CSLB General Building (B) — All Questions

An investor wants to buy XYZ stock, currently trading at $52, but is only willing to pay $50 or less per share. Which order type best fits this goal?

• a.A buy limit order at $50✓
• b.A market order
• c.A buy stop order at $50
• d.A sell stop order at $50

A buy limit order sets the maximum price the buyer is willing to pay, so it executes only at $50 or lower. A market order would fill immediately near $52. A buy stop is a trigger order placed above the market, not a price ceiling.

In a quoted market, the bid-ask spread represents which of the following?

• a.The commission charged by the broker
• b.The difference between the highest price a buyer will pay and the lowest price a seller will accept✓
• c.The daily change in the stock's closing price
• d.The dividend yield of the security

The spread is the gap between the highest bid (best buying price) and the lowest ask/offer (best selling price). A narrow spread generally signals a liquid, actively traded security, while a wide spread suggests lower liquidity.

An investor bought a stock at $30 and it now trades at $45. She wants to limit her downside by triggering a sale if the price falls to $40. Which order should she enter?

• a.A buy limit order at $40
• b.A sell limit order at $40
• c.A sell stop order at $40✓
• d.A market order at $40

A sell stop order placed below the current market becomes a market order to sell once the stock trades at or through the $40 stop price, protecting accumulated gains. A sell limit at $40 would execute only at $40 or higher and would not protect against a decline.

Under current regular-way settlement for corporate stocks, when does settlement occur relative to the trade date?

• a.Same day as the trade (T+0)
• b.Three business days after the trade (T+3)
• c.Two business days after the trade (T+2)
• d.One business day after the trade (T+1)✓

Regular-way settlement for equities, corporate bonds, and municipal securities is T+1, meaning one business day after the trade date. The industry moved from T+2 to T+1 to reduce counterparty risk and speed the exchange of cash and securities.

A broker-dealer fills a customer's buy order by selling shares out of its own inventory and adds a markup to the price. In what capacity did the firm act?

• a.As a principal (dealer)✓
• b.As an agent (broker)
• c.As an underwriter
• d.As a transfer agent

When a firm trades from its own account with a customer and charges a markup or markdown, it acts as a principal, or dealer. When it merely arranges a trade between a customer and a third party for a commission, it acts as an agent, or broker.Securities Exchange Act of 1934

When a company sells newly issued shares to the public for the first time and receives the proceeds, this transaction takes place in which market?

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

The primary market is where issuers raise capital by selling new securities directly to investors, as in an IPO; the proceeds go to the issuer. The secondary market is where investors trade already-issued securities among themselves, with proceeds going to the selling investor.

A stock closed at $40 the day before its ex-dividend date, and the company declared a $1 cash dividend. All else equal, what is the expected opening price on the ex-dividend date?

• a.$41
• b.$40
• c.$39✓
• d.$38

On the ex-dividend date, a buyer is not entitled to the upcoming dividend, so the market typically reduces the stock's opening price by the dividend amount. A $40 stock paying a $1 dividend is expected to open around $39, all else equal.

Which organization acts as the central counterparty that nets and guarantees the settlement of most U.S. broker-to-broker equity trades?

• a.The Securities and Exchange Commission (SEC)
• b.The Federal Reserve
• c.The Municipal Securities Rulemaking Board (MSRB)
• d.The National Securities Clearing Corporation (NSCC)✓

The NSCC, a subsidiary of the DTCC, provides central clearing, multilateral netting, and settlement guarantees for equity trades between broker-dealers. The SEC is a regulator, not a clearing house, and the Federal Reserve handles the banking payment system.Securities Exchange Act of 1934

An investor wants his order executed immediately and is not concerned about getting a specific price. Which order type should he use?

• a.A market order✓
• b.A limit order
• c.A stop order
• d.An all-or-none order

A market order is executed promptly at the best available price, prioritizing speed and certainty of execution over price. A limit order prioritizes price and may not execute at all if the limit is not met.

An investor sells stock short. Under what condition does the position become profitable?

• a.When the stock's price rises
• b.When the stock's price falls✓
• c.When the company pays a dividend
• d.When the stock splits

A short seller borrows shares and sells them, hoping to buy them back later at a lower price. The position profits when the stock's price falls; if the price rises, the short seller faces a loss that is theoretically unlimited.Securities Exchange Act of 1934

A company sets Wednesday as its dividend record date. Under T+1 regular-way settlement, what is the last day an investor can buy the stock regular way and still be entitled to the dividend?

• a.Wednesday (the record date)
• b.Thursday
• c.Tuesday✓
• d.Monday

To be a holder of record on Wednesday, the trade must settle by Wednesday. Under T+1, a purchase made on Tuesday settles Wednesday, so Tuesday is the last day to buy and receive the dividend; Wednesday is the ex-dividend date.

A stop-limit order combines the features of which two order types?

• a.A market order and an all-or-none order
• b.A limit order and a fill-or-kill order
• c.Two separate market orders
• d.A stop order and a limit order✓

A stop-limit order uses a stop price to trigger the order and a limit price to cap the execution price once triggered. This gives price protection that a plain stop order lacks, but it risks non-execution if the market moves past the limit.

What is the primary function of a market maker in the secondary market?

• a.To provide liquidity by continuously quoting both bid and ask prices and standing ready to buy or sell✓
• b.To audit the financial statements of issuers
• c.To set the interest rate policy of the Federal Reserve
• d.To approve securities for registration with the SEC

A market maker (a dealer) commits capital to continuously quote firm bid and ask prices, standing ready to buy at the bid and sell at the ask. This adds liquidity and helps ensure that investors can trade even when there is no immediate counterparty.Securities Exchange Act of 1934

A firm receives a customer order, locates another party in the market to take the other side, and charges a commission for arranging the trade. In what capacity did the firm act, and what did it charge?

• a.As a principal, charging a markup
• b.As an agent, charging a commission✓
• c.As an underwriter, charging a spread
• d.As a dealer, charging a markdown

By arranging a trade between the customer and a third party without using its own inventory, the firm acts as an agent (broker) and is compensated with a commission. Markups and markdowns apply only when a firm acts as a principal from its own account.Securities Exchange Act of 1934

An investor owns 100 shares of a stock trading at $80 when the company declares a 2-for-1 forward stock split. After the split, what does the investor own?

• a.50 shares worth $160 each
• b.100 shares worth $40 each
• c.200 shares worth $40 each✓
• d.200 shares worth $80 each

In a 2-for-1 forward split, share count doubles and price halves, leaving total market value unchanged. The investor now holds 200 shares at about $40 each, for the same $8,000 total value.

Which statement best describes the over-the-counter (OTC) market?

• a.It is a physical trading floor where an auction takes place
• b.It handles only the initial sale of new securities
• c.It is where listed securities are matched by a designated market maker on an exchange floor
• d.It is a decentralized network of dealers who negotiate trades electronically or by phone✓

The OTC market has no central physical location; it is a dealer-driven, negotiated market connected electronically and by telephone. Exchanges, by contrast, are centralized auction markets where buyers and sellers compete through posted bids and offers.Securities Exchange Act of 1934

An investor needs the proceeds from a stock sale available the same day the trade is executed. Which settlement type should be specified?

• a.Cash settlement✓
• b.Regular-way settlement
• c.When-issued settlement
• d.Seller's option settlement

A cash (same-day) settlement requires delivery of securities and payment on the trade date itself, making the funds available immediately. Regular-way settlement for equities is T+1, one business day after the trade.

An investor is short 100 shares of a stock at $30 and wants to limit potential losses if the price rises. Which order should be placed?

• a.A sell limit order above $30
• b.A buy stop order above $30✓
• c.A sell stop order below $30
• d.A buy limit order below $30

A buy stop order placed above the current price triggers a buy-to-cover once the stock rises to the stop, capping the short seller's loss. Because a short position loses money as the price rises, a buy stop is the standard protective order.

Which entity serves as the central securities depository that holds securities in electronic (book-entry) form and facilitates their transfer between members?

• a.The Financial Industry Regulatory Authority (FINRA)
• b.The Options Clearing Corporation (OCC)
• c.The Depository Trust Company (DTC)✓
• d.The Securities Investor Protection Corporation (SIPC)

The DTC, a subsidiary of the DTCC, immobilizes securities in book-entry form and enables ownership to be transferred by electronic bookkeeping rather than physical certificate delivery. The OCC clears options, and SIPC provides limited customer account protection.Securities Exchange Act of 1934

An investor owns stock trading at $25 and is willing to sell only if she can get $28 or more per share. Which order should she enter?

• a.A sell stop order at $28
• b.A market order
• c.A buy limit order at $28
• d.A sell limit order at $28✓

A sell limit order sets the minimum acceptable price, executing only at $28 or higher. A sell stop at $28 would sit below the market as a trigger and, being below the current $25... would trigger a sale at market, which is not what she wants.

A company with shares trading at $2 declares a 1-for-10 reverse stock split. What happens to an investor holding 1,000 shares?

• a.The investor holds 100 shares worth about $20 each✓
• b.The investor holds 10,000 shares worth about $0.20 each
• c.The investor holds 1,000 shares worth about $20 each
• d.The investor holds 100 shares worth about $2 each

A 1-for-10 reverse split reduces share count tenfold and multiplies the price tenfold, leaving total value unchanged. The 1,000 shares become 100 shares priced near $20, still worth about $2,000. Reverse splits are often used to raise a low share price.

Compared with a stock that has a wide bid-ask spread, a stock with a very narrow spread most likely indicates:

• a.Lower liquidity and infrequent trading
• b.Higher liquidity and active trading✓
• c.A pending stock split
• d.An upcoming dividend payment

A narrow spread typically reflects high liquidity, tight competition among market makers, and heavy trading volume. A wide spread is more common in thinly traded, less liquid securities where the cost of trading is higher.

In the sequence of dividend dates, which date is when the board of directors formally announces that a dividend will be paid?

• a.The record date
• b.The ex-dividend date
• c.The declaration date✓
• d.The payable date

The declaration date is when the board announces the dividend and sets the record and payable dates. The ex-dividend date determines who is entitled, the record date identifies shareholders of record, and the payable date is when the dividend is actually paid.

Which of the following best distinguishes a securities exchange from the OTC market?

• a.An exchange trades only bonds, while the OTC market trades only stocks
• b.An exchange is unregulated, while the OTC market is regulated by FINRA
• c.An exchange never uses market makers of any kind
• d.An exchange is a centralized auction market, while the OTC market is a decentralized negotiated market✓

An exchange operates as a centralized auction market where competing bids and offers meet, whereas the OTC market is a decentralized, dealer-negotiated market. Both are regulated, and both trade a range of securities.Securities Exchange Act of 1934

Under T+1 regular-way settlement, how does the ex-dividend date relate to the record date?

• a.The ex-dividend date is the same day as the record date✓
• b.The ex-dividend date is two business days before the record date
• c.The ex-dividend date is one business day after the record date
• d.The ex-dividend date is one week before the record date

Because regular-way trades now settle in one business day (T+1), a purchase made on the record date would not settle until the next day, too late to be a holder of record. As a result, the ex-dividend date now falls on the same day as the record date.

When a retail customer places a market order to buy stock from a dealer, at which price will the customer generally buy?

• a.At the bid price
• b.At the ask (offer) price✓
• c.At the midpoint of the spread
• d.At the previous day's closing price

A customer buys at the dealer's ask (offer) and sells at the dealer's bid. The dealer, conversely, buys at the bid and sells at the ask, earning the spread as compensation for providing liquidity.

What happens to a standard stop order once the market reaches the stop price?

• a.It is automatically canceled
• b.It becomes a limit order at the stop price
• c.It becomes a market order and is executed at the next available price✓
• d.It is held until the end of the trading day before executing

A plain stop order is a trigger: once the stock trades at or through the stop price, the order becomes a market order and executes at the best available price. This guarantees execution but not a specific price, so it may fill worse than the stop in a fast market.

An investment bank purchases an entire new issue of stock from a corporation and resells it to the public. In this primary-market role, the investment bank is acting as a:

• a.Transfer agent
• b.Registrar
• c.Custodian
• d.Underwriter✓

An underwriter helps an issuer bring new securities to market, often buying the issue and reselling it to investors in the primary market. Transfer agents and registrars handle recordkeeping, while custodians safeguard assets.

An investor who is 'long' 200 shares of a stock has which market position and outlook?

• a.Owns the shares and profits if the price rises (bullish)✓
• b.Has borrowed and sold the shares and profits if the price falls (bearish)
• c.Has no economic exposure to the stock
• d.Owns the shares but profits only if the price falls

Being long means owning the security; the investor benefits when the price rises and is considered bullish. Being short means having sold borrowed shares, profiting when the price falls (bearish).

Which statement about the risk of a short stock position is correct?

• a.The maximum loss is limited to the amount invested
• b.The potential loss is theoretically unlimited because the stock price can rise without limit✓
• c.There is no risk once the shares are borrowed
• d.The maximum loss equals the dividend paid

A short seller must eventually buy back the shares. Because a stock's price can rise indefinitely, the potential loss on a short sale is theoretically unlimited, unlike a long position, where the most an investor can lose is the amount invested.Securities Exchange Act of 1934

An investor buys 100 shares of common stock regular way on a Thursday, with no intervening holidays. On what day does the trade settle?

• a.Thursday (same day)
• b.Saturday
• c.Friday✓
• d.The following Monday

Regular-way equity settlement is T+1, so a Thursday trade settles on Friday, the next business day. Weekends and holidays are excluded when counting settlement days.

Under the Securities Exchange Act of 1934, what is the key difference between a 'broker' and a 'dealer'?

• a.A broker only sells bonds; a dealer only sells stocks
• b.A broker is unregistered; a dealer must register with the SEC
• c.A broker trades only in the primary market; a dealer trades only in the secondary market
• d.A broker effects transactions for the accounts of others; a dealer buys and sells for its own account✓

The 1934 Act defines a broker as a person effecting securities transactions for the account of others (agency), while a dealer buys and sells securities for its own account (principal). Many firms are 'broker-dealers' because they act in both capacities at different times.Securities Exchange Act of 1934

Which dividend-related date is the day the corporation actually distributes the dividend to eligible shareholders?

• a.The payable date✓
• b.The record date
• c.The ex-dividend date
• d.The declaration date

The payable date is when the company actually pays the dividend to shareholders who were on record as of the record date. It comes after the declaration, ex-dividend, and record dates in the dividend timeline.

Which of the following is a primary risk of using a limit order instead of a market order?

• a.The order will always execute at a worse price than the market
• b.The order may never be executed if the limit price is not reached✓
• c.The order guarantees execution but not a price
• d.The order must be canceled at the end of every trading day

A limit order controls the execution price but does not guarantee a fill; if the market never reaches the limit, the order goes unexecuted. A market order, by contrast, guarantees execution but not a specific price.

An investor buys 100 shares of a public company from another investor through an exchange. This transaction takes place in the:

• a.Primary market
• b.Third market only
• c.Secondary market✓
• d.Fourth market only

Trading of already-issued securities among investors occurs in the secondary market, where the issuer receives no proceeds. The primary market involves the original sale of new securities by the issuer to raise capital.

A customer's trade confirmation shows a commission charge rather than a markup. This indicates the firm executed the trade in what capacity?

• a.As a principal from inventory
• b.As a dealer making a market
• c.As an underwriter in a new issue
• d.As an agent for the customer✓

A commission is charged only when a firm acts as an agent (broker), arranging a trade between the customer and a third party. When a firm acts as a principal (dealer) trading from its own inventory, it charges a markup or markdown instead.Securities Exchange Act of 1934

A stock is trading on a 'when-issued' (WI) basis. What does this indicate?

• a.The security has been authorized but not yet issued, so trades are conditional on issuance✓
• b.The security has been delisted from all exchanges
• c.The security can only be sold, not bought
• d.The security pays no dividends

When-issued trading occurs for securities that have been authorized but not yet formally issued, such as shares from a stock split or a new municipal issue. Trades are made on a conditional basis and settle once the securities are actually issued.

On the NYSE, which participant is assigned to a particular stock to maintain a fair and orderly market and provide liquidity when natural buyers or sellers are absent?

• a.A transfer agent
• b.A designated market maker (specialist)✓
• c.A registrar
• d.A syndicate manager

A designated market maker (historically called a specialist) is responsible for maintaining a fair and orderly market in assigned securities, quoting bids and offers and committing capital when needed. Transfer agents and registrars perform recordkeeping functions, not trading.Securities Exchange Act of 1934

A stock trades at $100. An investor places a sell stop order at $92 and a separate sell limit order at $110. Which describes the intended strategy?

• a.Both orders will execute immediately
• b.The stop protects gains on the upside and the limit protects on the downside
• c.The stop limits downside loss at around $92 while the limit takes profit at $110 or higher✓
• d.Neither order can be entered at the same time

The sell stop at $92 (below the market) triggers a sale to limit losses if the stock falls, while the sell limit at $110 (above the market) sells to capture profit if the stock rises. Together they bracket the position with downside protection and an upside target.

The NSCC and the DTC are both subsidiaries of which parent organization?

• a.The New York Stock Exchange
• b.The Federal Reserve System
• c.The Securities and Exchange Commission
• d.The Depository Trust & Clearing Corporation (DTCC)✓

The DTCC is the holding company that owns both the NSCC (which clears and nets trades) and the DTC (which holds securities in book-entry form and settles transfers). Together they provide the core post-trade clearing and settlement infrastructure for U.S. securities.

A dealer quotes a stock at $20.00 bid and $20.10 ask. If the dealer buys from one customer and sells to another at these quotes, what is the dealer's gross profit per share?

• a.$0.10, the spread between the bid and ask✓
• b.$20.10, the full ask price
• c.$0.00, because dealers do not profit from quotes
• d.$40.10, the sum of the bid and ask

The dealer buys at the $20.00 bid and sells at the $20.10 ask, earning the $0.10 spread per share as compensation for providing liquidity. The spread, not a separate commission, is how a principal dealer is typically paid.

In equity trading, a standard 'round lot' of common stock is generally how many shares?

• a.1 share
• b.100 shares✓
• c.10 shares
• d.1,000 shares

A round lot for most common stocks is 100 shares, the standard trading unit. An order for fewer than 100 shares is an odd lot, and an order such as 250 shares is a mixed lot (a round lot plus an odd lot).

A stock is trading at $48. An investor believes that if it breaks above $52 it will continue climbing, and wants to buy automatically at that point. Which order accomplishes this?

• a.A buy limit order at $52
• b.A sell stop order at $52
• c.A buy stop order at $52✓
• d.A sell limit order at $52

A buy stop order placed above the current market ($52, above $48) triggers a purchase once the stock trades at or through $52, letting the investor enter on upside momentum. A buy limit at $52 would instead try to buy at $52 or lower and would fill immediately below the market.

Which self-regulatory organization is chiefly responsible for regulating broker-dealers and the over-the-counter securities market in the United States?

• a.The Federal Reserve
• b.The Depository Trust Company
• c.The Securities and Exchange Commission
• d.The Financial Industry Regulatory Authority (FINRA)✓

FINRA is the self-regulatory organization that oversees broker-dealers and much of the OTC market, writing conduct rules and enforcing them under SEC oversight. The SEC is the federal government regulator, not an SRO, and the Federal Reserve handles monetary policy and banking.Securities Exchange Act of 1934

How does a stock dividend differ from a cash dividend for a shareholder?

• a.A stock dividend pays additional shares and lowers the cost basis per share, while a cash dividend pays money✓
• b.A stock dividend is always taxed immediately, while a cash dividend never is
• c.A stock dividend reduces the number of shares owned
• d.A stock dividend can only be paid by bond issuers

A stock dividend distributes additional shares rather than cash; the shareholder owns more shares, and the cost basis per share is reduced so total basis stays roughly the same. A cash dividend distributes money to shareholders.

A dealer quotes stock XYZ at $15.20 - $15.35. At what price would a customer's market order to sell be executed?

• a.$15.35, the ask price
• b.$15.20, the bid price✓
• c.$15.275, the midpoint
• d.$30.55, the sum of the quotes

A customer sells at the dealer's bid, which is the lower quote of $15.20, and buys at the dealer's ask of $15.35. The dealer captures the $0.15 spread as compensation.

Which statement about a forward stock split is TRUE?

• a.It increases the total market value of an investor's holding
• b.It is paid in cash to shareholders
• c.It increases the number of shares outstanding and proportionally lowers the price per share✓
• d.It reduces the number of shares an investor owns

A forward split increases shares outstanding and proportionally reduces the price per share, so the total market value of a holding is unchanged immediately after the split. It is not a cash payment, and it increases, not decreases, the number of shares held.

An investor enters a limit order and specifies that it should remain in effect until it executes or is canceled, even across multiple trading days. This is known as what type of order?

• a.A day order
• b.A fill-or-kill order
• c.An immediate-or-cancel order
• d.A good-till-canceled (GTC) order✓

A good-till-canceled (GTC) order stays active across multiple trading sessions until it is executed or the investor cancels it. A day order, by contrast, expires at the end of the trading day if it is not filled.

Before executing a short sale, what must a broker-dealer generally do with respect to the shares being sold?

• a.Locate shares that can be borrowed for delivery✓
• b.Register the shares with the SEC
• c.Pay the dividend in advance to the buyer
• d.Convert the shares into bonds

Under short-sale rules (Regulation SHO), a firm must reasonably locate shares available to borrow before effecting a short sale, so the borrowed shares can be delivered to the buyer at settlement. This 'locate' requirement helps prevent abusive naked short selling.Securities Exchange Act of 1934

During a company's initial public offering, an investor pays $18 per share for newly issued stock. Who receives the $18 per share?

• a.The investor who previously owned the shares
• b.The issuing company (less underwriting compensation)✓
• c.The stock exchange
• d.The transfer agent

In a primary-market transaction such as an IPO, the proceeds go to the issuing company, which is raising capital, minus the underwriters' compensation. In secondary-market trades, by contrast, the proceeds flow to the selling investor, not the issuer.

The trading of exchange-listed securities in the over-the-counter market (for example, by institutions through OTC market makers) is often referred to as the:

• a.Primary market
• b.Fourth market
• c.Third market✓
• d.Gray market

The third market refers to trading of exchange-listed securities in the OTC market. The fourth market refers to direct institution-to-institution trading without a broker-dealer, often through electronic networks.

An investor buys 100 shares at $60 (total cost $6,000). The stock later does a 3-for-1 forward split. What are the investor's new share count and adjusted cost basis per share?

• a.100 shares at $180 per share
• b.33 shares at $60 per share
• c.100 shares at $20 per share
• d.300 shares at $20 per share✓

A 3-for-1 split triples the shares to 300 and divides the price and per-share basis by three, from $60 to $20. Total cost basis remains $6,000 (300 shares x $20), so the split does not change the investor's total economic value.

A single firm sometimes arranges trades between customers and third parties for a commission, and at other times trades from its own inventory and charges a markup. This firm is best described as a:

• a.Broker-dealer acting in both agency and principal capacities✓
• b.Broker only, never a dealer
• c.Dealer only, never a broker
• d.Transfer agent

A firm that acts as an agent (broker) on some trades and as a principal (dealer) on others is a broker-dealer. On any given trade it must disclose the capacity in which it acted, since that determines whether it charges a commission or a markup/markdown.Securities Exchange Act of 1934

In a fast-moving, volatile market, an investor is most concerned about certainty of execution and less concerned about the exact price. Which order best serves that priority?

• a.A limit order, because it locks in a price
• b.A market order, because it prioritizes immediate execution✓
• c.A stop-limit order, because it may not execute
• d.A good-till-canceled limit order held for weeks

When immediate, certain execution matters most, a market order is appropriate because it fills promptly at the best available price. Limit and stop-limit orders prioritize price and risk not executing at all if the market moves away from the limit.

Under SEC rules, when must a broker-dealer send a customer a written confirmation of a securities transaction?

• a.Within 30 days of the trade
• b.Only upon the customer's request
• c.At or before completion of the transaction (generally by settlement)✓
• d.Only at the end of the calendar year

SEC Rule 10b-10 requires a broker-dealer to send a trade confirmation at or before completion of the transaction, which is generally the settlement date. The confirmation discloses key details such as price, capacity (agency or principal), and any commission or markup.Securities Exchange Act of 1934

When handling a customer order, a broker-dealer's obligation to seek the most favorable terms reasonably available under the circumstances is known as its duty of:

• a.Suitability
• b.Disclosure
• c.Diversification
• d.Best execution✓

Best execution requires a firm to use reasonable diligence to obtain the most favorable price and terms for a customer order given current market conditions. Suitability concerns whether a recommendation fits the customer, which is a separate obligation.Securities Exchange Act of 1934

A customer sells stock to a firm that buys the shares into its own inventory. The firm lowers the price it pays below the current market to compensate itself. What is this charge called?

• a.A markdown✓
• b.A commission
• c.A management fee
• d.A sales load

When a firm acting as a principal buys securities from a customer for its own account, it pays slightly less than the prevailing market price; that difference is a markdown. A markup is the mirror image charged when the firm sells to a customer as principal, and a commission applies only to agency trades.

After a forward stock split, what happens to an individual shareholder's proportional ownership of the company?

• a.It increases because the shareholder owns more shares
• b.It stays the same because every shareholder's share count changes proportionally✓
• c.It decreases because more shares are outstanding
• d.It becomes zero until the shares are re-registered

A forward split increases every shareholder's share count in the same proportion, so each investor's percentage ownership of the company is unchanged. The split changes the number and price of shares, not the relative stake each holder controls.

A trade is executed for 'cash' settlement on a Monday morning. When must delivery of the securities and payment occur?

• a.Tuesday (T+1)
• b.Wednesday (T+2)
• c.The same Monday (trade date)✓
• d.The following Monday

A cash settlement requires delivery of securities and payment on the trade date itself, the same day the trade is executed. This is faster than regular-way settlement, which is T+1 for equities.

An investor buys stock ON the ex-dividend date. With respect to the upcoming dividend, what is the result?

• a.The buyer receives the dividend because the purchase came first
• b.The buyer and seller split the dividend equally
• c.The company cancels the dividend for that quarter
• d.The buyer is not entitled to the dividend; the seller keeps it✓

Buying on or after the ex-dividend date means the trade will not settle in time for the buyer to be a holder of record, so the buyer is not entitled to the dividend. The seller, who owned the shares before the ex-date, keeps the upcoming dividend.

What is the main benefit of the multilateral netting performed by a central clearing corporation such as the NSCC?

• a.It reduces the number and value of securities and payments that must actually be exchanged✓
• b.It eliminates the need for any settlement of trades
• c.It guarantees that every stock will rise in value
• d.It replaces the role of the SEC as a regulator

Multilateral netting offsets each member's many buy and sell obligations against one another so that only the net amounts of securities and cash change hands. This dramatically reduces settlement volume, cost, and counterparty risk across the market.

Why does it matter to a customer whether a firm executed a trade as an agent or as a principal?

• a.Only principal trades are reported to regulators
• b.It determines whether the customer pays a commission or a markup/markdown, both of which must be disclosed✓
• c.Agency trades are always cheaper by law
• d.Principal trades do not require a confirmation

The firm's capacity determines the form of its compensation: a commission for agency trades or a markup/markdown for principal trades. Under SEC Rule 10b-10, the capacity and related charges must be disclosed on the trade confirmation so the customer understands the cost.Securities Exchange Act of 1934

A brokerage account is registered as joint tenants with right of survivorship (JTWROS). One of the two owners dies. What happens to the account assets?

• a.The deceased owner's share passes to their estate under their will
• b.The account is frozen until a probate court divides it equally
• c.The assets are split 50/50 between the survivor and the estate
• d.The entire account passes automatically to the surviving joint owner✓

In a JTWROS account, the right of survivorship means the surviving owner automatically receives the deceased owner's interest, bypassing probate. This is the defining feature that distinguishes JTWROS from tenants in common.

Two business partners hold a joint account as tenants in common (TIC), with a 70%/30% ownership split. If the 70% owner dies, how are that owner's assets handled?

• a.The surviving partner automatically inherits the full 70% interest
• b.The account is automatically re-titled 50/50
• c.The 70% interest is forfeited to the broker-dealer
• d.The 70% interest passes to the deceased partner's estate, not to the surviving partner✓

Tenants in common has no right of survivorship. Each owner's fractional interest passes to their own estate upon death. This makes TIC common for unrelated parties who want their share to go to their heirs rather than the co-owner.

In an UGMA or UTMA custodial account, who has the legal authority to make investment decisions while the beneficiary is still a minor?

• a.The minor beneficiary
• b.The broker-dealer's compliance department
• c.The custodian named on the account✓
• d.Both parents jointly, regardless of who is custodian

The custodian manages the account for the benefit of the minor until the minor reaches the age of majority set by state law. There can be only one custodian and one minor per UGMA/UTMA account, and the assets are an irrevocable gift to the minor.Uniform Transfers to Minors Act

When opening a cash account for a corporation, what document does the firm typically require to establish who is authorized to trade?

• a.A copy of the CEO's personal tax return
• b.The corporation's annual report to shareholders
• c.A margin agreement signed by all shareholders
• d.A corporate resolution naming the authorized individuals✓

A corporate resolution (or its equivalent) identifies the officers authorized to act on the account. For a corporate margin account, the firm also needs to verify the corporate charter or bylaws permit margin trading.

A customer wants to open an account for a revocable living trust. What document should the registered representative obtain to determine the trustee's powers?

• a.The trust agreement (or a certification of trust)✓
• b.The beneficiaries' birth certificates
• c.A power of attorney from each beneficiary
• d.The trustee's brokerage statements from another firm

The trust agreement (or a trustee certification summarizing it) establishes who the trustee is and what investment powers they hold. The representative must ensure trades stay within the authority granted by the trust document.

Which statement best describes the tax treatment of a traditional IRA?

• a.Contributions are made with after-tax dollars and all withdrawals are tax-free
• b.Contributions may be tax-deductible and earnings grow tax-deferred until withdrawal✓
• c.Contributions and withdrawals are both fully taxable
• d.There are no taxes at any stage

Traditional IRA contributions may be deductible depending on income and workplace plan coverage, and earnings grow tax-deferred. Withdrawals in retirement are taxed as ordinary income, and required minimum distributions eventually apply.Internal Revenue Code

A qualified distribution from a Roth IRA is generally tax-free if the account has been open at least five years AND the owner meets which condition?

• a.Has held the account in a margin arrangement
• b.Rolls the funds into a 401(k) within 60 days
• c.Is at least age 59 1/2 (or meets another qualifying event)✓
• d.Has never taken a prior contribution back out

Roth IRAs are funded with after-tax dollars, so qualified distributions of earnings are tax-free when the five-year holding period is met and the owner is 59 1/2 or older (or death, disability, or a first-home purchase applies). Contributions can always be withdrawn tax-free.Internal Revenue Code

Which of the following is a defining feature of a traditional 401(k) plan?

• a.It is an employer-sponsored plan funded largely by pre-tax employee salary deferrals✓
• b.It is a plan that individuals open with any broker with no employer involvement
• c.It guarantees a fixed monthly pension based on years of service
• d.It can only hold shares of the employer's own stock

A 401(k) is an employer-sponsored defined-contribution plan. Employees defer part of their salary (traditionally pre-tax), often with an employer match, and the retirement benefit depends on contributions and investment performance rather than a guaranteed formula.

Under the Customer Identification Program (CIP), a firm must collect and verify certain minimum information before opening an account. Which set represents the four required items?

• a.Employer, salary, net worth, and investment objective
• b.Bank account number, credit score, mother's maiden name, and email
• c.Beneficiary name, spouse name, occupation, and phone number
• d.Name, date of birth, physical address, and taxpayer identification number✓

CIP, mandated by the USA PATRIOT Act, requires firms to obtain a customer's name, date of birth, physical address, and identification number (such as an SSN) and to verify identity. This helps prevent money laundering and terrorist financing.USA PATRIOT Act

FINRA's Know Your Customer rule requires a firm to use reasonable diligence to know the essential facts about every customer. The 'essential facts' are primarily those needed to do what?

• a.Guarantee the customer a profit on every trade
• b.Effectively service the account and comply with laws and firm policies✓
• c.Sell the customer as many products as possible
• d.Report the customer's spending to credit agencies

Rule 2090 requires knowing the essential facts to effectively service the account, act on any special handling instructions, understand the authority of anyone acting for the customer, and comply with applicable laws and regulations. It works alongside the suitability rule.FINRA Rule 2090

For a typical new cash account for an individual, whose signature is generally NOT required on the new account form itself?

• a.The registered representative who introduced the account
• b.A principal of the firm approving the account
• c.The customer opening the account✓
• d.The supervising branch manager where required

A customer signature is generally not required to open a standard cash account, though it is required for margin accounts and options accounts. The account form must, however, be approved (signed) by a principal, and it records the representative who opened it.

Before a registered representative may exercise discretion in a customer's account, what is generally required?

• a.Prior written authorization from the customer and firm acceptance of the account as discretionary✓
• b.Only a verbal okay from the customer for each trade
• c.Approval from the transfer agent
• d.A margin agreement, regardless of account type

Discretionary trading requires prior written authorization (a signed trading authorization or power of attorney) and the firm's written acceptance of the account. Each discretionary order must also be identified as such and the account reviewed frequently to detect churning.FINRA Rule 3260

A customer calls and says: 'Buy 500 shares of XYZ for me today, but you pick the best time and price.' The representative has no written discretionary authority. Is this order permissible?

• a.No, because choosing time and price always requires written discretion
• b.Yes, because time and price alone are not considered discretionary when the customer specified the security, action, and amount✓
• c.No, because all telephone orders are prohibited
• d.Yes, but only if the customer later signs a margin agreement

When the customer specifies the security, the action (buy/sell), and the number of shares, deciding only the time or price is a 'not-held' order and is not discretionary. Discretion over the security, action, or quantity would require prior written authorization.

What is the primary difference between a cash account and a margin account?

• a.A cash account can only hold bonds; a margin account can only hold stock
• b.A margin account is only for institutions; a cash account is only for individuals
• c.In a margin account the customer can borrow from the broker-dealer to buy securities; in a cash account full payment is required✓
• d.A cash account earns interest; a margin account never does

In a cash account the customer must pay in full for purchases. A margin account lets the customer borrow a portion of the purchase price from the firm, subject to Regulation T and FINRA maintenance requirements, which introduces leverage and additional risk.Regulation T

An individual wants to name specific people to receive her brokerage account assets at her death, without going through probate, while keeping full control during her lifetime. Which account registration accomplishes this?

• a.Tenants in common with the beneficiaries
• b.A discretionary account
• c.An UTMA custodial account
• d.A Transfer on Death (TOD) registration✓

A Transfer on Death (TOD) registration lets the owner keep full control while alive and designate beneficiaries who receive the assets directly at death, bypassing probate. The beneficiaries have no rights to the account while the owner is living.

What is the purpose of the Automated Customer Account Transfer Service (ACATS)?

• a.To transfer a customer's account positions from one broker-dealer to another✓
• b.To automatically execute stock trades on an exchange
• c.To calculate a customer's margin requirement each night
• d.To register new securities with the SEC

ACATS standardizes and automates the transfer of customer account assets between firms. Under FINRA rules, the carrying firm must generally validate or take exception to a transfer request within one business day and complete a validated transfer within about three business days.FINRA Rule 11870

Illegal insider trading generally involves trading a security while in possession of information that is both:

• a.Old and widely reported
• b.Material and nonpublic✓
• c.Optimistic and unverified
• d.Public and immaterial

Insider trading laws prohibit buying or selling securities based on material, nonpublic information (MNPI) in breach of a duty of trust or confidence. 'Material' means a reasonable investor would consider it important; 'nonpublic' means it has not been disseminated to the market.Securities Exchange Act of 1934

An executive tells his neighbor that his company will announce a surprise merger tomorrow. The neighbor buys the stock that afternoon and profits when the news breaks. Which statement is correct?

• a.Only the executive can be liable; the neighbor did nothing wrong
• b.No violation occurred because the neighbor is not an employee
• c.The neighbor (a tippee) can be liable for insider trading for using material nonpublic information✓
• d.Insider trading applies only to trades of over one million dollars

A tippee who trades on material nonpublic information tipped in breach of a duty can be held liable for insider trading, and so can the tipper. Liability does not require being a corporate insider or a minimum dollar amount.Insider Trading and Securities Fraud Enforcement Act of 1988

A group spreads false, glowing rumors about a thinly traded stock they own to drive up the price, then sells their shares into the buying frenzy, leaving new buyers with losses. This scheme is called:

• a.Front-running
• b.Churning
• c.Selling away
• d.A pump-and-dump✓

A pump-and-dump artificially inflates a security's price through false or misleading positive statements, then the promoters 'dump' their shares at the inflated price. It is a form of market manipulation prohibited under the antifraud provisions of the securities laws.Securities Exchange Act of 1934

A trader enters large buy orders he intends to cancel before execution, hoping to trick others into thinking demand is rising so he can sell at a higher price. What is this prohibited practice?

• a.Spoofing✓
• b.Dollar-cost averaging
• c.Rebalancing
• d.A wash sale for tax purposes

Spoofing is placing bids or offers with the intent to cancel them before execution, creating a false impression of supply or demand to manipulate prices. It is an illegal form of market manipulation.Securities Exchange Act of 1934

A trader learns his firm is about to place a very large customer buy order that will likely push the price up. He quickly buys the stock for his own account first. This is best described as:

• a.Legitimate proprietary trading
• b.Front-running✓
• c.Dollar-cost averaging
• d.A permissible hedge

Front-running is trading ahead of a known, imminent large order to profit from the expected price move it will cause. It breaches the duty owed to customers and the market and is a prohibited practice.Securities Exchange Act of 1934

Just before the market closes, a trader enters a flurry of small buy orders in a stock solely to push its closing price higher and inflate the value shown on month-end statements. This manipulation is known as:

• a.Arbitrage
• b.Position netting
• c.Marking the close✓
• d.Dividend capture

Marking the close (or 'painting the tape' at the close) is entering trades near the close specifically to influence the closing price. It is a prohibited form of manipulation, often done to affect valuations, indices, or derivative settlements.Securities Exchange Act of 1934

A representative with discretionary authority trades a retiree's account dozens of times a month, generating large commissions but no clear benefit to the customer's stated goals. This is most likely:

• a.Dollar-cost averaging
• b.Suitable active management
• c.Selling away
• d.Churning✓

Churning is excessive trading in a customer's account, primarily to generate commissions, that is inconsistent with the customer's objectives. It typically requires control over the account (such as discretion) and excessive trading measured against the customer's goals and resources.FINRA Rule 2111

Without any written discretionary authority and without calling the client, a representative buys 1,000 shares of a stock in the client's account because he is sure it will rise. What violation is this?

• a.Unauthorized trading✓
• b.A legitimate 'not-held' order
• c.Front-running
• d.Proper use of discretion

Executing a trade in a customer's account without the customer's authorization (and without valid written discretionary authority) is unauthorized trading, a violation of just-and-equitable-principles standards, regardless of whether the trade turns out well.FINRA Rule 2010

A registered representative sells a private investment to several clients on the side, receiving compensation, but never tells her firm or gets its approval. What prohibited activity is this?

• a.Churning
• b.Selling away (private securities transactions without firm approval)✓
• c.Commingling
• d.Marking the close

Selling away is engaging in private securities transactions outside the scope of employment without providing prior written notice to, and receiving approval from, the firm. It denies the firm the ability to supervise the activity and protect customers.FINRA Rule 3280

A firm mixes customer securities with the firm's own securities in a way that puts customer assets at risk if the firm fails. This prohibited practice is called:

• a.Netting
• b.Rehypothecation disclosure
• c.Commingling✓
• d.Subordination

Commingling improperly mixes customer funds or securities with those of the firm, endangering customer property. Rules such as the SEC's customer protection rule require firms to segregate and safeguard customer assets.Securities Exchange Act of 1934

To close a sale, a representative tells a customer that a corporate bond is 'guaranteed by the FDIC and can never lose money.' The statement is false. This is an example of:

• a.A permissible sales puff
• b.Suitable recommendation
• c.Selling away
• d.Misrepresentation✓

Misrepresentation is making a false or misleading statement of material fact to induce a securities transaction. Falsely claiming FDIC backing or a guarantee against loss is a serious violation of the antifraud provisions.Securities Exchange Act of 1934

The Bank Secrecy Act (BSA) and related anti-money-laundering rules primarily require financial firms to do what?

• a.Detect, prevent, and report money laundering and other suspicious financial activity✓
• b.Guarantee customers a minimum rate of return
• c.Insure customer deposits against market losses
• d.Register every stock trade with the IRS

The BSA is a cornerstone of U.S. anti-money-laundering law. It requires firms to maintain AML programs, verify customer identity, keep records, and file reports such as SARs and CTRs to help detect and prevent money laundering and terrorist financing.Bank Secrecy Act

A firm's Customer Identification Program is a required component of which broader compliance framework?

• a.The firm's marketing and advertising review
• b.The firm's anti-money-laundering (AML) program✓
• c.The firm's dividend reinvestment plan
• d.The firm's proxy voting policy

CIP is a mandatory part of a firm's AML compliance program under the USA PATRIOT Act. By verifying customer identity at account opening, CIP supports the broader goal of preventing money laundering and terrorist financing.USA PATRIOT Act

A firm notices a customer making a pattern of transactions that appear designed to hide the source of funds, with no apparent lawful business purpose. Which report is most appropriate?

• a.A Currency Transaction Report (CTR) only
• b.A Form 10-K
• c.A Suspicious Activity Report (SAR)✓
• d.A dividend disbursement notice

A Suspicious Activity Report (SAR) is filed when a firm detects transactions that appear to involve money laundering, have no apparent lawful purpose, or are otherwise suspicious (generally at or above a dollar threshold). Firms must not 'tip off' the customer that a SAR was filed.Bank Secrecy Act

A Currency Transaction Report (CTR) generally must be filed when a customer conducts a cash transaction exceeding what amount in a single business day?

• a.$1,000
• b.$3,000
• c.$5,000
• d.$10,000✓

A CTR is required for cash (currency) transactions exceeding $10,000 in a single business day, including multiple transactions that aggregate above that amount. It applies to physical currency, not ordinary securities trades settled by check or wire.Bank Secrecy Act

A customer repeatedly deposits cash in amounts of $9,500 to $9,800, seemingly to stay just under the $10,000 CTR threshold. This behavior is a classic AML red flag known as:

• a.Structuring✓
• b.Rebalancing
• c.Laddering (of bonds)
• d.Netting

Structuring is breaking up cash transactions to evade the CTR reporting requirement. It is itself illegal and a strong AML red flag that should prompt further review and likely a Suspicious Activity Report.Bank Secrecy Act

Under FINRA communications rules, a communication distributed to more than 25 retail investors within any 30-calendar-day period is classified as:

• a.Correspondence
• b.A retail communication✓
• c.An institutional communication
• d.A private placement memorandum

FINRA Rule 2210 defines a retail communication as any written communication distributed to more than 25 retail investors in a 30-day period. Correspondence goes to 25 or fewer retail investors, and institutional communications go only to institutional investors.FINRA Rule 2210

A firm plans to post an advertisement about a mutual fund on its public website, reaching thousands of retail investors. Generally, what must happen before it is used?

• a.Nothing; website posts are exempt from review
• b.The customer must sign a margin agreement
• c.A registered principal must approve the retail communication before first use✓
• d.The SEC must personally pre-clear the wording

Retail communications generally must be approved by a registered principal before first use (with limited exceptions). Certain communications, such as those about registered investment companies, may also need to be filed with FINRA within stated timeframes.FINRA Rule 2210

Broker-dealers are required to keep certain business records for specified minimum periods. What is the main regulatory reason for these recordkeeping rules?

• a.To allow regulators to reconstruct activity and supervise for compliance and investor protection✓
• b.To help firms reduce their tax bills
• c.To let customers avoid paying commissions
• d.To replace the need for customer confirmations

SEC rules (such as Rules 17a-3 and 17a-4) require firms to create and preserve books and records for set periods so regulators can examine and reconstruct the firm's activities. This supports supervision, audits, and investor protection.Securities Exchange Act of 1934

In a joint brokerage account (JTWROS or TIC), which statement about trading authority is generally true while all owners are living?

• a.Only the owner listed first may enter orders
• b.Neither owner may trade without a court order
• c.Only the owner with the higher net worth may trade
• d.Any owner may enter orders, but checks are typically payable to all owners✓

In a typical joint account, each owner can enter orders and access the account, but distributions such as checks are generally made payable to all owners. The specific rights depend on the account agreement and registration type.

A customer's adult son wants authority to place trades in his elderly father's individual account. What is generally required for the son to do so lawfully?

• a.Nothing, because he is a relative
• b.A written trading authorization (such as a power of attorney) on file with the firm✓
• c.Only the son's verbal assurance that his father agreed
• d.A joint tenants in common registration in the son's name

A third party may only trade in another person's account with proper written authorization, such as a limited or full power of attorney, on file with the firm. Being a relative does not by itself confer trading authority.

A self-employed person with no employees wants a tax-advantaged retirement plan that is simple to set up and allows relatively high contributions. Which is a common fit?

• a.A 529 college savings plan
• b.A Health Savings Account only
• c.A SEP IRA✓
• d.A UGMA account

A SEP IRA is a simplified employer-sponsored retirement plan often used by self-employed individuals and small businesses, allowing tax-deductible contributions with higher limits than a standard IRA. A 529 is for education and an UGMA is a custodial gift account, not retirement plans.Internal Revenue Code

A grandparent wants to make an irrevocable gift of securities to a 10-year-old grandchild, with an adult managing the assets until the child comes of age. Which account best fits?

• a.An UGMA/UTMA custodial account✓
• b.A corporate account
• c.A Roth IRA in the grandparent's name
• d.A tenants-in-common account with the child

An UGMA/UTMA custodial account is designed for an irrevocable gift to a minor, managed by a custodian until the minor reaches the age of majority. The child cannot open a Roth IRA without earned income, and a corporate account is unrelated.Uniform Transfers to Minors Act

Why must discretionary accounts be reviewed frequently by a principal?

• a.To increase the number of trades and commissions
• b.To detect excessive trading (churning) and unsuitable activity✓
• c.To guarantee the customer never loses money
• d.To avoid having to keep any records

Frequent principal review of discretionary accounts helps detect and prevent churning and other abuses, since the representative controls trading. Supervision is a core investor-protection safeguard for accounts where the firm exercises discretion.FINRA Rule 3260

A trustee opens an account for a trust that requires conservative, income-oriented investing. The representative recommends a highly speculative penny stock. What is the core problem?

• a.Penny stocks are always illegal in trust accounts
• b.The trustee cannot open any brokerage account
• c.There is no problem because the trustee approved it
• d.The recommendation conflicts with the trust's stated objectives and the trustee's fiduciary duty✓

A trustee has a fiduciary duty to invest according to the trust's terms and the beneficiaries' interests. Recommending a speculative security to a conservative, income-focused trust is unsuitable and inconsistent with that duty, even if the trustee could technically authorize it.

During account opening, a firm cannot verify a new customer's identity using the information provided and has no reasonable belief it knows the customer's true identity. Under CIP, what should the firm generally do?

• a.Decline to open the account (or close it) and consider whether to file a SAR✓
• b.Open the account immediately and skip verification
• c.Ask the customer to verify their own identity by email
• d.Open the account but double the commissions

If a firm cannot form a reasonable belief that it knows a customer's true identity, its CIP procedures should address not opening the account, conditions for trading, when to close it, and whether a SAR is warranted. Verification is a prerequisite to account opening under AML rules.USA PATRIOT Act

Broker-dealers are required to establish, maintain, and enforce written policies to prevent the misuse of material nonpublic information. These are commonly called:

• a.Best-execution rules
• b.Information barriers (or 'Chinese Walls')✓
• c.Payout grids
• d.Prospectus delivery rules

Firms must maintain information barriers (historically called 'Chinese Walls') to prevent MNPI from flowing between departments (for example, from investment banking to trading). This is required to control insider trading risk under federal law.Insider Trading and Securities Fraud Enforcement Act of 1988

A representative, worried about losing a client, promises in writing to personally reimburse any losses in the client's account. This is:

• a.Allowed, because it protects the customer
• b.Allowed if the branch manager verbally agrees
• c.Prohibited, because a representative may not guarantee a customer against loss or share in losses improperly✓
• d.Required whenever a customer complains

Guaranteeing a customer against loss, or improperly sharing in a customer's account, is prohibited. Representatives may not promise to cover losses; doing so misrepresents the nature of investing and violates FINRA rules.FINRA Rule 2150

Under FINRA rules, a registered representative may generally share in the profits or losses of a customer's account only if:

• a.The customer is a family member, with no other conditions
• b.The representative promises to cover all losses
• c.The account is discretionary and the customer is wealthy
• d.The firm gives prior written approval and sharing is proportionate to the representative's own financial contribution✓

Sharing in a customer account is permitted only with prior written approval from the firm and generally only in proportion to the representative's own capital contributed to the account. Guaranteeing against loss is never allowed.FINRA Rule 2150

A representative asks a wealthy client for a personal loan to cover his own expenses. Under FINRA rules, this is:

• a.Generally prohibited unless it meets narrow conditions and the firm's written procedures permit and approve it✓
• b.Always allowed between a rep and any client
• c.Allowed only if the loan is under $100
• d.Required to be reported to the SEC in advance

Borrowing from (or lending to) customers is generally prohibited unless the arrangement fits narrow exceptions (such as an immediate family member or a lending-business relationship) and the firm's written procedures permit it, usually with notice and approval. It presents a serious conflict of interest.FINRA Rule 3240

A customer asks to open an account identified only by a number to keep the account owner's identity secret from the firm. Is this permissible?

• a.Yes, numbered accounts hide identity from the firm entirely
• b.No; the firm may use a number for confidentiality, but must still know and document the true account owner's identity✓
• c.Yes, as long as the customer pays in cash
• d.No account may ever use a number or symbol

A firm may use account numbers or symbols for confidentiality, but it must still obtain a signed statement of the customer's ownership and know the true identity of the account owner. Hiding the owner's identity from the firm would violate CIP and recordkeeping rules.

Compared with a basic cash account, what added document must a customer sign to open and use a margin account?

• a.Nothing; margin accounts require no customer signature
• b.A dividend reinvestment form only
• c.A margin (credit) agreement, and typically a hypothecation agreement✓
• d.A Form 10-K

Unlike a basic cash account, a margin account requires the customer to sign a margin (credit) agreement, and typically a hypothecation agreement and loan consent. These document the borrowing relationship and the firm's rights, and are a prerequisite to margin trading.

Two traders repeatedly buy and sell the same security to each other, with no change in beneficial ownership, to create the false appearance of active trading volume. This manipulation is known as:

• a.Best execution
• b.Dollar-cost averaging
• c.Legitimate market making
• d.Wash trading (matched orders)✓

Wash trading and matched orders involve transactions that create the illusion of activity without real change in ownership, misleading other investors about supply, demand, or liquidity. Both are prohibited manipulative practices.Securities Exchange Act of 1934

Which of the following is most clearly an AML red flag when opening or servicing an account?

• a.A customer who is reluctant to provide identifying information and wants to move funds quickly with no clear business purpose✓
• b.A customer who provides a valid government ID and clear source of funds
• c.A retiree making regular, modest contributions to an IRA
• d.A customer who asks about a fund's expense ratio

Reluctance to provide identification, secrecy about the source of funds, and transactions with no apparent business or lawful purpose are classic AML red flags. Providing valid ID and a clear source of funds is normal, expected behavior.Bank Secrecy Act

Under FINRA Rule 2210, 'correspondence' generally refers to a written communication distributed to how many retail investors within a 30-day period?

• a.More than 100
• b.25 or fewer✓
• c.Exactly 50
• d.Only institutional investors

Correspondence is a written communication distributed to 25 or fewer retail investors within any 30-calendar-day period. This is distinct from retail communications (more than 25 retail investors) and institutional communications (institutional investors only).FINRA Rule 2210

Which statement about institutional communications is generally correct under FINRA rules?

• a.They must always be pre-approved by a principal before first use, like retail communications
• b.They may contain misleading claims because institutions are sophisticated
• c.They are not subject to the same pre-use principal approval requirement as retail communications, but must still be supervised and cannot be misleading✓
• d.They are exempt from all FINRA rules

Institutional communications generally do not require prior principal approval, but the firm must establish written procedures for their supervision and review. They still must be fair, balanced, and not misleading, and firms must ensure they are not forwarded to retail investors.FINRA Rule 2210

Generally, a withdrawal of earnings from a traditional IRA before age 59 1/2, without an exception, is subject to ordinary income tax plus an additional penalty of:

• a.1%
• b.2%
• c.5%
• d.10%✓

Early distributions from a traditional IRA before age 59 1/2 are generally subject to a 10% additional tax on top of ordinary income tax, unless an exception applies (such as certain medical expenses, a first-home purchase up to limits, or disability).Internal Revenue Code

A representative deposits a customer's check into the representative's own personal bank account 'temporarily' before moving it to the brokerage account. This is an example of:

• a.Improper commingling of customer funds with the representative's own funds✓
• b.A permissible convenience
• c.Best execution
• d.A standard settlement practice

Placing customer funds into a personal account, even briefly, improperly commingles customer money with the representative's own and violates rules protecting customer assets. Customer funds must be handled through proper firm channels.FINRA Rule 2010

A representative learns that a customer with an individual account has died. What is the appropriate immediate action?

• a.Continue trading based on the customer's last instructions
• b.Cancel open orders, freeze the account, and await proper legal documents before releasing assets✓
• c.Immediately transfer all assets to the customer's spouse
• d.Sell all positions to lock in gains

On learning of a customer's death, the firm should cancel open orders, mark the account deceased, and not permit further trading until it receives the required legal documents (such as letters testamentary or a death certificate) identifying who is entitled to the assets.

Two unrelated investors each want their portion of a joint account to pass to their own heirs, not to each other, upon death. Which registration should they choose?

• a.JTWROS
• b.Transfer on Death in one owner's name
• c.Tenants in common (TIC)✓
• d.A single individual account

Tenants in common lets each owner hold a distinct fractional interest that passes to their own estate/heirs at death, which suits unrelated co-owners. JTWROS, by contrast, passes the deceased's share to the surviving owner.

When gathering information to make suitable recommendations for a new customer, which of the following is LEAST relevant to the customer's investment profile?

• a.Risk tolerance and time horizon
• b.Financial situation and needs
• c.Investment objectives and experience
• d.The customer's favorite sports team✓

Suitability requires understanding the customer's investment profile: age, financial situation, tax status, objectives, experience, time horizon, liquidity needs, and risk tolerance. Personal trivia unrelated to finances, like a favorite sports team, is not part of the profile.FINRA Rule 2111

Which situation is generally NOT illegal insider trading?

• a.An investor trades based on his own analysis of publicly available earnings reports✓
• b.A lawyer trades using confidential merger details from a client before the deal is public
• c.An employee buys shares knowing of an unannounced FDA approval
• d.A director tips a friend about undisclosed quarterly losses

Trading on public information or one's own lawful research is legal. Insider trading requires trading on material nonpublic information in breach of a duty. The other choices all involve MNPI obtained or used improperly.Securities Exchange Act of 1934

What is the key difference between a CTR and a SAR?

• a.A CTR is voluntary; a SAR is optional
• b.A CTR is filed for cash transactions above a dollar threshold; a SAR is filed for suspicious activity regardless of amount thresholds✓
• c.Both are filed only when a customer requests them
• d.A SAR is filed with the customer's consent; a CTR is secret

A CTR is triggered by cash transactions exceeding $10,000 in a business day, based purely on amount. A SAR is triggered by activity that appears suspicious (such as possible money laundering), and firms must not tip off the customer that a SAR was filed.Bank Secrecy Act

A representative has valid written discretionary authority accepted by the firm. She buys a suitable stock in the client's account without calling first. Is this a violation?

• a.Yes, all trades require a phone call each time
• b.Yes, discretionary authority is never valid
• c.No, because valid discretionary authority permits trading without prior consultation for each order, if the trade is suitable and properly recorded✓
• d.No, but only if the client is a family member

With valid, firm-accepted written discretionary authority, the representative may enter suitable orders without contacting the customer for each trade, provided orders are marked discretionary and the account is properly supervised. Without such authority, the same trade would be unauthorized.FINRA Rule 3260

The prohibition on 'selling away' exists primarily to ensure that:

• a.A firm can supervise its representatives' securities transactions to protect customers✓
• b.Representatives earn higher commissions
• c.Customers avoid paying any fees
• d.Only institutions can buy private placements

Selling away is prohibited because private securities transactions conducted outside the firm's knowledge escape its supervision, exposing customers to unvetted, potentially fraudulent investments. Requiring prior notice and approval lets the firm supervise and protect customers.FINRA Rule 3280

A representative wants to include the phrase 'this fund is guaranteed to double your money in one year' in a brochure sent to retail clients. Under FINRA communication standards, this is:

• a.Acceptable if a principal approves it
• b.Prohibited, because communications must be fair and balanced and may not be false, exaggerated, or promise specific results✓
• c.Acceptable if printed in small font
• d.Required disclosure language

FINRA communication rules require content that is fair, balanced, and not misleading. Promising guaranteed or specific investment results, or making exaggerated or unwarranted claims, is prohibited regardless of principal approval.FINRA Rule 2210