Regulations - FINRA Rules
Arbitration is preferred over litigation as a means for settling disputes because:
It is less time consuming and less expensive (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 registered representative hears from a good friend that "ACME Fund has taken a large position in ABCD stock." Based on this, the registered representative calls all of her customers with the recommendation that ABCD stock be purchased immediately. This action is:
Prohibited since this is making a recommendation based upon a rumor
A registered representative is the subject of a written complaint from a customer alleging that he stole $12,000 from her account. Which statement is TRUE?
This must be reported to FINRA promptly ("Reportable events" to FINRA include the case where a registered representative is the subject of a customer complaint that alleges a felony - and stealing is a felony. A report must be made to FINRA promptly, but no later than 30 days after the event occurs. The report basically lays out the representative's side of the story - and FINRA uses this to decide whether to take follow-up action. Note that the fact that the allegation is not proven is meaningless here - the report is still required. The list of reportable events is long. If one 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.)
Under FINRA Rule 5130 on IPO distributions, a member may sell shares of a new issue of common stock to a registered representative:
under no circumstances (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.)
Which of the following would be considered to be a "retail communication?"
A website maintained by a broker-dealer that provides daily market information (Any communication made available to MORE than 25 existing or prospective retail clients is defined as "retail communication." Retail communications must be approved in advance of use by a principal and can be required to be filed with FINRA. A website is seen by a broad audience and falls into this category. Any communication made available to 25 or fewer existing or prospective retail clients is defined as "correspondence." Correspondence is required to be approved after use (as long as the firm has appropriate supervisory procedures in place) and is not subject to FINRA filing rules. Note that the research report sent to 20 clients is defined as "correspondence" and the direct mailing to 25 existing retail clients is right at the limit of the "correspondence" definition. Institutional communications are excluded from the "retail communications" definition, approval and filing rules because institutions are sophisticated investors who know what they are doing.)
Which of the following is an SRO? A. MSRB B. SEC C. SIPC D. FDIC
A: MSRB ( 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.)
Under FINRA rules, the maximum permitted annual gift from a registered representative to another person in the securities business or financial information media is:
$100 (Under FINRA rules, the maximum permitted gift that can be given to another person in the securities business or the financial news media is $100 per person per year.)
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?
2 years (If an individual leaves the industry and remains unaffiliated with a member firm for 2 years, all licenses lapse.)
Records of speaking engagements must be maintained by FINRA member firms for:
3 years (Generally speaking, all records kept at branch offices must be maintained for 3 years. The only notable exception is customer complaints, which must be retained for 4 years.)
Under FINRA rules, which of the following accounts would be considered to be "discretionary"?
An account where the broker has the power to decide when and what to trade without specific customer authorization (A discretionary account is one where the broker has the power to decide what and how much to trade. The customer gives a written power of attorney to the broker allowing discretion to be exercised.)
The Firm Element component of the "Continuing Education" requirement must be completed:
Annually (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.)
Which statement is TRUE about a seminar given by a registered representative about mutual funds, collateralized mortgage obligations or direct participation programs?
Any materials given to participants must be filed with FINRA no later than 10 business days after first use (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!).
A registered representative has a dispute with his firm. Under FINRA rules, this will be settled by:
Arbitration (Disputes between registered representatives and brokerage firms are handled by binding (non-appealable) arbitration.)
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. interested persons who are affiliated with member firms (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.)
All of the following statements about e-mail sent by a registered representative to 50 retail clients are true EXCEPT the communication: A. must be reviewed and approved in advance by a principal B. can recommend a new issue C. can be sent from the branch office where the representative works D. can recommend stocks
B: can recommend a new issue (New issues can only be offered and recommended via a prospectus (unless the security is exempt). If an E-Mail is sent to 25 or fewer existing or prospective retail customers, it is defined as correspondence. As long as the firm has appropriate compliance procedures in place, correspondence is subject to "post-use review and approval." If a E-Mail is sent to more than 25 existing or prospective retail customers, then it is defined as a "retail communication," and furthermore, within that broad definition, it is defined as sales literature. Retail communications must be approved in advance by a principal. E-mails to customers can be sent from a registered representative's branch office (but they cannot be sent from a registered representative's home). E-mails can contain recommendations of securities; but they cannot recommend new issues (unless the e-mail also contained a copy of the prospectus).
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: the meeting must be held every 2 years (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.)
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?
Because the seminar was attended by 40 prospective retail clients, it is defined as sales literature (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)
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 account number may be changed to the correct one by the:
Branch Office Manager (Under FINRA rules, alterations to executed order tickets are prohibited, unless the alteration is approved in writing by a "designated person" such as a branch manager. This person must understand all the facts of the situation before approving of the change, and is responsible for the change.)
All of the following are prohibited practices under FINRA rules EXCEPT: A. backing away B. interpositioning C. free riding D. arbitrage trading
D: arbitrage trading (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.)
All of the following statements would be prohibited under the regulations of the self regulatory organizations EXCEPT: A. "We promise that you will have a capital gain on this investment" B. "We promise to repurchase the security at your cost if its value declines" C. "We promise to perform timely executions of any orders that you place with us" D. "We promise to refund your original investment within 90 days if you change your mind"
C: "We promise to perform timely executions of any orders that you place with us" (A firm is prohibited from guaranteeing a customer against loss in any fashion. The only exception to this is formal "repurchase agreement" on an exempt debt instrument (such as a U.S. Government or Municipal bond), where the seller of the securities agrees to rebuy them at a later date at a pre-set price. Please do not confuse a formal repurchase agreement with an offer by a firm to buy back a security at cost. This is a guarantee that is prohibited. It is allowed for a firm to promise a timely execution of an order since this is one of the primary functions of a brokerage firm.)
Who does NOT have to be licensed in a broker-dealer? A. President B. Equity trader C. ACATS clerk D. Sales individual
C: ACATS clerk (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.)
Which of the following is a record that must be retained on file by a broker-dealer? A. Prospectuses B. Recommendations C. Complaints D. Solicitations
C: Complaints (Broker-dealers are not required to retain, as a record, recommendations made to clients. Customer complaints, account statements, and advertising are all records that must be retained by broker-dealers.)
What item given from a mutual fund sponsor to a registered representative is NOT considered to be "non-cash compensation"? A. 4 Super Bowl tickets B. An all-expense paid trip to a resort hotel C. An expense-paid trip to an educational conference D. 2 bottles of vintage wine valued at $200 each
C: an expense-paid trip to an educational conference (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. Note that an exception to the prohibition is given to sponsor-held educational seminars. The sponsor can pay for the registered representative's travel, accommodations, and meals at the conference. However, the conference cannot be promotional - it must be educational. Furthermore, the sponsor cannot pay for friends and family of the registered representative to come along.)
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: not permitted because the member firm has no way of auditing the representative's personal email account (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.)
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
C: permitted if it complies with the firm's policies and procedures (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.)
E-mail sent by a representative to an individual customer is considered to be (a(n)):
Correspondence ( 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 communication sent to 10 prospective retail clients and 20 existing institutional clients is defined as (a(n)):
Correspondence (FINRA has 2 basic definitions of communications with the public: Correspondence: A written or electronic communication made available to 25 or fewer existing or prospective clients Retail Communication: A written or electronic communication made available to more than 25 existing or prospective clients. Excluded from these definitions are institutional communications and public appearances. These do not count in the numerical limits. FINRA creates these 2 main categories of communications because "correspondence" is subject to "post use review and approval" by a manager or principal and is not required to be filed with FINRA; in contrast, retail communications must be approved in advance of use by a principal and can be required to be filed with FINRA. (Also note that the "previous" FINRA rule defined "advertising" (general audience, such as TV, radio, newsprint, websites) and "sales literature" (specific audience, such as a research report, form letter, scripted speech, password-protected website). These now fall into the definition of "retail communications," but advertising and sales literature must still be known for the exam).)
Which choice is TRUE regarding the recordkeeping requirement for customer account records (statements)?
Customer account statements must be retained by the member firm for 6 years
FINRA's 5% Policy applies to which of the following? A. Sales charges on mutual fund offerings B. Mark-ups charged on principal transactions of municipal bonds C. Underwriting spreads charged on new issue offerings effected over-the-counter D. Commissions charged on transactions effected over-the-counter
D: Commissions charged on transactions effected over-the-counter (The 5% Policy only applies secondary market transactions on exchange floor or over-the-counter. It does not apply to trades of municipal securities, which come under a similar MSRB rule. It does not apply to new issue offerings that require a prospectus, which also includes mutual funds.)
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
D: accredited investor (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. Note that an accredited investor is not necessary an institutional investor. For example, to be accredited, an individual must have an annual income of $200,000 or a net worth of $1,000,000. This person would not be an "institutional client" under FINRA rules.)
All of the following would be considered when determining a fair and reasonable commission or mark-up under the FINRA 5% Policy EXCEPT the: A. difficulty of executing the transaction B. level of service provided to the customer C. dollar amount of the transaction D. cost of the security to the broker-dealer
D: cost of the security to the broker-dealer (Under the FINRA 5% Policy, commissions and mark-ups in exchange and over-the-counter transactions must be fair and reasonable, with 5% being a guide, not a rule. Among the things considered in determining the amount to charge are the difficulty of the trade; the level of service provided to the customer; and the dollar amount of the transaction. All commissions or mark-ups are based on the current market value of the security; not the cost of the security to the dealer.)
Under the FINRA Conduct Rules, a broker-dealer may charge a customer all of the following services EXCEPT: A. collection of dividends on margin securities B. safekeeping of securities C. appraisals of securities in a customer portfolio D. distributing proxies to holders of securities in margin account
D: distributing proxies to holders of securities in margin account (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. Regarding proxies (voting materials) on street name shares - these are given by the issuer to the brokerage firm that holds the shares; and the broker must send them to the beneficial owners of the stock (the margin customers). This expense is paid for by the issuer; therefore it cannot be charged to the customer.)
All of the following statements are true regarding the U.S. securities markets EXCEPT: A. FINRA has regulatory authority over the markets and market participants in the trading of all non-exempt securities B. the Federal Reserve Board decides securities can be traded on margin C. the Securities and Exchange Commission has regulatory authority over the securities markets and its participants D. the MSRB has regulatory authority over the markets and market participants in the trading of all exempt securities
D: the MSRB has regulatory authority over the markets and market participants in the trading of all exempt securities (The MSRB only regulates the trading of municipal bonds - not U.S. Government or Agency bonds - so the statement that the MSRB regulates trading in all exempt securities is untrue. Both FINRA and the SEC regulate the U.S. securities markets and market participants. FINRA is the SRO (Self Regulatory Organization) that regulates the markets under SEC oversight. The Federal Reserve decides which securities are marginable, since it has power over margin rules given under the Securities Exchange Act of 1934.)
A registered representative tells the following to all of his customers: "I am aggressive in my approach; and frequently recommend that securities positions be changed during each day as market conditions fluctuate. While this approach can result in higher commission costs, it produces superior returns." All of the following statements are true about this statement EXCEPT: A. there is a high risk that the registered representative is churning his accounts B. the registered representative has made a prohibited performance guarantee to his customers C. the registered representative appears to be disregarding the requirement to determine suitability for each customer D. the registered representative has failed to disclose the remuneration received from each transaction, as required under industry rules
D: the registered representative has failed to disclose the remuneration received from each transaction, as required under industry rules (This registered representative appears to be churning his accounts, and has made a prohibited performance guarantee by not qualifying the statement that "it (this strategy) produces superior returns" with another statement mentioning the possibility that this may not occur. There is no requirement for a registered representative to disclose to the customer the amount of commission earned by the registered representative on each transaction.)
What activity undertaken by a registered representative will require written notice to the firm, along with following the firm's instructions covering this activity?
Driving for Uber after the markets have closed and securities transactions are not occurring (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.)
Enforcement of regulations regarding trading of listed securities in the "Third Market" is performed by:
FINRA ("Third Market" trades are transactions in listed securities effected "over-the-counter." These trades do not take place on the floor of the exchange, hence NYSE does not have jurisdiction. It is FINRA that regulates broker-dealer activities that take place OTC and on stock exchanges.)
Which of the following would NOT have to be reviewed by a principal?
Form letters for internal use within a firm (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 Internal documents of a brokerage firm do not have to be reviewed by a manager or principal. Because the public does not see these, FINRA is not concerned with their content. All customer complaint letters must also be reviewed and handled by a principal.)
FINRA's IPO purchase restrictions that prohibit industry personnel from buying new issues in the primary market apply to: I Common stock offerings II Preferred stock offerings III Non-convertible bond offerings IV Convertible bond offerings
I Only (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 enforcement authorities for the U.S. securities markets and market participants include: I FINRA II SEC III MSRB
I and II (Both FINRA and the Securities and Exchange Commission (SEC) regulate, and have enforcement capability over, the U.S. securities markets and market participants. The Municipal Securities Rulemaking Board creates rules for municipal market participants, but has no enforcement ability - enforcement of MSRB rules is performed by FINRA.)
Which statements are TRUE regarding a FINRA member firm's obligation to review electronic and facsimile correspondence? I Outgoing correspondence must be supervised and reviewed by the member firm II Incoming correspondence must be supervised and reviewed by the member firm III Outgoing correspondence is not required to be supervised and reviewed by the member firm IV Incoming correspondence is not required to be supervised and reviewed by the member firm
I and II (If a member firm has a communications compliance program in place, registered representatives are permitted to send e-mail to customers without submitting these for pre-use review and approval. In such a program, the firm is obligated to educate its registered representatives as to what is permissible in electronic communications; and must have procedures in place to audit and review these communications. Please note that the audit and review requirements not only apply to outgoing electronic communications; but also apply to incoming electronic communications as well.)
Which statements are TRUE regarding FINRA Rule 5130 that restricts equity IPO purchases? I An investment club is permitted to buy an equity IPO directly from an underwriter II An investment club is prohibited from buying an equity IPO directly from an underwriter III 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 10% or less IV An investment club that has any ownership by registered representatives is prohibited from buying an equity IPO directly from an underwriter
I and III ( FINRA Rule 5130 restricts "industry insiders" from buying equity IPOs directly from underwriters. 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%.)
A customer has fully paid marginable securities in his vault at home that he wishes his brokerage firm to hold. Which statements are TRUE? I The brokerage firm can charge for this service II The brokerage firm cannot charge for this service III The securities must be segregated and placed in safekeeping IV The securities can be commingled with those of other customers
I and III (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.)
Registered representatives may be compensated based on which of the following? I Trading commissions paid by the brokerage firm to the representative II Trading commissions paid by the customer to the representative III Salary paid by the brokerage firm to the representative IV Salary paid by the customer to the representative
I and III (Compensation cannot be paid by the customer to the registered representative. Only the broker-dealer may pay compensation to the registered representative.)
Which statements are TRUE about the use of the FINRA name on a member firm's or associated person's website? I The FINRA name can be shown II The FINRA name must be shown III If the FINRA name is shown, it must be hyperlinked to the FINRA website IV If the FINRA name is shown, it must be stated that FINRA does not sponsor the website
I and III (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 of the following statements are TRUE about items reviewed or approved by a principal? I Complaint letters received from customers must be reviewed by a principal II Complaint letters received from customers do not have to be reviewed by a principal III Internal documents of a brokerage firm must be reviewed by a principal IV Internal documents of a brokerage firm do not have to be reviewed by a principal
I and IV (All customer complaint letters must be reviewed and handled by a principal. Internal documents of a brokerage firm do not have to be reviewed by a principal.)
For member firms that have a communications compliance program, which statements are TRUE regarding a registered representative who wishes to send E-mail to customers? I E-mail may be sent from a computer in the registered representative's branch office II E-mail may be sent from a computer in the registered representative's home office III E-mail may not be sent from a computer in the registered representative's branch office IV E-mail may not be sent from a computer in the registered representative's home office
I and IV (If a member firm has a communications compliance program in place, registered representatives are permitted to send e-mail to customers without submitting these for pre-use review. However, e-mail can only be sent from the registered representative's branch office, since these computer generated communications are subject to firm audit and review procedures. This is not possible with communications sent from a registered representative's home office.)
A customer that wishes to open an account to buy new issues is required to make a: I positive representation that he or she is not restricted within 12 months preceding the first purchase II negative representation that he or she is not restricted within 12 months preceding the first purchase III positive representation that he or she is not restricted annually thereafter IV negative representation that he or she is not restricted annually thereafter
I and IV (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.)
The Regulatory Element component of the "Continuing Education" requirement must be completed: I on the registrant's 2nd anniversary of registration II on the registrant's 3rd anniversary of registration III every 2 years after the initial review IV every 3 years after the initial review
I and IV (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 customer instructs a registered representative to "Buy 500 shares of ADP whenever you think the price is right." Which of the following statements are true about this order? I The order is the same as a not held order II The order is the same as a limit order III Acceptance of the order requires a prior written discretionary power of attorney from the customer IV The order can be accepted without a prior written discretionary power of attorney from the customer
I and IV (This order states the number of shares to be bought and the security to be purchased. The registered representative is left to choose price and time of execution. This is the same as a "not held" order and can be accepted as given. If the representative were to choose the number of shares or the security, then the order would be discretionary, and would require a written power of attorney on file from the customer.)
Which of the following are violations of FINRA rules? I Trading mutual fund shares II Making blanket recommendations of low price speculative stocks III Performing trades of excessive frequency in a customer account IV Trading an account beyond a customer's financial capacity
I, II, III, and IV (Mutual fund shares cannot be traded - they are redeemable securities that are purchased from the fund; and that are redeemed with the fund. Blanket recommendations of low price speculative stocks are prohibited - since these are not suitable investments for everyone. Excessive trading in a customer account (churning) and trades that are too large for a customer account, are prohibited practices as well.)
Which of the following statements are TRUE regarding the U.S. securities markets? I The Federal Reserve Board decides which securities can be traded on margin II FINRA has regulatory authority over the U.S. securities markets and market participants in the trading of all non-exempt securities III The Securities and Exchange Commission has regulatory authority over the U.S. securities market and market participants IV The MSRB has regulatory authority over the U.S securities markets and market participants in the trading of all exempt securities
I, II, and III ( Both FINRA and the SEC regulate the U.S. securities markets. FINRA is the SRO (Self Regulatory Organization) that regulates the markets under SEC oversight. The Federal Reserve decides which securities are marginable, since it has power over margin rules given under the Securities Exchange Act of 1934. The MSRB only write regulations covering the trading of municipal bonds - not U.S. Government or Agency bonds - so the statement that the MSRB regulates trading in all exempt securities is untrue.)
Which of the following time stamps are on an order ticket? I Time of order entry II Time of order execution, if executed III Time of order cancellation, if canceled IV Time of order confirmation
I, II, and III ( 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.)
Under FINRA Rule 5130, which of the following are prohibited from buying a new issue directly from an underwriter? I A FINRA registered representative II A person who is financially dependent on a FINRA registered representative III A financially independent sibling of a FINRA registered representative
I, II, and III ( 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.)
The FINRA 5% Policy applies to which of the following transactions? I Over-the-counter agency trades II Over-the-counter principal trades III Trades of listed securities on an exchange floor IV Mutual fund purchases
I, II, and III (The FINRA 5% Policy applies to all over-the counter and exchange transactions EXCEPT those requiring a prospectus. Thus, it does not apply to mutual fund (prospectus) offerings.)
The FINRA 5% Policy requires that consideration be given to which of the following when determining mark-ups and commissions? I Level of service provided by the firm II Type of security involved in the transaction III Financial condition of customer IV Dollar amount of the transaction
I, II, and IV ( 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 of the following statements are TRUE regarding electronic communications sent by registered representatives at member firms that have a communications compliance program in place? I Registered representatives must be trained by the firm about what content is permitted in such communications II Registered representative communications must be supervised and reviewed by the member firm III Registered representative communications must be approved in advance by the member firm IV Registered representative communications may only be sent from a location supervised by the member firm
I, II, and IV (If a member firm has a communications compliance program in place, registered representatives are permitted to send e-mail to customers without submitting these for pre-use review and approval. In such a program, the firm is obligated to educate its registered representatives as to what is permissible in electronic communications; and must have procedures in place to audit and review these communications. Please note that the audit and review requirements not only apply to outgoing electronic communications; but also apply to incoming electronic communications as well. Such an audit program can only cover locations supervised by the firm, so registered representatives are only permitted to send electronic communications to customers from supervised locations.)
Which of the following are violations of FINRA rules? I Recommending the purchase of put options to protect a stock position from a downwards market move II Sharing in the profits and losses of a customer's account III Selling exempted securities to a customer with a written agreement to buy back the securities at a later date IV Orally guaranteeing to buy back customer securities at a preset price
II and IV (A registered representative cannot guarantee a customer's account against loss nor share in the account unless he or she opens a joint account with the customer; contributes capital proportional to any sharing agreement; and obtains the approval of a principal for the account. Selling exempted securities such as U.S. Governments with a written agreement to buy them back at a later date is a "repurchase" agreement, and is allowed (however, such repurchase agreements are typically for very large amounts, and are entered into by U.S. Government securities dealers). Recommending the purchase of a put option to protect against a downwards market move is perfectly acceptable, since that is what the option will do, and thus does not violate FINRA rules.)
If a registered representative wishes to engage in a private securities transaction, which statement is TRUE?
Prior written permission of the employing member firm is required (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!).
A registered representative is about to retire and has asked a younger representative in the same branch office if she wants to buy his book of business. The younger representative is very interested and the two RRs have negotiated a sale price and have agreed in a written contract that continuing commissions will be paid to the retiring representative for a period of 5 years following retirement, based on the clients named as of the date of retirement. Which statement is TRUE about such an arrangement?
Such an arrangement is a permitted private contract as long as the contract is executed prior to the retirement date. (Even though FINRA does not permit commissions to be shared with unregistered individuals, it gives an exception to this under Rule 2040. The intent is to allow a retiring representative to get income in retirement by selling his or her book of business. The rule allows continuing commissions to be paid to a "RRR" (Retired Registered Representative) from accounts held for continuing customers, regardless of whether funds or securities are added during the period of retirement, provided that: a bona-fide contract is entered into between the member firm and the RRR prior to retirement providing for the payments; and the contract prohibits the RRR from soliciting new business, new accounts or servicing those accounts that generate the continuing commission payments. Also note that the contract can permit the payments to continue to a beneficiary designated in the contract upon the RRR's death (a nice thing for widow(er)s). There is no notice to FINRA or FINRA approval. Note, however, that the member firm must approve such an arrangement.)
You are in the middle of a discussion with an institutional client over the phone, where you recommend that the client buy 100,000 shares of ABC stock. It looks like the client may be interested in making the purchase. Your cubicle is within earshot of the neighboring cubicle. Just before your client tells you take the order to buy, you overhear your colleague, the representative in the neighboring cubicle, selling 10,000 shares of ABC stock to his client. Which statement is TRUE about this situation?
The colleague has committed a violation because your customer's order could move the price of ABC stock (In this scenario, the colleague overhead the representative making the buy recommendation for a large block of shares to his institutional client and then rushed to tell his customer to buy the stock (since the market price could be moved by the large purchase) before the institutional client placed that order. This is front running and is a prohibited practice.)
A customer wishes to open an account that will be used primarily to buy initial public offerings (IPOs). Which statement is TRUE regarding the proper procedure for prequalifying the account?
The customer must sign a representation letter that he or she is not restricted from buying IPOs ( In order for a customer to buy IPOs (Initial Public Offerings) of common stock, 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). 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.
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?
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 (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 representative wants to speak to a group of clients about a private placement in a 2-year old company. The invited clients have a stated minimum net worth of $1 million. The representative is soliciting them to buy privately placed shares of the company because it is in a growth business due to the aging of the population in the U.S. - the company's business is the refurbishment of medical equipment in hospitals. In the Private Placement Memorandum (PPM), the company states that investors are expected to receive a 15% annual cash dividend and could also enjoy capital appreciation. What should the representative do before offering the security to these clients?
The registered representative should review the revenue and expenses as detailed in the PPM to see if it is feasible for the company to pay a 15% cash dividend (FINRA requires that when a private placement is offered, the broker-dealer or its representatives must conduct a reasonable investigation concerning that security and the issuer's representations about it. FINRA states that a broker-dealer "may not rely blindly upon the issuer for information concerning a company and it cannot rely on information provided by the issuer in lieu of its own reasonable investigation." The fact that a BD's customers are accredited does not obviate this investigation. The BD must conduct a reasonable investigation concerning the: issuer and its management; business prospects of the issuer; assets held by the issuer; claims being made; and intended use of the proceeds of the offering. Note that if registered securities are being offered, this detailed "due diligence" investigation by the BD offering the investment is not required - it is only a requirement for private placement offerings (because in a registered securities offering, the issuer and underwriters perform the required due diligence). Also note that there is no requirement for a signed receipt that each attendee received a Private Placement Memorandum.)
A registered representative at a FINRA member firm has been elected to his cooperative apartment building's Board of Directors. Which statement is TRUE?
This event must be reported to his or her employer (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.)
A registered representative at another member firm has a client who wishes to buy a Direct Participation Program (DPP) unit, a product that is not offered through his firm. He has a friend that is a registered representative at another member firm where DPPs are sold, and offers to refer the prospective client in exchange for a small fee. Which statement is TRUE?
This is prohibited (Registered representatives can only share commissions or pay referral fees to other registered persons at the same broker-dealer. Because these 2 representatives work for different firms, payment of the referral fee is prohibited.)
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:
Thursday, May 16th ( 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.)
Under FINRA rules, a customer complaint that must be resolved by the member firm is defined as any:
Written complaint (Under FINRA rules, a complaint from a customer is defined as one received in writing. Verbal complaints do not count!)
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: $15,500,000 Construction Company: $20,000,000 Construction 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?
Yes, because this is an outside business activity (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 amend her U4 filing for this?
Yes, because this is an outside business activity (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.)
A potential new customer is solicited by a registered representative to buy a new issue offering that is priced at $100 per share. The customer has $10,000 to invest and the registered representative explains to the customer that such an amount "deposited to a margin account creates $20,000 of buying power, so you will be able to buy 200 shares." This statement is:
a misrepresentation of margin rules, since new issues must be fully paid (While it is true that $10,000 of cash deposited to a margin account will buy $20,000 of marginable securities (since Reg T margin is 50%), new issues are not marginable. Thus, $10,000 of cash can only buy $10,000 of a new issue. The registered representative has made a misrepresentation to the customer.)
A customer brings $50,000 of cash to the brokerage firm office and gives it to the registered representative to pay for a securities purchase. The registered representative should:
accompany the customer to the cashier, so that the customer can be given a receipt for the payment (Cash can only be accepted from a customer if it is to be deposited to the customer's account. A registered representative cannot personally accept cash from a customer.)
A registered representative wishes to post his/her business card on a website. This is considered to be:
advertising (FINRA defines communications with the public as either: Correspondence: A communication made available to 25 or fewer existing or prospective retail clients Retail Communication: A communication made available to more than 25 existing or prospective retail clients Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA. A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience). Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective clients, scripted speeches delivered to more than 25 existing or prospective clients, password-protected websites)
A registered representative gives a speech to 30 retail clients about investing in mutual funds, and shows a chart that compares the growth of the fund to the Standard and Poor's 500 average. This action is:
allowed as long as the speech content is approved by the firm's compliance officer or principal (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 Because this speech is being given to 30 retail clients, it falls into the "Retail Communication" category that requires prior principal approval.)
Under the FINRA Code of Procedure, after the first level of hearings in any complaint proceeding with the District Hearing Panel, this decision may:
be appealed to the National Adjudicatory Council (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. It can also be used by a customer that has not signed an arbitration agreement. Under the FINRA Code of Procedure, the first level of hearings in any dispute or complaint proceeding is held at the District 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 customer instructs a registered representative to "Buy 100 shares of IBM whenever you think the price is right." Under industry regulations this order:
can be accepted as given (This order states the number of shares to be bought and the security to be purchased. The registered representative is left to choose price and time of execution. This is the same as a "not held" order and can be accepted as given. If the representative were to choose the number of shares or the security, then the order would be discretionary, and would require a written power of attorney on file from the customer.)
Customer securities held in margin accounts:
can be commingled with other customer margin securities and used as collateral for a loan by the brokerage firm ( 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 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:
can only accept the loan if written notice is given to his employing member firm and the firm's instructions are followed (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).
A registered representative recommends the purchase of a GNMA pass-through certificate to a customer that seeks safety of principal and a moderate level of income. When doing so, the registered representative states to the customer "GNMA certificates are guaranteed by the U.S. government and each month you will receive a check, all of which is income to you." This statement is:
deceptive because GNMA certificates make payments that are a combination of both principal and interest (GNMA pass-through certificates represent an ownership interest in a pool of underlying mortgages. Each month, the mortgage payments made into the pool are "passed through" to the certificate holders. Since mortgage payments represent a combined payment of both principal and interest, it is deceptive to say that the entire payment is income. The interest portion of the payment is income; while the principal portion is the return of capital invested.)
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:
is a prohibited practice, since a suitability determination was not made for each client (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.)
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 accept unsolicited orders for his employer's stock; but cannot solicit orders for, nor recommend, buying that security (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 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:
misrepresents the findings of the firm's research report (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.)
If a registered representative fails to complete the Regulatory Element of the Continuing Education requirement within the stated time period, that person:
must cease performing all of the functions of a registered representative (If a registered representative fails to complete the Regulatory Element of the Continuing Education requirement within 120 days of the notification date, that person's registration is suspended and that person cannot continue to perform any of the functions of a registered representative.)
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:
not appropriate because it induces the customer to invest beyond his financial capacity (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").
Under FINRA rules, when no proxy contest is involved, the proxy of a customer whose shares are margined, that is returned without indicating how the shares should be voted is:
not counted in the vote (Customers whose securities are margined have their securities held in "street" name. Thus, whenever, there is a mailing to the shareholders by the corporation, the brokerage firm shows as the "owner" and receives the mailing from the issuer. The brokerage firm is obligated, in turn, to forward the materials to the beneficial owner (the customer) of the securities. Under FINRA rules, if a proxy is sent to shareholders, the brokerage firm must distribute it to the beneficial owners. 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 with a FINRA member firm is opening a new cash account for a customer who lives in another state. The customer explains that he wishes to place a trade today. To accommodate the customer's wish, the registered representative gets the customer's permission to sign the customer's name to the arbitration agreement. This action by the registered representative is:
prohibited (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)
A registered representative notes that the price of ABC stock has been falling rapidly, and calls all of his customers with ABC positions to encourage them to sell. On one of these calls, he reaches an answering machine. The registered representative leaves the following message: "ABC stock is plummeting. If I don't hear from you in one hour, I will sell out your position to protect you from further loss." This action is:
prohibited, unless the registered representative has been given previous written discretionary authorization by the customer ( For a registered representative to execute a trade in a customer account, written discretionary authorization from the customer is required. To execute a trade in a customer account without discretionary authority is an unethical practice.)
A registered representative receives a written complaint from a customer stating the commissions being charged in the account are too high. The registered representative should:
refer the complaint to the branch manager (Any written complaint received by a registered representative must be given to the Branch Manager or Principal. The Manager or Principal is responsible for overseeing the resolution of the complaint.)
A customer wishes to give a $1,000 cash "bonus" to a registered representative for doing such a good job. The registered representative may:
tell the customer to donate the money to a specific charity that the registered representative supports ( FINRA does permit registered representatives to accept gifts of up to $100 in value per year per customer. Since this gift exceeds that amount, it cannot be accepted under any circumstances. There is nothing prohibiting the registered representative having the customer donate this money to a charity - as a matter of fact, it's a rather nice gesture.)
If a brokerage firm receives a written customer complaint, then:
the firm must resolve the complaint and keep a separate file of the complaints, with action taken, for inspection by the SRO (If a firm receives a written customer complaint, it must be resolved under the supervision of a principal and a file of the complaint with actions taken must be maintained by the firm for inspection by the self regulatory organization (FINRA).
