Chapter 5

Question 1

Scope of Securities Act of 1934

Answer 1

• Regulation of transactions in the secondary market, including antimanipulation rules and regs
• Registration and regulation of BDs
• Oversight of SROs
• Registration and regulation of companies w/ securities trading in secondary markets

Question 2

Composition of SEC

Answer 2

Members are appointed by the president w/ the recommendations coming from the Senate. There are 5 commissioners w/ no more than 3 of them from the same political party. These 5 commisioners cannot participate in securities transactions during their tenure. The members are appointed for terms every 5 years.

Question 3

Interstate commerce

Answer 3

Trade, commerce, transportation, or communication among the states or between any foreign country and a state.

Question 4

Antifraud rules

Answer 4

Any transaction involving something or someone in the US is subject to antifraud rules.

Question 5

Prohibition against manipulation of securities prices

Answer 5

Section 9 of the 1934 Exchange Act governs manipulative activities.

Question 6

Rule 10b-1 and 10b-3

Answer 6

These rules prohibit the use of manipulative and deceptive devices regarding listed securities and exempt securities. The rule covers activities by mail, interstate commerce, and activities within the facilities of a national exchange.

Question 7

Rule 10b-5 (a.k.a. catch-all-fraud rule)

Answer 7

This rule prohibits any activity that a person or BD may use to manipulate the securities markets or the purchase or sale of securities. Specifically, the rule prohibits:
- Any scheme to defaud
- Untrutheful statements or omission of material facts
- Participating in any act, practice, or course of business

Question 8

Section 15D of Act of 1934

Answer 8

Governs conflicts of interest

Question 9

Reocrds that must be kept for 6 years

Answer 9

1. Blotters: must be posted by the next business day
2. Customer account ledgers: must be posted by settlement date
3. Position records: must be posted by next business day after settlement date OR date of securities movement
4. GL: must be posted no less than once per month
5. Cash and margin account records: must be posted before the execution of a transaction

Question 9

Records that must be kept for 3 years

Answer 9

1. Fail to receive; fail to deliver: must be posted no later than 2 days after settlement
2. Long and short stock record differences: must be posted no later than 7 business days after discovery
3. Securities in transfer, dividend and interest received, securities borrowed and loaned, money borrowed and loaned: must be posted no later than 2 business days after movement
4. Order tickets: must be posted before the execution of the transaction
5. Confirmations: must be posted by no later than the business day after the transaction
6. Options records: must be posted no later than one business day after the option is written
7. Trial balance: must be posted no later tan 10 business days after the accounting period
8. Associated person’s application and fingerprint card: must be posted before the start date
9. Termination notice: must be posted shortly after termination of job
10. WSP: must be current
11. Supervisory personnel designations: must be posted at time of designation until no longer effective

Question 10

Records that must be kept for a lifetime:

Answer 10

• Articles of partnership
• Articles of incorporation
• Minute books
• Stock certificate books

Question 11

True or false: A BD is not required to prepare records if it clears its trades through a bank and the bank prepares the records?

Answer 11

True. However, the bank must provide the BD w/ a written agreement indicating that the records are the property of the BD. Additionally, the bank must provide the SEC w/ a written notification that the records are available for SEC inspection.

Question 12

True or false: If a BD clears a trade on a fully disclosed basis through another BD, the obligation to maintain records rests w/ the clearing firm?

Answer 12

True

Question 13

Fully disclosed account

Answer 13

An account where the introducing BD turns over full responsibility for the maintenance of the account to the clearing BD.

Question 14

Omnibus account

Answer 14

An account where the clearing BD will transact the orders and clear the trades, but the introducing BD will maintain the account in all other respects.

• For omnibus accounts, the introducing BD is responsible for record maintenance.

Question 15

True or false: If a BD intends to use electronic storage for recordkeeping or retention, it must notify their designated examining authority (DEA) at least 60 days prior to use?

Answer 15

False, 90 days

Question 16

Reg AC

Answer 16

Requires RAs to make certifications regarding any conflicts. The RA must disclose whether their compensation is related to recommendations/views expressed in the report. Also requires BD maintain records regarding public appearances made by their personnel.

Question 17

Reg AC’s rules regarding recordkeeping after public appearances

Answer 17

Reg AC requires that records be created within 30 days after the end of each calendar quarter in which a research analyst makes a public appearance. The records must include certifications that include:
- A statement by the RA to certify that the views they expressed during his public appearance(s) reflect their own personal views.
- A written statement that describes whether the RAs compensation will or will not be related to the performance of their recommendations.

• If the BD doesn’t obtain these certifications, it must notify the DEA. If this happens, for the next 120 days, the BD must disclose in any report which is prepared by the analyst that the analyst did not provide certifications regarding certain public appearances.

Question 18

Reg G

Answer 18

Reg G mandates that a registrant who publicly discloses material info that incluses non-GAAP measures must accompany that w/:
1. A presentation of the most directly comparable GAAP financial measures
2. A reconciliation for the non-GAAP measures.

• Reg G also prohibits untrue or deceptive material non-GAAP measures

Question 19

Reg G doesn’t pertain to foreign pvt issuers that meet these conditions:

Answer 19

• The securities are listed or quoted on an exchange or quotation system outside the US.
• The non-GAAP financial measure is not based on a measure that’s calculated and present under GAAP
• Non-GAAP disclosure made outside of the US by the registrant or on its behalf

Question 20

True or false: Generally, Reg M restricts distribution participants (underwriters) and issuers from bidding on their stock in the secondary market for a predetermined period around the effective date. However, under specific conditions, the SEC makes exceptions for market makers and syndicates that want to stabilize the price of the new issue?

Answer 20

True

Question 21

Restricted period (Rule 101)

Answer 21

A period where distribution participants are not permitted to buy or bid for the security. This period generally begins five days prior to pricing OR whenever the BD becomes a participant, whichever comes later. The period ends when the BD’s participation ends. If the subject security has an average trading volume of at least $100M and the issuer’s public float is $25MM or more, the five business day standard is reduced to one business day.

Question 22

Exceptions to Rule 101

Answer 22

• Transactions involving gvt and muni bonds, non-convertible investment-grade debt and PS, and registered investment company securities.
• Odd-lot transactions
• Actively traded securities: those with an avg. daily trading volume of at least $1MM and where the public float is at least $150MM
• The excerise of any option, warrant, right, or similar instrument during the restricted period.
• Unsolicited brokerage transactions and unsolicited purchases when acting as a principal

Question 23

What is a reserch report as defined by Reg AC

Answer 23

A written communication that analyzes a security/issuer, and provides info that’s resaonably sufficient on which an investment decision may be based. These reports include BOTH equity and debt

FINRA’s definition is only equity

Question 24

Reg AC specifically excludes these from the definition of a research report:

Answer 24

1. Statistical summaries of multiple companies’ financial data that doesn’t include any analysis of individual company data
2. An analysis prepared for < 15 persons
3. Periodic reports that are prepared for investment company shareholders
4. Internal communications that aren’t given to customers

Question 25

True or false: Most of the time, the DEA is the SEC not FINRA?

Answer 25

False, most of the time it’s FINRA

Question 26

True or false: Research reports that refer to overed securities may not be distributed during the restricted period under any circumstance?

Answer 26

False, they may be distributed during the restricted period if they meet the conditions of rules 138 and 139.

Question 27

Reg FD

Answer 27

This was created to protect retail investors by banning senior officials of issuers from selectively disclosing material nonpublic info to securities professionals or to shareholders. For intentional selective disclosure, the info MUST be disclosed simultaneously to the public. For non-intentional disclosure, the info MUST be promptly disclosed within 24 hours.

• Disclosure may be made by filing Form 8-K or any other method to effect broad distribution.

Question 28

4 categories of persons who selective disclosure may not be made w/o a specified exclusion:

Answer 28

1. BDs and their RRs
2. IAs and IARs
3. Investment companies, hedge funds, and affiliated persons
4. Existing shareholders of the issuer’s securities under circustances where it’s reasonable foreseeable that such persons may purchase/sell securities on the basis of the info.

Question 29

True or false: Disclosing info at an industry conference is an example of selective disclosure?

Answer 29

True