Regulations Finra Rules

What is the FINRA 5% Policy

5% Policy - Applicability The 5% Policy applies to all exchange and OTC transactions (secondary market) except for municipal bond transactions that are covered by a separate MSRB "fair pricing" rule. It does not apply to new issue offerings - the primary market.

In a secondary offering, a member who acted as manager or co-manager CANNOT issue a research report on that company within how many days following the effective date? A 3 calendar days B 5 calendar days C 10 calendar days D 25 calendar days

A. A member, who acted as manager or co-manager of a secondary offering for an issuer, may not issue research reports regarding the issuer within 3 calendar days following the effective date of the offering. Research Report Issuance... A member may not issue research reports regarding an issuer for which the member acted as manager or co-manager of an initial public offering within 10 calendar days following the effective date of the offering. For a secondary offering, the issuance of research reports cannot occur within 3 calendar days following the effective date of the offering.

A registered representative is prospecting customers for a new mutual fund being sponsored by his firm. All of the following information items mailed to customers must be accompanied by a prospectus EXCEPT: A letter stating the fund's objective(s) B sales literature that promotes the fund C research report recommending the fund D advertisement about the fund

A. Because mutual funds are "prospectus offerings," nothing can be sent to customers that can be considered an offer or advertisement of the security unless the material is preceded or accompanied by a prospectus. Sales literature, advertising, and research reports fall into the category of items that are "offers" of the security and must be accompanied by a prospectus. A letter simply stating the fund's objectives is not promotional and does not have to be accompanied by a prospectus. This type of communication is specifically exempted from the prospectus requirement under SEC Rule 135A.

Registered representatives may be compensated based on which of the following? I Trading commissions paid by the brokerage firm to the representative II Trading commissions paid by the customer to the representative III Salary paid by the brokerage firm to the representative IV Salary paid by the customer to the representative A I and III B I and IV C II and III D II and IV

A. Compensation cannot be paid by the customer to the registered representative. Only the broker-dealer may pay compensation to the registered representative.

Which of the following gifts is the maximum permitted under FINRA rules? A One gift of $100 value per person per year B Unlimited number of gifts of $100 value per person per year C One gift of $200 value per person per year D Unlimited number of gifts of $200 value per person per year

A. FINRA limits gifts related to one's activities in the securities industry to a maximum of $100 value per person per year. This limit is applied to either giving, or receiving, the gift.

Fidelity bonds are maintained by brokerage firms to protect against loss due to: A embezzlement by employees B catastrophic events C severe market volatility D regulatory changes

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

All of the following are violations of FINRA's Conduct Rules EXCEPT: A guaranteeing a customer account against loss B selling a customer an exempt security with a written agreement to buy back that security at a fixed price C making blanket recommendations of low price speculative stocks to customers D selling dividends to customers by inducing customers to buy stocks just prior to the ex date

B. Choice B 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. Review

Registered representatives are required to attend a compliance meeting at their firm: A Semi-annually B Annually C Every 2 years D Every 3 years

B. Every member firm must hold an annual compliance meeting with each registered employee, covering compliance issues that have arisen over the past year, and the procedures and policies that have been put in place to address those issues.

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 FINRAIII The FINRA name must be used on the website IV The FINRA name, when used, must be hyperlinked to the FINRA website A I and III B I and IV C II and III D II and IV

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. Review

A registered representative solicits a customer to buy a stock, explaining that: "Because the trade settles in 2 business days, if the stock rises, you can sell at any time during this time period and we will send you a check for the net profit. On the other hand, if the stock falls, you can sell at any time during this time period and only have to pay for the net loss." This statement is: A true B a misrepresentation of the requirements of Regulation T C permitted only if the security or transaction is exempt D permitted only if the security or transaction is non-exempt

B. Regulation T requires that customers pay for securities purchases promptly. If the customer sells the position prior to settlement, payment for the purchase is still required. The only way in which a customer is required to pay for a net loss, or will receive the proceeds of a net gain, is if both the buy and sell occur on the same day.

Which statements are TRUE regarding the purchase of a new issue directly from the underwriter by industry personnel? I Purchase of IPOs directly from the underwriter that open for trading in the secondary market at a discount price is permitted II Purchase of IPOs directly from the underwriter that open for trading in the secondary market at a premium price is permitted III Purchase of IPOs directly from the underwriter that open for trading in the secondary market at a discount price is prohibited IV Purchase of IPOs directly from the underwriter that open for trading in the secondary market at a premium price is prohibited A I and II B III and IV C I and IV D II and III

B. The FINRA rule restricting member firms and their employees from buying IPOs applies to all equity IPOs - it makes no difference if the IPO opens for trading at a discount or a premium. Note, however, that once the shares start trading in the secondary market, anyone can buy them at the current market price.

Under SEC rules, a representative would be considered to be delivering a "research report" to customers if the communication: I analyzes securities and provides a basis upon which to make an investment decision II analyzes securities and makes a projection of future performance III is distributed to 5 or more clients IV is distributed to 15 or more clients A I and III B I and IV C II and III D II and IV

B. The SEC defines a research report as "any client communication that analyzes individual securities or companies if it provides information reasonably sufficient upon which to base an investment decision and is distributed to at least 15 persons." If a representative gives a presentation to clients that meets this definition, then the representative would be considered an "analyst" and must give all of the required disclosures of potential conflicts of interest required of research analysts when they recommend a security.

Which statement is TRUE? A Both customer trade confirmations and account statements must be retained for 3 years B Customer trade confirmations must be retained for 3 years and customer account statements must be retained for 6 years C Customer trade confirmations must be retained for 6 years and customer account statements must be retained for 3 years D Both customer trade confirmations and account statements must be retained for 6 years

B. Under SEC rules, customer trade confirmations must be retained for 3 years, while customer account records (statements of account) must be retained for 6 years.

ACME Life Insurance Company has come out with a new Variable Life product that it wishes to promote and it invites a large number of its licensed agents to a luncheon and talk to introduce the product. The agents: A can attend without having to take any further action because they are licensed B can only attend if they are licensed in the state where the luncheon is being held C can only attend if they inform their broker-dealer in writing and receive firm approval D cannot attend because it is a conflict of interest

C. The issue here is that the luncheon is not being held by the member firm employer; rather it is being held by the insurance company that is marketing the variable life product. Registered representatives are not allowed to accept remuneration from anyone other than their firm unless they inform the firm in writing and follow the firm's instructions.

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 statement is TRUE? A FINRA member firms are prohibited from using 3rd party research reports B 3rd party research reports can be sent to customers if prior approval is obtained from FINRA C 3rd party research reports can be sent to customers if prior approval is obtained from the Supervisory Analyst and the Compliance Officer of the firm D 3rd party research reports can be sent to customers without any additional approvals required

C. 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 being sent out. This would be approval of the supervisory analyst. In addition, if the communication is going to more than 25 existing or prospective retail clients (as is the case here), it is a "retail communication" that requires prior principal approval.

The FINRA 5% Policy requires that consideration be given to which of the following when determining mark-ups and commissions? I Level of service provided by the firm II Type of security involved in the transaction III Financial condition of customer IV Dollar amount of the transaction A I and II only B III and IV only C I, II, and IV D I, II, III, IV

C. 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. in determining a fair and reasonable mark-up or commission, the following should be considered: Type of security involved; Availability of the security; Dollar amount of the transaction; Level of service provided.

Which statement is TRUE? A A registered representative can sign the name of a customer on an arbitration agreement B A registered representative can sign the name of a customer on a margin agreement C A customer can sign her name on a trading authorization, allowing a registered representative to trade her account D A third party can sign the name of a customer on a joint account agreement

C. 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. Thus, Choices A, B, and D are wrong. Customers can sign trading authorizations, allowing anyone (including registered representatives) to trade their account.

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 A I and III B I and IV C II and III D II and IV

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: A management fees charged by the funds B past performance of the funds C projected earnings of the funds D liquidity of the fund's investment holdings

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.

To make a public offering of a Direct Participation Program, which statement is TRUE? A No registration is required because the security is exempt B The issue must be registered with FINRA C The issue must be registered with the SEC D The issue must be registered with the MSRB

C. Public offerings of direct participation programs are "non-exempt" offerings under the Securities Act of 1933, and must be registered. The MSRB has no jurisdiction over direct participation program offerings, since these are not municipal securities. DPP offerings are regulated by FINRA, but they are not registered with FINRA.

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

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 exceptions are customer complaints, which must be retained for 4 years, and customer account statements, which must be kept for 6 years.

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 A I and III B I and IV C II and III D II and IV

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.

A registered representative at another member firm has a client who wishes to buy a Direct Participation Program (DPP) unit, a product that is not offered through his firm. He has a friend that is a registered representative at another member firm where DPPs are sold, and offers to refer the prospective client in exchange for a small fee. Which statement is TRUE? A This is permitted since the referral payment is small B This is permitted because the recipient of the referral fee is a registered individual C This is permitted as long as the client is informed that a referral fee has been paid D This is prohibited

D. Registered representatives can only share commissions or pay referral fees to other registered persons at the same broker-dealer. Because these 2 representatives work for different firms, payment of the referral fee is prohibited. Review

A customer wishes to give a $1,000 cash "bonus" to a registered representative for doing such a good job. The registered representative may: A accept the bonus without giving notification to the firm B accept the bonus if notification is given to the firm C tell the customer to donate the money to a specific charity that the registered representative supports D tell the customer to donate the money to an immediate family member that the registered representative supports

c. FINRA does permit registered representatives to accept gifts of up to $100 in value per year per customer. Since this gift exceeds that amount, it cannot be accepted under any circumstances. There is nothing prohibiting the registered representative having the customer donate this money to a charity - as a matter of fact, it's a rather nice gesture.

All of the following gifts given by a mutual fund sponsor to a registered representative violate FINRA rules EXCEPT: A a discount from the public offering price that is not included in the fund prospectus B wholesale overrides on fund sales C $50 per person per year D a trip to Hawaii based solely on sales volume

s C. 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. Therefore, registered representatives cannot be given "discounts," wholesale overrides, or excessive gifts such as trips. 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."

What to remember for OUT-Side Business activities

written approval only to manager but must be reported to manager and finra.

Under FINRA rules, when no proxy contest is involved, the proxy of a customer whose shares are margined, that is not returned by that customer, is: A not counted in the voting B counted in the voting only if a tie occurs C voted by the member firm D voted by the management of the company

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 branch manager puts a billboard in the branch window that states: "Now is a great time to invest in stocks!" This is considered to be: A advertising B sales literature C public forum D correspondence

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 retail clients, scripted speeches delivered to more than 25 existing or prospective retail clients, password-protected websites Review

Any materials handed out to attendees must be filed with FINRA for seminars involving all of the following investments EXCEPT: A Corporate debentures B Collateralized Mortgage Obligations C Mutual funds D Direct Participation Programs

A. FINRA's general rule on filing of retail communications is that for a member firm's first year of operations, all retail communications must be filed 10 business days in advance of use. Thereafter, no filing is required, but the member firm is subject to spot check. However, there are exceptions to the general rule. Retail communications that must ALWAYS be filed 10 business days in ADVANCE of first use are: Options retail communications; and Mutual fund retail communications with member-prepared performance rankings. (Evidently FINRA ran into problems with these, so it wants these pre-filed at all times.) Retail communications that must ALWAYS be filed 10 business days AFTER first use are: All other mutual fund retail communications; CMO retail communications; and DPP retail communications. (The Investment Company Act of 1940 requires an SRO to get copies of investment company advertising; and the FINRA department that gets these also handles CMO and DPP ads, so they all are grouped under the same rule.)

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: A conduct a reasonable investigation concerning the security and the issuer's representations about it B register the securities with the SEC C determine that each potential purchaser is sophisticated D list the issue on a recognized stock exchange

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.

Under FINRA rules, a research report to be sent to customers must be prepared, or approved, by a: A supervisory analyst B financial analyst C branch manager D registered representative

A. FINRA rules require that a research report that will be made available to customers be prepared or approved by a supervisory analyst. There is no requirement to file the report with FINRA, nor to obtain their approval before sending out the report. Review

On Tuesday, May 14th, a registered representative receives an order to sell 100 shares of ABC stock that has been "transferred and shipped" to the customer. Before executing the order, the registered representative must make sure the securities can be delivered by: A Thursday, May 16th B Friday, May 17th C Monday, May 20th D Tuesday, May 21st

A. FINRA rules require that orders to sell cannot be accepted unless the firm has reasonable assurance that the securities can be delivered in 2 business days (regular way settlement). Two business days after Tuesday, May 14th is Thursday, May 16th. Also, note that the location of the securities must be noted on the order ticket to sell.

To take a second job, under FINRA rules, prior written approval must be obtained from: I Branch Manager II FINRA III Securities and Exchange Commission A I only B I and II C II and III D I, II, III

A. For a registered representative to take a second job requires approval of the branch manager under FINRA rules. The manager is acting for the member firm when doing so. There is no requirement to get approval from FINRA or the SEC.

In order to open a new account for a customer that wishes to buy IPOs, the: A customer must sign a representation letter B registered representative must sign a representation letter C branch manager must sign a representation letter D all of the above

A. 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.

A registered representative is a 5% 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? A The account can buy the issue without restriction B The account can buy the issue if the branch manager approves C The account can buy the issue if the registered representative agrees not to share in the profit on the position D The account is prohibited from buying the new issue

A. Registered representatives are prohibited from buying new issues from underwriters. This is true for any account in which registered representatives or other restricted persons have a greater than 10% participation as well. Thus, this account would NOT be prohibited from buying the IPO.

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

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.

Which of the following is NOT defined as correspondence? A E-mail distributed to 15 existing retail customers B Seminar text for a speech that will be delivered to 30 prospective retail clients C E-mail sent to 10 prospective retail clients D Prospecting letter sent to 5 sales leads

B. Correspondence is defined as a communication to 25 or fewer existing or prospective retail clients. Choices A, C and D are items of correspondence. These can be reviewed and approved by a manager or principal after they are sent out, as long as the firm has put in appropriate correspondence compliance procedures. Also, these are not subject to any FINRA filing requirement. Choice B, a speech text, is a "Retail Communication," defined as a communication to more than 25 existing or prospective retail clients. Retail communications require prior principal approval and can be required to be filed with FINRA. Note that the main categories of retail communications are "advertising" (general audience, such as TV, radio, newsprint, websites) and "sales literature" (specific audience, such as a research report, form letter, scripted speech, password-protected website).

Which of the following would NOT have to be reviewed by a principal? A Form letters mailed to all customers B Form letters for internal use within a firm C Letters recommending securities to all clients of a registered representative D Complaint letters received from customers

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). 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 Internal documents of a brokerage firm do not have to be reviewed by a manager or principal. Because the public does not see these, FINRA is not concerned with their content. All customer complaint letters must also be reviewed and handled by a principal.

The minimum asset size threshold for an investor to be considered an "institutional client" for purposes of the FINRA communications rules is: A $25 million B $50 million C $75 million D $100 million

B. 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.

A communication sent to 30 retail clients and 10 institutional clients is defined as (a): A Correspondence B Retail Communication C Public Appearance D Institutional Communication

B. 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. (Also note that the "previous" FINRA rule defined "advertising" (general audience, such as TV, radio, newsprint, websites) and "sales literature" (specific audience, such as a research report, form letter, scripted speech, password-protected website). These now fall into the definition of "retail communications," but advertising and sales literature must still be known for the exam).

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

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. Custody of Fully Paid Securities 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.

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

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.

An electronic communication that recommends securities that is sent by a registered representative to each of her 77 customers is defined as: A Advertising B Sales Literature C Correspondence D Educational Material

B. Sales Literature FINRA defines communications with the public as either:Correspondence: A communication made available to 25 or fewer existing or prospective retail clientsRetail 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 boardsSales 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

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 A I and III B II and IV C I, II, IV D I, II, III, IV

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). Recommending the purchase of a put option to protect against a downwards market move is perfectly acceptable, since that is what the option will do, and thus does not violate FINRA rules.

Which of the following decisions by a registered representative require specific customer authorization? I Determining price and time of execution in a cash account II Determining price and time of execution in a margin account III Determining price and the number of shares traded in a cash account IV Determining price and the number of shares traded in a margin account A I and II B III and IV C I and III D II and IV

B. A written power of attorney is required only if a registered representative chooses more than price and/or time of execution in a customer transaction. Thus, if the registered representative chooses the security to be traded or the size of the trade, a discretionary power of attorney is required. It makes no difference if the transaction is effected in either a cash account or a margin account.

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 A I and III B I and IV C II and III D II and IV

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.

A FINRA member firm has placed a "Buy" recommendation on ABCD stock. In his presentation to customers, a registered representative wishes to use a third party research report that recommends the stock as well. The representative believes that showing that other firms are bullish on the stock will make the customers more at ease with this recommendation. Which statement is TRUE about the use of the third party research report? A Representatives are prohibited from using third party research reports in presentations to customers B The use of a third party research report requires prior approval of the supervisory analyst of the member firm C The use of a third party research report requires prior approval of FINRA D The use of a third party research report is per

B. Any research report issued by a FINRA member firm must be approved in writing by a Supervisory Analyst. This is true even if the firm "buys" that research report from an outside vendor (so-called "third party" research). Also note that if the research report were distributed to more than 25 existing or prospective clients, it is also a "retail communication" that requires prior principal approval.

The enforcement authorities for the U.S. securities markets and market participants include: I FINRA II SEC III MSRB A I only B I and II C II and III D I, II, III

B. Both FINRA and the Securities and Exchange Commission (SEC) regulate, and have enforcement capability over, the U.S. securities markets and market participants. The Municipal Securities Rulemaking Board creates rules for municipal market participants, but has no enforcement ability - enforcement of MSRB rules is performed by FINRA.

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: A engagement B entanglement C entrapment D enablement

B. FINRA states that as a general matter, 3rd party posts by customers or anyone else on social media sites established by the firm or its personnel do not fall under its communications rules. The reason why is because the member firm or its personnel had nothing to do with creating or shaping the content of the post. However, FINRA then goes on to state that if the firm or its personnel is involved in creating or shaping the content (FINRA calls this "entanglement"), then the post comes under FINRA's communications rules. Because that is the case with the posting in this question, and it will be seen by the general public, it is defined as a "retail communication" that must be preapproved by a principal and that can be required to be filed with FINRA.

A registered representative with a wealthy clientele has many clients that are officers of publicly held companies. The registered representative receives an order from the executive vice-president of ADAP Corp. to sell 4% of the outstanding shares. Prior to placing this order, the registered representative may, in his or her personal account,: A buy ADAP put options B buy ADAP common stock C sell ADAP call options D sell short ADAP stock

B. Front running a customer order that is likely to have a market impact is a prohibited practice. This officer is selling 4% of the outstanding shares, which is likely to depress the price of the stock. Prior to placing the order, the representative cannot personally take a position in that stock to profit from the likely market decline - thus, the representative cannot sell that stock short, cannot buy put options on the stock, and cannot sell call options on the stock. There is no reason why the representative cannot buy that stock for his or her personal account - since this is profitable if the stock rises, and will result in a loss if the stock falls.

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 A I and III B I and IV C II and III D II and IV

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. Review

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

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).

Who does NOT have to be licensed in a broker-dealer? A Chief Executive Officer B Partner who only provides capital C Chief Financial Officer D Sales individual

B. Passive owners of broker-dealers, who can be officers, are not required to be licensed. All other officers, traders, and salespersons must be registered and licensed.

A registered representative wishes to give a speech to a group of 35 potential retail clients at a restaurant. The speech is scripted and is a general discussion about investing in securities. Which statement is TRUE? A Registered representatives are prohibited from making speeches at locations other than the representative's branch office B A registered principal must be in attendance when the speech is given C Prior principal approval must be obtained and a copy of the speech must be retained in your firm's Office of Supervisory Jurisdiction D A copy of the speech script must be filed with the SEC at least 10 business days prior to the date the speech is to be given

C 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 Copies must be retained by the member firm for 3 years. Speech content should be informational, not promotional, in nature.

While as a general rule, registered representatives cannot borrow from customers, an exception is given if a representative wishes to borrow from a customer who: A has offered the loan without prompting or solicitation by the representative B works in a unrelated area in the securities industry C is a family member of the representative D is a close friend of the representative

C. As a general rule, registered representatives can neither lend money to, nor borrow money from, customers. However, as long as the firm has written policies and procedures covering this, a representative can borrow money from, or lend money to, an immediate family member who is a customer without having to give prior notice to the firm and get the firm's prior approval. For purposes of this rule, "immediate family" means parents, grandparents, mother-in-law or father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or nephew, and any other person whom the registered person supports, directly or indirectly, to a material extent.

Which statement is TRUE? A In a communication to clients, a registered representative can say that he or she is a member of FINRA B In a communication to clients, a registered representative can say that he or she is a endorsed by FINRA C In a communication to clients, a member firm can say that it is a member of FINRA D In a communication to clients, a member firm can say that it is endorsed by FINRA

C. Member firms can only say that they are FINRA members. They cannot say that they are approved or endorsed by FINRA. A registered representative cannot say that he or she is a member of FINRA - it is the firm that is the member, not the rep!

A representative who has a bank as a client is permitted to borrow from that bank: A under no conditions B as long as the loan is documented in writing C as long as the loan is offered on the same terms and conditions as those that apply to the general public D without restriction because the bank is an institutional lender

C. Representatives are prohibited from borrowing from their clients. However, there are permitted exceptions to the rule: Representatives are permitted to borrow from immediate family members who are clients (such as a husband borrowing from a wife or vice-versa); and Representatives are permitted to borrow from banks who are clients, as long as the terms and conditions of the loan are the same as those given to the general public.

A client receives a $150 gift card from a broker-dealer for giving a testimonial about her highly positive experience with her registered representative. What is the broker-dealer NOT required to disclose if the testimonial is used in a retail communication? A The fact that the testimonial may not be representative of the experience of other customers B The fact that the maker of the testimonial was paid C Whether any guarantee of growth was made by the representative to induce the giving of the testimonial D The fact that the testimonial is no guarantee of future performance or success

C. The FINRA rule on testimonials used in communications states that: "Retail communications or correspondence providing any testimonial concerning the investment advice or investment performance of a member or its products must prominently disclose the following: The fact that the testimonial may not be representative of the experience of other customers. The fact that the testimonial is no guarantee of future performance or success. If more than $100 in value is paid for the testimonial, the fact that it is a paid testimonial."

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? A No, because only individuals who are currently registered can collect commissions B No, because the representative must currently be servicing accounts to receive commissions C Yes, if there is a written agreement between the member firm and the registered representative that is executed prior to termination D Yes, because the representative will now be doing charitable work

C. As a general rule, only currently registered individuals can be paid commissions. However, there is an exception to this FINRA rule that typically applies to "RRRs" - Retiring Registered Representatives. It is designed to give these persons an income stream in retirement, where if the registered representative retires, then he or she can contractually agree with the firm to continue to pay trail commissions in retirement. However, it can be used in a situation like this as well - but, of course, the member firm must agree to this.

Which of the following is NOT required to be retained on file by a broker-dealer? A Customer complaints B Trade confirmations C IPO prospectuses D Correspondence

C. Broker-dealers are not required to retain prospectuses as a record. They are created by the issuer, not the broker-dealer, and copies can be obtained by the SEC, which has an electronic recordkeeping system for them. Customer complaints, trade confirmations, and correspondence 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: A a violation of FINRA rules B permitted because less than $100 was spent on a per-person basis C permitted if it complies with the firm's policies and procedures D permitted under all circumstances

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.

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? A If the representative accepts the invitation, this is a violation of FINRA rules because the value is more than $100 B If the representative accepts the invitation, this is a violation of FINRA rules because there is a conflict of interest C The representative can only accept the invitation if he or she notifies the member firm and follows the firm's policies and procedures D The representative can accept the invitation without restriction

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.

A prospective customer has been solicited by a registered representative, and prior to opening an account, the customer wishes to check on the disciplinary background of that registered representative. Which statement is TRUE? A The customer cannot get this information B The customer can obtain this information from the SEC C The customer can obtain this information from the BrokerCheck website run by CRD D The customer can obtain this information from the FBI

C. 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 registered representative at a FINRA member firm has been elected to his cooperative apartment building's Board of Directors. Which statement is TRUE? A This event must be reported as an Outside Business Activity to FINRA on the individual's U-4 Form B This event must be reported to the individual's employer C 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 D No report is required to either FINRA or the employing member firm

C. FINRA requires that associated persons give written notice to their employer and receive written approval from their employer, to serve as an officer, director, partner or employee of another business organization. Being compensated is not the sole determinant here. The issue is that an individual who is on the Board of Directors of a cooperative apartment house, while not compensated, is in a position to "steer" the Board when it makes a decision as to investing the coop's reserve fund and operating fund. Thus, FINRA defines this an an OBA (Outside Business Activity) that requires employer approval and that also must be reported on that individual's U-4 Form. This information then flows into that registered representative's BrokerCheck report and shows as an OBA on the report. The intent of the OBA disclosure in BrokerCheck is that a potential customer can assess how much time a representative is devoting to his or her business as a representative, as opposed to how much time the representative is devoting to Outside Business Activities.

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 Appraisals of securities in a customer portfolio A I and II only B III and IV only C I, II, III, IV D None of the above

C. FINRA rules allow fair and reasonable charges for "clerical" services that are unrelated to trading and market making (charges to customers for trading and market making are covered under the 5% Policy). These services include collection of dividends on street name stock; safekeeping of securities; transfer of securities; and appraisals of securities.

Under FINRA rules, if an institutional communication is distributed to retail clients: I it is considered to be an institutional communication II it is considered to be a retail communication III it must be approved by a principal prior to distribution IV it is subject to post use review and approval by a principal A I and III B I and IV C II and III D II and IV

C. 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. Review

A firm has a social media account and a very satisfied client wants to post a testimonial on it. The client sends the proposed post to her representative, who edits it to make it more "impactful" and then returns to the client, who posts it on the firm's social media site. Under FINRA rules, this communication would be defined as (a): A correspondence B public forum C retail communication D 3rd party post

C. FINRA states that as long as the firm or representative has no involvement with a customer posting on a social media site, even one owned by the member firm, then it does not come under FINRA's communications rules. Then FINRA goes on to state that if the member firm or its representative writes or edits the social media post (FINRA calls this "entanglement") then it does come under FINRA 's communications rules. That is the case with this posting, and because it would be seen by the general public, it becomes a retail communication that must be approved in advance by a principal, and which can be required to be filed with FINRA.

Which statement is TRUE about the use of the FINRA name on a member firm's or associated person's website? A The FINRA name cannot be shown B The FINRA name must be shown C If the FINRA name is shown, it must be hyperlinked to the FINRA website D If the FINRA name is shown, it must be stated that FINRA does not sponsor the website

C. 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.

A customer has marginable securities held in an account that has a debit balance at the brokerage firm. Which statements are TRUE? I The securities must be segregated and placed in safekeeping II The securities can be commingled with those of other margin customers III The securities may be rehypothecated to a bank for a loan by the broker IV The securities cannot be rehypothecated to a bank for a loan by the broker A I and III B I and IV C II and III D II and IV

C. 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. However, margin securities are pledged to the broker-dealer as collateral for the margin loan (debit balance). It is these securities that may be commingled with other customer margin securities; and these securities can be rehypothecated to a bank for a loan by the broker.

Which of the following is NOT required to be disclosed when a brokerage firm makes a securities recommendation? A Whether the firm is an investment banker for that issuer B Whether the firm is a market maker in that issuer's securities C Whether the firm's officers own that issuer's securities D Whether the issuer's employees own that issuer's securities

D. It must be disclosed if the firm, (or its officers); Owns the security being recommended; Owns options or warrants on the security being recommended; Makes a market in the security being recommended; Has been a manager or co-manager in an underwriting of that company's securities within the past 12 months; or Intends to seek underwriting business from that company in the upcoming 3 months.

A registered representative has done fund raising and charitable work for a not-for-profit hospital for many years and has just been invited to join the hospital's Board of Directors. She will get no compensation for this. Does she have to amend her U4 filing for this? A No, because it is charitable work B No, because she has been fund raising for the hospital for many years C No, because she is not being compensated D Yes, because this is an outside business activity

D. Any "OBA" - Outside Business Activity - must be reported to the firm and must be approved by the firm. Furthermore, it must be reported on that registered representative's U4 Form and is disclosed in that individual's BrokerCheck report. Remember that an individual does not have to be paid for an OBA to exist. If the representative is in the position to steer investment activities of the outside business entity - that makes it an OBA. The fact that the registered representative, on the Board of Directors of the hospital, would be in a position to steer the investment activities of the hospital's operating and endowment funds - makes this an OBA.

Which of the following would be considered to be a "retail communication?" A A direct mailing sent to 25 existing retail clients B A research report sent to 20 prospective retail clients C An institutional communication D A website maintained by a broker-dealer that provides daily market information

D. 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.

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

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 representative is hosting 20 wealthy guests at a dinner seminar at a Michelin star-rated restaurant, and when coffee and dessert are being served, she intends to give a small talk about the potential benefits of investing in hedge funds. This is defined by FINRA as a(n): A retail communication B institutional communication C research report D public appearance

D. FINRA describes a public appearance as a spontaneous, unscripted, live presentation to potential investors. These are not subject to FINRA filing rules and do not require prior principal approval (unless the firm requires this as an internal procedure). However, they are subject to the firm's written supervisory procedures, which must include post-use review and approval by a principal. (Also note that if the talk included specific recommendations that allowed the participants to form a purchase decision, the talk could also be defined as a research report - but that is not where this question is going!)

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: A recommend the purchase of his employer's stock to existing customers B solicit new customers to buy his employer's stock C write and distribute a research report recommending the purchase of the employer's stock D accept unsolicited orders for his employer's stock; but cannot solicit orders for, nor recommend the security

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.

In order to get "M&A" business from a company that is looking to make an acquisition in the next month, an investment banker offers a new issue allocation to an officer of that company who is in a position to direct that business to the broker-dealer. This is: A permitted under FINRA rules since the officer as long as the company is not in the financial services business B permitted under FINRA rules as long as the officer agrees to hold the stock for a minimum of 6 months before selling those shares C prohibited under FINRA rules because all officers of publicly held companies are prohibited from buying IPO shares D prohibited under FINRA rules because this is "spinning"

D. 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). An executive officer or director of a publicly held company cannot receive a new issue allocation if the company is currently an investment banking client of the member; if the member has received investment banking compensation from the company in the past 12 months; or if the member expects to be retained by the company to provide investment banking services to the company in the upcoming 3 months (which is the case in this question).

The research department of a brokerage firm has prepared a buy recommendation for the common shares of a company. Which of the following is NOT required to be disclosed in the report? A That the firm makes a market in that company's shares B That the firm was a manager or co-manager in an equity underwriting of that company's securities within the past 12 months C That the firm received compensation from investment banking services rendered to that issuer within the past 12 months D That the firm recommends the purchase of a mutual fund which holds that issuer's equity securities

D. 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). Because the firm doesn't decide which securities are purchased in a mutual fund, this is not required to be disclosed.

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 A I and III B I and IV C II and III D II and IV

D. The SEC defines a research report as "any client communication that analyzes individual securities or companies if it provides information reasonably sufficient upon which to base an investment decision and is distributed to at least 15 persons." If a representative gives a presentation to clients that meets this definition, then the representative would be considered an "analyst" and must give all of the required disclosures of potential conflicts of interest required of research analysts when they recommend a security. In this case, since only 10 customers are invited, the definition is not met.

A registered representative recommends the purchase of a new issue to the customer, and believing that the prospectus is too difficult for the customer to understand, prepares an abstract of the prospectus to send for the customer to read. This action is: A permitted because it helps the customer better understand the nature of the investment B permitted only if the communication is pre-filed with FINRA C permitted only with the permission of the issuer D prohibited

D. Alterations to a preliminary prospectus or final prospectus are prohibited. These documents have been filed with the SEC; and it is expected that the public will receive them in the exact form as filed with the SEC. Any changes to the documents invalidate the filing.

A FINRA member distributes a firm quote through the OTCBB and then does not honor the quote. This is: A Free Riding B Front-Running C Interpositioning D Backing Away

D. Any quote that is published without qualification is considered to be a "firm" quote to be honored for a normal trading unit. Backing away from quotes is a prohibited practice under FINRA rules.

Who is responsible for sending issuer reports to brokerage firm customers who have their shares held in street name? A Corporate issuer B FINRA C DTCC D Broker-dealer

D. Corporate reports sent by issuers to shareholders include annual audited financial statements and any proxies that require a shareholder vote - such as voting for the members of the Board of Directors. When stock is held in street name, the issuer does not know the identity of the beneficial owner. In this case, the issuer sends the reports or voting material to the broker-dealer, and the broker-dealer distributes them to the beneficial owners. The cost of distribution is paid by the issuer to the broker-dealer. The beneficial owners cannot be charged for this.

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? A The account can buy the issue without restriction B The account can buy the issue if the branch manager approves C The account can buy the issue if the registered representative agrees not to share in the profit on the position D The account is prohibited from buying the new issue

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.

A report must be sent promptly to FINRA if a registered employee of a member firm: I has violated the Securities Acts II is the subject of a written customer complaint alleging theft III is suspended or expelled by another Self Regulatory Organization IV is arrested or convicted of any criminal offense A I only B II and III only C I, II, IV D I, II, III, IV

D. FINRA does require notification for a variety of reasons. If a registered representative 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 registered individual leaves the industry, and is concerned that he might not reassociate with another member firm within 2 years. The individual approaches a friend at another member firm to hold his license during his absence. This action is: A permitted without restriction B permitted with the permission of the principal C permitted with the permission of the self-regulatory organization D prohibited

D. FINRA prohibits "parking" of licenses when an individual is not affiliated with a member firm. If that person remains unaffiliated for 2 years, all licenses lapse. Parking Licenses If a registered person leaves the industry, all licenses lapse after 2 years. If that person re-enters the industry after 2 years, all of the licensing examinations must be taken again. A person cannot arrange to have a member firm hold his or her license during the period when he or she is not employed at a member firm. This is a prohibited practice known as "parking a license."

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: A allowed without restriction B allowed with the oral approval of the principal C allowed if the trade is performed as "agent" D not allowed

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!)

Under FINRA rules, a registered representative: A may borrow money from a customer only with the permission of FINRA B may borrow money from a customer only with the permission of the branch manager C may borrow money from a customer only with the permission of the customer D may not borrow money from a customer

D. FINRA prohibits registered representatives from borrowing money personally from a customer. Exceptions to the rule are permitted if the customer is an immediate family member; if the customer is a "significant other" such as a live-in girlfriend or boyfriend; or if the customer is a bank, making the loan on the same conditions that it would give to anyone else.

A registered representative is permitted to borrow securities from a customer: A only if the customer has signed a margin agreement B only if the customer has signed a loan consent agreement C as long as the securities will be replaced no later than the end of that month D under no circumstances

D. FINRA prohibits registered representatives from either lending money or securities personally to a customer or borrowing money or securities 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.

Under FINRA rules, a readily apparent reference to BrokerCheck and hyperlink to the BrokerCheck website is required: A on a member firm's initial webpage that is intended to be viewed by retail investors B on a member firm's web page that includes a professional profile of an individual registered person who conducts business with retail investors C on a member firm's web page that includes the professional profiles of a number of registered persons who conduct business with retail investors D on all of the above

D. FINRA requires that a readily apparent reference to BrokerCheck and a hyperlink to the BrokerCheck website be shown on a member firm's initial webpage that is intended to be viewed by retail investors and also on any member firm web page that includes a professional profile of a registered person (or a number of registered persons) who conducts business with retail

All of the following time stamps are on an order ticket EXCEPT the time of order: A entry B execution, if executed C cancellation, if canceled D confirmation

D. 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 of order confirmation. These time stamps are now recorded electronically.

If a registered representative fails to complete the Regulatory Element of the Continuing Education requirement within the stated time period, that person: A can continue to perform all of the functions of a registered representative B can only accept unsolicited orders from customers C can only be compensated on a salary basis; commission compensation is prohibited D must cease performing all of the functions of a registered representative

D. 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.

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

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.

The Regulatory Element component of the "Continuing Education" requirement must be completed: I on the registrant's 1st anniversary of registration II on the registrant's 2nd anniversary of registration III every 2 years after the initial review IV every 3 years after the initial review A I and III B I and IV C II and III D II and IV

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. On each registered person's 2nd anniversary of registration and every 3rd year thereafter, a Regulatory Element Continuing Education program must be completed. This is administered by FINRA on the PROCTOR system. The Regulatory Element is a training session that must be completed within 120 days of notification. If the Regulatory Element is not completed, that person's license is suspended until completion occurs.

An individual who has successfully passed the SIE exam may: A only sell equity securities B only sell securities that are either issued or guaranteed by the U.S. Government or its wholly-owned agencies C only sell redeemable securities of investment companies registered under the Investment Company Act of 1940 D not sell any securities until successfully completing the appropriate representative qualification exam

D. The SIE is a "corequisite exam." In order to be licensed as a registered representative, the SIE must be passed; and the appropriate representative qualification exam must be passed (e.g., Series 6 or Series 7). Review

A registered representative tells the following to all of his customers: "I am aggressive in my approach; and frequently recommend that securities positions be changed during each day as market conditions fluctuate. While this approach can result in higher commission costs, it produces superior returns." All of the following statements are true about this statement EXCEPT: A there is a high risk that the registered representative is churning his accounts B the registered representative has made a prohibited performance guarantee to his customers C the registered representative appears to be disregarding the requirement to determine suitability for each customer D the registered representative has failed to disclose the remuneration received from each transaction, as required under industry rules

D. This registered representative appears to be churning his accounts, and has made a prohibited performance guarantee by not qualifying the statement that "it (this strategy) produces superior returns" with another statement mentioning the possibility that this may not occur. There is no requirement for a registered representative to disclose to the customer the amount of commission earned by the registered representative on each transaction.

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: A must be canceled B ticket can be corrected by the registered representative that took the order C ticket can be corrected by the Purchase and Sales Department D ticket can be corrected with the approving signature of the Branch Manager

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.

All of the following are violations of FINRA rules EXCEPT: A refusal to trade at a stated quote unless the quote has been identified as nominal B selling mutual fund shares to customers in quantities just below breakpoint levels C pledging fully paid customer securities to a bank to secure a loan D exchanging customer margin securities with other collateral to secure a debit balance

D. Under the "margin agreement," margin securities are held in street name and can be commingled with the securities of other customers. Thus, collateral at a bank can be changed at any time, since it consists solely of commingled street name securities. Fully paid securities must be segregated and placed in safekeeping. Selling to a customer just below a breakpoint is a violation. Clearly, refusal to trade at stated quotes is a violation, since quotes must be "bona fide."

FINRA enforces regulations in which of the following markets? I First Market II Second Market III Third Market IV Fourth Market A I only B II only C I, III, IV D I, II, III, IV

FINRA is the regulator for all of the securities markets - the Primary Market (new issues); the First Market (trades on exchanges); the Second Market (OTC trades of non-exchange listed securities); the Third Market (OTC trades of exchange listed issues) and the Fourth Market (direct trading between institutions on ECNs and ATSs). FINRA is the regulator for all of the securities markets - the Primary Market (new issues); the First Market (trades on exchanges); the Second Market (OTC trades of non-exchange listed securities); the Third Market (OTC trades of exchange listed issues) and the Fourth Market (direct trading between institutions on ECNs and ATSs).

Buying IPOs - Spinning

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). An executive officer or director of a publicly held company cannot receive a new issue allocation if: the company is currently an investment banking client of the member; the member has received investment banking compensation from the company in the past 12 months; or the member expects to be retained by the company to provide investment banking services to the company in the upcoming 3 months.

Which disclosure is optional when advertising a CMO Tranche? A Coupon B Credit Rating C Final Maturity Date D Average Life Of Investment

The best answer is B. FINRA sets minimum disclosure requirements when advertising a CMO tranche. It requires disclosure of the: Coupon Anticipated Yield and Average Life Specific Tranche ID - Number and Class Final Maturity Date Underlying Collateral In addition, FINRA requires the following statement: "The yield and average life shown above consider prepayment assumptions that may or may not be met. Changes in payments may significantly affect yield and average life. Please contact your representative for information on CMOs and how they react to different market conditions." Then FINRA states that the following disclosures are optional: Minimum Denomination Rating Agency / Government Backing Income Payment Structure Generic Description of Tranche (e.g., PAC, Companion) Yield to maturity of CMOs Offered at Par

All of the following would be considered to be a "retail communication" EXCEPT a(n): A direct mailing sent to 30 existing retail clients B password-protected website maintained by a broker-dealer C institutional communication D internet bulletin board

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). A direct mailing to more than 25 existing or retail clients is a retail communication that is sales literature. 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.