section 1 of exam

Question 1

What securities are exempt from registration?

Answer 1

gov/muni bonds
commercial paper
banker’s acceptances
bank issues
non-profit and small business issues

Question 2

What are different types of underwriting?

Answer 2

Firm commitment: syndicate absorbs losses
Best Efforts: unsold shares returned to issuer
All or None: offering is cancelled if all shares are not sold
Mini-Maxi: offering cancelled if minimum is not sold
Standby: Syndicate buys shares not purchased

Question 3

What is Reg A and what are the different requirements to qualify for Tier 1 and 2?

Answer 3

Tier 2: max offering of $75m over 12 mo with no more than $22.5m offered by selling shareholders

Question 4

What is a stabilization bid and how many are allowed?

Answer 4

supports a new issue’s price and keeps it from falling, one stabilization bid is allowed.
Only form of price manipulation that is allowed by the SEC

Question 5

What are the three main obligations in FINRA’s suitability rule?

Answer 5

reasonable basis
customer-specific
quantitative

Question 6

When should a CTR be filed?

Answer 6

whenever cash deposits exceed $10k (even when SAR is also filed)

Question 7

What is ERISA?

Answer 7

prohibits aggressive derivative strategies, but conservative options strategies are permissible

Question 8

What is a day trade, and who is considered a pattern day trader?

Answer 8

-purchase and sale of the same security on the same day in a margin account not permitted in cash accounts
-any customer executing 4 or more day trades over a 5 business day period

Question 9

What is the UPIA?

Answer 9

Uniform Prudent Investor Act
-acknowledges that there are no categorical restrictions
-identifies investors’ objectives to diversify portfolios
-indicates that a custodian can authorize discretion to a third party

Question 10

When is a registered rep NOT required to notify the member firm when opening an account at another firm?

Answer 10

do not obtain written consent from employing firm/notification of employment if transactions only involve:
-registered investment company securities (mutual fund shares)
-variable contracts (variable annuities)
-UITs
-municipal fund securities (529s)

Question 11

What is communication vs correspondence?

Answer 11

-retail communications are available to 25 retail clients over a 30 day period
-approval not required unless a recommendation is made
-institutional communications are only with institutional investors (no approval required)
-correspondence is messages available to 25 or fewer retail clients over 30 day period

Question 12

What is a CMO?

Answer 12

Collateralized mortgage obligation
-multi-class debt instruments backed by a pool of mortgage-related securities

Question 13

When can a report be published after an IPO and follow on offering?

Answer 13

-10 calendar days after IPO
-3 days after follow on only for manager and co-manager

Question 14

When does retail communication need to be filed with FINRA?

Answer 14

-new brokerage firm must file 10 days prior to use for the first year
-communication making recommendations/promotes product or service
-DPPS, CMOs, investment companies (variable insurance, mutual funds, closed-end funds, UITs, ETFs

Question 14

hypotheticals of variable life insurance policies must follow these guidelines:

Answer 14

-assumed rate of return cannot exceed 12%
-one of the assumed rates of return must be 0%
-assumed rates must be reasonable based on current market conditions
-statement explaining that results are not predicted

Question 15

What must an investment company invest in?

Answer 15

a company with a name that suggests an emphasis (eg stock fund) must invest at least 80% of assets in the type of security indicated by its name

Question 16

What is the wash sale rule?

Answer 16

if an investor sells a security for a loss and makes another purchase of substantially the same security, the loss will be disallowed for taxes

Question 17

What is a bond’s basis?

Answer 17

YTM, will be earned if an investor holds the bond to maturity

Question 18

What is the dated date of a bond?

Answer 18

interest begins to accrue for a new bond, like it’s date of birth

Question 19

For callable bonds, what yield is included on the trade confirmation?

Answer 19

YTM or YTC, whichever is lower
-if bonds are trading at a discount, YTM will be lower
-if bonds are trading at a premium, YTC is lower

Question 20

What is the order of liquidation

Answer 20

secured creditors (equipment trust certificate holders)
unsecured creditors (debenture holders)
preferred stockholders
common stock holders

Question 21

If there is a stock split or dividend and the shares have a non-dilutive feature, what happens to conversion ratio and price?

Answer 21

conversion features are adjusted
-%x old ratio=new shares+old ratio=new ratio
- 1000 par/new conversion ratio=new price

Question 22

What is the difference between BAs and ADRs?

Answer 22

BAs help facilitate foreign trade by financing trade between importers and exporters
ADRs permit trading of foreign stocks in the US

Question 23

What are Eurodollars?

Answer 23

US dollars on deposit in all foreign banks
principal and interest paid in USD, issued outside of the US

Question 24

What are reverse convertible securities, and who are they suitable for?

Answer 24

-short-term notes that pay a coupon above market rates, considered structured products since investor may be required to purchase shares of underlying asset
-issuer pays higher coupon since they have option to sell security if price falls below the knock-in level
-suitable for those desiring higher yield and anticipating the underlying asset to remain stable, or increase

Question 25

What is the difference between Moral Obligation and Double-Barreled bonds?

Answer 25

Moral Obligation are payable by the state if revenues fail to satisfy debt service payment (must be approved by state legislature
-double barreled bonds are general obligation bonds backed by faith and credit of issuing muni

Question 26

What is an auction rate security, and what happens if an auction fails?

Answer 26

-If there are not enough bids to cover the amount being sold, holders keep the securities and interest rate will be set to the max rate allowed in program documents

Question 27

What is a flow of funds provision?

Answer 27

how funds backing a muni revenue bond will be applied
-school district bonds are GO bonds, do not have a flow of funds provision

Question 28

When do treasury notes and bonds pay interest?

Answer 28

semiannually and at maturity, repayment of par at maturity

Question 29

When soliciting mutual fund transactions, when must a BD provide the prospectus to an investor

Answer 29

at or prior to solicitation

Question 30

What is Subchapter M?

Answer 30

-regulated investment company
-must distribute min 90% of net investment income to shareholders

Question 31

What is a UIT?

Answer 31

no management fees, low sales charges, fixed portfolios of muni or corporate bonds

Question 32

What are the differences between closed and open ended investment companies?

Question 33

What is Switching?

Answer 33

the sale of one mutual fund followed by reinvestment of proceeds in another mutual fund