Exam 2 Flashcards
NASDAQ Level II shows the following quotes for market makers in ABCD stock:
NASDAQ Level II Screen
Bid(SOB) Ask(BOA)
Raymond James 10.00 10.50
Morgan Stanley 10.20 10.60
UBS Cap. Mkts 10.25 10.60
Wells Fargo Sec. 10.15 10.75
A customer of Wells Fargo Securities wishes to BUY ABCD stock. As a market maker, Wells Fargo confirms the purchase to the customer at $11.00 Net, with appropriate disclosure of the mark-up. The mark-up percentage, computed according to the 5% Policy, is:
A 2.325%
B 4.76%
C 4.875%
D 5.00%
B.
Even though Wells Fargo quotes an ask price of $10.75, this is irrelevant for computing the mark-up percentage.
The best ask quote (BOA, buy at lowest) in the market is that of Raymond James - $10.50. It is from this quote that the mark-up percentage must be computed under the 5% Policy. This makes sense because if Wells Fargo cannot meet this quote, it should simply buy the stock from Raymond James at $10.50 and charge the customer a commission on the trade for acting as middleman.
The mark-up percentage is:
$.50 /$10.50 = 4.76%
ACME Corporation has a defined benefit retirement plan regulated under ERISA. The President of ACME Corp. wishes to sell a personal real estate investment to the ACME Corp. pension trust at a price that is 15% below appraised market value. This transaction is:
A permitted because the pension fund benefits from purchasing the real estate at a discount to the current market value
B permitted if a legal opinion is obtained from the issuer’s counsel that the President is engaging in an arm’s length transaction
C prohibited because pension plans cannot make direct real estate investments
D prohibited because the President is a party-in-interest
D.
ERISA - Employee Retirement Income Security Act defines a “Party-In-Interest” as any person who is a participant in the plan, including corporate employees and officers; who provides services to the plan; or who oversees the operations of the plan (e.g., a plan trustee).
Such parties-in-interest are prohibited from selling assets to the plan; from using plan assets for their own purposes (e.g., borrowing securities from the plan to effect a short sale for the trustee’s personal account); and from receiving any benefit from the operations of the plan (e.g., fees, commissions).
Under MSRB Rule G-15, which of the following information MUST be included on customer confirmations?
I Current Yield
II Taxable Equivalent Yield
III Call Date and Price if used to calculate Yield
IV Catastrophe Call Dates
A III only
B I and III
C II and IV
D I, II, III
A.
There is no requirement to disclose current yield on a confirmation. The coupon rate must be shown, and the lower of yield to maturity or yield to call must be shown, as applicable. If used to calculate the yield, the call date and price are shown. Taxable equivalent yield is not shown, since this is dependent on each customer’s specific tax situation. Calamity call dates are not shown - who knows when a calamity will occur?
Regarding an order entered by a person who has a power of attorney over an account, under MSRB rules, which of the following information MUST be recorded on the order memorandum?
I Name of account
II Address of account
III Name of person entering order, if other than account name
IV Address of person entering order, if other than account name
A I and II only
B I and III only
C I, III and IV
D I, II, III, IV
C.
- The name of the account must always be on an order ticket (or account number, if a numbered account).
- There is no requirement for the address of the account to be on the order ticket.
- When an order is entered by a person whose name is not the account name, the MSRB requires that person’s name and address be on the order ticket. Thus, for corporate accounts, partnership accounts, trust accounts, or accounts with Third Party powers of attorney, this provision applies.
- The order ticket must also show the execution price (if the order was executed), and the date and time of receipt. Order tickets do not show the settlement date - this is on the confirmation.
Which of the following is a “public arbitrator”?
A An individual associated with a member firm
B An individual associated with a commodities firm
C The Chief Financial Officer of a financial institution
D A Chief Compliance Officer of a financial institution
C.
FINRA defines a “Non-Public Arbitrator” as any person (or that person’s immediate family member), who:
- within the past 5 years was associated with a securities broker-dealer (including government and municipal dealers) or with a commodities firm;
- is retired from engaging in any of the business activities in the previous definition;
- is an attorney, accountant, or other professional who has devoted 20% or more of his or her professional work in the last two years to clients in the first definition;
- is an employee of a bank or other financial institution and effects transactions in securities (including governments and municipals) or commodities (including futures and options) or monitors compliance of employees engaged in these activities.
Only Choice C does not fit this definition.
Under Rule 17a-4, customer statements must be posted no later than: A T B T+ 1 C S D S+2
C.
To be considered “current” under SEC rules, customer statements must be posted no later than settlement date.
Under the supervisory rules, all of the following would be items of relevance in the annual compliance review conducted with each registered individual EXCEPT:
A electronic communications content and approval requirements
B disclosures to clients about the content of impending research report announcements
C disclosures to clients about the investment features of a security
D disclosures to clients of the trading actions of other customers
C. (Covered in CE, not annual compliance review)
The annual compliance review to be conducted with each registered person is supposed to cover compliance and regulation issues.
Electronic communications approval requirements, permitted and prohibited disclosure to clients about impending research announcements and permitted and prohibited disclosures to clients about the trading actions of other customers fall into this category.
In contrast, the annual Firm Element Continuing Education requirement covers new products, and can cover compliance issues as well, if necessary.
Which individual would be LEAST likely to be considered an “insider” under the Securities Exchange Act of 1934?
A Attorney for a corporation
B A research scientist that heads the company’s latest cold fusion initiative
C The administrative assistant of the CEO of a publicly traded company
D A sell side research analyst employed at a broker-dealer
D.
Anyone who has material information about a publicly traded company, that has not been distributed to the public can be considered to be an “insider,” under the court rulings that accompany the formal definition of an insider under the Securities Exchange Act of 1934.
-A. A corporation’s attorney or accountant is almost assuredly in possession of material non-public material information.
-B. A research scientist for the corporation would also likely be in possession of material non-public information.
-C. Surprisingly, given his or her proximity to the CEO, an administrative assistant could also fall under this information-based definition.
-D. A sell side research analyst is one who works for a retail member firm that sells securities to the public (in contrast, a buy side research analyst typically works for a mutual fund or hedge fund, researching potential investments to buy). The research analyst might have a deep understanding of the company, but would not be considered an insider unless he or she was in possession of material non-public information.
Bottom line: Anyone who has material information about a publicly traded company, that has not been distributed to the public, can be deemed an “insider” regardless of his or her job title or relationship to the issuer.
Under MSRB rules regarding control relationships, a control relationship is deemed to exist if a:
A person has the ability to direct, or cause the direction of, management or the policies of the broker-dealer
B municipal securities professional provides, or enters into an agreement to provide, financial and advisory services to an issuer regarding the terms and structure of a new issue
C municipal securities dealer shares, directly or indirectly, in the profits and losses of the account of a customer carried or introduced by such broker or dealer in which municipal securities are held or traded
D municipal securities broker, directly or indirectly, gives or permits to be given, any gift of up to $100 in value to any person other than an employee of that firm, if the payments are in relation to the municipal securities activities of the firm
A.
Choice A is an interpretation of the MSRB’s definition of a control relationship - that is, where a person affiliated with another entity has the ability to direct, or cause the direction of, management or the policies of the broker-dealer.
Choice B is the definition of a municipal financial advisory relationship, where a municipal securities professional provides, or enters into an agreement to provide, financial and advisory services to an issuer regarding the terms and structure of a new issue.
Choice C is the MSRB’s definition of “sharing in accounts,” where a municipal securities dealer shares, directly or indirectly, in the profits and losses of the account of a customer carried or introduced by such broker or dealer in which municipal securities are held or traded.
Choice D defines the MSRB’s gift limitation, where a municipal securities broker, directly or indirectly, gives, or permits to be given, any gift of up to $100 in value to any person other than an employee of that firm, if the payments are in relation to the municipal securities activities of the firm.
Which of the following would be defined as “Sales Literature” by FINRA?
A Advertisement placed in social media
B Letter to customers describing the effects of tax law changes
C Technical report on options income strategies mailed to customers
D A letter to a customer discussing his particular portfolio performance
C.
C. A report to customers that deals with “options income strategies” falls under the FINRA definition of sales literature.
B. A letter to customers giving general economic information that is not directly related to the securities markets, such as the report on tax law changes, does not fall under the definition of sales literature.
A. Advertising in social media is defined as “advertising” (intended for the general public - sales literature is a mailing list item so it is directed to a specific audience).
D. A letter of an individual nature to a customer is also not considered to be sales literature - rather, it is defined as “correspondence” that is subject to principal review.
Which risk disclosure is MOST important when recommending a long-term CD to a customer?
A The customer may lose principal if the CD is redeemed prior to maturity
B The CD may be callable if market interest rates fall
C The CD is illiquid and cannot be readily sold
D The CD does not qualify for SIPC insurance coverage
B.
Be careful about the distinction between a “long term CD” and a “long-term negotiable CD.”
A long-term CD is purchased from a bank directly and is non-negotiable, meaning it cannot be traded in the market. The customer can redeem early with the issuing bank at par, but will lose some interest when doing so. Thus, there is no loss of principal if the CD is redeemed early. The main risk is that these can be 10 - 20 year maturity CDs, and they are often callable at par. If market interest rates fall, the bank will call the CD and the investor will not be able to reinvest the proceeds at the same interest rate.
In contrast, a “long-term negotiable CD” is a “brokered CD.” These cannot be redeemed with the issuing bank until maturity. Rather, if the customer wants to get out early, the customer must sell the CD in the market (because they are negotiable) and the market for these is “thin.” Typically, the brokerage firm that sold the CD will make a market and buy it back, reselling it for its remaining value to another investor - but is not obligated to do so.
CDs are bank products, so they do not get SIPC coverage. They will get FDIC coverage if they are titled in the customer’s name.
Jonathan Meyers, the son of your good customer, Joseph Meyers, has reached the age of majority in the state, which is age 18, and comes into the branch to take control of his UGMA account, over which Joseph is the custodian. In order to transfer the account into the name of Jonathan Meyers:
A a notarized authorization letter from Joseph Meyers, the custodian, must be presented to the member firm
B Joseph Meyers must appear, in person, along with Jonathan Meyers, giving permission to transfer the assets
C Jonathan Meyers must present proof of legal age and identity to the member firm
D an ACATS instruction form must be completed by Joseph Meyers, authorizing the account transfer to Jonathan
C.
Under the Uniform Gifts to Minors Act, when a child reaches legal age, the custodianship ceases and the custodian has no legal authority over the account. All the new adult must do is provide proof of legal age (such as a birth certificate) and proof of identity (such as a driver’s license) and the account must be transferred to the new adult.
A corporation declares a 3:1 stock split on March 1st to stockholders of record as of March 15th, with the payable date set at March 31st. A customer who buys 100 shares at $30 on March 30th would:
I be confirmed as buying 100 shares at $30
II be confirmed as buying 300 shares at $10
III receive a due bill for an additional 200 shares
IV not receive a due bill for an additional 200 shares
A I and III
B I and IV
C II and III
D II and IV
A.
The ex-date for a stock dividend or stock split is different than that for a cash dividend.
The ex-date for a stock split or stock dividend is set at the day after the Payable Date. This creates a problem. Anyone who buys the stock and settles on the Record Date of March 15th or before will be on the shareholder list to receive the additional shares on the payable date. There is no impact on these people. But anyone who buys the stock, settling anywhere from March 16th (day after Record Date) through March 31st (Payable Date) will pay the full unadjusted price for the stock, but will not be on the record books to receive the additional shares when the stock split or stock dividend is paid (on March 31st). This isn’t fair, and these customers can claim the additional shares with a due bill.
A new customer, age 75, opens an account at a FINRA member firm. The new account form shows an investment objective of safety of principal and current income. If a registered representative recommends a 25 year “AAA” rated corporate bond to this customer, the branch manager would be MOST concerned with:
A legislative risk
B time horizon
C interest rate risk
D liquidity risk
C.
This customer wants safety of principal and current income. While a bond gives current income, the long maturity exposes the customer to a potential capital loss on the bond if market interest rates rise. Thus, the objective of safety of principal is not being met. This is the best of the choices offered.
Also note that Choice B is pretty good - the 25 year bond is probably not the best investment for a 75 year old person who probably has about 10 years until death. However, this choice does not contradict the customer’s stated investment objective - Choice C does.
Which statement is FALSE when comparing a non-traded REIT and a private REIT?
A Private REITs trade on an exchange while non-traded REITs do not trade on an exchange
B Private REITs are not registered with the SEC while non-traded REITs are registered with the SEC
C Private REITs are only offered to accredited investors while non-traded REITs can be offered to any investor for whom the product is suitable
D Private REITs are not subject to the same level of SEC disclosure requirements as non-traded REITs
A.
Private REITs:
- are non-traded REITs that are sold only to accredited investors in a private placement.
- are not SEC-registered and are the most risky type of REIT.
- because they are unregistered private placements, have much “lighter” investor disclosure requirements.
Non-traded REITs:
- are registered with the SEC, but they are not listed, so they are illiquid.
- because they are SEC-registered, provide full disclosure to investors with a prospectus.
Notification to FINRA is required if a customer dispute with a registered representative:
I is settled for an amount greater than $2,500
II is settled for an amount greater than $15,000
III results in fines imposed by the firm against the registered representative exceeding $2,500
IV results in fines imposed by the firm against the registered representative exceeding $15,000
A I and III
B I and IV
C II and III
D II and IV
C.
Any dispute that a registered representative has with a customer that results in:
-a settlement paid to the customer in excess of $15,000;
or
-an imposition of fines or withheld commissions in excess of $2,500;
Must be reported to FINRA promptly, but no later than 30 days after the event.
A member firm contracts with an issuer to be the underwriter in a firm commitment for 50,000,000 shares of the corporation’s stock at $20 per share. At the completion of the offering, the underwriter has sold 40,000,000 shares. What can the underwriter do with the other 10,000,000 shares?
A The underwriter can place the 10,000,000 shares in its proprietary trading account and buy put options on those shares to hedge
B The underwriter can spread the shares into its discretionary accounts
C The underwriter can contact the 25 highest paid executives of the issuer and sell them the shares
D The underwriter can exercise its “Green Shoe” clause to sell the shares
A.
In a firm commitment underwriting, the underwriter buys the entire issue outright from the issuer, and will resell those shares to the public. If there is an undersale, as in this case, the underwriter now is a large stockholder in that company! The underwriter would place the shares in its proprietary trading account and, typically, would slowly sell them in the market. To protect against a loss on those shares, the underwriter could buy put options. The underwriter cannot place the shares into its discretionary accounts unless the client has signed an IPO letter. There is nothing stopping the underwriter from seeing if the executives of the company want to buy more shares, but they typically already own a lot of restricted stock and are not likely buyers. A Green Shoe clause is used when there is an oversale - not an undersale. If an underwriter oversells, the company agrees that it will issue up to 15% additional shares to cover the oversale by the underwriter.
Under Rule 147, which purchaser would NOT satisfy the state residency requirement?
A A corporation incorporated in a neighboring state that does the majority of its business in the state of issuance
B A partnership, consisting of 3 non-resident individuals and 1 resident individual, formed under the laws of that state expressly to purchase the issue
C A corporation with its principal place of business in the state that conducts limited business in other states
D A trust formed under the laws of the state whose trustee is a resident of the state where the securities are offered
B.
All purchasers of Rule 147 (intrastate) offerings must be residents of that state. An individual is resident if his permanent residence is in that state if his or her primary residence is in that state. A legally formed entity, such as a corporation, partnership, or trust is a resident if its principal place of business is in that state.
A partnership formed in that state expressly to purchase the issue, that is not composed 100% of state residents, does not qualify as a “resident.” Otherwise, it would be very easy to circumvent the residency requirement by forming partnerships in that state composed of out-of-state residents to buy the issue.
Portfolio margining is NOT available for: A Listed common stocks B Listed bonds C Listed options D Unlisted derivatives
B.
Portfolio margin, which is risk-based as opposed to strategy-based, reduces margins for hedged stock positions and hedged stock portfolios. To hedge stock positions, both listed options and unlisted derivatives may be used.
Portfolio margins cannot be used for bond positions. This is the case because they already have very low margins (for example, the margin on corporate bonds is the greater of 7% of face or 20% of market value).
