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.

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.

All of the following statements are true about margin on securities EXCEPT: A. the FRB sets margins for exempt securities B. the FRB sets margins for non-exempt securities C. FINRA sets margins for exempt securities D. FINRA sets margins for non-exempt securities

The best answer is A. The Federal Reserve Board (FRB) only has the power to set margins for non-exempt issues. It has no power to set margins for exempt issues under the Securities Exchange Act of 1934. However, FINRA sets minimum margins for both exempt and non-exempt issues. For example, there is no Regulation T margin for corporate bond positions (a non-exempt security), but FINRA sets the minimum at the greater of 7% of face or 20% of market value. For example, there is no Regulation T margin for municipal bond positions (an exempt security), but FINRA sets the minimum at the greater of 7% of face or 15% of market value.

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.

A broker-dealer may hold fully paid customer securities: A. when authorized in writing by the customer B. if the securities are segregated and held in safekeeping C. if the firm notifies the customer every 3 months as to the amount of securities and the fact that they are "not segregated" D. only if the customer is traveling

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.

Information barriers are required between which brokerage firm departments? I Margin and Reorganization II Research and Accounting III Investment Banking and Research IV Trading and Investment Banking A. I and II B. III and IV C. I and IV D. II and III

The best answer is B. Information barriers, so called "Chinese Walls," as used in the securities industry, are the complete separation of a broker-dealer's investment banking unit from its trading and research units. 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. A wall is put between research and investment banking because research should not be influenced by pending investment banking deals - e.g., research could "help" the deal by putting out a "buy" recommendation on that stock. In addition, research personnel might buy the stock themselves, which can be viewed as trading on "inside information."

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.

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 fix commission rates to be charged to public customers A. I and II only B. I, II, III C. II, III, IV D. I, II, III, IV

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; 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. Fixed commission rates are prohibited under the Securities Exchange Act of 1934 - these are set by the member firms.

A corporate executive holds a meeting with a select group of research analysts and gives information about the company's expected revenue and income for the upcoming quarter. If the analysts use the information to make recommendations, which statements are TRUE under Regulation FD? I The corporate officer is considered to be a tipper II The corporate officer is considered to be a tippee III Each analyst is considered to be a tipper IV Each analyst is considered to be a tippee A. I and III B. I and IV C. II and III D. II and IV

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. If such selective disclosure is made and trades result, the corporate officers giving the information become "tippers" and the recipients become "tippees."

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.

Under the "penny stock rule," an established customer that is exempt from the rule is defined as a person who has: I effected a securities transaction or made a deposit of funds or securities with that broker-dealer more than 1 year previously II effected a securities transaction or made a deposit of funds or securities with that broker-dealer more than 3 years previously III made at least 1 previous purchase of "penny stocks" from the same broker-dealer IV made at least 3 previous purchases of "penny stocks" from the same broker-dealer A. I or III B. I or IV C. II or III D. II or IV

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.

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.

The Securities Exchange Act of 1934 regulates which of the following? I Futures transactions II Securities transactions III Futures brokers IV Securities brokers A. I and III only B. II and IV only C. III and IV only D. I, II, III, IV

The best answer is B. The Securities Exchange Act of 1934 does not regulate futures transactions or futures brokers. These are not defined as securities, and this market place is regulated by the CFTC - the Commodities Futures Trading Commission. The Securities Exchange Act of 1934 regulates securities transactions and securities brokers.

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.

If a registered representative solicits an order from a new customer to purchase a "penny stock" that is trading over-the-counter, which procedure is required? A. Send a prospectus to the customer B. Have the customer sign a statement that he or she understands the risks involved prior to executing the order C. Have the branch manager approve the order and then fill the customer's order in the same manner as with any other security D. Send the customer a Subscription Agreement to be signed before filling the order

The best answer is B. Under the SEC's "penny stock rule" (Rules 15g-1 through 15g-6), if a registered representative solicits a new customer to buy a non-NASDAQ over-the-counter stock priced under $5 (translated, this is an OTCBB or Pink Sheet issue under $5), the registered representative must complete a detailed suitability statement for the customer, and the customer must sign this statement before the order can be confirmed. This rule was enacted to curb unethical sales practices of so-called "penny stocks."

An officer of a listed company calls his registered representative and tells him to buy a large block of that stock. Prior to placing the order to buy, the registered representative calls ten of his customers and tells them to buy that company's stock. Which statement is TRUE? A. This action is permitted under SEC rules B. This action is a violation of the insider trading rules C. This action is an ethical business practice D. This action is beneficial to the customer, and thus is allowed

The best answer is B. When the registered representative received the buy order from the officer, he is obligated to execute that order before acting on the information he has received. Once the order is executed, it 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 buy before placing the officer's buy order. This is a violation of the Securities Exchange Act Rule 10b-5.

The definition of a "short swing" profit under the Securities Exchange Act of 1934 is a completed round turn trade effected at a profit within: A. the same day by any investor B. six months by any investor C. six months by an insider D. within one year by an insider

The best answer is C. 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.

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.

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.

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.

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. 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!) The amount to be paid is 3 times (treble damages) the profit achieved or loss avoided.

An individual who made a profit of $1,000,000 from insider trading would be subject to a civil penalty of: A. $1,000,000 B. $2,000,000 C. $3,000,000 D. $4,000,000

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.

The provisions of the Penny Stock Rule, which require the pre-qualifying of a new customer before a "penny" stock can be sold to that individual, only apply to the recommendations of: A. NYSE securities B. NASDAQ securities C. OTCBB securities D. AMEX securities

The best answer is C. 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.

The Securities and Exchange Commission is empowered to administrate which of the following Acts? I Securities Act of 1933 II Securities Exchange Act of 1934 III Trust Indenture Act of 1939 IV Uniform Securities Act A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is C. The SEC administrates 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 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 Securities Exchange Act of 1934 regulates which of the following markets? I Primary Market II Second Market III Third Market IV Fourth Market A. I only B. II only C. II, III, IV D. I, II, III, IV

The best answer is C. 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 on ECNs and ATSs).

All of the following meet the statutory definition of an "insider" EXCEPT: A. an officer of a company B. the holder of 10% of the equity securities of a company C. the holder of 10% of the debt of a company D. a director of a company

The best answer is C. The Securities Exchange Act of 1934 defines a statutory "insider" as any officer, director, or 10% shareholder of the equity securities of the issuer.

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.

Under Federal law, stock can be tendered from which of the following accounts? I Restricted margin account II Short margin account III Long margin account IV Cash account A. IV only B. I and III only C. I, III, IV 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. 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.

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 statement is TRUE? A. Only the research analyst has violated insider trading rules B. Only the registered representative has violated insider trading rules C. Both the research analyst and the registered representative have violated insider trading rules D. Neither the research analyst nor the registered representative has violated insider trading rules

The best answer is C. 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.

Which of the following statements are TRUE regarding trading of that company's stock by an officer of a publicly traded company? I Officers are allowed to sell their own company's stock short II Officers are not allowed to sell their own company's stock short III Officers are allowed to retain any profits obtained from gains on stock positions which have been held for 1 year IV Officers must disgorge any profits obtained from gains on stock positions which have been held for 1 year A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. Under the Securities Exchange Act of 1934, insiders are prohibited from selling their own company's stock short. They must also disgorge any profits obtained from short swing trading of that company's stock (defined as gains earned over a 6 month period). Thus, the officers who sell after holding the position for 1 year can keep the profits.

Pre-arranged trades by insiders are: A. prohibited B. permitted under Rule 10b-5 C. permitted under Rule 10b-5-1 D. permitted under Regulation FD

The best answer is C. 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.

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

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.

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 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.)

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.

Under Regulation M, which statement is FALSE regarding stabilizing bids entered by market makers? A. Only the syndicate manager placed a stabilizing bid B. There is no time limitation on the period that a stabilizing bid can be maintained C. A stabilizing bid cannot be placed unless a "Notice of Stabilization" is included in the prospectus D. A stabilizing bid can be placed at any price that is reasonably related to the market

The best answer is D. Only 1 stabilizing bid, placed by the manager, is permitted at any time after registration becomes effective. The stabilizing bid is placed at, or just below the Public Offering Price. It can never be placed above the P.O.P. 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.

Under the provisions of the Securities Exchange Act of 1934, which of the following must be registered? I The exchanges that trade securities II Member firms III Officers of member firms IV Sales employees of member firms A. IV 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 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.

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.

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.

A customer inherits 3,000,000 shares of ABC stock, a company listed on the NYSE which has 10,000,000 shares outstanding. The customer is not a director or officer of the company. Which of the following statements is (are) TRUE? I The customer is defined as an "insider" under the Securities Exchange Act of 1934 II The customer is prohibited from selling ABC stock short; however, the customer may short against the box at year end, as long as the position is covered within 20 days III If the customer trades ABC stock at a profit after having held the stock for less than 6 months, the gain is forfeited IV The customer must report trading activity to the SEC A. I only B. II and IV C. I, II, IV D. I, II, III, IV

The best answer is D. This person falls into the definition of an "insider" because he holds 10% or more (in this case he holds 30%) of the company's common stock. Insiders cannot sell their stock short (except to short against the box at year end to lock in a gain, in which case the position must be closed within 20 days); they must forfeit any short swing profits derived from trading their own company's shares; and trading activity must be reported within 2 business days of the trade to the SEC.