SIE Unit 1

Which of the following statements regarding the third market is true? A) It is composed of listed securities traded OTC. B) It is composed only of unlisted securities. C) The services of a brokerage firm are not used. D) It refers to the block trading of unlisted securities.

A) It is composed of listed securities traded OTC. The third market is composed of OTC market makers (dealers) that deal in and provide liquidity for exchange-listed stocks. Though most of the trading of listed stocks takes place on the exchanges they are listed on, there is no rule that prevents OTC market makers from providing liquidity for these stocks as well.

Which of the following securities is exempt from the Securities Act of 1933? A) Municipal note B) Common stock C) Preferred stock D) Debenture

A) Municipal note Municipal debt securities, including short-term notes, are exempt from the Securities Act of 1933. LO 1.c

Which of the following terms is not associated with the exchanges? A) Negotiated pricing B) Listed security C) Physical location D) Auction

A) Negotiated pricing Negotiated pricing is a characteristic of the over-the-counter markets. Prices on the exchanges are set by the auction. Exchanges are often physical locations. Securities that trade on an exchange are called listed securities.

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? A) Private (nonpublic) securities offering B) Additional public offering (APO) C) Shelf offering D) Initial public offering

A) Private (nonpublic) securities offering Issuers wanting relief (exemption) from the registration provisions of the Securities Act of 1933 can offer securities privately. These securities offerings are often called private placements.

The purchase of an equity option settles ___________; the exercise of an equity option settles ________________. A) T+1, T+2 B) T+2, T+1 C) same day, T+1 D) T+2, T+3

A) T+1, T+2 All option trades settle the next day. The exercise of an equity option must be completed two days after exercise instructions are issued.

What federal law regulates the initial sale of securities to the public? A) The Securities Act of 1933 B) The Securities Exchange Act of 1934 C) The Investment Company Act f 1940 D) The Truth in Investing Act

A) The Securities Act of 1933 The rules for registering a new issue come primarily from the Securities Act of 1933.

When a broker-dealer maintains an inventory in a particular stock and trades that stock in the OTC market, it is acting as A) An agent B) A market maker C) A broker D) An underwriter

B) A market maker A market maker is a dealer in the OTC market that maintains an inventory in a stock and provides liquidity for customers seeking to buy and sell the security.

ABC stock is currently trading at $63. Julia Miller would like to purchase ABC stock, but not at $63. If the price of ABC stock were to fall to $58 or less, then Miller wants to buy the stock. Which type of order should Miller place considering her objective. A) Market order B) Buy limit C) Buy stop D) Buy stop limit

B) Buy limit While market orders are always executed immediately at the current market price, limit orders can only be executed at the limit price designated by the customer or better. For a buy limit order, "or better" means at a limit price or lower. Miller should place a buy limit order at $58.

All of the following are market centers within the secondary market except A) over-the-counter. B) capital. C) third market. D) exchanges.

B) capital. Capital markets is a term that covers all the markets used in capital formation. The others are all parts of the secondary markets in the United States.

A large-volume transaction for an institutional investor has occurred on an alternative trading system or network. Entered anonymously, the general public will see no information regarding the volume, price, or who the institutional investor was. This transaction scenario is generally referred to as having occurred A) on a U.S. exchange. B) in a dark pool C) in the over-the-counter market D) in the third market

B) in a dark pool Dark pools are designed to help institutional traders operate in a less-transparent setting than the exchanges (sometimes called lit markets, in contract to dark pools). This allows the institutions to trade with less disruption of the secondary markets. It also helps these institutional money managers make it more difficult to determine the strategies they are using.

Regular way settlement for the purchase of an equity option occurs A) the same business day as the trade date. B) one business day after the trade date. C) two business days after the trade date. D) three business days after the trade date.

B) one business day after the trade date. An equity option trade settles the next business day (T+1). LO 1.i

BigCo is currently quoted bid 32 ask 32.5 10 X 12. Your customer may be able to buy A) 1,000 shares at $32/share B) 1,200 shares at $32/share C) 1,200 shares at $32.50/share D) 1,000 shares at $32.50/share

C) 1,200 shares at $32.50/share Customers buy at the ask ($32.50) and there are 1,200 shares available at that prices (12 X 100).

Seabird Airlines is selling shares to the public for the first time. The company intends to use the proceeds from the sale of its stock to purchase several new passenger aircraft. This offering is an example of A) a secondary offering. B) a rights offering. C) an initial public offering. D) a subsequent primary offering.

C) An initial public offering This is the first time this company has made its stock available to the public, so this is an initial public offering. This transaction is in the primary market (the issuer is receiving the proceeds).

Under the intrastate offering rule (Rule 147), when may a resident purchaser of securities resell them to a nonresident? A) Three months after the first sale made in that state. B) Six months after the last sale made in that state. C) At least six months after the date of purchase. D) None of these.

C) At least six months after the date of purchase. In an intrastate offering, a purchaser of the issue may not sell the securities to a resident of another state for at least six months from the date of purchase.

A quote for Seabird Airlines (SBRD) is 17 B 17 ½ A 5 x 5. A customer would be able to sell how many shares and at what price? A) 1,750 shares at $5 a share B) 5 shares at $17 a share C) 500 shares at $17.50 a share D) 500 shares at $17 a share

D) 500 shares at $17 a share A quote is the bid and ask prices followed by the size on each side. A customer sells at the bid ($17) and the size is in round lots (5 × 100 = 500 shares). LO 1.f

On Tuesday, December 10 your customer Bought 5 OEX (S&P 100 Index) 230 March calls at four. On Tuesday, March 10 the calls are in-the-money and your customer issues exercise instructions. On what days did the trade and the exercise settle? A) December 12 and March 12 B) December 11 and March 12 C) December 12 and March 11 D) December 11 and March 11

D) December 11 and March 11 All option trades settle next business days. The exercise of an Index option settles the next business day. LO 1.i

Bao Chiang executes a trade to purchase 100 shares of ABC Corporation common in her cash account on Thursday, June 30. Cash must be in her account sufficient to pay the trade by the close of business on A) July 1 B) July 2 C) July 4 D) July 5

D) July 5 Regular way settlement for corporate securities is two business days. The second business day following Thursday, June 30, is Tuesday, July 5. Saturday and Sunday are not business days. July 4 is a national holiday and therefore considered a day-off.

All of the following are true for designated market makers except A) they are members of an exchange B) they are charged with maintaining a fair and orderly market C) they maintain an inventory of the assigned stock D) They guarantee the customer will get a profitable trade

D) They guarantee the customer will get a profitable trade Nobody can guarantee a profit in securities trading. A designated market maker is an exchange member that maintains an inventory in stock, provides liquidity, and is responsible for maintaining a fair and orderly market in its assigned securities.

How many primary offerings can a corporation issue? A) One primary offering B) Two primary offerings C) Three primary offerings D) Unlimited

D) Unlimited A corporation can sell as many shares and have as many offerings as it can get people to buy the stock.

ABC stock is quoted at 25.20 bid -- ask 25.22 X 12. The spread is A) $.02 B) $0.25 C) $0.20 D) $0.12

A) $.02 The difference between the bid and the ask is two cents.

ABC currently has the following quotes: Bid Ask Size 10.00 10.50 3 × 2 10.20 10.45 4 × 3 10.25 10.60 3 × 2 What is the spread in ABC? A) 0.20 B) 0.30 C) 0.25 D) 0.50

A) 0.20 The spread is computed as the difference between the lowest ask and the highest bid. In this case, the lowest ask is 10.45 and the highest bid is 10.25. Therefore, 10.45 - 10.25 = 0.20. LO 1.f

During the cooling-off period, an underwriter may do all of the following except: A) Gather binding indications of interest B) Distribute red herrings to interested parties. C) Perform due diligence. D) File required forms for state registration.

A) Gather binding indications of interest. There are no binding indications of interest. Indications of interest are nonbonding. All the other functions mentioned are allowed during the cooling-off period, as are nonbonding indications of interest.

Your customer places an order to buy 300 shares of Narcissus, Inc., (ticker: NCS) at $100 per share fill or kill (FOK). When the order is entered, there are 250 shares available at $100 per share. What happens to the order? A) They won't buy anything; the order will be canceled and nothing will be done. B) They will buy 250 shares, and the remainder of the order remains open until filled. C) They will buy 250 shares; the rest of the order will be canceled. D) They will do nothing, but the order stays open until the end of the day if more inventory becomes available.

A) They won't buy anything; the order will be canceled and nothing will be done. A FOK order instructs that the order be filled in its entirety and immediately. As there are insufficient shares available to fill this order, it will be canceled and nothing will be done.

Each of the following provides for an exemption from the registration requirement of the Securities Act of 1933 except A) access equals delivery rule. B) Regulation D. C) Regulation A. D) Rule 147.

A) access equals delivery rule. Securities offerings may qualify for exemption from the registration statement and prospectus requirements of the Securities Act of 1933 under Regulation A, Regulation D, Rule 147 and Regulation S. LO 1.c

A customer who is bullish on ABC would most likely A) buy ABC long. B) sell ABC short. C) sell ABC long. D) buy ABC short.

A) buy ABC long. When a customer is bullish, the customer expects the price to go up. Because trades are profitable when purchases are made at low prices and sales are made when prices are high, a customer would want to buy ABC long. Buying stock short is not a real trading strategy. LO 1.g

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

A) have transparent pricing for assets. A number of different assets, such as equities (stocks), debt (bonds), currencies, and derivative products like options can be offered and traded in the financial markets. These markets are expected to have transparent pricing aligning with supply and demand and to adhere to basic rules and regulations. LO 1.d

State registration is not required if the transaction is exempt. An example of an exempt transaction would be A) one that is unsolicited. B) one involving U.S. government bonds. C) one that is solicited. D) one involving municipal bonds.

A) one that is unsolicited. Purchases and sales that are unsolicited (unsolicited transactions) are exempt under the blue-sky (state securities) laws. Municipal bonds and U.S. government bonds are examples of exempt securities, not transactions. LO 1.b

If the issuer of a security is receiving the funds from an offering, it is a A) primary market transaction. B) secondary market transaction. C) over-the-counter transaction. D) backdoor deal.

A) primary market transaction. Whether an IPO, APO, or something else, if the issuer is getting the money, it is a primary offering.

The Securities Act of 1933 protects investors who buy new issues by doing all of the following except A) requiring the licensing of persons affiliated with broker-dealers. B) regulating the underwriting and distribution of primary and secondary issues. C) requiring an issuer to provide full and fair disclosure. D) providing criminal penalties for fraud in the issuance of new securities.

A) requiring the licensing of persons affiliated with broker-dealers. Licensing of individuals associated with broker-dealers is mandated under the Securities Exchange Act of 1934. The Securities Act of 1933 protects investors who buy new issues regulating, among other things, registration of new issues, underwriting, full disclosure, and the potential for fraud in the issuance of securities. LO 1.a

Public offerings of securities are regulated under A) the Securities Act of 1933. B) the Consumer Protection Act. C) Financial Industry Regulatory Authority (FINRA)'s communications with the public rules. D) the Securities Act of 1934.

A) the Securities Act of 1933. In a public offering, securities are offered and sold to the investing public. Public offerings of securities are regulated under the Securities Act of 1933. LO 1.a

A corporation needs to build a new manufacturing facility costing several hundred million dollars. In which of the following markets could this new capital be raised? A) Secondary market B) Capital market C) Municipal bond market D) Government bond market

B) Capital market Capital markets are a source of financing for corporations, municipalities, and governments. Capital can be raised by issuing equities or debt and offering the securities to investors in an initial public offering (IPO) or an additional public offering (APO). Note that bonds might be issued by a municipality or the federal government to raise money, but corporations (as noted in this question) do not issue government bonds, either federal or municipal. LO 1.a

Trading in the over-the-counter market occurs between whom? A) Specialists B) Market makers C) Institutions D) Retail investors

B) Market makers OTC trading occurs between market makers in a decentralized electronic market. LO 1.d

Regarding primary offerings, which of the following is true? A) A corporation can have two primary offerings—the initial public offering (IPO) and an additional public offering (APO). B) There is no limit to the number of primary offerings a corporation can issue. C) A corporation can have only one primary offering—the initial public offering (IPO). D) After its initial public offering (IPO), a corporation can have only one more primary offering—its subsequent primary offering (SPO).

B) There is no limit to the number of primary offerings a corporation can issue. While a corporation can have only one IPO, there is no limit to the number of SPOs or APOs it can issue. IPOs, SPOs, and APOs are all primary offerings—those where the offering proceeds go to the issuer. LO 1.a

Your customer buys 300 shares of Steel Tools common stock on Tuesday and will be an owner of record as of the close of business that same Tuesday. This must be A) not possible. B) a cash settlement trade. C) a mutual fund. D) a quick settlement trade.

B) a cash settlement trade. This is called a cash settlement trade. It states that the trade is a common stock, so not a mutual fund. There is no formal quick settlement trade. LO 1.i

Which of the following is not a characterization of the Securities Act of 1933? A) Truth in Securities Act B) Paper Act C) Exchange Act D) Prospectus Act

C) Exchange Act The act that regulates exchanges and members is the Exchange Act of 1934. The Securities Act of 1933 regulates new issues (New Issues Act) requiring registration (Paper Act), along with full disclosure (Prospectus or Truth in Securities Act). LO 1.a

Which of the following may purchase an IPO at the POP? A) Jim, a registered representative of Seacoast Securities. B) Jim's brother Robert, a contractor C) Jim's niece Amber, a chef D) Jim's father Roy, a retired engineer

C) Jim's niece Amber, a chef Jim, an employee of a BD, is a prohibited person, as are his spouse, parents, siblings, children and various in-laws. Aunts and uncles are not on the prohibited list, nor are nieces and nephews.

The SEC regulates the trading of all of the following except A) The New York Stock Exchange B) The Chicago Board of Options Exchange C) The London Stock Exchange D) The OTC market

C) The London Stock Exchange. The SEC only regulates U.S. trading.

To qualify as an exempt transaction under Tier 2 of Regulation A, an issuer may offer a maximum of which of the following? A) Up to $20 million in securities in a 12-month period B) Up to $15 million in securities in a 12-month period C) Up to $75 million in securities in a 12-month period D) Up to $22.5 million in securities in a 12-month period

C) Up to $75 million in securities in a 12-month period Securities offerings up to $75 million in a 12-month period are allowed in Tier 2. Of the $75 million, no more than $22.5 million can be sold on behalf of existing selling shareholders (similar to a combination offering). These offerings are subject to SEC review only and no review at the state level. Tier 2 offerings are still subject to rigorous disclosure requirements to the SEC, including audited financial statements and annual, semiannual, and current reports.

The Interstate Pension Trust manages over $1 billion in assets. The trust is seeking to purchase a large block of the stock of a Nasdaq-listed company with the assistance of a large broker-dealer. In this example, the trust is A) an angel investor. B) a retail investor. C) an institutional investor. D) not permitted to do this transaction because it is a pension trust.

C) an institutional investor. With over $1 billion in assets, the trust is an institutional investor. We know that they are not acting as a venture capitalist (or angel) because the company is already trading, and these shares are to be purchased in the secondary markets. We do not expect you to see angel investor on the exam except as a distractor. LO 1.a

All of the following are features of the exchanges except A) designated market makers maintaining liquidity. B) two-dollar brokers assisting in maintaining an orderly market. C) employees of the exchange buying and selling securities on the floor. D) a physical floor where traders call out bids and offers.

C) employees of the exchange buying and selling securities on the floor. Trades on the floor of the exchange are conducted by floor brokers, two-dollar brokers, and floor traders, and are members, not employees, of the exchange. Market makers are tasked with maintaining an orderly market and are also members of the exchange. LO 1.d

The requirement for a supplemental prospectus to be filed before each sale is applicable to A) additional issues. B) sales of shares in the secondary market. C) shelf registration sales. D) initial public offering sales.

C) shelf registration sales. Through a shelf offering, an issuer who is already a publically traded company can register new securities without selling any of the shares until later or waiting to sell a portion of the shares. For securities offered via a shelf registration, a supplemental prospectus must be filed with the Securities and Exchange Commission (SEC) before each sale.

The access equals delivery rule applies to A) all prospectuses delivered before the registration date. B) the preliminary prospectus delivery requirements during the cooling-off period. C) the final prospectus delivery requirements during the cooling-off period. D) the final prospectus and aftermarket delivery obligations.

D) the final prospectus and aftermarket delivery obligations. The access equals delivery rule applies to the final prospectus and aftermarket prospectus delivery obligations. It does not apply to preliminary prospectuses. No prospectus can be delivered before the registration date. LO 1.b

Isaac James has some call options in his account that he would like to exercise. He wants to know when the resulting purchase of the stock would settle. You would tell him: A) trade date plus 3 business days. B) trade date. C) trade date plus 1 business day. D) trade date plus 2 business days.

D) trade date plus 2 business days. When purchasing or selling an option, the settlement is the next business day. When an option is exercised the resulting stock transaction is 2 business days following exercise.

The SEC has established rules regarding delivery of a prospectus when a secondary market transaction occurs after the effective date. Which of these comply with those rules for initial (IPO) and additional (APO) public offerings? I. An IPO of a stock to be listed on the NYSE requires delivery for a period of 25 days. II. An IPO of a stock that will not be listed nor quoted over Nasdaq requires delivery for a period of 40 days. III. An APO of a stock listed on the NYSE requires delivery for a period of 25 days. IV. An APO of a stock that will not be listed nor quoted over Nasdaq requires delivery for a period of 40 days.

I. An IPO of a stock to be listed on the NYSE requires delivery for a period of 25 days -- AND -- IV. An APO of a stock that will not be listed nor quoted over Nasdaq requires delivery for a period of 40 days. The prospectus delivery rules include the following: IPO for listed or Nasdaq—25 days APO for listed or Nasdaq—none IPO for non-Nasdaq—90 days APO for non-Nasdaq—40 day LO 1.b