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FINRA Rules

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If a registered representative wishes to engage in a private securities transaction, which statement is TRUE? A Prior written permission of the employing member firm is required B There is no requirement for prior permission from the employing member firm. C Notification must be given to the employing member firm within 10 business days D Notification must be given to FINRA promptly, but no later than 30 days after entering into the transaction

A. An example of a "private securities transaction" would be the following scenario: "A registered representative works in a branch office on Main Street, USA." At lunchtime, when the branch manager is out, the manager of a neighboring bank comes in and tells the representatives that if they have customers who want a nice, safe, investment, that if they sell one of her bank's CDs, she will pay that representative $100." If the representative were to sell one of the bank's CDs, this is an example of "selling away" - a prohibited practice. The representative would be selling an investment "away from his or her firm" - meaning that he or she is selling an investment in a transaction that is not known to the firm and that is not being supervised by the firm. The FINRA rule is that if a representative wants to engage in a private securities transaction ("selling away"), he or she must give prior written notice to the firm; the firm must approve in writing; and the firm must record the transaction on its books and records and supervise it. (And this would happen when hell freezes over!).

Which of the following is an SRO? A MSRB B SEC C SIPC D FDIC

A. Both FINRA and the MSRB are SROs - self-regulatory organizations under SEC oversight. The MSRB write rules for municipal market participants, but it does not enforce those rules. Enforcement of MSRB rules is performed by FINRA for broker-dealers. SIPC is the Securities Investor Protection Corporation, which insures customer accounts at broker-dealers from B/D failure. FDIC (Federal Deposit Insurance Corporation) insures customer accounts at banks from bank failure.

Salespersons may be compensated based on which of the following? A Trading commissions paid by the brokerage firm to the representative B Trading commissions paid by the customer to the representative C Fees paid by the customer to the investment advisor representative D Salary paid by the customer to the representative

A. Broker-dealers earn commissions or mark-ups/mark-downs for execution transactions. Investment Advisers earn fees for rendering advice. Compensation cannot be directly paid by the customer to any salesperson. All compensation must be paid by the salesperson's employer.

Customer securities held in margin accounts: A can be commingled with other customer margin securities and used as collateral for a loan by the brokerage firm B can be commingled with fully paid customer securities and used as collateral for a loan by the brokerage firm C must be held in custody of the customer D must be segregated and placed in safekeeping

A. Brokerage firms can hold fully paid customer securities as long as the positions are segregated from other margin securities and are kept in safekeeping. Customer margin securities are pledged as collateral for the margin loan. The broker is permitted to commingle ("mix-up") these securities with those of other margin customers (but not with fully paid customer securities), and it is these margin securities that may be pledged to a bank for a loan.

A website maintained by a member firm that is not password protected is considered to be: A advertising B sales literature C public forum D correspondence

A. FINRA defines communications with the public as either: Correspondence: A communication made available to 25 or fewer existing or prospective retail clients Retail Communication: A communication made available to more than 25 existing or prospective retail clients Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA. A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience). Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective retail clients, scripted speeches delivered to more than 25 existing or prospective retail clients, password-protected websites

A communication sent to fewer than 25 existing or prospective retail clients is defined as (a): A Correspondence B Retail Communication C Public Appearance D Advertising

A. FINRA has 2 basic definitions of communications with the public: Correspondence: A written or electronic communication made available to 25 or fewer existing or prospective clients Retail Communication: A written or electronic communication made available to more than 25 existing or prospective clients. Excluded from these definitions are institutional communications and public appearances. FINRA creates these 2 main categories of communications because "correspondence" is subject to "post use review and approval" by a manager or principal and is not required to be filed with FINRA; in contrast, retail communications must be approved in advance of use by a principal and can be required to be filed with FINRA.

Under FINRA rules, a readily apparent reference to BrokerCheck and hyperlink to the BrokerCheck website is required: A on a member firm's initial webpage that is intended to be viewed by retail investors B on a member firm's initial webpage that is intended to be viewed by institutional investors C on a member firm's initial webpage that is intended to be viewed by hedge fund investors D on every page of a member firm's website that is intended to be viewed by anyone

A. FINRA requires that a readily apparent reference to BrokerCheck and a hyperlink to the BrokerCheck website be shown on a member firm's initial webpage that is intended to be viewed by retail investors and also on any member firm web page that includes a professional profile of a registered person who conducts business with retail investors. Note that the reference is only required for web pages viewed by retail investors, so that they can "check" on their broker. Institutional clients and hedge fund clients are sophisticated investors who "know what they are doing" and don't need this guidance.

Any materials handed out to attendees must be filed with FINRA for seminars involving all of the following investments EXCEPT: A Corporate debentures B Collateralized Mortgage Obligations C Mutual funds D Direct Participation Programs

A. FINRA's general rule on filing of retail communications is that for a member firm's first year of operations, all retail communications must be filed 10 business days in advance of use. Thereafter, no filing is required, but the member firm is subject to spot check. However, there are exceptions to the general rule. Retail communications that must ALWAYS be filed 10 business days in ADVANCE of first use are: Options retail communications; and Mutual fund retail communications with member-prepared performance rankings. (Evidently FINRA ran into problems with these, so it wants these pre-filed at all times.) Retail communications that must ALWAYS be filed 10 business days AFTER first use are: All other mutual fund retail communications; CMO retail communications; and DPP retail communications. (The Investment Company Act of 1940 requires an SRO to get copies of investment company advertising; and the FINRA department that gets these also handles CMO and DPP ads, so they all are grouped under the same rule.)

In which situation can an associated person borrow money from a client without giving prior notice to the employing member firm? A The spouse of the representative lends money to the representative B Another employee at the member firm lends money to the representative C An individual who has previously lent money to the representative makes another loan D The loan is based on a pre-existing business relationship

A. FINRA's rule on a registered representative borrowing from a client is basically "No - Unless." Exceptions are granted to: borrowing from or lending to a customer who is an immediate family member; borrowing from a lending institution that is a customer where the loan is made under the same terms and conditions that would be extended to anyone else; borrowing from or lending to a customer who is a "significant other" like a girlfriend or boyfriend; and borrowing from or lending to a customer with whom the representative has an existing business relationship Note that for (1) and (2) above, prior written approval of the firm is not required. For (3) and (4), the representative must get prior written approval from his or her firm.

A customer that wishes to open an account to buy new issues is required to make a: A positive representation that he or she is not restricted within 12 months preceding the first purchase B negative representation that he or she is not restricted within 12 months preceding the first purchase C a quarterly positive representation that he or she is not restricted thereafter D a quarterly negative representation that he or she is not restricted thereafter

A. In order for a customer to buy IPOs (Initial Public Offerings) of equity securities, the customer must sign a representation letter that he or she is not restricted from buying the issue under FINRA rules (FINRA prohibits industry "insiders" from buying the issue from the underwriter). Because the customer must sign this representation, this is a "positive" affirmation. Annually thereafter, the customer must be sent a notice that the firm has the customer's representation on file that he or she is not restricted, and that if this has changed, the customer must notify the firm so that the account file can be amended. Because the customer does not sign this representation, this is a "negative" affirmation.

All of the following are prohibited practices under FINRA rules EXCEPT: A selling enough mutual funds to a customer to obtain a breakpoint B backing away from a quote. C interpositioning another firm between a customer and market maker D withholding new issues from sale to the public

A. Selling enough of a mutual fund to a customer that would qualify for a breakpoint in the sales charge is not prohibited - this is desired. It allows a customer to get a reduced sales charge for large dollar purchases. Backing away from quotes (not honoring the quote) is prohibited; interpositioning another firm between a customer and the market maker is prohibited (this would increase the cost of the transaction because 2 middlemen must be paid); and withholding new issues from sale to the public is prohibited.

FINRA's IPO purchase restrictions that prohibit industry personnel from buying new issues in the primary market apply to: A Common stock offerings B Preferred stock offerings C Convertible bond offerings D All of the above

A. The FINRA rule restricting member firms and their employees from buying IPOs from underwriters only applies to equity offerings. This is the case because the pricing of equity issues has a large "expectations" component that is difficult to quantify - and substantial price increases in the aftermarket due to overblown "expectations" for the issue are not uncommon. The rule does not apply to preferred stock or bond offerings, where the pricing is determined by the present value of the income flows to be received over the life of the security. For these issues, there is no "expectations" component to pricing. Note that if the preferred stock or bond offering is convertible, the rule still does not apply. This is true since at issuance, the conversion feature has no value - these securities are priced based on their income (dividend or interest) stream.

The FINRA 5% Policy requires that consideration be given to all of the following when determining mark-ups and commissions EXCEPT: A financial condition of customer B dollar amount of the transaction. C level of service provided by the firm D type of security involved in the transaction

A. A customer's ability to pay has no bearing on the amount of commission or mark-up that is charged. The dollar amount of the transaction, level of service provided by the firm, and the type of security involved are all considerations under the 5% Policy when determining a fair and reasonable commission or mark-up.

Which statement is TRUE when comparing arbitration to litigation as a means of settling disputes? A Arbitration is a faster and cheaper means of settling disputes than litigation. B Litigation is a faster and cheaper means of settling disputes than arbitration C Both methods are comparable as to cost and time involved for dispute resolution D Litigation is the normal method of dispute resolution in the securities industry as compared to arbitration

A. Arbitration is preferred over litigation as a means for settling disputes because it is simpler and cheaper. Under FINRA rules, arbitration is mandatory for settling all disputes where a member firm or its personnel are involved.

A customer has fully paid marginable securities in his vault at home that he wishes his brokerage firm to hold. Which statement is TRUE? A The brokerage firm may charge for this service B The brokerage firm may only charge for this service if the customer is institutional C The securities can be commingled with firm positions D The securities can be commingled with those of other customers

A. Brokerage firms can charge for clerical services such as safekeeping of securities. Fully paid customer securities must be segregated by the brokerage firm and placed in safekeeping. Such fully paid customer securities cannot be commingled with customer margin securities; cannot be commingled with firm positions; and cannot be rehypothecated to a bank.

Which statement is TRUE regarding FINRA Rule 5130 that restricts equity IPO purchases? A An investment club may be permitted to buy an equity IPO directly from an underwriter B An investment club is prohibited from buying an equity IPO directly from an underwriter but may purchase shares from a selling group member C An investment club that has registered representatives as owners is permitted to buy an equity IPO directly from an underwriter if their total ownership is 25% or less D An investment club that has any ownership by registered representatives is prohibited from buying an equity IPO directly from an underwriter

A. FINRA Rule 5130 restricts "industry insiders" from buying equity IPOs directly from underwriters(or selling group members). Investment clubs do not fall under the prohibition, as long their members are not restricted. On the other hand, if a member is restricted (which is the case with a registered representative), then the investment club would be restricted if the total ownership of restricted persons is more than 10%.

On Tuesday, May 14th, a registered representative receives an order to sell 100 shares of ABC stock that has been "transferred and shipped" to the customer. Before executing the order, the registered representative must make sure the securities can be delivered by: A Thursday, May 16th B Friday, May 17th C Monday, May 20th D Tuesday, May 21st

A. FINRA rules require that orders to sell cannot be accepted unless the firm has reasonable assurance that the securities can be delivered in 2 business days (regular way settlement). Two business days after Tuesday, May 14th is Thursday, May 16th. Also, note that the location of the securities must be noted on the order ticket to sell.

What must be disclosed on a U4 Form by an individual applying for registration with a member firm? A Individual's primary residence for the past 5 years B Any foreign bank accounts currently owned by the applicant C Individual's personal financial statement showing a positive net worth of at least $2,500 D Names and contact information of any immediate family members who work in the securities industry

A. On the U4 questionnaire, the individual must disclose residence addresses for the past 5 years (that way, if the authorities want to find that person, they know where to look!). There is no requirement to disclose bank accounts; financial status; or the names of other family members who work in the securities industry. Note, however, that if the individual has declared bankruptcy or is the subject to a financial judgment or lien on assets, these must be disclosed.

Under FINRA rules, proxy materials: A must be sent to the beneficial owner of that stock, even if the owner has instructed the member firm not to do so B may be discarded if the owner has instructed the member firm to do so C may be voted by the member firm, if no contest is involved, if they are not received from the owner within 10 days' of the annual meeting D may be voted by the issuer's Board of Directors, if no contest is involved, if they are not received from the owner within 10 days' of the annual meeting

A. Proxy materials on street name stock must be sent to the beneficial owner of the shares, or to the beneficial owner's designated investment adviser, if the beneficial owner has so instructed. This cost is paid for by the issuer. If the voting materials are not returned, or if they are returned without voting instructions, the member firm is not permitted to vote the shares.

A registered representative is a 5% participant in an investment club formed by members of the local Elks Club. The Elks Club investment club has opened a securities account at ABC Brokerage. The account wishes to buy an IPO being offered by an underwriter. Which statement is TRUE? A The account can buy the issue without restriction B The account can buy the issue if the branch manager approves C The account can buy the issue if the registered representative agrees not to share in the profit on the position D The account is prohibited from buying the new issue

A. Registered representatives are prohibited from buying new issues from underwriters. This is true for any account in which registered representatives or other restricted persons have a greater than 10% participation as well. Thus, this account would NOT be prohibited from buying the IPO.

Under FINRA Rule 5130 on IPO distributions, a member may sell shares of a new issue of common stock to a registered representative: A under no circumstances B if the principal approves of the sale in writing C if the issue does not trade at a premium in the aftermarket D without restriction

A. Registered representatives fall into the category of persons who are prohibited from buying a new issue from the underwriter under Rule 5130 regarding IPOs of common stock.

A customer buys 100 shares of ABC stock at $20 per share. Two months later, the stock is quoted at $10.00 - $10.50. The registered representative that sold the stock to the customer offers to repurchase the shares at $18. Which statement is TRUE? A This is prohibited because the FINRA Conduct Rules do not allow customer accounts to be guaranteed against loss B This is prohibited because the registered representative is interpositioning himself between the customer and the current "inside" market C This action is permitted, as long as the principal approves in writing prior to the proposed trade D This action is permitted as a method of maintaining customer "goodwill" with the firm

A. The action of repurchasing the customer's shares at a price higher than the current market to limit the customer's loss, is a prohibited practice under FINRA rules. Customers cannot be guaranteed against loss. If the market moves up, this customer wins; if it moves down, this customer loses.

In a communication to the public, a member firm: A cannot make reference to the FINRA name B can state that it is a member of FINRA C can stated that it is approved by FINRA D can state that it is endorsed by FINRA

B. Member firms can only say that they are FINRA members. They cannot say that they are approved or endorsed by FINRA.

A registered representative at a FINRA member firm has been elected to his cooperative apartment building's Board of Directors. Which statement is TRUE?. A This event must be reported to FINRA B This event must be reported to his or her employer C This event must be reported to both FINRA and his or her employer D No report is required to either FINRA or the employing member firm

B. Any "OBA" - Outside Business Activity - must be reported to the firm and must be approved by the firm. Furthermore, it must be reported on that registered representative's U4 Form and is disclosed in that individual's BrokerCheck report. Remember that an individual does not have to be paid for an OBA to exist. If the representative is in the position to steer investment activities of the outside business entity - that makes it an OBA. The fact that the registered representative, on the Board of Directors of the cooperative apartment house, would be in a position to steer the investment activities of the coop's operating and reserve funds - makes this an OBA.

As long as the firm has written policies and procedures covering borrowing from customers, a registered representative can borrow money without getting the firm's prior approval from a customer who is (a): A accredited B relative C roommate D neighbor

B. As a general rule, registered representatives can neither lend money to, nor borrow money from, customers. However, as long as the firm has written policies and procedures covering this, a representative can borrow money from, or lend money to, an immediate family member who is a customer without having to give prior notice to the firm and get the firm's prior approval. For purposes of this rule, "immediate family" means parents, grandparents, mother-in-law or father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or nephew, and any other person whom the registered person supports, directly or indirectly, to a material extent.

A password-protected website maintained by a member firm is considered to be: A advertising B sales literature C public forum. D correspondence

B. FINRA defines communications with the public as either: Correspondence: A communication made available to 25 or fewer existing or prospective retail clients Retail Communication: A communication made available to more than 25 existing or prospective retail clients Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA. A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience). Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective retail clients, scripted speeches delivered to more than 25 existing or prospective retail clients, password-protected websites

A registered representative holds a seminar for 40 prospective retail clients covering the benefits of investing in mutual funds. At the meeting, the representative sets up a table with canvas bags embossed with the member firm's logo that include a prospectus for each fund that was discussed, a brochure about the brokerage firm, and the registered representative's business card. At the end of the meeting, the prospective clients are encouraged to take a bag home. Which statement is TRUE? A Because the prospective clients can choose whether or not to take a bag, this does not fall under the communications rules B Because the seminar was attended by 40 prospective retail clients, it is defined as sales literature C Because the meeting was held for prospective retail clients, it is considered to be advertising D Because the representative personally delivered the seminar, it is defined as correspondence

Which of the following would NOT have to be reviewed by a principal? A Form letters mailed to all customers B Form letters for internal use within a firm C Letters recommending securities to all clients of a registered representative D Complaint letters received from customers

Who does NOT have to be licensed in a broker-dealer? A Chief Executive Officer B Chairman of the Board of Directors C Chief Financial Officer D Chief Compliance Officer

B. Only operating officers of broker-dealers must be registered - this would include the CEO, CFO and CCO. A member of the Board of Directors is not required to be licensed unless that person is also an operating officer. Also note that passive owners of broker-dealers who are also officers are not required to be licensed. And, of course, all traders, and salespersons must be registered and licensed.

A registered representative has a long-term client who works in a bank. The representative tells the client that he wants to buy a new house and has started to look for a mortgage. The client informs the representative that because of their relationship, she can get the representative a better mortgage interest rate than is available to the general public. Which statement is TRUE about this? A This is prohibited because representatives cannot borrow from their clients B This is prohibited because representatives cannot borrow from bank clients at preferential rates C This is permitted because banks are in the business of lending money D This is permitted because there is a long-standing client relationship

B. Representatives are prohibited from borrowing from their clients. However, there are permitted exceptions to the rule: Representatives are permitted to borrow from immediate family members who are clients (such as a husband borrowing from a wife or vice-versa); and Representatives are permitted to borrow from banks who are clients, as long as the terms and conditions of the loan are the same as those given to the general public. The problem here is that the loan from the bank is being given on preferential terms. Because of this, the loan to the representative is prohibited.

Under FINRA rules, who can buy shares of an IPO? A A broker-dealer who is not part of the underwriting group B A mutual fund portfolio manager buying for the fund portfolio C A registered representative who works for a firm that is not in the underwriting group D The sister-in-law of a representative whose firm is in the underwriting group

B. The FINRA IPO basically prohibits industry "insiders" from buying common stock IPOs directly from the underwriter. The "idea" is that these insiders would know which deals are the "good" ones that are likely to rise in price once trading starts in the market and they would buy them for themselves rather than distributing them to the public. Prohibited from buying from the underwriters at the POP (Public Offering Price) are: FINRA member firms buying for their own accounts; FINRA member firm officers and employees (whether registered or not) and their immediate family members; Institutional portfolio managers who wish to buy personally and their immediate family members. Note that institutional portfolio managers, such as mutual fund managers, can buy IPOs for the funds that they manage. But they cannot buy them personally, where they could personally profit. Also note that regarding the prohibition on immediate family of FINRA member firms buying an IPO, FINRA applies the rule only to purchases from the firm employing the registered representative. But immediate family of member firm employees can buy IPOs from firms where they do not have a relative who is employed

All of the following persons can be on securities industry arbitration panels EXCEPT: A disinterested persons who are affiliated with member firms B interested persons who are affiliated with member firms C members of the general public D attorneys who are members of the bar

B. Arbitration panels consist of individuals affiliated with member firms and representatives from the general public. Attorneys are also permitted on arbitration panels (a nice source of income for attorneys who are retired). All of these individuals must be "disinterested" - meaning they cannot have business, family, or other connections to the parties involved in the arbitration proceeding.

When an issuer wishes to conduct a shareholder vote as part of the annual meeting, the proxies are sent to beneficial owners holding shares in street name by (the) A shareholder relations department of the issuer B broker-dealer holding the shares C DTCC D transfer agent

B. Corporate reports sent by issuers to shareholders include annual audited financial statements and any proxies that require a shareholder vote - such as voting for the members of the Board of Directors. When stock is held in street name, the issuer does not know the identity of the beneficial owner. In this case, the issuer sends the reports or voting material to the broker-dealer, and the broker-dealer distributes them to the beneficial owners. The cost of distribution is paid by the issuer to the broker-dealer. The beneficial owners cannot be charged for this.

A customer has decided to transfer his account from Broker-Dealer A to Broker-Dealer B. Which statement is TRUE regarding the maintenance of the customers existing account records? A Broker-Dealer A must retain the customer's existing account records (statements) for 3 years B Broker-Dealer A must retain the customer's existing account records (statements) for 6 years C Broker-Dealer B must retain the customer's existing account records (statements for 3 years) D Broker-Dealer B must retain the customer's existing account records (statements for 6 years)

B. Customer account statements must be retained for 6 years. In this case, the responsibility for retaining existing account records falls on Broker-Dealer A, because that is where the account was held prior to the transfer that will now occur.

A registered representative has a dispute with his firm. Under FINRA rules, this will be settled by: A litigation B arbitration C mediation D negotiation

B. Disputes between registered representatives and brokerage firms are handled by binding (non-appealable) arbitration.

All of the following statements are true about the compliance meeting held by the firm that registered individuals must attend EXCEPT: A the content of the meeting must address compliance issues that have arisen at the firm B the meeting must be held every 2 years C proof of attendance at the meeting is required D the meeting cannot include topics on how to improve sales

B. Every member firm must hold an annual compliance meeting with each registered employee, covering compliance issues that have arisen over the past year, and the procedures and policies that have been put in place to address those issues. The meeting cannot cover selling skills (that has nothing to do with compliance), and proof of attendance is required.

Which decision by a registered representative requires specific customer authorization? A Determining time of execution in a cash account B Determining the number of shares purchased in a margin account C Determining price of execution in a margin account D Determining the execution venue for a trade in a margin account

B. Generally, a written power of attorney is required only if a registered representative chooses more than price and/or time of execution in a customer transaction. (The firm/rep may however choose the trading venue without a POA) Thus, if the registered representative chooses the security to be traded or the size of the trade, a discretionary power of attorney is required. It makes no difference if the transaction is effected in either a cash account or a margin account.

FINRA's 5% Policy applies to which of the following? A Commissions charged on variable annuities B Commissions charged on transactions effected on stock exchanges C Underwriting spreads charged on new issue offerings effected over-the-counter D Sales charges imposed on mutual fund offerings

B. The 5% Policy applies to over-the-counter and exchange transactions that do not involve a prospectus. Thus, it does not apply to new issue offerings, variable products or mutual fund offerings, since these products require a prospectus.

The Firm Element component of the "Continuing Education" requirement must be completed: A semi-annually B annually C bi-annually D tri-annually

B. The Firm Element of the Continuing Education requirement obligates member firms to deliver annual training to all registered representatives on product, regulation, and compliance issues.

Under FINRA rules, a customer complaint that must be resolved by the member firm is defined as any: A verbal complaint B written complaint C complaint received by certified mail D complaint received in any form

B. Under FINRA rules, a complaint from a customer is defined as one received in writing. Verbal complaints do not count!

Which of the following is NOT required to be retained on file by a broker-dealer? A Customer complaints B Trade confirmations C IPO prospectuses D Correspondence

C. Broker-dealers are not required to retain prospectuses as a record. They are created by the issuer, not the broker-dealer, and copies can be obtained by the SEC, which has an electronic recordkeeping system for them. Customer complaints, trade confirmations, and correspondence are all records that must be retained by broker-dealers.

Who does NOT have to be licensed in a broker-dealer? A President B Equity trader C ACATS clerk D Sales individual

C. Clerical personnel who are not "client facing" are not required to be licensed. ACATS is the Automated Customer Account Transfer System, which is run by DTC (Depository Trust Corporation) to manage client account transfers from one firm to another. Operating officers and owners (but not passive owners), traders, and salespersons must be registered and licensed.

A registered representative would like to increase his production by working from home at nights and on weekends. As part of this effort, the representative wants to use his home e-mail account to send his customers information and recommendations. This action is: A permitted as long as the representative uses his personal e-mail account B permitted with the prior permission of the branch manager C not permitted because the member firm has no way of auditing the representative's personal e-mail account D not permitted because the representative has not registered his personal e-mail account with the SEC

C. A registered representative working from home via e-mail presents a thorny issue for FINRA member firms, since all e-mails must be audited, given that the firm has implemented an electronic communications compliance program. If the representative were only to use his or her work e-mail account, and the firm implemented appropriate safeguards, this could be acceptable. However, this representative wants to use his personal e-mail account - which the member firm has no control over - and this would be prohibited.

All of the following would be considered to be a "retail communication" EXCEPT a(n): A direct mailing sent to 30 existing retail clients B password-protected website maintained by a broker-dealer C institutional communication D internet bulletin board

C. FINRA defines communications with the public as either: Correspondence: A communication made available to 25 or fewer existing or prospective retail clients Retail Communication: A communication made available to more than 25 existing or prospective retail clients Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" as long as the firm has appropriate supervisory procedures in place and cannot be required to be filed with FINRA. A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience). A direct mailing to more than 25 existing or retail clients is a retail communication that is sales literature. A password protected website is a retail communication that is sales literature, since it is seen by a specific audience. An internet bulletin board is a retail communication that is advertising, since it is seen by the general public. Institutional communications are excluded from the "retail communications" definition, approval and filing rules because institutions are sophisticated investors who know what they are doing.

All of the following are defined as "institutional clients" for purposes of the FINRA communications rules EXCEPT: A insurance company B bank C investor with $25 million of assets D savings and loan

C. FINRA distinguishes between "retail communications" and "institutional communications" because "institutional communications" go to sophisticated investors who can take care of themselves. While retail communications must be approved by a principal prior to use, institutional communications are subject to "post use review and approval" by a principal. An institutional communication is defined as one that is distributed to an institutional investor - a bank, savings and loan, insurance company, registered investment company, registered investment adviser, employee benefit plan with at least 100 participants, government entity or a person with at least $50 million of assets for investment.

ACME Life Insurance Company has come out with a new Variable Life product that it wishes to promote and it invites a large number of its licensed agents to a luncheon and talk to introduce the product at a 5 star resort hotel, with travel expenses paid by the insurance company. The agents who are invited are registered with a broker-dealer that is owned by ACME Life Insurance Company. The agents: A can attend without having to take any further action because they are licensed B can only attend if they are licensed in the state where the luncheon is being held C can only attend if they inform their broker-dealer in writing and receive firm approval D cannot attend because it is a conflict of interest

C. The issue here is that the luncheon is not being held by the member firm employer; rather it is being held by the insurance company that is marketing the variable life product. Registered representatives are not allowed to accept remuneration (and remuneration does not have to be cash!) from anyone other than their firm unless they inform the firm in writing and follow the firm's instructions.

Which statement is TRUE? A A registered representative can sign the name of a customer on an arbitration agreement B A registered representative can sign the name of a customer on a margin agreement C A customer can sign her name on a trading authorization, allowing a registered representative to trade her account D A third party can sign the name of a customer on a joint account agreement

C. A customer's signature cannot be forged, even if the customer were to give permission to do so. Legally, the customer's signature is required in order to have a binding contractual agreement that will have standing in a court of law. Thus, Choices A, B, and D are wrong. Customers can sign trading authorizations, allowing anyone (including registered representatives) to trade their account.

Which of the following time stamps is NOT on an order ticket? A Time of order entry B Time of order execution, if executed C Time of order confirmation D Time of order cancellation, if canceled

C. FINRA requires that all order tickets sent to an exchange be stamped with the time of: Order entry; Order execution; and Order cancellation, if canceled. There is no time stamp on the order ticket for the time of order confirmation. These time stamps are now recorded electronically.

A registered representative has a customer with an account at his firm who is a long-time friend. The registered representative is a bit short on funds this month and accepts a loan from his friend to meet his obligations for the month. The registered representative has wealthy parents who give him an annual gift of $15,000, which he expects to receive shortly, and will use this to repay the loan. Which statement is TRUE about this? The registered representative: A is prohibited from accepting the loan B can accept the loan because it is short term and the source of the repayment is known C can only accept the loan if written notice is given to his employing member firm and the firm's instructions are followed D can accept the loan without restriction

C. A registered representative is prohibited from borrowing from a customer unless the customer is an immediate family member or the customer is a bank, lending to the representative on the same terms and conditions as it would lend to anyone else. In these 2 cases, there is no requirement for the representative to notify the firm in advance under FINRA rules (though the firm can put in its own procedure requiring this). If the representative wishes to borrow from any other customer, the representative must notify the firm in writing and follow the firm's instructions (and the firm would generally say "No!" to this).

The primary criteria for a person to be appointed to a securities industry arbitration panel is that the person be: A registered B interested C disinterested D retired

C. Arbitration panels consist of individuals affiliated with member firms and representatives from the general public. Attorneys are also permitted on arbitration panels (a nice source of income for attorneys who are retired). All of these individuals must be "disinterested" - meaning they cannot have business, family, or other connections to the parties involved in the arbitration proceeding

A registered representative has spent 10 years working at his broker-dealer and has sold customers many mutual funds that pay trail commissions from 12b-1 fees. The registered representative is thinking about leaving his firm to do charitable work. He would like to collect the trail commissions on the funds after he terminates his employment from the firm. Is this possible? A No, because only individuals who are currently registered can collect commissions. B No, because the representative must currently be servicing accounts to receive commissions C Yes, if there is a written agreement between the member firm and the registered representative that is executed prior to termination D Yes, because the representative will now be doing charitable work

C. As a general rule, only currently registered individuals can be paid commissions. However, there is an exception to this FINRA rule that typically applies to "RRRs" - Retiring Registered Representatives. It is designed to give these persons an income stream in retirement, where if the registered representative retires, then he or she can contractually agree with the firm to continue to pay trail commissions in retirement. However, it can be used in a situation like this as well - but, of course, the member firm must agree to this.

A registered representative takes a customer out to a dinner and a show, spending $180. This activity is: A a violation of FINRA rules B permitted because less than $100 was spent on a per-person basis C permitted if it complies with the firm's policies and procedures D permitted under all circumstances

A registered representative is invited by a very satisfied customer to that customer's ski house in Vail, Colorado during Christmas. Which statement is TRUE about the representative accepting this invitation? A If the representative accepts the invitation, this is a violation of FINRA rules because the value is more than $100 B If the representative accepts the invitation, this is a violation of FINRA rules because there is a conflict of interest C The representative can only accept the invitation if he or she notifies the member firm and follows the firm's policies and procedures D The representative can accept the invitation without restriction

C. Business entertainment does not fall under the $100 gift limit. Business entertainment is permitted as long as it is not too excessive or too frequent and it must comply with the firm's policies and procedures. Business entertainment means that the representative and the customer are together at some type of event.

A registered representative is provided with an all-expenses paid trip by a mutual fund sponsor to a resort in Hawaii. FINRA defines this as: A a gift B a gratuity C non-cash compensation D business entertainment

C. FINRA prohibits registered representatives from accepting a gift in the amount of more than $100. This does not prohibit business entertainment where the cost is greater than $100, but such "entertainment" requires that the registered representative and the client are together, say at a ball game or at dinner. If a registered representative accepts "non-cash compensation" - such as this all-expense paid trip - this is a violation of FINRA rules.

Under FINRA rules, a readily apparent reference to BrokerCheck and hyperlink to the BrokerCheck website is required: A only on a member firm's initial webpage that is intended to be viewed by retail investors B only on a member firm's web page that includes a professional profile of a registered person who conducts business with retail investors C on both a member firm's initial webpage that is intended to be viewed by retail investors and any web page that includes a professional profile of a registered person who conducts business with retail investors D on every page of a member firm's website that is intended to be viewed by retail investors

C. FINRA requires that a readily apparent reference to BrokerCheck and a hyperlink to the BrokerCheck website be shown on a member firm's initial webpage that is intended to be viewed by retail investors and also on any member firm web page that includes a professional profile of a registered person who conducts business with retail investors.

Under the FINRA Conduct Rules, a broker-dealer may charge a customer for all of the following services EXCEPT: A Collection of dividends B Safekeeping of securities C Generating electronic confirms D Appraisals of securities in a customer portfolio

C. FINRA rules allow fair and reasonable charges for "clerical" services that are unrelated to trading and market making (charges to customers for trading and market making are covered under the 5% Policy). These services include collection of dividends on street name stock; safekeeping of securities; transfer of securities; and appraisals of securities. Firms may charge a nominal fee for paper confirms due to the extra costs involved but may not levy extra fees for electronic confirms.

Which statement is TRUE about the use of the FINRA name on a member firm's or associated person's website? A The FINRA name can only be shown if the member firm receives advance approval from FINRA B If the FINRA name is shown, it must be accompanied by a disclaimer that FINRA does not approve of the member C If the FINRA name is shown, it must be hyperlinked to the FINRA website D The FINRA name may not be used because it would imply endorsement of the firm

C. FINRA states that its name can be used on a member firm or associated person's website. The use of the FINRA name must make it clear that the firm is the FINRA member and not the associated person. Furthermore, the FINRA name, if used, must be hyperlinked to the FINRA website.

Which statement is TRUE about the use of the FINRA name on a member firm's or associated person's website? A The FINRA name cannot be shown B The FINRA name must be shown C If the FINRA name is shown, it must be hyperlinked to the FINRA website D If the FINRA name is shown, it must be stated that FINRA does not sponsor the website

A firm's research department issues a research report on ABC Corp. and changes its recommendation from "Reduce" to "Accumulate." Based on this information a registered representative calls all his clients and tells each one to: "Use all available cash to buy as much ABC Corp. stock as you can immediately." This action by the registered representative is: A appropriate since the recommendation is based on the firm's research B appropriate only if the proposed investment is not too risky for the customer C not appropriate because it induces the customer to invest beyond his financial capacity D not appropriate because it makes a recommendation based on inside information

C. First of all, making the same recommendation to every customer is a prohibited practice. A recommendation can only be made based upon a suitability determination specific to that client. Second, it would not be appropriate to use "all available cash to buy as much of the stock as possible" because this would concentrate the customer's exposure to potential loss on that one specific stock position ("capital risk").

A registered individual leaves the industry. The individual's license(s) will expire if that person remains unaffiliated with a brokerage firm for how long? A 6 months B 1 year C 2 years D 10 years

C. If an individual leaves the industry and remains unaffiliated with a member firm for 2 years, all licenses lapse.

E-mail sent by a representative to an individual customer is considered to be (a(n)): A Advertising B Sales Literature C Correspondence D Retail Communication

C. Letters of an individual nature to a customer (whether written or electronic) are considered to be correspondence. The specific definition is a written or electronic communication made available to 25 or fewer existing or prospective retail customers. These can be reviewed and approved by a manager or principal after they are sent out, as long as the firm has put in appropriate correspondence compliance procedures. Also, these are not subject to any FINRA filing requirement.A communication to more than 25 existing or prospective retail customers is a "retail communication." Examples of retail communications are advertising and sales literature. These must be approved by a principal prior to use and they can be required to be filed by FINRA.

A registered representative reads in that morning's newspaper that "Asian securities markets appear to have finally bottomed out." Based on this information, the registered representative calls each of her customers and says: "Now is the time to buy Asia Fund." This action by the registered representative is: A defined as a communication with the public and must be approved in advance by a compliance officer B a prohibited practice, since this is churning C a prohibited practice, since a suitability determination was not made for each client D a prohibited practice, since the recommendation did not come from the member firm's research department

C. Making the same recommendation to every customer is a prohibited practice. A recommendation can only be made based upon a suitability determination specific to that client.

Under FINRA rules, copies of order tickets must be kept for:. A 6 months B 2 years C 3 years D 5 years

C. Order tickets must be kept for 3 years. As a general rule, all records that you come in contact with must be kept for 3 years. The only notable exception is customer complaints, which must be retained for 4 years.

An elderly customer that is interested in buying a mutual fund asks her registered representative to highlight the most important information in the prospectus, so that it is easier for her to understand the merits and risks of the investment. Which statement is TRUE about this request? A The registered representative should honor the customer's request B The registered representative could not normally honor such a request, but is permitted to do so in this case because of the customer's advanced age C The registered representative cannot honor the customer's request, but can offer to answer any questions that she has about the information in the prospectus D The registered representative cannot honor the customer's request and is not permitted to answer any questions that she has about the information in the prospectus

C. Prospectuses cannot be highlighted or marked-up because this alters the "legal" presentation of the information. However, the representative should answer any questions that the customer has about the information presented in the prospectus - giving complete and accurate information is one of the important functions of a representative.

A registered individual who does not complete Regulatory Element Continuing Education within 120 days of notice from CRD: A can, under exceptional circumstances, obtain a 30-day extension B must be expelled as an associated person from his or her FINRA firm C must be suspended from his or her FINRA firm and cannot be paid D must initiate an arbitration claim or will be terminated

C. Regulatory Element CE must be completed 2 years after initial registration and every 3 years thereafter. The individual is given a notice from CRD (Central Registration Depository) and must complete the session within 120 days of receiving notice. If the individual does not complete the training within this time frame, he or she must be suspended with no pay (a good incentive to get it done!).

A FINRA member firm's research department has prepared a report on ACME Corp. that changes the firm's recommendation from "Buy" to "Hold." Based on this information, a registered representative calls all of his customers and tells them that "This report will create an exceptional opportunity to buy this stock at a more favorable price. I recommend you increase the size of your holdings." This action: A requires the prior approval of the branch manager B requires the prior approval of FINRA C misrepresents the findings of the firm's research report D is consistent with the findings of the firm's research report

C. Since this firm's research department is downgrading the stock (recommending that no additional purchases be made), the registered representative has misrepresented the report's findings.

The SIE Exam allows an individual to: A perform the functions of a registered representative with the exception of solicitation of potential clients B sell securities that are either issued or guaranteed by the U.S. Government or its wholly-owned agencies C become licensed upon passing the appropriate representative qualification exam D only sell redeemable securities of investment companies registered under the Investment Company Act of 1940

C. The SIE is a "corequisite exam." In order to be licensed as a registered representative, the SIE must be passed; and the appropriate representative qualification exam must be passed (e.g., Series 6 or Series 7).

A registered representative wishes to sell a customer a limited partnership unit that is offered through his friend - the general partner in the venture. Under FINRA rules, this action is: A permitted without restriction B only permitted if general partner approves C only permitted if the member firm is notified in writing and gives prior written approval to the transaction D only permitted if FINRA is notified in writing and gives prior written approval to the transaction

C. Under FINRA rules, registered representatives are prohibited from effecting "private securities transactions." As a registered representative, one is an agent for the firm and all transactions must be effected through the firm in one's agency capacity. However, FINRA does allow an exemption from this prohibition. If a registered representative: provides written notice to the member of the transaction and details in writing any compensation to be received and obtains express approval in writing from the member firm, then the associated person can perform the transaction. In addition, the member must record the transaction on its books as if it had been effected through the firm.

A registered representative services the brokerage account of her father-in-law at her broker-dealer. The father-in-law has asked the registered representative to act as the trustee in a trust account for her spouse and children. The following assets are being donated by the father-in-law into the trust: Office Building:$15,500,000Construction Company:$20,000,000Construction Equipment:$ 2,000,000 The registered representative has agreed not to charge a trustee's fee to do this. Does she have to get permission of her broker-dealer to act as trustee? A No, because it is a family relationship B No, because the trust does not hold securities C No, because she is not being compensated to be the trustee D Yes, because this is an outside business activity

D. Any "OBA" - Outside Business Activity - must be reported to the firm and must be approved by the firm. Furthermore, it must be reported on that registered representative's U4 Form and is disclosed in that individual's BrokerCheck report. Remember that an individual does not have to be paid for an OBA to exist. If the representative is in the position to steer investment activities of the outside business entity - that makes it an OBA. The fact that the registered representative, as trustee, would get to oversee the activities of an office building and a construction company - and both of these entities could have operating and investment accounts - makes this an OBA.

A registered representative has done fund raising and charitable work for a not-for-profit hospital for many years and has just been invited to join the hospital's Board of Directors. She will get no compensation for this. Does she have to get permission of her broker-dealer to do this? A No, because it is charitable work B No, because she has been fund raising for the hospital for many years C No, because she is not being compensated D Yes, because this is an outside business activity

D. Any "OBA" - Outside Business Activity - must be reported to the firm and must be approved by the firm. Furthermore, it must be reported on that registered representative's U4 Form and is disclosed in that individual's BrokerCheck report. Remember that an individual does not have to be paid for an OBA to exist. If the representative is in the position to steer investment activities of the outside business entity - that makes it an OBA. The fact that the registered representative, on the Board of Directors of the hospital, would be in a position to steer the investment activities of the hospital's operating and endowment funds - makes this an OBA.

What activity undertaken by a registered representative will require written notice to the firm, along with following the firm's instructions covering this activity? A Volunteering at a local soup kitchen after work B Traveling to a foreign country on vacation C Selling a proprietary growth mutual fund to a client with a growth investment objective D Driving for Uber after the markets have closed and securities transactions are not occurring

D. Driving for Uber is work for pay - and to take an outside job, the representative must give notice to the firm, follow the firm's instructions (so if the firm says no, the answer is no), and must and his or her U4 to show this "OBA" - Outside Business Activity. Volunteer work for no pay is not an OBA, unless it places the representative in a control position to direct the management of investment funds. Traveling by a representative does not have to be reported to the firm. Selling investments, whether proprietary (meaning products of that firm) or nonproprietary, (meaning products of other securities issuers) is the job description of a registered representative.

A registered representative has written a script that will be used to make unsolicited telephone calls to potential retail customers. The representative has a list of 150 potential clients who will be called. Which statement is TRUE? A The script needs no approval from the general principal since it is not a written communication to customers B The script must be pre-filed with FINRA prior to use. C The script must be pre-filed with the SEC prior to use D The script must be approved by the general principal prior to use

D. FINRA defines communications with the public as either: Correspondence: A communication made available to 25 or fewer existing or prospective retail clients Retail Communication: A communication made available to more than 25 existing or prospective retail clients Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA. A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience). Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective retail clients, scripted speeches delivered to more than 25 existing or prospective retail clients, password-protected websites Since this script will be delivered to 150 potential retail clients, it falls under the "Retail Communication" definition, and within that category is defined as "sales literature," and requires prior principal approval.

All of the following are defined as "institutional clients" for purposes of the FINRA communications rules EXCEPT: A bank B investment company C insurance company D real estate company

D. FINRA distinguishes between "retail communications" and "institutional communications" because "institutional communications" go to sophisticated investors who can take care of themselves. While retail communications must be approved by a principal prior to use, institutional communications are subject to "post use review and approval" by a principal. An institutional communication is defined as one that is distributed to an institutional investor - a bank, savings and loan, insurance company, registered investment company, registered investment adviser, employee benefit plan with at least 100 participants, government entity or a person with at least $50 million of assets for investment.

All of the following are defined as "institutional clients" for purposes of the FINRA communications rules EXCEPT: A mutual fund B investment adviser C investor with $50 million of assets D accredited investor

Notification to FINRA is required for all of the following events EXCEPT: A A registered representative is arrested for embezzlement B A registered representative is indicted under the Securities Exchange Act of 1934 for "insider" trading violations C A written customer complaint is received about a registered employee misappropriating customer funds D A registered representative is fined for speeding in a school zone

D. FINRA does require notification for a variety of reasons. If a registered individual is the subject of a written customer complaint involving theft or embezzlement; if one is arrested, arraigned, indicted, convicted, or pleads guilty to any criminal offense (except for minor traffic violations); or if one is sued under the Securities Acts; notification to FINRA is required. In addition, notification to FINRA is required if the registered representative is suspended or expelled by any other self-regulatory organization; is denied registration by another self-regulatory organization; or is the subject of a customer complaint that is settled for more than $15,000; or is the subject of disciplinary action by the member firm involving suspension, termination, or the withholding of commissions in excess of $2,500. When FINRA gets the report, they review it to see if they should do nothing, suspend the person's registration, or expel the registered representative.

A representative gives a seminar to investors, making a presentation about successful hedge fund strategies. It is attended by 10 retail clients and 20 institutional clients. FINRA defines this as: A an advertisement B a solicitation C a retail communication D correspondence

D. FINRA has 2 main categories of communications to retail clients: Correspondence: A communication to 25 or fewer existing or prospective retail clients Retail Communication: A communication to more than 25 existing or prospective retail clients Excluded from these definitions are Institutional Communications and Public Appearances. Correspondence, Institutional Communications, and Public Appearances are not subject to prior principal approval - rather, FINRA states that as long as the firm has appropriate supervisory procedures in place, they are subject to "post use review and approval." They are also not subject to FINRA filing rules. In contrast, retail communications must be approved by a principal prior to use and are subject to FINRA filing rules. Because this is a communication to 10 retail clients (the number of institutional clients is irrelevant), this is defined as "correspondence."

FINRA enforces regulations in all of the following markets EXCEPT: A First Market B Second Market C Third Market D Futures Market

D. FINRA is the regulator for all of the securities markets - the Primary Market (new issues); the First Market (trades on exchanges); the Second Market (OTC trades of non-exchange listed securities); the Third Market (OTC trades of exchange listed issues) and the Fourth Market (direct trading between institutions on ECNs and ATSs). FINRA has no regulatory authority over the futures markets - that function is performed by the CFTC - the Commodities Futures Trading Commission.

Text:A mutual fund sponsor wants to hold a sales contest to promote sales during the typically slow month of January. The terms of the contest are that the salesperson in the fund selling group that sells the most of the sponsor's funds during the month of January will get the keys to a new Mercedes sports car. Under FINRA rules, this is an example of: A a gift and is permitted B a gift and is prohibited C non-cash compensation and is permitted D non-cash compensation and is prohibited

D. FINRA prohibits registered representatives from accepting a gift in the amount of more than $100, and also prohibits representatives from accepting "non-cash compensation" from someone other than their employer that exceeds this $100 limit. The mutual fund sponsor is not the employer of the registered representative - the representative is an employee of the broker-dealer who is in the mutual fund selling group. The sponsor is actually not permitted to hold such a sales contest - only the employing member firm can hold a sales contest, and it cannot favor the sale of one fund over another. In other words, the sales contest must cover all mutual funds sold by that broker-dealer. If the registered representative were to win this sales contest and get the new car from the sponsor, this is an example of "non-cash compensation" under FINRA rules and is prohibited.

Which statement is TRUE about a seminar given by a registered representative about mutual funds, collateralized mortgage obligations or direct participation programs? A The seminar must be recorded and the recording must be retained by the member firm B The attendees must be pre-screened for suitability of any investments recommended at the seminar C The representative giving the seminar must have an unblemished BrokerCheck report D Any materials given to participants must be filed with FINRA no later than 10 business days after first use

D. FINRA's general rule on filing of retail communications is that for a member firm's first year of operations, all retail communications must be filed 10 business days in advance of use. Thereafter, no filing is required, but the member firm is subject to spot check. However, there are exceptions to the general rule. Retail communications that must ALWAYS be filed 10 business days in ADVANCE of first use are: Options retail communications; and Mutual fund retail communications with member-prepared performance rankings. (Evidently FINRA ran into problems with these, so it wants these pre-filed at all times.) Retail communications that must ALWAYS be filed 10 business days AFTER first use are: All other mutual fund retail communications; CMO retail communications; and DPP retail communications. (The Investment Company Act of 1940 requires an SRO to get copies of investment company advertising; and the FINRA department that gets these also handles CMO and DPP ads, so they all are grouped under the same rule.) There is no requirement that the seminar be recorded; there is no requirement to pre-screen attendees; and there is no requirement that the representative giving the seminars have an unblemished BrokerCheck report (though this would be nice!).

Which action is permitted under FINRA rules? A A registered representative accepts a $300 gift from a customer B A registered representative pays for a $1200 sushi meal with a customer C A registered representative gives a customer $200 tickets to a show D A registered representative accompanies a customer to a show, for which the representative paid $200 for the tickets

D. Business entertainment does not fall under the $100 gift limit. Business entertainment is permitted as long as it is not too excessive ($1200 for raw fish seems excessive!) or too frequent and it must comply with the firm's policies and procedures. Business entertainment means that the representative and the customer are together at some type of event.

A registered representative personally owns some rental property that has not been doing well. The representative is underwater on the investment and negotiates with the bank to do a short sale of the property. Does this have to be reported to her broker-dealer and be reported on her U4 Form? A No, because it is an outside business relationship B No, because the representative is not personally responsible for any loss on the sale of the property C No, because securities are not involved in the transaction D Yes, because she had made a compromise with a creditor

D. Regulators are worried that registered representatives who are in "money trouble" might be a risk to investors because they would attempt to get money from customers illegally (say, by churning their accounts to generate commissions, or by simply stealing from them). Financial disclosures required on a U4 Form include whether the applicant has, within the past 10 years, filed for bankruptcy, made a compromise with creditors, or been the subject of an involuntary bankruptcy petition. A short sale of property is totally different than a short sale of stock. If a person owns a residential or investment property that is mortgaged and is "in trouble" - meaning that the mortgage payments cannot be made, the individual can attempt to negotiate a "short sale" with the bank instead of having to go through foreclosure. In a short sale, the lender agrees to accept a sale price for the property that is less than the outstanding mortgage amount; and the lender forgives any mortgage balance due upon the sale of the property. So this is really a negotiation with a lender to accept a loan repayment that is less than the balance due.

A representative who is new to the industry is setting up her on-line social media profile, using a template provided by her firm, which is one of the largest asset managers. She wants clients to know about her capabilities and the "high touch" personal involvement that she will offer. Which statement made in the profile would be considered to be misleading? A "With the resources offered by our firm, we have proprietary in-depth research reports on companies and industries that you can only get through us" B "I will work diligently to find the best investments that meet your specific investment objectives, risk tolerance level, and investment time horizon" C "I will be your personal point of contact, so that any questions or concerns that you have will be answered by me and not by some individual who is not personally involved in managing your account" D "I have industry experience and depth of knowledge, assuring you that your account is being managed by one of the best in the business"

D. Since this is a new representative, stating that she has "industry experience" is misleading. She may have depth of knowledge (she could be well schooled and trained), but she does not have experience (yet).

Under the FINRA Code of Procedure, the first level of hearings in any dispute or complaint proceeding is held at the: A National Adjudicatory Council B Securities and Exchange Commission C Federal Court D Hearing Panel

D. The FINRA Code of Procedure is used when the FINRA Department of Enforcement wishes to prosecute a member firm or an associated person for rule violations. Under the FINRA Code of Procedure, the first level of hearings in any dispute or complaint proceeding is held at the Hearing Panel. Their decision may be appealed to the National Adjudicatory Council. The National Adjudicatory Council's decision may be appealed to the Securities and Exchange Commission. Finally, the SEC's decision may be appealed to Federal Court.

A registered representative wants to use her social media account to contact both existing and prospective clients who also use the site. Which statement is TRUE about the registered representative doing this? A The registered representative is prohibited from doing this and is only permitted to contact clients through e-mail accounts established by the member firm B The registered representative can do this if the communication is filed with FINRA 10 days in advance of distribution C The registered representative can only contact existing clients, and the communications must be captured and supervised by the member firm D The registered representative can contact both existing and prospective clients as long as the communications are captured and supervised by the member firm

D. The use of social media sites (such as Linked In or Facebook) for business purposes by a registered representative comes under FINRA's communications rules. This means that the firm must capture these communications, supervise them and retain them. It makes no difference if the communication is sent to an existing or prospective client.

Under FINRA Rule 5130, all of the following are prohibited from buying a new issue directly from an underwriter EXCEPT: A A FINRA registered representative B A person who is financially dependent on a FINRA registered representative C A financially independent sibling of a FINRA registered representative D A cousin of a FINRA registered representative

D. Under FINRA Rule 5130 on IPO distributions of common stock, the first category of persons restricted from buying the shares includes member firms for their own accounts, officers of member firms, associated persons, or any other employee of a member firm. Also prohibited are "agents" of broker-dealers; and immediate family members of the officers and employees of broker-dealers. ("Immediate family" is anyone that is 1 step removed from that officer or employee and includes spouses, siblings, parents, and children, as well as in-laws of these individuals.) Also note that "immediate family" includes anyone under the financial control of these prohibited individuals.

A FINRA member distributes a firm quote through the OTCBB and then does not honor the quote. This is: A Free Riding B Front-Running C Interpositioning D Backing Away

D. Any quote that is published without qualification is considered to be a "firm" quote to be honored for a normal trading unit. Backing away from quotes is a prohibited practice under FINRA rules.

All of the following are prohibited practices under FINRA rules EXCEPT: A backing away B interpositioning C free riding D arbitrage trading

D. Arbitrage is a basic trading activity. Backing away from quotes (not honoring the quote) is prohibited; interpositioning another firm between a customer and market maker is prohibited; and free riding (buying and then selling an issue without paying for it) is also prohibited.

An existing customer of a brokerage firm wishes to buy an initial public offering that he has heard good things about. The registered representative only has a limited number of shares to sell and explains to the customer that the offering is already "sold out". The customer tells the registered representative "If you can get me some of the stock, I will drop off cash payment in full today, with a little extra for you." The registered representative: A can accept the customer's offer without restriction B can accept the customer's offer if the cash payment does not exceed $500 C can accept the customer's offer if the gift is reported to the IRS D cannot accept the customer's offer

D. Cash can only be accepted from a customer if it is to be deposited to the customer's account. A registered representative cannot personally accept cash from a customer.

Under FINRA rules, a registered representative may: A borrow money from a customer only with the permission of FINRA B borrow money from a customer only with the permission of the branch manager C borrow money from a customer only with the permission of the customer D not borrow money from a customer

D. FINRA prohibits registered representatives from borrowing money personally from a customer. Exceptions to the rule are permitted if the customer is an immediate family member; if the customer is a "significant other" such as a live-in girlfriend or boyfriend; or if the customer is a bank, making the loan on the same conditions that it would give to anyone else.

Under FINRA rules, a readily apparent reference to BrokerCheck and hyperlink to the BrokerCheck website is required: A on a member firm's initial webpage that is intended to be viewed by retail investors B on a member firm's web page that includes a professional profile of an individual registered person who conducts business with retail investors C on a member firm's web page that includes the professional profiles of a number of registered persons who conduct business with retail investors D on all of the above

D. FINRA requires that a readily apparent reference to BrokerCheck and a hyperlink to the BrokerCheck website be shown on a member firm's initial webpage that is intended to be viewed by retail investors and also on any member firm web page that includes a professional profile of a registered person (or a number of registered persons) who conducts business with retail investors.

All of the following time stamps are on an order ticket EXCEPT the time of order: A entry. B execution, if executed C cancellation, if canceled D confirmation

D. FINRA requires that all order tickets sent to an exchange be stamped with the time of: Order entry; Order execution; and Order cancellation, if canceled. There is no time stamp on the order ticket for the time of order confirmation. These time stamps are now recorded electronically.

If a customer places a very large order to buy a stock that is likely to have a market impact, the registered representative may: A buy the stock for his personal account prior to executing the order. B buy the stock for his child's UGMA account prior to executing the order C buy call options on the stock for his personal account prior to executing the order D buy the stock for his personal account after executing the customer order

D. Front running (cutting ahead) of a customer order that is likely to have a market impact is a prohibited practice. It makes no difference if the "front running" is done in the registered representative's account, a related account with that stock, or with options on the stock. All these actions are prohibited. Choice D is acceptable, because the client order had already been filled.

A registered representative is employed by a broker-dealer that is a publicly traded company, listed on the New York Stock Exchange. Which statement is TRUE? The registered representative may: A recommend the purchase of his employer's stock to existing customers B solicit new customers to buy his employer's stock C write and distribute a research report recommending the purchase of the employer's stock D accept unsolicited orders for his employer's stock; but cannot solicit orders for, nor recommend the security

D. If a registered representative is employed by a publicly traded member firm (say Raymond James), generally speaking he or she cannot recommend the purchase of that company's shares; nor can he solicit customers to buy the shares. This is not an explicit SEC or FINRA regulation; rather it is industry practice that ensures compliance with FINRA's "suitability" requirements; and the requirement to disclose control relationships at or prior to confirmation. However, it is permitted to accept unsolicited customer orders for the shares.

A customer has generated a lot of business this year, and the representative wants to give the customer an appropriate "thank you" gift. Knowing that FINRA has a $100 gratuity limit, the representative arranges to have a friend who works outside the securities industry buy the customer a $400 gift certificate. For this, the representative will reimburse the friend. Which statement is TRUE? A This action is acceptable because the payment was not made by an associated person B This action is acceptable only if FINRA approves in advance C This action is acceptable only if the payment is made by the representative and not by the friend D This action is a violation of FINRA rules

D. One cannot get around the gift limit rules by having a third party give the gift!

A golf pro at the country club where a registered representative is a member wants to refer prospective clients to the representative in exchange for a small fee. Which statement is TRUE? A This is permitted since the referral payment is small B This is permitted if the representative discloses the existence of the relationship to each referred client C This is permitted as long as the payment is limited to less than 8 1/2% of the amount invested D This is prohibited

D. Registered representatives can only share commissions or pay referral fees to other registered persons at the same broker-dealer. Thus, paying referral fees to the golf pro is prohibited.

The Regulatory Element component of the "Continuing Education" requirement must be completed: A on the registrant's 1st anniversary of registration B on the registrant's 3rd anniversary of registration C every 2 years after the initial review D every 3 years after the initial review

D. The Regulatory Element of the Continuing Education requirement must be completed by registered persons on their 2nd anniversary of registration and every 3rd year thereafter. This involves completing a computerized "training experience" that covers relevant rules and regulations.

A mutual fund has been doing poorly. The registered representative decides to sell the position because of this and does this before speaking with the client. Which statement is TRUE? A This is permitted because it is to the benefit of the client B This is permitted as long as the client's signature is obtained the next business day C This is permitted as long as the client's signature is obtained within 2 business days D This is an unauthorized trade and the registered representative will be subject to penalties

D. There is no mention that the registered representative has been given discretion by the customer, therefore the representative cannot do the trade unless the customer has given permission before the trade was executed.

An order ticket is filled out and sent to the New York Stock Exchange floor for execution. After being executed on the floor, it is discovered that the account number is incorrect. Under FINRA rules, the order: A must be canceled B ticket can be corrected by the registered representative that took the order C ticket can be corrected by thePurchase and Sales Department D ticket can be corrected with the approving signature of theBranch Manager

D. Under FINRA rules, alterations to executed order tickets are prohibited, unless the alteration is approved in writing by a Compliance Officer or "designated person," such as a Branch Manager. This person must understand all of the facts surrounding the alteration before approving of the change, and is responsible for the change.

A registered representative employed by ABC broker/dealer is good friends with an independent venture capitalist. The venture capitalist asks the registered representative to obtain investors for a private placement that he is forming. Which statement is TRUE? A The registered representative can direct customers to the private placement since this is an exempt transaction B The registered representative cannot direct customers to the private placement since his broker-dealer is not the private placement sponsor C The registered representative can direct customers to the private placement only if the venture capitalist is a member of FINRA D The registered representative can direct customers to the private placement only with the prior written approval of his employer

D. Under FINRA rules, registered representatives are prohibited from effecting "private securities transactions." As a registered representative, one is an agent for the firm and all transactions must be effected through the firm in one's agency capacity.However, FINRA does allow an exemption from this prohibition. If a registered representative: provides written notice to the member of the transaction, and details in writing any compensation to be received, and obtains express approval in writing from the member firm, then the associated person can perform the transaction. In addition, the member must record the transaction on its books as if it had been effected through the firm.

How long must customer account statements be retained by a broker-dealer? A 3 years from account opening B 3 years from account closing C 6 years from account opening D 6 years from account closing

D. You might remember that customer account records must be retained for 6 years, which gets you to 50/50! The correct wording is Choice D - customer account records must be retained for 6 years on an ongoing basis, and if the account is closed, then records must be retained until 6 years elapse from account closing.

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