Chapter 16 US Government and State Rules and Regulations

Question 1

Tender Offers

Answer 1

If a company makes a cash tender offer for another company, the Act of 1934 states that shareholders of the target company may tender their shares only to the extent of their net long position.

Question 2

Maloney Act of 1938

Answer 2

The Maloney Act amended the Act of 1934 and enabled the SEC to create SROs, or DEAs for monitoring brokers and dealers not affilitated with a stock exchange. Such as FINRA and MSRB.

Question 3

Trust Indenture Act of 1939

Answer 3

Corporate debt sold interstate for more than $5 million within 12 months. Maturity of 9 months or more.
Requires that issuers appoint a trustee to ensure that promises (covenants) between issuer and trustee are carried out. Filed at office of custodian.

Question 4

Investment Act of 1940

Answer 4

The Investment Act of 1940 defines and regulates investment companies, including mutual funds. It requires that:
Companies register with SEC before selling publicly.
State investment objectives
Net Worth of at least $100,000 before offering to the public.
Be Owned by a minimum of 100 Shareholders

Question 5

Investment Advisers Act of 1940

Answer 5

Require any one who, as part of their business, gives investment advice for compensation to register as investment advisers under the Act. Example Wrap Account.

Question 6

Wrap Account

Answer 6

Flat annual or quarterly fee. Covers all administrative and commissions.

Question 7

The Securities Investor Protection Act and SIPC

Answer 7

Act is meant to protect investors against B/D insolvencies. Created Securities Investor Protection Corporation

Question 8

Membership and Assessment

Answer 8

SIPC is an independent, government-sponsored corporation that collects annual assessments from b/d. Create general insurance fund for customer claims from b/d failure. All broker dealers registered with the SEC must be SIPC members except for those handling only.
Mutual Fnds or Unit Trusts
Variable Annuities or Insurance.

Question 9

Violation of Net Capital

Answer 9

Securities Held in customer name are delivered to registered owners.
Cash and Street name securities distrubuted pro rata
SIPC funds distrubuted to meet remaining claims
Customers with excess claims become general creditors.

Question 10

SIPC coverage

Answer 10

Current is 500,000 and 250,000. At time of account opening and a year thereafter. Cash and margin combined. Valued the same time the court is petitioned to appoint a SIPC trustee.

Question 11

Fidelity BONDS

Answer 11

Firms required to join SIPC must purchase a blanket fidelity bond. The purpose of this bond is to protect against employee theft. Minimum coverage is 100,000 although firms may require additional coverage based on their scope.

Question 12

Securities Act Amendement of 1975

Answer 12

Established the MSRB

Question 13

Chinese Wall - Firewall

Answer 13

barrier against flow of material from one department to another. If SEC determines a violation has occurred, civil penalties go up to 300% of profits made or losses avoided. Criminal penalties of up to 30 years. If employee, B/D is trebled or $5 million.

Question 14

Contemporaneous Traders

Answer 14

Can be sued even after 5 years. Informer Bounty of 10% recouped.

Question 15

Penny Stock Cold Calling

Answer 15

Broker/Dealer must disclose
Name of Penny Stock
Number of Shares
Current Quotes
Amount of Commission that the firm and the representative received.  Monthly statements should be sent with market value and number of shares for each penny stock/ issuer name

Question 16

Penny Stock Established Customers

Answer 16

Has Held account with the Broker/Dealer for at least one year, and has made a deposit of funds or securities.
Has Made at least 3 penny stock purchases of different issuers on different days.. Established customers don’t need suitability but do need discloure. Applies to solicited.

Question 17

Bank Secrecy Act

Answer 17

Establishes the US Treasury Department as the lead agency for developing regulations in connection with anti-money laundering.

Question 18

Money Laundering Stages

Answer 18

Placement
Layering
Integration

Question 19

Placement

Answer 19

First Stage of Laundering is when funds or assets are moved into laundering system. This stage is more susceptible.

Question 20

Layering

Answer 20

The goal of money launderers is to conceal source of the funds or assets. Crossing of jurisdictions

Question 21

Integration

Answer 21

Illegal funds are commingled with legitimate funds in what appear to be viable legitimate businesses. Cash basis companies, import/export companies.

Question 22

Currency Transactions

Answer 22

in excess of $10,000 or more a day be reported to the IRS on form 104.
B/D file suspicious activity reports (SARs). Example, a customer who designs deposits to fall under $10,000 radar, known as structuring.

Question 23

Sarbanes-Oaxley Act

Answer 23

Established the Public Company Accounting Oversight Board to oversee, regulate, inspect and discipline accounting firms in their roles as auditors of public companies. Research Analyst conflict of interest.

Question 24

Regulation NMS (National Market System)

Answer 24

Broad Sweeping regulation that was enacted to bring trading and reporting uniformity to the various US securities markets.
Order Protection Rule - Best available price
Minimum Increpemt Pricing - for $1.00 or more minimum increment is $0.01. Sub-penny allowed for less than $1.00

Question 25

The Uniform Securities Act

Answer 25

Registrations must be renewed annually. Isolated unsolicited transactions are exempt from the state registration requirement.

Question 26

Registering Securities State

Answer 26

Coordination
Filing (Notification)
Qualification

Question 27

Coordination

Answer 27

Issuer files with the state at the same time it files with the SEC. Registration is effective at the time the federal filing becomes effective. Coordination can only be used for IPOs.

Question 28

Filing

Answer 28

If an issuer has met various financial criteria and has filed previousily in a state, it may notify the state that it is about to sell securities. No reponse, effective 5th business day after filing.

Question 29

Qualification

Answer 29

Effective only when so ordered by the state securities administrator. Most difficult way of registering securities in a state.

Question 30

Insider Trading

Answer 30

300% or $1 million