S66 FSA: Other Federal Acts

If a firm maintains both a bid and ask quote in the secondary market, it is acting as a: A market maker B broker-dealer C specialist D floor broker

The best answer is A. A market maker maintains a bid-ask quote in a security, with the profit to the firm being the spread between the bid and ask quotes. A market maker is a dealer in securities. A specialist (now called the DMM - Designated Market Maker) on an exchange has a dual function - the specialist can act either as a dealer or as a broker, matching customer orders for a commission. A broker-dealer has a similar dual function. A floor broker acts as agent only, executing trades for customers as a broker on an exchange floor.

The Investment Company Act of 1940 requires that which of the following register with the SEC as an investment company? A Management companies B Investment advisers C Investment managers D Investment counsels

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

Mutual funds must send their financial statements to shareholders: A once a year B two times per year C three times per year D four times per year

The best answer is B. Mutual funds must send their financial statements to shareholders semi-annually (twice a year).

The SEC is permitted to pursue persons for violations of: I FINRA rules II MSRB rules III State securities rules A I only B I and II C II and III D I, II, III

The best answer is B. The SEC is the federal regulator, and all self-regulatory organizations such as FINRA, CBOE, and the MSRB operate under SEC supervision and oversight. Thus, the SEC can pursue persons for violations of SRO rules. However, in each State, it is the Administrator (not the SEC) that has jurisdiction when violations of State law occur. Note that when someone violates securities laws, they may be pursued by both the SEC and the State(s).

Which statements are TRUE regarding closed-end management companies? I The initial offering of shares is made under a prospectus II Shares are redeemable with the issuer at the NAV III Shares trade in the secondary market at prevailing market prices IV The portfolio of investments is not managed A I and II only B I and III only C III and IV only D I, III, and IV only

The best answer is B. The initial offering of closed-end management company shares is made under a prospectus; then the books of the fund are closed to new investment and the shares are listed on an exchange and trade like any other stock. The shares are not redeemable; they are negotiable. The portfolio of investments is managed - remember, this is one of the 2 types of "management" companies.

Under the Investment Company Act of 1940, an affiliated person: I can borrow money from the fund II cannot borrow securities from the fund III can buy shares of the fund IV cannot buy shares of the fund A I and III B I and IV C II and III D II and IV

The best answer is C. 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 broker-dealer participates in the distribution of a new issue on a best efforts basis, receiving an underwriting fee from the issuer. The broker-dealer is: A acting as agent for the issuer and as an investment adviser to the purchasers B acting as principal for the issuer and as an investment adviser to the purchasers C acting as agent for the issuer and as an underwriter of the securities D acting as a principal for the issuer and as an underwriter of the securities

The best answer is C. 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.

What is the sales charge on a mutual fund called? A 12b-1 fee B commission C load D mark-up

The best answer is C. The sales charge on a mutual fund is also called the sales load. The maximum sales charge is 8 ½% of the Public Offering Price under FINRA rules. In contrast, 12b-1 fees are annual charges against net assets that can be used to pay for soliciting new investment into the fund. The maximum permitted annual 12b-1 fee is .75% under FINRA rules.

Regulation T allows a customer to pay for a securities purchase with all of the following EXCEPT: A 100% cash deposit B 50% cash and 50% credit C 100% fully paid securities deposit D Installment payments of 25% each

The best answer is D. A customer can pay in full in cash (100% cash deposit) to buy securities. IF a customer buys on margin, the customer can deposit 50% (Regulation T requirement) and can borrow the other 50% from the broker. Or the customer can make a 100% fully paid securities deposit and use the loan value of these securities (50%) as the deposit on an additional securities purchase. The purchase of securities with installment payments is prohibited under Regulation T.

Commercial paper is an exempt security under the Securities Act of 1933 as long as its maturity does not exceed: A 30 days B 90 days C 180 days D 270 days

The best answer is D. Commercial paper is an exempt security under the Securities Act of 1933 as long as its maturity does not exceed 270 days. If the maturity is longer than this, it is non-exempt and must be registered and sold with a prospectus.

An offering of securities in an amount that does not exceed $75,000,000, is given an exemption from registration under the Securities Act of 1933's: A Regulation A B Rule 147 C Regulation D D Rule 144

AndrewThe best answer is A. Regulation A under the Securities Act of 1933 gives an exemption from registration to issues of no more than $75,000,000. Rule 147 is the SEC's "intrastate" exemption; while Regulation D is the SEC's "private placement" exemption.

Which of the following can be purchased on margin? I NASDAQ issues II Options III Futures IV OTCBB issues A I and III B I and IV C II and III D II and IV

The best answer is A. 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.

Under the Securities Act of 1933, which statement is TRUE regarding a Regulation D private placement exemption? A No advertising or public offers are permitted B No commissions or other compensation may be received in connection with the offering C The offering may be made only to a maximum of 10 investors D The offering may be made only to accredited investors

The best answer is A. 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.

Investment companies that are required to be registered with the SEC under the Investment Company Act of 1940 have at least: I 100 shareholders II 1,000 shareholders III $100,000 of net assets IV $1,000,000 of net assets A I and III B I and IV C II and III D II and IV

The best answer is A. Investment companies that must register with the SEC are those with at least 100 shareholders and at least $100,000 of net assets.

Which of the following funds MUST be closed-end? A $9.00 NAV; $8.50 POP B $9.00 NAV; $9.00 POP C $9.00 NAV; $9.50 POP D $9.00 NAV; $9.83 POP

The best answer is A. Only closed-end funds can trade at a discount to NAV. This occurs when investors are bearish on the fund. The minimum purchase price for an open-end fund is NAV if the fund is no load. If the fund imposes a sales charge, then the POP will be more than NAV.

Which of the following investment companies can adopt a 12b-1 plan? A Mutual fund B Closed end fund C Unit trust D Face amount certificate company

The best answer is A. 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 issuers MUST report to the SEC under the Securities Exchange Act of 1934? A Investment Companies B Federal Agencies C Federal Government D Municipalities

The best answer is A. Only publicly traded corporations, limited partnerships, and investment companies file annual audited (10K) and quarterly unaudited (10Q) reports with the SEC. Municipal and federal issuers are exempt from the Act of 1934.

An order to buy a new issue that has not been registered with the SEC can be accepted if the issue is: A exempt B non-exempt C sold to professional investors D offered in no more than 5 States

The best answer is A. Orders to buy a new issue that is not registered with the SEC can only be accepted if the security is exempt; or if the security is sold in an exempt transaction, such as a private placement. There is no professional investor exemption; nor is there a federal exemption available if the offering is sold in no more than 5 States.

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 A I and III B I and IV C II and III D II and IV

The best answer is A. 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.

The Securities Exchange Act of 1934 is NOT concerned with: A full and fair disclosure relating to new securities issues sold to the public B fair trading practices on securities exchanges used by the public C curbing insider trading abuses D registration of broker-dealers that participate in the securities markets

The best answer is A. The Securities Act of 1933 concerns the primary market - it requires that non-exempt new issues be registered with the SEC and sold with a prospectus that gives "full and fair" disclosure to investors. In contrast, the Securities Exchange Act of 1934 is a group of rules and regulations to curb abuses in the secondary (trading) market. Included among the Act of 34's provisions are insider trading prohibitions; registration requirements for broker-dealers and exchanges; and prohibitions on various manipulative trading practices.

The Federal law that requires the registration with the SEC of non-exempt new issues is: A Securities Act of 1933 B Securities Exchange Act of 1934 C Investment Advisers Act of 1940 D Investment Company Act of 1940

The best answer is A. 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.

"Small Dollar Offerings" are given an exemption from registration under the Securities Act of 1933 under the provisions of: A Regulation A B Regulation B C Regulation C D Regulation D

The best answer is 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.

An indication of interest for a new stock offering is normally taken: A before the 20 day cooling off period B during the 20 day cooling off period C after the 20 day cooling off period D either before, during, or after the 20 day cooling off period

The best answer is B. An indication of interest is taken during the 20 day cooling off period before a new issue's registration becomes effective. The underwriters use the indications collected as one of the determinants for pricing the issue (this happens at the very end of the cooling off period).

If a person accumulates a 5% or greater holding in a publicly held company with the intention of exercising control: A Form d must be filed within 5 business days B Form 13d must be filed within 10 business days C Form 10k must be filed within 10 business days D Form S-l must be filed promptly

The best answer is B. Anyone who accumulates a 5% position in one company must make a 13d filing with the SEC within 10 business days.

A market maker is defined as a person that: A engages in the business of effecting transactions in securities for the account of others B engages in the business of effecting transactions in securities for his or her own account C either engages in the business of effecting transactions in securities for the account of others or for his or her own account D represents a broker-dealer or issuer in effecting, or attempting to effect, purchases or sales of securities

The best answer is B. Choice B defines a market maker, which is a principal, either buying securities into its own account from customers, or selling securities from its own account to customers. In contrast, Choice A is a broker, which is a middleman or agent, matching buyer and seller. Choice C defines a "broker-dealer." Choice D defines an "agent."

A publicly held corporation has 100,000,000 shares outstanding. A wealthy investor that buys 8,000,000 shares of the company as a passive investor: A must file a 13d report with the SEC B must file a 13g report with the SEC C must file a 13f report with the SEC D is not required to file a report with the SEC

The best answer is B. If a 5% or greater holding is accumulated in a publicly held company, and the purchaser does not intend to exercise control over that company (that is, will be a passive investor), then a 13g filing is made with the SEC. If the purchaser intends to exercise control, then a 13d filing is made.

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 A I and III B I and IV C II and III D II and IV

The best answer is B. 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.

Under Rule 147, intrastate offerings cannot be resold out of state for how long after the sale date? A 3 months B 6 months C 9 months D 12 months

The best answer is B. Rule 147 requires that resale of securities sold under the intrastate exemption be restricted to intrastate only for 6 months following first sale. Thereafter, they can be resold interstate.

Under the provisions of the Sarbanes-Oxley Act of 2002, the annual audited 10K report filed with the SEC MUST be certified by the: I chief financial officer of the issuer II chief legal officer of the issuer III chief compliance officer of the issuer IV chief executive officer of the issuer A I and III B I and IV C II and III D II and IV

The best answer is B. Sarbanes-Oxley was passed after the Enron fraud was uncovered in 2001. Enron basically produced fictitious financial statements that gave "market support" to the stock's price. When the fraud was uncovered, the stock price collapsed, taking a lot of innocent investors with it. As a result, "SarbOx" made auditors take personal liability for certifying a company's financial statements; and also made the CEO and CFO take personal liability for any misrepresentations or misstatements in the company's financial statements.

Which statements are TRUE about Regulation D? I The maximum permitted offering under Rule 504 is $10,000,000 II The minimum permitted offering under Rule 504 is $10,000,000 III The maximum permitted offering under Rule 506 is $10,000,000 IV The minimum permitted offering under Rule 506 is $10,000,000 A I and III B I and IV C II and III D II and IV

The best answer is B. 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 $10,000,000. 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 $10,000,000: 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.

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 A I and IV only B II and III only C I and II only D III and IV only

The best answer is B. 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).

All of the following statements are true about the Securities Act of 1933 EXCEPT that it requires: A the registration of non-exempt new issue offerings with the SEC B the registration of non-exempt new issue offerings in each State where the security will be sold C that investors receive full and fair disclosure when purchasing a new issue of securities D that new issues cannot be sold to customers in any manner that is fraudulent

The best answer is B. 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.

Under the provisions of the Securities Exchange Act of 1934, margin on securities is set by the: A Securities and Exchange Commission B Board of Governors of the Federal Reserve System C Federal Deposit Insurance Corporation D Department of Treasury

The best answer is B. The Securities Exchange Act of 1934 gives the Board of Governors of the Federal Reserve System the power to set margins on non-exempt securities.

Which of the following is NOT an accredited investor under Regulation D? A An individual with a $3 million net worth B An individual with $2 million in securities C An employee benefit plan with $7 million to invest D A couple that has $400,000 per year of annual income

The best answer is B. 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.

Under the Investment Company Act of 1940, which statement is TRUE regarding the composition of a management company's Board of Directors? A 40% of the Board of Directors can be affiliated persons; 60% of the Board of Directors must be unaffiliated persons B 40% of the Board of Directors must be unaffiliated persons; 60% of the Board of Directors can be affiliated persons C 100% of the Board of Directors must be unaffiliated persons D 100% of the Board of Directors can be affiliated persons

The best answer is B. 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.

Which of the following can be purchased on margin? A Mutual fund shares B Options C Futures D OTCBB issues

The best answer is C. 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 agent of a broker-dealer is solicited by the general partner of an oil and gas income program being offered as a private placement only to accredited investors. The general partner explains that for each customer that the agent brings to the general partner, he will pay a finder's fee of 10% of the amount invested. The agent gets 20 copies of a full-color brochure from the general partner and distributes them to his largest customers for their consideration. Based on this information, you should be LEAST concerned about: A a potential violation of Regulation D B whether the investment is defined as a security C the track record of the general partner D the information disclosed in the brochure

The best answer is C. Well, the immediate violation that is present here and NOT addressed in the choices is that the agent is "selling away from his firm." There is no mention that the firm knows what the agent is doing. The agent's customers think they are buying the partnership unit from the broker-dealer, when, in fact, they are not. Rather, the agent has made himself a "statutory broker-dealer" by doing this and is in violation of State law by not being registered as such in the State. However, based on the choices offered, this question really is about private placements under Regulation D of the Securities Act of 1933. First - Is the partnership a "security?" - which it sounds like it is, since the general partner is the manager and the limited partners are passive investors. Second, this is an offering only to accredited (wealthy investors), but there is no mention that the agent checked to see if the customers to whom he sent the brochures were accredited. Third, does the brochure give the disclosures required under Regulation D? These are all legal issues that must be looked at first (remember, this is a test largely written by securities attorneys). The track record of the general partner is a business issue, and while important, will never take precedence over legal issues in a test written by lawyers!

What is the difference between Class A and Class B stock in a pooled investment vehicle? A Class A stock distributes dividends only while Class B stock distributes capital gains only B Class A stock is negotiable while Class B stock is redeemable C Class A stock offers breakpoints while Class B stock does not D Class A stock is more marketable than Class B stock

The best answer is C. 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 of the following are considered to be "insiders"? I ABC Corporation's President II The spouse of ABC Corporation's President III The in-house counsel of ABC corporation IV An investor holding non-convertible senior ABC securities A I only B I and II C I, II, III D II, III, IV

The best answer is C. An insider is defined as an officer, director, 10% shareholder or "affiliated person." The President of the corporation is an officer; the President's spouse is an "affiliated person." Court decisions have extended the definition of an insider to include almost anyone who has "material non-public information" about the company. Because of this, an in-house lawyer is considered an "insider." An investor who holds non-convertible bonds or preferred stock of the company is not an insider - he is not in a position to get non-public information.

Which statement is TRUE regarding mutual funds? A That day's opening price is the basis for fund purchase price and redemption computations B The next day's opening price is the basis for fund purchase price and redemption computations C That day's closing price is the basis for fund purchase price and redemption computations D The next day's closing price is the basis for fund purchase price and redemption computations

The best answer is C. 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.

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 A I and II only B III and IV only C II, III, IV D I, II, III, IV

The best answer is C. 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.

All of the following would be considered to be securities information processors under the Securities Exchange Act of 1934 EXCEPT: A NYSE TRF B Pink Sheets C The Wall Street Journal D NASDAQ TRF

The best answer is C. 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.

The maximum permitted dollar amount that can be raised in a Private Placement under Rule 504 of Regulation D is: A $1,000,000 B $5,000,000 C $10,000,000 D Unlimited

The best answer is C. 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 $10,000,000. 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 $10,000,000: 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.

Which statement is TRUE regarding the appointment of SEC commissioners? A Each commissioner holds the office for a term of 3 years B Political party affiliation is irrelevant to the choice of commissioners C Commissioners are not permitted to engage in any other business or employment D Commissioners are not permitted to engage in securities transactions unless they are publicly disclosed

The best answer is C. 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!).

Under the Securities Exchange Act of 1934, all of the following must register with the Securities and Exchange Commission EXCEPT: A Broker-Dealers B National Securities Exchanges C Investment Advisers D Securities Information Processors

The best answer is C. The Securities Exchange Act of 1934 requires the registration of exchanges and makes them "self-regulatory organizations" under SEC oversight. The Act also requires the registration of broker-dealers, their officers, and their sales personnel. Note that the 1934 Act does not require the registration of investment advisers - instead this is required under the Investment Advisers Act of 1940. Finally, the Act requires the registration of securities information processors.

Under the Investment Company Act of 1940, an investment adviser's contract is initially set for: A 1 year; and is subject to renewal every year thereafter B 1 year; and is subject to renewal every 2 years thereafter C 2 years; and is subject to renewal every year thereafter D 2 years; and is subject to renewal every 2 years thereafter

The best answer is C. The investment adviser's contract is initially set for 2 years and is then renewed annually. The contract renewal is approved either by the Board of Directors of the Fund; or a majority vote of the outstanding shares.

Under the Securities Act of 1933, all of the following signatures are obtained and found in a registration statement for a new issue offering EXCEPT the signature of the: A Chief Executive Officer of the issuer B Chief Financial Officer of the issuer C Initial purchasers of the issue D Lawyers for the issuer

The best answer is C. 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. The names of the initial investors in the issue are not found in the registration statement.

The Investment Company Act of 1940 permits an open-end management company to: A buy securities on margin B sell short securities C change its investment objective if shareholders approve D have a Board of Directors that is 70% composed of "affiliated" persons

The best answer is C. 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). They can change their investment objective with a majority vote of the shareholders. The Board of Directors must be composed of no more than 60% "affiliated" persons.

A broker-dealer MUST maintain physical possession of which of the following? A Securities issued by municipalities B Securities traded in an omnibus trading account C Securities held as collateral for derivative trading components D Securities that are unregistered and non-exempt

The best answer is C. 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.

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 A I and III B I and IV C II and III D II and IV

The best answer is C. 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.

13G reports are filed with all of the following EXCEPT: A Securities and Exchange Commission B Company that is the subject of the report C Exchange where company trades D Financial Industry Regulatory Authority

The best answer is D. 13G reports are filed by "passive" investors that purchase 5% or more of a company's stock without the intention to exercise control (a 13d report is filed if the purchaser intends to exercise control). The 13G report is filed within 45 calendar days of year-end. A copy of the form is filed with the SEC; the exchange where the company trades; and the issuing corporation.

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 A I and III B I and IV C II and III D II and IV

The best answer is D. 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.

Which of the following are exempt issues under the Securities Act of 1933? I Government Bonds II Municipal Bonds III State Chartered Bank Issues IV Small Business Investment Companies A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is D. All of the issuers listed are exempt from the provisions of the Securities Act of 1933 - government bonds, municipal bonds, state chartered bank issues(regulated by the banking laws) and small business investment companies (regulated by other Federal legislation).

If the SEC sends a deficiency letter to the issuer regarding an issue in registration, which of the following statements are TRUE? I Disclosure in the registration documents is not complete II The issuer must file an amendment with the SEC to cure the deficiency III The 20-day cooling off period starts again once the amendment is filed IV The SEC can issue subsequent deficiency letters after amendments are reviewed A I and III B II and IV C I, II, III D I, II, III, IV

The best answer is D. An SEC "deficiency letter" indicates that there is not adequate disclosure in the registration documents to allow investors to make an informed decision. The deficiency must be cured before the SEC will allow the registration to be effective. Once the amendment is filed, the 20-day cooling off period starts counting again from the beginning. If the SEC finds that there is not adequate disclosure after the amendment is filed, it can issue subsequent deficiency letters. Thus, the registration for the issue may never "go effective."

All of the following are defined as "affiliated persons" under the Investment Company Act of 1940 EXCEPT: A an officer of the management company B an employee of the management company C a 5% holder of the management company's shares D the independent auditor of the management company

The best answer is D. 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.

Net capital rules for broker-dealers under the Securities Exchange Act of 1934 set: I Minimum Net Worth amounts II Minimum Liquid Net Worth amounts III Maximum leverage ratios of Debt to Net Worth IV Maximum leverage ratios of Debt to Liquid Net Worth A I and III B I and IV C II and III D II and IV

The best answer is D. Broker-dealer net capital is the firm's liquid net worth (liquid assets minus all liabilities). 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. Minimum net capital amounts for broker-dealers are set under the Securities Exchange Act of 1934. The ratio of debt to net capital is a leverage measure for a broker-dealer, with maximum limits set under the 1934 Act.

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? A An internal report prepared by the issuer that projects increasing product line market share over the next 3 years B Copies of advertisements used by the issuer to promote its products during the past year C An advance copy of the broker-dealer's research report on that issuer that will be released after the restriction period ends D A copy of the tombstone announcement prepared by the underwriter in connection with the offering of the issue

The best answer is D. 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.

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 A I and II B III and IV C I, III and IV D I, II, III, IV

The best answer is D. 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 Act of 1933, liability for omissions or misstatements of material fact in a registration statement or prospectus rests with: A the accountants for the issuer B the officers of the issuer C the lawyers for the issuer D every person who signed the documents or who gave an opinion related to the documents

The best answer is D. 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.

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 A I and II B III and IV C I, II, III, IV D None of the above

The best answer is D. 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.

12b-1 fees are assessed by investment companies: A when shares are purchased B when shares are redeemed C when shares are exchanged D as shares are held

The best answer is D. SEC Rule 12b-1 allows management companies to charge against total net assets, an annual fee for the cost of soliciting new investors to the fund. In reality, though the fee is expressed as an annual percentage of total net assets, it is imposed pro-rata for every day that the investor holds the shares.

All of the following are defined as investment companies under the Investment Company Act of 1940 EXCEPT: A Management Companies B Face Amount Certificate Companies C Unit Investment Trusts D Collateralized Mortgage Obligation

The best answer is D. 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, an investment manager is required to report to the SEC if the manager exercises discretion over: A $100,000 of customer assets B $1,000,000 of customer assets C $10,000,000 of customer assets D $100,000,000 of customer assets

The best answer is D. The Securities Exchange Act of 1934 requires investment managers that have discretion over $100,000,000 or more of customer assets to file a Form 13F with the SEC. The Form 13F is filed 45 days after the quarter ending where the adviser, at the end of any month in that quarter, had $100,000,000 or more of customer assets with discretionary authority.

Which of the following are national securities exchanges that MUST register with the SEC? I NYSE II AMEX (NYSE American) III PHLX IV CBOE A I only B I and II C III and IV D I, II, III, IV

The best answer is D. 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.

To be defined as a diversified management company, a fund must have at least what percentage of its assets invested in securities? A 5% B 10% C 25% D 75%

The best answer is D. 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.

Under the Securities Exchange Act of 1934, registration with the SEC as a broker-dealer may be revoked for all of the following reasons EXCEPT the broker-dealer fails to: A maintain minimum net capital B send its financial statements to customers C be audited annually D report its net income to customers

The best answer is D. Under the Securities Exchange Act of 1934, broker-dealers must maintain minimum net capital; must send their financial statements (the requirement here is for a balance sheet only; there is no requirement to send an income statement) to customers semi-annually; and must be audited annually. Failure to comply with these will result in the broker-dealer's registration being revoked.

Under the Securities Exchange Act of 1934, the SEC can suspend trading in the securities markets if it gives prior notice to the: A CEOs of the companies traded on the securities markets B United States Senate C United States Congress D President of the United States

The best answer is D. 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.