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109 Cards in this Set
- Front
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A customer's long margin account appears as follows:
CMV = $50, 000 DR = $30,000 The customer calls his registered representative and places the following orders; sell $10,000 XYZ and buy $4,000 PDQ. Which of the following statements is (are) correct? (Regulation "T" = 50%) I. The firm will retain $6,000 II. The customer's account will be credited with $3,000 III. The firm will retain $3,000 IV. The customer's account will be credited with $6,000 (a) I (b) I, III (c) II, III (d) IV |
The correct answer is c
Explanation: This customer's account is restricted, which, of course means that the equity in the account is below 50% of the CMV ($50,000 CMV - $30,000 DR = $20,000 EQ) and, ($50,000 × 50% = $25,000) so the account is restricted by $5,000. In a restricted account, the firm must impose the 50% rule retention on any sales. In this case, the customer has a net sale, (Sell $10,000 -; buy $4,000 = $6,000 net sale) the retention rule requires that the firm retain 50% × $6,000 = $3,000. The customer may withdraw the remaining $3,000 or leave it in the account. (Note: DR is the a notation for "Debit", and CMV is the notation for "Current Market Value") |
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Which of the following trading sequences contains a zero-plus tick?
(a) 38.39.40.41.40.41.39.40 (b) 31.31.30.29.30.30.29.28 (c) 27.28.27.26.27.26.25.27 (d) 43.42.42.41.42.41.41.40 |
The correct answer is b.
Explanation: A zero-plus tick occurs when there are two or more trades at the same price, but the most recent change was a plus tick. In the following sequence: 31.31.30.29.30.30.29.28, when the stock trades at 30, just after the 29, that is a plus tick. The next transaction is also at 30 which creates a zero-plus tick. |
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Which of the following terms are associated with the purchase/redemption of open-end investment company shares?
(a) Current business day close (b) 90-day backdating (c) At the money (d) Forward pricing |
The correct answer is d.
Explanation: Forward pricing is the SEC Rule that requires all transactions in open-end investment company shares to be based on the next calculation of the fund's Net Asset Value (NAV). |
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Which TWO of the following are true of securities transactions in the primary market:
I. Investors know a bond's coupon rate before they place an order II. A bond's coupon rate is not finalized until the offering date III. A stock's initial public offering date is always determined months in advance IV. A stock's initial public offering date is often not determined until the bulk of the buyers are already lined up. (a) I and IV (b) II and III (c) I and III (d) II and IV |
The correct answer is d.
Explanation: Since future levels of interest rates and equity market conditions cannot be predicted when the issue is first planned, a bond's coupon rate and a stock's IPO are not finalized until the offering date. |
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Under the rules of the CBOE, what is the maximum period of time for which a LEAPS contract may be written?
(a) 24 months (b) 39 months (c) 9 months (d) 12 months |
The correct answer is b
Explanation: Although LEAPS (Long-Term Equity AnticiPation Securities) contracts are most commonly traded with expiration dates of up to 24 months, the CBOE rules allow for contracts of up to 39 months. |
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A customer whose account is being traded for her by an investment advisory firm has had all confirmations of trades sent to the firm. She calls her RR and tells him that it is unnecessary for the broker-dealer to send her a copy of her quarterly statement of account, since a copy of the statement is already going to the investment advisor. Which of the following is a true statement?
(a) With the approval of the supervising principal, the statement will only go to the advisory firm (b) A copy of the statement will continue to be sent to the client. (c) If the client submits a written, notarized request to the broker-dealer, the quarterly statement that would normally have gone to her will be maintained locally in her file (d) The copy of the client’s quarterly statement which would normally have been sent to her will be retained by the compliance department. |
The correct answer is b
Explanation: The requirement for a quarterly statement to be sent to a customer cannot be abridged. The broker-dealer will continue to send the client the quarterly statement; what she does with the document upon receipt is her choice. |
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Which of the following is (are) TRUE of stop orders:
I. It is an order to buy a stock at the market price when the price rises to a certain level or to sell a stock at the market price when the price falls to a certain level. II. A stop order to buy or sell securities at the current market price will be filled as long as there is a market for the security. III. A stop order buys or sells securities at a specified price. IV. A stop-limit order buys a stock at a specified price, rather than a stop order, where the price must rise to a certain level before the order is entered. (a) I and III only (b) I only (c) IV only (d) II and III only |
The correct answer is b
Explanation: Stop orders become market orders once the stock's price has surpassed a particular point. This type of order is often entered by investors who are leaving for holidays or will be unable to monitor their portfolio for an extended period of time. Though helpful, they cannot guarantee the desired entry or exit points. Stop-limit orders become limit orders once the stock has reached the stop price or better. The limit order then becomes a market order once the limit price (or better) has been reached. A stop-limit has essentially combined the features of a stop order, and a limit order. |
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Under the provisions of Rule 144A, which of the following are true statements?
(a) Non-affiliated persons may trade letter stocks freely after 1 year. (b) Affiliates have no holding period for restricted stocks. (c) Restricted stocks may only be traded after a two-year holding period. (d) QIBs may trade restricted securities without regard to quantity or holding periods. |
The correct answer is d
Explanation: QIB stands for Qualified Institutional Buyer. Entities that meet the requirements for this type buyer may trade restricted stocks freely with no holding period or quantity restrictions. Rule 411A stipulates the requirements for these institutions. |
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When control stock is sold for a profit before a six-month holding period has elapsed, this is known as which of the following?
(a) A short swing profit (b) An unregistered sale of restricted stock (c) A statutory underwriter sale (d) A short-term gain |
The correct answer is a.
Explanation: Control stock is stock held by "control persons" who are corporate insiders. These persons must hold their company's stock for six months to avoid the "short-swing" profit rule. If a control person sells the stock at a profit after holding it for less than six months, the profit must be "disgorged," or go back to the corporation. |
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The registrar of a public corporation performs which of the following functions?
(a) Maintain records of stock ownership. (b) Ensure that no more than the authorized number of shares is in circulation. (c) Issue and cancel stock certificates. (d) Certify the authenticity of damaged certificates. |
The correct answer is b
Explanation: All of the choices except "C" are functions of the corporation's transfer agent. The registrar, in many ways, functions as an auditor of the stock records held by the transfer agent. |
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Which of the following electronic/computer systems is associated with market order execution on the NYSE?
(a) OSS (b) SOES (c) Super Montage (d) Super Dot |
The correct answer is d
Explanation: The Super DOT (Designated Order Turnaround) is a NYSE automated system for execution of small and moderate-sized orders by bypassing the floor brokers and going directly to the specialist's post for execution. The system is primarily used for market orders. SOES and Super Montage are associated with OTC markets and OSS, with the options exchange |
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Quotes for stocks on Level 1 of the NASDAQ system are most accurately described by which of the following?
(a) Firm (b) Bona Fide (c) Subject (d) Workout |
The correct answer is c.
Explanation: Level 1 of the NASDAQ system only gives the inside market; which is the highest bid and lowest ask prices from Level 2. It does not show the size of the quotes and is therefore not a firm quote, but subject. |
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A registered representative receives a call from Jane, who has had a JTWROS account with her husband, Joe. She tells the RR that Joe has passed away, and that she wants to sell enough XYZ stock from margin account to bring the debit balance to zero. Which of the following actions should the representative take?
(a) Check with the executor of Joe’s estate before acting. (b) Clear the action with the principal prior to acting. (c) Execute the order. (d) Check with the firm’s compliance department. |
The correct answer is c.
Explanation: The account is Joint Tenants With Rights of Survivorship. This means that either party can give orders independently and that, upon death of one of the parties, the survivor owns the account completely. The RR executes the order as quickly as possible. |
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Which of the following are characteristics of DVP settlement?
I. Normally institutional II. Trade date plus 3 business days III. Typically used between municipal dealers with customers (a) II, III (b) II only (c) I only (d) I, III |
The correct answer is c
Explanation: DVP (Delivery Versus Payment) settlement is normally used in institutional trades. The actual payment to the delivering institution is usually cash. |
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A broker-dealer's customer has opened a new long margin account by buying $10,000 of XYZ stock and making the required Reg. "T" (50%) deposit. When the broker-dealer rehypothecates the customer's stock, how much of the securities may be pledged?
(a) $5,000 (b) $7,000 (c) $14,000 (d) $10,000 |
The correct answer is b.
Explanation: Rehypothecation by the broker dealer means that the firm is pledging customer's street-name securities, purchased on margin, to a bank as collateral for a loan. The Federal Reserve Board Rule stipulates that the broker dealer may rehypothecate (pledge) 140% of the customer's debit balance. In this question, the customer bought $10,000 and made the required 50% deposit, so the broker-dealer loaned the customer $5,000 to pay for the stock—that is the initial debit balance. The broker-dealer rehypothecates the customer's stock ($5,000 × 140% = $7,000), pledging it as collateral for a loan. |
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In Progress : Question No. 20 of 602
20) Although organizations differ in their internal practices, which of the following correctly represents the typical flow of a customer's order through a broker-dealer's office? I. Margin department II. Wire Room III. Cashier IV. Purchases and Sales (a) II, IV, I, III (b) I, II, III, IV (c) IV, II, I, III (d) II, I, III, IV |
The correct answer is a.
Explanation: The order goes through the Wire Room for transmittal to the appropriate trading desk/market. The Purchases and Sales department creates the follow-up documents, including confirmations. All orders go through the Margin department to account for the funds. Finally the order ticket goes to the Cashier where securities and money are transferred. |
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Which of the following options strategies/transactions may be executed in a client's cash account?
(a) Write 1 LIB Feb 55 Call @ 3 and Buy 100 shares LIB @ 51 (b) Write 1 FBN Apr 50 Put @ 5 and Sell (short) 100 shares of FBN @ 52 (c) Buy 1 ABC Dec 60 Call @ 3 and Sell 1 ABC Dec 50 Call @ 9 (d) Write 1 PDQ Mar 70 Call @ 4 and Sell 1 PDQ Mar 70 Put @ 5 |
The correct answer is a.
Explanation: Writing 1 LIB Feb 55 Call @ 3 and buying 100 shares LIB @ 51 can be executed in a cash account since it is a covered call. Covered calls are considered the most conservative of options strategies. All of the other strategies, principally because of risk, can only be established in a margin account. |
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An investor has placed the following order with her broker-dealer: Buy 500 shares XYZ @ 50 IOC. When the order is presented to the trading crowd at the specialist's post, the floor broker is only able to buy 300 shares at 50. What will be the result?
(a) The order goes on the specialist’s book as GTC (b) The order is partially filled by a purchase of 300 shares and the remainder is cancelled. (c) The order is cancelled (d) The order will be designated as DNR by the specialist |
The correct answer is b.
Explanation: An IOC (Immediate or Cancel) order allows for partial fills. When partially filled, the remainder of the order is automatically canceled. |
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Under MSRB Rules, the required apprenticeship period for a municipals registered representative is:
(a) 120 days (b) There is no required time period (c) 30 days (d) 90 days |
The correct answer is d
Explanation: The MSRB rules require a 90 day apprenticeship period for a new municipals representative. During this period, the apprentice rep may actually conduct business with other securities professionals, but not with the public. |
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XYZ stock is paying a cash dividend of $.35/share, and is currently trading at $42/share. Which of the following orders, assuming there are no DNR instructions, will be reduced on the specialist's book on the ex-dividend day.
I. Buy XYZ 41.50 limit II. Sell XYZ 43.25 limit III. Buy XYZ 45 Stop limit IV. Sell XYZ 40 Stop |
The correct answer is a
Explanation: In the absence of DNR (Do Not Reduce) instructions, the specialist will automatically reduce orders that are below-the-market, by the exact amount of the cash dividend. The below the market orders are Buy Limits and Sell Stops. Choices I and IV are the orders which will be reduced. |
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n investor sells short 1,000 shares of FBN stock at 1.75. Under the rules what is the investor's required deposit for this transaction?
(a) $3,750 (b) $2,500 (c) $2,000 (d) $1,750 |
The correct answer is b
Explanation: Under the so-called "cheap stock" rule, the investor who sells short stock that is priced $0 - $2.50 per share, the requirement is $2.50 per share. Selling short is a strategy that investors use when they expect the market to drop. There isn't much room for a stock priced at $1.75 to drop. Also, the lower-priced stocks tend to exhibit great volatility, which translates to even greater risk to the investor. |
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A customer's margin account is as follows:
Long 500 shares PDQ @ 50 Short 200 shares FBN @ 30 Credit balance = $14,000 Debit balance = $15,000 What is the customers combined equity in her account? (a) $10,000 (b) $6,000 (c) $18,000 (d) $13,000 |
The correct answer is c.
Explanation: In this question the customer's full account information is given so we just follow both formulas for account equity and add the result. Long account: Current market value -; debit = equity ($25,000-15,000 = $10,000). Short account: Credit -; Market value short = equity ($14,000-6,000 = $8,000). For the total combined equity, add the two ($10,000+8,000)=$18, 0000. |
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A registered representative is explaining the details of a new municipal offering to a client. She explains that the debt service for the bond will be paid from taxes collected from the sales of tobacco and alcohol. This type bond is known as which of the following?
(a) Full faith and credit bond (b) Special assessment bond (c) Moral obligation bond (d) Special tax bond |
The correct answer is d
Explanation: Special tax bonds are a form of municipal revenue bonds, sometimes called "sin tax" bonds because the revenues are from excise taxes on commodities such as alcohol and tobacco—gasoline taxes are also included. |
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Which of the following BEST describes the information required on an order ticket:
(a) Buy or sell; security’s CUSIP number; quantity of shares (b) Buy or sell; client’s account number; quantity of shares (c) Buy or sell; security’s CUSIP number; client’s account number (d) Buy or sell; security’s CUSIP number; ticker symbol |
The correct answer is b.
Explanation: The security's ticker symbol, not its CUSIP number, is used on order tickets |
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When a broker-dealer receives mutilated certificates from another member firm that are not accompanied by coupons, what is the process by which the transaction may be corrected if the delivery was initially accepted?
(a) Rejection (b) Reclamation (c) Certification (d) Rejuvenation |
The correct answer is b
Explanation: If a broker-dealer that has initially accepted delivery of certificates that are later found not to be good delivery, the process by which corrections may be made is reclamation. If the firm finds, upon delivery, that the certificates are not in good form, the broker-dealer will reject delivery. |
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An investor has placed an order through her registered representative to buy 10,000 shares of ZBT stock at $35, at the RR's suggestion, the order was submitted as AON. What would be the reason for marking the order in this manner?
(a) To be sure that the order, if not executed immediately, is canceled (b) As a means of informing the firm’s floor broker that the order must be executed entirely by the end of the business day (c) To save on commissions (d) As a note to the specialist to execute the order without regard to priority |
The correct answer is c.
Explanation: An All-Or-None (AON) order must be filled in its entirety or not at all. It differs from an Immediate-Or-Cancel or a Fill-Or-Kill, order in that it is not automatically canceled if not executed at once. If the entire order is executed with one transaction for all the shares, the customer will save money on commissions compared with piecemeal execution. |
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Which of the following BEST describes the correct timeline for settling ex-dividend trades:
(a) Dividend declared; ex-date; record date; distribution date (b) Record date; dividend declared; ex-date; distribution date (c) Ex-date; dividend declared; record date; distribution date (d) Dividend declared; record date; ex-date; distribution date |
The correct answer is a
Explanation: The board first declares a dividend, and the ex-date is usually two business days before the record date. |
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A customer purchased restricted stock in a Regulation D private placement offering 18 months ago. She instructs the registered representative to sell as much of the stock as possible immediately. Which of the following are true?
I. The stock may not be sold for another six months. II. The RR must file a Form 144 no later than concurrently with the sale. III. The customer may sell an amount of her stock representing the greater of 1% of the company's outstanding stock, or the average of the past six weeks of trading volume. IV. The customer may sell an amount of her stock equal to the greater of 1% of the company's outstanding stock, or the average of the immediately past four weeks of trading volume. (a) I, II, III (b) I, IV (c) II, IV (d) II, III |
The correct answer is c
Explanation: The holding period for restricted stock is one year, fully-paid. During the second year, an investor must file a Form 144, which covers 90 days of sales, with the SEC no later than concurrently with the sale. The volume limitation for sales is the greater of 1% of the company's stock or the average of the past four weeks trading volume. |
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A customer's long margin account is as follows:
CMV - $55,000 DR - $30,000 SMA - $5,000 After the customer withdraws the $5,000 SMA, this account is: (a) Subject to a maintenance call (b) Properly margined according to Reg. “T.” (c) Restricted (d) Rehypothecated |
The correct answer is c.
Explanation: CMV-DR = EQ. With Reg. "T" at 50%, the EQ in the account should be $27,500. The account equity is still above the SRO minimum maintenance level, but is below the Reg. "T" level. The account is considered "restricted" and is subject to the 50% retention rule. |
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Which of the following GTC orders on the specialist's book will be automatically adjusted when a stock goes ex-dividend?
I. Sell limits II. Buy limits III. Sell stops IV. Buy stops (a) I, IV (b) I, III (c) II, IV (d) II, III |
The correct answer is d.
Explanation: The specialist will reduce GTC orders on the book that are below the market on ex-dividend date, by the exact amount of the dividend. This will be automatically done so long as the order has not been market, DNR, Do Not Reduce. |
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A registered representative has a client, Sally, whose margin account has become restricted. Sally makes the following trades in the account on the same day: Sell 500 shares LIB @ 30 and buy 200 shares PDQ @ 25. What will be the result of these transactions?
(a) Sales proceeds of $5,000 credited to her account (b) She will be required to meet a maintenance call for $5,000 (c) Sales proceeds of $15,000 credited to her account. (d) A deposit of $2,500 will be required |
The correct answer is a.
Explanation: When a client buys and sells in a restricted margin account, it is a same-day substitution. In a restricted account, if the transactions result in a net sale, the 50% retention rule requires 50% of any net sale to be retained by the broker-dealer. In this case, the net sale is $10,000 ($15,000 -; $5,000 = $10,000), and 50% of the net sale is $5,000 ($10,000 × 50% = $5,000). |
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If a municipal bond is delivered "ex-legal", what does this signify?
(a) The bond counsel's legal opinion was an unqualified opinion. (b) This is not good delivery under the MSRB rules. (c) The secondary market bond trade is being done without a copy of the legal opinion being delivered to the buyer. (d) The issuer of the bond has not yet received the legal opinion from the bond counsel. |
The correct answer is c
Explanation: The term ex-legal describes a municipal bond trade in the secondary market without a copy of the legal opinion provided. When municipal bonds were in their definitive form (there was an actual certificate), the legal opinion was printed on the back of the bond. Ex-legal delivery is common when there is no certificate |
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All exchange-traded stock is, by definition, marginable. Which of the following decides, and maintains a list of, OTC stocks that are marginable?
(a) SEC (b) NYSE (c) FRB (d) NASD |
The correct answer is c.
Explanation: Actually, this should be a fairly easy question if you recall that the FRB—the Federal Reserve Board—sets the margin requirements themselves. By extension, the FRB also decides which OTC stocks are marginable. |
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Which of the following interest rates is/are set by the Federal Reserve?
I. Prime rate II. Discount rate III. Broker call loan rate IV. Fed Funds rate (a) I, II (b) IV (c) II (d) III, IV |
The correct answer is c
Explanation: The only interest rate directly set by the Fed is the discount rate. That is the interest rate that the Fed charges member banks for direct loans. The Fed's policies, of course, affect all the other rates such as the prime rate, which is set by the banks themselves and the fed funds rate at which banks borrow money from each other overnight to maintain reserves. |
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Which of the following would not be included in a "when, as, and if issued confirmation"?
I. Extended principal II. Accrued interest III. Settlement date IV. Total dollar amount (a) II, III, IV (b) III, IV (c) I, II, III, IV (d) I, IV |
The correct answer is a.
Explanation: A "when, as, and if issued confirmation" - or WI confirmation - is confirming a trade in a new issue that has been authorized but not yet issued. Because the settlement date is unknown, accrued interest cannot be calculated. If the accrued interest is unknown, the total dollar amount cannot be calculated. |
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A customer's long margin account is as follows:
CMV - $55,000 DR - $30,000 SMA - $5,000 Continuing the situation as described above, after the customer withdraws the $5,000 in SMA, if the market value of the customers stock drops, at what point in the CMV will he/she be subject to a maintenance call? (a) $12,500.00 (b) $46,666.67 (c) $40,000.00 (d) $43,500.33 |
The correct answer is b.
Explanation: After the customer uses the SMA by borrowing it out as cash, the DR balance is now $35,000. To determine how low the CMV may drop before a maintenance call is triggered, divide the DR balance by 0.75. ($35,000 ÷ 0.75 = $46,666.67). (An alternative method, mathematically the same, is to multiply the DR balance by 4/3). |
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Trades by broker-dealers in which of the following securities are considered to settle in clearinghouse funds?
(a) Municipal (b) U.S. Government (c) Commodities (d) Options |
The correct answer is a.
Explanation: Municipal securities settle, regular way, T+3 (trade + 3 business days) in clearinghouse funds. Government securities settle T+1, in federal funds. By the way, commodities are not securities. |
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A trader for a broker-dealer in New York makes a trade over the telephone for 5,000 shares of Exxon stock with a broker-dealer in Dallas. Which of the following is/are true regarding this transaction?
I. It is considered to be a third market transaction II. It will be reported on Tape "B" III. It is considered an exchange transaction since Exxon is a listed stock IV. It will be reported on Tape "A" (a) I, IV (b) II, III (c) I, II (d) I |
The correct answer is a
Explanation: Transactions in exchange-listed stocks that take place away from the exchange floor are technically called NASDAQ Intermarket trades. The earlier term, Third Market is, however, still in use and may appear on your exam. All trades in NYSE-listed stocks are reported on Tape "A," regardless of where they occur. |
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On the ex-dividend day for a stock, which of the following are automatically reduced on the specialist's book - in the absence of DNR instructions - by the amount of the dividend?
I. Buy stops II. Sell stops III. Buy limits IV. Buy stops (a) I, II, III, IV (b) I, IV (c) I, III, IV (d) II, III |
The correct answer is d.
Explanation: On the ex-dividend day, the specialist will reduce all below-the-market orders by dividend to be paid. These orders are buy limits and sell stops. If a customer does not want his or her order reduced, he or she will give do not reduce (DNR) instructions. |
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A broker-dealer in Philadelphia is a market-maker in LIB stock, a NYSE listed stock. In a telephone transaction, the firm sells 5,000 shares of LIB to a broke-dealer in Dallas. This transaction would be known as:
(a) A NASDAQ transaction (b) A fourth-market transaction (c) A NYSE trade (d) A NASDAQ Intermarket Transaction |
The correct answer is d
Explanation: When listed stock is traded in transactions away from the exchange, (that is, over-the-counter—OTC) this is known as a NASDAQ Intermarket trade. These transactions were known as "third market" transactions until just a few years ago. |
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Which of the following is reported on Tape "A"?
I. NNM stocks II. NYSE-listed stocks III. Bonds for NYSE-listed companies IV. Rights for NYSE-listed stocks (a) II, III (b) II, IV (c) I, II, III, IV (d) I, II |
The correct answer is b.
Explanation: Tape "A" only reports trades of NYSE-listed equity securities. NNM stocks are OTC stocks. Rights and warrants, as equity securities, are reported along with their underlying stocks. |
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Under the NASD's Conduct Rules, to which of the following does the segregation rule apply?
I. Securities a customer has purchased in a margin account with securities in lieu of cash. II. Fully-paid securities purchased in a margin account. III. Securities held by the broker-dealer in a margin account in excess of 140% of the client's debit balance. IV. Only those securities held in the client's name. (a) II, III (b) I, II, III (c) II, III, IV (d) IV |
The correct answer is a.
Explanation: The Rule for segregation of fully paid and excess margin securities requires that a broker-dealer must completely segregate, or completely separate, the securities described in choices II and III. The broker-dealer may not commingle, or mix client's fully-paid and excess margin securities with those of the firm. Excess margin stocks are those held by the broker-dealer in excess of that stock rehypothecated by the broker-dealer. |
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An underwriting agreement, for an initial public offering, between a corporation and an investment banking firm that specifies a set minimum amount of stock that must be sold for the offer to be continued is known as a/an:
(a) mini-max agreement (b) firm commitment agreement (c) standby underwriting agreement (d) All-Or-None agreement |
The correct answer is a.
Explanation: In a mini-max agreement, (a form of best-efforts underwriting) the underwriter must sell a minimum amount of stock for the offering to continue. If that minimum is reached, the escrowed commissions will be released and the proceeds released to the company. If the specified amount is not reached, the offering is terminated. If the agreement was all-or-none, the entire issue would have to be sold, or it would be terminated. A standby underwriting is associated with a preemptive rights offering, and could not be used in an IPO. |
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On which exchange(s) do foreign currency options contracts trade?
(a) NYSE (b) AMEX (c) CBOE (d) PHLX |
The correct answer is d
Explanation: Although years ago, foreign currency options were traded on other options exchanges, they are now traded exclusively on the Philadelphia Exchange, the PHLX. |
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Which of the following types of orders never appear in the specialist's book?
(a) Stop limit (b) Not held (c) Stop (d) GTC |
The correct answer is b.
Explanation: A not held order gives the floor broker the responsibility of executing an order and choosing the best time and price for execution. The floor broker, however, is not held responsible for a specific time or price. Floor brokers must execute such orders themselves and may not leave them with the specialist for execution. All of the other orders are normal orders in the specialist's book |
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The underwriters for the MSM Corporation have filed a registration statement, under the Securities Act of 1933, for the firm's IPO. The securities are currently in registration. Which of the following activities may the underwriters engage in at this time?
I. Take indications of interest II. Send out "red herring" prospectuses III. Provide a copy of an initial research report along with the preliminary prospectus IV. Hold a due diligence meeting (a) I, II, IV (b) II, IV (c) I, II, III, IV (d) II, III |
The correct answer is a.
Explanation: When a registration statement has been filed and the securities are in registration, there is a 20-day cooling-off period. In general, there are only three activities permitted: taking indications of interest, sending out "red herring" prospectuses and holding a due diligence meeting. There is generally no communication with the public (other than the preliminary prospectus, or red herring) during this period. |
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Which of the following is the rule for settlement when a customer makes an opening transaction by purchasing a call contract?
(a) Trade date plus five business days (b) Same day settlement (c) Trade date plus three business days (d) Next day settlement |
The correct answer is d.
Explanation: By rule, settlement for options contracts is next day. |
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Under MSRB Rule G-34, which of the following is responsible for applying for the CUSIP numbers on a new issue of municipal bonds?
(a) The syndicate manager (b) The Bond Counsel (c) The trustee bank (d) The issuing authority |
The correct answer is a
Explanation: Rule G-34 requires that the syndicate manager make application for the issue's CUSIP numbers. |
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A customer of a NYSE firm has decided to open a margin account. As her first trade she buys 100 shares of LIB stock at $15 per share. With Regulation "T" at the standard 50%, what will be her minimum required deposit for this transaction?
(a) $3,500 (b) $2,000 (c) $750 (d) $1,500 |
The correct answer is d.
Explanation: The initial equity in a new margin account, by NYSE and NASD rules is $2,000 unless the total transaction is less than $2,000 as it is in this case. The customer, for the opening transaction will deposit the total amount of the purchase. |
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If the manager of a municipal underwriting syndicate determines that it is necessary to change the normal priority of order fills, under the rules of the MSRB it may do so:
I. If it is deemed to be in the best interests of the syndicate. II. At least two business days before sales begin, all syndicate members are notified of the change. III. The selling group will be paid concessions in excess of the total takedown. IV. If all of the other members of the syndicate are notified no later than 5 business days before sales begin. (a) I, II (b) II, III (c) I, III, IV (d) I, III |
The correct answer is a.
Explanation: Under MSRB Rules, the normal order priority may be altered by the syndicate manager if it is in the best interests of the syndicate. The manager must, however, inform the members of the syndicate of the actual order fill priority no later than two business days before sales begin. |
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Municipal securities trades between member firms settle:
(a) in clearinghouse funds, T+1. (b) in federal funds, T+3. (c) in federal funds, next day. (d) in clearinghouse funds, T+3. |
The correct answer is d
Explanation: Municipal securities trades between broker-dealers settle in clearinghouse funds. These are funds represented by checks or drafts that pass through the banking system, and require three business days to clear. This is in contrast to U.S. Government securities trades that settle next day—T+1—in federal funds. |
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A broker-dealer must keep which TWO of the following for three years:
I. All receipts and disbursements of cash and all other debits and credits. II. All guarantees of accounts, powers of attorney and any other evidence of the granting of discretionary authority. III. All repurchase and reverse repurchase agreements. IV. All purchases, sales, receipts and deliveries of securities and commodities for each account, and all other debits and credits to each account. (a) II and IV (b) II and III (c) I and IV (d) I and III |
The correct answer is b.
Explanation: Transaction records such as receipts and disbursements of cash, and all purchases, sales, receipts and deliveries of securities, have six-year holding requirements. |
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Which of the following transactions may a customer execute in his/her cash account?
(a) Long 100 shares XYZ and Write 1 XYZ Feb 35 Call (b) Write 1 ABC Jan 55 Put and Buy 1 ABC Jan 65 put (c) Short 100 shares LIB, and Write 1 LIB Nov 50 Put. (d) Short 1 PDQ Dec 50 Call and Short 1 PDQ Dec 50 Put |
The correct answer is a.
Explanation: The transaction: "Long 100 shares XYZ and Write 1 XYZ Feb 35 Call", is a covered call. The investor owns the stock that the short call requires for delivery if exercised. Covered calls are the most conservative of options strategies. All the other positions/strategies may only be executed in a margin account because of risk. |
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A customer places an order to buy 1,000 shares of XYZ stock immediately at $35/share and cancel whatever portion of the order cannot be filled at that price. The registered representative will submit the order as which of the following?
(a) IOC (b) GTC (c) FOK (d) AON |
The correct answer is a.
Explanation: The order requires an Immediate or Cancel notation. The customer will accept a partial fill of the order, so it is not FOK (Fill or Kill). GTC stands for Good Till Cancelled, and AON orders (All or None), which must be filled in one transaction are typically GTC. |
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Under exchange rules, a GTC order on the specialist's book must be renewed with the specialist at what intervals?
(a) Semi-annually, at the end of April and end of October (b) Annually by the end of December (c) On the first business day of each quarter (d) Semi-annually, at the beginning of April and beginning of October |
The correct answer is a
Explanation: The rule specifies the end of April and October. Don't pick the first of April—that's April Fool's Day! |
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Use the following information about a customer's margin account to answer the question.
ABC stock - 200 shares. CMV $40/share PDQ stock - 100 shares. CMV $30/share LIB stock - 100 shares. CMV $50/ share Debit balance -- $6,400 From the information above, this account: (a) is in a position for a maintenance call (b) has excess equity (c) is restricted (d) is under margined |
The correct answer is b
Explanation: This is, of course, a long margin account. The formula for the account is: CMV-DR=EQ (16,000 CMV -; 6,400 DR = 9,600 EQ). To determine the Reg. "T" EQ requirement, multiply the CMV by 50% (16,000 ´ 50% = 8,000). The account actually has 9,600; therefore it has excess equity. |
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To reduce or eliminate open long options positions, an investor will:
(a) Initiate additional long positions at different strike prices and/or expiration dates (b) Make closing sales (c) Exercise the contracts at their intrinsic value (d) Establish debit spread positions |
The correct answer is b
Explanation: To reduce or eliminate open long options positions, the investor will offset the positions by making closing sales. If the investor buys (long) to open a position, then he/she will sell the position to close it. The order ticket will be marked "closing sale". |
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A bond trader at SYC Securities sees in a dealer inventory that another municipal bond trading firm, LTP, has quoted $500,000 city of Burney GO bonds at 102 ½ . He calls LTP and negotiates a price of 102 ¼ for the entire inventory. LTP's trader tells the SYC trader that the quote is firm for one hour with a five-minute recall. During the hour, another firm, TBC, calls LTP and is willing to buy the entire inventory at the original quote of 102 ½. The quoting dealer, LTP, will:
I. make the trade since the new offer meets the original quote. II. tell the trader at TBC that the bonds are out firm. III. give TBC five minutes to improve their offer. IV. call SYC and tell the trader there that he/she has five minutes to execute a transaction against the quoted price. (a) II, IV (b) II, III (c) I (d) III |
The correct answer is a.
Explanation: This complex question describes how a situation might develop in a municipals trading firm. The quote that was "firm for one hour with a five-minute recall," means that the price will be held firm for one hour, but if a better offer comes in the firm will get a call saying that they have five minutes to make the trade. To the trading firm that inquired after the firm quote was given, the trader will say that the bonds are "out firm," meaning that a firm quote to another dealer is pending. |
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Which is/are TRUE about Regulation T?
I. It sets the loan amount in margin accounts. II. It is a regulation of the Federal Reserve. III. It stipulates that cash trades must settle next business day. IV. It stipulates how accounts can be closed due to unmet margin calls. (a) I and II (b) I, II, III and IV (c) I only (d) I, II and III |
The correct answer is a
Explanation: According to Reg T, cash trades must settle same day, and accounts can be restricted, not closed, due to unmet margin calls. Reg T is a regulation of the Federal Reserve. |
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Which of the following signatures are required on a client's new account form?
I. The client's II. The client's spouse III. The registered representative IV. The principal (a) I, II (b) III, IV (c) I, II, III, IV (d) I, III, IV |
The correct answer is b
Explanation: While local practices of a broker-dealer may well require the client to sign the form, even when opening a cash account, the rules do not require this. Only the RR and the supervising principal are required, by rules, to sign the form. |
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Fred is a highly successful registered representative who has several high-net worth clients. A college friend who is a General Securities representative tells Fred that he is assisting some venture capital clients in structuring a private placement limited partnership. He asks Fred to invite several of his best clients to attend a seminar hosted by the company and to come himself. He promises that Fred will be paid a finder's fee if a person he has introduced buys an interest. Which of the following statements is true?
(a) Fred may not engage in these activities without notifying his employing broker-dealer. (b) If Fred is to be compensated for the introductions in any way, he must have the permission of his broker-dealer. (c) Failure to notify the employing broker-dealer and to receive permission when being compensated is known as "selling away". (d) All of these statements are true. |
The correct answer is d
Explanation: Selling away (private securities transactions) conducted by a RR without proper notification and permission (when receiving compensation) violates NASD Conduct Rules 2110 and 3040. If a RR wishes to sell securities away from his or her firm, then he/she must notify the firm in writing. If the RR is being compensated, he/she must have the firm''s permission. |
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Which of the following TWO statements are true of custodial accounts?
I. They must always be cash accounts. II. Option trading and short selling are permitted in custodial accounts, provided the custodian provides written permission. III. A registered rep needs written authorization from her supervisor and the client before exercising discretionary authority in a custodial account. IV. A registered rep needs power of attorney before exercising discretionary authority in a custodial account. (a) I and IV (b) II and IV (c) II and III (d) I and III |
The correct answer is d.
Explanation: Custodial accounts must be cash accounts and written authorization is sufficient in order to exercise discretionary authority in a custodial account. |
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All of the following are actions the broker-dealer should take upon hearing of the death of an account holder EXCEPT:
(a) Ensure that no further orders are placed (b) Convert the account to an estate account (c) Keep the account open until all until officially notified that all tax claims have been resolved. (d) Cancel all open orders |
The correct answer is b.
Explanation: No changes should be made to the account's type until the broker-dealer has received a death certificate. |
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The regulation that governs the extension of credit from broker/dealer to customers in the securities markets is Reg. T. This is a regulation of:
(a) The NYSE (b) The NASD (c) The Federal Reserve Board (d) The SEC |
The correct answer is c
Explanation: The Federal Reserve Board governs the extension of credit in the securities industry and Reg. T is the regulation that deals with extension of credit from broker/dealers to customers. |
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An investor opens a new margin account by buying 1,000 shares of PGS stock at $40/share and meets the Reg. T requirements. Two months later, PGS is trading at $45. The broker/dealer has created a special memorandum account for the customer in the amount of $2,500. A few weeks later, negative estimates from analysts and a slumping overall market have driven the price of PGS down to $38.25. If the customer calls her RR to ask about the SMA in her account, he should tell her that the amount is:
(a) Zero, because the account is now in restriction (b) $2,000 (c) $875 (d) $2,500 |
The correct answer is d.
Explanation: SMA is created by positive movement in a customer's account. It is best described as a line of credit in a customer's margin account. It does not decrease until it is used. The fact that the account has moved into restriction (equity is below 50%) does not affect the SMA. If the account goes deeply enough into restriction, the customer may not be able to use the SMA, but it remains. |
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Which of the following are ineligible for margin?
I. IRA accounts II. Custodial accounts for minors III. Purchase of initial public offerings IV. Stocks trading under $2.50 per share (a) I only (b) I, II, III and IV (c) I, II and III only (d) I and II only |
The correct answer is b
Explanation: Only stocks trading over $5 per share are eligible for margin. |
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Which of the following sequences contains a zero-plus tick?
(a) 51.53.54.54.55 (b) 64.63.63.63.62 (c) 28.29.28.28.29 (d) 34.33.34.35.34 |
The correct answer is a
Explanation: A plus tick or a zero-plus tick is required to execute a short sale. A zero-plus tick is a trade at a price that is the same as the most recent price, but the most recent change was positive. In choice 51.53.54.54.55, the first trade at 54 was a plus tick and the second trade at 54 was the zero-plus tick. |
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Which of the following is/are TRUE about custodial accounts opened under the Uniform Gift to Minors Act?
I. They establish a simple way for a minor to own securities and other types of property. II. Terms are established by a trust document. III. The donor irrevocably gifts the assets to the trust. IV. There is no special tax treatment. (a) II, III and IV (b) IV only (c) I, II, III and IV (d) III and IV |
The correct answer is d
Explanation: I is incorrect because other types of property are gifted under the UTMA. II is incorrect because terms are set by statute, not by the trust document. |
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When a corporation wishes to open a margin account with a broker-dealer, which of the following is required?
I. A corporate resolution from the board of directors II. A copy of the corporation's trust indenture III. A copy of the corporation's charter or by-laws IV. An agreement that the stock of the corporation will not be traded by the broker-dealer as a market-maker. (a) I, II (b) I, II, III, IV (c) I, III (d) II, IV |
The correct answer is c
Explanation: Whenever a corporation opens an account with a broker-dealer, a resolution by the board of directors, appointing specific individuals who have trading authority must accompany the application. In addition, if the company wishes to open a margin account, the company must also provide a copy of its charter or by-laws as evidence that the company is legally permitted to trade on margin. |
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Mr. Smith and Mr. Brown are business partners. They have a tenants in common account with the brokerage firm of JTP. During a trading day, Mr. Brown calls the RR who handles the account and directs him to sell 1,000 shares of FBN stock immediately at the market. Which of the following actions must the RR take?
(a) Clear the trade with the supervising principal (b) Execute the trade as quickly and accurately as possible (c) Check with Mr. Smith before executing the order (d) Clear trades in the account with the compliance department |
The correct answer is b
Explanation: The account is a tenants in common account. Any person who has signed the account documents may make trades without reference to other parties. These accounts do not have the flexibility of a JTWROS account in case of the death of one of the parties. |
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An RR's customer calls to ask questions about his margin account. The RR tells the customer that the current status of the account is: CMV=$53,000; DR=$28,000; EQ=$25,000; SMA=$9,500. The customer is concerned that one of the stocks in the account has been slipping in the market lately and asks how low the CMV can go before he will get a maintenance call. The RR replies that under the standard SRO maintenance of 25%, the CMV could go to:
(a) $37,333 (b) $26,500 (c) $35,000 (d) $39,750 |
The correct answer is a.
Explanation: To determine how low the CMV could sink given a specific debit balance, divide the DR by .75 ($28,000/.75=$37,333). An alternative formula, which will produce the same result, is: DR X 4/3 = CMV@ minimum SRO maintenance of 25%. |
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All of the following records must be kept by broker-dealers for six years EXCEPT:
(a) all evidence of the granting of any discretionary authority. (b) all receipts and disbursements of cash and all other debits. (c) ledgers reflecting all assets, liabilities, capital, income and expenses. (d) all purchases, sales, receipts and deliveries of securities and commodities for each account. |
The correct answer is a.
Explanation: All evidence of grants of any discretionary authority must be kept for only 3 years. |
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When a corporation opens a margin account with a broker-dealer, what documents must the broker have to approve the account for trading
I. A corporate resolution for the account II. An affidavit of corporate domicile III. A copy of the corporation's charter or by laws IV. A certificate of incontestability (a) I, II, III, IV (b) II, III, IV (c) I, III (d) II, IV |
The correct answer is c.
Explanation: All corporate accounts must be opened when the broker-dealer has a copy of a corporate resolution for the account, signed by all those who are to trade the account. When a corporation opens a margin account, it must also provide a copy of its by-laws or charter to indicate that it is legal for the company to trade on margin. |
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An RR's regular customer informs him that he will be taking a week-long cruise and will be out of telephone or internet contact. One of the customer's stocks, GBS, has experienced quite a bit of volatility in the past few weeks, near the top of its trading range. The RR does not have discretionary authority, the customer leaves a voicemail message that says, "Watch GBS until I contact you again." The customer leaves no additional instructions. During a trading day when the customer cannot be reached, GBS begins a decline that threatens to wipe out all the unrealized gains shown over the past weeks. Which of the following actions are appropriate?
(a) Execute a sell stop for the customer to halt his losses since the customer has used this strategy before. (b) Attempt to contact the customer and otherwise do nothing. (c) Buy a put option on GBS for the customer. (d) Sell GBS stock immediately to lock in the gain and have the customer execute a retroactive discretionary order. |
The correct answer is b
Explanation: The customer's instructions were simply to "watch". Without a discretionary account and in the absence of other orders, the RR cannot legally take any actions other than try to contact the customer. All the other choices are prohibited as unauthorized transactions. |
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When a client opens an options trading account, which of the following is required?
I. The approval of a general securities principal II. The provision, to the customer, of the Options Disclosure Document III. The approval of a ROP IV. The provision, to the customer, of a prospectus (a) II, III (b) II, IV (c) I, II (d) I, IV |
The correct answer is a
Explanation: When an investor opens an options account he/she must be provided with a copy of the current Options Disclosure Document. The ROP (Registered Options Principal) determines the suitability of options trading for the customer and determines the level of risk that the broker-dealer firm may allow. |
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A company has applied to the SEC for registration of its stock under the provisions of Regulation "A." Which of these is true regarding the company's filing?
I. The company will file a registration statement with the SEC II. The document provided to customers is known as an "Offering Circular." III. The company will file an offering statement with the SEC IV. The company is limited by regulation to issuing no more than $5 million in securities in a year. (a) I, II, IV (b) I, III, IV (c) II, III, IV (d) II, III |
The correct answer is c.
Explanation: When an investor opens an options account he/she must be provided with a copy of the current Options Disclosure Document. The ROP (Registered Options Principal) determines the suitability of options trading for the customer and determines the level of risk that the broker-dealer firm may allow. An exemption from the registration requirements mandated by the Securities Act, applicable to small public offerings of securities that do not exceed $5 million in any 12-month period. A company that uses the Regulation A exemption for a securities offering must still file an offering statement with the Securities and Exchange Commission. While Regulation A offerings share some characteristics with registered offerings, they have some distinct advantages over full registration. |
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In the opening trade in a new margin account, an investor purchases $20,000 in stock. What is the maximum amount that may be rehypothecated by the broker-dealer? (Regulation T = 50%)
(a) $10,000 (b) $14,000 (c) $5,000 (d) $20,000 |
The correct answer is b.
Explanation: Regulation "T" of the FRB allows the broker-dealer to pledge (to a bank) an amount of the customer's stock equal to 140% of the customer's debit balance. The customer bought $20,000 and Reg. "T" stands at 50%, so the customer's debit balance is $10,000 x 140% = $14,000. This is the maximum amount the broker-dealer is allowed to pledge for a loan of no more than $10,000. Definition of 'Regulation T - Reg T' The Federal Reserve Board regulation that governs customer cash accounts and the amount of credit that brokerage firms and dealers may extend to customers for the purchase of securities. According to Regulation T, you may borrow up to 50% of the purchase price of securities that can be purchased on margin. This is known as the initial margin. |
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Which TWO statements are TRUE about writing covered calls?
I. The maintenance margin requirement is 25%. II. Physical delivery may be required upon exercise. III. The writer has cash on deposit equal to the cost to purchase the shares from the option holder. IV. It is a bearish strategy. (a) II and IV (b) II and III (c) I and II (d) I and IV |
The correct answer is a.
Explanation: I is incorrect because there is no margin requirement. III is incorrect because a call writer must have the shares on deposit. A put writer is required to have the cash equivalent. An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. This is often employed when an investor has a short-term neutral view on the asset and for this reason hold the asset long and simultaneously have a short position via the option to generate income from the option premium. This is also known as a "buy-write". |
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A registered representative of a NYSE member firm has decided to earn some extra income during the Christmas Season by opening a candy kiosk with her cousin in the local shopping mall. Which of the following applies to this proposed endeavor?
(a) She must first notify the employing broker-dealer in writing (b) Duplicates of all her earnings statements from the outside enterprise must be furnished to the NASD (c) Since this enterprise represents no conflict of interest, she will only need to inform her principal verbally (d) She must first receive written permission from the employing member firm |
The correct answer is d.
Explanation: NYSE rules require that a representative who wishes to engage in any business outside the member firm's supervision must apply for and receive written permission to do so. |
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Under the Employee Retirement Income Security Act of 1974 (ERISA), pension plans must:
I. inform participants about plan benefits, availability, vesting procedures and adequacy of funding. II. establish a grievance and appeals process. III. be subject to lawsuits from participants for benefits and breaches of fiduciary duty. IV. guarantee a reasonable return on investment. (a) I only (b) I and II (c) I, II, III and IV (d) I, II and III |
The correct answer is d.
Explanation: ERISA governs fixed-benefit plans, for which, adequacy of funding is more important than return on investment. 1. Requires plans to provide participants with important information about plan features and funding. 2. Sets minimum standards for participation, vesting, benefit accrual and funding. 3. Requires accountability of plan fiduciaries. ERISA generally defines a fiduciary as anyone who exercises discretionary authority or control over a plan's management or assets, including anyone who provides investment advice to the plan 4. Gives participants the right to sue for benefits and breaches of fiduciary duty. 5. Guarantees payment of certain benefits if a defined plan is terminated through a federally chartered corporation, known as the Pension Benefit Guaranty Corporation. 6. Protects the plan from mismanagement and misuse of assets through its fiduciary provisions. |
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When an investor opens a new options account with a broker dealer, which of the following are true?
I. The account must be approved by a ROP prior to any trading II. The new options client must be given a copy of the options disclosure document at, or prior to, account approval III. Immediately upon approval of the account, the customer may enter orders for options trades IV. The customer has 15 days after approval of the account to return the signed options account agreement. (a) I, II (b) I (c) I, II, III (d) I, II, III, IV |
The correct answer is d
Explanation: By rule, all of these are correct. While the rules state that the customer may enter orders as soon as the account has been approved and has 15 days to return the signed agreement, many broker-dealers institute tighter controls on a local basis. In any case, if the customer has not returned the signed agreement within 15 days, any open positions may only be closed and no new positions established. |
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Which of the following is a reason for delays in transferring accounts?
I. The transfer form is incomplete. II. The transfer includes a margin account. III. The account owner is changed. IV. The transfer involves a retirement account. (a) I, II and III only (b) I only (c) I and II only (d) I, II, III and IV |
The correct answer is d
Explanation: NYSE Rule 412 requires that transfers be completed within three business days but these problems often arise. |
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Which of the following are FALSE regarding maintenance margin?
I. It is 50% of the current market value of most long securities in the account II. It is $2.50 per share or 100% of current market value, whichever is greater, of each short stock in the account selling at less than $5.00 per share III. It is $5.00 per share or 30% of the current market value, whichever is greater, of each stock short in the account selling at or above $5.00 per share. IV. It is 5% of the principal amount or 30% of the account value, whichever is greater, of each short bond in the account. (a) I, II and III only (b) I only (c) I and II only (d) I, II, III and IV |
The correct answer is b
Explanation: Most long stocks require a maintenance margin of 25% of the total market value of the securities in the margin account. Note that this level is a minimum and many brokerages have higher maintenance requirements of 30-40%. The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account. Keep in mind that this level is a minimum, and many brokerages have higher maintenance requirements of 30-40%. Also referred to as "minimum maintenance" or "maintenance requirement." As governed by the Federal Reserve's Regulation T, when a trader buys on margin, key levels must be maintained throughout the life of the trade. First off, a broker cannot extend any credit to accounts with less than $2,000 in cash (or securities). |
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All of the following statements describing short selling in a margin account are FALSE EXCEPT:
(a) A short sale may only be executed on a zero plus tick. (b) Equity in a margin account is reduced by the short market value. (c) Short selling is prohibited in a margin account. (d) Short selling against the box is a strategy for hedging long positions. |
The correct answer is b
Explanation: Short selling against the box is a tax strategy; short sales can be executed on a zero plus tick or a plus tick. Since you are essentially borrowing money when you perform a short sale, a margin account is required. |
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An RR has an elderly, single man who has been his client in an individual account for years. The RR learns that the client has passed away. Which of the following actions does the RR take?
I. Cancel all open orders II. Mark the account "deceased" III. Execute open orders at the best price. IV. Await instructions from the executor of the estate. (a) I, II, IV (b) II, IV (c) I, III, IV (d) III, IV |
The correct answer is a
Explanation: When the client in an individual account dies, only three actions are permitted: the cancelation of all open orders, marking the account "deceased" and awaiting instructions from the executor of the estate. The question did not specify any other instructions. |
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Which statements about common shareholder rights are FALSE?
I. A shareholder may exchange shares to convertible bonds at his option. II. A shareholder's right to a dividend precedes a bondholder's right to a coupon payment. III. A shareholder may inspect a company's books. IV. A shareholder may transfer ownership to minor children. (a) I, II and IV (b) II, III and IV (c) II and III (d) I, II, III and IV |
The correct answer is a
Explanation: "I" should be the other way around: convertible bond holders can exchange their bonds for shares. "II" is incorrect because bondholders precede shareholders. "IV" is incorrect because Shareholders have the right of transfer, but minor children cannot hold securities. An arrangement among a company's shareholders describing how the company should be operated and the shareholders' rights and obligations. It also includes information on the regulation of the shareholders' relationship, the management of the company, ownership of shares and privileges and protection of shareholders. |
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When a registered representative is opening an account for a new customer, in which of the following cases would notification to the member firm be required?
I. A registered representative of a NASD member firm II. Registered representative of a bank dealer III. A teller in a bank IV. A ROP (a) I, II, III (b) II, IV (c) I, II, IV (d) I, II, III, IV |
The correct answer is c
Explanation: The rules of the Self Regulatory Organizations (SROs) require notification of the member firm when a registered person opens a securities account. This does not, however, apply to a person who is not registered and not an employee of a member firm or a dealer bank firm. |
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A margin account has a long market value of $12,000, a debit balance of -$6,000 and a credit balance of $6,000. Which is/are TRUE about the this margin account if the share price of the stock purchased should appreciate 20% and the Reg T margin requirement is 50%?
I. Long market value is $14,400. II. Debit balance is $7,200. III. Reg T requirement is $6,000. IV. Excess equity is $1,200. (a) I, II, III and IV (b) I only (c) I, II and IV (d) I and IV |
The correct answer is d
Explanation: I is correct since the stock's currently valued at $12,000 are increasing 20% or $2,400. II is incorrect because the debit balance remains at $6,000. III is incorrect since the Reg T requirement is $7,200. IV is correct since: ($14,400/2) - $6,000 = $1,200. |
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Which of the following statements is FALSE about custodial accounts opened under the Uniform Gift to Minors Act?
(a) The child has no right to gift the money back. (b) The child must pay income tax on the account. (c) The custodian may not draw cash from the fund. (d) The money is the child’s property. |
The correct answer is c
Explanation: The custodian can withdraw cash to spend on items of benefit to the child, provided they go beyond basic parental obligations. |
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Which TWO of the following statements are true of account rules?
I. Broker-dealers must send confirmation of each transaction to the account owner within 1 business day of settlement II. Transaction confirmations must be supplemented by quarterly statements. III. Broker-dealers must retain any correspondence received from each client. IV. Orders in discretionary accounts must be marked "discretion" and approved by a manager. (a) III and IV (b) I and III (c) I and II (d) I and IV |
The correct answer is d.
Explanation: Transactions must be confirmed prior to settlement and supplemented by monthly statements unless the account is thinly traded. |
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When a registered representative opens an account for a corporation that includes margin trading, which of the following documents must be obtained?
I. An affidavit of domicile II. A copy of the Corporation's charter III. A corporate resolution IV. A discretionary waiver |
The correct answer is b.
Explanation: When opening a corporate account, the RR must always obtain a signed resolution from the corporation. In addition, to attest to the legality of the corporation's trading on margin, a copy of the corporation's charter or by laws must be obtained. |
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Which of the following are TRUE regarding margin accounts?
I. Most stocks are marginable provided they are trading over $5 per share. II. All marginable stocks require an initial margin of 60% of the total purchase or short-sale price. III. The margin requirement for Treasury securities starts at 10% initial margin requirements. IV. If a maintenance margin requirement has not been covered by five days after the settlement date, the account can be frozen. own obligations. (a) I and II (b) I and IV (c) II and III (d) II and IV |
The correct answer is b
Explanation: II is false since stocks require a 50% initial margin, not 60%. III is false since Treasuries start at 3%, not 10%. |
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John is an RR in Mississippi whose client, Sally, has placed an order to buy stock. John's sales assistant takes the call and leaves John a note to call Sally when the order is executed. John notices that the area code and number are different from what he has on file and when he calls Sally he discovers that she has moved to Texas. Which of the following actions must John take?
(a) Mail the confirmation to Sally's old Mississippi address so that it will be forwarded to her in Texas. (b) Begin action to become registered in Texas under the Uniform Securities Act. (c) Cancel the order. (d) If his broker-dealer is registered in Texas, John’s registration is also effective in that state. |
The correct answer is b.
Explanation: Under the Uniform Securities Act (the "Blue Sky Laws") a RR must be registered in each state in which he/she conducts business unless there is an exemption. In this case there are no applicable exemptions |
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Which statement about the New York Stock Exchange is FALSE?
(a) It requires written authorization from a customer before an employee of a member can exercise discretionary power over an account. (b) It is a self-regulating organization. (c) Employees of members cannot open accounts at competing broker-dealers. (d) It permits coded accounts |
The correct answer is c.
Explanation: The practice of opening accounts at a competing broker-dealer is regulated, not prohibited. |
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Which TWO of the following are FALSE regarding margin accounts?
I. The client must pay, in full and by the settlement date, the amount due on any transaction. II. All money and securities in the account are wholly owned by the client and held in her name. III. Securities in the account may be used as collateral for the loaned money with which they were bought. IV. The broker-dealer can pledge securities in a client's account as collateral for its own obligations. (a) II and III (b) I and III (c) III and IV (d) I and II |
The correct answer is d.
Explanation: Securities in a margin account may be used as collateral by the client and the broker-dealer. |
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Which of the following choices may a RR make on behalf of a customer without a discretionary account?
I. Price II. Quantity III. Timing IV. Buy/Sell (a) I, III (b) I, II, III (c) III, IV (d) II, III, IV |
The correct answer is a.
Explanation: A discretionary account gives the RR the authority to make trades for the customer and choose all of these. Without a discretionary account, the RR can choose price and time of execution - as in a "not held" order. |
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Under which of the following circumstances would a registered representative (RR) be required to register as an investment advisory representative?
(a) The RR, as a part of his job, makes recommendations to customers regarding securities purchases and sales. (b) The RR, on a quarterly basis, works with clients to evaluate the potential need for changes in investment objectives. (c) The RR assists customers in identifying patterns of investments that are most likely to support the client’s stated objectives. (d) The RR sets up a “wrap account” based on the client’s profile and objectives. |
The correct answer is d
Explanation: A wrap account is one in which both the fees for management of the portfolio and commissions are "wrapped-up" in a flat quarterly or annual fee. The firm offering these accounts must be registered as an investment advisor and the individual dealing with the public customer must be registered as an investment advisory representative. |
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Which of the following accurately calculates the combined equity in a customer's long and short margin accounts?
(a) (Debit balance – credit balance) – (long market value + short market value) (b) (Long market value + credit balance) – (debit balance + short market value) (c) (Long market value – short market value) + (credit balance – debit balance) (d) (Short market value – debit balance) + (long market value – credit balance) |
The correct answer is b.
Explanation: What the customer owns is the long market value (in the long account) and the credit balance (in the short account.) The customer owes the debit balance (in the long account) and the short market value (in the short account). |
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A hypothecation agreement:
(a) cannot be signed until the account is activated. (b) pledges that securities in a customer account may be used as collateral for funds loaned by the broker-dealer. (c) pledges that securities in street name may be used as collateral for the broker-dealer’s obligations. (d) applies to cash and margin accounts. |
The correct answer is b
Explanation: The pledge that securities in street name may be used as collateral for the broker-dealer's obligations is a description of rehypothecation. |
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When may a registered representative make cold calls prospecting for new customers?
I. After checking the firm's "Do Not Call" list. II. Any time during business hours. III. No earlier than 8:00 a.m. and no later than 9:00 p.m. at the called person's location. IV. After checking the company's prospect list. (a) III only (b) II, IV (c) I only (d) I, III |
The correct answer is d.
Explanation: The Telephone Consumer Protection Act (TCPA) of 1991 requires that telemarketing firms establish, maintain and train their solicitors in the use of a "Do Not Call" list. The Act restricts cold calls to the times of day noted |
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All of the following are discretionary order execution qualifiers used by secondary markets EXCEPT:
(a) fill-or-kill (b) all-or-none (c) immediate-or-cancel (d) when-and-if-issued |
The correct answer is d.
Explanation: WI relates to delivery of securities on primary markets |
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When a RR is involved in telemarketing activities, the Telephone Consumer Protection Act of 1991 requires the caller make which of the following disclosures to the called party?
I. Name of the person making the call. II. Address/phone number of the company III. Company he/she represents IV. Source from which the company obtained the party's telephone number (a) I, II, III (b) II, III (c) I, II, III, IV (d) II, III, IV |
The correct answer is a.
Explanation: TCPA 1991 requires that the caller disclose all the items listed in choices I, II and III. There is no requirement to disclose the source from which the firm obtained the called party's telephone number. Other requirements include limited calling hours and written procedures for "do-not-call" lists for the telemarketing company. |
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When a registered representative opens a new options account for a client, the account must be approved by a Registered Options Principal (ROP) prior to any options positions being opened. Which of the following strategies, that the customer may initiate, would entail the greatest scrutiny of the account by the ROP?
(a) Establishing debit call spreads (b) Writing uncovered calls (c) Establishing bear put spreads (d) Opening long combinations |
The correct answer is b
Explanation: The riskiest of all options positions is writing uncovered—or naked—calls, because the writer is subject to unlimited losses. The ROP who approves this strategy would only do so after extensive scrutiny of the client's financial condition and ability to withstand the risk. All the other choices are positions in which the most that the investor can lose is the premium invested. |
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What is the MOST important difference between joint tenants with right of survivorships (JTWROS) and joint tenants in common (JTIC)?
(a) JTWROS accounts require both account owners’ authorization for transactions. (b) JTWROS accounts are subject to probate when an owner dies. (c) Under JTIC, the decedent’s will stipulates how his or her interest will be passed to heirs. (d) Married couples cannot open JTIC accounts. |
The correct answer is c.
Explanation: JTWROS accounts pass automatically to survivors and avoid probate. |
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What is the principal advantage for a client to designate an heir under the TOD Security Registration Act?
(a) Assets in the account are protected against all claims and pass to the heir unencumbered (b) Assets in the account pass through to the designated beneficiary without going through the probate process (c) The assets held in the account will be exempt from estate taxes (d) It works much like a JTWROS account |
The correct answer is b.
Explanation: The Uniform Transfer on Death Security Act has been adopted by most states. It allows an investor to designate a beneficiary who will automatically receive the assets in the account at the death of the client without going through probate. The TOD account does not protect the assets against all claims and it does not shelter the account from estate taxes. The beneficiary has no ownership in the account until the death of the decedent. |
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When a RR is looking at a corporation's balance sheet and income statement, he sees that the company's EPS is 2.50 and the company's stock is currently trading at $50/share. The company has a large number of convertible bonds. If the RR computes the company's diluted earnings per share, the amount will be:
(a) $2.50 (b) $20 (c) Less than $2.50 (d) Greater than $2.50 |
The correct answer is c
Explanation: Computing the EPS of a corporation takes both the balance sheet and the income statement. The analyst would look at the earnings available for common after all other obligations have been paid and divide that by the number of common shares. If the convertible bonds become stock, the larger number of shares will dilute the EPS. |
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In comparing a publicly-offered oil and gas drilling DPP with a private offering, all of the following are typically characteristics of a public program EXECPT:
(a) A public partnership typically carries lower risk (b) A public partnership is registered with the state or SEC (c) A public partnership typically offers greater diversification (d) A public partnership has higher expenses |
The correct answer is d
Explanation: Choices "B," "C," and "D" are typically cited as characteristics of public partnerships that may make them more suitable for many investors. The fact that a public partnership is registered does not, of course, mean any guarantees, but indicates that the regulatory authorities have at least examined the offering. |
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LEAPS options may be written to have a maximum expiration of:
(a) 39 months (b) 6 months (c) 9 months (d) 12 months |
The correct answer is a.
Explanation: LEAPS (Long Term Equity AnticiPation Securities) options have a maximum of 39 months. The standard for other equity options is 9 months. |
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A client has a variable annuity with an AIR of 5%. Over the past few months, the actual performance of the separate account has been: 7%, 6.5%, 6%, and 5.5%. What effect has the performance over these months had on the client's payout?
(a) The number of annuity units has decreased. (b) The payouts have decreased each month. (c) There is no change in payout. (d) The payouts have increased each month. |
The correct answer is d.
Explanation: Any time the actual return of the separate account exceeds the AIR (Assumed Interest Rate); the cheque will increase compared to the previous month's cheque. Of course, just the opposite is also true. You must always compare the actual rate of return to the AIR, as a benchmark. The number of annuity units is fixed at the time the account is annuitized and does not change. |
