REGS: Fed & State Regulations, CBOE

A registered representative who has passed the Series 63 examination wishes to sell managed accounts to customers in differing states. Which statement is TRUE? Incorrect Answer A. The registered representative needs no further licenses to sell managed accounts Correct Answer B. The registered representative must pass either the Series 65 or Series 66 examination to sell managed accounts StatusC C. The registered representative must post a surety bond prior to selling managed accounts StatusD 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.

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 StatusA A. I and III StatusB B. I and IV Correct C. II and III StatusD 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.

Which of the following is defined as options "advertising"? StatusA A. Options disclosure document StatusB B. Standard option worksheet Correct C. Options website StatusD D. Letters of an "individual" nature sent to customers

The best answer is C. 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, signs, or through sales communications to the public. A letter sent to a customer is defined as correspondence; an options worksheet is defined as sales literature. The Options Disclosure Document (ODD) is the required offering information that must be given to customers when they open an options account; and that must accompany or precede any options communication that makes a recommendation; that shows past performance; or that makes a projection.

Regarding options sales literature, which statement is TRUE? StatusA A. Options sales literature is prohibited from containing specific recommendations StatusB B. Options sales literature must be accompanied by complete documentation that supports any claims Correct C. Options sales literature that shows performance must be accompanied or preceded by the latest Options Disclosure Document StatusD D. Options sales literature is prohibited from containing annualized yield calculations

The best answer is C. A customer who receives any options communication that makes a recommendation; shows past performance; or includes a performance projection; must get the latest Options Disclosure Document (ODD) at or prior to the receipt of the material.

Which statements are TRUE about banks that have customer accounts holding both exempt and non-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 member of the Securities Investor Protection Corporation IV The bank does not need to be a member of the Securities Investor Protection Corporation Correct A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is A. Insurance coverage for customer accounts at any broker-dealer that must be registered under the Securities Exchange Act of 1934 is provided by SIPC - Securities Investor Protection Corporation. The broker-dealers that must be registered are those that handle non-exempt securities. Thus, if a bank has customer accounts that hold both exempt and non-exempt securities, it would be obligated to register as a broker-dealer under the Securities Exchange Act of 1934; and would be obligated to join SIPC as well.

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 Correct A. I and III StatusB B. I and IV StatusC C. II and III StatusD 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 primary purpose of the Trust Indenture Act of 1939 is to: Correct A. protect the interests of holders of "non-exempt" bonds by appointment of a trustee StatusB B. protect the interests of unit investment trust holders by appointment of a trustee StatusC C. protect the interests of charitable trust beneficiaries by appointment of a trustee StatusD D. regulate the securities activities of banks and trust companies

The best answer is A. The primary purpose of the Trust Indenture Act of 1939 is to protect 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.

The designated Registered Options Principal is responsible for all of the following functions EXCEPT: StatusA A. approval of options advertising Correct Answer B. approval of options accounts Incorrect Answer C. writing of procedures for supervision of options accounts StatusD D. review of procedures for supervision of options accounts

The best answer is B. The designated Registered Options Principal resides in the main office of the firm and is responsible for creating and enforcing procedures for compliance with the rules of the O.C.C. and options exchanges. This person is also responsible for approving all options advertising and sales literature. Each branch must have a BOM - Branch Office Manager. This person is responsible for approving options accounts, options orders, options correspondence sent to 25 or fewer existing or prospective clients and for resolving options complaints.

All of the following must be registered under state blue sky laws EXCEPT: StatusA A. Broker-Dealers Correct B. U.S. Government Issues StatusC C. Limited Partnership Offerings StatusD D. Sales Representatives

The best answer is B. 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 limited partnership offerings) must be registered.

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

The best answer is B. 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.

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: StatusA A. can deduct the loss from that year's taxes Correct B. becomes an unsecured general creditor with last claim in the liquidation StatusC C. becomes a super-secured creditor with first claim in the liquidation StatusD D. has no claim against the failed broker-dealer

The best answer is B. 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.

The Trust Indenture Act of 1939 protects: StatusA A. municipal bondholders from being taken advantage of by the issuing municipality Correct Answer B. corporate bondholders from being taken advantage of by the issuing corporation StatusC C. government bondholders from being taken advantage of by the issuing governmental unit Incorrect Answer D. all bondholders from being taken advantage of by the issuing entity

The best answer is B. 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 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: StatusA A. is exempt from state registration StatusB B. falls under a "Blue Chip" exemption by being listed on a recognized national stock exchange Correct Answer C. is traded by at least 2 market makers Incorrect Answer D. falls under a "Manual Exemption" by being included in Standard & Poor's Manual

The best answer is C. 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.

The maximum coverage provided by Securities Investor Protection Corporation for securities held in a customer's account is: StatusA A. $250,000 StatusB B. $400,000 Correct C. $500,000 StatusD D. $600,000

The best answer is C. 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.

If an unsolicited facsimile is sent to a potential client, which of the following information must be sent? I Date and number of sheets II Identity of sender III Time, place and address from which sent IV Phone number from which sent StatusA A. I and II only StatusB B. III and IV only Correct C. II, III, IV StatusD D. I, II, III, IV

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 must be registered with the SEC as an investment adviser under the Investment Advisers Act of 1940? StatusA A. Broker-dealer StatusB B. Bank StatusC C. Senior Editor of an investment magazine Correct D. Accountant who gives investment advice to clients for a fee

The best answer is D. Any person who gives investment advice for a fee can be considered to be an Investment Adviser who must be registered with the SEC under the Investment Advisers Act of 1940. Excluded from the definition of investment advisers are broker-dealers, banks, lawyers and accountants who give advice that is solely incidental to their practice and who do not charge separately for such advice; and periodicals that give general advice and that are not "tailored" to specific customer situations. (Also note that the accountant giving investment advice 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 the adviser does not meet the threshold, then it must register in the State and not with the SEC.)

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: StatusA A. all of the accounts as a single account StatusB B. the individual and joint accounts as one account; and the custodian accounts as one account StatusC C. the individual and joint accounts as one accounts; and each custodian account separately Correct D. each account separately

The best answer is D. 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.

The legislation that requires a broker-dealer's research analysts to be completely separated from that firm's investment banking department the: StatusA A. Securities Act of 1933 Incorrect Answer B. Securities Exchange Act of 1934 StatusC C. Trust Indenture Act of 1939 Correct Answer D. Sarbanes-Oxley Act of 2002

The best answer is D. The Sarbanes-Oxley Act of 2002 requires that research analysts at broker-dealers be completely separated from investment banking, so that the analysts are not "encouraged" or "intimidated" by the firm's investment bankers to write favorable reports to get future investment banking business.

Securities Investor Protection Corporation protects against: Correct A. broker-dealer failure StatusB B. credit risk StatusC C. fraudulent trading StatusD D. loss of principal

The best answer is A. Securities Investor Protection Corporation protects customer accounts when a broker-dealer fails.

Wrap account

a brokerage account where all customer services are "wrapped" into one account, including trade executions, investment management and portfolio allocation, with an annual fee typically based on a percentage of total assets invested with the firm. This is considered to be an "advisory product," so persons selling "wrap" accounts must be registered as both sales representatives and investment adviser representatives in most states.

Trust Indenture Act of 1939

federal law enacted to protect corporate bondholders from harmful actions by the issuer. The Trust Indenture Act of 1939 requires issuers of non-exempt debt securities to include SEC approved protective covenants for the purchasers of the debt securities. Additionally, the issuer must appoint an independent trustee to monitor its adherence to the covenants. (see Non-exempt security, Trust indenture)

Sarbanes-Oxley Act of 2002

passed in response to the wave of scandals that became evident after the great market meltdown of 2000, this Act tightened corporate reporting rules including faster reporting of insider trades, mandated that research analysts be separated from broker-dealer investment banking functions, and increased auditor liability for fraudulent corporate actions.

Prudent man rule

under state law, a standard by which fiduciaries are expected to handle accounts over which they have control. Specifically, the law requires that the fiduciary handle the account and make investment decisions in the same way any prudent, intelligent person would, with emphasis on preservation of capital, a reasonable rate of return, and low risk. (see Fiduciary account)

"Blue Sky" laws generally require registration in the state for: I Agents that are resident in the state II Non-resident agents who direct offers into the state III Broker-dealers that are resident in the state IV Non-resident broker-dealers who direct offers into the state StatusA A. I and II only StatusB B. III and IV only StatusC C. I and III only Correct D. I, II, III, IV

The best answer is D. State blue sky laws require registration of resident agents and broker-dealers, as well as registration of non-resident agents and broker-dealers that direct offers into the state.

Options sales literature that makes a recommendation: I must be preceded or accompanied by the Options Disclosure Document II must be approved in writing by the designated ROP prior to use III must be filed with the exchange 10 days before use IV cannot include projections or show past performance Correct Answer A. I and II only StatusB B. III and IV only StatusC C. I, II, III Incorrect Answer D. I, II, III, IV

The best answer is A. All options communications with the public must be approved by the designated ROP (main office compliance ROP) - not the Branch Manager. Any communication that shows past performance; makes a performance projection; or that makes a recommendation; must be accompanied or preceded by the ODD (Options Disclosure Document). Options sales literature usually falls under these rules. Only options communications that are NOT accompanied by the ODD must be filed with the Exchange 10 days in advance of use. These are basically advertisements seen by the general public.

A satisfied customer gives his representative a client referral. Which statement is TRUE? Correct Answer A. The representative should check the firm's Do Not Call list prior to acting on the referral StatusB B. The representative is not required check the firm's Do Not Call list prior to acting because the client was referred Incorrect Answer 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 StatusD D. The representative is not permitted to contact the referred client unless the referred client initiates the contact

The best answer is A. 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.

A customer wishes to place a buy order for a security that has not been registered in the state. The security may be purchased if the security: I is exempt from state registration II falls under a "Blue Chip" exemption by being listed on a recognized national stock exchange III is traded by at least 2 market makers IV has been trading in the market for at least 1 year Correct A. I and II only StatusB B. III and IV only StatusC C. I, II, III StatusD D. I, II, III, IV

The best answer is A. Generally, securities that are exempt from Federal registration are also exempt from state registration. For example, government and municipal securities do not have to be registered in each state. 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. Therefore, separate state registration is overkill. There is no exemption offered from state registration for securities trading for at least 1 year or securities traded by at least 2 market makers.

A registered representative prepares the firm's standard options worksheet for a customer, detailing an income strategy for writing covered calls against "blue chip" stocks that the customer holds in his cash account. Which statement is TRUE? StatusA A. No additional steps are required before sending the completed worksheet to the customer Correct B. The customer must receive an Options Disclosure Document before receiving, or with the completed standard options worksheet StatusC C. The completed worksheet must be approved in writing by the firm's compliance department prior to being sent to the customer StatusD D. The worksheet must be filed with the Options Exchange 10 business days prior to its being forwarded to the customer

The best answer is B. "Standard" options worksheets are "blank forms" that detail potential gain, loss, and breakeven, for a given options strategy. A registered representative will complete this form by filling in the proposed options and stock positions that will be used in the strategy for that customer. Prior to use, the "standard" blank form worksheet must be approved by the firm's designated Registered Options Principal (ROP). Once the blank form is approved, it may be used by a registered representative with Branch Manager approval. However, the customer must receive the latest Options Disclosure Document at or prior to receipt of the completed standard options worksheet, since these include a performance projection. There is no filing with, or approval by, the CBOE, since options sales literature is accompanied or preceded by the ODD. Only communications that are not accompanied or preceded by the ODD (basically options advertising) must be pre-filed with the CBOE.

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 StatusA A. I and III Correct B. I and IV StatusC C. II and III StatusD 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 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? StatusA 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 Correct B. The firm must cease doing business with the customer until it and the agent register in the State of Georgia StatusC C. Only unsolicited orders may be accepted from this customer StatusD D. The customer must place any orders with the firm in writing; telephone orders cannot be accepted

The best answer is B. 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? StatusA A. Prospecting is permitted in any State once an individual has been registered in one State Correct B. The individual must be registered in the State of New York before contacting potential customers in that State StatusC C. The individual must be registered in the State of New York before writing orders from that State StatusD D. The individual must be registered in the State of New York before any orders can be confirmed to customers in that State

The best answer is B. 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.

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 StatusA A. I only Correct B. I and II StatusC C. III and IV StatusD D. I, II, III, IV

The best answer is B. 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.

Issuers of securities are prohibited from: StatusA A. buying calls on their own stock Correct B. selling calls on their own stock StatusC C. buying puts on their own stock StatusD D. selling puts on their own stock

The best answer is B. Issuers are prohibited from selling call options against their underlying stock. If they were exercised, they could simply issue more shares to deliver on the exercise notice, diluting each existing stockholder's equity. Furthermore, the issuance of the new shares would require a registration with the SEC. Thus, issuers are prohibited from selling calls against their own stock.

A registered representative has mailed promotional material and response cards to potential clients in near-by affluent neighborhoods. The registered representative receives a returned signed response card from one of the prospects, and when calling the phone number provided, finds that it is on the National Do-Not-Call List. Which statement is TRUE? StatusA A. This prospect cannot be called by the registered representative Correct B. This prospect can be called by the registered representative StatusC C. This prospect can only be called by the registered representative between the hours of 8:00 AM and 9:00 PM StatusD D. This prospect can only be called by the registered representative with written approval of the #24 General Principal

The best answer is B. There are 3 exceptions provided for cold calls to individuals that are on the National Do-Not-Call list. These are the: Established Business Relationship ("EBR") Exception; Prior Express Written Consent Exception; and Personal Relationship With The Associated Person Exception. Because this prospect signed and returned the response card, this qualifies for the "Prior Written Consent" exception. Furthermore, if the prospect has given such consent, the prohibition on making solicitations before 8:00 AM and after 9:00 PM does not apply.

Which of the following maintain "Do Not Call" lists? I SEC II Member firm III FTC IV FINRA StatusA A. I and IV Correct Answer B. II and III StatusC C. I, II, III Incorrect Answer D. I, II, III, IV

The best answer is B. 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 statement is TRUE concerning "wrap accounts"? StatusA A. Wrap accounts must be registered with the SEC and sold with a prospectus Correct B. To sell a wrap account, the registered representative must also be licensed as an investment adviser representative by the State StatusC C. To sell a wrap account, the registered representative must also be licensed to sell insurance products by the State StatusD D. Wrap accounts cannot be sold by registered representatives

The best answer is B. Wrap accounts "wrap" all services provided into a fee arrangement that is not transaction based - instead, the fee might be a fixed annual dollar fee; or a fee based on percentage of assets under management. Wrap accounts are defined as advisory products in most States, and a State investment adviser representative license is required (Series 65 or 66 exam) in addition to the federal Series 7 license needed to sell all securities.

All of the following options orders to sell calls are permitted EXCEPT a(n): StatusA A. individual selling naked calls in a discretionary account StatusB B. investment company selling calls against securities in its portfolio Correct Answer C. corporation selling calls against its underlying stock Incorrect Answer D. custodian selling calls against securities in a custodian account

The best answer is C. Issuers are prohibited from selling call options against their underlying stock. If they were exercised, they could simply issue more shares to deliver on the exercise notice, diluting existing stockholders' equity. Furthermore, the issuance of the new shares would require a registration with the SEC. Thus, issuers are prohibited from selling calls against their own stock. There is no prohibition on investment companies selling calls against stocks held in their portfolios - this is a very popular strategy for enhancing income. Custodians can also sell covered calls against securities held in the custodian account to increase income. In a discretionary account, all orders are permitted as long as a written power of attorney is received from the customer and the trades are suitable for the account.

Which of the following statements can be made to customers about the trading of options? I "Options can be used to hedge stock positions from loss" II "Many portfolio managers use covered call writing strategies to enhance income" III "Options involve a lower degree of risk than trading the underlying securities because the capital requirements are lower" IV "Options are available on stocks, foreign currencies, stock indexes and interest rates" StatusA A. I and III only StatusB B. II and IV only Correct Answer C. I, II, IV Incorrect Answer D. I, II, III, IV

The best answer is C. Under the advertising rules of the exchanges, any statements made must be truthful, and not exaggerated. Statements I, II, and IV are facts and are true. Statement III is untrue - options have greater risk than the underlying securities because they are more volatile and lose time value each day.

Which of the following actions taken by a fiduciary would NOT be consistent with the obligations imposed under the "Prudent Man Rule"? StatusA A. Diversifying a fixed income portfolio with securities of varying maturities StatusB B. Selecting AA rated corporate convertible bond investments to meet an investment objective of both income and capital gains Correct C. Investing in small capitalization unlisted new issue investments for long term growth StatusD D. Writing covered calls against securities positions held in the account to increase income

The best answer is C. 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.

The date that SIPC uses to value securities for purposes of insurance coverage limits is the date that the: StatusA A. securities were purchased by the customer StatusB B. securities were sold by the customer Correct C. petition was made in court for a trustee appointment StatusD D. certificates are retrieved from Depository Trust

The best answer is C. 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.

Which of the following callers are subject to the provisions of the Federal Telephone Consumer Protection Act of 1991? I Non-profit Organization II Securities Firm III Telemarketing Firm IV Real Estate Company StatusA A. II only StatusB B. III only Correct Answer C. II, III, IV Incorrect Answer D. I, II, III, IV

The best answer is C. 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 callers is EXEMPT from the provisions of the Federal Telephone Consumer Protection Act of 1991? StatusA A. Telemarketing Firm StatusB B. Real Estate Company Correct C. Non-profit Organization StatusD D. Securities Firm

The best answer is C. 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 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 StatusA A. I only StatusB B. II and III Correct C. I, II, III StatusD D. I, II, III, IV

The best answer is C. 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.

The Federal Telephone Consumer Protection Act permits: I solicited calls to be made only after 8 AM or before 9 PM in the time zone of the recipient II unsolicited calls to be made only after 8 AM or before 9 PM in the time zone of the recipient III solicited calls to be made anytime IV unsolicited calls to be made anytime StatusA A. I and III StatusB B. I and IV Correct C. II and III StatusD D. II and IV

The best answer is C. The Federal Telephone Consumer Protection Act of 1991 requires that unsolicited calls cannot be made before 8:00 AM nor after 9:00 PM, in the time zone of the recipient. Thus, unsolicited calls are only permitted after 8:00 AM until 9:00 PM in the time zone of the recipient. Solicited calls can be made anytime (as an example of a solicited call, a customer tells you to call at 7:00 AM, before he or she leaves for work).

The Sarbanes-Oxley Act of 2002 requires: I registration of new non-exempt issues with the SEC II chief corporate officers to certify the company's financial disclosures III research analysts to be separated from investment banking functions at broker-dealers IV issuers to file audited financial statements with the SEC StatusA A. I and III StatusB B. I and IV Correct C. II and III StatusD D. II and IV

The best answer is C. 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 Act also required that research analysts at broker-dealers be completely separated from investment banking, so that the analysts are not "encouraged" or "intimidated" by the firm's investment bankers to write favorable reports to get future investment banking business.

The Trust Indenture Act of 1939 applies to: I U.S. Government Bonds II Municipal Bonds III Corporate Bonds StatusA A. I only StatusB B. II only Correct C. III only StatusD D. I, II, III

The best answer is C. The Trust Indenture Act of 1939 applies to corporate bond issues of more than $50,000,000.

The designated Registered Options Principal is responsible for which of the following functions? I Writing of procedures for supervision of options accounts II Review of procedures for supervision of options accounts III Approval of options advertising IV Approval of options accounts StatusA A. I and II only StatusB B. III and IV only Correct C. I, II, III StatusD D. I, II, III, IV

The best answer is C. The designated Registered Options Principal resides in the main office of the firm and is responsible for creating and enforcing procedures for compliance with the rules of the O.C.C. and options exchanges. This person is also responsible for approving all options advertising and sales literature. Each branch must have a BOM - Branch Office Manager. This person is responsible for approving options accounts, options orders, options correspondence sent to 25 or fewer existing or prospective clients and for resolving options complaints.

Under the Trust Indenture Act of 1939, which of the following statements are TRUE? I The trustee will pay the issuer for services rendered II The issuer will pay the trustee for services rendered III The trustee protects the interests of the bondholders IV The issuer protects the interests of the trustee StatusA A. I and III StatusB B. I and IV Correct C. II and III StatusD D. II and IV

The best answer is C. Under the requirements of the Trust Indenture Act of 1939, trustees are appointed by the issuer (so the issuer pays the trustee). The trustee is appointed to protect the interests of the bondholders.

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? StatusA A. The lawyer must be registered with the Securities and Exchange Commission (SEC) as an investment adviser StatusB B. The lawyer must be registered with FINRA as a representative Incorrect Answer C. The lawyer must be registered with both the SEC as an investment adviser and with FINRA as a representative Correct Answer D. The lawyer is not required to be registered with the SEC as an investment adviser nor with FINRA as a representative

The best answer is D. 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.

Which statement is TRUE about insurance coverage on customer brokerage accounts maintained at banks registered solely as municipal securities dealers? StatusA A. Insurance coverage is provided solely by the Federal Deposit Insurance Corporation (FDIC) Incorrect Answer B. Insurance coverage is provided solely by the Securities Investors Protection Corporation (SIPC) StatusC C. Insurance coverage is provided by both the FDIC and by the SIPC Correct Answer D. No insurance protection is offered on customer municipal accounts maintained at bank broker-dealers

The best answer is D. Insurance coverage for customer accounts at any broker-dealer that must be registered under the Securities Exchange Act of 1934 is provided by SIPC - Securities Investor Protection Corporation. However, 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, are not covered by SIPC. Similarly, customer accounts at banks who are municipal securities dealers, are also not required to be covered under SIPC. Please note that 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. The FDIC - Federal Deposit Insurance Corporation - does not insure brokerage accounts, that is securities positions held at banks. It only insures bank accounts (deposits) maintained by customers at banks.

Which of the following is defined as options "sales literature"? StatusA A. Options Disclosure Document StatusB B. Options billboard StatusC C. Telephone recording on options investing Correct D. Lecture on options investing

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.

Which of the following options communications sent to more than 25 prospective customers must be approved by the designated Registered Options Principal prior to use? StatusA A. Advertising StatusB B. Sales literature StatusC C. Independently prepared reprints Correct D. All of the above

The best answer is D. Options communications that are distributed to more than 25 existing or prospective clients must be approved in writing prior to use by the designated Registered Options Principal (main office compliance ROP). Retail communications include advertising, sales literature and independently prepared reprints distributed to more than 25 existing or prospective clients. Options institutional sales literature and public appearances are the 2 public communications that do not require designated ROP approval. However, they are subject to the firm's policies and procedures. Options correspondence is a communication to up to 25 existing or prospective clients. It is subject to "post use review and approval" by a branch manager or ROP.

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 Incorrect Answer A. I and III StatusB B. I and IV StatusC C. II and III Correct Answer D. II and IV

The best answer is D. 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 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? StatusA A. SIPC will provide coverage for the $160,000 of securities only StatusB B. SIPC will provide coverage for the total of $500,000 of securities and cash StatusC C. SIPC will provide coverage for only $250,000 of cash Correct D. The customer will become a general creditor in the amount of $90,000

The best answer is D. 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 an account with a brokerage firm that is in receivership. The account holds $90,000 of securities and has a $50,000 debit. Which statement is TRUE regarding SIPC coverage? StatusA A. The account is covered for $90,000 StatusB B. The customer must deposit $50,000 to receive the $90,000 of securities StatusC C. The account is covered for $50,000 Correct D. The account is covered for $40,000

The best answer is D. SIPC covers the equity in a customer's account, with coverage not to exceed $500,000 equity per account in securities. However, cash coverage is limited to $250,000. This account has $90,000 of securities and a $50,000 debit, so the equity is $40,000. The customer will receive $40,000 worth of securities in the liquidation.

A customer is very satisfied with the service provided by his registered representative and gives the representative the name and telephone number of a good friend that needs investment advice. When the representative enters the telephone number of the friend, it comes up as blocked since this person is on the firm's "Do Not Call" list. Which statement is TRUE? StatusA A. Because the friend's name was given as a referral, this individual can be solicited by the representative StatusB B. Because the friend's telephone number was given as part of the referral, this individual can be solicited by the representative StatusC C. Because the referral was made by an existing customer of the firm, this individual can be solicited by the representative Correct D. Because this individual is on the firm's "Do Not Call" list, no solicitation by the representative is permitted

The best answer is D. The permitted exception to the Federal "Do Not Call" rule is if there is a personal relationship between the registered representative and the person being called - as long as that person is NOT on the firm's "Do Not Call" list. However, since this person is on the firm's "Do Not Call" list, he can't be called!

Standards for options advertising that is not preceded by delivery of the ODD (Options Disclosure Document) allow all of the following EXCEPT: StatusA A. making reference to the Options Clearing Corporation StatusB B. using a corporate logo StatusC C. referring to a specific options exchange Correct D. referring to a specific option contract

The best answer is D. The recommendation or reference to specific options contracts is prohibited in options any options communication that is not accompanied or preceded by delivery of the ODD. However, advertising can mention the functions of the Options Clearing Corporation, can include the broker-dealer's name and logo; and can explain the functions of the options exchanges.