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Flashcards in Federal Regulations (Securities Exchange act 1934) Deck (53):
1

Which of the following statements regarding discretionary accounts is TRUE?

A) The rules regarding churning of accounts do not apply to discretionary accounts.
B) A branch manager must approve discretionary orders before entry.
C) A principal must approve discretionary orders before entry.
D) An order in which an investor designates the security's name, the number of shares, and whether to buy or sell and gives the agent discretion as to time and price only is not considered discretionary.

D) An order in which an investor designates the security's name, the number of shares, and whether to buy or sell and gives the agent discretion as to time and price only is not considered discretionary.

An order is discretionary only if an agent selects the size of the trade, the security, or whether to buy or sell. Selecting only price and/or time does not constitute discretion. Churning rules apply to discretionary accounts, and a principal must approve order tickets after the trades, not before.

2

The Securities Exchange Act of 1934 regulates or mandates each of the following EXCEPT:

A) full and fair disclosure on new offerings.
B) creation of the SEC.
C) manipulation of the secondary market.
D) extension of credit to customers.

A) full and fair disclosure on new offerings.

The Securities Exchange Act of 1934 created the SEC and regulates the secondary market. The Securities Exchange Act of 1934 does not address full and fair disclosure issues; the Securities Act of 1933 addresses such issues.

3

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

A) Securities Exchange Act of 1934.
B) Securities Act of 1933.
C) Trust Indenture Act of 1939.
D) Investment Company Act of 1940.

A) Securities Exchange Act of 1934.

The Securities Exchange Act of 1934 mandates that public issuers file annual and quarterly reports with the SEC.

4

The Securities Exchange Act of 1934 covers all of the following EXCEPT:

A) trading of corporate securities.
B) issuance of financial reports by corporations.
C) issuance of corporate securities.
D) trading on exchanges.

C) issuance of corporate securities.

The Securities Exchange Act of 1934 regulates secondary trading or trading markets, including reporting requirements. The Securities Act of 1933 regulates the issuance of new, nonexempt securities.

5

Under federal law, which act regulates the activities of broker/dealers and associated persons?

A) Securities Exchange Act of 1934.
B) Investment Company Act of 1940.
C) Trust Indenture Act of 1939.
D) Uniform Securities Act.

A) Securities Exchange Act of 1934.

The Securities Exchange Act of 1934 regulates the secondary market and its employees and firms.

6

Which of the following is regulated by the Securities Exchange Act of 1934?

A) Requirements for the provisions of a prospectus.
B) Registration of new issues of stock.
C) Regulation of exchanges.
D) Exemptions of new issues from registration requirements.

C) Regulation of exchanges.

The purpose of the Securities Exchange Act of 1934 is to regulate secondary market trading of securities that have already been issued. It created the SEC and requires that all securities exchanges and firms register with the SEC if they are involved in interstate commerce. It was the Securities Act of 1933 that dealt with registration and exemption from registration of new issues and prospectus delivery requirements.

7

What is the purpose of the Securities Exchange Act of 1934?

A) It regulates the persons involved in the secondary market.
B) It provides requirements relating to new issues.
C) It provides policies relating to unethical business practices.
D) It provides standards among the states.

A) It regulates the persons involved in the secondary market.

The Securities Exchange Act of 1934 was designed to regulate securities transactions, securities markets, and securities firms that trade in the secondary market. The Securities Act of 1933 was designed to provide regulation in the new issue market. Unethical business practices are covered in NASAA's Statements of Policy on Unethical Business Practices. The Uniform Securities Act provides a model for the states.

8

Under the Securities Exchange Act of 1934, SEC Commissioners

A) must not have any other business or employment besides their ​role with the SEC
B) must have professional experience as attorneys as well as knowledge of the securities business
C) are ​appointed by ​FINRA and ​confirmed by the United States Senate
D) must not be affiliated with any political party.

A) must not have any other business or employment besides their ​role with the SEC

SEC Commissioners may have no other business or employment other than their commission seat​. They must also refrain from any securities trading. However, experience as ​an attorney is not a qualification. Commissioners are not elected but are appointed by the president and confirmed by the senate. Political party affiliation is a consideration, since no more than 3 of the 5 Commissioners may belong to the same party.

9

When an agent submits an order ticket to purchase securities for a client, all of the following would appear EXCEPT:

A) the details of the order.
B) the current market price of the security.
C) the broker dealer's name.
D) the agent's name.

B) the current market price of the security.

Any order ticket submitted by an agent for execution at a broker/dealer will always include the agent's name and that of the B/D. All order details must be listed, e.g. the number of shares, limit or market, etc. but the current market price is never included.

10

Under the Securities Exchange Act of 1934, commissioners of the SEC:

1. are appointed by a joint House/Senate panel.
2. are appointed by the President.
3. may not engage in any other business.

2. are appointed by the President.
3. may not engage in any other business.

The SEC was created by the Securities Exchange Act of 1934 with the power to enforce the Securities Act of 1933 and all subsequent federal securities acts. The policies of the SEC are determined by 5 commissioners appointed by the President of the United States, with the advice and consent of the Senate, to staggered 5-year terms (with 1 expiring each year). No more than 3 commissioners may belong to the same political party, and commissioners may not engage in any outside employment.

11

According to the Securities Exchange Act of 1934, who appoints the SEC Commissioners?

A) The President.
B) A Senate committee.
C) The Federal Reserve Board governors.
D) The entire Senate.

A) The President.

SEC Commissioners are appointed by the President of the United States, with the advice and consent of the Senate, to staggered 5-year terms, with 1 term expiring each year. There are 5 Commissioners, and no more than 3 may belong to the same political party. SEC Commissioners may not engage in any outside employment or securities transactions.

12

Which of the following is TRUE of SEC Commissioners under the Securities Exchange Act of 1934?

A) They may not invest in any securities other than those issued or guaranteed by the U.S. government.
B) Their political affiliation is of no concern.
C) They are appointed by a senate panel.
D) They are appointed for life.

A) They may not invest in any securities other than those issued or guaranteed by the U.S. government.

Other than securities issued or guaranteed by the U.S. government, SEC commissioners are prohibited from investing during their term in office. The policies of the SEC are determined by 5 Commissioners appointed to staggered, 5-year terms by the President of the United States with the advice and consent of the Senate. No more than 3 may belong to the same political party, and Commissioners may not engage in any outside employment.

13

Under the Securities Exchange Act of 1934, which of the following are municipal bonds?

1. Treasury bonds.
2. State bonds.
3. Bonds issued by a city.

2. State bonds.
3. Bonds issued by a city.

Municipal securities are debt-related securities issued by or guaranteed by any political entity that is not part of the federal government or a government agency. Treasury bonds are part of the federal government and do not qualify under the definition.

14

Seven years ago, Ivan was found guilty of embezzling securities from clients. He now wishes to join another brokerage firm. Which of the following statements is TRUE regarding this situation?

A) There are no provisions restricting his employment because the restriction time period has elapsed.
B) He cannot be employed because he is still subject to statutory disqualification provisions.
C) He may be employed in a sales position, provided the firm agrees to be liable for any losses due to his misconduct.
D) He may be employed by a brokerage firm, provided he is not involved directly in any dealings with clients.

B) He cannot be employed because he is still subject to statutory disqualification provisions.

Under the Securities Exchange Act of 1934, there are a number of items that disqualify a person from becoming a member of, or from associating with, a member of a self- regulatory organization (SRO). The items include being currently under suspension, revocation, or injunction by any court, regulatory authority, or SRO (foreign or domestic); currently employing a person statutorily disqualified; having been convicted in the past 10 years of a felony or a securities- or financially-related crime; or falsifying an application for registration. Ivan cannot be employed by a brokerage firm, because he was convicted 7 years ago. Because the Securities Exchange Act of 1934 requires a broker/dealer to join one or more SROs, being statutorily disqualified eliminates the possibility of employment.

15

Under the Securities Exchange Act of 1934, which of the following would NOT be grounds for disqualification of a broker/dealer's registration?

A) Being sued by a client.
B) Conviction of misappropriation of client funds.
C) Prohibition by court order from practicing as an investment adviser.
D) Violating a securities act.

A) Being sued by a client.

Being sued by a client is not grounds for disqualification. Items that would disqualify a registration include being currently under suspension, revocation, or injunction by any court, regulatory authority or SRO, domestic or foreign; currently employing a person statutorily disqualified; having been convicted in the past 10 years of a felony or a securities or financially related crime; or falsifying an application for registration.

16

Under the Securities Exchange Act of 1934, which of the following is TRUE regarding the jurisdiction of the SEC over a person who violates the rules of the Municipal Securities Rulemaking Board?

A) The SEC has the authority to investigate such violations only if the person is a financial institution.
B) Only the MSRB has the authority to investigate violations of its rules.
C) The SEC has the authority to investigate such violations unless the person is a financial institution.
D) The SEC has the authority to investigate such violations even if the person is a financial institution.

C) The SEC has the authority to investigate such violations unless the person is a financial institution.

The SEC is charged with administering the federal securities laws, under which the Municipal Securities Rulemaking Board (MSRB) exists. So the SEC has jurisdiction over the MSRB. However, financial institutions come under the jurisdiction of banking regulatory authorities.

17

The Securities and Exchange Commission does NOT have any regulatory jurisdiction over which of the following?

A) Federal Reserve Board.
B) Municipal Securities Rulemaking Board.
C) National securities exchanges.
D) FINRA.

A) Federal Reserve Board.

The Federal Reserve Board is not regulated by the SEC.

18

Which of the following statements is (are) TRUE regarding the jurisdiction of the SEC under the Securities Exchange Act of 1934?

1. The SEC has jurisdiction over exchanges and SROs.
2. The SEC has jurisdiction over broker/dealers, investment advisers, and registered representatives that are required to be registered under federal law.
3. The SEC has jurisdiction over banks and savings and loans regarding their securities activities.

1. The SEC has jurisdiction over exchanges and SROs.
2. The SEC has jurisdiction over broker/dealers, investment advisers, and registered representatives that are required to be registered under federal law.

The SEC was created by the Securities Exchange Act of 1934 and has the responsibility of administering all federal securities laws. The SEC has jurisdiction over exchanges, SROs, and all persons required to be registered under federal law. The SEC does not enforce state securities statutes, nor does it have jurisdiction over banks or savings and loans regarding their securities activities. Banking authorities, such as the Federal Reserve Board, the Federal Deposit Insurance Corporation, and others, regulate banks and savings and loans.

19

The SEC has jurisdiction over all of the following EXCEPT:

A) the stock exchanges and broker/dealers.
B) the Federal Reserve System.
C) the MSRB.
D) FINRA.

B) the Federal Reserve System.

The SEC has jurisdiction over the MSRB, FINRA, stock exchanges, and broker/dealers. The Federal Reserve is not under the jurisdiction of the SEC.

20

The Securities Exchange Act of 1934 prohibits

1. a member firm of a registered stock exchange from effecting transactions for its own account as principal
2. a broker/dealer from exercising discretion in a client's account unless written discretionary authority is received prior to the first trade for the client
3. the purchase of a security on one exchange and the simultaneous sale of that security at a higher price on another exchange
4. the use of fraudulent or manipulative devices in the sale of an exempt security

2. a broker/dealer from exercising discretion in a client's account unless written discretionary authority is received prior to the first trade for the client
4. the use of fraudulent or manipulative devices in the sale of an exempt security

Under both state and federal law, it is prohibited for any broker/dealer or agent to exercise discretion in a client's account prior to receiving the discretionary account authorization in writing. The written discretionary power must be received prior to taking control of the account. Even if the security is exempt from SEC registration, it is never exempt from the antifraud provisions of the law. Designated Market Makers (DMMs), formerly known as specialists, are exchange members who trade for their inventory, and buying and selling on two different exchanges to capitalize on a price disparity is a legal practice known as arbitrage.

21

Under the Securities Exchange Act of 1934, which of the following would NOT be considered associated with XYZ Corp., a broker/dealer?

A) Paula, who is on XYZ's board of directors but who has no other connection with the firm.
B) Arvin, one of XYZ's agents.
C) Brian, an XYZ vice president.
D) Robust, Inc., a tiny fraction of whose stock XYZ has purchased for its own account.

D) Robust, Inc., a tiny fraction of whose stock XYZ has purchased for its own account.

An associated person of a broker/dealer includes any partner, branch manager, officer, or director of a broker/dealer, including outside directors. It also includes employees such as account executives or sales representatives who are not clerks or ministerial personnel, and anyone who controls, is controlled by, or is under common control with the broker/dealer.

22

Which of the following is considered an associated person of a broker/dealer?

A) A clerical person who is not authorized to accept or execute orders for clients.
B) A broker/dealer's officer who represents the broker/dealer in effecting or attempting to effect the purchase or sale of securities.
C) A secretary to a general partner of a broker/dealer.
D) A secretary who assists brokers with clerical tasks.

B) A broker/dealer's officer who represents the broker/dealer in effecting or attempting to effect the purchase or sale of securities.

An associated person is either an officer or a broker/dealer employee who represents the broker/dealer in soliciting the purchase or sale of securities. Associated person also includes any individual authorized to accept customers' orders for the broker/dealer.

23

Which of the following is(are) considered an associated person(s) of a broker/dealer under the Securities Exchange Act of 1934?

1. Any employee of a broker/dealer, except for clerical or ministerial employees.
2. Any officer, partner, or manager associated with the broker/dealer.
3. Any employee, other than a clerical or ministerial employee, who is supervised by, supervises, or is under common supervision of the broker/dealer.

1. Any employee of a broker/dealer, except for clerical or ministerial employees.
2. Any officer, partner, or manager associated with the broker/dealer.
3. Any employee, other than a clerical or ministerial employee, who is supervised by, supervises, or is under common supervision of the broker/dealer.

An associated person is any officer or person in a control position to the broker/dealer or any employee of the broker/dealer, except for clerical or ministerial employees.

24

The Securities Exchange Act of 1934 granted the SEC the authority to register a number of participants in the securities markets. One of those entities is a securities information processor (SIP). Which of the following statements best describes a SIP?

A) Any person who acts as an intermediary in making payments or deliveries or both in connection with transactions in securities or who provides facilities for comparison of data respecting the terms of settlement of securities transactions, to reduce the number of settlements of securities transactions, or for the allocation of securities settlement responsibilities.
B) Any person engaged in the business of collecting, processing, or preparing for distribution or publication; or assisting, participating in, or coordinating the distribution or publication of information with respect to transactions in or quotations for any nonexempt security.
C) Any person who engages on behalf of an issuer of securities or on behalf of itself as an issuer of securities in countersigning such securities upon issuance.
D) Any person who uses a clearing agency to clear or settle securities transactions or to transfer, pledge, lend, or hypothecate securities.

B) Any person engaged in the business of collecting, processing, or preparing for distribution or publication; or assisting, participating in, or coordinating the distribution or publication of information with respect to transactions in or quotations for any nonexempt security.

This answer is taken directly from the Act itself. There is a second part to the definition and that is that a SIP is also any person distributing or publishing (whether by means of a ticker tape, a communications network, a terminal display device, or otherwise) on a current and continuing basis, information with respect to such transactions or quotations.

25

The Securities Exchange Act of 1934 calls for the registration of many different entities involved in the securities business, such as exchanges and broker/dealers. The Act also requires registration of securities information processors such as

1. CNBC
2. "Investor's Business Daily"
3. Securities Industry Automation Corporation (SIAC)
4. OPRA

3. Securities Industry Automation Corporation (SIAC)
4. OPRA

Securities information processors (SIPs) collect and disseminate trading and pricing information. TV stations, such as CNBC, and newspapers, such as IBD, obtain information from SIPs and then rebroadcast or reprint it.

26

Which of the following are regulated under the Securities Exchange Act of 1934?

1. Broker/dealers.
2. Investment advisers.
3. Pension plans.
4. Transfer agents.

1. Broker/dealers.
4. Transfer agents.

The Securities Exchange Act of 1934 regulates broker/dealers and transfer agents. Investment advisers are regulated under the Investment Advisers Act of 1940 (and, to a certain extent, the Investment Company Act of 1940), whereas pension plans in the private sector are regulated under ERISA.

27

Which of the following are regulated under the Securities Exchange Act of 1934?

1. New issues.
2. Broker/dealers.
3. Transfer agents.

2. Broker/dealers.
3. Transfer agents.

The Securities Exchange Act of 1934 was designed to regulate securities transactions, securities markets, and the securities firms who do the trading. While the Securities Act of 1933 covers requirements relating to new issues, the Securities Exchange Act of 1934 covers almost everything else in the securities industry. Its greatest impact is on the securities firms and the people who sell securities (i.e., broker/dealers and their agents) in the secondary market. Of the choices listed, new issues would be regulated by the Securities Act of 1933.

28

Under the Securities Exchange Act of 1934, an exchange is:

A) an organization which provides facilities for bringing together buyers and sellers of securities.
B) any transaction involving a security.
C) a disposition of a security for value.
D) an organization of securities professionals designed to promote fair practices in doing business with the public.

A) an organization which provides facilities for bringing together buyers and sellers of securities.

Under the Securities Exchange Act of 1934, exchange does not refer to a transaction, but to an organization or facilities for bringing together buyers and sellers of securities. It is important to distinguish this function from other activities carried out by persons in the secondary market, such as transfer agents, securities information processors, or broker/dealers.

29

All of the following statements regarding corporate insiders are true EXCEPT:

A) purchases may not be made through the exercise of options.
B) reports of changes in holdings must be filed with the SEC.
C) short selling is prohibited.
D) only public information can be used to make transactions.

A) purchases may not be made through the exercise of options.

A corporate insider, or affiliate, is defined as an officer, a director, a greater than 10% stockholder, or a family member of an insider. Insiders can purchase stock through the exercise of options. All of the other statements are true.

30

If an individual accumulates a holding of more than five percent in the voting stock of a publicly traded company, notification must be made to all of the following EXCEPT:

A) the Administrator of the state in which the customer resides.
B) the SEC.
C) the exchange where the security is traded.
D) the issuer's board of directors.

A) the Administrator of the state in which the customer resides.

When an individual accumulates a holding of more than 5% in the voting stock of a publicly traded company, notification must be made on Form 13-D within 10 business days to the SEC, the exchange where the issue is listed, and the issuer's board of directors. Notification to the state securities Administrator is not required.

31

The XYZ corporation, listed on the NYSE, has 100 million shares of common stock outstanding. Warren has owned 4 million shares since 1999. If Warren were to acquire 1.1 million additional shares, which of the following statements is CORRECT?

A) Form 144 would have to be filed concurrent with the transaction.
B) Because Warren does not own more than 10% of the outstanding shares, no form is required to be filed.
C) Schedule 13D would have to be filed within 10 business days of the transaction.
D) Schedule 13D would have to be filed before the end of the 2nd business day following the transaction.

C) Schedule 13D would have to be filed within 10 business days of the transaction.

Section 13(d) of the Securities Exchange Act of 1934 requires filing of a Schedule 13D within 10 business days of the transaction once a person becomes an owner of more than 5% of the outstanding voting shares of a reporting company. Section 16 of the Act requires filing within 2 business days of any transaction by a control person, which is not the case here.

32

According to the Securities Exchange Act of 1934, a report of beneficial ownership must be filed with the SEC by interested persons when their ownership of a security registered on a national exchange exceeds what level?

A) 12%.
B) 5%.
C) 2%.
D) 10%.

B) 5%.

An interested person is any person (including 2 or more persons acting together) who owns more than 5% of the outstanding equity securities of a registered issuer. Such persons are required to file reports of beneficial ownership on Schedule 13D with the issuer, the exchanges (if a listed security), and the SEC within 10 days of exceeding the 5% level.

33

Under section 13(d) of the Securities Exchange Act of 1934, a person who acquires more than 5% of a class of securities registered under the act must, within 10 days, file a report of beneficial ownership with:

1. the SEC.
2. the issuer.
3. the exchange where traded.

1. the SEC.
2. the issuer.
3. the exchange where traded.

Persons who own more than 5% of the outstanding equity securities of a registered issuer are known as interested persons under the act. These persons are required to file a Schedule 13D report of beneficial ownership with the issuer, the exchanges, and the SEC within 10 days of reaching the greater than 5% level.

34

Protection of the investing public is one of the major objectives of the SEC. Much of the protection comes from the disclosure requirements enveloping the industry. Among the disclosure forms used is Form 13F. To come under the SEC's requirement to file a Form 13F, an institutional manager must have discretion over:

A) more than 10% of the outstanding voting securities of a reporting company.
B) a portfolio of at least $100 million of 13(f) securities.
C) a portfolio of at least $50 million.
D) a portfolio of at least $100 million.

B) a portfolio of at least $100 million of 13(f) securities.

An institutional money manager, with at least $100 million in 13(f) securities under discretionary management, is required to file Form 13F. This form must be filed within 45 days of the end of the quarter.

35

Under the Securities Exchange Act of 1934, which of the following statements regarding reports required to be filed with the SEC is TRUE?

A) Institutional investment managers who exercise discretion over accounts valued at $100 million or more of 13(f) securities must file reports quarterly.
B) Persons who become the beneficial owner of more than 5% of a security registered under the Securities Exchange act of 1934 must file a report within 2 days.
C) Persons who become the beneficial owner of more than 2% of a security registered under the Securities Exchange Act of 1934 must file a report within 5 days.
D) Institutional investment managers who exercise discretion over accounts valued at $100 million or more need not file reports if all their clients are insurance companies.

A) Institutional investment managers who exercise discretion over accounts valued at $100 million or more of 13(f) securities must file reports quarterly.

The requirement for reports of beneficial ownership is that anyone who becomes the owner of more than 5% of a security registered under the Securities Exchange Act of 1934 must file a report within 10 days; therefore, neither 2 days nor 5 days is correct. The requirement for institutional investment managers is that they must file reports quarterly (13F) if they exercise discretion over accounts valued at $100 million or more of 13(f) securities. Whether the institutional investment manager's clients are insurance companies is not relevant.

36

The Securities Exchange Act of 1934 granted the SEC the power to regulate all of the following EXCEPT:

A) transfer agents.
B) margin requirements.
C) broker/dealers.
D) securities information processors (SIPs).

B) margin requirements.

The Securities Exchange Act of 1934 granted the Board of Governors of the Federal Reserve System the power to regulate margin requirements.

37

Margin regulations are determined by the Board of Governors of the Federal Reserve System. The authority for them to do so is found in the:

A) Securities Exchange Act of 1934.
B) Federal Reserve Act of 1913.
C) Securities Act of 1933.
D) Maloney Act of 1938.

A) Securities Exchange Act of 1934.

The Securities Exchange Act of 1934 contains the authorization for the FED to regulate the use of credit in the securities business.

38

Which of the following is(are) TRUE regarding the Securities Exchange Act of 1934?

1. The act bars the use of credit to purchase new issues.
2. The act prohibits the simultaneous purchase and sale of a security to create the appearance of trading.
3. The act prohibits the spread of false rumors to induce others to trade.

1. The act bars the use of credit to purchase new issues.
2. The act prohibits the simultaneous purchase and sale of a security to create the appearance of trading.
3. The act prohibits the spread of false rumors to induce others to trade.

The Securities Exchange Act of 1934 specifically bars the use of credit to purchase new issues and also prohibits installment payments when making such purchases. The act also prohibits any form of manipulation of securities prices or any practices that would influence the market price of a security. This includes wash trades, which are simultaneous purchases and sales that create the appearance of trading activity, and the use of rumors to induce others to trade.

39

Under the Securities Exchange Act of 1934, which body regulates the extension of credit for nonexempt securities?

A) The New York Stock Exchange.
B) The Federal Reserve Board.
C) The Comptroller of Currency.
D) The SEC.

B) The Federal Reserve Board.

The Securities Exchange Act of 1934 empowered the Federal Reserve Board (FRB) to set margin requirements and regulate the use of credit to purchase securities. The FRB determines what issues may be purchased on margin and what percentage of the purchase price must be deposited by the purchaser.

40

Which of the following statements is TRUE about sales of new issues under the Securities Exchange Act of 1934?

A) The SEC determines what issues may be purchased on margin.
B) The use of credit to purchase new issues is prohibited for the first 30 days.
C) Credit may be used in purchasing new issues.
D) Installment payments are allowed on purchases.

B) The use of credit to purchase new issues is prohibited for the first 30 days.

The Securities Exchange Act of 1934 specifically bars the use of credit in purchasing new issues for the first 30 days from the date of issue. In addition, it prohibits installment payments on issues that can be bought on margin. The Securities Exchange Act of 1934 also empowered the board of governors of the Federal Reserve Board (FRB) to set margin requirements, and the FRB determines which issues may be purchased on margin.

41

A major stockholder of the XYZ Corporation makes frequent purchases and sales of this stock on the open market to give the impression that it is actively traded. This unethical practice is best described as:

A) matched orders.
B) front running.
C) pegging.
D) positioning.

A) matched orders.

Matched orders, or painting the tape, occurs when there is no real change in beneficial ownership. Purchases and sales are offset, but the volume of trading creates the illusion of substantial interest in the stock.

42

What law was enacted requiring transactions by officers, directors, and principal shareholders to be reported and ensuring equitable and fair practices in the secondary trading of securities?

A) Securities Act of 1933.
B) Investment Company Act of 1940.
C) Securities Investor Protection Act of 1970.
D) Securities Exchange Act of 1934.

D) Securities Exchange Act of 1934.

The Securities Exchange Act of 1934 created the SEC to regulate trading practices of exchanges, broker/dealers, issuing companies, and individuals who trade securities.

43

A broker/dealer makes a market in XYZ stock and places large orders for it on the open market either at or slightly above its current price with the aim of stabilizing the price. This unethical practice is best described as:

A) front running.
B) straddling.
C) matched orders.
D) pegging.

D) pegging.

Pegging involves entering buy orders for the purpose of supporting a stock price (i.e., to keep it from falling). This is a form of market manipulation and is illegal. Front running involves a representative or firm entering orders ahead of client orders. Straddles are an option position that combines a put and a call on the same stock; there is nothing improper with that strategy. Matched orders involves buying and selling a stock from one hand to the other to create the false appearance of trading volume and is another form of market manipulation.

44

Which of the following would be considered when determining whether excessive trading has occurred in a client's account?

A) The number of years the account has been opened.
B) The nature of the client's financial objectives.
C) The performance of the account in comparison to other client's accounts.
D) The size of the companies issuing the securities.

B) The nature of the client's financial objectives.

An agent is engaging in unethical conduct if she induced a client to trade securities too frequently in view of the financial resources, investment objectives, and character of the client's account. Frequent trading and trading in large amounts is not necessarily wrong. It is only wrong if the trades are not suitable for a particular client. Thus, the only factor listed that must be considered in determining whether trading is excessive is the nature of the client's financial objectives.

45

The Securities Exchange Act of 1934 requires written authority for a discretionary account, unless the securities professional's discretionary authority is limited to determining:

1. the price of the stock.
2. the amount of the stock.
3. the time of the order.

1. the price of the stock.
3. the time of the order.

The securities professional's ability to determine the time and/or price at which a specific customer order will be executed does not constitute discretionary power and, therefore, does not require written authorization.

46

Under the rules of the Securities Exchange Act of 1934, trading in a client's account would be considered excessive if:

1. the agent receives a commission from trading.
2. trading was conducted without considering the client's investment objectives.
3.trading is inappropriate in view of a client's resources.

2. trading was conducted without considering the client's investment objectives.
3. trading is inappropriate in view of a client's resources.

Trading is considered excessive if the agent induces a client to trade securities in transactions that are excessive in size or frequency in view of the financial resources, investment objectives, and character of the client's account.

47

Mary bought 1,000 shares in the morning and sold 1,000 shares of the same security in the afternoon. Under the Securities Exchange Act of 1934's rules dealing with the regulation of the use of manipulative and deceptive devices, which of the following statements is TRUE?

A) Her broker has violated the act.
B) She has violated the act only if she was trying to create market activity for the security to give a misleading appearance.
C) She has violated the act.
D) She has violated the act if a profit was made.

B) She has violated the act only if she was trying to create market activity for the security to give a misleading appearance.

The purchase and sale of the same security on the same day are permissible as long as the investor is not attempting to create the appearance of market activity.There is nothing in the act prohibiting "day-trading"; only trading made for the purpose of manipulating market prices.

48

The term "churning" means:

1. switching a client's account from an income fund to a growth fund.
2. excessively trading securities in the account of a client primarily for the purpose of generating commissions for the agent.
3. trading unsuitable securities in a client's account.
4. a bond swap in a customer's account for tax benefits
A) II and IV.
B) II only.
C) I and II.
D) I and III.

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Answer: B

Churning is conducting excessive transactions in a customer's account for the purpose of generating commissions and is prohibited.

2. excessively trading securities in the account of a client primarily for the purpose of generating commissions for the agent.

Churning is conducting excessive transactions in a customer's account for the purpose of generating commissions and is prohibited.

49

The procedure for entering an order to purchase a security for the account of a customer is to complete an order ticket. Which of the following would be found on an order ticket?

A) Customer name, customer address, execution price, time of execution or cancellation.
B) Account number, execution price, time of order entry, time of execution or cancellation, and terms and conditions of the order.
C) Account number, customer address, time of order entry, and terms and conditions of the order.
D) Customer name, execution price, time of order entry, and time of execution or cancellation.

B) Account number, execution price, time of order entry, time of execution or cancellation, and terms and conditions of the order.

This is one of those questions where the best way to find the answer is by determining what is NOT correct. Customer name and/or address would never be on an order ticket and that knocks out three of the choices. The account number (not name), the execution price (once the order is completed), the time of entry and execution (or cancellation if it is a day order that is not executed) and the terms and conditions (limit, market, stop, etc.) are all on the order ticket.

50

An agent for a broker/dealer member of FINRA may exercise his judgment as to which of the following without written authorization from the customer?

1. Quantity.
2. Time.
3. Security.
4. Price.

2. Time.
4. Price.

Agents (or any of the other securities professionals) have the authority to decide the timing and price of a trade. Under prevailing securities law, time and/or price does not constitute discretion. Decisions involving the quantity and security require written trading authorization from the client.

51

Over which of the following would the investment adviser representative have discretionary authority?

A) An order that specifies the size of the trade and name of the security, but leaves the choice of price and time up to the investment adviser representative.
B) An account in which a customer has power of attorney over another individual's account.
C) An account in which a trustee has power of attorney over another individual's account.
D) An account in which the investment adviser representative chooses portfolio securities on behalf of the client.

D) An account in which the investment adviser representative chooses portfolio securities on behalf of the client.

An order is discretionary when it is placed for a customer's account by the member firm or its representative, without the customer's express authorization. Also, for the order to be considered discretionary, the firm must choose at least one of the following: size of the trade, whether to buy or sell, or the security. Choosing time and price is not considered to be an exercise of discretion.

52

An agent's client calls on Monday to discuss the current market situation. They discuss how 100 shares of Kapco common stock would be an appropriate addition to the client's portfolio. On Thursday, the client calls and tells the agent to place an order for the Kapco stock at whatever price the agent feels is best. The agent waits until Friday, purchasing the stock at a price $2 per share below Thursday's low. In this case the agent acted:

A) properly because the agent used discretion as to price and time.
B) properly because the agent saved the client money.
C) improperly; the order should have been placed on Thursday.
D) improperly; the order cannot be placed without prior written authorization allowing discretion.

C) improperly; the order should have been placed on Thursday.

In this question, the client specified that the agent should determine the best price. Nothing other than oral permission is necessary in order for an agent to use discretion as to time and or price. However, time and/or price discretion are only good for that day – those are considered “day” orders, so the agent is able to use judgment, but the order must be placed during the day it was received.

53

An agent's client calls on Monday to discuss the current market situation. They discuss how 100 shares of Kapco common stock would be an appropriate addition to the client's portfolio. On Thursday, the client calls and tells the agent to place a market order for the Kapco stock. The agent waits until Friday, purchasing the stock at a price $2 per share below Thursday's low. In this case the agent acted:

A) improperly; the order should have been placed on Thursday.
B) improperly; the order should have been placed on Monday.
C) properly because the agent used discretion as to price and time.
D) properly because the agent saved the client money.

A) improperly; the order should have been placed on Thursday.

A market order is to be placed immediately with an effort made to obtain the best execution possible at that time.

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