Securities Exchange Act of 1934

Question 1

The Securities Exchange Act of 1934 is primarily concerned with:

A. registration of exempt issues
B. registration of non-exempt issues
C. prevention of manipulation and fraud in the primary market
D. prevention of manipulation and fraud in the secondary market

Answer 1

The best answer is D.

The Securities Act of 1933 requires that new issues that are not exempt from the Act be registered with the SEC. Thus, the 1933 Act is concerned with the primary (new issue) market.

The Securities Exchange Act of 1934 consists of a variety of rules covering the trading (secondary) market that are primarily intended to prevent manipulation and fraud.

Question 2

The Securities Exchange Act of 1934 regulates which of the following markets?

A. Exchanges only
B. Listed issues only
C. Exchanges and ECNs only
D. All of the above

Answer 2

The best answer is D.

The Securities Act of 1933 regulates the new issue (primary) market. The Securities Exchange Act of 1934 regulates the secondary market (the trading market). The trading markets consist of the first market (trading of listed securities on an exchange), second market (over-the-counter trading of securities not listed on an exchange), third market (over-the-counter trading of securities listed on an exchange floor), and fourth market (direct trading of securities between institutions on ECNs and ATSs).

Question 3

The Securities Exchange Act of 1934 regulates trading of all of the following EXCEPT:

A. Corporate Stock
B. Corporate Bonds
C. Options
D. Commodities Futures

Answer 3

The best answer is D.

The Securities Exchange Act of 1934 regulates trading of all non-exempt securities, including common stocks, preferred stocks, corporate bonds, options on securities, etc.

It does not regulate the trading of commodities, since these are not securities, and thus, are not regulated under the Securities Acts. Rather, futures (commodities) are regulated by the CFTC - the Commodities Futures Trading Commission.

Please note, also, that the Securities Exchange Act of 1934 states that manipulation is fraud under the Act, whether the manipulation involves either non-exempt or exempt securities.

Question 4

Which statement is TRUE regarding the Securities Exchange Act of 1934?

A. The anti-fraud provisions of the Act apply only to exempt securities
B. The anti-fraud provisions of the Act apply only to non-exempt securities
C. The anti-fraud provisions of the Act apply to both exempt and non-exempt securities
D. The anti-fraud provisions of the Act do not apply to either exempt or non-exempt securities

Answer 4

The best answer is C.

The anti-fraud provisions of the Act apply to both exempt and non-exempt securities. Thus, if a person fraudulently trades municipal bonds (an exempt security), this person is in violation of the Act.

In contrast, the general provisions of the Securities Exchange Act of 1934 apply to non-exempt securities only. For example, holders of municipal bonds (an exempt security) cannot be considered to be “insiders” while a holder of corporate stock (a non-exempt security) can be an “insider.”

Question 5

Municipal market participants are subject to which of the following rules?

A. Anti-fraud Rule 10b-5 under the Securities Exchange Act of 1934
B. Prospectus delivery rules under the Securities Act of 1933
C. Issuer reporting requirements under the Securities Exchange Act of 1934
D. Indenture requirements of the Trust Indenture Act of 1939

Answer 5

The best answer is A.

Municipal bonds are “exempt” securities and thus are not subject to the provisions of the Securities Acts with the exception of the “anti-fraud” provisions. Municipal bonds do not have to provide a trust indenture; municipalities do not report to the SEC; no prospectus is required when selling a new municipal issue. However, fraudulent activities in the municipal market are covered by the Act of 1934.

Question 6

The Securities and Exchange Commission was:

A. created under the Securities Act of 1933
B. created under the Securities Exchange Act of 1934
C. established after the 1929 market crash as the first self- regulatory organization
D. given regulatory authority over futures exchanges

Answer 6

The best answer is B.

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. FINRA, not the the SEC is an SRO. The SEC is part of the Federal Government.

Question 7

The Securities and Exchange Commission is empowered to administer all of the following EXCEPT:

A. Blue Sky Laws
B. Securities Act of 1933
C. Trust Indenture Act of 1939
D. Investment Company Act of 1940

Answer 7

The best answer is A.

The SEC administrates 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 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.

Question 8

The Securities and Exchange Commission is empowered to administer all of the following Acts EXCEPT:

A. Securities Act of 1933
B. Securities Exchange Act of 1934
C. Trust Indenture Act of 1939
D. Uniform Securities Act

Answer 8

The best answer is D.

The SEC administer 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 Uniform Securities Act (USA) 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.

Question 9

The Self Regulatory Organizations (SROs) are:

A. private companies
B. government sponsored enterprises
C. membership organizations
D. publicly traded companies

Answer 9

The best answer is C.

The self regulatory organizations are membership organizations. Note that the self regulatory organizations are now divested from the actual trading marketplaces. For example, FINRA is the SRO; and NYSE and NASDAQ are the stock exchanges. Both of these exchanges are publicly traded entities. The SRO is a membership organization that writes and enforces rules for members, audits members for compliance, and that collects dues from members to pay for these activities.

Question 10

The Securities Exchange Act of 1934 established “self regulatory organizations” (SROs) and empowered these organizations to do all of the following EXCEPT:

A. set guidelines for fair dealing with the public
B. establish commission rates to be charged to the public
C. take administrative action against broker-dealers that violate industry regulations
D. establish arbitration procedures to settle intra-industry disputes

Answer 10

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; its handle 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.

Question 11

Under the provisions of the Securities Exchange Act of 1934, all of the following must be registered EXCEPT:

A. the exchanges that trade securities
B. member firms
D. customers of member firms

Answer 11

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 and traders register. (Now you know where the term “registered representative comes from! And to be registered, you must pass both the SIE and the appropriate Top-Off Exam - these exams are corequisites.)

There is no requirement for customers to register (duh!).

Question 12

Broker-dealers are required to report their computed Net Capital to customers:

A. monthly
B. quarterly
C. semi-annually
D. annually

Answer 12

The best answer is C.

Broker-dealers must send their customers a semi-annual balance sheet and Net Capital computation.

Question 13

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

Answer 13

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.

Question 14

When is a foreign broker-dealer permitted to solicit U.S. based clients?

A. If the foreign broker-dealer establishes an SEC-registered U.S. subsidiary
B. If the foreign broker-dealer only offers exempt securities
C. If the foreign broker-dealer only deals with Non-U.S. citizens who are residing within U.S. borders
D. If the foreign broker-dealer only deals with accredited individual investors

Answer 14

The best answer is A.
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.

Note that there is no exception offered for foreign broker-dealers that only wish to offer exempt securities in the United States; nor is there an exemption for solicitation of accredited investors.

Question 15

Which of the following issuers must report to the SEC under the Securities Exchange Act of 1934?

A. Corporations and Investment Companies
B. The U.S. Treasury
C. Municipalities
D. Federal Agencies

Answer 15

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.

Question 16

All of the following are provided to shareholders in the annual reports of registered corporations EXCEPT:

A. Income Statement
B. Balance Sheet
C. Statement of Changes in Stockholders’ Equity
D. Details regarding new product launches

Answer 16

The best answer is D.

Corporate annual reports contain the following audited financial statements - Income Statement; Balance Sheet; Statement of Changes to Retained Earnings (this shows earnings added for the year and dividends paid from retained earnings for that year); and Statement of Sources and Uses of Cash (this shows cash received that year from income earned; stock and bond offerings; and disposals of equipment; and cash paid that year for equipment purchases, pay-down of debt; dividends, etc.).

Details regarding new product launches are likely confidential and would not be in the report.

Question 17

All of the following events would require a corporation to file an 8K report with the SEC EXCEPT declaration of (a):

A. divestiture
B. merger
C. dividend
D. bankruptcy

Answer 17

The best answer is C.

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 rather normal event, so no filing is required.

Question 18

If an event occurs which requires an issuer to make an 8K filing with the SEC, the filing must be made:

A. promptly
B. 1 business day after the event
C. 2 business days after the event
D. 4 business days after the event

Answer 18

The best answer is D.

An 8K filing with the SEC is required by a corporation 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.

Question 19

An investor who accumulates a 5% or greater position in the common stock of a registered issuer must file which of the following forms with the SEC?

A. 8K
B. 10K
C. 13D
D. 144

Answer 19

The best answer is C.

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!)

Question 20

Which statement is TRUE about a tender offer for common shares?

A. The offer must remain open for at least 10 business days
B. The offer must remain open for at least 30 business days
C. Each “sweetening” of the offer must extend the offer for an additional 10 business days
D. Each “sweetening” of the offer must extend the offer for an additional 20 business days

Answer 20

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

Question 21

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

Answer 21

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.

Question 22

Who determines if an OTC stock is marginable?

A. FRB
B. FINRA
C. SEC
D. OTCBB

Answer 22

The best answer is A.

The Federal Reserve Board (FRB) is given the power to control margin on securities under Regulation T. Under Regulation T, all listed securities are marginable, and securities on the “OTC Margin List” published by the FRB are marginable.

Question 23

Which statement is TRUE regarding margin regulations?

A. In-house rules may be more stringent than FINRA rules
B. Exchange rules may be less stringent than Federal Reserve rules
C. In-house rules may be less stringent than FINRA rules
D. In-house rules must be approved by the SEC prior to any change

Answer 23

The best answer is A.

Regarding margin rules, FINRA rules may be more stringent than Federal Reserve rules, but cannot be less stringent. Firm rules can be more stringent than FINRA rules, but cannot be less stringent.There is no requirement to have in-house rule changes pre-approved by the SEC.

Question 24

Margins on government and municipal securities are set by (the):

A. MSRB
B. FINRA
C. FRB
D. SEC

Answer 24

The best answer is B.

Because municipals and governments are exempt, the Federal Reserve has no power to set margins. However, FINRA sets minimum maintenance margins for these securities that member firms must meet.

Question 25

All of the following statements are true about margin on securities EXCEPT: A. the FRB sets initial margins for exempt securities B. the FRB sets initial margins for non-exempt securities C. FINRA sets minimum margins for exempt securities D. FINRA sets minimum margins for non-exempt securities

Answer 25

The best answer is A. The Federal Reserve Board (FRB) only has the power to set margins for non-exempt issues. It has no power to set margins for exempt issues under the Securities Exchange Act of 1934. However, FINRA sets minimum margins for both exempt and non-exempt issues. For example, there is no Regulation T margin for corporate bond positions (a non-exempt security), but FINRA sets the minimum at the greater of 7% of face or 20% of market value. For example, there is no Regulation T margin for municipal bond positions (an exempt security), but FINRA sets the minimum at the greater of 7% of face or 15% of market value.

Question 26

The determination of which stocks are marginable is made by (the): A. FRB B. SEC C. FINRA D. SIPC

Answer 26

The best answer is A. The Federal Reserve Board decides which non-exempt securities are marginable. The Fed has decided that all listed securities are marginable and over-the-counter securities which it approves are marginable.

Question 27

Stabilization rules for new issues are set forth under the: A. Securities Act of 1933 B. Securities Exchange Act of 1934 C. Trust Indenture Act of 1939 D. Investment Company Act of 1940

Answer 27

The best answer is B. The Securities Exchange Act of 1934 prohibits market manipulation - with one exception. Stabilization of new issues is permitted as long as the stabilizing trades (which take place in the secondary market) conform to the requirements of the 1934 Act.

Question 28

Which of the following usually acts as the stabilizing market maker? A. Issuer B. Managing underwriter C. Any member of the syndicate D. Any member of the selling group

Answer 28

The best answer is B. Only 1 stabilizing bid is permitted at any time, typically placed by the manager of the syndicate.

Question 29

Which of the following CANNOT be a stabilizing bid for a new issue that has a Public Offering Price of $30 per share? A. $29.00 B. $29.88 C. $30.00 D. $30.13

Answer 29

The best answer is D. Stabilizing bids can only be entered at or below the public offering price, never above. If the bid were allowed to be placed above the public offering price, it would make the issue instantly "hot" and this is prohibited.

Question 30

Under Regulation M, which statement is TRUE regarding stabilizing bids entered by market makers? A. Stabilizing bids may only be maintained for 5 consecutive business days B. Stabilizing bids may be maintained by multiple market makers C. A stabilizing bid cannot be placed unless a "Notice of Stabilization" is included in the prospectus D. A stabilizing bid cannot be placed unless an "Official Notice of Sale" is published in a national publication

Answer 30

The best answer is C. There is no time limitation on the period that a stabilizing bid can be maintained under Regulation M. However, stabilization must cease when the syndicate is broken by the manager. Only one market maker, the manager of the syndicate, can place a stabilizing bid. The members of the syndicate cannot do this. A "Notice of Stabilization" must be included in the prospectus (on the inside front cover) that details the fact that the manager can start and stop stabilizing at any time and that when stabilization stops, the price of the issue may drop. An Official Notice of Sale is used to solicit competitive bids for municipal new issues and has nothing to do with stabilization.

Question 31

All of the following individuals would be considered an insider EXCEPT: A. A person who uses public information to trade in that company's stock for a profit B. A person who uses non-public information to trade in that company's stock for a profit C. A Chairman of a corporation who uses non-public information to trade in that company's stock for a profit D. A wife of a Chairman of a corporation who uses non-public information to trade in that company's stock for a profit

Answer 31

The best answer is A. Anyone can use public information to trade stock for a profit. However, any person who uses material non-public information to trade in a company's stock for profit (or to avoid a loss) can be considered to be an "insider."

Question 32

The Chairman of XYZ Corporation, while playing golf with a neighbor, casually mentions that this quarter's earnings are likely to be lower than expected. Based on this information, the neighbor sells short XYZ stock the next day. Which statement is TRUE? A. Both the Chairman and the neighbor have violated the insider trading rules B. Only the Chairman has violated the insider trading rules C. Only the neighbor has violated the insider trading rules D. Neither has violated the insider trading rules since the actual earnings number was not disclosed

Answer 32

The best answer is A. Under the Insider Trading Act of 1988, any person who uses material non-public information to trade in a company's stock for profit can be considered to be an "insider." In addition, the Act extends the definition of an insider to "controlling" persons - in this case, the provider of the information. A person who "communicates" material non-public information can be held liable under the Act unless "that person acted in good faith and did not directly or indirectly induce the act constituting the violation." Therefore, both the person trading on the inside information (the "tippee") and the communicator of the information (the "tipper") can be held liable under the Act.

Question 33

An individual who made a profit of $1,000,000 from insider trading would be subject to a civil penalty of: A. $1,000,000 B. $2,000,000 C. $3,000,000 D. $4,000,000

Answer 33

The best answer is C. If an individual is found guilty of insider trading, he or she must pay back the profit achieved or loss avoided, and in addition must pay a penalty equal to 3 times that amount. This is called "treble damages."

Question 34

Fines assessed for convictions involving violations of insider trading laws are paid to the: A. Department of Justice B. Securities and Exchange Commission C. Securities Investor Protection Corporation D. Department of Treasury

Answer 34

The best answer is D. Fines assessed for insider trading convictions are paid to the Department of Treasury. The fines are not paid to the SEC. If they were, then the SEC might be tempted to "go crazy" prosecuting insider trading cases to pump up its operating budget (raises for everyone!)

Question 35

Information barriers are required between which brokerage firm departments? A. Margin and Reorganization B. Research and Accounting C. Investment Banking and Payroll D. Trading and Investment Banking

Answer 35

The best answer is D. Information barriers, so called "Chinese Walls," as used in the securities industry, are the complete separation of a broker-dealer's investment banking unit from its trading and research units. In its normal operations, an investment banking unit may advise on takeovers; or receive other confidential information that could influence the price of an issuer's securities once the information is public. Broker-dealers establish a "wall" between the investment banking unit and the trading unit, so that this information is not received by the firm's traders in advance of its release to the public. A wall is put between research and investment banking because research should not be influenced by pending investment banking deals - e.g., research could "help" the deal by putting out a "buy" recommendation on that stock. In addition, research personnel might buy the stock themselves, which can be viewed as trading on "inside information." (Note: We know that using the term "Chinese Wall" is not PC and the term "Information Barrier" is much better. However, this term is commonly used in the securities industry and is used on the exam.)

Question 36

The director of a public corporation wishes to sell stock of that company in compliance with Rule 144. Which statement is FALSE? A. Registered control stock must be held for 6 months, fully paid, before it can be sold B. Unregistered restricted stock must be held for 6 months, fully paid, before it can be sold C. If the sale is for 5,000 shares or less, worth $50,000 or less, no SEC filing is required D. Any short swing profits (within 6 months) from trading the stock must be returned to the corporation

Answer 36

The best answer is A. Rule 144 requires that unregistered shares be held fully paid for 6 months before they can be sold under the rule. Registered shares held by officers can be sold without meeting the holding period requirement, but are subject to the other provisions of the rule. No filing is required if 5,000 shares or less, worth $50,000 or less, are sold every 3 months. Under the Securities Exchange Act of 1934, any short swing profits (achieved within a 6-month time frame) that officers derive from trading that company's stock must be repaid to the company.

Question 37

Corporate officers who wish to trade their own company's stock must comply with all of the following rules EXCEPT: A. filing change of holding reports with the SEC B. prohibitions on short sales of that company's stock C. purchase restrictions through the exercise of stock options D. trading is restricted to decisions based on publicly available information

Answer 37

The best answer is C. There is no restriction on corporate officers' buying their company's stock through the exercise of stock options. Many companies compensate their officers with stock option packages. Officers must report their trades to the SEC within 2 business days of the trade, since they are classed as "insiders;" insiders are prohibited from selling their company's stock short except for year-end "short against the box" trades; and insiders can only trade based on publicly available information.

Question 38

An officer of a listed company calls his registered representative and tells him to buy a large block of that stock. Prior to placing the order to buy, the registered representative calls ten of his customers and tells them to buy that company's stock. Which statement is TRUE? A. This action is permitted under SEC rules B. This action is a violation of the insider trading rules C. This action is an ethical business practice D. This action is beneficial to the customer, and thus is allowed

Answer 38

The best answer is B. When the registered representative received the buy order from the officer, he is obligated to execute that order before acting on the information he has received. Once the order is executed, it is public information. At this point, the representative can trade for himself or his customers, and is no longer considered to be an "insider." In effect, the registered representative is "front running" the officer by telling his or her other customers to buy before placing the officer's buy order. This is a violation of Securities Exchange Act Rule 10b-5.

Question 39

A corporate executive holds a meeting with a select group of research analysts and gives information about the company's expected revenue and income for the upcoming quarter. If the analysts use the information to make recommendations, which statement is TRUE under Regulation FD? A. The corporate officer and each analyst are considered to be tippers B. The corporate officer and each analyst are considered to be tippees C. The corporate officer is considered to be a tipper and each analyst is considered to be a tippee D. The corporate officer is considered to be a tippee and each analyst is considered to be a tipper

Answer 39

The best answer is C. Regulation FD (Fair Disclosure), passed in 2000, is basically an elaboration of the insider trading rules. It prohibits issuers from making selective disclosure of non-public information to research analysts, mutual fund managers, and other industry professionals, unless at the same time, the information is broadly disseminated to the public. If such selective disclosure is made and trades result, the corporate officers giving the information become "tippers" and the recipients become "tippees."

Question 40

An officer of a company has been invited by a large mutual fund company to give a talk to the fund company's analysts about its business plans and prospects. At the talk, the officer inadvertently discloses material information that could affect the stock's price. Which statement is FALSE? A. The officer is considered to be a "tipper" B. The analysts are considered to be "tippees" C. The company must make an immediate public disclosure of the information to avoid insider trading liability D. The company must file a 10K with the SEC disclosing the information to avoid insider trading liability

Answer 40

The best answer is D. If an officer of a company makes an accidental disclosure of material non-public information at a presentation to analysts, Regulation FD considers the officer to be a tipper and the analysts to be tippees. To avoid insider trading liability, the company can either make an immediate public disclosure of the information or can file an 8K Report (a special report of significant events with the SEC, which makes the information public). A 10K is the corporation's annual audited financial statements and has nothing to do with Regulation FD.

Question 41

SEC Rule 10b-5-1: A. is the "catch all" fraud rule that makes any deceptive or manipulative practice in connection with the sale of a security potentially fraudulent under the Securities Exchange Act of 1934 B. gives officers of publicly held companies a safe harbor from being charged with an insider trading violation if they establish a pre-arranged trading plan for that issuer's securities C. prohibits the purchase or sale of an issuer's securities based on material nonpublic information in breach of duty of trust owed to the issuer or shareholders of that security D. prohibits any person, in connection with a tender offer for securities, to bid for or purchase the security which is subject of the tender offer through any means other than via the offer

Answer 41

The best answer is B. SEC Rule 10b-5-1 allows officers of publicly held companies (statutory insiders) to establish "pre-arranged trading plans" that set future transaction dates and amounts of that issuer's securities; or that specify algorithms that establish the transaction dates and amounts. As long as the officer does not deviate from the plan, the officer is given a "safe harbor" from being accused of insider trading based on those trades.

Question 42

Pre-arranged trades by insiders are: A. prohibited B. permitted under Rule 10b-5 C. permitted under Rule 10b-5-1 D. permitted under Regulation FD

Answer 42

The best answer is C. We all know that insiders are prohibited from trading based on material non-public information. In 2000, the SEC issued a "safe-harbor" rule that permits statutory insiders (officers, directors and 10% shareholders) to set up a written plan for trading that company's securities. Such a written plan specifies the future date with amount on which securities are to be bought and sold; or specifies the algorithm to be used for determining the amount and date of future purchases or sales. Once the plan is in force, the "insider" cannot have any further influence on trades effected under the plan. As long as the insider adheres to such a written trading plan, that person is given a "safe harbor" from being accused of using "inside information" as the basis for the trades that occur based on adhering to the plan.

Question 43

A "penny stock" is a designation that applies to a: A. debt security B. equity security C. long call option D. mutual fund share

Answer 43

The best answer is B. The "penny stock" designation only applies to equities that are not listed on an exchange or NASDAQ; and that are under $5 per share. To solicit the purchase of such securities requires that a detailed suitability determination be performed; that the customer be sent the determination; and that the customer sign and return this form before the sale can be confirmed.

Question 44

If a registered representative solicits an order from a new customer to purchase a "penny stock" that is trading over-the-counter, which procedure is required? A. Send a prospectus to the customer B. Have the customer sign a statement that he or she understands the risks involved prior to executing the order C. Have the branch manager approve the order and then fill the customer's order in the same manner as with any other security D. Send the customer a Subscription Agreement to be signed before filling the order

Answer 44

The best answer is B. Under the SEC's "penny stock rule" (Rules 15g-1 through 15g-6), if a registered representative solicits a new customer to buy a non-NASDAQ over-the-counter stock priced under $5 (translated, this is an OTCBB or Pink OTC Markets issue under $5), the registered representative must complete a detailed suitability statement for the customer, and the customer must sign this statement before the order can be confirmed. This rule was enacted to curb unethical sales practices of so-called "penny stocks."

Question 45

Under the "penny stock rule," a customer is considered to be "established" and does not have to sign a suitability statement to buy a penny stock if that customer has bought how many penny stock issues previously from that broker-dealer? A. 2 B. 3 C. 5 D. 10

Answer 45

The best answer is B. Suitability statements are not required under the "penny stock rule" for so called "established customers." These are customers who have either had cash or securities in custody of that broker-dealer for at least 1 year; or customers who have bought 3 or more "penny stock" issues previously from that broker-dealer.

Question 46

All of the following statements are true about listed securities EXCEPT: A. listed securities trade in the Second Market B. under Regulation T, all listed securities are marginable C. listed securities are subject to Regulation SHO D. listed companies must be registered with, and report their results to, the SEC

Answer 46

The best answer is A. Listed securities (those listed on an exchange) are marginable under Regulation T. Under the Exchange Act of 1934, Regulation SHO requires that before any equity security (either listed or unlisted) can be sold short, the member firm must affirmatively determine that the security can be borrowed and delivered on settlement. This is called the "locate" requirement. Listed securities trade in the first (exchanges), third (OTC trading of exchange listed securities) and fourth (direct trades between institutions via ECNs) markets. The second market is trading of unlisted securities over-the-counter. These are OTCBB and Pink OTC Markets issues. Listed companies must register with, and report their results to, the SEC.

Question 47

All of the following requires filing with the SEC EXCEPT: A. Purchase of a 3% position in one company's stock B. An officer selling 1% of that company's stock C. Broker-Dealer Net Capital computation D. Corporate proxy materials

Answer 47

The best answer is A. All of the items listed are filed with the SEC. Anyone who accumulates a 5% position in one company must make a 13D filing with the SEC; officers must report their sales of that company's stock under the insider rules by filing a Form 4 within 2 business days of the trade; broker/dealers must report their Net Capital to the SEC; corporate proxy materials must be filed with the SEC 10 business days before use.

Question 48

All of the following actions require a filing with the SEC EXCEPT: A. the purchase of a 5% position in one company's stock B. an officer selling 1% of that company's stock C. a broker-dealer's net capital computation D. a company declaring a cash dividend to stockholders

Answer 48

The best answer is D. Anyone who accumulates a 5% position in one company must make a 13D filing with the SEC; officers must report their sales of that company's stock under the insider rules by filing a Form 4 within 2 business days of the trade; and broker/dealers must report their Net Capital to the SEC. A corporate 8K filing is required for any unusual corporate announcements such as a merger or divestiture - it is not required for a dividend announcement, which is rather typical.

Question 49

All of the following requires filing with the SEC EXCEPT: A. Purchase of a 5% position in one company's stock B. An officer selling 1% of that company's stock C. Corporation declaring bankruptcy D. Corporate marketing materials

Answer 49

The best answer is D. All of the items listed are filed with the SEC. Anyone who accumulates a 5% position in one company must make a 13D filing with the SEC; officers must report their sales of that company's stock under the insider rules by filing a Form 4 within 2 business days of the trade; a corporate 8K filing is required for any unusual corporate announcements such as a merger or divestiture, or bankruptcy declaration; and corporate proxy materials must be filed with the SEC 10 business days before use.

Question 50

The provisions of the Securities Exchange Act of 1934 apply to all of the following activities EXCEPT: A. trading of corporate bonds B. trading of municipal bonds C. issuance of municipal bonds D. issuance of corporate financial statements

Answer 50

The best answer is C. The Securities Exchange Act of 1934 relates to the secondary (trading) market; it does not cover the issuance of securities. Trading of both corporate and municipal bonds is covered under the "anti-fraud" provisions of the Act. Corporate financial reporting standards and public disclosure of financial reports is another part of the '34 Act.

Question 51

All of the following are covered under the Securities Exchange Act of 1934 EXCEPT: A. registration of broker-dealers B. registration of new issues C. stabilization of new issues D. registration of exchanges

Answer 51

The best answer is B. The Securities Act of 1933 requires registration of non-exempt new issues. The Securities Exchange Act of 1934 requires registration of exchanges and their members with the SEC, and allows stabilization of new issues in the secondary market under prescribed conditions.