UNIT 18 CHECKPOINT EXAM Flashcards
A customer is long 400 shares of BuyStuff Inc., a big-box retailer. He borrows 400 shares to sell while maintaining his long position. This sale is called
A) a closing transaction.
B) short against the box.
C) an effective tax strategy.
D) short against the long.
B) short against the box.
Explanation
This is called a short against the box. It was a popular way of locking in a capital gain and deferring the tax consequences into another year. However, this practice was restricted by the Tax Relief Act of 1997; it was so restricted that it has largely disappeared as a practice.
Two months ago your customer sold short 200 shares of Seabird Airlines at $15 a share. Today, the stock is trading at $10 a share. In order to close out the position your customer would
A) buy 200 shares of Seabird.
B) buy Seabird calls.
C) realize a $5 a share loss.
D) borrow 200 shares of Seabird.
A) buy 200 shares of Seabird.
Explanation
A customer would need to buy the shares in order to close this short position. Borrowing the shares does not close the short, nor does buying the call. They could buy the call and then exercise, but the buy, alone, does not close the position. If they closed the position at $10 they would have a gain.
Rep. Pete receives a call from his client, Neil, to place a trade. He wants to buy 200 shares of the Starshine Entertainment Company. Pete asks Neil a few questions about the trade before placing it. This is
A) a solicited trade
B) an unclassified trade
C) a discretionary trade
D) an unsolicited trade
D) an unsolicited trade
Explanation
As the representative did not introduce the trade to the customer this is an unsolicited trade. The customer provide the three key elements of the order (Action, Asset, Amount) it is not a discretionary trade.
Your customer purchased 300 shares of XYZ stocks six months ago and sold the shares last week. The actions your customer took in relation to XYZ were to
A) buy long and sell short.
B) buy long and sell long.
C) buy short and sell long.
D) buy short and sell short.
B) buy long and sell long.
Explanation
The purchase of the stock is a long buy. The subsequent sale of the long position is a long sale.
Before executing a short sale the broker-dealer must first
A) do all of these.
B) have the customer deposit funds sufficient the cover the potential loss.
C) check to see if the customer already owns the shares.
D) locate the shares to be borrowed.
D) locate the shares to be borrowed.
Explanation
The locate requirement mandates that the broker-dealer have located the share to be borrowed before the order is executed. If the customer already owns the shares then this would be a short against the box, and still requires the broker-dealer locate the shares. As this is an unlimited risk position it would be impossible to deposit sufficient funds to cover the potential loss.
Who must grant permission for a representative to have discretionary trading authority on an account?
A) The customer, the principal, and the representative
B) The customer and a principal of the broker-dealer
C) The representative and a principal
D) The customer and the representative
B) The customer and a principal of the broker-dealer
Explanation
Authorization for discretionary trading must come from both the customer and the firm (represented by a principal). The representative’s authorization is not a requirement.
Your client, Bill Hearst, inherited several thousand shares of his grandfather’s auto parts manufacturer, National Autoparts. He sells a portion of the position in order to raise some cash to buy a new boat. Which of these is true?
I. This is a secondary market transaction.
II. This is a primary market transaction.
III. This is a long sale of the stock.
IV. This is a short sale of the stock (he never purchased it).
A) II and III
B) II and IV
C) I and III
D) I and IV
C) I and III
I. This is a secondary market transaction.
III. This is a long sale of the stock.
Explanation
The issuer has no part of this transaction; it is considered a secondary market transaction. It does not matter that Bill did not buy the shares; it matters that he owned them. This is a long sale.
Two weeks ago representative Pete introduced his customer Neil to the Windmill Growth Fund in response to Neil’s interest in growth funds. Today the customer calls Pete to place a trade to invest $10,000 in the Windmill Growth Fund. This is
A) a solicited trade
B) an unclassified trade
C) a discretionary trade
D) an unsolicited trade
A) a solicited trade
Explanation
As the representative introduced the security to the customer, this is a solicited trade. The customer provided the three key elements of the order (action, asset, amount) it is not a discretionary trade.
A customer has an account with a broker-dealer who provides a group of services, such as asset allocation, portfolio management, trade executions, and administration, for a single fee. This is known as a
A) margin account.
B) discretionary account.
C) commission-based account.
D) wrap account.
D) wrap account.
Explanation
Wrap accounts are accounts for which firms provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee rather than charging commissions for individual transactions. Wrap accounts are generally investment advisory accounts and can be cash accounts, margin accounts, discretionary accounts, or nondiscretionary accounts.
A registered representative placing trades in a customer account must have discretionary authority if they choose which of the following aspects of the trade?
A) The action to be taken and the asset to be traded.
B) The asset to be traded and the amount of the trade.
C) The action to be taken, the asset to be traded, and the amount of the trade.
D) The action to be taken, the asset to be traded, or the amount of the trade
D) The action to be taken, the asset to be traded, or the amount of the trade
Explanation
In order for a trade to be considered discretionary the representative needs to choose any one or more of the three aspects of the trade (asset, action, or amount). It does not require more than one aspect, so the best response to the question is Action, Asset, or Amount. Any response that includes “and” suggests more than one of the “A”s needs to be controlled and is not accurate.
