Exam 1 Flashcards
Which of the following provisions of the Securities Act of 1933 CANNOT be used for an initial public offering of securities? A Rule 144 B Rule 147 C Regulation A D Regulation D
A.
Rule 144 can only be used to sell unregistered stock if a public trading market in the security already exists. Selling in compliance with the rule registers those shares. It cannot be used for an initial public offering.
IPOs are exempt from registration if the private placement exemption requirements are met (Regulation D), or if the issue is sold “intra-state” (under the provisions of a Rule 147 exemption).
If a small amount is sold (under $50,000,000), Regulation A provides for an exemption from registration.
Which of the following MUST be disclosed on trade confirmations?
I The amount of any commission charged in an agency trade
II The amount of any mark-up in a principal trade of a non-NASDAQ security
III The capacity in which the firm acted
IV In an agency trade, the name of the other party to the trade and the time of the trade; or a statement that such information is available upon request
A I and II only
B I, II, III
C II, III, IV
D I, III, IV
D.
Under SEC Rule 10b-10:
- disclosure on confirmations must include the amount of any commission disclosed in an agency trade.
- There is no requirement to disclose the mark-up in a principal transaction unless the security is included in the NASDAQ System.
- The confirmation must disclose the capacity in which the firm acted (either agent or principal);
- In an agency trade, the name of the other party to the trade and the time of the trade must be made available upon request.
In an inter-dealer trade of a Global Market stock between a market maker quoting that stock in the NASDAQ System and a non-market maker that accesses the quote in the System, who is required to report the trade to the NASDAQ TRF? A Buy side B Sell side C Market maker D Non-market maker
C.
Under ACT reporting rules for the NASDAQ TRF (Trade Reporting Facility), the executing member reports the trade. The market maker posting the quote in the NASDAQ system received the report from the non-market maker and executed it, so the market maker is the executing member and reports the trade within 10 seconds (during the hours that ACT is open).
A FINRA member firm sponsors a blog about investing that it shows on its website. A registered representative at the firm copies and pastes content from the blog to a public investing website, along with the registered representative’s contact information. This action is:
A prohibited under FINRA rules
B permitted only with prior principal approval of the posting
C permitted only if the content is filed 10 business days in advance with FINRA
D permitted only if the FINRA name is included in the posting along with a hyperlink to the FINRA website
B.
The issue here is that the firm-sponsored blog content would be principal approved, but the registered representative copying and pasting that content to a “public investing website” along with the rep’s contact information is a different use of the content - and this would require prior principal approval as well. Prior filing is only required with FINRA for the firm’s first year of operations. The FINRA name does not have to be used on a member website, but if it is used, it must be in smaller letters than the firm’s name and must be hyperlinked to the FINRA website.
A municipal dealer receives a written complaint from a customer. Under MSRB rules, which statements are TRUE?
I A principal must personally handle the complaint
II A principal may delegate the handling of the complaint
III A principal must approve the resolution of the complaint
IV Copies of the complaint, and documentation of any action taken, must be retained for 3 years
A I and III
B II and III
C I, II, IV
D II, III, IV
B.
The principal does not have to personally handle customer complaints - this work can be delegated to someone else.
However, the principal is responsible for the complaint’s handling and resolution. Copies of complaints, with actions taken, must be retained for 6 years under MSRB rules.
The responsibilities of the BOM include:
I Approval of new accounts and transactions in accounts
II Ascertainment of the good character of applicants for registration
III Maintenance of personnel files for branch employees
IV Review of securities business related incoming correspondence directed to registered representatives
A I and II
B III and IV
C I, II and IV
D I, II, III, IV
D.
The BOM has responsibility for:
- account approval and transaction approval in customer accounts;
- for ascertaining the good character, business repute, qualifications, and experience of each applicant for registration in the branch;
- for reviewing incoming correspondence directed to representatives in the branch and outgoing correspondence from representatives to their customers.
As far as having responsibility for maintaining personnel files of branch employees, this one is “debatable,” but we think that the answer is “yes” to this one as well. Most personnel record information originates in the branch, and the records are usually kept at both the branch location and a central HR location.
All of the following statements are true regarding margin EXCEPT all: A listed stocks are marginable B over-the-counter stocks are marginable C U.S. Government bonds are marginable D listed bonds are marginable
B.
Under Regulation T of the Federal Reserve, all listed securities are marginable.
In order for an over-the-counter security to be marginable, it must be approved for margin by the Federal Reserve. Currently, the Fed approves all NASDAQ securities for margin. Other selected OTC issues are also on the OTC “margin list.”
All Government and Municipal issues are marginable under the maintenance margin rules of FINRA. The Federal Reserve cannot set margins for the issues because they are exempt from the Securities Exchange Act of 1934. The Act of 1934 only empowers the Fed to set margins for non-exempt securities.
A tender offer is being made for ABC shares. Exercise is required in order for the holder to tender which of the following?
A ABC call options
B ABC rights
C ABC warrants
D All of the above
A.
Do not confuse the requirements for tender offers with the requirements for marking order tickets to sell “long”! Tender offers very often have a contingency where a specified percentage of the shares must be tendered for the deal to go through; and another contingency where if there is an over-tender beyond the stated percentage, the issuer can either accept the overage or can return the overage.
Therefore, in a tender offer, not only can the common stock be tendered, but the convertible securities can be tendered without giving instructions to convert, and rights and warrants can be tendered without exercising. If the offer is not accepted, these are returned. If the offer is accepted, the maker of the offer will accept the convertibles and convert them (if there is an over-tender, the excess convertibles are returned unconverted) and rights and warrants will be exercised, with the maker of the offer paying the cash difference between the exercise price and the tender offer price to the person who tendered (if there is an over-tender, any unexercised rights or warrants are returned).
Note that call options cannot be accepted because they are not an issuer-created security - exercises go through the OCC - not through the transfer agent. However, if the holder of a call option exercises, the resulting shares received can be tendered!
Which order is NOT permitted to be executed in the NASDAQ Market Center Execution System?
A A riskless principal trade for an institutional customer
B A block trade of 1,000,000 shares for a pension plan
C A proprietary short sale
D A small agency order for a retail client
B.
The NASDAQ Market Center Execution System accepts market, marketable limit, and limit orders to buy, sell long, and sell short. The system may be used for both proprietary trades and agency trades. Order size in the system is limited to 999,999 shares, making Choice B too large of an order to be placed as a single trade.
FINRA requires that a “readily apparent reference and hyperlink to BrokerCheck” be included on:
A the initial web page of the broker-dealer
B electronic trade confirmations
C electronic statements
D electronic member firm directories
A.
In order to expand the visibility of BrokerCheck to existing and potential clients of broker-dealers, in 2016, FINRA required member firms to include a “readily apparent reference and hyperlink” to BrokerCheck on the initial web page of the broker-dealer and any page that includes the professional profile of an associated person who conducts business with retail investors.
Note that this is not required on electronic trade confirmations, account statements or member firm directories.
A registered representative in your office is also the beneficiary of a trust that directs its securities trades to that representative for execution. This arrangement is:
A prohibited because it is a conflict of interest
B permitted if the registered representative is the sole beneficiary of the trust
C permitted if the arrangement is approved in writing by the branch manager
D permitted if the registered representative holds a power of attorney over the account
B.
The trustee is a fiduciary that must act in the best interests of the trust beneficiary or beneficiaries. The trustee chooses the broker to execute the portfolio transactions, and must act in the best interests of the beneficiary when doing so. If the trustee selects the broker that also happens to be the beneficiary of the trust, so be it! Note, however, that this gets stickier if there are multiple beneficiaries to the trust - because one beneficiary (the registered representative) would be getting a disproportionate benefit by earning the commissions on the directed portfolio trades; and the commission cost is being borne by the other beneficiaries in the trust. In such a case, then there is a conflict of interest that would prohibit such an arrangement unless the other beneficiaries approved.
Which statement is TRUE concerning quotes entered into the non-NASDAQ OTC Bulletin Board?
A Quotes must be firm and 2-sided
B All quotes must be unfirm and can be either 1- or 2-sided
C BW may be placed by a dealer seeking to sell stock
D The minimum quote size is 100 shares
C.
The “OTC Bulletin Board” (run by FINRA) shows quotes for securities that do not qualify for a NASDAQ listing. It lists firm quotes at the top of the screen, followed by “unfirm” quotes (meaning the dealer wants to negotiate on price - note that these quotes are prohibited in NASDAQ). In the OTCBB, both 2-sided and 1-sided quotes are permitted. In contrast, only 2-sided firm quotes can be entered in NASDAQ.
In addition, dealers can place “BW” and “OW” entries for positions (Bids Wanted and Offers Wanted) and can place unpriced indications of interest in securities positions. BW would be used by a dealer who is seeking to sell stock. OW would be used by a dealer who is looking to buy stock.
Minimum quote size is dependent on the price of the underlying security. Depending on the price level of the quotation, a different minimum size can apply to each side of the market being quoted by the member in a given security.
Priced (Firm) Bid or Offer Minimum Quote Size
$.0001 - .0999 10,000 shares
$.10 - $.1999 5,000 shares
$.20 - $.5099 2,500 shares
$.51 - $.9999 1,000 shares
$1.00 - $174.99 100 shares
$175+ 1 share
Any purchaser of an Initial Public Offering of a “Pink Sheet” stock:
A must be provided with a copy of the prospectus if the purchase occurs within 25 days of the effective date
B must be provided with a copy of the prospectus if the purchase occurs within 40 days of the effective date
C must be provided with a copy of the prospectus if the purchase occurs within 90 days of the effective date
D is not required to be provided with the prospectus
C.
The prospectus delivery rules following the effective date are as follows:
- 90 days: IPO of the security that is NOT exchange listed (e.g., OTCBB and Pink Sheets):
- 40 days: Add on Offering of a security that is NOT exchange listed
- 25 days: Security that is exchange listed
Which security MUST be registered with the SEC?
A Port authority revenue bond
B Bank CD in the amount of $10 million
C Debenture shelf offering of $100 million
D Regional bank stock sold in an add on offering
C.
Debentures are corporate non-exempt securities that must be registered with the SEC. A revenue bond is a municipal bond and is exempt. Any bank offering or bank stock is also exempt.
A “bona fide” customer, to whom a copy of a member firm’s statement of financial condition must be provided upon request, is defined as a person who:
A has cash or securities in the possession of the member
B has traded through the member within the past 3 months
C is not a member of FINRA
D has engaged in any business transaction with the member within the past 12 months
A.
Under FINRA rules, bona fide customers must be provided with the latest copy of the firm’s balance sheet upon request. Members must also provide this information to other member firms. A bona fide customer is defined as one who has cash or securities in the possession of the broker-dealer.
Under FINRA rules, the requirement to provide an educational brochure to former customers who are solicited to move their accounts by a registered representative who has moved to another firm applies for a period of:
A 1 month after the representative begins employment with the new firm
B 3 months after the representative begins employment with the new firm
C 6 months after the representative begins employment with the new firm
D 12 months after the representative begins employment with the new firm
B.
FINRA Rule 2273 covers the situation where a representative moves from one broker-dealer to another, and solicits his or her former customers to move their accounts to the new firm. FINRA requires that if such a solicitation is made, an educational brochure must be provided to the former customer with any written solicitation, or if the solicitation is oral, the written brochure must be sent within 3 business days.
The brochure details that:
- The representative may receive incentives from the new firm that create a conflict of interest;
- Some assets may not be transferable, so they would either have to be liquidated and the cash transferred; or if they remain at the old firm, they may be subject to higher account maintenance fees;
- Fee structures can be different at the 2 firms, and the new firm might have higher fees; and
- Products and services available at each firm can be different.
This brochure must be delivered for the 3-month window following the representative’s association with the new firm. Finally, the rule also applies if the former customer seeks to transfer assets to another firm without being individually contacted. Then the customer must get the brochure with the approved account transfer documentation.
Which of the following are defined as “branch” offices of your firm by FINRA?
I A home office of a registered representative where the representative regularly meets with customers
II An office sublet by your firm to another FINRA member firm
III An office location of your firm listed in a telephone directory
IV An office shared with another company that is not in the securities business
A III only
B II and IV
C I, III, IV
D I, II, III, IV
C. FINRA defines a branch office as a location where underwriting or securities business is performed or one that is advertised as such.
Under this definition, a home office of a registered representative is not a “branch” as long as the location is not advertised as a branch; the representative does not meet customers at that office; and the representative does not accept cash or securities at that office. Since this representative is meeting customers at his or her home office, this falls under the branch definition.
An office listed in a phone directory is being “advertised” and therefore is a branch; and an office shared with another type of business is also your branch (since you would be paying your share of expenses).
An office sublet by your firm to another FINRA firm is the other firm’s branch office - not your firm’s.
All of the following investments are allowed in an HR 10 plan EXCEPT:
A Cash life insurance
B Whole life insurance
C Term life insurance
D Variable annuity with plan completion insurance
C.
The permitted investments for Keogh plans are:
- CDs;
- securities;
- U.S. minted gold coins;
- gold and silver bullion; and
- the cash value of life insurance.
Variable annuities are defined as a security, and hence are permitted. Cash life insurance and whole life insurance have cash values and are permitted. Term life is a pure insurance product with no cash value, and hence is not permitted.
A Series 7 licensed registered representative leaves the employ of Broker-Dealer A to try a new career as a hair stylist. He leaves that business after working for 22 months because he was called up for active duty in the military. Upon return from military service 24 months later, he decides that he no longer wants to be a hair stylist and wishes to re-enter the securities business. He interviews with Broker-Dealer B and is hired 70 days after returning from active military duty. Which statement is TRUE about requalification of this individual?
A This individual must retake and pass the Series 7 exam in order to be requalified
B This individual must take Regulatory Element CE in order to be requalified
C This individual must retake and pass the Series 7 exam and must take Regulatory Element CE in order to be requalified
D This individual will be relicensed without being required to retake the Series 7 exam and returns to the normal Regulatory Element CE schedule
D.
FINRA has interpreted that it will grant “special inactive status” not only to currently registered individuals who are called up for active military duty, but it will also do so for anyone who is called up for active military duty in the 24 months following termination of association with a member. This keeps the person’s licensing exam from lapsing and excuses the individual from the CE obligation until that individual returns from active military duty, as long as he or she reassociates with a member firm within 90 days of return from service. This is the case in this example, so Choice D is correct.
