Series 7: Regulations (Other Federal and State Regulations)
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
I, II, III 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.
"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
I, II, III, IV 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.
Which of the following must be registered with the SEC as an investment adviser under the Investment Advisers Act of 1940?
Accountant who gives investment advice to clients for a fee 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.)
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
I and III 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
I and III 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!).
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
I, II, III 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).
Which of the following actions taken by a fiduciary would be consistent with the obligations imposed by the "Prudent Man Rule"? I Diversifying a fixed income portfolio with securities of varying maturities II Selecting AA rated corporate convertible bond investments to meet an investment objective of both income and capital gains III Investing in small capitalization unlisted new issue investments for long term growth IV Writing covered calls against securities positions held in the account to increase income
I, II, IV 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.
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
II and III 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 Federal Telephone Consumer Protection Act of 1991 permits unsolicited calls to be made: I before 8:00 AM in the time zone of the recipient II after 8:00 AM in the time zone of the recipient III before 9:00 PM in the time zone of the recipient IV after 9:00 PM in the time zone of the recipient
II and III The Federal Telephone Consumer Protection Act of 1991 does not allow unsolicited calls to be made before 8:00 AM, nor after 9:00 PM, in the time zone of the recipient. Thus, unsolicited calls may be made after 8:00 AM, but not after 9:00 PM in the time zone of the recipient.
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
II and III 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.
Which TWO of the following are correct statements regarding telephone solicitations? I Calls are only permitted between 8:00 AM and 10:00 PM in the time zone of the recipient II The firm must maintain written procedures regarding telephone solicitations III The firm must maintain a "Do Not Call" list IV The representative must maintain a "Do Not Call" list
II and III Unsolicited cold calls cannot be made before 8:00 AM, nor after 9:00 PM, in the time zone of the recipient, making Choice I wrong. The firm must maintain a Do Not Call list and must have written procedures covering telephone solicitations, making Choices II and III correct. The firm maintains the Do Not Call List, not the representative, making Choice IV wrong.
State registration (Blue Sky) requirements apply to: I registration of government and municipal securities II registration of corporate securities III registration of state chartered bank issues
II only Generally speaking, if a security is exempt from Federal law, it will be exempt under Blue Sky laws (though there are some exceptions). Governments, municipals, and state chartered bank issues are exempt under both Federal and State law; corporate issues are non-exempt.
The Trust Indenture Act of 1939 applies to which of the following offerings? I $100,000,000 of Sewer Revenue Bonds sold interstate II $100,000,000 of Corporate Debentures sold interstate III $10,000,000 of Corporate Debentures sold interstate IV $100,000,000 of 30 day commercial paper sold interstate
II only The Trust Indenture Act of 1939 applies solely to non-exempt interstate securities offerings over $50,000,000. Sewer revenue bonds are exempt, as is commercial paper. Corporate debentures are non-exempt, but only the $100,000,000 offering is subject to the Act. The $10,000,000 corporate debt offering is under the $50,000,000 limit.
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
II, III, IV 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 actions taken by a fiduciary would be consistent with the obligations imposed by the "Prudent Man Rule"? I Purchasing new issues of low price speculative stocks II Writing naked calls to profit from an anticipated downward market move III Selling covered calls to generate extra income during a period of expected market stability IV Diversifying a debt portfolio with securities of varying maturities
III and IV only 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," nor would selling naked call options that expose the writer to unlimited loss potential. Diversifying a portfolio, and writing covered calls against stock positions for extra income are both proven, prudent investment strategies.
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?
This prospect can be called by the registered representative 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.
If an individual joins a broker-dealer to sell wrap accounts, under uniform state law, this person:
must register and pass the Series 63 examination must register and pass the Series 65 examination Uniform state law, in most states, requires individuals who sell securities in a state to register as an agent and pass the Series 63 examination. In addition, most states define managed accounts as "investment advisers" and individuals who sell these accounts must register as "investment adviser representatives" and pass the Series 65 examination.
The primary purpose of the Trust Indenture Act of 1939 is to:
protect the interests of holders of "non-exempt" bonds by appointment of a trustee 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.
A customer has an individual cash account, an individual margin account, a joint cash account with his wife, and a custodial account for each of his 2 children. If the firm liquidates, Securities Investor Protection Corporation covers:
the custodial accounts separately, the joint account separately, and both individual accounts are combined and treated as one Securities Investor Protection Corporation coverage is applied "per customer name." If John Jones has both an individual cash and margin account, they are treated as one account; a joint account with someone else is a separate account; each custodian account is a separate account.
The Trust Indenture Act of 1939 applies to: I U.S. Government Bonds II Municipal Bonds III Corporate Bonds
III only The Trust Indenture Act of 1939 applies to corporate bond issues of more than $50,000,000.
In a Securities Investor Protection Corporation (SIPC) liquidation, which statement regarding SIPC coverage limits is correct?
SIPC covers each customer account for $500,000 total inclusive of $250,000 in cash Securities Investor Protection Corporation coverage is limited to $500,000 total (cash and securities) per customer name, inclusive of maximum cash coverage of $250,000 for that account.
Which statement is TRUE about Securities Investor Protection Corporation (SIPC)?
SIPC protects cash and securities held in brokerage accounts from the failure of the broker-dealer SIPC insures customer accounts holding cash and/or securities against loss if a broker-dealer fails. FDIC insures customer accounts at banks against bank failure.
The legislation that requires the CEO (Chief Executive Officer) of a publicly traded company to make an annual certification of the information presented in the company's financial statements is the:
Sarbanes-Oxley Act of 2002 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.
A customer has an account with a brokerage firm that is in receivership. The account holds $220,000 of securities and has a $90,000 debit. Which statement is TRUE regarding SIPC coverage?
The account is covered for $130,000 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 $220,000 of securities and a $90,000 debit, so the equity is $130,000. The customer will receive $130,000 worth of securities in the liquidation.
In an SIPC liquidation, the trustee has distributed all securities registered in customer name. After this distribution, a customer has a claim for $590,000 in securities and another $260,000 of cash (free credit balance). Which statement regarding SIPC coverage limits is TRUE?
The customer is covered for $500,000 total, and becomes a general creditor for $350,000 SIPC coverage is limited to $500,000 total, inclusive of maximum cash coverage of $250.000. This customer has a total of $590,000 of securities and $260,000 of cash, for a total claim of $850,000. Cash is covered to a maximum of $250,000, so $10,000 of the claim for cash is uncovered. Since total coverage is $500,000 and $250,000 of this has been used for the cash claim, only another $250,000 of coverage is available against the securities claim of $590,000, leaving $340,000 of the securities claim uncovered. The customer becomes a general creditor for the uncovered claim amount of $10,000 + $340,000 = $350,000.
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?
The firm must cease doing business with the customer until it and the agent register in the State of Georgia 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?
The individual must be registered in the State of New York before contacting potential customers in that State 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.
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?
The lawyer is not required to be registered with the SEC as an investment adviser nor with FINRA as a representative 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.
A lawyer is a partner at a major investment advisory firm and is paid a fee by a customer for investment advice. Which statement is TRUE?
The lawyer must be registered with the Securities and Exchange Commission (SEC) as an investment adviser Anyone who renders investment advice in the normal course of business for a fee is considered to be an investment adviser. Thus, a lawyer that is a partner in a major advisory firm who renders advice for a fee is defined as an adviser that must register.Also, note that the lawyer/adviser 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 it does not meet the threshold, then it must register in the State and not with the SEC. Finally, please note that an exemption is granted if a lawyer 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.
All of the following must be registered under state blue sky laws EXCEPT:
U.S. Government Issues Issues that are exempt from registration under Federal laws are also exempt under state laws, so U.S. Governments do not have to be registered with the state. However, sales representatives, broker-dealers, and non-exempt issues (such as REITs) must be registered.
All of the following communications fall under the Federal Telephone Consumer Protection Act of 1991 EXCEPT:
U.S. Mail The Federal Telephone Consumer Protection Act of 1991 does not apply to offers made through the U.S. mail. It does apply to any unsolicited offers made through the phone - whether these are made by fax, pre-recorded messages, or personal contact.
General creditor status in the liquidation is given to any customer claims that are:
above Securities Investor Protection Corporation coverage limits 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. Coverage limits apply to both cash and margin accounts.
The Trust Indenture Act of 1939 was enacted to:
protect holders of non-exempt bond issues from issuer misconduct 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.
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
I and II 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.
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
I and II only 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 customer has an account with a brokerage firm that is in receivership. The account holds $350,000 of securities and has a $150,000 debit. Which statement is TRUE regarding SIPC coverage?
The account is covered for $200,000 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 $350,000 of securities and a $150,000 debit, so the equity is $200,000. The customer will receive $200,000 worth of securities in the liquidation.
A registered representative conducts a seminar about investing in the meeting room of a local apartment complex. At the end of the talk, he hands out his business card and tells the attendees that if they want additional information, please write their contact information on the reverse side of the business card and return it to him. When he gets back to the office and starts to re-contact some of the attendees who returned the business card, he finds that one of them is blocked because the client name is on the National Do Not Call Registry. Which statement is TRUE?
This prospect can be called by the registered representative 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 gave written permission by returning the business card with his contact information, 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.
A customer has a cash account and a margin account at a brokerage firm. In a liquidation under SIPC:
both accounts are treated as one account with coverage limited to $500,000 SIPC coverage limits are applied by customer name; thus if John Jones has both a cash account and a margin account at a firm, they are treated as one account under SIPC. If John and Mary Jones also have a joint cash account and a joint margin account, these are lumped together and considered to be one account under SIPC rules.
The "valuation date" for securities in a SIPC liquidation is the date the:
court appoints a trustee in bankruptcy To determine the amount of SIPC coverage given to each customer name, the securities owned by each customer are valued as of the date the court is petitioned to appoint a trustee in bankruptcy. It may take the trustee years to clean up the mess and distribute any assets found to these customers. If the securities subsequently go up in value, the customer wins (if they went down in value, the customer loses).
