FINRA Regulations
To make a public offering of a Direct Participation Program, which statements are TRUE? I The offering must be registered with the SEC II The offering does not have to be registered with the SEC III The offering is subject to regulation by FINRA IV The offering is not subject to regulation by FINRA A I and III B I and IV C II and III D II and IV
A. Public offerings of direct participation programs are "non-exempt" offerings under the Securities Act of 1933, and must be registered. FINRA oversees and regulates the offering of these securities.
Which statements are TRUE about a registered representative that wishes to promote him- or herself on the Internet? I The representative can create a website with approval of the principal II The representative can create a website with approval of FINRA III The FINRA name must be used on the website IV The FINRA name, when used, must be hyperlinked to the FINRA website A I and III B I and IV C II and III D II and IV
B. Regarding a website prepared by an associated person, FINRA states that this is permitted (though, odds are, your firm will not allow you to do it). Again, approval of FINRA is not required. Rather, approval of the firm is required. The FINRA name can be shown on a member firm or associated person's website, but is not required to be shown. If shown, it must be accompanied by a hyperlink to the FINRA website.
Which of the following gifts is permitted to be accepted by a registered representative from a mutual fund sponsor? A Trip to Bermuda B $50 gift certificate C $500 cash D $500 towards the purchase of fund shares
B. The FINRA "anti-reciprocal" rule prohibits investment companies from compensating salesmen at broker-dealers for selling their shares outside of the sales charges stated in the Prospectus. FINRA does allow a maximum gift of $100 value per person per year from a mutual fund sponsor to a registered representative that is not considered as "compensation."
All of the following are violations of FINRA's Conduct Rules EXCEPT: A guaranteeing a customer account against loss B selling a customer an exempt security with a written agreement to buy back that security at a fixed price C making blanket recommendations of low price speculative stocks to customers D selling dividends to customers by inducing customers to buy stocks just prior to the ex date
B. Choice B defines a repurchase agreement, which typically involves two government securities dealers; or the Federal Reserve and a government dealer. These are permitted, since they are essentially overnight loans of monies at a predetermined interest rate. Prohibited activities include guaranteeing a customer account against loss; making blanket recommendations of low price speculative stocks; and selling dividends to customers.
A long time customer has purchased securities in a margin account and is experiencing a temporary cash shortfall. The customer tells the registered representative that he cannot pay on settlement; and the registered representative offers to lend the customer the necessary funds. This action is: A prohibited B allowed with the permission of the branch manager C allowed only if the loan will be repaid within 30 days D allowed without restriction
A. FINRA prohibits registered representatives from either lending money personally to a customer or borrowing money personally from a customer. There are certain exceptions to the prohibition if the customer is a spouse, "significant other" or family member, but this is not the case here. Review
Fidelity bonds are maintained by brokerage firms to: A protect against loss due to employee theft B protect against loss against falling markets C insure against casualty losses D meet minimum Net Capital standards
A. FINRA requires brokerage firms to maintain fidelity bond coverage to protect against loss due to loss of securities, employee theft, or embezzlement of funds.
Which statements are TRUE about the use of the FINRA name on a member firm's or associated person's website? I The FINRA name can be shown II The FINRA name must be shown III If the FINRA name is shown, it must be hyperlinked to the FINRA website IV If the FINRA name is shown, it must be stated that FINRA does not sponsor the website A I and III B I and IV C II and III D II and IV
A. FINRA states that its name can be used on a member firm or associated person's website. The use of the FINRA name must make it clear that the firm is the FINRA member and not the associated person. Furthermore, the FINRA name, if used, must be hyperlinked to the FINRA website.
Under FINRA communications rules, if a representative participates in an Internet Chat Room, this is defined as: A correspondence B public appearance C advertising D sales literature
B. FINRA defines participation in an Internet Chat Room as a public appearance. This is actually an older definition, because such participation now comes under the broader umbrella of "retail communications" - which is not given as a choice. Retail communications under FINRA rules encompasses advertising, sales literature and public appearances.
If a reference to FINRA is made on a member firm's website, which statements are TRUE? I The FINRA name must be hyperlinked to the FINRA website II The FINRA name cannot be hyperlinked to the FINRA website III The font size used for the FINRA name cannot be smaller than the font used for the member's name IV The font size used for the FINRA name must be smaller than the font used for the member's name A I and III B I and IV C II and III D II and IV
B. The FINRA name can be used on a member firm' website, but it must be hyperlinked to the FINRA website. It cannot state that FINRA approves or endorses the firm. It can only state that the firm is a FINRA member. Furthermore, to make sure that readers don't think that the member firm is FINRA, the FINRA name must always be smaller than the member firm's name.
Who is permitted to buy an Initial Public Offering (IPO) from a member firm? A Self-supporting mother of a registered representative who is employed by that member firm B College-age brother of a registered representative who is employed by that member firm C Self-supporting ex-wife of a registered representative who is employed by that member firm D Non self-supporting minor daughter of a registered representative who is employed by that member firm
C. On the prohibited list of purchasers of IPOs from underwriters are FINRA member firms for their own accounts, their officers and employees, and the "immediate family" of officers and employees of member firms. Immediate family includes parents, children, siblings, and spouses (and in-laws in this grouping). These individuals are viewed as potential conduits through which a registered representative could attempt to make a prohibited IPO purchase. Note that the ex-wife of a registered representative is no longer a spouse and would no longer fall into the prohibited group.
All of the following time stamps are on an order ticket EXCEPT the time of: A order entry B trade execution, if executed C order cancellation, if canceled D trade reporting to the Consolidated Tape
D. FINRA requires that all order tickets sent to an exchange be stamped with the time of: Order entry; Order execution; and Order cancellation, if canceled. There is no time stamp on the order ticket for the time the trade was reported to the Consolidated Tape. These time stamps are now recorded electronically.
A representative is hosting 20 wealthy guests at a dinner seminar at a Michelin star-rated restaurant, and when coffee and dessert are being served, she intends to give a small talk about the potential benefits of investing in hedge funds. This is defined by FINRA as a(n): A retail communication B institutional communication C research report D public appearance
D. FINRA describes a public appearance as a spontaneous, unscripted, live presentation to potential investors. These are not subject to FINRA filing rules and do not require prior principal approval (unless the firm requires this as an internal procedure). However, they are subject to the firm's written supervisory procedures, which must include post-use review and approval by a principal. (Also note that if the talk included specific recommendations that allowed the participants to form a purchase decision, the talk could also be defined as a research report - but that is not where this question is going!)
A customer requests the preliminary prospectus for a new issue that a firm is underwriting. The registered representative "highlights" important information in the document with a red marking pen. This action is: A permitted with written approval of the branch manager B permitted if the registered representative sends the customer a letter acknowledging the alterations C permitted if the altered document is filed with the SEC D not allowed under any circumstances
D. Alterations to a preliminary prospectus or final prospectus are prohibited. These documents have been filed with the SEC; and it is expected that the public will receive them in the exact form as filed with the SEC. Any changes to the documents invalidate the filing. Review
Which of the following is NOT required to be retained on file by a broker-dealer? A Account statements B Written complaints C Advertising D Recommendations
D. Broker-dealers are not required to retain, as a record, recommendations made to clients; solicitations made to potential clients; and prospectuses (copies of these can be obtained from the SEC). Any written customer complaint is a record that must be retained by broker-dealers.
An existing customer of a brokerage firm wishes to buy an initial public offering that he has heard good things about. The registered representative only has a limited number of shares to sell and explains to the customer that the offering is already "sold out." The customer tells the registered representative "If you can get me some of the stock, I will drop off cash payment in full today, with a little extra for you." The registered representative: A can accept the customer's offer without restriction B can accept the customer's offer if the cash payment does not exceed $500 C can accept the customer's offer if the gift is reported to the IRS D cannot accept the customer's offer
D. Cash can only be accepted from a customer if it is to be deposited to the customer's account. A registered representative cannot personally accept cash from a customer.
A registered representative explains to each of his customers that "Day trading of stock index options to profit from intra-day market swings is a safe and highly profitable strategy." This statement is: A truthful B only permitted for those customers who have previously signed an options agreement C only permitted for those customers who effected at least 10 options trades in the past year D unethical
D. Day trading of stock index options is hardly safe; and while it may be profitable in some cases, it's just as likely to be unprofitable in others. This is a highly unethical statement.
If a customer wishes to find out about a registered representative's disciplinary history, this information is: A sealed and cannot be given to customers B available from the Securities and Exchange Commission C available in the Federal Register D available from the Central Registration Depository on the BrokerCheck website
D. FINRA maintains a "BrokerCheck" website, where retail customers can input a registered representative's name and see that individual's employment history for the last 10 years, disciplinary record, licenses held, states in which that person is registered, and outside business activities. In addition, pending serious customer complaints that are not yet resolved are included. For customers without web access, a toll-free "hot line" to BrokerCheck is available.
A registered representative wishes to post his/her business card on a website. This is considered to be: A advertising B sales literature C correspondence D educational material
A. FINRA defines communications with the public as either: Correspondence: A communication made available to 25 or fewer existing or prospective retail clients Retail Communication: A communication made available to more than 25 existing or prospective retail clients Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA. A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience). Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective clients, scripted speeches delivered to more than 25 existing or prospective clients, password-protected websites
A communication sent to 10 prospective retail clients and 20 existing institutional clients is defined as (a(n)): A Correspondence B Retail Communication C Public Appearance D Institutional Communication
A. FINRA has 2 basic definitions of communications with the public: Correspondence: A written or electronic communication made available to 25 or fewer existing or prospective clients Retail Communication: A written or electronic communication made available to more than 25 existing or prospective clients. Excluded from these definitions are institutional communications and public appearances. These do not count in the numerical limits. FINRA creates these 2 main categories of communications because "correspondence" is subject to "post use review and approval" by a manager or principal and is not required to be filed with FINRA; in contrast, retail communications must be approved in advance of use by a principal and can be required to be filed with FINRA. (Also note that the "previous" FINRA rule defined "advertising" (general audience, such as TV, radio, newsprint, websites) and "sales literature" (specific audience, such as a research report, form letter, scripted speech, password-protected website). These now fall into the definition of "retail communications," but advertising and sales literature must still be known for the exam).
A broker-dealer has just opened a new branch office in a small city and wants to publicize this by sending out a marketing postcard to the mailing addresses in the town, stating that the firm is "endorsed by FINRA." Which statement is TRUE about this communication? A This is prohibited because member firms are not allowed to state that they are endorsed or approved by FINRA B This is permitted as long as the communication was approved by a principal of the firm C This is permitted because it is considered to be a non-promotional communication with the public D This is prohibited because mailings are only permitted to a list of individuals who have asked to receive communications from the firm
A. Member firms can only say that they are FINRA members. They cannot say that they are approved or endorsed by FINRA.
A registered representative at a FINRA member firm wishes to hold a seminar after work at the branch location. It will feature a dinner buffet, followed by a talk about the firm's latest investment recommendations and their possible suitability for the attendees. Each attendee will be asked to complete a suitability questionnaire prior to the dinner so that appropriate recommendations can be made. If the event is attended by 12 existing customers and 8 prospective customers, then the "talk:" I is defined as a research report II is not defined as a research report III requires prior approval of the supervisory analyst IV does not require prior approval of the supervisory analyst A I and III B I and IV C II and III D II and IV
A. The SEC defines a research report as "any client communication that analyzes individual securities or companies if it provides information reasonably sufficient upon which to base an investment decision and is distributed to at least 15 persons." This representative is giving a talk to 20 individuals and is making recommendations based on customer input. This meets the definition of a "research report" and must be approved in advance by a Supervisory Analyst and by a Compliance Officer or Principal under FINRA rules.
A registered representative is prospecting customers for a new mutual fund being sponsored by his firm. All of the following information items mailed to customers must be accompanied by a prospectus EXCEPT: A letter stating the fund's objective(s) B sales literature that promotes the fund C research report recommending the fund D advertisement about the fund
A. Because mutual funds are "prospectus offerings," nothing can be sent to customers that can be considered an offer or advertisement of the security unless the material is preceded or accompanied by a prospectus. Sales literature, advertising, and research reports fall into the category of items that are "offers" of the security and must be accompanied by a prospectus.A letter simply stating the fund's objectives is not promotional and does not have to be accompanied by a prospectus. This type of communication is specifically exempted from the prospectus requirement under SEC Rule 135A.
Which of the following is defined as sales literature? A E-mail distributed to 15 existing retail customers B Seminar text for a speech that will be delivered to 30 prospective retail clients C E-mail sent to 10 prospective retail clients D Prospecting letter sent to 5 sales leads
B. FINRA defines communications with the public as either: Correspondence: A communication made available to 25 or fewer existing or prospective retail clients Retail Communication: A communication made available to more than 25 existing or prospective retail clients Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA. A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience). Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective retail clients, scripted speeches delivered to more than 25 existing or prospective retail clients, password-protected websites
Regulation AC requires that research analysts at member firms MUST give a: I written certification on each published research report II written certification on each week's published research reports III must give a blanket certification to all appearances made each month IV must give a blanket certification to all appearances made each quarter A I and III B I and IV C II and III D II and IV
B. Regulation AC (Analyst Certification) requires research analysts to certify each published research report; and to make a quarterly certification covering all public appearances made during that quarter. The certification basically states that the analyst gave his or her honest view at that time; and that the analyst's compensation was not tied to the recommendation or views expressed. If an analyst fails to make the required certification, FINRA must be notified; and for the next 120 days, any research reports authored by that analyst must include the disclosure that the analyst did not provide the required certification.
Which of the following would be considered to be a "retail communication"? A Direct mailing sent to 15 existing retail clients B Password-protected website maintained by a broker-dealer C Institutional communication D Correspondence to an individual client
B. FINRA defines communications with the public as either: Correspondence: A communication made available to 25 or fewer existing or prospective retail clients Retail Communication: A communication made available to more than 25 existing or prospective retail clients Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA. A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience). A direct mailing to more than 25 existing or retail clients is a retail communication that is sales literature since it goes to a specific audience. A password protected website is a retail communication that is sales literature, since it is seen by a specific audience. An internet bulletin board is a retail communication that is advertising, since it is seen by the general public. Institutional communications are excluded from the "retail communications" definition, approval and filing rules because institutions are sophisticated investors who know what they are doing.
The minimum asset size threshold for an investor to be considered an "institutional client" for purposes of the FINRA communications rules is: A $25 million B $50 million C $75 million D $100 million
B. FINRA distinguishes between "retail communications" and "institutional communications" because "institutional communications" go to sophisticated investors who can take care of themselves. While retail communications must be approved by a principal prior to use, institutional communications are subject to "post use review and approval" by a principal. An institutional communication is defined as one that is distributed to an institutional investor - a bank, savings and loan, insurance company, registered investment company, registered investment adviser, employee benefit plan with at least 100 participants, government entity or a person with at least $50 million of assets for investment.
Which disclosure is optional when advertising a CMO Tranche? A Coupon B Minimum Denomination C Final Maturity Date D Average Life Of Investment
B. FINRA sets minimum disclosure requirements when advertising a CMO tranche. It requires disclosure of the: Coupon Anticipated Yield and Average Life Specific Tranche ID - Number and Class Final Maturity Date Underlying Collateral In addition, FINRA requires the following statement: "The yield and average life shown above consider prepayment assumptions that may or may not be met. Changes in payments may significantly affect yield and average life. Please contact your representative for information on CMOs and how they react to different market conditions." Then FINRA states that the following disclosures are optional: Minimum Denomination Rating Agency / Government Backing Income Payment Structure Generic Description of Tranche (e.g., PAC, Companion) Yield to maturity of CMOs Offered at Par
Under FINRA rules, a barrier must be put in place between a member firm's: A compliance department and its investment banking department B institutional communications distribution list and its retail communications distribution list C institutional trading desk and its retail trading desk D investment banking department and its mergers and acquisitions department
B. If an institutional communication is distributed to any number of retail clients, it is considered to be a "retail communication." This means that instead of being subject to "post use review and approval," it must be approved by a principal prior to distribution. FINRA states that each member firm must have policies and procedures in place "reasonably designed to prevent institutional communications from being forwarded to retail investors." Regarding information barriers for purposes of stopping "insider trading," the firm's investment banking department must be walled off from the other departments of the firm, such as research and trading; and research must be walled off from investment banking and trading. Compliance oversees all firm activities and is not walled off from anything!
A research analyst who has a buy recommendation on a stock also has a personal holding in that company. The research analyst would be permitted to sell that personal holding: A under no circumstances B only if hardship is shown C only if the transaction is effected on an up-bid D without restriction
B. Research analysts cannot trade a stock personally counter to their recommendation. If a research analyst has a buy recommendation, the research analyst could buy that stock (only after the research report is widely disseminated and as long as the member firm does not prohibit this), but cannot be the one selling the stock. The issue here is the following scenario: A research analyst has a large personal holding and wants to sell it at a profit, so why not issue a favorable research report (so the price goes up) and then sell the stock? The only time when a research analyst with a buy recommendation on a stock can sell a personal holding in that same security is if the analyst can show hardship. Again, such a sale would be subject to the firm's policies and procedures on this.
A registered representative at a FINRA member firm is giving a talk about investing attended by 13 customers and 4 prospects. The speech includes recommendations of specific securities. Which statement is TRUE? A The speech can be given without prior approval B The speech content must be approved by the Supervisory Analyst C The speech content must be approved by FINRA D The speech content must be approved by the Branch Manager
B. A "research report" is defined as a client communication that analyzes individual companies that provides information reasonably sufficient upon which to base an investment decision and is distributed to at least 15 persons. In this case, there are 17 attendees, so the speech falls under the definition.
A registered representative buys call options on a stock with the advance knowledge of a large buy order being placed by an institution. This is known as: A Free Riding B Front Running C Interpositioning D Backing Away
B. A registered representative buying call options in advance of placing a large buy order for a customer is "front running" the trade, hoping to make a profit from a rise in the stock's price due to the influence of the large purchase. This is a prohibited practice.
A FINRA member firm has placed a "Buy" recommendation on ABCD stock. In his presentation to customers, a registered representative wishes to use a third party research report that recommends the stock as well. The representative believes that showing that other firms are bullish on the stock will make the customers more at ease with this recommendation. Which statement is TRUE about the use of the third party research report? A Representatives are prohibited from using third party research reports in presentations to customers B The use of a third party research report requires prior approval of the supervisory analyst of the member firm C The use of a third party research report requires prior approval of FINRA D The use of a third party research report is permitted without restriction since it is independently prepared
B. Any research report issued by a FINRA member firm must be approved in writing by a Supervisory Analyst. This is true even if the firm "buys" that research report from an outside vendor (so-called "third party" research). Also note that if the research report were distributed to more than 25 existing or prospective clients, it is also a "retail communication" that requires prior principal approval.
Which time(s) must be recorded on unexecuted order tickets? I Time of order receipt II Time of order execution III Time of order cancellation, if canceled A I only B I and III C II and III D I, II, III
B. The time of execution is not recorded on an "unexecuted order ticket" because there was no fill. The time of order receipt must be recorded and if the order is canceled, the time of order cancellation must be on the ticket.
A registered representative is prospecting customers for a mutual fund that is sponsored by his firm. Which of the following information items mailed to customers MUST be accompanied by a prospectus? I Sales literature II Research Report III Letter stating the fund's objective(s) IV Fund Annual Report A I and II B III and IV C I, II, IV D I, II, III, IV
C. Because mutual funds are "prospectus offerings," nothing can be sent to customers that can be considered an offer or advertisement of the security unless the material is preceded or accompanied by a prospectus. Sales literature and research reports fall into the category of items that are "offers" of the security and must be accompanied by a prospectus. A copy of the fund annual report sent to anyone is also considered to be an "offer" of the fund since it contains fund performance data and must be accompanied by a prospectus. A letter simply stating the fund's objectives is not promotional and does not have to be accompanied by a prospectus. This type of communication is specifically exempted from the prospectus requirement under SEC Rule 135A.
A registered representative wishes to give a speech to a group of 35 potential retail clients. The speech is scripted and explains the differences between investing in growth versus value stocks. All of the following statements are true about giving the speech EXCEPT: A the content must be approved in writing by a compliance officer or principal prior to giving the speech B the speech must be truthful and in good taste C a copy of the speech must be pre-filed with FINRA D the speech must be informational, not promotional, in nature
C. FINRA defines communications with the public as either: Correspondence: A communication made available to 25 or fewer existing or prospective retail clients Retail Communication: A communication made available to more than 25 existing or prospective retail clients Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA. A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience). Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective retail clients, scripted speeches delivered to more than 25 existing or prospective retail clients, password-protected websites. Since this speech will be delivered to 35 attendees, it falls under the "Retail Communication" definition, and within that broad definition, it is defined as "sales literature." All speeches must be truthful and in good taste; and the speech must be informational, not promotional, in nature. There is no requirement for the speech content to be pre-filed with FINRA, but a copy must be retained for 3 years for possible inspection by FINRA examiners.
An offer of IPO shares made to an officer of a publicly held company is considered to be spinning if the publicly held company is: A in the financial services industry B not a seasoned issuer C an investment banking client of the broker-dealer D followed by the research department of the broker-dealer
C. FINRA prohibits the "spinning" of IPO shares. This is a "quid pro quo" arrangement where a member firm gives officers of public companies IPO allocations in return for receiving underwriting business from that company (since the officers are in a position to direct that business to the member firm). An executive officer or director of a publicly held company cannot receive a new issue allocation if the company is currently an investment banking client of the member; if the member has received investment banking compensation from the company in the past 12 months; or if the member expects to be retained by the company to provide investment banking services to the company in the upcoming 3 months (which is the case in this question).
A client receives a $150 gift card from a broker-dealer for giving a testimonial about her highly positive experience with her registered representative. What is the broker-dealer NOT required to disclose if the testimonial is used in a retail communication? A The fact that the testimonial may not be representative of the experience of other customers B The fact that the maker of the testimonial was paid C Whether any guarantee of growth was made by the representative to induce the giving of the testimonial D The fact that the testimonial is no guarantee of future performance or success
C. The FINRA rule on testimonials used in communications states that: "Retail communications or correspondence providing any testimonial concerning the investment advice or investment performance of a member or its products must prominently disclose the following: The fact that the testimonial may not be representative of the experience of other customers. The fact that the testimonial is no guarantee of future performance or success. If more than $100 in value is paid for the testimonial, the fact that it is a paid testimonial."
Which of the following are defined as "immediate family" for purposes of FINRA Rule 5130 on IPO distributions? I Financially independent parent of broker-dealer employee II Financially independent spouse of broker-dealer employee III Financially independent uncle of broker-dealer employee IV Financially dependent uncle of broker-dealer employee A I and II B III only C I, II, IV D I, II, III, IV
C. "Immediate family" consists of parents, children, spouses and siblings, as well as any in-laws of these individuals, and anyone who is a financial dependent. Excluded from the definition are grandparents, grandchildren, uncles and aunts - unless they are financial dependents.
In an initial public offering, a member who acted as manager or co-manager CANNOT issue a research report on that company within how many days following the effective date? A 3 calendar days B 5 calendar days C 10 calendar days D 25 calendar days
C. A member, who acted as manager or co-manager of an initial public offering for an issuer, may not issue research reports regarding the issuer within 10 calendar days following the effective date of the offering.
A registered representative would like to increase his production by working from home at nights and on weekends. As part of this effort, the representative wants to use his home e-mail account to send his customers information and recommendations. This action is: A permitted as long as the representative uses his personal e-mail account B permitted with the prior permission of the branch manager C not permitted because the member firm has no way of auditing the representative's personal e-mail account D not permitted because the representative has not registered his personal e-mail account with the SEC
C. A registered representative working from home via e-mail presents a thorny issue for FINRA member firms, since all e-mails must be audited, given that the firm has implemented an electronic communications compliance program. If the representative were only to use his or her work e-mail account, and the firm implemented appropriate safeguards, this could be acceptable. However, this representative wants to use his personal e-mail account - which the member firm has no control over - and this would be prohibited.
Investment company advertising is prohibited from showing: A past performance B benchmark performance covering the preceding 1, 3, 5, and 10 years C performance projections D investment objective
C. All advertising is prohibited from including performance projections. Past performance may be shown in advertising, as can comparisons of past performance to a relevant benchmark.
Which of the following is a record that must be retained on file by a broker-dealer? A Prospectuses B Recommendations C Complaints D Solicitations
C. Broker-dealers are not required to retain, as a record, recommendations made to clients. Customer complaints, account statements, and advertising are all records that must be retained by broker-dealers.
Which statements are TRUE about a registered representative that wishes to promote him- or herself on the Internet? I Participation in an Internet Chat Room is defined as advertising II Participation in an Internet Chat Room is defined as a public appearance III Creation of a Website or Internet Bulletin Board posting is defined as advertising IV Creation of a Website or Internet Bulletin Board posting is defined as a public appearance A I and III B I and IV C II and III D II and IV
C. FINRA defines participation in an Internet Chat Room as a "Public Appearance," which is an unscripted spontaneous appearance. Public Appearances are excluded from the "Retail Communications" definition. Rather, they are only subject to the member firm's policies and procedures.Regarding a website prepared by an associated person or an internet bulletin board posting, these are defined as "retail communications" and within that broad category, they would be defined as advertising because they are seen by the general public. FINRA states that this is permitted (though, odds are, your firm will not allow you to do it). Again, approval of FINRA is not required. Rather, approval of the firm is required.
Which of the following time stamps are on an order ticket? I Time of order entry II Time of order execution, if executed III Time of order cancellation, if canceled IV Time of order confirmation A I and II only B III and IV only C I, II, III D I, II, III, IV
C. FINRA requires that all order tickets sent to an exchange be stamped with the time of: Order entry; Order execution; and Order cancellation, if canceled. There is no time stamp on the order ticket for the time of order confirmation. These time stamps are now recorded electronically.
A registered representative notes that the price of ABC stock has been falling rapidly, and calls all of his customers with ABC positions to encourage them to sell. On one of these calls, he reaches an answering machine. The registered representative leaves the following message: "ABC stock is plummeting. If I don't hear from you in one hour, I will sell out your position to protect you from further loss." This action is: A allowed, since the registered representative is attempting to protect the customer B prohibited, unless the registered representative has been given previous verbal discretionary authorization by the customer C prohibited, unless the registered representative has been given previous written discretionary authorization by the customer D allowed, only if the manager gives authorization in writing
C. For a registered representative to execute a trade in a customer account, written discretionary authorization from the customer is required. To execute a trade in a customer account without discretionary authority is an unethical practice.
A member firm prepares a piece of sales literature that compares 2 different mutual funds that have similar objectives. Comparisons of all of the following can be made in the sales literature EXCEPT: A management fees charged by the funds B past performance of the funds C projected earnings of the funds D liquidity of the fund's investment holdings
C. Mutual fund advertising and sales literature can show past performance, but are not permitted to make performance projections. This is a requirement of SEC Rule 156.
A customer opened an account with a member firm 5 years ago. Under FINRA rules, which records must the firm have retained for this entire time period? A Written customer complaints B Trade confirmations C Account statements D Order memoranda
C. Under SEC rules, customer account records (statements of account) must be retained for 6 years. Trade confirms and order tickets ("memoranda") must be retained for 3 years. Written customer complaints must be retained for 4 years.
A registered representative presents a seminar to a group of 35 prospective retail investors about investing in mutual funds. At the seminar, he makes recommendations of various funds, based on their objectives and performance. The seminar is defined by FINRA as: A correspondence B an internal memorandum C advertising D sales literature
D. FINRA defines communications with the public as either: Correspondence: A communication made available to 25 or fewer existing or prospective retail clients Retail Communication: A communication made available to more than 25 existing or prospective retail clients Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA. A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience). Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective retail clients, scripted speeches delivered to more than 25 existing or prospective retail clients, password-protected websites
A representative gives a seminar to investors, making a presentation about successful hedge fund strategies. It is attended by 10 retail clients and 20 institutional clients. FINRA defines this as: A an advertisement B a solicitation C a retail communication D correspondence
D. FINRA has 2 main categories of communications to retail clients: Correspondence: A communication to 25 or fewer existing or prospective retail clients Retail Communication: A communication to more than 25 existing or prospective retail clients Excluded from these definitions are Institutional Communications and Public Appearances. Correspondence, Institutional Communications, and Public Appearances are not subject to prior principal approval - rather, FINRA states that as long as the firm has appropriate supervisory procedures in place, they are subject to "post use review and approval." They are also not subject to FINRA filing rules. In contrast, retail communications must be approved by a principal prior to use and are subject to FINRA filing rules. Because this is a communication to 10 retail clients (the number of institutional clients is irrelevant), this is defined as "correspondence."
Which statement is FALSE about social media postings by clients about the quality of services provided by associated persons and member firms? A Social media posts that are independently prepared and posted by clients do not fall under the FINRA communications rules B Social media posts that are created by the member firm and then submitted to a client for posting do fall under the FINRA communications rules C Social media posts created by a client that are reviewed or edited by an associated person or member firm do fall under the FINRA communication rules D Social media posts are treated by FINRA as a public appearance and are only subject to the member firm's internal policies and procedures
D. FINRA states that as a general matter, 3rd party posts by customers or anyone else on social media sites established by the firm or its personnel do not fall under its communications rules. The reason why is because the member firm or its personnel had nothing to do with creating or shaping the content of the post. However, FINRA then goes on to state that if the firm or its personnel is involved in creating or shaping the content (FINRA calls this "entanglement"), then the post comes under FINRA's communications rules. If such a posting will be seen by the general public, it is defined as a "retail communication" that must be preapproved by a principal and that can be required to be filed with FINRA. If such a posting will be seen by 25 or fewer existing or prospective clients, it is defined as "correspondence" and is only subject to "post use review and approval" by a principal.
Which statement is TRUE about a seminar given by a registered representative about mutual funds, collateralized mortgage obligations or direct participation programs? A The seminar must be recorded and the recording must be retained by the member firm B The attendees must be pre-screened for suitability of any investments recommended at the seminar C The representative giving the seminar must have an unblemished BrokerCheck report D Any materials given to participants must be filed with FINRA no later than 10 business days after first use
D. FINRA's general rule on filing of retail communications is that for a member firm's first year of operations, all retail communications must be filed 10 business days in advance of use. Thereafter, no filing is required, but the member firm is subject to spot check. However, there are exceptions to the general rule. Retail communications that must ALWAYS be filed 10 business days in ADVANCE of first use are: Options retail communications; and Mutual fund retail communications with member-prepared performance rankings. (Evidently FINRA ran into problems with these, so it wants these pre-filed at all times.) Retail communications that must ALWAYS be filed 10 business days AFTER first use are: All other mutual fund retail communications; CMO retail communications; and DPP retail communications. (The Investment Company Act of 1940 requires an SRO to get copies of investment company advertising; and the FINRA department that gets these also handles CMO and DPP ads, so they all are grouped under the same rule.) There is no requirement that the seminar be recorded; there is no requirement to pre-screen attendees; and there is no requirement that the representative giving the seminars have an unblemished BrokerCheck report (though this would be nice!).
The research department of a brokerage firm has prepared a buy recommendation for the common shares of a company. Which of the following is NOT required to be disclosed in the report? A That the firm makes a market in that company's shares B That the firm was a manager or co-manager in an equity underwriting of that company's securities within the past 12 months C That the firm received compensation from investment banking services rendered to that issuer within the past 12 months D That the firm recommends the purchase of a mutual fund which holds that issuer's equity securities
D. If a recommendation is made, the brokerage firm must disclose if it: has managed or co-managed any equity securities offering of that issuer within the past 12 months; has received compensation from investment banking services from that issuer in the past 12 months; expects to receive or intends to seek investment banking compensation from that issuer in the next 3 months; is an investment banking services client of the firm; or is a market maker in the issuer's stock. Also, the brokerage firm must disclose if it or its affiliates own(s) the issuer's securities (including options). Because the firm doesn't decide which securities are purchased in a mutual fund, this is not required to be disclosed.
A widely-followed research analyst is going to issue a "Buy" recommendation on a company. Prior to the release of the recommendation, the analyst and immediate family can: A buy the stock without restriction B buy the stock only if the purchase conforms to their normal investment profile C buy the stock only if the company is exchange listed D not buy the stock
D. Member firms must have policies and procedures in place to stop research analysts and their immediate family from "front running" their "about-to-be-released" research reports. In essence, if the research analyst or immediate family were to take a position in the stock prior to the release of the research report in an attempt to profit from a subsequent price move, they become "insiders" who have violated the insider trading rules. Once a research report has been widely distributed, the analyst who wrote the report and immediate family can buy that stock, subject to any restrictions on this placed by the employing member firm.
How many years must customer account records be retained by a member firm? A 3 years from account opening B 3 years from account closing C 6 years from account opening D 6 years from account closing
D. Under SEC rules, customer account records (statements of account) must be retained for 6 years. If a customer closes an account, the records must be retained for a 6-year time window following account closing. This is the best description of the recordkeeping requirement.
