Chapter 16- US Government and State Rules And Regulations 15-20 Qs

Question 1

The securities act of 1933

Answer 1

First government response to crash of 1929

Requires full and fair disclosure of new issues of securities

MajorAspects of the act:
Issuers of nonexempt securities must file registration statements with a regulation body. SEC was created to do this in Act of 1934

Prospectus must be provided to all purchasers of new, non exempt issues

Fraudulent activity in connection with underwriting and issuing of all securities is prohibited

Question 2

Securities Exchange Act of 1934

Peoples act

Answer 2

Addresses secondary market and regulates all people involved, and all securities

Created the SEC

Registration requirement of all persons and firms that trade securities OTC and on exchanges for public

Regulation of Exchanges and OTC market

Regulation of credit by Federal Reserve Board

Regulation of trading activities

Regulation of insider transactions, short sales and proxies

Regulation of client accounts

Customer protection rule

Net capital rule and financial responsibility for broker/dealers

Reporting requirements for issuers

Question 3

Tender offers

Answer 3

Act of 1934

If a company makes an offer for another company, shareholders can only tender their net long positions

500 long 200 short= 300 allowed to be tendered

Question 4

Maloney Act of 1938

Answer 4

Amended act of 1934

Enabled the SEC to create SROs or Designated examine authorities for monitoring brokers and dealers not affiliated with exchange

FINRA and MSRB are two most prominent

Question 5

Trust indenture Act of 1939

Answer 5

Applies to corporate bonds (nonexempt) with following characteristics:
Issue size of more than 50 million within 12 months
Maturity of nine months of more
Offered interstate

Requires a trustee be appointed to ensure the trust indenture isn’t broken

Question 6

The investment company act of 1940

Answer 6

Defined and regulates investment companies. Requires invest companies to:

Register with SEC before selling shares publicly

Clearly state investment objectives

Have net worth over 100k before offering shares to public

Be owned by 100 shareholders minimum

Comply with standards on pricing, public sale and reporting

Includes face amount certificate companies, Unit invest trusts and management companies

Question 7

Investment Advisers act of 1940

Answer 7

Requires anyone giving investment advice to register as as investment advisers

Must register and pass series 65 or 66 (those who passed 7).

Advice that is not charged for does not require registration

Charging is outside of normal commissions

Question 8

Securities investor protection act and the SIPC

Answer 8

Passed in 1970 to protect investors from broker/dealer failure or insolvency

SIPC is gov sponsored but not a gov agency. Collects annual assessments to be used for customer claims from broker dealers

Must be registered with SIPC unless handling only: Mutual funds, unit trusts or variable annuities/insurance

Investment advisers are not SIPC members

Firms cannot participate in brokerage business if not paying SIPC assessments

Question 9

Violation of SIPC net capital requirements

Answer 9

SEC or SRO notified SIPC
SIPC investigates
Petitions for liquidation trustee and firm ceases business

Liquidation proceeding follows guideline:
Securities in customer name are delivered

Cash and street name securities are distributed pro rata

SIPC funds are distributed to meet difference to max amount (500,000, cash claims up to 250,000 of the 500k)

Excess claims become general creditors

Broker/dealers must include SIPC membership on all advertising and must notify customers that they can receive info on SIPC once a year

SIPC cannot be bigger than own name on advertising

Question 10

Blanket Fidelity Bond

Answer 10

Minimum coverage is 25k and coverage must be reviewed once a year

Protects against employee theft

Cash and margin are combined for SIPC purposes

Question 11

Securities Acts Amendments of 1975

Answer 11

Established Municipal Securities Rule making Board

Question 12

Insider Trading and Securities Fraud Enforcement Act of 1988

Answer 12

Insider- anyone with non public info about a company

Both the Tipper and Tipee are liable. Key questions of liability:
Is info material and no public?
Does tipper owe a fiduciary duty to company?
Does tipper meet personal benefits test?
Does the tipee know or should it know the info was confidential?

A broker/dealer is responsible for keeping sensitive info within department (information barrier)

Question 13

Penalty of insider trading

Answer 13

SEC can investigate any person suspected of violation

3x profits made or losses avoided

Registered rep could be fined $1 million or 3x profit whichever is greater

Violators may face up to $5 million dollar fine and 20 years in jail

Firm could be fined treble (3x damages) or 25 million which ever is greater

Question 14

Contemporaneous trades

Answer 14

Persons who entered trades at same time may sue persons who violated up to five years later

Question 15

Informer bounty

Answer 15

10-30% of amount recovered on information receivers

Question 16

SIPC coverage of accounts

Answer 16

500,000 (250 in cash) covered per separate customer account

So a joint account and a cash account are separate and each able to secure 500k

Value is calculated from date of federal court trustee appointment

Question 17

Penny stock cold calling rules (SEC rule)

Answer 17

Prevent abusive sales practices involving high risk securities sold to unsophisticated investors

Solicitation of non-Nasdaq securities traded in OTC for under $5 per share (bulletin board/otc pink)

Reps must determine suitability and have a suitability statement signed by customer before trade can occur

Must disclose:
Name of penny stock
Number of shares
Current Quotation
Amount of commission received

Must also provide monthly statement to customer

Established customers (held account for 1 yr, made at least three different penny stock purchases) are exempt from suitability statement

Rules only apply to solicited transactions

Question 18

Bank Secrecy Act

Answer 18

Established US treasury as lead agency for developing regulations in connection with anti money laundering programs

Before September 11, 2001, more concerned with origin of cash, now concerned with where it’s going

Three types:
Placement: Moved into laundering System
Layering: Goal is to conceal source of funds through numerous transactions
Integration: Commingling funds in viable business accounts

Current regulations require broker/dealers to file Suspicous Activity Reporting (SARs) if over $5000 in activity is suspicious

Question 19

Red flags of Money laundering

Answer 19

Lack of concern in transactions

Frequent or large deposits of currency

Large number of wire transfers to unrelated third parties

Excessive journal entries between unrelated accounts

A customer who designs deposits between unrelated accounts

Deposits of 10000 or less

Question 20

Sarbanes Oxley Act of 2002

Answer 20

Response to a number of corporate and accounting scandals

Enhanced standards for all US public company boards, management and public accounting firms

Created Public Company accounting oversight board (PCAOB)

Question 21

Regulation National Market System (NMS)

Answer 21

Trading and reporting uniformity
Enacted the following rules:
1. The Order Protection Rule: prohibits trade throughs (not getting best available price)

2. Limit Up/Limit Down- designed to address sudden severe price movements, % price per perimeters, doubled at stock openings and closings. Pricing above or below bands cannot be displayed.
3. Minimum increment pricing rule- sub penny only allowed for stocks under $1.00, penny otherwise

Question 22

Blue Sky Laws

Answer 22

State security regulation laws

Question 23

Uniform Securities Act (USA)

Answer 23

Legal framework for the state registration of securities

Can be adopted and adapted

State security administrators can revoke a registration if a violation occurs

Must register in a state if doing business in state, registration must be renewed annually

Isolated transactions are allowed

Question 24

Registering Securities (state, 3 ways)

Answer 24

Coordination- files with state and SEC at same time. Effective once fed is effective. Only at IPO

Filing (notification)- if an issuer has met criteria and sold previously, it may notify and proceed if it doesn’t hear from the date by the 5th business day

Qualification- Must respond to any requirement the state specified, most difficult

Question 25

What accounts are NOT SIPC insured

Answer 25

Commodities accounts or any accounts not holding securities

Question 26

SIPC coverage for separate accounts

Answer 26

Pays coverage for each separate customer

A client with a cash and margin account is one customer

A client with a cash and a JTWROS with another customer is two customers

Only 250k is payable for losses of cash

Question 27

Money Market funds

Answer 27

Considered a security and not cash, therefore SIPC covers it as a security