Securities Fraud

Question 1

In some jurisdictions, self-regulatory organizations (SROs) play an important role in the resolution of disputes arising from securities transactions.

A. True
B. False

Answer 1

True

Question 2

To be effective, securities regulation must balance the legitimate needs of businesses to raise capital against the need to reduce market risk.

A. True
B. False

Answer 2

False

Question 3

In general, for a contract, transaction, or scheme to be classified as an investment contract, the instrument must be purchased by investors who display management activity in the instrument’s enterprise and have expectations of making profits that are to be generated from their own efforts.

A. True
B. False

Answer 3

False

Question 4

To determine if a misrepresentation in the offer or sale of any securities is ________, the fraud examiner should answer the following question: “Would a reasonable investor want to know this information to make an informed decision?”

A. Material
B. Promotional
C. Privileged
D. Relevant

Answer 4

A. Material

Question 5

One of the main objectives of the International Organization of Securities Commissions (IOSCO) is to assist its members in promoting high standards of regulation in order to maintain just, efficient, and sound markets.

A. True
B. False

Answer 5

True

Question 6

All the following are red flags that might indicate that an entity is operating a security business without the proper license or registration EXCEPT:

A. Justified gaps in a promoter’s work history
B. Prior customer complaints
C. Agents with criminal records
D. A history of regulatory problems

Answer 6

A. Justified gaps in a promoter’s work history

Question 7

The reduction of systemic risk is one of the objectives on which the International Organization of Securities Commissions Objectives and Principles of Securities Regulation (IOSCO Principles) is based.

A. True
B. False

Answer 7

True

Question 8

Which of the following is NOT a purpose of securities regulation?

A. To provide protections for investors
B. To restrict market competition
C. To reduce the prevalence of financial crime
D. To discourage behavior that might harm the market

Answer 8

B. To restrict market competition

Question 9

Which of the following is one of the objectives on which the International Organization of Securities Commissions Objectives and Principles of Securities Regulation (IOSCO Principles) is based?

A. Harmonizing securities laws and standards across the globe
B. Enhancing the financial system’s growth
C. Ensuring that markets are fair, efficient, and transparent
D. Eliminating market risk

Answer 9

C. Ensuring that markets are fair, efficient, and transparent

Question 10

Which of the following statements about the International Organization of Securities Commissions (IOSCO) is TRUE?

A. One of IOSCO’s main objectives is to assist its members in promoting high standards of regulation in order to maintain just, efficient, and sound markets
B. IOSCO is comprised of securities commissioners and administrators responsible for securities regulation and the administration of securities laws in their respective countries
C. IOSCO is recognized as the international standard-setter for securities markets
D. All of the above

Answer 10

D. All of the above

Question 11

All the following would violate rules that prohibit securities broker-dealers from making unsuitable recommendations on investments or investment strategies EXCEPT:

A. A broker-dealer makes an investment without obtaining approval to make the transaction.
B. A broker-dealer makes an investment that is inconsistent with the client’s objectives.
C. A broker-dealer recommends an investment without ascertaining relevant financial information about the client.
D. A broker-dealer recommends an investment strategy that is unsuitable for the client.

Answer 11

A. A broker-dealer makes an investment without obtaining approval to make the transaction.

Question 12

To determine if a misrepresentation in the offer or sale of any securities is material, a fraud examiner should consider which of the following?

A. Whether a reasonable investor would want to know the information to make an informed decision
B. Whether the person who made the representation believed that it was suitable for potential investors
C. Whether the person who made the representation intended to mislead potential investors
D. Whether the person who made the representation had authorization to make the statements

Answer 12

A. Whether a reasonable investor would want to know the information to make an informed decision

Question 13

Self-regulatory organizations (SROs) are nongovernmental entities that exercise some level of regulatory authority over the operations, standards of practice, and business conduct of an industry or profession.

A. True
B. False

Answer 13

True

Question 14

If a broker who is subject to rules that prohibit securities broker-dealers from making unsuitable recommendations on investments or investment strategies recommends that their client make an investment that is inconsistent with their client’s objectives, then this recommendation would be considered a violation of the rules prohibiting unsuitable recommendations.

A. True
B. False

Answer 14

False

Question 15

If a broker who is subject to rules that prohibit securities broker-dealers from making unsuitable recommendations on investments or investment strategies recommends that their client make an investment that is inconsistent with their client’s objectives, then this recommendation would be considered a violation of the rules prohibiting unsuitable recommendations.

A. True
B. False

Answer 15

True

Question 16

The International Council of Securities Associations (ICSA) is recognized as the international standard-setter for securities markets.

A. True
B. False

Answer 16

False

Question 17

Which of the following terms refers to the inappropriate practice of an investment professional who engages in the excessive trading of a customer account to generate commissions while disregarding the customer’s interests?

A. Parking
B. Selling away
C. Churning
D. Pump and dump

Answer 17

C. Churning

Question 18

The protection of investors is one of the objectives on which the International Organization of Securities Commissions Objectives and Principles of Securities Regulation (IOSCO Principles) is based.

A. True
B. False

Answer 18

True

Question 19

Which of the following functions is NOT typically performed by self-regulatory organizations (SROs) in the securities industry?

A. Operating market surveillance programs to monitor compliance with industry rules
B. Establishing the standards and rules under which members of the securities industry operate
C. Imposing criminal sanctions against individuals who violate industry rules
D. Offering professional training, testing, and licensing to members of the securities industry

Answer 19

C. Imposing criminal sanctions against individuals who violate industry rules

Question 20

Haley, an investment professional, was responsible for managing the brokerage account of her client Tammie. Tammie had little investment experience and trusted Haley to control her account. Over an eight-month period, Haley executed more than one hundred trades on Tammie’s behalf for the purpose of increasing her own commissions. Haley executed the trades without regard for Tammie’s investment goals. This securities fraud scheme is BEST known as:

A. Insider trading
B. Selling away
C. Churning
D. Running

Answer 20

C. Churning

Question 21

Which of the following is an example of insider trading?

A. An individual sells their shares in a company after reading a news article about an explosion at the company’s factory.
B. An individual buys a company’s shares because the company operates in an industry that is growing rapidly.
C. A bank manager tells a customer that the interest rates for thirty-year mortgages have reached an all-time low.
D. An employee sells shares of their company’s stock because they know that the company is going to publicly announce that it is filing for bankruptcy.

Answer 21

D. An employee sells shares of their company’s stock because they know that the company is going to publicly announce that it is filing for bankruptcy.

Question 22

The International Organization of Securities Commissions (IOSCO) is an international oversight body that is responsible for issuing and enforcing regulatory standards that govern all international securities markets.

A. True
B. False

Answer 22

False

Question 23

Which of the following is the MOST ACCURATE definition of insider trading?

A. Systematically trading accounts against each other
B. Issuing equity illegally through capital markets
C. Using publicly available information to manage investment portfolios
D. Trading in securities based on material, nonpublic information

Answer 23

D. Trading in securities based on material, nonpublic information

Question 24

Which of the following is an example of insider trading?

A. Smith sells shares of his company’s stock because he knows that the company is going to announce low earnings
B. Albert buys shares of a company after the company’s CEO tells him about earnings growth a day before making the news public
C. Regina purchases shares of her company’s stock after she learns that her company is going to announce a new joint venture with a very successful and well-known multinational corporation
D. All of the above

Answer 24

D. All of the above

Question 25

Generally, for a contract, transaction, or scheme to qualify as an investment contract, four elements must be met. Which of the following is one of those four elements?

A. The investment was made with expectations of making a profit
B. The investment is in a common enterprise
C. There is an investment of money or another asset
D. All of the above

Answer 25

D. All of the above

Question 26

Which of the following would MOST LIKELY be considered a security that is subject to registration and regulation regarding trading?

A. An instrument that represents ownership interest
B. A notarized contract
C. Anything of material value or usefulness
D. An investment contract

Answer 26

D. An investment contract

Question 27

The presence of securities regulation tends to decrease investors’ confidence in the market.

A. True
B. False

Answer 27

False

Question 28

Which of the following entities is recognized as the international standard-setter for securities markets?

A. The International Capital Market Association (ICMA)
B. The International Organization of Securities Commissions (IOSCO)
C. The International Council of Securities Associations (ICSA)
D. The World Federation of Exchanges (WFE)

Answer 28

B. The International Organization of Securities Commissions (IOSCO)

Question 29

If a broker who is subject to rules that prohibit securities broker-dealers from making unsuitable recommendations on investments or investment strategies recommends an investment to a client without ascertaining relevant personal and financial information about the client, then the broker has violated the rules that prohibit unsuitable recommendations.

A. True
B. False

Answer 29

True