Series 24 - Review

.Z on a trade report of a NASDAQ stock designates that the trade was reported: A. late and occurred during regular market hours B. erroneously and occurred during regular market hours C. late and occurred outside of regular market hours D. erroneously and occurred outside of regular market hours

The best answer is A. If a trade on NASDAQ that took place during regular market hours (9:30 AM - 4:00 PM ET) is reported "late" (later than the required 10 seconds after execution), then it is appended with the symbol .Z. If a trade on NASDAQ took place outside of regular market hours and was reported late, it is appended with the symbol .U.

An OTC trader at a large market making firm routinely telephones his counterparts at smaller firms to inquire as to why they don't route their non-NMS orders to his firm, stating that: "With our large institutional client base orders directed to our firm will result in quick, profitable executions for both of us. Furthermore, I'm sure you want to be included in some of our syndicate deals, which I can arrange if we begin to see order flow." These phone calls are an example of: A. front running B. harassment C. collusion D. Interpositioning

The best answer is B. "Routine" telephone calls of this nature are an attempt to induce smaller trading firms to preference their orders with this market maker. This is a form of harassment of the smaller trading firms - though one could also argue that is a good business practice for the market maker. Anyway, harassment is the best of the choices offered.

The required quarterly physical securities count must include all of the following EXCEPT: A. Securities in transit B. Securities in reclamation C. Securities in transfer D. Securities failed to receive

The best answer is B. The required quarterly "box" count must also include securities that the firm does not physically have, but which are under the firm's control. These include securities in transfer, securities in transit, securities sold subject to repurchase agreements, fails to receive and fails to deliver. The rule does not include securities in reclamation, which are mainly securities returned for technical corrections such as a missing signature guarantee.

The Customer Protection Rule (15c3-3) exempts certain broker dealers from its provisions. Under the K2-i exemption: A. fully disclosed broker-dealers that do not carry customer accounts are exempted B. broker-dealers that carry no margin accounts and effect all transactions through a Special Reserve Bank Account For Customers are exempted C. clearing broker-dealers that carry both cash and margin accounts are exempted D. broker-dealers that limit their business to the sale of registered investment company securities are exempted

The K2-i exemption provides that broker-dealers that carry no margin accounts and that transfer all customer monies through a Special Reserve Bank Account do not have to comply with the Customer Protection Rule requirements. The K2-ii exemption provides that fully disclosed broker-dealers are exempt from the requirements of the Rule, since all customer monies would be handled by the clearing firm.

Which of the following individuals MUST be registered with FINRA? A. variable annuity salesmen B. commodity salesmen C. floor traders on recognized stock exchanges D. government securities traders

The best answer is A. To sell variable annuity contracts (which are considered to be a non-exempt security by the SEC), not only must an individual be registered with the State Insurance Commission, but he must also be registered with FINRA through a broker-dealer. Persons who have passed the Series 6 (Investment Companies/Variable Annuities exam) or the Series 7 (General Securities) exam are licensed to sell these products. Commodities are not securities and are not regulated by FINRA. U.S. Governments are exempt securities, and traders of these securities are exempt from registration. Floor traders on recognized stock exchanges are registered through the exchanges. They have no involvement with FINRA, which only regulates the over-the-counter market.

Which mutual fund transaction is acceptable? A. A FINRA member selling shares to another member at a discount to the Public Offering Price B. A FINRA member selling shares to a customer at a discount to the Public Offering Price C. A FINRA member selling to a non-member dealer at a discount to the Public Offering Price D. A FINRA member redeeming shares at the Public Offering Price

The best answer is A. A FINRA member can give discounts to other members on mutual fund purchases. Non-members are treated as customers and must pay the Public Offering Price. Thus, Choice A is acceptable, because a member can give a discount to another member. The real-world application of this is a mutual fund distributor (which is a broker-dealer) signing up broker-dealer firms into the fund's selling group. The selling group members get to buy the shares at a discount from POP, and then sell them at POP to their customers, earning the spread. Choice B is not acceptable because a customer must pay the Public Offering Price, and the calculation of this will vary based on the sales charge imposed on the purchase as given in the breakpoint schedule in the fund prospectus. Thus, the real rule is that a customer cannot be given a discount on a mutual fund purchase other than that shown in the prospectus. Choice C is not acceptable since a non-member is treated as the public and must also pay the Public Offering Price. Choice D is incorrect because redemptions are processed at the Net Asset Value (NAV), not at the POP - and a member cannot arrange for a customer to get more than NAV at redemption.

Under SEC Rule 15c2-11, if a member firm wants to piggyback onto another member's quote or an OTC issue, the member currently quoting the stock: A. must have published quotes in the subject security for 12 business days out of the preceding 30 calendar days B. cannot have had more than 10 consecutive business days without quotes in the subject issue during the preceding 30 calendar days C. must be registered as a NASDAQ market maker in that issue D. must ensure that the issuer is current in its SEC filings

The best answer is A. An exemption from filing Form 211 to register as a market maker in an OTC issue is given if an existing market maker in an OTC issue has met the "continuous quote rule" - that is, if it has quoted the stock in 12 business days out of the preceding 30 calendar days, with no more than 4 consecutive business days (not 10 consecutive business days) without a quote. Thus, there is a "proven" market for the stock (so noted by the word "active" showing on the quote screen for that stock), so any new potential market makers can begin to quote immediately without filing Form 211. This is called the "piggybacking exemption." Since this is an OTC issue, the stock would not be in NASDAQ, making Choice C false. Choice D is incorrect because an issuer can be delinquent in its SEC filings and still trade OTC.

An introducing broker-dealer operating under a $5,000 Net Capital requirement is permitted to: A. participate in an All or None underwriting as either a syndicate or selling group member B. effect up to 10 transactions for its own investment account in a calendar year C. participate in a Firm Commitment underwriting as either a syndicate or selling group member D. receive, but cannot hold, customer funds or securities

The best answer is A. An introducing broker-dealer operating under a $5,000 net capital requirement is permitted to participate in an All or None underwriting either as a Syndicate or Selling Group Member (because the underwriter takes no risk). A $5,000 broker-dealer cannot participate in a firm commitment underwriting in any capacity. It cannot effect any transactions for its own investment account and cannot receive, nor hold, customer funds or securities. In contrast, an introducing broker-dealer operating under a $50,000 net capital requirement is permitted to participate in an All or None underwriting either as a Syndicate or Selling Group Member (because the underwriter takes on no risk) and it can also participate in a Firm Commitment underwriting as a selling group member (but not as a syndicate member). It can effect up to 10 transactions for its own investment account per year and not have to increase its net capital and can receive, but cannot hold, customer funds or securities. A $250,000 general securities broker-dealer can pretty much do anything it wants!

Quotes for which of the following listed securities would be found on the Consolidated Quotations Service (CQS)? A. Rights on an NYSE-listed issue B. NASDAQ issues C. Options D. Non-Convertible Mortgage Bonds

The best answer is A. Consolidated Quotations Service went "live" in 1979 to put competition on the NYSE. It shows quotes for NYSE-listed equity issues from all sources, including regional exchanges that dual list the stock and OTC Third Market Makers. Thus, on one screen, one would see all quotes for that security and would go to the market posting the best quote rather than going to the NYSE itself (a novel concept at the time). It also includes quotes for AMEX-listed issues (AMEX was much bigger back then). The NYSE not only trades common and preferred stocks, it also trades rights and warrants on its listed issues. When CQS was started, NASDAQ was in its infancy (it started in 1971) and was the "OTC" market trading stocks that did not meet exchange listing standards. It was not included in CQS. Finally, listed options trading did not start until 1973, and quotes for listed options also were not included in CQS.

FINRA Rule 5130, covering IPO distributions, applies to: A. Common stock IPOs B. Preferred stock IPOs C. Convertible bond IPOs D. All of the above

The best answer is A. FINRA Rule 5130 that prohibits sales of IPOs to industry "insiders" applies to common equity issues only. Common stock valuation is an "art form" and the intent of the rule is to stop underwriters from "underpricing" issues and then funneling them to "friends and family" instead of selling them to the general public. On the other hand, the pricing of fixed income securities (preferred stocks and bonds, whether convertible or not) is simply based on discounted cash flow based on current market interest rates. Since these are securities that will not be intentionally underpriced, anyone can buy them at the IPO.

Which recommendation is NOT a "red-flag" that is usually considered unsuitable for seniors? A. REITs B. Structured products C. Mortgaging a primary residence to obtain investment funds D. Variable annuities

The best answer is A. FINRA has stated that it does not prohibit any particular recommendation to a senior citizen as long as it is suitable. However, certain types of recommendations are "red-flags" - meaning that the firm must be able to strongly defend such a recommendation to a senior citizen. Included on the list of "no-no's" are recommendations to seniors to: purchase variable annuities, equity indexed annuities, and real estate limited partnerships; purchase variable life settlements; purchase complex structured products such as CDOs (Collateralized Debt Obligations); mortgage their residence to obtain funds for investment purposes; use retirement savings, including early withdrawals from IRAs, to invest in high-risk investments. Many REITs are conservatively managed to produce a stable income stream and are often suitable for senior investors.

On Wednesday, March 18th, a customer buys 5M of U.S. Government 4% bonds, maturing on 1/1/2046 at 99. The interest payment dates are January 1 and July 1. How many days of accrued interest are payable from buyer to seller? (It is not a leap year.) A. 77 B. 78 C. 84 D. 85

The best answer is A. Interest on government bonds accrues on an actual day month/actual day year basis. Interest accrues up to, but not including, settlement date. Since the bonds were bought on March 18th, the trade settles on March 19th - remember governments settle regular way on the next business day. Therefore, interest accrues through the 18th of March. The previous interest payment date was January 1st, so the accrued interest payable is: January 31 days February 28 days March 18 days = 77 days

Under NASDAQ rules, short interest reports must be filed by the: A. 2nd business day after the reporting settlement date B. 3rd business day after the reporting settlement date C. 5th business day after the reporting settlement date D. 10th business day after the reporting settlement date

The best answer is A. NASDAQ requires the reporting of outstanding short positions maintained at member firms as of the 15th and last business day of each month. NASDAQ aggregates the information and reports it as the outstanding short interest. The report must be filed by the member on the 2nd business day after the reporting settlement date.

Under FINRA rules, the presumption that contemporaneous cost is the basis for computing mark-ups or mark-downs on debt securities purchased from, or sold to, customers in principal transaction can be overcome if there is a(n): A. change in interest rates subsequent to the dealer's contemporaneous transaction to degree that such change would reasonably cause a change in securities pricing. B. isolated transaction in similar securities with institutional accounts with which the dealer effects transactions in similar securities C. inventory position in the security held by the dealer that has been marked to market using the last reported trade as of the preceding trading session close D. pre-existing agreement with the customer stipulating the price to be used as the basis for the calculation of the mark-up or mark-down

The best answer is A. The FINRA 5% Policy (Fairness of Commissions and Mark-Ups) applies to equity and debt securities (with the exception of municipal securities, which are covered by a similar MSRB rule). Regarding debt securities, the mark-up or mark-down is calculated using the prevailing market price, which for debt securities is contemporaneous purchases or sales. The dealer can use a different price as the basis for the calculation only if: 1. Interest rates have changed after the most recent contemporaneous purchase or sale, to the extent where they would be expected to change debt securities prices; 2. The credit quality of the issue has changed after the most recent contemporaneous purchase or sale, to the extent where this would be expected to change the security's price; or 3. News was issued that had an effect on the perceived value of the debt changed after the most recent contemporaneous purchase or sale.

A trade between two NASDAQ market makers executed at 5:00 PM ET must be reported through TRF: A within 10 seconds of execution B on T+1 C on T+1 "as/of" D on Form T

The best answer is A. The following schedule summarizes the reporting rules into ACT/TRF (Trade Reporting Facility) for both regular and "after hours" trading: Time of Trade Reporting Designation Midnight-8am 8:00-8:15AM "T" 8am - 9:30 10 seconds "T" 9:30-4:00 10 seconds None 4:00-8:00 10 seconds "T" 8:00-Midnight 8:00-8:15 AM (next biz day) "as/of" Trades not reported through ACT as required above, for whatever reason, must be reported promptly to the Market Regulation Department on Form T. The usual reason firms must report is because of equipment malfunction.

What is the "ABC" test? A. The acronym for the tests that determine whether a person defined as an Investment Adviser B. The acronym for the tests that determine whether a person defined as an associated person C. The acronym for the tests that determine whether a person is defined as a broker-dealer D. The acronym for the tests that determine whether a person is defined as a securities exchange

The best answer is A. Under the Investment Advisers Act of 1940, anyone who gives advice about investing in securities for a fee is defined as an Investment Adviser, unless that person is excluded from the definition. The SEC then came out with a "3 prong test" to determine if someone's activities make than person an investment adviser: Test 1: Advice about securities - is that person giving advice about investing in securities? Giving advice about things like real estate or commodities does not count. Test 2: In the Business - is that person in the business of rendering advice about securities - is it a regular thing that this person does? Test 3: Is the person Compensated - giving advice for free does not count - the person must be compensated for giving advice. This is informally called the "ABC" test.

8K report filings are made by registered: A. domestic securities issuers B. investment companies C. broker-dealers D. foreign ADR issuers

The best answer is A. 8K reports (special report of significant events such as declaration of bankruptcy, declaration of a merger or divestiture, changes in the composition of the Board of Directors) must be filed by domestic issuers of registered securities for any material change in the status of the issuer - within 4 business days of the change. Investment companies, broker-dealers and foreign issuers of ADRs are not required to file 8K reports.

A registered representative is exiting a firm and that firm is the broker-dealer of record on a variable insurance product held directly at the issuer. The firm will not be providing the services that the registered representative was performing on the directly-held accounts. The broker-dealer wants to change the BD of record to a firm that is willing to provide services to the accounts. Which statement is TRUE? A. This is allowed with a negative response letter B. This is allowed, but only with a positive response letter C. This is allowed only with the consent of the issuer D. This is not allowed

The best answer is A. As a general rule, if a customer wishes to have an account transferred to another firm, the customer must give "positive consent" to the account transfer by signing a "TIF" - Transfer Initiation Form- which starts the ACATS (Automated Customer Account Transfer System) procedure. However, FINRA gives 5 specific situations where "negative consent" letters can be used to transfer customer accounts in bulk. The "idea" behind the use of the negative consent letter is that if the account is not transferred, it would be abandoned and the customer would be left "high and dry." Negative consent letters can be used to transfer customer accounts in the following situations: The member is experiencing financial or operational difficulties (so the accounts are being transferred in bulk to another firm that is not about to "blow-up"); The introducing firm is no longer in business; The member firm is being acquired by another firm; An introducing firm is changing its clearing firm; A networking arrangement with a financial institution is being changed. In these cases, all the customers can get a letter stating that their account is being moved to another broker-dealer unless they object (this is a negative consent). FINRA then was asked for interpretative guidance on the situation where a registered representative assigned to a customer's directly held mutual fund or variable insurance product is "no longer available to provide services to the account and the member firm currently named as BD of record no longer intends to provide these services." In this case, because the customers' registered representative is no longer available to service the customers' directly held accounts and the member does not intend to continue to service such accounts, then this causes the potential "abandonment" of the accounts. FINRA states that this is a compelling concern and that a negative consent letter can be used in this instance.

A FINRA member is OBLIGATED to accept which of the following orders for a NASDAQ security? A. Market B. Marketable limit C. Limit stop D. All of the above

The best answer is A. FINRA members are only obligated to accept market orders from customers. They can accept limit orders, subject to the execution restrictions of the limit order protection rule - if the firm does not wish to comply with the limit order protection rule, it simply can refuse to accept limit orders from customers! Regarding stop orders, a trade must occur at the stop (trigger) price for the order to become executable. Some FINRA member firms accept these orders; others will not. Also note that while the NASDAQ System has the capability of handling market and limit orders, market makers and order entry firms are only obligated to take market orders under NASDAQ rules. They accept limit orders at their own discretion for entry in the System. Currently, the NASDAQ System does not accept stop orders; however, a member firm can accept a stop order at its own discretion placing it on its internal order book for execution if the market moves to or through the stop price.

A VWAP order is permitted to be reported "late" after the 4:30 PM time limit: A. if the trade was effected manually B. if efficient reporting is in place C. if the trade is reported electronically D. under no circumstance

The best answer is A. VWAP (Volume Weighted Average Price) trades are large trades for institutions where the member firm agrees to fill the order after the 4:00 PM market close at the VWAP that occurs during the period of time specified in the order. It is the member's problem to position its inventory account to fill the order at the end of the day. The trade is required to be reported by 4:30 PM, but because these are very detailed, manually prepared, trade reports, FINRA states that there can be "reasonable justification to excuse what may be deemed to be a pattern or practice of late trade reports."

The main risk of investing in EAGLEs or ASTROs ETNs is: A. credit risk B. liquidity risk C. tax audit risk D. interest rate risk

The best answer is A. "ASTROs" and "EAGLEs" are structured products created by offered by banks that gives a return tied to an equity index (e.g., there is a Nikkei 225 Index ASTRO) and these notes are issued with a 7 year maturity. One of the problems with structured products is that they are illiquid. This product solves this problem by listing the product on the AMEX as an "ETN" - an Exchange Traded Note. The big problem with any structured product is that there is no underlying portfolio. The bank is simply promising to pay back a return based on the equity index (7 years in the future) and a lot can go wrong in 7 years. Structured products and ETNs are subject to risk of default (ask the customers who bought Lehman Brothers structured products!). They are only as sound as the issuing bank, and this is the main concern for a purchaser.

A broker-dealer is short of personnel for the first hour that the NASDAQ system is open due to severe traffic conditions. To handle the trades during this period, the member directs the trades through a third party. Which statement is TRUE? A. This action is considered to be interpositioning and is a violation of FINRA rules B. This action is permitted if the third party broker confirms directly to the customers C. This action is permitted if the short staffed broker-dealer discloses to the customers the identity of the third party D. This action is permitted if it can be demonstrated that the trades are executed at the same price to the customer

The best answer is A. A shortage of personnel is not an acceptable reason for interpositioning another firm between a member and customers. This action is permitted only if it can be demonstrated the customers will get a better execution.

The subscription service that permits orders to be routed through a market maker's internal trading system is known as: A. ACES B. ACT C. CAT D. ADF

The best answer is A. ACES (Advanced Computerized Execution System), known as the ACES Pass-Through system, allows order entry firms to contract with a specified market maker to access that market maker's internal trading system for order placement and execution in the NASDAQ System. The market maker pays the order entry firm for the order flow, usually in soft dollars. The order entry firm no longer has to deal with the hassle of order entry and order maintenance in the System. The market maker gets a chunk of internalized order flow against which it can trade. ACT is the Automated Confirmation of Trade system, which collects and reports trades of all equities traded OTC. CAT is the Consolidated Audit Trail system for automated order entry and subsequent trade matching via ACT. The ADF is the Alternate Display Facility used by ECNs that choose not to display their quotes in the NASDAQ System.

If a broker-dealer sends monthly statements to customers, notification of free credit balances must be given: A. monthly B. quarterly C. semi-annually D. yearly

The best answer is A. Broker dealers carrying customer accounts must generate account statements at least quarterly, but if there is a transaction in a given month a statement must be generate for that month. On the statement, any amount of uninvested free credit (cash) balance must be disclosed.

All of the following are "flow-through" entities EXCEPT: A. C corporations B. S corporations C. LLCs D. MLPs

The best answer is A. C corporations are taxed on their net income at the corporate level. Any dividend distributions are made to shareholders out of this after-tax income. In contrast, S corporations, Limited Liability Corporations (LLCs) and Master Limited Partnerships (MLPs) are all "flow-through" entities that are not taxable. All gains and losses flow through to the owners and are only taxed at the owner level.

Which statement is FALSE about the Consolidated Quotations Service (CQS)? A. CQS shows trades of reported securities as they occur B. CQS show bid and ask quotes with sizes for FINRA members registered as CQS market makers C. CQS is open from 9:00 AM Eastern Time to 6:30 PM Eastern Time D. If a CQS market maker does not list quotes for 5 business days, its registration in that security is terminated

The best answer is A. CQS gives the bid and ask quotes of the market makers in NYSE and AMEX (NYSE American) listed securities with the size of the quote. Consolidated Quotations Service does not show trades as they occur. These are reported on the Consolidated Tape for all trades in exchange listed securities. CQS is open from 9:00 AM Eastern Time until 6:30 PM Eastern Time. If a CQS market maker does not enter quotes for 5 business days, its registration in that security and thus its ability to enter quotes is terminated.

Which of the following is a TRUE statement regarding the sale of a "hot" issue to a finder by the underwriter? A. The underwriter is categorically prohibited from placing hot stock with a finder B. The underwriter can sell an insubstantial amount if the finder has demonstrated a history of buying new issues C. The underwriter can sell to the finder, if the purchase amount and price have been filed with the Committee on Corporate Financing D. The underwriter can sell the stock to the finder without restriction under FINRA Rule 5130 on IPO distributions

The best answer is A. FINRA Rule 5130 prohibits the sale of IPOs to industry "insiders" - it makes no difference if the IPO is "hot" or not. A "finder" is a firm that finds a company that wishes to go public and introduces that firm to an underwriter. For this, the underwriter pays the finder a "finder's fee." Finders are deemed to be industry "insiders" and cannot be compensated with IPOs of common stock.

Another name for prearranged trading is: A. painting the tape B. interpositioning C. block positioning D. dual capacity

The best answer is A. Prearranged trading is a prohibited manipulative practice. Another name for this is "painting the tape" - since prearranged trades that are reported represent fictitious pricing and trading activity and are used to induce trading by others to move market prices up or down.

"Fairness opinions" that issuers obtain in connection with acquisitions express an opinion on the: A. financial fairness of the transaction B. legal fairness of the transaction C. accounting fairness of the transaction D. fairness and reasonableness of the transaction

The best answer is A. Fairness opinions are typically obtained by both parties in a corporate takeover. The intent of the opinion is to have an outside, independent advisor give an opinion of the fairness of the price of the deal. This gives the Board of Directors of each company that is a party to the deal a "fig leaf" against a shareholder suit that the price paid was too high (the acquiring company's shareholders believe that the company overpaid and wasted the shareholders' capital); or that the price paid was too low (the takeover target company's shareholders believe that the price is too low and that they are being underpaid for their shares).

Which statement is TRUE regarding the distribution of a "new" common stock issue? A. The member firm may hold part of the issue in its investment account if the underwriting is undersubscribed B. Employees of the member firm may buy part of the issue if they demonstrate a history of buying new issues and a small amount is purchased C. The immediate family of the employees of the member firm may buy part of the issue if they demonstrate a history of buying new issues and a small amount is purchased D. Portfolio managers for financial institutions may buy part of the issue for themselves if they demonstrate a history of buying new issues and a small amount is purchased

The best answer is A. IPOs (Initial Public Offerings) of equity securities cannot be purchased by FINRA member firms or by officers and employees (and their immediate family) of FINRA member firms. This prohibition extends to fiduciaries for FINRA member firms such as accountants and lawyers and to finders for FINRA member firms. (A finder is a person that "finds" a company that wants to go public and introduces that company to an underwriter for a finder's fee.) Also prohibited from purchasing new issues are portfolio managers for institutional investors that are buying the securities for themselves. These prohibitions are absolute - there is no "insubstantial" purchase amount test that makes it OK for these individuals to buy IPOs from underwriters. Note, however, that if an IPO is undersubscribed, the member firm can retain shares in its investment account - which is logical, since no one wants to buy those shares at the present time anyway.

The minimum net capital requirement for a broker-dealer that neither receives nor holds customer funds or securities is: A. $5,000 B. $25,000 C. $50,000 D. $250,000

The best answer is A. If a broker-dealer neither receives, nor holds, customer funds or securities, the minimum net capital requirement is only $5,000. If the broker-dealer receives, but does not hold, customer funds or securities, the minimum net capital requirement increases to $50,000. Finally, if the broker-dealer receives and holds customer funds and securities, the minimum net capital requirement increases to $250,000.

A registered representative has sold Class B shares of a proprietary mutual fund to his customers. The registered representative leaves the employ of that broker-dealer. Which statement is FALSE regarding payment of continuing commissions on the Class B share sales after the registered representative leaves that broker-dealer's employ? A. In order to receive continuing commissions, the individual must associate with another broker-dealer in a registered capacity B. In order to receive continuing commissions, there must be an executed contract between the representative and the employing broker-dealer prior to termination C. In order to receive continuing commissions, the representative who is leaving the firm cannot be subject to suspension or expulsion by FINRA D. In order to receive continuing commissions without being registered, the individual must be leaving the business due to retirement or disability

The best answer is A. If a registered individual leaves the employ of a broker-dealer, that person can no longer be paid commissions or trail fees. Under FINRA rules, commissions or trail fees can only be paid to currently registered persons. However, there is a major exception granted if an individual is leaving the business due to retirement or disability. In this case, the broker-dealer can pay continuing commissions to the RRR (Retired Registered Representative) as long as a valid contract is executed between the RRR and BD prior to retirement or leave due to disability. Thus, Choice A is false - the individual does not have to associate with another broker-dealer to receive trail fees, as long as he or she is retiring. FINRA also states that trail fees to RRRs cannot be paid if the individual is suspended or expelled. So basically, a registered person who retires can get an income stream from 12b-1 trail fees, as long as he or she is not a bad actor!

A customer has a combined long and short margin account. The long market value increases, while the short market value decreases. Which statement is TRUE? A. The equity in the account will increase B. The equity in the account will decrease C. The equity in the account will remain unchanged D. The change in equity cannot be determined without knowing the specific stock positions

The best answer is A. In a combined long and short account, the customer maintains both long positions and short positions. If the long market value increases, equity must increase. If the short market value decreases, equity in the short positions also increases. Thus, combined equity must increase.

How many days must elapse before the certificate of incumbency appointing a guardian over an incompetent becomes void, if no action is taken by the guardian? A. 60 days B. 90 days C. 180 days D. 360 days

The best answer is A. In most states, if a guardian does not take control over an account within 60 days, the court must appoint a successor guardian.

Which statement is TRUE regarding the NASDAQ Closing Cross? A. The latest time that a Market On Close (MOC) order is accepted is 3:55 PM B. The latest time that an Imbalance Only (IO) order is accepted is 3:55 PM C. Both MOC and IO orders are not accepted after 3:55 PM D. Both MOC and IO orders are accepted up until the 4:00 PM Closing Cross

The best answer is A. NASDAQ Closing Cross Procedures prohibit the placement of Market-On-Close (MOC) orders after 3:55 PM. (Note: NASDAQ extended the cutoff time from 3:50 PM to 3:55 PM at the end of 2018. If this is not reflected on the exam, Your only option is to choose the "old" 3:50 PM cutoff time.) On the other hand, Imbalance Only (IO) orders can be accepted up until the market close of 4:00 PM.

When an order is received from a customer, a written record of the order must be prepared: A. prior to the time the order is given to the trading department B. prior to the time that execution is confirmed by the trading desk C. prior to the time the confirmation is mailed to the customer D. prior to the time the transaction settles

The best answer is A. Order tickets must be written before they are presented to the trading desk. Verbal orders are not acceptable. The written ticket is needed to ensure that the order is filled as actually stated, and to have a physical record of the order and its execution.

An uninterrupted chain of dealer-to-dealer transactions in debt securities offered under Regulation S would be first permitted to be resold to an account for a U.S. person after what length of time elapses from the date the securities are first offered to the public? A. 40 days B. 60 days C. 6 months D. 1 year

The best answer is A. Regulation S offerings are offshore transactions that are given a "safe-harbor" from having to register the securities under the 1933 Act. Most Regulation S securities offerings are subject to a "distribution compliance period," during which distributors may not offer or sell the securities to, or for, the account of a U.S. person. This period runs for 40 days from the date the securities are first offered to the public, or the closing of the offering, whichever comes last. This 40-day distribution compliance period applies to unsold allotments, defined as securities acquired: from the issuer; or from a dealer in an uninterrupted chain of transactions between dealers; or in stabilization activities. Of course, during this 40-day period, the securities can be sold in offshore transactions to non-U.S. persons. This rule ensures that the securities being sold under the "safe harbor" rule are not immediately resold back into the U.S. Also note that if the securities are resold back into the U.S, they must either be registered with the SEC, or must be sold in compliance with a Rule 144A exemption.

An individual does not make a timely payment for a substantial purchase of securities in a cash account. The proper procedure is to: A. freeze the account for 90 days B. send the customer a written first warning C. extend credit to the customer by converting the cash account to a margin account through a journal entry D. sell out the account and prohibit the customer from making future transactions at the firm

The best answer is A. Regulation T requires that if a customer does not pay for a purchase by 2 business days past settlement in a cash account, the unpaid position must be liquidated and the account frozen for 90 days. During the "freeze," no purchases can be made unless the customer pays first; no sales can be made unless the firm has physical possession of the securities.

Sarbanes-Oxley did which of the following? A. It extended the statute of limitations for filing lawsuits alleging insider trading violations B. It expanded the definition of a statutory insider to include securities industry personnel C. It extended liability for insider trading violations to the tipper as well as the tippee D. It increased the informer bounty for successful insider trading prosecutions

The best answer is A. Sarbanes-Oxley (2002 legislation) was basically aimed at cleaning up "too cozy" relationships between outside auditors and their corporate clients. Another piece of "SarbOx" was to eliminate research analyst conflicts of interest. SarbOx also strengthened the "insider trading" rules by accelerating the filing of insider trading reports; lengthening the amount of time for filing insider trading lawsuits (from 3 years to 6 years) and steeply increasing insider trading penalties (both monetary and jail time). SarbOx did not expand the "insider" definition, nor did it expand insider training liability to both the tipper and tippee - these were part of the Insider Trading Act Amendments of 1988. This legislation also put in an informer bounty of 10% of the amount collected for insider trading convictions, and it was subsequently increased to anywhere from 10% to 30% under the Dodd-Frank Act of 2010.

Temporary subordinated loan agreements: A. are prohibited if a broker-dealer's AI/NC ratio exceeds 10:1 B. have a maximum life of 60 days C. must be filed in standard form, 15 business days in advance with FINRA and the SEC D. are permitted as long as the broker-dealer's capital is at least 110% of its statutory minimum

The best answer is A. Temporary subordinated loans are used by broker-dealers for short term temporary injections of additional capital needed for underwritings. To get one, the broker-dealer must be in good financial shape - its net capital cannot be below 120% of the minimum requirement and its ratio of AI to NC cannot be more than 10:1. Filing of standard form agreements is required 10 business days in advance of the loan's effective date with both FINRA and the SEC (note that if a non-standard agreement is used, FINRA requires 30 days' advance filing). The maximum life of temporary subordinated loans is 45 days (not 60 days) - which should be plenty of time to complete an underwriting. Finally, a member cannot obtain more than 3 subordinated loans per year.

Broker-dealers are required to maintain indemnification insurance based upon that firm's: A. Net Capital requirement B. Special Reserve Bank Account requirement C. SIPC assessment rate D. Aggregate payroll and number of employees

The best answer is A. The FINRA Conduct Rules require that a broker-dealer maintain fidelity bond coverage to protect against loss, theft or embezzlement by employees, as well as fraudulent trading. The minimum coverage is $100,000, with the dollar requirement increasing as the firm's net capital increases.

A member firm that is a market maker in ABCD stock has numerous accounts for which it acts as an investment adviser. Under the Investment Advisers Act of 1940, a transaction for one of these accounts in ABCD stock must be: A. effected on an agency basis B. effected on a principal basis C. executed by another independent market maker in that security D. executed by the dominant market maker in that security

The best answer is A. The Investment Advisers Act of 1940 requires that market makers, when effecting trades for accounts where it acts as investment adviser, can only effect those trades in an agency capacity. One must remember that this rule was written over 60 years ago, when the OTC market was in its infancy, and transaction prices of OTC securities were not readily available. Thus, trades in OTC issues that were done on a principal basis might be at prices that were not reasonable related to the current market. However, trades done on an agency basis require that a contra-broker be found to take the other side of the trade - thus a true market price is determined.

The Letter of Intent for a new issue underwriting is signed: A. prior to the filing of the registration statement with the SEC B. no later than the business day following the filing of the registration statement with the SEC C. just before the registration statement filed with the SEC becomes effective D. just after the registration statement filed with the SEC becomes effective

The best answer is A. The Letter of Intent for an underwriting is signed by the issuer and the underwriter prior to the filing of the registration statement with the SEC. The Letter spells out the type of security to be issued, proposed size of the issue, estimated price, spread and type of underwriting commitment. The letter is not binding and is subject to the definitive contract signed just prior to the effective date (when the Final POP and issue size are known) called the "Underwriting Agreement."

All of the following tests must be met to be included on the NASDAQ Capital Market list EXCEPT a minimum: A. of 400 shareholders B. of 1,000,000 shares outstanding C. $4 market price per share D. of 3 market makers in the issue

The best answer is A. The NASDAQ Capital Market has lower numerical listing standards than the NASDAQ Global Market. The requirements include a minimum number of shareholders (300), minimum number of outstanding shares (1,000,000), minimum share price ($4), and a minimum number of market makers in the issue (3). Please note, however, that there is no requirement for a minimum operating history period to be listed on the Capital Market. Remember, the Capital Market is NASDAQ's "breeding ground" for new small companies to list on NASDAQ.

Who is NOT empowered to enforce FINRA rules? A. NASDAQ Stock Market B. FINRA C. SEC D. Department of Justice

The best answer is A. The NASDAQ Stock Market does not enforce FINRA rules. It is an SRO (Self Regulatory Organization) under FINRA and SEC oversight. FINRA rules are enforced by both FINRA and the Securities and Exchange Commission. FINRA has its own enforcement division and can take action against a violator under the Code of Procedure. The SEC can bring an action in civil court or through an internal administrative hearing. If FINRA or the SEC believes that there was criminal activity, they refer the case to the Department of Justice.

The Securities and Exchange Commission will issue a deficiency letter if: A. a registration statement filed with the Commission is incomplete in any material respect B. a B/D application filed by a broker-dealer is incomplete in any material respect C. the broker-dealer shows deficient net capital in a FOCUS report filing D. a U4 application is filed by a person associated with a broker-dealer that is incomplete in any material respect

The best answer is A. The SEC issues deficiency letters if a registration statement is found to be incomplete during the review performed by the SEC during the 20 day cooling off period.

The Securities Investor Protection Corporation logo is required to appear on which written communication by a broker-dealer? A. Advertising B. Stationery C. Research Report D. Market Letter

The best answer is A. The SIPC logo is required on all broker-dealer advertising that is larger than 10 square inches. It is not required to be placed on firm stationery, research reports, or market letters (though the firm may choose to do so).

Which transaction in securities would NOT be considered an act of "interstate commerce" that would fall under the jurisdiction of the Securities Act of 1933? A. London, England to Frankfurt, Germany B. New York, New York to Brussels, Belgium C. Los Angeles, California to Mexico City, Mexico D. Rockville, Maryland to Washington, D.C.

The best answer is A. The Securities Acts apply to all interstate transactions in non-exempt securities. The Acts define "interstate" as a transaction between 2 states; between a state and a territory (such as Puerto Rico); between a state and the District of Columbia; and between a state and any foreign country. Basically, it says that once a securities transaction crosses a state line and winds up anywhere outside that state, it is an act of "interstate commerce." A transaction that occurs between London to Frankfurt does not involve any U.S. state, so the transaction would not be defined as "interstate commerce."

When a Series 24 Principal signs a New Account Form, this means that the: A. account has been accepted in accordance with the member firm's policies and procedures B. suitability of recommendations made to the client has been reviewed and approved by the principal C. customer's new account profile information, including income and net worth, has been reviewed by the principal D. customer's good character and reputation have been verified by the principal under the provisions of the Know Your Customer rule

The best answer is A. The Series 24 signature, required on the New Account Form, indicates that the account has been accepted by the firm in accordance with that firm's policies and procedures

Under FINRA rules, the minimum quotation display size for CQS market makers is: A. 1 x 1 B. 5 x 5 C. 10 x 10 D. 100 x 100

The best answer is A. The minimum quote size for both CQS and NASDAQ is 100 shares (1 x 1). Note that the minimum quote sizes for OTC issues are different, with a schedule based on stock price.

"The manager will credit each syndicate member based on sales of the issue allotted to the member and such credits extinguish liability against all securities that remain unsold by all members." The paragraph above would be found in a(n): A. Eastern syndicate agreement B. Western syndicate agreement C. Letter of Intent D. Underwriting agreement

The best answer is A. This bit of "legalese" states that liability in the syndicate account is erased based on all sales made by all syndicate members. Therefore liability is undivided between the syndicate members. The account is an Eastern or undivided syndicate. In a Western (divided) syndicate, sales by each member erase the liability of that member only.

In order to independently verify the identity of a corporation that wishes to open a brokerage account, which documentation is acceptable? A. Certified articles of incorporation B. Better Business Bureau membership certificate C. State-issued driver's license of each corporate officer D. Signed and sealed corporate resolution

The best answer is A. To verify the identity of a corporation that wishes to open an account, government issued identification is required to perform the match. This would take the form of the company's certified articles of incorporation (which are certified by the state); or a state issued business license. The Better Business Bureau is a private entity, so a membership certificate from the BBB cannot be used for the match. The driver's license of each corporate officer does not prove the existence of the corporation, so these are of no use either. The corporate resolution is a "boiler plate" document produced by the broker-dealer that is an attestation that the corporation authorized the opening of the account, the names of individuals authorized to trade the account are listed, and it is signed and sealed by the Secretary of the corporation. Again, this document does not prove corporate identity.

In a principal transaction, a market maker buys 500 shares of ABCD from a customer at $49.75, which includes a mark-down of $.25. Which statement is TRUE about reporting the transaction to ACT? A. 500 shares are reported at $50.00 B. 500 shares are reported at $49.75 C. 500 shares are reported at $49.50 D. No report is required for principal transactions

The best answer is A. Trades are reported to ACT excluding any mark-ups or mark-downs or any other charges. This trade at $49.75 included a mark-down of $.25, so the real price of the trade was $50.00. This is the price to report to ACT.

Trades of all of the following securities settle regular way EXCEPT: A. UIT B. REIT C. Commercial paper D. U.S. Government securities

The best answer is A. UITs (Unit Investment Trusts) are redeemable securities - they are non-negotiable and do not trade. The sponsor makes a market in trust units (but is not obligated to do so), so if a customer wishes to cash out early, the sponsor will buy back the trust unit at its current market value and remarket it to another investor. In contrast, REITs, commercial paper and U.S. Government securities are all negotiable and trade.

Which situation will trigger an "Emergency" report under Rule 17a-11? A. A broker-dealer engaged in a general securities business with $200,000 of net capital B. A broker-dealer with a ratio of aggregate indebtedness to net capital of 1,300% C. A broker-dealer with a debt-equity ratio of 75% for 60 days D. A broker-dealer with 110% of required net capital

The best answer is A. Under Rule 17a-11, immediate electronic notice must be given, and the firm must cease operations, if a broker-dealer's net capital falls below the minimum (Choice A, where the firm needs a minimum of $250,000 of capital and only has $200,000). Other emergency reporting events would occur when the firm's ratio of aggregate indebtedness to net capital exceeds 1,500% after the first year of business; or where the firm's ratio of subordinated loans to total capital exceeds 70% for over 90 days. Choice C, where the broker-dealer is at 75% for 60 days does not yet trigger the emergency filing. Choices B and D fall under the rule's "Early Warning" provisions. Under Early Warning, a broker dealer whose net capital is below 120% of the minimum or whose ratio of aggregate indebtedness to net capital exceeds 1,200% (12 to 1 AI/NC ratio) must give electronic notice within 24 hours and must file any reports requested by FINRA.

The maximum dollar penalty that can be imposed on a member firm under a Minor Rules Violation Plan is: A. $2,500 B. $10,000 C. $15,000 D. $25,000

The best answer is A. Under a Minor Rules Violation Plan, a member admits guilt to a minor offense in return for a "slap on the wrist." The maximum fine is $2,500. This is a much lighter penalty than suspension or expulsion and high potential fines that can be imposed for more serious offenses.

In an inactive competitive market, the prevailing market price for mark-up purposes is: A. contemporaneous sales to other dealers B. highest bid C. contemporaneous cost D. lowest ask

The best answer is A. Under the 5% Policy, if there is an inactive competitive market for a security, the prevailing market price to be used for mark-ups is contemporaneous sales to other dealers and for mark-downs is contemporaneous purchases from other dealers.

Under the Investment Advisers Act of 1940, which of the following person(s) is EXEMPT from registration with the SEC? A. An investment adviser whose only clients are insurance companies B. An investment adviser whose only clients are investment companies C. An investment adviser whose only clients are pension plans D. All of the above

The best answer is A. Under the Investment Advisers Act of 1940, anyone who gives advice about securities only to insurance companies is exempt from registration. This exemption does not extend to persons who give advice to investment companies or pension plans. (Remember that the primary intent of the Investment Advisers Act of 1940 was to register advisers to investment companies and limit their compensation.)

Under the FINRA Uniform Practice Code, upon the failure of the buyer to accept delivery of securities in accordance with the terms of the contract, the seller may: A. immediately sell out the securities without notice in the best available market B. sell out the securities only after giving the buyer written notice of the proposed sell out C. sell out the securities no earlier than 3 business days from settlement date D. not sell out the securities unless a written request is made to, and approval is received from, FINRA

The best answer is A. Under the Uniform Practice Code, if a buyer refuses to accept a delivery of securities from a seller on settlement, the seller has the right to immediately "sell out" the securities without prior notice given to the buyer. The buyer is responsible for any losses or expenses incurred by the seller in closing out the transaction. After completing the sell out, the seller must, as promptly as possible, but no later than the end of the business day of the "sell out," notify the broker-dealer for whose account and risk the securities were sold of the quantity sold and price received.

A registered representative wishes to mail sales literature along with a preliminary prospectus to his customers for an issue in registration. Which statement is TRUE? A. This action is prohibited under the Securities Act of 1933 B. The action is allowed without restriction C. The sales literature can accompany the prospectus if a copy has been filed with FINRA D. The sales literature can accompany the prospectus if a principal approves the sales literature in writing

The best answer is A. When an issue is "in registration," advertising is prohibited. Specifically excluded from the definition of advertising is a "preliminary prospectus." This may be sent to customers. However, any accompanying material would be considered to be an advertisement, which is prohibited under the Securities Act of 1933.

A registered representative places information about his firm and business on "Facebook." Under FINRA rules, this type of communication is considered to be: A. advertising B. sales literature C. public appearance D. correspondence

The best answer is A. While there is little or no control over who might view this communication, it is considered to be advertising since it is accessible to the general public. Thus, it requires prior principal approval. Note that if the representative restricted this communication to his or her designated contacts on the site, it would be considered to be sales literature.

A customer has a Non-Managed Fee Based Account at your firm. When the account was opened, the customer had a high level of trading activity. You are the principal reviewing account activity and you notice that trading frequency has decreased dramatically. Your main concern should be that the registered representative is: A. reverse churning B. interpositioning C. trail fee trolling D. trade shredding

The best answer is A. With more and more firms placing customers in fee based accounts, as opposed to per trade commission charge accounts, a new regulatory concern has emerged. Customers that are infrequent traders often wind up paying higher total dollar amounts for annual account maintenance in fixed fee accounts. This is called "reverse churning" (basically gathering fat fees on inactive accounts) and is considered to be overcharging - a FINRA violation.

An individual who is independent of the agent handling a tender offer is in possession of material non-public information relating to the offer, which has not yet been publicly announced. This individual: A. cannot buy any securities of the issuer until the offer is announced B. may buy the issuer's non-convertible debt securities before the offer is announced C. may buy the issuer's equity and equity related securities before the offer is announced D. can buy call options on the company's stock issued by the Options Clearing Corporation at any time

The best answer is B. Under SEC Rule 14e-3, during the life of a tender offer, an individual who receives material nonpublic information from the maker of the offer about the offer itself, or how it is progressing, is treated as an "insider." Therefore, that individual cannot buy the issuer's common stock, convertible securities or options on these securities until the news of the offer is broadly disseminated to the public. Note that the purchase of non-convertible debt is permitted, since the security not equity-related and its price would not be impacted by the news of the offer. Note that once the offer is publicly disclosed, then it is no longer treated as "inside" information, and that individual is permitted to buy that issuer's equity-related securities. Finally, note that if this individual worked for the agent, issuer or broker-dealer involved in communicating about the offer, the prohibition would apply throughout the entire life of the offer - not just until the offer was publicly announced.

Under the Uniform Practice Code, a firm that has a fail to receive can give written notice of "buy-in" to the contra-broker no later than 12 noon (contra-broker's time): A. 1 business day prior to the proposed buy in B. 2 business days prior to the proposed buy in C. 3 business days prior to the proposed buy in D. 7 business days prior to the proposed buy in

The best answer is B. Under the Uniform Practice Code, if a firm buys securities and does not receive them from the contra-broker on settlement, it can give a written notice of buy-in. The notice must be delivered by 12 noon, 2 business days prior to the proposed buy in.

Under FINRA rules covering "net basis" transactions, retail customers: A. are prohibited from engaging in "net basis" transactions; only institutional customers may do so B. must give written consent on an order-by-order basis prior to executing a transaction on a "net basis" C. are permitted to give either oral or written consent on an order-by-order basis prior to executing a transaction on a "net basis" D. are permitted to give either oral or written consent on an order-by-order basis or can sign a blanket "negative consent" letter

The best answer is B. "Net basis" transactions are most often demanded by sophisticated institutions. The member firm agrees to sell the institution a block of stock at a fixed price, with no additional mark-up or commission. The member firm is making only the difference between its bid (buy) price and its ask (sell price) in the transaction. Retail customers don't do net basis transactions very often, so FINRA demands that the customer give written order-by-order permission. In contrast, institutional customers are given simpler ways to give permission - they can give either oral or written approval on an order-by-order basis or they can be given a "negative consent" letter that clearly discloses to the institutional customer in writing the terms and conditions for handling the order(s) and provides the institutional customer with a meaningful opportunity to object to the execution of transactions on a net basis. If the customer does not object, it is assumed that the customer consents (in contrast, a "positive consent" letter requires a customer signature).

Which of the following must be monitored by a member firm? A. An existing client of a firm posts an unsolicited favorable review of her representative on a social media site B. A representative employed by the firm uses her personal phone to respond to text messages sent by clients C. An existing client of a firm uses a link on the firm's website to access a 3rd party website that lists the firm as one of the "best 100" companies to work for D. A representative employed by the firm uses her personal phone to talk with clients about their accounts

The best answer is B. All electronic messages (texts, IMs) sent by representatives to clients come under the FINRA definition of "correspondence." Correspondence is not required to be approved in advance by a principal, but is subject to "post use review and approval." The word "review" means that the member firm must capture these communications for review (usually done electronically) and those communications that appear to be inappropriate are then sent up the food chain to compliance for a manual review. In contrast, phone conversations are not required to be captured and recorded unless the firm is subject to the FINRA "Taping Rule." As far as social media postings, these are only required to be captured, reviewed and approved if the representative or firm is "entangled" with their preparation. Finally, links on a firm's website to unaffiliated 3rd parties are not subject to FINRA rules - but if the firm has involvement with the 3rd party, then they would be subject to FINRA rules on capture, review and approval.

Which claim MUST be handled through the FINRA Code of Arbitration? A. An associated person who makes a sexual harassment claim against a broker-dealer's CEO B. A member broker-dealer that claims that a syndicate manager unfairly allocated expenses under a syndicate agreement C. A customer who claims that an associated person effected unauthorized trades in her account D. A member firm that claims that a customer, to meet a margin call, pledged securities to which the customer did not have clear title

The best answer is B. Any disputes between member firms or members and clearing corporations must be handled by binding arbitration. Disputes between members and customers are handled by arbitration only if the customer agrees to do so (which is almost 100% the case, because pretty much every member firm requires a customer to sign an arbitration agreement at account opening - but the firm could choose not to require this). When a person applying for registration signs a U4 Form, he or she agrees to settle all disputes with his or her employer by arbitration, with the exception of discrimination, sexual harassment, and whistleblower claims. For these, the individual can sue!

At what ownership level must a report be made to the issuer of publicly held securities? A. 1% ownership of outstanding shares B. 5% ownership of outstanding shares C. 10% ownership of outstanding shares D. 20% ownership of outstanding shares

The best answer is B. Anyone who accumulates a 5% or greater holding in a publicly held company with the intention of exercising control must file a Form 13D within 10 business days. A copy goes to the issuer, the SEC and the exchange where the stock trades. Passive holders who cross the 5% threshold file a Form 13G, within 45 calendar days of calendar year end. In contrast, when anyone accumulates a 10% or greater holding, a Form 3 report that this person is now a statutory insider must be made to the SEC, and this is a public document.

The system that captures all market maker quotes, broker-dealer proprietary orders and customer orders is called: A. ACT B. CAT C. ACES D. TRF

The best answer is B. CAT (Consolidated Audit Trail) captures reports of all market maker quotes, all broker-dealer orders along with related customer account information, and all trade executions for NMS securities, listed options and OTC equities. ACT is the Automated Comparison of Transactions Service that reports trades and compares the trade execution details to the order details so that it matches and is "locked in" for automated settlement. ACES is a system used by small broker-dealers to route their orders to a specified large market maker for order entry, maintenance and execution in the NASDAQ System. The TRF is the Trade Reporting Facility, which is run by ACT. It is the subsystem for reporting of trades to the appropriate tape (Network A, Network, B, Network C).

Which statement is TRUE regarding settlement of NASDAQ System transactions? A. Trades are locked in and are matched/compared within 10 seconds of execution B. Trades are locked in and are matched/compared within 20 minutes of execution C. Trades are not locked in and comparisons must be exchanged the next business day D. Trades are not locked in and comparisons must be exchanged within 2 business days

The best answer is B. Executions of NASDAQ trades are electronically "locked-in," meaning that the trade has been compared and matched by NASDAQ's ACT Service (Automated Comparison of Transactions Service) before being reported to DTCC (Depository Trust and Clearing Corporation) for movement of the securities position and money on settlement. Executed locked-in trade reports of all NASDAQ trades are given immediately to each "side" of the trade through the ACT system, during ACT operating hours of 8 AM - 8 PM. If either side receives a trade report that it believes it a mismatch, it must be remedied promptly - that is, within 20 minutes.

Under FINRA rules, the requirement to provide an educational brochure to former customers who are solicited to move their accounts by a registered representative who has moved to another firm applies for a period of: A. 1 month after the representative begins employment with the new firm B. 3 months after the representative begins employment with the new firm C. 6 months after the representative begins employment with the new firm D. 12 months after the representative begins employment with the new firm

The best answer is B. FINRA Rule 2273 covers the situation where a representative moves from one broker-dealer to another, and solicits his or her former customers to move their accounts to the new firm. FINRA requires that if such a solicitation is made, an educational brochure must be provided to the former customer with any written solicitation, or if the solicitation is oral, the written brochure must be sent within 3 business days. The brochure details that: The representative may receive incentives from the new firm that create a conflict of interest; Some assets may not be transferable, so they would either have to be liquidated and the cash transferred; or if they remain at the old firm, they may be subject to higher account maintenance fees; Fee structures can be different at the 2 firms, and the new firm might have higher fees; and Products and services available at each firm can be different. This brochure must be delivered for the 3-month window following the representative's association with the new firm. Finally, the rule also applies if the former customer seeks to transfer assets to another firm without being individually contacted. Then the customer must get the brochure with the approved account transfer documentation.

All of the following actions by a FINRA member are prohibited under the Conduct Rules EXCEPT: A. The sale of mutual fund shares to a non-member at a discount to the public offering price B. The sale of a new issue of municipal bonds to a non-member bank at a discount to the public offering price C. The sale of part of a new issue being underwritten by the member to the issuer's employees at a discount to the public offering price D. The sale of a new issue that is "hot" to employees of FINRA member firms

The best answer is B. FINRA members can only give discounts on non-exempt new issue offerings to other members. Non-members are treated as regular customers who must pay the public offering price. FINRA has no jurisdiction over transactions in municipal securities (that belongs to the MSRB), it cannot set price policies for transactions in municipal bonds. Thus, a FINRA member cannot sell mutual fund shares (a non-exempt new issue) to a non-member at a discount to the public offering price (Choice A) and a new issue cannot be sold to a non-member issuer's employees at a discount to the public offering price (Choice C). Members are prohibited from selling new issues (whether "hot" or not) to employees of FINRA member firms under FINRA Rule 5130 (Choice D).

Under FINRA Rule 2040, an unregistered foreign finder that directs the business of customers to a member firm, where both the finder and the customers are foreign nationals may: A. not receive compensation from the member firm B. only receive transaction-based compensation from the member firm C. only receive a flat referral fee as compensation from the member firm D. receive either transaction-based compensation or a flat referral fee as compensation

The best answer is B. FINRA prohibits member firms and associated persons from paying compensation to non-registered individuals. There are exceptions to the rule for 2 situations: 1. Unregistered foreign finders can receive transaction-based compensation based on customer referrals as long as: - both the finder and the customer are foreign nationals; - the fact that a fee is being paid is disclosed on each confirmation; - the customer receives a descriptive brochure explaining that a referral fee is being paid and signs a statement that he or she knows of the arrangement; - and records are kept by the FINRA member firm. 2. When a registered representative is retiring, the RRR (Retiring Registered Representative) can sell his or her "book" of business to another representative at the firm and can continue to receive commissions in retirement - but this contract must be completed prior to retirement.

If a trade that was previously reported to FINRA is cancelled, the report of the cancellation must be made to the: A. exchange where the order was originally routed for execution B. same reporting facility to which the trade was originally reported C. Market Operations Review Committee for affirmation or declination D. FINRA Department of Market Regulation

The best answer is B. FINRA requires that if a trade was reported to a "FINRA facility" and then it is subsequently cancelled, the cancellation report must be made to the same FINRA facility. FINRA facilities include the NYSE TRF (for trades of NYSE listed issues), NASDAQ TRF (for trades of NASDAQ listed issues), ORF (for trades of OTC issues) and TRACS (for trades resulting from quotes shown in the ADF - Alternate Display Facility). The trade cancellation is submitted to remove the trade from the tape, so that the tape accurately reflects that the trade did not take place. The time frame for reporting trade cancellations is the same as for reporting trades (e.g., within 10 seconds of cancellation during regular market hours).

Which of the following is an outside business activity that must be disclosed on Form U4? A. The representative is on the Board of Directors of a non-profit entity that is a client of the representative B. The representative is a corporate officer of a family-owned business that accepts cash payments for precious metals purchases C. The representative has purchased a second home to use for vacations and permits family members to visit when he is not there D. The representative is registered as both a broker-dealer representative and as an investment adviser representative of his employing firm

The best answer is B. Form U4 asks: "Are you currently engaged in any other business as a proprietor, partner, officer, director, trustee, agent or otherwise?" Followed by: "Please exclude non-investment related activity that is exclusively charitable, civic, religious or fraternal and that is recognized as tax exempt." Choice B meets this definition and must be disclosed as an outside business activity (OBA). Now, let's talk about Choice A. As long as the representative sitting on the Board of Directors of the charity has no involvement in how the charity manages its investments, then this would NOT have to be disclosed as an OBA. If the representative did have involvement in how the charity manages its money, then this would have to be disclosed as an OBA. However, we are not given information about this in the question! So you must pick the "better" answer, which is Choice B. Choice C is not an OBA because the second home is not being used for a business purpose. Choice D is not an OBA because the Form U4 is used to register an individual as both an agent of a broker-dealer and a representative of an investment adviser - so this disclosure is already included on the Form

A "bought deal" would most likely be used by a(n): A. Emerging Growth Company looking to raise capital before it goes public B. Well Known Seasoned issuer that has a shelf registration on file with the SEC C. Unseasoned issuer conducting its Initial Public Offering D. Issuer conducting a follow-on offering subject to the provisions of Regulation M

The best answer is B. In a "bought deal," an issuer attempts to sell its securities very quickly to an underwriter in a competitive bid process. The underwriter must bid on a firm commitment basis and, if it is the winner, it is now the owner of the securities. The underwriter will not bid unless it knows the issuer well, and it knows that it can quickly remarket the issue. Thus, these deals are pretty much restricted to WKSIs (Well Known Seasoned Issuers) that are looking to raise capital quickly and that have a shelf registration on file with the SEC. The bidder/underwriter then knows that if it wins the bid, it can quickly resell those shares under the shelf registration already on file. The advantage for the issuer is that it raises the money quickly and does not have to go through a road show and marketing process to complete the deal. There is no 20-day cooling off period involved and there are no gun jumping issues. The disadvantage is that the price realized per share may be less than if the issuer did go through that process!

A broker-dealer based in London has prepared a research report on companies based in Europe that it wishes to distribute to institutional investors in the United States. The broker-dealer is not registered with FINRA. Which statement is TRUE about this? A. The broker-dealer is prohibited from distributing the research report in the United States B. The broker-dealer can distribute the research report only it is accompanied by a cover letter from a chaperoning broker-dealer C. The broker-dealer can distribute the research report only if it is filed with FINRA 10 business days in advance of use and gets FINRA approval D. The broker-dealer can distribute the report to institutional investors in the United States

The best answer is B. Rule 15a-6 prohibits foreign broker-dealers from soliciting in the United States unless they either register a U.S. broker-dealer affiliate or they enter into a "chaperoning" agreement with a U.S. broker-dealer. Exceptions to the rule are given if the foreign broker-dealer: - accepts an unsolicited transaction from the United States; or - distributes research reports only to major institutional investors in the United States: So this question hinges on the research report being distributed to an "institutional investor" as opposed to a "major institutional investor." A major institutional investor is one that invests at least $100 million, whereas an "institutional investor" is one with less than $100 million available for investment. To distribute a research report to an institutional investor would require either the U.S. registration of the BD, or the use of a U.S. chaperoning broker-dealer in connection with the distribution of the research report.

Under SEC Rule 606, the required quarterly report on order routing methods includes information on which of the following? A. Directed orders for NMS securities B. Non-directed orders for NMS securities C. Directed orders for both NMS and OTC securities D. Non-directed orders for both NMS and OTC securities

The best answer is B. Rule 606 of Regulation NMS requires broker-dealers to do the following: - The fact that the firm received a payment for order flow must be disclosed on the customer trade confirmation; - The firm, on request of the customer, must disclose the identity of the market to which the customer's orders were routed for execution in the preceding 6 months along with the time of execution. (These are known as "non-directed" orders, since the customer did not tell the broker the specific market where the order was to be executed, so the member firm could route the order to wherever it wanted.); and - The firm must notify customers, in writing, at least annually, of the availability of this information. In addition, the rule requires member firms to prepare a quarterly report that is publicly available that details the: - Percentage of customer orders that were "non-directed"; - Identity of the 10 largest markets or market makers, to whom non-directed orders were routed and any other venue that received 5% or more of the firm's orders; - Member firm's relationship with that market maker (for example, many larger retail member firms own their own market maker subsidiaries to whom they route orders); and - Arrangement, if any, for payment for order flow or profit-sharing. Because of this rule, member firms cannot have "hidden" arrangements with market makers to favor them in return for "payment for order flow" - everything is out in the open and is fully disclosed. Thus, customers can make informed decisions about how retail member firms are routing and executing their orders. Note that Rule 606 does not apply to "directed orders" where the customer specified the market venue to which the order was sent. The rule applies to "non-directed" orders for exchange listed stocks, exchange listed options and NASDAQ securities. The rule does not apply to OTC trade executions.

A proprietary trading desk trades ahead of a customer limit order placed with the firm's market making desk. Which statement is TRUE? A. This is permitted without restriction B. This is permitted only if the firm has a "Chinese Wall" in place between the trading desk and market making desk C. This is permitted only if the firm is a bona fide market maker in the stock D. This is prohibited under all circumstances

The best answer is B. If the firm did NOT have a Chinese Wall in place between its proprietary trading desk and its market making desk, then the customer limit order must be filled first. However, if a Chinese Wall is in place, then the proprietary trading desk would have no knowledge of the customer limit order, and the trading desk could place orders to buy or sell that security "at will."

In order for a security to be eligible for a delisting exemption under Rule 15c2-11, all of the following criteria are acceptable EXCEPT the: A. security's removal from NASDAQ must be due to failure to meet maintenance standards B. security must have been continuously quoted on NASDAQ during the 90 calendar days preceding the delisting C. issuer must be current in its SEC filings D. issuer must not be subject to any bankruptcy proceeding

The best answer is B. SEC Rule 15c2-11 requires that anyone who wants to make a market in a non-exchange listed stock (meaning OTC issues) must obtain a copy of the company's latest financial filings with the SEC and perform due diligence on them. A Form 211 must be filed with the SEC attesting to this, 3 days in advance of posting a quote. However, this is not required if: Another market maker is currently quoting the stock, so they filed the Form 211 (called the "piggybacking exemption" because the new market maker can piggyback onto the existing market maker's quote); or The quote is being placed because of an unsolicited customer order; or The stock was recently delisted from NASDAQ, where the firm already was a market maker. This last exemption is commonly known as the "breaking the buck" exemption. A stock is delisted from NASDAQ if it trades below $1 for 30 days. If this occurs, the market maker can start quoting the stock immediately OTC. The delisting must be due to not meeting maintenance standards; the issuer cannot be in bankruptcy; the issuer must be current in its SEC filings. Choice B is incorrect because a continuous market must have been made in the stock for the preceding 30 (not 90) calendar days on NASDAQ prior to the delisting.

Under the provisions of Rule 15c3-3, securities included on the broker-dealer's books and records as failed to receive for more than: A. 10 business days, must be bought in promptly B. 30 calendar days, must be bought in promptly C. 45 calendar days, must be bought in promptly D. 60 calendar days, must be bought in promptly

The best answer is B. SEC Rule 15c3-3 is the Customer Protection Rule. It requires clearing broker-dealers to maintain a Special Reserve Bank Account for the Benefit of Customers. It also requires that "excess margin securities" be reduced to possession or control daily; that customer fails to receive older than 30 calendar days be bought in promptly; and the short securities differences older then 45 calendar days be bought in promptly. Do not confuse these buy-in rules with the separate buy-in rules for a customer fail to deliver imposed by Rule 15c3-1, and the buy-in rules of Regulation SHO.

Which statement is TRUE regarding SMA in a margin account? A. SMA cannot be borrowed if it causes the account to be restricted B. SMA cannot be borrowed if it causes the account to receive a maintenance call C. SMA adds to the equity of a long account D. Buying power for marginable issues is 4x the SMA amount

The best answer is B. SMA is the "cash borrowing line" that is available in a customer margin account. It is any excess equity created when the account rises above 50% initial Regulation T margin. This amount may be borrowed in cash; or 2 times this amount may be purchased in marginable securities (since purchases only require a 50% Reg. T deposit). If SMA is created due to a rising market and is not borrowed out, and then the market starts to drop, SMA "locks" and is not taken away. The SMA amount can be borrowed, as long as the borrowing does not take the account below the 25% minimum maintenance margin. Note that if an account is restricted (meaning it is below 50% Regulation T initial margin), the SMA can be borrowed, which will drop the margin percentage further. However, any borrowing that would bring the account below 25% minimum is prohibited. SMA does not add to the equity in an account - a similar erroneous line of reasoning would be that a home equity line adds to the equity in your house. If the SMA is used (borrowed), that cash withdrawal from the account reduces equity.

The ex-dividend date for a mutual fund is: A. set by FINRA at 1 business day prior to record date B. set by the Board of Directors of the fund at the business day following the record date C. typically declared quarterly with distributions made within 10 business days D. the date when the fund's Net Asset Value (NAV) per share will be increased by the amount of the dividend

The best answer is B. Since mutual funds do not trade, the ex-date set by the Fund's Board of Directors is not reported to FINRA. The Board sets the ex-date at the business day following the record date. On that day, the NAV of the fund's shares is reduced for the distribution (making Choice D incorrect). Any purchaser as of the ex-date will not get the dividend distribution. Since most shareholders choose to have the distributions automatically reinvested in new shares, each shareholder ends up with more shares worth a lesser amount per share. But, in aggregate, the value of their holdings stays the same. Choice C is incorrect since there is no standardization as to when funds pay out dividends. Some funds pay monthly, others, quarterly, and still others on differing schedules.

The 5% Policy applies to transactions in which of the following securities? A. Open end investment companies B. Real estate investment trusts C. Unit investment trusts D. Variable annuities

The best answer is B. The FINRA 5% Policy applies to over-the-counter and exchange transactions that take place in the secondary market - the trading market. Therefore, it applies to securities that are traded, such as closed-end funds and REITs. It does not apply to "redeemable securities" such as mutual funds (open-end investment companies) and unit investment trusts. These are new issue offerings sold under a prospectus and they do not trade. Rather, they are redeemable with the issuer. Similarly, it does not apply to variable annuities, which are sold with a prospectus and do not trade.

Which statement is TRUE about the adult son of a registered representative who wishes to purchase a common stock Initial Public Offering (IPO)? A. The son is only allowed to purchase an IPO offered by the firm that employs his father as a registered representative B. The son is only allowed to purchase an IPO offered by a firm that does not employ his father as a registered representative C. The son is not allowed to purchase an IPO from any broker-dealer D. The son is allowed to purchase an IPO from any broker-dealer

The best answer is B. The FINRA IPO rule prohibits "industry insiders" from buying IPOs, since they are likely to have information on which of these are the "good deals," and given the opportunity, would buy them for themselves, shutting out the general public. The list of prohibited purchasers includes member firms, their officers, their employees and their immediate family members. The way that FINRA applies the rule is: Member firms, officers and employees are prohibited from buying a common stock IPO offered by ANY firm; Immediate family of those listed above are prohibited from buying an IPO ONLY from the firm that employs their relative. Therefore, immediate family members of officers and employees of member firms are permitted to buy IPOs from other broker-dealers. This makes sense, because they would have no "inside connection" at broker-dealers where they have no family members working.

Under FINRA rules, a transaction is considered to be "complete" when: A. a customer pays in part, or in full, prior to settlement date for securities purchased through a member B. the appropriate debit and credit entries are made by the broker-dealer on settlement date for securities purchased or sold through a member C. a customer delivers a security to a member prior to settlement date for securities sold through the member D. the counterparty "locks in" the trade via the NASDAQ System

The best answer is B. The FINRA rule on "completion of a transaction" basically states that transactions are considered to be complete on settlement, not before. This is the date that the transaction must be recorded to the customer account under SEC rules, with no extensions permitted. If a customer pays for a purchase prior to settlement, this is not recorded in the customer account until settlement; and if a customer delivers securities on a sale prior to settlement, again, this is not recorded in the customer account until settlement. This also dovetails with the fact that broker-dealers use settlement date accounting. Under FINRA rules, a transaction is considered to be complete if: a security is purchased, the customer pays in part (e.g., on margin) or in full on settlement date, or the broker-dealer makes the appropriate accounting entries to the customer's account on settlement (e.g., using a customer free credit balance to "pay" for a purchase). Note that if payment or the entries are made before settlement, this does not complete the transaction. a security is sold, the customer delivers the security on settlement date, or the broker-dealer makes the appropriate accounting entries to the customer's account on settlement (e.g., giving the customer a free credit balance from the sale). Note that if the securities are delivered or the entries are made before settlement, this does not complete the transaction. Choice D refers to the NASDAQ "locked in" trade function. Once a NASDAQ trade is executed and reported, it is matched in batches during ACT operating hours (8 AM - 8 PM) to the CAT file. If there is a mismatch (a very rare occurrence), a DK ("Don't Know") is generated and sent to both sides of the trade. Each side then has 20 minutes to affirm the transaction or file a report with NASDAQ MarketWatch that a "Clearly Erroneous Trade" occurred. NASDAQ MarketWatch then investigates and comes up with a determination as to the validity of the trade within 30 minutes. The decision of NASDAQ MarketWatch can be appealed to "MORC" - the Market Operations Review Committee. MORC's decision is binding and cannot be appealed.

Which statement is FALSE regarding closed-end management companies regulated under the Investment Company Act of 1940? A. The company is prohibited from redeeming shares at Net Asset Value B. The company is prohibited from issuing preferred stock unless it has asset coverage of at least 300 percentum C. The company is prohibited from issuing bonds unless it has asset coverage of at least 300 percentum D. The company is prohibited from borrowing to make any dividend distribution

The best answer is B. The Investment Company Act of 1940 prohibits closed-end funds ("publicly traded funds") from issuing bonds or making interest payments on bonds unless the company's asset coverage is at least 300%; and from issuing preferred stock or making dividend payments on preferred stock unless the asset coverage is at least 200% (not 300%, making Choice B incorrect). As an example, a closed-end fund with $300 million of net assets could issue $100 million of bonds; and a closed-end fund with $200 million of net assets could issue $100 million of preferred stock. Any investment company (either open or closed-end) is prohibited from borrowing to make dividend distributions. Closed-end funds are prohibited from redeeming their shares, which makes Choice A incorrect. Remember, closed-end funds are capitalized like any other corporation - with a fixed number of shares that are listed and trade on an exchange. To retire shares, the company would have to announce a tender offer, or buy its shares in the open market and retire them as Treasury Stock.

The underwriting agreement is a contract between the: A. issuer and the syndicate manager B. issuer and the syndicate members C. syndicate manager and syndicate members D. syndicate members and selling group members

The best answer is B. The various signed agreements in an underwriting are: - Underwriting Agreement: Agreement between the syndicate and the issuer, where the underwriter agrees to manage the offering of the issuer's securities. It is signed by the issuer and the syndicate members. - Agreement Among Underwriters: Agreement between the syndicate manager and syndicate members, spelling out selling responsibility and liability. - Selling Agreement: Agreement between the syndicate members and selling group, spelling out the selling group member's compensation for finding customers to buy the issue.

Under the Net Capital Rule 15c3-1, which of the following is prohibited? A. $750,000 of subordinated loans; $250,000 of equity for 1 month B. $750,000 of subordinated loans; $250,000 of equity for 4 months C. $800,000 of aggregate indebtedness; $100,000 of net capital for a 1st year "fully-disclosed" broker-dealer D. $1,200,000 of aggregate indebtedness; $120,000 of net capital for a 3rd year "fully-disclosed" broker-deale

The best answer is B. Violations of the net capital rule occur if the broker-dealer's: Net Capital falls below the minimum; or Ratio of Aggregate Indebtedness to Net Capital exceeds 1,500% (15 to 1 ratio) after the first year or 800% (8 to 1 ratio) during the first year of operations; or Ratio of subordinated debt to total capital exceeds 70% for over 90 days. A broker-dealer with $250,000 of equity and $750,000 of subordinated loans has $1,000,000 of total capital and is at a 75% ratio. However, no violation occurs unless this ratio persists for over 90 days, making Choice B a violation (Choice A is not a violation since the duration is too short -the firm has only been at a 75% ratio for 30 days). A first-year broker-dealer with an 800% (8 to 1) ratio is exactly at the maximum level, so Choice C is not in violation. Any further increase in the ratio and the firm is in violation. A third-year broker dealer with a 1,000% (10 to 1) ratio (Choice D) is well below the maximum of 1500% (15 to 1) ratio so the firm is not in violation.

Trades of NASDAQ securities executed on an unlinked ECN are reported by: A. CAES B. TRACS C. ACT D. TRACE

The best answer is B. "TRACS" is the Trade Reporting and Comparison Service. It reports trades of stocks that are listed in the ADF - the Alternate Display Facility. These are quotes for listed stocks posted by ECNs that choose not to participate in the NASDAQ System (unlinked ECNs). Trades of NASDAQ, NYSE and NYSE American (AMEX) securities executed by linked ECNs are reported through the TRF - the Trade Reporting Facility that is part of the ACT system.

A company has just gone public and the underwriter is in the "10-day blackout period" prohibiting communication to the public about the company. Which event would permit the underwriter to publicly disseminate a report prior to the expiration of the blackout period? A. Loss of a customer B. General strike by the company's workers shutting down production C. Resignation of the company's Chief Marketing Officer D. None of the above

The best answer is B. An exception to the information blackout rule covering underwriters that have just completed an underwriting is given if "truly market moving" information becomes known about the company. Choice B is a major event; the other two choices given are not as significant.

Under SEC Rule 17a-11, reporting is INITIATED if a clearing broker-dealer's net capital falls below: A $500,000 B $300,000 C $250,000 D $50,000

The best answer is B. Rule 17a-11 covers violation reporting. Under this rule's early warning provisions, if a broker dealer's net capital falls below 120% of the minimum ($300,000 for a $250,000 clearing broker-dealer) or if the firm's ratio of aggregate indebtedness to net capital exceeds 1,200%; then the firm must give electronic notice to the Designated Examining Authority (FINRA) within 24 hours; and must file any reports requested by that authority.

For Net Capital purposes, secured demand notes are valued at: A. the current market value of the securities collateralizing the note B. the current market value of the securities collateralizing the note less an appropriate haircut C. the face amount of the securities collateralizing the note D. the stated amount of the note, regardless of changes in value of the underlying collateral

The best answer is B. Secured demand note agreements provide for the lender to give marketable securities to the broker-dealer instead of lending the broker-dealer cash. These securities are placed in "street" name, and the broker-dealer rehypothecates them to a bank for a loan. Banks will only lend the 70% value of equity collateral to broker-dealers under the provisions of Regulation U. Therefore, if $100,000 of common stocks are pledged, the bank will lend the broker-dealer $100,000 less a 30% haircut = $70,000. This would be the addition to the firm's net capital. (Also please note that the 30% "haircut" specified under Regulation U differs from the 15% reduction that is taken from net capital for equity securities held in the firm's inventory.)

Which statement is TRUE regarding margin on securities? A. All over-the-counter securities are marginable under Federal Reserve regulations B. All NASDAQ Global Market securities are marginable under Federal Reserve regulations C. All Pink Open Market securities are approved for margin by the Federal Reserve Board D. Only exchange listed securities traded over-the-counter are marginable

The best answer is B. The Federal Reserve approves all exchange and NASDAQ-listed securities for margin. These securities meet exchange listing standards. Unlisted OTC securities, such as those found in the Pink Open Market are generally not marginable. Only a handful of these OTC securities are on the "OTC margin list" approved by the Federal Reserve.

Under NYSE rules, the latest time that an MOC order can be entered or canceled is: A. 3:30 PM ET B. 3:50 PM ET C. 3:55 PM ET D. 4:00 PM ET

The best answer is B. The NYSE allows "MOC" - Market On Close - orders to be entered, or canceled, until 3:50 PM ET. Note, in contrast, that NASDAQ allows MOC orders to be entered or canceled until 3:55 PM ET. Also note that the NYSE and NASDAQ extended these times by 5 minutes in early 2019 from the previous 3:45 PM (NYSE) and 3:50 PM (NASDAQ) cutoffs.

An associated person has completed a deferred variable annuity application for a customer and has received the customer's check made payable to the insurance company. The application and check are forwarded to the principal for review. Once the application is approved, the check must be transmitted to the insurance company: A. By the close of business that day B. No later than 12 noon the next business day C. By the close of business on the 2nd business day after principal approval D. by the close of business on the 7th day after principal approval

The best answer is B. Under FINRA rules, once a variable annuity application lands on the desk of the principal, it must be reviewed and approved within 7 business days. Once it is approved by the principal, the broker-dealer must promptly forward the check to the insurance company, defined by FINRA as no later than noon the next business day. This interpretation is based on the fact that mutual fund and variable annuity broker-dealers are only required to maintain $25,000 of net capital, as long as they do not hold customer funds or securities. If they were to hold these, they would need $250,000 of net capital. So FINRA said that they will not consider the broker-dealer to be holding customer funds as long as the check is submitted to the insurance company no later than noon on the business day after the principal approves the VA application.

All the following are assessments and fees paid by FINRA members EXCEPT: A. Annual membership fee B. Annual fee per employee C. Percentage of annual gross domestic securities revenue D. Annual fee per branch office

The best answer is B. You do not have to know the actual dollar amounts of the fees that FINRA assesses its members, but you must know the basis upon which dues are assessed. There is an annual membership fee, which is the greater of a flat dollar amount or a percentage of all domestic securities revenue. There is also an annual fee per branch office, and an annual fee per registered individual (note that this is based on registered individuals, not all employees).

Trade comparisons for transactions not reported to ACT must be mailed to the contra-broker no later than: A. T B. T+1 C. S D. S+1

The best answer is B. "T" stands for trade date. "S" stands for settlement date. Under FINRA rules, trade comparisons for trades not reported to ACT (Automated Confirmation of Transactions service) must be sent to the contra-broker no later than the business day after trade date - "T+1."

All the following statements are true regarding the physical count of securities required of broker-dealers EXCEPT: A. the "box count" must be performed quarterly B. both clearing broker-dealers and introducing broker-dealers are required to perform the count C. the count must be performed or supervised by a person who does not have daily responsibility for safekeeping securities D. any unresolved differences found in the count must be recorded on the books of the broker-dealer no later than 7 business days after the count

The best answer is B. A physical count of securities must be performed quarterly. Choice B is incorrect because only clearing broker-dealers (not introducing firms) are required to perform the count. Clearing firms hold customer funds or securities; introducing firms cannot do so. The count must be performed or supervised by a person who does not have daily responsibility for safekeeping securities. Finally, any unresolved differences found in the count must be recorded on the books of the broker-dealer no later than 7 business days after the count.

OTC transactions in all of the following securities are reported through ACT EXCEPT: A. Convertible debt securities B. High yield debt securities C. Equity securities D. CQS securities

The best answer is B. ACT is the Automated Confirmation of Transactions service - virtually all OTC trades are reported into ACT, where the contra-party has 20 minutes to confirm or decline the details of the trade. ACT also reports the trade to the "tape." Trades of NASDAQ, OTC, and 3rd Market issues are reported to ACT. NASDAQ lists convertible bonds, but does not list non-convertible bonds. FINRA maintains a separate trade reporting system for all corporate bonds, government bonds, and agency bonds called TRACE - Trade Reporting And Compliance Engine.

Under Rule 17a-5, all of the following records of original entry must be kept for 6 years EXCEPT A. Cash receipts and disbursements B. Purchase and sales C. Securities receive and deliver D. Fails to receive and fails to deliver

The best answer is D. The records of original entry that must be kept for 6 years are: cash receipts and disbursements blotter, purchase and sales blotter, and securities receive and deliver blotter. A fail to receive and fail to deliver blotter is a "subsidiary record" that need only be kept for 3 years.

Under Rule 147, which purchaser would NOT satisfy the state residency requirement? A. A corporation incorporated in a neighboring state that does the majority of its business in the state of issuance B. A partnership, consisting of 3 non-resident individuals and 1 resident individual, formed under the laws of that state expressly to purchase the issue C. A corporation with its principal place of business in the state that conducts limited business in other states D. A trust formed under the laws of the state whose trustee is a resident of the state where the securities are offered

The best answer is B. All purchasers of Rule 147 (intrastate) offerings must be residents of that state. An individual is resident if his permanent residence is in that state if his or her primary residence is in that state. A legally formed entity, such as a corporation, partnership, or trust is a resident if its principal place of business is in that state. A partnership formed in that state expressly to purchase the issue, that is not composed 100% of state residents, does not qualify as a "resident." Otherwise, it would be very easy to circumvent the residency requirement by forming partnerships in that state composed of out-of-state residents to buy the issue.

A broker-dealer that is a Registered Reporting Market Maker in a stock for the past year receives a customer order to sell that stock under Rule 144. Which statement is TRUE regarding the actions of the firm when handling this order? A. The firm must act as an agent when executing this transaction and cannot buy the stock into its inventory B. The firm is allowed to buy the stock into its own inventory C. The firm must execute the transaction through a third party broker-dealer because a control relationship exists D. The firm is prohibited from executing 144 transactions, either on an agency or principal basis in the stocks in which it is a market maker

The best answer is B. As a general rule, a broker-dealer is prohibited from acting as a market maker in 144 stock, unless that firm is a bona fide market maker. This stops FINRA members from buying 144 shares into their inventory as an "accommodation" to the sellers of 144 stock. The rule requires them to act as agents in the transaction, selling the stock to another customer or to a bona fide market maker. A bona fide market maker is one which has made a market in the stock for at least 12 of the preceding 30 calendar days, with no more than 4 successive days without making two-sided quotes. A Registered Reporting Market Maker meets this requirement.

The CNS System is maintained by: A. SIPC B. NSCC C. FINRA D. SEC

The best answer is B. CNS stands for Continuous Net Settlement system. It is the clearance and settlement system used by NSCC - the National Securities Clearing Corporation, which clears almost all equity, corporate bond and municipal bond trades in the U.S (all of these trades settle T+2). It does not clear trades of Treasury issues (these settle T+1). This is done by FICC - Fixed Income Clearing Corporation - also owned by NSCC. It also does not clear options trades (also T+1) settlement - this is done by the OCC - the Options Clearing Corporation. The CNS System reduces each member firm's daily trades to one net long or net short position on settlement date in that security, along with a net money balance to be received by the member (long) or to be paid (short) by the member. With CNS, the member firm is not required to deliver or receive securities on a trade-by-trade basis.

If the markets are closed due to the imposition of the market-wide circuit breaker, a member firm is A. prohibited from accepting new customer orders until the markets reopen B. permitted to accept new customer orders for entry when the markets reopen C. limited to accepting Market On Open (MOO) orders D. limited to accepting Market On Close (MOC) orders

The best answer is B. During the period when the market-side circuit breakers are in effect (either a 7%, 13% or 20% decline in the S&P 500 Index), the markets in the U.S. are closed. No new orders can be entered onto the exchange or NASDAQ books, but resting orders stay on the books and are unaffected. When the markets reopen, new orders can be routed to the exchanges. Finally, note that a member firm can accept an order during the market close and then route it to the exchange when trading resumes.

FINRA recommends that member firms implement a mandatory 2-week vacation policy for: A. all employees B. all traders C. only proprietary traders D. only traders who have an intimate knowledge of the firm's risk management procedures

The best answer is B. FINRA recommends that firms put in a mandatory 10 consecutive day business vacation policy for "traders and other sensitive persons." While the rule is mainly directed at proprietary traders, there are other individuals in firms who could do unauthorized trading. The SEC says that such individuals may include "traders, trader assistants, portfolio managers, brokers, investment advisers, order placement personnel or trading desks, (collectively, "traders"), as well as mid-or back-office, risk management and other personnel."

Fingerprinting is NOT required for a superviser of a broker-dealer having responsibility for overseeing the: A. sale of securities B. processing of customer account transfers C. deposit or withdrawal of customer funds D. maintenance of the firm's books and records

The best answer is B. Fingerprinting of officers is required under Rule 17f-2 for all officers of broker-dealers that supervise the selling of securities; or that supervise the processing of monies, securities, or maintenance of books and records. The individual who supervises customer account transfers does not fall under the requirement.

A customer buys 1,000 shares of ABC stock at $15.00 as an initial transaction in a new margin account, depositing the required margin. The customer will receive a call for maintenance margin if the stock price falls below: A. $12.00 per share B. $10.00 per share C. $ 9.00 per share D. $ 7.50 per share

The best answer is B. If $15,000 of stock is purchased as the initial transaction in the account, 50% or $7,500 is deposited and there is a debit balance of $7,500. The account will be at maintenance if the debit equals 75% of the market value (at this point equity would equal the 25% maintenance level). Dividing the debit of $7,500 by .75 gives a market value of $10,000 where the account will be at maintenance. If the market value falls below $10,000 ($10 per share), with a debit of $7,500, the equity in the account is $2,500 or 25% of market value. Below this market value, a maintenance call will be sent to restore the account to 25% maintenance margin.

A customer margin account shows the following positions: Long 200 ABC@ $30 200 DEF@ $40 200 XYZ@ $50 Debit: $7,500 The securities can decline to which market value BEFORE a maintenance call will be sent? A. $12,000 B. $10,000 C. $8,000 D. $2,000

The best answer is B. The account will be at maintenance if equity equals 25% of long market value. Since long market value minus the debit equals equity in a long account, at maintenance, the debit must be 75% of market value. Thus, with a $7,500 debit, the account will be at maintenance when the market value falls to $7,500/.75 = $10,000. At this point, equity will be $2,500 in the account and the margin percentage would be $2,500 equity/$10,000 market value = 25%.

A representative is contacted by one of her institutional clients, who tells her that he intends to place an order to buy 10 million shares of ABCD stock the next morning right after the opening. The representative immediately e-mails all of the other reps in the office, telling them not to place orders to buy the stock until 10:00 AM tomorrow, and that if they do this, he will take them all out for drinks after work that day. Which statement is TRUE about this situation? A. This is not permitted because taking all of the representatives in the office out for drinks the next day exceeds the FINRA gift limit B. The principal should instruct the representatives in the office not to place solicited orders to buy the stock until 10 AM the next day, since they are aware of the impending trade C. The principal should call the client to explain that other representatives are aware of the pending order and confirm that the customer still intends to place the order D. The principal is not required to do anything because the customer has not placed the order to buy

The best answer is B. If a member firm receives a large customer order that is not filled immediately, the firm it is prohibited from trading the security for its own account at a price that will satisfy the order prior to filling that order. If the firm were to solicit other clients to trade the stock prior to filling the large customer order, this is simply another version of the prohibited behavior (trading ahead). Of course, the firm could accept unsolicited customer orders to trade the stock. This is covered in FINRA Rule 5320, which also states that the member must "have a written methodology in place governing the execution and priority of all pending orders that is consistent with the requirements of this Rule."

A member firm that is not a market maker in a stock is participating in an add-on underwriting that is subject to a restricted period under Regulation M. The member firm is: A. not required to give notice to FINRA B. required to notify FINRA 1 business day prior to the start of the restricted period C. required to notify FINRA 5 business days prior to the start of the restricted period D. required to notify FINRA 10 business days prior to the start of the restricted period

The best answer is B. If a member firm that is not a market maker is a syndicate member in an add-on offering, the firm may be restricted from buying the stock in the market if the company is thinly traded. The idea is to stop the firm from attempting to manipulate the price of the stock up, so a higher POP can be set just prior to the effective date. The restricted period is either 5 business days or 1 business day prior to the effective date (depending on the trading volume and market cap of the subject company) under Rule 101 of Regulation M. FINRA requires that a member firm that is subject to this restriction file a Regulation M Notification Form with FINRA 1 business day prior to the start of the restricted period.

If an individual is convicted of a felony involving securities or misappropriation of funds, this person cannot be associated with a member firm: A. until 5 years elapse from conviction B. until 10 years elapse from conviction C. until 15 years elapse from conviction D. permanently

The best answer is B. If a person is convicted of a felony involving securities or misappropriation of funds, he or she cannot be associated with a member firm for a 10-year period from conviction.

If a recommendation of a security is made in a communication with customers, which statement is TRUE? A. The firm must disclose any expected commissions or mark-ups it will receive from the recommendation B. The firm must disclose the fact that its officers own the security being recommended or own options on that security C. The firm must disclose the amounts and lengths of time the security has been held in its inventory D. The firm must disclose if it has been in a selling group in the past 12 months in an underwriting of any of that company's securities

The best answer is B. If a recommendation of a security is made in a retail communication, it must be disclosed if the firm or its officers own the security or own options, warrants or rights on the security being recommended. There is no requirement to disclose the amounts and length of time the security has been owned. There is no requirement to disclose expected commissions to be received from the recommendation. The firm must disclose if it has been a manager or co-manager in an underwriting of any of that company's securities within the past 12 months. There is no requirement to disclose if the firm has been a syndicate member or a selling group member in an underwriting of that company's securities within the past 12 months.

A registered person resigns from a broker-dealer in order to finish graduate school. 3 years later, this individual reassociates with another broker-dealer firm. This person MUST participate in the Regulatory Element of CE (Continuing Education) on a cycle based on: A. the date of initial registration B. the date of reassociation C. a date determined by FINRA D. a date determined by a general principal

The best answer is B. If a registered person terminates association with a broker-dealer firm, and reassociates after 2 years of termination, that person is subject to the Regulatory Element of CE on a cycle based on the date of reassociation (i.e., the most recent registration date). Once re-registered this would be completed annually by December 31st each year.

Under FINRA rules, if a member suspects that a senior citizen is being financially exploited: A. a temporary hold may be placed on disbursements from the account for up to 10 business days B. a temporary hold may be placed on disbursements from the account for up to 15 business days C. any hold placed on the account, if supported by the member's review of the situation, can be extended for another 5 business days D. any hold placed on the account, if supported by the member's review of the situation, can be extended for another 15 business days

The best answer is B. If activity is thought to be suspicious, a firm can place an initial hold on the senior's account for 15 business days to investigate the activity. If the firm's investigation determines that the activity is possibly fraudulent, an additional hold of 10 more business days can be added for a total of 25 business days. If the activity becomes part of a governmental investigation, an additional hold of 30 business days can be placed on the account, for a grand total of 55 business days. Also note that the temporary hold only applies to disbursements that are suspicious.

Under the FINRA Review of the Committee on Corporate Financing, finders may be compensated in a new issue offering with all of the following EXCEPT: A. options B. cheap stock (priced lower than the Public Offering Price) C. free stock (freely transferable) D. fee based on the size of the offering

The best answer is C. The Committee on Corporate Financing requires that any stock acquired by an underwriter or other parties involved in the underwriting (such as finders, accountants, lawyers) in connection with a new issue offering, be restricted for 6 months. This means that the stock cannot be transferred (sold). Thus, the stock is not freely transferable. It is acceptable under the Committee's rules to give options, cheap stock, or a fee to finders, accountants, and lawyers involved in the offering.

A broker-dealer has been retained to act as proxy solicitor for a corporation. Which statement is TRUE regarding the shareholder list provided to the broker-dealer for the solicitation of proxies? A. The broker-dealer can use the list to solicit orders since it is public information B. The broker-dealer can use the list to solicit orders after obtaining written consent of the corporation C. The broker-dealer can use the list to solicit orders by obtaining written consent from each customer D. The broker-dealer cannot use the list under any circumstances other than to solicit proxies

The best answer is B. It is a conflict of interest for the broker-dealer to use the shareholder list to solicit customers. The only way this can be accomplished is to get written permission from the corporation to use the list. If the corporation withholds consent, the broker-dealer cannot use the list to solicit customers.

A customer has a large margined position in XYZZ stock, a thinly traded issue. XYZZ has been falling steeply in value during the day, and the customer places an order with the firm to buy 10,000 shares of XYZZ MOC, which is executed per the customer's instructions. As the principal reviewing the trade blotter at the end of the day, your main concern should be that the customer was: A. trading on inside information B. marking the close C. marking to market D. front running

The best answer is B. Marking the close is a prohibited practice. It is the attempt to manipulate the closing price of a security, usually by fund managers who want to influence the closing NAV per share calculation. However, it can also be done by margin customers who are worried about receiving a maintenance call. By the way, an "MOC" order is a Market On Close order.

Which statement is TRUE about mutual fund share classes? A. Both Class A and Class B shares impose a sales charge at the time of purchase B. Class A shares impose a sales charge at the time of purchase while Class B shares can impose a sales charge at the time of redemption C. Class B shares impose a sales charge at the time of purchase while Class A shares can impose a sales charge at the time of redemption D. Neither Class A nor Class B shares impose a sales charge at the time of purchase

The best answer is B. Mutual fund Class A shares are the "original" style of fund shares, imposing a 1-time up-front sales charge lowered by breakpoints for large dollar purchases, and no 12b-1 fees. When Rule 12b-1 was passed (in 1980), mutual funds, for the first time, could charge the cost of soliciting new investment via trail commissions and the Class B share was invented. Class B shares have no up-front sales charge, and have a declining CDSC (Contingent Deferred Sales Charge) that is imposed only on redemption. The CDSC typically declines to "0" after the 7th year. The rub is that Class B shares impose annual 12b-1 fees of around .50%, and while some funds convert the Class B shares to A shares after 7 years, so no more trail fees are collected, others do not. A long-term investor buying a Class B share can wind up paying a much higher cumulative sales charge with the add up of annual 12b-1 fees as opposed to buying a Class A share instead. Inappropriate recommendation of Class B shares to customers with large dollar amounts to invest and a long-term investment time horizon (earning the rep a bonanza of trail commissions from 12b-1 fee collections), as opposed to recommending Class A shares (where the rep earns a 1-time up front portion of the sales charge reduced by a breakpoint), is a big FINRA regulatory "hot button."

A customer who has a pattern day trading account has a margin call outstanding. Until the margin call is met, the account is limited to "buying power" of: A. 1x the maintenance margin excess in the account B. 2x the maintenance margin excess in the account C. 3x the maintenance margin excess in the account D. 4x the maintenance margin excess in the account

The best answer is B. Normally, buying power in a pattern day trading account is based on the fact that the account is only subject to FINRA minimum maintenance margin of 25%, so the buying power is 1/.25 = 4 times the maintenance margin excess. However, if the account has an unsatisfied margin call outstanding, then the buying power is reduced to 2 times the maintenance margin excess. And this point must be known for the exam!

A registered representative at your firm informs you, the principal, that he has been going through a nasty divorce and a court has issued an automatic restraining order prohibiting him from selling jointly owned property and withdrawing money from joint bank accounts. Which statement is TRUE? A. This is a reportable event to FINRA B. This requires prompt amendment of the representative's U4 Form C. This is both a reportable event to FINRA and requires prompt amendment of the representative's U4 Form D. This is not required to be reported

The best answer is B. One of the questions on the U4 Form is if the registrant is the subject of a court action, naming the party that initiated the proceedings, the relief sought (a restraining order in the case), the filing date, the date process was served, the court of jurisdiction, and a description of the proceeding. Note that this is a disclosure item, but it would not result in statutory disqualification. And a restraining order issued in a divorce proceeding is not a reportable event to FINRA (mainly because it does not involve business dealings).

Portfolio margining is NOT available for: A. Listed common stocks B. Listed bonds C. Listed options D. Unlisted derivatives

The best answer is B. Portfolio margin, which is risk-based as opposed to strategy-based, reduces margins for hedged stock positions and hedge stock portfolios. To hedge stock positions, both listed options and unlisted derivatives may be used. Portfolio margins cannot be used for bond positions. This is the case because they already have very low margins (for example, the margin on corporate bonds is the greater of 7% of face or 20% of market value).

During the 20-day cooling off period for the IPO of an EGC, the distribution of promotional material to "test the waters" is: A. prohibited under the "quiet period" rules B. permitted only if the client is a QIB or accredited investor C. permitted only if the client made an unsolicited request for the materials D. permitted without restriction

The best answer is B. The JOBS Act of 2012 eased the regulatory burden on "EGCs" - Emerging Growth Companies - defined as a company with less than $1 billion of annual revenue, in an effort to stimulate economic growth. Among other things, the Act eased the IPO "quiet period" rules for EGCs. It permits the issuer to "test the waters" for the IPO by distributing both oral and written communications to potential investors who are either Qualified Institutional Buyers (QIBs) under Rule 144A or accredited investors under Regulation D. These communications can be distributed before the registration statement is filed with the SEC and through the 20-day cooling off period to determine if these investors have an interest in the contemplated securities offering. In contrast, such communications are prohibited for a regular registered securities offering.

Under the provisions of Regulation A, which statement is TRUE about the use of marketing materials in connection with the securities offering? A. The Offering Circular is the only marketing material that is permitted to be used in connection with the offering of securities B. Marketing materials may be distributed to potential purchasers prior to the filing of the Offering Statement with the SEC C. Marketing materials may be distributed to potential purchasers once the Offering Statement has been filed with the SEC D. Marketing materials may be distributed to potential purchasers only if they are accompanied or preceded by the Offering Circular

The best answer is B. Regulation A, which gives an exemption from registration to securities offerings of a maximum of $20 million under Tier 1 and $75 million under Tier 2 within a 12-month period, includes a unique "test the waters" provision. It allows an issuer to use general solicitation and advertising prior to filing the offering statement (Form 1-A offering statement) with the SEC, giving the issuer the advantage of determining whether there is enough market interest in the securities before the issuer incurs the legal and accounting costs associated with filing an offering statement. Note, however, that "solicitations" and the acceptance of money, are not permitted until the SEC completes the review of the Form 1-A (the offering goes through a 20-day cooling off period, just like a regular S-1 registered offering).

In a Delivery Versus Payment (COD) transaction, a customer instructs that the securities be delivered directly to a bank that has been given instructions by the customer to pay upon delivery. Under the requirements of Regulation T, the funds must be available to pay for the securities no later than: A. the business day after trade date B. 4 business days after trade date C. 35 calendar days after trade date D. 90 calendar days after trade date

The best answer is B. Regulation T grants an exception to payment in a cash account being made promptly to "COD" - Cash on Delivery Transactions. In such transactions, "when issued" securities are typically delivered to a bank that has been instructed by the customer to pay upon delivery "POD." The broker-dealer has up to 35 calendar days after trade date to deliver such securities against payment under Regulation T. The funds must be ready to pay for these securities when they are delivered. In fact, the customer must have those funds deposited with the bank to pay no later than 4 business days after trade date ("Settlement + 2") - the maximum length of time permitted under Regulation T.

SEC Rule 10b-17 requires issuers to give the SRO at least how many days advance notice of the setting of a record date for a cash dividend, stock dividend or stock split? A. 5 days B. 10 days C. 15 days D. 20 days

The best answer is B. SEC Rule 10b-17 requires issuers to give the SROs at least 10 days advance notice of the setting of a record date for a stock split, stock dividend or cash dividend. This gives the SRO enough time to set an appropriate ex-date. On the ex-date, the stock price is reduced for the distribution, and if it is a stock split or stock dividend, the number of outstanding shares is increased.

SEC Rule 10b-18 allows an issuer to buy its shares in the open market: A. at any price that is reasonably related to the current market B. at the highest independent bid or the last reported sale price, whichever is higher C. at the lowest independent offer or the last reported sale price, whichever is lower D. under no circumstances, since this is considered to be market manipulation

The best answer is B. SEC Rule 10b-18 sets ground rules for issuers or affiliated persons who wish to buy their shares in the open market. If an issuer aggressively buys its stock in the market, or bids for its stock, it can manipulate the market price upwards. Bids and purchases that are made in compliance with Rule 10b-18 will not be considered manipulative activities under Rule 10b-5 ("catch-all" fraud rule). Rule 10b-18 purchases, as they are known: Must be effected through 1 broker/dealer on any given day; Cannot be the opening transaction; Cannot be executed within 10 minutes of market close if the security is "actively traded" as designated by Rule 101 of Regulation M; otherwise, the purchase cannot be executed within 30 minutes of market close; Must be effected at prices no higher than the current highest independent bid for that security or last reported sale price (whichever is higher); and Cannot exceed 25% of the trading volume in the security that day (except for block purchases handled outside the normal flow of orders).

A customer has a cash account at a member firm with a free credit balance of $375,000. The customer also has a margin account with $225,000 of securities and a $100,000 debit balance. The firm enters into SIPC liquidation. SIPC insurance coverage for this customer is: A. $225,000 B. $375,000 C. $500,000 D. $600,000

The best answer is B. SIPC covers each customer account for a maximum of $500,000 of equity, with cash coverage set at a maximum of $250,000. Of the $375,000 free credit balance, only $250,000 is covered. In the margin account, the equity of $125,000 is covered ($225,000 market value - $100,000 debit). The total coverage is $250,000 + $125,000 = $375,000.

A new customer wishes to open an account. He explains that he is a foreign college student and that he will be using family business contacts to start an import/export business. He tells you that he will need to make 5-6 withdrawals a month to make payments for goods purchased. As the General Principal, you should tell the representative that the account: A. cannot be opened B. can be opened if the customer's business contacts are verified C. cannot be opened until proper due diligence is completed D. can be opened after the customer signs AML papers

The best answer is B. Since this is a "student" who is a foreign customer who is going to be in the "import/export" business, there are a number of red flags here. The question does not give a choice of matching the customer name to the terrorist watchlist (which is required). One way of determining that the customer is legitimate is to verify his foreign business contacts. This is a common compliance tool for making sure that accounts doing foreign business are legitimate.

An order is received via phone for a non-NMS security. Who is responsible for reporting the trade execution? A. The caller B. The recipient C. The buyer D. The seller

The best answer is B. Since this is a non-NMS security, it must be an OTC issue, and quotes for these are maintained by market makers. The recipient of the call would be the market maker, and the market maker would be the person executing the trade. Under Nasdaq rules, the "executing member" reports the trade. Also note that since the question does not mention who is the buyer or who is the seller, these cannot be valid answers.

The minimum duration for a non-temporary subordinated loan is: A. 30 days B. 45 days C. 1 year D. 2 years

The best answer is C. The minimum duration for a regular (non-temporary) subordinated loan is 1 year. In contrast, there is no minimum duration for temporary subordinated loans - rather, there is a maximum duration of 45 days.

Under FINRA Rule 2124 - Net Transactions With Customers - in order to execute a "net basis" transaction with a non-institutional customer, the member must provide disclosure and obtain consent from the customer: A. using a negative consent letter B. using written consent on an order-by-order basis C. using oral disclosure and consent on an order-by-order basis D. any of the above

The best answer is B. So-called "net basis" orders are executed by the member on a principal basis without a commission charge or mark-up/mark-down. These can be demanded by institutions who consider the spread earned by the dealer in its buy-sell transactions to be sufficient remuneration without the additional charge of a commission or mark-up. If a customer places a buy order on a "net basis," the dealer buys that security in the market, takes it into inventory, and then immediately resells it to the client at a slightly higher price. This is really no different than a riskless principal transaction. The institution placing the order believes that the differential between the dealer's buy and sell price (the equivalent of the spread) will be cheaper than if the trade were done on an agencv basis with a commission charge. Most broker-dealers will not accept "net basis" transactions from retail (non-institutional) clients. If the firm does, it must get written consent from the client on an order-by-order basis, evidencing the customer's understanding of the terms and conditions of the order. On the other hand, institutions are more likely to demand such "net basis" transactions. In this case, consent can be obtained either by: Using a negative consent letter that gives the institution the meaningful opportunity to object to having transactions effected on a net basis; or Using oral disclosure and consent on an order-by-order basis (this must be documented) or Using written consent on an order-by-order basis.

Under the "Penny Stock Rule," a registered representative must take all the following steps before selling non-NASDAQ OTC securities priced under $5 to a new customer in a recommended transaction EXCEPT: A. the registered representative must document the basis of his or her recommendation in writing B. written authorization must be obtained from the customer at, or prior to, settlement of the transaction C. the customer must be provided with a suitability statement D. financial information must be obtained from the customer

The best answer is B. The "Penny Stock Rule" applies when a new customer is offered a non-NASDAQ OTC security trading for $5 or less. The intent of the rule is to limit "boiler room" sales of penny stocks. Before a sale can be made to a customer of an OTC non-NASDAQ stock trading for less than $5, complete financial information must be obtained from the customer. The registered representative must then complete a suitability statement, showing why this investment is appropriate for the customer. This statement must be sent to the customer for his or her signature before confirmation (not by settlement which makes Choice B incorrect) of any purchase to that customer in a recommended transaction.

Quotes displayed in the ADF are from: A. linked ECNs B. unlinked ECNs C. third market makers D. dark pools

The best answer is B. The ADF is the Alternate Display Facility. It was mandated by the SEC when NASDAQ introduced its Super Montage (now NASDAQ Market Center) system, which the larger ECNs believed used an algorithm that favored NASDAQ market makers over the ECNs. So the SEC made NASDAQ put up the ADF, where so called "unlinked ECNs" that chose not to link into the NASDAQ platform to display their quotes, would be able to display their quotes in an "alternate" venue. Thus, to find the best market for a NASDAQ stock, both the NASDAQ Market Center and the ADF must be checked.

The Bank Secrecy Act of 1970 requires: A. the reporting of wire transfers of $3,000 or more B. detailed recordkeeping of wire transfers sent outside the U.S. of $3,000 or more C. the reporting of wire transfers of $10,000 or more D. detailed recordkeeping of wire transfers sent outside the U.S. of $10,000 or more

The best answer is B. The Bank Secrecy Act of 1970 requires financial institutions to report currency (cash) transactions in excess of $10,000 (Form CTR) to FinCEN, but it does not require the reporting of wire transfers. Rather, it requires that financial institutions keep detailed records of wire transfers of $3,000 or more sent outside the U.S. The record must include the: Name and account number of the transmittor;Address of the transmittor;Identity of the transmittor's financial institution;Amount of the transmittal order;Execution date of the transmittal order; andIdentity of the recipient's financial institution.

Each broker-dealer must keep a record of each wire transfer sent outside the U.S. that is: A. $1,000 or more B. $3,000 or more C. $5,000 or more D. $10,000 or more

The best answer is B. The Bank Secrecy Act requires financial institutions to keep records of wire transfers of $3,000 or more sent outside the U.S. The record must include the: name and address of the transmittor; account number of the transmittor, if used; identity of the transmittor's financial institution; amount of the transmittal order; execution date of the transmittal order; identity of the recipient's financial institution; and, if received: name and address of the recipient; account number of the recipient.

The FINRA Code of Procedure is used to handle: A. disputes between member firms B. unfair trade practice complaints C. fails to receive upon settlement D. errors in securities deliveries

The best answer is B. The Code of Procedure is used to handle complaints alleging rule violations. The Code of Arbitration is used to handle disputes from member to member, such as settlement problems.

Which of the following MUST be disclosed in the main body of a fairness opinion? A. The amount of the fee payable to the member firm that prepared the fairness opinion B. Whether the member firm expresses an opinion about the fairness of compensation to insiders relative to compensation to the client's public shareholders C. For each category of data provided by the issuer with respect to transaction participants, disclosure of whether the member firm has independently verified the data provided by the issuer D. The specific procedures and valuation methodologies employed to determine the fairness of the proposed deal price

The best answer is B. The FINRA "fairness opinion" rule is meant to address potential conflicts of interest when member firms are hired by either the acquiring company or the target company to render an opinion as to the "fairness" of the deal price and terms. The basic conflict is that the member firm may receive compensation that is contingent on the successful completion of the deal, biasing the member firm to give a favorable opinion. The rule requires the member firm to disclose 6 items when it gives a "fairness opinion": 1. Contingent Compensation: The member firm must disclose whether it acted as financial advisor to any party to the transaction and if it will receive compensation that is contingent on the successful completion of the transaction - note that there is no requirement to disclose the amount of compensation to be earned; 2. Other Compensation: The member firm must disclose if it will receive any other significant compensation contingent on the successful completion of the transaction - e.g., the member firm will arrange financing for the transaction and earn a fee for this; 3. Material Relationships: The member firm must disclose any material relationships that existed in the past 2 years with any party to the transaction in which any compensation was received by the member; 4. Verification of Information: The member firm must disclose whether it has independently verified any of the information provided by the client or give a blanket statement that no information has been verified - this is a general disclosure or non-disclosure item - there is no requirement for a "verification" statement for each category of data provided by the issuer; 5. Fairness Committee: The member firm must disclose if the fairness opinion was approved or issued by a fairness committee - note that the rule does not require a member firm to use or have a fairness committee; and 6. Insider Compensation: The member firm must disclose whether it expresses an opinion on the amount of compensation to be received by insiders (officers and directors of the issuer) as part of the deal, as compared to the compensation to be received by the shareholders. This last point is the one covered by the question. The issue here is whether the officers and directors of the companies involved are receiving "rich" compensation as compared to the price per share to be received by the acquired company's shareholders. This is an area that is usually covered by compensation consultants and typically is not covered in a fairness opinion - so most member firms that give fairness opinions will state that the opinion does not cover such payments. Also note that the required disclosures are very general in nature. The question gives 3 "very specific" possible disclosures and 1 "general" disclosure. There are no "specific" disclosures required by the rule, and understanding this helps when answering the question.

When must dealer to dealer confirmations be sent out in a DVP (Delivery versus Payment) transaction? A. Trade Date B. Trade Date + 1 C. Trade Date + 2 D. No later than 35 days from Trade Date

The best answer is B. The FINRA rule on sending out dealer-to-dealer confirmations is that they must be sent no later than the business day after trade date, with the exception of cash transactions, where the confirmations must be exchanged on trade date (which is also settlement date in a cash transaction).

An issuer that has filed a registration statement with the SEC wishes to make a revision to the red herring being used to collect indications of interest. Which statement is TRUE? A. The red herring may not be revised by the issuer unless a new S-1 filing is made with the SEC B. The issuer may revise the red herring with immediate effectiveness C. The issuer may revise the red herring with the changes becoming effective in 10 business days D. The issuer may revise the red herring with the changes becoming effective in 20 business days

The best answer is B. The red herring preliminary prospectus is used during the 20-day cooling off period to give information about the new issue to potential investors. Because it has the big red disclaimer on it that this is not an offer or recommendation of the securities and that it is not the final prospectus, it can be amended during the cooling off period with immediate effectiveness.

A customer buys $100,000 face amount of general obligation bonds with 20 years to maturity at 80. The minimum maintenance margin requirement is: A. $5,000 B. $12,000 C. $15,000 D. $20,00

The best answer is B. There is no Reg. T initial margin requirement for municipal bonds since they are exempt securities. Reg. T only applies to non-exempt securities. However, FINRA does set a minimum maintenance margin requirement for municipal bonds. The minimum maintenance margin is the greater of 15% of the market value of the bonds (15% of $80,000 = $12,000) or 7% of the face of the bonds (7% of $100,000 = $7,000). The greater amount is $12,000, and so this is the minimum maintenance margin requirement.

A market maker effects an agency cross transaction of 400 shares at $41.00, charging the buyer a commission of $.50; and the seller a commission of $.50. Under ACT rules, the transaction would be reported as: A. 400 shares at $40.50 B. 400 shares at $41.00 C. 400 shares at $41.50 D. 400 shares at $40.50; 400 shares at $41.50

The best answer is B. This is an agency cross transaction - where a buy order for a customer and a sell order for another customer are "crossed" by the market maker. There is only 1 report of the trade made to ACT - that is, for the sell side. If there was a report made of both the buy and sell, there would be a double report of the same trade. All trade reports are made at the price of the trade excluding commissions, mark-ups; mark-downs; or service fees.

A registered representative at a member firm is considering making a recommendation that a customer exchange an existing whole life insurance policy for a variable life policy. In order to make such a recommendation, the representative should be LEAST concerned with: A. in-force ledger B. sub accounts C. current affordability D. life insurance coverage

The best answer is B. This question requires a little bit of thinking. FINRA states that valid reasons to exchange an existing whole life insurance policy are: - to get better coverage at a lower cost; - to get more desirable features or benefits; or - if the customer is concerned about the solvency of the company that issued the original policy or with the service of the agent that sold the policy. Reasons not to exchange an existing policy are: -to use an existing policy's cash value to pay for a new policy's first year expenses (mainly commissions); -if the existing policy is in its early years and cashing out the policy will incur high surrender charges; -if the existing policy is past its 2 year "contestability period" and any new policy could allow the insurance company to challenge a death claim that occurs in its first 2 years; or -if there are unfavorable tax consequences of the exchange. One would consider current affordability - a new policy might give better coverage at lower cost. One would consider the amount of life insurance coverage - a new policy might buy more coverage for the same (or lower) cost. One would also consider the in-force ledger. The in-force ledger is the statement of the existing whole life policy's cash value, surrender charges (if applicable), and projections of future death benefit and cash value. This would be used to see what the current coverage amount is; if there are surrender charges on the existing policy; if there is cash value that can be used to pay for a new policy; and if the insurance amount provided by the new policy is comparable or better than that provided by the old policy. The sub account to recommend to the customer when the variable life policy is purchased is a decision that is made after it is determined that making the exchange is appropriate. It is the item that is of the "least" concern.

All of the following statements are true regarding margin EXCEPT: A. all listed stocks are marginable B. all over-the-counter stocks are marginable C. all U.S. Government bonds are marginable D. all listed bonds are marginable

The best answer is B. Under Reg. T of the Federal Reserve, all listed securities are marginable. In order for an over-the-counter security to be marginable, it must be approved for margin by the Federal Reserve. Currently, the Fed approves all NASDAQ securities for margin. Other selected OTC issues are also on the OTC "margin list." All Government and Municipal issues are marginable under the maintenance margin rules of FINRA. The Federal Reserve cannot set margins for the issues because they are exempt from the Securities Exchange Act of 1934. The Act of 1934 only empowers the Fed to set margins for non-exempt securities.

Under Rule 147 (Intrastate exemption), the SEC will integrate any offerings of the same issuer that take place: A. 3 months after the offer B. 6 months after the offer C. 9 months after the offer D. 12 months after the offer

The best answer is B. Under Rule 147, the SEC can "integrate" any issues of new securities that occurred in the six months following that offering. Thus, an issuer would not be able to claim an intrastate exemption in, let us say, New York, and two months later, offer another issue under an intrastate exemption in New Jersey. The SEC would integrate these offerings and claim that an interstate offering requiring full registration was being made. Thus, under the integration provisions, it is difficult for an issuer to circumvent the rules.

In order for an issuer to qualify for a "safe harbor" under SEC Rule 168, factual or forward-looking information disclosure is: A. only permitted prior to the filing of a registration statement B. permitted prior to or after the filing of a registration statement C. only permitted after registration has been declared effective D. only permitted if the issuer is a WKSI and receives an SEC indemnification waiver

The best answer is B. Under Rule 168, which was passed in 2005, the SEC gave a "safe harbor" to a reporting issuer's forward-looking statements and factual statements that are made in the normal course of business. Thus, these issuers did not have to worry about investor lawsuits that they were making these statements as part of an offering of securities. The rule permits these disclosures anytime - as long as they are not being made in connection with a securities offering and as long as they are being made in the regular, normal fashion in which prior similar disclosures were made. An SEC indemnification waiver is a fictitious term. A WKSI is a "Well Known Seasoned Issuer" under Rule 405 which can do an automatic shelf registration with the SEC for add-on offerings.

Trades of all of the following debt securities are reported through TRACE EXCEPT: A. U.S. Governments B. Agencies C. Municipals D. Corporates

The best answer is C. FINRA started TRACE as a trade reporting system for corporate debt, but it has been expanded over the years to include agency debt (both unsecured and asset backed) and effective July 2017, also reports trades of U.S. Government bonds. Municipal bond trades are reported under a different system maintained by the MSRB called RTRS - the Real Time Reporting System.

Under SEC rules, a registered broker-dealer that engages in the purchase or sale of trading units of $200,000 or more is known as a: A. Third Market Maker B. Qualified Block Positioner C. Registered Reporting Member D. Primary Market Maker

The best answer is B. Under SEC rules, a Qualified Block Positioner is defined as any broker-dealer who is registered with the SEC under Section 15 of the Act that engages in the purchase or sale of blocks of stock of $200,000 or more. A Qualified Block Positioner must meet higher capital standards than Qualified Third Market Makers. Such firms can execute block transactions without being subject to Regulation SHO. In executing block transactions, the firm must exercise reasonable diligence so that the block could not be sold to or purchased from others at better terms; and that the shares comprising the block are sold as rapidly as possible under the circumstances.

In order to effect a penny stock transaction for a customer, all of the following must be given to the customer EXCEPT the: A. Current bid-ask quote for that security B. Average daily trading volume for that security C. compensation to be earned by the broker-dealer in the transaction D. compensation to be earned by the registered representative in the transaction

The best answer is B. Under the "Penny Stock" rules (Rules 15g-1 through 15g-6), when effecting a transaction for a customer in a non-exchange listed, non-NASDAQ stock under $5, the customer must be given the current bid-ask quote for the issue; and must be given the compensation amounts to be earned by the registered representative and brokerage firm. This is intended to stop sleazy penny stock boiler rooms from overcharging customers or from taking excessive spreads. There is no requirement to disclose average daily trading volume in the issue to the customer.

Mutual funds are permitted to effect all of the following transactions EXCEPT: A. The purchase of stock B. The short sale of stock C. The purchase of options D. The short sale of options

The best answer is B. Under the Investment Company Act of 1940, investment companies are prohibited from selling stock short. They are permitted to buy stock; to buy options; and to sell option contracts. Generally, options are sold against shares held in the portfolio to increase income from the portfolio if the options expire unexercised. These are so called "covered" writing strategies.

In order to be regulated under Subchapter M of the Internal Revenue Code, REITs are required to distribute at least what minimum percentage of their Net Investment Income? A. 75% B. 85% C. 90% D. 100%

The best answer is C. REITs and registered investment companies get "conduit" tax treatment under Subchapter M if they distribute at least 90% of their Net Investment Income to shareholders. This means that the REIT does not pay tax on the distributed income - it is only taxed at the shareholder level.

Which of the following would meet the definition of a "WKSI" under SEC Rule 405? An issuer that: A. has annual gross sales of at least $1 million for each of the past 3 years B. has at least 35 seasoned investors C. had never issued common stock but that has issued $1 billion of non-convertible debt in the past 3 years D. has previously registered at least $100 million of common stock with the SEC under Rule 415 in the past 3 years

The best answer is C. A "Well Known Seasoned Issuer" (WKSI) under SEC Rule 405 qualifies for automatic shelf registration of its securities. It is an issuer that is currently reporting to the SEC that either: has at least a $700 million world-wide market capitalization; or has issued at least $1 billion in non-convertible senior securities (preferred stock or bonds) in the past 3 years; or is a majority owned subsidiary of a parent company that is a "WKSI" and is issuing either non-convertible stocks or bonds.

A publicly traded company is the subject of a tender offer. The company is obligated to give its shareholders its response to the proposed offer within: A. 1 business day B. 5 business days C. 10 business days D. 20 business days

The best answer is C. A company that is the subject of a tender offer must give its shareholders its "opinion" of the offer within 10 business days of the offer's publication. The company must either: give security holders a statement that it recommends acceptance or rejection of the tender offer; or give security holders a statement that it expresses no opinion and is remaining neutral toward the bidder's tender offer; or give security holders a statement that it is unable to take a position with respect to the bidder's tender offer. question # 1-3-142-4Copyright 1989-

Under the Uniform Net Capital Rule, a fully disclosed broker-dealer that neither receives, nor holds, customer funds or securities, wants to participate in underwritings. Which statement is FALSE? A. The broker-dealer may participate in best efforts or all or none underwritings as a syndicate member B. All monies collected by the broker-dealer must be made payable to an escrow agent and must be promptly forwarded to that agent C. The firm may participate in firm commitment underwritings as a selling group member D. The firm must maintain minimum net capital of $5,000 at all times

The best answer is C. A fully disclosed broker-dealer that neither receives, nor holds, customer funds or securities must maintain minimum net capital of $5,000. A $5,000 broker-dealer cannot participate in a firm commitment underwriting, either as a syndicate or selling group member. In order to participate in a firm commitment underwriting, a higher level of net capital is required. Firms with $50,000 of net capital can participate in firm commitment underwritings as a selling group member only (no liability). Firms with $250,000 of net capital can participate in a firm commitment underwriting, either as a syndicate or selling group member. $5,000 fully disclosed broker-dealers can participate in best efforts (or best efforts-all or none) underwritings, either as a syndicate or selling group member, without increasing their capital. In a best efforts underwriting, the underwriter has no liability for unsold shares and only gets credit for the amount sold. As with any $5,000 broker-dealer, taking checks from customers is prohibited (only $250,000 clearing broker-dealers can accept and hold customer funds and securities). Thus, all monies collected in the best efforts underwriting must be made payable to, and be promptly transferred to, an escrow agent.

A member firm has outsourced some of its business support activities to third party vendors. Under FINRA rules: A. any vendors used must also be FINRA member firms B. the vendors used must agree to be subject to FINRA inspection C. the relationship with the vendors used must be included in the firm's Business Continuity Plan D. the vendors used must be located within the United States

The best answer is C. If a member firm outsources "mission critical" functions to 3rd party vendors, FINRA requires that this be addressed in the firm's Business Continuity Plan (e.g., the member firm must get assurance or proof that the vendor has its own BCP and business recovery procedures).

A broker-dealer will typically sell out customer securities whenever the: A. customer does not pay for a purchase by settlement B. account becomes restricted as defined under Regulation T C. account equity falls below minimum maintenance margin or the house requirement, whichever is greater D. account equity falls below the initial Regulation T margin requirement

The best answer is C. Customers are typically not immediately sold out for non-payment on settlement. If a customer does not pay for a purchase by "Settlement + 2" business days allowed under Reg. T, ignoring an extension, the position must be sold out and the account frozen for 90 days. If an account falls below the initial Reg. T margin, the account is restricted. Nothing happens in the account. The only effect of restriction is that if a customer wishes to sell securities, he or she must retain 50% of the proceeds to reduce the debit. If an account falls below minimum maintenance margin, a maintenance call is generated which must be met promptly. Otherwise, the firm will liquidate positions in the account until the account is brought above maintenance.

Which order is subject to the Limit Order Display Rule? A. Block size order of at least 10,000 shares or $200,000 B. Odd lot size order smaller than 100 shares C. Priced customer order that is not immediately executable D. Priced order that the customer requests not be displayed

The best answer is C. Exceptions to the Limit Order Display rule are given to odd lots, block trades, orders that the customer requests not be displayed, and orders that do not improve the MMs displayed price and do not increase the display size by at least 10%. On the other hand, customer limit orders that are not immediately executable are the ones to be displayed, as long as they are better-priced than the MM's quote.

Under SEC rules, which limit order is NOT required to be protected by a member firm's market making unit? A. An unsolicited order from a retail customer of the market making unit B. An order placed by another member firm for one of its customers C. An order placed by that member firm's proprietary trading unit that is separated from the firm's market making unit D. An order received by an introducing broker-dealer from one of its customers that is routed to its clearing firm for execution

The best answer is C. FINRA Rule 5320 prohibits trading ahead of customer limit orders. "Protection" means that customer orders are filled prior to any filling an order with the same terms entered by that member firm - so customer orders always go first. An exception to the rule is given to large size customer orders (10,000 or more shares) and institutional orders, where FINRA states that: if these customers are given comprehensive written disclosure at account opening and annually thereafter that the member may trade proprietarily at prices that would satisfy the customer order; and the customer is given the opportunity to "Opt In" to protection and chooses not to do so; then the member is not subject to the rule. Another exception is given to orders placed by member firm proprietary trading desks that are "walled off" from the firm's market making and order entry units, so that it could have "no knowledge" of incoming customer limit orders. Finally, orders placed to fill odd lots and to correct errors, are excluded from the rule.

In order to recommend a variable annuity to a customer, all the following statements are true EXCEPT: A. the customer must be informed, in general terms, of the material features of the product B. the representative must believe that the customer would benefit from the product's features and that the underlying separate accounts to which funds are allocated and riders to the policy are suitable C. the customer must sign an attestation that he or she understands the features and risks of the product prior to confirmation of purchase D. the representative must sign a statement that all required representations and determinations were completed prior to approving the contract

The best answer is C. In order to recommend a variable annuity to a customer, the representative must have a reasonable basis to believe that: the customer has been informed, in general terms, of the material features of the product; the customer would benefit from one or more of the product's features; and the particular variable product as a whole, the underlying separate accounts to which funds are allocated, and riders to the policy are suitable. Furthermore, the representative (not the customer) must sign a statement that all required representations and determinations were completed.

Which statement is TRUE about quotes entered for OTC stocks? A. Quotes must be firm and 2-sided B. All quotes must be unfirm and can be either 1- or 2-sided C. BW may be placed by a dealer seeking to sell stock D. The minimum quote size is 100 shares

The best answer is C. OTC Markets Group shows quotes for securities that do not qualify for a NASDAQ listing. It lists firm quotes at the top of the screen, followed by "unfirm" quotes (meaning the dealer wants to negotiate on price - note that these quotes are prohibited in NASDAQ). OTC, both 2-sided and 1-sided quotes are permitted. In contrast, only 2-sided firm quotes can be entered in NASDAQ. In addition, dealers can place "BW" and "OW" entries for positions (Bids Wanted and Offers Wanted) and can place unpriced indications of interest in securities positions. BW would be used by a dealer who is seeking to sell stock. OW would be used by a dealer who is looking to buy stock. Minimum quote size is dependent on the price of the underlying security. Depending on the price level of the quotation, a different minimum size can apply to each side of the market being quoted by the member in a given security. Priced (Firm) Bid or Offer Minimum Quote Size $.0001 - .0999 10,000 shares $.10 - $.1999 5,000 shares $.20 - $.5099 2,500 shares $.51 - $.9999 1,000 shares $1.00 - $174.99 100 shares $175+ 1 share

An order entered into NASDAQ as "Market Hours IOC TIF" must be immediately filled in: A. its entirety or canceled between the hours of 9:30 AM and 4:00 PM B. its entirety or canceled between the hours of 4:00 AM and 8:00 PM C. part or in full between the hours of 9:30 AM and 4:00 PM D. part or in full between the hours of 4:00 AM and 8:00 PM

The best answer is C. Orders entered into the NASDAQ Market Center are entered either as: Market Day: An order to be executed during the regular trading hours of 9:30 AM - 4:00 PM ET System Day: An order to be executed during the system operating hours of 4:00 AM - 8:00 PM ET, which includes both the Premarket and Aftermarket trading sessions. The term "Market Hours" means that the order is to be placed with a "TIF" - (Time in Force) of Market Day. IOC means "Immediate or Cancel" - either fill the order in full or in part, and any unfilled portion is canceled.

A registered representative at your firm borrows $9,000 from another representative in the same branch office. As the principal, you become aware of this at the next scheduled compliance meeting of your firm. What action should you take? A. No action needs to be taken B. This is a "reportable event" that must be filed with FINRA promptly C. You should determine that one representative was not the customer of the other representative D. You should advise the representatives that such a loan requires each to amend their U4

The best answer is C. Registered representatives cannot borrow from customers. Exceptions are given if the: - customer is an immediate family member; - customer is a bank making a loan on the same terms and conditions that it gives the general public; - customer is another registered employee of the same broker-dealer; - lending arrangement is based on a personal relationship with the customer that is outside of the broker-customer relationship; or - lending arrangement is based on a business arrangement that is outside of the broker-customer relationship. The key point is that the rule applies to borrowing from customers. The rule states that the firm must have policies and procedures covering borrowing from customers and that items 3, 4 and 5 require prior notice and approval from the firm. Regarding items 1 and 2, it is up to the firm whether it wants to require prior notice and approval. So, if one representative is borrowing from another, the next question is: "Is there a customer relationship there?" For example, someone who is registered with a Series 99 back office license could have an account with the firm managed by someone with a Series 7 license. If that is the case, then the rule would apply and prior written notice to the firm and firm approval is required. Also note that if there is no "customer relationship," then the firm can still put in an internal procedure where any borrowing by a representative must be reported to the firm and approved by the firm - since heavy borrowing by a representative is a "red flag."

Under Regulation SHO, a member firm is exempt from the "locate requirement" when effecting a short sale: A. under no circumstances B. if the short sale is effected on an upbid C. if the short sale is effected as part of the firm's bona-fide market making activities D. if the short sale is effected to fill a customer order

The best answer is C. Regulation SHO requires that if a short sale is being effected, the member firm must "locate" the shares to be borrowed and document this. This is intended to stop the prohibited practice of naked short selling, where the seller is speculating on a market drop without actually borrowing the shares for delivery on settlement. An exception to the locate rule is given to market makers who effect short sales as part of their regular market making activities. Remember, these firms are actively trading throughout the day, and imposing a "locate" and documentation requirement prior to each trade would severely gum things up. Furthermore, market makers try to balance their books (long versus short positions) throughout the day and especially overnight, so that they are not subject to a market value swing. Thus, naked shorts, where the seller is speculating on a market drop without actually borrowing the shares, is not a position that a market maker would take.

Which of the following could be evidence of rogue trading? A. A sequence of trades that is consistently profitable B. A sequence of trades that results in a flat position at end of day C. A sequence of trades that results in a higher level of cancels and corrects D. A sequence of trades that are concentrated at the opening or close

The best answer is C. Rogue traders are trying to fly under the firm's radar, taking positions that are larger than the firm permits, in an attempt to offset existing losses or magnify gains. If a trader has a significant position with a loss, and does not want the firm to know about it, the trader could enter a "sell" order that is basically a false trade (this could only be done outside of automated trading systems - for example, OTC derivatives), so there would no position visible at the end of the day. The trader is hoping that, on the next day, the position will rebound, and he or she can close the position at no loss, or at a profit. The "tip off" to the firm that something is going on is that a DK (Don't Know) will be generated by the "supposed" trade counterparty, and when received by the firm, the rogue trader would be forced to cancel that trade. Choice A is a potential indicator of insider trading. Choice B is typical for traders who don't want to carry risk overnight (a flat position is a "0" position). Choice D is also typical, because most trading volume and most volatility occurs right after opening, or as the market heads for a close.

A corporation wishes to place a large purchase order to buy its own stock for the company's Employee Stock Option Plan (ESOP). The current inside market for the stock is $20.00 - $20.50. The last trade in the stock occurred at $20.10. What is the highest price at which the company can purchase its own shares? A. Any price that is reasonably related to the current market B. $20.00 C. $20.10 D. $20.50

The best answer is C. Rule 10b-18 sets the guidelines for a corporation that wishes to buy back its stock in the market. The rule gives the company a "safe harbor" from being accused of trying to manipulate up the price of its stock. Rule 10b-18 purchases, as they are known: - Must be effected through 1 broker/dealer on any given day; - Cannot be the opening transaction; - Cannot be executed within 10 minutes of market close if the security is "actively traded" as designated by Rule 101 of Regulation M, otherwise the purchase cannot be executed within 30 minutes of market close; - Must be effected at prices no higher than the current highest independent bid for that security or last reported sale price (whichever is higher); - Cannot exceed 25% of the trading volume in the security that day (except for block purchases handled outside the normal flow of orders). The last reported trade of $20.10 is higher than the current inside bid of $20.00, so the stock can be purchased at a price no higher than $20.10.

Under what circumstance would a foreign broker-dealer lose its exemption from having to register in the United States under the provisions of SEC Rule 15a-6? A. The foreign broker-dealer prepares and distributes a research report to FINRA member firms without conditioning the distribution on business generated B. The foreign broker-dealer solicits transactions with institutional investors in the U.S. and executes the transactions through a correspondent U.S. broker-dealer C. The foreign broker-dealer effects an unsolicited trade for a non-institutional U.S. customer and sends a trade confirmation with a research report included in the mailing D. The foreign broker-dealer solicits expatriates temporarily in the U.S. with whom the firm had a pre-existing relationship

The best answer is C. Rule 15a-6 defines what a foreign broker-dealer can do in the United States without having to register. There are 5 broadly permitted activities: Effecting unsolicited transactions for clients in the U.S.; Distributing research reports to institutional investors; Soliciting transactions with institutional investors which are then effected through a "chaperoning" U.S. broker-dealer; and Conducting business with U.S. broker-dealers and banks; and Conducting business with expatriates who are temporarily present in the U.S. with which the foreign broker-dealer had a pre-existing relationship. In Choice C, the problem is that by putting a research report in the trade confirmation, this is viewed as the foreign broker-dealer soliciting another trade from this non-institutional U.S. client, and solicitation is only permitted of institutional investors (and then, any resulting trades must go through a correspondent U.S. broker-dealer). Choice A would be exempt under Item 4, and possibly Item 2. Choice B would be exempt under Item 3. Choice D would be exempt under Item 5.

Given no other information, a minimum capital requirement of $1,000,000 applies to which type of market maker? A. Qualified OTC Market Maker B. Qualified Third Market Maker C. Qualified Block Positioner D. Qualified Independent Underwriter

The best answer is C. SEC Rule 3b-8 defines different types of market makers for the purpose of the market maker borrowing from a bank using securities as collateral under Regulation U. It sets substantial net capital requirements for these market makers to borrow from banks. The definitions are: Qualified OTC Market Maker: A dealer in OTC margin securities that publishes regular bid-ask quotes and it ready, willing, and able to effect transactions in reasonable amounts. A Qualified OTC Market Maker must maintain minimum net capital of the lesser of $250,000 or $25,000 plus $5,000 for each security in excess of 5 in which the firm makes a market. Qualified Third Market Maker: A dealer in any stock registered on a national stock exchange that publishes regular bid-ask quotes and it ready, willing, and able to effect transactions in reasonable amounts. A Qualified Third Market Maker must maintain minimum net capital of the lesser of $500,000 or $100,000 plus $20,000 for each security in excess of 5 in which the firm makes a market. Qualified Block Positioner: A broker or dealer who engages in the activity of purchasing or selling short a block of stock with a market value of $200,000 or more in a single transaction to facilitate a sale or purchase by a customer. The block positioner must determine that the trade could not have been executed on better terms somewhere else and must sell the shares comprising the block as rapidly as possible. To be a Qualified Block Positioner, minimum net capital of $1,000,000 is required. A Qualified Independent Underwriter (QIU) is a FINRA term for an underwriter that can be used to price the shares of a privately-held member firm that wishes to take itself public.

Which statement is FALSE regarding a firm that wishes to advertise options over the radio? A. The advertisement must meet the requirements of SEC Rule 134 or 134a B. The advertisement is limited to a general description of the security being offered and the nature of the options markets C. The advertisement can contain recommendations, and may show past, or projected performance D. The advertisement must state the name and address of the person from whom a current disclosure document can be obtained, if specific securities are named

The best answer is C. Since every option contract is a "newly issued" security, options advertising falls under the Securities Act of 1933 prohibition on advertising of new issues. The only acceptable method of offering a new issue (unless exempt) is through a prospectus - the Options Disclosure Document. Anyone who receives an advertisement on a new issue must get a prospectus at the same time. This effectively prohibits the advertising of new issues in any form, including radio and television. However, the SEC allows certain announcements that it does not define as "advertising," therefore a prospectus need not be sent. These announcements are covered under Rule 134 (and 134a for mutual funds). This is known as the "tombstone" rule, since tombstone announcements meet the rule's requirements. Tombstones give general information on the security being offered and state that a prospectus is available upon request from a party identified in the announcement. Recommendations of the issue are prohibited in tombstones.

In order to satisfy the "locate" requirement of Regulation SHO, a member firm may employ all of the following means EXCEPT: A. make a determination prior to each short sale B. rely on an "Easy-to-Borrow" list C. rely on the "Threshold" list D. rely on assurances from their clearing firm

The best answer is C. The "locate" requirement of Regulation SHO requires that a broker-dealer cannot execute a short sale for its own account or for the account of another person unless: the security has been borrowed or an arrangement has been entered into to borrow the security; or there are reasonable grounds to believe that the security could be borrowed and delivered on settlement. To meet the "reasonable grounds" test, a broker-dealer can create a list of "Easy To Borrow" securities that is less than 24 hours old. These "Easy-to-Borrow" securities are readily available and are unlikely to create a fail to deliver on settlement. The "threshold" list is prepared by NASDAQ and is the list of "Hard-to-Borrow" securities. Many smaller introducing firms obtain their Easy-to-Borrow list from their clearing firm, so assurances from the larger entity regarding share availability are sufficient.

Which communications with the public MUST be pre-filed with FINRA by an established broker-dealer? A. Security Futures (options) advertisements and mutual fund advertisements B. Collateralized Mortgage Obligation (CMO) advertisements and registered Direct Participation Program advertisements C. Investment company advertisements that include member-prepared performance rankings and Security Futures advertisements D. Registered Structured Product advertisement and Investment Analysis Tools

The best answer is C. The basic advertising filing rule is that for a member firm's first year of operations, advertisements must be filed with FINRA 10 days prior to use and receive FINRA approval. Thereafter, no filing is required, but they are subject to spot check. However, there are exceptions to this basic rule. FINRA specifically requires advance filing of any advertisements about Security Futures (Options), and Investment Company advertising that includes member-prepared performance rankings (FINRA encountered misleading advertising by member firms about these, and wants to keep on close on them). Then there are other advertisements that FINRA requires be filed 10 days after first use, always. This question is quite picky because regular investment company advertising that does not include member-prepared performance rankings is filed 10 days after 1st use (this is actually a requirement of the Investment Company Act of 1940). Also, CMO, registered Structured Product, and registered DPP advertising, are all required to filed with FINRA 10 days after first use.

A broker-dealer makes a market in 50 common stocks that are under $5 bid, and 50 stocks that are over $5 bid. What is the minimum net capital requirement for this firm, based on the number of securities in which a market is being made? A. $50,000 B. $100,000 C. $175,000 D. $1,000,000

The best answer is C. The net capital requirement for broker-dealers who are market makers is a minimum of $100,000 and maximum of $1,000,000, based on the number of securities in which the firm makes a market. For each stock of $5 bid or under, $1,000 of capital is required; for each stock over $5 bid, $2,500 of capital is required. 50 stocks under $5 bid x $1,000 capital for each = $50,000 capital 50 stocks over $5 bid x $2,500 capital for each = $125,000 capital Total capital based on the number of securities in which a market is made totals $175,000. This is below the maximum requirement based on the number of securities in which a market is made of $1,000,000.

If securities are suspected to be lost, the member firm: A. must give immediate electronic notice to the Securities Information Center B. has one business day to find the securities and then must notify the Securities Information Center on the next business day C. has two business days to find the securities and then must notify the Securities Information Center on the next business day D. has five business days to find the securities and then must notify the Securities Information Center on the next business day

The best answer is C. If securities are suspected to be lost, with no criminal activity involved, the firm has 2 business days to find them and must report the loss on the 3rd business day. If criminal activity is suspected, the firm has 1 day to find the securities and then must report the loss to the Securities Information Center on the next business day.

If a customer opens up a cash account on-line at a broker-dealer with no outside input, what signature(s) is (are) required on the account record maintained at the broker-dealer? A. Customer B. Registered Representative C. Principal D. No signature is required on the account record

The best answer is C. This one is interesting because FINRA has "modernized" its rule regarding required signatures on a new customer account. To open a cash account, a principal must always sign the new account documentation, accepting the account for the firm. What about the Registered Representative? It depends! If a suitability determination was completed by the RR, both the representative and the principal accepting the account for the firm must sign. If the account was opened online directly by a customer, only a principal signature is required. In either case, there is no requirement for a customer signature. However, if the customer opens a margin account, the customer's signature is needed on the margin agreement. Finally, this is the FINRA rule, but it is not industry practice. Every firm that we know of has the customer sign an arbitration agreement at account opening, but it is not legally required. If a firm wants to open a customer account without having the customer sign an arbitration agreement, it can!

Under the Net Capital Rule, fails to deliver for equity securities that are older than 4 business days are: A. valued at the contract price B. marked to market, but no haircut is taken C. marked to market and are subject to a 15% haircut D. marked to market and are subject to a 100% haircut

The best answer is C. A fail to deliver arises when a brokerage firm sells a security (usually for a customer) and on settlement date, the customer does not deliver the security to the firm. This forces the firm to "fail to deliver" the security on the sale. The firm is now waiting for the customer to deliver - so this really represents a security receivable to the brokerage firm. Through 4 business days past settlement, the Net Capital rule allows the full value of the security as an asset of the broker-dealer, since it is likely that the customer will deliver. On the 5th business day, the SEC is now concerned that the customer may not deliver, and the contract must be marked to market and haircutted by 15%. After the 10th business day, customer fails to deliver must be bought in by the firm. (Any loss on buy-in would be charged to the customer's account). (Note: The newer (2009) SEC Rule 204 of Regulation SHO, which requires mandatory buy-in of fails to deliver resulting from short sales the morning of S+1; and from long sales the morning of S+3; effectively makes these rules obsolete. However, when the SEC adopted the new rules, they did not go through the older rules that were impacted by this change to clean them up. The "old" rules are still on the books and are still tested, since they still exist!)

Which of the following would be defined as "Sales Literature" by FINRA? A. Advertisement in social media B. Letter to customers describing the effects of tax law changes C. Technical report on options income strategies mailed to customers D. A letter to a customer discussing his particular portfolio performance

The best answer is C. A report to customers that deals with "options income strategies" falls under the FINRA definition of sales literature. A letter to customers giving general economic information that is not directly related to the securities markets, such as the report on tax law changes, does not fall under the definition of sales literature. Advertising in social media is defined as "advertising" (intended for the general public; in contrast, a password-protected website is seen by a specific audience and is sales literature). A letter of an individual nature to a customer is also not considered to be sales literature - rather it is defined as "correspondence" that is subject to principal review.

As a result of a finding against a member firm in a hearing conducted under the Code of Procedure, FINRA can take all of the following actions EXCEPT: A. Expulsion B. Fine C. Cease and desist order D. public announcement of wrongdoing

The best answer is C. As a result of a finding against a member firm or associated person by the Hearing Panel, FINRA can censure, suspend, or expel the associated person or firm; can impose a fine of any dollar amount; and can make of public announcement of the actions taken and why. FINRA also has the right to issue a cease and desist order against an associated person or firm, but these are issued to "maintain the status quo while an underlying disciplinary proceeding is being litigated." So FINRA would issue a cease and desist order as the hearings are occurring to stop "further violative conduct." Once the Hearing Panel has made a finding and taken action such as a fine, suspension, or expulsion, there is no longer a need for such a "cease and desist" order.

Which statement is TRUE about NASDAQ limit order rules? A. Member firms must accept limit orders and cannot levy special handling charges against these orders B. Member firms must accept limit orders, but can levy special handling charges against these orders C. Member firms are not obligated to accept limit orders, but if accepted, can levy special handling charges against these orders D. Member firms are not obligated to accept limit orders, but if accepted, cannot levy special handling charges against these orders

The best answer is C. NASDAQ market makers are not under the obligation to accept limit orders from customers - they are only required to accept market orders. This way, if the market maker does not want to comply with the requirements of the Limit Order Protection Rule (FINRA Rule 5320), it does not have to do so. If the market maker chooses to accept limit orders (which the vast majority of market makers do), they may impose special charges for the additional work of executing this type of order.

A customer sells short 1,000 shares of ABC stock at $14.00 as an initial transaction in a new margin account, depositing the required margin. The customer will receive a call for maintenance margin if the stock price rises above: A. $15.00 per share B. $16.00 per share C. $16.15 per share D. $16.50 per share

The best answer is C. Short margin accounts have a minimum maintenance margin requirement of 30%. The formula for the market value at maintenance in a short margin account is: In this account, the customer sells short $14,000 (current market value) of stock for a credit of $14,000 to the account. In addition, he must deposit 50% initial margin or $7,000 for another credit. Total credits equal $21,000 for this position. To find the market value where the account is at maintenance: $21,000 Credit/1.3=$16,153 for 1,000 shares=$16.15 per share If the market value rises above $16.15, a maintenance call will be generated.

Under FINRA rules regarding advertising, all of the following statements are true EXCEPT: A. If a recommendation of a security is made, the price at the time must be included B. If a testimonial is given, it must be stated whether the maker has been paid for the testimonial, if more than a nominal sum was paid C. The performance of previous recommendations may not be shown in the report D. It must be disclosed if the firm was a manager or co-manager in an underwriting of any of that company's securities within the past 12 months

The best answer is C. Under FINRA advertising rules, if a recommendation of a security is made, the price of the security at the time and the date must be included. If a testimonial is given, it must be stated if the maker has been paid, if more than a nominal amount is involved. It also must be disclosed if the firm owns the security or options, warrants, etc.; if the firm is a market maker in the security; or if the firm was a manager or co-manager in an underwriting of any of the company's securities within the past 12 months. There is no prohibition on showing past performance of recommendations - as long as all recommendations of that type are shown (one cannot be deliberately selective and only show the "good" ones) and a statement is made that past performance does not predict future results.

All investment company advertising must be filed with FINRA: A. 10 business days prior to 1st use B. 10 business days prior to use for the 1st year of operations; no filing is required thereafter C. 10 business days after 1st use D. 10 business days after 1st use for the 1st year of operations; no filing is required thereafter

The best answer is C. Under FINRA rules, Investment Companies, CMO, registered Structured Products and registered Direct Participation Program (DPP) retail communications must be filed 10 business days after first use. Options retail communications must be filed 10 business days prior to 1st use. All other retail communications must be filed 10 business days prior to first use for the first year of operations; thereafter, no filing is required, but they are subject to spot check.

A "seasoned equity offering (SEO)" is a(n): A secondary offering of shares of a company held by selling shareholders and officers B primary distribution of shares of a company that has publicly held shares trading in foreign equity markets C add-on offering of shares where a company wishes to raise additional capital D offering of shares made by a "WKSI" - Well-Known Seasoned Issu

The best answer is C. A "seasoned equity offering" or "seasoned issuer" is one that is making an "add-on" offering of shares. Thus, the issuer has already registered shares with the SEC for its IPO and is now coming back to the market, issuing additional shares to raise more capital.

Under the Net Capital Rule, when a fail to receive for the firm account has been sold: A. both net worth and aggregate indebtedness increase B. both net worth and aggregate indebtedness decrease C. net worth is unaffected and aggregate indebtedness increases D. net worth decreases and aggregate indebtedness is unaffected

The best answer is C. A fail to receive arises when a firm buys a security and on settlement date, the security does not arrive. The firm does not have the physical security in its possession and is obligated to pay when it arrives. If the firm "sells" this security, it cannot make delivery (since it does not have physical possession). Thus, it is obligated to pay for that stock to make delivery, so aggregate indebtedness of the firm increases. However, there is no effect on net worth - only a profit or a loss will affect a firm's net worth.

All of the following statements are true about restricted margin accounts EXCEPT: A. An account is restricted if it falls below 50% initial margin B. The long sale of stock in a restricted account releases 50% of the proceeds to SMA C. The long sale of an option position releases 50% of the proceeds to SMA D. The retention requirement in a restricted margin account is 50%

The best answer is C. A margin account is restricted under Reg. T when it falls below initial margin (50%). In a restricted account, 50% of the proceeds of any sale must be retained in the account to reduce the debit balance (the "retention requirement"). The other 50% of the sale is released to SMA and can be taken out of the account by the customer. Since long options are not marginable (100% must be deposited to purchase long options), the sale of a long option releases the full proceeds (100%) to SMA.

A new customer is completing the paperwork to open a new account at your firm. When reviewing the paperwork, the new accounts department of your firm notices that the trusted contact person named is located in a country on the OFAC list. What is the best action for the firm to take? A. Refuse the opening of the account B. Only open the account if the customer names a different trusted contact person C. Open the account, but subject it to heightened supervision D. Open the account with no further action required

The best answer is C. A trusted contact person has no control over the account and cannot effect transactions in the account (unless that individual is given a power of attorney). There is nothing stopping a firm from opening an account if the trusted contact person is located in a foreign country - even one that is on the OFAC (Office of Foreign Assets Control) list and subject to sanctions, such as Iran and Cuba. However, it is unusual and the account should be monitored closely to see if there is suspicious activity - in which case an SAR report should be filed.

Registered representative participation in an Internet Chat Room is defined by FINRA as a(n): A. institutional communication subject to post-use principal review and approval B. testimonial the requires disclosure that it was paid, if more than $100 was received C. public appearance subject to the firm's Written Supervisory Procedures (WSPs) D. retail communication subject to prior principal approval

The best answer is C. Chat room participation by a registered representative is defined as a "public appearance." These are defined as unscripted, spontaneous appearances. FINRA has taken the stance that it cannot control these, so it leaves it up to the firm to come up with internal policies and procedures to ensure that associated persons behave properly in these circumstances.

A customer has a combined long and short margin account with the same number of shares of differing stocks. There is a sharp market decline affecting all positions in the account equally. Which statement is TRUE? A. The account becomes restricted under Regulation T B. The equity in the account will decrease C. The equity in the account remains unchanged D. The account will receive a maintenance call

The best answer is C. If the market value of all the securities in the account drops equally, then the long market value will fall, reducing equity, and the short market value will fall, increasing equity. If the long and short positions are of equal size, the loss on one side cancels out the gain on the other and equity remains unaffected.

Which is a prohibited practice under the FINRA Conduct Rules? A. Advising a client to purchase stock based on a market analysis indicating that the stock is likely to appreciate in the near term B. Selling a security prior to advising a customer to purchase that security C. Buying a security prior to advising a customer to buy that security D. Advising a client to sell stock based on a market analysis indicating that the stock is likely to decline in the near term

The best answer is C. Choice C is an example of "front running," which is a prohibited practice under FINRA rules. For example, if a firm receives a large buy order from a customer (which is likely to raise the market price), it cannot buy the stock for the firm's account before executing the large customer order. Advising a customer to buy a stock based on a market analysis is perfectly acceptable; selling a security before advising a customer to buy does not conflict with the customer order nor is it front running, so this is acceptable; and advising a client to sell stock based on a market analysis is perfectly acceptable.

Quotes for all of the following will be found on CQS EXCEPT: A. Listed common stock B. Listed preferred stock C. Listed convertible bonds D. Listed ADRs

The best answer is C. Consolidated Quotations Service only provides quotes for equity securities, that is common stock (including ADRs), preferred stock, warrants, and rights. It does not give quotes for options, nor for any type of debt security. Remember that CQS gives quotes for NYSE and NYSE American (AMEX) listed securities. It does not give quotes for NASDAQ or OTC securities.

Customer account records must be maintained for how many years after a customer closes an account? A. 1 year B. 3 years C. 6 years D. 10 year

The best answer is C. Customer account records must be kept for 6 years after an account is closed.

Broker-dealers are required to keep daily logs for: A. 2 years B. 3 years C. 6 years D. the life of the firm

The best answer is C. Daily logs are another name for the daily blotters - the cash receipts and disbursement blotter; the purchase and sales blotter; and the securities receive and deliver blotter. These must be retained for 6 years.

If correspondence is flagged for review by a firm's electronic surveillance tool, this review: A. must be performed by a Series 24 principal B. must be performed by a registered individual C. can be delegated to an individual who need not be registered D. must be performed by the firm's chief compliance officer

The best answer is C. FINRA permits a member firm to use risk-based principles for "post use" review and approval of correspondence. An electronic program can be used to select a valid sampling size of emails for review; and then a lexicon-based program is used to look for prohibited words or phrases in the emails. Those e-mails that are flagged must be sent to a human reviewer, who need not be registered. The name of the individual who reviewed the email and the actions taken, if any, must be recorded by the member firm. A principal must take overall responsibility for this correspondence compliance program.

An employee of FINRA wishes to open an account at a member firm. This action is: A. prohibited B. permitted only with prior FINRA approval C. permitted only if the employee discloses this to FINRA and authorizes that duplicate statements be sent to FINRA D. permitted without restriction

The best answer is C. FINRA permits its own employees to open accounts at member firms, however the FINRA employee cannot buy the stock or debt of a member firm; must disclose the account to FINRA; and must authorize that FINRA be sent duplicate account statements.

Under the Conduct Rules, FINRA prohibits a member firm from selling a domestic security for a customer if the firm has a fail to deliver in that security that is older than: A. 10 days B. 30 days C. 60 days D. 90 days

The best answer is C. FINRA prohibits a member firm from accepting a customer order to sell, or from selling for its own account, if it has a fail to deliver in that security that is older than 60 days. This time period is extended to 90 days if the firm has a fail to deliver in a foreign security. (Note: The newer (2009) SEC Rule 204 of Regulation SHO, which requires mandatory buy-in of fails to deliver resulting from short sales the morning of S+1; and from long sales the morning of S+3; effectively makes these rules obsolete. However, when the SEC adopted the new rules, FINRA did not go through the older rules that were impacted by this change to clean them up. The "old" rules are still on the books and are still tested, since they still exist!)

When an introducing broker-dealer uses a clearing broker-dealer to generate its account statements, the required notice on the statement directing customers to promptly report inaccuracies or discrepancies in their accounts should direct customers to: A. the introducing broker-dealer B. the clearing broker-dealer C. both the introducing and clearing broker-dealer D. FINRA

The best answer is C. FINRA requires that customer account statements include a notice that the customer should contact the member firm promptly to report any inaccuracies or errors on the statement. The notice must include the phone number of the contact person at the broker-dealer, and any such reports must be confirmed to the customer in writing. Where both a clearing and introducing firm are involved, there must be 2 contact numbers - one for each. Also note that member firms have interpreted the appropriate contact person to be in the firm's compliance department. The contact person is not in the operations department (they could have made the statement error!) nor can it be the representative servicing the account.

The required verification of applicant information provided on Form U4: A. must be conducted by the member firm utilizing a national search of all reasonably available public records B. must be conducted by the member firm utilizing a national search of all reasonably available public and nonpublic records C. can be conducted by either the member firm or a third-party service provider utilizing a national search of all reasonably available public records D. can be conducted by either the member firm or a third-party service provider utilizing a national search of all reasonably available public and nonpublic records

The best answer is C. FINRA requires that when a new hire applicant completes a Form U4, the member firm must complete verification of the information within 30 calendar days after the form is filed with FINRA (but FINRA "encourages" firms to complete the verification process before the Form U4 is filed). The verification process must provide for a national search of reasonably available public records (but not nonpublic records!) conducted either by the firm or a third-party service provider. Public records include criminal records, bankruptcy records, civil litigation and liens, and business records. To comply with this, the firm could review a credit report on the individual that contains public record information; can search a reputable public records database such as Lexis/Nexis; or could review a consolidated report from a specialized provider.

Which of the following is considered to be a fraudulent and manipulative practice? A. Buying ABCD stock, Selling Long ABCD stock, Buying ABCD stock, Selling Long ABCD stock in a customer account B. Placing an order to buy ABCD stock for the firm account ahead of a customer limit order to buy ABCD at the same price C. Selling short ABCD stock for a customer without first locating the stock and determining that it can be delivered on settlement D. Quoting a Bid and Ask price for ABCD stock to a customer for a minimum quantity and changing the quote if the customer accepts

The best answer is C. Notice that while all of the choices are prohibited, the question is asking which one is manipulative. Selling short a stock without locating the security and determining that it can be delivered on settlement is the manipulative practice of "Naked Short Selling" - which are short sales designed to drive the price of a security down, without any mention of borrowing and delivering the shares that are sold (note that this practice is on the SEC's and FINRA's radar screens). The other choices are all prohibited, but are not "manipulative" - in that they are not designed to move the price of a security. Choice A is the prohibited practice of "painting the tape" - creating a series of reported trades without changing ownership of the security. Choice B is the prohibited practice of front running a customer order. Choice D is the prohibited practice of backing away from a firm quote.

A Well Known Seasoned Issuer (WKSI) has filed an automatic shelf registration (Form S-3ASR) with the SEC. Later that year, the WKSI's market capitalization falls below the threshold required for WKSI status. As a result of this, the issuer: A. must replace its Form S-3ASR shelf registration with a Form S-3 shelf registration within 90 days B. is not obligated to take any action until the expiration date of the Form S-3ASR C. must designate on its next 10-K filing with the SEC that it is no longer a WKSI D. must make a tender offer at the price paid to any purchasers of its securities under the automatic shelf registration in that calendar year

The best answer is C. Part of the Form 10K (annual audited financial statements) filed with the SEC is an attestation as to whether the issuer qualifies for WKSI (Well Known Seasoned Issuer) status. A WKSI has a market cap of $700 million or has at least $1 billion of bonds outstanding. If the issuer's market cap falls below the threshold, that issuer is now simply a "seasoned issuer" and can use the regular shelf registration (Form S-3), but is not eligible for automatic shelf registration (Form S-3ASR).

A reverse pegged order to sell is placed at the: A inside bid B inside ask C inside bid plus $.01 or more D inside ask minus $.01 or more

The best answer is C. Peg orders dynamically track the inside market - their price movements are "pegged" to the movements of the NBBO. A "market peg" order (a reverse peg order) is tied to the opposite side of the NBBO. Thus, a market peg order to buy is tied to the inside ask. A market peg order to sell is tied to the inside bid. A reverse peg order to buy is placed at the inside offer less at least $.01. This means that the pegged bid will be lower than the inside ask, so there will not be a lock or cross. A reverse peg order to sell is placed at the inside bid plus at least $.01. This means that the pegged ask will always be higher than the inside bid, so there will not be a lock or a cross.

A securities offering that uses an "investment letter" to sell restricted securities is a: A. Rule 144 offering B. Rule 147 offering C. Regulation D offering D. Regulation A offering

The best answer is C. Private placements are sold under an "investment letter," signed by the purchaser. The letter states that the issue is not registered; that resale is restricted; and that the purchaser understands these facts.

Under Regulation T, "when issued" securities purchased with the understanding that the customer will pay on delivery in a cash account must be delivered by the broker dealer, and paid for: A. promptly B. within 4 business days of trade date C. within 35 calendar days of trade date D. within 90 calendar days of trade date

The best answer is C. Regulation T grants an exception to payment in a cash account being made promptly to "COD" - Cash on Delivery Transactions. In such transactions, "when issued" securities are typically delivered to a bank that has been instructed by the customer to pay upon delivery "POD." The broker-dealer has up to 35 calendar days after trade date to deliver such securities against payment under Regulation T. The funds must be ready to pay for these securities when they are delivered. In fact, the customer must have those funds deposited with the bank to pay no later than 4 business days after trade date ("Settlement + 2") - the maximum length of time permitted under Regulation T.

The purchase of a reverse convertible note would be most suitable for which investor? A A married couple in their late 30s who have extra funds because their kids are not going to college. They have a low risk tolerance and are beginning to plan for their retirement B A single woman, age 20, who is currently in her last year of college and who has just inherited $75,000. She intends to buy her first house within the next 4 years C An ex-CEO of a publicly traded company, age 55, who has received a big payout upon termination and is not sure how to invest the funds D A 70-year old retired investor of moderate means who is looking for extra income to supplement his small monthly pension and social security payments

The best answer is C. Reverse convertible notes are a type of structured product created by investment banks that look like a "bond" in that they have a stated rate of interest and a typical maturity of around 7 years. They give a higher rate of return than a conventional bond because, if the price of the "reference security" into which the bond is convertible drops, then at maturity, the owner gets back the stock and not the par value of the bond. For example, a customer buys a 7-year 15% $1,000 par reverse convertible note with a "knock-in" price of $100 per share for the stock (10 shares of stock based on $1,000 par). At maturity, the stock's price is at $80. The customer will receive 10 shares worth $80 = $800. If, instead, the price of the stock was above $100, the customer would receive $1,000 par. The risk to the customer is that the stock becomes worthless - then the entire principal amount is lost as of maturity. In addition, because they are created by banks, repayment of par at maturity if the stock price stays at par or rises, is dependent on the credit quality of the issuing bank. Reverse convertibles give a higher interest rate in return for higher risk. They are illiquid structured products that are really only suitable for a risk-tolerant sophisticated investor, making Choice C the best one offered.

Under FINRA rules, non-supervisory branches must be inspected: A. annually B. every 2 years C. every 3 years D. periodically

The best answer is C. The FINRA supervision rule requires that supervisory branches and OSJs be inspected annually; that non-supervisory branches be inspected every 3 years; and that non-branch locations (such as a back-office) be inspected "periodically."

Under the Investment Company Act of 1940, capital distributions must be distributed: A. quarterly B. semi-annually C. annually D. bi-annually

The best answer is C. The Investment Company Act of 1940 requires that capital gains distributions be made by investment companies annually, if they choose to make such a distribution. When the distribution is made, the share price is reduced on ex date (set by the Board of Directors of the Fund) for the value of the distribution.

Which of the following sell orders for EFFE common stock pursuant to Rule 144 is NOT permitted? A. The sale of registered EFFE shares by the President of EFFE Corporation B. The sale of registered EFFE shares by the wife of the President of EFFE Corporation C. The sale of unregistered EFFE shares by a bank trust officer acting on behalf of EFFE Corporation D. The sale of unregistered EFFE shares by a minority shareholder in EFFE Corporation

The best answer is C. Rule 144 cannot be used to sell unregistered shares on behalf of the corporate issuer. These securities must either be registered or must be offered under another exemption such as a private placement or intrastate offering. Rule 144 can only be used by "non-issuers" who hold restricted shares and wish to sell them into the public marketplace - which assumes that the company already has registered shares outstanding. In addition, Rule 144 applies to the sale of registered shares by control persons - officers and directors of that company and any "affiliated" persons.

Which statement is TRUE about shares issued under Rule 144A? A. The shares can be freely transferred between qualified institutional buyers after 6 months B. The shares can be freely transferred between individual accredited investors after 6 months C. The shares can be freely transferred between qualified institutional buyers immediately D. The shares can be freely transferred between all investors immediately

The best answer is C. Rule 144A issues can be freely traded from QIB (Qualified Institutional Buyer) to QIB with no holding period restrictions. Basically, a QIB is an institutional investor with at least $100 million of assets under management. No matter how wealthy an individual is, he or she is not a QIB. The trading system for 144A securities is PORTAL.

The maximum dollar limit for an offering to be subject to the provisions of Rule 504 under Regulation D is? A. $1,000,000 B. $5,000,000 C. $10,000,000 D. Unlimited

The best answer is C. Rule 504 applies of private placements of no more than $10,000,000. It allows for minimal disclosure requirements to investors in these small dollar offerings.

A customer account shows a free credit balance of $260,000 and fully paid securities with the value of $240,000. SIPC coverage for this account is: A. $240,000 B. $260,000 C. $490,000 D. $500,000

The best answer is C. SIPC coverage is limited to $250,000 of cash, with maximum coverage of $500,000 (inclusive of the cash coverage). In this case, only $250,000 of the $260,000 of cash is covered, and the entire $240,000 of securities is covered for a total coverage of $490,000.

Which statement is TRUE regarding structured products? A. Structured products are standardized and have a fixed maturity date B. Structured products are standardized and do not have a fixed maturity date C. Structured products are not standardized and have a fixed maturity date D. Structured products are not standardized and do not have a fixed maturity date

The best answer is C. Structured products are securities based on, or derived from, a basket of securities, an index, or other securities, commodities or currencies. There are many types of structured products, but generally they consist of a "bond" portion with a fixed maturity date, which pays interest based on the performance of a well-known index such as the S&P 500 Index. In addition, they have a derivative component (an embedded option) that allows the holder to sell the security back to the issuer (at par) at maturity. These are often marketed as debt instruments, but that is not really the case. Structured products are created by many different brokerage firms and are not standardized as each firm's version is somewhat different.

Under FINRA rules, if a corporate bond is traded between 2 member firms: A. the buy side reports the trade to TRACE B. the sell side reports the trade to TRACE C. both the buy side and sell side report to TRACE D. the trade report is made to TRACE by the firm that is a Registered Reporting Member

The best answer is C. TRACE reports corporate, government, and agency bond trades. Each member that trades a corporate, government, or agency bond must report the transaction to TRACE as soon as practicable, but no later than 15 minutes, after execution. Unlike reporting of stock trades, where only the executing side reports the trade (with some minor exceptions), TRACE requires that both the buyer and the seller report the trade. This ensures compliance with the rule, because if one side reports and the other does not, FINRA knows because it has an unmatched trade report and can discipline the non-compliant firm.

Temporary subordinated loans can only be used to: A. provide capital for a broker-dealer's market making activities B. permit a broker-dealer to acquire another member firm C. enable a broker-dealer to participate in an underwriting D. meet calls for additional margin made by the clearing corporation

The best answer is C. Temporary subordinated loans are only to be used in "extraordinary circumstances" - which the rule defines as providing additional capital to participate in a firm commitment underwriting. Member firms can only take out 3 temporary subordinated loans per year, with a maximum duration of 45 days each (which is plenty of time to do an underwriting). Firm commitment underwritings require huge amounts of capital because the member firm must haircut 30% of the firm commitment value from net capital prior to entering into the underwriting agreement.

Which statement is FALSE about temporary subordinated loans? A. The standard form loan document must be filed 10 business days in advance with FINRA and the SEC B. No more than 3 loans are permitted in any 12 month period C. The firm's aggregate indebtedness cannot exceed 1,200% of its net capital D. A loan with a stated term of 30 days is permitted

The best answer is C. Temporary subordinated loans are only to be used in exceptional circumstances, when a short-term injection of capital is needed, say for an underwriting. The standard form loan agreement must be filed 10 business days in advance with both FINRA and the SEC (if this were a non-standard form subordinated loan, it must be filed 30 days in advance with FINRA and 10 business days in advance with the SEC). No more than 3 temporary subordinated loans are permitted per year. To use a temporary subordinated loan, the firm's ratio of Aggregate Indebtedness to Net Capital cannot exceed 10:1, making Choice C false. The maximum duration of each temporary loan is 45 days, making Choice D true.

The haircut to be taken on a thinly traded equity security is: A. 15% B. 30% C. 40% D. 50%

The best answer is C. The "regular" haircut taken on an equity security is 15%. To qualify, the security must either be exchange listed or, for an OTC security, there must be 3 or more market makers in the security aside from that firm. If there are only 1 or 2 market makers in the security aside from that firm, the security has a "limited trading market" and the haircut bumps up to 40%. Also note that if the firm is the sole market maker in the stock (no other market makers aside from that firm), the haircut is 100%.

The breakpoint schedule shown in a mutual fund prospectus is set by: A. the broker-dealer and is the same for all broker-dealers offering the fund B. the broker-dealer offering the fund and may be modified by each broker-dealer offering the fund C. the fund and must comply with maximum sales charges set by FINRA D. FINRA and must comply with maximum purchase amounts set under the Investment Company Act of 1940

The best answer is C. The actual breakpoint schedule in a mutual fund prospectus is set by the fund, not by FINRA or the broker-dealer selling the fund shares. Broker-dealers may NOT modify the schedule to compete on price. The breakpoint schedule must comply with maximum sales charges and required minimum breakpoints set under FINRA Rule 2830. The fund can create a schedule that is equal to, or better than, the FINRA requirements. If it creates a schedule that does not meet the minimum requirements set forth in Rule 2830, then FINRA reduces the maximum sales charges that the fund can impose. The fund cannot create a breakpoint schedule that does not meet the minimum requirements set forth in Rule 2830 - this would be a violation of the FINRA Conduct Rules.

The minimum net capital requirement for a broker-dealer engaged in the sale of options contracts, other than on a national securities exchange, is: A. $5,000 B. $50,000 C. $100,000 D. $250,000

The best answer is C. The minimum net capital requirement for broker-dealers that write or endorse over-the-counter option contracts is $100,000. Since the firm is a market maker in these securities, it falls under the market maker net capital requirement. Please note that with the great popularity of exchange traded options contracts, over-the-counter options are all but dead.

A general securities firm makes a market in 1,000 different securities, all valued at more than $5 bid. The firm's net capital requirement is: A. $100,000 B. $250,000 C. $1,000,000 D. $2,500,000

The best answer is C. The net capital requirement for a market maker is a minimum of $100,000 and a maximum of $1,000,000 based on the number of securities in which the firm makes a market. For each stock position valued at $5 bid or under, $1,000 of capital is required. For each stock position valued over $5 bid, $2,500 of capital is required. For a firm making markets in 1,000 stocks over $5 bid, the capital requirement is $2,500 x 1,000 = $2,500,000. Since the maximum requirement is $1,000,000 based on the number of securities in which a firm makes a market, this is the required capital amount.

Under SEC Rule 10b-10, all of the following information is required on customer confirmations for NASDAQ trades EXCEPT: A. whether the firm acted as agent or principal in the transaction B. difference between the reported trade price and the price to the customer C. whether the order was solicited or unsolicited D. dual agency, if applicable

The best answer is C. There is no requirement to disclose on a customer confirmation if the order was solicited or unsolicited (though many firms choose to do this). The capacity (agent or principal) in which the firm acted must be disclosed. The commission must be disclosed in agency trades for all securities; and the mark-up or mark-down must be disclosed for principal transactions in NASDAQ securities. If dual agency is applicable (an agency cross - that is, crossing an order to buy and an order to sell at the prevailing market), this must be disclosed as well.

A customer makes a request of her representative for the member firm's Business Continuity Plan (BCP). Which statement is TRUE about this? A. The member firm is not obligated to provide its BCP to the client B. The member firm must refer the customer to the BCP information posted on the firm's website C. The member firm must provide a summary of the BCP that addresses the possibility of business disruption and how the member plans to respond to events of varying scope D. The member must provide the complete BCP covering all the elements addressed including data recovery, financial and operational impacts, alternate communications methods, alternate physical locations, and assuring customer access to funds and securities

The best answer is C. There is no requirement to provide customers with the member firm's detailed BCP. The requirement is that customers, at account opening, receive a summarized document that gives business disruption scenarios of increasing severity and how the member firm intends to respond. Furthermore, this summary must be posted on the firm's website and must be provided to customers on request.

A market maker in an OTCBB stock is quoting the stock at: $10.00 - $10.2510 x 10 The quote represents the inside market. A customer enters an order to buy 200 shares of the stock at $10. Under SEC rules, the market maker: A. must sell 200 shares at $10.00 B. must update its quote size to 10 x 12 C. must update its quote size to 12 x 10 D. is not required to take any action

The best answer is C. This customer order to buy cannot be filled right now because the best offer price is at $10.25 and this customer wants to pay no more than $10.00 per share. The dealer is already willing to buy 1,000 shares at $10.00. Since the customer wants to buy 200 shares at $10, the dealer's bid must be updated to reflect the fact that there are now orders to buy 1,200 shares at $10 in the market. SEC rules require that the quote be updated within 30 seconds to reflect this. (Note - do not confuse this 30 second updating rule with the 10 second trade reporting rule.)

The inside market for ABCD, a NASDAQ stock is $37.00 - $37.40. An order entry firm enters an order into the NASDAQ system to buy 500 shares @ $30.15. Which statement is TRUE? A. The order will be executed at $37.00 B. The order will be executed at $37.40 C. The order will be placed in the limit order file D. The order will be returned to the order entry firm

The best answer is C. This customer wishes to buy, paying no more than $30.15. The cheapest price at which the stock can be bought is $37.40, so this order will be placed in the NASDAQ System as a buy limit order below the current market.

A registered representative is currently Series 6 licensed and sells mutual funds only. She wants to start selling variable annuities. What additional licensing is required? A. No additional licensing is required because the Series 6 license allows an individual to sell variable products B. The representative must pass the Series 7 exam C. The representative must pass a state insurance exam D. The representative must pass both the Series 7 exam and a state licensing exam

The best answer is C. To sell a variable product, in addition to either a federal Series 6 or Series 7 license, a state insurance license is required. Remember, variable products are a hybrid securities/insurance product that are only sold by insurance companies. They are regulated at the state level as an insurance product, in addition to being regulated at the federal level as an investment company security.

The managing underwriter of a public offering of securities may publish a research report or make a public appearance about the underwritten security: A. after 90 days have elapsed for an initial public offering and after 40 days have elapsed for a secondary offering B. after 50 days have elapsed for an initial public offering and after 20 days have elapsed for a secondary offering C. after 10 days have elapsed for an initial public offering and after 3 days have elapsed for a secondary offering D. under no circumstances

The best answer is C. To stop managing underwriters from "hyping" an underwriting once sale of the issue commences, the managing underwriter is prohibited from issuing a research report on that company, or from making public appearances where it comments on that company, for the 10 days following the effective date for an initial public offering; and for the 3 days following the effective date for a secondary (add-on) offering.

Who must approve a broker-dealer's Firm Element Continuing Education program? A. Chief Executive Officer (CEO) of the broker-dealer B. FINRA C. Principal designated by the broker-dealer D. Chief Information Officer (CIO) of the broker-dealer

The best answer is C. Under FINRA Rule 1250, a principal (Series 24 General Principal - not a Series 9/10) must be designated by the broker-dealer as the person responsible for the implementation of the B/D's Firm Element CE program. This principal designation is reported to FINRA, and the information filed with FINRA must be reviewed and updated (if necessary) within 17 business days of year-end.

All of the following must be disclosed when a firm is recommending a security EXCEPT: A. the price of the security at the time B. that the firm is a market maker in the security C. the size of the holding in the security maintained by the firm D. that the firm owns call options or warrants on the security

The best answer is C. Under FINRA advertising rules, if a recommendation of a security is made, the price of the security at the time and the date must be included. It also must be disclosed if the firm owns the security or options, warrants, etc.; if the firm is a market maker in the security; or if the firm was a manager or co-manager in an underwriting of any of the company's securities within the past 12 months. There is no requirement to disclose the size of the firm's holdings in the security being recommended.

A syndicate member in an add-on offering is a market maker in the shares being sold to the public. The firm has elected to be a Passive Market Maker during the 20-day cooling off period under the provisions of Rule 103 of Regulation M. During the regular trading session in that security, at 3:40:22 PM ET, there is a significant drop in the stock's price. What should the Market Maker do? A. Maintain its current quote B. Nothing because it is within 30 minutes of market close C. Lower its bid to a price that matches the current best bid in the market D. Lower its bid to a price that is lower than the current best bid in the market

The best answer is C. Under Rule 103 of Regulation M, if a market maker in a security is a syndicate member for an add-on offering of shares of that issuer, the worry is that the firm will attempt to "push up" the stock's price during the "20-day cooling off" period, so that when the POP is set right at the end of that period, the market price is higher, so the POP can be set higher, resulting in a larger spread for the underwriters! Of course, this manipulation is prohibited. To ensure that this does not occur, the market maker has a choice during the 20-day cooling off period of either resigning as a market maker or acting as a "PSMM" - a Passive Market Maker. As a PSMM, the market maker agrees to bid no higher than the highest current independent bid (Choice C), and agrees to limit daily purchases to the greater of 30% of ADTV (Average Daily Trading Volume) or 200 shares. Note that, technically, Choice D would also be correct, but Choice C uses the wording of the rule.

Who would typically supervise a producing BOM? A. Another BOM B. Operations manager C. Regional sales manager D. Compliance manager

The best answer is C. Under the "Supervision Rule," all persons selling or soliciting must be supervised - and this includes producing BOMs. The customer account activity of producing managers must be supervised by a person who is senior to, or is otherwise independent of, the producing manager. A Regional Sales Manager is senior to a producing BOM and can be the supervisor. Another BOM is not "senior"; and the operations manager has nothing to do with sales supervision. An argument could be made that a compliance manager could be the supervisor, but this is not the usual case. The usual reporting scenario is that a producing BOM will report to a Regional Sales Manager, so this is the better answer.

Reports to CAT are required: A. within 50 milliseconds of entry or execution B. within 10 seconds of entry or execution C. by 4:00 PM that Trading Day D. by 8:00 AM the next Trading Day

The best answer is D. CAT (Consolidated Audit Trail) captures reports of all market maker quotes, all broker-dealer orders along with related customer account information, and all trade executions, for NMS securities, listed options and OTC equities. CAT reports are required no later than 8:00 AM the next Trading Day for all activity that occurred the preceding Trading Day. Do not confuse CAT timestamps and trade execution reporting requirements with CAT reporting requirements. All CAT information must be recorded in 50 millisecond increments or finer and all equity trades must be reported within 10 seconds of execution.

Electronic notice is NOT required if a broker-dealer: A. discovers that the books and records of the firm are not current B. finds a material inadequacy in the firm's books and records C. finds that its net capital is 110% of the minimum requirement D. finds that its ratio of aggregate indebtedness to net capital is 1100% after the firm's first year of operations

The best answer is D. Electronic notice to FINRA is required if a broker-dealer: discovers that the books and records of the firm are not current (this requires immediate notice); finds a material inadequacy in the firm's books and records (this requires notice within 24 hours); finds that its net capital is below 100% of the minimum requirement or if its ratio of AI/NC exceeds 8:1 in the first year or 15:1 thereafter (this requires immediate notice); or enters "Early Warning" - which is net capital falling below 120% of the minimum requirement or the firm's ratio of AI/NC exceeding 12:1 (this requires notice within 24 hours). Choice D is incorrect since a ratio of aggregate indebtedness to net capital of 11:1 (1100%) is under the reporting threshold. The AI/NC ratio must be in excess of 12:1 to trigger an "Early Warning" notice.

A prospective new hire has been interviewed by the firm and offered a position that requires registration. When completing the U4 application, the individual discloses that, 8 years ago, he was convicted of the misdemeanor of shoplifting an item worth $30 from a Target department store when he was 16 years old. This has resulted in his application being denied because this subjects the individual to statutory disqualification under the Securities Exchange Act of 1934. The broker-dealer still wants to hire this person. Which statement is TRUE about onboarding this individual? A. This individual cannot be hired by the broker-dealer B. This individual can be hired by the broker-dealer only after another 2 years elapse C. This individual can be hired by the broker-dealer only if FINRA approves after completing an Eligibility Proceeding D. This individual can be hired by the broker-dealer only if FINRA approves after completing an Eligibility Proceeding and the SEC approves that decision

The best answer is D. If an individual is subject to statutory disqualification, he or she cannot be associated with a member firm. FINRA recognizes that the "statutory disqualification" definition is quite broad and exceptions might be justified. For example, if an individual is convicted of any felony within the past 10 years, this is a reason for statutory disqualification - and a DUI is usually a felony. Should a person who had one drunk driving felony conviction, went to counseling, and never had another problem be barred from the securities industry? Is this person a risk to investors? It is this type of situation that the Eligibility Proceeding is designed to address. Statutory Disqualification can be overcome and the person can be registered if the Eligibility Proceeding process is completed. Member Regulation will review the gravity and nature of the disqualifying event, the length of time that has elapsed after the event, whether any intervening misconduct has occurred, and any other mitigating or aggravating factors, to determine if the registration application should be approved. Its findings are given to FINRA National, which will schedule a hearing attended by the applicant, the member firm, his or her attorney, along with a representative of Member Regulation and an attorney for FINRA. After the hearing, the Statutory Disqualification Committee (SD Committee) meets to consider the application and presents a recommendation to the FINRA National Adjudicatory Council for a final decision. If FINRA approves the application, it must file a notice with the SEC under Rule 19h-1 and the SEC must review and approve that decision before it takes effect.

The registered principal is NOT required to: A. approve and endorse, in writing, the opening of each customer account B. review and endorse, in writing, each customer transaction C. review all correspondence of registered representatives relating to the broker-dealer's securities business, and give written approval if a communications compliance program has not been implemented D. preapprove all discretionary orders to detect and prevent unsuitable transactions and churning

The best answer is D. The registered principal must approve and endorse, in writing, the opening of each customer account; review and endorse, in writing, each customer transaction; and review all correspondence of registered representatives relating to the member firm's investment banking and securities business. If the member firm has not implemented a communications compliance program, then the general principal must endorse each item of correspondence sent. If such a program is implemented, then this additional step is not required. Choice D is incorrect since there is no requirement to preapprove orders in discretionary accounts. All transactions (discretionary or otherwise) are typically reviewed and approved by end of day. End of day approval works because if there is a problem, it can still be fixed - transactions are not recorded in a customer account until settlement - which is 2 business days after trade date. If a discretionary trade is inappropriate, it will be taken out of the customer account and placed in the branch error account and closed out the next day. It is considered to be the firm's transaction, and any profit or loss on close-out belongs to the firm.

Under the Customer Protection Rule 15c3-3, a broker dealer is eligible to compute the Reserve Requirement monthly instead of weekly if: A. the firm's ratio of Aggregate Indebtedness to Net Capital does not exceed 10 to 1 B. the firm's customer base is composed solely of institutional investors C. aggregate credit balances in customer accounts do not exceed $5,000,000 D. the firm agrees to deposit at least 105% of the required amount

The best answer is D. To compute the Customer Reserve Account monthly, instead of weekly, a broker-dealer's ratio of Aggregate Indebtedness to Net Capital cannot exceed 800% (8 to 1) and aggregate customer credit balances cannot exceed $1,000,000. In addition, if monthly computation is elected, 105% of the required amount must be deposited, instead of 100%. There is no special carve out in the rule for firms which deal solely with institutions. (OK - so this rule was written in the early 1970's when $1 million was a lot of money. Needless to say, today, no one computes monthly, but the rule is still on the books and is still tested!)

Which individual would be LEAST likely to be considered an "insider" under the Securities Exchange Act of 1934? A. Attorney for a corporation B. A research scientist that heads the company's latest cold fusion initiative C. The administrative assistant of the CEO of a publicly traded company D. A sell side research analyst employed at a broker-dealer

The best answer is D. Anyone who has material information about a publicly traded company, that has not been distributed to the public can be considered to be an "insider," under the court rulings that accompany the formal definition of an insider under the Securities Exchange Act of 1934. A corporation's attorney or accountant is almost assuredly in possession of material non-public material information. A research scientist for the corporation would also likely be in possession of material non-public information. Surprisingly, given his or her proximity to the CEO, an administrative assistant could also fall under this information-based definition. A sell side research analyst is one who works for a retail member firm that sells securities to the public (in contrast, a buy side research analyst typically works for a mutual fund or hedge fund, researching potential investments to buy). The research analyst might have a deep understanding of the company, but would not be considered an insider unless he or she was in possession of material non-public information. Bottom line: Anyone who has material information about a publicly traded company, that has not been distributed to the public, can be deemed an "insider" regardless of his or her job title or relationship to the issuer.

In its required disclosure to customers of business continuity plans, the member must provide the customer with all of the following EXCEPT: A. specific scenarios of varying severity B. a statement of whether it plans to continue business during the scenario C. planned recovery time from a specific scenario D. the contact information of the plan's two emergency contact persons

The best answer is D. At account opening for a customer, the member must disclose, in writing, how the member's business continuity plan addresses the possibility of significant business disruption and how the member plans to respond to events of varying scope by giving detailed scenarios. It must include a planned recovery time from each scenario and whether it plans to continue in business during the scenario. Each firm is required to designate two individuals as emergency contact persons. These are the "go to" people whose names and contact information are provided to FINRA in case the broker-dealer suffers a substantial business disruption. At least one of the emergency contact persons must be a registered principal of the member. Note that contact information is provided to FINRA, not customers.

Retail communications distributed by an established broker-dealer concerning all the following are subject to post-use filing with FINRA EXCEPT: A. registered Collateralized Mortgage Obligations B. registered Direct Participation Programs C. registered Structured Products D. registered Security Futures

The best answer is D. Even though the "general" FINRA rule is that no filing of retail communications is required by a broker-dealer after its first year of operations, there are major exceptions. There are certain retail communications where FINRA encountered problems in the past due to misrepresentations that were made, so these are "sensitive" items. These ads must be filed with FINRA 10 business days prior to use, always. These are ads for: - Options (Securities Futures for the exam); and - Investment Companies, where member-prepared performance rankings are shown. FINRA has different filing requirements for advertisements relating to: - Collateralized Mortgage Obligations; - Investment Companies (where member-prepared performance rankings are not shown); - Registered Structured Products; and - Registered Direct Participation Programs (DPP - Limited Partnerships). These retail communications must be filed with FINRA 10 business days after first use, always. (These are handled by a different department of FINRA that has its own filing rules.)

A registered representative has purchased 20 copies of a professionally-prepared pamphlet about the benefits of variable annuity investments, which the provider has embossed with the representative's name. He sends it to 20 of his best clients for whom he believes such an investment could be suitable. Prior to sending out the pamphlet, he gave a copy to the principal, who approved it for distribution. Which statement is TRUE about this? A. The principal should not have approved the pamphlet for distribution because it was not prepared by the member firm B. The principal should have required that the fact that the pamphlet was prepared by a third party was disclosed on the pamphlet C. The principal should have required that the name of the member firm was prominently disclosed on the pamphlet D. The principal should have required that the fact that the pamphlet was prepared by a third party was disclosed and that the name of the member firm was prominently disclosed on the pamphlet

The best answer is D. FINRA has issued a Regulatory Notice about "the obligation of firms when supervising registered representatives' use of market materials to establish expertise." Their concern is that customers are being mislead into believing that representatives have investment acumen in the area covered in the communication, when that may not be the case. So, if a registered representative uses a brochure, pamphlet, or other publication (including an electronic version) that was prepared by an outside party to give to clients, FINRA requires that it be supervised by the firm (meaning the principal must review and approve); that the publication must disclose that it was prepared by a third party or for the representative's use; and that the publication prominently disclose the member firm's name.

A customer of yours bought a non-tradable direct participation program (DPP) investment several years ago from your firm. This year she asks about the valuation of her investment. The proper response is that the value of the investment: A. cannot be determined because the DPP is not actively traded B. is based upon the price at the time of investment plus an annual reset based upon inflation C. is based on the revenue and expenses of the DPP at least quarterly as determined by an independent certified accountant D. is based on valuations of the assets and liabilities of the DPP at least annually by a third-party valuation expert or service

The best answer is D. FINRA requires that DPP and non-traded REIT investments be shown on account statements on a per share estimated value that must be recalculated annually (there is an exception to this for the first 29 months after the IPO, during which time the investment value shown can be the net proceeds that went to the issuer on a per share basis). The per share estimated value is: based on valuations of the assets and liabilities of the DPP performed at least annually, by, or with the material assistance or confirmation of, a third-party valuation expert or service; derived from a methodology that conforms to a standard industry practice; and accompanied by a written opinion or report by the issuer, delivered at least annually, that explains the scope of the review, the methodology used to develop the valuation or valuations, and the basis for the value or values reported.

Unless an exemption is available, a Form 211 filing is required prior to publishing or disseminating quotations in: A. NYSE issues B. NASDAQ issues C. NMS issues D. OTC issues

The best answer is D. Form 211 is filed by a market maker that wishes to register in a non-NASDAQ security. The form, as well as the related information required by SEC Rule 15c2-11, must be filed at least 3 business days prior to entering quotes for OTC issues. The form is basically an attestation that the market makers has obtained a copy of the issuer's latest SEC filing and performed due diligence on it. Notice that there is no such requirement for market makers in exchange-listed issues, since these issues must meet rigorous listing requirements and must be current in their SEC reports. On the other hand, OTC issues have no listing requirements.

An investment adviser wishes to effect an "agency cross" transaction. Which statement concerning this transaction is FALSE? A. The adviser cannot have recommended the transaction to both the buyer and the seller B. Written consent from the customer is required to effect the transaction C. The total remuneration to be received in connection with the transaction must be disclosed to the customer D. A disclosure statement must be sent to customers with each statement of account detailing the number of agency cross transactions effected and the total dollar remuneration received by the adviser for those transactions

The best answer is D. In an "agency cross" transaction, the adviser, for a customer who wishes to sell a security, finds another customer to buy that security; or vice-versa. There is an inherent conflict in such a transaction, since generally, the reason for a customer wishing to sell is the same reason why the purchase of that security should not be recommended to another customer. If an investment adviser wishes to effect such an "agency cross" transaction with the customer, it must: - recommend the transaction to only 1 side of the cross; e.g., one of the customers in the transaction cannot have been solicited - if both customers have been solicited, the transaction is prohibited; - act in the best possible interests of the client to obtain the best possible price; - obtain a written consent from the customer to effect an agency cross transaction that discloses that the adviser will be acting as a broker for both the buyer and seller; - disclose that a commission will be received by the adviser from both parties and that a potential conflict of interest exists. Choice D is incorrect since the adviser must send to each client, at least annually, a written disclosure statement, identifying the total number of agency cross transactions and total commissions received from such transactions, during the past year. It is not required to be sent with each account statement.

A customer buys 10 Allied Corporation 8% debentures, M'25, at 90 on Tuesday, October 9th, in a regular way trade. The interest payment dates are Feb 15th and Aug 15th. How many days of accrued interest will the buyer pay to the seller? A. 53 B. 54 C. 55 D. 56

The best answer is D. Interest on corporate bonds accrues on a 30 day month / 360 day year basis. Interest accrues up to, but not including settlement date. Since the bonds were bought on Tuesday, October 9th, the trade settles on Thursday, October 11th (regular way settlement is 2 business days after trade date). Therefore, interest accrues through the 10th of October. The previous interest payment date was August 15th covering the 6-month window of time prior to that date. Interest has been accruing from the beginning of the 15th. The accrued interest payable is: August 16 days (15 through 30 = 16 days!)\ September 30 days October 10 days = 56 days

NASDAQ has the authority to declare a clearly erroneous trade "null and void" based on all of the following EXCEPT: A. its own motion B. the result of an investigation made after receiving a complaint from the buying dealer C. the result of an investigation made after receiving a complaint from the selling dealer D. a decision made by a majority of arbitrators under the Code of Arbitration and Mediation

The best answer is D. NASDAQ has the authority to declare a transaction as "null and void" on its own motion; or as the result of an investigation that it makes after receiving a complaint from either the buying dealer or selling dealer. Any member or person associated with a member that seeks to have a transaction reviewed must submit a written complaint to NASDAQ MarketWatch within 30 minutes of the execution time. NASDAQ MarketWatch comes up with an initial determination either affirming the trade or declaring it "null and void." If either party does not agree with NASDAQ MarketWatch's decision, an appeal can be filed with "MORC" - the Market Operations Review Committee. MORC's decision is final and cannot be appealed. Note that FINRA's arbitration rules are not used to resolve trading or reporting errors.

The notification to the SEC and DEA of replacement of accountant required under Rule 17a-5 must include all of the following information EXCEPT: A. problems encountered over the prior 24 months that were resolved to the former accountant's satisfaction B. problems encountered over the prior 24 months that were not resolved to the former accountant's satisfaction C. a statement as to whether the accountant's report for the past 2 years contained an adverse opinion, disclaimer of opinion or qualification D. a statement as to whether any dispute existed between the member firm and the accountant over fees payable for services rendered over the past 2 years

The best answer is D. Rule 17a-5 requires that the SEC and DEA be notified within 15 business days if the firm's auditor is replaced. The notice must: include the date of notification of the termination; include the details of any problems existing in the preceding 24 months relating to any matter of accounting principles or practices, financial statement disclosure, auditing scope, or compliance with applicable rules, which if not resolved, would have caused the auditor to make reference to them in the report; include problems required to be reported, whether they were resolved or unresolved; state whether the accountant's report on the financial statements for the past 2 years contained an adverse opinion, disclaimer of opinion, or was qualified as to uncertainties, audit scope or accounting principles and describe the nature of such; and include a letter from the terminated accountant addressed to the SEC stating whether he or she agrees with the statements contained in the notice and, if not, detailing the respects in which he or she does not agree. Basically, the notice is only detailing problems with the firm's accounting and control procedures. There is no requirement to include the details of any fee dispute that occurred during the past 2 years between the terminated auditor and the member firm, since this not an accounting issue.

Which statement is FALSE about Regulation S-P? A. A customer must be provided with a privacy notice at account opening B. A consumer must be provided with a privacy notice at account opening C. A customer must be offered a privacy notice annually D. A consumer must be offered a privacy notice annually

The best answer is D. SEC Regulation S-P (Statement of Privacy) requires broker-dealers and other "financial institutions" to provide customers with a notice of the firm's privacy policies and practices. Firms cannot divulge non-public information about customers to third parties unless the firm has given notice to the customer that this may happen and the customer has not elected to opt out of the disclosure. The customer must be given the "privacy notice" at the time of account opening and it must be made available to the customer annually thereafter. Note that the annual "offer" of the privacy notice only applies to customers, meaning individuals who have funds or securities in custody of the firm. In the situation where an individual does not have an account - for example, the individual simply wants the firm to sell some securities that he or she holds and remit a check - this person is defined as a "consumer" and not a "customer." A "consumer" only gets the privacy notice at the time of the transaction. He or she does not have an "account" requiring the annual offer of the privacy notice, making Choice D false.

Under SEC rules, all of the following information must be on a customer confirmation EXCEPT: A. whether the firm acted as agent or principal in the transaction B. whether the firm is a market maker in the subject security C. the mark-up or mark-down in principal transactions in NASDAQ securities D. whether the transaction was solicited or unsolicited

The best answer is D. SEC Rule 10b-10 requires that the following information be on customer confirmations: - Customer name and address; - Firm name, address and telephone number; - Name of security purchased; - Size of trade and Price of trade; - Trade date and Settlement date; - If the trade is an agency trade, the commission must be disclosed. In addition, the time of the trade and the name of the contra-party to the trade must be made available to the customer on request; - If the trade is a principal transaction, the mark-up is not disclosed except for principal transactions in NASDAQ stocks; - If the market maker effecting the trade paid a fee to the introducing broker, this must be disclosed - this is known as "payment for order flow"; - If the firm is a market maker in the security, this must be disclosed; and - If a control relationship exists between the member firm and the issuer of the security, this must be disclosed. Whether the trade was solicited or unsolicited is not required on the confirmation, however it is required on order ticket copies.

All of the following statements are true regarding the entry of a stabilizing bid on the NASDAQ system EXCEPT: A. Only one market maker is allowed to enter a stabilizing bid B. Notification must be given to NASDAQ in writing prior to the first day that the stabilizing bid will appear on the system C. Market makers are prohibited from maintaining a regular bid and offer at the same time that a stabilizing bid is entered D. No identification is given on NASDAQ that the bid is a stabilizing bid

The best answer is D. When a stabilizing bid is entered into the NASDAQ system, it must be identified as such. The other statements are true. Only one market maker is allowed to enter a stabilizing bid; notification must be given to NASDAQ in writing prior to the first day that the stabilizing bid will appear on the system; and market makers are prohibited from maintaining a regular bid and offer at the same time that a stabilizing bid is entered by that market maker.

Which individual associated with a member firm is NOT required to be registered with FINRA as a principal? A. Branch Office Manager B. Office of Supervisory Jurisdiction Manager C. Member Firm Officer D. Designated AML Compliance Pers

The best answer is D. Surprisingly, there is no requirement that a firm's anti-money laundering (AML) officer be registered with FINRA. The Designated AML compliance person, who is responsible for creating and enforcing the firm's written AML program, must be an "associated person." FINRA states that this person can either be registered or not, which seems sort of unusual, until you consider that when the rule went into place, AML programs were in place at banks, but not broker-dealers. This way a bank could hire an experienced AML person from a bank without worrying about having to get that person registered and passing a difficult test! FINRA requires managers of Branch Offices, managers of Offices of Supervisory Jurisdiction and officers of the firm to be registered as principals. The only officer of a member firm that is not required to be registered is a passive owner, with no day-to-day management responsibilities. (Also note that for very small offices, FINRA permits a non-resident branch manager to supervise these locations, with functions delegated to a registered representative in the small branch, but the BOM is still responsible for supervision.)

A trade in a corporate bond executed at 6:30:00 PM: A. is not required to be reported B. must be reported that day C. must be reported prior to the next opening D. must be reported on T+1

The best answer is D. TRACE reports trades of all bonds, except for municipals. The system is open from 8:00 AM to 6:30 PM. If a trade takes place during this time window, it must be reported "as soon as practicable, but no later than 15 minutes after execution." The actual rule states that this required trade reporting applies to all trades that occur at, or after 8:00:00 AM through 6:29:59 PM ET. If the trade takes place anywhere from 6:30:00 PM or after, it is reported within 15 minutes of the next TRACE opening, which is the next business day (T+1).

A broker-dealer has no policy for paying continuing commissions to retired representatives. A registered representative who is close to retirement has been approached by a colleague in his branch office to "take over" his accounts when he retires, and will pay a portion of the commissions earned to the newly-retired representative for a period of 10 years. Which statement is TRUE about this? A. This is permitted under FINRA rules if there is a written contract between the 2 representatives that is entered into prior to retirement B. This is permitted under FINRA rules with the approval of the member firm C. This is prohibited under FINRA rules because the maximum life of such contracts is 5 years D. This is prohibited under FINRA rules

The best answer is D. The "problem" in this scenario is that commissions cannot be paid to unregistered persons. FINRA gives an exception to this when a registered representative is retiring ("RRR"), and a contract is entered into prior to retirement between the member firm and the RRR, allowing commissions to be paid in retirement (a nice thing). But this is not permitted between 2 associated persons when one is retiring. Note that there is a way around this. The RRR could "sell" his or her book of business for a 1-time payment prior to retiring, so there are no continuing commissions. The issues with this are that the buying representative must have the cash to pay for the purchase, and the member firm must approve of the arrangement in writing.

The provisions of the Trust Indenture Act of 1939 apply to: A. municipal and corporate debt issues B. commercial paper C. closed end funds investing in corporate debt issues D. convertible and non-convertible corporate debt issues

The best answer is D. The Trust Indenture Act of 1939 only applies to corporate debt offerings. It is intended to give protection to corporate bondholders from the issuer acting in bad faith, by having an independent trustee monitor the provisions of the bond contract for compliance. If the trustee finds that the issuer is not in compliance, the trustee will declare a default and the issue becomes payable in full immediately. The Trust Indenture Act of 1939 does not apply to exempt debt offerings such as U.S. Government issues or municipal issues, since we trust that governments will not abuse investors. In addition, the Act has no application to closed end funds (these are regulated under the Investment Company Act of 1940). Please note, however, the corporate debt securities in which the investment company invests would fall under the Act. Regarding corporate debt issues, the Trust Indenture Act of 1939 applies to both convertible and non-convertible corporate debt offerings. Choice B is incorrect because short term securities (those with maturities of 270 days or less) such as commercial paper are exempt. Remember, securities exempted from regulation under the Securities Act of 1933 are also exempted from the Trust Indenture Act of 1939.

What is one of the purposes of the syndicate agreement in a firm commitment underwriting? A. To contractually bind the syndicate to purchase the securities being underwritten from the issuer at an established number of shares or units and price B. To broaden the distribution of the securities being underwritten through member firms acting in an agency capacity only C. To ensure that the syndicate members only sell the underwritten securities to individual or institutional investors who are not prohibited purchasers under FINRA rules D. To establish whether the syndicate members are sharing liability on an undivided or divided basis

The best answer is D. The syndicate agreement, also called the agreement among underwriters, is between the syndicate manager and the syndicate members. It binds the member firms to contribute capital to purchase the securities from the issuer as a percentage of the entire offering; and establishes how liability will be shared for unsold securities. It appoints the manager to act for the syndicate members in dealings with the issuer, for which the manager earns a management fee.

The selling agreement is a contract between the: A. issuer and the syndicate manager B. issuer and the syndicate members C. syndicate manager and syndicate members D. syndicate members and selling group members

The best answer is D. The various signed agreements in an underwriting are: Underwriting Agreement: Agreement between the syndicate and the issuer, where the underwriter agrees to manage the offering of the issuer's securities. It is signed by the issuer and the syndicate members. Agreement Among Underwriters: Agreement between the syndicate manager and syndicate members, spelling out selling responsibility and liability. Selling Agreement: Agreement between the syndicate members and selling group, spelling out the selling group member's compensation for finding customers to buy the issue.

A customer of a registered representative posts on a social media blog that his registered representative is "a cheapskate and a jerk" because he refused to donate to the customer's child's soccer team. The customer also posts that the representative stole money from him. As the principal, what should you do? A. Nothing because the complaint was not sent in writing to the member firm B. The firm should log the complaint but is not required to take action unless it is sent directly by the customer to the firm C. The firm must include the complaint in its quarterly complaint summary filings to FINRA D. Contact the client and investigate the allegation made

The best answer is D. This is very subjective. If the customer sent this to the firm, it would definitely be a "complaint" that must be resolved under the principal's supervision. In addition, because it alleges a felony, it is a reportable event. However, this is a "complaint" posted on a third-party blog - it was not sent to the firm. Then it does not fall into FINRA's definition of a complaint. So Choice A is potentially true. However, if the firm becomes aware of the posting (which appears to be the case in this question), then the best practice is to contact the customer and investigate the complaint (Choice D). So here we have a question with 2 correct answers - and you must choose the "better" action to take.

A customer sells short a security and fails to deliver on settlement date. Mandatory close-out is required if the stock: A. is not delivered within an additional 24 hours if an extension has been granted B. is not delivered by the last date for collection of funds under Regulation T (S+2) C. remains on the threshold list for 5 consecutive settlement days D. remains on the threshold list for 13 consecutive settlement days

The best answer is D. Under Regulation SHO, customer short sales of threshold list securities not resulting in delivery must be bought in after "13 consecutive settlement days." These are securities that are "hard to borrow," and the SEC does not want large outstanding short positions that are uncovered to build in these securities. A threshold security is one with a large outstanding short position - defined as one with a clearing short position at the National Securities Clearing Corporation of 10,000 shares or more; and the position represents 1/2% or more of the total shares outstanding. (Note: The newer (2009) SEC Rule 204 of Regulation SHO, which requires mandatory buy-in of fails to deliver resulting from short sales the morning of S+1; and from long sales the morning of S+3; effectively makes these rules obsolete. However, when the SEC adopted the new rules, they stated that they are retaining the old rules as a backstop because Rule 204 has some exceptions.)

Which of the following is NOT qualified as a participant in DTCC? A. Member of a national securities exchange B. Bank or trust company C. Registered investment company D. Registered investment adviser

The best answer is D. Depository Trust and Clearing Corporation is owned by its member participants (exchanges, member firms, banks, investment companies and insurance companies) and is a central depository holding stock and bond certificates for these firms. As trades are settled daily, it records the change of ownership and net money amounts to be either debited or credited to members' accounts. Investment advisers are not DTCC member participants.

Under SEC Rule 15g-1, member firms are exempt from the provisions of the "penny stock rule" if its penny stock business is less than: A. 20% of its revenue B. 15% of its revenue C. 10% of its revenue D. 5% of its revenue

The best answer is D. If a member firm's revenue from penny stock transactions is less than 5% of total revenue, then the member firm is exempt from the penny stock disclosure rule requiring that when a customer is solicited to buy a penny stock, the customer must sign and return a detailed suitability statement prior to confirmation of sale. The intent of the rule is to make life difficult for firms that, as a majority of their business, push penny stocks.

A live road show presented in connection with a Rule 405 Automatic Shelf Registered Offering is: A. considered to be a graphic communication B. considered to be a free writing prospectus C. considered to be both a graphic communication and a free writing prospectus D. considered to be neither a graphic communication nor a free writing prospectus

The best answer is D. SEC "quiet period" rules for issues in registration, which restrict firms in the syndicate from promoting the sale of the issue, cover both "written" and "oral" communications. The SEC defines a graphic communication as a written communication. The SEC list of graphic communications includes any form of electronic media, including videotapes, audiotapes, facsimiles, CD-ROM, electronic mail, Internet web sites and computer networks. Under SEC Rule 405 (shelf registration for WKSIs - Well Known Seasoned Issuers), these graphic communications are defined as "free-writing prospectuses" that do not require advance SEC filing and review. Rather, these can be distributed to potential clients as long as a copy is also filed with the SEC. A pre-recorded electronic road show falls under the definition of both a graphic communication and is also a FWP - Free Writing Prospectus, so it must be filed with the SEC. Note, in contrast, that a presentation at a seminar, such as a live road show appearance, would be defined as an oral communication and is neither a graphic communication nor a free writing prospectus, so no SEC filing is required.

All of the following statements about a broker-dealer using the Alternative Net Capital method under Rule 15c3-1 are true EXCEPT: A. minimum capital is 2% of aggregate debits in the Customer Reserve Bank Account computation, but at least $250,000 B. if Net Capital falls below 5% of aggregate debits in the Customer Reserve Bank Account formula, the broker-dealer must report under Rule 17a-11's "Early Warning" provisions C. if Net Capital falls below 2% of aggregate debits in the Customer Reserve Computation or below $250,000, immediate electronic notice must be given to FINRA and the SEC D. if Aggregate Indebtedness exceeds 1,500% of Net Capital after the first year of operations, immediate electronic notice must be given to FINRA and the SEC

The best answer is D. Under the Alternative Net Capital Requirement, a broker dealer must maintain minimum capital equal to 2% of debits in the Customer Reserve computation, but at least $250,000 of capital. If the firm's capital drops below this amount, the firm is in violation of the Net Capital Rule and must give immediate electronic notice to FINRA under Rule 17a-11; and cease business operation. The firm hits the "Early Warning" level if capital falls below 5% of debits in the Reserve formula. Early Warning reporting requires electronic notice to FINRA within 24 hours; and the filing of any reports requested by FINRA. Under the Alternative rule, there is no requirement to compute aggregate indebtedness, nor is there a maximum ratio test of aggregate indebtedness to net capital.

Under the Customer Protection Rule, the definition of excess margin securities that must be brought into the firm's possession or control is: A. securities in excess of 50% of the customer's debit balance B. securities in excess of 70% of the customer's debit balance C. securities in excess of 100% of the customer's debit balance D. securities in excess of 140% of the customer's debit balance

The best answer is D. "Excess margin securities" are defined as those customer securities held in margin accounts in excess of 140% of the customer's debit balance. The Customer Protection Rule requires that clearing broker-dealers reduce excess margin securities daily to possession or control. For example: A customer who buys $20,000 of stock must put up 50% margin or $10,000. The other $10,000 needed to purchase the securities is lent by the broker-dealer - a customer debit balance of $10,000. Of the $20,000 of securities, only 140% of the debit or $14,000 can be rehypothecated to a bank (leaving the broker's possession). The other $6,000 of excess margin securities must be kept in possession of the broker-dealer.

Which statement is TRUE about independent third party research distributed by a member firm? A. Independent 3rd party research is considered to have been prepared by an employee of the member firm and must be approved by a principal before it is distributed B. Independent 3rd party research is considered to have been prepared by an employee of the member firm and is not required be approved by a principal before it is distributed C. Independent 3rd party research is not considered to have been prepared by an employee of the member firm and must be approved by a principal before it is distributed D. Independent 3rd party research is not considered to have been prepared by an employee of the member firm and is not required to be approved by a principal before it is distributed

The best answer is D. 3rd party research is defined as a research report produced by a person other than the member. Typically, in this instance, the member firm hires an outside person to produce research, and the firm has input into the content of the report. It is not considered to have been prepared by an employee of the member because it was prepared by a "3rd party" but the Series 24 must still approve the report before it is distributed to retail clients. Do not confuse a "3rd party research report" with an "independent 3rd party research report." FINRA states that an "independent 3rd party research report" is one where the "member does not have a contractual or business relationship that is likely to inform the content of the report." In this case, distribution of "independent 3rd party research" is not subject to prior principal approval because it was not prepared with input or direction from the member firm.

Which of the following is the definition of a "stock power"? A. A power of attorney given to the broker-dealer to accept dividends and interest on behalf of the customer for securities held in street name B. A limited power of attorney given to the broker-dealer to vote the stock if no contest exists C. The amount of securities that can be purchased in a margin account without making a deposit D. A limited power of assignment or substitution given to the broker-dealer

The best answer is D. A stock power is a form that is separate from a stock certificate on which the assignment can be performed. Transfers of ownership are effected by naming the old and new holders on the stock power. In this way, a new stock certificate does not have to be issued each time there is a change of ownership. Instead, a new stock power is used.

Which of the following is defined as an advertisement? A. Speech about investments B. Written form letter sent to prospective clients C. Research report that includes illustrative charts and graphs D. Electronic publication in a web site

The best answer is D. An advertisement is a communication that is accessible to the general public. In contrast, sales literature is a communication directed to a specific audience.

All of the following are allowable assets for Net Capital purposes EXCEPT? A. Cash on Deposit in a Special Reserve Bank Account For The Benefit of Customers B. Customer Debit Balances in Margin Accounts that are fully secured C. Fails To Deliver D. Unsecured Advances To Salesmen

The best answer is D. An allowable asset is one that can be converted into cash in a liquidation and used to pay off claims of creditors. Non-allowable assets are non-liquid or are unsecured (so their true value is indeterminate). Cash on Deposit in A Special Reserve Bank Account is an allowable asset since it is earmarked to pay off customer claims in a liquidation; customer debit balances (receivables from customers) are allowable since the firm has the margin securities as collateral; fails to deliver are allowable (as long as they are not too old). These represent a security receivable. Unsecured advances to salesmen are not allowable, since there is no collateral backing the receivable from the salesmen. If the firm liquidates, these monies would be hard to collect.

13D reports are filed: A. annually B. semi-annually C. quarterly D. on an event-driven basis

The best answer is D. Anyone who accumulates a 5% or greater holding in a publicly held company with the intention of exercising control must file a Form 13D within 10 business days.

A CAT report is NOT required for an order received: A. telephonically to purchase a NASDAQ-listed common stock B. via an instant message to sell a NYSE-listed preferred stock C. by an e-mail to buy a penny stock quoted in the Pink OTC Market D. via text to buy a NYSE-listed non-convertible corporate debt issue

The best answer is D. CAT stands for "Consolidated Audit Trail" system. It electronically captures order information for all listed and OTC equity securities, and all options orders. CAT reports are required no matter how the order was received - telephonically; in person at a branch office; via e-mail or the Internet; via the firm's web site; or via instant messaging. Choice D is incorrect since a non-convertible bond is not an equity security, so no CAT report would be generated.

The minimum net capital required for a firm to act as a clearing prime broker is: A. $250,000 B. $500,000 C. $1,000,000 D. $1,500,000

The best answer is D. Clearing prime brokers must maintain minimum net capital of $1,500,000. Any executing brokers whose trades are settled by the prime broker must maintain minimum net capital of $1,000,000.

All of the following statements are true regarding the NASDAQ EXCEPT: A. filling of orders results in decrementation B. proprietary orders are accepted C. the system will execute orders of 999,999 shares or less for all NASDAQ securities D. orders that lock the market are not filled and returned by the system

The best answer is D. Decrementation of the size of the market maker's quote occurs upon the filling of orders in the NASDAQ System. Proprietary trading is permitted, as well as executing orders for customers on an agency basis. Market orders, marketable limit orders, and limit orders are accepted. Locking orders entered into the System are treated as immediately executable at the inside market and are filled.

During the period when an add-on offering is in registration, a member firm that is part of the underwriting group is permitted to: A. recommend the purchase of the issue B. recommend the purchase of call options or warrants on the issue C. solicit buy orders for the issue D. accept unsolicited buy orders for the issue

The best answer is D. During the "20-day cooling off" period, a firm in the underwriting group may not advertise, recommend the purchase, or solicit purchase orders for the issue or for equivalent securities (such as convertibles, options, or warrants). The firm can accept unsolicited buy orders, as long as it can document that it did not solicit the transaction. This is accomplished by having the customer sign a non-solicitation letter. Note that these rules would only apply to add-on offerings; if the issue were an IPO, there would be no securities of that issuer in the public markets to trade.

The FINRA interpretation on charitable solicitations covers: A charitable giving by associated persons in their individual capacities B charitable giving initiated by member firms or their foundations C solicitations received directly from charitable organizations D solicitations by employees or agents of a customer acting in a fiduciary capacity

The best answer is D. FINRA has issued an interpretation on "charitable solicitations." This covers the situation where an employee of an investment adviser or mutual fund "solicits" a charitable contribution to be made by a broker-dealer to whom he or she directs brokerage business. The worry of the regulators is that this individual might be requesting the charitable contribution because he or she made a pledge to a charity and then satisfies the pledge by coercing the broker-dealer to make the contribution (since he or she directs so much business to that firm). The problem is that this individual is getting a personal benefit from the brokerage firm making the contribution, since he or she is being relieved of the liability of making that contribution. In doing so, this individual violates his or her fiduciary responsibility to his or her employing investment adviser or mutual fund. Thus, the FINRA interpretation only covers employees of customers (these would be institutional customers like mutual funds) who are soliciting charitable contributions from broker-dealers with whom they do business. It does not cover charitable giving by employees of broker-dealers; by member firms; or solicitations of contributions received directly from charitable organizations.

Under FINRA rules, the maximum "O&O" expenses permitted in a DPP or REIT offering are limited to: A. 5% of the gross proceeds of the offering B. 8 1/2% of the gross proceeds of the offering C. 10% of the gross proceeds of the offering D. 15% of the gross proceeds of the offering

The best answer is D. FINRA limits compensation that can be taken in public offerings of DPPs (Direct Participation Programs) and REITs. The basic rule is that there is a 10% limit on underwriting fees (or anything similar or related); and a 5% limit on offering expenses that are reimbursed from the proceeds of the offering; for a total compensation limit of 15%. "O&O" stands for "Organization and Offering" expenses. Included under the 10% limit for underwriting expenses are amounts paid to member firms, wholesalers, amounts paid for advertising or sales material, trail commissions, consulting fees, finder's fees, reimbursement for the underwriter's due diligence, etc. The idea here is that any payment in any form to an underwriter or salesperson selling the offering will be included within the 10% limit - it makes no difference what it is called! Issuer expenses that are reimbursed from the offering proceeds are limited to another 5% - these include the cost of advertising, sales material and subscription agreements, the issuer's legal expenses, securities registration fees and transfer agent and depository fees.

Under the provisions of the Uniform Practice Code, final settlement of corporate syndicate accounts must be effected by the syndicate manager within: A. 1 business day of syndicate settlement date B. 2 business days of syndicate settlement date C. 30 calendar days of syndicate settlement date D. 90 calendar days of syndicate settlement date

The best answer is D. FINRA rules require that final settlement of syndicate accounts be made by the manager no later than 90 calendar days after syndicate settlement date (the date the syndicate "closes" its books).

If there is a reverse 1:5 stock split, which statement is TRUE regarding existing orders on a member firm's internal order book on the ex-date? A. All open orders that are below the market are adjusted for the reverse split B. All open orders that are above the market are adjusted for the reverse split C. All open orders, both below and above the market are adjusted for the reverse split D. All open orders are canceled as a result of the reverse split

The best answer is D. For reverse stock splits, which are a rare occurrence, all orders are canceled. For regular stock dividends and stock splits, all orders, both above and below the market are reduced. For cash dividends, only the orders placed below the market are reduced.

A broker-dealer is permitted to lend fully paid customer securities and excess margin securities by having that customer sign a: A. hypothecation agreement B. stock power C. margin agreement D. separate loan consent agreement

The best answer is D. Fully paid customer securities and excess margin securities are required to be reduced to possession or control daily under Rule 15c3-3. The broker-dealer cannot lend out these securities unless the customer agrees by signing a separate loan consent agreement. Many brokerage firms require customers who open any account, whether it is cash or margin, to sign such a loan consent agreement.

After voluntarily withdrawing its quote, a market maker is not permitted to re-enter quotes for: A. 1 business day into both NASDAQ and CQS B. 20 business days into both NASDAQ and CQS C. 1 business day into NASDAQ and 20 business days into CQS D. 20 business days into NASDAQ and 1 business days into CQS

The best answer is D. If a quote is withdrawn voluntarily, it is not excused. The Consolidated Quotations Service Rules for Third Market Makers state that if this occurs, quotes cannot be re-entered for 1 business day. FINRA's rule for NASDAQ market makers is much more draconian - if an unexcused withdrawal occurs, quotes cannot be re-entered for 20 business days.

If an associated person is the subject of a reportable event, the report must be filed with FINRA: A. immediately B. within 10 days C. within 20 days D. within 30 days

The best answer is D. If a registered individual is the subject of a "reportable event" such as being suspended or expelled by another regulator; being sued under the Securities Acts; being arrested or indicted; being subject to a customer complaint alleging a money or securities related offense; etc., a report must be filed with FINRA "promptly," but no later than 30 days after the event.

A customer of a broker-dealer sells short 500 shares of PDQ stock just prior to the ex-date for a dividend distribution. The dividend will be: A. received by the seller from the issuer and remitted to the buyer of the securities by the short seller B. received by the seller from the issuer and remitted to the lender of the securities by the short seller C. received by the buyer from the issuer and remitted to the short seller by the lender of the securities D. received by the buyer from the issuer and remitted to the lender of the securities by the short seller

The best answer is D. If securities are sold prior to the ex-date, the trade will settle before the record date. Thus, the buyer will be on record to receive the dividend directly from the issuer. Since these shares were "sold short" to the buyer, they were borrowed from another customer. The short seller must remit the dividend to the customer from whom the shares were borrowed. Thus, the short seller will pay the dividend to the lender of the securities.

Long securities differences that are unsold: A. increase Net Worth B. decrease Net Worth C. offset short securities differences D. have no effect on Net Worth

The best answer is D. Long securities differences that are unsold must be recorded, and resolved. The "extra" securities cannot be added to Net Capital, nor can they be used to offset any short securities differences that are discovered.

NASDAQ MarketWatch would halt trading in an issuer's stock for all of the following reasons EXCEPT: A. the CEO of the company dies unexpectedly B. an S-4 is filed with the SEC for an unsolicited merger C. the company requests the halt because it wants to make a major earnings announcement D. a 13G is filed with the SEC for an investor that accumulates a 5% holding in the company

The best answer is D. NASDAQ MarketWatch will halt trading in a company's stock when there is a material news announcement that could affect the company's stock price and which needs to be given time to be disseminated to all investors so that "favored investors" who got the news before everyone else could not profit. Choices A, B and C fit this description. A 13g is filed by a passive investor, 45 calendar days after year-end, disclosing that investor's holding in a company. This is typically not a market-moving event.

The maximum dollar limit for an offering to be subject to the provisions of Rule 506 under Regulation D is? A. $3,000,000 B. $5,000,000 C. $10,000,000 D. Unlimited

The best answer is D. Rule 506 applies to private placements greater than $10,000,000. It requires greater disclosure to investors than Rule 504 offerings (which cannot exceed $10,000,000).

A customer has a cash account and a margin account at a brokerage firm. In a liquidation under SIPC: A. only the equity in the margin account is covered B. only the cash account value is covered C. each account is covered separately up to $500,000 total coverage per account D. both accounts are treated as one account with coverage limited to $500,000

The best answer is D. SIPC coverage limits are applied by customer name; thus if John Jones has both a cash account and a margin account at a firm, they are treated as one account under SIPC. If John and Mary Jones also have a joint cash account and a joint margin account, these are lumped together and considered to be one account under SIPC rules.

Under FINRA Rule 2124 - Net Transactions With Customers - in order to execute a "net basis" transaction with an institutional customer, the member must provide disclosure and obtain consent from the customer: A. using a negative consent letter B. using written consent on an order-by-order basis C. using oral disclosure and consent on an order-by-order basis D. any of the above

The best answer is D. So-called "net basis" orders are executed by the member on a principal basis without a commission charge or mark-up/mark-down. These can be demanded by institutions who consider the spread earned by the dealer in its buy-sell transactions to be sufficient remuneration without the additional charge of a commission or mark-up. If a customer places a buy order on a "net basis," the dealer buys that security in the market, takes it into inventory, and then immediately resells it to the client at a slightly higher price. This is really no different than a riskless principal transaction. The institution placing the order believes that the differential between the dealer's buy and sell price (the equivalent of the spread) will be cheaper than if the trade were done on an agencv basis with a commission charge. Most broker-dealers will not accept "net basis" transactions from retail (non-institutional) clients. If the firm does, it must get written consent from the client on an order-by-order basis, evidencing the customer's understanding of the terms and conditions of the order. On the other hand, institutions are more likely to demand such "net basis" transactions. In this case, consent can be obtained either by: Using a negative consent letter that gives the institution the meaningful opportunity to object to having transactions effected on a net basis; or Using oral disclosure and consent on an order-by-order basis (this must be documented) or Using written consent on an order-by-order basis.

All of the following statements are true about stabilizing bids under Regulation M EXCEPT: A. stabilizing bids are permitted at or below the Public Offering Price B. only one stabilizing quote can be maintained on NASDAQ or CQS C. only one market maker is permitted to maintain the stabilizing bid D. the bid is shown on the NASDAQ or CQS system without any special identification

The best answer is D. Stabilizing bids are identified as such on both CQS and NASDAQ. Such bids are permitted at or below the Public Offering Price - never above. Only one market marker can maintain the stabilizing bid, thus only one quote can be entered into a quotations system at any time.

An issuer has filed an S-1 registration statement for an IPO. During the cooling off period, the underwriters have found unexpectedly high investor demand for the issue. The issuer would be required to file an amended S-1 for the offering if the size was increased by: A. 5% B. 10% C. 15% D. 20%

The best answer is D. The "Green Shoe" clause inserted in the underwriting agreement between the issuer and the underwriter states that if there is an excess demand, the company will issue additional shares to cover the oversale. FINRA rules limit the Green Shoe clause to 15% of shares issued. If more shares will be issued than the 15% limit, the registration statement filed with the SEC would be required to be amended.

A non-12b-1 mutual fund has a net asset value of $9.15 per share. If a customer purchases $5,000 of the fund, the maximum offering price per share is: A $9.15 B $9.50 C $9.92 D $10.00

The best answer is D. The maximum sales charge for single purchases of non 12b-1 fund shares is 8 1/2% of the Public Offering Price under FINRA rules. No breakpoint is available until the purchase amount exceeds $10,000. Therefore, a customer who buys $5,000 of a fund as a single purchase will pay an offering price of: $9.15 / 100% - 8 1/2% = $9.15 / .915 = $10.00

A market maker in ABCD stock is quoting the security at $10.00 - $10.50 (15 x 10). A customer enters an order to buy 100 shares at $10.00. Under SEC rules, the market maker: A. must update its quote size to 16 x 10 B. must update its quote size to 15 x 11 C. must execute the order D. is not required to update its quotes

The best answer is D. The "de minimis" exemption states that if a customer limit order is at the same price, but is 10% or less than the size of the market, then the market maker does not have to update his quote. This market maker is bidding for 1,500 shares at $10.00. The customer places a limit order to buy 100 shares at $10.00. Since this is less than 10% of the market maker's current size; and the price is not improved; there is no obligation to update the size of the market maker's quote.

Under the FINRA Supervision rule, all of the following statements are true EXCEPT the member must: A. tape the phone conversations of its representatives if it is notified by FINRA B. tape the phone conversations of its representatives if it has actual knowledge that it has hired too many representatives from another disciplined member C. review any tape recordings made to ensure compliance with securities laws and FINRA rules D. file a report on the member's supervision of the telemarketing activities of its representatives with FINRA by the 30th day following calendar year end

The best answer is D. The "taping rule" is imposed by FINRA on member firms that hire too many representatives from other disciplined members. FINRA notifies the member firm that it must tape all phone conversations of its representatives. The rule also states that if the member knows that it must comply with the rule, even if it did not get the notice, it must still start taping (we love regulators!). Taping must start within 60 days of notice from FINRA, and the firm must create special written procedures to review the tapes for compliance with securities laws. At the end of each calendar quarter (not at the end of each year), the member must file a report with FINRA on its supervision of its telemarketing activities.

Under the FINRA Communications with the Public Rule, who is NOT considered to be an institutional investor? A. Registered person associated with a member B. Registered investment advisor C. FINRA member firm D. Person or entity with assets of $5 million

The best answer is D. The FINRA Communications Rule defines "institutional investors" as banks, savings and loan associations, insurance companies, registered investment companies, registered investment advisors, a person or entity with assets of at least $50 million, government entities, employee benefit plans and qualified plans with at least 100 participants, FINRA member firms and registered persons, and a person acting solely on behalf of an institutional investor. In Choice D, a person or entity must have at least $50 million of assets (not $5 million) to be defined as an institutional investor.

A customer complaint about a trade that was effected through the NASDAQ system remains unresolved. The complainant should be referred to which of the following? A. SEC B. NASDAQ C. National Adjudicatory Council D. FINRA Department of Market Regulation

The best answer is D. The FINRA Department of Market Regulation supervises all trading activities. If a customer has an unresolved complaint about a trade, he or she should be directed to them.

The Board of Directors of an open-end management company that has been segregated into classes, can have maximum terms of: A. 1 year B. 2 years C. 3 years D. 5 years

The best answer is D. The Investment Company Act of 1940 allows investment company Boards of Directors to be segregated into "classes" that come up for election. One of the classes must come up for election each year; and the maximum term before a class must come up for reelection is every 5 years.

11 years ago, an individual applied for a position as an associated person at BD "A." When completing her U4 Form, she did not disclose that she had been convicted of a felony 2 years earlier. She worked at BD "A" for 10 years and BD "A" never became aware of the felony conviction during her term of employment. She moves to BD "B" and when completing the U4 at the new firm, she again does not disclose the felony because she has honestly forgotten about it. When BD "B" runs a background check on the applicant, the felony conviction is reported. Which statement is TRUE? A. She can be registered as an associated person with BD "B" because it was an honest omission B. She can be registered as an associated person with BD "B" because the felony conviction is more than 10 years old C. She cannot be registered as an associated person with BD "B" because the 10-year statute of limitations on statutory disqualifying events does not run if the information is omitted or misrepresented on the U4 Form D. She cannot be registered as an associated person with BD "B" because the U4 Form requires the disclosure of any felony charge or conviction without time limitation

The best answer is D. The issue here is that a question on the U4 Form is whether the applicant for registration has EVER been charged or convicted of a felony. The fact that this occurred must be disclosed - there is no time limit. Note that this would result in statutory disqualification only if there was a conviction that occurred in the past 10 years, but the disclosure rule is different. Finally, not making the disclosure basically paints the individual as a deceptive person who is not wanted in the securities industry (even though she has already been in the industry for 11 years!).

Which of the following information is NOT considered to be private under Regulation S-P? A. Information provided by the customer as part of the account opening process B. Information reported about the customer in a consumer report C. Information collected about the customer through an Internet "cookie" D. Information collected about the customer from federal, state, or local government records

The best answer is D. The list of "personally identifiable financial information" about a customer or consumer under Regulation S-P includes information provided to obtain a financial product or service (e.g., new account info.); information about any customer transaction, account balance, payment history, etc.; the fact that an individual is a customer of the firm or information that indicates that the individual is a customer; any information collected about the customer in connection with collecting on a loan or servicing a loan; any information collected through an internet cookie (a web information collecting device); any information from a consumer report (e.g., information obtained from an Equifax or TransUnion credit report). These are all considered to be "private" information that cannot be disclosed to others, unless the customer permits this. Examples of information that is not subject to the privacy rules include non-personally identifiable information including aggregated or blind data that cannot be linked to a specific customer; and information that is publicly available, such as information collected from federal, state or local government records, widely distributed media, and disclosures to the general public made under federal, state or local law.

If a mutual fund wishes to adopt or to reapprove a "12b-1" plan, all of the following are required EXCEPT: A. Majority vote of the outstanding shares of the fund B. Majority vote of directors of the fund C. Majority vote of the "uninterested" directors of the fund D. Majority vote of investment advisory board of the fund

The best answer is D. To adopt a 12b-1 advertising plan, three levels of approval are required. These are the majority vote of the outstanding shares and the majority vote of both all directors and all uninterested directors (persons who are not affiliated with the sponsor of the fund). There is no requirement for majority vote of the fund's advisory board.

NASDAQ will delist a stock if its price falls below A. $5 for at least 30 consecutive days B. $3 for at least 30 consecutive days C. $2 for at least 30 consecutive days D. $1 for at least 30 consecutive days

The best answer is D. To be listed on NASDAQ, the minimum share price is $4. If the price falls below $1 for 30 consecutive days, NASDAQ will delist the issue. Then it winds up in the being quoted OTC.

When a member firm opens a margin account, the customer must receive or sign all of the following EXCEPT: A. Hypothecation Agreement B. Credit Agreement C. Margin Risk Disclosure Document D. Loan Consent Agreement

The best answer is D. To open a margin account, other than completing the new account form, the customer must sign a hypothecation agreement and must receive a credit disclosure agreement. The hypothecation agreement pledges the customer's securities in the account to the brokerage firm as collateral for the loan made by the broker to the customer (the debit balance). The credit agreement explains how the debit is computed and how interest will be charged on the loan. The customer must also be provided with a Margin Risk Disclosure Document that explains that borrowing creates leverage, which accelerates gain in a rising market; but also accelerates loss in a falling market. Finally, it is customary, but not mandatory, that a customer sign a loan consent agreement, permitting his or her securities to be lent out to a short seller.

An issuer will qualify for a Rule 147 (Intrastate) exemption if any one of the following tests is met EXCEPT A. 80% of the issuer's revenue must be in the state B. 80% of the issuer's assets must be in the state C. 80% of the proceeds of the issue must be used in the state D. 80% of the issuer's employees must be based in the state

The best answer is D. To qualify for an intrastate exemption, any one of the following tests must be met: 80% of the assets of the issuer are located in the state. 80% of the gross revenue of the issuer is derived in the state. 80% of the proceeds of the offering will be used in the state. A majority of the issuer's employees are based in the state. Regarding the last choice, only the majority of the issuers employees (not 80%) must be based in the state.

In determining whether a trade was made based on "inside" information, all of the following factors would be considered EXCEPT: A. whether the transaction resulted in a profit or avoided a loss B. whether the information was available to other individuals C. the time of the transaction relative to the time the information was made available to the public D. the size of the transaction relative to the daily trading activity in the security

The best answer is D. Under Rule 10b-5, the courts have expanded the definition of an insider to anyone who receives material non-public information in a fiduciary capacity and uses that information to trade for profit (or to avoid a loss, which is essentially the same idea). The size of the transaction has no bearing on whether the trade was based on "inside information" - although it is tougher to catch a small "inside" trade than a large "inside" trade.

As an initial transaction in an existing short margin account, a customer sells short 1,000 ABC at $1.50. The minimum margin requirement is: A. $750 B. $1,500 C. $2,000 D. $2,500

The best answer is D. Under the "cheap stock" rule, the minimum margin to short a stock that sells for less than $5 per share is the greater of 100% or $2.50 per share. To short a stock worth $1.50 per share, the minimum is the greater of $1.50 (100%) or $2.50 per share. 1,000 shares x $2.50 minimum margin = $2,500 margin requirement. Note that this also exceeds the $2,000 initial equity requirement.

Which statement about Institutional Communications is TRUE? A. Prior principal approval is required before distribution of institutional communications B. Prior filing with FINRA is required before distribution of institutional communications C. Institutional communications may be distributed to retail investors D. Each member must have written procedures for the review and approval of institutional communications

The best answer is D. Under the FINRA communications rules, "Institutional Communications" are exempted from the FINRA filing rules and requirement for prior principal approval (since these are sophisticated customers who need less protection). The rule requires each member to establish written procedures for the "review" of institutional communications by a principal - so these can be approved after the fact. FINRA adds that if these procedures do not provide for prior principal approval, then the firm must, as part of its procedures, train associated persons regarding what can and cannot be stated in institutional communications.

All of the following statements are true about the handling of written customer complaints EXCEPT: A. the complaint must be captured B. the complaint must be acknowledged C. a record of the action taken by the member, if any, must be retained D. a written response must be sent to the complainant

The best answer is D. Written customer complaints must be resolved under the supervision of a Series 24 Principal or Series 9/10 Branch Office Manager. A record of the complaint must be captured (since it most likely came via email); a record must be made of action taken (if any); and the complaint must be acknowledged to the client. This acknowledgment is not required to be in writing. As an example, the firm might receive a complaint via email from a client about lousy service, and the firm could respond by talking it over with the customer (and the firm might want to record that conversation!).