SRO

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.

The Securities and Exchange Commission was created by which law?

1. A.The Securities Exchange Act of 1934Correct — the 1934 Act created the SEC and governs secondary-market trading.
2. B.The Securities Act of 1933The 1933 Act governs new issues and prospectus delivery — it predates the SEC by a year.
3. C.The Maloney Act of 1938The Maloney Act authorized SROs for the OTC market (leading to the NASD, FINRA's predecessor) — it did not create the SEC.
4. D.The Investment Advisers Act of 1940The Advisers Act regulates investment advisers; the SEC already existed by 1940.

Why: The Securities Exchange Act of 1934 — the law governing the secondary market — established the SEC and gave it authority over exchanges, broker-dealers, and the SROs.

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.

What is the Municipal Securities Rulemaking Board's role in the regulation of municipal securities dealers?

1. A.It writes the rules and conducts examinations, but refers enforcement proceedings to the SEC.Wrong. It does not examine either; both examination and enforcement sit with other regulators.
2. B.It writes rules for municipal securities dealers but does not examine or enforce; others do that.Correct. Congress created it as a rule-writing body and left enforcement with agencies that had examination staff.
3. C.It registers municipal issuers and reviews their official statements before an offering may proceed.Wrong. Municipal issuers are largely exempt from registration and the board does not review their disclosure.
4. D.It operates as the primary market in municipal securities, matching dealer bids with issuer offerings.Wrong. It is a regulatory body and does not operate any trading facility or market.

Why: The MSRB writes the rules governing municipal securities dealers and municipal advisors, but it has no examination or enforcement authority of its own. Enforcement is carried out by others: FINRA for broker-dealers, the federal banking regulators for bank dealers, and the SEC across the whole field. The structure exists because the MSRB was created as a rule-writing body for a market that had previously been largely unregulated, and Congress placed enforcement with agencies that already had examination staff. The practical consequence is that a firm charged with violating an MSRB rule faces a proceeding brought by FINRA or the SEC rather than by the MSRB.