SIE/Top Off Prep: SIE Test Question Review

Money market instruments are typically A) fixed-income (debt) securities with short-term maturities B) equity securities with short- to intermediate-term maturities C) equity securities with short-term maturities D) fixed-income (debt) securities with short- to intermediate-term maturities

A Money market instruments are fixed-income (debt) securities with short-term maturities, typically one year or less

Money available to lend to corporations and consumers is impacted most in the United States by the policies of which of the following A) The Federal Open Market Committee (FOMC) B) The Internal Revenue Service (IRS) C) The Securities and Exchange Commission (SEC) D) The National Securities Clearing Corporation (NSCC)

A The Federal Open Market Committee (FOMC) meets regularly to direct the Federal Reserve Board to either buy or sell Treasury securities in the open market. Purchases add money to the economy, making the money available to lend more plentiful, and sales take money out of the economy, making money available to lend less plentiful

An officer of a public company buys 1,000 shares of the company's registered stock in the open market. Regarding the sale of these shares, the officer may sell A) under Rule 144 only after a 6-month holding period B) immediately, with no volume restrictions C) immediately, subject to Rule 144 volume limitations D) only after leaving (becoming unaffiliated with) the company

C Because the shares were purchased in the open market (already registered), the transaction is not a private placement and there is no required holding period. The officer, however, is an affiliate and is therefore subject to the reporting and volume limitations imposed when selling under Rule 144

An investor owning 400 shares of CDS stock receives notice that the stock will be split. When the split is complete, the customer owns 600 shares of stock. The split must have been A) a reverse, uneven split B) a reverse, even split C) a forward, uneven split D) a forward, even split

C Because the split resulted in the investor owning more shares, it was a forward split. Because the ratio of shares owned before and after the split was 2:3 (400:600 in this case), the split was an uneven split

After the issuer files a registration statement with the SEC, the time known as the cooling-off period begins. This allows a registration to become effective as early as A) 20 business days after the date the SEC has received it B) 40 business days after the date the SEC has received it C) 40 calendar days after the date the SEC has received it D) 20 calendar days after the date the SEC has received it

D Once the registration statement has been received by the SEC, a cooling-off period begins and it must last at least 20 calendar days. This allows the registration to become effective as early as 20 calendar days after the date the SEC has received it

Roth IRAs I. have no minimum required distributions at any age II. have higher contribution limits than those allowed for a traditional IRA III. allow the withdrawal of earnings tax free as long as the account has been opened for 2 years IV. can be contributed to in the same year as a traditional IRA A) I and III B) II and III C) II and IV D) I and IV

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

The federal law requiring companies offering public equity or debt securities to provide a prospectus to investors is known as A) the Securities Investors Protection Act of 1970 B) the Securities Exchange Act of 1934 C) the Trust Indenture Act of 1939 D) the Securities Act of 1933

D The Securities Act of 1933 is also known as the Prospectus Act. With limited exceptions, companies looking to offer securities to the public must provide a prospectus to those who are approached about purchasing those securities. A prospectus is a disclosure document that provides key information about the company

An investor makes several statements regarding what they know about exchange-traded funds. All of them are correct EXCEPT A) I won't have to pay any sales charges as I do with mutual funds, but I will have to pay commissions B) I can expect them to have lower expense and operating costs than mutual funds C) I'll be able to buy or sell them throughout the trading day like stocks trading on an exchange D) I can't buy them on margin because they represent an entire basket of stocks like mutual funds do

D Though mutual funds cannot be purchased on margin, ETFs can be. They can be traded throughout the trading day with purchases and sales commissionable transactions. They tend to have low expense ratios

Recommendations regarding investment strategies under the "know your customer" (KYC) rule would NOT apply to recommendations to A) buy or sell commodities B) buy, hold, or sell common stock C) make purchases and sales intraday (day trading) D) make equity purchases in a particular market sector

The definition of "investment strategy" does not include non-security investments such as commodities or fixed annuities. The term does apply to recommendations to invest in (buy), hold, or sell specific securities, as well as specific market sectors; trading, both long or short-term; or divesting of any asset or investment to make funds available to purchase securities

Restricted shares, those that are unregistered, meaning that they were not attained in a public offering, may be sold by a nonaffiliate A) at any time but with volume restrictions B) after holding them for 6 months but then subject to volume restrictions C) freely, with no holding period or volume restrictions D) after holding them for 6 months and freely thereafter

D Nonaffiliates holding unregistered shares must wait 6 months before divesting of those shares, but because they are nonaffiliates, they may sell freely (without volume restrictions) thereafter

Someone responsible only for training associated persons at a FINRA member firm

must be registered as a principal of the firm

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) Carrying firm B) Fully disclosed firm C) Limited broker-dealer D) Introducing firm

A 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

Which of the following constitute a private securities transaction, or "selling away"? I. A registered representative executes a trade for a customer in securities of a type normally handled by the representative's broker-dealer. II. A registered representative's sibling has some old bonds that the representative sells as a favor through a municipal securities broker. III. A registered representative helps an old school friend issue securities for a small business under formation. IV. A registered representative helps an acquaintance sell some inherited stock certificates without the acquaintance becoming a customer of the firm. A) III and IV B) I and III C) II and IV D) I and II

A A private securities transaction is any sale of securities outside the scope of the regular business of the associated person involved and of the broker-dealer firm. Such a transaction done for an immediate family member, however, does not fall under the definition

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

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

Regarding primary and secondary offerings, which of the following are TRUE? I. An offering can only be either a primary or secondary. II. An offering can be a combination of primary and secondary. III. An IPO is a secondary offering. IV. An APO is a primary offering. A) II and IV B) II and III C) I and IV D) I and III

A An offering can be a combination of primary and secondary. These are known as split offerings. Both IPOs (initial primary offering) and APOs (additional primary offerings) are primary offerings, where the issuer receives the sale proceeds

Regarding exchange-traded funds (ETFs), as compared to open-end (mutual) funds, which of the following are TRUE? I. ETF transactions are subject to commissions. II. Expenses for ETFs tend to be very high compared to mutual funds. III. ETFs may trade at a price that is less than the NAV per share. IV. ETFs cannot be purchased on margin while mutual funds can be. A) I and III B) II and IV C) II and III D) I and IV

A Because ETFs usually track an index, the operating expense ratios are generally lower than that of open-end companies. But that advantage can be canceled out by the commission charges when purchasing and selling an ETF. An open-end investment company must redeem shares at the NAV per share; with ETFs, pricing is based on supply and demand, making it possible to receive less than NAV. One cannot purchase open-end shares on margin, but ETFs can be

For margin transactions taking place through introducing broker-dealers, those who do not clear their own transactions, extension requests are A) made by the clearing firm B) made by the customer C) made by the introducing broker-dealer D) never permitted

A Broker-dealers who are self-clearing will make their own extension requests. For those that are not self-clearing, known as introducing broker-dealers, the extension request must be made by the clearing firm

For Treasury receipts and STRIPS, which of the following is TRUE A) Treasury STRIPS are backed in full by the U.S. government. Treasury receipts are not. B) Treasury receipts are backed in full by the U.S. government. Treasury STRIPS are not. C) Both Treasury receipts and STRIPS are backed in full by the U.S. government. D) Neither Treasury receipts or STRIPS are backed in full by the U.S. government.

A Brokerage firms can create and issue a type of bond known as a Treasury receipt from U.S. Treasury notes and bonds. Issued by financial institutions, they are not backed by the U.S. government. However, the Treasury Department has its own version of receipts known as Treasury STRIPS. Issued by the Treasury Department, they are direct debt obligations of the U.S. government

An associated person of a FINRA member firm has been found guilty of forging a customer's signature on a document relating to a securities transaction. Under the Code of Procedure, FINRA could impose any of the following sanctions EXCEPT A) imprisonment for a specified period B) a fine far in excess of the amount involved in the transaction C) suspension from FINRA that might cause the person extreme hardship D) requiring the person to retake the licensing exam before resuming work

A FINRA does not have arrest or imprisonment authority, but in the event of a violation, FINRA may impose any fitting sanction on the guilty firm or associated person. Customary penalties include censure, suspension, expulsion, and fines, but FINRA is not limited to those. For example, taking the licensing exam is often imposed on associated persons found guilty of a violation

If it finds that the registration statement needs revision, expansion, or to have corrections made, the SEC may suspend the review of the new issue and issue a deficiency letter. Once the issuer submits a corrected registration statement, the 20-day cooling-off period A) resumes where it had left off B) considered over allowing the registration to be effective C) begins anew D) is increased by 10 business days to accommodate review of the new information

A If the SEC issues a deficiency letter suspending its review of the new issue, the 20-day cooling-off period is halted and resumes where it had left off once the corrected registration statement is received

A broker-dealer has engaged in a reverse repurchase (repo) agreement. How was this done A) An initial purchase is followed by a sale later, at a higher price. B) An initial purchase is followed by a sale later, at a lower price. C) An initial sale is followed by a purchase later, at a higher price. D) An initial sale is followed by a purchase later, at a lower price.

A In a reverse repurchase (repo) agreement a dealer agrees to buy securities from an investor and sell them back later at a higher price. In other words, the reverse of a repo agreement

Portfolio diversifying might be used to reduce which of the following risks A) Business risk B) Market risk C) Interest-rate risk D) Inflation risk

A Nonsystematic risks can be reduced using diversification. These would include business, financial, credit, and liquidity risk (among others). Market, inflation, and interest-rate risks are types of systematic risks that are considered nondiversifiable because they impact all investments and, therefore, cannot be "diversified" away or mitigated simply by diversifying

A bank employee has noticed that one of its customers has deposited $9,000 in his account every Monday, Wednesday and Friday for the past 4 weeks. Though the action could be legitimate, the customer might be trying to circumvent which of the following A) The Bank Secrecy Act B) The Securities Exchange Act C) The Trust Indenture Act D) The Maloney Act

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

In general, the first industry form that a new applicant for registration sees is the Form U-4. This lengthy form requests information about the applicant's I. name including any aliases II. residency history back through the previous two years III. 10-year employment history IV. convictions, but not arrests, dealing with any securities related violations A) I and III B) III and IV C) II and IV D) I and II

A The Form U-4 contains the applicant's name as well as any aliases used. Residence history is shown for the past 5 years and employment history for the past 10 years. Charges, arrests, and convictions for securities related violations must be disclosed

The rate at which banks lend to broker-dealers for the purpose of lending money for margin loans is typically A) slightly above (a percentage point or so) other short-term lending rates B) notably above (several percentage points) other short-term lending rates C) slightly below (a percentage point or so) other short-term lending rates D) notably below (several percentage points) other short-term lending rates

A The broker call loan rate is the rate at which banks lend to broker-dealers for the purpose of lending money for margin loans. This rate is usually slightly above, by a percentage point or so, other short-term lending rates

The broker loan rate charged by banks is also known as A) the call loan rate B) prime rate C) federal funds rate D) discount rate

A The broker loan rate or call loan rate is the interest rate banks charge broker-dealers on money that broker-dealers borrow to lend to margin account customers

An investor owns one NMS June 40 call trading at 5. If the underlying value of NMS stock is 45, the contract is trading A) at parity B) out of the money C) at the money D) with no intrinsic value

A This call contract is in the money by 5 points (45 - 40). It therefore has intrinsic value of 5 points. When a contracts premium (5) equals its intrinsic value (5), it is trading right at parity

A "free lunch" seminar is advertised among senior citizens who may be looking to improve the results of their investment portfolio. Which of the following activities by the registered hosts of the seminar would be deemed a potential violation? I. Use of a designation such as Chartered Senior Advisor, a largely unknown designation II. The representative is introduced as someone approved by FINRA to answer questions from senior investors III. Use of degrees and registration licenses IV. Promoting technology stocks A) I and II B) III and IV C) I and IV D) II and III

A Use of degrees or designations may never be used in a misleading fashion nor can any reference to nonexistent or largely unknown designations be made. The use of designations is permissible so long as the compliance department of the firm has performed due diligence and is satisfied the credentials are bona fide and would be reasonably recognized as true tokens of expertise. Using educational degrees or securities registration licenses is permissible. To say that the representative is approved by FINRA to offer advice to seniors would likely bring heavy sanctions. The promotion of any stock is permissible so long as it is a balanced presentation with disclosure of the potential risks

For securities held in "street name," which of the following is TRUE A) The customer is the beneficial owner. B) The bank accepting the securities as collateral is the beneficial owner. C) The customer is the named or nominal owner. D) The broker-dealer is the beneficial owner.

A When securities are held in street name (the name of the broker-dealer), the BD is the named or nominal owner, but the customer is still the beneficial owner retaining all rights of ownership

When the board of directors (BOD) declares a dividend A) owners of preferred shares must be paid before any payment is made to common shareholders B) owners of preferred shares must be paid at least the same amount as any payment made to common shareholders C) owners of preferred shares are paid only after any payment is made to common shareholders D) owners of common shares must be paid at least the same amount as any payment made to preferred shareholders

A When the board of directors (BOD) declares dividends, owners of preferred shares must be paid before any payment is made to common shareholders. This is known as the dividend preference allotted to preferred shareholders. There is no relationship between the amounts paid to preferred shareholders and common shareholders

A customer has a short-term investment time horizon and a fairly certain need for funds she wishes to invest. Which of the following might meet those 2 investment objectives A) Money market instruments B) Corporate bonds C) Common stock D) Government bonds

A With a short-term time horizon and an already identified need for the funds, the only choice of those listed here would be money market instruments with a fixed rate of return. Bonds are generally long-term instruments, and equity investments, such as common stock, do not offer a fixed rate of return and can be volatile

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) Market making D) Full service

B 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

FINRA's Conduct Rules regarding gifts and gratuities would permit a branch manager to A) offer a portfolio manager 2 tickets to all shows for that theater season B) invite a portfolio manager to see a popular Broadway show together C) transfer ownership and the rights to a luxury box to the portfolio manager D) offer 2 tickets to the portfolio manager only if their value did not exceed $100

B A gift of tickets to a single event would be permitted under the Conduct Rules. A scenario where a representative of the firm accompanies the guest would fall under the heading of normal business dealings and the requirement that gifts be of no more than $100 in value is waived

An associated person is unable to work for any business other than his member firm without having the employing broker-dealer's A) assuming liability for that business B) knowledge of the activity C) authorization by a principal D) permission in writing

B An associated person cannot work for any business (independent activity) other than his member firm without his employing broker-dealer's knowledge

An associated person of a FINRA member firm would not be considered a municipal finance professional (MFP) if involved solely in which of the following A) Underwriting municipal securities for the firm B) Municipal securities sales to customers C) Research involving municipal securities for the firm D) Municipal securities communications with customers

B Associated persons whose activities are limited solely to sales or have only clerical or ministerial functions are not MFPs. All the other activities would be associated with an MFP

While preferred shares tend to be less volatile than common shares, one type of preferred is noted as being even more stable in price than the others. This would be A) convertible B) adjustable rate C) callable D) participating

B Because the dividend payment adjusts to current interest rates, the price of the stock remains relatively stable. In other words, it is the return that fluctuates rather than the price

By electing a board of directors (BOD), stockholders have A) neither a say in the company's management nor a say in any of the day-to-day details of its operations B) a say in the company's management but are not involved in the day-to-day details of its operations C) a say in the company's management and all day-to-day details of its business operations D) a say in the day-to-day details of its operations but no say in the management selected to carry out those operations

B By electing a board of directors, stockholders have a say in the company's management but are not involved in the day-to-day details of its operations

In order for a registered representative of a member firm to receive any form of compensation, such as commissions, after terminating employment, all of the following statements are correct EXCEPT A) it would be permissible to pay continuing commissions to a surviving spouse B) earnings from referred business from existing clients would be eligible for payment C) there must be a contract in effect calling for these continuing commissions D) the agreement must be entered into before the termination of employment

B Continuing commissions are permitted, but there is no requirement that they be offered. In order for a former registered representative to receive them, the terms must be spelled out in a contract entered into before termination. The contract may call for payment to heirs but cannot provide any compensation for business referred or introduced by an employee after that person ceases to be registered with the member

Which of the following statements is the most CORRECT regarding customer accounts A) Cash accounts need to be approved by a principal promptly after the first trade. B) A customer may open both a cash and margin account at the same time. C) Only margin accounts need to be approved by an authorized principal of a broker-dealer. D) Hypothecation agreements are required for joint cash accounts only.

B Customers may open a cash account, margin account, or any other account so long as the firm supports that type of an account and an authorized principal approves it

Which of the following interest rates do large U.S. money center commercial banks charge their most creditworthy corporate borrowers for unsecured loans A) Federal funds rate B) Prime rate C) Broker call loan rate D) Discount rate

B Each bank sets its own prime rate—the rate charged to their most credit worthy corporate customers for unsecured loans

In what order do the following economic phases typically occur? I. Recovery II. Trough III. Decline IV. Prosperity A) II, I, III, IV B) I, IV, III, II C) IV, III, I, II D) III, IV, I, II

B Expansion (recovery) is considered to be the beginning of the business cycle, followed by the peak (prosperity), contraction (decline), and trough

FINRA is concerned about potential conflicts of interest in providing incentives or rewards for selling a sponsor's product. Which of the following situations regarding a product sponsors product training or education for outside RRs would FINRA disallow A) A member firm's permission for its registered representatives to attend is required. B) Spouses are included in the invitation with travel expenses paid for. C) Separate outings are planned in conjunction with the training at the expense of the attendees if they wish to participate. D) A training location is chosen based on its being convenient for attendees to get to and its proximity to the main office

B FINRA deems payment or reimbursement by sponsors in connection with meetings held to train or educate representatives acceptable as long as certain requirements are met. These would include, but are not limited to, the following: the representative obtains the member firm's prior permission to attend, the location of the meeting is appropriate to the purpose of the meeting, there is no payment or reimbursement for a guest (e.g., a spouse) of the representative attending the meeting, and there is no payment or reimbursement for certain expenses incurred in connection with meetings, such as golf outings

A registered representative is discussing fee-based and commission based accounts with a customer. All of the following are true EXCEPT A) A commission based account bills for each transaction separately. B) Fee-based accounts are most suitable for those who do very little trading during the course of the year. C) Disclosure of what services the fees cover in in a fee-based account must be made to the customer before the account is opened. D) A fee-based account charges a single annual fee that can be a fixed dollar amount or a percentage of assets under management.

B Fee-based accounts charging a fixed dollar amount or a percentage of assets under management are more suitable for those doing at least a moderate amount of trading. Commission based accounts charging for each transaction on the other hand are better suited for those who do fewer transactions each year. For fee-based accounts full disclosure of what is covered by the annual fee must be made before the account can be opened

When a registered person leaves the securities business, FINRA retains jurisdiction over that person for how long A) 1 year B) 2 years C) In perpetuity D) 30 days

B If a terminated person becomes subject to a customer complaint or charges are brought against that person by FINRA, that person remains subject to FINRA jurisdiction for two years following termination

To arrive at M3, one would add to M2 which of the following A) Savings and checking accounts B) $100,000 and larger time deposits and repurchase agreements C) Gold and silver bars held on reserve at the FR D) All currency in circulation, including coins

B Included in M3 but not found in M2 are time deposits of more than $100,000 and repurchase agreements with terms longer than one day

A mutual fund's share class determines: A) how the shares are delivered to the investor B) how sales charges and related expenses are paid C) how many shares the investor may purchase D) the net asset value per share

B Individual mutual funds are often available to investors as Class A, Class B, or Class C, and there are other classes varying from fund to fund. The share class determines when and how the sales charge is paid. Class A shares have it paid when the shares are purchased, Class B shares have it paid when the shares are redeemed, and Class C shares have a small charge removed from the investor's account every quarte

Regarding the taxation of gains on securities, all of the following are true EXCEPT A) long-term gains are taxed at more favorable long-term rates B) gains on securities for a position held at least 12 months are not taxable C) capital gains are associated with the sale of securities and other real assets D) short-term gains are taxed at less favorable ordinary income tax rates

B Investment income, which includes capital gains realized on securities positons, is taxable. Depending on how long a security was held, the gains might be taxable at the investor's ordinary income tax rate (for short-term gains) or at a more favorable long-term rate if the position was held for longer than 12 months

Money market securities can be associated with which of the following characteristics? A) Making interest payments at regular intervals B) Being highly liquid C) Long-term maturities D) High returns relative to the general debt market

B Money market securities have short-term maturities. With little time left to default, they are considered to be highly liquid and, therefore, relatively safe. Safety or less risk equates to lower returns. Typically issued at a discount and maturing at face value, they generally make no regular interest payments. The difference between the discounted purchase price and the face value received at maturity represents their return

Which if the following may NOT be purchased on margin but can be used as collateral for a margin loan after being held for 30 days A) Equities B) Mutual funds C) Options D) Warrants

B Neither mutual funds nor new issues can be purchased on margin. However, both may be used as collateral for a margin loan after being held for 30 days. Options are not marginable securities, but equities, bonds, and warrants are

Notice filing for securities at the state level is for A) securities being issued in an initial public offering only B) securities that are deemed to be federally covered only C) secondary offerings of debt securities only D) secondary offerings of equity securities only

B Notice filing at the state level is for securities deemed to be federal covered. The state may require a notice be filed for these securities, such as those listed on national exchanges and those registered under the Investment Company Act of 1940, even though it has no jurisdiction over the registration requirements

Which of the following must be signed by a customer wanting to open a margin account A) Loan consent and hypothecation agreements B) Credit and hypothecation agreements C) Risk disclosure document and credit agreement D) Credit and loan consent agreements

B Opening a margin account requires that the customer sign the credit agreement and the hypothecation agreement. The loan consent form (agreement) is optional. While the risk disclosure document must be received and attested to as read by signing the credit agreement, it need not be signed

Which of the following would be unacceptable reasons for an officer of a member firm to make a contribution to the election campaign of a political candidate? I. The candidate is a member of the officer's political party. II. The candidate has promised to steer business to the officer's firm. III. The candidate is a close relative of a potential customer of the firm. IV. The officer approves of the policies and programs the candidate has proposed A) II and IV B) II and III C) I and IV D) I and III

B Political contributions may never be used to procure or enhance business

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

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

An investor has some stock held in street name and has just received proxy statements forwarded by the broker-dealer for an upcoming shareholders' meeting. If the investor wishes the shares to be voted as recommended by the issuer's management, which of the following must the investor do A) Inform the broker-dealer by letter or phone call how the shares are to be voted B) Sign and return the proxy statements by the 10th day before the meeting C) Sign and return the proxy statements by the 5th day before the meeting D) Nothing in this case

B Signing and returning proxy statements to a broker-dealer for stock held in street name is enough to get the shares voted as recommended by the issuer's management, as long as the broker-dealer receives the statements by the 10th day before a shareholders' meeting. If the shares are to be voted in some other way, the investor must specify the desired changes

When the economy shows high unemployment and is failing to expand as measured by a lack of consumer demand and business activity, but prices for goods and services are still rising, this could be described as what A) Inflation B) Stagflation C) Stagnation D) Deflation

B Stagflation is the term used to describe the unusual combination of inflation (a rise in prices) and high unemployment (stagnation). This generally occurs when the economy is not growing and there is a lack of consumer demand and business activity, yet prices for goods continue to rise

The Federal Reserve Board (FRB) does all of the following EXCEPT A) regulate and impact the money supply B) enact fiscal policy C) determine monetary policy D) supervise the printing of currency

B The FRB determines monetary policy (not fiscal) and takes actions to implement its policies, including but not limited to regulating the U.S. money supply and supervising the printing of currency

Which of the following is TRUE for exchange-traded funds (ETFs) A) The SEC has classified them as mutual funds, and they have operating costs and expenses that are lower than most mutual funds. B) The SEC has classified them as a type of open-end fund, and they have operating costs and expenses that are lower than most mutual funds. C) The SEC has classified them as mutual funds, and they have operating costs and expenses that are higher than most mutual funds. D) The SEC has classified them as a type of open-end fund, and they have operating costs and expenses that are higher than most mutual funds.

B The SEC has classified exchange-traded funds as a type of open-end fund but not a mutual fund. ETFs traditionally have operating costs and expenses that are lower than most mutual funds because they do not have to purchase and sell holdings within the portfolio to accommodate investors purchasing shares or redeeming shares, as is the case with mutual funds

A registered representative has a customer buying securities, but rather than paying in full, the customer wants to borrow some of the money needed for the purchase from the broker-dealer. It is explained to the customer that in order to borrow the money, there will be interest payable based on A) the prime rate B) the broker call loan rate C) the discount rate D) the federal funds rate

B The broker call loan rate is the interest rate banks charge broker-dealers on money they borrow to relend to margin account customers

A broker-dealer and its associated persons may be subjected to sanctions for violations of FINRA and SEC rules. Which of the following penalties can be levied against the associated persons A) Imprisonment B) Censure C) Limits placed on research activities D) Loss of SIPC coverage

B There are many ways a firm and its associated persons can be sanctioned by FINRA including censure. However, imprisonment and forced withdrawal from SIPC are not approved disciplinary actions

Treasury bills A) are always issued at a slight premium to par value B) are issued at a discount without a stated interest rate C) can be issued with initial maturities of 3, 12, 24, and 50 weeks D) have the highest interest-rate risk of all Treasury securities

B Treasury bills are always issued at a discount, without a stated interest rate. Because of their short-term maturities, they have the lowest interest-rate risk for Treasury securities, not the highest. They are issued with maturities of 4, 13, 26, and 52 weeks

Which of the following are securities representing other securities held on deposit with a trustee where the principal and interest payments have been separated A) Treasury notes and bonds B) Treasury receipts and STRIPS C) Treasury bills and notes D) Treasury receipts, bills, and notes

B Treasury receipts or STRIPS can represent U.S. T-bonds and notes held on deposit at a bank where essentially the coupon interest payments have been separated from the principal. When the Treasury Department does this, the resulting new issues are known as Treasury STRIPS, and when broker-dealers do this, the resulting new issues are known as Treasury receipts

A company offers to repurchase outstanding debt securities it has issued directly from its bondholders for cash in what would commonly be known as a A) buy-back B) tender-offer C) hostile takeover D) acquisition

B When a company offers to buy outstanding securities for cash or for cash plus other securities from its stockholders or bondholders this is known as a tender-offer. In contrast, a buyback, sometimes referred to as a repurchase, is when a company buys its own outstanding securities in the open market rather than appealing directly to its investors

In the event that a customer complaint is received it is essential that the appropriate personnel are notified immediately. Which of the following need not be notified or only notified regarding specific scenarios A) The account's registered representative, if received by someone else B) The Financial Industry Regulatory Authority C) The branch manager in the location where the account is serviced D) The principal supervising the registered representative servicing the account

B Whenever a customer complaint is received, it is essential that the proper personnel are notified. Persons who should be notified may include the account's representative, the account's principal, the branch manager, or a member of the compliance department. A notice to FINRA is required only in regards to certain scenarios, such as allegations of theft, forgery, misappropriation of funds, or securities

For investors, changes made to the tax code by the IRS are known as a form of A) financial risk B) regulatory risk C) political risk D) legislative risk

D Legislative risk results from changes in the law, not regulations. Changes in tax laws are one example

A member of the Federal Reserve System wanting to increase its reserves could do so by borrowing money from A) another FRB member bank at the prime rate. B) another FRB member bank at the discount rate. C) the Federal Reserve Board (FRB) at the discount rate. D) the Federal Reserve Board (FRB) at the federal funds rate

C A Federal Reserve Board member bank can increase its reserves by borrowing from the Federal Reserve Bank directly, or it can borrow from another FRB member bank. When borrowing from the FRB directly, a bank will pay the discount rate. When borrowing from another member bank, a bank will pay the federal funds rate

Which of the following choices would BEST describe a "follow-on" offering A) The common stock that is issued attached to a "rights" offering B) An offering to the employees of the issuing company C) An issue of shares by a public company that is already listed on an exchange D) An IPO that has additional shares added by the issuer on the effective date

C A follow-on public offer (FPO) is an issue of shares by a public company (registered and reporting to the SEC) that is currently listed on an exchange and has previously gone through the IPO process. FPOs are popular methods for companies to raise additional equity capital in the capital markets through a stock issue.

Passive investments do not fall under the definition of an outside business activity. Which of the following investments would be considered a passive investment A) A partnership interest in a local credit union B) A partnership interest in a real estate brokerage firm C) limited partnership unit D) A partial ownership in a car dealership

C A passive investment, such as the purchase of a limited partnership unit, is not considered an outside business activity. An associated person may make a passive investment for his own account without providing written notice to the employing broker-dealer

All corporations will issue A) preferred stock B) common and preferred stock C) common stock D) different classes of common stock

C All corporations will issue common stock, of which there can be only one class, but not all corporations issue preferred stock. Corporations that choose to issue preferred shares can issue more than one class

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

C Any action to fix or stabilize the price of a security is pegging. Choice II would keep the price up, which would protect the holder of a long position; this is known as supporting. Choice IV would keep the price down, which would protect the holder of a short call; this is known as capping. Both constitute pegging

All of the following are true regarding customer account statements EXCEPT A) customer statements containing penny stocks must be sent monthly, even if no activity occurred in the account B) customer statements must be sent at least quarterly, activity or not C) monthly statements need not be sent if the only account activity is the receipt of interest or dividends D) customers must be alerted to report any inaccuracies or discrepancies promptly

C Any activity in an account—transactions, dividends and interest, stock splits or dividends—will trigger the requirement to send a monthly statement. In addition, in any month an account contains penny stocks, a statement is required to be sent. If there is no activity, statements are only required quarterly. All statements sent require notice that inaccurate information be reported promptly

Regarding the purchase of new equity issues by restricted persons, which statements are TRUE? I. An investment club is permitted to buy a new equity issue at the offering price. II. An investment club is not permitted to buy a new equity issue at the offering price. III. An investment club that has a registered representative as a member is permitted to buy a new equity issue at the offering price. IV. An investment club that has a registered representative as a member is not permitted to buy a new equity issue at the offering price. A) I and III B) II and III C) I and IV D) II and IV

C As long as an investment club has no restricted persons as members, the club may purchase new equity issues at the public offering price. A registered representative is a restricted person under the rules regarding the purchase of new equity issues

Holding customer mail is consistent with your broker-dealer's in-house rules. Considering this, if requested to do so, the BD must A) await approval from FINRA B) have the customer request anew after six months and then each three months thereafter C) verify at reasonable intervals that the customer's instructions still apply D) request approval from the Securities Exchange Commission (SEC)

C If the BD chooses to hold customer mail, once requested to do so in writing the BD must verify at reasonable intervals that the customer's instructions still apply. The rule regarding holding customer mail does not require the BD to request or get SEC or FINRA approval and there is no requirement that the customer make additional requests to continue having the BD hold mail

An investor owns a bond purchased several years ago yielding 3%, which at the time was considered a fair return. However, these fixed 3% interest payments have not kept up with the inflation rate. This situation presents the investor with A) currency risk B) liquidity risk C) purchasing power risk D) financial risk

C Inflation can generally be associated with diminished purchasing power—purchasing power risk. During times of inflation, a dollar will not be able to purchase what it had previously in the way of goods and services. Investments such as bonds paying fixed rates of return are negatively impacted during these times

At a shareholders' meeting, a mutual fund investor might be called upon to vote on any of the following EXCEPT I. changes in membership in the board of directors II. whether to sell a certain company's stock out of the portfolio III. approval of the investment adviser's contract IV. changing to a new landscaper for the fund's headquarters A) II and III B) I and III C) II and IV D) I and IV

C Like other shareholders, mutual fund investors vote their shares on crucial corporate decisions, such as membership of the board, and approval or ratification of an investment adviser's contract. Which stocks to sell out of the portfolio is up the investment adviser. Day-to-day business decisions, such as those regarding contractors to employ, is up to those who report to the board of directors

All the following are exempt from the Securities Act of 1933 EXCEPT A) Debt securities issued by religious organization B) U.S. Treasury securities C) Limited partnership D) Fixed annuity contracts

C Limited partnership interests are not exempt securities. The exempt securities include U.S. government securities, municipal bonds, commercial paper and banker's acceptances that have maturities of less than 270 days, insurance policies and fixed annuity contracts (but not variable annuities), charitable, religious, educational, and nonprofit association issues and more

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(n) A) clearing corporation B) direct participation program C) market maker D) holding company

C 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 FINRA that they can manage the operational and financial risk

Money market instruments can be associated with all of the following EXCEPT A) short-term debt instruments B) highly liquid debt instruments C) high-yielding debt instruments D) nonvolatile and safe debt instruments

C Money market instruments are highly liquid, short-term debt securities. The short time to maturity makes them less volatile and relatively safe, suitable to meet short-term investment horizons. In return for the safety, investors sacrifice high potential yields for low yields

An investor purchased and then sold a security 8 months later for a gain. This gain A) is considered to be a long-term gain, and it will be taxed at the same rate as the taxpayer's other ordinary income B) is considered to be a short-term gain, and it will be taxed at a more favorable rate than long-term gains C) is considered to be a short-term gain, and it will be taxed at the same rate as the taxpayer's other ordinary income D) is considered to be a long-term gain, and it will be taxed at a more favorable rate than short-term gains

C Positions closed within 12 months or less are considered short term. When a gain is realized, it will be taxed at the same rate as the taxpayer's other ordinary income. By contrast, a long-term capital gain is taxed at a favorable long-term rate

Regarding registered representatives working from their residence, commonly known as their "home office," all of the following would be true EXCEPT A) the office is subject to a premise visit by FINRA examiners as often as they see fit B) home office address and telephone numbers may be used for normal advertising purposes C) prospects would not be allowed to visit and be on the premises at this location D) the office would be subject to a premise visit and review by a principal of the firm

C Registered representatives are allowed to operate out of a home or residence, advertising the address and contact numbers. All normal business activities, including taking customer orders for the purchase and sale of securities, would be permitted. Additionally, it would be subject to a premise visit and review by principals of the firm and FINRA examiners as often as needed

There are several types of investment risks that will generally fall into 2 categories. These categories are known as A) averse and nonaverse B) high return and low return C) systematic and nonsystematic D) investment and investor

C The 2 categories of investment risks are systematic (the risk that change in overall economy will impact individual securities) and nonsystematic (those risks that are unique to a particular industry, business, or investment type)

Which of the following retirement plans does not require minimum distributions once the participant has reached age 70½ A) 401(k) B) Traditional IRA C) Roth IRA D) 403(b)

C The Roth IRA has no specific requirement that the participant receive distributions. In all of the other plans, generally, upon reaching age 70 ½, minimum distributions must commence no later than the following April 1

The cost of doing business is closely linked to the cost of money, which is known as A) demand B) supply C) interest D) M1

C The cost of doing business is closely linked to the cost of money; the cost of money is called interest. In large measure, the supply and demand of money determines the rate of interest that must be paid to borrow it

XYZ Corporation is guaranteeing a debt issue for the IHG Company. Regarding these bonds, which of the following is TRUE A) These bonds are unsecured, with the value of the guarantee being as good as the strength of IHG the issuer. B) These bonds are secured, with the value of the guarantee being as good as the strength of IHG issuer. C) These bonds are unsecured, with the value of the guarantee being as good as the strength of XYZ. D) These bonds are secured, with the value of the guarantee being as good as the strength of XYZ.

C These are guaranteed bonds where the value of the guarantee is only as good as the financial strength (good faith and credit) of the company making the guarantee—in this case, XYZ Corporation. Because these bonds are backed by the good faith and credit of XYZ and not by any tangible asset, they are unsecured debt instruments. Always remember that even though the word "guaranteed" is used to describe such issues, the bonds are unsecured debt

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

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

If an officer of a bank with the authority to purchase and sell securities on behalf of the bank wants to purchase new issues, which of the following statements is TRUE? A) The officer may purchase a new issue because anyone is allowed to purchase new issues. B) The officer may not purchase a new issue unless the amount he wishes to purchase is considered small in relation to the total offering. C) The officer may not purchase a new issue because he is considered a restricted person. D) The officer may purchase a new issue because no banking rules prohibit it.

C Under the rules regarding the purchase of new issues, bank officers would generally be characterized as restricted persons. They may not, therefore, purchase new issues

Automatic exercise will occur at expiration for any equity option contract that is in the money by at least A) 1/8 of a point B) 1/4 of a point C) 0.01 D) 0.05

C Unless specific instructions are given by the customer not to do so, options contracts will be automatically exercised at expiration if they are in the money by at least 0.01

A member firm receives an order to purchase shares in a common stock IPO from another broker-dealer for a customer. Regarding restricted persons, the member must A) refuse to accept the order B) obtain a list of all of the broker-dealer clients to determine eligibility C) obtain a written representation that the buyer is not a restricted person D) obtain a statement witnessed by a notary representing that the buyer is not restricted

C When receiving an order to buy a new equity issue, a member must obtain a written representation that purchasers are in compliance with rules regarding sales of new issues to restricted persons (i.e., they are not restricted persons)

Which of the following could be granted a selling concession or commission by a FINRA member firm, though the recipient lacks registration A) A retired broker who recommended the broker's old firm be used for the order B) A member of the public who provided crucial assistance in the transaction C) A foreign nonmember firm, provided it agrees to abide by FINRA rules D) A suspended firm, provided the reason for suspension is unrelated to the transaction

C With exceptions, FINRA member firms may not pay commissions or grant selling concessions to any person or firm not a member of FINRA. One exception to this is a foreign firm, thus not eligible for FINRA membership. Such a firm may receive commissions or concessions, provided it agrees in writing to abide by FINRA rules and regulations

Each of the following activities would be deemed a violation of FINRA rules EXCEPT A) marking the close B) parking C) notice filing D) breakpoint sales

C With the exception of notice filing, each of these is a violation of FINRA rules. Certain categories of securities, such as those listed on national exchanges and investment companies registered under the Investment Company Act of 1940, are deemed to be federally covered (known as federal covered). The effect of this is that states do not have jurisdiction over the registration requirements of these securities. However, the law provides that states may require the filing of a notice to sell securities in that state along with a filing fee

Yield to call (YTC) calculations reflect the early redemption date and I. acceleration of the discount gain if the bond was originally purchased at a premium II. acceleration of the discount gain if the bond was originally purchased at a discount III. accelerated premium loss if the bond was originally purchased at a premium IV. accelerated premium loss if the bond was originally purchased at a discount A) II and IV B) I and IV C) II and III D) I and III

C Yield to call (YTC) calculations reflect the early redemption date and consequent acceleration of the discount gain if the bond was originally purchased at a discount (less than what will be received at maturity), or the accelerated premium loss if the bond was originally purchased at a premium discount (more than what will be received at maturity)

A registered representative has a customer who is interested in utilizing options strategies such as spreads and straddles. The RR's firm does not offer options transactions as part of their existing business model. As such, the RR directs the customer to open an account through another broker-dealer. This would be known in the securities industry as A) trading away B) placing away C) investing away D) selling away

D A private securities transaction is any sale of securities outside an associated person's regular business and his employing member. Private securities transactions are also known as selling away. If an associated person wishes to enter into a private securities transaction, that person must provide prior written notice to his employer, describe in detail the proposed transaction, describe in detail the RR's proposed role in the transaction, and disclose whether they have or may receive compensation for the transaction

A broker-dealer that executes trades and settles transactions for another broker-dealer is called a A) limited broker-dealer B) introducing firm C) fully disclosed firm D) carrying firm

D Carrying firms, also known as clearing firms, 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 classified as introducing, or fully disclosed firms

Rule 144 imposes volume limitations on the number of shares that can be sold by I. control persons selling registered stock held for 1 year II. control persons selling restricted stock held for 2 years III. nonaffiliates selling registered stock held for 1 month IV. nonaffiliates selling restricted stock held for more than 6 months A) III and IV B) II and III C) I and IV D) I and II

D Control persons are always subject to volume limitations. Nonaffiliates have no volume (or any other restrictions) when selling registered stock. If, however, the shares are restricted, volume limits for nonaffiliates are imposed for 6 months

One of the FINRA Conduct Rules is concerned with private securities transactions. Under that rule, it would be CORRECT to state that I. if the member approves the RR participating in a transaction for compensation, it must treat the transaction as if it is being done on its own behalf by entering the transaction on its own books and supervising the associated person during the transaction II. as long as no compensation to the RR is involved, notification to the member is not required III. sale of a securities product to the RR's mother where there is only nominal compensation is not covered under the rule IV. if the member disapproves of the RR's participation in a transaction for compensation, the associated person may not participate in it A) II and III B) I and II C) III and IV D) I and IV

D FINRA divides private securities transactions into two categories. If the associated person will receive compensation, the rules are more comprehensive requiring approval or disapproval. If approved, the firm must record the transaction on its books and records and supervise as if it were executed on behalf of the member firm. Trades with immediate family members are not included if there is no compensation. In other transactions where there is no compensation, written notice to the employer member is still required

For nonlisted and non-Nasdaq securities, a prospectus must be provided to all those who purchase securities for how many days after the effective date A) 60 B) 10 C) 30 D) 40

D For nonlisted and non-Nasdaq securities, the prospectus delivery requirement period in the aftermarket is 40 days, 25 days for Nasdaq or exchange listed, and 90 days for issues quoted OTCBB or the electronic OTC Pink

Registered representatives who have not completed their regulatory element training in the prescribed time frame will have their registrations A) suspended for a period of 60 days and reinstated when the requirements of the program are met B) suspended and subject to a fine of not more than $500 C) permanently revoked and subject to criminal charges D) deactivated by FINRA until the requirements of the program are met

D If a person fails to complete the regulatory element within the prescribed time period, FINRA will deactivate that person's registration until the requirements of the program have been met

Associated persons or registered representatives who want to work outside of their existing employment with their current broker-dealer may do so if they provide prior written notice to the member. In which of the following would notice not be required A) They intend to serve only in the capacity of a director of another company with no compensation. B) The amount of total compensation expected from the outside employer is less than $7,500 per year. C) Ownership equaling 5% interest in another financial services company is intended to be made. D) They will be involved in extensive fundraising activities for a charitable institution.

D If a registered person wants to be employed by or accept compensation from an entity other than the member firm, that person must provide prior written notice to the member. These affiliations would include serving as an officer or director of a company or owning any interest in another financial services company

An investor has asked a mutual fund company for a copy of its Statement of Additional Information (SAI). How long does the fund have to comply with the request A) By end of week in which the request was received B) SAI must go into the mail on the same day C) 5 business days from the date of the request D) 3 business days from the date of the request

D If an investor asks for a copy of a mutual fund's SAI, the copy must go into the mail no later than the end of the 3rd business day from the date of the request. It must also be supplied free of charge

Several registered representatives have agreed to purchase a certain security for their own accounts, then tout the security to their best customers. They hope that a number of large orders will be entered, driving up the price of the security, which they can then sell from their own accounts for a capital gain. This illegal practice is a form of A) supporting B) painting the tape C) insider trading D) front running

D If buying pressure is placed on a security, the price goes up. In this case of front running, the buying pressure was artificially induced at the expense of customers to generate capital gains for the registered representatives. Both criminal and civil penalties are possible, depending on the scope of the violation

Bondholders should expect that interest payments would always be forthcoming for all of the following EXCEPT A) subordinated debentures B) debentures C) convertible bonds D) income bonds

D Income bonds pay interest only if earnings are sufficient and the payments to be made are declared by the board of directors. This is not true of any of the other fixed-income securities listed (debentures, subordinated debentures, or convertible bonds)