FINRA SIE — Securities Industry Essentials — All Questions

A non-executive employee of a public company learns on Monday of an unannounced acquisition. On Tuesday she adopts a written Rule 10b5-1 plan to sell shares starting 45 days later. She sells on that date under the plan, and the acquisition is announced two weeks after the sale. Does the plan give her the affirmative defense?

• a.Yes, because the 30-day cooling-off period had passed before the first sale
• b.No, because only directors and officers may use a Rule 10b5-1 plan
• c.Yes, because she is neither a director nor an officer of the company
• d.No, because she adopted the plan after she became aware of the information✓

Rule 10b5-1(c)(1) protects a trade only if, before becoming aware of the information, the person had entered into the binding contract, given the instruction or adopted the written plan. She adopted hers a day after learning of the acquisition, so the defense is unavailable even though she followed the plan. The 30-day cooling-off period that applies to a person who is not an officer or director is an additional condition, not a substitute for adopting the plan before awareness. Non-officers can use such plans, so being an ordinary employee neither removes the awareness test nor bars the defense by itself.Exchange Act Rule 10b5-1(b) and (c)(1)

Several shareholders of a mutual fund registered under the Investment Company Act are employees of broker-dealers. The fund places an order for an initial public offering of common stock with an underwriting member. May the member sell the new issue to the fund?

• a.Yes, but only if restricted persons own no more than 10% of the fund's shares
• b.Yes, because a registered fund is exempt, with an eligibility representation✓
• c.No, because the fund's restricted-person shareholders have a beneficial interest in it
• d.Yes, but only after each shareholder certifies that none is a restricted person

Rule 5130(c)(1) exempts a registered investment company from the general prohibition, so the broker-dealer employees among its shareholders do not bar the sale. The 10% limit belongs to a different exemption, Rule 5130(c)(4), which applies to accounts that do not fit a specific category. The exemption does not remove the precondition in Rule 5130(b): before selling a new issue to any account, the member must in good faith have obtained, within the prior 12 months, a representation that the account is eligible or, for a conduit, that its purchases comply with the rule.FINRA Rule 5130(b) and (c)(1)

A member last sold a new issue to a hedge fund's account on May 4, 2026, and has sold it nothing since. Counting from that sale, what is the earliest date through which the member must keep the records on whether the account was eligible?

• a.May 4, 2028, two years after the last sale
• b.May 4, 2032, six years following the last sale
• c.May 4, 2027, one year after the last sale
• d.May 4, 2029, three years after the last sale✓

Rule 5130(b) requires a member to keep a copy of all records and information on whether an account is eligible to purchase new issues for at least three years following its last sale of a new issue to that account. Three years after May 4, 2026 is May 4, 2029. One and two years fall short of the minimum, and six years is the retention period used by other rules, such as the six-year retention of profit-sharing authorizations after an account closes, not by Rule 5130.FINRA Rule 5130(b)

A representative obtained the written authorizations required to share in the profits and losses of a customer's account, and the account is now closed. How long must the member preserve those authorizations?

• a.Until the date the account is closed and the arrangement ends
• b.At least six years after the date the sharing began
• c.At least three years after the last profit-sharing payment
• d.At least six years after the date the account is closed✓

Rule 2150 Supplementary Material .03 requires a member to preserve the written authorizations, from the employer and from the customer, for at least six years after the date the account is closed. The period runs from closing, not from the start of the arrangement or the last payment, and the authorizations must outlast the account rather than lapse when it closes. The three-year figure belongs to Rule 5130 records, which is a different rule.FINRA Rule 2150(c)(1) and Supplementary Material .03

On Thursday, March 5, 2026, a firm places a temporary hold on a disbursement from the account of a 72-year-old customer because it reasonably believes she is being financially exploited. The week has no holidays. By what date must the firm give notice of the hold and the reason to the parties authorized on the account and the trusted contact person, unless they are unavailable or suspected of the exploitation?

• a.Friday, March 6, one business day after the hold
• b.Monday, March 9, two business days after the hold✓
• c.Saturday, March 7, two calendar days after the hold
• d.Tuesday, March 10, three business days after the hold

Rule 2165(b)(1)(B) requires notice not later than two business days after the member first placed the hold. Counting business days from Thursday, March 5, Friday March 6 is the first and Monday March 9 is the second, because Saturday and Sunday are not business days. Two calendar days would end on a Saturday, Friday is only one business day, and Tuesday adds a third day that the rule does not allow.FINRA Rule 2165(b)(1)(B)

A registered representative retires and leaves the securities industry. Under a written contract entered into in good faith while he was registered with the firm, the firm keeps paying him commissions on accounts of customers he used to serve. The contract bars him from soliciting new business, opening new accounts or servicing those accounts. Is the payment permissible?

• a.Yes, but only for the first year of continuing commissions after he retires
• b.Yes, because it fits the retiring-representative exception to the rule✓
• c.No, because commissions may be paid only to persons currently registered with the firm
• d.Yes, but only if he keeps servicing those accounts for customers after retiring

Rule 2040(b)(1) lets a member pay continuing commissions to a retiring registered representative on accounts of continuing customers, provided a bona fide contract was entered into in good faith while he was registered and it prohibits him from soliciting new business, opening new accounts or servicing the accounts. The arrangement must also comply with the federal securities laws. Servicing the accounts would take the payments outside the exception, and the rule sets no one-year limit. The general ban on paying unregistered persons does not apply to this exception.FINRA Rule 2040(b)(1)

A person who recently left a member firm, and who remains subject to FINRA's jurisdiction, does not respond to a Rule 8210 request for documents and testimony in an investigation. FINRA sent the request to the residential address shown in the CRD and had no knowledge that it was out of date. He says he never saw it. Has he violated Rule 8210?

• a.Yes, but only after FINRA obtains a court order directing him to comply with the request
• b.No, because a request is binding on him only if he signs a receipt for the notice itself
• c.Yes, because the notice is deemed received at his CRD address, and not complying violates the rule✓
• d.No, because Rule 8210 reaches only persons who are currently registered with a member

Rule 8210(d) deems a notice received by a formerly registered person when it is mailed or otherwise transmitted to his last known residential address in the CRD, absent actual knowledge by FINRA staff that the address is out of date. Rule 8210(c) then provides that no member or person shall fail to provide information or testimony or to permit inspection. Not seeing the notice, not signing for it, or not being registered any longer does not excuse him, and nothing in the rule makes compliance depend on a court order.FINRA Rule 8210(c) and (d)

A member's trader phones a customer and urges a purchase of a thinly traded stock by falsely claiming that a large fund will buy the whole float tomorrow. The stock happens to fit the customer's profile. Does the conduct violate FINRA rules?

• a.Yes, because inducing a purchase through deception violates Rule 2020 even for a suitable stock✓
• b.No, because Rule 2020 covers only transactions the member effects for its own account
• c.Yes, but only if the customer actually loses money on the purchase after the claim
• d.No, because a recommendation that fits the customer's profile cannot violate FINRA rules

Rule 2020 provides that no member shall effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance. A false claim about a pending purchase by a large fund is such a device, and the rule is about how the purchase was induced, so suitability does not cure it. The rule reaches inducing customers as well as the member's own trades, and a violation does not depend on whether the customer ends up with a loss.FINRA Rule 2020

A brokerage firm fails and cannot return customer assets. One customer's account held $100,000 of securities and $300,000 of cash. What is the most SIPC can restore?

• a.$350,000: $100,000 in securities plus $250,000 in cash✓
• b.$400,000: the full value of the securities and the cash
• c.$500,000: the overall limit applied to the whole account
• d.$250,000: the cash limit applied to the entire account

SIPC protects up to $500,000 per customer, but no more than $250,000 of that can be cash. The $100,000 of securities is fully covered. The $300,000 of cash is covered only to $250,000, so the maximum is $100,000 + $250,000 = $350,000. Paying $400,000 ignores the cash sub-limit. The $500,000 figure is the overall ceiling, not what this account is entitled to, because the account does not hold that much protected value. Paying $250,000 counts only cash and drops securities that are also covered.SIPA §9 (15 U.S.C. 78fff-3)

A customer holds a $180,000 CD and a $120,000 savings account, both in her own name at one FDIC-insured bank. If the bank fails, how much of her money is insured?

• a.$500,000, because each account type has its own limit
• b.$250,000, because the two accounts are added together✓
• c.$180,000, because only the larger account counts
• d.$300,000, because both accounts are insured in full

FDIC coverage is $250,000 per depositor, per insured bank, per ownership category. Both accounts are in her single name at the same bank, so they are combined: $180,000 + $120,000 = $300,000, of which $250,000 is insured and $50,000 is not. Treating both as fully insured ignores the combined limit. Product type does not create separate limits, so doubling to $500,000 is wrong. Coverage is not limited to the larger account; deposits in the category are added up before the limit applies.12 U.S.C. 1821(a)

A member firm opens a new retail account. Under FINRA Rule 2266, what must the firm do about SIPC information?

• a.Notify only customers whose balances exceed the SIPC coverage limits
• b.Post SIPC contact details on its website instead of notifying each customer
• c.Notify customers in writing at opening how to reach SIPC, then at least yearly✓
• d.Hand over the full SIPC brochure once, at the time the account is opened

Rule 2266 requires written notice at account opening that SIPC information, including its brochure, can be obtained from SIPC, along with SIPC's website address and telephone number. The same information must go to all customers in writing at least once a year. A one-time delivery fails the annual repeat, and the rule asks for notice of how to get the brochure rather than delivery of it. A website posting is not written notice to each customer. The duty covers all customers, not only those with large balances.FINRA Rule 2266

An investment adviser with its principal office in a state that regulates advisers manages $40 million and has no other basis for SEC registration. Where does it register?

• a.With the SEC, because assets exceed $25 million
• b.Nowhere, since advisers under $100 million are exempt
• c.With FINRA, which regulates investment advisers
• d.With its home state's securities administrator✓

Section 203A reserves SEC registration for larger advisers. A mid-sized adviser, with $25 million to under $100 million in assets, registers with the state when the state regulates advisers, so $40 million points to the state securities administrator. The $25 million figure is the floor for becoming eligible for SEC registration, not a trigger that requires it. FINRA regulates broker-dealers, not investment advisers. Advisers below $100 million are not exempt; they register at the state level.Advisers Act §203A

A city hires a municipal advisor to help structure a bond issue. Under the Exchange Act, what standard governs the advisor's dealings with the city?

• a.A suitability obligation, as a broker-dealer owes a retail customer
• b.A fiduciary duty to the city, including duties of loyalty and care✓
• c.No federal duty, since a city is treated as a sophisticated client
• d.A duty to the underwriter that will later buy the bonds

Section 15B(c)(1) deems a municipal advisor, and its associated persons, to owe a fiduciary duty to the municipal entity it advises, and bars acts inconsistent with that duty. Suitability is the broker-dealer standard for recommendations to customers and is weaker than a fiduciary duty. The advisor works for the issuer, so its duty does not run to the underwriter whose interests may differ. Sophistication of the client does not remove the statutory duty.Exchange Act §15B(c)(1)

A customer's $200,000 portfolio at a solvent SIPC-member firm falls to $120,000 after a market decline. What does SIPC do about the $80,000 loss?

• a.It reimburses any loss that exceeds the cash portion of the account
• b.It pays only if the firm's recommendation is found unsuitable
• c.Nothing, because SIPC does not protect against declines in market value✓
• d.It reimburses the $80,000, since the account is under the $500,000 limit

SIPC replaces missing customer securities and cash when a member firm fails; it does not insure the value of investments. A fall in market price at a solvent firm is an ordinary investment loss, so no payment is made. The $500,000 limit caps protection when assets are missing and does not turn market losses into claims. Cash is part of the limit calculation and has no link to market losses. Whether a recommendation was suitable is handled through FINRA arbitration or litigation, not SIPC.SIPA §9 (15 U.S.C. 78fff-3)

The SEC is led by five commissioners appointed by the President. What limit applies to their party affiliation?

• a.No more than two may belong to the President's party
• b.No party limit applies, so the President may choose freely
• c.No more than three may belong to the same political party✓
• d.No more than four may belong to the same political party

Section 4(a) of the Exchange Act creates a five-member Commission and provides that not more than three commissioners may be members of the same political party. Four from one party would exceed the cap. The cap applies to every party, not only the President's, and says nothing special about two. The statute does contain a party limit, so the President does not choose freely.Exchange Act §4(a)

The federal government sells new 10-year notes at auction to fund its spending. Which entity is the issuer of those notes?

• a.Fannie Mae, which raises money on behalf of the government
• b.The U.S. Department of the Treasury, acting for the federal government✓
• c.The Securities and Exchange Commission, which registers the offering
• d.The Federal Reserve, which runs the auctions and sells the notes

Treasury notes are direct obligations of the U.S. government, and the Treasury Department is the issuer. The Federal Reserve Banks act as fiscal agents that run the auction mechanics, but they do not issue the notes. The SEC regulates securities markets, and Treasury securities are exempt from its registration requirements, so it neither issues nor sells them. Fannie Mae issues its own agency debt and does not borrow for the government.

On one settlement date a broker-dealer has trades to buy 8,000 shares of XYZ and to sell 5,000 shares of XYZ with other NSCC members. After continuous net settlement, what is its obligation?

• a.No transfer, since the two trades offset in value
• b.Receive a net 3,000 shares of XYZ from NSCC✓
• c.Receive 8,000 and deliver 5,000 shares separately
• d.Deliver a net 3,000 shares of XYZ to NSCC

NSCC's continuous net settlement collapses each member's buys and sells in a security into one net position per settlement date. Buying 8,000 and selling 5,000 leaves a net purchase of 3,000 shares, so the firm receives 3,000. Separate transfers of 8,000 and 5,000 would defeat the point of netting. Delivering 3,000 reverses the direction, since the firm bought more than it sold. The trades offset in shares only to the extent of the smaller side, so a net position of 3,000 remains.

Most listed shares are held by a depository in the name of its nominee. How are trades between brokers then settled on the depository's records?

• a.By book-entry changes, without moving any certificates✓
• b.By messenger delivery of certificates between brokers
• c.By wiring the physical certificates to the buyer's bank
• d.By the transfer agent issuing a new certificate per trade

A depository such as DTC immobilizes certificates in its vault and records ownership by electronic entry. When brokers trade, their accounts at the depository are debited and credited, so ownership changes without paper moving. Messenger delivery was the older physical method that immobilization replaced. A transfer agent does not issue a new certificate for every ordinary trade. Certificates are not wired; only funds are.

An introducing broker-dealer wants a carrying firm to carry its customer accounts on a fully disclosed basis. What must happen before the carrying agreement takes effect?

• a.The agreement must be declared effective by the SEC after a filing
• b.The carrying firm may notify FINRA within 10 days after clearing begins
• c.The introducing firm must obtain written consent from each customer
• d.The carrying firm must submit it to FINRA and receive prior approval✓

Rule 4311(b)(1) requires the carrying firm to submit any carrying agreement to FINRA for prior approval before it can become effective; material changes need the same approval. Individual customers are not asked to consent to the arrangement between the two firms. Notice after the fact does not satisfy a prior-approval requirement; the 10-business-day item is advance notice about a new introducing firm. The SEC does not declare carrying agreements effective.FINRA Rule 4311(b)(1)

What is a designated market maker on the NYSE expected to do in its assigned stock?

• a.Underwrite each new offering of the stock for the issuer
• b.Guarantee the issuer a minimum price for the stock each day
• c.Execute customer orders only as agent, never trading for itself
• d.Maintain a fair and orderly market, trading as principal when needed✓

A DMM has an obligation to maintain a fair and orderly market in its assigned securities, which includes quoting and trading for its own account to narrow spreads and smooth imbalances. It is not limited to agency trades; trading as a dealer is central to the role. No one guarantees a minimum price for a listed stock. Underwriting new offerings is an investment-banking function, not part of a DMM's market-making duty.

After a merger, shareholders of the target company turn in old stock certificates and receive new ones, and the company's record of owners is updated. Which party performs these tasks?

• a.The company's transfer agent✓
• b.The clearing firm's custodian
• c.The designated market maker
• d.The lead syndicate manager

A transfer agent keeps the issuer's record of registered owners, cancels old certificates and issues new ones, and processes changes of ownership. A syndicate manager runs an underwriting and has no role in an issuer's shareholder records. A designated market maker quotes and trades the stock on the exchange. A custodian bank safekeeps assets for clients but does not maintain the issuer's ownership register.

A customer buys 100 shares of a listed stock on a Friday that is followed by a normal business day. When does regular-way settlement occur?

• a.Tuesday, two business days later
• b.Wednesday, three business days later
• c.Friday, the same day as the trade
• d.Monday, the next business day✓

Rule 15c6-1 sets the standard settlement cycle at one business day after the trade date (T+1). A Friday trade therefore settles on the next business day, Monday. Tuesday is where a Friday trade would settle under the old T+2 cycle, which no longer applies. Same-day settlement is available only if the parties agree to it. Wednesday would require a three-day cycle that the rule does not use.Exchange Act Rule 15c6-1(a)

A Tier 1 NMS stock priced above $3 has a reference price of $50.00 at midday. Using the 5% limit up-limit down band, what are the price bands?

• a.$47.50 lower band and $52.50 upper band✓
• b.$49.50 lower band and $50.50 upper band
• c.$49.00 lower band and $51.00 upper band
• d.$45.00 lower band and $55.00 upper band

Tier 1 stocks priced above $3 have bands set at 5% on each side of the reference price, which is the mean of eligible trade prices over the preceding five minutes. 5% of $50.00 is $2.50, giving $47.50 and $52.50. The $45.00 and $55.00 bands are a 10% calculation, which fits Tier 2 stocks. $49.00 and $51.00 are 2%, and $49.50 and $50.50 are 1%; neither percentage is used for these stocks.NMS Plan to Address Extraordinary Market Volatility (LULD Plan)

A stock's national best offer reaches its upper LULD price band and stays there. If the stock does not leave the limit state within 15 seconds, what happens next?

• a.Trading is paused for five minutes, then reopens✓
• b.Trading is halted for the rest of the day
• c.Trading continues once the bands are widened
• d.Trading is halted for 15 minutes, then reopens

Under the LULD Plan, when a stock enters a limit state and does not exit within 15 seconds, the primary listing exchange declares a five-minute trading pause. A rest-of-day halt is not the LULD response; it is far more severe than a pause. Fifteen minutes is the length of the market-wide Level 1 halt for a 7% index decline, a different mechanism. The bands do not simply widen to let trading carry on; the pause is the consequence of staying in the limit state.NMS Plan to Address Extraordinary Market Volatility (LULD Plan)

The S&P 500 closed yesterday at 5,000. At what intraday level would the Level 1 market-wide circuit breaker be triggered?

• a.4,000, a 20% decline
• b.4,650, a 7% decline✓
• c.4,350, a 13% decline
• d.4,750, a 5% decline

Market-wide circuit breakers are measured against the S&P 500's prior-day close, with Level 1 at a 7% decline, Level 2 at 13% and Level 3 at 20%. Level 1 is 5,000 x 0.93 = 4,650. A 5% decline to 4,750 is not a circuit-breaker threshold. 5,000 x 0.87 = 4,350 is the Level 2 trigger, and 5,000 x 0.80 = 4,000 is the Level 3 trigger, so each is a deeper decline than Level 1.NYSE Rule 7.12; Nasdaq Rule 4121

At 10:15:00 a.m. a member firm executes an off-exchange trade in an NMS stock. By when must the firm report it to a FINRA trade reporting facility?

• a.Within 10 seconds of execution✓
• b.By the end of the trading day
• c.Within 15 minutes of execution
• d.By the following business day's open

Rule 6380A requires members to report transactions in NMS stocks executed otherwise than on an exchange to a FINRA trade reporting facility as soon as practicable, and no later than 10 seconds after execution. Fifteen minutes is the corporate bond reporting window under TRACE, a different market. End-of-day and next-day reporting are the older, slower standards that real-time tape reporting replaced.FINRA Rule 6380A

During TRACE system hours, a dealer sells a corporate bond to a customer at 1:00 p.m. By what time must the trade generally be reported to TRACE?

• a.The next business day, before the open
• b.4:00 p.m., at the close of the trading day
• c.1:00:10 p.m., within 10 seconds of execution
• d.1:15 p.m., within 15 minutes of execution✓

Rule 6730 requires members to report transactions in TRACE-eligible securities, including corporate bonds, as soon as practicable but no later than 15 minutes after execution, with limited exceptions. The 10-second standard belongs to NMS equity trade reporting under Rule 6380A. End-of-day and next-day reporting are not the TRACE standard for a trade executed during system hours.FINRA Rule 6730(a)

A broker-dealer that is not an exchange member trades an NYSE-listed stock for its own account with a customer, away from the exchange floor. This activity is part of which market?

• a.The primary market
• b.The fourth market
• c.The auction market
• d.The third market✓

The third market is over-the-counter trading of exchange-listed securities by broker-dealers acting as market makers away from the exchange. The fourth market is institutions trading directly with each other without a broker-dealer in the middle, which does not match a dealer trading for its own account. The primary market is where issuers sell new securities. The auction market describes exchange trading, where orders meet in a central marketplace.

A person is appointed to a full term on the Federal Reserve Board of Governors. How long is that term?

• a.4 years, matching the appointing President's term
• b.6 years, the same length as a U.S. Senate term
• c.10 years, with unlimited reappointment allowed
• d.14 years, staggered so one expires every two years✓

Federal Reserve governors are appointed by the President and confirmed by the Senate to 14-year terms. With seven seats, the terms are staggered so one expires every two years, which keeps any one President from replacing the Board quickly. The four-year term belongs to the Chair and Vice Chair in those leadership roles, not to the governor seat. Senators serve six years, and the Board's terms are not tied to that cycle. A governor who serves a full 14-year term cannot be reappointed, so unlimited reappointment is wrong, and the long staggered terms are meant to insulate the Board from politics.12 U.S.C. 242

How many Federal Reserve Bank presidents hold a vote on the FOMC at any one time?

• a.Three, rotating among the regional banks each year
• b.Twelve, one from each Federal Reserve Bank
• c.Five, with the New York Fed president always voting✓
• d.Seven, matching the number of Board governors

The FOMC has twelve voting members: the seven Board governors plus five Reserve Bank presidents. The New York Fed president always votes, and the other four seats rotate among the remaining Reserve Banks. All twelve presidents attend, but only five vote at any time. Seven is the number of governors, not of presidents. Three understates the presidents' voting seats.12 U.S.C. 263

Inflation measured by the PCE index has run at 3.5% for a year, against the Fed's 2% goal. Which action is most consistent with that goal?

• a.Lowering the discount rate to encourage borrowing
• b.Raising the target range for the federal funds rate✓
• c.Buying Treasury securities in open market operations
• d.Cutting the federal funds target to spur lending

The Fed has stated a longer-run goal of 2% inflation as measured by the PCE price index. With inflation well above that goal, tightening is consistent with it, and raising the federal funds target range makes credit more expensive and slows demand. Lowering the discount rate, buying Treasuries and cutting the funds target all add liquidity or cheapen credit, which would push inflation further above the goal.

Holding other factors constant, what is the likely effect when the Fed sells Treasury securities to primary dealers in open market operations?

• a.Bank reserves rise and short-term interest rates tend to rise
• b.Bank reserves rise and short-term interest rates tend to fall
• c.Bank reserves fall and short-term interest rates tend to rise✓
• d.Bank reserves fall and short-term interest rates tend to fall

When the Fed sells securities, buyers pay with funds drawn from bank reserves, so reserves fall. With less money available to lend, short-term interest rates tend to rise, which is a tightening step. Rising reserves with falling rates describes a Fed purchase. The other two combinations pair reserves and rates in a way that no open market operation produces: with fewer reserves, rates do not fall, and with more reserves, they do not rise.

Economists classify some indicators as leading, coincident or lagging. Which of the following is a lagging indicator?

• a.Building permits for new homes
• b.The prime rate charged by banks✓
• c.Stock prices of the S&P 500 index
• d.Average weekly hours in manufacturing

Lagging indicators change after the economy has already turned, and the bank prime rate is one of them because banks adjust it after conditions and the Fed's policy rate have moved. Building permits, average weekly manufacturing hours and stock prices are leading indicators: they tend to change before the economy does, because they reflect plans and expectations about future output.

Nominal GDP grew 6% over a year while the price level rose 4%. Approximately how much did real GDP grow?

• a.About 6%, since nominal growth is the real rate
• b.About 24%, nominal growth times inflation
• c.About 2%, nominal growth minus inflation✓
• d.About 10%, nominal growth plus inflation

Real GDP removes the effect of price changes, so real growth is roughly nominal growth less inflation: 6% - 4% = about 2%. More exactly, 1.06 / 1.04 - 1 = 1.9%. Adding the two figures counts inflation as growth in output. Multiplying them has no economic meaning here. Treating nominal growth as real growth ignores the 4% of the increase that came from higher prices.

A factory closes after automating, and its displaced workers lack the skills for the job openings in their region. Which type of unemployment does this describe?

• a.Seasonal unemployment
• b.Frictional unemployment
• c.Structural unemployment✓
• d.Cyclical unemployment

Structural unemployment arises when the skills workers have do not match the jobs available, often because technology or industry shifts remove a type of work. Frictional unemployment is the short gap while workers move between suitable jobs. Cyclical unemployment follows downturns in the business cycle and recovers when demand returns. Seasonal unemployment follows predictable calendar patterns, such as holiday hiring.

Which school of economic thought holds that growth in the money supply is the main determinant of inflation and of nominal economic activity?

• a.Early mercantilism
• b.The monetarist school✓
• c.Supply-side economics
• d.Keynesian economics

Monetarism, associated with Milton Friedman, argues that the rate of growth of the money supply drives inflation and nominal output, so policy should aim for steady money growth. Keynesian economics stresses aggregate demand and government spending. Supply-side economics focuses on tax and regulatory incentives to produce more. Mercantilism is an older doctrine centered on accumulating gold and a trade surplus.

The two-year Treasury yields 4.8% and the ten-year Treasury yields 4.2%. How is this yield curve described, and what does the shape often signal?

• a.Inverted, often seen before slowdowns✓
• b.Normal, since longer maturities usually pay more
• c.Flat, since both yields are above 4%
• d.Steep, a sign investors expect faster growth

When short-term yields exceed long-term yields, the curve is inverted. Here the two-year yield of 4.8% is above the ten-year yield of 4.2%. Inversions have often come before slowdowns because investors expect weaker growth and lower future rates. A normal curve slopes upward, with the long yield higher. A flat curve has yields about equal, and a 0.6-point gap is not flat. A steep curve has a wide upward gap, which is the opposite of this one.

A firm reports current assets of $600,000, including $200,000 of inventory, and current liabilities of $400,000. What is its acid-test (quick) ratio?

• a.0.67, quick assets over current assets
• b.1.0, quick assets over current liabilities✓
• c.1.5, current assets over current liabilities
• d.0.5, inventory over current liabilities

The acid-test ratio excludes inventory, the least liquid current asset: ($600,000 - $200,000) / $400,000 = 1.0. The 1.5 figure is the ordinary current ratio, which leaves inventory in. The 0.5 figure divides only inventory by current liabilities. The 0.67 figure inverts the idea by dividing quick assets by total current assets, which is not a liquidity-coverage ratio.

A company earned $12 million, paid $2 million in preferred dividends, and has 5 million common shares outstanding. At a market price of $30, what is the price-earnings ratio?

• a.15.0, using EPS of $2.00 after preferred dividends✓
• b.12.5, using EPS of $2.40 before preferred dividends
• c.6.0, dividing the price by the shares outstanding
• d.2.0, taking the earnings per share figure itself

Earnings available to common shareholders are $12 million - $2 million = $10 million. Divided by 5 million shares, EPS is $2.00. The P/E ratio is $30 / $2.00 = 15.0. Using $12 million ignores that preferred holders are paid first, which overstates EPS at $2.40 and gives 12.5. The 2.0 figure is EPS rather than a ratio of price to earnings. The 6.0 figure divides the share price by the share count, which has no meaning here.

A firm has total assets of $500 million and total liabilities of $320 million. What is its debt-to-equity ratio, measured as total liabilities divided by shareholders' equity?

• a.About 1.56, assets over liabilities
• b.About 1.78, liabilities over equity✓
• c.About 0.56, equity over liabilities
• d.About 0.64, liabilities over total assets

Assets equal liabilities plus equity, so equity is $500 million - $320 million = $180 million. Debt-to-equity is $320 million / $180 million = about 1.78. The 0.64 figure is liabilities over assets, a debt ratio. The 0.56 figure flips the ratio upside down. The 1.56 figure divides assets by liabilities, an asset-coverage measure.

A new issue carries a spread of $1.50 per share: a $0.20 management fee, a $0.30 underwriting fee and a $1.00 selling concession. A syndicate member sells 10,000 shares to its own customers. What does it earn on those shares?

• a.$10,000, the concession alone
• b.$3,000, the underwriting fee
• c.$13,000, the full takedown✓
• d.$15,000, the gross spread

A syndicate member that sells shares itself keeps the takedown, which is the underwriting fee plus the selling concession: $0.30 + $1.00 = $1.30 per share. On 10,000 shares that is $13,000. The $10,000 figure leaves out the underwriting fee the member also earns as a syndicate participant. The full $15,000 would include the $0.20 management fee, which goes to the managing underwriter rather than to the member. The $3,000 figure counts only the underwriting fee and omits the concession for selling.

A $20 million stock offering is underwritten in an Eastern (undivided) account. A member with a 20% participation sold its full $4 million allotment, but $5 million of the issue remains unsold overall. What is the member's liability for the unsold stock?

• a.$4,000,000, the value of its own allotment
• b.$0, because it sold its entire allotment
• c.$1,000,000, 20% of the unsold stock✓
• d.$5,000,000, the entire unsold amount

In an Eastern (undivided) account every member is liable for its percentage of whatever remains unsold, whether or not it sold its own allotment. 20% of $5 million is $1,000,000. A liability of $0 is the Western (divided) result, where the member answers only for its own unsold allotment. The full $5 million would apply only to a sole underwriter. The $4 million figure is the member's allotment, which it has already sold.

A firm commitment IPO has a base offering of 4,000,000 shares. Under FINRA Rule 5110, what is the largest overallotment option the underwriters may hold?

• a.400,000 shares (10%)
• b.800,000 shares (20%)
• c.600,000 shares (15%)✓
• d.1,000,000 shares (25%)

Rule 5110(g)(9) prohibits an overallotment option covering more than 15% of the securities being offered, computed without counting the option shares. 15% of 4,000,000 is 600,000 shares. A 10% option of 400,000 is permitted but is not the largest one allowed. The 20% and 25% figures exceed the 15% cap.FINRA Rule 5110(g)(9)

A lead underwriter allocates shares of a hot IPO. Which allocation violates FINRA Rule 5131?

• a.Shares to an account in which a client company's CFO holds a 20% beneficial interest
• b.Shares to the CFO of a company that paid the firm fees eight months ago✓
• c.Shares to the CFO of a company that paid fees 14 months ago, with no new work expected
• d.Shares to an institutional account that gave an indication of interest in the roadshow

Rule 5131(b) bars allocating new-issue shares to an executive officer or director of a company that is currently an investment banking client or paid the member for investment banking services in the past 12 months. Eight months falls inside that window, so the allocation is spinning. An institutional account with an indication of interest is an ordinary allocation. The rule does not apply to an account in which executives' beneficial interests do not exceed 25% of the account. Fees paid 14 months ago fall outside the 12-month look-back, and no future work is expected.FINRA Rule 5131(b)(1)(A)

A stock has an ADTV of $60,000 and a public float of $40 million. The offering price will be determined on Wednesday, November 4, with no holidays in the preceding two weeks. A syndicate member was already a distribution participant. When does its Regulation M restricted period begin?

• a.Tuesday, October 27, six business days before pricing
• b.Tuesday, November 3, one business day before pricing
• c.Wednesday, October 28, five business days before pricing✓
• d.Thursday, October 29, four business days before pricing

The one-business-day restricted period applies only to securities with ADTV of at least $100,000 from an issuer with a public float of at least $25 million. This stock's ADTV is $60,000, so the five-business-day period applies. Counting back from Wednesday, November 4: Tuesday November 3, Monday November 2, Friday October 30, Thursday October 29 and Wednesday October 28, which is the fifth. November 3 would apply to a more liquid stock. October 29 is only four business days and October 27 is six.Regulation M Rule 100

A selling group member sells 5,000 shares of a new issue at a selling concession of $0.80 per share. At the end of the offering, the syndicate has unsold shares. What is the selling group member's position?

• a.It earns $4,000 but shares the syndicate's liability for unsold shares
• b.It earns $0.80 a share only if the entire issue sells out
• c.It earns $4,000 and must buy back any shares it failed to place
• d.It earns $4,000 and has no liability for the unsold shares✓

A selling group member is not part of the underwriting commitment. It has agreed only to sell shares and earns the concession on what it sells: 5,000 x $0.80 = $4,000. It has no liability for shares left unsold, which stays with the syndicate. Sharing in unsold shares is what syndicate members do. The concession is earned on each share sold, not on the issue selling out. A selling group member has no obligation to take back shares it could not place.FINRA Rule 5141 (selling concessions in fixed-price offerings)

Which document sets out the relationship among the members of an underwriting syndicate, including each member's participation and the manager's authority?

• a.The issuer purchase agreement
• b.The preliminary prospectus
• c.Agreement among underwriters✓
• d.The selling group agreement

The agreement among underwriters (AAU) governs the syndicate itself: the manager's authority, each member's percentage participation and liability, and how expenses are shared. The underwriting agreement is signed between the issuer and the managing underwriter. The selling group agreement is for firms that sell but do not underwrite. The preliminary prospectus informs investors about the issuer and has nothing to say about syndicate relationships.Securities Act s.2(a)(11); standard Agreement Among Underwriters

An issuer's all-or-none best-efforts offering of $10 million has sold only $8 million of shares when the offering period ends. What happens?

• a.The underwriter buys the remaining $2 million for its own account
• b.The offering continues until the remaining shares are sold
• c.The offering is canceled and investors' money is returned✓
• d.The issuer keeps the $8 million raised and the offering closes

In an all-or-none best-efforts offering the issuer receives funds only if the entire amount is sold. Because only $8 million was sold, the offering is canceled and investor funds, held in escrow, are returned. Buying the unsold portion is the commitment made in a firm commitment underwriting, not in best efforts. Closing on a lesser amount describes a mini-max offering, which has a lower threshold. An all-or-none deal cannot be extended indefinitely past its stated offering period.Exchange Act Rule 10b-9 (all-or-none offerings)

An issuer files a registration statement with the SEC on October 1 and never amends it. If the SEC takes no action to accelerate or delay effectiveness, when does the registration statement become effective?

• a.October 11, the 10th day after filing
• b.October 31, the 30th day after filing
• c.November 30, the 60th day after filing
• d.October 21, the 20th day after filing✓

Section 8(a) makes a registration statement effective on the 20th day after filing unless the SEC sets an earlier date, so October 1 becomes October 21. The 10th-day, 30th-day and 60th-day dates have no basis in the statute. An amendment filed before effectiveness would have restarted the clock, because the statement is then deemed filed on the date of the amendment, but this issuer never amends.Securities Act Section 8(a)

A registration statement was filed eight days ago and is not yet effective. A customer asks a registered representative about buying shares of the new issue. What may the firm do?

• a.Accept a binding order with payment and hold it until the statement is effective
• b.Provide a preliminary prospectus and note a non-binding indication of interest✓
• c.Send a confirmation reserving the shares at the expected offering price
• d.Quote the final offering price, which the preliminary prospectus fixes

Between filing and effectiveness, Section 5 allows offers but not sales. The firm may deliver a preliminary prospectus and record a non-binding indication of interest, which the customer can withdraw. A binding order accepted with payment is a sale made before effectiveness. Confirming a reservation at an expected price is also a sale. The preliminary prospectus omits the final price, usually showing only a range, so no final price can be quoted.Securities Act Section 5(a) and 5(c)