SIE exam prep part 3

Which of the following investment companies do not redeem their shares? A) Closed end funds B) Open end funds C) Face amount certificates D) Unit investment trusts

A

Of the following stocks, which would be defined as penny stocks? Nasdaq-listed stock trading at $4 per share Bulletin Board stock trading at $4 per share Exchange-listed stock trading at $4 per share OTC Pink stock trading at $4 per share A) II and IV B) I and IV C) II and III D) I and III

A Explanation A penny stock is a non-Nasdaq listed (therefore, Bulletin Board or OTC Pink) stock trading under $5 per share. If a stock is listed on an exchange or listed on Nasdaq, it is not a penny stock, regardless of price.

The maximum loss on a short call is A) unlimited. B) the premium. C) strike + premium. D) strike - premium.

A An investor holding a short call begins to lose money as the stock price exceeds the strike price of the option. Because there is no limit to how high a stock price can go, the potential loss on a short call is unlimited.

Which of the following is a characteristic shared by both corporate debentures and income bonds? A) Both must pay principal as it comes due. B) Both are a type of mortgage bond. C) Both are secured by assets of the corporation. D) Neither pay interest.

A Explanation All bonds must pay principal when due. Income bonds, however, are not required to pay interest when due unless the earnings of the issuer are deemed to be sufficient and the board of directors (BOD) declares that interest payments be made.

In an LP, which of the following is true? A) Any gains realized from a limited partnership are tax exempt. B) The partnership entity is not responsible for paying taxes on gains. C) Only losses but not gains flow through to the individual partners. D) The partners are not responsible for paying taxes on gains.

A Explanation Both gains and losses from an LP flow through to the individual partners. Gains are taxable, and any taxes due are the responsibility of the individual partners, not the partnership entity.

Records relating to a Currency Transaction Report (CTR) must be retained for A) five years. B) four years. C) three years. D) six years.

A Explanation Currency Transaction Reports (CTRs) must be retained on file, together with other records generated in conjunction with them, for five years.

If the portfolio of a variable annuity separate account is directly and actively managed by the insurance company, the separate account must be registered as A) an open-end management investment company. B) an equity unit investment trust. C) a face-amount certificate company. D) a closed-end management investment company.

A Explanation If managed by the insurance company's own investment advisor, a separate account must register as an open-end company. If it is managed by a third party, it must register as a unit investment trust.

A client opens a new margin account and, as the initial trade, purchases 300 shares of MS Corporation common stock at $10 per share. The firm would send the client a margin call for A) $2,000. B) $1,500. C) $1,000. D) $3,000.

A Explanation No credit may be extended in a new margin account with less than $2,000 in equity. This purchase of $3,000 of stock would normally require 50% payment ($1,500) in accordance with Regulation T, but because it is the initial trade in the account, the $2,000 minimum must be met.

By virtue of a stocks listing for trading on a U.S. stock exchange, which of the following risks is reduced or even recognized as eliminated? A) Liquidity risk B) Market risk C) Price risk D) Equity risk

A Explanation One of the advantages of a security being traded on a U.S. listed stock exchange is the ready availability of buyers and sellers. This means the investment can be considered a liquid one—easy to divest of at a fair price, if and when one needs to.

Each of the following activities would require prior written notification by an associated person to the employing broker-dealer except A) becoming a limited partner in an oil and gas drilling program. B) acting as a real estate sales agent, limited to the sales of individual homes only. C) offering to sell a limited partnership interest in an oil and gas drilling program. D) part-time work parking cars on the weekend at a local racetrack.

A Explanation Passive investments, such as the purchase of a limited partnership interest, are not considered outside business activity. An associated person may make a passive investment for his own account without providing written notice to the employing broker-dealer.

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

B (Accept the Market RISK)

A member of the Federal Reserve System wanting to increase its reserves could do so by borrowing money from A) another FRB member bank at the discount rate. B) the Federal Reserve Board (FRB) at the discount rate. C) another FRB member bank at the prime rate. D) the Federal Reserve Board (FRB) at the federal funds rate.

B Explanation A Federal Reserve Board member bank can increase its reserves by borrowing from the Federal Reserve Bank directly, or it can borrow from another FRB member bank. When borrowing from the FRB directly, a bank will pay the discount rate. When borrowing from another member bank, a bank will pay the federal funds rate.

Contributions to an IRA can be made up to which of the following dates? A) April 15 of the year the contribution is for B) April 15 of the year following the year the contribution is for C) The extension deadline, October 15 of the year following the year the contribution is for D) December 31 of the year the contribution is for

B Explanation A contribution for tax year 2019 could be made until the tax filing dead line for the year which would be April 15, 2020. No extensions are available for contributions even if an extension is granted for filing the taxes.

Regarding exchange-traded funds (ETFs), as compared to open-end (mutual) funds, which of the following are true? ETF transactions are subject to commissions. Expenses for ETFs tend to be very high compared to mutual funds. ETFs may trade at a price that is less than the NAV per share. ETFs cannot be purchased on margin while mutual funds can be. A) II and III B) I and III C) I and IV D) II and IV

B Explanation But that advantage can be canceled out by the commission charges when purchasing and selling an ETF. ETFs, pricing is based on supply and demand, making it possible to receive less than NAV.

Electronic delivery of documents requires all of the following except A) procedures to deliver the information in paper form upon request. B) a recording of the customer verbally agreeing to such receipt. C) assurance of confidentiality of the documents and personal information. D) procedures to show that delivery took place as intended.

B Explanation Consent to receive documents such as confirmations and account statements by electronic means must be in writing.

Earned income would include all the following except A) tips. B) dividends earned on mutual funds. C) year-end bonus. D) commission on sales for a real estate agent.

B Explanation Earned income includes wages, salary, tips, bonuses, income from active participation in a trade or business.

Which of the following would be considered earned income? A) The premium kept from an unexercised short put B) Bonus received from employment C) Dividends received from a stock investment D) Interest received from a bond investment

B Explanation Earned income is received as the result of participating in trade or business, the generation and/or sale of goods and/or services—in other words, from work. The other choices are earnings from investments and are known as portfolio income.

Which of the following are true of traditional IRAs but not of Roth IRAs? Contributions may be deductible Contributions are always deductible There is a 50% penalty for failing to take the required minimum distribution (RMD) There are income limits for making contributions A) I and II B) I and III C) II and III D) III and IV

B Explanation If the contributor has an employer-sponsored plan and makes over the limit, the contributor can still have an IRA but it won't be deductible. After reaching age 72, if not still working, the RMDs must be taken each year. Failure to do so results in a 50% penalty. Income limits on traditional IRAs impact deductibility, not contributions.

Which of the following orders need not be immediately filled in their entirety? Immediate or cancel (IOC) Fill or kill (FOK) Market at open Buy stop limit A) II and IV B) I and IV C) I and III D) II and III

B Explanation Immediate or cancel (IOC) orders allow partial execution, with the unexecuted portion of the order being canceled. Limit orders may be partially filled. A limit order may be filled in pieces until the end of the day (if a day order), or until cancelled (if GTC). Both FOK and market at open orders are expected to be filled immediately and in their entirety. If unable, a FOK order would be canceled (killed).

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

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

Which of the following is a leading indicator? A) Gross domestic product B) Wages C) New orders for consumer goods D) Corporate profits

C Explanation New orders for consumer goods is a leading indicator, foretelling future economic activity (the actual purchase of those goods). Wages and gross domestic product are coincident indicators. Corporate profits are lagging indicators.

The maximum loss on a short put is A) strike price + premium. B) the premium. C) strike price - premium. D) the strike price.

C Explanation The maximum loss on a short put is limited by the fact the stock price cannot drop below zero. The maximum loss on a short put occurs if the stock drops to zero and the seller of the put is exercised. The seller is forced to buy the worthless stock for the strike price, but at least gets the premium to offset the loss.

Which of the following records must be kept by a broker-dealer firm for three years? A) Form BD and amendments B) Customer account records C) Trial balances D) Blotters

C Explanation Trial balances, usually run at the end of a reporting period to ensure that the firm's credit and debit columns arrive at identical sums, must be kept for three years after the trial balance was run. Form BD and amendments are lifetime records, whereas blotters and customer account records are six-year records.

Benefits of mutual funds include all of the following except A) mutual funds can provide broad diversification inside a single fund. B) mutual funds are professionally managed. C) reinvested dividends are not taxed until withdrawal. D) mutual funds report distributions annually to investors.

C Explanation When dividends (or capital gains) are reinvested they are still taxed. All the other options are considered benefits of mutual funds. REINVEST MUTUAL

Which of the following securities is exempt from the Regulation T margin requirements but still subject to an initial margin requirement as determined by the broker-dealer? A) Mutual funds B) Options C) T-notes D) Rights

C Explanation While Treasury securities (bills, notes, and bonds) are exempt from Regulation T margin requirements, purchases of them on margin are allowed and would be subject to the firm's determination of what the initial margin deposit requirement should be.

An investor would expect which type of preferred stock to pay the highest stated dividend rate? A) Convertible B) Cumulative C) Callable D) Straight

C Explanation With callable preferred stock, to compensate for the possibility that the shares may be called, the issuer pays a higher dividend than with straight preferred. Cumulative and convertible preferred have positive characteristics that would justify a lower fixed dividend than straight.

A shareholder owns preferred shares that allow for the possibility of receiving more than the stated dividend. This type of preferred share would be known as A) convertible. B) callable. C) participating. D) adjustable.

C (Participates in MORE)

Hedge funds A) are highly regulated, starting with the requirement to be registered with the SEC. B) are regulated under the Investment Company Act of 1940 with no SEC registration required. C) are not regulated under the Investment Company Act and no Securities and Exchange Commission (SEC) registration is required. D) are nonregulated but still require SEC registration.

C (don't regulate hedges) Explanation Hedge funds normally do not require registration with the SEC as they are often sold under Reg D.

The risk that an investor might not be able to sell an investment quickly and at a fair market price is known as A) financial or default risk. B) call or reinvestment risk. C) liquidity or marketability risk. D) inflation or purchasing power risk.

C (quickly sell means liquid) Explanation Having investments that are liquid means being able to divest of them quickly at a fair price. Liquidity risk comes for investors holding assets where doing that might not be possible.

Registered representatives must complete or satisfy each of the following except A) the regulatory element. B) the firm element. C) state registration requirements. D) the Form U-5.

D A representative is not required to file a Form U-5. That form is filed by the member firm upon the termination of a registered representative for any reason. A copy will be provided to the departed representative.

What is the tax status of a dividend paid to a U.S.-based American depository receipts (ADR) investor? A) These dividends are tax deferred. B) These dividends are only taxable to foreign buyers. C) These dividends are tax free. D) These dividends may be taxed by both the foreign country and the United States.

D Dividends paid to a U.S. investor may be subject to a withholding tax by the home country of the underlying foreign stock issuer. In many cases, the amount of tax withheld by the foreign government is applied as a credit against the investor's U.S. tax liability. Note: Any trading profits (capital gains) from the ADR would only be taxable here in the United States.

The current yield on a bond with a coupon (nominal) rate of 7.5% currently selling at 105½ is approximately A) 8.2%. B) 7.5%. C) 6.5%. D) 7.1%.

D Explanation A bond with a coupon rate of 7.5% pays $75 of interest annually. Current yield equals annual interest amount divided by bond market price, or $75 ÷ $1,055 = 7.109%, or approximately 7.1%.

Which of the following would be associated with loans made to member banks of the Federal Reserve? A) Margin rate B) Call loan rate C) Prime rate D) Discount rate

D Explanation Loans made to member banks of the Federal Reserve are made by the Federal Reserve Board (FRB) at the discount rate. The call loan rate and the prime rate are rates at which banks lend to broker-dealers and corporate customers, respectively. Although margin is controlled by the FRB, it has no bearing on this question.

Negotiable jumbo CDs are characterized by all of the following except A) they trade in the secondary market. B) they are issued in amounts of $100,000-$1 million. C) they are unsecured debt of the issuing bank. D) each issue generally matures in 5-10 years.

D Explanation Negotiable jumbo CDs are issued in denominations of $100,000-$1 million and trade in the secondary market. Most jumbo CDs are issued with maturities of one year or less. These CDs are unsecured promissory notes backed only by the credit standing of the issuing institution.

A corporate issuer of common stock has decided that it wants an agreement that its underwriter must either raise all of the capital needed or cancel the underwriting. To best accommodate this the underwriting should be A) a firm commitment. B) an all or none (AON). C) a mini-max. D) an immediate of cancel.

B Explanation In an AON underwriting, the issuing company has determined that it wants the underwriter to sell all of the shares required to raise all of the capital needed or cancel the underwriting. Because of the uncertainty over the outcome of an AON offering, any funds collected from investors during the offering period must be held in escrow pending final disposition of the underwriting.

An investor purchased an MJS Corporation 6% 20-year bond at issue for $950. Two years later, the investor sold the bond for $925. This investor experienced A) a $25 interest loss. B) a $925 return on investment. C) a $25 capital loss. D) a $25 return on investment.

C (CAPITAL LOSS)

An investor purchased and then sold a security eight months later for a gain. This gain A) is considered to be a short-term gain, and it will be taxed at the same rate as the taxpayer's other ordinary income. B) is considered to be a short-term gain, and it will be taxed at a more favorable rate than long-term gains. C) is considered to be a long-term gain, and it will be taxed at the same rate as the taxpayer's other ordinary income. D) is considered to be a long-term gain, and it will be taxed at a more favorable rate than short-term gains.

A Explanation Positions closed within 12 months or less are considered short term. When a gain is realized, it will be taxed at the same rate as the taxpayer's other ordinary income. By contrast, a long-term capital gain is taxed at a favorable long-term rate.

The rate on an adjustable preferred stock would most likely be indexed to A) the Treasury bill (T-bill) rate. B) the Consumer Price Index (CPI). C) the Dow Jones Industrial Average (DJIA). D) the Producer Price Index (PPI).

A Explanation The dividend on an adjustable-rate preferred stock is tied to a particular benchmark interest rate, and the Treasury bill rate is a common benchmark. The CPI, the PPI, and the DJIA are not interest rates.

Three brothers open a joint account instructing you that if they die, they want the cash and securities in the account to go to the remaining parties to the account. The account should be opened A) with rights of survivorship. B) as a tenants in common (TIC) account. C) as a custodial account. D) as a transfer on death (TOD) account.

A Explanation Under joint tenants with right of survivorship (JTWROS), each brother's interest in the account would go to the surviving brother. Although JTWROS accounts may be opened with a TOD designation, that is not the best answer to this question - that is a feature that would be added to the account. From time to time, you will see questions on the exam where it will be a challenge to choose between two good-looking answers. The key is to pick the one that is the most appropriate to the specific question.

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

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

A customer receives a Regulation T margin call for $3,200. To meet the deposit requirement, which of the following can be deposited? A) Fully paid for marginable securities totaling $6,400 in market value B) Fully paid for marginable securities totaling $3,200 in market value C) Fully paid for marginable securities totaling $1,600 in market value D) Cash in the amount of $1,600

A Explanation When meeting a Regulation T margin call with cash, 100% of the call must be deposited—in this case, $3,200. If using fully paid for marginable securities to meet the call, a deposit totaling twice the amount of the call must be made—in this case, $6,400. This is because securities are only marginable to 50% of their value.

Six days into the cooling-off period, an issuer receives a deficiency letter from the Securities and Exchange Commission (SEC) requesting clarification and corrections. Once the issuer submits these, and assuming that they satisfy the deficiency, the cooling-off period will resume. With no other deficiencies arising, the issue should become effective in A) 14 days. B) 20 days. C) 15 days. D) 8 days.

A Explanation When the issuer submits the corrections necessary to satisfy the deficiency letter, the 20-day cooling-off period picks up where it left off; in this case, from six days, which means that the issue should be effective 14 days later.

The maximum gain on a short call is A) the premium. B) the strike price. C) strike + premium. D) strike - premium.

A The maximum gain on any short option position is the premium received. The seller of the option is hoping the contract goes out of the money and expires unexercised.

If the stock market were to fall substantially in a single day, a portfolio consisting primarily of common and preferred stock would be most subject to A) market risk. B) inflation risk. C) regulatory risk. D) reinvestment risk.

A Explanation Market risk is the risk that when the overall market declines, so too will any portfolio made of securities the market is composed of.

Which of the following preferred issues is most likely to fluctuate in line with the issuer's common shares? A) Convertible B) Adjustable rate C) Participating D) Callable

A (Conversion fluctuate) Explanation Convertible preferred shares can be converted into shares of the issuer's common stock. In this light, the value of a convertible preferred stock is linked to the value of the common stock and the convertible preferred share price tends to fluctuate in line with the common.

A brokerage firm places U.S. Treasury notes and bonds in a trust at a bank and then issues securities collateralized by either the principal or interest payments those notes and bonds represent. These new securities the broker-dealer is offering are A) Treasury receipts. B) Treasury bills. C) collateralized obligations. D) Treasury STRIPS.

A (T-notes note on receipts) Explanation Brokerage firms can create a type of bond known as a Treasury receipt from U.S. Treasury notes and bonds placed in trust at a bank. They then sell separate receipts against the principal and coupon payments the notes and bonds represent.

An investor who has a short position in 500 shares of JKH common stock would eliminate that position by A) entering a closing sale order for 500 shares of JJK. B) entering a closing purchase order for 500 shares of JKH. C) entering an opening purchase order for 500 shares of JKH. D) entering a closing purchase order for 500 shares of ABC.

B Explanation In order to eliminate a position, long or short, the investor always takes an action opposite that of the one that began (opened) the position. Therefore, we always close the position with a closing order. In the case of a short position, we began with a sale, so we close with a purchase of the same security that was initially sold short—in this case, 500 shares of JKH.

What is the intrinsic value of an XYZ 30 call purchased at a premium of 3 when the current market value of XYZ is at 40? A) $7 B) $10 C) -$7 D) -$10

B Explanation Intrinsic value is the amount that a contract is in the money. The premium of the contract is not a factor. All calls are in the money when the market value of the stock is above the strike price.

Which of the following would cause a mutual fund's net asset value (NAV) per share to fall? The fund purchases securities for the portfolio. The fund pays a dividend to shareholders. The market value of the portfolio declines. A large number of shares are redeemed. A) II and IV B) II and III C) I and IV D) I and III

B Explanation Paying a dividend and suffering market decline both reduce the net assets of the fund without reducing the number of shares; hence, the NAV declines. Purchasing portfolio securities simply replaces portfolio cash with an equivalent value of securities; hence the NAV remains unchanged. Redemption of shares reduces the fund's net assets, but the number of shares declines by an equivalent proportion; hence, the NAV remains unchanged.

James Thomas calls and is interested in buying some GNMA certificates and wants to know when payment will be due. You should tell him A) trade date plus 1 business day. B) trade date plus 2 business days. C) trade date plus 3 business days. D) trade date.

B Explanation Regular way settlement is T + 2 for everything except treasuries, money market securities, and options.

Which of the following option positions would offer a full hedge to a short stock position? A) Short put B) Long call C) Short call D) Long put

B Explanation The best way to hedge a short stock position is with a long call.

Which is the most common way investors pay a mutual fund's sales charge? A) Variable load B) Front-end load C) Back-end load D) Level load

B Explanation The front-end load is the most common way a mutual fund's sales charge is paid. The sales charge is paid at the time of purchase. Front-end load, or Class A, shares have lower expenses than other classes, because the fund does not have to keep books on sales charge payments. It's already taken care of.

When speaking to a customer about exchange-traded funds (ETFs), a registered representative could make which of the following correct statements? A) ETFs cannot be purchased using traditional limit or stop orders. B) ETFs have different potential tax consequences than mutual funds. C) ETFs cannot be bought on margin. D) ETFs can be purchased only by paying a sales charge added to the NAV.

B Explanation The potential tax consequences of owning an ETF can be different than those experienced when owning mutual funds. While an ETF can make a capital gains distribution, they generally do not—unlike a mutual fund, which generally would make such distributions on an annual basis. ETFs can be traded like other exchange products using traditional stock-trading techniques and order types and are priced by supply and demand. Customers pay commissions, not sales charges.

Which of the following describes the consequences of a stock split? If the number of shares goes up, the price goes down. If the number of shares goes up, the price goes up. If the number of shares goes down, the price goes down. If the number of shares goes down, the price goes up. A) II and III B) I and IV C) I and III D) II and IV

B Explanation The rule on a stock split is that the total value of the stock must be the same before and after the split. Hence, if the number of shares goes up or down, the price per share must go down or up, respectively.

Six days into the cooling-off period, an issuer receives a deficiency letter from the Securities and Exchange Commission (SEC) requesting clarification and corrections. Once the issuer submits these, and assuming that they satisfy the deficiency, the cooling-off period will resume. With no other deficiencies arising, the issue should become effective in A) 20 days. B) 14 days. C) 15 days. D) 8 days.

B Explanation When the issuer submits the corrections necessary to satisfy the deficiency letter, the 20-day cooling-off period picks up where it left off; in this case, from six days, which means that the issue should be effective 14 days later.

A buy stop order @ 39 could fill at which of the following prices? 38 39 40 41 A) I & II B) I, II, III, & IV C) II & III D) III & IV

B Explanation A buy stop order becomes a market order and fills at the next available price once it touches or passes through the stop price.

A penny stock is best described as A) an exchange-listed stock valued at less than $5 per share. B) an unlisted stock valued at less than $5 per share. C) an unlisted stock valued at less than $1 per share. D) an unlisted stock valued at less than $2 per share.

B (Unused change) Explanation A penny stock is an unlisted (not listed on a U.S. stock exchange) security offered at less than $5 per share.

A customer has been found in violation of freeriding. As a penalty which of the following will occur? A) The account will be frozen for 10 days and no new transactions can occur unless there is cash or marginable securities in the account before any other purchase is made. B) Cash or marginable securities must be in the account for all purchases made for the life of the account. C) The account will be frozen for 90 days and no new transactions can occur unless there is cash or marginable securities in the account before any other purchase is made. D) Only closing transactions can be entered to close existing positions and the account closed immediately thereafter.

C Explanation As a penalty for freeriding, an account will be frozen for 90 days and no new transactions can occur unless there is cash or marginable securities in the account before any other purchase is made.

An equity option call buyer has the right to A) purchase stock and therefore is bearish. B) sell the stock and therefore is bearish. C) purchase stock and therefore is bullish. D) sell the stock and therefore is bullish.

C Explanation Call buyers pay the premium for the right to purchase the stock at the strike price. Those who buy stock are bullish (anticipate that it will rise).

Which class of shares use a CDSC as the main sales charge? A) Class C shares B) No load C) Class B shares D) Class A shares

C Explanation Class B shares have back-end loads that reduce over time (contingent deferred sales charge, or CDSC). Class A shares charge an upfront load, and class C shares charge a level load as part of the expense ratio. No load funds have no sales charge.

A bank trustee holds the titles to assets a corporation has purchased and utilizes in its day-to-day business. The corporation issues debt securities backed by these assets. These securities are A) debentures. B) collateral trust bonds. C) equipment trust certificates. D) mortgage bonds.

C Explanation Debt securities issued by corporations backed by the assets the corporation owns and uses in its daily business are known as equipment trust certificates.

One of the Financial Industry Regulatory Authority (FINRA) Conduct Rules is concerned with private securities transactions. Under that rule, it would be correct to state that 1. if the member approves the registered representative participating in a transaction for compensation, it must treat the transaction as if it is being done on its own behalf by entering the transaction on its own books and supervising the associated person during the transaction. 2. as long as no compensation to the registered representative is involved, notification to the member is not required. 3. sale of a securities product to the registered representative's mother where there is only nominal compensation is not covered under the rule. 4. if the member disapproves of the registered representative's participation in a transaction for compensation, the associated person may not participate in it. A) I and II B) II and III C) I and IV D) III and IV

C Explanation FINRA divides private securities transactions into two categories. If the associated person will receive compensation, the rules are more comprehensive requiring approval or disapproval. If approved, the firm must record the transaction on its books and records and supervise as if it were executed on behalf of the member firm. Trades with immediate family members are not included if there is no compensation. In other transactions where there is no compensation, written notice to the employer member is still required.

Mr. Smith purchases 2% of MES Corporation's common stock. Four years later Mrs. Smith purchases 9% for her own account. Which of the following is true? A) Neither Mr. or Mrs. Smith is considered a control person. B) Only Mr. Smith, as the initial shareholder, would be considered a control person. C) Both Mr. and Mrs. Smith are considered control persons. D) Because she owns more shares, only Mrs. Smith is considered a control person.

C Explanation If a 10% or more interest is held by immediate family members, then all those family members owning voting stock are control persons. In this instance the combined ownership is more than 10% (2% + 9% = 11%).

Which of the following orders need not be immediately filled in their entirety? Immediate or cancel (IOC) Fill or kill (FOK) Market at open Buy stop limit A) II and IV B) I and III C) I and IV D) II and III

C Explanation Immediate or cancel (IOC) orders allow partial execution, with the unexecuted portion of the order being canceled. Limit orders may be partially filled. A limit order may be filled in pieces until the end of the day (if a day order), or until cancelled (if GTC). Both FOK and market at open orders are expected to be filled immediately and in their entirety. If unable, a FOK order would be canceled (killed).

Unique tax advantages associated with oil and gas direct participation programs are A) tax credits and depreciation allowances. B) tax credits and cash flow allowances. C) intangible costs and depletion allowances. D) intangible costs and cash flow allowances.

C Explanation Intangible drilling costs (IDCs) and depletion allowances are both unique tax advantages associated with oil and gas DPPs. IDCs can all be written off completely in the first year of the program instead of over the entire life of the program, and depletion allowances are allowable deductions that compensate for the depletion of the natural resource taken after it is sold.

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

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

When the supply for money exceeds the demand, A) interest rates fall, making consumer borrowing more difficult. B) interest rates rise, making consumer borrowing more difficult. C) interest rates fall, making consumer borrowing easier. D) interest rates rise, making consumer borrowing easier.

C Explanation Money available to lend is like all commodities in that its cost (interest) is impacted by supply and demand. When the supply is greater than the demand for money, interest rates fall, making consumer borrowing easier.

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

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

A select pair or group of companies organized to underwrite corporate or municipal securities is best known as A) a market maker. B) an investment club. C) an introducing broker-dealer. D) a syndicate.

D Explanation A syndicate is two or more broker-dealers (investment bankers) which work with an issuer through, for example, the registration process in the case of corporate securities and bring the issuer's securities to the market by selling them to investors. There are syndicates that specialize in underwriting municipal bonds. The members of a syndicate are also known as the underwriters or collectively the underwriting group.

A registered securities broker-dealer that does not comply with Financial Industry Regulatory Authority (FINRA) and Securities and Exchange Commission (SEC) rules and regulations is subject to each of the following sanctions except A) limits on activities, functions, or operations. B) censure. C) partial or full suspension of its registration. D) reductions in Securities Investor Protection Corporation (SIPC) coverage.

D Explanation Broker-dealers that do not comply with SEC and FINRA rules and regulations are subject to censure, limits on activities, functions, or operations, suspension of its registration, revocation of registration, fines, and more.

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

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

In order for a registered representative of a member firm to receive any form of compensation, such as commissions, after terminating employment, all of the following statements are correct except A) there must be a contract in effect calling for these continuing commissions. B) the agreement must be entered into before the termination of employment. C) it would be permissible to pay continuing commissions to a surviving spouse. D) earnings from referred business from existing clients would be eligible for payment.

D Explanation Continuing commissions are permitted, but there is no requirement that they be offered. In order for a former registered representative to receive them, the terms must be spelled out in a contract entered into before termination. The contract may call for payment to heirs but cannot provide any compensation for business referred or introduced by an employee after that person ceases to be registered with the member.

Which of the following would be included in a mutual fund's list of expenses? Shareholder records and service Investment advisor's fee Broker-dealer sales charges Underwriter's sales loads A) I and IV B) II and III C) III and IV D) I and II

D Explanation Costs to maintain shareholder records, costs to provide services to shareholders, and the investment adviser's fees are all expenses to the fund. The costs paid in the form of sales charges (loads) to an underwriter or broker-dealers selling mutual funds to the public may never be treated as an expense to the fund. They are expenses to the investor.

Direct participation programs (DPPs) are set up A) as tax-free investments with no potential write-offs. B) to be taxed directly, much like corporations are taxed. C) to pass on taxable income only to the investors, but not losses. D) having the owners of the business liable for any taxes due.

D Explanation DPPs are not taxed directly as a corporation would be. Instead, the income or losses from the business are passed directly through to the owners of the partnership. These are the investors who are then individually responsible for any tax liability.

Jackson Raleigh a registered representative in Memphis, TN, has a client that is a pension fund manager for the Tiger Pension Fund. Mr. Raleigh creates several flyers of informational literature about the funds available in the Tiger Pension Fund and emails them to the fund manager so that the fund manager can print copies of the flyers and make them available to the participants in the pension fund. Financial Industry Regulatory Authority (FINRA) would classify these flyers as A) institutional communications. B) sales literature. C) correspondence. D) retail communications.

D Explanation FINRA has three classifications of communication with the public: correspondence is communication to 25 or fewer retail investors in a 30 day period; retail communications is to more than 25 retail investors in a 30-day period; and institutional communication is going to banks, insurance companies, and mutual funds et cetera. Even though the material was sent to the pension fund which could be considered institutional communications because the material was being forwarded to retail investors, it is considered retail communication.

Failure to complete the regulatory element continuing education (CE) requirement within the allotted time period will result in A) an automatic extension request, which Financial Industry Regulatory Authority (FINRA) will normally be grant. B) suspension of the individual until all CE requirements are met. C) an automatic bar from the industry for three years. D) the registration being deactivated until the requirements are met.

D Explanation Failure to complete the regulatory element within the allowable time frame will lead to FINRA's deactivating that person's registration until the CE regulatory element is met.

The trade would need to be placed in a discretionary account if the registered representative chooses which of the following? The time of execution of the trade Which security to buy How much of the security to buy At what price to execute the trade A) I and IV B) II and IV C) I and II D) II and III

D Explanation If the registered representative chooses the asset, the action, or the amount, it must be placed in a discretionary account. The registered representative can choose the time or price without the needing to place the trade in a discretionary account.

Roth IRAs have no minimum required distributions at any age. have higher contribution limits than those allowed for a traditional IRA. allow the withdrawal of earnings tax free as long as the account has been opened for two years. can be contributed to in the same year as a traditional IRA. A) II and III B) II and IV C) I and III D) I and IV

D Explanation Roth IRAs have no minimum required distributions at any age. All earnings grow and may be withdrawn tax free as long as there has been an open Roth IRA for at least five years and the participant is at least age 59½. One may contribute to both a Roth and a traditional IRA in the same year, but the combined contribution may not exceed the annual maximum for any plan.

The allowable deduction for equipment used in an oil and gas direct participation program is taken as A) a one-time expense applied at the end of the program. B) depletion applied when the equipment is sold. C) a credit applied at the end of the program. D) depreciation over the life of the program.

D Explanation Tangibles such as equipment that will have some salvage value at the end of the program can be depreciated. The depreciation is an allowable deduction taken over the life of the program.

When a bond is purchased at a premium, the current yield will be A) higher than the fixed rate. B) the same as the nominal rate. C) higher than the stated rate. D) lower than the coupon rate.

D Explanation The coupon rate, the stated rate, the fixed rate, and the nominal rate all mean the same thing. It is the amount the bond will pay each year. On a premium bond the coupon rate is always higher than the current yield.

Which of the following investment companies has an actively managed portfolio? A) Equity fixed unit investment trust (UIT) B) Face-amount certificate company C) Debt fixed unit investment trust (UIT) D) Closed-end company

D Explanation The portfolios of both face-amount certificate companies and UITs are nonmanaged. The closest they come to management is when the securities to make up the portfolio are selected. After that, the portfolio does not change. Closed-end companies have an investment adviser who actively manages the portfolio, buying and selling securities.

The Investment Company Act of 1940 classified all the following as investment companies except A) face-amount certificates. B) unit investment trusts. C) management companies. D) private investment companies.

D Explanation The three classifications established under the Investment Company Act of 1940 are face-amount certificates, unit investment trusts, and management companies (open and closed-end funds). Private investment companies do not come under the Act of 1940.

An investor who is long MES equity put options is A) bullish on MES stock. B) wants MES stock to remain fixed at the current price. C) is bearish on the put price but bullish on MES stock. D) bearish on MES stock.

D Explanation Those who buy equity put options have the right to sell the underlying stock, in this case MES stock. Being in a position to sell the stock makes the investor bearish on the stock. If the underlying goes down in value, the premium on the put will go up.

Records of original entry must be recorded no later than the next business day and must be kept readily available for A) four years. B) three years. C) six years. D) two years.

D (Original couple) Explanation The records must be maintained for a period of six years, but must be readily available for two years.

Which of the following would not be considered ordinary income for tax purposes? A) Dividends on common stock B) Rents from income properties C) Salary and commissions D) Gains gotten from the sale of securities

D (gains are capital, not income) Explanation Gains gotten from the sale of securities is an example of capital gains for tax purposes. All the others are considered ordinary income.