Series 7 Review Questions

Missed Exam Questions for Review

What is displayed on the Consolidated Quotation System (CQS)?

bid/ask quotations for listed stocks reported by national exchanges and OTC third market makers.

Directed Orders (by customer)

Directed orders specify the exchange on which they want the trade executed. Broker dealers are not obligated to accept, but if it does, it is required to follow the customers instructions. These orders are exempt from the BD’s best execution obligation.

What is the interest rate for a margin account debit balance based on?

Broker call loan rate… this is the rate charged to a brokerage firm when it borrows money from a bank to replace the funds being provided to a margin customer.

Can options contracts be purchased on margin?

No. They must be paid in full.

Per Reg T, what is the payment date for securities purchased in either a cash or margin account?

2 business days after the settlement date

SEC Regulation SHO

Prior to executing a short sale, a BD must locate the securities to ensure that they will be available for delivery upon settlement date. The purpose of the requirement is to protect against uncovered short selling abuses.
Also requires that BDs make a notation on every sell order ticket to indicate whether the transaction is a long sale or short sell.

Explain the similarities and differences between VRDOs and ARSs.

VRDOs have rates reset by remarketing agent; ARSs by Dutch auction. Both are LT. VRDOs have lower liquidity risk, auctions can fail for ARSs.

Grey Markets

stocks that are non-exchange listed and not actively quoted in OTC markets are bought and sold on grey markets. Stocks may have been delisted or yet to go public.

Market Wide Circuit Breakers Tiers

L1 - 7% - 15m halt (up to 3:25pm)
L2 - 13% - 15m halt (up to 3:25pm)
L3 - 20% - Trading halts for remainder of day

Tenants in Common Account

interest of deceased passes to the estate of the deceased

Overlapping Debt

Involves GO borrowing

3 types of REITs?

Morgage, equity, hybrid

Lock Up Agreement

dictates the amount of time that pre-IPO investors, such as private placement buyers, typically must wait to sell shares once a company has gone public.

When does an arbitrage opportunity exist for convertible bonds?

When stock is trading at a premium to parity

Electronic Communication Networks (ECNs)

securities trading systems that are designed to anonymously match buyers with sellers

According to SEAof1934, only long must BDs wait before extending credit on MF shares

30 day

Reverse Merger

Typically done when a private company buys a public company. The public company survives. This allows the private company to bypass the IPO process.

Back End Sales Charges

In addition to a disclosure in the prospectus, a confirmation is sent by a member firm selling a fund with a back-end load (CDSC) must include a statement that a sales charge may be assessed upon redemption

Sinking Funds

Savings accounts that assist issuers in paying an outstanding bond issue. Often associated with term bond offerings. Escrow and crossover funding are associated with the re-financing of outstanding bonds

Employed Yield Computation Disclosure

A BD who transacts an order for a customer must send a confirmation disclosing the yield computation employed, if it acted as an agent for the customer and as an agent for another person, and if it acted as a principal for its own account

Total Bonded Debt

All of the GO debt issued by a municipality. Total directed debt is the sum of all of the total debt and unfunded debt.

Portfolio Margin requirements

significantly lower than normal margin requirements

Interval Fund

Type of closed end fund that continuously offers shares to investors. Interval fund shares don’t trade above or below NA or in the secondary market. Investors are only allowed to sell shares back to the fund at NAV at specific intervals.

Reverse Convertible Security

ST note issued by banks and BDs that typically pays a coupon rate above prevailing market rates. Investors may be forced to purchase stock if price fails to knock-in level.

ETF Minimum Margin Requirement

Leverage factor * SRO min req (50%)

Retail Communication

>25 investors in a 30 day period

Additional Bonds Covenant or Test

used to issue new bonds. Its purpose is to ensure a project’s revenue is high enough to pay both existing bonds and bonds that are being proposed.

Student Loan Marketing Association (SLMA) aka Sallie Mae

provides liquidity to student loan makers and financing for state student loan agencies. They do not back CMOs.

Where are priority provisions for liquidating a general partnership found?

Certificate of Limited Partnership

How does the OCC select a firm to receive an exercise notice?

Random selection basis

Eurodollars

US dollars on deposit in foreign banks, not just in Europe. Primarily for financing investments outside the US.

What needs to be filed with a complaint?

A memo describing any action taken in response to the compliant

What securities are eligible as escrow when a municipal bond is being advance refunded

Treasury obligations

What do closed-end investment company shares sell at

current market value plus commission

Allocation of municipal bond issues

presale > group > designated > member

How often is a short margin account marked to market to make sure the account is above maintenance?

Once a day

FINRA Rule 2330

Suitability requirements for recommendations concerning purchase of variable annuities apply to the following 3 scenarios:
(1) new purchases, (2) exchanges, (3) initial subaccount allocations

FinCEN and OFAC are both apart of the…

Treasury Department

Control Relationship Disclosure

Customers must be informed about the existence of a control relationship regardless of the type of account or transaction. Q

What are municipal notes typically used for?

Interim (temporary) financing

Minimum maintenance requirement states that equity must equal ___% of the market value of the securities in the account

25%

__% of REIT’s income must be derived from dividends, interest, or rents from RE investments. __% of income mist go to shareholders

95% and 90%

Where are foreign exchange rates established?

The Interbank Market

Rule 147 Exemption

provides exemption from registration for securities being sold on an intrastate basis. Cannot sell to out of state investors until after 6 months.

In regards to MF bid and ask prices, when can a member firm sell at a discount?

Only to other member firms. Not to public or nonmembers.

Level Debt Service Bond Issue

combined annual interest and principal payments are equal

Delivery vs Payment (DVP) and Receive vs Payment (RVP) Accounts

used by institutions that hold assets at a third party, typically a custodian bank. When the institution is buying or selling securities, its BD will need to communicate with the third-party agent about payment and security delivery. The institutional client needs to provide details about the third-party agent.

Net Overall Debt to Assessed Valuation

useful in analyzing the credit risk of an issuer of GO bonds

What is required when a non-US citizen is opening an account?

One of the following: passport and country of issuance, taxpayer ID#, or any government issued document with a photo.

Where do trades in error go

BDs error account

What is required before a municipality can begin making payments on a moral obligation bond?

State legislative approval

When rates increase, will the price of a discounted or premium bond fall more sharply?

Discounted bond

Reg A Offering

exempt from the registration and prospectus requirement. Offering is limited to $75 million of securities during a 12 month period.

Rule 145

Applies to mergers, consolidations, reclassifications of securities or transfers of corporate assets. Companies must provide written disclosure.

Regulation S resale

Before a security that is sold under the provisions of Reg S may be resold in the US, there is a distribution compliance period that must be satisfied. 40 days for debt, 1 year for equities.

When are breakpoints permitted

For investments in the same fund family even if the shares are purchased at a diff BD

Are changes permitted after the annuitization of an annuity?

No

What is the relevant look-back period for exchanges of variable contracts?

36 months. Exchanges must be scrutinized for frequency and suitability.

Soft Dollars

products and services that an investment adviser receives from a BD in exchange for customer order flow. Services must benefit the customer

Contributions to qualified plan

made with pre-tax dollars, zero cost basis. Entire distribution amount is taxable.

What is the Federal Farm Credit System composed of?

Banks for Cooperatives, Federal Intermediate Credit Banks, and Federal Land Banks

Form 144

After filing, an investor has 90 days to sell the greater of 1% of the outstanding shares, or the average weekly trading volume over the past 4 weeks

Options contract adjustment

Number of shares can be adjusted for a stock dividend or odd stock split

Long Combination

Purchase of a call and put on the same stock, with different expirations and/or strike prices, is a long combination.

When can firm place a temporary hold on account?

Hold of funds can be placed on account for any customer who is over 18 and has a mental or physical impariment

Variable Annuity L Shares

aka short surrender annuities, generally have surrender periods of 3 to 4 years, after which no sales charges apply

VA B Shares

normal shares with CDSC, typical surrender period of 7 to 8 years

VA A Shares

front end loaded

VA C Shares

12b-1 fees

Who is responsible for the operation of a UIT

Trusttee

Total Takedown =

additional takedown + concession

MF disclosure requirement

required to disclose in the front of a prospectus a standardized fee table of all of its fees

Do portfolio margin client need to be approved for uncovered writing?

Yes

How long must records be kept when changes are made to a customers account

Min 6 years

Callable Bonds and YTC

When bonds are called, the YTC must be disclosed on the confirmation. If a call notice has not been issued, the lower of the YTC or YTM must be disclosed.

Bond at discount YTC>YTM… premium YTM>YTC

Retail Order Period

Negotiated municipal bond offerings will often have a retail order period, during which orders from individual investors or small investment accounts receive priority

Federal Regulation requires that an individual receive payment for redemption of a MF within…

7 days

When must a person file form 3 with the SEC

Within 10 days of becoming an insider (owns >10% of equity securities)

Interest and principal payments on GNMA pass through certificates are made…

monthly

Renewal and Replacement Fund

holds monies set aside for the improvement of the facility on a municipal revenue issue

During annuitization, a variable annuity owner will receive payments that are based on a:

fixed number of annuity units

Position Limit Rule

regulates the maximum number of option contracts and investor may have, per security, on one side of the market.W

What rate are REIT dividends taxed at?

taxed at the same rate as ordinary income since an REIT does not pay corporate income tax if it distributes a minimum percentage of its income.

Portfolio Margin Breakdown

In a portfolio margin account, hedges are considered as well as the interrelationship between existing positions. Using a portfolio-based rationale, margin allows a BD to align the amount of margin money required to be maintained in the account to the risk of the portfolio as a whole. This approach considers simulated market activity and considers offsetting positions in an account that are positively correlated. Portfolio margining examines the net risk of the entire portfolio

If a person who's associated with a FINRA member firm has been indicted for any felony or any misdemeanor that involves the purchase or sale of a security, theft, robbery, burglary, extortion, forgery, or counterfeiting, what action must be taken? This includes shoplifting and, in some states, driving under the influence (DUI).

The event must be reported to FINRA. Since the person has not been convicted, he is not subject to statutory disqualification and may stay employed at the member firm.

Is written notification required when opening an account with another member firm if the transactions will be limited to redeemable investment company shares, variable contracts, or unit investment trusts?

No

Option Trade Settlement

T + 1

Series K Preferred Stock is suitable for what kind of investor?

An investor who is seeking a high fixed dividend for a period followed by a floating rate dividend.
Series K characteristics: issued by financial services company, has no maturity date, its dividend is non-cumulative and it may not carry voting rights, and it is callable at the option of the issuer

Yield to Worse

Callable bond quote based on the most conversative scenario

T or F: Changes in a client’s patterns or purchases and sales may indicate a different financial situation, and thus the RR should update the client’s profile

True

A private placement conducted under Regulation D may be sold to a maximum of…

35 nonaccredited investors. There is no limit to the number of accredited investors. W

When Issued Transaction

The term “when-issued” covers the period of a new issue of municipal bond securities from the original date of sale by the issuer to the delivery of securities to the underwriter.

Guaranteed Bond

Bond that, along with its primary form of collateral, is secured by the guarantee of another corporation. The other corporation promises to pay principal and interest if necessary.

How long must records of customer complaints be maintained by member firms?

4 years

Due bill is used if trade occurs…

Before the ex-dividend date, with delivery made after the record date.
A due bill is evidence that a dividend is due to a buyer of stock, but will be paid to the seller instead.

Ex-dividend date for a mutual fund

Mutual fund shares do not trade on exchanges and do not have a fixed settlement date. For this reason, the ex-dividend rate for a mutual fund will not automatically be on the same day as the record date, as it is for common stock. A mutual funds ex-dividend date is on a date that is determined by the fund or principal underwriter (sponsor).

Does the MSRB regulate issuers?

No. This means copies of official statements do not need to be retained, or even prepared.

Regulation SP Privacy Requirements

A privacy notice must be provided to a customer at the time the account is opened and annually thereafter. If this individual did not have an account with the dealer, he would be defined as a consumer, and the privacy notice would have to be provided at the time any non-public (personal) information was disclosed to an unaffiliated third party.

Consumer must be given a reasonable opportunity to opt out of information sharing. This is done through the delivery of the privacy notice, and the customer must positively affirm he wants to opt out.

Regulation NMS (National Market System)

Requires a BD to provide its clients with the best price available for listed equity trades available for electronic execution. The best price is defined as the highest bid or lowest offer (inside market) from all available market centers.

Does not apply to securities that are subject to manual execution, or to debt or OTC equities.

Business Development Company (BDC)

raises capital by selling securities to investors, has a structure that is similar to a closed-end investment company, and provides investors with access to their capital.