Regulations-FINRA

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The Firm Element component of the "Continuing Education" requirement: I is administered by FINRA II is administered by the FINRA-member employer III must be completed annually IV must be completed bi-annually StatusA A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

e best answer is C. The Firm Element of the Continuing Education requirement obligates member firms to deliver annual training to all registered representatives on product, regulation, and compliance issues.

Fidelity bonds are maintained by brokerage firms to: StatusA A. protect against loss due to employee theft StatusB B. protect against loss against falling markets StatusC C. insure against casualty losses StatusD D. meet minimum Net Capital standards

The best answer is A. FINRA requires brokerage firms to maintain fidelity bond coverage to protect against loss due to loss of securities, employee theft, or embezzlement of funds.

Under FINRA rules, when no proxy contest is involved, the proxy of a customer whose shares are margined, that is returned without indicating how the shares should be voted is: StatusA A. not counted in the vote StatusB B. voted by the member firm StatusC C. voted by the management of the company StatusD D. returned to the shareholder for voting

The best answer is A. Customers whose securities are margined have their securities held in "street" name. Thus, whenever, there is a mailing to the shareholders by the corporation, the brokerage firm shows as the "owner" and receives the mailing from the issuer. The brokerage firm is obligated, in turn, to forward the materials to the beneficial owner (the customer) of the securities. Under FINRA rules, if a proxy is sent to shareholders, the brokerage firm must distribute it to the beneficial owners. This cost is paid for by the issuer. If the voting materials are not returned, or if they are returned without voting instructions, the member firm is not permitted to vote the shares

A registered representative wishes to post his/her business card on a website. This is considered to be: StatusA A. advertising StatusB B. sales literature StatusC C. correspondence StatusD D. educational material

The best answer is A. FINRA defines communications with the public as either: •Correspondence: A communication made available to 25 or fewer existing or prospective retail clients •Retail Communication: A communication made available to more than 25 existing or prospective retail clients Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA. A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience). •Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards •Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective clients, scripted speeches delivered to more than 25 existing or prospective clients, password-protected websites

A communication sent to fewer than 25 existing or prospective retail clients is defined as (a): StatusA A. Correspondence StatusB B. Retail Communication StatusC C. Public Appearance StatusD D. Advertising

The best answer is A. FINRA has 2 basic definitions of communications with the public: •Correspondence: A written or electronic communication made available to 25 or fewer existing or prospective clients •Retail Communication: A written or electronic communication made available to more than 25 existing or prospective clients. Excluded from these definitions are institutional communications and public appearances. FINRA creates these 2 main categories of communications because "correspondence" is subject to "post use review and approval" by a manager or principal and is not required to be filed with FINRA; in contrast, retail communications must be approved in advance of use by a principal and can be required to be filed with FINRA.

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 StatusA A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is A. Third party research is prepared by independent research firms that tend to be free of the conflicts of interest that have troubled member firms that prepare research reports on the issuers with which they do underwriting and advisory business. If a registered representative were to, on his or her own, obtain 3rd party research to send to customers, then it would need the appropriate approvals required of research reports before they can be sent out. This would be approval of both a principal in compliance (because this is a retail communication being sent to more than 25 existing or prospective retail clients) and the supervisory analyst.

A registered representative has been very successful and has experienced a 50% growth in new accounts and an 80% growth in client assets. The representative finds that she cannot handle the call volume from these clients and wishes to hire a sales assistant that will help her service her accounts. Which statement is TRUE about how the sales assistant may be compensated? StatusA A. The sales assistant can be compensated based on a flat hourly rate StatusB B. The sales assistant can be compensated based on new client business generated StatusC C. The sales assistant can be compensated based on the number of trades generated from clients with whom he or she speaks StatusD D. The sales assistant can only receive compensation based on a schedule set by FINRA

The best answer is A. Sales assistants may not be compensated on a commission basis or on new accounts opened. They can be paid a salary or hourly wage.

A registered representative is the subject of a written complaint from a customer alleging that he stole $12,000 from her account. Which statement is TRUE? StatusA A. This must be reported to FINRA promptly StatusB B. No report to FINRA is required because this complaint in not verified StatusC C. No report to FINRA is required because the amount involved is under $15,000 StatusD D. The representative can settle the complaint by offering to pay the customer $12,000

The best answer is A. "Reportable events" to FINRA include the case where a registered representative is the subject of a customer complaint that alleges a felony - and stealing is a felony. A report must be made to FINRA promptly, but no later than 30 days after the event occurs. The report basically lays out the representative's side of the story - and FINRA uses this to decide whether to take follow-up action. Note that the fact that the allegation is not proven is meaningless here - the report is still required. The list of reportable events is long. If one is the subject of a written customer complaint involving theft or embezzlement; if one is arrested, arraigned, indicted, convicted, or pleads guilty to any criminal offense (except for minor traffic violations); or if one is sued under the Securities Acts; notification to FINRA is required. In addition, notification to FINRA is required if the registered representative is suspended or expelled by any other self-regulatory organization; is denied registration by another self-regulatory organization; or is the subject of a customer complaint that is settled for more than $15,000; or is the subject of disciplinary action by the member firm involving suspension, termination, or the withholding of commissions in excess of $2,500. When FINRA gets the report, they review it to see if they should do nothing, suspend the person's registration, or expel the registered representative.

Enforcement of regulations regarding trading of listed securities in the "Third Market" is performed by: StatusA A. FINRA StatusB B. NYSE StatusC C. MSRB StatusD D. FDIC

The best answer is A. "Third Market" trades are transactions in listed securities effected "over-the-counter." These trades do not take place on the floor of the exchange, hence NYSE does not have jurisdiction. It is FINRA that regulates broker-dealer activities that take place OTC and on stock exchanges.

The FINRA 5% Policy requires that consideration be given to all of the following when determining mark-ups and commissions EXCEPT: StatusA A. financial condition of customer StatusB B. dollar amount of the transaction StatusC C. level of service provided by the firm StatusD D. type of security involved in the transaction

The best answer is A. A customer's ability to pay has no bearing on the amount of commission or mark-up that is charged. The dollar amount of the transaction, level of service provided by the firm, and the type of security involved are all considerations under the 5% Policy when determining a fair and reasonable commission or mark-up.

Arbitration is preferred over litigation as a means for settling disputes because: StatusA A. it is less time consuming and less expensive StatusB B. it allows the parties involved to get a hearing of their grievances StatusC C. the decision cannot be appealed StatusD D. the arbitration panel is more knowledgeable about industry practices

The best answer is A. Arbitration is preferred over litigation as a means for settling disputes because it is simpler and cheaper. Under FINRA rules, arbitration is mandatory for settling all disputes where a member firm or its personnel are involved.

Which of the following statements are TRUE regarding a customer's securities held in a margin account at a brokerage firm? I The brokerage firm can charge for safekeeping the securities II The brokerage firm cannot charge for safekeeping the securities III The brokerage firm can charge for collecting dividends and interest on the securities IV The brokerage firm cannot charge for collecting dividends and interest on the securities StatusA A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is A. Brokerage firms can charge for clerical services such as safekeeping of securities. Since margin securities are held in "street" name, the brokerage firm is the owner of record to receive dividend and interest payments from the issuer. After they are received by the broker, they are credited to the customer's margin account. This is another clerical service, for which a broker may charge the customer.

Customer securities held in margin accounts: StatusA A. can be commingled with other customer margin securities and used as collateral for a loan by the brokerage firm StatusB B. can be commingled with fully paid customer securities and used as collateral for a loan by the brokerage firm StatusC C. must be held in custody of the customer StatusD D. must be segregated and placed in safekeeping

The best answer is A. Brokerage firms can hold fully paid customer securities as long as the positions are segregated from other margin securities and are kept in safekeeping. Customer margin securities are pledged as collateral for the margin loan. The broker is permitted to commingle ("mix-up") these securities with those of other margin customers (but not with fully paid customer securities), and it is these margin securities that may be pledged to a bank for a loan.

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 StatusA A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is A. FINRA Rule 5130 restricts "industry insiders" from buying equity IPOs directly from underwriters. Investment clubs do not fall under the prohibition, as long their members are not restricted. On the other hand, if a member is restricted (which is the case with a registered representative), then the investment club would be restricted if the total ownership of restricted persons is more than 10%.

A long time customer has purchased securities in a margin account and is experiencing a temporary cash shortfall. The customer tells the registered representative that he cannot pay on settlement; and the registered representative offers to lend the customer the necessary funds. This action is: StatusA A. prohibited StatusB B. allowed with the permission of the branch manager StatusC C. allowed only if the loan will be repaid within 30 days StatusD D. allowed without restriction

The best answer is A. FINRA prohibits registered representatives from either lending money personally to a customer or borrowing money personally from a customer. There are certain exceptions to the prohibition if the customer is a spouse, "significant other" or family member, but this is not the case here.

A registered representative of a member firm markets private placements to wealthy accredited investors. Before the member firm can market these private placement securities, it MUST: StatusA A. conduct a reasonable investigation concerning the security and the issuer's representations about it StatusB B. register the securities with the SEC StatusC C. determine that each potential purchaser is sophisticated StatusD D. list the issue on a recognized stock exchange

The best answer is A. FINRA requires that when a private placement is offered, the broker-dealer or its representatives must conduct a reasonable investigation concerning that security and the issuer's representations about it. FINRA states that a broker-dealer "may not rely blindly upon the issuer for information concerning a company and it cannot rely on information provided by the issuer in lieu of its own reasonable investigation." The fact that a BD's customers are accredited does not obviate this investigation. The BD must conduct a reasonable investigation concerning the: issuer and its management; business prospects of the issuer; assets held by the issuer; claims being made; and intended use of the proceeds of the offering. Note that if registered securities are being offered, this detailed "due diligence" investigation by the BD offering the investment is not required - it is only a requirement for private placement offerings (because in a registered securities offering, the issuer and underwriters perform the required due diligence). Also note that there is no requirement for accredited investors in a private placement to be sophisticated (they are rich!) - this is only a requirement for sales to non-accredited investors.

Which statements are TRUE about the use of the FINRA name on a member firm's or associated person's website? I The FINRA name can be shown II The FINRA name must be shown III If the FINRA name is shown, it must be hyperlinked to the FINRA website IV If the FINRA name is shown, it must be stated that FINRA does not sponsor the website StatusA A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is A. FINRA states that its name can be used on a member firm or associated person's website. The use of the FINRA name must make it clear that the firm is the FINRA member and not the associated person. Furthermore, the FINRA name, if used, must be hyperlinked to the FINRA website

Which statements are TRUE regarding a FINRA member firm's obligation to review electronic and facsimile correspondence? I Outgoing correspondence must be supervised and reviewed by the member firm II Incoming correspondence must be supervised and reviewed by the member firm III Outgoing correspondence is not required to be supervised and reviewed by the member firm IV Incoming correspondence is not required to be supervised and reviewed by the member firm StatusA A. I and II StatusB B. III and IV StatusC C. I and IV StatusD D. II and III

The best answer is A. If a member firm has a communications compliance program in place, registered representatives are permitted to send e-mail to customers without submitting these for pre-use review and approval. In such a program, the firm is obligated to educate its registered representatives as to what is permissible in electronic communications; and must have procedures in place to audit and review these communications. Please note that the audit and review requirements not only apply to outgoing electronic communications; but also apply to incoming electronic communications as well.

A customer opens a new margin account and has placed a trade. After the customer leaves the office, the registered representative notices that the customer has failed to sign the margin agreement. The registered representative should: StatusA A. send the margin agreement to the customer to sign StatusB B. sign the customer's name without contacting the customer StatusC C. sign the customer's name with the verbal authority of the customer StatusD D. have the branch manager sign the customer's name

The best answer is A. In this situation the firm must send the margin agreement to the customer to sign. The firm may execute the transaction that the customer has ordered. If the customer does not return the signed margin agreement, the stance of the firm is that the account was never opened. The trade will be placed into the firm's house account, and the position closed out. If there is a profit (not likely if the signed agreement has not been returned), the firm keeps the profit. If there is a loss, it's charged to the registered representative (which is why you're supposed to "know your customer").

A prospectus MUST accompany which of the following mailings to a customer? I A research report written by the firm about a mutual fund that the firm sells II An annual report issued by the corporation III A report analyzing the effect of future budget deficits on market valuation StatusA A. I only StatusB B. II only StatusC C. III only StatusD D. I, II, III

The best answer is A. Prospectuses are required for any "offer" of a new issue that is not exempt from the provisions of the Securities Act of 1933. Every mutual fund share that is sold is "newly issued" by that fund, therefore mutual funds must be offered with a prospectus. A research report on a new issue sent to a customer typically recommends the purchase of that issue and thus constitutes an "offer" under the Act. Any offer must be accompanied with, or preceded by, a prospectus. There is no requirement to send out a prospectus with annual reports or with general economic analyses - these are not "offers" of securities.

To make a public offering of a Direct Participation Program, which statements are TRUE? I The offering must be registered with the SEC II The offering does not have to be registered with the SEC III The offering is subject to regulation by FINRA IV The offering is not subject to regulation by FINRA StatusA A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is A. Public offerings of direct participation programs are "non-exempt" offerings under the Securities Act of 1933, and must be registered. FINRA oversees and regulates the offering of these securities.

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? StatusA A. 0% StatusB B. 5% StatusC C. 10% StatusD D. 15%

The best answer is A. Registered representatives cannot share commissions, sales charges, or pay referral fees, to anyone other than another registered person at the same member firm.

Under FINRA Rule 5130 on IPO distributions, a member may sell shares of a new issue of common stock to a registered representative: StatusA A. under no circumstances StatusB B. if the principal approves of the sale in writing StatusC C. if the issue does not trade at a premium in the aftermarket StatusD D. without restriction

The best answer is A. Registered representatives fall into the category of persons who are prohibited from buying a new issue from the underwriter under Rule 5130 regarding IPOs of common stock.

FINRA's IPO purchase restrictions that prohibit industry personnel from buying new issues in the primary market apply to: StatusA A. common stock offerings StatusB B. preferred stock offerings StatusC C. bond offerings StatusD D. investment company offerings

The best answer is A. The FINRA rule restricting member firms and their employees from buying IPOs from underwriters only applies to equity offerings. This is the case because the pricing of equity issues has a large "expectations" component that is difficult to quantify - and substantial price increases in the aftermarket due to overblown "expectations" for the issue are not uncommon. The rule does not apply to preferred stock or bond offerings, where the pricing is determined by the present value of the income flows to be received over the life of the security. For these issues, there is no "expectations" component to pricing.

FINRA's IPO purchase restrictions that prohibit industry personnel from buying new issues in the primary market apply to: I Common stock offerings II Preferred stock offerings III Non-convertible bond offerings IV Convertible bond offerings StatusA A. I only StatusB B. I and II StatusC C. II and IV StatusD D. I, II, III, IV

Under FINRA rules, which statements are true about the gift limit from a registered representative to another person in the securities business or the financial news media? I The gift limit is $100 per person per year II The gift limit is $250 per person per year III Records must be retained of all gifts given IV Records need not be retained of all gifts given StatusA A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is A. Under FINRA rules, the maximum permitted gift that can be given to another person in the securities business or the financial news media is $100 per person per year. Records of all gifts given must be retained at the member firm, available for inspection by FINRA examiners.

Which of the following would be considered to be a "retail communication"? StatusA A. Direct mailing sent to 15 existing retail clients StatusB B. Password-protected website maintained by a broker-dealer StatusC C. Institutional communication StatusD D. Correspondence to an individual client

The best answer is B. FINRA defines communications with the public as either: •Correspondence: A communication made available to 25 or fewer existing or prospective retail clients •Retail Communication: A communication made available to more than 25 existing or prospective retail clients Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA. A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience). A direct mailing to more than 25 existing or retail clients is a retail communication that is sales literature since it goes to a specific audience. A password protected website is a retail communication that is sales literature, since it is seen by a specific audience. An internet bulletin board is a retail communication that is advertising, since it is seen by the general public. Institutional communications are excluded from the "retail communications" definition, approval and filing rules because institutions are sophisticated investors who know what they are doing.

Under FINRA rules, a barrier must be put in place between a member firm's: StatusA A. compliance department and its investment banking department StatusB B. institutional communications distribution list and its retail communications distribution list StatusC C. institutional trading desk and its retail trading desk StatusD D. investment banking department and its mergers and acquisitions department

The best answer is B. If an institutional communication is distributed to any number of retail clients, it is considered to be a "retail communication." This means that instead of being subject to "post use review and approval," it must be approved by a principal prior to distribution. FINRA states that each member firm must have policies and procedures in place "reasonably designed to prevent institutional communications from being forwarded to retail investors." Regarding information barriers for purposes of stopping "insider trading," the firm's investment banking department must be walled off from the other departments of the firm, such as research and trading; and research must be walled off from investment banking and trading. Compliance oversees all firm activities and is not walled off from anything!

Regulation AC requires all of the following EXCEPT: StatusA A. member firm research analysts certify each written research report StatusB B. 3rd party research analysts certify each written research report StatusC C. research analysts must certify that their opinion is unbiased and honest StatusD D. research analysts must certify that they received no special compensation for giving a favorable opinion

The best answer is B. Regulation AC (Analyst Certification) requires research analysts at member firms to certify each published research report; and to make a quarterly certification covering all public appearances made during that quarter. The certification basically states that the analyst gave his or her honest view at that time; and that the analyst's compensation was not tied to the recommendation or views expressed. If an analyst fails to make the required certification, FINRA must be notified; and for the next 120 days, any research reports authored by that analyst must include the disclosure that the analyst did not provide the required certification. Note that the rule does not apply to "independent research" prepared by 3rd parties, since the potential for conflicts of interest does not exist.

Under the Code of Procedure, disciplinary action taken by FINRA against a registered representative can be all of the following EXCEPT: StatusA A. Termination of employment StatusB B. Arbitration StatusC C. Fine StatusD D. Censure

The best answer is B. The Code of Procedure is a hearing process used by FINRA if the FINRA Department of Enforcement wishes to take action against a firm or representative. It also can be used by a customer who has a complaint who has not signed an arbitration agreement. If the hearing panel finds that there was a violation, the disciplinary actions taken can include censure, suspension, expulsion, fines and taking away securities licenses. Arbitration occurs under the Code of Arbitration, which is used for settling intra-industry disputes and customer disputes where the customer has signed an arbitration agreement.

A registered representative at a FINRA member firm is giving a talk about investing attended by 13 customers and 4 prospects. The speech includes recommendations of specific securities. Which statement is TRUE? StatusA A. The speech can be given without prior approval StatusB B. The speech content must be approved by the Supervisory Analyst StatusC C. The speech content must be approved by FINRA StatusD D. The speech content must be approved by the Branch Manager

The best answer is B. A "research report" is defined as a client communication that analyzes individual companies that provides information reasonably sufficient upon which to base an investment decision and is distributed to at least 15 persons. In this case, there are 17 attendees, so the speech falls under the definition.

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 StatusA A. I only StatusB B. I and III StatusC C. II and III StatusD D. I, II, III

The best answer is B. A registered representative cannot guarantee a customer's account against loss nor share in the account unless he or she opens a joint account with the customer; contributes capital proportional to any sharing agreement; and obtains the approval of a principal for the account. Selling exempted securities such as U.S. Governments with a written agreement to buy them back at a later date is a "repurchase" agreement, and is allowed (however, such repurchase agreements are typically for very large amounts, and are entered into by U.S. Government securities dealers).

Which of the following are violations of FINRA rules? I Recommending the purchase of put options to protect a stock position from a downwards market move II Sharing in the profits and losses of a customer's account III Selling exempted securities to a customer with a written agreement to buy back the securities at a later date IV Orally guaranteeing to buy back customer securities at a preset price StatusA A. I and III StatusB B. II and IV StatusC C. I, II, IV StatusD D. I, II, III, IV

A research report on an issuer CANNOT be published by the underwriter of that issuer's securities for the time period encompassing: I 10 days following the effective date for an initial public offering II 25 days following the effective date for an initial public offering III 10 days following the effective date for a secondary offering IV 3 days following the effective date for a secondary offering StatusA A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is B. A research report on an issuer cannot be published by the underwriter of that issuer's securities for the time period of 10 days following the effective date for an initial public offering; and 3 days following the effective date for a secondary offering.

Which of the following statements are TRUE about items reviewed or approved by a principal? I Complaint letters received from customers must be reviewed by a principal II Complaint letters received from customers do not have to be reviewed by a principal III Internal documents of a brokerage firm must be reviewed by a principal IV Internal documents of a brokerage firm do not have to be reviewed by a principal StatusA A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is B. All customer complaint letters must be reviewed and handled by a principal. Internal documents of a brokerage firm do not have to be reviewed by a principal.

okerage firm is permitted to hold fully paid customer securities if the: StatusA A. customer gives a full power of attorney to the brokerage firm and signs a rehypothecation agreement StatusB B. brokerage firm segregates those positions from margin securities and places them in safekeeping StatusC C. customer identifies in writing the specific securities that he wishes the brokerage firm to hold StatusD D. brokerage firm sends the customer a written receipt for the securities being held

The best answer is B. Brokerage firms can hold fully paid customer securities as long as the positions are segregated from other margin securities and are kept in safekeeping.

A customer brings $50,000 of cash to the brokerage firm office and gives it to the registered representative to pay for a securities purchase. The registered representative should: StatusA A. reject the cash payment, since cash payments over $10,000 cannot be accepted StatusB B. accompany the customer to the cashier, so that the customer can be given a receipt for the payment StatusC C. accept the payment on the firm's behalf StatusD D. deposit the cash to his personal account and issue a check in the same amount to the firm for crediting to the customer's account

The best answer is B. Cash can only be accepted from a customer if it is to be deposited to the customer's account. A registered representative cannot personally accept cash from a customer

A registered representative has a dispute with his firm. Under FINRA rules, this will be settled by: StatusA A. litigation StatusB B. arbitration StatusC C. mediation StatusD D. negotiation

The best answer is B. Disputes between registered representatives and brokerage firms are handled by binding (non-appealable) arbitration.

A registered representative receives an order from an institutional client to buy a large block of ABCD stock. The firm has information barriers in place. Which statement is TRUE about orders placed to buy ABCD stock at the firm prior to the filling of the block order to buy? StatusA A. The registered representative can place an order to buy ABCD stock personally, but other buy orders received by the firm cannot be filled StatusB B. Other buy orders received by the firm can be filled, but the registered representative cannot place an order to buy ABCD stock StatusC C. Buy orders from both the registered representative and other clients of the firm can be filled StatusD D. Orders placed by either the representative or the clients of the firm cannot be filled

The best answer is B. In its "front running" rule, FINRA gives an exception to the prohibition on a member firm placing orders to trade a stock prior to the filling of a large block order if the firm has information barriers in place. If this is the case, the front running prohibition only falls on the people at the firm who know about the existence of the large block order - in this case, the registered representative. Persons placing orders to buy ABCD stock at the firm who have no knowledge of the impending block purchase are exempted from the "front running" rule because, with effective information barriers in place, they could not have known about the large trade that is about to be placed.

A customer that wishes to open an account to buy new issues is required to make a: I positive representation that he or she is not restricted within 12 months preceding the first purchase II negative representation that he or she is not restricted within 12 months preceding the first purchase III positive representation that he or she is not restricted annually thereafter IV negative representation that he or she is not restricted annually thereafter StatusA A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is B. In order for a customer to buy IPOs (Initial Public Offerings) of equity securities, the customer must sign a representation letter that he or she is not restricted from buying the issue under FINRA rules (FINRA prohibits industry "insiders" from buying the issue from the underwriter). Because the customer must sign this representation, this is a "positive" affirmation. Annually thereafter, the customer must be sent a notice that the firm has the customer's representation on file that he or she is not restricted, and that if this has changed, the customer must notify the firm so that the account file can be amended. Because the customer does not sign this representation, this is a "negative" affirmation.

All of the following statements about e-mail sent by a registered representative to 50 retail clients are true EXCEPT the communication: StatusA A. must be reviewed and approved in advance by a principal StatusB B. can recommend a new issue StatusC C. can be sent from the branch office where the representative works StatusD D. can recommend stocks

The best answer is B. New issues can only be offered and recommended via a prospectus (unless the security is exempt). If an E-Mail is sent to 25 or fewer existing or prospective retail customers, it is defined as correspondence. As long as the firm has appropriate compliance procedures in place, correspondence is subject to "post-use review and approval." If a E-Mail is sent to more than 25 existing or prospective retail customers, then it is defined as a "retail communication," and furthermore, within that broad definition, it is defined as sales literature. Retail communications must be approved in advance by a principal. E-mails to customers can be sent from a registered representative's branch office (but they cannot be sent from a registered representative's home). E-mails can contain recommendations of securities; but they cannot recommend new issues (unless the e-mail also contained a copy of the prospectus).

Which statements are TRUE about a registered representative that wishes to promote him- or herself on the Internet? I The representative can create a website with approval of the principal II The representative can create a website with approval of FINRA III The FINRA name must be used on the website IV The FINRA name, when used, must be hyperlinked to the FINRA website StatusA A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is B. Regarding a website prepared by an associated person, FINRA states that this is permitted (though, odds are, your firm will not allow you to do it). Again, approval of FINRA is not required. Rather, approval of the firm is required. The FINRA name can be shown on a member firm or associated person's website, but is not required to be shown. If shown, it must be accompanied by a hyperlink to the FINRA website.

Which of the following gifts is permitted to be accepted by a registered representative from a mutual fund sponsor? StatusA A. Trip to Bermuda StatusB B. $50 gift certificate StatusC C. $500 cash StatusD D. $500 towards the purchase of fund shares

The best answer is B. The FINRA "anti-reciprocal" rule prohibits investment companies from compensating salesmen at broker-dealers for selling their shares outside of the sales charges stated in the Prospectus. FINRA does allow a maximum gift of $100 value per person per year from a mutual fund sponsor to a registered representative that is not considered as "compensation."

A registered representative is approached by the president of an investment club to buy an IPO being offered by the representative's firm. Which statement is TRUE? StatusA A. The investment club is a restricted purchaser and cannot buy the IPO StatusB B. The investment club is not a restricted purchaser and may buy the IPO StatusC C. The investment club is only permitted to buy the issue if it buys an insubstantial amount StatusD D. The investment club is only permitted to buy the issue if its members certify that they are not restricted

The best answer is B. The FINRA IPO rule lists "restricted purchasers" that cannot buy common stock IPOs from underwriters. These are basically industry insiders, including member firms, their officers and employees, fiduciaries to member firms such as outside attorneys retained by broker-dealers, and institutional portfolio managers that are buying for their personal accounts. Investment clubs are not on the restricted list - they can buy common stock IPOs. One could argue that an "investment club" could be formed by industry insiders to get around the rule, but FINRA addresses this by stating that any account in which an industry insider has a greater than 10% ownership interest is restricted.

If a reference to FINRA is made on a member firm's website, which statements are TRUE? I The FINRA name must be hyperlinked to the FINRA website II The FINRA name cannot be hyperlinked to the FINRA website III The font size used for the FINRA name cannot be smaller than the font used for the member's name IV The font size used for the FINRA name must be smaller than the font used for the member's name StatusA A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is B. The FINRA name can be used on a member firm' website, but it must be hyperlinked to the FINRA website. It cannot state that FINRA approves or endorses the firm. It can only state that the firm is a FINRA member. Furthermore, to make sure that readers don't think that the member firm is FINRA, the FINRA name must always be smaller than the member firm's name

A customer instructs a registered representative to "Buy 100 shares of IBM whenever you think the price is right." Under industry regulations this order: StatusA A. must be refused unless a written power of attorney is on file from the customer StatusB B. can be accepted as given StatusC C. is considered to be discretionary and must be approved by a branch manager prior to execution StatusD D. is given the same treatment as a market order

The best answer is B. This order states the number of shares to be bought and the security to be purchased. The registered representative is left to choose price and time of execution. This is the same as a "not held" order and can be accepted as given. If the representative were to choose the number of shares or the security, then the order would be discretionary, and would require a written power of attorney on file from the customer.

A potential new customer is solicited by a registered representative to buy a new issue offering that is priced at $100 per share. The customer has $10,000 to invest and the registered representative explains to the customer that such an amount "deposited to a margin account creates $20,000 of buying power, so you will be able to buy 200 shares." This statement is: StatusA A. true in all material respects StatusB B. a misrepresentation of margin rules, since new issues must be fully paid StatusC C. allowed only if accompanied, or preceded by, a prospectus StatusD D. allowed only if the transaction was unsolicited

The best answer is B. While it is true that $10,000 of cash deposited to a margin account will buy $20,000 of marginable securities (since Reg T margin is 50%), new issues are not marginable. Thus, $10,000 of cash can only buy $10,000 of a new issue. The registered representative has made a misrepresentation to the customer.

A registered representative wishes to give a speech to a group of 35 potential retail clients. The speech is scripted and explains the differences between investing in growth versus value stocks. All of the following statements are true about giving the speech EXCEPT: StatusA A. the content must be approved in writing by a compliance officer or principal prior to giving the speech StatusB B. the speech must be truthful and in good taste StatusC C. a copy of the speech must be pre-filed with FINRA StatusD D. the speech must be informational, not promotional, in nature

The best answer is C. FINRA defines communications with the public as either: •Correspondence: A communication made available to 25 or fewer existing or prospective retail clients •Retail Communication: A communication made available to more than 25 existing or prospective retail clients Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA. A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience). •Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards •Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective retail clients, scripted speeches delivered to more than 25 existing or prospective retail clients, password-protected websites. Since this speech will be delivered to 35 attendees, it falls under the "Retail Communication" definition, and within that broad definition, it is defined as "sales literature." All speeches must be truthful and in good taste; and the speech must be informational, not promotional, in nature. There is no requirement for the speech content to be pre-filed with FINRA, but a copy must be retained for 3 years for possible inspection by FINRA examiners.

All of the following are defined as "institutional clients" for purposes of the FINRA communications rules EXCEPT: A. insurance company B. bank C. investor with $25 million of assets D. savings and loan

The best answer is C. FINRA distinguishes between "retail communications" and "institutional communications" because "institutional communications" go to sophisticated investors who can take care of themselves. While retail communications must be approved by a principal prior to use, institutional communications are subject to "post use review and approval" by a principal. An institutional communication is defined as one that is distributed to an institutional investor - a bank, savings and loan, insurance company, registered investment company, registered investment adviser, employee benefit plan with at least 100 participants, government entity or a person with at least $50 million of assets for investment.

Which of the following MUST be disclosed in a research report recommending the purchase of a specific security? I Whether the firm or its officers own that security II Whether the firm or its officers own options or warrants on that security III Whether the firm has been a manager or co-manager in an underwriting of any of the issuer's securities within the past 12 months IV Whether the firm has previously recommended the purchase of that issuer's securities to its customers StatusA A. I and II only StatusB B. III and IV only StatusC C. I, II, III only StatusD D. I, II, III, IV Record your answer

The best answer is C. If a recommendation is made, the brokerage firm must disclose if it: •has managed or co-managed any equity securities offering of that issuer within the past 12 months; •has received compensation from investment banking services from that issuer in the past 12 months; •expects to receive or intends to seek investment banking compensation from that issuer in the next 3 months; •is an investment banking services client of the firm; or •is a market maker in the issuer's stock. Also, the brokerage firm must disclose if it or its affiliates own(s) the issuer's securities (including options). There is no requirement to disclose if the firm has previously recommended this security, since this does not create a possible conflict of interest.

Which of the following are defined as "immediate family" for purposes of FINRA Rule 5130 on IPO distributions? I Financially independent parent of broker-dealer employee II Financially independent spouse of broker-dealer employee III Financially independent uncle of broker-dealer employee IV Financially dependent uncle of broker-dealer employee StatusA A. I and II StatusB B. III only StatusC C. I, II, IV StatusD D. I, II, III, IV

The best answer is C. "Immediate family" consists of parents, children, spouses and siblings, as well as any in-laws of these individuals, and anyone who is a financial dependent. Excluded from the definition are grandparents, grandchildren, uncles and aunts - unless they are financial dependents.

Investment company advertising is prohibited from showing: StatusA A. past performance StatusB B. benchmark performance covering the preceding 1, 3, 5, and 10 years StatusC C. performance projections StatusD D. investment objective

The best answer is C. All advertising is prohibited from including performance projections. Past performance may be shown in advertising, as can comparisons of past performance to a relevant benchmark.

A registered representative receives a written complaint from a customer stating the commissions being charged in the account are too high. The registered representative should: StatusA A. negotiate a new commission rate that satisfies the customer StatusB B. refer the complaint to FINRA StatusC C. refer the complaint to the Branch Manager StatusD D. not take any action because the complaint does not allege a rule violation

The best answer is C. Any written complaint received by a registered representative must be given to the Branch Manager or Principal. The Manager or Principal is responsible for overseeing the resolution of the complaint.

The primary criteria for a person to be appointed to a securities industry arbitration panel is that the person be: StatusA A. registered StatusB B. interested Correct C. disinterested StatusD D. retired

The best answer is C. Arbitration panels consist of individuals affiliated with member firms and representatives from the general public. Attorneys are also permitted on arbitration panels (a nice source of income for attorneys who are retired). All of these individuals must be "disinterested" - meaning they cannot have business, family, or other connections to the parties involved in the arbitration proceeding.

Which of the following are prohibited practices under FINRA rules? I Interpositioning II Free riding III Arbitrage Trading IV Backing Away StatusA A. I and II only StatusB B. III and IV only StatusC C. I, II, IV StatusD D. I, II, III, IV

The best answer is C. Backing away from quotes (not honoring the quote) is prohibited; interpositioning another firm between a customer and market maker is prohibited; and free riding (buying and then selling an issue without paying for it) is also prohibited. Arbitrage is a basic trading activity.

Which of the following is a record that must be retained on file by a broker-dealer? StatusA A. Prospectuses StatusB B. Recommendations StatusC C. Complaints StatusD D. Solicitations

The best answer is C. Broker-dealers are not required to retain, as a record, recommendations made to clients. Customer complaints, account statements, and advertising are all records that must be retained by broker-dealers.

A registered representative takes a customer out to a dinner and a show, spending $180. This activity is: StatusA A. a violation of FINRA rules StatusB B. permitted because less than $100 was spent on a per-person basis StatusC C. permitted if it complies with the firm's policies and procedures StatusD D. permitted under all circumstances

A registered representative is invited by a very satisfied customer to that customer's ski house in Vail, Colorado during Christmas. Which statement is TRUE about the representative accepting this invitation? StatusA A. If the representative accepts the invitation, this is a violation of FINRA rules because the value is more than $100 StatusB B. If the representative accepts the invitation, this is a violation of FINRA rules because there is a conflict of interest StatusC C. The representative can only accept the invitation if he or she notifies the member firm and follows the firm's policies and procedures StatusD D. The representative can accept the invitation without restriction

The best answer is C. Business entertainment does not fall under the $100 gift limit. Business entertainment is permitted as long as it is not too excessive or too frequent and it must comply with the firm's policies and procedures. Business entertainment means that the representative and the customer are together at some type of event.

Which of the following are violations of FINRA's Conduct Rules? I Selling a customer an exempt security with a written agreement to buy back that security at a fixed price II Guaranteeing a customer account against loss III Making blanket recommendations of low price speculative stocks to customers IV Selling dividends to customers by inducing customers to buy stocks just prior to the ex date StatusA A. I and II only StatusB B. III and IV only StatusC C. II, III, IV StatusD D. I, II, III, IV

The best answer is C. Choice I defines a repurchase agreement, which typically involves two government securities dealers; or the Federal Reserve and a government dealer. These are permitted, since they are essentially overnight loans of monies at a predetermined interest rate. Prohibited activities include guaranteeing a customer account against loss; making blanket recommendations of low price speculative stocks; and selling dividends to customers

The sale of Direct Participation Programs is regulated by (the): I Securities Act of 1933 II State Blue Sky Laws III FINRA Rules IV MSRB Rules StatusA A. I and II only StatusB B. III and IV only StatusC C. I, II, III StatusD D. II, III, IV

The best answer is C. Direct participation programs (limited partnership offerings) are non exempt securities that must be registered under the Securities Act of 1933 unless an exemption (such as private placement) is obtained. The issue must also be registered in the state(s) where it will be offered. FINRA regulates the sale of limited partnerships. The MSRB has no regulatory authority over limited partnerships. It simply makes (but cannot enforce) rules for municipal market participants.

Which of the following time stamps are on an order ticket? I Time of order entry II Time of trade execution, if executed III Time of order cancellation, if canceled IV Time of trade reporting on the Consolidated Tape A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is C. FINRA requires that all order tickets sent to an exchange be stamped with the time of: •Order entry; •Order execution; and •Order cancellation, if canceled. There is no time stamp on the order ticket for the time the trade was reported to the Consolidated Tape. These time stamps are now recorded electronically.

Upon receipt of a large customer order to buy a stock that is likely to have positive market impact, a registered representative first places an order to buy that stock for his or her personal account. This is: I a permitted practice II a prohibited practice III known as front running IV known as shadowing StatusA A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is C. Front running a customer order that is likely to have a market impact is a prohibited practice. If the representative places an order to buy a stock for his or her account prior to placing a large customer order to buy that stock (which is likely to make that stock move up), this is "front running". If the representative places an order to buy a stock for his or her account just after placing a large customer order to buy that stock (which is likely to make that stock move up), this is "shadowing" and is prohibited as well.

If a registered representative fails to complete the Regulatory Element of the Continuing Education requirement within the stated time period, that person: StatusA A. must be immediately terminated by the employing member StatusB B. will be fined by FINRA StatusC C. must cease performing all of the functions of a registered representative StatusD D. can apply for an extension from FINRA to complete the requirement

The best answer is C. If a registered representative fails to complete the Regulatory Element of the Continuing Education requirement within 120 days of the notification date, that person's registration is suspended and that person cannot continue to perform any of the functions of a registered representative. There is no requirement that the person be fired by the firm - who knows, there might be a nice maintenance job available at the firm!

A registered individual leaves the industry. The individual's license(s) will expire if that person remains unaffiliated with a brokerage firm for how long? StatusA A. 6 months StatusB B. 1 year StatusC C. 2 years StatusD D. 10 years

The best answer is C. If an individual leaves the industry and remains unaffiliated with a member firm for 2 years, all licenses lapse.

Notification to FINRA is required for all of the following EXCEPT: StatusA A. a written customer complaint is received about a registered employee misappropriating customer funds StatusB B. a registered representative is arrested for assault and battery StatusC C. a registered representative is committed to a mental institution StatusD D. a registered representative is indicted under the Securities Exchange Act of 1934 for "insider trading" violations

The best answer is C. If one goes insane, notification to FINRA is not required. (After all, how would that person know to notify FINRA - he's insane). However, FINRA does require prompt notification for a variety of reasons. If one is the subject of a written customer complaint involving theft or embezzlement; if one is arrested, arraigned, indicted, convicted, or pleads guilty to any criminal offense (except for minor traffic violations); or if one is sued under the Securities Acts; notification to FINRA is required. In addition, notification to FINRA is required if the registered representative is suspended or expelled by any other self-regulatory organization; is denied registration by another self-regulatory organization; or is the subject of a customer complaint that is settled for more than $15,000; or is the subject of disciplinary action by the member firm involving suspension, termination, or the withholding of commissions in excess of $2,500. When FINRA gets the report, they review it to see if they should do nothing, suspend the person's registration, or expel the registered representative.

A widely-followed research analyst is going to issue a "Buy" recommendation on a company. The analyst and immediate family: I can buy the stock prior to the release of the research report II cannot buy the stock prior to the release of the research report III can buy the stock after the research report has been widely distributed IV cannot buy the stock after the research report has been widely distributed StatusA A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is C. Member firms must have policies and procedures in place to stop research analysts and their immediate family from "front running" their "about-to-be-released" research reports. In essence, if the research analyst or immediate family were to take a position in the stock prior to the release of the research report in an attempt to profit from a subsequent price move, they become "insiders" who have violated the insider trading rules.

A member firm prepares a piece of sales literature that compares 2 different mutual funds that have similar objectives. Comparisons of all of the following can be made in the sales literature EXCEPT: StatusA A. management fees charged by the funds StatusB B. past performance of the funds StatusC C. projected earnings of the funds StatusD D. liquidity of the fund's investment holdings

The best answer is C. Mutual fund advertising and sales literature can show past performance, but are not permitted to make performance projections. This is a requirement of SEC Rule 156.

An elderly customer that is interested in buying a mutual fund asks her registered representative to highlight the most important information in the prospectus, so that it is easier for her to understand the merits and risks of the investment. Which statement is TRUE about this request? StatusA A. The registered representative should honor the customer's request StatusB B. The registered representative could not normally honor such a request, but is permitted to do so in this case because of the customer's advanced age StatusC C. The registered representative cannot honor the customer's request, but can offer to answer any questions that she has about the information in the prospectus StatusD D. The registered representative cannot honor the customer's request and is not permitted to answer any questions that she has about the information in the prospectus

The best answer is C. Prospectuses cannot be highlighted or marked-up because this alters the "legal" presentation of the information. However, the representative should answer any questions that the customer has about the information presented in the prospectus - giving complete and accurate information is one of the important functions of a representative

Under FINRA rules, research reports approved by a supervisory analyst must be kept by member firms for: StatusA A. 6 months StatusB B. 2 years StatusC C. 3 years StatusD D. 5 years

The best answer is C. Research reports approved by a supervisory analyst must be kept for 3 years. As a general rule, all records that you come in contact with must be kept for 3 years. The only notable exception is customer complaints, which must be retained for 4 years.

A registered representative hears from a good friend that "ACME Fund has taken a large position in ABCD stock." Based on this, the registered representative calls all of her customers with the recommendation that ABCD stock be purchased immediately. This action is: StatusA A. permitted without restriction StatusB B. permitted only if the fund has filed a Form 13F with the SEC StatusC C. prohibited since this is making a recommendation based upon a rumor StatusD D. prohibited since this is making a recommendation based upon inside information

The best answer is C. The information received by the registered representative is unsubstantiated, and it is unethical for this to be used as a basis for making a recommendation

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 StatusA A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is C. There is no requirement to file research reports with FINRA, nor to obtain FINRA approval before sending out the report. However, FINRA rules require that a research report be prepared or approved by a supervisory analyst.

Under FINRA rules, a member firm is allowed to vote the stock of securities held in street name: StatusA A. if the distributed proxy is not returned within 10 days of the annual meeting StatusB B. if the distributed proxy is not returned within 20 days of the annual meeting StatusC C. if the distributed proxy is not returned within 30 days of the annual meeting StatusD D. under no circumstances

The best answer is D. Customers whose securities are margined have their securities held in "street" name. Thus, whenever, there is a mailing to the shareholders by the corporation, the brokerage firm shows as the "owner" and receives the mailing from the issuer. The brokerage firm is obligated, in turn, to forward the materials to the beneficial owner (the customer) of the securities. Under FINRA rules, if a proxy is sent to shareholders, the brokerage firm must distribute it to the beneficial owners. This cost is paid for by the issuer. If the voting materials are not returned, or if they are returned without voting instructions, the member firm is not permitted to vote the shares.

A registered representative presents a seminar to a group of 35 prospective retail investors about investing in mutual funds. At the seminar, he makes recommendations of various funds, based on their objectives and performance. The seminar is defined by FINRA as: StatusA A. correspondence StatusB B. an internal memorandum StatusC C. advertising StatusD D. sales literature

The best answer is D. FINRA defines communications with the public as either: •Correspondence: A communication made available to 25 or fewer existing or prospective retail clients •Retail Communication: A communication made available to more than 25 existing or prospective retail clients Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA. A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience). •Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards •Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective retail clients, scripted speeches delivered to more than 25 existing or prospective retail clients, password-protected websites

A registered representative has written a script that will be used to make unsolicited telephone calls to potential retail customers. The representative has a list of 150 potential clients who will be called. Which statement is TRUE? StatusA A. The script needs no approval from the general principal since it is not a written communication to customers StatusB B. The script must be pre-filed with FINRA prior to use StatusC C. The script must be pre-filed with the SEC prior to use StatusD D. The script must be approved by the general principal prior to use

A newly hired registered representative finds a standard form letter on the firm's intranet and wants to send it to 20 of his friends. Which statements are TRUE? I The letter must be filed with FINRA prior to use II The letter must be used without change III The letter must include the FINRA logo IV The letter must be maintained on file by the firm for at least 3 years after use StatusA A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

A representative gives a seminar to investors, making a presentation about successful hedge fund strategies. It is attended by 10 retail clients and 20 institutional clients. FINRA defines this as: StatusA A. an advertisement StatusB B. a solicitation StatusC C. a retail communication StatusD D. correspondence

The best answer is D. FINRA has 2 main categories of communications to retail clients: •Correspondence: A communication to 25 or fewer existing or prospective retail clients •Retail Communication: A communication to more than 25 existing or prospective retail clients Excluded from these definitions are Institutional Communications and Public Appearances. Correspondence, Institutional Communications, and Public Appearances are not subject to prior principal approval - rather, FINRA states that as long as the firm has appropriate supervisory procedures in place, they are subject to "post use review and approval." They are also not subject to FINRA filing rules. In contrast, retail communications must be approved by a principal prior to use and are subject to FINRA filing rules. Because this is a communication to 10 retail clients (the number of institutional clients is irrelevant), this is defined as "correspondence."

A registered representative with a FINRA member firm is opening a new cash account for a customer who lives in another state. The customer explains that he wishes to place a trade today. To accommodate the customer's wish, the registered representative gets the customer's permission to sign the customer's name to the arbitration agreement. This action by the registered representative is: StatusA A. permitted if a branch manager approves StatusB B. permitted if the customer's verbal permission has been tape recorded StatusC C. permitted if the customer follows up with written permission within 48 hours StatusD D. prohibited

The best answer is D. A customer's signature cannot be forged, even if the customer were to give permission to do so. Legally, the customer's signature is required in order to have a binding contractual agreement that will have standing in a court of law.

Which of the following individuals are permitted to be included in arbitration panels? I Persons affiliated with member firms II Disinterested persons with no industry affiliation III Attorneys that are members of the bar StatusA A. I only StatusB B. II only StatusC C. III only StatusD D. I, II, III

The best answer is D. Arbitration panels consist of individuals affiliated with member firms and representatives from the general public. Attorneys are also permitted on arbitration panels (a nice source of income for attorneys who are retired).

A registered representative makes the following recommendation to her customer: "In case of an emergency requiring immediate cash, you may not be able to sell your securities and get a check the same day. I recommend that you send $10,000 of cash to me at my office where I will place it in safekeeping. If you have an emergency cash need, I can bring the cash to you immediately." This action is: StatusA A. permitted, since it better serves the client StatusB B. permitted only if the registered representative has worked in the business for at least 10 years StatusC C. permitted only if the registered representative is also a registered investment adviser representative StatusD D. prohibited under FINRA rules

The best answer is D. Cash can only be accepted from a customer if it is to be deposited to the customer's account.

Registered representatives may be compensated based on all of the following EXCEPT: A. salary paid by the brokerage firm to the representative B. asset based fees paid by the customer to the brokerage firm C. trading commissions paid by the customer to the brokerage firm D. trading commissions paid by the customer to the representative

The best answer is D. Compensation cannot be paid by the customer to the registered representative. Only the broker-dealer may pay compensation to the registered representative.

Which statements are TRUE about the FINRA BrokerCheck website? I It includes the registered individual's licenses and states in which registered II It includes disciplinary actions taken against the registered individual III It includes the securities industry employment history of the registered individual IV It includes pending customer complaints against the registered individual that have not yet been resolved StatusA A. I and II only StatusB B. III and IV only StatusC C. I, II, III StatusD D. I, II, III, IV

The best answer is D. FINRA maintains a "BrokerCheck" website, where retail customers can input a registered representative's name and see that individual's employment history for the last 10 years, disciplinary record, licenses held, states in which that person is registered, and outside business activities. In addition, pending serious customer complaints that are not yet resolved are included. For customers without web access, a toll-free "hot line" to BrokerCheck is available.

A customer calls a registered representative to sell 500 shares of an over-the-counter stock and tells the representative that he wants the trade done privately - not in the public market. This is: StatusA A. allowed without restriction StatusB B. allowed with the oral approval of the principal StatusC C. allowed if the trade is performed as "agent" StatusD D. not allowed

The best answer is D. FINRA prohibits "private securities" transactions. Trades must be done with the knowledge of your firm in the public securities markets. The only way in which a "private" transaction can be effected is for the employee to get prior written approval of the broker-dealer (and the broker-dealer is not likely to do this!)

Which of the following actions by a registered representative are prohibited under FINRA rules? I Spreading rumors of a sensational character that might be expected to influence prices on the exchange II Lending money to a customer where investment securities will be the collateral for the loan III Sharing in the gain or loss of a customer account IV Guaranteeing the performance of an investment StatusA A. I and II only StatusB B. III and IV only StatusC C. I, II, III StatusD D. I, II, III, IV

The best answer is D. FINRA prohibits member firms and their representatives from spreading rumors about securities; from personally lending monies to customers outside of the requirements of Regulation T; from sharing in the gain and loss of a customer account; and from guaranteeing the performance of an investment in a customer account.

Which statement is TRUE about a registered representative that wishes to take a second job under FINRA rules? StatusA A. This action is prohibited StatusB B. This action is permitted without restriction StatusC C. This action requires the prior written approval of FINRA StatusD D. This action requires the prior written approval of the member organization employer

The best answer is D. For a registered representative to take a second job requires approval of the branch manager or other authorized person at the member firm under FINRA rules.

A registered representative is employed by a broker-dealer that is a publicly traded company, listed on the New York Stock Exchange. Which statement is TRUE? The registered representative may: StatusA A. recommend the purchase of his employer's stock to existing customers StatusB B. solicit new customers to buy his employer's stock StatusC C. write and distribute a research report recommending the purchase of the employer's stock StatusD D. accept unsolicited orders for his employer's stock; but cannot solicit orders for, nor recommend the security

The best answer is D. If a registered representative is employed by a publicly traded member firm (say Raymond James), generally speaking he or she cannot recommend the purchase of that company's shares; nor can he solicit customers to buy the shares. This is not an explicit SEC or FINRA regulation; rather it is industry practice that ensures compliance with FINRA's "suitability" requirements; and the requirement to disclose control relationships at or prior to confirmation. However, it is permitted to accept unsolicited customer orders for the shares.

A registered representative is a 15% participant in an investment club formed by members of the local Elks Club. The Elks Club investment club has opened a securities account at ABC Brokerage. The account wishes to buy an IPO being offered by an underwriter. Which statement is TRUE? StatusA A. The account can buy the issue without restriction StatusB B. The account can buy the issue if the branch manager approves StatusC C. The account can buy the issue if the registered representative agrees not to share in the profit on the position StatusD D. The account is prohibited from buying the new issue

The best answer is D. Registered representatives are prohibited from buying new issues from underwriters. This is true for any account in which registered representatives or restricted persons have a greater than 10% participation as well. Thus, this account would be prohibited from buying the IPO.

The FINRA 5% Policy applies to which of the following? I Mark-ups charged on purchases effected as a principal in over-the-counter securities transactions II Mark-downs charged on sales effected as a principal in over-the-counter securities transactions III Commissions charged on purchases effected as agent in over-the-counter securities transactions IV Commissions charged on sales effected as agent in over-the-counter securities transactions A. I only B. I and II only C. III and IV only D. I, II, III, IV

The best answer is D. The FINRA 5% Policy applies to both mark-ups and mark-downs earned in principal transactions effected in the secondary market as a dealer, as well as to commissions earned in agency transactions effected in the secondary market. A firm earns a "mark-up" when it sells a security out of its inventory to a customer, while it earns a "mark-down" when it buys a security into its inventory from a customer. In these cases, firm acts as a dealer in the transaction. A firm earns a commission when it matches a customer who wishes to buy with someone other than that firm who wishes to sell (and vice-versa). In this case the firm acts as a broker. The Policy states that such commissions and mark-ups (and mark-downs) must be "fair and reasonable," with 5% as a guideline - not a rule. In determining a fair and reasonable charge, a number of factors are considered, including the size of the trade; the dollar amount involved; the difficulty of the trade; and the level of service provided by the firm.

All of the following statements are true regarding the U.S. securities markets EXCEPT: StatusA A. FINRA has regulatory authority over the markets and market participants in the trading of all non-exempt securities StatusB B. the Federal Reserve Board decides securities can be traded on margin StatusC C. the Securities and Exchange Commission has regulatory authority over the securities markets and its participants StatusD D. the MSRB has regulatory authority over the markets and market participants in the trading of all exempt securities

The best answer is D. The MSRB only regulates the trading of municipal bonds - not U.S. Government or Agency bonds - so the statement that the MSRB regulates trading in all exempt securities is untrue. Both FINRA and the SEC regulate the U.S. securities markets and market participants. FINRA is the SRO (Self Regulatory Organization) that regulates the markets under SEC oversight. The Federal Reserve decides which securities are marginable, since it has power over margin rules given under the Securities Exchange Act of 1934.

After completion of his or her first Regulatory Element review, a Registered Representative: A. is not required to complete any further Regulatory Element reviews B. must complete an annual Regulatory Element review thereafter C. must complete a Regulatory Element review every two years thereafter D. must complete a Regulatory Element review every three years thereafter

The best answer is D. The Regulatory Element of the Continuing Education requirement must be completed by registered persons on their 2nd anniversary of registration and every 3rd year thereafter. This involves completing a computerized "training experience" that covers relevant rules and regulations.

An order ticket is filled out and sent to the New York Stock Exchange floor for execution. After being executed on the floor, it is discovered that the account number is incorrect. Under FINRA rules, the order: StatusA A. must be canceled StatusB B. ticket can be corrected by the registered representative that took the order StatusC C. ticket can be corrected by the Purchase and Sales Department StatusD D. ticket can be corrected with the approving signature of the Branch Manager

The best answer is D. Under FINRA rules, alterations to executed order tickets are prohibited, unless the alteration is approved in writing by a Compliance Officer or "designated person," such as a Branch Manager. This person must understand all of the facts surrounding the alteration before approving of the change, and is responsible for the change.

Under FINRA rules, alterations to executed order tickets for orders that were filled on the NYSE are prohibited: StatusA A. under all circumstances StatusB B. unless the alterations are approved in writing by the Floor Governors of the NYSE StatusC C. unless the alterations are approved in writing by the DMM on the floor of the NYSE StatusD D. unless the alterations are approved in writing by the Branch Manager

The best answer is D. Under FINRA rules, alterations to order tickets are prohibited, unless the alteration is approved in writing by a "designated person" such as a branch manager. This person must understand all of the facts surrounding the alteration before approving of the change, and is responsible for the change.`

A registered representative employed by ABC broker/dealer is good friends with an independent venture capitalist. The venture capitalist asks the registered representative to obtain investors for a private placement that he is forming. Which statement is TRUE? StatusA A. The registered representative can direct customers to the private placement since this is an exempt transaction StatusB B. The registered representative cannot direct customers to the private placement since his broker-dealer is not the private placement sponsor StatusC C. The registered representative can direct customers to the private placement only if the venture capitalist is a member of FINRA StatusD D. The registered representative can direct customers to the private placement only with the prior written approval of his employer

The best answer is D. Under FINRA rules, registered representatives are prohibited from effecting "private securities transactions." As a registered representative, one is an agent for the firm and all transactions must be effected through the firm in one's agency capacity. However, FINRA does allow an exemption from this prohibition. If a registered representative: •provides written notice to the member of the transaction, and •details in writing any compensation to be received, and •obtains express approval in writing from the member firm, then the associated person can perform the transaction. In addition, the member must record the transaction on its books as if it had been effected through the firm.

A customer has fully paid marginable securities in his vault at home that he wishes his brokerage firm to hold. Which statements are TRUE? I The brokerage firm can charge for this service II The brokerage firm cannot charge for this service III The securities must be segregated and placed in safekeeping IV The securities can be commingled with those of other customers StatusA A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

he best answer is A. Brokerage firms can charge for clerical services such as safekeeping of securities. Fully paid customer securities must be segregated by the brokerage firm and placed in safekeeping. Such fully paid customer securities cannot be commingled with customer margin securities; cannot be commingled with firm positions; and cannot be rehypothecated to a bank.

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