Section 1 - Laws, Regulations and Guidelines, Including Prohibitions on Unethical Business Practices

Question 1

The Securities Act of 1933 is also known as what other 3 names

Answer 1

The Paper Act, the Truth in Securities Act, and the Prospectus Act

Question 2

The Securities Act of 1933 requires security issuers to…

Answer 2

make full disclosure of all material information in their registrations materials in order for investments to make fully informed investment decisions.

Question 3

What are the 4 conditions of an “investment contract” based on the Howey Case?

Answer 3

1. the investment of money
2. in a common enterprise (pooling)
3. With an expectation of profits
4. results solely from efforts of others

Question 4

On the basis of Howey, a “security” is any of the following

Answer 4

Stock, bond, debenture, right or warrant, note, put, call or other option, limited partnership interests, certificate of interest in a profit-sharing agreement.

Question 5

An issuer is understood as

Answer 5

any person who issues or proposes issue to any security is an issuer. Most issuers are business, but can apply to a government entity.

Question 6

An underwriter is…

Answer 6

any person who has purchased from an issuer with a view to selling. Does not include a brokerage firm earning a commission on a retail sale to the public.

Question 7

A Prospectus is…

Answer 7

any notice, circular, letter, or communication, written or broadcast by radio or television, that offers any security for sale or confirms the sale of a security. A “tombstone advertisement” is not considered a prospectus nor an offering of the subject security. The term prospectus does not include oral communications.

Question 8

The sale of a security does not include:

Answer 8

preliminary negotiations or agreements between the issuer and underwriter; or
a gift of securities
Any security given or delivered with, or as a bonus on account of, any purchase of securities is presumed to constitute a part of that purchase and to have been offered and sold for value.

Question 9

The term “issuer” as defined in the Securities Act of 1933 would include

Answer 9

a government entity issuing exempt securities, and a corporation issuing securities in an exempt transaction.

Question 10

Under the Securities Act of 1933, which of the following is NOT a security? 1. a Convertible Bond 2. a stock warrant, 3. a stock right or 4. a term life insurance policy?

Answer 10

A term life policy is NOT a security.

Question 11

Does the exemption described for banks apply to bank holding companies?

Answer 11

No, it does not apply.

Most of the large U.S. banks today are owned by holding companies.

Question 12

True or False: Securities offered and sold to people or residents within a single state or territory or that are state specific usually are an exempt security under federal law, but not exempt under the Uniform Securities Act and will need to register with the state.

Answer 12

True

Question 13

Explain the 80-80-80 Rule

Answer 13

Under rule 147, the security that is federally exempt but not state exempt must follow the criteria:
1- At least 80% of the issuer’s gross revenue must be derived from operations within the state.
2- At least 80% of the proceeds of the offering must be used for business purposes within the state.
3- At least 80% of the issuer’s assets must be located within the state.

Question 14

Under the Securities Act of 1933: In addition to exempting certain securities, the act also exempts…

Answer 14

• Transactions by any person other than an issuer, underwriter, or dealer; and
• transactions by an issuer that do not involve a public offering (private placement under Regulation D)

Question 15

Under the Securities Act of 1933: In addition to exempting certain securities, the act also exempts…

Answer 15

• Transactions by any person other than an issuer, underwriter, or dealer; and
• transactions by an issuer that do not involve a public offering (private placement under Regulation D)

Question 16

What is the “Cooling-Off Period” for an issuer?

Answer 16

The time during which the SEC reads over the statement to ensure it does not have any untrue statements, or something isn’t stated properly, is missing, or needs further explanation. Can take up to several months for corrections to be made and it to be approved by SEC.

Question 17

What is a “Red Herring” or Preliminary Prospectus?

Answer 17

A preliminary prospectus made available to any prospective purchaser who expresses interest in the security from the time the issue is filed with the SEC until it becomes publicly available for sale. Used to acquaint investors with essential facts concerning the new issue.

Question 18

True or False A broker dealer or one of its agents may accept money or orders prior to the effective date.

Answer 18

FALSE. Under no circumstances may a broker-dealer or one of its agents accept money or orders prior to the effective date.

Question 19

What are the two items missing from the preliminary prospectus (red herring)?

Answer 19

The public offering price (expected range may be shown) &
the effective date.

Question 20

Can assets in an account or property held jointly with another person who is not the purchaser’s spouse be included in determining whether the purchaser satisfies the net work test in Rule 501?

Answer 20

Yes, assets in an account or property held jointly with a person who is not the purchaser’s spouse may be included in the calculation for the net worth test, but only to the extend of his or her percentage ownership of the account or property.

Question 21

Can assets in an account or property held jointly with another person who is not the purchaser’s spouse be included in determining whether the purchaser satisfies the net work test in Rule 501?

Answer 21

Yes, assets in an account or property held jointly with a person who is not the purchaser’s spouse may be included in the calculation for the net worth test, but only to the extend of his or her percentage ownership of the account or property.

Question 22

Which of the following statements about accredited investors is TRUE:
A. Taxpayers who report an income in excess of $200k on a joint return in each of the last two years and who reasonably expect the same for the current year are included in the definition.
B. An officer, director, or greater than 10% shareholder of any company listed on the NYSE would be considered an accredited investor for purposes of acquiring a private placement your firm is selling.
C. The term includes an employee benefit plan with assets in excess of $2 Million.
D. Purchases of securities by accredited investors do not count toward the 35-investor limitation found in Rule 506(b) of Regulation D.

Answer 22

D.

Question 23

A Man owns 15% of the stock of a company. His wife owns 5% of the stock of the same company. If the wife wishes to sell the stock she owns, which of the following statements are true?

1. Both the husband and the wife are affiliates.
2. He is an affiliate, but she is not.
3. She must file under Rule 144.
4. She does not have to file under Rule 144.

Answer 23

1 and 3.

Question 24

SEC Rule 144 (Sale of Restricted and Control Securities) says…

Answer 24

Makes it possible to sell existing securities without having to file a complete registration statement with the SEC. Those who wish to sell control or restricted stock must do so by filing a Form 144.

Question 25

The Securities Exchange Act of 1934 grants the SEC…

Answer 25

authority over all aspects of the securities industry, including the power to register, regulate, and oversee brokerage firms, transfer agents , and clearing agencies as well as the nation’s securities self-regulatory organizations (NYSE, Nasdaq, etc)
Also prohibits certain types of conduct in the markets and confers to the SEC disciplinary powers over regulated entities.
Also empowers SEC to require periodic reporting of information by companies with publicly traded securities.

Question 26

The Securities Exchange Act of 1934 grants the SEC…

Answer 26

authority over all aspects of the securities industry, including the power to register, regulate, and oversee brokerage firms, transfer agents , and clearing agencies as well as the nation’s securities self-regulatory organizations (NYSE, Nasdaq, etc)
Also prohibits certain types of conduct in the markets and confers to the SEC disciplinary powers over regulated entities.
Also empowers SEC to require periodic reporting of information by companies with publicly traded securities.

Question 27

Define a Broker

Answer 27

Any person engaged in the business of effecting transactions in securities for the account of others. Banks are NOT included.

Question 28

Define a Dealer

Answer 28

Any person regularly engaged in the business of buying and selling securities for his own account. Banks, insurance companies, investment companies, and any persons engaged in investing, reinvesting, or trading in securities for their own account, either individually or in some fiduciary capacity, but not as party of a regular business, are not included in the definition.

Question 29

Define an Associated Person with a broker-dealer

Answer 29

Any partner, officer, or director of the broker-dealer (or any person performing similar functions) or any person directly or indirectly controlling or controlled by the broker-dealer, including any employees of the broker-dealer, except that any person associated with a broker or dealer whose functions are solely clerical or ministerial, shall not be included in the meaning of the term.

Question 30

Define an “Exchange”

Answer 30

An organization, association, or group of persons providing a marketplace or facilities for bringing together purchasers and sellers of securities.

Question 31

An order is discretionary if any one of the 3 A’s are missing, the 3 A’s are…

Answer 31

Activity
Amount; and
Asset

Question 32

TRUE OR FALSE? State and Federal law prohibit the exercise of any discretionary power by a broker-dealer or agent in a customer’s account unless the customer has given prior written authorization to a stated individual or individuals and the account has been accepted by the member firm.

Answer 32

TRUE

Question 33

When is an oral grant of time or price discretion expired?

Answer 33

At the end of the business day on which the customer grants it.

Question 34

An agent receives instructions from a client to buy 100 shares of KAPCO common stock at what he agent thinks is the best price. Two days later, the agent enters the order. In this case, the agent has:
A- Acted Appropriately
B- Acted Innappropriately
C- Failed to follow the customer’s instructions
D- Potentially become subject to statutory disqualification

Answer 34

B -
Whenever the order calls for time/price discretion, it is considered a DAY order and must be executed that day. Waiting two days is inappropriate.

Question 35

Alice Allison is the president of Podunk University and sits on the board of directors at KAPCO Securities, a broker-dealer registered with the SEC. President Allison…
A - Would be considered an associated person of KAPCO
B - Would not be considered an associated person of KAPCO
C- Would be required to register as an agent of KAPCO
D- Must resign her position at Podunk University in order to remain on KAPCO’s board

Answer 35

A. University Presidents are a popular choice for serving as outside directors. Under the Securities Exchange Act of 1934, the term “associated person” of a broker-dealer would include an outside director of a broker-dealer and all registered personnel but not employees who are strictly clerical and administrative.

Question 36

Alice Allison is the president of Podunk University and sits on the board of directors at KAPCO Securities, a broker-dealer registered with the SEC. President Allison…
A - Would be considered an associated person of KAPCO
B - Would not be considered an associated person of KAPCO
C- Would be required to register as an agent of KAPCO
D- Must resign her position at Podunk University in order to remain on KAPCO’s board

Answer 36

A. University Presidents are a popular choice for serving as outside directors. Under the Securities Exchange Act of 1934, the term “associated person” of a broker-dealer would include an outside director of a broker-dealer and all registered personnel but not employees who are strictly clerical and administrative.

Question 37

A securities order that is initiated by a client is what type of order?
A. Nondiscretionary
B. Unsolicited
C. Discretionary
D. Solicited

Answer 37

B. This is the definition of an unsolicited transaction.

Question 38

What does the insider transactions act say

Answer 38

A person who is directly or indirectly the beneficial owner of more than 10% of any class of equity security, or
officers or directors of the issuers of such securities
must file a statement with the SEC concerning the amount of equity securities owned.

Question 39

Schedule 13D Filings generally requires…

Answer 39

a beneficial owner of more than 5% of a class of equity securities registered under the Securities Exchange Act of 1934 to file a report with the issuer, SEC, and the securities markets where those securities trade within 10 days of any transaction that results in beneficial ownership of more than 5%.