Chapter 15 Custom Exam
Which of the following statements is NOT TRUE about a fidelity bond? A) It protects customers in the event their broker-dealer goes bankrupt. B) It's insurance that protects a broker-dealer in case of fraud such as forgery or counterfeit currency. C) FINRA must be notified if the bond is cancelled or substantially modified. D) It covers securities that are held at the brokerage firm as well as those in transit.
A) It protects customers in the event their broker-dealer goes bankrupt. A fidelity bond does not protect customers in the event of broker-dealer bankruptcy; that's the role of SIPC. Instead, a fidelity bond is insurance that protects a broker-dealer in case of fraud such as forgery or counterfeit currency. The bond covers securities that are held at the brokerage firm as well as those in transit. FINRA must be notified if the bond is cancelled or substantially modified.
A member firm's business continuity plan (BCP) is designed to address: A) The day-to-day policies and procedures of the firm B) The procedures that will be followed in the event of a catastrophe at the firm C) How a complaint is handled when it is received by a firm D) The procedures used in the event of the loss of a key employee
B) The procedures that will be followed in the event of a catastrophe at the firm Business continuity plans consist of written procedures to be followed in the event that the firm is involved in a catastrophe (e.g., earthquakes, floods, fires, terrorism, etc.).
Broker-dealers must provide a privacy notice to every customer: A) When the first trade occurs B) When the account is opened C) If requested D) Before disclosing nonpublic, personal information
B) When the account is opened Broker-dealers, investment companies, and investment advisers must provide a privacy notice to customers when the account is opened. An updated version must be sent to customers annually.
Which of the following regulations protects the confidentiality of the information that broker-dealers collect from their clients? A) The Securities Investor Protection Act of 1970 B) The Insider Trading and Securities Fraud Enforcement Act of 1988 C) Regulation SP D) Regulation FD
C) Regulation SP Regulation SP requires all broker-dealers, investment companies, and investment advisers registered with the SEC to adopt procedures to protect the privacy of confidential information collected from their clients. The Securities Investor Protection Act of 1970 protects customers of failed broker-dealers. The Insider Trading and Securities Fraud Enforcement Act of 1988 established specific penalties for the misuse of material, nonpublic information. Regulation FD addressed the distribution of material, nonpublic information to select individuals, such as research analysts.
A customer has recently closed her account. How long is her broker-dealer required to keep records related to her account? A) Three years B) Four years C) Six years D) 10 years
C) Six years Although many brokerage records are kept for three years, a broker-dealer is required to keep customer records for six years after an account is closed. Customer complaints must be kept for four years.
A broker-dealer must maintain customer account records for how long after an account is closed? A) Two years B) Three years C) Six years D) The life of the firm
C) Six years Records that relate to customer accounts must be maintained for a total of six years after the account is closed. For the first two years, the records must be in an easily accessible location.
As it relates to money laundering, which of the following choices best describes structuring? A) A client bribes someone to accept the deposit of funds. B) The client uses fake companies to launder money. C) The client makes small deposits to evade AML reporting thresholds. D) A client buys and sells securities illegally with foreign nationals.
C) The client makes small deposits to evade AML reporting thresholds. Structuring occurs when a client attempts to circumvent anti-money laundering (AML) reporting requirements by depositing funds in amounts just below the reporting levels. The goal is to evade detection by engaging in numerous small deposits.
After opening an account with a firm a customer must receive an updated privacy notice: A) Semi-annually. B) Annually C) Bi-annually. D) A privacy notice need not be provided after opening an account.
A) Annually According to Regulation SP, a privacy notice must be provided to a customer at the time an account is opened and annually thereafter. If this individual did not have an account with the dealer, he would be defined as a consumer and the privacy notice would have to be provided at the time any non-public (personal) information was disclosed to an unaffiliated third party.
When can broker-dealers make unsolicited telephone calls? A) Between 8:00 a.m. and 9:00 p.m. B) Between 9:00 a.m. and 8:00 p.m. C) Between 10:00 a.m. and 6:00 p.m. D) Between 9:00 a.m. and 5:00 p.m.
A) Between 8:00 a.m. and 9:00 p.m. Under the Telephone Consumer Protection Act, solicitors are only permitted to contact consumers between 8:00 a.m. and 9:00 p.m. (17566)
A registered representative is sending an email to 20 individual investors. This is defined as a(n): A) Correspondence B) Institutional communication C) Retail communication D) Public appearance
A) Correspondence FINRA's Communications with the Public Rule defines different types of communication. Correspondence, which is defined as any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period. Institutional communication, which is defined as any written or electronic communication that is distributed or made available only to institutional investors. This would not include any internal communication by the broker-dealer. Retail communication, which is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30 calendar-day period. Public appearances are situations where employees associated with a broker-dealer or sponsor participate in a television or radio interview, seminar, or forum, or make a public appearance, or engage in speaking activities that are unscripted and are not otherwise considered retail communication. Social media sites, which permit real-time communication or interactive, electronic forums, fall under the guidelines of a public appearance (e.g., Facebook, Twitter, and LinkedIn). Since the e-mail is being sent to 25 or fewer individual (retail) investors, it is defined as a correspondence. It makes no difference whether the investors have an account with the RR or the member firm.
The SEC rules regarding the record retention generally require that records be kept in an easily accessible location for the: A) First two years B) First three years C) First six years D) Life of the firm
A) First two years The SEC rules regarding record retention generally require that records be kept in an easily accessible location for the first two years. Records must generally be kept in total for either three years, six years, or the life of the firm depending on the specific record.
A broker-dealer is permitted to hold a customer's mail without instructions concerning a valid reason: A) For a period not exceeding three consecutive months B) For a period not exceeding two consecutive months C) For a period not exceeding six consecutive months D) Under no circumstances
A) For a period not exceeding three consecutive months A broker-dealer may hold mail for a customer who will not be receiving mail at his usual address provided the firm receives written instructions from the customer that include the time-period during which the mail is to be held. If the period exceeds three consecutive months, the customer's instructions must also include a valid reason for the request.
A Suspicious Activity Report should be filed: A) For most types of suspicious activity depending on the facts and circumstances B) Only in the event that the firm has actual knowledge that the client is laundering money C) Only for transactions for parties on the OFAC list D) Only for transactions for more than $10,000
A) For most types of suspicious activity depending on the facts and circumstances A Suspicious Activity Report (SAR) should be filed for most suspicious transactions depending on the facts and circumstances surrounding the transaction.
Which of the following information is required under anti-money laundering rules? The client's Social Security number The client's DOB The client's physical address Supporting documentation A) I, II, III, and IV B) II, III, and IV only C) I and II only D) II and IV only
A) I, II, III, and IV Anti-money laundering rules require firms to verify the identity of clients for whom they are opening accounts. As a result firms must collect the client's name, date of birth, home or business street address, social security number and other supporting documentation.
A broker-dealer's anti-money laundering (AML) compliance program must be approved: A) In writing by a member of senior management B) By FINRA and a member of senior management of the broker-dealer C) By the SEC and the head of compliance for the broker-dealer D) In writing by both the CEO and the CFO
A) In writing by a member of senior management Each member's AML program must be approved in writing by a member of senior management.
A registered representative is sending an email to five clients. Which of the following statements is TRUE? A) It is considered correspondence and subject to review by a principal. B) It is considered correspondence and subject to pre-approval by a principal. C) It is considered retail communication and subject to review by a principal. D) It is considered retail communication and subject to pre-approval by a principal.
A) It is considered correspondence and subject to review by a principal. It is considered correspondence and subject to review by a principal. Correspondence is defined as any written or electronic message that a member firm distributes or makes available to 25 or fewer retail investors within a 30-calendar-day period. On the other hand, retail communication is defined as any written or electronic communication that a member firm distributes or makes available to more than 25 retail investors within a 30-calendar-day period. A retail investor is considered any person who does not meet the definition of an institutional investor. Retail communications are generally subject to pre-approval; however, correspondence and institutional communications are subject to review and supervision.
Which of the following statements is TRUE concerning the opening of a cash account? A) The customer must sign the new account form. B) A principal of the firm must sign the new account form. C) Both the customer and a principal must sign the new account form. D) Neither the customer nor a principal must sign the new account form.
B) A principal of the firm must sign the new account form. A principal of the firm must sign the new account form. Although many firms have established internal rules about obtaining a client's signature to open a cash account, it's not a FINRA requirement.
A broker-dealer's privacy notice must include all the following information, EXCEPT the: A) Type of personal information that the firm collects B) Names of any other financial institutions with which the firm is affiliated C) Fact that clients may opt out of having their information shared with non-affiliates D) Types of third parties to which the firm may disclose information
B) Names of any other financial institutions with which the firm is affiliated A privacy notice is not required to include the names of any other financial institutions with which the firm is affiliated.
Broker-dealers are required to send balance sheets to customers every: A) Nine months B) Six months C) Three months D) 12 months
B) Six months Broker-dealers are required to send balance sheets to customers every six months and upon request.
A confirmation must be sent to a customer no later than: A) The trade date B) The business day after the settlement date C) The completion of the trade D) Two business days after the settlement date
C) The completion of the trade A broker-dealer must send a confirmation to a customer at or before the completion of the transaction, which is usually the settlement date.
In which of the following situations must a broker-dealer file a Currency Transaction Report (CTR)? A) A customer deposits bearer bonds with a face value of $100,000 B) A customer purchases stock with a $20,000 personal check C) A customer opens an account with $11,000 in cash D) A customer opens an account with a credit card debit check valued at $20,000
C) A customer opens an account with $11,000 in cash Currency Transaction Reports must be filed when a customer deposits a total of more than $10,000 in cash in any one day.
All of the following forms of communication with the public that are used by a member firm fall under the industry definition of retail communication, EXCEPT: A) An advertisement for the firm that's published in a magazine B) A billboard that describes the range of services offered by the firm C) A seminar handout provided to 20 retail investors D) A telemarketing script
C) A seminar handout provided to 20 retail investors Any written or electronic communication that is sent by a member firm to 25 or fewer retail investors is considered correspondence. For that reason, the seminar handout provided to 20 retail investors is not considered retail communication; it's considered correspondence. Retail communication is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30-calendar-day period. A retail investor is considered any person who does not meet the definition of an institutional investor. Retail communication is the broadest category of communication and includes both advertising and sales literature. All materials that are prepared for the public media in which the ultimate audience is unknown are considered retail communications including: Television, radio, and billboards Magazines and newspapers Certain websites and online interactive electronic forums, such as chat rooms, blogs, or social networking sites (assuming retail investors have access to these sites) Telemarketing and sales scripts Independently prepared reprints (e.g., newspaper or magazine articles) that are sent to more than 25 retail investors
Which of the following statements is NOT TRUE regarding the Telephone Consumer Protection Act? A) Broker-dealers must maintain a do-not-call list B) Cold calls are allowed between 8:00 a.m. and 9:00 p.m. local time of the party being called C) Broker-dealers are permitted to contact existing customers only during certain times during the day D) The name of the caller must be given to the party called
C) Broker-dealers are permitted to contact existing customers only during certain times during the day The Telephone Consumer Protection Act of 1991 sets forth standards that must be followed by those firms soliciting business over the telephone (i.e., cold calling). Telephone solicitations may be made only between 8:00 a.m. and 9:00 p.m. local time of the party being called. The person being called must be told the name of the caller and the firm on whose behalf the call is being made, and given a telephone number or address at which the firm may be reached. The firm must maintain a do-not-call list indicating the phone numbers of those individuals who have stated that they do not wish to be called in the future. Broker-dealers may contact existing customers anytime during the day
An e-mail sent to an individual customer is defined as: A) Retail communication B) Internal communication C) Correspondence D) A public appearance
C) Correspondence
All FINRA members must have an anti-money laundering compliance program that includes all the following requirements, EXCEPT: A) A designated compliance officer to administer the program B) An ongoing program to train personnel C) Disclosure to FINRA of the name of the designated compliance training officer D) An independent audit function to test the program's effectiveness
C) Disclosure to FINRA of the name of the designated compliance training officer According to FINRA, all member broker-dealers must have an AML compliance program that includes policies and procedures reasonably designed to detect money laundering and must report suspicious transactions. The requirements include the designation of a compliance officer who is responsible for the program, an ongoing employee training program, and an independent audit function to test the program's effectiveness. The name of the person overseeing the anti-money laundering program must be provided to FINRA, not the name of the training officer.
Which of the following statements are NOT TRUE about the SEC Customer Protection Rule? A) A broker-dealer is required to maintain possession or control of all fully paid and excess margin securities that belong to customers. B) DTCC is considered an acceptable location to hold securities. C) Excess margin securities are equal to the client's equity in the account (market value minus debit balance). D) Holding securities at the broker-dealer is considered an acceptable location.
C) Excess margin securities are equal to the client's equity in the account (market value minus debit balance). All of the statements are true except that excess margin securities are equal to the client's equity in the account (market value minus debit balance). Instead, excess margin securities are considered those securities whose value exceeds 140% of the debit balance. The securities may be held at the broker-dealer or at a depository facility, such as the DTCC.
Where is a FINRA member required to place a link for FINRA's BrokerCheck website? A) On all webpages that are available to the public B) Only on webpages that are accessible to existing customers with a password C) On the first landing page of the broker-dealer's publicly available website D) Only on webpages that are viewed by institutional investors
C) On the first landing page of the broker-dealer's publicly available website Under FINRA rules, broker-dealers are required to include a hyperlink to BrokerCheck on the initial webpage that the firm intends to be viewed by retail investors. The link is not required to be on every webpage of the broker-dealer or on pages that are only viewed by instructional investors.
A broker-dealer must file a Currency Transaction Report (CTR) when a customer: A) Deposits bearer bonds with a face value of $100,000 B) Purchases stock with a $20,000 personal check C) Opens an account with $11,000 in cash D) Opens an account with a credit card debit check valued at $20,000
C) Opens an account with $11,000 in cash CTRs are filed on FinCEN Form 104 when a customer deposits a total amount of more than $10,000 in cash on any one day.
A broker-dealer's suitability obligation is: A) To protect the customer against a loss B) A requirement by a broker-dealer to avoid conflicts of interest C) To make sure the recommended security fits the customer investment objectives D) To make sure a customer does not invest in risky securities
C) To make sure the recommended security fits the customer investment objectives Broker-dealers have a suitability obligation to all customers. For noninstitutional or retail customers, the broker-dealer (or registered person at the firm) must have a reasonable basis for recommending a transaction based on information obtained from the customer concerning his investment profile. This would include the customer's age, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, and risk tolerance. A broker-dealer may assist a customer in limiting a loss but not guarantee a customer against a loss. Conflicts of interest must be disclosed, but do not need to be avoided. A firm may recommend that a small amount of a customer's portfolio be invested in riskier securities if they fit into an overall investment strategy.
Confirmations for transactions are sent in: A) Written form only B) Electronic form only C) Written or electronic form D) Written and electronic form
C) Written or electronic form Confirmations for transactions may be sent in written or electronic form. If sent electronically, and the customer requests the confirmation in paper form, the broker-dealer must send it in paper form as well. Otherwise, the confirmation does NOT need to be sent in both electronic AND written form.
According to FINRA, which of the following is NOT considered an institutional account? A) An account for a bank B) An account for a registered investment adviser C) An account for a registered investment company D) An account for a person with $2 million of assets
D) An account for a person with $2 million of assets An institutional account includes those of banks, savings and loans, insurance companies, registered investment advisers, registered investment companies, or any person with total assets of at least $50 million.
Jerry is planning to open an account at Grace Securities. Grace must furnish him with a privacy notice: A) Only if it plans to disclose any of Jerry's private information to nonaffiliated third parties B) Before Jerry enters his first order in the account C) By the end of the year in which the account is opened and annually thereafter D) At the time he opens the account
D) At the time he opens the account Grace must furnish Jerry with a privacy notice at the time he opens the account. Jerry is establishing an ongoing relationship with Grace Securities by opening an account with them. Thus, he is considered a customer under Regulation SP and must receive a privacy notice at the time he opens the account (first establishes the ongoing relationship).
Which of the following statements is NOT TRUE about a customer free credit balance at a broker-dealer? A) A customer free credit balance represents funds that a customer can withdraw on demand. B) Notification of the free credit balance must be provided on each statement. C) The notice must state if the funds are not segregated and may be used in the conduct of the broker-dealer's business. D) Notification must be provided at least semi-annually.
D) Notification must be provided at least semi-annually. All of the statements are true except that notification must be at least semi-annually. Actually, notification must be provided at least quarterly. If statements are sent more frequently (i.e., monthly), then notice must be provided on each statement.
Which of the following statements is NOT TRUE? A) Clients must be notified of their free credit balances at least quarterly. B) Broker-dealers must send customers balance sheets at least every six months. C) Depending on the record, SEC record retention rules generally require a firm to maintain required records for either three years, six years, or the life of the firm. D) SEC record retention rules generally require a firm to maintain records in an easily accessible location for the first three years.
D) SEC record retention rules generally require a firm to maintain records in an easily accessible location for the first three years. All of the statements are true except that SEC record retention rules generally require a firm to maintain records in an easily accessible location for the first three years. Instead, a firm is required to maintain records in an easily accessible location for the first two years.
Which of the following statements is TRUE concerning member firms' suitability requirements for institutional investors? A) Institutional investors are exempt from SRO suitability requirements B) The SRO suitability requirements apply unless the account is defined as a Qualified Institutional Buyer C) The suitability requirements are more stringent than those of retail accounts D) The suitability requirements are less stringent than those of retail accounts
D) The suitability requirements are less stringent than those of retail accounts Institutional investors are subject to FINRA suitability requirements, but they are less stringent than those of retail accounts. There is no special exemption for QIBs. Firms have a suitability obligation to all clients. When determining the suitability obligations of a broker-dealer concerning institutional customers, the two most important considerations are the customer's ability to evaluate the investment risk independently, and the extent to which the customer is exercising that ability in connection with the recommendation.
An RR must attempt to obtain all of the following information about customers, EXCEPT: A) Their occupation B) Their tax ID number C) Their legal residence D) Their educational background
D) Their educational background There is no requirement to attempt to obtain a client's educational background.
On a confirmation to a customer, a FINRA member must disclose all of the following , EXCEPT: A) Whether the member acted as agent or principal B) If acting as agent, the amount of the commission C) The time of execution (or an offer to reveal it upon request) D) Whether the broker-dealer is also an investment banker for the issuer of the security
D) Whether the broker-dealer is also an investment banker for the issuer of the security The customer confirmation must disclose whether the brokerage firm acted as a principal or agent. If it acted as agent, the amount of the commission must be disclosed. Also, the broker-dealer must disclose or offer to disclose the time that the trade was executed. Whether the broker-dealer is also an investment banker for the issuer of the security is disclosed in a research report, but is not required on a confirmation.
