Module 3: Understanding Trading, Customer Accounts and Prohibited Activities

• Topic 01

  Trading, Settlement and Corporate Actions

  114 questions
• Topic 02

  Customer Accounts and Compliance Considerations

  115 questions
• Topic 03

  Prohibited Activities

  96 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. Why does a bond buyer pay accrued interest to the seller?

   • A
     The buyer pays accrued interest to compensate for the seller's loss of future coupon payments
   • B
     Accrued interest is a penalty charged to the buyer by the broker-dealer for executing a bond transaction
   • C
     Accrued interest is only paid when the bond is trading above par value
   • D
     The seller held the bond and earned interest from the last coupon payment date until the sale date; the buyer compensates the seller for this earned but unpaid interest
     Correct answer
   Explanation

   Bond interest accrues daily between coupon payments. If a bond pays coupons every 6 months and the seller owned it for 3 months of the current period, they have earned 3 months of interest. The buyer pays this accrued amount at settlement, then receives the full next coupon payment (which reimburses them for the interest they pre-paid to the seller).

2. What is the employee salary deferral feature of a SIMPLE IRA?

   • A
     Only the employer can make contributions; employees cannot defer salary into a SIMPLE IRA
   • B
     Salary deferrals to a SIMPLE IRA are made with after-tax dollars and are rarely tax-deductible
   • C
     Employees can elect to defer a portion of their salary into the SIMPLE IRA, similar to a 401(k), though at lower contribution limits
     Correct answer
   • D
     Employees can defer unlimited salary amounts as long as the total plan balance stays under $100,000
   Explanation

   SIMPLE IRAs allow employees to contribute a portion of their pre-tax salary (salary deferral) up to the annual limit ($16,000 in 2024, with a $3,500 catch-up for those 50+). Employers must either match up to 3% of compensation or make a 2% non-elective contribution for all eligible employees.

3. When did Regulation Best Interest become effective for broker-dealers?

   • A
     January 1, 2020
   • B
     January 1, 2018
   • C
     June 30, 2020
     Correct answer
   • D
     December 31, 2019
   Explanation

   Regulation Best Interest (Reg BI) was adopted by the SEC in June 2019 and became effective on June 30, 2020. Broker-dealers were required to comply with all four component obligations (Disclosure, Care, Conflict of Interest, and Compliance) from that date.