FINRA Rules
seven deadly sins of prohibited practices
Selling away- Putting a customer into a security that is not under the firm's supervision. Backing away- Not honoring a firm quote. Front running- Performing a trade for the firm's account or for a personal account before executing the same trade for a customer who previously placed an order. Interpositioning- Putting another trading firm between the customer and the best available market. Selling dividends- Inducing a customer to buy a stock just before an ex date. Breakpoint sales- Selling a customer a mutual fund in an amount just below a breakpoint level.
what is FINRA's rule with borrowing money
FINRA prohibits RRs from borrowing money personally from a customer or from lending money personally to a customer UNLESS customer is immediate family member, significant other, or a bank making a loan like it would to anyone else
what constitutes an Outside Business Activity
(reported on U4) being compensated or if a RR assumes a "control" position in a not-for-profit entity
FINRA gift limit related to one's employment in the securities business is
$100 per person per year either given or received
The minimum asset size threshold for an investor to be considered an "institutional client" for purposes of the FINRA communications rules is: $25 million $50 million $75 million $100 million
$50 million
A client of a registered representative refers a new potential customer. This customer is interested in purchasing an oil and gas limited partnership unit. What percentage of the purchase amount can the representative share with the referring client as a finder's fee? 0% 5% 10% 15%
0% Registered representatives cannot share commissions, sales charges, or pay referral fees, to anyone other than another registered person at the same member firm.
If a member firm acts as the managing underwriter in an initial public offering of an issuer's securities, then the member is prohibited from issuing a research report on that company for: 3 days following the effective date 5 days following the effective date 10 days following the effective date 25 days following the effective date
10 days following the effective date
Under FINRA rules, research reports approved by a supervisory analyst must be kept by member firms for: 6 months 2 years 3 years 5 years
3 years
Which of the following would be considered to be a "retail communication?" A direct mailing sent to 25 existing retail clients A research report sent to 20 prospective retail clients An institutional communication A website maintained by a broker-dealer that provides daily market information
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.
how must partially paid customer margin securities be held by firms
Partially paid customer margin securities are kept in street name. These securities may be commingled with the securities of other margin customers. These securities may be rehypothecated by the broker to a bank for a loan.
What item given from a mutual fund sponsor to a registered representative is NOT considered to be "non-cash compensation"? 4 Super Bowl tickets An all-expense paid trip to a resort hotel An expense-paid trip to an educational conference 2 bottles of vintage wine valued at $200 each
An expense-paid trip to an educational conference
information that must be disclosed in the Form U4 by applicant for registration in the securities industry includes
Applicant's Name and Address; Broker-Dealer Name and Address; Name and Address of "Old" Broker-Dealer if the registrant is transferring from another firm; 5 Year Consecutive Residence History; 10 Year Consecutive Employment History; Any Other Businesses In Which The Registrant Is Currently Engaged; Any Other Names By Which The Registrant Is Known; Disclosure By The Applicant Of Any Arrest, Conviction, Charge, involving investments, fraud, bribery, forgery, etc.; Disclosure By The Applicant of Any Felony Charge or Conviction; and Any Misdemeanor Charge or Conviction Involving Money, Securities, Theft, Perjury, etc.
spinning of IPO shares
FINRA prohibits the "spinning" of IPO shares. This is a "quid pro quo" arrangement where a member firm gives officers of public companies IPO allocations in return for receiving underwriting business from that company (since the officers are in a position to direct that business to the member firm).
Websites established by brokerage firms are considered to be: advertising sales literature correspondence educational material
advertising
Which of the following is a record that must be retained on file by a broker-dealer? Prospectuses Recommendations Complaints Solicitations
Complaints
Which disclosure is optional when advertising a CMO Tranche? Coupon Credit Rating Final Maturity Date Average Life Of Investment
Credit Rating
What securities markets does FINRA regulate and which ones does it not?
FINRA regulates- Primary market, First Market, Second Market, Third Market, Fourth Market FINRA does not regulate the CBOE options trading floor
A registered representative receives a large buy order from an institution and buys that stock for his own account before placing the order. This is known as: Interpositioning Free Riding Backing Away Front Running
Front running
how must fully paid customer securities be held by firms
Fully paid customer securities that are held in custody of the firm must be segregated and placed in safekeeping. They cannot be commingled with customer margin securities; and cannot be rehypothecated by the broker to a bank for a loan.
Under FINRA rules, proxy materials: I must be sent to the beneficial owner of that stock, even if the owner has instructed the member firm not to do so II may be sent to the beneficial owner's designated investment adviser, if the owner has instructed the member firm to do so III may be voted by the member firm, if no contest is involved, if they are not received from the owner within 10 days' of the annual meeting IV may be voted by the issuer's Board of Directors, if no contest is involved, if they are not received from the owner within 10 days' of the annual meeting
I and II
A FINRA member firm does not follow a particular stock and a registered representative wishes to obtain a 3rd party research report to send to 30 interested retail customers. Which statements are TRUE? I The report must be approved by a Compliance Officer or Principal before it can be sent out II The report is not required to be approved in advance by a Compliance Officer or Principal before it can be sent out III The report must be approved by a Supervisory Analyst before it can be sent out IV The report is not required to be approved in advance by a Supervisory Analyst before it can be sent out
I and III
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
Which of the following are violations of FINRA rules? I Sharing in the profits and losses of a customer's account without contributing proportional capital II Selling exempted securities to a customer with a written agreement to buy back the securities at a later date III Orally guaranteeing to buy back customer securities at a preset price
I and III 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).
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, III
Under the FINRA Conduct Rules, a broker-dealer may charge a customer for which of the following services: I Collection of dividends II Safekeeping of securities III Handling the transfer and reregistering of securities IV Distributing proxies to the owners of margin securities
I, II, III
Which of the following persons are prohibited from buying a new common stock issue from the underwriter under FINRA Rule 5130? I Brother of a registered representative II Husband or wife of a registered representative III Uncle of a registered representative who is supported by the representative IV Grandfather of a registered representative who lives in another state
I, II, III
A registered representative is prospecting customers for a mutual fund that is sponsored by his firm. Which of the following information items mailed to customers MUST be accompanied by a prospectus? I Sales literature II Research Report III Letter stating the fund's objective(s) IV Fund Annual Report
I, II, Iv
how do customers with margin securities that are held in street name get proxies to vote
Margin shares of customers are held in "street" name (the name of the brokerage firm). When a shareholder vote is being taken, the proxy materials are sent to the brokerage firm by the issuer; the broker, in turn, sends the voting cards to the beneficial owners of the shares or their designees. If the shareholders do not return their proxies, the member firm is not permitted to vote the shares.
A representative wishes to invite 10 of her best customers to an intimate dinner, to be followed by a presentation that the representative will make on investing. If the representative includes analyses of specific stocks in the speech; and the attendees use this information to determine whether to invest in those securities; then the: I presentation is considered to be a research report II presentation is not considered to be a research report III representative is required to make all of the disclosures required of research analysts IV representative is not required to make all of the disclosures required of a research analyst
II and IV
A registered representative is employed by a broker-dealer that is a subsidiary of a publicly traded company, listed on the New York Stock Exchange. Which statements are TRUE? I The registered representative may recommend the purchase of the parent company's common stock II The registered representative cannot recommend the purchase of the parent company's common stock III The registered representative may accept unsolicited orders for the parent company's common stock IV The registered representative may not accept any orders - solicited or unsolicited - for the parent company's common stock
II and III
Under FINRA rules, which of the following statements are TRUE regarding research reports? I The research report must be filed with FINRA II The research report does not have to be filed with FINRA III The research report must be approved by a supervisory analyst IV The research report does not have to be approved by a supervisory analyst
II and III
Which of the following would constitute violations of the FINRA Conduct Rules? I Opening a cash account for a customer without obtaining that customer's signature II Offering to trade mutual fund shares for a customer III Recommending to a customer that he should get a group of friends together to buy mutual fund shares at a breakpoint IV Discussing the purchase of mutual fund shares with a customer before sending a prospectus
II and III Under the FINRA Conduct Rules, trading of mutual fund shares is prohibited. These are redeemable securities - not negotiable securities. Recommending that customers group together to buy mutual fund shares at a breakpoint is also prohibited. Breakpoints are only available to individual customers.
can RR execute private securities transactions
NO--This is known as "Selling Away" from the firm and is a prohibited practice. All securities transactions effected by registered representatives must be known to the firm and supervised by the firm.
who is not allowed to buy IPOs
Rule 5130 prohibits industry "insiders" from buying common equity IPOs directly from underwriters. The main categories of prohibited purchasers are: FINRA member firms, their officers and employees, and immediately family members; Fiduciaries to member firms such as accountants and lawyers retained by member firms, and their immediate family members; Investment portfolio managers such as mutual fund managers, insurance company investment managers and pension fund managers buying for their personal accounts. ONLY COMMON EQUITY SECURITIES (not preferred stock or bonds)
the 5% policy
The 5% Policy applies to the secondary (trading) market and states that mark-ups charged in principal transactions and commissions charged in agency transactions must be fair and reasonable, with 5% being a guideline, not a rule.
A registered representative at a FINRA member firm goes on the Board of Directors of a not-for-profit charity. Which statement is TRUE? This event must be reported as an Outside Business Activity to FINRA on the individual's U-4 Form This event must be reported to the individual's employer This event must be reported as an Outside Business Activity to both FINRA on the individual's U-4 Form and to his or her employer No report is required to either FINRA or the employing member firm
This event must be reported as an Outside Business Activity to both FINRA on the individual's U-4 Form and to his or her employer
A customer buys 100 shares of ABC stock at $20 per share. Two months later, the stock is quoted at $10.00 - $10.50. The registered representative that sold the stock to the customer offers to repurchase the shares at $18. Which statement is TRUE? This is prohibited because the FINRA Conduct Rules do not allow customer accounts to be guaranteed against loss This is prohibited because the registered representative is interpositioning himself between the customer and the current "inside" market This action is permitted, as long as the principal approves in writing prior to the proposed trade This action is permitted as a method of maintaining customer "goodwill" with the firm
This is prohibited because the FINRA Conduct Rules do not allow customer accounts to be guaranteed against loss
A registered representative has spent 10 years working at his broker-dealer and has sold customers many mutual funds that pay trail commissions from 12b-1 fees. The registered representative is thinking about leaving his firm to do charitable work. He would like to collect the trail commissions on the funds after he terminates his employment from the firm. Is this possible? No, because only individuals who are currently registered can collect commissions No, because the representative must currently be servicing accounts to receive commissions Yes, if there is a written agreement between the member firm and the registered representative that is executed prior to termination Yes, because the representative will now be doing charitable work
Yes, if there is a written agreement between the member firm and the registered representative that is executed prior to termination
what happens if a licensing person leaves the industry
all licenses lapse after two years; if they enter back into the industry after two years, they must retake the licensing exams a member firm cannot hold a RR license during a period where they are not employed at a firm (this is called parking a license)
who must be registered at a broker dealer
all operating officers all sales persons all traders back office personnel who prepare customer confirmations or customer account statements all other clerical personnel are not required to
An offer of IPO shares made to an officer of a publicly held company is considered to be spinning if the publicly held company is: in the financial services industry not a seasoned issuer an investment banking client of the broker-dealer followed by the research department of the broker-dealer
an investment banking client of the broker-dealer
A representative who has a bank as a client is permitted to borrow from that bank: under no conditions as long as the loan is documented in writing as long as the loan is offered on the same terms and conditions as those that apply to the general public without restriction because the bank is an institutional lender
as long as the loan is offered on the same terms and conditions as those that apply to the general public
examples of events that will require a U4 amendment
change of name; change of residence address; taking an outside business activity; filing for bankruptcy or making a compromise with a creditor; being convicted of a misdemeanor involving securities, monies, or theft or being convicted of ANY felony (and DUIs are usually felonies!).
In order to open a new account for a customer that wishes to buy IPOs, the: customer must sign a representation letter registered representative must sign a representation letter branch manager must sign a representation letter all of the above
customer must sign a representation letter
Firm's continuing education program vs Regulatory Element continuing education program
each year, every member firm must deliver a continuing education program to each RR that covers releveant compliance issues, regulatory issues, and product feautures and issues; this must be documented on each RR's second year anniversary of registration (licensing) and every three years thereafter, a Regulatory Element Continuing education program must be completed through PROCTOR; must be completed within 120 days of notification and if not, license may be suspended
A registered representative has a social media account on a site established by the member firm. A very satisfied client of the registered representative wants to post a good review, giving the representative 5 stars. The client sends the proposed review to the registered representative, who edits it and sends it back to the client to post. Under FINRA rules, this is an example of: engagement entanglement entrapment enablement
entanglement
The FINRA 5% Policy requires that consideration be given to all of the following when determining mark-ups and commissions EXCEPT: financial condition of customer dollar amount of the transaction level of service provided by the firm type of security involved in the transaction
financial condition of customer
when must FINRA be notified
has violated the Securities Acts; is suspended or expelled by another self-regulatory organization; is sued under the Securities Acts; is convicted of a misdemeanor involving securities or monies; or is convicted of ANY felony; is the subject of a customer complaint alleging theft, embezzlement, misappropriation of funds, etc.; is arrested (except for minor traffic infractions and non-felony DUIs); is the subject of a written customer complaint settled through adjudication or arbitration for damages exceeding $15,000; is the subject of disciplinary action by the member firm which includes fines or withheld commissions exceeding $2,500.
what happens if there is a change to the information on a RR U4 filing
it must be amended promptly to reflect the new information
does business entertainment fall under the $100 gift limit
no! as long as it is not too excessive or too frequent and it must comply with the firm's policies business entertainment is that the representative and the customer are together at some type of event
A variable annuity sponsor wants to give an incentive to promote the sale of its products by the firms in the variable annuity selling group. To increase sales in the typically slow month of December, the sponsor is offering 4 Super Bowl tickets, along with paid travel expenses to and from the game for those 4 individuals, to the representative with the highest production number in December. Under FINRA rules, this is an example of: business entertainment and is permitted business entertainment and is prohibited non-cash compensation and is permitted non-cash compensation and is prohibited
non-cash compensation and is prohibited
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: permitted as long as the representative uses his personal e-mail account permitted with the prior permission of the branch manager not permitted because the member firm has no way of auditing the representative's personal e-mail account not permitted because the representative has not registered his personal e-mail account with the SEC
not permitted because the member firm has no way of auditing the representative's personal e-mail account
how many RR be compensated
only by the brokerage firm they work at based on trading commissions, salary, or asset based fees NOT from customers
Investment company advertising is prohibited from showing: past performance benchmark performance covering the preceding 1, 3, 5, and 10 years performance projections investment objective
performance projections
who must be notified if a RR takes a second job
the employing member firm must be notified in writing no requirement to notify or get FINRA approval
what if a RR accepted a non-cash compensation from someone other than their employer exceeding $100
this is prohibited EXCEPTION-- sponsor held educational seminars
Under FINRA rules, a member firm is allowed to vote the stock of securities held in street name: if the distributed proxy is not returned within 10 days of the annual meeting if the distributed proxy is not returned within 20 days of the annual meeting if the distributed proxy is not returned within 30 days of the annual meeting under no circumstance
under no circumstances
Under FINRA rules, alterations to executed order tickets for orders that were filled on the NYSE are prohibited: under all circumstances unless the alterations are approved in writing by the Floor Governors of the NYSE unless the alterations are approved in writing by the DMM on the floor of the NYSE unless the alterations are approved in writing by the Branch Manager
unless the alterations are approved in writing by the Branch Manager
can RR share commissions with other RRs?
yes as long as they both work at the same broker dealer
