporation with outstanding publically traded shares to offer new shares to existing shareholders prior to offering them to the public. When existing shareholders receive rights, they can: - exercise the rights and buy more shares, - sell the rights to another investor, - gift the rights to another investor, but the right holder is NOT permitted to redeem the rights back to the corporation for cash.

A signed "options agreement" must be obtained from a new options customer: [A] Before the first options order [B] Within 15 days after the account has been approved for options transactions [C] No later than the settlement date of the first options trade in the account [D] Not later than 30 days after the settlement date of the first options trade in the account

[B] - A signed options agreement must be received by the firm within 15 days from the time the account has been approved for options transactions.

When a division or subsidiary of a corporation becomes an independent company as part of a divestiture, it's called a(n): [A] recapitalization [B] spin-off [C] acquisition [D] leverage buyout

[B] - A spin-off is a form of corporation divestiture in which a subsidiary or division becomes an independent company. Recapitalization is an alteration of a corporation's capital structure, such as an exchange of bonds for stock. A leveraged buyout is a takeover of a company using borrowed funds.

A customer holds a corporate bond with a coupon rate of 5.75%. This bond will pay how much interest on an annual basis? [A] $5.75 [B] $57.50 [C] $575.00 [D] Annual coupon payments will depend on the market price at which the bond was purchased

[B] - A standard corporate bond will have a par value of $1,000. Coupon rates are based on par value (NOT market price), so a rate of 5.75% on a $1,000 would be $57.50 (.0575/1000) in annual interest related to the coupon rate ($1,000 par x 0.0575) = $57.50. This interest will be broken into two semi-annual interest payments, but the question asks for the annual payout.

An individual owner of a brokerage account may [A] be 17 years old. [B] designate another individual to perform actions in the account on his behalf. [C] not open a joint account also at the same member firm. [D] assume that upon his death, ownership of the account will automatically be transferred to a surviving parent.

[B] - An individual may designate another individual to act on his behalf by signing a power of attorney or a limited trading authorization (discretionary power).

A customer buys $20,000 of securities in his cash account. On the settlement date, he tells the RR he cannot pay. He says to sell out the purchase. Which of the following is correct? [A] If the proceeds of the sale exceed the cost, there is no penalty. [B] Under Regulation T, the account must be frozen for 90 days. [C] This is a violation of the 1934 Act anti-fraud rules. [D] The SEC considers the account undesirable and the account must be closed.

[B] - Because the transaction was liquidated (cannot pay on settlement day), the cash account would be frozen for 90 days.

Which of the following BEST describes a market maker who acts in a "dealer" or "principal" capacity? [A] A designated market maker working trades of buyers and sellers, typically on the floor of an exchange. [B] A broker/dealer firm that trades into and out of their own inventory, typically in the Over-the-Counter (OTC) market. [C] Issuers, who work with underwriters in the sale of their own securities in order to generate capital for business operations. [D] Advisory firms who provide advice related to securities for fees.

[B] - Broker/dealers who trade into and out of their own account are working in a principal or dealer capacity. Market makers are often broker/dealers who are working in that dealer or principal capacity in the OTC market. The listed market is where a designated market maker maintains an orderly market. Issuers are the companies that are trying to generate capital and would not fit into the definition of a market maker as they sell in the primary market, while market makers work in the secondary market. Advisory firms also would not be considered market makers unless they were trading into and out of their own inventory, which is not specified.

Which two of the following options strategies would be considered "bullish"? (i) Selling uncovered put options (ii) Selling uncovered call options (iii) Buying put options (iv) Buying call options [A] I and III [B] I and IV [C] II and III [D] III and IV

[B] - Bullish: - Long calls and - short puts (covered or uncovered)

A mutual fund's purchase price is determined by the [A] net asset value at the previous day's close [B] net asset value calculated at the close after the order is received [C] price that reflects the current supply-demand for the security [D] intraday net asset value

[B] - Forward pricing is always required when purchasing an open-end mutual fund, which means you will pay the next calculated price (less any sales load discount) after your order is entered.

Which of the following are regulated by the Securities Exchange Act of 1934? (i) Insider trading (ii) The extension of credit for the purchase of securities (iii) Required disclosures on publicly traded securities (iv) The Secondary Market for securities [A] I & II only [B] I, II & IV only [C] III & IV only [D] I, II, III, IV

[D] - The Securities Exchange Act of 1934 provides for regulation of all choices offered. - insider trading - extension of credit - required disclosures - Secondary market for securities

A customer at the firm purchases a corporate bond that is both callable and convertible. The customer wants to know when the transaction will settle. Assuming the trade settles under normal circumstances, what should the customer be told? [A] The trade will settle regular way on the business day following trade date. [B] The trade will settle regular way, two business days following the trade date. [C] The trade will settle under Reg T rules, four business days following the trade date. [D] The trade will settle under Reg T rules, five business days following the trade date.

[B] - If the trade is to settle under normal circumstances, this would be a "regular way" settlement. (T+2)

Mrs. Smith set up a Uniform Gifts to Minors Account for her daughter and the custodial account has done very well this past year. The profits and earnings on this account would be reportable on which person's tax return? [A] Mrs. Smith's [B] Mrs. Smith's daughter [C] Mr. Smith [D] Mr. and Mrs. Smith's joint tax return

[B] - In a UGMA/UTMA account the child's social security number is used and the profits and earnings on the account will be filed on the tax return of the minor. These profits and returns are NOT filed on the donor's or custodian's return.

The Fed would use which of the following tactics to attempt to LOWER inflation? (i) The discount rate would be increased. (ii) The requirements on margin accounts would be lowered. (iii) Open operations would take place where the Fed sells government securities. (iv) The reserve requirements on banks would be reduced. [A] I and II [B] I and III [C] II and III [D] III and IV

[B] - In order to LOWER inflation, - the Fed would attempt to take money out of the system and - they would increase rates. If the Fed sells government securities, the member banks are forced to buy these securities. This removes money from the system making for tighter money and less ease of borrowing. An increase in interest rates make borrowing more expensive, thus having a similar effect.

An investor at the firm insists on buying a stock in order to receive the dividend, despite being advised against this by their registered representative. The stock's record date is Monday, October 23rd. Assuming a regular-way settlement, the latest that this investor could buy the stock and still receive the dividend is [A] Wednesday, October 18th. [B] Thursday, October 19th. [C] Friday, October 20th. [D] Saturday, October 21st.

[B] - In order to receive the dividend, the investor would have to buy the stock prior to the ex-date in order to receive the dividend. The ex-date in this scenario is Friday, October 20th, which is one business day prior to the record date. (T+1) Therefore, the investor would need to purchase this stock on or prior to Thursday, October 19th, in order to receive the dividend.

Which of the following activities by registered representatives conducted outside of their normal scope of activities at the member firm does NOT require written notice and approval from the member firm? [A] A Yoga instructor [B] A passive limited partner in a real estate limited partnership [C] A general partner in a privately-owned restaurant [D] A part-time realtor

[B] - Passive income activities do not have to be reported to the employing member firm. All of the other activities involve active participation in an outside business activity which would require notice and approval from the member firm.

Which two of the following statements would be correct regarding Regular Way settlement on common stock and Reg T settlements? (i) Reg T settlement is trade date plus 2 business days (ii) Reg T settlement is trade date plus 4 business days (iii) Regular Way settlement is trade date plus 2 business days (iv) Regular Way settlement is trade date plus 4 business days [A] I and III [B] II and III [C] I and IV [D] II and IV

[B] - Regular Way = (T+2) Regulation T settlement on common stock = (T+4)

On Tuesday, February 11th, one of your clients calls in and is curious about a stock that they purchased the previous business day of Monday, February 10th. The stock was purchased regular way and the client wants to know when the transaction will settle. What is the anticipated settlement date for this trade? [A] The stock will settle T+4, so settlement should be expected no later than Friday, February 14th. [B] The stock will settle T+2, so settlement should be expected no later than Wednesday, February 12th. [C] The stock will settle T+1, so settlement should take place no later than the end of the business day on which the client called, Tuesday, February 11th. [D] The stock should have settled same day, on Monday, February 10th.

[B] - Regular way settlement is T+2. If the trade date was Monday, February 10th, then the settlement date will be Wednesday, February 12th.

A regular-way settlement on US Government Treasury Bonds purchased in the secondary market is [A] same day as trade day. [B] trade day plus one business day. [C] trade day plus two business days. [D] trade day plus three business days.

[B] - Regular-way settlement of US Government Securities in the secondary market is trade date plus one business day. (T+1) From auction in the primary market, US Government Securities settle trade date plus three business days. (T+3) Regular way settlement of most corporate securities in the secondary market is trade date plus two business days. (T+2) Cash transactions in corporate securities settle on the same day as trade date.

The primary function of SIPC (Securities Investor Protection Corporation) is to protect investors [A] from identity theft and fraudulent transactions in their accounts [B] in the event that their broker/dealer fails, providing compensation for losses on cash and securities up to SIPC limitations [C] from negligence on the part of a SIPC member when handling transactions in customer accounts. [D] from the mismanagement of executives who run the member firms where the customers maintain their accounts

[B] - SIPC protects customers against the default or insolvency of their broker/dealer. SIPC compensates investors for cash and securities held in their accounts up to certain limitations.

An Over-The-Counter (OTC) security is [A] any security that is available for purchase without a recommendation from an agent or investment adviser representative. [B] a security that is traded on the floor of an exchange, typically available from a designated market maker functioning in a broker capacity. [C] a security that is traded off of the floor of an exchange, typically available from a market maker functioning in a dealer capacity. [D] any security that is being sold to the public for the first time in an initial public offering (IPO).

[C] - OTC securities are securities that trade off of the floor of an exchange. Transactions normally take place with market makers, often broker/dealer firms, who act in a dealer or principal capacity, trading into and out of their own inventory of securities.

Which of the following is TRUE of an investor who is long 1 ABC July 50 Call Option decides to exercise the call? [A] The exercise requires the investor to buy an additional ABC July 50 Call Option in their account. [B] The investor will buy 100 shares of ABC Stock at $50 per share. [C] The investor will sell 100 shares of ABC Stock at $50 per share. [D] The exercise requires the investor to contact the same investor who sold the option in order to complete the transaction.

[B] - So when the investor decides to exercise, this means that the investor who is long the option and exercises will buy 100 shares of the underlying stock at the exercise or strike price. The sale of 100 shares due to an exercise would be related to the purchase of a put option, NOT a call option. Exercising an option does not require the purchase of another option. Option contracts are standardized and are not isolated to two individuals which means that the investor will not have to contact the seller, as the OCC will assign the exercise to a seller in the market which is unlikely to be the same seller involved in the original option transaction.

Under the FINRA rules, among the factors that should be considered when determining whether a broker-dealer has used "reasonable diligence" in finding the best market and execution for a customer's order are all of the following EXCEPT: [A] The size and type of the order [B] Whether order execution is manual or automated [C] The number of markets checked [D] The accessibility to price quotations

[B] - The FINRA rule on Best Execution (Rule 2320) requires member firms " to use reasonable diligence in finding the best market and execution for customer orders." The rule lists five factors that should be considered in determining whether "reasonable diligence" Correct choices has been made including A, C and D. The rule assumes that the order execution will be automated and makes no allowance for MANUAL ORDERS

An RR who is also involved in outside business activities which have been approved by their firm is sued for fraud with regard to the outside business activity. Which of the following actions should be taken by the branch manager of the RR's firm? [A] No action is required since this involves an outside business activity. [B] This situation must reported by the branch manager. [C] This situation must reported by the branch manager if the lawsuit involves a claim for damages in the amount of $10,000 or more. [D] Await a subpoena from the party filing the lawsuit.

[B] - This must be immediately reported (the incident may involve improper business conduct and practices)

U.S. Treasury securities regular way settlement is: [A] same day as trade date [B] the next business day after trade date [C] five business days after trade date [D] seven business days after trade date

[B] - U.S. Government securities transactions settle the next business day after trade date. (T+1)

ABC Company declared a fifty cent ($0.50) per share dividend on August 15th to shareholders of record Friday, September 15th. On which two of the following days can an ABC Company stockholder sell his shares and still receive his fifty cent ($0.50) per share dividend? (i) Wednesday, September 13th for regular way settlement. (ii) Thursday, September 14th for regular way settlement. (iii) Friday, September 15th for cash settlement. (iv) Monday, September 18th for cash settlement. [A] I and III [B] II and IV [C] I and IV [D] II and III

[B] - Usually dividend questions are asked from a buyer's point of view, - buy before ex-date to receive the dividend - but this question says the investor already owns the stock and wants to keep the dividend; when should they SELL. In this case the investor would wait until the ex-date or after before selling in order to keep the dividend. Ex-date for regular way settlement is 1 business day prior to record date - or II Sept 14. Ex-date for cash settlement is the business day after record date - or IV Sept 18. Remember you must: Buy before the ex-date or Sell on or after the ex-date to receive the dividend.

All of the following statements on the secondary market of Brokered CDs are INCORRECT EXCEPT: [A] An interest penalty is added to the par value of the Brokered CD when it is returned to the investor. [B] On settlement date, accrued interest is added to the market value of the Brokered CD and the seller receives both. [C] No interest is added to the par value when the Brokered CD is returned to the seller. [D] On settlement date, the accrued interest penalty is subtracted from the market value of the Brokered CD and then paid to the seller.

[B] - When Brokered CDs are sold in the secondary market, they trade at the market value of the brokered CD plus accrued interest. This is paid to the seller by the buyer on settlement date.

When a call option is exercised the [A] buyer of the call will deliver 100 shares of the underlying stock at the market price. [B] seller of the call will deliver 100 shares of the underlying stock at the strike price. [C] buyer of the call will deliver 100 shares of the underlying stock at the strike price. [D] seller of the call will deliver 100 shares of the underlying stock at the market price.

[B] - When a call option is exercised = the seller of the call is obligated to deliver(sell) 100 shares of the underlying stock at the strike price. The buyer of the call will pay the seller the strike price for the 100 shares and is not required to deliver shares.

Open-end investment companies do not list on national exchanges because they [A] qualify for listing on the OTC market only [B] are continuously being offered as new issues by the fund [C] require 100% shareholder approval [D] are wholly owned and traded by the underwriter

[B] - open-end investment companies offer redeemable shares only (they do not offer shares that are publicly traded) Therefore, the fund is always issuing new shares to the public and redeeming shares that are sold back to the fund and would not have shares listed on a national exchange.

When discounting a draft between a US company and a foreign exporter to expedite foreign trade, they would be discounting which of the following? [A] A Treasury Bill [B] A Banker's Acceptance [C] A Certificate of Deposit [D] A Letter of Credit

[B} - A Banker's Acceptance would be used to finance foreign trade and would be discounted in order for the exporter to receive immediate payment.

The terms "bid" and "ask" are used to indicate [A] last sale information [B] initial public offering price [C] quotations on securities in the secondary market [D] the range within which securities are trading for that day

[C] - Quotations will contain the bid price and ask price for a security trading in the secondary market.

A client is currently filling out the paperwork for a new margin account with your firm. The client calls you and asks you about the purpose of the Loan Consent Agreement. What is the MOST appropriate description of this document? [A] The agreement provides the RR with the authority to make trades in the account which fall in line with the account's investment objectives without first consulting the client. [B] The agreement provides the firm with the authority to sell a customer out of a position and liquidate the necessary amount of securities needed to meet margin and maintenance calls when the customer fails to meet such calls. [C] The agreement provides the firm with the authority to lend margined securities from the customer's account to other firms and customers for purposes such as short sales. [D] The agreement provides the RR with the authority to put the margined securities in the customer's account up as collateral for loans from banks.

[C] - A Loan Consent Agreement provides the firm with the authority to lend the customer's margined securities to other firms and customers for purposes such as short selling. -The other options include discretionary authority, new account forms related to margin and maintenance calls, and hypothecation agreements.

FINRA rules on discretionary accounts require which of the following? [A] A record of the customer agreeing to arbitrate all disputes between the customer and the member firm [B] An attestation that the customer will abide by FINRA rules [C] A record indicating the date that the written discretionary authority was granted by the customer [D] Evidence that the customer has read and understood the SIPC coverage limits

[C] - A signed/dated written discretionary authorization must be submitted by the customer before the RR can execute any discretionary trades.

What are the purposes of the Securities Exchange Act of 1934? (i) Created the SEC (ii) Provided for the regulation of credit (iii) Provided for the regulation of exchanges (iv) Provided for the regulation of new issues [A] II, III and IV [B] I and IV [C] I, II and III [D] I and III

[C] - All choices are true except IV. - Securities Exchange Act of 1934 regulates exchanges - Securities Act of 1933, which regulates new issues.

All of the following are requirements for a cash account for the purchase of listed options EXCEPT: [A] A new account report form. [B] An option account agreement. [C] A hypothecation agreement. [D] The authorization of a Registered Option Principal.

[C] - An hypothecation agreement is required in a margin account, not a cash account.

If an investor buys a call option contract on the S&P 500 Index, what will the investor receive when exercising the call? [A] 100 shares of the S&P 500 ETF at the strike price listed on the contract [B] The market price of the index at the close of trading on the day of exercise, in cash [C] The difference between the strike price on the contract and the market price of the index at the close of trading on the day of exercise, in cash [D] Proportionate shares of S&P 500 stocks to the value of the contract

[C] - Buyers of index options receive cash that is equal: to the difference between the market price at the close of trading for the index and the exercise price on the contract. - Index options settle in cash, not in ETF or actual common shares. - Index options have a strike price, so investors would not receive the full market price of the index at close in cash, as the strike price will offset this amount for call contracts.

Which of the following statements about call features found on securities such as preferred stock or bonds is CORRECT? [A] Call features should not be a consideration as they do not impact the security's return. [B] Call features are required on all long-term bonds. [C] Call features are beneficial to the issuer of the securities. [D] Call features are beneficial to the investor purchasing the securities.

[C] - Call features allow the issuing company to "call in" their securities prior to their specified maturity date. These features are beneficial to issuers because they allow the issuer to call securities if lower costs of borrowing (lower rates of interest on bonds/dividends on preferred stocks) can be acquired. These features significantly affect securities, they are not required, and they are not beneficial to investors because the investor may end up with a lower return because of the call feature.

The intent of ERISA (Employee Retirement Income Security Act) is to protect the funds within an employee retirement fund from which of the following? [A] ERISA is designed to protect retirement funds from poor management by investment advisory firms and investment adviser representatives. [B] ERISA is designed to protect retirement funds from fraudulent activity which may take place at an executing broker/dealer's place of business. [C] ERISA is designed to protect retirement funds from poor management by an employer who handles the company retirement policy. [D] ERISA is designed to protect retirement funds from predatory taxation policies of the federal government.

[C] - ERISA was designed to protect the retirement funds of employees from poor management by employers. It places limitations and establishes guidelines associated with how funds can be invested and used within the retirement plan.

In which of the following scenarios would it be UNACCEPTABLE for a FINRA member firm to hold a customer's mail? [A] The customer is leaving the United States on business and the trip will be shorter than 3 months. [B] The customer provides a written request to the member firm to forward mail to a previously unknown address. [C] The customer asks the member firm to hold his mail until further notice from the customer. [D] The customer notifies the member firm that he will be on vacation for over a month.

[C] - Firms may not hold customer's mail indefinitely. - The customer must tell the member firm how long the mail must be held. All of the other situations are acceptable concerning holding customer mail.

One of your customers holds a position in DEF common. The customer calls and informs you that they want to sell 250 shares of DEF at $30. The current bid on DEF is $22, so you, the RR, enter a GTC order to sell 250 shares at $30. After sitting on the GTC order for a month, the customer sees that the bid on DEF has gone up to $26. The customer calls you up and tells you to sell at the BEST available price. What should you do? [A] You should reduce the execution price on the GTC order to $26.50 and wait. [B] You should reduce the execution price on the GTC order to $26.00. [C] You should enter a new order to sell at the market after cancelling the previous GTC order. [D] You should enter a sell order at the market and leave the GTC order alone.

[C] - In this situation, the registered rep should cancel the GTC order that is outstanding still at $30 per share and enter a market order which will achieve the best current price for the customer. Entering another GTC order, or adjusting a previous order does not fulfill the customer's wishes to sell at the best price. In the time that it takes to enter such an order, the price could go down from $26.

An investment that consists of a managed portfolio of property established to earn profits for its shareholders would be best described by which of the following? [A] This description best applies to CMOs (Collateralized Mortgage Obligations). [B] This description best applies to Real Estate Direct Participation Programs. [C] This description best applies to REITs (Real Estate Investment Trusts). [D] This description best applies to debt issued by the Federal Farm Banks.

[C] - Real Estate Investment Trusts (REIT's) consist of a managed portfolio of real property which is intended to earn profits for the REIT's shareholders. A Direct Participation Program would have limited partners and would not have shareholders.

Minor declines over at least two consecutive quarters in which of the options below would be considered a recession? [A] DJIA - Dow Jones Industrial Average [B] NASDAQ 100 [C] Gross Domestic Product [D] Cost of Living Index

[C] - Recession is measured by changes in the GDP. A recession is signified by declines in GDP over the course of at least two consecutive quarters.

When is payment typically due on the regular-way purchase of a round lot of T-Notes? [A] Payment is typically due on the 4th business day. [B] Payment is typically due on the 3rd business day. [C] Payment is typically due on the following business day. [D] Payment is typically due on the day of the trade.

[C] - Regular-way settlement for Treasury Securities is the business day following the trade date. (T+1)

Mutual funds must send financial reports to their shareholders at least [A] with each trade confirmation which contains a link to the reports [B] Upon request by the customer [C] Semi-annually [D] Annually

[C] - Sections 13(a) and 15(d) of the Securities Exchange Act of 1934 require funds to send financial reports to shareholders at least semi-annually (once every six months).

Which of the following is considered an affiliate, but bears no financial obligation when it comes to the primary offering of securities through a syndicate? [A] The Managing Underwriter [B] The Selling Syndicate Members [C] The Selling Group Members [D] Outside Broker/Dealers

[C] - Selling group members may be allocated a portion of the offering to sell, but bear no financial responsibility. The syndicate is comprised of the managing underwriter who puts together a selling syndicate. Outside broker-dealers are not affiliated with the syndicate

An investor is nearing retirement. Historically, the investor has purchased shares of equity funds, including growth funds, with the objective of capital appreciation in their retirement portfolio. Now, the investor is seeking to transition that objective to income generation for retirement purposes. The investor can avoid additional sales load, because the investor keeps their assets under the same family of funds. Which of the following allows this investor to avoid an additional sales load at this time? [A] A Letter of Intent [B] Rights of Accumulation [C] An Exchange or Switching Privilege [D] A Contingent Deferred Sales Load

[C] - Some families of funds offer conversion/exchange/switching privileges. These allow buyers of funds to reduce or eliminate sales loads when objective changes. In this question, the investor avoids additional sales loads because the family of funds offers an exchange or switching privilege. - Letters of Intent and Rights of Accumulation apply to volume discounts, breakpoints, on new purchases of shares, not changes to objective. - Contingent deferred sales loads apply to Class B mutual fund shares and would not be relevant to this scenario.

A person who has a Series 6 license would be allowed to say which of the following to a potential client? [A] "Now that I am registered with FINRA, I can sell mutual funds in your state." [B] "The S6 registration allows me to sell only securities that have been approved by the SEC." [C] "As a registered representative I am required to disclose all material facts about the mutual funds that I offer." [D] "My registration allows me to recommend some basic option strategies."

[C] - The S6 registration satisfies FINRA requirements; the individual now has to register as an agent in each state. The SEC does not approve any security. Lastly, the S6 registration does not approve an individual to sell options.

If a broker-dealer fails, the trustee appointed by SIPC will [A] secure temporary financing for the broker-dealer with the Federal Reserve. [B] freeze the assets of the broker-dealer and recover damages in bankruptcy court. [C] liquidate the assets of the broker-dealer in an orderly fashion and notify customers on how they can file their claims. [D] hire an investment banker to seek a suitable merger partner with the failing broker-dealer.

[C] - The SIPC trustee will liquidate the assets and notify customers on the procedures to file a claim.

You are analyzing your company in order to ensure that the retirement plans of its employees best benefit both the employees and the company. You notice that two of your executives are currently 57 and 60. Of the following choices, which best fulfills your concerns about the benefits working for both employee and employer? [A] Offering the two executives a deferred compensation plan that is non-qualified. [B] Offering the two executives a 403(b) plan. [C] Offering the two executives a defined benefit plan. [D] Offering the two executives a tax-sheltered annuity.

[C] - The defined benefit plan best suits both the company and the two executives that are likely to retire in the upcoming years. Older, long-service employees will have already accumulated the highest monthly pension benefits under a defined benefit plan. The formula for a defined benefit plan defines the monthly pension that the retiree will receive.

A customer's only account at a broker-dealer is an established margin account. The customer wishes to participate in the distribution of a new issue of common stock coming to market in the next few days. Which of the following is true regarding this situation? The customer must be told that [A] he will be required to open a cash account in order to participate in the new issue. [B] new issue purchases are not allowed in a margin account. [C] he can purchase the new issue shares in his margin account but would be required to pay for the purchase in full since it is an IPO. [D] new issues require a margin deposit of 75%.

[C] - This investor would be allowed to purchase the new issue shares in his margin account - but since it is a new issue, the purchase is not permitted using margin borrowing - the customer will be required to pay for the purchase in full.

A registered representative at your firm has a client who is on the board of directors of QRS Corporation. The client calls in and in passing, mentions that QRS will not come close to meeting their earnings projections for the coming period. The release of earnings figures for QRS does not take place until late in the following week. Which of the following is the APPROPRIATE action to take in this scenario? [A] The RR should log into their personal account and sell as much of QRS short as possible in anticipation of the bad news. [B] The RR should enter short sale orders for the client in QRS in anticipation of the bad news. [C] The RR should make a call to the firm's compliance department to inform them of the disclosure and ensure all precautions are taken related to the matter and the RR should not discuss the call with other RRs or other clients. [D] The RR should immediately call the firm's research department to confirm the numbers and once confirmed, should broadcast this information to all reps within the firm.

[C] - Whenever an RR is given insider information, the RR should NOT act on the information and should immediately contact the firm's legal department and/or compliance department for further instruction. Each of the other actions would be an example of insider trading and would be inappropriate.

A 90-day frozen period where restrictions are placed on trading activity would apply to an individual account when the [A] owner receives a margin call on a long margin account and meets the call. [B] margin account has entered "restriction" where equity drops below 50%. [C] owner purchases and sells stock in a cash account and never deposits adequate funds to cover the initial purchase. [D] purchase of equity options takes place in a cash account.

[C] - One key aspect of a cash account is that all securities must be paid for in full, regardless of if the securities were sold prior to the settlement of the purchase. In a scenario where the owner of a cash account fails to pay for securities in full or buys and sells a security before paying for it (free-riding), Regulation T requires that the account be "frozen" for a period of 90 days.

All of the following are considered to be benefits of investing in a municipal bond unit investment trust EXCEPT: [A] diversification [B] tax free interest income [C] redeemable units [D] active investment management

[D] - A municipal bond unit investment trust is not managed. (It is supervised) As bonds in the portfolio mature, the proceeds are paid out to investors. They are not reinvested. Therefore, no buy-sell-hold decisions are needed to be made by an investment manager.

A quote for a security trading in the secondary market typically contains all of the following, EXCEPT: [A] A bid price [B] An ask price [C] The size of the market [D] Average daily trading volume

[D] - A quote for a security typically contains: - the bid price, - the ask price, - and the size of the market (the number of shares available for sale and for purchase).

Which of the following are required in order to open an options account? (i) The RR must inquire about the investment objectives of the customer. (ii) The RR must gather and keep record of customer financial background information. (iii) The RR must provide an Options Disclosure Document (iv) The customer must sign a document agreeing not to violate position limit and exercise limit rules. [A] II only [B] II and IV only [C] III and IV only [D] I, II, III, and IV

[D] - All choices are correct regarding the opening of an options account for a customer. RR: - must inquire about the investment objectives of the customer. - must gather/keep record of customer financial background information. - must provide an Options Disclosure Document Customer: must sign a document agreeing not to violate position limit and exercise limit rules.

Which of the following would be considered "sales literature" under FINRA rules? (i) Brochures made available at the branch office reception area (ii) A research report sent to customers regarding investing in certain industries (iii) Reprints of materials that were prepared independently [A] I only [B] II only [C] II and III only [D] I, II, III

[D] - All three choices are included in FINRA's definition of sales literature. -brochures -reports -reprints

Of the following, which is a possible cause of the yield curve becoming inverted? [A] Due to favorable trends in interest rates, corporations are taking advantage by borrowing on a long-term basis. [B] Since short-term rates are low, there is an increased demand with regards to long-term debt. [C] Projections in manufacturing are showing a higher demand for goods, which has led manufacturing firms to borrow on a long-term basis to finance expansion. [D] Due to an economic slowdown, manufacturing firms have been unable to sell current inventories, leading to increased short-term borrowing to finance inventory carrying costs.

[D] - An increase in demand for short-term borrowing leads to increased rates in the short-term debt market (e.g., it will cost more to borrow short-term if everyone wishes to borrow short-term). This will lead to an inversion of the yield curve as short-term rates increase relative to long-term rates. (Each of the other alternatives shows an increase in demand for long-term debt.)

When is it permissible for a non-registered individual to receive commissions? [A] Only if the individual's supervising principal approves of the payment [B] Commissions paid to the non-registered person must represent no more than 10% of the total commissions paid. [C] The non-registered person can receive commissions only for accounts that he or she introduced to the RR. [D] Only if there is an employment contract in place which allows for commission payments to be made to the non-registered spouse of a registered representative

[D] - Continuing commissions may be paid to a non-registered individual if provided for in the written employment agreement of the RR.

When considering penalty free withdrawals from a Traditional IRA prior to age 59 ½ , all of the following could qualify EXCEPT: [A] Death [B] Disability [C] College education costs [D] Building a vacation home

[D] - Distributions from a Traditional IRA may begin at age 59 1/2 . Funds withdrawn before age 59 ½ will be subject to a 10% penalty except for death, disability, some medical expenses, first time (not vacation) home purchases, and higher education costs (college).

The value of accumulation units in a variable annuity contract is directly related to the value of which of the following? [A] The Consumer Price Index [B] The Dow Jones Industrial Average [C] The securities in the general account of the insurance company [D] The securities in the separate account of the insurance company

[D] - In a variable annuity, accumulation units are used during the pay-in period to determine the contract holders interest in a separate account of the insurance company issuing the variable annuity contract. The separate account consists of a portfolio of securities managed by a Board of Managers elected by the contract holders.

A client of yours wants to put additional funds into his retirement account. He has an annual income of $400,000 and two children to support. He is considered a qualified plan participant. The best form of retirement account for this individual is: [A] A Coverdell Education Savings Account would be the client's best decision. [B] The best form of retirement plan would be a Roth IRA. [C] This client is best suited for a Rollover IRA. [D] This client would be best served by a Traditional IRA.

[D] - In this situation, since the individual wishes to put additional funds away for retirement, the best answer of those given would be the Traditional IRA. A. Coverdell - For educational expenses. B. Roth IRA - Income of $400,000 exceeds the maximum income limit for a Roth, and therefore they cannot contribute. C. Rollover IRA - The individual doesn't want to roll over his qualified plan, he wants to put additional funds into a retirement account.

Information pertaining to the suitability of various investments and investment strategies is required by an RR at what point in time? [A] Before beginning a telemarketing campaign [B] Within 10 calendar days of the account opening [C] After providing the prospect with sales literature [D] At the time the prospective client becomes a customer

[D] - Much of the information required for determining suitability must be included in the New Account Report form that must be signed by the registered representative. "A" cannot be true because the RR has not yet talked with the prospects. "B" is wrong because the customer's profile and suitability assessment must be done at the time of account opening. Providing prospects sale literature does nothing with respect to determining suitability.

Retail Communications identified as advertising and/or sales literature must be approved by which of the following before it can be distributed? [A] One of the firm's sales supervisors [B] A registered representative with at least 3 years of sales experience [C] The firm's chief compliance officer [D] A registered principal

[D] - Retail Communications identified as either advertising and/or sales literature must be reviewed/approved by = a registered principal of the firm PRIOR to use.

Once a registration statement has been filed with the SEC and it becomes effective, which of the following statements by an issuer would be ACCEPTABLE? [A] "The issue has now been approved by the SEC." [B] "The SEC has verified the accuracy of statements filed with them about the issue." [C] "The SEC provides an objective review of the quality of the investment." [D] "The SEC has completed its review and no additional information is required from the issuer at this time."

[D] - The SEC review the issue in an attempt to determine that full and fair disclosure has been made but take responsibility for nothing.

The main purpose of the Securities Exchange Act of 1934 is to regulate [A] the sale of new issues, prospectuses, and disclosures [B] the distribution and sale of investment companies [C] the issuance of Treasury securities to the public [D] broker/dealers and markets on which securities trade

[D] - The Securities Exchange Act of 1934 regulates the secondary market, which is the exchanging of securities after they have been issued to the public. The 1934 Act also regulates stock exchanges, broker/dealers, and some SROs, including FINRA.

Which of the following activities by a RR would require registration as a Investment Adviser Representative? [A] Advising a customer about various financial planning tools [B] Advising a customer about tax and insurance matters [C] Printing Certified Financial Planner (CFP) on the RRs business cards [D] Recommending a stock to a customer based on an asset allocation model

[D] - The Uniform Securities Act requires registration as an IAR if the agent of the IA firm makes recommendations about any securities.

When converting accumulation units to annuity units when annuitizing a variable annuity contract, all of the following would be considered EXCEPT the [A] annuitant's age [B] annuitant's gender [C] assumed interest rate [D] beneficiary's choice of payout options

[D] - The choice of payout options is made by the annuitant, not the beneficiary. The annuitant's age and gender are important in calculating the number of years in the annuitant's life expectancy. The assumed interest rate is important in estimating the rate of return that the insurance company can expect to earn during the life expectancy of the annuitant.

A customer wishes to sell a stock just after the stock pays a dividend with a record date of Friday, October 20th. Assuming a regular-way settlement, the earliest that the customer could sell the stock and still receive the dividend is [A] Monday, October 16th. [B] Tuesday, October 17th. [C] Wednesday, October 18th. [D] Thursday, October 19th.

[D] - The ex-date on a dividend is one business day prior to the record date (Thursday, October 19th). In this case, the record date is listed as Friday, October 20th. The customer would have to sell on or after October 19th to still receive the dividend, making 10/19 the earliest that the customer could sell the stock and still receive the dividend.

Zero coupon bonds are frequently used to: [A] amortize the cost of the bond [B] provide a steady stream of dividend income [C] provide a steady stream of interest income [D] accumulate capital to fund a particular investment goal

[D] - They are generally purchased by investors that do not need the semi-annual income and want to accumulate capital.

A registered representative offers to share in all of the gains and losses in a customer's account in order to give her confidence in his recommendations. Under the FINRA rules, the RR [A] is forbidden from such sharing under all circumstances [B] is permitted only if the RR has had a prior financial relationship with the customer [C] must obtain prior approval from FINRA [D] must obtain the prior written approval of his firm

[D] - Under FINRA Rule 2330 (f), the RR would need the prior written approval of his firm and the firm would need the prior written approval of the customer.

Corporation X announces an offering of subscription rights. Which of the following statements is NOT true? [A] New common stock can be purchased by a rights holder below the offering price. [B] New common stock can be purchased by a rights holder before the public is able to buy. [C] Existing shareholders will receive rights offerings as a privilege. [D] The holder of a right can purchase the stock for two or more years.

[D] - Rights have a maximum life of 90 days. A rights offering is a privilege that is granted to existing shareholders & allows them to maintain proportionate ownership of the underlying company by purchasing more shares before a new issues is offered to the public. Often the shares can be purchased at a price below the current market value, and they can be purchased before the shares are offered to the public.