Series 7 Chapter 16: U.S. Government and State Rules and Regulations

Which of the following customer accounts is NOT SIPC-insured? A) TIC account with business partner. B) Customer margin account. C) TIC commodities account with son. D) JTWROS account with spouse.

The correct answer was: TIC commodities account with son.Your answer, Customer margin account., was incorrect. SIPC coverage only applies to accounts holding securities; commodities accounts are not covered.

Under SEC rules, a penny stock is defined as an unlisted, non-Nasdaq security trading at less than: A) $2.50 per share. B) $1 per share. C) $5 per share. D) $2 per share.

Your answer, $1 per share., was incorrect. The correct answer was: $5 per share. SEC rules define penny stocks as unlisted, non-Nasdaq stocks of less than $5 per share

If a registered representative is found to have engaged in insider trading, under criminal penalties the registered representative can be fined up to 3 times the profit gained or loss avoided, or A) $1 million, whichever is greater B) $5 million, whichever is greater C) $25 million, whichever is less D) $500,000, whichever is greater

Your answer, $25 million, whichever is less, was incorrect. The correct answer was: $5 million, whichever is greater If a registered representative is found to have engaged in insider trading, under criminal penalties the registered representative can be fined up to 3 times the profit gained or loss avoided, or $5 million, which ever is greater. The member firm, which must have procedures in place to prevent insider trading, can be fined up to 3 times the profit gained or loss avoided, or $25 million, whichever is greater.

A customer has a cash account that has securities with a market value of $300,000 and $300,000 in cash. The customer also has a joint account with his wife that has securities with a market value of $400,000 and $80,000 in cash. If the firm were to go bankrupt, the customer would be covered under SIPC for cash and securities of: A) $500,000 cash and securities for both accounts combined. B) $300,000 cash for his account and $80,000 cash for the joint account. C) $500,000 cash and securities for his account and $480,000 cash and securities for the joint account. D) $600,000 cash and securities in his account and $480,000 cash and securities in the joint account.

Your answer, $300,000 cash for his account and $80,000 cash for the joint account., was incorrect. The correct answer was: $500,000 cash and securities for his account and $480,000 cash and securities for the joint account. There are two separate customers, each entitled to the $500,000 SIPC protection, but since SIPC only covers up to $250,000 in cash, the customer will not get full coverage for the $300,000 cash in his account. All of the securities and cash will be covered in the joint account.

A client has a cash account with stock valued at $460,000 and $40,000 in cash and shares a joint account with a spouse that has a market value of $320,000 and $200,000 in cash. How much is the SIPC coverage? A) $500,000 for the cash account and $420,000 for the joint account. B) $460,000 for the cash account and $320,000 for the joint account. C) $500,000 for the cash account and $500,000 for the joint account. D) Total of $880,000 for both accounts.

Your answer, $500,000 for the cash account and $500,000 for the joint account., was correct!. SIPC coverage is $500,000 per separate customer with cash coverage not to exceed $250,000. In the single-name account, SIPC provides full coverage, while in the joint account, SIPC covers the full value of the securities, but only $180,000 of the $200,000 in cash. The remaining $20,000 becomes a general debt of the bankrupt broker/dealer.

A client with $315,000 cash and $35,000 in securities in his account is protected to what extent in the event a SIPC trustee is appointed? A) 250,000. B) 315,000. C) 350,000. D) 285,000.

Your answer, 285,000., was correct!. SIPC covers cash up to $250,000 and a total of cash and securities up to $500,000. The total covered in this question is $285,000 ($250,000 of the cash plus the $35,000 in securities).

A customer has a margin account with RTQ Securities, Inc. in which he has securities with a market value of $400,000 and a debit balance of $110,000. In the event of the bankruptcy of RTQ, SIPC covers: A) 290000. B) 500000. C) 400000. D) 100000.

Your answer, 400000., was incorrect. The correct answer was: 290000. SIPC protects each separate customer to a maximum of $500,000 in equity. This account has equity of $290,000 ($400,000 LMV minus $110,000 Dr).

If a customer has a securities account worth $220,000 and a money market account worth $260,000, what is this customer's coverage under SIPC? A) 220,000. B) 250,000. C) 480,000. D) 470,000.

Your answer, 480,000., was correct!. Coverage under SIPC is up to $500,000 per separate customer. Of that total, SIPC covers no more than $250,000 in cash. Because a money market share is considered an investment company security, not cash, this customer's coverage is $480,000.

Which of the following items would NOT be considered a suspicious activity? A) A client who has a pattern of wiring money to your firm then redirects the funds to other offshore accounts. B) A client transfers funds to a beneficiary account on behalf of his niece. C) A new client, operating an import/export firm, wire transfers $75,000 to an account in Malaysia. D) A client's monthly account activity triples without any real justification.

Your answer, A client transfers funds to a beneficiary account on behalf of his niece., was correct!. Transferring to a beneficiary account on behalf of his niece, the client appears to be conducting a normal transfer of funds to a legitimate beneficiary. Each of the remaining choices could be construed as suspicious activity.

Which of the following customers would be fully protected under SIPC? A) A customer with $600,000 par value corporate bonds trading at 80. B) A customer with $200,000 of a sugar futures contracts. C) A customer with a cash balance of $170,000 in his cash account and a cash balance of $160,000 in his margin account. D) A customer with municipal bonds valued at $280,000 and $320,000 in cash.

Your answer, A customer with $200,000 of a sugar futures contracts., was incorrect. The correct answer was: A customer with $600,000 par value corporate bonds trading at 80. Coverage under SIPC is up to $500,000 per separate customer in securities and cash. Of that total, SIPC will cover no more than $250,000 in cash. Of the choices given, only the customer with $600,000 par value municipal bonds trading at 80 will be fully covered ($600,000 / $1,000 Par = 600 bonds, 600 bonds × $800 = $480,000). The customer with $320,000 cash will have $70,000 left uncovered. The customer with both a margin and a cash account will have them combined for SIPC coverage ($170,000 + $160,000 = $330,000) and will be left with $80,000 uncovered. Commodities and futures contracts are not considered securities and therefore not covered.

A customer has $150,000 in securities and $300,000 in cash with his brokerage firm. If the firm were forced to liquidate, how much of the account would be covered by SIPC? A) All of the cash and $300,000 of the securities. B) All of the securities and all of the cash. C) All of the securities and $250,000 of the cash. D) All of the cash and $250,000 of the securities.

Your answer, All of the securities and $250,000 of the cash., was correct!. SIPC covers cash and securities up to $500,000, but only up to $250,000 of the total can be cash.

Which of the following is a true statement regarding payment to informants (whistleblowers)? A) Awards can only be paid for information regarding violations of the Insider Trading Securities Fraud Enforcement Act. B) If an award is paid to a "whistleblower", the amount of the award can not be based on any amount recovered. C) Awards are not paid for information regarding securities law violations regardless of the success of any enforcement action taken. D) Awards may be paid in connection with original information concerning any violation of securities law that leads to successful enforcement.

Your answer, Awards are not paid for information regarding securities law violations regardless of the success of any enforcement action taken., was incorrect. The correct answer was: Awards may be paid in connection with original information concerning any violation of securities law that leads to successful enforcement. Awards to "whistleblowers" may be paid in connection with original information concerning any violation of securities law including but not limited to violations of the Insider Trading Securities Fraud Enforcement Act. Those awarded may be paid a percentage of the amount collected.

If one of your customers has been making weekly cash deposits of $6,000 into his account, your firm would likely file a(n) A) Form 112 B) Form 4 C) FOCUS. Report D) SAR

Your answer, Form 112, was incorrect. The correct answer was: SAR A SAR (suspicious activity report) would likely be filed with FinCEN, a unit of the U.S. Treasury. This report is filed when a transaction or a pattern of transactions is suspicious and a possible indication of money laundering. FinCEN Form 112 is filed for any cash deposit, on a single day, of more than $10,000.

Under MSRB rules, which of the following statements regarding a fidelity bond is TRUE? A) It insures brokerage firm customers in the event the brokerage firm must liquidate. B) It is contained in the trust indenture. C) It insures against loss due to theft. D) It will insure against the price decline of a security.

Your answer, It is contained in the trust indenture., was incorrect. The correct answer was: It insures against loss due to theft. MSRB members are required to have a fidelity bond which protects against loss due to employee theft.

SIPC uses which of the following to determine the value of customer claims when a broker/dealer becomes insolvent? A) Market value on the date a federal court is petitioned to appoint a trustee. B) Market value on the date the broker/dealer becomes insolvent. C) Market value on the date the trustee pays the customers their balances. D) Average market value from the time a trustee is appointed to the payment date.

Your answer, Market value on the date the trustee pays the customers their balances., was incorrect. The correct answer was: Market value on the date a federal court is petitioned to appoint a trustee. Under SIPC rules, customer claims are valued on the day a federal court is petitioned to appoint a trustee.

The antifraud provisions of the Securities Exchange Act of 1934 apply to all of the following EXCEPT A) municipal bonds B) commodities C) Nasdaq and exchange listed securities D) options

Your answer, Nasdaq and exchange listed securities, was incorrect. The correct answer was: commodities All securities are subject to the antifraud provisions of federal securities law. It should be recognized that commodities such as wheat or oil are not securities.

The chairman of XYZ Corporation confides to a neighbor that his company will be announcing a major acquisition the following week. As a result of this conversation, the neighbor buys call options on the target company in his personal account. Who violated the 1988 insider trading rules? A) The chairman. B) Neither the chairman nor the neighbor. C) The neighbor. D) Both the chairman and the neighbor.

Your answer, Neither the chairman nor the neighbor., was incorrect. The correct answer was: Both the chairman and the neighbor. Once inside information is used to trade for profit or to avoid a loss, both the person who gave the tip (the chairman) and the person who used the tip (the neighbor) have violated the 1988 insider trading rules.

The order protection rule which prohibits a trade-through and the minimum increments pricing rule which addresses penny and sub-penny pricing were each enacted under a broad sweeping SEC regulation designed to bring trading and reporting uniformity to US securities markets. This regulation is known as: A) SIPA (Securities Investors Protection Act). B) USA (Uniform Securities Act). C) Regulation NMS (National Market System). D) The Bank Secrecy Act.

Your answer, SIPA (Securities Investors Protection Act)., was incorrect. The correct answer was: Regulation NMS (National Market System). Regulation NMS (National Market System) is the SEC regulation designed to bring trading and reporting uniformity to the US securities markets. Among the rules it encompasses are the order protection rule which prohibits a trade-through and the minimum increments pricing rule which addresses $.01 and sub-penny pricing.

Which of the following mandates the creation of an information barrier to thwart the flow of sensitive or non public information between departments within a broker dealer? A) Securities Exchange Act of 1934 B) U.S.A. PATRIOT Act C) Securities Act of 1933 D) Insider Trading and Securities Fraud Enforcement Act of 1988

Your answer, Securities Act of 1933, was incorrect. The correct answer was: Insider Trading and Securities Fraud Enforcement Act of 1988 The Insider Trading and Securities Fraud Enforcement Act of 1988 requires firms to create information barriers between departments so that sensitive or non public information does not flow between them. Typically this is required between departments handling mergers and acquisitions or IPOs, and retail or market making departments.

Which of the following legislative acts exclusively regulates debt securities? A) Investment Advisers Act of 1940. B) Securities Exchange Act of 1934. C) Trust Indenture Act of 1939. D) Securities Act of 1933.

Your answer, Securities Exchange Act of 1934., was incorrect. The correct answer was: Trust Indenture Act of 1939. The Trust Indenture Act of 1939 protects investors in corporate bonds should the issuing company default. While the Acts of 1933 and 1934 both impact debt securities, the Trust Indenture Act of 1939 is the only act that regulates them exclusively.

A new customer deposits three separate $3,500 money orders with a broker/dealer on three consecutive days, then deposits $7,000 into a variable annuity and wires $3,000 to another broker/dealer. Which of these actions if any, would trigger a Suspicious Activity Report (SAR) be filed? A) The second deposit of $3,500 B) Depositing $7,000 into a variable annuity C) None D) Wiring $3,000 to another BD

Your answer, The second deposit of $3,500, was correct!. Broker/dealers are required to file suspicious activity reports (SARs) involving transactions of $5,000 or more when financial behavior appears commercially illogical and serves no apparent purpose. The second deposit exceeds the $5,000 threshold. A currency transaction report (CTR) would be triggered for transactions totaling $10,000 or more within a single day.

The Trust Indenture Act of 1939 covers all of the following securities transactions EXCEPT: A) a sale of an equipment trust bond issue worth $62 million. B) a sale of an issue of $5 billion worth of Treasury bonds maturing in 2011. C) a corporate bond issue worth $55 million sold interstate. D) a public issue of debentures worth $60 million sold by a single member firm throughout the United States.

Your answer, a sale of an issue of $5 billion worth of Treasury bonds maturing in 2011., was correct!. The Trust Indenture Act of 1939 requires all corporate debt issues of $50 million or more sold interstate to have a trust indenture; U.S. governments are exempt.

Your firm uses unregistered personnel to make cold calls to prospects. When contacting a friend with money to invest, the cold caller is permitted to: A) recommend stocks, but only those on the firm's recommended list. B) open the new account on the phone. C) write an order ticket, pending receipt of the new account forms being sent to the new client. D) ask the prospect if one of the firm's registered representatives can contact the person about opening an account.

Your answer, ask the prospect if one of the firm's registered representatives can contact the person about opening an account., was correct!. Unregistered personnel may make cold calls, but any further actions such as opening a new account, writing order tickets or making recommendations could only be performed by registered personnel.

Inside information is considered public when it is: A) reviewed by industry SROs. B) available for public evaluation. C) available to the national financial publications. D) declared so by the SEC.

Your answer, available for public evaluation., was correct!. The law states that inside information is considered public information when the public has had a chance to evaluate it.

All of the following would be included in a penny stock risk disclosure statement EXCEPT A) risks of investing in penny stock B) investors' legal rights C) definition of penny stock D) broker/dealer's statement of guarantee

Your answer, broker/dealer's statement of guarantee, was correct!. Penny stock disclosure statements must be furnished to all buyers of unlisted, non-Nasdaq stocks of less than $5 per share. The disclosure must include the risks of penny stock investing, the rights of the investors, and the responsibilities of the broker/dealer to the investor. There would be no statements regarding guarantees either implied or expressly written.

Under federal law, stock can be tendered from all of the following accounts EXCEPT A) long margin accounts B) cash accounts C) short margin accounts D) restricted margin accounts

Your answer, cash accounts, was incorrect. The correct answer was: short margin accounts Under the short tender rule, shareholders can only tender stock to the extent of their stock's net long position; stock in a short account is borrowed stock.

According to the Insider Trading and Securities Fraud Enforcement Act, contemporaneous traders are all of the following EXCEPT: A) persons who make trades at approximately the same time as inside traders. B) insiders such as corporate employees. C) noninsiders. D) persons granted the right to sue inside traders for damages under the act.

Your answer, insiders such as corporate employees., was correct!. According to the Insider Trading and Securities Fraud Enforcement Act of 1988, contemporaneous traders are corporate outsiders who make trades at about the same time as insiders. They are granted the right to sue inside traders for damages sustained.

ABC Corp. announces a tender offer for XYZ common stock at $50 per share. All of the following customers can tender their stock to ABC EXCEPT a customer who: A) is long XYZ stock in a cash account. B) borrows XYZ stock. C) is long XYZ stock in a margin account. D) exercises XYZ call options.

Your answer, is long XYZ stock in a margin account., was incorrect. The correct answer was: borrows XYZ stock. Only customers with long positions in XYZ can tender their shares; SEC rules prohibit borrowing shares to tender those shares.

All of the following are characteristics of the Securities Investor Protection Corporation (SIPC) EXCEPT: A) it protects against losses produced by fluctuations in the market. B) investors are insured up to $500,000 in assets, up to which only $250,000 may be for cash. C) it is not a regulatory authority. D) it is non-profit corporation funded by members.

Your answer, it is not a regulatory authority., was incorrect. The correct answer was: it protects against losses produced by fluctuations in the market. SIPC does not protect against losses produced by fluctuations in the market. SIPC a member funded corporation insures against broker default.

A large amount of cash deposits into an account may indicate that a customer is engaged in: A) pegging. B) front-running. C) money laundering. D) capping.

Your answer, money laundering., was correct!. While depositing cash into a brokerage account is not illegal, a large number of these transactions indicate the possibility that the customer is engaged in money laundering.

A registered representative who is NOT licensed in Utah but whose firm is registered in Utah: A) need not be licensed in that state until after he writes his third order ticket. B) need not be licensed provided his firm's registration remains effective. C) must be licensed in Utah to conduct securities business in that state. D) need not be licensed if he solicits only state-registered securities.

Your answer, need not be licensed provided his firm's registration remains effective., was incorrect. The correct answer was: must be licensed in Utah to conduct securities business in that state. State law requires the broker/dealer and the representative to register before securities business is transacted in the state.

The current market in XYZZ stock is 6.12 bid, offered at 6.18. A customer wants to bid 6.125 for 100 shares. How should the buy order ticket read? A) 6.12 bid B) offer at 6.12 C) offer at 6.125 D) 6.125 bid

Your answer, offer at 6.125, was incorrect. The correct answer was: 6.12 bid Because the order is to "buy" the ticket will reflect a bid, not an offer. Under the minimum increments pricing rule of Regulation NMS (National Market System) only stocks priced below $1 can trade in sub-penny prices. Therefore the order ticket for this buy limit must reflect a price in increments of no less than $.01, in this instance 6.12. Note that because the customer did not want to pay more than 6.125, rounding the order up to 6.13 would not be permitted.

The Trust Indenture Act of 1939 applies to each of the following corporate debt offerings EXCEPT: A) offerings under $50 million. B) interstate offerings. C) offerings over $50 million. D) nonexempt debt securities.

Your answer, offerings under $50 million., was correct!. Corporate debt offerings under $50 million and exempt issues are not subject to the Trust Indenture Act of 1939.

Registered corporations are required to file certain reports with the SEC. All of the following statements regarding those reports are true EXCEPT: A) the financial statements must be audited. B) the audit may be performed by the corporation's Chief Financial Officer. C) the annual report contains both a balance sheet and income statement. D) copies of the annual report must be sent to shareholders of record.

Your answer, the audit may be performed by the corporation's Chief Financial Officer., was correct!. An independent auditor must perform the audit.

Broker dealers must establish what is commonly referred to as a firewall or barrier. This is required to prevent A) orders from being transmitted to a trading floor or market for execution that are clearly being entered for the purpose of either supporting a price (pegging) or holding a price down (capping) B) the passing of potentially sensitive material and sensitive nonpublic information between a firm's departments C) the execution of trades through an established bid price or offer price D) any type of retail advertising or sales information from being conveyed over social or professional media websites

Your answer, the execution of trades through an established bid price or offer price, was incorrect. The correct answer was: the passing of potentially sensitive material and sensitive nonpublic information between a firm's departments All broker/dealers must establish written supervisory procedures specifically prohibiting the misuse of inside information. Aligning with this, they must establish policies that restrict the passing of potentially sensitive material, nonpublic information between a firm's departments known as a firewall, or an information barrier.