Regulations - Securities Exchange Act of 1934

Who determines if an OTC stock is marginable?

FRB (The Federal Reserve Board (FRB) is given the power to control margin on securities under Regulation T. Under Regulation T, all listed securities are marginable, and securities on the "OTC Margin List" published by the FRB are marginable.)

Which statements are TRUE about stabilizing bids? I A stabilizing bid is placed by the syndicate manager II A stabilizing bid is placed by each syndicate member III Only 1 stabilizing bid is permitted at any time IV Any number of stabilizing bids can be placed at any time

I and III (Only 1 stabilizing bid is permitted at any time. The manager of the syndicate places the stabilizing bid on behalf of the syndicate.)

The Securities and Exchange Commission was created by the

Securities Exchange Act of 1934 ( The Securities and Exchange Commission was created by the Securities Exchange Act of 1934 (which was passed in the very beginning of 1934, while the 1933 Act was passed at the very end of 1933 - so these 2 Acts were really enacted "back-to-back").

A broker-dealer may hold fully paid customer securities:

if the securities are segregated and held in safekeeping (Broker-dealers are obligated to segregate fully paid customer securities and hold them in safekeeping under the 1934 Act. These securities cannot be rehypothecated to a bank.)

The Securities Exchange Act of 1934 is MOST concerned with:

prevention of fraud in the trading markets (secondary market). (The primary purpose of the Securities Acts was to curb speculation and fraud in the markets. The Act of 1933 regulates the primary (new issue) market; while the Act of 1934 regulates the secondary (trading market). It is also a true statement that the Act of 1934 requires the registration of broker-dealers, but this is not the primary purpose of the Act.)

An individual who made a profit of $1,000,000 from insider trading would be subject to a civil penalty of:

$3,000,000 (If an individual is found guilty of insider trading, he or she must pay back the profit achieved or loss avoided, and in addition must pay a penalty equal to 3 times that amount. This is called "treble damages.")

Under the "penny stock rule," an established customer that is exempt from the rule is defined as a person who has effected a securities transaction or made a deposit of funds or securities with that broker-dealer more than:

1 Year previously (Suitability statements are not required under the "penny stock rule" for so-called "established customers." These are customers who have either had cash or securities in custody of that broker-dealer for at least 1 year; or customers who have bought 3 or more "penny stock" issues previously from that broker-dealer.)

The definition of a "short swing" profit under the Securities Exchange Act of 1934 is a completed round turn trade effected at a profit within:

6 months by an insider (A "short swing" profit is defined as one achieved by an insider (officer, director, or 10% shareholder) trading that company's stock within a six month period. Short swing profits must be returned to the corporation under the Act.)

Which of the following describes a "Chinese Wall" as used in the securities industry?

A separation of investment banking and trading functions within a broker-dealer to stop the potential flow of inside information (The "Chinese Wall" as used in the securities industry, is the complete separation of a broker-dealer's investment banking unit from its trading unit. In its normal operations, an investment banking unit may advise on takeovers; or receive other confidential information that could influence the price of an issuer's securities once the information is public. Broker-dealers establish a "wall" between the investment banking unit and the trading unit, so that this information is not received by the firm's traders in advance of its release to the public. This is accomplished by referring to the issuer's name as a codeword only; by severely restricting the number of people that work on sensitive projects, etc. In this manner, the firm's traders cannot profit from the information in advance of its release to the public. This is critical, since to do so would be a violation of the "Insider Trading" provisions of the Securities Exchange Act of 1934.)

Municipal market participants are subject to which of the following rules? A. Anti-fraud Rule 10b-5 under the Securities Exchange Act of 1934 B. Prospectus delivery rules under the Securities Act of 1933 C. Issuer reporting requirements under the Securities Exchange Act of 1934 D. Indenture requirements of the Trust Indenture Act of 1939

A: Anti-fraud Rule 10b-5 under the Securities Exchange Act of 1934 (Municipal bonds are "exempt" securities and thus are not subject to the provisions of the Securities Acts with the exception of the "anti-fraud" provisions. Municipal bonds do not have to provide a trust indenture; municipalities do not report to the SEC; no prospectus is required when selling a new municipal issue. However, fraudulent activities in the municipal market are covered by the Act of 1934.)

All of the following publicly held issuers must report to the SEC under the Securities Exchange Act of 1934 EXCEPT: A. Municipalities B. Unit investment trusts C. Mutual funds D. Corporations

A: Municipalities (Only corporations and investment companies (which are either corporations or trusts) file annual (10K) and quarterly (10Q) reports with the SEC. Municipal and federal issuers are exempt from the Securities Exchange Act of 1934.)

All of the following are covered under the Securities Exchange Act of 1934 EXCEPT: A. registration of broker-dealers B. registration of new issues C. stabilization of new issues D. registration of exchanges

B: Registration of new issues (The Securities Act of 1933 requires registration of non-exempt new issues. The Securities Exchange Act of 1934 requires registration of exchanges and their members with the SEC, and allows stabilization of new issues in the secondary market under prescribed conditions.)

All of the following statements about the Securities Exchange Act of 1934 are true EXCEPT the: A. general provisions of the Act apply to non-exempt securities B. general provisions of the Act apply to exempt securities C. anti-fraud provisions of the Act apply to non-exempt securities D. anti-fraud provisions of the Act apply to exempt securities

B: general provisions of the act apply to exempt securities (The general provisions of the Securities Exchange Act of 1934 apply to non-exempt securities only. For example, holders of municipal bonds (an exempt security) cannot be considered to be "insiders" while a holder of corporate stock (a non-exempt security) can be an "insider." However, the anti-fraud provisions of the Act apply to both exempt and non-exempt securities. Thus, if a person fraudulently trades municipal bonds (an exempt security), this person is in violation of the Act.)

The Chairman of XYZ Corporation, while playing golf with a neighbor, casually mentions that this quarter's earnings are likely to be lower than expected. Based on this information, the neighbor sells short XYZ stock the next day. Which statement is TRUE?

Both the neighbor and the Chairman have violated insider trading rules (Under the Insider Trading Act of 1988, any person who uses material non-public information to trade in a company's stock for profit can be considered to be an "insider". In addition, the Act extends the definition of an insider to "controlling" persons - in this case, the provider of the information. A person who "communicates" material non-public information can be held liable under the Act unless "that person acted in good faith and did not directly or indirectly induce the act constituting the violation." Therefore, both the person trading on the inside information (the "tippee") and the communicator of the information (the "tipper") can be held liable under the Act.)

An investor who accumulates a 5% or greater position in the common stock of a registered issuer must file which of the following forms with the SEC? A. 8K B. 10K C. 13D D. 144

C: 13D (Investors who accumulate a 5% or greater position in the common stock of one registered issuer are required to file a 13D notice with the SEC within 10 business days of date that the 5% threshold was passed. This information is made public (and is of great interest to the management of the company, since the new large stockholder will probably want a say in how the company is being run!)

All of the following events would require a corporation to file an 8K report with the SEC EXCEPT declaration of (a): A. divestiture B. merger C. dividend D. bankruptcy

C: Dividend (An 8K filing with the SEC is required by a corporation if a "major event" happens at the company. These include if there is a change in the composition of the Board of Directors; if the company declares bankruptcy; if there is a major acquisition or divestiture of assets; if the company proposes a merger; or if any other major corporate event occurs. The notice must be filed no later than 4 business days after the event. Declaration of a dividend is a rather normal event, so no filing is required.)

Which of the following CANNOT be a stabilizing bid for a new issue that has a Public Offering Price of $30 per share? A. $29.00 B. $29.88 C. $30.00 D. $30.13

D: $30.13 (Stabilizing bids can only be entered at or below the public offering price, never above. If the bid were allowed to be placed above the public offering price, it would make the issue instantly "hot" and this is prohibited.)

All of the following are included in the 10K report filed by corporate issuers with the SEC EXCEPT: A. income statement B. balance sheet C. retained earnings statement D. net capital computation

D: Net capital computation (Corporate annual reports contain the following audited financial statements - Income Statement; Balance Sheet; Statement of Changes to Retained Earnings (this shows earnings added for the year and dividends paid from retained earnings for that year); and Statement of Sources and Uses of Cash (this shows cash received that year from income earned; stock and bond offerings; and disposals of equipment; and cash paid that year for equipment purchases, pay-down of debt; dividends, etc.) Net capital computations are only required for broker-dealers registered with the SEC.)

An officer of a company has been invited by a large mutual fund company to give a talk to the fund company's analysts about its business plans and prospects. At the talk, the officer inadvertently discloses material information that could affect the stock's price. Which statement is FALSE? A. The officer is considered to be a "tipper" B. The analysts are considered to be "tippees" C. The company must make an immediate public disclosure of the information to avoid insider trading liability D. The company must file a 10K with the SEC disclosing the information to avoid insider trading liability

D: the company must file a 10k with the SEC disclosing the information to avoid insider trading liability (If an officer of a company makes an accidental disclosure of material non-public information at a presentation to analysts, Regulation FD considers the officer to be a tipper and the analysts to be tippees. To avoid insider trading liability, the company can either make an immediate public disclosure of the information or can file an 8K Report (a special report of significant events with the SEC, which makes the information public). A 10K is the corporation's annual audited financial statements and has nothing to do with Regulation FD.)

Fines assessed for convictions involving violations of insider trading laws are paid to the:

Department of treasury (Fines assessed for insider trading convictions are paid to the Department of Treasury. The fines are not paid to the SEC. If they were, then the SEC might be tempted to "go crazy" prosecuting insider trading cases to pump up its operating budget (raises for everyone!)

A "penny stock" is a designation that applies to a:

Equity Security (The "penny stock" designation only applies to equities that are not listed on an exchange or NASDAQ; and that are under $5 per share. To solicit the purchase of such securities requires that a detailed suitability determination be performed; that the customer be sent the determination; and that the customer sign and return this form before the sale can be confirmed.)

SEC Rule 10b-5-1:

Gives officers of publicly held companies a safe harbor from being charged with an insider trading violation if they establish a pre-arranged trading plan for that issuer's securities (SEC Rule 10b-5-1 allows officers of publicly held companies (statutory insiders) to establish "pre-arranged trading plans" that set future transaction dates and amounts of that issuer's securities; or that specify algorithms that establish the transaction dates and amounts. As long as the officer does not deviate from the plan, the officer is given a "safe harbor" from being accused of insider trading based on those trades.)

Which of the following statements are TRUE regarding margin regulations? I In-house rules may be more stringent than FINRA rules II Exchange rules may be more stringent than Federal Reserve rules III In-house rules may be less stringent than FINRA rules IV Exchange rules may be less stringent than Federal Reserve Rules

I and II (Regarding margin rules, FINRA rules may be more stringent than Federal Reserve rules, but cannot be less stringent. Firm rules can be more stringent than FINRA rules, but cannot be less stringent.)

When is a foreign broker-dealer permitted to solicit U.S. based clients? I If the foreign broker-dealer establishes an SEC-registered U.S. subsidiary II If the foreign broker-dealer only offers exempt securities III If the foreign broker-dealer only deals with major institutional investors IV If the foreign broker-dealer only deals with accredited investors

I and III (In order for a broker-dealer to solicit in the U.S., it must be registered with the SEC. For foreign broker-dealers, this means setting up an SEC-registered U.S. subsidiary. However, recognizing the increasingly global nature of the world's securities markets, the SEC adopted Rule 15a-6, which is intended to permit foreign broker-dealers to engage in limited activities in the U.S. without registering with the SEC. Under Rule 15a-6, foreign broker-dealers that are not SEC registered are permitted to: effect trades for U.S. persons that contact them on an unsolicited basis; solicit business from and provide research reports to Major Institutional Investors (an investor with at least $100 million of investments) and Institutional Investors (investment companies, insurance companies, banks, etc.) and conduct business with foreign nationals temporarily present in the U.S. Note that there is no exception offered for foreign broker-dealers that only wish to offer exempt securities in the United States; nor is there an exemption for solicitation of accredited investors.)

The Securities and Exchange Commission is empowered to administrate which of the following Acts? I Securities Act of 1933 II Securities Exchange Act of 1934 III Trust Indenture Act of 1939 IV Uniform Securities Act

I, II, and III (The SEC administrates the Securities Act of 1933; the Securities Exchange Act of 1934; the Trust Indenture Act of 1939; and the Investment Company Act of 1940. The Uniform Securities Act is more commonly known as the "Blue Sky" state law, and is adopted "state by state." The SEC, a Federal agency, has no jurisdiction over activities within each state and does not administrate this Act.)

Which of the following statements are TRUE regarding corporate officers who wish to trade their own company's stock? I Officers are prohibited from selling their company's stock short except for "short against the box" trades II Officers are allowed without restriction to sell their company's stock short III Officers must file change of holding reports with the SEC IV Officers do not have to file change of holding reports with the SEC

I and III (Insiders are prohibited from selling their company's stock short except for year end "short against the box" trades (which are used to lock in a gain and potentially defer taxation - though this is now quite difficult to do). Officers must report their trades to the SEC (within 2 business days of the trade) since they are classed as "insiders" - and monthly reporting of trades by insiders to the SEC is required.)

The Vice-President of ACME Corporation, an NYSE listed firm, places an order to buy 10,000 shares of ACME common at the market. 3 months later, ACME stock's price has increased by 20% and the officer places an order to sell. Which statements are TRUE? I The sale of the stock is subject to Rule 144 II The stock cannot be sold unless it has been held, fully paid, for 6 months III The sale is prohibited until a "waiver of liability" has been obtained from the issuer IV The officer must forfeit the profit on the sale

I and IV (Since the seller is an officer of that company, he is a control person under Rule 144, and any sales must conform with the Rule. Rule 144 requires that restricted shares be held for 6 months, fully paid, before being sold. Since these shares are registered, they are not "restricted" and the 6-month holding period requirement does not apply. There is no requirement for a "waiver of liability" from the issuer. Since the officer did not hold the appreciated securities for at least 6 months, he or she has a "short swing" profit that must be paid back to the issuer under the Securities Exchange Act of 1934 "Insider" rules.)

Which of the following requires filing with the SEC? I Purchase of a 5% position in one company's stock II An officer selling 1% of that company's stock III Broker-Dealer Net Capital computation IV Corporate proxy materials

I, II, III, and IV (All of the items listed are filed with the SEC. Anyone who accumulates a 5% position in one company must make a 13D filing with the SEC; officers must report their sales of that company's stock under the insider rules by filing a Form 4 within 2 business days of the trade; broker/dealers must report their Net Capital to the SEC; corporate proxy materials must be filed with the SEC 10 business days before use.)

Which statements are TRUE about the "penny stock rule"? I Before confirmation of a trade in a "penny stock" can be made with a new customer, a suitability determination must be completed, signed and returned II Suitability statements are required for new customers who wish to purchase OTC equity securities valued at under $5 that are not included on NASDAQ III Suitability statements are not required for customer purchases of NASDAQ listed and exchange listed securities IV Suitability statements are not required for customers who have either had cash or securities in custody of that firm for at least 1 year; or for customers who have bought 3 or more "penny stock" issues previously from that firm

I, II, III, and IV (All of the statements are true about the "penny stock rule" (Rules 15g-1 through 15g-6). Before confirmation of a trade in a "penny stock" can be made, the customer must sign and return a suitability statement. Suitability statements are required for new customers who wish to purchase OTC equity securities valued at under $5 that are not included on NASDAQ or are not exchange listed (translated, these are OTCBB or Pink Sheet issues under $5). Therefore, suitability statements are not required for customer purchases of NASDAQ listed and exchange listed securities. In addition, suitability statements are not required for so called "established customers." These are customers who have either had cash or securities in custody of that broker-dealer for at least 1 year; or customers who have bought 3 or more "penny stock" issues previously from that broker-dealer.)

Which of the following can be considered to be "insiders" of ABC Corporation? I ABC Corporation's President II ABC Corporation's Treasurer III The outside counsel of ABC Corporation IV The independent auditor of ABC Corporation

I, II, III, and IV (An insider is defined as an officer, director, 10% shareholder or "affiliated person." The President and Treasurer of the corporation are both officers. Court decisions have extended the definition of an insider to include almost anyone who has "material non-public information" about the company. Because of this, a lawyer or accountant for the company can be considered to be an "insider.")

Which of the following are provided to shareholders in the annual reports of registered corporations? I Income Statement II Balance Sheet III Statement of Changes in Stockholders' Equity IV Sources and Uses of Cash Statement

I, II, III, and IV (Corporate annual reports contain the following audited financial statements - Income Statement; Balance Sheet; Statement of Changes to Retained Earnings (this shows earnings added for the year and dividends paid from retained earnings for that year); and Statement of Sources and Uses of Cash (this shows cash received that year from income earned; stock and bond offerings; and disposals of equipment; and cash paid that year for equipment purchases, pay-down of debt; dividends, etc.)

The Securities Exchange Act of 1934 established "self regulatory organizations" (SROs) and empowered these organizations to: I set guidelines for fair dealing with the public II handle complaints against broker-dealers for securities law violations III take administrative action against broker-dealers that violate industry regulations IV fix commission rates to be charged to public customers

I, II, and III (Originally, the exchanges, such as the NYSE and NASD (National Association of Securities Dealers) were both marketplaces and regulators of their member firms. This changed when FINRA was created in 2006. Each exchange now only regulates its trading operation; and FINRA regulates the broker-dealer member firms and is its own SRO (Self Regulatory Organization). FINRA sets guidelines for fair dealing with the public with its Conduct Rules; its handle complaints against broker-dealers for securities law violations under the Code of Procedure; it can take administrative action against broker-dealers that violate industry regulations; and it establishes arbitration procedures to settle intra-industry disputes. Fixed commission rates are prohibited under the Securities Exchange Act of 1934 - these are set by the member firms.)

Under the provisions of the Securities Exchange Act of 1934, which of the following must be registered? I The exchanges that trade securities II Member firms III Sales employees of member firms IV Clerical employees of member firms

I, II, and III (The Securities Exchange Act of 1934 requires the registration of each securities exchange, so that it now becomes a "self-regulatory organization" (SRO), subject to SEC oversight. In addition, FINRA and the MSRB are SROs. The Act requires that member firms register with FINRA; that their officers register; and that their sales employees (you!) register. There is no requirement for clerical employees to register.)

Which of the following statements are TRUE about listed securities? I Under Regulation T, all listed securities are marginable II Listed securities are subject to Regulation SHO III Listed securities trade in the Second Market IV Listed companies must be registered with, and report their results to, the SEC

I, II, and IV (Listed securities (those listed on an exchange) are marginable under Regulation T. Under the Exchange Act of 1934, Regulation SHO requires that before any equity security (either listed or unlisted) can be sold short, the member firm must affirmatively determine that the security can be borrowed and delivered on settlement. This is called the "locate" requirement. Listed securities trade in the first (exchanges), third (OTC trading of exchange listed securities) and fourth (direct trades between institutions via ECNs) markets. The second market is trading of unlisted securities over-the-counter. These are OTCBB and Pink Sheet issues. Listed companies must register with, and report their results to, the SEC.)

Under Federal law, stock can be tendered from which of the following accounts? I Restricted margin account II Short margin account III Long margin account IV Cash account

I, III, and IV ( Under the "short tender rule," a person cannot tender borrowed shares. To tender stock, the person must be in a "net long" position in that security. Long stock can be held in a cash or margin account. Restriction (an account below 50% initial Regulation T margin) has no bearing on tendering shares. If shares are tendered from a margin account, the account must still meet the exchange minimum maintenance margin after those shares leave the account. If not, a maintenance call will be generated to bring the account back to minimum margin.)

Which statements are TRUE about a tender offer for common shares? I The offer must remain open for at least 10 business days II The offer must remain open for at least 20 business days III Each "sweetening" of the offer must extend the offer for an additional 10 business days IV Each "sweetening" of the offer must extend the offer for an additional 20 business days

II and III (When a tender offer is made for the common shares of an issuer, the maker of the offer is attempting to buy a majority stake in the company. To attract shareholders to tender, the maker usually prices the offer at a premium to the current market price. Such offers are typically contingent on a minimum number of shares being tendered. If the minimum number is not met, the maker might "sweeten" the offer by raising the tender price; or could simply cancel the offer and return the tendered shares to the subscribing shareholders. The initial offer must be held out for a minimum of 20 business days under SEC rules. Each sweetening of the offer must extend the life of the offer by another 10 business days)

The Securities Exchange Act of 1934 regulates which of the following? I Futures transactions II Securities transactions III Futures brokers IV Securities brokers

II and IV ( The Securities Exchange Act of 1934 does not regulate futures transactions or futures brokers. These are not defined as securities, and this market place is regulated by the CFTC - the Commodities Futures Trading Commission. The Securities Exchange Act of 1934 regulates securities transactions and securities brokers.)

If a publicly traded corporation declares bankruptcy: I a 10K report must be filed II an 8K report must be filed III the required report must be filed within 1 business day IV the required report must be filed within 4 business days

II and IV (Corporations are required to file 8K reports within 4 business days of significant events such as a declaration of bankruptcy, merger, change in the Board of Directors, etc. The 8K is filed with the SEC, and is a public document.)

Stabilization of new issues is: I a provision of the Securities Act of 1933 II a provision of the Securities Exchange Act of 1934 III permitted at, or above, the Public Offering Price IV permitted at, or below, the Public Offering Price

II and IV (Since a stabilizing bid is placed in the trading (secondary) market, the rules for stabilizing bids come under the Securities Exchange Act of 1934. Stabilizing bids are permitted at, or below, the Public Offering Price - never above.)

The director of a public corporation wishes to sell stock of that company in compliance with Rule 144. Which statements are TRUE? I Registered control stock must be held for 6 months, fully paid, before it can be sold II Unregistered restricted stock must be held for 6 months, fully paid, before it can be sold III If the sale is for 5,000 shares or less, worth $50,000 or less, no SEC filing is required IV Any short swing profits (within 6 months) from trading the stock must be returned to the corporation

II, III, and IV (Rule 144 requires that unregistered shares be held fully paid for 6 months before they can be sold under the rule. Registered shares held by officers can be sold without meeting the holding period requirement, but are subject to the other provisions of the rule. No filing is required if 5,000 shares or less, worth $50,000 or less, are sold every 3 months. Under the Securities Exchange Act of 1934, any short swing profits (achieved within a 6-month time frame) that officers derive from trading that company's stock must be repaid to the company.)

Which of the following must be sent to customers of broker-dealers semi-annually? I Broker-dealer securities inventory amounts II Broker-dealer balance sheet III Broker-dealer subordinated loan amounts IV Broker-dealer net capital computation

II, III, and IV (Semi-annually, customers receive a balance sheet (which includes a listing of subordinated loans - these are loans to broker-dealers where the lender subordinates his claim to all other creditors and are included as part of the firm's capital base) and a net capital computation from the broker-dealer. There is no requirement for a broker-dealer to disclose his inventory positions to customers.)

The Securities Exchange Act of 1934 regulates which of the following markets? I Primary Market II Second Market III Third Market IV Fourth Market

II, III, and IV (The Securities Act of 1933 regulates the new issue (primary) market. The Securities Exchange Act of 1934 regulates the secondary market (the trading market). The trading markets consist of the first market (trading of listed securities on an exchange), second market (over-the-counter trading of securities not listed on an exchange), third market (over-the-counter trading of securities listed on an exchange floor), and fourth market (direct trading of securities between institutions on ECNs and ATSs).)

Which of the following are covered under the Securities Exchange Act of 1934? I Registration of new issues II Stabilization of new issues III Registration of exchanges IV Registration of broker/dealers

II, III, and IV (The Securities Act of 1933 requires registration of non-exempt new issues. The Securities Exchange Act of 1934 requires registration of exchanges and their members with the SEC, and allows stabilization of new issues in the secondary market under prescribed conditions.)

The provisions of the Securities Exchange Act of 1934 apply to which of the following activities? I Trading rules for exempt securities II Trading rules for non-exempt securities III Anti-fraud rules for exempt securities IV Anti-fraud rules for non-exempt securities

II, III, and IV (The Securities Exchange Act of 1934 relates to the secondary (trading) market. The provisions of the Act apply to non-exempt securities only, with the exception of the "anti-fraud" provisions of the Act. The "anti-fraud" provisions apply to both exempt and non-exempt securities.)

Under Regulation M, which statement is TRUE regarding stabilizing bids entered by market makers?

There is no time limitation on the period that a stabilizing bid can be maintained (There is no time limitation on the period that a stabilizing bid can be maintained under Regulation M. However, stabilization must cease when the syndicate is broken by the manager.)

An officer of a listed company calls his registered representative and tells him to sell the maximum amount of that company's common shares in accordance with Rule 144. Prior to placing the order to sell, the registered representative calls five of his customers and tells them to sell that company's stock. Which statement is TRUE?

This action violates the Securities Exchange Act of 1934 (This is a violation of the Securities Exchange Act of 1934 Rule 10b-5. When the registered representative received the sell order from the officer, he is obligated to execute that order before acting on the information he has received. Once the order is executed, the Form 144 has been filed (it must be filed either at or prior to execution of the order) and the order is public information. At this point, he can trade for himself or his customers, and he is no longer considered to be an "insider." In effect, the registered representative is "front running" the officer by telling his other customers to sell before placing the officer's sell order. This is a violation of the Securities Exchange Act Rule 10b-5.)

A corporate executive holds a meeting with a select group of high-producing registered representatives and gives information about the company's expected revenue and income for the upcoming quarter that is extremely positive. The representatives are permitted to:

do nothing with the information and should report the situation to the firm's compliance department (Regulation FD (Fair Disclosure), passed in 2000, is basically an elaboration of the insider trading rules. It prohibits issuers from making selective disclosure of non-public information to research analysts, mutual fund managers, and other industry professionals, unless at the same time, the information is broadly disseminated to the public If such selective disclosure is made and trades result, the corporate officers giving the information become "tippers" and the recipients become "tippees.")