08 Rules and Regulations Flashcards

Question 1

Q

An omitting prospectus for a mutual fund containing performance data must include a legend disclosing which of the following?

I. The performance data quoted represents past performance
II. Past performance does not guarantee future results
III. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost
IV. The fund currently has a 10% chance of finishing in the top 5%+ of its peer group.

A. Ill only
B. I, II, III only
C. I only
D. I, II, III, IV

Answer

A

B. I, II, III only

Rationale:
You will see these three statements on any mutual fund
print advertisement in a magazine or newspaper

Question 2

Q

Which of the following would tell a bank how much credit it may extend to a broker-dealer borrowing money to re-lend to a margin customer?

A. Regulation T
B. Regulation D
C. Regulation 147
D. Regulation U

Answer

A

D. Regulation U

Rationale:
Think of the last name “Eubanks.” Reg U tells banks how much credit to extend. Reg T tells broker-dealers how much credit to extend.

Question 3

Q

Arbitration is binding in which of the following disputes?

I. Member versus another member
II. Member versus transfer agent
III. Member versus registered representative
IV. Customer versus member

A. II, II
B. I, II, III, IV
C. I
D. I,II,III

Answer

A

B. I, II, III, IV

Rationale:
Arbitration is always binding on anyone who uses arbitration. It isn’t mandatory that a customer use arbitration, but if the customer uses it, he/she is bound by the decision. Also remember that once the customer signs the arbitration agreement, he/she must then use arbitration rather than the civil courts to pursue monetary disputes.

Question 4

Q

Arbitration is mandatory in which of the following monetary
disputes?

I. Member versus another member
II. Member versus registered representative
III. Customer versus member

A. II,III
B. I,II
C. I
D. I,II,III

Answer

A

B. I,II

Rationale:
Only if the customer has signed the arbitration agreement. Then it’s mandatory.

Question 5

Q

A registered representative claims that her broker-dealer employer owes her $100,000 in promised commissions. Pursuing the matter in arbitration, she loses the decision and receives nothing. She may appeal this decision to

A. None of the choices listed
B. SEC
C. NAC
D. DOE

Answer

A

A. None of the choices listed

Rationale:
No appeals to arbitration decisions. That’s the point of using the process—it prevents industry professionals from spending all their time suing and appealing.

Question 6

Q

None of the following is prohibited except:

A. Buying stock on NYSE while simultaneously selling it on a regional exchange at a different price
B. Sharing gains and losses with a customer in an approved joint account in proportion to the capital commitment on the part of the registered rep
C. Sharing commissions with other registered agents at the firm
D. Recommending a security to all | 200 clients on a broker’s book of business

Answer

A

D. Recommending a security to all | 200 clients on a broker’s book of business

Rationale:
No “blanket recommendations.” The registered rep has to take each client’s needs and objectives into consideration.

Question 7

Q

Your sister is the CFO for a large publicly traded company. Over a few too many martinis she tells you that her company is about to surprise Wall Street by beating earnings estimates by over 20 cents a share. Next morning you call your best clients and tell them to buy the company’s stock in advance of the earnings announcement. Your activities represent:

A. A violation of federal securities laws
B. All choices listed
C A violation of FINRA rules
D. A violation of the Securities Exchange Act of 1934

Answer

A

B. All choices listed

Rationale:
Your sister violated federal securities laws—the Securities Exchange Act of 1934, specifically, which was beefed up by the “Insider Trading Act of 1988.” You violated both federal securities laws and SRO rules with this type of sordid activity.

Question 8

Q

The CEO of a pharmaceutical company tells a well-known TV personality that the FDA will announce tomorrow that the company’s promising new drug has not been approved for sale. The TV personality sells her shares immediately, avoiding a $200,000 loss that would have occurred had she held the shares until after the announcement This violation of the Insider Trading Act would most likely result in a fine of:

A. $1,000,000
B. $200,000 plus interest
C $600,000
D. as determined by Congress and the President

Answer

A

C $600,000

Rationale:
The civil penalty is 3 times the amount of the benefit (treble damages).

Question 9

Q

The Securities Exchange Act of 1934 covers all of the following except:

A. Contents of a preliminary prospectus
B. Fraudulent sales
C. Insider trading
D. Registration of persons

Answer

A

A. Contents of a preliminary prospectus

Rationale:
Prospectus, paper, primary all = Act of 1933. The other stuff here is covered by the Act of 1934.

Question 10

Q

NASD, pre-FINRA, was chartered as the SRO for the OTC market through the passage of:

A. The Securities Act of 1929
B. FINRA Authorization Act
C. The MaIoney Act
D. The SRO-OTC Act

Answer

A

C. The MaIoney Act

Rationale:
The other three choices are bogus. Sorry about that.

Question 11

Q

The Department of Enforcement decides that you must pay a $10,000 fine for making unsuitable recommendations in several client portfolios. You may appeal this decision to:

A. The SEC
B. No one, no appeals to DOE decisions are allowed
C. The NAC
D. The NAC, within 25 days

Answer

A

D. The NAC, within 25 days

Rationale:
NAC stands for “National Adjudicatory Council,” the first
level of appeals. You have 25 days to file that appeal. Don’t confuse this with Arbitration. No appeals to arbitration, ever.

Question 12

Q

Whenever a registered representative receives a written complaint from a customer, he must immediately forward the complaint to the:

A. Margin department
B. SEC
C. Principal
D. FINRA

Answer

A

C. Principal

Rationale:
Take the written complaints to the principal/supervisor.

Question 13

Q

Which of the following securities are “margin-able”?

A. Options
B. Mutual funds
C. IBM
D. IPO shares

Answer

A

C. IBM

Rationale:
Probably not a testable point, but I’d sure hate to assume anything with this opponent!

Question 14

Q

Your client has granted you discretion over her account She is a fixed-income investor nearing retirement, with a low risk tolerance. If you purchase penny stocks for this account, you have:

A. All choices listed
B. Made an unsuitable purchase
C. Violated FINRA rules
D. Made an unauthorized purchase

Answer

A

A. All choices listed

Rationale:
The transaction was both unauthorized and unsuitable. In other words, just recommending the security was a violation—when you went ahead and bought it without talking to the investor, you really stepped in it.

Question 15

Q

A broker-dealer’s advertising and sales literature must be on file for:

A. 3 years
B. 90 days
C. 2 years
D. 1 year

Answer

A

A. 3 years

Rationale:
Just another number for you to memorize and enjoy.

Question 16

Q

Who grants approval for a broker-dealer’s advertising and sales literature?

A. MSRB
B. SEC
C. Principal
D. FINRA

Answer

A

C. Principal

Rationale:
Advertising/sales literature is approved in-house by a
principal. The other folks are all way too busy to look at every single firm’s advertising/sales literature. They might do a spot inspection from time to time, but they don’t have the time or the room for storing and examining every firm’s material.

Question 17

Q

A registered rep working for Broker-Dealer XYZ wants to start an investment account with Broker-Dealer PDQ. If both
firms are FINRA members, which of the following correctly describes the steps that need to be taken?

A. Broker-Dealer PDQ must notify XYZ in writing and send duplicate trade confirmations upon request
B. Broker-Dealer PDQ must receive written permission from XYZ
C. The account may not be opened
D. The account may be opened upon the signing of a notarized affidavit

Answer

A

A. Broker-Dealer PDQ must notify XYZ in writing and send duplicate trade confirmations upon request

Rationale:
The employing broker-dealer must be notified by the other firm. The other firm will send duplicate trade confirmations if the employing broker-dealer requests it, not automatically. The agent or other employee also has to indicate that he/she is employed by a broker- dealer when starting the account at the other firm.

Question 18

Q

An associated person would include which of the following?

A. Agent
B. All choices listed
C. Principal
D. Registered representative

Answer

A

B. All choices listed

Both agents and principals are “associated persons” of member firms. An agent could be referred to by many different terms agent, sales representative, salesperson, registered representative, account executive, etc.

Question 19

Q

Which of the following represent
accurate statements of 12b-
distribution fees?

I. Typically used to cover management fees
II. Typically higher on B and C shares compared to A shares III. May not be charged by no-load funds
IV. Labeled an operating expense

A. II, IV
B. I
C. III
D. I, II, IV

Answer

A

A. II, IV

Rationale:
No-load funds keep the 12b-1 fee to no more than .25%. Management fees are listed as one operating expense, and the 12b-1 fee is separate from that. The other expenses are typically listed as “other expenses” and with a little digging the investor can see which items are included under that heading, plus the total expense ratio.

Question 20

Q

An open-end fund advertises itself as a “no-load fund,” even
though it does deduct a 12 b-1 fee. What is true of this situation?

A. It is permissible provided the fee does not exceed .25% of POP
B. It is a violation of FINRA rules
C. It is permissible provided the fee does not exceed .25% of average net assets
D. It is a violation of SEC rules

Answer

A

It is permissible provided the fee does not exceed .25% of average net assets.

Rationale:
Distribution expenses (selling, printing, mailing, advertising) are either covered by sales loads if the fund uses a distributor or by 12 b-1 fees if the fund acts as its own distributor. This is an annual fee deducted quarterly, not a percentage of each purchase.

Question 21

Q

Mutual funds may publish expected returns for which of
the following periods?

A. 5 years
B. 3 years
C. None of the choices listed
D. 1 year

Answer

A

C. None of the choices listed

Rationale:
No projections, ever. Past performance, not expected performance.

Question 22

Q

Your firm is the sponsor of an open-end fund. In order to push sales of the fund, you offer $150 to the registered representative of any FINRA member firm who sells the most shares. This practice:

A. None of the choices listed
B. Is acceptable with approval of the firm’s principal
C. Is a violation
D. Is acceptable

Answer

A

C. Is a violation

Rationale:
The limit on gifts to other members is $100 per year. Your own firm might have a sales contest for its rep’s, but you can’t give other firms and their reps more than $100 per person per year.

Question 23

Q

In order to close a big sale, a registered representative omits an immaterial fact to avoid distracting the customer. This activity:

A. Is a violation
B. Is fraudulent
C. Is perfectly acceptable for high-net worth clients
D. Is perfectly acceptable

Answer

A

D. Is perfectly acceptable

Rationale:
An immaterial fact would be the average height of all Ford
vice-presidents, or the most common middle name of GM employees. Who cares? Just don’t omit a material (relevant, important) fact.

Question 24

Q

During the offering period for XYZE, the manager of the
syndicate notices that the shares are being sold on the secondary market for $3 less than the public offering price.
Immediately, the manager appoints your firm, a member of the underwriting group, to go out on the secondary market and place bids above the CMV, all the way up to the POP. This action is:

A. Prohibited in all cases
B. Called “stabilization,” a routine occurrence in public offerings
C. Called “stabilization” and presents grounds for suspension
D. Prohibited and fraudulent

Answer

A

B. Called “stabilization,” a routine occurrence in public offerings

Rationale:
The syndicate promises to keep the price stable during the offering period. If the price drops, they go out and bid the
price up … all the way to the POP, but never higher.

Question 25

Q

Which of the following represent(s) accurate statements concerning statutory disqualification under FINRA rules?

A. All choices listed
B. An individual may be disqualified from associating with a member firm if he/she has been convicted of any felony in the past 10 years
C. An individual may be disqualified from associating with a member firm if he/she has been convicted of a securities-related misdemeanor in the past 10 years
D. A member firm may be disqualified if principals have been convicted of a non- securities-related felony in the past 10 years

Answer

A

A. All choices listed

Rationale:
It just doesn’t sound right letting a convicted felon take over people’s assets, get their bank routing numbers, what have you. So any felony in the past 10 years will probably keep someone out of the business. Any misdemeanor over the past 10 years will be a problem if it relates to “money crimes,” or crimes of dishonesty like theft, fraud, extortion, counterfeiting, bribery, forgery, or perjury. The U-4 makes the individual disclose all cases in which he was charged, convicted of, or pled guilty or no contest to any of the above, though, not just those that occurred in the past 10 years.

Question 26

Q

Rule 17f-2 of the Securities Exchange Act of 1934 requires officers and certain employees of member firms to submit fingerprints. Which of the following is/are subject to this rule?

I. Director of a NYSE-member broker-dealer
II. Officer of a FINRA-member broker-dealer
III. Registered representative of an FINRA-member broker-dealer
IV. Employee of a FINRA-member broker-dealer not involved in sales or clearing transactions

A. I
B. I, II, III
C. Ill
D. I, II, IV

Answer

A

B. I, II, III

Rationale:
If you’re not involved with sales or keeping the books on all the transactions, there is no reason to fingerprint you.

Question 27

Q

Which of the following investments most likely meet(s) the definition of a “security” as defined in the Securities Exchange Act of 1934, the Uniform Securities Act, and the Howey decision?

I. Certificate evidencing a 10% Ownership of a prize-winning racehorse
II. 5% interest in 5 ATM machines
III. Fixed Annuity
IV. Variable Annuity

A. IV
B. I, III, IV
C. I, II, IV
D. II

Answer

A

C. I, II, IV

Rationale:
A fixed annuity is not a security, and neither is whole/term life insurance. There is a difference between having a 5% interest in the profits generated by 5 ATM machines and actually owning machines. Anytime the investor puts in money and gets an interest in the profits of an operation, it’s probably a security.

Question 28

Q

Charla Davenport works in the investment banking division of a large broker-dealer. While working on the registration statement for a client’s new issue of debentures, Charla learns of certain negative financial information out the client company. Prior to the public release of this information Charla calls one of her best customers and reveals that “there could be trouble ahead” for the company’s common stock, instructing the customer not to repeat the information to anyone until the announcement is made. If the customer sells the company’s stock to avoid a loss

A. Both Charla and the customer have violated insider trading rules
B. Only Charla has violated insider trading rules
C. No violation of insider trading rules has occurred
D. Only the customer who sold the stock has violated insider trading rules

Answer

A

A. Both Charla and the customer have violated insider trading rules

Rationale:
It seems pretty clear that the customer knew the information was non-public when she took advantage of it.

Question 29

Q

Joanie Jenkins, a registered representativeforXYZBroker- Dealers, has a client who is an income investor. Knowing that the E-town Equity Income Fund is about to pay a dividend of $1.00 per share, Joanie recommends that the client purchase the fund promptly in order to receive the upcoming situation?

A. Joanie has violated the rule against selling dividends.
B. The E-town Equity Income Fund is unsuitable for an income investor, who would purchase bonds.
C. Joanie has made a suitable recommendation for an income investor.
D. Joanie has committed a violation known as breakpoint selling.

Answer

A

A. Joanie has violated the rule against selling dividends.

Rationale:
Never sell the upcoming dividend to somebody. It’s a
shell game in which she buys the dividend, watches the
stock drop by that amount, then pays tax on the dividend.

Question 30

Q

Under the Securities Exchange Act of 1934, which of the
following must register with the SEC?

A. Broker-dealer member firm of FINRA
B. Stock exchanges
C. All choices listed
D. National securities associations, such as FINRA

Answer

A

C. All choices listed

Rationale:
Three things to know about the ”Act of ‘34.”

Question 31

Q

A person is subject to disqualification from FINRA if the person

I. Has been suspended or expelled from membership in a self-regulatory organization
II. Is subject to an order of the SEC or other regulatory agency denying, suspending, or revoking registration
III. Has made a false or misleading statement in an application
IV. Has been convicted within the last ten years of a non-securities-related felony

A. I, II, and III only
B. II only
C. I, II, III, and IV
D. and IV only

Answer

A

C. I, II, III, and IV

Rationale:
Felonies don’t have to be related to money or fraud to keep you out of the industry. Beating someone to death with a piece of rebar will generally prove to be a red flag to FINRA regulators as well, whether directly related to securities or not. For, even though your honesty may be unquestioned, your temperament would seem a bad fit for dealing with clients whining about the value of their accounts when you’re just not in the friggin’ mood. On the other hand, a misdemeanor having nothing to do with money or dishonesty will not have to be disclosed. For example, misdemeanor open liquor or public urination charges (I’m just saying for example) would also not have to be disclosed.

Question 32

Q

Which of the following statement(s) accurately describes definitions under the Investment Company Act of 1940

I. Face-amount certificates are investments of periodic or lump sums whereby the issuer is obligated to pay a stated sum on a certain date more than 24 months after issuance
II. A unit investment trust (UIT) is an investment company organized as a trust, having no board of directors, and issuing only redeemable securities
III. An open-end fund is an example of a management company
IV. A closed-end fund is not an example of a management company

A. II
B. I, II, III
C. III
D. I, II, III, IV

Answer

A

B. I, II, III

Rationale:
There are face amount certificates, UlT’s, and management companies. Management companies include open-end and closed-end funds.

Question 33

Q

Which of the following represent true statements concerning a private placement under Reg D?

I. The maximum number of non- accredited investors is 35
II. There is no maximum number of non-accredited investors
III. The maximum number of accredited investors is 35
IV. The CFO of the issuer is an accredited investor

A. II, III only
B. I, IV only
C. I, III only
D. I only

Answer

A

B. I, IV only

Rationale:
No more than 35 non- accredited investors. No maximum number for accredited investors. The board members and officers of the issuer are accredited.

Question 34

Q

Which of the following represent(s) violations of FINRA rules concerning investment company securities?

A. All of the choices listed
B. A member firm acts as a distributor with a non-member firm
C. A member firm offers to promote a mutual fund provided the fund increase its trading volume through the firm’s trading department
D. A member firm acts as a distributor with a member firm without a formal sales agreement in place

Answer

A

A. All of the choices listed

Rationale:
All three are violations.

Question 35

Q

Which of the following would protect an investor against broker-dealer failure?

A. Anti-Embezzlement Protection Corporation
B. FDIC
C. FRB
D. SIPC

Answer

A

D. SIPC

Rationale:
SIPC is the Securities Investor Protection Corporation, a non-profit, industry-funded insurance company that protects a client account up to $500,000 in case the broker-dealer goes belly up and creditors seize assets that might actually belong to customers. Watch out for fictitious choices.

Question 36

Q

Under FINRA rules, certain persons are defined as “restricted persons” who may not purchase initial public offerings through member firms. Which of the following represent restricted persons for purposes of this rule?

A. Receptionist for a member firm not involved in the sales or trading operations of the firm
B. All of the choices listed
C. Portfolio manager for a large insurance company
D. Sister-in-law of a registered representative of a member firm

Answer

A

B. All of the choices listed

Rationale:
All broker-dealer employees are restricted, not just the registered rep’s.

Question 37

Q

Aranov Broker-Dealers, LLC has found that complying with FINRA rules on “telemarketing” is time-consuming and expensive. Therefore, the firm instructs its registered representatives to provide prospects with a 900-number should they wish to contact the firm for purposes of being placed on the firm’s do-not-call list. The charges are minimal and deemed reasonable by the firm’s chief compliance officer. Also, in order to reduce phone charges, the firm has instructed registered representatives to direct prospects to the 900-number if they would like the full name and title of the caller as well as the firm. What is true of this situation?

A. All of the choices listed
B. The firm has violated the rule by providing a toll number
C. The firm has violated the rule by instructing agents not to provide their name and the name of the firm they represent
D. The calling representatives must also identify that the purpose of their call is to interest the prospect in securities or related services

Answer

A

A. All of the choices listed

Rationale:
Three good things to know about cold-calling rules.

Question 38

Q

A member firm has entered into an informal agreement with a growth & Income mutual fund whereby the portfolio manager of the fund will trade exclusively through the member when the member’s sales of the growth & income fund to retail clients exceeds a specified target. What is true of this situation?

A. It represents common, acceptable arrangements between member firms and mutual funds.
B. As long as a compliance offer at the member firm.approves the arrangement in writing, no rules have been violated.
C. FINRA for bids member firms from offering to promote a
particular mutual fund based on the trading business executed on behalf of the fund.
D. It would not violate FINRA rules if the agreement were in writing

Answer

A

C. FINRA for bids member firms from offering to promote a
particular mutual fund based on the trading business executed on behalf of the fund.

Rationale:
No “shelf space programs” are allowed. Now, the broker-dealer can sell shares of the fund even if the fund executes trades through the firm. But, they can’t tie their enthusiasm for pushing the fund to the level of trading business the fund gives them.

Question 39

Q

Rory Haskins is a registered representative of Booya Broker- Dealers. During Rory’s second year of employment, he is called up for active duty by the USMC, a tour of duty expected to last three years. Therefore:

A. Rory will be placed on “inactive” status with FINRA and will not have to re-qualify by exam provided he completes the Firm and Regulatory Elements
B. Rory will be placed on “inactive” status with FINRA and will not have to re-qualify by exam or complete the Firm or Regulatory Elements
C. The USMC will defer to FINRA’s authority to grant or deny Rory a waiver
D. Rory will be required to re-qualify by exam after a three-year absence from the firm

Answer

A

B. Rory will be placed on “inactive” status with FINRA and will not have to re-qualify by exam or complete the Firm or Regulatory Elements

Rationale:
Of course you didn’t choose the answer that places FINRA in some position of authority over the United States Marine Corps. Rory will actually not have to re-take the Series 7, 6, etc. when he returns and will not have to take any continuing education requirements while dodging shrapnel and RPG’s in Iraq or Afghanistan.

Question 40

Q

When explaining the results of a bond mutual fund, an agent may combine capital gains distributions with dividend distributions to calculate yield:

A. For tax-exempt bond funds only
B. Under no circumstances
C. When doing so clarifies an important aspect of the results
D. With prior principal approval

Answer

A

B. Under no circumstances

Rationale:
Yield consists only of the dividend divided by the share price. Capital gains distributions (and capital appreciation) go into the “total return” calculation only. If an agent isnt clear, the investor can be misled.

Question 41

Q

What must be disclosed on the trade confirmation for all stock transactions?

A. Price the dealer originally paid for the security
B. Name of the contra party
C. Amount of the commission
D. Amount of the markup

Answer

A

B. Name of the contra party

Rationale:
Some transactions are done for a commission, some for a markup, so you had to eliminate those two choices. The “contra party” is the seller or buyer on the “other side” of the transaction.

Question 42

Q

What must be disclosed on the trade confirmation for all stock transactions?

A. Price the dealer originally paid for the security
B. Name of the contra party
C. Amount of the commission
D. Amount of the markup

Answer

A

B. Name of the contra party

Rationale:
Some transactions are done for a commission, some for a markup, so you had to eliminate those two choices. The “contra party” is the seller or buyer on the “other side” of the transaction.

Question 43

Q

Which of the following are Self- Regulatory Organizations (SRO’S)?

I. CBOE
II. FINRA
III. MSR
IV. SEC

A. I, II, III
B. I, II, III, IV
C. II
D. III

Answer

A

A. I, II, III

Rationale:
The SEC is a government body-the federal government. The others register with the SEC and function as “self-regulatory organizations.”

Question 44

Q

Which of the following represent accurate statement(s) concerning statutory disqualification under FINRA rules?

A. An individual may be disqualified from associating with a member firm if he/she has been convicted of any felony in the past 10 years
B. An individual may be disqualified from associating with a member firm if he/she has been convicted of a securities-related misdemeanor in the past 10 years
C. All choices listed
D. A member firm may be disqualified if principals have been convicted of a non-securities-related felony in the past 10 years

Answer

A

C. All choices listed

Rationale:
Any securities-related misdemeanor, and any felony over the past 10 years can be used to disqualify an applicant. The term “securities-related” does not mean that something happened in the securities business. It means that the securities business is no place for people who forge signatures, lie under oath (perjury), steal, print bogus money (counterfeiting), force money out of people (extortion), and commit other crimes directly related to the securities industry.

Question 45

Q

A Series 6 licensee may accept orders for which of the following?

A. Treasury bonds
B. REITs (real estate investment trusts)
C. Preferred stock
D. Closed-end fund in the primary market

Answer

A

D. Closed-end fund in the primary market

Rationale:
The Series 6 allows you to sell mutual funds, variable annuities, variable life insurance, UlT’s, and you can also be part of a primary offering for a closed-end fund. Once the closed-end shares trade among investors on the secondary market, you would have to let a Series 7 licensee take those orders.

Question 46

Q

An arbitration claim may not be initiated after:

A. 3 years
B. 10 years
C. 6 years
D. 5 years

Answer

A

C. 6 years

Rationale:
Customer complaints are kept on file for 6 years because after that it’s too late for a customer to file an arbitration complaint.

Question 47

Q

A person is subject to disqualification by FINRA if the
person

I. Has been suspended or expelled from membership in a self-regulatory organization
II. Is subject to an order of the SEC or other regulatory agency denying, suspending, or revoking registration
III. Has made a false or misleading statement in an application
IV. Has been convicted within the last ten years of any felony

A. Ill and IV only
B. I and II only
C. I and III only
D. I, II, III, and IV

Answer

A

D. I, II, III, and IV

Rationale:
Basically, if the SEC or any other securities/financial regulator has taken action against the individual, things are not looking good. Any felony or any misdemeanor related to money, fraud, forgery, perjury, dishonesty, etc. will also keep the applicant from getting registered in most cases.

Question 48

Q

Under FINRA rules, certain persons are defined as “restricted persons” who may not purchase initial public offerings through member firms. Which of the following represent restricted persons for purposes of this rule?

A. Receptionist for a member firm not involved in the sales or trading operations of the firm
B. Portfolio manager purchasing for her own account
C. Brother-in-law of a registered representative for a member firm
D. All of the choices listed

Answer

A

D. All of the choices listed

Rationale:
Because of the abuses during the go-go 90’s, just about nobody working at a broker- dealer or their immediate family can buy an IPO now.

Question 49

Q

Which of the following statement(s) accurately describes definitions under the Investment Company Act of 1940

I. Face-amount certificates are investments of periodic or lump sums whereby the issuer is obligated to pay a stated sum on a certain date more than 24 months after issuance
II. A unit investment trust (UIT) is an investment company organized as a trust, having no board of directors, and issuing only redeemable securities
III. An open-end fund is an example of a management company
IV. A closed-end fund is an example of a management company

A. I, II, III, IV
B. I, II, III
C. II
D. III

Answer

A

A. I, II, III, IV

Rationale:
Face amount certificate, UIT, management company. The two management companies are open-end and closed-end funds.

Question 50

Q

A member firm acts as a distributor for variable annuity contracts. The member, who is headquartered in Des Moines, Iowa, would like to provide a training seminar for registered representatives. What is true of this situation?

A. As long as the attending registered representatives achieved at least $1 million in sales, this would be acceptable
B. The member may reimburse registered representatives and one guest for all seminar-related expenses
C. The member may reimburse the registered representative for his/her expenses only and may not precondition attendance on achieving a specific sales target.
D. As long as the attending registered representatives are limited to those meeting a specific sales target, this would be acceptable

Answer

A

C. The member may reimburse the registered representative for his/her expenses only and may not precondition attendance on achieving a specific sales target.

Rationale:
It had better be a true seminar where people could reasonably be expected to leam about more than the finer points of snorkeling and karaoke. And. it can not be for representatives who reach a certain sales target. Otherwise, the distributors would be motivating firms/reps to promote annuities that reward them with tropical vacations rather than annuities that best meet their investors’ needs. The sponsor can’t cover the guest’s expenses-only the rep’s.

Question 51

Q

Kelly, a registered representative of a member firm, services her mother-in- law’s investment account held at
the firm. Recently, Kelly’s mother-in-law offered to lend Kelly $5,000 toward the purchase of a townhouse.
Which statement most accurately addresses this situation?

A. Since Kelly’s mother-in-law is a member of the immediate family, the member firm may not set policy on such loans
B. It is always a violation for a registered representative to borrow money from a client of a member firm
C. The firm must file a suspicious activity report to FinCEN
D. The member must have written policy addressing loans of this nature and may decide that notification is not required concerning loans from or to immediate family members

Answer

A

D. The member must have written policy addressing loans of this nature and may decide that notification is not required concerning loans from or to immediate family members

Rationale:
The firm will establish a policy for this and for borrowing from a client who is a business partner, or someone with whom the rep had an outside relationship. The firm can be as strict as they care to be.

Question 52

Q

A member firm acts as a distributor for variable annuity contracts. The member, who is headquartered in Des Moines, Iowa, would like to provide a training seminar for registered representatives. What is true of this situation?

A. As long as the attending registered representatives achieved at least $1 million in sales, this would be acceptable
B. The member may reimburse registered representatives and one guest for all seminar-related expenses
C. The member may reimburse the registered representative for his/her expenses only and may not precondition attendance on achieving a specific sales target.
D. As long as the attending registered representatives are limited to those meeting a specific sales target, this would be acceptable

Answer

A

C. The member may reimburse the registered representative for his/her expenses only and may not precondition attendance on achieving a specific sales target.

Rationale:
It had better be a true seminar where people could reasonably be expected to leam about more than the finer points of snorkeling and karaoke. And. it can not be for representatives who reach a certain sales target. Otherwise, the distributors would be motivating firms/reps to promote annuities that reward them with tropical vacations rather than annuities that best meet their investors’ needs. The sponsor can’t cover the guest’s expenses-only the rep’s.

Question 53

Q

Kelly, a registered representative of a member firm, services her mother-in- law’s investment account held at
the firm. Recently, Kelly’s mother-in-law offered to lend Kelly $5,000 toward the purchase of a townhouse.
Which statement most accurately addresses this situation?

A. Since Kelly’s mother-in-law is a member of the immediate family, the member firm may not set policy on such loans
B. It is always a violation for a registered representative to borrow money from a client of a member firm
C. The firm must file a suspicious activity report to FinCEN
D. The member must have written policy addressing loans of this nature and may decide that notification is not required concerning loans from or to immediate family members

Answer

A

D. The member must have written policy addressing loans of this nature and may decide that notification is not required concerning loans from or to immediate family members

Rationale:
The firm will establish a policy for this and for borrowing from a client who is a business partner, or someone with whom the rep had an outside relationship. The firm can be as strict as they care to be.

Question 54

Q

Which of the following persons may a registered representative call at a primary residence before 8 AM?

A. Either choice listed
B. Neither choice listed
C. An investor who has held an IRA account with the firm for two years
D. An investor who has expressed interest in completing a transfer of funds from a 401 (k) plan to an IRA at the firm

Answer

A

A. Either choice listed

Rationale:
The cold calling rules protect prospects from unwanted phone calls. If it’s an existing customer, or if the person has expressed an interest in writing, you can call that person even before 8 AM in her time zone.

Question 55

Q

Under FINRA Rules on communications with the public, a registered representative participating in a chat room about securities products would be defined as:

A. Sales literature
B. Public appearance
C. Institutional sales literature
D. Advertising

Answer

A

B. Public appearance

Rationale:
Know the different types of communications for the exam. Other examples of “public appearances” would bespeaking engagements for, say, a local chamber of commerce or a PTA group. Always get these things approved by a compliance officer/principal before going forward.

Question 56

Q

A registered representative sees an article in a major national financial magazine talking up the performance of a mutual fund that her firm sells. The registered representative would like to photocopy the article and send it to her clients. What is true of this situation?

A. A principal at the firm must approve the article.
B. This is a violation known as “pegging”
C. A principal at the firm must approve the article and file it with FINRA within 10 days of first use.
D. Photocopies of magazine articles may not be sent to customers.

Answer

A

A. A principal at the firm must approve the article.

Rationale:
For independently prepared reprints, a principal must approve it, but will file it internally. Advertising and sales literature connected to investment company shares that has not been filed previously must be filed with FINRA. The independently prepared reprint is subject to FINRA spot checks, which is why it needs to be filed at the firm.

Question 57

Q

Under FINRA Rules on communications with the public, a registered representative participating in a chat room about securities products would be defined as:

A. Sales literature
B. Public appearance
C. Institutional sales literature
D. Advertising

Answer

A

B. Public appearance

Rationale:
Know the different types of communications for the exam. Other examples of “public appearances” would bespeaking engagements for, say, a local chamber of commerce or a PTA group. Always get these things approved by a compliance officer/principal before going forward.

Question 58

Q

Using a prospectus in selling a security relieves a salesperson from the responsibility to disclose to a customer

A. Neither choice listed
B. Negative financial information about the company, i.e. Moody’s downgrade
C. Highly competitive nature of the corporation’s industry
D. Both choices listed

Answer

A

A. Neither choice listed

Rationale:
You must present the prospectus, but if you know other material information, you would also need to disclose that to a customer.

Question 59

Q

Last week you sent a prospectus for the Argood Capital Appreciation Fund to a client. The client calls back, telling you she still has questions about the fund and would like to bring the prospectus in with her for a meeting at your office. You:

A. May highlight the most important pages of the document for your client
B. May draft a brief summary of the prospectus and give it to the client
C. May provide supplemental sales literature on the fund
D. Must not further discuss any concepts already explained in the prospectus

Answer

A

C. May provide supplemental sales literature on the fund

Rationale:
Never highlight a prospectus or create your own little written summary.

Question 60

Q

Why is selling dividends considered a violation?

A. Investors do not actually receive the first dividend distribution until shares have been held fully paid for one financial quarter.
B. Investors do not actually receive the first dividend distribution until shares have been held fully paid for 30 calendar days.
C. Dividend distributions are already included in the price paid for the security.
D. Dividends create tax burdens for investors and should, therefore, be avoided.

Answer

A

C. Dividend distributions are already included in the price paid for the security.

Rationale:
You pay the price of the mutual fund share, then you get back, say, $1. The day they pay the $1, the NAV drops by $1. So you, effectively, “bought the dividend,” which is taxable.

Question 61

Q

One of your clients calls to inquire about an aggressive growth fund that your firm sells and requests a prospectus. Since her objectives perfectly match the objectives of the fund, you explain the risks involved and discuss the various methods of reducing the front-end sales charges on A-shares. The client invests $3,000 in the fund. Therefore:

A. A prospectus is not required for an unsolicited order such as this
B. You have complied with suitability requirements
C. No violations have occurred, provided the client does not lose more than % of her principal
D. You have violated prospectus delivery requirements

Answer

A

D. You have violated prospectus delivery requirements

Rationale:
If the client requests a prospectus, can you think of a
reason not to deliver one?

Question 62

Q

Why is selling dividends considered a violation?

A. Investors do not actually receive the first dividend distribution until shares have been held fully paid for one financial quarter.
B. Investors do not actually receive the first dividend distribution until shares have been held fully paid for 30 calendar days.
C. Dividend distributions are already included in the price paid for the security.
D. Dividends create tax burdens for investors and should, therefore, be avoided.

Answer

A

C. Dividend distributions are already included in the price paid for the security.

Rationale:
You pay the price of the mutual fund share, then you get back, say, $1. The day they pay the $1, the NAV drops by $1. So you, effectively, “bought the dividend,” which is taxable.

Question 63

Q

Registered representatives are warned against the practice of encouraging customers to frequently liquidate shares of a mutual fund in order to purchase shares of another fund, especially if the fund is within a different family. Which of the following represent acceptable justifications for encouraging a customer to switch from one fund to another fund inside a different mutual fund family

I. The investor’s objectives have changed.
II. The investor’s risk tolerance has changed.
III. The fund the investor has owned for three years has a contingent deferred sales charge.
IV. The fund the investor plans to purchase pays higher compensation to registered representatives.

A. II only
B. I only
C. I, II only
D. I, III only

Answer

A

C. I, II only

Rationale:
You can’t base the decision on the commissions you’ll receive, and if there is a contingent deferred sales charge, the investor will get hit pretty hard in the third year.

Question 64

Q

If a mutual fund distributor would like registered representatives to consider recommending a mutual fund to suitable clients, registered representative are permitted to accept from the distributor all of the following except:

A. $75 worth of coffee mugs with the fund’s name and logo
B. Reimbursement for attending a 2- day educational seminar on the funds held in Des Moines, Iowa
C. Four days at a Caribbean resort in reward for selling a certain amount of the fund
D. Two tickets to a professional baseball game

Answer

A

C. Four days at a Caribbean resort in reward for selling a certain amount of the fund

Rationale:
Gifts to persons in the industry are not to exceed $100 per year. Rep’s can not be rewarded with vacations in exchange for meeting a sales target of the distributor’s mutual funds.

Answer 65

A

A. III, IV

Rationale:
If the letter/email goes to 25 or more prospects, it leaves the category of “correspondence” and becomes “sales literature.” Why would that matter? Sales literature must be pre-approved. Correspondence must be regularly monitored.

Answer 66

A

B. Letter sent to fewer than 25 retail prospects in a 30-day period

Rationale:
If it’s fewer than 25, it’s correspondence, not sales literature.

Answer 67

A

B. None of the choices listed

Rationale:
No projections of future returns for mutual funds, ever.

Answer 68

A

C. I, II, and III

Rationale:
FINRA will bust you for violating SEC rules. And when those folks crack the whip on you, they’re usually very diligent in reporting their action to the state where you used to have a license.

Answer 69

A

B. None of the choices listed

Rationale:
No projections of future returns for mutual funds, ever.

Answer 70

A

B. This is a violation of FINRA conduct rules because the registered representative gave her employer no opportunity to supervise her activities

Rationale:
This is a violation called “selling away.” Never offer investments without letting your firm first know about your crazy intentions.

Answer 71

A

D. Recruiting advertisement

Rationale:
All other advertising must contain the name of the member firm. Recruiting ads might just ask interested candidates to apply for a job and send the resume to a PO Box without identifying the firm. That way they won’t have to field 250 phone calls from over aggressive sales types trying to gain on edge on the hiring process.

Answer 72

A

D. Refrain from sotiticing the purchase of a variable annuity at this time

Rationale:
customers must be given a prospectus either at or before they are solicited for a purchase of a variable annuity or a mutual fund. So, if you don’t have a prospectus handy . . . wait. You can talk in general about variable contracts, but don’t try to pitch a particular variable annuity unless you have a prospectus with you, or one has already been delivered to the customer.

Answer 73

A

C. Books and records are maintained there

Rationale:
Think in terms of activity-where is market making, investment banking, or custody taking place?

Answer 74

A

D. Refrain from sotiticing the purchase of a variable annuity at this time

Rationale:
customers must be given a prospectus either at or before they are solicited for a purchase of a variable annuity or a mutual fund. So, if you don’t have a prospectus handy . . . wait. You can talk in general about variable contracts, but don’t try to pitch a particular variable annuity unless you have a prospectus with you, or one has already been delivered to the customer.

Answer 75

A

B. The customer becomes a general creditor

Rationale:
if the account balance is bigger than the SIPC coverage, the customer becomes a general creditor for the difference.

Answer 76

A

D. Daniella has likely made an unsuitable recommendation and may be disciplined as well as pursued via arbitration

Rationale:
A totally unsuitable recommendation, but she can’t try to make it go away by offering to repurchase the securities to guarantee against a loss.

Answer 77

A

A. Advertising reaches an audience that, by definition, is not as targeted as that receiving sales literature

Rationale:
Both advertising and sales lit must be pre-approved by a principal and filed for 3 years. Advertising uses the broadcast media while sales literature is delivered to a more targeted audience.

Answer 78

A

B. You must receive prior principal approval of the seminar and any materials connected to it

Rationale:
This is definitely a form of communications that a principal must pre-approve. Don’t assume that fancy words like “adjourn” indicate a correct answer.

Answer 79

A

D. Must promptly notify her employer of the account and the carrying member of her new employment status

Rationale:
Employees of broker-dealers must notify their employer of any outside accounts and must notify the firm carrying the account that they work for a member firm (or have an immediate family member in the business)

Answer 80

A

B. A non-registered receptionist of a broker-dealer opens an account at a different member firm

Rationale:
Rental income is “passive income” and not considered to be working outside the firm. The rule about disclosing accounts at other firms applies to all broker-dealer personnel, not just registered persons.

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08 Rules and Regulations Flashcards

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