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117 Cards in this Set

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A market order to buy should be executed at the:
a. Highest bid available
b. Lowest bid available
c. Highest offer available
d. Lowest offer available
D
A market order to buy should be executed at the lowest offer price available. A market order to sell should be executed at the highest bid price available. (11-1)
A customer enters a sell stop-limit order for 100 shares at 18.50. The last round-lot sale that took place before the order was entered was 18.88. Round-lot sales that took place after the order was entered occurred at 18.25, 18.38, 18.50, and 18.63.
The round-lot sale that activated the order was at:
a. 18.25
b. 18.38
c. 18.50
d. 18.63
A
In order for a sell-stop order to be activated, a transaction must occur at or below the stop price. In this example, the stop was at 18.50. The first transaction was 18.25, which is at or below the stop price of 18.50, and that activated the order. (11-23)
A customer enters a sell stop-limit order for 100 shares at 18.50. The last round-lot sale that took place before the order was entered was 18.88. Round-lot sales that took place after the order was entered occurred at 18.25, 18.38, 18.50, and 18.63.
The trade was executed at:
a. 18.25
b. 18.38
c. 18.50
d. 18.63
C
After the order was activated by the round-lot sale of 18.25, the order became a limit order to sell 100 shares at 18.50 or better. 18.50 is the first price that meets this requirement and would be the execution price. (11-23, 11-24)
In a municipal bond transaction, "T + 3" means:
a. The bond trades with a 3-point premium
b. The bond trades with an additional takedown of 3 points
c. The transaction will settle regular way in 3 business days from the trade date
d. Three bonds will be delivered on the settlement date
C
"T + 3" in a municipal bond transaction means the bonds will settle regular way in 3 business days from the trade date. (11-1)
A stock closed at $44 on the NYSE on September 14th. It trades ex-dividend 50 cents a share on the opening of trading on September 15th. The specialist will reduce which of the following GTC orders on his book?
I. An open buy limit order
II. An open sell limit order
III. An open buy stop order
IV. An open sell stop order
a. I and III
b. I and IV
c. II and III
d. II and IV
B
All GTC orders that are entered below the market (buy limit orders, sell stop orders, and sell stop-limit orders) are automatically reduced by the dollar amount of the dividend or right when the stock sells ex- (without the) dividend or right. These orders are reduced unless they are marked DNR (do not reduce) when they are entered. The open buy limit order and open sell stop order are entered below the market and will therefore be reduced. (11-24)
The following appears on the NYSE ticker tape: T 18.25 .50. This means that:
a. American Telephone is quoted 18.25 - 18.50
b. 100 shares of American Telephone traded at 18.25, followed by another trade of 100 shares at 18.50
c. An odd-lot of American Telephone traded at 18.25, followed by a round-lot at 18.50
d. None of the above
B
The symbol for American Telephone and Telegraph is T. When a trade is for 100 shares, only the price is shown. Therefore, the answer is 100 shares of American Telephone traded at 18.25, followed by another trade of American Telephone at 18.50. (11-28)
The following appears on the NYSE ticker tape: X 67. 3s .13. Relating to this, which of the following is true?
a. USX Corp. is quoted at 67 to 67.13.
b. Someone is bidding for 100 shares of USX Corp. at 67 and someone else is offering 300 USX Corp. at 67.13.
c. 100 shares of USX Corp. traded at 67, followed by a trade of 300 at 67.13.
d. USX Corp. opened at 67 followed by a trade of 300 shares at 67.13.
C
The answer is 100 shares of X (the symbol for USX Corp) traded at 67, followed by a trade of 300 shares at 67.13. When 100 shares of a stock trade, only the symbol of the stock and price are printed. When the amount is from 200 to 9,900, the last two zeros are omitted and the symbol for the 100-share round-lot is added. For example, it is shown as 2s for 200, 3s for 300, 10s for 1,000, and 99s for 9,900. When the amount traded is 10,000 shares or more, the entire amount is printed (for example, X 10,000s 67 means that 10,000 shares of USX traded at 67). (11-28)
When the underlying common stock sells ex-dividend, a GTC buy-limit order will:
a. Remain unchanged
b. Be reduced
c. Be increased
d. Change at the discretion of the specialist
B
All GTC (good-until-cancelled) orders entered below the current market at the time they are entered are automatically reduced by the amount of the dividend on the ex-dividend date (unless they are market DNR -- Do Not Reduce). A buy-limit order is entered below the current market at the time it is entered and would be reduced. (11-24)
All of the following are true regarding the SuperDOT system EXCEPT:
a. Orders are sent directly to the specialist by computer
b. Orders do not go through a floor broker
c. All orders may be entered into the system regardless of the number of shares involved
d. Transaction reports are received faster than those executed by floor brokers
B
The SuperDOT System (Designated Order Turnaround) provides a direct computer tie-in with the specialist and thus bypasses the floor brokers. It can be used for odd-lots, consolidated odd-lots, market orders and limit orders. The NYSE sets limits on the number of shares that may be entered. (11-29)
A customer enters a stop order to sell 100 shares of XYZ at 20. The current market price of XYZ is 22. If XYZ trades at 20, the stop order:
a. Will only be executed at 20 or better
b. Becomes a market order for immediate execution
c. Will be cancelled
d. Will be executed at the discretion of the floor broker
B
A sell stop order becomes a market order when the security trades at or below a particular price. If XYZ trades at 20, the stop order becomes a market order for immediate execution. A buy stop order becomes a market order when the security trades at or above the stop price. (11-23)
The payment date for securities purchased in a cash or margin account as stated by Regulation T.
Use the following choices to answer this question.
a. One business day from the trade date
b. Three business days from the trade date
c. Two business days from the settlement date
d. Ten business days from the settlement date
B
According to current FRB requirements, securities purchased in a cash or margin account must be paid for within two business days of the settlement date of the transaction. (11-3)
The latest date that a broker-dealer may buy-in stock when the customer who sold the stock fails to deliver.
Use the following choices to answer this question.
a. One business day from the trade date
b. Three business days from the trade date
c. Two business days from the settlement date
d. Ten business days from the settlement date
D
SEC Rule 15c3-3 (the Customer Protection Rule) sets forth rules for broker-dealer reserve requirements and custody of securities. Under the custody of securities section, a brokerage firm must buy-insecurities within 10 business days from settlement when a customer has failed to deliver securities that were previously sold. (11-3)
An order entered with a brokerage firm will be processed in which order?
I. Cashier's department
II. Margin department
III. Purchase and sale (P&S) department
IV. Wire room (order department)
a. I, II, III, and IV
b. I, III, II, and IV
c. IV, III, II, and I
d. II, III, I, and IV
C
When an order is entered by a customer, it is processed first in the wire room or order room, then in the P&S department, then the margin department, and then the cashier's department. (11-18) OPMC
A director of a company owns 180,000 shares of BDG stock which were purchased in the secondary market. If the director wants to sell 17,000 shares of BDG that she has owned for nine months, which of the following statements is TRUE?
a. The director is permitted to sell the shares if the trade is reported.
b. The director is permitted to sell the shares only if the they are held for three additional months and the trade is reported.
c. The director is permitted to sell the shares and no report is required.
d. The director is only permitted to sell the shares if the transaction would result in a loss.
A
An insider, as defined by the Securities Exchange Act of 1934, is a director, officer, or owner of more than 10% of the voting stock of a corporation. Immediate family members of the insider are also subject to the same limitations. An officer or director is required to register with the SEC regardless of their ownership levels in the company. The director as an insider is required to report the transaction to the SEC within two business days. Insiders are not permitted to make short-swing profits (based on ownership of six months or less in their own company's stock). Since the director owned the shares for nine months, there is no violation. Since the shares were purchased by the director in the secondary market, the shares are considered control, not restricted stock and are not subject to the six months' holding . (11-5)
A customer entered a market order to purchase 100 shares of XYZ Corporation. The brokerage firm confirms to the customer the purchase of 100 shares of XYZ Corporation at 28.25. The firm later finds that the purchase was actually executed at 28.75. The customer:
a. Must pay 28.25
b. Must pay 28.75
c. Can accept the 28.75 or cancel the order
d. Can cancel the order
B
The customer must pay 28.75 which was the actual purchase price, even though the brokerage firm confirmed (erroneously) to the customer that the purchase was made at 28.25. (11-32)
A customer enters a stop order to sell 1,000 shares of ATT at 35. The order will be executed at:
a. 35
b. 34.99 or below
c. The next trade after 35 is touched
d. 35.01 or above
C
Stop orders become market orders once the stop order becomes activated. After the order is activated at or below 35, the next trade will be the execution price. (11-23)
STOP ORDER (S7) :
(1.) An order to buy or sell that becomes a market order when the stock sells at or through a specified price.

(2.) A notice sent by the SEC that prevents an offering of a new issue.
All of the following are prohibited according to the Securities Exchange Act of 1934 EXCEPT:
a. A trader buys shares late in the day to prevent the price of a security from falling
b. Short sales of municipal bonds
c. Selling short shares of an exchange-traded stock without borrowing the security
d. Two traders enter into transactions where ownership does not actually change, in order to increase trading volume
B
All of the choices listed are prohibited according to the Securities Exchange Act of 1934 except short sales of municipal bonds. Short sales of securities are subject to the borrowing requirements of Regulation SHO. This makes choice (c) a violation. Municipal bonds are exempt securities and are not subject to the borrowing requirements of Regulation SHO. Any person that buys or sells a security for the purpose of attempting to stop the price from falling (pegging) or rising (capping) would be engaging in a manipulative action. Persons who enter into transactions to increase volume, without ownership changing, have engaged in painting the tape. This is a manipulative act and is a violation. (11-4)
The Securities Exchange Act of 1934:
I. Created the SEC
II. Provided for the regulation of credit
III. Provided for the regulation of exchanges
IV. Provided for the regulation of new issues
a. I and III only
b. I and IV only
c. I, II, and III only
d. II, III, and IV only
C
The Securities Exchange Act of 1934 created the SEC and provided for the regulation of credit and exchanges. The Securities Act of 1933 provided for the regulation of new issues. (11-2)
If a customer wants to purchase securities in an account that has been frozen, when must he deposit the required cash in the account?
a. On the same day of the purchase
b. No later than 5 business days after the purchase
c. No later than 3 business days after the purchase
d. Before the purchase transaction is made
D
A frozen account requires the full amount of money to be deposited in the account before the order is accepted. If the client wanted to sell securities in a frozen account, the securities have to be in the account before the sale is made. (11-3)
FROZEN ACCOUNT (S7) : An account in which the customer has violated Reg. T by not paying within five business days. A purchase or sale in a frozen account will only be done when sufficient funds or the securities are in the account.
A specialist can accept all of the following orders EXCEPT a:
a. Not-held order
b. Market order
c. Good-'til-cancelled (open) order
d. Day order
A
A specialist can accept all of the orders listed except a not-held order, which allows a floor broker to use discretion in executing an order. If the question asked which orders can the specialist accept and place on his "book," the answer would be open (GTC) and day orders only. A specialist can accept a market order but must execute it immediately and cannot place it in his book. (11-16, 11-25)
When you purchase an option contract, according to Regulation T, the transaction must be paid for in:
a. 1 business day
b. 3 business days
c. 5 business days
d. 7 business days
C
According to Regulation T, securities must be paid for within 2 business days of the standard (regular-way) settlement date. Since regular-way settlement is three business days, payment is required within five business days from the trade date. Therefore, while option transactions settle next day, the customer has five business days in which to pay for a purchase. (11-3)
REGULAR-WAY SETTLEMENT (S7) : The conclusion of a securities transaction when a broker-dealer pays for securities purchased or delivers securities sold and receives from the contra broker the proceeds of a sale. Regular-way settlement, for most securities, is three business days from the trade date. Government bonds and options settle the next business day. A transaction done for cash settles on the same day.
Ms. Green owns 600,000 shares of a company's stock. If there are 3,000,000 outstanding shares, she would be considered an insider:
a. Only if she was an officer or director
b. Only if she did not report all changes in position to the SEC
c. Only if she did not sell the shares according to Rule 144
d. Under all circumstances
D
According to the Securities Exchange Act of 1934, any person who is an officer or director, or who owns more than 10% of a company's outstanding stock, is considered an insider. Ms. Green owns 20% of the outstanding shares (600,000 divided by 3,000,000) and is therefore considered an insider. (11-5)
A type of order that becomes a market order when a round-lot trades at or through a particular price is called a:
a. Market order
b. Limit order
c. Stop order
d. Stop-limit order
C
A type of order which becomes a market order when a round-lot trades at or through a particular price is called a stop order. A variation of a stop order is a stop-limit order which is activated when a round-lot trades at or through a particular price but then the limit price must be satisfied. (11-23)
Maintaining a fair and orderly market and acting as a broker for other brokers is the function of the:
a. Specialist
b. Odd-lot dealer
c. Floor trader
d. Two-dollar broker
A
Maintaining a fair and orderly market, and acting as a broker (agent) when executing orders for other brokers, is the function of the specialist. (11-16)
On May 25th, the president of MaxCo bought 3,000 shares of MaxCo stock in the OTC market at $33. Two months later, the stock has increased to a price of $40. If the president wants to sell the shares:
a. Permission must be granted by the MaxCo board of directors
b. The profit from the trade must be forfeited according to the short-swing profit rule
c. The sale would not be permitted due to the holding period required by Rule 144
d. Permission must be granted by FINRA
B
The Securities Exchange Act of 1934 prohibits insiders from making short-swing profits. A short-swing profit is a profit made on stock held by insiders for less than six months. If the president of MaxCo sold stock two months after it was purchased, MaxCo could sue for recovery of the profit. (11-5)
Which of the following orders will be reduced when XYZ Corporation sells ex-dividend?
I. A GTC order to sell 100 XYZ at $50
II. A GTC to buy 100 XYZ at $50 stop
III. A GTC to buy 100 XYZ at $50
IV. A GTC to sell 100 XYZ at $50 stop
a. I and II
b. II and III
c. II and IV
d. III and IV
D
Open or good-until-cancelled (GTC) orders that are entered below the market are automatically reduced when a stock sells ex-dividend unless they are marked do not reduce (DNR). Orders that are entered below the current market at the time they are entered are buy limit orders, sell stop orders, and sell stop-limit orders. Open orders that are entered above the market are sell limit orders, buy stop, and buy stop-limit orders. The GTC buy limit and sell stop orders are entered below the market, and are reduced on the ex-dividend date. (11-24)
A customer's account is currently frozen. A registered representative may do all of the following EXCEPT:
a. Accept an order in a cash account if all the money is in the account before the order is entered
b. Accept an order in a margin account if the total dollar amount of the purchase is in the account before the order is entered
c. Accept a sell order for a security in a cash account if the security is in the cash account before the order is entered
d. Accept a sell order for a security in a cash account if the security is not in the account before the order is entered
D
All of the statements about a frozen account are true except that a registered representative can accept a sell order for a security in a cash account if the security is not in the account before the order is entered. (11-3)
All of the following are TRUE regarding trading halts on the NYSE EXCEPT:
a. When the DJIA declines by 5% from its previous day's close, all trading halts for 30 minutes
b. When the DJIA declines by 10% from the previous day's close, trading halts for one hour
c. When the DJIA declines by 20% from the previous day's close, trading halts for two hours
d. When the DJIA declines by 30% from the previous day's close, the trading session ends
A
Trading halts on the New York Stock Exchange are triggered by a decline in the Dow Jones Industrial Average (DJIA) of 10%, 20%, and 30%. Choice (a) is incorrect. The initial trading halt is based on a decline of 10% from the previous day's close. All of the other choices are correct according to Rule 80B, which regulates the introduction of trading halts due to extraordinary circumstances. (11-32)
A customer is short 100 ABC at $120. The market is moving up sharply and the customer decides to cover his short position. The customer instructs his registered representative to cover the short position at the market on the close. The order will be executed:
a. At or as near as possible to the closing price
b. On the closing price of the day
c. At the closing bid price
d. At the closing offer price
B
The order will be executed at the closing price. If the order cannot be executed, it is cancelled. (11-25)
A specialist places a GTC order in his book to buy 1,000 shares of XYZ at $30. XYZ declares a 50% stock dividend. The specialist should adjust the order when the stock sells ex-dividend to:
a. 1,000 shares at $20
b. 1,000 shares at $30
c. 1,500 shares at $20
d. 1,500 shares at $30
C
The order must be adjusted to reflect the change in XYZ stock. The number of shares will be increased to reflect the dividend and will now be 1,500 shares (1,000 shares plus 50% of 1,000). The price of ABC will be adjusted downward to $20. The total value of the order before the dividend (1,000 shares at $30 = $30,000) must equal the value after the dividend (1,500 shares at $20 = $30,000). (11-24)
A customer entered a GTC sell-stop order for GM at $35. GM was selling at $38 when the order was entered. GM sells ex-dividend by the amount of the dividend which is $1.60. The customer's order will appear on the specialist's book after the stock goes ex-dividend as:
a. 33.40
b. 35
c. 36.40
d. 38
A
All GTC orders that are entered below the current market on the specialist's book (buy limit, sell-stop, and sell-stop limit orders) will be reduced by the amount of the dividend when the stock sells ex-dividend. The stock will always be reduced by an amount to entirely cover the dividend. The dividend is $1.60, so the order will be reduced 1.60, which will reduce the stop price on the order to 33.40. (11-24)
The following transactions appear on the NYSE ticker tape:
PM 4s 51.25 ..... VMO SLD 18 ..... FTRpr 40ss 81.50
The trade VMO SLD 18 indicates:
a. 100 shares of VMO were sold
b. 100 shares of VMO were sold but were reported out of sequence
c. An exchange distribution in VMO took place
d. 1,800 shares of VMO were sold
B
The trade VMO SLD 18 indicates that 100 shares sold at 18 but was reported out of sequence. SLD is the symbol indicating that it is an out of sequence transaction. These trades occurred at a prior time, but for some reason were not printed at the time they occurred. (11-29)
The following transactions appear on the NYSE ticker tape:
PM 4s 51.25 ..... VMO SLD 18 ..... FTRpr 40ss 81.50
The trade FTRpr 40ss 81.50 indicates:
a. 40 shares of FTR preferred sold at 81.50
b. 400 shares of FTR preferred sold at 81.50
c. 40 shares of FTR preferred sold short at 81.50
d. 400 shares of FTR preferred sold short at 81.50
B
The symbol ss represents a 10 share round lot. Some stocks which are thinly traded issues trade in 10 share round lots rather than the standard 100 share round lots. To determine the total number of shares traded, add a zero (multiply by 10) to the volume shown.
Therefore, 40ss represents 400 shares. (11-29)
A customer enters an order for 150 shares of OTC stock. The order:
a. Must be entered on two separate tickets
b. Can be entered on one order ticket
c. Must be entered as a round-lot and an odd-lot
d. Must be executed through the odd-lot firm
B
The order can be entered on one order ticket. (11-17)
Use the following section of the NYSE tape to answer this question.
ABC wt STC pr
52s5 11
Relative to the transaction for ABC wt, which of the following statements is TRUE?
a. 520 shares of ABC will trade at a price of 5
b. 5,200 shares of ABC will trade at a price of 5
c. 520 ABC warrants traded at a price of 5
d. 5,200 ABC warrants traded at a price of 5
D
ABC wt indicates ABC warrants. The "s" after the 52 indicates round-lots of 100. Therefore, the volume is 5,200. (11-29)
Use the following section of the NYSE tape to answer this question.
ABC wt STC pr
52s5 11
Relative to the transaction for STC pr, which of the following statements is TRUE?
a. 100 shares of STC previously traded at 11
b. One ten-share lot of STC traded at 11
c. 100 shares of STC preferred stock traded at 11
d. The eleven dollar per share price reported for STC is a price rise from the previous transaction.
C
STC pr indicates STC preferred stock. If no volume is indicated, then a 100-share trade is assumed. (11-29)
A customer fails to pay for securities by payment date. Which of the following is TRUE?
a. The account is frozen for 90 days
b. The customer is prohibited from opening another account for 90 days
c. The customer can trade after 30 days
d. The account is closed because it is in violation
A
When a customer fails to pay for securities, the account is restricted (frozen) for 90 days. Before the customer can buy additional securities, the customer must deposit the full purchase price of the securities in the account. This is a Regulation T requirement. The other choices are incorrect. (11-3)
A customer buys $10,000 worth of stock in a cash account. Two business days after the transaction settles, the customer calls the broker and tells the broker he does not have sufficient funds to pay for the stock. The brokerage firm will:
a. Sell him out and freeze the account according to Regulation T of the FRB
b. Sell him out and if there is no loss there is no penalty
c. Automatically give the customer an extension for two days
d. Automatically give the customer an extension for five days
A
According to Regulation T of the Federal Reserve Board, the brokerage firm must sell out the securities in the account and freeze the account for 90 days. (11-3)
A customer enters a sell stop-limit order for 100 XYZ at 25.50. XYZ trades occur as follows: 25.50, 25.25, 25.13, SLD 25.50. The customer's order was:
a. Executed at the market price after the order was entered
b. Executed at 25.25
c. Executed at 25.50
d. Not executed
D
The first trade at 25.50 touched the stop price of 25.50 and the order became an active or live order to sell 100 shares of XYZ at a limit price of 25.50 or better. Thus, the stock must increase to at least 25.50 for an execution. The only other trade at 25.50 has the symbol SLD next to it, indicating that a trade occurred previously (assume prior to the other trades shown), was reported out of sequence and is now being shown to indicate that fact. There is no trade at the customer's limit price of 25.50 after the customer's order became a live order. Therefore, the customer's order was not executed. (11-29, 11-24)
A customer, who is going on vacation, enters a GTC order to buy a stock. The order is executed. The customer tells the registered representative that he wants the stock but will not return in time to pay for the security by the payment date. The customer states he will send in a check a few days late. The registered representative should:
a. Cancel the trade
b. Pay for the stock himself with a principal's approval
c. Transfer the order to a margin account
d. Request an extension
D
The customer has indicated that he wants to purchase the stock but will not be able to pay for it in time because he will be on vacation. The order was a good-until-cancelled (GTC) order so the customer did not know if and when the order would be executed. The reason for the late payment is due to the customer being on vacation. This is a valid reason, and the registered representative should request an extension. (11-3)
An investor who owns 1,000 shares of Microsoft (MSFT) informs you that they would like to sell short against the box. Which of the following statements is TRUE?
a. This type of transaction is only permitted by institutional investors.
b. This type of transaction is permitted if the order ticket is marked short.
c. This type of transaction is permitted if the order ticket is marked long.
d. This type of transaction is only permitted in a cash account.
B
In certain instances, a client (institutional or retail) that is long a security may want to sell the stock, but not deliver their long position. The client must borrow the security to effect delivery requiring the order ticket to be marked short. This type of transaction is called selling short against the box. The term "box" is an old industry term referring to a safe deposit box. Short sales are only permitted to be executed in a margin account. (11-18)
JULY 20XX
S M T W T F S
1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31
Use the calendar above to answer this question.
If an investor bought a stock in a cash account on July 2nd, when would the settlement date be in a regular-way transaction?
a. July 5th
b. July 8th
c. July 9th
d. July 12th
B
July 8th would be the settlement date. This is three business days after the trade date in a regular-way transaction in a cash or margin account. Thursday, July 4th is not a business day; it is a legal holiday and is not counted. The third business day after the trade date of July 2nd would be July 8th. (11-3)
JULY 20XX
S M T W T F S
1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31

Use the calendar above to answer this question.
If a customer bought stock in a margin account on July 3rd, what would the settlement date be in a regular-way transaction?
a. July 4th
b. July 8th
c. July 9th
d. July 11th
C
July 9th would be the settlement date. Again, July 4th should not be counted. Therefore, three business days after July 3rd would be July 9th. The fact that it is a margin account and not a cash account, as in the previous example, does not change the three-business-day regular-way settlement date. (11-3)
JULY 20XX
S M T W T F S
1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31

Use the calendar above to answer this question.
If a customer bought stock for cash (on a cash contract basis) on Friday, July 5th, when would the trade settle?
a. July 5th
b. July 6th
c. July 8th
d. July 11th
A
Securities bought or sold for cash or a cash trade have a same-day settlement for payment and delivery. The settlement date is July 5th, which is the same day the trade was made. (11-3)
JULY 20XX
S M T W T F S
1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31

Use the calendar above to answer this question.
If a customer bought $50,000 par value of Treasury notes on July 3rd, when would payment be due?
a. July 3rd
b. July 4th
c. July 5th
d. July 11th
C
U.S. government notes have a next-business-day settlement and delivery date. Therefore, payment is due for the notes on the next business day which would be July 5th. Remember, July 4th is a U.S. national holiday and is not considered a business day. (11-3)
An investor buys T-bonds on Friday, January 16th for cash settlement. This transaction will settle on:
a. January 16th
b. January 17th
c. January 19th
d. January 20th
A
Cash settlement for all securities takes place on the trade date. (11-1)
When purchasing a new issue of stock in a cash account, when must payment be made under Reg T?
a. On settlement date
b. Two business days after the trade date
c. When the securities are delivered
d. Two business days after the settlement date
D
Regulation T states that payment for a new issue in a cash account is due within two business days following the settlement date of the transaction. When buying shares of a new issue, an investor will receive a when-issued confirmation. Payment is due two business days following the date that the securities are ready for delivery. (11-3, 10-9)
When a broker-dealer is not acting for its own account but is making securities transactions for the account of others, the firm is acting as a(n):
a. Broker
b. Principal
c. Underwriter
d. Dealer
A
When a broker-dealer is making securities transactions for the account of others, the broker-dealer or brokerage firm is acting as a broker or agent. When the firm is selling from its own inventory, it is acting as a principal or dealer. (11-2)
If an at-the-opening order is not executed:
a. It will be put in the specialist's book for later execution.
b. It will be cancelled.
c. A closing transaction must be placed with the specialist.
d. It is handled as a market order.
B
An at-the-opening order is an order placed for execution at the opening price of the day. If it is not executed, it will be cancelled. Do not confuse this type of order with an opening transaction which is a trade to establish or add to an option position. (11-25)
Which of the following settlement dates does not conform to standard industry procedures?
a. Preferred stock settling in 3 business days
b. Government securities settling next business day
c. Municipal bonds settling in 3 business days
d. Options settling in 3 business days
D
Regular-way settlement for government securities and options is the next business day. All other securities settle in three business days. (11-3)
When a customer purchases securities and fails to pay for them by payment date, the brokerage firm will:
a. Sell out the securities and freeze the account
b. Notify the customer's bank
c. Notify the SEC
d. Notify the NYSE and FINRA
A
When a customer purchases securities and fails to pay by the Reg T payment date (within 2 business days following settlement), the brokerage firm will sell out the securities and freeze the account for 90 days. (11-3)
ABC Brokerage, a broker-dealer, purchases 600 shares of stock from a market maker to fill a customer's buy order. ABC has acted as a:
a. Dealer
b. Specialist
c. Agent
d. Underwriter
C
When a broker-dealer buys a security from a market maker (dealer) on behalf of its customer; it has acted as a broker (agent).The client would be charged a commission on the transaction. If the firm bought the security for its own account, or sold the security to a client from its inventory, it would be acting as a dealer (principal). The client in this case would be charged a markup or markdown. (11-2)
Mr. Smith is short 1,000 shares of ABC Corporation at $100. Mr. Smith enters GTC orders to either buy 1,000 shares of ABC at $95 if it declines or buy 1,000 shares at $105 stop if it should go up. ABC Corporation declines to $95 but Mr. Smith is only able to buy 300 shares. The order should be revised to:
a. Buy 700 at $95 and buy 700 at $105 stop
b. Buy 700 at $95 and buy 1,000 at $105 stop
c. Buy 1,000 at $95 and buy 700 at $105 stop
d. Buy 1300 at 95 and 1300 at $105 stop
A
Mr. Smith covered 300 shares of ABC Corporation at $95 when the stock declined, leaving 700 shares left uncovered. The GTC orders left on the specialist's book will now be: buy 700 at $95 and buy 700 at $105 stop. The floor broker will have the specialist change the order so the specialist does not execute an order on his book with an incorrect number of shares. (11-23)
UNCOVERED (S7) : A short option position in which the investor does not currently have another investment position that will meet the obligation of the option contract (vs. Covered). Also known as Naked.
All of the following are TRUE about stopping stock on the NYSEEXCEPT it:
a. Is permitted only for public orders
b. Requires permission of an exchange official
c. Is done by the specialist
d. Will guarantee a price for the order
B
A specialist can stop stock if it is for a public order and the specialist is guaranteeing a price. (11-16)
If a client places an open (GTC) order for a stock listed on the NYSE it will:
a. Be cancelled at the end of the day if it is not executed
b. Be cancelled if it is not executed at that day's opening price
c. Be cancelled if it is not executed within one week of being entered
d. Remain active until executed or cancelled but must be renewed according to exchange rules
B
A good 'til cancelled (GTC) order will remain active as long as it is properly renewed. (11-25)
Which of the following is NOT permitted to write call options on XYZ Corporation?
a. An individual who owns XYZ Corporation stock
b. XYZ Corporation
c. An individual who owns more than 5% of XYZ Corporation stock
d. All of the above
B
Any entity is permitted to write call options except the corporation itself. (11-5)
As far as stop-limit orders are concerned:
a. The activating round-lot sale is also the execution price
b. The order will become a market order as soon as it is activated
c. The order can be activated but may or may not be executed
d. The customer is guaranteed an execution at the limit price after the order is activated
C
With reference to stop-limit orders, the order can be activated but may or may not be executed. Unlike a stop order, a stop-limit order does not become a market order. Once it is activated, it must satisfy the limit price, which may never occur. All of the other choices are not true of a stop-limit order. (11-23)
In the underwriting of a new issue, all of the terms listed below would be relevant EXCEPT:
a. A due diligence meeting
b. Stabilization
c. Matching orders
d. Blue Sky laws
C
In the underwriting of a new issue, all of the terms would be relevant except matching orders. This is a form of manipulation, where offsetting trades are made (matched) to create the appearance of activity in a stock. This draws attention to the stock. Matching orders are prohibited under the Securities Exchange Act of 1934. (11-5, 9-7, 9-16)
A customer gives you an order to sell 100 shares of ATT. All of the following must be noted on the order ticket EXCEPT:
a. The customer's account number
b. The customer's original purchase price of the stock
c. The location of the securities
d. Solicited or unsolicited
B
All order tickets must contain the customer's account number and whether the registered representative solicited the order or it was unsolicited. A sell ticket must indicate if it is a short sale or a sale of securities owned by the client. The location of the securities must be indicated (long in the customer's account or held by the customer). (11-17)
A NYSE bond order ticket shows the following:
Buy 5m @ 101 GTC
The customer has placed a:
a. Limit order to buy $5,000 of bonds
b. Stop order to buy $5,000 of bonds
c. Limit order to buy $50,000 of bonds
d. Market order to buy $5,000,000 of bonds
A
The symbol "m" is used to indicate a $1,000 face value bond ("mm" stands for million). A customer placing an order for 5m bonds would be placing an order to purchase bonds with a face value of $5,000. Since the order specifies a price, it is a limit order. (11-22, 8-24)
All of the following are listing requirements for a stock to be listed on the NYSE EXCEPT:
a. Minimum 25% dividend payout ratio
b. Agreement to solicit proxies
c. National interest in the company
d. Minimum number of round-lot shareholders
A
To be listed on the NYSE, a corporation must have 2,000 round-lot shareholders, 1,100,000 publicly held shares, a minimum aggregate market value of publicly held shares, a positive earnings history, national interest in the corporation, and agreement to solicit proxies. Dividend payout ratios are not a listing requirement. (11-14)
Who cannot trade on the floor of the NYSE?
a. A two-dollar broker
b. A specialist
c. An institutional block trader
d. A competitive trader
A
An institutional block trader may forward orders to the NYSE trading floor from the brokerage firm's trading desk but is not physically located and trading on the floor of the NYSE. The two-dollar broker, specialist, and competitive trader all trade on the NYSE floor. (11-15)
Which of the following orders is a specialist prohibited from accepting on his book?
I. An open (GTC) order
II. A day order
III. A market order
IV. A not-held order
a. I and III
b. I and IV
c. II and III
d. III and IV
D
A specialist may accept open GTC orders and day orders on his book. The specialist may not accept market orders and not-held orders on his book. A not-held order allows a floor broker to use his expertise with regard to the proper time and price for execution of the order. The term "not-held" means the floor broker is not held to a specific price for the stock. The specialist is not involved with not-held orders. Market orders would not be placed on the specialist's book, as the specialist would immediately execute any market order. (11-25)
If a customer enters an order that is good for one month only, who is responsible for cancelling the order at the end of the month if the order is not executed?
a. The specialist
b. The customer
c. The NYSE
d. The brokerage firm that entered the order
D
A customer can enter an order good for a week, a month, or any specified time. If the order is not executed by the end of the specified time, the brokerage firm is responsible for cancelling the order. (11-25)
An attorney is working on the acquisition of a company and is in possession of material nonpublic information. The attorney tells her butcher that the targeted company is a good buy in light of this information. The butcher buys the stock and makes a profit of $500,000. Which two of the following penalties would apply?
I. Only the attorney may be subject to civil penalties.
II. Both parties may be subject to civil penalties.
III. The butcher may be subject to a $1 million civil penalty.
IV. The butcher may be subject to a $1.5 million civil penalty.
a. I and III
b. I and IV
c. II and III
d. II and IV
D
The rules against insider trading apply to tippers as well as tippees. The maximum civil fine is equal to $1.5 million (3 times the profit gained or loss avoided). (11-6)
A registered representative is discussing the investment merits of ABC stock with a customer. The registered representative may say:
a. "Let's buy ABC stock because we expect it to go up 4 points in the next two weeks."
b. "Our mergers department is working on a leveraged buyout for ABC Corporation. Let's buy it now before it is announced to the public."
c. "One of our analysts just issued a favorable research report for public use on ABC stock which estimates a 10% growth in earnings over the next three years. It appears to be a good situation for you."
d. "Let's buy ABC stock because we are in a bull market and all stocks go up in a bull market."
C
This is the only statement that would not be a violation since it is a statement of fact, coupled with an opinion or estimate of what should happen in the future. The other statements are violations because they definitely state an event (the stock will go up) will occur, which cannot be known in advance. Spreading rumors is also a violation. (11-5)
Which of the following individuals are not permitted to trade on the floor of the NYSE?
a. $2 brokers
b. Registered representatives
c. Commission house brokers
d. Specialists
B
Registered representatives of a broker-dealer are not permitted to trade on the floor of the NYSE. (11-15)
An investor purchases stock on Monday, September 15th. The settlement date on the purchase would be:
a. Monday, September 15
b. Thursday, September 18
c. Monday, September 22
d. Wednesday, September 24
C
The settlement date on a transaction is three business days following the trade date. Regulation T requires payment by customers for purchases in two business days following the settlement date, while the rules of the SRO require settlement between the buying and selling brokers in three business days from the trade date. (11-3
A floor broker goes to a trading post to execute an order. When told of the floor broker's order, the specialist replies "you're stopped at 21." This means:
a. The floor broker cannot trade the stock until it hits 21
b. The floor broker is guaranteed a price of 21
c. The stock stopped trading at 21
d. The floor broker will enter a limit order at 21
B
When a specialist stops stock, she is guaranteeing a price. Stopping stock may only be done for a public order. (11-16)
))A customer receives a verbal confirmation that her securities were sold at a price of $28.35 per share. A clerical error was subsequently discovered, and the corrected price of $27.85 per share is shown on her written confirmation. Which of the following statements is true?
a. The order will be rescinded.
b. The client will receive the price of $28.35 share.
c. The client will receive $27.85 per share.
d. Under certain circumstances, the client may accept either price.
C
Regardless of information provided in an erroneous report, trades are based on actual executions. (11-32)
Cash trades (trades done for cash), as compared to trades done in a cash account, have a delivery date on the:
a. Same day as the trade date
b. Next business day after the trade date
c. Third business day after the trade date
d. Fifth business day after the trade date
A
Cash trades, or trades made for cash, have a delivery date on the same day as the trade date. Be sure to distinguish a cash trade from a trade done in a cash account which generally settles regular way. (11-3)
A trade of General Electric appears on the NYSE Tape showing only the symbol GE and the price with no volume indicated. This would indicate:
a. 10 shares traded
b. 1,000 shares traded
c. An odd-lot trade
d. A round-lot trade
D
When only the stock symbol and price are shown on the Tape, it is an indication of a round-lot of 100 shares. Odd-lot transactions do not appear on the Tape. When the amount is for more than a 100-share round-lot, the symbol 2s, to represent 200 shares, 3s, to represent 300 shares, etc., is used. If the trade is for 1,000 shares, the symbol 10s is used. When 10,000 or more shares are traded, the entire amount of shares traded is printed.
The symbol for a 10 share round-lot is ss. 4ss means 40 shares were sold. (11-28)
Prior to being listed on an exchange, which of the following must be evaluated?
I. Number of shareholders
II. Dividend payout
III. Earnings record
IV. Current market price
a. I and III only
b. III and IV only
c. I, III, and IV only
d. I, II, III, and IV
D
Listing requirements include: a minimum of 2,000 round-lot shareholders, a minimum of 1,100,000 shares publicly held, minimum market values, a positive earnings history, and national interest in the stock. The amount of dividends paid or the dividend payout ratio is not a factor. (11-14)
When a stock sells ex-rights, which orders on a specialist's book will be reduced?
I. Buy-limit order
II. Sell-stop order
III. Buy-stop order
IV. Sell-limit order
a. I only
b. I and II only
c. II and III only
d. III and IV only
B
When a stock sells ex-rights, the specialist will reduce those orders on his book that were entered below the market. A buy-limit order and a sell-stop order will be reduced by the amount the stock sells ex-rights since these orders are entered below the market. (11-24)
Which of the following securities would have a regular way settlement of T+3?
a. Convertible bonds
b. Mutual fund shares
c. U.S. Treasury bills
d. Options
A
Corporate and municipal securities settle regular way three business days after the trade date (T+3). Mutual fund shares typically settle same day, while U.S. Treasury securities and option contracts settle T+1. Keep in mind that an exercised stock option would involve the purchase and sale of a corporate security, and therefore settle T+3. (11-3)
Use the following information to answer this question.
Public orders on a specialist's book show an inside market comprised of Broker A bidding for 100 shares of ABC Corporation at 42.25. Broker B is offering to sell 300 shares of ABC at 42.63.
The size of the market would be:
a. 100 by 300
b. 300 by 100
c. 100 by 100
d. 300 by 300
A
The amount of shares at the highest bid and the lowest offer on the specialist's book is called the size of the market. The size of the market is 100 shares bid for at 42.25 and 300 shares offered at 42.63 or 100 by 300. (11-16)
Use the following information to answer this question.
Public orders on a specialist's book show an inside market comprised of Broker A bidding for 100 shares of ABC Corporation at 42.25. Broker B is offering to sell 300 shares of ABC at 42.63.
If the specialist wanted to bid for his own account, what is the lowest price he could bid for the stock?
a. 41.94
b. 42
c. 42.25
d. 42.26
A
The specialist must buy and sell for his own account (acting as a dealer) to make the market fair and orderly. He must be a buyer when there are no buyers and be a seller when there are no sellers. By so doing, he narrows the spread between sales. The specialist cannot compete with an order on his book (a public order) at the same price and must always bid higher and offer lower than orders on his book. There is a bid of 42.25 on his book. He must bid at least one cent higher than 42.25, which would be 42.26. (11-16)
Use the following information to answer this question.
Public orders on a specialist's book show an inside market comprised of Broker A bidding for 100 shares of ABC Corporation at 42.25. Broker B is offering to sell 300 shares of ABC at 42.63.
If the specialist wanted to offer stock, what is the highest price at which he could offer the stock?
a. 42.62
b. 42.63
c. 42.64
d. 42.88
A
On the offer side, the specialist must be willing to sell for at least one cent lower than the offer on his book. There is an offer of 42.63 on his book. He must offer at least one cent lower, which would be 42.62. (11-16)
The CEO of a publicly traded company has inadvertently disclosed material non public information in a conference call with securities analysts. According to Reg FD, which of the following statements is true?
a. The CEO is guilty of insider trading.
b. The CEO and analysts are guilty of insider trading.
c. The company must make a public disclosure of this information within 24 hours.
d. The CEO has violated rule 8K.
A
Reg FD requires that material nonpublic information disclosed to analysts or other investors must be made public. If the disclosure was intentional, the information must be simultaneously disclosed to the public. If unintentional, the public disclosure must be made within 24 hours. A Form 8K, filed with the SEC, is one method of meeting the public disclosure requirement. (11-7)
A client with no long position in PMXE instructs her broker to sell 2,500 shares of PMXE since she is anticipating a decline in the stock. The order ticket would be marked:
a. Sell short
b. Selling short against the box
c. Sell long
d. This transaction cannot be executed
A
Since the client does not own the security, the order ticket would be marked short. If the seller owns the security being sold, the sell order ticket would be marked long. Selling short against the box is when a client holding a long position wants to sell the stock, and not deliver his long position to close out the transaction. (11-17)
A specialist has an order on its book from a public customer to buy stock at $34.70 and another order from a public customer to sell stock at $34.90. The specialist may:
a. Buy stock for its own account at $34.65
b. Buy stock for its own account at $34.75
c. Sell stock from its own account at $34.90
d. Sell stock from its own account at $34.95
B
A specialist is not permitted to compete with public orders when trading for its own account. The specialist may buy stock at a higher price or sell stock at a lower price. In doing so, the specialist has narrowed the spread (the difference between the bid and ask). The specialist, buying stock at $34.75, is permitted since this price is higher than the price of the public order ($34.70). The other choices would result in the specialist buying lower or selling at a price equal to or higher than the public customer's order. (11-16)
The current market price of XYZ Corporation stock is $52. A customer enters an order to sell 100 shares of XYZ Corporation at $50 stop but will not accept less than $49. He has entered a:
a. Stop order
b. Limit order
c. Market order
d. Stop-limit order
D
A sell order with a stop at one price (to sell at $50) and also with a limit price ($49), is called a stop-limit order. A round lot sale at or below $50 would activate the order, but then the stock would have to be sold at the limit price of $49 or better for the order to be executed. Sell stop-limit orders are entered below the market. (11-23)
Mr. Thomas calls his registered representative with an order to buy up to 2,000 shares of XYZ at $35 per share right now and do not leave the unexecuted portion on the specialist book. Mr. Thomas has entered
a(n):
a. Order that cannot be accepted
b. Immediate-or-cancel order
c. Limit order
d. Day order
B
An order that dictates to fill as much of the order as you can right now and cancel the rest is called an immediate-or-cancel order. Limit orders are placed as either day or GTC orders and the unexecuted portions are placed on the specialist book. Mr. Jones entered this kind of order when he said he wanted by buy 2,000 shares of XYZ. (11-25)
Which of the following best describes painting the tape?
a. A market maker's failure to honor a firm quote
b. Individuals entering into transactions in which ownership does not actually change, in order to give the impression of trading volume in a security
c. Employees of a broker-dealer purchasing shares of a hot new issue at the public offering price for their own account
d. A registered representative with discretion over a client's account conducting excessive trading to generate commissions
B
Painting the tape is a technique whereby individuals acting in concert repeatedly sell a security to one another without actually changing ownership of the securities. This is intended to give an impression of increased trading volume. The regulators considered this to be a type of manipulation. (11-5)
What department or section of the brokerage firm would be responsible for tendering stock?
a. P&S Department
b. Margin Department
c. Cashier's Department
d. Reorganization Department
D
The Reorganization ("Reorg") department handles the exchange of one security for another (i.e., tender offers or converting rights into stock). The P&S Department normally handles the function of computing and comparing trades. The Margin Department handles the enforcement of Regulation T. The Cashier's Department is concerned with the handling and protection of securities. (11-18)
ABC Brokerage, a broker-dealer, sells 200 shares of stock to a customer from its own inventory. In this transaction, ABC acted as
a(n):
a. Agent
b. Broker
c. Principal
d. Underwriter
D
When a broker-dealer sells securities to a customer from its own account (inventory) or buys securities from a customer for its own account, it is acting as a principal or dealer. If the firm matched up a buyer and a seller without involving its own account, it would be acting as an agent or broker. (11-2)
All of the following statements regarding proxies are TRUE EXCEPT:
a. When signing a proxy statement, investors permit another party to vote their shares at the annual shareholders' meeting
b. The SEC regulates the solicitation of proxies
c. The NYSE does not require the solicitation of proxies by listed companies
d. Broker-dealers must forward proxies to clients even if the customer does not want to receive them
C
The NYSE requires listed companies to solicit proxies from shareholders. A proxy solicitation invites the shareholder to be represented at a shareholders' meeting by allowing the appointment of someone to vote on their behalf. Under the Securities Exchange Act of 1934, the SEC regulates proxies. Even if a client does not want to receive a proxy, the broker-dealer is still responsible for sending it to the client. (11-4)
Buy stop orders or sell stop orders can do all of the following EXCEPT:
a. Provide price protection for a short position
b. Provide price protection for a long position
c. Give a broker discretion when the order is activated
d. Cause a pronounced fluctuation in the market price of a stock when the order is activated
C
Buy stop or sell stop orders do not give a broker discretion when the order is activated. When activated, the order becomes a market order and should be executed immediately. All of the other choices are correct. (11-23)
Mr. Mulligan hears sensitive news on Culligan Corporation before it is disseminated to the public. Mr. Mulligan conveys this information to Smithers, who purchases Culligan Corporation for his own account. According to federal securities law, Mr. Mulligan would be considered:
a. Exempt from insider trading rules
b. A tipper
c. A contemporaneous trader
d. An informant
B
Mr. Mulligan is considered a tipper under the insider trading laws -- one who is liable under federal securities law for trading based on inside information or communicating such information to others who use the information. (11-6)
Duties of the specialist on the NYSE include which of the following?
I. Maintaining a fair and orderly market in selected securities
II. Appointing floor brokers
III. Resolving trade imbalances
IV. Arbitrating disputes between member firms
a. I and II only
b. I and III only
c. I, III, and IV only
d. I, II, III, and IV
B
The responsibilities of the specialist include resolving trade imbalances, which may result from a temporary lack of supply or demand in a particular security. The specialist's role also includes maintaining liquidity and a fair and orderly market. Floor brokers are not appointed by the specialist. Arbitration disputes between member firms are handled under the Arbitration Code. (11-16)
An investor sells uncovered calls and, just prior to their expiration, sells short the underlying stock. The intent is to keep the price from rising above the exercise price. Such an action is called:
a. Pegging
b. Supporting
c. Capping
d. Frontrunning
B
Writers of uncovered calls will benefit if they can prevent the price of stock from rising above the exercise price. They could accomplish this by capping the stock (entering sell orders to prevent the price from rising above a certain level). Capping is considered a manipulative activity and is a violation of securities law. (11-5)
When selling a security for a customer, all of the following must be entered on the sell ticket EXCEPT:
a. Number of shares or par value
b. Location of the security
c. Customer's Social Security number
d. Customer's account number
C
An order ticket must include the customer's account number, number of shares or par value (for a bond), name of the security, limitations (limit, stop, etc.), and whether it is a buy or sell. If it is a sell order, the location of the security (long or short) must be indicated. The customer's Social Security number is not needed on the order ticket. (11-17)
Ms. Brown sells short 100 shares of AJW at 95. Two weeks later, the stock drops to a price of 89. In an attempt to protect her profit, Ms. Brown would enter a:
a. Sell stop order at 90
b. Buy stop order at 90
c. Buy limit order at 87
d. Sell limit order at 90
B
Ms. Brown is seeking to protect her profitable short position should the market price of ABC increase. While a buy stop order at 90 would not guarantee a profit, it would be activated as a market order if the stock rose to 90 or higher. The buy limit order would not be executed if the stock were to rise above 90. Thus, the buy limit would not offer any protection against an increase in the stock. (11-22)
Kyle, a client at TLC brokerage firm, anticipates a decline in the earnings of LPOP. LPOP is a thinly traded issue. Which of the following statements BEST describes what the RR should disclose to Kyle?
a. The stock may be difficult to sell short because the shares may not be available to borrow.
b. All securities may be sold short provided the client has a margin account.
c. As long as the order ticket is marked sell long, the stock could be sold short.
d. Exchange-traded put options are available on all securities and would be a less risky method to profit.
A
A client may sell short or buy a put to profit from a decline in the value of a security is anticipated. In order to sell short, the broker-dealer is required to borrow the security. Although short sales may only be executed in a margin account, if an issue is thinly traded, it may be difficult or impossible to borrow the security. A put option may be an attractive alternative to selling short; however, put options are unlikely to be available on a thinly traded security. (11-4, 12-15, 13-14, 14-15)
On the morning of January 5th, the DJIA traded up 5% from the previous day's close. The market then sold off and the index was down 6% from the previous day's close. Which of the following statements is TRUE?
a. Trading will be halted immediately.
b. Trading will not be halted.
c. Trading will be halted for one hour.
d. Trading will only be allowed by institutional customers.
B
In order for trading to be halted for one hour, the DJIA must be down 10% from the previous day's close (Once again, the 10% is based on the previous quarter's close and is reset quarterly). (11-32)
A customer purchases 1,000 shares of ATT stock at 30 requiring a $15,000 deposit in his margin account. On the payment date, ATT is selling at 35 per share but the customer has not paid for the transaction. Which of the following actions would be considered freeriding?
a. Depositing $30,000 of fully paid for IBM stock to pay for the ATT stock
b. Depositing $15,000 cash into the account and then liquidating the shares at 35
c. Liquidating the stock at 35 and using the sale proceeds to pay for the $15,000 margin requirement
d. Requesting an extension, if there is a legitimate reason to do so
C
The customer would not be permitted to liquidate the stock and use the sale proceeds to pay for the margin requirement. This illegal practice is known as freeriding. To satisfy the $15,000 margin requirement, the customer may deposit the full amount in cash or twice the amount in marginable securities. If there is a legitimate reason for the customer not paying, an extension may be requested. (11-3)
A customer is willing to accept a partial execution on an order to buy up to 800 shares of XYZ stock at 30. If the client does not want the unexecuted portion to be placed on the specialist book, this order should be entered as:
a. Buy 800 XYZ NH
b. Buy 800 XYZ at 30 IOC
c. Buy 800 XYZ at 30 Day Order
d. Buy 800 XYZ at 30 GTC
B
An immediate or cancel (IOC) order must be executed immediately but does not have to be executed in its entirety. Part of the order can be executed. The unexecuted portion of a Day order or a GTC order is placed on the specialist book. A not-held (NH) order gives the floor broker discretion as to when to execute the order. (11-25)
Mrs. Green enters an order to sell stock that is currently in her safe deposit box. According to SEC rules, a broker-dealer must buy-in the stock if Mrs. Green does not deliver the shares within:
a. 3 business days after the trade date
b. 3 business days after the settlement date
c. 10 business days after the trade date
d. 10 business days after the settlement date
D
SEC rules require that the broker-dealer must receive the stock (or, if necessary, buy it in) within 10 business days after settlement. (11-3)
Use the following quote to answer this question.
ABC P25.13 + .25 B 25 A 25.25
Excluding any markups, what price would a customer pay to purchase the security?
a. 25
b. 25.13
c. 25.25
d. 25.38
C
When purchasing stock, a customer would pay the ask (offer) price. A customer selling stock would receive the bid price. (11-1)
Use the following quote to answer this question.
ABC P25.13 + .25 B 25 A 25.25
On which exchange did the last transaction take place?
a. New York
b. American
c. Philadelphia
d. Pacific
D
The "P" in the quote indicates that ABC stock traded on the Pacific exchange. The quote shows that the last reported trade was at 25.13 which is .25 higher than the previous closing price (25.13 + .25). The symbol for the Philadelphia exchange is "X". (11-28)
A customer gave his registered representative an order to buy 1,000 shares of GM at the market. If the execution report from the floor of the exchange states that 1,200 shares were purchased at 78 the:
a. Customer must accept the execution even though it conflicts with the order
b. Customer is only obligated to accept the amount ordered, not executed
c. Registered representative should ignore the execution and enter a new order to buy 1,000 shares of GM at 78 for the customer
d. Registered representative should advise the exchange about the error
B
The customer is not required to accept more than the original order for 1,000 shares. However, the order should not be cancelled. Since an error was made, the registered representative should speak with his supervisor to determine how to handle the situation. Entering a new order to buy 1,000 shares would not solve the problem because if it is executed, the firm will now be long 2,200 shares of stock. (11-32)
Which of the following routing systems is used on the floor of the NYSE?
a. Consolidated Quotation System
b. SuperMontage
c. RAES
d. Super DOT
D
Super DOT is a routing system used on the NYSE. The retail automatic execution system (RAES) is used by the CBOE (Chicago Board Option Exchange). SuperMontage was the system used by Nasdaq and it is called the Nasdaq execution system. The Consolidated Quotation System provided quotes (not executions) for NYSE and AMEX stocks trading off the exchange floor. (11-29)
An insider is not permitted to:
a. Sell short his corporation's stock
b. Exercise options on his corporation's stock
c. Use public information
d. Sell stock under Rule 144
A
Insiders are not permitted to sell short or act on insider (nonpublic) information. (11-5)
A customer entered a market order to sell 100 shares of ABC corporation on the NYSE. The trade was reported to be executed at 39.50. It was later determined that the sale was actually executed at 39.25. Relative to this situation, which of the following is true? The customer:
a. May cancel the transaction
b. Is entitled to execution at 39.50
c. Must accept the execution at 39.25
d. May choose the execution price
C
The erroneous report rule states that should a discrepancy exist between the reported execution price and the actual execution price, the actual execution price shall prevail. Therefore, the customer must accept the actual execution price of 39.25. (11-32)
A transaction for a listed stock settles on a regular-way basis. This means that settlement occurs:
I. In three business days
II. In five business days
III. At the buyer's premises
IV. At the seller's premises
a. I and III only
b. I and IV only
c. II and III only
d. II and IV only
A
Regular-way settlement for stock transactions is in three business days. Since the seller must deliver the securities, settlement takes place at the buyer's premises. (11-3)
An investor enters an order to buy 400 shares of HRJ @ 56 on the NYSE. Which of the following are TRUE regarding this order?
I. The specialist may hold this order in his book.
II. The order can only be executed at 56.
III. A portion of the 400 shares may be purchased.
IV. The order must be executed immediately.
a. I and III only
b. II and III only
c. II and IV only
d. I, II, III, and IV
A
Since a price is specified, it is a limit order. A limit order may be executed at the limit price or better (lower for a buy order). It does not have to be executed at exactly the limit price. A specialist is permitted to hold a stop, limit, and stop limit order. A portion of the order may be executed since the order was not marked AON (all or none). It does not have to be executed immediately since it was not marked IOC (immediate or cancel). (11-22)
Which of the following are covered under the Securities Exchange Act of 1934?
I. Short selling of municipal revenue bonds
II. Short selling of listed securities
III. Registration of broker-dealers
IV. Registration of new issues
a. I and II only
b. II and III only
c. I, II, and III only
d. II, III, and IV only
B
Registration of broker-dealers, publicly traded companies, exchanges, and other self-regulatory organizations are regulated under the Securities Exchange Act of 1934. Registration of new issues is covered under the Securities Act of 1933. The 1934 Act, through Regulation SHO, governs short sales of equity securities. Short sales of municipal bonds are not covered under the 1934 Act, and are exempt from registration under the Securities Act of 1933. (11-2, 11-4, 9-12)
Which of the following may write calls covered by XYZ stock?
I. The president of XYZ Corporation
II. The trustee of XYZ Corporation's pension fund
III. XYZ Corporation
IV. ABC Corporation
a. II and IV only
b. I, II, and III only
c. I, II, and IV only
d. I, III, and IV only
C
Individual stockholders may write calls on stock they own, regardless of their position as an insider. Trustees of pension funds are permitted by ERISA to write covered calls provided the strategy meets the objectives of the fund. Corporations may write calls covered by stock of other companies. However, a corporation may not write calls covered by its own stock. (11-5)
A stop order would NOT be used to:
a. Protect a gain when a long stock position appreciates
b. Limit a loss if the market price of a short position increases
c. Receive a specific price when buying or selling
d. Limit a loss if the market price of a long stock position decreases
C
A knowledgeable investor would use a sell-stop order to protect a profit (or limit a loss) in a long position and a buy-stop order to limit a loss in a short position. A sell-stop order is entered below the current market and becomes a market order when the stop price is reached or penetrated on the downside. A buy-stop order is entered above the current market and becomes a market order when the stop price is reached or penetrated on the upside. Since it becomes a market order when the stop price is hit or penetrated, there is no guarantee as to execution price. (11-23)
When a broker-dealer sells a security to a client and charges a commission on the transaction, it is acting as the client's:
a. Market maker
b. Principal
c. Specialist
d. Agent
D
A broker-dealer that buys securities from or sells securities to a client without owning the securities is acting as the client's agent or broker. The broker-dealer does not have any risk and the client pays a commission on this type of transaction. When acting in a principal capacity, the client is charged a markup or markdown. (11-2)
A securities market is considered efficient if which two of the following conditions are present?
I. Large differences between the bid and offer prices
II. Small differences between the bid and offer prices
III. A large number of transactions
IV. A small number of transactions
a. I and II
b. I and IV
c. II and III
d. II and IV
C
An efficient secondary market for securities would exist if a large number of buyers and sellers are willing to pay similar prices. This would help to keep the difference between the quoted prices (the spread) small and would attract a large number of buyers or sellers willing to execute transactions. (11-1)
According to the Securities Exchange Act of 1934, a person who is on the board of directors of a public corporation and owns 3% of the company stock is:
a. Required to sell shares of the company stock currently owned every three months
b. Not permitted to purchase additional shares of the company stock
c. Required to register as an insider of the corporation
d. Not required to register as an insider of the corporation
C
An insider, as defined by the Securities Exchange Act of 1934, is a director, officer, or owner of more than 10% of the voting stock of a corporation and his immediate family members. Individuals who become insiders are required to report to the SEC within 10 days of becoming insiders. An officer or director is required to register regardless of the number of shares he owns of the public corporation. Insiders are not permitted to make short-swing profits in the stock of the corporation in which they are insiders. If an insider sells the stock at a profit within six months of its acquisition, or sells stock for a profit that was held six months or longer and then repurchases it within six months of the sale, the corporation may sue for recovery of the profit. Insiders are also not permitted to short the stock of the company in which they are shareholders. Insiders are never required to sell shares, but are permitted to buy additional shares as long as it is reported to the SEC. (11-5)
Rosewood Securities LLC has been accused of buying and selling securities for the purpose of creating artificial trading activity. Which of the following choices BEST describes this activity?
a. Churning
b. Matched orders
c. Capping
d. Stabilization
B
A matched order is also known as painting the tape. It is an illegal activity based on a group of market manipulators buying and/or selling a security among themselves to create artificial trading activity. The intention of this activity is to lure unsuspecting investors into trading the stock because of the appearance of unusual trading volume. The manipulators have already taken a position in the stock, and hope to influence the market (illegally) to make their position profitable through this fake heavy trading volume.

Churning is a violation in which a salesperson effects a series of transactions in a customer's account that are excessive in size and/or frequency in relation to the size and investment objectives of the account. A salesperson churning an account is normally seeking to maximize their income (in commissions, sales credits or markups) derived from the account. Capping is when a manipulator is attempting to stop a securities price from rising.

Stabilization is a practice used in connection with certain public offerings in which an underwriter posts an open bid for securities at a stated price. Stabilization is intended to maintain an orderly market for the securities during the underwriting and to prevent sharp fluctuations in the market for the securities due simply to supply factors. Properly disclosed, this is an acceptable practice. (11-5, 9-7)
An RR receives unsubstantiated information that a biotech company trading on Nasdaq has been approached by a large pharmaceutical company as a possible acquisition. The news seems to indicate that the price of the biotech company will increase greatly in value. Which of the following choices is the most inappropriate action for the RR to take?
a. Take no action
b. Contact clients and indicate that this biotech company is heading upward and that they should place a buy order
c. Wait for the news to break and then see if the stock is worth buying
d. Contact your firm's compliance department
B
If an RR receives unsubstantiated news (possibly a rumor), he should take no action until the information becomes public. At that time, the RR would be in a better position to be able to recommend whether clients should purchase the stock. If he received material nonpublic information on a company, the best course of action is for the RR to contact a principal or compliance person associated with his firm. (11-5)
An investor owns shares of stock that have declined in value. She would like to sell them at $39 a share but is not willing to accept less than $38. The RR should recommend which of the following orders?
a. A market order
b. Sell limit at $39
c. Sell stop $38, limit $39
d. Sell stop $39, limit $38
D
If an investor wants to sell a security if the price falls, but is not willing to accept less than a certain price, the RR should recommend a sell stop limit order. In this example, the first trade at or below $39 would trigger (activate) the order into a limit order to sell at or above $38. If the stock traded at or below $39, and then immediately traded below $38, the order would be activated, but not executed. This is one of the risks when placing a stop limit order. (11-23)
A client owns shares of stock purchased at $46 a share. If the current market price is now $70 and the client wants to protect her profit if the price should fall 10%, the RR should recommend which of the following orders?
a. A market order
b. Sell stop $63
c. Sell limit $63
d. Sell stop limit $63
B
This client only wants to sell her position if the stock declines by 10% or $7.00. The RR should recommend a sell stop at $63. A market order is not suitable since the client does not want to sell unless the price declines. A market order would not allow the client to receive further profits if the stock increases above $70.

A sell limit is an order to sell at a specified price or higher and is usually placed above the current market price; therefore, a sell limit at $63 would not be suitable.

Since the client never mentioned a specific limit selling price she is willing to accept, a stop limit order should not be recommended. In addition, a stop limit order may be activated but never executed, and the client would not be able to protect her profit. (11-23)
A when, as, and if distributed contract settles:
a. Same day
b. T + 1
c. T + 3
d. On the day determined by FINRA
D
When, as, and if issued contracts are contracts for securities that are trading but are not yet available for delivery. They are also referred to as a when-issued (WI) security. FINRA determines the date of settlement to be when a sufficient percentage of the issue is outstanding. (11-2)