Series 10 - Questions

Under MSRB Rule G-22, which of the following constitutes a control relationship? A An officer of a municipal dealer is the Treasurer of a municipality whose bonds are being recommended B The municipal dealer has its headquarters in the municipality whose bonds are being recommended C The municipal dealer has won every competitive bid for that municipality's securities over the past 3 years D The municipal dealer always makes a market in the municipal securities that are being recommended

The best answer is A. A control relationship is defined by the MSRB as one where an issuer controls, is under common control, or is controlled by, a municipal dealer. In Choice A, an officer of the municipal dealer is also the Treasurer of the issuer whose securities are being recommended by that dealer. This is clearly a control relationship that must be disclosed. The other choices do not meet this definition (not even by a long shot!).

A registered representative is exiting a firm and that firm is the broker-dealer of record on a variable insurance product held directly at the issuer. The firm will not be providing the services that the registered representative was performing on the directly-held accounts. The broker-dealer wants to change the BD of record to a firm that is willing to provide services to the accounts. Which statement is TRUE? A This is allowed with a negative response letter B This is allowed, but only with a positive response letter C This is allowed only with the consent of the issuer D This is not allowed

The best answer is A. As a general rule, if a customer wishes to have an account transferred to another firm, the customer must give "positive consent" to the account transfer by signing a "TIF" - Transfer Initiation Form - which starts the ACATS (Automated Customer Account Transfer System) procedure. However, FINRA gives 5 specific situations where "negative consent" letters can be used to transfer customer accounts in bulk. The "idea" behind the use of the negative consent letter is that if the account is not transferred, it would be abandoned and the customer would be left "high and dry." Negative consent letters can be used to transfer customer accounts in the following situations: 1.The member is experiencing financial or operational difficulties (so the accounts are being transferred in bulk to another firm that is not about to "blow-up"); 2.The introducing firm is no longer in business; 3.The member firm is being acquired by another firm; 4.An introducing firm is changing its clearing firm; 5.A networking arrangement with a financial institution is being changed. In these cases, all the customers can get a letter stating that their account is being moved to another broker-dealer unless they object (this is a negative consent). FINRA then was asked for interpretative guidance on the situation where a registered representative assigned to a customer's directly held mutual fund or variable insurance product is "no longer available to provide services to the account and the member firm currently named as BD of record no longer intends to provide these services." In this case, because the customers' registered representative is no longer available to service the customers' directly held accounts and the member does not intend to continue to service such accounts, then this causes the potential "abandonment" of the accounts. FINRA states that this is a compelling concern and that a negative consent letter can be used in this instance.

A municipal dealer who is a FINRA member employs 7 sales representatives, 3 traders, 2 financial advisors and 2 administrative persons. Under MSRB rules, this dealer must have: A 1 municipal principal B 2 municipal principals C 3 municipal principals D 4 municipal principals

The best answer is A. As a general rule, municipal securities firms are required to have 2 municipal securities principals. However, two exceptions are provided: •If a municipal securities dealer has fewer than 11 full time employees engaged in the municipal securities business, it is only required to have one municipal securities principal. Please note that clerical employees are not included in the "fewer than 11" number. •If the firm is also a FINRA member with a person licensed as a General Principal (Series 24), then only 1 Series 53 license is required. Since this firm is a FINRA member, only 1 municipal principal is required.

Which of the following will change the SMA balance in a long margin account? I Cash dividends received II Stock dividends received III Interest charged on the debit balance IV Decline in the value of the securities A I only B III and IV C I and IV D II and III

The best answer is A. Cash dividends are credited to SMA, increasing the balance that can be borrowed, for 30 days. At the same time, they reduce the debit balance. If the customer borrows the dividends within the 30-day time limit, then SMA is reduced and the debit increases to its previous balance. Interest charged on the debit is added to the debit balance, but has no effect on SMA. Stock dividends received have no effect on the debit, nor on SMA. The number of shares increase, but the aggregate market value in the account would theoretically be unchanged for the stock dividend. A decline in the market value of securities has no effect on SMA. SMA "locks" at its existing level if the market value declines.

If, in the course of settlements, securities are suspected to be stolen, a report must be filed with the Securities Information Center within: A one business day of discovery B two business days of discovery C three business days of discovery D four business days of discovery

The best answer is A. If securities are suspected to be stolen, the Securities Information Center must be notified within 1 day of discovery. In addition, the transfer agent must be notified and the local authorities must be contacted promptly.

How many days must elapse before the certificate of incumbency appointing a guardian over an incompetent becomes void, if no action is taken by the guardian? A 60 days B 90 days C 180 days D 360 days

The best answer is A. In most States, if a guardian does not take control over an account within 60 days, the court must appoint a successor guardian.

If a member firm wishes to increase its in-house minimum maintenance margin required for long accounts from 30% to 35%, which statement is TRUE? A The firm can do so without giving customers prior written notice B The firm can only do so after giving customers 90 days advance notice of the change C The firm can only do so after filing the change with FINRA D The firm can only do so after filing the change with the FRB

The best answer is A. Member firms are free to change their minimum maintenance margins at will. There is no requirement to give the customer advance notice of a change.

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

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

Which of the following positions can be held in a non-securities credit account? A Precious metals B Foreign currency options C Money market funds D Exchange traded notes

The best answer is A. Regulation T only allows securities positions to be held in cash, margin or arbitrage accounts. Foreign currency options are PHLX-traded and are a security; money market funds are an investment company security; and exchange traded notes (ETNs) are an equity index-linked structured product that are NYSE-MKT-listed. These are all securities. On the other hand, "non-securities" positions, which have different margin rules, include precious metals, commodities and futures contracts. These positions are held in a "non-securities" credit account.

Which of the following exemption provisions of the Securities Act of 1933 cannot be used for an initial public offering of securities? A Rule 144 B Rule 147 C Regulation A D Regulation D

The best answer is A. Rule 144 can only be used to sell unregistered stock if a public trading market in the security already exists. Selling in compliance with the rule registers those shares. It cannot be used for an initial public offering. IPOs are exempt from registration if the private placement exemption requirements are met (Regulation D); if a small amount is sold (under $50,000,000 as required under a Regulation A exemption); or if the issue is sold "intra-state" (under the provisions of a Rule 147 exemption).

Under Rule 204 of Regulation SHO, if a security that is sold short is not delivered on settlement, mandatory buy-in must occur at the market: A opening on T+4 B closing on T+4 C opening on T+6 D closing on T+6

The best answer is A. Rule 204 of Regulation SHO mandates the buy in of all short sales where there is a fail to deliver on "T+4" (the morning of the business day after settlement), which is the same as S+1.

A syndicate member submits a Group order to the manager. Under MSRB rules: I The dealer must disclose the identity of the person for whom the order is submitted II The manager must disclose to other syndicate members, the identity of the person for whom a group order was submitted, if securities have been allocated to that order III If securities are allocated to the order, the allocations must cover the entire amount of the order IV Group orders have priority over Pre-Sale orders A I and II B I and III C I, II, III D II, III, IV

The best answer is A. Rule G-11 requires that the identity of Group Net orders be disclosed to the manager when orders for the new issue are placed by syndicate members (making Choice I correct). Such orders are filled after "Pre-Sale" orders, making Choice IV wrong. Disclosure of group orders that have been filled must be given by the manager to the syndicate, making Choice II correct. There is no requirement that allocations fill each order in its entirety - partial allocations are permitted, so Choice III is wrong.

An issuer will sell securities under the terms of an "investment letter" because: A it does not wish to go through the cost and time of registering the issue with the SEC B it is a well-known seasoned issuer and is therefore exempt from registration C the purchasers of the securities all reside in the same state D the offering is limited to no more than $5,000,000 in a 12-month period

The best answer is A. So-called "letter stock" is private placement stock sold under Regulation D. An "investment letter" that accompanies these issues explains that the securities are not SEC registered and cannot be resold in the public markets unless they are either registered or sold under an exemption such as Rule 144.

An assistant sales representative - order processing registered representative is permitted to: A qualify new customers B trade for the firm's account C solicit orders from customers D make recommendations of securities to customers

The best answer is A. The Series 11 license - Assistant Sales Representative - Order Processor, allows an individual to accept unsolicited customer orders or to provide current quotes to customers. This person is prohibited from rendering investment advice, making recommendations, effecting trades, or from accepting or opening new accounts. This question treads a fine line, since "qualifying" a customer simply means that information is being taken to determine if an account should be opened. This is acceptable as long as the actual opening of the account is performed by a registered representative, and is approved by a principal. An assistant sales representative cannot be compensated on a commission basis; or on any basis that links compensation to activity in an account or the opening of new accounts. Bonuses are acceptable as long as they are not based on account activity or the opening of new accounts.

A corporation declares a 3:1 stock split on March 1st to stockholders of record as of March 15th, with the payable date set at March 31st. A customer who buys 100 shares at $30 on March 30th would: I be confirmed as buying 100 shares at $30 II be confirmed as buying 300 shares at $10 III receive a due bill for an additional 200 shares IV not receive a due bill for an additional 200 shares A I and III B I and IV C II and III D II and IV

The best answer is A. The ex-date for a stock dividend or stock split is different than that for a cash dividend. The ex-date for a stock split or stock dividend is set at the day after the Payable Date. This creates a problem. Anyone who buys the stock and settles on the Record Date of March 15th or before will be on the shareholder list to receive the additional shares on the payable date. There is no impact on these people. But anyone who buys the stock, settling anywhere from March 16th (day after Record Date) through March 31st (Payable Date) will pay the full unadjusted price for the stock, but will not be on the record books to receive the additional shares when the stock split or stock dividend is paid (on March 31st). This isn't fair, and these customers can claim the additional shares with a due bill. Anyone who buys, settling on the ex-date of April 1st or later, will pay the reduced price, for the proper number of shares and a due-bill is no longer required.

A political contribution in excess of the MSRB limit is made erroneously by an MFP to an elected official's campaign. Such a contribution to which elected officials' campaigns would have the worst impact on the municipal broker-dealer that effects municipal securities business? I Governor running for re- election in the State II Senator of that State running for President III Cousin of the MFP running for a town council seat IV Local businessman running for a Congressional seat A I and III B I and IV C II and III D II and IV

The best answer is A. The intent of Rule G-37 is to stop large campaign contributions at the State level and lower, where that elected official is in a position to "steer" future municipal underwriting business to a dealer or person employed by a dealer that made a large campaign contribution. A Governor running for reelection in a State is in a position to steer future State bond offerings to a municipal underwriter, so this campaign is clearly subject to the prohibition, as is an individual running for a town council seat, since that person can influence the selection of an underwriter for that town's bonds. Regarding the Senator running for President, this is a federal official running for a higher federal office. This does not come under the rule. However, please note that if a municipal issuer official is running for federal office, the Rule G-37 prohibition does apply (presumably the MSRB believes that if the municipal official wins the federal election, he or she will still have "friends" at the State or political subdivision level that he or she can influence to direct municipal securities business to a specific underwriter). Finally, the local businessman running for a Congressional seat is not a municipal issuer official seeking Federal election, so Rule G-37 does not apply.

A customer places an order to buy $50,000 par value of new issue municipal bonds from a dealer that are offered "WAII." Which statement is TRUE about the acceptance of the order? A The dealer can accept the customer order B The dealer must wait until the POS (Preliminary Official Statement) is available for delivery to the customer before accepting the order C The dealer must wait until the customer deposits 100% of the funds in the account before accepting the order D The dealer is prohibited from accepting the order until the actual issuance date of the bonds

The best answer is A. This bond is being offered on a "When, As and If Issued" basis. There is nothing prohibiting the dealer from accepting the order. Both payment and delivery of the Official Statement (or the Preliminary Official Statement if no final version is being prepared) will be required on settlement.

Which of the following individuals MUST be registered with FINRA? A Variable annuity salesmen B Commodity salesmen C DMMs on recognized stock exchanges D Government securities traders

The best answer is A. To sell variable annuity contracts (which are considered to be a non-exempt security by the SEC), not only must an individual be registered with the State Insurance Commission, but he must also be registered with FINRA through a broker-dealer. Persons who have passed the Series 6 (Investment Companies/Variable Annuities exam) or the Series 7 (General Securities) exam are licensed to sell these products. Commodities are not securities and are not regulated by FINRA. U.S. Governments are exempt securities, so they do not fall under FINRA jurisdiction unless the government securities dealer is also an FINRA member. Floor traders on recognized stock exchanges are registered through the exchanges. They are not regulated by FINRA. DMMs (Designated Market Makers) on recognized stock exchanges are registered through the exchanges.

Which of the following MUST be furnished to purchasers of new municipal issues at or prior to settlement? I The Final Official Statement furnished by the issuer (or a typed summary if a Final Official Statement is not being prepared, with a notice that no Final Statement is being prepared) at or prior to confirmation II The Official Notice of Sale published by the issuer III The Legal Opinion rendered by the Bond Counsel A I only B I and II only C II and III only D I, II, III

The best answer is A. Under MSRB new issue disclosure rules, it is required that each purchaser of a new issue receive the Final Official Statement furnished by the issuer (or a typed summary if a Final Official Statement is not being prepared, with a notice that no Final Statement is being prepared) at or prior to settlement. If the underwriting was negotiated, it is also required that the customer receive disclosure of the initial offering price of each maturity offered, and disclosure of the underwriting spread. (Please note that this disclosure is not required for competitive bid issues.) There is no requirement for the customer to receive a copy of the Official Notice of Sale, nor the Legal Opinion at or prior to settlement. The Official Notice of Sale is published by the municipal issuer when it wishes to solicit competitive bids from prospective underwriters. The Legal Opinion will be included on the face of the bonds, and is delivered to customers in this manner.

Under Rule 144, control stock that is purchased in the open market can be sold: A immediately B after a 6 month holding period has elapsed C after a 1 year holding period has elapsed D after a 2 year holding period has elapsed

The best answer is A. Under Rule 144, control stock that is purchased in the open market can be sold immediately (if they are bought in the open market, the shares must be registered). However, the 1% and 4 week trading average limits on sale must still be met. Restricted stock (unregistered stock acquired through a private placement) can only be sold under Rule 144 after having been held for 6 months, fully paid.

FINRA members are permitted to join with non-members in domestic underwritings of: I Non-convertible corporate bonds II Convertible corporate bonds III Municipal bonds IV Government bonds A I and II only B III and IV only C I, III, IV D I, II, III, IV

The best answer is B. A FINRA member can only join in domestic underwritings of non-exempt securities with other members. Of course, the member can join with non-member banks and government dealers in exempt securities underwritings such as government agency securities or municipals since FINRA has no jurisdiction over exempt securities.

A corporation has established a profit sharing plan. In a year when the company has no profit, a plan contribution: A cannot be made by the company B can be made at the company's discretion C must be made by the company D must be made only if the plan is underfunded

The best answer is B. Corporate profit sharing plans are qualified plans. Contributions are made solely at the employer's discretion. Unlike other qualified plans, there is no required annual contribution.

If a customer deposits over $10,000 of cash to his or her account, what form must be filed? A FOCUS B CTR C SAR D ADV

The best answer is B. Deposits or withdrawals of over $10,000 of cash are reported to FinCEN on a Currency Transaction Report ("CTR") within 15 days.

A registered representative in your branch office is also a certified financial planner. The representative wishes to make a financial planning presentation to an existing client that has not purchased a financial plan and has pulled up the client's account statements for the previous 2 years so that he can review them and send the customer a proposal. Which statement is TRUE? This action is: A prohibited because the representative must get the client's permission to review his or her previous account activity B prohibited unless the registered representative has also been registered as an adviser representative C permitted because the representative has earned the certified financial planner designation D permitted because the representative is not soliciting a new client

The best answer is B. Financial plans are "advisory products." To sell these, the firm must be registered as an "investment adviser" in each State where the plans are offered and the representatives offering the plans must be registered as "investment adviser representatives" in the State. As a requirement of registration, the adviser representative must have passed either the Series 65 or Series 66 exam that is administered by NASAA - North American State Administrators Association. Note that having passed the CFP exam does not qualify an individual to be registered to sell such plans in the State.

Under MSRB rules, the name and address of the person entering the order should be noted on the order ticket for all of the following accounts EXCEPT: A joint account B individual account C corporate account D partnership account

The best answer is B. If an account is that of a partnership, corporation, a joint account, or an order entered pursuant to a power of attorney, the name and address (if other than the account address) of the person entering the order must be noted on order tickets under MSRB rules.

Under which circumstances can a member firm hire, on a temporary basis, administrative employees of another member firm? I A written agreement between the hiring member and the person to be employed, detailing the nature of the proposed employment and compensation, must be completed II The written consent of the full-time employer member must be obtained III The written consent of FINRA must be obtained A I only B I and II C II and III D I, II, III

The best answer is B. If an employee of one member firm wishes to take any other employment with another member, a written agreement between the hiring member and the person to be employed, detailing the nature of the proposed employment and compensation, must be completed. In addition, the written consent of the full-time employer member must be obtained. There is no requirement to obtain the written consent of FINRA.

When acting as an agent in a municipal transaction, all of the following are relevant considerations in determining a fair price to customers EXCEPT: A availability of the security B nature of the dealer's business C execution expenses D value of extraordinary services rendered

The best answer is B. In an agency transaction the MSRB states that the following should be considered to determine a "fair price." The items to be considered for BOTH principal and agency trades are: 1.Best judgment of the fair market value of the securities when the trade occurs, and if applicable, the value of securities exchanged or traded in connection with the transaction; 2.Expense of filling the order; 3.The fact that the firm is entitled to a profit; 4.Availability of the security; 5.Total dollar amount of the transaction (larger transactions for institutions should have a lower mark-up or commission per bond); and 6.Value of services rendered in effecting the trade. The factors to be considered that ONLY apply to agency trades are: 1.The price of the transaction; and 2.Amount of any other compensation received in connection with this transaction (e.g., a proceeds transaction, where the customer directs the broker to sell one security and use the proceeds to buy another. Two commissions are charged and because the two trades are tied together, each commission should be lower). 3.For firms that sell municipal fund securities (529 plans - which are basically mutual funds sold in a State-created wrapper to fund college education), if the dealer's fees or commissions fall within FINRA's sales charge schedules for mutual funds, this is a "significant" (but not conclusive) factor is setting a fair charge. The factors to be considered that ONLY apply to principal trades are: 1.Most important of all is that the yield should be comparable to that of other securities of similar quality, maturity, coupon rate and block size then available in the market; 2.Maturity, rating and call features of the security, including the impact of information from ratings agencies about potential rating changes; 3.Nature of the dealer's business; and 4.The existence of material information about a security through EMMA or other industry sources.

Under MSRB Rule G-27, a municipal principal is responsible for which of the following? I Reviewing all order tickets promptly II Reviewing all order tickets daily III Reviewing customer accounts daily IV Reviewing customer accounts frequently A I and III B I and IV C II and III D II and IV

The best answer is B. MSRB Rule G-27 (Supervision) requires that order tickets be approved by the principal "promptly"; and that customer accounts be reviewed "frequently."

Under NYSE rules, the earliest that a seller's option trade can settle is: A T+1 B T+2 C T+3 D T+4

The best answer is B. NYSE Seller's Option settlement is defined as a trade that settles no earlier than 2 business days after trade date; but no later than 60 business days after trade date. Also note that the FINRA definition of a seller's option transaction is quite different. FINRA defines a Seller's Option transaction as one that settles at the seller's option no earlier than 4 business days after trade date (thus, settlement occurs after the regular way settlement time frame).

A syndicate member places an order with the manager for $600,000 of bonds to be placed in an accumulation account managed by that dealer. Under MSRB Rule G-11, the dealer must disclose that the bonds are being purchased for a related portfolio, and the manager will accord the order: A pre-sale status B member status C group status D designated status

The best answer is B. Orders placed by syndicate members for that dealer's account, related portfolio, accumulation account managed by that dealer, or municipal unit trust sponsored by that dealer, must be disclosed to the manager at the time that the order is entered. The manager must accord them last priority - which is Member at the Takedown.

A new customer wishes to open an account. He explains that he is a foreign college student, and that he will be using family business contacts to start an import/export business. He tells you that he will need to make 5-6 withdrawals a month to make payments for goods purchased. As the BOM, you should tell the representative that the account: A cannot be opened B can be opened if the customer's business contacts are verified C cannot be opened until proper due diligence is completed D can be opened after the customer signs AML papers

The best answer is B. Since this is a "student" who is a foreign customer who is going to be in the "import/export" business, there are a number of red flags here. The question does not give a choice of matching the customer name to the terrorist watchlist (which is required). One way of determining that the customer is legitimate is to verify his foreign business contacts. This is a common compliance tool for making sure that accounts doing foreign business are legitimate.

The practice of soft dollar remuneration is: A prohibited under FINRA rules B permitted under FINRA rules C permitted under FINRA rules only if the firm's research analysts are properly registered D permitted under FINRA rules only if the firm's research reports are made available to the general public

The best answer is B. Soft dollar remuneration occurs when an institution directs its portfolio trades to a broker in return for research (or other services that benefit the institution's customers) that is provided by that broker to the institution. The compensation to the broker by the institution for the research is included in the commission charge - there is no separate charge for the research - hence the term "soft dollars." This is a permitted practice under FINRA and SEC rules.

Subscribers to the Consolidated Quotations Service receive listings of: A bid and ask quotes with their sizes for over-the-counter stocks B bid and ask quotes with their size for exchange listed stocks C real time reports of actual trades in over-the-counter stocks D real time reports of actual trades in exchange listed stocks

The best answer is B. The Consolidated Quotations Service provides bid and ask quotes with sizes for all market makers in exchange listed stocks. These market makers are the Specialists/DMMs on the New York Stock Exchange, Specialists on regional exchanges where the stock may also be listed (e.g., the Philadelphia Exchange), and Third Market Makers such as Weeden and Jefferies and Co.

An MFP (Municipal Finance Professional) gives $100 to the primary campaign of an elected official in which she is entitled to vote. The official wins the primary and the MFP gives another $200 to the same official's general election campaign. Which statement is TRUE? A Because more than $250 was given to campaigns for the same official, this will result in a ban B Because the amount given to each campaign did not exceed $250, this will not result in a ban C Because the MFP is prohibited from giving any dollar amount to an elected official's campaign, this will result in a ban D Because the MSRB rule only applies to non-MFPs, this will not result in a ban

The best answer is B. The MSRB political contribution rule applies a limit of $250 to a contribution made by an MFP (Municipal Financial Professional) to each "campaign" without a 2-year ban being imposed. This MFP gave $100 to one campaign for the candidate (the primary) and $200 to another campaign for the same candidate (the general election), so there is no ban.

Which of the following usually acts as the stabilizing market maker? A Issuer B Managing underwriter C Any member of the syndicate D Any member of the selling group

The best answer is B. The managing underwriter will act as the stabilizing underwriter in a new issue offering. At any time, only one firm (the manager) can maintain a stabilizing bid.

A registered representative in your office is also the beneficiary of a trust that directs its securities trades to that representative for execution. This arrangement is: A prohibited because it is a conflict of interest B permitted if the registered representative is the sole beneficiary of the trust C permitted if the arrangement is approved in writing by the branch manager D permitted if the registered representative holds a power of attorney over the account

The best answer is B. The trustee is a fiduciary that must act in the best interests of the trust beneficiary or beneficiaries. The trustee chooses the broker to execute the portfolio transactions, and must act in the best interests of the beneficiary when doing so. If the trustee selects the broker that also happens to be the beneficiary of the trust, so be it! Note, however, that this gets stickier if there are multiple beneficiaries to the trust - because one beneficiary (the registered representative) would be getting a disproportionate benefit by earning the commissions on the directed portfolio trades; and the commission cost is being borne by the other beneficiaries in the trust. In such a case, then there is a conflict of interest that would prohibit such an arrangement unless the other beneficiaries approved.

All of the following are disclosed on a customer confirmation EXCEPT: A the fact that a member is a market maker when a transaction is effected for the customer on a principal basis B the fact that a security is marginable, if this is the case C the mark-up amount in riskless transactions where the member is not a registered market maker D the commission amount when a transaction is effected on an agency basis, as well as making available the time of the trade and the name of the contra-party

The best answer is B. There is no disclosure on a confirmation that a security is marginable. It is disclosed on the confirmation that a member is a market maker when a transaction is effected for the customer on a principal basis; the mark-up amount is disclosed in riskless transactions where the member is not a registered market maker; and the commission amount is disclosed when a transaction is effected on an agency basis, and the time of the trade and the name of the contra-party are made available as well.

A registered representative has been referred to a new potential client by one of his best friends. The registered representative holds a meeting in his office with the potential client, who decides to open an account. The registered representative asks the customer for a photo ID, and the client responds that he does not have it with him. The registered representative can: A not open the account until a photo ID is received from the customer B open the account, deposit the client funds and make the initial investments C open the account, deposit the funds but wait until ID is received from the customer before making any investments D open the account, deposit the funds, make the initial investments and obtain a copy of the customer's ID within 60 days of account opening

The best answer is B. This customer does not have a photo ID. The rules on verifying customer identity allow for "non-documentary" means of verifying identity by using a database service such as Equifax or TransUnion. Such verification must occur promptly after account opening. The firm may have a policy in place that does not allow account opening before verification is made, but this is not the rule. In theory, this account can be opened as long as the information provided by the customer is verified with a database service promptly after account opening.

A new registered representative in your branch is anxious to build a book of business and had been working late into the evening at the branch office telemarketing potential clients. As the BOM, your primary concern with the representative working these unusual hours would be that the: A Federal Telemarketing rules regarding unsolicited cold calls are not being violated B representative is under the direct supervision of a supervisor during these hours C record of the employee's working hours is maintained in accordance with State labor laws D customer records maintained in the branch office are secured and protected from intrusion or alteration when the full staff is not in the office

The best answer is B. This is judgmental, but the issue here is that the representative must be under the direct supervision of the firm when he or she is conducting securities business. Thus, as BOM, you must have procedures in place to supervise the representative during these "unusual hours" - such as having an assistant branch manager present during these hours; or having the representative's conversations tape recorded during these "unusual" hours. Choice A is plausible, but B is the better choice.

All of the following statements are true about operating a broker-dealer branch in a bank setting EXCEPT: A the SIPC sign must be visible within the kiosk or office where the branch is located B any promotional materials must include both the name of the broker-dealer and the bank within which the broker-dealer operates C bank employees are not allowed to enter the broker-dealer branch with a client unless they are registered D new clients must be given the "NOT-NOT-MAY" disclosure both verbally and in writing

The best answer is B. This question is directed at BDs such as "INVEST" which sign marketing agreements with banks, and install INVEST kiosks in the bank's branches and license a few bank employees in each bank branch with a Series 6 license. When the bank employee enters the kiosk with a customer, the employee "transforms" into an INVEST representative. Any new customer entering the kiosk must be given the "NOT-NOT-MAY" disclosure verbally and in writing (the products offered are NOT bank products; are NOT FDIC insured; and MAY lose value). Only registered employees can enter the kiosk with a client and the SIPC sign must be visible in the kiosk. Any promotional materials are only required to include the name of the BD (INVEST in this example) and not the name of the bank with which INVEST has the marketing agreement. This makes sense because the products are being offered by the BD and NOT by the bank.

FINRA supervisory rules require annual compliance reviews of the activities of all of the following EXCEPT: A Offices of supervisory jurisdiction B Non-supervisory branch offices C Registered representatives D Registered principals

The best answer is B. Under FINRA supervisory rules, each Office of Supervisory Jurisdiction must be reviewed at least annually to ensure compliance with all industry regulations; and each registered representative and registered principal must be interviewed or participate in an annual meeting at which compliance matters that are relevant are discussed. FINRA's Supervisory rules require periodic inspection of customer account records in the branch offices. Regarding inspection of the branches, supervisory branches must be inspected at least annually; non-supervisory branches must be inspected at least every 3 years.

Under MSRB rules, an order ticket for an agency transaction must include all of the following EXCEPT: A time of order receipt B time of order entry C time of order execution D time of order cancellation

The best answer is B. Under MSRB rules, the following must be noted on agency order tickets: 1.Terms and conditions of the order. 2.Date and time of receipt of the order. 3.The price at which the trade was executed. 4.The date of execution, and to the extent feasible, the time of execution. 5.If the account is that of a partnership, corporation, a joint account, or an order entered pursuant to a power of attorney, the name and address (if other than the account address) of the person entering the order. 6.If the order is canceled by a customer, the record must show the terms, conditions and date of cancellation, and to the extent feasible, the time of cancellation. 7.If the trade is discretionary, the ticket must be designated as such. Note that there is no requirement to note the time of order entry on the ticket.

A FINRA member firm wishes to appoint a non-resident principal to supervise the operations of a branch office. How long does the appointment last? A 1 year B 2 years C 5 years D Indefinitely

The best answer is B. Under the "Supervision Rule," all persons selling or soliciting must be supervised - and this includes producing BOMs. The customer account activity of producing managers must be supervised by a person who is senior to, or is otherwise independent of, the producing manager. To be such requires that 4 tests be met: 1.This person cannot report to the producing manager. 2.This person must be located in a different office from the producing manager. 3.This person cannot have supervisory responsibility for the activity being reviewed (meaning that this person's compensation cannot be based on the producing manager's sales). 4.This person must alternate responsibility every 2 years or less.

Regarding FINRA Rule 5130 on IPO purchases of common stock from underwriters, which statement is TRUE? A A FINRA member firm is allowed to buy a new issue for the firm's investment account B An underwriter in the syndicate is allowed to buy and retain a portion of the issue C The self-supporting spouse of a bank President is permitted to buy the issue D The self-supporting father of a registered representative whose firm is in the underwriting group is permitted to buy the issue

The best answer is C. FINRA Rule 5130 on IPO distributions prohibits the following industry "insiders" from buying new issues from underwriters: 1.Member firms for their own accounts, officers of member firms, associated persons, or any other employee of a member firm are restricted. Also prohibited are "agents" of broker-dealers; and immediate family members of the officers and employees of broker-dealers. ("Immediate family" is anyone that is 1 step removed from that officer or employee and includes spouses, siblings, parents, and children, as well as in-laws of these individuals.) Also note that "immediate family" members are only prohibited if they live in the same household as the registered representative, or if they contribute to the material support of the representative (or vice-versa), or if they are buying an IPO being sold by the representative's firm. 2.Fiduciaries to member firms are restricted, such as lawyers, accountants and financial consultants who provide services to member firms. In a similar vein, finders are restricted as well. A finder is a person who finds a new company that wishes to go public and introduces it to the member firm that will act as the underwriter. For this service, the finder is paid a "finder's fee" by the underwriter - but the finder cannot get stock of the IPO that results. Also note that this prohibition applies to the immediate family of lawyers, accountants, financial consultants and finders for the underwriter. 3.Portfolio managers who have authority to buy or sell securities for institutional investors are restricted. These individuals are typically investment officers of banks, savings and loans, insurance companies, investment companies, investment advisors or collective investment accounts. Also restricted are the immediate family members of these individuals. 4.Passive owners of broker-dealers that are not included in Category 1 are restricted as well.

Which of the following are violations of the MSRB's advertising rule? I Placing an advertisement that includes only current yield II Placing an advertisement for bonds that the dealer does not have in inventory III Placing an advertisement for discount bonds without indicating that the Yield to Maturity is a gross yield IV Placing an advertisement which shows only a percentage rate without specifying whether this represents the coupon rate or yield A I and III B II and IV C I, III, IV D I, II, III, IV

The best answer is C. The MSRB Advertising Rule G-21 requires that current yield can only be shown in an advertisement, only if it is accompanied by the lower of yield to maturity or yield to call. Furthermore, if yield to call is shown, the call date and price must be disclosed. Dealers are permitted to advertise bonds that they do not have in inventory (strange, but true!), as long as the: •securities advertised are described as "subject to availability"; •dealer is not aware that the bonds are no longer available in the secondary market; •dealer would attempt to acquire the bonds if contacted by a customer; and •advertisement states that the bonds are subject to change in yield or price. When advertising discount bonds in the secondary market, the dealer must state that the yield to maturity shown is a gross yield (since it consists of both the annual interest income from the bond + the annual pro-rated capital gain on that bond); and must also state that the capital gain is subject to federal taxation. Finally, an advertisement which shows only a percentage rate without specifying whether is represents the coupon rate or yield is a rule violation.

A customer places an order to: "Buy 1,000 shares of ABCD stock - MOC." At the end of that day, the stock is trading "FAST" and it does not close until 4:10 PM. Which statement is TRUE? A The order will not fill and will be canceled B The order will be filled based on the 4:00 PM price for ABCD stock C The order will be filled based on the 4:10 PM price for ABCD stock D The order will be filled as close to the closing price as possible

The best answer is C. An "MOC" order is a Market On Close order - to be filled at the closing price or canceled. This stock did not close until 4:10 PM (instead of the usual 4:00 PM) because the market could not keep up with the rate of order flow. The order will still be filled at the closing price - which does not occur until 4:10 PM because the market needed that amount of time to process all the executed orders.

Notification to FINRA is required if a customer dispute with a registered representative: I is settled for an amount greater than $2,500 II is settled for an amount greater than $15,000 III results in fines imposed by the firm against the registered representative exceeding $2,500 IV results in fines imposed by the firm against the registered representative exceeding $15,000 A I and III B I and IV C II and III D II and IV

The best answer is C. Any dispute that a registered representative has with a customer that results in a settlement paid to the customer in excess of $15,000; or that results in the imposition of fines or withheld commissions in excess of $2,500; must be reported to FINRA promptly, but no later than 30 days after the event.

If a customer requests to be placed on the firm's "Do Not Call" list, the record of this must be retained for: A 1 year B 3 years C 5 years D 7 years

The best answer is C. Any person that requests to be placed on either a firm's internal, or the national, "Do Not Call" list, stays on that list indefinitely. The FINRA (firm) rule on this is the same at the FTC (national) rule. This changed in mid-2012 from the old rule requiring 5 year retention. Note, however, that FINRA has been slow in making test updates and the test may not reflect the rule change. Since indefinitely is not offered as a choice, 5 years must be chosen in this question. (On the other hand, if "indefinitely" were given as a choice, then the question has been updated and this would be the answer - and also note that the old rule of 5 years would not be offered as a choice in the updated question.)

Rule 144 allows a broker to contact which of the following potential buyers of 144 stock? I Existing customers of the firm that already have positions in that security II All existing customers of the firm that have cash or securities positions III A customer who has indicated an unsolicited bona fide interest in the securities within the preceding 10 business days IV A broker-dealer who has indicated an unsolicited bona fide interest in the securities within the preceding 60 calendar days A I only B I and II C III and IV D I, III, IV

The best answer is C. As a general rule, solicitation of orders to buy Rule 144 stock is prohibited. However, if a customer has indicated an unsolicited bona fide interest within the preceding 10 days; or a broker-dealer has indicated an unsolicited bona fide interest within the preceding 60 days; these persons can be recontacted to buy the stock.

A customer deposits $2,000 of cash to his account on Monday; $2,500 on Wednesday of that week; $3,000 on Friday of that week and $3,000 on the Monday following. Which statement is TRUE? A No report of cash transactions is required to be filed because each deposit was less than $10,000 B No report of cash transactions is required because the $10,000 reporting threshold covers each week's total cash deposit or withdrawal C A report of the cash transactions must be filed with FinCEN on Form CTR D A report of the cash transactions must be filed with FinCEN on an SAR

The best answer is C. Cash reporting is based on 2-week time windows. If a customer deposits cash that totals over $10,000 over a 2-week time window; or withdraws cash of more than $10,000 over a 2-week time window; this must be reported to FinCEN within 15 days on a Currency Transaction Report. Note that the report will be filed even if the customer comes "close" to the $10,000 reporting threshold but does not go over $10,000, since he is attempting to structure transactions here so that they would not be reported - and these structurings are also required to be reported! In contrast, suspicious activities reports (SARs) are filed with FinCEN within 30 days.

An order is received to buy 500 shares of XYZZ stock at the market. Currently, trading is halted due to the imposition of the market wide circuit breaker. Which statement is TRUE? A The order should be routed to an ECN for execution B The order must be returned to the client C The order should be entered upon the resumption of trading D The order should be entered as a Market On Open (MOO) prior to the next trading session

The best answer is C. During a trading halt, a member can still accept orders from clients. The orders are entered once trading resumes.

Which of the following is a "public arbitrator"? A An individual associated with a member firm B An individual associated with a commodities firm C The Chief Financial Officer of a financial institution D A Chief Compliance Officer of a financial institution

The best answer is C. FINRA defines a "Non-Public Arbitrator" as any person (or that person's immediate family member), who: •within the past 5 years was associated with a securities broker-dealer (including government and municipal dealers) or with a commodities firm; •is retired from engaging in any of the business activities in the previous definition; •is an attorney, accountant, or other professional who has devoted 20% or more of his or her professional work in the last two years to clients in the first definition; •is an employee of a bank or other financial institution and effects transactions in securities (including governments and municipals) or commodities (including futures and options) or monitors compliance of employees engaged in these activities. Only Choice C does not fit this definition.

A FINRA member firm is the principal underwriter for a variable annuity contract. Other FINRA member firms may sell the variable annuity if: I a written sales contract exists II they are registered broker-dealers III it is agreed that any selling commission will be returned to the insurance company if the contract is tendered for redemption within 7 business days after acceptance IV Any discounts given by the underwriter to the member firm must be granted to the customer A I only B I and IV only C I, II and III only D I, II, III, IV

The best answer is C. If a FINRA member firm wishes to sell variable annuity contracts, a written selling agreement signed by the member and the underwriter is required (Choice I). Only registered broker-dealers may sell variable annuities since the SEC defines these contracts as a security, not as an insurance product (Choice II). The selling agreement must provide that any selling commission will be returned to the insurance company if the contract is tendered for redemption within 7 business days of acceptance (Choice III). Under FINRA rules, the contracts must be sold at the current unit value plus a sales charge that is fair and reasonable. Sales charge discounts, other than those provided by the FINRA Conduct Rules, cannot be passed to customers. These are prospectus offerings, which must be sold to the public at the public offering price. Discounts can only be given to other FINRA members - not to the public.

Under MSRB Rule G-32, which of the following must be disclosed to customers in a negotiated offering? I Underwriting spread II Initial offering prices of each serial maturity III Amount of any fee received by the dealer for acting as agent for the issuer IV Participation percentage of each syndicate member A I and III B II and IV C I, II, III D I, II, III, IV

The best answer is C. In a negotiated offering, under MSRB Rule G-32, the following must be disclosed to customers: •underwriting spread •amount of any fees received in connection with the underwriting •initial offering price of each maturity There is no requirement under this rule to disclose the names of the syndicate members, nor their participation percentages.

Which of the following is NOT subject to the locate requirement of Regulation SHO? A Class A Voting Stock B Class B Non-Voting Stock C Corporate Bonds D OTC Stock

The best answer is C. Regulation SHO requires that when a short sale is effected in any equity security, the broker-dealer must "locate" the shares to be borrowed and make an affirmative determination that they can be delivered by settlement date. It makes no difference if the stock is exchange-listed or OTC-traded, nor does it make a difference if the shares have different voting rights. The rule does not apply to debt securities. Regulation SHO only applies to equity securities.

A corporation wishes to place a large purchase order to buy its own stock for the company's Employee Stock Option Plan (ESOP). The current inside market for the stock is $20.00 - $20.50. The last trade in the stock occurred at $20.10. What is the highest price at which the company can purchase its own shares? A Any price that is reasonably related to the current market B $20.00 C $20.10 D $20.50

The best answer is C. Rule 10b-18 sets the guidelines for corporation that wishes to buy back its stock in the market. The rules gives the company a "safe harbor" from being accused of trying to manipulate up the price of its stock. Rule 10b-18 purchases, as they are known: •Must be effected through 1 broker/dealer on any given day; •Cannot be the opening transaction; •Cannot be executed within 10 minutes of market close if the security is "actively traded" as designated by Rule 101 of Regulation M, otherwise the purchase cannot be executed within 30 minutes of market close; •Must be effected at prices no higher than the current highest independent bid for that security or last reported sale price (whichever is higher); •Cannot exceed 25% of the trading volume in the security that day (except for block purchases handled outside the normal flow of orders). The last reported trade of $20.10 is higher than the current inside bid of $20.00, so the stock can be purchased at a price no higher than $20.10.

Aside from a new account form, what must be sent to a customer that wishes to open a 529 Plan? I Official Notice of Sale II Official Statement III Prospectus for underlying mutual fund IV Risk Disclosure Document A I and III B I and IV C II and III D II and IV

The best answer is C. Section 529 Plans are a "municipal fund" security. The plan itself is an exempt municipal security, but customers must be provided with an Official Statement (disclosure document) by settlement of the first transaction. In addition, if the plan is purchasing an underlying mutual fund, the customer must be provided with a copy of the mutual fund prospectus.

The ex dividend date for a mutual fund is: I set by FINRA at 2 business days prior to record date II set by the Board of Directors of the fund on the same day as the record date III the date on which the fund's Net Asset Value per share will be decreased for the distribution IV the date when the fund's Net Asset Value per share will be increased for the distribution A I and III B I and IV C II and III D II and IV

The best answer is C. Since mutual funds do not trade, the ex-date set by the Fund's Board of Directors is not reported to FINRA. The Board sets the ex-date on the same day as the record date. On that day, the value of the fund's shares is reduced for the distribution. Since most shareholders choose to have the distributions automatically reinvested in new shares, each shareholder ends up with more shares worth a lesser amount per share. But, in aggregate, the value stays the same.

The FINRA 5% Policy applies to transactions in which of the following securities? I Open end investment companies II Closed end investment companies III Unit investment trusts IV Real estate investment trusts A I and II only B III and IV only C II and IV only D I, II, III, IV

The best answer is C. The FINRA 5% Policy applies to over-the-counter and exchange transactions that take place in the secondary market - the trading market. It does not apply to "redeemable securities" such as mutual funds (open end investment companies) and unit investment trusts. It does apply to securities that are traded, such as closed end funds and Real Estate Investment Trusts.

Every broker-dealer is required to have written policies and procedures to prevent the misuse of material non-public information by: I the employees of the broker-dealer II associated persons of the broker-dealer III suppliers of the broker-dealer IV disinterested parties of the broker-dealer A I only B II and IV only C I and II only D I, II, III, IV

The best answer is C. The Insider Trading Act Amendments of 1988 requires broker dealers and investment advisers to have written policies and procedures to prevent the misuse of material non-public information by the firm's employees and its associated persons. There is no requirement to have such policies over suppliers and disinterested persons, since these persons are not under the control of the broker-dealer.

Which statement is TRUE about inspection of customer account records by the Office of Supervisory Jurisdiction? A Customer account records must be inspected at least annually by the Office of Supervisory Jurisdiction B Customer account records must be inspected at least quarterly by the Office of Supervisory Jurisdiction C Customer account records must be inspected periodically by the Office of Supervisory Jurisdiction D No inspection of customer account records is required by the Office of Supervisory Jurisdiction

The best answer is C. The Office of Supervisory Jurisdiction must inspect customer account records periodically to detect and prevent irregularities or abuses. In addition, the member firm must inspect each OSJ at least annually, to ascertain that these procedures are, in fact, being carried out.

A registered representative at a FINRA member firm gives a speech to 15 potential customers about investing in high yielding common stocks and gives opinions about specific issues that would allow the attendees to form an opinion as to whether to buy those securities. Which statement is NOT true? A The speech must be approved in advance by the Supervisory Analyst B The speech must be accompanied by an "Analyst Certification" C The speech must be approved in advance by FINRA D The speech must disclose any potential conflicts of interest between the member firm or analyst and the recommended issuers

The best answer is C. The SEC has defined a "research report" to include a speech to 15 or more persons about investing that would allow the attendees to form an opinion as to whether to buy or sell the securities discussed. Thus, FINRA research report requirements must be met, which includes approval of the recommendations by the Supervisory Analyst and disclosure of all potential conflicts of interest. In addition, SEC Regulation AC - Analyst Certification - also applies to research reports, so the representative must certify that the opinion expressed is his or her un-coerced and un-conflicted opinion. There is no requirement for research reports to be approved by FINRA.

To sell Real Estate Limited Partnerships and other types of syndications, which of the following registrations are acceptable? I Series 6 Investment Companies/Variable Annuities Representative II Series 7 General Securities Representative III Series 22 Direct Participation Programs Representative IV Series 62 Corporate Securities Representative A I and II only B III and IV only C II and III only D II, III, IV

The best answer is C. The Series 22 license solely allows an individual to sell limited partnerships (so called "Direct Participation Programs"). The Series 7 license allows an individual to sell any security. The Series 6 license allows an individual to sell open end investment companies, variable annuities, and initial offerings of closed end investment companies. The Series 62 license allows an individual to sell corporate securities (excluding options), but not open end investment companies (with the sole exception of money funds). The Series 62 license does not allow the sale of limited partnership interests.

Under the supervisory rules, all of the following would be items of relevance in the annual compliance review conducted with each registered individual EXCEPT: A electronic communications content and approval requirements B disclosures to clients about the content of impending research report announcements C disclosures to clients about the investment features of a security D disclosures to clients of the trading actions of other customers

The best answer is C. The annual compliance review to be conducted with each registered person is supposed to cover compliance and regulation issues. Electronic communications approval requirements, permitted and prohibited disclosure to clients about impending research announcements and permitted and prohibited disclosures to clients about the trading actions of other customers fall into this category. In contrast, the annual Firm Element Continuing Education requirement covers new products, and can cover compliance issues as well, if necessary.

Regarding an order entered by a person who has a power of attorney over an account, under MSRB rules, which of the following information MUST be recorded on the order memorandum? I Name of account II Address of account III Name of person entering order, if other than account name IV Address of person entering order, if other than account name A I and II only B I and III only C I, III and IV D I, II, III, IV

The best answer is C. The name of the account must always be on an order ticket (or account number, if a numbered account). There is no requirement for the address of the account to be on the order ticket. When an order is entered by a person whose name is not the account name, the MSRB requires that person's name and address be on the order ticket. Thus, for corporate accounts, partnership accounts, trust accounts, or accounts with Third Party powers of attorney, this provision applies. The order ticket must also show the execution price (if the order was executed), and the date and time of receipt. Order tickets do not show the settlement date - this is on the confirmation.

Any purchaser of an Initial Public Offering of a "Pink Sheet" stock: A must be provided with a copy of the prospectus if the purchase occurs within 25 days of the effective date B must be provided with a copy of the prospectus if the purchase occurs within 40 days of the effective date C must be provided with a copy of the prospectus if the purchase occurs within 90 days of the effective date D is not required to be provided with the prospectus

The best answer is C. The prospectus delivery rules following the effective date are as follows: IPO of the security that is NOT exchange listed (e.g., OTCBB and Pink Sheets): 90 days Add on Offering of a security that is NOT exchange listed: 40 days Security that is exchange listed: 25 days

Under MSRB Rule G-27, a municipal principal must review and approve which of the following? I Account transactions II Trade confirmations III Customer complaints IV New accounts A I and III B II and IV C I, III and IV D I, II, III, IV

The best answer is C. There is no requirement for a municipal principal to approve trade confirmations. The principal must approve each order; each new account; resolve customer complaints; and approve correspondence sent to customers. By approving each order, the principal has already indirectly approved the trade confirmation generated from the execution of that order.

Under MSRB Rule G-15, which of the following information must be made available to customers on a municipal trade confirmation? I For agency trades, the amount of the commission II For principal trades, the amount of the mark-up III For agency trades, the time of the trade IV For agency trades, the name of the other party to the transaction A I only B II and IV C I, III, IV D I, II, III, IV

The best answer is C. There is no requirement to disclose the mark-up or mark-down taken in principal transactions. The customer is charged a net price, inclusive of any mark-up or mark-down. This price must be "fair and reasonable," however. In agency trades, the amount of the commission must be disclosed. In addition, in an agency trade, the name of the other party to the trade and the time of the trade must be "made available" on the confirmation.

Upon customer request, a dealer in a competitive bid offering must disclose the: A spread B takedown C order priority provisions D names of the syndicate members

The best answer is C. There is no requirement to disclose the spread to customers in competitive bid offerings; this is only required for negotiated offerings. Upon customer request, syndicate members must disclose the order priority provisions. Thus, customers will have a better understanding of their chance for a "fill" of a new issue order, since they know the priority in which orders taken will be filled. Takedowns are never disclosed to customers. The names of the syndicate members are nowhere stated by the MSRB as being required to be disclosed to customers; but this information is readily available.

A market maker in a Global Market stock is quoting the stock at: $10.00 - $10.25 10 x 10 The quote represents the inside market. A customer enters an order to buy 200 shares of the stock at $10. Under SEC rules, the market maker: A must sell 200 shares at $10.00 B must update its quote size to 10 x 12 C must update its quote size to 12 x 10 D is not required to take any action

The best answer is C. This customer order to buy cannot be filled right now because the best offer price is at $10.25 and this customer wants to pay no more than $10.00 per share. The dealer is already willing to buy 1,000 shares at $10.00. Since the customer wants to buy 200 shares at $10, the dealer's bid must be updated to reflect the fact that there are now orders to buy 1,200 shares at $10 in the market. SEC rules require that the quote be updated within 30 seconds to reflect this. Do not confuse this with the 10-second trade reporting rule.

In an inter-dealer trade of a Global Market stock between a market maker quoting that stock in the NASDAQ System and a non-market maker that access the quote in the System who is required to report the trade to the NASDAQ TRF? A Buy side B Sell side C Market maker D Non-market maker

The best answer is C. Under ACT reporting rules for the NASDAQ TRF (Trade Reporting Facility), the executing member reports the trade. The market maker posting the quote in the NASDAQ system received the report from the non-market maker and executed it, so the market maker is the executing member and reports the trade within 10 seconds (during the hours that ACT is open).

All investment company advertising must be filed with FINRA: A 10 business days prior to 1st use B 10 business days prior to use for the 1st year of operations; no filing is required thereafter C 10 business days after 1st use D 10 business days after 1st use for the 1st year of operations; no filing is required thereafter

The best answer is C. Under FINRA rules, Investment Companies, CMO, registered Structured Products and registered Direct Participation Program (DPP) retail communications must be filed 10 business days after first use. Options retail communications must be filed 10 business days prior to 1st use. All other retail communications must be filed 10 business days prior to first use for the first year of operations; thereafter, no filing is required, but they are subject to spot check.

Which of the following would violate MSRB Rule G-20 on gifts and gratuities? I A municipal representative gives his client 2 tickets to a "sold out" rock concert with a value of $175 each II A municipal representative takes his client to a "sold out" rock concert where the tickets cost $175 each III A municipal representative takes his largest retail client to lunch at the "Four Seasons" once each month IV A municipal representative picks up all expenses for his largest client's weekend gambling excursion to Las Vegas A I and IV B II and III C I, III, IV D I, II, III, IV

The best answer is C. Under MSRB Rule G-20, gifts related to the municipal securities business are limited to $100 in value, per person, per year. This makes Choices I and IV violations. However, business entertainment is permitted, is long as it is not too excessive or too frequent. Choice II appears to be a reasonable entertainment expense. However, Choice III appears both "too frequent" and "excessive."

Which of the following meet the Securities Act of 1933's definition of a "security"? I Deferred single premium (fixed) annuity II Debenture III Limited partnership participation IV Whole life policy A I and II B III and IV C II and III D I, II, III, IV

The best answer is C. Under SEC rules, for an offering to be defined as a "security," the purchaser must be assuming "investment risk." There is no investment risk in a fixed annuity. In this product, the investment return is guaranteed by the insurance company issuing the annuity, so it is the insurer that assumes the "investment risk." This is defined as "insurance" - it is not defined as a security. Similarly, whole life policies offer a guaranteed rate of return from the insurance company, and are not considered to be a security. Debentures and limited partnership offerings are securities, since the purchaser bears the investment risk.

A registered representative has resigned from BD (Broker-Dealer) A and moved to BD B. When he left BD A, he handed over his client book to the branch manager, but transposed client contact phone numbers and email addresses. The registered representative took the actual client phone numbers and email addresses with him when he left BD A and used them to solicit these clients to move their accounts once he started employment at BD B. Which statement is TRUE about this situation? A No violation has occurred because the registered representative did not start soliciting his clients to move their accounts until he was employed at BD B, as required by the Broker Protocol B No violation has occurred because the registered representative only took client phone numbers and email addresses, as permitted under the Broker Protocol C This is a violation of FINRA rules because registered representatives are prohibited from soliciting their old clients to move their accounts when they move to a new BD under the Broker Protocol D This is a violation of FINRA rules that will result in the discipline of the registered representative for the falsification of records at the old BD

The best answer is D. When a registered representative leaves the employ of a BD to move to another firm, his or her worry, quite reasonably, is that the old BD will rush to contact the representative's clients to woo them to stay with the firm. A way to thwart this is for the leaving representative the change the contact information in the firm's files. This is prohibited under FINRA rules and FINRA has taken action against representatives who have done this. Regarding the Broker Protocol, the firms who have signed this agreement set the ground rules for what a representative can and cannot do when moving from one firm to another. Under the protocol, a registered representative who resigns to move to another BD: •must give written notice of resignation to the branch manager of the "old" BD, detailing the information that the representative is taking; •the information that can be taken is limited to client name, address, phone number, email address, and client account title; •cannot contact any of his or her clients until he or she is fully employed at the new broker-dealer; and •cannot use anyone else to contact the clients at the "old" broker-dealer.

ACME Corporation has a defined benefit retirement plan regulated under ERISA. The President of ACME Corp. wishes to sell a personal real estate investment to the ACME Corp. pension trust at a price that is 15% below appraised market value. This transaction is: A permitted because the pension fund benefits from purchasing the real estate at a discount to the current market value B permitted if a legal opinion is obtained from the issuer's counsel that the President is engaging in an arm's length transaction C prohibited because pension plans cannot make direct real estate investments D prohibited because the President is a party-in-interest

The best answer is D. ERISA - Employee Retirement Income Security Act defines a "Party-In-Interest" as any person who is a participant in the plan, including corporate employees and officers; who provides services to the plan; or who oversees the operations of the plan (e.g., a plan trustee). Such parties-in-interest are prohibited from selling assets to the plan; from using plan assets for their own purposes (e.g., borrowing securities from the plan to effect a short sale for the trustee's personal account); and from receiving any benefit from the operations of the plan (e.g., fees, commissions).

A Series 7 licensed registered representative leaves the employ of Broker-Dealer A to try a new career as a hair stylist. He leaves that business after working for 22 months because he was called up for active duty in the military. Upon return from military service 24 months later, he decides that he no longer wants to be a hair stylist and wishes to re-enter the securities business. He interviews with Broker-Dealer B and is hired 70 days after returning from active military duty. Which statement is TRUE about requalification of this individual? A This individual must retake and pass the Series 7 exam in order to be requalified B This individual must take Regulatory Element CE in order to be requalified C This individual must retake and pass the Series 7 exam and must take Regulatory Element CE in order to be requalified D This individual will be relicensed without being required to retake the Series 7 exam and returns to the normal Regulatory Element CE schedule

The best answer is D. FINRA has interpreted that it will grant "special inactive status" not only to currently registered individuals who are called up for active military duty, but it will also do so for anyone who is called up for active military duty in the 24 months following termination of association with a member. This keeps the person's licensing exam from lapsing and excuses the individual from the CE obligation until that individual returns from active military duty, as long as he or she reassociates with a member firm within 90 days of return from service. This is the case in this example, so Choice D is correct.

A market maker engages in transactions for institutional investors, including VWAP transactions where the market maker is permitted to position its inventory account and hedge to fill the institutional customer's VWAP orders. The market maker must obtain written permission from the institutional client to engage in these transactions: A prior to each VWAP transaction for that client B monthly C quarterly D annually

The best answer is D. FINRA has issued an interpretation regarding VWAP (Volume Weighted Average Price) transactions, which are typically large institutional orders, that when executed, could move the price of the stock that is the subject of the order. FINRA states that the member firm cannot front-run or trade ahead of the large order (duh!), and when a member receives such an order, it is obligated to disclose in writing to the customer that it may engage in hedging or other positioning activity in order to complete the order, and that this could affect the market that is involved in the transaction. The customer must sign the written letter that covers the potential hedging and positioning transactions related to the handling of the VWAP order. FINRA states that "the member need not obtain such "affirmative consent" on a transaction-by-transaction basis. However, the member should, annually, take steps to have customers confirm consent."

A registered representative in your branch office is a devout Jehovah's Witness and has been asked by his church to assist in the sale of a $5,000,000 Church bond issue to refurbish the church's main sanctuary, which is over 75 years old and now has a leaking roof, along with other structural problems. The registered representative wishes to help his church in the project and will receive no compensation for his involvement. Which statement is TRUE about the registered representative's potential involvement in this activity? A The representative is prohibited from participating in the sale of the church bonds because this would be a "selling away" violation B The registered representative is permitted to participate in the church bond offering without notifying his firm because he is not being compensated for assisting in the sale of the bonds C The representative must give written notice to the firm in order to sell the church bonds and must receive the firm's written approval in order to participate D The representative must give written notice to the firm, the receipt of which must be acknowledged by the firm, and the representative must follow any instructions of the firm

The best answer is D. If a registered individual wishes to "sell away" from his firm, FINRA distinguishes between whether compensation is to be received for selling those securities or not. If compensation is to be received, the representative must give written notice to the firm detailing any compensation to be received; and the firm must expressly approve or disapprove of the transaction in writing. If the member firm approves, it must record the transaction on its books and records and supervise it. If no compensation is to be received, then written notice must still be given to the member firm, and the member firm must give prompt acknowledgment of said notice and may, at its discretion, require the person to adhere to specified conditions in connection with his participation in the transaction. Notice that the fact that the transaction involves charitable church bonds has no bearing. The rule applies to any investment offered by a representative that is not offered through the member firm.

A registered representative enters an order ticket to buy 1,000 shares of ABC stock at $57 per share for a customer. Prior to the execution of the order, the representative discovers that the trade was supposed to be for 100 shares and not 1,000 shares. Which statement is TRUE? A The order cannot be changed once it has been entered B A cancel/rebill record must be created in order to cancel the old order and enter a new order C A change order must be entered to correct the error D The old order must be canceled and a new order for the purchase of 100 shares must be entered

The best answer is D. If an order has been entered and is not yet executed, it can be canceled at any time. The proper procedure is to cancel the incorrect order and enter a new order with the correct information. Note that if the order was entered incorrectly and executed, then if the trade could have been executed per the customer's instructions, then the broker-dealer must give the customer the correct trade amount and price (with the BD eating any loss that might be incurred doing this).

Under MSRB Rule G-32, a customer must be delivered the Official Statement(OS) for a municipal fund security after every: A non-periodic purchase B periodic purchase C non-periodic purchase and the OS has been changed D non-periodic purchase or periodic purchase and the OS has been changed

The best answer is D. If the Official Statement for a municipal fund security is changed or amended, the customer must be provided with the changed copy when an additional purchase is made.

Regulation SHO applies to short sales of securities effected in: I NYSE listed issues II NASDAQ listed issues III OTCBB listed issues IV Pink Sheet listed issues A I only B I and II C III and IV D I, II, III, IV

The best answer is D. Regulation SHO (the SEC "all purpose" short sale rule) defines when a sell order must be marked "long" or "short;" imposes the "locate" requirement when securities are sold short and requires that if hard-to-borrow securities are sold short and not delivered on settlement, then mandatory buy-in must occur in "13 settlement days." Regulation SHO applies to short sales of all equity securities - including exchange listed, NASDAQ listed, OTCBB and Pink Sheet issues.

Under SEC Rule 10b-18, all of the following statements are true regarding an issuer purchasing its own securities EXCEPT: A purchases cannot affect the issue's opening or closing price B daily purchases cannot exceed 25% of the issue's daily trading volume C purchases outside the normal order flow are permitted D purchases on any single day can be made through no more than 2 market makers

The best answer is D. Rule 10b-18 sets the ground rules for an issuer that wishes to buy its shares in the open market for such purchases not to be considered to be manipulative. Rule 10b-18 purchases, as they are known: •Must be effected through 1 broker/dealer on any given day; •Cannot be the opening transaction; •Cannot be executed within 10 minutes of market close if the security is "actively traded" as designated by Rule 101 of Regulation M; otherwise, the purchase cannot be executed within 30 minutes of market close; •Must be effected at prices no higher than the current highest independent bid for that security or last reported sale price (whichever is higher); •Cannot exceed 25% of the trading volume in the security that day (except for block purchases handled outside the normal flow of orders).

All of the following are specifically defined as "Investment Companies" under the Investment Company Act of 1940 EXCEPT: A management company B unit investment trust C face amount certificate company D mutual fund

The best answer is D. The Investment Company Act of 1940 defines 3 types of investment companies. These are face amount certificate companies; unit investment trusts; and management companies. The "common" name for an open-end management company is a "Mutual Fund." The "common" name for a closed-end management company is a "Publicly Traded Fund." These "common" names are not found in the Act.

Which of the following orders are permitted to be entered into the NASDAQ System? I Riskless principal trade II Marketable limit order III Proprietary orders IV Agency orders A I and IV only B II and III only C I, II and IV D I, II, III, IV

The best answer is D. The NASDAQ System accepts market, marketable limit, and limit orders. It allows proprietary trades and agency trades.

In order to open a new account for an individual customer, which information is required on the new account form? I Customer Name II Residence Address III Date of Birth IV Social Security Number A I and III B II and IV C I, II, III D I, II, III, IV

The best answer is D. There are 4 critical pieces of information that must be collected to open a new account for an individual customer - Name, Address, Date of birth, and Social Security number. The member firm must independently verify the customer's identity - either by matching this information to a government issued identification such as a driver's license or passport; or by using a database service that allows computer matching of this information.

As an initial transaction in an existing short margin account, a customer sells short 1,000 ABC at $1.50. The minimum margin requirement is: A $750 B $1,500 C $2,000 D $2,500

The best answer is D. Under the "cheap stock" rule, the minimum margin to short a stock that sells for less than $5 per share is the greater of 100% or $2.50 per share. To short a stock worth $1.50 per share, the minimum is the greater of $1.50 (100%) or $2.50 per share. 1,000 shares x $2.50 minimum margin = $2,500 margin requirement. Note that this also exceeds the $2,000 initial equity requirement.

During the period when an initial public offering is "in registration," a registered representative is permitted to: I solicit buy orders for the issue II accept firm offers to buy III send out sales literature IV send out research reports A I and II only B III and IV only C II, III, IV D None of the above

The best answer is D. When an initial public offering is in registration, no solicitation or taking of orders is permitted. The only acceptable practice is to distribute a preliminary prospectus to take "indications of interest" - not orders. If this were a secondary distribution - that is, the issuer already has registered stock outstanding - it would be permitted to accept unsolicited orders to buy that issuer's stock that is already trading.

All of the following documents can be used to verify customer identity EXCEPT: A Passport B Military ID C Driver's License D Birth Certificate

The best answer is D. When opening a customer account, the customer's identity must be verified promptly after account opening. This is done by matching the customer information to a valid government issued photo ID. A birth certificate does not have a photo (but it does have a footprint!).

Under FINRA rules, if a person associated with a member firm wishes to open an account at another member, the executing member MUST: I Notify the employer member in writing prior to execution of any transactions II Notify the person opening the account that the employer will be notified III Send duplicate trade confirmations, statements, or any other information upon written request of the employer member A I only B I and III C II and III D I, II, III

The best answer is D. When opening an account for an employee of another member firm, all of the steps outlined must be taken. The firm opening the account must notify the employer member in writing prior to execution of any transactions. It must notify the person opening the account that the employer will be notified. It must send duplicate trade confirmations, statements, or any other information upon written request of the employer member.

If a broker-dealer sends monthly statements to customers, notification of free credit balances, must be given: A monthly B quarterly C semi-annually D yearly

The best answer is A. Broker-dealers carrying customer accounts must give their customers notification of the amount of any free credit balance held for the customer at least quarterly. However, if the firm sends statements monthly, the notice must be included on each statement.

Under the FINRA Conduct Rule regarding mutual fund breakpoints, the maximum sales charge on single purchases non-12b-1 mutual funds up to $10,000 is: A 8 ½% of the Public Offering Price B 8 ½% of Net Asset Value C 9% of the Public Offering Price D 9% of the Net Asset Value

The best answer is A. The maximum sales charge that can be imposed on single purchases of non-12b-1 mutual funds is 8 ½% of the Public Offering Price under FINRA Conduct Rules. If the fund has a 12b-1 plan in effect, the maximum sales charge percentage is reduced.

A "bona fide" customer, to whom a copy of a member firm's statement of financial condition must be provided upon request, is defined as a person who: A has cash or securities in the possession of the member B has traded through the member within the past 3 months C is not a member of FINRA D has engaged in any business transaction with the member within the past 12 months

The best answer is A. Under FINRA rules, bona fide customers must be provided with the latest copy of the firm's balance sheet upon request. Members must also provide this information to other member firms. A bona fide customer is defined as one who has cash or securities in the possession of the broker-dealer.

Under the FINRA 5% Policy, in an inactive competitive market, the prevailing market price to be used for mark-down purposes is the: A last sale B contemporaneous purchases from other dealers C contemporaneous sales to other dealers D highest bid price

The best answer is B. If a security is trading in an inactive competitive market, the FINRA 5% Policy states that the basis for the computation of the mark-up or mark-down percentage is: •For sales to customers where a mark-up is charged, contemporaneous sales to other dealers; •For purchases from customers where a mark-down is charged, contemporaneous purchases from other dealers.

Which document gives the names of the individuals authorized to trade a corporate account? A New account form B Corporate resolution C Articles of incorporation D Registration statement

The best answer is B. To open a corporate account, a corporate resolution must be completed and signed by the Corporate Secretary. The resolution authorizes the opening of the account and names the individuals authorized to trade. For CIP (Customer Identification Procedures), a copy of the corporate charter must be obtained to determine that the company is "real."

Under MSRB rules, control relationships must be disclosed to customers: I verbally before entering into a contract to buy or sell II in writing before entering into a contract to buy or sell III verbally, at, or prior to, confirmation IV in writing, at, or prior to, confirmation A II only B I and III C I and IV D II and IV

The best answer is C. Control relationships must be disclosed verbally when the order is taken (legally, when the contract to buy or sell is entered into); and must be disclosed in writing on the trade confirmation.

Which security MUST be registered with the SEC? A Port authority revenue bond B Bank CD in the amount of $10 million C Debenture shelf offering of $100 million D Regional bank stock sold in an add on offering

The best answer is C. Debentures are corporate non-exempt securities that must be registered with the SEC. A revenue bond is a municipal bond and is exempt. Any bank offering or bank stock is also exempt.

Under MSRB rules, a repurchase agreement between a municipal dealer and a customer: I is considered to be a guarantee against loss II is not considered to be guarantee against loss III must be in written form IV may be in verbal form A I and III B I and IV C II and III D II and IV

The best answer is C. Repurchase agreements must be in written form; and are not considered to be a prohibited "guarantee" against loss. Verbal repurchase agreements are prohibited and would constitute such a prohibited "guarantee."

All of the following investments are allowed in an HR 10 plan EXCEPT: A Cash life insurance B Whole life insurance C Term life insurance D Variable annuity with plan completion insurance

The best answer is C. The permitted investments for Keogh plans are CDs; securities; U.S. minted gold coins; gold and silver bullion; and the cash value of life insurance. Variable annuities are defined as a security, and hence are permitted. Cash life insurance and whole life insurance have cash values and are permitted. Term life is a pure insurance product with no cash value, and hence is not permitted.

If an employee leaves a municipal firm, all employment records, including Form U-4 and fingerprint cards, must be retained for: A 1 year B 2 years C 4 years D 6 years

The best answer is C. Under MSRB rules, employee records must be retained for 4 years after an employee leaves or is terminated.