Greenlight Exam 2
The BG mutual fund has a NAV of $11.72 and an offering price of $12.67. What is the sales charge for this fund? A) 7.5% B) 8.10% C) 8.50% D) 9%
A) 7.5% The sales charge for the fund is calculated by dividing the difference between the offering price and the NAV ($12.67 - $11.72 = $0.95) by the offering price ($0.95 divided by $12.67 equals 7 1/2 %
A corporation wishes to open a cash account. Which of the following documents is required? A) A corporate resolution B) A copy of the corporate charter C) A hypothecation agreement D) A risk disclosure document
A) A corporate resolution A corporate resolution authorizing a person to trade for the account is necessary to open a corporate cash account. A risk disclosure document may be required but only if options or penny stocks are going to be traded in the account. A hypothecation agreement and corporate charter are required to open a margin account.
A customer executing a short sale anticipates: A) A decrease in the market value of a security B) An increase in the market value of a security C) No change in the market value of a security D) Either a large increase or decrease in the market value of a security
A) A decrease in the market value of a security A customer executing a short sale is anticipating a decrease in the market value of a security. This is known as a bearish strategy, and the customer is hoping to buy back the security or cover the short sale at a lower price. For example, a customer executing a short sale at $20 a share, who then buys back the stock at $15 a share, has a gain or profit of $5.00 per share.
A client owns stock that's trading at $52.50 and wants to sell her shares, but only if she can sell at $54.00 or higher. She should place which of the following orders? A) A sell limit B) A sell stop C) A sell stop-limit D) A buy stop
A) A sell limit She should place a limit order to sell, which can only be executed at a specified price or higher. A sell stop and/or sell stop-limit order is placed below a stock's current value and is used to protect the stock in case it falls in value. A buy stop and/or buy stop-limit order is placed above a stock's current value and is used to protect a short position in case it rises in value.
When a broker-dealer is not acting for its own account but is making securities transactions for the accounts of others, the firm is acting as a(n): A) Broker B) Principal C) Underwriter D) Dealer
A) Broker When a broker-dealer is making securities transactions for the accounts of others, the broker-dealer or brokerage firm is acting as a broker (agent). When the firm is selling from its own inventory, it is acting as a principal (dealer).
Which of the following is TRUE concerning the beneficiary of a Coverdell ESA? A) Contributions can be made until age 18 and must be used by age 30. B) Contributions can be made until age 25 and must be used by age 30. C) Contributions can be made until age 18 and used at any age. D) Contributions can be made until age 25 and used at any age.
A) Contributions can be made until age 18 and must be used by age 30. The beneficiary of a Coverdell ESA can be named at birth, thereafter contributions can begin and continue up to age 18. The assets in the account must be used by the beneficiary's 30th birthday or transferred to another relative who is not yet age 30.
A corporate bond that has no specific collateral backing and is guaranteed by the "full faith and credit" of the issuing corporation is called a(n): A) Debenture B) Guaranteed bond C) Income bond D) Equipment trust certificate
A) Debenture A corporate bond that has no specific collateral backing and is guaranteed by the "full faith and credit" of the issuing corporation is called a debenture. A strong, financially sound, well-regarded company is able to borrow money backed by its full faith and credit and does not need to provide collateral as a guarantee.
A member of the Federal Reserve System is seeking to borrow funds from another member bank. The interest rate that's charged on the loan is referred to as the: A) Fed funds rate B) Discount rate C) Call rate D) Prime rate
A) Fed funds rate If a member bank needs funds, it can either go to another member bank or to the Federal Reserve Board. When a bank borrows from another member bank, the interest rate charged is referred to as the fed funds rate. However, if a bank borrows directly from the FRB, it will be charged the discount rate
A rise in the prices of several key goods and services would be an indicator of: A) Inflation B) A recession C) A weak dollar D) Political instability
A) Inflation Inflation is a general rise in the prices of goods and services. An increase in the prices of selected goods and services would create concern that inflation was occurring across the board.
Which of the following statements is TRUE about revenue bonds? A) Interest is usually paid from the earnings of the facility for which the bond was issued B) Interest is subject to federal taxes C) Revenue bonds are considered safer than general obligation bonds D) The state public utility commission must approve each interest payment
A) Interest is usually paid from the earnings of the facility for which the bond was issued The interest on a revenue bond is usually paid from the earnings of the facility for which the bonds were issued. The interest is exempt from federal income tax and revenue bonds are considered riskier than general obligation bonds. State public utility commissions set utility rates within the state but they do not approve municipal revenue issue payments.
Which of the following is responsible for updating state securities laws? A) NASAA B) FINRA C) SEC D) Nasdaq
A) NASAA The North American Securities Administrators Association (NASAA) is responsible for updating the provisions of the Uniform Securities Act (USA). The USA is the model law for state securities laws.
Which of the following statements about Regulation T is correct? A) Regulation T is set by the FRB B) Regulation T requires payment by settlement date C) Regulation T is set by FINRA D) Regulation T is set by the SEC
A) Regulation T is set by the FRB Regulation T is set by the FRB and requires payment from a customer in two business days following regular-way settlement.
Deposits of cash that are held at a bank are insured by which of the following? A) The Federal Deposit Insurance Corporation (FDIC) B) The Internal Revenue Service (IRS) C) The Securities Investors Protection Corporation (SIPC) D) The Securities Exchange Commission (SEC)
A) The Federal Deposit Insurance Corporation (FDIC) The Federal Deposit Insurance Corporation is an independent agency that was created by the Congress. The FDIC's role is to maintain stability and public confidence in the nation's financial system. The FDIC insures banking deposits and examines financial institutions for both safety and soundness. The current FDIC insurance coverage limit is $250,000 per depositor, per FDIC-insured bank
The practice of selling dividends is prohibited because: A) The amount of the dividend is already included in the price the customer pays for the fund B) The investor must pay a capital gains tax on any fund distribution C) The dividend is tax-free D) This would constitute making a recommendation on nonpublic information
A) The amount of the dividend is already included in the price the customer pays for the fund The phrase selling dividends is applied to the practice of inducing an investor to purchase a mutual fund on the basis of an impending dividend. For example, a mutual fund has announced that it will pay a dividend of $1 a share to holders of record as of December 30. A registered representative tells a customer to purchase the fund on December 20 at $10 a share. In this case, the investor will be listed as a holder of record on the record date and will be entitled to the distribution. The investor might be under the impression that there will be a 10% return on investment almost immediately and will, therefore, be inclined to purchase the fund. However, the fund will trade ex-dividend by the amount of the distribution. Assuming that the fund is still selling at $10 on the record date, the price will be reduced to $9 ($10 less the $1 distribution) on the ex-dividend date. The $1 dividend that the fund distributed is, therefore, already included in the price of the fund. An investor who waited until the ex-date would have been able to purchase the fund at $9 a share. Dividends are taxed as ordinary income.
Which one of the following persons is permitted to purchase an equity IPO in her personal account? A) The cousin of a registered representative B) The mother-in-law of a registered representative C) A portfolio manager of a mutual fund D) A person employed by an insurance company who buys and sells securities
A) The cousin of a registered representative The prohibition against IPO purchases by restricted persons includes: Member firms and any associated person (i.e., an employee) of the member firm. An immediate family member of an employee of a member firm if the equity IPO is purchased from the employee's firm or there is material support between the immediate family member and the employee of the member firm. Immediate family members include a spouse, children, parents, siblings, in-laws, and any other person who is materially supported by an employee of a member firm. Portfolio managers, which include persons who can buy or sell securities on behalf of institutional investors (e.g., banks, investment companies, investment advisers, insurance companies, savings and loan institutions), as well as anyone whom they materially support. These are people who are in a position to direct future business to the firm, which is the reason for their restricted status. They also may not purchase equity IPOs in their personal accounts. Since, under the rule, a registered representative's cousin is not considered an immediate family member, she is permitted to purchase an equity IPO.
In which of the following situations can a registered person of a broker-dealer borrow funds from a customer without approval of her firm? A) The customer is the brother-in-law of the registered person B) The customer is an institutional investor C) The customer is a personal friend of the registered person's sister D) The loan is based on a business relationship that's independent from the member firm-customer relationship
A) The customer is the brother-in-law of the registered person Registered individuals may not borrow money from, or lend money to, a customer unless certain conditions are met. These conditions include implementing written procedures permitting such activity and satisfying one of the following provisions: 1) The customer and the registered person are immediate family members. 2) The customer is a financial institution that's regularly involved in the business of extending credit or providing loans. 3) Both parties are registered with the same firm. 4) The loan is based on a personal relationship between the customer and the registered person. 5) The loan is based on a business relationship that's independent of the customer-broker-dealer relationship. If the loan is based on provisions 1 or 2 (borrowing from family members or from a financial institution whose business is loaning money), firm notification or firm approval is not required. However, if the conditions indicated in provisions 3, 4, or 5 apply (e.g., borrowing from a neighbor), the firm must approve the lending activity prior to the execution of the loan. The definition of immediate family includes the spouse, parents, children, brother or sister, and in-laws of the registered person. The other three answers require the firm's approval
Which of the following activities by a market maker is NOT prohibited by FINRA's Anti-Intimidation/Coordination Interpretation? A) The market maker setting its own bid and ask prices in a Nasdaq security B) The market maker attempting to influence another firm to adjust its quotation C) The market maker attempting to influence another firm to alter its ask price D) The market maker coordinating quotations with another broker-dealer
A) The market maker setting its own bid and ask prices in a Nasdaq security Under this interpretation, the following actions are considered inconsistent with the just and equitable principles of trade for any member or person associated with a member (broker dealer or market maker): 1) To coordinate prices (including quotes), trades, or trade reports with any other member or person associated with a member; 2) To direct or request another member to alter a price (including a quote); 3) To engage, directly or indirectly, in any conduct that threatens, harasses, coerces, intimidates, or otherwise attempts to improperly influence another member or person associated with a member (this includes, but is not limited to, any attempt to influence another member or person associated with a member to adjust or maintain a price or quote, regardless of whether it's displayed on an automated system that's operated by Nasdaq); 4) To engage in conduct that retaliates against or discourages the competitive activities of another market maker or market participant
A sales breakpoint of a mutual fund is: A) The minimum dollar amount of a purchase of a mutual fund where a volume discount is given B) The minimum share amount of a purchase of a mutual fund where a volume discount is given C) The point at which a letter of intent can be obtained D) The point at which a letter of intent can be backdated
A) The minimum dollar amount of a purchase of a mutual fund where a volume discount is given A sales breakpoint of a mutual fund is the minimum dollar amount (not the share amount) of a purchase of a mutual fund where a volume discount is given. The percentage of the sales charge declines when certain minimum dollar amounts are reached.
All of the following statements are TRUE regarding private securities transactions that are executed by an associated person of a member firm, EXCEPT: A) The transactions may not involve private placements, even if the activity is otherwise acceptable B) If a registered person will be compensated, the firm must approve of the transactions in writing C) If a registered person will not be compensated, the firm must be notified of the person's participation D) A registered person's personal transactions in mutual funds are not covered by this rule
A) The transactions may not involve private placements, even if the activity is otherwise acceptable Private securities transactions are defined as transactions that are executed outside of the regular scope of an associated person's employment with a member firm. An associated person who engages in these transactions must provide written notice to the employing member. In addition, if the associated person is to receive compensation for the transaction, the member must specifically approve the transactions in writing in order for the person to participate. However, personal transactions in investment company and variable annuity securities are not covered by this rule. There is no specific prohibition regarding private placements.
A person who is employed by a brokerage firm and buys and sells securities for the firm's account is considered a(n): A) Trader B) Investment banker C) Research analyst D) Investment adviser representative
A) Trader A person who is employed by a brokerage firm and buys and sells securities for the firm's account is considered a trader. A type of trader that buys securities from and sells securities to investors for the firm's account is considered a market maker. An investment adviser representative is an individual who is employed by an investment adviser (a firm).
What is the required annual income for a married couple to be considered an accredited investor under Regulation D? A) $100,000 B) $300,000 C) $1 million D) $5 million
B) $300,000 To be considered accredited, the required annual income for a married couple is $300,000 in each of the last two years, with the expectation that this level will continue. For a individual investor, the required annual income is $200,000
A bond has a 6% coupon and is trading with an 8.34% basis. The bond is trading at which of the following price levels? A) Par B) A discount C) A premium D) Cannot be determined
B) A discount Basis (or yield basis) is a different method of expressing yield to maturity. In this case, the yield to maturity is higher than the coupon rate. The only time a client's yield to maturity is above the coupon is when the bond has been purchased at a price less than par (lower price means higher yield). Therefore, the bond must be trading at a discount.
If an annuitant cancels her variable annuity during the accumulation period, she may be required to pay which of the following? A) A penalty to the IRS B) A surrender charge C) An additional management fee D) An additional administrative fee
B) A surrender charge An annuitant may cancel (surrender) her variable annuity at any time during the accumulation period and receive the annuity's current value. However, the annuitant may be required to pay a surrender charge that's determined by how long she had held the annuity. An IRS penalty may be assessed if the annuitant withdraws funds (but does not cancel the contract) before the age of 59 1/2
An investor notices a specific stock is trading at a higher price on one exchange than on another. If the investor takes advantage of this difference, it's referred to as: A) Front running B) Arbitrage C) Insider trading D) Trading ahead
B) Arbitrage Simultaneously buying and selling a security on different exchanges in order to take advantage of a price difference is referred to as arbitrage. Front running, insider trading, and trading ahead are all prohibited activities.
Class A shares of an open-end investment company are different from Class B shares in that: A) Class A shares are common shares, while Class B shares are preferred shares B) Class A shares have a front-end sales charge, while Class B shares have a contingent deferred sales charge C) Class A shares pay quarterly dividends, while Class B shares pay a monthly dividend D) Class A shares can be purchased directly from the fund, while Class B shares are offered through broker-dealers
B) Class A shares have a front-end sales charge, while Class B shares have a contingent deferred sales charge The difference between Class A and Class B shares is normally the fact that A shares have a front-end sales charge while the B shares have a contingent deferred sales charge (CDSC). A CDSC is deducted only when the investor redeems shares. Generally, if the investor holds the B shares for a sufficient period, there is no sales charge deducted upon redemption
Exchange-traded notes are most susceptible to which risks? A) Regulatory and interest-rate risk B) Credit and market risk C) Legislative and business risk D) Currency and political risk
B) Credit and market risk Exchange-traded notes (ETNs) are unsecured debt instruments that are most susceptible to credit risk of the issuer. ETNs also trade on exchanges, which makes them susceptible to market risk
A disciplinary action concerning a registered representative (RR) is reported by the firm through which of the following? A) CRD B) Form U4 C) Form U5 D) BrokerCheck
B) Form U4 Disciplinary actions concerning an RR are reported by the employing firm as an amendment to the RR's Form U4. Form U4 is originally processed when an RR joins a firm and updated thereafter. Form U5 is processed when an RR leaves employment with a firm and also contains information regarding the RR's disciplinary history. Form U6 is filed by an SRO (e.g., FINRA), but not by a member firm, to report disciplinary actions against broker-dealers and RRs. All three of these forms feed information into the Central Registration Depository (CRD) system. Some of the information that's found in the CRD system may be accessed by the public through FINRA's BrokerCheck system.
If an investor owns Treasury bonds that will mature in 20 years, she is exposed to: A) Credit risk B) Inflationary risk C) Political risk D) Capital risk
B) Inflationary risk All fixed-income securities expose an investor to inflationary (purchasing-power) risk. Inflation results in the increase in prices which will reduce the purchasing power of the fixed income payments received on bonds. Credit risk is the risk that a bond investor will not receive interest and/or principal when it's due. Capital risk is the risk that an investor will lose his investment. Political risk is associated with foreign investors being subject to changes in their country's government or regulatory environment. Since Treasury bonds are direct obligations of the U.S. government, there is no risk that the investor will not receive interest and/or principal when due, or lose his investment. Therefore, the investor is free of credit and capital risk.
Repurchase agreements (repos) and reverse repos would MOST likely be used by: A) A municipality borrowing to build a new highway B) Institutions that have a need to borrow on a short-term basis, or have money to lend on a short-term basis C) Corporations issuing stock to raise money D) Importers and exporters in connection with foreign trade that represents money to be paid in the future and is guaranteed by a bank
B) Institutions that have a need to borrow on a short-term basis, or have money to lend on a short-term basis In a repurchase agreement, a firm sells securities to another firm and agrees to repurchase them at a specific time and a specific price, which produces an agreed-upon rate of return. In effect, one firm is borrowing money from the other with securities as collateral.
A customer contacts her registered representative to buy an OTC stock. Rather than buying it directly from a market maker, the broker-dealer contacts another broker-dealer, who buys it from a market maker creating two levels of transaction fees. This is known as: A) Free-riding and withholding B) Interpositioning C) Backing away D) Churning
B) Interpositioning Interpositioning occurs when a broker-dealer, executing an order for a customer, places another broker-dealer between itself and the market. This is generally prohibited. Backing away is a violation and occurs when a market maker fails to honor a firm quote it has given another dealer.
Which of the following statements is TRUE concerning filing a registration application with FINRA? A) It is acceptable not to answer certain questions due to privacy concerns. B) It is a violation for an application to be incomplete or misleading. C) If a person has already been registered and changes firms, a new application is not required. D) All registered persons are required to update their application every two years.
B) It is a violation for an application to be incomplete or misleading. Under FINRA rules, it is a violation for any member firm or person associated with a member firm to file an application for registration (Form BD for a firm and Form U4 for an individual) that is incomplete, inaccurate, or misleading. Not answering questions due to privacy concerns is not permitted and, if a person changes firms, she is required to file a new application. There is no requirement to update the application every two years.
According to FINRA rules, an e-mail complaint: A) Does not constitute an official complaint and does not need to be retained by the broker-dealer B) Must be maintained for four years C) Must be maintained for six years D) Must be maintained for the life of the member firm
B) Must be maintained for four years Records of customer complaints must be maintained for four years according to FINRA record-keeping rules. Complaints can be delivered in any written format, including letters, e-mails, and text messages.
A corporation that has issued common or preferred stock has created: A) Debt obligations B) Outstanding equity C) A current tax liability D) A leveraged position
B) Outstanding equity Holders of common and preferred stock are considered to have equity (ownership) in a corporation. Bonds represent debt owed by the corporation. Issuers with a large amount of bonds outstanding would be in a leveraged position.
A portfolio manager has recently taken his client's equity holdings out of technology stocks and moved them into manufacturing stocks. The manager has historically moved client funds from one industry to another during defined periods. What is this type of strategy called? A) Dollar cost averaging B) Sector rotation C) Asset rebalancing D) Portfolio rebalancing
B) Sector rotation Sector rotation is the switching from one industry (sector) into another as the economy changes. Dollar cost averaging is investing the same dollar amount over a fixed period, regardless of the price changes. Rebalancing strategies involve buying and selling to keep the portfolio's asset mix consistent over the long term.
If a limited partnership must liquidate, the distribution of assets is first made to the: A) General creditors B) Secured creditors C) Limited partners D) General partners
B) Secured creditors At the liquidation of a limited partnership, the assets are first distributed to secured creditors, followed by general creditors, then limited partners, and finally general partners. Remember, the claims of owners (the general and limited partners) are subordinate to those of creditors.
Which of the following statements best describes the difference between Settlement date and Regulation T payment date? A) Regulation T payment date is the date the two broker-dealers exchange security and money and Settlement date is the date the customers must pay their broker-dealer. B) Settlement date is the date the two broker-dealers exchange security and money and Regulation T payment date is the date the customers must pay their broker-dealer. C) Settlement date is for cash accounts and Regulation T payment date is for margin accounts. D) Settlement date is for margin accounts and Regulation T payment date is for cash accounts.
B) Settlement date is the date the two broker-dealers exchange security and money and Regulation T payment date is the date the customers must pay their broker-dealer. Settlement date is the date the two broker-dealers exchange security and money and Regulation T payment date is the date the customers must pay their broker-dealer. Whether it is a cash or margin account is not relevant.
A 529A of ABLE account permits which of the following? A) Tax-free growth B) Tax-deferred growth C) Pretax contributions D) Growth that is taxed at a lower rate
B) Tax-deferred growth One of the benefits of a 529A or Achieving a Better Life Experience (ABLE) account is tax-deferred growth. Additionally, the earnings are distributed tax-free if used for qualified expenses, including basic living expenses, education, employment support, housing, financial management, legal fees, transportation, and wellness for disabled persons. ABLE accounts are funded with after-tax contributions.
A withdrawal from an IRA may be made prior to age 59 1/2 without incurring a 10% penalty tax in which of the following situations? A) To purchase a vacation home B) To pay for the college tuition of the investor's daughter C) As a result of the permanent and total disability of the investor's spouse. D) To cover the costs of the funeral of the investor's father.
B) To pay for the college tuition of the investor's daughter Under certain conditions, the 10% penalty tax is waived for IRA withdrawals prior to age 59 1/2. These situations include withdrawals that are: Used to pay qualified higher education expenses for the account owner, the owner's spouse, or the child or grandchild of the owner or the owner's spouse Used to pay acquisition costs for a first-time homebuyer, which can include the account owner, the owner's spouse, and any child, grandchild, or ancestor of the owner or spouse. However, this does not include the purchase of a vacation home. Withdrawals related to disability also receive the waiver, but only due to the disability of the account owner. Note, when a waiver applies, it's only the penalty tax that's waived. The taxable part of the distribution is still reported as ordinary income.
When executing customer orders, best execution rules require the broker-dealer to: A) Obtain the lowest price available in the market at the time B) Use reasonable diligence to obtain the best price possible C) Obtain a price that balances the customer's interests with the firm's need to make a profit D) Always use an automated execution system
B) Use reasonable diligence to obtain the best price possible Broker-dealers must use reasonable diligence to enable customers to obtain the best price possible on purchases and sales. This does not mean that a firm has violated its best execution obligation if it fails to find the best price, since this can be difficult to determine in some markets. However, a firm must be able to show that it made a reasonable effort to find such a price
Three basis points are equal to: A) 3% B) 3/10th of 1% C) 3/100th of 1% D) 3/1000th of 1%
C) 3/100th of 1% One basis point is equal to .01%, or 1/100th of 1%. Therefore, three basis points equals .03%, or 3/100th of 1%.
A Regulation D offering may be sold to a maximum of: A) 15 non-accredited investors B) 15 accredited investors C) 35 non-accredited investors D) 35 accredited investors
C) 35 non-accredited investors A Regulation D (private placement) offering may be sold to a maximum of 35 non-accredited investors. There is no limit on the number of accredited investors. An individual will be considered an accredited investor if he has a net worth of $1,000,000 or has had $200,000 ($300,000 for a married couple) of income for the previous two years with an anticipation of continued earnings at the same or a greater level.
What is the real interest rate for a bond that's yielding 6%, while the level of inflation is 2%, and the prime rate is 5%? A) 6% B) 5% C) 4% D) 3%
C) 4% The formula for calculating the real interest rate of a bond is the bond's yield minus the current rate of inflation. For this question, the bond's real interest rate is 4% (6% - 2%). The real interest rate factors in the decline of purchasing power. The prime rate (which is the rate that commercial banks charge their best corporate clients) is not a factor in this question.
Listed equity options cease trading at: A) 11:00 a.m. Eastern Time on the expiration date B) 2:30 p.m. Eastern Time on the expiration date C) 4:00 p.m. Eastern Time on the expiration date D) 5:30 p.m. Eastern Time on the expiration date
C) 4:00 p.m. Eastern Time on the expiration date Listed equity options cease trading at 4:00 p.m. Eastern Time on the expiration date. The expiration date for listed equity options is the third Friday of the expiration month, at 11:59 p.m. Eastern Time.
When an ETF is purchased, what is the transaction cost paid by the client? A) A sales charge B) A load C) A commission D) A fee
C) A commission ETFs trade on exchanges and clients pay transactions costs in commissions.
All of the following are acceptable forms of non-cash compensation that may be paid by a distributor of mutual fund shares to registered representatives, EXCEPT: A) A gym bag with the firm's logo B) An umbrella C) A golf bag D) A towel with the firm's logo
C) A golf bag Promotional items that are given to RRs by distributors and wholesalers of investment products (e.g., mutual fund shares and annuities) are acceptable provided they are of a nominal value. For non-cash compensation items to be considered of nominal value, the value must generally not exceed $100 (the gift limit). Of the four choices listed, the one that has a value that likely exceeds $100 is the golf bag.
An registered person has received a letter from a customer which includes a complaint about a recent new issue that declined substantially on its first day of trading. The customer purchased the shares based on a recommendation by the registered person and now claims that the recommendation was unsuitable. Which of the following statements is TRUE? A) The firm must keep a copy of the complaint for six years. B) The principal must review the complaint and submit a written response to the customer. C) A memo must be prepared describing any action taken in response to the complaint. D) The firm must promptly enter into arbitration (or mediation) with the customer to determine whether a reimbursement is warranted.
C) A memo must be prepared describing any action taken in response to the complaint. All written complaints must be reviewed by a principal and must be kept in a file, along with a memo describing any action taken in response to the complaint. There is no requirement to respond to the client in writing or to enter into arbitration or mediation. Under FINRA rules, records of complaints must be kept for a minimum of four years.
By using a dollar-cost averaging investment strategy, an investor will generally find the: A) Average price of securities being purchased are less than the average cost of the securities over a long period B) Average cost of securities purchased is more than the average price of the securities purchased over a short period C) Average price of the securities purchased will be more than the average cost of the securities over a long period D) Average cost of the securities will be equal to the average price of the securities over a long period
C) Average price of the securities purchased will be more than the average cost of the securities over a long period Dollar-cost averaging involves investing the same amount of money, in the same securities, over a long period. Since prices are volatile, the result is that the average cost of the securities purchased should be less than the average price of the securities over that period. However, dollar-cost averaging doesn't assure profits or long-term growth
Broker-dealers must provide a privacy notice to every consumer: A) When the account is opened B) When the first trade occurs C) Before disclosing nonpublic, personal information D) If requested
C) Before disclosing nonpublic, personal information A consumer is someone who provides information to a firm in connection with a potential transaction but is not yet a customer. The rules differ for customers and consumers. A consumer need only be provided with a privacy notice before disclosing nonpublic, personal information to a non-affiliated third party. If the firm does not intend to provide this information to a non-affiliated third party, it does not need to provide the consumer with its privacy notice.
Jim sits on the board of directors of a corporation. He has told his neighbor that his company will soon announce a revolutionary new product that should double the company's revenues. As a result, his neighbor purchases the stock. Jim does not purchase shares of the company. Who may be liable for violating insider trading restrictions? A) Only the neighbor, since she is the person who bought the stock. B) Only Jim, since he is the one who violated his duty to his shareholders. C) Both Jim as the tipper and the neighbor as the tippee. D) Unless the neighbor profits on the transaction, neither person is in violation.
C) Both Jim as the tipper and the neighbor as the tippee. In some situations, material non-public information is passed from one person (the tipper) to another person (the tippee). Thereafter, the tippee trades on the information. If the tippee knew, or should have known, that the information was confidential, both the tippee and the tipper may have violated insider trading rules. This is true even if the tipper did not directly participate in the transaction.
Which of the following is the rate that's charged on overnight loans between commercial banks? A) Prime rate B) Discount rate C) Federal funds rate D) Call rate
C) Federal Funds Rate The federal funds rate is the rate charged on overnight loans between member banks. The prime rate is the rate that commercial banks charge their best corporate clients. The discount rate is the rate that the Federal Reserve charges when lending to member banks. The call rate is what commercial banks charge on loans to broker-dealers for margin purposes
When illicit funds have entered the banking system undetected and appear to be legitimate, the funds are referred to as: A) Structured B) Layered C) Integrated D) Properly washed
C) Integrated Integration is the term used to define illicit funds that appear to be legitimate. When money is laundered, the first phase is structuring. During this phase money is deposited in the banking system in small amounts to avoid detection. It is then layered. Layering is the process of moving the funds around so that their origin is difficult to detect. The final stage is integration. This occurs when the funds finally appear to be from a legitimate source.
A call premium is best described as the amount the: A) Investor pays above the par value B) Investor will receive if the bond is sold above the par value C) Issuer pays above 100 to retire bonds prior to maturity D) Bondholder receives at maturity
C) Issuer pays above 100 to retire bonds prior to maturity A bond issue's indenture will usually require that, if an issuer calls bonds (redeems prior to maturity), it must pay the bondholder a premium (above par value). For example, a bond that matures in 30 years is callable at 103.5 in 10 years. The issuer must pay a premium of $35 per bond (103.5% of $1,000 is $1,035) above par to retire the bonds prior to maturity.
Federal and state registration requirements apply to all of the following, EXCEPT: A) Publicly traded limited partnerships B) Preferred stock C) Municipal securities D) Open-end investment companies
C) Municipal securities Municipal and U.S. government securities are exempt from the registration requirements of the Securities Act of 1933 and from state registration requirements.
A security with a high beta: A) Outperforms the market when it is gaining and losing B) Under-performs the market when it is gaining and losing C) Outperforms the market when its gaining and under-performs the market when its losing D) Under-performs the market when its gaining and outperforms the market when its losing
C) Outperforms the market when its gaining and under-performs the market when its losing Beta measures a security's volatility in relation to the market. A security's beta is compared to the beta of the market (i.e., the S&P 500), which has a beta of 1. A stock with a low beta (less than 1) is less sensitive to market movements. In a rising market, a low-beta security will lag in performance. However, when prices are declining, this security will do better since it will generally fall less than the market. On the other hand, a stock with a high beta (greater than 1) will be more sensitive to market movements. A high-beta stock will rise and fall faster than the overall market.
Prior to the maturity of a variable-rate demand obligation, an investor has the right to receive the: A) Current market value B) Par value C) Par value plus accrued interest D) Par value less accrued interest
C) Par value plus accrued interest A variable-rate demand obligation (VRDO) can be redeemed prior to maturity on any date the interest rate on the obligation is reset. Rates can be reset on a monthly, weekly, or daily basis. The obligation will be redeemed at par value plus accrued interest.
If a newly hired person is employed by a broker-dealer and will be offering mutual fund shares, she can become FINRA registered by: A) Passing the SIE Exam only B) Passing the Series 6 Exam only C) Passing the SIE Exam and the Series 6 Exam D) Passing the SIE Exam and the Series 63 Exam
C) Passing the SIE Exam and the Series 6 Exam In order to become properly registered or qualified, a newly hired person must pass the SIE Exam and the appropriate FINRA licensing exam. To offer mutual funds, a person must pass either the Series 6 or Series 7 Exam plus the SIE Exam. The Series 63 is a state exam, not a FINRA exam.
Many investors prefer to receive variable annuity payments under the straight-life payout option because it: A) Is the most conservative method for receiving payments B) Allows for a beneficiary for the entire payout period C) Provides the maximum cash flow of all payout options D) Provides an equal amount each month for the investor's lifetime
C) Provides the maximum cash flow of all payout options The annuitant will receive the greatest cash flow from the straight-life annuity payout option. This option allows the annuitant to receive payments as long as the annuitant is alive. At death the payments stop. No beneficiary is designated and the insurance company is relieved of its obligation to make payments. The annuitant has the greatest degree of risk with this type of payout.
It is most beneficial to the holder of a call if the price of the underlying security is: A) Falling B) Rising C) Remaining the same D) Fluctuating
C) Remaining the same The holder (purchaser) of a call expects the market price of the underlying security to rise and, therefore, will profit from a rise in the security.
Under the New Issue Rule, all of the following persons are defined as restricted persons, EXCEPT: A) The portfolio manager of an investment company B) A registered person of a broker-dealer C) The brother of a registered person of a broker-dealer who has an account with a different broker-dealer D) The parents of a registered person of a broker-dealer who reside in the same house as the registered person
C) The brother of a registered person of a broker-dealer who has an account with a different broker-dealer All of the choices listed are considered restricted persons except for the brother of a registered person of a broker-dealer. Restricted persons include any employee of a FINRA member firm (broker-dealer) and any immediate family member of the member firm's employees. Immediate family members include a spouse, children, parents, siblings, in-laws, and any other person who is materially supported by an employee of a member firm. Regarding immediate family members, they are only considered restricted persons if any one of the following three conditions apply: 1) the employee gives/receives material support to/from the immediate family member (material support is defined as providing more than 25% of the person's income or living in the same household as the registered person of the broker-dealer, 2) the registered person is affiliated with the member firm that's selling the new issue, or 3) the employee has the ability to control the allocation of the new issue. Since there are no details given to suggest that the brother lives in the registered person's home or gives/receives material support, he is not considered a restricted person
A facility is created by the issuance of industrial development revenue bonds. The bonds are backed by: A) The local municipal district in which the facility is domiciled B) The state in which the facility is domiciled C) The corporation that leases the facility D) Both the corporation that leases the facility and the municipality
C) The corporation that leases the facility The corporation using the facility that was built by the industrial development revenue bond becomes the authority that backs the bonds. The credit rating of these bonds is dependent on that corporation, not on the municipality that issued the bonds.
If a bond is currently selling for less than par value, then: A) The current yield is lower than the nominal yield B) The current yield is equal to the nominal yield C) The current yield is higher than the nominal yield D) Interest rates are currently lower than when the bond was originally issued
C) The current yield is higher than the nominal yield Bond yields and prices have an inverse (opposite) relationship, meaning that as one increases, the other would decrease. Therefore, if a bond is selling at a premium (above par), its current yield would have to be lower than its nominal yield. For example, an investor owns an 8% bond trading at $850. The nominal yield is 8%. The current yield is found by dividing the annual interest by the market price. An 8% bond pays $80 per year assuming a par value of $1,000. Therefore, the current yield is 9.41% ($80 / $850 = 9.41%
An investor, age 52, with funds in a 401(k) plan, is leaving her employer and wants to transfer the funds to an IRA account at your firm. Which of the following statements is TRUE? A) There will be a 10% penalty B) There will be a 50% penalty C) There will be no penalty D) There will be no penalty but the amount transferred will be taxable
C) There will be no penalty An investor may transfer funds from one retirement account to an IRA or other retirement account without incurring taxes or penalties. A transfer is a situation where a plan's assets move directly from one trustee to another. There is no limit to the number of these transactions. An investor who withdraws money from an IRA before reaching the age of 59 1/2 will pay a 10% tax penalty on the amount withdrawn, in addition to being liable for ordinary income taxes on the withdrawal. The amount of the early withdrawal will be added to the investor's taxable income for that year.
An investor purchases 1,000 shares of ABC stock at $30 per share and receives an annual dividend of $1.20. After one year, the stock's market value has increased to $36 per share. What is the investor's total return? A) 4% B) 17% C) 20% D) 24%
D) 24% An investment's total return is calculated by adding all of the cash flow received from dividends and/or interest, plus any appreciation or minus any depreciation in the value of the investment, and dividing by the initial investment. Therefore, the total return is determined as follows: [($36,000 - $30,000) + $1,200 in dividends] = $7,200/$30,000 = 24%.
A customer owns 50 shares of ABC Corporation. ABC Corporation is engaging in a rights offering. Each existing share receives one right. The terms of the offering are that 10 rights plus $35 is required to buy one new share of stock. If the customer wanted to subscribe to the rights offering, how many additional rights would she need to buy 100 new shares of stock? A) 95 B) 100 C) 350 D) 950
D) 950 The terms of the rights offering are that 10 rights are required to subscribe to one new share of stock. If an investor wanted to subscribe to 100 shares of stock, the investor would need 1,000 rights. (10 rights x 100 shares = 1,000 rights.) The investor owns 50 shares of stock and will receive 50 rights from the corporation (one right for each share owned). If the customer wanted to subscribe to 100 shares through the rights offering, the investor would need to purchase an additional 950 rights.
A broker-dealer's customer is attempting to raise money for a new business venture. The customer's registered representative (RR) agrees to assist by referring other clients and, in return, the RR will receive free services from the new business venture. This arrangement is: A) Normal business practice B) Acceptable as long as the free services are considered fair and reasonable C) Acceptable if the firm was provided prior written notice D) Acceptable if the firm was provided prior written notice and it maintains records of all transactions on the firm's books
D) Acceptable if the firm was provided prior written notice and it maintains records of all transactions on the firm's books This would be considered selling away, i.e., a private securities transaction which, according to FINRA rules, requires prior written notification to the firm. In addition, since the representative is receiving compensation, the firm must maintain records of all transactions related to this relationship.
ERISA stipulates that employers with qualified plans are not permitted to exclude employees who have worked for the employer at least one year and: A) Are age 18 or older B) Are age 21 or older C) Are age 18 or older and have worked a minimum of 1,000 hours during the year D) Are age 21 or older and have worked a minimum of 1,000 hours during the year
D) Are age 21 or older and have worked a minimum of 1,000 hours during the year In order to be eligible to participate in employer-sponsored qualified retirement plans, ERISA requires that employees be age 21 or older, have worked full-time (1,000 hours minimum) during the year, and be employed for at least one year.
Foremost Corporation has declared a quarterly dividend of 25 cents payable to stockholders of record on Friday, December 1. The dividend will be paid to all stockholders whose names appear on the record books of Foremost Corporation on: A) November 28 B) November 29 C) November 30 D) December 1
D) December 1 The dividend will be paid to all stockholders whose names appear on the record books of Foremost Corporation on the record date, which is given in this example as December 1.
Which of the following is typically completed prior to determining whether to issue a revenue bond? A) Registration statement B) Referendum certification C) Prospectus D) Feasibility study
D) Feasibility study A feasibility study determines whether a specific project should be built and whether the anticipated revenue will be sufficient to cover the expense.
A broker-dealer executes but does not process transactions. If the firm processing the transactions knows the identity of the customers, this arrangement is known as a(n): A) Prime broker B) Clearing broker C) Omnibus account D) Fully disclosed account
D) Fully disclosed account Due to the expense of setting up trade processing operations, many smaller broker-dealers choose not to self-clear. These firms do not process customer transactions nor operate their own operations department. Instead, they contract with another member firm to perform these services. The firm providing these services is the clearing firm, while the firm paying for these services is the introducing firm. While customers of an introducing firm consider that firm as their broker-dealer, their funds and securities are physically held at the clearing firm, from which they generally also receive statements and confirmations. If the introducing firm keeps the books and records for its own customers and the clearing firm does not know the identity of these customers, the introducing firm is known as an omnibus account. Many introducing firms operate through a clearing firm on a fully disclosed basis. This means that information about each of the individual customers of the introducing firm will be transmitted to the clearing firm and all of the customer books and records are kept by the clearing firm
Which of the following may charge performance-based fees? A) Mutual funds B) REITS C) DPPs D) Hedge funds
D) Hedge Funds In addition to assessing an initial sales charge on purchases, hedge funds often charge their owners a performance-based fee.
Which of the following choices is a characteristic of preferred stock? A) It has no fixed dividend. B) It has a dividend that is guaranteed. C) The board of directors are not required to declare the dividends. D) It carries no voting rights.
D) It carries no voting rights. The board of directors must declare dividends for both common and preferred stock. Neither common nor preferred stockholders are guaranteed a dividend. Preferred stock normally has a fixed dividend. Preferred stock does not have voting rights, only common shares may vote.
Which of the following statements is TRUE regarding a REIT? A) It is exempt from the Securities Act of 1933 B) It is a regulated investment company C) It may pass losses through to the investors D) It may be traded on an exchange
D) It may be traded on an exchange REIT shares may be traded either OTC or on an exchange. REITs are nonexempt securities under the 1933 Act. REITs are not regulated investment companies and may not pass losses to the investors.
If an issuer's convertible bonds are converted by bondholders, what is the effect on the issuer's outstanding common stock? A) It will no have no effect. B) It will decrease the number of outstanding shares. C) It will provide existing shareholders with a larger dividend. D) It will increase the number of outstanding shares.
D) It will increase the number of outstanding shares If an issuer's convertible bonds are converted into stock, the immediate impact is an increase to the number of outstanding shares. The conversion of the bonds does not change the dividend payment being made to existing shareholders.
Joan owns 100 shares of XYZ, which is currently trading at $57 per share. She wishes to liquidate the position when she can receive $6,000 from the trade. Which of the following orders is the BEST choice to fulfill Joan's intentions? A) Sell Stop @ 57 B) Sell Stop @ 60 C) Sell Limit @ 57 D) Sell Limit @ 60
D) Sell Limit @ 60 This situation is best approached by looking at the customer's intent. Joan wants to receive $6,000 for her stock. She owns 100 shares, so she needs to sell them at $60 per share in order to do that. This immediately rules out choices (a) and (c). Now, consider the two remaining choices, a sell stop at $60 and a sell limit at $60. If Joan were to place an order to sell stop at $60, her stock will be sold instantly, at a price of $57 per share (roughly). Why? Remember that sell stop orders are used to protect a position from losing value. The activation price of this order will be $60, which translates into: If the stock is trading at $60 OR LOWER, sell it instantly at the going market price. Since XYZ is trading at $57, the order will be triggered automatically, selling the stock at the market. The sell limit @ $60 is the right choice. In this case, no sell order will occur until XYZ is at or above the price of $60 per share.
If a person fails a qualification exam on her third attempt, for how long is she required to wait before retaking that same exam? A) 30 days B) 90 days C) Two years D) Six months
D) Six Months If a person fails a qualification examination, a 30-day waiting period applies between the first and second attempt, and again between the second and third attempt. However, if a person fails the qualifying examination on her third attempt, she must wait 180 days (six months) between all subsequent attempts.
A 529 plan may be offered by which of the following methods? A) Directly sold only B) Sold by an adviser only C) Sold by an employee who is not associated with a brokerage firm D) Sold directly or by an adviser
D) Sold directly or by an adviser There are two methods by which 529 plans may be sold to customers. One is referred to as direct-sold, in which there's no salesperson and the plan is sold directly through the 529 savings plan's website or through the mail. The other method is adviser-sold, in which the plan is sold through a broker-dealer that has entered into a signed selling agreement with the primary distributor of the 529 plan
Which of the following statements is TRUE for a bond trading at par? A) The bond will trade at a yield basis equal to the prevailing prime funds rate B) Due to the effect of compounding, the bond will trade at a basis above its coupon rate C) Due to the time value effect of discounting, the bond will trade at a basis less than its coupon rate D) The basis and coupon will be identical
D) The basis and coupon will be identical Basis is a different method of saying yield to maturity. In the case of a bond trading at par, all three yields (nominal, current, and YTM) will be equal to the coupon rate.
The Founders Income Fund has declared a dividend that is payable to stockholders of record on Thursday, May 29. This mutual fund's ex-dividend will typically be on: A) Monday, May 26 B) Tuesday, May 27 C) Wednesday, May 28 D) The date that is set by the fund or its principal underwriter (sponsor)
D) The date that is set by the fund or its principal underwriter (sponsor) Mutual fund shares do not trade on exchanges and do not have a fixed settlement date. For this reason, the ex-dividend date for a mutual fund will not automatically be one day before the record date, as it is for common stock. Instead, a mutual fund's ex-dividend date is on a date that is determined by the fund or its principal underwriter (sponsor). In practice, mutual funds will often use the day after the record date as the ex-dividend date.
An individual considering the purchase of an equity-indexed annuity should understand that: A) The return over long periods of time will equal the underlying index B) These products tend to outperform the stock market over long periods of time C) These products do not have sales charges or surrender fees like mutual funds and should only be purchased by seniors who want a death benefit and life payout D) The return over long periods of time will equal the greater of the participation rate of the underlying index (adjusted rate of return) or the guaranteed minimum
D) The return over long periods of time will equal the greater of the participation rate of the underlying index (adjusted rate of return) or the guaranteed minimum Equity indexed annuities (EIAs) are a hybrid product that combines the elements of fixed and variable annuities. They provide a guaranteed minimum rate of return, but their performance is linked to a securities stock market index. Participation in the return found in the index is usually less than 100% and the calculation excludes dividends, which are normally based solely on appreciation. These products typically have surrender charges, fees based upon the riders selected, generally making these unsuitable for senior citizens or those needing access to their money.
Which of the following trades does NOT fall under the jurisdiction of the SEC? A) The sale of a foreign company's stock by a customer in London to a broker-dealer in West Virginia B) The sale of a foreign company's stock between a broker-dealer in Ohio and institutional customer in Puerto Rico C) A sale of a foreign company's stock between a customer in New Mexico and a broker-dealer in the Virgin Islands D) The sale of a U.S. company's stock by a broker-dealer in Paris to an investment fund in Geneva
D) The sale of a U.S. company's stock by a broker-dealer in Paris to an investment fund in Geneva The Securities and Exchange Commission (SEC) has jurisdiction in matters that involve interstate commerce when at least one party to the transaction is located in a state, possession, commonwealth, or territory of the United States
Equity options expire on: A) The last Friday of the expiration month at 5:30 p.m. Eastern Time B) The last Friday of the expiration month at 11:59 p.m. Eastern Time C) The third Friday of the expiration month at 5:30 p.m. Eastern Time D) The third Friday of the expiration month at 11:59 p.m. Eastern Time
D) The third Friday of the expiration month at 11:59 p.m. Eastern Time
Regarding exchange-traded options, all of the following are TRUE statements, EXCEPT: A) The number of shares per contract is standardized. B) There are position limits that are imposed on clients. C) They are settled on the next business day (T + 1). D) They are settled on the second business day (T + 2).
D) They are settled on the second business day (T + 2). Since the question is in reference to options trading, all of the statements are true except that they settle on the second business day (T + 2). Option trades settle on the next business day (T + 1). However, if the question asked about the exercise of an option, the resulting stock transaction settles on the second business day (T + 2).
The phase of the business cycle that represents the bottom of the economy's decline is: A) Expansion B) Peak C) Contraction D) Trough
D) Trough The trough is considered the bottom of the economy's decline. In this phase, the lower prices of goods should cause the economy to move into a period of expansion.
The time at which an employee is eligible to receive at least some of the retirement benefits that have been contributed to the plan by the employer is referred to as: A) Eligibility B) Qualification C) Contributory D) Vested
D) Vested The time at which employees are eligible to receive at least some of the retirement benefits that have been contributed to the plan by the employer is referred to as vested. There are different schedules that can be used to determine when the employee is fully (100%) vested in the employer's contributions.
According to the Customer Identification Program, broker-dealers are required to verify each customer's identity: A) Before the account is opened B) Before the privacy notice is given C) Before the first trade D) Within a reasonable period
D) Within a reasonable period The Customer Identification Program (CIP) is part of a broker-dealer's overall anti-money laundering compliance program. Under this program, a customer's identity must be verified within a reasonable period following the opening of the account.
