Regulations - FINRA Rules
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."
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.
After completion of his or her first Regulatory Element review, a Registered Representative: A. is not required to complete any further Regulatory Element reviews B. must complete an annual Regulatory Element review thereafter C. must complete a Regulatory Element review every two years thereafter D. must complete a Regulatory Element review every three years thereafter
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.
Records of speaking engagements must be maintained by FINRA member firms for: A. 6 months B. 1 year C. 3 years D. 5 years
The best answer is C. Generally speaking, all records kept at branch offices must be maintained for 3 years. The only notable exception is customer complaints, which must be retained for 4 years.
A Series 11 assistant representative license permits an individual to: I accept unsolicited customer orders II solicit customer orders III make recommendations to customers IV approve new accounts A. I only B. I and II only C. II and IV only D. I, II, III, and IV
The best answer is A. An Assistant Representative - Order Processor is an individual that has a Series 11 license. This person can only accept unsolicited customer orders. He or she cannot solicit customers. This person can take new account information (e.g., customer name, address, social security number, etc.) but cannot perform a suitability determination or sign the new account form. This person can be paid a salary, but cannot be paid commissions. Account approval is performed by the principal.
Which of the following gifts is the maximum permitted under FINRA rules? A. One gift of $100 value per person per year B. Unlimited number of gifts of $100 value per person per year C. One gift of $200 value per person per year D. Unlimited number of gifts of $200 value per person per year
The best answer is A. FINRA limits gifts related to one's activities in the securities industry to a maximum of $100 value per person per year. This limit is applied to either giving, or receiving, the gift.
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.
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.
The use of which of the following is permitted in mutual fund advertising? A. Performance projections B. Performance guarantees C. Performance charts D. Performance predictions
The best answer is C. Past performance may be shown in advertising, as can comparisons of past performance to a relevant benchmark. This is done by showing a performance chart using 1, 5 and 10 year periods. All advertising is prohibited from including performance projections, predictions or guarantees.
Which statements are TRUE regarding FINRA Rule 5130 that restricts equity IPO purchases? I An investment club is permitted to buy an equity IPO directly from an underwriter II An investment club is prohibited from buying an equity IPO directly from an underwriter III An investment club that has registered representatives as owners is permitted to buy an equity IPO directly from an underwriter if their total ownership is 10% or less IV An investment club that has any ownership by registered representatives is prohibited from buying an equity IPO directly from an underwriter A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. FINRA Rule 5130 restricts "industry insiders" from buying equity IPOs directly from underwriters. Investment clubs do not fall under the prohibition, as long their members are not restricted. On the other hand, if a member is restricted (which is the case with a registered representative), then the investment club would be restricted if the total ownership of restricted persons is more than 10%.
Under FINRA rules, proxy materials: I must be sent to the beneficial owner of that stock, even if the owner has instructed the member firm not to do so II may be sent to the beneficial owner's designated investment adviser, if the owner has instructed the member firm to do so III may be voted by the member firm, if no contest is involved, if they are not received from the owner within 10 days' of the annual meeting IV may be voted by the issuer's Board of Directors, if no contest is involved, if they are not received from the owner within 10 days' of the annual meeting A. I and II B. I and IV C. II and III D. I, II and IV only
The best answer is A. Proxy materials on street name stock must be sent to the beneficial owner of the shares, or to the beneficial owner's designated investment adviser, if the beneficial owner has so instructed. This cost is paid for by the issuer. If the voting materials are not returned, or if they are returned without voting instructions, the member firm is not permitted to vote the shares.
A registered representative that wishes to purchase Initial Public Offerings is restricted from buying IPOs of: A. common stock B. non-convertible preferred stock C. convertible preferred stock D. any new issue security
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.
A communication sent to 10 prospective retail clients and 20 existing institutional clients is defined as (a(n)): A. Correspondence B. Retail Communication C. Public Appearance D. Institutional Communication
The best answer is A. FINRA has 2 basic definitions of communications with the public: Correspondence: A written or electronic communication made available to 25 or fewer existing or prospective clients Retail Communication: A written or electronic communication made available to more than 25 existing or prospective clients. Excluded from these definitions are institutional communications and public appearances. These do not count in the numerical limits. FINRA creates these 2 main categories of communications because "correspondence" is subject to "post use review and approval" by a manager or principal and is not required to be filed with FINRA; in contrast, retail communications must be approved in advance of use by a principal and can be required to be filed with FINRA. (Also note that the "previous" FINRA rule defined "advertising" (general audience, such as TV, radio, newsprint, websites) and "sales literature" (specific audience, such as a research report, form letter, scripted speech, password-protected website). These now fall into the definition of "retail communications," but advertising and sales literature must still be known for the exam).
A long time customer has purchased securities in a margin account and is experiencing a temporary cash shortfall. The customer tells the registered representative that he cannot pay on settlement; and the registered representative offers to lend the customer the necessary funds. This action is: Correct A. prohibited StatusB B. allowed with the permission of the branch manager StatusC C. allowed only if the loan will be repaid within 30 days StatusD D. allowed without restriction
The best answer is A. FINRA prohibits registered representatives from either lending money personally to a customer or borrowing money 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.
Fidelity bonds are maintained by brokerage firms to: A. protect against loss due to employee theft B. protect against loss against falling markets C. insure against casualty losses D. meet minimum Net Capital standards
The best answer is A. FINRA requires brokerage firms to maintain fidelity bond coverage to protect against loss due to loss of securities, employee theft, or embezzlement of funds.
To make a public offering of a Direct Participation Program, which statements are TRUE? I The offering must be registered with the SEC II The offering does not have to be registered with the SEC III The offering is subject to regulation by FINRA IV The offering is not subject to regulation by FINRA A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. Public offerings of direct participation programs are "non-exempt" offerings under the Securities Act of 1933, and must be registered. FINRA oversees and regulates the offering of these securities.
A customer buys 100 shares of ABC stock at $20 per share. Two months later, the stock is quoted at $10.00 - $10.50. The registered representative that sold the stock to the customer offers to repurchase the shares at $18. Which statement is TRUE? A. This is prohibited because the FINRA Conduct Rules do not allow customer accounts to be guaranteed against loss B. This is prohibited because the registered representative is interpositioning himself between the customer and the current "inside" market C. This action is permitted, as long as the principal approves in writing prior to the proposed trade D. This action is permitted as a method of maintaining customer "goodwill" with the firm
The best answer is A. The action of repurchasing the customer's shares at a price higher than the current market to limit the customer's loss, is a prohibited practice under FINRA rules. Customers cannot be guaranteed against loss. If the market moves up, this customer wins; if it moves down, this customer loses.
A FINRA member firm does not follow a particular stock and a registered representative wishes to obtain a 3rd party research report to send to 30 interested retail customers. Which statements are TRUE? I The report must be approved by a Compliance Officer or Principal before it can be sent out II The report is not required to be approved in advance by a Compliance Officer or Principal before it can be sent out III The report must be approved by a Supervisory Analyst before it can be sent out IV The report is not required to be approved in advance by a Supervisory Analyst before it can be sent out A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. Third party research is prepared by independent research firms that tend to be free of the conflicts of interest that have troubled member firms that prepare research reports on the issuers with which they do underwriting and advisory business. If a registered representative were to, on his or her own, obtain 3rd party research to send to customers, then it would need the appropriate approvals required of research reports before they can be sent out. This would be approval of both a principal in compliance (because this is a retail communication being sent to more than 25 existing or prospective retail clients) and the supervisory analyst.
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.
On Tuesday, May 14th, 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 A. 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 Tuesday, May 14th is Thursday, May 16th. Also, note that the location of the securities must be noted on the order ticket to sell.
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 customer that wishes to open an account to buy new issues is required to make a: I positive representation that he or she is not restricted within 12 months preceding the first purchase II negative representation that he or she is not restricted within 12 months preceding the first purchase III positive representation that he or she is not restricted annually thereafter IV negative representation that he or she is not restricted annually thereafter A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. In order for a customer to buy IPOs (Initial Public Offerings) of equity securities, the customer must sign a representation letter that he or she is not restricted from buying the issue under FINRA rules (FINRA prohibits industry "insiders" from buying the issue from the underwriter). Because the customer must sign this representation, this is a "positive" affirmation. Annually thereafter, the customer must be sent a notice that the firm has the customer's representation on file that he or she is not restricted, and that if this has changed, the customer must notify the firm so that the account file can be amended. Because the customer does not sign this representation, this is a "negative" affirmation.
All of the following statements about e-mail sent by a registered representative to 50 retail clients are true EXCEPT the communication: StatusA A. must be reviewed and approved in advance by a principal Correct B. can recommend a new issue StatusC C. can be sent from the branch office where the representative works StatusD D. can recommend stocks
The best answer is B. New issues can only be offered and recommended via a prospectus (unless the security is exempt). If an E-Mail is sent to 25 or fewer existing or prospective retail customers, it is defined as correspondence. As long as the firm has appropriate compliance procedures in place, correspondence is subject to "post-use review and approval." If a E-Mail is sent to more than 25 existing or prospective retail customers, then it is defined as a "retail communication," and furthermore, within that broad definition, it is defined as sales literature. Retail communications must be approved in advance by a principal. E-mails to customers can be sent from a registered representative's branch office (but they cannot be sent from a registered representative's home). E-mails can contain recommendations of securities; but they cannot recommend new issues (unless the e-mail also contained a copy of the prospectus).
Which of the following decisions by a registered representative require specific customer authorization? I Determining price and time of execution in a cash account II Determining price and time of execution in a margin account III Determining price and the number of shares traded in a cash account IV Determining price and the number of shares traded in a margin account A. I and II B. III and IV C. I and III D. II and IV
The best answer is B. A written power of attorney is required only if a registered representative chooses more than price and/or time of execution in a customer transaction. Thus, if the registered representative chooses the security to be traded or the size of the trade, a discretionary power of attorney is required. It makes no difference if the transaction is effected in either a cash account or a margin account.
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.
Which disclosure is optional when advertising a CMO Tranche? A. Coupon B. Credit Rating C. Final Maturity Date D. Average Life Of Investment
The best answer is B. 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
A registered representative receives an order from an institutional client to buy a large block of ABCD stock. The firm has information barriers in place. Which statement is TRUE about orders placed to buy ABCD stock at the firm prior to the filling of the block order to buy? A. The registered representative can place an order to buy ABCD stock personally, but other buy orders received by the firm cannot be filled B. Other buy orders received by the firm can be filled, but the registered representative cannot place an order to buy ABCD stock C. Buy orders from both the registered representative and other clients of the firm can be filled D. Orders placed by either the representative or the clients of the firm cannot be filled
The best answer is B. In its "front running" rule, FINRA gives an exception to the prohibition on a member firm placing orders to trade a stock prior to the filling of a large block order if the firm has information barriers in place. If this is the case, the front running prohibition only falls on the people at the firm who know about the existence of the large block order - in this case, the registered representative. Persons placing orders to buy ABCD stock at the firm who have no knowledge of the impending block purchase are exempted from the "front running" rule because, with effective information barriers in place, they could not have known about the large trade that is about to be placed.
Which of the following gifts is permitted to be accepted by a registered representative from a mutual fund sponsor? A. Trip to Bermuda B. $50 gift certificate C. $500 cash D. $500 towards the purchase of fund shares
The best answer is B. 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."
A registered representative is approached by the president of an investment club to buy an IPO being offered by the representative's firm. Which statement is TRUE? A. The investment club is a restricted purchaser and cannot buy the IPO B. The investment club is not a restricted purchaser and may buy the IPO C. The investment club is only permitted to buy the issue if it buys an insubstantial amount D. The investment club is only permitted to buy the issue if its members certify that they are not restricted
The best answer is B. The FINRA IPO rule lists "restricted purchasers" that cannot buy common stock IPOs from underwriters. These are basically industry insiders, including member firms, their officers and employees, fiduciaries to member firms such as outside attorneys retained by broker-dealers, and institutional portfolio managers that are buying for their personal accounts. Investment clubs are not on the restricted list - they can buy common stock IPOs. One could argue that an "investment club" could be formed by industry insiders to get around the rule, but FINRA addresses this by stating that any account in which an industry insider has a greater than 10% ownership interest is restricted.
A customer instructs a registered representative to "Buy 500 shares of ADP whenever you think the price is right." Which of the following statements are true about this order? I The order is the same as a not held order II The order is the same as a limit order III Acceptance of the order requires a prior written discretionary power of attorney from the customer IV The order can be accepted without a prior written discretionary power of attorney from the customer A. I and III B. I and IV C. II and III D. II and IV
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 seminar about investing in CMOs as a way for older investors seeking an income-producing investment in a low-interest rate environment without assuming a high level of risk. Which statement is TRUE about giving this seminar? A. A registered principal must attend the seminar and such attendance must be documented B. Any materials given to participants must be filed with FINRA no later than 10 business days after first use C. The names of the attendees of the seminar must be recorded by the member firm and must be retained for at least 3 years D. FINRA prohibits registered representatives from giving seminars about CMOs
The best answer is B. 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 prohibition on giving seminars about CMOs; there is no requirement for a principal to attend; and there is no requirement to get the names of the attendees.
Regulation AC requires all of the following EXCEPT: A. member firm research analysts certify each written research report B. 3rd party research analysts certify each written research report C. research analysts must certify that their opinion is unbiased and honest D. research analysts must certify that they received no special compensation for giving a favorable opinion
The best answer is B. Regulation AC (Analyst Certification) requires research analysts at member firms 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. Note that the rule does not apply to "independent research" prepared by 3rd parties, since the potential for conflicts of interest does not exist.
A registered representative writes a letter to be sent as a general mailing to prospective customers, that recommends the purchase of a specific mutual fund. Which statements are TRUE? I Each letter must include a copy of the fund prospectus II The letter must be approved in advance by the principal III The prospectus must be approved in advance by the principal A. I only B. I and II only C. II and III only D. I, II, III
The best answer is B. Prospectuses are required for any "offer" of a new issue that is not exempt from the provisions of the Securities Act of 1933. Every mutual fund share that is sold is "newly issued" by that fund, therefore mutual funds must be offered with a prospectus. A letter to customers that recommends the purchase of a mutual fund constitutes an "offer" of a new issue under the Securities Act of 1933. Any offer must be accompanied with, or preceded by, a prospectus. The prospectus need not be approved by the principal, since it is lawyer prepared and has been filed with the SEC; however, the solicitation letter to customers must be approved in advance by the principal.
Which of the following time stamps are on an order ticket? I Time of order entry II Time of trade execution, if executed III Time of order cancellation, if canceled IV Time of trade reporting on the Consolidated Tape A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV
The best answer is C. FINRA requires that all order tickets sent to an exchange be stamped with the time of: Order entry; Order execution; and Order cancellation, if canceled. There is no time stamp on the order ticket for the time the trade was reported to the Consolidated Tape. These time stamps are now recorded electronically.
A registered representative wants to speak to a group of clients about a private placement in a 2-year old company. The invited clients have a stated minimum net worth of $1 million. The representative is soliciting them to buy privately placed shares of the company because it is in a growth business due to the aging of the population in the U.S. - the company's business is the refurbishment of medical equipment in hospitals. In the Private Placement Memorandum (PPM), the company states that investors are expected to receive a 15% annual cash dividend and could also enjoy capital appreciation. What should the representative do before offering the security to these clients? A. Nothing, because they all receive protection under anti-fraud Rule 10b-5 under the Securities Exchange Act of 1934 B. Nothing, because all of the investors are accredited under Regulation D of the Securities Act of 1933 C. The registered representative should review the revenue and expenses as detailed in the PPM to see if it is feasible for the company to pay a 15% cash dividend D. The registered representative must get a signed attestation from each attendee that they received the PPM
The best answer is C. FINRA requires that when a private placement is offered, the broker-dealer or its representatives must conduct a reasonable investigation concerning that security and the issuer's representations about it. FINRA states that a broker-dealer "may not rely blindly upon the issuer for information concerning a company and it cannot rely on information provided by the issuer in lieu of its own reasonable investigation." The fact that a BD's customers are accredited does not obviate this investigation. The BD must conduct a reasonable investigation concerning the: issuer and its management; business prospects of the issuer; assets held by the issuer; claims being made; and intended use of the proceeds of the offering. Note that if registered securities are being offered, this detailed "due diligence" investigation by the BD offering the investment is not required - it is only a requirement for private placement offerings (because in a registered securities offering, the issuer and underwriters perform the required due diligence). Also note that there is no requirement for a signed receipt that each attendee received a Private Placement Memorandum.
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 Distributing proxies to the owners of margin securities A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV
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. Regarding proxies (voting materials) on street name shares - these are given by the issuer to the brokerage firm that holds the shares; and the broker must send them to the beneficial owners of the stock (the margin customers). This expense is paid for by the issuer; therefore it cannot be charged to the customer.
If a member firm acts as the managing underwriter in an initial public offering of an issuer's securities, then the member is prohibited from issuing a research report on that company for: A. 3 days following the effective date B. 5 days following the effective date C. 10 days following the effective date D. 25 days following the effective date
The best answer is C. If a member firm acts as the underwriting manager or co-manager in an initial public offering for an issuer, the member cannot issue a research report on that company for 10 days following the effective date of the offering.
Under FINRA rules, if an institutional communication is distributed to retail clients: I it is considered to be an institutional communication II it is considered to be a retail communication III it must be approved by a principal prior to distribution IV it is subject to post use review and approval by a principal StatusA A. I and III StatusB B. I and IV Correct C. II and III StatusD D. II and IV
The best answer is C. 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.
The Firm Element component of the "Continuing Education" requirement: I is administered by FINRA II is administered by the FINRA-member employer III must be completed annually IV must be completed bi-annually A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. The Firm Element of the Continuing Education requirement obligates member firms to deliver annual training to all registered representatives on product, regulation, and compliance issues.
A registered representative wishes to sell a customer a limited partnership unit that is offered through his friend - the general partner in the venture. Under FINRA rules, this action is: A. permitted without restriction B. only permitted if general partner approves C. only permitted if the member firm is notified in writing and gives prior written approval to the transaction D. only permitted if FINRA is notified in writing and gives prior written approval to the transaction
The best answer is C. Under FINRA rules, registered representatives are prohibited from effecting "private securities transactions." As a registered representative, one is an agent for the firm and all transactions must be effected through the firm in one's agency capacity. However, FINRA does allow an exemption from this prohibition. If a registered representative: provides written notice to the member of the transaction and details in writing any compensation to be received and obtains express approval in writing from the member firm, then the associated person can perform the transaction. In addition, the member must record the transaction on its books as if it had been effected through the firm.
Which statements are TRUE about a registered representative that wishes to promote him- or herself on the Internet? I Participation in an Internet Chat Room is defined as advertising II Participation in an Internet Chat Room is defined as a public appearance III Creation of a Website or Internet Bulletin Board posting is defined as advertising IV Creation of a Website or Internet Bulletin Board posting is defined as a public appearance A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. FINRA defines participation in an Internet Chat Room as a "Public Appearance," which is an unscripted spontaneous appearance. Public Appearances are excluded from the "Retail Communications" definition. Rather, they are only subject to the member firm's policies and procedures. Regarding a website prepared by an associated person or an internet bulletin board posting, these are defined as "retail communications" and within that broad category, they would be defined as advertising because they are seen by the general public. 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 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
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.
All of the following statements would be prohibited under the regulations of the self regulatory organizations EXCEPT: A. "We promise that you will have a capital gain on this investment" B. "We promise to repurchase the security at your cost if its value declines" C. "We promise to perform timely executions of any orders that you place with us" D. "We promise to refund your original investment within 90 days if you change your mind"
The best answer is C. A firm is prohibited from guaranteeing a customer against loss in any fashion. The only exception to this is formal "repurchase agreement" on an exempt debt instrument (such as a U.S. Government or Municipal bond), where the seller of the securities agrees to rebuy them at a later date at a pre-set price. Please do not confuse a formal repurchase agreement with an offer by a firm to buy back a security at cost. This is a guarantee that is prohibited. It is allowed for a firm to promise a timely execution of an order since this is one of the primary functions of a brokerage firm.
Which of the following communications with the public MUST be approved in advance of use by a principal? I Form letter to be sent to all customers that recommends allocating assets among stock, bond, and money market fund investments II Advertisement placed in the local newspaper that states that "Now is the time to open an IRA account" III Research report that recommends the purchase of ABC stock IV Prospectus sent to customers who request information about a mutual fund A. I and II only B. III only C. I, II, III D. I, II, III, IV
The best answer is C. FINRA defines communications with the public as either: Correspondence: A communication made available to 25 or fewer existing or prospective retail clients Retail Communication: A communication made available to more than 25 existing or prospective retail clients Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA. A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience). Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective retail clients, scripted speeches delivered to more than 25 existing or prospective retail clients, password-protected websites The rule does not apply to prospectuses or tombstone announcements, since their content is prescribed by SEC rules; and omissions or misstatements in these documents is fraud under the Securities Act of 1933.
A registered representative at a FINRA member firm goes on the Board of Directors of a not-for-profit charity. 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 not-for-profit charity, while not compensated, is in a position to "steer" the Board when it makes a decision as to investing the charity's endowment funds. 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.
A registered representative is employed by a broker-dealer that is a subsidiary of a publicly traded company, listed on the New York Stock Exchange. Which statements are TRUE? I The registered representative may recommend the purchase of the parent company's common stock II The registered representative cannot recommend the purchase of the parent company's common stock III The registered representative may accept unsolicited orders for the parent company's common stock IV The registered representative may not accept any orders - solicited or unsolicited - for the parent company's common stock A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. If a registered representative is employed by a publicly traded member firm (say Raymond James), generally speaking he or she cannot recommend the purchase of that company's shares; nor can he solicit customers to buy the shares. This is not an explicit SEC or FINRA regulation; rather it is industry practice that ensures compliance with FINRA's "suitability" requirements; and the requirement to disclose control relationships at or prior to confirmation. However, it is permitted to accept unsolicited customer orders for the shares.
A registered individual leaves the industry. The individual's license(s) will expire if that person remains unaffiliated with a brokerage firm for how long? A. 6 months B. 1 year C. 2 years D. 10 years
The best answer is C. If an individual leaves the industry and remains unaffiliated with a member firm for 2 years, all licenses lapse.
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.
A customer wishes to give a $1,000 cash "bonus" to a registered representative for doing such a good job. The registered representative may: A. accept the bonus without giving notification to the firm B. accept the bonus if notification is given to the firm C. tell the customer to donate the money to a specific charity that the registered representative supports D. tell the customer to donate the money to an immediate family member that the registered representative supports
The best answer is C. FINRA does permit registered representatives to accept gifts of up to $100 in value per year per customer. Since this gift exceeds that amount, it cannot be accepted under any circumstances. There is nothing prohibiting the registered representative having the customer donate this money to a charity - as a matter of fact, it's a rather nice gesture.
A registered representative receives a large buy order from an institution and buys that stock for his own account before placing the order. This is known as: A. Interpositioning B. Free Riding C. Backing Away D. Front Running
The best answer is D. A registered representative buys stock in advance of placing a large buy order for a customer is "front running" the trade, hoping to make a profit from a rise in the stock's price due to the influence of the large purchase. This is a prohibited practice.
Fully paid customer securities: A. can be commingled with customer margin securities B. can be used as collateral for a loan by the brokerage firm C. must be held in custody of the customer D. can be held by the member firm if they are segregated, and placed in safekeeping
The best answer is D. Brokerage firms can hold fully paid customer securities as long as the positions are segregated from other margin securities and are kept in safekeeping. Customer margin securities are pledged as collateral for the margin loan. The broker is permitted to commingle ("mix-up") these securities with those of other margin customers (but not with fully paid customer securities), and it is these margin securities that may be pledged to a bank for a loan.
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.
Which of the following are violations of FINRA rules? I Trading mutual fund shares II Making blanket recommendations of low price speculative stocks III Performing trades of excessive frequency in a customer account IV Trading an account beyond a customer's financial capacity A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV
The best answer is D. Mutual fund shares cannot be traded - they are redeemable securities that are purchased from the fund; and that are redeemed with the fund. Blanket recommendations of low price speculative stocks are prohibited - since these are not suitable investments for everyone. Excessive trading in a customer account (churning) and trades that are too large for a customer account, are prohibited practices as well.
If an analyst makes a public appearance, under Regulation AC, the analyst MUST: A. make a verbal certification to the group being addressed B. distribute a written certification to each person in the group addressed C. give a blanket certification to all appearances made each month D. give a blanket certification to all appearances made each quarter
The best answer is D. 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.
Under the FINRA Code of Procedure, the first level of hearings in any dispute or complaint proceeding is held at the: A. National Adjudicatory Council B. Securities and Exchange Commission C. Federal Court D. District Hearing Panel
The best answer is D. The FINRA Code of Procedure is used when the FINRA Department of Enforcement wishes to prosecute a member firm or an associated person for rule violations. It can also be used by a customer that has not signed an arbitration agreement. Under the FINRA Code of Procedure, the first level of hearings in any dispute or complaint proceeding is held at the District Hearing Panel. Their decision may be appealed to the National Adjudicatory Council. The National Adjudicatory Council's decision may be appealed to the Securities and Exchange Commission. Finally, the SEC's decision may be appealed to Federal Court.
All of the following statements are true regarding the U.S. securities markets EXCEPT: A. FINRA has regulatory authority over the markets and market participants in the trading of all non-exempt securities B. the Federal Reserve Board decides securities can be traded on margin C. the Securities and Exchange Commission has regulatory authority over the securities markets and its participants D. the MSRB has regulatory authority over the markets and market participants in the trading of all exempt securities
The best answer is D. The MSRB only regulates the trading of municipal bonds - not U.S. Government or Agency bonds - so the statement that the MSRB regulates trading in all exempt securities is untrue. Both FINRA and the SEC regulate the U.S. securities markets and market participants. FINRA is the SRO (Self Regulatory Organization) that regulates the markets under SEC oversight. The Federal Reserve decides which securities are marginable, since it has power over margin rules given under the Securities Exchange Act of 1934.
Under FINRA rules, alterations to executed order tickets for orders that were filled on the NYSE are prohibited: A. under all circumstances B. unless the alterations are approved in writing by the Floor Governors of the NYSE C. unless the alterations are approved in writing by the DMM on the floor of the NYSE D. unless the alterations are approved in writing by the Branch Manager
The best answer is D. Under FINRA rules, alterations to order tickets are prohibited, unless the alteration is approved in writing by a "designated person" such as a branch manager. This person must understand all of the facts surrounding the alteration before approving of the change, and is responsible for the change.
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.