FINRA-Like SIE Practice Exam and Questions

Each of these when associated with a bond issue makes the bond more attractive from a client’s point of view.

Not only do the past unpaid dividends have to be brought current, but the current year’s dividend must also be paid. Common stock cannot get any dividend payment until the cumulative preferred has been brought completely current. Therefore, a total of $5 is past due covering the shortfall in the prior 2 years, and $5 is due for the current year: $10 must be paid to get current.

The purchase needs to be paid for in a timely way or the law does not consider the purchaser to be the ‘owner’ of the shares and entitled to any profit on them. Regulation T refers to the use of sale proceeds to pay for the purchase as ‘free-riding.’ It is not acceptable.

A Currency Transaction Report (CTR) must be filed with FINCEN within 15 days for any cash deposits in excess of $10,000 in a single day.

Whether one considers answers A, B, or C partially accurate, the last answer, D is the most complete therefore best answer.

REITs can avoid double taxation on profits passed through as dividends to shareholders by concentrating their investments in real estate. At least 75% of total assets must be in real estate, and at least 75% of gross income must be derived from real estate. Also, they must pass through at least 90% of their gains to shareholders.

This is one of the functions of a Transfer Agent. Registrars make sure that a company does not issue more shares than authorized in the Charter.

Remember the acronym D E R P — this is the chronological order of the relevant dates when a cash dividend is declared: declaration date; ex-dividend date; record date; payable date.

For regular way trades in equities, the ex-dividend date is one business days before the record date.

One of the most attractive benefits of a variable annuity is tax-deferred growth during the accumulation period. All dividends, interest, and capital gains earned during the accumulation period may be reinvested tax-free.

As described in the explanation to question #67 above, diversification is an effective way to reduce exposure to business risk.

Rights are short-term instruments that allow a shareholder to purchase the stock below its market price for a period that usually expires after 4-6 weeks. They are issued to existing shareholders in proportion to their ownership interest, so that if exercised, they allow the shareholder to maintain their percentage of ownership, or protect against dilution. Warrants are long term instruments and are often used as sweeteners in corporate bond issues. They do not protect shareholders from dilution.

Investors seeking ‘tax shelter’ or ‘tax advantage’ are often suitable for the flow through benefits of DPPs (direct participation program— limited partnerships).

Since the ‘money market’ includes short term debt instruments only, and since ADRs represent ownership (equity) in foreign stocks, ADRs are not debt.

Regulation D covers Private Placement offerings.

A letter of intent is not an obligation but rather a show on one’s intent to invest an amount equal or more than a mutual fund’s breakpoint level so as to qualify for the reduced sales charge. LOI gives 13 months to do so.

M&A means mergers and acquisitions. This department assists companies in their efforts to buy another company or sell their company to an interested buyer.

All three are correct – in fact, Regular and Statutory are the same.

Cyclical companies tend to follow the business cycle: defensive companies tend to perform in a consistent stable way regardless of the cycle; growth companies are expected to grow faster than the economy in general.

Under a Tenancy in Common (or Joints Tenants in Common account), each owner has a specified percentage of the entire account. At each owner’s death, his/her portion of the account is liquidated and distributed to his/her beneficiary.

Though a very simplistic way of describing Keynesian theory, it focuses on government taxation and spending policies, which are fiscal in nature. Answer A would be more appropriate if we were asking about monetary policies, which would be the work of the Federal Reserve.

The Securities Exchange Act of 1934 created the U.S. Securities and Exchange Commission (SEC) and authorized it to govern the secondary market trading of company securities in the U.S.

Firms must verify customer information at least once every 36 months. The point of this requirement is to ensure that the account is still appropriate and the information on file is still accurate.

Investors make after-tax contributions to 529 Plans. The earnings in the plan grow tax- free and any distributions for qualified educational expenses are tax-free at the federal level. Additionally, registered representatives must disclose that there may be certain tax benefits for opening a plan inside your state of residency, for example, tax deductions off of your state income taxes. Conversely, if an individual invests in a 529 Plan outside of their state, their state of residency might make they pay taxes on the growth of the plan.

The SEC reviews the information in a registration statement, it does not approve or disapprove of the information, nor does it guarantee the accuracy of the information disclosures. Therefore no sales agent can say to a prospect that these are ‘government approved’ securities.

JoeBrokerDealer will be subject to the ban for two years after the contribution was made even if the MFP leaves the firm. JaneBrokerDealer is also subject to the ban for the same period, even though the contribution was made while the MFP was associated with another municipal securities firm.

Investment grade ratings end with the BBB rating. Below that are speculative grade ratings. BB+ would be the higher speculative rating from among these multiple choice answers. Ba1 is a Moody’s rating, not S&P.

The best (inside) bid is the price at which a client’s liquidation (sell) order will be executed.

Short term debt reacts the least in price when rates change.

Under Regulation D, for a married couple to be accredited they must have a net worth, excluding home equity, of $1 million. The income test for married persons is a joint income of $300,000 in each of the two most recent years. This couple meets neither test.

Under monetary policy, an increase to either the reserve requirement or the discount rate will deter lending, which will result in a tightening of the money supply. A decrease in spending by the U.S. government will also reduce the amount of money, but government spending is a tool of fiscal policy. When the Fed purchases securities in the open market more money goes into circulation, so this would ease the money supply.

Passive losses may be used to offset earnings from other passive sources only. They cannot be used to offset investment income or ordinary income.

Occasionally, a client will be told that a trade was done at a transaction price which turns out to be incorrect. This can happen for a number of reasons, usually clerical, not intentional. Federal law and FINRA rules state clearly that the client will be told about the erroneous report, and the transaction will be done at the actual price at which it took place, not at the erroneous price. Since every transaction is a legal contract, the actual price at which the trade was executed is the legally binding price.

Pink sheets: the Pinks: the Pink quotes: All these terms in your textbook speak of thinly traded, closely-held, low daily volume stocks, where liquidity is not especially present when compared to NYSE and NASDAQ stocks.

A firm may hold customer mail upon written request. Mail can be held for up to three months.

Penny stocks are stocks priced below $5 per share that do not trade on an exchange. They are frequently thinly traded, which means that there may be no market for the stock if customers want to liquidate their positions. Because of this market risk additional disclosure must be made to all buyers of penny stock.

Think of a funnel. Big institutional investors are doing many trades every day through numerous broker-dealers with which they have accounts. But all the transactions and the cash and securities clearing and settlement are ‘funneled’ through one firm for accounting simplicity. The prime broker is the bottom part of the funnel.

Pre-emptive Rights entitle a corporate shareholder to purchase shares in an additional share offering at a favorable below market price. Warrants enable the holder of the warrant to buy more shares at an exercise price which when first set, tends to be higher than CMV at that time. Warrants are normally quite long term whereas rights typically expire in 30 days or less. Both are tradable on organized stock exchanges, such as the NYSE.

Each of these answers is a true statement.

Customers that open margin accounts must sign a hypothecation agreement to pledge their securities as collateral for loans from the broker-dealer for margin account purchases. The broker-dealer may then rehypothecate the securities to the bank, meaning that they are pledged to the bank as collateral for loans to the broker-dealer for lending to customers.

Closed-end company shares trade in the secondary market on exchanges. Their prices are determined by market supply and demand and therefore may be priced at a premium or discount to their NAV.

The ‘trick’ with this question is that anytime a company is selling NEW previously unissued shares from their Authorized shares maximum, those shares are NEW —- Primary distribution means the shares being sold are NEW, never before issued, not previously owned by anyone.

An individual who is retired, or in the later stages of life, would not be likely to make an investment that could result in the complete loss of their capital, or one that would require a long-term investment horizon.

Cold calls can be made between 8am and 9pm in the customer’s time zone. Although it is 7:30pm in California, it is actually 10:30pm in New Jersey because of the difference in time zones. Therefore, this call is prohibited.

Trades are to be reported to the appropriate ‘tape’ within 10 seconds of execution of the transaction.

NYSE hours and CBOE hours are the same. 9:30 to 4 ET for the NYSE is the same as 8:30 to 3:00 CT. Make sure you KNOW your time zones!

When an investor shorts/writes/sells a put option, they agree to be OBLIGATED to BUY the underlying instrument at the strike price.

Outside business activity requires the firm to be notified of the full details of the activity. It does not, however, require permission from the firm. Borrowing money from family members does not require permission from a broker dealer.

SIPC was set up to protect customer ACCOUNTS in the event of a broker-dealer bankruptcy, not protect investments against loss. Be careful of the wording in this question. Cash & securities in customer accounts are ‘insured’ up to $500,000 in the event the B/D goes bankrupt and the cash and securities can’t be located and properly returned to the customer.

The term ‘STOCK’ dividend tells you this is a distribution, NOT of cash, but of more shares of STOCK.

Nasdaq is a negotiated market where market-makers negotiate a price with other customers and broker-dealers.

A market order gives the broker instructions to buy or sell a specified quantity of securities immediately, as soon as the order reaches the market. A full execution of the order is assured but the execution price is unknown.

The credit quality of an exchange-traded note is based on the creditworthiness of the issuer, usually an investment bank that structures the note and sets its terms. Importantly, the credit quality is not based on the underlying portfolio for which the performance of the investment is based upon.

Failure to honor a firm quote is called ‘backing away.’

Since with a Zero coupon instrument there is no annual income to ‘reinvest,’ Zeroes have no reinvestment risk.

Statements III and IV are two of the ways to obtain a reduced sales charge (breakpoint). Switching from one fund to another under the same sponsorship(exchange privilege) carries no sales charge at all, so a reduction is irrelevant. Reinvesting distributions is a wonderful practice, and will help reach a breakpoint, but ONLY under the ROA (rights of accumulation) program, not the 13 months LOI approach.

Investors sell their shares at the net asset value price next calculated after the order is received, which is the concept of forward pricing.

There are no federal dollar limits on contributions as long as they do not exceed “the amount necessary to provide for the qualified education expenses of the beneficiary.” Many states do impose dollar limits on total contributions made on behalf of one beneficiary.

Any investor who writes a call or a put option, also known as selling an option, also known as ‘shorting’ an option, is obligated to perform in accordance with the terms of the contract, but only if the option is exercised by the person who had purchased the option, referred to as the holder of the option, or the long option position.

Defensive: stable, utilities, basic food, the basic needs of life, these are NOT growth industries.

Market making firms post firm quotes during the trading day at which they are obligating themselves to do business with other firms as well as retail customers.

An investor must own stock as of the date of record in order to receive a dividend payment. To own stock by the record date, it must be purchased before the ex-dividend date which is 1 business day before the record date. By purchasing before the ex-date, there are two business days for settlement to occur, in accordance with regular way settlement process.

ETFs are not redeemed by the issuer. Instead, investors liquidate shares by selling them on an exchange.

Common stock is purchased by investors for its capital appreciation potential. Historically it has kept pace with the rate of inflation and is used to meet growth objectives. It is most junior in terms of claims to assets in a corporate liquidation, and does not protect investors from investment risk.

The 529 plans are considered by the SEC and FINRA to be municipal fund securities.

A ‘weak’ US dollar makes US goods ‘cheaper’ for foreign buyers to buy, since their currency becomes ‘stronger.’ This leads to an increase in the export of US manufactured goods.

Freeriding is the prohibited practice of entering a trade to buy securities, then selling them the following day without having had sufficient funds in the account to pay for the trade.

Inflation risk is a major concern for investors who hold portfolios of fixed income investments for funding retirement income. As inflation increases, the purchasing power of their fixed coupon will fall.

Roth IRAs are not available to everyone with earned income. Instead, only individuals who earn below a certain threshold can contribute to a Roth. In contrast, any investor with earned income is eligible to invest in a traditional IRA.

8 am to 9 pm in the prospect’s time zone is the law.

The “third market” is where exchange listed securities trade in the OTC market, typically handled by a broker-dealer through its own trading system.

Accrued interest is measured from the last interest payment date (coupon date) up to but not including the settlement date of the trade. Settlement date is not included in these accrued interest computations because legal ownership of the bond changes on settlement date and this is the date from which the new owner of the bond begins earning his own interest.

The term Secondary Offering is used to describe a situation in which already-issued shares are being resold into the marketplace, usually by insiders, officers, and directors of a company. The shares being sold are NOT new shares coming from the company. A follow-on offering, also called an APO (additional public offering) is where a company is issuing and selling more new shares to the public.

Non-systematic risk is business risk — the risk of putting all your eggs in one basket, in one company, in one business sector…..and if that business does badly, you lose. Diversification is a good way of mitigating this risk.

Investors would now be facing reinvestment rate risk, as bonds have been called and it will be difficult to find another investment offering the same return that was available prior to the bond being called.