Other Federal and State Regulations
Securities Investor Protection Corporation protects brokerage: A. firm employees from employer mismanagement B. accounts against investment mismanagement C. accounts against broker-dealer failure D. firms from employee theft and embezzlement
The best answer is C. SIPC insures customer accounts holding cash and/or securities against loss if a broker-dealer fails.
The maximum coverage provided by Securities Investor Protection Corporation for securities held in a customer's account is: A. $250,000 B. $400,000 C. $500,000 D. $600,000
The best answer is C. Securities Investor Protection Corporation provides protection on customer securities up to $500,000 in total cash and securities, but only covers cash balances for $250,000 included within the $500,000 limit
New non-exempt debt issues in excess of $50,000,000 are subject to which of the following requirements? I Registration of the issue with the SEC under the Securities Act of 1933 II Sale of the securities with a prospectus under the Securities Act of 1933 III Appointment of an independent trustee to protect the bondholders under the Trust Indenture Act of 1939 IV Anti-fraud Rule 10b-5 under the Securities Exchange Act of 1934 for any subsequent resales of the securities A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV
The best answer is D. Non-exempt new issues must be registered with the SEC and sold with a prospectus under the Securities Act of 1933. If the issue is a non-exempt debt security, in excess of $50,000,000, then the Trust Indenture Act of 1939 applies, and requires that an independent trustee be appointed to protect the interest of the bondholders from corporate misconduct. Transactions in all securities (whether exempt or not) are subject to the anti-fraud provisions of the Securities Exchange Act of 1934
A customer has an account with a brokerage firm that is in receivership. The account holds $220,000 of securities and has a $90,000 debit. Which statement is TRUE regarding SIPC coverage? A. The customer must deposit $90,000 to receive the $220,000 of securities B. The account is covered for $100,000 C. The account is covered for $130,000 D. The account is covered for $220,
The best answer is C. SIPC covers the equity in a customer's account, with coverage not to exceed $500,000 equity per account in securities. However, cash coverage is limited to $250,000. This account has $220,000 of securities and a $90,000 debit, so the equity is $130,000. The customer will receive $130,000 worth of securities in the liquidation.
A customer has an individual cash account, an individual margin account, a joint cash account with his wife, and a custodian account for each of his 2 children. If the firm liquidates, Securities Investor Protection Corporation covers: A. only the custodian accounts B. the custodian accounts separately, the joint account separately, and both individual accounts separately C. the custodian accounts separately, the joint account separately, and both individual accounts are combined and treated as one D. any one account of the customer's choosing; the other accounts become general creditors of the broker-dealer
The best answer is C. Securities Investor Protection Corporation coverage is applied "per customer name." If John Jones has both an individual cash and margin account, they are treated as one account; a joint account with someone else is a separate account; each custodian account is a separate account.
The Sarbanes-Oxley Act of 2002 requires: I registration of new non-exempt issues with the SEC II chief corporate officers to certify the company's financial disclosures III research analysts to be separated from investment banking functions at broker-dealers IV issuers to file audited financial statements with the SEC A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. The Sarbanes-Oxley Act of 2002, in an attempt to prevent fraudulent actions by corporate officers, requires both the CEO and CFO of publicly traded companies to make an annual certification as to the appropriateness of the financial statements and disclosures made in that issuer's 10K and 10Q reports. The Act also required that research analysts at broker-dealers be completely separated from investment banking, so that the analysts are not "encouraged" or "intimidated" by the firm's investment bankers to write favorable reports to get future investment banking business.
The Trust Indenture Act of 1939 applies to: I U.S. Government Bonds II Municipal Bonds III Corporate Bonds A. I only B. II only C. III only D. I, II, III
The best answer is C. The Trust Indenture Act of 1939 applies to corporate bond issues of more than $50,000,000.
The Trust Indenture Act of 1939 was enacted to: A. regulate the activities of Real Estate Investment Trusts not included in the Investment Company Act of 1940 B. require the registration of Trust Company issues with the Securities and Exchange Commission C. protect holders of non-exempt bond issues from issuer misconduct D. require that trustees in bankruptcy, where new securities will be issued, are subject to the Securities Act of 1933
The best answer is C. The primary purpose of the Trust Indenture Act of 1939 is to protect corporate bondholders from being taken advantage of by the issuing corporation. It provides for the appointment of a substantial independent trustee to protect the interests of the bondholders.
Under the Trust Indenture Act of 1939, which of the following statements are TRUE? I The trustee will pay the issuer for services rendered II The issuer will pay the trustee for services rendered III The trustee protects the interests of the bondholders IV The issuer protects the interests of the trustee A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. Under the requirements of the Trust Indenture Act of 1939, trustees are appointed by the issuer (so the issuer pays the trustee). The trustee is appointed to protect the interests of the bondholders.
If an unsolicited facsimile is sent to a potential client, which of the following information must be sent? I Date and number of sheets II Identity of sender III Time, place and address from which sent IV Phone number from which sent A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV
The best answer is C. Unsolicited phone calls, even by fax, come under the Federal Telephone Consumer Protection Act of 1991. This Act requires that the caller identify his name, the firm name, and phone number or address from which the communication is being sent. There is no legal requirement to give the date and number of sheets on a fax transmission (though this is commonly done).
What is a "legal person" under securities law? A. An individual human being B. A group of individual human beings opening a joint account C. A corporation D. Any of the above
The best answer is C. When it comes to legal terms, you have to know the details! A "natural person" is a human being. A "legal person" is a legally-created entity, such as a corporation, limited partnership or trust, that has the same legal abilities as a human being (a natural person), such as the ability to sue, own property, and enter into contracts.
A registered representative wishes to sell a municipal bond to a customer who lives in a neighboring state. Which of the following MUST be registered in the neighboring state? I The municipal bond II The broker-dealer III The registered representative IV The customer A. I only B. III and IV only C. II and III only D. I, II, III, IV
The best answer is C. Municipal bonds are an exempt security, from both Federal and State registration. However, broker-dealers and their sales employees that sell these bonds must still be registered under state law in any state in which the securities are offered. It makes no difference that the security being offered is exempt; the agent and broker-dealer offering them in the state must still be registered in the state (since they can offer these securities fraudulently, and the state wants to know where to find these persons if they do so!) There is no registration requirement for customers.
New corporate bond issues in excess of $50,000,000 are: I exempt securities under the Securities Act of 1933 II non-exempt securities under the Securities Act of 1933 III subject to the Trust Indenture Act of 1939 IV exempt from the Trust Indenture Act of 1939 A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. New corporate bond issues are non-exempt securities under the Securities Act of 1933 and thus must be registered and sold under a prospectus. In addition, corporate bond offerings in excess of $50,000,000 fall under the Trust Indenture Act of 1939, requiring that the bonds be sold under a Trust Indenture.
Which of the following must be registered with the SEC as an investment adviser under the Investment Advisers Act of 1940? A. Broker-dealer B. Bank C. Senior Editor of an investment magazine D. Accountant who gives investment advice to clients for a fee
The best answer is D. Any person who gives investment advice for a fee can be considered to be an Investment Adviser who must be registered with the SEC under the Investment Advisers Act of 1940. Excluded from the definition of investment advisers are broker-dealers, banks, lawyers and accountants who give advice that is solely incidental to their practice and who do not charge separately for such advice; and periodicals that give general advice and that are not "tailored" to specific customer situations. (Also note that the accountant giving investment advice will only be required to register with the SEC as a federal covered adviser if the adviser has $100 million or more of assets under management. If the adviser does not meet the threshold, then it must register in the State and not with the SEC.)
The legislation that requires the CEO (Chief Executive Officer) of a publicly traded company to make an annual certification of the information presented in the company's financial statements is the: A. Securities Act of 1933 B. Securities Exchange Act of 1934 C. Trust Indenture Act of 1939 D. Sarbanes-Oxley Act of 2002
The best answer is D. The Sarbanes-Oxley Act of 2002, in an attempt to prevent fraudulent actions by corporate officers, requires both the CEO and CFO of publicly traded companies to make an annual certification as to the appropriateness of the financial statements and disclosures made in that issuer's 10K and 10Q reports.
Which of the following callers is EXEMPT from the provisions of the Federal Telephone Consumer Protection Act of 1991? A. Telemarketing Firm B. Real Estate Company C. Non-profit Organization D. Securities Firm
The best answer is C. The Federal Telephone Consumer Protection Act of 1991 applies to any unsolicited "commercial" phone calls. Charitable (not-for-profit) institutions are exempt from the Act's provisions.
A Series 7 licensed individual wishes to sell "wrap" accounts. Which statements are TRUE? I This individual must be State-registered II This individual must be Federal-registered III This individual must pass either the Series 65 exam or the Series 66 exam IV This individual is not required to take any additional licensing exams A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. A "wrap" account is not defined as a brokerage product. Any flat annual fee account is defined as an "advisory product" and the firm must be a registered investment adviser to sell them. The representative that sells them, in addition to being registered as an agent of the broker-dealer, must also register as an agent of the investment adviser firm. There is no Federal registration of investment adviser representatives. Only the investment adviser firm may be required to register with the SEC (and only if its assets under management exceed $100 million). Any investment adviser representative is State-registered and must pass either the Series 65 or Series 66 exam.
A lawyer is a partner at a major investment advisory firm and is paid a fee by a customer for investment advice. Which statement is TRUE? A. The lawyer must be registered with the Securities and Exchange Commission (SEC) as an investment adviser B. The lawyer must be registered with FINRA as a representative C. The lawyer must be registered with both the SEC as an investment adviser and with FINRA as a representative D. The lawyer is not required to be registered with the SEC as an investment adviser nor with FINRA as a representative
The best answer is A. Anyone who renders investment advice in the normal course of business for a fee is considered to be an investment adviser. Thus, a lawyer that is a partner in a major advisory firm who renders advice for a fee is defined as an adviser that must register. Also, note that the lawyer/adviser will only be required to register with the SEC as a federal covered adviser if the adviser has $100 million or more of assets under management. If it does not meet the threshold, then it must register in the State and not with the SEC. Finally, please note that an exemption is granted if a lawyer renders investment advice that is solely incidental to the regular business of that person. Thus, a lawyer who renders investment advice as part of an overall estate tax plan would be exempt from registration as an adviser
Securities Investor Protection Corporation protects against: A. broker-dealer failure B. credit risk C. fraudulent trading D. loss of principal
The best answer is A. Securities Investor Protection Corporation protects customer accounts when a broker-dealer fails.
For any claims that a customer may have against a failed broker-dealer that are in excess of Securities Investor Protection Corporation coverage limits, the customer becomes a: A. general creditor B. secured creditor C. super-secured creditor D. equity holder
The best answer is A. Securities Investor Protection Corporation provides protection on customer securities up to $500,000 in total cash and securities, but only covers cash balances for $250,000 included within the $500,000 limit. For any uncovered claim amounts above these limits, the customer becomes a general creditor of the failed broker-dealer.
A registered representative conducts a seminar about investing in the meeting room of a local apartment complex. At the end of the talk, he hands out his business card and tells the attendees that if they want additional information, please write their contact information on the reverse side of the business card and return it to him. When he gets back to the office and starts to re-contact some of the attendees who returned the business card, he finds that one of them is blocked because the client name is on the National Do Not Call Registry. Which statement is TRUE? A. This prospect can be called by the registered representative B. This prospect cannot be called by the registered representative C. This prospect can only be called by the registered representative between the hours of 8:00 AM and 9:00 PM D. This prospect can only be called by the registered representative with written approval of the Branch Office Manager
The best answer is A. There are 3 exceptions provided for cold calls to individuals that are on the National Do-Not-Call list. These are the: -Established Business Relationship ("EBR") Exception; -Prior Express Written Consent Exception; and -Personal Relationship With The Associated Person Exception. Because this prospect gave written permission by returning the business card with his contact information, this qualifies for the "Prior Written Consent" exception. Furthermore, if the prospect has given such consent, the prohibition on making solicitations before 8:00 AM and after 9:00 PM does not apply
A customer who lives in New York has an account with a broker-dealer and sales representative that are both registered in the State of New York. The customer moves to the State of Georgia, a state where the broker-dealer and the sales representative are not registered. Which statement is TRUE? A. Orders may be solicited from this customer under an "existing customer" exemption without the agent or broker-dealer having to register in the State of Georgia B. The firm must cease doing business with the customer until it and the agent register in the State of Georgia C. Only unsolicited orders may be accepted from this customer D. The customer must place any orders with the firm in writing; telephone orders cannot be accepted
The best answer is B. Because the broker-dealer and sales representative are not registered in the State of Georgia, they cannot solicit the purchase of securities in the State of Georgia (to do so requires registration in the state - there is no such thing as an "existing customer" exemption). Under State law, there is an "unsolicited transaction exemption" that gives an exemption from State registration to any security involved in an unsolicited transaction. However, it does NOT give an exemption from registration to the agent involved in the transaction! In order for the agent to deal with a customer in Georgia (either solicited or unsolicited), the agent and broker-dealer must be registered in Georgia as well!
A sales representative is registered as an agent in the State of California. She wishes to prospect customers in the State of New York, in which she is not registered. Which statement is TRUE? A. Prospecting is permitted in any State once an individual has been registered in one State B. The individual must be registered in the State of New York before contacting potential customers in that State C. The individual must be registered in the State of New York before writing orders from that State D. The individual must be registered in the State of New York before any orders can be confirmed to customers in that State
The best answer is B. Before any offer can be directed into a state for a non-exempt security, the registered representative making that offer must be registered in that state. There are some exemptions allowed, but they are very limited.
State registration (Blue Sky) requirements apply to which of the following securities? I ABC Corporation common stock II ABC Corporation warrants III U.S. Government bonds IV General Obligation bonds A. I only B. I and II C. III and IV D. I, II, III, IV
The best answer is B. Generally speaking, if a security is exempt from Federal law, it will be exempt under Blue Sky laws (though there are some exceptions). Government and municipal issues are exempt under both Federal and State law; corporate issues are non-exempt.
All of the following must be registered under state blue sky laws EXCEPT: A. Broker-Dealers B. U.S. Government Issues C. Limited Partnership Offerings D. Sales Representatives
The best answer is B. Issues that are exempt from registration under Federal laws are also exempt under state laws, so U.S. Governments do not have to be registered with the state. However, sales representatives, broker-dealers, and non-exempt issues (such as limited partnership offerings) must be registered.
A customer has a margin account at a broker-dealer that goes bankrupt. The account holds $800,000 of securities and has a $400,000 debit balance. The customer will receive: A. $400,000 in cash B. $400,000 in securities C. $500,000 of securities after the debit balance is paid off and becomes a general creditor for the remaining $300,000 D. The customer will receive $500,000 of cash and $300,000 of securities
The best answer is B. The SIPC coverage limit of $500,000 in securities is based on the equity in a customer's account. An account with $800,000 in securities and a $400,000 debit has $400,000 of equity. The customer will receive $400,000 of securities in the liquidation
In an SIPC liquidation, the trustee has distributed all securities registered in customer name. After this distribution, a customer has a claim for $590,000 in securities and another $260,000 of cash (free credit balance). Which statement regarding SIPC coverage limits is TRUE? A. The customer is covered for the total amount of $850,000 B. The customer is covered for $500,000 total, and becomes a general creditor for $350,000 C. The customer is only covered for $500,000 of the securities; cash is not covered D. The customer is only covered for $250,000 of the cash; securities are not covered
The best answer is B. SIPC coverage is limited to $500,000 total, inclusive of maximum cash coverage of $250.000. This customer has a total of $590,000 of securities and $260,000 of cash, for a total claim of $850,000. Cash is covered to a maximum of $250,000, so $10,000 of the claim for cash is uncovered. Since total coverage is $500,000 and $250,000 of this has been used for the cash claim, only another $250,000 of coverage is available against the securities claim of $590,000, leaving $340,000 of the securities claim uncovered. The customer becomes a general creditor for the uncovered claim amount of $10,000 + $340,000 = $350,000.
All of the following are "legal persons" under securities law EXCEPT: A. A group of individuals forming a limited partnership B. A group of individuals opening a joint account C. A corporation D. A trust
The best answer is B. When it comes to legal terms, you have to know the details! A "natural person" is a human being. A "legal person" is a legally-created entity, such as a corporation, limited partnership or trust, that has the same legal abilities as a human being (a natural person), such as the ability to sue, own property, and enter into contracts.
A customer wishes to place a buy order for a security that has not been registered in the state. The security may be purchased in all of the following instances EXCEPT where the security: A. is exempt from state registration B. falls under a "Blue Chip" exemption by being listed on a recognized national stock exchange C. is traded by at least 2 market makers D. falls under a "Manual Exemption" by being included in Standard & Poor's Manual
The best answer is C. Generally, securities that are exempt from Federal registration are also exempt from state registration. States also allow for "Blue Chip" exemptions for non-exempt securities. Under this exemption, stocks listed on national stock exchanges are exempt from state registration. The logic for this exemption is that the issuer must meet stringent exchange listing and reporting requirements, as well as Federal registration requirements. The same logic applies to those issues listed in Moody's or Standard & Poor's Manual. There is no exemption offered from state registration for securities traded by at least 2 market makers.
Which of the following actions taken by a fiduciary would NOT be consistent with the obligations imposed under the "Prudent Man Rule"? A. Diversifying a fixed income portfolio with securities of varying maturities B. Selecting AA rated corporate convertible bond investments to meet an investment objective of both income and capital gains C. Investing in small capitalization unlisted new issue investments for long term growth D. Writing covered calls against securities positions held in the account to increase income
The best answer is C. The "prudent man rule" is part of Uniform State Law, and it requires fiduciaries to make investments for accounts under their control as would a "prudent man." This makes sense, since fiduciaries are investing for the benefit of others, and the investments are supposed to provide a long term future benefit to these persons. Investing in unproven, speculative new issues would not be consistent with the "prudent man rule." Diversifying a portfolio, investing in AA rated convertible bonds to meet an objective of both income and growth, and writing covered calls against stock positions are all proven, prudent investment strategies.
A customer has a brokerage account at a failed broker-dealer. For SIPC coverage purposes, the securities in the account are valued on the date: A. of purchase of each position B. SIPC returns securities to the customer C. SIPC petitions a court to appoint a trustee in bankruptcy D. SIPC sends the customer a claim form by certified mail
The best answer is C. The "valuation date" for coverage purposes in an SIPC liquidation is the date that SIPC files in court to be the trustee in the bankruptcy of the failed broker-dealer.
Which of the following communications fall under the Federal Telephone Consumer Protection Act of 1991? I Telephonic via live human voice II Telephonic via pre-recorded message III Facsimile transmission IV Courier delivery A. I only B. II and III C. I, II, III D. I, II, III, IV
The best answer is C. The Federal Telephone Consumer Protection Act of 1991 applies to any unsolicited offers made through the phone - whether these are made by personal contact, pre-recorded messages, facsimile or electronic mail. It does not apply to offers made through the U.S. mail or by delivery services
The Federal Telephone Consumer Protection Act of 1991 permits unsolicited calls to be made: I before 8:00 AM in the time zone of the recipient II after 8:00 AM in the time zone of the recipient III before 9:00 PM in the time zone of the recipient IV after 9:00 PM in the time zone of the recipient A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. The Federal Telephone Consumer Protection Act of 1991 does not allow unsolicited calls to be made before 8:00 AM, nor after 9:00 PM, in the time zone of the recipient. Thus, unsolicited calls may be made after 8:00 AM, but not after 9:00 PM in the time zone of the recipient.
Which statements are TRUE about SIPC coverage for customer accounts at banks that solely handle exempt securities? I The bank must be registered as a broker-dealer under the Securities Exchange Act of 1934 II The bank does not need to be registered as a broker-dealer under the Securities Exchange Act of 1934 III The bank must be a member of the Securities Investor Protection Corporation IV The bank does not need to be a member of the Securities Investor Protection Corporation A. I and III B. I and IV C. II and III D. II and IV
The best answer is D. Dealers who solely handle exempt securities are not required to be SIPC members. Therefore, customer accounts at firms that deal solely in U.S. Government securities or municipal securities, are not covered by SIPC. If a bank dealer were to handle non-exempt securities, then it would have to register under the Securities Exchange Act of 1934 as a broker-dealer, and thus, would be obligated to be an SIPC member as well
A registered representative calls a potential customer about investing in growth stocks. The customer states "Don't call me. Good-bye" and hangs up the phone. The registered representative should: A. have the branch manager contact the customer B. fax the customer about the mutual fund being offered C. e-mail the customer about the mutual fund being offered D. place the customer on a "Do Not Call" list
The best answer is D. If a potential customer who is being solicited says "Do not call me," then the Federal Telephone Consumer Protection Act requires that the customer be placed on a "Do Not Call" list at that firm; at that the customer not be called over the phone by that firm in any manner - by voice phone, electronic mail (which travels over the phone lines) or by fax (since it travels over the phone lines)
John Jones has an individual cash account; a joint margin account with his wife; a custodian account for his minor daughter; and a custodian account for his minor son; all at the same brokerage firm. If the firm should fail, Securities Investor Protection Corporation will cover: A. all of the accounts as a single account B. the individual and joint accounts as one account; and the custodian accounts as one account C. the individual and joint accounts as one account; and each custodian account separately D. each account separately
The best answer is D. Securities Investor Protection Corporation coverage is applied "per customer name." If a customer has an individual cash account, that is one name; the joint margin account is a second name; the custodian account for the daughter is the third name; and the custodian account for the son is the fourth name.
Which of the following statements about the Securities Investor Protection Corporation (SIPC) are TRUE? I SIPC is a non-profit government sponsored corporation II Every broker-dealer registered under the Securities Exchange Act of 1934 must be a member of SIPC III SIPC is an insurance fund protecting against broker-dealer insolvency IV SIPC is funded through annual assessments paid by broker-dealer members A. I and II only B. III and IV only C. I, III, IV D. I, II, III, IV
The best answer is D. Securities Investor Protection Corporation is a non-profit membership corporation, composed of all broker-dealers registered under the Securities Exchange Act of 1934. SIPC is government sponsored, but is not an agency of the U.S. Government. SIPC is funded by annual assessments paid in by its broker-dealer members. SIPC insures customer accounts at broker-dealers for up to $500,000, inclusive of maximum cash coverage of $250,000.
"Blue Sky" laws generally require registration in the state for: I Agents that are resident in the state II Non-resident agents who direct offers into the state III Broker-dealers that are resident in the state IV Non-resident broker-dealers who direct offers into the state A. I and II only B. III and IV only C. I and III only D. I, II, III, IV
The best answer is D. State blue sky laws require registration of resident agents and broker-dealers, as well as registration of non-resident agents and broker-dealers that direct offers into the state.
Which of the following is a securities account opened by legal person? A. Individual B. Joint Tenants With Rights of Survivorship C. Tenants in Common D. Trust
The best answer is D. When it comes to legal terms, you have to know the details! A "natural person" is a human being. A "legal person" is a legally-created entity, such as a corporation, limited partnership or trust, that has the same legal abilities as a human being (a natural person), such as the ability to sue, own property, and enter into contracts.