SIE UNIT 8 Securities Exchange Act of 1934 and the Secondary Markets

A clearing corporation agent or depository for securities transactions A) can be a commercial bank. B) can never be a corporation. C) must be a broker-dealer. D) can be a bank or corporation only if they are also a broker-dealer.

A) can be a commercial bank. A clearing agent can be a broker-dealer but doesn't have to be. In addition to broker-dealers, commercial banks can act as clearing agencies and depositories, as can corporations that are set up specifically to clearing securities transactions and taking custody of funds and securities.

A firm that functions for the purpose of receiving and delivering payments and securities on behalf of both buyer and seller in a securities transaction is A) a clearing agent. B) a broker-dealer. C) a transfer agent. D) a depository.

A) a clearing agent. A clearing agent is an intermediary between the buy and sell sides of a transaction that receives and delivers payments and securities on behalf of both parties. While some broker-dealers are self clearing (act as their own clearing agent), simply being a broker-dealer doesn't always include being able to provide the services of a clearing agent.

An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another is known as A) a custodian. B) a unit investment trust. C) a fully disclosed firm. D) an investment company.

A) a custodian. A person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another is known as a custodian, for example, the custodian for the account of a minor. This is different than a trustee who is a legally appointed entity. By contrast, anyone can open a custodial account for a minor as long as they are themselves an adult.

An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another is known as A) a custodian. B) an investment company. C) a fully disclosed firm. D) a unit investment trust.

A) a custodian. A person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another is known as a custodian, for example, the custodian for the account of a minor. This is different than a trustee who is a legally appointed entity. By contrast, anyone can open a custodial account for a minor as long as they are themselves an adult.

Which of the following is not part of the secondary markets? A) The exchanges B) Mutual fund market C) Over-the-counter market D) Third market

B) Mutual fund market Mutual funds, as open-end investment companies, do not trade in the secondary markets.

A broker-dealer designated as a carrying firm would be expected to do all of the following except A) perform back-office functions, such as sending trade confirmations to customers. B) maintain a lower net capital than noncarrying broker-dealers. C) clear transactions for customer accounts. D) take custody of customer funds and securities.

B) maintain a lower net capital than noncarrying broker-dealers.

In a prime brokerage account, the prime broker A) provides custody and clearing, but no margin financing. B) provides custody and clearing services, as well as margin loans. C) subcontracts out all services to other brokers. D) provides execution services only, while another broker clears transactions and provides any other account services required.

B) provides custody and clearing services, as well as margin loans. In a prime brokerage account, the prime broker provides custody and clearing services (including margin loans). The prime broker may provide some execution services and contract with other brokers to provide additional execution services.

A broker-dealer that accepts the risk of holding a particular security in its account to facilitate trading and provide liquidity in that security is best described as A) a direct participation program. B) a clearing corporation. C) a market maker. D) a holding company.

C) a market maker. Market makers are broker-dealers with a line of business to stand ready to buy or sell securities (make markets) with the view of being profitable by buying low and selling high or selling high and buying low (short selling). Market making is risky. Firms that do this must demonstrate to FINRA that they can manage the operational and financial risk.

All of the following are true regarding the term market except A) it includes stock exchanges. B) it can be a physical place or an electronic venue. C) it is unique to the U.S. securities industry. D) it is where buyers and sellers come together for the purpose of trading assets.

C) it is unique to the U.S. securities industry. The term market is used to describe any physical place or electronic venue where buyers and sellers can come together for the purpose of trading assets. Markets can be found in nearly every nation in the world and would include stock markets and other trading venues where they exist.

For margin transactions taking place through introducing broker-dealers, those who do not clear their own transactions, extension requests are A) made by the introducing broker-dealer. B) never permitted. C) made by the clearing firm. D) made by the customer.

C) made by the clearing firm. Broker-dealers who are self-clearing will make their own extension requests. For those that are not self-clearing, known as introducing broker-dealers, the extension request must be made by the clearing firm.

A broker-dealer designated as a clearing firm would be expected to do all of the following except A) take custody of customer funds and securities. B) clear transactions for customer accounts. C) maintain a lower net capital than noncarrying broker-dealers. D) perform back-office functions such as sending trade confirmations to customers.

C) maintain a lower net capital than noncarrying broker-dealers.

All of the following are benefits of using a prime broker except A) cost savings. B) multiple executing brokers. C) research. D) consolidation of records.

C) research. An institutional investor may select one firm (the prime broker) to provide custody and financing of securities while other firms, called executing brokers, handle all trades placed by the customer. It is not unusual for large companies to use dozens of executing broker-dealers. Trade confirmations from the many executing broker-dealers are consolidated and are provided along with account statements by the prime broker. Prime brokerage is efficient and saves the customer time and money. Research is not associated with prime brokerage accounts.

A market in which exchange-listed securities are traded in the over-the-counter (OTC) market would best be described as A) the Second Market. B) the First Market. C) the Third Market. D) the Fourth Market.

C) the Third Market. Broker-dealers registered as OTC market makers in exchange-listed securities may execute transactions in the Third Market. All securities listed on the NYSE and most securities listed on the regional exchanges are eligible for OTC trading as long as the trades are reported to the Consolidated Tape within 10 seconds of execution.

Your broker-dealer, rather than clear its own securities transactions, chooses to introduce its business to another firm that will clear, processes and handle all back-office operations for it. The firm receiving the business is known as A) a depository trust. B) a receivership. C) a fully disclosed firm. D) a carrying firm.

D) a carrying firm. A firm that chooses to introduce its customers' business to another firm to clear and process transactions, as well as handle all back-office tasks such as sending trade confirmations and taking custody of customer funds and securities, is known as an introducing or fully disclosed firm. The firm receiving the business is known as the carrying or clearing firm.

A broker-dealer that executes trades and settles transactions for another broker-dealer is called A) a limited broker-dealer. B) an introducing firm. C) a fully disclosed firm. D) a carrying firm.

D) a carrying firm. Carrying firms, also known as clearing firms, execute trades, clear and settle transactions, take custody of customer funds and securities, and handle all back-office tasks such as sending trade confirmations and statements for themselves as well as for other broker-dealers classified as introducing or fully disclosed firms.

A broker-dealer that concentrated its business efforts on proprietary trading would most likely be functioning as A) an underwriter. B) an investment banker. C) an investment adviser. D) a market maker.

D) a market maker.

A broker-dealer that accepts the risk of holding a particular security in its account to facilitate trading and provide liquidity in that security is best described as A) a clearing corporation. B) a direct participation program. C) a holding company. D) a market maker.

D) a market maker. Market makers can be individuals or broker-dealers with a line of business to stand ready to buy or sell securities (make markets) with the view of being profitable by buying low and selling high or selling high and buying low (short selling). Market making is risky. Firms that do this must demonstrate to Financial Industry Regulatory Authority (FINRA) that they can manage the operational and financial risk.

An individual who purchases securities for a personal account is called A) an institutional investor. B) an accredited investor. C) a market maker. D) a retail investor.

D) a retail investor. An individual who makes investments such as the purchase of securities for his account rather than for an organization is a retail investor. This investor may be accredited, but there is no way to know for sure given the limited information.

An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another who has been legally appointed to provide these services is best described as A) an investment advisor. B) a market maker. C) a prime broker. D) a trustee.

D) a trustee.

Both the individual and institutional investor are able to easily buy and sell securities to meet their objectives through A) outdoor malls. B) primary markets. C) biennial markets. D) secondary markets.

D) secondary markets.

All of the following would be secondary market transactions except A) securities sold on both the OTC and NYSE. B) securities bought and sold on the NYSE. C) securities bought and sold on the OTC. D) securities sold to the public by the issuer.

D) securities sold to the public by the issuer. Exchanges (like the NYSE and the OTC market) are part of the secondary market. The primary market is the issuer selling to the public.

A broker-dealer that accepts funds and securities from customers and its correspondent member firms would most likely be which of the following? A) A carrying firm B) A fully disclosed introducing firm C) An investment company D) A depository trust

A) A carrying firm Most firms choose to introduce their customers to another member firm known as a clearing or carrying firm to handle back-office tasks, such as clearing trades, sending trade confirmations, settlement and reporting compliance, trade execution, and custody of customer funds and securities.

Which of these broker-dealers would most likely have correspondent firms? A) A self-clearing firm B) A fully disclosed broker-dealer C) A market maker D) An introducing broker-dealer

A) A self-clearing firm

Correspondent firms would be likely to have relationships with which of the following types of broker-dealers? A) Self-clearing B) Market maker C) Introducing D) Fully disclosed

A) Self-clearing A self-clearing (or carrying) firm holds funds and securities of the fully disclosed or introducing firm's customers and performs related functions, such as sending confirmations and statements for them. Those firms for whom the carrying firm performs these services are known as their correspondents.

An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another who has been legally appointed to provide these services is best described as A) a trustee. B) a prime broker. C) a market maker. D) an investment advisor.

A) a trustee. A trustee is legally appointed to manage as a fiduciary assets in a trust.

Anyone who, as part of their business, gives investment advice for compensation must register as A) an investment adviser under the Investment Advisers Act of 1940. B) an agent for the issuer. C) an underwriter. D) a stock broker.

A) an investment adviser under the Investment Advisers Act of 1940.

An institutional customer, such as a hedge fund, utilizes the services of a broker-dealer who provides custody of securities, as well as other back-office functions, while allowing the customer to establish relationships with other broker-dealers for the purpose of executing orders. This account would be known as a A) prime account. B) clearing account. C) self-clearing account. D) fully-disclosed account.

A) prime account. A broker-dealer that provides custody of securities and other back-office functions but allows the customer to maintain relationships with other broker-dealers who will provide execution services is known as a prime broker-dealer. The account, known as a prime account, is maintained with the prime broker rather than with any executing brokers.

Carrying firms, those that carry customer accounts, must A) segregate customer funds and securities from the firms' funds and securities. B) maintain levels of net capital equal to or lower than noncarrying firms. C) commingle customer funds and securities with the firms' funds and securities. D) not disclose its net capital if it is higher than noncarrying firms.

A) segregate customer funds and securities from the firms' funds and securities. Carrying firms, those that carry customer accounts, must segregate customer funds and securities from that of the firm's and because carrying customer accounts entails some inherent risk, maintain net capital higher than that which would be required for noncarrying firms.

A broker-dealer that accepts funds and securities from customers and its correspondent member firms would most likely be which of the following? A) A fully disclosed introducing firm B) A carrying firm C) A depository trust D) An investment company

B) A carrying firm Most firms choose to introduce their customers to another member firm known as a clearing or carrying firm to handle back-office tasks, such as clearing trades, sending trade confirmations, settlement and reporting compliance, trade execution, and custody of customer funds and securities.

Which of the following statements would describe the Fourth Market? A) These transactions take place through electronic communications networks (ECNs). ECNs are open 24 hours a day and act solely as principals B) A market for institutional investors in which large blocks of stock, both listed and unlisted, trade in transactions unassisted by broker-dealers C) These transactions take place through electronic communications networks (ECNs) which are open during normal trading hours and act solely as principals D) The after-hours market

B) A market for institutional investors in which large blocks of stock, both listed and unlisted, trade in transactions unassisted by broker-dealers

Great Plains Securities, an OTC market maker, holds inventory and provides liquidity for Modulux Homes, an NYSE listed company. This is an example of A) the primary market. B) the third market. C) the fourth market. D) the force market.

B) the third market. When an exchange-listed security trades in the OTC market, it is being traded in the third market. The fourth market is composed of electronic communication networks and is primarily used by institutional investors. Primary markets are for raising capital.

Which of the following would be a secondary market transaction? A) A broker-dealer arranges for a customer to purchase an IPO B) A broker-dealer arranges for a customer to purchase mutual fund shares C) A broker-dealer arranges for a customer's order to be executed on the NYSE D) A broker-dealer arranges for a customer to purchase an APO

C) A broker-dealer arranges for a customer's order to be executed on the NYSE IPOs, APOs, and mutual fund transactions involve the issuer selling to the public, which are primary market transactions. Secondary market transactions are between investors (which is what takes place on the NYSE as well as other exchanges and the OTC market).

Which of the following statements would describe the Fourth Market? A) These transactions take place through electronic communications networks (ECNs). ECNs are open 24 hours a day and act solely as principals B) The after-hours market C) A market for institutional investors in which large blocks of stock, both listed and unlisted, trade in transactions unassisted by broker-dealers D) These transactions take place through electronic communications networks (ECNs) which are open during normal trading hours and act solely as principals

C) A market for institutional investors in which large blocks of stock, both listed and unlisted, trade in transactions unassisted by broker-dealers

Your broker-dealer executes trades for other broker-dealers and after execution settles those transactions for them. Your firm would be classified as which of the following? A) Fully disclosed firm B) Limited broker-dealer C) Carrying firm D) Introducing firm

C) Carrying firm Carrying firms, or clearing broker-dealers, can execute trades, clear and settle transactions, take custody of customer funds and securities, and handle all back-office tasks, such as sending trade confirmations and statements for themselves as well as for other broker-dealers.

A broker-dealer that executes trades and settles transactions for another broker-dealer is called A) a fully disclosed firm. B) a limited broker-dealer. C) a carrying firm. D) an introducing firm.

C) a carrying firm.

A clearing corporation agent or depository for securities transactions A) must be a broker-dealer. B) can be a bank or corporation only if they are also a broker-dealer. C) can be a commercial bank. D) can never be a corporation.

C) can be a commercial bank. A clearing agent can be a broker-dealer but doesn't have to be. In addition to broker-dealers, commercial banks can act as clearing agencies and depositories, as can corporations that are set up specifically to clearing securities transactions and taking custody of funds and securities.

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

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

A corporation enlists the services of a transfer agent, who would be expected to handle all of the following functions except A) maintaining records of shareholder ownership. B) replacing lost or destroyed stock certificates. C) registering the corporation's securities with the state. D) canceling old certificates and issuing new ones.

C) registering the corporation's securities with the state.

A corporation enlists the services of a transfer agent, who would be expected to handle all of the following functions except A) maintaining records of shareholder ownership. B) canceling old certificates and issuing new ones. C) registering the corporation's securities with the state. D) replacing lost or destroyed stock certificates.

C) registering the corporation's securities with the state. The transfer agent for a corporation is responsible for ensuring that its securities are issued in the correct owner's name; canceling old certificates and issuing new ones; maintaining records of ownership; and handling problems relating to lost, stolen, or destroyed certificates. It is the registrar—a separate entity—who is responsible for registering the corporation's securities with the state.

Electronic market centers designed primarily for institutional investors describes A) the exchanges. B) the third market. C) the fourth market. D) the OTC market.

C) the fourth market.

Anyone who, as part of their business, gives investment advice for compensation must register as A) an agent for the issuer. B) an underwriter. C) a stock broker. D) an investment adviser under the Investment Advisers Act of 1940.

D) an investment adviser under the Investment Advisers Act of 1940.

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

D) have transparent pricing for assets.

A market maker A) can only be an institution doing proprietary trading. B) trades in a customer's account standing ready to buy or sell at their own discretion. C) acts as an agent to buy and sell for public customers who will hold their own securities. D) trades in a proprietary account to facilitate trading of a security and provide liquidity.

D) trades in a proprietary account to facilitate trading of a security and provide liquidity. Any entity, individual or institution, willing to accept the risk of holding a particular security in its own account to facilitate trading and provide liquidity in that security is known as a market maker or trader.

The transfer agent for a corporation is responsible for each of the following except A) canceling old and issuing new certificates. B) acting as an intermediary between the buy and sell sides of a transaction. C) ensuring that its securities are issued in the correct owner's name. D) maintaining records of ownership.

B) acting as an intermediary between the buy and sell sides of a transaction. The transfer agent (often a bank) for a corporation is responsible for ensuring that its securities are issued in the correct owner's name, canceling old and issuing new certificates, maintaining records of ownership, and handling problems relating to lost, stolen, or destroyed certificates. Acting as an intermediary in a trade is the function of the clearing corporation.

A central, physical, marketplace where securities are traded through a designated market maker is A) the third market. B) an exchange. C) the OTC. D) the pit.

B) an exchange. This description most aligns with the exchange model where securities are traded in a central location through a designated market maker.

A business entity that performs the function of receiving and delivering payments and securities on behalf of both parties to a securities transaction is called a A) broker-dealer. B) clearing agency. C) depository. D) transfer agent.

B) clearing agency. This is the function of a clearing agency. Although there are some broker-dealers that do act as clearing agents, being a broker-dealer does not always include providing the services of a clearing agent. The broker-dealer would need to meet all of the requirements of being a clearing agent.

Secondary markets exist to do all of these except A) support the existence of primary markets. B) decrease liquidity in the national markets. C) allow individual investors easy access to investment vehicles. D) allow investors to easily liquidate securities.

B) decrease liquidity in the national markets. Secondary markets are focused on providing, not decreasing liquidity. Ultimately, a fair and orderly secondary market makes securities more attractive, supporting the functioning of the primary markets.

When investors buy and sell securities to and from one another, these transactions occur A) in the primary market. B) in the secondary market. C) on exchanges only. D) in the over-the-counter (OTC) market only.

B) in the secondary market.

A broker-dealer's business model allows for only the purchase and sale of securities for retail customer accounts. It does not execute, settle, or clear its customer's transactions, nor does it tend to any back-office functions such as sending trade confirmations or forwarding proxies. This broker-dealer would best be described as what type of firm? A) Full service B) Market making C) Clearing agent/carrying agent D) Introducing/fully disclosed

D) Introducing/fully disclosed A fully disclosed introducing broker-dealer is what the word implies—it introduces its customer's business to a clearing firm. Clearing firms (often called carrying firms or agents) hold funds and securities and settle transactions (clear and process) for their correspondent introducing firms. Essentially, the clearing firm acts as the introducing firm's back office.

Correspondent firms would be likely to have relationships with which of the following types of broker-dealers? A) Fully disclosed B) Market maker C) Introducing D) Self-clearing

D) Self-clearing