Finra Rules Flashcards
Registered representatives may NOT be compensated based on:
A. trading commissions paid by the customer to the brokerage firm
B. salary paid by the brokerage firm to the representative
C. trading commissions paid by the customer to the representative
D. asset based fees paid by the customer to the brokerage firm
The best answer is C.
Compensation cannot be paid by the customer to the registered representative. Only the broker-dealer may pay compensation to the registered representative.
To take a second job, under FINRA rules, prior written approval must be obtained from:
I Branch Manager
II FINRA
III Securities and Exchange Commission
A. I only
B. I and II
C. II and III
D. I, II, III
The best answer is A.
For a registered representative to take a second job requires approval of the branch manager under FINRA rules. The manager is acting for the member firm when doing so. There is no requirement to get approval from FINRA or the SEC.
Which of the following is NOT defined as an Outside Business Activity by FINRA?
A. A registered representative who helps out in his or her family’s restaurant at night, only earning tips
B. A registered representative who is elected to the Board of Directors of her cooperative apartment house
C. A registered representative who volunteers to make solicitations of contributions to her church
D. A registered representative who teaches a course on financial literacy at a local community college
The best answer is C.
FINRA requires that associated persons give written notice to their employer and receive written approval from their employer, to serve as an officer, director, partner or employee of another business organization. In addition, such an OBA (Outside Business Activity) must be reported on that individual’s U-4 Form. This information then flows into that registered representative’s BrokerCheck report and shows as an OBA on the report.
The intent of the OBA disclosure in BrokerCheck is that a potential customer can assess how much time a representative is devoting to his or her business as a representative, as opposed to how much time the representative is devoting to Outside Business Activities.
Being compensated is not the sole determinant of whether an activity is an OBA. If the activity can reasonably be expected to lead to additional business for that representative, it is an OBA. Teaching a course in night school at a college could be a way to get new client leads, and hence is an OBA. Being on the Board of Directors of a cooperative apartment house, while not compensated, puts the representative in a position to “steer” the Board when it makes a decision as to investing the coop’s reserve and operating funds, so it is an OBA. Working in the family restaurant for tips is clearly an OBA.
Note that volunteer charitable work, where there is no “quid pro quo” arrangement, is not an OBA. Rather, it is simply doing a good thing!
Under FINRA rules, which statement is TRUE about the gift limit from a registered representative to another person in the securities business or the financial news media?
A. No gifts are permitted
B. One gift of no more than $100 value to one person is permitted per year
C. Five gifts of no more than $100 value to one person are permitted per year
D. An unlimited number of $100 value gifts may be given to the same person in a year
The best answer is B.
Under FINRA rules, the maximum permitted gift that can be given to another person in the securities business or the financial news media is $100 per person per year.
A registered representative is permitted to borrow securities from a customer:
A. only if the customer has signed a margin agreement
B. only if the customer has signed a loan consent agreement
C. as long as the securities will be replaced no later than the end of that month
D. under no circumstances
The best answer is D.
FINRA prohibits registered representatives from either lending money or securities personally to a customer or borrowing money or securities personally from a customer. There are certain exceptions to the prohibition if the customer is a spouse, “significant other” or family member, but this is not the case here.
A registered representative would be permitted to take a loan from all of the following EXCEPT:
A. a spouse
B. a parent
C. a bank lending to the representative on the same terms and conditions as loans made to the general public
D. a bank lending to the representative on more favorable terms and conditions than loans made to the general public
The best answer is D.
Representatives are prohibited from borrowing from their clients. However, there are permitted exceptions to the rule:
Representatives are permitted to borrow from immediate family members who are clients (such as a husband borrowing from a wife or vice-versa, or a representative borrowing from a parent); and
Representatives are permitted to borrow from banks who are clients, as long as the terms and conditions of the loan are the same as those given to the general public.
Note that a loan from a bank to a representative on more favorable terms than those given to the general public is prohibited.
Finally, note that any borrowing by representatives must comply with the firm’s policies and procedures covering this.
A registered representative takes a customer out to a dinner and a show, spending $180. This activity is:
A. a violation of FINRA rules
B. permitted because less than $100 was spent on a per-person basis
C. permitted if it complies with the firm’s policies and procedures
D. permitted under all circumstances
The best answer is C.
Business entertainment does not fall under the $100 gift limit. Business entertainment is permitted as long as it is not too excessive or too frequent and it must comply with the firm’s policies and procedures.
A registered representative at another member firm has a client who wishes to buy a Direct Participation Program (DPP) unit, a product that is not offered through his firm. He has a friend that is a registered representative at another member firm where DPPs are sold, and offers to refer the prospective client in exchange for a small fee. Which statement is TRUE?
A. This is permitted since the referral payment is small
B. This is permitted because the recipient of the referral fee is a registered individual
C. This is permitted as long as the client is informed that a referral fee has been paid
D. This is prohibited
The best answer is D.
Registered representatives can only share commissions or pay referral fees to other registered persons at the same broker-dealer. Because these 2 representatives work for different firms, payment of the referral fee is prohibited.
The Firm Element component of the “Continuing Education” requirement:
I is administered by FINRA
II is administered by the FINRA-member employer
III must be completed annually
IV must be completed bi-annually
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is C.
The Firm Element of the Continuing Education requirement obligates member firms to deliver annual training to all registered representatives on product, regulation, and compliance issues.
The Regulatory Element component of the “Continuing Education” requirement must be completed:
I on the registrant’s 1st anniversary of registration
II on the registrant’s 2nd anniversary of registration
III every 2 years after the initial review
IV every 3 years after the initial review
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is D.
The Regulatory Element of the Continuing Education requirement must be completed by registered persons on their 2nd anniversary of registration and every 3rd year thereafter. This involves completing a computerized “training experience” that covers relevant rules and regulations.
If a registered representative fails to complete the Regulatory Element of the Continuing Education requirement within the stated time period, that person:
A. can continue to perform all of the functions of a registered representative
B. can only accept unsolicited orders from customers
C. can only be compensated on a salary basis; commission compensation is prohibited
D. must cease performing all of the functions of a registered representative
The best answer is D.
If a registered representative fails to complete the Regulatory Element of the Continuing Education requirement within 120 days of the notification date, that person’s registration is suspended and that person cannot continue to perform any of the functions of a registered representative.
A registered individual leaves the industry. The individual’s license(s) will expire if that person remains unaffiliated with a brokerage firm for how long?
A. 6 months
B. 1 year
C. 2 years
D. 10 years
The best answer is C.
If an individual leaves the industry and remains unaffiliated with a member firm for 2 years, all licenses lapse.
Notification to FINRA is required for all of the following EXCEPT:
A. a written customer complaint is received about a registered employee misappropriating customer funds
B. a registered representative is arrested for assault and battery
C. a registered representative is committed to a mental institution
D. a registered representative is indicted under the Securities Exchange Act of 1934 for “insider trading” violations
The best answer is C.
If one goes insane, notification to FINRA is not required. (After all, how would that person know to notify FINRA - he’s insane).
However, FINRA does require prompt notification for a variety of reasons. If one is the subject of a written customer complaint involving theft or embezzlement; if one is arrested, arraigned, indicted, convicted, or pleads guilty to any criminal offense (except for minor traffic violations); or if one is sued under the Securities Acts; notification to FINRA is required. In addition, notification to FINRA is required if the registered representative is suspended or expelled by any other self-regulatory organization; is denied registration by another self-regulatory organization; or is the subject of a customer complaint that is settled for more than $15,000; or is the subject of disciplinary action by the member firm involving suspension, termination, or the withholding of commissions in excess of $2,500. When FINRA gets the report, they review it to see if they should do nothing, suspend the person’s registration, or expel the registered representative.
A registered representative is employed by a broker-dealer that is a publicly traded company, listed on the New York Stock Exchange. Which statement is TRUE? The registered representative may:
A. recommend the purchase of his employer’s stock to existing customers
B. solicit new customers to buy his employer’s stock
C. write and distribute a research report recommending the purchase of the employer’s stock
Correct D. accept unsolicited orders for his employer’s stock; but cannot solicit orders for, nor recommend the security
The best answer is D.
If a registered representative is employed by a publicly traded member firm (say Raymond James), generally speaking he or she cannot recommend the purchase of that company’s shares; nor can he solicit customers to buy the shares. This is not an explicit SEC or FINRA regulation; rather it is industry practice that ensures compliance with FINRA’s “suitability” requirements; and the requirement to disclose control relationships at or prior to confirmation. However, it is permitted to accept unsolicited customer orders for the shares.
A customer instructs a registered representative to “Buy 100 shares of IBM whenever you think the price is right.” Under industry regulations this order:
A. must be refused unless a written power of attorney is on file from the customer
B. can be accepted as given
C. is considered to be discretionary and must be approved by a branch manager prior to execution
D. is given the same treatment as a market order
The best answer is B.
This order states the number of shares to be bought and the security to be purchased. The registered representative is left to choose price and time of execution. This is the same as a “not held” order and can be accepted as given. If the representative were to choose the number of shares or the security, then the order would be discretionary, and would require a written power of attorney on file from the customer.
Which statement is TRUE?
A. A registered representative can sign the name of a customer on an arbitration agreement
B. A registered representative can sign the name of a customer on a margin agreement
C. A customer can sign her name on a trading authorization, allowing a registered representative to trade her account
D. A third party can sign the name of a customer on a joint account agreement
The best answer is C.
A customer’s signature cannot be forged, even if the customer were to give permission to do so. Legally, the customer’s signature is required in order to have a binding contractual agreement that will have standing in a court of law. Thus, Choices A, B, and D are wrong. Customers can sign trading authorizations, allowing anyone (including registered representatives) to trade their account.
Under FINRA rules, alterations to executed order tickets for orders that were filled on the NYSE are prohibited:
A. under all circumstances
B. unless the alterations are approved in writing by the Floor Governors of the NYSE
C. unless the alterations are approved in writing by the DMM on the floor of the NYSE
D. unless the alterations are approved in writing by the Branch Manager
The best answer is D.
Under FINRA rules, alterations to order tickets are prohibited, unless the alteration is approved in writing by a “designated person” such as a branch manager. This person must understand all of the facts surrounding the alteration before approving of the change, and is responsible for the change.
An order ticket is filled out and sent to the New York Stock Exchange floor for execution. After being executed on the floor, it is discovered that the account number is incorrect. Under FINRA rules, the account number may be changed to the correct one by the:
A. Registered Representative
B. Specialist
C. Branch Office Manager
D. Floor Governor
The best answer is C.
Under FINRA rules, alterations to executed order tickets are prohibited, unless the alteration is approved in writing by a “designated person” such as a branch manager. This person must understand all the facts of the situation before approving of the change, and is responsible for the change.
Which of the following statements are TRUE about items reviewed or approved by a principal?
I Complaint letters received from customers must be reviewed by a principal
II Complaint letters received from customers do not have to be reviewed by a principal
III Internal documents of a brokerage firm must be reviewed by a principal
IV Internal documents of a brokerage firm do not have to be reviewed by a principal
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is B.
All customer complaint letters must be reviewed and handled by a principal. Internal documents of a brokerage firm do not have to be reviewed by a principal.
The FINRA 5% Policy requires that consideration be given to all of the following when determining mark-ups and commissions EXCEPT:
A. financial condition of customer
B. dollar amount of the transaction
C. level of service provided by the firm
D. type of security involved in the transaction
The best answer is A.
A customer’s ability to pay has no bearing on the amount of commission or mark-up that is charged. The dollar amount of the transaction, level of service provided by the firm, and the type of security involved are all considerations under the 5% Policy when determining a fair and reasonable commission or mark-up.
FINRA’s 5% Policy applies to which of the following?
A. Sales charges on mutual fund offerings
B. Mark-ups charged on principal transactions of municipal bonds
C. Underwriting spreads charged on new issue offerings effected over-the-counter
D. Commissions charged on transactions effected over-the-counter
The best answer is D.
The 5% Policy only applies secondary market transactions on exchange floor or over-the-counter. It does not apply to trades of municipal securities, which come under a similar MSRB rule. It does not apply to new issue offerings that require a prospectus, which also includes mutual funds.
Under the FINRA Conduct Rules, a broker-dealer may charge a customer for which of the following services?
I Collection of dividends
II Safekeeping of securities
III Handling the transfer and reregistering of securities
IV Appraisals of securities in a customer portfolio
A. I and II only
B. III and IV only
C. I, II, III, IV
D. None of the above
The best answer is C.
FINRA rules allow fair and reasonable charges for “clerical” services that are unrelated to trading and market making (charges to customers for trading and market making are covered under the 5% Policy). These services include collection of dividends on street name stock; safekeeping of securities; transfer of securities; and appraisals of securities.
Under the FINRA Conduct Rules, a broker-dealer may charge a customer for which of the following services:
I Collection of dividends
II Safekeeping of securities
III Handling the transfer and reregistering of securities
IV Distributing proxies to the owners of margin securities
A. I and II only
B. III and IV only
C. I, II, III
D. I, II, III, IV
The best answer is C.
FINRA rules allow fair and reasonable charges for “clerical” services that are unrelated to trading and market making (charges to customers for trading and market making are covered under the 5% Policy). These services include collection of dividends on street name stock; safekeeping of securities; transfer of securities; and appraisals of securities. Regarding proxies (voting materials) on street name shares - these are given by the issuer to the brokerage firm that holds the shares; and the broker must send them to the beneficial owners of the stock (the margin customers). This expense is paid for by the issuer; therefore it cannot be charged to the customer.
Which of the following are violations of FINRA rules?
I Recommending the purchase of put options to protect a stock position from a downwards market move
II Sharing in the profits and losses of a customer’s account
III Selling exempted securities to a customer with a written agreement to buy back the securities at a later date
IV Orally guaranteeing to buy back customer securities at a preset price
A. I and III
B. II and IV
C. I, II, IV
D. I, II, III, IV
The best answer is B.
A registered representative cannot guarantee a customer’s account against loss nor share in the account unless he or she opens a joint account with the customer; contributes capital proportional to any sharing agreement; and obtains the approval of a principal for the account. Selling exempted securities such as U.S. Governments with a written agreement to buy them back at a later date is a “repurchase” agreement, and is allowed (however, such repurchase agreements are typically for very large amounts, and are entered into by U.S. Government securities dealers). Recommending the purchase of a put option to protect against a downwards market move is perfectly acceptable, since that is what the option will do, and thus does not violate FINRA rules.
A customer buys 100 shares of ABC stock at $20 per share. Two months later, the stock is quoted at $10.00 - $10.50. The registered representative that sold the stock to the customer offers to repurchase the shares at $18. Which statement is TRUE?
A. This is prohibited because the FINRA Conduct Rules do not allow customer accounts to be guaranteed against loss
B. This is prohibited because the registered representative is interpositioning himself between the customer and the current “inside” market
C. This action is permitted, as long as the principal approves in writing prior to the proposed trade
D. This action is permitted as a method of maintaining customer “goodwill” with the firm
The best answer is A.
The action of repurchasing the customer’s shares at a price higher than the current market to limit the customer’s loss, is a prohibited practice under FINRA rules. Customers cannot be guaranteed against loss. If the market moves up, this customer wins; if it moves down, this customer loses.
Which of the following are violations of FINRA rules?
I Sharing in the profits and losses of a customer’s account without contributing proportional capital
II Selling exempted securities to a customer with a written agreement to buy back the securities at a later date
III Orally guaranteeing to buy back customer securities at a preset price
A. I only
B. I and III
D. I, II, III
The best answer is B.
A registered representative cannot guarantee a customer’s account against loss nor share in the account unless he or she opens a joint account with the customer; contributes capital proportional to any sharing agreement; and obtains the approval of a principal for the account. Selling exempted securities such as U.S. Governments with a written agreement to buy them back at a later date is a “repurchase” agreement, and is allowed (however, such repurchase agreements are typically for very large amounts, and are entered into by U.S. Government securities dealers).
Fully paid customer securities:
A. can be commingled with customer margin securities
B. can be used as collateral for a loan by the brokerage firm
C. must be held in custody of the customer
D. can be held by the member firm if they are segregated, and placed in safekeeping
The best answer is D.
Brokerage firms can hold fully paid customer securities as long as the positions are segregated from other margin securities and are kept in safekeeping. Customer margin securities are pledged as collateral for the margin loan. The broker is permitted to commingle (“mix-up”) these securities with those of other margin customers (but not with fully paid customer securities), and it is these margin securities that may be pledged to a bank for a loan.
Customer securities held in margin accounts:
A. can be commingled with other customer margin securities and used as collateral for a loan by the brokerage firm
B. can be commingled with fully paid customer securities and used as collateral for a loan by the brokerage firm
C. must be held in custody of the customer
D. must be segregated and placed in safekeeping
The best answer is A.
Brokerage firms can hold fully paid customer securities as long as the positions are segregated from other margin securities and are kept in safekeeping. Customer margin securities are pledged as collateral for the margin loan. The broker is permitted to commingle (“mix-up”) these securities with those of other margin customers (but not with fully paid customer securities), and it is these margin securities that may be pledged to a bank for a loan.
Under FINRA rules, a member firm is allowed to vote the stock of securities held in street name:
A. if the distributed proxy is not returned within 10 days of the annual meeting
B. if the distributed proxy is not returned within 20 days of the annual meeting
C. if the distributed proxy is not returned within 30 days of the annual meeting
D. under no circumstances
The best answer is D.
Customers whose securities are margined have their securities held in “street” name. Thus, whenever, there is a mailing to the shareholders by the corporation, the brokerage firm shows as the “owner” and receives the mailing from the issuer. The brokerage firm is obligated, in turn, to forward the materials to the beneficial owner (the customer) of the securities.
Under FINRA rules, if a proxy is sent to shareholders, the brokerage firm must distribute it to the beneficial owners. This cost is paid for by the issuer. If the voting materials are not returned, or if they are returned without voting instructions, the member firm is not permitted to vote the shares.
On Thursday, May 16th, a registered representative receives an order to sell 100 shares of ABC stock that has been “transferred and shipped” to the customer. Before executing the order, the registered representative must make sure the securities can be delivered by:
A. Thursday, May 16th
B. Friday, May 17th
C. Monday, May 20th
D. Tuesday, May 21st
The best answer is C.
FINRA rules require that orders to sell cannot be accepted unless the firm has reasonable assurance that the securities can be delivered in 2 business days (regular way settlement). Two business days after Thursday, May 16th is Monday, May 20th. Also, note that the location of the securities must be noted on the order ticket to sell.
A registered representative employed by ABC broker/dealer is good friends with an independent venture capitalist. The venture capitalist asks the registered representative to obtain investors for a private placement that he is forming. Which statement is TRUE?
A. The registered representative can direct customers to the private placement since this is an exempt transaction
B. The registered representative cannot direct customers to the private placement since his broker-dealer is not the private placement sponsor
C. The registered representative can direct customers to the private placement only if the venture capitalist is a member of FINRA
D. The registered representative can direct customers to the private placement only with the prior written approval of his employer
The best answer is D.
Under FINRA rules, registered representatives are prohibited from effecting “private securities transactions.” As a registered representative, one is an agent for the firm and all transactions must be effected through the firm in one’s agency capacity.
However, FINRA does allow an exemption from this prohibition. If a registered representative:
- **provides written notice to the member of the transaction, and
- **details in writing any compensation to be received, and
- **obtains express approval in writing from the member firm,
then the associated person can perform the transaction. In addition, the member must record the transaction on its books as if it had been effected through the firm.
A customer calls a registered representative to sell 500 shares of an over-the-counter stock and tells the representative that he wants the trade done privately - not in the public market. This is:
A. allowed without restriction
B. allowed with the oral approval of the principal
C. allowed if the trade is performed as “agent”
D. not allowed
The best answer is D.
FINRA prohibits “private securities” transactions. Trades must be done with the knowledge of your firm in the public securities markets. The only way in which a “private” transaction can be effected is for the employee to get prior written approval of the broker-dealer (and the broker-dealer is not likely to do this!)
A registered representative wishes to sell a customer a limited partnership unit that is offered through his friend - the general partner in the venture. Under FINRA rules, this action is:
A. permitted without restriction
B. only permitted if general partner approves
C. only permitted if the member firm is notified in writing and gives prior written approval to the transaction
D. only permitted if FINRA is notified in writing and gives prior written approval to the transaction
The best answer is C.
Under FINRA rules, registered representatives are prohibited from effecting “private securities transactions.” As a registered representative, one is an agent for the firm and all transactions must be effected through the firm in one’s agency capacity.
However, FINRA does allow an exemption from this prohibition. If a registered representative:
- **provides written notice to the member of the transaction, and
- **details in writing any compensation to be received, and
- **obtains express approval in writing from the member firm,
then the associated person can perform the transaction. In addition, the member must record the transaction on its books as if it had been effected through the firm.
A customer that wishes to open an account to buy new issues is required to make a:
I positive representation that he or she is not restricted within 12 months preceding the first purchase
II negative representation that he or she is not restricted within 12 months preceding the first purchase
III positive representation that he or she is not restricted annually thereafter
IV negative representation that he or she is not restricted annually thereafter
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is B.
In order for a customer to buy IPOs (Initial Public Offerings) of equity securities, the customer must sign a representation letter that he or she is not restricted from buying the issue under FINRA rules (FINRA prohibits industry “insiders” from buying the issue from the underwriter). Because the customer must sign this representation, this is a “positive” affirmation. Annually thereafter, the customer must be sent a notice that the firm has the customer’s representation on file that he or she is not restricted, and that if this has changed, the customer must notify the firm so that the account file can be amended. Because the customer does not sign this representation, this is a “negative” affirmation.
In order to open a new account for a customer that wishes to buy IPOs, the:
A. customer must sign a representation letter
B. registered representative must sign a representation letter
C. branch manager must sign a representation letter
D. all of the above
The best answer is A.
In order for a customer to buy IPOs (Initial Public Offerings) of equity securities, the customer must sign a representation letter that he or she is not restricted from buying the issue under FINRA rules (FINRA prohibits industry “insiders” from buying the issue from the underwriter). Because the customer must sign this representation, this is a “positive” affirmation.
A customer wishes to open an account that will be used primarily to buy initial public offerings (IPOs). Which statement is TRUE regarding the proper procedure for prequalifying the account?
A. The customer must sign a representation letter that he or she is not restricted from buying IPOs
B. The registered representative must determine that the customer is not restricted from buying IPOs and must sign the new account form to demonstrate compliance
C. The branch manager must determine that the customer is not restricted from buying IPOs and must sign the new account form to demonstrate compliance
D. There are no special procedures to follow when opening an account that will purchase IPOs
The best answer is A.
In order for a customer to buy IPOs (Initial Public Offerings) of common stock, the customer must sign a representation letter that he or she is not restricted from buying the issue under FINRA rules (FINRA prohibits industry “insiders” from buying the issue from the underwriter). Annually thereafter, the customer must be sent a notice that the firm has the customer’s representation on file that he or she is not restricted, and that if this has changed, the customer must notify the firm so that the account file can be amended.
FINRA’s IPO purchase restrictions that prohibit industry personnel from buying new issues in the primary market apply to:
I Common stock offerings
II Preferred stock offerings
III Non-convertible bond offerings
IV Convertible bond offerings
A. I only
B. I and II
C. II and IV
D. I, II, III, IV
The best answer is A.
The FINRA rule restricting member firms and their employees from buying IPOs from underwriters only applies to equity offerings. This is the case because the pricing of equity issues has a large “expectations” component that is difficult to quantify - and substantial price increases in the aftermarket due to overblown “expectations” for the issue are not uncommon. The rule does not apply to preferred stock or bond offerings, where the pricing is determined by the present value of the income flows to be received over the life of the security. For these issues, there is no “expectations” component to pricing. Note that if the preferred stock or bond offering is convertible, the rule still does not apply. This is true since at issuance, the conversion feature has no value - these securities are priced based on their income (dividend or interest) stream.
A registered representative that wishes to purchase Initial Public Offerings is restricted from buying IPOs of:
A. common stock
B. non-convertible preferred stock
C. convertible preferred stock
D. any new issue security
The best answer is A.
The FINRA rule restricting member firms and their employees from buying IPOs from underwriters only applies to equity offerings. This is the case because the pricing of equity issues has a large “expectations” component that is difficult to quantify - and substantial price increases in the aftermarket due to overblown “expectations” for the issue are not uncommon. The rule does not apply to preferred stock or bond offerings, where the pricing is determined by the present value of the income flows to be received over the life of the security. For these issues, there is no “expectations” component to pricing.
Under FINRA Rule 5130 on IPO distributions, a member may sell shares of a new issue of common stock to a registered representative:
A. under no circumstances
B. if the principal approves of the sale in writing
C. if the issue does not trade at a premium in the aftermarket
D. without restriction
The best answer is A.
Registered representatives fall into the category of persons who are prohibited from buying a new issue from the underwriter under Rule 5130 regarding IPOs of common stock.
Which of the following persons are prohibited from buying a new common stock issue from the underwriter under FINRA Rule 5130?
I Brother of a registered representative
II Husband or wife of a registered representative
III Uncle of a registered representative who is supported by the representative
IV Grandfather of a registered representative who lives in another state
A. II only
B. I and II only
C. I, II, III
D. I, II, III, IV
The best answer is C.
Under FINRA Rule 5130, all officers and employees of FINRA member firms and their “immediate family” are prohibited from buying new issues from underwriters. Immediate family includes spouses, siblings, parents, children, and anyone who is supported to a material extent. It does not include uncles, aunts, grandparents and grandchildren (unless they are supported by the employee). Thus, Choices I and II are clearly prohibited. Choice III, the uncle who is supported by the representative, is also prohibited. Choice IV, the grandfather living in another state, is not prohibited under this policy, since we can assume that he is self-supporting.
A registered representative is a 15% participant in an investment club formed by members of the local Elks Club. The Elks Club investment club has opened a securities account at ABC Brokerage. The account wishes to buy an IPO being offered by an underwriter. Which statement is TRUE?
A. The account can buy the issue without restriction
B. The account can buy the issue if the branch manager approves
C. The account can buy the issue if the registered representative agrees not to share in the profit on the position
D. The account is prohibited from buying the new issue
The best answer is D.
Registered representatives are prohibited from buying new issues from underwriters. This is true for any account in which registered representatives or restricted persons have a greater than 10% participation as well. Thus, this account would be prohibited from buying the IPO.
A registered representative is approached by the president of an investment club to buy an IPO being offered by the representative’s firm. Which statement is TRUE?
A. The investment club is a restricted purchaser and cannot buy the IPO
B. The investment club is not a restricted purchaser and may buy the IPO
C. The investment club is only permitted to buy the issue if it buys an insubstantial amount
D. The investment club is only permitted to buy the issue if its members certify that they are not restricted
The best answer is B.
The FINRA IPO rule lists “restricted purchasers” that cannot buy common stock IPOs from underwriters. These are basically industry insiders, including member firms, their officers and employees, fiduciaries to member firms such as outside attorneys retained by broker-dealers, and institutional portfolio managers that are buying for their personal accounts. Investment clubs are not on the restricted list - they can buy common stock IPOs. One could argue that an “investment club” could be formed by industry insiders to get around the rule, but FINRA addresses this by stating that any account in which an industry insider has a greater than 10% ownership interest is restricted.