CSLB General Building (B) — All Questions

The primary purpose of the Securities Act of 1933 is to:

• a.Regulate secondary market trading and exchanges
• b.Require full and fair disclosure of material information for new securities offered to the public✓
• c.Create the Federal Reserve
• d.Set margin requirements

The Securities Act of 1933 governs the primary market, requiring issuers to register new public offerings and provide a prospectus with full and fair disclosure of material facts so investors can make informed decisions. It focuses on disclosure at issuance rather than regulating ongoing trading, which is the domain of the 1934 Act.Securities Act of 1933

During the cooling-off period of a registered offering, a broker-dealer may:

• a.Sell the securities to customers
• b.Accept binding purchase orders and payment
• c.Collect non-binding indications of interest✓
• d.Guarantee the offering price

During the cooling-off period (after the registration statement is filed but before it is effective), sales and binding orders are prohibited. Firms may distribute a preliminary prospectus (red herring) and gather non-binding indications of interest, but no money or binding commitments may be accepted until the registration is effective.Securities Act of 1933

A preliminary prospectus (red herring) used before a registration is effective:

• a.Contains the final public offering price and effective date
• b.Constitutes an offer to sell the securities
• c.May be used to accept customer payments
• d.Omits the final offering price and effective date and is used to gauge investor interest✓

A red herring is a preliminary prospectus circulated during the cooling-off period; it omits the final public offering price and the effective date and includes a legend noting it is not an offer to sell. It is used to solicit non-binding indications of interest, not to make sales.Securities Act of 1933

In a firm commitment underwriting, the underwriter:

• a.Purchases the entire issue from the issuer and assumes the risk of reselling it to the public✓
• b.Acts only as an agent and bears no risk
• c.Guarantees the securities will rise in price
• d.Is exempt from delivering a prospectus

In a firm commitment underwriting, the underwriting syndicate buys the whole issue from the issuer and resells it to the public, assuming the risk of any unsold shares. This differs from a best efforts underwriting, where the underwriter acts as agent and only sells what it can without buying the issue outright.Securities Act of 1933

A private placement conducted under Regulation D of the Securities Act of 1933 is:

• a.A public offering requiring a full prospectus
• b.An exempt offering sold primarily to accredited investors without full SEC registration✓
• c.A municipal bond offering
• d.A guaranteed government security

Regulation D provides exemptions from full registration for private placements sold mainly to accredited investors, with limits on general solicitation and on the number of non-accredited investors depending on the specific rule used. These securities are typically restricted and cannot be freely resold without meeting conditions.Securities Act of 1933

The Securities Exchange Act of 1934 is best known for:

• a.Registering new issues only
• b.Exempting all trading from regulation
• c.Creating the SEC and regulating secondary market trading, exchanges, and broker-dealers✓
• d.Setting federal income tax rates

The Securities Exchange Act of 1934 created the Securities and Exchange Commission and governs the secondary market, including exchanges, broker-dealers, reporting by public companies, proxy rules, and antifraud and anti-manipulation provisions. It complements the 1933 Act, which focuses on new issues.Securities Exchange Act of 1934

Trading securities on the basis of material, nonpublic information is prohibited as:

• a.A permissible research edge
• b.Legitimate market making
• c.A form of best execution
• d.Insider trading, which violates the antifraud provisions of the Exchange Act✓

Using material nonpublic information to trade, or tipping others who trade, is insider trading and violates the antifraud provisions of the Securities Exchange Act of 1934 and related rules. Penalties can include disgorgement, civil penalties, and criminal prosecution.Securities Exchange Act of 1934

Under FINRA rules, communications with the public are generally categorized as:

• a.Only advertisements
• b.Retail communications, correspondence, and institutional communications✓
• c.Only prospectuses
• d.Solely social media posts

FINRA classifies public communications as retail communications (distributed to more than 25 retail investors in 30 days), correspondence (to 25 or fewer retail investors in 30 days), and institutional communications. Each category carries different approval, review, and recordkeeping requirements, with retail communications facing the most oversight.

A registered representative's communications with the public must be:

• a.Designed to guarantee returns
• b.Allowed to omit risks if they are unfavorable
• c.Fair, balanced, and not misleading, presenting risks along with benefits✓
• d.Approved only after distribution

FINRA content standards require that communications be fair, balanced, and not misleading, providing a sound basis for evaluation and disclosing material risks alongside potential benefits. Promissory statements, guarantees of performance, and omission of material risk information are prohibited.

Under anti-money laundering (AML) rules, a Currency Transaction Report (CTR) must generally be filed for cash transactions exceeding:

• a.$10,000 in a single business day✓
• b.$1,000
• c.$50,000
• d.$100,000

Under the Bank Secrecy Act, financial institutions must file a Currency Transaction Report for cash transactions exceeding $10,000 in a single business day, aggregating multiple related transactions. Structuring transactions to evade this reporting threshold is itself illegal.Bank Secrecy Act

A Suspicious Activity Report (SAR) is filed by a firm when:

• a.A customer earns a large profit
• b.A transaction appears to involve possible money laundering or has no apparent lawful purpose✓
• c.A customer opens a retirement account
• d.A dividend is paid

Firms must file a Suspicious Activity Report when they detect transactions that appear to involve funds from illegal activity, are designed to evade reporting requirements, or have no apparent business or lawful purpose. Firms generally may not notify the customer that a SAR has been filed (no tipping off).Bank Secrecy Act

Which of the following is a prohibited practice for a registered representative?

• a.Recommending a diversified portfolio
• b.Disclosing all material risks
• c.Guaranteeing a customer against loss in a securities account✓
• d.Filing accurate records

It is prohibited to guarantee a customer against loss or to promise a specific investment result; investment returns cannot be assured. Other prohibited practices include churning, unauthorized trading, commingling customer funds with firm funds, and making unsuitable recommendations.

'Churning' refers to:

• a.Diversifying a client's portfolio
• b.Reinvesting dividends automatically
• c.Rebalancing once per year
• d.Excessive trading in a customer's account primarily to generate commissions✓

Churning is excessive trading in a customer's account that is driven by the representative's interest in generating commissions rather than the customer's investment objectives. It violates suitability and Reg BI obligations and is a prohibited practice regardless of whether the account gains or loses value.

Commingling a customer's funds or securities with the firm's own assets is:

• a.Prohibited; customer assets must be properly segregated✓
• b.Permitted with verbal consent
• c.Required by FINRA
• d.Allowed for margin accounts only

Firms must keep customer funds and fully paid securities segregated from the firm's own assets to protect customers, particularly in the event of firm insolvency. Commingling customer property with firm property is a prohibited practice and violates customer protection rules.

The Securities Investor Protection Corporation (SIPC) protects customers by:

• a.Guaranteeing against market losses on investments
• b.Providing limited coverage of customer cash and securities if a member broker-dealer fails✓
• c.Insuring bond issuers against default
• d.Setting margin requirements

SIPC, established under the Securities Investor Protection Act, provides limited protection for customers' cash and securities if a member broker-dealer becomes insolvent, up to statutory limits. It does not protect against ordinary market losses or the decline in value of investments.Securities Investor Protection Act

Under FINRA rules, most customer account records and communications must generally be:

• a.Destroyed after 30 days
• b.Kept only if the customer requests it
• c.Preserved for specified retention periods, often several years, and made available to regulators✓
• d.Stored only in paper form

FINRA and SEC recordkeeping rules require firms to preserve books, records, and communications for specified periods, commonly several years, in an accessible format for regulatory examination. Records such as blotters, customer account information, and communications must be retained and readily retrievable.

A registered representative who wishes to engage in an outside business activity must:

• a.Keep it secret from the firm
• b.Obtain approval from the SEC directly
• c.Do so only if it is unpaid
• d.Provide prior written notice to the employing firm as required by FINRA rules✓

FINRA rules require a registered person to provide prior written notice to the member firm before engaging in outside business activities, and private securities transactions ('selling away') require prior written notice and firm approval. This lets the firm assess conflicts and supervisory responsibilities.

'Selling away,' or participating in private securities transactions without the firm's knowledge and approval, is:

• a.Prohibited without prior written notice to and approval from the firm✓
• b.Always permitted for accredited investors
• c.Required by FINRA
• d.Allowed if the customer signs a waiver

Selling away occurs when a representative participates in securities transactions outside the scope of employment without notifying and obtaining approval from the firm. FINRA rules prohibit this unless the representative gives prior written notice and, for compensated transactions, receives the firm's approval and supervision.Securities Exchange Act of 1934

The Investment Company Act of 1940 primarily regulates:

• a.The issuance of municipal bonds
• b.Investment companies such as mutual funds, closed-end funds, and unit investment trusts✓
• c.Commodity futures
• d.Bank deposits

The Investment Company Act of 1940 governs the organization and operation of investment companies, including open-end funds (mutual funds), closed-end funds, and unit investment trusts. It addresses disclosure, governance, capital structure, and restrictions on transactions to protect fund investors.Investment Company Act of 1940

A firm's written supervisory procedures and designation of principals are intended to:

• a.Eliminate the need for compliance
• b.Increase commissions
• c.Ensure the firm supervises its associated persons and business for compliance with securities laws and rules✓
• d.Replace customer suitability obligations

FINRA rules require firms to establish and maintain a supervisory system, including written supervisory procedures and qualified principals, reasonably designed to achieve compliance with applicable securities laws and rules. Effective supervision helps detect and prevent violations such as unsuitable recommendations, unauthorized trading, and churning.