Chapter 1 Practice Question Answers
1. Answer: B. A self-regulatory organization (SRO) is an industry group that exercises regulatory authority under the oversight of the SEC. SROs devise their own sets of rules, subject to SEC approval. FINRA, the MSRB, and securities exchanges such as Nasdaq are all SROs. Fannie Mae is not an SRO. It is a government-sponsored enterprise (GSE), which is a private corporation chartered by the federal government to direct funds into an area of national importance—in the case of Fannie Mae, supporting homeownership.
2. Answer: C. The requirement for members to arbitrate disputes does not hold when a member firm has its license canceled, suspended, or revoked, or it goes bankrupt. In this case, customers may sue the firm in civil court.
3. Answer: D. The Securities Exchange Act of 1934 regulates broker-dealers and the people who work for them, which is why it is sometimes called the People Act. It deals mainly with the secondary market (consisting of sales among investors) rather than the primary market (consisting of sales by issuers to investors). It created the SEC, and not the MSRB.
4. Answer: A. The MSRB has the authority to make the rules that govern the behavior of municipal securities dealers and municipal advisors, but it does not have the authority to enforce the rules. The rules are enforced by FINRA and the SEC.
5. Answer: C. While loans made by GSEs have an implied guarantee of the federal government, that guarantee has never been explicit. However, they are exempt from state and local taxation, exempt from SEC oversight, and have access to a standing line of credit in excess of $2 billion.
6. Answer: A. While the accountant is not offering investment advice, the attorney definitely is. A lawyer is not considered an investment adviser if he or she provides advice that is incidental to his or her profession—however, in this situation, the la