Securities Exchange Act of 1934
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 statements are TRUE? I A public announcement of the news must be made within 24 hours II A public announcement of the news must be made within 10 business days III The company must file an 8K with the SEC disclosing the information to avoid insider trading liability IV The company must file a 10K with the SEC disclosing the information to avoid insider trading liability A. I or III B. I or IV C. II or III D. II or IV
The best answer is A. 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 (defined as public disclosure within 24 hours of the inadvertent disclosure) 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.
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.
Municipal market participants are subject to which of the following rules? A. Anti-fraud Rule 10b-5 under the Securities Exchange Act of 1934 B. Prospectus delivery rules under the Securities Act of 1933 C. Issuer reporting requirements under the Securities Exchange Act of 1934 D. Indenture requirements of the Trust Indenture Act of 1939
The best answer is A. Municipal bonds are "exempt" securities and thus are not subject to the provisions of the Securities Acts with the exception of the "anti-fraud" provisions. Municipal bonds do not have to provide a trust indenture; municipalities do not report to the SEC; no prospectus is required when selling a new municipal issue. However, fraudulent activities in the municipal market are covered by the Act of 1934.
The SEC requires financial reports from all of the following EXCEPT: A. municipal issuers B. corporate issuers C. municipal broker-dealers D. corporate broker-dealers
The best answer is A. Municipal issuers are exempt from the provisions of the Securities Acts, as are all other governmental issuers. The SEC has authority over corporate issuers, and requires financial reports from corporations. Broker-dealers, including municipal broker-dealers, are registered through FINRA under SEC oversight; and their financial reports are filed with both FINRA and the SEC.
All of the following publicly held issuers must report to the SEC under the Securities Exchange Act of 1934 EXCEPT: A. Municipalities B. Unit investment trusts C. Mutual funds D. Corporations
The best answer is A. Only corporations and investment companies (which are either corporations or trusts) file annual (10K) and quarterly (10Q) reports with the SEC. Municipal and federal issuers are exempt from the Securities Exchange Act of 1934.
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.
Which of the following statements are TRUE regarding margin regulations? I In-house rules may be more stringent than FINRA rules II Exchange rules may be more stringent than Federal Reserve rules III In-house rules may be less stringent than FINRA rules IV Exchange rules may be less stringent than Federal Reserve Rules A. I and II B. III and IV C. I and IV D. II and III
The best answer is A. Regarding margin rules, FINRA rules may be more stringent than Federal Reserve rules, but cannot be less stringent. Firm rules can be more stringent than FINRA rules, but cannot be less stringent.
Under the "penny stock rule," an established customer that is exempt from the rule is defined as a person who has effected a securities transaction or made a deposit of funds or securities with that broker-dealer more than: A. 1 year previously B. 2 years previously C. 3 years previously D. 5 years previously
The best answer is A. 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.
Who determines if an OTC stock is marginable? A. FRB B. FINRA C. SEC D. OTCBB
The best answer is A. The Federal Reserve Board (FRB) is given the power to control margin on securities under Regulation T. Under Regulation T, all listed securities are marginable, and securities on the "OTC Margin List" published by the FRB are marginable.
The determination of which stocks are marginable is made by (the): A. FRB B. SEC C. FINRA D. SIPC
The best answer is A. The Federal Reserve Board decides which non-exempt securities are marginable. The Fed has decided that all listed securities are marginable and over-the-counter securities which it approves are marginable.
The Securities Exchange Act of 1934 regulates trading of all of the following EXCEPT: A. Commodities Futures B. Options C. Corporate Bonds D. Corporate Stock
The best answer is A. The Securities Exchange Act of 1934 does not regulate the trading of commodities, since these are not securities, and are not regulated under the Securities Acts. Rather, futures (commodities) are regulated by the CFTC - the Commodities Futures Trading Commission. The Securities Exchange Act of 1934 does regulate trading of all non-exempt securities, including common stocks, preferred stocks, corporate bonds, options on securities, etc.
A research analyst at PDQ Securities mentions to a registered representative at that firm that a new research report is coming out about ACME Corporation that is "highly positive." Prior to the issuance of the research report, the registered representative calls his customers and tells them to buy ACME stock. Based on this information, which statements are TRUE? I The research analyst has violated the insider trading rules II The research analyst has not violated the insider trading rules III The registered representative has violated the insider trading rules IV The registered representative has not violated the insider trading rules A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. Under the Insider Trading Act of 1988, any person who uses material non-public information to trade in a company's stock for profit can be considered to be an "insider." In addition, the Act extends the definition of an insider to "controlling" persons - in this case, the provider of the information. A person who "communicates" material non-public information can be held liable under the Act unless "that person acted in good faith and did not directly or indirectly induce the act constituting the violation." Therefore, both the person trading on the inside information (the "tippee") and the communicator of the information (the "tipper") can be held liable under the Act.
Under Rule 10b-5-1, pre-arranged trading plans by insiders are: I permitted only if the provisions cannot be altered during the plan's life II permitted only if the provisions can be altered during the plan's life III given a safe harbor to officers and directors against an "insider trading" prosecution if the plan is followed IV given a right of rescission for any trades that are deemed to be a violation of the insider trading rules A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. We all know that insiders are prohibited from trading based on material non-public information. In 2000, the SEC issued a "safe-harbor" rule that permits statutory insiders (officers, directors and 10% shareholders) to set up a written plan for trading that company's securities. Such a written plan specifies the future date with amount on which securities are to be bought and sold; or specifies the algorithm to be used for determining the amount and date of future purchases or sales. Once the plan is in force, the "insider" cannot have any further influence on trades effected under the plan. As long as the insider adheres to such a written trading plan, that person is given a "safe harbor" from being accused of using "inside information" as the basis for the trades that occur based on adhering to the plan.
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.
Issuers that wish to give "earnings guidance" to research analysts must conform with the provisions of SEC: A. Regulation SB B. Regulation FD C. Regulation SK D. Regulation SP
The best answer is B. 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. Regulation SP requires financial institutions to provide customers with a copy of their privacy policies and procedures, including whether customer information is provided to third parties; and requires that customers be given the ability to "opt out" of any such disclosures. Regulation SK standardizes the reporting of financial and non-financial information by issuers to the SEC. Regulation SB (Small Business) streamlines registration of issues by small businesses with the SEC.
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.
The Vice-President of ACME Corporation, an NYSE listed firm, places an order to buy 10,000 shares of ACME common at the market. 3 months later, ACME stock's price has increased by 20% and the officer places an order to sell. Which statements are TRUE? I The sale of the stock is subject to Rule 144 II The stock cannot be sold unless it has been held, fully paid, for 6 months III The sale is prohibited until a "waiver of liability" has been obtained from the issuer IV The officer must forfeit the profit on the sale A. I and II only B. I and IV only C. II and III only D. I, II, III, IV
The best answer is B. Since the seller is an officer of that company, he is a control person under Rule 144, and any sales must conform with the Rule. Rule 144 requires that restricted shares be held for 6 months, fully paid, before being sold. Since these shares are registered, they are not "restricted" and the 6-month holding period requirement does not apply. There is no requirement for a "waiver of liability" from the issuer. Since the officer did not hold the appreciated securities for at least 6 months, he or she has a "short swing" profit that must be paid back to the issuer under the Securities Exchange Act of 1934 "Insider" rules.
Which statement is FALSE about stabilizing bids? A. A stabilizing bid is placed by the syndicate manager B. Stabilization is permitted during the 20-day cooling off period C. Only 1 stabilizing bid is permitted at any time D. Stabilization is permitted under Regulation M
The best answer is B. Stabilization of new issue prices in the aftermarket is permitted under Regulation M. The bid cannot be placed until the effective date; it is not permitted during the 20-day cooling off period. 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 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.
All of the following statements about the Securities Exchange Act of 1934 are true EXCEPT the: A. general provisions of the Act apply to non-exempt securities B. general provisions of the Act apply to exempt securities C. anti-fraud provisions of the Act apply to non-exempt securities D. anti-fraud provisions of the Act apply to exempt securities
The best answer is B. The general provisions of the Securities Exchange Act of 1934 apply to non-exempt securities only. For example, holders of municipal bonds (an exempt security) cannot be considered to be "insiders" while a holder of corporate stock (a non-exempt security) can be an "insider." However, the anti-fraud provisions of the Act apply to both exempt and non-exempt securities. Thus, if a person fraudulently trades municipal bonds (an exempt security), this person is in violation of the Act.
A customer is opening a new account at a brokerage firm and has been recommended penny stocks by the representative, since these are suitable based on the customer's investment objectives and risk tolerance. Which forms are needed to open the account? I New account form II Margin agreement III Form ADV IV Form 15g-2 A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. To open any new account, a new account form must be completed. Since penny stocks are not marginable, there is no margin agreement - the account must be opened as a cash account. The Form ADV is used to register Investment Advisers with either the SEC (the big advisers with $100 million or more of assets under management or advisers to mutual funds) or the State (the smaller advisers). The "Penny Stock Rules" are Rules 15g-1 through 15g-6. Rule 15g-2 requires that customers be provided with a Risk Disclosure Document and sign it at, or prior to, the opening of an account that is recommended penny stock transactions
A customer is long 1,000 shares of ABCD stock and has gone "short against the box" 400 shares of ABCD stock. If there is a tender offer for the shares of ABCD Corporation, the customer: A. cannot tender any shares B. can tender 400 shares C. can tender 600 shares D. can tender 1,000 shares
The best answer is C. A customer is only considered to be "long" to the extent of his or her "net" long position in a security. This customer is long 1,000 shares of ABCD and short 400 shares of ABCD, for a net long position of 600 shares. This is the amount that can be tendered (remember that the customer must replace the 400 shares borrowed to sell short, leaving him or her with the remaining 600 shares out of the 1,000 owned.)
All of the following events would require a corporation to file an 8K report with the SEC EXCEPT declaration of (a): A. divestiture B. merger C. dividend D. bankruptcy
The best answer is C. An 8K filing with the SEC is required by a corporation if a "major event" happens at the company. These include if there is a change in the composition of the Board of Directors; if the company declares bankruptcy; if there is a major acquisition or divestiture of assets; if the company proposes a merger; or if any other major corporate event occurs. The notice must be filed no later than 4 business days after the event. Declaration of a dividend is a rather normal event, so no filing is required.
Which of the following individuals would be considered an insider? I A person who uses public information to trade in that company's stock for a profit II A person who uses non-public information to trade in that company's stock for a profit III A Chairman of a corporation who uses non-public information to trade in that company's stock for a profit IV A wife of a Chairman of a corporation who uses non-public information to trade in that company's stock for a profit A. I and II B. III and IV C. II, III, IV D. I, II, III, IV
The best answer is C. Anyone can use public information to trade stock for a profit. However, any person who uses material non-public information to trade in a company's stock for profit (or to avoid a loss) can be considered to be an "insider."
Broker-dealers are required to report their computed Net Capital to customers: A. monthly B. quarterly C. semi-annually D. annually
The best answer is C. Broker-dealers must send their customers a semi-annual balance sheet and Net Capital computation
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."
An investor who accumulates a 5% or greater position in the common stock of a registered issuer must file which of the following forms with the SEC? A. 8K B. 10K C. 13D D. 144
The best answer is C. 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!)
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.
Which of the following can be a stabilizing bid for a new issue that has a Public Offering Price of $30 per share? I $29.75 II $29.88 III $30.00 IV $30.13 A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV
The best answer is C. 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.
Stabilization rules for new issues are: A. set by FINRA B. covered under the Securities Act of 1933 C. covered under the Securities Exchange Act of 1934 D. covered under the Securities Investor Protection Act of 1970
The best answer is C. The Securities Exchange Act of 1934 prohibits market manipulation - with one exception. Stabilization of new issues is permitted as long as the stabilizing trades (which take place in the secondary market) conform to the requirements of the 1934 Act.
Under Regulation M, which statements are TRUE regarding stabilizing bids entered by market makers? I Stabilizing bids can only be maintained for 5 consecutive business days II There is no time limitation on the period that a stabilizing bid can be maintained III A stabilizing bid cannot be placed unless a "Notice of Stabilization" is included in the prospectus IV A stabilizing bid cannot be placed unless an "Official Notice of Sale" is placed in the prospectus A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. 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. A "Notice of Stabilization" must be included in the prospectus (on the inside front cover) that details the fact that the manager can start and stop stabilizing at any time and that when stabilization stops, the price of the issue may drop. An Official Notice of Sale is used to solicit competitive bids for municipal new issues and has nothing to do with stabilization.
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.
A tender offer is announced for ABC common stock. Which of the following customer accounts can tender 100 shares of ABC on the offer? I Long 100 shares of ABC II Long 100 shares of ABC; Short 100 shares of ABC III Long 200 shares of ABC; Short 100 shares of ABC IV Long 100 shares of ABC; Short 200 shares of ABC A. I only B. III and IV C. I and III D. I, II, III, IV
The best answer is C. 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. Choice I is net long 100 shares and can tender; Choice II is net "0" and cannot tender; Choice III is net long 100 shares and can tender; Choice IV is net short 100 shares and cannot tender.
Which statements are TRUE about a tender offer for common shares? I The offer must remain open for at least 10 business days II The offer must remain open for at least 20 business days III Each "sweetening" of the offer must extend the offer for an additional 10 business days IV Each "sweetening" of the offer must extend the offer for an additional 20 business days A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. When a tender offer is made for the common shares of an issuer, the maker of the offer is attempting to buy a majority stake in the company. To attract shareholders to tender, the maker usually prices the offer at a premium to the current market price. Such offers are typically contingent on a minimum number of shares being tendered. If the minimum number is not met, the maker might "sweeten" the offer by raising the tender price; or could simply cancel the offer and return the tendered shares to the subscribing shareholders. The initial offer must be held out for a minimum of 20 business days under SEC rules. Each sweetening of the offer must extend the life of the offer by another 10 business days
Which of the following requires filing with the SEC? I Purchase of a 5% position in one company's stock II An officer selling 1% of that company's stock III Corporation declaring bankruptcy IV Corporate proxy materials A. I only B. II only C. I, II, III D. I, II, III, IV
The best answer is D. All of the items listed are filed with the SEC. Anyone who accumulates a 5% position in one company must make a 13D filing with the SEC; officers must report their sales of that company's stock under the insider rules by filing a Form 4 within 2 business days of the trade; a corporate 8K filing is required for any unusual corporate announcements such as a merger or divestiture, or bankruptcy declaration; and corporate proxy materials must be filed with the SEC 10 business days before use.
If an event occurs which requires an issuer to make an 8K filing with the SEC, the filing must be made: A. promptly B. 1 business day after the event C. 2 business days after the event D. 4 business days after the event
The best answer is D. An 8K filing with the SEC is required by a corporation if there is a change in the composition of the Board of Directors; if the company declares bankruptcy; if there is a major acquisition or divestiture of assets; if the company proposes a merger; or if any other major corporate event occurs. The notice must be filed no later than 4 business days after the event.
All of the following actions require a filing with the SEC EXCEPT: A. the purchase of a 5% position in one company's stock B. an officer selling 1% of that company's stock C. a broker-dealer's net capital computation D. a company declaring a cash dividend to stockholders
The best answer is D. Anyone who accumulates a 5% position in one company must make a 13D filing with the SEC; officers must report their sales of that company's stock under the insider rules by filing a Form 4 within 2 business days of the trade; and broker/dealers must report their Net Capital to the SEC. A corporate 8K filing is required for any unusual corporate announcements such as a merger or divestiture - it is not required for a dividend announcement, which is rather typical.
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.
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. Corporate annual reports contain the following audited financial statements - Income Statement; Balance Sheet; Statement of Changes to Retained Earnings (this shows earnings added for the year and dividends paid from retained earnings for that year); and Statement of Sources and Uses of Cash (this shows cash received that year from income earned; stock and bond offerings; and disposals of equipment; and cash paid that year for equipment purchases, pay-down of debt; dividends, etc.)
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.
The Securities Exchange Act of 1934 established "self regulatory organizations" (SROs) and empowered these organizations to: I set guidelines for fair dealing with the public II handle complaints against broker-dealers for securities law violations III take administrative action against broker-dealers that violate industry regulations IV establish arbitration procedures to settle intra-industry disputes A. I and II only B. I, II, III C. II, III, IV D. I, II, III, IV
The best answer is D. 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; its handle 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.
The "penny stock" rule applies to equity securities which are: I listed on an exchange or on NASDAQ II not listed on an exchange or on NASDAQ III priced at $5 or over IV priced under $5 A. I and III B. I and IV C. II and III D. II and IV
The best answer is D. The "penny stock" designation only applies to equity securities which are not listed on an exchange or NASDAQ; and that are under $5 per share. Translated, we are talking about "penny stocks" included in the OTCBB or Pink Sheets. To solicit the purchase of such securities requires that a detailed suitability determination be performed; that the customer be sent the determination; and that the customer sign and return this form before the sale can be confirmed.
The Securities Exchange Act of 1934 regulates which of the following markets? I First II Second III Third market IV Fourth A. I only B. II only C. II, III, IV D. I, II, III, IV
The best answer is D. The Securities Act of 1933 regulates the new issue (primary) market. The Securities Exchange Act of 1934 regulates the secondary market (the trading market). The trading markets consist of the first market (trading of listed securities on an exchange), second market (over-the-counter trading of securities not listed on an exchange), third market (over-the-counter trading of securities listed on an exchange floor), and fourth market (direct trading of securities between institutions via ECNs and ATSs).
Under the provisions of the Securities Exchange Act of 1934, all of the following must be registered EXCEPT: A. the exchanges that trade securities B. member firms C. sales employees of member firms D. customers of member firms
The best answer is D. The Securities Exchange Act of 1934 requires the registration of each securities exchange, so that it now becomes a "self-regulatory organization" (SRO), subject to SEC oversight. In addition, FINRA and the MSRB are SROs. The Act requires that member firms register with FINRA; that their officers register; and that their sales employees (you!) register. There is no requirement for customers to register (duh!).
The Securities and Exchange Commission was created by: A. a Constitutional amendment B. a Supreme Court decision C. the Securities Act of 1933 D. the Securities Exchange Act of 1934
The best answer is D. The Securities and Exchange Commission was created by the Securities Exchange Act of 1934 (which was passed in the very beginning of 1934, while the 1933 Act was passed at the very end of 1933 - so these 2 Acts were really enacted "back-to-back").
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.
The Securities Exchange Act of 1934 is MOST concerned with: A. registration of new issues B. registration of market participants C. prevention of fraud in the primary market D. prevention of fraud in the secondary market
The best answer is D. The primary purpose of the Securities Acts was to curb speculation and fraud in the markets. The Act of 1933 regulates the primary (new issue) market; while the Act of 1934 regulates the secondary (trading market). It is also a true statement that the Act of 1934 requires the registration of broker-dealers, but this is not the primary purpose of the Act.
An officer of a publicly traded company is prohibited from all of the following actions EXCEPT: A. selling short the common stock of that company B. retaining a profit generated from the purchase and sale of the company's stock within a 6 month period C. trading that company's stock based upon material, non-public information D. exercising call options or pre-emptive rights on that issuer's stock
The best answer is D. Under the Securities Exchange Act of 1934, insiders are prohibited from selling their own company's stock short; must disgorge any profits obtained from short swing trading of that company's stock (defined as gains earned over a 6 month period); and are prohibited from trading based upon material, non-public ("inside") information. There is no prohibition on an insider exercising pre-emptive rights or call options held on that company's stock. However, these transactions would be reported to the SEC within 2 business days of the trade.
Short against the box
an end-of-the-year tax strategy that enables an investor to lock in a gain on a profitable long position; however, under 1997 tax law revisions, it will generally not defer taxes from one year to the next (unless very specific tests are met). The investor borrows and sells short a number of shares equal to his or her profitable long position at the current market price. This locks in the gain, and taxes are due at this point. Both the long and short positions are held into the new year, at which time the investor uses the long position to cover the short (replacing the borrowed shares). This transaction is effected in an Arbitrage Account, which has a very low margin requirement because this is, essentially, a riskless transaction.
