Section C Question Set: FIS-Securities Fraud-Practice

10 A(n) ____________ is an agreement between buyers and sellers to make delivery (i.e., sell) or to take delivery of (i.e., buy) a given quantity and quality of a commodity at a specified price and on a specified future date. a. Futures contract (future). b. Warrant. c. Certificate of deposit (CD). d. Option contract.

A

12 If a broker who is subject to rules prohibiting securities broker-dealers from making unsuitable recommendations on investments or investment strategies recommends an investment to a client without ascertaining relevant personal and financial information about the client, the broker has violated the rules prohibiting unsuitable recommendations. a. True. b. False.

A

19 Which of the following is the most accurate statement regarding the main function of Rule 10b-5, which the U.S. Securities and Exchange Commission (SEC) promulgated pursuant to Section 10 of the Securities Exchange Act of 1934? a. The main function of Rule 10b-5 is to prohibit false statements and other fraudulent activity in connection with the purchase or sale of any security. b. The main function of Rule 10b-5 is to ensure that investment advisors and investment advisor representatives file timely reports with the SEC. c. The main function of Rule 10b-5 is to provide for a private cause of criminal action for victims of securities fraud. d. The main function of Rule 10b-5 is to ensure that corporate executives release their personal financial statements to the public.

A

2 Which of the following investments are commonly recognized as securities? a. Bonds. b. All of these answers are correct. c. Retirement plans. d. Fixed insurance policies.

A

23 In the United States, the Commodities Futures Trading Commission (CFTC) regulates the activities of futures commission merchants (FCMs) and their associated persons. a. True. b. False.

A

26 Following the Wall Street Crash of 1929, the U.S. Congress passed the ______________ to regulate the subsequent trading of securities through brokers and exchanges. a. Securities Exchange Act of 1934. b. Truth in Lending Act of 1931. c. Investment Fraud Prevention Act of 1933. d. Securities Act of 1930.

A

3 The Financial Industry Regulatory Authority (FINRA) and the National Futures Association (NFA) are examples of self-regulatory organizations in the United States. a. True. b. False.

A

32 If a broker who is subject to rules prohibiting securities broker-dealers from making unsuitable recommendations on investments or investment strategies recommends that his client make an investment that is inconsistent with his client's objectives, this recommendation would be considered a violation of the rules prohibiting unsuitable recommendations. a. True. b. False.

A

34 To determine whether a registered person is excessively trading securities on a customer account for the purpose of generating commissions, a fraud examiner should calculate: a. The amount of monthly gross commissions generated from the customer account as a percentage of the average account balance. b. The percentage of change in commissions between accounting periods by dividing the amount of increase or decrease for each trade by the base period amount. c. The account's net asset value based on the market value of the customer's portfolio divided by the number of shares outstanding. d. The account's fair value to determine if the commissions are high or low compared to the underlying index.

A

36 Illegal pyramid schemes and Ponzi schemes can qualify as investment contracts under certain conditions. a. True. b. False.

A

37 A financial advisor has been ordered by a client to sell a large amount of a particular stock in which the advisor owns shares. Knowing that the order will certainly cause the stock price to fall, the advisor sells his shares of the stock before he places the customer's order. This practice is called: a. Front-running. b. Parking. c. Churning. d. Conversion.

A

38 In the United States, Rule 10b-5 makes it a crime to fail to state a material fact when selling securities if the omission would be misleading to a potential buyer. a. True. b. False.

A

4 Steven, an investment professional, was responsible for managing the brokerage account of his client Joe Fisher. Joe had little investment experience and trusted Steven to control his account. Over an eight-month period, Steven executed more than 100 trades on Joe's behalf for the purpose of increasing his own commissions. Steven executed the trades without regard for Joe's investment goals. This securities fraud scheme is best known as: a. Churning. b. Insider trading. c. Selling away. d. Running.

A

8 Under U.S. federal law, which of the following could be considered a security subject to registration and regulation regarding trading? a. An investment contract. b. A notarized contract. c. An instrument that represents ownership interest. d. Anything of material value or usefulness.

A

9 Which of the following is prohibited with regard to the purchase or sale of securities under Rule 10b-5 established by the U.S. Securities and Exchange Commission (SEC)? a. All of these answers are correct. b. Engaging in any act, practice, or course of business that would operate as a fraud against any person. c. Making any untrue statement of material fact. d. Employing any device scheme to defraud.

A

14 To determine if a misrepresentation in the offer or sale of any securities is material, a fraud examiner should consider which of the following? a. Whether the person who made the representation intended to mislead potential investors. b. Whether a reasonable investor would wish to know the information to make an informed decision. c. Whether the person who made the representation believed that it was suitable for potential investors. d. Whether the person who made the representation had authorization to make the statements.

B

16 For a financial instrument to be classified as an investment contract, and therefore, a security, under the U.S. Howey test, the instrument must be purchased by investors who display management activity in the instrument's enterprise and have expectations of making profits that are to be derived from their own efforts. a. True. b. False.

B

17 The U.S. Securities Act of 1933 regulates the trading of securities through brokers and exchanges, whereas the U.S. Securities Exchange Act of 1934 mainly regulates the issuance of securities. a. True. b. False.

B

18 All of the following would violate rules prohibiting securities broker-dealers from making unsuitable recommendations on investments or investment strategies except: a. A broker makes an investment that is inconsistent with the client's objectives. b. A broker makes an investment without obtaining prior approval for making the transactions. c. A broker recommends an investment strategy that is unsuitable for the client. d. A broker recommends an investment without ascertaining relevant financial information about the client.

B

20 In the United States, Rule 10b-5 makes it a crime to act negligently when engaging in transactions involving the purchase or sale of securities. a. True. b. False.

B

21 To determine if a misrepresentation in the offer or sale of any securities is ________, the fraud examiner should answer the following question: "Would a reasonable investor wish to know this information to make an informed decision?" a. Promotional. b. Material. c. Privileged. d. Relevant.

B

22 If an investment offering falls within the definition of a security under the Securities Act of 1933, it must be registered with the U.S. Securities and Exchange Commission (SEC). There are no exceptions or exemptions. a. True. b. False.

B

24 In the United States, the securities industry is only regulated at the federal level. a. True. b. False.

B

25 In limited partnerships, the limited partners manage the enterprise's activities. a. True. b. False.

B

28 Which of the following is the most accurate definition of insider trading? a. Using publicly available information to manage investment portfolios. b. Trading in securities based on material, nonpublic information. c. Systematically trading accounts against each other. d. Issuing equity illegally through capital markets.

B

30 In the United States, the Securities Trading Commission is responsible for overseeing all self-regulatory organizations (SROs) in the securities industry and shares regulatory responsibility with them. a. True. b. False.

B

31 Which of the following is an example of insider trading? a. An individual sells his shares in a company after reading a news article about an explosion at the company's factory. b. An employee sells shares of his company's stock because he knows that the company is about to publicly announce it is filing for bankruptcy. c. A bank manager tells a customer that the interest rates for a 30-year-mortgages have reached an all-time low. d. An individual buys a company's shares because the company operates in an industry that is growing rapidly.

B

35 All of the following are red flags indicating that an entity is operating a security business without the proper license or registration except: a. Agents with criminal records. b. Justified gaps in a promoter's work history. c. Prior customer complaints. d. A history of regulatory problems.

B

39 Following the Wall Street Crash of 1929, the U.S. Congress passed the ______________ to regulate the public offering of securities and to protect investors. a. Investment Fraud Prevention Act of 1933. b. Securities Act of 1933. c. Truth in Lending Act of 1931. d. Securities Exchange Act of 1931.

B

5 The primary function of Rule 10b-5, which the U.S. Securities and Exchange Commission (SEC) promulgated pursuant to Section 10 of the Securities Exchange Act of 1934, is to regulate the filing of annual reports by companies that engage primarily in investing, reinvesting, and trading in securities. a. True. b. False.

B

7 According to the U.S. Uniform Securities Act of 2002, a model act from which many state securities laws are based, certain conditions must be in place before a security can be sold or offered for sale. Which of the following correctly lists those conditions that must be present? a. A registration in place to cover the security, full and fair disclosure of all material information, and an administration agency to arbitrate securities lawsuits. b. A registration in place to cover the security, a registered securities professional, and full and fair disclosure of all material information. c. A registration in place to cover the security, the listing of the security on a national stock exchange, and a registered broker-dealer. d. A registration in place to cover the security, the listing of the security on a national stock exchange, and an administration agency to arbitrate securities lawsuits.

B

15 Which of the following statements about general partners is correct? a. General partners assume liability for partnership's debts but have no management responsibility for the enterprise. b. General partners cannot incur obligations on behalf of the partnership. c. General partners have management responsibility for the enterprise and assume liability for the partnership's debts. d. General partners have management responsibility for the enterprise but assume no liability for the partnership's debts.

C

27 For a misstatement (false statement) or omission to be actionable under Rule 10b-5, which was promulgated under Section 10(b) of the U.S. Securities Exchange Act of 1934, the misstatement or omission generally must be: a. Made with an intent to defraud. b. Material. c. All of these answers are correct. d. Relied on by the victim.

C

29 Which of the following is true with regard to partnerships? a. In a limited partnership, limited partners manage the enterprise's activities. b. In a general partnership, the liability of each partner is limited to the amount of his investment in the company. c. Unlike general partnership interests, interests in limited partnerships can be considered investment contracts. d. A limited partner is liable for all debts of the partnership.

C

6 To determine if an investment contract is a security subject to registration in the United States, a court might apply the ________ test. a. Huey. b. Frye. c. Howey. d. Blue Sky.

C

1 Which of the following terms refers to the inappropriate practice of an investment professional who engages in the excessive trading of a customer account to generate commissions while disregarding the customer's interests? a. Pump and dump. b. Parking. c. Selling away. d. Churning.

D

11 Which of the following is an example of insider trading? a. Albert buys shares of a company after the company's CEO tells him about earnings growth a day before making the news public. b. Smith sells shares of his company's stock because he knows that the company is about to announce poor earnings. c. Roger purchases shares of his company's stock after he learns that his company is about to announce a new joint venture with a very successful and well-known multi-national corporation. d. All of these answers are correct.

D

13 An investment contract, or security, has four components. Which of the following is one of those components? a. The investment was made with expectations of making a profit. b. The investment is in a common enterprise. c. There is an investment of money or other asset. d. All of these answers are correct.

D

33 Which of the following statements about self-regulatory organizations (SROs) in the U.S. securities industry is true? a. The Financial Industry Regulatory Authority (FINRA) is an SRO with delegated regulatory authority from the Securities and Exchange Commission. b. SROs enforce and create the standards and rules under which their members operate. c. SROs oversee the markets they operate and police the members participating in those markets. d. All of these answers are correct.

D