Regulation of Securities Markets Flashcards
Two years ago, an investor purchased 300 shares of XYZ Corporation at $18.35 per share. During this time, the stock paid a quarterly dividend of $0.05 per share. The stock price closed at $24.60 per share today. If the investor is in the 24% tax bracket, how much in capital gains taxes does the investor owe on the increase in value?
A
$0
B
$120
C
$525
D
$1,875
A
$0
This question says that the investor’s stock holding has increased in value from the time of purchase, but it does not say that the shares were sold. The investor currently has an unrealized gain of $1,875 ($7,380 current value ˗ $5,505 cost basis), but gains are not realized, and no capital gains taxes are due until the shares are sold. The investor did receive a cash dividend totaling $120 over the last 2 years ($0.05 per share × 8 quarters × 300 shares), and this is taxable income, but it is not a capital gain.
What is the role of an investment banker?
A
To shore up the capital of issuers who are in financial difficulty to protect investors
B
To work with the issuer to help sell securities to the public
C
To guarantee principal and interest payments are made in timely fashion
D
To make loans and accept deposits
B
To work with the issuer to help sell securities to the public
An underwriter or investment banker is a broker-dealer that administers the public issuance and distribution of securities for a corporation or other issuing body. The underwriter works with the issuing entity to assist in determining the offering price and may buy the security from the issuer to sell to public investors through a distribution network.
Which one of the following is false regarding the Federal Reserve Board?
A
Regulation T sets payment dates on corporate securities as trade date plus 4 business days
B
Regulation T regulates the extension of credit from the broker-dealer to customers for margin accounts
C
Regulation U regulates the extension of credit from banks to broker-dealers
D
The FED establishes the minimum capital requirements for broker-dealers
D
The FED establishes the minimum capital requirements for broker-dealers
The following SEC regulations empower the Federal Reserve Board to regulate margin accounts and the extension of credit from banks to broker-dealers and their customers: Regulation T regulates the extension of credit from the broker-dealer to customers for margin accounts. Regulation T also sets payment dates on corporate securities as trade date plus 4 business days. Regulation U regulates the extension of credit from banks to broker-dealers.
What entity makes security transactions on a large scale for their own accounts or for insurance or investment companies, trusts, broker-dealers and bank clients?
A
A qualified investor
B
An institutional investor
C
An accredited investor
D
A sophisticated investor
B
An institutional investor
An institutional investor is an entity that makes security transactions on a large scale for their own accounts or for institutional clients, such as: insurance or investment companies, trusts, broker-dealers, investment advisers, banks, savings institutions, government agencies or employee benefit plans.
Which department of a broker-dealer ensures accurate recordkeeping within the firm?
A
Research
B
Investment banking
C
Operations
D
Trading
C
Operations
Broker-dealers have several departments that carry out the necessary functions of the firm. – Investment banking – The department of a broker-dealer that negotiates with issuers when selling securities to the public – Research – The department of a broker-dealer that investigates issuers and the merits of their securities to make buy and sell recommendations – Trading – The department of a broker-dealer that handles trade executions for clients and the firm – Operations – The department of a broker-dealer that ensures accurate recordkeeping within the firm
Which of the following are subsets of the Nasdaq system?
A
Global Market and Capital Market
B
Capital Market and Global Premium Market
C
National Market and OTC Markets Group
D
National Market System and Global Select Market
A
Global Market and Capital Market
Nasdaq is the largest electronic trading exchange in the U.S., meaning there is no trading floor. To facilitate trading, Nasdaq has 3 different markets, each having different listing requirements. Nasdaq Global Select Market has the most rigorous initial listing standards. Nasdaq Global Market consists of OTC stocks of companies worldwide that meet one of the three sets of initial listing standards. Nasdaq Capital Market consists of smaller companies with less capitalization than Global Market.
An investor purchases 100 shares of ABC stock in a cash transaction on Tuesday February 12th. The investor must accept the shares and pay for them on what day?
A
Tuesday, February 12th
B
Friday, February 15th
C
Wednesday, February 13th
D
Thursday, February 14th
A
Tuesday, February 12th
Cash settlement is “same day” settlement, and the securities must be paid for on the trade date (T=S). For corporate and municipal securities, regular-way settlement is (T+2), but it is possible for a customer to request a cash settlement (and it will likely affect the price to find a buyer willing to pay on the same day for the securities). In this question, the trade date is February 12th. So, with cash settlement, the trade settles February 12th.
Which of the following statements is not true regarding the Securities and Exchange Commission (SEC)?
A
It is the primary federal regulator for the securities industry
B
All broker-dealers that do business across state lines must register with the SEC
C
It is not responsible for protecting U.S. investors
D
It oversees all the self-regulatory organizations (SROs)
C
It is not responsible for protecting U.S. investors
The SEC functions as the ultimate enforcer of federal securities laws and is responsible for protecting U.S. investors.
What does Rule 144A allow?
A
Qualified institutional buyers (QIBs) to trade unregistered securities with each other
B
Holders of restricted stock to sell their shares prior the holding period expiration with any profits being disgorged
C
Insiders to sell restricted stock in lots of 10,000 shares or less to the public
D
Control persons to sell above the volume limitations when certain family financial emergencies arise
A
Qualified institutional buyers (QIBs) to trade unregistered securities with each other
Rule 144A was created to allow Qualified institutional buyers (QIBs) to trade unregistered securities with each other. These securities are usually private placements that normally cannot be traded without being registered. Rule 144A transactions have the following restrictions: Initial purchases by a QIB must equal $500,000 or more; Once purchased, the securities can be traded without restriction between QIBs. These securities trade on a separate trading platform called PORTAL. These securities can never be publicly traded unless registered.
All the following statements are true regarding the cooling-off period, except:
A
The cooling-off period is a minimum of 20 days
B
If the SEC finds issues with the prospectus, the issuer will need to file an amendment to the registration statement, which restarts the cooling-off period
C
The SEC will try to determine whether the security is a good investment
D
During the cooling-off period, the SEC has a chance to review and comment on the registration statement
C
The SEC will try to determine whether the security is a good investment
During the cooling-off period, the SEC will not try to determine whether the security is a good investment. Rather, it will make sure everything that is supposed to be in the registration statement is in it. If the SEC finds no material omissions or misleading statements, the registration statement will become effective after 20 calendar days.
Which one of the following is not a security?
A
Stock
B
Certificate of deposit
C
Bond
D
Mutual fund
B
Certificate of deposit
A security is an investment contract offered through a legal entity managing the efforts for an expected profit. Common examples include stocks, bonds, and mutual funds. Unless it said that the CD was a negotiable one, it is assumed to be a bank offering, guaranteed by the bank, and backed by FDIC insurance. Therefore, there would be no investment risk.
For a security to be sold interstate, it must be registered with the SEC. The time from which the issuer submits the security for registration until it is sold to the public is called the:
A
Registration period
B
Review period
C
Custodial period
D
Cooling-off period
D
Cooling-off period
The cooling-off period is the term used for the period before a security may be sold, between the SEC filing date and the effective date (the date on which the SEC releases the securities for sale).
Which of the following ads can be used during the cooling-off period?
A
Brochure
B
Marketing newsletter
C
Tombstone ad
D
Commercial on TV
C
Tombstone ad
While advertising is generally prohibited during the cooling-off period, one exception is a simple ad describing the nature of the offering and the syndicate members, from whom a preliminary prospectus may be obtained. This is referred to as a tombstone ad. Marketing materials, brochures, and commercials on TV are not permitted during the cooling-off period as the securities have not cleared the registration process and cannot be offered to the public.
Stockholders are all the following to the corporation, except:
A
Junior claim status in the event of bankruptcy
B
Debt position
C
Owner
D
Equity position
B
Debt position
A stockholder is an owner of the company and has an equity position. In the event of the corporation’s bankruptcy, stockholders have a junior claim on assets. A debt position represents a lender or creditor position.
A tombstone advertisement:
A
Lists the number of shares in the offering and the name of the managing underwriter
B
Is an offer to participate in the offering
C
Is usually sent in a mailing to retail investors
D
Is an offer to buy securities in the offering
A
Lists the number of shares in the offering and the name of the managing underwriter
A tombstone advertisement is generally placed in a newspaper with respect to an upcoming IPO. Correctly written, it is not deemed to be an offer to sell or a solicitation of an offer to buy a security. It is primarily used to refer prospective buyers to the underwriter of the IPO to obtain additional information.
