Stock Jobs Stock Market Regulations and Compliance 2 — Questions and Answers
Question 1: What is the 'Pattern Day Trader' rule?
- A guideline for how often analysts should update stock ratings
- A FINRA rule requiring $25,000 minimum equity for accounts making 4+ day trades in 5 days (Correct answer)
- A regulation prohibiting repeated short-selling of the same stock
- An SEC rule limiting daily trading volume for retail investors
Correct answer: A FINRA rule requiring $25,000 minimum equity for accounts making 4+ day trades in 5 days
FINRA's Pattern Day Trader rule requires anyone who executes 4 or more day trades within 5 business days to maintain at least $25,000 in their margin account.
Question 2: What is 'Regulation Fair Disclosure' (Reg FD)?
- A rule requiring fair pricing in securities transactions
- An SEC rule requiring companies to disclose material information to all investors simultaneously (Correct answer)
- A FINRA regulation on fair advertising practices
- Rules governing fair competition among stock exchanges
Correct answer: An SEC rule requiring companies to disclose material information to all investors simultaneously
Reg FD requires that when a public company discloses material non-public information to certain investors or analysts, it must simultaneously or promptly disclose that information to the public.
Question 3: What is a 'fiduciary duty' in the context of investment professionals?
- The duty to generate maximum returns for a client regardless of risk
- The legal obligation to act in the best interests of clients when managing their investments (Correct answer)
- The requirement to disclose all personal investment positions
- The duty to report suspicious trading activity to regulators
Correct answer: The legal obligation to act in the best interests of clients when managing their investments
A fiduciary duty requires investment advisers and others to prioritize their clients' best interests above their own, including avoiding conflicts of interest.
Question 4: What is 'Know Your Customer' (KYC) in securities compliance?
- A customer service standard for brokerage firms
- A regulatory requirement to verify client identity and assess their investment profile before providing services (Correct answer)
- A program to educate retail investors about market risks
- A background check required for all licensed stockbrokers
Correct answer: A regulatory requirement to verify client identity and assess their investment profile before providing services
KYC regulations require financial firms to verify client identities, understand their financial situation, and assess investment objectives to prevent fraud and ensure suitability.
Question 5: What does the Securities Investor Protection Corporation (SIPC) do?
- Insures investors against stock market losses
- Protects investors if a brokerage firm fails by covering up to $500,000 in missing securities and cash (Correct answer)
- Regulates broker-dealer compensation practices
- Provides government guarantees on investment returns
Correct answer: Protects investors if a brokerage firm fails by covering up to $500,000 in missing securities and cash
SIPC protects customers of failed brokerage firms by covering up to $500,000 (including $250,000 in cash) of missing assets, though it does not cover investment losses.
Question 6: What is an 'accredited investor' under SEC rules?
- Any investor who has passed the Series 7 examination
- An investor meeting specific income or net worth thresholds, qualifying for access to certain private investments (Correct answer)
- A licensed investment adviser registered with the SEC
- An investor who has completed an SEC-approved education program
Correct answer: An investor meeting specific income or net worth thresholds, qualifying for access to certain private investments
An accredited investor generally must have income exceeding $200,000 annually (or $300,000 jointly) or a net worth over $1 million, qualifying them for unregistered private investments.
Stock Jobs Stock Market Regulations and Compliance 2
What is the 'Pattern Day Trader' rule?