SIE Exam - Chapters 1 - 20
What's the required minimum net worth for an investor to be considered accredited?
$1 million, excluding their primary residence. To be considered accredited, an investor must have a minimum net worth of $1 million, which excludes her primary residence. An investor could also be considered accredited if she has annual income of at least $200,000 ($300,000 if married) in each of the last two years.
If a broker-dealer declares bankruptcy, which of the following positions is fully covered by SIPC?
$300,000 in stock, $100,00 in cash. The SIPC provides for coverage of $500,000 per separate customer, with a maximum coverage of $250,000 of cash. SIPC doesn't provide protection for futures positions.
What's an investment adviser?
A person in the business of giving investment advice for a fee. Investment advisers are individuals or companies that provide investment advice about securities for a fee. Broker-dealers buy and sell securities for commissions. Custodians hold funds or securities for investors. Transfer agents manage and keep track of the shareholders of a corporation that issues stock.
The OTC Bulletin Board (OTCBB) is BEST defined as:
A quotation system for securities that are not listed on either the NYSE or Nasdaq. The OTC Bulletin Board (OTCBB) is a quotation system for securities that are not listed on either the NYSE or Nasdaq. The OTCBB has no listing requirements and it's not an exchange. The system doesn't provide the execution services; instead, the equity traders from broker-dealers can either contact the dealer that has provided the quote by telephone or through a proprietary electronic delivery system. The companies whose stock is quoted on the OTCBB either don't meet the requirements for listing on an exchange or they've been delisted from an exchange. A similar system is the Pink Marketplace. The third market refers to exchange-listed securities that are traded over-the-counter or away from traditional exchanges.
Which of the following statements is TRUE? A. SIPC covers broker-dealer bankruptcy, while the FDIC covers bank deposits. B. SIPC provides coverage for bank deposits. C. The FDIC covers broker-dealer bankruptcy. D. Both the SIPC and the FDIC protect investors and depositors against fraud.
A. SIPC covers broker-dealer bankruptcy, while the FDIC covers bank deposits. SIPC protects customers of a broker-dealer in the event the firm declares bankruptcy. However, the FDIC protects bank depositors in the event the bank cannot pay its banking customers.
Which of the following organizations provides clearing services for equity securities? A. The National Securities Clearing Corporation (NSCC). B. The Fixed Income Clearing Corporation (FICC). C. The Options Clearing Corporation (OCC). D. A transfer agent.
A. The National Securities Clearing Corporation (NSCC). The National Securities Clearing Corporation (NSCC) provides clearing services for the majority of broker-to-broker equity trades in the United States. The NSCC is also a subsidiary of the Depository Trust and Clearing Corporation (DTCC) that provides custodial services. The Fixed Income Clearing Corporation provides clearing services for U.S. government and mortgage-backed securities (i.e., debt securities).
A customer has an account with a discount broker-dealer that specializes in online trading. If the customer is being charged a commission, the firm is MOST likely acting in which of the following capacities?
Agent. A broker-dealer who charges customers a commission is acting as an agent or broker. A broker-dealer who charges customers a markup or markdown is acting as a principal or dealer.
A husband and wife have combined earnings of greater than $300,000 in each of the last two years. If it's reasonably expected that this level of income will remain the same, the couple is considered:
An Accredited Investor. Accredited investors have a net worth of $1 million (excluding their primary residence) or annual income of $200,000 in each of the last two years. For married couples to be considered an accredited investor, they need to have income of at least $300,000. A qualified institutional buyer (QIB) must be institution with $100 million in assets under management (AUM), but is NOT a natural person.
Which of the following statements is NOT TRUE concerning a clearing corporation? A. It provides trade comparison and reporting services. B. It is responsible for automated book-entry changes in the ownership of securities. C. It assists broker-dealers in transferring assets in a customer account to another broker-dealer. D. It offers customers the ability to have real-time trade matching.
B. It is responsible for automated book-entry changes in the ownership of securities. The responsibility for automated book-entry changes in the ownership of securities is a function of a depository facility (e.g., the DTC), not a clearing corporation. Each of the other choices are functions of a clearing system, such as the National Securities Clearing Corporation (NSCC).
The Investment Advisers Act of 1940 regulates which of the following? A. The markup charged by a financial services firm on a securities transaction B. The fee charged by an accountant for providing advice concerning securities C. The fee charged by a bank to hold securities D. The fee charge by an accountant when he files a client's tax return
B. The fee charged by an accountant for providing advice concerning securities. The Investment Advisers Act of 1940 regulates firms that are established as investment advisers (IAs). The Act both defines the term investment adviser and provides a number of exclusions from the IA definition. Examples of investment advisers include firms that manage mutual fund portfolios as well as firms that manage wrap accounts and collect a single fee to cover the costs related to investment advice along with the costs of transactions. Exclusions from the IA definition are available to broker-dealers, specific types of professionals (lawyers, accountants, teachers, engineers), and publishers. However, for the professionals to be excluded, the investment advice being provided must be incidental to their actual profession. For example, if an accountant decides to hold himself out to the public as an investment adviser and charge a separate fee for that service, the exclusion will not apply. On the other hand, if an account collects a fee for completing and filing a client's tax return, he is not considered to be acting as an investment adviser.
A person has opened an account at a brokerage firm. In which of the following situations is her account protected by SIPC? A. She purchases some penny stock from the firm and the stock quickly becomes worthless. B. The firm files for bankruptcy and ceases doing business. C. Her RR steals cash from her account and flees the country. D. After the firm assures her that interest rates will be falling, she buys some bonds yet interest rates rise.
B. The firm files for bankruptcy and ceases doing business. The purpose of the Securities Investor Protection Corporation (SIPC) is to protect separate customers from broker-dealer bankruptcy. SIPC does not protect against market or interest-rate risk. Also, SIPC does not protect against losses due to fraud or theft by broker-dealer employees. To cover the losses resulting from fraud or theft, broker-dealers are required to maintain insurance which is referred to as a fidelity bond. SIPC is a non-profit organization that is funded through assessments on its broker-dealer members and it is NOT part of the U.S. government or the FDIC.
If a market maker has a current quote of 50.00 - 50.05 (15 x 20), this indicates that the firm is willing to:
Buy 1,500 shares at $50.00 and sell 2,000 shares at $50.05. When reading a quote, the bid is always listed first (i.e., $50.00 in this question) and the offer/ask (i.e., $50.05 in this question) is listed second. The market maker willing to buy shares at $50.00 and sell them for $50.05. The numbers in parentheses or brackets refer to the number of shares represented by the bid and offer. Unless specified otherwise, it's assumed that the size is in round lots of 100 shares. Therefore, the market maker is willing to buy up to 1,500 (15 lots x 100 shares) at $50.00 and sell 2,000 (20 lots x 100 shares) at $50.05.
A market maker is quoting a stock as follows: Bid 23.50, Offer 23.70. This means that the market maker will:
Buy shares at 23.50 and sell shares at 23.70. The bid is the price at which a market maker is willing to buy stock, while the offer is the price at which a market maker is willing to sell stock. In this example, the market maker is obligated to buy shares at the bid price of 23.50 and is obligated to sell shares at 23.70.
Which of the following statements is TRUE regarding the role of SIPC? A. SIPC provides protection against employee theft. B. SIPC covers separate accounts. C. SIPC covers separate customers. D. All regulated investment companies must obtain SIPC coverage.
C. SIPC covers separate customers. SIPC covers separate customers of a broker-dealer. An individual would be viewed as a separate customer. An individual who holds a personal account and an IRA would be treated as two separate customers.
A broker-dealer acting in an agency capacity will charge customers a:
Commission. When acting in an agency capacity, the broker-dealer will normally charge the customer a commission. A broker-dealer that is always willing to buy and/or sell a security is considered a market maker. A market maker will normally act in a principal capacity and charge the customer a markdown when buying stock from a customer and charge a markup when selling stock to a customer.
The primary purpose of the North American Securities Administrators Association is to:
Create rules, laws, and exam requirements for states. The provisions of the Uniform Securities Act (USA), which is a model law for the individual states, are established by the North American Securities Administrators Association (NASAA) and enforced by the individual states. Each state has its own securities regulations department and the person in charge of the department is referred to as the Administrator or Commissioner. NASAA membership includes Administrators of the 50 states, the District of Columbia, the U.S. Virgin Islands, Puerto Rico, Canada, and Mexico.
The investment banking department of a broker-dealer does NOT typically perform which of the following activities? A. Assisting a corporation in raising capital. B. Acting as an underwriter when an issuer wants to offer bonds. C. Assisting a company that's restructuring after declaring bankruptcy. D. Buying and selling securities for both customers and the firm's own account.
D. Buying and selling securities for both customers and the firm's own account. All of the activities can be performed by the investment banking department, except for buying and selling securities for customers and/or the firm's own account. Instead, this is a function of the trading department.
The Municipal Securities Rulemaking Board (MSRB) does NOT regulate which of the following? A. Municipal dealers B. Municipal salespersons C. Municipal advertising D. Municipal issuers
D. Municipal Issuers. The MSRB has the power to regulate municipal securities broker-dealers, their personnel, and their municipal securities communications with the public. However, the MSRB doesn't have the authority to regulate municipal issuers.
The goal of which of the following entities is to increase the volume of securities transactions by eliminating physical delivery with a book entry system?
DTCC. The Depository Trust & Clearing Corporation's (DTCC's) goal is to expand the ability to process transactions by automating clearing and settlement. This involves replacing physical delivery of securities with book-entry (electronic delivery).
If ABC Brokerage (a broker-dealer) purchases 600 shares of stock from a customer and places the securities into its inventory, it likely acted as a(n):
Dealer. When a broker-dealer buys a security from a customer using its own funds and places the securities into its inventory, it is acting as a dealer (principal). Since the firm is buying the securities from the customer, the customer is charged a markdown on the transaction (the firm charges a markup if it is selling the securities to the customer). On the other hand, if the firm locates the other side of the trade for its customer, it is acting as a broker (agent) and will charge the customer a commission. A firm is acting as an underwriter when it buys securities from an issuer and sells them to customers (i.e., it engages in primary market transactions). A firm that controls trading in a given stock on an exchange is referred to as a designated market maker (DMM).
If SIPC does not cover in full a customer's account in a brokerage firm that has gone bankrupt, the investor is a:
General Creditor. If SIPC does not cover a client's account in a brokerage firm that has gone bankrupt, the client is a general creditor. The client ranks equally with all other general creditors.
The department of a brokerage firm that advises a corporation regarding the structure and timing of a potential stock offering and also assists in the underwriting of securities is the:
Investment Banking Department. The investment banking department of a brokerage firm assists issuers that intend to sell new securities to the public. The sales department is involved buying and selling securities for customers of the firm. The research department makes recommendations to customers as to whether they should buy, hold, or sell a security. The operations department ensures that all of the paperwork, funds, and securities transfers which are associated with a trade (or processing) are handled efficiently and according to specific industry standards.
MSRB rules do NOT apply to:
Issuers. Municipal Securities Rulemaking Board (MSRB) rules apply to all the parties listed except municipal bond issuers. The MSRB does not have the power to regulate municipal bond issuers.
If a company's insiders are buying its shares, what will most likely happen to the share price?
It will appreciate. Insiders know more about their company than most investors and are required to report their purchases and sales to the SEC. If a large number of insiders are buying stock, it's likely that investors will feel more confident about the company and the result is that the share price will rise or appreciate in value.
An investor who is searching for a quote on a non-listed stock may find it on:
OTCBB. Non-listed stocks, also referred to as OTC equities, are quoted electronically on the Over-the-Counter Bulletin Board (OTCBB) and the OTC Pink Marketplace.
A broker-dealer executes but does not process transactions. If the firm processing the transactions does not know the identity of the customers, this is known as a(n):
Omnibus 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, this arrangement is known as an omnibus account.
The type of market in which an issuer raises capital by selling its securities to investors is referred to as the:
Primary Market. The type of market in which an issuer raises capital by selling its securities to investors is referred to as the primary market. The secondary market is where investors that purchased securities in the primary market then sell them to other investors. The third market involves securities that are listed on an exchange (e.g., the NYSE or Nasdaq) are traded in the OTC market. The fourth market refers to direct institution-to-institution trading and does not involve the public markets or exchanges.
A customer sells 500 shares of stock to a broker-dealer that makes a market in the stock. The broker-dealer acted in a(n):
Principal capacity and charged the customer a markdown. A broker-dealer that's always willing to buy and/or sell shares of stock is considered a market maker. A market maker will normally act in a principal capacity and charge a customer a markdown when buying the stock from the customer and a markup when selling the stock to the customer. When acting in an agency capacity, the broker-dealer will not take the other side of the trade and normally charges the customer a commission.
The primary purpose of a self-regulatory organization (SRO) is to:
Promote fair and equitable practices among members. The primary purpose of SROs (e.g., the exchanges, FINRA, the MSRB) is to promote fair and equitable practices regarding trading and the process by which its broker-dealer members interact with customers. SROs do not establish market prices. The SEC, not an SRO, may recommend pressing charges for violations of securities laws.
The third market is concerned with:
Securities listed on an exchange, but traded in the OTC market. The third market is concerned with securities that are listed on an exchange (e.g., the NYSE or Nasdaq) that are traded in the OTC market. The fourth market refers to direct institution-to-institution trading and does not involve the public markets or exchanges.
If there is a violation of securities laws, which of the following is responsible for taking criminal action?
The Department of Justice (DOJ). The SEC may investigate potential securities law violations through its Division of Enforcement, which prosecutes cases on behalf of the Commission. The SEC may also bring civil actions. However, if criminal activity is discovered by the Commission, the case falls under the jurisdiction of the Department of Justice (DOJ).
Which of the following organizations does NOT enforce MSRB rules? A. The Comptroller of the Currency B. FINRA C. The MSRB D. The SEC
The MSRB. The MSRB has no enforcement power. The SEC and FINRA enforce municipal regulations for broker-dealers. The Comptroller of the Currency, FRB, and FDIC enforce municipal regulations for dealer banks. The MSRB establishes its rules but has no enforcement powers.
Which of the following is NOT considered a self-regulatory organization (SRO)?
The Securities Exchange Commission (SEC). The Securities and Exchange Commission is an independent federal government agency that's responsible for protecting investors, maintaining fair and orderly securities trading markets, and regulating the process by which issuers raise capital in the primary market. The SEC allowed for the creation of separate SROs to be responsible for regulation of specific aspects of the securities industry. Examples of SROs include FINRA, the MSRB, and the CBOE.
In the secondary market, the "spread" for a security represents the difference in:
The bid and offer prices. The spread for a stock in the over-the-counter (OTC) market is the difference between the bid and offer prices. The offer is sometimes called the "ask".
If a customer exceeds SIPC limits:
The customer is a general creditor.
A broker-dealer is clearing its trades through another broker-dealer but is not disclosing specific information regarding its clients. Who is responsible for maintaining the account records?
The introducing broker-dealer. When a firm clears trades for another firm but is not given specific information regarding the introducing firm's clients, the account is said to be an omnibus account. Introducing firms are required to establish and maintain records for omnibus accounts.
The Pink Marketplace displays:
The market makers for stocks that are not listed on either the NYSE or Nasdaq. The Pink Marketplace lists market makers and their bid and asked quotations for over-the-counter stocks (i.e., OTC equities). These OTC equities are not listed on either the NYSE or Nasdaq.
"Blue Sky Laws" were established by:
Uniform Securities Act. "Blue Sky Laws," which are state securities laws, were established by the Uniform Securities Act (USA). The National Securities Markets Improvement Act (NSMIA) created a more efficient process by which state and federal regulations apply to investment advisers and securities. The Bank Secrecy Act (BSA) addresses the concerns of money laundering. The Maloney Act established the NASD, which was the predecessor to FINRA.