FINRA Securities Industry Essentials 2 — Questions and Answers
Question 1: Which of the following best describes a 'market maker' in the context of OTC securities?
- A broker who executes orders on behalf of clients only
- A dealer who quotes both bid and ask prices and stands ready to buy or sell (Correct answer)
- A regulator who sets prices for thinly traded securities
- An exchange specialist who matches buy and sell orders
Correct answer: A dealer who quotes both bid and ask prices and stands ready to buy or sell
A market maker is a dealer firm that continuously quotes both bid (buy) and ask (sell) prices, providing liquidity in OTC markets.
Question 2: Under FINRA rules, a registered representative who wants to open a brokerage account at another member firm must:
- Notify their employer firm in writing prior to opening the account (Correct answer)
- Obtain FINRA approval before the account is opened
- Simply disclose the account on their annual compliance certification
- Obtain written permission from the SEC
Correct answer: Notify their employer firm in writing prior to opening the account
FINRA Rule 3210 requires associated persons to notify their employer firm prior to opening accounts at other member firms.
Question 3: A customer purchases 100 shares of XYZ stock at $50 per share and later sells them at $60 per share after 8 months. How is this gain classified for tax purposes?
- Long-term capital gain taxed at preferential rates
- Short-term capital gain taxed as ordinary income (Correct answer)
- Ordinary dividend income
- Tax-exempt income
Correct answer: Short-term capital gain taxed as ordinary income
Gains on securities held 12 months or less are short-term capital gains and are taxed at ordinary income rates.
Question 4: Which type of bond is backed solely by the full faith and credit of the issuing municipality, with repayment from general tax revenues?
- Revenue bond
- General obligation bond (Correct answer)
- Convertible bond
- Zero-coupon bond
Correct answer: General obligation bond
General obligation bonds are backed by the taxing power of the municipal issuer and repaid from general tax revenues.
Question 5: What is the primary purpose of the Securities Investor Protection Corporation (SIPC)?
- To guarantee investment returns against market losses
- To protect customers if a broker-dealer fails and customer assets are missing (Correct answer)
- To insure bank deposits up to $250,000
- To regulate margin requirements for securities accounts
Correct answer: To protect customers if a broker-dealer fails and customer assets are missing
SIPC protects customers of failed broker-dealers by replacing missing cash and securities up to $500,000, including a $250,000 cash limit.
Question 6: A bond with a 6% coupon is trading at a premium. Which statement about its yield to maturity (YTM) is correct?
- YTM equals the coupon rate of 6%
- YTM is greater than 6%
- YTM is less than 6% (Correct answer)
- YTM cannot be calculated when a bond trades at a premium
Correct answer: YTM is less than 6%
When a bond trades at a premium (above par), the YTM is lower than the coupon rate because the investor pays more than they will receive at maturity.
Question 7: Which regulatory body has primary oversight over futures contracts and commodities trading in the United States?
- FINRA
- SEC
- CFTC (Correct answer)
- OCC
Correct answer: CFTC
The Commodity Futures Trading Commission (CFTC) has primary regulatory authority over the futures and options on futures markets in the U.S.
FINRA Securities Industry Essentials 2
Which of the following best describes a 'market maker' in the context of OTC securities?