Other Federal and State Regulations

Question 1

The Trust Indenture Act of 1939 protects:

A. municipal bondholders from being taken advantage of by the issuing municipality
B. corporate bondholders from being taken advantage of by the issuing corporation
C. government bondholders from being taken advantage of by the issuing governmental unit
D. all bondholders from being taken advantage of by the issuing entity

Answer 1

The best answer is B.

The Trust Indenture Act of 1939 protects corporate bondholders from being taken advantage of by the issuing corporation. It provides for the appointment of a substantial independent trustee to protect the interests of the bondholders. Since we tend to trust our government (plus, the legislators write the laws!), issues of governments and municipalities are exempt from this Act

Question 2

The primary purpose of the Trust Indenture Act of 1939 is to:

A. protect the interests of holders of “non-exempt” bonds by appointment of a trustee
B. protect the interests of unit investment trust holders by appointment of a trustee
C. protect the interests of charitable trust beneficiaries by appointment of a trustee
D. regulate the securities activities of banks and trust companies

Answer 2

The best answer is A.

The primary purpose of the Trust Indenture Act of 1939 is to protect corporate bondholders from being taken advantage of by the issuing corporation. It provides for the appointment of a substantial independent trustee to protect the interests of the bondholders. Since we tend to trust our government (plus, the legislators write the laws!), issues of governments and municipalities are exempt from this Act.

Question 3

New corporate bond issues in excess of $50,000,000 are:

I exempt securities under the Securities Act of 1933
II non-exempt securities under the Securities Act of 1933
III subject to the Trust Indenture Act of 1939
IV exempt from the Trust Indenture Act of 1939

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 3

The best answer is C.

New corporate bond issues are non-exempt securities under the Securities Act of 1933 and thus must be registered and sold under a prospectus. In addition, corporate bond offerings in excess of $50,000,000 fall under the Trust Indenture Act of 1939, requiring that the bonds be sold under a Trust Indenture.

Question 4

A trustee in a bond issue:

I is charged with the responsibility of protecting bondholders against issuer misconduct
IIcannot have any conflicting interests in its administration of the loan arrangement
III is appointed by the issuing corporation
IV is paid by the issuing corporation

A. I and II only
B. III and IV only
C. I, II, III
D. I, II, III, IV

Answer 4

The best answer is D.

The trustee for bondholders is a fiduciary who is appointed and paid for by the issuer. The trustee ensures that all of the terms of the agreement are adhered to by the issuing corporation, thus it is protecting the bondholders from issuer misconduct. The trustee must not have any conflicting interests that would prejudice it towards either the bondholders or the issuer in its oversight role.

Question 5

nder the Trust Indenture Act of 1939, which of the following statements are TRUE?

I The trustee will pay the issuer for services rendered
II The issuer will pay the trustee for services rendered
III The trustee protects the interests of the bondholders
IV The issuer protects the interests of the trustee

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 5

The best answer is C.

Under the requirements of the Trust Indenture Act of 1939, trustees are appointed by the issuer (so the issuer pays the trustee). The trustee is appointed to protect the interests of the bondholders.

Question 6

A trust indenture is required for a(n):

A. Treasury bond
B. Agency bond
C. Corporate debenture
D. General Obligation bond

Answer 6

The best answer is C.

The Trust Indenture Act of 1939 requires a trust indenture for all non-exempt bond offerings in excess of $50,000,000. Because Treasuries, Agencies, and Municipals are exempt securities, they are not required to have a trust indenture. Corporate bonds are non-exempt securities, so these must be issued with a trust indenture. Also, please note that most municipal revenue bonds have a trust indenture, not because it is legally required, but rather, because the market demands it.

Question 7

Which of the following must be registered with the SEC as an investment adviser under the Investment Advisers Act of 1940?

A. Broker-dealer
B. Bank
C. Senior Editor of an investment magazine
D. Accountant who gives investment advice to clients for a fee

Answer 7

The best answer is D.

Any person who gives investment advice for a fee can be considered to be an Investment Adviser who must be registered with the SEC under the Investment Advisers Act of 1940. Excluded from the definition of investment advisers are broker-dealers, banks, lawyers and accountants who give advice that is solely incidental to their practice and who do not charge separately for such advice; and periodicals that give general advice and that are not “tailored” to specific customer situations.

(Also note that the accountant giving investment advice will only be required to register with the SEC as a federal covered adviser if the adviser has $100 million or more of assets under management. If the adviser does not meet the threshold, then it must register in the State and not with the SEC.)

Question 8

A lawyer is a partner at a major investment advisory firm and is paid a fee by a customer for investment advice. Which statement is TRUE?

A. The lawyer must be registered with the Securities and Exchange Commission (SEC) as an investment adviser
B. The lawyer must be registered with FINRA as a representative
C. The lawyer must be registered with both the SEC as an investment adviser and with FINRA as a representative
D. The lawyer is not required to be registered with the SEC as an investment adviser nor with FINRA as a representative

Answer 8

The best answer is A.

Anyone who renders investment advice in the normal course of business for a fee is considered to be an investment adviser. Thus, a lawyer that is a partner in a major advisory firm who renders advice for a fee is defined as an adviser that must register.

Also, note that the lawyer/adviser will only be required to register with the SEC as a federal covered adviser if the adviser has $100 million or more of assets under management. If it does not meet the threshold, then it must register in the State and not with the SEC.
Finally, please note that an exemption is granted if a lawyer renders investment advice that is solely incidental to the regular business of that person. Thus, a lawyer who renders investment advice as part of an overall estate tax plan would be exempt from registration as an adviser.

Question 9

Securities Investor Protection Corporation protects brokerage:

A. firm employees from employer mismanagement
B. accounts against investment mismanagement
C. accounts against broker-dealer failure
D. firms from employee theft and embezzlement

Answer 9

The best answer is C.

SIPC insures customer accounts holding cash and/or securities against loss if a broker-dealer fails.

Question 10

Which of the following statements about the Securities Investor Protection Corporation (SIPC) are TRUE?

I SIPC is a non-profit government sponsored corporation
II Every broker-dealer registered under the Securities Exchange Act of 1934 must be a member of SIPC
III SIPC is an insurance fund protecting against broker-dealer insolvency
IV SIPC is funded through annual assessments paid by broker-dealer members

A. I and II only
B. III and IV only
C. I, III, IV
D. I, II, III, IV

Answer 10

The best answer is D.

Securities Investor Protection Corporation is a non-profit membership corporation, composed of all broker-dealers registered under the Securities Exchange Act of 1934. SIPC is government sponsored, but is not an agency of the U.S. Government. SIPC is funded by annual assessments paid in by its broker-dealer members. SIPC insures customer accounts at broker-dealers for up to $500,000, inclusive of maximum cash coverage of $250,000.

Question 11

All of the following statements about Securities Investor Protection Corporation (SIPC) are true EXCEPT:

A. SIPC is a government sponsored non-profit corporation
B. SIPC is an insurance fund protecting customer accounts against broker-dealer insolvency
C. every broker-dealer registered under the Securities Exchange Act of 1934 must be a member of SIPC
D. SIPC protects the full balance in each customer account

Answer 11

The best answer is D.

Securities Investor Protection Corporation is a non-profit membership corporation, composed of all broker-dealers registered under the Securities Exchange Act of 1934. SIPC is government sponsored, but is not an agency of the U.S. Government. SIPC insures customer accounts at broker-dealers for up to $500,000, inclusive of maximum cash coverage of $250,000.

Question 12

Which statement is TRUE about insurance coverage on customer brokerage accounts maintained at banks registered solely as municipal securities dealers?

A. Insurance coverage is provided solely by the Federal Deposit Insurance Corporation (FDIC)
B. Insurance coverage is provided solely by the Securities Investors Protection Corporation (SIPC)
C. Insurance coverage is provided by both the FDIC and by the SIPC
D. No insurance protection is offered on customer municipal accounts maintained at bank broker-dealers

Answer 12

The best answer is D.

Insurance coverage for customer accounts at any broker-dealer that must be registered under the Securities Exchange Act of 1934 is provided by SIPC - Securities Investor Protection Corporation. However, dealers who solely handle exempt securities are not required to be SIPC members. Therefore, customer accounts at firms that deal solely in U.S. Government securities, are not covered by SIPC. Similarly, customer accounts at banks who are municipal securities dealers, are also not required to be covered under SIPC.

Please note that if a bank dealer were to handle non-exempt securities, then it would have to register under the Securities Exchange Act of 1934 as a broker-dealer, and thus, would be obligated to be an SIPC member as well.

The FDIC - Federal Deposit Insurance Corporation - does not insure brokerage accounts, that is securities positions held at banks. It only insures bank accounts (deposits) maintained by customers at b

Question 13

Which statements are TRUE about SIPC coverage for customer accounts at banks that solely handle exempt securities?

I The bank must be registered as a broker-dealer under the Securities Exchange Act of 1934
II The bank does not need to be registered as a broker-dealer under the Securities Exchange Act of 1934
III The bank must be a member of the Securities Investor Protection Corporation
IV The bank does not need to be a member of the Securities Investor Protection Corporation

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 13

The best answer is D.

Dealers who solely handle exempt securities are not required to be SIPC members. Therefore, customer accounts at firms that deal solely in U.S. Government securities or municipal securities, are not covered by SIPC. If a bank dealer were to handle non-exempt securities, then it would have to register under the Securities Exchange Act of 1934 as a broker-dealer, and thus, would be obligated to be an SIPC member as well.

Question 14

Which statements are TRUE about banks that have customer accounts holding both exempt and non-exempt securities?

I The bank must be registered as a broker-dealer under the Securities Exchange Act of 1934
II The bank does not need to be registered as a broker-dealer under the Securities Exchange Act of 1934
III The bank must be member of the Securities Investor Protection Corporation
IV The bank does not need to be a member of the Securities Investor Protection Corporation

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 14

The best answer is A.

Insurance coverage for customer accounts at any broker-dealer that must be registered under the Securities Exchange Act of 1934 is provided by SIPC - Securities Investor Protection Corporation. The broker-dealers that must be registered are those that handle non-exempt securities. Thus, if a bank has customer accounts that hold both exempt and non-exempt securities, it would be obligated to register as a broker-dealer under the Securities Exchange Act of 1934; and would be obligated to join SIPC as well.

Question 15

In a Securities Investor Protection Corporation (SIPC) liquidation, which statement regarding SIPC coverage limits is correct?

A. SIPC covers each customer account for $250,000 in securities plus $250,000 in cash
B. SIPC covers each customer account for $500,000 total inclusive of $250,000 in cash
C. SIPC covers each customer account for $500,000 in securities plus $250,000 in cash
D. SIPC covers each customer account for $750,000 in combined cash and securities

Answer 15

The best answer is B.

Securities Investor Protection Corporation coverage is limited to $500,000 total (cash and securities) per customer name, inclusive of maximum cash coverage of $250,000 for that account.

Question 16

The maximum coverage provided by Securities Investor Protection Corporation for securities held in a customer’s account is:

A. $250,000
B. $400,000
C. $500,000
D. $600,000

Answer 16

The best answer is C.

Securities Investor Protection Corporation provides protection on customer securities up to $500,000 in total cash and securities, but only covers cash balances for $250,000 included within the $500,000 limit.

Question 17

For any claims that a customer may have against a failed broker-dealer that are in excess of Securities Investor Protection Corporation coverage limits, the customer becomes a:

A. general creditor
B. secured creditor
C. super-secured creditor
D. equity holder

Answer 17

The best answer is A.

Securities Investor Protection Corporation provides protection on customer securities up to $500,000 in total cash and securities, but only covers cash balances for $250,000 included within the $500,000 limit. For any uncovered claim amounts above these limits, the customer becomes a general creditor of the failed broker-dealer.

Question 18

John Jones has an individual cash account; a joint margin account with his wife; a custodian account for his minor daughter; and a custodian account for his minor son; all at the same brokerage firm. If the firm should fail, Securities Investor Protection Corporation will cover:

A. all of the accounts as a single account
B. the individual and joint accounts as one account; and the custodian accounts as one account
C. the individual and joint accounts as one accounts; and each custodian account separately
D. each account separately

Answer 18

The best answer is D.

Securities Investor Protection Corporation coverage is applied “per customer name.” If a customer has an individual cash account, that is one name; the joint margin account is a second name; the custodian account for the daughter is the third name; and the custodian account for the son is the fourth name.

Question 19

A customer has an individual cash account, an individual margin account, a joint cash account with his wife, and a custodian account for each of his 2 children. If the firm liquidates, Securities Investor Protection Corporation covers:

A. only the custodian accounts
B. the custodian accounts separately, the joint account separately, and both individual accounts separately
C. the custodian accounts separately, the joint account separately, and both individual accounts are combined and treated as one
D. any one account of the customer’s choosing; the other accounts become general creditors of the broker-dealer

Answer 19

The best answer is C.

Securities Investor Protection Corporation coverage is applied “per customer name.” If John Jones has both an individual cash and margin account, they are treated as one account; a joint account with someone else is a separate account; each custodian account is a separate account.

Question 20

A customer has opened the following accounts:

Individual cash account
Individual margin account
Joint cash account with husband
Custodian Account for minor child

This is treated as how many “covered accounts” in an SIPC liquidation?

A. 1
B. 2
C. 3
D. 4

Answer 20

The best answer is C.

Securities Investor Protection Corporation coverage is applied “per customer name.” If a customer has both an individual cash and margin account, they are treated as one account. The joint account with someone else is treated as a separate account. Finally, the custodian account for a minor child is treated as a separate account.

Question 21

A customer has an account holding $310,000 of securities and $290,000 of cash. If the broker-dealer were to fail, which statement is TRUE regarding the status of the account in an SIPC liquidation?

A. The customer will become a general creditor for $40,000 owed
B. The customer will become a general creditor for $100,000 owed
C. SIPC will provide coverage for $310,000 of securities only
D. SIPC will provide coverage for $250,000 of cash only

Answer 21

The best answer is B.

SIPC covers customer claims against a failed broker-dealer for a total of $500,000, inclusive of maximum cash coverage of $250,000. For any claims above these limits, the customer becomes a general creditor of the failed broker-dealer. This customer has $310,000 of securities and $290,000 of cash, for a total claim of $600,000. $250,000 of the cash is covered, leaving $40,000 uncovered. The remaining $250,000 of coverage is applied against the $310,000 securities position, leaving $60,000 of securities uncovered. The customer becomes a general creditor for the $100,000 total of the uncovered claims.

Question 22

A customer has a cash account holding $200,000 of securities and $340,000 of cash. If the broker-dealer were to fail, which statement is TRUE regarding the status of the account in an SIPC liquidation?

A. SIPC will provide coverage for the $200,000 of securities only
B. SIPC will provide coverage for the total of $540,000 of securities and cash
C. SIPC will provide coverage for only $340,000 of cash
D. The customer will become a general creditor in the amount of $90,000

Answer 22

The best answer is D.

SIPC covers customer claims against a failed broker-dealer for a total of $500,000, inclusive of maximum cash coverage of $250,000. For any claims above these limits, the customer becomes a general creditor of the failed broker-dealer. This customer has $200,000 of securities (covered in full) and $340,000 of cash (covered only for $250,000), for total coverage of $450,000. For the remaining $90,000 of cash not covered, the customer becomes a general creditor.

Question 23

A customer has a cash account holding $160,000 of securities and $340,000 of cash. If the broker-dealer were to fail, which statement is TRUE regarding the status of the account in an SIPC liquidation?

A. SIPC will provide coverage for the $160,000 of securities only
B. SIPC will provide coverage for the total of $500,000 of securities and cash
C. SIPC will provide coverage for only $250,000 of cash
D. The customer will become a general creditor in the amount of $90,000

Answer 23

The best answer is D.

SIPC covers customer claims against a failed broker-dealer for a total of $500,000, inclusive of maximum cash coverage of $250,000. For any claims above these limits, the customer becomes a general creditor of the failed broker-dealer. This customer has $160,000 of securities (covered in full) and $340,000 of cash (covered only for $250,000), for total coverage of $410,000. For the remaining $90,000 of cash not covered, the customer becomes a general creditor.

Question 24

A customer has a margin account at a broker-dealer that goes bankrupt. The account holds $800,000 of securities and has a $400,000 debit balance. The customer will receive:

A. $400,000 in cash
B. $400,000 in securities
C. $500,000 of securities after the debit balance is paid off and becomes a general creditor for the remaining $300,000
D. The customer will receive $500,000 of cash and $300,000 of securities

Answer 24

The best answer is B.

The SIPC coverage limit of $500,000 in securities is based on the equity in a customer’s account. An account with $800,000 in securities and a $400,000 debit has $400,000 of equity. The customer will receive $400,000 of securities in the liquidation.

Question 25

A customer has an account with a brokerage firm that is in receivership. The account holds $350,000 of securities and has a $150,000 debit. Which statement is TRUE regarding SIPC coverage?

A. The customer must deposit $150,000 to receive the $350,000 of securities
B. The account is covered for $200,000
C. The account is covered for $350,000
D. The account is covered for $500,000

Answer 25

The best answer is B.

SIPC covers the equity in a customer’s account, with coverage not to exceed $500,000 equity per account in securities. However, cash coverage is limited to $250,000. This account has $350,000 of securities and a $150,000 debit, so the equity is $200,000. The customer will receive $200,000 worth of securities in the liquidation.

Question 26

A customer has an account with a brokerage firm that is in receivership. The account holds $220,000 of securities and has a $90,000 debit. Which statement is TRUE regarding SIPC coverage?

A. The customer must deposit $90,000 to receive the $220,000 of securities
B. The account is covered for $100,000
C. The account is covered for $130,000
D. The account is covered for $220,000

Answer 26

The best answer is C.

SIPC covers the equity in a customer’s account, with coverage not to exceed $500,000 equity per account in securities. However, cash coverage is limited to $250,000. This account has $220,000 of securities and a $90,000 debit, so the equity is $130,000. The customer will receive $130,000 worth of securities in the liquidation.

Question 27

A customer has a brokerage account at a failed broker-dealer. For SIPC coverage purposes, the securities in the account are valued on the date:

A. of purchase of each position
B. SIPC returns securities to the customer
C. SIPC petitions a court to appoint a trustee in bankruptcy
D. SIPC sends the customer a claim form by certified mail

Answer 27

The best answer is C.

The “valuation date” for coverage purposes in an SIPC liquidation is the date that SIPC files in court to be the trustee in the bankruptcy of the failed broker-dealer.

Question 28

Which of the following communications fall under the Federal Telephone Consumer Protection Act of 1991?

I Telephonic via live human voice
II Telephonic via pre-recorded message
III Facsimile transmission
IV U.S. Mail

A. I only
B. II and III
C. I, II, III
D. I, II, III, IV

Answer 28

The best answer is C.

The Federal Telephone Consumer Protection Act of 1991 applies to any unsolicited offers made through the phone - whether these are made by personal contact, pre-recorded messages, or facsimile. It does not apply to offers made through the U.S. mail.

Question 29

If an unsolicited facsimile is sent to a potential client, which of the following information must be sent?

I Date and number of sheets
II Identity of sender
III Time, place and address from which sent
IV Phone number from which sent

A. I and II only
B. III and IV only
C. II, III, IV
D. I, II, III, IV

Answer 29

The best answer is C.

Unsolicited phone calls, even by fax, come under the Federal Telephone Consumer Protection Act of 1991. This Act requires that the caller identify his name, the firm name, and phone number or address from which the communication is being sent. There is no legal requirement to give the date and number of sheets on a fax transmission (though this is commonly done).

Question 30

If an unsolicited facsimile is sent to a potential client, all of the following information must be included EXCEPT the:

A. identity of sender
B. time, place and address from which sent
C. date and number of sheets
D. phone number from which sent

Answer 30

The best answer is C.

Unsolicited phone calls, even by fax, come under the Federal Telephone Consumer Protection Act of 1991. This Act requires that the caller identify his name, the firm name, and phone number or address from which the communication is being sent. There is no legal requirement to give the date and number of sheets on a fax transmission (though this is commonly done).

Question 31

Which of the following statements are TRUE regarding the Federal Telephone Consumer Protection Act of 1991?

I The Act applies to for-profit organizations
II The Act does not apply to for-profit organizations
III The Act applies to not-for-profit organizations
IV The Act does not apply to not-for-profit organizations

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 31

The best answer is B.

The Federal Telephone Consumer Protection Act of 1991 applies to any unsolicited “commercial” phone calls. Charitable (not-for-profit) institutions are exempt from the Act’s provisions.

Question 32

Which of the following callers is EXEMPT from the provisions of the Federal Telephone Consumer Protection Act of 1991?

A. Telemarketing Firm
B. Real Estate Company
C. Non-profit Organization
D. Securities Firm

Answer 32

The best answer is C.

The Federal Telephone Consumer Protection Act of 1991 applies to any unsolicited “commercial” phone calls. Charitable (not-for-profit) institutions are exempt from the Act’s provisions.

Question 33

The Federal Telephone Consumer Protection Act of 1991 permits unsolicited calls to be made:

I before 8:00 AM in the time zone of the recipient
II after 8:00 AM in the time zone of the recipient
III before 9:00 PM in the time zone of the recipient
IV after 9:00 PM in the time zone of the recipient

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 33

The best answer is C.

The Federal Telephone Consumer Protection Act of 1991 does not allow unsolicited calls to be made before 8:00 AM, nor after 9:00 PM, in the time zone of the recipient. Thus, unsolicited calls may be made after 8:00 AM, but not after 9:00 PM in the time zone of the recipient.

Question 34

A registered representative based in Los Angeles is working at the office late making cold calls to potential customers. At 6:45 PM in Los Angeles, the registered representative is making cold calls to individuals in Miami and individuals in Sacramento. Which statements are TRUE?

I Cold calls to potential customers in Miami are prohibited
II Cold calls to potential customers in Miami are permitted
III Cold calls to potential customers in Sacramento are prohibited
IV Cold calls to potential customers in Sacramento are permitted

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 34

The best answer is B.

Unsolicited cold calls cannot be made after 9:00 PM in the time zone where they are received. Since this representative is in California, he or she can make cold calls to California at 6:45 PM Pacific time. However, since it is 9:45 PM (3 hours later) in Miami, cold calls to that city are not permitted.

Question 35

A customer is very satisfied with the service provided by his registered representative and gives the representative the name and telephone number of a good friend that needs investment advice. When the representative enters the telephone number of the friend, it comes up as blocked since this person is on the firm’s “Do Not Call” list. Which statement is TRUE?

A. Because the friend’s name was given as a referral, this individual can be solicited by the representative
B. Because the friend’s telephone number was given as part of the referral, this individual can be solicited by the representative
C. Because the referral was made by an existing customer of the firm, this individual can be solicited by the representative
D. Because this individual is on the firm’s “Do Not Call” list, no solicitation by the representative is permitted

Answer 35

The best answer is D.

The permitted exception to the Federal “Do Not Call” rule is if there is a personal relationship between the registered representative and the person being called - as long as that person is NOT on the firm’s “Do Not Call” list. However, since this person is on the firm’s “Do Not Call” list, he can’t be called!

Question 36

A registered representative has mailed promotional material and response cards to potential clients in near-by affluent neighborhoods. The registered representative receives a returned signed response card from one of the prospects, and when calling the phone number provided, finds that it is on the National Do-Not-Call List. Which statement is TRUE?

A. This prospect cannot be called by the registered representative
B. This prospect can be called by the registered representative
C. This prospect can only be called by the registered representative between the hours of 8:00 AM and 9:00 PM
D. This prospect can only be called by the registered representative with written approval of the #24 General Principal

Answer 36

The best answer is B.

There are 3 exceptions provided for cold calls to individuals that are on the National Do-Not-Call list. These are the:
Established Business Relationship (“EBR”) Exception;
Prior Express Written Consent Exception; and
Personal Relationship With The Associated Person Exception.
Because this prospect signed and returned the response card, this qualifies for the “Prior Written Consent” exception. Furthermore, if the prospect has given such consent, the prohibition on making solicitations before 8:00 AM and after 9:00 PM does not apply.

Question 37

A registered representative is considering prospecting a wealthy family member to see if she will open a brokerage account at his firm. The registered representative checks the National Do-Not-Call List and finds the family member there. The registered representative checks the firm’s Do-Not-Call list and does not find the family member there. Which statement is TRUE?

A. This prospect cannot be called by the registered representative
B. This prospect can be called by the registered representative
C. This prospect can only be called by the registered representative between the hours of 8:00 AM and 9:00 PM
D. This prospect can only be called by the registered representative with written approval of the #24 General Principal

Answer 37

The best answer is B.

There are 3 exceptions provided for cold calls to individuals that are on the National Do-Not-Call list. These are the:

Established Business Relationship (EBR) Exception;

Prior Express Written Consent Exception; and

Personal Relationship With The Associated Person Exception.

Because this prospect is a family member, she comes under the “personal relationship” exemption, as long as she is not on the firm’s Do-Not-Call list - which is the case here. Note that if the family member were on the firm’’s Do-Not-Call list, then she could not be solicited.

Question 38

The legislation that requires a broker-dealer’s research analysts to be completely separated from that firm’s investment banking department is the:

A. Securities Act of 1933
B. Securities Exchange Act of 1934
C. Trust Indenture Act of 1939
D. Sarbanes-Oxley Act of 2002

Answer 38

The best answer is D.

The Sarbanes-Oxley Act of 2002 requires that research analysts at broker-dealers be completely separated from investment banking, so that the analysts are not “encouraged” or “intimidated” by the firm’s investment bankers to write favorable reports to get future investment banking business.

Question 39

Which of the following securities are typically subject to state registration requirements?

A. U.S. Government issues
B. Intrastate offerings
C. State chartered bank issues
D. Municipal issues

Answer 39

The best answer is B.

State registration is not required for those securities that are exempt under the Federal Securities Acts, such as U.S. Government debt, municipal debt, and state chartered bank issues. Intrastate offerings are exempt from Federal (SEC) registration, but are still subject to registration within the state where the offer is being made, unless the security being sold is exempt; or the transaction in which the security is being sold is exempt.

Question 40

Which of the following securities are typically exempt from state registration requirements?

I U.S. Government issues
II Municipal issues
III Securities listed on a national stock exchange (“blue chips”)
IV New securities for an issuer who has filed registration statements previously in the state

A. I and II
B. II and IV
C. I, II, III
D. I, II, III, IV

Answer 40

The best answer is C.

State registration is not required for those securities that are exempt under the Federal Securities Acts, such as U.S. Government and Municipal debt. State laws typically exempt listed companies from registering in the state under what is known as a “blue chip exemption.” The reasoning is that if the company is solid enough to be listed on an exchange and it is registered with the SEC, then that is sufficient. Because an issuer has filed registration statements previously in a state does not exempt that issuer from filing for a new proposed issue (the logic for this is that the State wants to collect a registration fee for that issue!)

Question 41

A customer wishes to place a buy order for a security that has not been registered in the state. The security may be purchased if the security:

I is exempt from state registration
II falls under a “Blue Chip” exemption by being listed on a recognized national stock exchange
III is traded by at least 2 market makers
IV has been trading in the market for at least 1 year

A. I and II only
B. III and IV only
C. I, II, III
D. I, II, III, IV

Answer 41

The best answer is A.

Generally, securities that are exempt from Federal registration are also exempt from state registration. For example, government and municipal securities do not have to be registered in each state. States also allow for “Blue Chip” exemptions for non-exempt securities. Under this exemption, stocks listed on national stock exchanges are exempt from state registration. The logic for this exemption is that the issuer must meet stringent exchange listing and reporting requirements, as well as Federal registration requirements. Therefore, separate state registration is overkill. There is no exemption offered from state registration for securities trading for at least 1 year or securities traded by at least 2 market makers.

Question 42

State registration (Blue Sky) requirements apply to:

I resident salespersons soliciting in that state
II non-resident salespersons soliciting in that state
III resident issuers of securities offered in that state
IV non-resident issuers of securities offered in that state

A. I and III
B. II and IV
C. I and II
D. I, II, III, IV

Answer 42

The best answer is D.

Blue sky laws apply to both resident and non-resident salespersons who solicit in that state, as well as to their brokerage firms, who also must be registered in that state. Any issues that are offered in the state must also be registered, unless an exemption is available.

Question 43

A sales representative and his broker-dealer are registered in the State of Ohio. He wishes to prospect customers in the State of Massachusetts. Which statements are TRUE?

I The sales representative must be registered in Massachusetts
II The sales representative does not have to be registered in Massachusetts, since he is registered in Ohio
III The broker-dealer that employs the sales representative must be registered in Massachusetts
IV The broker-dealer that employs the sales representative does not have to be registered in Massachusetts, since it is registered in Ohio

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 43

The best answer is A.

Before any offer can be directed into a state for a non-exempt security, the registered representative making that offer must be registered in that state; and the broker-dealer employing that salesperson must be registered in that state. There are some exemptions allowed, but they are very limited.

Question 44

When a sales representative wishes to sell an exempt security to an out of state customer, which of the following statements are TRUE?

I The broker-dealer must be registered in the state where the sale of the exempt security is going to be made
II The broker-dealer does not have to be registered in the state where the sale is going to be made because the security is exempt
III The sales representative must be registered in the state where the sale of the exempt security is going to be made
IV The sales representative does not have to be registered in the state where the sale is going to be made because the security is exempt

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 44

The best answer is A.

While exempt securities are not registered under both Federal and State law, broker-dealers and their sales employees that sell these bonds must still be registered under state law in any state in which the securities are offered. It makes no difference that the security being offered is exempt; the agent and broker-dealer offering them in the state must still be registered in the state (since they can offer these securities fraudulently, and the state wants to know where to find these persons if they do so!).

Question 45

A registered representative who has passed the Series 63 examination wishes to sell managed accounts to customers in differing states. Which statement is TRUE?

A. The registered representative needs no further licenses to sell managed accounts
B. The registered representative must pass either the Series 65 or Series 66 examination to sell managed accounts
C. The registered representative must post a surety bond prior to selling managed accounts
D. The registered representative is prohibited from selling managed accounts

Answer 45

The best answer is B.

Managed or wrap accounts are defined as “investment advisers” in most states. As such, the firm selling managed accounts must register as an investment adviser; and the individuals selling managed accounts for these firms must register as “investment adviser representatives” and pass either the Series 65 or Series 66 examination.

Question 46

If an individual joins a broker-dealer to sell wrap accounts, under uniform state law, this person:

A. must register and pass the Series 63 examination
B. must register and pass the Series 65 examination
C. both of the above
D. neither of the above

Answer 46

The best answer is C.

Uniform state law, in most states, requires individuals who sell securities in a state to register as an agent and pass the Series 63 examination. In addition, most states define managed accounts as “investment advisers” and individuals who sell these accounts must register as “investment adviser representatives” and pass the Series 65 examination.

Question 47

A customer in New Jersey calls a registered representative (agent) in New York and inquires about buying common stock. The customer wishes to place the order. Which statements are TRUE?

I The agent must be registered in the State of New York to accept the order
II The agent must be registered in the State of New Jersey to accept the order
III The agent is not required to be registered in the State of New York to accept the order
IV The agent is not required to be registered in the State of New Jersey to accept the order

A. I and II
B. III and IV
C. I and IV
D. II and III

Answer 47

The best answer is A.

This question gets at a fine point of State law. Under State law, there is an “unsolicited transaction exemption” that gives an exemption from State registration to any security involved in an unsolicited transaction. However, it does NOT give an exemption from registration to the agent involved in the transaction! Because the agent is resident in New York, he or she must register there. Because the agent is dealing with a customer in New Jersey, the agent must be registered in New Jersey as well!

Question 48

A customer who lives in New York has an account with a broker-dealer and sales representative that are both registered in State of New York. The customer moves to the State of Georgia, a state where the broker-dealer and sales representative are not registered. Which statements are TRUE?

I Solicitations may be directed to this customer
II Solicitations cannot be directed to this customer
III Unsolicited orders can be accepted from this customer
IV Unsolicited orders cannot be accepted from this customer

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 48

The best answer is D.

Because the broker-dealer and sales representative are not registered in the State of Georgia, they cannot solicit the purchase of securities in the State of Georgia (to do so requires registration in the state). Under State law, there is an “unsolicited transaction exemption” that gives an exemption from State registration to any security involved in an unsolicited transaction. However, it does NOT give an exemption from registration to the agent involved in the transaction! In order for the agent to deal with a customer in Georgia (either solicited or unsolicited), the agent and broker-dealer must be registered in Georgia as well!

Question 49

Which of the following actions taken by a fiduciary would be consistent with the obligations imposed by the “Prudent Man Rule”?

I Diversifying a fixed income portfolio with securities of varying maturities
II Selecting AA rated corporate convertible bond investments to meet an investment objective of both income and capital gains
III Investing in small capitalization unlisted new issue investments for long term growth
IV Writing covered calls against securities positions held in the account to increase income

A. I and II only
B. III and IV only
C. I, II, IV
D. I, II, III, IV

Answer 49

The best answer is C.

The “prudent man rule” is part of Uniform State Law, and it requires fiduciaries to make investments for accounts under their control as would a “prudent man.” This makes sense, since fiduciaries are investing for the benefit of others, and the investments are supposed to provide a long term future benefit to these persons. Investing in unproven, speculative new issues would not be consistent with the “prudent man rule.” Diversifying a portfolio, investing in AA rated convertible bonds to meet an objective of both income and growth, and writing covered calls against stock positions are all proven, prudent investment strategies.

Question 50

Blue Sky Laws require registration of all of the following EXCEPT:

A. exempt issues
B. non-exempt issues
C. broker-dealers
D. sales representatives

Answer 50

The best answer is A.

State blue sky laws are independent of the Federal Securities Acts. As a general rule, securities exempt from Federal registration are also exempt from state registration. Blue sky laws require registration of broker-dealers, sales representatives, and non-exempt issues in that state. Under these laws, states have the power to suspend or expel individuals or issues from registration.

Question 51

All of the following must be registered under state blue sky laws EXCEPT:

A. Sales Representatives
B. Broker-Dealers
C. U.S. Government Issues
D. Real Estate Investment Trust Issues

Answer 51

The best answer is C.

Issues that are exempt from registration under Federal laws are also exempt under state laws, so U.S. Governments do not have to be registered with the state. However, sales representatives, broker-dealers, and non-exempt issues (such as REITs) must be registered.