Exam 2 Redo

Question 1

During normal market hours, transactions in CQS securities must be locked-in within:

Answer 1

20 minutes of execution

Transactions in NYSE and other exchange-listed securities must be affirmed (locked-in) by the order-entry side of the transaction within 20 minutes of execution. This affirmation clears the trade for settlement.

Question 2

A firm is the managing underwriter of a follow-on offering of a security that’s listed on the NYSE. The aftermarket prospectus delivery rule:

Answer 2

Does not require the firm to deliver a prospectus

Question 3

Which of the following situations will result in a violation of SEC rules concerning material, non-public information?

Answer 3

An investment banking representative discusses a proposed tender offer with a registered person who’s employed in the high net worth sales division of his firm

SEC Rule 14e-3 prohibits a person from trading while in possession of material, non-public information concerning a tender offer. In addition, a person (e.g., an investment banking representative) who acquires material, non-public information concerning a tender offer is prohibited from disclosing this information. An exception is provided if the communication is made in good faith to:
Officers, directors, employees, or advisers of the person that’s making the tender offer. The adviser’s role involves the planning, financing, preparation, or execution of the tender offer.
Officers, directors, employees, or advisers of the person that’s the subject of the tender offer (the target company). The adviser’s role involves the planning, financing, preparation, or execution of the tender offer.
If a tender offer is proposed, the implication is that the information has not yet been made public. An investment banking representative cannot discuss a proposed tender offer with a registered person who’s employed in the high net worth sales division of his firm. (11305)

Question 4

A member firm is required to report to FINRA if which of the following actions are taken against a registered representative(RR)?

Answer 4

An RR was suspended for five days by his firm.

FINRA rules require broker-dealers to report the occurrence of certain events within 30 days. These events include:
Written customer complaints involving allegations of theft or misappropriation of funds or securities, or forgery
Any securities or commodities-related judgment, award, or settlement against an RR for more than $15,000 ($25,000 if the claim is against the firm)
If the firm or any associated person is indicted, or convicted of, or pleads guilty to any felony; or any misdemeanor that involves the purchase or sale of any security, bribery, perjury, burglary, larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds, or securities, or a conspiracy to commit any of these offenses, or substantially equivalent activity in a domestic, military or foreign court
A disciplinary action against an RR by the member firm involving suspension, termination, the withholding of commissions, or imposition of fines in excess of $2,500
A complaint is not reportable on its own since the complaint doesn’t specify that it involves allegations of theft or misappropriation of funds or securities, or forgery. Fines are only reportable if the amount of the fine is in excess of $2,500.

Question 5

A firm is distributing a follow-on offering involving the securities of an NYSE-listed company. In this case, a prospectus must be provided to any aftermarket purchaser for:

Answer 5

0 days

When a new issue is sold to the public, a prospectus must be provided to all potential purchasers. In addition, dealers that immediately sell the security in the aftermarket may be required to provide a prospectus. This requirement lasts for 25 days following the initial public offering (IPO) for issues to be listed on an exchange (NYSE or Nasdaq) and 90 days for IPOs of OTC equities. Follow-on offerings of listed issues (as in this question) are not subject to aftermarket prospectus delivery rules. (11210)

Question 6

A current Nasdaq market maker would like to begin making a market in a security that has just been authorized to trade on Nasdaq. The market maker enters a registration request by contacting Nasdaq Market Operations. When does the registration become effective?

Answer 6

On the day the request is entered

A Nasdaq market maker may become registered in a newly authorized issue by contacting Nasdaq Market Operations. The registration becomes effective on the day the request is entered. (98779)

Question 7

The SIPC logo may be placed on all of the following items, EXCEPT:

Answer 7

A brochure for the firm’s commodities business

Membership in SIPC or FINRA may be placed on business cards, letterhead, or in advertisements, provided the notation is not more prominent than the name of the member firm. In the event of bankruptcy, SIPC covers the value of securities. Commodity or futures contracts and general account products are not considered securities. Broker-dealers may only use the official SIPC logo with the attestation that the firm is a member.

Question 8

A client has a margin account with a long market value of $450,000 and a debit balance of $250,000. If the broker-dealer declares bankruptcy, each of the following statements are TRUE, EXCEPT:

Answer 8

SIPC covers the $450,000 in long market value.

According to SIPC, if a client has a margin account, the net equity is covered (i.e., Long Market Value - Debit). In this example, the client is covered for $200,000 of securities ($450,000 LMV - $250,000 Debit). Customers may, but are not required to, pay off the debit balance and receive the full value of the securities. If the client paid the $250,000 debit balance, he would receive $450,000 of coverage for the securities. SIPC doesn’t provide coverage for debit balances.

Question 9

A firm that decides to use time stamps in nanoseconds it must record and report to the Consolidated Audit Trail (CAT) system time stamps in:

Answer 9

Nanoseconds

CAT requires firms using computerized clocks to record trades in milliseconds. However, if a firm chooses to record in finer increments it must use time stamps in the finer increment up to nanoseconds. (11954)

Question 10

Which of the following securities must be cleared through the National Securities Clearing Corporation (NSCC)?

Answer 10

A qualified security between two members of the NSCC

The National Securities Clearing Corporation clears trades in securities qualified to be cleared through the system between members. (98860)

Question 11

The inside market is 10-10.50. A confirmation of a customer buy transaction executed at 10.70 shows a .10 markup. This confirmation:

Answer 11

Should reflect a 20-cent markup

The markup is 20 cents, based on the inside offer of 10.50. The inside bid would be used for markdowns. In this case, the markup shown is inaccurate. The confirmation should disclose a 20-cent markup. The extra 10 cents is a hidden profit. RRs are never paid a commission and a markup on the same transaction. (71099)

Question 12

A registered principal has been indicted for theft that was unrelated to his employment at the member firm. Which of the following statements is TRUE?

Answer 12

The registered person is permitted to stay employed at the member firm, but the event must be reported to FINRA.

If a person who’s associated with a FINRA member firm has been indicted for a felony or a misdemeanor that involves the purchase or sale of a security, theft, robbery, burglary, extortion, forgery, or counterfeiting, the event must be reported to FINRA. This includes shoplifting and, in some states, driving under the influence (DUI). However, in this question, since the person has not been convicted, he’s not subject to statutory disqualification and may stay employed at the member firm. (18641)

Question 13

Which of the following criteria is considered MOST important for a dealer when determining the markup it may charge to a client on a transaction involving a debt security?

Answer 13

The dealer’s contemporaneous cost in the same security

The best definition of the prevailing market price of a debt security is the dealer’s contemporaneous cost for the same security. If this price cannot be determined, a hierarchy of the following factors must be used by the broker-dealer to determine a fair transaction price:

(A) Prices of contemporaneous interdealer transactions
(B) Prices of contemporaneous dealer transactions in the same security with institutional customers (in the absence of A)
(C) Contemporaneous quotes of the same security for actively traded securities (in the absence of both A and B)

If the previously described contemporaneous pricing information is not available, then the broker-dealer may use the prices of similar securities to determine the fair price of the subject security. (11354)

Question 14

Which of the following employees would be allowed to open an account at another member firm without requiring prior written approval of his employer?

Answer 14

A trader at a mutual fund that transacts business with a member firm

With the exception of the trader at a mutual fund, all of the individuals listed are employees of a FINRA member firm, and would require prior written consent of their member firm in order to open an account at another member firm. Since the insurance agent is selling variable annuities as an employee of a member firm, he would also be subject to the rule. (88254)

Question 15

A customer places an order to purchase 500 shares of XYZ at the market. The member’s bid and offer for XYZ is 38.88 - 38.99. The inside market is 38.90 - 38.95. The member firm confirms the sale as principal at 39. The compensation would be a:

Answer 15

Markup of .05

Markups and markdowns are charged when a firm is acting as principal.

Commissions are charged when a broker-dealer is acting as agent

Question 16

On a stock loan between two broker-dealers used to facilitate delivery on a short sale, which of the following statements is TRUE?

Answer 16

The borrower receives voting rights.

When stock is lent from one broker-dealer to another, the lending firm has the right to recall the stock at any time. The borrowing firm will deposit the full market value of the stock at the time of the loan. The client is required to deposit 50% of the sale price, the Regulation T requirement. Both the lending firm and the borrowing firm will mark the stock to the market periodically and, if either party is unsecured, the unsecured party will have the right to demand cash payment. The lending firm retains all rights to the stock, except for the right to vote. (71155)

Question 17

FINRA has the authority to halt trading in all of the following securities, pending release of material information, EXCEPT:

Answer 17

OTC equity securities underlying an ADR

Members may not execute any type of order in a Nasdaq security or an exchange-traded security for which an SRO has imposed a trading halt, pending the release of material information. FINRA has limited authority to halt trading of OTC equity securities underlying an ADR, but may not halt trading pending release of material information. (82913)

Question 18

A company is seeking to raise $10 million to expand its business through a best-efforts offering. The underwriter is having difficulty placing the shares. Which of the following statements regarding this scenario is TRUE?

Answer 18

The offering period could potentially be extended.

In a best-efforts underwriting, the underwriter acts as an agent for the issuer. As a result, any unsold shares will be retained by the issuer. The offering period of a best-efforts underwriting may be extended if this contingency is noted in the prospectus. The issuer would need to add a supplement to the prospectus and send it to all of the subscribers to advise them of the extension. This supplement is often a sticker that’s attached to the prospectus. There’s no requirement to file an entirely new Form S-1. However, an amendment to the prior document would be required. The issuer’s employees may participate regardless of the level of public demand for the issue. (11338)

Question 19

Which of the following features or risks are associated with extended-hours trading?

Answer 19

Exaggerated effect of news announcements

According to FINRA, the following risks must be disclosed to customers, prior to engaging in extended-hours trading: reduced liquidity, increased volatility, changing prices, unlinked markets, wider spreads, and exaggerated effects of news announcements. Extended trading hours are prior to 9:30 a.m. and after 4:00 p.m.

Question 20

A member firm receives a check from a customer made payable to an insurance company for a deferred variable annuity. The firm:

Answer 20

May forward the check to the insurance company prior to the application being approved

A member firm is permitted to receive, and then forward a check made payable to the insurance company if certain conditions are met. The firm must have a written agreement with the insurance company that stipulates that the insurance company agrees to segregate the funds until notified by the member firm that a principal has approved the application for a deferred variable annuity. In addition, the agreement must also stipulate that the customer’s funds will be returned if the application is rejected. (82855)

Question 21

A customer’s order to sell is executed on a principal basis at the inside bid price. The firm charges the client a small commission. The commission is:

Answer 21

Not permitted

A broker-dealer may never act as a broker (agent) and dealer (principal) in the same transaction. In this question, the member firm is acting as a principal, selling at a net price, and adding a commission as agent. This dual compensation arrangement is prohibited. (82543)

Question 22

A registered representative (RR) has been employed by a brokerage firm for the last five years, but he recently pled guilty to a felony. The brokerage firm has just received notification from FINRA that the representative’s registration has been revoked because of the guilty plea; however, the firm intends to request relief of the RR’s behalf. How long does the firm have to apply for relief?

Answer 22

10 business days

When FINRA issues a notice to a member firm regarding a disqualification, the notice must state that the member may file a written application requesting relief on behalf of itself or a person associated with the member within 10 business days after service of the notice. In compliance with FINRA Rule 9522, if the member fails to file the application requesting relief within 10 business days, the registration of the disqualified person will be revoked. (11807)

Question 23

Which of the following persons releases funds in a best-efforts underwriting?

Answer 23

The escrow agent

The escrow agent releases funds in a best-efforts, contingent underwriting. If the underwriting is successful, the issuer receives the offering proceeds less underwriter fees. If the offering fails, all clients’ funds must be returned in their entirety with no deductions permitted for offering expenses. (99746)

Question 24

The minimum quote size permitted for a broker-dealer in OTC equity securities is:

Answer 24

Based upon the price of the quote

The minimum size requirement for a quote in an OTC equity security varies based on the price of the quote. The bid price could have a different minimum size than the offer. (82865)

Question 25

According to Regulation SHO, a qualified block positioner is:

Answer 25

Exempt from the locate requirement only if it’s engaging in bona fide market-making activities

Regulation SHO requires broker-dealers that are accepting short sale orders to first locate the securities to determine if they can be borrowed. This locate requirement has certain exceptions. One exception is any short sale that’s effected by a market maker in connection with bona fide market-making activity. According to Regulation SHO, the term “market maker” refers to the Securities Exchange Act of 1934 definition, and includes any dealer that acts in the capacity of a qualified block positioner, any specialist permitted to act as a dealer, and any dealer that enters quotations in an interdealer communication system (a Nasdaq market maker). This exception is only available when the dealer is engaging in bona fide market-making activities. (11391)

Question 26

Each of the following orders are exempt from the Limit Order Display Rule, EXCEPT:

Answer 26

An order for 5,000 shares at $30 per share

Some of the orders that are excluded from being displayed under the Limit Order Display Rule include the following: Odd-lot orders, all-or-none orders, orders that are executed immediately, and block size orders. A block size order is defined as any order (i) of at least 10,000 shares, or (ii) for a quantity of stock having a market value of at least $200,000. An order for 5,000 shares at $30 per share would not qualify for an exemption unless the customer requests for it to not be displayed.

Question 27

A trade that occurs at 5:00 p.m. ET on Thursday would be reported to CAT on:

Answer 27

Monday

CAT system reports must be submitted by 8 a.m. ET on the trading day following the day the data is recorded. A trading day starts immediately after 4:15:00 p.m. on one trade date and ends exactly at 4:15:00 p.m. on the next trade date. Weekends, or days national securities exchanges are closed are not considered a trading day. Because this trade was part of Friday’s trading day it would be reported by 8:00 a.m. on Monday. (11948)

Question 28

A market maker’s quote consists of a bid of $30.30 and an offered of $30.45. A customer wants to buy that stock at $30.33. The firm must reflect the client’s interest:

Answer 28

Immediately

Under the Customer Limit Order Display Rule, a displayable customer limit order must be reflected in the market maker’s quote immediately. The SEC defines the term immediately as within 30 seconds under normal market conditions.
(11615)

Question 29

Which of the following statements is TRUE concerning the character of quotations by a Nasdaq market maker?

Answer 29

All quotations and orders entered into the system are automatically executable for their displayed and non-displayed size.

A Nasdaq market maker must have a two-sided quote at all times using its MPID (market participant identifier), and must display a quotation size equal to at least a normal unit of trading, which is 100 shares. All quotations and orders entered into the system are automatically executable for their displayed and non-displayed size, and any quote or order entered into the system that would lock or cross the market will be executed. (71171)

Question 30

As required by SEC Rule 17a-13, a firm has conducted its quarterly box count and discovered 500 shares of stock missing. The firm is unsure, but it suspects that there may be a recordkeeping error. What’s the next step to be taken?

Answer 30

Contact the SIC and the transfer agent

If securities are discovered to be missing after conducting the quarterly box count, the firm should contact both the SIC and the transfer agent. The FBI only needs to be contacted if theft or other illegal activities are suspected. (11533

Question 31

When engaging in a 1035 exchange, an individual should be aware that:

Answer 31

The exchange is not a taxable event, but the new annuity may come with additional restrictions

The primary benefit of a 1035 exchange is that it’s not taxable. However, the new annuity may come with new restrictions, thereby making it unsuitable for the investor. (18239)

Question 32

Which of the following statements is TRUE regarding the difference between the trading of listed stocks on exchanges and CQS?

Answer 32

Exchange markets have one market maker on the floor while the CQS has multiple market makers for each security

Most exchanges award the market-making franchise for a particular stock to a single specialist or designated market maker (DMM), while any FINRA member can choose to quote an exchange-traded stock on the CQS. Exchange-listed securities are covered by the SEC’s Firm Quote Rule regardless of where they are traded. The Consolidated Tape disseminates reports of CQS trades and identifies them as such. (76147)

Question 33

A wholesaler for a mutual fund has given a registered representative of a broker-dealer an advertisement that promotes the fund family’s superior performance. This communication:

Answer 33

Must be approved internally by the broker-dealer

ll retail communications related to investment companies must be filed with an SRO within 10 business days of initial use. If a fund (sponsor) prepares the retail communication that’s subsequently used by a broker-dealer, the sponsor (not the broker-dealer) is required to file the retail communication. Remember, prior to its use by the member firm’s salespersons, the retail communication must be approved internally by a principal of the broker-dealer. (11580)

Question 34

An ECN is currently alone at the inside market on a Nasdaq stock. A market maker in the stock receives a limit order to buy from a customer and this order would improve the market maker’s quote, but would not change the inside market. If the market maker sends the order to the ECN, which of the following statements is TRUE?

Answer 34

Neither the ECN’s nor the market maker’s Nasdaq quote will change.

By sending the customer limit order to an ECN, the market maker has satisfied its obligation under the Display Rule. Since the customer’s order will not change the inside market, the ECN’s Nasdaq quote will not be affected when it receives the customer order. It’s important to note that, while the market maker has satisfied its obligation under the Display Rule, it must still monitor the status of the customer order at the ECN to ensure that it complies with the Manning Rule (i.e., it cannot trade ahead of the customer limit order being held by the ECN). (11766)

Question 35

If a firm chooses to file a Membership Continuance (MC-400A) application, it must be filed:

Answer 35

Within 10 business days

Question 36

Regulation M-A reduces restrictions on communications in cross-border M&A transactions through all of the following actions, EXCEPT the Regulation:

Answer 36

Eliminates the requirement for security holders to receive a disclosure document, such as a prospectus, proxy statement, or tender offer statement, prior to voting or tendering securities

Question 37

A dealer may NOT use which of the following justifications as a reason to ignore its contemporaneous cost, when calculating the markup of a debt security?

Answer 37

The dealer’s credit rating has been downgraded below investment grade

Question 38

A client purchases a variable annuity and then places a redemption request a few days later. In this situation:

Answer 38

The firm forfeits all sales charges

If any security issued by an open-end management investment company or variable product issuer is repurchased by the issuer, or by the underwriter for the account of the issuer, or is tendered for redemption within seven business days after the date of the transaction, the dealer or broker must refund to the underwriter the full concession allowed to the dealer or broker on the original sale and the underwriter must pay to the issuer the underwriter’s share of the sales charge on the original sale. The client is not refunded her purchase amount, but receives the NAV at the time of redemption which means she can lose money on the transactions. (82576)

Question 39

A firm that decides to use time stamps in nanoseconds it must record and report to the Consolidated Audit Trail (CAT) system time stamps in:

Answer 39

Nanoseconds

CAT requires firms using computerized clocks to record trades in milliseconds. However, if a firm chooses to record in finer increments it must use time stamps in the finer increment up to nanoseconds. (11954)

Question 40

Allen was appointed by the court as a fiduciary for his uncle’s affairs after it was determined that his uncle was mentally incompetent. His uncle has a brokerage account at ABC Capital over which the RR exercises discretion. In order for Allen to effect transactions in the account he would need:

Answer 40

Evidence of appointment of incumbency
.
Allen would need evidence of appointment of incumbency. Evidence of appointment of incumbency could be provided in the form of a document that certifies that the person listed therein is the fiduciary for another person. A power of attorney or trading authorization would become invalid if the account owner is declared mentally incompetent. A court-appointed fiduciary could supply the court order or court document of appointment. These documents may not be dated more than 60 days prior to presentation (i.e., no more than 60 days old). All POAs become invalid if a client dies or is declared incompetent. An incompetent person may not sign over authority. (31880)

Question 41

Which of the following is not a DTC eligible security?

Answer 41

Options

Options securities are not considered to be DTC-eligible securities. These securities are cleared through the Options Clearing Corporation (OCC). The following securities are DTC-eligible.
Corporate equities
Corporate bonds
Municipal bonds
Money-market instruments
Mortgage-backed bonds
U.S. Treasuries and agency securities
(82598)

Question 42

A written or electronic communication that includes an analysis of individual companies as well as information on which to base an investment decision:

Answer 42

Is defined as a research report, it must be approved, but it’s not required to be filed with FINRA

The term research report is broad and is defined as any written or electronic communication that includes an analysis of equity securities of individual companies or industries and provides information that’s reasonably sufficient on which to base an investment decision. The report is not required to be labeled a research report, and the person who prepares it is not required to have the job title research analyst. For example, a newsletter or another type of communication with in-depth information on individual stocks that’s prepared by an RR is defined as a research report. A Supervisory Analyst (Series 16) may approve research reports related to debt and equity securities, as well as other research-related communications. Research reports are not required to be filed with FINRA.

Question 43

Is the CFO of the issuer of a private placement permitted to act as a purchaser representative in a Regulation D offering?

Answer 43

Yes, if she’s related to the purchaser.

The term purchaser representative designates a person who represents potential non-accredited purchasers who are solicited to buy securities under Regulation D. A purchaser representative cannot be an affiliate, director, officer, or employee of the issuer unless the representative is related to the purchaser by blood, marriage, or adoption. The purchaser representative cannot own 10% or more of the stock of the issuer and must be knowledgeable and experienced in financial and business matters. The potential purchaser must designate an individual to be the purchaser representative in writing for each individual offering. Blanket approval to represent the potential purchaser for all Regulation D offerings is not permitted.

Question 44

All of the following statements regarding simplified arbitration are TRUE, EXCEPT:

Answer 44

An award to a customer must be in the full amount of the dispute.

The amount of an award by an arbitration panel need not equal the full amount of the dispute. Any judgment against a broker-dealer must be paid within 30 days, or disciplinary action against the broker-dealer may result. Simplified arbitration does not require a hearing, unless the arbitrator calls for one. The maximum amount of disputes governed by this process is $50,000.

Question 45

A broker-dealer is required to notify its customers of in-house maintenance margin requirement changes:

Answer 45

There is no notification requirement