SIE Unit Three

Which of the following are required if a registered representative is to share in profits and losses with a customer? 1. The trades must be done in a joint account. 2. The customer must be a family member of the representative. 3. The principal must give permission in writing for the arrangement. 4. The broker-dealer firm must also be a tenant in the account.

1 and 3

Roth IRAs 1. have no minimum required distributions at any age 2. have higher contribution limits than those allowed for a traditional IRA 3. allow the withdrawal of earnings tax free as long as the account has been opened for 2 years 4. can be contributed to in the same year as a traditional IRA

1 and 4. Roth IRAs have no minimum required distributions at any age. All earnings grow and may be withdrawn tax free as long as there has been an open Roth IRA for at least 5 years and the participant is at least age 59½. One may contribute to both a Roth and a traditional IRA in the same year, but the combined contribution may not exceed the annual maximum for any plan.

An investor purchased 100 shares of LMN in 2013 at a price of $40 per share. Soon after, the LMN declared a 25% stock dividend. Three years after the shares were purchased, they were sold at $50. Which of the following statements are CORRECT? 1. The adjusted cost basis of the shares is $30. 2. The adjusted cost basis of the shares is $32. 3. There is a short-term capital gain on all the shares sold. 4. There is a long-term capital gain on all the shares sold.

2 and 4: When a company declares a stock dividend, the cost basis per share is always reduced. The customer will receive 25 new shares (100 shares × 0.25 = 25). The computation is the original total cost $4,000 (100 × $40) divided by the new number of shares 125 (100 + 25). $4,000 / 125 shares equals a new cost basis per share of $32. The holding period for capital gain or loss (short or long term) is always from the original purchase date. In this case, because the shares were sold 3 years later at 50, the gains are long term.

Which of the following are not 3-year or 6-year records? 1. Compliance and Procedures Manual 2. List of home, regional, and branch offices 3. Minutes of directors' meetings 4. Customer complaints

3 and 4. Minutes of directors' meetings (The Minute Book) is a lifetime record. Customer complaints must be kept on file for 4 years, not 3 or 6. The Compliance and Procedures Manual, which must frequently be updated, and the list of all offices where business is done are both 3-year records.

Which of the following is NOT true for trade confirmations? a. Commissions are added to the sales proceeds to arrive at the amount the seller is to receive b. Commissions are not shown when a markup or markdown is charged. c. the firms acting capacity as agent or principal is shown d. they are received by both parties at or before the settlement date

A

When a client makes a trade, industry rules require that a confirmation be delivered no later than completion of the trade. Included on that confirmation would be all of the following information EXCEPT a. the number of bonds in the transaction b. the number of shares of stock in the transaction c. the CUSIP number d. the capacity in which the BD executing the trade acted

A. (par vale is indicated, not # of bonds)

A GTC order is left unexecuted at the end of the trading day on the last business day of April. Which of the following is TRUE? A) The order will be automatically canceled. B) The order will be automatically renewed. C) The order will only continue working through the opening of the next business day. D) The customer must give specific instructions to cancel the order so that it will not continue as a good working order.

A. All GTC orders if unexecuted will be automatically canceled on the last business day of April and the last business day of October. If the customer wishes to have the order continue working beyond that date, it must be reentered after the automatic cancellation.

Which of the following is an acceptable investment for an IRA? A) A mutual fund specializing in speculative bonds B) A collection of medieval manuscripts and art C) A universal variable life insurance contract D) Gold coins minted in Switzerland but sold in the U.S.

A. Investments in an IRA are limited to cash and securities. This would include gold coins if they are from a U.S. mint. Collectibles and insurance are not acceptable IRA investments.

Each of the following are likely to be found on a trade confirmation EXCEPT A) bond credit rating B) CUSIP C) description D) commission

A. Trade confirmations are required to include many details about the trade and the securities including, but not limited to, the trade date, description of the security, CUSIP number, commissions (not markups or markdowns) and more. There is no obligation for the firm to print the bond credit rating on the trade confirmation.

A stock is purchased on June 10 of this year and sold on January 10 of next year for a profit of $200. How will the $200 be taxed? a. As a short term capital gain, taxed at the ordinary income tax rate b. As a short term capital gain, taxed at the lower capital gain rate c. As a long term capital gain, taxed at the ordinary income tax rate d. As a long term capital gain, taxed at the lower capital gain rate

B

A certificate issued by a company granting its owner the right to purchase securities from the issuer at some specified price years into the future would best be described as a A) rights certificate B) warrant C) call option D) proxy

B. A rights certificate is a very short-term security that grants the holder the right to buy the common stock of the company at a price lower than the current market price. A warrant is a long-term security that grants its owner the right to purchase securities from the issuer at a specified price that is higher than the current market price at the time the warrants are issued and at some point, in the future. Note that while the exercise price is higher than the current market value when the warrants are issued, it is hoped that the exercise price will be below current market value when the warrants are eventually exercised.

A client of a brokerage firm opened an UTMA account for her granddaughter five years ago, naming the child's father as the custodian. Through appreciation as well as additional contributions, the account value has grown to $50,000 and generates interest and dividend income in excess of $3,000. Who bears the liability for the taxes on this income? a. the donor b. the custodian c. the granddaughter d. no one, bc there are no taxes on an UTMA account until the beneficiary takes possession of the account

C

An investor has a long position in OMQ stock. After selling the stock at a loss, the investor could purchase which of the following and not violate the wash sale rule? A) OMQ warrants B) OMQ call options C) OMQ put options D) OMQ convertible bonds

C. In order to avoid violating the wash sale rule, investors selling a stock at a loss cannot purchase that same, or substantially identical, security within a 30-day period before or after the sale incurring the loss. Substantially identical would include anything that is exercisable or convertible into the same shares of stock, such as rights, warrants, call options, or a convertible bond. Purchasing the put options would not violate the wash sale rule because these can be exercised to sell the stock, not purchase it.

The Securities and Exchange Commission (SEC) requires that notice of corporate actions be given for all of the following EXCEPT A) dividend payments on the issuer's common stock B) a reverse split on the issuer's common stock C) interest payments on the issuer's debt instruments D) the issuance of warrants to be attached to a bond offering

C. Payment of bond interest is an obligation and therefore not considered a special corporate action notice. Reverse splits and warrants are not regular happenings, and even though some companies have paid dividends regularly, those dividends are not guaranteed and can be halted. Hence, these events would be considered special corporate actions and therefore require notification to the marketplace.

All of the following are true regarding breakpoints for mutual funds EXCEPT A) the greater the investment, the lower the sales charge B) a breakpoint sale is considered to be a sale just below a breakpoint C) the first breakpoint investors can achieve is mandated by industry rule to be at the $10,000 investment threshold D) breakpoints must be disclosed to potential investors

C. There is no standardized industry mandated breakpoint schedule. Offering breakpoints and where they occur is at the discretion of the investment company. In accordance with a breakpoint schedule, the greater the investment, the lower the sales charge will be. A breakpoint sale occurs when a sale is made just below a breakpoint with the intent of the registered representative to be the recipient of a higher sales commission. In this light, disclosure of breakpoints when they are offered is required.

A customer has returned a signed proxy statement for stock held in street name by a member firm. He did not indicate how he wanted to vote for any issues listed on his ballot. What action, if any, is required of the member firm? a. No action is required and no votes are cast b. The firm must contact the beneficial owner of the stock and ask for direction on how to vote on the proposals listed. c. The firm may vote on the ballot s it sees fit for the benefit of the customer. d. The firm must vote in accordance with the recommendations made by the issuer of the stock

D

A wealthy individual has established a trust and wishes to establish an account with your BD that permits the trust to engage in margin transactions. Which of the following statements regarding margin trading in trust accounts is TRUE? a. It is not permitted. b. It is permitted if the trustee observes the prudent investor rule. c. It is permitted with the written approval of the beneficiary of the trust. d. It is permitted if provided for in the trust's documentation

D

A customer's account has been frozen. Which of the following is TRUE if the customer wants to purchase more securities? A) Approval must be received for any purchase in the account from the SEC.v B) Funds can be borrowed in the form of a margin loan up to 50% of the securities' value. C) No new purchases can be made in an account that has been frozen. D) Funds to pay in full must be available in the account before the buy order is entered.

D. Purchasing securities in a frozen account is permitted, but the funds to pay for the purchase in full must be available in the account before the order can be entered.

Suspicious activity reports (SARs) are A) filed internally only for analysis involving potential problematic patters B) filed with FINRA as required by FINRA's code of conduct C) filed with the SEC as required by the Securities Exchange Act of 1933 D) filed to the Financial Crimes Enforcement Network (FinCEN) as required by the USA PATRIOT Act

D. Suspicious activity reports (SARs) are filed to the Financial Crimes Enforcement Network (FinCEN) as required by the USA PATRIOT Act.

A 40-year-old individual is not covered by a retirement plan at work. What is the maximum contribution this individual can make to an IRA this year? A) The current maximum allowed by the IRS plus the catch-up amount, but none of the contribution will be deductible. B) The current maximum allowed by the IRS, but none of the contribution can ever be deductible. C) Nothing, because this individual has no retirement plan at work. D) The current maximum allowed by the IRS, which will all be deductible if the individual does not exceed the income limit.

D. While the exact annual contribution limit numbers are not likely to be tested, students should know that for those not covered by a retirement plan at work, the maximum contribution allowed by the IRS would be permitted and can be deducted on one's tax return. The deduction, however, would be phased out above a certain income level. The catch-up provision only applies to those age 50 or older.

An investor sells put options and, just prior to their expiration, buys the underlying stock. The intent is to keep the price from falling below the strike price of the options. Such an action is called

Supporting

A corporation divests itself of all of the shares of another company it owns. This is known as

a spin-off

A broker-dealer's customer will be relocating for a position with a higher salary and bonus potential. This requires

notification to the broker-dealer of the change within 30 days

An investor notices that a bond purchased several years ago at 95 is now priced at 90. The investor sells the bond for 90, then immediately repurchases it for 90. This action is known as

wash sale; The investor's intent with this wash sale is to declare a $50 capital loss without changing positions on the bond. Immediate repurchase is not illegal, but it precludes declaring the loss for tax purposes. The investor must wait at least 30 days before buying the bond back, or the loss will be disallowed.