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Series 10 > Chapter 04 : Operation and Regulation of Secondary Markets > Flashcards

Chapter 04 : Operation and Regulation of Secondary Markets Flashcards

1
Q

One trader asks another trader to delay a trade report or misreport a transaction, what is this practice called?

A

Collusion

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2
Q

What is the maintenance requirement for all forms of communication with the public?

A

Three years from last use

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3
Q

The ex-dividend date occurs ___ business day(s) ______ the record date.

A

The ex-dividend date occurs one business day before the record date.

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4
Q

Between 3:55 and 3:58 p.m. ET, for what reason may MOC/LOC orders be cancelled?

A

Only to correct a legitimate error

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5
Q

Identify the acronym: SEC

A

Securities and Exchange Commission

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6
Q

How often must a physical count of all securities in the firm be conducted?

A

Inventory counts must be conducted every quarter.

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7
Q

Which market is considered negotiated?

A

The over-the-counter (OTC) market in which market makers negotiate prices (e.g., the OTCBB)

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8
Q

Nasdaq market makers use a Level ____ terminal.

A

Nasdaq market makers use a Level 3 terminal.

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9
Q

If an RR receives information about a new company from someone in the research department of his BD, what must be done?

A

The RR must report the analyst’s disclosure to his manager. This could be a case of insider trading.

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10
Q

A corporate officer informs his son of an upcoming earnings report and the son effects trades. Is this a violation?

A

Yes. Both parties, the tipper (officer) and the tippee (the son), have violated the Insider Trading Act.

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11
Q

What is interpositioning?

A

The placement of another BD between a customer and the best market

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12
Q

What is an ECN?

A

Electronic Communication Network; any one of several systems which permit the entry and dissemination of quotes

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13
Q

Insiders must return short-swing profits, which are profits earned on stock that has been held for less than ___ months.

A

Insiders must return short-swing profits, which are profits earned on stock that has been held for less than six months.

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14
Q

True or False: ECNs allow subscribers to post quotes and trade electronically and anonymously.

A

True

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15
Q

What yield would be disclosed for a bond purchased at a premium and callable at par?

A

Yield to call (YTC)

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16
Q

Market makers must report trades within _____ seconds.

A

Market makers must report trades within 10 seconds.

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17
Q

For how long must retail communication, institutional communication, and correspondence be maintained?

A

For three years, but easily accessible for the first two years

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18
Q

True or False: A customer selling stock is considered long if she owns options, rights, or warrants in the stock.

A

False. She must have EXERCISED the options, rights, or warrants.

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19
Q

What is the violation for a market maker failing to honor its firm quote?

A

Backing away

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20
Q

What can be found on Level II Nasdaq?

A

Current quotes of all market makers for a specific security

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21
Q

What is the system that provides quotes for the Third Market?

A

Consolidated Quotation System (CQS)

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22
Q

True or False: BD records may only be maintained in physical form.

A

False. Documents may be maintained in any format, but if an electronic media is used, the SRO must be notified.

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23
Q

What does Level III Nasdaq give market makers the ability to do?

A

Change their quotes

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24
Q

The inside market is the _________ bid and the ________ ask.

A

The inside market is the highest bid and the lowest ask.

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25
Q

Where can you find quotes for stocks not listed on an exchange or Nasdaq?

A

The OTCBB and Pink Sheets

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26
Q

9

According to FINRA rules, written customer complaints must be maintained for ____ years.

A

According to FINRA rules, written customer complaints must be maintained for four years.

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27
Q

Trades involving corporate or municipal securities settle by the _______________ day following the trade date (T + __).

A

Trades involving corporate or municipal securities settle by the second business day following the trade date (T + 2)

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28
Q

If an equity option is exercised, when does the transaction in the underlying security settle?

A

In two business days (T + 2)

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29
Q

9

True or False: Nasdaq is a physical trading venue.

A

False. Nasdaq is an electronic trading platform and the participants are competing market makers.

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30
Q

Put the following four types of orders in the correct priority: Group Net, Member, Presale, Designated

A

1) Presale 2) Group Net 3) Designated 4) Member (Remember: P, G, D, M)

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31
Q

__________ is a manipulative activity that is designed to keep the price of a stock from falling (and is prohibited).

A

Pegging is a manipulative activity that is designed to keep the price of a stock from falling (and is prohibited).

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32
Q

What does the term good delivery mean?

A

The security is in proper form and endorsed or accompanied by a stock power.

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33
Q

Which federal law created the SEC?

A

The Securities Exchange Act of 1934

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34
Q

After an account is closed, for how long are customer account records maintained?

A

For 6 years after the account is closed

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35
Q

Up to _____ p.m. ET, all MOC/LOC orders may be cancelled for any reason.

A

Up to 3:55 p.m. ET, all MOC/LOC orders may be cancelled for any reason.

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36
Q

If securities are discovered missing during a quarterly securities count, what is the reporting period?

A

No later than 10 business days from discovery

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37
Q

Without an order imbalance, MOC/LOC orders may not be entered after _____ p.m. ET.

A

Without an order imbalance, MOC/LOC orders may not be entered after 3:55 p.m. ET.

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38
Q

When is settlement for a transaction using a seller’s option settlement?

A

On a date that is agreed on by both parties, but not earlier than three business days after the trade date

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39
Q

Which federal law governs the registration of RRs and their firms?

A

The Securities Exchange Act of 1934

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40
Q

What yield would be disclosed for a bond purchased at a discount?

A

Yield to maturity (YTM)

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41
Q

What system is used to report Nasdaq trades?

A

The Trade Reporting Facility (TRF)

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42
Q

According to the Locate Requirement of Regulation SHO, BDs may use an easy-to-borrow list less than _________ old.

A

According to the Locate Requirement of Regulation SHO, BDs may use an easy-to-borrow list less than 24 hours old.

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43
Q

To be a threshold security, how many shares must be in a failing position?

A

10,000 shares or more

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44
Q

If a BD receives bearer bonds from an unknown source, what should the firm do?

A

Make an inquiry of the Securities Information Center

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45
Q

What is the SIC?

A

Securities Information Center; created to identify and intercept stolen, forged or missing securities

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46
Q

True or False: On the ex-dividend date, a buy stop order’s price would be reduced.

A

False. On the ex-dividend date, the prices for buy limit and sell stop orders are reduced.

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47
Q

How long is a municipal purchase and sales blotter required to be retained?

A

6 years

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48
Q

How often are blotters of all transactions, as well as records of cash and securities movements, created?

A

On a daily basis

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49
Q

What is the Nasdaq Market Center Execution System?

A

What is the Nasdaq Market Center Execution System?

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50
Q

What is the trade reporting system for OTC equities?

A

Over-the-Counter Reporting Facility (ORF)

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51
Q

If the S&P 500 falls by 20% from the previous day’s close, trading halts for ________________________.

A

If the S&P 500 falls by 20% from the previous day’s close, trading halts for the remainder of the day.

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52
Q

Under FINRA rules, market makers are required to report trades in what types of securities?

A

All Nasdaq securities, Nasdaq-listed convertible bonds, CQS securities, OTC equities

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53
Q

A transfer agent, the Securities Information Center (SIC), and FBI are notified together for what probable reason?

A

Stolen or counterfeit securities have been discovered.

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54
Q

What types of records are maintained for the life of the BD?

A

Documents that create the BD, such as partnership agreements and corporate charters

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55
Q

True or False: A memorandum of each trade must show the terms of the transaction along with any modifications.

A

True. Trade tickets will also show the account name or number and the person accepting the order.

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56
Q

What securities settle in two business days after the trade date?

A

Corporate securities (stocks and bonds) and municipal securities

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57
Q

The ___________________________ is the primary system for accessing the quotes of Nasdaq market makers.

A

The Nasdaq Market Center Execution System is the primary system for accessing the quotes of Nasdaq market makers.

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58
Q

Any quote qualified by the terms “subject”, “workout,” or “nominal” is not considered a ______ quote.

A

Any quote qualified by the terms “subject”, “workout” or “nominal: is not considered a firm quote.

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59
Q

Of what violation is an RR guilty when buying stock based on knowledge of a pending large client order?

A

Front running

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60
Q

An _________ is any person who has possession of material non-public information.

A

An insider is any person who has possession of material non-public information.

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61
Q

True or False: Syndicate managers may change the priority of orders if justifiable and in the syndicate’s best interest.

A

True

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62
Q

XYZ’s record date is Thursday, May 3. With a regular-way trade, when could Emma sell her stock, but keep the dividend?

A

On Wednesday, May 2 or later. She must remain the owner at least through May 3 to keep the dividend.

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63
Q

The _________ date is the date by which stock must be owned to receive the dividend.

A

The Record date is the date by which stock must be owned to receive the dividend.

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64
Q

When do municipal bond trades settle?

A

Two business days after the trade date (T+2)

65
Q

A BD buys a security to fill an existing client order. This is called a ___________________________ transaction.

A

A BD buys a security to fill an existing client order. This is called a riskless/simultaneous principal transaction.

66
Q

All documents are to be maintained readily accessible for the first ___ years.

A

All documents are to be maintained readily accessible for the first 2 years.

67
Q

A written customer complaint is retained for _____ years from the date of its resolution.

A

A written customer complaint is retained for four years from the date of its resolution

68
Q

When is confirmation of a transaction sent to a client?

A

No later than completion of the transaction

69
Q

True or False: Level III Nasdaq is available to the public.

A

False. Level III is exclusively for market makers.

70
Q

After 3:55 p.m. ET, only MOC/LOC orders on the ____________ of a published imbalance may be entered.

A

After 3:55 p.m. ET, only MOC/LOC orders on the contra side of a published imbalance may be entered.

71
Q

___________ is the settlement for cash transactions (also referred to as cash trades or cash settlement).

A

Same day is the settlement for cash transactions (also referred to as cash trades or cash settlement).

72
Q

Account statements must be sent to customers at least ____________.

A

Account statements must be sent to customers at least quarterly.

73
Q

True or False: An exchange is always a physical location.

A

False. Nasdaq (essentially an electronic marketplace) is an exchange.

74
Q

When are Nasdaq trades required to be reported to the Trade Reporting Facility (TRF)?

A

Within 10 seconds

75
Q

When must insiders report their transactions?

A

Within 2 business days of the trade

76
Q

What does Regulation SHO regulate?

A

Short sales

77
Q

What are the two ways order tickets can be marked when selling securities?

A

Long (selling shares that are owned) or short (selling stock that is being borrowed)

78
Q

Where may quotes for non-Nasdaq (OTC equity) stocks be found?

A

Pink Sheets or the OTC Bulletin Board

79
Q

After conducting a securities count, a BD determines that securities are missing, when must an SIC report be filed?

A

No later than 10 business days following the count

80
Q

According to FINRA, when are member firms required to provide clients with a statement of financial condition?

A

Upon request

81
Q

May firms allow for the free flow of information between their research department and investment banking department?

A

No, these two departments must be separated to avoid conflicts of interest.

82
Q

If a BD believes a security has been stolen, with whom is a report filed?

A

The Securities Information Center (SIC), the issuer’s transfer agent, and the FBI

83
Q

83 of 159

Under which federal law are firms, RRs, and exchanges registered?

A

The Securities and Exchange Act of 1934

84
Q

Transactions of less than $_______ do not require an inquiry of the SIC.

A

Transactions of less than $10,000 do not require an inquiry to the SIC.

85
Q

____________ is the buyer’s refusal to accept the delivery of municipal bonds.

A

Rejection is the buyer’s refusal to accept the delivery of municipal bonds.

86
Q

The ___________________ has the authority to change the priority of orders.

A

The syndicate manager has the authority to change the priority of orders.

87
Q

A 7% decline in the S&P 500 would trigger a ____-minute trading halt on the NYSE.

A

A 7% decline in the S&P 500 would trigger a 15-minute trading halt on the NYSE.

88
Q

When must a BD notify the authorities if securities are discovered missing due to a securities count?

A

Within 10 business days

89
Q

9

The ______________ is where trades occur between institutions without the use of BDs.

A

The Fourth Market is where trades occur between institutions without the use of BDs.

90
Q

When executing a COD order, who receives the confirmation of the transaction?

A

The client (unless otherwise instructed)

91
Q

ABC sets a record date of Wednesday, Oct. 19. Would a buyer of ABC on Tuesday, October 18 be entitled to the dividend?

A

No, the investor must own (trade settles) on or before the record date. This trade would not settle until October 20.

92
Q

A BD executes a proprietary put purchase before executing a client’s stock sale. Is this practice permitted?

A

No. This prohibited practice is referred to as front-running.

93
Q

_______________ following the trade date is settlement for trades of U.S. Government securities or option contracts.

A

1 business day (T+1) following the trade date is settlement for trades of U.S. Government securities or option contracts

94
Q

What are treble damages?

A

The civil penalty for insider trading, which is three times the profit made or loss avoided

95
Q

What is the trade reporting system for Nasdaq securities?

A

Trade Reporting Facility (TRF) - formerly the Automated Confirmation Transaction system (ACT)

96
Q

If two firms agree to settle a trade in nine business days, what settlement style is being used?

A

Seller’s option

97
Q

The maximum denomination of registered bonds pursuant to MSRB good delivery rules is $________.

A

The maximum denomination of registered bonds pursuant to MSRB good delivery rules is $100,000.

98
Q

The criminal penalty for insider trading by an individual is a maximum of $_________ and/or ___ years in prison.

A

The criminal penalty for insider trading by an individual is a maximum of $5 million and/or 20 years in prison.

99
Q

List some of the information to be included on a municipal customer confirmation.

A

Description, price and yield (lower of YTM or YTC), BD capacity (commission for agency), trade and settlement dates

100
Q

If there is a market-wide halt on the NYSE, what happens on the Nasdaq Exchange?

A

It is halted as well.

101
Q

Define an insider.

A

Officers, directors, partners, greater than 10% owners, and immediate family members of all listed

102
Q

Executing a series of trades at the end of the day to manipulate the price of a security is called ________________.

A

Executing a series of trades at the end of the day to manipulate the price of a security is called marking-the-close.

103
Q

What items are shown on a securities ledger?

A

For each security, the ledger shows its physical location and the account that owns it.

104
Q

How frequently do BDs conduct physical counts of securities in their possession?

A

Quarterly

105
Q

Individuals must register with the SEC within __________ of becoming an insider.

A

Individuals must register with the SEC within 10 days of becoming an insider.

106
Q

According to NYSE rules, if the S&P 500 falls by 13% from the previous day’s close, trading will halt for ____ minutes.

A

According to NYSE rules, if the S&P 500 falls by 13% from the previous day’s close, trading will halt for 15 minutes.

107
Q

To satisfy best execution requirements for a non-Nasdaq OTC equity, BDs must obtain quotes from how many dealers?

A

A minimum of three BDs or all BBD that are quoting a price if there are less than three.

108
Q

____________________ is the insertion of a third party between a customer and the best market price.

A

Interpositioning is the insertion of a third party between a customer and the best market price.

109
Q

Define completion of a transaction

A

When a client delivers cash or securities to a BD, or when the client’s account is debited for cash or securities

110
Q

Whose authentication is acceptable for mutilated securities?

A

The transfer agent, registrar, trustee, or issuer

111
Q

__________ is a manipulative activity that is designed to keep the price of a stock from rising (and is prohibited).

A

Capping is a manipulative activity that is designed to keep the price of a stock from rising (and is prohibited).

112
Q

A _______ order indicates quantity, security, and whether to buy or sell, but only at a particular price or better.

A

A limit order indicates quantity, security, and whether to buy or sell, but only at a particular price or better.

113
Q

How often must member firms send clients an account statement?

A

At least quarterly

114
Q

Transactions effected on an exchange or OTC must be reported within ____ seconds.

A

Transactions effected on an exchange or OTC must be reported within 10 seconds.

115
Q

For how long is an employee questionnaire (Form U4) and fingerprint cards retained?

A

For 3 years after the representative leaves the firm

116
Q

What does the following quote of a Nasdaq market maker indicate it is willing to do? 15.30 - 15.35, 6 x 10

A

Buy up to 600 shares at 15.30 or sell up to 1,000 shares at 15.35

117
Q

“For insider trading violations, the SEC can sue for treble damages.” What does that statement mean?

A

The SEC can sue for three times the damage (profit made or loss avoided).

118
Q

All forms of communication with the public must be kept for _____ years, but easily accessible for the first ___ years.

A

All forms of communication with the public must be kept for three years, but easily accessible for the first two years.

119
Q

For active accounts, account statements must be sent ____________.

A

For active accounts, account statements must be sent monthly.

120
Q

When must customer confirmations be sent?

A

By the completion of the transaction (usually the settlement date)

121
Q

Copies of confirmations and statements are maintained for ___ years.

A

Copies of confirmations and statements are maintained for 3 years.

122
Q

After what time may MOC/LOC orders no longer be cancelled for any reason?

A

3:58 p.m. ET

123
Q

______________ is the return of municipal bonds that were originally accepted for delivery.

A

Reclamation is the return of municipal bonds that were originally accepted for delivery.

124
Q

True or False: Nasdaq is a securities exchange registered with the SEC.

A

True

125
Q

When will a cash trade for a municipal bond settle?

A

Same day

126
Q

Fails-to-deliver in threshold securities that have existed for ___________________ settlement days must be closed-out.

A

Fails-to-deliver in threshold securities that have existed for 13 consecutive settlement days must be closed-out.

127
Q

Are quotes on the OTCBB firm?

A

Yes (except for DPPs)

128
Q

What issue is the threshold security list designed to address?

A

Aged fails to deliver

129
Q

For how long must mutual fund retail communication be kept on file?

A

For three years (but kept easily accessible for the first two years)

130
Q

For a BD to trade along with an institutional customer, ____________ consent is required.

A

For a BD to trade along with an institutional customer, affirmative consent is required.

131
Q

True or False: The OTCBB is an electronic, real-time, quote and execution system.

A

False. The OTCBB does not have an execution feature.

132
Q

What yield would be disclosed for a bond purchased at a premium and callable at a premium?

A

The lower of the YTM or YTC

133
Q

Name two prohibitions that relate to being an insider.

A
  1. No shorting of the stock and 2. No keeping of short-swing profits
134
Q

What happens if the S&P 500 declines by 20% at any time during the day?

A

The market is closed for the remainder of the trading day

135
Q

Define painting the tape.

A

Traders effecting transactions back and forth to create a misleading appearance of activity

136
Q

A ________ order indicates quantity, security, and whether to buy or sell and is executed at the best price available.

A

A market order indicates quantity, security, and whether to buy or sell and is executed at the best price available.

137
Q

Is interpositioning an acceptable practice?

A

No, it is generally prohibited.

138
Q

What yield would always be disclosed for a bond that has been prerefunded?

A

YTC

139
Q

THE NYSE would close for the day if the DJIA fell by ___%.

A

THE NYSE would close for the day if the DJIA fell by 20%.

140
Q

If a pricing error occurs when reporting a trade, the client is obligated to accept the ________ price.

A

If a pricing error occurs when reporting a trade, the client is obligated to accept the actual price.

141
Q

A BD deposits $40,000 worth of MSFT in an account of a new client. With whom must an inquiry be made?

A

A BD deposits $40,000 worth of MSFT in an account of a new client. With whom must an inquiry be made?

142
Q

Identify the acronym: OTC

A

Over-the-Counter

143
Q

True or False: Customers selling stock are considered long if they own a preferred or bond convertible into the stock.

A

False, the convertibles must already have been TENDERED for conversion.

144
Q

The highest bid and the lowest offer for a security is referred to as the ________________.

A

The highest bid and the lowest offer for a security is referred to as the Inside Market.

145
Q

When are third market trades involving IBM required to be reported to the Trade Reporting Facility (TRF)?

A

Within 10 seconds

146
Q

Trading on material, non-public information is considered ________ ________.

A

Trading on material, non-public information is considered insider trading.

147
Q

A record of all customers’ securities positions, along with profits and losses, must be maintained for _____ years.

A

A record of all customers’ securities positions, along with profits and losses, must be maintained for six years.

148
Q

What is the criminal penalty for insider trading by corporations?

A

$25 million per violation

149
Q

How often does a BD need to make a physical examination and count of securities?

A

Quarterly

150
Q

May client information be given to a third party?

A

Only if the third party has legal authority (e.g., IRS) or the client provides written consent

151
Q

True or False: An RR may mark a sell order ticket long if the seller will make delivery within 10 business days.

A

False. The RR must have an expectation that the seller will deliver no later than the settlement date.

152
Q

True or False: Stocks found in the Pink Sheets are often thinly traded.

A

True

153
Q

For a municipal bond to be considered good delivery, is a Legal Opinion mandatory?

A

Yes. A Legal Opinion must be imprinted or attached (unless identified as ex-legal).

154
Q

If a published imbalance exists for a stock, on what side of the imbalance may an LOC/MOC order be entered?

A

On the contra side of the imbalance

155
Q

Which level of Nasdaq will only show the inside market for a security?

A

Level I

156
Q

A 13% decline in the S&P 500 would trigger a ____-minute trading halt on the NYSE.

A

A 13% decline in the S&P 500 would trigger a 15-minute trading halt on the NYSE.

157
Q

In order to sell short, Regulation SHO requires that securities be easy or hard to borrow?

A

Easy to borrow (called the locate requirement)

158
Q

Pursuant to short sale activities, when must a BD identify that shares are available for borrowing?

A

Prior to effecting a short sale

159
Q

According to NYSE rules, if the S&P 500 falls by 7% from the previous day’s close, trading will halt for ______ minutes.

A

According to NYSE Rules, if the S&P 500 falls by 7% from the previous day’s close, trading will halt for 15 minutes.

Series 10 (7 decks)

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