Finra Rules

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As the result of a hearing in front of the Hearing Panel, a registered representative is suspended. Which statement is TRUE regarding the right of appeal? A The decision of the Hearing Panel is final and cannot be appealed B The decision may be appealed to the National Adjudicatory Council C The decision may be appealed to the Securities and Exchange Commission D The decision may be appealed to Federal Court

B The decision may be appealed to the National Adjudicatory Council Code of Procedure The FINRA Code of Procedure is used when the FINRA Department of Enforcement wishes to prosecute a member firm or an associated person for rule violations. It can also be used by a customer that has not signed an arbitration agreement. Under the Code of Procedure, a complaint is filed with the FINRA District Hearing Panel. The District Hearing Panel reviews the complaint; has a hearing; and renders a decision. If either the customer or the firm disagrees with the decision of the District Hearing Panel, an appeal may be filed with the National Adjudicatory Council. If either the customer or the firm disagrees with the decision of the National Adjudicatory Council, an appeal may be filed with the Securities and Exchange Commission (SEC). If either the customer or the firm disagrees with the decision of the SEC, an appeal may be filed with Federal Court.

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

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

A website maintained by a member firm that is not password protected is considered to be: A advertising B sales literature C public forum D correspondence

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

Websites established by brokerage firms are considered to be: A advertising B sales literature C correspondence D educational material

Under FINRA rules, a readily apparent reference to BrokerCheck and hyperlink to the BrokerCheck website is required: A on a member firm's initial webpage that is intended to be viewed by retail investors B on a member firm's initial webpage that is intended to be viewed by institutional investors C on a member firm's initial webpage that is intended to be viewed by hedge fund investors D on every page of a member firm's website that is intended to be viewed by anyone

The best answer is A. FINRA requires that a readily apparent reference to BrokerCheck and a hyperlink to the BrokerCheck website be shown on a member firm's initial webpage that is intended to be viewed by retail investors and also on any member firm web page that includes a professional profile of a registered person who conducts business with retail investors. Note that the reference is only required for web pages viewed by retail investors, so that they can "check" on their broker. Institutional clients and hedge fund clients are sophisticated investors who "know what they are doing" and don't need this guidance.

A client receives a $75 gift card from a broker-dealer for giving a testimonial about her highly positive experience with her registered representative. What must the broker-dealer disclose if the testimonial is used in a retail communication? A The fact that the testimonial may not be representative of the experience of other customers B The fact that the maker of the testimonial was paid, along with the amount of compensation C Whether any guarantee of growth was made by the representative to induce the giving of the testimonial D The length of the time that the maker of the testimonial had an account with the broker-dealer

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

Which of the following is (are) prohibited in mutual fund advertising? I Showing past performance II Showing projected performance III Showing past performance against a benchmark index A II only B I and II C II and III D I, II, III

The best answer is A. All advertising is prohibited from including performance projections. Past performance may be shown in advertising, as can comparisons of past performance to a relevant benchmark.

A registered representative recommends the purchase of a new issue security registered under the Securities Act of 1933 to a customer. Which statement(s) is (are) TRUE? I The customer may be sent a prospectus about the issue II The customer may be sent a prospectus that is "highlighted" by the registered representative to emphasize important information III The customer may be sent an abstract of the prospectus that summarizes important information A I only B I and II C II and III D I, II, III

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

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

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

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

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

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

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

A customer buys securities without making payment and then sells the same securities without showing the intent to settle the transaction. This is: A Free Riding B Front Running C Interpositioning D Backing Away

The best answer is A. If a customer buys securities and then sells the same securities without the intent to pay for the purchase, he is taking a "free ride" on the brokerage firm. Any profit on the trades belongs to the customer since it is the customer's account. Brokerage firms will not tolerate "free riding" in customer accounts and will refuse further transactions if this occurs.

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

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

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

The best answer is A. In order for a customer to buy IPOs (Initial Public Offerings) of equity securities, the customer must sign a representation letter that he or she is not restricted from buying the issue under FINRA rules (FINRA prohibits industry "insiders" from buying the issue from the underwriter). Because the customer must sign this representation, this is a "positive" affirmation.

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

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

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

The best answer is A. The FINRA rule restricting member firms and their employees from buying IPOs from underwriters only applies to equity offerings. This is the case because the pricing of equity issues has a large "expectations" component that is difficult to quantify - and substantial price increases in the aftermarket due to overblown "expectations" for the issue are not uncommon. The rule does not apply to preferred stock or bond offerings, where the pricing is determined by the present value of the income flows to be received over the life of the security. For these issues, there is no "expectations" component to pricing.

To take a second job, an employee of a FINRA member firm: I must get written permission from his or her employer II is not required to get written permission from his or her employer III must amend his U-4 filing with FINRA and the SEC IV is not required to amend his U-4 filing with FINRA and the SEC A I and III B I and IV C II and III D II and IV

The best answer is A. To take a second job, FINRA requires that the individual obtain the written permission of his or her employer. In addition, any outside business activities must be disclosed on that individual's U-4 filing, so the U-4 must be amended promptly if the employer approves and outside work is taken. Finally, any outside business activities are shown on that registered representative's BrokerCheck report.

A registered representative holds a seminar for 40 prospective retail clients covering the benefits of investing in mutual funds. At the meeting, the representative sets up a table with canvas bags embossed with the member firm's logo that include a prospectus for each fund that was discussed, a brochure about the brokerage firm, and the registered representative's business card. At the end of the meeting, the prospective clients are encouraged to take a bag home. Which statement is TRUE? A Because the prospective clients can choose whether or not to take a bag, this does not fall under the communications rules B Because the seminar was attended by 40 prospective retail clients, it is defined as sales literature C Because the meeting was held for prospective retail clients, it is considered to be advertising D Because the representative personally delivered the seminar, it is defined as correspondence

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

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

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

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

The best answer is B. FINRA has 2 basic definitions of communications with the public: Correspondence: A written or electronic communication made available to 25 or fewer existing or prospective clients Retail Communication: A written or electronic communication made available to more than 25 existing or prospective clients. Excluded from these definitions are institutional communications and public appearances. FINRA creates these 2 main categories of communications because "correspondence" is subject to "post use review and approval" by a manager or principal and is not required to be filed with FINRA; in contrast, retail communications must be approved in advance of use by a principal and can be required to be filed with FINRA. (Also note that the "previous" FINRA rule defined "advertising" (general audience, such as TV, radio, newsprint, websites) and "sales literature" (specific audience, such as a research report, form letter, scripted speech, password-protected website). These now fall into the definition of "retail communications," but advertising and sales literature must still be known for the exam).

Under FINRA rules, a barrier must be put in place between a member firm's: A institutional sales department and its retail sales department B institutional communications distribution list and its retail communications distribution list C institutional trading desk and its retail trading desk D compliance department and its research department

The best answer is B. If an institutional communication is distributed to any number of retail clients, it is considered to be a "retail communication." This means that instead of being subject to "post use review and approval," it must be approved by a principal prior to distribution. FINRA states that each member firm must have policies and procedures in place "reasonably designed to prevent institutional communications from being forwarded to retail investors." Regarding information barriers for purposes of stopping "insider trading," the firm's investment banking department must be walled off from the other departments of the firm, such as research and trading; and research must be walled off from investment banking and trading. Compliance oversees all firm activities and is not walled off from anything!

Regulation AC requires that research analysts at member firms MUST give a: I written certification on each published research report II written certification on each week's published research reports III must give a blanket certification to all appearances made each month IV must give a blanket certification to all appearances made each quarter A I and III B I and IV C II and III D II and IV

The best answer is B. Regulation AC (Analyst Certification) requires research analysts to certify each published research report; and to make a quarterly certification covering all public appearances made during that quarter. The certification basically states that the analyst gave his or her honest view at that time; and that the analyst's compensation was not tied to the recommendation or views expressed. If an analyst fails to make the required certification, FINRA must be notified; and for the next 120 days, any research reports authored by that analyst must include the disclosure that the analyst did not provide the required certification.

Which of the following are violations of FINRA rules? I Recommending the purchase of put options to protect a stock position from a downwards market move II Sharing in the profits and losses of a customer's account III Selling exempted securities to a customer with a written agreement to buy back the securities at a later date IV Orally guaranteeing to buy back customer securities at a preset price A I and III B II and IV C I, II, IV D I, II, III, IV

The best answer is B. A registered representative cannot guarantee a customer's account against loss nor share in the account unless he or she opens a joint account with the customer; contributes capital proportional to any sharing agreement; and obtains the approval of a principal for the account. Selling exempted securities such as U.S. Governments with a written agreement to buy them back at a later date is a "repurchase" agreement, and is allowed (however, such repurchase agreements are typically for very large amounts, and are entered into by U.S. Government securities dealers). Recommending the purchase of a put option to protect against a downwards market move is perfectly acceptable, since that is what the option will do, and thus does not violate FINRA rules.

A research report on an issuer CANNOT be published by the underwriter of that issuer's securities for the time period encompassing: I 10 days following the effective date for an initial public offering II 25 days following the effective date for an initial public offering III 10 days following the effective date for a secondary offering IV 3 days following the effective date for a secondary offering A I and III B I and IV C II and III D II and IV

The best answer is B. A research report on an issuer cannot be published by the underwriter of that issuer's securities for the time period of 10 days following the effective date for an initial public offering; and 3 days following the effective date for a secondary offering.

When an issuer wishes to conduct a shareholder vote as part of the annual meeting, the proxies are sent to beneficial owners holding shares in street name by (the) A shareholder relations department of the issuer B broker-dealer holding the shares C DTCC D transfer agent

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

Under FINRA rules, disputes between a registered representative and a brokerage firm are: I handled by binding arbitration II handled by litigation III appealable IV non-appealable A I and III B I and IV C II and III D II and IV

The best answer is B. Disputes between registered representatives and brokerage firms are handled by binding (non-appealable) arbitration.

All of the following statements are true about the compliance meeting held by the firm that registered individuals must attend EXCEPT: A the content of the meeting must address compliance issues that have arisen at the firm B the meeting must be held every 2 years C proof of attendance at the meeting is required D the meeting cannot include topics on how to improve sales

The best answer is B. Every member firm must hold an annual compliance meeting with each registered employee, covering compliance issues that have arisen over the past year, and the procedures and policies that have been put in place to address those issues. The meeting cannot cover selling skills (that has nothing to do with compliance), and proof of attendance is required.

Under FINRA rules, research reports must be approved in advance by the: A member firm's investment banking department B member firm's supervisory analyst C FINRA communications department D company that is the subject of the report

The best answer is B. FINRA requires advance approval of research reports by the member firm's supervisory analyst.

On Wednesday, May 15th, a registered representative receives an order to sell 100 shares of ABC stock that has been "transferred and shipped" to the customer. Before executing the order, the registered representative must make sure the securities can be delivered by: A Thursday, May 16th B Friday, May 17th C Monday, May 20th D Tuesday, May 21st

The best answer is B. FINRA rules require that orders to sell cannot be accepted unless the firm has reasonable assurance that the securities can be delivered in 2 business days (regular way settlement). Two business days after Wednesday, May 15th is Friday, May 17th. Also, note that the location of the securities must be noted on the order ticket to sell.

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

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

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

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

Which statements are TRUE about a registered representative that wishes to promote him- or herself on the Internet? I The representative can create a website with approval of the principal II The representative can create a website with approval of FINRA III The FINRA name must be used on the website IV The FINRA name, when used, must be hyperlinked to the FINRA website A I and III B I and IV C II and III D II and IV

The best answer is B. Regarding a website prepared by an associated person, FINRA states that this is permitted (though, odds are, your firm will not allow you to do it). Again, approval of FINRA is not required. Rather, approval of the firm is required. The FINRA name can be shown on a member firm or associated person's website, but is not required to be shown. If shown, it must be accompanied by a hyperlink to the FINRA website.

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

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

FINRA's 5% Policy applies to which of the following? I Commissions charged on transactions effected over-the-counter II Commissions charged on transactions effected on stock exchanges III Underwriting spreads charged on new issue offerings effected over-the-counter IV Sales charges imposed on mutual fund offerings A I only B I and II only C III and IV only D I, II, III, IV

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

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

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

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

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

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

The best answer is C. Since this speech will be delivered to 35 attendees, it falls under the "Retail Communication" definition, and within that broad definition, it is defined as "sales literature." All speeches must be truthful and in good taste; and the speech must be informational, not promotional, in nature. There is no requirement for the speech content to be pre-filed with the SEC. A copy must be retained for 3 years for possible inspection by FINRA examiners. The location where the speech script would be kept on file is the firm's supervisory compliance office - called the OSJ - Office of Supervisory Jurisdiction.

An electronic communication of an "individual" nature sent by a representative to a customer is defined as: A Advertising B Sales Literature C Correspondence D Educational Material

The best answer is C. A communication of an individual nature sent to a customer is defined as correspondence. The specific definition is a written or electronic communication made available to 25 or fewer existing or prospective retail customers. Every piece of correspondence sent by a representative to a customer must be approved by a principal or manager. If the firm has implemented an correspondence compliance program, then FINRA permits "post-use review and approval." If the firm has not implemented a correspondence compliance program, then each piece of correspondence must be approved by a principal prior to use. Of course, virtually every firm has put in appropriate compliance procedures so that it can approve these "after the fact."

Specific compliance approval is needed for a registered representative to send out all of the following to 40 retail customers EXCEPT: A 3rd party research report on a stock not followed by the firm obtained by the representative B photocopy of a newspaper article about good stock picks C existing research report prepared by that firm D research report prepared by that representative about stocks that she likes

The best answer is C. A communication to more than 25 existing or prospective retail clients is a "retail communication" that requires prior principal approval before distribution. The key to this question is that an existing research report prepared by that firm would be "already approved" (approvals from the Supervisory Analyst and a principal) and does not need an additional approval to be sent out. The other 3 choices are communications prepared by either the representative or someone outside that firm. They would all require prior principal approval. Furthermore, the research reports would require approval of a Supervisory Analyst at that firm.

While as a general rule, registered representatives cannot borrow from customers, an exception is given if a representative wishes to borrow from a customer who: A has offered the loan without prompting or solicitation by the representative B works in a unrelated area in the securities industry C is a family member of the representative D is a close friend of the representative Explanation The best answer is C. As a general rule, registered representatives can neither lend money to, nor borrow money from, customers. However, as long as the firm has written policies and procedures covering this, a representative can borrow money from, or lend money to, an immediate family member who is a customer without having to give prior notice to the firm and get the firm's prior approval. For purposes of this rule, "immediate family" means parents, grandparents, mother-in-law or father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or nephew, and any other person whom the registered person supports, directly or indirectly, to a material extent.

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

A retiring registered representative (RRR) has a book of business that he wishes to sell prior to the time of his retirement. Another representative at the same firm enters into a contract to buy the RRR's book of business, paying 50% of commissions earned for the next 10 years. Which statement is TRUE about this? A This is prohibited under FINRA rules because registered representatives can only share commissions with other representatives at the same firm and not with ex-representatives who are not currently registered B This is prohibited because the "book" of business is not the property of the RRR, rather it is the property of the member firm C This is permitted as long as the contract is completed prior to retirement and the RRR does not solicit new business, open new accounts, or service the accounts generating the continuing commission payments D This is permitted as long as the contract includes a mandatory termination clause in the event that the buying representative leaves the employ of the broker-dealer

The best answer is C. As a general rule, registered representatives cannot share commissions with unregistered persons. However, FINRA makes a specific exception under its "continuing commissions" policy, which is intended to help retiring registered representatives - RRRs- (and also spouses of deceased registered representatives). The intent is to allow RRRs to "sell" their book of business for a share of future commissions generated by the RRR's accounts, giving that individual retirement income. FINRA specifically permits this (it is kinda a nice thing!) as long as the contract is entered into before retirement and the RRR contractually agrees not to solicit new business, open new accounts, or service the accounts generating the continuing commission payments.

Who does NOT have to be licensed in a broker-dealer? A President B Equity trader C ACATS clerk D Sales individual

The best answer is C. Clerical personnel who are not "client facing" are not required to be licensed. ACATS is the Automated Customer Account Transfer System, which is run by DTC (Depository Trust Corporation) to manage client account transfers from one firm to another. Operating officers and owners (but not passive owners), traders, and salespersons must be registered and licensed.

An offer of IPO shares made to an officer of a publicly held company: A is prohibited under FINRA rules B is prohibited if the company is in the banking or financial services industry C is prohibited if the purpose of the offer is to get investment banking business from that company D is permitted as long as the officer signs an IPO letter

The best answer is C. FINRA prohibits the "spinning" of IPO shares. This is a "quid pro quo" arrangement where a member firm gives officers of public companies IPO allocations in return for receiving underwriting business from that company (since the officers are in a position to direct that business to the member firm). An executive officer or director of a publicly held company cannot receive a new issue allocation if the company is currently an investment banking client of the member; if the member has received investment banking compensation from the company in the past 12 months; or if the member expects to be retained by the company to provide investment banking services to the company in the upcoming 3 months (which is the case in this question).

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

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

If mediation is chosen instead of arbitration to settle a dispute, all of the following statements are true EXCEPT: A either party can reject the mediator's decision B both parties must have agreed to the use of mediation C the decision of the mediator is binding and cannot be appealed D the use of mediation is an alternative to the FINRA arbitration procedure

The best answer is C. Virtually every broker-dealer requires a customer to sign an arbitration agreement at account opening. This requires the customer to use FINRA arbitration as the means of settling the dispute. In 2010, after the market meltdown of 2008-2009, FINRA was inundated with arbitration claims and had a 3-year backlog. To reduce the time to get these cases settled, FINRA amended its arbitration procedures to permit the parties involved to voluntarily choose to use a FINRA-approved mediator to settle the dispute. If a mediator is chosen, both sides must agree to this and the decision of the mediator is not binding or final. Both sides can agree to the findings of the mediator, or either party can reject the mediator's findings and the case will go into the arbitration queue. When a decision is reached by the arbitrators, it is binding and final.

Under FINRA rules, which of the following statements are TRUE regarding research reports? I The research report must be filed with FINRA II The research report does not have to be filed with FINRA III The research report must be approved by a supervisory analyst IV The research report does not have to be approved by a supervisory analyst A I and III B I and IV C II and III D II and IV

The best answer is C. There is no requirement to file research reports with FINRA, nor to obtain FINRA approval before sending out the report. However, FINRA rules require that a research report be prepared or approved by a supervisory analyst.

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

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

Which of the following is a record that must be retained on file by a broker-dealer? A Prospectuses B Recommendations C Complaints D Solicitations

The best answer is C. Broker-dealers are not required to retain, as a record, recommendations made to clients. Customer complaints, account statements, and advertising are all records that must be retained by broker-dealers.

A registered representative takes a customer out to a dinner and a show, spending $180. This activity is: A a violation of FINRA rules B permitted because less than $100 was spent on a per-person basis C permitted if it complies with the firm's policies and procedures D permitted under all circumstances

The best answer is C. Business entertainment does not fall under the $100 gift limit. Business entertainment is permitted as long as it is not too excessive or too frequent and it must comply with the firm's policies and procedures.

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

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

The sale of Direct Participation Programs is regulated by all of the following EXCEPT: A State Blue Sky Laws B FINRA Rules C MSRB Rules D Securities Act of 1933

The best answer is C. Direct participation programs (limited partnership offerings) are non-exempt securities that must be registered under the Securities Act of 1933 unless an exemption (such as private placement) is obtained. The issue must also be registered in the state(s) where it will be offered. FINRA regulates the sale of limited partnerships. The MSRB has no regulatory authority over limited partnerships. It simply makes (but cannot enforce) rules for the municipal markets.

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

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

Under the FINRA Conduct Rules, a broker-dealer may charge a customer for which of the following services? I Collection of dividends II Safekeeping of securities III Handling the transfer and reregistering of securities IV Appraisals of securities in a customer portfolio A I and II only B III and IV only C I, II, III, IV D None of the above

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

A firm's research department issues a research report on ABC Corp. and changes its recommendation from "Reduce" to "Accumulate." Based on this information a registered representative calls all his clients and tells each one to: "Use all available cash to buy as much ABC Corp. stock as you can immediately." This action by the registered representative is: A appropriate since the recommendation is based on the firm's research B appropriate only if the proposed investment is not too risky for the customer C not appropriate because it induces the customer to invest beyond his financial capacity D not appropriate because it makes a recommendation based on inside information

The best answer is C. First of all, making the same recommendation to every customer is a prohibited practice. A recommendation can only be made based upon a suitability determination specific to that client. Second, it would not be appropriate to use "all available cash to buy as much of the stock as possible" because this would concentrate the customer's exposure to potential loss on that one specific stock position ("capital risk").

Which of the following statements are TRUE regarding electronic communications sent by registered representatives at member firms that have a communications compliance program in place? I Registered representatives must be trained by the firm about what content is permitted in such communications II Registered representative communications must be supervised and reviewed by the member firm III Registered representative communications must be approved in advance by the member firm IV Registered representative communications may only be sent from a location supervised by the member firm A I and II only B III and IV only C I, II, IV D I, II, III, IV

The best answer is C. If a member firm has a communications compliance program in place, registered representatives are permitted to send e-mail to customers without submitting these for pre-use review and approval. In such a program, the firm is obligated to educate its registered representatives as to what is permissible in electronic communications; and must have procedures in place to audit and review these communications. Please note that the audit and review requirements not only apply to outgoing electronic communications; but also apply to incoming electronic communications as well. Such an audit program can only cover locations supervised by the firm, so registered representatives are only permitted to send electronic communications to customers from supervised locations.

If a registered representative fails to complete the Regulatory Element of the Continuing Education requirement within the stated time period, that person: A must be immediately terminated by the employing member B will be fined by FINRA C must cease performing all of the functions of a registered representative D can apply for an extension from FINRA to complete the requirement

The best answer is C. If a registered representative fails to complete the Regulatory Element of the Continuing Education requirement within 120 days of the notification date, that person's registration is suspended and that person cannot continue to perform any of the functions of a registered representative. There is no requirement that the person be fired by the firm - who knows, there might be a nice maintenance job available at the firm!

Who is permitted to buy an Initial Public Offering (IPO) from a member firm? A Self-supporting mother of a registered representative who is employed by that member firm B College-age brother of a registered representative who is employed by that member firm C Self-supporting ex-wife of a registered representative who is employed by that member firm D Non self-supporting minor daughter of a registered representative who is employed by that member firm

The best answer is C. On the prohibited list of purchasers of IPOs from underwriters are FINRA member firms for their own accounts, their officers and employees, and the "immediate family" of officers and employees of member firms. Immediate family includes parents, children, siblings, and spouses (and in-laws in this grouping). These individuals are viewed as potential conduits through which a registered representative could attempt to make a prohibited IPO purchase. Note that the ex-wife of a registered representative is no longer a spouse and would no longer fall into the prohibited group.

Under FINRA rules, copies of order tickets must be kept for: A 6 months B 2 years C 3 years D 5 years

The best answer is C. Order tickets must be kept for 3 years. As a general rule, all records that you come in contact with must be kept for 3 years. The only notable exceptions are customer complaints, which must be retained for 4 years, and customer account statements, which must be kept for 6 years.

A FINRA member firm's research department has prepared a report on ACME Corp. that changes the firm's recommendation from "Buy" to "Hold." Based on this information, a registered representative calls all of his customers and tells them that "This report will create an exceptional opportunity to buy this stock at a more favorable price. I recommend you increase the size of your holdings." This action: A requires the prior approval of the branch manager B requires the prior approval of FINRA C misrepresents the findings of the firm's research report D is consistent with the findings of the firm's research report

The best answer is C. Since this firm's research department is downgrading the stock (recommending that no additional purchases be made), the registered representative has misrepresented the report's findings.

Which of the following gifts CANNOT be accepted by a registered representative from a mutual fund sponsor? I All expenses paid trip to Bermuda II $50 gift certificate III $500 cash IV $1,000 towards the purchase of fund shares A II and III only B I and IV only C I, III, and IV D I, II, III, IV

The best answer is C. The FINRA "anti-reciprocal" rule prohibits investment companies from compensating salesmen at broker-dealers for selling their shares outside of the sales charges stated in the Prospectus. FINRA does allow a maximum gift of $100 value per person per year from a mutual fund sponsor to a registered representative that is not considered as "compensation." An all expense-paid trip to Bermuda clearly exceeds the limit, as does $500 cash or $1,000 credited towards the purchase of fund shares.

Once an individual has completed the SIE exam, he or she: A is only permitted to accept unsolicited trades from clients B is only permitted to report completed trades to clients C will become licensed upon passing the appropriate representative qualification exam D will become licensed upon being hired by a registered broker-dealer

The best answer is C. The SIE is a "corequisite exam." In order to be licensed as a registered representative, the SIE must be passed; and the appropriate representative qualification exam must be passed (e.g., Series 6 or Series 7). Note that being hired by a registered broker-dealer does not make one registered. To be registered, that individual must complete a U4 application and pass the appropriate licensing exam.

Which of the following persons are prohibited from buying a new common stock issue from the underwriter under FINRA Rule 5130? I Brother of a registered representative II Husband or wife of a registered representative III Uncle of a registered representative who is supported by the representative IV Grandfather of a registered representative who lives in another state A II only B I and II only C I, II, III D I, II, III, IV

The best answer is C. Under FINRA Rule 5130, all officers and employees of FINRA member firms and their "immediate family" are prohibited from buying new issues from underwriters. Immediate family includes spouses, siblings, parents, children, and anyone who is supported to a material extent. It does not include uncles, aunts, grandparents and grandchildren (unless they are supported by the employee). Thus, Choices I and II are clearly prohibited. Choice III, the uncle who is supported by the representative, is also prohibited. Choice IV, the grandfather living in another state, is not prohibited under this policy, since we can assume that he is self-supporting.

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

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

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

The best answer is D. Customers whose securities are margined have their securities held in "street" name. Thus, whenever, there is a mailing to the shareholders by the corporation, the brokerage firm shows as the "owner" and receives the mailing from the issuer. The brokerage firm is obligated, in turn, to forward the materials to the beneficial owner (the customer) of the securities. Under FINRA rules, if a proxy is sent to shareholders, the brokerage firm must distribute it to the beneficial owners. This cost is paid for by the issuer. If the voting materials are not returned, or if they are returned without voting instructions, the member firm is not permitted to vote the shares.

A registered representative has a social media account on a site established by the member firm. A very satisfied client of the registered representative wants to post a good review, giving the representative 5 stars. The client sends the proposed review to the registered representative, who edits it and sends it back to the client to post. Under FINRA rules, this is an example of: A engagement B entanglement C entrapment D enablement

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

A registered representative participates in an internet chat room. This is defined by FINRA as a(n): A retail communication B institutional communication C seminar D public appearance

The best answer is D. FINRA describes a public appearance as a spontaneous, unscripted, live presentation to potential investors. These are not subject to FINRA filing rules and do not require prior principal approval (unless the firm requires this as an internal procedure). However, they are subject to the firm's written supervisory procedures, which must include post-use review and approval by a principal.

All of the following are defined as "institutional clients" for purposes of the FINRA communications rules EXCEPT: A bank B investment company C insurance company D real estate company

The best answer is D. FINRA distinguishes between "retail communications" and "institutional communications" because "institutional communications" go to sophisticated investors who can take care of themselves. While retail communications must be approved by a principal prior to use, institutional communications are subject to "post use review and approval" by a principal. An institutional communication is defined as one that is distributed to an institutional investor - a bank, savings and loan, insurance company, registered investment company, registered investment adviser, employee benefit plan with at least 100 participants, government entity or a person with at least $50 million of assets for investment.

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

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

Which disclosure is required when advertising a CMO Tranche? A Minimum Denomination B Credit Rating C Payment Frequency D Average Life Of Investment

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

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

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

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

The best answer is D. If a recommendation is made, the brokerage firm must disclose if it: has managed or co-managed any equity securities offering of that issuer within the past 12 months; has received compensation from investment banking services from that issuer in the past 12 months; expects to receive or intends to seek investment banking compensation from that issuer in the next 3 months; is an investment banking services client of the firm; or is a market maker in the issuer's stock. Also, the brokerage firm must disclose if it or its affiliates own(s) the issuer's securities (including options). It is normal and expected for the issuer's employees to own that issuer's securities - there is no conflict of interest.

A widely-followed research analyst is going to issue a "Buy" recommendation on a company. Prior to the release of the recommendation, the analyst and immediate family can: A buy the stock without restriction B buy the stock only if the purchase conforms to their normal investment profile C buy the stock only if the company is exchange listed D not buy the stock

The best answer is D. Member firms must have policies and procedures in place to stop research analysts and their immediate family from "front running" their "about-to-be-released" research reports. In essence, if the research analyst or immediate family were to take a position in the stock prior to the release of the research report in an attempt to profit from a subsequent price move, they become "insiders" who have violated the insider trading rules. Once a research report has been widely distributed, the analyst who wrote the report and immediate family can buy that stock, subject to any restrictions on this placed by the employing member firm.

A registered representative would be permitted to take a loan from all of the following EXCEPT: A a spouse B a parent C a bank lending to the representative on the same terms and conditions as loans made to the general public D a bank lending to the representative on more favorable terms and conditions than loans made to the general public

The best answer is D. Representatives are prohibited from borrowing from their clients. However, there are permitted exceptions to the rule: Representatives are permitted to borrow from immediate family members who are clients (such as a husband borrowing from a wife or vice-versa, or a representative borrowing from a parent); and Representatives are permitted to borrow from banks who are clients, as long as the terms and conditions of the loan are the same as those given to the general public. Note that a loan from a bank to a representative on more favorable terms than those given to the general public is prohibited. Finally, note that any borrowing by representatives must comply with the firm's policies and procedures covering this.

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

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

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

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

A registered representative makes the following recommendation to her customer: "In case of an emergency requiring immediate cash, you may not be able to sell your securities and get a check the same day. I recommend that you send $10,000 of cash to me at my office where I will place it in safekeeping. If you have an emergency cash need, I can bring the cash to you immediately." This action is: A permitted, since it better serves the client B permitted only if the registered representative has worked in the business for at least 10 years C permitted only if the registered representative is also a registered investment adviser representative D prohibited under FINRA rules

The best answer is D. Cash can only be accepted from a customer if it is to be deposited to the customer's account.

Registered representatives may be compensated based on all of the following EXCEPT: A salary paid by the brokerage firm to the representative B asset based fees paid by the customer to the brokerage firm C trading commissions paid by the customer to the brokerage firm D trading commissions paid by the customer to the representative

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

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

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

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

The best answer is D. FINRA does require notification for a variety of reasons. If a registered representative is the subject of a written customer complaint involving theft or embezzlement; if one is arrested, arraigned, indicted, convicted, or pleads guilty to any criminal offense (except for minor traffic violations); or if one is sued under the Securities Acts; notification to FINRA is required. In addition, notification to FINRA is required if the registered representative is suspended or expelled by any other self-regulatory organization; is denied registration by another self-regulatory organization; or is the subject of a customer complaint that is settled for more than $15,000; or is the subject of disciplinary action by the member firm involving suspension, termination, or the withholding of commissions in excess of $2,500. When FINRA gets the report, they review it to see if they should do nothing, suspend the person's registration, or expel the registered representative.

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

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

If a customer wishes to find out about a registered representative's disciplinary history, this information is: A sealed and cannot be given to customers B available from the Securities and Exchange Commission C available in the Federal Register D available from the Central Registration Depository on the BrokerCheck website

The best answer is D. FINRA maintains a "BrokerCheck" website, where retail customers can input a registered representative's name and see that individual's employment history for the last 10 years, disciplinary record, licenses held, states in which that person is registered, and outside business activities. In addition, pending serious customer complaints that are not yet resolved are included. For customers without web access, a toll-free "hot line" to BrokerCheck is available.

A customer calls a registered representative to sell 500 shares of an over-the-counter stock and tells the representative that he wants the trade done privately - not in the public market. This is: A allowed without restriction B allowed with the oral approval of the principal C allowed if the trade is performed as "agent" D not allowed

The best answer is D. FINRA prohibits "private securities" transactions. Trades must be done with the knowledge of your firm in the public securities markets. The only way in which a "private" transaction can be effected is for the employee to get prior written approval of the broker-dealer (and the broker-dealer is not likely to do this!)

All of the following actions by a registered representative are prohibited under FINRA rules EXCEPT: A spreading rumors of a sensational character that might be expected to influence prices on the exchange B lending money to a customer where investment securities will be the collateral for the loan C sharing in the gain or loss of a customer account D accepting unsolicited orders from non-established customers

The best answer is D. FINRA prohibits member firms and their representatives from spreading rumors about securities; from personally lending monies to customers outside of the requirements of Regulation T; from sharing in the gain and loss of a customer account; and from guaranteeing the performance of an investment in a customer account. There is no prohibition on either soliciting or accepting unsolicited orders from customers (otherwise, how would you earn a living?) However, order tickets must be marked with the fact that either the order was solicited or unsolicited.

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

The best answer is D. FINRA prohibits registered representatives from either lending money or securities personally to a customer or borrowing money or securities personally from a customer. There are certain exceptions to the prohibition if the customer is a spouse, "significant other" or family member, but this is not the case here

A registered representative of a member firm markets private placements to wealthy accredited investors. Before the member firm can market these private placement securities, it MUST conduct a reasonable investigation concerning the: I issuer and its management II business prospects of the issuer III assets held by the issuer IV claims being made A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is D. FINRA requires that when a private placement is offered, the broker-dealer or its representatives must conduct a reasonable investigation concerning that security and the issuer's representations about it. FINRA states that a broker-dealer "may not rely blindly upon the issuer for information concerning a company and it cannot rely on information provided by the issuer in lieu of its own reasonable investigation." The fact that a BD's customers are accredited does not obviate this investigation. The BD must conduct a reasonable investigation concerning the: issuer and its management;business prospects of the issuer;assets held by the issuer;claims being made; andintended use of the proceeds of the offering.Note that if registered securities are being offered, this detailed "due diligence" investigation by the BD offering the investment is not required - it is only a requirement for private placement offerings (because in a registered securities offering, the issuer and underwriters perform the required due diligence). Also note that there is no requirement for accredited investors in a private placement to be sophisticated (they are rich!) - this is only a requirement for sales to non-accredited investors.

If a customer places a very large order to buy a stock that is likely to have a market impact, the registered representative may: I buy the stock for his personal account prior to executing the order II not buy the stock for his personal account prior to executing the order III buy call options on the stock for his personal account prior to executing the order IV not buy call options on the stock for his personal account prior to executing the order A I and III B I and IV C II and III D II and IV

The best answer is D. Front running a customer order that is likely to have a market impact is a prohibited practice. It makes no difference if the "front running" is done with that stock or with options on the stock.

A registered representative recommends the purchase of a GNMA pass-through certificate to a customer that seeks safety of principal and a moderate level of income. When doing so, the registered representative states to the customer "GNMA certificates are guaranteed by the U.S. government and each month you will receive a check, all of which is income to you." This statement is: A truthful and accurate B deceptive because GNMA certificates are not directly guaranteed by the U.S. government C deceptive because GNMA certificates make payments semi-annually, not monthly D deceptive because GNMA certificates make payments that are a combination of both principal and interest

The best answer is D. GNMA pass-through certificates represent an ownership interest in a pool of underlying mortgages. Each month, the mortgage payments made into the pool are "passed through" to the certificate holders. Since mortgage payments represent a combined payment of both principal and interest, it is deceptive to say that the entire payment is income. The interest portion of the payment is income; while the principal portion is the return of capital invested.

A registered representative is employed by a broker-dealer that is a publicly traded company, listed on the New York Stock Exchange. Which statement is TRUE? The registered representative may: A recommend the purchase of his employer's stock to existing customers B solicit new customers to buy his employer's stock C write and distribute a research report recommending the purchase of the employer's stock D accept unsolicited orders for his employer's stock; but cannot solicit orders for, nor recommend the security

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

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

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

The Firm Element component of the "Continuing Education" requirement: I is administered by the compliance department II must be completed by all registered persons III must be completed annually IV must communicate information that is understood by the participants A I only B I and II only C III and IV only D I, II, III, IV

The best answer is D. The Firm Element of the Continuing Education requirement obligates member firms to deliver annual training to all registered representatives on product, regulation, and compliance issues. The firm must maintain a record that shows that the participant understood the information presented.

All of the following statements are true regarding the U.S. securities markets EXCEPT: A FINRA has regulatory authority over the markets and market participants in the trading of all non-exempt securities B the Federal Reserve Board decides securities can be traded on margin C the Securities and Exchange Commission has regulatory authority over the securities markets and its participants D the MSRB has regulatory authority over the markets and market participants in the trading of all exempt securities Explanation The best answer is D. The MSRB only regulates the trading of municipal bonds - not U.S. Government or Agency bonds - so the statement that the MSRB regulates trading in all exempt securities is untrue. Both FINRA and the SEC regulate the U.S. securities markets and market participants. FINRA is the SRO (Self Regulatory Organization) that regulates the markets under SEC oversight. The Federal Reserve decides which securities are marginable, since it has power over margin rules given under the Securities Exchange Act of 1934.

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

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

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

How many years must customer account records be retained by a member firm? A 3 years from account opening B 3 years from account closing C 6 years from account opening D 6 years from account closing

The best answer is D. Under SEC rules, customer account records (statements of account) must be retained for 6 years. If a customer closes an account, the records must be retained for a 6-year time window following account closing. This is the best description of the recordkeeping requirement.

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

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

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