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There are a number of critical details required to appear on order tickets. If the customer’s trade is a result of their agent’s recommendation, then the ticket must be marked as:
New customer or existing customer
Question 1 Explanation:
Agent recommendations are considered solicitations and must be identified as such on order tickets.
On an order ticket, there are occasions where special instructions are associated with the customer’s order, including:
Contingencies such as execute 'at the close'
All of the above
Question 2 Explanation:
When an order is associated with a specific trigger or execution price, or the customer has requested the order be held until the end of the trading day before being executed, these are considered special instructions that an agent must transmit to the order department of the firm to ensure the order is carried out properly.
When a registered representative takes an order in which the customer indicates what stock to buy but suggests the RR decide on the quantity, the RR:
May execute the order for the client with branch manager approval
May execute the order using their best judgment, as requested
May not execute the order in the absence of a properly executed discretionary account agreement on file in the office
May not execute the order until receiving at least a verbal approval from the client for this temporary trading authorization
Question 3 Explanation:
In order to bypass discretionary account/discretionary order requirements, customers are required to provide the following information for each securities order: (1) the identity of the security; (2) whether to buy or sell that security; and (3) the quantity to be bought or sold. The customer in this example has asked the registered representative to decide on the quantity, which cannot be done without a written discretionary authorization form signed by the client and approved by the branch manager on file.
An investor buys ABC common stock at $10 per share on July 25th. 4 months later the stock is trading at $14 per share, and the investor contacts you to discuss selling their position. All of the following statements are true except:
The position is currently showing an unrealized capital gain of $4 per share
If the position is sold, then the client will have a gross realized capital gain of $4 per share (disregarding commissions and potential taxes)
If the position is not sold, then the client is exposed to a complete loss of their original investment of $10 per share
If the position is not sold, then the client is exposed to a complete loss of their original investment of $10 per share plus the $4 gain
Question 4 Explanation:
You can’t lose what you never had. According to the IRS this investor could receive a tax deduction for their $10 per share initial investment, assuming the stock value drops to zero, in a bankruptcy proceeding. However, the $4 ‘gain’ was never theirs; they ‘could’ have turned it into cash by selling when the stock reached $14, at which point they’d have a taxable gain of $4.
Following Question #4, the customer’s per-share cost basis is:
$10 plus any gain realized on the investment
$10 plus the highest unrealized gain on the investment
None of the above
Question 5 Explanation:
The IRS holds that an investor’s cost basis is the original amount of their investment, i.e., how much they have put ‘at risk.’ In this example, the cost basis is $10 per share.
A board of directors declares a 2-for-1 stock split. For a stockholder who already owns 100 shares originally purchased at a price of $150 per share, their new (adjusted) cost basis per share and total number of shares owned will be:
150 shares at $ 100 per share
200 shares at $75 per share
100 shares at $150 per share
300 shares at $50 per share
Question 6 Explanation:
Shares are doubled in 2-for-1 stock splits thus the stockholder in this example, who already owns 100 shares, will have 200 shares after the split. The rules for 2-for-1 splits further require that the new share price be reduced by half to keep the value of each shareholder’s stake the same. $150/2 = a new price of $75 per share.
The terms AML, SAR, FinCEN and OFAC all pertain to which area of the investment industry?
Detection and reporting of various potentially illegal financial activities
Compliance reporting required by one or more SROs
Information requirements at time of a new account opening
Surveillance of activities of foreign account holders with accounts at U.S. brokerage firms
Question 7 Explanation:
Anti-money laundering (AML), suspicious activity report (SAR), Financial Crimes Enforcement Network (FinCEN), Office of Financial Asset Control (OFAC) – these are just some of the many resources available to detect and prevent financial criminal activity.
In order to ensure they meet their obligations to customers, counterparties and other broker-dealers in the event an emergency or other significant business disruption occurs, FINRA member firms are required to create and maintain which of the following?
Business continuity plan
Question 8 Explanation:
FINRA Rule 4370 requires every member firm to have in place a business continuity plan in the event natural or other disasters occur.
The details of each purchase or sale transaction done in a customer’s account is backed up in written form and provided to the customer – at or prior to the settlement of the transaction – as a copy of which of the following?
Executed order ticket
Original unexecuted order ticket along with the execution ticket
Question 9 Explanation:
Every transaction is confirmed in writing through a trade confirmation, to be provided to the customer no later than the trade settlement date.
A customer places an order to go long 100 shares of XYZ on Monday, February 11th and the trade is executed at $42 per share. On Tuesday, before the due date for paying for Monday’s purchase, the customer places an order to sell the 100 shares of XYZ at its current market price of $47. The customer requests that the proceeds from the $47 sale be used to pay for the original purchase and to leave the net profit in their account.
This is not permitted as it represents a violation known as freeriding
This is not permitted as it represents a violation known as front-running
This is permitted only with branch manager approval
This is permitted in the normal course of business
Question 10 Explanation:
Using proceeds from one sale to pay for another is known as ‘freeriding’ and violates a number of regulations, including Regulation T of the Securities & Exchange Act of 1934. This customer has no ownership of these securities that have gone up in value – nor are they entitled to any profits – until they have paid for the securities with cash, not sale proceeds.
11. When a dealer publishes a firm quote for a stock in which it is a market maker, then fails to honor such quote, this represents a violation known as:
Bait and switch
Market makers change their quotes as market conditions require – this is not an unusual practice
Question 11 Explanation:
Providing a firm quote and then failing to honor the quote is a serious regulatory violation known as ‘backing away.’
Under most circumstances, a registered representative wishing to purchase shares of an upcoming IPO:
May do so if their firm is not participating in the syndicate or the group distributing the shares
May not do so but their immediate family members may do so as long as such is consistent with their normal investment practices
May not do so
May do so with branch manager approval
Question 12 Explanation:
With extremely narrow exceptions, all employees of FINRA member broker-dealers are prohibited from purchasing a new issue of an equity security (initial public offering or IPO).
Material nonpublic information may not be used by agents or their customers for trading decisions until or unless:
The information has been made public
The information is filed with the agent's SRO
The information is filed with the SEC
This information may not be used under any circumstances
Question 13 Explanation:
Also known as ‘insider information’, significant (material) information that is not yet available to the general public cannot be taken advantage of by investors until such information has been publicly disseminated, which generally happens through news or press releases – not through regulators.
Soon after a customer has turned over discretionary trading authority to a broker, there is a substantial increase in trading activity, much of which generates commissions with little (if any) improvement in account value. This is likely an example of which violation?
This would not be a violation due to the broker having discretionary trading authority
Question 14 Explanation:
An increase in trading activity in an account could potentially be normal if a client has notified their agent of a desire to change their approach to the market. However, when an account becomes discretionary, this increase is often evidence of the agent seeking to increase their commission income, referred to as ‘churning’ the account through excessive trading.
FINRA member firms may act in an agency capacity, collecting brokerage commissions on each trade they complete for customers. They may also as principals, charging which of the following for trades they make on their own behalf?
Mark-ups (or Mark-downs)
Question 15 Explanation:
When acting as a principal/dealer in a trade with a customer, the firm is selling to the customer from their own inventory of securities and as such will add a mark-up to the transaction. In contract, they charge mark-downs when buying from customers. Commissions are the compensation a firm receives when acting solely as an intermediary between a buying customer and a selling customer, acting in an ‘agency’ capacity.
On April 1, the board of directors of XYZ Company declares a cash dividend payable to its shareholders on May 15. Shareholders of record on the company's books on or before April 30 are entitled to the dividend and the stock will go ex-dividend on April 29. A prospective investor would need to purchase shares of XYZ Company before which date in order to be eligible for the dividend?
Question 16 Explanation:
In order to receive the next scheduled dividend, shareholders must own the stock before the ex-dividend date (April 29). If the stock is purchased on or after the ex-dividend date then the seller of the stock gets to keep the dividend.
All of the following retirement accounts have required minimum distributions for the original account owner except:
Employee Stock Ownership Plan (ESOP)
Question 17 Explanation:
Most retirement plans come with required minimum distributions, meaning account owners must start withdrawing annual minimum amounts from their accounts when they reach a predetermined age. Unlike traditional IRAs, however, required minimum distributions are not required for Roth IRAs if the individual is the original account owner.
An investor makes a public offer to ABC Company’s shareholders to buy all of their shares at $230 per share. The stock of ABC Company is currently trading at $220. This would be described as which of the following corporate actions?
Question 18 Explanation:
A tender offer is one way to acquire a company and is achieved by an investor (commonly referred to as an acquirer) making a public offer directly to a target company’s shareholders to buy some or all of their shares, often at a price higher than the current market price.
A customer deposits $12,500 in cash with their bank. The bank is required to file which of the following with FinCEN?
Suspicious Activity Report (SAR)
The customer’s account statements
Currency Transaction Report (CTR)
Question 19 Explanation:
Financial institutions — such as banks — are required to file a currency transaction report (CTR) with FinCEN whenever a customer completes a transaction (deposit, withdrawal, or other payment or transfer) in currency of more than $10,000.
FINRA Rule 2111 describes the suitability obligations of broker-dealers and their associated persons, including:
All of the above
Question 20 Explanation:
Broker-dealers and associated persons are required by FINRA Rule 2111 to have a reasonable basis to believe a recommended securities transaction (or investment strategy involving securities) is suitable for the customer. The three main suitability obligations of Rule 2111 are reasonable-basis suitability, customer-specific suitability, and quantitative suitability.
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