Regulations: FINRA Rules
Under FINRA rules, how long must copies of order tickets be kept?
3 years 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 exception is customer complaints, which must be retained for 4 years.
Under FINRA rules, how long must copies of customer complaints be kept?
4 years
What is a Fidelity Bond?
A fidelity bond is a form of insurance protection that covers policyholders for losses that they incur as a result of fraudulent acts by specified individuals. It usually insures a business for losses caused by the dishonest acts of its employees.
What is the "BrokerCheck" Website?
A 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.
Enforcement of regulations regarding trading of listed securities in the "Third Market" is performed by: A. FINRA B. NYSE C. MSRB D. FDIC
A. FINRA "Third Market" trades are transactions in listed securities effected "over-the-counter." These trades do not take place on the floor of the exchange, hence NYSE does not have jurisdiction. It is FINRA that regulates broker-dealer activities that take place OTC and on stock exchanges.
A promising new customer at a FINRA member firm has complained verbally to a registered representative that he lost $500 on the first stock recommended by that representative. Wanting to keep the customer, the representative offers to make this up to the customer by giving the customer, the customer's spouse, and each of the customer's 3 children a gift of $100. Which statement is TRUE? A. This action is a violation of FINRA rules B. This action is acceptable because it does not exceed the $100 per person gift limit C. This action is acceptable only if the member firm approves in advance D. This action is acceptable only if the payment is made by the member firm and not the representative
A. This action is a violation of FINRA rules Guaranteeing a customer against loss is a prohibited practice. This representative is trying to get around the rule by breaking up the payments to cover the customer's $500 loss into $100 units. This is a clear rule violation.
An Assistant Representative holding a Series 11 license may: A. accept unsolicited orders B. solicit a customer order C. make recommendations to customers D. all of the above
A. accept unsolicited orders
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
A. advertising Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards
Customer securities held in margin accounts: A. can be commingled with other customer margin securities and used as collateral for a loan by the brokerage firm B. can be commingled with fully paid customer securities and used as collateral for a loan by the brokerage firm C. must be held in custody of the customer D. must be segregated and placed in safekeeping
A. can be commingled with other customer margin securities and used as collateral for a loan by the brokerage firm 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.
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
A. common stock 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.
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
A. customer must sign a representation letter 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.
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
A. embezzlement by employees
What is a Research Report defined by the SEC?
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.
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
B. 3rd party research analysts certify each written research report Regulation AC does not apply to "independent research" prepared by 3rd parties, since the potential for conflicts of interest does not exist.
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
B. Any materials given to participants must be filed with FINRA no later than 10 business days after first use
Which of the following would NOT have to be reviewed by a principal? A. Form letters mailed to all customers B. Form letters for internal use within a firm C. Letters recommending securities to all clients of a registered representative D. Complaint letters received from customers
B. Form letters for internal use within a firm Internal documents of a brokerage firm do not have to be reviewed by a manager or principal. Because the public does not see these, FINRA is not concerned with their content.
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
B. Friday, May 17th 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).
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
B. Retail Communication Retail Communication: A written or electronic communication made available to more than 25 existing or prospective clients.
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
B. The investment club is not a restricted purchaser and may buy the IPO 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 representative is asked by the local PTA to make a speech on investing. About 100 people are expected to attend. If the representative includes analyses of specific stocks in the speech; and the attendees use this information to determine whether to invest in those securities, then the speech is considered to be: A. advertising B. a research report C. sales literature D. public forum
B. a research report
A customer brings $50,000 of cash to the brokerage firm office and gives it to the registered representative to pay for a securities purchase. The registered representative should: A. reject the cash payment, since cash payments over $10,000 cannot be accepted B. accompany the customer to the cashier, so that the customer can be given a receipt for the payment C. accept the payment on the firm's behalf D. deposit the cash to his personal account and issue a check in the same amount to the firm for crediting to the customer's account
B. accompany the customer to the cashier, so that the customer can be given a receipt for the payment Cash can only be accepted from a customer if it is to be deposited to the customer's account. A registered representative cannot personally accept cash from a customer.
The Firm Element component of the "Continuing Education" requirement must be completed: A. semi-annually B. annually C. bi-annually D. tri-annually
B. annually 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.
Under FINRA rules, a barrier must be put in place between a member firm's: A. compliance department and its investment banking department B. institutional communications distribution list and its retail communications distribution list C. institutional trading desk and its retail trading desk D. investment banking department and its mergers and acquisitions department
B. institutional communications distribution list and its retail communications distribution list 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."
A research analyst who has a buy recommendation on a stock also has a personal holding in that company. The research analyst would be permitted to sell that personal holding: A. under no circumstances B. only if hardship is shown C. only if the transaction is effected on an up-bid D. without restriction
B. only if hardship is shown
A password protected website maintained by a member firm is considered to be: A. advertising B. sales literature C. public forum D. correspondence
B. sales literature 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
All of the following gifts given by a mutual fund sponsor to a registered representative violate FINRA rules EXCEPT: A. a discount from the public offering price that is not included in the fund prospectus B. wholesale overrides on fund sales C. $50 per person per year D. a trip to Hawaii based solely on sales volume
C. $50 per person per year 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. Therefore, registered representatives cannot be given "discounts," wholesale overrides, or excessive gifts such as trips. 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 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 statement is TRUE? A. FINRA member firms are prohibited from using 3rd party research reports B. 3rd party research reports can be sent to customers if prior approval is obtained from FINRA C. 3rd party research reports can be sent to customers if prior approval is obtained from the Supervisory Analyst and the Compliance Officer of the firm D. 3rd party research reports can be sent to customers without any additional approvals required
C. 3rd party research reports can be sent to customers if prior approval is obtained from the Supervisory Analyst and the Compliance Officer of the firm If a registered rep 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 being sent out. This would be approval of the supervisory analyst. In addition, if the communication is going to more than 25 existing or prospective retail clients, it is a "retail communication" that requires prior principal approval.
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
C. Complaints
E-mail sent by a representative to an individual customer is considered to be (a(n)): A. Advertising B. Sales Literature C. Correspondence D. Retail Communication
C. Correspondence Correspondence: A written or electronic communication made available to 25 or fewer existing or prospective clients
Which of the following is NOT required to be retained on file by a broker-dealer? A. Customer complaints B. Trade confirmations C. IPO prospectuses D. Correspondence
C. IPO prospectuses Broker-dealers are not required to retain prospectuses as a record. They are created by the issuer, not the broker-dealer, and copies can be obtained by the SEC, which has an electronic record-keeping system for them. Customer complaints, trade confirmations, and correspondence are all records that must be retained by broker-dealers.
Which statement is TRUE about the use of the FINRA name on a member firm's or associated person's website? A. The FINRA name cannot be shown B. The FINRA name must be shown C. If the FINRA name is shown, it must be hyperlinked to the FINRA website D. If the FINRA name is shown, it must be stated that FINRA does not sponsor the website
C. If the FINRA name is shown, it must be hyperlinked to the FINRA website
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
C. MSRB Rules 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 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
C. Prior principal approval must be obtained and a copy of the speech must be retained in your firm's Office of Supervisory Jurisdiction Since this speech will be delivered to 35 attendees, it falls under the "Retail Communication" definition, and within that broad definition, it is defined as "sales literature." All speeches must be truthful and in good taste; and the speech must be informational, not promotional, in nature. There is no requirement for the speech content to be pre-filed with the SEC. A copy must be retained for 3 years for possible inspection by FINRA examiners. The location where the speech script would be kept on file is the firm's supervisory compliance office - called the OSJ - Office of Supervisory Jurisdiction.
A representative gives a seminar to investors, making a presentation about successful hedge fund strategies. It is attended by 30 retail clients and 20 institutional clients. FINRA defines this as: A. an advertisement B. a solicitation C. a retail communication D. correspondence
C. a retail communication
All of the following are defined as "institutional clients" for purposes of the FINRA communications rules EXCEPT: A. insurance company B. bank C. investor with $25 million of assets D. savings and loan
C. investor with $25 million of assets 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 registered representative is employed by a broker-dealer that is a publicly traded company, listed on the New York Stock Exchange. Which statement is TRUE? The registered representative: A. may recommend the purchase of his employer's stock to established customers, but not to new customers B. may recommend the purchase of his employer's stock to new customers, but not to established customers C. may accept unsolicited orders for his employer's stock; but cannot solicit orders for, nor recommend, buying that security D. cannot accept solicited or unsolicited orders for his employer's stock; nor can he or she recommend buying that security
C. may accept unsolicited orders for his employer's stock; but cannot solicit orders for, nor recommend, buying that security 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 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
C. permitted if it complies with the firm's policies and procedures 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.
A registered representative notes that the price of ABC stock has been falling rapidly, and calls all of his customers with ABC positions to encourage them to sell. On one of these calls, he reaches an answering machine. The registered representative leaves the following message: "ABC stock is plummeting. If I don't hear from you in one hour, I will sell out your position to protect you from further loss." This action is: A. allowed, since the registered representative is attempting to protect the customer B. prohibited, unless the registered representative has been given previous verbal discretionary authorization by the customer C. prohibited, unless the registered representative has been given previous written discretionary authorization by the customer D. allowed, only if the manager gives authorization in writing
C. prohibited, unless the registered representative has been given previous written discretionary authorization by the customer For a registered representative to execute a trade in a customer account, written discretionary authorization from the customer is required. To execute a trade in a customer account without discretionary authority is an unethical practice.
A member firm prepares a piece of sales literature that compares 2 different mutual funds that have similar objectives. Comparisons of all of the following can be made in the sales literature EXCEPT: A. management fees charged by the funds B. past performance of the funds C. projected earnings of the funds D. liquidity of the fund's investment holdings
C. projected earnings of the funds Mutual fund advertising and sales literature can show past performance, but are not permitted to make performance projections. This is a requirement of SEC Rule 156.
What are the two kinds of communication defined by FINRA?
Correspondence and Retail Communication
What records must be retained by broker-dealers?
Customer complaints, account statements, and advertising
Which of the following would be considered to be a "retail communication?" A. A direct mailing sent to 25 existing retail clients B. A research report sent to 20 prospective retail clients C. An institutional communication D. A website maintained by a broker-dealer that provides daily market information
D. A website maintained by a broker-dealer that provides daily market information Any communication made available to MORE than 25 existing or prospective retail clients is defined as "retail communication." Retail communications must be approved in advance of use by a principal and can be required to be filed with FINRA. A website is seen by a broad audience and falls into this category.
Which of the following is NOT required to be retained on file by a broker-dealer? A. Account statements B. Written complaints C. Advertising D. Recommendations
D. Recommendations Broker-dealers are not required to retain, as a record, recommendations made to clients; solicitations made to potential clients; and prospectuses (copies of these can be obtained from the SEC). Any written customer complaint is a record that must be retained by broker-dealers.
A registered representative employed by ABC broker/dealer is good friends with an independent venture capitalist. The venture capitalist asks the registered representative to obtain investors for a private placement that he is forming. Which statement is TRUE? A. The registered representative can direct customers to the private placement since this is an exempt transaction B. The registered representative cannot direct customers to the private placement since his broker-dealer is not the private placement sponsor C. The registered representative can direct customers to the private placement only if the venture capitalist is a member of FINRA D. The registered representative can direct customers to the private placement only with the prior written approval of his employer
D. The registered representative can direct customers to the private placement only with the prior written approval of his employer Under FINRA rules, registered reps are prohibited from effecting "private securities transactions." As a registered rep, one is an agent for the firm and all transactions must be effected through the firm in one's agency capacity. FINRA does allow an exemption from this prohibition. If a registered rep: • provides written notice to the member of the transaction, and • details in writing any compensation to be received, and • obtains express approval in writing from the member firm, then the associated person can perform the transaction. In addition, the member must record the transaction on its books as if it had been effected through the firm.
A registered representative has written a script that will be used to make unsolicited telephone calls to potential retail customers. The representative has a list of 150 potential clients who will be called. Which statement is TRUE? A. The script needs no approval from the general principal since it is not a written communication to customers B. The script must be pre-filed with FINRA prior to use C. The script must be pre-filed with the SEC prior to use D. The script must be approved by the general principal prior to use
D. The script must be approved by the general principal prior to use The communication made available to more than 25 existing or prospective retail clients, therefore the script is considered retail communication. Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA
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
D. This is prohibited 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.
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
D. available from the Central Registration Depository on the BrokerCheck website
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
D. exchanging customer margin securities with other collateral to secure a debit balance 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."
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
D. give a blanket certification to all appearances made each quarter
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
D. not buy the stock 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 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
D. prohibited A customer's signature cannot be forged, even if the customer were to give permission to do so. Legally, the customer's signature is required in order to have a binding contractual agreement that will have standing in a court of law.
A registered individual leaves the industry, and is concerned that he might not reassociate with another member firm within 2 years. The individual approaches a friend at another member firm to hold his license during his absence. This action is: A. permitted without restriction B. permitted with the permission of the principal C. permitted with the permission of the self-regulatory organization D. prohibited
D. prohibited FINRA prohibits "parking" of licenses when an individual is not affiliated with a member firm. If that person remains unaffiliated for 2 years, all licenses lapse.
Failure to complete the Regulatory Element within the stated time period will result in a registered representative's: A. termination B. censure C. expulsion D. suspension
D. suspension 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.
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
D. trading commissions paid by the customer to the representative Compensation cannot be paid by the customer to the registered representative. Only the broker-dealer may pay compensation to the registered representative.
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
D. unless the alterations are approved in writing by the Branch Manager
What is Correspondence?
Defined by FINRA, correspondence is a communication made available to 25 or fewer existing or prospective retail clients. 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.
What is retail communication?
Defined by FINRA, retail communication is 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
The enforcement authorities for the U.S. securities markets and market participants include: I FINRA II SEC III MSRB
I and II Both the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) regulate, and have enforcement capability over, the U.S. securities markets and market participants. The Municipal Securities Rulemaking Board (MSRB) creates rules for municipal market participants, but has no enforcement ability - enforcement of MSRB rules is performed by FINRA.
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
I and II 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.
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
I and III
Under FINRA rules, which statements are true about the gift limit from a registered representative to another person in the securities business or the financial news media? I The gift limit is $100 per person per year II The gift limit is $250 per person per year III Records must be retained of all gifts given IV Records need not be retained of all gifts given
I and III
A customer has fully paid marginable securities in his vault at home that he wishes his brokerage firm to hold. Which statements are TRUE? I The brokerage firm can charge for this service II The brokerage firm cannot charge for this service III The securities must be segregated and placed in safekeeping IV The securities can be commingled with those of other customers
I and III Brokerage firms can charge for clerical services such as safekeeping of securities. Fully paid customer securities must be segregated by the brokerage firm and placed in safekeeping. Such fully paid customer securities cannot be commingled with customer margin securities; cannot be commingled with firm positions; and cannot be rehypothecated to a bank.
Which of the following are violations of FINRA rules? I Sharing in the profits and losses of a customer's account without contributing proportional capital II Selling exempted securities to a customer with a written agreement to buy back the securities at a later date III Orally guaranteeing to buy back customer securities at a preset price
I and III 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).
A person registered as an Assistant Representative - Order Processor may perform which of the following functions? I Accept unsolicited orders II Qualify new accounts III Take new account information IV Make recommendations to customers
I and III 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.
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
I and III 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%.
Which time(s) must be recorded on unexecuted order tickets? I Time of order receipt II Time of order execution III Time of order cancellation, if canceled
I and III The time of execution is not recorded on an "unexecuted order ticket" because there was no fill. The time of order receipt must be recorded and if the order is canceled, the time of order cancellation must be on the ticket.
For member firms that have a communications compliance program, which statements are TRUE regarding a registered representative who wishes to send E-mail to customers? I E-mail may be sent from a computer in the registered representative's branch office II E-mail may be sent from a computer in the registered representative's home office III E-mail may not be sent from a computer in the registered representative's branch office IV E-mail may not be sent from a computer in the registered representative's home office
I and IV
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
I and IV 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 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
I and IV 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.
A prospectus MUST accompany which of the following mailings to a customer? I A research report written by the firm about a mutual fund that the firm sells II An annual report issued by the corporation III A report analyzing the effect of future budget deficits on market valuation
I only 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 research report on a new issue sent to a customer typically recommends the purchase of that issue and thus constitutes an "offer" under the Act. Any offer must be accompanied with, or preceded by, a prospectus. There is no requirement to send out a prospectus with annual reports or with general economic analyses - these are not "offers" of securities.
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
I only 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.
Which of the following statements are TRUE regarding the U.S. securities markets? I The Federal Reserve Board decides which securities can be traded on margin II FINRA has regulatory authority over the U.S. securities markets and market participants in the trading of all non-exempt securities III The Securities and Exchange Commission has regulatory authority over the U.S. securities market and market participants IV The MSRB has regulatory authority over the U.S securities markets and market participants in the trading of all exempt securities
I, II, III Both FINRA and the SEC regulate the U.S. securities markets. 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 MSRB only write regulations covering 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.
Notification to FINRA is required for which of the following events? I A registered representative is arrested for embezzlement II A registered representative is indicted under the Securities Exchange Act of 1934 for "insider" trading violations III A written customer complaint is received about a registered employee misappropriating customer funds IV A registered representative is arrested for assault and battery
I, II, III, IV
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
I, II, III, IV 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. 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 • intended use of the proceeds of the offering
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
II and IV 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.
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
I, II, III, and IV FINRA rules allow fair and reasonable charges for "clerical" services that are unrelated to trading and market making (charges to customers for trading and market making are covered under the 5% Policy). These services include collection of dividends on street name stock; safekeeping of securities; transfer of securities; and appraisals of securities.
The FINRA 5% Policy applies to which of the following? I Mark-ups charged on purchases effected as a principal in over-the-counter securities transactions II Mark-downs charged on sales effected as a principal in over-the-counter securities transactions III Commissions charged on purchases effected as agent in over-the-counter securities transactions IV Commissions charged on sales effected as agent in over-the-counter securities transactions
I, II, III, and IV The FINRA 5% Policy applies to both mark-ups and mark-downs earned in principal transactions effected in the secondary market as a dealer, as well as to commissions earned in agency transactions effected in the secondary market. A firm earns a "mark-up" when it sells a security out of its inventory to a customer, while it earns a "mark-down" when it buys a security into its inventory from a customer. In these cases, firm acts as a dealer in the transaction. A firm earns a commission when it matches a customer who wishes to buy with someone other than that firm who wishes to sell (and vice-versa). In this case the firm acts as a broker.
Which of the following MUST be disclosed in a research report recommending the purchase of a specific security? I Whether the firm or its officers own that security II Whether the firm or its officers own options or warrants on that security III Whether the firm has been a manager or co-manager in an underwriting of any of the issuer's securities within the past 12 months IV Whether the firm has previously recommended the purchase of that issuer's securities to its customers
I, II, and III
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
I, II, and III 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.
Under FINRA Rule 5130, which of the following are prohibited from buying a new issue directly from an underwriter? I A FINRA registered representative II A person who is financially dependent on a FINRA registered representative III A financially independent sibling of a FINRA registered representative
I, II, and III Under FINRA Rule 5130 on IPO distributions of common stock, the first category of persons restricted from buying the shares includes member firms for their own accounts, officers of member firms, associated persons, or any other employee of a member firm. Also prohibited are "agents" of broker-dealers; and immediate family members of the officers and employees of broker-dealers. ("Immediate family" is anyone that is 1 step removed from that officer or employee and includes spouses, siblings, parents, and children, as well as in-laws of these individuals.) Also note that "immediate family" includes anyone under the financial control of these prohibited individuals.
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
I, II, and IV 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 would constitute violations of the FINRA Conduct Rules? I Opening a cash account for a customer without obtaining that customer's signature II Offering to trade mutual fund shares for a customer III Recommending to a customer that he should get a group of friends together to buy mutual fund shares at a breakpoint IV Discussing the purchase of mutual fund shares with a customer before sending a prospectus
II and III Under the FINRA Conduct Rules, trading of mutual fund shares is prohibited. These are redeemable securities - not negotiable securities. Recommending that customers group together to buy mutual fund shares at a breakpoint is also prohibited. Breakpoints are only available to individual customers. No customer signature is needed to open a cash account. The signature is needed to open a margin account only. Discussing the purchase of mutual fund shares before sending a Prospectus is allowed, but the customer must receive the Prospectus either at or prior to confirmation of an order for the shares.
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
II and III 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.
A customer has marginable securities held in account that has a debit balance at the brokerage firm. Which statements are TRUE? I The securities must be segregated and placed in safekeeping II The securities can be commingled with those of other margin customers III The securities may be rehypothecated to a bank for a loan by the broker IV The securities cannot be rehypothecated to a bank for a loan by the broker
II and III Fully paid customer securities must be segregated by the brokerage firm and placed in safekeeping. Such fully paid customer securities cannot be commingled with customer margin securities; cannot be commingled with firm positions; and cannot be rehypothecated to a bank. However, margin securities are pledged to the broker-dealer as collateral for the margin loan (debit balance). It is these securities that may be commingled with other customer margin securities; and these securities can be rehypothecated to a bank for a loan by the broker.
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
II and III 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.
Which statements are TRUE? I A registered representative is permitted to buy a new issue directly from the underwriter(s) II A registered representative is prohibited from buying a new issue directly from the underwriter(s) III A registered representative is permitted to buy a new issue once it starts trading in the secondary market IV A registered representative is prohibited from buying a new issue once it starts trading in the secondary market
II and III The FINRA rule restricting member firms and their employees from buying IPOs only applies to the initial fixed price prospectus offering. Once the shares start trading in the secondary market, anyone can buy them at the current market price.
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
II and IV
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
III and IV 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.
What must the brokerage firm disclose in a research report recommending the purchase of a specific security?
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 • is a market maker in the issuer's stock • if it or its affiliates own(s) the issuer's securities (including options)
Why can't a research analysts trade a stock personally counter to their recommendation?
If a research analyst has a buy recommendation, the research analyst could buy that stock (only after the research report is widely disseminated and as long as the member firm does not prohibit this), but cannot be the one selling the stock. The reason for this is because if a research analyst has a large personal holding and wants to sell it at a profit, they could just issue a favorable research report so the price goes up, and then sell the stock. The only time when a research analyst with a buy recommendation on a stock can sell a personal holding in that same security is if the analyst can show hardship.
What is Sales Literature?
Is a form of Retail Communication. 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, and password-protected websites are considered sales literature.
What is Advertising?
Is a form of Retail Communication. TV, radio, newsprint, billboards, websites, and internet bulletin boards are considered advertising.
What does Regulation AC (Analyst Certification) require?
Regulation AC 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.
What is front running?
a prohibited practice whereby an employee of a brokerage firm, prior to executing a large customer order, places the same order for his or her personal account, hoping to make a profit from a rise in the stock's price due to the influence of the large purchase- thus "front running" the customer.
What are Direct Participation Programs (DPP)
commonly known as a limited partnership or tax shelter, a DPP is a financial security that enables investors to participate in a business venture's cash flow and taxation benefits.The partners include the items of income and loss on their individual tax returns, and hence directly participate in the results of the enterprise.
What is the Central Registration Depository?
known as "CRD," this is FINRA's database of information on each registered representative, including each registered representative's disciplinary history.
What records do not need to be retained by the broker-dealers?
recommendations made to clients, solicitations made to potential clients, and prospectuses
What are the retail communications that must ALWAYS be filed 10 business days AFTER first use?
• All other mutual fund retail communications • CMO (collateralized mortgage obligation) retail communications • DPP (Direct participation programs) retail communications
What are the retail communications that must ALWAYS be filed 10 business days in ADVANCE of first use?
• Options retail communications • Mutual fund retail communications with member-prepared performance rankings
What times does FINRA require all order tickets sent to an exchange be stamped with?
• Order entry • Order execution • Order cancellation, if canceled
