FINRA Rules

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

The best answer is 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.

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

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

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

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

When comparing arbitration to litigation for settling disputes with brokerage firms, which of the following statements are true? I Arbitration is more time efficient II Arbitration is less time efficient III Arbitration is more cost efficient IV Arbitration is less cost efficient A. I and III B. I and IV C. II and III D. II and IV

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

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

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

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

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

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

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

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

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

A communication sent to 10 prospective retail clients and 20 existing institutional clients is defined as (a(n)): A. Correspondence B. Retail Communication C. Public Appearance D. Institutional Communication

The best answer is A. FINRA has 2 basic definitions of communications with the public: -Correspondence: A written or electronic communication made available to 25 or fewer existing or prospective clients -Retail Communication: A written or electronic communication made available to more than 25 existing or prospective clients. Excluded from these definitions are institutional communications and public appearances. These do not count in the numerical limits. 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).

Which of the following gifts are allowed under FINRA rules? I Gift of $75 in cash II Gift of baseball tickets with a value of $75 III Gift of $150 cash IV Gift of baseball tickets with a value of $150 A. I and II only B. III and IV only C. I and III only D. II and IV only

The best answer is 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.

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

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

A customer wishes to open an account that will be used primarily to buy initial public offerings (IPOs). Which statement is TRUE regarding the proper procedure for prequalifying the account? A. The customer must sign a representation letter that he or she is not restricted from buying IPOs B. The registered representative must determine that the customer is not restricted from buying IPOs and must sign the new account form to demonstrate compliance C. The branch manager must determine that the customer is not restricted from buying IPOs and must sign the new account form to demonstrate compliance D. There are no special procedures to follow when opening an account that will purchase IPOs

The best answer is A. In order for a customer to buy IPOs (Initial Public Offerings) of common stock, 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). 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.

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

The best answer is 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.

Under FINRA rules, proxy materials: I must be sent to the beneficial owner of that stock, even if the owner has instructed the member firm not to do so II may be sent to the beneficial owner's designated investment adviser, if the owner has instructed the member firm to do so III may be voted by the member firm, if no contest is involved, if they are not received from the owner within 10 days' of the annual meeting IV may be voted by the issuer's Board of Directors, if no contest is involved, if they are not received from the owner within 10 days' of the annual meeting A. I and II B. I and IV C. II and III D. I, II and IV only

The best answer is A. Proxy materials on street name stock must be sent to the beneficial owner of the shares, or to the beneficial owner's designated investment adviser, if the beneficial owner has so instructed. 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 client of a registered representative refers a new potential customer. This customer is interested in purchasing an oil and gas limited partnership unit. What percentage of the purchase amount can the representative share with the referring client as a finder's fee? A. 0% B. 5% C. 10% D. 15%

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

Under the FINRA Code of Procedure, after the first level of hearings in any complaint proceeding with the District Hearing Panel, this decision may: A. be appealed to the National Adjudicatory Council B. be appealed to the Securities and Exchange Commission C. be appealed to Federal Court D. not be appealed

The best answer is A. The FINRA Code of Procedure is used when the FINRA Department of Enforcement wishes to prosecute a member firm or an associated person for rule violations. It can also be used by a customer that has not signed an arbitration agreement. Under the FINRA Code of Procedure, the first level of hearings in any dispute or complaint proceeding is held at the District Hearing Panel. Their decision may be appealed to the National Adjudicatory Council. The National Adjudicatory Council's decision may be appealed to the Securities and Exchange Commission. Finally, the SEC's decision may be appealed to Federal Court.

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

The best answer is A. The FINRA rule restricting member firms and their employees from buying IPOs from underwriters only applies to equity offerings. This is the case because the pricing of equity issues has a large "expectations" component that is difficult to quantify - and substantial price increases in the aftermarket due to overblown "expectations" for the issue are not uncommon. The rule does not apply to preferred stock or bond offerings, where the pricing is determined by the present value of the income flows to be received over the life of the security. For these issues, there is no "expectations" component to pricing. Note that if the preferred stock or bond offering is convertible, the rule still does not apply. This is true since at issuance, the conversion feature has no value - these securities are priced based on their income (dividend or interest) stream.

A customer buys 100 shares of ABC stock at $20 per share. Two months later, the stock is quoted at $10.00 - $10.50. The registered representative that sold the stock to the customer offers to repurchase the shares at $18. Which statement is TRUE? A. This is prohibited because the FINRA Conduct Rules do not allow customer accounts to be guaranteed against loss B. This is prohibited because the registered representative is interpositioning himself between the customer and the current "inside" market C. This action is permitted, as long as the principal approves in writing prior to the proposed trade D. This action is permitted as a method of maintaining customer "goodwill" with the firm

The best answer is A. The action of repurchasing the customer's shares at a price higher than the current market to limit the customer's loss, is a prohibited practice under FINRA rules. Customers cannot be guaranteed against loss. If the market moves up, this customer wins; if it moves down, this customer loses.

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

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

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

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

All of the following persons can be on securities industry arbitration panels EXCEPT: A. disinterested persons who are affiliated with member firms B. interested persons who are affiliated with member firms C. members of the general public D. attorneys who are members of the bar

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

Which of the following 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

The best answer is 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).

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

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

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

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

The best answer is 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.

If a brokerage firm receives a written customer complaint, then: A. the complaint must be forwarded to the firm's self regulatory organization (SRO) for resolution B. the firm must resolve the complaint and keep a separate file of the complaints, with action taken, for inspection by the SRO C. the registered representative is responsible for resolving the customer complaint and keeping the records of actions taken D. no action need be taken unless the customer has also complained directly to the self regulatory organization

The best answer is B. If a firm receives a written customer complaint, it must be resolved under the supervision of a principal and a file of the complaint with actions taken must be maintained by the firm for inspection by the self regulatory organization (FINRA).

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

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

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

The best answer is 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.

All of the following practices are prohibited under FINRA rules EXCEPT: A. selling dividends B. selling listed securities to customers on margin C. recommending purchases beyond a customer's financial capacity D. trading mutual fund shares

The best answer is B. Selling listed securities to customers in a margin account is not prohibited, since all listed securities are marginable under Regulation T. However, mutual funds do not trade - they are issued by the fund and are redeemed by the fund. Dividends cannot be "sold," meaning customers cannot be induced to buy in time to get the dividend, because the "ex" date reduction causes them to get nothing. Recommending purchases beyond a customer's financial capacity is another prohibited practice.

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

The best answer is B. The 5% Policy applies to over-the-counter and exchange transactions that do not involve a prospectus. Thus, it does not apply to new issue offerings, nor to mutual fund offerings, since both require a prospectus.

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

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

A decision is reached by the District Hearing Panel under the Code of Procedure. Which statement is TRUE? A. The decision is binding and non-appealable B. An appeal may be filed with the National Adjudicatory Council C. An appeal may be filed with the SEC D. An appeal may be filed in Federal Court

The best answer is B. The FINRA Code of Procedure is used when the FINRA Department of Enforcement wishes to prosecute a member firm or an associated person for rule violations. It can also be used by a customer that has not signed an arbitration agreement. Under the FINRA Code of Procedure, the first level of hearings in any dispute or complaint proceeding is held at the District Hearing Panel. Their decision may be appealed to the National Adjudicatory Council. The National Adjudicatory Council's decision may be appealed to the Securities and Exchange Commission. Finally, the SEC's decision may be appealed to Federal Court. Also note, in contrast, that any arbitration decision is binding, with no appeal permitted.

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

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

The Firm Element component of the "Continuing Education" requirement must be completed: A. semi-annually B. annually C. bi-annually D. tri-annually

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

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

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

The best answer is 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.

A registered representative would like to increase his production by working from home at nights and on weekends. As part of this effort, the representative wants to use his home e-mail account to send his customers information and recommendations. This action is: A. permitted as long as the representative uses his personal e-mail account B. permitted with the prior permission of the branch manager C. not permitted because the member firm has no way of auditing the representative's personal e-mail account D. not permitted because the representative has not registered his personal e-mail account with the SEC

The best answer is C. A registered representative working from home via e-mail presents a thorny issue for FINRA member firms, since all e-mails must be audited, given that the firm has implemented an electronic communications compliance program. If the representative were only to use his or her work e-mail account, and the firm implemented appropriate safeguards, this could be acceptable. However, this representative wants to use his personal e-mail account - which the member firm has no control over - and this would be prohibited.

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

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

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

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

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

How long must customer account statements be retained after a customer account is closed? A. 2 years B. 3 years C. 6 years D. 10 years

The best answer is C. Customer account statements must be retained for 6 years.

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

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

A registered representative wants to speak to a group of clients about a private placement in a 2-year old company. The invited clients have a stated minimum net worth of $1 million. The representative is soliciting them to buy privately placed shares of the company because it is in a growth business due to the aging of the population in the U.S. - the company's business is the refurbishment of medical equipment in hospitals. In the Private Placement Memorandum (PPM), the company states that investors are expected to receive a 15% annual cash dividend and could also enjoy capital appreciation. What should the representative do before offering the security to these clients? A. Nothing, because they all receive protection under anti-fraud Rule 10b-5 under the Securities Exchange Act of 1934 B. Nothing, because all of the investors are accredited under Regulation D of the Securities Act of 1933 C. The registered representative should review the revenue and expenses as detailed in the PPM to see if it is feasible for the company to pay a 15% cash dividend D. The registered representative must get a signed attestation from each attendee that they received the PPM

The best answer is C. 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 a signed receipt that each attendee received a Private Placement Memorandum.

On Thursday, May 16th, 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

The best answer is C. 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 Thursday, May 16th is Monday, May 20th. Also, note that the location of the securities must be noted on the order ticket to sell.

A registered representative notes that the price of ABC stock has been falling rapidly, and calls all of his customers with ABC positions to encourage them to sell. On one of these calls, he reaches an answering machine. The registered representative leaves the following message: "ABC stock is plummeting. If I don't hear from you in one hour, I will sell out your position to protect you from further loss." This action is: A. allowed, since the registered representative is attempting to protect the customer B. prohibited, unless the registered representative has been given previous verbal discretionary authorization by the customer C. prohibited, unless the registered representative has been given previous written discretionary authorization by the customer D. allowed, only if the manager gives authorization in writing

The best answer is C. For a registered representative to execute a trade in a customer account, written discretionary authorization from the customer is required. To execute a trade in a customer account without discretionary authority is an unethical practice.

A customer has marginable securities held in 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

The best answer is 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.

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: A. may recommend the purchase of his employer's stock to established customers, but not to new customers B. may recommend the purchase of his employer's stock to new customers, but not to established customers C. may accept unsolicited orders for his employer's stock; but cannot solicit orders for, nor recommend, buying that security D. cannot accept solicited or unsolicited orders for his employer's stock; nor can he or she recommend buying that security

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

A registered representative is employed by a broker-dealer that is a subsidiary of a publicly traded company, listed on the New York Stock Exchange. Which statements are TRUE? I The registered representative may recommend the purchase of the parent company's common stock II The registered representative cannot recommend the purchase of the parent company's common stock III The registered representative may accept unsolicited orders for the parent company's common stock IV The registered representative may not accept any orders - solicited or unsolicited - for the parent company's common stock A. I and III B. I and IV C. II and III D. II and IV

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

A registered representative sends a letter to a customer that states that: "Since options trading is not for everyone, this creates an enormous profit opportunity for the select few who do trade options." This statement is: A. permitted if it is accompanied by the latest Options Disclosure Document B. permitted if the customer has previously traded options C. a misrepresentation of the options trading market D. truthful

The best answer is C. Options trading is a "zero sum game" - that is, if the holder has a gain, the writer has an equal loss; if the writer has a gain, the holder has an equal loss. Thus, there is an equal number of winners and losers. The statement that there may be an enormous profit opportunity must be balanced by a statement that there can also be an equal loss.

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

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

hich statements are TRUE? I A registered representative is permitted to buy a new issue directly from the underwriter(s) II A registered representative is prohibited from buying a new issue directly from the underwriter(s) III A registered representative is permitted to buy a new issue once it starts trading in the secondary market IV A registered representative is prohibited from buying a new issue once it starts trading in the secondary market A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. The FINRA rule restricting member firms and their employees from buying IPOs only applies to the initial fixed price prospectus offering. Once the shares start trading in the secondary market, anyone can buy them at the current market price.

A customer, who has previously signed an arbitration agreement, has a dispute with a member firm. Under FINRA rules, this will be handled by: A. litigation B. mediation C. arbitration D. negotiation

The best answer is C. Under FINRA and MSRB rules, if a customer has previously signed an arbitration agreement, any disputes must be submitted to arbitration for resolution.

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: A. permitted without restriction B. only permitted if general partner approves C. only permitted if the member firm is notified in writing and gives prior written approval to the transaction D. only permitted if FINRA is notified in writing and gives prior written approval to the transaction

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

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

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

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

The best answer is 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 registered representative services the brokerage account of her father-in-law at her broker-dealer. The father-in-law has asked the registered representative to act as the trustee in a trust account for her spouse and children. The following assets are being donated by the father-in-law into the trust: Office Building: $15,500,000 Construction Company: $20,000,000 Construction Equipment: $ 2,000,000 The registered representative has agreed not to charge a trustee's fee to do this. Does she have to get permission of her broker-dealer to act as trustee? A. No, because it is a family relationship B. No, because the trust does not hold securities C. No, because she is not being compensated to be the trustee D. Yes, because this is an outside business activity

The best answer is 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, as trustee, would get to oversee the activities of an office building and a construction company - and both of these entities could have operating and investment accounts - makes this an OBA.

All of the following are prohibited practices under FINRA rules EXCEPT: A. backing away B. interpositioning C. free riding D. arbitrage trading

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

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

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

Which of the following is NOT required to be retained on file by a broker-dealer? A. Account statements B. Written complaints C. Advertising D. Recommendations

The best answer is D. Broker-dealers are not required to retain, as a record, recommendations made to clients; solicitations made to potential clients; and prospectuses (copies of these can be obtained from the SEC). Any written customer complaint is a record that must be retained by broker-dealers.

Which are permitted under FINRA rules? I A registered representative accepts a $300 gift from a customer II A registered representative pays for a $300 meal with a customer III A registered representative gives a customer $200 tickets to a show IV A registered representative accompanies a customer to a show, for which the representative paid $200 for the tickets A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. 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.

An existing customer of a brokerage firm wishes to buy an initial public offering that he has heard good things about. The registered representative only has a limited number of shares to sell and explains to the customer that the offering is already "sold out". The customer tells the registered representative "If you can get me some of the stock, I will drop off cash payment in full today, with a little extra for you." The registered representative: A. can accept the customer's offer without restriction B. can accept the customer's offer if the cash payment does not exceed $500 C. can accept the customer's offer if the gift is reported to the IRS D. cannot accept the customer's offer

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

What activity undertaken by a registered representative will require written notice to the firm, along with following the firm's instructions covering this activity? A. Volunteering at a local soup kitchen after work B. Traveling to a foreign country on vacation C. Selling a proprietary growth mutual fund to a client with a growth investment objective D. Driving for Uber after the markets have closed and securities transactions are not occurring

The best answer is D. Driving for Uber is work for pay - and to take an outside job, the representative must give notice to the firm, follow the firm's instructions (so if the firm says no, the answer is no), and must and his or her U4 to show this "OBA" - Outside Business Activity. Volunteer work for no pay is not an OBA, unless it places the representative in a control position to direct the management of investment funds. Traveling by a representative does not have to be reported to the firm. Selling investments, whether proprietary (meaning products of that firm) or nonproprietary, (meaning products of other securities issuers) is the job description of a registered representative.

All of the following communications with the public must be approved in advance of use by a principal EXCEPT a(n): A. form letter to be sent to all customers that recommends allocating assets among stock, bond and money market fund investments B. advertisement placed in the local newspaper that states that "Now is the time to open an IRA account" C. research report that recommends the purchase of ABC stock D. prospectus sent to customers who request information about a mutual fund

The best answer is D. FINRA defines communications with the public as either: -Correspondence: A communication made available to 25 or fewer existing or prospective retail clients -Retail Communication: A communication made available to more than 25 existing or prospective retail clients Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA. A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience). -Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards -Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective clients, scripted speeches delivered to more than 25 existing or prospective clients, password-protected websites The rule does not apply to prospectuses or tombstone announcements, since their content is prescribed by SEC rules; and omissions or misstatements in these documents is fraud under the Securities Act of 1933.

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

The best answer is D. FINRA defines communications with the public as either: -Correspondence: A communication made available to 25 or fewer existing or prospective retail clients -Retail Communication: A communication made available to more than 25 existing or prospective retail clients Since this "standard form letter" is being sent to 20 "friends," it is defined as correspondence. Correspondence is not subject to FINRA filing rules (while Retail Communications are subject to FINRA filing rules). A "standard form letter" found on the firm's intranet would have already been approved by the firm for use and cannot be changed - unless a principal approves.There is no requirement to include the FINRA logo on correspondence or retail communications. The firm can use the logo if it wishes. All communications must be retained for 3 years.

Notification to FINRA is required for which of the following events? I A registered representative is arrested for embezzlement II A registered representative is indicted under the Securities Exchange Act of 1934 for "insider" trading violations III A written customer complaint is received about a registered employee misappropriating customer funds IV A registered representative is arrested for assault and battery A. II and III only B. I, II, IV C. II, III, IV D. I, II, III, IV

The best answer is D. FINRA does require notification for a variety of reasons. If a registered individual 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 representative gives a seminar to investors, making a presentation about successful hedge fund strategies. It is attended by 10 retail clients and 20 institutional clients. FINRA defines this as: A. an advertisement B. a solicitation C. a retail communication D. correspondence

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

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

The best answer is D. 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).

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

The best answer is 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.

A mutual fund sponsor wants to hold a sales contest to promote sales during the typically slow month of January. The terms of the contest are that the salesperson in the fund selling group that sells the most of the sponsor's funds during the month of January will get the keys to a new Mercedes sports car. Under FINRA rules, this is an example of: A. a gift and is permitted B. a gift and is prohibited C. non-cash compensation and is permitted D. non-cash compensation and is prohibited

The best answer is D. FINRA prohibits registered representatives from accepting a gift in the amount of more than $100, and also prohibits representatives from accepting "non-cash compensation" from someone other than their employer that exceeds this $100 limit. The mutual fund sponsor is not the employer of the registered representative - the representative is an employee of the broker-dealer who is in the mutual fund selling group. The sponsor is actually not permitted to hold such a sales contest - only the employing member firm can hold a sales contest, and it cannot favor the sale of one fund over another. In other words, the sales contest must cover all mutual funds sold by that broker-dealer. If the registered representative were to win this sales contest and get the new car from the sponsor, this is an example of "non-cash compensation" under FINRA rules and is prohibited.

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

The best answer is 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.

Which statement is TRUE about a seminar given by a registered representative about mutual funds, collateralized mortgage obligations or direct participation programs? A. The seminar must be recorded and the recording must be retained by the member firm B. The attendees must be pre-screened for suitability of any investments recommended at the seminar C. The representative giving the seminar must have an unblemished BrokerCheck report D. Any materials given to participants must be filed with FINRA no later than 10 business days after first use

The best answer is D. 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.) There is no requirement that the seminar be recorded; there is no requirement to pre-screen attendees; and there is no requirement that the representative giving the seminars have an unblemished BrokerCheck report (though this would be nice!).

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

The best answer is 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.

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

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

A registered representative personally owns some rental property that has not been doing well. The representative is underwater on the investment and negotiates with the bank to do a short sale of the property. Does this have to be reported to her broker-dealer and be reported on her U4 Form? A. No, because it is an outside business relationship B. No, because the representative is not personally responsible for any loss on the sale of the property C. No, because securities are not involved in the transaction D. Yes, because she had made a compromise with a creditor

The best answer is D. Regulators are worried that registered representatives who are in "money trouble" might be a risk to investors because they would attempt to get money from customers illegally (say, by churning their accounts to generate commissions, or by simply stealing from them). Financial disclosures required on a U4 Form include whether the applicant has, within the past 10 years, filed for bankruptcy, made a compromise with creditors, or been the subject of an involuntary bankruptcy petition. A short sale of property is totally different than a short sale of stock. If a person owns a residential or investment property that is mortgaged and is "in trouble" - meaning that the mortgage payments cannot be made, the individual can attempt to negotiate a "short sale" with the bank instead of having to go through foreclosure. In a short sale, the lender agrees to accept a sale price for the property that is less than the outstanding mortgage amount; and the lender forgives any mortgage balance due upon the sale of the property. So this is really a negotiation with a lender to accept a loan repayment that is less than the balance due.

Under the FINRA Code of Procedure, the first level of hearings in any dispute or complaint proceeding is held at the: A. National Adjudicatory Council B. Securities and Exchange Commission C. Federal Court D. District Hearing Panel

The best answer is D. The FINRA Code of Procedure is used when the FINRA Department of Enforcement wishes to prosecute a member firm or an associated person for rule violations. It can also be used by a customer that has not signed an arbitration agreement. Under the FINRA Code of Procedure, the first level of hearings in any dispute or complaint proceeding is held at the District Hearing Panel. Their decision may be appealed to the National Adjudicatory Council. The National Adjudicatory Council's decision may be appealed to the Securities and Exchange Commission. Finally, the SEC's decision may be appealed to Federal Court.

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

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

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

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

A mutual fund has been doing poorly. The registered representative decides to sell the position because of this and does this before speaking with the client. Which statement is TRUE? A. This is permitted because it is to the benefit of the client B. This is permitted as long as the client's signature is obtained the next business day C. This is permitted as long as the client's signature is obtained within 2 business days D. This is an unauthorized trade and the registered representative will be subject to penalties

The best answer is D. There is no mention that the registered representative has been given discretion by the customer, therefore the representative cannot do the trade unless the customer has given permission before the trade was executed.

A registered representative is talking to an institutional client and has just recommended that the institution place an order to buy a block of XYZ stock. Just before the client says "Yes," the registered representative overhears a representative in the adjoining cubicle taking a large buy order from another institutional investor for XYZ stock. Which statement is TRUE about this situation? A. The representative cannot accept the buy order from his or her client because it would be a "front running" violation B. The representative cannot accept the buy order from his or her client because it would be a "trading ahead of research" violation C. The representative cannot accept the buy order from his or her client because it would be an "interpositioning" violation D. The representative can accept the order from the client

The best answer is D. This question is all about timing! The registered representative made the recommendation to buy BEFORE overhearing the rep in the adjacent cubicle taking the big block buy order in the same stock. Thus, the representative had no knowledge of this order and there is no front running violation if the representative places the buy order for his or her client.

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

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

All of the following time stamps are on an order ticket EXCEPT the time of: A. order entry B. trade execution, if executed C. order cancellation, if canceled D. trade reporting to the Consolidated Tape

The best answer is 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 the trade was reported to the Consolidated Tape. These time stamps are now recorded electronically