Chapter 3 Custom Exam
Regarding communications, which of the following statements is TRUE concerning the responsibilities of a principal of a broker-dealer? A) A principal must approve retail communications prior to use. B) A principal must approve all institutional communications prior to use. C) A principal must approve all correspondence prior to use. D) A principal must approve all retail communications and correspondence prior to use.
A) A principal must approve retail communications prior to use. 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.
Which TWO of the following does not need to be filed with FINRA? A mutual fund profile Retail communications that include performance rankings A testimonial concerning an investment company Retail communication that relates to variable annuities A) I and III B) I and IV C) II and III D) II and IV
A) I and III Retail communication relating to investment companies must be filed with FINRA within ten business days after initial use. This category includes mutual funds, closed-end funds, exchange-traded funds, unit investment trusts, and variable products. Additional forms of retail communication that must be filed with FINRA at least 10 business days prior to their first use include: Material pertaining to registered investment companies that includes rankings or comparisons that have been created by the investment company itself Bond mutual funds that includes volatility ratings Testimonials, prospectuses, and mutual fund profiles which have been filed with the SEC are not required to be filed with FINRA.
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: A) Institutional communication B) Retail communication C) Correspondence D) Internal communication
A) Institutional communication 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.
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: A) The one- and five-year periods by the same ranking entity B) At least one year C) The one- and five-year periods by all ranking entities D) Since 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 one- and five-year periods by the same ranking entity 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.
Prior to first use, a municipal securities principal must approve which TWO of the following documents? The official statement The abstract of an official statement The red herring The research report A) I and III B) I and IV C) II and III D) II and IV
Advertising must be approved prior to first use by a municipal securities principal. An official statement or preliminary official statement is not considered advertising. However, a dealer-prepared summary or abstract of the official statement is considered advertising. Research reports are also considered advertising. A red herring (preliminary prospectus) relates to a requirement of the Securities Act of 1933 from which municipal issues are exempt. D) II and IV
Promotional material made available to the public may compare collateralized mortgage obligations (CMOs) to: A) No other investment product B) FDIC-insured certificates of deposit C) Corporate bonds backed by fixed assets D) Treasury securities
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. A) No other investment product
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: A) The tax-free return is actually greater than 12% if the bond is held to maturity B) A portion of the yield to maturity is taxable if the bond is held to maturity, making the after-tax return between 10% and 12% C) The tax-free return is actually less than 10% if the bond is held to maturity D) A principal approved the advertisement
B) A portion of the yield to maturity is taxable if the bond is held to maturity, making the after-tax return between 10% and 12% 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%.
Drysdale Securities has sent a third-party research report on Clinkscale Corporation to clients. Which of the following items is NOT a required disclosure? A) Whether Drysdale makes a market in Clinkscale B) A three-year price chart covering Drysdale recommendations C) Whether Drysdale managed or comanaged an offering D) Whether Drysdale owns 1% or more of outstanding shares
B) A three-year price chart covering Drysdale recommendations 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.
A registered representative invites 20 institutional clients to a seminar and allows each client to bring one guest. The sales script used for the presentation is considered: A) An interactive electronic forum B) Correspondence C) A public appearance D) Retail communication
B) Correspondence The key to this question is to identify the number of retail investors who are receiving the communication. Although the communication is being delivered to 40 total investors, only 20 are retail investors; therefore, the communication is considered correspondence. 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. As long as the number of retail investors is limited to 25, FINRA is willing to allow the communication to be delivered without a significant amount of oversight. On the other hand, retail communication is defined as any written or electronic communication that a member firm distributes or makes available to more than 25 retail investors within a 30-calendar-day period. For numerical purposes, retail investors may be existing and/or prospective.
According to SEC guidelines, which of the following could cause investment company advertising to be misleading? Failure to state a fact mentioned in the prospectus Representing that past performance is a good predictor of future performance Stating the goals of the investment company without indicating that those goals might not be achieved Making statements about benefits immediately followed by statements about the corresponding risks A) I and IV only B) II and III only C) I, II, and IV only D) I, II, III, and IV
B) II and III only Failure to state a fact mentioned in the prospectus would be misleading only if the fact was necessary to make the advertising not misleading. Statements about benefits must be balanced by statements about corresponding risks.
In regard to recruitment advertising by member firms, which of the following statements is TRUE? A) Recruitment advertising is not permitted B) Recruitment advertising may not contain exaggerated claims about opportunities in the securities business C) Recruitment advertising is subject to FINRA filing rules D) Recruitment advertising may be published only once per month
B) Recruitment advertising may not contain exaggerated claims about opportunities in the securities business 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.
Which of the following statements is TRUE concerning the use of bond volatility ratings when marketing a mutual fund? A) This practice is inherently deceptive and expressly prohibited under SEC regulations. B) These ratings must comply with the uniform standard set by Standard & Poor's and Moody's rating agencies. C) These ratings are often called risk ratings and are used for high yield funds exclusively. D) These ratings may account for NAV changes due to currency fluctuations.
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. D) These ratings may account for NAV changes due to currency fluctuations.
Which of the following is NOT required to be filed with FINRA? A) A retail communication concerning direct participation programs B) A retail communication concerning collateralized mortgage obligations C) A retail communication that provides information on a broker-dealer D) A retail communication that provides information on variable insurance products
C) A retail communication that provides information on a broker-dealer 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.
When determining whether a CMO is suitable, an RR must offer to a client all of the following information, EXCEPT a: A) Glossary of terms B) Discussion on how changing interest rates may affect the prepayment rates C) Discussion on how changing currency rates may affect the value of the securities D) Discussion on the relationship between mortgage loans and mortgage securities
C) Discussion on how changing currency rates may affect the value of the securities 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.
Retail communications that pertain to mutual fund shares must be: A) Filed with the issuer at least 10 business days prior to use B) Filed with the SEC at least 10 business days prior to use C) Filed with FINRA within 10 business days of first use D) Retained 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) Filed with FINRA within 10 business days of first use All retail communications pertaining to mutual funds must be filed with FINRA within 10 business days of first use or publication.
Which TWO of the following choices must a principal approve prior to use? I An advertisement concerning the appointment of new managing directors II An advertisement promoting a new type of CMO III An advertisement regarding covered call writing IV An email from an RR to a client concerning a security in her account A) I and III B) I and IV C) II and III D) II and IV
C) II and III 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.
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? A) ABC Corp is an investment banking client of the broker-dealer B) The broker-dealer has a 1% or greater beneficial ownership in ABC common stock C) The broker-dealer has a 1% or greater beneficial ownership in ABC nonconvertible bonds D) The broker-dealer makes a market in ABC common stock
C) The broker-dealer has a 1% or greater beneficial ownership in ABC nonconvertible bonds 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.
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: A) The script B) The slide presentation C) The prospectus D) The brochure
C) The prospectus 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 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 displayed The registered representative's firm name must be displayed A reference to FINRA membership is permitted Links to other Web sites are not permitted A) I and II B) I and III C) II and III D) II and IV
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. C) II and III
A municipal securities principal must approve: Memos in response to customer complaints The opening of accounts Advertisements to be used for a seminar Correspondence to customers A) II only B) II and III only C) I, II, and IV only D) I, II, III, and IV
D) I, II, III, and IV MSRB rules require a municipal securities principal to approve all the choices given. In addition, the principal must approve all transactions and must frequently review all discretionary accounts.
Which of the following statements is TRUE concerning the disclosure requirements in CMO correspondence? A) A comparison between a CMO and an highly rated corporate bond is permitted B) A comparison between a CMO and a municipal bond is permitted if the client is in a high tax bracket C) A comparison between a CMO and a bank certificate of deposit is permitted if the bank is FDIC-insured D) A comparison between a CMO and a bank certificate of deposit is not permitted under any circumstances
D) A comparison between a CMO and a bank certificate of deposit is not permitted under any circumstances 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.
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 correspondence This is considered retail communication This activity requires principal approval prior to use This activity should be reviewed A) I and III B) I and IV C) II and III D) II and IV
D) II and IV 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.
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? A) July 1st, 20XX B) July 2nd, 20XX C) July 11th, 20XX D) July 12th, 20XX
D) July 12th, 20XX The 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.
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? A) She 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. B) She 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. C) She 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. D) She may provide her clients with a summary prospectus obtained from the fund's wholesaler.
D) She may provide her clients with a summary prospectus obtained from the fund's wholesaler. 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.
When sent to a client, which of the following must be preceded or accompanied by a prospectus? A) A brochure describing how mutual funds in general work B) A tombstone ad for a new mutual fund being offered by the XYZ fund complex C) An omitting prospectus advertisement for the Cerebral Growth Fund D) Supplemental sales literature for the bond mutual funds in the Flyer Group family of funds
D) Supplemental sales literature for the bond mutual funds in the Flyer Group family of funds 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.
What information would NOT need to be disclosed by a broker-dealer in a research report? A) The broker-dealer received compensation for assisting the company in an acquisition B) The analyst provided a target price for the company C) The analyst is a director of the company D) The analyst had owned shares in the company one year before writing the report
D) The analyst had owned shares in the company one year before writing the report 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.
When making a presentation on 529 plans, what information is NOT required? A) Discussing the risks and costs involved with the different types of plans B) A disclaimer stating that, prior to investing in a plan, you should read the official statement C) A 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 D) The name and contact information for the municipal securities principal who will approve the customer's investment in the plan
D) The name and contact information for the municipal securities principal who will approve the customer's investment in the plan 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.
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? A) This advertisement can list past performance of the mutual fund. B) This advertisement should disclose to investors that it is important to read the prospectus before investing. C) This advertisement can be accompanied by an application to receive a prospectus. D) This advertisement can be accompanied by an application to invest.
D) This advertisement can be accompanied by an application to invest. 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.
Marlboro Securities would like to issue a research report on Winston Corporation, a U.S.-based company filing an S-3 registration statement. Marlboro has not issued research reports on Winston with reasonable regularity. Which of the following statements is TRUE if Marlboro is acting as an underwriter for the Winston Corporation? A) Since the issuer is an S-3 filer, research reports may be prepared and distributed B) Research reports may be prepared, but only distributed to institutional investors C) The report may be distributed outside the United States D) Underwriters that have not previously published research regarding an issue are prohibited from publishing a report during the registration period
Pursuant to Rule 139 of the 1933 Act, since Marlboro has not issued reports with reasonable regularity, it may not issue a report on Winston, either in the U.S. or outside the U.S. The SEC considers that reports distributed outside the U.S. could be used to facilitate a distribution in the U.S. This rule allows an underwriter to publish a research report if the issuer meets certain conditions (e.g., is an S-3 or F-3 filer), and the report is published in the normal course of business. The research report may not be an initiation report. D) Underwriters that have not previously published research regarding an issue are prohibited from publishing a report during the registration period
Which of the following communications would most likely contain the legend "This material must be preceded by or accompanied by a prospectus"? A) Tombstone ad B) Omitting prospectus ad C) Generic advertising D) Supplemental sales literature
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.
All of the following may be included in investment company advertising EXCEPT: A) An application for a prospectus B) Information that is contained in the full prospectus C) A current yield quotation D) An application to invest
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. D) An application to invest
