Test 3 Flashcards
If a customer sells short a security that is on the “threshold list” and the member firm fails to deliver the security on settlement, the:
A. customer’s account will be frozen for 90 days
B. security must be bought-in 10 business days from settlement
C. customer’s account must be restricted under Regulation T
D. customer’s margin requirement will be increased from 50% to 100% of the sale amount
The best answer is B.
Regulation SHO requires that if a security that is on the exchange’s “threshold list” (list of hard-to-borrow securities) is sold short and the seller fails to deliver on settlement, then the member firm must buy-in the position no later than 10 business days after settlement. Note that Regulation SHO states that this mandatory buy-in must occur within “13 settlement days,” because Regulation SHO counts from trade date, not from settlement date (T + 3 = regular way settlement + 10 for mandatory buy-in = 13 settlement days.)
Stockholder approval is needed if a corporation wishes to do all of the following EXCEPT:
A. split its stock 1 for 2
B. split its stock 2 for 1
C. repurchase shares for Treasury
D. issue convertible securities
The best answer is C.
Stockholder approval is needed for a stock split, because it changes the par value of the stock. The State in which the company is incorporated typically requires shareholder approval of a par value change. In contrast, dividend decisions, either in cash or stock, do not require shareholder approval because they are “paid” out of retained earnings and do not affect par value per share. They are made solely by the Board of Directors of the company.
Issuance of convertible securities requires shareholder approval because it is potentially “dilutive” (if the securities are converted, there will be more common shares outstanding, and earnings per common share will fall). The repurchase of shares for Treasury will boost earnings per share, because there will be fewer shares outstanding. This boosts the value of the existing common shares, so no shareholder approval is required. This is another decision that is made solely by the Board of Directors.
Which of the following options communications must be approved by the designated Registered Options Principal prior to use?
I Advertising
II Sales literature
III Independently prepared reprints
A. I only
B. I and II
C. II and III
D. I, II, III
The best answer is D.
The options communications that must be approved in writing prior to use by the designated Registered Options Principal (main office compliance ROP) include advertising, sales literature and independently prepared reprints.
Options institutional sales literature and public appearances are the 2 public communications that do not require designated ROP approval. However, they are subject to the firm’s policies and procedures.
Options correspondence is approved by the Branch Office Manager (however, note that correspondence sent to 25 or more customers in a 30 day time period is defined as “sales literature.”).
A registered representative takes an order from a customer to buy 100 shares of PSSS stock at $40 and writes the order ticket for processing. The registered representative fails to include the number of shares to be purchased on the ticket. Which statement is TRUE?
A. The order will be processed for a round lot of 100 shares by default
B. The order will be returned to the representative for entry of the order amount
C. The order will be referred to the member firm’s compliance department for resolution
D. The order will be canceled without any further action taken
The best answer is B.
Incomplete order information on an order ticket will result in the ticket not being processed. It will be returned to the representative for entry of all of the required information.
Which of the following statements are TRUE regarding a life annuity?
I The shorter the expected annuity period, the larger the monthly payment
II The longer the expected annuity period, the larger the monthly payment
III A life annuity usually pays the largest amount of all of the annuity payment options
IV A life annuity usually pays the smallest amount of all of the annuity payment options
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is A.
The shorter the time period to “expected death” when the separate account is annuitized, the larger the monthly payment will be; conversely the longer the time period to “expected death” when the separate account is annuitized, the smaller the monthly payment will be. Regarding annuity payment options, this must be looked at from the standpoint of the insurance company, that has a large pool of annuitants to cover. The insurance company can afford to pay a larger payment to those persons who it expects will be paid for the shortest time period; it will make smaller monthly payments when it expects to pay for a longer time period. A life annuity lasts only for that person’s life - this is the shortest expected period of the annuity payment options. A life annuity with period certain continues to pay for a fixed time period if the person dies early; a joint and last survivor annuity pays a spouse when one person dies; a unit refund annuity pays a lump sum if a person dies early.
Qubes (QQQs) are securities whose value is based upon the securities in the:
A. NASDAQ 100 Index
B. NASDAQ Composite Index
C. Standard and Poor’s 500 Index
D. Russell 2000 Index
The best answer is A.
Qubes (QQQs) are Exchange Traded Funds based on the NASDAQ 100 Index - the 100 largest NASDAQ stocks based on market capitalization. Currently the QQQs trade on the NASDAQ exchange.
Which statements are TRUE about non-managed fee based accounts?
I The customer must be provided with a disclosure document prior to account opening
II The customer must be provided with a disclosure document within 15 business days of account opening
III The account must be reviewed at least annually for its appropriateness as a fee based account
IV The account must be reviewed at least bi-annually for its appropriateness as a fee based account
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is A.
To open a non-managed fee based account (NMFBA) for a customer, a disclosure document must be provided, at, or prior to, account opening. Each account must be reviewed at least annually for its appropriateness for the customer.
Which of the following will cover the sale of a call contract on ABC stock?
A. Depositing cash equal to the current market value of ABC stock
B. Short 100 shares of ABC stock
C. Long 1 ABC Put at a lower strike price
D. Long 1 ABC Call at a lower strike price
The best answer is D.
The usual way that a short call contract (obligation to sell the stock at the strike price if the short call is exercised) is covered is by purchasing or owning the stock. Then, if the short call is exercised, the writer delivers the stock that is owned.
Another way of covering a short call is to buy a call contract on the same stock. To fully cover the sale of the call, the long call must be at the same strike price or lower and must be at the same expiration or later. This question only addresses the fact that the long call must be at the same strike price or lower. That way, if the short call is exercised, the stock can be purchased via the exercise of the long call and delivered with no loss.
Which of the following statements are TRUE regarding REITs?
I The REIT issues common shares representing a proportional interest in the investment company
II The REIT issues shares of beneficial interest representing an undivided interest in a pool of real estate investments
III REITs are similar to open end investment company shares
IV REITs are similar to closed end investment company shares
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is D.
REITs issue shares of beneficial interest with each certificate representing an undivided interest in the pool of real estate investments. Other than this difference, the trust is run in a similar fashion to a corporation. REITs are registered securities under the Securities Act of 1933 and trade on an exchange or OTC. Thus, they are similar to closed-end investment companies under the Investment Company Act of 1940, except that investments are made in real estate and mortgages, instead of in securities.
Which statement is TRUE?
A. AON orders can be executed in part or in full
B. FOK orders can be executed in part or in full
C. AON orders are canceled if the entire order is not executed
D. FOK orders are canceled if the entire order is not executed
The best answer is D.
A “fill or kill” order is to be executed in full or the order is canceled. An “all or none” order is to be executed in full, but if trader can’t fill the order, he is free to attempt execution at a later time. These orders cannot be executed in part.
The essential difference between a sponsored and an unsponsored ADR is:
A. SEC registration
B. Issuer sponsorship
C. Bank sponsorship
D. Broker-dealer market making
The best answer is B.
Sponsored ADRs are sponsored by the issuing foreign corporation. When an ADR is sponsored, the issuer agrees to provide financial statements to the ADR holder in English. The NYSE will only list sponsored ADRs. Unsponsored ADRs are assembled without the participation of the issuer. For example, a bank may assemble an ADR issue consisting of shares of a Japanese computer manufacturer. Since the Japanese firm is not “sponsoring” the ADR, any financial information received about the company will be in Japanese (unless the company also happens to prepare English language reports).
A customer who has a fully paid long position in ABC stock goes “short against the box” for a credit to his account of $50,000. ABC is an NYSE listed stock. The customer can withdraw:
A. $25,000
B. $45,000
C. $47,500
D. $50,000
The best answer is C.
When the customer goes “short against the box,” the net position is “0” (e.g., 1,000 shares long / 1,000 shares short). There is no risk at this point, so Reg. T. does not set an initial margin. However, FINRA sets a minimum maintenance margin of 5% of the long side. 5% of $50,000 of stock is $2,500 minimum margin. Therefore, the customer can withdraw $50,000 credit - $2,500 minimum margin = $47,500 withdrawal amount.
SEC Rule 10b-18 allows an issuer to buy its shares in the open market:
A. at any price that is reasonably related to the current market
B. at the highest independent bid or the last reported sale price, whichever is higher
C. at the lowest independent offer or the last reported sale price, whichever is lower
D. under no circumstances, since this is considered to be market manipulation
The best answer is B.
SEC Rule 10b-18 sets ground rules for issuers or affiliated persons who wish to buy their shares in the open market. If an issuer aggressively buys its stock in the market, or bids for its stock, it can manipulate the market price upwards. Bids and purchases that are made in compliance with Rule 10b-18 will not be considered manipulative activities under Rule 10b-5 (“catch-all” fraud rule). Rule 10b-18 purchases, as they are known:
Must be effected through 1 broker/dealer on any given day;
Cannot be the opening transaction;
Cannot be executed within 10 minutes of market close if the security is “actively traded,” otherwise it cannot be executed within 30 minutes of market close;
Must be effected at prices no higher than the current market;
Cannot exceed 25% of the trading volume in the security that day (except for block purchases handled outside the normal flow of orders).
A registered representative receives an order to sell 100 shares of ABC stock that has been “transferred and shipped” to the customer. Before executing the order, the registered representative must:
I Ascertain the location of the stock
II Ascertain that the securities can be delivered in 3 business days
III Validate that the securities are in “good form”
IV Obtain physical possession of the securities
A. I and II
B. II and III
C. IV only
D. I, II, III, IV
The best answer is A.
FINRA rules require that orders to sell cannot be accepted unless the firm has reasonable assurance that the securities can be delivered in 3 business days. There is no requirement to obtain physical possession of the securities before placing the sell order, nor is there a requirement to validate the securities as “good for delivery.”
For a qualified retirement plan contribution to be deductible from that year’s tax return, the contribution must be made by no later than:
A. April 15th of that year
B. December 31st of that year
C. April 15th of following year
D. the tax filing date of the following year
The best answer is D.
Contributions to qualified retirement plans (other than IRAs) must be made no later than the date the tax return is filed (even if it is filed with an extension). On the other hand, IRA contributions must be made no later than April 15th of the tax year after the year for which the deduction is claimed.
