SIE missed Comp. questions

Which statement is false regarding trading authorization over a customer account?

No one other than the broker-dealer may have written authorization over the account An investor may appoint anyone he/she desires to have control over his/her account. No one has discretion over his/her account without the customer's specific written authorization.

What is the tax implication of a corporation splitting its stock?

No taxable event occurs at the time of the split and the investor maintains their original cost basis For Stock Splits and Reverse Stock Splits, no taxable event occurs at the time of the split and the investor maintains their original cost basis. The taxable event occurs at the time of the sale.

With this type of order the registered representative determines only the time and price for the trade:

Non-discretionary

Which of the following information is not included in a registration statement?

Public offering price The registration statement includes a preliminary prospectus. The preliminary prospectus contains almost all the same information as the final prospectus, other than the public offering price, which is typically set the night before the offering.

Customer account statements must be mailed at least:

Quarterly Customer account statements must be sent at least quarterly, however if there is activity in the customer's account then a statement must be sent for that month.

Under the FINRA rule, a member firm's Business Continuity Plan (BCP) must provide, at a minimum all the following, except:

Disclosure provided to customers annually after account opening

All of the following are typical sales charges found within mutual funds, except:

Increasing loads Mutual funds might offer more than one class of its shares to investors including front-end sales charges, contingent deferred sales charges, or level load sales charges.

A 21-year-old college student works part-time at an ice cream shop to earn money to pay their cable bill. This year the student earned $1,200. What is the maximum this person can contribute to an IRA?

$1,200

A 21-year-old college student works part-time at an ice cream shop to earn money to pay their cable bill. This year the student earned $1,200. What is the maximum this person can contribute to an IRA?

$1,200 Individuals with earned income can contribute the lesser of 100% of earned income or the current year's specified dollar limit into an IRA. Earned income includes salaries, tips, and other forms of compensation that come from services provided. It does not include interest earned on investments and capital gains realized from the sale of assets. Since the student earned only $1,200, that is the maximum they can contribute into their IRA.

ABC BD is a market maker in XYZ Industries. The stock is currently trading at $11.23 bid and $11.35 offer (ask). If ABC executes a buy order for a customer on a principal basis, what price will the investor pay for the stock?

$11.35 plus a mark-up A market maker is a broker-dealer which posts continuous bids and offers for a stock. In some cases, the market maker may act as agent and simply match its customer with a third-party seller and collect a commission. In this case, if ABC acts as principal, it may sell stock to the customer out of its inventory and charge a price above the current offer. This increase in the price is known as a mark-up. Remember, commissions are charged by firms acting as agents and mark-ups/mark-downs are assessed by firms acting as principals. Therefore, the correct answer is the ask price plus a mark-up.

An investor purchased $75,000 of Class A shares with a breakpoint at $100,000. The investor signs an LOI to receive the reduced sales charge. Over the next 6 months, the investor automatically reinvests $500 in dividends and $1,000 in gains. How much more does this investor need to deposit into the fund to fulfill the LOI?

$25,000 The LOI can only be fulfilled with new money invested. Capital appreciation and reinvestment of dividends and capital gains will not count towards the investor's LOI.

An investor purchases a 5% bond at $800 and holds it for 5 years, at which time the bond matures and the investor receives the principal. What is the total return for this investor?

$450 Total return includes interest, dividends, capital appreciation, and distributions. This return assumes the investor reinvests all distributions. For a bond, the yield to maturity represents the total return, including interest income, and the gain or loss from the purchase price is included. The bond will pay $50 annually for each of the 5 years, which is $250. This bond was purchased at a discount ($800) and will mature at par ($1,000), giving the investor a $200 gain. The interest earned plus the gain is $450.

The PDQ Fund has a front load sales charge of 3% and a 12b-1 fee of .5%. The fund has a management fee of 1.0% per year and charges an administrative fee of .23%. What is the expense ratio of this fund?

1.73% The expense ratio of a fund is computed by adding the fund's ongoing expenses such as 12b-1 fees, management fees, and administrative fees. If the expenses are stated as percentages, simply add the percentages to determine the expense ratio. If stated in dollars, add the dollars and divide the total by the fund's average net assets. Sales charges are not included in this calculation.

To qualify for a reduced sales load, the investor can invest in large lump sum investments or establish a contract to purchase shares over how long a period?

13 months An LOI covers a period of 13 months. The LOI may be backdated three months, meaning that the customer has ten remaining months to complete the LOI.

A company has sent out proxy ballots to its shareholders to vote for board member candidates. There are currently four board member seats up for election, and the company uses a cumulative voting structure. An investor owns 500 shares of this corporation. What is the maximum number of votes the investor could cast for a single candidate?

2,000. In a cumulative voting structure, shareholders may cast their votes in any way they wish. The investor owns 500 shares and receives one vote per share, per issue. Since there are four seats up for election, this investor has a total of 2,000 votes (500 shares × 4 board seats). The investor can, if he chooses, cast all 2,000 votes for a single candidate, and no votes for the other three candidates.

How long must records of retail communications and correspondence be kept on file?

3 years All records of retail communication and correspondence must be kept on file for three years.

Which one of the following is considered a municipal offering?

529 college saving plan The MSRB oversees activities such as underwriting, trading and selling tax-exempt bonds, municipal securities, and 529 college savings plans.

A bond has a 7% coupon and an offering price of 106. Which of the following could be the yield to maturity of this bond?

6.40% Since the bond is priced at 106, it is a premium bond. With a premium bond, the yield to maturity is the lowest of the three yields. To determine the correct answer, calculate the current yield and choose the answer choice that is lower than the current yield. Current yield = annual interest divided by current market price. Therefore, current yield = $70 (7% of $1,000) divided by $1,060 (106 after moving the decimal one to the right), which is 6.6%. The only choice that is less than 6.6% is 6.40% which is the correct choice.

What is the maximum sales charge for an open-end investment company according to FINRA Conduct Rules?

8.5% Mutual fund companies are permitted to charge a maximum of 8.5% on purchases.

ABC Corporation proposes a merger with DEF Corporation. What filing, if any, must be submitted to the SEC?

8k An 8K filing with the SEC is required by a corporation if a "major event" happens at that company. Change in the composition of the Board of Directors; if the company declares bankruptcy; if there is a major acquisition or divestiture of assets; if the company proposes a merger; or if any other major corporate event occurs, it will trigger this filing requirement. The notice must be filed no later than 4 business days after the event.

If a corporate bond is worth $955 in the secondary marketplace, what is the quote for this security?

95.5 $955/$10 = 95.5. Each bond point is worth $10.

Which of the following is false regarding the Uniform Transfers to Minors Act?

Dividends and cash proceeds from sales must be immediately reinvested The custodian has total fiduciary responsibility over account. They can do whatever they think is best with dividends and sales proceeds.

Which of the following bonds will fluctuate the most in price when interest rates rise?

A 5% Treasury bond due in 11 years When interest rates rise, bond prices fall. The bond that will fall the most is the one with the longest time to maturity. The concept behind this answer is known as duration. Duration is used to determine the price sensitivity of a bond based on a small interest rate change. When given four bonds, the one with the longest maturity will move the most in price.

Which statement best describes an industrial revenue bond?

A bond issued by a municipality to finance an asset that is leased to a private firm

Which statement best describes an industrial revenue bond?

A bond issued by a municipality to finance an asset that is leased to a private firm An industrial revenue bond is issued by a municipality to finance an asset that is leased to a private firm. The corporation's lease payments repay the bonds. The other choices refer to a debenture, a general obligation bond and a revenue bond.

All of the following would be considered a formal customer complaint, EXCEPT:

A client calls and berates the RR for the unacceptable performance of his last five mutual fund selections; the angry customer informs the RR that he will bring this matter to the attention of the SEC and the firm's home office The key to answering this question properly is to remember that a firm must consider any written grievance to be a complaint, no matter how trivial it might seem. Although verbal accusations are not officially deemed complaints, this fact does not give the RR license to ignore what customers may say, just because it is not in writing. Emails and text messages are considered written complaints. Losing money is not a valid basis for a complaint unless the loss was caused by prohibited activities such as churning or inappropriate recommendations.

A charge deducted from proceeds when an investor redeems shares is which of the following?

A contingent deferred sales charge Charges deducted from redemption proceeds are contingent deferred sales charges or redemption fees.

All the following would hold "control" stock, except:

A day trader Control stock is stock held by an officer, director, 10% shareholder, or an affiliated person of the corporation. Because these persons tend to be large shareholders, a large sale of the control stock could cause large drops in the stock price. Therefore, control stock is subject to Rule 144 with the exception of the 6-month holding period. This rule would make extremely large shareholders take years to completely sell their position.

If a 5% bond is trading at a 6.05% basis the bond is trading at:

A discount Basis and yield to maturity refer to the same measurement, what the yield is if the bond is held to maturity taking into consideration the purchase price and the interest payments. If the bond is trading at its coupon then it is trading at its par. It a bond is trading at a basis more than its coupon then it is trading at a discount. If a bond is trading at a basis less than its coupon then it is trading at a premium.

If a 5% bond is trading at a 6.05% basis the bond is trading at:

A discount Basis and yield to maturity refer to the same measurement, what the yield is if the bond is held to maturity taking into consideration the purchase price and the interest payments. If the bond is trading at its coupon then it is trading at its par. It a bond is trading at a basis more than its coupon then it is trading at a discount. If a bond is trading at a basis less than its coupon then it is trading at a premium.

Your customer enters an order to buy XYZ stock at the best available price. He does not specify a price and expects the order to be executed. This order is:

A market order. Execution is guaranteed only for market orders. With limit orders or stop orders, the market price may never reach the limit price or the stop price. When no price is specified on the order, you can safely assume that it is a market order.

What must non-U.S. Citizens provide to open an account?

A passport and U.S. tax identification number Proper AML procedures include following the guidelines of the Customer Identification Program whereas financial institutions are required to implement procedures to verify the identity of each customer opening an account, maintain records used to identify the customer, and consult government-provided lists of known or suspected terrorists. Through the CIP, customer verification of name, date of birth, physical address, and tax ID number will all be accomplished. Non-U.S. Citizens must provide a passport and U.S. tax identification number to open an account.

Which one of the following regarding Tenants in Common (TIC) registrations is correct?

A trade may be authorized by any account owner Ownership of the account may be equal (50/50) or unequal, but each party's interest in the account is always undivided. When one of the account owners dies, the owner's portion of the account passes to their estate, not to a beneficiary. Any owner may act for the entire account and place trades.

Which of the following statements regarding Keoghs is false?

A vesting schedule may apply The employer contribution is 100% vested to the employee when it is made. No vesting schedule is permissible. Keogh plans are available to self-employed individuals and their employees. Contributions are tax deductible to the employer; employees may not contribute to the plan.

Which of the following statements about American Depositary Receipts is false?

ADRs pay dividends in the foreign currency

If the portfolio manager removes dollars from the underperforming assets to the assets the manager believes will outperform in the next quarter, this is a form of what?

Active portfolio managing

If an investor places a higher percentage of their assets in equities rather than in debt securities, they are:

Aggressive This is a method of portfolio management and asset allocation that attempts to achieve maximum return primarily through capital appreciation. Since the investor's aim is growth, a higher percentage of their assets are in equities rather than in debt securitie

ABC Corporation has recently announced its initial public offering. It will issue 100 million shares of common stock at a subscription price of $10 per share, and the common stock has a par value of $0.10 per share. The par value of ABC Corp. common stock represents:

An arbitrary dollar amount established in the articles of incorporation to give the shares a nominal value While the par value of preferred stocks and bonds are essential values, the par value of common stock is nearly meaningless. It is basically an accounting term, where each share is given an arbitrary nominal value, and is a line item on the company's balance sheet. It is usually set at a low price like $0.01 to $1 per share, though some stocks have zero par value. The par value is determined in the company's capital formation, but it does not represent the IPO subscription price, nor the underwriter's commission (called the spread), nor the dividend.

Which one of the following bonds is selling for a discount?

An investor owns a bond with a 5% coupon when a similar new bond can be issued with one at 7% An existing bond's market price will decrease in value when current interest rates increase in the market. When interest rates go up, new bonds are issued with coupon rates higher than the coupon rates on existing bonds trading in the market, driving existing bond prices downward.

Which offering is considered an exempt transaction?

An offering to no more than 35 non-accredited investors that does not exceed $5 million

All the following regarding options are true excep

An option contract with a premium of $2 would cost a buyer $2,000 Call contract - Provides the holder the right to BUY a specific stock, and the writer an obligation to SELL the specific stock, at the agreed (strike) price. Put contract - Provides the holder the right to SELL a specific stock, and the writer of the contract an obligation to BUY a specific stock, at the agreed (strike) price. Expiration date - The last date the option can be exercised. Most options have a 9-month life. Once this date passes, the option is worthless. Premium - The amount an investor will pay for an option; this number is based on 100 shares of the underlying security. An option with a premium of 2 would cost a buyer $200.

What is the name of a municipal security that has maturities from 3 months to 3 years, sell at a discount to par and pays principal at maturity?

Anticipation Notes Municipal notes are short-term debt obligations. They have maturities ranging from 3 months to 3 years. They sell at a discount to par and pay principal at maturity. They are called anticipation notes since their issuance is dependent upon some anticipated stream of revenue expected in the near future.

Which of the following statements is true regarding standby underwriting?

Any portion of the offering not sold to the public is retained by the underwriter In standby underwriting, an issuer attempts to use a "rights" offering to raise additional capital from existing shareholders. Under this arrangement, existing shareholders are given the "right" to buy additional stock (usually at a price below the current market price) for a limited time period. The underwriter will "standby" to purchase any unsold new shares for its own account and then attempt to sell those shares to the public. Any portion of the offering not sold to the public is retained by the underwriter. Standby underwriting is a type of firm commitment underwriting.

What information is required for an LLC to open an account at a broker-dealer?

Articles of organization To open an account for an LLC, a copy of the articles of organization and possibly a certificate of organization must be provided (but not notarized). Signatures of all the members are required when opening an account.

An investor holds shares of a publicly traded corporation that has been in the news lately for repeated scandals. This negative publicity has caused the stock price to fall by nearly half from its recent peak. The investor believes that it's time for new management and that shareholders should pressure the Board of Directors to remove the CEO. The investor wants to begin a letter-writing campaign to shareholders and requests a list of current shareholders from the transfer agent. Which of the following regarding this situation is TRUE?

As a current shareholder, the investor is entitled to receive the names and addresses of other shareholders upon request Shareholders have the right to inspect the books, records, and shareholder lists of the corporation in which they have invested. The financial reports can be downloaded from the EDGAR database, but not the shareholder list. No shareholder is restricted from receiving the list of all shareholders.

Which one of the following is not an exempt security?

Automotive corporation's common stock Certain securities are exempt from registration. Exempt securities do not need to be registered with the SEC, since it would not make sense for certain issuers to go through the time and expense of filing the registration statement. Exempt securities include U.S. government and agency issues, municipal issues, money market issues, bank issues, common carrier issues, insurance company issues, and nonprofit or religious organization issues. While an exempt issuer is not required to register its securities with the SEC, it is still subject to the anti-fraud provisions of the Act. A nonexempt security is one that must be registered with the SEC.

A market maker has a quote displayed for ABC stock $10.00 - $10.40 (3X5). A customer order is placed to buy 100 shares of ABC stock for $10.40, and the market maker suddenly changes the ask price to $10.45. This is known as:

Backing away Under SEC Rules, all quotes made by market makers must be firm. The market maker must honor the size and price of the quote that they have displayed. Backing away, which occurs when a firm fails to honor their quote, is prohibited and may result in a monetary fine, suspension from market-making, or both.

Which of the following statements is not true regarding best efforts underwriting?

Best efforts underwriting is less risky for the issuer

Which of the following statements is not true regarding best efforts underwriting?

Best efforts underwriting is less risky for the issuer Best efforts underwriting is less risky for the underwriter because they do not assume the risk of buying any unsold shares.

Which of the following will protect an investor against market risk?

Buying a fixed annuity Market risk is the possibility that the value of an investment will fall due to a decline in the market as a whole. Selecting stocks from different sectors of the economy will not protect an investor because stocks of all companies will probably decline. A combination of stocks and bonds will also probably not protect against market risk since the overall market is affected. Fixed annuities have no market risk as they are issued and backed by an insurer and their general account.

Which of the following ways of organizing a business would normally not allow for pass-through of income before taxes to the owners?

C corporation S corporations, limited partnerships, and, in most cases, limited liability companies, allow for pass-through of income to the owners before taxes are paid. However, a C corporation is taxed as an ordinary corporation.

A CMO primarily differs from a standard mortgage-backed security in the following way:

CMOs are divided into maturity classes CMOs are mortgage-backed securities that are divided into maturity classes. The underlying mortgages are residential and are usually guaranteed by a government agency. They generally have a lower risk and rate of return than standard mortgage-backed securities.

Which of the following statements is correct regarding joint accounts?

Checks must be made payable to both parties Checks must be issued as the account is titled, unless written permission (a letter of authorization) is obtained from all the account owners. Not all BDs will allow this. All taxable events occurring in a joint account are reported under one Social Security number, as designated at the account opening. Unmarried and married couples are permitted to open joint accounts.

An investor paid the market price plus a commission for management company shares. What type of shares did they purchase?

Closed-end management company shares A closed-end fund share trades like a stock according to secondary market supply and demand and the transaction cost is called a commission. Open-end fund shares are priced by formula and the transaction cost is called a sales charge or load.

All the following are considered money market securities, except:

Commercial paper maturing in 1 year Money market instruments are short-term debt instruments maturing in one year or less. They are highly liquid and offer safety of principal due to their short time period to maturity, as well as typically being issued by high-creditworthy issuers. Government issues such as T-bills are very liquid and are backed by the U.S. Government providing them with safety of principal. T-bills have maturities that are 52 week or shorter, and if the T-note or T-bond has one year or less remaining to maturity, they will also be considered money market securities. Bankers Acceptances are used to finance foreign trade. These are very short-term debt securities. Commercial paper that has a maturity of less than 270 days, in denominations of $50,000 and rated in one of the top three highest ratings would be considered a money market security. In this question though, the commercial paper is maturing in 1 year, so it does not meet the requirements.

In order to verify the identity of a corporation and open a margin account with your broker-dealer, what documentation must the registered representative obtain?

Corporate resolution and a corporate charter The corporate resolution specifies which individuals are authorized by the board of directors to enter orders in the account and act on behalf of the company and is usually notarized. It must be obtained when opening a corporate account. A corporate charter is the legal document filed in the state of incorporation that establishes the corporation's legal identity. The charter, also known as articles of incorporation, is needed along with the corporate resolution when a corporation opens an account at a broker-dealer that involves margin or options trading.

Which of following is excluded from the operating expenses of an open-end management company?

Cost of sales literature The underwriter pays for marketing expenses. The investment adviser, custodian, transfer agent, and BOD are all operating expenses of the fund.

J.T. Smith, a broker dealer trainee, has just passed the Ser 6 with a 94%. Many fellow trainees are scheduled to take the test in the near future and are anxious to talk to J.T. about the testing experience. J.T. may:

Critique the effectiveness of the firm's test prep program with a training manager Candidates are not permitted to discuss exam content with anyone, including a principal. The test taker may evaluate the effectiveness of the firm's training program.

A client that has trading activity in their account must receive a statement:

That month If activity takes place, a statement must be sent for that month. If there is no activity in a customer's account, statements are mailed quarterly.

Food, utilities, and pharmaceuticals/healthcare are examples of what type of stocks?

Defensive Cyclical stocks see the success of their company rise and fall alongside the economy; revenues will be higher when the economy is booming and lower when the business cycle contracts or slows. Examples of cyclical securities include automobile manufacturers, furniture and clothing stores, construction, hotels, and restaurants. Counter-cyclical stocks see prices move in the opposite direction of the market as a whole. When the stock market declines, investors move toward safer investment options. Stocks become less attractive, and bonds become the favored investment, with government bonds being the safest. Gold or precious metals are also counter-cyclical and typically soar when the stock market declines. Defensive stocks remain stable when the economy is fluctuating. Consumer staples are the essential products consumers can't live without. Examples include food, utilities, and pharmaceuticals/healthcare. Growth stocks are from issuers whose earnings are expected to grow at an above-average rate, perhaps due to a unique product, market expansion, or consumer demand. Growth companies tend to do well in the expansion phase of the business cycle, when the economy is strong. These companies are usually mid-cap or small-cap stocks with a higher level of risk and a high potential reward. They typically do not pay dividends, as they reinvest their profits into the company to continue growth. Technology stocks are an example of growth stocks.

A registered representative is directed by a wealthy client to invest $100,000 into "something fun." The RR should:

Do nothing until the client's investment objectives are more clearly defined Objectives such as "fun," "exciting," or "interesting" do not provide sufficient guidance to an RR to allow for a suitable investment recommendation. The RR should not invest the funds until there is a clearer understanding of the customer's financial situation and objectives. RRs are required to "know their customer" prior to making a recommendation.

Which of the following is false regarding an ETF?

ETFs are traded at the end of the business day ALL ETFs are passively managed and have lower management fees. ETFs can be traded throughout the day. ETF investors are charged commission for purchases and sales.

Which of the following statements regarding the Telephone Consumer Protection Act of 1991 is false?

Each soliciting firm must add its list to the national 'do not call' list at least every 30 days The TCPA requires each soliciting firm to update (or add to) its internal 'do not call' list from the national list; NOT to add its internal list to the national list. The other statements are true.

To contribute to a Roth IRA, an individual must have:

Earned income below certain maximum amounts Investment income does not qualify eligibility so income must be earned. Unlike traditional IRAs, contributions cannot be made in any year when earned income exceeds the stated maximum.

Two sisters acquired 1,200 shares as joint tenants with right of survivorship. Each sister's ownership is:

Equal/undivided In a JTWROS situation, each person must have equal ownership. In addition, each shareholder has an undivided interest. This means the sisters cannot say these 600 shares are mine and those 600 shares are yours. Tenants in common (TIC) arrangements may have unequal interests.

If the bond counsel provides an unqualified opinion this means:

Everything is legally in order and there are no problems with the issue

If the expense ratio of a fund is decreasing, what has likely happened?

Fund expenses have decreased, and the average net assets have stayed the same The fund's annual operating expenses are divided by the average dollar value of its assets under management to calculate the ratio. If the expenses of the fund have decreased and the average net assets have remained the same that will result in a lower expense ratio. Conversely, if the fund expenses have increased at a faster rate than the average net assets, the ratio would increase.

An investor has a long stock position and long put position. What type of strategy is this?

Hedge strategy Hedging is like buying insurance to protect a stock position. For hedging, an investor would buy (long) an option contract. With a long stock position, the investor is hoping the stock price will go up- if the stock price does go up the investor will let the option expire and will enjoy the gains in the stock position. The concern is that the stock price could decline, a long put can be purchased as protection. If the stock price declines below the strike price, the investor can exercise the put and sell the shares to the writer of the contract.

What bonds are normally called in early?

Higher yielding bonds An issuer will likely call in bonds prior to maturity if they were issued with a call feature and the new bonds at lower interest rates can replace old bonds with higher interest rates. It is similar to when a homeowner refinances their mortgages. It is done when interest rates have fallen.

A manufacturing corporation has applied to open an account with a FINRA member firm. The company wants to be able to invest its surplus cash, and would like the ability to use the securities in the account as collateral for margin transactions. Which of the following documents must the member firm obtain from the company to open this account? I Corporate resolution II Corporate charter III Margin account agreement

I Corporate resolution II Corporate charter III Margin account agreement

Full or fractional shares can be purchased in: I Mutual funds II Closed-end funds trading on the NYSE III Individual issues trading on NASDAQ

I Mutual funds Mutual funds sell full or fractional shares of the fund. If a customer invests $100 and the share price is $18.12, he will receive 5.52 shares in the fund. Publicly traded funds (closed-end funds) only sell full shares--no fractional shares in the secondary market. Individual issues like Ford Motor Company only sell full shares--no fractional shares in the secondary market.

Which of the following is true of negotiable certificates of deposit, money market funds, and treasury bills? I They may be traded in secondary markets II They are low risk III They require high investment IV They are backed by government guarantees

I They may be traded in secondary markets II They are low risk Only I and II are true of all three. Money market funds may be purchased with fairly small investments, and, of the three, only treasury bills are backed by guarantees of the federal government.

What type of transactions can take place in an options account? I. Buying calls II. Buying puts III. Writing calls IV. Writing puts

I. Buying calls II. Buying puts III. Writing calls IV. Writing puts At or before the time when the option account is approved, the customer must receive a copy of the disclosure document for options, called Characteristics and Risks of Standardized Options or Options Disclosure Document (ODD). When opening an option account for a client, the client must be explained the risks involved with trading options. These risks are explained in detail in the ODD. Buying and writing calls, buying and writing puts take place in an options account.

To properly diversify a bond portfolio what would most likely be included? I. Domestic and foreign growth and value stocks II. Bonds with different maturities III. Bonds of different credit quality IV. U.S. government, government agencies and corporate bonds

II, III and IV II. Bonds with different maturities III. Bonds of different credit quality IV. U.S. government, government agencies and corporate bonds

Of the choices given, which has the greatest credit risk?

Industrial revenue bonds Credit risk is the risk of losing money due to the financial failure of the underlying borrower. An industrial revenue bond is secured by a designated underlying corporation's revenue stream, and nothing else. Equipment trust certificates are safer because they are secured by the issuer's equipment. Municipal G.O. bonds are backed by the issuing municipality's sovereign taxing authority. GNMAs are a direct obligation of the federal government.

To properly diversify a stock portfolio what would most likely be included? I. Large, mid and small cap stocks II. Growth and value stocks III. Domestic and foreign stocks IV. High grade and high yield bonds

I. Large, mid and small cap stocks II. Growth and value stocks III. Domestic and foreign stocks Diversification is the process of allocating funds among different securities, industries, asset classes, and geographical locations to minimize risk in an investment portfolio. Further diversification is available among different classifications of stock. Those classifications are known as large-cap, mid-cap, and small-cap (cap is short for capitalization). These terms refer to the level of capitalization of a publicly traded corporation. Diversification may also include growth and value stocks. International stocks may also provide further diversification through taking advantage of currency (exchange rate) risk. Diversification can also occur when comprising a portfolio that includes bonds with various maturities such as, short-term, mid-term and long-term bonds. Selecting bonds from different issuers such as the United States Government, municipal governments, government agencies, and corporate bonds can provide the portfolio with debt instruments that vary regarding credit quality. This question specifically asks about diversifying a stock portfolio though, so the best answer would not include the high grade and high yield bonds.

What is the collateral in a margin account? I. Securities in a long account II. Cash in a short account III. Real and personal property of the investor

I. Securities in a long account II. Cash in a short account A margin account is a brokerage account in which the broker-dealer lends the customer money to buy securities for their account (long margin transaction) or lends the customer's securities to sell in the market (short margin transaction). The customer must deposit the initial margin requirement of 50% of the current market value of the securities purchased on margin, and the balance is borrowed from the broker-dealer. Securities in the account that are used as collateral against the loan are held in the name of the broker dealer and is referred to as "street name". A short sale happens when an investor sells shares of stock that they currently do not own. They would borrow the shares from a stock lender (broker dealer). The investor is then obligated to return the borrowed shares at a later date. If the market price of the stock declines, the investor can then purchase the shares at a discount to those sold. The profit would be the difference in the two prices minus any transaction costs.

Which two of the following are true regarding Roth IRAs? I A required minimum distribution must be made beginning at 72 II A required minimum distribution is not required beginning at 72 III Contributions are tax-deductible IV Contributions are not tax-deductible

II A required minimum distribution is not required beginning at 72 & IV Contributions are not tax-deductible

Which of the following are considered to be advertising under FINRA Conduct Rules? I Group e-mail II Internet Web sites III Videotaped presentations on cable TV IV Brochures

II Internet Web sites III Videotaped presentations on cable TV

A broker-dealer is considering registering as an investment adviser. Which of the following activities would mandate that the firm register as an IA under the Uniform Securities Act? I Payment of underwriting fees to the firm by an issuer II Payment of investment advisory fees to the firm by a retail customer III Payment of a wrap fee to the firm by an institutional customer IV Payment of sales charges to the firm on mutual fund sales

II Payment of investment advisory fees to the firm by a retail customer III Payment of a wrap fee to the firm by an institutional customer Broker-dealers may collect commissions, sales charges or underwriting fees from issuers and customers. A broker-dealer may not collect advisory or wrap account fees unless it is also registered as an investment adviser.

Which two of the following statements are correct concerning the risks borne by the holder of a U.S. Treasury bond? I The investor is exposed to credit risk II The investor is not exposed to credit risk III The investor is exposed to interest-rate risk IV The investor is not exposed to interest-rate risk

II The investor is not exposed to credit risk III The investor is exposed to interest-rate risk U.S. Treasury securities are virtually default free and therefore carry little credit risk. U.S. treasury securities are still subject to changes in the interest rate. In a rising rate environment, Treasury securities will fall in value, as would any other type of bond.

Which of the following statements concerning zero-coupon corporate bonds is correct? I These securities are not affected by changes in interest rates II These securities are not subject to reinvestment risk III No tax liability is incurred until the bond reaches maturity IV These securities may be a suitable investment for an IRA or other tax-advantaged account

II These securities are not subject to reinvestment risk IV These securities may be a suitable investment for an IRA or other tax-advantaged account Zero-coupon bonds do not pay periodic interest, but instead pay all interest to the investor at the bond's maturity. In effect, the interest being earned by the investor is reinvested and compounded at a set rate until maturity. Such bonds have no reinvestment risk, because the owner is not receiving periodic interest that must be reinvested at current rates. However, the fact that zero-coupon bonds are sold at a discount from par value makes their prices very sensitive to changes in interest rates.

Which of the following may be purchased on margin? I Registered mutual fund shares II U.S. government securities III Securities admitted to trading privileges on a national exchange IV All Nasdaq stocks

II U.S. government securities III Securities admitted to trading privileges on a national exchange IV All Nasdaq stocks

According to the Insider Trading Act, which of the following is fraudulent? I A company's president sells most of his stock when the price rises to an all-time high II An agent recommends selling a security after the company files for bankruptcy III A person who sits on the board of directors purchased a large block of the company's stock since the company was merging with a larger company within the next 6 months

III A person who sits on the board of directors purchased a large block of the company's stock since the company was merging with a larger company within the next 6 months Inside information is defined as information which is not made public by the issuer through the news media or public announcements. Filing for bankruptcy is a public record, not inside information. This person is acting upon information from a private board meeting. The misuse of non-public information is a violation of the Act. A company executive has the right to sell his holdings (with some restrictions) at anytime.

According to the Bank Secrecy Act, which of the following transaction(s) would need to be documented? I An investor deposits a check for $30,000 into his brokerage account II An investor deposits a $6,000 check into his brokerage account III An investor deposits $9,900 in cash into his brokerage account IV An investor wire transfers $3,100 of cash from an account in the Cayman Islands to his broker-dealer in the U.S.

IV An investor wire transfers $3,100 of cash from an account in the Cayman Islands to his broker-dealer in the U.S. According to the Bank Secrecy Act, BDs must file a Currency Transaction Report (CTR) if a transaction involves more than $10,000 of currency or cash equivalent. Wire transfers of at least $3,000 also need to be documented on the monetary instrument log.

A customer places an order for $5,000 worth of mutual fund shares, but does not pay within 5 business days. What options does the firm have? I Automatically extend the payment period for 5 business days II Apply to the SEC for an extension of the payment period by 5 business days III Transfer the shares to another account where cash is available IV Cancel and liquidate the transaction and freeze the account

IV Cancel and liquidate the transaction and freeze the account

When is interpositioning allowed?

If it results in a better price to the customer than the broker-dealer itself could obtain Interpositioning is when a broker-dealer introduces a third party between the broker-dealer and the customer. Interpositioning is not allowed unless it results in a better price to the customer than the broker-dealer itself could obtain. The burden of proof is on the broker-dealer to demonstrate why the third party was necessary to obtain the best price for the customer.

Which of the following is true with regard to a corporate insider?

Information legitimately acquired in the performance of duties may not be used for investment purposes One cannot use knowledge to invest (nor can one pass the information to others) unless it is public knowledge. The other statements are false. Short swing profits are prohibited. Insider status is not reported to FINRA and a change in position is not a reportable event.

A research analyst recently informed an agent of a broker-dealer that Company X was going to announce very disappointing earnings. The agent immediately sold all 5,000 shares in a client's discretionary account. Two days later, earnings were announced and the stock's price lost 50% of its value. Which unethical business practice was committed?

Insider trading Insider trading is using material, non-public information when engaging in a securities transaction. This not only violates federal securities laws, it is also considered a violation under the Uniform Securities Act. An RR who has been given inside information may not reveal that information to anyone except a supervisor. In addition, the RR cannot use the information to invest for him/herself or use the information to entice another investor to invest in the security.

What likely happened to force a bond holder to convert?

Interest rates in the market have declined or when the value of the underlying common stock has risen above the strike price Issuers will also make their convertible bonds callable. When interest rates in the market have declined or when the value of the underlying common stock has risen above the strike price, the issuer may call the bonds. This will cause the bond holders to either convert their bonds to shares of common or allow them to be redeemed by the issuer. This is called forced conversion.

How does a fee-based account work?

Investment advisers typically charge an annual fee, based on a percentage of assets under management Fee-based accounts established by investment advisers charge an annual fee, based on a percentage of assets under management, or an annual flat dollar amount for all investment advisory transactions. Commission-based accounts charge a commission to the customer for each investment transaction. Each type of account has its advantages, depending on the number of transactions a customer makes on an annual basis.

Which example describes the diversification feature of mutual funds?

Investment in a number of different securities for reducing investment risk Diversification is one of the main benefits of mutual fund investing. Diversification allows an investor to purchase one packaged security that invests in many different securities to reduce investment risk. The option to exchange shares of one fund for shares of another fund in the same family describes the family's exchange privilege. Minimizing the sales charge on a fund and investment by making larger purchases at one time describes breakpoints. An accumulation plan under which all dividends and capital gains distributions are reinvested back into the fund without paying an additional sales charge describes reinvestment options.

Which of the following is NOT considered personal financial information?

Investment objectives Personal financial information quantifies the investor's present condition. Investment objectives define the investor's goals for his future condition.

Which of the following statements best characterizes the current yield?

It is a measure of return that takes into account the bond's coupon and the price paid for the bond Current yield measures an investor's return based on the dollars invested (current market price for the bond). The current yield formula uses the annual interest earned and today's price for the bond. However, the amount of annual interest paid is not dependent on the changing market price of the bond. Interest is always paid on the original par value. The calculation of current yield is as follows: CURRENT YIELD = ANNUAL INTEREST/MARKET PRICE. The fact that a bond has an 8% coupon doesn't disclose how hard an investor's money is working. If a bond is purchased for $500 and it pays $80/year in interest (8% coupon), then the current yield is 16% ($80 divided by $500). In contrast, if a bond is purchased for $1,500 with an 8% coupon, the current yield is 5.33% ($80 divided by $1,500). The disadvantage of the current yield as a measurement of return is that it does not consider any gain or loss realized on the bond if it is held to maturity.

Which statement concerning a preliminary prospectus is NOT correct?

It may be accompanied by the firm's most recent research report Nothing may accompany the red herring during the cooling-off period. It is true that the preliminary prospectus may be sent to persons who have indicated an interest in the issue. It does not contain the public offering price, but it may contain information that has been corrected or clarified at the request of the SEC.

An investor owns a 10% ABC corporate bond. If current interest rates decline, what will happen to the price of the 10% ABC corporate bond?

It will increase Current interest rates and existing bond prices have an inverse relationship. If current interest rates are lower than the existing bond's coupon, the price for the existing bond should rise in the market. Conversely, if current interest rates in the market are higher than the coupon on the investor's bond, the price for the investor's existing bond will decrease in the market.

A husband and wife have a joint account where either party can make investment decisions, and if one of them dies, the account reverts to the other party. What kind of arrangement is this?

Joint tenants with rights of survivorship In joint tenants with rights of survivorship, both parties have the ability to direct the monies in the account. In addition, if one of the owners dies, the account will be reregistered to the surviving owner without having to go through the deceased's estate. In a tenants in common arrangement, the deceased's portion of the account goes to his estate, not to the other owner of the account. And in a tenants by entirety, investment decisions must be made by both parties.

A purchaser of cumulative preferred stock is entitled to:

Later payment of omitted dividends Each year, cumulative preferred stock has a right to its fixed dividend plus any dividends in arrears before common stock receives a dividend.

Earl has 60% of his assets invested in an oil services company that relies on domestic oil production for its revenue. Due to pressure from environmental groups, Congress is considering passing a law prohibiting all domestic oil drilling. What risk is Earl extremely vulnerable to at this time?

Legislative risk Earl is susceptible to legislative risk. This is the risk that a law change or any act of Congress will damage the value of a business into which someone is invested.

Regular way trades of which securities will settle the next business day?

Listed options U.S. Government debt and listed options have regular way settlement of T+1. Listed stock and municipal bonds have regular way settlement of T+2. Mutual funds have cash settlement where T=

If your client is worried about interest-rate risk, which security would you NOT recommend as an investment?

Long-term corporate bonds

A firm stands ready to buy and sell securities by maintaining a quote of buy and sell prices is a(n):

Market maker A market-maker is a dealer always ready to buy and sell securities by maintaining a quote of buy and sell prices.

Which of the following is normally an advantage of a REIT investment over an investment in a real estate limited partnership?

Marketability REITs can be sold in secondary markets, such as the NYSE or OTC markets, while limited partnerships are less liquid.

What is the primary role of the Designated Market Maker?

Match buyers and sellers The exchange operates as an auction market with all trading in a given security being routed through a Designated Market Maker (DMM), who is charged with keeping the market fair and orderly. The DMM is a member of the exchange who facilitates, like an auctioneer, the trading of a given stock. Their primary role on the floor of the exchange is to match up buyers and sellers.

At a minimum, an account statement must be sent out for an active account:

Monthly According to FINRA, active account statements must be sent out monthly. Inactive account statements must be sent out at least quarterly. Investment companies send out annual reports to the SEC and shareholders of the fund. Investment companies are also required to send semi-annual reports to shareholders only.

Which of the following securities would have the greatest taxation risk?

Municipal bonds A taxation risk exists when income tax laws change, causing unfavorable tax consequences to securities investors. Currently municipal bonds are not subject to federal (and in some cases state and local) taxation. A change in tax laws would have the greatest impact on municipal bonds.

Which of the following statements regarding mutual funds is correct?

Mutual funds are permitted to borrow from financial institutions, using the portfolio as collateral Mutual funds cannot issue debt securities, they are only permitted to issue common stock. Mutual funds cannot borrow from investors but are permitted to borrow from financial institutions and may use portfolio assets as collateral.

Under the Uniform Gift to Minors Act, when can the grantor revoke or take back the gift?

Never Money contributed into an UGMA account is irrevocable and cannot be taken back by the donor. UGMA account proceeds are to be used for any purpose on behalf of the child and cannot be returned back to the donor by the minor at any time.

John received a harshly worded letter from Bill, one of his biggest customers. Bill is accusing John of pocketing a $210 check that was sent to the firm to buy additional shares of the Enterprise Special Situations Fund. John is confused by this accusation in light of the fact that firm policy dictates that all mail be opened by the cashiering department and RRs are prohibited from handling customer funds. What would John's best course of action be in this situation?

Notify his manager of the letter and let the principal deal with the problem Customer complaints must be handled by a principal. An RR should never attempt to resolve a customer dispute on his own. RRs are required to promptly report all customer complaints to their supervisors.

All of the following statements regarding wrap accounts are true, EXCEPT that:

Only a broker dealer is permitted to sell wrap accounts Wrap accounts are established and sold through investment adviser firms. A broker dealer can only establish such accounts if also registered as an investment adviser.

After designing the optimal portfolio based on a client's profile, the adviser and client decide to automatically rebalance the portfolio by moving dollars from the over-performing asset classes to the underperforming asset classes. This is an example of:

Passive portfolio managing There are several ways to rebalance a portfolio. Passive rebalancing is a type of automatic rebalancing that removes dollars from the overperforming assets and reallocates them to the underperforming assets. This can be done on an annual or quarterly basis.

With regard to a security, when the term guaranteed is used, it means:

Payment of principal, interest, and dividends Guaranteed means a guarantee as to payment of principal, interest, or dividends.

A 61-year-old small business owner is planning to retire next year and let his daughter run the family business. He will continue to receive a small monthly income from the business to live on and is looking to invest his life savings of $316,000. Considering his age and financial situation, which of the following investment mixes would be most suitable?

Place 80% in high-grade fixed income funds and 20% in equity funds Although the majority of his assets should be invested conservatively, a portion should be placed in stock funds so their (potential) growth may act as an inflation hedge, since he could easily live another 20 years. His modest retirement income does not make him a likely candidate for tax-free (municipal) bonds and high-yield bonds are not a suitable investment for the majority of a retired person's assets.

A 23-year-old struggling artist has just inherited $28,000 from a deceased family member. The artist is a novice investor whose only exposure to the market consists of a few shares of a local utility company given as a gift 15 years ago. After seeking advice from an RR, the investor is unsure if the suggested 50% stock, 30% bond, 20% cash allocation is the right investment. Which investment should be made with the funds until the new investor makes a decision?

Place the funds in a taxable money market RRs should place an undecided investor's funds into a money market account until the client makes a decision on the allocation of his funds. In this case, the investor probably has a low enough income tax bracket that he/she would be better off in a taxable money market.

What is the name of the risk for when borrowers pay back their loans ahead of schedule?

Prepayment

To slow the economy, the president and congress would:

Raise taxes &Lower government spending The act of raising taxes reduces consumer spending. When combined with reduced government spending, this has a slowing effect on the economy. Conversely, consumer spending rises when taxes are lowered. This, combined with greater government spending, stimulates the economy. These are facets of fiscal policy.

Which of the following prohibited practices is best described as selling dividends?

Recommending the purchase of a fund just prior to the ex-date Selling dividends occurs when an RR encourages a customer to purchase shares of a mutual fund right before it distributes a dividend and/or capital gain. An RR must disclose that all distributions paid out by the fund are taxable and a portion of the investor's initial purchase is being paid back to them in the form of the taxable distribution. Some unethical registered reps even go so far as to say that the distribution amounts to an immediate profit, which is blatantly false because the NAV of the fund will fall by the amount of the distribution. The other answer choices are descriptions of front running, breakpoint selling and churning.

Which of the following ratings would indicate the highest rate and highest level of risk of a municipal note?

SG Using the Moody's rating system MIG1 is the highest rating which will be the safest with the lowest rate, this is considered a superior rating. MIG2 is a strong rating, MIG3 is acceptable and the lowest rating is SG which is speculative grade. Speculative grade will have the highest risk and carry a higher rate than the other ratings due to the increased risk.

Which of the following was created to provide investors the assurance that they could recover a loss of capital they placed within an investment firm if the firm became insolvent?

SIPC SIPA (Securities Investor Protection Act) paved the way for the creation of SIPC. SIPC (Securities Investor Protection Corporation) is a federally chartered, non-for-profit membership corporation that insures customers' accounts when a broker/dealer becomes insolvent. CUSIP is a committee which assigns identification numbers to securities. CPI is an abbreviation for Consumer Price Index which tracks the cost of consumer goods. SPPI is a made up term.

Which of the following statements is false regarding SIPC?

SIPC coverage is for cash, securities, commodities, and futures contracts SIPC reimburses customer losses on cash and securities only; not on commodities or futures.

Which is NOT a direct obligation of the U.S. government?

Securities issued by the Federal Farm Credit Consolidated System- Wide Banks Securities issued by the Federal Farm Credit Consolidated System-Wide Banks have a line of credit with the federal government, but are not backed by the full faith, credit, and taxing power of the U.S. government.

Mutual fund shareholders can do all of the following, except:

Sell their shares on the NYSE Investors may transfer ownership of their shares to another investor by following the fund's administrative procedures. Mutual fund shares may only be redeemed and do not trade on exchanges of OTC. The other 3 choices are shareholders' rights, which are explained in the prospectus.

Under FINRA rules, which of the following actions would constitute "selling away?"

Selling limited partnerships without notifying your employer

Mr. Gibbs has a conservative investment policy and has invested $20,000 into a bond fund. If interest rates increase by 3 1/2%, what affect would this have on the value of his shares and the income from the fund?

Share value decrease/income stable When interest rates increase, bond prices in the secondary market decrease. This is because new bonds will be issued at a higher interest rate, so the existing bonds (with the lower interest rates) are less attractive and drop in price. Even though the bonds drop in price, the interest income (in $ terms) from those bonds already in the fund will remain the same. The net asset value of a bond fund will rise and fall based on interest rates.

What does a stock split require?

Shareholder approval Unlike a cash dividend or a stock dividend paid to investors, declaring a stock split DOES require shareholder approval. The reason a corporation will split its stock is to make the stock more marketable or make the price more attractive for investors trading the stock in the secondary market. The company will issue more shares based on a ratio, such as 2-for-1. This will adjust the stock's par and market value but will not affect the total value of the stockholder's investment.

A registered representative who asks a customer to sign a blank form to keep on file for later use has committed which one of the following prohibited business practices?

Signature of convenience Registered representatives are strictly prohibited from using a "signature of convenience" by asking a customer to sign a blank form to keep on file for use later. It is unlawful for any person to knowingly alter any document or forge the customer's signature. Customers must receive copies of everything they sign. Withholding or falsifying documents is prohibited. All forms and other records must be kept in accordance with FINRA rules. Improper maintenance and retention of records can lead to disciplinary action.

When an employee starts to receive distributions from a traditional 401(k) plan what is the taxability of each payment?

Since neither the contributions nor the earnings have been taxed, all distributions will be taxed as ordinary income based on the employee's tax bracket in the year the withdrawal is taken Since neither the contributions nor the earnings have been taxed, all distributions will be taxed as ordinary income based on the employee's tax bracket in the year the withdrawal is taken, if subject to taxation per the IRS.

The right to purchase shares of common stock directly from the issuer for a limited time period is a:

Stock right Once the investor is notified of the new stock offering, the issuer usually gives investors 30 to 60 days to exercise their (preemptive) rights. Warrants are usually attached to debt securities and give the investor the right to purchase the issuer's common stock for a limited period of time (perhaps 5 years) to perpetuity (indefinitely). The question says directly from the issuer. An option gives the holder the right to buy the stock from an option writer, not the issuer. Options generally expire within 9 months or less. The question says for a very limited time period. A convertible security allows the investor to convert anytime in the future. This is not a limited time frame

How do you calculate the breakeven for a Put contract?

Strike price minus premium Breakeven is the point that the option buyer will not make any money or lose any money if the contract is exercised—this means that the market price is above or below the strike price by the exact amount of the premium paid. To calculate the breakeven for a put: Strike price minus the premium. To calculate the breakeven for a call: Strike price plus the premium.

Who has the greatest risk exposure in an underwriting?

Syndicate

Who has the greatest risk exposure in an underwriting?

Syndicate Syndicate members are liable for any shares that remain unsold at the end of the offering. The extent of liability and the terms under which the syndicate operates is agreed upon in a contract among the syndicate members.

Hedging reduces what type of risk?

Systematic Hedging is the method used to reduce systematic risk. Options on broad-based indexes can be purchased to protect an investor from overall market decline. An investor could purchase puts on the S&P 500 for example. If the market drops, the investor exercises the put and reaps the benefits of the market drop and lessens their losses on their long stock positions. Investors can also hedge by short selling in a falling market.

Which of the following is not considered to be a good delivery for a 400-share purchase of stock?

Ten 40 share certificates Stock certificates must be delivered in multiples of 100 shares and bonds must be delivered in multiples of $1,000.

An existing customer comes in to open another account and is asked by the registered representative for a government issued photo ID. The driver's license the customer provides has expired a month ago. Which of the following statements is true?

The account can be opened if another non-documentary method is used to verify the customer's identity The customer's identification is traditionally verified through Government issued identification cards, such as driver's license, military ID card or passport. Additionally, a firm can use non-documentary procedures to verify an investor's identity. A firm that uses non-documentary methods must keep an updated policy on what is suitable for non-documentary identification verification. Common forms of non-documentary identification include contacting the customer, obtaining the information from a consumer reporting agency, and checking references from other financial institutions.

A broker-dealer must forward, to its customers, all financial reports and voter proxies related to securities held in customers' accounts. Is the broker-dealer allowed to charge for this service?

The broker-dealer may charge the issuer of these materials

Which of the following statements is true regarding outside business activities of registered representatives?

The broker-dealer may prohibit the activity if it determines that the outside business activity could create a conflict of interest The registered representative must promptly notify the broker-dealer in writing of such outside business activity. The broker-dealer's permission is not required. However, the broker-dealer may prohibit the activity if it determines that the outside business activity could create a conflict of interest.

In order to motivate the RRs, a firm's sales manager decides to hold a firm-wide mutual fund sales contest to give away an all-expenses paid trip to Tahiti. Which of the following statements is (are) correct concerning this contest? I The contest would probably not violate any FINRA rules as long as it was based on total mutual fund production as opposed to sales of a particular fund II FINRA registered broker-dealers may only sponsor sales contests for those funds of which the firm is the principal underwriter III The firm may offer the trip, but must open the sales contest to RRs at other member firms as well IV Firm-sponsored sales contests are prohibited under FINRA's anti-reciprocal policy

The contest would probably not violate any FINRA rules as long as it was based on total mutual fund production as opposed to sales of a particular fund Brokerage firms may sponsor internal sales contests provided they conform to FINRA guidelines and the compensation is paid by the broker-dealer, not the mutual fund distributor. There is no requirement that the broker-dealer open the contest to RRs from other firms or limit the contest to sales of funds of which it is the distributor.

Which is NOT one of the characteristics of a cash account?

The customer can sell short Short sales may only be effected through a margin account. The other choices are characteristics of a cash account. In a cash account, the customer agrees to pay in cash to buy securities. The customer must deposit the necessary cash in the account within 4 days of the trade date and may withdraw cash when securities are sold.

Which of the following statements regarding separate accounts is false?

The insurance company bears the investment risk in the separate account

A registered representative for a boutique broker-dealer wants to recommend a non-NMS stock to one of her best clients. This stock is currently bid at $2.50 and offered at $3.00. This investor has been a customer for several years, and the registered representative remembers that on multiple occasions this client purchased similarly priced OTC stocks. The representative calls the client and recommends the purchase at the current offer price. Which of the following regarding this solicited order is TRUE?

The large spread between the bid and the ask prices indicates this is security likely has a low trading volume and is relatively illiquid

All the following statements are true regarding the post-registration period, except:

The period begins when the registration statement is filed The post-registration period is the period after the registration statement has become effective. At this point, the company can sell its securities to the public.

Which of the following statements is false?

The spread is the amount paid to the issuer Market makers buy at the bid and sell at the ask. The difference between those numbers is the spread, which is earned by the market maker.

Who administers a trust?

The trustee

If a person does not fulfill his letter of intent:

The underwriter can liquidate shares in escrow and use the proceeds to pay the sales charge

Which of the following statements concerning 12b-1 fees is correct?

These fees may be levied by a no-load fund Many funds assess 12b-1 fees to help cover the costs of distribution. The fee is named after an SEC rule that permits funds to charge an annual fee to help cover the costs of attracting new assets. These fees cover direct marketing expenses of the fund, such as advertising, and may also be used to pay "trailer" (ongoing) commissions to RRs. These fees are assessed against the assets of the fund on an annual percentage basis, regardless of whether the fund makes or loses money. No-load funds can charge 12b-1 fees. Under FINRA rules, a fund with a 12b-1 charge of .25% or less, and no sales charge, may be called "no load."

Which statement best describes an investment company?

They are a company that holds and manages securities for investment purposes on behalf of investors who, in return share in the profits and losses An investment company is a corporation, trust, or partnership that issues packaged securities to investors. The investment company collects the investors' money and then selects the appropriate securities to meet the objectives for that specific portfolio. Each investor has an undivided interest in the investment. This means that investors share in the profits and losses generated within the portfolio in proportion to their own investment, but do not have a beneficial ownership interest in any of the individual securities. An investment company with 100 shareholders or more must be registered with the SEC, but they are not approved by the SEC.

When an investor purchases mutual funds pursuant to a letter of intent, what is the status of the shares in their escrow account?

They are subject to changes in the NAV, like other shares Escrow shares have the same rights and risks of non-escrow shares. Once the investor completes the LOI, they are released into their account. If the investor fails to complete the LOI, they are liquidated and the funds used to pay the additional sales charge.

Which one of the following statements about a fund of hedge funds is false?

They can be redeemed at any time Broker-dealers created funds of hedge funds so smaller investors could also participate. These funds must be registered under the Investment Company Act of 1940 and usually have a minimum investment amount of $25,000. Because the underlying investments are hedge funds, they are considered very aggressive investments. They are also more expensive than traditional investment company securities since they have two sets of fees: one for the hedge fund managers, and one for the investment manager of the fund. The composition of hedge funds also makes them more illiquid than traditional funds, and they cannot be redeemed any time. Funds of hedge funds usually have specific time frames where investors can liquidate all or a portion of their holdings.

Which of the following is true of negotiable certificates of deposit, money market funds, and treasury bills?

They may be traded in secondary markets & They are low risk Only I and II are true of all three. Money market funds may be purchased with fairly small investments, and, of the three, only treasury bills are backed by guarantees of the federal government.

How is restricted stock initially acquired?

Through private offerings or employee incentive plans SEC Rule 144 details how certain stock, either restricted or control, can be sold to the public. The first condition of Rule 144 is that the restricted or control stock must be from a company that is already publicly traded. Restricted stock is unregistered stock, acquired through private offerings or employee incentive plans, and is subject to mandatory holding periods before it can be sold. If a company is an SEC reporting company, the stock is restricted from sale for 6 months and the certificate must be marked with the appropriate legends stating any restrictions. Sellers must file form 144 with the SEC declaring their intention to sell. This "Notice of Intention to Sell" must be filed at or before the sale date.

One of the purposes of SIPC is:.

To pay up to $250,000 for cash in a customer's account if the broker-dealer is insolvent SIPC provides protection for customers' accounts in case a BD becomes insolvent. Each separate customer is covered up to $500,000 total, of which no more than $250,000 of cash is covered. Employee theft is covered under a fidelity bond

The Fourth Market is where:

Trading is conducted between institutions The Fourth Market is for direct trading between institutions. These trades are also handled OTC. Electronic Communication Networks (ECNs) were developed to handle these trades on a 24 hour a day basis. These trades can only be done by institutions. The purpose was an attempt to eliminate or reduce the costs of transactions handled through the exchanges or OTC.

Which of the following securities are not traded in the secondary market?

UITs UITs are redeemable with the trust, they do not trade. All the stocks mentioned are traded in the secondary market.

A gift made to an UTMA may be revoked under which of the following circumstances?

Under no circumstances Gifts given to a minor in an UTMA are irrevocable.

All the following pay dividends that are considered qualified and taxable at preferential rates, EXCEPT:

Units of a Real Estate Investment Trust Qualified dividends are those that qualify for taxation at a preferential rate, which is 15% for nearly all investors, 20% for very high-income investors, or 0% for very low-income investors. Dividends paid from common stock, preferred stock, and dividend distributions from equity (stock) mutual funds qualify for the lower preferential tax rate. Non-qualified dividends, such as those paid from Real Estate Investment Trusts, are taxed as ordinary income as they pass-through income directly to unit holders, rather than paying a true dividend.

This type of order is directed by the customer and the registered representative must place the trade, even if they feel it is unsuitable:

Unsolicited A discretionary order is an order in which the registered rep determines the name of the security, size of the order, and/or action to be taken (buy or sell). The customer must authorize this type of order by granting power of attorney to the RR. Otherwise, the order must be non-discretionary, even if the RR determines time/price. A solicited order is based on a recommendation by the representative. Solicited orders must comply with suitability requirements. An unsolicited order is directed by the customer. The RR must place the unsolicited trade, even if unsuitable. Trades must be marked as solicited or unsolicited.

An investor purchases 200 shares of XYZ common stock on Thursday, March 5th for a total price of $8,000. Under Regulation T, when must the investor pay for this trade?

Wednesday, March 11th Regular-way settlement for corporate securities and municipal bonds is T+2. Firms are required to give customers 2 extra business days beyond regular-way settlement to pay for their trades. Therefore, payment is due no later than T+4, which may also be stated as S+2. The trade in this question occurred on Thursday, March 5th and will settle on Monday, March 9th. Payment will be due no later than Wednesday, March 11th.

XYZ's common stock has a par value of $1 per share, a book value of $5 per share and a current market price per share was $100. XYZ has 1,000,000 shares outstanding. What is its capitalization?

$100 million Capitalization is calculated by multiplying the share price by the outstanding price. 100 shares x 1,000,000= $100 million Ex) xyz Corp is currently trading at $40 per share with 500 million shares outstanding. The Corp capitalization is 20 billion.

What would a holder of an 8% bond paying semiannual interest receive on each payment date?

$40 The investor will receive $80 per year ($1, 000 x .08), but only $40 per payment, since the bond pays interest semiannually.

What is true of Government National Mortgage Association (GNMA) securities?​

-The principal and interest is guaranteed by the full faith, credit and taxing power of the U.S. Government -Income is paid monthly to investors representing interest and principal on the underlying mortgages -The portfolio invests in high quality mortgages purchased from banks and other financial institutions A GNMA security or pass-through certificate has a portfolio of high quality mortgages purchased from banks and other financial institutions. GNMA pass through certificates pay income on a monthly basis made up of interest and principal from the underlying mortgages the GNMA pass-through certificate invests in. Because GNMA is a government entity (part of the Housing and Urban Development division of the U.S. Government) the interest and principal is guaranteed by the full faith, credit and taxing power of the government. Interest is taxable as ordinary income, not the principal.

The value of a variable annuity, prior to the annuitization period is based on:

-The value of the accumulation units Prior to the annuitization period, the variable annuity is in the accumulation period. The accumulation period is the pay-in phase of the annuity, beginning when the first deposit is made. During this period, contributions are valued in accumulations units, which are comparable to shares of a mutual fund. Once annuitization occurs or the payout phase begins, ownership of assets changes. The accumulation units are converted to a fixed number of annuity units. The investments in the units remain intact and income payments from the insurance company to the annuitant are made based on the value of the contract's underlying annuity units.

While meeting with a client, the registered representative completes a risk tolerance profile. The client is clearly a conservative individual who is most concerned with capital preservation. A mutual fund that would be appropriate for this client would likely have a beta of:

.7 Beta describes the likely movement of a security compared to the market. A higher beta means that the price of the security is more likely to rise or fall dramatically over a short time period; lower beta means that a security's value does not fluctuate as dramatically or as frequently.

Regular-way settlement for corporate securities is how many business days after the trade date?

2 Regular-way settlement for corporate securities is trade date plus 2 business days. Treasury securities and options settle T + 1.

A FINRA member that has resigned, or had its membership cancelled or revoked, remains subject to regulation following the filing of a complaint for a period of:

2 years A member that has resigned, or had its membership cancelled or revoked, remains subject to regulation following the filing of a complaint within 2 years after the effective date of resignation, cancellation, or revocation.

Rule 147 intrastate offering shares may not be sold outside of the state for how many months unless fully registered under the Securities Act of 1933?

6 One exempt transaction is an offering made to investors in only one state. It is known as a Rule 147 Intrastate Offering. Issuers using the exemption under Rule 147 must meet all the following requirements: 80% of the issuer's gross revenues must come from business activities within the state; 80% of the issuer's assets are located within the state; 80% of the net proceeds from the offering must be used within the state; or a majority of the issuer's employee's must be based within the state. Securities purchased under Rule 147 may not be sold outside of the state for 6 months. The appropriate disclosures must made to purchasers on the limitations of resale. Certificates must be marked with the appropriate legend stating any restrictions. These securities still must be registered under Blue Sky laws.

If an investment yields 9% and the CPI is 3% for that time period, what is the real rate of return?

6% The inflation-adjusted return subtracts the inflation rate from the return. The inflation rate used is for the time period held and is based on the consumer price index (CPI). Inflation-adjusted return is also known as the real return.

Which of the following statements regarding liability is false?

A corporation has limited liability The corporation has unlimited liability, but its owners (stockholders) have limited liability. The most that an equity holder can lose is the amount of their investment. In a limited partnership, the general partner has unlimited liability, while the limited partners have limited liability.

The ABC Fund currently invests in micro-cap offerings in the bio-technology arena. The fund would like to alter its primary investment objective and begin investing in more well-established small to mid-cap holdings. What must occur prior to the fund changing its objective?

A majority of the fund's outstanding shares must approve of the change In order to alter any fundamental investment policy, such as its primary investment objective, a fund must obtain the approval of its shareholders. Each share (not each shareholder) receives one vote, so the votes of a majority of the fund's outstanding shares is needed for the change to occur. The shareholder voting process is the notification to the existing shareholders. Future prospectuses will be updated so that anyone buying new shares will have full and fair disclosure.

Ken Tremble comes into an RR's office looking to open a joint account with his wife, Tamara. Tamara could not attend the meeting since she is in Paris, on business. Which of the following statements concerning who must sign the new account form is/are correct?

A principal must sign the form

If a customer expressed interest in a new underwriting before SEC and state registration of the security becomes effective, what could the broker-dealer send them?

A red herring Before the effective date of a security's registration, only red herrings may be distributed to the public. Red herrings can state certain factual information and how to get a final prospectus once it is available but cannot include any sales material nor make any offer to sell the security. Relevant Content: R

Which two of the following are true regarding Roth IRAs?

A required minimum distribution is not required beginning at 72 & Contributions are not tax-deductible All contributions into a Roth IRA are nondeductible. There is no required minimum distribution beginning April 1st of the year following year the investor reaches age 72 as in other retirement accounts.

Which of the following situations best describes an example of continuing commissions?

A retired RR receiving trailer commissions on funds that his clients purchased prior to his retirement Continuing commissions were established so that an RR can continue to be compensated after he retires and his license expires, if he completes the proper paperwork while registered. These commissions can only be paid on business the rep produced while he was registered; he cannot be compensated for referring business to his former firm once his registration has been terminated.

All the following are true regarding 529 plans except:

Account balances may not be transferred to another relative 529 plans have the following features : Maximum contribution are determined by individual plan or state, Contributions are nondeductible, No taxation on earnings used for qualified education, Account balances may be transferred to another relative, No income limits for eligibility, and They are considered municipal fund securities regulated by the MSRB.

Which of the following would narrow the U.S. balance of payments deficit?

An increase of foreign tourists in the U.S. The balance of payments is the flow of money between other countries and the U.S. A deficit means more U.S. dollars are being spent abroad for foreign goods and services than are being spent in the U.S. by foreigners for domestic goods and services. A surplus occurs when more money is flowing into the country than flows out. The only choice that will have more money flowing into the U.S (narrowing the deficit) is an increase of foreign tourists in the U.S. Increased levels of U.S. imports will cause more dollars to leave the U.S. which will widen the deficit, more money is flowing out to pay for the imports. Decreased sales of U.S. securities to foreign investors mean less money flowing in to purchase those securities, again this widens the deficit. An increase of payment of dividends to foreign investors has more money flowing out of the U.S., widening the deficit.

All the following regarding options are true except:

An option contract with a premium of $2 would cost a buyer $2,000 Call contract - Provides the holder the right to BUY a specific stock, and the writer an obligation to SELL the specific stock, at the agreed (strike) price. Put contract - Provides the holder the right to SELL a specific stock, and the writer of the contract an obligation to BUY a specific stock, at the agreed (strike) price. Expiration date - The last date the option can be exercised. Most options have a 9-month life. Once this date passes, the option is worthless. Premium - The amount an investor will pay for an option; this number is based on 100 shares of the underlying security. An option with a premium of 2 would cost a buyer $200.

The last transaction in KNP 7s 2020 was at 92. This bond is trading:

At a discount This is an example of a financial listing that may be found in the newspaper or financial publication such as The Wall Street Journal. The information includes the issuer, the stated interest rate, maturity and last trade price. This reads as follows: KNP corporate bonds, with stated interest rate of 7% (7s means 7% bonds), maturing in 2020, last traded at 92 ($920).

Which of the following statements is not true regarding best efforts underwriting?

Best efforts underwriting is less risky for the issuer Best efforts underwriting is less risky for the underwriter because they do not assume the risk of buying any unsold shares.

Which of the following records must be maintained for the life of the enterprise?

Board meeting minutes The following records must be kept for the life of the enterprise, plus an additional 3 years after the enterprise ceases to exist: Articles of incorporation or Partnership Agreement, Minutes of Board Meetings (or Partnership meetings), and stock certificate books. SAR & CTR reports are kept for a period of 5 years. Customer complaints are kept for a period of 4 years (municipal complaints for a period of 6 years). Communication records are kept for a period of 3 years.

An investment in a Treasury note has virtually no:

Business risk The return on investment on a U.S. Government security with a fixed rate of interest is subject to interest rate risk and purchasing power risk. Changes in the individual tax laws could also affect the net income of the investor. However, with the U.S. Government behind them, treasuries have almost no business credit risk.

SEC Rule 144 details how restricted or control stock

Can be sold to the public SEC Rule 144 details how certain stock, either restricted or control, can be sold to the public. The first condition of Rule 144 is that the restricted or control stock must be from a company that is already publicly traded. Restricted stock is unregistered stock, acquired through private offerings or employee incentive plans, and is subject to mandatory holding periods before it can be sold. If a company is an SEC reporting company, the stock is restricted from sale for 6 months and the certificate must be marked with the appropriate legends stating any restrictions. Sellers must file form 144 with the SEC declaring their intention to sell. This "Notice of Intention to Sell" must be filed at or before the sale date.

What is included in the duties of a transfer agent?

Cancel shares submitted for redemption The transfer agent is responsible for shareholder service, including destruction of shares redeemed by shareholders, mailing statements and proxies, and updating customer account information.

All the following statements are true, except: (Regulation of Securities Markets)

Cash settlement is settlement that occurs on the same day as the confirmation date Cash settlement is settlement that occurs on the same day as the trade date.

Which two of the following are penalties for violating insider trading rules?

Civil penalties of up to three times the amount of gain or loss avoided or $1,000,000, whichever is greater & Criminal penalties of up to $5,000,000 and/or up to twenty years in prison There are both civil and criminal penalties for insider trading. Civil penalties are the greater of three times the amount gained or loss avoided or $1,000,000. Criminal penalties can be as much as fines up to $5,000,000 and/or up to 20 years in prison.

Someone who has given personal information about his financial goals to a registered representative is called a:

Consumer A consumer is essentially just a prospect, one who has provided personal information in the pursuit of a transaction or potential transaction. A customer has an ongoing business relationship with the representative and/or firm.

A limited partner does which of the following?

Contributes capital to the partnership & Pays tax on their proportionate share of the partnership's earnings A limited partner contributes capital and pays tax on their proportionate share of the partnership's earnings. A limited partner does not participate in the management of the partnership.

Which of the following statements is true regarding contributions and distributions to/from qualified retirement plans?

Contributions are pre-tax dollars, distributions are fully taxable as ordinary income A qualified plan receives certain tax advantages for both the employer and employee. Employees can contribute on a pre-tax basis and have earnings grow tax-deferred. Upon withdrawal, if subject to taxation, the amount will be taxed at the investor's current ordinary income rate.

Which of the following statements regarding SEP IRAs is false?

Contributions to SEP IRAs are not tax deductible A SEP IRA is a "Simplified Employee Pension" plan that must be set up by the employer, with deductible contributions made by the employer. An Individual Retirement Account is established for each employee that is fully funded by the employer. Employers are allowed (but not required) to make annual contributions subject to specified limits of up to 25% of the employee's salary. These limits are much higher than traditional IRA plans.

Ned is a very successful real estate attorney who knows all of the right people in the community. He offers to direct brokerage business to an RR as long as he is provided with duplicate statements on all of his referrals. What course of action should be pursued?

Duplicate statements may not be sent unless you obtain written consent from the owners of each account An RR may only share account information if the customer provides written permission. RRs may, however, be forced to provide information if bound to do so by a court order or if subject to an official request by a governmental authority such as the IRS.

When an investor fails to satisfy the terms of a letter of intent, what is the disposition of the shares that are held in escrow?

Enough shares are liquidated to pay the underwriter the appropriate sales charge When an investor fails to complete an LOI, the fund will liquidate enough of the customer's shares held in escrow to pay the charge. The liquidation is performed at current NAV.

What does the SEC do?

Establishes a registration's effective date The SEC does not warrant the accuracy of the registration statement or pass any judgment on the quality of the investment. It is unlawful to say or imply that the SEC approves of any investment; this disclaimer must be at the front of every prospectus. Anyone soliciting securities by use of a prospectus containing false or misleading information, or omitting material information, may be held liable. Criminal penalties may be imposed for anyone offering securities through fraud or misrepresentation. The person who purchases a security has the right to pursue civil tort claims if the items in the filing statements include false statements regarding material facts or omit material facts required to be stated.

If the bond counsel provides an unqualified opinion this means:

Everything is legally in order and there are no problems with the issue The bond counsel will deliver an opinion at the closing which addresses if the issuer has properly authorized and issued the bonds; if the bonds are enforceable under law and if the interest on the bonds is exempt from federal income tax and certain state taxes. An unqualified opinion means that everything is legally in order, there are no problems with the issue. However, is the counsel finds any problems with the validity, legality or tax status of the bonds the bond counsel will render a qualified opinion.

Private offerings are generally:

Exempt from the registration process Since the goal of the Securities Act of 1933 is to protect the general public from investment fraud, offerings that are not made public, known as private offerings, are exempt from the registration process. Most private placements are sold under Regulation D. Under Reg D, private placement transactions are exempt from registration when offered to no more than 35 non-accredited investors (persons who do not meet the definition of accredited under the Act) and do not exceed $5 million. There are no restrictions on the number of accredited investors that can be involved in the sale.

Fred Brandon has just passed his securities qualification exam and is now registered with FINRA as a Limited Securities Representative with First Federated State Securities. He wishes to acknowledge this accomplishment on his business cards. Which of the following imprints would most likely be viewed as a potential violation of FINRA's Conduct Rules?

Fred Brandon, Retirement Specialist for Seniors FINRA rules prohibit the misuse of professional designations or credentials in a way that may be misleading to customers. Abbreviations or acronyms which indicate that an individual has achieved a recognized certification or degree, such as MBA, CFP, Ph.D., ChFC may be used in customer communications, provided that the individual using them has actually earned the right to display the designation. Since such acronyms and abbreviations are generally recognized as proof of achievement or expertise in a specific area, using similar abbreviations without accreditation is generally considered to be misleading and is prohibited. Fred's use of "Retirement Specialist for Seniors" also implies that he has expertise that he hasn't earned and is misleading.

What type of prospectus is a communication of an offer to sell or a solicitation to buy provided only by well-known issuers prior to filing a registration statement?

Free writing Free Writing Prospectus is communication of an offer to sell or solicitation to buy that is provided by well-known issuers before filing a registration statement. Other issuers can only provide in conjunction with a full prospectus. It must be approved by the SEC prior to use.

What tends to have a deflationary effect on the U.S. economy?

Higher taxes and less government spending Higher taxes reduce private spending. This combined with less government spending slows the economy down. Deflation is a symptom of a declining economy.

How could an investor profit in a market decline?

I. The investor can buy put options on a broad-based stock index II. The investor can sell short stocks in a margin account III. The investor can buy inverse ETFs on broad-based stock index Hedging is the method used to reduce systematic risk. Options on broad-based indexes can be purchased to protect an investor from overall market decline. An investor could purchase puts on the S&P 500 for example. If the market drops, the investor exercises the put and reaps the benefits of the market drop and lessens their losses on their long stock positions. Investors can also hedge by short selling in a falling market. This can't be done with mutual funds but, could be done with ETFs that mirror an index. Again, if the market drops the investor will profit from the decline on their short ETF position and offset the losses on their long positions.

A registered representative has a client with an individual account at the firm. The representative receives a phone call from the spouse of a client, who specifies trade instructions to the representative. What can the registered representative do?

If the customer has provided written power of attorney, giving third-party trading rights to the spouse, the representative can follow the trade instructions of the spouse If the customer has provided written power of attorney, giving the spouse trading rights, the representative can follow the order. Unauthorized trading would occur if the representative accepted an order from a third party that is not authorized to trade in the account. Third-party trading rights must be authorized in writing before they are effective.

Which of the following is the primary purpose of the Federal Reserve?

Implementing monetary policy The Federal Reserve (the Fed) acts as the central bank of the United States. The institution is governed by the Federal Reserve Board (FRB). It has a number of important functions, including supervising and regulating banking institutions, and maintaining the stability of the financial system.

ABC is quoted at 15 - 16. What is the bid?

In the secondary market, the customer sells at the bid price which is the lower of the two prices shown. The broker-dealer pays the bid price to the seller. If the investor were purchasing they would pay the ask price which is the higher of the two prices shown. The difference between the bid and ask is the spread. The narrower the spread the greater the number of shares being traded. The larger the spread indicates a much more thinly trading market in that securities. One way to remember the bid and ask price is to realize that broker-dealers make money by buying low and selling high.

What is placement?

Introducing funds to be laundered into the legitimate financial system Money laundering involves three independent, and often simultaneous, steps: Placement - Introducing funds to be laundered into the legitimate financial system, Layering - Separating the proceeds of criminal activity from their origins through layers of complex financial transactions to hide the source of the funds, Integration - Reintroducing the now clean funds back into the financial system by providing an apparently legitimate explanation for the illicit proceeds.

Which investment vehicle is appropriate for a client who seeks current income and preservation of capital?

Investment quality corporate bonds Zero coupon bonds do not pay income but do pay an amount at maturity equal to the par value. High grade corporate bonds provide a blend of income and principal safety. Stocks are generally for long-term appreciation and income from dividends but do not provide preservation of principal.

What happens to the money supply when the Fed sells securities to a bank or dealer?

It decreases When the Fed buys securities from a bank or broker-dealer, this increases the money supply and has an easing effect on the economy. When the Fed sells securities to banks or broker-dealers, this decreases the money supply and has a tightening effect on the economy, causing interest rates to increase. A reverse repurchase agreement (reverse repo) is used when the Fed wants to tighten the money supply and sells government securities to banks or dealers.

What does Regulation T of the Securities Exchange Act of 1934 have to do with margin accounts?

It designated the Federal Reserve Board to regulate the extension of credit for broker-dealer customers Under a portion of Regulation T of the Securities Exchange act of 1934, the federal reserve board has the right to regulate the extension of credit for customers wishing to borrow money or securities from the broker-dealer. A margin account is a brokerage account in which the broker-dealer lends the customer money to buy securities for their account (long margin transaction) or lends the customer's securities to sell in the market (short margin transaction).

When may a preliminary prospectus be used to sell securities?

It may never be used to sell securities The preliminary prospectus is used only during the cooling-off period (before the effective date) and only to generate indications of interest, NOT sales. After the effective date of the registration, the red herrings are discarded and are replaced with the final effective prospectus.

A purchaser of cumulative preferred stock is entitled to:

Later payment of omitted dividends Each year, cumulative preferred stock has a right to its fixed dividend plus any dividends in arrears before common stock receives a dividend

A client, in a cash account, purchased stock from his broker-dealer. He does not make payment for the shares within 5 business days. According to Regulation T, the broker-dealer must now:

Liquidate enough stock to settle the account According to Regulation T, the broker-dealer must liquidate enough stock to settle the account (or apply to the appropriate SRO for an extension). The broker-dealer does not have authority to grant extensions. Broker-dealers do not arrange outside financing for customers.

An investor purchased 200 shares of a stock at $24 per share. Payment is not made by the fourth business day after trade date and an extension request is denied. Under Regulation T, the broker-dealer must:

Liquidate the transaction and freeze the customer's account Only the appropriate SRO can grant an extension, not the broker-dealer. The broker-dealer protects itself by liquidating sufficient securities to pay for the trade, not by suing.

A tombstone advertisement:

Lists the number of shares in the offering and the name of the managing underwriter A tombstone advertisement is generally placed in a newspaper with respect to an upcoming IPO. Correctly written, it is not deemed to be an offer to sell or a solicitation of an offer to buy a security. It is primarily used to refer prospective buyers to the underwriter of the IPO to obtain additional information.

All of the following must be obtained by an RR when opening up a new account for a customer, except:

Mailing address The customer's physical address, not mailing address, must be on the new account form. Also required are the customer's name (or a number is permissible), birthdate or indication of legal age, SS#, and signature of approving principal.

In most states, which of the following statements are true regarding UTMA accounts?

Margin transactions are specifically prohibited & The custodian must follow the Uniform Prudent Investors Act when investing the account assets In an UTMA account, a custodian is appointed to handle the investment affairs for the account. As fiduciaries, custodians are required to protect the interests of the child. Most states operate under the Uniform Prudent Investors Act (UPIA) that establishes standards for fiduciaries. Under this Act, the portfolio must be invested in a prudent and diversified manner. The account is looked at as a whole, as opposed to scrutinizing the individual investments. Under UGMA, trading on margin (with borrowed funds) is prohibited, since it would put the child in debt. Certain option transactions, such as protective puts or covered call writing, are used to reduce risk within a portfolio and certainly could be considered prudent investment choices.

When recommending a variable annuity to a prospective purchaser, which would NOT be a consideration?

Marital history While marital status is a suitability factor, marital history is not. Each of the other factors is relevant in determining suitability of a variable annuity.

This is not an immediate execution type order rather it gives the trader some discretion to wait and try to get a better price but must be executed before the close of trading that same day:

Market not held A market order is the most common type of order. It is an order that does not specify a price; it is filled at the current bid or ask price. These types of orders are executed immediately, or at the next available price, and are cancelled if not filled by the end of the trading day. Limit orders are either buy limit orders or sell limit orders. When placing a limit order, the investor is choosing a price that is their "limit". They want either that price or better. With a Buy Limit, the investor specifies the highest price they are willing to pay, and with a Sell Limit, they are specifying the lowest price they will accept to sell. A stop order is a type of order that is placed to stop losses that may occur. It is placed to protect the gains in a long or short position. If an investor has a highly appreciated long position, they could place a sell stop order at a price lower than the current market value. Once the stock drops to that price, the sell stop would turn into a market order, and the trade would occur at the next price. With this type of order, the investor could be selling at, above, or below the stop price. A buy stop order is placed by an investor with a short position. Remember, when a customer is short in a stock, they don't own it and are hoping that the price drops. That customer could enter a buy stop order to limit their losses if the stock rose in price. Again, once the stock hits that price, the order becomes a market order and will trade at the next available price. Stop limit orders combine limit orders and stop orders, though they function in a similar manner as stop orders. The main difference is when the stock hits the stop price, it now becomes a limit order, instead of a market order.

What is not a characteristic of a variable annuity?

Minimum guaranteed rate of interest A variable annuity enjoys tremendous flexibility, the cost being the sacrifice of a number of guarantees, one of which is a minimum guaranteed rate of interest.

If an account is frozen, which of the following statements is correct?

Money (or securities) must be in the account before a buy (sell) order may be placed A customer who violates Regulation T will have her account restricted or frozen for 90 days. Customers wishing to buy or sell securities in a frozen account must have the cash or securities on the premises with the broker-dealer prior to placing any orders.

Which of the following is considered retail communication?

Newspaper ad & Radio or television ad Retail communication includes written and electronic communication sent to 25 or more customers or prospective customers per 30 days (if sent to less than 25, it is classified as correspondence). Communication directed to a larger retail audience is also considered retail communication. IV is considered institutional communication.

PPZ Industries will file a registration statement with the SEC for a public offering of 10 million units, where each unit will contain one share of common stock and one warrant. Prior to the registration's filing date, the underwriters may distribute:

No written communication regarding the offering The key words in this question are "prior to the registration's filing date". Broker-dealers are prohibited from discussing any aspect of an offering, or sending any communications regarding an offering, to customers prior to a registration statement being filed with the SEC. Once the registration statement is filed and the offering is in its cooling-off period, customers may be sent a preliminary prospectus (red herring).

With this type of order the registered representative determines only the time and price for the trade:

Non-discretionary A discretionary order is an order in which the registered rep determines the name of the security, size of the order, and/or action to be taken (buy or sell). The customer must authorize this type of order by granting power of attorney to the RR. Otherwise, the order must be non-discretionary, even if the RR determines time/price. A solicited order is based on a recommendation by the representative. Solicited orders must comply with suitability requirements. An unsolicited order is directed by the customer. The RR must place the unsolicited trade, even if unsuitable. Trades must be marked as solicited or unsolicited.

Which type of expenses and/or fees do not apply to the sales load of a mutual fund?

Operating expenses Operating expenses are costs of running the fund and are deducted in calculating NAV. Front- and back-end loads pay for promoting/marketing/selling shares. The underwriter's compensation comes out of any sales load.

The department of a broker-dealer that ensures accurate record-keeping within the firm is:

Operations Broker-dealers have several departments that carry out the necessary functions: Investment Banking - The department of a broker-dealer that negotiates with issuers when selling securities to the public Research - The department of a broker-dealer that investigates issuers and the merits of their securities to make buy and sell recommendations Trading - The department of a broker-dealer that handles trade executions for clients and the firm Operations - The department of a broker-dealer that ensures accurate record-keeping within the firm

Which preferred stock has a minimum dividend but not a maximum?

Participating In a cumulative preferred, dividends that are not paid will accumulate and could be paid later. Participating preferred stock may pay an extra dividend along with the fixed dividend. The fixed dividend is the minimum. Convertible preferred converts into a set number of common stock. Straight preferred has no extra features.

All the following are FINRA prohibited trade practices except:

Paying any member firm concessions for sales made based on a written agreement FINRA's regulations promote fair and just principals of trade for any member firm and their associated person. It is therefore, considered a violation to intimidate other members by threats or harassment attempting to influence items such as pricing, quoting or research reports. Retaliating against another member or associate is also not allowed regarding the same items. It would also be a violation to coordinate prices, trades or reports with any other member or associated person. Paying any party attempting to influence the market price of a security is also prohibited.

A registered broker-dealer is also considering registering as and investment adviser. Prior to its registration as an IA, which of the following would be acceptable forms of compensation?

Payment of commissions to the firm by an issuer &Payment of commissions to the firm by a customer​ Broker-dealers may collect commissions from issuers on primary market transactions and from customers on secondary market trades. A broker-dealer may not collect advisory or wrap account fees unless it is also registered as an investment advisor.

Which of the following types of accounts may be used for education purposes and is regulated by the MSRB?

Prepaid tuition plan Section 529 of the IRC enabled the establishment of state-sponsored, tax-deferred, college savings vehicles. The two types of plans created to help meet qualified education expenses are prepaid college tuition plans and college savings plans. These are both types of municipal funds regulated by the MSRB.

What is the name of the risk for when borrowers pay back their loans ahead of schedule?

Prepayment One drawback of mortgage-backed securities and asset backed securities is that the principal may be paid back by the borrower ahead of schedule. Although many of the loans backing these pools have a 30-year life, home sales, voluntary early payoffs, and refinancing by homeowners will all accelerate the payment of principal. This prepayment risk occurs when interest rates decline in the market. Extension risk is the risk that the principal will be paid back at a slower rate than expected. This occurs when interest rates in the market rise.

When reviewing registration forms (U4), the supervising principal must verify:

Prior 3 years of employment history In reviewing the registration forms (U4), the principal must investigate the good character, business reputation, and experience of every applicant. The supervising principal must review, sign, and date all new hire registration forms (U4) and must verify the prior 3 years of employment history.

A registered representative must provide a customer relationship summary form in all the following situations except:

Prior to calling existing customers Broker-dealers must deliver the Customer Relationship Summary Form (Form CRS) to retail customer at the time of making a recommendation of an account type, securities transaction, or an investment strategy involving securities. The document must be delivered before placing an order for a retail customer or opening an account for a retail customer. Existing customers that open new accounts must receive Form CRS prior to opening the new account. Registered representatives are not limited when calling existing customers but may need Form CRS before making a new investment recommendation, even to an existing customer.

What is the preference preferred stockholders have over common stockholders?

Priority claim to dividends and corporate assets in case of liquidation Preferred stock is senior to common stock in terms of dividends and priority in claims on any residual assets.

Under SEC Rules, broker-dealers must provide customers with their free credit balances with every statement but, at a minimum:

Quarterly Under SEC Rules, broker-dealers must ensure the safe keeping of customer funds and securities. This Customer Protection Rule does not apply to other broker-dealers, partners, officers or directors. The firm is required to obtain and hold all customer funds and securities in a timely and efficient manner while abiding by all settlement and delivery rules. The firms must also provide customers with their free credit balances with every statement but, at a minimum quarterly. The concern is the proper segregating, record keeping and accounting of customer funds and securities in situations where the firm can use them in the conduct of their business. For example, if they are held within a margin account.

Which of the following must sign a customer new account form?

Registered Principal According to industry regulations, a new account form must be signed by the principal that approves the account opening. Remember, that although many firms require the customer's signature, the exam tests industry regulation, not individual firm practices.

Which of the following documents is filed with the SEC during the pre-filing period for new securities?

Registration Statement Securities cannot be offered, purchased, or sold during the pre-filing period.

An issuer with excess funds could retire bonds at a price that is less than par by which of the following methods?

Repurchase in the open market The issuer can always buy back its bonds in the open market to retire them prior to maturity. If market rates have risen, the buy-back price will be less than par. Think of this as you have "extra cash" and use that money to pay off a loan ahead of schedule.

What type of investor is considered part of the "general public?"

Retail A retail investor is an individual that purchases securities for their own account and is part of the general public.

What type of trust allows for changes in the trust terms or to terminate it all together?

Revocable A revocable trust affords the grantor the ability to change the trust terms when the grantor sees fit or revoke the trust completely. Traditionally, a revocable trust is established because of the desire to avoid the delays of the probate process at the death of the grantor. In a revocable trust, upon the grantor's death, the assets can pass directly to the beneficiaries named in the trust. The assets in a revocable trust provide no protection from creditors and will be included in the grantor's estate for estate tax purposes. Once a trust is established as an irrevocable trust, the trust and its terms cannot be changed. The assets placed in an irrevocable trust are afforded protection from creditors. The main benefit of opening an irrevocable trust is that the trust is not included in the grantor's estate and is not subject to estate taxation. An irrevocable trust has its own tax ID, and its own tax rates.

If an investor thinks the U.S. equity market is going to crash in the short-term and wants to make the most money, which one of the following should they consider investing in?

S&P 500 Inverse Leveraged ETF Inverse leveraged ETFs use a combination of leverage and the inverse fund concept. These are often called "ultra short" funds, since they are trying to obtain a return that is a multiple of the inverse ETF.

Which of the following qualified plans would be most appropriate for a corporation that employs 75 employees, if the corporation wishes to make contributions for the employees annually?

SIMPLE A SIMPLE plan can be adopted by small businesses (self-employed, sole proprietors, partnerships and corporations) that employ 100 or fewer employees and do not have another qualified plan available. Employees may make elective contributions based on a stated percentage within the allowable annual contribution limits. In addition, the employer must contribute either matching funds (dollar-for-dollar up to 3%) or 2% for each eligible employee. The 403(b) is available for eligible employees of public-school systems and qualified 501(c)(3) nonprofit organizations, including religious organizations, colleges, universities, hospitals, and museums. Keogh plans (HR-10) may be established as a defined benefit or defined contribution plan and are available to unincorporated self-employed persons (owner-employees). The 457 plan is a type of non-qualified, retirement plan that is available for governmental and certain non-governmental employers in the United States.

An investment company's registration statement has been filed, but the security has not been declared effective yet. What can a registered representative do in regards to the new issue?

Send a preliminary prospectus to customers & Send a letter to customers telling the approximate price of the shares, the name of the security, the address for obtaining a prospectus, and the fact that the brokerage firm sending the letter will be executing orders The firm may send a preliminary prospectus (I), and with a preliminary prospectus a registered representative may solicit indications of interest. The firm may also send a notice stating basic facts as in (III). However, the firm may not solicit or take commitments or any funds from customers for purchasing shares during the cooling-off period.

What type of prospectus is considered an offer to sell an IPO?

Statutory Statutory prospectus is the full prospectus and is an "offer to sell" an initial public offering (IPO), a subsequent primary offering of securities, or mutual funds and variable insurance products, and can be circulated after the security is registered and approved for sale to the public. It also is referred to as a "final prospectus" for stocks and funds and/or bonds. It supersedes the preliminary prospectus and includes details, such as: Exact number of shares available; Where or how shares may be purchased; The offering price; All material financial information concerning the issuer, its executive officers, and its board of directors; An application to purchase

Which of the following regarding a corporation that uses a statutory voting structure is TRUE?

Statutory voting benefits institutional investors In a statutory voting structure, each shareholder gets one vote per share, per issue. The more shares an investor owns, the more votes he gets. An institutional investor, such as a mutual fund, can own millions of shares of a corporation and therefore can have millions of votes. Since large investors have more voting power, they tend to get their way. Only holders of a company's common stock have voting rights, its creditors do not unless they have bought shares in the company as well as lending money to it. A cumulative voting structure allows shareholder to stack their votes towards one issue or one board member candidate. Proxy voting allows shareholders to mail their election ballots, and all voting structures allow votes to be counted by proxy.

An investor owns 3% of WHO Corporation stock. The investor has been provided with the right to purchase an additional 3% within the next 30 days. This is a description of a:

Subscription right Also called a preemptive right. These allow a shareholder to buy additional shares to maintain the same percentage of ownership. Rights are usually no more than 30-days. Warrants are long term. Standard options contracts expire in 9 months.

Which of the following is NOT the responsibility of the board of directors of a mutual fund?

Supervising the investment portfolio daily The investment adviser is responsible for daily management of the portfolio. The board of directors oversees all the other entities who operate the fund, including the custodian, transfer agent, and investment adviser.

If a listed security trades off the exchange floor and trades OTC, which market does this occur in?

The Third Market The secondary market consists of 4 subdivisions. The First Market is the trading of exchange listed securities on stock exchanges. The Second Market is the trading of unlisted securities OTC. The Third Market is the trading of exchange listed securities OTC. The Fourth Market is for direct trading between institutions. The Primary Market is where new issues are sold (not traded).

A disabled individual under the age of 59 ½ makes a withdrawal from their IRA, how will this be treated?

The amount withdrawn may be subject to income tax but will not be subject to the 10% penalty Most distributions taken from an IRA, if under age 59½, are subject to an additional 10% early distribution penalty on the taxable portion, unless certain exceptions apply. If a person is disabled, withdrawals prior to age 59 1/2 are may be subject to regular income tax but are not subject to the 10% penalty tax.

Which one of the following is true regarding a convertible bond?

The bondholder can change holdings into common stock of the same company A convertible bond gives the bondholder the right to trade the bond for shares of common stock of the same company. The stock is acquired at a preset price known as the conversion price. There is rarely an opportunity to take a bond and immediately increase the value in the portfolio by converting it into stock. This is because as the stock value increases so does the value of the bond. A disparity may occur only briefly which would allow for an arbitrage opportunity. Conversions take place because investors are interested in becoming owners of the company (stockholders) instead of creditors (bondholders).

A broker-dealer must forward, to its customers, all financial reports and voter proxies related to securities held in customers' accounts. Is the broker-dealer allowed to charge for this service?

The broker-dealer may charge the issuer of these materials A broker-dealer must forward to its customers all financial reports and voter proxies related to securities held in the customers' accounts. The broker-dealer may not charge the customer for this forwarding service but may charge the issuer of these materials.

Customer's confirmation statements may be sent to a third-party if:

The customer provides written consent The SEC requires that member firms provide their customers with confirmations of each transaction. Confirmations are generally sent on or before the settlement date. The confirmation must include the price and identity of the security, the number of shares, date of transaction, time of execution, capacity of the firm (agent or principal), commission, mark-up or mark-down, price and yield and the settlement date. Confirmations may only be sent to a third-party with written consent of the customer.

Bill has redeemed his ABC Growth Fund and used the proceeds to buy shares in the ABC High Yield Fund. What are the tax implications of this exchange?

The exchange is a taxable event Even though the switch is occurring within the same fund family, the liquidation of the original holding is a taxable event. If the switch were to occur inside of a qualified retirement plan such as a 401(k), no tax liability would be incurred.

What type of municipal bond subjects the bond holder to AMT?

The interest on private activity bonds that directly benefit a corporation Unlike other municipals, the interest on private activity bonds that directly benefit a corporation are subject to federal Alternative Minimum Tax (AMT).

An investor is short 1 STU Mar 35 call option and received $5 per share premium. On the expiration date, STU stock is trading at $105 a share and the investor is assigned an exercise notice. Which of the following regarding the assignment is TRUE?

The investor with the short call position must accept the assignment, and must deliver 100 shares of STU by the settlement date of the trade Once an investor has been assigned, it may not be declined or traded to another individual, nor may they close their short position by repurchasing the call option. The customer, once exercised, must deliver the underlying security. Their loss on this trade will be partly offset by the premium received for selling the call option. They must buy the stock at the current market price, sell the stock at the strike price, for a loss of $70 per share ($35 received ˗ $105 purchase price), offset by the $5 per share premium for a net loss of $65 per share (˗$70 lost on the trade + $5 premium).

In response to the Dodd-Frank Act, the SEC created Regulation S-ID. What is the purpose of this regulation?

The regulation requires member firms to create a written Identity Theft Prevention Program Regulation S-ID requires firms to create a written Identity Theft Prevention Program designed to identify, detect and respond to "red flags"- patterns, practices or specific activities- that could indicate identity theft. Identity theft is a fraud committed or attempted using the identifying information of another person without authority.

Two friends each invested in diversified management companies. One of them invested in a fund that had a continuous offering of shares and the other in a fund that did not. Which of the following is true regarding this situation?

The selling price for the fund that does not continuously offer shares is the highest bid price The fund with continuously offered shares is an open-end company. The pricing of this fund is based on the NAV plus an applicable sales charge. The share price of the fund that is not offered continuously is based on public demand. The open-end fund's sales price is the next calculated NAV and not the bid price since open-end shares are not auctioned. Closed-end shares are sold at the highest bid price.

A registered representative wishes to work from home in the evening to confirm appointments for the following day. The representative sends emails to customers from a personal email address, which of the following statements is true regarding this practice?

This is allowed if the firm permits but the firm must have access to the email account RRs who use social media and/or personal email accounts for any business communication, no matter how informal and infrequent, must allow their firms access to these accounts, and should understand that any communications in these accounts may be subject to archiving by their firm.

What is never an ownership right of common stockholders?

To receive a fixed portion of the corporation's earnings in the form of dividends Dividends on common stock are never guaranteed; they are paid only when and if declared by the board of directors. Preemptive right is the right to subscribe to any new shares to protect percentage of ownership. Common stockholders vote on big issues, including capitalization issues and the board of directors. Common stock is called the junior security because it has the lowest (residual) claim to assets at bankruptcy.

How much may be contributed to a Coverdell Education Savings Account during 2018 for the benefit of a single child (BEST ANSWER)?

Up to $2,000 total in any number of ESAs with any number of contributors For any beneficiary, total contributions to ESAs must not exceed $2,000. The number of ESAs and contributors is not limited.

Greta, a conservative investor, has a small brokerage account at ABC Investments. Greta informs her RR that she has recently come into a large inheritance due to the death of her Uncle Erik. What steps should the RR take based on Greta's new circumstances?

Update her account record to reflect her recent good fortune Anytime a client has a major life change (e.g., marriage, inheritance, new job), the RR should change the account records to reflect the change. After updating the paperwork, the RR should look to meet with the client to determine if her objectives have changed. In no way should the RR assume that the life change automatically changes the client's goals or objectives.

When an individual buys a security and simultaneously sells it, with the intent to create the appearance of trading activity, this is called:

Wash trade A wash trade involves the simultaneous purchase and sale of the same security. The intent of this action to give the appearance of active trading without an actual change in beneficial ownership. If there were 2 or more parties involved, that would instead be considered matched sales. Twisting is also called churning and is excessive trading activity. Freeriding is when a customer has a cash account and attempts to purchase securities and profit on them by selling before paying for them. Pump and Dump involves an individual or group that owns a security will use market rumors to promote a stock on the internet, attempting to drive the price up so they can pump the price up and dump their shares at an inflated price.

When is an account frozen?

When payment has not been received for a trade within T + 4 An account is frozen when a customer has not promptly paid for a trade. Promptly is defined as trade date plus 4 business days. Special rules apply to transactions in a frozen account. No buy orders will be entered unless sufficient cash is in the account, and no sell orders will be entered unless the securities are on the premises.