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- A registered representative at your firm borrows $9,000 from another repre- sentative in the same branch office. As the principal, you become aware of this at the next scheduled compliance meeting of your firm. What action should you take? A. No action needs to be taken B. This is a "reportable event" that must be filed with FINRA promptly C. You should determine that one representative was not the customer of the other representative D. You should advise the representatives that such a loan requires each to amend their U4: The best answer is C. Registered representatives cannot borrow from customers. Exceptions are given if the:
- customer is an immediate family member;
- customer is a bank making a loan on the same terms and conditions that it gives the general public;
- customer is another registered employee of the same broker-dealer;
- lending arrangement is based on a personal relationship with the customer that is outside of the broker-customer relationship; or
- lending arrangement is based on a business arrangement that is outside of the broker-customer relationship. The key point is that the rule applies to borrowing from customers. The rule states that the firm must have policies and procedures covering borrowing from customers and that items 3, 4 and 5 require prior notice and approval from the firm. Regarding items 1 and 2, it is up to the firm whether it wants to require prior notice and approval. So, if one representative is borrowing from another, the next question is: "Is there a customer relationship there?" For example, someone who is registered with a Series 99 back office license could have an account with the firm managed by someone with a Series 7 license. If that is the case, then the rule would apply and prior written notice to the firm and firm approval is required. Also note that if there is no "customer relationship," then the firm can still put in an internal procedure where any borrowing by a representative must be reported to the firm and approved by the firm - since heavy borrowing by a representative is a "red flag."
- As a result of a finding against a member firm in a hearing conducted under the Code of Procedure, FINRA can take all of the following actions EXCEPT: A. Expulsion
Study online at https://quizlet.com/_d02sin B. Fine C. Cease and desist order D. public announcement of wrongdoing: The best answer is C. As a result of a finding against a member firm or associated person by the Hearing Panel, FINRA can censure, suspend, or expel the associated person or firm; can impose a fine of any dollar amount; and can make of public announcement of the actions taken and why. FINRA also has the right to issue a cease and desist order against an associated person or firm, but these are issued to "maintain the status quo while an underlying disciplinary proceeding is being litigated." So FINRA would issue a cease and desist order as the hearings are occurring to stop "further violative conduct." Once the Hearing Panel has made a finding and taken action such as a fine, suspension, or expulsion, there is no longer a need for such a "cease and desist" order.
- An associated person has completed a deferred variable annuity application for a customer and has received the customer's check made payable to the insurance company. The application and check are forwarded to the principal for review. Once the application is approved, the check must be transmitted to the insurance company: A. By the close of business that day B. No later than 12 noon the next business day C. By the close of business on the 2nd business day after principal approval D. by the close of business on the 7th day after principal approval: The best answer is B. Under FINRA rules, once a variable annuity application lands on the desk of the principal, it must be reviewed and approved within 7 business days. Once it is approved by the principal, the broker-dealer must promptly forward the check to the insurance company, defined by FINRA as no later than noon the next business day. This interpretation is based on the fact that mutual fund and variable annuity broker-dealers are only required to maintain $25,000 of net capital, as long as they do not hold customer funds or securities. If they were to hold these, they would need $250,000 of net capital. So FINRA said that they will not consider the broker-dealer to be holding customer funds as long as the check is submitted to the insurance
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- A FINRA member is OBLIGATED to accept which of the following orders for a NASDAQ security? A. Market B. Marketable limit C. Limit stop D. All of the above: The best answer is A. FINRA members are only obligated to accept market orders from customers. They can accept limit orders, subject to the execution restrictions of the limit order protection rule - if the firm does not wish to comply with the limit order protection rule, it simply can refuse to accept limit orders from customers! Regarding stop orders, a trade must occur at the stop (trigger) price for the order to become executable. Some FINRA member firms accept these orders; others will not. Also note that while the NASDAQ System has the capability of handling market and limit orders, market makers and order entry firms are only obligated to take market orders under NASDAQ rules. They accept limit orders at their own discretion for entry in the System. Currently, the NASDAQ System does not accept stop orders; however, a member firm can accept a stop order at its own discretion placing it on its internal order book for execution if the market moves to or through the stop price.
- An OTC trader at a large market making firm routinely telephones his coun- terparts at smaller firms to inquire as to why they don't route their non-NMS orders to his firm, stating that: "With our large institutional client base orders directed to our firm will result in quick, profitable executions for both of us. Furthermore, I'm sure you want to be included in some of our syndicate deals, which I can arrange if we begin to see order flow." These phone calls are an example of: A. front running B. harassment C. collusion D. Interpositioning: The best answer is B. "Routine" telephone calls of this nature are an attempt to induce smaller trading firms to preference their orders with this market maker. This is a form of harassment of the smaller trading firms - though one could also argue that is a good business practice for the market maker. Anyway, harassment is the best of the choices offered.
- All investment company advertising must be filed with FINRA: A. 10 business days prior to 1st use
Study online at https://quizlet.com/_d02sin B. 10 business days prior to use for the 1st year of operations; no filing is required thereafter C. 10 business days after 1st use D. 10 business days after 1st use for the 1st year of operations; no filing is required thereafter: The best answer is C. Under FINRA rules, Investment Companies, CMO, registered Structured Products and registered Direct Participation Program (DPP) retail communications must be filed 10 business days after first use. Options retail communications must be filed 10 business days prior to 1st use. All other retail communications must be filed 10 business days prior to first use for the first year of operations; thereafter, no filing is required, but they are subject to spot check.
- A live road show presented in connection with a Rule 405 Automatic Shelf Registered Offering is: A. considered to be a graphic communication B. considered to be a free writing prospectus C. considered to be both a graphic communication and a free writing prospec- tus D. considered to be neither a graphic communication nor a free writing prospectus: The best answer is D. SEC "quiet period" rules for issues in registration, which restrict firms in the syndicate from promoting the sale of the issue, cover both "written" and "oral" communications. The SEC defines a graphic communication as a written communication. The SEC list of graphic communications includes any form of electronic media, including videotapes, audiotapes, facsimiles, CD-ROM, electronic mail, Internet web sites and computer networks. Under SEC Rule 405 (shelf registration for WKSIs - Well Known Seasoned Issuers), these graphic communications are defined as "free-writing prospectuses" that do not require advance SEC filing and review. Rather, these can be distributed to potential clients as long as a copy is also filed with the SEC. A pre-recorded electronic road show falls under the definition of both a graphic communication and is also a FWP - Free Writing Prospectus, so it must be filed with the SEC. Note, in contrast, that a presentation at a seminar, such as a live road show
Study online at https://quizlet.com/_d02sin 10b-18 will not be considered manipulative activities under Rule 10b-5 ("catch-all" fraud rule). Rule 10b-18 purchases, as they are known: Must be effected through 1 broker/dealer on any given day; Cannot be the opening transaction; Cannot be executed within 10 minutes of market close if the security is "actively traded" as designated by Rule 101 of Regulation M; otherwise, the purchase cannot be executed within 30 minutes of market close; Must be effected at prices no higher than the current highest independent bid for that security or last reported sale price (whichever is higher); and Cannot exceed 25% of the trading volume in the security that day (except for block purchases handled outside the normal flow of orders).
- Under SEC Rule 15g-1, member firms are exempt from the provisions of the "penny stock rule" if its penny stock business is less than: A. 20% of its revenue B. 15% of its revenue C. 10% of its revenue D. 5% of its revenue: The best answer is D. If a member firm's revenue from penny stock transactions is less than 5% of total revenue, then the member firm is exempt from the penny stock disclosure rule requiring that when a customer is solicited to buy a penny stock, the customer must sign and return a detailed suitability statement prior to confirmation of sale. The intent of the rule is to make life difficult for firms that, as a majority of their business, push penny stocks.
- A VWAP order is permitted to be reported "late" after the 4:30 PM time limit: A. if the trade was effected manually B. if efficient reporting is in place C. if the trade is reported electronically D. under no circumstance: The best answer is A. VWAP (Volume Weighted Average Price) trades are large trades for institutions where the member firm agrees to fill the order after the 4:00 PM market close at the VWAP that occurs during the period of time specified in the order. It is the member's problem to position its inventory account to fill the order at the end of the day. The trade is required to be reported by 4:30 PM, but because these are very detailed, manually prepared, trade reports, FINRA states that there can be
Study online at https://quizlet.com/_d02sin "reasonable justification to excuse what may be deemed to be a pattern or practice of late trade reports."
- Under NASDAQ rules, short interest reports must be filed by the: A. 2nd business day after the reporting settlement date B. 3rd business day after the reporting settlement date C. 5th business day after the reporting settlement date D. 10th business day after the reporting settlement date: The best answer is A. NASDAQ requires the reporting of outstanding short positions maintained at mem- ber firms as of the 15th and last business day of each month. NASDAQ aggregates the information and reports it as the outstanding short interest. The report must be filed by the member on the 2nd business day after the reporting settlement date.
- Under the Customer Protection Rule 15c3-3, a broker dealer is eligible to compute the Reserve Requirement monthly instead of weekly if: A. the firm's ratio of Aggregate Indebtedness to Net Capital does not exceed 10 to 1 B. the firm's customer base is composed solely of institutional investors C. aggregate credit balances in customer accounts do not exceed $5,000, D. the firm agrees to deposit at least 105% of the required amount: The best answer is D. To compute the Customer Reserve Account monthly, instead of weekly, a bro- ker-dealer's ratio of Aggregate Indebtedness to Net Capital cannot exceed 800% (8 to 1) and aggregate customer credit balances cannot exceed $1,000,000. In addition, if monthly computation is elected, 105% of the required amount must be deposited, instead of 100%. There is no special carve out in the rule for firms which deal solely with institutions. (OK - so this rule was written in the early 1970's when $1 million was a lot of money. Needless to say, today, no one computes monthly, but the rule is still on the books and is still tested!)
- For Net Capital purposes, secured demand notes are valued at: A. the current market value of the securities collateralizing the note B. the current market value of the securities collateralizing the note less an appropriate haircut C. the face amount of the securities collateralizing the note D. the stated amount of the note, regardless of changes in value of the underlying collateral: The best answer is B. Secured demand note agreements provide for the lender to give marketable securi-
Study online at https://quizlet.com/_d02sin through a Special Reserve Bank Account For Customers are exempted C. clearing broker-dealers that carry both cash and margin accounts are exempted D. broker-dealers that limit their business to the sale of registered investment company securities are exempted: The K2-i exemption provides that broker-deal- ers that carry no margin accounts and that transfer all customer monies through a Special Reserve Bank Account do not have to comply with the Customer Protection Rule requirements. The K2-ii exemption provides that fully disclosed broker-dealers are exempt from the requirements of the Rule, since all customer monies would be handled by the clearing firm.
- A company has just gone public and the underwriter is in the "10-day blackout period" prohibiting communication to the public about the company. Which event would permit the underwriter to publicly disseminate a report prior to the expiration of the blackout period? A. Loss of a customer B. General strike by the company's workers shutting down production C. Resignation of the company's Chief Marketing Officer D. None of the above: The best answer is B. An exception to the information blackout rule covering underwriters that have just completed an underwriting is given if "truly market moving" information becomes known about the company. Choice B is a major event; the other two choices given are not as significant.
- Which of the following is NOT qualified as a participant in DTCC? A. Member of a national securities exchange B. Bank or trust company C. Registered investment company D. Registered investment adviser: The best answer is D. Depository Trust and Clearing Corporation is owned by its member participants (ex- changes, member firms, banks, investment companies and insurance companies) and is a central depository holding stock and bond certificates for these firms. As trades are settled daily, it records the change of ownership and net money amounts to be either debited or credited to members' accounts. Investment advisers are not DTCC member participants.
- All of the following statements are true regarding the entry of a stabilizing bid on the NASDAQ system EXCEPT: A. Only one market maker is allowed to enter a stabilizing bid
Study online at https://quizlet.com/_d02sin B. Notification must be given to NASDAQ in writing prior to the first day that the stabilizing bid will appear on the system C. Market makers are prohibited from maintaining a regular bid and offer at the same time that a stabilizing bid is entered D. No identification is given on NASDAQ that the bid is a stabilizing bid: The best answer is D. When a stabilizing bid is entered into the NASDAQ system, it must be identified as such. The other statements are true. Only one market maker is allowed to enter a stabilizing bid; notification must be given to NASDAQ in writing prior to the first day that the stabilizing bid will appear on the system; and market makers are prohibited from maintaining a regular bid and offer at the same time that a stabilizing bid is entered by that market maker.
- A proprietary trading desk trades ahead of a customer limit order placed with the firm's market making desk. Which statement is TRUE? A. This is permitted without restriction B. This is permitted only if the firm has a "Chinese Wall" in place between the trading desk and market making desk C. This is permitted only if the firm is a bona fide market maker in the stock D. This is prohibited under all circumstances: The best answer is B. If the firm did NOT have a Chinese Wall in place between its proprietary trading desk and its market making desk, then the customer limit order must be filled first. However, if a Chinese Wall is in place, then the proprietary trading desk would have no knowledge of the customer limit order, and the trading desk could place orders to buy or sell that security "at will."
- The minimum duration for a non-temporary subordinated loan is: A. 30 days B. 45 days C. 1 year D. 2 years: The best answer is C. The minimum duration for a regular (non-temporary) subordinated loan is 1 year. In contrast, there is no minimum duration for temporary subordinated loans - rather, there is a maximum duration of 45 days.
- Which of the following individuals MUST be registered with FINRA? A. variable annuity salesmen B. commodity salesmen C. floor traders on recognized stock exchanges
Study online at https://quizlet.com/_d02sin is appended with the symbol .Z. If a trade on NASDAQ took place outside of regular market hours and was reported late, it is appended with the symbol .U.
- 8 K report filings are made by registered: A. domestic securities issuers B. investment companies C. broker-dealers D. foreign ADR issuers: The best answer is A. 8K reports (special report of significant events such as declaration of bankruptcy, declaration of a merger or divestiture, changes in the composition of the Board of Directors) must be filed by domestic issuers of registered securities for any material change in the status of the issuer - within 4 business days of the change. Investment companies, broker-dealers and foreign issuers of ADRs are not required to file 8K reports.
- Under FINRA rules regarding advertising, all of the following statements are true EXCEPT: A. If a recommendation of a security is made, the price at the time must be included B. If a testimonial is given, it must be stated whether the maker has been paid for the testimonial, if more than a nominal sum was paid C. The performance of previous recommendations may not be shown in the report D. It must be disclosed if the firm was a manager or co-manager in an under- writing of any of that company's securities within the past 12 months: The best answer is C. Under FINRA advertising rules, if a recommendation of a security is made, the price of the security at the time and the date must be included. If a testimonial is given, it must be stated if the maker has been paid, if more than a nominal amount is involved. It also must be disclosed if the firm owns the security or options, warrants, etc.; if the firm is a market maker in the security; or if the firm was a manager or co-manager in an underwriting of any of the company's securities within the past 12 months. There is no prohibition on showing past performance of recommendations - as long as all recommendations of that type are shown (one cannot be deliberately selective and only show the "good" ones) and a statement is made that past performance does not predict future results.
- Under the Uniform Practice Code, a firm that has a fail to receive can give written notice of "buy-in" to the contra-broker no later than 12 noon (contra-broker's time):
Study online at https://quizlet.com/_d02sin A. 1 business day prior to the proposed buy in B. 2 business days prior to the proposed buy in C. 3 business days prior to the proposed buy in D. 7 business days prior to the proposed buy in: The best answer is B. Under the Uniform Practice Code, if a firm buys securities and does not receive them from the contra-broker on settlement, it can give a written notice of buy-in. The notice must be delivered by 12 noon, 2 business days prior to the proposed buy in.
- 13 D reports are filed: A. annually B. semi-annually C. quarterly D. on an event-driven basis: The best answer is D. Anyone who accumulates a 5% or greater holding in a publicly held company with the intention of exercising control must file a Form 13D within 10 business days.
- A member firm that is a market maker in ABCD stock has numerous accounts for which it acts as an investment adviser. Under the Investment Advisers Act of 1940, a transaction for one of these accounts in ABCD stock must be: A. effected on an agency basis B. effected on a principal basis C. executed by another independent market maker in that security D. executed by the dominant market maker in that security: The best answer is A. The Investment Advisers Act of 1940 requires that market makers, when effecting trades for accounts where it acts as investment adviser, can only effect those trades in an agency capacity. One must remember that this rule was written over 60 years ago, when the OTC market was in its infancy, and transaction prices of OTC securities were not readily available. Thus, trades in OTC issues that were done on a principal basis might be at prices that were not reasonable related to the current market. However, trades done on an agency basis require that a contra-broker be found to take the other side of the trade - thus a true market price is determined.
- Which statement is TRUE regarding margin on securities? A. All over-the-counter securities are marginable under Federal Reserve reg- ulations B. All NASDAQ Global Market securities are marginable under Federal Reserve regulations C. All Pink Open Market securities are approved for margin by the Federal Reserve Board D. Only exchange listed securities traded over-the-counter are marginable: -
Study online at https://quizlet.com/_d02sin C. 6 years D. the life of the firm: The best answer is C. Daily logs are another name for the daily blotters - the cash receipts and disbursement blotter; the purchase and sales blotter; and the securities receive and deliver blotter. These must be retained for 6 years.
- In order to recommend a variable annuity to a customer, all the following statements are true EXCEPT: A. the customer must be informed, in general terms, of the material features of the product B. the representative must believe that the customer would benefit from the product's features and that the underlying separate accounts to which funds are allocated and riders to the policy are suitable C. the customer must sign an attestation that he or she understands the features and risks of the product prior to confirmation of purchase D. the representative must sign a statement that all required representations and determinations were completed prior to approving the contract: The best answer is C. In order to recommend a variable annuity to a customer, the representative must have a reasonable basis to believe that: the customer has been informed, in general terms, of the material features of the product; the customer would benefit from one or more of the product's features; and the particular variable product as a whole, the underlying separate accounts to which funds are allocated, and riders to the policy are suitable. Furthermore, the representative (not the customer) must sign a statement that all required representations and determinations were completed.
- A customer who has a pattern day trading account has a margin call outstanding. Until the margin call is met, the account is limited to "buying power" of: A. 1x the maintenance margin excess in the account B. 2x the maintenance margin excess in the account C. 3x the maintenance margin excess in the account D. 4x the maintenance margin excess in the account: The best answer is B. Normally, buying power in a pattern day trading account is based on the fact that the account is only subject to FINRA minimum maintenance margin of 25%, so the buying power is 1/.25 = 4 times the maintenance margin excess. However, if the account has an unsatisfied margin call outstanding, then the buying power is reduced to 2 times the maintenance margin excess. And this point must be known for the exam!
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- A "bought deal" would most likely be used by a(n): A. Emerging Growth Company looking to raise capital before it goes public B. Well Known Seasoned issuer that has a shelf registration on file with the SEC C. Unseasoned issuer conducting its Initial Public Offering D. Issuer conducting a follow-on offering subject to the provisions of Regula- tion M: The best answer is B. In a "bought deal," an issuer attempts to sell its securities very quickly to an under- writer in a competitive bid process. The underwriter must bid on a firm commitment basis and, if it is the winner, it is now the owner of the securities. The underwriter will not bid unless it knows the issuer well, and it knows that it can quickly remarket the issue. Thus, these deals are pretty much restricted to WKSIs (Well Known Seasoned Issuers) that are looking to raise capital quickly and that have a shelf registration on file with the SEC. The bidder/underwriter then knows that if it wins the bid, it can quickly resell those shares under the shelf registration already on file. The advantage for the issuer is that it raises the money quickly and does not have to go through a road show and marketing process to complete the deal. There is no 20-day cooling off period involved and there are no gun jumping issues. The disadvantage is that the price realized per share may be less than if the issuer did go through that process!
- The 5% Policy applies to transactions in which of the following securities? A. Open end investment companies B. Real estate investment trusts C. Unit investment trusts D. Variable annuities: The best answer is B. The FINRA 5% Policy applies to over-the-counter and exchange transactions that take place in the secondary market - the trading market. Therefore, it applies to securities that are traded, such as closed-end funds and REITs. It does not apply to "redeemable securities" such as mutual funds (open-end investment companies) and unit investment trusts. These are new issue offerings sold under a prospectus and they do not trade. Rather, they are redeemable with the issuer. Similarly, it does not apply to variable annuities, which are sold with a prospectus and do not trade.
- Under FINRA rules, the requirement to provide an educational brochure to former customers who are solicited to move their accounts by a registered representative who has moved to another firm applies for a period of: A. 1 month after the representative begins employment with the new firm B. 3 months after the representative begins employment with the new firm C. 6 months after the representative begins employment with the new firm
Study online at https://quizlet.com/_d02sin waiver: The best answer is B. Under Rule 168, which was passed in 2005, the SEC gave a "safe harbor" to a reporting issuer's forward-looking statements and factual statements that are made in the normal course of business. Thus, these issuers did not have to worry about investor lawsuits that they were making these statements as part of an offering of securities. The rule permits these disclosures anytime - as long as they are not being made in connection with a securities offering and as long as they are being made in the regular, normal fashion in which prior similar disclosures were made. An SEC indemnification waiver is a fictitious term. A WKSI is a "Well Known Seasoned Issuer" under Rule 405 which can do an automatic shelf registration with the SEC for add-on offerings.
- A market maker effects an agency cross transaction of 400 shares at $41.00, charging the buyer a commission of $.50; and the seller a commission of $.50. Under ACT rules, the transaction would be reported as: A. 400 shares at $40. B. 400 shares at $41. C. 400 shares at $41. D. 400 shares at $40.50; 400 shares at $41.50: The best answer is B. This is an agency cross transaction - where a buy order for a customer and a sell order for another customer are "crossed" by the market maker. There is only 1 report of the trade made to ACT - that is, for the sell side. If there was a report made of both the buy and sell, there would be a double report of the same trade. All trade reports are made at the price of the trade excluding commissions, mark-ups; mark-downs; or service fees.
- "Fairness opinions" that issuers obtain in connection with acquisitions express an opinion on the: A. financial fairness of the transaction B. legal fairness of the transaction C. accounting fairness of the transaction D. fairness and reasonableness of the transaction: The best answer is A. Fair- ness opinions are typically obtained by both parties in a corporate takeover. The intent of the opinion is to have an outside, independent advisor give an opinion of the fairness of the price of the deal. This gives the Board of Directors of each company that is a party to the deal a "fig leaf" against a shareholder suit that the price paid was too high (the acquiring company's shareholders believe that the company overpaid and wasted the shareholders' capital); or that the price paid was too low (the takeover target company's shareholders believe that the price is too low and that they are being underpaid for their shares).
- An individual who is independent of the agent handling a tender offer is in possession of material non-public information relating to the offer, which has
Study online at https://quizlet.com/_d02sin not yet been publicly announced. This individual: A. cannot buy any securities of the issuer until the offer is announced B. may buy the issuer's non-convertible debt securities before the offer is announced C. may buy the issuer's equity and equity related securities before the offer is announced D. can buy call options on the company's stock issued by the Options Clearing Corporation at any time: The best answer is B. Under SEC Rule 14e-3, during the life of a tender offer, an individual who receives material nonpublic information from the maker of the offer about the offer itself, or how it is progressing, is treated as an "insider." Therefore, that individual cannot buy the issuer's common stock, convertible securities or options on these securities until the news of the offer is broadly disseminated to the public. Note that the purchase of non-convertible debt is permitted, since the security not equity-related and its price would not be impacted by the news of the offer. Note that once the offer is publicly disclosed, then it is no longer treated as "inside" information, and that individual is permitted to buy that issuer's equity-related securities. Finally, note that if this individual worked for the agent, issuer or broker-dealer involved in communicating about the offer, the prohibition would apply throughout the entire life of the offer - not just until the offer was publicly announced.
- Which individual associated with a member firm is NOT required to be registered with FINRA as a principal? A. Branch Office Manager B. Office of Supervisory Jurisdiction Manager C. Member Firm Officer D. Designated AML Compliance Pers: The best answer is D. Surprisingly, there is no requirement that a firm's anti-money laundering (AML) officer be registered with FINRA. The Designated AML compliance person, who is responsible for creating and enforcing the firm's written AML program, must be an "associated person." FINRA states that this person can either be registered or not, which seems sort of unusual, until you consider that when the rule went into place, AML programs were in place at banks, but not broker-dealers. This way a bank could hire an experienced AML person from a bank without worrying about having to get that person registered and passing a difficult test! FINRA requires managers of Branch Offices, managers of Offices of Supervisory Jurisdiction and officers of the firm to be registered as principals. The only officer of a member firm that is not required to be registered is a passive owner, with no day-to-day management responsibilities. (Also note that for very small offices,
