Stock Trading Regulatory Frameworks & Compliance 5 — Questions and Answers
Question 1: Which SEC rule prohibits broker-dealers from publishing quotes for a security if they have not reviewed the issuer's current financial information, commonly applied to OTC stocks?
- Rule 10b-5
- Rule 15c2-11 (Correct answer)
- Rule 144A
- Rule 506(b)
Correct answer: Rule 15c2-11
SEC Rule 15c2-11 requires broker-dealers to review current issuer information before publishing quotations for OTC securities, reducing fraud in thinly-traded markets.
Question 2: A broker-dealer's net capital computation under SEC Rule 15c3-1 is primarily designed to ensure what?
- That the firm maintains adequate insurance coverage for client losses
- That the firm has sufficient liquid assets to meet obligations to customers and creditors (Correct answer)
- That the firm does not exceed position limits on individual securities
- That the firm maintains a minimum revenue threshold to stay registered
Correct answer: That the firm has sufficient liquid assets to meet obligations to customers and creditors
The Net Capital Rule (15c3-1) requires broker-dealers to maintain minimum liquid capital to protect customers and creditors if the firm fails.
Question 3: FINRA's wash trading prohibition under Rule 4560 (and related SEC rules) targets the practice of buying and selling the same security to do what?
- Lock in tax losses without changing economic position
- Create artificial trading volume or the appearance of active market interest (Correct answer)
- Avoid triggering margin calls during volatile periods
- Circumvent short-sale restrictions under Regulation SHO
Correct answer: Create artificial trading volume or the appearance of active market interest
Wash trading involves coordinated buying and selling by the same beneficial owner to create misleading trading activity, which is considered market manipulation.
Question 4: Under FINRA Rule 4512, member firms must collect and maintain specific customer account information. Which item is NOT required to be collected?
- Customer's occupation and employer name
- Customer's net worth and annual income
- Customer's social media accounts and online trading history (Correct answer)
- Customer's investment objectives and risk tolerance
Correct answer: Customer's social media accounts and online trading history
Rule 4512 requires essential financial and personal information for KYC purposes, but does not require social media accounts or online trading history.
Question 5: The SEC's Regulation D exempts certain private placements from registration. Under Rule 506(b), issuers may sell to up to how many non-accredited but sophisticated investors?
- None — only accredited investors are permitted
- Up to 35 non-accredited sophisticated investors (Correct answer)
- Up to 50 non-accredited investors regardless of sophistication
- Up to 100 non-accredited investors if the offering is under $5 million
Correct answer: Up to 35 non-accredited sophisticated investors
Rule 506(b) allows issuers to sell to up to 35 non-accredited investors who meet a sophistication standard, in addition to unlimited accredited investors.
Question 6: Which act established the Financial Industry Regulatory Authority (FINRA) and consolidated NASD and the NYSE regulatory functions?
- The Sarbanes-Oxley Act of 2002
- The Dodd-Frank Act of 2010
- FINRA was created by merger of NASD and NYSE Regulation in 2007 under existing SRO authority (Correct answer)
- The Securities Acts Amendments of 1975
Correct answer: FINRA was created by merger of NASD and NYSE Regulation in 2007 under existing SRO authority
FINRA was created in July 2007 through the consolidation of NASD and the member regulation functions of NYSE Group, without requiring new legislation.
Question 7: Under SEC Rule 10b5-1, a corporate insider can potentially avoid insider trading liability for planned trades by doing which of the following?
- Reporting all trades to the CFO before execution
- Establishing a written trading plan when not in possession of material non-public information (Correct answer)
- Limiting trades to periods outside of earnings blackout windows
- Trading only through a blind trust managed by an independent trustee
Correct answer: Establishing a written trading plan when not in possession of material non-public information
Rule 10b5-1 provides an affirmative defense if an insider establishes a written, pre-planned trading arrangement while not aware of MNPI, removing discretion from future trades.
Stock Trading Regulatory Frameworks & Compliance 5
Which SEC rule prohibits broker-dealers from publishing quotes for a security if they have not reviewed the issuer's current financial information, commonly applied to OTC stocks?