SIE EXAM PREP Chapter 02: Overview of Regulation
Four customers have accounts at a broker-dealer with the following balances: Securities Cash Commodities & Futures Options Customer 1 $50,000 $20,000 $0 $30,000 Customer 2 $40,000 $10,000 $0 $20,000 Customer 3 $30,000 $20,000 $10,000 $40,000 Customer 4 $50,000 $40,000 $0 $40,000 Under SIPC rules, which customer will not be fully covered if the broker-dealer declares bankruptcy?
CUSTOMER 3 In the event of broker-dealer bankruptcy, SIPC protects customers' securities positions and cash being held by the broker-dealer. SIPC provides $500,000 of coverage for each separate customer, of which no more than $250,000 may be in the form of cash. SIPC does not cover futures and commodities positions. Although each of the customers are under the SIPC coverage limits, the $10,000 in commodities and futures positions of Customer 3 will not be covered. (20954)
Banks savings account are guaranteed and insured by the: a. FDIC b. SIPC c. federal reserve board d. department of treasury
FDIC In the event that a bank is unable to pay its depositors, the Federal Deposit Insurance Corporation (FDIC) guarantees bank accounts up to $250,000. The Securities Investor Protection Corporation (SIPC) protects brokerage customers against broker-dealer bankruptcy.
Which of the following organizations enforces municipal securities regulations for broker-dealers? a. FINRA b. the FRB c. FDIC d. MSRB
FINRA Although the MSRB creates rules governing municipal securities broker-dealers, its rules are enforced by other regulatory bodies. The appropriate regulatory agencies are the: The SEC or FINRA for broker-dealers The comptroller of the currency for federal banks The FRB for state banks that are members of the FRB The FDIC for member banks of the FDIC
Which of the following statements is TRUE regarding the role of SIPC? a. SIPC provides protection vs employee theft b. SIPC covers separate accounts c. SIPC covers separate customers d. all regulated investment companies must obtain SIPC coverage
SIPC covers separate customers SIPC covers separate customers of a broker-dealer. An individual would be viewed as a separate customer. An individual who holds a personal account and an IRA would be treated as two separate customers.
If a broker-dealer declares bankruptcy, which of the following positions is fully covered by SIPC? a. $200,000 in stock, $100,000 in cash, $75,000 in futures b. $300,000 in stock, $100,000 in cash c. $100,000 in stock, $300,000 in cash d.$200,000 in stock, $200,000 in cash, $25,000 in futures
b. $300,000 in stock, $100,000 in cash The SIPC provides for coverage of $500,000 per separate customer, with a maximum coverage of $250,000 of cash. SIPC doesn't provide protection for futures positions. (17505)
The Investment Advisers Act of 1940 regulates which of the following? a. The markup charged by a financial services firm on a securities transaction b. The fee charged by an accountant for providing advice concerning securities c. The fee charged by a bank to hold securities d. The fee charge by an accountant when he files a client's tax return
b. The fee charged by an accountant for providing advice concerning securities The Investment Advisers Act of 1940 regulates firms that are established as investment advisers (IAs). The Act both defines the term investment adviser and provides a number of exclusions from the IA definition. Examples of investment advisers include firms that manage mutual fund portfolios as well as firms that manage wrap accounts and collect a single fee to cover the costs related to investment advice along with the costs of transactions. Exclusions from the IA definition are available to broker-dealers, specific types of professionals (lawyers, accountants, teachers, engineers), and publishers. However, for the professionals to be excluded, the investment advice being provided must be incidental to their actual profession. For example, if an accountant decides to hold himself out to the public as an investment adviser and charge a separate fee for that service, the exclusion will not apply. On the other hand, if an account collects a fee for completing and filing a client's tax return, he is not considered to be acting as an investment adviser.
The primary purpose of the North American Securities Administrators Association is to: a. Enforce rules that are established by the states b. Create rules, laws, and exam requirements for states c. Create rules, laws, and exam requirements for interstate transactions of securities d. Examine broker-dealers that are registered in a state
create rules, laws and exam requirements for states The provisions of the Uniform Securities Act (USA), which is a model law for the individual states, are established by the North American Securities Administrators Association (NASAA) and enforced by the individual states. Each state has its own securities regulations department and the person in charge of the department is referred to as the Administrator or Commissioner. NASAA membership includes Administrators of the 50 states, the District of Columbia, the U.S. Virgin Islands, Puerto Rico, Canada, and Mexico.
If a customer exceeds SIPC limits: A. The customer will receive cash rather than his securities B. The customer is a secured creditor C. The customer doesn't have a claim to the excess amount D. The customer is a general creditor
customer is a general creditor If a customer's claim exceeds SIPC limits, he becomes a general creditor.
The primary purpose of a self-regulatory organization (SRO) is to: a. Press criminal charges for violations of securities laws b. Establish market prices for the securities that trade in the market it regulates c. Ensure the solvency of broker-dealers and other market participants d. Promote fair and equitable practices among members
d. Promote fair and equitable practices among members The primary purpose of SROs (e.g., the exchanges, FINRA, the MSRB) is to promote fair and equitable practices regarding trading and the process by which its broker-dealer members interact with customers. SROs do not establish market prices. The SEC, not an SRO, may recommend pressing charges for violations of securities laws.
The FDIC provides coverage for: a. fixed annuities b. life insurance c. variable annuities d. certificates of deposit (CD's)
d. certificates of deposit (CD's) The Federal Deposit Insurance Corporation (FDIC) provides coverage for deposits at a bank, in the event the bank has financial troubles. FDIC will cover CDs, but not insurance, or fixed and variable annuities.
If SIPC does not cover in full a customer's account in a brokerage firm that has gone bankrupt, the investor is a: a. general creditor b. secured creditor c. preferred creditor d. guaranteed creditor
general creditor If SIPC does not cover a client's account in a brokerage firm that has gone bankrupt, the client is a general creditor. The client ranks equally with all other general creditors.
MSRB rules do NOT apply to: a. Registered representatives b. Broker-dealers that prepare research c. Underwriters d. Issuers
issuers Municipal Securities Rulemaking Board (MSRB) rules apply to all the parties listed except municipal bond issuers. The MSRB does not have the power to regulate municipal bond issuers.
If a company's insiders are buying its shares, what will most likely happen to the share price? a. it will appreciate b. it will depreciate c. it will neither appreciate nor depreciate d. it depends on how correlated the stock is with the S&p 500 index
it will appreciate Insiders know more about their company than most investors and are required to report their purchases and sales to the SEC. If a large number of insiders are buying stock, it's likely that investors will feel more confident about the company and the result is that the share price will rise or appreciate in value.
If there is a violation of securities laws, which of the following is responsible for taking criminal action? a. The Financial Industry Regulatory Authority (FINRA) b. The Securities Exchange Commission (SEC) c. The Department of Justice (DOJ) d. The Internal Revenue Service (IRS)
the department of justice The SEC may investigate potential securities law violations through its Division of Enforcement, which prosecutes cases on behalf of the Commission. The SEC may also bring civil actions. However, if criminal activity is discovered by the Commission, the case falls under the jurisdiction of the Department of Justice (DOJ).
A person has opened an account at a brokerage firm. In which of the following situations is her account protected by SIPC? a. She purchases some penny stock from the firm and the stock quickly becomes worthless. b. The firm files for bankruptcy and ceases doing business. c. Her RR steals cash from her account and flees the country. d. After the firm assures her that interest rates will be falling, she buys some bonds yet interest rates rise.
the firm files for bankruptcy and ceases doing business The purpose of the Securities Investor Protection Corporation (SIPC) is to protect separate customers from broker-dealer bankruptcy. SIPC does not protect against market or interest-rate risk. Also, SIPC does not protect against losses due to fraud or theft by broker-dealer employees. To cover the losses resulting from fraud or theft, broker-dealers are required to maintain insurance which is referred to as a fidelity bond. SIPC is a non-profit organization that is funded through assessments on its broker-dealer members and it is NOT part of the U.S. government or the FDIC.
"Blue Sky Laws" were established by: a. uniform securities act b. national securities markets improvement act c. bank secrecy act d. the maloney act
uniform securities act "Blue Sky Laws," which are state securities laws, were established by the Uniform Securities Act (USA). The National Securities Markets Improvement Act (NSMIA) created a more efficient process by which state and federal regulations apply to investment advisers and securities. The Bank Secrecy Act (BSA) addresses the concerns of money laundering. The Maloney Act established the NASD, which was the predecessor to FINRA. (17504)