S-12 Regulatory Framework and Oversight 1 — Questions and Answers
Question 1: Which US federal agency has primary regulatory authority over securities markets and broker-dealers?
- FINRA
- The SEC (Securities and Exchange Commission) (Correct answer)
- The Federal Reserve
- CFTC
Correct answer: The SEC (Securities and Exchange Commission)
The SEC is the primary federal regulator of US securities markets and broker-dealers under the Securities Exchange Act of 1934.
Question 2: What is the purpose of the Securities Exchange Act of 1934?
- To regulate mutual fund companies
- To regulate securities trading in secondary markets and broker-dealers (Correct answer)
- To establish federal income tax rules for investments
- To create the Federal Deposit Insurance Corporation
Correct answer: To regulate securities trading in secondary markets and broker-dealers
The Securities Exchange Act of 1934 regulates secondary market trading and established the SEC to oversee broker-dealers and exchanges.
Question 3: FINRA is best described as:
- A federal government agency
- A self-regulatory organization (SRO) that oversees broker-dealers (Correct answer)
- An insurance fund for securities accounts
- A division of the Federal Reserve
Correct answer: A self-regulatory organization (SRO) that oversees broker-dealers
FINRA is a self-regulatory organization authorized by Congress to oversee broker-dealers and registered representatives in the US.
Question 4: Under Regulation Best Interest (Reg BI), broker-dealers must act in whose best interest when making a recommendation?
- The broker-dealer firm
- The retail customer (Correct answer)
- The issuer of the security
- The clearing firm
Correct answer: The retail customer
Reg BI requires broker-dealers to act in the best interest of the retail customer when making a securities recommendation.
Question 5: Which legislation created the framework for regulating investment advisers in the United States?
- The Investment Advisers Act of 1940 (Correct answer)
- The Sarbanes-Oxley Act of 2002
- The Securities Act of 1933
- The Dodd-Frank Act of 2010
Correct answer: The Investment Advisers Act of 1940
The Investment Advisers Act of 1940 established the regulatory framework for investment advisers and their registration requirements.
Question 6: What is the primary purpose of the Securities Investor Protection Corporation (SIPC)?
- To guarantee investment returns
- To protect customers if a brokerage firm fails financially (Correct answer)
- To regulate securities pricing
- To insure against market losses
Correct answer: To protect customers if a brokerage firm fails financially
SIPC protects customers of failed brokerage firms by covering missing cash and securities up to $500,000, including $250,000 for cash.
S-12 Regulatory Framework and Oversight 1
Which US federal agency has primary regulatory authority over securities markets and broker-dealers?