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1

Insider Trading
Question ID: 48621
At a social gathering, an officer of a publicly traded company confides to his neighbor, a registered representative, that his company will announce a major acquisition in the coming week. Which of the following statements regarding the SEC's insider trading rules is TRUE?

A) The registered representative is in violation.
B) Both the officer and the registered representative are in violation.
C) Neither the officer nor the registered representative is in violation.
D) The officer is in violation.

Answer: C

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

Reference: 5.1 in the License Exam Manual.

2

Insider Trading
Question ID: 48626
Broker/dealers are required to have written procedures to prevent the misuse of material, nonpublic information by:

I. employees of the broker/dealer.
II. associated persons of the broker/dealer.
III. suppliers to the broker/dealer.
IV. disinterested parties.
A) II and IV.
B) III and IV.
C) I and II.
D) I and III.

Answer: C

FINRA rules require member firms to establish written supervisory procedures designed to detect and prevent the misuse of inside information by persons affiliated with members.

Reference: 5.1.1 in the License Exam Manual.

3

Insider Trading
Question ID: 48649
As the result of a conversation with an officer of a publicly traded company, a registered representative comes into possession of material, nonpublic information indicating a high probability that the company's stock will increase substantially in value. If the following morning the registered representative buys call options on the stock, which of the following statements is TRUE?

A) Neither the officer nor the registered representative violated insider trading rules.
B) Both the officer and the registered representative violated insider trading rules.
C) The officer violated insider trading rules.
D) The registered representative violated insider trading rules.

Answer: B

A violation occurs if insider information is used to trade for profit or to avoid a loss. In such cases, both the tipper and the tippee are liable.

Reference: 5.1 in the License Exam Manual.

4

Insider Trading
Question ID: 48754
Which of the following persons involved in an underwriting are subject to the provisions of the Insider Trading Act of 1988?

I. Accountant for the issuer.
II. Employee of the issuer.
III. Attorney for the issuer.
IV. Financial printer for the issuer.

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

Answer: A

Any persons associated with the issuer in an underwriting of new securities are subject to the provisions of the Insider Trading Act of 1988; all could be aware of information not yet released to the public. Anyone who has access or could have access to material, nonpublic information would be considered an insider under insider trading rules.

Reference: 5.1 in the License Exam Manual.

5

Insider Trading
Question ID: 48763
Which of the following conditions must be present for a violation of the Insider Trading Act of 1988 to occur?

I. The insider must have known the information is nonpublic.
II. The insider must have breached his fiduciary responsibility to the issuer.
III. The insider must have derived personal benefit from the use of the information.
IV. The transaction must occur in an account in the name of the insider.

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

Answer: D

A violation of the Insider Trading Act of 1988 occurs if any benefit is derived (not just financial) from the misuse of material, nonpublic information by persons that have a fiduciary responsibility to the issuer.

Reference: 5.1 in the License Exam Manual.

6

Insider Trading
Question ID: 49094
A research analyst attends a meeting where the chief financial officer of ABC inadvertently discloses nonpublic, material information about ABC. Once disclosed to the public, the information would likely have a significant impact on the company's stock price. The analyst would be permitted to do all of the following EXCEPT:

A) discuss the information with her firm's institutional clients.
B) discuss the information with her immediate supervisor.
C) update, but not release, her report on the company.
D) update, but not release, her rating on the company.

Answer: A

Regulation FD was designed to curb the selective disclosure of nonpublic, material information by issuers to analysts and institutional investors. Regulation FD requires that when an issuer discloses material information, it do so publicly to provide a level playing field. In this question, there is no indication that the issuer made the required public disclosure. Therefore, the analyst would be prohibited from discussing or disclosing this information to anyone other then her immediate supervisor and/or compliance and legal personnel. To do otherwise would be a violation of insider trading rules.

Reference: 5.1.1 in the License Exam Manual.

7

Distribution of Securities of Member Firms
Question ID: 48639
Under FINRA rules, an independent qualified underwriter must have been actively engaged in the investment banking or securities business for how many years prior to filing a registration statement?

A) 10 years.
B) 5 years.
C) 2 years.
D) 3 years.

Answer: B

An independent qualified underwriter must have been actively engaged in the investment banking or securities business for at least 5 years immediately preceding the filing of the registration statement. Further, the firm must have acted as manager or co-manager of offerings with gross proceeds of not less than 50% of the proceeds of the proposed offering, or gross proceeds of $50 million or more.

Reference: 5.10.1.1 in the License Exam Manual.

8

Distribution of Securities of Member Firms
Question ID: 48667
All of the following statements are true regarding the sale of a member's securities to the public EXCEPT:

A) in an additional issue, an independent underwriter must be engaged.
B) information on the offering must be filed with the Corporate Financing Department.
C) in an IPO, an independent underwriter must be engaged.
D) written customer permission is required prior to purchasing the securities in a discretionary account.

Answer: A

Information on the offering must be filed with the Corporate Financing Department. In an IPO, an independent underwriter must be engaged. In an additional issue, the member is permitted to price its own issue. Prior to purchasing these securities in a discretionary account, the member must first receive a customer's written permission.

Reference: 5.10.1 in the License Exam Manual.

9

Distribution of Securities of Member Firms
Question ID: 49024
Under FINRA Rule 5121, all customer checks received to purchase newly issued shares of a member firm:

A) may be pledged to a bank to support member indebtedness.
B) must be placed in an escrow account.
C) may be immediately placed in a syndicate account of the member firm.
D) must be placed in a reserve account under SEC Rule 15c-3-3.

Answer: B

When a member firm itself goes public, customer checks must be placed in an escrow account pending a net capital computation. If the firm's capital is below 120% of minimum or its AI-to-NC ratio exceeds 10:1, the offering is cancelled, and the checks must be returned to the purchasers.

Reference: 5.10.1.1 in the License Exam Manual.

10

Distribution of Securities of Member Firms
Question ID: 49128
A member firm is offering its stock to the public in an IPO. Under FINRA Rule 5121, which of the following statements are TRUE?

I. The offering will be canceled if its AI-to-NC exceeds 12:1.
II. The offering will be canceled if its AI-to-NC exceeds 10:1.
III. The offering will be canceled if its capital is less than 7% of aggregate debits in its reserve computation.
IV. The offering will be canceled if its capital is less than 5% of aggregate debits in its reserve computation.

A) II or IV.
B) II or III.
C) I or III.
D) I or IV.

Answer: B

In a member offering, all customer checks must be placed in escrow pending a net capital computation. Proceeds from the sale, although in escrow, may be taken into consideration when computing net capital. For firms using the standard method, if capital is less than 120% of minimum or AI-to-NC exceeds 10:1, the offering must be cancelled. For firms using the alternative method, if capital is less than 120% of minimum or is less than 7% of aggregate debits, the offering must be cancelled.

Reference: 5.10.1 in the License Exam Manual.

11

Corporate Financing Dept.
Question ID: 48526
According to FINRA's Corporate Financing Department, stock acquired as compensation will not be considered unreasonable if the amount does not exceed what percentage of the total offering?

A) There is no limitation.
B) 10%.
C) 5%.
D) 15%.

Answer: B

The Corporate Financing Department considers shares acquired by an underwriter in excess of 10% of the total offering to be unreasonable compensation.

Reference: 5.11.1.2 in the License Exam Manual.

12

Corporate Financing Dept.
Question ID: 48553
Under FINRA's filing review directive, the Corporate Financing Department will examine all of the following EXCEPT:

A) municipal bond offerings.
B) Regulation A offerings.
C) convertible bond offerings.
D) non-convertible debt offerings.

Answer: A

The FINRA Committee on Corporate Financing requires a review of all new offerings except in the case of investment companies (except for closed-end management companies), straight corporate bonds rated investment grade, and exempt securities. Regulation D offerings are also exempt from filing.

Reference: 5.11.1.1 in the License Exam Manual.

13


Corporate Financing Dept.
Question ID: 48617
Reimbursement by the issuer of which of the following expenses borne by the underwriter would be considered compensation by the Corporate Financing Department?

A) Blue-sky fees.
B) Legal fees.
C) Printing costs.
D) Solicitation costs.

Answer: D

Reimbursement from issuer to underwriter is commonplace and is not considered compensation if the expense is normally borne by the issuer. Blue-sky fees, legal fees, and printing costs are expenses normally paid by the issuer. Therefore, if paid by the underwriters and subsequently reimbursed, this is not considered compensation. However, the underwriters generally pay solicitation costs. If the underwriters are reimbursed for these expenses, the Corporate Financing Department will consider the reimbursement to be compensation.

Reference: 5.11.1.2.1 in the License Exam Manual.

14

Corporate Financing Dept.
Question ID: 48635
The responsibility for filing the required information with the Corporate Financing Department rests with the:

A) syndicate manager.
B) issuer.
C) legal counsel for the syndicate.
D) legal counsel for the issuer.

Answer: A

Information to be filed with the Corporate Financing Department is filed by the syndicate manager on or about the date the registration statement is filed with the SEC.

Reference: 5.11.1.1 in the License Exam Manual.

15

Corporate Financing Dept.
Question ID: 48648
If the syndicate manager is advised by the Corporate Financing Department that the underwriter's compensation in a proposed offering is unfair or unreasonable, the manager must immediately:

A) notify Nasdaq.
B) cancel the offering.
C) notify the other members of the underwriting group.
D) notify the issuer.

Answer: C

If notified by the Corporate Financing Department that the compensation is unreasonable, the syndicate manager must immediately notify the other members of the underwriting group.

Reference: 5.11.1.1 in the License Exam Manual.

16

Corporate Financing Dept.
Question ID: 49020
If a clearing firm receives a customer's complaint regarding the activities of an associated person at one of its introducing broker/dealers, the clearing firm must do all of the following EXCEPT:

A) forward the complaint to FINRA.
B) notify the customer that the complaint was received and forwarded.
C) forward the complaint to the SEC.
D) forward the complaint to the introducing firm.

Answer: C

The clearing firm must immediately forward the complaint to both the introducing firm and FINRA. It must also notify the customer that the complaint was received and forwarded as stated.

Reference: 5.11.1.3 in the License Exam Manual.

17

Corporate Financing Dept.
Question ID: 49111
An introducing firm amends its carrying agreement with a clearing firm whose DEA is the CBOE. Under FINRA rules, the responsibility to file the amended agreement with FINRA for review rests with:

I. the introducing firm.
II. the clearing firm.

A) Both I and II.
B) Neither I nor II.
C) I only.
D) II only.

Answer: C

The key to this question is the DEA of the clearing firm. If it is FINRA, the clearing firm is responsible for submitting the agreement to FINRA for review. If it is not FINRA, as in this situation, then the responsibility to submit the amended agreement for review rests with the introducing firm.

Reference: 5.11.1.3 in the License Exam Manual.

18

PAIB
Question ID: 49073
An introducing broker/dealer has no PAIB agreement with its clearing firm. Which of the following statements are TRUE?

I. Clearing deposits are considered allowable assets in the computation of net capital.
II. Clearing deposits are considered non-allowable assets in the computation of net capital.
III. Net equity, in its investment account, is considered an allowable asset in the computation of net capital.
IV. Net equity, in its investment account, is considered a nonallowable asset in the computation of net capital.

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

Answer: A

If an introducing broker/dealer has not entered into a PAIB agreement with its clearing firm, both clearing deposits and net equity in its investment account must be treated as nonallowable assets in the computation of net capital.

Reference: 5.12 in the License Exam Manual.

19

PAIB
Question ID: 49112
Under SEC rules, if a clearing broker is unable to make a required deposit into its PAIB reserve account, it must notify all of its correspondent introducing firms:

A) within five business days.
B) promptly.
C) within two business days.
D) within three business days.

Answer: A

If a clearing firm is unable to make a required deposit into its PAIB reserve account, it must notify the SEC and its DEA immediately. Unless a corrective plan is acceptable to both the SEC and the DEA, the clearing firm must provide written notice to its introducing firms within five business days.

Reference: 5.12 in the License Exam Manual.

20

PAIB
Question ID: 49175
All of the following statements are true regarding PAIB rules EXCEPT:

A) the PAIB reserve computation is performed on the same schedule as the customer reserve computation.
B) an introducing firm's proprietary assets held by the clearing firm are always allowable.
C) an introducing firm's clearing deposit is allowable only if a PAIB agreement is in place with its clearing firm.
D) an introducing firm's proprietary assets are only allowable if a PAIB agreement is in place with its clearing firm.

Answer: B

Without a PAIB agreement, proprietary assets of an introducing firm held by its clearing firm are nonallowable.

Reference: 5.12 in the License Exam Manual.

21

PAIB
Question ID: 49192
Which of the following statements regarding PAIB rules are TRUE?

I. A PAIB deposit requirement can be satisfied with excess debits in the customer reserve computation.
II. A PAIB deposit requirement cannot be satisfied with excess debits in the customer reserve computation.
III. A customer reserve deposit requirement can be satisfied with excess debits in the PAIB reserve computation.
IV. A customer reserve deposit requirement cannot be satisfied with excess debits in the PAIB reserve computation.

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

Answer: D

If the PAIB reserve computation results in a deposit requirement, the requirement can be satisfied to the extent of any excess debits in the customer reserve formula of the same date. However, a deposit requirement resulting from the customer reserve formula cannot be satisfied with excess debits from the PAIB reserve computation.

Reference: 5.12 in the License Exam Manual.

22

FINRA
Question ID: 48495
If a registered representative is convicted of a felony involving the sale of a security, for how many years will this person be disqualified from associating with a FINRA member firm?

A) 7 years.
B) 10 years.
C) 1 year.
D) 3 years.

Answer: B

A felony conviction within the 10 years preceding application for registration is considered a statutory disqualification. The same restriction applies to convictions for misdemeanors if they involve securities- or money-related offenses. However, this person could be readmitted under certain conditions.

Reference: 5.3.2.1 in the License Exam Manual.

23

FINRA
Question ID: 48569
An individual will be statutorily disqualified if convicted of money or securities-related fraud within the previous:

A) 10 years.
B) 2 years.
C) 3 years.
D) 5 years.

Answer: A

If convicted of a money- or securities-related fraud within the prior 10 years, FINRA will deny an applicant registration.

Reference: 5.3.2.1 in the License Exam Manual.

24

FINRA
Question ID: 48575
FINRA charges members with assessments and fees based on which of the following?

I. Revenue from municipal bond transactions.
II. Revenue from over-the-counter equity transactions.
III. Revenue from U.S. government securities transactions.
IV. The number of registered branch offices.

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

Answer: D

FINRA fees are based on the number of registered representatives and principals associated with a member, and the number of branch offices registered with FINRA. Assessments are based on revenue (net of certain costs) from securities transactions.

Reference: 5.3.2.4 in the License Exam Manual.

25

FINRA
Question ID: 48625
A FINRA member firm's fees are based on which of the following?

I. Net capital.
II. Number of registered representatives.
III. Number of branch offices.
IV. Gross revenue.

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

Answer: C

FINRA's membership fees are based on the number of branch offices registered with FINRA as well as the number of registered representatives and principals registered with the association. Assessments, as opposed to fees, are made against revenue generated from securities transactions.

Reference: 5.3.2.4 in the License Exam Manual.

26

FINRA
Question ID: 48638
Which of the following individuals associated with a member firm must be registered as principals?

I. Branch office managers.
II. Managers of offices of supervisory jurisdiction.
III. Officers with active roles in the investment banking or securities business of a member firm.
IV. Clerical employees handling cash or securities.

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

Answer: C

All managers of OSJs and all officers of a member firm must be registered as principals. Branch office managers need not be registered as principals.

Reference: 5.3.4.1 in the License Exam Manual.

27

FINRA
Question ID: 48670
A customer complaint alleging which of the following requires members to immediately notify FINRA?

I. A registered representative soliciting an unsuitable penny stock trade.
II. Misappropriation of customer funds or securities.
III. Forgery.
IV. A registered representative executing an unauthorized trade.

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

Answer: D

If a member receives a customer complaint alleging theft, misappropriation of customer assets, or forgery, the member must immediately (within ten business days) notify FINRA.

Reference: 5.3.2.3 in the License Exam Manual.

28

FINRA
Question ID: 49012
FINRA must be notified promptly if a registered representative becomes the subject of any disciplinary action taken by a member involving:

I. suspension.
II. termination for cause.
III. the withholding of commissions in excess of $2,500.
IV. the imposition of a fine in excess of $2,500.

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

Answer: D

Under FINRA rules, suspension, termination for cause, the withholding of commissions in excess of $2,500, or the imposition of a fine in excess of $2,500 all require that FINRA be promptly notified (within 10 business days).

Reference: 5.3.2.3 in the License Exam Manual.

29

License and Jurisdictional Retention
Question ID: 48572
Under FINRA rules, a registered representative must complete the regulatory element of continuing education within how many days of a registration anniversary date?

A) 30 days.
B) 60 days.
C) 90 days.
D) 120 days.

Answer: D

The regulatory element requires that all registered persons complete a computer-based training session within 120 days of their second registration anniversary and every third anniversary thereafter.

Reference: 5.4.7.1 in the License Exam Manual.

30

License and Jurisdictional Retention
Question ID: 48574
A registered person leaves the industry and 18 months later reassociates with another member firm. Under FINRA rules, this person's cycle for determining the dates for the regulatory element of continuing education is based on:

I. initial registration date.
II. reassociation date.

A) I only.
B) II only.
C) both I and II.
D) neither I nor II.

Answer: A

Provided reassociation occurs within two years; the cycle for determining the dates for the regulatory element of continuing education is based on the initial registration date. If reassociation occurs after two years, the cycle is based on the reassociation date.

Reference: 5.4.7.1 in the License Exam Manual.