SIE Practice 2
A 12b-1 fee allows a mutual fund to: A Assess shareholders for promotional expenses of the fund B Assess a front-end sales charge C Distribute shares through an underwriter D Assess a deferred sales charge
A 12b-1 fees get their name from the SEC rule that authorizes a fund to pay them. A 12b-1 fee is used to pay for marketing, promotional, and distribution expenses of the fund. A mutual fund with a 12b-1 fee may or may not be distributed through an underwriter and may or may not have front-end load or deferred sales charges. FINRA has established limits as to how much a fund may charge for this fee.
If a Currency Transaction Report (CTR) is completed, which of the following is not reported? A Payroll direct deposits B Exchanges of currency C Deposits of cash D Withdrawals of cash
A A Currency Transaction Report (CTR) must be completed by the financial institution to file reports of deposits, withdrawals, exchanges of currency, or other payments or transfers involving a transaction in cash totaling more than $10,000. The report must be filed within 15 days. Payroll direct deposits are not cash transactions.
Someone who has given personal information to a registered representative about their financial goals is called a: A Consumer B Client C Customer D Consumer and client
A A consumer is essentially just a prospect, one who has provided personal information in the pursuit of a transaction or potential transaction. A customer has an ongoing business relationship with the representative and/or firm.
Which of the following statements is false about American depositary receipts? A ADRs pay dividends in the foreign currency B ADRs have no voting rights C ADRs are subject to political risk D ADRs are subject to currency risk
A ADRs are shares of foreign stock held by a U.S. bank overseas, they have both currency & political risk. Dividends paid by the foreign corporation are passed through the bank and paid to U.S. investors in U.S. dollars. Taxes may be withheld by the foreign company's local government before being paid to the investors. ADRs have no voting or preemptive rights.
What is the name given to the entity that assists issuers in the process of underwriting and registering security offerings with the SEC, as required under the Securities Act of 1933? A Investment banker B Selling group member C Syndicate member D Registered representative
A An investment banker is a broker-dealer that assists in the process of underwriting and registering the securities offering with the SEC, as required by the Securities Act of 1933. Syndicate and selling group members are part of the underwriting team. Registered representatives work for broker-dealers.
Which of the following best describes a company's book value? A It is the company's theoretical liquidation value B It is the value stock analysts agree the stock is worth C It is a nominal value assigned for accounting purposes D It is the price investors will pay in the secondary market
A Book value is the theoretical liquidation value of the business. This is what the stock would be worth if the assets are sold, and the liabilities are paid. Par value is the nominal value given to stock for accounting purposes. Market value is the price an investor will pay for shares in the secondary marketplace.
Which of the following pays income taxes at the corporate rate? A C corporations B Custodial accounts C S corporations D General partnerships
A C corporations pay income tax at the corporate rate before dividends are paid to shareholders. Custodial accounts may be subject to taxation at the custodian's tax rate if earnings are above an annually adjusted threshold. General partnerships and S corporations pass pretax income to the owners, who then pay taxes on the earnings at their personal rates.
An investor places an order to liquidate shares of the ABC closed-end fund on Monday, at 3:23 pm, Eastern time. What price will most likely be received? A The current bid price of the fund at the time the order was placed B Monday's closing POP C The current ask of the fund at the time the order was placed D Monday's closing NAV
A Closed-end fund shares are not redeemable. Investors liquidate them by selling them in the secondary market. When selling shares, investors receive the current bid price.
How does a professional money manager diversify a portfolio? A By investing in different securities, industries, asset classes, and geographical locations B By having more than one person making the investment decisions C By investing different sums at different times in the same stocks D By utilizing different investment research data
A Diversification is the process of allocating funds among different securities, industries, asset classes, and geographical locations to minimize risk in an investment portfolio.
Which of the following is a way to diversify by asset class? A Invest in stocks, bonds, and cash equivalents B Invest in automotive, technology, and mining stocks C Invest in different credit quality companies and their securities D Invest in U.S. government, agency, municipal and corporate bonds
A Diversification is the process of allocating funds among different securities, industries, asset classes, and geographical locations to minimize risk in an investment portfolio.
Who is exempt from the provisions of the Insider Trading Act of 1988? A No one B Attorneys C Financial printers D Accountants
A Everyone is subject to the provisions of the Act. This includes tippees, tippers, and members of the public.
Mutual funds may give investors the choice between different classes of shares including Class A, B or C shares. What is the difference between the classes of shares? A The different classes have varying fee structures B Each share class represents different holdings within the fund C The share classes each offer varying fund objectives D Class A shares offer long-term gains, Class C shares offer short-term gains
A Funds give customers a choice of when to pay the sales charge (up front, back-end, or level load). The portfolio of each class contains the exact same holdings.
After spending 40 minutes on the phone listening intently to an RR from ABC Investments try to pitch a sale, the prospect decided not to do business with this firm and asked to be placed on their "do-not-call" list. Based on this request, ABC Investments must: A Record the request to be placed on the do-not-call list immediately and honor the request before 30 days elapse from the time of the request B Petition the federal government to add the prospect to its do-not-call list C Require that the request be submitted in writing before recording and honoring D Honor the do-not-call request and update the list by the end of that business day
A If a person requests not to receive calls from a member firm, the firm must record the request and place the person's name and telephone number on the firm's do-not-call list at the time the request is made. Members must honor a person's do-not-call request within a reasonable time not to exceed 30 days from the date of such request.
All the following information must be requested to open a new customer account, except: A Copy of the most recent tax return B Customer occupation and employer C The customer's country of citizenship D Experience with investing
A If the customer chooses not to provide all the requested information, the registered representative may still open the account. Without all the requested information, the RR cannot make any recommendations, therefore all transactions in an account missing some requested information must be unsolicited (the customer's request). When opening an account, the registered representative must ask for the country of citizenship, as customers must sign Form W-9 (for U.S. residents) or Form W-8 (for non-U.S. residents), verifying their tax ID number or attesting to the fact that they are not subject to U.S. taxation. A copy of the customer's tax return is not necessary.
All the following are considered manipulative acts, except: A Giving recommendations to customers B Wash trades C Trading on inside information D Creating misleading appearances in the market
A It is an investment adviser's or representative's job to give recommendations to their customers. If this is done in an honest, ethical way, it is not unlawful or manipulative.
An issuer's transfer agent would not be responsible for which of the following? A Registration of the issuer's securities with the state B Maintenance of shareholder ownership records C Cancellation of old certificates and the issuing of new ones D Providing for the replacement of lost or destroyed stock certificates
A It is the registrar, not the transfer agent, who is responsible for registering an issuer's securities with the state. The transfer agent performs all recordkeeping and customer service functions, including ensuring that the securities are issued in the correct owner's name and maintaining records of shareholder ownership. When physical certificates exist, the registrar is also in charge of canceling old certificates and issuing new ones, as well as handling any procedures relating to lost, stolen, or damaged stock certificates.
All the following statements are true regarding a penalty bid, except: A Penalty bids are put in place to discourage selected dealers from selling to customers who will flip the shares, which may cause a new issue's price to increase B The penalty bid states that if the syndicate manager buys back too many shares from a particular syndicate member, that member is penalized by losing their concession on those shares C A penalty bid, if included, will be located in the syndicate agreement D The penalty is usually equal to the broker's commission on the sale
A Penalty bids are put in place to prevent too many people from hitting the stabilizing bid, looking to flip the purchase of shares of an IPO for a quick profit and which may cause a new issue's price to decline.
A registered representative is recommending the purchase of a variable annuity inside the IRA of a 68-year old client. The contract has a 7-year declining surrender charge. What is the sales practice issue associated with this sale? A This practice is permissible, but the client must be made aware that they would be forced to take mandatory distributions after age 72 B This practice is prohibited because annuities do not offer death benefits to new contract holders who are above 65 years of age C This practice is prohibited since annuities may not be sold to investors above 65 years of age D This practice is prohibited since annuities may not be placed into IRAs
A Placing a variable annuity inside of an IRA is permissible but is often viewed as a suspect sales practice due to the higher fees and expenses associated with a variable annuity versus a mutual fund. Reasons for such a placement may include the annuity's death benefit or guarantee of lifelong income to the policyholder. The client must be apprised that these benefits will come at the expense of higher fees. In this case, the client is already 68 years old so theoretically, they must wait until age 75 to avoid the contract's surrender charges. Unfortunately, they must begin taking distributions at age 72. However, some annuities will waive surrender charges for RMDs.
A registered representative is prospecting for new customers at a charity golf outing. The RR is paired with a very wealthy and sophisticated investor. The investor offers to open an account with the RR and is willing to split some of the profits if the RR achieves above average performance. Under what conditions is this arrangement acceptable? A The RR may share in the profits and losses provided they also deposit funds into the account, and the profit and loss allocation is in direct proportion to each party's monetary contribution B The RR may share in any profits generated above an agreed upon benchmark, such as the return of the S&P 500 Index C The RR may share in any profits generated more than the returns generated by a given benchmark, such as the S&P 500 Index, provided they also agree to share in the losses if the account underperforms D This arrangement is never acceptable; splitting profits and losses with a customer is always a violation of FINRA Conduct Rules
A RRs may not share in profits and losses in client accounts without the prior written agreement between the client and the RR, which has been approved by the employing BD. The sharing must also be proportionate to contributions to the account.
A call contract has a strike price of $50. The premium paid for the contract was $2. What is the breakeven price per share? A $52 B $50 C $48 D $2
A The breakeven point is the point that the option buyer will not make any money or lose any money if the contract is exercised. This means that the market price is above or below the strike price by the exact amount of the premium paid. For a call contract the BE is the strike price plus the premium, $50 + $2 = $52.
An investor purchased 10,000 shares of ABC common stock at $10 per share. The transaction charges for this transaction were $1,000 total. The investor sold the shares for $15 per share. What was his outcome for income tax purposes? A A taxable gain of $49,000 B A taxable gain of $51,000 C A taxable gain of $150,000 D A taxable gain of $50,000
A The cost basis is the original purchase price of a security, plus any costs associated with that purchase. It is used for calculating taxable gains or losses associated with the sale of a security or liquidations in certain types of accounts. $150,000 - $100,000 - $1,000 = $49,000.
The market price of common stock will be influenced by which of the following? A The expectation for future earnings of the company B The book value of the company C The number of authorized shares under the corporate charter D The par value of the shares
A The market price of common stock is determined by investor expectations about the future of the company. Par value and book value have no bearing on the market price of the common stock. The number of authorized shares is the maximum number of shares the issuer is permitted to sell.
The XYZ Corporation, which already has publicly traded securities, is selling new securities to the public to raise money to expand operations. What is this called? A Primary distribution B Initial public offering C Secondary market issue D Best-efforts issue
A Though not XYZ's initial public offering (IPO), this is still a primary distribution. Once a company has ''gone public,'' continued growth may prompt it to sell additional securities to investors to raise more capital. This sale of new securities is called a follow-on offering, rather than an IPO, but is still a primary offering.
Which of the following bonds will fluctuate the most in price when interest rates rise? A A 5% Treasury bond due in 11 years B An 8% debenture due in 8 years C A 6% mortgage bond due in 6 years D A 4.6% general obligation bond due in 6 years
A When interest rates rise, bond prices fall. The bond that will fall the most is the one with the longest time to maturity. The concept behind this answer is known as duration. Duration is used to determine the price sensitivity of a bond based on a small interest rate change. When given 4 bonds, the one with the longest maturity will move the most in price.
At the end of the year, ABC common stock had a market price of $10 and a dividend of $1.00. Recently, the stock's market value has risen by 10% while its dividend has been increased by 5%. How do these changes affect the stock's dividend yield? A The yield has risen B The yield has fallen C The current yield will remain at 10%, since it is not affected by market movements D The concept of current yield only applies to bonds, not stocks
B A stock's dividend yield is calculated as follows: annual dividends divided by current market price. If the market value rises by more than the dividend on a percentage basis, then the dividend yield falls. At the end of the year, the dividend yield was $1.00 ÷ $10.00 = .10 or 10%. The market price has risen 10% ($10 x 0.1= $1), therefore ABC now has a current market price of $11. The dividend has increased by 5% ($1 x 0.05 = 0.05), therefore the dividend is $1.05. The new dividend yield is $1.05 ÷ $11.00 = .09 or 9%.
A real estate investment trust could receive income from all the following, except: A Rental income B Depreciation of property values C The spread between its borrowing costs and its lending rates D Interest income
B An equity REIT could receive rental income and capital appreciation, while a mortgage REIT could profit from interest income and the difference (the spread) between its borrowing costs and its lending rates. Depreciation is not a form of income.
If a $1,000 par value 6% bond is selling at $500, the current yield is: A 6% B 12% C 8% D 10%
B Current yield = annual interest of $60 divided by market price of $500 = 12%. Par value has no bearing on current market price. The nominal yield (stated or coupon rate) is 6%, regardless of the bond's market price.
Updated Form CRS must be provided to existing customers within how many days? A 90 B 60 C 180 D 120
B Existing retail customers opening new accounts must receive Form CRS prior to the new account opening. Firms must update their form CRS with the SEC within 30 days of the event causing a material change. Customers must receive the updated Form CRS within 60 days. Firms must deliver Form CRS to a retail customer within 30 days of a request. The recordkeeping requirement for Form CRS is 6 years from date of last use for broker-dealers and 5 years for investment advisers.
A 21-year-old college student works part-time at an ice cream shop to earn money to pay their cable bill. This year the student earned $1,200. What is the maximum this person can contribute to an IRA? A $5,500 B $1,200 C $300 D $0.00
B Individuals with earned income can contribute the lesser of 100% of earned income or the current year's specified dollar limit into an IRA. Earned income includes salaries, tips, and other forms of compensation that come from services provided. It does not include interest earned on investments or capital gains realized from the sale of assets. Since the student earned only $1,200, that is the maximum they can contribute into their IRA.
What type of order is placed to stop losses that may occur, can be placed to protect the gains in a long or short position, and once the order is triggered, it is executed at a specified price or better (for buys, the most they are willing to pay; for sells, the least they are willing to accept)? A Market B Stop limit C Limit D Stop
B Limit orders are either buy limit orders or sell limit orders. When placing a limit order, the investor is choosing a price that is their "limit." They want either that price or better. With a buy limit, the investor specifies the highest price they are willing to pay, and with a sell limit, they are specifying the lowest price they will accept to sell. A stop order is a type of order that is placed to stop losses that may occur. It is placed to protect the gains in a long or short position. Once the stock hits the stop price, it becomes a market order and trades at the next available price. Stop limit orders combine limit orders and stop orders, though they function in a similar manner as stop orders. The main difference is when the stock hits the stop price, it now becomes a limit order, instead of a market order.
The risk of taking a loss because of not being able to quickly sell or redeem an investment when necessary is known as: A Market risk B Liquidity risk C Purchasing-power risk D Currency risk
B Liquidity risk is the risk that the investor who needs to liquidate quickly will have to take a loss because the investment is not liquid. Purchasing-power risk is also called inflation risk. Market risk is the risk that the entire market declines. Currency risk is the risk that the U.S. dollar moves negatively against a foreign currency.
Which of the following is not an argument for portfolio diversification? A There is a potential for winners to offset losers in the portfolio B There will be less market risk C There are securities in the portfolio with varying grades of risk D Not all securities decrease in value in an adverse market
B Market risk is the possibility that the value of an investment will fall due to a decline in the market as a whole and is unrelated to any adverse conditions of an issuer. A systematic risk is inherent to investing in the market. Diversification does not protect from systematic risks. The other choices all validate diversification.
What activity involves spreading false, exaggerated, or misleading information about companies to influence the market price? A Pump and dump B Market rumors C Marking the open or close D Insider trading
B Marking the open or close is placing large trades at the open or close of the market to influence the opening or closing price of specific securities. This gives the appearance of higher or lower market prices than is truly the case. This is considered fraudulent and is a prohibited activity. Market rumors involve spreading false, exaggerated, or misleading information about companies to influence the market price. The internet has become a common place for this prohibited and illegal behavior. Another form of market manipulation that involves market rumors is the pump and dump. An individual or group that owns a security will use market rumors to promote a stock on the internet, attempting to drive the price up. These stocks tend to be small or micro-cap stocks that are thinly traded. Prior to the release of the market rumors, those involved in the scheme will buy large quantities of the stock at very low prices. Releasing the market rumors will "pump" up the price of the stock. The violators will then sell or "dump" their largely appreciated holding at a large profit.
A registered representative can promise a client that the security being recommended for purchase will be resold at a price higher than paid by the client: A If the customer signs a waiver B Under no circumstances C If approved by the supervising principal D If the arrangement is documented in writing
B No member firm or associated person can guarantee a customer against loss in connection with any securities transaction or in any securities account.
Rule 147 intrastate offering shares may not be sold outside of the state for how many months? A 9 B 6 C 1 D 3
B One exempt transaction is an offering made to investors in only one state. It is known as a Rule 147 Intrastate Offering. Issuers using the exemption under Rule 147 must meet one of the following requirements: 80% of the issuer's gross revenues must come from business activities within the state, 80% of the issuer's assets are located within the state, 80% of the net proceeds from the offering must be used within the state, or a majority of the issuer's employee's must be based within the state. Securities purchased under Rule 147 may not be sold outside of the state for 6 months. The appropriate disclosures must be made to purchasers on the limitations of resale. Certificates must be marked with the appropriate legend stating any restrictions. These securities still must be registered under blue-sky laws.
An investor deposited $5,000 into an open-end investment company. 12 months later, the shares were worth $11,000. The investor deposited an additional $1,000 and received a reduced sales charge. This investor has most likely used the fund's: A Statement of intention B Rights of accumulation C Combination privilege D Conversion privilege
B Rights of accumulation provide shareholders with reduced sales charges on any new purchases after their accounts have accumulated to a certain value either through appreciation or additional contributions. An investor can receive a reduced sales charge on an initial investment if they sign a letter of intent; however, nothing in the question indicated the client signed an LOI. The conversion privilege allows an investor to convert from one fund to another fund in the same family without a sales charge.
Written disclosure documents are provided to private placement investors. What are these disclosure documents called? A Omitting prospectus B Offering memorandum or private placement memorandum (PPM) C Statutory prospectus D Red herring
B Since there is no prospectus requirement, written disclosure documents are provided to private placement investors. These disclosure documents are referred to as an offering memorandum or private placement memorandum (PPM).
The Securities Act of 1933 covers which of the following? A Any agreement for the sale of securities between an issuer and an underwriter B New issues of securities that must be sold with a prospectus C Transactions involving accredited investors D Securities traded in the secondary market
B The Securities Act of 1933 covers new public issues of securities and requires that a prospectus accompany the offering. Securities traded in the secondary market are covered in the Securities Exchange Act of 1934. Agreements for the sale of securities between an issuer and an underwriter could include private sales of securities and/or sales in the secondary market. Transactions involving accredited investors are Regulation D offerings. They are private placements to a limited number of people meeting certain suitability standards. Regulation D offerings do not require registration and are not covered by the Act of 1933.
An investor purchases 3 different bonds that each have a nominal yield of 7%, with 10-year, 15-year, and 20-year maturities. If interest rates fall to 5% in the market, which bond will have the greatest price change? A 10-year maturity B 20-year maturity C 15-year maturity D The bonds will all have the same change in price
B The term volatility refers to the frequency and degree of price movements. The deeper the discount, the greater the volatility. Also, bonds with longer maturities will have greater volatility, and the lower the coupon on the bond, the greater the price volatility. These bonds all have the same nominal yield but have different maturities, so the bond with the longest maturity will be the most volatile.
If a corporate security transaction was paid for on January 9, 2021, and the order executed on January 7, 2021, which of the following statements is true? A The settlement occurred 1 day later than the required T+1 B The trade date is January 7, 2021 and the settlement date is January 9, 2021 C The settlement date is January 7, 2021 and the trade date is January 9, 2021 D The trade date and settlement date are both January 9, 2021
B The trade date is the date in which the order is executed. Trades are settled with payment and/or delivery of the traded security. The settlement date is the date in which the transaction is paid for. Regular-way settlement for corporate and municipal securities is trade date plus 2 business days ( T+2). Regular-way settlement for U.S. government securities and options is T+1.
Why will a corporation split its stock? A To address creditor's concerns about the company's finances B To increase the marketability of its shares or make the share price more attractive C To decrease the dollar amount of dividends it will have to pay D To help it raise additional capital
B Unlike a cash dividend or a stock dividend paid to investors, declaring a stock split does require shareholder approval. The reason a corporation will split its stock is to make the stock more marketable or make the price more attractive for investors trading the stock in the secondary market. The company will issue more shares based on a ratio, such as 2-for-1. This will adjust the stock's par and market value but will not affect the total value of the stockholder's investment.
A mutual fund wholesaler is attempting to increase business in his their region. Which of the following activities is permissible? A Giving certain high producing RRs a 1% bonus on all sales more than $1 million per quarter B Taking certain high producing RRs out for dinner and drinks at an ultra-exclusive waterfront spa and restaurant C Offering to pay for golf memberships for certain RRs who achieve a stated sales goal D Making an offer to certain firms the ability to discount the fund's standard load for all trades done in the quarter
B Wholesalers may entertain RRs to win their business. Entertainment is not considered a gift and does not fall under the $100 limitation of FINRA's gift rule. Wholesalers are prohibited from selectively offering bonuses to certain RRs or firms. In addition, firms may not unilaterally discount MF trades. Sales charges may only be reduced based upon the breakpoints contained within the prospectus.
Regarding different equity shareholder investment objectives, which of the following is accurate? A A growth or capital appreciation objective is achieved when dividends are declared by the board of directors B An income objective is achieved when the value of shares owned increases C A growth or capital appreciation objective is achieved when the value of shares owned increases D Neither an income nor growth objective is achieved when dividends are declared by the board of directors
C A growth or capital appreciation objective for shareholders is achieved when there is an increase in the value of shares owned. An income objective is achieved when dividends are declared and paid.
Which of the following is not true regarding Roth IRAs? A Qualified distributions are tax-free B Required minimum distributions are not required C Contributions are tax-deductible D Contributions can be withdrawn at any time without penalty
C All contributions into a Roth IRA are nondeductible. There is no required minimum distribution. Contributions can always be withdrawn income tax-free and penalty free. Qualified distributions are also tax-free.
What change in interest rates will cause a bond's price to consistently drop in the secondary market? A No change B Interest rates decrease C Interest rates increase D Interest rates remain stable
C Bond prices move in the opposite direction of interest rates. Rising interest rates mean falling bond prices.
An investor purchases 100 shares of ABC stock in a cash transaction on Tuesday February 12th. The investor must accept the shares and pay for them on what day? A Wednesday, February 13th B Thursday, February 14th C Tuesday, February 12th D Friday, February 15th
C Cash settlement is "same day" settlement, and the securities must be paid for on the trade date (T=S). For corporate and municipal securities, regular-way settlement is (T+2), but it is possible for a customer to request a cash settlement (and it will likely affect the price to find a buyer willing to pay on the same day for the securities). In this question, the trade date is February 12th. So, with cash settlement, the trade settles February 12th.
An investor has $12,000 to invest and is deciding between purchasing the Class A shares or the Class B shares of the NOP High-Yield Fund. Which of the following is not true in this situation? A A determining factor for this decision should be the investment time horizon B Class B shares typically charge a back-end load C The two share types are unlikely to have the same portfolio holdings D Class A shares typically charge a front-end load
C Class A shares typically charge a front-end load to new investors. While the portfolios of each class of shares contain the same holdings, their NAVs may differ slightly due to the timing and amount of the different sales charges deducted. When deciding between A shares and B shares, a determining factor should be the time horizon of the investment. Class A shares are usually the better choice for long-term investments due to the lower annual expenses. If the time horizon is closer to 5 to 7 years, then B shares are likely to be more suitable due to the absence of a front-end load and a minimal, to no, back-end fee if the shares are held that long.
What are general obligation (GO) bonds? A Revenue bonds B Federal government bonds C Municipal bonds backed by the full faith and credit of the municipality D Corporate debentures
C General obligation bonds (GOs) are issued by municipalities and repaid through taxes. Revenue bonds are municipal bonds, which are repaid through a public facility's user fees.
A bond backed by real estate owned by a corporation, such as an office building, is a(n): A Debenture B Equipment trust certificate C Mortgage bond D Collateral trust certificate
C Mortgage bonds are secured by the corporation's real estate or property owned by the issuer, such as an office building. A debenture is an unsecured bond issue backed only by the creditworthiness of the issuer. A collateral trust certificate is backed by securities of another company. Equipment trust certificates are secured issues backed by leased or purchased equipment, such as vehicles or other machinery, by debtors, such as railroads, trucking companies, and airlines.
A disabled individual under the age of 59 ½ makes a withdrawal from their IRA, how will this be treated? A The amount withdrawn will be subject to income tax and will be subject to the 10% penalty B The amount withdrawn will not be subject to income tax and will not be subject to the 10% penalty C The amount withdrawn may be subject to income tax but will not be subject to the 10% penalty D The amount withdrawn will not be subject to income tax but will be subject to the 10% penalty
C Most distributions taken from an IRA, if under the age 59½, are subject to an additional 10% early distribution penalty on the taxable portion, unless certain exceptions apply. If a person is disabled, withdrawals prior to age 59 ½ may be subject to ordinary income tax but are not subject to the 10% penalty tax.
Which of the following are subsets of the Nasdaq system? A National Market System and Global Select Market B National Market and OTC Markets Group C Global Market and Capital Market D Capital Market and Global Premium Market
C Nasdaq is the largest electronic trading exchange in the U.S., meaning there is no trading floor. To facilitate trading, Nasdaq has 3 different markets, each having different listing requirements. Nasdaq Global Select Market has the most rigorous initial listing standards. Nasdaq Global Market consists of OTC stocks of companies worldwide that meet one of the three sets of initial listing standards. Nasdaq Capital Market consists of smaller companies with less capitalization than Global Market.
Which of the following are issuers of federal tax-exempt commercial paper? A U.S. government B All governments C Municipal governments D Corporations
C Only municipal issuers are exempt from federal income tax on interest income.
Which of the following statements about REITs is false? A Publicly traded REITs are listed and trade on a stock exchange B Non-traded REITs are registered with the SEC but are unlisted and do not trade on an exchange C Non-traded REITs are considered safer than publicly traded REITs and are easier to redeem D Private REITs are not registered with the SEC and are normally offered as private placements through Regulation D
C REITs that are registered with the SEC may be publicly traded or non-traded. Publicly traded REITs are listed and trade on a stock exchange and are considered safer than non-traded. Non-traded REITs are still registered with the SEC but are unlisted and do not trade on an exchange. This makes them harder to redeem, and investors may have to wait long periods of time to liquidate their investment. Private REITs are not registered with the SEC, they are normally offered as private placements through Regulation D and are only offered to qualified purchasers or accredited investors. There are no disclosure requirements for private REITs.
Who approves the opening of a customer's option account? A FINRA B The registered representative C A registered options principal D The SEC
C Since option accounts can have considerable risk, FINRA requires broker-dealers to use extra care when opening option accounts for customers. Once the new option account form is completed, the registered representative must take the form to a registered options principal (ROP) for approval.
The interest rate charged to member banks by the Federal Reserve is called: A Prime rate B Federal funds rate C Discount rate D Broker loan rate
C The discount rate is the interest rate the Fed charges member banks for short-term loans, this is the only rate set by the Fed. The Fed funds rate is the interest rate banks charge each other for loans. If a bank has excess reserves, they can lend these excess reserves to other banks that do not have enough reserves to meet Fed requirements. The prime rate is the rate banks charge their best corporate customers, which is set by the banks. The call money rate (also called the broker loan rate) is the rate charged by banks on margin loans to broker-dealers against stock collateral.
A client wants to establish an account to fund payment of private high school tuition. If the customer does not plan to deposit more than $2,000 per year and wishes to get a tax benefit, what is the most appropriate account to accomplish this? A UTMA account B 529A C Coverdell ESA D UGMA account
C The maximum annual contribution limit for a Coverdell is $2,000, which is not tax deductible, though the account builds tax-deferred. Funds can be withdrawn tax-free to pay for qualified education expenses, which include the cost of elementary, middle, and high school, vocational school as well as college costs. A UTMA/UGMA account could be used to pay for education, but there is no tax-deferral, so earnings are taxable annually. 529A accounts (ABLE accounts) are for individuals with disabilities. Since this question did not state that the beneficiary was disabled, it is not the best answer.
All the following statements are true regarding the post-registration period, except: A Active marketing and selling of securities begins B The final prospectus is filed with the SEC C The period begins when the registration statement is filed D Underwriters set the price of the issue
C The post-registration period is the period after the registration statement has become effective. At this point, the company can sell its securities to the public.
What is included in the duties of a transfer agent? A Help supervise the investments made for the portfolio B Assist in sales promotion of the fund C Cancel shares submitted for redemption D Safeguard the assets of the mutual fund
C The transfer agent is responsible for shareholder service, including destruction of shares redeemed by shareholders, mailing statements and proxies, and updating customer account information.
If an investor places an extremely high percentage of their assets in equities rather than in debt securities, they are: A Diversified B Defensive C Aggressive D Accredited
C This is a method of portfolio management and asset allocation that attempts to achieve maximum return primarily through capital appreciation. Since the investor's aim is growth, a higher percentage of their assets are in equities rather than in debt securities.
All the following are required when opening margin accounts, except: A Loan consent B Margin agreement C Customer net worth statement D Hypothecation agreement
C To open a margin account, the customer will need to sign a margin agreement that pledges their securities. They will also be given a loan consent agreement, which authorizes the firm to lend the client securities to others. A credit disclosure document must also be given to the customer, explaining all the details on how the loans work and how interest is charged. Margin accounts also require a properly executed written hypothecation agreement which permits the broker-dealer to use some of the customer's securities as collateral for a bank loan to finance the customer's margin account debt or to lend to other customers. Additionally, a customer opening a margin account must receive a margin risk disclosure document at or before the opening of the account. A customer's net worth statement may be helpful for the firm but is not a requirement for opening a margin account.
All the following are required to open a trust account, except: A Beneficiary B Trust agreement C Attorney D Trustee
C Trust accounts are established by a grantor who provides the investment. The trustee acts as the fiduciary and manages the assets on behalf of a beneficiary. All transactions should be based on the beneficiary's needs, not the trustee's needs. A trust agreement is required to open the account and names both the trustee and the beneficiary. The agreement specifies the trading authority of the trustee, who may also be the grantor. Though most trusts are established by trust attorneys, this is not a requirement.
Which offering is considered an exempt transaction? A When the individuals participating agree they will not seek legal action if there are any future problems with the offering B An offering to an unlimited number of non-accredited investors and no more than 35 accredited investors C An offering to no more than 35 non-accredited investors D When the offering is made by an issuer that has been in business continuously for 3 years, reporting to the SEC
C Under Regulation D, private placement transactions are exempt from registration when offered to no more than 35 non-accredited investors (persons who do not meet the definition of accredited under the Act). There are no restrictions on the number of accredited investors that can be involved in the sale.
What type of trust allows for changes in the trust terms or to terminate it all together? A Testate B Irrevocable C Intestate D Revocable
D A revocable trust affords the grantor the ability to change the trust terms when the grantor sees fit or revoke the trust completely. Traditionally, a revocable trust is established because of the desire to avoid the delays of the probate process at the death of the grantor. In a revocable trust, upon the grantor's death, the assets can pass directly to the beneficiaries named in the trust. The assets in a revocable trust provide no protection from creditors and will be included in the grantor's estate for estate tax purposes. Once a trust is established as an irrevocable trust, the trust and its terms cannot be changed.
Which of the following statements is not true regarding an issuer? A An issuer can be a municipality B An issuer offers securities to the public to raise capital C An issuer can be a corporation D An issuer can be a natural person
D An issuer is a legal entity, including a corporation, municipality, or the federal government, offering securities to the public to raise capital. Issuers may sell equity (stocks) or debt (bonds) securities to raise money.
Which of the following choices places the phases of the economic cycle in correct chronological order? A Trough, contraction, peak, expansion B Contraction, expansion, peak, trough C Expansion, peak, trough, contraction D Expansion, peak, contraction, trough
D Expansion eventually ceases, resulting in a high point or peak (which is identified in hindsight). Subsequently the economy contracts. Eventually this contraction ceases, resulting in the trough (identified in hindsight). From this trough, or low point, the economy begins to expand, initiating the cycle again. When you are asked to identify the correct chronological order of the economic cycle, focus on the sequence of the 4 phases and not on which phase begins the sequence. In other words, what follows that part of the cycle next.
How are withdrawals from a Section 529 savings plan taxed if the money is used for qualified education expenses? A Ordinary income B Passive income C Capital gain D Tax-free
D If the money in a Section 529 savings plan is used to pay for qualified education expenses, it is withdrawn tax-free. If the money is used for purposes other than qualified education expenses, the taxable portion is taxed as ordinary income, and a 10% penalty may be assessed as well.
When reviewing registration forms (U4), the supervising principal must verify: A That the applicant has a college degree B All employment history listed C Prior 5 years of residence history D Prior 3 years of employment history
D In reviewing the registration forms (U4), the principal must investigate the good character, business reputation, and experience of every applicant. The supervising principal must review, sign, and date all new hire registration forms (U4) and must verify the prior 3 years of employment history.
A new RR is looking to build their business through networking with local professionals. At a recent golf outing, the RR met with an attorney who offered to direct business to the RR in return for "a share of the action." Under what circumstances may the RR split commissions with the attorney? A If the RR has a written authorization from their manager B The initial commissions may be split with the attorney, but the attorney would not be entitled to any trailing commissions generated by the assets C The RR may only pay the attorney a maximum 1% finder's fee on any directed assets D The RR may not split commissions with the attorney unless the attorney holds a valid FINRA registration and is employed by the same firm or an affiliate
D RRs are prohibited from splitting commissions with unregistered individuals or paying for referrals. RRs are, however, allowed to return the favor and direct business back to the referring professional.
Investment recommendations are limited to what type of investment if the registered representative fails to obtain the requested information from a customer to determine suitability? A Preferred stocks B Government securities C Blue-chip stocks D Money market funds
D Registered representatives are unable to provide recommendations when they do not obtain all requested information from a customer. This means that the only investment recommendation they can make of the choices given is money market funds. Money market funds are considered cash, which means that, essentially, no recommendation is being made.
A registered representative with ABC Securities completed their regulatory element of the continuing education program today. When will the RR be required to complete the regulatory element again? A 2 years B It is a one-time requirement, so the RR is no longer required to take it C 1 year D 3 years
D Registered representatives must complete the regulatory element of the securities industry continuing education program within 120 days of their second anniversary of registration and every 3 years thereafter. On January 1, 2023, agents will be required to take this training every year.
The maximum annual contribution to an IRA for an individual is: A 100% of all income with no limitations B The greater of a specified annual limit or 100% of earned income C The greater of a specified annual limit or 50% of earned income D The lesser of a specified annual limit or 100% of earned income
D The maximum annual contribution per person is the lesser of a specified annual limit or 100% of earned income. Earned income includes wages, salary, tips, and commissions. Investment income such as bond interest, stock dividends, or income from retirement plans is not considered earned income.
ABCD Corporation has issued preferred convertible stock at par that is convertible at $25. When current market price of ABCD common stock is $26, what is the parity price of the preferred? A $106 B $96 C $120 D $104
D This is a 2-step problem. First you must determine the conversion ratio using the formula: par value ÷ conversion price (100 ÷ 25 = 4). Remember the phrase "we commonly multiply and prefer to divide". The question gives the current market price of the common stock. Multiply the CMP of the common by the conversion ratio to get the parity of the preferred (26 x 4= $104). This investor would want to consider conversion if the preferred is trading at any price below $104.
Which of the following ratings indicates the highest rate and highest level of risk of a municipal note? A MIG1 B MIG2 C MIG3 D SG
D Using the Moody's rating system MIG1 is the highest rating, which will be the safest with the lowest rate. This is considered a superior rating. MIG2 is a strong rating, MIG3 is acceptable, and the lowest rating is SG, which is speculative grade. Speculative grade will have the highest risk and carry a higher rate than the other ratings due to the increased risk.
Which of the following is not true about wrap accounts? A Wrap accounts do not charge commissions B One fee is charged for all services and transactions C Wrap accounts are established by investment advisers D No special disclosure is required for wrap accounts
D Wrap accounts are established by investment advisers. The IA must deliver a wrap account disclosure statement or brochure to existing and potential clients.
A registered representative is prohibited from doing all the following, except: A Forging a customer's signature B Altering any document C Providing customers with copies of all signed documents D Using a signature of convenience
Registered representatives are strictly prohibited from using a "signature of convenience" by asking a customer to sign a blank form to keep on file for use later. It is unlawful for any person to knowingly alter any document or forge the customer's signature. Customers must receive copies of everything they sign. Withholding or falsifying documents is prohibited.
