Chapter 1 & 2 Flashcards

Question

The Investment Advisers Act of 1940 regulates which of the following? The markup charged by a financial services firm on a securities transaction The fee charged by a bank to hold securities The fee charged by an accountant for providing advice concerning securities The fee charge by an accountant when he files a client's tax return

Answer 1

The fee charged by an accountant for providing advice concerning securities

Answer 2

SIPC covers separate customers. SIPC covers separate customers of a broker-dealer. An individual would be viewed as a separate customer. An individual who holds a personal account and an IRA would be treated as two separate customers.

Answer 3

A broker-dealer that's a member of a national securities exchange

Answer 4

$300,000 in stock, $100,000 in cash The SIPC provides for coverage of $500,000 per separate customer, with a maximum coverage of $250,000 of cash. SIPC doesn't provide protection for futures positions. (17505)

Answer 5

It is responsible for automated book-entry changes in the ownership of securities. The responsibility for automated book-entry changes in the ownership of securities is a function of a depository facility (e.g., the DTC), not a clearing corporation. Each of the other choices are functions of a clearing system, such as the National Securities Clearing Corporation (NSCC).

Answer 6

The Department of Justice (DOJ) The SEC may investigate potential securities law violations through its Division of Enforcement, which prosecutes cases on behalf of the Commission. The SEC may also bring civil actions. However, if criminal activity is discovered by the Commission, the case falls under the jurisdiction of the Department of Justice (DOJ).

Answer 7

An accredited investor Accredited investors have a net worth of $1 million (excluding their primary residence) or annual income of $200,000 in each of the last two years. For married couples to be considered an accredited investor, they need to have income of at least $300,000. A qualified institutional buyer (QIB) must be institution with $100 million in assets under management (AUM), but is NOT a natural person.

Answer 8

It will appreciate Insiders know more about their company than most investors and are required to report their purchases and sales to the SEC. If a large number of insiders are buying stock, it's likely that investors will feel more confident about the company and the result is that the share price will rise or appreciate in value.

Answer 9

FDIC In the event that a bank is unable to pay its depositors, the Federal Deposit Insurance Corporation (FDIC) guarantees bank accounts up to $250,000. The Securities Investor Protection Corporation (SIPC) protects brokerage customers against broker-dealer bankruptcy.

Answer 10

Uniform Securities Act "Blue Sky Laws," which are state securities laws, were established by the Uniform Securities Act (USA). The National Securities Markets Improvement Act (NSMIA) created a more efficient process by which state and federal regulations apply to investment advisers and securities. The Bank Secrecy Act (BSA) addresses the concerns of money laundering. The Maloney Act established the NASD, which was the predecessor to FINRA. (17504)

Answer 11

Principal capacity and charged the customer a markdown A broker-dealer that's always willing to buy and/or sell shares of stock is considered a market maker. A market maker will normally act in a principal capacity and charge a customer a markdown when buying the stock from the customer and a markup when selling the stock to the customer. When acting in an agency capacity, the broker-dealer will not take the other side of the trade and normally charges the customer a commission.

Answer 12

FINRA Although the MSRB creates rules governing municipal securities broker-dealers, its rules are enforced by other regulatory bodies. The appropriate regulatory agencies are the: - The SEC or FINRA for broker-dealers - The comptroller of the currency for federal banks - The FRB for state banks that are members of the FRB - The FDIC for member banks of the FDIC

Answer 13

Securities listed on an exchange, but traded in the OTC market The third market is concerned with securities that are listed on an exchange (e.g., the NYSE or Nasdaq) that are traded in the OTC market. The fourth market refers to direct institution-to-institution trading and does not involve the public markets or exchanges. (37522)

Answer 14

Issuers Municipal Securities Rulemaking Board (MSRB) rules apply to all the parties listed except municipal bond issuers. The MSRB does not have the power to regulate municipal bond issuers. (71330)

Answer 15

Certificates of deposit (CDs) The Federal Deposit Insurance Corporation (FDIC) provides coverage for deposits at a bank, in the event the bank has financial troubles. FDIC will cover CDs, but not insurance, or fixed and variable annuities.

Answer 16

An investment adviser Investment advisers charge fees for providing advice to their clients. These fees are often based on a percentage of assets under management (AUM) and are charged regardless of whether any trades occurred in their clients’ accounts. Broker-dealers earn compensation (e.g., commissions) for executing transactions and an exchange is a facility that brings together the buyers and sellers of securities. (37494)

Answer 17

Customer 3 In the event of broker-dealer bankruptcy, SIPC protects customers' securities positions and cash being held by the broker-dealer. SIPC provides $500,000 of coverage for each separate customer, of which no more than $250,000 may be in the form of cash. SIPC does not cover futures and commodities positions. Although each of the customers are under the SIPC coverage limits, the $10,000 in commodities and futures positions of Customer 3 will not be covered.

Answer 18

Omnibus account Due to the expense of setting up trade processing operations, many smaller broker-dealers choose not to self-clear. These firms do not process customer transactions nor operate their own Operations Department. Instead, they contract with another member firm to perform these services. The firm providing these services is the clearing firm, while the firm paying for these services is the introducing firm. While customers of an introducing firm consider that firm as their broker-dealer, their funds and securities are physically held at the clearing firm, from which they generally also receive statements and confirmations. If the introducing firm keeps the books and records for its own customers and the clearing firm does not know the identity of these customers, this arrangement is known as an omnibus account.

Answer 19

They can be used by investors who want to trade anonymously. Electronic communication networks (ECNs) are securities trading systems that are designed to anonymously match buyers with sellers. These systems can be used by both institutional and retail investors. One of the benefits of their use is immediate automatic execution if a matching buy or sell order can be found on the system. ECNs do not allow investors to trade directly with one another; however, they do allow subscribers (e.g., broker-dealers) to use these systems to execute orders that they receive from their clients.

Answer 20

Agent A broker-dealer who charges customers a commission is acting as an agent or broker. A broker-dealer who charges customers a markup or markdown is acting as a principal or dealer. (63763)

Answer 21

General creditor If SIPC does not cover a client's account in a brokerage firm that has gone bankrupt, the client is a general creditor. The client ranks equally with all other general creditors. (72518)

Answer 22

The fee charged by an accountant for providing advice concerning securities The Investment Advisers Act of 1940 regulates firms that are established as investment advisers (IAs). The Act both defines the term investment adviser and provides a number of exclusions from the IA definition. Examples of investment advisers include firms that manage mutual fund portfolios as well as firms that manage wrap accounts and collect a single fee to cover the costs related to investment advice along with the costs of transactions. Exclusions from the IA definition are available to broker-dealers, specific types of professionals (lawyers, accountants, teachers, engineers), and publishers. However, for the professionals to be excluded, the investment advice being provided must be incidental to their actual profession. For example, if an accountant decides to hold himself out to the public as an investment adviser and charge a separate fee for that service, the exclusion will not apply. On the other hand, if an account collects a fee for completing and filing a client's tax return, he is not considered to be acting as an investment adviser. (37508)

Answer 23

The customer is a general creditor If a customer's claim exceeds SIPC limits, he becomes a general creditor. (17406)

Answer 24

Promote fair and equitable practices among members The primary purpose of SROs (e.g., the exchanges, FINRA, the MSRB) is to promote fair and equitable practices regarding trading and the process by which its broker-dealer members interact with customers. SROs do not establish market prices. The SEC, not an SRO, may recommend pressing charges for violations of securities laws. (37529)

Answer 25

Buy 1,500 shares at $50.00 and sell 2,000 shares at $50.05 When reading a quote, the bid is always listed first (i.e., $50.00 in this question) and the offer/ask (i.e., $50.05 in this question) is listed second. The market maker willing to buy shares at $50.00 and sell them for $50.05. The numbers in parentheses or brackets refer to the number of shares represented by the bid and offer. Unless specified otherwise, it's assumed that the size is in round lots of 100 shares. Therefore, the market maker is willing to buy up to 1,500 (15 lots x 100 shares) at $50.00 and sell 2,000 (20 lots x 100 shares) at $50.05. (17602)

Answer 26

The bid and offer prices The spread for a stock in the over-the-counter (OTC) market is the difference between the bid and offer prices. The offer is sometimes called the "ask". (17604)

Answer 27

The Options Clearing Corporation Exchange-traded options are issued and guaranteed by the Options Clearing Corporation (OCC). It’s important to note that derivatives (e.g., options) are not issued by corporations in an attempt to raise capital. Instead, options are created when a buyer and seller agree to standardized terms. If either the buyer or seller cannot fulfill its side of the transaction, the OCC will step in and guarantee the other side of the option position. (10731)

Answer 28

A broker-dealer that's a member of a national securities exchange Registered employees of broker-dealers are considered associated persons of the member firm. A broker-dealer that's a member of a national securities exchange is likely a FINRA member. (13490)