Series 6: Regulations (FINRA Rules)

A registered representative has been called to active military duty and his registration has been placed in inactive status by the member firm. Which of the following statements are true?

Both the Firm Element of Continuing Education and the Regulatory Element of Continuing Education is suspended FINRA permits registered representatives that are called up for military duty to be placed on inactive status during which time they are not required to complete either of the Continuing Education requirements. Both the Firm and the Regulatory Elements get suspended.

FINRA member firms must retain:

advertising and sales literature for 3 years from each use FINRA rules require member firms to retain advertising and sales literature materials for 3 years from each use.

Under FINRA rules, all of the following offices of a member firm must be designated as Offices of Supervisory Jurisdiction EXCEPT a location where the member firm:

conducts securities business with the public An Office of Supervisory Jurisdiction (OSJ) is any office where a member firm approves new accounts, approves customer orders, approves advertising, maintains custody of customer funds or securities, or supervises the activities of other persons associated with the member at branch offices. A principal (Series #26 for mutual fund broker-dealers or Series #24 for general securities broker-dealers) must be resident in an OSJ. A branch office is a location that conducts securities business with the public.

The Regulatory Element component of the "Continuing Education" requirement must be completed:

on the registrant's 2nd anniversary of registration and every 3 years after the initial session is completed The Regulatory Element of the Continuing Education requirement is administered by FINRA and 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.

All of the following must meet FINRA requirements for communications with the public EXCEPT a(n):

presentation to a client FINRA's rules on communications with the public apply to communications through the media or to groups of investors. They do not apply to sales presentations to an individual customer.

All of the following information must be disclosed on the U-4 Form EXCEPT:

whether the applicant has been sued in a court of law The U-4 Form is the Uniform Securities Industry Application for associated persons. The information included on the form includes: Applicant name, address, hair color, eye color, height, weight (this descriptive information is included because if they ever want to arrest you, they know what you look like!); Employment history for the past 10 years; Residence history for the past 5 years; Record of any felony conviction and record of misdemeanor convictions that are money or investment-related; Record of disciplinary actions taken by securities, commodities, banking or insurance regulators; Record of consumer-initiated investment related complaints that are still pending or that have been settled for $15,000 or more; A questionnaire that seeks to determine if the applicant will be a risk to investors (e.g., have you ever been arrested? indicted? filed for bankruptcy? etc.); Whether the applicant will be "dual registered" (registered with more than 1 broker-dealer) or whether the applicant will take outside work; Any other names under which the individual is known. The intent is to determine if there are any events that should cause the individual's registration to be denied - which basically means that the individual is a risk to investors. There is no requirement to disclose pending lawsuits (for example, you could be sued because your dog bit the mailman - this is not required to be disclosed). However, remember that consumer-initiated investment-related complaints that are pending must be disclosed.

If a representative is called for active military duty, that individual:

will go on special inactive status in CRD and can continue to be paid by the member firm If a registered individual is called for active military duty, his or her registration goes into "special inactive status" which basically means everything is put on hold and everything resumes from the same point when that individual returns to work. Thus, the individual will not be called for CE while away on active military duty; and that individual's licenses will not lapse for being "out of the business" for more than 2 years (if the length of military service is that long). While away, the representative can continue to be paid, and can arrange for another representative to service his or her accounts and share commissions with that individual.

If FINRA requires that a member firm begin taping its phone conversations with customers, taping must begin:

within 60 days of the requirement If FINRA requires a member firm to begin taping its phone conversations with customers, the member firm must start taping within 60 days. This gives the firm enough time to order and install the taping equipment.

When a registered representative describes a municipal bond fund that invests in bonds from many states, the representative may make which of the following statements?

"The income is free of federal income taxes" The typical tax status of interest received from a municipal bond is that the interest is exempt from federal income tax; and is exempt from state and local tax only when purchased by a resident of that state. With a municipal bond fund that invests in bonds from many states, the income will be free of federal income taxes, but will be subject in part to state and local income taxes based on bonds held in the portfolio that were not issued by the purchaser's state of residence.

Which statement can a registered representative make to investors about a money market fund?

"The investment is not an obligation of any insured depository institution" A money market fund is not a bank product and does not have a bank or FDIC guarantee. It cannot be stated that the SEC approves of an investment. The only truthful statement is that the money market fund shares are NOT an obligation of an insured depository institution.

Which of the following statements may a registered representative make to a prospective customer?

"The liquidation value for mutual fund shares fluctuates according to the market price for the fund's portfolio of securities" Mutual fund shares are easy to liquidate because the fund must redeem them at net asset value. The fund must make payment within seven calendar days of the request for redemption. Nevertheless, fund shares should only be recommended for long-term investment because of the sales charges on the purchases (unless the fund is a "no load" fund). A representative should not say that the investment is safe because net asset value may decrease. The market prices of the securities in the fund's investment portfolio determine the value of the shares.

If a customer wishes to file a complaint against a registered representative for violating FINRA rules, the customer must file no later than:

2 years from discovery of the alleged event The FINRA Code of Procedure requires that if a customer wishes to file a complaint against a registered representative, the customer must file within 2 years of discovery of the alleged violation.

A timely claim must be filed under the FINRA Code of Arbitration within what period of time?

6 years Under the FINRA Code of Arbitration, claims must be filed within 6 years of the event giving rise to the claim.

Which statement concerning the retaking of securities exams is correct?

A candidate who fails a test three times successively cannot retake the exam for 180 days When one fails a securities licensing exam, 30 days must elapse before the next retake is permitted. If a person fails 3 times in a row, then 180 days (6 months) must elapse before each successive retake.

Which choice is defined as a branch office?

A location where a registered representative meets frequently with customers at his or her house A location is considered to be a "branch" by FINRA if it is advertised as such. In addition, if a registered representative meets customers at his or her residence; or accepts funds or securities from a customer at his or her residence, the location is defined by FINRA as a "branch." Branch locations must be registered with FINRA and are subject to direct supervision by the OSJ. Note, however, that a registered representative may contact customers from his or her residence and it does not fall under the definition of a "branch." Also note that Choices A, B and C are defined as "back office" locations - not branch offices.

Which of the following is NOT subject to industry rules on communications with the public?

A radio broadcast by the show's host on investing FINRA advertising rules do not cover a radio broadcast about investing by a station employee, since the radio station is not a FINRA member! The rules apply to, among other things, media presentations, investment seminars, and electronic communication sales literature (e-mails) to 25 or more prospective clients.

Which is permitted under FINRA rules?

A registered representative accompanies a customer to a Broadway show, for which the representative paid $200 for the tickets 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 statement concerning advertising of "free" services by FINRA members is correct?

A service can be advertised as "free" only if it is provided without charge or condition A service can be advertised as "free" only if it is provided without charge, without restrictions, and is currently available.

Which of the following language is appropriate for inclusion in an advertisement for ABC Funds?

ABC Funds Distributor is a FINRA member A broker-dealer can only identify itself as a FINRA member - and a mutual fund distributor is a FINRA member firm. The firm is the member, not the representatives associated with the firm. Thus, it can never be stated that a representative is a FINRA member. It can never be stated that FINRA or the SEC endorses or approves of anyone or anything!

Which statement about hearings conducted under the Code of Procedure is FALSE?

At the hearing, the Hearing Officer decides whether the respondent can present arguments in its defense shit's true: The registered representative may receive a request to testify The member must make available books and records relating to the complaint At the hearing, the Hearing Officer decides whether the respondent can present arguments in its defense A representative can be summoned to testify at a hearing under the Code of Procedure; a member must produce books and records if requested; and if the respondent admits guilt to a minor wrongdoing, the matter can be settled without a hearing. At the hearing, the respondent (member or its registered representative) may present arguments in its defense - this is not decided by the Hearing Officer.

After a registered representative has made a sale of a deferred variable annuity, when must a principal review the transaction?

Before the application is transmitted to the insurance company and no later than 7 business days after the customer's signing A principal must review and sign a variable annuity application before it is sent to the insurance company, but no later than 7 business days after the customer signs it. As part of the review, the principal must determine that the representative performed the detailed suitability determination required by FINRA before approving the purchase.

Which statement applies to BOTH fixed and variable annuities?

Benefit payments continue for the life of the annuitant With both fixed and variable life annuities, the annuitant will receive payments for life. The insurer assumes this mortality risk for both fixed and variable life annuities. The insurer who issues fixed annuities bears the investment risk, but the issuer of a variable annuity does not. Insurers who offer both fixed and variable annuities offer expense guarantees and may not reduce benefit payments just because expenses increase. The salesperson for a variable annuity must register with both FINRA and the State Insurance Department since this product is considered to be insurance by state regulators; but is also a non-exempt security according to the SEC. The salesperson for a fixed annuity must register only with the State Insurance Department, since a fixed annuity not a security - it is a pure insurance product.

The maximum penalty for a Minor Rules Violation (MRV) is:

Censure and fine of $2,500 When a person associated with a member firm submits an executed Minor Rules Violation plan letter to settle a complaint under the Code of Procedure, the maximum penalty is a censure and a fine not to exceed $2,500.

For rule violations, FINRA may impose penalties on members or registered representatives that include all of the following EXCEPT:

Confinement to prison shit it can do: Censure Expulsion Fines of any dollar amount FINRA has the power to censure, suspend, expel and fine both member firms and persons associated with member firms for rule violations. FINRA does not have the power to imprison anyone - but FINRA can refer a criminal case to state or federal court, where this power exists.

The Code of Arbitration Procedure does NOT apply to which of the following disputes?

Disputes between a member and its insurance carrier "Intra-Industry" disputes must be settled by binding arbitration. These include disputes between one broker-dealer and another; between a broker-dealer and its registered employee; and between a broker-dealer and a clearing corporation. It does not apply to disputes between member firms and their business vendors, such as their insurance carrier. Regarding a dispute between a dealer and a customer, if the customer has signed an arbitration agreement, then the dispute must be resolved by arbitration. If the customer has not signed an arbitration agreement, the customer can voluntarily choose arbitration to settle the dispute; or can file a complaint with the FINRA District Office to initiate a proceeding under the Code of Procedure; or simply can litigate in court.

Which of the following statements concerning termination of FINRA membership is TRUE?

Even though a firm resigns from membership, FINRA will retain jurisdiction over the firm for two years to handle complaints The termination of a partner or a representative has no effect on a FINRA member firm's registration. The reverse is true - if a member firm's FINRA registration is terminated, then all of the individuals who were registered will have their registrations terminated. FINRA memberships cannot be transferred. Each firm must apply for membership, go through a membership interview, and be approved by FINRA. FINRA retains jurisdiction over member firms and individuals associated with member firms for 30 days after resignation, but extends this to 2 years if a customer complaint is filed following resignation.

Which of the following two can file a formal complaint against a member firm or an associated person under the FINRA Code of Procedure?

FINRA Department of Enforcement or FINRA Department of Market Regulation Formal complaints under the Code of Procedure can be filed by either FINRA Department of Enforcement or the FINRA Department of Market Regulation. A member firm or a customer may file a complaint with FINRA, and if FINRA believes the complaint has merit, it is sent to either the Department of Enforcement or the Department of Market Regulation (as appropriate) for further investigation. If these departments believe that a violation has occurred, then a complaint will be filed under the Code of Procedure.

What two actions take place in the OSJ (Office of Supervisory Jurisdiction)?

Final approval of new accounts and review and endorsement of customer orders An Office of Supervisory Jurisdiction (OSJ) is any office where a member firm approves new accounts, approves customer orders, approves advertising, maintains custody of customer funds or securities, or supervises the activities of other persons associated with the member at branch offices. A principal (Series #26 for mutual fund broker-dealers or Series #24 for general securities broker-dealers) must be resident in an OSJ. A branch office is a location that conducts securities business with the public. New accounts are opened in the branch (but final approval of account opening occurs in the OSJ) and orders for customer accounts are entered by the branch; however, execution of the orders and review and endorsement (approval) of the orders occurs at the OSJ.

Which of the following actions are violations of FINRA rules? I Opening a cash account for a customer without obtaining that customer's signature II Offering to trade mutual fund shares for a customer III Recommending to a customer to get a group of friends together to buy mutual fund shares at a breakpoint IV Discussing the purchase of mutual fund shares before sending a prospectus

II & III only Cash accounts do not require a customer signature. The customer must sign to open a margin account, but not a cash account. FINRA prohibits trading of mutual fund shares because these are redeemable, not negotiable, securities. Recommending that customers group together to buy mutual fund shares to reach a breakpoint is also a violation. Breakpoints are only available to individual customers or to related immediate family members in the same household that join together. A representative may discuss a mutual fund share purchase before sending a prospectus. The customer must receive the prospectus either at, or prior to, confirmation of an order for the shares.

All of the following statements concerning FINRA simplified arbitration procedures are correct EXCEPT:

The decision can be appealable for amounts less than $2,500 Simplified arbitration is used to settle customer disputes with either a member firm or an associated person, where the amount in dispute is no more than $50,000. Written arguments from each side are given to a single public arbitrator, who makes a binding decision (no appeal) based on the evidence presented. Note that the single arbitrator has the discretion to demand further documentary evidence; and can also demand that the matter be presented in front of a full 3-person arbitration panel.

In the past, a licensed insurance agent has sold only life insurance policies. The insurance agent wants to sell mutual funds to one of her customers in a one-time transaction and receive commissions. Which statement is correct?

The insurance agent cannot make the sale unless she passes the Series #6 or the Series #7 examination and receives the license A person cannot sell mutual funds until he or she has passed either the Series #6 (investment company products sold with a prospectus) or Series #7 (general securities) exam and received the license. Insurance agents may only sell securities AFTER obtaining the Series #6 or Series #7 license. It makes no difference that this is a one-time event.

When recommending an equity security, which of the following must a member clearly state?

The price of the security at the time of the recommendation When recommending an equity security, the price of security at the time of the recommendation must be disclosed. The member must have a reasonable basis for making the recommendation and must provide supporting documentation on request. While the member may support a recommendation based on past recommendations of similar securities, there is no requirement to include such support. Projections of future performance are prohibited.

When a registered representative refers to FINRA membership in a presentation to a customer, which of the following statements is correct?

The representative can tell customers that his or her firm is a FINRA member A representative can tell customers only that his or her firm is a FINRA member. Membership does not signify endorsement or approval, and the representative may not imply or state that he or she works for or represents FINRA.

All of the following events will require a registered representative to amend his or her U-4 Form EXCEPT:

The representative is sued for divorce by her spouse Change of name or address requires a U-4 amendment. Being sued for divorce is not a U-4 disclosure item. However, customer-initiated investment-related complaints that are pending or that have been settled for $15,000 or more must be disclosed.

Which statement is true about a registered representative that wishes to work at nights and on weekends, contacting potential clients from his or her home residence?

The representative may only contact customers from that location if the principal approves and the representative is supervised from the branch location to which he or she is assigned A representative may solicit new or existing customers from a residence location only if the principal approves and the representative is supervised from the branch location to which he or she is assigned.

Claims must be filed under the FINRA Code of Arbitration within what time period?

Within 6 years of the event giving rise to the claim Under the FINRA Code of Arbitration, claims must be filed within 6 years of the event giving rise to the claim.

The Firm Element component of the "Continuing Education" requirement must be completed:

annually 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.

FINRA believes that arbitration is preferable to litigation to settle disputes because:

arbitration is a fair process, is cheaper and is faster FINRA prefers the use of arbitration to settle disputes because it is a 1-time process with no appeals that it believes is unbiased, cheaper and faster than litigation.

A Series #6 licensed representative:

can only take a second job if he or she gives written notice to the member firm employer In order to take outside employment, representatives are required by FINRA to give written notice to their firm, and they must follow any instructions of the firm.

FINRA member firms must be:

domestic broker-dealers FINRA has no authority outside the U.S., so only domestic broker-dealers can be FINRA members. FINRA member firms (there are about 5,000 member firms) consist of broker-dealers that sell securities to the public; market makers; investment banking firms; and mutual fund distributors that sign up member firms into a mutual fund selling group. Only U.S. broker-dealers can be FINRA members. Banks cannot be FINRA members (but a bank can have a broker-dealer subsidiary that is a member).

All of the following actions by a member are violations of FINRA rules EXCEPT:

failing to use legal representation at an arbitration hearing It is a violation of FINRA arbitration rules for a member to fail to produce documents demanded; for a member to fail to testify if demanded by the arbitrators and for the member to fail to pay a monetary award. At an arbitration hearing, the respondent can either have legal representation or can represent him- or herself.

A customer that has agreed to submit a dispute to mediation:

is permitted to withdraw from the mediation process without consent of the other party or the mediator A customer that has submitted a dispute to mediation has entered into a process from which the customer can withdraw at any time. There is no requirement for consent from the mediator, the other party to the dispute, or from FINRA in order to withdraw. The dispute will then go to arbitration for resolution.

Under the FINRA Code of Procedure, decisions of the District Hearing Panel:

may be appealed directly to the National Adjudicatory Council Once the District Hearing Panel renders a decision, either side may appeal to the National Adjudicatory Council (FINRA National). Once the National Adjudicatory Council renders a decision, either side can appeal to the SEC. Only after SEC review can either side appeal the case to a federal appellate court.

A registered principal must approve all of the following before a firm may use them or send them to a customer EXCEPT:

prospectus Every piece of advertising, sales literature (a research report is sales literature), and correspondence must be approved by a principal prior to use. Prospectus and tombstones do not fall under the requirement because they are prepared under stringent legal requirements. They are not written by broker-dealer personnel who could say pretty much anything!

A person associated with a member firm is the subject of a disciplinary complaint served by FINRA's Department of Enforcement. The associate files an answer to the complaint, and the department schedules a hearing. The person associated with the member has all of the following rights EXCEPT the right to:

remove the case to federal court prior to the hearing If a District Hearing Panel has scheduled a disciplinary hearing for a person associated with a member firm, he or she has the right to have a lawyer present; he or she has the right to review any documentary evidence scheduled for presentation; and the associate can summon witnesses on his or her behalf. The associate cannot remove the case to federal court. Once the District Hearing Panel renders a decision, either side may appeal to the National Adjudicatory Council (FINRA National). Once the National Adjudicatory Council renders a decision on appeal, either side can appeal to the SEC. Only after SEC review can the associate appeal the case to a federal appellate court.

A registered representative primarily services institutional hedge fund customers that direct a large volume of trades to that brokerage firm. One of the hedge fund customers tells the representative: "I would like you to talk to the administrative people at the Jeffersonian Fund Group. If they allow me to place redemption orders for their fund shares at 4:10 PM each day, at that day's NAV, I will invest $200,000,000 in the Jeffersonian Fund Family." The customer should be informed that:

such an activity is illegal and any redemption requests placed at 4:00 PM must be processed based upon the next day's NAV computation In past years, FINRA has taken enforcement action against sophisticated institutional hedge fund investors that have engaged in illegal mutual fund trading practices at the expense of the existing mutual fund shareholders. There are 2 specific types of violations: Late Trading: The practice of placing orders to buy, redeem, or exchange mutual fund shares after the time as of which the fund calculates its daily NAV (typically at 4:00 PM ET). Any such "late" orders are not supposed to be processed at that day's closing NAV; rather, they should be processed at the following day's NAV. Such late trading is prohibited under the Investment Company Act of 1940. Some mutual fund companies accepted redemption orders past the 4:00 PM cut-off, allowing sophisticated traders to take advantage of after-4:00 PM ET market close news announcements - an advantage that the regular fund shareholders did not have. This late trading is now an explicitly prohibited activity for both the fund company and the investor. Market Timing: The practice of frequently buying and selling a fund's shares to exploit inefficiencies in how the mutual fund company computes NAV per share. For example, if the fund held overseas stocks, that might slow up the computation of NAV for the fund company - however the sophisticated hedge fund investor might build its own software to compute NAV faster than the fund company - and would place buy orders for shares that it found to be undervalued and sell orders for fund shares that it found to be overvalued. Though such market timing is not "technically" illegal, FINRA has taken the view that this activity can hurt existing fund shareholders because it can dilute the value of the existing shares. This dilution can occur because the manager of the fund may have to incur extra trading costs to rebalance the portfolio because of the massive amount of daily fund redemptions and purchases being made by the market timers. To prevent market timing, most mutual funds have placed restrictions on excessive trading in their prospectuses and monitor accounts for excessive short-term trading. Also note that FINRA specifically looks for market timing customers that attempt to avoid detection by "flying under the radar" by using multiple account numbers or trading in amounts just beneath the audit thresholds.

A customer who has not signed an arbitration agreement files a complaint about a registered representative at the FINRA District office. The District office reviews the complaint and believes that it is serious and has merit and refers the complaint to the Department of Enforcement. This complaint will be resolved:

under the Code of Procedure A customer that has not signed an arbitration agreement with a member firm has a number of options available to settle complaints that cannot be resolved directly with the member firm. The customer can voluntarily choose arbitration or mediation conducted by FINRA. The customer can simply sue the member firm in court. Or, the customer can file a complaint in the FINRA District office. Upon review, if the District office believes the complaint has merit, it will be sent to the Department of Enforcement, which will initiate a proceeding under the Code of Procedure.

A registered representative tells a customer that his money market fund purchase is "both FDIC and SIPC insured." This statement is:

untrue because money market funds only get SIPC coverage if they are held in a brokerage account FDIC does not provide insurance for investors who purchase shares of a money market fund. SIPC insurance is only provided when the investment is held in an account at a broker-dealer.

An "office of convenience" is a location of a member firm:

where a customer is met on a non-regular basis by appointment Branch locations must be registered with FINRA and are subject to direct supervision by the OSJ (Office of Supervisory Jurisdiction). An office of convenience is excluded from the branch definition - it is a location where a customer is met on a non-regular basis by appointment. A satellite office is also excluded from the definition of a branch - it is a non-securities location of a member firm (e.g., an office that only sells insurance) that does no more than 25 securities trades in a year. A location that holds itself out (meaning advertises itself) as a location that conducts securities business with the public is a "branch."

All of the following statements can be made by a registered representative to a new customer who is unfamiliar with investing in mutual funds EXCEPT:

"I have prepared a synopsis of the fund prospectus, highlighting the important features of the investment. This is all you need to read before making a decision" A registered representative is prohibited from making an offer of the fund unless the prospectus is delivered. A synopsis of the prospectus is not sufficient - it may omit important facts or misstate facts, and this is fraudulent. A customer must read the prospectus carefully before investing in mutual funds.

Which of the following may NOT be accepted by a registered representative from a mutual fund wholesaler?

$200 in cash 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." Also note that the rule does not apply to "business entertainment." As long as the wholesaler goes out with the representative to a function, such as a dinner, show or baseball game, the gift limit does not apply. FINRA permits the person doing the entertaining to pay for the representative's spouse as well. However, FINRA states that such business entertainment should not be too excessive or too frequent.

Which of the following need not comply with FINRA rules applicable to communications with the public?

A dinner presentation to a prospective client FINRA's rules on communications with the public apply to communications through the media or to groups of investors. They do not apply to a sales presentation to a prospective customer.

Which of the following is NOT a person qualifying for reduced sales charges from quantity purchases of investment company shares?

A father and adult son purchasing shares in a joint account Individuals cannot join together to get the benefit of mutual fund breakpoints. Thus, investment clubs are not permitted to get breakpoints, nor can joint accounts for unrelated persons or joint accounts for relatives that are not legally recognized. For example, a husband and wife are legally recognized and count as one person. A corporation is legally recognized and counts as one person. A custodian account for a minor is legally recognized and counts as one person. A father and adult son are legally separate, and thus are two persons. They do not qualify for a breakpoint.

Which statement concerning a representative who changes employment is correct?

A representative who moves from one member firm to another must resign from registration and reapply A representative who changes employment must resign from the "old" firm, which files a U-5 Form, removing that individual from registration with CRD (Central Registration Depository). To regain registered status, that individual must file a U-4 Form (Uniform Securities Industry Application Form) at the new employer. No retake of the licensing exam is required, unless the individual waited for more than 2 years after leaving the business to reassociate with another member firm. "Parking" or "hanging" a license (keeping one's license going through a "friendly" broker-dealer) while an individual is out of the business to keep from having to retake the licensing exams is explicitly prohibited under FINRA rules.

Which of the following must be approved by a principal before use?

An ad using only information summarized from the Prospectus Prospectuses, Statements of Additional Information, the FINRA manual and tombstones are excluded from the requirement for principal approval of advertising and sales literature, since they are prepared under stringent legal requirements. However, a "summary" or "abstract" of a prospectus is prepared by the broker-dealer, not by a lawyer, and an employee of a broker-dealer might say something that is inappropriate! Therefore, such summaries are defined as sales literature that requires prior principal approval.

FINRA rules consider all of the following to be sales literature EXCEPT:

An invitation sent to a prospective client for a lunch meeting Advertising is defined as any material that is accessible to the general public, including items published in a newspaper, magazine, Web site, on television, radio or on signs or billboards, etc. Sales literature is defined as material that is directed at a specific audience, including market letters, research reports, seminar texts, circulars, reprints, performance reports, telemarketing scripts and form letters sent to more than 25 existing or prospective clients. Excluded from the definitions are prospectuses and tombstones (because they are non-promotional); help wanted advertising and change announcements. An invitation sent to a prospective client for a lunch meeting is defined as correspondence. Correspondence only falls into the definition of sales literature if the invitation is sent to more than 25 existing or customers.

Which of the following must be sent by broker-dealers to their customers?

Annual audited balance sheet and computed net capital and mid-year unaudited balance sheet and computed net capital Each broker-dealer is obligated to send the firm's balance sheet and computed amount of net capital to customers 2 times per year (annual audited and mid-year unaudited). Most firms enclose these as a "statement stuffer" in the account statements sent to the customers at those times. There is no requirement for a member firm to send a customer a copy of the firm's income statement (most privately-held broker-dealers do not enclose an income statement).

All statements are TRUE regarding 529 plans EXCEPT:

Any prospective purchaser must be provided with a prospectus for the underlying mutual fund only A 529 plan is a college savings plan that is sponsored by the state. In essence, it is a mutual fund purchased in a state securities "wrapper." There is no federal tax deduction for contributions to the plan and earnings build "tax-free" as long as the funds in the plan are used to pay for education expenses. The state of issuance may give a state tax deduction for contributions made, but only for that state's plan. There is a broad range of required disclosures about 529 plans in advertising. Among them are: A statement that the investor should consider the objectives, risks, charges and expenses before investing; A statement that more information about municipal fund securities is available in the issuer's official statement (the municipal new issue disclosure document) and the name of the source from which the official statement may be obtained (broker-dealer or fund underwriter); A statement that the official statement should be read carefully before investing; A statement that the investor should consider whether the home state offers any tax benefits that are only available to that state's residents. Any prospective purchaser must be provided with both a copy of BOTH the municipal fund security official statement (municipal new issue disclosure document) and a prospectus for the underlying mutual fund.

All of the following statements concerning FINRA rules on mutual fund advertising are correct EXCEPT:

FINRA does not require filing of mutual fund advertisements All new broker-dealer firms must file their advertisements and sales literature with FINRA for review, 10 business days prior to use. After the first year, FINRA now "trusts" that member firm, and investment company advertisements are filed 10 business days after first use. However, the advance filing requirement applies "forever" to mutual fund advertisements that include specially created performance rankings (evidently FINRA is worried about these). Finally, FINRA can subject any advertisements to spot check.

Which of the following statements concerning mutual funds may a registered representative NOT make to customers? I "Your income yield for this fund will include the dividends and capital gains distributions" II "Diversification means gains from other securities may offset any losses, so you can't lose" III "By reinvesting distributions, you can maximize your potential return from this fund" IV "You won't have any tax liability for capital appreciation while you own shares unless the fund sells securities from its portfolio at a gain"

I & II only Income yield for mutual fund shares does not include capital gains distributions - it only includes dividends. Thus, Choice I is a false statement that cannot be made to customers. A registered representative cannot tell an investor that he or she "can't lose" on an investment in mutual fund shares - since this is not true. While diversification reduces risk, it does not eliminate it. Thus, Choice II is a false statement that cannot be made to customers. By reinvesting distributions, the investor can maximize potential return from fund shares, thus Choice III is a true statement. The shareholder is only taxed on capital gains - these are gains on appreciated securities that the fund manager has sold. Unrealized appreciation on investments is not taxed until the shares are redeemed. Thus, Choice IV is a true statement.

A registered representative with a Series #6 license may solicit orders for: I a primary distribution of open-end fund shares II a primary distribution of closed-end fund shares III secondary trading of closed-end fund shares that are exchange listed IV secondary trading of closed-end fund shares that trade OTC

I and II only The Series #6 license allows an individual to sell solely Investment Company securities offered under a prospectus. These include face amount certificates, unit investment trusts, and open-end management company shares (since these are all newly issued securities offered and sold through a prospectus). Regarding closed-end fund shares, the initial offering of these securities occurs through prospectus, and, thus, a Series #6 licensed individual can offer them. However, once the closed-end fund shares start trading in the secondary market, either a full Series #7 general securities license or a Series #62 corporate securities license is needed to handle trades of closed-end funds.

You want to write a letter to your customers about the advantages of investing in ACME Fund. Which of the following statements are TRUE? I The letter cannot be misleading or make exaggerated claims II The letter must be approved by a principal before being sent out III The letter must be preceded or accompanied by a prospectus IV The letter must be filed with FINRA 10 days in advance of use

I, II and III only FINRA defines a letter sent to up to 25 prospective customers and to any number of existing customers as correspondence. The principal must approve every piece of correspondence sent to a customer in writing prior to use. Note that in a world of e-mail, this prior approval requirement is not terribly workable. As an alternative, FINRA allows the member firm to put a correspondence compliance program in place that trains representatives in what can and can't be said in such communications and that audits them. If this is done, no prior approval is required. But if the firm does not have such a program, then each piece of correspondence must be approved by a principal before it goes out. If the question does not mention a correspondence compliance program, then do not assume that the firm has one! Because this is a mutual fund offer, the letter must be accompanied with, or be preceded by, a prospectus. As with all communications with customers, FINRA rules prohibit misleading statements and exaggerated claims. There is no filing of correspondence with FINRA. Note, however, that there are filing rules for advertising.

Which statements are TRUE about the annual compliance review? I It must be held individually with each registered person II It can be held as a group meeting or as a webinar III It must be held "in person" IV It can be held "remotely"

II and IV The annual compliance review is supposed to cover compliance and regulatory issues that are important to the member firm. It can be held in groups and it can be held remotely such as by teleconferencing or by a webinar. The FINRA requirements are that it be interactive; that the content covered be documented; and that the names of the participating representatives be documented.

Which of the following are responsibilities of the principal in the OSJ? I Approval of each new account II Approval of each transaction in a customer account III Review of each piece of correspondence sent to a customer IV Approval of each cash withdrawal from a customer account

I, II and III only Responsibilities of the principal include: approval of each new account; approval of each transaction in a customer account (at the end of each day); review in advance of correspondence sent to customers; and resolution of each written customer complaint. Receipts of cash from a customer and deliveries of cash to a customer are a back office function, that also must be properly supervised; but this is not the responsibility of the principal in the OSJ (Series #26 for mutual fund broker-dealers; Series #24 for general securities broker-dealers); rather it is the responsibility of the firm's financial and operations principal (Series #27 license).

Sales literature for periodic investment plans featuring dollar cost averaging must state that: I these plans do not protect against loss in a declining market II there is no assurance of making a profit III dollar cost averaging requires continuous investment in securities regardless of prices levels IV dollar cost averaging requires the customer to consider his or her financial ability to continue purchases through periods of low price levels

I, II, III, IV All of the items must be disclosed if periodic investment plans are recommended. These plans do not protect against loss in a declining market; these plans do not assure that a profit will be made; and if dollar cost averaging is mentioned, it must be stated that such a program requires continuous investment over many years of fixed dollar amounts, regardless of price levels and the customer should consider his financial ability to meet this annual commitment through periods of low price levels.

Which of the following statements about member firm business continuity plans are correct? I A registered principal in senior management must approve the firm's business continuity plan II The member firm must provide a written copy of the plan to each customer at the time an account is opened III The plan must tell customers how they will get prompt access to their funds and securities when the member cannot continue in business IV The plan must be posted on the member's Internet Web site and must be mailed to customers upon request

I, II, III, IV Every member must prepare a detailed business continuity plan to deal with possible business disruptions due to a calamity. A copy must be provided to customers at account opening; and the plan must be made available to customers upon request. The plan must be approved by a principal and must be reviewed and updated at least annually.

Which of the following are allowed under FINRA rules? I The acceptance by a registered representative of a $100 cash gift from a customer II The giving of a $100 cash gift from a registered representative to a customer III The acceptance by a registered representative of a $100 gift of goods from a customer IV The giving of a $100 gift of goods from a registered representative to a customer

I, II, III, IV 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.

Under FINRA rules, which of the following statements are correct concerning the Office of Supervisory Jurisdiction (OSJ)? I The OSJ creates and enforces written procedures for the supervision of customer accounts II The OSJ is responsible for the resolution of each written customer complaints III The principal in the OSJ must review and endorse every customer transaction IV The principal in the OSJ must review and approve correspondence sent to customers

I, II, III, and IV Under FINRA Rules, the Office of Supervisory Jurisdiction (OSJ) is the supervisory office over branch locations. It is any office where the firm approves new accounts, maintains customer funds or securities, endorses or executes orders, and approves advertising. The Office of Supervisory is responsible for creating and enforcing written supervisory procedures that provide for: periodic review of customer account records in the branches; resolution of each written customer complaint; final approval of new accounts; review and approval of orders in customer accounts; approval of correspondence sent to customers; approval of advertising and sales literature; an annual compliance review conducted with each registered individual; and an annual review of all businesses of the firm to detect and prevent violations.

FINRA rules prohibit a fund underwriter from engaging in which of the following transactions? I Entering into a written agreement to sell mutual fund shares to FINRA members below the public offering price II Offering additional concessions to representatives who promote sales of that fund's shares III Making payment of concessions directly to registered representatives after their employment ends

II & III only In order to sell mutual fund shares of a given fund, the member firm must sign a written selling group agreement with the fund underwriter. As part of the selling group agreement, the member firm agrees to sell fund shares to customers only at the POP as stated in the prospectus. Note that the selling group member buys the shares from the fund underwriter at a discount to the POP - this is the only way that the selling group member can make money. The anti-reciprocal rule covers dealings between the fund underwriter and its selling group members. The basic rule is that the fund underwriter cannot compensate the representatives of the selling group members; only the selling group members can compensate their representatives. Thus, the fund underwriter: cannot hold a sales contest that rewards representatives in the selling group for selling that fund's shares; however the selling group member firm can hold a sales contest as long as it does not favor one fund sponsor over another; cannot give gifts to representatives in the selling group of more than $100 per person per year; cannot pay any compensation to the representatives in the selling group; the compensation must be paid by the member firm that employs the selling group member. Note that the sponsor can hold "educational seminars" and invite representatives in the selling group to these events; and the sponsor can "entertain" representatives in the selling group as long as this conforms with each member firms internal policies and procedures.

FINRA requires registered representatives to do which of the following? I Notify the member firm in writing if he or she wishes to work for a charity for no pay II Provide the employing firm with written notification prior to engaging in an outside business activity III Obtain written permission from his or her employer prior to "selling away" IV Obtain written approval of each piece of correspondence about securities sent to customers

II, III and IV only Prior written notice to the employer is required if the representative wishes to engage in an outside business activity. It is not required if the representative is engaging in charitable work for no pay (but if the charitable work involves selling securities for that charity, then employer-notice is required. Prior written approval is required if a representative wishes to "sell away" from his or her firm (effecting a private securities transaction from a customer). Finally, each piece of correspondence written by a representative to a customer must be approved by a principal before it is sent out.

An elderly registered representative has many customers who have purchased Class B mutual fund shares, where the 12b-1 fees are imposed annually. The representative is retiring and wishes to receive those 12b-1 fees as they are earned in future years. Which statement is true?

If the representative enters into a signed agreement with the employing broker-dealer prior to retirement to receive future 12b-1 fees, then these can be paid in future years to the retired representative The basic rule is that in order to receive commissions, an individual must be registered. However, FINRA allows registered representatives that leave their firm to receive continuing commissions. This is typical when a registered representative is retiring and the intent of the rule is to permit retiring representatives to receive some retirement income from business that they created when they were still employed by the broker-dealer. There is no requirement that the individual remain registered to receive continuing commissions. The FINRA requirement is that there must be a written agreement between the member firm and the representative that is signed prior to the representative leaving the firm. Note that the agreement can specify that the continuing commissions be paid to a surviving spouse or a beneficiary of a registered representative upon that representative's death. Finally, note that a representative that is retiring or leaving can "sell" his or her book of business to another representative at the firm for a 1-time flat fee. However, he or she cannot share future commissions as part of "selling" his or her book of business because that individual is no longer registered.

All of the following statements are TRUE regarding the use of instant messaging (IMs) with clients EXCEPT:

Industry rules do not apply to the use of instant messages Communications with the public rules cover the use of instant messages. If the firm permits their use, the firm must review, approve, and retain instant messages. The only realistic way for a firm to allow IMs is if the firm implements an electronic communications compliance program, in which case prior approval of each IM by a principal is not required. If such a program is not in place, then each IM would need to be approved by a principal before being sent out.

A representative is required to give written notice to his or her employer if the representative wishes to do all of the following EXCEPT:

Perform charitable work Selling away is a prohibited practice. All securities transactions done by representatives must be known to the firm and supervised by the firm. If a representative wishes to "sell away," he or she must give written notice to the firm and must get approval of the firm. To take outside paid work, the representative must give notice to the firm and follow the firm's instructions. If a representative wants to open a personal account at another brokerage firm, he or she must give written notice to his or her broker-dealer employer and follow any instructions of the employer. Doing charitable work does not present any potential conflict of interest (which is the case with the other 3 choices) and is a good thing to do - so there is no requirement for notice to be given to the employer. Note, however, that if the charitable work involves selling securities for a charity, even if no compensation is earned, this requires notice to the employer.

An employee whose responsibilities at a FINRA member firm include supervising solicitations or training must register as a:

Principal FINRA rules require a principal's license for persons supervising sales solicitations or training.

When a registered representative receives an application from a customer for a variable annuity, how soon must the application be delivered to the insurance company?

Promptly FINRA rules require the delivery of a variable contract to the insurance company promptly.

What license(s) are needed for an individual to sell 529 plans?

Series #6 Investment Companies Representative or Series #7 General Securities Representative 529 Plans are "municipal fund securities." These are state-sponsored education savings plans that allow for investment in designated mutual funds. Essentially, these are mutual funds purchased in a "municipal securities wrapper." There is no federal tax deduction for the contribution, though the state may permit a tax deduction. Earnings build tax-free, and as long as the funds are used to pay for a child's education, distributions are not taxed. To sell a 529 plan, only the Series #6 or Series #7 license is needed - there is no State insurance license needed because this is not an insurance product. A municipal securities principal license is needed for a person who supervises the sale of municipal securities - not for a sales agent.

A registered representative who works for ACME securities posts a message on an internet bulletin board that: "ACME Securities is tops in research. I have no interest in them and I highly recommend them." Which statement is true about this?

Such a posting is defined by FINRA as an advertisement and requires advance approval of the principal A posting by a representative on an electronic bulletin board is defined by FINRA as an "advertisement" since it is seen by the general public. All advertisements have to be truthful. This one is not, since the posting states that "I have no interest in them" (the broker-dealer), when, in fact, the representative works for that broker-dealer. All advertising must be approved by a principal prior to distribution and may be required to be filed with FINRA prior to distribution.

Which of the following 4 scenarios would cause the taping rule to be triggered?

The broker-dealer hires a significant number of previously registered representatives from a member that was expelled due to cold calling rule violations The taping rule that requires member firms to tape the conversations of its registered representatives, is triggered if the member firm hires too many representatives from a firm that has been previously disciplined by FINRA.

A registered representative has prepared the following business card to give to her customers: _____________________________________________________________ Jane Jones; Registered Representative Offering Mutual Funds, Variable Annuities and Life Insurance 200 River Road, Pottstown, Pa. 22417 404-555-5320 Member: FINRA _____________________________________________________________ Which statement is TRUE about this business card?

The business card is not acceptable because it does not show the name of the member firm When a registered representative's name is shown on a business card, the name of the member firm must always be present. It is the member firm that belongs to FINRA; not the representative; and omitting the member firm's name makes it appear that the representative is the FINRA member. Regarding the SIPC name, it need only be shown on advertisements that are at least 10 square inches, so there is no requirement for the SIPC name on a business card.

If a member uses a testimonial in advertising or sales literature intended for public distribution, which statement is FALSE?

The firm must disclose the amount of compensation paid to the maker of the testimonial The firm must disclose if it paid compensation to the maker of the testimonial, but there is no disclosure of the amount paid. When using a testimonial, the firm must: include disclaimers that the testimonial is no guarantee of future performance and that the testimonial may not be representative of the experience of other clients. If a testimonial presents the maker of the testimonial as an authority, that person must have the appropriate knowledge and experience to form a valid opinion.

A registered representative wishes to write a letter to 5 of her customers about the advantages of investing in ACME fund. Which statement(s) is (are) true?

The letter cannot be misleading and cannot make exaggerated claims The letter must be approved by a principal prior to use The letter must be accompanied or preceded by a prospectus FINRA defines a letter sent to up to 25 prospective customers and to any number of existing customers as correspondence. The principal must approve every piece of correspondence sent to a customer in writing prior to use. Note that in a world of e-mail, this prior approval requirement is not terribly workable. As an alternative, FINRA allows the member firm to put a correspondence compliance program in place that trains representatives in what can and can't be said in such communications and that audits them. If this is done, no prior approval is required. But if the firm does not have such a program, then each piece of correspondence must be approved by a principal before it goes out. If the question does not mention a correspondence compliance program, then do not assume that the firm has one! Because this is a mutual fund offer, the letter must be accompanied with, or be preceded by, a prospectus. As with all communications with customers, FINRA rules prohibit misleading statements and exaggerated claims.

How can a member firm satisfy a customer request to view the FINRA rulebook?

The member firm can give the customer a printed copy of the latest FINRA manual to review or can direct the customer to the FINRA website if the customer has web access FINRA requires that a copy of its manual be made available to customers upon request. For customers that have internet access, directing the customer to the FINRA website, where the manual is available, is permitted. A customer is defined as any person that has cash or securities in custody of the member firm. Therefore, there is no requirement to provide a potential customer with a copy of the manual.

Which statement is TRUE regarding member firms holding sales contests for selling mutual funds and variable annuities?

The member firm is permitted to pay both a commission on each mutual fund and variable annuity sale and a bonus to any representative that meets the minimum sales goal Member firms can hold sales contests, but the contest cannot favor one fund family or variable annuity provider over another. The firm can offer bonuses - these are items of compensation and are not gifts.

A representative wishes to sell church bonds to help his church raise funds to replace its leaky roof. He will not earn any fees or commissions for this because it is charitable work. Which statement is TRUE?

The representative is only permitted to sell the church bonds if he gives prior written notice to the member firm and follows the instructions of the member firm Doing charitable work does not present any potential conflict of interest and is a good thing to do, so normally, there is no requirement for notice to be given to the employer. Note, however, that if the charitable work involves selling securities for a charity, even if no compensation is earned, this requires notice to the broker-dealer employer.

A registered representative receives a call from a good client who is interested in a new mutual fund. After the call, the representative finds a research report on the fund and sends it to the client. Which statement is TRUE?

The representative should have included a prospectus when mailing the research report to the customer Research reports about mutual funds are defined as sales literature, and must be preceded by delivery of a prospectus or accompanied by a prospectus when given to a client. There is no FINRA approval required to send the customer a research report, however if there is any personal note or letter included in the package sent to the customer, the principal must approve this.

Which of the following is FALSE about the general standards for communication with the public?

The standards for advertising and sale literature do not apply to personal appearances to groups of potential investors The standards for advertising and sales literature apply to registered representatives that give speeches about investing to potential customers. The general standards require that public communications must not mislead or exaggerate and must not omit any material facts. Additionally, the general standards require that public communication must follow the principles of fair dealing and good faith.

A mutual fund underwriter is offering a prize of a $450 mountain bike to any registered representative in the selling group that sells at least $20,000 of that fund's shares during the month of December. Which statement is true?

This incentive is prohibited under FINRA rules The anti-reciprocal rule covers dealings between the fund underwriter and its selling group members. The basic rule is that the fund underwriter cannot compensate the representatives of the selling group members; only the selling group members can compensate their representatives. Thus, the fund underwriter: cannot hold a sales contest that rewards representatives in the selling group for selling that fund's shares; however the selling group member firm can hold a sales contest as long as it does not favor one fund sponsor over another; cannot give gifts to representatives in the selling group of more than $100 per person per year; cannot pay any compensation to the representatives in the selling group; the compensation must be paid by the member firm that employs the selling group member. The $450 mountain bike "prize" violates 2 rules. First, the sponsor cannot hold a sales contest for the representatives in the selling group - only the employing member firm can hold such a sales contest. Second, it exceeds the $100 annual gift limit, so it cannot be justified as a gift either.

An associated person that is dissatisfied with his job quits and walks out the door of the branch office. The next day that individual leaves on vacation for Europe and never returns. Which statement is TRUE?

This individual will be terminated from registration within 30 days with a U-5 Form filed by the member firm The U-5 Form is used to remove an individual from registration. It is filed by the member firm on the terminated individual's behalf. The terminated individual does not sign the form. The form must be filed within 30 days of termination and it must disclose the reasons for that individual's termination.

A registered representative sells a mutual fund with a back-end load provision. The representative leaves the broker-dealer. Can the registered representative receive his or her share of the sales load, even if he or she has left the industry?

Yes, if there is a written agreement between the representative and the broker-dealer signed prior to the representative leaving the firm The basic rule is that in order to receive commissions, an individual must be registered. However, FINRA allows registered representatives that leave their firm to receive continuing commissions. This is typical when a registered representative is retiring. There is no requirement that the individual remain registered to receive continuing commissions. The FINRA requirement is that there must be a written agreement between the member firm and the representative that is signed prior to the representative leaving the firm. Also note that the agreement can specify that the continuing commissions be paid to a surviving spouse or a beneficiary of a registered representative.

All of the following statements concerning a representative who changes employment are correct EXCEPT:

a representative can directly transfer FINRA registration from one firm to another when the representative changes jobs A representative who changes employment must resign from the "old" firm, which files a U-5 Form, removing that individual from registration with CRD (Central Registration Depository). The U-5 will not be processed by CRD if there is an unresolved pending complaint against the representative. This means that FINRA retains disciplinary power over the representative. To regain registered status, that individual must file a U-4 Form (Uniform Securities Industry Application Form) at the new employer. No retake of the licensing exam is required, unless the individual waited for more than 2 years after leaving the business to reassociate with another member firm.

All of the following communications with customers by registered representatives and their firms are subject to FINRA rules regarding communications with the public EXCEPT:

a sales presentation about ABX Fund by a representative to a customer FINRA's rules on communications with the public apply to communications through the media or to groups of investors. They do not apply to sales presentations to an individual customer.

All of the following information is required in an advertisement for a 529 Plan EXCEPT:

a statement that identifies the name and contact information of the registered representative from whom the product may be purchased Consider this to be a learning question about the advertising rules for 529 Plans. A 529 plan is a college savings plan that is sponsored by the state. In essence, it is a mutual fund purchased in a state securities "wrapper." There is no federal tax deduction for contributions to the plan and earnings build "tax-free" as long as the funds in the plan are used to pay for education expenses. The state of issuance may give a state tax deduction for contributions made, but only for that state's plan. There is a broad range of required disclosures about 529 plans in advertising. Among them are: A statement that the investor should consider the objectives, risks, charges and expenses before investing; A statement that more information about municipal fund securities is available in the issuer's official statement (the municipal new issue disclosure document) and the name of the source from which the official statement may be obtained (broker-dealer or fund underwriter); A statement that the official statement should be read carefully before investing; A statement that the investor should consider whether the home state offers any tax benefits that are only available to that state's residents. There is no naming of the registered representative with contact information on an advertisement.

An Assistant Representative holding a Series #11 license may:

accept unsolicited orders An Assistant Representative - Order Processor is an individual that has a Series #11 license. This person can only accept unsolicited customer orders. He or she cannot solicit customers. This person can take new account information (e.g., customer name, address, social security number, etc.) but cannot perform a suitability determination or sign the new account form. This person can be paid a salary, but cannot be paid commissions.

A registered representative's employment and disciplinary history is:

accessible to the public through BrokerCheck run by CRD FINRA runs "CRD" - the Central Registration Depository. CRD keeps the records of all registered representatives - including licenses held, employment history, disciplinary history, etc. The public can view relevant portions of a representative's CRD file on-line through "Broker-Check;" or can call a toll-free phone number for the information.

A Series #6 license permits a person to sell all of the following EXCEPT:

closed-end fund shares traded in the secondary market A Series #6 license allows a person to sell investment company offerings that require a prospectus. These include open-end investment company shares, initial public offerings of closed-end investment company shares, face amount certificates, and unit investment trusts. To offer corporate securities that are trading in the secondary market (and closed-end fund shares are the only investment company securities that trade) requires either a Series #7 general securities license or a Series #62 corporate securities license.

All of the following purchasers qualify for aggregation to reach a breakpoint EXCEPT a:

father and 32-year old son purchasing in a joint account Individuals cannot join to get the benefit of mutual fund breakpoints. Thus, investment clubs may not get breakpoints, nor can joint accounts for unrelated persons or joint accounts for relatives that are not legally recognized. For example, a husband and wife are legally recognized and count as one person. A corporation is legally recognized and counts as one person. A custodian account for a minor is legally recognized and counts as one person. A father and adult son are legally separate, and thus are two persons. They do not qualify for a breakpoint.

All of the following statements are TRUE EXCEPT a Series #6 licensed individual can act as agent:

for a customer who wants to trade closed-end company shares A Series #6 representative can only make prospectus offerings of investment company securities. Thus, a Series #6 licensed individual can act as agent handling the initial public offering of open-end and closed-end company shares, since both are prospectus offerings. The Series #6 license also allows individual to sell state sponsored municipal fund securities (529 plans), which are essentially mutual funds sold in a "state securities wrapper" used to fund higher education expenses; and up to $10,000 for schooling below college level. Open-end fund (mutual fund) shares do not trade, so a Series #6 representative cannot act as agent for a customer that wishes to trade open-end company shares. They are redeemable with the sponsor and are non-negotiable (no trading!). Closed-end fund shares trade like any other stock after the initial offering. Once closed-end fund shares start trading, either a Series #7 general securities license or a Series #62 corporate securities license is needed to accept customer orders.

A broker-dealer has just hired several new associates from a tainted member firm. As a result of this, the firm gets a taping notice from FINRA. The firm will be able to avoid the taping rule:

if the member terminates the tainted representatives within 30 days If a member firm hires too many representatives from another disciplined member (a FINRA code-word for a sleazy penny stock firm that FINRA has just shut down), then FINRA will send that firm a notice that it must tape all of its phone conversations and put heightened supervisory procedures in place. To avoid having to do this, the member simply has to fire those newly hired associates within 30 days of receiving the taping notice.

All of the following qualify for reduced sales charges on quantity purchases of investment company shares EXCEPT a(n):

incorporated investment club purchasing shares for its own account FINRA rules prohibit groups of investors from joining together to take advantage of a breakpoint. As an example, an investment club (even one that is "incorporated") cannot pool its money to get a breakpoint on mutual fund purchases. However, a single entity that purchases for a group of individuals, such as a pension plan trustee, or a corporation that is buying mutual fund shares for an employee benefits plan, qualifies for the breakpoint. Family groups also qualify for the breakpoint with the "grouped" family members including husband, wife and minor children.

A person is subject to disqualification from FINRA membership for all of the following reasons EXCEPT the:

individual has a conviction for misdemeanor embezzlement 15 years ago for theft from an employer An individual cannot be associated with a member firm if that person has been expelled by another regulator; has been denied registration by another regulator; or is currently under suspension by another regulator. Another reason for statutory disqualification is if the individual lies or omits material information on the securities industry application. In addition, if an individual has been convicted within the past 10 years of any felony; or a misdemeanor involving securities or funds; he or she cannot be associated with a member firm. This individual's conviction 15 years ago will not keep him from re-entering the business. After 10 years, he or she can start all over again!

If a member firm receives a written complaint from a customer, the member must:

keep a separate file of the written complaint with action taken (if any) in the Office of Supervisory Jurisdiction The member firm must keep a file of all written complaints received from customers. A copy of the complaint with action taken (if any) must be maintained in a central file in the Office of Supervisory Jurisdiction, in addition to a copy being maintained at the branch where the complaint was received. All written complaints received by representatives must be forwarded to a manager or principal for resolution. There is no forwarding of customer complaints to FINRA or the SEC. Finally, the Code of Procedure is a process that a customer can use to lodge a complaint against a member firm through FINRA instead of filing the complaint directly with the member firm.

To use a testimonial in its advertising, a FINRA member must prominently disclose all of the following EXCEPT the fact that the:

maker of the testimonial has extensive investment experience with the member firm When using a testimonial (e.g., a celebrity that is a satisfied client of a member firm makes a paid endorsement of the firm's services), it must be disclosed that: the testimonial may not be representative of the experience of other clients; the testimonial is not a guarantee of future success; and the maker of the testimonial was paid, if more than a nominal amount is involved. There is no requirement to disclose that the maker has extensive investment experience.

You want to write a letter to your customers about the advantages of investing in ACE Fund. All of the following statements are TRUE EXCEPT the letter:

must be filed with FINRA 10 days in advance of use FINRA defines a letter sent to up to 25 prospective customers and to any number of existing customers as correspondence. The principal must approve every piece of correspondence sent to a customer in writing prior to use. Note that in a world of e-mail, this prior approval requirement is not terribly workable. As an alternative, FINRA allows the member firm to put a correspondence compliance program in place that trains representatives in what can and can't be said in such communications and that audits them. If this is done, no prior approval is required. But if the firm does not have such a program, then each piece of correspondence must be approved by a principal before it goes out. If the question does not mention a correspondence compliance program, then do not assume that the firm has one! Because this is a mutual fund offer, the letter must be accompanied with, or be preceded by, a prospectus. As with all communications with customers, FINRA rules prohibit misleading statements and exaggerated claims. There is no filing of correspondence with FINRA. Note, however, that there are filing rules for advertising.

If a registered representative fails to complete the Regulatory Element of the Continuing Education requirement within the stated time period, that person:

must cease performing all of the functions of a registered representative 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; that person cannot be paid; 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.

All of the following are requirements for an individual to sell a variable annuity EXCEPT the sales representative must:

must deliver an annuity benefit illustration to the customer There is no requirement that a representative deliver an annuity benefit illustration when selling a variable annuity to a customer. The representative must have a Series #6 or Series #7 license; must have a state insurance license; and must deliver a prospectus to the customer, since a variable annuity separate account is an investment company offering.

FINRA defines an office that supervises the activities of other persons at the branch locations of a broker-dealer as a(n):

office of supervisory jurisdiction An Office of Supervisory Jurisdiction (OSJ) is any office where a member firm approves new accounts, approves customer orders, approves advertising, maintains custody of customer funds or securities, or supervises the activities of other persons associated with the member at branch offices. A principal (Series #26 for mutual fund broker-dealers or Series #24 for general securities broker-dealers) must be resident in an OSJ. A branch office is a location that conducts securities business with the public.

A member firm may publish sales literature about an investment company which includes a ranking prepared by the member firm or the investment company:

only if the sales literature is filed with FINRA 10 days in advance of use While the general rule for filing of mutual fund advertising and sales literature is that is must be filed 10 business days after first use, FINRA applies a much stricter rule for advertising and sale literature that includes member-prepared performance rankings. These must be filed with FINRA 10 business days in advance of use and must receive FINRA approval prior to use. (Clearly FINRA must have run into deceptive advertising prepared by member firms using their own performance rankings, otherwise this strict rule never would have been written!).

A registered representative wishes to sell a customer a limited partnership unit that is offered through his friend - the general partner in the venture. Under FINRA rules, this action is:

only permitted if the member firm is notified in writing and gives prior written approval to the transaction 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 done by the representative must be known to the firm and supervised by the firm. A representative that sells a customer an investment offered by a firm other than his or her employer has engaged in the prohibited practice of "selling away" - which is "selling away" from his or her firm. 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 and supervise it as its own transaction. (By the way, the odds that a member firm will approve such a private securities transaction are about "0.")

Under FINRA rules, bond fund volatility ratings may be used in:

sales literature Regarding the use of mutual fund volatility ratings, FINRA only permits these in bond mutual fund sales literature - not in advertising. Volatility ratings are used to assess the sensitivity of a bond fund's portfolio to changes in market conditions.

FINRA is a(n):

self-regulatory organization of securities industry firms FINRA - Financial Industry Regulatory Authority - is the SRO - self-regulatory organization, whose members consist of all registered broker-dealers in the United States.

A registered principal must approve all of the following before use EXCEPT a:

statement of additional information A firm's principal must approve advertising and sales literature before use. Billboards and radio spots are advertising. Research reports are sales literature. The Statement of Additional Information is a supplement to the prospectus which contains a mutual fund's current financial statements. These do not require supervisory approval because they are prepared under stringent legal requirements and are non-promotional.

A residence office will NOT be defined by FINRA as a branch if:

telephone calls are made to customers from the residence If a registered representative advertises his or her residence as an office location of the member firm, then it is defined as a "branch." In addition, if the representative meets customers at his or her residence, or accepts funds or securities from a customer at his or her residence, the location is defined by FINRA as a "branch." Branch locations must be registered with FINRA and are subject to direct supervision by the OSJ. Note, however, that a registered representative may contact customers from his or her residence and it does not fall under the definition of a "branch." Finally, any such work outside of the regular branch location requires prior principal approval and the individual must be supervised out of his or her assigned branch location.

A registered representative's residence office will be defined as a "branch" by FINRA if any of the following occur EXCEPT:

telephone calls to customers are made from the office A location is considered to be a "branch" by FINRA if it is advertised as such. In addition, if a registered representative meets customers at his or her residence; or accepts funds or securities from a customer at his or her residence, the location is defined by FINRA as a "branch." Branch locations must be registered with FINRA and are subject to direct supervision by the OSJ. Note, however, that a registered representative may contact customers from his or her residence and it does not fall under the definition of a "branch."

A representative breaks her leg and must stay immobile for 1 month. While she is laid up, she wishes to work from her residence. All of the following statements are true about this being permitted EXCEPT she cannot:

telephone or e-mail customers from her residence If a registered representative advertises his or her residence as an office location of the member firm, then it is defined as a "branch." In addition, if the representative meets customers at his or her residence; or accepts funds or securities from a customer at his or her residence, the location is defined by FINRA as a "branch." Branch locations must be registered with FINRA and are subject to direct supervision by the OSJ. Note, however, that a registered representative may contact customers from his or her residence and it does not fall under the definition of a "branch." Finally, any such work outside of the regular branch location requires prior principal approval and the individual must be supervised out of his or her assigned branch location.

All of the following statements concerning the preparation of sales literature or advertisements by established FINRA member firms are correct EXCEPT:

the broker-dealer must submit all advertising and sales literature to FINRA for approval before distributing it All advertising and sales literature must be approved by a principal prior to use and must be kept for 3 years after each use, along with a record of who prepared the material and who approved the material. Regarding filing of advertising and sales literature, only first year broker-dealers must file these with FINRA 10 days prior to use. "Established" (after the first year) broker-dealers are not required to file advertisements and sales literature with FINRA; however mutual fund advertisements come under another rule that requires their filing 10 days after first use, always.

All of the following statements are TRUE about the U-5 Form filing EXCEPT:

the form must be signed by the terminated individual The U-5 Form is used to remove an individual from registration. It is filed by the member firm on the terminated individual's behalf. The terminated individual does not sign the form. The form must be filed within 30 days of termination and it must disclose the reasons for that individual's termination. If the member firm subsequently discovers any information about the terminated individual that should have been disclosed on the form, an amendment must be filed within 30 days of discovery.

A customer can get a copy of a member firm's business continuity plan by making a request to:

the member firm Every member must prepare a detailed business continuity plan to deal with possible business disruptions due to a calamity. A copy must be provided to customers at account opening; and the plan must be made available to customers upon request. The plan is not filed with FINRA, the SEC or with CRD (Central Registration Depository which keeps the records of all registered individuals).

FINRA rules define advertising as a solicitation made:

to the public via mass media Advertising is defined as any material that is accessible to the general public, including items published in a newspaper, magazine, Web site, on television, signs, or billboards, etc. Sales literature is defined as material that is directed at a specific audience, including market letters, research reports, seminar texts, and form letters sent to more than 25 existing or prospective clients. Excluded from the definitions are prospectuses and tombstones (because they are non-promotional), help wanted advertising and change announcements.