Series 7 Unit 19

If an investment representative hosts an investment seminar and intends to discuss general investment concepts and a specific mutual fund for which he has performance charts, which of the following are true? He may discuss the investment returns of the mutual fund in general, provided he does not use a specific time frame. He may discuss the investment returns of the mutual fund using a specific time frame. He must disclose all material facts regarding the mutual fund to the audience. He may emphasize the positive aspects of the mutual fund and refer prospective investors to the prospectus for further details. A) II and IV B) II and III C) I and III D) I and IV

2 and 3 He may discuss the investment returns of the mutual fund as long as he uses a specific time frame. When discussing an investment, he must disclose all material facts pertaining to the investment, both negative and positive.

A customer asks for sales literature for a money market mutual fund. Upon receiving the literature, she notices A) the fund seeks to maintain a stable price but the fund can lose money. B) the fund's current yield is insured by the Federal Deposit Insurance Corporation. C) the fund stipulates that future results will be substantially the same as the past performance listed in the 1-, 5-, and 10-year returns. D) the fund is an appropriate addition for investors seeking capital appreciation.

A

All of the following statements regarding municipal advertising are true except A) copies must be sent to the Municipal Securities Rulemaking Board (MSRB). B) copies must be kept for four years. C) it must be approved by a principal. D) it must not be misleading.

A All municipal advertising must be approved, in writing, by an appropriate principal before the first use and kept on file for four years. It need not be filed with the MSRB because the MSRB has no enforcement authority.

A registered representative is preparing a PowerPoint slide presentation, to be delivered in a live seminar, for a group of invited institutional clients. To use the slides, they may have to be A) reviewed by a principal of the broker-dealer. B) submitted to the SEC for review and approval. C) submitted to both FINRA and the SEC for preuse approval. D) approved by FINRA in writing.

A Communications material that is intended for use with institutional customers only need be supervised and reviewed by a principal of the member firm. Alternatively, if the member's procedures do not require review of institutional communications, they must include a provision for the education and training of associated persons so that they will understand the firm's requirements. Though FINRA can request spot checks of any material used to communicate with the public, submission of institutional communications to FINRA or the SEC for review or approval is not required. LO 19.c

Communications with the public include all of the following except A) informational material on a new mutual fund intended for sales personnel. B) independently prepared reprints forwarded to your firm's customers. C) institutional sales material. D) television appearances by an officer of the firm.

A Material intended for internal use only is not considered a communication with the publi

Options communications may contain projected performance figures (including projected annualized rates of return), provided that A) all such communications are accompanied or preceded by the Options Disclosure Document. B) the client has returned the options account agreement within the specified time. C) all such communications are accompanied or preceded by a warning of the possible defalcation by an officer of the exchange. D) in communications relating to annualized rates of return, the returns are not based on any less than a 30-day experienc

A Once the communications get specific enough to include performance figures, prior or concurrent delivery of the ODD is necessary. Although the risks must be disclosed, possible defalcation by an exchange officer (a form of embezzlement), is not an investment-related risk. The requirement to return the options account agreement within 15 days has nothing to do with permitted options communications. When annualized rates of return are shown, the minimum is a 60-day period, not 30 days

Lorne Walters is a registered representative with Pecuniary Profits Securities, PPS, a FINRA member firm. Walters has decided to conduct virtual meetings using a system called Xoom. Because he has never used the system before, Walters decides to make a trial run of his securities presentation to six family members who are PPS customers. All of these family members are accredited investors. Which of the following choices best describes this situation? A) Prior approval of PPS may be required, but it is not mandated by FINRA for this public appearance. B) Walters may not recommend securities during the presentation, unless a principal of PPS provides prior approval. C) This constitutes an institutional communication to accredited investors and does not require preapproval by a principal of the firm. D) The virtual meeting may not be archived for later viewing.

A The virtual meeting is defined as a public appearance. Prior approval of a broker-dealer is not mandated by FINRA but may be required by the broker-dealer. An associated person of a broker-dealer may make a recommendation of a security in a public appearance but must have a reasonable basis for the recommendation. Individual accredited investors are not institutional investors unless they have assets of at least $50 million, and there is nothing in the question to indicate that is the case with these customers. If such electronic presentations are recorded, the recording must be preserved for a minimum of three years.

Filing with FINRA within 10 business days of first use is required for all of the following except A) retail communications that promote or recommend a specific registered investment company or family of registered investment companies including exchange-traded funds (ETFs). B) retail communications that promote or recommend a specific real estate investment trust (REIT). C) retail communications concerning collateralized mortgage obligations (CMOs) registered under the Securities Act, D) retail communications concerning public direct participation programs (DPPs),

B

Démodé Classic Investments (DCI) is planning a direct mail campaign to several thousand potential investors. The topic of the campaign deals with owning real estate through direct participation program limited partnerships. Under FINRA Rule 2210 on communications with the public, this is considered A) a retail communication and must be filed with FINRA at least 10 business days before first use or publication. B) a retail communication and must be filed with FINRA within 10 business days of first use or publication. C) a retail communication that needs approval, but not filing, by a designated DCI principal. D) correspondence and needs review, not approval, by a designated DCI principal.

B A direct mail communication to more than 25 existing and/or potential clients within a 30-day period is a retail communication. Unless an exception applies, a designated principal of the firm must approve all retail communications. DPPs are part of a group of securities (other common examples are investment companies and CMOs) where filing with FINRA within 10 business days of first use or publication is the rule.

nder the rules on communication with the public, review of which of the following by a principal may take place either before or after distribution? A) Independently prepared reprints B) Correspondence to 25 or fewer retail investors within any 30-calendar-day period C) Seminar scripts D) Advertising in a newspaper

B A principal may review correspondence before or after its distribution as long as it is limited to no more than 25 retail investors during any 30-calendar-day period. The other choices require principal approval rather than just review before first use.

A member firm must prefile its retail communications if the member has not previously filed with FINRA. it appertains to standardized options prior to the distribution of the ODD. the advertising relates to single stock futures. under an order from FINRA to prefile. A) II and IV B) I, II, III, and IV C) I and IV D) II and III

B For a member that has not previously filed retail communications with FINRA, prefiling is required for the 1-year period following the first filing. Retail communications relating to single stock futures must be prefiled, as do options if prior to the distribution of the options disclosure document. In addition, if a member is under an order from FINRA to prefile, it must do so

If a prospectus for a variable life insurance product contains hypothetical projections of returns, A) they must reflect returns for the past 1-, 5-, and 10-year periods. B) the maximum return permitted is 12%, and there must be an illustration showing a 0% return as well. C) they may be used to demonstrate why this is an investment product. D) the issuer could be liable for civil action.

B In discussions of variable life insurance with customers, projections of hypothetical returns may be used. This is to demonstrate how the program really works and the risks involved if the projections are not met. The maximum allowable hypothetical rate of return is 12%, and there must also be a projection shown assuming a 0% return. Variable life insurance must not be sold as an investment product. It must always be emphasized that the policy should be purchased to meet an insurance need.

Which of the following would be defined as a research report? A) A technical analysis that indicates the demand for steel is increasing based on the trading volume and price of the steel industry B) A document that states the banking industry is ready for recovery but ABC Bank will not participate in the recovery and if owned, investors should sell the security C) A written opinion that the economy is poised for recovery D) A notice that the rating for a bond has been downgraded by Moody's

B One of the keys to defining a research report is that it suggests taking action (buy, sell, or hold) on the subject security. The term does not include commentaries on economic, political, or market conditions.

A registered representative is reading an article in a popular magazine about the advantages of tax deferral in retirement planning. There is a note that reprints of the article are available. In order to send these reprints to existing and prospective customers, A) filing a copy with FINRA is required. B) member alterations to the contents are only to make it consistent with applicable regulatory standards or to correct factual errors. C) the name of the underwriter who commissioned the article must be prominently displayed. D) pre or post approval by a principal is required.

B This is an example of an independently prepared reprint. It is a form of retail communications and can be used only if the preparer is independent of the member firm. In most cases, these are used "untouched." However, if there are factual errors or statements contrary to FINRA standards, they must be fixed. Preapproval by a principal is required and there is no filing necessary with FINRA. If the publisher is independent but received money from an issuer or underwriter for authoring the article, it may not be use

The ABC Insurance Company is advertising its variable annuity product as "ABC Lifetime Income—income generated from mutual fund returns." This advertisement is A) prohibited because it doesn't reference an annuity. B) permitted as long as there's no guarantee. C) permitted. D) prohibited because it implies returns from mutual funds.

B Variable contracts or their underlying accounts cannot be advertised as mutual funds. Proprietary terms can be used instead of words such as "annuity."

A registered representative reproduced a research report prepared by an independent research analyst on his broker-dealer's letterhead, with no mention of the party who prepared the report. If this literature is forwarded to a select group of clients only, the registered representative's action is A) allowed. B) allowed with the written approval of a principal of the broker-dealer. C) not allowed. D) allowed only if the research report has been filed with FINRA.

C A broker-dealer is prohibited from presenting to a client research reports, analysis, or recommendations prepared by other persons or firms without disclosing that they were prepared by a third party.

A registered representative of a FINRA member firm uses her personal smartphone to send a client a text message about a security in the client's portfolio. This practice is A) not permitted under FINRA rules; all electronic communications must be on company-owned devices. B) considered a retail communication and must have principal approval. C) considered an electronic communication and must be reviewed by a principal. D) a personal message and does not come under the FINRA rules on communications with the public. Explanation

C Although many member firms do not permit use of personal devices, that is a firm's decision, not a FINRA rule. When permitted, a single message like this is considered correspondence delivered electronically. As with all correspondence, review by a principal is required. This review may be on a pre- or post-use basis. A text message sent to more than 25 persons within a 30-day period becomes retail communication.

Which of the following do not represent communications with the public? A) Billboards B) Research reports C) Internal memos D) Market letters

C Each of the terms qualifies as either a form of advertising or sales literature except internal memos, which are communication pieces intended only for use within the broker-dealer and not for public distribution.

Which of the following is not a factor when a communication to be distributed to the public is either being reviewed or approved within the broker-dealer? A) Whether achieving past performance results has been implied B) The nature of the audience to which the communication is intended to be distributed C) Whether the piece will be distributed in written form or via electronic media D) Whether statements of benefits are balanced with statements of potential risks Explanation

C FINRA holds broker-dealers to certain general standards regarding all member firm communications. Consideration must be given to whether all statements in a communication are clear and not misleading, are balanced regarding the representation of risk and reward, do not omit material facts or make exaggerated claims, and do not imply that past performance can be projected to future outcomes. These standards would apply and be the same, whether the communication was distributed in written or electronic form.

A generic ad for an investment company placed by a broker-dealer would contain A) both the name of the investment company and the name of the broker-dealer. B) the name of the investment company, but not the name of the broker-dealer. C) the name of the broker-dealer, but not the name of the investment company. D) neither the name of the investment company nor the name of the broker-dealer.

C Generic advertising of investment companies presents a nonspecific introduction to investment company shares. A specific fund or investment company is not mentioned in generic advertising, but the broker-dealer who is placing the ad must be named

All of the following are unlawful except A) omitting a statement of a material fact. B) representing that the SEC has approved of a broker-dealer or a security being sold. C) giving written notification to a customer that the broker-dealer is acting as a principal for the trade. D) selling new issues on margin.

C New issues may not be sold on margin. The SEC does not approve or disapprove of securities, broker-dealers, or registered representatives. It is always unlawful to make a fraudulent communication in connection with the sale or purchase of securities; making a fraudulent communication includes failing to state a material fact.

Which of the following is true regarding an institutional communication? A) No more than five retail customers may receive an institutional communication. B) It must be preapproved by a principal. C) An individual with $50 million or more in total assets is considered an institution. D) It must be filed with FINRA.

C This is the rare case when an individual is considered an institution. As long as assets are at least $50 million, it is an institution. Institutional communication is not required to have the preapproval of a principal, nor is it required to be filed with FINRA. There must a reasonable belief that the communication will not be seen by any retail investors. If that should happen, the communication may lose its status and come under the retail communications requirements.

FINRA Rule 2210, communications with the public, has a number of filing requirements. Some communications are prefiled, others are postfiled, and some are excluded from filing with FINRA. Included in the list of exclusions would be retail communications A) that do no more than identify and recommend a specific registered investment company or family of registered investment companies. B) dealing with specific index funds that previously have been filed with FINRA and that are to be used, with the only change being a recommendation of index exchange-traded funds from the same sponsoring organization. C) that do not make any financial or investment recommendation, but only promote a service offered by the member. D) that do no more than identify a national securities exchange symbol of the member or identify a security for which the member is a registered market maker. Explanation

D A communication limited to identifying the member's exchange or market-maker symbol is excluded from the FINRA filing requirements. A communication that identifies and recommends a specific investment company or companies must be filed. When previously filed material is used, no filing is necessary as long as there is no material change. However, changing from recommending specific funds to specific ETFs is a material change and would require filing. A retail communication promoting a service offered by a member firm is a communication that would likely need filing with FINRA.

All of the following would be considered either retail communications or correspondence except A) an electronic communication distributed through the firm's website regarding potential opportunities with the firm as a registered representative. B) a letter to 10 individual investors within the past week regarding a new investment strategy. C) a written communication to all of the firm's customers regarding a new mutual fund being offered. D) an email to several municipalities sent out in a single day offering your firm's services for underwriting their municipal securities.

D Communications with government entities, which includes municipalities, fall under the heading of institutional communications. The others are all examples of either retail communications or correspondence, depending on how many recipients there are within a 30-calendar-day period. (Retail equals more than 25 retail investors within any 30-calendar-day period, and correspondence is 25 or fewer retail investors within any 30-calendar-day period.)

Which of the following statements is an accurate interpretation of FINRA Conduct Rules governing the use of retail communications? A) Sales and product promotion materials distributed to registered representatives and other employees are retail communications and must be submitted for FINRA review, even though such materials are not intended for public distribution. B) All communications with individual clients are considered retail communications. C) All retail communications must be filed with FINRA before first use. D) Institutional communications need not be preapproved by a princip

D FINRA does not require principal preapproval of institutional communications. The same is true for internal communications. Not all communications with individual clients are retail communications. Many times, they are correspondence. There could even be an individual client with assets of at least $50 million, and then it would be institutional communication. Prefiling with FINRA can depend on a number of factors such as the product. For example, prefiling of retail communications is required for certain pieces having to do with investment companies and variable annuities, but not for pieces having to do with direct participation programs or collateralized mortgage obligations.

Guarantees on insurance products A) are permissible for principal values in the separate account. B) are only permissible for companies with an A+ rating from A.M. Best. C) are not allowed. D) must be specific to the insurance contract and not associated investments.

D Guarantees are only permissible for the specific guarantees within an insurance contract. Companies cannot guarantee returns or even principal values in investments, including separate accounts. While high ratings may indicate stability and quality in a company, they cannot be used to make a guarantee

Under FINRA's Rule 2210 on communications with the public, which of the following is excluded from the filing requirements? A) Retail communications concerning public direct participation programs B) Retail communications that previously have been filed with FINRA and that are to be used with material change C) Retail communications concerning collateralized mortgage obligations registered under the Securities Act of 1933 D) Correspondence with prospective clients that is delivered through electronic media

D In most cases, retail communications must be filed with FINRA while correspondence, regardless of the method of delivery, is not. If the retail communication has previously been filed with FINRA and is being used without material change, it does not have to be refiled.

Under Options Clearing Corporation (OCC) rules regarding options communications with the public, if an educational piece making no projected performance figures or recommendations is distributed to customers, it A) can only be distributed to institutional customers. B) can only be distributed to retail customers. C) need not be approved by a registered options principal (ROP). D) need not be preceded by an options disclosure document (ODD).

D OCC communications rules do not distinguish between retail and institutional customers. Therefore, their communications rules apply to all customers. All communications pieces must be approved by an ROP. If the educational piece makes no recommendations or performance projections, it need not be preceded by an ODD, but it must be accompanied by a notice containing a name and address where the ODD can be obtained.

All of the following are excluded from the FINRA filing requirement for communications with the public except A) retail communications that only identify the member firm. B) correspondence. C) retail communications posted on an interactive forum online. D) retail communications posted online that require a login to access.

D Retail communications, unless specifically exempted, must be filed with FINRA. There is no exemption for requiring a login to access. Correspondence does not need to be filed with FINRA nor does retail communications only identifying the member firm or posted on an online interactive forum.

All of the following may be included in an advertisement for a collateralized mortgage obligation (CMO) issue except A) a generic description of the CMO tranche. B) a disclosure of the CMO's coupon rate and final maturity date. C) a disclosure that payment assumptions may or may not be met. D) a statement that the CMO is guaranteed by the U.S. government.

D The U.S. government does not issue or back CMOs. It is also misleading to state or imply that a CMO's anticipated yield or average life is guaranteed. CMOs must include the coupon rate and the final maturity date, a generic description of the CMO tranche, and disclosure that payment assumptions may or may not be met.

Pristine Brokerage Services, (PBS), accepted as a FINRA member firm seven months ago, is planning a direct mail campaign to several thousand potential investors. The topic of the campaign deals with owning real estate through direct participation programs. Under FINRA Rule 2210 on communications with the public, this is considered A) a retail communication and must be filed with FINRA within 10 business days of first use or publication. B) a retail communication that needs approval, but not filing, by a designated PBS principal. C) correspondence and needs review, not approval by a designated PBS principal. D) a retail communication and must be filed with FINRA at least 10 business days before first use or publication.

D The key here is that PBS is within its first year of membership. As such, any retail communications (and a communication to more than 25 existing and/or potential clients within a 30-day period is retail communications) must be filed with FINRA at least 10 business days before first use. Retail communications must be approved by a designated principal before filing with FINRA. A more complete answer would have had both the approval and the filing, but sometimes a test question focuses on a single point such as this one does. LO 19.d

A principal of a member firm with the responsibility of supervising registered representatives would perform all of the following duties except A) review a registered representative's correspondence with the firm's customers in accordance with the firm's written procedures. B) approve each securities transaction, whether for retail or institutional customers. C) approve the opening of all new accounts, whether for retail or institutional customers. D) write all sales material and advertising copy intended to be used as a means of communicating with the public.

D here is no industry requirement that sales or advertising material intended to be used to communicate with the public be written by a principal of the firm. A principal must approve all retail communications before use, new accounts, and each transaction. All correspondence must be reviewed by a principal, but FINRA rules state that principal review of correspondence can take place before or after use, in accordance with the member firm's written procedures.