Unit 3 (Corporate Actions and Questions)

All of the following are considered unique or nonstandard corporate actions EXCEPT tender offer, merger, takover, 3:1 split

3:1 split, Corporate actions where the adjustments to cost basis are standardized would include cash and stock dividends, even and uneven splits both forward and reverse and the issuance of rights and warrants. All other corporate actions are considered nonstandard. Examples would include mergers and acquisitions, takeovers, spin-offs, tender offers and buy-backs or repurchases of stock.

Records relating to a currency transaction report must be retained for (3, 4, 6 or 5 years)

5 years, Currency Transaction Reports (CTRs) must be retained on file, together with other records generated in conjunction with them, for 5 years.

Catch-up IRA contributions are permitted for individuals who are at least age: a. 40 b. 50 c. 60 d. 70

50

Which of the following are NOT 3-yr or 6-yr records? A)Compliance and Procedures Manual B)List of home, regional, and branch offices C)Minutes of directors' meetings D)Customer complaints

A and D Minutes of directors' meetings (The Minute Book) is a lifetime record. Customer complaints must be kept on file for 4 years, not 3 or 6. The Compliance and Procedures Manual, which must frequently be updated, and the list of all offices where business is done are both 3-year records.

Under what circumstances could a member firm holding stock in street name vote the shares as it sees fit? If the customer signs and returns a proxy statement but does not indicate how to the shares are to be voted If the customer does not return the signed proxy statement by the 10th day before the shareholders' meeting If the matters to be voted on are of major importance If the matters to be voted on are of minor importance A) II and III B) II and IV C) I and III D) I and IV

B) A member firm holding stock in street name may vote the shares as it sees fit if the customer does not return the signed proxy statement by the 10th day before the shareholders' meeting, and if the matters to be voted on are of minor importance. If the matters are of major importance (such as a change in the direction of the business or a merger or acquisition), the shares are simply not voted.

ABC stock is currently trading at $63, Julia Miller would lke to purchase ABC stock but not at $63. if the price were to fall to $58 or less, then Miller wants to buy the stock. Which order should she place? Market Order, Buy limit, Buy Stop, Buy Stop Limit

Buy Limit

A securities firm that is not a FINRA member wishes to do trades with a FINRA member firm. Which of the following statements is TRUE regarding this situation? A) The firm may sell at a markup from the public bid price, but it may receive no markdown from the public offering price. B) The firm may buy at a markdown from the public offering price, but it may receive no markup from the bid price. C) The nonmember firm will receive no concessions, but it will buy at the public offering price and sell at the public bid price. D) The firm may receive markups or markdowns from principal transactions, but it may not receive commissions from brokered transactions.

C) A domestic nonmember firm dealing with a member firm must be treated like any member of the public. It may not be granted markups, markdowns, commissions, or concessions, but it must purchase at the public offering price and sell at the public bid price.

A 40-year-old individual is not covered by a retirement plan at work. What is the maximum contribution this individual can make to an IRA this year? A) Nothing, because this individual has no retirement plan at work. B) The current maximum allowed by the IRS plus the catch-up amount, but none of the contribution will be deductible. C) The current maximum allowed by the IRS, but none of the contribution can ever be deductible. D)The current maximum allowed by the IRS, which will all be deductible if the individual does not exceed the income limit.

D) While the exact annual contribution limit numbers are not likely to be tested, students should know that for those not covered by a retirement plan at work, the maximum contribution allowed by the IRS would be permitted and can be deducted on one's tax return. The deduction, however, would be phased out above a certain income level. The catch-up provision only applies to those age 50 or older.

An investor who sells a stock short...

will close their position by purchasing the stock is bearish loss is unlimited price of the stock must go down to make a profit

A market maker provides a firm quote to another broker/dealer then refuses to buy or sell at the price quoted. This is a violation where the market maker is said to be A) freeriding. B) backing away. C) marking the open D) pegging

Backing away. A market maker that does not honor its firm quote is said to be "backing away".

If a registered representative is sharing in profits and losses with a customer, all of the following statements apply EXCEPT A) If the customer is an immediate family member of the representative, sharing in gains and losses need not be proportional B) The representative must receive prior written permission from the principal before the arrangement may be made C) The representative's expertise must be considered part of the contributions to the account D) The representative may share in gains and losses, but only in proportion to the representative's share of the investment money

C) A registered representative may share in gains and losses with a customer, provided written permission is first obtained from the representative's principal, the investments take place in a joint account, and the representative's share of the gains and losses is proportional to the representative's share of the investment funds. The representative's knowledge and expertise may not be considered part of the representative's contribution, only what proportion of the investment funds the representative has contributed.

Shares to sell short have been located in order to be borrowed. Once sold short, these shares will be known as

(covered) Selling short requires borrowing or locating the shares to be borrowed first. These shares, because they have already been located to be borrowed, are known to be covered.

Regulation S-P (Privacy Notices)

-Enacted by the SEC to protect customer information -Deals with nonpublic information like SS numbers, transaction history -Firms must provide a privacy notice describing its privacy policies whenever a new account it opened and after that. -Reasonable opt-out methods must be provided to customers so information is not sent out to third party vendors. -Lastly firms must secure private information (locking laptops and computers, and locking document vaults)

Breakpoint Sale

-Prohibited -attempting to make higher commissions by selling shares just below the point at which a sales charge is reduced

SKRAM corporation is appealing directly to the shareholders of IDNIC corporation to acquire shares of IDNIC stock. This appeal is best described as a

A hostile takeover is accomplished when the buyer (SKRAM) goes directly to the target (IDNIC) company's shareholders bypassing the board of directors or management.

A hypothecation agreement would be best described as a

A signed hypothecation agreement permits the pledging of customer securities as collateral for margin loans

An officer of a financial firm has identified what might represent suspicious behavior on the part of a customer, involving more than $5,000. When must the firm file a suspicious activity report (SAR)? A) Within 30 calendar days B) Within 180 calendar days C) Within 5 business days D)By the end of the business day

A) A suspicious activity report must be filed with FinCEN within 30 calendar days of the firm becoming aware of the suspicious activity. The suspected parties may not be informed that they are the subject of an SAR.

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

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

Meeting the location requirements and the borrowing of securities when a customer wants to sell short is done by A) the broker-dealer on behalf of the short-selling customer B) the purchaser of the securities being sold short C) the customer who wants to sell short D) the customer or entity that the shares will be borrowed from

A) Meeting the location requirements and the borrowing of securities is done by the back office of the broker-dealer on behalf of the short-selling customer. Meeting these requirements is not something the short-selling customer would undertake without a broker-dealer.

What are the 2 basic types of return on an investment? A) Short term and long term B) Interest and principal C) Capital gains and income D) Dividends and interest

Capital gains and income. Upon the purchase of a security, the investors may receive dividends or interest, which are forms of income, or they may sell the security for a different price than was paid for it, which represents a capital gain or loss.

A mutual fund has breakpoints at $25,000, $50,000, $100,000, and $250,000. Which of the following transactions might be considered a breakpoint sale? The client purchases $48,000 worth of shares The client redeems $24,000 worth of shares The client purchases $252,000 worth of shares The client purchases $96,000 worth of shares A)II and III B) I and III C) II and IV D) I and IV

D) Breakpoints allow for lower sales charges at or above the designated points—in other words, quantity discounts. A breakpoint sale occurs whenever a purchase is made just below a designated breakpoint amount. Allowing a purchase to occur in an amount just below a breakpoint can be viewed as an effort by representatives to share in the higher sales charges.

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

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

Which of the following would lead to a standardized cost-base adjustment for stockholders? A) Spinoff B) Merger C) Dividend D)Takeover

Dividend. Scheduled, common events such as dividend declarations, issuance of rights and warrants, and forward and reverse stock splits are accompanied by standardized adjustment of the stock's cost base. Unique events such as corporate mergers, takeovers and spinoffs are dealt with in a nonstandardized case-by-case manner that depends on the individual circumstances. Ideally, the outcome is what is best for the stockholder and the company.

Your firm must provide an account statement to a customer this month if I. 5 months have passed since the last activity in his account II. there are penny stocks in the account III. activity has occurred in the account this month IV. some of the securities in the account have lost significant market value this month

II and III. FINRA members must send at least quarterly account statements to their account holders. If activity has occurred in a given month, a statement must be sent that month, and monthly statements are required as long as the account holds penny stocks.

Reverse Even Split Example investor owns 100 shares at $5 (1:4 Reverse split)

Investor now owns 25 shares worth $20 per share

All of the following statements about securities purchases are true EXCEPT A) in a cash account, the customer pays in full for securities. B) in a short margin account, customers borrow securities for short sales C) securities may not be purchased with borrowed money D) in a long margin account, customers borrow money for securities purchases

C) Borrowing is a perfectly acceptable practice when buying and selling securities, whether it is cash that is borrowed for purchases or securities that are borrowed, chiefly from other investors who have signed a loan consent agreement, allowing their securities to be borrowed for short sales.

An investor purchased an MJS corporation 6% 20-year bond at issue for $950. Two years later, the investor sold the bond for $925. This investor experienced A) a $25 interest loss B) a $925 return on investment C) a $25 capital loss D) a $25 return on investment

C) If a security is sold for less than the original purchase price, the difference is called a capital loss. This would apply to both equity and debt securities.

The regulation enacted by the SEC to protect the privacy of customer information is known as A) The bank secrecy act B) The trust indenture act C) Regulation S-P D) Regulation D

C) Privacy Requirements are mandated in Regulation S-P enacted by the SEC to protect the privacy of customer information. In particular, the regulation deals with nonpublic personal information

Notice of Corporate action should include

title of security, date of declaration, date of record, date of payment, for a cash dividend - the amount to be paid, for a stock dividend - the rate of the dividend, for a split, the rate of the distribution (e.g. 2:1 or 3:2) Notice should be given no later than 10 days before the record involved

Which of the following will settle regular way T+1 corporate, revenue, treasury or GNMA bond

treasury bond

Proxy Voting

a grant of authority by a shareholder allowing another individual to vote his or her shares (granting limited power of attorney) proxy is automatically revoked if the stockholder attends the meeting or if the proxy is replaced by another proxy (in a proxy contest everyone who participates must register with the SEC)

Each of the following activities would be deemed by market regulators to be manipulative behavior EXCEPT Capping, front running, proxy solicitation, marking the open or the close

Proxies are permissible to be solicited. The SEC requires a company to give stockholders information about the items to be voted on and allow the SEC to review this information before it sends the proxies to shareholders.

Shareholders who own the stock on a certain date receive a dividend when one has been declared. That date is known as the payable, declaration, ex-dividend, record

Record date, Shareholders must be owners of the stock on or before the record date in order to receive the current dividend.

In an effort to safeguard customer information which regulation specifies securing desktop and laptop computers and encrypting email? A) Regulation A B) The Securities Exchange Act C) Regulation S-P D) Regulation T

Regulation S-P. Safeguard requirements such as securing desktop and laptop computers and encrypting email to protect customer information is an obligation of financial institutions under Regulation S-P

A company offers to repurchase outstanding debt securities it has issued directly from its bondholders for cash in what would commonly be known as a Tender offer, Acquisition, buy-back, hostile takeover

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

Reverse Split

a stock split in which a firm's number of shares outstanding is reduced (investors own few shares worth more per share) the total position for the Shareholder doesn't change

Tender offer

an offer to purchase the stock of a firm targeted for acquisition at a price just high enough to tempt stockholders to sell their shares

49.50 bid - 49.75 ask

best price anyone is willing to sell is 49.75 best price anyone is willing to buy is 49.50

Buybacks

company buys its own outstanding shares to reduce the # of shares and hopefully increase value of shares still available (demand) or eliminate the threat of takeover

Forward Stock Split

increases the number of shares and reduces the price without affecting the total market value of shares outstanding (more shares and a lower price results in the same ownership interest

Corporate Actions notice

issuers are required by the SEC to give notice of CA to shareholders such as dividends, or splits or rights or warrants offerings

Stock Warrant

long term, bundled with other securities, allows them to purchase shares above the CMV when the warrant is issued (hopefully the price riseas and CMV rises above the price before the warrant is exercised)

Hypothecation Agreement

permits the broker-dealer to pledge the client's margin securities as collateral for a loan that the BD takes out. In simple terms, there are two loans taking place: The loan from the BD to the client with the client's securities used as collateral. That is covered in the credit agreement The loan from a bank to the BD with the client's securities used as collateral for the BD's loan. The authorization for the BD to use those securities is found in the hypothecation agreement.

A corporation with 1 million shares of stock outstanding wishes to sell another 250,000 shares. When management conducts a rights offering, a shareholder owning 100 shares will be given stock rights to purchase how many additional shares? A) 250 shares B) 125 shares C) 100 shares D) 25 shares

25 Shares. Stock rights (also known as preemptive rights or subscription rights) give current shareholders the ability to preemptively purchase enough shares to maintain their proportionate ownership of the corporation. This prevents their dividend and voting power from being diluted. The shares outstanding in this case will go from 1,000,000 to 1,250,000. This investor must thus go from owning 100 shares out of 1,000,000 to 125 shares out of 1,250,000. This would require that the investor be able to purchase an additional 25 shares.

An investor owns 500 shares of stock whose current market value is $20 per share. The stock undergoes a split, after which the investor owns 400 shares. What is the new price of the investor's stock? 10, 60, 40, 25

25, The rule for stock splits is that the total value of the stock position must be the same before and after the split. In the case of this reverse, uneven split, the total value of the stock before the adjustment was $10,000. For the 400 shares after the split to be worth $10,000, the price would have to be adjusted to $25 per share ($10,000 / 400 shares = $25).

To ensure that the information obtained from each new customer is accurate, firms must furnish to each customer a copy of the account record within how many days of opening the account? 30, 20, 10, 45

30, A copy of the account record must be furnished to each customer within 30 days of opening the account.

Once a customer account has been opened at a broker-dealer, rules require that updating information on the account record occur no less frequently than once every 36 months, a quarter, a year

36 months

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

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

Uneven split (example) Investor Owns 100 Shares at $60 (5:4 stock split) What are the new amount of shares and value

An "uneven split", also known as a "fractional split", such as a 3:2 or 5:4 Now owns 125 shares at $48 per share

Which of the following regarding income is TRUE? A)Salary or bonuses are portfolio income; interest and dividends are investment income. B) Salary or bonuses are earned income; interest and dividends are investment income. C) Salary, bonuses, interest, and dividends are all investment income. D) Salary, bonuses, interest, and dividends are all portfolio income.

B) While someone's salary or bonus would be earned income, investment income is that which is earned from one's investments. Sometimes called portfolio income, it would include dividends, interest, and capital gains derived from the sale of securities.

Which of the following statements about rights and warrants is TRUE? A) Rights and warrants are both long term. B) Rights are short term; warrants are long term. C) Rights and warrants are both short term. D) Rights are long term; warrants are short term.

B) A security with a termination, maturity, or expiration date that is 1 year or less from the date of issue is said to be short term. Rights offerings have a lifetime of 4 to 6 weeks, which makes them short term. If the end date is more than a year from the issue date, the security is long term. Warrants have expiration dates typically 2 to 5 years from the date of issue, which makes them long term.

A shareholder had arranged to vote by proxy at the corporation's annual shareholders' meeting, but later decided to vote the shares personally. All of the following statements regarding this situation are true EXCEPT A) the shareholders may instead vote personally as they wish B) the shareholders must accept the proxy's decision C) the proxy may be assigned to yet another person D) the shareholders may still abstain from voting altogether

B) If a shareholder decides not to abide by the decision to assign a proxy to a particular person, the decision can easily be abrogated. The shareholder may still abstain, may vote the shares personally or by mail or online, or may reassign the proxy to another.

A customer receives a Regulation T margin call for $3,200. To meet the deposit requirement, which of the following can be deposited? A) Fully paid for marginable securities totaling $3,200 in market value B) Fully paid for marginable securities totaling $6,400 in market value C) Fully paid for marginable securities totaling $1,600 in market value D) Cash in the amount of $1,600

B) When meeting a Regulation T margin call with cash, 100% of the call must be deposited—in this case, $3,200. If using fully paid for marginable securities to meet the call, a deposit totaling twice the amount of the call must be made—in this case, $6,400. This is because securities are only marginable to 50% of their value.

All of the following are true regarding market indexes EXCEPT A) they are performance standards investors can monitor B) they can demonstrate the overall direction of the market C) they can be used to compare against the performance of one's portfolio D) they track single stocks rather than hypothetical portfolios

D) Indexes such as the DJIA or the S&P 500 are hypothetical portfolios, not single stocks. While there's no single standard or benchmark, an index can be used as a performance standard one can monitor and therefore judge the performance of a portfolio or investment against. When we refer to the stock market's performance in general, we are most likely referring to the performance of an index or average that tracks stocks or bonds. These benchmarks can serve as an indicator of the overall direction of the market as a whole, or the direction of individual market sectors.

Should a member firm or an associated person be found in violation of FINRA's Conduct Rules, a number of sanctions may be imposed. However, under the Code of Procedure, FINRA may NOT A) bar an associated person from the industry forever B) issue a fine to a member firm or associate C) censure the violator D) impose a prison sentence on the violator

D) Only a court can issue a prison sentence. Each of the remaining answer selections, bar, fine, and censure, are sanctions FINRA could impose under the Code of Procedure.

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

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

Under the Uniform Transfers to Minors Act (UTMA) a custodian has control over the account and can do each of the following EXCEPT A) buy or sell securities B) liquidate, trade, or hold securities C) exercise right or warrants D) sell short and write uncovered call options

D) Selling short and writing uncovered options may only be effected in a margin account. The UTMA forbid the establishment of a margin account. Furthermore, these investment strategies, though legal and appropriate in other settings, provides unlimited risk and is inappropriate in an account held for a minor and therefore not permitted.

Regarding the potential financial exploitation of seniors, impacted accounts would be those for individuals (65 and older or age 18 and older

FINRA has specifically identified for the purpose of preventing financial exploitation of seniors individuals who are age 65 and older, or age 18 and older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.

Considering a customer's non-financial considerations is as important as considering the customer's financial concerns. Included in the category of non-financial considerations are salary marital status credit card debt number and ages of dependents

Marital Status and Number and ages of Dependents. Non-financial considerations are those that are not generally monetized. Even so, they can sometimes be more important than the financial ones. Things like marital status and the number and ages of the customer's dependents play a critical role in determining the appropriate investment strategies.

Subject to market liquidity, which of the following orders is most likely to be executed immediately? A) All-or-none order B) Fill-or-kill order C) Limit order D)Market order

Market Order. When a liquid market exists, buy or sell market orders are executed at the best available price immediately.

If the beneficiary of a custodian account dies, the securities in the account pass to the A) custodian's estate B) minor's estate C) parents D) SIPC trustee's account

Minor's estate, If the beneficiary of a custodial account (minor) dies, the securities in the account must pass to the minor's estate, not to the parents' or custodian's estate.

Stock Rights

Short term, given to existing stockholders who have the right (preemptive privilege) to purchase newly issued shares in proportion to their holdings below the CMV

Which of the following publishes and maintains a list of known terrorists and drug traffickers and those controlled by them or acting on their behalf? A) The Financial Crimes Enforcement Network (FinCEN) B) The Federal Open Market Committee (FOMC) C) The Financial Industry Regulatory Authority (FINRA) D) The Office of Foreign Assets Control (OFAC)

The office of Foreign Assets Control, Such a list is maintained by OFAC and is available to broker-dealers and other companies in the financial industry. It must be consulted when a firm takes on a new customer and on other occasions. The FOMC carries out open-market operations for the Federal Reserve. FinCEN is concerned with detecting and preventing the various steps of money laundering, and FINRA, of course, is responsible for regulating trades at the New York Stock Exchange and in the OTC market in the US