Securities Exchange Act of 1934 Flashcards
The Securities and Exchange Commission was:
I created under the Securities Act of 1933
II created under the Securities Exchange Act of 1934
III given regulatory authority over securities exchanges
IV given regulatory authority over futures exchanges
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is C.
The Securities and Exchange Commission was created under the Securities Exchange Act of 1934. It has overall regulatory authority over the securities markets and securities market participants. It has no power over the futures markets - these are regulated by the CFTC - the Commodities Futures Trading Commission.
The Securities and Exchange Commission is empowered to administrate all of the following Acts EXCEPT:
A. Securities Act of 1933
B. Trust Indenture Act of 1939
C. Investment Company Act of 1940
D. Uniform Securities Act
The best answer is D.
The Uniform Securities Act is more commonly known as the “Blue Sky” state law, and is adopted “state by state.” The SEC, a Federal agency, has no jurisdiction over activities within each state and does not administrate this Act. The SEC does administrate the Securities Act of 1933; the Securities Exchange Act of 1934; the Trust Indenture Act of 1939; and the Investment Company Act of 1940.
The Securities Exchange Act of 1934 established “self regulatory organizations” (SROs) and empowered these organizations to:
I set guidelines for fair dealing with the public
II handle complaints against broker-dealers for securities law violations
III take administrative action against broker-dealers that violate industry regulations
IV fix commission rates to be charged to public customers
A. I and II only
B. I, II, III
C. II, III, IV
D. I, II, III, IV
The best answer is B.
Originally, the exchanges, such as the NYSE and NASD (National Association of Securities Dealers) were both marketplaces and regulators of their member firms. This changed when FINRA was created in 2006. Each exchange now only regulates its trading operation; and FINRA regulates the broker-dealer member firms and is its own SRO (Self Regulatory Organization). FINRA sets guidelines for fair dealing with the public with its Conduct Rules; it handles complaints against broker-dealers for securities law violations under the Code of Procedure; it can take administrative action against broker-dealers that violate industry regulations; and it establishes arbitration procedures to settle intra-industry disputes.
Fixed commission rates are prohibited under the Securities Exchange Act of 1934 - these are set by the member firms.
Under the provisions of the Securities Exchange Act of 1934, which of the following must be registered?
I The exchanges that trade securities
II Member firms
III Sales employees of member firms
IV Clerical employees of member firms
A. III only
B. I and II only
C. I, II, III
D. I, II, III, IV
The best answer is C.
The Securities Exchange Act of 1934 requires the registration of each securities exchange, so that it now becomes a “self-regulatory organization” (SRO), subject to SEC oversight. In addition, FINRA and the MSRB are SROs. The Act requires that member firms register with FINRA; that their officers register; and that their sales employees (you!) register. There is no requirement for clerical employees to register.
Under the provisions of the Securities Exchange Act of 1934, which of the following must be registered?
I The exchanges that trade securities
II Member firms
III Officers of member firms
IV Sales employees of member firms
A. IV only
B. I and II
C. III and IV
D. I, II, III, IV
The best answer is D.
The Securities Exchange Act of 1934 requires the registration of each securities exchange, so that it now becomes a “self-regulatory organization” (SRO), subject to SEC oversight. In addition, FINRA and the MSRB are SROs. The Act requires that member firms register with FINRA; that their officers register; and that their sales employees (you!) register.
Regarding the notification of a broker-dealer’s financial condition to customers, a brokerage firm must send semi-annual statements which include the firm’s:
I Balance sheet
II Income statement
III Net capital computation
A. I only
B. I and II
C. I and III
D. II and III
The best answer is C.
Broker-dealers must send their customers a semi-annual balance sheet and Net Capital computation. There is no requirement that the customer be sent the income statement of the broker-dealer.
Broker-dealers are required to report their computed Net Capital to customers:
A. monthly
B. quarterly
C. semi-annually
D. annually
The best answer is C.
Broker-dealers must send their customers a semi-annual balance sheet and Net Capital computation.
A broker-dealer may hold fully paid customer securities:
A. when authorized in writing by the customer
B. if the securities are segregated and held in safekeeping
C. if the firm notifies the customer every 3 months as to the amount of securities and the fact that they are “not segregated”
D. only if the customer is traveling
The best answer is B.
Broker-dealers are obligated to segregate fully paid customer securities and hold them in safekeeping under the 1934 Act. These securities cannot be rehypothecated to a bank.
A foreign broker-dealer that is not SEC registered is permitted to deal with clients in the United States:
A. under no circumstances
B. only if the clients are accredited investors
C. only if the clients are sophisticated
D. only if the clients are major institutional investors
The best answer is D.
In order for a broker-dealer to solicit in the U.S., it must be registered with the SEC. For foreign broker-dealers, this means setting up an SEC-registered U.S. subsidiary. However, recognizing the increasingly global nature of the world’s securities markets, the SEC adopted Rule 15a-6, which is intended to permit foreign broker-dealers to engage in limited activities in the U.S. without registering with the SEC. Under Rule 15a-6, foreign broker-dealers that are not SEC registered are permitted to:
effect trades for U.S. persons that contact them on an unsolicited basis;
solicit business from and provide research reports to Major Institutional Investors (an investor with at least $100 million of investments) and Institutional Investors (investment companies, insurance companies, banks, etc.) and
conduct business with foreign nationals temporarily present in the U.S.
Which of the following issuers must report to the SEC under the Securities Exchange Act of 1934?
I Corporations
II Investment Companies
III Municipalities
IV Federal Agencies
A. I and II
B. II and III
C. I, II, III
D. I, II, III, IV
The best answer is A.
Only corporations and investment companies (which are either corporations or trusts) file annual and semi-annual reports with the SEC. Municipal and federal issuers are exempt from the Securities Exchange Act of 1934.
Which of the following statements are TRUE regarding corporate reports sent to shareholders?
I The 10K report consists of the annual financial statements
II The 10K report consists of the quarterly financial statements
III The 10Q report consists of the annual financial statements
IV The 10Q report consists of the quarterly financial statements
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is B.
Corporate annual reports are 10K reports which are audited reports. The 10Q is a quarterly report which is unaudited. Corporate annual reports contain the following audited financial statements - Income Statement; Balance Sheet; Statement of Changes to Retained Earnings; and Statement of Sources and Uses of Cash.
An issuer is required to make an 8K filing with the SEC for all of the following events EXCEPT:
A. declaration of a cash dividend
B. election of new members of the Board of Directors
C. declaration of bankruptcy
D. proposal of a merger with another corporation
The best answer is A.
An 8K filing with the SEC is required by a corporation if a “major event” happens at the company. These include if there is a change in the composition of the Board of Directors; if the company declares bankruptcy; if there is a major acquisition or divestiture of assets; if the company proposes a merger; or if any other major corporate event occurs. The notice must be filed no later than 4 business days after the event. Declaration of a dividend is a regular event, and no filing is required when this occurs.
If a publicly traded corporation declares bankruptcy:
I a 10K report must be filed
II an 8K report must be filed
III the required report must be filed within 1 business day
IV the required report must be filed within 4 business days
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is D.
Corporations are required to file 8K reports within 4 business days of significant events such as a declaration of bankruptcy, merger, change in the Board of Directors, etc. The 8K is filed with the SEC, and is a public document.
A registered representative receives an order from a corporate issuer to buy 100,000 shares of that issuer’s stock in the market just before the market close. The registered representative should:
A. accept the order from the customer
B. inform the company that the trade can only be executed on an upbid
C. reject the order and report the company to the SEC
D. inform the company that this is a possible market manipulation under the Securities Exchange Act of 1934
The best answer is D.
SEC Rule 10b-18 sets ground rules for issuers or affiliated persons who wish to buy their shares in the open market. If an issuer aggressively buys its stock in the market, or bids for its stock, it can manipulate the market price upwards. Bids and purchases that are made in compliance with Rule 10b-18 will not be considered manipulative activities under Rule 10b-5 (“catch-all” fraud rule). Rule 10b-18 purchases, as they are known:
Must be effected through 1 broker/dealer on any given day;
Cannot be the opening transaction;
Cannot be executed within 10 minutes of market close if the security is “actively traded,” otherwise it cannot be executed within 30 minutes of market close;
Must be effected at prices no higher than the current market;
Cannot exceed 25% of the trading volume in the security that day (except for block purchases handled outside the normal flow of orders).
Because the issuer is placing the order to buy its stock just prior to market close, it could be accused of trying to manipulate its closing price upwards. The client should be informed of this.
An investor must file a 13D report with the SEC if a:
A. 5% or greater common stock holding is purchased of one issuer
B. 10% or greater common stock holding is purchased of one issuer
C. 15% or greater common stock holding is purchased of one issuer
D. 20% or greater common stock holding is purchased of one issuer
The best answer is A.
Investors who accumulate a 5% or greater position in the common stock of one registered issuer are required to file a 13D notice with the SEC within 10 business days of date that the 5% threshold was passed. This information is made public (and is of great interest to the management of the company, since the new large stockholder will probably want a say in how the company is being run!) There is no requirement to file for holding a large portion of a corporation’s debt.
Which of the following statements are TRUE about a tender offer for common shares:
I The offer must remain open for at least 20 business days
II Each “sweetening” of the offer must extend the offer for an additional 10 business days
III During the life of the offer, the issuer can buy the stock in the market in addition to buying shares via the offer
IV During the life of the offer, any subscribing investors’ shares that are tendered are held in escrow pending the outcome of the offer
A. I and II only
B. III and IV only
C. I, II and IV
D. I, II, III, IV
The best answer is C.
When a tender offer is made for the common shares of an issuer, the maker of the offer is attempting to buy a majority stake in the company. To attract shareholders to tender, the maker usually prices the offer at a premium to the current market price. Such offers are typically contingent on a minimum number of shares being tendered. If the minimum number is not met, the maker might “sweeten” the offer by raising the tender price, or could simply cancel the offer and return the tendered shares to the subscribing shareholders. Note that an escrow agent is used to hold the tendered shares, pending the outcome of the offer.
During the life of the offer, the maker of the offer and its agents are treated as “insiders,” since they have information on how the tender offer is progressing that the general public does not know about. This means that, during the offer, they are prohibited from buying the stock in the market.
The initial offer must be held out for a minimum of 20 business days under SEC rules. Each sweetening of the offer must extend the life of the offer by another 10 business days.
Which statements are TRUE about a tender offer for common shares?
I The offer must remain open for at least 10 business days
II The offer must remain open for at least 20 business days
III Each “sweetening” of the offer must extend the offer for an additional 10 business days
IV Each “sweetening” of the offer must extend the offer for an additional 20 business days
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is C.
When a tender offer is made for the common shares of an issuer, the maker of the offer is attempting to buy a majority stake in the company. To attract shareholders to tender, the maker usually prices the offer at a premium to the current market price. Such offers are typically contingent on a minimum number of shares being tendered. If the minimum number is not met, the maker might “sweeten” the offer by raising the tender price; or could simply cancel the offer and return the tendered shares to the subscribing shareholders.
The initial offer must be held out for a minimum of 20 business days under SEC rules. Each sweetening of the offer must extend the life of the offer by another 10 business days
All of the following statements are true about an issuer making a tender offer for its non-convertible bonds EXCEPT:
A. The initial life of the offer is 5 business days
B. Any increase in the tender price increases the life of the offer by 5 business days
C. The offer is contingent on a minimum amount of bonds being tendered
D. The final price given to all bondholders is not determined until the last business day of the offer
The best answer is C.
An issuer would consider tendering for its outstanding bonds when it has debt outstanding that is not callable, but it has excess funds that it believes would be best used to reduce the amount of debt outstanding.
A tender offer is made to the bondholders, who have the choice of tendering or not. Unlike stock tender offers, where the initial offer must be held out for 20 business days, here the initial life of the offer is only 5 business days. (The life is shorter because this tender offer is being made by the issuer, not an outsider.) Unlike stock tender offers, where there is typically a contingency that a minimum number of shares be tendered, these are “any and all offers” - so if a bondholder tenders, he or she will receive the tender price for the bonds.
If the issuer does not get enough bonds tendered, the issuer can “sweeten” the offer. This extends the offer by another 5 business days, and the sweetened price is given to all bonds tendered. (While the initial offer specifies a price to be paid, or a price based on a spread to a benchmark debt security, the actual price paid on the tendered bonds is not set until that last business day of the offer).
Which statements are TRUE about an issuer making a tender offer for its non-convertible bonds?
I The minimum life of the initial offer is 5 business days
II The minimum life of the initial offer is 10 business days
III Each “sweetening” of the offer must extend the offer for another 5 business days
IV Each “sweetening” of the offer must extend the offer for another 10 business days
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is A.
An issuer would consider tendering for its outstanding bonds when it has debt outstanding that is not callable, but it has excess funds that it believes would be best used to reduce the amount of debt outstanding.
A tender offer is made to the bondholders, who have the choice of tendering or not. Unlike stock tender offers, where the initial offer must be held out for 20 business days, here the initial life of the offer is only 5 business days. (The life is shorter because this tender offer is being made by the issuer, not an outsider.) Unlike stock tender offers, where there is typically a contingency that a minimum number of shares be tendered, these are “any and all offers” - so if a bondholder tenders, he or she will receive the tender price for the bonds.
If the issuer does not get enough bonds tendered, the issuer can “sweeten” the offer. This extends the offer by another 5 business days, and the sweetened price is given to all bonds tendered. (While the initial offer specifies a price to be paid, or a price based on a spread to a benchmark debt security, the actual price paid on the tendered bonds is not set until that last business day of the offer).
A tender offer is announced for ABC common stock. Which of the following customer accounts can tender 100 shares of ABC on the offer?
I Long 100 shares of ABC
II Long 100 shares of ABC; Short 100 shares of ABC
III Long 200 shares of ABC; Short 100 shares of ABC
IV Long 100 shares of ABC; Short 200 shares of ABC
A. I only
B. III and IV
C. I and III
D. I, II, III, IV
The best answer is C.
Under the “short tender rule,” a person cannot tender borrowed shares. To tender stock, the person must be in a “net long” position in that security. Choice I is net long 100 shares and can tender; Choice II is net “0” and cannot tender; Choice III is net long 100 shares and can tender; Choice IV is net short 100 shares and cannot tender.
A customer is long 1,000 shares of ABCD stock and has gone “short against the box” 400 shares of ABCD stock. If there is a tender offer for the shares of ABCD Corporation, the customer:
A. cannot tender any shares
B. can tender 400 shares
C. can tender 600 shares
D. can tender 1,000 shares
The best answer is C.
A customer is only considered to be “long” to the extent of his or her “net” long position in a security. This customer is long 1,000 shares of ABCD and short 400 shares of ABCD, for a net long position of 600 shares. This is the amount that can be tendered (remember that the customer must replace the 400 shares borrowed to sell short, leaving him or her with the remaining 600 shares out of the 1,000 owned.)
During a tender offer, all of the following activities are prohibited EXCEPT:
A. purchasing the stock in a cash account and tendering 4 business days after trade date
B. purchasing a call option in a cash account and tendering 4 business days after trade date
C. tendering shares held in an arbitrage account where the position is “short against the box”
D. purchasing a warrant in a cash account and tender 5 business days after trade date
The best answer is A.
Under the short tender rule, a customer can only hand in shares on a tender offer to the extent of his or her “net long” position. A customer who has bought the stock is “long” and can tender. A customer who has bought a call option or a warrant is not “long” until the option or warrant is exercised, so he or she cannot tender. A customer who is “short against the box” has a net “zero” position and cannot tender.
During a tender offer, which of the following activities are prohibited?
I Purchase the stock in a cash account and tender 2 business days after trade date
II Purchase a call option in a cash account and tender 2 business days after trade date
III Tender shares held in an arbitrage account where the position is “short against the box”
IV Exercise a call option held in a cash account and issue irrevocable instructions to deliver the acquired shares
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is C.
Under the short tender rule, a customer can only hand in shares on a tender offer to the extent of his “net long” position. A customer who has bought the stock (Choice I) is “long” and can tender. A customer who has bought a call option is not “long” until the option is exercised, so he cannot tender. A customer who is “short against the box” has a net “zero” position and cannot tender. A customer who has exercised a call option is “long” since the stock is being delivered to him. Therefore, he can tender.
Under Federal law, stock can be tendered from which of the following accounts?
I Restricted margin account
II Short margin account
III Long margin account
IV Cash account
A. IV only
B. I and III only
C. I, III, IV
D. I, II, III, IV
The best answer is C.
Under the “short tender rule,” a person cannot tender borrowed shares. To tender stock, the person must be in a “net long” position in that security. Long stock can be held in a cash or margin account. Restriction (an account below 50% initial Regulation T margin) has no bearing on tendering shares. If shares are tendered from a margin account, the account must still meet the exchange minimum maintenance margin after those shares leave the account. If not, a maintenance call will be generated to bring the account back to minimum margin.
