Function, Purpose, and Regulation of Financial Institutions

Question 1

A ___________________ ________________ takes money from investors (individuals, businesses, governments, and other financial institutions), either in the form of a direct investment or by borrowing and lends the money out to others or makes investments.

Answer 1

Financial intermediary

Question 2

This form of financial intermediary works by borrowing money in the form of deposits and making either unsecured or secured loans to individuals, businesses, and governments.

Answer 2

A bank

Question 3

A financial intermediary that operates as a non-profit organization owned by its members (those who have an account or deposit) is known as:

Answer 3

A credit union

Question 4

This financial intermediary does not take deposits, offer accounts for use by households, or make traditional loans. Instead, this intermediary is involved in new securities underwriting, funding of firm mergers and acquisitions, reorganizations, and other financial transactions undertaken by firms and governments.

Answer 4

An investment bank

Question 5

These firms do not provide traditional deposit and lending services. Instead, this financial intermediary provides money management services for individuals, families, and businesses that hold assets in legal trusts.

Answer 5

A trust company

Question 6

What is a brokerage company?

Answer 6

A financial intermediary that employs registered representatives who work directly with households, businesses, and other investors. Other firms provide services through online portals and large call centers. Besides offering accounts that allow someone to trade securities in the markets, brokerage companies typically also offer a variety of financial products and services, including mortgage lending, money market accounts, checking accounts, and other products.

Question 7

Which federal agency provides insurance for all deposit accounts held at a member financial institution?

Answer 7

Federal Deposit Insurance Corporation (FDIC)

Question 8

What is the FDIC coverage limit?

Answer 8

$250,000 per owner, per institution.

Question 9

Which agency provides insurance for all deposit accounts held at a credit union?

Answer 9

The National Credit Union Administration, through the National Credit Union Share Insurance Fund (NCUSIF)

Question 10

What federal agency provides coverage for cash and securities held by a brokerage for a client in case the brokerage firm goes out of business?

Answer 10

The Securities Investor Protection Corporation (SIPC)

Question 11

What is the NCUSIF coverage limit?

Answer 11

$250,000 per owner, per institution.

Question 12

What is the SIPC coverage limit?

Answer 12

SIPC insurance covers cash and securities held by a brokerage for a client in case the brokerage firm goes out of business. Cash and securities held by the brokerage firm may be protected up to $500,000, including a $250,000 limit for cash.

Question 13

Which federal agency was created by the Employee Retirement Income Security Act of 1974 (ERISA) to protect pension benefits in private-sector defined benefit plans?

Answer 13

The Pension Benefit Guaranty Corporation (PBGC)

Question 14

The mission of this federal agency is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.

Answer 14

The Securities and Exchange Commission (SEC)

Question 15

Which federal Act was responsible for creating the Securities and Exchange Commission?

Answer 15

The Securities Exchange Act of 1934

Question 16

How many commissioners serve on the Securities and Exchange Commission?

Answer 16

The SEC consists of five Commissioners appointed by the President. One Commissioner is designated by the President as Chairman of the Commission. By law, no more than three of the Commissioners may belong to the same political party, ensuring non-partisanship.

Question 17

Which federal Act requires that investors receive financial and other significant information concerning securities being offered for public sale, and prohibits deceit, misrepresentations, and other fraud in the sale of securities.

Answer 17

The Securities Act of 1933

Question 18

What are some types of common conduct that may lead to SEC investigations?

Answer 18

• Misrepresentation or omission of important information about securities
• Manipulation of the market prices of securities
• Stealing customers’ funds or securities
• Violating broker-dealers’ responsibility to treat customers fairly
• Insider trading (violating a trust relationship by trading while in possession of material, non-public information about a security)
• Selling unregistered securities

Question 19

What types of securities offerings are exempt from SEC registration?

Answer 19

Exemptions from the registration requirement include:

• Private offerings to a limited number of persons or institutions
• Offerings of limited size
• Intrastate offerings
• Securities of municipal, state, and federal governments

Question 20

Which federal Act regulates the activities of investor advisers?

Answer 20

The Investment Advisers Act of 1940

Question 21

What is the asset threshold required for registration with the SEC as a Registered Investment Adviser (RIA)?

Answer 21

Generally, RIAs who manage more than $100 million are required to register with the SEC directly. A large adviser with at least $110 million of assets under management (AUM) is required to register with the SEC, unless a registration exemption is available.

Question 22

An investment adviser who manages less than $100 million generally must register with what regulator?

Answer 22

Registered investment advisers who manage less than $100 million in assets generally must register in the state in which they conduct business.

Question 23

What firms and individuals generally are not required to register as an investment adviser with the SEC?

Answer 23

• Publisher of a news magazine or newspaper or financial publication (including a website) for the general public
• Broker whose advice is incidental to the work
• Lawyer
• Accountant
• Engineer
• Teacher
• Domestic bank
• Those who provide advice about only U.S. government securities or banks and bank holding companies

Question 24

This Act applies to debt securities such as bonds, debentures, and notes that are offered for public sale. Even though such securities may be registered under the Securities Act, they may not be offered for sale to the public unless a formal agreement between the issuer of bonds and the bondholder, known as the trust indenture, conforms to the standards of this Act.

Answer 24

Trust Indenture Act of 1939

Question 25

What does the Investment Company Act of 1940 regulate?

Answer 25

The organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. The regulation is designed to minimize conflicts of interest that arise in these complex operations. The Act requires these companies to disclose their financial condition and investment policies to investors when stock is initially sold and, subsequently, on a regular basis.

Question 26

This Act mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures, and combat corporate and accounting fraud, and created the Public Company Accounting Oversight Board, also known as the PCAOB, to oversee the activities of the auditing profession.

Answer 26

Sarbanes-Oxley Act of 2002

Question 27

This Act set out to reshape the U.S. regulatory system in a number of areas including but not limited to consumer protection, trading restrictions, credit ratings, regulation of financial products, corporate governance and disclosure, and transparency.

Answer 27

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

Question 28

This Act requires the SEC to write rules and issue studies on capital formation, disclosure, and registration requirements. Cost-effective access to capital for companies of all sizes plays a critical role in our national economy, and companies seeking access to capital should not be hindered by unnecessary or overly burdensome regulations.

Answer 28

Jumpstart Our Business Startups (JOBS) Act

Question 29

An organization that provides oversight to professions and industries is called a:

Answer 29

Self-regulatory organization (SRO)

Question 30

This SRO is dedicated to investor protection and market integrity through effective and efficient regulation of the securities industry.

Answer 30

Financial Industry Regulatory Authority (FINRA)

Question 31

What is the primary enforcement agency for those working in the securities markets, and is responsible for testing and licensing all brokers, registered representatives, and those who supervise them?

Answer 31

Financial Industry Regulatory Authority (FINRA)

Question 32

This FINRA license allows a licensee to sell mutual funds, unit investment trusts, annuities, and variable life products.

Answer 32

Series 6

Question 33

This FINRA license allows a licensee to sell nearly all other investment products, except commodities and futures.

Answer 33

Series 7

Question 34

What is the name of the SEC rule that requires a registered investment adviser and a registered investment adviser representative to provide clients ADV Part II within 48 hours prior to entering into a contract, otherwise the client has a five-day right to revoke the contract?

Answer 34

The Brochure Rule

Question 35

What does Part II of Form ADV outline?

Answer 35

ADV Part II outlines advisory services and fees, types of securities recommended, education and business standards, and other important disclosures.

Question 36

What is the purpose of ADV Part II?

Answer 36

ADV Part II is used to disclose compensation and fees, educational background, investment objectives, strategies, and other types of information.

Question 37

A required document that discloses how a firm stores, handles, and disseminates client information is known as a:

Answer 37

Privacy Policy Statement

Question 38

In order to file a registered investment adviser application with the SEC, one must first apply to what organization for access to the WebCRD/IARD online system?

Answer 38

Financial Industry Regulatory Authority (FINRA)

Question 39

An adviser approaching $100 million of AUM may rely on a registration “buffer” that ranges from $90 million to $110 million of AUM. What are the registration options for this type of adviser?

Answer 39

The adviser:

• May register with the SEC when it acquires $100 million of AUM;
• Must register with the SEC once it reaches $110 million of AUM, unless a registration exemption is available; and
• Once registered with the SEC, is not required to withdraw from SEC registration and register with the states until the adviser has less than $90 million of AUM.