- The central securities depository in the United States, responsible for automating the clearing, settlement, and custody of most securities transactions, is the:
Answer: Depository Trust & Clearing Corporation (DTCC).
The DTCC is a user-owned organization that provides post-trade clearing, settlement, custody, and information services for equities, corporate and municipal bonds, mutual funds, and other securities. The SEC is a regulator, the OCC clears options, and the Federal Reserve is the central bank.
- A firm that specializes in assisting corporations with raising capital through securities offerings, and may also provide advice on mergers and acquisitions, is known as a(n):
Answer: investment bank.
An investment bank is a financial intermediary that performs a variety of services, most notably acting as an underwriter for corporations and governments that are issuing securities. A commercial bank primarily takes deposits and makes loans. A clearing corporation handles post-trade processing, and a custodial bank holds assets.
- A firm that stands ready to buy or sell a specific security for its own account on a regular and continuous basis at a publicly quoted price is best described as a(n):
Answer: market maker.
A market maker is a firm that provides liquidity in a security by displaying buy (bid) and sell (ask) quotes for its own account, hoping to profit from the spread. A trader buys and sells for the firm's account but is not required to maintain a continuous two-sided market. An underwriter assists issuers in the primary market, and an investment adviser provides advice for a fee.
- Which of the following is an example of an institutional investor?
Answer: An insurance company managing its investment portfolio
Institutional investors are organizations that pool large sums of money and invest those sums in securities. Examples include insurance companies, mutual funds, pension funds, and endowments. An individual with a high net worth is considered an accredited investor, while the couple and business owner are typically classified as retail investors.
- In a firm commitment underwriting, which party assumes the financial risk of unsold securities?
Answer: The underwriter
In a firm commitment underwriting, the underwriter (or underwriting syndicate) purchases the entire issue of securities from the issuer and resells them to the public. The underwriter assumes the risk of being unable to sell the securities at the offering price.
- An employee of a FINRA member firm proprietary trading desk who buys and sells securities for the firm's account is best described as a:
Answer: trader.
A trader is an individual or firm that buys and sells securities for their own account (proprietary trading) rather than on behalf of clients. A broker (or agent) executes trades for clients. A transfer agent and custodian perform administrative and safekeeping functions, respectively.
- Which market participant is responsible for maintaining records of stock and bond ownership, as well as mailing dividend and interest payments to the correct registered owners?
Answer: The transfer agent
The transfer agent is responsible for ensuring that securities are issued in the correct owner's name, maintaining ownership records, and distributing dividends and interest payments. The custodian holds assets, the clearing broker handles settlement functions, and the DTCC provides clearing and settlement services for securities transactions.
- Which two market participants have a direct relationship where one holds customer accounts and the other introduces those accounts but does not hold them?
Answer: Clearing Broker and Introducing Broker
A clearing broker has a contractual relationship with one or more introducing brokers. The introducing broker establishes the customer relationship and accepts orders, while the clearing broker is responsible for holding the assets, clearing trades, and generating statements.
- The role of a custodian differs from that of a trustee in that a custodian primarily:
Answer: safeguards the assets in an account.
The primary role of a custodian is the safekeeping of assets. While a trustee also ensures assets are safe, their role is a broader fiduciary one that involves legally administering the account or indenture according to a specified agreement for the benefit of a beneficiary or bondholders. A custodian's role is more administrative and less discretionary.
- An individual investor who does not meet the income or net worth criteria for being accredited is typically referred to as a(n):
Answer: retail investor.
A retail investor is an individual who buys and sells securities for their personal account, and is not classified as an institutional or accredited investor. This category represents the majority of individual market participants.
- A company's common stock is held in electronic, or 'book-entry,' form rather than as physical certificates. Which entity is primarily responsible for maintaining these records of ownership?
Answer: A central securities depository
A central securities depository, such as the Depository Trust Company (DTC), holds securities in book-entry form. It maintains ownership records on behalf of its participants (broker-dealers and banks), which in turn maintain records for the ultimate beneficial owners.
- A large, self-directed broker-dealer that holds its clients' securities and cash, provides trade execution, and prepares account statements is operating as a(n):
Answer: clearing broker-dealer.
A clearing broker-dealer, also known as a carrying firm, is responsible for holding customer cash and securities, executing and settling trades, and maintaining books and records. An introducing broker-dealer accepts orders but uses a clearing firm to handle the back-office functions.
- The primary role of an underwriter in a public offering is to:
Answer: purchase securities from the issuer and resell them to the public.
The underwriter, typically an investment bank, facilitates the distribution of new issues in the primary market. Its main function is to purchase the securities from the issuer and sell them to investors, thereby helping the issuer raise capital.
- A city government plans to issue new bonds to fund the construction of a public library. The city hires a firm to provide advice on the timing, structure, and terms of the new bond offering. This firm is acting as a(n):
Answer: municipal advisor.
A municipal advisor provides advice to municipal entities regarding the issuance of municipal securities or municipal financial products. An underwriter would purchase the bonds from the city for resale to the public. An investment adviser provides advice on securities investments, and a trustee represents bondholders.
- If a shareholder is concerned about the handling of a stock dividend payment, they should contact the:
Answer: company's transfer agent.
The transfer agent is responsible for all aspects of maintaining shareholder records, including the payment of stock and cash dividends, handling stock splits, and mailing proxy materials. The other entities are not directly involved in shareholder services.
- In the context of a corporate bond offering, which entity is appointed to act in a fiduciary capacity on behalf of the bondholders and enforce the terms of the indenture?
Answer: The trustee
A trustee, typically a bank or trust company, is appointed to represent the interests of bondholders. The trustee's role and responsibilities are outlined in the bond's trust indenture. The custodian holds assets, the issuer is the borrower, and the underwriter markets the bonds.
- Which of the following would be defined as an 'accredited investor' under SEC Regulation D?
Answer: An individual with a net worth of over $1 million, excluding primary residence.
An accredited investor is an individual who meets certain financial criteria, such as having a net worth of over $1 million (excluding primary residence) or an annual income over $200,000 ($300,000 for joint income) for the past two years with a reasonable expectation of the same for the current year. Knowledge or employment alone does not confer accredited status.
- A broker-dealer that does not hold customer funds or securities and instead introduces its customer accounts to another firm to handle all clearing and processing functions is known as a(n):
Answer: introducing broker.
An introducing broker, or fully disclosed broker-dealer, introduces its customers to a clearing broker that handles all cash and securities, processes trades, and sends account statements. A clearing broker performs these functions. A prime broker offers specialized services to institutional clients, and a market maker provides liquidity in the secondary market.
- When a broker-dealer buys a security from a market maker for its own inventory and then resells it to a customer at a higher price, the firm is acting as a(n):
Answer: principal.
When a firm trades for its own account, it is acting in a principal capacity. The compensation is a markup (when selling to a customer) or a markdown (when buying from a customer). When the firm facilitates a trade between two other parties, it acts as an agent and earns a commission.
- The Options Clearing Corporation (OCC) performs all of the following functions EXCEPT:
Answer: recommending specific options strategies to investors.
The OCC is the central clearinghouse for U.S. exchange-listed options. It issues, guarantees, and standardizes options contracts, but it does not provide investment advice or recommend strategies. That role would fall to a registered representative or investment adviser.
