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SEC Phase 2-7B Equities Securities Salesman (ESS) Exam - Philippines study materials
SEC Phase 2-7B Equities Securities Salesman (ESS) Exam - Philippines study resources

SEC Phase 2-7B Equities Securities Salesman (ESS) Exam - Philippines practice questions

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Question 1Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

Under the Securities Regulation Code (RA 8799), which body is vested with the power to register securities and regulate the securities market in the Philippines?

  1. The Insurance Commission
  2. The Philippine Stock Exchange
  3. The Bangko Sentral ng Pilipinas
  4. The Securities and Exchange Commission Correct answer.

Explanation

RA 8799 reconstituted the Securities and Exchange Commission and vested it with primary authority to register securities, license market participants, and enforce the Code. The other agencies have sector-specific mandates but do not administer the SRC registration regime.

Question 2Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

A corporation plans to offer shares to the public in the Philippines for the first time. Before any sale, which document must be filed with and cleared by the SEC?

  1. An annual report
  2. A certificate of incorporation
  3. A board resolution only
  4. A registration statement with a prospectus Correct answer.

Explanation

Section 12 of the SRC requires securities offered to the public to be registered through a registration statement that includes a prospectus, and the SEC must declare it effective before sales may be made. Corporate and board documents alone do not satisfy the disclosure requirement.

Question 3Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

Which of the following is a recognized exempt transaction under the Securities Regulation Code that does not require full registration?

  1. A public offering advertised to retail investors nationwide
  2. A listing on the Philippine Stock Exchange
  3. A sale by an issuer to fewer than 20 persons in the Philippines Correct answer.
  4. A rights offering to existing shareholders

Explanation

Section 10 of the SRC lists exempt transactions, including certain sales to a limited number of persons and to institutional or accredited investors, which may proceed without full registration subject to SEC rules. Public offerings and exchange listings fall within the registration framework.

Question 4Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

A salesman tells a client that a security is "guaranteed by the SEC." This statement is best characterized as:

  1. Accurate, because the SEC approves all registrations
  2. Misleading, because SEC approval does not constitute a guarantee of the security Correct answer.
  3. Accurate, because the SEC insures investor losses
  4. Permissible marketing hyperbole with no regulatory consequence

Explanation

SEC registration confirms that required disclosures were made; it is not a finding that the security is sound or that its value is guaranteed. Representing otherwise is a misrepresentation that violates fair-dealing and anti-fraud standards under the SRC.

Question 5Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

Which of the following persons is required to be registered with the SEC in order to act as a securities salesman for a broker-dealer?

  1. A person who has passed the required licensure examination and is associated with a registered broker-dealer Correct answer.
  2. A client who refers friends to the broker
  3. Any employee of the broker-dealer regardless of function
  4. A part-time clerk who only answers phones

Explanation

The SRC and its implementing rules require individuals who solicit or transact securities business to be licensed as salesmen associated with a registered broker-dealer and to meet examination and fitness requirements. Mere employment by a broker is insufficient without licensing.

Question 6Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

A broker-dealer's client asks to pay for a securities purchase using funds of unknown origin routed through a third-party account. The salesman's most appropriate action is to:

  1. Split the payment into smaller transactions to reduce scrutiny
  2. Escalate the matter under the firm's anti-money-laundering procedures and decline the arrangement Correct answer.
  3. Accept the funds but note them in the client file
  4. Accept the funds to preserve the client relationship

Explanation

The Anti-Money Laundering Act and SEC rules require covered institutions, including broker-dealers, to detect and report suspicious transactions and to know their customers. Third-party funding of unknown origin is a red flag that must be escalated rather than accommodated.

Question 7Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

Under the SRC, which of the following constitutes insider trading?

  1. Trading by a fund manager based on publicly available analyst reports
  2. Trading by a retail client following news reports
  3. Trading by an investor based on published financial statements
  4. Trading by a director on material non-public information about an unannounced merger Correct answer.

Explanation

Section 27 of the SRC prohibits trading while in possession of material non-public information obtained through a relationship of trust or confidence, such as a directorship. Trading on publicly disclosed information is not insider trading.

Question 8Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

A securities salesman knowingly executes a series of trades in a client's account solely to generate commissions without regard to the client's objectives. This practice is known as:

  1. Churning Correct answer.
  2. Arbitrage
  3. Hedging
  4. Underwriting

Explanation

Churning is excessive trading in a client account to generate commissions rather than to serve the client's investment interests, and it breaches the duty of fair dealing. Arbitrage, hedging, and underwriting are legitimate market activities with different purposes.

Question 9Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

A client's written instruction to buy a security is executed by the salesman at a price materially worse than the prevailing market price, with the difference retained by the salesman. This conduct is best described as:

  1. Churning
  2. Front-running
  3. Misappropriation of client funds Correct answer.
  4. Best execution

Explanation

Retaining the difference between the executed price and the price the client should have received amounts to misappropriation of client property and a breach of fiduciary duty. Best execution requires the firm to seek the most favorable terms reasonably available.

Question 10Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

Which document must a registered broker-dealer deliver to a customer at or before opening an account, describing the nature of the relationship and required disclosures?

  1. A prospectus for every security the firm may trade
  2. A copy of the firm's tax return
  3. A personal financial statement of the salesman
  4. A customer account agreement and risk disclosure documentation Correct answer.

Explanation

SEC rules require broker-dealers to provide customers with account-opening documentation, including the customer agreement and appropriate risk disclosures, so that the client understands the terms of the relationship. Prospectuses are security-specific, and personal documents of staff are irrelevant.

Question 11Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

A corporation's board approves a material acquisition on a Friday, with public announcement scheduled for the following Wednesday. A director tells his broker to buy shares on Monday. The director has most likely:

  1. Violated the insider trading prohibition Correct answer.
  2. Committed an exempt transaction
  3. Acted lawfully because the announcement was imminent
  4. Acted lawfully because the board already approved the deal

Explanation

Material information remains non-public until it is disclosed to the market, so trading before the announcement while in possession of it violates Section 27 of the SRC. Board approval does not make the information public, and imminent disclosure is not a defense.

Question 12Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

Under the SRC, a person who manipulates the price of a listed security through a series of matched orders with a confederate is engaging in:

  1. Block trading
  2. Short selling
  3. Legitimate market making
  4. Wash trading and price manipulation Correct answer.

Explanation

Matched orders that create a false appearance of trading activity constitute wash sales and manipulation prohibited under the SRC. Market making, block trading, and short selling are distinct activities that may be lawful when conducted transparently and in compliance with rules.

Question 13Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

A tender offer for the shares of a listed company is launched. Under the SRC, the offeror is generally required to:

  1. Keep the offer confidential from target shareholders
  2. Pay a premium only to the largest shareholders
  3. Complete the offer without any filing
  4. Provide disclosure to shareholders and comply with the tender offer rules Correct answer.

Explanation

The SRC and its rules require tender offers to be disclosed to shareholders and conducted in accordance with procedural safeguards so that holders can make an informed decision. Secrecy, absence of filing, and selective premiums undermine those protections.

Question 14Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

A company wishes to sell securities to 15 institutional investors in the Philippines without full registration. Which SRC concept most directly supports this?

  1. The rule on tender offers
  2. The exempt transaction provisions for limited or institutional placements Correct answer.
  3. The prohibition on insider trading
  4. The requirement for periodic reporting

Explanation

Section 10 of the SRC exempts certain transactions, including sales to a limited number of persons and to institutional investors, from full registration subject to SEC conditions. Insider trading, reporting, and tender offer rules address different regulatory concerns.

Question 15Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

Which of the following best describes the SEC's power over a broker-dealer that repeatedly fails to maintain required net capital?

  1. The SEC may only issue a warning letter
  2. The SEC must refer the matter to the Philippine Stock Exchange for final action
  3. The SEC may suspend or revoke the broker-dealer's registration Correct answer.
  4. The SEC has no authority over broker-dealer finances

Explanation

The SRC empowers the SEC to suspend or revoke the registration of market participants that violate the Code or its rules, including financial responsibility requirements such as net capital. Warnings, referral alone, or denial of authority do not reflect the statutory enforcement powers.

Question 16Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

A salesman receives a complaint from a client alleging unauthorized trades. Under fair-dealing standards, the salesman should first:

  1. Ask the client to withdraw the complaint before investigation
  2. Offer the client a personal cash settlement outside firm records
  3. Ignore the complaint because the client signed an agreement
  4. Promptly report the complaint through the firm's supervisory and complaint-handling process Correct answer.

Explanation

Firms must maintain supervisory procedures and complaint-handling processes, and personnel must escalate client complaints so they can be investigated and remediated. Off-record settlements and discouraging complaints undermine investor protection and recordkeeping requirements.

Question 17Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

A listed issuer fails to file its required quarterly report on time. The most likely regulatory consequence is:

  1. No consequence if the share price is stable
  2. Immediate criminal liability for the salesman
  3. SEC action, including possible penalties or suspension of trading, after due process Correct answer.
  4. Automatic delisting without any proceeding

Explanation

The SRC requires periodic disclosure by registered issuers, and the SEC may impose sanctions or suspend trading for non-compliance after appropriate proceedings. Automatic delisting, personal liability of salesmen, and price-based exceptions are not the rule.

Question 18Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

Which of the following is a material fact that generally must be disclosed in a prospectus for a registered offering?

  1. The number of employees who commute by bicycle
  2. The color scheme of the issuer's logo
  3. The personal salary of the salesman marketing the offering
  4. Pending litigation that could materially affect the issuer Correct answer.

Explanation

A prospectus must disclose material information investors need to make an informed decision, including material legal proceedings and risk factors. Trivial operational or personal details do not meet the materiality standard.

Question 19Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

A client insists on investing her retirement savings entirely in a highly speculative security. The salesman's best response under suitability principles is to:

  1. Assess the client's profile and warn her of the concentration risk before executing Correct answer.
  2. Execute the order without discussion because the client is an adult
  3. Execute the order but hide the risk in the documentation
  4. Refuse all future business with the client

Explanation

Suitability rules require the firm to obtain client information and make recommendations consistent with the client's objectives and risk tolerance, including appropriate warnings. Blind execution, blanket refusal, and concealment of risk are inconsistent with that duty.

Question 20Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

Under the SRC, which of the following statements about the SEC's rulemaking authority is correct?

  1. The SEC cannot issue rules affecting broker-dealers
  2. The SEC may issue rules only with prior approval of the Philippine Stock Exchange
  3. The SEC's rules take effect only after ratification by Congress
  4. The SEC may issue rules to implement the Code, subject to publication and procedural requirements Correct answer.

Explanation

The SRC grants the SEC authority to promulgate rules and regulations to implement the Code, and those rules must comply with publication and administrative procedure requirements. Exchange approval, exclusion of broker-dealers, and congressional ratification are not conditions.

Question 21Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

A salesman learns that his firm's research department will downgrade a stock tomorrow. He sells his personal holdings today. This conduct is most likely:

  1. Front-running based on material non-public information Correct answer.
  2. Permissible if he discloses the trade after the fact
  3. A legitimate use of professional knowledge
  4. Permissible because the research is the firm's own property

Explanation

Trading ahead of a forthcoming firm recommendation on the basis of non-public information is a misuse of confidential information and a form of front-running prohibited under the SRC. Disclosure after the fact does not cure the violation.

Question 22Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

Which of the following best describes the SEC's authority over exchanges and self-regulatory organizations under the SRC?

  1. The exchange supervises the SEC
  2. The SEC approves exchange rules and may review exchange disciplinary actions Correct answer.
  3. The exchange may set rules without any regulatory oversight
  4. The SEC has no role once an exchange is established

Explanation

Exchanges operate as self-regulatory organizations subject to SEC oversight, including approval of their rules and review of disciplinary decisions. The SEC retains ultimate authority, and the exchange does not supervise the SEC.

Question 23Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

A salesman accepts a cash gift from a client in exchange for allocating a hot IPO allocation to that client. This conduct is best characterized as:

  1. A conflict of interest and potential violation of fair-dealing and anti-fraud rules Correct answer.
  2. Permissible if the gift is small
  3. Customary client appreciation
  4. Permissible if reported to the client's family

Explanation

Accepting personal benefits in exchange for preferential allocation creates an undisclosed conflict of interest and may constitute fraud or unfair dealing under the SRC. Custom, size, or disclosure to third parties do not legitimize the arrangement.

Question 24Philippine Securities Regulation and the Securities Regulation Code (RA 8799)

Under the SRC, the SEC may investigate a suspected violation of the Code and require the production of documents. This power is exercised:

  1. Only with the consent of the broker-dealer
  2. Through its investigative and enforcement authority, subject to due process Correct answer.
  3. Only after a criminal conviction
  4. Only by the Philippine Stock Exchange

Explanation

The SRC confers investigative and enforcement powers on the SEC, including the ability to require documents and conduct hearings, exercised consistently with due process. Prior conviction, consent, or exclusive exchange action is not required.

Question 25SEC Licensing, Registration, and Conduct Rules for Market Participants

Under the SEC rules on licensing of securities salesmen, which body formally approves the registration of a person as an Associated Person before that person may solicit securities transactions from the public?

  1. The broker-dealer's own compliance committee, which self-certifies its personnel
  2. The Bangko Sentral ng Pilipinas, which supervises all sales personnel of financial institutions
  3. The Securities and Exchange Commission, through the Markets and Securities Regulation Department Correct answer.
  4. The Philippine Stock Exchange, which issues the trading license on its own authority

Explanation

Registration of securities salesmen and other Associated Persons is granted by the SEC upon application endorsed by the broker-dealer. The Exchange and the firm play screening and sponsoring roles, but the licensing authority rests with the Commission, which may suspend or revoke the registration for cause.

Question 26SEC Licensing, Registration, and Conduct Rules for Market Participants

A candidate passes the SEC salesmen licensure examination and joins a broker-dealer. Which statement best describes the required next step before the candidate may lawfully solicit orders from clients?

  1. The candidate must first register with the Exchange as a floor trader
  2. The candidate may solicit for up to one year while the paperwork is being completed
  3. The candidate must apply for registration with the SEC through the sponsoring broker-dealer and await approval Correct answer.
  4. The candidate may begin soliciting immediately because passing the examination is the license

Explanation

Passing the examination only establishes eligibility; the person must still be registered with the SEC upon the endorsement of the employing broker-dealer. Solicitation before registration is a violation even if the examination has been passed.

Question 27SEC Licensing, Registration, and Conduct Rules for Market Participants

Which of the following persons is generally required to be registered with the SEC as an Associated Person of a broker-dealer?

  1. An individual who solicits and negotiates securities transactions with customers on behalf of the firm Correct answer.
  2. A janitorial contractor providing cleaning services to the trading floor
  3. An independent auditor engaged to opine on the firm's financial statements
  4. An external counsel who reviews the firm's contracts on a retainer

Explanation

Associated Persons are individuals who, on behalf of a broker-dealer, solicit, negotiate, or effect securities transactions with the public. Support contractors and independent professional advisers who do not deal with customers on securities transactions fall outside that definition.

Question 28SEC Licensing, Registration, and Conduct Rules for Market Participants

A registered salesman resigns from Broker A and joins Broker B three weeks later. What is the correct treatment of his registration?

  1. His registration lapses permanently and he must retake the licensure examination
  2. Broker B must cause a new application for registration to be filed and approved before he solicits for Broker B Correct answer.
  3. He may solicit for Broker B immediately and simply notify the SEC within thirty days
  4. His registration automatically transfers to Broker B because registration attaches to the individual

Explanation

Registration is tied to the sponsoring broker-dealer, so a change of employment requires a new application and approval. The individual's examination credit generally remains valid, but the authority to solicit for the new firm does not arise automatically.

Question 29SEC Licensing, Registration, and Conduct Rules for Market Participants

A salesman's SEC registration is suspended for a violation of the Securities Regulation Code. Which consequence follows most directly?

  1. His clients' accounts are automatically liquidated by the SEC
  2. His employer's trading license is automatically revoked
  3. He may not solicit or transact securities business on behalf of any broker-dealer during the suspension Correct answer.
  4. He may continue soliciting but may not receive commissions during the suspension

Explanation

Suspension removes the authority to act as a registered salesman, so solicitation during the period is unauthorized. The sanction operates against the individual's registration and does not by itself terminate the firm's license or the clients' accounts.

Question 30SEC Licensing, Registration, and Conduct Rules for Market Participants

Which of the following best describes the continuing obligation of a registered securities salesman after licensing?

  1. Pay an annual licensing fee to the Exchange in lieu of any SEC requirement
  2. Comply with SEC rules and the firm's supervisory procedures, and disclose material changes affecting his registration Correct answer.
  3. Complete a new licensure examination every three years
  4. File his personal securities holdings directly with the SEC each quarter

Explanation

Registration carries continuing conduct and compliance obligations, including adherence to SEC rules and internal supervisory controls, and disclosure of matters that affect eligibility. Periodic re-examination and direct quarterly filings by individuals are not the mechanism used.

Question 31SEC Licensing, Registration, and Conduct Rules for Market Participants

Broker-dealer X wants to appoint a new head of sales who will supervise registered salesmen. Which statement is most accurate regarding supervisory responsibility?

  1. The firm must maintain written supervisory procedures and designate qualified supervisors responsible for overseeing salesmen's conduct Correct answer.
  2. A supervisor need not be registered because supervisory work does not involve solicitation
  3. Supervision is required only when the SEC conducts an inspection
  4. Supervisory duties may be delegated entirely to the salesmen themselves through a peer-review arrangement

Explanation

Broker-dealers must maintain written supervisory procedures and assign qualified persons to enforce them, including oversight of salesmen's activities. Supervision is a continuous obligation rather than an inspection-driven exercise, and supervisors of sales activity are themselves subject to registration and qualification standards.

Question 32SEC Licensing, Registration, and Conduct Rules for Market Participants

A salesman learns that a client's account was opened using a falsified identification document. Under the conduct rules, what is the salesman's most appropriate immediate action?

  1. Escalate the matter promptly to the firm's compliance officer and follow the firm's reporting and escalation procedures Correct answer.
  2. Continue servicing the account until the next scheduled SEC examination
  3. Quietly close the account and keep the matter confidential between himself and the client
  4. Report the matter directly to the Exchange without informing his employer

Explanation

Suspected fraud or falsified documentation must be escalated internally so the firm can assess reporting and remediation obligations. Individual salesmen are not expected to handle such matters privately or to bypass their employer's compliance function.

Question 33SEC Licensing, Registration, and Conduct Rules for Market Participants

Which practice by a registered salesman is most clearly inconsistent with fair dealing obligations under the Securities Regulation Code?

  1. Providing a client with a written risk disclosure before accepting an order
  2. Declining an order that the client cannot fund
  3. Recording the basis of a recommendation in the client file
  4. Recommending a security without disclosing a material conflict of interest to the client Correct answer.

Explanation

Fair dealing requires that customers be treated honestly and that material conflicts be disclosed so clients can assess the advice they receive. Written risk disclosure, suitability screening, and documentation of recommendations are consistent with, rather than contrary to, those obligations.

Question 34SEC Licensing, Registration, and Conduct Rules for Market Participants

A client asks a salesman to execute a series of trades that appear designed to create the impression of active trading in a thinly traded security. What should the salesman do?

  1. Execute the trades but omit them from the firm's records
  2. Execute the trades only if the client signs a waiver of liability
  3. Execute the trades because the client bears responsibility for the client's own instructions
  4. Refuse to participate and escalate the concern, because transactions that create a false impression of activity may constitute market manipulation Correct answer.

Explanation

Facilitating trades intended to create a false or misleading appearance of trading activity can amount to manipulation, and a salesman may not rely on client instructions as a defense. The proper response is to decline and escalate the concern to compliance.

Question 35SEC Licensing, Registration, and Conduct Rules for Market Participants

Which statement correctly describes the treatment of customer orders and client funds handled by a broker-dealer's salesmen?

  1. Salesmen may accept cash payments from clients for investment without any firm record
  2. Client funds may be commingled with the firm's operating funds at the salesman's discretion
  3. Client funds and securities must be handled through the firm's established custody and settlement arrangements, not personal accounts Correct answer.
  4. Salesmen may hold client funds briefly in a personal account to speed settlement

Explanation

Customer funds and securities must flow through the firm's authorized custody, settlement, and recordkeeping channels. Personal handling or commingling of client assets is prohibited because it exposes customers to loss and defeats supervisory and audit controls.

Question 36SEC Licensing, Registration, and Conduct Rules for Market Participants

A salesman wants to use a social media account to promote his firm's brokerage services. Which approach is most consistent with SEC conduct and advertising rules?

  1. Post freely on personal accounts because social media is outside the scope of securities advertising rules
  2. Use only communications approved under the firm's supervisory and review procedures, and retain records of them Correct answer.
  3. Use testimonials from clients promising guaranteed returns to attract followers
  4. Delete all posts periodically so that no record remains

Explanation

Communications with the public about securities business are advertising subject to firm review and recordkeeping, whether or not they appear on social media. Promises of guaranteed returns and destruction of records are themselves violations.

Question 37SEC Licensing, Registration, and Conduct Rules for Market Participants

Which of the following is a core anti-money-laundering obligation of a securities salesman handling client accounts?

  1. Guaranteeing clients' returns so that funds are traceable
  2. Accepting third-party funding without identifying the source
  3. Keeping suspicious transaction reports confidential from the firm's compliance officer
  4. Performing customer identification and reporting suspicious transactions through the firm's compliance process Correct answer.

Explanation

Covered institutions must identify customers, monitor transactions, and report suspicious activity through their compliance function. A salesman's role is to apply these controls at the point of client contact and to escalate concerns rather than to conceal them.

Question 38SEC Licensing, Registration, and Conduct Rules for Market Participants

A salesman has a personal brokerage account at another firm and trades the same securities he recommends to his clients. Which statement best reflects the applicable conduct standard?

  1. He must comply with the employing firm's personal trading and conflict-of-interest policies, including pre-clearance and reporting requirements Correct answer.
  2. He may trade freely because personal accounts are beyond the reach of SEC rules
  3. He must close the outside account because salesmen may not hold personal investments
  4. He may front-run client orders as long as he discloses it afterward

Explanation

Personal trading by associated persons is subject to firm policies designed to detect and prevent conflicts, front-running, and misuse of information. Trading ahead of client orders is prohibited regardless of later disclosure, and outright prohibition of personal accounts is not the regulatory approach.

Question 39SEC Licensing, Registration, and Conduct Rules for Market Participants

During a client presentation, a salesman states that an offering is "approved by the SEC, so it is a safe investment." Why is this statement problematic?

  1. The statement is acceptable if the client signs an acknowledgment
  2. SEC registration of securities does not constitute a finding that the investment is safe or suitable, and implying otherwise misleads the client Correct answer.
  3. The statement is acceptable because SEC approval legally guarantees the issuer's creditworthiness
  4. The statement is problematic only if the securities are later delisted

Explanation

Registration of securities concerns compliance with disclosure requirements and does not represent a merit judgment or guarantee of safety. Characterizing registration as an assurance of safety misrepresents the regulatory process and misleads the investor.

Question 40SEC Licensing, Registration, and Conduct Rules for Market Participants

Which of the following best describes the suitability obligation of a securities salesman when accepting a client's order?

  1. Suitability requires the salesman to guarantee that the recommended security will appreciate
  2. Recommendations should be consistent with the client's investment objectives, financial situation, and risk tolerance, based on information obtained from the client Correct answer.
  3. Suitability applies only to institutional clients with large portfolios
  4. Suitability is satisfied whenever the client signs a general waiver of all claims

Explanation

The suitability standard requires a reasonable basis for believing a recommendation fits the particular customer's objectives, finances, and risk profile. It is not discharged by blanket waivers, it is not limited to institutions, and it never involves guaranteeing performance.

Question 41SEC Licensing, Registration, and Conduct Rules for Market Participants

A salesman is asked by his firm's compliance department to provide records of his communications with a client relating to a disputed order. What is the appropriate response?

  1. Provide the records promptly and cooperate fully with the firm's inquiry and any regulatory examination Correct answer.
  2. Provide only the records that support the firm's position
  3. Delete informal messages but provide formal emails
  4. Refuse until the client consents in writing

Explanation

Registered persons must cooperate with supervisory and regulatory inquiries and preserve records relevant to the matter. Selective production or destruction of records obstructs the inquiry and is itself a violation.

Question 42SEC Licensing, Registration, and Conduct Rules for Market Participants

Which statement about the permissible scope of a salesman's activities is correct?

  1. A registered salesman may sell any investment product, including insurance and real estate, without further authority
  2. A salesman may execute trades on any exchange worldwide without additional accreditation
  3. A salesman may act as an investment adviser to clients independently of his firm without any registration
  4. A salesman may solicit and execute orders for the types of securities his firm is authorized to deal in, and must refer other products to appropriately authorized personnel Correct answer.

Explanation

A salesman's authority is bounded by the firm's licensed activities and the products it is authorized to offer. Selling products outside that scope, or holding oneself out as an independent adviser, requires separate authority or registration.

Question 43SEC Licensing, Registration, and Conduct Rules for Market Participants

A salesman discovers that a colleague has been executing unauthorized trades in client accounts to generate commissions. What is the most appropriate course of action under the conduct rules?

  1. Inform affected clients directly and advise them to sue the firm
  2. Confront the colleague privately and take no further action if the practice stops
  3. Report the conduct through the firm's compliance and escalation channels so that the firm can investigate and remediate Correct answer.
  4. Ignore the conduct because it is the supervisor's responsibility alone

Explanation

Known or suspected misconduct must be reported through the firm's compliance channels so that it can be investigated, client harm remediated, and regulatory obligations assessed. Private resolution or silence leaves clients exposed and may make the reporting salesman complicit.

Question 44SEC Licensing, Registration, and Conduct Rules for Market Participants

Which of the following best describes the SEC's authority over a registered salesman who commits a fraudulent act in connection with a securities transaction?

  1. The SEC may investigate and impose administrative sanctions, including suspension or revocation of registration and fines, apart from any criminal liability Correct answer.
  2. The SEC may act only if the client first obtains a civil judgment
  3. The SEC may only issue a warning letter because criminal courts have exclusive jurisdiction
  4. The SEC must defer entirely to the broker-dealer's internal disciplinary decision

Explanation

The Commission has administrative enforcement powers over registered persons and may suspend or revoke registration and impose fines for violations. These administrative remedies are independent of criminal prosecution and do not require a prior civil judgment or internal firm action.

Question 45Equity Securities: Shares, Rights, and Corporate Actions

Under the Revised Corporation Code of the Philippines, shares issued with a stated par value may not be issued for consideration less than that par value. What is the principal purpose of this rule?

  1. To fix the market trading price of the shares on the exchange
  2. To preserve the corporation's stated capital as a creditor-protection buffer against dilution of the capital account Correct answer.
  3. To prevent stockholders from selling their shares at a loss
  4. To guarantee that the corporation will declare dividends every year

Explanation

The par value rule protects the integrity of stated capital, which creditors rely on as a margin of safety; issuing below par would water down that capital account. It does not control market pricing, dividend policy, or a holder's resale outcome.

Question 46Equity Securities: Shares, Rights, and Corporate Actions

A Philippine listed company declares a 20% stock dividend. An existing holder of 5,000 shares receives additional shares. How many new shares are issued to that holder, and what happens to the total number of shares outstanding?

  1. 1,000 new shares; total shares outstanding increase by 20% Correct answer.
  2. 1,000 new shares; total shares outstanding remain unchanged
  3. 20,000 new shares; total shares outstanding increase by 20%
  4. 5,000 new shares; total shares outstanding double

Explanation

A 20% stock dividend gives each holder 0.20 new shares per share held, so 5,000 x 0.20 equals 1,000 new shares. Because new shares are issued to all holders proportionally, total shares outstanding rise by 20%, though each holder's percentage ownership is unchanged.

Question 47Equity Securities: Shares, Rights, and Corporate Actions

Which of the following best describes a stock rights offering made by a Philippine listed corporation to its existing shareholders?

  1. A distribution of surplus cash in proportion to shareholdings
  2. A mandatory cash call that shareholders must fund or forfeit their existing shares
  3. A buyback in which the corporation repurchases shares from the public
  4. An offer of new shares to existing holders, usually at a discount, in proportion to their current holdings Correct answer.

Explanation

A rights offering lets existing shareholders subscribe to newly issued shares, typically priced below market, in proportion to their current holdings, protecting them against dilution. It is optional, not mandatory, and it raises capital rather than distributing cash or buying shares back.

Question 48Equity Securities: Shares, Rights, and Corporate Actions

A company's articles of incorporation authorize 100,000,000 shares, of which 60,000,000 are issued and outstanding and 10,000,000 are held in treasury. How many unissued shares remain available for future issuance?

  1. 10,000,000
  2. 50,000,000
  3. 40,000,000
  4. 30,000,000 Correct answer.

Explanation

Unissued shares equal authorized shares minus issued shares; treasury shares have already been issued, so they are not part of the unissued pool. That gives 100,000,000 minus 60,000,000 equals 40,000,000 issued in total, and 100,000,000 minus 70,000,000 equals 30,000,000 unissued.

Question 49Equity Securities: Shares, Rights, and Corporate Actions

A corporation holds treasury shares acquired in a buyback. Which statement correctly describes their status?

  1. They must be cancelled immediately upon acquisition
  2. They are counted as outstanding for quorum and dividend purposes
  3. They carry full voting rights and receive dividends while held by the corporation
  4. They are treated as unissued shares and may be reissued by the board Correct answer.

Explanation

Treasury shares have been issued and reacquired but are not outstanding; they carry no voting or dividend rights while held and may be reissued or sold by the board. They are not automatically cancelled on acquisition.

Question 50Equity Securities: Shares, Rights, and Corporate Actions

A corporation declares a cash dividend on a record date of 15 May. Under the standard Philippine settlement convention of T+2, an investor buying shares on the exchange must trade on or before which date to be the holder of record?

  1. 16 May
  2. 13 May Correct answer.
  3. 14 May
  4. 15 May

Explanation

With T+2 settlement, a trade executed on 13 May settles on 15 May, making the buyer the holder of record on the record date. A trade on 14 May would settle on 16 May, after the record date.