AAMS module 12 Regulatory and Ethical Issues for the Investment Professional Questions with Correct Solutions

The Securities Act of 1933 - cORRECT sOLUTION This act applies to most new, publicly issued securities. Its purpose is to require the "registration" of securities with the Securities and Exchange Commission (SEC) by providing full disclosure in the registration statement of the securities that the issuer or vendor was about to issue. If the SEC finds misleading, incomplete, or inaccurate information, it will delay the offering until the registration statement is corrected. All new issues must be accompanied by a prospectus, a detailed summary of the registration statement. The Securities Exchange Act of 1934 - cORRECT sOLUTION This act, which established the Securities and Exchange Commission and gave it enforcement powers for this act, aimed to regulate securities transactions on both organized exchanges and in over-the-counter markets. This act forbids market manipulation, deception, misrepresentation of facts, and fraudulent practices. It requires most broker-dealers and transfer agents, clearing agencies, and self-regulatory organizations (including securities exchanges) to register with the SEC The Investment Advisers Act of 1940 - cORRECT sOLUTION The Investment Advisers Act of 1940 wrote into law the fiduciary duty owed by investment advisers to their clients. This act requires investment advisers to register with the SEC by filing Form ADV. It also contains certain prohibitions regarding advertising practices and certain requirements for disclosure. The Investment Company Act of 1940 - cORRECT sOLUTION The Investment Company Act of 1940 subjects both the structure and the operations of mutual funds to detailed regulation. Mutual funds belong to a class of investment companies defined in the 1940 act as "management companies," which are further classified as either diversified or nondiversified. A diversified company is one in which at least 75% of the value of its total assets is represented by cash and cash items (including receivables), government securities, securities of other investment companies, and other securities. There is also a limit of not greater in value than 5% of the fund's assets and not more than 10% of the outstanding voting securities of any one issuer The Securities Investor Protection Act of 1970 - cORRECT sOLUTION This act established the Securities Investor Protection Corporation (SIPC) to oversee the liquidation of brokerage firms and to insure investors' accounts up to a maximum value of $500,000 (of which only up to $250,000 can be cash balances) in the case of bankruptcy of a brokerage firm. The Securities Acts Amendments of 1975 - cORRECT sOLUTION This act directed the SEC to supervise the development of a national securities market. The assumption behind this act was that any national market would extensively use computers and electronic communications. It also prohibited fixed commissions on public transactions, which fosters greater competition and more efficient prices. The USA Patriot Act - cORRECT sOLUTION This act requires broker-dealers, among others, to have internal policies, procedures, and controls meet the "know your customer" mandate to combat terrorism and money laundering. Broker- dealers, in turn, may well ask their investment advisers to provide more detailed information about their clients. Advisers should look for red flags such as transactions that do not make sense for a client, numerous accounts held in different names or corporations for no apparent reason, and clients' lack of concern about investment objectives, risks, and investment costs. The adviser's requirements in complying with the act are still evolving, but the adviser should be aware of this act and its possible implications, including having formal policies in place to fight money laundering. Return to question. The Sarbanes-Oxley Act of 2002 - cORRECT sOLUTION This act set up the Public Company Accounting Oversight Board, which consists of five financially literate members, two of whom must be or have been certified public accountants. The board is to establish, or adopt, by rule, "auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers." It also must conduct inspections of accounting firms, conduct investigations and disciplinary proceedings, and impose appropriate sanctions. It requires a company's chief executive officer and chief financial officer each to certify the financial and other information contained in the issuer's quarterly and annual reports.