P2U8

  1. Question #1 of 39Question ID: 1269460
    When a firm engages in proprietary trading, buying into and selling out of its own inventory for profit, it is acting as



    • D)
    • Explanation

    When a broker-dealer buys and sells securities into and out of its own account as for the purpose of making a profit it is engaged in proprietary trading and is acting as a market maker (making markets in those securities). Investment banking and underwriting both primarily involve assisting issuers with bringing new securities issues to public investors. Agents act on behalf of others in the marketplace, such as a broker-dealer buying or selling for one of its customers.
  2. Question #2 of 39Question ID: 1269470
    A broker-dealer has a line of business restricted solely to the purchase and sale of securities with trade executions being handled by another member firm. Which of the following would best describe this type of firm?

    A)Clearing/carrying
    B)Introducing/fully disclosed
    C)Market making
    D)Prime/executing
    • B)
    • Explanation

    A fully disclosed introducing broker-dealer is what the word impliesjQuery112406637519010145121_1614394526614it introduces its customers to a clearing firm. Clearing firms (often referred to as carrying firms) hold their customer's funds and securities as well as those of their correspondent introducing firms. Essentially, the clearing firm acts as the introducing firm's back office. Because the risk associated with holding customer funds and securities is not present, net capital requirements are much lower for introducing firms than they are for self-clearing or carrying broker-dealers.
  3. Question #3 of 39Question ID: 1269455
    All of the following are benefits of using a prime broker except




    • D)
    • Explanation

    An institutional investor may select one firm (the prime broker) to provide custody and financing of securities while other firms, called executing brokers, handle all trades placed by the customer. It is not unusual for large companies to use dozens of executing broker-dealers. Trade confirmations from the many executing broker-dealers are consolidated and are provided along with account statements by the prime broker. Prime brokerage is efficient and saves the customer time and money. Research is not associated with prime brokerage accounts.
  4. Question #4 of 39Question ID: 1269452
    A broker-dealer that accepts the risk of holding a particular security in its account to facilitate trading and provide liquidity in that security is best described as

    A)a clearing corporation.
    B)a holding company.
    C)a market maker.
    D)a direct participation program.
    • C)
    • Explanation

    Market makers are broker-dealers with a line of business to stand ready to buy or sell securities (make markets) with the view of being profitable by buying low and selling high or selling high and buying low (short selling). Market making is risky. Firms that do this must demonstrate to FINRA that they can manage the operational and financial risk.
  5. Question #5 of 39Question ID: 1345710
    For margin transactions taking place through introducing broker-dealers, those who do not clear their own transactions, extension requests are




    • C)
    • Explanation

    Broker-dealers who are self-clearing will make their own extension requests. For those that are not self-clearing, known as introducing broker-dealers, the extension request must be made by the clearing firm.
  6. Question #6 of 39Question ID: 1269459
    A market maker

    A)trades in a proprietary account to facilitate trading of a security and provide liquidity.
    B)acts as an agent to buy and sell for public customers who will hold their own securities.
    C)can only be an institution doing proprietary trading.
    D)trades in a customer's account standing ready to buy or sell at their own discretion.
    • A)
    • Explanation

    Any entity, individual or institution, willing to accept the risk of holding a particular security in its own account to facilitate trading and provide liquidity in that security is known as a market maker or trader.
  7. Question #7 of 39Question ID: 1269451
    Having been told that a firm incorporates proprietary trading in its business model buying and selling securities into and out of its own inventory you would know that it is




    • A)
    • Explanation

    Broker-dealers who incorporate proprietary trading into their business model are known as market makers. As a market maker the broker-dealer trades in their own account attempting to profit. A firm making markets may be a carrying firm or a fully disclosed firm. Commissionable transactions are those done by brokers for customer accounts, not proprietary trades.
  8. Question #8 of 39Question ID: 1269478
    A broker-dealer that accepts funds and securities from customers and its correspondent member firms would most likely be which of the following?

    A)An investment company
    B)A carrying firm
    C)A depository trust
    D)A fully disclosed introducing firm
    • B)
    • Explanation

    Most firms choose to introduce their customers to another member firm known as a clearing or carrying firm to handle back-office tasks, such as clearing trades, sending trade confirmations, settlement and reporting compliance, trade execution, and custody of customer funds and securities.
  9. Question #9 of 39Question ID: 1269464
    An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another who has been legally appointed to provide these services is best described as




    • A)
    • Explanation

    A trustee is legally appointed to manage as a fiduciary assets in a trust.
  10. Question #10 of 39Question ID: 1269447
    A stock's market value is directly determined by which of the following?

    A)Company's financial condition
    B)Vote of the stockholders
    C)Board of directors
    D)Supply and demand
    • D)
    • Explanation

    The market value of stock is directly determined by supply and demand and only indirectly by the remaining choices, such as a company's financial condition.
  11. Question #11 of 39Question ID: 1269467
    Your broker-dealer, rather than clear its own securities transactions, chooses to introduce its business to another firm that will clear, processes and handle all back-office operations for it. The firm receiving the business is known as




    • B)
    • Explanation

    A firm that chooses to introduce its customers' business to another firm to clear and process transactions, as well as handle all back-office tasks such as sending trade confirmations and taking custody of customer funds and securities, is known as an introducing or fully disclosed firm. The firm receiving the business is known as the carrying or clearing firm.
  12. Question #12 of 39Question ID: 1269454
    An institutional investor selects a single Financial Industry Regulatory Authority (FINRA)/NYSE member firm to provide for financing and custody of securities while orders to buy or sell are placed with executing brokers. This is an example of




    • B)
    • Explanation

    A prime brokerage account is one in which a customer (an institution) selects one member to provide custody and financing of securities and executes trades with other firms known as executing brokers.
  13. Question #13 of 39Question ID: 1269457
    A clearing corporation agent or depository for securities transactions

    A)can be a commercial bank.
    B)must be a broker-dealer.
    C)can be a bank or corporation only if they are also a broker-dealer.
    D)can never be a corporation.
    • A)
    • Explanation

    A clearing agent can be a broker-dealer but doesn't have to be. In addition to broker-dealers, commercial banks can act as clearing agencies and depositories, as can corporations that are set up specifically to clearing securities transactions and taking custody of funds and securities.
  14. Question #14 of 39Question ID: 1269456
    Anyone who, as part of their business, gives investment advice for compensation must register as




    • B)
    • Explanation

    Broker-dealers who provide advice for a fee are subject to registration under this 1940 IA Act. Agents of investment advisers must register and pass a qualification examination.
  15. Question #15 of 39Question ID: 1269462
    A broker-dealer that accepts the risk of holding a particular security in its account to facilitate trading and provide liquidity in that security is best described as

    A)a holding company.
    B)a direct participation program.
    C)a market maker.
    D)a clearing corporation.
    • C)
    • Explanation

    Market makers can be individuals or broker-dealers with a line of business to stand ready to buy or sell securities (make markets) with the view of being profitable by buying low and selling high or selling high and buying low (short selling). Market making is risky. Firms that do this must demonstrate to Financial Industry Regulatory Authority (FINRA) that they can manage the operational and financial risk.
  16. Question #16 of 39Question ID: 1269450
    Which of the following statements would describe the Fourth Market?



    • C)
    • Explanation
    • The Fourth Market is a market for institutional investors in which blocks of stock trade through ECNs that are open 24 hours a day acting as agents.
  17. Question #17 of 39Question ID: 1269449
    A market in which exchange-listed securities are traded in the over-the-counter (OTC) market would best be described as

    A)the First Market.
    B)the Third Market.
    C)the Second Market.
    D)the Fourth Market.
    • B)
    • Explanation
    • Broker-dealers registered as OTC market makers in exchange-listed securities may execute transactions in the Third Market. All securities listed on the NYSE and most securities listed on the regional exchanges are eligible for OTC trading as long as the trades are reported to the Consolidated Tape within 10 seconds of execution.
  18. Question #18 of 39Question ID: 1280021
    All of the following would be secondary market transactions except




    • D)
    • Explanation
    • Exchanges (like the NYSE and the OTC market) are part of the secondary market. The primary market is the issuer selling to the public.
  19. Question #19 of 39Question ID: 1269476
    A firm that functions for the purpose of receiving and delivering payments and securities on behalf of both buyer and seller in a securities transaction is

    A)a clearing agent.
    B)a transfer agent.
    C)a broker-dealer.
    D)a depository.
    • A)
    • Explanation
    • A clearing agent is an intermediary between the buy and sell sides of a transaction that receives and delivers payments and securities on behalf of both parties. While some broker-dealers are self clearing (act as their own clearing agent), simply being a broker-dealer doesn't always include being able to provide the services of a clearing agent.
  20. Question #20 of 39Question ID: 1269463
    An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another is known as



    • A)
    • Explanation
    • A person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another is known as a custodian, for example, the custodian for the account of a minor. This is different than a trustee who is a legally appointed entity. By contrast, anyone can open a custodial account for a minor as long as they are themselves an adult.
  21. Question #21 of 39Question ID: 1269453
    An individual who purchases securities for a personal account is called




    • D)
    • Explanation
    • An individual who makes investments such as the purchase of securities for his account rather than for an organization is a retail investor. This investor may be accredited, but there is no way to know for sure given the limited information.
  22. Question #22 of 39Question ID: 1345711
    All of the following are true regarding the term market except



    • D)
    • Explanation

    The term market is used to describe any physical place or electronic venue where buyers and sellers can come together for the purpose of trading assets. Markets can be found in nearly every nation in the world and would include stock markets and other trading venues where they exist.
  23. Question #23 of 39Question ID: 1269448
    When investors buy and sell securities to and from one another, these transactions occur



    • D)
    • Explanation

    Primary market transactions involve the issuer or someone acting on behalf of the issuer, such as an underwriter. Secondary markets are where investors can buy and sell securities to and from one another. The secondary market includes exchanges and the OTC market.
  24. Question #24 of 39Question ID: 1307633
    Which of the following would be a secondary market transaction?



    • A)
    • Explanation

    IPOs, APOs, and mutual fund transactions involve the issuer selling to the public, which are primary market transactions. Secondary market transactions are between investors (which is what takes place on the NYSE as well as other exchanges and the OTC market).
  25. Question #25 of 39Question ID: 1269468
    Carrying firms, those that carry customer accounts, must



    • D)
    • Explanation

    Carrying firms, those that carry customer accounts, must segregate customer funds and securities from that of the firm's and because carrying customer accounts entails some inherent risk, maintain net capital higher than that which would be required for noncarrying firms.
  26. Question #26 of 39Question ID: 1269469
    Carrying firms may not



    • A)
    • Explanation
    • Carrying firms can do trade executions, clear and settle transactions, and handle all back-office tasks, such as sending trade confirmations and statements. While they can take custody of customer funds and securities, they may not commingle them with those belonging to the firm. Abiding by the rule is known as segregating customer funds and securities.
  27. Question #27 of 39Question ID: 1269474
    A fully disclosed broker-dealer

    A)is also known as a full-service clearing agent able to process and clear transactions.
    B)is like a clearing agent in that it can take custody of funds and securities.
    C)is one that introduces its business to a carrying firm to clear transactions.
    D)clears all of its retail customer transactions and those of other broker-dealers.
    • C)
    • Explanation
    • A fully disclosed broker-dealer is also known as an introducing broker-dealer because it introduces its business to a carrying firm that can clear and process transactions for it. Unable to clear transactions themselves, they are not a clearing agent or carrying firm and therefore cannot take custody of funds and securities.
  28. Question #28 of 39Question ID: 1269461
    Which of the following is true regarding a member firm operating under Financial Industry Regulatory Authority (FINRA) membership or the membership of another self-regulatory organization (SRO)?



    • C)
    • Explanation
    • Member firms can offer all types of investment products such as stocks, bonds, mutual funds, and derivatives like options and others (be full service) or limit the products they offer to only a few. They need not adopt proprietary trading into their business model but can if they wish to. Likewise, they need not accommodate doing business with retail customers if they wish to deal only with other industry professionals, such as institutional investors.
  29. Question #29 of 39Question ID: 1269466
    All of the following are associated with being a carrying firm except




    • C)
    • Explanation
    • A carrying firm has the capability to do trade executions, clear and settle transactions, and take custody of customer funds and securities. A fully disclosed firm is one that introduces its customer business to another firm for the purpose of clearing and settling transactions.
  30. Question #30 of 39Question ID: 1269472
    A firm designated as self-clearing can
    act in a back-office capacity for an introducing firm.
    not act in a back-office capacity for an introducing firm.
    clear and settle transactions executed by other firms.
    only clear transactions it executed.
    A)I and III
    B)I and IV
    C)II and IV
    D)II and III
    • A)
    • Explanation

    Self-clearing firms not only clear and settle their own executions (transactions) but can clear the executions of other firms that would be considered introducing or fully disclosed firms. In this light, fully disclosed firms are those that introduce their business to clearing firms. Clearing and settling transactions includes providing any back-office functions needed.
  31. Question #31 of 39Question ID: 1269475
    A broker-dealer's business model allows for only the purchase and sale of securities for retail customer accounts. It does not execute, settle, or clear its customer's transactions, nor does it tend to any back-office functions such as sending trade confirmations or forwarding proxies. This broker-dealer would best be described as what type of firm?
    A)Full service
    B)Clearing agent/carrying agent
    C)Introducing/fully disclosed
    D)Market making
    • C)
    • Explanation

    A fully disclosed introducing broker-dealer is what the word implies??it introduces its customer's business to a clearing firm. Clearing firms (often called carrying firms or agents) hold funds and securities and settle transactions (clear and process) for their correspondent introducing firms. Essentially, the clearing firm acts as the introducing firm's back office.
  32. Question #32 of 39Question ID: 1269446
    It is expected that financial markets



    • A)
    • Explanation
    • A number of different assets, such as equities (stocks), debt (bonds), currencies, and derivative products like options can be offered and traded in the financial markets. These markets are expected to have transparent pricing aligning with supply and demand and to adhere to basic rules and regulations.
  33. Question #33 of 39Question ID: 1269477
    A broker-dealer that executes trades and settles transactions for another broker-dealer is called

    A)a limited broker-dealer.
    B)an introducing firm.
    C)a carrying firm.
    D)a fully disclosed firm.
    • C)
    • Explanation
    • Carrying firms, also known as clearing firms, execute trades, clear and settle transactions, take custody of customer funds and securities, and handle all back-office tasks such as sending trade confirmations and statements for themselves as well as for other broker-dealers classified as introducing or fully disclosed firms.
  34. Question #34 of 39Question ID: 1269465
    The transfer agent for a corporation is responsible for each of the following except



    • D)
    • Explanation

    The transfer agent (often a bank) for a corporation is responsible for ensuring that its securities are issued in the correct owner's name, canceling old and issuing new certificates, maintaining records of ownership, and handling problems relating to lost, stolen, or destroyed certificates. Acting as an intermediary in a trade is the function of the clearing corporation.
  35. Question #35 of 39Question ID: 1269473
    Correspondent firms would be likely to have relationships with which of the following types of broker-dealers?



    • B)
    • Explanation

    A self-clearing (or carrying) firm holds funds and securities of the fully disclosed or introducing firm's customers and performs related functions, such as sending confirmations and statements for them. Those firms for whom the carrying firm performs these services are known as their correspondents.
  36. Question #36 of 39Question ID: 1280023
    Which of the following transactions would take place in the secondary market?




    • C)
    • Explanation
    • Secondary market transactions are investor-to-investor transactions. Primary market transactions are issuers selling to the public. A broker-dealer selling securities from its own inventory is operating in the secondary market (likely as a market maker in the OTC market).
  37. Question #37 of 39Question ID: 1269479
    All of the following are acceptable choices to function as a depository and intermediary for transactions between buyers and sellers of securities except



    • D)
    • Explanation

    Credit unions cannot serve as a depository or clearing facility for securities transactions.
  38. Question #38 of 39Question ID: 1280022
    Secondary market transactions would include all of the following except



    • A)
    • Explanation
    • Market makers are broker-dealer who sell out of their own account in the secondary market. Underwriters are broker-dealers who help issuers bring their securities to market in the primary market.
  39. Question #39 of 39Question ID: 1269471
    Your broker-dealer executes trades for other broker-dealers and after execution settles those transactions for them. Your firm would be classified as which of the following?



    • A)
    • Explanation
    • Carrying firms, or clearing broker-dealers, can execute trades, clear and settle transactions, take custody of customer funds and securities, and handle all back-office tasks, such as sending trade confirmations and statements for themselves as well as for other broker-dealers.
Author
NancyShi
ID
354706
Card Set
P2U8
Description
Part 2 Unit 8
Updated