Other Federal and State Regulations Flashcards
The primary purpose of the Trust Indenture Act of 1939 is to:
A. protect the interests of holders of “non-exempt” bonds by appointment of a trustee
B. protect the interests of unit investment trust holders by appointment of a trustee
C. protect the interests of charitable trust beneficiaries by appointment of a trustee
D. regulate the securities activities of banks and trust companies
The best answer is A.
The primary purpose of the Trust Indenture Act of 1939 is to protect corporate bondholders from being taken advantage of by the issuing corporation. It provides for the appointment of a substantial independent trustee to protect the interests of the bondholders. Since we tend to trust our government (plus, the legislators write the laws!), issues of governments and municipalities are exempt from this Act.
The Trust Indenture Act of 1939 was enacted to:
A. regulate the activities of Real Estate Investment Trusts not included in the Investment Company Act of 1940
B. require the registration of Trust Company issues with the Securities and Exchange Commission
C. protect holders of non-exempt bond issues from issuer misconduct
D. require that trustees in bankruptcy, where new securities will be issued, are subject to the Securities Act of 1933
The best answer is C.
The primary purpose of the Trust Indenture Act of 1939 is to protect corporate bondholders from being taken advantage of by the issuing corporation. It provides for the appointment of a substantial independent trustee to protect the interests of the bondholders.
A primary offering of $200,000,000 of ACME Corporation 10% debentures with a 20 year maturity would be regulated under the:
A. Securities Act of 1933 only
B. Securities Exchange Act of 1934 and Trust Indenture Act of 1939
C. Securities Act of 1933 and Trust Indenture Act of 1939
D. Investment Company Act of 1940 and Securities Act of 1933
The best answer is C.
New corporate bond issues are non-exempt securities under the Securities Act of 1933 and thus must be registered and sold under a prospectus. In addition, corporate bond offerings in excess of $50,000,000 fall under the Trust Indenture Act of 1939, requiring that the bonds be sold under a Trust Indenture. The Securities Exchange Act of 1934 regulates the trading markets (secondary market) - not the primary market. Investment companies fall under the Investment Company Act of 1940; regular corporate securities are not subject to this Act.
New corporate bond issues in excess of what dollar amount are subject to the Trust Indenture Act of 1939?
A. $5 million
B. $10 million
C. $50 million
D. $100 million
The best answer is C.
Corporate bond offerings in excess of $50,000,000 fall under the Trust Indenture Act of 1939, requiring that the bonds be sold under a Trust Indenture.
A trustee in a bond issue:
A. is charged with the responsibility of protecting the issuer’s claim to assets
B. is typically a broker-dealer
C. is appointed by the bondholders
D. is paid by the issuing corporation
The best answer is D.
The trustee for bondholders is a fiduciary who is appointed and paid for by the issuer. The trustee ensures that all of the terms of the agreement are adhered to by the issuing corporation, thus it is protecting the bondholders from issuer misconduct. The trustee must not have any conflicting interests that would prejudice it towards either the bondholders or the issuer in its oversight role. Bank or a Trust Companies are appointed as trustee, not broker-dealers.
The Trust Indenture Act of 1939 applies to which of the following offerings?
A. $100,000,000 of Sewer Revenue Bonds sold interstate
B. $100,000,000 of Corporate Debentures sold interstate
C. $10,000,000 of Corporate Debentures sold interstate
D. $100,000,000 of 30 day commercial paper sold interstate
The best answer is B.
The Trust Indenture Act of 1939 applies solely to non-exempt interstate securities offerings over $50,000,000. Sewer revenue bonds (which are municipal securities) are exempt, as is commercial paper. Corporate debentures are non-exempt, but only the $100,000,000 offering is subject to the Act. The $10,000,000 corporate debt offering is under the $50,000,000 limit.
The Trust Indenture Act of 1939 applies to:
A. U.S. Government Bonds
B. Municipal Bonds
C. Corporate Bonds
D. All bond issues over $50,000,000
The best answer is C.
The Trust Indenture Act of 1939 applies to corporate bond issues of more than $50,000,000.
A lawyer is a partner at a major investment advisory firm and is paid a fee by a customer for investment advice. Which statement is TRUE?
A. The lawyer must be registered with the Securities and Exchange Commission (SEC) as an investment adviser
B. The lawyer must be registered with FINRA as a representative
C. The lawyer must be registered with both the SEC as an investment adviser and with FINRA as a representative
D. The lawyer is not required to be registered with the SEC as an investment adviser nor with FINRA as a representative
The best answer is A.
Anyone who renders investment advice in the normal course of business for a fee is considered to be an investment adviser. Thus, a lawyer that is a partner in a major advisory firm who renders advice for a fee is defined as an adviser that must register.
Also, note that the lawyer/adviser will only be required to register with the SEC as a federal covered adviser if the adviser has $100 million or more of assets under management. If it does not meet the threshold, then it must register in the State and not with the SEC.
Finally, please note that an exemption is granted if a lawyer renders investment advice that is solely incidental to the regular business of that person. Thus, a lawyer who renders investment advice as part of an overall estate tax plan would be exempt from registration as an adviser.
Securities Investor Protection Corporation protects against:
A. broker-dealer failure
B. credit risk
C. fraudulent trading
D. loss of principal
The best answer is A.
Securities Investor Protection Corporation protects customer accounts when a broker-dealer fails.
Which statement about the Securities Investor Protection Corporation (SIPC) is FALSE?
A. SIPC is a non-profit government sponsored corporation
B. Every broker-dealer registered under the Securities Exchange Act of 1934 must be a member of SIPC
C. SIPC is an insurance fund protecting against broker-dealer insolvency
D. SIPC is funded through annual assessments paid by customers
The best answer is D.
Securities Investor Protection Corporation is a non-profit membership corporation, composed of all broker-dealers registered under the Securities Exchange Act of 1934. SIPC is government sponsored, but is not an agency of the U.S. Government. SIPC is funded by annual assessments paid in by its broker-dealer members, not customers. SIPC insures customer accounts at broker-dealers for up to $500,000, inclusive of maximum cash coverage of $250,000.
Which statement is TRUE about SIPC coverage for customer accounts at banks that solely handle exempt securities?
A. The bank must be registered as a broker-dealer under the Securities Exchange Act of 1934
B. The bank only needs to obtain supplemental SIPC coverage because all securities losses would primarily be covered by FDIC.
C. The bank must be a member of the Securities Investor Protection Corporation unless it obtains a waiver from the FRB
D. The bank does not need to be a member of the Securities Investor Protection Corporation
The best answer is D.
Dealers who solely handle exempt securities are not required to be SIPC members. Therefore, customer accounts at firms that deal solely in U.S. Government securities or municipal securities, are not covered by SIPC. If a bank dealer were to handle non-exempt securities, then it would have to register under the Securities Exchange Act of 1934 as a broker-dealer, and thus, would be obligated to be an SIPC member as well.
FDIC does NOT cover losses on securities. The FDIC - Federal Deposit Insurance Corporation - does not insure brokerage accounts, that is securities positions held at banks. It only insures bank accounts (deposits) maintained by customers at banks.
Which statement is TRUE about insurance coverage on customer brokerage accounts maintained at banks registered solely as municipal securities dealers?
A. Insurance coverage is provided solely by the Federal Deposit Insurance Corporation (FDIC)
B. Insurance coverage is provided solely by the Securities Investors Protection Corporation (SIPC)
C. Insurance coverage is provided by both the FDIC and by the SIPC
D. No insurance protection is offered on customer municipal accounts maintained at bank broker-dealers
The best answer is D.
Insurance coverage for customer accounts at any broker-dealer that must be registered under the Securities Exchange Act of 1934 is provided by SIPC - Securities Investor Protection Corporation. However, dealers who solely handle exempt securities are not required to be SIPC members. Therefore, customer accounts at firms that deal solely in U.S. Government securities, are not covered by SIPC. Similarly, customer accounts at banks who are municipal securities dealers, are also not required to be covered under SIPC.
Please note that if a bank dealer were to handle non-exempt securities, then it would have to register under the Securities Exchange Act of 1934 as a broker-dealer, and thus, would be obligated to be an SIPC member as well.
The FDIC - Federal Deposit Insurance Corporation - does not insure brokerage accounts, that is securities positions held at banks. It only insures bank accounts (deposits) maintained by customers at banks.
The maximum coverage provided by Securities Investor Protection Corporation for securities held in a customer’s account is:
A. $250,000
B. $400,000
C. $500,000
D. $600,000
The best answer is C.
Securities Investor Protection Corporation provides protection on customer securities up to $500,000 in total cash and securities, but only covers cash balances for $250,000 included within the $500,000 limit.
General creditor status in the liquidation is given to any customer claims that are:
A. below Securities Investor Protection Corporation coverage limits
B. above Securities Investor Protection Corporation coverage limits
C. for securities held in margins accounts that had a debit balance
D. for cash balances below $250,000
The best answer is B.
Securities Investor Protection Corporation provides protection on customer securities up to $500,000 in total cash and securities, but only covers cash balances for $250,000 included within the $500,000 limit. For any uncovered claim amounts above these limits, the customer becomes a general creditor of the failed broker-dealer. Coverage limits apply to both cash and margin accounts.
A customer has an individual cash account, an individual margin account, a joint cash account with his wife, and a custodial account for each of his 2 children. If the firm liquidates, Securities Investor Protection Corporation covers:
A. only the custodial accounts
B. the custodial accounts separately, the joint account separately, and both individual accounts separately
C. the custodial accounts separately, the joint account separately, and both individual accounts are combined and treated as one
D. any one account of the customer’s choosing; the other accounts become general creditors of the broker-dealer
The best answer is C.
Securities Investor Protection Corporation coverage is applied “per customer name.” If John Jones has both an individual cash and margin account, they are treated as one account; a joint account with someone else is a separate account; each custodial account is a separate account.
A customer has an account holding $310,000 of securities and $290,000 of cash. If the broker-dealer were to fail, which statement is TRUE regarding the status of the account in an SIPC liquidation?
A. The customer will become a general creditor for $40,000 owed
B. The customer will become a general creditor for $100,000 owed
C. SIPC will provide coverage for $310,000 of securities only
D. SIPC will provide coverage for $250,000 of cash only
The best answer is B.
SIPC covers customer claims against a failed broker-dealer for a total of $500,000, inclusive of maximum cash coverage of $250,000. For any claims above these limits, the customer becomes a general creditor of the failed broker-dealer. This customer has $310,000 of securities and $290,000 of cash, for a total claim of $600,000. $250,000 of the cash is covered, leaving $40,000 uncovered. The remaining $250,000 of coverage is applied against the $310,000 securities position, leaving $60,000 of securities uncovered. The customer becomes a general creditor for the $100,000 total of the uncovered claims.
A customer has a cash account holding $200,000 of securities and $340,000 of cash. If the broker-dealer were to fail, which statement is TRUE regarding the status of the account in an SIPC liquidation?
A. SIPC will provide coverage for the $200,000 of securities only
B. SIPC will provide coverage for the total of $540,000 of securities and cash
C. SIPC will provide coverage for only $340,000 of cash
D. The customer will become a general creditor in the amount of $90,000
The best answer is D.
SIPC covers customer claims against a failed broker-dealer for a total of $500,000, inclusive of maximum cash coverage of $250,000. For any claims above these limits, the customer becomes a general creditor of the failed broker-dealer. This customer has $200,000 of securities (covered in full) and $340,000 of cash (covered only for $250,000), for total coverage of $450,000. For the remaining $90,000 of cash not covered, the customer becomes a general creditor.
In an SIPC liquidation, the trustee has distributed all securities registered in customer name. After this distribution, a customer has a claim for $590,000 in securities and another $260,000 of cash (free credit balance). Which statement regarding SIPC coverage limits is TRUE?
A. The customer is covered for the total amount of $850,000
B. The customer is covered for $500,000 total, and becomes a general creditor for $350,000
C. The customer is only covered for $500,000 of the securities; cash is not covered
D. The customer is only covered for $250,000 of the cash; securities are not covered
The best answer is B.
SIPC coverage is limited to $500,000 total, inclusive of maximum cash coverage of $250.000. This customer has a total of $590,000 of securities and $260,000 of cash, for a total claim of $850,000. Cash is covered to a maximum of $250,000, so $10,000 of the claim for cash is uncovered. Since total coverage is $500,000 and $250,000 of this has been used for the cash claim, only another $250,000 of coverage is available against the securities claim of $590,000, leaving $340,000 of the securities claim uncovered. The customer becomes a general creditor for the uncovered claim amount of $10,000 + $340,000 = $350,000.
A customer has a margin account at a broker-dealer who goes bankrupt. The account holds $900,000 of securities and has a $400,000 debit balance. The customer will receive:
A. $400,000 in cash
B. $500,000 in securities
C. $500,000 in cash
D. $900,000 in securities
The best answer is B.
The SIPC coverage limit of $500,000 in securities is based on the equity in a customer’s account. An account with $900,000 in securities and a $400,000 debit has $500,000 of equity. The customer will receive $500,000 of securities in the liquidation.
A customer has a brokerage account at a failed broker-dealer. For SIPC coverage purposes, the securities in the account are valued on the date:
A. of purchase of each position
B. SIPC returns securities to the customer
C. SIPC petitions a court to appoint a trustee in bankruptcy
D. SIPC sends the customer a claim form by certified mail
The best answer is C.
The “valuation date” for coverage purposes in an SIPC liquidation is the date that SIPC files in court to be the trustee in the bankruptcy of the failed broker-dealer.
All of the following communications fall under the Federal Telephone Consumer Protection Act of 1991 EXCEPT:
A. Live human callers
B. Robot callers
C. Facsimile transmission
D. Courier delivery
The best answer is D.
The Federal Telephone Consumer Protection Act of 1991 applies to any unsolicited offers made through the phone - whether these are made by personal contact, pre-recorded messages (robot callers), facsimile or electronic mail. It does not apply to offers made through the U.S. mail or by delivery services.
All of the following information must be disclosed when making unsolicited phone calls to potential customers EXCEPT:
A. Caller’s name
B. Firm’s name
C. Address or phone number from which the caller is dialing
D. CRD number of the Registered Representative placing the call
The best answer is D.
The Federal Telephone Consumer Protection Act of 1991 requires the following procedures for making unsolicited “commercial” phone calls.
- Unsolicited calls cannot be made before 8:00 AM nor after 9:00 PM, in the time zone of the recipient.
- The caller must identify him or herself by:
- **Name;
- **Firm;
- **Address or telephone number from which the caller is dialing
- If the person called states that he or she does not wish to receive calls, the person must be placed on a “Do Not Call” list.
Violations of the Act can be enforced by each State Attorney General and by the FTC (Federal Trade Commission).
The is no requirement for the Registered Representative to provide his CRD number when making an introduction but if asked, this information should be provided to a client.
Which of the following callers is NOT subject to the provisions of the Federal Telephone Consumer Protection Act of 1991?
A. An Animal Shelter
B. Securities Firm
C. Telemarketing Firm
D. Real Estate Company
The best answer is A.
The Federal Telephone Consumer Protection Act of 1991 applies to any unsolicited “commercial” phone calls. Charitable (not-for-profit) institutions are exempt from the Act’s provisions.
A registered representative based in Los Angeles is working at the office late making cold calls to potential customers. At 6:45 PM in Los Angeles, the registered representative is making cold calls to individuals in Miami and individuals in Sacramento. Which statement is TRUE?
A. Cold calls to potential customers in Miami are prohibited but permitted for potential customers in Sacramento
B. Cold calls to potential customers in both cities are permitted
C. Cold calls to potential customers in both cities are prohibited
D. Cold calls to potential customers in Sacramento are prohibited but permitted to potential customers in Miami
The best answer is A.
Unsolicited cold calls cannot be made after 9:00 PM in the time zone where they are received. Since this representative is in California, he or she can make cold calls to California at 6:45 PM Pacific time. However, since it is 9:45 PM (3 hours later) in Miami, cold calls to that city are not permitted.
