Regulations Quiz

If a customer places a very large order to buy a stock that is likely to have a market impact, the registered representative may:
I buy the stock for his personal account prior to executing the order
II not buy the stock for his personal account prior to

II and IV (Front running a customer order that is likely to have a market impact is a prohibited practice. It makes no difference if the "front running" is done with that stock or with options on the stock.)

Under the provisions of the Securities Exchange Act of 1934, all of the following must be registered EXCEPT:
A. the exchanges that trade securities
B. member firms
C. sales employees of member firms
D. customers of member firms

D: customers of member firms (The Securities Exchange Act of 1934 requires the registration of each securities exchange, so that it now becomes a "self-regulatory organization" (SRO), subject to SEC oversight. In addition, FINRA and the MSRB are SROs. The

A detailed suitability determination must be completed by the registered representative and signed by the customer before confirmation of sale of a(n):
A. NASDAQ security
B. NYSE listed security
C. Pink sheet security under $5
D. CBOE listed option

C: Pink sheet security under $5

Which TWO of the following are correct statements regarding telephone solicitations?
I Calls are only permitted between 8:00 AM and 10:00 PM in the time zone of the recipient
II The firm must maintain written procedures regarding telephone solicitations
I

II and III (Unsolicited cold calls cannot be made before 8:00 AM, nor after 9:00 PM, in the time zone of the recipient, making Choice I wrong. The firm must maintain a Do Not Call list and must have written procedures covering telephone solicitations, mak

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 represe

I and III (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

Excluding the trading volume test, how much of the issuer's outstanding shares can be sold every 90 days under Rule 144?
A. 1%
B. 5%
C. 10%
D. 25%

A: 1% (Rule 144 allows the sale of 1% of the issuer's outstanding shares or the weekly average of the preceding 4 weeks' trading volume (whichever is higher) to be sold every 90 days.)

An "accredited investor questionnaire" is required when which type of offering is made to investors?
A. Rule 147
B. Regulation D
C. Regulation A
D. Rule 144

B: Regulation D (Private placements under Regulation D are typically only offered to "accredited investors." These are wealthy individuals and institutional investors. To document that the purchasers are, indeed, accredited, an "accredited investor questi

Who does NOT have to be licensed in a broker-dealer?
A. Chief Executive Officer
B. Partner who only provides capital
C. Chief Financial Officer
D. Sales individual

B: partner who only provides capital (Passive owners of broker-dealers, who can be officers, are not required to be licensed. All other officers, traders, and salespersons must be registered and licensed.)

Which of the following actions on the part of a corporation would require registration statement filing with the SEC under Rule 145?
I Stock dividend distribution
II Stock split
III Merger with another publicly held company
IV Spin off of a subsidiary as

III and IV only (Corporate distributions that result in an issuer distributing the exact same class of security to existing shareholders do not require a registration statement filing with the SEC. Thus, a corporation distributing a stock dividend or spli

Under Regulation D, issuers must provide which of the following to investors to obtain a private placement exemption?
A. Copy of the Prospectus
B. Copy of the Official Notice of Sale C. Copy of the Offering Circular or Private Placement Memorandum
D. Copy

C: copy of the offering circular or private placement memorandum (Under Regulation D, purchasers of private placements must be given full disclosure about the issue, even though no prospectus is required (the issue is exempt). Disclosure is accomplished b

The Securities and Exchange Commission is empowered to administrate all of the following Acts EXCEPT:
A. Securities Act of 1933
B. Trust Indenture Act of 1939
C. Investment Company Act of 1940
D. Uniform Securities Act

D: Uniform Securities Act (The Uniform Securities Act is more commonly known as the "Blue Sky" state law, and is adopted "state by state." The SEC, a Federal agency, has no jurisdiction over activities within each state and does not administrate this Act.

Which of the following statements are TRUE regarding the Securities Exchange Act of 1934?
I The general provisions of the Act apply to non-exempt securities only
II The general provisions of the Act apply to both exempt and non-exempt securities
III The a

I and IV (The general provisions of the Securities Exchange Act of 1934 apply to non-exempt securities only. For example, holders of municipal bonds (an exempt security) cannot be considered to be "insiders" while a holder of corporate stock (a non-exempt

A registered representative has written discretionary authorization from a customer. Specific customer approval is needed for the registered representative to effect which of the following transactions in the customer's account?
A. Sell naked calls
B. Sel

C: Purchase a municipal bond where the broker-dealer has a control relationship with the issuer
(The best answer is C.
If a control relationship exists between a brokerage firm and the municipal security being recommended, this security cannot be purchase

All of the following statements are true regarding negotiated municipal underwritings EXCEPT the:
A. initial offering price of each maturity must be disclosed
B. spread must be disclosed
C. participation amount of each underwriter must be disclosed
D. cus

C: participation amount of each underwriter must be disclosed (In negotiated municipal underwritings, the spread and offering price of each maturity must be disclosed. There is no requirement to disclose the names of the underwriters nor their participati

All of the following are exempt issues under the Securities Act of 1933 EXCEPT:
A. U.S. Government Bonds
B. Savings and Loan Issues
C. Real Estate Investment Trusts
D. Municipal Revenue Bonds

C: real estate investment trusts (Real Estate Investment Trusts are regulated similarly to Investment Companies, and their securities are non-exempt and must be registered under the Securities Act of 1933. U.S. Government issues, savings and loan issues,

A registered representative has done fund raising and charitable work for a not-for-profit hospital for many years and has just been invited to join the hospital's Board of Directors. She will get no compensation for this. Does she have to get permission

D: Yes, because this is an outside business activity (Any "OBA" - Outside Business Activity - must be reported to the firm and must be approved by the firm. Furthermore, it must be reported on that registered representative's U4 Form and is disclosed in t

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 custodi

C: the custodian accounts separately, the joint account separately, and both individual accounts are combined and treated as one (Securities Investor Protection Corporation coverage is applied "per customer name." If John Jones has both an individual cash

Which of the following is NOT subject to the registration requirements of the Securities Act of 1933?
A. American Depositary Receipts
B. American Depositary Shares
C. American Style Options
D. Foreign Currency Contracts

D: Foreign Currency Contracts (ADRs (American Depositary Receipts) are non-exempt securities and must be registered with the SEC under the Securities Act of 1933. ADRs are the way that most foreign corporate issues trade in the United States. The bank tha

Corporate officers who wish to trade their own company's stock must comply with all of the following rules EXCEPT:
A. filing change of holding reports with the SEC
B. prohibitions on short sales of that company's stock
C. purchase restrictions through the

C: purchase restrictions through the exercise of stock options (There is no restriction on corporate officers' buying their company's stock through the exercise of stock options. Many companies compensate their officers with stock option packages. Officer

The Securities Exchange Act of 1934 regulates which of the following markets?
I First
II Second
III Third market
IV Fourth

I, II, III, and IV (The Securities Act of 1933 regulates the new issue (primary) market. The Securities Exchange Act of 1934 regulates the secondary market (the trading market). The trading markets consist of the first market (trading of listed securities

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 s

B: The account is covered for $200,000 (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 $15

All of the following statements are true about margin on securities EXCEPT:
A. the FRB sets margins for exempt securities B. the FRB sets margins for non-exempt securities
C. FINRA sets margins for exempt securities
D. FINRA sets margins for non-exempt se

A: the FRB sets margins for exempt securities (The Federal Reserve Board (FRB) only has the power to set margins for non-exempt issues. It has no power to set margins for exempt issues under the Securities Exchange Act of 1934. However, FINRA sets minimum

During a tender offer, which of the following activities are prohibited?
I Purchase the stock in a cash account and tender 2 business days after trade date
II Purchase a call option in a cash account and tender 2 business days after trade date
III Tender

II and III (Under the short tender rule, a customer can only hand in shares on a tender offer to the extent of his "net long" position. A customer who has bought the stock (Choice I) is "long" and can tender. A customer who has bought a call option is not

A preliminary Official Statement must be delivered to a customer if:

B. the final official statement is not ready at the time of settlement (Under MSRB rules, if a Final Official Statement is being prepared but is not yet ready, at the time of settlement, the customer can be sent a typed summary or a Preliminary Official S

Which of the following is a prohibited practice?
A. Receiving an order from a customer and sending it to another broker for execution B. Selling a stock based on material non-public information about that issuer
C. Selling a stock for the firm's account f

B. Selling a stock based on material non-public information about that issuer ( Choice B is insider trading - an illegal practice. Choice C is not insider trading by the customer, since the customer would not know the information that was received by the

Which of the following statements are TRUE regarding a broker-dealer holding margin and fully paid securities?
I Margin securities can be commingled with the securities of other customers and rehypothecated
II Margin securities must be segregated and plac

I and IV

Under MSRB rules, which of the following records must be kept for specified time periods?
I Trade comparisons
II Official Statements
III Customer account statements
IV Customer complaints

I, III and IV ( 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 is NOT required to sell "144" stock?
A. Buyer's representation letter
B. Issuer's representation letter
C. Broker's representation letter
D. Seller's representation letter

A: Buyer's representation letter (To effect Rule 144 transactions, certain representations are required to ensure that the sale is not being made in contravention of the rule. The issuer must represent that the corporation is current with all required SEC

A registered representative has spent 10 years working at his broker-dealer and has sold customers many mutual funds that pay trail commissions from 12b-1 fees. The registered representative is thinking about leaving his firm to do charitable work. He wou

Yes, if there is a written agreement between the member firm and the registered representative that is executed prior to termination (As a general rule, only currently registered individuals can be paid commissions. However, there is an exception to this

All of the following issues are exempt from registration under the Securities Act of 1933 EXCEPT:
A. Investment companies
B. Insurance companies
C. Agency issues
D. Municipal issues

A: Investment Companies (Governments, agencies and municipals are all exempt issues. Insurance company and bank issues are exempt as well. Investment company issues are non-exempt and must be registered and sold with a prospectus under the 1933 Act.)

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 o

D: MSRB must be notified in advance of the sharing arrangement (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

The Securities Exchange Act of 1934 regulates trading of which of the following?
I Corporate Stock
II Corporate Bonds
III Options
IV Commodities Futures

I, II, and III (The Securities Exchange Act of 1934 regulates trading of all non-exempt securities, including common stocks, preferred stocks, corporate bonds, options on securities, etc. It does not regulate the trading of commodities, since these are no

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

B. Intrastate offerings ( 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 Federa

Which of the following must be approved or reviewed by the municipal principal?
I Each New Account
II Each Municipal Transaction
III Each Customer Complaint
IV Each Mailing Piece That Solicits Business

I, II, III, and IV (Under MSRB rules, the principal must approve each new account; approve each municipal trade (this need not occur prior to the trade); handle the resolution of each customer complaint; and approve each mailing piece used to solicit busi

A seller who has filed Form 144 can sell 1% of the outstanding shares or the weekly average of the last 4 week's trading volume. This amount may be sold:

4 times a year ( Rule 144 allows the sale of 1% of the issuer's outstanding shares or the weekly average of the preceding 4 weeks' trading volume (whichever is greater). This amount can be sold every 90 days (every 3 months), so a sale can occur 4 times p

If the SEC sends a deficiency letter to the issuer regarding an issue in registration,:

disclosure is not considered to be adequate (An SEC "deficiency letter" indicates that there is not adequate disclosure in the registration documents to allow investors to make an informed decision. The deficiency must be cured before the SEC will allow t

Under MSRB rules, all of the following statements are true regarding a broker-dealer recommending municipal securities EXCEPT:
A. the broker-dealer must have reasonable grounds for making any recommendation
B. the broker-dealer must have reasonable ground

D: if the customer refuses to disclose significant financial information, recommendations can still be made (Under MSRB rules, when recommending municipal securities, the broker-dealer must have reasonable grounds for making any recommendation; the broker

Which of the following would be considered to be a "retail communication"?
A. Direct mailing sent to 15 existing retail clients
B. Password-protected website maintained by a broker-dealer
C. Institutional communication
D. Correspondence to an individual c

B: Password-protected website maintained by a broker-dealer (FINRA defines communications with the public as either:
Correspondence: A communication made available to 25 or fewer existing or prospective retail clients
Retail Communication: A communication

A registered representative presents a seminar to a group of 35 prospective retail investors about investing in mutual funds. At the seminar, he makes recommendations of various funds, based on their objectives and performance. The seminar is defined by F

Sales literature

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

Sarbanes-Oxley act of 2002 (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 wr