Understanding, Trading, Customer Accounts, and Prohibited Activities

A new customer opens a margin account and, upon account approval, does an initial transaction purchasing 100 shares of MJS common stock at $25. How much will the customer need to deposit?

$2,000 For the first trade in a newly opened margin account, there must be at least $2,000 in equity. The rule is as follows: transaction greater than $4,000, deposit 50%; between $2,000 and $4,000, deposit $2,000; and if the transaction is less than $2,000, deposit 100% of the purchase price. In this case, the transaction was between $2,000 and $4,000, and so a deposit of $2,000 is required.

A client opens a new margin account and, as the initial trade, purchases 300 shares of MS Corporation common stock at $10 per share. The firm would send the client a margin call for

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

An investor purchased 100 shares of Acme Shoelace stock for $20 per share. Four years later, the investor sold the stock for $28 per share. This investor would report these transactions, on a per share basis, as

$20 cost base, $8 capital gain The price paid for a security is known as the cost base for the transaction. If the security is later sold for more than the cost base, the difference is a capital gain; if for less, it is a capital loss. This investor paid $20 per share, the cost base. Later, selling the stock for $28, the investor made an $8 capital gain per share. Of the total $28 price of the security, upon sale, $20 could also be called return of capital.

An investor owns 500 shares of stock whose current market value is $20 per share. The stock undergoes a split, after which the investor owns 400 shares. What is the new price of the investor's stock?

$25 per share The rule for stock splits is that the total value of the stock position must be the same before and after the split. In the case of this reverse, uneven split, the total value of the stock before the adjustment was $10,000. For the 400 shares after the split to be worth $10,000, the price would have to be adjusted to $25 per share ($10,000 / 400 shares = $25).

A 72-year-old customer has a $30,000 required minimum distribution (RMD) calculated to be taken from an IRIf the customer is in the 20% income tax bracket and only withdraws $25,000 from the account, how much tax will be owed?

$7,500 Failure to meet the required minimum distribution (RMD) results in a 50% penalty tax on the shortfall. In this case, taking only $25,000 when $30,000 should have been taken leaves $5,000 exposed to the 50% penalty tax. $5,000 × 50% equals $2,500. In addition to the penalty tax, the ordinary income tax on the amount withdrawn must also be paid (20% × $25,000 = $5,000). Total tax liability on this withdrawal equals $7,500 ($2,500 penalty tax plus $5,000 ordinary income tax).

An investor owning 500 shares of MES stock received notice that the stock had undergone a 2:1 forward split when the stock's market price was $10 per share. The investor now owns

1,000 shares worth $5 per share A forward split increases the number of shares and reduces the price proportionately so that the stock's total value is the same before and after the split. A 2:1 split in this case doubles the number of shares to 1,000 (the investor receives 2 shares for every 1 owned) and halves the price to $5 per share.

Interest on a 7% corporate bond would be paid to the investor as

2 semiannual checks for $35 each Interest on corporate bonds is paid twice per year, or semiannually. The interest rate reported, however, is an annual rate. Thus a 7% bond would pay 7% of par ($1,000), or $70, per year as 2 semiannual checks for $35 each.

A customer enters the following order: Sell 1,000 shares of XYZ at 23. Which of the following executions would the customer accept?

23.50 When selling at a limit price (23), the customer will accept that price or better (higher for sell orders). Given the customer is willing to accept 23, any price of 23 or higher (in this case 23.50) is an acceptable execution.

A corporation with 1 million shares of stock outstanding wishes to sell another 250,000 shares. When management conducts a rights offering, a shareholder owning 100 shares will be given stock rights to purchase how many additional shares?

250 shares Stock rights (also known as preemptive rights or subscription rights) give current shareholders the ability to preemptively purchase enough shares to maintain their proportionate ownership of the corporation. This prevents their dividend and voting power from being diluted. The shares outstanding in this case will go from 1,000,000 to 1,250,000. This investor must thus go from owning 100 shares out of 1,000,000 to 125 shares out of 1,250,000. This would require that the investor be able to purchase an additional 25 shares.

To ensure that the information obtained from each new customer is accurate, firms must furnish to each customer a copy of the account record within how many days of opening the account?

30

A customer has just notified the brokerage firm of a change of address. How long does the broker-dealer have to provide the customer with an amended account record for confirmation?

30 calendar days

An order is entered by a customer to sell at 30 stop limit. Once the order is entered, the stock trades in the following sequence: 32, 29, 31, and 33. The order would be executed and the investor would receive a price of

31 This is a sell stop order with a limit of 30. Once the stock trades at 30 or lower, the order is elected (triggered) and becomes a live working order. This occurs at 29. The order will then be executed at its limit (30) or better. This occurs at 31.

Once a customer account has been opened at a broker-dealer, rules require that updating information on the account record occur no less frequently than once every

36 months

All of the following are considered unique or nonstandard corporate actions EXCEPT

3:1 stock split

An investor owns 200 shares of MNO common stock. The company's management has proposed a 2 for 1 stock split. If the price of the stock at the time of the split is $50, what would the investor's adjusted position be?

400 shares at $25 The number of shares doubles to 400 (2 × 200) and the price per share would be $25 ($50 / 2).

Records relating to a currency transaction report must be retained for

5 years

A registered person has left the securities industry and now holds a manufacturing job. Under what circumstances may this formerly registered person continue to receive commissions from work done at the person's old firm?

A contract must have been signed by the registered person and the firm specifying what commissions are still to be paid.

Which of the following statements is the most CORRECT regarding customer accounts?

A customer may open both a cash and margin account at the same time.

Which of the following is TRUE regarding accounts trading on margin?

A fiduciary account may only trade on margin if it is specifically permitted in the trust or custodial agreement.

Which of the following may receive a commission from a FINRA member firm?

A foreign nonmember firm that agrees to abide by FINRA rules

Which of the following could be granted a selling concession or commission by a FINRA member firm, though the recipient lacks registration?

A foreign nonmember firm, provided it agrees to abide by FINRA rules

Which of the following is an acceptable investment for an IRA?

A mutual fund specializing in speculative bonds

A member firm suspects financial exploitation of a senior customer. Which of the following is true regarding actions that can be taken?

A trusted contact person if one was named can be contacted and a temporary hold on disbursements from the account can be administered.

Which of the following would NOT require delivery of notice?

An interest payment on a corporate bond

Of the following, which would NOT be considered institutional communications with the public?

An internal memo promoting a new product that will be offered to your firm's institutional customers only

Which of the following must precede the first trade in an account?

Approval of the new account by a principal

An investor has been putting aside funds for retirement in a nonqualified variable annuity for over five years. She is now age 66 and takes a lump-sum distribution. How are the earnings taxed?

As ordinary income

Which of the following would be considered earned income?

Bonus received from employment

Which of the following orders can be used to close a short position in CDT stock that consists of 1,000 shares?

Buy 1,000 shares of CDT

What are the 2 basic types of return on an investment?

Capital gains and income

Which of the following settlement arrangements has trade and settlement occurring on the same day?

Cash settlement

Which of the following must be signed by a customer wanting to open a margin account?

Credit and hypothecation agreements

Which of the following records must be maintained for 6 years?

Customer ledgers (statements)

Which of the following would lead to a standardized cost-base adjustment for stockholders?

Dividend

A registered representative is discussing fee-based and commission based accounts with a customer. All of the following are true EXCEPT

Fee-based accounts are most suitable for those who do very little trading during the course of the year.

Financial institutions such as broker-dealers must report when there is an event, transaction, or series of events or transactions that appear to be questionable to

FinCEN The USA PATRIOT Act requires firms to report to Financial Crimes Enforcement Network (FinCEN) when there is an event, transaction, or series of events or transactions that appear to be questionable.

A customer has requested that your BD hold mail for them while they are traveling. Which of the following is TRUE?

Firms may choose or choose not to hold customer mail when requested to.

A stock trade took place on Tuesday, July 2. When would regular way settlement normally take place?

Friday, July 5 Regular way settlement for a stock trade is T + 2 (trade date plus 2 business days). This would normally make settlement for this transaction Thursday July 4, but because July 4 is not a business day (national holiday), regular way settlement would have to be Friday, July 5.

Brokers placing orders for their own account ahead of notably large customer orders that are known to be entering the market in an attempt to gain from the price movement that is likely to occur is an example of what prohibited activity?

Front running

A customer receives a Regulation T margin call for $3,200. To meet the deposit requirement, which of the following can be deposited?

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

Which of the following might be considered a red flag in a customer's account activities?

Funds and securities are moved from one account to another for no apparent reason.

A customer's account has been frozen. Which of the following is TRUE if the customer wants to purchase more securities?

Funds to pay in full must be available in the account before the buy order is entered.

Which of the following would NOT be considered ordinary income for tax purposes?

Gains gotten from the sale of securities

A married couple have equal 50% ownership interests in a tenants in common account (TIC). If one party to the account dies, what happens to the shares in the account?

Half, or 50% of the shares, would belong to the remaining party and the balance would be distributed to the estate of the deceased party.

Which of the following must be opened as a cash account?. Custodial accounts Individual retirement accounts Joint accounts Partnership accounts

I and II

Which of the following would be TRUE with regard to capital gains? If an asset is sold within one year (12 months or less) of its purchase, the gain is considered to be short-term and taxed at the same rate as the taxpayer's ordinary income. If the asset is held for more than a year, the gain is considered to be a long-term and is taxed at a favorable long-term rate. Capital gains are usually associated with the distribution of dividends including stock splits. Capital gains can be defined as the income earned from interest, wages, rents, royalties, and similar income streams.

I and II

A customer leaves the sale proceeds from a recent transaction in the account. This amount would be considered a free credit balance a margin debit balance available to the customer at any time a loan to the broker-dealer, who will pay interest to the customer

I and III

An exception report would be most likely generated by which of the following observations? Seeing activity in the account of a deceased person Noting that a customer's telephone area code matches the ZIP code provided Receiving an execution for 300 shares when the order was for only 100 Receiving a written complaint from a customer

I and III

As long as it is not restricted in any documentation, margin trading is permissible in which of the following accounts? Corporate IRA Partnership Fiduciary

I and III

The tax rate on qualified dividends depends on which of the following? The current IRS tax code The financial status of the issuer The tax bracket of the shareholder The price per share of the stock

I and III

Which of the following records must be kept by a broker-dealer firm for 6 years? Customer new account forms Advertising the firm has published Stock records Minute books

I and III New account forms filled out when the customer account was opened and stock records showing all the securities held by the firm and where they are held must be kept for 6 years. Minute books showing the minutes of directors' meetings are lifetime records. Advertising need only be kept for 3 years.

A mutual fund has breakpoints at $25,000, $50,000, $100,000, and $250,000. Which of the following transactions might be considered a breakpoint sale? The client purchases $48,000 worth of shares The client redeems $24,000 worth of shares The client purchases $252,000 worth of shares The client purchases $96,000 worth of shares

I and IV

Distinguishing between a sell stop order and a sell stop limit order, which of the following are TRUE? The sell stop limit order becomes a sell limit once triggered. The sell stop order becomes a sell limit order once triggered. The sell stop limit order becomes an order to sell at the market triggered. The sell stop order becomes an order to sell at the market triggered.

I and IV

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

I and IV

Which of the following are associated with manipulative, deceptive, or fraudulent devices? Breakpoint sale Preemptive Fill-or-kill Capping

I and IV

Which of the following describes the consequences of a stock split? If the number of shares goes up, the price goes down. If the number of shares goes up, the price goes up. If the number of shares goes down, the price goes down. If the number of shares goes down, the price goes up.

I and IV

Which of the following orders need NOT be immediately filled in their entirety? Immediate or cancel (IOC) Fill or kill (FOK) Market at open All or none (AON)

I and IV

Which of the following would NOT be considered violations? As soon as a customer opens a margin account and signs the loan consent agreement, the BD lends all of the securities in the customer's account to other customers for the purpose of selling short. A BD temporarily lends a customer's securities to another customer with no loan consent on file. A registered representative transfers funds from Mr. Smith's account to the account of his spouse, Mrs. Smith, in order to meet a margin call she has received. The intent is to move the funds back to Mr. Smith once Mrs. Smith makes her required margin call deposit. Mr. Smith makes a deposit into his spouse's account for the purpose of meeting a margin call.

I and IV

An investor has opened an individual brokerage account for use in a small business and has given a business partner a power of attorney (POA) over the account. Which of the following persons may have access to the account for trading purposes? The attorney who administers to the business's legal needs The investor's partner who was given the POA The investor who opened the account A secretary at the business, but only in an emergency

II and III

What happens to the contents of a custodial account in the event of the death of the beneficial owner (the minor child)? The account's contents are returned to the donor(s). The custodian's fiduciary responsibility ceases. The account passes to the minor's estate. The custodian remains fiduciary. A)

II and III

Which 2 of the following criteria, taken together, would cause a particular fact to be considered insider information under the Insider Information and Securities Fraud Enforcement Act of 1988? It is personally embarrassing to the CEO of the corporation. It is not known to the general public. It could have a strong effect on the welfare of the corporation. It has only been reported in the industry's technical journals.

II and III

Which of the following are account types that can be opened at a broker-dealer? Credit account Margin account Cash account Debit account

II and III

Your firm must provide an account statement to a customer this month if 5 months have passed since the last activity in his account there are penny stocks in the account activity has occurred in the account this month some of the securities in the account have lost significant market value this month

II and III

WRJ stock is quoted as 21 bid, 21.15 offer. Which of the following is TRUE? A purchase can be made at $21 per share if buying at the market. A purchase can be made at $21.15 per share if buying at the market. The spread is $0.15. A sale can be made at $21.15 per share if selling at the market.

II and III A quote always represents the bid and an ask (offer) price. Investors pay the current ask price when purchasing (21.15) and receive the current bid price when selling (21). The spread is the difference between the bid and the ask price—in this quote, 0.15.

An investor owning 500 shares of stock worth $40 per share receives notice that the stock will undergo a split. When the split is completed, the investor owns 400 shares of stock worth $50 per share. The split must have been a forward split a reverse split an uneven split an even split

II and III This split reduced the number of shares, which makes it a reverse split. This investor now owns 400 shares when previously they had 500 shares, which would be expressed as a 4:5 split. Since neither number in the ratio is 1, it is an uneven split.

As they apply to knowing your customer and making recommendations which of the following are TRUE statements? The term investment strategy applies to recommendations to buy and sell only. The term investment strategy applies to recommendations to buy, hold and sell. Only financial considerations such as income and net worth should be considered when making recommendations. Non-financial considerations such as marital status and age should be considered as well as financial considerations when making recommendations.

II and IV

Considering a customer's nonfinancial considerations is as important as considering the customer's financial concerns. Included in the category of nonfinancial considerations are salary marital status credit card debt number and ages of dependents

II and IV

For each transaction, a customer must be sent or given a written confirmation of the trade at or before the completion of the transaction, the settlement date. Information on that trade confirmation would include the markup (markdown) charged on a principal transaction the commission charged on an agency transaction the number of bonds purchased in a bond trade the CUSIP number (if any)

II and IV

In a proxy contest, which of the following must register with the Securities and Exchange Commission? All shareholders who have been approached by solicitors All persons participating in proxy solicitation The upper management of the corporation who are also shareholders All persons providing shareholders with unsolicited advice

II and IV

The USA PATRIOT Act's required Customer Identification Program is designed chiefly to prevent real estate fraud funding of terrorist activities use of insider information money laundering

II and IV

Under what circumstances could a member firm holding stock in street name vote the shares as it sees fit? If the customer signs and returns a proxy statement but does not indicate how to the shares are to be voted If the customer does not return the signed proxy statement by the 10th day before the shareholders' meeting If the matters to be voted on are of major importance If the matters to be voted on are of minor importance

II and IV

Which of the following activities constitute pegging? Immediate repurchase of a security, purchased some time ago and just sold at a loss Multiple purchases a security during a down market to keep it from falling Two investors trading a security back and forth several times within one day Protecting a short call option from being exercised by placing sell orders during the day in the underlying stock

II and IV

Which of the following are available to participants in a 401(k) plan that are not available to IRA holders? Tax deferral on the earnings Hardship withdrawals The catch-up provision for those who are age 50 and older Loans against the vested balance

II and IV

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? The adjusted cost basis of the shares is $30. The adjusted cost basis of the shares is $32. There is a short-term capital gain on all the shares sold. There is a long-term capital gain on all the shares sold.

II and IV 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 would constitute improper use of a customer's securities or funds? Agreeing to a stock purchase the representative thinks is beyond the client's means Selling a bond at the client's insistence during a period of high interest rates Lending securities for a short sale when the client has agreed to it on the phone Borrowing a client's funds without permission, though it will be repaid the same day

III and IV

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

III and IV 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.

Under what circumstances could a broker-dealer firm share in a financial loss with a customer?

If the loss was due to an error on the part of the firm

A market order to buy must be executed when and at what available price?

Immediately, at the lowest

A registered representative is explaining discretionary and nondiscretionary accounts to a customer. Only one of the following statements is accurate and can be made by the RR. Which is it?

In a nondiscretionary account no order can be entered without your prior approval.

In which of the following accounts would the use of margin always be prohibited?

Individual retirement accounts

A registered representative is appointed the fiduciary for a trust account. Which of the following is TRUE?

Investment decisions must be made in accordance with the prudent investor rule.

Regarding the Regulation T requirement, which of the following is TRUE?

It is currently 50% but can be changed at any time by the FRB.

Under FINRA's Code of Procedure, which of the following is NOT a sanction that could be imposed against a firm or registered person?

Jail sentence for an associated person of the firm A jail sentence is not within the jurisdictional powers of FINRA.

A customer of a securities firm has concluded that selling short would be an effective trading technique to reach his investment goals. Assuming the firm's principal agrees to permit the customer to effect short sales, what type of account would be most suitable for short selling?

Margin account

Subject to market liquidity, which of the following orders is most likely to be executed immediately?

Market order

Which if the following may NOT be purchased on margin but can be used as collateral for a margin loan after being held for 30 days?

Mutual funds

An individual is solicited with a cold call made by a registered representative. He tells the representative he is not interested in this investment or in making any future investments. Which of the following actions is required by the Telephone Consumer Protection Act of 1991?

No calls may be made to the prospect by anyone at the firm.

What dollar limit is placed on damages if a suit is filed based on allegations of manipulative practices?

No dollar limit

A broker-dealer's business continuity plan to be enacted in the event of a significant business disruption requires all of the following EXCEPT

Notification to regulators within 1 hour of the event

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?

OMQ put options

A corporation is issuing a bond with an interest rate below that which is commonly being offered for this type of bond. To improve the bond's marketability without reducing the capital to be obtained, which of the following actions might the corporation take?

Offer a warrant on the stock with each bond

In left unexecuted, a good til cancel (GTC) order will automatically be canceled when?

On the last business day of April and the last business day of October

A partnership account wants to trade on margin. When would this be permitted?

Only if it is not restricted from doing so in the partnership resolution

A married couple have 2 children, both still minors. Which of the following UTMA accounts could be opened?

Parent as custodian for one of the children

A registered representative wants to place advertisements in his daughters youth athletic league quarterly sponsorship booklet. He wants to convey in the weekly bulletin at his church that he specializes in retirement planning and 529 plans. Which of the following statements regarding these advertisements is TRUE?

Pre-approval by a principal of the broker dealer is required.

In an effort to safeguard customer information which regulation specifies securing desktop and laptop computers and encrypting email?

Regulation S-P

The regulation enacted by the SEC to protect the privacy of customer information is known as

Regulation S-P

Which of the following statements about rights and warrants is TRUE?

Rights are short term; warrants are long term.

Which statement describes rights and warrants?

Rights are short term; warrants are long term.

An investor needs to decide whether or not they would like to maintain their percentage of ownership in a company that has decided to increase the number of outstanding shares. Which of the following is the best description of what is taking place?

Rights will be distributed to existing stockholders with an exercise price lower than the current market value

Which of the following retirement plans does not require minimum distributions once the participant has reached age 70½?

Roth IRA

Which of the following regarding income is TRUE?

Salary or bonuses are earned income; interest and dividends are investment income.

Which of the flowing is TRUE regarding short sales?

Selling short involves selling shares not yet owned.

To meet a Regulation T margin call, a customer would have how long?

Settlement plus 2 additional business days The rule requires that the call be met within 2 business days of the settlement date, referred to as S + 2. If regular way settlement was T + 2, adding 2 additional business days to the trade date would be T + 4.

Regarding capital gains, which of the following is TRUE?

Short-term gains are those realized on positions held for 12 months or less.

An investor has some stock held in street name and has just received proxy statements forwarded by the broker-dealer for an upcoming shareholders' meeting. If the investor wishes the shares to be voted as recommended by the issuer's management, which of the following must the investor do?

Sign and return the proxy statements by the 10th day before the meeting

Which of the following must be kept for the life of the firm?

Stock certificate book

Which of the following records must be kept for the life of a broker-dealer firm?

Stock certificate books

By the SEC definition, when is the latest that payment in full for purchased securities may take place in a cash account?

T + 4 business days Regulation T, which applies to everyone who opens a brokerage account, specifies that payment in full for securities must take place no later than 2 business days after regular way settlement. Since regular way settlement is T + 2, it follows that T + 4 is the latest.

Which of the following securities is exempt from the Regulation T margin requirements but still subject to an initial margin requirement as determined by the broker-dealer?

T-notes

A bank employee has noticed that one of its customers has deposited $9,000 in his account every Monday, Wednesday and Friday for the past 4 weeks. Though the action could be legitimate, the customer might be trying to circumvent which of the following?

The Bank Secrecy Act The Bank Secrecy Act requires, among other things, that transactions in currency amounting to more than $10,000 in a single day be reported on a Currency Transaction Report, CTR (Form 112). By keeping deposits under $10,000, the depositor might be engaging in one of the many forms of structuring. That is, structuring deposits in such a way so as to avoid the reporting requirements.

An investor has received insider information from a research scientist that a chemical company has just invented a new polymer that could be very useful in making strong, light girders in building construction. The investor buys several thousand shares of the company's stock through his registered representative. Several months later, when the patent comes out, the investor sells the stock for a substantial capital gain. Which of the following is least likely to be found liable under the Insider Trading Act?

The CEO of the chemical firm

Which of the following publishes and maintains a list of known terrorists and drug traffickers and those controlled by them or acting on their behalf?

The Office of Foreign Assets Control (OFAC)

A customer has been found in violation of freeriding. As a penalty which of the following will occur?

The account will be frozen for 90 days and no new transactions can occur unless there is cash or marginable securities in the account before any other purchase is made.

Which of the following is considered a benefit for broker-dealers offering margin accounts to their customers?

The additional income generated from the payment of margin interest

If a customer's Regulation T margin deposit is late, which of the following is TRUE?

The broker-dealer may apply to its designated examining authority (DEA) for an extension.

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, which will all be deductible if the individual does not exceed the income limit.

Generally before borrowing from or lending to a customer, a registered representative must advise the firm in writing and receive written permission. Which of the following would be an exception to the written notice and approval requirement?

The customer is an immediate family member of the RR.

For securities held in "street name," which of the following is TRUE?

The customer is the beneficial owner.

Which of the following is a nonfinancial investment consideration?

The customer's place of employment and status

he Conduct rules permit specific types of lending arrangements between RR's and their firms and customers. Which arrangement below would not be permitted?

The firm lends the customer's securities without a consent agreement.

Which of the following is acceptable in a broker-dealer firm's relations with its customers?

The firm reimburses the customer for a loss due to a clerical error by the firm.

A customer wants to save some money for his grandson's college education in an IRA account. Which of the following regarding a Coverdell Education Savings Account (ESA) is TRUE?

The funds must be distributed by the time the grandchild attains age 30, unless they are rolled over.

A securities firm that is not a FINRA member wishes to do trades with a FINRA member firm. Which of the following statements is TRUE regarding this situation?

The nonmember firm will receive no concessions, but it will buy at the public offering price and sell at the public bid price.

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?

The order will be automatically canceled.

If a registered representative is sharing in profits and losses with a customer, all of the following statements apply EXCEPT

The representative's expertise must be considered part of the contributions to the account

An investor is long MJS stock. For this investor, which of the following is TRUE?

The risk is that the stock falls in price.

Which of the following statements best describes the term "churning"?

Trading in a customer's account considered excessive, and for which no discernible investment purpose is detected.

Which of the following securities are most likely deemed marginable by either the Federal Reserve Board (FRB) or regulatory bodies such as FINRA and the New York Stock Exchange?

Treasury bonds

Which of the following records must be kept by a broker-dealer firm for 3 years?

Trial balances

A corporate stock is purchased on Friday, April 2, regular way. When will the trade settle?

Tuesday, April 6 For corporate securities, regular way settlement is the trade date (Friday, April 2) plus two business days; therefore, the trade will settle on Tuesday, April 6.

On October 8, an investor discovers that a security purchase that took place on August 5 of the same year was prompted by fraudulent information provided by the broker-dealer on the day of the purchase. How long does the investor have to bring action?

Until October 7 of the following year The statute of limitations on fraudulent practices, under the Securities Exchange Act of 1934, is 3 years from the event itself, or one year from its discovery, whichever comes sooner.

Which type of accounts bills a single fee annually for a group of services that might include asset allocation, portfolio management, and executions?

Wrap account.

An investor purchased an MJS corporation 6% 20-year bond for $950. Two years later, the investor sold the bond for $925. This investor experienced

a $25 capital loss

Your customer opens a position at 45 and then closes it later at 47. This represents

a 2-point gain or loss

If a registered representative allows a customer to unknowingly buy investment company shares in an amount just under a dollar bracket that would qualify for a reduced sales charge, or encourages such a purchase, this is known as

a breakpoint sale violation

Mr. Smith enters a trade in a stock at the same time as Mr. Jones, who has inside information regarding that company. Mr. Smith is considered

a contemporaneous trader

An investor owning 400 shares of stock receives notice that the stock will be split. When the split is complete, the customer owns 1,200 shares of stock. The split must have been

a forward, even split

An investor owning 400 shares of CDS stock receives notice that the stock will be split. When the split is complete, the customer owns 600 shares of stock. The split must have been

a forward, uneven split

SKRAM corporation is appealing directly to the shareholders of IDNIC corporation to acquire shares of IDNIC stock. This appeal is best described as

a hostile takeover with IDNIC the target company

A customer has given permission for securities in an investment account to be used for the purpose of other customers who want to borrow them in order to sell those securities short. This would have entailed the customer signing

a loan consent form

If a shareholder does not wish to attend an annual stockholders' meeting, but still wishes to vote, the shareholder may confer a limited power of attorney on another party to vote the shares. This power is known as

a proxy

Electronic delivery of documents requires all of the following EXCEPT

a recording of the customer verbally agreeing to such receipt

If a stock is at risk of failing to maintain the minimum price requirements to remain listed on the NYSE, the most likely corporate action taken to preserve the listing could be

a reverse split

The price of a certain stock has diminished over the last several months to the point where it may be delisted by the exchange where it trades. An action the issuer could take in this case would be

a reverse split

An investor with no existing positions in MMS stock sells 100 shares. This is

a short bearish position

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

a spin-off.

All of the following unregistered persons may under certain circumstances receive commissions from a FINRA member firm EXCEPT

a suspended broker who recommends the broker's firm for a transaction

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

a 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.

Regarding the potential financial exploitation of seniors, impacted accounts would be those for individuals

age 65 and older, or age 18 and older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.

An investor receives an unsolicited email about a startup company trading for pennies. The email notes that a patent for a new technology is forthcoming and investors need to get in now. The next day the investor sees lots of information on the same stock in an internet chat room. The hype seems to be similar to what was received in the email blast. Being cautious, the investor senses that this could be

an effort to spread market rumors in an attempt to manipulate the stock

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

and III

A fiduciary would be best described as

any person legally appointed and authorized to represent another person, act on that person's behalf, and make whatever decisions are necessary to the prudent management of the account.

The category of correspondence, one of the three identified as being communications with the public, is defined as

any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period

A market maker provides a firm quote to another broker/dealer then refuses to buy or sell at the price quoted. This is a violation where the market maker is said to be

backing away.

Failure to honor a firm quote is called

backing away.

Each of the following are likely to be found on a trade confirmation EXCEPT

bond credit rating

Recommendations regarding investment strategies under the "know your customer" (KYC) rule would NOT apply to recommendations to

buy or sell commodities

All of the following may be purchased on margin EXCEPT

call and put contracts

There are a number of prohibited actions that can be considered market manipulation. One of them that is primarily used by investors who have written call option contracts is

capping Capping is the act of entering sell orders in a stock for the purpose of keeping the stock from rising. This would be an attempt to keep calls one is short from being in the money and exercised.

If a customer wishes to open a cash account in his name only and allow a third party to make trading decisions, but not withdraw cash and securities, he must instruct his broker-dealer to open a

cash account with limited power of attorney

Margin calls can be met with deposits of

cash or fully paid for marginable securities

In accordance with the terms of the Telephone Consumer Protection Act, all of the following statements are true EXCEPT:

cold calls may be made between 8:00 am and 9:00 pm in the time zone from which the representative is making the call.

A hypothecation agreement would be best described as a

contract allowing securities to be pledged for the loan

All of the following are exempt from the Federal Reserve Board (FRB) Regulation T margin requirements EXCEPT

corporate stocks

Shares to sell short have been located in order to be borrowed. Once sold short, these shares will be known as

covered

A company's board of directors (BOD) approves a dividend payment. When this occurs it is recognized as the

declaration date

All of the following are stages of money laundering EXCEPT

diversification

In order for a registered representative of a member firm to receive any form of compensation, such as commissions, after terminating employment, all of the following statements are correct EXCEPT

earnings from referred business from existing clients would be eligible for payment

A closing transaction can be

either a buy or a sell

An opening transaction can be

either a buy or a sell An opening transaction can be either a buy or a sell. Which one will determine the investor's market attitude—bullish when buying to open a position and bearish when selling to open a position (selling short).

A violation known as "churning" refers to

excessive transactions done solely for the purpose of generating commissions.

Suspicious activity reports (SARs) are

filed to the Financial Crimes Enforcement Network (FinCEN) as required by the USA PATRIOT Act

A customer has purchased a stock and then sold it before paying for the purchase. This is generally known as

freeriding

Several registered representatives have agreed to purchase a certain security for their own accounts, then tout the security to their best customers. They hope that a number of large orders will be entered, driving up the price of the security, which they can then sell from their own accounts for a capital gain. This illegal practice is a form of

front running

Regarding the taxation of gains on securities, all of the following are true EXCEPT

gains on securities for a position held at least 12 months are not taxable

All of the following are possible actions of an investor who has received stock rights EXCEPT

hold the rights for a possible long-term capital gain

For the risk disclosures found in the options disclosure document (ODD), all of the following would be accurate disclosures EXCEPT

if a maintenance call is not met, the customer must direct which securities to sell

Should a member firm or an associated person be found in violation of FINRA's Conduct Rules, a number of sanctions may be imposed. However, under the Code of Procedure, FINRA may NOT

impose a prison sentence on the violator

An associated person of a FINRA member firm has been found guilty of forging a customer's signature on a document relating to a securities transaction. Under the Code of Procedure, FINRA could impose any of the following sanctions EXCEPT

imprisonment for a specified period

Under the Telephone Consumer Protection Act of 1991 (TCPA), administered by the Federal Communications Commission (FCC), a telephone solicitation is defined as a telephone call

initiated for the purpose of encouraging the purchase of, or investment in property, goods, or services

Income from an investment in debt securities is known as

interest

The Securities and Exchange Commission (SEC) requires that notice of corporate actions be given for all of the following EXCEPT

interest payments on the issuer's debt instruments

An investor purchased and then sold a security 8 months later for a gain. This gain

is considered to be a short-term gain, and it will be taxed at the same rate as the taxpayer's other ordinary income

If a margin deposit is late, an extension request made by the broker-dealer

is not required but can be made, and may or may not be granted

Selling shares not yet borrowed or located to be borrowed is

known as a naked short sale and is prohibited

A broker-dealer is confronted with margin deposit due but not yet received. The BD can choose to take no action, neither selling out the securities nor requesting an extension, if the amount due is

less than $1,000 The required deposit will be 50% of the securities' value. If the deposit is late, the broker-dealer can either choose to sell out the securities or request an extension. However, for late deposits of less than $1,000, the broker-dealer can choose to take no action.

A broker-dealer firm opening a corporate account must establish all of the following EXCEPT

location of any account records the corporation will keep when received

An investor is long 300 shares of MAS at 45. The stock has just undergone a 3:1 split. The investor's new position is

long 900 shares at 15 The split is a "forward" split, which means the number of shares increases, while the price decreases. At 3:1, the number of shares goes up by a factor of 3 and the price goes down by a factor of one-third (i.e., to one-third of its previous value). The rule is that the total value of the position must remain unchanged before and after the adjustment. In this case, the original position's value was 300 shares × $45, or $13,500. The new position is valued at 900 × $15, which is also $13,500.

Ownership of a security indicates that one is

long the position and bullish

For margin transactions taking place through introducing broker-dealers, those who do not clear their own transactions, extension requests are

made by the clearing firm

A registered representative is opening a new account for a senior citizen age 68. The RR must

make a reasonable effort to obtain the name and contact information for a trusted contact person

A market maker owning 70,000 shares of HCHS stock noted that it is down .25 on the day so far. Near the very end of the trading day the market maker enters an order to buy 100 shares at the market. This is likely an attempt to

mark the close

Which of the following is not a category of communications with the public designated by FINRA?

market letters

The income level of a donor

may affect contributions into a Coverdell ES

All of the following are true regarding customer account statements EXCEPT

monthly statements need not be sent if the only account activity is the receipt of interest or dividends

Each of the following activities would be deemed a violation of FINRA rules EXCEPT

notice filing

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

All of the following are valid terms describing stock splits EXCEPT

odd split

Under the USA PATRIOT Act, financial firms must create and maintain records of wire transfers only

of $3,000 or more

When securities are bought and sold, ownership changes hands between the buyer and the seller

on the settlement date of the transaction

Corporate accounts may trade on margin

only if it is not listed as being restricted from doing so in the corporate charter

How an account is registered determines

ownership and control of the investments in the account

Those who look to hide money from government agencies and law enforcement to avoid the payment of taxes or to fund criminal enterprises often look to launder money in the following order:

placement, layering, integration

Broker/dealers who reserve the right to disclose nonpublic private information about their customers to unaffiliated third parties must

provide notice to customers at the time of the account opening and provide reasonable means for customers to opt out of such disclosures

Each of the following activities would be deemed by market regulators to be manipulative behavior EXCEPT

proxy solicitation

A brokerage firm has accumulated a large holding in a little known company by purchasing several hundred thousand shares of the company's stock. The firm instructs its RRs to begin touting the stock to every one of its customers and to make cold calls to new potential customers as well. This is most likely a scheme known as

pump and dump

An investor has just received stock rights in the mail allowing the purchase of 250 shares of a stock offering at a discount. With these rights, the investor may take any of the following actions EXCEPT

purchase 125 shares at double the discount

Shareholders who own the stock on a certain date receive a dividend when one has been declared. That date is known as the

record date

When a client of a broker-dealer purchases stock on margin, in order to finance the loan, the broker-dealer

rehypothecates the stock to a bank

When a broker-dealer pledges customer securities to a bank as collateral for a margin loan, the pledge is known as

rehypothecation By signing the margin agreement, a customer hypothecates (pledges) the securities to the BD who then rehypothecates (pledges) them to the bank as collateral for the margin loan.

All of the following statements about securities purchases are true EXCEPT

securities may not be purchased with borrowed money

On behalf of a customer, a broker-dealer requested an extension for payment that was not granted. The broker-dealer must

sell out the securities purchased and freeze the account for 90 days

Under the Uniform Transfers to Minors Act (UTMA) a custodian has control over the account and can do each of the following EXCEPT

sell short and write uncovered call options

Shares must be borrowed in order to

sell short to open a position

When investors open a position by going long the security, they can close the position by

selling the security

All of the following are bullish positions EXCEPT

short stock Bullish, anticipating that the security's price will rise, is associated with owning the security—having a long position. Therefore, owning securities that can be converted into the stock, such as being long calls, rights, or warrants, would also be considered bullish positions.

Opening a margin account for a client requires the client to do all of the following EXCEPT

signing the loan consent

A registered representative suggests a trade to a customer which the customer agrees is suitable given their investment objectives. The order is entered. This transaction is

solicited and the order ticket must be marked solicited

All of the following are taxable to the investor EXCEPT

stock dividends

For tax purposes, investment income is

taxed at either ordinary income tax or capital gains tax rates

A company offers to repurchase outstanding debt securities it has issued directly from its bondholders for cash in what would commonly be known as a

tender-offer

The president of a pharmaceutical company sells his stock in the company after learning that the Food and Drug Administration (FDA) is going to deny sales of a new drug that it was reviewing for the company. The registered representative that executes the order and knows of the denial informs a key client and recommends the client sell their stock in the pharmaceutical company. According to the Insider Trading and the Securities Fraud Enforcement Act of 1988, all of the following are guilty of insider trading EXCEPT

the FDA

Regulation T, the initial margin requirement, is set by

the Federal Reserve Board (FRB)

A party wishing to solicit proxy authority to vote a particular stockholder's shares must register with

the Securities and Exchange Commission

All of the following would require that updated account information be sent to the customer for confirmation within 30 days EXCEPT

the account records system has been changed to a new format Updated account information must be sent to the customer with 30 days for confirmation upon the opening of the account, at least once every 36 months thereafter, and in the event of the customer notifying the firm of changes in any information shown or listed on the account form.

When making unsolicited cold calls to prospects, a registered representative must disclose all of the following to the individual called EXCEPT

the address of any securities issuer mentioned during the call

A customer of a broker-dealer purchases 100 shares of XYZ stock at $50 per share on Monday. Later that week, a confirmation arrives electronically indicating that the total cost of the transaction was $5,000. The client is puzzled that there is no additional charge for commission. The most likely reason for that is

the broker-dealer acted as a principal in the trade Broker-dealers must always indicate their capacity on the confirmation. If the client had looked, there would have been a statement something to the effect of "we acted as principals in this trade". When the firm does that, there is no commission; there is a markup (in the case of a buy) or a markdown (in the case of a sell). In this instance, the actual price of the stock would have been lower than $50 per share and the BD marked it up to $50. (e.g., price of $49.50 with a .50 markup = $50) When the firm is acting as an agent however, commissions are always disclosed.

Meeting the location requirements and the borrowing of securities when a customer wants to sell short is done by

the broker-dealer on behalf of the short-selling customer

With a discretionary account

the customer may still enter orders

A broker-dealer firm has just rehypothecated a thousand shares of MMS stock. This means

the customer pledged the stock to the firm, which has now pledged it to a bank

The term investment strategy applies to all of the following EXCEPT

the customer's position in real estate

All of the following are true regarding breakpoints for mutual funds EXCEPT

the first breakpoint investors can achieve is mandated by industry rule to be at the $10,000 investment threshold

A customer wanting to open a margin account is told that the securities will be held in street name. This means that the securities will be registered in

the name of the broker-dealer

All member firm communications are held to certain standards by FINRA. All of the following characterize those standards EXCEPT

the nature of the audience (age, investment experience) need not be a consideration at an open seminar

A registered representative enters a discretionary order for her clients account. All of the following are required EXCEPT

the order must be approved by a principal prior to entry

Hypothecation is

the pledging of customer securities as collateral for margin loans

FINRA and the other SROs place extreme importance on knowing your customer. That involves knowing both financial and non- financial considerations. All of the following are non-financial considerations EXCEPT

the salary paid to the client by her employer

A shareholder had arranged to vote by proxy at the corporation's annual shareholders' meeting, but later decided to vote the shares personally. All of the following statements regarding this situation are true EXCEPT

the shareholders must accept the proxy's decision

All of the following would be included in a notice of corporate action regarding a stock dividend EXCEPT

the stock's issue date

All of the following are true regarding market indexes EXCEPT

they track single stocks rather than hypothetical portfolios

Discretion given to a registered representative to make transactions applies to all of the following EXCEPT

timing and price only

FINRA requires that member firms provide at least how many names as emergency contacts as a part of their business continuity plan?

two

Each of the following investments and practices are deemed ineligible for an IRA or any other retirement plan EXCEPT

variable annuities

Holding customer mail is consistent with your broker-dealer's in-house rules. Considering this, if requested to do so, the BD must

verify at reasonable intervals that the customer's instructions still apply

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

warrant

Your firm must provide a privacy notice describing its privacy policies to customers

whenever a new account is opened and annually thereafter

Your customer has purchased $10,000 in U. S. Treasury bonds. These securities

will have evidence of ownership recorded in book entry form

Three brothers open a joint account instructing you that if they die, they want the cash and securities in the account to go to the remaining parties to the account. The account should be opened:

with rights of survivorship.

A customer receives a voting proxy from a broker-dealer for shares owned by the customer and held in street name. The customer returns the proxy but later decides to attend and vote at the shareholder meeting in person. The voting proxy

would be revoked, and only the vote at the meeting would count