SIE Practice Exam 3

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

The FINRA markup markdown and commission policy does not apply to new issues as well as municipal bonds — MSRB has its own such policy.

A written allegation: this is formally known as a complaint.

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.

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.

The healthcare industry is considered a recession-proof (i.e. defensive) sector because it remains constant regardless of the ups and downs of the economy.

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.

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.

CCO = Chief Compliance Officer.

The terms ‘clearing’ and ‘carrying’ have to do with a brokerage firm’s performance of certain functions most other firms are not permitted to do, such as have physical possession and custody of customers’ cash and securities.

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

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.

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.

Answer A is accurate — short call means writing a call, which puts the investor in an obligated position to sell 100 shares of the stock at the exercise price if exercised….. assuming it’s an equity option.

This SIE exam enables the candidate to take one of several different FINRA registered reps exam.

In a short margin account, a customer must deposit $2,000 even if the full value of the transaction is less than $2,000. This is a FINRA rule separate from the Federal Reserve Board’s Regulation T.

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.

Monthly or quarterly, depending on whether there has been any securities activity in the account.

Short options positions have obligations that must be performed if the holder exercises the contract. Put writers have the obligation to buy stock at exercise when the put holders exercise the right to sell at the strike price.

The order of liquidation in a limited partnership is secured bondholder, unsecured bondholder, limited partner, and lastly general partner.

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.

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

Variable annuities sell ‘accumulation units’ to purchasers, whose price each day is based upon the 4 pm net asset value of the separate account.

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.

What do many homeowners do when interest rates decline? They refinance their mortgage at the lower interest rate. This means the high-interest mortgages in the portfolio of the mortgage-backed product will vanish…..one term used to describe the risk of this occurring is prepayment risk.

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.

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.

When an investor buys a call to protect a short stock position, the investor will breakeven when the stock price is equal to the price at which the stock was sold short minus the call premium paid. 61 – 1.50 = $59.50. The investor is bearish and will make money only when the short position can be covered at a price below this point because of the premium that was paid for the call.

A customer can open a joint account with their registered rep. In that event, sharing in the performance of the account is permitted, in proportion to the contribution made by each party.

You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account when you reach age 72. Roth IRAs do not require withdrawals until after the death of the owner.

This is the framework behind Keynesian economic theory, founded by John Maynard Keynes in the 1930’s.

Interest income received by holders of municipal bonds is generally exempt from federal income tax and from state and local income taxes for residents of the state in which debt is issued.

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

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.

Going public means sharing equity ownership (common stock) with public investors, for the first time (Initial public offering, IPO).

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.

Shorting an option contract is doing an opening sale transaction, which is writing an option contract, generating premium income.

TIC, tenants in common, holds that each co-tenant in the account will have their % share of the account go to their estate upon death. In joint tenancy with rights of survivorship (JTWROS), the survivor receives the share of the other co-tenant upon death.

A client who owns stock is exposed to 100% loss of invested principal, unless the client engages is one of a number of strategies designed to mitigate/reduce the risk of loss. One such strategy is the sell stop order, in which the client picks a price at which he or she will exit/liquidate their stock position if the stock falls to that price level, ‘stopping’ the loss from getting any worse.

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