Incorrect Test Questions Part 7

Question 1

The Nasdaq Market Center TotalView order display and execution system shows the aggregate size attached to how many of the best bids and asks?

Answer 1

Five

The Nasdaq Market Center TotalView shows the aggregate size of the top five bid and ask price levels for each security. These levels include the highest bid and lowest ask price (the inside market), and the four best price levels beneath each bid and ask.

Question 2

What’s the lowest price at which an employee of a mutual fund family is permitted to buy shares in that complex’s fund offerings?

Answer 2

Net asset value (NAV)

As a courtesy, many fund families permit employees and their immediate family members to purchase mutual fund shares at net asset value (NAV). Buyers of these shares are still subject to the payment of ongoing fees such as 12b-1 fees.

Question 3

Trading ahead exemptions:

Answer 3

Orders from institutional accounts (RIAs) and other entities with at least $50m

10k+ share orders, unless <$100k.

Both exemptions require proper disclosure, client still has to opt in and agree. They are not required to agree.

Question 4

SEC Rule 611 or Trade-Through Rule, what is it?

If the order is executed through an automatic execution system by Market Center A at 30.25 when the inside market is 30.26 - 30.35…

Answer 4

A trade-through occurs when an order is filled at a price that is inferior to a protected quote (the sell order is filled at 30.25 instead of 30.26). Any quotation that is immediately accessible through an automated execution system is a protected quote. Market Center A has a best-execution requirement to send the order to the market center that has the better price, in this case, 30.26.

Question 5

Rule 101 of Regulation M

Answer 5

BD cannot solicit orders whether acting in agency or dealer capacity.

Unsolicited orders are okay

Must notify FINRA if it changes its market-maker status

Question 6

Each member firm is required to identify to FINRA on Form BD which of the following names?

Answer 6

The name(s) of each principal that serves as a chief compliance officer

This is one of the requirements of FINRA Rule 3130, the annual certification of compliance and supervisory processes

Question 7

A market maker is required to apply to Nasdaq Market Operations for excused withdrawal status and may do so under the following circumstances.

Answer 7

An excused withdrawal for up to five business days may be granted for circumstances beyond the market maker’s control (such as damage from a severe storm or a sudden illness)

Withdrawals of up to 60 days may be granted for legal or regulatory reasons, if supporting documentation is provided and the condition is not permanent in nature.

Excused withdrawal status for religious holidays may be granted, but application must be made one business day in advance and must be approved by FINRA.

Small firms (defined as market makers with three or fewer Level 3 terminals) may have difficulty because of vacations by key personnel.

If a firm fails to maintain a clearing relationship with a registered clearing agency or a member of a clearing agency (and is thereby not participating in the TRF), it may reenter quotes after reestablishing a clearing relationship. However, if the market maker’s failure to maintain a clearing relationship is voluntary, its withdrawal is considered voluntary, not excused.

Excused withdrawals will NOT be granted because of pending news about an issuer or because of price changes or a sudden influx of orders.

Question 8

Broker-Dealer A purchased 50,000 shares of stock for a customer and the trade was reported to the TRF. The customer had instructed Broker-Dealer A to allocate 20,000 shares to the customer’s account at Broker-Dealer B. Which of the following agreements/reports could be used to accomplish this request?

Answer 8

A step-out is a method used by broker-dealers that have previously executed a transaction to allocate all or part of the transaction to another broker-dealer for clearing purposes. Broker-Dealer A may step out of 20,000 shares by submitting a clearing-only report to the TRF. This function is used to transfer the customer’s position, but it is not used to report the trade

Question 9

If a member firm is participating in a distribution of a public offering of its own securities, or of a firm that controls the member firm, certain conditions must be met.

Answer 9

A qualified independent underwriter must participate in the preparation of the offering documents (registration statement), and any conflicts of interest must be prominently disclosed in the prospectus.

A qualified independent underwriter must have served as a manager or co-manager in at least three previous public offerings of a similar size and type during the three-year period preceding filing of the registration statement.

Question 10

A company is planning to issue securities under a Rule 506 Regulation D offering

Answer 10

They may only be sold under an exemption provided by the Act or, once the securities become registered.

The issuer is required to place a legend on the certificates which indicates that the securities are unregistered and must obtain a written statement from purchasers that they will sell the securities only if they’re registered or sold under an exemption

The issuer must also issue stop transfer instructions to the transfer agent to ensure that no illegal sale occurs.

there’s a limit of 35 non-accredited investors who may participate in the offering, although, unlimited accredited investors

Question 11

A client has established a DVP account at ABC Brokerage. What would NOT be found on this client’s account statement?

Answer 11

A closing balance, any statements generated by the brokerage firm will not have closing positions or balances since all securities are shipped directly to the client’s bank for payment (COD).

Debits and credits will be posted in the account as well as details regarding trades such as prices and commissions.

Generally, the name, address and phone number of a broker-dealer is found on a client statement

Question 12

Can Market Makers agree to execute a block trade before the open?

Answer 12

Dealers may negotiate to trade at prices away from the inside market. Often a seller with a large block will be willing to accept a negotiated price below the current market price since open market sales would likely drive the bid down anyway.

Market makers are permitted to coordinate efforts when buying a big block of stock. This practice often occurs at times outside the normal business hours of 9:30 a.m. to 4:00 p.m.

Question 13

In what capacity does a member firm report after conducting a net basis transaction?

Answer 13

Principal

In a net basis transaction, a dealer holding a customer order to buy, acquires the stock on a principal basis, and executes the customer order at a different price than the dealer’s acquisition price. Since the two legs of a net basis transaction are at different prices, the market maker will report both sides of the transaction as principal.

Question 14

There are three instances in which a broker-dealer may use borrowed securities to make delivery. These instances include times during which

Answer 14

That broker-dealer is lending a security to another broker or dealer

That broker-dealer knows or has been led to believe that the seller owns the security being sold and will deliver the security by the scheduled settlement date, but the seller fails to deliver

Before a loan arrangement for a security to make delivery or before a fail to deliver, an exchange or a securities association discovers that the sale originated from a good-faith mistake, although the broker-dealer used due diligence regarding the sale, and the requirement of a buy-in would create an undue hardship, or the sale had been effected at an unacceptable price

In instances where a broker-dealer knows or has been led to believe that the seller owns the security being sold and will deliver the security by the scheduled settlement date, but the seller fails to deliver, the broker-dealer must borrow securities or close out the short position by buying securities of a like kind and quantity.

Question 15

Under SEC Rule 606, a broker-dealer that routes directed and nondirected order flow to Nasdaq:

Answer 15

Must report nondirected order flow only.

SEC Rule 606 requires broker-dealers to disclose quarterly, nondirected order flow sent to market centers.

Question 16

In a give-up relationship:

Answer 16

The introducing firm will provide the contra broker with the clearing firm’s DTCC information.

In a standard give-up relationship, one broker-dealer will report and lock in a trade on behalf of another broker-dealer. To enable this to occur, a written agreement must exist between the two broker-dealers.

Question 17

Step out relationship:

Answer 17

A broker-dealer who previously reported a trade allocates part of the trade to another broker-dealer

Question 18

For any customer who purchases or owns an unlisted or non-traded REIT, a broker-dealer is required to disclose on the customer’s account statement the REIT’s estimated value using one of the following two methods:

Answer 18

Net Investment: At any time before 150 days following the second anniversary of breaking escrow, a firm may include a per share estimated value reflecting the net investment disclosed in the issuer’s most recent periodic or current report.

Appraised Value: Firms may use an estimated value based on the assets and liabilities of the REIT or DPP that’s performed at least annually, conducted by a third-party expert or service, and derived from a methodology that conforms to standard industry practice.

Question 19

Providing software for accounting services for soft dollar arrangements?

Answer 19

A soft-dollar arrangement is a practice in which an investment adviser pays for research or other services from a broker-dealer with commission dollars rather than buying these services separately. Providing software for accounting services would not assist the client in making an investment decision.

Question 20

Define an at-the-market offering

Answer 20

An at-the-market offering permits a company to raise capital and issue shares over a period of time rather than all at once.

This method of raising capital provides flexibility to the issuer when selling its shares, since it not limited to selling the securities at one time, as is the case in a registered secondary (follow-on) offering.

An at-the-market offering is a registered issue of a publicly traded company. It may only be conducted by a company that is eligible to use Form S-3 or F-3, and sold pursuant to a shelf registration.

Question 21

Filing a U5:

Answer 21

Each associated person’s employment application (i.e., Form U4) and termination notice (i.e., Form U5) must be retained for three years after termination of employment.

Form U5 must contain the reason(s) for the individual leaving the firm and a copy must be provided to the individual within 30 days of the termination date.

The firm must also file updates if answers to certain disciplinary questions involving the individual change within 30 days of discovering the change.

Question 22

If the buying broker-dealer fails to pay for securities that have been delivered by settlement date:

Answer 22

The selling broker-dealer may without notice initiate a sell-out immediately

and to charge the buying broker-dealer with any loss incurred

This is known as a sell-out and the broker-dealer that does the sell-out must notify the other broker-dealer of such action on the same day

Question 23

Underwriters is a generic term that applies to all _________________. They may also be called “members” of the syndicate as well. The managing underwriter(s) are the ____ underwriter that initially signed the issuer as a client. It is the _________ that makes the decision to share the business and form an underwriting syndicate verses simply conducting the issue by themselves taking all of the risk.

Answer 23

members of an underwriting syndicate.

lead

managing underwriter

Question 24

A Nasdaq market maker that withdraws its quotes for a specific stock from Nasdaq on an unexcused basis is:

Answer 24

Prohibited from reregistering as a market maker in that stock for 20 business days

This penalty regarding one security does not affect the market maker’s status regarding other Nasdaq securities

Question 25

A client has a pattern of making dozens of small cash deposits and withdrawals each month. These activities may be evidence of:

Answer 25

Structuring

Structuring is a technique that money launderers commonly use to avoid federal reporting requirements. Large transactions are broken into smaller ones (usually under $10,000) in order to evade the reporting and record-keeping requirements of the Bank Secrecy Act (BSA)

Question 26

The term investment letter is associated with a:

Answer 26

Regulation D offering

Investors who purchase securities in a private placement that’s conducted under Regulation D sign an investment letter which acknowledges that they understand the securities are unregistered and cannot be resold unless they’re registered under the Securities Act of 1933 or sold under an exemption.

Question 27

The Customer Order Protection Rules requires firms to:

Answer 27

Protect customer orders in the pre-market

Immediately generally means within 60 seconds of the execution for the firm’s account.

Of course, non-marketable limit orders (those buy orders below the market or sell orders above the market) are not required to be filled by the firm. Manning obligations apply to both pre-market and after-market orders

Question 28

A registered representative (RR) sent promotional material to 20 prospective retail clients using a social media site. Then, 20 days later, the RR sends the same material to 30 institutional investors that are not existing clients of the broker-dealer. Under FINRA rules, the promotional material is:

Answer 28

Correspondence

Since the RR only sent the communication to 20 retail investors, it’s considered correspondence.

Question 29

A broker-dealer is permitted to enter into temporary subordination agreements for purposes of engaging in underwriting activities if the duration of the agreement does NOT exceed:

Answer 29

45 days

Subordination agreements must have a duration of one year. There is, however, an exception to this requirement. A broker-dealer is allowed to enter into a temporary subordination agreement for purposes of engaging in underwriting activities. Temporary subordination agreements may not exceed 45 days in duration.

Question 30

If a registered person’s spouse is engaged in outside business activities (employed by another broker-dealer), the person is ______ to notify her employing firm.

Answer 30

not required

Question 31

Any security that’s listed on Nasdaq or another national exchange is _________ from the definition of a penny stock regardless of the price at which it’s being quoted. For OTC equities, if the BID price is _______, the security is not defined as a penny stock. (11771)

Answer 31

exempt

$5.00 or higher

Question 32

Securities that are registered in the name of a customer are _________ by SIPC when they’re held by the customer.

For the purposes of SIPC coverage, it’s important to note that a money-market mutual fund is considered a security and not cash.

Answer 32

not protected

Question 33

The BOD of a listed issuer is considering taking the company private.

Answer 33

Schedule 13 E-3 must be filed with the SEC.

Going private, allows management to maintain control, company can repurchase shares through a tender offer.

Must go below threshold of 300 shareholders for SEC

Needs to file 14a proxy statement with the SEC

Question 34

The legal fees attributable to the syndicate are considered ____________ if they were charged to the issuer.

Answer 34

underwriting compensation

Question 35

A corporation is organized in Delaware, but the company’s managers control and coordinate all of the corporate activities from North Carolina. Which of the following statements is TRUE regarding the corporation’s ability to raise capital without registering its securities with the SEC?

Answer 35

Its offers may be made to residents of any state, but sales may be made only to residents of North Carolina.

Under Rule 147 and Rule 147A, if a company is conducting an offering and selling its securities only to its state residents, the offering is exempt from registration. Rule 147A allows for multi-state offers (not sales), which means that issuers are permitted to use general solicitation and publicly available websites to locate potential in-state investors. Although offers are able to be made outside of the state, all sales must still be limited to in-state residents.

Question 36

Under Regulation SHO, if a broker-dealer has a fail to deliver position at a clearing firm in a threshold security for a continuous period of _______, it must close out the fail to deliver ________ by purchasing securities of a like kind and quantity.

Answer 36

13 settlement days

immediately

Question 37

In order to qualify for the block-size order exception to the SEC’s Limit Order Display Rule, the order must be for at least:

Block orders under the Customer Limit Order Protection Rule are defined as

Answer 37

10,000 shares or have a value of at least $200,000

orders of at 10,000 shares or more and a value of at least $100,000

Question 38

Engaging in a firm-commitment underwriting. In a firm-commitment offer, funds move directly:

In all best-efforts offerings (including an all-or-none and a mini-maxi), underwritings may be cancelled ______

Answer 38

from the syndicate to the issuer.

When an underwriting syndicate is committing its own capital and agrees to purchase the entire issue and absorb any securities that are not sold

if a certain amount of the issue is not sold. Therefore, under SEC Rule 15c2-4, client funds must be placed in an escrow account in the event that the contingencies outlined in the offering document are not satisfied.

Question 39

The federal securities laws allow the SEC to suspend trading in any stock for up to ______ days and to close an exchange for up to ____ days

Answer 39

10 business days

90 calendar days

Question 40

Regulation M of the Securities Exchange Act of 1934 restricts transactions by underwriters and issuers in the period leading up to, and during, the distribution of a new issue of equity securities. Issuers and selling stockholders can_______ of their company’s common stock in the open market while they’re in the process of selling shares. In this case, the order cannot be accepted.

Answer 40

cannot buy shares of their company’s stock in the open market

Question 41

The corporation’s bonds have received an investment-grade rating from one rating organization and a non-investment-grade rating from another rating organization. These bonds are described as:

Answer 41

Split-rated

Securities that are given an investment-grade rating from one NRSRO (nationally recognized statistical ratings organization) and a non-investment-grade rating from another NRSRO are referred to as split-rated

Question 42

A trade executed by a broker-dealer at 3:55 p.m. must be reported to the ADF:

Answer 42

Member firms must report to the ADF as soon as practicable but no later than 10 seconds after execution, last sale reports of transactions in ADF-eligible securities executed between 9:30 a.m. and 4:00 p.m. Eastern Time. The ADF reporting facility is open from 8:00 a.m. until 6:30 p.m.

Question 43

The term pay-as-you-go registration refers to a

Answer 43

well-known seasoned issuer (WKSI) that’s filing a Form S-3 ASR (automatic shelf registration) and then paying the registration fee to the SEC as it sells securities off the shelf.

Only a WKSI is permitted to file an S-3 ASR and use this type of procedure. All of the other issuers are required to pay the SEC filing fee when they file the appropriate form with the SEC.

Question 44

Private REITS and non-traded REITS are _____ and ______to price since they’re not listed on an exchange and ______ throughout the day. Instead, they’re reported on customer account statements at their ______-.

Answer 44

illiquid

difficult

don’t trade

estimated market value

Question 45

Included on a order ticket

Answer 45

RR and client identifiers

Solicited or unsolicited

Do not reduce instructions

Trade date

Account type

Contra-brokers & settlement date are NOT included

Question 46

The overallotment provision of an underwriting agreement often contains a Green Shoe Clause. This clause allows the syndicate to increase the_________ over the original number of shares in the offering, but these additional shares are sold at the____

Answer 46

number of shares by 15%

POP

Question 47

Retail communications that pertain to mutual fund shares must be:

Answer 47

Filed with FINRA within 10 business days of first use

Question 48

A brokerage firm has a marketing agreement with a bank whereby bank personnel obtain Series 7 registrations and engage in securities transactions under the broker-dealer’s supervision. Due to a violation of internal procedures, the broker-dealer has terminated one of the registered representatives who’s employed at the bank and files Form U5 with FINRA. To whom is notification of termination also required?

Answer 48

The bank

SRO rules govern broker-dealer activity on the premises of financial institutions (banks). Under this rule, a member firm must promptly notify the financial institution if an associated person of the member firm who’s employed by the financial institution is terminated for cause by the member. This is in addition to any other required notifications, such as the filing of Form U5 to notify FINRA and any appropriate state securities regulators.

Question 49

The manager of an office of supervisory jurisdiction (OSJ):

Answer 49

Must have a physical office at the OSJ

An OSJ must be supervised by a registered principal. As a general rule, FINRA requires this person to be on-site, and have a physical presence on a regular and routine basis but there is no requirement as to the frequency of the principal’s presence at the OSJ. The OSJ manager may function as a producing registered representative if the firm documents how this person will be properly supervised. Inspection of the OSJ is routinely done by personnel from outside of the location to avoid conflicts. Certain options activates must be approved by a registered options principal (ROP) who may be remote from the OSJ location.