Finra Rules Flashcards
1
Q
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
A
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.
2
Q
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
A
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.
3
Q
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
A
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!
4
Q
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
A
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.
5
Q
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
A
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.
6
Q
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
A
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.
7
Q
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
A
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.
8
Q
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
A
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.
9
Q
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
A
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.
10
Q
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
A
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.
11
Q
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
A
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.
12
Q
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
A
The best answer is C.
If an individual leaves the industry and remains unaffiliated with a member firm for 2 years, all licenses lapse.
13
Q
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
A
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.
14
Q
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
A
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.
15
Q
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
A
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.
16
Q
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
A
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.
17
Q
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
A
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.
18
Q
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
A
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.
19
Q
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
A
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.
20
Q
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
A
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.
21
Q
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
A
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.
22
Q
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
A
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.
23
Q
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
A
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.
24
Q
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
A
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.
25
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.
26
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).
27
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.
28
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.
29
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.
30
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.
31
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.
32
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!)
33
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.
34
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.
35
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.
36
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.
37
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.
38
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.
39
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.
40
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.
41
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.
42
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.
43
A registered representative is a 5% 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 A.
Registered representatives are prohibited from buying new issues from underwriters. This is true for any account in which registered representatives or other restricted persons have a greater than 10% participation as well. Thus, this account would NOT be prohibited from buying the IPO.
44
A registered representative of a member firm markets private placements to wealthy accredited investors. Before the member firm can market these private placement securities, it MUST conduct a reasonable investigation concerning the:
I issuer and its management
II business prospects of the issuer
III assets held by the issuer
IV claims being made
A. I and II only
B. III and IV only
C. I, II, III
D. I, II, III, IV
The best answer is D.
FINRA requires that when a private placement is offered, the broker-dealer or its representatives must conduct a reasonable investigation concerning that security and the issuer's representations about it. FINRA states that a broker-dealer "may not rely blindly upon the issuer for information concerning a company and it cannot rely on information provided by the issuer in lieu of its own reasonable investigation." The fact that a BD's customers are accredited does not obviate this investigation. The BD must conduct a reasonable investigation concerning the:
issuer and its management;
business prospects of the issuer;
assets held by the issuer;
claims being made; and
intended use of the proceeds of the offering.
Note that if registered securities are being offered, this detailed "due diligence" investigation by the BD offering the investment is not required - it is only a requirement for private placement offerings (because in a registered securities offering, the issuer and underwriters perform the required due diligence). Also note that there is no requirement for accredited investors in a private placement to be sophisticated (they are rich!) - this is only a requirement for sales to non-accredited investors.
45
A FINRA member distributes a firm quote through the OTCBB and then does not honor the quote. This is:
A. Free Riding
B. Front-Running
C. Interpositioning
D. Backing Away
The best answer is D.
Any quote that is published without qualification is considered to be a "firm" quote to be honored for a normal trading unit. Backing away from quotes is a prohibited practice under FINRA rules.
46
Which of the following practices are prohibited under FINRA rules?
I Trading mutual fund shares
II Selling dividends
III Making blanket recommendations of low price speculative stocks
IV Recommending purchases beyond a customer's financial capacity
A. I only
B. I and II
C. III and IV
D. I, II, III, IV
The best answer is D.
All of the practices listed are manipulative - mutual funds do not trade - they are issued by the fund and are redeemed by the fund. Dividends cannot be "sold." This means that customers cannot be induced to buy in time to get the dividend, because the "ex" date reduction causes them to get nothing. Blanket recommendations of low price speculative stocks do not consider customer suitability. Trades of excessive frequency or size are manipulative and simply a means of generating commissions.
47
Which of the following are violations of FINRA's Conduct Rules?
I Selling a customer an exempt security with a written agreement to buy back that security at a fixed price
II Guaranteeing a customer account against loss
III Making blanket recommendations of low price speculative stocks to customers
IV Selling dividends to customers by inducing customers to buy stocks just prior to the ex date
A. I and II only
B. III and IV only
C. II, III, IV
D. I, II, III, IV
The best answer is C.
Choice I defines a repurchase agreement, which typically involves two government securities dealers; or the Federal Reserve and a government dealer. These are permitted, since they are essentially overnight loans of monies at a predetermined interest rate. Prohibited activities include guaranteeing a customer account against loss; making blanket recommendations of low price speculative stocks; and selling dividends to customers.
48
All of the following are prohibited practices under FINRA rules EXCEPT:
A. selling enough mutual funds to a customer to obtain a breakpoint
B. backing away from a quote
C. interpositioning another firm between a customer and market maker
D. withholding new issues from sale to the public
The best answer is A.
Selling enough of a mutual fund to a customer that would qualify for a breakpoint in the sales charge is not prohibited - this is desired. It allows a customer to get a reduced sales charge for large dollar purchases. Backing away from quotes (not honoring the quote) is prohibited; interpositioning another firm between a customer and the market maker is prohibited (this would increase the cost of the transaction because 2 middlemen must be paid); and withholding new issues from sale to the public is prohibited.
49
A communication sent to fewer than 25 existing or prospective retail clients is defined as (a):
A. Correspondence
B. Retail Communication
C. Public Appearance
D. Advertising
The best answer is A.
FINRA has 2 basic definitions of communications with the public:
Correspondence: A written or electronic communication made available to 25 or fewer existing or prospective clients
Retail Communication: A written or electronic communication made available to more than 25 existing or prospective clients.
Excluded from these definitions are institutional communications and public appearances. FINRA creates these 2 main categories of communications because "correspondence" is subject to "post use review and approval" by a manager or principal and is not required to be filed with FINRA; in contrast, retail communications must be approved in advance of use by a principal and can be required to be filed with FINRA.
50
A representative gives a seminar to investors, making a presentation about successful hedge fund strategies. It is attended by 10 retail clients and 20 institutional clients. FINRA defines this as:
A. an advertisement
B. a solicitation
C. a retail communication
D. correspondence
The best answer is D.
FINRA has 2 main categories of communications to retail clients:
Correspondence: A communication to 25 or fewer existing or prospective retail clients
Retail Communication: A communication to more than 25 existing or prospective retail clients
Excluded from these definitions are Institutional Communications and Public Appearances.
Correspondence, Institutional Communications, and Public Appearances are not subject to prior principal approval - rather, FINRA states that as long as the firm has appropriate supervisory procedures in place, they are subject to "post use review and approval." They are also not subject to FINRA filing rules.
In contrast, retail communications must be approved by a principal prior to use and are subject to FINRA filing rules.
Because this is a communication to 10 retail clients (the number of institutional clients is irrelevant), this is defined as "correspondence."
51
Which of the following is NOT defined as correspondence?
A. E-mail distributed to 15 existing retail customers
B. Seminar text for a speech that will be delivered to 30 prospective retail clients
C. E-mail sent to 10 prospective retail clients
D. Prospecting letter sent to 5 sales leads
The best answer is B.
Correspondence is defined as a communication to 25 or fewer existing or prospective retail clients. Choices A, C and D are items of correspondence. These can be reviewed and approved by a manager or principal after they are sent out, as long as the firm has put in appropriate correspondence compliance procedures. Also, these are not subject to any FINRA filing requirement.
Choice B, a speech text, is a "Retail Communication," defined as a communication to more than 25 existing or prospective retail clients. Retail communications require prior principal approval and can be required to be filed with FINRA. Note that the main categories of retail communications are "advertising" (general audience, such as TV, radio, newsprint, websites) and "sales literature" (specific audience, such as a research report, form letter, scripted speech, password-protected website).
52
E-mail sent by a representative to an individual customer is considered to be (a(n)):
A. Advertising
B. Sales Literature
C. Correspondence
D. Retail Communication
The best answer is C.
Letters of an individual nature to a customer (whether written or electronic) are considered to be correspondence. The specific definition is a written or electronic communication made available to 25 or fewer existing or prospective retail customers. These can be reviewed and approved by a manager or principal after they are sent out, as long as the firm has put in appropriate correspondence compliance procedures. Also, these are not subject to any FINRA filing requirement.
A communication to more than 25 existing or prospective retail customers is a "retail communication." Examples of retail communications are advertising and sales literature. These must be approved by a principal prior to use and they can be required to be filed by FINRA.
53
Which of the following would be considered to be a "retail communication?"
A. A direct mailing sent to 25 existing retail clients
B. A research report sent to 20 prospective retail clients
C. An institutional communication
D. A website maintained by a broker-dealer that provides daily market information
The best answer is D.
Any communication made available to MORE than 25 existing or prospective retail clients is defined as "retail communication." Retail communications must be approved in advance of use by a principal and can be required to be filed with FINRA. A website is seen by a broad audience and falls into this category.
Any communication made available to 25 or fewer existing or prospective retail clients is defined as "correspondence." Correspondence is required to be approved after use (as long as the firm has appropriate supervisory procedures in place) and is not subject to FINRA filing rules. Note that the research report sent to 20 clients is defined as "correspondence" and the direct mailing to 25 existing retail clients is right at the limit of the "correspondence" definition.
Institutional communications are excluded from the "retail communications" definition, approval and filing rules because institutions are sophisticated investors who know what they are doing.
54
All of the following are defined as "institutional clients" for purposes of the FINRA communications rules EXCEPT:
A. insurance company
B. bank
C. investor with $25 million of assets
D. savings and loan
The best answer is C.
FINRA distinguishes between "retail communications" and "institutional communications" because "institutional communications" go to sophisticated investors who can take care of themselves. While retail communications must be approved by a principal prior to use, institutional communications are subject to "post use review and approval" by a principal.
An institutional communication is defined as one that is distributed to an institutional investor - a bank, savings and loan, insurance company, registered investment company, registered investment adviser, employee benefit plan with at least 100 participants, government entity or a person with at least $50 million of assets for investment.
55
A registered representative wishes to post his/her business card on a website. This is considered to be:
A. advertising
B. sales literature
C. correspondence
D. educational material
The best answer is A.
FINRA defines communications with the public as either:
* **Correspondence: A communication made available to 25 or fewer existing or prospective retail clients
* **Retail Communication: A communication made available to more than 25 existing or prospective retail clients
Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA.
A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience).
* **Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards
* **Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective clients, scripted speeches delivered to more than 25 existing or prospective clients, password-protected websites
56
Which of the following is defined as sales literature?
A. E-mail distributed to 15 existing retail customers
B. Seminar text for a speech that will be delivered to 30 prospective retail clients
C. E-mail sent to 10 prospective retail clients
D. Prospecting letter sent to 5 sales leads
The best answer is B.
FINRA defines communications with the public as either:
* **Correspondence: A communication made available to 25 or fewer existing or prospective retail clients
* **Retail Communication: A communication made available to more than 25 existing or prospective retail clients
Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA.
A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience).
* **Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards
* **Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective retail clients, scripted speeches delivered to more than 25 existing or prospective retail clients, password-protected websites
57
A registered representative holds a seminar for 40 prospective retail clients covering the benefits of investing in mutual funds. At the meeting, the representative sets up a table with canvas bags embossed with the member firm's logo that include a prospectus for each fund that was discussed, a brochure about the brokerage firm, and the registered representative's business card. At the end of the meeting, the prospective clients are encouraged to take a bag home. Which statement is TRUE?
A. Because the prospective clients can choose whether or not to take a bag, this does not fall under the communications rules
B. Because the seminar was attended by 40 prospective retail clients, it is defined as sales literature
C. Because the meeting was held for prospective retail clients, it is considered to be advertising
D. Because the representative personally delivered the seminar, it is defined as correspondence
The best answer is B.
FINRA defines communications with the public as either:
* **Correspondence: A communication made available to 25 or fewer existing or prospective retail clients
* **Retail Communication: A communication made available to more than 25 existing or prospective retail clients
Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA.
A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience).
* **Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards
* **Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective retail clients, scripted speeches delivered to more than 25 existing or prospective retail clients, password-protected websites
58
All of the following communications with the public must be approved in advance of use by a principal EXCEPT a(n):
A. form letter to be sent to all customers that recommends allocating assets among stock, bond and money market fund investments
B. advertisement placed in the local newspaper that states that "Now is the time to open an IRA account"
C. research report that recommends the purchase of ABC stock
D. prospectus sent to customers who request information about a mutual fund
The best answer is D.
FINRA defines communications with the public as either:
* *Correspondence: A communication made available to 25 or fewer existing or prospective retail clients
* *Retail Communication: A communication made available to more than 25 existing or prospective retail clients
Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA.
A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience).
* *Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards
* **Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective retail clients, scripted speeches delivered to more than 25 existing or prospective retail clients, password-protected websites
The rule does not apply to prospectuses or tombstone announcements, since their content is prescribed by SEC rules; and omissions or misstatements in these documents is fraud under the Securities Act of 1933.
59
A newly hired registered representative finds a standard form letter on the firm's intranet and wants to send it to 20 of his friends. Which statements are TRUE?
I The letter must be filed with FINRA prior to use
II The letter must be used without change
III The letter must include the FINRA logo
IV The letter must be maintained on file by the firm for at least 3 years after use
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is D.
FINRA defines communications with the public as either:
* ***Correspondence: A communication made available to 25 or fewer existing or prospective retail clients
* ****Retail Communication: A communication made available to more than 25 existing or prospective retail clients
Since this "standard form letter" is being sent to 20 "friends," it is defined as correspondence. Correspondence is not subject to FINRA filing rules (while Retail Communications are subject to FINRA filing rules). A "standard form letter" found on the firm's intranet would have already been approved by the firm for use and cannot be changed - unless a principal approves.There is no requirement to include the FINRA logo on correspondence or retail communications. The firm can use the logo if it wishes. All communications must be retained for 3 years.
60
Which of the following would NOT have to be reviewed by a principal?
A. Form letters mailed to all customers
B. Form letters for internal use within a firm
C. Letters recommending securities to all clients of a registered representative
D. Complaint letters received from customers
The best answer is B.
FINRA defines communications with the public as either:
* ***Correspondence: A communication made available to 25 or fewer existing or prospective retail clients
* ***Retail Communication: A communication made available to more than 25 existing or prospective retail clients
Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA.
A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience).
****Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards
****Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective retail clients, scripted speeches delivered to more than 25 existing or prospective retail clients, password-protected websites
Internal documents of a brokerage firm do not have to be reviewed by a manager or principal. Because the public does not see these, FINRA is not concerned with their content.
All customer complaint letters must also be reviewed and handled by a principal.
61
A registered representative has written a script that will be used to make unsolicited telephone calls to potential retail customers. The representative has a list of 150 potential clients who will be called. Which statement is TRUE?
A. The script needs no approval from the general principal since it is not a written communication to customers
B. The script must be pre-filed with FINRA prior to use
C. The script must be pre-filed with the SEC prior to use
D. The script must be approved by the general principal prior to use
The best answer is D.
FINRA defines communications with the public as either:
* ***Correspondence: A communication made available to 25 or fewer existing or prospective retail clients
* ***Retail Communication: A communication made available to more than 25 existing or prospective retail clients
Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA.
A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience).
****Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards
****Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective retail clients, scripted speeches delivered to more than 25 existing or prospective retail clients, password-protected websites
Internal documents of a brokerage firm do not have to be reviewed by a manager or principal. Because the public does not see these, FINRA is not concerned with their content.
Since this script will be delivered to 150 potential retail clients, it falls under the "Retail Communication" definition, and within that category is defined as "sales literature," and requires prior principal approval.
62
\Which disclosure is optional when advertising a CMO Tranche?
A. Coupon
B. Credit Rating
C. Final Maturity Date
D. Average Life Of Investment
The best answer is B.
FINRA sets minimum disclosure requirements when advertising a CMO tranche. It requires disclosure of the:
```
Coupon
Anticipated Yield and Average Life
Specific Tranche ID – Number and Class
Final Maturity Date
Underlying Collateral
In addition, FINRA requires the following statement:
```
"The yield and average life shown above consider prepayment assumptions that may or may not be met. Changes in payments may significantly affect yield and average life. Please contact your representative for information on CMOs and how they react to different market conditions.”
Then FINRA states that the following disclosures are optional:
```
Minimum Denomination
Rating
Agency / Government Backing
Income Payment Structure
Generic Description of Tranche (e.g., PAC, Companion)
Yield to maturity of CMOs Offered at Par
```
63
If a client is paid less than $100 to give a testimonial about a broker-dealer's services, which statement is FALSE?
A. The fact that the testimonial may not be representative of the experience of other customers must be disclosed
B. The fact that the maker of the testimonial was paid must be disclosed
C. The fact that the testimonial is no guarantee of future performance must be disclosed
D. The fact that the testimonial is no guarantee of future success must be disclosed
The best answer is B.
The FINRA rule on testimonials used in communications states that:
“Retail communications or correspondence providing any testimonial concerning the investment advice or investment performance of a member or its products must prominently disclose the following:
i. The fact that the testimonial may not be representative of the experience of other customers.
ii. The fact that the testimonial is no guarantee of future performance or success.
iii. If more than $100 in value is paid for the testimonial, the fact that it is a paid testimonial.”
Note that the fact that a testimonial was paid is only required to be disclosed is MORE than $100 was paid to the maker.
64
A client receives a $75 gift card from a broker-dealer for giving a testimonial about her highly positive experience with her registered representative. What must the broker-dealer disclose if the testimonial is used in a retail communication?
A. The fact that the testimonial may not be representative of the experience of other customers
B. The fact that the maker of the testimonial was paid, along with the amount of compensation
C. Whether any guarantee of growth was made by the representative to induce the giving of the testimonial
D. The length of the time that the maker of the testimonial had an account with the broker-dealer
The best answer is A.
The FINRA rule on testimonials used in communications states that:
“Retail communications or correspondence providing any testimonial concerning the investment advice or investment performance of a member or its products must prominently disclose the following:
i. The fact that the testimonial may not be representative of the experience of other customers.
ii. The fact that the testimonial is no guarantee of future performance or success.
iii. If more than $100 in value is paid for the testimonial, the fact that it is a paid testimonial.”
Note that the fact that a testimonial was paid is only required to be disclosed is MORE than $100 was paid to the maker.
65
Any materials handed out to attendees must be filed with FINRA for seminars involving all of the following investments EXCEPT:
A. Corporate debentures
B. Collateralized Mortgage Obligations
C. Mutual funds
D. Direct Participation Programs
The best answer is A.
FINRA's general rule on filing of retail communications is that for a member firm's first year of operations, all retail communications must be filed 10 business days in advance of use. Thereafter, no filing is required, but the member firm is subject to spot check. However, there are exceptions to the general rule.
Retail communications that must ALWAYS be filed 10 business days in ADVANCE of first use are:
Options retail communications; and
Mutual fund retail communications with member-prepared performance rankings.
(Evidently FINRA ran into problems with these, so it wants these pre-filed at all times.)
Retail communications that must ALWAYS be filed 10 business days AFTER first use are:
All other mutual fund retail communications;
CMO retail communications; and
DPP retail communications.
(The Investment Company Act of 1940 requires an SRO to get copies of investment company advertising; and the FINRA department that gets these also handles CMO and DPP ads, so they all are grouped under the same rule.)
66
Which statements are TRUE regarding a FINRA member firm's obligation to review electronic and facsimile correspondence?
I Outgoing correspondence must be supervised and reviewed by the member firm
II Incoming correspondence must be supervised and reviewed by the member firm
III Outgoing correspondence is not required to be supervised and reviewed by the member firm
IV Incoming correspondence is not required to be supervised and reviewed by the member firm
A. I and II
B. III and IV
C. I and IV
D. II and III
The best answer is A.
If a member firm has a communications compliance program in place, registered representatives are permitted to send e-mail to customers without submitting these for pre-use review and approval. In such a program, the firm is obligated to educate its registered representatives as to what is permissible in electronic communications; and must have procedures in place to audit and review these communications. Please note that the audit and review requirements not only apply to outgoing electronic communications; but also apply to incoming electronic communications as well.
67
A registered representative would like to increase his production by working from home at nights and on weekends. As part of this effort, the representative wants to use his home e-mail account to send his customers information and recommendations. This action is:
A. permitted as long as the representative uses his personal e-mail account
B. permitted with the prior permission of the branch manager
C. not permitted because the member firm has no way of auditing the representative's personal e-mail account
D. not permitted because the representative has not registered his personal e-mail account with the SEC
The best answer is C.
A registered representative working from home via e-mail presents a thorny issue for FINRA member firms, since all e-mails must be audited, given that the firm has implemented an electronic communications compliance program. If the representative were only to use his or her work e-mail account, and the firm implemented appropriate safeguards, this could be acceptable. However, this representative wants to use his personal e-mail account - which the member firm has no control over - and this would be prohibited.
68
Which statement is TRUE about the use of the FINRA name on a member firm's or associated person's website?
A. The FINRA name can only be shown if the member firm receives advance approval from FINRA
B. If the FINRA name is shown, it must be accompanied by a disclaimer that FINRA does not approve of the member
C. If the FINRA name is shown, it must be hyperlinked to the FINRA website
D. If the FINRA name is shown, it must be stated that FINRA does not sponsor the website
The best answer is C.
FINRA states that its name can be used on a member firm or associated person's website. The use of the FINRA name must make it clear that the firm is the FINRA member and not the associated person. Furthermore, the FINRA name, if used, must be hyperlinked to the FINRA website.
69
Under FINRA rules, a barrier must be put in place between a member firm's:
A. compliance department and its investment banking department
B. institutional communications distribution list and its retail communications distribution list
C. institutional trading desk and its retail trading desk
D. investment banking department and its mergers and acquisitions department
The best answer is B.
If an institutional communication is distributed to any number of retail clients, it is considered to be a "retail communication." This means that instead of being subject to "post use review and approval," it must be approved by a principal prior to distribution. FINRA states that each member firm must have policies and procedures in place "reasonably designed to prevent institutional communications from being forwarded to retail investors."
Regarding information barriers for purposes of stopping "insider trading," the firm's investment banking department must be walled off from the other departments of the firm, such as research and trading; and research must be walled off from investment banking and trading. Compliance oversees all firm activities and is not walled off from anything!
70
Under FINRA communications rules, if a representative participates in an Internet Chat Room, this is defined as:
A. correspondence
B. public appearance
C. advertising
D. sales literature
The best answer is B.
FINRA defines participation in an Internet Chat Room as a public appearance. This is actually an older definition, because such participation now comes under the broader umbrella of “retail communications” – which is not given as a choice. Retail communications under FINRA rules encompasses advertising, sales literature and public appearances.
71
Under FINRA rules, which of the following statements are TRUE regarding research reports?
I The research report must be filed with FINRA
II The research report does not have to be filed with FINRA
III The research report must be approved by a supervisory analyst
IV The research report does not have to be approved by a supervisory analyst
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is C.
There is no requirement to file research reports with FINRA, nor to obtain FINRA approval before sending out the report. However, FINRA rules require that a research report be prepared or approved by a supervisory analyst.
72
A widely-followed research analyst is going to issue a "Buy" recommendation on a company. The analyst and immediate family:
I can buy the stock prior to the release of the research report
II cannot buy the stock prior to the release of the research report
III can buy the stock after the research report has been widely distributed
IV cannot buy the stock after the research report has been widely distributed
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is C.
Member firms must have policies and procedures in place to stop research analysts and their immediate family from "front running" their "about-to-be-released" research reports. In essence, if the research analyst or immediate family were to take a position in the stock prior to the release of the research report in an attempt to profit from a subsequent price move, they become "insiders" who have violated the insider trading rules.
73
A widely-followed research analyst is going to issue a "Buy" recommendation on a company. Prior to the release of the recommendation, the analyst and immediate family can:
A. buy the stock without restriction
B. buy the stock only if the purchase conforms to their normal investment profile
C. buy the stock only if the company is exchange listed
D. not buy the stock
The best answer is D.
Member firms must have policies and procedures in place to stop research analysts and their immediate family from "front running" their "about-to-be-released" research reports. In essence, if the research analyst or immediate family were to take a position in the stock prior to the release of the research report in an attempt to profit from a subsequent price move, they become "insiders" who have violated the insider trading rules.
Once a research report has been widely distributed, the analyst who wrote the report and immediate family can buy that stock, subject to any restrictions on this placed by the employing member firm.
74
A research report on an issuer CANNOT be published by the underwriter of that issuer's securities for the time period encompassing:
I 10 days following the effective date for an initial public offering
II 25 days following the effective date for an initial public offering
III 10 days following the effective date for a secondary offering
IV 3 days following the effective date for a secondary offering
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is B.
A research report on an issuer cannot be published by the underwriter of that issuer's securities for the time period of 10 days following the effective date for an initial public offering; and 3 days following the effective date for a secondary offering.
75
All of the following must be disclosed to a customer on a research report recommending the purchase of a specific security EXCEPT whether the firm:
A. or its officers own that security
B. or its officers own options or warrants on that security
C. has been a manager or co-manager in an underwriting of any of the issuer's securities within the past 12 months
D. has previously recommended this security to any of its customers
The best answer is D.
If a recommendation is made, the brokerage firm must disclose if it:
has managed or co-managed any equity securities offering of that issuer within the past 12 months;
has received compensation from investment banking services from that issuer in the past 12 months;
expects to receive or intends to seek investment banking compensation from that issuer in the next 3 months;
is an investment banking services client of the firm; or
is a market maker in the issuer's stock.
Also, the brokerage firm must disclose if it or its affiliates own(s) the issuer's securities (including options). There is no requirement to disclose if the firm has previously recommended this security, since this does not create a possible conflict of interest.
76
A FINRA member firm does not follow a particular stock and a registered representative wishes to obtain a 3rd party research report to send to 30 interested retail customers. Which statement is TRUE?
A. FINRA member firms are prohibited from using 3rd party research reports
B. 3rd party research reports can be sent to customers if prior approval is obtained from FINRA
C. 3rd party research reports can be sent to customers if prior approval is obtained from the Supervisory Analyst and the Compliance Officer of the firm
D. 3rd party research reports can be sent to customers without any additional approvals required
The best answer is C.
Third party research is prepared by independent research firms that tend to be free of the conflicts of interest that have troubled member firms that prepare research reports on the issuers with which they do underwriting and advisory business.
If a registered representative were to, on his or her own, obtain 3rd party research to send to customers, then it would need the appropriate approvals required of research reports before being sent out. This would be approval of the supervisory analyst. In addition, if the communication is going to more than 25 existing or prospective retail clients (as is the case here), it is a "retail communication" that requires prior principal approval.
77
Under SEC rules, a representative would be considered to be delivering a "research report" to customers if the communication:
I analyzes securities and provides a basis upon which to make an investment decision
II analyzes securities and makes a projection of future performance
III is distributed to 5 or more clients
IV is distributed to 15 or more clients
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is B.
The SEC defines a research report as "any client communication that analyzes individual securities or companies if it provides information reasonably sufficient upon which to base an investment decision and is distributed to at least 15 persons." If a representative gives a presentation to clients that meets this definition, then the representative would be considered an "analyst" and must give all of the required disclosures of potential conflicts of interest required of research analysts when they recommend a security.
78
A representative is asked by the local PTA to make a speech on investing. About 100 people are expected to attend. If the representative includes analyses of specific stocks in the speech; and the attendees use this information to determine whether to invest in those securities, then the speech is considered to be:
A. advertising
B. a research report
C. sales literature
D. public forum
The best answer is B.
The SEC defines a research report as "any client communication that analyzes individual securities or companies if it provides information reasonably sufficient upon which to base an investment decision and is distributed to at least 15 persons."
If a representative gives a presentation to clients that meets this definition, then the representative would be considered an "analyst" and must give all of the required disclosures of potential conflicts of interest required of research analysts when they recommend a security.
79
A representative wishes to invite 30 prospective customers to a buffet dinner, to be followed by a presentation that the representative will make on investing. If the representative includes analyses of specific stocks in the speech; and the attendees use this information to determine whether to invest in those securities; then the:
I presentation is considered to be a research report
II presentation is not considered to be a research report
III representative is required to make all of the disclosures required of research analysts
IV representative is not required to make all of the disclosures required of research analysts
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is A.
The SEC defines a research report as "any client communication that analyzes individual securities or companies if it provides information reasonably sufficient upon which to base an investment decision and is distributed to at least 15 persons."
If a representative gives a presentation to clients that meets this definition, then the representative would be considered an "analyst" and must give all of the required disclosures of potential conflicts of interest required of research analysts when they recommend a security. In this case, since 30 customers are invited, the definition is met.
80
If an analyst makes a public appearance, under Regulation AC, the analyst MUST:
A. make a verbal certification to the group being addressed
B. distribute a written certification to each person in the group addressed
C. give a blanket certification to all appearances made each month
D. give a blanket certification to all appearances made each quarter
The best answer is D.
Regulation AC (Analyst Certification) requires research analysts to certify each published research report; and to make a quarterly certification covering all public appearances made during that quarter. The certification basically states that the analyst gave his or her honest view at that time; and that the analyst's compensation was not tied to the recommendation or views expressed.
If an analyst fails to make the required certification, FINRA must be notified; and for the next 120 days, any research reports authored by that analyst must include the disclosure that the analyst did not provide the required certification.
81
Regulation AC requires all of the following EXCEPT:
A. member firm research analysts certify each written research report
B. 3rd party research analysts certify each written research report
C. research analysts must certify that their opinion is unbiased and honest
D. research analysts must certify that they received no special compensation for giving a favorable opinion
The best answer is B.
Regulation AC (Analyst Certification) requires research analysts at member firms to certify each published research report; and to make a quarterly certification covering all public appearances made during that quarter. The certification basically states that the analyst gave his or her honest view at that time; and that the analyst's compensation was not tied to the recommendation or views expressed.
If an analyst fails to make the required certification, FINRA must be notified; and for the next 120 days, any research reports authored by that analyst must include the disclosure that the analyst did not provide the required certification.
Note that the rule does not apply to "independent research" prepared by 3rd parties, since the potential for conflicts of interest does not exist.
82
A prospectus MUST accompany which of the following mailings to a customer?
I A research report written by the firm about a mutual fund that the firm sells
II An annual report issued by the corporation
III A report analyzing the effect of future budget deficits on market valuation
A. I only
B. II only
C. III only
D. I, II, III
The best answer is A.
Prospectuses are required for any "offer" of a new issue that is not exempt from the provisions of the Securities Act of 1933. Every mutual fund share that is sold is "newly issued" by that fund, therefore mutual funds must be offered with a prospectus. A research report on a new issue sent to a customer typically recommends the purchase of that issue and thus constitutes an "offer" under the Act. Any offer must be accompanied with, or preceded by, a prospectus. There is no requirement to send out a prospectus with annual reports or with general economic analyses - these are not "offers" of securities.
83
A registered representative is prospecting customers for a mutual fund that is sponsored by his firm. Which of the following information items mailed to customers MUST be accompanied by a prospectus?
I Sales literature
II Research Report
III Letter stating the fund's objective(s)
IV Fund Annual Report
A. I and II
B. III and IV
C. I, II, IV
D. I, II, III, IV
The best answer is C.
Because mutual funds are "prospectus offerings," nothing can be sent to customers that can be considered an offer or advertisement of the security unless the material is preceded or accompanied by a prospectus. Sales literature and research reports fall into the category of items that are "offers" of the security and must be accompanied by a prospectus. A copy of the fund annual report sent to anyone is also considered to be an "offer" of the fund since it contains fund performance data and must be accompanied by a prospectus.
A letter simply stating the fund's objectives is not promotional and does not have to be accompanied by a prospectus. This type of communication is specifically exempted from the prospectus requirement under SEC Rule 135A.
84
The use of which of the following is permitted in mutual fund advertising?
A. Performance projections
B. Performance guarantees
C. Performance charts
D. Performance predictions
The best answer is C.
Past performance may be shown in advertising, as can comparisons of past performance to a relevant benchmark. This is done by showing a performance chart using 1, 5 and 10 year periods. All advertising is prohibited from including performance projections, predictions or guarantees.
85
A registered representative recommends the purchase of a new issue security registered under the Securities Act of 1933 to a customer. Which statement(s) is (are) TRUE?
I The customer may be sent a prospectus about the issue
II The customer may be sent a prospectus that is "highlighted" by the registered representative to emphasize important information
III The customer may be sent an abstract of the prospectus that summarizes important information
A. I only
B. I and II
C. II and III
D. I, II, III
The best answer is A.
Alterations to a preliminary prospectus or final prospectus are prohibited. These documents have been filed with the SEC; and it is expected that the public will receive them in the exact form as filed with the SEC. Any changes to the documents invalidate the filing.
86
Which of the following is a record that must be retained on file by a broker-dealer?
A. Prospectuses
B. Recommendations
C. Complaints
D. Solicitations
The best answer is C.
Broker-dealers are not required to retain, as a record, recommendations made to clients. Customer complaints, account statements, and advertising are all records that must be retained by broker-dealers
87
All of the following time stamps are on an order ticket EXCEPT the time of:
A. order entry
B. trade execution, if executed
C. order cancellation, if canceled
D. trade reporting to the Consolidated Tape
The best answer is D.
FINRA requires that all order tickets sent to an exchange be stamped with the time of:
Order entry;
Order execution; and
Order cancellation, if canceled.
There is no time stamp on the order ticket for the time the trade was reported to the Consolidated Tape. These time stamps are now recorded electronically.
88
Under FINRA rules, research reports approved by a supervisory analyst must be kept by member firms for:
A. 6 months
B. 2 years
C. 3 years
D. 5 years
The best answer is C.
Research reports approved by a supervisory analyst must be kept for 3 years. As a general rule, all records that you come in contact with must be kept for 3 years. The only notable exception is customer complaints, which must be retained for 4 years.
89
To make a public offering of a Direct Participation Program, which statement is TRUE?
A. No registration is required because the security is exempt
B. The issue must be registered with FINRA
C. The issue must be registered with the SEC
D. The issue must be registered with the MSRB
The best answer is C.
Public offerings of direct participation programs are "non-exempt" offerings under the Securities Act of 1933, and must be registered. The MSRB has no jurisdiction over direct participation program offerings, since these are not municipal securities. DPP offerings are regulated by FINRA, but they are not registered with FINRA.
90
To make a public offering of a Direct Participation Program, which statements are TRUE?
I The offering must be registered with the SEC
II The offering does not have to be registered with the SEC
III The offering is subject to regulation by FINRA
IV The offering is not subject to regulation by FINRA
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is A.
Public offerings of direct participation programs are "non-exempt" offerings under the Securities Act of 1933, and must be registered. FINRA oversees and regulates the offering of these securities.
91
Which of the following gifts given by a mutual fund sponsor to a registered representative violate FINRA rules?
I Wholesale overrides on fund sales
II $150 per person per year
III A discount from the public offering price that is not included in the fund prospectus
IV A trip to Hawaii based solely on sales volume
A. I and III only
B. II and IV only
C. I, II, III
D. I, II, III, IV
The best answer is D.
The FINRA "anti-reciprocal" rule prohibits investment companies from compensating salesmen at broker-dealers for selling their shares outside of the sales charges stated in the Prospectus. Therefore, registered representatives cannot be given "discounts," wholesale overrides, or excessive gifts such as trips. FINRA does allow a maximum gift of $100 value per person per year from a mutual fund sponsor to a registered representative that is not considered as "compensation."
92
Fidelity bonds are maintained by brokerage firms to protect against loss due to:
A. embezzlement by employees
B. catastrophic events
C. severe market volatility
D. regulatory changes
The best answer is A.
FINRA requires brokerage firms to maintain fidelity bond coverage to protect against loss due to securities loss, employee theft, or embezzlement of funds.
93
A prospective customer has been solicited by a registered representative, and prior to opening an account, the customer wishes to check on the disciplinary background of that registered representative. Which statement is TRUE?
A. The customer cannot get this information
B. The customer can obtain this information from the SEC
C. The customer can obtain this information from the BrokerCheck website run by CRD
D. The customer can obtain this information from the FBI
The best answer is C.
FINRA maintains a "BrokerCheck" website, where retail customers can input a registered representative's name and see that individual's employment history for the last 10 years, disciplinary record, licenses held, states in which that person is registered, and outside business activities. In addition, pending serious customer complaints that are not yet resolved are included. For customers without web access, a toll-free "hot line" to BrokerCheck is available.
94
A firm's research department issues a research report on ABC Corp. and changes its recommendation from "Reduce" to "Accumulate." Based on this information a registered representative calls all his clients and tells each one to: "Use all available cash to buy as much ABC Corp. stock as you can immediately." This action by the registered representative is:
A. appropriate since the recommendation is based on the firm's research
B. appropriate only if the proposed investment is not too risky for the customer
C. not appropriate because it induces the customer to invest beyond his financial capacity
D. not appropriate because it makes a recommendation based on inside information
The best answer is C.
First of all, making the same recommendation to every customer is a prohibited practice. A recommendation can only be made based upon a suitability determination specific to that client. Second, it would not be appropriate to use "all available cash to buy as much of the stock as possible" because this would concentrate the customer's exposure to potential loss on that one specific stock position ("capital risk").
95
A registered representative tells the following to all of his customers: "I am aggressive in my approach; and frequently recommend that securities positions be changed during each day as market conditions fluctuate. While this approach can result in higher commission costs, it produces superior returns." All of the following statements are true about this statement EXCEPT:
A. there is a high risk that the registered representative is churning his accounts
B. the registered representative has made a prohibited performance guarantee to his customers
C. the registered representative appears to be disregarding the requirement to determine suitability for each customer
D. the registered representative has failed to disclose the remuneration received from each transaction, as required under industry rules
The best answer is D.
This registered representative appears to be churning his accounts, and has made a prohibited performance guarantee by not qualifying the statement that "it (this strategy) produces superior returns" with another statement mentioning the possibility that this may not occur. There is no requirement for a registered representative to disclose to the customer the amount of commission earned by the registered representative on each transaction.
96
A registered representative recommends the purchase of a GNMA pass-through certificate to a customer that seeks safety of principal and a moderate level of income. When doing so, the registered representative states to the customer "GNMA certificates are guaranteed by the U.S. government and each month you will receive a check, all of which is income to you." This statement is:
A. truthful and accurate
B. deceptive because GNMA certificates are not directly guaranteed by the U.S. government
C. deceptive because GNMA certificates make payments semi-annually, not monthly
D. deceptive because GNMA certificates make payments that are a combination of both principal and interest
The best answer is D.
GNMA pass-through certificates represent an ownership interest in a pool of underlying mortgages. Each month, the mortgage payments made into the pool are "passed through" to the certificate holders. Since mortgage payments represent a combined payment of both principal and interest, it is deceptive to say that the entire payment is income. The interest portion of the payment is income; while the principal portion is the return of capital invested.
97
A FINRA member firm's research department has prepared a report on ACME Corp. that changes the firm's recommendation from "Buy" to "Hold." Based on this information, a registered representative calls all of his customers and tells them that "This report will create an exceptional opportunity to buy this stock at a more favorable price. I recommend you increase the size of your holdings." This action:
A. requires the prior approval of the branch manager
B. requires the prior approval of FINRA
C. misrepresents the findings of the firm's research report
D. is consistent with the findings of the firm's research report
The best answer is C.
Since this firm's research department is downgrading the stock (recommending that no additional purchases be made), the registered representative has misrepresented the report's findings.
98
An existing customer of a brokerage firm wishes to buy an initial public offering that he has heard good things about. The registered representative only has a limited number of shares to sell and explains to the customer that the offering is already "sold out." The customer tells the registered representative "If you can get me some of the stock, I will drop off cash payment in full today, with a little extra for you." The registered representative:
A. can accept the customer's offer without restriction
B. can accept the customer's offer if the cash payment does not exceed $500
C. can accept the customer's offer if the gift is reported to the IRS
D. cannot accept the customer's offer
The best answer is D.
Cash can only be accepted from a customer if it is to be deposited to the customer's account. A registered representative cannot personally accept cash from a customer.
99
A potential new customer is solicited by a registered representative to buy a new issue offering that is priced at $100 per share. The customer has $10,000 to invest and the registered representative explains to the customer that such an amount "deposited to a margin account creates $20,000 of buying power, so you will be able to buy 200 shares." This statement is:
A. true in all material respects
B. a misrepresentation of margin rules, since new issues must be fully paid
C. allowed only if accompanied, or preceded by, a prospectus
D. allowed only if the transaction was unsolicited
The best answer is B.
While it is true that $10,000 of cash deposited to a margin account will buy $20,000 of marginable securities (since Reg T margin is 50%), new issues are not marginable. Thus, $10,000 of cash can only buy $10,000 of a new issue. The registered representative has made a misrepresentation to the customer.
100
You are in the middle of a discussion with an institutional client over the phone, where you recommend that the client buy 100,000 shares of ABC stock. It looks like the client may be interested in making the purchase. Your cubicle is within earshot of the neighboring cubicle. Just before your client tells you take the order to buy, you overhear your colleague, the representative in the neighboring cubicle, selling 10,000 shares of ABC stock to his client. Which statement is TRUE about this situation?
A. The colleague has not committed a violation because your order was not imminent
B. The colleague has not committed a violation if information barriers are in place
C. The colleague has committed a violation because your customer's order could move the price of ABC stock
D. The colleague has committed a violation because he was eavesdropping
The best answer is C.
In this scenario, the colleague overhead the representative making the buy recommendation for a large block of shares to his institutional client and then rushed to tell his customer to buy the stock (since the market price could be moved by the large purchase) before the institutional client placed that order. This is front running and is a prohibited practice.
101
Which of the following actions by a registered representative are prohibited under FINRA rules?
I Spreading rumors of a sensational character that might be expected to influence prices on the exchange
II Lending money to a customer where investment securities will be the collateral for the loan
III Sharing in the gain or loss of a customer account
IV Guaranteeing the performance of an investment
A. I and II only
B. III and IV only
C. I, II, III
D. I, II, III, IV
The best answer is D.
FINRA prohibits member firms and their representatives from spreading rumors about securities; from personally lending monies to customers outside of the requirements of Regulation T; from sharing in the gain and loss of a customer account; and from guaranteeing the performance of an investment in a customer account.
102
Under FINRA rules, disputes between a registered representative and a brokerage firm are:
I handled by binding arbitration
II handled by litigation
III appealable
IV non-appealable
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is B.
Disputes between registered representatives and brokerage firms are handled by binding (non-appealable) arbitration.
103
Which statement is TRUE when comparing arbitration to litigation as a means of settling disputes?
A. Arbitration is a faster and cheaper means of settling disputes than litigation
B. Litigation is a faster and cheaper means of settling disputes than arbitration
C. Both methods are comparable as to cost and time involved for dispute resolution
D. Litigation is the normal method of dispute resolution in the securities industry as compared to arbitration
The best answer is A.
Arbitration is preferred over litigation as a means for settling disputes because it is simpler and cheaper. Under FINRA rules, arbitration is mandatory for settling all disputes where a member firm or its personnel are involved.
104
The primary criteria for a person to be appointed to a securities industry arbitration panel is that the person be:
A. registered
B. interested
C. disinterested
D. retired
The best answer is C.
Arbitration panels consist of individuals affiliated with member firms and representatives from the general public. Attorneys are also permitted on arbitration panels (a nice source of income for attorneys who are retired). All of these individuals must be "disinterested" - meaning they cannot have business, family, or other connections to the parties involved in the arbitration proceeding.
105
All of the following terms apply when comparing the FINRA Code of Mediation to the FINRA Code of Arbitration EXCEPT:
A. Binding
B. Voluntary
C. Faster
D. Cheaper
The best answer is A.
Virtually every broker-dealer requires a customer to sign an arbitration agreement at account opening. This requires the customer to use FINRA arbitration as the means of settling the dispute. In 2010, after the market meltdown of 2008-2009, FINRA was inundated with arbitration claims and had a 3-year backlog. To reduce the time to get these cases settled, FINRA amended its arbitration procedures to permit the parties involved to voluntarily choose to use a FINRA-approved mediator to settle the dispute. If both parities agreed with the mediator's decision, the process would be faster and cheaper than going through the preparation and hearing process for an arbitration.
If a mediator is chosen, both sides must agree to this and the decision of the mediator is not binding or final. Both sides can agree to the findings of the mediator, or either party can reject the mediator’s findings and the case will go into the arbitration queue. When a decision is reached by the arbitrators, it is binding and final
106
If mediation is chosen instead of arbitration to settle a dispute, all of the following statements are true EXCEPT:
A. either party can reject the mediator's decision
B. both parties must have agreed to the use of mediation
C. the decision of the mediator is binding and cannot be appealed
D. the use of mediation is an alternative to the FINRA arbitration procedure
The best answer is C.
Virtually every broker-dealer requires a customer to sign an arbitration agreement at account opening. This requires the customer to use FINRA arbitration as the means of settling the dispute. In 2010, after the market meltdown of 2008-2009, FINRA was inundated with arbitration claims and had a 3-year backlog. To reduce the time to get these cases settled, FINRA amended its arbitration procedures to permit the parties involved to voluntarily choose to use a FINRA-approved mediator to settle the dispute.
If a mediator is chosen, both sides must agree to this and the decision of the mediator is not binding or final. Both sides can agree to the findings of the mediator, or either party can reject the mediator’s findings and the case will go into the arbitration queue. When a decision is reached by the arbitrators, it is binding and final.
107
Under the FINRA Code of Procedure, after the first level of hearings in any complaint proceeding with the District Hearing Panel, this decision may:
A. be appealed to the National Adjudicatory Council
B. be appealed to the Securities and Exchange Commission
C. be appealed to Federal Court
D. not be appealed
The best answer is A.
The FINRA Code of Procedure is used when the FINRA Department of Enforcement wishes to prosecute a member firm or an associated person for rule violations. It can also be used by a customer that has not signed an arbitration agreement. Under the FINRA Code of Procedure, the first level of hearings in any dispute or complaint proceeding is held at the District Hearing Panel. Their decision may be appealed to the National Adjudicatory Council. The National Adjudicatory Council's decision may be appealed to the Securities and Exchange Commission. Finally, the SEC's decision may be appealed to Federal Court.
