Unit 1 : Primary Markets and Secondary Markets
All of the following are benefits of using a prime broker except: A) multiple executing brokers. B) research. C) cost savings. D) consolidation of records.
B) 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.
ABC Securities is a FINRA member broker-dealer that maintains an inventory in BigTech Computing stock. When transacting business in BigTech stock, ABC is most likely acting in what capacity? A) Underwriter B) Broker C) Agent D) Market maker
D) Market maker When a BD acts as a dealer (or market maker), they are selling securities from the firm's inventory to a customer or buying a security from a customer for the dealer's inventory.
Great Plains Investment is a member firm that maintains an inventory in BigBox Stores, Inc., common stock. When transacting business in BigBox stock, the firm is most likely acting in what capacity? A) Underwriter B) Broker C) Agent D) Market maker
D) Market maker When a BD acts as a dealer (or market maker), they are selling securities from the firm's inventory to a customer or buying a security from a customer for the dealer's inventory.
All of the following phrases are associated with a broker-dealer acting as a principal except: A) "trades with customers from own inventory." B) "maintains inventory." C) "charges a commission for the transaction." D) "profits on spread."
C) "charges a commission for the transaction." When a BD acts as a principal (dealer, market maker), they are selling securities from the firm's inventory to a customer or buying a security from a customer for the dealer's inventory. The firm profits on the difference between what the firm paid for the security and what the customer pays, which is called the spread (or mark-up). There is no commission when a firm acts in a principal capacity.
Which of the following best describes how a buy stop at 39 would fill? A) The next price below 39 after the market price falls to 39 B) The next price above 39 after the market price rises to 39 C) The next available price after the market price rises to 39 D) The next available price after the market price falls to 39
C) The next available price after the market price rises to 39 A buy stop order becomes a market order and fills at the next available price once it touches or passes through the stop price.
All of the following are associated with being a carrying firm except: A) accepting customer funds. B) accepting customer securities. C) being a fully disclosed firm. D) being able to clear customer transactions.
C) being a fully disclosed firm. A carrying firm has the capability to do trade executions, clear and settle transactions, and take custody of customer funds and securities. A fully disclosed firm is one that introduces its customer business to another firm for the purpose of clearing and settling transactions
Which of the following best describes how a sell stop at 39 order would be filled? A) The next price above 39 after the market rises to 39 B) The next available price after the market price falls to 39 C) The next price below 39 after the market falls to 39 D) The next available price after the market price rises to 39
B) The next available price after the market price falls to 39 Sell stop orders are placed below the current market price and become market orders once the price touches or passes through the stop price.
Issuance and trading of securities are regulated at more than one governmental level. These would include regulations at which of the following? I. County level II. City level III. Federal level IV. State level A) I and IV B) II and III C) I and II D) III and IV
D) III and IV Issuance and trading of securities are regulated at the federal level by the Securities and Exchange Commission (SEC) and the various self-regulatory organizations (SROs) in the securities industry. They are also regulated at the state level through the Uniform Securities Act and state laws regulating securities.
The aftermarket prospectus requirement for the IPO of nonlisted securities is A) 40 days. B) 25 days. C) 90 days. D) not specified in the Securities Act of 1933.
C) 90 days. For the first 90 days following the IPO, a prospectus must be provided to purchasers in the secondary market.
Your customer purchases shares of a common stock of a major exchange in a trade that settles the same day. This is an example of which type of trade? A) Not possible B) A quick settlement trade C) A cash settlement trade D) A mutual fund
C) A cash settlement trade This is called a cash settlement trade. It states that the trade is a common stock, so, not a mutual fund. There is no formal quick settlement trade.
Your client, Bill Hearst, inherited several thousand shares of his grandfather's auto parts manufacturer, National Autoparts. He sells a portion of the position in order to raise some cash to buy a new boat. Which of these is true? I. This is a secondary market transaction. II. This is a primary market transaction. III. This is a long sale of the stock. IV. This is a short sale of the stock (he never purchased it). A) I and IV B) II and III C) II and IV D) I and III
D) I and III The issuer has no part of this transaction; it is considered a secondary market transaction. It does not matter that Bill did not buy the shares; it matters that he owned them. This is a long sale.
During the cooling-off period, underwriters may not A) distribute a preliminary prospectus. B) place a tombstone advertisement. C) take indications of interest. D) distribute sales literature or advertising material.
D) distribute sales literature or advertising material. During the cooling-off period, underwriters may not distribute sales or advertising literature regarding the securities to be offered. However, they may distribute a preliminary prospectus intended to gather indications of interest and place tombstone ads.
During the cooling-off period, underwriters of new securities may: I. accept orders to purchase shares. II. not accept orders to purchase shares. III. not accept indications of interest regarding potential purchases of shares. IV. accept indications of interest regarding potential purchases of shares. A) II and IV B) I and IV C) I and III D) II and III
A) II and IV Orders for shares may never be taken before the effective date; therefore, no orders to purchase shares may be taken during the cooling-off period. Indications of interest, however, are allowed to be taken but are not binding on either party.
A customer purchased shares of stock into her account. This action is known as A) buying long. B) buying short. C) selling long. D) selling short.
A) buying long. The purchase of the stock is a long buy. The subsequent sale of the long position is a long sale.
Which of the following statements would describe the Fourth Market? A) A market for institutional investors in which large blocks of stock, both listed and unlisted, trade in transactions unassisted by broker-dealers B) These transactions take place through electronic communications networks (ECNs) which are open during normal trading hours and act solely as principals C) These transactions take place through electronic communications networks (ECNs). ECNs are open 24 hours a day and act solely as principals D) The after-hours market
A) A market for institutional investors in which large blocks of stock, both listed and unlisted, trade in transactions unassisted by broker-dealers The Fourth Market is a market for institutional investors in which blocks of stock trade through ECNs that are open 24 hours a day acting as agents.
For the primary market, which of the following is true? A) Issuer transactions occur in the primary market, and securities are offered at a public offering price. B) All U.S. exchanges are primary markets where price is determined by supply and demand. C) All U.S. exchanges are primary markets where securities are offered at a public offering price. D) Issuer transactions occur in the primary market, and price is determined by supply and demand.
A) Issuer transactions occur in the primary market, and securities are offered at a public offering price. The primary market, regulated by the 1933 Securities Act, is where securities are offered by issuers (issuer transactions) at an offering price. The sales proceeds of these transactions go to the issuer.
Primary market transactions would include which of the following? A) Sale of $10 million of corporate bond by a broker-dealer acting as an underwriter B) Sale of $10 million of corporate stock by a broker-dealer acting as a market maker C) Sale of $10 million of municipal bonds by a broker-dealer acting as a market maker D) Sale of $10 million of U.S. Treasury bonds by a broker-dealer acting as a market maker
A) Sale of $10 million of corporate bond by a broker-dealer acting as an underwriter Market makers are broker-dealers who sell out of their own account in the secondary market. Underwriters are broker-dealers who help issuers bring their securities to market in the primary market.
The market for Sierra Verde Coffee Company stock is at $72 per share. Your customer would like to sell his shares for $75, and believes the stock will climb to that level in the next two to three weeks. Which order should he place? A) Sell limit 75 GTC B) Sell limit 75 AON C) Sell limit 75 FOK D) Sell limit 75
A) Sell limit 75 GTC Only the good-til-canceled (GTC) order will live past today. All the others will cancel if unexecuted by the end of the day. If there is no qualifier, then it is a day order. Fill-or-kill (FOK) orders cannot be filled immediately or canceled. An all-or-none (AON) order would need to also be marked GTC to go into the next day.
A broker-dealer firm purchases 400 shares of ABC Corporation common stock on behalf of a customer at a price of $40 per share. The firm charges the customer $40 for this transaction. Which of the following is true? A) The firm is acting as an agent. B) The firm is acting as a dealer. C) The firm is overcharging the customer. D) The firm is acting as an underwriter.
A) The firm is acting as an agent. The firm is acting as an agent for the customer. There is no mention of an inventory or a mark-up, and the firm charges a commission. A commission of 0.25% is well within the guidelines.
When choosing to issue additional bonds to the general public in order to raise more capital, a corporate issuer is engaging in A) a primary offering. B) an initial public offering. C) a secondary offering. D) a private securities offering
A) a primary offering. A primary corporate offering is one in which the proceeds raised go to the issuing corporation. Primary offerings of bonds may be made by an issuer to the general public as an initial public offering (IPO) or, as is the case here, in an additional public offering (APO). Both are primary offerings.
Shares held in electronic form at a clearing house under a broker-dealers account are: A) held in street name. B) are in custodial name. C) held in safe keeping. D) in trust name.
A) held in street name Shares held in street name are normally registered to the broker-dealer, who hold them on behalf of the client at the broker-dealers clearing firm.
Each of the following may be traded on an exchange except A) life insurance. B) options. C) bonds. D) equities.
A) life insurance. All types of financial assets and investment instruments are traded among buyers and sellers on securities exchanges. Stocks (equity securities), bonds (debt securities), options (derivative securities), currencies, and more are traded on exchanges and other securities markets every business day. Life insurance is not a security and may not be traded.
The access equals delivery rule applies to: A) the final prospectus and aftermarket delivery obligations. B) the preliminary prospectus delivery requirements during the cooling-off period. C) the final prospectus delivery requirements during the cooling-off period. D) all prospectuses delivered before the registration date.
A) the final prospectus and aftermarket delivery obligations The access equals delivery rule applies to the final prospectus and aftermarket prospectus delivery obligations. It does not apply to preliminary prospectuses. No prospectus can be delivered before the registration date.
Certain investors are deemed accredited when they have a net worth of: A) $1 million. B) $1 million, not including net equity in the primary residence. C) $200,000. D) $500,000, not including net equity in the primary residence.
B) $1 million, not including net equity in the primary residence. An accredited investor is defined as a natural person who has a net worth of $1 million or more, not including net equity in a primary residence; or has had an annual income of $200,000 or more in each of the two most recent years (or $300,000 jointly with a spouse) and who has a reasonable expectation of reaching the same income level during the current year.
An investor has her registered representative enter a sell stop limit order at 50. Following the order entry, trades occur at 52, 50, 49, 51, and 53. The investor would receive: A) 49 B) 51 C) 50 D) 53
B) 51 This is really two orders. The first is to stop at 50. That is, once the stock trades at 50 or lower, the order is elected (triggered) and becomes a live working order. That order is to sell at 50 or better. Therefore, the first time the stock hits 50 (or less), is the trade at 50. That triggers the sell limit order to sell at 50 or better. The next trade is at 49 and that is not an acceptable price given the limit order set at 50. The following price, however, at 51, is the next acceptable price after the order is triggered and that is where the order would be executed.
Your client, Randall Stephens, has been bearish on LMN stock and sold it short several months ago. He now believes the company is in a good position for a turnaround and wants to change his strategy on LMN. What should he do to implement his new strategy? A) Sell short QRS to close his existing position B) Buy to close his existing position and open a new long position in the stock C) Buy an equal number of shares to his existing short position D) Sell an equal number of shares to his existing position
B) Buy to close his existing position and open a new long position in the stock Buying to close will eliminate his existing position, but if he now wants to engage in a bullish strategy on LMN, he would need to buy additional shares.
Distinguishing between a sell stop order and a sell stop limit order, which of the following are true? I. The sell stop limit order becomes a sell limit once triggered. II. The sell stop order becomes a sell limit order once triggered. III. The sell stop limit order becomes an order to sell at the market when triggered. IV. The sell stop order becomes an order to sell at the market when triggered. A) I and III B) I and IV C) II and IV D) II and III
B) I and IV Stop orders become market orders once triggered, and stop limit orders become orders to sell at the specified limit once triggered. Stop or stop limit orders can be either buys or sells.
A market order to buy must be executed when and at what available price? A) Within 24 hours, at the highest B) Immediately, at the lowest C) Immediately, at the highest D) Within 24 hours, at the lowest
B) Immediately, at the lowest Market orders carry the idea of immediate execution at the best available price. A market order to buy would require execution at the lowest available price.
Which of the following securities is exempt from the Securities Act of 1933? A) Debenture B) Municipal note C) Preferred stock D) Common stock
B) Municipal note Municipal debt securities, including short-term notes, are exempt from the Securities Act of 1933.
What is the maximum number of nonaccredited investors allowed in a Regulation D exempt transaction under Rule 506(c)? A) 50 B) None C) 25 D) 35
B) None In order to sell under Rule 506(c) (which allows advertising), all purchasers of the advertised securities must be accredited investors, or the business must reasonably believe that the investors are accredited investors at the time of the sale.
The preliminary prospectus for an IPO indicates that the number of shares to be sold may be increased as much as 15% if market demand is sufficient. This is called: A) an adjustment offering. B) a Green Shoe option. C) a shelf offering. D) a flexible offering.
B) a Green Shoe option This is a Green Shoe offering, based on a rule first used in the IPO for the Green Shoe Manufacturing Company (now known as Stride-Rite). A shelf offering occurs when the shares may be held and sold later under Rule 415. The other names are fictional.
A customer enters an order that must be executed in its entirety when entered or canceled immediately. This is known as A) a day order. B) a fill-or-kill (FOK) order. C) an all-or-none (AON) order. D) an immediate or cancel (IOC) order.
B) a fill-or-kill (FOK) order. A FOK order must be canceled immediately if it cannot be filled in its entirety when entered. In this situation, there can be no partial executions. The entire order must be filled immediately, or it must be killed. An IOC order allows for partial executions, and an AON order can remain working as a good-till-canceled order if it cannot be filled immediately when entered.
Private placements are primarily sold to A) individuals who do not meet the definition of accredited investor. B) institutional investors. C) investment bankers. D) general public investors
B) institutional investors. Institutional investors are the overwhelming majority of buyers in private placements, although private placement securities may be sold to small numbers of wealthy individuals who meet certain criteria (accredited investors).
Regarding the purchase of new equity issues (IPOs), restricted persons may A) purchase shares of a new issue only in amounts that are not substantial in relation to the total number of shares being issued. B) not purchase shares of a new issue. C) purchase shares of a new issue only if they work for a bank. D) purchase shares of a new issue only if they are employed by a broker-dealer as a registered representative.
B) not purchase shares of a new issue. Persons characterized as restricted persons are prohibited from purchasing shares of new issues in any quantity. If one is already restricted, working for a bank or a broker-dealer does not exempt them from the rule
Sandal manufacturer Achilles, Inc., had registered to sell shares of its stock to the public for the first time. The company has several different uses for the money to be raised—first among them is the building of a new manufacturing plant outside of Troy, Michigan. This sale would be part of: A) the secondary market. B) the primary market. C) the OTC market. D) the spot market.
B) the primary market The company is selling its stock to raise money for its growth. This is a primary market transaction. The issuer is the person selling the security. The secondary market is where others buy and sell securities. The issuer is not normally involved in a secondary market transaction. The OTC market is part of the secondary market. The spot market involves the trading of foreign currency
Josie Reese, one of your clients with an option account, calls and asks you to remind her when she is required to settle if she bought a call today. You would tell her: A) trade date. B) trade date plus 1 business day. C) trade date plus 3 business days. D) trade date plus 2 business days.
B) trade date plus 1 business day Options settle the next business day (T + 1). Regular way settlement is T + 2 for everything else except treasuries and money market securities.
All of the following are exempt issuers under the Securities Act of 1933 except: A) the state of Montana B) Helpful Charities, Inc. C) ABC Broker-Dealer, which issues Treasury receipts D) the U.S. Treasury
C) ABC Broker-Dealer, which issues Treasury receipts A BD is not an exempt issuer. The federal government, states, and charities are examples of exempt issuers
Which of the following would be applicable to nonexempt securities (those that must be registered) being offered to the public by a corporate issuer? I. Securities Act of 1933 II. Prospectus III. Securities Act of 1934 IV. Secondary market A) II and IV B) III and IV C) I and II D) II and III
C) I and II Offering nonexempt securities [those that must be registered with the Securities and Exchange Commission (SEC)] such as common stock to the public requires the registration of the securities under the Securities Act of 1933. The offering must be made by prospectus.
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) Clearing agent/carrying agent C) Introducing/fully disclosed D) Market making
C) 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
The Sierra Verde Coffee Company files a registration statement with the SEC for the sale of new securities. While reviewing the registration statement, the SEC determines that it has not been filed properly and issues a deficiency letter. Sierra Verde submits a corrected registration statement. Which of the following is true regarding the 20-day cooling-off period? A) It is halted on the day the deficiency letter is issued and must begin anew from that same date once the corrected registration is received. B) It continues and is not impacted by the issuance of the deficiency letter by the SEC. C) It is halted on the day the deficiency letter is issued and may resume where it left off on the day the corrected registration is received. D) It is halted and does not resume until 20 days after the corrected registration is received.
C) It is halted on the day the deficiency letter is issued and may resume where it left off on the day the corrected registration is received. When a deficiency letter is issued by the SEC to an issuer, the 20-day cooling-off period is halted. It may resume where it left off when the corrected registration statement is filed. In other words, the days that the cooling-off period are suspended do not count toward the 20 days. Note that the regulators may halt the entire process if they believe fraud may be involved.
All of the following are acceptable choices to function as a depository and intermediary for transactions between buyers and sellers of securities except A) carrying firms. B) the National Securities Clearing Corporation (NSCC). C) credit unions. D) the Depository Trust Company (DTC)
C) credit unions. Credit unions cannot serve as a depository or clearing facility for securities transactions.
An opening transaction can be A) a sell only. B) a buy only. C) either a buy or a sell. D) a short sale only.
C) either a buy or a sell. An opening transaction can be either a buy or a sell. Which one will determine the investor's market attitude—bullish when buying to open a position and bearish when selling to open a position (selling short).
Each of the following may be traded on an exchange except: A) options. B) bonds. C) life insurance. D) equities.
C) life insurance All types of financial assets and investment instruments are traded among buyers and sellers on securities exchanges. Stocks (equity securities), bonds (debt securities), options (derivative securities), currencies, and more are traded on exchanges and other securities markets every business day. Life insurance is not a security and may not be traded.
For a new issue that qualifies for Nasdaq listing, a prospectus must be provided to all purchasers within how many days after the effective date? A) 90 days B) 60 days C) 40 days D) 25 days
D) 25 days For new issues that qualify for listing on an exchange or Nasdaq, the prospectus delivery requirement period in the aftermarket is 25 days. If the new issue will be specifically quoted by the OTC Markets Group the period is 90 days. An additional public offering (APO) for a non-NMS security, the requirement for delivery is 40 days. There is no requirement for an APO of an NMS security.
How long can a good 'til canceled order remain in force without being reconfirmed by the customer? A) 12 months B) 24 months C) 36 months D) 6 months
D) 6 months Good 'til canceled orders historically have been canceled at the end of April and October. Some firms will cancel them more frequently, but for the order to stay in effect longer than six months, the customer would need to reinstate or reconfirm the order.
Which of the following will not be found in a final prospectus? A) Statement that the Securities and Exchange Commission (SEC) neither approves nor disapproves of the issue B) Effective date and offering price C) Business plan and use of the proceeds D) Agreement among underwriters
D) Agreement among underwriters The agreement among underwriters is not a part of a prospectus.
Ensuring that the investing public is fully informed about a security and its issuing company when shares are first sold in the primary market is covered under which of the following federal acts? A) Securities Exchange Act of 1934 B) Investment Company Act of 1940 C) Uniform Securities Act D) Securities Act of 1933
D) Securities Act of 1933 Companies looking to offer securities to the public must provide a prospectus to those who are approached to purchase the shares. This requirement ensures that the investing public is fully informed about a new security and its issuing company.
In order to qualify to invest in a Regulation A Tier 2 offering, a customer must do which of the following? A) Submit tax documents showing qualification B) Submit an affidavit swearing to their qualification C) Submit audited financial statements demonstrating qualification D) Self-certify that they meet the requirements
D) Self-certify that they meet the requirements Tier 2 investors must be qualified investors, and there are two ways to qualify: Be an accredited investor as defined in Rule 501 of Regulation D OR Limit the investment to a maximum of the greater of 10% of the investor's net worth or 10% of the investor's net income per offering. Note that self-certification of net worth and income is all that is required for Tier 2 qualification, with no burdensome filings.
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 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
Which of the following is not required to endorse a stock certificate for transfer? A) Proper endorsement by all owners B) Certificates in good condition C) The correct number of shares are delivered D) Signatures of the receiving registered representative
D) Signatures of the receiving registered representative The broker-dealer does not sign the certificate. All the rest of these are requirements.
Shelf offerings are covered under which if the following? A) The Investment Company Act of 1940 B) The Trust Indenture Act of 1939 C) The Bank Secrecy Act D) The Securities Act of 1933
D) The Securities Act of 1933 The shelf offering (registration) provision under the Securities Act of 1933 allows issuers to quickly raise capital when needed or when market conditions are favorable.
For initial public offerings (IPOs) of common stock, all of the following would be considered restricted persons except: A) Employees of the member firm B) a member firm C) fiduciaries acting on behalf of the underwriters D) a person owning at least 5% of the member firm
D) a person owning at least 5% of the member firm An indicidual person or entity would have to own 10% or more of a member firm before they would be considered a restricted person
Restricted persons are not allowed to purchase an IPO of common stock. All of the following are restricted persons except: A) broker-dealers. B) any person owning 10% or more of a member firm. C) registered representatives. D) the grandparent of a restricted person.
D) the grandparent of a restricted person. Immediate family to a restricted person is a restricted person. This includes parents, in-laws, spouses, siblings, children, or any other individual to whom the person provides material support. Aunts and uncles as well as grandparents are not considered immediate family. If, however, one of these individuals lives in the same household as a restricted person, that individual would be a restricted person.
A registration statement disclosing material information about a new issue must be filed with the Securities Exchange Commission. The accuracy and adequacy of the registration statement is the responsibility of A) the Securities Exchange Commission (SEC). B) the exchanges where the shares will trade. C) the underwriters. D) the issuer.
D) the issuer. Even though the underwriters assist the issuer in preparing the registration statement that must be filed with the SEC, the issuers are ultimately responsible for the accuracy and adequacy of these documents. Remember that the SEC neither approves nor disapproves of anything within the registration statement.