Kaplan Series 65 Federal Securities Regulations

Front 1

Charlotte is an agent of Gibraltar Securities. Her most active customer told Charlotte that he is thinking about buying 10,000 shares of a retailer's stock for which Gibraltar will be participating in the underwriting syndicate. The SEC release date for the stock is anticipated within 10 business days. What may Charlotte send to the client today?

A) An order request.

B) The preliminary prospectus.

C) The preliminary prospectus and a reprint of a popular advertisement placed by the issuing corporation.

D) The final prospectus.

Back 1

B. Because a security is in registration until released by the SEC for public sale, only the unadulterated prospectus may be sent to parties indicating interest in purchasing the stock. Orders may not be accepted for a security while in registration. Because the final prospectus is indeed an offering document, it may not be presented until the SEC has released the security for public sale (made the security effective.)

Front 2

Under the Securities Act of 1933, a registration statement for a security must be signed by:

A) the issuer's chief executive officer, chief financial officer, and a majority of the issuer's board of directors.

B) a majority of the issuer's board of directors and the underwriter.

C) a majority of the issuer's board of directors only.

D) the issuer's chief executive officer and the underwriter.

Back 2

A. The underwriter's signature is not required on a registration statement, but the chief executive officer, the chief financial officer, and a majority of the board of directors must all sign.

Front 3

For purposes of the definition found in Rule 501 of Regulation D of the Securities Act of 1933, the term accredited investor would not apply to:

A) a large employee benefit plan.

B) an investment company registered under the Investment Company Act of 1940.

C) an investment adviser representative.

D) an officer of the company involved in the underwriting.

Back 3

C. An individual is not an accredited investor solely by virtue of being an IAR. If that person had the net worth or income specified in the Rule, OK, but just being in the business does not qualify someone.

Front 4

An intrastate offering is exempt from:

A) all registrations.
B) blue-sky registration.
C) state registration.
D) federal registration.

Back 4

D, An intrastate offering (Rule 147 exemption) is limited to companies that do business in one state and limit stock or bond sales to that state's residents. Even though this offering may be exempt from SEC registration, it is not exempt from registering with that one state. Blue-sky registration (Uniform Securities Act registration) means the same thing as state registration.

Front 5

All of the following would qualify as management companies EXCEPT:

I. face amount certificate companies.
II. unit investment trusts.
III. closed-end investment companies.
IV. open-end investment companies.

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

Back 5

C. As defined in the Investment Company Act of 1940, closed- and open-end funds are subclassifications of management companies (actively managed portfolios). Face amount certificate companies and unit trusts are separate investment company classifications and do not have managed portfolios.

Front 6

Under the Investment Company Act of 1940, which of the following statements about advisory contracts between an investment company and an outside adviser is TRUE?

A) The initial contract is effective once approved by the board of directors.

B) The contract may not be unilaterally assigned to another adviser.

C) The contract must be established for a 1-year period and renewed annually thereafter.

D) The contract may be in writing, or it may be oral if there are at least two witnesses to the agreement.

Back 6

B. All contracts between an investment company and an outside adviser must be in writing and must contain certain provisions; these include that the contract may not be unilaterally assigned to another adviser. The initial contract may be for two years, but it is subject to annual reapproval by a majority vote of the outstanding shares or the board of directors as well as a majority of the directors who are considered to be non-interested parties.

Front 7

Under the Securities Exchange Act of 1934, which of the following statements is (are) TRUE about the authority of the SEC to investigate violations of securities laws?

I. The SEC may not investigate violations of the Securities Act of 1933 and the Securities Exchange Act of 1934.
II. The SEC has the power to investigate violations of all federal securities acts.
III. The SEC may investigate violations of the rules of the SROs.

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

Back 7

B. The SEC may investigate violations of all federal securities acts, including the Acts of 1933 and 1934, and may also investigate violations of the rules of SROs.

Front 8

An issuer properly files Form D in accordance with Rule 503 of Regulation D of the Securities Act of 1933. As such, the securities that are the subject of any transaction are:

A) federal covered securities.

B) required to register with the SEC.

C) required to register with the state(s) in which they are sold.

D) available only to institutional purchasers.

Back 8

A. Securities sold under Regulation D of the Securities Act of 1933 are private placements and, under the NSMIA, are considered federal covered securities.

Front 9

Under the Securities Exchange Act of 1934, the SEC may suspend all trading on an exchange:

A) under no circumstances.

B) only if it has cause to believe that such suspension is necessary to prevent criminal violations that are about to occur on the exchange.

C) only with prior notification to the President of the United States.

D) for ten days, in its discretion.

Back 9

C. To suspend all trading on an exchange, the SEC must first notify the President of the United States. The SEC may summarily suspend trading in any nonexempt security for up to 10 days without prior notice.

Front 10

According to the Securities Act of 1933, all of the following statements are true EXCEPT:

A) the SEC has the authority to conduct formal investigations in the interest of investor protection.

B) a sale of securities includes any security given as a bonus for making a purchase.

C) an omitting prospectus may not be used as an advertisement.

D) a futures contract is not considered a security under the act.

Back 10

C. An omitting prospectus is used by a registered investment company to advise readers of the availability of a full prospectus and where it may be obtained. It is allowed under SEC Rule 482 as advertising, provided the ad is not accompanied by an application and proper advertising caveats are used.

Front 11

When can an investment adviser send mutual fund sales literature to a client?

A) When the sales literature is accompanied or preceded by a prospectus.

B) When the sales literature is accompanied by a registered tombstone advertisement.

C) Never; sending sales literature in conjunction with a mutual fund is prohibited.

D) As the investment adviser sees fit.

Back 11

A. An investment adviser may make mutual fund sales literature available to a client as long as such literature is accompanied or preceded by a prospectus.

Front 12

Under the Securities Act of 1933, securities issued by a charitable organization are exempt if:

A) a minimum of five percent of its assets are distributed each year.

B) the organization is operated by funds through government grants.

C) the organization is nonprofit.

D) no commissions are paid on sales of its securities.

Back 12

C. The Securities Act of 1933 exempts securities issued by charitable or religious organizations from the registration and prospectus delivery requirements as long as the organizations are nonprofit.

Front 13

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

A) only public information can be used to make transactions.

B) short selling is prohibited.

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

D) reports of changes in holdings must be filed with the SEC.

Back 13

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

Front 14

The federal Securities Act of 1933 has certain requirements for those selling new issues. One of those requirements is to:

A) deliver a final prospectus no later than with confirmation of the sale.

B) deliver a copy of the prospectus prior to the sale.

C) be properly licensed prior to making the offering.

D) deliver a preliminary prospectus to any person who has purchased the new issue.

Back 14

A. The Securities Act of 1933 requires that a prospectus dealing with a new stock issue be delivered to a purchaser no later than with the confirmation of the trade. Preliminary prospectuses have no relevance once the issue is effective. The Securities Act of 1933 does not deal with the registration requirements

Front 15

Under the Securities Act of 1933, which of the following is NOT a security?

A) Preferred stock.

B) Commodities futures contracts.

C) Bond.

D) Certificates of deposit for a security.

Back 15

B. Under the Securities Act of 1933, a security is any note, stock, bond, certificate of interest, or participation in any profit sharing arrangement, investment contract, certificate of deposit for a security, fractional undivided interest in oil, gas, or mining rights, or any investment commonly considered a security. The definition does not include direct ownership of real estate, commodities futures contracts (e.g., corn, wheat), collectibles, or precious metals.

Front 16

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

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

B) Brian, an XYZ vice president.

C) Paula, who is on XYZ's board of directors but who has no other connection with the firm.

D) Arvin, one of XYZ's agents.

Back 16

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

Front 17

Under the Investment Company Act of 1940, an investment company may initially retain the services of an investment adviser only with approval of:

A) the majority vote of the outstanding shares.

B) the majority vote of the outstanding shares and a majority of that portion of the board of directors that are considered noninterested members.

C) the majority vote of the board of directors.

D) the majority vote of the noninterested directors.

Back 17

B. The investment adviser's contract must be initially approved by a majority vote of the outstanding shares and a majority of the noninterested members of the board of directors. It is renewed annually by either a majority of the board or a majority of the outstanding shares. In addition, as with all contracts, initial and renewal, it requires a majority of the noninterested board members.

Front 18

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

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

Back 18

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

Front 19

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

A) Exemptions of new issues from registration requirements.

B) Regulation of exchanges.

C) Registration of new issues of stock.

D) Requirements for the provisions of a prospectus.

Back 19

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

Front 20

The provisions of the Securities Act of 1933 include all of the following EXCEPT:

A) prohibition of fraud in the sale of new securities.

B) requirement that an issuer provide full and fair disclosure about an offering.

C) regulation of offerings of new securities.

D) regulation of the secondary market.

Back 20

D. The Securities Act of 1933 regulates new issues of corporate securities sold to the public and is designed to prevent fraud in the sale of newly issued securities. Trading and the secondary markets are regulated under the Securities Exchange Act of 1934.

Front 21

The registration requirements of the Securities Act of 1933 would not apply to which of the following?

I. Stocks and bonds issued by insurance companies.
II. Fixed annuities and other fixed insurance contracts.
III. Securities issued by foreign governments.


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

Back 21

D. Securities issued by insurance companies and foreign governments are not exempt under the Securities Act of 1933. However, the registration requirements would not apply to non-security products, such as fixed annuities.

Front 22

Under Regulation D, accredited investors in a private placement must meet minimum standards that may include which of the following?

I. Annual income in excess of $200,000 for at least the last 2 years.
II. Annual income in excess of $100,000 for at least the last 2 years.
III. Net worth, excluding the primary residence, in excess of $1 million.
IV. Net worth, excluding the primary residence, in excess of $200,000.

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

Back 22

A. The requirement for an accredited investor under the private placement exemption is either a net worth, excluding the primary residence, in excess of $1 million, or annual income in excess of $200,000 in the last 2 years and the same or more income expected this year, or $300,000 for joint incomes.

Front 23

Corporate debt securities (such as commercial paper) are exempt from registration under the Securities Act of 1933 if their maturities do not exceed how many days?

A) 270 days.
B) 90 days.
C) 30 days.
D) 365 days.

Back 23

A. Corporate debt securities (such as commercial paper) with maturities of 270 days or less are exempt from registration; longer maturities would subject them to the act's registration and disclosure requirements.

Front 24

Under the Investment Advisers Act of 1940, which of the following powers does the SEC have at its disposal to enforce the act?

I. The SEC may conduct investigations.
II. The SEC may subpoena witnesses and administer oaths.
III. The SEC may make and issue rules.

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

Back 24

B. In enforcing the Investment Advisers Act, the SEC may investigate, administer oaths, subpoena witnesses, books, and records, issue and make rules, issue stop orders, hold hearings, and seek court injunctions against persons who have violated or are about to violate any provisions of the act. The SEC may also file civil actions in the federal court system in enforcing the provisions of the act, or refer information to the U.S. Justice Department for criminal prosecution.

Front 25

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

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

Back 25

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

Front 26

Under the Insider Trading and Securities Fraud Enforcement Act of 1988, a person who has violated the prohibition against insider trading is liable for a civil penalty of:

A) 3 times the amount of the profit gained or loss avoided on the transaction.

B) 10 times the amount of the profit gained or loss avoided on the transaction.

C) twice the amount of the profit gained or loss avoided on the transaction.

D) the amount of the profit gained or loss avoided on the transaction.

Back 26

A. The Insider Trading and Securities Fraud Enforcement Act of 1988 provides that the SEC may seek triple damages through the courts for violations of the insider trading rules. This means that the SEC may seek court action that imposes civil penalties of 3 times the profit gained or 3 times the loss avoided as a result of inside information.

Front 27

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

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

B) Persons who become the beneficial owner of more than 2% of a security registered under the Securities Exchange Act of 1934 must file a report within 5 days.

C) Persons who become the beneficial owner of more than 5% of a security registered under the Securities Exchange act of 1934 must file a report within 2 days.

D) Institutional investment managers who exercise discretion over accounts valued at $100 million or more need not file reports if all their clients are insurance companies.

Back 27

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

Front 28

Under the Securities Act of 1933, the definition of an issuer would include:

I. a government entity issuing exempt securities.
II. a corporation issuing securities in an exempt transaction.
III. an antique dealer selling items from a collection of rare books.

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

Back 28

B. An issuer is a person who issues a security, whether or not the security is exempt. In the question, the antique dealer is issuing collectibles, not securities.

Front 29

Under the Securities Act of 1933, which of the following would be considered a prospectus?

I. Tombstone advertisement.
II. Television advertisement that makes full disclosure of all material facts.
III. Offer communicated over the telephone.

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

Back 29

A. A prospectus is any communication that offers a security for sale, including newspaper, radio, and television offers. Tombstone announcements are excluded from the definition. Also excluded are oral

Front 30

Under the Securities Act of 1933, an accredited investor may be:

I. a bank, insurance company, investment company, or employee benefit plan valued in excess of $5 million.
II. a wealthy person in some cases.
III. partners, officers, and directors of the issuer for a particular issue.

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

Back 30

D. Accredited investors are financial institutions, wealthy persons meeting specific requirements, and (for a particular issue) persons involved in the management of the issuer.

Front 31

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

A) It provides policies relating to unethical business practices.

B) It provides requirements relating to new issues.

C) It provides standards among the states.

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

Back 31

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

Front 32

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

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

Back 32

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

Front 33

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

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

Back 33

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

Front 34

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

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

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

Back 34

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

Front 35

Under the provisions of the Securities Exchange Act of 1934, the SEC may suspend trading on a national exchange by notifying the:

A) President of the United States.

B) board of governors of the Federal Reserve Bank.

C) president of that exchange.

D) chairperson of a joint House/Senate committee on banking.

Back 35

A. The SEC may suspend all trading on a specific exchange for up to 90 days with prior notification to the President of the United States and may summarily suspend securities trading in a registered security that is listed on a stock exchange for up to 10 days if it believes such action to be in the public interest.

Front 36

Which of the following is responsible for administration of the Bank Secrecy Act?

A) Securities and Exchange Commission.

B) The Financial Crimes Enforcement Network.

C) Security Services.

D) Department of Health and Human Service.
Your answer, The Financial Crimes Enforcement Networ

Back 36

B. Or FinCEN as it is more commonly printed.

Front 37

The first of the federal securities acts was the Securities Act of 1933. This act requires persons selling a new offering to their clients to:

A) deliver a copy of the registration statement no later than with confirmation of the sale.

B) deliver an effective (final) prospectus no later than with confirmation of the sale.

C) be properly registered prior to making the offer.

D) deliver a preliminary (red herring) prospectus prior to the sale.

Back 37

B. The Securities Act of 1933, sometimes referred to as the “paper act”, requires that an effective, or final prospectus be delivered to all purchasers of a new offering no later than with confirmation of the sale. It is not required that purchasers receive a red herring prospectus and only the SEC gets copies of the registration statement. Yes, they must be properly registered to make the offer (and sale), but that comes under the “people act”, the Securities Exchange Act of 1934.

Front 38

Under the Securities Act of 1933, a registration statement of an issuer must contain all of the following information EXCEPT:


A) the current balance sheet and profit/loss statements.

B) the names of all the owners of the company's stock.

C) the business of the issuer.

D) the identity of the officers and directors and the extent of their holdings in the issuer.

Back 38

B. The names of all of the owners of the company's stock are not required. The identity and stock holdings of the officers, directors, and holders of more than 10% of the company's voting stock, as well as the principal business of the issuer and current financial information, must be disclosed.

Front 39

Under the Investment Company Act of 1940, which of the following would be considered an affiliated person?

I. Persons who control, are controlled by, or share common control with the company.
II. Any officer, director, or employee of the company.
III. Persons who own or control five percent or more of the voting shares of the company.

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

Back 39

D. Affiliated persons are any investment company directors, officers, employees, or owners of five percent or more of the voting shares of stock, and/or any persons controlling or controlled by such persons.

Front 40

To be in compliance with the Securities Act of 1933, the sale of which of the following securities would require delivery of a prospectus?

I. Primary offering of a closed-end investment company registered under the Investment Company Act of 1940.
II. Primary offering of 5-year U.S. treasury notes sold to an individual investor.
III. Private placement sold under the provisions of Regulation D.
IV. Sale of shares of an open-end investment company whose first public offering was 23 years ago.

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

Back 40

B. Any primary offering, unless the security is exempt, requires timely delivery of a prospectus. Treasury notes and private placements are exempt.

Front 41

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

I. the agent receives a commission from trading.
II. trading was conducted without considering the client's investment objectives.
III. trading is inappropriate in view of a client's resources.

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

Back 41

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

Front 42

According to the Investment Company Act of 1940, if an issuer is in the business of investing, reinvesting, trading, owning, or holding securities, and owns or intends to own securities that exceed 40% of its assets, it is classified as a(n):

A) investment company.
B) unit investment trust.
C) investment partnership.
D) face-amount certificate company.

Back 42

A. By definition under the Investment Company Act of 1940, an investment company is in the business of investing, reinvesting, trading, owning, and holding securities, and owns or intends to own securities that exceed 40% of its assets. Although face-amount certificate companies and unit investment trusts are investment companies, those choices are not as inclusive an answer.

Front 43

Under the USA, each of the following materials may be distributed if an issuing company has applied for registration but is not yet cleared for sale EXCEPT:

A) an application with a request for a down payment.

B) tombstone advertising.

C) a red herring

D) a preliminary prospectus.

Back 43

A. Prior to clearance, a red herring or preliminary prospectus (a disclosure document) may be distributed in response to those customers who express interest in the offering. While rarely used before the effective date, a tombstone advertisement may be published while the issue is in registration. The red herring is only used to solicit indications of interest; no orders or funds may be accepted before the effective date.

Front 44

Under the Securities Act of 1933, which of the following would be civilly liable for false registration statements, using a prospectus that is untrue, or failing to meet the prospectus delivery requirements of the act?

I. Any and every person who has signed the registration statement.
II. Every expert who is named in the registration statement.
III. Every underwriter of the security.
IV. Every stockholder named in the registration statement.

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

Back 44

B. Anyone who has signed the registration statement, anyone who is named in the statement as an expert, and every underwriter may be liable to the purchasers of the securities if the statement contains false information. Although a registration statement contains the names of stockholders who own more than 10% of the issue, they are not liable unless they fall into one of the other categories (officer, director, or expert). Anyone who sells the underlying security without providing a valid prospectus, uses a prospectus that is false, or omits material information is also civilly liable to the purchaser.

Front 45

Under the Securities Act of 1933, a registration statement for a security generally becomes effective how many days after it is filed?

A) 20 days.
B) 31 days.
C) 10 days.
D) 30 days.

Back 45

A. A registration statement for a security becomes effective 20 days after it is filed, unless the SEC orders a delay.

Front 46

Under the Investment Company Act of 1940, which of the following statements is(are) TRUE about an investment company that wishes to contract with an outside investment adviser to manage its portfolio?

I. This is prohibited under the act.
II. Investment companies may employ outside advisers if a written contract is executed.
III. The initial contract must be approved by either the board of directors or a majority vote of the outstanding shares.

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

Back 46

C. One of the requirements of the Investment Company Act of 1940 is that the contract between a management investment company (open or closed-end) must be in writing. The initial contract must be approved by a majority vote of the outstanding shares and the "non-interested" members of the board of directors. It is renewed annually by either a majority vote of the outstanding shares or the board of directors as well as a majority of the directors who are considered to be non-interested parties.

Front 47

The SEC has jurisdiction over all of the following EXCEPT:

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

Back 47

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

Front 48

All of the following statements regarding a closed-end investment company are true EXCEPT:

A) it sells at the market price plus a commission.
B) it may redeem its own shares.
C) it is a type of management company.
D) it differs from a mutual fund.

Back 48

B. A closed-end investment company does not redeem its own shares. The term "mutual fund" refers to an open-end management investment company that issues redeemable shares.

Front 49

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

I. CNBC
II. "Investor's Business Daily"
III. OPRA
IV. The OTC Markets Group Inc, (formerly known as the Pink Sheets)

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

Back 49

A. Securities information processors (SIPs) collect and disseminate trading and pricing information. TV stations, such as CNBC, and newspapers, such as IBD, obtain information from SIPs and then rebroadcast or reprint it. OPRA is not the name of a TV personality; it stand for Options Price Reporting Authority.

Front 50

To be in compliance with the Investment Company Act of 1940, it is permissible for the portfolio manager of an open-end investment company to buy all of the following securities EXCEPT:

A) high yield bonds.
B) stock on margin.
C) call options.
D) shares of other mutual funds.

Back 50

B. The Investment Company Act of 1940 generally prohibits mutual funds from making purchases on margin. There are exceptions to this rule, such as in the case of hedge funds. A fund is not prohibited from buying options or low-quality bonds. A mutual fund may invest in other mutual funds so long as it does not acquire more than three percent of the outstanding shares of the other fund.

Front 51

The Investment Company Act of 1940 does which of the following?

A) Sets rules for the registration of investment advisers.

B) Regulates the secondary market.

C) Governs the issuance of new issues.

D) Prescribes procedures for the establishment of investment companies.

Back 51

D. The Investment Company Act of 1940 requires all investment companies to register with the SEC as such and be regulated under the act. The companies are still subject to all the other applicable securities acts. However, the Investment Company Act of 1940 provides additional regulation to ensure investors are fully informed and fairly treated by the management of investment companies.

Front 52

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

A) Conviction of misappropriation of client funds.

B) Prohibition by court order from practicing as an investment adviser.

C) Being sued by a client.

D) Violating a securities act.

Back 52

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

Front 53

Under the Investment Company Act of 1940, SEC Rule 12b-1 allows a fund to charge distribution and sales expenses to net assets as a percentage of the total assets. Normally, the cost of distribution of the shares is paid by the underwriter out of the sales load paid by the individual purchaser. For a fund to impose 12b-1 charges, which of the following conditions apply (applies)?

I. The board of directors has sole approval authority.
II. The majority of the outstanding shares has sole approval authority.
III. Both the board and the majority of outstanding shares must approve it.
IV. A distribution plan must be written.

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

Back 53

C. For the fund to impose 12b-1 charges, the distribution plan must be in writing and approved by a majority of the outstanding shares as well as a majority of the board of directors, including a majority of directors classified as outside directors.

Front 54

According to the Investment Company Act of 1940, all of the following statements are true EXCEPT:

A) open-end investment companies must redeem securities within 7 days after their tender.

B) an investment company must have more than $100,000 capitalization to be offered to the public.

C) shareholders have the right to vote on a company's change from a closed-end to an open-end investment company.

D) an investment company's board of directors may be composed of up to 70% of the company's interested persons.

Back 54

D. At least 40% of the board of directors must be noninterested persons. No more than 60% may be interested persons of the investment company.

Front 55

The Securities Exchange Act of 1934 gives the SEC the power to do all of the following EXCEPT:

A) refer evidence for prosecution.
B) subpoena witnesses.
C) administer oaths.
D) set margin requirements.

Back 55

D. The Securities Exchange Act of 1934 specifies that the Federal Reserve Board will have control over the issuance of credit when trading securities. The Securities Exchange Act of 1934 gives the SEC the power to make, amend, and rescind rules; issue cease and desist orders; administer oaths; conduct investigations; take evidence; and subpoena witnesses, books, and records. The Commission may seek temporary or permanent restraining orders (injunctions) from the courts, file civil suits, or refer evidence to the attorney general for criminal prosecution.

Front 56

An investment company offering securities registered under the Act of 1933 may make which of the following statements?

I. "The SEC has passed on the merits of these securities as an investment.".
II. "The SEC has released our securities for sale to the public.".
III. "The SEC has passed on the accuracy of the information in our prospectus.".
IV. "The SEC has declared this prospectus effective.".

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

Back 56

C. When a security registers with the SEC, the date sales are allowed is known as the effective date. The SEC neither approves nor disapproves an issue, nor does it pass on the accuracy or adequacy (completeness) of the information presented in a prospectus.

Front 57

Under the Securities Act of 1933, the Securities and Exchange Commission has the authority to:

I. issue stop orders.
II. approve new issues.
III. review standard registration forms.

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

Back 57

C. During the cooling-off period, the SEC reviews registration statements and may issue stop orders. The SEC does not approve securities; it only clears them for distribution to the public.

Front 58

The investment adviser under contract to a regulated, diversified, open-end investment company:

I. makes sure the fund invests in such a manner as to retain its diversified status.
II. attempts to fulfill the fund's investment objective by means of careful investing.
III. changes investment objectives that he believes are in the best interest of the investors.
IV. investigates the tax status of potential investments.

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

Back 58

A. The investment adviser is responsible for making investments according to the objective stipulated by the investment company. These decisions should maintain and reflect the diversified status of the fund and should identify the tax status of potential investments. The fund's objective may be changed only by majority vote of the outstanding shares (i.e., by the owners of the company, not the portfolio manager).

Front 59

Among the restrictions placed on open-end investment companies by the Investment Company Act of 1940 are:

I. mutual funds are only allowed to maintain TIC accounts with other funds that are members of the same "family" of funds.
II. no public offering may commence unless the fund has at least $100,000 in net assets.
III. no registered investment company may own more than 3% of the voting shares of another registered investment company.
IV. shares of the fund will not have any margin loan value until the 30th day after purchase.
A) I and IV.
B) II and III.
C) II and IV.
D) I and II.

Back 59

B. The minimum capitalization requirement for a new fund is $100,000 in net assets. A further restriction placed by the act is limiting one fund's holdings to a maximum of 3% of the voting shares of another fund. Because the shares of an open-end company are always considered a new issue, the shares may not be purchased on margin, but, as with other new issues, do have a loan value once owned at least 30 days. However, this restriction is part of the Securities Exchange Act of 1934, not the Investment Company Act of 1940.