Unit 16

Question 1

Key words identifying the Act of 1934 in Test questions?

Answer 1

The secondary market, outstanding securities, and trading activities

Question 2

What did the Maloney Act do?

Answer 2

It amended the Act of 1934 and enabled the SEC to create SROs or designated examining authorities(DEAs) for monitoring brokers and deals not affiliated with a stock exchange, FINRA and MSRB.

Question 3

What is the Trust Indenture Act of 1939?

Answer 3

Applies to corporate bonds with the following characteristics: Issue size of more than $50 million within 12 months, Maturity of nine months or more

Question 4

What is the Investment Company Act of 1940?

Answer 4

Defines and regulates investment companies, including mutual funds.

Requires investment companies to:
Register with the SEC before selling shares publicly
Clearly state their investment objectives in their registration statement and prospectus
Have net worth of at least $100k before offering shares to the public
Be owned by a minimum of 100 shareholders
Comply with standards on pricing, public sale, and reporting

Question 5

Definition of a Trust Indenture?

Answer 5

The trust indenture is a series of promises between the issuer and the trustee for the benefit of the bondholders

Question 6

Three classifications of investment companies, what are they?

Answer 6

Face-amount certificate companies(FACs)
Unit-Investment trusts(UITs)
Management Companies

Question 7

What is the purpose of the Investment Advisers Act of 1940?

Answer 7

To require anyone who, as part of their business, gives investment advice for compensation to register as investment advisers under the act.

Question 8

What is the Securities Investor Protection Act of 1970?

Answer 8

Protect customers from broker/deal failure or insolvency, also created SIPC.

Question 9

What is Treble?

Answer 9

A legal word often used in federal securities law; it means three times damages or losses avoided

Question 10

What are contemporaneous traders?

Answer 10

Persons who enter trades at or near the same time in the same security as a person who has inside information

Question 11

Under the Securities Exchange Act of 1934, the SEC

1) regulates the securities exchanges
2) requires the registration of brokers and dealers
3) prohibits inequitable and unfair trade practices
4) regulates the over-the-counter markets?

Answer 11

Answer: all of them

Question 12

Which of the following acts requires corporations to issue annual reports?

1) Securities Act of 1933
2) Securities Exchange Act of 1934
3) Trust Indenture Act of 1939
4) Investment Company Act of 1940

Answer 12

2) Securities Exchange Act of 1934

Question 13

What are the three basic stages of money laundering?

Answer 13

Placement, Layering, and Integration

Question 14

What are Blue-Sky Laws?

Answer 14

In addition to federal securities regulation, each state has laws that pertain to the issuance and trading of securities.

Question 15

What is the Uniform Securities Act?

Answer 15

Provides a legal framework for the state registration of securities

Question 16

Which of the following legislative acts exclusively regulates debt securities?

1) Securities Act of 1933
2) Securities Exchange Act of 1934
3) Trust Indenture Act of 1939
4) Investment Advisers Act of 1940

Answer 16

Trust Indenture Act of 1939

Question 17

Which of the following statements about SIPC are TRUE?

1) It is a nonprofit membership corporation
2) It is an agency of the US Government
3) It is funded by brokers/dealers
4) Coverage is limited to $500k per customer

A) I and III
B) I, III, and IV
C) I and IV
D) III and IV

Answer 17

B, I, III, and IV

Question 18

The Securities Investor protection corporation will provide protection of up to $500k per separate account on customers claims for cash and securities in the event of the liquidation of a SIPC member. However, the amount of this coverage for cash left on deposit with a SIPC member is limited to a maximum of?

A) $250k per separate customer
B) $500k per separate customer
C) $500k per account
D) $250k per account

Answer 18

A) $250 k per account

Question 19

Under MSRB rules, which of the following statements regarding a fidelity bond is TRUE?

A) It insures against loss due to theft.

B) It will insure against the price decline of a security.

C) It insures brokerage firm customers in the event the brokerage firm must liquidate.

D) It is contained in the trust indenture.

Answer 19

It insures against loss due to theft.

MSRB members are required to have a fidelity bond which protects against loss due to employee theft.

Question 20

If a registered representative is found to have engaged in insider trading, under criminal penalties the registered representative can be

A) fined up to $1 million and receive a jail sentence

B) fined up to $25 million, but jail sentences cannot be imposed

C) fined up to $500,000, but jail sentences cannot be imposed

D) fined up to $5 million and receive a jail sentence

Answer 20

fined up to $5 million and receive a jail sentence

The member firm, which must have procedures in place to prevent insider trading, can be fined up to 3 times the profit gained or loss avoided, or $25 million, whichever is greater

Question 21

Under SIPC, when a trustee is appointed, customer claims are filed with the:

A)failed broker/dealer’s SRO.

B) Securities Investor Protection Corporation.

C) court-appointed trustee.

D) Securities and Exchange Commission.

Answer 21

court-appointed trustee.

Customer claim forms are filed with the trustee.

Question 22

Under the Securities Investors Protection Act which of the following is TRUE?

I. Cash and margin accounts are combined for coverage purposes as outlined by SIPC
II. Cash and margin accounts are treated separately for coverage purposes as outlined by SIPC
III. Valuation date for securities held with the failed BD is the day the customer files the coverage claim
IV. Valuation date for securities held with the failed BD is the day the court is petitioned to appoint a trustee

Answer 22

I and IV

Question 23

Under SEC rules regarding penny stocks, which of the following regarding established customers are TRUE?

I.They are exempt from the requirement to prepare a suitability statement.
II.They are not exempt from the requirement to prepare a suitability statement.
III.They are exempt from the disclosure rules.
IV.They are not exempt from the disclosure rules.

Answer 23

I and IV

Question 24

At a social gathering, an officer of a publicly traded company confides to his neighbor, a registered representative, that his company will announce a major acquisition in the coming week. Considering what has occurred up to this point in time, which of the following statements regarding the SEC’s insider trading rules is TRUE?

A) Neither the officer nor the registered representative is in violation.

B) The officer is in violation.

C) The registered representative is in violation.

D) Both the officer and the registered representative are in violation.

Answer 24

Neither the officer nor the registered representative is in violation.

Simply giving someone material, nonpublic information (while imprudent) is not a violation. However, if the information is used to trade for profit or to avoid a loss, both the tipper and the tippee would have violated the law.

Question 25

Under penny stock rules, which of the following would qualify an investor to be considered an established customer at a broker/dealer?

A) Open cash account with that BD for 6 months before the first penny stock transaction

B) Signed transaction agreement on file with that BD

C) Signed risk disclosure statement on file with that BD

D) At least 3 separate penny stock purchases with that BD

Answer 25

At least 3 separate penny stock purchases with that BD

Under penny stock rules, investors are established customers if they have deposited funds or securities in an account for at least 1 year prior to the penny stock transaction, or have purchased at least 3 different penny stocks from the same broker/dealer.
Reference: 16.1.9.1 in the License Exam Manual

Question 26

According to the Insider Trading and Securities Fraud Enforcement Act, contemporaneous traders are all of the following EXCEPT

A) non corporate insiders (outsiders)

B) insiders such as corporate employees

C) persons granted the right to sue inside traders for damages under the act

D) persons who make trades at approximately the same time as inside traders

Answer 26

insiders such as corporate employees

According to the Insider Trading and Securities Fraud Enforcement Act of 1988, contemporaneous traders are corporate outsiders who make trades at about the same time as insiders. They are granted the right to sue inside traders for damages sustained.

Question 27

The order protection rule which prohibits a trade-through and the minimum increments pricing rule which addresses penny and sub-penny pricing were each enacted under a broad sweeping SEC regulation designed to bring trading and reporting uniformity to US securities markets. This regulation is known as

A) USA (Uniform Securities Act)

B) Regulation NMS (National Market System)

C) The Bank Secrecy Act

D) SIPA (Securities Investors Protection Act)

Answer 27

Regulation NMS (National Market System)

Regulation NMS (National Market System) is the SEC regulation designed to bring trading and reporting uniformity to the US securities markets. Among the rules it encompasses are the order protection rule which prohibits a trade-through and the minimum increments pricing rule which addresses $.01 anbacd sub-penny pricing.

Question 28

The Sarbanes-Oxley Act legislation was established to enhance standards for

I. Market makers in U.S. exchange listed securities
II. Boards of directors of U.S. publicly traded companies
III. Public accounting firms
IV. Block traders in stocks of U.S. exchange listed securities

Answer 28

II and III

The Sarbanes-Oxley Act of 2002 (SOX) was enacted in response to a number of major corporate and accounting scandals. The legislation established enhanced standards for all U.S. public company boards of directors, management, and public accounting firms.