Regulations - Other Federal and State Regulations

All of the following statements about Securities Investor Protection Corporation (SIPC) are true EXCEPT: A. SIPC is a government sponsored non-profit corporation B. SIPC is an insurance fund protecting customer accounts against broker-dealer insolvency C. every broker-dealer registered under the Securities Exchange Act of 1934 must be a member of SIPC D. SIPC protects the full balance in each customer account

D: SIPC protects the full balance in each customer account

A customer has a cash account holding $160,000 of securities and $340,000 of cash. If the broker-dealer were to fail, which statement is TRUE regarding the status of the account in an SIPC liquidation? A. SIPC will provide coverage for the $160,000 of securities only B. SIPC will provide coverage for the total of $500,000 of securities and cash C. SIPC will provide coverage for only $250,000 of cash D. The customer will become a general creditor in the amount of $90,000

D: The customer will become a general creditor in the amount of $90,000 (SIPC covers customer claims against a failed broker-dealer for a total of $500,000, inclusive of maximum cash coverage of $250,000. For any claims above these limits, the customer becomes a general creditor of the failed broker-dealer. This customer has $160,000 of securities (covered in full) and $340,000 of cash (covered only for $250,000), for total coverage of $410,000. For the remaining $90,000 of cash not covered, the customer becomes a general creditor.)

A customer has a margin account at a broker-dealer who goes bankrupt. The account holds $900,000 of securities and has a $400,000 debit balance. The customer will receive: A. $400,000 in cash B. $500,000 in securities C. $500,000 in cash D. $900,000 in securities

B: $500,000 in securities (The SIPC coverage limit of $500,000 in securities is based on the equity in a customer's account. An account with $900,000 in securities and a $400,000 debit has $500,000 of equity. The customer will receive $500,000 of securities in the liquidation.)

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

B: A group of individuals opening a joint account (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.)

All of the following statements about Securities Investor Protection Corporation (SIPC) are true EXCEPT: A. SIPC is a non-profit corporation B. SIPC is a U.S. Government agency C. SIPC is an insurance fund protecting customer accounts against broker-dealer insolvency D. every broker-dealer registered under the Securities Exchange Act of 1934 must be a member of SIPC

B: SIPC is a U.S. Government Agency (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 insures customer accounts at broker-dealers for up to $500,000, inclusive of maximum cash coverage of $250,000.)

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

I and III ( 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 client of a sales representative who is based in New York moves to the State of Florida. The sales representative and his broker-dealer are registered in the State of New York, but not in the State of Florida. To solicit the customer's business in the State of Florida, the: I sales representative must be registered in Florida II sales representative does not have to be registered in Florida, since he is registered in New York and this is an existing customer III broker-dealer that employs the sales representative must be registered in Florida IV broker-dealer that employs the sales representative does not have to be registered in Florida, since it is registered in New York and this is an existing customer

I and III (In order for the registered representative to solicit orders in the State of Florida, both the registered representative and his firm must be registered in the State of Florida under Uniform State Law. It makes no difference that this was an existing customer of the broker-dealer that had moved to the State of Florida.)

An agent who lives and is registered in New York wishes to sell a municipal bond to a customer who lives in New Jersey. Which of the following statements are TRUE about the registering of this agent and his or her broker-dealer in New Jersey? I The agent must be registered in New Jersey II The agent does not have to register in New Jersey III The broker-dealer must be registered in New Jersey IV The broker-dealer does not have to register in New Jersey

I and III (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 in each state where the securities are being offered (since they can offer these securities fraudulently, and the state wants to know where to find these persons if they do so!).

Securities Investor Protection Corporation coverage limits per customer account are: I $500,000 total in cash and securities II $5,000,000 total in cash and securities III inclusive of $250,000 cash maximum IV inclusive of $500,000 cash maximum

I and III (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.)

Which of the following are permitted to be trustees under the Trust Indenture Act of 1939? I Bank II Trust Attorney III Trust Company IV Broker-Dealer

I and III (The trustee for bondholders is a fiduciary who is appointed and paid for by the issuer. The trustee ensures that all of the terms of the agreement are adhered to by the issuing corporation, thus it is protecting the bondholders from issuer misconduct. The trustee must not have any conflicting interests that would prejudice it towards either the bondholders or the issuer in its oversight role and it must be financially big enough to ensure that the issuer cannot exert influence over it. Thus, the appropriate choices are a Bank or a Trust Company.)

The Federal Telephone Consumer Protection Act of 1991 prohibits unsolicited calls from being 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

I and IV (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 trustees performing their duties under the Trust Indenture Act of 1939? I The trustee is appointed by the issuer II The trustee is elected by the bondholders III The trustee protects the interests of the issuer IV The trustee protects the interests of the bondholders

I and IV (Under the requirements of the Trust Indenture Act of 1939, trustees are appointed by the issuer (who pays the trustee); however, the trustee is appointed to protect the interests of the bondholders.)

Which information, at a minimum, must be disclosed when making unsolicited phone calls to potential customers? I Caller's name II Firm's name III Address or phone number from which the caller is dialing

I, II, and III (The Federal Telephone Consumer Protection Act of 1991 requires the following procedures for making unsolicited "commercial" phone calls: Unsolicited calls cannot be made before 8:00 AM nor after 9:00 PM, in the time zone of the recipient. The caller must identify him or herself by: Name; Firm; Address or telephone number from which the caller is dialing If the person called states that he or she does not wish to receive calls, the person must be placed on a "Do Not Call" list. Violations of the Act can be enforced by each State Attorney General and by the FTC (Federal Trade Commission).

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:

Each account seperately (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 MUST be registered under state blue sky laws? I Sales Representatives II Broker-Dealers III U.S. Government Issues IV Real Estate Investment Trust Issues

I, II, and IV (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 REITs) must be registered.)

What does SIPC do?

It protects customer accounts at broker-dealers that are now defunct (SIPC is the Securities Investor Protection Corporation. It is an insurance fund that protects customer accounts at broker-dealers who go bankrupt. Each customer of a failed broker-dealer is covered for up to $500,000 of equity, inclusive of cash coverage not to exceed $250,000.)

The date that SIPC uses to value securities for purposes of insurance coverage limits is the date that the:

Petition was made in court for a trustee appointment ( 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.)

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:

Sarbanes-Oxley Act of 2002 (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 Trust Indenture Act of 1939 protects:

corporate bondholders from being taken advantage of by the issuing corporation (The Trust Indenture Act of 1939 protects 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. Since we tend to trust our government (plus, the legislators write the laws!), issues of governments and municipalities are exempt from this Act.)

A customer has opened the following accounts: Individual cash account Individual margin account Joint cash account with husband Custodian Account for minor child This is treated as how many "covered accounts" in an SIPC liquidation?

3 (Securities Investor Protection Corporation coverage is applied "per customer name." If a customer has both an individual cash and margin account, they are treated as one account. The joint account with someone else is treated as a separate account. Finally, the custodian account for a minor child is treated as a separate account.)

Which bond offering is required to have a trust indenture under the Trust Indenture Act of 1939? A. Mortgage bond B. Lease rental bond C. School district bond D. Treasury bond

A: Mortgage Bond (Corporate bond offerings over $50,000,000 must have a trust indenture under the Trust Indenture Act of 1939. Mortgage bonds are corporate bonds, typically issued by utilities. Municipal bonds such as lease rental bonds and school district bonds are exempt, as are U.S. Government issues.)

A trust indenture is required for a(n): A. Treasury bond B. Agency bond C. Corporate debenture D. General Obligation bond

C: Corporate debenture (The Trust Indenture Act of 1939 requires a trust indenture for all non-exempt bond offerings in excess of $50,000,000. Because Treasuries, Agencies, and Municipals are exempt securities, they are not required to have a trust indenture. Corporate bonds are non-exempt securities, so these must be issued with a trust indenture. Also, please note that most municipal revenue bonds have a trust indenture, not because it is legally required, but rather, because the market demands it.)

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

C: is traded by at least 2 market makers (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.)

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

I and II (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.)

Which of the following statements are TRUE regarding the Federal Telephone Consumer Protection Act of 1991? I The Act applies to for-profit organizations II The Act does not apply to for-profit organizations III The Act applies to not-for-profit organizations IV The Act does not apply to not-for-profit organizations

I and IV (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.)

Which of the following persons MUST be registered under State "Blue Sky" Laws? I Brokers soliciting customers in that State II Dealers soliciting customers in that State III Salespersons soliciting customers in the State IV Investment advisers soliciting customers in that State

I, II, III, and IV ( Under the Blue Sky laws of each state, any broker, dealer, or agent (registered representative) that solicits in that State must be registered. Agents must pass the Series 63 exam to comply with this requirement in most states. In addition, the laws require that any Investment Adviser in the State be registered as well. In many states, these persons must pass the Series 65 examination.)

State registration (Blue Sky) requirements apply to: I resident salespersons soliciting in that state II non-resident salespersons soliciting in that state III resident issuers of securities offered in that state IV non-resident issuers of securities offered in that state

I, II, III, and IV (Blue sky laws apply to both resident and non-resident salespersons who solicit in that state, as well as to their brokerage firms, who also must be registered in that state. Any issues that are offered in the state must also be registered, unless an exemption is available.)

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

I, II, and III (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.)

Which of the following actions taken by a fiduciary would be consistent with the obligations imposed by the "Prudent Man Rule"? I Diversifying a fixed income portfolio with securities of varying maturities II Selecting AA rated corporate convertible bond investments to meet an investment objective of both income and capital gains III Investing in small capitalization unlisted new issue investments for long term growth IV Writing covered calls against securities positions held in the account to increase income

I, II, and IV (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.)

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

II and III (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 maintain "Do Not Call" lists? I SEC II Member firm III FTC IV FINRA

II and III (There is both a Federal "Do Not Call" list requirement and a FINRA "Do Not Call List" requirement. The Federal List is maintained by the FTC (Federal Trade Commission). FINRA requires each member firm to keep its own "Do Not Call" list. FINRA itself does not keep the list, nor does the SEC.)

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

II and IV (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 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

A: The lawyer must be registered with the Securities and Exchange Commission (SEC) as an investment adviser (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.)

A satisfied customer gives his representative a client referral. Which statement is TRUE? A. The representative should check the firm's Do Not Call list prior to acting on the referral B. The representative is not required check the firm's Do Not Call list prior to acting because the client was referred C. The referred client can only be contacted between the hours of 8:00 AM and 9:00 PM in the time zone of the representative D. The representative is not permitted to contact the referred client unless the referred client initiates the contact

A: The representative should check the firm's Do Not Call list prior to acting on the referral (If the representative calls the referred individual, this is a solicitation. The representative must check to see if the individual is on the firm's or the National Do Not Call list. If this is the case, the referred client cannot be called.)

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

B: The customer is covered for $500,000 total, and becomes a general creditor for $350,000 (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.)

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

B: The firm must cease doing business with the customer until it and the agent register in the State of Georgia ( 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

B: The individual must be registered in the state of New York before contacting potential customers in that state (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.)

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 an unsecured general creditor with last claim in the liquidation (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 partner in a law firm renders investment advice to a customer as part of an overall estate plan being prepared by that firm. 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

D: The lawyer is not required to be registered with the SEC as an investment adviser nor with FINRA as a representative (Anyone who renders investment advice in the normal course of business for a fee is considered to be an investment adviser. An exemption is granted if a lawyer or other professional 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. If the lawyer charged separately for giving advice about investing, then the lawyer would be defined as an investment adviser that must register. Registration with the SEC is required 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.)