Chapter 1 Sales Supervision (Self) Flashcards
Under SEC Rule 15g-1, which of the following are defined as an “established customer” that is exempt from the provisions of the “Penny Stock Rule”?
I A customer who has extensive equity trading experience
II A customer who maintains a good credit relationship with another registered broker-dealer
III A customer who has had an account with the broker-dealer for at least 1 year
IV A customer who wishes to effect a penny stock trade in a transaction that was unsolicited
A I and II only
B III and IV only
C I and IV only
D II and III only
B. The established customer exemption from the requirement of the “penny stock” rule applies to customers who have had an account at the firm for at least 1 year; customers who have already signed 3 suitability determinations at that firm; and customers that are effecting transactions in penny stocks that are unsolicited.
A password-protected website is defined as: A advertising B sales literature C public appearance D correspondence
B. FINRA defines a password-protected website maintained by a member firm as sales literature, which is only seen by a specific audience. If the website is not password protected, then the general public can see it and it becomes advertising.
A broker-dealer may charge separately for which of the following services? I Collection of dividends II Safekeeping of securities III Appraisals of securities IV Recommendations of securities A I and II only BIII and IV only C I, II, III D I, II, III, IV
C. A broker-dealer can charge for clerical services such as collection of dividends; safekeeping of securities; and appraisals of securities. It cannot charge separately for recommendations. Any compensation for this is derived from commissions and mark-ups.
Unless a customer chooses an optional composition, an arbitration panel to hear a dispute between a customer and a member, where the amount is $100,000 or more, will be composed of: A 3 arbitrators; 1 public, 2 non-public B 3 arbitrators; 2 public, 1 non-public C 5 arbitrators; 2 public, 3 non-public D 5 arbitrators; 3 public, 2 non-public
B. Generally, arbitration panels to hear disputes with customers where the amount in dispute is $100,000 or more, consist of 3 arbitrators - 2 public and 1 non-public. In contrast, arbitration panels to hear disputes between member firms where the amount in dispute is $100,000 or more, consist of 3 non-public arbitrators. Also note that FINRA has an optional arbitration panel composition for customer disputes, where the panel will consist of 3 public arbitrators - but this is not offered as a choice.
Upon request, a broker-dealer must furnish a customer with:
I The firm’s latest balance sheet (statement of financial condition)
II The firm’s latest income statement
III The firm’s latest net capital computation
A I and II
B I and III
C II and III
D I, II, III
B. Upon request, a firm must furnish a customer with its latest balance sheet and net capital computation. There is no requirement to furnish an income statement.
A customer sends a written complaint to her broker-dealer that she did not receive her most recent cash dividend on ABCD stock and that the registered representative servicing the account is stealing from her. The BOM researches the situation and finds out that the dividend was mailed to the wrong address and that the registered representative had no involvement with the error. The BOM calls the customer and explains this to her, at which point she withdraws the complaint. Which statement is TRUE about this?
A A Form CTR must be filed with FinCEN within 15 days
B A Form SAR must be filed with FinCEN within 30 days
C A report must be filed with FINRA promptly
D No report is required to be filed with FINRA
C. Written allegations against a registered individual of theft, embezzlement, misappropriation of funds, etc. are reportable events to FINRA. FINRA states that even if such a written allegation is subsequently withdrawn, the report is still required. Finally, note that this rule only requires reports for written complaints - a complaint made over the phone does not count and would not be reported.
Research personnel are permitted to:
A offer to follow a company that is interested in using the services of that firm’s investment banking department to go public by issuing quarterly research reports on that issuer
B offer to issue a “buy” recommendation to a company that is interested in using the services of that firm’s investment banking department to go public
C inform an issuer that if it does not use the firm’s investment banking services, that the broker-dealer will stop issuing favorable research reports on that issuer
D inform an issuer that the broker-dealer is going to terminate coverage because of a management decision to stop following that industry
D. Research personnel cannot make a “pitch” to an issuer in an attempt to get that issuer’s underwriting business, by offering to give a favorable rating on the company if the issuer sends its business to the broker-dealer; nor can they threaten an issuer with an “unfavorable” rating if the issuer does not do business with the broker-dealer. If a broker-dealer has been following an issuer and now intends to stop coverage, FINRA requires that the member firm give the issuer notice of this. The member firm must make available a final research report that is comparable in scope, detail, and distribution, to the previous reports; and must include a final recommendation or rating.
Which of the following is NOT defined as an OSJ?
A A location where new issue offerings are structured
B A location where final review of new accounts occurs
C A location where advertising and sales literature is approved
D A location where orders are accepted from customers
D. A location where orders are accepted from customers is a “branch office.” An Office of Supervisory Jurisdiction is a location where any of the following activities take place:
Order execution and/or market making;
Structuring of new issue offerings;
Final approval of new accounts;
Review and approval of customer orders;
Review and approval of advertising/sales literature;
Responsibility for supervising activities at one or more branch offices.
A mediator fails to resolve a dispute between a customer and a member firm. Under FINRA rules, the:
I dispute will be handled under the Code of Arbitration Procedure
II dispute will be handled under the Code of Procedure
III mediator cannot participate in any subsequent hearing related to this matter
IV mediator can participate in any subsequent hearing related to this matter
A I and III
B I and IV
C II and III
D II and IV
A. If both parties have agreed to attempt to settle a dispute by mediation and no resolution has been reached, then the dispute will be submitted to arbitration for resolution. The mediator in the unresolved dispute is prohibited from acting as one of the arbitrators on the panel that will hear the matter.
A customer buys a premium corporate bond as the economy is peaking. It is anticipated that interest rates are going to rise. The customer can be protected against loss by:
A promising to buy the bond at par if interest rates should rise
B entering into a formal written repurchase agreement approved by a principal
C purchasing a put contract on the bond or a similar instrument
D making a written guarantee to the customer
C. FINRA prohibits the guaranteeing of a customer account against loss. Therefore, Choice A is not allowed, since a buy back promise at a stated price is a guarantee. Repurchase agreements are permitted for exempt securities, since FINRA has no jurisdiction. However, for non-exempt securities (such as corporate bonds), a repurchase agreement, at a stated price, constitutes a guarantee. Therefore, Choice B is incorrect. The purchase of a put option does not constitute a guarantee and is a legitimate hedging tool. Thus, Choice C is correct. Choice D is incorrect since a written guarantee cannot be made to a customer.
A registered representative is fined $5,000 in withheld commissions by a member firm for violating firm policies and procedures. Which statement is TRUE?
A This is not required to be reported to FINRA
B A report must be filed with FINRA within 10 business days
C A report must be filed with FINRA within 15 business days
D A report must be filed with FINRA promptly, but no later than 30 calendar days
D. One of the “reportable events” that requires prompt filing with FINRA (but no later than 30 days after the event) is if a registered representative has been fined more than $2,500 by the member firm.
Advertisements dealing with which one of the following must be pre-filed with FINRA by an established broker-dealer? A Options B CMOs C Public DPPs D Treasury securities
A. All retail communications involving security futures (options) must be filed with FINRA 10 business days prior to first use. Also subject to the 10 day advance filing rule are mutual fund retail communications with member-prepared performance rankings.
The retail communications that must be filed 10 days after first use (always) are CMO, publicly traded-structured product, DPP and other mutual fund retail communications. Also note that broadly-disseminated free-writing prospectuses must also be filed 10 days after first use. All other retail communications, after a firm’s first year of operations, are not required to be filed, but are subject to spot check.
For a firm’s first year of operations, all other advertising and must be filed with FINRA 10 business days prior to use. Thereafter, no filing is required, but the firm is subject to spot check.
A Series 7 licensed registered representative has been called up for active duty in the military. The representative wants his licensed registered sales assistant to service his clients while he is away, and agrees to pay the sales assistant a weekly salary for this, out of commissions earned. This arrangement is:
A permitted under FINRA rules
B prohibited because a sales assistant is not Series 7 licensed
C prohibited because sales assistants cannot earn commissions
D is prohibited because representatives that are called up for active duty cannot be compensated while they are “out of the business”
A. A registered representative that has been called up for active duty in a foreign country can arrange for another representative at the same firm to service his or her customer account while away; and can share commissions with that representative. Notice that this sharing is only permitted with a representative at the same broker-dealer, not another broker-dealer.
Customer complaint records must be kept: I in each branch office II in each Office of Supervisory Jurisdiction III for 4 years IV for 5 years A I and III B I and IV C II and III D II and IV
C. Customer complaint records with their resolution must be kept on file in each Office of Supervisory Jurisdiction for 4 years.
An attorney is defined as a “non-public arbitrator” if he or she has devoted:
A 20% or more of his or her professional work to securities firm clients within the past 2 years
B 20% or more of his or her professional work to securities firm clients within the past 3 years
C 50% or more of his or her professional work to securities firm clients within the past 2 years
D 50% or more of his or her professional work to securities firm clients within the past 3 years
A. Any professionals such as accountants and attorneys, who devoted at least 20% of their professional work to securities firm clients within the past 2 years, are defined as non-public arbitrators.
