Chapter 13 - FINRA Registration Flashcards
All of the following statements are true regarding statutory disqualification EXCEPT
A) A firm must amend a U-4 form within 10 days of learning of a statutory disqualifying event
B) It can apply to both firms and representatives
C) A statutory disqualification can prevent a person from becoming registered
D) Persons subject to statutory disqualification are barred from working in the securities industry for a minimum of two years
D) Persons subject to statutory disqualification are barred from working in the securities industry for a minimum of two years
Answer Explanation
Not all persons subject to statutory disqualification are barred from the industry, because firms may request relief from eligibility if they wish to sponsor a person subject to statutory disqualification. If an exemption is not available, the person may be disqualified for 10 years. Statutory disqualification may disqualify a firm or individual from the securities industry. When a firm learns of a statutory disqualifying event, it must update the U-4 within 10 days.
Textbook Reference
Please see textbook section 13.3.7
The Firm Element of Continuing Education must be completed
A) Every quarter.
B) Every month.
C) Every day.
D) Every year
D) Every Year
Answer Explanation
The Firm Element of Continuing Education must be completed on an annual basis.
Textbook Reference
Please see textbook section 13.3.8.2
In administering Regulatory Element Continuing Education, a broker-dealer is required by FINRA to do all of the following EXCEPT
A) Restrict CE inactive persons from performing prohibited activities
B) Designate a contact person to receive Regulatory Element email notifications
C) Review quarterly Regulatory Element performance reports to determine topics where additional training may be needed
D) Develop an annual needs analysis and training program
D
Answer Explanation
FINRA does not require firms to develop their own Regulatory Element programs. Regulatory Element CE is administered and delivered by FINRA. This requirement applies to Firm Element. On an annual basis, a broker-dealer is required to conduct a needs analysis and training plan for the delivery of Firm Element training.
Textbook Reference
Please see textbook section 13.3.8.1
A large adviser is defined as one with
A) 50 or more clients
B) 250 or more clients
C) More than $50 million of AUM
D) More than $100 million of AUM
D
Answer Explanation
Most advisers with more than $100 million in AUM are considered large advisers, and they are required to register with the SEC.
Textbook Reference
Please see textbook section 13.5.1
All of the following enforce MSRB Rules EXCEPT
A) The Financial Industry Regulatory Authority
B) The Federal Deposit Insurance Corporation
C) The MSRB
D) The Comptroller of the Currency
C) The MSRB
Answer Explanation
The Federal Reserve Board, Comptroller of the Currency, and Federal Deposit Insurance Corporation are all enforcers of MSRB rules within bank dealers. The MSRB has no enforcement power over the rules it establishes.
Textbook Reference
Please see textbook section 13.1.2
U.S. securities dealers are required to be members of which self-regulatory organization?
A) FINRA
B) MSRB
C) NYSE
D) CFA
A) FINRA
Answer Explanation
Headquartered in Washington, FINRA is one of the largest and most powerful SROs in the U.S. Securities industry. FINRA was formed in 2007 when the NASD merged with the securities enforcement arm of the New York Stock Exchange.
Textbook Reference
Please see textbook section 13.1.1
A college sophomore has recently completed the SIE Exam. This individual
A) Must pass an additional qualification exam in order to become fully registered in the securities industry.
B) Must complete an additional qualification exam prior to graduating from college.
C) May begin selling securities immediately.
D) Must pass an additional oral exam prior to becoming fully registered
A
Answer Explanation
Passing the SIE alone does not qualify an individual to conduct a securities business. An additional exam must be completed prior to becoming fully registered. The SIE credential is valid for four years.
Textbook Reference
Please see textbook section 13.3.3.1
Which of the following regulators enforce the MSRB rules for securities firms?
A) Federal Reserve.
B) FINRA.
C) Comptroller of the Currency.
D) FDIC.
B
Answer Explanation
The MSRB creates rules, but does not enforce its own rules. The MSRB rules are enforced by FINRA for securities firms. Within banks, they are enforced by the Federal Reserve, Comptroller of the Currency, and the FDIC.
Textbook Reference
Please see textbook section 13.1.2
The Regulatory Element of Continuing Education must be completed within how many days of an individual’s registration anniversary date?
A) 30
B) 90
C) 60
D) 120
D) 120
Answer Explanation
The Regulatory Element of Continuing Education must be completed within 120 days of the registration anniversary date. The relevant dates are the second registration anniversary, and every third year thereafter. This means Year 2, 5, 8, 11 , 14 etc.
Textbook Reference
Please see textbook section 13.3.8.1
The Regulatory Element of Continuing Education must be completed
A) With 120 days of passing the FINRA qualification exam
B) Two years after initial registration and three years thereafter
C) Three years after initial registration and every two year thereafter
D) Two years after initial registration and every three years thereafter
D
Answer Explanation
The Regulatory Element of Continuing Education must be completed two years after initial registration and every three years thereafter.
Textbook Reference
Please see textbook section 13.3.8.1
A person must take a new qualification exam if they have not been registered with a member firm for a period of
A) 2 years
B) 1 year
C) six months
D) 3 years
A) 2 Years
Answer Explanation
Any person whose registration has not been registered with a member firm for a period of two or more years is required to re-register by passing a Qualification Examination.
Textbook Reference
Please see textbook section 13.3.5.1
A registered representative is found to be in violation of FINRA rules. FINRA may impose which of the following?
I. Fine of $10,000
II. Revoke Series 79 registration
III. Bar the representative from associating with any other member firm for 10 years
A) III only
B) I and III only
C) I only
D) I, II, and III
D) I, II, and III
Answer Explanation
FINRA is authorized to impose virtually any penalty deemed appropriate for a violation of securities rules and regulations, with the exception of a jail sentence. It can revoke or cancel a representative’s registration, impose a fine or bar the representative from associating with any member firm. Rep’s have a right to request a hearing with FINRA for violations that could lead to such a penalty. That decision can then be appealed to the SEC and federal courts.
Textbook Reference
Please see textbook section 13.3.7
When completing a U-4 Form, a candidate for registration intentionally omits information about a previous securities related misdemeanor when he worked in the securities industry 7 years ago. The employing firm becomes aware of this information when performing a background investigation. This omission
I. is not material because it is a misdemeanor
II. must be reported to FINRA
III. may be grounds for statutory disqualification
IV. is not grounds for statutory disqualification since it is a misdemeanor and not a felony
A) II and III
B) I and IV
C) I and II
D) II and IV
A) II and III
Answer Explanation
A misdemeanor involving securities within the past 10 years must be reported on a Form U-4. An intentional omission is grounds for statutory disqualification, and must be reported to FINRA as soon as the firm is aware of it.
Textbook Reference
Please see textbook section 13.3.7
When a person does not complete the regulatory portion of their ongoing qualification requirements they are said to be
A) Exempt
B) Statutory disqualified
C) CE Inactive
D) Disobedient
C) CE Inactive
Answer Explanation
If a rep does not complete Regulatory Element Continuing Education on time, the rep is said to be CE Inactive. While CE Inactive, a rep cannot function or be paid as a registered person.
Textbook Reference
Please see textbook section 13.3.8.1
Thomas Smith works for an RIA firm, soliciting and negotiating investment advisory services. How should he be registered?
A) As an RIA, with the SEC
B) As an RIA, with the state in which he works
C) As an IAR, with the SEC
D) As an IAR, with the state in which he works
D
Answer Explanation
Investment Adviser Representatives (IARs) are individuals who work for RIA firms in activities such as managing portfolios for a fee and soliciting investment advisory services. They are not registered by the SEC, but most states require registration of IARs.
Textbook Reference
Please see textbook section 13.5.1
State securities laws are sometimes referred to as
A) Green Grass Laws
B) Blue Sky Laws
C) All State Laws
D) Home State Laws
B) Blue Sky Laws
Answer Explanation
The state securities laws are also known as the Blue Sky Laws.
Textbook Reference
Please see textbook section 13.4
In what capacity is a Registered Investment Adviser (RIA) required to put clients’ interest first and adhere to duties of loyalty and care?
A) Brokerage
B) Custody
C) Clearing
D) Fiduciary
D) Fiduciary
Answer Explanation
RIAs act as fiduciaries who must put clients’ interests first at all times, including ahead of their own interests. RIAs also must adhere to fiduciary duties of loyalty and care. Any conflicts of interest with clients must be eliminated or fully disclosed as to all material facts.
Textbook Reference
Please see textbook section 13.5
Which of the following statements regarding statutory disqualification are TRUE?
I. An individual or firm may be subject to a statutory disqualification
II. Certain persons may re-enter or continue in the securities industry following a statutory disqualification
III. Disqualifying events can include bars, injunctions suspensions and expulsions from certain activities, SROs and exchanges
IV. Once it becomes aware of a statutory disqualifying event a member is obligated to report the event to FINRA
A) I, II, III and IV
B) I and IV only
C) I and III only
D) II and III only
A) I, II, III and IV
Answer Explanation
A statutory disqualification occurs when an individual or member firm has violated securities regulations and has been barred, suspended, expelled, enjoined, fined or possibly jailed for the activity for a period of time. Whenever a member firm becomes aware of a statutory disqualification it is required to report the event to FINRA. Certain persons or firms may be allowed to continue in the securities industry following a statutory disqualification but only with written approval from FINRA and heightened supervision.
Textbook Reference
Please see textbook section 13.3.7
A representative fails to complete the Regulatory Element when required. The broker-dealer must
I. Report the representative to FINRA for possible disciplinary action
II. Restrict the representative from activities that require registration
III. Terminate the representative
IV. Discontinue payment of compensation to the representative for activities that require registration
A) II and IV
B) I and IV
C) II and III
D) I and III
A) II and IV
Answer Explanation
If a representative fails to complete Regulatory Element continuing education when required, the broker-dealer must restrict the representative from activities that require registration and discontinue payment of compensation for those activities.
Textbook Reference
Please see textbook section 13.3.8.1
All of the following could result in statutory disqualification of a registered representative EXCEPT
A) Conviction of a misdemeanor related to activities in the mortgage business 8 years ago
B) A failure to supervise violation in the past 5 years
C) Suspension from all trading activities on the Philadelphia Exchange 6 years ago
D) A felony drug charge 15 years ago
D
Answer Explanation
Statutory disqualification can result from any felony or a misdemeanor involving securities within the past ten years. Any failure to supervise violation or suspension, bar, expulsion, or injunction by an exchange, SRO, or any other regulator could result in statutory disqualification.
Textbook Reference
Please see textbook section 13.3.7
Decisions rendered in a securities industry arbitration case
A) must be approved by the FINRA Arbitration Committee.
B) may not be appealed, unless either party disagrees with the final decision.
C) may be appealed to the FINRA Arbitration Board.
D) are final and binding on all parties.
D
Answer Explanation
All decisions rendered in an arbitration case are considered final and binding on all parties. Customers must consent in writing to the use of arbitration as a means of resolving disputes.
Textbook Reference
Please see textbook section 13.3.1.1
The primary purpose of BrokerCheck is to
A) Provide background information on registered representatives and broker-dealers
B) Resolve customer disputes
C) Enable a broker-dealer to become registered with FINRA
D) Verify that a broker-dealer meets all minimum standards to conduct a securities business.
A
Answer Explanation
BrokerCheck is a public access service that provides background information on registered representatives and broker-dealers.
Textbook Reference
Please see textbook section 13.3.6
A registered representative has sold her primary residence for less than the outstanding mortgage balance owed to the lender. Consequently, the bank has accepted less than the full repayment of the mortgage. Which of the following statements is true?
A) A portion of the rep’s salary must be withheld with the funds placed in an escrow account, until the rep is able to complete the full payoff of her mortgage.
B) The rep must serve a mandatory 30 -day suspension.
C) This is an example of a short sale of a mortgage which will negatively impact the credit status of the rep and must be reported to the compliance department of the broker-dealer.
D) The rep has engaged in an illegal act and must be terminated from the firm.
C) This is an example of a short sale of a mortgage which will negatively impact the credit status of the rep and must be reported to the compliance department of the broker-dealer.
Answer Explanation
In an instance such as the short sale of a home, the rep must notify her compliance department of this negative credit event. There are no other punitive measures that must be taken. This topic is not explicitly covered in the textbook, but as long as you review this rational for this question you will be covered for exam purposes.
Textbook Reference
Please see textbook section 13.3.4
Under most circumstances a general securities firm is required to have a minimum of
A) Two principals
B) Five principals
C) One principal
D) Three principals
A
Answer Explanation
FINRA generally requires that general securities firms have a minimum of two principals. They must also have access to a Financial and Operations Principal.
Textbook Reference
Please see textbook section 13.3.3.3
An individual has passed the SIE but not a top-off Exam. Until this person passes a top-off exam, she may
A) only sell securities that she is not recommending to customers.
B) accept orders from her customers but cannot execute these orders for her clients.
C) not engage in any securities business.
D) only sell US Government securities, as they are the safest assets in the marketplace.
C
Answer Explanation
In order to be properly registered to sell securities, an individual must complete both the SIE and a top-off exam, such as the Series 7 or Series 79.
Textbook Reference
Please see textbook section 13.3.3.1
FINRA has the authority to impose all of the following sanctions for rules violations EXCEPT
A) incarceration
B) expulsion from membership
C) censure
D) permanent cease and desist order
A
Answer Explanation
Although FINRA cannot sentence rule violators to jail, FINRA is empowered to:
* censure a member firm or associated person
* impose a fine upon a member firm or associated person
* suspend the membership of a member firm or associated person a definite period or a period contingent on the performance of a particular act;
* expel a member firm, cancel the membership of a member firm, or revoke or cancel the registration of an associated person
* suspend or bar a member or associated person from association with all members;
* impose a temporary or permanent cease and desist order against a member firm or associated person
Textbook Reference
Please see textbook section 13.1
Unlike broker-dealers, investment advisors are compensated for the securities related advice they provide to clients, in the form of fees which may be determined based on a variety of factors. A large advisor, who has at least $100 million of assets under management,
A) must register with each individual state in which it has retail clients.
B) may choose to register with either the SEC or the individual states.
C) must register with the SEC.
D) is not required to register with any regulatory body since they are not affecting any securities trades.
C
Answer Explanation
An investment advisor managing at least $100 million in client assets must register with the SEC. Advisors with less than this level of assets under management must register with each state in which they are doing business.
Textbook Reference
Please see textbook section 13.5.1
Which of the following will not subject an individual to a “statutory disqualification”?
A) An arrest three years ago for drug use
B) A conviction on a weapons charge four years ago.
C) Expulsion from the securities industry two years ago.
D) The issuance of a temporary injunction by a state court eight years ago
A
Answer Explanation
An arrest in and of itself is not included in the universe of actions that define a statutory disqualification.
Textbook Reference
Please see textbook section 13.3.7
FINRA’s publicly accessible system that allows customers to review regulatory actions against a member firm or a registered representative is
A) WebCRD.
B) BrokerCheck.
C) FINRA Contact System (FCS).
D) Gateway.
B
Answer Explanation
FINRA’s BrokerCheck is accessible to customers, and allows them to review reports about broker-dealers and representatives, including information about regulatory matters and incidents.
Textbook Reference
Please see textbook section 13.3.6
An individual who has worked for the same broker-dealer for the last 5 years must complete the Regulatory Element
A) Every 2 years, within 120 days of the anniversary date of the individual’s registration
B) Every 5 years, within 120 days of the anniversary date of the individual’s registration
C) Annually
D) Every 3 years, within 120 days of the anniversary date of the individual’s registration
D
Answer Explanation
Registered persons are required to complete Regulatory Element every 3 years, within 120 days of the anniversary date of registration. If the individual is newly registered, however, Regulatory Element must be completed within 120 days of the 2nd anniversary of registration, and every three years thereafter.
Textbook Reference
Please see textbook section 13.3.8.1
In general, unless an exception applies, which types of RIAs are prohibited from registering with the SEC?
A) Small and mid-size
B) Large only
C) Small only
D) Mid-size and large
A
Answer Explanation
In general, small and mid-size advisers are prohibited from registering with the SEC, unless an exception applies.
Textbook Reference
Please see textbook section 13.5.1
Firms must report to FINRA any written customer complaints
A) within 10 business days
B) within 15 days of the end of the quarter in which the complaint was submitted
C) immediately
D) within 30 days
B
Answer Explanation
Firms are required to make detailed reports to FINRA based on the nature and consequences of a customer complaint. These must be made by the 15th day of the month following the calendar quarter in which the customer complaint was received by the firm.
Textbook Reference
Please see textbook section 14.4.10.1
A broker-dealer would be most likely to heighten its supervision over which of the following individuals?
A) A registered representative who requested an advance on their commission run for the prior month.
B) A registered representative who did not submit a vacation request within the time parameters set forth by firm policy.
C) A registered representative with a history of notable events on the Form U-4.
D) A registered representative who consistently outperforms sales goals created by the marketing team.
C
Answer Explanation
A broker-dealer would apply heightened supervision to an individual who has a history of notable events on their Form U-4. These events would be a red flag that the firm would want to monitor closely.
Textbook Reference
Please see textbook section 13.3.4
Which one of the following is not an investment adviser?
A) Mutual fund management company
B) Registered representative who charges commissions
C) Personal portfolio manager who works on an asset-based fee
D) Financial planner who charges a fee
B
Answer Explanation
An investment adviser provides certain services (analysis, advice) for compensation. The compensation may be asset-based, hourly, flat, or per-service. Registered representatives who work only on commissions are not required to register as investment advisers.
Textbook Reference
Please see textbook section 13.5
For a two-year period following termination from a FINRA member firm, a registered representative
A) must continue to update FINRA on any address changes.
B) is prohibited from being employed by another FINRA member firm.
C) may not communicate with any former colleagues at the firm.
D) must refrain from any social media posts regarding their prior affiliation with the firm.
A
Answer Explanation
Once a registered representative is terminated from a FINRA member firm, a current address must be kept on file with FINRA for a two- year period post- employment. This topic is not explicitly covered in the textbook, but as long as you review this rational for this question you will be covered for exam purposes.
Textbook Reference
Please see textbook section 13.3.5.2
A registered representative of a broker-dealer
A) has an obligation to make suitable recommendation to her customers.
B) must execute trades for her client only if she agrees with the client’s instructions.
C) is considered a fiduciary to her clients, and is legally required to act as such.
D) may make any recommendation to a client who has the financial ability to undertake that investment.
A
Answer Explanation
Registered reps have a suitability obligation to their customers, not a fiduciary responsibility.
Textbook Reference
Please see textbook section 13.5
Form U-4 is used by an individual to
A) Settle a customer dispute.
B) Resign from a FINRA member firm
C) Register with a FINRA member firm
D) Apply for a second job while working for a FINRA member firm.
C
Answer Explanation
Form U-4 is used by an individual to register with a FINRA member firm.
Textbook Reference
Please see textbook section 13.3.1
A statutory disqualification may be imposed if, within the past ten years, an individual has been
A) formally charged in an insider trading case
B) arrested for a securities related felony
C) convicted of a securities misdemeanor
D) convicted of a minor traffic violation
C
Answer Explanation
A statutory disqualification may occur if an individual has been convicted of a felony or securities related misdemeanor within the past ten years.
Textbook Reference
Please see textbook section 13.3.7
When a registered representative leaves a firm, within what time period is the individual required to reassociate with a new firm and complete a U4 before a registration expires?
A) 1 year
B) 2 years
C) 10 years
D) 6 months
B
Answer Explanation
A registered rep is required to complete a U5 upon leaving a firm and a U4 upon joining a new firm but is not required to retake an examination as long as no more than two years has elapsed.
Textbook Reference
Please see textbook section 13.3.5.1
In order for a firm to begin business as a broker-dealer, it must have satisfied all of the following requirements EXCEPT
A) Become a member of an SRO
B) Filed Form BD
C) Received approval from the SEC
D) Become a member of SIPC
C
Answer Explanation
In order to start doing business as a broker dealer, a firm must have appropriately qualified associated persons, must have filed Form BD, satisfied appropriate state requirements and become a member of SIPC and an SRO. Registration with the SEC, not approval from the SEC, is required to begin business as a broker-dealer.
Textbook Reference
Please see textbook section 13.2
When a firm learns of a statutory disqualifying event, it must update a registered representative’s U-4 within
A) 10 days
B) 60 days
C) 20 days
D) 30 days
A
Answer Explanation
Firms must amend U-4 forms within 10 days when they learn of a statutory disqualifying event.
Textbook Reference
Please see textbook section 13.3.4
Which type of advisers must be registered with the SEC?
A) Mid-size and small advisers
B) Large, mid-size and small advisers
C) Large and mid-size advisers
D) Large advisers
D
Answer Explanation
Large advisers (with more than $100 million in AUM) are required to register with the SEC unless they qualify for an exemption. Most mid-size and small advisers are prohibited by law from registering with the SEC.
Textbook Reference
Please see textbook section 13.5.1
A securities dealer that is registered with the SEC
A) is approved as a reputable office for conducting municipal securities business
B) is in good financial standing
C) is clear of conduct violations as of its most recent examinations
D) has been released to conduct municipal securities business by the SEC
D
Answer Explanation
SEC registration does not imply a “favorable” standing, and firms and representatives are prohibited from implying that it does. It also does not indicate any clearance of conduct violations.
Textbook Reference
Please see textbook section 13.2
All of the following statements are true about FINRA Broker Check EXCEPT
A) Examination scores and failed examination attempts are included
B) Information is available on both firms and representatives who are in or have been in the business within the last 10 years
C) Information available from Broker Check is compiled from FINRA registration filings
D) Historic customer complaint information is included
A
Answer Explanation
FINRA Broker Check does not include information about failed examination attempts or examination scores. It does include a rep’s employment, registration and disciplinary history.
Textbook Reference
Please see textbook section 13.3.6
A registered representative of a broker-dealer is convicted of a securities-related misdemeanor. This will most likely lead to
A) termination of the representative’s registration and termination of the representative’s employment with the firm.
B) no action since it is not a felony conviction.
C) enhanced supervision of the representative.
D) a change in the representative’s responsibilities consistent with termination of his registration.
A
Answer Explanation
Events that can lead to a statutory disqualification include a conviction for any securities or money related crime or any felony. If a representative commits an action that would lead to a statutory disqualification, they are prohibited from being associated with a FINRA member firm in any capacity.
Textbook Reference
Please see textbook section 13.3.7
The national regulatory body that oversees uniform state blue sky laws is
A) the SEC.
B) NASAA.
C) the NASD.
D) FINRA.
B
Answer Explanation
State securities laws are referred to as blue sky laws. They are enforced by each state. The North American Securities Administrators Association (NASAA) oversees uniform state blue laws.
Textbook Reference
Please see textbook section 13.4
All of the following persons are subject to completion of Firm Element continuing education requirements EXCEPT
A) Registered research analysts who deal directly with institutional customers.
B) Supervisors of registered representatives.
C) Servicing Agents of Investment companies.
D) Sales assistants with no customer contact.
D
Answer Explanation
The Firm Element requirement applies to all persons who have contact with public customers or who supervise those persons that do. “Customers” include retail, institutional and investment banking customers, but not other broker-dealers.
Textbook Reference
Please see textbook section 13.3.8.2
An individual serving as an arbitrator under FINRA rules
A) may be associated with a FINRA member firm or may be a public arbitrator.
B) must have securities industry experience.
C) must hold a law degree from a FINRA accredited institution.
D) may not work in the securities industry for 3 years following service as an arbitrator.
A
Answer Explanation
Arbitration is the dispute resolution process overseen by FINRA rules. An arbitrator may be associated with the securities industry, or may be an unaffiliated (public) individual. The specific composition of an arbitration panel would be determined by the nature of the parties involved in the dispute.
Textbook Reference
Please see textbook section 13.3.1.1
A customer complaint involving theft or forgery must be reported to FINRA
I. Within 20 days
II. Within 10 days
III. If it exceeds $10,000
IV. Regardless of the dollar amount
A) II and III
B) II and IV
C) I and IV
D) I and III
B) II AND IV
Answer Explanation
A firm must report to FINRA not later than 10 days after the firm or a representative becomes the subject of any written customer complaint involving allegations of theft or misappropriation of funds or securities or of forgery.
Textbook Reference
Please see textbook section 13.3.7.1
An individual who has passed the SIE will need to take a top-off exam within a period of
A) 120 days.
B) 2 years.
C) 4 years.
D) 6 years.
C
Answer Explanation
The SIE credential is valid for four years, within which time a top-off exam (e.g. Series 7 or 79) would need to be completed to ensure full registration is achieved. Otherwise, the SIE credential would lapse after four years and would need to be re-established.
Textbook Reference
Please see textbook section 13.3.3.1
A broker-dealer must develop and deliver a Firm Element training program
A) every three years
B) as frequently as its covered persons have training needs, as identified by the firm’s needs analysis
C) every two years
D) annually
D
Answer Explanation
The Firm Element consists of annual, firm-developed and administered training programs designed to keep covered persons current regarding job and product related subjects.
Textbook Reference
Please see textbook section 13.3.8.2
Which one of the following individuals involved in a broker-dealer does not need to be finger-printed?
A) A silent partner of a broker-dealer
B) A registered representative in her first year of work
C) A sales manager of a broker-dealer
D) An assistant involved in the processing of securities transactions
A
Answer Explanation
A silent partner investor of a broker-dealer does not need to be fingerprinted since they are not engaged in the sale of securities and do not regularly have access to the keeping, handling, or processing of securities, money, or original books and records relating to securities or money.
Textbook Reference
Please see textbook section 13.3.2
A person who has not been registered for the past three years has now become newly registered with another broker-dealer. With regard to Regulatory Element, this representative
I. Must take the appropriate module as if subject to the program for the first time
II. Is grandfathered from the Regulatory Element program
III. Must complete Regulatory Element within a 120-day period that begins with the second anniversary of their registration
IV. Must complete Regulatory Element within a 120-day period that begins with the third anniversary of their registration
A) I and III
B) I and IV
C) II and IV
D) II and III
A
Answer Explanation
When an individual has left the securities industry for more than two years, and becomes newly registered and qualified the individual is subject to the Regulatory Element as if entering the program for the first time. The individual would be required to complete the program within a120-day period that commences with the second anniversary of the new securities registration, and every three years thereafter.
Textbook Reference
Please see textbook section 13.3.8.1
All of the following statements regarding a broker-dealer’s Firm Element training program are true EXCEPT
A) Broker-dealers may use training materials and presentations available from sources outside the firm in delivering their Firm Element program
B) A broker-dealer’s training plan must be approved by its SRO prior to implementation
C) A broker-dealer must conduct an annual needs analysis
D) A written training plan must be developed and available for audit each year
B
Answer Explanation
A firm’s SRO will not pre-approve training materials or training programs. Firms are responsible for training material content regardless of whether it was prepared by the firm or by an outside training provider.
Textbook Reference
Please see textbook section 13.3.8.2
All of the following records must be maintained by a broker-dealer EXCEPT
A) Fingerprints of personnel.
B) Prospectuses for underwritten deals where the broker-dealer is the syndicate manager.
C) Customer complaints in written form.
D) General firm advertisements.
B
Answer Explanation
Broker-dealers are not required to maintain records of registration statements, prospectuses or preliminary prospectuses (red herrings).
Textbook Reference
Please see textbook section 13.3.2
The integrity of the US securities markets and the protection of investors is the primary mission of the
A) The Financial Regulatory Authority (FINRA)
B) Federal Reserve Board (FRB)
C) Securities and Exchange Commission (SEC)
D) Depository Trust & Clearing Corporation (DTCC).
C
Answer Explanation
The SEC has as its primary role the protection of investors and the general oversight of the US securities markets.
Textbook Reference
Please see textbook section 13.1
An individual may be subject to statutory disqualification if he or she has committed a felony within the past
A) Three years
B) Five years
C) Six years
D) Ten years
D
Answer Explanation
A person may be subject to statutory disqualification if he or she has committed a felony or a misdemeanor involving securities within the past 10 years.
Textbook Reference
Please see textbook section 13.3.7
If a registered representative is arrested for theft, but claims innocence and has witnesses to corroborate his/her alibi, which of the following would be the most likely to happen?
A) The incident would be reported to FINRA and the representative would be subject to a statutory disqualification.
B) The incident would be reported to compliance and the firm can choose to delay action until the legal process has run its course.
C) The incident would not be reported to anyone until a legal resolution is reached.
D) The incident would be reported to FINRA and the representative would not be subject to a statutory disqualification.
B
Answer Explanation
Any felony conviction must be reported to FINRA and will likely lead to statutory disqualification and the representative’s termination from the firm. An arrest, however, is not grounds for a statutory disqualification. The best course of action would be to report the incident to the firm’s compliance department and wait for the legal process to conclude.
Textbook Reference
Please see textbook section 13.3.7
An investment adviser is a person who provides advice or analysis for
A) Commissions
B) Individuals only
C) Institutions only
D) Compensation
D
Answer Explanation
An investment adviser provides certain services (analysis, advice) for compensation. The compensation may be asset-based, hourly, flat, or per-service.
Textbook Reference
Please see textbook section 13.5
To become fully registered in the securities industry,
A) A formal interview, application, and the SIE credential all must be completed prior to becoming fully registered.
B) The SIE must be completed with 90 days of joining a broker-dealer.
C) A valid fingerprint card must be submitted along with all application fees.
D) The SIE and an appropriate additional exam must be completed.
D
Answer Explanation
All persons must complete both the SIE and the appropriate follow up exam in order to become fully registered in the securities industry.
Textbook Reference
Please see textbook section 13.3.3.1
A registered representative has become deficient in making timely payments on his credit card, resulting in a reduced credit standing. This activity must be
A) reported to FINRA within 10 business days.
B) recorded on the books and records of the broker-dealer.
C) reported to the compliance department of the firm.
D) documented in the rep’s employee file and the rep must be placed on a watch list until the situation improves.
C
Answer Explanation
Any activity that negatively impacts the credit of a registered representative must be reported to the compliance department of the broker-dealer. This topic is not explicitly covered in the textbook, but as long as you review this rational for this question you will be covered for exam purposes.
Textbook Reference
Please see textbook section 13.3.4
A retail salesperson who has been registered for five years with the same broker-dealer is required to complete Firm Element training
A) every 2 years, within 120 days of the anniversary date of the individual’s registration
B) every 5 years, within 120 days of the anniversary date of the individual’s registration
C) annually
D) every 3 years, within 120 days of the anniversary date of the individual’s registration
C
Answer Explanation
All covered persons are required to complete Firm Element training annually, regardless of how long they have been registered.
Textbook Reference
Please see textbook section 13.3.8.2
A broker-dealer is not subject to investment adviser registration, provided that it
A) only offers fee-based accounts.
B) does not advise clients to purchase mutual funds or hedge funds.
C) offers advice that is solely incidental to securities sales and receives no special advisory compensation.
D) advises only sophisticated investors and institutions.
C
Answer Explanation
Broker-dealers and registered reps can provide advice that is solely incidental to their main business and receive no special compensation for advisory services. In this case, they are exempt from investment adviser registration.
Textbook Reference
Please see textbook section 13.5.2
A registered rep has been out of the securities industry for 3 years. This person
A) must re-take the top-off exam within two years of returning to the securities industry.
B) would need to re-take their top-off exam and complete continuing education on the 2nd anniversary of passing the top-off exam.
C) is not required to take any exams in order to return to the securities industry, but must complete all continuing education requirements upon return to the industry.
D) must re-take the SIE and top-off exam in order to return to the securities industry.
B
Answer Explanation
A registered rep who has been out of the industry for between 2-4 years would need to re-take a top-off exam and complete continuing education on the second anniversary date of passing the top-off exam.
Textbook Reference
Please see textbook section 13.3.5.1
Which of the following individuals would not be subject to fingerprint requirements?
A) Registered representative preparing order tickets for submission to trading desk
B) Member of the cashier’s dept handling cash deposits
C) A silent partner investor of a broker-dealer
D) Employee in the stock loan dept handling securities certificates
C
Answer Explanation
Any person handling securities, cash, or books and records of a broker-dealer is subject to securities industry fingerprint rules. A silent partner investing in the firm does not do any of these things.
Textbook Reference
Please see textbook section 13.3.2
When designing its continuing education program, a firm must require that all covered persons complete
I. Firm Element training annually
II. Regulatory Element training annually
III. Regulatory Element through a computer based module, and Firm Element through the method the broker-dealer has determined most appropriate
A) I and II only
B) I and III only
C) II and III only
D) I, II and III
B) I and III only
Answer Explanation
Broker-dealers must require covered persons to complete Firm Element annually. The Regulatory Element must be completed every three years (although new reps must complete it within 120 days of their second anniversary of registration). The Firm Element requirement is defined by each broker-dealer, and may be delivered through whatever means the broker-dealer has identified as appropriate in its needs analysis and training plan. Regulatory Element is delivered by the CE Council via computer-based training modules.
Textbook Reference
Please see textbook section 13.3.8
All of the following information is required when submitting a Form U-4 for a registered representative EXCEPT
A) Residential history for the past 5 years
B) Tax returns for the past 3 years
C) Employment history for the past 10 years
D) Social Security Number
B
Answer Explanation
Form U-4 must include the following personal information:
-name;
-SSN,
-physical characteristics,
-5 years of residential address history,
-10 years of employment experience; and
-education
It must also report information relating to customer complaints, arbitration claims, regulatory proceedings, bankruptcies, certain criminal history, certain civil litigation and liens and judgments.
Textbook Reference
Please see textbook section 13.3.1
A registered representative has been terminated from his firm. Which of the following statements is true?
A) The rep may not post on social media that he was terminated from his firm.
B) The rep must file a change of address card with the local post office.
C) The rep is prohibited from joining another FINRA member firm for two years.
D) The rep must keep his home address updated with FINRA for two years following termination.
D
Answer Explanation
When a registered representative is terminated from a broker-dealer, he must maintain a current address with FINRA for two years following his termination date. This topic is not explicitly covered in the textbook, but as long as you review this rational for this question you will be covered for exam purposes.
Textbook Reference
Please see textbook section 13.3.5.2
An investment newsletter publisher is required to register as an investment adviser if it publishes
A) A general circulation business or financial publication
B) Specific recommendation tailored to individuals
C) Across state lines
D) More often than monthly
B
Answer Explanation
It is the type of material published that determines whether registration is required of a publisher. The material must make specific recommendations tailored to individuals.
Textbook Reference
Please see textbook section 13.5.2
FINRA is responsible for each of the following activities for registered representatives EXCEPT:
A) Bringing disciplinary proceedings
B) Continuing education (CE) requirements
C) Licensing and testing
D) Investment Adviser registration
D
Answer Explanation
As an SRO, FINRA is responsible for registered reps’ licensing, testing and CE requirements. FINRA brings disciplinary proceedings against member firms and reps for violating its rules. However, FINRA is not responsible for adviser registration, which falls within the jurisdiction of the SEC and the individual states.
Textbook Reference
Please see textbook section 13.5.1
All of the following are subject to the rules of the MSRB EXCEPT
A) Issuers of municipal securities
B) Individuals that sell municipal securities to institutional customers
C) Underwriters of municipal securities
D) General securities firms that distribute municipal securities
A
Answer Explanation
The MSRB does not have authority over municipal securities issuers. Its rules apply to persons and firms that transact business in municipal securities.
Textbook Reference
Please see textbook section 13.1.2
Parking a registration is a violation of FINRA rules and occurs if
A) A broker-dealer sponsors an individual who is in ineligible for FINRA registration
B) A registered representative is employed by two broker-dealers simultaneously.
C) A broker-dealer sponsors an individual who is not employed with the broker-dealer.
D) An employee passes a FINRA qualification exam and resigns two months later
C
Answer Explanation
Parking a registration occurs when a broker-dealer sponsors an individual for a FINRA qualification exam and that person is not employed by the firm.
Textbook Reference
Please see textbook section 13.3
If FINRA or the SEC issues an order that imposes a suspension of the registration of a registered representative, the representative is prohibited from
A) Acting in a clerical capacity for the firm
B) Associating with the firm in any capacity whatsoever
C) Performing sales functions, but can receive compensation earned during the period
D) Continuing performing sales functions if the firm has permission from FINRA, and if the firm has agreed to heightened supervision of all transactions
B
Answer Explanation
If FINRA or the SEC suspends a registered representative, the firm cannot allow the representatives to remain associated with it in any capacity, including a clerical or ministerial capacity. The firm is also unable to pay or credit any remuneration that results from any securities transaction that the representative might have earned during the period of suspension.
Textbook Reference
Please see textbook section 13.3.7
Mary Jane is a registered representative who helps her clients buy securities, and she also gives them investment advice about retirement plans. What type of compensation could require her to register as an investment adviser?
A) Markup
B) Markdown
C) Hourly fee
D) Commission
C
Answer Explanation
Any compensation received by a broker-dealer or registered representative other than commissions, markups or markdowns is considered special compensation. Receiving special compensation can trigger a need for adviser registration.
Textbook Reference
Please see textbook section 13.5
All of the following are subject to MSRB rules EXCEPT
A) A municipal finance department within a general securities broker dealer
B) A school district that is issuing GO bonds
C) A bank that acts as an underwriter of municipal securities
D) An online brokerage firm that executes only unsolicited orders in municipal securities
B
Answer Explanation
Note that this is an EXCEPT question. The MSRB does not have authority over issuers of municipal securities issuers. MSRB Rules apply to members and their associated persons, which are defined as broker-dealers and bank dealers that engage in municipal securities sales, trading, underwriting, or financial advice to issuers.
Textbook Reference
Please see textbook section 13.1.2
A brokerage firm that has been registered with the SEC
I. Is subject to the SEC’s regulation and oversight
II. Has been approved by the SEC as part of its registration process
III. Can sell both exempt and non-exempt securities
A) I and III only
B) I only
C) I, II and III
D) II and III only
A) I and III only
Answer Explanation
A broker-dealer that is registered with the SEC is subject to the SEC’s regulations, but is not approved by the SEC. SEC-registered broker-dealers may sell both exempt and non-exempt securities.
Textbook Reference
Please see textbook section 13.2
A broker-dealer is excluded from registration as an investment adviser if both of two tests are met. One test is receipt of no special compensation for advisory services. What is the other test?
A) Having no discretionary trading authority
B) Advising less than 25 retail clients
C) Providing advisory services that are solely incidental to the main business
D) Advising less than $25 million in total assets under management
C
Answer Explanation
Both of two tests must be met by broker-dealers and registered representatives that wish to avoid adviser registration. One is solely incidental services. The other is no special compensation.
Textbook Reference
Please see textbook section 13.5.2
All of the following statements about FINRA are accurate except
A) it is overseen by the SEC.
B) it regulates broker-dealers.
C) it is a self-regulatory organization.
D) it can issue new rules without approval.
D
Answer Explanation
FINRA is a self-regulatory organization (SRO), which is empowered by and accountable to the SEC. FINRA can make rules, but they must be approved by the SEC before they become effective.
Textbook Reference
Please see textbook section 13.1.1
FINRA has cancelled the registration of a registered representative due to a violation of SEC regulations. In this case the representative may
A) Not be associated with a member firm in any capacity
B) Associate with a new member firm with heightened supervision
C) Requalify by examination after a period of 2 years
D) Act in a clerical capacity for a period of 2 years and then resume former duties with FINRA permission
A
Answer Explanation
If FINRA cancels the registration of a registered representative that person is allowed no association with any member firm.
Textbook Reference
Please see textbook section 13.3.7
In the process of registering as a member firm with FINRA, a non-bank broker-dealer that will transact general securities must
I. File a Form BD
II. Obtain SEC approval
III.Pay filing fees to FINRA
IV. Become a member of SIPC
A) II and III only
B) I, III, and IV only
C) II and IV only
D) I, II, III and IV
B) I, III and IV only
Answer Explanation
When applying for membership with FINRA, a non-bank broker-dealer must submit both a FORM BD and a New Member Agreement to FINRA. The firm is registered with the SEC when it receives its FINRA membership; no further action or approval is necessary from the SEC. All non-bank broker-dealers in the general securities business must become members of SIPC.
Textbook Reference
Please see textbook section 13.2
A customer wishes to check on his broker-dealer’s past regulatory issues. This information is publicly available through
A) the SEC’s website.
B) SIPC.
C) FINRA’s CRD.
D) FINRA BrokerCheck.
D) FINRA BrokerCheck
Answer Explanation
FINRA BrokerCheck provides public information regarding all registered broker-dealers and representatives. In addition to information about the type of businesses a broker-dealer is engaged in, BrokerCheck discloses past regulatory issues and also information about senior management. The FINRA CRD system is not available to the public.
Textbook Reference
Please see textbook section 13.3.6
Which of the following are acceptable options for delivery of Firm Element education?
I. Computer-based training modules prepared by outside vendors
II. Face-to-face training delivered by the firm’s compliance department to all registered representatives
III. Pre-recorded web conferences presented by high level product experts within the firm
A) I, II, and III
B) II and III only
C) I and II only
D) I only
A) I, II and III
Answer Explanation
A broker-dealer’s Firm Element training program can include any form of education that the firm determines appropriate for its representatives and supervisors. A broker-dealer must conduct a needs analysis to identify the firm’s training needs. New product information, regulatory and compliance developments, and updates on internal procedures are topics that are recommended for consideration.
Textbook Reference
Please see textbook section 13.3.8.2
