Regulations Quiz
Which of the following usually acts as the stabilizing market maker? A Issuer B Managing underwriter C Any member of the syndicate D Any member of the selling group
The best answer is B. Only 1 stabilizing bid is permitted at any time, typically placed by the manager of the syndicate.
Restricted securities can be sold under Rule 144 if all of the following conditions are met EXCEPT: A they are sold on a dealer basis B they are sold on an agency basis C solicitation of orders to buy is restricted to customers expressing interest within the past 10 days D the issuer is reporting currently to the SEC
The best answer is A. Rule 144 requires that restricted securities be sold on an agency basis only. Your firm cannot act as a market maker in "144" shares. Solicitation of orders to buy "144" shares is prohibited (to stop you from soliciting potential customers to buy 144 shares, which would tend to push the price up). However you are allowed to recontact individuals expressing buying interest in "144" transactions within the past 10 days. Since 144 shares are being sold in the open market, the issuer must comply with SEC issuer reporting rules to maintain the public market in the securities.
Broker-dealers are required to report their computed Net Capital to customers: A monthly B quarterly C semi-annually D annually
The best answer is C. Broker-dealers must send their customers a semi-annual balance sheet and Net Capital computation.
Which of the following Securities Acts define(s) exempt issuers and exempt transactions? I The Securities Act of 1933 defines exempt issuers II The Securities Exchange Act of 1934 defines exempt issuers III The Securities Act of 1933 defines exempt transactions IV The Securities Exchange Act of 1934 defines exempt transactions A I and III B I and IV C II and III D II and IV
The best answer is A. The Securities Act of 1933 covers the new issue (primary market) and defines exempt issuers and exempt transactions. If an issuer is exempt or if a new non-exempt issue is sold in an exempt transaction, that new issue does not have to be registered under the Act. Otherwise, registration is required. The Act of 1934 consists of a variety of rules covering the secondary (trading) market.
Under Rule 10b-5-1, pre-arranged trading plans by insiders are: I permitted only if the provisions cannot be altered during the plan's life II permitted only if the provisions can be altered during the plan's life III given a safe harbor to officers and directors against an "insider trading" prosecution if the plan is followed IV given a right of rescission for any trades that are deemed to be a violation of the insider trading rules A I and III BI and IV CII and III DII and IV
The best answer is A. We all know that insiders are prohibited from trading based on material non-public information. In 2000, the SEC issued a "safe-harbor" rule that permits statutory insiders (officers, directors and 10% shareholders) to set up a written plan for trading that company's securities. Such a written plan specifies the future date with amount on which securities are to be bought and sold; or specifies the algorithm to be used for determining the amount and date of future purchases or sales. Once the plan is in force, the "insider" cannot have any further influence on trades effected under the plan. As long as the insider adheres to such a written trading plan, that person is given a "safe harbor" from being accused of using "inside information" as the basis for the trades that occur based on adhering to the plan.
Which of the following statements are TRUE regarding the preliminary prospectus? I The preliminary prospectus may be sent to a potential customer prior to that customer expressing an indication of interest II The preliminary prospectus may not be sent to a potential customer prior to that customer expressing an indication of interest III The preliminary prospectus constitutes an offer to sell the issue IV The preliminary prospectus does not constitute an offer to sell the issue A I and III B I and IV C II and III D II and IV
The best answer is B. A "red herring" preliminary prospectus may be sent to any prospective purchaser of that new issue once the issue has entered into the "20 day cooling off" period that commences upon filing of the registration statement with the SEC. The use of the "preliminary prospectus" does not constitute an "offer" under the 1933 Act, and the red ink statement on the cover of the preliminary prospectus states this (hence the name "red herring"). The red herring is used to obtain non-binding indications of interest in the issue, and may be sent to anyone during the cooling off period, whether or not that person has previously expressed any interest in the issue.
Which disclosure is optional when advertising a CMO Tranche? A Coupon B Credit Rating C Final Maturity Date D Average Life Of Investment
The best answer is B. FINRA sets minimum disclosure requirements when advertising a CMO tranche. It requires disclosure of the: Coupon Anticipated Yield and Average Life Specific Tranche ID - Number and Class Final Maturity Date Underlying Collateral In addition, FINRA requires the following statement: "The yield and average life shown above consider prepayment assumptions that may or may not be met. Changes in payments may significantly affect yield and average life. Please contact your representative for information on CMOs and how they react to different market conditions." Then FINRA states that the following disclosures are optional: Minimum Denomination Rating Agency / Government Backing Income Payment Structure Generic Description of Tranche (e.g., PAC, Companion) Yield to maturity of CMOs Offered at Par
To be defined as an "accredited investor" under Regulation D, a couple that wishes to jointly purchase a private placement offering must have an annual income of: A $200,000 B $300,000 C $400,000 D $1,000,000
The best answer is B. For a couple jointly purchasing a private placement unit to be accredited, they must have a combined income of at least $300,000. Note that this is a somewhat easier hurdle than that imposed on an individual to be accredited, which is $200,000 for that individual.
A registered representative who has passed the Series 63 examination wishes to sell managed accounts to customers in differing states. Which statement is TRUE? A The registered representative needs no further licenses to sell managed accounts B The registered representative must pass either the Series 65 or Series 66 examination to sell managed accounts C The registered representative must post a surety bond prior to selling managed accounts D The registered representative is prohibited from selling managed accounts
The best answer is B. Managed or wrap accounts are defined as "investment advisers" in most states. As such, the firm selling managed accounts must register as an investment adviser; and the individuals selling managed accounts for these firms must register as "investment adviser representatives" and pass either the Series 65 or Series 66 examination.
If a registered representative solicits an order from a new customer to purchase a "penny stock" that is trading over-the-counter, which procedure is required? A Send a prospectus to the customer B Have the customer sign a statement that he or she understands the risks involved prior to executing the order C Have the branch manager approve the order and then fill the customer's order in the same manner as with any other security D Send the customer a Subscription Agreement to be signed before filling the order
The best answer is B. Under the SEC's "penny stock rule" (Rules 15g-1 through 15g-6), if a registered representative solicits a new customer to buy a non-NASDAQ over-the-counter stock priced under $5 (translated, this is an OTCBB or Pink Sheet issue under $5), the registered representative must complete a detailed suitability statement for the customer, and the customer must sign this statement before the order can be confirmed. This rule was enacted to curb unethical sales practices of so-called "penny stocks."
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 A I and III B I and IV C II and III D II and IV
The best answer is B. 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.
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.
An officer of a company has acquired shares of that issuer in the open market. If the officer wishes to sell the shares, the officer must meet all of the following requirements EXCEPT: A filing of the Form 144 with the SEC B a maximum of 4 sales per year are permitted C the stock must be held for 6 months, fully paid D each sale is limited to the greater of 1% of the outstanding shares; or the weekly average of the prior 4 weeks' trading volume
The best answer is C. "Control stock," which is registered stock of a company bought in the open market by an officer or director of that company, is subject to all Rule 144 requirements when the officer or director wishes to sell, except for the 6-month holding period. The 6-month holding period is required for restricted stock, but not for control stock.
Investment company advertising is prohibited from showing: A past performance B benchmark performance covering the preceding 1, 3, 5, and 10 years C performance projections D investment objective
The best answer is C. All advertising is prohibited from including performance projections. Past performance may be shown in advertising, as can comparisons of past performance to a relevant benchmark.
Which of the following securities is NOT exempt from the Securities Act of 1933? A Municipal revenue bond issues B Common carrier issues C Income bond issues D U.S. Government bond issues
The best answer is C. Income Bonds (a.k.a. Adjustment Bonds) are issued to existing bondholders by corporations which are in default. On these bonds, the corporation is only obligated to pay the interest on the bonds if it has sufficient income. Since these are corporate issues, they are not exempt. U.S. Government bonds, municipal bonds, and common carrier issues (airlines, railroads, etc.) are all exempt.
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 A I and II only B III and IV only C I, II, IV D I, II, III, IV
The best answer is C. 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.
Municipal market participants are subject to which of the following? I Indenture requirements of the Trust Indenture Act of 1939 II Issuer reporting requirements under the Securities Exchange Act of 1934 III Prospectus delivery rules under the Securities Act of 1933 IV Anti-fraud Rule 10-B-5 under the Securities Exchange Act of 1934 A I and II B II and III C IV only D II, III, IV
The best answer is C. 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.
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.
What must be disclosed on a U4 Form by an individual applying for registration with a member firm? A Individual's employers for the past 5 years B Any foreign bank accounts currently owned by the applicant C Individual's residence addresses for the past 5 years D Names and contact information of any immediate family members who work in the securities industry
The best answer is C. On the U4 questionnaire, the individual must disclose residence addresses for the past 5 years (that way, if the authorities want to find that person, they know where to look!). The prior 10 years' employers must be disclosed - not 5 years. There is no requirement to disclose bank accounts nor is there a requirement to disclose contact information of immediate family members who work in the securities industry.
A short seller is prohibited from covering short sales with offered securities purchased from an underwriter participating in the offering if the short sale occurred how many days prior to the pricing of the offered securities? A 1 B 2 C 5 D 10
The best answer is C. SEC Regulation M (Rules 101-105) covers secondary market activities related to registered public offerings, and addresses such items as prohibitions or limits on syndicate members buying the stock in the secondary market during the 20-day cooling off period (this is for add-on offerings); stabilization rules (because stabilizing bids are placed in the secondary market); and also, under Rule 105, addresses a rather nasty market manipulation that occurred in secondary offerings. Prior to the adoption of this rule, a common trading practice was for overly aggressive independent traders to short that stock in the market - pushing the price down during the 20-day cooling off period. The fall in the market price would force the underwriters to lower the Public Offering Price of the issue. Thus, when registration became effective, the independent trading firms could buy the issue from the underwriters at the lower P.O.P., cover their short positions, and have a nice profit. The problem was, however, that this activity was clearly manipulative. The SEC took a dim view of this activity, and under Rule 105, prohibits broker-dealers from purchasing shares of stock from the underwriters at the offering price to cover short positions established within 5 business days of the effective date.
Which of the following can be a stabilizing bid for a new issue that has a Public Offering Price of $30 per share? I $29.75 II $29.88 III $30.00 IV $30.13 A I and II only B III and IV only C I, II, III D I, II, III, IV
The best answer is C. 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.
The Securities and Exchange Commission is empowered to administrate which of the following Acts? I Uniform Securities Act II Securities Act of 1933 III Trust Indenture Act of 1939 IV Investment Company Act of 1940 A II only B I and II only C II, III, IV D I, II, III, IV
The best answer is C. 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 are required to sell "144" stock? I Issuer's representation letter II Broker's representation letter III Seller's representation letter IV Buyer's representation letter A I and II only B II and IV only C I, II, III D I, II, III, IV
The best answer is C. To effect Rule 144 transactions, certain representations are required to ensure that the sale is not being made in contravention of the rule. The issuer must represent that the corporation is current with all required SEC filings because it is prohibited to use Rule 144 to sell if this is not the case. The seller must represent that the securities have been held fully paid for 6 months, otherwise Rule 144 cannot be used. Finally, the broker must represent that it did not solicit the transaction and that it acted as agent in executing the transaction. There is no representation required on the part of the buyer - when the restricted stock is sold through the rule, the buyer receives "clean" unrestricted shares from the transfer agent.
After 3 cold calls, a prospect asks to be placed on the firm's "Do Not Call" list. His name will remain on the list for: A 3 years from the date of the request B 3 years from the initial phone call C 5 years from the date of the request D 5 years from the initial phone call
The best answer is C. Under "former" FINRA and FTC rules, any individual who asked to be placed on either a Firm Do Not Call list or the National Do Not Call registry remained there for 5 years from the date of the request. Subsequent rule changes now place an individual on the list "indefinitely," but this is not reflected in the question. This is the way it should be known for the exam, unless "indefinitely" is presented as a choice.
If an unsolicited facsimile is sent to a potential client, all of the following information must be included EXCEPT the: A identity of sender B time, place and address from which sent C date and number of sheets D phone number from which sent
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).
Which of the following statements are TRUE about a Regulation D private placement? I The offering may be made to a maximum of 35 accredited investors II The offering may be made to a maximum of 35 non-accredited investors III The offering may be made to an unlimited number of accredited investors IV The offering may be made to an unlimited number of non-accredited investors A I and II B III and IV C I and IV D II and III
The best answer is D. A private placement is an offering of securities to a maximum of 35 "non-accredited investors" and an unlimited number of accredited (wealthy or institutional) investors.
A foreign broker-dealer that is not SEC registered is permitted to deal with clients in the United States: A under no circumstances B only if the clients are accredited investors C only if the clients are sophisticated D only if the clients are major institutional investors
The best answer is D. 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.) andconduct business with foreign nationals temporarily present in the U.S.
A registered representative at another member firm has a client who wishes to buy a Direct Participation Program (DPP) unit, a product that is not offered through his firm. He has a friend that is a registered representative at another member firm where DPPs are sold, and offers to refer the prospective client in exchange for a small fee. Which statement is TRUE? A This is permitted since the referral payment is small B This is permitted because the recipient of the referral fee is a registered individual C This is permitted as long as the client is informed that a referral fee has been paid D This is prohibited
The best answer is D. Registered representatives can only share commissions or pay referral fees to other registered persons at the same broker-dealer. Because these 2 representatives work for different firms, payment of the referral fee is prohibited.
Which statements are TRUE regarding intrastate offerings? I Intrastate offerings are subject to Federal registration II Intrastate offerings are subject to State registration III Intrastate offerings are exempt from Federal registration IV Intrastate offerings are exempt from State registration A I and II only B III and IV only C I and IV only D II and III only
The best answer is D. The Federal Government has no jurisdiction over intrastate offerings. The Federal Government only has jurisdiction over interstate offerings. Thus, intrastate offerings of securities are exempt from Federal registration, but still are subject to registration within that State under the State's Blue Sky laws
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.
The Securities Exchange Act of 1934 regulates which of the following markets? I First II Second III Third market IV Fourth A I only B II only C II, III, IV D I, II, III, IV
The best answer is D. 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 via ECNs and ATSs).
Which of the following securities are exempt from registration under the Securities Act of 1933? I Insurance company issues II Bank issues III Savings and loan issues IV Common carrier issues A I and II only B III and IV only C I, II, III D I, II, III, IV
The best answer is D. When the Securities Act of 1933 was written, issuers that were already regulated under other laws were generally exempted from the provisions of the Act. Insurance companies were already regulated under State insurance laws; banks and savings and loans were regulated by both State and Federal banking laws; common carriers were regulated by the Interstate Commerce Commission (now part of the Department of Transportation).