Quiz #1 Flashcards
A registered representative makes the following recommendation to her customer: “In case of an emergency requiring immediate cash, you may not be able to sell your securities and get a check the same day. I recommend that you send $10,000 of cash to me at my office where I will place it in safekeeping. If you have an emergency cash need, I can bring the cash to you immediately.” This action is:
A. permitted, since it better serves the client
B. permitted only if the registered representative has worked in the business for at least 10 years
C. permitted only if the registered representative is also a registered investment adviser representative
D. prohibited under FINRA rules
The best answer is D.
Cash can only be accepted from a customer if it is to be deposited to the customer’s account.
Under Regulation D regarding private placements, how many non-accredited investors are allowed to invest in the offering?
A. 10
B. 35
C. 50
D. An unlimited number
The best answer is B.
Regulation D permits a private placement to be sold to a maximum of 35 non-accredited investors and an unlimited number of accredited (wealthy and institutional) investors.
Which of the following activities are allowed prior to the filing of a registration statement?
I Solicitations of indications of interest
II Solicitations of orders
III Sending a preliminary prospectus
IV Publishing a tombstone announcement
A. I and II only
B. II and III only
C. I, II, III, IV
D. None of the above
The best answer is D.
Prior to the filing of a registration statement for a new issue, nothing can be done. Once the registration statement is filed, a preliminary prospectus can be sent; indications of interest can be accepted; and a “tombstone” announcement can be published. Once the registration is effective, orders can be accepted if customers receive the final prospectus, at or prior to, confirmation of sale.
Which information, at a minimum, must be disclosed when making unsolicited phone calls to potential customers?
I Caller’s name
II Firm’s name
III Address or phone number from which the caller is dialing
A. I only
B. II only
C. I and III only
D. I, II, III
The best answer is D.
The Federal Telephone Consumer Protection Act of 1991 requires the following procedures for making unsolicited “commercial” phone calls.
- Unsolicited calls cannot be made before 8:00 AM nor after 9:00 PM, in the time zone of the recipient.
- The caller must identify him or herself by:
Name;
Firm;
Address or telephone number from which the caller is dialing - If the person called states that he or she does not wish to receive calls, the person must be placed on a “Do Not Call” list.
Violations of the Act can be enforced by each State Attorney General and by the FTC (Federal Trade Commission).
The SEC requires financial reports from all of the following EXCEPT:
A. municipal issuers
B. corporate issuers
C. municipal broker-dealers
D. corporate broker-dealers
The best answer is A.
Municipal issuers are exempt from the provisions of the Securities Acts, as are all other governmental issuers. The SEC has authority over corporate issuers, and requires financial reports from corporations. Broker-dealers, including municipal broker-dealers, are registered through FINRA under SEC oversight; and their financial reports are filed with both FINRA and the SEC.
A sales representative is registered as an agent in the State of California. She wishes to prospect customers in the State of New York, in which she is not registered. Which statement is TRUE?
A. Prospecting is permitted in any State once an individual has been registered in one State
B. The individual must be registered in the State of New York before contacting potential customers in that State
C. The individual must be registered in the State of New York before writing orders from that State
D. The individual must be registered in the State of New York before any orders can be confirmed to customers in that State
The best answer is B.
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. There are some exemptions allowed, but they are very limited.
Under Rule 10b-5-1, pre-arranged trading plans by insiders are:
I permitted only if the provisions cannot be altered during the plan’s life
II permitted only if the provisions can be altered during the plan’s life
III given a safe harbor to officers and directors against an “insider trading” prosecution if the plan is followed
IV given a right of rescission for any trades that are deemed to be a violation of the insider trading rules
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is A.
We all know that insiders are prohibited from trading based on material non-public information. In 2000, the SEC issued a “safe-harbor” rule that permits statutory insiders (officers, directors and 10% shareholders) to set up a written plan for trading that company’s securities. Such a written plan specifies the future date with amount on which securities are to be bought and sold; or specifies the algorithm to be used for determining the amount and date of future purchases or sales. Once the plan is in force, the “insider” cannot have any further influence on trades effected under the plan. As long as the insider adheres to such a written trading plan, that person is given a “safe harbor” from being accused of using “inside information” as the basis for the trades that occur based on adhering to the plan.
Which statement describes trading of Rule 144A issues?
A. Rule 144A issues are NMS securities that are listed and trade on the NYSE, AMEX and NASDAQ
B. Rule 144A issues are not listed and trade in the OTCBB or Pink Sheets
C. Rule 144A issues trade in the PORTAL market from QIB to QIB
D. Rule 144A issues cannot be traded in the public markets
The best answer is C.
Rule 144A issues are private placement securities sold in minimum $500,000 blocks only to QIBs - Qualified Institutional Buyers (institutions with at least $100MM of assets available for investment). Whereas normal private placements cannot be traded, these can be traded from QIB to QIB. The market for this is PORTAL, but trading activity is thin in this market, especially as compared to the market for publicly traded securities.
A customer who lives in New York has an account with a broker-dealer and sales representative that are both registered in the State of New York. The customer moves to the State of Georgia, a state where the broker-dealer and the sales representative are not registered. Which statement is TRUE?
A. Orders may be solicited from this customer under an “existing customer” exemption without the agent or broker-dealer having to register in the State of Georgia
B. The firm must cease doing business with the customer until it and the agent register in the State of Georgia
C. Only unsolicited orders may be accepted from this customer
D. The customer must place any orders with the firm in writing; telephone orders cannot be accepted
The best answer is B.
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 - there is no such thing as an “existing customer” exemption). 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!
Under MSRB rules, all of the following statements are true about a registered representative sharing in a customer account EXCEPT the:
A. registered representative must receive approval to do so from the principal
B. registered representative must share only in proportion to the capital contributed
C. registered representative must share in both gain and loss
D. MSRB must be notified in advance of the sharing arrangement
The best answer is D.
Sharing in a customer account is prohibited unless the registered representative gets written approval for the account from the principal; opens a joint account with the customer; and shares in gain and loss in proportion to the capital contributed. There is no requirement to give notice of such an arrangement to the MSRB - if this were the case, the MSRB couldn’t do anything about it anyway since they do not enforce their rules (enforcement for broker-dealers is performed by FINRA).
The final prospectus for a new registered securities issue:
I contains the Public Offering Price
II does not contain the Public Offering Price
III must be given to the customer at, or prior to, confirmation of sale
IV must be given to the customer at, or prior to, settlement of the transaction
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is A.
The final prospectus contains the Public Offering Price and the underwriter’s spread on the front cover (this is not in the preliminary prospectus). Any purchaser of the new issue must be given the final prospectus, at, or prior to, confirmation of sale.
Under MSRB rules, a registered representative can perform which of the following functions?
I Trading municipal issues in the secondary market
II Offering call and put options on municipal securities to customers
III Overseeing the activities of other municipal registered representatives
IV Offering new municipal issues to retail customers
A. I and II only
B. III and IV only
C. I, II, and IV
D. I, II, III, IV
The best answer is C.
Municipal representatives are permitted to trade municipal issues in the secondary market; offer call and put options on municipal issues; and sell new municipal issues to customers. Registered representatives are not permitted to supervise other representatives. To do so, the individual must pass the principal’s exam.
A Municipal Finance Professional (MFP) can give what dollar amount to an elected official’s campaign in which he or she is NOT entitled to vote without this action resulting in a 2 year ban?
A. 0
B. $100
C. $250
D. $500
The best answer is A.
Under MSRB Rule G-37, a Municipal Finance Professional can give up to $250 to an elected official’s campaign in which the MFP is entitled to vote without any problems.
If the amount given is more than $250, or if ANY dollar amount is given to an elected official’s campaign in which the MFP is not entitled to vote (as in this case), then the municipal broker-dealer is banned from doing negotiated underwritings and municipal financial advisory work for that municipality for 2 years.
Therefore, an MFP can give nothing to an elected official’s campaign in which he or she is not entitled to vote, otherwise a ban will result. The idea here is simple - why would an MFP give any campaign contribution where he or she is not entitled to vote, other than to curry favor with that issuer official?
Which disclosure is required when advertising a CMO Tranche?
A. Minimum Denomination
B. Credit Rating
C. Payment Frequency
D. Average Life Of Investment
The best answer is D.
FINRA sets minimum disclosure requirements when advertising a CMO tranche. It requires disclosure of the:
Coupon Anticipated Yield and Average Life Specific Tranche ID – Number and Class Final Maturity Date Underlying Collateral In addition, FINRA requires the following statement:
“The yield and average life shown above consider prepayment assumptions that may or may not be met. Changes in payments may significantly affect yield and average life. Please contact your representative for information on CMOs and how they react to different market conditions.”
Then FINRA states that the following disclosures are optional:
Minimum Denomination Rating Agency / Government Backing Income Payment Structure Generic Description of Tranche (e.g., PAC, Companion) Yield to maturity of CMOs Offered at Par
Under MSRB rules, which of the following records must be kept for specified time periods?
I Official Statements
II Trade comparisons
III Customer account statements
IV Customer complaints
A. I and II only
B. III and IV only
C. II, III, IV
D. I, II, III, IV
The best answer is C.
There is no requirement to keep Official Statements filed at the firm. The underwriter for the issuer files a copy of the Official Statement with the MSRB, which puts it up on its EMMA website for public access.
Which of the following are non-exempt securities under the Securities Act of 1933?
I Government National Mortgage Association Mortgage Pass Through Certificates
II Small Business Investment Company Shares
III Commercial Paper maturing over 270 days
IV Variable Annuity Contracts
A. I and II
B. III and IV
C. II, III, IV
D. I, II, III, IV
The best answer is B.
Government National Mortgage Association is owned by the U.S. Government. Its issues are exempt from the provisions of the Securities Act of 1933.
Small Business Investment Companies are also exempt from the Act’s provisions (though regular Investment Company issues are non-exempt).
For commercial paper to be exempt, its maturity must be 270 days or less. Since the maturity in this question is over 270 days, this issue is non-exempt.
Variable annuity contracts are also a non-exempt security that must be registered under the 1933 Act, because the customer is basically buying a mutual fund in an insurance company “wrapper.” Note, in contrast, that fixed annuities sold by insurance companies are not defined as a security and hence are not subject to registration requirements.
Rule 105 of Regulation M, covering transactions that occur in the secondary market during the 20-day cooling off period for “add on” securities offerings, requires that any short sales of the issue that occur:
A. 5 business days prior to the effective date be effected on an upbid
B. 20 business days prior to the effective date be effected on an upbid
C. 5 business days prior to the effective date cannot be covered by purchasing the issue from the syndicate
D. 20 business days prior to the effective date cannot be covered by purchasing the issue from the syndicate
The best answer is C.
SEC Regulation M (Rules 101-105) covers secondary market activities related to registered public offerings, and addresses such items as prohibitions or limits on syndicate members buying the stock in the secondary market during the 20-day cooling off period (this is for add-on offerings); stabilization rules (because stabilizing bids are placed in the secondary market); and also, under Rule 105, addresses a rather nasty market manipulation that occurred in secondary offerings.
Prior to the adoption of this rule, a common trading practice was for overly aggressive independent traders to short that stock in the market - pushing the price down during the 20-day cooling off period. The fall in the market price would force the underwriters to lower the Public Offering Price of the issue. Thus, when registration became effective, the independent trading firms could buy the issue from the underwriters at the lower P.O.P., cover their short positions, and have a nice profit. The problem was, however, that this activity was clearly manipulative. The SEC took a dim view of this activity, and under Rule 105, prohibits broker-dealers from purchasing shares of stock from the underwriters at the offering price to cover short positions established within 5 business days of the effective date.
The President of PDQ Corporation buys PDQ shares in the open market. After holding them for 3 months fully paid, the President wishes to sell the shares. The shares can be sold:
A. immediately
B. after holding the securities for an additional 3 months
C. after holding the securities for an additional 6 months
D. after holding the securities for an additional 1 year
The best answer is A.
“Control stock,” which is registered stock of a company bought in the open market by an officer or director of that company, is subject to all Rule 144 requirements when the officer or director wishes to sell, except for the 6-month holding period. The 6-month holding period is required for restricted stock, but not for control stock.
The designated Registered Options Principal is responsible for which of the following functions?
I Writing of procedures for supervision of options accounts
II Review of procedures for supervision of options accounts
III Approval of options advertising
IV Approval of options accounts
A. I and II only
B. III and IV only
C. I, II, III
D. I, II, III, IV
The best answer is C.
The designated Registered Options Principal resides in the main office of the firm and is responsible for creating and enforcing procedures for compliance with the rules of the O.C.C. and options exchanges. This person is also responsible for approving all options advertising and sales literature.
Each branch must have a BOM - Branch Office Manager. This person is responsible for approving options accounts, options orders, options correspondence sent to 25 or fewer existing or prospective clients and for resolving options complaints.
All of the following are defined as “institutional clients” for purposes of the FINRA communications rules EXCEPT:
A. mutual fund
B. investment adviser
C. investor with $50 million of assets
D. accredited investor
The best answer is D.
FINRA distinguishes between “retail communications” and “institutional communications” because “institutional communications” go to sophisticated investors who can take care of themselves. While retail communications must be approved by a principal prior to use, institutional communications are subject to “post use review and approval” by a principal.
An institutional communication is defined as one that is distributed to an institutional investor - a bank, savings and loan, insurance company, registered investment company, registered investment adviser, employee benefit plan with at least 100 participants, government entity or a person with at least $50 million of assets for investment.
Note that an accredited investor is not necessary an institutional investor. For example, to be accredited, an individual must have an annual income of $200,000 or a net worth of $1,000,000. This person would not be an “institutional client” under FINRA rules.
Which of the following is defined as options “sales literature”?
A. Member firm options website
B. Standard option worksheet
C. Options memorandums for internal use
D. Letters of an “individual” nature sent to customers
The best answer is B.
Options Sales Literature is any written communication distributed to customers or the public that contains any analysis, performance report, projection or recommendation. Included, as well, are standard forms of options worksheets (these detail gain, loss, and breakeven for a given strategy to be employed by a customer), and seminar texts for lectures to be given to the public about options. Sales literature must be accompanied or preceded by an Options Disclosure Document.
Options Advertising is defined as any sales material that reaches a public audience through a mass media, including: newspapers, periodicals, magazines, websites, radio, television, telephone recordings, motion pictures, billboards, signs, or through written sales communications to the public that are NOT required to be preceded by an Options Disclosure Document. The content of these communications is very limited so that they are not “promotional” and they must state where an Options Disclosure Document can be obtained.
A letter of an individual nature to a customer is defined as correspondence. Letters for internal use by a member firm do not come under any of these definitions, since they are not distributed to the public.
Which bond offering is required to have a trust indenture under the Trust Indenture Act of 1939?
A. Mortgage bond
B. Lease rental bond
C. School district bond
D. Treasury bond
The best answer is A.
Corporate bond offerings over $50,000,000 must have a trust indenture under the Trust Indenture Act of 1939. Mortgage bonds are corporate bonds, typically issued by utilities. Municipal bonds such as lease rental bonds and school district bonds are exempt, as are U.S. Government issues.
Rule 144 applies to:
I purchases of control stock
II purchases of restricted stock
III sales of control stock
IV sales of restricted stock
A. I and II only
B. III and IV only
C. I and III only
D. II and IV only
The best answer is B.
Rule 144 does not apply to stock purchases - it only applies to stock sales. It applies limits to sales of restricted (private placement) stock in the open market and sales of registered stock being sold by control persons.
Which of the following statements are TRUE about listed securities?
I Under Regulation T, all listed securities are marginable
II Listed securities are subject to Regulation SHO
III Listed securities trade in the Second Market
IV Listed companies must be registered with, and report their results to, the SEC
A. I and II only
B. II and III only
C. I, II, IV
D. I, II, III, IV
The best answer is C.
Listed securities (those listed on an exchange) are marginable under Regulation T. Under the Exchange Act of 1934, Regulation SHO requires that before any equity security (either listed or unlisted) can be sold short, the member firm must affirmatively determine that the security can be borrowed and delivered on settlement. This is called the “locate” requirement. Listed securities trade in the first (exchanges), third (OTC trading of exchange listed securities) and fourth (direct trades between institutions via ECNs) markets. The second market is trading of unlisted securities over-the-counter. These are OTCBB and Pink Sheet issues. Listed companies must register with, and report their results to, the SEC.
