SIE

What is NOT a fiduciary account? A. Custodial Account B. UGMA Account C. Partnership Account D. Trust Account The best answer is C. Both Trust accounts and Custodial accounts are "fiduciary accounts," where a third party is designated to manage the account in the best interests of the account owner. UGMA accounts are custodial accounts.

Partnership accounts and joint accounts are directly managed by an owner of the account, and thus are not fiduciary accounts.

A securities firm does a trade for a customer and charges a commission. In what capacity did the firm act? A. Agent B. Dealer C. Principal D. Market Maker

The best answer is A. A FINRA member firm can do securities transactions in one of two ways. It can act as a broker, routing the order to the best market, charging a commission for this service. This is called an agency trade, and the firm is acting as a middleman in the transaction. The other way to do the trade is to act as a dealer. Here, the firm maintains an inventory of the security, and acts as a principal, buying the security into inventory from the customer; or selling to the customer out of inventory. When acting as a principal, the firm earns a mark-up when selling to the customer out of inventory; or a mark-down when buying into inventory.

A money purchase retirement plan would invest in all of the following securities EXCEPT: A. Tax Free Municipal Bonds B. U.S. Government Bonds C. Equities D. Variable Annuities

The best answer is A. A retirement plan would not invest in tax free municipal bonds because such instruments provide a lower yield than taxable bonds. Since the pension plan itself is a "tax free" envelope in which securities are held, the plan would invest in securities that yield a higher amount.

A tombstone announcement shows a corporate offering of $10,000,000 of common stock at $1 par. The price per share is $50. The tombstone shows the: A. gross proceeds to the issuer B. net proceeds to the issuer C. syndicate members' percentage participations D. whether the syndicate account is Eastern or Western

The best answer is A. A tombstone announcement shows the gross proceeds of a new issue offering. It does not show the net amount received by the issuer (that is, the gross proceeds reduced by the underwriter's spread). It does not show the syndicate member participations, though it does show syndicate member names. It does not indicate whether the syndicate account is Eastern or Western. These items are found in the syndicate agreement.

All of the following are considered to be MFPs EXCEPT a representative who: A. sells municipal securities to retail customers B. provides advice to an issuer regarding an offering of municipal securities C. provides research regarding municipal securities to institutional clients D. is involved in soliciting municipal securities business

The best answer is A. An MFP (Municipal Finance Professional) is any associated person engaged in municipal securities representative activities EXCEPT the sale of municipal securities to "natural" persons - meaning human beings. Municipal securities representative activities include: the underwriting or sales of municipal securities; the solicitation of municipal securities business; financial advisory or consultant services to municipal issuers; research of investment advice regarding municipal securities; and communication with public investors about municipal securities. In addition, any principal that supervises these persons are defined as MFPs. It is important to note that since sales activities with "natural persons" are not considered to be MFP activities, retail representatives are excluded from the definition and do not fall under the political contribution rules.

Individual Retirement Account contributions can be made with: A. Cash B. Exempt Securities C. Non-Exempt Securities D. All of the above

The best answer is A. Contributions to an IRA can only be made with cash. Once the cash is deposited, it can be used to purchase any type of qualified investments (bank certificates of deposit, securities, U.S. minted gold coins, and precious metals).

If a customer does not give a broker his or her instructions, cost basis reporting on Form 1099-B for a stock holding where there have been multiple purchases at different times is done on a: A. FIFO basis B. LIFO basis C. Specific identification basis D. Random selection basis

The best answer is A. Cost basis reporting to the IRS is required on Form 1099-B. The Form includes the cost basis of the security, the sale proceeds, and whether the holding period is short term or long term. If there are multiple purchases of the stock position, absent customer instructions, FIFO is used to report cost basis. If the customer gives instructions to the broker, then specific identification can be used - which is beneficial if higher cost shares are selected to either reduce capital gains or increase reported capital losses.

Which of the following do NOT enforce MSRB rules for bank dealers that are not registered with FINRA? A. Securities and Exchange Commission B. Office of the Comptroller of Currency C. Federal Deposit Insurance Corporation D. Federal Reserve Board

The best answer is A. Enforcement of MSRB rules for bank dealers that are not registered as broker-dealers with FINRA is performed by the bank regulatory bodies - the Office of Comptroller of Currency; the Federal Reserve; and the Federal Deposit Insurance Corporation. Note that the SEC has no authority over banks unless the bank has a separate FINRA registered broker-dealer unit.

Which of the following gifts is the maximum permitted under FINRA rules? A. One gift of $100 value per person per year B. Unlimited number of gifts of $100 value per person per year C. One gift of $200 value per person per year D. Unlimited number of gifts of $200 value per person per year

The best answer is A. FINRA limits gifts related to one's activities in the securities industry to a maximum of $100 value per person per year. This limit is applied to either giving, or receiving, the gift.

A divorced woman with 2 young children has a small trust fund that gives her $2,500 a year in income. She collects another $2,500 per year in alimony payments. The woman wishes to make a contribution to an Individual Retirement Account this year. Which statement is TRUE? A. No contribution can be made B. A contribution can be made based only on the income received from the trust fund C. A contribution can be made based only on the alimony payments received D. A contribution can be made based on both the income received from the trust fund and the alimony payments received

The best answer is A. IRA contributions can only be made based on earned income - meaning income from one's work. Portfolio income does not count, since it is not earned income. Alimony and child support payments are not classified as "earned income" for purposes of making IRA contributions. Thus, a woman who has income from a trust fund and who received alimony payments cannot make an IRA contribution based on either of these sources of income. (Of course, the big question here is, "If this person only has total income of $5,000 a year, how would she be able to make an IRA contribution since she doesn't even have enough money to eat!")

All of the following are non-exempt issues under the Securities Act of 1933 EXCEPT: A. Fixed annuity contracts B. Variable annuity contracts C. Listed option contracts D. Listed common stock

The best answer is A. Insurance company offerings are exempt from the 1933 Act with the exception of variable annuity and variable life contracts. Thus, a fixed annuity offered by an insurance company is exempt from the 1933 Act. Listed stocks, and stock options are non-exempt issues that must be registered with the SEC.

When a customer buys a new stock issue from a syndicate member, the customer pays: A. the Public Offering Price B. the Public Offering Price plus a commission C. a negotiated price that can be at or below the Public Offering Price D. any price because this is a negotiated market offering

The best answer is A. New stock issues are sold under a prospectus that states the Public Offering Price, which is inclusive of any compensation to the underwriter (the spread). Additional commissions or charges above the POP are not allowed.

The lower 15% tax rate applies to: A. cash dividends received from stock investments B. stock dividends received from stock investments C. stock splits received from stock investments D. distributions from retirement plans

The best answer is A. Only cash dividends received from stock investments (both common and preferred) qualify for the lower 15% tax rate (or 20% for individuals in the highest tax bracket). Stock dividends and stock splits are not taxable as income, rather for tax purposes, the cost basis per share is reduced for the distribution and the number of shares is increased proportionately.Any taxable portion of a retirement distribution is taxed at ordinary income rates.

A wealthy customer has been asked by his neighbor to invest in the private placement of a "start-up" technology company as a venture capital investor. This is the first time that the customer has considered such an investment. The customer contacts his registered representative and asks: "Aside from the investment risk associated with a "start-up" company, what are the other issues that I should consider before making such an investment." The registered representative should inform the customer that: A. there is no public resale market for these securities unless the company "goes public" and is current in SEC filings B. these securities can only be sold to customers that have a minimum net worth of $100,000,000 C. these securities must be held for at least 12 months before a public resale is permitted under the provisions of Rule 144 D. after issuance, these securities can only be traded in the PORTAL market

The best answer is A. Private placement securities are not registered and hence, cannot be publicly traded. Only if the company subsequently "goes public" and begins reporting its results to the SEC can the shares trade in the public markets. However, these securities can be resold "privately" - but there is not much of a market for private resales of unregistered securities. If the company does go public, and if the customer holds these securities for 6 months fully paid, then they can be sold under Rule 144 and the sale via the rule will register the shares. There is no trading of Rule 144 issues in the PORTAL market. PORTAL is an electronic marketplace for the trading of Rule 144A issues (Rule 144A is completely different than Rule 144!) from QIB (Qualified Institutional Buyer with at least $100 million of assets to invest) to QIB.

Who determines if an OTC stock is marginable? A. FRB B. FINRA C. SEC D. OTCBB

The best answer is A. The Federal Reserve Board (FRB) is given the power to control margin on securities under Regulation T. Under Regulation T, all listed securities are marginable, and securities on the "OTC Margin List" published by the FRB are marginable.

What is the Net Asset Value per share of a mutual fund? A. Assets - Liabilities / Outstanding Shares B. Assets - Operating Expenses / Issued Shares C. Assets - Management Fees / Outstanding Shares D. Assets - Redemption Fees / Issued Shares

The best answer is A. The formula for Net Asset Value per share of a mutual fund is the market value of all fund investments (assets) minus any fund liabilities (for example, mutual funds can borrow from banks within limits, so any bank loans would be deducted). This gives Net Asset Value (NAV). Dividing NAV by the number of outstanding shares gives NAV per share.

Which statement is TRUE about TIPS? A. The coupon rate is less than the rate on an equivalent maturity Treasury Bond B. The coupon rate is equal to the rate on an equivalent maturity Treasury Bond C. The coupon rate is a market approximation of the inflation rate D. The coupon rate is a market approximation of the discount rate

The best answer is A. The interest rate placed on a TIPS (Treasury Inflation Protection Security) is less than the rate on an equivalent maturity Treasury Bond. For example, a 30 year Treasury Bond might have a coupon rate of 4%; but a 30 year TIPS has a coupon rate of 2.75%. The "difference" between the two is the current market expectation for the inflation rate (1.25% in this example). The coupon rate on the TIPS approximates the "real interest rate" - the rate earned after factoring out inflation. If 30 year T-Bonds have a nominal yield of 4%; and the inflation rate is expected to be 1.25%; then the "real" interest rate is 2.75%. The reason why the TIPS sells at a lower coupon rate is that, every year, the principal amount is adjusted upwards by that year's inflation rate. So there are really 2 components of return on a TIPS - the lower coupon rate plus the principal adjustment equal to that year's inflation rate.

A customer that discovers an error on his or her account statement must report the error: A. promptly to the member firm B. before the next account statement is generated C. to the representative servicing the account D. to FINRA

The best answer is A. The issue at hand is that FINRA is concerned about registered representatives that do unauthorized trading in their customer accounts to generate commission income, without the customer knowing about or authorizing the transactions. So FINRA requires that a legend be placed on customer account statements that any errors found must be reported to the member firm (not FINRA) promptly. The person to whom the report cannot be made is the registered representative, since if he or she is effecting unauthorized trades, then the report just might get "lost."

A registered representative solicits an order from a customer to buy 200 shares of XYZZ at $50. The customer agrees and the registered representative completes the order ticket and enters the order for execution. Once the member firm processes the order, the order ticket record must contain all of the following information EXCEPT: A. Time of order solicitation B. Time of order receipt C. Time of order entry D. Time of order execution

The best answer is A. The required time stamps on an order ticket are time of order receipt; order entry; and order execution. There is no requirement for the time of order solicitation to be on the order ticket (remember, also, that many trades are unsolicited).

A customer in New Jersey calls a registered representative (agent) in New York and inquires about buying common stock that his brother-in-law recommended. The customer wishes to place the order. Which statement is TRUE? A. The agent must be registered in both the State of New York and the State of New Jersey B. The agent must be registered in the State of New Jersey only C. The agent must be registered in the State of New York only since the trade is unsolicited D. The agent is not required to be registered in either state since the trade is unsolicited

The best answer is A. This question gets at a fine point of State law. Under State law, there is an "unsolicited transaction exemption" that gives an exemption from State registration to any security involved in an unsolicited transaction. However, it does NOT give an exemption from registration to the agent involved in the transaction! Because the agent is resident in New York, he or she must register there. Because the agent is dealing with a customer in New Jersey, the agent must be registered in New Jersey as well!

An open order is on the member firm's internal order entry system to sell 200 XYZ at 30 Stop GTC. The company has declared a 50% stock dividend. On the morning of the ex date, the order on the book will be: A. Sell 300 XYZ at 20 Stop GTC B. Sell 300 XYZ at 30 Stop GTC C. Sell 300 XYZ at 40 Stop GTC D. Sell 300 XYZ at 60 Stop GTC

The best answer is A. To adjust the order for the 50% stock dividend, the number of shares is multiplied by a factor of 1.50 (since there are 50% extra shares) while the order price is divided by a factor of 1.50. 200 shares x 1.50 = 300 The price would change to: $30 price / 1.50 = $20 adjusted order price

Treasury notes: A. are issued in minimum $100 denominations B. are issued at a discount C. have maturities between 10 and 20 years at issuance D. mature at par plus accrued interest

The best answer is A. Treasury notes are issued at par in minimum denominations of $100 each, and pay interest semi-annually. At maturity, the bondholder receives par. Maturities at issuance range between 2 and 10 years.

Which statement is TRUE regarding a minor in a custodial account opened under UGMA reaching legal age? A. The new adult must take control of the account B. The new adult can let the custodian retain control of the account C. The new adult can appoint a successor custodian D. The new adult must liquidate the account, and open a new account with the proceeds

The best answer is A. Under UGMA, when a minor reaches legal age, the registration on the custodial account is changed to the sole name of the new adult. To do so, the new adult must present proof of age and a government issued photo I.D. The new adult is free to do as he or she wishes with the account.

Variable rate municipal notes avoid which of the following risks? A. market risk B. default risk C. marketability risk D. credit risk

The best answer is A. Variable rate municipal notes avoid "interest rate risk," also known as market risk, since a rise in interest rates will not devalue these securities. With a fixed rate note, as interest rates rise or fall, the note's value must decrease or increase proportionately, so that the note gives a yield that approximates the current level of interest rates. Variable rate notes periodically adjust the rate of interest paid to holders, usually based upon an index of government securities. The interest rate on the notes is adjusted up or down, based upon prevailing market interest rates; thus the price of the instrument will stay at, or very close to, par.

Which of the following best describes "structuring"? A. Depositing or withdrawing cash in amounts just over $10,000 B. Depositing or withdrawing cash in amounts just under $10,000 C. Diversifying among asset classes in amounts just over $10,000 D. Diversifying among asset classes in amounts just under $10,000

The best answer is B. "Structuring" is the illegal practice of making a pattern of deposits or withdrawals of cash in amounts under $10,000 to avoid currency transaction reporting rules. (its also called layering)

In the same year, a customer has $14,000 of long-term capital losses on stock positions and $4,000 of short-term capital gains on options positions. Which statement is TRUE? A. The capital losses can be netted against the capital gains and a $10,000 net capital loss is reported, all of which is deductible B. The capital losses can be netted against the capital gains and a $10,000 net capital loss is reported, $3,000 of which is deductible C. The $14,000 of capital losses on the stock positions must be reported separately from the $4,000 of capital gains on the options positions, with all $14,000 of capital losses being deductible and all $4,000 of capital gains being taxable D. The $14,000 of capital losses on the stock positions must be reported separately from the $4,000 of capital gains on the options positions, with only $3,000 of capital losses being deductible and all $4,000 of capital gains being taxable

The best answer is B. Capital gains and capital losses on all assets are "netted" against each other. There is no segregation by type of asset. This customer had $14,000 of long term capital losses on stocks and $4,000 of short term capital gains on options. The customer has a net $10,000 long-term capital loss, of which only $3,000 is deductible in 1 year. The remaining $7,000 of unused net capital losses is carried forward to the next year.

For municipal transactions effected on a yield basis, how are these bonds generally priced? A. All bonds are priced to their highest possible yield B. Premium bonds are priced to the near-term call date C. All bonds are priced to maturity date D. All bonds are priced to the initial near-term call date

The best answer is B. For transactions in callable issues effected on a yield basis, discount bonds are priced to maturity while premium bonds are priced to the near term call date. Thus, the customer is always given a dollar price that ensures he will, at a minimum, get the promised yield. In essence all bonds are priced at their "yield to worst."

The credit rating of a guaranteed corporate bond is based on the credit quality of the: A. corporate issuer B. corporate guarantor C. FDIC D. SIPC

The best answer is B. Guaranteed corporate bonds are guaranteed by another corporation (typically a parent company guaranteeing the debt of a wholly owned subsidiary). The guarantor will have the higher credit rating, so the bonds will be able to be issued at a lower interest cost. Such bonds take on the credit rating of the corporate guarantor, who is liable for payment if the issuer defaults. Agencies, such as Federal Deposit Insurance Corp. and Securities Investor Protection Corp. do not guarantee corporate bonds. They protect customer accounts if banks, or securities firms fail, respectively.

A divided municipal syndicate sells $4,000,000 of bonds out of a $4,500,000 offering. When the manager disbands the syndicate, the unsold bonds will be: A. returned to the issuer B. confirmed to each syndicate member that did not sell its allotment C. confirmed to all syndicate members on a pro-rata basis D. retained by the manager for distribution through a joint account

The best answer is B. In a divided (Western) syndicate, each member takes a preset dollar amount of the issue. If any one syndicate member undersells, he is responsible for his unsold amount. For example, if a syndicate member takes $500,000 out of a $5,000,000 underwriting and only sells $400,000, the member is responsible for the other $100,000.

Which of the following must be disclosed to customers in competitive bid municipal underwritings? A. Spread B. Dollar price C. Participation amount of each underwriter D. Names of the Underwriters

The best answer is B. In competitive bid municipal underwritings, the spread is not required to be disclosed, since it would be quite narrow. Only the reoffering yield and resultant dollar price is disclosed. There is no requirement to disclose the names of the underwriters, nor their participation amounts.

Who guarantees an Industrial Development Bond? A. Municipal issuing authority B. Corporate lessee C. MBIA D. AMBAC

The best answer is B. Industrial Development Bonds are issued by municipal authorities, with the revenue source being the lease payments made by a corporate lessee. Furthermore, the corporate lessee unconditionally guarantees the bonds - so they take on the credit rating of the corporate guarantor.

A 13D notice would be filed when a(n): A. corporation has a change in its Board of Directors B. investor accumulates a 5% or greater position in the common stock of an issuer C. corporation reports its annual results to the Securities and Exchange Commission D. investor wishes to sell shares of restricted stock in the public market

The best answer is B. Investors who accumulate a 5% or greater position in the common stock of one registered issuer are required to file a 13D notice with the SEC within 10 business days of date that the 5% threshold was passed. This information is made public (and is of great interest to the management of the company, since the new large stockholder will probably want a say in how the company is being run!). Choice A would require the filing of an 8K by the corporation. Choice C would require the filing of a 10K by the corporation. Choice D would require the filing of a Form 144 by the seller.

Which economic theory postulates that production and economic growth are stimulated by lower interest rate levels, and can be managed by Federal Reserve actions? A. Supply Side Theory B. Monetarist Theory C. Keynesian Theory D. Demand Side Theory

The best answer is B. Monetarist Theory states that economic growth is controlled by the Federal Reserve's actions. If the Federal Reserve allows the money supply to grow at a pace consistent with real economic growth, there is balance. The theory holds that if the Federal Reserve allows the money supply to grow more rapidly than real economic growth, interest rates will fall, stimulating borrowing and investment. Conversely, if the Federal Reserve allows the money supply to grow more slowly than real economic growth, interest rates will rise, reducing borrowing and investment.

Which of the following usually acts as the stabilizing market maker? A. Issuer B. Managing underwriter C. Any member of the syndicate D. Any member of the selling group

The best answer is B. Only 1 stabilizing bid is permitted at any time, typically placed by the manager of the syndicate.

To claim a private placement exemption: A. a registration statement must be filed with the SEC B. a Form D must be filed with the SEC C. a Form 144 must be filed with the SEC D. no filing is required with the SEC

The best answer is B. Private placements are exempt transactions under the Securities Act of 1933. No registration is required. The issuer must file a Form D with the SEC within 15 days of the offering to claim the exemption. The filing of Form D is not a registration. It simply notifies the SEC that the issue is being offered in compliance with the exemption.

An "accredited investor questionnaire" is required when which type of offering is made to investors? A. Rule 147 B. Regulation D C. Regulation A D. Rule 144

The best answer is B. Private placements under Regulation D are typically only offered to "accredited investors." These are wealthy individuals and institutional investors. To document that the purchasers are, indeed, accredited, an "accredited investor questionnaire" must be completed and signed by the potential purchaser. This is retained by the broker-dealer or issuer selling the securities and is proof that the purchasers were accredited. Rule 147 is the intrastate exemption; Rule 144 is an exemption from SEC registration for the resale of private placement stock owned by an investor where the company subsequently went public; and Regulation A is an exemption from registration for the sale of a small dollar amount ($50 million or less).

Which statement is TRUE? A. Regulation T requires payment for purchases no later than 2 business days after trade date B. Regulation T only applies to non-exempt securities C. Regulation T only applies to listed securities D. Regulation T sets both initial and maintenance margins

The best answer is B. Regulation T requires payment for securities purchases promptly, but no later than "S+2," which is 4 business days after trade date (2 business days regular way settlement + 2 grace days). Regulation T only applies to non-exempt securities. It does not apply to exempt securities since it is part of the Securities Exchange Act of 1934, of which only the anti-fraud provisions apply to exempts. Regulation T margins apply to both listed and unlisted securities. The Federal Reserve only allows exchange listed and NASDAQ securities to be margined. OTCBB and Pink OTC Markets securities cannot be margined. Regulation T only sets initial margins; maintenance margins are set by FINRA.

To buy a listed stock in a margin account requires a deposit of: A. 25% of the price of the transaction B. 50% of the price of the transaction C. 25% of the closing price of the security that day D. 50% of the closing price of the security that day

The best answer is B. Regulation T requires that 50% of the purchase amount, based on the price of the trade, be deposited. The closing price has no effect on the deposit amount required.

Series EE bonds: A. are issued at a discount to face B. are redeemed at par plus interest earned C. are issued in certificate form D. are actively traded in the secondary market

The best answer is B. Series EE bonds are "savings bonds" issued by the U.S. Government with a minimum purchase amount of $25 (or more). This is the face value of the bond, and any interest earned is added to the bond's value. The interest rate is set at the date of issuance. Interest is "earned" monthly and credited to the principal amount every 6 months. The bonds have no stated maturity - the holder can redeem at any time, however interest is only credited to the bonds for 30 years. Savings bonds do not trade - they are issued by the Treasury and are redeemed with the Treasury. No physical certificates are issued - the bonds are issued in electronic form.

If a customer wishes to open an account for a minor without additional documentation, the account must be opened as a: A. guardian account B. cash account C. margin account D. conservator account

The best answer is B. The "default" setting of the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act is that custodial accounts can only be opened as cash accounts. They can be opened as margin accounts only if the state permits it in its version of the law (which some states do, most do not). For the exam, custodial accounts can only be opened as cash accounts, since this is the rule in most states. No additional documentation is needed for the adult to open the account, as compared to, say opening a trust account, which requires a copy of the trust document.

OFAC: A. receives Suspicious Activity Reports filed by financial institutions B. creates the Specially Designated Nationals list that must be checked when opening an account for a non-U.S. citizen C. monitors foreign currency inflows into the U.S. markets D. enforces the provisions of the Bank Secrecy Act

The best answer is B. The Department of Treasury's Office of Foreign Assets Control (OFAC) maintains a list of named countries, organizations, and individuals with whom anyone in the U.S. is prohibited from doing business. The "SDN" (Specially Designated Nationals) list includes such countries as Iran and North Korea and such organizations as the Al-Qaeda, as well as specified individuals associated with these countries and organizations. The intent is to place economic pressure on these groups by stopping U.S. investment in them. The SDN list must be checked before opening an account for a foreigner or foreign entity.

A customer sends an IM to his registered representative with an order to buy 500 shares of ABCD at the market. Which statement is TRUE about accepting this order from the customer? A. The order cannot be accepted because all customer orders must be placed by telephone B. The order cannot be accepted because the firm cannot verify that it was the customer who actually sent the order C. The order cannot be accepted because FINRA requires that all customer orders be sent using an app that is encrypted D. The order can be accepted as given

The best answer is B. The issue with taking orders that are placed electronically is: "How does the firm know that it is really the customer who is placing the order." If the customer logs into his or her account via the firm's website to place the order, then the customer's identity can be verified because the customer must enter or use his or her e-mail address that has been previously registered with the firm and must enter a password before being let into his or her account to place the order. When an order is placed via regular email, text message, or by an IM, the firm cannot verify that it is really the customer placing the order. Because of this, orders from these sources cannot be accepted (at least until a means of verifying that it is really the customer placing the order has been developed).

Which statement is TRUE about a registered representative who wants to be appointed as trustee for a trust account being established by a client for the client's children? A. The registered representative can act as the trustee without restriction B. The registered representative can act as the trustee only with approval of the firm's compliance department C. The registered representative can act as trustee only if no trustee fee is accepted D. The registered representative cannot act as trustee under any circumstances

The best answer is B. The trustee over a trust account is a fiduciary who must manage the account in the best interest of the beneficiaries. It is an inherent conflict of interest for the registered representative to act as the trustee. This is the case because he or she, as "trustee," has the power to trade the account, and that trading activity will result in commissions paid to the representative. Thus, the representative would have an incentive to overtrade the account, earning excessive commissions at the expense of the trust beneficiaries. Typically, a trustee is a bank or an investment adviser, both of whom are already under a fiduciary obligation. The trustee decides who the broker will be. While it is "possible" for a registered representative to be a trustee in such an account (if there is written disclosure to the grantor of the trust of the nature of the conflict of interest and if the fees charged by the trustee are "reasonable"), many brokerage firms have an internal policy of prohibiting their representatives from being trustees in any accounts that they oversee. The only way that this can be overcome is if compliance is informed of the situation and approves.

Which of the following is defined as an "accredited investor" under Regulation D? A. Non-profit organization with assets in excess of $2,000,000 B. Trust with assets in excess of $5,000,000 whose purchase is directed by a sophisticated person C. The president of an insurance company D. An individual investor who buys $2,000,000 of the offering

The best answer is B. There is no limit on the number of accredited investors that can purchase a private placement under Regulation D. Regarding institutional investors, any investment company, insurance company, bank, or savings and loan is accredited. The president of an Insurance Company is not necessarily accredited even though his or her employer is. A non-profit organization, trust, or institutional investor is accredited if it has at least $5,000,000 of assets and was NOT formed with the intent of buying the private placement. The idea here is that people could attempt to get around the 35 non-accredited investor limit by having these non-accredited investors contribute to a trust that would buy the issue. If the trust accumulated $5,000,000 for investment, it would be accredited. But the rule disallows this if the trust is formed for the purpose of buying the private placement! Regarding individual investors, either a minimum income ($200,000 for an individual or $300,000 for a married couple) or net worth test ($1,000,000 net worth) must be met to be accredited. There is no minimum purchase amount that makes an individual accredited.

An investor holds shares of a stock that declares a 10% stock dividend. Which statement is TRUE regarding the stock position after the dividend is paid? A. The cost basis per share is adjusted upward and is taxable B. The cost basis per share is adjusted downward and is not taxable C. The cost basis per share is adjusted downward and is taxable D. The cost basis per share is adjusted upward and is not taxable

The best answer is B. Under IRS rules, stock dividends are not taxable at the time of receipt. The stock dividend results in the cost basis per share being reduced, with the number of shares held increased proportionately. In aggregate, the customer's cost basis remains the same.

A Municipal Finance Professional (MFP) who lives in New York City gives a $100 contribution to the election campaign of an individual running for the office of mayor of Boston. Which statement is TRUE about this? A. There is no violation of Rule G-37 if the amount of the contribution is less than $250 B. There is a violation of Rule G-37 because the contribution was made to a campaign where the MFP is not entitled to vote C. There is no violation of Rule G-37 because the rule would only apply to contributions made to candidates running for office in New York D. There is a violation of Rule G-37 because MFPs are not permitted to make contributions to the campaigns of any candidates running for election

The best answer is B. Under MSRB Rule G-37, a Municipal Finance Professional can give up to $250 to an elected official's campaign in which the MFP is entitled to vote without any problems. If the amount given is more than $250, or if ANY dollar amount is given to an elected official's campaign in which the MFP is not entitled to vote (as in this case), then the municipal broker-dealer is banned from doing negotiated underwritings and municipal financial advisory work for that municipality for 2 years.

A municipal securities firm places the following advertisement: "We Hold and Sell New York State 6% TANs" Under MSRB rules, which statement is TRUE? A. The advertisement must also show the maturity of the notes B. The advertisement must state whether the percentage rate shown is the coupon or yield C. The advertisement must show the tax equivalent yield for an investor in the top tax Federal bracket D. The advertisement must show the bond rating assigned by Moody's or Standard and Poor's

The best answer is B. Under MSRB rules, any advertisement that shows an interest rate or yield must state whether the rate of return shown is the coupon rate or the yield to maturity; and if the yield is being shown, it must be stated if it is yield to maturity, or yield to call date.

An outstanding bond issue which is currently trading at 103 1/4 is callable starting next year at 102 1/2. The call premium on the bond issue is: A. 3/4 points B. 1 3/4 points C. 2 1/2 points D. 3 1/4 points

The best answer is C. A bond "call premium" is simply the price above par at which the issuer has the right to call in the bonds from the bondholders. These bonds are callable at 102 1/2, hence the call premium is 2 1/2 points.

All of the following are sources of income that can be used for debt service on municipal revenue bonds EXCEPT: A. User Fees B. Special Taxes C. Capitalized Interest D. Lease Rentals

The best answer is C. A revenue bond is defined as a debt where payment of interest and principal is derived from a source other than ad valorem taxes. Thus, revenue bonds can be paid off by lease rental fees, user fees, and special taxes (such as excise taxes). Capitalized interest is not an income source; rather it is part of the cost of a construction project that is included in the total financing needs when building a facility.

XYZ common stock is currently trading at $96 per share. Last year, XYZ common stock earned $8.00 per share, giving the company a Price / Earnings Ratio of 12:1. If XYZ splits 3 for 1, the new Price / Earnings ratio will be: A. 4:1 B. 6:1 C. 12:1 D. 24:1

The best answer is C. A stock split or dividend will have no effect on the Price / Earnings ratio of an issuer. The market price is adjusted on "ex date" for the split; and the earnings per share are restated downward to reflect the increased number of shares that will be issued. Since both decrease proportionately, the ratio stays the same.

Accelerated depreciation deductions: A. increase reported income in early years B. do not impact the income statement since these are balance sheet items C. increase reported income in later years D. increase each quarter

The best answer is C. Accelerated depreciation deductions, when compared to straight-line depreciation deductions, are "front loaded." The depreciation deduction is higher in earlier years; but the deduction is lower in later years (as compared to straight line depreciation). Because there are higher deductions in the earlier years, this will reduce reported income in those years; while the lower deductions in later years will increase reported income for those years.

LGIPs marketed by broker-dealers are: A. defined as a type of investment company B. defined as a federal-sponsored security C. regulated by the MSRB D. regulated by the SEC

The best answer is C. An LGIP is a "Local Government Investment Pool." It is an investment fund set up under state law that is only offered to local municipal governmental entities in that state. For example, if a town in a state has collected its real estate taxes, but has not yet spent those funds, it can put the balance in that state's LGIP. The LGIP is managed to provide a safe investment return. The MSRB takes the stance that if an LGIP retains a broker-dealer to market its offerings in that state, then it is a municipal fund security subject to MSRB rules. On the other hand, if the LGIP uses its own employees to market itself to local state governmental entities, then it is not subject to MSRB rules.

Which statement is FALSE about CMBs? A. CMBs are used to smooth out cash flow B. CMBs are sold at a discount to par C. CMBs are sold at a regular weekly auction D. CMBs are direct obligations of the U.S. government

The best answer is C. CMBs are Cash Management Bills. They are sold at auction by the Treasury on an "as needed" basis to meet unexpected cash shortfalls, so they are not part of the regular auction cycle. They are the shortest-term U.S. government security, often with maturities as short as 5 days. They are sold in $100 minimums at a discount to par value, just like Treasury Bills.

If a customer buys a fully-paid security that is enrolled in DTC's DRS system, the customer will receive a(n): A. physical certificate B. escrow receipt C. statement of ownership D. depository receipt

The best answer is C. DTC (Depository Trust Corporation) has a relatively new "book entry" registration system for stocks, where there are no more physical certificates issued (saves time and money). This is called "DRS" - the Direct Registration System. Instead of getting physical certificates, the customer gets a "statement of ownership" - essentially an account statement.

ll of the following statements are true for both mutual funds and variable annuities that are in the accumulation phase EXCEPT: A. both are regulated a under the Investment Company Act of 1940 B. the underlying portfolios are managed C. both investments grow tax-deferred D. the return to investors is dependent on the performance of the securities in the underlying portfolio

The best answer is C. During the accumulation phase of a variable annuity contract, dividend and capital gains distributions must be reinvested and build tax-deferred. In contrast, mutual fund distributions do not have to be reinvested, and they are taxable. The underlying portfolios of mutual funds and variable annuities are both "managed," since separate accounts buy the shares of management companies, and both are regulated under the Investment Company Act of 1940 Investment returns for both are dependent on the performance of the manager of the mutual fund, whether directly purchased or purchased in separate account.

For the year 2019, couples who are age 50 or over are permitted to make a maximum annual IRA contribution of: A. $12,000 B. $13,000 C. $14,000 D. $15,000

The best answer is C. For the year 2019, the maximum annual contribution for an individual into an IRA is $6,000. However, individuals age 50 or older can make an extra "catch up" contribution of $1,000, for a total permitted contribution of $7,000. For couples where at least 1 person works that are age 50 or older, this amount is doubled to $14,000.

All of the following are reported on Form 1099-DIV EXCEPT: A. cash dividends paid B. qualifying cash dividends paid C. interest paid on taxable bonds D. capital gains distributions paid by mutual funds

The best answer is C. Form 1099-DIV is the report to the IRS by issuers of cash dividends paid and capital gains distributions made by mutual funds. Dividends that "qualify" for the lower 15% (or 20% for higher earners) tax rate are reported in a separate box on the form. Interest paid on taxable bonds and tax-free bonds is reported on Form 1099-INT.

A client owns a municipal bond fund. What is the tax status of distributions from the fund? A. Both interest distributions and capital gains distributions are subject to federal tax B. Both interest distributions and capital gains distributions are exempt from federal tax C. Interest distributions are exempt from federal tax, but capital gains distributions are subject to federal tax D. Interest distributions are subject to federal tax, but capital gains distributions are exempt from federal tax

The best answer is C. Interest income from municipal bonds is generally exempt from federal income tax. However, capital gains on municipal bonds are subject to federal tax.

All of the following securities are quoted on a yield basis EXCEPT: A. Commercial Paper B. Treasury Bills C. American Depositary Receipts D. Banker's Acceptances

The best answer is C. Money market instruments are original issue discount obligations quoted on a yield basis that are priced at a discount to par (with the exception of negotiable certificate of deposit that are priced at par plus accrued interest). The discount from par is the interest earned. American Depositary Receipts are not a money market instrument. They are essentially shares of a foreign company, traded domestically similar to equity securities. They are dollar price quoted in 1/8ths.

All of the following are types of accounts in which securities transactions can be effected under Regulation T EXCEPT: A. Margin account B. Cash account C. Discretionary account D. Arbitrage account

The best answer is C. Regulation T defines 3 types of accounts in which securities transactions can occur - a cash account where full payment is required; a margin account where partial payment is required; and an arbitrage account for going "short against the box." Discretionary accounts, and the rules for their operation, are defined by the regulations of the SROs (Self Regulatory Organizations such as FINRA).

A customer has opened the following accounts: Individual cash account Individual margin account Joint cash account with husband Custodial Account for minor child This is treated as how many "covered accounts" in an SIPC liquidation? A. 1 B. 2 C. 3 D. 4

The best answer is C. Securities Investor Protection Corporation coverage is applied "per customer name." If a customer has both an individual cash and margin account, they are treated as one account. The joint account with someone else is treated as a separate account. Finally, the custodial account for a minor child is treated as a separate account.

When referring to a client account that has a trading authorization, the "third party" in the account is the: A. Customer B. Broker C. Named person other than the customer D. Clearing corporation

The best answer is C. The "First Party" to a brokerage account is the brokerage firm; the "Second Party" to a brokerage account is the customer; the "Third Party" to a brokerage account is anyone else named by the customer as authorized to trade the account.

The Firm Element component of the "Continuing Education" requirement: A. is administered by FINRA B. is administered by the SEC C. must be completed annually D. must be completed bi-annually

The best answer is C. The Firm Element of the Continuing Education requirement obligates member firms to deliver annual training to all registered representatives on product, regulation, and compliance issues.

Which information is NOT found in the Official Notice of Sale? A. Bond Type B. Bond Maturities C. Bond Interest Rates D. Bond Attorney Name

The best answer is C. The Official Notice of Sale gives the basic information needed to bid on a new bond offering. Included is the type of bond, dollar amount of each maturity, the names of the bond counsel and authorized person to conduct the bond sale at the township, among numerous other items such as the dated date of the issue (the date from which interest will start accruing) and the award date - the date that the winning bid will be announced. What is not known is the interest rate on the bonds - this is determined by the winning bidder. The lowest interest rate bid wins - and this interest rate is printed on the bonds when they are delivered to the winning bidder.

As an initial transaction in a new margin account, a customer buys 100 shares of ABC at $35. The customer must deposit: A. $1,500 B. $1,750 C. $2,000 D. $3,500

The best answer is C. The Regulation T requirement to buy $3,500 of stock in a long margin account is 50% = $1,750. However, this is the initial transaction and the minimum equity to open an account is $2,000, so this amount must be deposited.

Which statement is TRUE about a tender offer for common shares? A. The offer must remain open for at least 10 business days B. The offer must remain open for at least 30 business days C. Each "sweetening" of the offer must extend the offer for an additional 10 business days D. Each "sweetening" of the offer must extend the offer for an additional 20 business days

The best answer is C. When a tender offer is made for the common shares of an issuer, the maker of the offer is attempting to buy a majority stake in the company. To attract shareholders to tender, the maker usually prices the offer at a premium to the current market price. Such offers are typically contingent on a minimum number of shares being tendered. If the minimum number is not met, the maker might "sweeten" the offer by raising the tender price; or could simply cancel the offer and return the tendered shares to the subscribing shareholders. The initial offer must be held out for a minimum of 20 business days under SEC rules. Each sweetening of the offer must extend the life of the offer by another 10 business days

Under MSRB rules, yield to worst means that: A. all municipal bonds quoted on a yield basis must be priced to maturity B. municipal par bonds quoted on a yield basis must be priced to maturity C. municipal discount bonds quoted on a yield basis must be priced to maturity D. municipal premium bonds quoted on a yield basis must be priced to maturity

The best answer is C. When municipal serial bonds are quoted on a yield basis, the dealer must compute the dollar price shown on the customer confirmation. This dollar price must assure, that at a minimum, the customer will receive the promised yield. This is known as pricing to the "worst case" scenario. For a premium bond, the "worst case" scenario is having the bond called early (which is the likely case). Bonds trade at a premium because market interest rates have dropped, so the issuer can refund the issue at lower current market rates by calling in the bonds. In this case, the bond is priced based on giving the customer the promised yield using the near-term in whole call date as the redemption date. If the bond were not called, the customer's actual yield would improve, because the annual loss of premium incorporated into the yield would be spread over a longer time frame. For a discount bond, the "worst case" scenario is having the bond held to maturity (which is the likely case). Bonds trade at a discount because market interest rates have risen, so the issuer would not call these bonds. In this case, the bond is priced based on giving the customer the promised yield using the maturity date. If the bond were called early, the customer's actual yield would improve, because the annual earning of the discount incorporated into the yield would be spread over a shorter time frame.

A closed end fund has a Net Asset Value of $10 per share. The minimum price at which the shares can be purchased is: A. $10 B. $10 plus a commission C. market price D. market price plus a commission

The best answer is D. A closed end fund is traded in the market like any other stock. Any purchaser would pay the prevailing market price (which can be below, at, or above Net Asset Value) and would have to pay a commission to have the trade executed. Thus, a closed end fund share is purchased at the prevailing market price plus a commission. This contrasts to mutual fund (open end management company) shares that are newly issued by the fund to any purchaser. The purchaser pays the next computed Net Asset Value plus a sales charge if the fund imposes a "sales load."

A mutilated security is considered a good delivery if validated by: A. customer who bought the stock B. customer who sold the stock C. contra broker D. issuer

The best answer is D. A mutilated security is a "good delivery" if it is accompanied by a letter of validation from the issuer or transfer agent. It is not acceptable to have the customer or delivering broker tell you that the mutilated security is "OK."

For a qualified retirement plan contribution to be deductible from that year's tax return, the contribution must be made by no later than: A. April 15th of that year B. December 31st of that year C. April 15th of following year D. the tax filing date of the following year

The best answer is D. Contributions to qualified retirement plans (other than IRAs) must be made no later than the date the tax return is filed (even if it is filed with an extension). On the other hand, IRA contributions must be made no later than April 15th of the tax year after the year for which the deduction is claimed.

Which of the following is prohibited from buying an IPO directly from an underwriter? A. A registered investment company B. A pension plan C. An insurance company D. An officer of an insurance company

The best answer is D. FINRA prohibits the purchase of equity IPOs (Initial Public Offerings) by industry "insiders." The list of prohibited purchasers includes FINRA member firms for their own accounts, officers and employees of member firms (and their immediate family members), fiduciaries to member firms (such as accountants and lawyers that are retained by FINRA member firms); and investment managers for investment companies, insurance companies, pension plans, who are buying personally, etc. Note that investment companies, insurance companies and pension plans may buy IPOs - it is only their investment managers that are restricted from buying IPOs for their personal accounts.

Fines assessed for convictions involving violations of insider trading laws are paid to the: A. Department of Justice B. Securities and Exchange Commission C. Securities Investor Protection Corporation D. Department of Treasury

The best answer is D. Fines assessed for insider trading convictions are paid to the Department of Treasury. The fines are not paid to the SEC. If they were, then the SEC might be tempted to "go crazy" prosecuting insider trading cases to pump up its operating budget (raises for everyone!)

An information barrier must be put in place between: A. Human Resources and Retail Sales B. Compliance and Institutional Sales C. Human Resources and Compliance D. Institutional Sales and Retail Sales

The best answer is D. Information barriers are designed to stop the flow of information that, if obtained before public release and traded on, could result in insider trading violations and/or front running violations. To stop the flow of non-public information: Investment Banking must be walled off from Sales and Trading Departments; Research must be walled off from Sales and Trading Departments; Institutional Sales must be walled off from Retail Sales (to stop potential front running of big institutional orders). Human Resources and Compliance are not subject to information barriers to stop the flow of non-public information that could be traded on.

Which statement is TRUE about insurance coverage on customer brokerage accounts maintained at banks registered solely as municipal securities dealers? A. Insurance coverage is provided solely by the Federal Deposit Insurance Corporation (FDIC) B. Insurance coverage is provided solely by the Securities Investors Protection Corporation (SIPC) C. Insurance coverage is provided by both the FDIC and by the SIPC D. No insurance protection is offered on customer municipal accounts maintained at bank broker-dealers

The best answer is D. Insurance coverage for customer accounts at any broker-dealer that must be registered under the Securities Exchange Act of 1934 is provided by SIPC - Securities Investor Protection Corporation. However, dealers who solely handle exempt securities are not required to be SIPC members. Therefore, customer accounts at firms that deal solely in U.S. Government securities, are not covered by SIPC. Similarly, customer accounts at banks who are municipal securities dealers, are also not required to be covered under SIPC. Please note that if a bank dealer were to handle non-exempt securities, then it would have to register under the Securities Exchange Act of 1934 as a broker-dealer, and thus, would be obligated to be an SIPC member as well. The FDIC - Federal Deposit Insurance Corporation - does not insure brokerage accounts, that is securities positions held at banks. It only insures bank accounts (deposits) maintained by customers at banks.

Level debt service is best described as: A. debt service increases as the years progress B. debt service decreases as the years progress C. principal repayments decrease as the years progress D. principal repayments increase as the years progress

The best answer is D. Level debt service means that the issuer pays the same amount each year, with the funds being used to pay both interest and a portion of principal on the issue. The balance of the level payment is used to pay off bonds for that year. Thus, each year, the principal repayment amount increases; and the interest amount decreases. The total of the two remains the same. This is essentially the same idea as a mortgage amortization schedule.

New non-exempt debt issues in excess of $50,000,000 are subject to all of the following requirements EXCEPT: A. Prospectus delivery rules under the Securities Act of 1933 B. Anti fraud rules under the Securities Exchange Act of 1934 C. Appointment of an independent trustee to protect the bondholders under the Trust Indenture Act of 1939 D. "Hot Issue" allocation rules

The best answer is D. Non-exempt new issues must be registered with the SEC and sold with a prospectus under the Securities Act of 1933. If the issue is a non-exempt debt security, in excess of $50,000,000, then the Trust Indenture Act of 1939 applies, and requires that an independent trustee be appointed to protect the interest of the bondholders from corporate misconduct. Transactions in all securities (whether exempt or not) are subject to the anti-fraud provisions of the Securities Exchange Act of 1934. "Hot Issue" allocation rules only apply to equity securities.

A customer has a cash account holding $160,000 of securities and $340,000 of cash. If the broker-dealer were to fail, which statement is TRUE regarding the status of the account in an SIPC liquidation? A. SIPC will provide coverage for the $160,000 of securities only B. SIPC will provide coverage for the total of $500,000 of securities and cash C. SIPC will provide coverage for only $250,000 of cash D. The customer will become a general creditor in the amount of $90,000

The best answer is D. SIPC covers customer claims against a failed broker-dealer for a total of $500,000, inclusive of maximum cash coverage of $250,000. For any claims above these limits, the customer becomes a general creditor of the failed broker-dealer. This customer has $160,000 of securities (covered in full) and $340,000 of cash (covered only for $250,000), for total coverage of $410,000. For the remaining $90,000 of cash not covered, the customer becomes a general creditor.

An investor buys $10,000 of a "regulated" mutual fund investing solely in municipal securities. Which statement is TRUE regarding the federal tax treatment of the interest income? A. The investor must pay federal income tax on all interest received, since payments come from the investment company B. The investor must pay tax on any distributions received from the investment company, while the company has no tax obligation C. The investor has no tax liability on any distributions received, while the investment company must pay tax on any retained income D. The investor has no tax liability on distributions received, and the investment company has no tax liability on retained income

The best answer is D. Since this mutual fund invests solely in municipal securities, there is no federal tax liability on the interest income received (remember, the interest income from municipal securities is exempt from federal income tax). Under the "conduit" theory, any payment distributed by the fund to shareholders retains the same character and is free from federal income tax. Similarly, undistributed income retained by the fund would not be taxed, since it consists solely of tax free municipal interest income.

Electronic delivery of a prospectus is NOT permitted for: A. common stock issues B. preferred stock issues C. corporate debt issues D. investment company issues

The best answer is D. The "access equals delivery" rule that permits electronic delivery of a prospectus (instead of paper) to those customers that have internet access is permitted for all securities offerings with the exception of investment company issues. For example, the purchaser of a mutual fund must still get a paper prospectus.

If a Municipal Finance Professional gives more than $250 to an elected official's campaign in which the MFP is entitled to vote, then the: A. MFP is banned for 1 year from being associated with a municipal securities dealer B. municipal securities firm employing the MFP is banned for 1 year from engaging in municipal securities business with that issuer C. MFP is banned for 2 years from being associated with a municipal securities dealer D. municipal securities firm employing the MFP is banned for 2 years from engaging in municipal securities business with that issuer

The best answer is D. The MSRB political contribution rule is intended to stop so-called "pay to play" practices, where a person associated with a municipal firm would give large dollar contributions to the campaign of an elected official, and in return, the elected official would steer that issuer's upcoming underwritings to that municipal firm. The maximum amount that can be given by an MFP to an elected official's campaign in which the MFP is entitled to vote is $250 without any problems. If more than $250 is contributed, then that firm is banned from engaging in municipal securities business with that issuer for the next 2 years.

A customer wishes to give a gift of securities to her nephew under the Uniform Transfers To Minors Act. Which statement is TRUE? A. When the minor reaches legal age in that state, the custodian can continue in that capacity with the express permission of the minor B. When the minor reaches legal age in that state, the account must be transferred into the name of the minor C. At legal age, the account must be liquidated and the proceeds paid to the new adult D. The transfer age is set by the custodian, up to the maximum age permitted by the state

The best answer is D. The main difference between UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) is that while the assets in an UGMA account transfer to the new adult at legal age, and an UTMA account, the custodian sets the transfer age (up to the maximum age set by that state - in most states, the maximum age is 21, a few have a maximum age of 25).

The ex date for a stock split is set at: A. 2 business days prior to the Record Date B. 1 business day following the Record Date C. 2 business days prior to the Payable Date D. 1 business day following the Payable Date

The best answer is D. The regular way ex date for cash dividends is 1 business day prior to the record date. However, the ex date for stock dividends, stock splits and rights offerings is different. For non-cash distributions, the ex date is set at the business day following the payable date.

A trustee in a bond issue: A. is charged with the responsibility of protecting the issuer's claim to assets B. is typically a broker-dealer C. is appointed by the bondholders D. is paid by the issuing corporation

The best answer is D. The trustee for bondholders is a fiduciary who is appointed and paid for by the issuer. The trustee ensures that all of the terms of the agreement are adhered to by the issuing corporation, thus it is protecting the bondholders from issuer misconduct. The trustee must not have any conflicting interests that would prejudice it towards either the bondholders or the issuer in its oversight role. Bank or a Trust Companies are appointed as trustee, not broker-dealers.

Under Regulation M, which statement is TRUE regarding stabilizing bids entered by market makers? A. Stabilizing bids may only be maintained for 5 consecutive business days B. Stabilizing bids may only be maintained for 30 calendar days C. Stabilizing bids may only be maintained for 45 calendar days D. There is no time limitation on the period that a stabilizing bid can be maintained

The best answer is D. There is no time limitation on the period that a stabilizing bid may be maintained under Regulation M. However, stabilization must cease when the syndicate is broken by the manager.

A customer wishes to purchase $100,000 face amount of municipal bonds that the broker-dealer does not have in inventory. Under MSRB rules, the firm should: A. sell short the security to the customer B. refer the customer to a municipal firm that has the bonds in inventory C. contact at least 5 dealers and obtain quotes for the customer D. contact enough dealers so that a reasonable market quote is obtained

The best answer is D. Under MSRB rules, when a municipal dealer acts in an agency capacity, the price charged must be representative of the market for that type of security. There is no requirement to obtain a pre-set number of quotes, nor is there a requirement to direct the customer to a dealer that physically has those bonds. The dealer would not sell short the bonds to the customer, since short covering is very difficult in the thinly traded municipal market.

All of the following would be considered when determining a fair and reasonable commission or mark-up under the FINRA 5% Policy EXCEPT the: A. difficulty of executing the transaction B. level of service provided to the customer C. dollar amount of the transaction D. cost of the security to the broker-dealer

The best answer is D. Under the FINRA 5% Policy, commissions and mark-ups in exchange and over-the-counter transactions must be fair and reasonable, with 5% being a guide, not a rule. Among the things considered in determining the amount to charge are the difficulty of the trade; the level of service provided to the customer; and the dollar amount of the transaction. All commissions or mark-ups are based on the current market value of the security; not the cost of the security to the dealer.

The largest component of the Standard and Poor's 500 Average is the: A. utilities B. technology C. consumer staples D. industrials

technologies