Series 7 - Regulations: Securities Act of 1934
An issuer is required to make an 8K filing with the SEC for all of the following events EXCEPT: A declaration of a cash dividend B election of new members of the Board of Directors C declaration of bankruptcy D proposal of a merger with another corporation
The best answer is A 8K reports must be filed if the issuer: declares bankruptcy; declares a merger; declares a divestiture; changes the composition of the Board of Directors.
Which of the following statements are TRUE regarding corporate officers who wish to trade their own company's stock? I Officers are prohibited from selling their company's stock short except for "short against the box" trades II Officers are allowed without restriction to sell their company's stock short III Officers must file change of holding reports with the SEC IV Officers do not have to file change of holding reports with the SEC A I and III B I and IV C II and III D II and IV
The best answer is A. Insiders are prohibited from selling their company's stock short except for year end "short against the box" trades (which are used to lock in a gain and potentially defer taxation - though this is now quite difficult to do). Officers must report their trades to the SEC (within 2 business days of the trade) since they are classed as "insiders" - and monthly reporting of trades by insiders to the SEC is required.
An investor must file a 13D report with the SEC if a: A 5% or greater common stock holding is purchased of one issuer B 10% or greater common stock holding is purchased of one issuer C 15% or greater common stock holding is purchased of one issuer D 20% or greater common stock holding is purchased of one issuer
The best answer is A. Investors who accumulate a 5% or greater position in the common stock of one registered issuer are required to file a 13D notice with the SEC within 10 business days of date that the 5% threshold was passed. This information is made public (and is of great interest to the management of the company, since the new large stockholder will probably want a say in how the company is being run!) There is no requirement to file for holding a large portion of a corporation's debt.
All of the following statements are true about listed securities EXCEPT: A listed securities trade in the Second Market B under Regulation T, all listed securities are marginable C listed securities are subject to Regulation SHO D listed companies must be registered with, and report their results to, the SEC
The best answer is A. Listed securities (those listed on an exchange) are marginable under Regulation T. Under the Exchange Act of 1934, Regulation SHO requires that before any equity security (either listed or unlisted) can be sold short, the member firm must affirmatively determine that the security can be borrowed and delivered on settlement. This is called the "locate" requirement. Listed securities trade in the first (exchanges), third (OTC trading of exchange listed securities) and fourth (direct trades between institutions via ECNs) markets. The second market is trading of unlisted securities over-the-counter. These are OTCBB and Pink Sheet issues. Listed companies must register with, and report their results to, the SEC.
Which statements are TRUE about stabilizing bids? I A stabilizing bid is placed by the syndicate manager II A stabilizing bid is placed by each syndicate member III Only 1 stabilizing bid is permitted at any time IV Any number of stabilizing bids can be placed at any time A I and III B I and IV C II and III D II and IV
The best answer is A. Only 1 stabilizing bid is permitted at any time. The manager of the syndicate places the stabilizing bid on behalf of the syndicate.
Which of the following issuers must report to the SEC under the Securities Exchange Act of 1934? I Corporations II Investment Companies III Municipalities IV Federal Agencies A I and II B II and III C I, II, III D I, II, III, IV
The best answer is A. Only corporations and investment companies (which are either corporations or trusts) file annual and semi-annual reports with the SEC. Municipal and federal issuers are exempt from the Securities Exchange Act of 1934.
Under the "penny stock rule," a customer is considered to be "established" and does not have to sign a suitability statement to buy a penny stock if that customer has bought how many penny stock issues previously from that broker-dealer? A 2 B 3 C 5 D 10
The best answer is B. Suitability statements are not required under the "penny stock rule" for so called "established customers." These are customers who have either had cash or securities in custody of that broker-dealer for at least 1 year; or customers who have bought 3 or more "penny stock" issues previously from that broker-dealer.
An issuer making a tender offer for its non-convertible bonds and later increases the price being offered by 10%. Which statement is TRUE? A The increase in the tender price has no effect on the life of the offer B The increase in the tender price increases the life of the offer by another 5 business days C The increase in the tender price increases the life of the offer by another 10 business days D The increase in the tender price increases the life of the offer by another 20 business days
The best answer is B. If the issuer does not get enough bonds tendered, the issuer can "sweeten" the offer. This extends the offer by another 5 business days, and the sweetened price is given to all bonds tendered.
The Securities Exchange Act of 1934 established "self regulatory organizations" (SROs) and empowered these organizations to do all of the following EXCEPT: A set guidelines for fair dealing with the public B establish commission rates to be charged to the public C take administrative action against broker-dealers that violate industry regulations D establish arbitration procedures to settle intra-industry disputes
The best answer is B. Originally, the exchanges, such as the NYSE and NASD (National Association of Securities Dealers) were both marketplaces and regulators of their member firms. This changed when FINRA was created in 2006. Each exchange now only regulates its trading operation; and FINRA regulates the broker-dealer member firms and is its own SRO (Self Regulatory Organization). FINRA sets guidelines for fair dealing with the public with its Conduct Rules; it handles complaints against broker-dealers for securities law violations under the Code of Procedure; it can take administrative action against broker-dealers that violate industry regulations; and it establishes arbitration procedures to settle intra-industry disputes. Fixed commission rates are prohibited under the Securities Exchange Act of 1934 - these are set by the member firms.
If a broker-dealer holds fully paid customer securities, which of the following statements are TRUE? I The securities must be segregated and held in safekeeping II The securities do not have to be segregated and held in safekeeping III The securities can be rehypothecated to a bank IV The securities cannot be rehypothecated to a bank A I and III B I and IV C II and III D II and IV
The best answer is B. Broker-dealers are obligated to segregate fully paid customer securities and hold them in safekeeping under the 1934 Act. These securities cannot be rehypothecated to a bank.
A "short swing" profit is defined as a profit achieved by an insider who trades his or her company's stock within: A 3 months B 6 months C 9 months D 12 months
The best answer is B. A "short swing" profit is defined as one achieved by an insider (officer, director or 10% shareholder) trading that company's stock within a six month period. Short swing profits must be returned to the corporation under the Act.
Fines assessed for convictions involving violations of insider trading laws are paid to the: A Internal Revenue Service B Department of Treasury C Securities and Exchange Commission D Department of Justice
The best answer is B. Fines assessed for insider trading convictions are paid to the Department of Treasury. The fines are not paid to the SEC. If they were, then the SEC might be tempted to "go crazy" prosecuting insider trading cases to pump up its operating budget (raises for everyone!)
Which of the following statements are TRUE regarding a broker-dealer holding margin and fully paid securities? I Margin securities can be commingled with the securities of other customers and rehypothecated II Margin securities must be segregated and placed in safekeeping III Fully paid securities can be commingled with the securities of other customers and rehypothecated IV Fully paid securities must be segregated and placed in safekeeping A I and III B I and IV C II and III D II and IV
The best answer is B. Margin securities are held in street name and can be commingled with the securities of other customers. These securities are permitted to be pledged (rehypothecated) to a bank for a margin loan. Thus, collateral at a bank can be changed at any time, since it consists solely of commingled street name securities. Fully paid securities, on the other hand, must be segregated and placed in safekeeping.
SEC Rule 10b-18 allows an issuer to buy its shares in the open market: A at any price that is reasonably related to the current market B at the highest independent bid or the last reported sale price, whichever is higher C at the lowest independent offer or the last reported sale price, whichever is lower D under no circumstances, since this is considered to be market manipulation
The best answer is B. SEC Rule 10b-18 sets ground rules for issuers or affiliated persons who wish to buy their shares in the open market. If an issuer aggressively buys its stock in the market, or bids for its stock, it can manipulate the market price upwards. Bids and purchases that are made in compliance with Rule 10b-18 will not be considered manipulative activities under Rule 10b-5 ("catch-all" fraud rule). Rule 10b-18 purchases, as they are known: Must be effected through 1 broker/dealer on any given day; Cannot be the opening transaction; Cannot be executed within 10 minutes of market close if the security is "actively traded," otherwise it cannot be executed within 30 minutes of market close; Must be effected at prices no higher than the current market; Cannot exceed 25% of the trading volume in the security that day (except for block purchases handled outside the normal flow of orders).
SEC Rule 10b-5-1: A is the "catch all" fraud rule that makes any deceptive or manipulative practice in connection with the sale of a security potentially fraudulent under the Securities Exchange Act of 1934 B gives officers of publicly held companies a safe harbor from being charged with an insider trading violation if they establish a pre-arranged trading plan for that issuer's securities C prohibits the purchase or sale of an issuer's securities based on material nonpublic information in breach of duty of trust owed to the issuer or shareholders of that security D prohibits any person, in connection with a tender offer for securities, to bid for or purchase the security which is subject of the tender offer through any means other than via the offer
The best answer is B. SEC Rule 10b-5-1 allows officers of publicly held companies (statutory insiders) to establish "pre-arranged trading plans" that set future transaction dates and amounts of that issuer's securities; or that specify algorithms that establish the transaction dates and amounts. As long as the officer does not deviate from the plan, the officer is given a "safe harbor" from being accused of insider trading based on those trades.
Which of the following describes a "Chinese Wall" as used in the securities industry? A The prohibition on trading in the United States of companies listed on the Hong Kong, Singapore, and Taiwan markets B A separation of investment banking and trading functions within a broker-dealer to stop the potential flow of inside information C The restriction of currency movement imposed by mainland China on the Hong Kong Stock Exchange D The restriction imposed by the U.S. Government against trading of securities issued by mainland China by "Wall Street" firms
The best answer is B. The "Chinese Wall" as used in the securities industry, is the complete separation of a broker-dealer's investment banking unit from its trading unit. In its normal operations, an investment banking unit may advise on takeovers; or receive other confidential information that could influence the price of an issuer's securities once the information is public. Broker-dealers establish a "wall" between the investment banking unit and the trading unit, so that this information is not received by the firm's traders in advance of its release to the public. This is accomplished by referring to the issuer's name as a codeword only; by severely restricting the number of people that work on sensitive projects, etc. In this manner, the firm's traders cannot profit from the information in advance of its release to the public. This is critical, since to do so would be a violation of the "Insider Trading" provisions of the Securities Exchange Act of 1934.
The provisions of the Penny Stock Rule, which require the pre-qualifying of a new customer before a recommended "penny" stock can be sold to that individual, apply to recommendations of: I NYSE listed securities II NASDAQ listed securities III OTCBB listed securities IV Pink Sheet listed securities A I and II only B III and IV only C I, II, III D I, II, III, IV
The best answer is B. The "penny stock rule" (Rules 15g-1 through 15g-6) requires that new customers who receive a recommendation and purchase non-exchange listed securities (meaning OTCBB or Pink Sheet issues) priced under $5 per share sign and return a suitability statement before sale can be confirmed. This rule is intended to stop "boiler room" high pressure phone sales of speculative penny stocks. Review
All of the following statements are true about an issuer making a tender offer for its non-convertible bonds EXCEPT: A The initial life of the offer is 5 business days B Any increase in the tender price increases the life of the offer by 5 business days C The offer is contingent on a minimum amount of bonds being tendered D The final price given to all bondholders is not determined until the last business day of the offer
The best answer is C. If the issuer does not get enough bonds tendered, the issuer can "sweeten" the offer. This extends the offer by another 5 business days, and the sweetened price is given to all bonds tendered. (While the initial offer specifies a price to be paid, or a price based on a spread to a benchmark debt security, the actual price paid on the tendered bonds is not set until that last business day of the offer).
If a person is convicted of insider trading: I the amount of any profit achieved or loss avoided must be paid II three times the amount of any profit achieved or loss avoided must be paid III payments are made to the Department of Treasury IV payments are made to the Securities and Exchange Commission A I and III B I and IV C II and III D II and IV
The best answer is C. Violations of insider trading rules are punishable by "treble damages." For a violation, the fine is 3 times the profit achieved or loss avoided, plus possible jail time. Payment of fines is made to the "Department of Treasury" - not to the SEC.
Regarding the notification of a broker-dealer's financial condition to customers, a brokerage firm must send semi-annual statements which include the firm's: I Balance sheet II Income statement III Net capital computation A I only B I and II C I and III D II and III
The best answer is C. Broker-dealers must send their customers a semi-annual balance sheet and Net Capital computation. There is no requirement that the customer be sent the income statement of the broker-dealer.
A corporate issuer is obligated to file an 8K report of significant events within how many business days of the event? A 1 day B 2 days C 4 days D 10 days
The best answer is C. Corporations are required to file 8K reports within 4 business days of significant events such as a declaration of bankruptcy, merger, change in the Board of Directors, etc. The 8K is filed with the SEC, and is a public document.
If an individual is found guilty of insider trading, the civil penalty imposed can be how many times the profit achieved or loss avoided? A 1X B 2X C 3X D 4X
The best answer is C. If an individual is found guilty of insider trading, he or she must pay back the profit achieved or loss avoided, and in addition must pay a penalty equal to 3 times that amount. This is called "treble damages."
All of the following are covered under the Securities Exchange Act of 1934 EXCEPT: A issuance of corporate annual reports B registration of broker-dealers C registration of new issues D margin on securities
The best answer is C. Registration of new issues falls under the Securities Act of 1933. The Securities Exchange Act of 1934 requires registration of broker-dealers; prescribes the content of corporate annual reports; and gives the Federal Reserve the power to set margins on both new issues and secondary market securities.
The Securities and Exchange Commission was: I created under the Securities Act of 1933 II created under the Securities Exchange Act of 1934 III given regulatory authority over securities exchanges IV given regulatory authority over futures exchanges A I and III B I and IV C II and III D II and IV
The best answer is C. The Securities and Exchange Commission was created under the Securities Exchange Act of 1934. It has overall regulatory authority over the securities markets and securities market participants. It has no power over the futures markets - these are regulated by the CFTC - the Commodities Futures Trading Commission.
A registered representative receives an order from a corporate issuer to buy 100,000 shares of that issuer's stock in the market just before the market close. The registered representative should: A accept the order from the customer B inform the company that the trade can only be executed on an upbid C reject the order and report the company to the SEC D inform the company that this is a possible market manipulation under the Securities Exchange Act of 1934
The best answer is D. SEC Rule 10b-18 sets ground rules for issuers or affiliated persons who wish to buy their shares in the open market.. Because the issuer is placing the order to buy its stock just prior to market close, it could be accused of trying to manipulate its closing price upwards. The client should be informed of this.
An officer of a listed company calls his registered representative and tells him to sell the maximum amount of that company's common shares in accordance with Rule 144. Prior to placing the order to sell, the registered representative calls five of his customers and tells them to sell that company's stock. Which statement is TRUE? A This action does not violate any securities laws B This action violates the Securities Act of 1933 C This action violates the Securities Exchange Act of 1934 D This action violates Rule 144
The best answer is C. This is a violation of the Securities Exchange Act of 1934 Rule 10b-5. When the registered representative received the sell order from the officer, he is obligated to execute that order before acting on the information he has received. Once the order is executed, the Form 144 has been filed (it must be filed either at or prior to execution of the order) and the order is public information. At this point, he can trade for himself or his customers, and he is no longer considered to be an "insider." In effect, the registered representative is "front running" the officer by telling his other customers to sell before placing the officer's sell order. This is a violation of the Securities Exchange Act Rule 10b-5.
If a customer is recommended the purchase of a penny stock and the customer makes the purchase, all of the following must be disclosed to the customer EXCEPT: A the current bid-ask quote, if any B the compensation earned by the representative in the transaction C the compensation earned by the member firm in the transaction D the Standard and Poor's rating assigned to the issuer, if any
The best answer is D. If a penny stock is recommended, then the: customer must sign a detailed suitability determination as to why the recommendation is appropriate prior to the execution of the transaction customer must be provided by a penny stock risk disclosure document stock's current bid-ask, if any, must be disclosed compensation earned by the representative in the transaction must be disclosed compensation earned by the member firm in transaction must be disclosed customer must be provided with monthly account statements (as opposed to the regular rule of quarterly account statements if there is no trading activity, monthly if there is trading activity) Issuers of penny stocks would not even be followed by Standard and Poor's - they are too small. And there is no requirement to disclose an issuer's rating in either SEC, FINRA or MSRB rules.
Which of the following are provided to shareholders in the annual reports of registered corporations? I Income Statement II Balance Sheet III Statement of Changes in Stockholders' Equity IV Sources and Uses of Cash Statement A I only B II and III only C I, II, III D I, II, III, IV
The best answer is D. The annual 10K report includes: -Income Statement; -Balance Sheet; -Statement of Changes to Retained Earnings; -Sources and Uses of Cash Statement.
Which of the following statements is TRUE regarding a brokerage firm holding fully paid customer securities? Brokerage firms: A cannot hold fully paid customer securities under any circumstances B can hold fully paid customer securities without restriction C can hold fully paid customer securities if the dollar value of the positions is kept in a depository institution D can hold fully paid customer securities if they are segregated from other marginable securities and are kept in safekeeping
The best answer is D. Brokerage firms can hold fully paid customer securities as long as the positions are segregated from other margin securities and are kept in safekeeping.
An officer of a company has been invited by a large mutual fund company to give a talk to the fund company's analysts about its business plans and prospects. At the talk, the officer inadvertently discloses material information that could affect the stock's price. Which statement is FALSE? A The officer is considered to be a "tipper" B The analysts are considered to be "tippees" C The company must file an 8K report immediately with the SEC disclosing the information to avoid insider trading liability D The company must file a 10K report immediately with the SEC disclosing the information to avoid insider trading liability
The best answer is D. If an officer of a company makes an accidental disclosure of material non-public information at a presentation to analysts, Regulation FD considers the officer to be a tipper and the analysts to be tippees. To avoid insider trading liability, the company can either make an immediate public disclosure of the information or can file an 8K Report (a special report of significant events with the SEC, which makes the information public). A 10K is the corporation's annual audited financial statements and has nothing to do with Regulation FD.
A foreign broker-dealer that is not SEC registered is permitted to deal with clients in the United States: A under no circumstances B only if the clients are accredited investors C only if the clients are sophisticated D only if the clients are major institutional investors
The best answer is D. In order for a broker-dealer to solicit in the U.S., it must be registered with the SEC. For foreign broker-dealers, this means setting up an SEC-registered U.S. subsidiary. However, recognizing the increasingly global nature of the world's securities markets, the SEC adopted Rule 15a-6, which is intended to permit foreign broker-dealers to engage in limited activities in the U.S. without registering with the SEC. Under Rule 15a-6, foreign broker-dealers that are not SEC registered are permitted to: effect trades for U.S. persons that contact them on an unsolicited basis; solicit business from and provide research reports to Major Institutional Investors (an investor with at least $100 million of investments) and Institutional Investors (investment companies, insurance companies, banks, etc.) and conduct business with foreign nationals temporarily present in the U.S.
A corporate executive holds a meeting with a select group of high-producing registered representatives and gives information about the company's expected revenue and income for the upcoming quarter that is extremely positive. The representatives are permitted to: A buy the stock for their personal accounts only B recommend that their customers buy the stock C recommend that their family members buy the stock D do nothing with the information and should report the situation to the firm's compliance department
The best answer is D. Regulation FD (Fair Disclosure), passed in 2000, is basically an elaboration of the insider trading rules. It prohibits issuers from making selective disclosure of non-public information to research analysts, mutual fund managers, and other industry professionals, unless at the same time, the information is broadly disseminated to the public If such selective disclosure is made and trades result, the corporate officers giving the information become "tippers" and the recipients become "tippees."
A registered representative receives an order from a corporate issuer to buy 500,000 shares of that issuer's stock in the market, 5 minutes prior to market close. The registered representative should: A reject the order B accept the order as given C inform the company that this is a possible market manipulation under the Securities Exchange Act of 1934 D route the order to an ECN
The best answer is D. SEC Rule 10b-18 sets ground rules for issuers or affiliated persons who wish to buy their shares in the open market.. Because the issuer is placing the order to buy its stock just prior to market close, it could be accused of trying to manipulate its closing price upwards. The client should be informed of this.
Stabilization of new issues is: I a provision of the Securities Act of 1933 II a provision of the Securities Exchange Act of 1934 III permitted at, or above, the Public Offering Price IV permitted at, or below, the Public Offering Price A I and III B I and IV C II and III D II and IV
The best answer is D. Since a stabilizing bid is placed in the trading (secondary) market, the rules for stabilizing bids come under the Securities Exchange Act of 1934. Stabilizing bids are permitted at, or below, the Public Offering Price - never above.
Which of the following CANNOT be a stabilizing bid for a new issue that has a Public Offering Price of $30 per share? A $29.00 B $29.88 C $30.00 D $30.13
The best answer is D. Stabilizing bids can only be entered at or below the public offering price, never above. If the bid were allowed to be placed above the public offering price, it would make the issue instantly "hot" and this is prohibited.
The Securities and Exchange Commission is empowered to administrate all of the following Acts EXCEPT: A Securities Act of 1933 B Trust Indenture Act of 1939 C Investment Company Act of 1940 D Uniform Securities Act
The best answer is D. The Uniform Securities Act is more commonly known as the "Blue Sky" state law, and is adopted "state by state." The SEC, a Federal agency, has no jurisdiction over activities within each state and does not administrate this Act. The SEC does administrate the Securities Act of 1933; the Securities Exchange Act of 1934; the Trust Indenture Act of 1939; and the Investment Company Act of 1940.
Under Regulation M, which statement is TRUE regarding stabilizing bids entered by market makers? A Stabilizing bids can only be maintained for 5 consecutive business days B Stabilizing bids can only be maintained for 30 calendar days C Stabilizing bids can only be maintained for 45 calendar days D There is no time limitation on the period that a stabilizing bid can be maintained
The best answer is D. There is no time limitation on the period that a stabilizing bid can be maintained under Regulation M. However, stabilization must cease when the syndicate is broken by the manager.
Under Federal law, stock can be tendered from all of the following accounts EXCEPT a: A cash account B long margin account C restricted margin account D short margin (borrowed) account
The best answer is D. Under the "short tender rule," a person cannot tender borrowed shares. To tender stock, the person must be in a "net long" position in that security. Long stock can be held in a cash or margin account. Restriction (an account below 50% initial Regulation T margin) has no bearing on tendering shares. If shares are tendered from a margin account, the account must still meet the exchange minimum maintenance margin after those shares leave the account. If not, a maintenance call will be generated to bring the account back to minimum margin.
