Q Bank Unit 17
To which of the following persons may a broker/dealer pay commissions under a continuing commission contract? To a retired employee, for past business. To the widow of a former employee, for past business. To a retired employee who refers a neighbor to the broker/dealer. To a retired employee who, in the course of his travels, acquires new business for the broker/dealer. A) I and II. B) I and IV. C) II and III. D) III and IV.
Answer: A A FINRA member firm may continue to pay commissions to either a retired employee or a former employee's widowed spouse if a prior written contract exists. Commissions may be paid only on business generated while employed.
A registered representative has reproduced a research report prepared by an independent research analyst on his broker/dealer's letterhead, with no mention of the party who prepared the report. If this literature is forwarded to a select group of clients only, the registered representative's action is: A) not allowed. B) allowed. C) allowed with the written approval of a principal of the broker/dealer. D) allowed only if the research report has been filed with FINRA.
Answer: A A broker/dealer is prohibited from presenting to a client research reports, analyses, or recommendations prepared by other persons or firms without disclosing that they were prepared by a third party.
Which of the following statements are accurate interpretations of FINRA rules governing the use of retail communications? Copies of all retail communications must be kept on file for 3 years. All retail communications must be approved by a principal. All retail communications must be filed with FINRA before first use. Sales and product promotion materials distributed to registered representatives and other employees are retail communications and must be submitted for FINRA review, even though such materials are not intended for public distribution. A) I and II B) I and III C) II and IV D) III and IV
Answer: A A broker/dealer's retail communications must be approved by a principal of the firm before use or filing with FINRA when filing is required, and must be kept on file for at least three years. Pre-filing with FINRA can depend on a number of factors, such as the product. For example, pre-filing of retail communications is required for certain pieces having to do with investment companies and VAs, but not for pieces having to do with DPPs or CMOs.
If a registered representative is suspended by FINRA's Department of Enforcement, his first appeal would be to: A) the National Adjudicatory Council. B) the SEC. C) the SIPC. D) a federal court.
Answer: A A registered representative may appeal decisions of the DOE to FINRA's National Adjudicatory Council. Appeals may then go to the SEC and finally to the federal appellate court system.
An individual who has worked as a registered representative must requalify for registration if he subsequently takes a job outside the securities industry for more than: A) 24 months. B) 6 months. C) 12 months. D) 18 months.
Answer: A A resigned registered representative may reenter the industry without passing an examination if his resignation lapse is less than 2 years; after 2 years, he must requalify by examination.
Under the Code of Procedure, the maximum fine for a minor rule violation (MRV) is: A) 2500. B) 1000. C) 7500. D) 10000.
Answer: A According to the Code of Procedure, the maximum fine for a minor rule violation is $2,500.
Under the terms of the Telephone Consumer Protection Act, all of the following statements are true EXCEPT: A) cold calls may be made between 8:00 am and 9:00 pm in the time zone from which the representative is making the call. B) the firm must maintain a Do-Not-Call list. C) calls made to parties with whom the caller has an established business relationship are exempt. D) calls made on behalf of tax-exempt nonprofit organizations are exempt.
Answer: A Any solicitation made must occur between 8:00 am and 9:00 pm in the recipient's time zone. Firms must maintain a Do-Not-Call list, and the act exempts calls made on behalf of tax-exempt nonprofit organizations and calls made to parties with whom the caller has an established business relationship.
A statutory disqualification applies to an employee or an officer of a broker/dealer who, within the past 10 years, has: A) been convicted of securities-related fraud. B) been charged with driving under the influence (DUI). C) been convicted of a minor traffic violation. D) been convicted of a misdemeanor and then sued in civil court regarding the same charge.
Answer: A Anyone who has been convicted within the past 10 years of any felony or any securities- or money-related misdemeanor is subject to statutory disqualification. A mere charge is not enough.
A registered representative is preparing a power point slide presentation to be delivered in a live seminar for a group of invited institutional clients. To use the slides, they must be A) reviewed by a principal of the broker/dealer B) approved by FINRA in writing C) submitted to the SEC for review and approval D) submitted to both FINRA and the SEC for pre-use approval
Answer: A Communications material that is intended for use with institutional customers only need be supervised and reviewed by a principal of the member firm. Though FINRA can request spot-checks of any material used to communicate with the public, submission of institutional communications to FINRA or the SEC for review or approval is not required.
Content having to do with the business of a broker/dealer or registered representative delivered electronically to the public on social networking Websites and blogs A) is subject to all rules and regulations governing communications with the public B) can only be subject to supervisory rules but not filing rules C) is never subject to supervisory rules if it is static content such as a RR's profile or background D) is not subject to the rules and regulations addressing communications with the public because it is delivered electronically
Answer: A Content having to do with the business of a BD or RR is subject to the rules and regulations governing communications with the public. Whether delivered in written form or by electronic means, it is the content for whom it is intended and the number of recipients that determines what category of public communications it falls under, and whether approval or supervision is applicable and/or filing with FINRA is required.
If an individual is convicted of a money- or securities-related fraud, FINRA will deny registration to that individual for how many years from the conviction date? A) 10. B) 1. C) 2. D) 5.
Answer: A Conviction within the past 10 years for any felony or securities-/money-related misdemeanor will lead to statutory disqualification of an applicant for registration with a FINRA member firm.
The Code of Arbitration Procedure would be mandatory to settle disputes between: a member and a registered clearing corporation. a member and one of its associated persons. an associated person with a statutory discrimination claim against a member. a member and a client who has signed a predispute arbitration clause. A) I, II and IV. B) I and II. C) II, III and IV. D) II and IV.
Answer: A Disputes between anyone in the industry, including registered clearing corporations, must go to arbitration, with the exception of statutory discrimination claims, which are claims alleging sexual harassment or discrimination on the basis of, among other things, age, sex, or ethnicity. Such claims may be taken to court instead of arbitration. When a client has signed a predispute arbitration agreement, arbitration is mandatory.
Regarding FINRA spot-checks of a member firm's communications with the public, which of the following statements is CORRECT? Only written communications are subject to spot-checks. Both written and electronic forms of communication are subject to spot-checks. Upon written request from FINRA, the member must submit the material requested within the time frame specified by FINRA. Upon written request from FINRA, the member has 10 business days to submit the requested material. A) II and III B) I and III C) I and IV D) II and IV
Answer: A Each member's written and electronic communications may be subject to a spot-check procedure by FINRA. Upon written request from FINRA, each member must submit the material requested within the time frame specified by FINRA.
A registered representative who does not complete the regulatory element of continuing education within the prescribed time frame: A) cannot function as a representative until the CE requirement is met. B) can continue to function as a representative with the written permission of a principal. C) is limited to accepting unsolicited orders only until the CE requirement is met. D) is required to take a 120-day leave of absence .
Answer: A If a registered person does not complete the regulatory element of CE within the prescribed time frame, the representative's license will be suspended by FINRA until the CE is completed.
If an employee of an NYSE member wants to take a second job, which of the following statements is TRUE? A) Prior approval of the member firm is required. B) Prior approval of the NYSE is required. C) Prior approval of both the NYSE and the member firm is required. D) No approval is required.
Answer: A If an employee wants to take a second job, that person must give prior written notice to the member and receive prior written consent from the member. The NYSE is not notified.
When an agent explains mutual funds to a prospective investor, which of the following statements may be made? A) The redemption value of mutual fund shares fluctuates according to the fund's portfolio value. B) Mutual fund shares are liquid and may be switched from fund to fund without tax liability. C) A fund always redeems shares at NAV, with little chance of a financial loss. D) Mutual funds must make payment within 7 days of a redemption request and guarantee a return of the original investment.
Answer: A Mutual fund redemption values fluctuate according to the value of the securities in the portfolio. The tax liabilities associated with mutual fund switching may not be glossed over. While the redemption rules of the Investment Company Act of 1940 do make mutual funds liquid, investors are not guaranteed to receive an amount equal to the original investment.
Which of the following materials is subject to FINRA's filing requirements? A) Retail communications for an open-end management investment company. B) Prospectus for a face amount certificate company. C) Prospectus for a closed-end management investment company. D) Internal memo describing the benefits of an investment in a certain unit investment trust.
Answer: A Retail communications for investment companies are subject to filing requirements with FINRA. Those that include a performance ranking that is either created by the investment company or from a source that is not regularly published require pre-filing. Those that do not include such a performance ranking can be filed within 10 business days of first use. Prospectuses and internal memos need not be filed with FINRA.
All research reports issued by a member firm must disclose: any control relationship with the issuer. the price at the time the original recommendation was made. whether the member firm has a 1% or more position in the security. the name of the member firm providing the recommendation. A) I, II, III and IV. B) I and III. C) II and IV. D) III and IV.
Answer: A The source of the recommendation, the security's price, any member firm interest in the security of 1% or more, and that the member firm is a market maker in the security all must be disclosed in the research report. In addition, if a control relationship exists between the member and the company being recommended, this relationship also must be disclosed.
You have just received a statement of claim from the Director of Arbitration. One of your customers is claiming that your failure to follow his instructions led to a loss of $36,000. Under FINRA rules, you must respond within: A) 45 days. B) 24 business hours. C) the business day the claim was received. D) 60 days.
Answer: A Under the Code of Arbitration, a respondent has 45 days to respond to both the director and the claimant.
A broker/dealer informs registered personnel that, to satisfy the annual compliance meeting requirements, they have recorded a Webcast that individuals can view at their own convenience. A Webcast of this type would be: A) allowed for all registered personnel if informed of the opportunity to submit questions and receive answers in a timely fashion. B) allowed for principals only. C) allowed for registered representatives but not for principals. D) prohibited because this is recorded and not a live Webcast.
Answer: A Using a recorded Webcast for the annual compliance meeting is allowed for all registered personnel so long as certain safeguards are in place. One such safeguard is the opportunity to ask questions and receive answers in a timely fashion; the firm's registered individuals should be made aware of this opportunity.
All of the following records must be kept for 6 years EXCEPT A) blotters B) the general ledger C) customer account records, like monthly statements D) communications with the public
Answer: D Of the answer choices listed, it is important to recognize that communications with the public must be maintained on file for 3 years by a member firm, and therefore, would not fall under the 6-year record retention requirement.
During a period of suspension, a suspended member must: A) restrict its securities activities to mutual funds. B) be treated as a nonmember by other members. C) have no securities dealings of any kind. D) restrict its securities activities to investment banking.
Answer: B A member firm under suspension is essentially a nonmember during the period of suspension. Accordingly, during that time period, other FINRA members must treat the suspended firm as a nonmember. For example, during the period of suspension, other firms may sell new issues to the suspended firm only at the public offering price.
Which of the following best describes the disciplinary actions a self regulatory organization (SRO) such as FINRA or an exchange can impose upon a registered representative who has violated its rules? A) The SRO can only recommend disciplinary actions that must then be imposed by the SEC. B) The SRO has authority to censure, fine, or expel the registered representative. C) The SRO has full authority to impose a jail sentence if warranted. D) The SRO must coordinated all disciplinary actions with the employing member firm who must then impose them on the registered representative.
Answer: B A self regulatory organization (SRO) such as FINRA or an exchange may censor, fine, or expel a representative directly, but it cannot impose a jail sentence.
One of the benefits of using arbitration to settle disputes between member firms is that it: A) gives more time to prepare arguments. B) is relatively inexpensive. C) is not binding on both parties. D) does not allow for arguments from parties outside the industry.
Answer: B Arbitration is a method for settling disputes between member firms that is less costly than litigation. In addition, all decisions are final and binding on all parties.
Under FINRA rules, a member may pay continuing commissions to a retired representative: only if a written agreement is in effect. based on business generated while employed. based on business introduced after retirement. only within 30 days of retirement. A) III and IV. B) I and II. C) I and IV. D) II and III.
Answer: B Continuing commissions may be paid to a retired representative only if a written agreement exists between the member and the retired representative and if payout is based only on business generated while employed.
Which of the following violations could bar an agent from employment in the securities industry? A) Associating with a known felon. B) Conviction for the misdemeanor of petty theft of money from a client. C) Failing to qualify by examination as an agent. D) Being convicted of a traffic violation.
Answer: B Conviction of a felony or a misdemeanor involving money within the past 10 years may subject an individual to a statutory disqualification from the industry. Failing to pass the exam would prohibit the individual from acting as an agent but would not disqualify that individual from performing other duties.
Correspondence, one of the three categories of communication with the public, is defined as A) communications that are targeted only at individuals who currently maintain accounts with the broker dealer B) any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period C) electronic communications only, that have been made available to 25 or fewer retail investors within the past 6 months D) written communications only, that have been made available to 25 or fewer retail investors within the past 6 months
Answer: B Correspondence can be written or electronic and targeted at either account holders or non-account holders of the broker/dealer. The criteria that makes the communication correspondence is that it is distributed to 25 or fewer retail customers within any 30 calendar-day period.
Which of the following accurately depicts communications with the public designated as correspondence? Review by a principal must occur before use Review by a principal can occur either before or after use in accordance with the firm's written procedures Filing with FINRA is required Filing with FINRA is not required A) I and IV B) II and IV C) II and III D) I and III
Answer: B Correspondence review by a principal can occur either before or after use in accordance with the firm's written procedures. Filing of correspondence with FINRA is not required.
All of the following are included under the terms "advertising" and "sales literature" EXCEPT: A) market letters. B) internal memos. C) billboards. D) research reports.
Answer: B Each of the terms qualifies as either advertising or sales literature except internal memos, which are communications pieces intended only for use within the broker/dealer and not for use with the public.
FINRA fees paid by a member firm are based on which of the following? Number of registered representatives employed. Number of trades carried out per year. Annual revenue from over-the-counter securities transactions. Number of branch offices registered with FINRA. A) II and IV. B) I and IV. C) I and III. D) II and III.
Answer: B FINRA fees are determined by the number of registered representatives, principals, and branch offices registered with FINRA. Assessments are based on annual revenue from over-the-counter securities transactions.
A broker/dealer allows registered representatives to utilize social networking sites such as Facebook and LinkedIn but prohibits the use of delivery platforms such as blogs where comments can be posted, starting discussions on blog sites, or starting discussions in Internet chat rooms and posting tweets on Twitter. One of the BD's registered representatives tweets that he is going to learn the details about a new investment product today. The Twitter posting A) is allowed because no investment advice was offered regarding the new product in the tweet B) is not allowed because the BD has in-house rules prohibiting tweeting in regards to business C) is not allowed because FINRA prohibits modes of communication where content can be posted impulsively such as on blogs, in chat rooms, or tweeting D) would be allowed as long as the registered representative had adhered to all of FINRA's guidance on utilizing electronic platforms and devices
Answer: B FINRA has offered guidance on the use of electronic modes of delivering business-related content communications to the public. It does not prohibit the use of any technology or device but can offer and update guidance with regards to any specific technology or device. Within that guidance, FINRA has stated that in-house prohibitions on the use of any technology or device that have been mandated by the BD must be adhered to by all BD personnel.
Your firm prepares a communications piece to be made available to several of your institutional customers only. Your broker/dealer is aware that some of these institutional customers will use the pieces your broker/dealer has prepared for them from time to time and distribute the pieces to their retail customers unaltered. How must the piece be handled by your broker/dealer regarding FINRA approval and filing requirements? A) As an internal piece intended for its own personnel B) As a retail communications piece C) As an institutional communications piece D) As correspondence
Answer: B FINRA mandates that no member may treat a communication as having been distributed to an institutional investor if the member firm has reason to believe that the communication, or any part of it, will be forwarded or made available to any retail investor.
Continuing commissions in connection with the sale of investment company securities: A) is illegal. B) may be paid to a retired employee provided a bona fide contract calling for such payment was entered into by the registered representative while employed by a member. C) are a form of deferred compensation; therefore, when a registered representative resigns, the registered representative must be paid all commissions due. D) must be paid by a member whether or not the person receiving the commissions is a registered representative of a member.
Answer: B FINRA rules permit the payment of continuing commissions to retired registered representatives in connection with the sale of investment company securities if a bona fide contract to do so exists between the firm and the registered representative.
Your broker/dealer has received a written complaint from a customer. FINRA rules require that a record of the written complaint be kept on file by the BD for how long? A) As long as the broker/dealer is in existence or a continues to be a FINRA member firm B) 4 years C) 3 years D) Until the complaint is resolved
Answer: B FINRA rules require that records of written complaints be preserved or kept on file for a period of 4 years.
An individual is employed as a research analyst for a member firm that specializes in investment banking and has just completed a research report comparing two companies in the semiconductor business. Which of the following would be considered prohibited activities by this analyst, under FINRA rules? Purchasing shares of a semiconductor company before that issuer's IPO. Trading in these two stocks or their derivatives in a manner inconsistent with that analyst's recommendation. Purchasing shares of either of these two stocks for a personal account after the research report has been issued. Purchasing shares of the XYZ Semiconductor Fund, a fund qualifying as a diversified management investment company under the Investment Company Act of 1940 but not covered or analyzed in the research report. A) III and IV. B) I and II. C) I and IV. D) II and III.
Answer: B FINRA rules restrict personal trading by research analysts. They are never permitted to acquire shares in advance of an IPO in a company in the same type of business that the analysts research. They are never permitted to engage in trading contrary to their opinions, as published in their firm's research reports. Once the report has been issued, they may trade in accordance with their recommendations. Purchasing shares of a mutual fund, even one that specializes in their field of research, is permitted.
If an investment representative hosts an investment seminar and intends to discuss general investment concepts and a specific mutual fund for which he has performance charts, which of the following are TRUE? He may discuss the investment returns of the mutual fund in general, provided he does not use a specific time frame. He may discuss the investment returns of the mutual fund using a specific time frame. He must disclose all material facts regarding the mutual fund to the audience. He may emphasize the positive aspects of the mutual fund and refer prospective investors to the prospectus for further details. A) II and IV. B) II and III. C) I and III. D) I and IV.
Answer: B He may discuss the investment returns of the mutual fund as long as he uses a specific time frame. When discussing an investment, he must disclose all material facts pertaining to the investment, both negative and positive.
If another member broker/dealer has already received clearance from FINRA for a retail communication, filing the piece with FINRA so that your broker/dealer can now use it A) must be done before publication by your broker dealer whether it is altered or unaltered B) is not necessary if unaltered and used as originally intended C) must be done within 3 days after use by your broker dealer, even if unaltered D) must be done 10 days before your broker dealer can use it, even if unaltered
Answer: B If unaltered and used as it was originally intended, re-filing with FINRA is not required. If the piece had been altered or was intended to be used in a manner inconsistent with how it had been originally intended to be used, filing with FINRA would be required.
In making unsolicited cold calls to prospects, a registered representative must disclose which of the following to the called party? The caller's name. The name of the member firm. The address at which the caller may be contacted. A) II and III. B) I, II and III. C) I and II. D) I and III.
Answer: B In making cold calls, the caller must disclose his name and the name of the member firm, the telephone number or address at which the caller may be contacted, and that the purpose of the call is to solicit the purchase of securities.
Which of the following would NOT be considered institutional communications with the public? A) A letter to a municipality offering your firm's services as an underwriter B) An internal memo promoting a new product that will be offered to your firm's institutional customers only C) A letter to another broker/dealer D) A communication with an individual designated to act on behalf of your institutional customer
Answer: B Institution communications specifically exclude internal communications. Communications with another member firm, a government entity, such as a municipality or with someone designated to act on behalf of one of your firm's institutional customers, would all fall within the definition of institutional communications.
Under NYSE rules, an associated person who wishes to accept outside employment must notify the: A) NYSE in writing. B) member firm in writing. C) member firm. D) NYSE.
Answer: B Notification must be made to the member firm in writing (not the NYSE), and written consent must be received before accepting outside employment.
Records of speaking engagements by persons associated with a member firm must be retained for: A) 6 years. B) 3 years. C) 1 year. D) 2 years.
Answer: B Records of speaking engagements considered to be a form of communication with the public should be kept for a minimum of three years and for the first two years in a readily accessible location.
Which of the following statements regarding investment companies is TRUE? A) Pre-filing for investment company retail communications is always required. B) Retail communications for investment companies must be filed within 10 business days of first use if the communication does not include a performance ranking. C) Retail communications for investment companies must be pre-filed 10 business days before first use when the communication does not include a performance ranking. D) Pre-filing for investment company retail communications is never required.
Answer: B Retail communications for investment companies must be filed within 10 business days of first use if the communication does not include a performance ranking. For retail communications that do include a performance ranking, a 10 day pre-filing is required.
All of the following communications are exempt from filing with FINRA EXCEPT A) retail communications previously filed with FINRA B) retail communications that make a financial or investment recommendation C) prospectuses and preliminary prospectuses D) communications that refer to an investment solely as part of a listing of products offered by the member
Answer: B Retail communications previously filed with FINRA, prospectuses and preliminary prospectuses, as well as communications that refer to an investment solely as part of a listing of products offered by the member, are all exempt from filing with FINRA. Any retail communication that makes a financial or investment recommendation would require filing.
Which of the following observations may a registered representative make when giving a sales presentation based on performance statements and charts? A) The portfolio's broad diversification will ensure the continuation of the 6% yield. B) The fund has consistently outperformed the market and should continue to do so. C) Yield over the last 5 years has fluctuated between 6% and 8%, indicating it will continue at 6% or better. D) The fund has had a positive performance in the last few years.
Answer: D Predictions are strictly prohibited and conjecture about future trends or occurrences must be labeled as such.
In making a sales presentation to a prospective customer, a registered representative selling open-end investment company shares may compare the shares to a savings account at a bank if: A) a statement is made concerning the variable amounts of dividend return. B) All of these are true. C) the purpose of the comparison is to point out the risks and advantages of common stock investment versus the lack of risk and advantages of deposits in savings institutions. D) a statement is made concerning the risk of fluctuation in share market price.
Answer: B Securities regulations prohibit the use of fraudulent or misleading statements in the sale of securities. It would be misleading for a registered representative to compare mutual fund shares with bank savings accounts without indicating that the latter are insured by the federal government. However, making such a comparison and pointing out that the increased risk of open-end investment company shares carries with it the potential of increased profits would not be a misleading sales communication. Sales presentations of mutual fund shares should also include statements that past performance is no guarantee of future results; that an investor's initial investment in mutual fund shares could be lost; and that dividends paid on mutual fund shares are not guaranteed.
Which of the following statements regarding the Code of Arbitration are TRUE? Simplified arbitration is available for claims of $50,000 or less. Simplified arbitration is available for claims of $25,000 or less. The statute of limitations for filing a claim is 3 years from the event. The statute of limitations for filing a claim is 6 years from the event. A) II and III B) I and IV C) I and III D) II and IV
Answer: B Simplified arbitration is available for claims of $50,000 or less. The statute of limitations for filing a claim is 6 years from the event giving rise to the claim.
When making cold calls which of the following actions is NOT required? A) Limiting calls to between the hours of 8:00 am and 9:00 pm in the prospect's time zone. B) Asking the recipient of the call if they would like to placed on the Do-Not-Call list. C) Immediately recording the names and telephone numbers of those who ask not to be called again. D) Informing the prospect of the name and telephone number or address of the broker/dealer.
Answer: B The Telephone Consumer Protection Act (TCPA) requires that representatives contact prospects between 8:00 am and 9:00 pm in their time zone and disclose the member broker dealer's name and phone number or address. If a prospect asks not to be called again, their name and telephone number must be added to the firm's "Do-Not-Call" list. There is no requirement that the recipient of the call be asked if they would like to be placed on the "Do-Not-Call" list.
The regulatory element of continuing education must be completed: A) within 120 days of the 3rd registration anniversary and every 2 years thereafter. B) within 120 days of the 2nd registration anniversary and every 3 years thereafter. C) annually. D) every 3rd year.
Answer: B The regulatory element must be completed within 120 days of the person's 2nd registration anniversary and every 3 years thereafter.
A principal of a member firm with the responsibility of supervising registered representatives would perform all of the following EXCEPT A) approve each securities transaction whether for retail or institutional customers B) write all sales material and advertising copy intended to be used as a means of communicating with the public C) review a registered representative's correspondence with the firm's customers in accordance with the firm's written procedures D) approve the opening of all new accounts whether for retail or institutional customers
Answer: B There is no industry requirement that sales or advertising material intended to be used to communicate with the public be written by a principal of the firm. A principal must approve all new accounts and approve each transaction, and all correspondence must be reviewed by a principal. FINRA rules state that principal review of correspondence can take place before or after use in accordance with the member firm's written procedures.
Employees of a FINRA member firm must be fingerprinted if involved in any of the following EXCEPT: A) cashiering. B) customer account processing. C) sales. D) the transfer of securities.
Answer: B Under SEC Rule 17f-2, persons registered with FINRA, persons involved in handling customer funds or securities (including employees of transfer agents), and persons involved in preparing the firm's original books and records must be fingerprinted. Mere processing of customer accounts does not involve any of these.
Rulings under the Code of Arbitration Procedure: A) may be appealed to the FINRA National Adjudicatory Council. B) may be appealed to the SEC. C) are binding on all parties. D) are binding on members but not on customers.
Answer: C A customer or member who chooses to submit a claim or dispute to arbitration under the Code of Arbitration Procedure is bound by the arbitration decision, which is not subject to appeal by either party.
Under what circumstances may a member firm use a fictional name or DBA (doing business as) in its communications? A) The name is filed with the Securities Information Center. B) Fictional names may not be used. C) The name is filed with both FINRA and SEC. D) The name is filed with FINRA.
Answer: C A fictional name or DBA may be used, provided the name is filed with both FINRA and the SEC.
Which of the following statements could legally appear in mutual fund advertising or sales literature? A) Our growth fund net asset value will increase faster than the market in general. B) The fund never yielded less than 8% and will continue at that rate in the future. C) Our managers are dedicated to giving you the very best service. D) Our management is unequaled in the investment industry.
Answer: C A statement such as, "Our managers are dedicated to giving you the very best service," makes no promises and is, therefore, not in violation of the Conduct Rules. Exaggerated claims about the management's investment expertise are prohibited, as are predictions of future fund performance or unsubstantiated claims of superiority.
According to MSRB rules, a dispute between 2 member firms concerning municipal securities is settled through: A) administration. B) delegation. C) arbitration. D) litigation.
Answer: C According to MSRB rules, a complaint between a customer and a member firm concerning municipal securities is settled through the Code of Arbitration. The MSRB does not have a Code of Procedure and, therefore, does not have the use of the Office of Hearing Officers and the NAC.
A registered representative who leaves the industry must requalify by examination to return to the industry if he is unaffiliated with a broker/dealer for more than: A) 5 years. B) 10 years. C) 2 years. D) 3 years.
Answer: C All securities licenses become null and void once an individual is unaffiliated for more than 2 years.
Arbitration and mediation are 2 services provided by FINRA to settle disputes between members. Regarding these services, which of the following statements are NOT true? Mediation is mandatory; arbitration is not. Arbitration always results in a binding decision; mediation may not. If arbitration is unsuccessful, the dispute moves on to mediation. A mediator in a dispute may not serve as an arbitrator in the same dispute. A) II and III. B) II and IV. C) I and III. D) I and IV.
Answer: C Arbitration is mandatory in disputes between members. If mediation takes place and is not successful, the dispute moves on to arbitration. The person who served as mediator may not be an arbitrator in the same dispute.
All of the following would be considered either retail communications or correspondence EXCEPT A) a written communication to all of the firm's customers regarding a new mutual fund being offered B) an electronic communication distributed through the firm's website regarding potential opportunities with the firm as a registered representative C) an email to several municipalities sent out in a single day offering your firm's services for underwriting their municipal securities D) a letter to 10 individual investors within the past week regarding a new investment strategy
Answer: C Communications with government entities, which includes municipalities, fall under the heading of institutional communications. The others are all examples of either retail communications or correspondence depending on how many recipients there are within a 30 calendar-day period. (Retail—more than 25 retail investors within any 30 calendar-day period, and Correspondence—25 or fewer retail investors within any 30 calendar-day period.)
Compensation paid to research analysts may: be tied to specific investment banking transactions. not be tied to specific investment banking transactions. be tied to the firm's investment banking revenue. not be tied to the firm's investment banking revenue. A) I and IV. B) II and IV. C) II and III. D) I and III.
Answer: C Compensation may never be tied to a specific investment banking transaction because the conflict of interest is too severe. However, compensation may be tied to the firm's overall investment banking revenue, but it must be disclosed in research reports.
Which of the following statements regarding communications with the public are CORRECT? Correspondence does not include email. Prior principal approval is required for all correspondence. Correspondence can include communications sent to existing customers. Correspondence can include communications sent to prospective customers. A) I and IV B) II and III C) III and IV D) I and II
Answer: C Correspondence includes both written and electronic forms of communications, such as email, and includes communications sent to existing or prospective retail customers. It must be supervised and reviewed by a principal but does not require prior principal approval.
FINRA may take which of the following actions against members or associated persons who violate the Conduct Rules? Imprisonment. Censure. Indictment if the charge involves a violation of criminal law. Suspension. A) I and IV. B) II and III. C) II and IV. D) I and III.
Answer: C FINRA members or employees of members who violate the Conduct Rules are subject to procedural penalties only. No SRO may arrest, indict, convict, or imprison a violator.
In compliance with FINRA's requirement to maintain a plan to continue conducting business in the event of a significant occurrence, all of the following statements regarding a business continuity and disaster recovery plan are accurate EXCEPT A) the plan must document how the firm will continue to communicate with employees in the event of a significant disruption of business B) the member firm must designate a senior member of management who is also a principal of the firm to initially approve the plan and to conduct a review of the plan annually C) the member firm must designate as contact persons any 2 employees of the firm D) the plan must document how the firm will continue to communicate with clients in the event of a significant disruption
Answer: C FINRA requires that firms create and maintain business continuity plans to be utilized in the event of a significant occurrence. All of the items listed would be requirements associated with a business continuity plan, except that the 2 individuals designated as contact persons to FINRA must be members of senior management who are also principals of the firm.
Your broker/dealer has prepared an advertising piece for general distribution to all of its retail customers regarding numerous option strategies. Filing the piece with FINRA is A) required to occur no later than the end of the month during which it was used B) not required C) required at least 10 business days prior to first use or publication D) required within 10 business days of the time it is first used or published
Answer: C Filing with FINRA is required at least 10 business days prior to first use or publication for retail communications having to do with options.
The latest issue of a newsletter your firm subscribes to is especially relevant to one of your firm's investment products. If you decide to send it to clients and prospects, you must disclose that: A) the newsletter discusses only those products which you have available through your firm . B) the newsletter's purpose is to provide your clients with a choice of products that are suitable for all of their portfolios. C) the newsletter is written and produced by a third party. D) future articles sent will provide similar discussions and information.
Answer: C If a third party is the creator of the newsletter, that fact must be disclosed together with the name of the third party and the date of publication.
If a member wishes to appeal an adverse decision in a Code of Procedure hearing, the member first must appeal to the National Adjudicatory Council within how many days of the decision date? A) 40. B) 45. C) 25. D) 30.
Answer: C If either side is displeased with a Code of Procedure decision, an appeal must be made within 25 days of the decision date.
An arbitration proceeding involving a customer in an amount over $100,000 has been agreed to. In such an arbitration dispute, which of the following is TRUE? A) Disputes in amounts greater than $100,000 are always heard by a single arbitrator. B) Both parties must agree before three arbitrators can be used in disputes involving amounts greater than $100,000. C) The customer can request that all three of the arbitrators selected be from the public sector. D) Only nonpublic (industry) arbitrators can be used for disputes in amounts greater than $100,000
Answer: C In disputes involving a customer for amounts greater than $100,000 three arbitrators will be used unless both parties agree to one. In the case where three arbitrators are used, the customer can request that all three arbitrators be selected from the public sector.
Market letters may be supervised as correspondence instead of retail communications A) at all times B) never C) as long as they are distributed to 25 or fewer existing retail customers within any 30 calendar-day period D) only when they are distributed to more than 25 existing retail customers within any 30 calendar-day period
Answer: C Market letters, which are a form of sales literature used to communicate with the public, may be supervised as correspondence only if the communication adheres to the definition of correspondence. Correspondence is any communication piece, written or electronic, that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period.
Once a broker/dealer receives an enrollment notification for an employee to test for the Series 7 licensing exam, the employee will have how long to successfully complete (pass) the exam? A) 3 months. B) 6 months. C) 4 months. D) 2 months.
Answer: C Once notification of enrollment for testing has been received by the broker/dealer the candidate will have 120 days (4 months) to successfully complete (pass) the exam. This is commonly referred to as the "testing window".
Penalties resulting from a Code of Procedure hearing may include all of the following EXCEPT: A) expulsion. B) suspension. C) prison sentence. D) censure.
Answer: C Penalties under the Code of Procedure may include censure, expulsion, suspension, and/or fines but not a prison sentence.
Which of the following statements regarding recruiting advertising by FINRA member firms are TRUE? It must include the name of the broker/dealer. It may not contain exaggerated claims about opportunities in the securities business. Principal approval is not required. During a firm's first year of business, it must be filed with FINRA. A) I and IV. B) II and III. C) II and IV. D) I and III.
Answer: C Recruitment advertising is treated as a form of retail communication. A firm in its first year of business must prefile all of its retail communications with FINRA. Furthermore, all retail communications must be approved by a principal before use. Recruitment advertisements may be placed as blind advertisements (i.e., without the name of the broker/dealer), but they may not contain exaggerated claims.
A registered representative has been giving monthly lectures to various civic organizations on the pros and cons of investing in fixed-income securities. For what period must the employing broker/dealer keep records of these lectures? A) 5 years. B) 6 years. C) 3 years. D) 1 year.
Answer: C Speeches and lectures are considered to be forms of communication with the public and must be kept for at least a period of three years in a format and media that complies with regulations.
An employee involved in the management of a FINRA member's business, particularly in the supervision of business solicitation or in training, must be registered as a: A) compliance officer. B) partner. C) principal. D) broker.
Answer: C Supervision of business solicitation or training requires that a person be registered as a principal.
Which of the following are differences between the Code of Procedure and the Code of Arbitration Procedure? The Code of Procedure deals with violations of the Conduct Rules, whereas arbitration is used to settle disputes. Mediation is not required with the Code of Procedure but is mandatory with Arbitration. Code of Procedure decisions may be appealed, whereas decisions reached under Arbitration may not. Arbitration is used for violations that are more serious than those for which the Code of Procedure is used. A) II and IV. B) III and IV. C) I and III. D) I and II.
Answer: C The Code of Procedure is used to deal with violations of the Conduct Rules, whereas the Code of Arbitration is used to settle disputes. Adverse decisions and penalties under the CoP can be appealed to the National Adjudicatory Council, then to the SEC, and, eventually, to the federal appellate court system. Settlements under arbitration are not subject to appeal, and mediation is not mandatory.
The firm element of the continuing education requirement must be completed: A) on the 2nd registration anniversary and every 3 years thereafter. B) on the 3rd registration anniversary and every 2 years thereafter. C) annually. D) every 3rd year.
Answer: C The firm element of continuing education must be completed each year by all registered persons who have direct contact with the public.
A prospect receives a cold call from a registered representative, and he tells the representative he is not interested in this investment or in making any future investments. Which of the following actions is required by the Telephone Consumer Protection Act of 1991? A) A principal of the firm may call the prospect the next time. B) The representative may never make cold calls again. . C) No calls may be made to the prospect by anyone at the firm. D) The representative may send a fax regarding future recommendations.
Answer: C The prospect's name must be placed on the firm's Do-Not-Call list, and no one at the firm may call.
Regarding a FINRA member broker/dealer website which of the following is true? When FINRA is referenced on a member broker/dealer website it is meant to imply that the broker/dealer has the approval of FINRA. If FINRA is referenced on a member broker/dealer website a hyperlink to the FINRA website is mandated. When FINRA or its logo is referenced it must not appear in a typeface larger or more prominent than the broker/dealer's own name and logo. A reference to FINRA membership is mandated by FINRA on member broker/dealer websites. A) I and III. B) III and IV. C) II and III. D) I and II.
Answer: C There is no requirement to list or mention FINRA membership or any other SRO membership on a broker/dealer website. If however a broker/dealer chooses to have the FINRA name or logo on its website, a hyperlink to the FINRA website is required, and its name or logo may not appear in a typeface larger than or more prominent than the broker/dealer's own name or logo and should never be meant to imply approval of FINRA.
A customer has filed a serious complaint against your firm and is threatening to take the firm to court. When informed that he has signed a predispute arbitration agreement, he demands to see a copy of it. How long does your firm have to supply the customer with a copy of the signed agreement upon receipt of his request? A) 5 business days. B) 7 business days. C) 10 business days. D) 3 business days.
Answer: C Upon receiving a customer request for a copy of the signed predispute arbitration agreement, the member firm has 10 business days to supply it.
Before becoming registered, a representative may: A) send research reports to prospective clients. B) solicit indications of interest from prospective purchasers. C) effect trades for customers with commissions deferred until registered. D) compile a prospect list.
Answer: D A representative may not solicit any orders before registration. Compiling a prospect list is a passive procedure that is not soliciting.
Under the Code of Arbitration, all monetary awards must be paid within how many days of the decision date? A) 15. B) 45. C) 60. D) 30.
Answer: D All monetary awards in a Code of Arbitration decision must be paid within 30 days of the decision date. If payment is not made, the amount of the award begins to accrue interest as of the decision date.
FINRA requires that each registered representative and principal receive compliance training on an annual basis. Regarding the FINRA requirement, which of the following statements are TRUE? The meeting delivery method can be individually or in groups. Webcast must be live and may not be recorded. Participants must be able to ask questions in a live format. The meeting can be in person or by Webcast. A) I and III. B) II and III. C) II and IV. D) I and IV.
Answer: D Annual compliance reviews can be done individually or in groups either in person or by Webcast. If by Webcast, the presentation may be live or recorded. In any format the participants must have the opportunity to ask questions or engage in dialogue either live or electronically or be told where they can send questions to be answered.
A registered representative wants to place advertisements in his daughters youth athletic league quarterly sponsorship booklet and in the weekly bulletin at his church describing that he specializes in retirement planning and 529 plans. Which of the following statements regarding these advertisements is TRUE? A) No approval is required because both the youth athletic league and the church would be recognized as bona-fide non-profit organizations by the IRS. B) The advertisement is considered institutional communications because it is placed in literature being distributed by organizations such as the youth athletic league and the church organization and therefore no principal pre-approval is required. C) The piece will be regulated as correspondence because it is only being forwarded to two organizations. D) Pre-approval by a principal of the broker dealer is required.
Answer: D Any piece promoting securities services and / or products intended to be received by more than 25 retail customers within any 30 calendar-day period must be pre-approved by a principal before use. Given the intended placements of the piece there is no way to determine the exact number of retail customers who will be exposed to it and within what time frames and therefore it must be regulated as retail communications. It fits neither the definition of correspondence or institutional communications.
A brokerage firm's research department has issued a buy recommendation on XYZ Corporation common stock. The report must contain all of the following information EXCEPT: A) that the firm was the managing underwriter in a recent public offering of the stock. B) that the partners of the firm hold options to purchase the stock. C) that the firm makes a trading market in the stock. D) that the firm was part of the selling group in a recent public offering of the stock.
Answer: D Disclosure of participation as a selling group member is not required.
Which of the following is NOT a factor when a communication to be distributed to the public is either being reviewed or approved within the broker/dealer? A) Whether achieving past performance results has been implied B) The nature of the audience to which the communication is intended to be distributed C) Whether statements of benefits are balanced with statements of potential risks D) Whether the piece will be distributed in written form or via electronic media
Answer: D FINRA holds BDs to certain general standards regarding all member firm communications. Consideration must be given to whether all statements in a communication are clear and not misleading, are balanced regarding the representation of risk and reward, do not omit material facts or make exaggerated claims, and do not imply that past performance can be projected to future outcomes. These standards would apply, and be the same, whether the communication was distributed in written or electronic form.
If a member firm suspends a registered representative, the member firm must report the suspension to the: A) state securities Commissioner. B) SEC. C) news media. D) designated examining authority.
Answer: D If a member firm suspends a registered representative, the firm must report the suspension to its designated examining authority (DEA), which typically is FINRA or the exchanges where the firm is a member. Each DEA is a self-regulatory organization. The notice must be made within 10 business days of the suspension.
If an individual fails a FINRA qualification exam three consecutive times, a fourth attempt may NOT be made for: A) 30 days. B) 60 days. C) 90 days. D) 6 months.
Answer: D If a qualification exam is failed three consecutive times, a fourth attempt may not be made for 6 months.
A registered person leaves the securities industry and 18 months later reassociates with another member firm. FINRA requires that this person's cycle for determining the dates for the regulatory element portion of continuing education be based on: A) his original hire date. B) his date of reassociation with his new firm. C) the date on his application for reregistration. D) his initial registration date.
Answer: D If reassociation occurs within 2 years, the cycle date remains associated with his original registration date. If it occurs after 2 years have elapsed, the new cycle is based on the reassociation date.
Your firm is doing interviews of the top candidates from among those who responded to a recruiting advertisement. FINRA communications with the public rules for recruitment advertisements require that A) at least 2 positions be offered to successful candidates, so that they may make a choice B) the successful candidate be promised that she will hold the position for at least one year after being hired C) rules do not cover recruitment advertisements or interviews D) both the job opportunity and the industry itself be represented honestly
Answer: D In recruitment interviews or advertisements, false or extravagant claims may not be made. Both the job opportunity and the industry must be represented honestly. There are no requirements that candidates be offered or promised anything.
Communications with the public include all of the following EXCEPT: A) television appearances by an officer of the firm. B) independently prepared reprints forwarded to your firm's customers. C) institutional sales material. D) informational material on a new mutual fund intended for sales personnel.
Answer: D Material intended for internal use only is not considered a communication with the public.
A registered representative gives a free financial seminar at a resort to an audience composed entirely of retail investors. Which of the following statements is TRUE? A) No principal approval is necessary. B) A copy of the script or materials distributed must be provided to the SEC. C) The registered representative also must be licensed as an investment adviser. D) Approval by a principal of the firm is necessary.
Answer: D Materials or scripts used to present information to retail investors are considered retail communications with the public, and therefore, principal approval is required. There is no requirement for a copy of the materials to to be submitted to the SEC. It is not necessary for the registered representative to be licensed as an investment adviser to engage in such an activity.
A member firm has decided to allow a registered representative to operate from his residence. Which of the following statements are TRUE? Prior consent of the member's self regulatory organization (SRO) is required. Prior consent of the member's self regulatory organization (SRO) is not required. The residence may be advertised. The residence may not be advertised. A) I and IV. B) II and III. C) II and IV. D) I and III.
Answer: D Prior approval of the member firm's SRO is required when opening any office, including a private residence. The home address and telephone number may be advertised in any normal manner such as business cards, stationery, local newspapers, and so forth.
A customer can make a toll-free inquiry to determine the disciplinary history of a registered representative by contacting the: A) SEC. B) SIA. C) SIPC. D) CRD.
Answer: D The Central Registration Depository (CRD), through BrokerCheck, maintains information on the disciplinary history of all persons currently registered.
Which of the following disputes must be resolved using the Code of Arbitration? Dispute between two FINRA members. Dispute between two banks. Dispute between a member and an associated person. Dispute between two customers. A) I and IV. B) II and III. C) II and IV. D) I and III.
Answer: D The Code of Arbitration is mandatory in member-against-member disputes, and in disputes involving a member and an associated person. FINRA has no jurisdiction over banks or over disputes between nonmembers such as customers.
Under FINRA rules, a registered representative must complete the regulatory element of continuing education within how many days of a registration anniversary date? A) 30. B) 60. C) 90. D) 120.
Answer: D The regulatory element requires that all registered persons complete a computer-based training session within 120 days of their second registration anniversary and every third anniversary thereafter.
The legislation that required SRO's to establish research analyst conflict of interest rules for its members is: A) Securities Act of 1933. B) Regulation D. C) Securities Investors Protection Act. D) Sarbanes-Oxley.
Answer: D The research analyst conflict of interest rules were mandated by the Sarbanes-Oxley Act.
Each of the following is a category of communications with the public designated by FINRA EXCEPT A) institutional B) correspondence C) retail D) market letters
Answer: D The three categories of communications with the public designated by FINRA are retail, correspondence, and institutional. Market letters, as all sales or advertising pieces would, can fall under any of the three communications categories depending on to whom they are sent or made available to, and the number of recipients.
All of the following must be included in a testimonial made on behalf of a member firm and distributed to potential clients EXCEPT: A) qualifications of the person giving the testimonial if a specialized or an expert opinion is implied. B) that the returns and investment performance cited in the testimonial may not be duplicated. C) whether compensation of more than $100 in cash or value was paid to the person giving the testimonial. D) length of time the testimonial covers.
Answer: D When a member firm uses a testimonial, it must be accompanied by a statement that this person's results do not necessarily represent those of other customers; a disclosure regarding compensation paid; and the testimonial giver's qualifications if an expert opinion is implied. There is no time-of-coverage requirement.
