Federal Reserve Board

Which regulator has authority over the amount of credit a broker-dealer may extend to a customer buying securities on margin?

1. A.The SEC, which regulates all extensions of credit in connection with securities transactions.Wrong. The Commission oversees the markets broadly but the initial margin authority was given elsewhere.
2. B.The Federal Reserve Board, which sets the initial credit that may be extended on a securities purchase.Correct. Congress placed this with the central bank because margin credit bears on the money supply itself.
3. C.FINRA, which sets both the initial and the maintenance requirements for its member firms.Wrong. Self-regulatory organisations set maintenance requirements beneath the federal initial requirement.
4. D.The Treasury Department, through its authority over government securities dealers.Wrong. Treasury's rulemaking concerns the government securities market rather than margin credit generally.

Why: The Federal Reserve Board sets the initial credit that may be extended in a securities transaction, exercising an authority Congress gave it in the Securities Exchange Act because margin credit affects the money supply and the stability of the banking system, not merely investor protection. Its rules govern credit extended by broker-dealers and separately by banks and other lenders. Beyond that federal floor, the self-regulatory organisations impose maintenance requirements, and individual firms routinely set house requirements stricter still. So three layers apply, and the top layer, the initial extension of credit, belongs to the central bank rather than to the SEC.

A depositor asks which body stands behind the balance in her checking account at an insured commercial bank. The correct answer is:

1. A.The Federal Reserve, because it regulates member banks and holds their reserve balances.Wrong. The Fed conducts monetary policy and supervises banks, but it does not insure the deposits themselves.
2. B.The Securities Investor Protection Corporation, because a bank is a financial institution.Wrong. That body covers customer securities and cash held at a failed broker-dealer, not deposits at a bank.
3. C.The Federal Deposit Insurance Corporation, which insures deposits at its member banks.Correct. Deposit insurance at member banks is the FDIC's function, subject to the applicable coverage limits.
4. D.The Treasury, because insured bank deposits are direct obligations of the federal government.Wrong. A deposit is an obligation of the bank, and the government's role runs through the insurance program instead.

Why: The federal financial agencies each own a distinct function, and confusing them is a reliable source of wrong answers. Deposit insurance is administered by the FDIC, which pays insured depositors when a member bank fails. The Federal Reserve conducts monetary policy and supervises banks but insures nothing. The securities-side counterpart is a separate corporation covering assets held at a failed broker-dealer, and neither program protects against investment losses.

Which of the following is a self-regulatory organization?

1. A.The Federal ReserveThe Fed is the central bank — a government institution, not an industry membership organization.
2. B.The FDICThe FDIC is a federal deposit insurer, not an industry self-regulator.
3. C.FINRACorrect — FINRA is a private body regulating its own members under SEC oversight, the definition of an SRO.
4. D.The SECThe SEC is a federal government agency — it oversees SROs but is not one.

Why: FINRA is a private industry body that regulates its own broker-dealer members under SEC oversight — the definition of an SRO. The SEC is a government agency, the FDIC is a government corporation, and the Federal Reserve is the central bank.

Which of the following is a tool of monetary policy?

1. A.Funding a federal infrastructure programGovernment spending programs are fiscal policy decisions made through the budget process.
2. B.Imposing tariffs on imported goodsTariffs are trade and tax policy — tools of the government, not the central bank.
3. C.Changing federal income tax ratesTax rates are fiscal policy, set by Congress and the President.
4. D.Open market operationsCorrect — buying and selling government securities is the Fed's workhorse monetary policy tool.

Why: Open market operations — the Fed buying and selling government securities — are the Fed's primary monetary policy tool. Taxes, spending programs, and tariffs are all fiscal actions taken by Congress and the President.