SIE Unit 8 Checkpoint exam

Correspondent firms would be likely to have relationships with which of the following types of broker-dealers? A) Self-clearing B) Market maker C) Fully disclosed D) Introducing

A) Self-clearing A self-clearing (or carrying) firm holds funds and securities of the fully disclosed or introducing firm's customers and performs related functions, such as sending confirmations and statements for them. Those firms for whom the carrying firm performs these services are known as their correspondents. LO 8.c

All of the following are associated with being a carrying firm except A) being a fully disclosed firm. B) being able to clear customer transactions. C) accepting customer securities. D) accepting customer funds.

A) being a fully disclosed firm. A carrying firm has the capability to do trade executions, clear and settle transactions, and take custody of customer funds and securities. A fully disclosed firm is one that introduces its customer business to another firm for the purpose of clearing and settling transactions. LO 8.c

A clearing corporation agent or depository for securities transactions A) can be a commercial bank. B) can never be a corporation. C) must be a broker-dealer. D) can be a bank or corporation only if they are also a broker-dealer.

A) can be a commercial bank. A clearing agent can be a broker-dealer but doesn't have to be. In addition to broker-dealers, commercial banks can act as clearing agencies and depositories, as can corporations that are set up specifically to clearing securities transactions and taking custody of funds and securities. LO 8.c

It is expected that financial markets A) be limited to stocks and bonds and not include derivatives like options. B) have transparent pricing for assets. C) be nonregulated to allow for free trade. D) have securities prices determined by a board of directors.

B) have transparent pricing for assets. A number of different assets, such as equities (stocks), debt (bonds), currencies, and derivative products like options can be offered and traded in the financial markets. These markets are expected to have transparent pricing aligning with supply and demand and to adhere to basic rules and regulations. LO 8.a

All of the following would be secondary market transactions except A) securities bought and sold on the OTC. B) securities sold to the public by the issuer. C) securities bought and sold on the NYSE. D) securities sold on both the OTC and NYSE.

B) securities sold to the public by the issuer. Exchanges (like the NYSE and the OTC market) are part of the secondary market. The primary market is the issuer selling to the public. LO 8.b

A broker-dealer designated as a carrying firm would be expected to do all of the following except A) take custody of customer funds and securities. B) clear transactions for customer accounts. C) maintain a lower net capital than noncarrying broker-dealers. D) perform back-office functions, such as sending trade confirmations to customers.

C) maintain a lower net capital than noncarrying broker-dealers. A firm carrying customer funds and securities assumes certain risks and is therefore required to maintain levels of net capital higher than that of firms that do not accept custody of funds or securities (noncarrying firms). LO 8.c

Carrying firms may not A) clear and settle transactions for their customers. B) send trade confirmations and statements to customers. C) mix customer funds and securities with their own. D) execute transactions for their customers.

C) mix customer funds and securities with their own. Carrying firms can do trade executions, clear and settle transactions, and handle all back-office tasks, such as sending trade confirmations and statements. While they can take custody of customer funds and securities, they may not commingle them with those belonging to the firm. Abiding by the rule is known as segregating customer funds and securities. LO 8.c

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

B) Introducing/fully disclosed A fully disclosed introducing broker-dealer is what the word implies—it introduces its customer's business to a clearing firm. Clearing firms (often called carrying firms or agents) hold funds and securities and settle transactions (clear and process) for their correspondent introducing firms. Essentially, the clearing firm acts as the introducing firm's back office. LO 8.c

Which of the following statements would describe the Fourth Market? A) These transactions take place through electronic communications networks (ECNs). ECNs are open 24 hours a day and act solely as principals B) These transactions take place through electronic communications networks (ECNs) which are open during normal trading hours and act solely as principals C) A market for institutional investors in which large blocks of stock, both listed and unlisted, trade in transactions unassisted by broker-dealers D) The after-hours market

C) A market for institutional investors in which large blocks of stock, both listed and unlisted, trade in transactions unassisted by broker-dealers The Fourth Market is a market for institutional investors in which blocks of stock trade through ECNs that are open 24 hours a day acting as agents. LO 8.b

A firm that functions for the purpose of receiving and delivering payments and securities on behalf of both buyer and seller in a securities transaction is A) a broker-dealer. B) a depository. C) a clearing agent. D) a transfer agent.

C) a clearing agent. A clearing agent is an intermediary between the buy and sell sides of a transaction that receives and delivers payments and securities on behalf of both parties. While some broker-dealers are self clearing (act as their own clearing agent), simply being a broker-dealer doesn't always include being able to provide the services of a clearing agent. LO 8.c

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

C) a custodian. A person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another is known as a custodian, for example, the custodian for the account of a minor. This is different than a trustee who is a legally appointed entity. By contrast, anyone can open a custodial account for a minor as long as they are themselves an adult. LO 8.c

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

C) a market maker. Market makers can be individuals or broker-dealers with a line of business to stand ready to buy or sell securities (make markets) with the view of being profitable by buying low and selling high or selling high and buying low (short selling). Market making is risky. Firms that do this must demonstrate to Financial Industry Regulatory Authority (FINRA) that they can manage the operational and financial risk. LO 8.d

An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another who has been legally appointed to provide these services is best described as A) a market maker. B) a prime broker. C) a trustee. D) an investment advisor.

C) a trustee. A trustee is legally appointed to manage as a fiduciary assets in a trust. LO 8.c

Which of the following would be a secondary market transaction? A) A broker-dealer arranges for a customer to purchase mutual fund shares B) A broker-dealer arranges for a customer to purchase an IPO C) A broker-dealer arranges for a customer to purchase an APO D) A broker-dealer arranges for a customer's order to be executed on the NYSE

D) A broker-dealer arranges for a customer's order to be executed on the NYSE IPOs, APOs, and mutual fund transactions involve the issuer selling to the public, which are primary market transactions. Secondary market transactions are between investors (which is what takes place on the NYSE as well as other exchanges and the OTC market). LO 8.a

A broker-dealer that accepts funds and securities from customers and its correspondent member firms would most likely be which of the following? A) A fully disclosed introducing firm B) An investment company C) A depository trust D) A carrying firm

D) A carrying firm Most firms choose to introduce their customers to another member firm known as a clearing or carrying firm to handle back-office tasks, such as clearing trades, sending trade confirmations, settlement and reporting compliance, trade execution, and custody of customer funds and securities. LO 8.c

Your broker-dealer executes trades for other broker-dealers and after execution settles those transactions for them. Your firm would be classified as which of the following? A) Fully disclosed firm B) Limited broker-dealer C) Introducing firm D) Carrying firm

D) Carrying firm Carrying firms, or clearing broker-dealers, can execute trades, clear and settle transactions, take custody of customer funds and securities, and handle all back-office tasks, such as sending trade confirmations and statements for themselves as well as for other broker-dealers. LO 8.c

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

D) Member firms can offer all types of investment products, such as stocks, bonds, mutual funds, options, and others or limit the products they offer to only a few. Member firms can offer all types of investment products such as stocks, bonds, mutual funds, and derivatives like options and others (be full service) or limit the products they offer to only a few. They need not adopt proprietary trading into their business model but can if they wish to. Likewise, they need not accommodate doing business with retail customers if they wish to deal only with other industry professionals, such as institutional investors. LO 8.c

All of the following are acceptable choices to function as a depository and intermediary for transactions between buyers and sellers of securities except A) the Depository Trust Company (DTC). B) carrying firms. C) the National Securities Clearing Corporation (NSCC). D) credit unions.

D) credit unions. Credit unions cannot serve as a depository or clearing facility for securities transactions. LO 8.c

When shares are held in street name, this refers to the shares being A) allowed to be sold only on the exchange where they were initially purchased. B) held at the transfer agent for the beneficial owner. C) restricted, and thus, nontransferable. D) held in the name of the broker-dealer for the beneficial owner.

D) held in the name of the broker-dealer for the beneficial owner. When shares are held in street name, they are being held in the name of the broker-dealer for the beneficial owner. This is done to facilitate payments and delivery. This does not encumber the shares regarding receipts of dividends or their transferability if sold. LO 8.c

When investors buy and sell securities to and from one another, these transactions occur A) in the over-the-counter (OTC) market only. B) in the primary market. C) on exchanges only. D) in the secondary market.

D) in the secondary market. Primary market transactions involve the issuer or someone acting on behalf of the issuer, such as an underwriter. Secondary markets are where investors can buy and sell securities to and from one another. The secondary market includes exchanges and the OTC market. LO 8.a