SIE Part 2
Describe the Fourth Market.
A market for institutional investors in which large blocks of stock trade through ECNs that are open 24 hours a day, in transactions unassisted by broker-dealers
Regarding primary and secondary offerings, which of the following are true? 1. An offering can only be either a primary or secondary. 2. An offering can be a combination of primary and secondary. 3. An initial public offering (IPO) is a secondary offering. 4. An additional primary offerings (APO) is a primary offering.
2. An offering can be a combination of primary and secondary. - These are known as split offerings. 4. An additional primary offerings (APO) is a primary offering. - the issuer receives the sale proceeds.
A final prospectus contains all of the following except A) history of the business. B) SEC approval. C) the use of the proceeds. D) description of the management.
B) SEC approval. The SEC neither approves nor disapproves a final prospectus; they allow the issue to become effective. Beware of any approval language when referring to a regulator.
Which segment of the business cycle would one expect to find rising interest rates and higher wages?
Expansion
Implementing monetary policy, and thereby undertaking the responsibility to maintain the stability of the U.S. financial system, is
the Federal Open Market Committee (FOMC).
A member of the Federal Reserve System wanting to increase its reserves could do so by borrowing money from
the Federal Reserve Board (FRB) at the discount rate.
The federal law requiring companies offering public equity or debt securities to provide a prospectus to investors is known as
the Securities Act of 1933. The Securities Act of 1933 is also known as the Prospectus Act.
A market in which exchange-listed securities are traded in the over-the-counter (OTC) market would best be described as
the Third Market.
The flow of money between the United States and other countries is known as
the balance of payments.
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
the broker call loan rate. 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 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 market maker.
The Securities Act of 1933 requires that
a new issue, unless specifically exempted from the Act, be registered with the Securities and Exchange Commission (SEC) before public sale.
A new registered representative receives a memo discussing the distribution of a red herring. The registered representative knows that the memo is referencing
a preliminary prospectus.
A company is looking to raise additional capital to fund an expansion plan. The company's senior management chooses to issue additional bonds to the general public. The best expression to explain this type of offering would be
a primary offering. A primary offering is one in which the proceeds raised go to the issuing corporation, municipality, or government.
An institutional investor selects a single Financial Industry Regulatory Authority (FINRA)/NYSE member firm to provide for financing and custody of securities while orders to buy or sell are placed with executing brokers. This is an example of
a prime brokerage account.
When an issuing company sells securities to primarily institutional investors and a small number of wealthy individuals, as opposed to the general investing public in an exempt offering, this is known as
a private placement
When the Federal Open Market Committee (FOMC) directs that Treasury securities be sold in the open market, this
decreases the supply of money. Treasury securities are going into the economy and, therefore, money is coming out—the money supply decreases.
During the cooling-off period, underwriters may not
distribute sales literature or advertising material. However, they may distribute a preliminary prospectus intended to gather indications of interest and place tombstone ads.
Regarding registration for the sale of securities, those registered under the Investment Company Act of 1940, such as mutual funds, would be considered
federal covered securities and not required to register at the state level.
A measure of a nation's citizen's economic activity is
gross national product. The gross national output is a measure of only the economic output of a country's citizens and companies, regardless of location. The gross domestic product measures all the output only within a nation's borders.
A company very concerned about liquidity would want
high current ratio. The current ratio is a measure of liquidity. The higher the ratio, the more liquid the company.
A deficit in the U.S. balance of payments can occur if interest rates in foreign countries are ______ than U.S. domestic rates.
higher
When investors buy and sell securities to and from one another, these transactions occur
in the secondary market. Secondary markets are where investors can buy and sell securities to and from one another. The secondary market includes exchanges and the OTC market.
A preliminary prospectus is used to solicit
indications of interest before the effective date.
In an underwriting where fixing a minimum dollar amount to be sold in order to move forward with the entire offering is most commonly referred to as
mini-max A mini-max offering is a best efforts underwriting setting a minimum, which is the least amount the issuer needs to raise in order to move forward with the underwriting, and a ceiling or maximum on the dollar amount of securities the issuer is willing to sell.
According to the U.S. Commerce Department, the economy is in a depression when a decline in real output of goods and services lasts
18 months or more (6 quarters).
For a new issue that qualifies for Nasdaq listing, a prospectus must be provided to all purchasers within how many days after the effective date?
25 days For nonlisted and non-Nasdaq securities, the period is 40 days. If the new issue will be specifically quoted on the OTCBB or the electronic OTC Pink, the period is 90 days.
According to the U.S. Commerce Department, the economy is in a recession when a decline in real output of goods and services lasts
6 months or more.
All of the following are self-regulatory organizations (SROs) except A) New York Stock Exchange (NYSE). B) Securities and Exchange Commission (SEC). C) Municipal Securities Rule Board (MSRB). D) Financial Industry Regulatory Authority (FINRA).
B) Securities and Exchange Commission (SEC).
Regarding the issuance of new securities to the public, which of the following is true? A) The Securities and Exchange Commission (SEC) review of a new issues filing must always be longer than 20 days. B) The Securities Act of 1933 provides criminal penalties for fraud. C) Underwriters are permitted to accept orders for securities during the Securities and Exchange Commission (SEC) review period. D) Registrations become effective within 10 business days of Securities and Exchange Commission (SEC) filing.
B) The Securities Act of 1933 provides criminal penalties for fraud.
Which of the following acts created the SEC? A) The Securities Investor Protection Act of 1970 B) The Securities Exchange Act of 1934 C) The Securities Market Improvement Act of 1975 D) The Securities Act of 1933
B) The Securities Exchange Act of 1934 The Securities Act of 1933 requires the registration of most new issues; the Securities Exchange Act of 1934 created the SEC; the Securities Investor Protection Act of 1970 created the SIPC; the Securities Market Improvement Act of 1975 created the MSRB.
The Securities Act of 1933 requires that all of the following be offered by a prospectus except A) unit investment trusts. B) Treasury bonds. C) mutual fund shares. D) variable annuities.
B) Treasury bonds.
All of the following would be considered current assets except A) cash. B) a warehouse. C) marketable securities. D) inventory.
B) a warehouse. Current assets are those that are either cash or expected to generate cash within the next year. Warehouses are fixed assets used for many years.
Which of the following correctly states the impact of open-market operations taken by the Federal Reserve Board (FRB)?
By buying securities, the FRB puts money into the banking system, expanding the money supply and reducing interest rates.
Which of the following pairs are not covered by the Federal Deposit Insurance Corporation (FDIC) at any level? A) Certificates of deposit and self-directed IRAs B) Savings accounts and annuities C) Mutual funds and annuities D) Certificates of deposit and mutual funds
C) Mutual funds and annuities This would also include life insurance policies and individual securities, such as stocks and bonds.
Under the Securities Act of 1933, which of the following is a nonexempt security? A) Commercial paper B) Municipal bonds C) Shares issued by a U.S. government bond fund D) U.S. government bonds
C) Shares issued by a U.S. government bond fund This is a mutual fund. Mutual funds are not exempt securities under the Securities Act of 1933.
Shelf offerings are covered under which if the following? A) The Investment Company Act of 1940 B) The Trust Indenture Act of 1939 C) The Securities Act of 1933 D) The Bank Secrecy Act
C) The Securities Act of 1933 The shelf offering (registration) provision under the Securities Act of 1933 allows issuers to quickly raise capital when needed or when market conditions are favorable.
All the following are cyclical industries except A) automobiles. B) home appliances. C) precious metals. D) heavy equipment.
C) precious metals. Cyclical industries are those that grow during expansions and shrink during declines. Precious metals are the exact opposite—they grow during declines and contract during expansions in the business cycle, and are termed countercyclical.
The business cycle is generally viewed as having how many stages? What are they?
Economists recognize four stages in the business cycle: peak, contraction, trough, and expansion.
Which regulatory body oversees trading in the over-the-counter (OTC) market?
FINRA
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?
Introducing/fully disclosed A fully disclosed introducing broker-dealer is what the word implies—it introduces its customer's business to a clearing firm. Clearing firms (often called carrying firms or agents) hold funds and securities and settle transactions (clear and process) for their correspondent introducing firms. Essentially, the clearing firm acts as the introducing firm's back office.
A company is considering raising capital without going through the registration process requirements mandated by the Securities Act of 1933. To be exempt from the act, which of the following offerings might they employ?
Private (nonpublic) securities offering These securities offerings are often called private placements.
What theory does this describe?: Government should allow market forces to determine prices of all goods and that the federal government should reduce government spending as well as taxes.
Supply-side Economic Theory
Which of the following would be allowed during the cooling off period?
Taking indications of interest. No selling or soliciting is allowed during the cooling off period.
Which entity considers appeals of decisions made in department of enforcement (DOE) actions?
The National Adjudicatory Council (NAC)
Mrs. Jones is an employee of a member firm and as such is a restricted person regarding the purchase of new issues. She belongs to an investment club and has a 1% interest in the club's brokerage account. Is the invest meant club restricted?
The investment club is not a restricted account and will be allowed to purchase equity shares of an IPO. Because the restricted person's interest in the club's brokerage account does not exceed 10%
An issuer that is already a publically traded company wants to register new securities without selling any of the shares until later when it anticipates it will be retooling all of its existing manufacturing plants. How can this be done?
This can be accomplished by utilizing a shelf registration specifically designed to register shares presently to be sold later.
A clearing corporation agent or depository for securities transactions can be a commercial bank. T/F
True. A clearing agent can be a broker-dealer but doesn't have to be.
Which set of FINRA rules focuses on broker-dealers doing business with other broker-dealers?
Uniform Practice Code
If large money center commercial banks begin to lower their prime rates, what will smaller banks do?
When large money center commercial bank lower the prime rate (the rate charged to their most creditworthy corporate customers), smaller banks will generally follow in order to stay competitive.
An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another is known as
a custodian
Underwriters acting as principals and committing to purchase any unsold shares for the syndicate account would best be described as being engaged in
a firm commitment.
An offering in which one or more stockholders in the corporation are selling all or a portion of their own shares to the investing public for the first time is known as
a secondary offering
A toy company is experiencing sudden strong demand for a game. Purchasing this company's stock may prove profitable in the short run. This company's stock might best be termed as
a special situation.
The U.S. gross domestic product is best described as
all goods and services produced within the nation.
A fully disclosed broker-dealer is also know as
an introducing broker-dealer
Under the Uniform Securities Act (USA), registrations must be renewed how frequently?
annually
Tombstone ads are permitted
before the effective date. Tombstone ads are the only form of advertising that is permitted from the time the registration statement is filed with the SEC and the effective date of the offering.
Under the Securities Exchange Act of 1934, registration is required for
broker-dealers.
To ease its monetary policy, allowing consumers to borrow more easily, the Federal Reserve Board (FRB) can
lower the discount rate.
The statement "These securities have not been approved or disapproved nor have any representations been made about the accuracy or the adequacy of the information" is
mandated to be in the final prospectus by the Securities and Exchange Commission (SEC). Commonly known as the SEC's disclaimer
Tools available to the Federal Reserve Board (FRB) include
open-market operations, setting the discount rate, and setting reserve requirements.
Economists call mild, short-term contractions
recessions.
If it finds that the registration statement needs revision, expansion, or to have corrections made, the Securities and Exchange Commission (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
resumes where it had left off.
The requirement for a supplemental prospectus to be filed before each sale is applicable to
shelf registration sales.
The rate at which banks lend to broker-dealers for the purpose of lending money for margin loans is typically
slightly above (a percentage point or so) other short-term lending rates.
The economy is showing that employment is low, there is little consumer demand, and loans for expansion and retooling are way down, showing a lack of business activity. Yet prices for consumer goods are still rising. Economists would call this a period of
stagflation. - Inflation is characterized by a rise in prices for goods and services. Stagnation is characterized by high unemployment and lack of growth and business activity. When these occur simultaneously, economists refer to these times as periods of stagflation.
The law that provides the legal framework for state registration of securities is
the Uniform Securities Act.
A municipal advisor does which of the following activities?
Advises municipalities on selling securities
What would best describe a follow-on offering?
An issue of shares by a public company that is already listed on an exchange
The Uniform Practice Code (UPC) establishes uniform trade practices pertaining to all of the following except A) communications with the public. B) don't know (DK) procedures. C) good-delivery procedures. D) settlement and ex-dates.
A) communications with the public.
A broker-dealer that accepts funds and securities from customers and its correspondent member firms would most likely be which of the following?
A carrying firm
Which of the following regulatory bodies regulates but has no enforcement powers? A) Municipal Securities Rule Board (MSRB) B) Securities and Exchange Commission (SEC) C) Chicago Board Options Exchange (CBOE) D) Financial Industry Regulatory Authority (FINRA)
A) Municipal Securities Rule Board (MSRB) The MSRB regulates all matters related to the underwriting and trading of state and municipal securities.
A tombstone advertisement would be expected to include all of the following information except A) any inherent risks associated with the offering or the issuer offering the securities. B) an advisory that the advertisement is neither an offer to sell nor a solicitation of an offer for any of these securities. C) the name of the issuer and underwriters if they are being used to assist in the offering. D) the price or price range at which the securities are expected to be offered.
A) any inherent risks associated with the offering or the issuer offering the securities. While any inherent risks associated with the issuer or the securities the issuer is offering would be expected to be shown in a prospectus, they would not be expected to be found in a tombstone advertisement.
ABC and MNO both have the same market price and shares outstanding for their common stock. If ABC's price-to-earnings ratio is higher, that would indicate
ABC's net income is less than MNO's. If ABC's price-to-earnings ratio is higher than MNO's, then its earnings (defined as net income ÷ shares outstanding) is lower than MNO's.
Restricted persons are not allowed to purchase an IPO of common stock. All of the following are restricted persons except A) broker-dealers. B) the grandparent of a restricted person. C) any person owning 10% or more of a member firm. D) registered representatives.
B) the grandparent of a restricted person. Aunts and uncles as well as grandparents are not considered immediate family. If, however, one of these individuals lives in the same household as a restricted person, that individual would be a restricted person.
A broker-dealer and its associated persons may be subjected to sanctions for violations of the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) rules. What penalty can be levied against the associated persons?
Censure definition: express severe disapproval of (someone or something), especially in a formal statement.
Which of the following sets of FINRA rules focuses on how member violations will be handled?
Code of procedures
Which of the following sets of FINRA rules focuses on fair dealing with the public?
Conduct rules
Reports of rising inventories generally occur during which period of the business cycle?
Contraction (due to a lack of consumer demand)
To stimulate the economy during a recession by expanding the availability of credit, the Federal Reserve Board (FRB) would do any of the following except A) buy U.S. government securities in open-market operations. B) lower the discount rate. C) lower the reserve requirement. D) raise the federal funds rate.
D) raise the federal funds rate. The federal funds rate is not set by the FRB.
All of the following self-regulatory organizations (SROs) function under the Securities and Exchange Commission's (SEC's) oversight except A) the Financial Industry Regulatory Authority (FINRA). B) the Chicago Board Options Exchange (CBOE). C) the Municipal Securities Rule Board (MSRB). D) the Federal Savings and Loan Insurance Corporation (FSLIC).
D) the Federal Savings and Loan Insurance Corporation (FSLIC).
Where can demand deposits, checking accounts, paper currency and coins be found in the money supply?
M1, M2, and M3
Currency held by the public, including checking accounts and time deposits less than $100,000, and money market mutual funds would best be described by economists as
M2 M2 is M1 (currency held by the public including checking accounts) plus time deposits less than $100,000 and money market mutual funds.
Within the money supply, which of the following are part of M2 but not M1?
M2 includes everything in M1, plus time deposits and money market funds.
Large time deposits of more than $100,000 are considered to be found in what part of the money supply?
M3
According to economists which of the following is the correct characterization of the money supply?
M3 includes all of M1 and M2, plus time deposits of more than $100,000 and repurchase agreements with terms longer than one day. In this light, M3 is that measure of the money supply that is the most inclusive.
What theory does this describe?: A well-controlled, moderately increasing money supply leads to price stability and a healthy economy.
Monetarist Theory
What are the two distinctive types of policies that impact the U.S. economy?
Monetary and fiscal Monetary policy is what the Federal Reserve Board (FRB) engages in when it attempts to influence the money supply. Fiscal policy refers to governmental budget decisions.
An official statement is a disclosure document that would be used in connection with an offering of what securities?
Municipal bonds
An investor opens an account with BNZ Government Securities, a broker-dealer limiting its transactions exclusively to securities issued by the U.S. government. The account holds $250,000 of Treasury bonds, $250,000 of Treasury notes, and $50,000 in cash. If BNZ's broker-dealer business should fail, the investor would receive Securities Investor Protection Corporation (SIPC) protection in the amount of
$0. Although the vast majority of broker-dealers are required to be members of SIPC, those who deal exclusively in U.S. government securities are exempt.
Certain investors are deemed accredited when they have a net worth of
$1 million, not including net equity in the primary residence.
An investor has a cash account with $300,000 in securities and $40,000 in cash. The investor also has a restricted long margin account containing securities with a market value of $220,000 and equity of $60,000. What is the extent of this investor's Securities Investor Protection Corporation (SIPC) coverage?
$400,000 Coverage under SIPC may not exceed $500,000 in cash and securities, of which up to $250,000 may be cash. In the cash account, his coverage is $300,000 in securities plus $40,000 in cash. In the long margin account, the coverage is only the equity, which is $60,000. Total: $300,000 + $40,000 + $60,000 = $400,000.
If a married couple have a joint account with a market value of $1 million and a debit balance of $600,000, all of which is in securities, how much coverage would this account have?
$400,000 A joint account has a maximum coverage of $500,000; however, in a margin account only the equity is covered, so the debit balance is subtracted from the market value, leaving $400,000 equity.
ABC has the following recorded on its balance sheet: Current Assets $50,000 Fixed Assets $100,000 Notes payable $40,000 Accounts Payable $25,000 ABC's net worth is
$85,000
The best characterization of how economists view the money supply is
cash, loans, different forms of credit, and other liquid instruments.
Under the Uniform Securities Act (USA), state laws require that registered representatives must register in a state in which of the following circumstances? 1. The registered representative is a resident of the state. 2. The registered representative solicits business in the state. 3. The registered representative vacations in a state more than twice per year. 4. The registered representative owns rental property in a state.
1. The registered representative is a resident of the state. 2. The registered representative solicits business in the state.
A firm designated as self-clearing can
1. act in a back-office capacity for an introducing firm. 2. clear and settle transactions executed by other firms.
During the 20-day cooling-off period,
1. solicitations of sales may not be made. 2. deficiency letters, if issued, are sent to the issuer.
Which of the following are methods of registering securities within a state? 1. Registration by coordination 2. Registration by qualification 3. Registration by notification 4. Registration by application
1. Registration by coordination 2. Registration by qualification
Which of the following calls for the underwriters to buy securities from the issuer acting as an agent, not as principal?
Best efforts underwriting The underwriter acts as an agent contingent on its ability to sell shares in either a public offering or a private placement.
An underwriting group is currently assisting an issuer with the preparation and filing of the registration statement for a new issue. Who is responsible for the accuracy of the information within the registration statement?
Issuing corporation
What is the economic theory that says the government can and should effect individual spending by adjusting taxes and government spending?
Keynesian
When engaging in open-market operations, taking actions to either expand or contract the money supply, the Federal Reserve Board (FRB) will buy or sell
Treasury securities
The cost of doing business is closely linked to the cost of money, which is known as
the cost of money is called interest
A customer has a significant amount of money in bank deposit accounts: $225,000 in a savings account titled in the customer's name; $240,000 in a checking account titled jointly with a spouse; and $100,000 in an account where the customer is custodian for a grandchild. Should that bank fail, the Federal Deposit Insurance Corporation (FDIC) insurance would cover
the entire $565,000. The FDIC provides deposit insurance guaranteeing the safety of a depositor's accounts in member banks up to $250,000 for each deposit ownership category in each insured bank. Each account listed (savings, checking, and custodial) is a separate ownership category under FDIC rules, so all the money in each of them is covered.
The interest rate negotiated for an uncollateralized overnight loan between two money center banks is known as
the federal funds rate.
The most volatile interest rate in the U.S. economy is
the federal funds rate. - The federal funds rate is the rate commercial money center banks charge each other for overnight loans of $1 million or more.
