Series 24 - Review

The Customer Protection Rule (15c3-3) exempts certain broker dealers from its provisions. Under the K2-i exemption: A. fully disclosed broker-dealers that do not carry customer accounts are exempted B. broker-dealers that carry no margin accounts and effect all transactions through a Special Reserve Bank Account For Customers are exempted C. clearing broker-dealers that carry both cash and margin accounts are exempted D. broker-dealers that limit their business to the sale of registered investment company securities are exempted

The K2-i exemption provides that broker-dealers that carry no margin accounts and that transfer all customer monies through a Special Reserve Bank Account do not have to comply with the Customer Protection Rule requirements. The K2-ii exemption provides that fully disclosed broker-dealers are exempt from the requirements of the Rule, since all customer monies would be handled by the clearing firm.

Which of the following individuals MUST be registered with FINRA? A. variable annuity salesmen B. commodity salesmen C. floor traders 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, and traders of these securities are exempt from registration. Floor traders on recognized stock exchanges are registered through the exchanges. They have no involvement with FINRA, which only regulates the over-the-counter market.

8K report filings are made by registered: A. domestic securities issuers B. investment companies C. broker-dealers D. foreign ADR issuers

The best answer is A. 8K reports (special report of significant events such as declaration of bankruptcy, declaration of a merger or divestiture, changes in the composition of the Board of Directors) must be filed by domestic issuers of registered securities for any material change in the status of the issuer - within 4 business days of the change. Investment companies, broker-dealers and foreign issuers of ADRs are not required to file 8K reports.

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: 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"); The introducing firm is no longer in business; The member firm is being acquired by another firm; An introducing firm is changing its clearing firm; 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 FINRA member is OBLIGATED to accept which of the following orders for a NASDAQ security? A. Market B. Marketable limit C. Limit stop D. All of the above

The best answer is A. FINRA members are only obligated to accept market orders from customers. They can accept limit orders, subject to the execution restrictions of the limit order protection rule - if the firm does not wish to comply with the limit order protection rule, it simply can refuse to accept limit orders from customers! Regarding stop orders, a trade must occur at the stop (trigger) price for the order to become executable. Some FINRA member firms accept these orders; others will not. Also note that while the NASDAQ System has the capability of handling market and limit orders, market makers and order entry firms are only obligated to take market orders under NASDAQ rules. They accept limit orders at their own discretion for entry in the System. Currently, the NASDAQ System does not accept stop orders; however, a member firm can accept a stop order at its own discretion placing it on its internal order book for execution if the market moves to or through the stop price.

.Z on a trade report of a NASDAQ stock designates that the trade was reported: A. late and occurred during regular market hours B. erroneously and occurred during regular market hours C. late and occurred outside of regular market hours D. erroneously and occurred outside of regular market hours

The best answer is A. If a trade on NASDAQ that took place during regular market hours (9:30 AM - 4:00 PM ET) is reported "late" (later than the required 10 seconds after execution), then it is appended with the symbol .Z. If a trade on NASDAQ took place outside of regular market hours and was reported late, it is appended with the symbol .U.

Under NASDAQ rules, short interest reports must be filed by the: A. 2nd business day after the reporting settlement date B. 3rd business day after the reporting settlement date C. 5th business day after the reporting settlement date D. 10th business day after the reporting settlement date

The best answer is A. NASDAQ requires the reporting of outstanding short positions maintained at member firms as of the 15th and last business day of each month. NASDAQ aggregates the information and reports it as the outstanding short interest. The report must be filed by the member on the 2nd business day after the reporting settlement date.

A VWAP order is permitted to be reported "late" after the 4:30 PM time limit: A. if the trade was effected manually B. if efficient reporting is in place C. if the trade is reported electronically D. under no circumstance

The best answer is A. VWAP (Volume Weighted Average Price) trades are large trades for institutions where the member firm agrees to fill the order after the 4:00 PM market close at the VWAP that occurs during the period of time specified in the order. It is the member's problem to position its inventory account to fill the order at the end of the day. The trade is required to be reported by 4:30 PM, but because these are very detailed, manually prepared, trade reports, FINRA states that there can be "reasonable justification to excuse what may be deemed to be a pattern or practice of late trade reports."

"Fairness opinions" that issuers obtain in connection with acquisitions express an opinion on the: A. financial fairness of the transaction B. legal fairness of the transaction C. accounting fairness of the transaction D. fairness and reasonableness of the transaction

The best answer is A. Fairness opinions are typically obtained by both parties in a corporate takeover. The intent of the opinion is to have an outside, independent advisor give an opinion of the fairness of the price of the deal. This gives the Board of Directors of each company that is a party to the deal a "fig leaf" against a shareholder suit that the price paid was too high (the acquiring company's shareholders believe that the company overpaid and wasted the shareholders' capital); or that the price paid was too low (the takeover target company's shareholders believe that the price is too low and that they are being underpaid for their shares).

A customer has a combined long and short margin account. The long market value increases, while the short market value decreases. Which statement is TRUE? A. The equity in the account will increase B. The equity in the account will decrease C. The equity in the account will remain unchanged D. The change in equity cannot be determined without knowing the specific stock positions

The best answer is A. In a combined long and short account, the customer maintains both long positions and short positions. If the long market value increases, equity must increase. If the short market value decreases, equity in the short positions also increases. Thus, combined equity must increase.

Another name for prearranged trading is: A. painting the tape B. interpositioning C. block positioning D. dual capacity

The best answer is A. Prearranged trading is a prohibited manipulative practice. Another name for this is "painting the tape" - since prearranged trades that are reported represent fictitious pricing and trading activity and are used to induce trading by others to move market prices up or down.

Temporary subordinated loan agreements: A. are prohibited if a broker-dealer's AI/NC ratio exceeds 10:1 B. have a maximum life of 60 days C. must be filed in standard form, 15 business days in advance with FINRA and the SEC D. are permitted as long as the broker-dealer's capital is at least 110% of its statutory minimum

The best answer is A. Temporary subordinated loans are used by broker-dealers for short term temporary injections of additional capital needed for underwritings. To get one, the broker-dealer must be in good financial shape - its net capital cannot be below 120% of the minimum requirement and its ratio of AI to NC cannot be more than 10:1. Filing of standard form agreements is required 10 business days in advance of the loan's effective date with both FINRA and the SEC (note that if a non-standard agreement is used, FINRA requires 30 days' advance filing). The maximum life of temporary subordinated loans is 45 days (not 60 days) - which should be plenty of time to complete an underwriting. Finally, a member cannot obtain more than 3 subordinated loans per year.

A member firm that is a market maker in ABCD stock has numerous accounts for which it acts as an investment adviser. Under the Investment Advisers Act of 1940, a transaction for one of these accounts in ABCD stock must be: A. effected on an agency basis B. effected on a principal basis C. executed by another independent market maker in that security D. executed by the dominant market maker in that security

The best answer is A. The Investment Advisers Act of 1940 requires that market makers, when effecting trades for accounts where it acts as investment adviser, can only effect those trades in an agency capacity. One must remember that this rule was written over 60 years ago, when the OTC market was in its infancy, and transaction prices of OTC securities were not readily available. Thus, trades in OTC issues that were done on a principal basis might be at prices that were not reasonable related to the current market. However, trades done on an agency basis require that a contra-broker be found to take the other side of the trade - thus a true market price is determined.

"The manager will credit each syndicate member based on sales of the issue allotted to the member and such credits extinguish liability against all securities that remain unsold by all members." The paragraph above would be found in a(n): A. Eastern syndicate agreement B. Western syndicate agreement C. Letter of Intent D. Underwriting agreement

The best answer is A. This bit of "legalese" states that liability in the syndicate account is erased based on all sales made by all syndicate members. Therefore liability is undivided between the syndicate members. The account is an Eastern or undivided syndicate. In a Western (divided) syndicate, sales by each member erase the liability of that member only.

The maximum dollar penalty that can be imposed on a member firm under a Minor Rules Violation Plan is: A. $2,500 B. $10,000 C. $15,000 D. $25,000

The best answer is A. Under a Minor Rules Violation Plan, a member admits guilt to a minor offense in return for a "slap on the wrist." The maximum fine is $2,500. This is a much lighter penalty than suspension or expulsion and high potential fines that can be imposed for more serious offenses.

A customer has a Non-Managed Fee Based Account at your firm. When the account was opened, the customer had a high level of trading activity. You are the principal reviewing account activity and you notice that trading frequency has decreased dramatically. Your main concern should be that the registered representative is: A. reverse churning B. interpositioning C. trail fee trolling D. trade shredding

The best answer is A. With more and more firms placing customers in fee based accounts, as opposed to per trade commission charge accounts, a new regulatory concern has emerged. Customers that are infrequent traders often wind up paying higher total dollar amounts for annual account maintenance in fixed fee accounts. This is called "reverse churning" (basically gathering fat fees on inactive accounts) and is considered to be overcharging - a FINRA violation.

An individual who is independent of the agent handling a tender offer is in possession of material non-public information relating to the offer, which has not yet been publicly announced. This individual: A. cannot buy any securities of the issuer until the offer is announced B. may buy the issuer's non-convertible debt securities before the offer is announced C. may buy the issuer's equity and equity related securities before the offer is announced D. can buy call options on the company's stock issued by the Options Clearing Corporation at any time

The best answer is B. Under SEC Rule 14e-3, during the life of a tender offer, an individual who receives material nonpublic information from the maker of the offer about the offer itself, or how it is progressing, is treated as an "insider." Therefore, that individual cannot buy the issuer's common stock, convertible securities or options on these securities until the news of the offer is broadly disseminated to the public. Note that the purchase of non-convertible debt is permitted, since the security not equity-related and its price would not be impacted by the news of the offer. Note that once the offer is publicly disclosed, then it is no longer treated as "inside" information, and that individual is permitted to buy that issuer's equity-related securities. Finally, note that if this individual worked for the agent, issuer or broker-dealer involved in communicating about the offer, the prohibition would apply throughout the entire life of the offer - not just until the offer was publicly announced.

Under the Uniform Practice Code, a firm that has a fail to receive can give written notice of "buy-in" to the contra-broker no later than 12 noon (contra-broker's time): A. 1 business day prior to the proposed buy in B. 2 business days prior to the proposed buy in C. 3 business days prior to the proposed buy in D. 7 business days prior to the proposed buy in

The best answer is B. Under the Uniform Practice Code, if a firm buys securities and does not receive them from the contra-broker on settlement, it can give a written notice of buy-in. The notice must be delivered by 12 noon, 2 business days prior to the proposed buy in.

Under FINRA rules covering "net basis" transactions, retail customers: A. are prohibited from engaging in "net basis" transactions; only institutional customers may do so B. must give written consent on an order-by-order basis prior to executing a transaction on a "net basis" C. are permitted to give either oral or written consent on an order-by-order basis prior to executing a transaction on a "net basis" D. are permitted to give either oral or written consent on an order-by-order basis or can sign a blanket "negative consent" letter

The best answer is B. "Net basis" transactions are most often demanded by sophisticated institutions. The member firm agrees to sell the institution a block of stock at a fixed price, with no additional mark-up or commission. The member firm is making only the difference between its bid (buy) price and its ask (sell price) in the transaction. Retail customers don't do net basis transactions very often, so FINRA demands that the customer give written order-by-order permission. In contrast, institutional customers are given simpler ways to give permission - they can give either oral or written approval on an order-by-order basis or they can be given a "negative consent" letter that clearly discloses to the institutional customer in writing the terms and conditions for handling the order(s) and provides the institutional customer with a meaningful opportunity to object to the execution of transactions on a net basis. If the customer does not object, it is assumed that the customer consents (in contrast, a "positive consent" letter requires a customer signature).

Which of the following must be monitored by a member firm? A. An existing client of a firm posts an unsolicited favorable review of her representative on a social media site B. A representative employed by the firm uses her personal phone to respond to text messages sent by clients C. An existing client of a firm uses a link on the firm's website to access a 3rd party website that lists the firm as one of the "best 100" companies to work for D. A representative employed by the firm uses her personal phone to talk with clients about their accounts

The best answer is B. All electronic messages (texts, IMs) sent by representatives to clients come under the FINRA definition of "correspondence." Correspondence is not required to be approved in advance by a principal, but is subject to "post use review and approval." The word "review" means that the member firm must capture these communications for review (usually done electronically) and those communications that appear to be inappropriate are then sent up the food chain to compliance for a manual review. In contrast, phone conversations are not required to be captured and recorded unless the firm is subject to the FINRA "Taping Rule." As far as social media postings, these are only required to be captured, reviewed and approved if the representative or firm is "entangled" with their preparation. Finally, links on a firm's website to unaffiliated 3rd parties are not subject to FINRA rules - but if the firm has involvement with the 3rd party, then they would be subject to FINRA rules on capture, review and approval.

Which statement is TRUE regarding settlement of NASDAQ System transactions? A. Trades are locked in and are matched/compared within 10 seconds of execution B. Trades are locked in and are matched/compared within 20 minutes of execution C. Trades are not locked in and comparisons must be exchanged the next business day D. Trades are not locked in and comparisons must be exchanged within 2 business days

The best answer is B. Executions of NASDAQ trades are electronically "locked-in," meaning that the trade has been compared and matched by NASDAQ's ACT Service (Automated Comparison of Transactions Service) before being reported to DTCC (Depository Trust and Clearing Corporation) for movement of the securities position and money on settlement. Executed locked-in trade reports of all NASDAQ trades are given immediately to each "side" of the trade through the ACT system, during ACT operating hours of 8 AM - 8 PM. If either side receives a trade report that it believes it a mismatch, it must be remedied promptly - that is, within 20 minutes.

Under FINRA rules, the requirement to provide an educational brochure to former customers who are solicited to move their accounts by a registered representative who has moved to another firm applies for a period of: A. 1 month after the representative begins employment with the new firm B. 3 months after the representative begins employment with the new firm C. 6 months after the representative begins employment with the new firm D. 12 months after the representative begins employment with the new firm

The best answer is B. FINRA Rule 2273 covers the situation where a representative moves from one broker-dealer to another, and solicits his or her former customers to move their accounts to the new firm. FINRA requires that if such a solicitation is made, an educational brochure must be provided to the former customer with any written solicitation, or if the solicitation is oral, the written brochure must be sent within 3 business days. The brochure details that: The representative may receive incentives from the new firm that create a conflict of interest; Some assets may not be transferable, so they would either have to be liquidated and the cash transferred; or if they remain at the old firm, they may be subject to higher account maintenance fees; Fee structures can be different at the 2 firms, and the new firm might have higher fees; and Products and services available at each firm can be different. This brochure must be delivered for the 3-month window following the representative's association with the new firm. Finally, the rule also applies if the former customer seeks to transfer assets to another firm without being individually contacted. Then the customer must get the brochure with the approved account transfer documentation.

All of the following actions by a FINRA member are prohibited under the Conduct Rules EXCEPT: A. The sale of mutual fund shares to a non-member at a discount to the public offering price B. The sale of a new issue of municipal bonds to a non-member bank at a discount to the public offering price C. The sale of part of a new issue being underwritten by the member to the issuer's employees at a discount to the public offering price D. The sale of a new issue that is "hot" to employees of FINRA member firms

The best answer is B. FINRA members can only give discounts on non-exempt new issue offerings to other members. Non-members are treated as regular customers who must pay the public offering price. FINRA has no jurisdiction over transactions in municipal securities (that belongs to the MSRB), it cannot set price policies for transactions in municipal bonds. Thus, a FINRA member cannot sell mutual fund shares (a non-exempt new issue) to a non-member at a discount to the public offering price (Choice A) and a new issue cannot be sold to a non-member issuer's employees at a discount to the public offering price (Choice C). Members are prohibited from selling new issues (whether "hot" or not) to employees of FINRA member firms under FINRA Rule 5130 (Choice D).

A "bought deal" would most likely be used by a(n): A. Emerging Growth Company looking to raise capital before it goes public B. Well Known Seasoned issuer that has a shelf registration on file with the SEC C. Unseasoned issuer conducting its Initial Public Offering D. Issuer conducting a follow-on offering subject to the provisions of Regulation M

The best answer is B. In a "bought deal," an issuer attempts to sell its securities very quickly to an underwriter in a competitive bid process. The underwriter must bid on a firm commitment basis and, if it is the winner, it is now the owner of the securities. The underwriter will not bid unless it knows the issuer well, and it knows that it can quickly remarket the issue. Thus, these deals are pretty much restricted to WKSIs (Well Known Seasoned Issuers) that are looking to raise capital quickly and that have a shelf registration on file with the SEC. The bidder/underwriter then knows that if it wins the bid, it can quickly resell those shares under the shelf registration already on file. The advantage for the issuer is that it raises the money quickly and does not have to go through a road show and marketing process to complete the deal. There is no 20-day cooling off period involved and there are no gun jumping issues. The disadvantage is that the price realized per share may be less than if the issuer did go through that process!

Which statement is TRUE regarding SMA in a margin account? A. SMA cannot be borrowed if it causes the account to be restricted B. SMA cannot be borrowed if it causes the account to receive a maintenance call C. SMA adds to the equity of a long account D. Buying power for marginable issues is 4x the SMA amount

The best answer is B. SMA is the "cash borrowing line" that is available in a customer margin account. It is any excess equity created when the account rises above 50% initial Regulation T margin. This amount may be borrowed in cash; or 2 times this amount may be purchased in marginable securities (since purchases only require a 50% Reg. T deposit). If SMA is created due to a rising market and is not borrowed out, and then the market starts to drop, SMA "locks" and is not taken away. The SMA amount can be borrowed, as long as the borrowing does not take the account below the 25% minimum maintenance margin. Note that if an account is restricted (meaning it is below 50% Regulation T initial margin), the SMA can be borrowed, which will drop the margin percentage further. However, any borrowing that would bring the account below 25% minimum is prohibited. SMA does not add to the equity in an account - a similar erroneous line of reasoning would be that a home equity line adds to the equity in your house. If the SMA is used (borrowed), that cash withdrawal from the account reduces equity.

The 5% Policy applies to transactions in which of the following securities? A. Open end investment companies B. Real estate investment trusts C. Unit investment trusts D. Variable annuities

The best answer is B. The FINRA 5% Policy applies to over-the-counter and exchange transactions that take place in the secondary market - the trading market. Therefore, it applies to securities that are traded, such as closed-end funds and REITs. It does not apply to "redeemable securities" such as mutual funds (open-end investment companies) and unit investment trusts. These are new issue offerings sold under a prospectus and they do not trade. Rather, they are redeemable with the issuer. Similarly, it does not apply to variable annuities, which are sold with a prospectus and do not trade.

Under FINRA rules, a transaction is considered to be "complete" when: A. a customer pays in part, or in full, prior to settlement date for securities purchased through a member B. the appropriate debit and credit entries are made by the broker-dealer on settlement date for securities purchased or sold through a member C. a customer delivers a security to a member prior to settlement date for securities sold through the member D. the counterparty "locks in" the trade via the NASDAQ System

The best answer is B. The FINRA rule on "completion of a transaction" basically states that transactions are considered to be complete on settlement, not before. This is the date that the transaction must be recorded to the customer account under SEC rules, with no extensions permitted. If a customer pays for a purchase prior to settlement, this is not recorded in the customer account until settlement; and if a customer delivers securities on a sale prior to settlement, again, this is not recorded in the customer account until settlement. This also dovetails with the fact that broker-dealers use settlement date accounting. Under FINRA rules, a transaction is considered to be complete if: a security is purchased, the customer pays in part (e.g., on margin) or in full on settlement date, or the broker-dealer makes the appropriate accounting entries to the customer's account on settlement (e.g., using a customer free credit balance to "pay" for a purchase). Note that if payment or the entries are made before settlement, this does not complete the transaction. a security is sold, the customer delivers the security on settlement date, or the broker-dealer makes the appropriate accounting entries to the customer's account on settlement (e.g., giving the customer a free credit balance from the sale). Note that if the securities are delivered or the entries are made before settlement, this does not complete the transaction. Choice D refers to the NASDAQ "locked in" trade function. Once a NASDAQ trade is executed and reported, it is matched in batches during ACT operating hours (8 AM - 8 PM) to the CAT file. If there is a mismatch (a very rare occurrence), a DK ("Don't Know") is generated and sent to both sides of the trade. Each side then has 20 minutes to affirm the transaction or file a report with NASDAQ MarketWatch that a "Clearly Erroneous Trade" occurred. NASDAQ MarketWatch then investigates and comes up with a determination as to the validity of the trade within 30 minutes. The decision of NASDAQ MarketWatch can be appealed to "MORC" - the Market Operations Review Committee. MORC's decision is binding and cannot be appealed.

Under the Net Capital Rule 15c3-1, which of the following is prohibited? A. $750,000 of subordinated loans; $250,000 of equity for 1 month B. $750,000 of subordinated loans; $250,000 of equity for 4 months C. $800,000 of aggregate indebtedness; $100,000 of net capital for a 1st year "fully-disclosed" broker-dealer D. $1,200,000 of aggregate indebtedness; $120,000 of net capital for a 3rd year "fully-disclosed" broker-deale

The best answer is B. Violations of the net capital rule occur if the broker-dealer's: Net Capital falls below the minimum; or Ratio of Aggregate Indebtedness to Net Capital exceeds 1,500% (15 to 1 ratio) after the first year or 800% (8 to 1 ratio) during the first year of operations; or Ratio of subordinated debt to total capital exceeds 70% for over 90 days. A broker-dealer with $250,000 of equity and $750,000 of subordinated loans has $1,000,000 of total capital and is at a 75% ratio. However, no violation occurs unless this ratio persists for over 90 days, making Choice B a violation (Choice A is not a violation since the duration is too short -the firm has only been at a 75% ratio for 30 days). A first-year broker-dealer with an 800% (8 to 1) ratio is exactly at the maximum level, so Choice C is not in violation. Any further increase in the ratio and the firm is in violation. A third-year broker dealer with a 1,000% (10 to 1) ratio (Choice D) is well below the maximum of 1500% (15 to 1) ratio so the firm is not in violation.

An OTC trader at a large market making firm routinely telephones his counterparts at smaller firms to inquire as to why they don't route their non-NMS orders to his firm, stating that: "With our large institutional client base orders directed to our firm will result in quick, profitable executions for both of us. Furthermore, I'm sure you want to be included in some of our syndicate deals, which I can arrange if we begin to see order flow." These phone calls are an example of: A. front running B. harassment C. collusion D. Interpositioning

The best answer is B. "Routine" telephone calls of this nature are an attempt to induce smaller trading firms to preference their orders with this market maker. This is a form of harassment of the smaller trading firms - though one could also argue that is a good business practice for the market maker. Anyway, harassment is the best of the choices offered.

Trades of NASDAQ securities executed on an unlinked ECN are reported by: A. CAES B. TRACS C. ACT D. TRACE

The best answer is B. "TRACS" is the Trade Reporting and Comparison Service. It reports trades of stocks that are listed in the ADF - the Alternate Display Facility. These are quotes for listed stocks posted by ECNs that choose not to participate in the NASDAQ System (unlinked ECNs). Trades of NASDAQ, NYSE and NYSE American (AMEX) securities executed by linked ECNs are reported through the TRF - the Trade Reporting Facility that is part of the ACT system.

A company has just gone public and the underwriter is in the "10-day blackout period" prohibiting communication to the public about the company. Which event would permit the underwriter to publicly disseminate a report prior to the expiration of the blackout period? A. Loss of a customer B. General strike by the company's workers shutting down production C. Resignation of the company's Chief Marketing Officer D. None of the above

The best answer is B. An exception to the information blackout rule covering underwriters that have just completed an underwriting is given if "truly market moving" information becomes known about the company. Choice B is a major event; the other two choices given are not as significant.

A proprietary trading desk trades ahead of a customer limit order placed with the firm's market making desk. Which statement is TRUE? A. This is permitted without restriction B. This is permitted only if the firm has a "Chinese Wall" in place between the trading desk and market making desk C. This is permitted only if the firm is a bona fide market maker in the stock D. This is prohibited under all circumstances

The best answer is B. If the firm did NOT have a Chinese Wall in place between its proprietary trading desk and its market making desk, then the customer limit order must be filled first. However, if a Chinese Wall is in place, then the proprietary trading desk would have no knowledge of the customer limit order, and the trading desk could place orders to buy or sell that security "at will."

Under SEC Rule 17a-11, reporting is INITIATED if a clearing broker-dealer's net capital falls below: A $500,000 B $300,000 C $250,000 D $50,000

The best answer is B. Rule 17a-11 covers violation reporting. Under this rule's early warning provisions, if a broker dealer's net capital falls below 120% of the minimum ($300,000 for a $250,000 clearing broker-dealer) or if the firm's ratio of aggregate indebtedness to net capital exceeds 1,200%; then the firm must give electronic notice to the Designated Examining Authority (FINRA) within 24 hours; and must file any reports requested by that authority.

For Net Capital purposes, secured demand notes are valued at: A. the current market value of the securities collateralizing the note B. the current market value of the securities collateralizing the note less an appropriate haircut C. the face amount of the securities collateralizing the note D. the stated amount of the note, regardless of changes in value of the underlying collateral

The best answer is B. Secured demand note agreements provide for the lender to give marketable securities to the broker-dealer instead of lending the broker-dealer cash. These securities are placed in "street" name, and the broker-dealer rehypothecates them to a bank for a loan. Banks will only lend the 70% value of equity collateral to broker-dealers under the provisions of Regulation U. Therefore, if $100,000 of common stocks are pledged, the bank will lend the broker-dealer $100,000 less a 30% haircut = $70,000. This would be the addition to the firm's net capital. (Also please note that the 30% "haircut" specified under Regulation U differs from the 15% reduction that is taken from net capital for equity securities held in the firm's inventory.)

Which statement is TRUE regarding margin on securities? A. All over-the-counter securities are marginable under Federal Reserve regulations B. All NASDAQ Global Market securities are marginable under Federal Reserve regulations C. All Pink Open Market securities are approved for margin by the Federal Reserve Board D. Only exchange listed securities traded over-the-counter are marginable

The best answer is B. The Federal Reserve approves all exchange and NASDAQ-listed securities for margin. These securities meet exchange listing standards. Unlisted OTC securities, such as those found in the Pink Open Market are generally not marginable. Only a handful of these OTC securities are on the "OTC margin list" approved by the Federal Reserve.

Under NYSE rules, the latest time that an MOC order can be entered or canceled is: A. 3:30 PM ET B. 3:50 PM ET C. 3:55 PM ET D. 4:00 PM ET

The best answer is B. The NYSE allows "MOC" - Market On Close - orders to be entered, or canceled, until 3:50 PM ET. Note, in contrast, that NASDAQ allows MOC orders to be entered or canceled until 3:55 PM ET. Also note that the NYSE and NASDAQ extended these times by 5 minutes in early 2019 from the previous 3:45 PM (NYSE) and 3:50 PM (NASDAQ) cutoffs.

The required quarterly physical securities count must include all of the following EXCEPT: A. Securities in transit B. Securities in reclamation C. Securities in transfer D. Securities failed to receive

The best answer is B. The required quarterly "box" count must also include securities that the firm does not physically have, but which are under the firm's control. These include securities in transfer, securities in transit, securities sold subject to repurchase agreements, fails to receive and fails to deliver. The rule does not include securities in reclamation, which are mainly securities returned for technical corrections such as a missing signature guarantee.

An associated person has completed a deferred variable annuity application for a customer and has received the customer's check made payable to the insurance company. The application and check are forwarded to the principal for review. Once the application is approved, the check must be transmitted to the insurance company: A. By the close of business that day B. No later than 12 noon the next business day C. By the close of business on the 2nd business day after principal approval D. by the close of business on the 7th day after principal approval

The best answer is B. Under FINRA rules, once a variable annuity application lands on the desk of the principal, it must be reviewed and approved within 7 business days. Once it is approved by the principal, the broker-dealer must promptly forward the check to the insurance company, defined by FINRA as no later than noon the next business day. This interpretation is based on the fact that mutual fund and variable annuity broker-dealers are only required to maintain $25,000 of net capital, as long as they do not hold customer funds or securities. If they were to hold these, they would need $250,000 of net capital. So FINRA said that they will not consider the broker-dealer to be holding customer funds as long as the check is submitted to the insurance company no later than noon on the business day after the principal approves the VA application.

All the following are assessments and fees paid by FINRA members EXCEPT: A. Annual membership fee B. Annual fee per employee C. Percentage of annual gross domestic securities revenue D. Annual fee per branch office

The best answer is B. You do not have to know the actual dollar amounts of the fees that FINRA assesses its members, but you must know the basis upon which dues are assessed. There is an annual membership fee, which is the greater of a flat dollar amount or a percentage of all domestic securities revenue. There is also an annual fee per branch office, and an annual fee per registered individual (note that this is based on registered individuals, not all employees).

All the following statements are true regarding the physical count of securities required of broker-dealers EXCEPT: A. the "box count" must be performed quarterly B. both clearing broker-dealers and introducing broker-dealers are required to perform the count C. the count must be performed or supervised by a person who does not have daily responsibility for safekeeping securities D. any unresolved differences found in the count must be recorded on the books of the broker-dealer no later than 7 business days after the count

The best answer is B. A physical count of securities must be performed quarterly. Choice B is incorrect because only clearing broker-dealers (not introducing firms) are required to perform the count. Clearing firms hold customer funds or securities; introducing firms cannot do so. The count must be performed or supervised by a person who does not have daily responsibility for safekeeping securities. Finally, any unresolved differences found in the count must be recorded on the books of the broker-dealer no later than 7 business days after the count.

OTC transactions in all of the following securities are reported through ACT EXCEPT: A. Convertible debt securities B. High yield debt securities C. Equity securities D. CQS securities

The best answer is B. ACT is the Automated Confirmation of Transactions service - virtually all OTC trades are reported into ACT, where the contra-party has 20 minutes to confirm or decline the details of the trade. ACT also reports the trade to the "tape." Trades of NASDAQ, OTC, and 3rd Market issues are reported to ACT. NASDAQ lists convertible bonds, but does not list non-convertible bonds. FINRA maintains a separate trade reporting system for all corporate bonds, government bonds, and agency bonds called TRACE - Trade Reporting And Compliance Engine.

A broker-dealer that is a Registered Reporting Market Maker in a stock for the past year receives a customer order to sell that stock under Rule 144. Which statement is TRUE regarding the actions of the firm when handling this order? A. The firm must act as an agent when executing this transaction and cannot buy the stock into its inventory B. The firm is allowed to buy the stock into its own inventory C. The firm must execute the transaction through a third party broker-dealer because a control relationship exists D. The firm is prohibited from executing 144 transactions, either on an agency or principal basis in the stocks in which it is a market maker

The best answer is B. As a general rule, a broker-dealer is prohibited from acting as a market maker in 144 stock, unless that firm is a bona fide market maker. This stops FINRA members from buying 144 shares into their inventory as an "accommodation" to the sellers of 144 stock. The rule requires them to act as agents in the transaction, selling the stock to another customer or to a bona fide market maker. A bona fide market maker is one which has made a market in the stock for at least 12 of the preceding 30 calendar days, with no more than 4 successive days without making two-sided quotes. A Registered Reporting Market Maker meets this requirement.

The CNS System is maintained by: A. SIPC B. NSCC C. FINRA D. SEC

The best answer is B. CNS stands for Continuous Net Settlement system. It is the clearance and settlement system used by NSCC - the National Securities Clearing Corporation, which clears almost all equity, corporate bond and municipal bond trades in the U.S (all of these trades settle T+2). It does not clear trades of Treasury issues (these settle T+1). This is done by FICC - Fixed Income Clearing Corporation - also owned by NSCC. It also does not clear options trades (also T+1) settlement - this is done by the OCC - the Options Clearing Corporation. The CNS System reduces each member firm's daily trades to one net long or net short position on settlement date in that security, along with a net money balance to be received by the member (long) or to be paid (short) by the member. With CNS, the member firm is not required to deliver or receive securities on a trade-by-trade basis.

FINRA recommends that member firms implement a mandatory 2-week vacation policy for: A. all employees B. all traders C. only proprietary traders D. only traders who have an intimate knowledge of the firm's risk management procedures

The best answer is B. FINRA recommends that firms put in a mandatory 10 consecutive day business vacation policy for "traders and other sensitive persons." While the rule is mainly directed at proprietary traders, there are other individuals in firms who could do unauthorized trading. The SEC says that such individuals may include "traders, trader assistants, portfolio managers, brokers, investment advisers, order placement personnel or trading desks, (collectively, "traders"), as well as mid-or back-office, risk management and other personnel."

A customer buys 1,000 shares of ABC stock at $15.00 as an initial transaction in a new margin account, depositing the required margin. The customer will receive a call for maintenance margin if the stock price falls below: A. $12.00 per share B. $10.00 per share C. $ 9.00 per share D. $ 7.50 per share

The best answer is B. If $15,000 of stock is purchased as the initial transaction in the account, 50% or $7,500 is deposited and there is a debit balance of $7,500. The account will be at maintenance if the debit equals 75% of the market value (at this point equity would equal the 25% maintenance level). Dividing the debit of $7,500 by .75 gives a market value of $10,000 where the account will be at maintenance. If the market value falls below $10,000 ($10 per share), with a debit of $7,500, the equity in the account is $2,500 or 25% of market value. Below this market value, a maintenance call will be sent to restore the account to 25% maintenance margin.

A customer who has a pattern day trading account has a margin call outstanding. Until the margin call is met, the account is limited to "buying power" of: A. 1x the maintenance margin excess in the account B. 2x the maintenance margin excess in the account C. 3x the maintenance margin excess in the account D. 4x the maintenance margin excess in the account

The best answer is B. Normally, buying power in a pattern day trading account is based on the fact that the account is only subject to FINRA minimum maintenance margin of 25%, so the buying power is 1/.25 = 4 times the maintenance margin excess. However, if the account has an unsatisfied margin call outstanding, then the buying power is reduced to 2 times the maintenance margin excess. And this point must be known for the exam!

A registered representative at your firm informs you, the principal, that he has been going through a nasty divorce and a court has issued an automatic restraining order prohibiting him from selling jointly owned property and withdrawing money from joint bank accounts. Which statement is TRUE? A. This is a reportable event to FINRA B. This requires prompt amendment of the representative's U4 Form C. This is both a reportable event to FINRA and requires prompt amendment of the representative's U4 Form D. This is not required to be reported

The best answer is B. One of the questions on the U4 Form is if the registrant is the subject of a court action, naming the party that initiated the proceedings, the relief sought (a restraining order in the case), the filing date, the date process was served, the court of jurisdiction, and a description of the proceeding. Note that this is a disclosure item, but it would not result in statutory disqualification. And a restraining order issued in a divorce proceeding is not a reportable event to FINRA (mainly because it does not involve business dealings).

SEC Rule 10b-18 allows an issuer to buy its shares in the open market: A. at any price that is reasonably related to the current market B. at the highest independent bid or the last reported sale price, whichever is higher C. at the lowest independent offer or the last reported sale price, whichever is lower D. under no circumstances, since this is considered to be market manipulation

The best answer is B. SEC Rule 10b-18 sets ground rules for issuers or affiliated persons who wish to buy their shares in the open market. If an issuer aggressively buys its stock in the market, or bids for its stock, it can manipulate the market price upwards. Bids and purchases that are made in compliance with Rule 10b-18 will not be considered manipulative activities under Rule 10b-5 ("catch-all" fraud rule). 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); and Cannot exceed 25% of the trading volume in the security that day (except for block purchases handled outside the normal flow of orders).

A market maker effects an agency cross transaction of 400 shares at $41.00, charging the buyer a commission of $.50; and the seller a commission of $.50. Under ACT rules, the transaction would be reported as: A. 400 shares at $40.50 B. 400 shares at $41.00 C. 400 shares at $41.50 D. 400 shares at $40.50; 400 shares at $41.50

The best answer is B. This is an agency cross transaction - where a buy order for a customer and a sell order for another customer are "crossed" by the market maker. There is only 1 report of the trade made to ACT - that is, for the sell side. If there was a report made of both the buy and sell, there would be a double report of the same trade. All trade reports are made at the price of the trade excluding commissions, mark-ups; mark-downs; or service fees.

A registered representative at a member firm is considering making a recommendation that a customer exchange an existing whole life insurance policy for a variable life policy. In order to make such a recommendation, the representative should be LEAST concerned with: A. in-force ledger B. sub accounts C. current affordability D. life insurance coverage

The best answer is B. This question requires a little bit of thinking. FINRA states that valid reasons to exchange an existing whole life insurance policy are: - to get better coverage at a lower cost; - to get more desirable features or benefits; or - if the customer is concerned about the solvency of the company that issued the original policy or with the service of the agent that sold the policy. Reasons not to exchange an existing policy are: -to use an existing policy's cash value to pay for a new policy's first year expenses (mainly commissions); -if the existing policy is in its early years and cashing out the policy will incur high surrender charges; -if the existing policy is past its 2 year "contestability period" and any new policy could allow the insurance company to challenge a death claim that occurs in its first 2 years; or -if there are unfavorable tax consequences of the exchange. One would consider current affordability - a new policy might give better coverage at lower cost. One would consider the amount of life insurance coverage - a new policy might buy more coverage for the same (or lower) cost. One would also consider the in-force ledger. The in-force ledger is the statement of the existing whole life policy's cash value, surrender charges (if applicable), and projections of future death benefit and cash value. This would be used to see what the current coverage amount is; if there are surrender charges on the existing policy; if there is cash value that can be used to pay for a new policy; and if the insurance amount provided by the new policy is comparable or better than that provided by the old policy. The sub account to recommend to the customer when the variable life policy is purchased is a decision that is made after it is determined that making the exchange is appropriate. It is the item that is of the "least" concern.

In order for an issuer to qualify for a "safe harbor" under SEC Rule 168, factual or forward-looking information disclosure is: A. only permitted prior to the filing of a registration statement B. permitted prior to or after the filing of a registration statement C. only permitted after registration has been declared effective D. only permitted if the issuer is a WKSI and receives an SEC indemnification waiver

The best answer is B. Under Rule 168, which was passed in 2005, the SEC gave a "safe harbor" to a reporting issuer's forward-looking statements and factual statements that are made in the normal course of business. Thus, these issuers did not have to worry about investor lawsuits that they were making these statements as part of an offering of securities. The rule permits these disclosures anytime - as long as they are not being made in connection with a securities offering and as long as they are being made in the regular, normal fashion in which prior similar disclosures were made. An SEC indemnification waiver is a fictitious term. A WKSI is a "Well Known Seasoned Issuer" under Rule 405 which can do an automatic shelf registration with the SEC for add-on offerings.

Mutual funds are permitted to effect all of the following transactions EXCEPT: A. The purchase of stock B. The short sale of stock C. The purchase of options D. The short sale of options

The best answer is B. Under the Investment Company Act of 1940, investment companies are prohibited from selling stock short. They are permitted to buy stock; to buy options; and to sell option contracts. Generally, options are sold against shares held in the portfolio to increase income from the portfolio if the options expire unexercised. These are so called "covered" writing strategies.

In order to be regulated under Subchapter M of the Internal Revenue Code, REITs are required to distribute at least what minimum percentage of their Net Investment Income? A. 75% B. 85% C. 90% D. 100%

The best answer is C. REITs and registered investment companies get "conduit" tax treatment under Subchapter M if they distribute at least 90% of their Net Investment Income to shareholders. This means that the REIT does not pay tax on the distributed income - it is only taxed at the shareholder level.

Which of the following would meet the definition of a "WKSI" under SEC Rule 405? An issuer that: A. has annual gross sales of at least $1 million for each of the past 3 years B. has at least 35 seasoned investors C. had never issued common stock but that has issued $1 billion of non-convertible debt in the past 3 years D. has previously registered at least $100 million of common stock with the SEC under Rule 415 in the past 3 years

The best answer is C. A "Well Known Seasoned Issuer" (WKSI) under SEC Rule 405 qualifies for automatic shelf registration of its securities. It is an issuer that is currently reporting to the SEC that either: has at least a $700 million world-wide market capitalization; or has issued at least $1 billion in non-convertible senior securities (preferred stock or bonds) in the past 3 years; or is a majority owned subsidiary of a parent company that is a "WKSI" and is issuing either non-convertible stocks or bonds.

Under the Uniform Net Capital Rule, a fully disclosed broker-dealer that neither receives, nor holds, customer funds or securities, wants to participate in underwritings. Which statement is FALSE? A. The broker-dealer may participate in best efforts or all or none underwritings as a syndicate member B. All monies collected by the broker-dealer must be made payable to an escrow agent and must be promptly forwarded to that agent C. The firm may participate in firm commitment underwritings as a selling group member D. The firm must maintain minimum net capital of $5,000 at all times

The best answer is C. A fully disclosed broker-dealer that neither receives, nor holds, customer funds or securities must maintain minimum net capital of $5,000. A $5,000 broker-dealer cannot participate in a firm commitment underwriting, either as a syndicate or selling group member. In order to participate in a firm commitment underwriting, a higher level of net capital is required. Firms with $50,000 of net capital can participate in firm commitment underwritings as a selling group member only (no liability). Firms with $250,000 of net capital can participate in a firm commitment underwriting, either as a syndicate or selling group member. $5,000 fully disclosed broker-dealers can participate in best efforts (or best efforts-all or none) underwritings, either as a syndicate or selling group member, without increasing their capital. In a best efforts underwriting, the underwriter has no liability for unsold shares and only gets credit for the amount sold. As with any $5,000 broker-dealer, taking checks from customers is prohibited (only $250,000 clearing broker-dealers can accept and hold customer funds and securities). Thus, all monies collected in the best efforts underwriting must be made payable to, and be promptly transferred to, an escrow agent.

Under SEC rules, which limit order is NOT required to be protected by a member firm's market making unit? A. An unsolicited order from a retail customer of the market making unit B. An order placed by another member firm for one of its customers C. An order placed by that member firm's proprietary trading unit that is separated from the firm's market making unit D. An order received by an introducing broker-dealer from one of its customers that is routed to its clearing firm for execution

The best answer is C. FINRA Rule 5320 prohibits trading ahead of customer limit orders. "Protection" means that customer orders are filled prior to any filling an order with the same terms entered by that member firm - so customer orders always go first. An exception to the rule is given to large size customer orders (10,000 or more shares) and institutional orders, where FINRA states that: if these customers are given comprehensive written disclosure at account opening and annually thereafter that the member may trade proprietarily at prices that would satisfy the customer order; and the customer is given the opportunity to "Opt In" to protection and chooses not to do so; then the member is not subject to the rule. Another exception is given to orders placed by member firm proprietary trading desks that are "walled off" from the firm's market making and order entry units, so that it could have "no knowledge" of incoming customer limit orders. Finally, orders placed to fill odd lots and to correct errors, are excluded from the rule.

In order to recommend a variable annuity to a customer, all the following statements are true EXCEPT: A. the customer must be informed, in general terms, of the material features of the product B. the representative must believe that the customer would benefit from the product's features and that the underlying separate accounts to which funds are allocated and riders to the policy are suitable C. the customer must sign an attestation that he or she understands the features and risks of the product prior to confirmation of purchase D. the representative must sign a statement that all required representations and determinations were completed prior to approving the contract

The best answer is C. In order to recommend a variable annuity to a customer, the representative must have a reasonable basis to believe that: the customer has been informed, in general terms, of the material features of the product; the customer would benefit from one or more of the product's features; and the particular variable product as a whole, the underlying separate accounts to which funds are allocated, and riders to the policy are suitable. Furthermore, the representative (not the customer) must sign a statement that all required representations and determinations were completed.

An order entered into NASDAQ as "Market Hours IOC TIF" must be immediately filled in: A. its entirety or canceled between the hours of 9:30 AM and 4:00 PM B. its entirety or canceled between the hours of 4:00 AM and 8:00 PM C. part or in full between the hours of 9:30 AM and 4:00 PM D. part or in full between the hours of 4:00 AM and 8:00 PM

The best answer is C. Orders entered into the NASDAQ Market Center are entered either as: Market Day: An order to be executed during the regular trading hours of 9:30 AM - 4:00 PM ET System Day: An order to be executed during the system operating hours of 4:00 AM - 8:00 PM ET, which includes both the Premarket and Aftermarket trading sessions. The term "Market Hours" means that the order is to be placed with a "TIF" - (Time in Force) of Market Day. IOC means "Immediate or Cancel" - either fill the order in full or in part, and any unfilled portion is canceled.

A registered representative at your firm borrows $9,000 from another representative in the same branch office. As the principal, you become aware of this at the next scheduled compliance meeting of your firm. What action should you take? A. No action needs to be taken B. This is a "reportable event" that must be filed with FINRA promptly C. You should determine that one representative was not the customer of the other representative D. You should advise the representatives that such a loan requires each to amend their U4

The best answer is C. Registered representatives cannot borrow from customers. Exceptions are given if the: - customer is an immediate family member; - customer is a bank making a loan on the same terms and conditions that it gives the general public; - customer is another registered employee of the same broker-dealer; - lending arrangement is based on a personal relationship with the customer that is outside of the broker-customer relationship; or - lending arrangement is based on a business arrangement that is outside of the broker-customer relationship. The key point is that the rule applies to borrowing from customers. The rule states that the firm must have policies and procedures covering borrowing from customers and that items 3, 4 and 5 require prior notice and approval from the firm. Regarding items 1 and 2, it is up to the firm whether it wants to require prior notice and approval. So, if one representative is borrowing from another, the next question is: "Is there a customer relationship there?" For example, someone who is registered with a Series 99 back office license could have an account with the firm managed by someone with a Series 7 license. If that is the case, then the rule would apply and prior written notice to the firm and firm approval is required. Also note that if there is no "customer relationship," then the firm can still put in an internal procedure where any borrowing by a representative must be reported to the firm and approved by the firm - since heavy borrowing by a representative is a "red flag."

Which of the following could be evidence of rogue trading? A. A sequence of trades that is consistently profitable B. A sequence of trades that results in a flat position at end of day C. A sequence of trades that results in a higher level of cancels and corrects D. A sequence of trades that are concentrated at the opening or close

The best answer is C. Rogue traders are trying to fly under the firm's radar, taking positions that are larger than the firm permits, in an attempt to offset existing losses or magnify gains. If a trader has a significant position with a loss, and does not want the firm to know about it, the trader could enter a "sell" order that is basically a false trade (this could only be done outside of automated trading systems - for example, OTC derivatives), so there would no position visible at the end of the day. The trader is hoping that, on the next day, the position will rebound, and he or she can close the position at no loss, or at a profit. The "tip off" to the firm that something is going on is that a DK (Don't Know) will be generated by the "supposed" trade counterparty, and when received by the firm, the rogue trader would be forced to cancel that trade. Choice A is a potential indicator of insider trading. Choice B is typical for traders who don't want to carry risk overnight (a flat position is a "0" position). Choice D is also typical, because most trading volume and most volatility occurs right after opening, or as the market heads for a close.

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 a corporation that wishes to buy back its stock in the market. The rule 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.

If a customer opens up a cash account on-line at a broker-dealer with no outside input, what signature(s) is (are) required on the account record maintained at the broker-dealer? A. Customer B. Registered Representative C. Principal D. No signature is required on the account record

The best answer is C. This one is interesting because FINRA has "modernized" its rule regarding required signatures on a new customer account. To open a cash account, a principal must always sign the new account documentation, accepting the account for the firm. What about the Registered Representative? It depends! If a suitability determination was completed by the RR, both the representative and the principal accepting the account for the firm must sign. If the account was opened online directly by a customer, only a principal signature is required. In either case, there is no requirement for a customer signature. However, if the customer opens a margin account, the customer's signature is needed on the margin agreement. Finally, this is the FINRA rule, but it is not industry practice. Every firm that we know of has the customer sign an arbitration agreement at account opening, but it is not legally required. If a firm wants to open a customer account without having the customer sign an arbitration agreement, it can!

Under the Net Capital Rule, fails to deliver for equity securities that are older than 4 business days are: A. valued at the contract price B. marked to market, but no haircut is taken C. marked to market and are subject to a 15% haircut D. marked to market and are subject to a 100% haircut

The best answer is C. A fail to deliver arises when a brokerage firm sells a security (usually for a customer) and on settlement date, the customer does not deliver the security to the firm. This forces the firm to "fail to deliver" the security on the sale. The firm is now waiting for the customer to deliver - so this really represents a security receivable to the brokerage firm. Through 4 business days past settlement, the Net Capital rule allows the full value of the security as an asset of the broker-dealer, since it is likely that the customer will deliver. On the 5th business day, the SEC is now concerned that the customer may not deliver, and the contract must be marked to market and haircutted by 15%. After the 10th business day, customer fails to deliver must be bought in by the firm. (Any loss on buy-in would be charged to the customer's account). (Note: The newer (2009) SEC Rule 204 of Regulation SHO, which requires mandatory buy-in of fails to deliver resulting from short sales the morning of S+1; and from long sales the morning of S+3; effectively makes these rules obsolete. However, when the SEC adopted the new rules, they did not go through the older rules that were impacted by this change to clean them up. The "old" rules are still on the books and are still tested, since they still exist!)

Which of the following would be defined as "Sales Literature" by FINRA? A. Advertisement in social media B. Letter to customers describing the effects of tax law changes C. Technical report on options income strategies mailed to customers D. A letter to a customer discussing his particular portfolio performance

The best answer is C. A report to customers that deals with "options income strategies" falls under the FINRA definition of sales literature. A letter to customers giving general economic information that is not directly related to the securities markets, such as the report on tax law changes, does not fall under the definition of sales literature. Advertising in social media is defined as "advertising" (intended for the general public; in contrast, a password-protected website is seen by a specific audience and is sales literature). A letter of an individual nature to a customer is also not considered to be sales literature - rather it is defined as "correspondence" that is subject to principal review.

As a result of a finding against a member firm in a hearing conducted under the Code of Procedure, FINRA can take all of the following actions EXCEPT: A. Expulsion B. Fine C. Cease and desist order D. public announcement of wrongdoing

The best answer is C. As a result of a finding against a member firm or associated person by the Hearing Panel, FINRA can censure, suspend, or expel the associated person or firm; can impose a fine of any dollar amount; and can make of public announcement of the actions taken and why. FINRA also has the right to issue a cease and desist order against an associated person or firm, but these are issued to "maintain the status quo while an underlying disciplinary proceeding is being litigated." So FINRA would issue a cease and desist order as the hearings are occurring to stop "further violative conduct." Once the Hearing Panel has made a finding and taken action such as a fine, suspension, or expulsion, there is no longer a need for such a "cease and desist" order.

Which statement is TRUE about NASDAQ limit order rules? A. Member firms must accept limit orders and cannot levy special handling charges against these orders B. Member firms must accept limit orders, but can levy special handling charges against these orders C. Member firms are not obligated to accept limit orders, but if accepted, can levy special handling charges against these orders D. Member firms are not obligated to accept limit orders, but if accepted, cannot levy special handling charges against these orders

The best answer is C. NASDAQ market makers are not under the obligation to accept limit orders from customers - they are only required to accept market orders. This way, if the market maker does not want to comply with the requirements of the Limit Order Protection Rule (FINRA Rule 5320), it does not have to do so. If the market maker chooses to accept limit orders (which the vast majority of market makers do), they may impose special charges for the additional work of executing this type of order.

A customer sells short 1,000 shares of ABC stock at $14.00 as an initial transaction in a new margin account, depositing the required margin. The customer will receive a call for maintenance margin if the stock price rises above: A. $15.00 per share B. $16.00 per share C. $16.15 per share D. $16.50 per share

The best answer is C. Short margin accounts have a minimum maintenance margin requirement of 30%. The formula for the market value at maintenance in a short margin account is: In this account, the customer sells short $14,000 (current market value) of stock for a credit of $14,000 to the account. In addition, he must deposit 50% initial margin or $7,000 for another credit. Total credits equal $21,000 for this position. To find the market value where the account is at maintenance: $21,000 Credit/1.3=$16,153 for 1,000 shares=$16.15 per share If the market value rises above $16.15, a maintenance call will be generated.

Under the FINRA Review of the Committee on Corporate Financing, finders may be compensated in a new issue offering with all of the following EXCEPT: A. options B. cheap stock (priced lower than the Public Offering Price) C. free stock (freely transferable) D. fee based on the size of the offering

The best answer is C. The Committee on Corporate Financing requires that any stock acquired by an underwriter or other parties involved in the underwriting (such as finders, accountants, lawyers) in connection with a new issue offering, be restricted for 6 months. This means that the stock cannot be transferred (sold). Thus, the stock is not freely transferable. It is acceptable under the Committee's rules to give options, cheap stock, or a fee to finders, accountants, and lawyers involved in the offering.

The minimum duration for a non-temporary subordinated loan is: A. 30 days B. 45 days C. 1 year D. 2 years

The best answer is C. The minimum duration for a regular (non-temporary) subordinated loan is 1 year. In contrast, there is no minimum duration for temporary subordinated loans - rather, there is a maximum duration of 45 days.

Under FINRA rules regarding advertising, all of the following statements are true EXCEPT: A. If a recommendation of a security is made, the price at the time must be included B. If a testimonial is given, it must be stated whether the maker has been paid for the testimonial, if more than a nominal sum was paid C. The performance of previous recommendations may not be shown in the report D. It must be disclosed if the firm was a manager or co-manager in an underwriting of any of that company's securities within the past 12 months

The best answer is C. Under FINRA advertising rules, if a recommendation of a security is made, the price of the security at the time and the date must be included. If a testimonial is given, it must be stated if the maker has been paid, if more than a nominal amount is involved. It also must be disclosed if the firm owns the security or options, warrants, etc.; if the firm is a market maker in the security; or if the firm was a manager or co-manager in an underwriting of any of the company's securities within the past 12 months. There is no prohibition on showing past performance of recommendations - as long as all recommendations of that type are shown (one cannot be deliberately selective and only show the "good" ones) and a statement is made that past performance does not predict future results.

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 is a prohibited practice under the FINRA Conduct Rules? A. Advising a client to purchase stock based on a market analysis indicating that the stock is likely to appreciate in the near term B. Selling a security prior to advising a customer to purchase that security C. Buying a security prior to advising a customer to buy that security D. Advising a client to sell stock based on a market analysis indicating that the stock is likely to decline in the near term

The best answer is C. Choice C is an example of "front running," which is a prohibited practice under FINRA rules. For example, if a firm receives a large buy order from a customer (which is likely to raise the market price), it cannot buy the stock for the firm's account before executing the large customer order. Advising a customer to buy a stock based on a market analysis is perfectly acceptable; selling a security before advising a customer to buy does not conflict with the customer order nor is it front running, so this is acceptable; and advising a client to sell stock based on a market analysis is perfectly acceptable.

Customer account records must be maintained for how many years after a customer closes an account? A. 1 year B. 3 years C. 6 years D. 10 year

The best answer is C. Customer account records must be kept for 6 years after an account is closed.

Broker-dealers are required to keep daily logs for: A. 2 years B. 3 years C. 6 years D. the life of the firm

The best answer is C. Daily logs are another name for the daily blotters - the cash receipts and disbursement blotter; the purchase and sales blotter; and the securities receive and deliver blotter. These must be retained for 6 years.

Under the Conduct Rules, FINRA prohibits a member firm from selling a domestic security for a customer if the firm has a fail to deliver in that security that is older than: A. 10 days B. 30 days C. 60 days D. 90 days

The best answer is C. FINRA prohibits a member firm from accepting a customer order to sell, or from selling for its own account, if it has a fail to deliver in that security that is older than 60 days. This time period is extended to 90 days if the firm has a fail to deliver in a foreign security. (Note: The newer (2009) SEC Rule 204 of Regulation SHO, which requires mandatory buy-in of fails to deliver resulting from short sales the morning of S+1; and from long sales the morning of S+3; effectively makes these rules obsolete. However, when the SEC adopted the new rules, FINRA did not go through the older rules that were impacted by this change to clean them up. The "old" rules are still on the books and are still tested, since they still exist!)

Trades of all of the following debt securities are reported through TRACE EXCEPT: A. U.S. Governments B. Agencies C. Municipals D. Corporates

The best answer is C. FINRA started TRACE as a trade reporting system for corporate debt, but it has been expanded over the years to include agency debt (both unsecured and asset backed) and effective July 2017, also reports trades of U.S. Government bonds. Municipal bond trades are reported under a different system maintained by the MSRB called RTRS - the Real Time Reporting System.

A member firm has outsourced some of its business support activities to third party vendors. Under FINRA rules: A. any vendors used must also be FINRA member firms B. the vendors used must agree to be subject to FINRA inspection C. the relationship with the vendors used must be included in the firm's Business Continuity Plan D. the vendors used must be located within the United States

The best answer is C. If a member firm outsources "mission critical" functions to 3rd party vendors, FINRA requires that this be addressed in the firm's Business Continuity Plan (e.g., the member firm must get assurance or proof that the vendor has its own BCP and business recovery procedures).

A customer has a combined long and short margin account with the same number of shares of differing stocks. There is a sharp market decline affecting all positions in the account equally. Which statement is TRUE? A. The account becomes restricted under Regulation T B. The equity in the account will decrease C. The equity in the account remains unchanged D. The account will receive a maintenance call

The best answer is C. If the market value of all the securities in the account drops equally, then the long market value will fall, reducing equity, and the short market value will fall, increasing equity. If the long and short positions are of equal size, the loss on one side cancels out the gain on the other and equity remains unaffected.

A customer account shows a free credit balance of $260,000 and fully paid securities with the value of $240,000. SIPC coverage for this account is: A. $240,000 B. $260,000 C. $490,000 D. $500,000

The best answer is C. SIPC coverage is limited to $250,000 of cash, with maximum coverage of $500,000 (inclusive of the cash coverage). In this case, only $250,000 of the $260,000 of cash is covered, and the entire $240,000 of securities is covered for a total coverage of $490,000.

Under SEC Rule 10b-10, all of the following information is required on customer confirmations for NASDAQ trades EXCEPT: A. whether the firm acted as agent or principal in the transaction B. difference between the reported trade price and the price to the customer C. whether the order was solicited or unsolicited D. dual agency, if applicable

The best answer is C. There is no requirement to disclose on a customer confirmation if the order was solicited or unsolicited (though many firms choose to do this). The capacity (agent or principal) in which the firm acted must be disclosed. The commission must be disclosed in agency trades for all securities; and the mark-up or mark-down must be disclosed for principal transactions in NASDAQ securities. If dual agency is applicable (an agency cross - that is, crossing an order to buy and an order to sell at the prevailing market), this must be disclosed as well.

A market maker in an OTCBB stock is quoting the stock at: $10.00 - $10.2510 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. (Note - do not confuse this 30 second updating rule with the 10 second trade reporting rule.)

The inside market for ABCD, a NASDAQ stock is $37.00 - $37.40. An order entry firm enters an order into the NASDAQ system to buy 500 shares @ $30.15. Which statement is TRUE? A. The order will be executed at $37.00 B. The order will be executed at $37.40 C. The order will be placed in the limit order file D. The order will be returned to the order entry firm

The best answer is C. This customer wishes to buy, paying no more than $30.15. The cheapest price at which the stock can be bought is $37.40, so this order will be placed in the NASDAQ System as a buy limit order below the current market.

The managing underwriter of a public offering of securities may publish a research report or make a public appearance about the underwritten security: A. after 90 days have elapsed for an initial public offering and after 40 days have elapsed for a secondary offering B. after 50 days have elapsed for an initial public offering and after 20 days have elapsed for a secondary offering C. after 10 days have elapsed for an initial public offering and after 3 days have elapsed for a secondary offering D. under no circumstances

The best answer is C. To stop managing underwriters from "hyping" an underwriting once sale of the issue commences, the managing underwriter is prohibited from issuing a research report on that company, or from making public appearances where it comments on that company, for the 10 days following the effective date for an initial public offering; and for the 3 days following the effective date for a secondary (add-on) offering.

The registered principal is NOT required to: A. approve and endorse, in writing, the opening of each customer account B. review and endorse, in writing, each customer transaction C. review all correspondence of registered representatives relating to the broker-dealer's securities business, and give written approval if a communications compliance program has not been implemented D. preapprove all discretionary orders to detect and prevent unsuitable transactions and churning

The best answer is D. The registered principal must approve and endorse, in writing, the opening of each customer account; review and endorse, in writing, each customer transaction; and review all correspondence of registered representatives relating to the member firm's investment banking and securities business. If the member firm has not implemented a communications compliance program, then the general principal must endorse each item of correspondence sent. If such a program is implemented, then this additional step is not required. Choice D is incorrect since there is no requirement to preapprove orders in discretionary accounts. All transactions (discretionary or otherwise) are typically reviewed and approved by end of day. End of day approval works because if there is a problem, it can still be fixed - transactions are not recorded in a customer account until settlement - which is 2 business days after trade date. If a discretionary trade is inappropriate, it will be taken out of the customer account and placed in the branch error account and closed out the next day. It is considered to be the firm's transaction, and any profit or loss on close-out belongs to the firm.

Under the Customer Protection Rule 15c3-3, a broker dealer is eligible to compute the Reserve Requirement monthly instead of weekly if: A. the firm's ratio of Aggregate Indebtedness to Net Capital does not exceed 10 to 1 B. the firm's customer base is composed solely of institutional investors C. aggregate credit balances in customer accounts do not exceed $5,000,000 D. the firm agrees to deposit at least 105% of the required amount

The best answer is D. To compute the Customer Reserve Account monthly, instead of weekly, a broker-dealer's ratio of Aggregate Indebtedness to Net Capital cannot exceed 800% (8 to 1) and aggregate customer credit balances cannot exceed $1,000,000. In addition, if monthly computation is elected, 105% of the required amount must be deposited, instead of 100%. There is no special carve out in the rule for firms which deal solely with institutions. (OK - so this rule was written in the early 1970's when $1 million was a lot of money. Needless to say, today, no one computes monthly, but the rule is still on the books and is still tested!)

Which individual would be LEAST likely to be considered an "insider" under the Securities Exchange Act of 1934? A. Attorney for a corporation B. A research scientist that heads the company's latest cold fusion initiative C. The administrative assistant of the CEO of a publicly traded company D. A sell side research analyst employed at a broker-dealer

The best answer is D. Anyone who has material information about a publicly traded company, that has not been distributed to the public can be considered to be an "insider," under the court rulings that accompany the formal definition of an insider under the Securities Exchange Act of 1934. A corporation's attorney or accountant is almost assuredly in possession of material non-public material information. A research scientist for the corporation would also likely be in possession of material non-public information. Surprisingly, given his or her proximity to the CEO, an administrative assistant could also fall under this information-based definition. A sell side research analyst is one who works for a retail member firm that sells securities to the public (in contrast, a buy side research analyst typically works for a mutual fund or hedge fund, researching potential investments to buy). The research analyst might have a deep understanding of the company, but would not be considered an insider unless he or she was in possession of material non-public information. Bottom line: Anyone who has material information about a publicly traded company, that has not been distributed to the public, can be deemed an "insider" regardless of his or her job title or relationship to the issuer.

Electronic notice is NOT required if a broker-dealer: A. discovers that the books and records of the firm are not current B. finds a material inadequacy in the firm's books and records C. finds that its net capital is 110% of the minimum requirement D. finds that its ratio of aggregate indebtedness to net capital is 1100% after the firm's first year of operations

The best answer is D. Electronic notice to FINRA is required if a broker-dealer: discovers that the books and records of the firm are not current (this requires immediate notice); finds a material inadequacy in the firm's books and records (this requires notice within 24 hours); finds that its net capital is below 100% of the minimum requirement or if its ratio of AI/NC exceeds 8:1 in the first year or 15:1 thereafter (this requires immediate notice); or enters "Early Warning" - which is net capital falling below 120% of the minimum requirement or the firm's ratio of AI/NC exceeding 12:1 (this requires notice within 24 hours). Choice D is incorrect since a ratio of aggregate indebtedness to net capital of 11:1 (1100%) is under the reporting threshold. The AI/NC ratio must be in excess of 12:1 to trigger an "Early Warning" notice.

Unless an exemption is available, a Form 211 filing is required prior to publishing or disseminating quotations in: A. NYSE issues B. NASDAQ issues C. NMS issues D. OTC issues

The best answer is D. Form 211 is filed by a market maker that wishes to register in a non-NASDAQ security. The form, as well as the related information required by SEC Rule 15c2-11, must be filed at least 3 business days prior to entering quotes for OTC issues. The form is basically an attestation that the market makers has obtained a copy of the issuer's latest SEC filing and performed due diligence on it. Notice that there is no such requirement for market makers in exchange-listed issues, since these issues must meet rigorous listing requirements and must be current in their SEC reports. On the other hand, OTC issues have no listing requirements.

Which individual associated with a member firm is NOT required to be registered with FINRA as a principal? A. Branch Office Manager B. Office of Supervisory Jurisdiction Manager C. Member Firm Officer D. Designated AML Compliance Pers

The best answer is D. Surprisingly, there is no requirement that a firm's anti-money laundering (AML) officer be registered with FINRA. The Designated AML compliance person, who is responsible for creating and enforcing the firm's written AML program, must be an "associated person." FINRA states that this person can either be registered or not, which seems sort of unusual, until you consider that when the rule went into place, AML programs were in place at banks, but not broker-dealers. This way a bank could hire an experienced AML person from a bank without worrying about having to get that person registered and passing a difficult test! FINRA requires managers of Branch Offices, managers of Offices of Supervisory Jurisdiction and officers of the firm to be registered as principals. The only officer of a member firm that is not required to be registered is a passive owner, with no day-to-day management responsibilities. (Also note that for very small offices, FINRA permits a non-resident branch manager to supervise these locations, with functions delegated to a registered representative in the small branch, but the BOM is still responsible for supervision.)

A customer sells short a security and fails to deliver on settlement date. Mandatory close-out is required if the stock: A. is not delivered within an additional 24 hours if an extension has been granted B. is not delivered by the last date for collection of funds under Regulation T (S+2) C. remains on the threshold list for 5 consecutive settlement days D. remains on the threshold list for 13 consecutive settlement days

The best answer is D. Under Regulation SHO, customer short sales of threshold list securities not resulting in delivery must be bought in after "13 consecutive settlement days." These are securities that are "hard to borrow," and the SEC does not want large outstanding short positions that are uncovered to build in these securities. A threshold security is one with a large outstanding short position - defined as one with a clearing short position at the National Securities Clearing Corporation of 10,000 shares or more; and the position represents 1/2% or more of the total shares outstanding. (Note: The newer (2009) SEC Rule 204 of Regulation SHO, which requires mandatory buy-in of fails to deliver resulting from short sales the morning of S+1; and from long sales the morning of S+3; effectively makes these rules obsolete. However, when the SEC adopted the new rules, they stated that they are retaining the old rules as a backstop because Rule 204 has some exceptions.)

Which of the following is NOT qualified as a participant in DTCC? A. Member of a national securities exchange B. Bank or trust company C. Registered investment company D. Registered investment adviser

The best answer is D. Depository Trust and Clearing Corporation is owned by its member participants (exchanges, member firms, banks, investment companies and insurance companies) and is a central depository holding stock and bond certificates for these firms. As trades are settled daily, it records the change of ownership and net money amounts to be either debited or credited to members' accounts. Investment advisers are not DTCC member participants.

Under SEC Rule 15g-1, member firms are exempt from the provisions of the "penny stock rule" if its penny stock business is less than: A. 20% of its revenue B. 15% of its revenue C. 10% of its revenue D. 5% of its revenue

The best answer is D. If a member firm's revenue from penny stock transactions is less than 5% of total revenue, then the member firm is exempt from the penny stock disclosure rule requiring that when a customer is solicited to buy a penny stock, the customer must sign and return a detailed suitability statement prior to confirmation of sale. The intent of the rule is to make life difficult for firms that, as a majority of their business, push penny stocks.

A live road show presented in connection with a Rule 405 Automatic Shelf Registered Offering is: A. considered to be a graphic communication B. considered to be a free writing prospectus C. considered to be both a graphic communication and a free writing prospectus D. considered to be neither a graphic communication nor a free writing prospectus

The best answer is D. SEC "quiet period" rules for issues in registration, which restrict firms in the syndicate from promoting the sale of the issue, cover both "written" and "oral" communications. The SEC defines a graphic communication as a written communication. The SEC list of graphic communications includes any form of electronic media, including videotapes, audiotapes, facsimiles, CD-ROM, electronic mail, Internet web sites and computer networks. Under SEC Rule 405 (shelf registration for WKSIs - Well Known Seasoned Issuers), these graphic communications are defined as "free-writing prospectuses" that do not require advance SEC filing and review. Rather, these can be distributed to potential clients as long as a copy is also filed with the SEC. A pre-recorded electronic road show falls under the definition of both a graphic communication and is also a FWP - Free Writing Prospectus, so it must be filed with the SEC. Note, in contrast, that a presentation at a seminar, such as a live road show appearance, would be defined as an oral communication and is neither a graphic communication nor a free writing prospectus, so no SEC filing is required.

All of the following statements about a broker-dealer using the Alternative Net Capital method under Rule 15c3-1 are true EXCEPT: A. minimum capital is 2% of aggregate debits in the Customer Reserve Bank Account computation, but at least $250,000 B. if Net Capital falls below 5% of aggregate debits in the Customer Reserve Bank Account formula, the broker-dealer must report under Rule 17a-11's "Early Warning" provisions C. if Net Capital falls below 2% of aggregate debits in the Customer Reserve Computation or below $250,000, immediate electronic notice must be given to FINRA and the SEC D. if Aggregate Indebtedness exceeds 1,500% of Net Capital after the first year of operations, immediate electronic notice must be given to FINRA and the SEC

The best answer is D. Under the Alternative Net Capital Requirement, a broker dealer must maintain minimum capital equal to 2% of debits in the Customer Reserve computation, but at least $250,000 of capital. If the firm's capital drops below this amount, the firm is in violation of the Net Capital Rule and must give immediate electronic notice to FINRA under Rule 17a-11; and cease business operation. The firm hits the "Early Warning" level if capital falls below 5% of debits in the Reserve formula. Early Warning reporting requires electronic notice to FINRA within 24 hours; and the filing of any reports requested by FINRA. Under the Alternative rule, there is no requirement to compute aggregate indebtedness, nor is there a maximum ratio test of aggregate indebtedness to net capital.

All of the following statements are true regarding the entry of a stabilizing bid on the NASDAQ system EXCEPT: A. Only one market maker is allowed to enter a stabilizing bid B. Notification must be given to NASDAQ in writing prior to the first day that the stabilizing bid will appear on the system C. Market makers are prohibited from maintaining a regular bid and offer at the same time that a stabilizing bid is entered D. No identification is given on NASDAQ that the bid is a stabilizing bid

The best answer is D. When a stabilizing bid is entered into the NASDAQ system, it must be identified as such. The other statements are true. Only one market maker is allowed to enter a stabilizing bid; notification must be given to NASDAQ in writing prior to the first day that the stabilizing bid will appear on the system; and market makers are prohibited from maintaining a regular bid and offer at the same time that a stabilizing bid is entered by that market maker.

Under the Customer Protection Rule, the definition of excess margin securities that must be brought into the firm's possession or control is: A. securities in excess of 50% of the customer's debit balance B. securities in excess of 70% of the customer's debit balance C. securities in excess of 100% of the customer's debit balance D. securities in excess of 140% of the customer's debit balance

The best answer is D. "Excess margin securities" are defined as those customer securities held in margin accounts in excess of 140% of the customer's debit balance. The Customer Protection Rule requires that clearing broker-dealers reduce excess margin securities daily to possession or control. For example: A customer who buys $20,000 of stock must put up 50% margin or $10,000. The other $10,000 needed to purchase the securities is lent by the broker-dealer - a customer debit balance of $10,000. Of the $20,000 of securities, only 140% of the debit or $14,000 can be rehypothecated to a bank (leaving the broker's possession). The other $6,000 of excess margin securities must be kept in possession of the broker-dealer.

13D reports are filed: A. annually B. semi-annually C. quarterly D. on an event-driven basis

The best answer is D. Anyone who accumulates a 5% or greater holding in a publicly held company with the intention of exercising control must file a Form 13D within 10 business days.

Under FINRA rules, the maximum "O&O" expenses permitted in a DPP or REIT offering are limited to: A. 5% of the gross proceeds of the offering B. 8 1/2% of the gross proceeds of the offering C. 10% of the gross proceeds of the offering D. 15% of the gross proceeds of the offering

The best answer is D. FINRA limits compensation that can be taken in public offerings of DPPs (Direct Participation Programs) and REITs. The basic rule is that there is a 10% limit on underwriting fees (or anything similar or related); and a 5% limit on offering expenses that are reimbursed from the proceeds of the offering; for a total compensation limit of 15%. "O&O" stands for "Organization and Offering" expenses. Included under the 10% limit for underwriting expenses are amounts paid to member firms, wholesalers, amounts paid for advertising or sales material, trail commissions, consulting fees, finder's fees, reimbursement for the underwriter's due diligence, etc. The idea here is that any payment in any form to an underwriter or salesperson selling the offering will be included within the 10% limit - it makes no difference what it is called! Issuer expenses that are reimbursed from the offering proceeds are limited to another 5% - these include the cost of advertising, sales material and subscription agreements, the issuer's legal expenses, securities registration fees and transfer agent and depository fees.

A broker-dealer is permitted to lend fully paid customer securities and excess margin securities by having that customer sign a: A. hypothecation agreement B. stock power C. margin agreement D. separate loan consent agreement

The best answer is D. Fully paid customer securities and excess margin securities are required to be reduced to possession or control daily under Rule 15c3-3. The broker-dealer cannot lend out these securities unless the customer agrees by signing a separate loan consent agreement. Many brokerage firms require customers who open any account, whether it is cash or margin, to sign such a loan consent agreement.

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.