SIE

A corporation's shareholders must vote for:

stock split

A corporation has a 9% cumulative preferred stock issue outstanding. The company paid a $7 dividend two years ago and $8 last year. If the company wants to pay a common stock dividend in the current year, the cumulative preferred stockholders must first receive a dividend of:

$12

If a broker-dealer declares bankruptcy, which of the following positions is fully covered by SIPC?

$300,000 in stock, $100,000 in cash

the computation of dollar prices and accrued interest on municipal bonds is normally on what calendar basis?

30/360

The primary purpose of the North American Securities Administrators Association is to:

Create rules, laws, and exam requirements for states

Which of the following statements about Form 10-K is TRUE?

A Form 10-K must be filed within 60 days of a company's fiscal year-end. A Form 10-Q (not a Form 10-K) is filed within 40 days of the end of a firm's fiscal quarter. Form 10-K is not required to be sent to shareholders; instead, companies are required to send their annual report to shareholders, which is less detailed than Form 10-K. Proxies contain information about corporate elections and must be sent to owners before a vote is made.

A breakpoint sale is BEST defined as:

A breakpoint sale is the sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity purchases. This practice is done to assess higher sales charges on transactions and is a violation of the Conduct Rules.

The 5% Markup Policy applies when a member firm:

A broker is an agent who acts for someone else and receives a commission when a trade is executed. A dealer is a principal who acts for his own account and adds a markup on a purchase. In both cases, they must conform to the 5% Markup Policy, which is a guide broker-dealers must follow. The 5% Markup Policy covers all transactions except municipal bonds and those requiring a prospectus (i.e., the sale of a new issue, mutual fund, and registered secondary). If a member was acting as an underwriter, the firm would be involved in a new issue and, if acting as a sponsor would be involved in the sale of a mutual fund. Since these transactions require a prospectus, they would not be covered by the 5% Markup Policy.

A brokerage firm buys stock for its own account at $30 per share. The firm is required to take which of the following actions?

A broker-dealer is in violation of FINRA rules if it accepts and holds a customer order (either market or limit) for an equity security and executes a trade involving that security for its own account at the same price and on the same side of the market (buy or sell). If the firm buys stock at $30 per share for its own account, it has an obligation (within 60 seconds) to fill any order that it's currently holding from a customer to buy at $30 or better. The firm is permitted to execute a customer's order below $30, but it's not required to do so.

A broker-dealer is permitted to hold a customer's mail without instructions concerning a valid reason:

A broker-dealer may hold mail for a customer who will not be receiving mail at his usual address provided the firm receives written instructions from the customer that include the time-period during which the mail is to be held. If the period exceeds three consecutive months, the customer's instructions must also include a valid reason for the request.

A confirmation must be sent to a customer no later than:

A broker-dealer must send a confirmation to a customer at or before the completion of the transaction, which is usually the settlement date.

A client purchased 1,500 shares of stock from a broker-dealer, a registered market maker in this stock. The broker-dealer acted in a(n):

A broker-dealer that is always willing to buy and/or sell shares of stock is considered a market maker. A market maker will normally act in a principal capacity and charge the client a markup or markdown. When acting in an agency capacity, the broker-dealer will normally charge the client a commission.

Jamie has inherited 500 shares of an investment company. She calls her broker to redeem the shares and is informed that the kind of investment company she owns makes no provision for future purchases or redemptions. What kind of investment company does she own?

A closed-end fund makes no provision for future purchases or redemptions from the issuing fund. Shares are bought and sold in the open market in the same manner as the common stock of corporations. All of the other types of funds listed do provide for future purchases to and redemptions from the fund.

A reverse repurchase agreement is sometimes referred to as:

A reverse repurchase agreement is also referred to as a matched sale and is created when the Federal Open Market Committee (FOMC) sells securities to dealers with the intention of buying the securities back at a future date. This activity has the short-term effect of absorbing (removing) funds from the money supply. Federal funds or fed funds are the monies that are borrowed overnight on a bank-to-bank basis.

Which of the following statements is TRUE regarding preemptive rights?

A corporation's existing common stockholders are entitled to preemptive rights, not its preferred stockholders.

Which of the following statements is NOT TRUE about a fidelity bond?

A fidelity bond does not protect customers in the event of broker-dealer bankruptcy; that's the role of SIPC. Instead, a fidelity bond is insurance that protects a broker-dealer in case of fraud such as forgery or counterfeit currency. The bond covers securities that are held at the brokerage firm as well as those in transit. FINRA must be notified if the bond is cancelled or substantially modified.

Which of the following sources of revenue is NOT used to pay the debt service on general obligation bonds?

A general obligation (GO) bond is backed by the full faith and credit of the municipality. Items that may be used to pay the debt service on GO bonds include fines, sales taxes, property taxes, income taxes, and licensing fees. Items such as tolls, concessions, and lease rental payments would be used to back a revenue bond.

Which of the following limited partnerships is the least likely to generate income?

A limited partnership that invests in raw land is not designed to generate income. Instead, raw land investments are suitable for investors who are seeking appreciation in the value of the property. Partnerships that invest in existing properties and government-assisted housing properties are types of real estate programs that are more likely to generate income.

Which of the following choices best describes the price that a mutual fund investor receives when she redeems her shares?

A mutual fund investor who redeems her fund shares will receive the next computed bid price on the day that the shares are redeemed.

The purchase price of a no-load fund is determined by the:

A no-load fund has no sales charge and the purchase price is equal to the fund's net asset value.

The purchase price of a no-load fund is determined by:

A no-load fund has no sales charge. The purchase price is determined by the net asset value as computed at the end of each business day.

A not-held order:

A not-held order is not considered a discretionary order and can be executed by a registered representative on the day it's received. Since a not-held order specifies the asset, the action, and the amount of the security to be purchased or sold, written approval is not required. Instead, a not-held order can be accepted with simply the client's verbal authorization.

Which of the following is NOT a pass-through entity?

A pass-through entity is a business that avoids double taxation. Instead, the income passes or flows through to the owners of the business. S Corporations, LLCs and REITs are considered pass-through entities. Income generated by C Corporations is taxed twice (once at the corporate level and again at the investor level); therefore, they are not pass through entities.

A primary offering of securities is being made for a company listed on the NYSE. Prospectuses must be delivered:

A primary offering of securities for a company that is already exchange-listed requires that prospectuses be delivered only on purchases, at the public offering price (POP). There is no aftermarket delivery requirement.

Which of the following statements is TRUE concerning the opening of a cash account?

A principal of the firm must sign the new account form. Although many firms have established internal rules about obtaining a client's signature to open a cash account, it's not a FINRA requirement.

The OTC Bulletin Board (OTCBB) is BEST defined as:

A quotation system for securities that are not listed on either the NYSE or Nasdaq

What's required if a registered representative intends to sell limited partnership interest outside of her employment with a broker-dealer?

A registered representative (RR) is not allowed to sell securities outside of her employment unless she provides written notification to her employing broker-dealer. Additionally, if an RR is being compensated (e.g., receiving commission), she also need to obtain her employer's written consent. If an RR fails to notify her firm of outside securities trades, she's guilty of selling away. Although the question doesn't specify whether the RR is receiving compensation, the best answer is that she must receive her employer's written consent.

Which of the following items is NOT found on a sell order ticket?

A sell order ticket doesn't indicate the investor's original purchase price. All order tickets must contain the customer's account number, whether discretion was exercised, whether the trade was solicited by the registered representative or unsolicited, and it must also indicate the client is selling long (shares that are owned) or selling short (shares that are borrowed). If the client is long the stock, the location of the securities must be indicated (long in the customer's account or held by the customer).

If a seller knows she requires additional time to settle due to legal issues with the stock certificate, which of the following is TRUE?

A seller's option may be requested and implemented if the buyer agrees. This accommodation must be requested prior to the trade execution.

An individual purchased 100 shares of stock at $35 per share. The stock is now trading at $44 per share and the issuer decides to split the stock 2-for-1. After the split, the individual's cost basis per share will be:

A stock split or dividend results in an adjustment in the number of outstanding shares. As a result, the current market value is adjusted to reflect the increase or decrease in shares. The same change would be made to the cost basis of all positions held by investors. A 2-for-1 stock split results in twice as many shares, with the values being adjusted to 1/2 of what they were before the split. The individual's stock would have an adjusted cost basis of $17.50 = $35 x 1/2.

The person who distributes interest in a DPP is referred to as the:

A syndicator (underwriter) is the person that distributes interests in a direct participation program (DPP).

Which of the following statements is TRUE regarding trustee-to-trustee IRA transfers?

A transfer of funds from one IRA trustee to another is not considered to be a distribution or a rollover. There is neither a limit to the number of transfers, nor are there any taxes or penalties. This differs from a distribution from a retirement plan. The distribution must be rolled over into another qualified plan, within 60 days of receiving the money, in order to avoid taxes and penalties. Rollovers may only be done once each year.

Which investment company does NOT charge a management fee?

A unit investment trust does not charge a management fee. The portfolio is fixed and there is no investment adviser since unit investment trusts are supervised, not managed.

Which of the following features applies to a variable annuity, but not to a mutual fund?

A variable annuity may have a death benefit which provides a payment if the annuitant dies during the accumulation period. The amount of the death benefit is the greater of the value of the annuity on the day of the annuitant's death or the total amount contributed.

According to current regulations, if a client redeems his mutual fund shares, the fund company must send the payment within:

Federal regulations require that funds send payment for the redemption of mutual fund shares within seven days.

A fee-based account is most suitable for customers who:

Fee-based accounts charge an annual fee for investment advice regardless of whether any transactions occur. These accounts are most suitable for customers who engage in frequent trading and want to avoid being charged commissions on each trade separately.

The payment date for securities purchased in a cash or margin account as stated by Regulation T is:

According to current FRB requirements, securities purchased in a cash or margin account must be paid for within two business days of the settlement date of the transaction.

Which of the following investments can be purchased on margin?

According to the FRB, shares that are listed on a national exchange (e.g., NYSE or Nasdaq) are marginable. Closed-end fund shares are listed on an exchange, traded in the secondary market, and are marginable. Remember, OTC equities are not listed on an exchange; instead, they trade through the OTCBB and OTC Pink Marketplace. (17536)

Which of the following is considered an investment company under the Investment Company Act of 1940?

According to the Investment Company Act of 1940, the three types of investment companies are 1) Face Amount Certificate Companies, 2) Unit Investment Trusts, and 3) Management Companies. There are two types of management companies—closed-end and open-end (i.e., mutual funds). REITs, ADRs, and VRDOs are all types of securities, not investment companies.

All of the following statements are TRUE concerning the underwriting of a new issue, EXCEPT:

All of the items listed are TRUE concerning the underwriting of a new issue except that the preliminary prospectus (red herring) will contain all the relevant information including the final price of the issue. The preliminary prospectus does not include the final price.

Which of the following statements is NOT TRUE?

All of the statements are true except that SEC record retention rules generally require a firm to maintain records in an easily accessible location for the first three years. Instead, a firm is required to maintain records in an easily accessible location for the first two years.

Compliance meetings must be attended by registered representatives no less frequently than:

All registered representatives are required to attend or participate in a compliance meeting no less frequently than annually. (17582)

Which of the following always trade at a discount?

Although all debt securities may trade at a discount at some point, Treasury bills are issued and trade at discounts since they don't have interest coupons. (17519)

Who is responsible for creating the official statement for a municipal bond offering?

Although assistance may be provided by others, the issuer is ultimately responsible for creating the official statement. If created, the underwriting syndicate is responsible for providing the official statement to investors who purchase the new offering. (17552)

A client wants to invest $250 per month and have broad exposure to the U.S. equity market. Which of the following recommendations is the MOST suitable for this client?

Although each of these investments are suitable for a client who's seeking broad exposure to the U.S. equity market, the mutual fund is the most cost-effective method. The closed-end fund shares are purchased on an exchange and the client pays the current market price plus a commission. Exchange-traded funds (ETFs) also trade on an exchange. While most broker-dealers are not charging a commission on ETF trades, some still do charge a commission. Index mutual funds don't assess front-end or back-end sales charges (i.e., they're no-load funds).

If an investor wants to build a bond portfolio that maintains a stable value, she should purchase bonds with:

Although short-term bonds are influenced by changing interest rates, the effect is relatively minor due to their short-term nature. For that reason, investors who want stability in their bond portfolios should invest in short-term debt. (17513)

An investor has annuitized a variable annuity and has realized that the payments he's receiving are falling below market return. If the investor wants to reallocate a portion of the investment portfolio within the separate account, which of the following statements is TRUE regarding this situation?

Although some limitations may apply, the investor is permitted to reallocate their investments within the separate account. Keep in mind, both the decision to annuitize and the chosen settlement option are final.

Which of the following organizations enforces municipal securities regulations for broker-dealers?

Although the MSRB creates rules governing municipal securities broker-dealers, its rules are enforced by other regulatory bodies. The appropriate regulatory agencies are the: The SEC or FINRA for broker-dealers The comptroller of the currency for federal banks The FRB for state banks that are members of the FRB The FDIC for member banks of the FDIC

A company based in Europe with offices located in New Jersey would like to have its stock traded on the NYSE. This would most likely be accomplished through the issuance of:

American Depositary Receipts

Foreign stocks trade in U.S. markets as:

American Depositary Receipts (ADRs)

In judging the fairness of a firm's markup, industry rules would NOT consider:

Among the relevant factors that a member may consider in determining a fair markup or commission are the following. The type of security involved (Common stock would normally demand a higher markup than debt.) The availability of the security in the market (actively or inactively traded) The price of the security The amount of money involved in the transaction Disclosure (made prior to the execution of the transaction may be relevant) The pattern of markups The nature of the member firm's business (What type of services does the member provide to the customer?) The type of client is not specifically mentioned in the rules as determining whether the markup or commission is fair and reasonable.

For an Industrial Development Bond (IDB), the primary source that backs the bond is:

An IDB is issued by a municipality, but secured by a lease agreement with a corporation. (17523)

A husband and wife have combined earnings of greater than $300,000 in each of the last two years. If it's reasonably expected that this level of income will remain the same, the couple is considered:

An accredited investor

An accumulation unit in a variable annuity contract is:

An accumulation unit in a variable annuity contract is an accounting measure used to determine the contract owner's interest in the separate account. The separate account is the portfolio in which the customer's contributions are invested. Some separate accounts consist of several subaccounts, with differing objectives and portfolios.

For an unregistered private placement of a real estate partnership, what document provides investors with the required disclosures?

An offering memorandum is considered the disclosure document for investors in an unregistered limited partnership offering. In fact, an offering memorandum is similar to a prospectus for registered offerings. The Certificate of Limited Partnership lists the general and limited partners and is filed with the state in order to establish the partnership. The partnership agreement is signed by all partners and it specifies their rights and responsibilities. (17550)

Prior felony convictions must be disclosed on Form U4 if the conviction occurred:

Any person filing Form U4 is required to disclose all felony convictions regardless of when they occurred. The person seeking registration will be statutorily disqualified if the conviction was within the last 10 years. The person may be registered if she requests and receives permission at a special hearing.

Although all of the following are reportable events on Form U4, which one results in statutory disqualification?

Applicants who have been convicted of a felony or a securities-related misdemeanor are subject to a statutory disqualification. Being accused of or charged with a statutory disqualification event is reportable, but it doesn't result in disqualification unless convicted. Filing for personal bankruptcy is not illegal, but should be reported on Form U4.

A registered person who is employed by a broker-dealer has committed an offense that makes the person subject to statutory disqualification. The firm is MOST likely to take which of the following actions?

As a general rule, any person who is subject to statutory disqualification may not be associated with a FINRA member firm in any capacity, even in a non-registered capacity. The firm is also required to report the event to FINRA. The member firm may request an eligibility proceeding to determine whether the person can remain in a registered capacity; however, there is no guarantee that the request will be granted. If the employee is terminated, the firm will file a Form U5.

Which of the following is most likely to occur if a company's assets are increasing?

Assets, liabilities, and shareholders' equity are the parts of a company's balance sheet. In fact, the balance sheet equation is Assets = Liabilities + Shareholders' Equity. If assets increases, then either liabilities or shareholders' equity must also increase to keep the balance sheet in balance. Earnings per share and net income are a part of the income statement and will not be directly impacted by a change in assets.

Which of the following statements BEST describes a banker's acceptance (BA)?

Bankers' acceptances (BAs) help facilitate foreign trade. ADRs permit the trading of foreign stocks in the U.S.

If a bond has a basis of 6.35 and a coupon rate of 6.15%, the bond is selling at:

Bonds may be quoted based on their yield-to-maturity, which in this example is 6.35 (basis and YTM are synonymous). Since the bonds has a nominal yield (coupon rate) of 6.15%, which is lower than the 6.35% YTM, the bond is selling at a price that is below the par value of $1,000 (i.e., a discount). On the other hand, if the yield-to-maturity was lower than the nominal yield, the bond would be selling at a premium.

The investments that tend to perform the WORST during periods of inflation are:

Bonds tend to perform the worst during periods of inflation since rising interest rates will result in falling bond prices and a decrease in the purchasing power of the interest payments. Mutual funds, ETFs, and gold and silver commodities tend to be good investments for a person seeking to offset inflation.

What feature is shared by both Roth IRA and Roth 401(k) plans?

Both Roth IRAs and Roth 401(k) plans allow investors to save for retirement, but contribution amounts are limited and are made after-tax (i.e., non-deductible). If withdrawals meet certain qualifications, they may be made tax-free. In other words, capital gains, dividends, and interest income are not taxed at the federal level, provided the withdrawals are qualified. If an investor makes non-qualified withdrawals (e.g., before he turns age 59 1/2), he's subject to taxes and, in some cases, an IRS penalty.

Broker-dealers are required to send balance sheets to customers every:

Broker-dealers are required to send balance sheets to customers every six months and upon request.

In what capacity is a firm acting if it charges a markup or markdown on a bond transaction?

Broker-dealers can act in either an agency or principal basis. When acting on a principal basis, the firm charges a markup or markdown. Broker-dealers that act as a principal buy or sell securities for or from their own accounts. When acting on an agency basis, the firm acts on behalf of its buying or selling customers by finding the other side of the trade. Broker-dealers that act on an agency basis can charge a commission for the trade execution.

A market maker is quoting a stock as follows: Bid 23.50, Offer 23.70. This means that the market maker will:

Buy shares at 23.50 and sell shares at 23.70

If a customer wishes to open an account to trade options, the account must be approved:

If a customer wishes to open an account to trade options, the account must be approved by an ROP prior to the time an initial order is accepted.

Which of the following investments has the MOST capital risk?

Capital risk is the risk of losing an entire investment and is higher for common stock, especially stock in a technology company.

An investor buys T-bonds on Friday, January 16 for cash settlement. This transaction will settle on:

Cash settlement for all securities takes place on the trade date.

The FDIC provides coverage for:

Certificates of Deposit

An individual who is considering the purchase of closed-end fund shares would pay:

Closed-end fund shares trade in the secondary market and their prices are determined by supply and demand for the shares. Although the shares have an NAV, it's only for comparative purposes. (17537)

All of the following statements are TRUE about closed-end investment companies, EXCEPT that the:

Closed-end investment companies are bought and sold in the same manner as common stocks. If a customer wants to sell a closed-end fund at the market, he would receive the current bid price (the market quote, not the net asset value). If a customer wants to buy a closed-end investment company at the market, he would buy it at the current offering (asked) price. The market price of the shares can be at, above, or below the net asset value. Closed-end investment companies have only one issue of shares. Once sold, no new shares are issued. The amount of outstanding shares remains constant. The shares may be listed on an exchange or may trade in the OTC market.

Which shares of preferred stock may increase the most if the value of the company's common stock appreciates?

Convertible preferred stock

Which of the following securities trades in fractional units of 1/32 of a point?

Corporate and municipal bonds trade in increments of 1/8 of a point, while Treasury notes and Treasury bonds trade in increments of 1/32 of a point. A convertible bond is a type of corporate bond.

Which of the following requires a limited partner to deposit additional funds?

If a limited partner is subject to an assessment, it is a request by the partnership for additional funds. Failure to provide the funds may result in the limited partner's losing her investment interest in the program.

Which of the following statements is TRUE concerning registered nontraded real estate investment trusts (REITs)?

They are required to distribute the same percentage of taxable income as exchange-traded REITs

Which of the following may NOT occur during the waiting period of the securities registration process?

During the waiting period (cooling-off-period), RRs may send customers the preliminary prospectus (red herring), discuss the issue with them, and accept (nonbinding) indications of interest. However, no part of the purchase price can be accepted until on or after the effective date.

Which of the following statements is TRUE concerning periodic payment variable annuities?

During the pay-in period of a variable annuity, the client is continually purchasing accumulation units. These accumulation units are then exchanged for a fixed number of annuity units when the payout period begins. The monthly payout is determined actuarially and is based on the performance of the separate account.

Which of the following disclosure documents is used for a private placement?

Disclosure documents are often required when selling newly issued stocks and bonds (i.e., in the primary market). If securities are being sold privately (e.g., through a Reg. D offering), broker-dealers may provide investors with an offering memorandum or private placement memorandum. Broker-dealers must provide investors with a prospectus when selling corporate stocks and/or bonds in a public offering. For a municipal bond issuance, the offering's disclosure document is referred to as the official statement.

Discretionary accounts require:

Discretionary accounts require written authorization from the customer. In addition, each discretionary order must be approved on the day the order is entered by a manager, partner, or authorized person.

During periods of easy money when interest rates are declining, yield curves tend to:

During periods of easy money when interest rates are declining, yields on shorter maturities will be less than yields on longer maturities. Yield curves tend to slope upward from the shorter to the longer maturities.

"Blue Sky Laws" were established by:

Uniform Securities Act

Which of the following statements are TRUE regarding a margin account?

Extensions of time to meet maintenance (margin calls) are not permitted. Customers can lose more than they deposited, they cannot choose which securities will be sold to meet margin calls, and a firm is not required to contact the customer when it sells securities from the account.

An investment company that is purchased in installments and that matures at a fixed-dollar amount is called a:

Face-amount certificate companies issue certificates of the installment type. The investor makes periodic payments and receives a fixed sum at the end of the period. Lump-sum payment certificates are also available.

The major provisions of ERISA provide protection for:

ERISA gave the government jurisdiction over private pension plans and protects employees from improper investments by their employers. ERISA does not protect investors in mutual funds, the benefits in defined contribution plans, or the loss of funds due to the bankruptcy of a broker-dealer.

A broker-dealer's anti-money laundering (AML) compliance program must be approved:

Each member's AML program must be approved in writing by a member of senior management.

Which of the following statements is TRUE concerning electronic communication networks (ECNs)?

Electronic communication networks (ECNs) are securities trading systems that are designed to anonymously match buyers with sellers. These systems can be used by both institutional and retail investors. One of the benefits of their use is immediate automatic execution if a matching buy or sell order can be found on the system. ECNs do not allow investors to trade directly with one another; however, they do allow subscribers (e.g., broker-dealers) to use these systems to execute orders that they receive from their clients.

Which of the following statements is TRUE regarding contributions to a 401(k) plan?

Employee participants should be aware of the risk of investing too much in their employer's stock. If the stock performs below expectations, a significant decline could be exhibited in the amount available for retirement. Contributions are made in pre-tax dollars and there is a limit to the amount that can be contributed annually. The employee determines the allocation of contributions from a list of investment options selected by the employer. The employer does not determine the investments into which the contributions are allocated.

A registered person of a broker-dealer has an existing account at another firm and has followed the proper procedures to open the account. The current responsibility of the registered person is to:

Employees of broker-dealers who intend to open outside brokerage accounts for the purpose of executing securities transactions are required to obtain the prior written consent of their firm. Once the employees obtain the written consent of their employers, they must ensure that their firms' guidelines are being followed when trading securities.

Which of the following risks does not apply to both foreign and domestic debt instruments?

Exchange (rate) risk could result in investors suffering losses due to a foreign currency losing value against the U.S. dollar. However, an investor who buys U.S. dollar denominated (domestic) debt is not subject to exchange risk. Interest rate risk is experienced when interest rates rise and prices of bonds fall, which impacts both foreign and domestic bonds. Repayment risk is an issue that impacts both foreign and domestic debt, since both foreign and U.S.-based issuers could default. Political risk could also impact both foreign and U.S. investments.

Which of the following securities are based on the credit rating of the issuer?

Exchange-traded notes (ETNs) are a type of unsecured debt security. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates, it can impact the value of the ETN negatively, regardless of how its underlying index performs. The credit rating of the securities included in a mutual fund, closed-end bond fund company, or ETF has an impact on these types of securities. These securities are not affected by the ratings of the company that is issuing the fund or ETF.

What is the typical maturity for an ETN?

Exchange-traded notes (ETNs) are long-term securities which typically have maturities between 10 and 30 years.

If an investor expects a sharp increase in a stock's price, which of the following will be the most profitable?

Exercising preemptive rights, similar to exercising long call options, will provide investors with an unlimited potential gain if the price of the underlying stock rises. If investors expect a stock's price to rise, selling puts will provide a profit, but maximum profit is limited to the premium received on the sale of the puts. Buying puts and selling calls are both bearish positions and are only profitable if the underlying stock's price falls.

For a competitive offering of municipal bonds, which document notifies potential bidders of the general features of the offering?

For a competitive offering of municipal bonds, the Notice of Sale is created by the issuer to provide potential bidders with information regarding the general characteristics of a proposed bond offering.

A customer of a broker-dealer has not executed a trade in the past 18 months. If the customer's account currently shows $30,000 in cash and $250,000 of securities, how often does the firm need to send her an account statement?

For accounts that are active, broker-dealers send account statements on a monthly basis; however, if the accounts are inactive, account statements are sent quarterly. An inactive account is one in which no transactions have been executed within the last 18 months.

For corporate bonds, accrued interest is calculated based on:

For corporate and municipal bonds, accrued interest is calculated based on 30 days in every month and 360 days in the year. On the other hand, Treasury notes and bonds use the actual calendar days in every month and a 365 days in the year. (17524)

Obtaining best execution includes all the following factors, EXCEPT:

For purposes of obtaining best execution. the factors considered include price and volatility of the security, general character of the market, size and type of transaction, and the locations and accessibility of the member organization to primary markets. However, the number of market makers for the security is not a factor.

A grant anticipation note is normally paid from:

Funds received from the federal government

Government-sponsored enterprise securities are comparable to direct government obligations with regard to all of the following statements, EXCEPT:

Government-sponsored enterprise securities are not guaranteed by the government. The other statements are true, They trade in the over-the-counter market, Short-term securities are quoted on a discount yield, Long-term securities are quoted as a percentage of par.

All of the following characteristics would be associated with a growth company, EXCEPT that it has a:

Growth companies will normally retain most of their earnings to enable them to continue their growth. They would typically have low dividend payout ratios, high research and development expenses, and high price/earnings ratios, as well as a wide trading range for the stock.

A client is short stock that's trading at $35.00 and wants to buy, but only if he can buy at $34.00 or lower. He should place which of the following orders?

He should place a limit order to buy, which can only be executed at a specified price or lower. A buy stop and/or buy stop-limit order is placed above a stock's current value and is used to protect the short position in case it rises in value. A sell stop and/or sell stop-limit is used to protect a long stock position in case it falls in value.

When warrants are issued, the exercise price is:

Higher than the current market price of the stock

If a firm places a temporary hold on a customer's account:

If a firm places a temporary hold on a customer's account, it can apply to either the entire account or specific disbursements. If the firm places the temporary hold, it must permit disbursements from the account if there is no reasonable belief that financial exploitation is occurring (e.g., paying normal bills).

A registered person has been indicted for investment fraud, which was unrelated to his employment at the member firm. Which of the following statements is TRUE?

If a person who's associated with a FINRA member firm has been indicted for any felony or any misdemeanor that involves the purchase or sale of a security, fraud, extortion, forgery, or counterfeiting, the event must be reported to FINRA. However, in this question, since the person has not been convicted, he's not subject to statutory disqualification and may remain employed at the member firm.

If a temporary hold has been placed on a customer's account, the firm:

If a temporary hold is placed on a customer's account (i.e., for a specified adult), the firm is required to notify both the account owner and the trusted contact person by no later than two business days after the hold has been placed.

If a temporary hold has been placed on an account, it will expire:

If a temporary hold is placed on the account of a specified adult, it will expire by no later than 15 business days after the date that it was first placed on the account, unless it was otherwise terminated or extended by another authorized regulatory entity. The temporary hold may be extended by the firm for no longer than 10 business days following the date, unless it was otherwise terminated or extended by another authorized regulatory entity.

A registered person's FINRA registration has become inactive because her firm is no longer in business. Unless she becomes employed by another member firm, she will be required to requalify by examination after:

If an individual's registration becomes inactive, she can avoid being required to requalify by examination if she becomes employed with another member firm within two years. For this question, the fact that the firm is no longer in business is irrelevant.

How can a client minimize principal risk in bonds due to fluctuating interest rates?

If an investor buys bonds that have short-term maturities, this will minimize loss in principal due to fluctuating interest rates. The prices of short-term bonds will fluctuate in response to interest rate swings less than the prices of long-term bonds. In addition, premium bonds (those priced above par) are less volatile than discount bonds (those priced below par).

The primary concern for investors who use a buy-and-hold strategy to maintain their portfolios is:

If an investor follows a buy-and-hold approach and fails to adjust the allocation of assets as the portfolio drifts, the portfolio balance will be altered and may no longer meet the investor's objectives. Although the individual investments within the portfolio are subject to various risks, those risks don't necessarily affect the allocation of the assets.

A firm is the managing underwriter of a follow-on offering of a security that's listed on the NYSE. The aftermarket prospectus delivery rule:

If an issuer was subject to the reporting requirements of the Securities Exchange Act of 1934 prior to the filing of the registration statement, there's no aftermarket prospectus delivery requirement for dealers. An issuer that's listed on the NYSE or Nasdaq is required to file reports with the SEC (a reporting issuer). If the issuer was filing for an IPO (a non-reporting issuer) and the securities will be subsequently listed on the NYSE or Nasdaq, the firm is required to deliver a prospectus to any purchaser in the aftermarket within 25 days of the effective date.

Premature withdrawals of earnings from an IRA that qualify for an exception are subject to:

If earnings are withdrawn from an IRA for any of the allowable exceptions, the individual avoids the 10% tax penalty; however, the amount withdrawn is subject to ordinary income taxes.

Investors in mortgage-backed securities are MOST concerned with prepayment risk if interest rates are:

If interest rates are falling, homeowners are more likely to refinance their mortgages, which results in the prepayment of these existing mortgages. For investors in mortgage-backed securities, they would be forced to find alternative investments that are likely paying lower rates of interest.

Which of the following statements is TRUE if interest rates are lower in the U.S. than they are overseas?

If interest rates are lower in the U.S. than they are overseas, this will typically lead to U.S. investors investing overseas. This will decrease the demand for the dollar, which results in a weaker dollar and foreign goods being less attractive.

Which of the following statements is NOT TRUE regarding profit-sharing plans?

In a profit-sharing plan, contributions are not required to be made each year and can be adjusted based on the profitability of the company. The board of directors determines the amount of the contributions, which are in pre-tax dollars and allocated based on a pre-determined formula.

During periods of deflation, the FRB will likely:

In an effort to stimulate the economy, the FRB will attempt to move into a period of easy money. Easing money (making it available) may be accomplished by purchasing securities in the open market. On the other hand, selling securities, issuing new securities, or encouraging higher interest rates will have an opposite effect.

The fund that would probably have the least price volatility is a(n):

In general, bond funds are less volatile than equity funds. Within the bond category, the NAVs of short-term bond funds are considerably less volatile than long-term bond funds whether corporate or municipal.

The fund that would probably have the most price volatility is a(n):

In general, bond funds are less volatile than equity funds. Within the equity category, the NAVs of growth and income bond funds are considerably less volatile than international equity funds whether corporate or municipal. International equity funds are not only vulnerable to market risk, but exchange and political risk as well.

A registered representative (RR) has a customer who is a senior officer of a corporation. The customer wants to open an account in the name of the corporation. Which of the following statements is TRUE?

In order to open a corporate account, an individual must supply a corporate resolution authorizing one or more persons to open and operate the account. Orders accepted from anyone not named in the corporate resolution would be unauthorized.

When interest rates are trending upward, the economy will normally be in which phase of the business cycle?

Increasing interest rates, along with increased costs and lower unemployment, are frequently associated with an expanding economy where there is an increasing demand for goods. As demand overtakes supply, prices begin to rise due to the scarcity of goods. This rise in prices is known as inflation. The Federal Reserve will look to raise interest rates in an attempt to curb demand and combat inflation.

An index option has been exercised. What is the writer of the option required to do to satisfy his obligation?

Index options are cash settled, which means that they never require delivery of securities at exercise. If an index option is exercised, the amount of money by which the option is in-the-money must be delivered by the writer. Index call options are in-the-money (have intrinsic value) when the index value is above the strike price. Index put options are in-the-money when the index value is below the strike price. (17548)

Why do regulators require broker-dealers to establish information barriers?

Information barriers are designed to prevent confidential information from spreading from one department to another. (17581)

Information barriers are required between which of the following departments of a broker-dealer?

Information barriers are required to prevent a trading department from learning of a pending research report regarding a security in which it has a position. The other departments don't require the establishment of information barriers.

Persons who violate federal insider trading regulations are subject to all of the following penalties, EXCEPT:

Insider traders face SEC civil penalties of up to three times the amount gained or loss avoided (treble damages). Criminal penalties for individuals can be as much as a $5,000,000 fine and 20 years in prison. In addition, private individuals who believe their investments were harmed by the actions of an insider trader may file a civil lawsuit to recover damages. However, FINRA fines may be assessed only against FINRA members and their associated persons. FINRA has jurisdiction only over members while anyone can be held civilly or criminally liable for insider trading. FINRA may not take action against someone who is not a FINRA member.

Interest on Treasury Inflation Protected Securities (TIPS) is:

Interest on any U.S. Treasury security is subject to federal income tax, but exempt from state income tax. This is the opposite of the tax treatment on municipal (state) bond interest, which may be subject to state tax, but is exempt from federal tax.

The investments in a Coverdell Education Savings Account (CESA) are:

Investments in a CESA are self-directed, which allows investors to buy and sell virtually any and all types of securities. Conversely, Section 529 plans are not self-directed; instead, the investments are determined by the entity that manages the plan.

All of the following statements are TRUE regarding an account that's held as tenants in common, EXCEPT:

Joint accounts allow for multiple owners, but they don't need to share equally in the account. An account that's held as tenants in common is divided upon the death of one of the owners. The distribution of assets is determined by the deceased's (i.e., decedent's) will or, if no will exists, state law. Tenants in common can be used for any number of people and is often used for businesses.

In order for a person registered at a broker-dealer to lend money to a customer of the broker-dealer with whom he has an outside business relationship, the loan:

Lending to or borrowing from customers is permitted if it's based on an existing business relationship outside of the broker-dealer relationship. In these situations, the loans must be disclosed in advance and preapproved by the firm.

In most cases, what's the maximum time an investor is given to meet a letter of intent on a mutual fund purchase?

Letters of intent may be offered as a way for investors to reduce the front-end sale charges on mutual fund share purchases. If an investor signs a letter of intent, he's committing to investing enough money over a 13-month period to meet a breakpoint. In exchange, the mutual fund will give the investor the breakpoint immediately (i.e., the sales charge is lowered). Letters of intent can also be backdated for up to 90 days, which allows the investor to use previous purchases to meet the breakpoint.

When documenting an investor's profile, which of the following is important?

Liquidity needs is one of the factors that make up an investor's profile. By itself, marital status is not relevant when making recommendations. An investor's current employment is more important than his employment history. Education is not nearly as important as a client's investing experience.

Which of the following is NOT a type of systematic risk?

Liquidity risk is an example of unsystematic or diversifiable risk, which is applicable to a specific security. On the other hand, systematic risk is one that affects all asset classes in the same manner. Examples of systematic risk include market risk, interest-rate risk, and inflation risk. If there is an overall decline in the stock market, it will cause stock prices to go down (market risk). If market interest rates rise, it will cause bond prices to decline (interest-rate risk). And finally, an increase in the rate of inflation will generally cause the overall bond market to decline.

A company has conducted a spin-off of a division which has begun independently trading. The physical shares of the spin-off are not yet available for delivery. The new company:

Will trade as a when-issued security and settle after the shares become available for delivery

During periods of rising interest rates, an investor can expect:

Long-term bond prices to fall more than short-term bond prices. Rising interest rates will result in the yields of bonds rising as well. Due to the inverse relationship between bond yields and bond prices, this will result in bond prices falling. Since long-term bonds are exposed to this risk for a longer period, the prices of long-term bonds will fall more than the prices of short-term bonds.

An investor has adjusted his portfolio based on changes that have been made in the S&P 500 Index. With this information, what types of portfolio strategy is this investor using?

Making adjustments to the investments in a portfolio based on changes that are made to an market index or average is referred to as indexing. Asset allocation is balancing the contents of a portfolio based on the risk tolerance and investment objectives of a client. Sector rotation is an active strategy that involves moving money from one industry to another to beat the return in the market. Dollar-cost averaging follows a regular schedule of investing the same amount of money as the market fluctuates. This avoids timing the market and may result in the average cost per share being less than the average price per share.

Which of the following choices is considered a leading economic indicator?

Manufacturing new orders is considered a leading economic indicator. Industrial production is considered a coincident indicator, while average duration of employment and commercial and industrial loans outstanding are lagging indicators.

A registered representative purchased two tickets to a concert for which he paid $175 per ticket. If the face value of the tickets is $95 per ticket, the RR may:

Member firm personnel may not give, or permit to be given, a gift of material value exceeding $100 per recipient per year to personnel employed by another member firm. The gifts should be valued at the higher of the cost or market value. If tickets to the concert have a face value of $95, but the tickets were purchased at a value of $175, the higher value would be used. Since the value of each ticket exceeds $100, none of the tickets may be given to the customer. If the RR attended the event with the customer, it would be a business expense and not a gift.

When issued, which security has a maturity of one year or less?

Money market instruments

Money received by a corporation when it sells its stock above its par value is called:

Money received by a corporation when it sells its stock above its par value is called capital surplus or paid-in capital. This is different from earned surplus (retained earnings), which is profits that have been retained by the company and have not been paid as dividends.

Which one of the following statements concerning money-market funds is TRUE?

Money-market funds are investments in which investors park cash holdings to wait out dips in the market or to maintain a source of liquid funds. These mutual funds are not FDIC insured, and will not necessarily maintain a stable NAV. Rather than investing in long-term debt like T-bonds, money-market funds typically hold short-term investments (e.g., T-bills). (15647)

The Bond Buyer Index is based on which of the following securities?

Municipal bond indices are created by The Bond Buyer. The Bond Buyer is a financial publication that specializes in the municipal market.

The Municipal Securities Rulemaking Board (MSRB) does NOT regulate which of the following?

Municipal issuers

Preferred dividends:

Must be satisfied before common dividends

Which of the following securities would be subject to federal securities registration requirements?

Mutual fund shares would be subject to registration requirements at the state and federal level. The other securities are exempt from federal and state registration requirements. GNMA, FNMA, FHLMC securities (U.S. government agency securities) and municipal securities are exempt securities. Private placements are exempt offerings.

According to FINRA rules, which of the following forms of non-cash compensation for mutual fund sales is unacceptable?

Non-cash compensation is strictly regulated. Generally, mutual fund wholesalers are prohibited from providing non-cash compensation unless it involves reasonable reimbursement or payment for educational related expenses. A fund wholesaler that provides an all-expenses paid trip for the registered representative with the most sales of the wholesaler's fund shares is a violation. Awards for sales-related activities cannot be based on the sale of any specific investment, but must be for total sales.

Official statements are the disclosure documents for what type of bond offering?

Official statements are the primary disclosure documents for municipal bond offerings.

If a company is utilizing statutory voting, how many votes will a common shareholder receive per vacant seat on the board?

One vote for each share that the stockholder owns

A corporation may choose to pay its shareholders with cash dividends or stock dividends. Which of the following statements concerning the tax status of these events is the most accurate?

Only cash dividends are taxable in the year in which they are received. The payment of a stock dividend increases the number of shares held by each shareholder. Since the stock's price will fall in the market, the IRS does not consider there to be a taxable event. However, shareholders are required to adjust their cost basis per share.

When do options trades settle?

Options trades typically settle within one business day (T + 1). However, if equity options are exercised, the settlement of the stock transactions occurs on the second business day (T + 2).

The call premium of a bond refers to the amount:

Over par value that the issuer must pay to exercise the call privilege

If a customer purchases shares of one stock and sells short shares of another stock, how can she settle these transactions?

Payment must be made for both transactions. The purchase could be made in either a cash or margin account, but the short sale must be executed in a margin account. The proceeds of the short sale cannot be used to pay for the purchase of the stock. (17556)

Preferred shares:

Preferred shares receive dividends before the common shares. In addition, preferred shares will be paid before common shares if the company declares bankruptcy (i.e., if the firm is liquidated). However, the bondholders are paid before the preferred shares in bankruptcy. Typically, only common shareholders of a company receive the right to vote in corporate elections.

Premature withdrawals from an Individual Retirement Account (IRA) are subject to a penalty of:

Premature withdrawals from an IRA or Keogh account are subject to a penalty of 10%.

A customer sells 500 shares of stock to a broker-dealer that makes a market in the stock. The broker-dealer acted in a(n):

Principal capacity and charged the customer a markdown

Which of the following statements is NOT TRUE regarding a private placement?

Private placements are exempt from registration requirements under the Securities Act of 1933. Generally, the number of nonaccredited investors permitted to purchase the securities is limited to 35. General solicitation (i.e., cold calling) of investors is normally not allowed. A disadvantage of buying securities issued in a private placement is that it is usually an illiquid investment.

An associated person of a broker-dealer will be receiving warrants as compensation for selling a security that is not being offered by her firm. The employing firm:

Private securities transactions are those that are executed outside of the regular scope of an associated person's employment with a member firm. If the associated person will be receiving compensation for the transaction, the member must specifically approve it in writing and it must be recorded on the member firm's books for the person to be permitted to participate. Compensation for this activity can come in many forms, including commissions, finders' fees, securities (or the right to receive securities through the receipt of warrants), and tax benefits. If the associated person will not be receiving compensation for the transaction, the member may still require the associated person to adhere to specific conditions in order to participate in the transaction.

When discussing the purchase of a variable annuity with a client, the RR is not required to disclose:

Probate fees and costs are associated with establishing the validity of a will, which is not a disclosure item for annuities. However, surrender, mortality, and administrative fees must be disclosed. (17541)

The primary purpose of a self-regulatory organization (SRO) is to:

Promote fair and equitable practices among members

401k and Roth IRA plans share which of the following features?

Qualified distributions are excluded from federal income tax

A qualified plan has all of the following characteristics, EXCEPT:

Qualified plans allow for tax-deferred growth, pre-tax contributions, and non-discrimination of participants. However, the plans do not provide for tax-free distributions. Instead, distributions of previously untaxed money are taxed at ordinary income rates when received.

According to SRO rules, an email message complaining about excessive commissions sent to an RR's personal electronic device:

Records of customer complaints must be maintained according to SRO record-keeping rules. Complaints may be delivered in any written format, including letters, email, IMs, and text messages. There is no requirement to follow up an electronic communication with a paper document or to send the complaint to the appropriate SRO.

The ability to reduce sales charges on mutual fund shares that are purchased through a front-end load is available to:

Reduced sales charges, also referred to as breakpoints, are only available on fund shares that are purchased with front-end loads. The reduction can be achieved by signing a letter of intent or through rights of accumulation. However, they are only available when shares are purchased from the same fund family. In order for the reduction to apply to other family members, they must be immediate family members and dependent children. A trust can qualify for breakpoints, but not by consolidating the assets of multiple trusts. (17535)

Which of the following is not considered a form of systematic risk?

Regulatory risk is a form of diversifiable risk. If regulators establish new environmental rules, it will help some companies, but will negatively impact others. Systematic risk, also referred to as non-diversifiable risk, is risk that's common to an entire class of assets or liabilities. The value of investments may decline over a given period simply due to economic changes or other events that impact large portions of the market. Some systematic risks include market risk, interest-rate risk, and inflation risk.

Which types of investments have historically shown a great deal of sensitivity to regulatory risk?

Regulatory risk is the possibility that changes in regulations can have an adverse impact on the value of investments. This is very similar to legislative risk, which is the risk associated with changes in laws. Although all kinds of investments can be subject to regulatory and legislative risk, limited partnerships have historically been particularly vulnerable. For example, adverse changes in the tax laws can cause the value of many limited partnerships to decline.

Which of the following represents the correct ranking of securities from longest to shortest life?

Rights usually last less than 60 days. Options usually last for nine months or less, although some can exist for three years. Warrants usually have a life span of several years and they can even be perpetual.

Which of the following entities is considered an eligible purchaser for a Rule 147 offering?

SEC Rule 147 covers an exemption from registration for the sale of securities on an intrastate basis. The issuer under Rule 147 is not allowed to sell the securities to a nonresident of the state. 100% of the purchasers must be residents of the state where the issuer is located. The purchaser may be an individual (who is a resident of the state), or a corporation, partnership, trust, or other business organization that has its principal office in the state. The business organization may not be formed for the specific purpose of purchasing the securities sold under this exemption.

Which of the following statements is TRUE?

SIPC covers broker-dealer bankruptcy, while the FDIC covers bank deposits.

The third market is concerned with:

Securities listed on an exchange, but traded in the OTC market

Which of the following securities are required to be registered under the Securities Act of 1933?

Securities that are sold to U.S. investors are generally required to be registered with the SEC. ADRs are a way for American investors to buy foreign stocks and, since ADRs are traded on U.S. exchanges, they need to be registered under the Act of 1933. Eurodollars are bonds that pays interest in U.S. dollars, but they're sold to foreign investors. As a result, they don't need to be registered with the SEC. Both municipal bonds and bonds that are issued by the U.S. government are exempt from registration with the SEC.

A corporation that intends to issue new shares within the next two years and wants to satisfy the registration provisions in advance could use:

Shelf registration permits new shares to be issued under the same registration for a period up to three years. In this way, the issuer can adjust its offering price to reflect current market conditions. Regulation A, Rule 147, and Regulation D also relate to raising capital, but not over an extended period. (17553)

A customer opens a new margin account and her initial transaction is a short sale of 100 shares of XYZ at $16. What is her minimum deposit requirement?

Short sales must be executed in a margin account since they involve borrowing securities. For the first short sale in a new margin account, the minimum deposit requirement is $2,000. (17555)

A company has announced a tender offer for its shares at $50. The issuer wants to purchase a minimum of 100,000 shares, up to a maximum of 1,000,000 shares. If 80,000 shares are tendered, how much will an investor receive if he has tendered 1,000 shares?

Since the tender offer has a minimum of 100,000 shares and only 80,000 shares have been tendered by investors (i.e., put up for sale), the company will not buy any shares. If the tender had crossed over the minimum of 100,000, then the investor would have tendered all of his shares and received $50,000. If the tender had gone over the maximum, the investor's tender would be filled on a pro-rata basis. (17557)

Which of the following is an advantage of a unit investment trust as compared to a managed mutual fund?

Since unit investment trusts (UITs) have fixed portfolios with no manager, they have no management fee. Therefore, UITs have lower operating costs than most mutual funds. Both UITs and mutual funds issue redeemable securities and are registered with the SEC under the Securities Act of 1933 and the Investment Company Act of 1940.

All of the following statements are TRUE concerning the underwriting of a new issue,

Some underwriting agreements include a clause that relieves the underwriter of his obligation if certain circumstances are not met The underwriting syndicate may engage in stabilization Members of the underwriting syndicate whose customers sell securities back to the manager of the syndicate during the underwriting period may be penalized

Which of the following is a prohibited practice?

Spreading a rumor about a company on social media and then buying the company's shares.

On Tuesday May 1, XYX Corporation's Board of Directors announced a dividend payable on Friday, May 25 to stockholders of record on Monday, May 14. The ex-dividend date is:

Stocks sell ex-dividend on the first business day preceding the record date. The record date is Monday, May 14. Therefore, the ex-dividend date would be one business day before, or Friday, May 11.

A person is completing a Form U4 to become registered and notices that the document requires his signature. The person has an aversion to signing legal documents that he doesn't fully understand. For clarification on the details of the form, he calls his brother who's a lawyer and specializes in employment law. The brother indicates that a person who signs Form U4 is agreeing to:

Submit potential disputes with the firm, other member firms, customers, or associated persons to arbitration, rather than litigation

The 5% markup policy applies to a:

The 5% markup policy does not apply to any trade requiring a prospectus (new issues, registered secondaries, and mutual funds) or a transaction involving an exempt security (municipal bond). The 5% policy applies to secondary market trades, which include proceeds transactions (using sale proceeds to buy another security) and riskless or simultaneous transactions.

If there is a violation of securities laws, which of the following is responsible for taking criminal action?

The Department of Justice (DOJ)

Of the following broad-based indexes, the one with the narrowest measure of the market is the:

The Dow Jones Industrial Average contains only 30 stocks. The Wilshire Index represents the dollar value of all the stocks and is considered the broadest of all indexes and averages. The S&P 500 Index contains 500 stocks, while the NYSE Composite Index consists of all of the common stocks that are listed on the NYSE.

Which of the following organizations does NOT enforce MSRB rules?

The MSRB

Under MSRB rules, firms that transact business in municipal securities are required to notify customers of the availability of a investor brochure:

The MSRB's Investor Education Rule is similar to FINRA's Investor Education and Protection Rule which requires a firm to notify a customer about the availability of educational material on an annual basis. The requirement is to disclose that the regulated entity is registered with the MSRB and the SEC, the MSRB's website address, and the availability of a brochure (Investor Brochure) on the MSRB's website which describes the protections available under MSRB rules. The brochure also explains how customers can file complaints with the appropriate regulatory authority.

Who has the responsibility to investigate the accuracy of the information in a prospectus for a DPP?

The SEC reviews only the information in a prospectus. It never attests to its accuracy. The managing underwriter is responsible for investigating the accuracy of the information.

The SEC rules regarding the record retention generally require that records be kept in an easily accessible location for the:

The SEC rules regarding record retention generally require that records be kept in an easily accessible location for the first two years. Records must generally be kept in total for either three years, six years, or the life of the firm depending on the specific record.

A registered representative intends to sell interests in a private placement to her clients, but they will not be offered through her firm. If she will not be compensated for the transactions, she must:

The SRO rule regarding private securities transactions requires a registered person to provide written notice to her firm if she will be engaging in securities transactions that are outside of the scope of her firm's business. If she will be compensated for the transactions, she must also receive written approval from her firm to participate. However, even if she's not to be compensated, her firm still has the ability to impose conditions on her participation.

Which of the following is NOT considered a self-regulatory organization (SRO)?

The Securities Exchange Commission (SEC)

An annuitant is receiving payments from a variable annuity and, at the time of his death, his beneficiary receives a lump-sum payment. The annuity payout option is:

The annuity payout option that provides the beneficiary with a lump-sum payment at the time of the annuitant's death (which reflects the value of the remaining annuity units) is referred to as a unit refund life annuity.

The assets in a Section 529 College Savings Plan may be transferred to another beneficiary without a tax penalty:

The assets in a 529 plan may be transferred to another beneficiary as long as the second beneficiary is a member of the first beneficiary's family. Family includes spouses, children, grandchildren, siblings, nieces and nephews, and first cousins.

A portfolio of debt instruments will be the most stable when:

The bonds have short maturities

The SEC established Regulation S-P to provide for customer privacy. According to Reg. S-P, what information is a broker-dealer required to include in its customer privacy notices?

The broker-dealer's policies that have been created to protect the security of the customer's private information

Which of the following is the rate that commercial banks charge on loans to broker-dealers for margin purposes?

The call rate is what commercial banks charge on loans to broker-dealers for margin purposes. The prime rate is the rate that commercial banks charge their best corporate clients. The discount rate is what the Federal Reserve charges when lending to member banks. The federal funds rate is the rate charged on overnight loans between member banks.

Which of the following factors will impact the value of a variable life insurance policy?

The cash value of a variable life insurance policy is primarily based on the performance of the separate account. (17538)

A corporation has raised money to use for expansion of its plant within the next six months. In which of the following securities should the corporation invest the funds until they are used?

The corporation intends to use the money in a short period and does not want to assume undue investment risks. Of the choices given, the most suitable investment is high-quality commercial paper since it is extremely safe and can be purchased with a short maturity to match the corporation's needs.

If a customer exceeds SIPC limits:

The customer is a general creditor

Common and preferred stock are similar in that:

The dividends for both must be declared by the board of directors

A corporation will be paying a cash dividend to its shareholders. On what date will the market price of the stock be reduced?

The ex-date is the first day that a stock trades without its dividend included in its price. On the ex-date, the stock's price is reduced by the amount of (or enough to cover) the dividend. (17527)

The term 'disclaimer' is most often associated with

The fact that the government cannot guarantee the accuracy of the information in a prospectus

The Investment Advisers Act of 1940 regulates which of the following?

The fee charged by an accountant for providing advice concerning securities

A person who invests in a fixed annuity is most concerned with the performance of the insurance company's:

The insurance company's general account is what backs an insurance company's fixed annuities and traditional (guaranteed) insurance products. On the other hand, the performance of a variable annuity is related to the performance of the insurance company's separate account.

The maximum civil penalty for insider trading violations is:

The maximum civil penalty for insider trading violations is three times the amount gained or loss avoided. The maximum criminal penalties per violation for individuals are a fine of $5,000,000 or 20 years in prison, or both. Corporations are subject to a criminal penalty of $25,000,000 per violation.

The minimum denomination for negotiable certificates of deposit is:

The minimum denomination for negotiable CDs is $100,000. Typical denominations are often $1,000,000 or more.

Who keeps track of the shareholders of a mutual fund?

The mutual fund's transfer agent is responsible for keeping track of all of the current owners of a mutual fund. Custodian banks provide for the safekeeping of the fund's securities and cash. The fund's portfolio is managed by the investment adviser.

Which of the following statements is TRUE about the SEC Customer Protection Rule?

The only true statement is that if a client sells securities and fails to deliver them within 10 business days of the settlement date, the broker-dealer must buy-in the customer. A broker-dealer may hold securities in its vault or at a depository (e.g., the DTCC). The Customer Protection Rule applies to funds and/or securities in either cash or margin accounts. A creditor of a broker-dealer is NOT considered a customer of the broker-dealer.

Which of the following is TRUE if a mutual fund investor chooses to implement a systematic withdrawal plan from the fund?

The only true statement is that the plan results in the reduction of capital, since shares will need to eventually be redeemed to make payments. Systematic withdrawal plans provide an investor with regular payments. These payments can be structured as fixed-dollar, fixed-percentage, or fixed-time. The option chosen determines whether the payments will remain the same or whether they will cease on a specific date. Payments will first come from dividends and capital gains that are generated from the fund, but after those funds are no longer sufficient, shares will be redeemed to provide the payments. (17533)

If a written customer complaint is received by a FINRA member firm, it must be:

The original complaint should be forwarded to the appropriate supervisor or principal. In some circumstances, it may be the compliance department. The complaint may be reviewed by the registered representative, but its the supervisor's responsibility to review and initial it. Only certain events trigger the need to send a complaint to FINRA.

Which of the following best describes what happens after a company executes a stock split?

The price per share of the common stock decreases

For how long must prospectuses continue to be delivered on an IPO of a company that will not be listed?

The prospectus delivery requirement for an IPO that will not be listed continues for 90 days after the deal closes. If the IPO will be listed, the prospectus delivery requirement continues for 25 days.

Which of the following statements is NOT TRUE concerning a clearing corporation?

The responsibility for automated book-entry changes in the ownership of securities is a function of a depository facility (e.g., the DTC), not a clearing corporation. Each of the other choices are functions of a clearing system, such as the National Securities Clearing Corporation (NSCC). It assists broker-dealers in transferring assets in a customer account to another broker-dealer. It provides trade comparison and reporting services. It offers customers the ability to have real-time trade matching.

When purchasing mutual fund shares, the ability to receive cumulative quantity discounts is referred to as:

The rights of accumulation provision gives investors the ability to receive cumulative quantity discounts when purchasing additional mutual fund shares. Rather than using the original purchase price, the current market value of the investment plus any additional investments are used to determine the applicable sales charge. A letter of intent qualifies an investor for a discount that's made available through breakpoints without initially depositing the entire amount required.

Two years ago, an investor bought mutual fund shares. Today, if the investor intends to purchase additional shares, she can obtain a reduced sales charge by using:

The rights of accumulation provision gives investors the ability to receive cumulative quantity discounts when purchasing additional mutual fund shares. Under the rights of accumulation provision, rather than using the original purchase price, the current market value of the investment plus any additional investments is used to determine the applicable sales charge. Once a breakpoint is reached, all future purchases qualify for the reduced sales charge. On the other hand, a letter of intent qualifies an investor for a discount that's made available through breakpoints without initially depositing the entire amount required.

The sale of which of the following dollar amount of mutual fund shares is most likely considered a breakpoint sale?

The sale of mutual fund shares at $99,000 is likely just below a breakpoint of $100,000. If this is the case, the investor will be assessed a higher sales charge than if she had invested $100,000 in the fund. The investor may have been able to use a letter of intent to take advantage without having deposited the full $100,000. (17578)

Which of the following statements is NOT TRUE about selling stock short?

The short seller will NOT receive any dividends that are paid while she is short the stock. In fact, the short seller is required to pay the dividend to the lender of the stock. Each of the other statements are true. Shorting stock must be done in a margin account, the broker-dealer loans the stock to the customer, and there is no set time by which the shares must be repurchased (as long as the client maintains sufficient equity in the margin account).

Regarding the characteristics of an annuity contract, which of the following statements is TRUE?

The specific type of annuity (e.g., fixed or variable) and payout option selected (e.g., straight life or joint and last survivor) will impact the amount of money an investor will receive from an annuity. Investors can use annuities to help save for retirement; however, investors are taxed on the earnings or growth when money is withdrawn. The amount of money investors receive when they annuitize their contracts into a stream of payments is dependent on their age and gender. During the annuitization phase of a variable annuity, the payouts are based on performance of the separate account, not on the insurance company's returns.

The cash flow received from dividends and/or interest, plus any appreciation or depreciation in the value of an investment, is referred to as the:

The total return calculation takes into account all of the cash flow received from dividends and/or interest, plus any appreciation or depreciation in the value of the investment. This return is expressed as a percentage and is typically calculated over a period of one year.

Which of the following activities is NOT performed by a transfer agent?

The transfer agent is responsible for the issuance and cancellation of certificates to reflect changes in ownership, acting as the company's paying agent for interest payments on bonds and for cash or stock dividends on equities, acting as proxy agent (sending voting materials) and mailing agent (mailing the company's financial reports to shareholders), as well as handling lost, destroyed, or stolen certificates. However, maintaining the issuer's ownership register for each issuance of securities is the role of the registrar.

Preemptive rights provide which of the following benefits to their holders?

Their proportionate ownership will not be diluted if additional shares are issued.`

Which of the following statements is a characteristic of a 529 plan?

There are no income limits placed on contributors. Withdrawals from 529 plans used for educational purposes are not subject to federal taxation. Earnings in the account are tax-deferred.

Which of the following choices would NOT be subject to the holding period restriction under Rule 144?

There is a required holding period of six months for all restricted stock. Restricted stock is unregistered stock that was acquired as a result of a private placement. There is no required holding period for control stock. However, if an affiliate (control person) acquires stock as a result of a private placement, this stock would be considered restricted stock rather than control stock and would be subject to the holding period. Control stock acquired as a result of an open-market purchase is exempt from the holding period.

A registered representative (RR) is having dinner with a client to discuss her portfolio and different investment opportunities. What is the maximum amount that the RR could spend on dinner?

There is no specific limit on what is considered legitimate business expenses, provided the giver is in attendance. Having dinner with a client to discuss investment opportunities would be considered a legitimate business expense.

XYZ Mutual Fund, an open-end investment company, has an NAV of $20 and a public offering price of $21.40. The prospectus states that the sales charge for purchases of fund shares of $25,000 through $49,999 is 4%. Approximately how many shares can the customer buy for $35,000?

To compute the number of shares that can be purchased, first determine how much of the investment will go to the sales charge. This amount is $1,400 ($35,000 investment x 4% sales charge). This leaves $33,600 for purchasing shares. The investor will purchase 1,680 shares ($33,600 divided by $20 NAV per share). You do not divide by the public offering price since it includes a sales charge and you have already deducted $1,400 in sales charges.

A convertible bond has a conversion price of $50 and is currently selling in the market at $1,100. The conversion ratio is:

To find the conversion ratio of a convertible bond, the bond's par value ($1,000) is divided by the conversion price ($50). In this question, the conversion ratio is 20 ($1,000 ÷ $50). To calculate the conversion ratio, the market price of the bond is irrelevant.

If a REIT generates at least 75% of its income from rents or mortgage interest, and pays out at least 90% of its income to the shareholders, for tax purposes the income distributed by the REIT will be taxable to:

To qualify as a REIT, it must receive no more than 25% of its revenue from subsidiary (non-real estate) activities and must be structured and established as a trust. Also, the REIT must distribute a minimum of 90% of its income. Shareholders are responsible for paying taxes on the income distributed by the REIT. This income is treated as a nonqualifying dividend for tax purposes.

The funds removed as a result of a qualified withdrawal from which of the following were tax-deferred?

Traditional IRAs provide investors with the tax-deferral of earnings. In other words, an investor is not required to pay taxes on their bond interest, cash dividends, or capital gains until he withdraws the funds from his IRA. Uniform Transfer to Minors Act (UTMA) accounts are set up for children, but don't offer tax-deferral of earnings. In both 529 plans and Roth 401(k) accounts, qualified withdrawals are tax-free, but contributions are made on a non-deductible (after-tax) basis.

A mother wants to gift money to her son. If she doesn't want the son to be able to use the money for living expenses, which of the following accounts is the most beneficial?

Trust accounts are set up to pass money and property to another person and, since they can be set up with restrictions on withdrawals, this is the best option for the mother. Although funds in 529 plans cannot be used for living expenses (they can only be used for education), they're not as flexible as a trust account.

Which of the following securities is exempt from registration?

U.S. government agency securities (e.g., GNMA, FNMA, FHLMC bonds) are exempt from registration under the Securities Act of 1933. Corporate securities that are to be sold publicly are typically required to be registered. Keep in mind, treasury stock is simply stock that was issued by a corporation which has since been repurchased by the corporation.

In which of the following types of accounts can an uncovered call writing strategy be executed?

Uncovered calls can only be written in a margin account. Retirement accounts, custodial accounts, and cash accounts cannot utilize the uncovered call writing strategy.

Where is a FINRA member required to place a link for FINRA's BrokerCheck website?

Under FINRA rules, broker-dealers are required to include a hyperlink to BrokerCheck on the initial webpage that the firm intends to be viewed by retail investors. The link is not required to be on every webpage of the broker-dealer or on pages that are only viewed by instructional investors. (17568)

An registered person has purchased two tickets to attend a basketball game with a client. If the tickets cost $85 each, which of the following statements is NOT TRUE?

Under FINRA rules, member firms and their associated persons may not provide gifts that exceed $100 per year to employees of other firms when the gift is in relation to the securities business of the recipient's employer. The underlying concern is that excessive gifts could cause the recipient to act contrary to the interests of the broker-dealer and/or clients. Exempt from the $100 limit are occasional meals, tickets to sporting and cultural events, reminder advertising (e.g., boxes of pens, key chains), and expenses related to legitimate business travel. For an activity to be considered an expense, the associated person of a broker-dealer must attend the event with the client. This type of activity is considered a legitimate expense. Since one ticket is valued at $85, it may be given to the client. On the other hand, two tickets being given to the client exceeds the $100 limit. Although approval by a principal is not required, a member firm should have this type of activity included in its policies and procedures manual.

Volume and holding-period restrictions do NOT apply to the resale of private placements when:

Under Rule 144A of the Securities Act of 1933, the owner of securities obtained through a private placement may resell those securities to a qualified institutional buyer (QIB) without the volume and holding-period restrictions of Rule 144. Qualified institutional buyers must have at least $100 million dollars of investable assets.

When can broker-dealers make unsolicited telephone calls?

Under the Telephone Consumer Protection Act, solicitors are only permitted to contact consumers between 8:00 a.m. and 9:00 p.m. (17566)

Which of the following is NOT a benefit of investing in a real estate investment trust (REIT)?

Unlike DPPs, real estate investment trusts (REITs) do not generate passive losses. REITs offer investors stable dividends based on the income being produced by owning a diversified portfolio of properties and/or mortgages. Most REITs trade on an exchange and offer investors liquidity. Since investors typically purchase REITs for their high dividend yield, if interest rates increase, the value of their shares will usually decrease as other newly issued income-earning securities become more attractive.

Which of the following stocks would most likely be considered a defensive stock?

Utility, food, beer, candy, pharmaceutical, tobacco, and soft drink stocks would be considered defensive stocks. They offer the investor a greater amount of safety because in periods of recession and adverse economic conditions these companies are the last to be affected.

An investment that provides investors with a floating rate of interest, a stated maturity, and the ability to put the security back to an intermediary on a pre-determined basis is referred to as:

Variable rate demand obligations (VRDOs) provide a floating rate, a fixed maturity, and the ability to sell (i.e., put) the security back to a financial intermediary. VRDOs can be put back at any time that the interest rate is reset, which may be daily, weekly, or monthly.

An issuer includes warrants with a bond offering that it's conducting. This is done to:

Warrants are generally considered a "sweetener," which gives holders the ability to purchase stock at a predetermined price for a long period. When issued with bonds, the issuer can typically lower the coupon rate and reduce its interest cost. (17508)

Which of the following statements is TRUE regarding warrants?

Warrants can be perpetual

Treasury stock:

Was previously issued stock that has been subsequently repurchased by the corporation

What strategy is the portfolio manager of a mutual fund employing when call options are being sold on stock that's held in the portfolio?

When a call option is written (sold) against a position in a portfolio, it's referred to as a covered call. The strategy is neither bullish nor bearish; instead, it's a conservative and neutral strategy that's designed to generate income from the receipt of the premium. The writer of the option doesn't believe the value of the underlying stock will rise or fall significantly. (17549)

A corporation that has filed for bankruptcy is to be liquidated. Which of the following securities issued by that corporation has seniority in the liquidation process?

When a corporation is liquidated, its assets are sold and the proceeds are distributed. Secured creditors are paid first (i.e., mortgage bondholders), then unsecured creditors (debenture holders), then preferred stockholders, and last the common stockholders. This would make mortgage bonds the senior security of those listed.

A customer requests that a broker-dealer sell stock that she owns and, at the same time, use the proceeds of the sale to purchase a different stock. For this transaction:

When a customer directs her broker-dealer to use the proceeds generated by the sale of one stock and, at the same time, purchase another stock, the transaction is referred to as a proceeds transaction. When the broker-dealer determines the markup it will charge, industry rules state that the firm may charge a markup or commission on both transactions, but should compute the markup based solely on the amount of money involved in the sale to the customer. The regulatory focus is to be certain that the total amount received for executing a proceeds transaction does not violate the 5% Markup Policy.

An individual may roll over a lump-sum distribution from a corporate pension plan to an IRA without tax consequences if it is done within:

When a lump-sum withdrawal from a corporate pension plan, Keogh, or IRA is deposited in an IRA, it is referred to as a rollover. If the rollover is done within 60 days, the investor will avoid a taxable event. Only one rollover is permitted each year.

A registered representative has been named as the beneficiary in a trust account that's established at another brokerage firm. Is the RR required to notify her employing firm of the account?

When a registered representative has a beneficial interest in an account at another financial firm, the RR must provide written notification to her employing broker-dealer. This is require regardless of whether the individual opened the account or is given trading authority. (17577)

A variable annuity contract holder dies during the accumulation period. Which of the following is TRUE regarding the tax consequences?

When a variable annuity contract holder dies during the accumulation period, the proceeds in excess of cost are taxable to the beneficiary as ordinary income.

While saving for her retirement, a variable annuity owner investing $1,000 per month will buy a:

When investors purchase a variable annuity contract, they are purchasing accumulation units. Once a contract has been annuitized, distributions are made by liquidating annuity units. Since the value of the subaccounts will fluctuate, a client investing $1,000 per month will purchase a different number of accumulation units with each purchase.in

In order for the sale of stock from a joint account to be considered good delivery:

When selling stock, it's often recommended to send unsigned certificates separately from the signed stock powers to avoid theft. If the stock is owned in a joint account, all of the owners must sign either the stock power or the stock certificate to be considered good delivery. (17559)

A registered representative purchased a vacation property, but it has since fallen in value. The RR decides to sell the property short and the bank agrees to accept the proceeds of the sale as payment in full for the mortgage. Is the registered representative required to take any action?

When the proceeds of a short sale of property is used to settle the payment of a mortgage at less than its full amount, it's considered a "compromise with creditors" and FINRA must be notified by the filing of an updated Form U4. (17584)

Which of the following statements is NOT TRUE regarding discretionary accounts?

When transacting business for a discretionary account, the registered representative must have written power of attorney authorizing her to act for the customer. Each order in which the registered representative exercises discretion must be marked discretionary. The registered representative should not enter orders that are excessive in size or frequency (in order to churn the account to generate commissions). The registered representative makes the investment decisions and does not need to receive the customer's approval for each order being executed.

The day-to-day business activities of a unit investment trust (UIT) are the responsibility of the:

While mutual funds are often structured as corporations with a board of directors, a UIT is a trust. A trustee is responsible for overseeing the operation of a UIT. Since a UIT is not actively managed, it has no investment adviser.

A customer has an account with a discount broker-dealer that specializes in online trading. If the customer is being charged a commission, the firm is MOST likely acting in which of the following capacities?

agent

A municipality borrowing for a short-term period to finance a capital project would issue:

bond anticipation notes

A broker-dealer acting in an agency capacity will charge customers a:

commission

During a period of stable interest rates, which type of preferred stock tends to be the most volatile?

convertible

A method of voting that gives smaller, less substantial stockholders a greater degree of voting power over the larger, more substantial stockholders is:

cumulative voting

If ABC Brokerage (a broker-dealer) purchases 600 shares of stock from a customer and places the securities into its inventory, it likely acted as a(n):

dealer

A corporate bond that's not backed by any specific asset is referred to as a:

debenture

A company in which your client owns stock is about to make a rights offering. The client informs you that he does not plan on subscribing to the offer. You would tell the client that his proportionate ownership interest in the company would:

decrease

Municipal bond rating organizations are concerned primarily with the risk of:

default

The goal of which of the following entities is to increase the volume of securities transactions by eliminating physical delivery with a book entry system?

dtcc

DPPs provide

exposure to non correlated assets w steady returns

If SIPC does not cover in full a customer's account in a brokerage firm that has gone bankrupt, the investor is a:

general creditor

A broker-dealer executes but does not process transactions. If the firm processing the transactions does not know the identity of the customers, this is known as a(n):

omnibus account

the redemption value of an open end investment company's shares is based on the:

previous closing NAV

commercial paper

primarily issued by corporations and some municipalities to raise short-term funds for working capital, but not to finance capital projects.

When bond issues have staggered maturity dates, they're referred to as:

serial bonds

The security with the longest expiration date would normally be a:

warrant