Series 7 Chapter 3
Regarding communications, which of the following statements is TRUE concerning the responsibilities of a principal of a broker-dealer? AA principal must approve retail communications prior to use. BA principal must approve all institutional communications prior to use. CA principal must approve all correspondence prior to use. DA principal must approve all retail communications and correspondence prior to use.
A A principal must approve retail communications prior to use. However, institutional communications and correspondence are subject to review and supervision by a principal, but not pre-approval.
On behalf of her firm, a registered representative is holding a seminar and the audience will consist of registered representatives from other member firms. This type of communication is considered: AInstitutional communication BRetail communication CCorrespondence DInternal communication
A Any communication that is directed only to registered representatives is defined as institutional communication. As it relates to communication, the definition of an institutional investor includes a FINRA member firm and its registered persons. On the other hand, if the audience consisted of only employees of the member firm that is providing the seminar, it would be considered internal communication.
Promotional material made available to the public may compare collateralized mortgage obligations (CMOs) to: ANo other investment product BFDIC-insured certificates of deposit CCorporate bonds backed by fixed assets DTreasury securities
A Any type of promotional communication made available to customers may not compare CMOs to any other security. This is due to the uniqueness of this product.
The ABC Growth Fund has been in existence for six years. An advertisement that refers to its ranking based on total return must refer to the total return for: AThe one- and five-year periods by the same ranking entity BAt least one year CThe one- and five-year periods by all ranking entities DSince the fund has not been in existence for at least 10 years, it may not use ranking based on total return in its advertising
A The standards set forth by the SEC and FINRA regarding mutual fund communications (advertising) are that performance statistics should cover 1-, 5- and 10-year periods. If the fund has not been in existence for 10 years, then disclosure must be made for the relevant for 1- and/or 5-year periods. In addition, the total return exhibited and the specific ranking must be determined by the same ranking entity.
An advertisement for municipal securities states the following: "15-year 10% tax-free bond priced to yield 12% to maturity. Call us now for more details." According to MSRB rules, this advertisement should also state that: AThe tax-free return is actually greater than 12% if the bond is held to maturity BA portion of the yield to maturity is taxable if the bond is held to maturity, making the after-tax return between 10% and 12% CThe tax-free return is actually less than 10% if the bond is held to maturity DA principal approved the advertisement
B According to MSRB rules, the advertisement must state that a portion of the yield to maturity for a discount bond may be subject to taxation and, therefore, does not represent a fully tax-free yield. In this question, the bond is being offered at a discount because the yield to maturity (12%) is greater than the nominal yield (coupon rate 10%). At maturity, the discount would be subject to taxation as ordinary income, causing the net yield to be between 10% and 12%.
n regard to recruitment advertising by member firms, which of the following statements is TRUE? ARecruitment advertising is not permitted BRecruitment advertising may not contain exaggerated claims about opportunities in the securities business CRecruitment advertising is subject to FINRA filing rules DRecruitment advertising may be published only once per month
B Advertising by a member firm falls under the definition of retail communication. A member firm's recruitment advertisements may not contain exaggerated claims about opportunities in the securities business. The advertisement is not required to be filed with FINRA since it does not promote a product or service by the broker-dealer.
A registered representative invites 40 clients to an investing seminar, the sales script that's used for the presentation is considered: AAn interactive electronic forum BRetail communication CA public appearance DCorrespondence
B Since the communication is being delivered to 40 total investors (and makes no reference to the investors being institutional), the sales script is considered retail communication. Correspondence is defined as any written or electronic message that a member firm distributes or makes available to 25 or fewer retail investors within a 30-calendar-day period. Communication that's delivered to more than 25 investors is considered retail communication. FINRA defines retail investors as existing and/or prospective clients.
Which TWO of the following choices must a principal approve prior to use? 1. An advertisement concerning the appointment of new managing directors 2. An advertisement promoting a new type of CMO 3. An advertisement regarding covered call writing 4. An email from an RR to a client concerning a security in her account
C - 2+3 All retail communications concerning options and CMOs must be approved before initial use by a principal of the member firm. Advertising concerning a change in the firm's personnel does not need to be approved. Correspondence, which is any written or electronic communication, (i.e., email) needs to be reviewed by the firm but does not require prior principal approval.
Drysdale Securities has sent a third-party research report on Clinkscale Corporation to clients. Which of the following items is NOT a required disclosure? AWhether Drysdale makes a market in Clinkscale BA three-year price chart covering Drysdale recommendations CWhether Drysdale managed or comanaged an offering DWhether Drysdale owns 1% or more of outstanding shares
B Third-party research has been prepared at the request of the brokerage firm (Drysdale Securities) and is distinct from independent third-party research. Third-party research must contain the disclosures that would apply had the member (Drysdale Securities) prepared the report. However, a price chart is not included within these required disclosures. Third-party research must include the following disclosures. Whether the broker-dealer received compensation from the subject company within the preceding 12 months, or expects to receive compensation in the upcoming 3 months, for investment banking services related to the subject company Whether the broker-dealer makes a market in the subject company Whether the broker-dealer owns 1% or more of the equities in the subject company Any other material conflicts of interest Independent third-party research has not been prepared at the request of the broker-dealer. Had this been the case, disclosures of Drysdale's activities in Clinkscale would not have been required.
Which of the following is NOT required to be filed with FINRA? AA retail communication concerning direct participation programs BA retail communication concerning collateralized mortgage obligations CA retail communication that provides information on a broker-dealer DA retail communication that provides information on variable insurance products
C A retail communication concerning direct participation programs (DPPs), collateralized mortgage obligations (CMOs), and investment companies are all required to be filed with FINRA. Investment companies include variable insurance products, mutual funds, closed-end funds, unit investment trusts (UITs), and exchange-traded funds (ETFs). A retail communication that does not make any financial or investment recommendation, or promote a product or service, such as providing information about a broker-dealer, does not need to be filed with FINRA.
Retail communications that pertain to mutual fund shares must be: AFiled with the issuer at least 10 business days prior to use BFiled with the SEC at least 10 business days prior to use CFiled with FINRA within 10 business days of first use DRetained by the firm in an easily accessible location for two years, but there is no requirement for the communications to be filed since that is the responsibility of the underwriter
C All retail communications pertaining to mutual funds must be filed with FINRA within 10 business days of first use or publication.
When determining whether a CMO is suitable, an RR must offer to a client all of the following information, EXCEPT a: AGlossary of terms BDiscussion on how changing interest rates may affect the prepayment rates CDiscussion on how changing currency rates may affect the value of the securities DDiscussion on the relationship between mortgage loans and mortgage securities
C Broker-dealers must offer customers educational material about the features of CMOs. This material must include: A discussion of the characteristics and risks of CMOs. This includes: how changing interest rates may affect prepayment rates and the average life of the security, tax considerations, credit risk, minimum investments, liquidity, and transactions costs. A discussion of the structure of a CMO. This includes the different types of structures, tranches, and risks associated with each type of security. It is also important to explain to a client that two CMOs with the same underlying collateral may have different prepayment risk and different interest-rate risk. A discussion that explains the relationship between mortgage loans and mortgage securities A glossary of terms applicable to mortgage-backed securities Changing currency rates are not applicable to the risks associated with CMOs.
A Web site is being designed for a registered representative of a member firm. Which TWO of the following statements are TRUE regarding the design of this Web site?The FINRA logo must be displayedThe registered representative's firm name must be displayedA reference to FINRA membership is permittedLinks to other Web sites are not permitted AI and II BI and III CII and III DII and IV
C Care should be taken in the design of Web sites. The name of the member firm with whom the registered representative is associated must be displayed. While the use of the FINRA logo is NOT permitted, the registered representative's association with a FINRA member firm is allowed. However, when a reference to FINRA membership is used, the Web site must provide a hyperlink to FINRA's home page. Links to other Web sites are allowed but care should be taken that these sites do not provide fraudulent or misleading information.
If a mutual fund has been in existence for 17 years, the longest average annual return that's required to be shown in an advertisement is: AThree years BFive years C10 years D17 years
C Fund advertisements showing average annual total returns must be presented for the following time periods: One year for funds in existence for at least one year. One and five years for funds in existence for at least five years. One, five, and 10 years (or for the life of the fund if shorter) for funds in existence for at least 10 years. If a fund has been in existence for more than 10 years, it may show the average annual total return for the life of the fund as well, but this is not required. Please notice that the question asks about the time period that's required. (17044)
A registered representative works for a brokerage firm that is a dealer for a mutual fund complex. The RR has prepared a script and a slide presentation for a seminar on the funds in the complex and also intends to hand out prospectuses for the funds and a brochure that was created by her firm. In this situation, all of the following should be filed with FINRA, EXCEPT: AThe script BThe slide presentation CThe prospectus DThe brochure
C Retail communication is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30-calendar-day period. A retail investor is considered any existing or prospective customer who does not meet the definition of an institutional investor. A script, slide presentation, and brochure are all defined as retail communication and are required to be filed with FINRA or another SRO within 10 business days of first use. Tombstone advertisements, mutual fund profiles, and prospectuses which have been filed with the SEC are exempt from the filing requirement.
A research analyst at a broker-dealer is preparing a research report recommending ABC common stock. Which of the following situations need not be disclosed? AABC Corp is an investment banking client of the broker-dealer BThe broker-dealer has a 1% or greater beneficial ownership in ABC common stock CThe broker-dealer has a 1% or greater beneficial ownership in ABC nonconvertible bonds DThe broker-dealer makes a market in ABC common stock
C The broker-dealer is required to make certain disclosures in its research reports, such as whether the firm has an investment banking relationship or makes a market in the common stock of ABC. It must also disclose its ownership in a subject security if the ownership is equal to or greater than 1% beneficial ownership in common equity. Since nonconvertible debt is not considered common equity, disclosure is not required.
Which of the following actions is a firm permitted to perform when it publishes a research report? ASend the report to the subject company for approval and editing. BSend a suggested target price for the company's stock to the subject company. CVerify factual information with the subject company. DOwn more than 1% of the subject company's stock without disclosure.
C To avoid conflicts, there are significant restrictions on firms that publish research reports on companies. These restrictions include sending the report to the subject company for editing or approval, sending a suggested target price for the company's stock to the subject company, owning 1% of more of the outstanding shares, or making a market in the subject company's stock without disclosure. However, firms are permitted to verify factual information with subject companies. (17045)
What information would NOT need to be disclosed by a broker-dealer in a research report? AThe broker-dealer received compensation for assisting the company in an acquisition BThe analyst provided a target price for the company CThe analyst is a director of the company DThe analyst had owned shares in the company one year before writing the report
D A broker-dealer is required to make certain disclosures in its research reports. Any investment banking compensation paid during the last 12 months, the anticipated price target, and the fact that the analyst is a director of the company are all required disclosures. In addition, any ownership in the company held by the analyst or a member of the analyst's immediate family at the time the report is issued must be disclosed. The fact that the analyst formerly owned shares that were sold does not need to be disclosed
A broker-dealer has established a page on a social media site which allows customers to post comments. The firm's responses to these comments are considered: ACorrespondence BA violation of FINRA rules CNeither correspondence nor retail communications DRetail communications
D A principal of the firm must approve the use of the social media site. Customer comments that are posted to a broker-dealer's social media page and the firm's responses are considered to be made on an interactive electronic forum. Although this is defined as retail communication, it's managed in a manner that's similar to correspondence (i.e., it's subject to review and supervision).
A registered representative receives text messages on a mobile device from one of her customers. Which of the follow is TRUE? AThe broker-dealer is not required to maintain any records of the messages. BThe broker-dealer is required to approve any communication with customers when the RR uses this type of device. CThe broker-dealer must purchase the mobile device that its RRs use to communicate with customers. DThe broker-dealer is required to maintain a record of all communication with customers regardless of the device used.
D According to FINRA rules, broker-dealers must supervise all written and electronic correspondence that their RRs have with customers (including text, e-mail, and instant messages). Additionally, these records must be maintained by the firm for a minimum of three years. If a firm permits its RRs to communicate with customers through non-firm email addresses and other electronic devices, it's required to supervise and retain those communications. In fact, some firms prohibit or block its RRs from accessing non-firm electronic platforms for business purposes. (17042)
Which of the following statements is TRUE regarding the supervision of real-time communication through social networking sites? AThe site must be approved by FINRA. BThe site must be approved by the SEC. CThis communication is regulated in a manner that's similar to retail communication. DThis communication is regulated in a manner that's similar to correspondence.
D According to FINRA, social media sites (e.g., Instagram, Facebook, Twitter, and LinkedIn) can be used to promote products or services of a broker-dealer. Real-time communication through social media site is supervised in a manner that's similar to correspondence. In other words, the communication is subject to review and supervision, but doesn't require principal approval prior to use. In addition, the communication is NOT required to be filed with FINRA.
A client is reading a financial publication that contains an advertisement for a mutual fund. Under the "omitting prospectus regulations" of the Securities Act of 1933, which of the following statements is FALSE? AThis advertisement can list past performance of the mutual fund. BThis advertisement should disclose to investors that it is important to read the prospectus before investing. CThis advertisement can be accompanied by an application to receive a prospectus. DThis advertisement can be accompanied by an application to invest.
D According to the SEC Rule 482, an offer to sell securities can only be made through a prospectus. An application to receive a prospectus can be placed in the advertisement but not an application to invest.
Which of the following statements is TRUE concerning the use of bond volatility ratings when marketing a mutual fund? AThis practice is inherently deceptive and expressly prohibited under SEC regulations. BThese ratings must comply with the uniform standard set by Standard & Poor's and Moody's rating agencies. CThese ratings are often called risk ratings and are used for high yield funds exclusively. DThese ratings may account for NAV changes due to currency fluctuations.
D Bond volatility ratings are independently produced ratings that attempt to quantify how sensitive a given bond fund's NAV is to changes in the economy such as interest rate and/or currency fluctuations. There is no standardized scale for this measurement and these ratings may never be referred to as risk ratings.
Which of the following statements is TRUE concerning the disclosure requirements in CMO correspondence? AA comparison between a CMO and an highly rated corporate bond is permitted BA comparison between a CMO and a municipal bond is permitted if the client is in a high tax bracket CA comparison between a CMO and a bank certificate of deposit is permitted if the bank is FDIC-insured DA comparison between a CMO and a bank certificate of deposit is not permitted under any circumstances
D Due to their unique characteristics, CMOs may not be compared to any other types of investment, including a certificate of deposit. This prohibition applies to any communications with the public about CMOs, which includes retail communications and correspondence.
Michelle Gladstone has noticed that many of her elderly clients do not bother to read the prospectus prior to making a purchase. They consider these documents much too confusing and far too time consuming to go through. They generally rely on Michelle's advice when pondering investment selections. Michelle is uncomfortable with her clients' lack of due diligence and is attempting to come up with a better way to educate them about the risks and rewards of investing in a particular fund. Under SEC rules, Michelle may engage in which of the following activities? AShe may type up a large font version of the prospectus for her clients' benefit, provided the large print version has been reviewed and approved by the firm's chief legal counsel. BShe may underline or highlight key content areas within the prospectus, but must remind her clients that the points she decided to emphasize are of no more or no less importance than the balance of the material contained in the full prospectus. CShe may summarize the prospectus provided her branch manager approves of the resulting abbreviated document and attaches a written notice to all recipients that a full version of the prospectus is available upon request. DShe may provide her clients with a summary prospectus obtained from the fund's wholesaler.
D Many mutual funds are employing shorter summary versions of the prospectus or profiles. These reader friendly documents highlight the most relevant information found in the complete prospectus and are designed to encourage potential investors, who may be intimidated by the complete prospectus, to do their due diligence prior to investing. An investor may buy shares solely based on the contents of this short version prospectus but must be made aware that they are entitled to receive a complete (full version) prospectus prior to making a purchase. Regardless of their intentions, RRs are not permitted to modify a traditional prospectus or make up their own summary piece. The only summary document that may be used (a profile) is created by the fund's distributor and filed with the SEC. Clients may make a purchase based on this profile and will receive a complete prospectus with their confirmation.
Which of the following communications would most likely contain the legend "This material must be preceded by or accompanied by a prospectus"? \ ATombstone ad BOmitting prospectus ad CGeneric advertising DSupplemental sales literature
D Supplemental sales literature for a mutual fund must be preceded by or accompanied by a prospectus for that fund. This requirement does not apply to the other communications mentioned in the question.
When sent to a client, which of the following must be preceded or accompanied by a prospectus? AA brochure describing how mutual funds in general work BA tombstone ad for a new mutual fund being offered by the XYZ fund complex CAn omitting prospectus advertisement for the Cerebral Growth Fund DSupplemental sales literature for the bond mutual funds in the Flyer Group family of funds
D Supplemental sales literature may only be used in the post-effective period and must be preceded or accompanied by a prospectus. These requirements do not apply to generic advertising, tombstone ads, or omitting prospectus ads. The latter two types of ads are often published in newspapers.
A registered representative is sending out electronic communication that has been prepared by her firm to 75 of her existing retail customers. The communication explains to the customers that their account statements are now available online. Which TWO of the following statements are TRUE?This is considered correspondenceThis is considered retail communicationThis activity requires principal approval prior to useThis activity should be reviewed AI and III BI and IV CII and III DII and IV
D This electronic communication is considered retail communication since the registered representative is distributing it to more than 25 retail customers. Retail communication is considered any written or electronic communication that is distributed or made available to more than 25 retail investors within any 30-calendar-day period. If the communication is directed to 25 or fewer individuals, it is considered correspondence. If the retail communication does not make a financial recommendation or does not promote a product or service of the firm (which the electronic communication in this question does not), prior principal approval is not required. In other words, FINRA does not consider announcing the availability of online account statements as promoting a product or service of the firm. However, this activity should be reviewed and supervised by the broker-dealer.
When making a presentation on 529 plans, what information is NOT required? ADiscussing the risks and costs involved with the different types of plans BA disclaimer stating that, prior to investing in a plan, you should read the official statement CA disclaimer that the client should check with her home state to learn if it offers tax benefits to those clients who invest in its plan DThe name and contact information for the municipal securities principal who will approve the customer's investment in the plan
D Under MSRB rules, an RR is required to disclose certain information when promoting 529 plans. The RR must discuss the risks and costs involved with the different types of plans, must provide a disclaimer stating that, prior to investing in a plan, the customer should read the official statement, and must provide a disclaimer that the client should check with her home state to learn if it offers tax benefits to those who invest in its plan. There is no requirement to provide the name and contact information for the municipal securities principal who will approve the customer's investment in the plan.
All of the following may be included in investment company advertising EXCEPT: AAn application for a prospectus BInformation that is contained in the full prospectus CA current yield quotation DAn application to invest
D Under SEC Rule 482, which addresses mutual fund advertising, an application to invest may not be contained within an advertisement. The investor must receive a prospectus before investing in funds.
The IPO of Symphony Music Inc. was registered on July 1st, 20XX. If the comanager of the issue wants to publish a research report on Symphony Music, what would the earliest date be that it could publish the report? AJuly 1st, 20XX BJuly 2nd, 20XX CJuly 11th, 20XX DJuly 12th, 20XX
D he earliest date on which the comanager of Symphony Music could publish a research report after the IPO (on July 1st, 20XX) is July 12th, 20XX. FINRA's quiet period rules are as follows. 10 calendar days from the effective date for an initial public offering, which applies to any syndicate member or dealer Three calendar days from the effective date for a secondary offering, which only applies for managers or comanagers Please note, when determining the earliest a research report may be published, the effective date is NOT counted. For example, if an IPO is registered on the 1st, the 10-calendar-day period is from the 2nd through the 11th, making the 12th the earliest date. If a secondary offering is registered on the 1st, the 3-calendar-day period would be from the 2nd through the 4th, and the 5th would be the earliest date.
