Series 66: Federal Securities Acts (Other Federal Acts)

All of the following filings are made by corporations with the SEC EXCEPT:

10C The 10K is a corporation's annual audited financial statements. The 10Q is a corporation's quarterly unaudited financial statements. The 8K is a corporation's special report of significant events, such as a change in the board of directors, a merger or a divestiture. A 10C is a discontinued form that was filed when a corporation changed its name.

Under the Securities Act of 1933, which statement is TRUE regarding a Regulation D private placement exemption?

No advertising or public offers are permitted Regulation D permits an exemption from registration for private placements with the SEC under the Securities Act of 1933. To qualify for the exemption, the securities cannot be sold to more than 35 "non-accredited" investors; and they may be sold to an unlimited number of accredited investors. No advertising is permitted, since this would be considered to be a "public" offer of these securities, which would then require registration with the SEC. (Note that an exception to the "no advertising" prohibition is given if an offering is only made to accredited investors - however, this is not mentioned in the question and cannot be assumed.) The State law private placement exemption under the Uniform Securities Act is quite different. It permits an exemption from State registration if the securities are offered to no more than 10 investors; and no commissions or other compensation may be received in connection with the offering. There is no such limitation under Federal law for private placements.

What is an example of a 12(b)-1 fee?

Marketing fees paid for advertising the fund 12(b)-1 fees cover the cost of soliciting new investment to a mutual fund. Included in permitted 12(b)-1 expenses are trail commissions earned by representatives and fund marketing and advertising costs. The 12(b)-1 fees are charged against fund net assets and show as an expense on the fund income statement.

Which statement is TRUE regarding mutual funds?

That day's closing price is the basis for fund purchase price and redemption computations An order placed to buy or redeem mutual fund shares is "filled" at that day's closing Net Asset Value adjusted by any sales charges or redemption fees. If the fund is no load, there's no sales charge.

"Small Dollar Offerings" are given an exemption from registration under the Securities Act of 1933 under the provisions of:

Regulation A Under Regulation A - Small Dollar Offerings - an issuer can sell up to $50,000,000 of securities within a 12-month period under an exemption from registration.

All of the following are registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 EXCEPT:

Securities administrators The State securities administrators are not registered with the SEC. The SEC requires the registration of the exchanges; transfer agents; clearing agencies; securities information processors; and issuers of publicly traded securities.

Which statement is TRUE regarding the ability of the Securities and Exchange Commission to suspend trading on a national securities exchange?

The SEC can suspend trading with prior notification to the President Under the Securities Exchange Act of 1934, the SEC can suspend trading in the securities markets if it gives prior notice to the President of the United States of this action; and if the President does not disagree with this action.

Mutual Funds NAV Buy Chg ALPO Fund 9.51 10.39 +.02 AUDI Fund 6.82 7.45 +.04 The funds listed are:

open end management companies These funds are open end management companies, commonly called mutual funds. Closed end management companies are not sold with a sales charge. They trade on an exchange and are bought at the prevailing market price plus a commission.

Mutual funds must send their financial statements to shareholders:

semi-annually Mutual funds send their financial statements to shareholders semi-annually.

Mutual funds must send their financial statements to shareholders:

two times per year Mutual funds must send their financial statements to shareholders semi-annually (twice a year).

Which of the following investment companies MUST be closed-end?

$9.00 NAV / $8.50 purchase price Only a closed-end fund can trade at a discount to net asset value. A discount occurs when investors are bearish on the fund. The minimum price for an open-end fund is net asset value. If an open-end fund has a purchase price equal to the NAV, as in Choice B, this fund is most likely a "no-load" fund. If the open-end fund imposes a sales charge, then the fund is a "load" fund.

To be defined as a diversified management company, a fund must have at least what percentage of its assets invested in securities?

75% To be defined as a "diversified" management company, the fund must have at least 75% of its assets invested in securities; with no more than 5% of assets invested in a single issuer; with no holding representing more than 10% of the voting stock of that issuer.

Commercial paper is exempt from registration under the Securities Act of 1933 as long as its maturity does not exceed a maximum of:

9 months In order for commercial paper to be an exempt security under the Securities Act of 1933, the maximum permitted maturity is 270 days, which is 9 months.

Which of the following is NOT an accredited investor under Regulation D?

An individual with $2 million in securities This question is not immediately obvious! An individual with $2 million of securities does not mean that he or she has a net worth of $1,000,000 (the minimum requirement to be accredited). He or she may have a margin loan against the securities, with the loan amount in excess of $1,000,000! As long as a couple earns at least $300,000 per year, they are accredited. Employee benefit plans and trusts that have over $5,000,000 under management, also are accredited investors under Regulation D.

The issuer does NOT redeem which of the following investment company shares?

Closed-end investment company shares Closed-end fund shares trade in the secondary market like any other stock. Mutual funds are open-end investment companies, and along with unit investment trusts, redeem their shares.

Institutional investment managers MUST file a Form 13F with the SEC: I Monthly II Quarterly III Within 10 business days of the due date IV Within 45 calendar days of the due date

II and IV The Form 13F (as in "Fund") is filed with the SEC by mutual funds that have at least $100,000,000 of assets under management. It discloses all of the fund's holdings and is filed within 45 calendar days of quarter-end.

The Securities Exchange Act of 1934 requires that: I there are 3 SEC Commissioners II there are 5 SEC Commissioners III SEC Commissioners have no outside work and cannot trade their own accounts IV SEC Commissioners cannot be affiliated with any political party

II and III Under the Securities Exchange Act of 1934, there are 5 SEC Commissioners, with no more than 3 from one political party. Commissioners must work full time; cannot have any outside work; and cannot trade their own securities accounts.

The provisions of the Securities Exchange Act of 1934 apply to which of the following activities? I Trading rules for exempt securities II Trading rules for non-exempt securities III Anti-fraud rules for exempt securities IV Anti-fraud rules for non-exempt securities

II, III, IV The Securities Exchange Act of 1934 relates to the secondary (trading) market. The provisions of the Act apply to non-exempt securities only, with the exception of the "anti-fraud" provisions of the Act. The "anti-fraud" provisions apply to both exempt and non-exempt securities.

The Federal law that requires the registration with the SEC of management companies is the:

Investment Company Act of 1940 The Investment Company Act of 1940 requires that investment companies (management companies, unit investment trusts and face amount certificate companies) register with the SEC.

Under the Securities Exchange Act of 1934, all of the following issuers must report to the SEC EXCEPT:

Municipalities Publicly traded corporations and limited partnerships, as well as investment companies, file reports with the SEC. Municipal and federal issuers are exempt from the Act of 1934.

The Regulation T requirement to buy a long term equity option is 75%. The "loan value" of the long term option is:

25% The "loan value" of a security is the amount that may be borrowed when the position is purchased. If Regulation T requires a 75% deposit, then the remaining 25% can be borrowed from the broker to buy the security. This is the "loan value."

Under the Investment Company Act of 1940, what percentage of a management company's Board of Directors MUST be unaffiliated with the investment company?

40% Under the Investment Company Act of 1940, at least 40% of a management company's Board of Directors must be "non-affiliated" persons. Thus, up to 60% of the Board can be "affiliated" persons. An "affiliated" person is basically someone who is financially remunerated by the investment company, such as the management company's lawyers or accountants; or someone who is both an employee of a broker-dealer and an affiliated investment company.

Under the Investment Company Act of 1940, the investment adviser's contract must be renewed by a majority vote of the fund's:

Board of Directors or the outstanding shares The investment adviser contract, under the Investment Company Act of 1940, must be renewed annually by either a majority vote of the management company's Board of Directors; or a majority vote of the outstanding shares.

Under the Securities Exchange Act of 1934, credit extended to customers for the purchase of securities is controlled by the:

Board of Governors of the Federal Reserve The extension of credit on securities is controlled by the Board of Governors of the Federal Reserve. Federal Reserve Regulation T controls credit on securities extended by brokers. Regulation U controls credit on securities extended by banks.

What is the difference between Class A and Class B stock in a pooled investment vehicle?

Class A stock offers breakpoints while Class B stock does not A pooled investment vehicle is an investment fund. Mutual funds offer share classes to investors, with different ways of imposing sales charges: Class A: An up-front sales charge reduced by breakpoints for larger purchases and no, or very low, annual 12b-1 fees. Class B: No up-front sales charge, instead a CDSC -Contingent Deferred Sales Charge is imposed that declines towards "0" over 6-7 years, however there are annual 12b-1 fees averaging .50%. Class C: No up front sales charge, usually no CDSC, but the fund charges the highest permitted annual 12b-1 fee of .75% annually. All share classes buy into the same exact mutual fund and receive the same distributions from the fund. Long-term investors, and investors with large dollar amounts, are usually better off with the "A" shares. Intermediate-term investors (6-7 years) with moderate amounts to invest are usually better off with the "B" shares. Short-term investors are better off with the "C" shares.

What is the difference between Class A and Class B stock in a pooled investment vehicle?

Class B stock charges higher 12(b)-1 fees than Class A stock A pooled investment vehicle is an investment fund. Mutual funds offer share classes to investors, with different ways of imposing sales charges: Class A: An up-front sales charge reduced by breakpoints for larger purchases and no, or very low, annual 12b-1 fees. Class B: No up-front sales charge, instead a CDSC - Contingent Deferred Sales Charge is imposed that declines towards "0" over 6-7 years, however there are annual 12b-1 fees averaging .50%. Class C: No up front sales charge, usually no CDSC, but the fund charges the highest permitted annual 12b-1 fee of .75% annually. All share classes buy into the same exact mutual fund and receive the same distributions from the fund. Long-term investors, and investors with large dollar amounts, are usually better off with the "A" shares. Intermediate-term investors (6-7 years) with moderate amounts to invest are usually better off with the "B" shares. Short-term investors are better off with the "C" shares.

Which statement is TRUE regarding the appointment of SEC commissioners?

Commissioners are not permitted to engage in any other business or employment The SEC has 5 commissioners appointed by the President of the United States, with the advice and consent of the Senate. Each commissioner is appointed for a term of 5 years. No more than 3 Commissioners can be from 1 political party. During his or her term, each Commissioner cannot have any another job; and cannot effect securities transactions (whether disclosed or not!).

In connection with a new issue offering, a broker-dealer would be permitted to send which of the following to a customer if it were accompanied by a copy of the final prospectus?

Copies of the issuer's audited financial statements showing performance over the prior year Delivery of prospectuses cannot be accompanied by promotional material of any type. The only information that can accompany a prospectus would be a "tombstone;" or information that has been filed with the SEC - such as audited financial reports.

If a person accumulates a 5% or greater holding in a publicly held company with the intention of exercising control:

Form 13d must be filed within 10 business days Anyone who accumulates a 5% position in one company must make a 13d filing with the SEC within 10 business days.

If a person accumulates a 5% or greater holding in a publicly held company with the intention of being a passive investor:

Form 13g must be filed within 45 calendar days of year end Anyone who accumulates a 5% position in one company and intends to remain a passive investor must make a 13g filing with the SEC within 45 calendar days of year-end.

Which of the following can be purchased on margin?

Futures NYSE, AMEX (NYSE American) and NASDAQ listed issues are marginable. These are actively traded stocks. The purchase of listed options cannot be done on margin - full payment is required because these have a maximum life of 9 months. In contrast, the futures markets are not subject to Regulation T and have their own margin requirements, which are quite low. Futures contracts can be purchased on margin. Purchases of OTCBB and Pink Sheet issues are not marginable because they are thinly traded issues.

An issuer has filed a registration statement with the SEC, but the registration is not yet effective. The issuer subsequently files additional documentation with the SEC to meet its "full and fair disclosure" obligation. Any agent that is contacting a potential customer to buy the issue must provide the customer with the: I Preliminary prospectus II Prospectus supplement III Offering price and spread

I and II only The registration for this issue is not yet effective, so it cannot be sold. The POP (Public Offering Price) is not yet set (this happens just prior to the effective date), so there is no disclosure of the POP. The agent can distribute the preliminary prospectus to obtain indications of interest from clients. If there is a supplement to the filing, this must be distributed as well. The final prospectus with the POP and spread is not available until the effective date.

The sale of a new issue of securities by a State chartered bank is: I exempt from registration with the SEC II subject to registration with the SEC III exempt from registration in the State IV subject to registration with the State

I and III Securities issued by banks (but NOT bank holding companies) are exempt from both Federal and State registration. Remember, banks are already extensively regulated at both the Federal and State level, so to require registration of their securities is considered to be overkill.

If the Securities and Exchange Commission sets the effective date for a new issue in registration, which of the following statements are TRUE? I All proper documents have been filed with the SEC II Additional documents must be filed with the SEC III The SEC approves of the new issue IV The issue may be offered to the public

I and IV If the SEC sets the "effective date" for an issue in registration, this means that all proper documents have been filed with the SEC. The SEC does not approve (nor does it disapprove) of any new issue in registration. Once the proper documents relating to a new issue offering are filed, the issue may be offered to the public.

Which statements are TRUE about Regulation D? I The maximum permitted offering under Rule 504 is $5,000,000 II The minimum permitted offering under Rule 504 is $5,000,000 III The maximum permitted offering under Rule 506 is $5,000,000 IV The minimum permitted offering under Rule 506 is $5,000,000

I and IV The Regulation D Private Placement exemption consists of Rules 501-506. Rules 501-503 are definitional rules, basically explaining who is an accredited investor and who is a "sophisticated" investor. The actual permitted offerings are detailed under Rules 504-506. Rule 504 is for small offerings, and is pretty much obsolete (but still tested!). Rule 505 has been rescinded. Rule 506 is the one everyone uses and can be used to raise any dollar amount. Rule 504: Covers offerings of up to $5,000,000. For such very small offerings, the rule does not specify required investor disclosures, and does not place any limit on the number of investors. Also, there is no audit requirement for the issuer's financial statements. While there is no Federal registration required, the State(s) where the issue is offered can still require State registration. Rule 505: Rescinded. Rule 506: Covers offerings of more than $5,000,000: This is the private placement rule used by pretty much everyone. The rule requires detailed disclosure to investors, similar to that required in a prospectus. The offer can only be made to a maximum of 35 non-accredited investors; and to an unlimited number of accredited investors. However, the States cannot require registration at the State level - a big financial benefit.

A customer wishes to place a buy order for a security that has not been registered with the SEC. The security may be purchased if the security: I is exempt from SEC registration II is traded by at least 2 market makers III has been trading in the market for at least 1 year

I only Generally, securities can only be purchased if they are registered with the SEC; or an exemption is available. For example, government and municipal securities do not have to be registered with the SEC; and may be purchased by individuals. There is no exemption offered from federal registration for securities trading for at least 1 year; or securities traded by at least 2 market makers.

Which of the following investment companies can adopt a 12b-1 plan? I Mutual fund II Closed end fund III Unit trust IV Face amount certificate company

I only Only mutual funds (open-end management companies) have sales loads and 12b-1 distribution fees. Closed-end fund share trade like any stock - the only cost of investing is the commission charge for buying or selling shares. Unit trusts and face amount certificate companies also cannot adopt 12b-1 plans.

Which of the following are exempt securities under the Securities Act of 1933? I Treasury bills II Agency bonds III Municipal bonds IV Secured corporate bonds

I, II, III Exempt from registration with the SEC are debt securities issued by the U.S. Government, government agencies and municipalities. Note that corporate debt and corporate equity are non-exempt (with the exception of corporate commercial paper that is exempt as long as its maturity does not exceed 270 days).

Under the Securities Act of 1933, which of the following sign a registration statement for a new issue? I CEO of the issuer II CFO of the issuer III Members of the Board of Directors of the issuer

I, II, III The registration statement is signed by the Officers of the issuer; the Board of Directors of the issuer; and the accountants and lawyers for the issue sign their respective accounting and legal opinions.

Reports filed by issuers with the SEC under the Securities Exchange Act of 1934 are made available to: I research analysts II securities attorneys III shareholders IV general public

I, II, III, IV Issuer filings (10K, 10Q, 8K reports) filed with the SEC are made public immediately, to anyone that wants to see them. The SEC has a website from which these can be accessed; and has a reading room in Washington, D.C. where these reports are made available to the public when the filing is received from the issuer.

Under the Securities Exchange Act of 1934, member firms are responsible for which of the following? I Registering with the SEC II Maintaining minimum net capital requirements and reporting net capital to the SEC III Sending the member firm's financial statements to customers twice a year IV Being audited at least once a year

I, II, III, IV Member firms must register with the SEC and must maintain minimum net capital to remain in business; must be audited at least once a year; and must send a copy of the annual audited balance and a mid-year unaudited balance sheet to its customers.

Which of the following are national securities exchanges that MUST register with the SEC? I NYSE II AMEX (NYSE American) III PHLX IV CBOE

I, II, III, IV The Securities Exchange Act of 1934 requires that each national securities exchange register with the SEC. Such exchanges include the NYSE, AMEX (NYSE American), CBOE, PHLX, etc. These exchanges become "self-regulatory organizations" under SEC oversight. They must have their rules approved by the SEC; and they enforce their own rules under SEC oversight.

A broker-dealer participates in the distribution of a new issue on a firm commitment basis, earning a spread on each share sold. The broker-dealer is: I acting as agent for the issuer II acting as a principal III the underwriter of the securities IV the investment adviser to the issuer

II and III Firms that handle new issue distributions for issuers are underwriters. The underwriter can either act as a principal or agent in the underwriting. A firm commitment underwriting obligates the underwriter to buy the issue from the issuer - the underwriter takes full financial liability. A best efforts underwriting means that the underwriter acts as agent, using its best efforts to sell the issue to the public, taking no liability. For this, it earns an underwriting fee on each share or bond sold.

The sale of a new issue of bonds by an insurance company is: I exempt from registration with the SEC II subject to registration with the SEC III exempt from registration in the State IV subject to registration with the State

II and III The Securities Act of 1933 exempts insurance company "products" from registration with the SEC - meaning insurance policies and fixed annuities. However, if an insurance company sells its own securities to the public (e.g., common stock, preferred stock or bonds), these are non-exempt securities that must be registered with the SEC and sold with a prospectus. However, insurance company securities are exempt from State registration requirements, because insurance companies are already regulated at the State level by each State Insurance Commission.

A broker-dealer MUST maintain physical possession of which of the following? I Fully paid customer securities II Customer securities that are collateral for a margin loan III Securities held as collateral for derivative trading components IV Bearer bonds that have remaining interest coupons attached

II and III When securities are purchased for a customer by a broker-dealer, they can be held in custody of the broker-dealer (or the broker-dealer's clearing firm); or they can be held by a custodian bank; or they can be transferred and shipped to the customer (some customers still want to put physical certificates under their mattresses!) However, if a customer buys a derivative security (such as a CMO created from underlying mortgage backed pass through securities), he or she cannot get the underlying physical security - it must be held in custody. Finally, customer securities held as collateral for a margin loan must remain in custody since the broker-dealer retains the right to keep those securities if the customer does not repay the debit balance. Finally, bearer bonds can be shipped to the customer, just like any other physical security - as long as they are fully paid.

Under the Securities Act of 1933, a Regulation D private placement exemption is allowed if the securities are sold to: I no more than 35 accredited investors II no more than 35 non-accredited investors III an unlimited number of accredited investors IV an unlimited number of non-accredited investors

II and III only The Securities Act of 1933 gives a private placement exemption under Regulation D to securities issues that are sold to no more than 35 "non-accredited" investors; and an unlimited number of "accredited" investors. An "accredited" investor is a wealthy investor (e.g., $200,000 of annual income or a net worth of $1,000,000).

Under the Investment Company Act of 1940, violations are punishable by which of the following? I 3 years in jail II 5 years in jail III $5,000 fine IV $10,000 fine

II and IV All of the Federal securities laws stipulate that violations are punishable by up to 5 years in jail and a $10,000 fine. This differs from Uniform State law, which imposes a maximum $5,000 fine and 3 years in jail for violations.

Under the Investment Company Act of 1940, an Open End Management Company: I can buy securities on margin II cannot buy securities on margin III can sell short securities IV cannot sell short securities

II and IV Under the Investment Company Act of 1940, open-end management companies (mutual funds) cannot buy securities on margin; and cannot sell short (which requires margin).

Which of the following are covered under the Securities Exchange Act of 1934? I Registration of new issues II Registration of broker-dealers III Registration of insiders IV Registration of securities information processors

II, III, IV Registration of new issues comes under the Securities Act of 1933, which regulates new issue offerings. The Securities Exchange Act of 1934 requires the registration of exchanges, member firms, salespersons, transfer agents, clearing organizations, securities depositories and securities information processors. It also requires that "insiders" (officers, directors and holders of 10% or more of a publicly held company) file notices with the SEC.

Under the Securities Act of 1933, which statements is (are) TRUE regarding private placements of securities? I No commissions can be paid II No more than 10 prospective investors may be contacted III General advertising is prohibited

III only Under the Uniform Securities Act, a private placement is an offering to no more than 10 persons, where no advertising is permitted; and no commissions can be paid for selling the issue. Note that the definition of a private placement under the Securities Act of 1933 is very different. Regulation D under the 1933 Act states that a private placement is an offering to a maximum of 35 non-accredited investors and an unlimited number of accredited investors. There is no prohibition against paying commissions for selling private placements under the 1933 Act. Similar to State law, Federal law also prohibits advertisements of private placements. (Note that an exception to the "no advertising" prohibition is given if an offering is only made to accredited investors - however, this is not mentioned in the question and cannot be assumed.)

Which ratio would be used to measure the financial leverage of a broker-dealer?

Loans to Net Capital "Leverage" is the use of debt in the capital base of a business. The standard measure of leverage for a business is the Debt to Equity ratio. For a broker-dealer, equity is often measured by the firm's "liquid" equity, called net capital. It is the money that would be left over if all of the firm's liquid assets were converted to cash and this was used to pay off all liabilities. The ratio of debt to net capital would be a leverage measure for a broker-dealer.

Under the Securities Exchange Act of 1934, all of the following are defined as "securities information processors" EXCEPT:

MSRB Securities information processors (SIPs) collect and disseminate price quotes and transaction prices in non-exempt securities. Each exchange has a "TRF" - a Trade Reporting Facility - that is a registered SIP. The NYSE TRF reports trades of NYSE listed stocks, wherever the trade occurred. The NASDAQ TRF reports trades of NASDAQ-listed stocks, where the trade occurred. The Pink Sheets is an SIP that distributes bid and ask quotes for over-the-counter stock issues, as does the OTCBB - the Over-The-Counter Bulletin Board. The MSRB is the Municipal Securities Rulemaking Board - which regulates municipal market participants.

A securities firm that stands ready to buy and sell a security for its own account is a(n):

Market maker A market maker or dealer is a firm that sells securities out of its own account or buys securities into its own account on a principal basis. The profit to the market maker is the "spread" (the difference) between the market maker's buy price and sell price. You could argue that principal is a true answer as well, but "market maker" is the better choice since this is a definitional question. Brokers effect trades for the account of customers on an agency basis, where the firm acts as a middleman, charging a commission to the customer.

Which securities can be purchased on margin?

NASDAQ issues NYSE, AMEX (NYSE American) and NASDAQ listed issues are marginable. These are actively traded stocks. New issues are not marginable for 30 days, and every share of a mutual fund (an open-end fund) is a newly issued share. The purchase of listed options cannot be done on margin - full payment is required because these have a maximum life of 9 months. Purchases of OTCBB and Pink Sheet issues are not marginable because they are thinly traded issues.

Which of the following activities are allowed prior to the filing of a registration statement? I Solicitations of indications of interest II Solicitations of orders III Sending a preliminary prospectus IV Publishing a tombstone announcement

None of the above Prior to the filing of a registration statement for a new issue, nothing can be done. Once the registration statement is filed, a preliminary prospectus can be sent; indications of interest can be accepted; and a "tombstone" announcement can be published. Once the registration is effective, orders can be accepted if customers receive the final prospectus, at or prior to, confirmation of sale.

An offering of securities in an amount that does not exceed $50,000,000, is given an exemption from registration under the Securities Act of 1933's:

Regulation A Regulation A under the Securities Act of 1933 gives an exemption from registration to issues of no more than $50,000,000. Rule 147 is the SEC's "intrastate" exemption; while Regulation D is the SEC's "private placement" exemption.

Rule 147 offerings under the Securities Act of 1933 are exempt from:

SEC registration Rule 147 under the Securities Act of 1933 exempts intrastate offerings from SEC registration - since the transaction never crosses a State line, the SEC does not have jurisdiction. However, such an offering must still be registered in that State.

The Federal law that requires the registration with the SEC of non-exempt new issues is:

Securities Act of 1933 The Securities Act of 1933 regulates the new issue market and requires that non-exempt new issues be registered with the SEC and sold with a prospectus giving full disclosure to investors. The Securities Exchange Act of 1934 is a broad ranging law to curb abuses in the trading (secondary) markets. The Investment Advisers Act of 1940 requires investment adviser registration with the SEC; while the Investment Company Act of 1940 defines the different types of investment companies and subjects them to SEC oversight and regulation.

A broker-dealer MUST maintain physical possession of which of the following?

Securities held as collateral for derivative trading components When securities are purchased for a customer by a broker-dealer, they can be held in custody of the broker-dealer (or the broker-dealer's clearing firm); or they can be held by a custodian bank; or they can be transferred and shipped to the customer (some customers still want to put physical certificates under their mattresses!) However, if a customer buys a derivative security (such as a CMO created from underlying mortgage backed pass through securities), he or she cannot get the underlying physical security - it must be held in custody.

All of the following would be considered to be securities information processors under the Securities Exchange Act of 1934 EXCEPT:

The Wall Street Journal Securities information processors (SIPs) collect and disseminate price quotes and transaction prices in non-exempt securities. Each exchange has a "TRF" - a Trade Reporting Facility - that is a registered SIP. The NYE TRF reports trades of NYSE listed stocks, wherever the trade occurred. The NASDAQ TRF reports trades of NASDAQ-listed stocks, where the trade occurred. The Pink Sheets is an SIP that distributes bid and ask quotes for over-the-counter stock issues, as does the OTCBB - the Over-The-Counter Bulletin Board. General circulation newspapers are not defined as securities information processors that must register with the SEC under the Securities Exchange Act of 1934.

A securities analyst employed by a major regional brokerage house tells a portfolio manager at a mutual fund managed by that firm to look for him on television being interviewed on CNBC that afternoon. He tells the portfolio manager that he will be putting a "buy" recommendation on ABCD stock, which the portfolio manager has been considering purchasing for the fund that he manages. Which statement is TRUE?

The portfolio manager is prohibited from buying the stock immediately under the "trading ahead of research" prohibition but can buy the stock once the television interview has been broadcast When a securities firm is going to issue a research report on a security, the firm and its employees are prohibited from trading that stock until the research report is broadly disseminated to the public. Technically, the firm and its employees are treated as "insiders." Trading ahead of a research report is a prohibited practice. Note that once the report has been distributed, then it would be acceptable for the firm and its employees to trade that stock.

All of the following activities are prohibited during the "cooling off" period EXCEPT:

accepting an indication of interest from the customer for part of the issue During the cooling off period, under the Securities Act of 1933, an offer or sale of the issue is prohibited. Sending a preliminary prospectus or accepting an indication of interest does not constitute an "offer" under the Act of 1933. Accepting an order, confirming a certain amount of the issue, or accepting a check from a customer are all considered to be "sales" and are prohibited until registration is effective.

Securities that are listed on a national stock exchange:

are subject to a State "blue chip" exemption from registration The "Blue Chip" exemption is only given under the Uniform Securities Act - exchange listed or NASDAQ securities are exempt from State registration. Essentially, the State Administrator is not worried about the issuer of such securities being "shady." These are now classified as "federal covered securities," which are only required to be registered federally and which cannot be required to be registered in each state. Thus, the issues that must be registered in the State are the smaller "OTC: issues" - where there has been a history of frauds that have occurred. However, under the Securities Act of 1933, all of these securities must be registered (though the SEC gives a much easier registration process for the "listed" issues).

Under the Investment Company Act of 1940, an affiliated person may:

buy shares of the fund Affiliated persons of investment companies (the officers, employees, and 5% shareholders of the fund) are prohibited from borrowing monies from the fund; from borrowing securities from the fund; or from buying securities personally from the fund's portfolio or selling securities personally to the fund's portfolio. In all of these instances, the affiliated person is in a position to effect such transactions at overly favorable terms - since there is no "arm's length." There is no prohibition on these persons buying the shares of the fund - in this case they buy at Net Asset Value (plus a sales charge, if any) - just like any other customer.

A $25,000,000 offering of limited partnership units is being made under Rule 506. So far, 25 people have been solicited to make an investment of a minimum of $500,000. A potential client is interested, but she only has $200,000 available for investment. The client should be told that she:

cannot become a limited partner Rule 506 is the main private placement rule under Regulation D. It permits the offering of any dollar amount of securities to a maximum of 35 non-accredited investors and an unlimited number of accredited (wealthy) investors. Regulation D offerings typically have high investment minimums to keep out unsophisticated, unqualified, unwealthy individuals. Here, the minimum investment amount is set by the sponsor at $500,000. If you don't have that much to invest, you are shut out.

If the SEC sends a deficiency letter to the issuer regarding an issue in registration:

disclosure is not considered to be adequate An SEC "deficiency letter" indicates that there is not adequate disclosure in the registration documents filed under the Securities Act of 1933 to allow investors to make an informed decision. The deficiency must be cured before the SEC will allow the registration to be effective.

Under the Securities Act of 1933, liability for omissions or misstatements of material fact in a registration statement or prospectus rests with:

every person who signed the documents or who gave an opinion related to the documents Liability for omissions or misstatements of material fact in a registration statement or prospectus rests with every person who signed the documents or who gave an opinion related to the documents. Thus, officers of the issuer (who sign the registration statement) are liable; accountants who give certifying opinions on the issue are liable; and lawyers who render legal opinions on the issue are liable. The issuer itself can be held liable as well - since it received the funds from the securities offering that was made illegally; and these funds must be paid back to the investors.

Investment companies, as defined under the Investment Company Act of 1940 are:

face amount certificate company, unit investment trust and management company The Investment Company Act of 1940 defines 3 types of investment companies - face amount certificate company; unit investment trust; and management company. Management companies are further subcategorized under the Act as either "open-end" or "closed-end;" and "diversified" or "non-diversified."

Under the Securities Exchange Act of 1934, the SEC:

has the power to suspend trading in any market located in the United States Under the Securities Exchange Act of 1934, the SEC can suspend trading in any or all securities markets in the United States if it gives prior notice to the President of the United States of this action; and if the President does not disagree with this action.

Reports filed by issuers with the SEC under the Securities Exchange Act of 1934 are made available to the public:

immediately Issuer filings (10K, 10Q, 8K reports) filed with the SEC are made public immediately. The SEC has a website from which these can be accessed; and has a reading room in Washington, D.C. where these reports are made available to the public when the filing is received from the issuer.

A customer wishes to place a buy order for a security that has not been registered with the SEC. The purchase order can be filled if the security:

is exempt from SEC registration Generally, securities can only be purchased if they are registered with the SEC; or an exemption is available. For example, government and municipal securities do not have to be registered with the SEC; and may be purchased by individuals. There is no exemption offered from federal registration for securities trading for at least 1 year; or securities traded by at least 2 market makers; or for securities that will be sold only to professional investors.

If a company has 100 shareholders and $100,000 of initial capital with the purpose of investing in securities, this company:

must be registered as an investment company under the Investment Company Act of 1940 The Investment Company Act of 1940 requires the registration of investment companies that have 100 or more shareholders; and which have $100,000 or more initial capital.

All of the following statements are true regarding "Securities Information Processors" EXCEPT:

no registration with the SEC is required if the processor solely disseminates quotes or transaction information relating to listed securities Securities information processors provide quotes or transaction information for trades of non-exempt securities. If the processor only gives this information for exempt securities, such as U.S. Governments, then no registration with the SEC is required. If the processor gives information about listed securities (for example, the Consolidated Quotations Service - CQS - gives quotes for listed stocks), registration is required because these are non-exempt under Federal law. General circulation newspapers are excluded from the definition of a securities information processor. Examples of "securities information processors" include each exchange's TRF (Trade Reporting Facility), Bloomberg, and Reuters.

The Securities Exchange Act of 1934 was enacted to:

prevent manipulation and fraud in the secondary market The Securities Exchange Act of 1934 is Federal legislation aimed at preventing manipulation and fraud in the secondary (trading) market. The Securities Act of 1933 is the Federal law that regulates the issuance of new securities. State securities laws are established by the Uniform Securities Act.

All of the following are defined as "affiliated persons" under the Investment Company Act of 1940 EXCEPT:

the independent auditor of the management company An affiliated person of an investment company is an officer, employee or 5% shareholder of the investment company. The Board of Directors of a management company cannot consist of more than 60% of these affiliated persons. Other persons, such as accountants and lawyers for the fund, who are compensated by that fund, are termed "interested" persons.

All of the following statements are true about the Securities Act of 1933 EXCEPT that it requires:

the registration of non-exempt new issue offerings in each State where the security will be sold The Securities Act of 1933 prevents fraud in the sale of new issue securities to the public. It requires that any non-exempt new issue security must be registered with the SEC and sold to investors who are given full and fair disclosure through a prospectus. The Securities Act of 1933 is Federal law and does not cover State securities registration requirements. Those are covered by the Uniform Securities Act as adopted in each State.