Practice: 1.1.4 Market Participants and their Roles

Section 1: Knowledge of Capital Markets. 12 question(s) in this unit's pool (2 above the exam). Free up to ten a day; the coach picks which ones based on what you have already answered and when each is next due.

Section 1: Knowledge of Capital MarketsSIE outline 1.1.4

Today's practice

Pick an answer, say how sure you are, then reveal. Every wrong choice gets its own explanation. Questions you have already answered correctly and confidently stay out of the way until they are due for review again.

Question 1Exam level

An introducing firm and a clearing firm both service the same customer account. Under FINRA Rule 2266, what may the two firms do about the SIPC notice requirement?

A. Assign the duty to just one of the two firms B. Each must send a separate, duplicate SIPC notice C. Neither firm carries any SIPC-notice duty once two firms share an account D. Only the clearing firm may ever send the notice, by rule

How sure are you?

Sure Fairly sure Guessing

Correct: A. FINRA Rule 2266's own text lets the two firms assign the SIPC-notice duty to just one of them when both service the account.

B. The rule exists to avoid a duplicate-notice requirement, not to require one.

C. The duty still exists; the rule only makes it assignable, it does not eliminate it.

D. The rule lets the two firms assign the duty between themselves; it does not fix it to the clearing firm alone.

Unit: SIE outline 1.1.4

Question 2Exam level

A large institutional client uses one firm that both brings in its trades and holds its assets, under a single relationship. What is that firm acting as?

A. A prime broker B. A transfer agent C. A municipal advisor D. A depository

How sure are you?

Sure Fairly sure Guessing

Correct: A. A prime broker does both the introducing and clearing roles for a large client, under one relationship.

B. A transfer agent keeps the ownership record; it does not introduce or clear trades.

C. A municipal advisor advises municipal issuers, not a trading client like this one.

D. A depository settles securities in bulk after a trade; it is not a single client's own relationship firm.

Unit: SIE outline 1.1.4

Question 3Exam level

A firm charges its clients an annual fee of 1% of assets for continuing portfolio advice and places no trades at all. Under which statute does it register?

A. The Securities Exchange Act of 1934, as a broker-dealer B. The Investment Advisers Act of 1940, as an adviser C. The Securities Act of 1933, as an issuer D. The Investment Company Act of 1940, as a fund

How sure are you?

Sure Fairly sure Guessing

Correct: B. The firm is paid a continuing fee for advice, not for effecting transactions, which is the line the outline draws between an adviser and a broker-dealer.

A. Exchange Act Section 15 registers firms that effect transactions for others; this firm places none.

C. The 1933 Act registers issuers' offerings, not advisory businesses.

D. The Investment Company Act governs pooled vehicles; a fee on separate accounts pools nothing.

Unit: SIE outline 1.1.4

Question 4Exam level

An introducing firm takes a customer's order but holds none of the customer's money or securities. Which firm actually holds and safeguards those assets, and sends the account statements?

A. The custodian bank B. The clearing (carrying) firm C. The transfer agent D. DTCC

How sure are you?

Sure Fairly sure Guessing

Correct: B. The clearing, or carrying, firm holds the customer's assets, clears and settles the trades, and issues the statements.

A. A custodian bank can hold assets in other contexts, but the outline's introducing/clearing split names the clearing firm as this role.

C. A transfer agent keeps the issuer's ownership record; it does not hold a customer's brokerage assets.

D. DTCC nets and settles between clearing firms; it is not the firm that holds a specific customer's account.

Unit: SIE outline 1.1.4

Question 5Exam level

A single firm is exclusively assigned to one listed stock on an exchange and carries an affirmative obligation to maintain a fair and orderly market in it. What is this participant called today?

A. A market maker B. A designated market maker (DMM) C. An introducing firm D. A prime broker

How sure are you?

Sure Fairly sure Guessing

Correct: B. A designated market maker, formerly called a specialist, is the single firm assigned to a listed security with that affirmative obligation.

A. A market maker is one of possibly several competing quoters in an over-the-counter security, not a single exclusive assignment.

C. An introducing firm takes customer orders; it has no role making prices in a listed security.

D. A prime broker finances and reports an institution's trades elsewhere; it does not make markets.

Unit: SIE outline 1.1.4

Question 6Exam level

Which participant maintains the issuer's official record of registered owners and pays the dividends off it?

A. The registrar, which audits the issuer's share count B. The transfer agent, which keeps the issuer's owner list C. The custodian bank that safekeeps the customer's shares D. The Depository Trust and Clearing Corporation (DTCC)

How sure are you?

Sure Fairly sure Guessing

Correct: B. The transfer agent keeps the issuer's official register of owners, records ownership changes, and pays dividends off that register.

A. The registrar audits that work, reconciling shares outstanding against shares authorized; it keeps no owner list of its own.

C. A custodian safekeeps property but records no ownership.

D. DTCC settles between clearing firms and keeps no owner list.

Unit: SIE outline 1.1.4

Question 7Exam level

On the SIE outline, what does "OCC" refer to when a stem discusses exercise, assignment and guarantee of a listed contract?

A. The Office of the Comptroller of the Currency B. The Options Clearing Corporation C. An abbreviation for "over-the-counter clearing" D. A state securities administrator

How sure are you?

Sure Fairly sure Guessing

Correct: B. Exercise, assignment and guarantee are options language; the outline's OCC is the Options Clearing Corporation, issuer and guarantor of every listed option.

A. The bank regulator shares the initials but is not named as a market participant on the SIE outline at all.

C. Not a real term; the outline uses "OCC" only for the Options Clearing Corporation.

D. State securities administrators are covered elsewhere in the outline, under NASAA, not this bullet.

Unit: SIE outline 1.1.4

Question 8Harder

An issuer offers a member firm monthly cash to publish quotations and make a market in its stock. What does FINRA Rule 5250 permit?

A. Accepting it if the payment is disclosed to customers in writing B. Accepting it only if the issuer is an SEC-reporting company C. Refusing it, though the firm may still be paid for bona fide underwriting D. Accepting it if the firm also quotes two other issuers' stocks

How sure are you?

Sure Fairly sure Guessing

Correct: C. Rule 5250(a) bars payment from an issuer for publishing a quotation or making a market; Rule 5250(b)(1) permits payment for bona fide services such as underwriting.

A. The rule contains no disclosure cure; telling the customer changes nothing.

B. The ban does not turn on whether the issuer reports to the SEC.

D. Quoting other issuers has no bearing on this ban.

Unit: SIE outline 1.1.4

Question 9Harder

A bond's indenture trustee monitors covenants on behalf of the bondholders. How does its role differ from a custodian's?

A. They are the same role under two different names B. A custodian only holds and safeguards assets; a trustee holds legal title and owes a duty to act for the beneficiary C. A trustee only holds assets; a custodian has the duty to act for the beneficiary D. Neither one ever holds legal title to anything

How sure are you?

Sure Fairly sure Guessing

Correct: B. A custodian safeguards assets belonging to someone else. A trustee holds legal title under a trust instrument or indenture and must act for the beneficiary, such as enforcing covenants for bondholders.

A. The outline pairs them precisely because they are not the same job; one only holds, the other holds and acts.

C. Reverses the two roles.

D. A trustee does hold legal title, under the trust document or indenture.

Unit: SIE outline 1.1.4

Question 10Harder

A municipal advisor is retained by a school district to help structure and time its own bond issue. How does this differ from a municipal trading desk at a dealer?

A. They are interchangeable names for the same registration. The two are registered separately precisely because the duties differ. B. The advisor owes the issuer a fiduciary duty; the trading desk buys and sells municipal bonds with customers and dealers and is paid on the transaction C. The trading desk owes the fiduciary duty; the advisor is paid on the transaction. Reverses the two roles. D. Only the trading desk is registered; the advisor needs no registration. The municipal advisor is separately registered for exactly this advisory role.

How sure are you?

Sure Fairly sure Guessing

Correct: B. The municipal advisor sits on the issuer's side of the table and owes it a fiduciary duty; the trading desk buys and sells municipal bonds with customers and other dealers and is compensated on the transaction.

A. The two are registered separately precisely because the duties differ.

C. Reverses the two roles.

D. The municipal advisor is separately registered for exactly this advisory role.

Unit: SIE outline 1.1.4

Question 11Above the exam

A broker-dealer executes a customer's order as agent for a commission on Monday. On Tuesday, the same firm underwrites a new issue on a firm-commitment basis. If some of Tuesday's new shares go unsold, whose problem is that, and was the firm still acting as an agent?

A. The issuer's problem; the firm was still acting as agent on both days B. The underwriter's own problem; in a firm-commitment deal it bought the issue outright and resells as principal, not as agent C. Nobody's problem; unsold shares in a firm-commitment deal are simply canceled D. The issuer's problem; underwriters are never at risk under any offering structure

How sure are you?

Sure Fairly sure Guessing

Correct: B. The same firm's capacity changes trade by trade: on Monday it acted as agent, on Tuesday, in a firm-commitment underwriting, it bought the issue outright and resells as principal, so unsold shares are its own risk, not the issuer's.

A. Ignores that a firm-commitment underwriter buys and resells as principal, not as agent, and that unsold-share risk sits with the underwriter, not the issuer.

C. Invents an automatic cancellation the source never describes; the underwriter owns the unsold shares.

D. Contradicts the very risk allocation a firm-commitment deal is defined by; the underwriter can carry real risk.

Unit: SIE outline 1.1.4

Question 12Above the exam

A 40-year-old has a net worth of $700,000 excluding her home, and earned $210,000, then $215,000, then $190,000 in the last three years respectively, the $190,000 being this most recent year. Does she qualify as an accredited investor under the natural-person tests?

A. No; her net worth is under $1,000,000, and her most recent year's income of $190,000 breaks the requirement that each of the two most recent years clear $200,000 B. Yes; her net worth alone qualifies her. $700,000 is below the $1,000,000 net-worth threshold, so this test alone does not qualify her. C. Yes; any single year over $200,000 in the past three years is enough. The test requires each of the two most recent years to clear the threshold, not just any one year in a longer span. D. No; only entities, never individuals, can be accredited investors. The natural-person tests exist specifically to qualify individuals; entities have their own separate tests.

How sure are you?

Sure Fairly sure Guessing

Correct: A. The net-worth test needs over $1,000,000 excluding the home; $700,000 fails it. The income test needs over $200,000 individually in each of the two most recent years; her two most recent years are $215,000 and $190,000, and the $190,000 year breaks the test.

B. $700,000 is below the $1,000,000 net-worth threshold, so this test alone does not qualify her.

C. The test requires each of the two most recent years to clear the threshold, not just any one year in a longer span.

D. The natural-person tests exist specifically to qualify individuals; entities have their own separate tests.

Unit: SIE outline 1.1.4

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