What are the two distinct functions that broker-dealers perform in capital markets?

Brokers (agents executing trades for clients) and dealers (principals trading for their own account).

True or False: When acting as a broker, the firm takes ownership of securities.

False. When acting as a broker, the firm serves as an agent and never owns the securities being traded.

A broker-dealer acts as an _____ when serving as a broker for clients.

Agent

Which compensation method do brokers earn?
A. Markup
B. Commission
C. Markdown
D. Spread

B. Commission

What is the bid-ask spread?

The difference between the dealer's buying price (bid) and selling price (ask).

Can a broker-dealer act as both broker and dealer in the same transaction?

No. This is prohibited to prevent conflicts of interest.

True or False: Dealers assume inventory risk when holding securities.

True. Dealers take ownership and assume market risk as prices may move adversely.

What obligation do brokers have when executing client orders?

Best execution obligation - seeking the most favorable terms reasonably available.

In a markup transaction, the dealer is selling securities from its _____.

Inventory

A client buys 100 shares at $50 with $10 commission. What is the total cost?

$5,010 ($5,000 for securities plus $10 commission)

Which capacity involves principal transactions?
A. Broker
B. Agent
C. Dealer
D. Intermediary

C. Dealer

What must trade confirmations clearly disclose about broker-dealer capacity?

Whether the firm acted as broker (agent) or dealer (principal).

True or False: Market makers provide liquidity by continuously quoting bid and ask prices.

True. Market makers create two-sided markets to ensure trading availability.

The _____ price is what a dealer will pay to buy securities from clients.

Bid

What is a riskless principal transaction?

Dealer receives customer order, then immediately purchases security to fill that order.

Which type of underwriting involves the dealer purchasing the entire issue?
A. Best efforts
B. Firm commitment
C. Agency
D. Brokerage

B. Firm commitment

What does FINRA's 5% policy address?

A guideline that markups and markdowns should generally not exceed 5% of prevailing market price.

True or False: The 5% policy is a firm rule that cannot be exceeded.

False. It is a guideline; actual fair pricing depends on specific circumstances.

In fee-based accounts, how is compensation typically calculated?

As an annual percentage of assets under management (typically 1-3%).

What is payment for order flow?

Compensation broker-dealers receive from market makers for routing customer orders to them.

Which rule requires broker-dealers to maintain minimum net capital?
A. Rule 15c3-1
B. Rule 15c3-3
C. Regulation S-P
D. Rule 10b-5

A. Rule 15c3-1

What does the Customer Protection Rule (15c3-3) require?

Segregation of customer securities and maintenance of cash reserve for customer protection.

True or False: FINRA creates and enforces rules for municipal securities dealers.

False. MSRB creates rules but FINRA enforces them for municipal securities.

How long must broker-dealers retain blotters and ledgers?

Six years (first two years in accessible location).

What form is used for broker-dealer registration with the SEC?

Form BD

SIPC protects customer accounts up to $_____ total with $_____ limit for cash.

$500,000 total with $250,000 limit for cash

Which document must be filed within 30 days of employee termination?
A. Form U4
B. Form U5
C. Form BD
D. Form ADV

B. Form U5

True or False: Customer signatures are required on new account forms.

False. Essential information must be obtained but signatures are not required.

What is churning in the context of broker-dealer regulation?

Excessive trading to generate commissions rather than serve client interests.

How often must retail communications be reviewed?

Must receive principal approval before first use.

What are the four pillars of an AML program?

Internal policies, designated compliance officer, ongoing training, and independent testing.

Currency Transaction Reports (CTRs) must be filed for transactions exceeding $_____.

$10,000

True or False: Broker-dealers can require customers to waive class action lawsuit rights.

False. Predispute arbitration agreements cannot waive class action rights.

What is front running?

Trading ahead of customer orders to benefit from anticipated price movement.

Which examination must municipal securities representatives pass?
A. Series 7
B. Series 24
C. Series 52
D. Series 63

C. Series 52