Series 7 - Regulations Quiz #1
To take a second job, under FINRA rules, prior written approval must be obtained from: I Branch Manager II FINRA III Securities and Exchange Commission A I only B I and II C II and III D I, II, III
The best answer is A. For a registered representative to take a second job requires approval of the branch manager under FINRA rules. The manager is acting for the member firm when doing so. There is no requirement to get approval from FINRA or the SEC.
Which of the following must be disclosed in negotiated municipal underwritings? I Spread II Initial offering price of each maturity III Participation amount of each underwriter IV Names of the underwriters A I and II only B III and IV only C I, II, IV D I, II, III, IV
The best answer is A. In negotiated municipal underwritings, the spread and offering price of each maturity must be disclosed. There is no requirement to disclose the names of the underwriters (though this information is readily available) nor their participation amounts (since this in no way affects the customer).
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 A I and III B I and IV C II and III D II and IV
The best answer is A. 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!).
The SEC requires financial reports from all of the following EXCEPT: A municipal issuers B corporate issuers C municipal broker-dealers D corporate broker-dealers
The best answer is A. Municipal issuers are exempt from the provisions of the Securities Acts, as are all other governmental issuers. The SEC has authority over corporate issuers, and requires financial reports from corporations. Broker-dealers, including municipal broker-dealers, are registered through FINRA under SEC oversight; and their financial reports are filed with both FINRA and the SEC.
A customer has a margin account at a failed broker-dealer. The securities were purchased for $50,000. As of the date that SIPC filed in court to be the trustee in the bankruptcy, the securities were worth $30,000. The account has a debit balance of $10,000. SIPC coverage will be: A $20,000 B $30,000 C $40,000 D $50,000
The best answer is A. 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. As of that date, the securities were valued at $30,000. However, because the customer had a $10,000 loan against the securities (debit balance), SIPC will cover the customer account only for $20,000 of equity
A primary offering of $200,000,000 of ACME Corporation 10% debentures with a 20 year maturity would be regulated under the: I Securities Act of 1933 II Securities Exchange Act of 1934 III Trust Indenture Act of 1939 IV Investment Company Act of 1940 A I only B I and III C II and IV D I, II, III, IV
The best answer is B. 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. The Securities Exchange Act of 1934 regulates the trading markets (secondary market) - not the primary market. Investment companies fall under the Investment Company Act of 1940; regular corporate securities are not subject to this Act.
Which of the following statements are TRUE regarding options advertising that is not accompanied by the ODD (Options Disclosure Document)? I It must be approved prior to use by the designated Registered Options Principal II It must be approved by the Branch Office Manager III The use of recommendations, or of past or projected performance, is permitted IV The use of recommendations, or of past or projected performance, is prohibited A I and III B I and IV C II and III D II and IV
The best answer is B. Options advertising must always be approved by the designated Registered Options Principal (the main office compliance ROP) prior to first use. The BOM (Branch Office Manager) cannot approve options advertising. Any options communication that includes a recommendation; that shows past performance; or that makes a performance projection; must be accompanied or preceded by the ODD. Since this advertisement is not accompanied by the ODD, these are all prohibited. Finally, any options communication with the public that is NOT accompanied or preceded by the ODD must be filed with the Exchange at least 10 days in advance of use. This typically applies to options advertising, but not sales literature, since sales literature is delivered with, or preceded by delivery of, the ODD.
A registered representative in Minnesota has a customer that has recently moved to Texas. The registered representative: A can deal with the customer without restriction B must be registered in Texas in order to deal with the customer C must be registered in Minnesota in order to deal with the customer D must be registered in each state between Minnesota and Texas in order to deal with the customer
The best answer is B. In order to deal with a customer in a Texas, the representative must be registered in the State of Texas. An exception is permitted if the representative were only accepting unsolicited trades from customers in Texas, but this is not mentioned in the question. Also note that because the representative is physically in the State of Minnesota, he or she must be registered in Minnesota as well.
Which of the following statements are TRUE regarding corporate reports sent to shareholders? I The 10K report consists of the annual financial statements II The 10K report consists of the quarterly financial statements III The 10Q report consists of the annual financial statements IV The 10Q report consists of the quarterly financial statements A I and III B I and IV C II and III D II and IV
The best answer is B. Corporate annual reports are 10K reports which are audited reports. The 10Q is a quarterly report which is unaudited. Corporate annual reports contain the following audited financial statements - Income Statement; Balance Sheet; Statement of Changes to Retained Earnings; and Statement of Sources and Uses of Cash.
The civil penalty for being found guilty of insider trading is: A double damages B treble damages C quadruple damages D quintuple damages
The best answer is B. 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."
Credit can be extended on new issues: A immediately after the offering is complete B after 30 days have elapsed from the completion of the offering C after 60 days have elapsed from the completion of the offering D after 90 days have elapsed from the completion of the offering
The best answer is B. New issues are not eligible for margin until 30 days have elapsed from the completion of the offering.
SEC Regulation FD covers: A notification to customers of a member firm's privacy policies and practices B selective disclosure of material non-public information by issuers C standardization of disclosure of financial and non-financial information by issuers D registration filings with the SEC by small business issuers
The best answer is B. 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.
Under Rule 147, intrastate offerings cannot be resold out of state for how long following completion of the initial offering? A 3 months B 6 months C 12 months D 24 months
The best answer is B. Rule 147 requires that resale of securities sold under the intrastate exemption be restricted to intrastate only for 6 months following completion of the initial offering. Thereafter, they can be resold interstate. Note, however, that because these securities were never registered with the SEC, they cannot be publicly traded. The only way to resell them is in a "private transaction."
As the result of a hearing in front of the Hearing Panel, a registered representative is suspended. Which statement is TRUE regarding the right of appeal? A The decision of the Hearing Panel is final and cannot be appealed B The decision may be appealed to the National Adjudicatory Council C The decision may be appealed to the Securities and Exchange Commission D The decision may be appealed to Federal Court
The best answer is B. The FINRA Code of Procedure is used when the FINRA Department of Enforcement wishes to prosecute a member firm or an associated person for rule violations. Under the FINRA Code of Procedure, the first level of hearings in any dispute or complaint proceeding is held in front of a Hearing Panel. Their decision may be appealed to the National Adjudicatory Council. The National Adjudicatory Council's decision may be appealed to the Securities and Exchange Commission. Finally, the SEC's decision may be appealed to Federal Court.
Under the Securities Acts of 1975, the Municipal Securities Rulemaking Board was created and empowered to regulate the: I disclosure of new information by municipal issuers II recordkeeping and settlement procedures of municipal broker-dealers III profit levels achieved by municipal broker-dealers A I only B II only C II and III D I, II, III
The best answer is B. The MSRB is empowered to regulate municipal market participants - municipal brokers, dealers, and banks that deal in municipal bonds. The MSRB has no power to regulate municipal issuers, making Choice I false. The MSRB does not regulate profit levels, making Choice III false.
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.
A municipal securities firm is hosting an event in its suite at a football game in the city where the firm is headquartered. A registered representative wants to invite an individual to join him in the suite to watch the game. The individual works for the municipality, and has worked with the registered representative on previous bond underwriting deals for the municipality. The ticket to the game is worth $250. Which statement is TRUE about this? A Giving the ticket to the game to this individual violates the MSRB $100 gift limit B This individual can be given the ticket because it has a de minimis value under the MSRB Political Contribution rule C This individual can be given the ticket because the firm is hosting the event and it is acceptable to invite a business client D This individual cannot be given the ticket because it is a conflict of interest
The best answer is C. This question is trying to confuse the MSRB gift limit with the MSRB Political Contribution Rule - and neither one applies in this scenario! The Political Contribution rule prohibits MFPs (Municipal Finance Professionals) from making a contribution of more than $250 to an elected official's campaign in which the MFP is entitled to vote. If this occurs, the municipal firm is banned from doing municipal securities business with that municipal issuer for 2 years. This situation is not a campaign contribution. The MSRB gift limit of $100 does not apply to business entertainment - which is what this is. The requirement here is that the registered representative be with the client during the period of entertainment (which is the case here) and the entertainment can not be too excessive nor too frequent. Finally, the entertainment must comply with the firm's policies and procedures - which is the case here because the firm is hosting the event.
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
The best answer is C. 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!)
Which Regulation D offering can be advertised? A An offering made to a maximum 10 accredited investors and 10 non-accredited investors B An offering made to a maximum of 35 non-accredited investors and 35 accredited investors C An offering made to an unlimited number of accredited investors and no non-accredited investors D An offering made to an unlimited number of non-accredited investors and no accredited investors
The best answer is C. A Regulation D offering is a "private placement." It can be sold to a maximum of 35 non-accredited investors and to an unlimited number of accredited investors. General advertising is prohibited, since this is a "private offering." However, a private placement that will only be offered to accredited investors is permitted to be advertised - as long as the advertisement states that the offering is only available to accredited investors.
Under MSRB rules, a registered representative can perform which of the following functions? I Trade municipal issues in the secondary market II Offer call and put options on municipal securities to customers III Approve municipal advertising that will be sent to customers IV Offer new municipal issues to retail customers A I and II only B III and IV only C I, II, and IV D I, II, III, IV
The best answer is C. Municipal representatives are permitted to trade municipal issues in the secondary market; offer call and put options on municipal issues; and sell new municipal issues to customers. Registered representatives are not permitted to approve municipal advertising. To do so, the individual must pass the principal's exam.
All of the following meet the statutory definition of an "insider" EXCEPT: A an officer of a company B the holder of 10% of the equity securities of a company C the holder of 10% of the debt of a company D a director of a company
The best answer is C. The Securities Exchange Act of 1934 defines a statutory "insider" as any officer, director, or 10% shareholder of the equity securities of the issuer.
An order ticket is filled out and sent to the New York Stock Exchange floor for execution. After being executed on the floor, it is discovered that the account number is incorrect. Under FINRA rules, the account number may be changed to the correct one by the: A Registered Representative B Specialist C Branch Office Manager D Floor Governor
The best answer is C. Under FINRA rules, alterations to executed order tickets are prohibited, unless the alteration is approved in writing by a "designated person" such as a branch manager. This person must understand all the facts of the situation before approving of the change, and is responsible for the change.
U.S. Government agency securities: A trades settle same day B are guaranteed by the U.S. Government C are exempt securities under the Securities Act of 1933 D are sold through competitive bid at the weekly Treasury Auction
The best answer is C. Under the 1933 Act, Agency securities are exempt and are not required to be registered with the SEC, nor are they required to be sold with a prospectus. Generally, agency securities trades settle in 1 business day, not the same day (for the purpose of the exam, though, because of the complexity of Agency settlements, these are NOT tested). Agencies are not guaranteed by the U.S. Government (with the sole exception of GNMA). Agencies are not sold through competitive bid. They are sold though selling groups on a negotiated basis.
The research department of a brokerage firm has prepared a buy recommendation for the common shares of a company. Which of the following is NOT required to be disclosed in the report? A That the firm makes a market in that company's shares B That the firm was a manager or co-manager in an equity underwriting of that company's securities within the past 12 months C That the firm received compensation from investment banking services rendered to that issuer within the past 12 months D That the firm recommends the purchase of a mutual fund which holds that issuer's equity securities
The best answer is D. If a recommendation is made, the brokerage firm must disclose if it: -has managed or co-managed any equity securities offering of that issuer within the past 12 months; -has received compensation from investment banking services from that issuer in the past 12 months; -expects to receive or intends to seek investment banking compensation from that issuer in the next 3 months; -is an investment banking services client of the firm; or -is a market maker in the issuer's stock. Also, the brokerage firm must disclose if it or its affiliates own(s) the issuer's securities (including options). Because the firm doesn't decide which securities are purchased in a mutual fund, this is not required to be disclosed.
Which of the following is defined as options "sales literature"? A Options movie B Options prospecting letter sent to 10 clients C Letters of an "individual" nature sent to customers D Options research report
The best answer is D. Options Sales Literature is any written communication distributed to customers or the public that contains any analysis, performance report, projection or recommendation. Included, as well, are standard forms of options worksheets (these detail gain, loss, and breakeven for a given strategy to be employed by a customer), and seminar texts for lectures to be given to the public about options. Sales literature must be accompanied or preceded by an Options Disclosure Document. Options Advertising is defined as any sales material that reaches a public audience through a mass media, including: newspapers, periodicals, magazines, websites, radio, television, telephone recordings, motion pictures, billboards, signs, or through written sales communications to the public that are NOT required to be preceded by an Options Disclosure Document. The content of these communications is very limited so that they are not "promotional" and they must state where an Options Disclosure Document can be obtained.
If an analyst makes a public appearance, under Regulation AC, the analyst MUST: A make a verbal certification to the group being addressed B distribute a written certification to each person in the group addressed C give a blanket certification to all appearances made each month D give a blanket certification to all appearances made each quarter
The best answer is D. Regulation AC (Analyst Certification) requires research analysts to certify each published research report; and to make a quarterly certification covering all public appearances made during that quarter. The certification basically states that the analyst gave his or her honest view at that time; and that the analyst's compensation was not tied to the recommendation or views expressed. If an analyst fails to make the required certification, FINRA must be notified; and for the next 120 days, any research reports authored by that analyst must include the disclosure that the analyst did not provide the required certification.
An officer of MNO Corporation wishes to sell stock under Rule 144. MNO has 50,000,000 shares outstanding. The previous weeks' trading volumes are: Week Ending Volume Nov 21 500,000 shares Nov 14 525,000 shares Nov 7 485,000 shares Oct 31 450,000 shares Oct 24 575,000 shares If the Form 144 had been filed one week prior to November 23rd, the maximum sale would be: A 490,000 shares B 500,000 shares C 506,250 shares D 508,750 shares
The best answer is D. Rule 144 allows the sale of the greater of 1% of the outstanding shares of the weekly average of the preceding 4 weeks' trading volume every 90 days. 1% of 50,000,000 shares = 500,000 shares. If the Form 144 were filed the preceding week, the trading volumes would have been: 2,035,000 shares/ 4 = 508,750 share average The greater amount, 508,750 shares, can be sold during the next 90 days.
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 A I only B II only C I and III only D I, II, III
The best answer is D. 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).
If a registered representative fails to complete the Regulatory Element of the Continuing Education requirement within the stated time period, that person: A can continue to perform all of the functions of a registered representative B can only accept unsolicited orders from customers C can only be compensated on a salary basis; commission compensation is prohibited D must cease performing all of the functions of a registered representative
The best answer is D. If a registered representative fails to complete the Regulatory Element of the Continuing Education requirement within 120 days of the notification date, that person's registration is suspended and that person cannot continue to perform any of the functions of a registered representative.
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 Corporation declaring bankruptcy IV Corporate proxy materials A I only B II only C I, II, III D I, II, III, IV
The best answer is D. 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; a corporate 8K filing is required for any unusual corporate announcements such as a merger or divestiture, or bankruptcy declaration; and corporate proxy materials must be filed with the SEC 10 business days before use.
To sell restricted stock in compliance with the provisions of Rule 144, which of the following are required? I Filing of a Form 144 II Issuer's representation that the corporation is current with all required SEC filings III Seller's representation that the securities have been held fully paid for 6 months IV Broker's representation that it did not solicit the transaction A I only B I and II only C III and IV only D I, II, III, IV
The best answer is D. All of the statements are true regarding Rule 144 sales. Filing of a Form 144 with the SEC is required at the time that the order to sell is placed. On the Form, the seller computes the maximum sale amount during the next 90 days. The issuer's representation that the corporation is current with all required SEC filings must be obtained 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.
A registered representative has prepared a research report about a new issue that is "in registration." Which statement is TRUE? A The research report may be sent to any customer expressing an "indication of interest" B The research report may be sent to any customer if it is accompanied by a preliminary prospectus C The research report may only be sent to customers who have bought new issues within the preceding 12 months D The research report may not be sent
The best answer is D. Since this issue is "in registration," it is in the 20-day cooling off period. The only permitted written communications during this period are the red herring preliminary prospectus, and a tombstone announcement (which, in reality, is not published until the effective date). This research report cannot be sent, since it would be considered to be a prohibited "offer to sell" the securities.
Under Regulation M, which statement is FALSE regarding stabilizing bids entered by market makers? A Only the syndicate manager placed a stabilizing bid B There is no time limitation on the period that a stabilizing bid can be maintained C A stabilizing bid cannot be placed unless a "Notice of Stabilization" is included in the prospectus D A stabilizing bid can be placed at any price that is reasonably related to the market
The best answer is D. Only 1 stabilizing bid, placed by the manager, is permitted at any time after registration becomes effective. The stabilizing bid is placed at, or just below the Public Offering Price. It can never be placed above the P.O.P. 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. A "Notice of Stabilization" must be included in the prospectus (on the inside front cover) that details the fact that the manager can start and stop stabilizing at any time and that when stabilization stops, the price of the issue may drop.
All of the following are defined as options "advertising" EXCEPT: A options website B magazine inserts on options investments C television commercials on options investments D lectures to the public on options investments
The best answer is D. Options advertising is defined as any sales material that reaches a public audience through a mass medium, including: websites, newspapers, periodicals, magazines, radio, television, telephone recordings, motion pictures, billboards, etc. A lecture about options is given to a "specific audience" and is defined as "sales literature."
Which of the following best describes a tombstone announcement? A It is an advertisement that is used to solicit the public to buy a new registered securities offering B It is the document that is sent to prospective investors to give them information about the new securities offering C It is the disclosure document that gives the purchaser the most complete information about a new securities offering D It is an announcement of a new issue offering that is being registered with the SEC
The best answer is D. The "tombstone" is an announcement of a new issue offering that is being registered with the SEC. It is not an advertisement because new issue advertising is prohibited. Rather, it is a non-promotional announcement of the offering - and the information in it is limited to the name of the issuer, the type of security, the size of the offering, the price of the issuer and the names of the underwriter(s). The disclosure document for a registered new issue offering is the prospectus.
Under the provisions of the Securities Exchange Act of 1934, all of the following must be registered EXCEPT: A the exchanges that trade securities B member firms C sales employees of member firms D customers of member firms
The best answer is D. 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 customers to register (duh!).
Under MSRB rules, all of the following statements are true regarding a broker-dealer recommending municipal securities EXCEPT: A the broker-dealer must have reasonable grounds for making any recommendation B the broker-dealer must have reasonable grounds to believe that the recommendation is suitable for the customer C if the customer refuses to disclose significant financial information, no recommendation can be made D if the customer refuses to disclose significant financial information, recommendations can still be made
The best answer is D. Under MSRB rules, when recommending municipal securities, the broker-dealer must have reasonable grounds for making any recommendation; the broker-dealer must have reasonable grounds to believe that the recommendation is suitable for the customer; and if the customer refuses to disclose significant financial information, no recommendation can be made. While it may be the case that a customer wishes to keep his or her financial information private, if he or she fails to provide sufficient information about his or her financial status or investment objectives, recommendations cannot be made. However, unsolicited transaction are still permitted.
How many years must customer account records be retained by a member firm? A 3 years from account opening B 3 years from account closing C 6 years from account opening D 6 years from account closing
The best answer is D. Under SEC rules, customer account records (statements of account) must be retained for 6 years. If a customer closes an account, the records must be retained for a 6-year time window following account closing. This is the best description of the recordkeeping requirement.
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? A There is no violation of FINRA rules B There is no violation of Securities and Exchange Commission rules C This action violates the Securities Act of 1933 D This action violates the insider trading provisions of the Securities Exchange Act of 1934
The best answer is D. 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. This is not a violation of the Securities Act of 1933, which solely covers the registration and sale of new issues.