Chapter One

Question 1

Define FINRA

Answer 1

Financial Industry Regulatory Authority

Question 2

What are the main functions of the Securities and Exchange Commission (SEC)?

Answer 2

To protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation

Question 3

What type of entities enforce the securities laws imposed by the SEC?

Answer 3

The self-regulatory organizations (SROs), including FINRA

Question 4

What are the 4 main categories of FINRA by-laws?

Answer 4

The Uniform Practice Code
The Rules of Conduct
The Code of Procedure
The Code of Arbitration

Question 5

What is the main purpose of the MSRB? What is its primary duty?

Answer 5

The MSRB is the principal regulator of the municipal securities market.

It regulates the activities of broker/dealers, banks that buy, sell and underwrite municipal securities, and municipal advisors and creates rules for municipal firms and broker/dealers involved in municipal activities.

Question 6

What is the difference between CBOE and Cboe?

Answer 6

CBOE is the Chicago Board Options Exchange, the largest U.S. options exchange, offering equity, index and ETF options.

Cboe Global Markets was formed in 2010 when CBOE became a publicly-traded corporation.

Cboe Global Markets has grown into one of the largest exchange holding companies in the world through a series of acquisitions and now offers options, futures, U.S. and European equities, exchange-traded products (ETPs), global foreign exchange (FX) and multi-asset volatility assets. Cboe is also a self-regulatory organization( SRO).

Question 7

What is the SIPC? How does it differ from the FDIC?

Answer 7

The Securities Investor Protection Corporation protects customer funds and securities in a brokerage account in the event of broker/dealer insolvency.

The Federal Deposit Insurance Corporation (FDIC) protects customer funds in bank deposit accounts, namely in checking and savings accounts.

Question 8

If a broker/dealer effects trades for itself, in what capacity is it acting? If it effects trades for others, in what capacity is it acting?

Answer 8

When effecting trades for its own account, a broker/dealer is acting in a principal capacity and is considered a dealer.

When effecting trades for others, a broker/dealer is acting in an agency capacity and is considered a broker.

Question 9

What is the definition of an investment adviser?

Answer 9

An investment adviser engages in the business of advising others for compensation, either directly or indirectly, as to the advisability and merit of purchasing or selling securities.

Question 10

What persons are excluded from the definition of investment adviser?

Answer 10

Lawyers, accountants, teachers, engineers, publishers, employees of investment advisers, and banks are a few examples of persons excluded. Please review the content for a complete list.

Question 11

What are the duties of a transfer agent?

Answer 11

Transfer agents have 3 main functions:

Issue and cancel certificates to reflect changes in ownership.

Act as an intermediary for the company as a paying agent, a proxy agent, an exchange agent, and a tender agent.

Handle lost, destroyed or stolen certificates.

Question 12

Define: American Depositary Receipt (ADR)

Answer 12

A negotiable instrument issued by a U.S. bank that trades in the U.S. financial markets and represents shares of a foreign stock

Question 13

Define: Ask price

Answer 13

The price a seller is willing to accept for a security

Question 14

Define: Bid price

Answer 14

The price a buyer is willing to pay for a security

Question 15

Define: Bond

Answer 15

A debt obligation in which the borrower promises to pay a set coupon rate until the issue matures, at which time the principal is repaid

Question 16

Define: Beneficiary

Answer 16

A person selected by the owner of a bank or brokerage account, trust, or insurance policy, who assumes ownership or receives the benefits of the asset in the event of the owner’s death

Question 17

Define: Broker/dealer

Answer 17

A firm that effects securities transactions for its own account or for the accounts of others

Question 18

Define: Futures contract

Answer 18

A standardized commodities or securities contract to deliver a certain quantity at a predetermined future price and date

Question 19

Define: Margin account

Answer 19

A brokerage account that allows investors to purchase securities with borrowed funds using credit extended by the broker/dealer

Question 20

Define: Member firm

Answer 20

broker/dealer belonging to a self-regulatory organization (SRO), such as FINRA or NYSE, or both

Question 21

Define: Mutual fund

Answer 21

A professionally managed open-end investment company issuing redeemable securities in a continuous offering of shares

Question 22

Define: Option

Answer 22

A security giving the holder the choice to either purchase or sell a security at a set price for a specific period

Question 23

Define: Prospectus

Answer 23

A full and fair risk disclosure document required by the Securities and Exchange Commission for all new offerings of nonexempt securities

Question 24

Define: Security

Answer 24

A financial instrument that has monetary value and can be traded between parties

Question 25

Define: Self-regulatory organization (SRO)

Answer 25

An organization that is authorized to enforce standards and requirements related to securities trading and brokerage

Question 26

Define: Stock

Answer 26

A type of security that represents ownership in a corporation

Question 27

Define: Underwriter

Answer 27

A broker/dealer or investment bank that helps a company in offering and distributing securities to the public

Question 28

The 1933 Securities Act or The Paper Act

Answer 28

Is often referred to as the “truth in securities” law. It requires prospectus and full disclosure filings for all new issues (primary market) of securities considered nonexempt, such as corporate stock and bond offerings.

Question 29

The 1934 Securities Exchange Act or The People Act

Answer 29

Regulates the trading of securities after they have been issued (secondary market). It also created the Securities and Exchange Commission (SEC).

Question 30

The Maloney Act of 1938

Answer 30

An amendment to the Securities Exchange Act of 1934, originally provided for self regulation of the over-the-counter market and paved the way for self-regulatory organizations, such as FINRA, the Financial Industry Regulatory Authority, in 1970.

Question 31

Investment Company Act of 1940

Answer 31

Regulates the organization of investment companies offering packaged products, including mutual funds.

Question 32

Investment Advisers Act of 1940

Answer 32

Regulates investment advisers, requiring those that are compensated for providing investment advice to register with the Securities and Exchange Commission (SEC).

Question 33

Securities Investor Protection Act of 1970 (SIPA)

Answer 33

Established procedures to protect consumer securities and funds in the event of broker/dealer insolvency.

Question 34

Employee Retirement Income Security Act of 1974 (ERISA)

Answer 34

Established minimum standards for retirement, health and other welfare benefit plans.

Question 35

Insider Trading and Securities Fraud Enforcement Act of 1988

Answer 35

Provides clarification on the penalties for violating insider trading rules that prohibit the use of material nonpublic information.

Question 36

The USA PATRIOT Act (2001)

Answer 36

Was enacted to address homeland security and fight terrorist activities with a focus on anti-money laundering. The acronym stands for

Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism.

Question 37

Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)

Answer 37

Represented an effort to reshape the U.S. regulatory system in the areas of consumer protection, trading restrictions, credit ratings, regulation of financial products, transparency, and corporate governance and disclosure.

Question 38

Who is required to register with the SEC?

Answer 38

Broker/dealers and federally covered investment advisers that conduct securities business in the US

Question 39

What is EDGAR

Answer 39

Electronic Data Gathering, Analysis, and Retrieval system used by companies to submit required filings with teh SEC.

Question 40

The Securities Exchange Commission functions include all of the following EXCEPT:

a.) Regulate broker / dealers who conduct securities business in the US
b.) promote efficient and orderly markets.
c.) provide safe keeping of customer funds and securities.
d.) write rules to enforece securities law.

Answer 40

C. Provide safe keeping of customer funds and securities.

Although the SEC has rules governing the safe keeping functions of broker/dealers and investment advisers must adhere, the SEC does NOT provide the safe keeping services itself.