Regulations: FINRA Rules
Advertising Content - Testimonials
"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."
FINRA limits gifts related to one's employment in the securities business, either given or received, to
$100 in value per person per year.
Obtaining Proper Signatures-
A customer's signature cannot be forged.
Research Department Conflicts of Interest 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 member firm research analyst is prohibited from trading the stock or options of the company that is the subject of a research report written by that analyst until the report is widely distributed. Only if hardship is shown
Research Report Issuance Restrictions
A member may not issue research reports regarding an issuer for which the member acted as manager or co-manager of an initial public offering within 10 calendar days following the effective date of the offering.
Public Appearance- 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.
A spontaneous, unscripted, live presentation to potential investors.
FINRA 5% Policy- The FINRA 5% Policy requires that consideration be given to which of the following when determining mark-ups and commissions?
Type of security involved; Availability of the security; Dollar amount of the transaction; Level of service provided.
Private Placement Offering Review- A registered representative of a member firm markets private placements to wealthy accredited investors. Before the member firm can market these private placement securities, it MUST conduct a reasonable investigation concerning the: I issuer and its management II business prospects of the issuer III assets held by the issuer IV claims being made
All of them
Prohibited Practices - Examples- Which of the following practices are prohibited under FINRA rules? I Trading mutual fund shares II Selling dividends III Making blanket recommendations of low price speculative stocks IV Recommending purchases beyond a customer's financial capacity
All of them
Required Records
All records created by broker-dealers must be retained so they can be inspected by FINRA & Customer complaints. Recommendations and solicitations made are not required to be retained as a record;
Approval Requirement - Speeches / Scripts A registered representative gives a speech to 30 retail clients about investing in mutual funds, and shows a chart that compares the growth of the fund to the Standard and Poor's 500 average. This action is:
Allowed as long as the speech content is approved by the firm's compliance officer or principal
Orders Requiring POA: Under FINRA rules, which of the following accounts would be considered to be "discretionary"?
An account where the broker has the power to decide when and what to trade without specific customer authorization
Institutional Communications-
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.
FINRA Filing Rules Which statement is TRUE about a seminar given by a registered representative about mutual funds, collateralized mortgage obligations or direct participation programs?
Any materials given to participants must be filed with FINRA no later than 10 business days after first use
Third Party Research Reports 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
Any research report distributed by a member firm must be approved by a Supervisory Analyst. D
Reason for Arbitration
Arbitration is preferred over litigation for settling disputes because it is cheaper and faster.
Composition of Arbitration Panels
Arbitration panels consist of people from the securities industry and the general public. There is no requirement for a person to be an attorney to be an arbitrator - the main requirement is that each arbitrator must be "disinterested."
Records Kept for 3 Years
As a general rule, FINRA requires that all records be retained for 3 years.
Hotline to CRD / BrokerCheck If a customer wishes to find out about a registered representative's disciplinary history, this information is:
Available from the Central Registration Depository on the BrokerCheck website
Buying IPOs - Permitted Purchasers A registered representative is approached by the president of an investment club to buy an IPO being offered by the representative's firm. Which statement is TRUE? A The investment club is a restricted purchaser and cannot buy the IPO B The investment club is not a restricted purchaser and may buy the IPO C The investment club is only permitted to buy the issue if it buys an insubstantial amount D The investment club is only permitted to buy the issue if its members certify that they are not restricted Review
B
FINRA's Rules on Borrowing and Lending Money
RR's are prohibited unless the customer is a bank, spouse, "significant other" or family member, but this is not the case here.
Code of Procedure Under the FINRA Code of Procedure, after the first level of hearings in any complaint proceeding with the Hearing Panel, this decision may:
Be appealed to the National Adjudicatory Council
Alterations to Executed Order Ticket- The order ticket may only be altered if the
Branch Manager indicates his or her approval of the change in writing on the order ticket.
Annual Compliance Meeting-
Broker-Dealer firms are required by FINRA to conduct an annual meeting for all registered personnel.
Custody of Fully Paid Securities A brokerage firm is permitted to hold fully paid customer securities if the:
Brokerage firm segregates those positions from margin securities and places them in safekeeping
Buying IPOs - Prohibited Purchasers- All of the following fall under the definition of "immediate family" for purposes of FINRA Rule 5130 covering IPO allocations EXCEPT the: A spouse of an associated person B child of an associated person C grandparent of an associated person D individual who is financially dependent upon an associated person
C
Research Report Disclosures All of the following must be disclosed to a customer on a research report recommending the purchase of a specific security EXCEPT whether the firm: A Or its officers own that security B Or its officers own options or warrants on that security C Has been a manager or co-manager in an underwriting of any of the issuer's securities within the past 12 months D Has previously recommended this security to any of its customers
D
Accepting Cash 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
Cash payments from customers cannot be accepted personally by registered representatives. D
Communications Definitions Overview- A communication sent to fewer than 25 existing or prospective retail clients is defined as (a):
Correspondence- a communication of an individual nature to a customer, or potential customer - specifically a communication made available to 25 or fewer existing or prospective retail customers.
Research Report Approvals
FINRA requires that research reports either be written or approved by a Supervisory Analyst (a FINRA license designation). The research report does not have to be filed with FINRA
Charging for Clerical Services- Which of the following statements are TRUE regarding a customer's securities held in a margin account at a brokerage firm?
FINRA permits fair and reasonable charges to customers for clerical services such as safekeeping of securities; collection of dividends on street name stock, appraisals of securities, etc. However, customers cannot be charged for distributing proxies on street name shares, since the issuer pays the broker-dealer to do this
Social Media A registered representative has a social media account on a site established by the member firm. A very satisfied client of the registered representative wants to post a good review, giving the representative 5 stars. The client sends the proposed review to the registered representative, who edits it and sends it back to the client to post. Under FINRA rules, this is an example of:
Entanglement
Fidelity Bond Coverage
Every FINRA member firm is obligated to maintain insurance coverage, known as fidelity bond coverage, against employee theft and embezzlement.
Scope of FINRA Oversight
FINRA is the regulator for the Primary and Secondary markets Only thing it doesn't regulate is CBOE options trading floor.
Mandatory Arbitration A customer, who has previously signed an arbitration agreement, has a dispute with a member firm. Under FINRA rules, this will be handled by:
FINRA mandates the use of arbitration to settle all disputes that are "intra-industry" Arbitration
Advertising Content - CMOs
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 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
Electronic Communications - Use of FINRA Name 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
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. I and IV
Recommending Stock of Publicly Held Parent Company-
Firm policies typically prohibit such a recommendation, due to the conflict of interest inherent in such a recommendation.
Prohibited Practices - Identifying- A customer buys securities without making payment and then sells the same securities without showing the intent to settle the transaction. This is:
Free Riding. The "7 Deadly Sins" under FINRA rules include:Selling away; Backing away; Front running; Selling dividends; Breakpoint sales; Interpositioning; Free riding. Also prohibited are: Trades of excessive frequency in a customer account (churning); Trades beyond a customer's financial capacity; Unsuitable recommendations; Guaranteeing a customer account against loss; and Blanket recommendations of low price speculative stocks
Complaints- A registered representative receives a written complaint from a customer stating the commissions being charged in the account are too high. The registered representative should:
Refer the complaint to the Branch Manager
Approval Requirement - Application Which of the following would have to be reviewed by a principal? I Letters recommending securities to all clients of a registered representative II Complaint letters received from customers III Form letters mailed to all customers IV Form letters for internal use within a firm
I, II, and III
Borrowing / Lending Money Under FINRA rules, a registered representative:
May not borrow money from a customer, unless it's from an immediate family member.
Parking a License-
If a registered person leaves the industry, all licenses lapse after 2 years. A person cannot arrange to have a member firm hold his or her license during the period when he or she is not employed at a member firm.
Mutual Fund Prospectus Delivery A prospectus MUST accompany which of the following mailings to a customer?
If mutual fund sales literature or advertising is being sent to a customer, it must be accompanied, or preceded by a copy of the fund Prospectus. A research report written by the firm about a mutual fund that the firm sells
Mediation Alternative to Arbitration A client wants to settle a dispute with a representative, however the client does not want the decision to be binding if she disagrees with the outcome. In order to do this, the client should choose which procedure to settle the dispute?
Mediation
Use of FINRA Name
In a communication to clients, a member firm can say that it is a member of FINRA
Retail Communications- Which of the following would be considered to be 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 website maintained by a broker-dealer that provides daily market information
A golf pro at the country club where a registered representative is a member wants to refer prospective clients to the representative in exchange for a small fee. Which statement is TRUE?
It's Prohibited
-Proxy Rules Under FINRA rules, proxy materials:
Must be sent to the beneficial owner of that stock, even if the owner has instructed the member firm not to do so May be sent to the beneficial owner's designated investment adviser, if the owner has instructed the member firm to do so
Mutual Fund Advertising / Sales Literature Which of the following is (are) prohibited in mutual fund advertising? I Showing past performance II Showing projected performance III Showing past performance against a benchmark index
Mutual fund advertising and sales literature cannot show performance projections and cannot predict performance (this is true for all advertising in the securities industry). II only
Electronic Communications - Rules 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:
Note that because all communications must be supervised, electronic communications can only be sent from, or received by, a computer that is under the firm's supervision. Not permitted because the member firm has no way of auditing the representative's personal e-mail account
Misrepresentations A registered representative sends a letter to a customer that states that: "Since options trading is not for everyone, this creates an enormous profit opportunity for the select few who do trade options." This statement is: A permitted if it is accompanied by the latest Options Disclosure Document B permitted if the customer has previously traded options C a misrepresentation of the options trading market D truthful
Omissions or misrepresentations of material fact in a presentation to a customer are prohibited. C
Electronic Communications: Hyperlink to BrokerCheck Under FINRA rules, a readily apparent reference to BrokerCheck and hyperlink to the BrokerCheck website is required:
On a member firm's initial webpage that is intended to be viewed by retail investors
The Regulatory Element component of the "Continuing Education" requirement must be completed:
On the registrant's 2nd anniversary of registration and every 3 years after the initial registration.
Order Ticket Time Stamps FINRA requires that all order tickets sent to a market venue be stamped with the time of:
Order entry; Order execution; Order cancellation, if canceled.
Non-Cash Compensations are:
Prohibited if it's more than $100
Buying IPOs - Spinning- In order to get "M&A" business from a company that is looking to make an acquisition in the next month, an investment banker offers a new issue allocation to an officer of that company who is in a position to direct that business to the broker-dealer. This is:
Prohibited under FINRA rules because this is "spinning"
Unsuitable / Unethical Recommendations 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:
Prohibited, unless the registered representative has been given previous written discretionary authorization by the customer
Internet Activities FINRA defines participation in an Internet Chat Room as a
Public Appearance
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
Buying IPOs - Restricted Offering Types- FINRA's IPO purchase restrictions that prohibit industry personnel from buying new issues in the primary market apply to:
Rule 5130 only applies to IPOs of common equity securities.
Anti-Reciprocal Rule Which of the following gifts is permitted to be accepted by a registered representative from a mutual fund sponsor
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." $50 gift cert.
Direct Participation Programs The sale of Direct Participation Programs is regulated by (the):
Securities Act of 1933 State Blue Sky Laws FINRA Rules
Completion of a Transaction- Before accepting a customer order to sell securities, the registered representative must inquire as to the location of the securities; and must determine that they will be delivered by:
Settlement Date
Guaranteeing / Sharing in Account- Which of the following are violations of FINRA rules?
Sharing in the profits and losses of a customer's account without contributing proportional capital Orally guaranteeing to buy back customer securities at a preset price
Failure to complete the Regulatory Element within the stated time period will result in a registered representative's:
Suspension
Advertising- A branch manager puts a billboard in the branch window that states: "Now is a great time to invest in stocks!"
TV, radio, newsprint, billboards, websites, internet bulletin boards
Alterations to Documents A registered representative recommends the purchase of a new issue security registered under the Securities Act of 1933 to a customer. Which statement(s) is (are) TRUE? I The customer may be sent a prospectus about the issue II The customer may be sent a prospectus that is "highlighted" by the registered representative to emphasize important information III The customer may be sent an abstract of the prospectus that summarizes important information
The Prospectus cannot be altered or "highlighted" in any way; it must be received by the customer in the same form as it is filed with the SEC. I Only
Research Report Creation by a Registered Representative
The SEC and the SROs define a research report as a client communication that meets ALL 3 of the following tests: The report analyzes individual securities or companies; The report provides information reasonably sufficient upon which to base an investment decision; The report is distributed to at least 15 persons.
5% Policy - Applicability The FINRA 5% Policy applies to which of the following?
To all exchange and OTC transactions (secondary market) except for municipal bond transactions that are covered by a separate MSRB "fair pricing" rule. It does not apply to new issue offerings - the primary market.
Buying IPOs - Qualifying Account- A customer wishes to open an account that will be used primarily to buy initial public offerings (IPOs). Which statement is TRUE regarding the proper procedure for prequalifying the account?
The customer must sign a representation letter that he or she is not restricted from buying IPOs
Compensation for a Registered Representative may only be provided by:
The brokerage firm for which the RR works, based on trading commissions, salary, or asset based fees. Not by customer
To take a second job, under FINRA rules, prior written approval must be obtained from:
The employer (Branch Manager)
RR's can borrow from banks as long as:
The loan is offered on the same terms and conditions as those that apply to the general public
Records Kept for 6 Years How many years must customer account records be retained by a member firm?
The major exceptions that must be know for the exam are: Written customer complaints: Retain for 4 years Customer account records (statements): Retain for 6 years after closing
Private Securities Transactions- A registered representative employed by ABC broker/dealer is good friends with an independent venture capitalist. The venture capitalist asks the registered representative to obtain investors for a private placement that he is forming. Which statement is TRUE?
The registered representative can direct customers to the private placement only with the prior written approval of his employer
A registered representative working at a member firm is currently engaged to be married. Once she is married, she will be taking her husband's name. Which statement is TRUE about this?
The registered representative's U4 filling must be amended promptly once her name has changed
Regulatory Authorities
The regulatory authorities for the securities markets and market participants are: -SEC -FINRA Authority that determines which securities are marginable: -Federal Reserve Board (FRB) Authority that writes rules for municipal market participants: -MSRB
A registered representative is invited by a very satisfied customer to that customer's ski house in Vail, Colorado during Christmas. Which statement is TRUE about the representative accepting this invitation?
The representative can only accept the invitation if he or she notifies the member firm and follows the firm's policies and procedures
Custody of Margin Securities A customer has marginable securities held in an account that has a debit balance at the brokerage firm. Which statements are TRUE?
The securities can be commingled The securities may be rehypothecated
Buying IPOs - Purchase Restrictions- Under FINRA Rule 5130 on IPO distributions, a member may sell shares of a new issue of common stock to a registered representative:
Under no circumstances
Once an individual has completed the SIE exam, he or she:
Will become licensed upon passing the appropriate representative qualification exam
Regulation AC- Regulation AC requires that research analysts at member firms MUST give a:
Written certification on each published research report Must give a blanket certification to all appearances made each quarter
A registered representative has spent 10 years working at his broker-dealer and has sold customers many mutual funds that pay trail commissions from 12b-1 fees. The registered representative is thinking about leaving his firm to do charitable work. He would like to collect the trail commissions on the funds after he terminates his employment from the firm. Is this possible?
Yes, if there is a written agreement between the member firm and the registered representative that is executed prior to termination
Distribution of Proxies- When an issuer wishes to distribute proxies to shareholders who have their shares held in margin accounts in street name, the distribution is performed by the:
broker-dealer at the issuer's expense
Retail / Institutional Communication Barrier Under FINRA rules, a barrier must be put in place between a member firm's:
institutional communications distribution list and its retail communications distribution list