SIE: Regulations (FINRA Rules)
Under FINRA rules, the maximum permitted annual gift from a registered representative to another person in the securities business or financial information media is:
$100 Under FINRA rules, the maximum permitted gift that can be given to another person in the securities business or the financial news media is $100 per person per year.
Under FINRA rules, copies of order tickets must be kept for:
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, which account would be considered to be "discretionary"?
An account where the broker has the power to decide when and what to trade without specific customer authorization A discretionary account is one where the broker has the power to decide what and how much to trade. The customer gives a written power of attorney to the broker allowing discretion to be exercised.
Registered representatives are required to attend a compliance meeting at their firm:
Annually Every member firm must hold an annual compliance meeting with each registered employee, covering compliance issues that have arisen over the past year, and the procedures and policies that have been put in place to address those issues.
To take a second job, under FINRA rules, a registered representative must obtain prior written approval from (the):
Branch Manager For a registered representative to take a second job requires approval of the branch manager under FINRA rules. The manager is acting for the member firm when doing so. There is no requirement to get approval from FINRA or the SEC.
Which record must be retained on file by a broker-dealer?
Complaints Broker-dealers are not required to retain, as a record, solicitations of clients or recommendations made to clients. They are not required to retain prospectuses, since these are on file at the SEC. Written customer complaints, along with a record of actions taken to resolve the complaint, must be retained by member firms.
A customer buys securities without making payment and then sells the same securities without showing the intent to settle the transaction. This is:
Free Riding If a customer buys securities and then sells the same securities without the intent to pay for the purchase, he is taking a "free ride" on the brokerage firm. Any profit on the trades belongs to the customer since it is the customer's account. Brokerage firms will not tolerate "free riding" in customer accounts and will refuse further transactions if this occurs.
What is the U.S. Government agency that has enforcement authority over the U.S. securities markets?
SEC Both FINRA and the Securities and Exchange Commission (SEC) regulate and have enforcement capability over the U.S. securities markets and market participants. However, the SEC is a government agency, while FINRA is an SRO - a self-regulatory organization under SEC oversight. The Municipal Securities Rulemaking Board is another SRO that creates rules for municipal market participants, but has no enforcement ability - enforcement of MSRB rules is performed by FINRA. The CFTC regulates futures and commodities.
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 statement is TRUE?
The registered representative may accept unsolicited orders for the parent company's common stock If a registered representative is employed by a publicly traded member firm (say Raymond James), generally speaking he or she cannot recommend the purchase of that company's shares; nor can he solicit customers to buy the shares. This is not an explicit SEC or FINRA regulation; rather it is industry practice that ensures compliance with FINRA's "suitability" requirements; and the requirement to disclose control relationships at or prior to confirmation. However, it is permitted to accept unsolicited customer orders for the shares.
A registered representative at another member firm has a client who wishes to buy a Direct Participation Program (DPP) unit, a product that is not offered through his firm. He has a friend that is a registered representative at another member firm where DPPs are sold, and offers to refer the prospective client in exchange for a small fee. Which statement is TRUE?
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.
A broker-dealer has just opened a new branch office in a small city and wants to publicize this by sending out a marketing postcard to the mailing addresses in the town, stating that the firm is "endorsed by FINRA." Which statement is TRUE about this communication?
This is prohibited because member firms are not allowed to state that they are endorsed or approved by FINRA Member firms can only say that they are FINRA members. They cannot say that they are approved or endorsed by FINRA.
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?
This is prohibited because the FINRA Conduct Rules do not allow customer accounts to be guaranteed against loss 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.
Salespersons may be compensated based on which of the following?
Trading commissions paid by the brokerage firm to the representative Broker-dealers earn commissions or mark-ups/mark-downs for execution transactions. Investment Advisers earn fees for rendering advice. Compensation cannot be directly paid by the customer to any salesperson. All compensation must be paid by the salesperson's employer.
The Firm Element component of the "Continuing Education" requirement must be completed:
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.
A registered representative has a dispute with his firm. Under FINRA rules, this will be settled by:
arbitration Disputes between registered representatives and brokerage firms are handled by binding (non-appealable) arbitration.
Under FINRA arbitration rules, the arbitration panel for a dispute involving a customer will consist of individuals:
working both inside and outside the securities industry In a dispute involving customers, arbitration panels consist of 3 arbitrators - 2 public and 1 non-public. A non-public arbitrator is someone who currently works in the securities industry or is retired from the securities industry. Also note that the customer has the option of choosing a panel that consists of 3 public arbitrators.
All of the following statements would be prohibited under the regulations of the self regulatory organizations EXCEPT:
"We promise to perform timely executions of any orders that you place with us" 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.
A client of a registered representative refers a new potential customer. This customer is interested in purchasing an oil and gas limited partnership unit. What percentage of the purchase amount can the representative share with the referring client as a finder's fee?
0% Registered representatives cannot share commissions, sales charges, or pay referral fees, to anyone other than another registered person at the same member firm.
How long must customer account statements be retained after a customer account is closed?
6 years Customer account statements must be retained for 6 years.
Under FINRA rules, who can buy shares of an IPO?
A mutual fund portfolio manager buying for the fund portfolio The FINRA IPO basically prohibits industry "insiders" from buying common stock IPOs directly from the underwriter. The "idea" is that these insiders would know which deals are the "good" ones that are likely to rise in price once trading starts in the market and they would buy them for themselves rather than distributing them to the public. Prohibited from buying from the underwriters at the POP (Public Offering Price) are: FINRA member firms buying for their own accounts; FINRA member firm officers and employees (whether registered or not) and their immediate family members; Institutional portfolio managers who wish to buy personally and their immediate family members. Note that institutional portfolio managers, such as mutual fund managers, can buy IPOs for the funds that they manage. But they cannot buy them personally, where they could personally profit.
Notification to FINRA is required for all of the following events EXCEPT:
A registered representative is fined for speeding in a school zone FINRA does require notification for a variety of reasons. If a registered individual is the subject of a written customer complaint involving theft or embezzlement; if one is arrested, arraigned, indicted, convicted, or pleads guilty to any criminal offense (except for minor traffic violations); or if one is sued under the Securities Acts; notification to FINRA is required. In addition, notification to FINRA is required if the registered representative is suspended or expelled by any other self-regulatory organization; is denied registration by another self-regulatory organization; or is the subject of a customer complaint that is settled for more than $15,000; or is the subject of disciplinary action by the member firm involving suspension, termination, or the withholding of commissions in excess of $2,500. When FINRA gets the report, they review it to see if they should do nothing, suspend the person's registration, or expel the registered representative.
A decision is reached by the District Hearing Panel under the Code of Procedure. Which statement is TRUE?
An appeal may be filed with the National Adjudicatory Council 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. Also note, in contrast, that any arbitration decision is binding, with no appeal permitted.
What item given from a mutual fund sponsor to a registered representative is NOT considered to be "non-cash compensation"?
An expense-paid trip to an educational conference FINRA prohibits registered representatives from accepting a gift in the amount of more than $100, and also prohibits representatives from accepting "non-cash compensation" from someone other than their employer that exceeds this $100 limit. Note that an exception to the prohibition is given to sponsor-held educational seminars. The sponsor can pay for the registered representative's travel, accommodations, and meals at the conference. However, the conference cannot be promotional - it must be educational. Furthermore, the sponsor cannot pay for friends and family of the registered representative to come along.
Which statement is TRUE regarding FINRA Rule 5130 that restricts equity IPO purchases?
An investment club may be permitted to buy an equity IPO directly from an underwriter FINRA Rule 5130 restricts "industry insiders" from buying equity IPOs directly from underwriters(or selling group members). 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%.
Who does NOT have to be licensed in a broker-dealer?
Partner who only provides capital Passive owners of broker-dealers, who can be officers, are not required to be licensed. All other officers, traders, and salespersons must be registered and licensed.
When comparing arbitration to litigation as a method for settling disputes with brokerage firms, which statement is TRUE?
Arbitration is more time efficient Arbitration is preferred over litigation as a means for settling disputes because it is simpler and cheaper. Under FINRA rules, arbitration is final, binding, and mandatory for settling all disputes where a member firm or its personnel are involved.
An order ticket is filled out and sent to the New York Stock Exchange floor for execution. After being executed on the floor, it is discovered that the account number is incorrect. Under FINRA rules, the account number may be changed to the correct one by the:
Branch Office Manager Under FINRA rules, alterations to executed 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 the facts of the situation before approving of the change, and is responsible for the change.
A customer has decided to transfer his account from Broker-Dealer A to Broker-Dealer B. Which statement is TRUE regarding the maintenance of the customers existing account records?
Broker-Dealer A must retain the customer's existing account records (statements) for 6 years Customer account statements must be retained for 6 years. In this case, the responsibility for retaining existing account records falls on Broker-Dealer A, because that is where the account was held prior to the transfer that will now occur.
Which action is permitted under FINRA rules?
Business entertainment does not fall under the $100 gift limit. Business entertainment is permitted as long as it is not too excessive ($1200 for raw fish seems excessive!) or too frequent and it must comply with the firm's policies and procedures. Business entertainment means that the representative and the customer are together at some type of event.
FINRA's 5% Policy applies to which of the following?
Commissions charged on transactions effected on stock exchanges 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, variable products or mutual fund offerings, since these products require a prospectus.
FINRA's IPO purchase restrictions that prohibit industry personnel from buying new issues in the primary market apply to:
Common stock offerings 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. Note that if the preferred stock or bond offering is convertible, the rule still does not apply. This is true since at issuance, the conversion feature has no value - these securities are priced based on their income (dividend or interest) stream.
Any materials handed out to attendees must be filed with FINRA for seminars involving all of the following investments EXCEPT:
Corporate debentures INRA'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.)
An electronic communication of an "individual" nature sent by a representative to a customer is defined as:
Correspondence A communication of an individual nature sent to a customer is defined as correspondence. The specific definition is a written or electronic communication made available to 25 or fewer existing or prospective retail customers. Every piece of correspondence sent by a representative to a customer must be approved by a principal or manager. If the firm has implemented an correspondence compliance program, then FINRA permits "post-use review and approval." If the firm has not implemented a correspondence compliance program, then each piece of correspondence must be approved by a principal prior to use. Of course, virtually every firm has put in appropriate compliance procedures so that it can approve these "after the fact."
A communication sent to fewer than 25 existing or prospective retail clients is defined as (a):
Correspondence FINRA has 2 basic definitions of communications with the public: Correspondence: A written or electronic communication made available to 25 or fewer existing or prospective clients Retail Communication: A written or electronic communication made available to more than 25 existing or prospective clients. Excluded from these definitions are institutional communications and public appearances. FINRA creates these 2 main categories of communications because "correspondence" is subject to "post use review and approval" by a manager or principal and is not required to be filed with FINRA; in contrast, retail communications must be approved in advance of use by a principal and can be required to be filed with FINRA.
Which choice is TRUE regarding the recordkeeping requirement for customer account records (statements)?
Customer account statements must be retained by the member firm for 6 years Customer account statements must be retained for 6 years. FINRA requires that most records be retained for 3 years - but there are exceptions! Customer complaint records must be retained for 4 years. Customer account statements must be retained for 6 years.
Which decision by a registered representative requires specific customer authorization?
Determining the number of shares purchased in a margin account Generally, 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. (The firm/rep may however choose the trading venue without a POA) 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 activity undertaken by a registered representative will require written notice to the firm, along with following the firm's instructions covering this activity?
Driving for Uber after the markets have closed and securities transactions are not occurring Driving for Uber is work for pay - and to take an outside job, the representative must give notice to the firm, follow the firm's instructions (so if the firm says no, the answer is no), and must and his or her U4 to show this "OBA" - Outside Business Activity. Volunteer work for no pay is not an OBA, unless it places the representative in a control position to direct the management of investment funds. Traveling by a representative does not have to be reported to the firm. Selling investments, whether proprietary (meaning products of that firm) or nonproprietary, (meaning products of other securities issuers) is the job description of a registered representative.
All of the following would have to be reviewed by a principal EXCEPT:
Form letters for internal use within a firm 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 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. All customer complaint letters must also be reviewed and handled by a principal.
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:
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). Two business days after Wednesday, May 15th is Friday, May 17th. Also, note that the location of the securities must be noted on the order ticket to sell.
FINRA enforces regulations in all of the following markets EXCEPT:
Futures Market FINRA is the regulator for all of the securities markets - the Primary Market (new issues); the First Market (trades on exchanges); the Second Market (OTC trades of non-exchange listed securities); the Third Market (OTC trades of exchange listed issues) and the Fourth Market (direct trading between institutions on ECNs and ATSs). FINRA has no regulatory authority over the futures markets - that function is performed by the CFTC - the Commodities Futures Trading Commission.
All of the following persons are prohibited from buying a new common stock issue from the underwriter under FINRA Rule 5130 EXCEPT:
Grandfather of a registered representative who lives in another state Under FINRA Rule 5130, all officers and employees of FINRA member firms and their "immediate family" are prohibited from buying new issues from underwriters. Immediate family includes spouses, siblings, parents, children, and anyone who is supported to a material extent. It does not include uncles, aunts, grandparents and grandchildren (unless they are supported by the employee). Thus, Choices A and B are clearly prohibited. Choice C, the uncle who is supported by the representative, is also prohibited. Choice D, the grandfather living in another state, is not prohibited under this policy, since we can assume that he is self-supporting.
Which statement is TRUE about the use of the FINRA name on a member firm's or associated person's website?
If the FINRA name is shown, it must be hyperlinked to the FINRA website FINRA states that its name can be used on a member firm or associated person's website. The use of the FINRA name must make it clear that the firm is the FINRA member and not the associated person. Furthermore, the FINRA name, if used, must be hyperlinked to the FINRA website.
Which of the following is an SRO?
MSRB Both FINRA and the MSRB are SROs - self-regulatory organizations under SEC oversight. The MSRB write rules for municipal market participants, but it does not enforce those rules. Enforcement of MSRB rules is performed by FINRA for broker-dealers. SIPC is the Securities Investor Protection Corporation, which insures customer accounts at broker-dealers from B/D failure. FDIC (Federal Deposit Insurance Corporation) insures customer accounts at banks from bank failure.
All of the following individuals are permitted to be included in arbitration panel EXCEPT:
Persons involved in the dispute Arbitration panels consist of individuals affiliated with member firms and representatives from the general public. Attorneys are also permitted on arbitration panels (a nice source of income for attorneys who are retired). Anyone who is a party to the arbitration could not be on the panel. This is akin to putting a defendant in the jury box!
Which statement is TRUE regarding the purchase of a new issue directly from the underwriter by industry personnel?
Purchase of IPOs once these issues start trading in the secondary market at a premium price is permitted The FINRA rule restricting member firms and their employees from buying IPOs applies to all equity IPOs - it makes no difference if the IPO opens for trading at a discount or a premium.This prohibition applies whether of not the representative's firm was involved in the underwriting. Note, however, that once the shares start trading in the secondary market, anyone can buy them at the current market price.
Which statement is TRUE about purchases of Initial Public Offerings by relatives of employees of member firms under the FINRA IPO Rule?
Relatives of employees of member firms can possibly buy IPOs offered through other member firms The FINRA IPO basically prohibits industry "insiders" from buying common stock IPOs directly from the underwriter. The "idea" is that these insiders would know which deals are the "good" ones that are likely to rise in price once trading starts in the market and they would buy them for themselves rather than distributing them to the public. Prohibited from buying from the underwriters at the POP (Public Offering Price) are: FINRA member firms buying for their own accounts; FINRA member firm officers and employees (whether registered or not); and Immediate family members of FINRA member firm officers and employees (immediate family is anyone who is one step removed from the FINRA member firm employee or officer, including parents, children, spouses, siblings (and in-laws as well!). The way that FINRA enforces the rule is that anyone controlled by a FINRA firm employee cannot buy an IPO from a member firm. But if the relative is not controlled by the FINRA firm employee (say this person is the brother of a registered representative, and that he works as a divorce lawyer), that individual could buy IPOs that are being offered by firms OTHER than the one where his brother works.
An electronic communication that recommends securities that is sent by a registered representative to each of her 77 customers is defined as:
Sales Literature 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
A registered representative is a 5% participant in an investment club formed by members of the local Elks Club. The Elks Club investment club has opened a securities account at ABC Brokerage. The account wishes to buy an IPO being offered by an underwriter. Which statement is TRUE?
The account can buy the issue without restriction Registered representatives are prohibited from buying new issues from underwriters. This is true for any account in which registered representatives or other restricted persons have a greater than 10% participation as well. Thus, this account would NOT be prohibited from buying the IPO.
You are in the middle of a discussion with an institutional client over the phone, where you recommend that the client buy 100,000 shares of ABC stock. It looks like the client may be interested in making the purchase. Your cubicle is within earshot of the neighboring cubicle. Just before your client tells you take the order to buy, you overhear your colleague, the representative in the neighboring cubicle, selling 10,000 shares of ABC stock to his client. Which statement is TRUE about this situation?
The colleague has committed a violation because your customer's order could move the price of ABC stock In this scenario, the colleague overhead the representative making the buy recommendation for a large block of shares to his institutional client and then rushed to tell his customer to buy the stock (since the market price could be moved by the large purchase) before the institutional client placed that order. This is front running and is a prohibited practice.
A customer wishes to open an account that will be used primarily to buy initial public offerings (IPOs). Which statement is TRUE regarding the proper procedure for prequalifying the account?
The customer must sign a representation letter that he or she is not restricted from buying IPOs In order for a customer to buy IPOs (Initial Public Offerings) of common stock, the customer must sign a representation letter that he or she is not restricted from buying the issue under FINRA rules (FINRA prohibits industry "insiders" from buying the issue from the underwriter). Annually thereafter, the customer must be sent a notice that the firm has the customer's representation on file that he or she is not restricted, and that if this has changed, the customer must notify the firm so that the account file can be amended.
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?
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 registered representative wants to use her social media account to contact both existing and prospective clients who also use the site. Which statement is TRUE about the registered representative doing this?
The registered representative can contact both existing and prospective clients as long as the communications are captured and supervised by the member firm The use of social media sites (such as Linked In or Facebook) for business purposes by a registered representative comes under FINRA's communications rules. This means that the firm must capture these communications, supervise them and retain them. It makes no difference if the communication is sent to an existing or prospective client.
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?
The registered representative can direct customers to the private placement only with the prior written approval of his employer 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.
A registered representative working at a member firm is currently engaged to be married. Once she is married, she will be taking her husband's name. Which statement is TRUE about this?
The registered representative's U4 filling must be amended promptly once her name has changed One of the U4 information items is any name that an individual has been known to use, including that person's name before and after marriage. So if a registered individual changes his or her name, prompt amendment of the U4 is required. This is asked because if the authorities want to find you (say to arrest you!), they want to know any names that you have used.
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?
The script must be approved by the general principal prior to use 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 Since this script will be delivered to 150 potential retail clients, it falls under the "Retail Communication" definition, and within that category is defined as "sales literature," and requires prior principal approval.
In which situation can an associated person borrow money from a client without giving prior notice to the employing member firm?
The spouse of the representative lends money to the representative FINRA's rule on a registered representative borrowing from a client is basically "No - Unless." Exceptions are granted to: borrowing from or lending to a customer who is an immediate family member; borrowing from a lending institution that is a customer where the loan is made under the same terms and conditions that would be extended to anyone else; borrowing from or lending to a customer who is a "significant other" like a girlfriend or boyfriend; and borrowing from or lending to a customer with whom the representative has an existing business relationship Note that for (1) and (2) above, prior written approval of the firm is not required. For (3) and (4), the representative must get prior written approval from his or her firm.
A registered representative at a FINRA member firm has been elected to his cooperative apartment building's Board of Directors. Which statement is TRUE?
This event must be reported to his or her employer Any "OBA" - Outside Business Activity - must be reported to the firm and must be approved by the firm. Furthermore, it must be reported on that registered representative's U4 Form and is disclosed in that individual's BrokerCheck report. Remember that an individual does not have to be paid for an OBA to exist. If the representative is in the position to steer investment activities of the outside business entity - that makes it an OBA. The fact that the registered representative, on the Board of Directors of the cooperative apartment house, would be in a position to steer the investment activities of the coop's operating and reserve funds - makes this an OBA.
A registered representative has spent 10 years working at his broker-dealer and has sold customers many mutual funds that pay trail commissions from 12b-1 fees. The registered representative is thinking about leaving his firm to do charitable work. He would like to collect the trail commissions on the funds after he terminates his employment from the firm. Is this possible?
Yes, if there is a written agreement between the member firm and the registered representative that is executed prior to termination As a general rule, only currently registered individuals can be paid commissions. However, there is an exception to this FINRA rule that typically applies to "RRRs" - Retiring Registered Representatives. It is designed to give these persons an income stream in retirement, where if the registered representative retires, then he or she can contractually agree with the firm to continue to pay trail commissions in retirement. However, it can be used in a situation like this as well - but, of course, the member firm must agree to this.
To open a margin account for a customer:
a customer signature must be obtained on the hypothecation agreement prior to settlement of the first transaction in the account Customers must sign margin agreements (hypothecation agreements) in order to open margin accounts. The signature must be obtained prior to settlement of the first transaction in the account.
A registered representative sends a letter to a customer that states that: "Since options trading is not for everyone, this creates an enormous profit opportunity for the select few who do trade options." This statement is:
a misrepresentation of the options trading market Options trading is a "zero sum game" - that is, if the holder has a gain, the writer has an equal loss; if the writer has a gain, the holder has an equal loss. Thus, there is an equal number of winners and losers. The statement that there may be an enormous profit opportunity must be balanced by a statement that there can also be an equal loss.
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 retail communication FINRA has 2 main categories of communications to retail clients: Correspondence: A communication to 25 or fewer existing or prospective retail clients Retail Communication: A communication to more than 25 existing or prospective retail clients Excluded from these definitions are Institutional communications and Public appearances. Correspondence, Institutional Communications, and Public Appearances are not subject to prior principal approval - rather, FINRA states that as long as the firm has appropriate supervisory procedures in place, they are subject to "post use review and approval." They are also not subject to FINRA filing rules. In contrast, retail communications must be approved by a principal prior to use and are subject to FINRA filing rules. Because this is a communication to 30 retail clients (the number of institutional clients is irrelevant), this is defined as a "retail communication."
A registered representative wishes to post his/her business card on a website. This is considered to be:
advertising 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 clients, scripted speeches delivered to more than 25 existing or prospective clients, password-protected websites
Under the FINRA Code of Procedure, after the first level of hearings in any complaint proceeding with the District Hearing Panel, this decision may:
be appealed to the National Adjudicatory Council 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 would be considered when determining a fair and reasonable commission or mark-up under the FINRA 5% Policy EXCEPT the:
cost of the security to the broker-dealer Under the FINRA 5% Policy, commissions and mark-ups in exchange and over-the-counter transactions must be fair and reasonable, with 5% being a guide, not a rule. Among the things considered in determining the amount to charge are the difficulty of the trade; the level of service provided to the customer; and the dollar amount of the transaction. All commissions or mark-ups are based on the current market value of the security; not the cost of the security to the dealer. cant charge commission and mark up on both trades, because mark up is for primary
Under FINRA rules, disputes between a registered representative and a brokerage firm are handled by:
binding arbitration and are non-appealable Disputes between registered representatives and brokerage firms are handled by binding (non-appealable) arbitration.
Customer securities held in margin accounts:
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.
Fully paid customer securities:
can be held by the member firm if they are segregated, and placed in safekeeping 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.
The FINRA 5% Policy requires that consideration be given to all of the following when determining mark-ups and commissions EXCEPT:
financial condition of customer 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.
Customers may be charged for all of the following services EXCEPT:
mailing of proxies on street name stock The cost of the distribution of proxies on street name stock cannot be charged to the customer - the issuer reimburses the broker for this. To charge the customer would be "double charging," since the issuer already pays the broker for this service. Charges to the customer for clerical services such as collection of interest and dividends, and safekeeping of securities, are permitted. You CAN: collection of dividends on street name stock safekeeping of securities collection of interest on bonds held in safekeeping
The Firm Element component of the "Continuing Education" requirement:
must be completed 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.
If a registered representative fails to complete the Regulatory Element of the Continuing Education requirement within the stated time period, that person:
must cease performing all of the functions of a registered representative 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.
A customer requests the preliminary prospectus for a new issue that a firm is underwriting. The registered representative "highlights" important information in the document with a red marking pen. This action is:
not allowed under any circumstances 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.
Under FINRA rules, when no proxy contest is involved, the proxy of a customer whose shares are margined, that is returned without indicating how the shares should be voted is:
not counted in the vote Customers whose securities are margined have their securities held in "street" name. Thus, whenever, there is a mailing to the shareholders by the corporation, the brokerage firm shows as the "owner" and receives the mailing from the issuer. The brokerage firm is obligated, in turn, to forward the materials to the beneficial owner (the customer) of the securities. Under FINRA rules, if a proxy is sent to shareholders, the brokerage firm must distribute it to the beneficial owners. This cost is paid for by the issuer. If the voting materials are not returned, or if they are returned without voting instructions, the member firm is not permitted to vote the shares.
The Regulatory Element component of the "Continuing Education" requirement must be completed:
on the registrant's 2nd anniversary of registration 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.
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:
only permitted if the member firm is notified in writing and gives prior written approval to the transaction 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.
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:
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.
A registered representative hears from a good friend that "ACME Fund has taken a large position in ABCD stock." Based on this, the registered representative calls all of her customers with the recommendation that ABCD stock be purchased immediately. This action is:
prohibited since this is making a recommendation based upon a rumor The information received by the registered representative is unsubstantiated, and it is unethical for this to be used as a basis for making a recommendation.
All of the following are defined as "institutional clients" for purposes of the FINRA communications rules EXCEPT:
real estate company 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 receives a written complaint from a customer stating the commissions being charged in the account are too high. The registered representative should:
refer the complaint to the Branch Manager Any written complaint received by a registered representative must be given to the Branch Manager or Principal. The Manager or Principal is responsible for overseeing the resolution of the complaint.
A registered representative presents a seminar to a group of 35 prospective retail investors about investing in mutual funds. At the seminar, he makes recommendations of various funds, based on their objectives and performance. The seminar is defined by FINRA as:
sales literature 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
All of the following are prohibited practices under FINRA rules EXCEPT:
selling enough mutual funds to a customer to obtain a breakpoint Selling enough of a mutual fund to a customer that would qualify for a breakpoint in the sales charge is not prohibited - this is desired. It allows a customer to get a reduced sales charge for large dollar purchases. Backing away from quotes (not honoring the quote) is prohibited; interpositioning another firm between a customer and the market maker is prohibited (this would increase the cost of the transaction because 2 middlemen must be paid); and withholding new issues from sale to the public is prohibited.
A customer wishes to give a $1,000 cash "bonus" to a registered representative for doing such a good job. The registered representative may:
tell the customer to donate the money to a specific charity that the registered representative supports 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.
All of the following statements are true about the compliance meeting held by the firm that registered individuals must attend EXCEPT:
the meeting must be held every 2 years (must be held annually) Every member firm must hold an annual compliance meeting with each registered employee, covering compliance issues that have arisen over the past year, and the procedures and policies that have been put in place to address those issues. The meeting cannot cover selling skills (that has nothing to do with compliance), and proof of attendance is required.
All of the following time stamps are on an order ticket EXCEPT the time of:
trade reporting to the Consolidated Tape 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.
