Chapter 05 : Sales Supervision - Secondary Market Flashcards
What forms of communication are required to be approved by a principal, but NOT filed with FINRA?
Email recommendations, telemarketing or sales scripts, independently prepared reprints, and ads promoting products
What retail communications are required to be filed with FINRA WITHIN 10 days of first use?
Those related to DPPs, CMOs, and ETNs, as well as templates for reports produced by investment analysis tools
When must retail communication concerning CMOs be filed with FINRA?
Within 10 business days of first use
Within 10 business days of first use
What ownership level triggers a disclosure requirement in a research report?
Greater than 1%
Name a type of transaction that is exempt from FINRA’s Debt Markup Policy.
Transactions in municipal securities
True or False: Retail communication related to mutual funds must be pre-filed with FINRA.
False. The rule specifically states that retail communication must be filed within 10 days of initial use.
Does the 5% policy apply when a BD is acting in an agency capacity, a principal capacity, or both?
Both
When may a registered representative be in charge of an office?
When it is a small office with three or fewer representatives
The Telephone Consumer Protection Act (TCPA), allows calls from ________ to ________ local time of the called party.
The Telephone Consumer Protection Act (TCPA), allows calls from 8:00 a.m. to 9:00 p.m. local time of the called party.
Does correspondence require the preapproval of a principal?
No. Correspondence does not require principal approval.
Under FINRA’s communication rules, form letters sent to 12 retail investors is considered ______________.
Under FINRA’s communication rules, form letters sent to 12 retail investors is considered correspondence.
True or False: Proceeds transactions are subject to the 5% Markup Policy.
True
What orders are exempt from the Limit Order Protection Rule?
Orders from institutional accounts and orders of 10,000 shares or more worth at least $100,000
According to the TCPA, what information must telephone solicitors provide to clients?
Their name, firm name, a telephone number, or address where they can be contacted, and the purpose of the call
An unlisted, non-Nasdaq stock priced below $5.00 per share is called a ____________________.
An unlisted, non-Nasdaq stock priced below $5.00 per share is called a penny stock.
When must a research report be approved?
Prior to first use by a Supervisory Analyst
What are some of the special standards that firms follow in regard to soliciting sales of penny stocks?
Determine suitability, principal approval, send risk disclosure, client’s written authorization for the first 3 trades
Is a research analyst allowed to buy shares while recommending that investors sell the shares?
No. Recommending a contrary trade is prohibited.
True or False: A 200-share trade of MSFT on Nasdaq is subject to the 5% policy.
True, the 5% Policy covers trades executed in the secondary market.
If a testimonial is used that relates to a technical aspect of investing, what is required of the provider?
The provider must have the knowledge and experience to form a valid opinion.
True or False: Firms failing to adhere to the Taping Rule requirements could be disciplined under the Code of Procedure.
True
List the three forms of communications with the public.
Retail communication, institutional communication, and correspondence
Under FINRA’s communication rules, what is meant by the term broadly disseminated?
That material has been created for generally accessible Web sites, print media, and television or radio
For accounts opened on the premises of a financial institution, what must BDs disclose regarding the products offered?
That the products are not insured by the FDIC and are subject to investment risk (potential loss)
For a firm’s first year as a FINRA member, when must its broadly disseminated retail communications be filed with FINRA?
10 business days prior to their first use
What are the rules about referring to past recommendations?
The period must cover at least one year and the firm must include all recommendations for the same type of security.
What factors could justify a larger markup than 5%?
The type of security, the availability of the security, or the total transaction amount
According to FINRA rules, list some of the persons that are considered institutional investors.
Banks, insurance companies, investment companies, investment advisers, FINRA members and their RRs
If retail communication has been pre-approved by a mutual fund wholesaler, must it be approved by a principal?
Yes. However, there is no need to re-file the retail communication with FINRA.
Retail communication for collateralized mortgage obligations (CMOs) must be filed within ____ business days of use.
Retail communication for collateralized mortgage obligations (CMOs) must be filed within 10 business days of use.
Retail communication related to mutual funds must be filed with FINRA within ____ business days of first use.
Retail communication related to mutual funds must be filed with FINRA within 10 business days of first use.
True or False: When referencing FINRA membership on a Web site, at least one hyperlink to the FINRA Web site is required.
If a member firm makes a recommendation to a client, what types of conflicts must be disclosed?
If a member firm makes a recommendation to a client, what types of conflicts must be disclosed?
Whether the member firm owns the security, makes a market in the security, or acted as an underwriter for that company
Under the communication rules, group e-mail sent to more than 25 retail investors is considered ____________________.
Under the communication rules, group e-mail sent to more than 25 retail investors is considered retail communication.
True or False: A 500-share trade of an NYSE stock executed in the OTC market is subject to the 5% Policy.
True, third market trades (exchange-listed securities traded OTC) are subject to the 5% Policy.
A small office is defined as one with ______ or fewer representatives.
A small office is defined as one with three or fewer representatives.
May an RR write a research report and not hold the title research analyst?
Yes
What is required for a research analyst to effect a sale of a stock while currently making a buy recommendation on it?
Permission from her legal department and the sale must qualify under the financial hardship rules
Is correspondence subject to principal approval?
No, but it must be reviewed by the firm.
Who signs a BD’s annual compliance certification?
The firm’s CEO
What are the permissible hours of operation for a customer help line?
24 hours a day/7 days a week. Client call-in lines are not bound by the Telephone Consumer Protection Act (TCPA).
If a firm reduces its staff to avoid the Taping Rule, the individuals may not be rehired for ____ days.
If a firm reduces its staff to avoid the Taping Rule, the individuals may not be rehired for 180 days.
True or False: Institutional communication must be preapproved by a principal and filed with FINRA.
False. Institutional communication is not required to be preapproved or filed with FINRA.
How is the volume weighted average price (VWAP) calculated?
By dividing the total dollar value of all trades by the total trading volume over a set period
True or False: A riskless or simultaneous transaction is subject to the 5% Policy.
True
A trade is booked into a client’s account on the day after the trade date. How may the trade be designated?
According to FINRA, the guideline for determining commission or markup on transactions is ___%.
According to FINRA, the guideline for determining commission or markup on transactions is ___%.
According to FINRA, the guideline for determining commission or markup on transactions is 5%.
Under Penny Stock Rules, when does a customer become established?
When they have purchased 3 different penny stocks on 3 different occasions, or they have been a customer for one year
According
The Chief Executive Officer (CEO) and Chief Financial Officer (CFO)
Name 3 factors that may be used when determining the markup of a security under the 5% Policy.
1) Type of security, 2) Price of security, 3) Availability of the security in the market
If a firm owns ___% or more of a subject company, a disclosure must be made in a research report.
If a firm owns 1% or more of a subject company, a disclosure must be made in a research report.
True or False: The 5% Policy is based on the dealer’s inventory cost on a security.
False, it is generally based on the inside market price.
True or False: A firm may charge a safekeeping fee of up to 5% of the value of the securities held.
False. A reasonable fee may be charged, but not a specific percentage.
Is a principal required to approve a BD’s publicly-available Web site?
Yes. The Web site is considered retail communication since it is available to the public.
After the publication of a research report on ABC Inc., an analyst must wait _____ calendar days to trade ABC stock.
After the publication of a research report on ABC Inc., an analyst must wait five calendar days to trade ABC stock.
Churning is described as _____________________ designed to _____________________.
Churning is described as excessive trading designed to generate commissions.
What retail communications are required to be filed with FINRA at least 10 business days PRIOR to first use?
Those for investment companies with self-created rankings, bond funds including volatility ratings, and security futures
What steps should be taken when an RR executes a trade but uses the wrong account number?
Do a cancel and re-bill. Transfer the trade to the correct account number with permission of a supervising principal.
Define institutional communication.
Written or electronic communication that is distributed or made available only to institutional investors
A client’s name and number must be kept on the Do Not Call List ____________.
A client’s name and number must be kept on the Do Not Call List indefinitely.
Retail communication concerning an investment company must be filed with FINRA within ___________ days of use.
Retail communication concerning an investment company must be filed with FINRA within 10 business days of use.
What trades would be covered by the 5% policy?
Secondary market trades of stocks, corporate bonds, and Treasuries
Individual text messages and e-mails are considered _________________.
Individual text messages and e-mails are considered correspondence.
Under the TCPA, how is an established customer defined?
One that has made an unsolicited inquiry or effected a transaction with the firm
Retail communication generally requires __________ ____________.
Retail communication requires principal preapproval.
True or False: On request, institutional communication may be provided to a retail client.
False. Institutional communication may never be provided to a retail investor.
What is required of communication that is sent to more than 25 retail investors within any 30-calendar-day period?
What is required of communication that is sent to more than 25 retail investors within any 30-calendar-day period?
Firms subject to the Taping Rule must commence taping phone calls within _____ days.
Firms subject to the Taping Rule must commence taping phone calls within 60 days.
True or False: Firms writing research reports must disclose potential conflicts of interest.
True (e.g., firm makes a market in the stock or has had or will have an investment banking relationship with the issuer)
If a BD’s investment company communications include self-created rankings, when must they be filed with FINRA?
At least 10 business days prior to use
True or False: An email sent to 25 or more prospects must be approved by a principal.
True. This is an example of retail communication which must be preapproved by a principal.
FINRA’s 5% policy addresses transactions executed in the ___________ market.
FINRA’s 5% policy addresses transactions executed in the secondary market.
If a testimonial appears in retail communication, what must be disclosed?
Whether the provider was paid more than a nominal fee and the provider’s qualifications if an expert opinion is implied
Once notified that taping is required, firms have ____ days to start taping and tapes are retained for ______ years.
Once notified that taping is required, firms have 60 days to start taping and tapes are retained for three years.
True or False: The 5% Policy is a rule that may not be exceeded.
False, it’s a guideline, not a rule.
Under FINRA rules, websites and pre-recorded telephone greetings are considered forms of ____________________.
Under FINRA rules, websites and pre-recorded telephone greetings are considered forms of retail communication.
What forms of communication are NOT required to be approved by a principal or filed with FINRA?
Retail communications that do not recommend or promote a BD’s services, institutional communications, and correspondence
What is required for a BD to share office space with another business?
Little or no customer traffic in either office, floor-to-ceiling walls, and specific signage
Define correspondence.
Material that a member firm makes available to 25 or fewer retail investors within any 30-calendar-day period.
What is exempt from the 5% policy?
Trading of municipal bonds, new issues, registered secondary offerings, and mutual funds
What two forms of communication are not subject to pre-use approval by a principal?
Institutional communication and correspondence
After an analyst places a buy rating on a stock, he must wait _____ days before purchasing the security.
After an analyst places a buy rating on a stock, he must wait five days before purchasing the security.
If a quantity error occurs when filing a trade, the client is obligated to accept the _________ quantity.
If an quantity error occurs when filing a trade, the client is only obligated to accept the desired quantity.
Under the communication rules, a written letter or e-mails sent to 25 or fewer retail investors is called _____________.
Under the communication rules, a written letter or e-mail sent to 25 or fewer retail investors is called correspondence.
True or False: FINRA’s 5% guideline applies to municipal bond transactions.
False. The MSRB has its own policy regarding the fairness of charges.
Is the 5% policy based upon the current market value of the security or the dealer’s cost?
Generally, the current market value
True or False: A broker-prepared, widely disseminated free writing prospectus (FWP) must be filed with FINRA before use.
False. Broker-prepared, widely disseminated FWPs must be filed WITHIN 10 business days of first use.
If personnel are hired from disciplined firms, what percentage would require the firm to tape all phone calls?
20%
What is the formula for determining the average cost per share?
Total dollars invested ÷ total shares purchased
How must disclosures be made to clients when an account is opened on the premises of a financial institution?
They must be made both orally and in writing.
