General Broker-Dealer Activities Flashcards
Alpha Securities, a member firm based in the U.S., has a correspondent relationship with Delta Securities, a non-U.S. based broker-dealer. Which statement regarding the activities of Delta Securities in the U.S. is true?
A. Delta can issue a research report in the U.S. under the name of Alpha.
B. Delta can join a syndicate underwriting nonexempt securities in the U.S.
C. If Delta visits its clients in the U.S., it must be accompanied by Alpha.
D. Delta can enter buy and sell orders direclty into Nasdaq Book for its clients.
A
A nonregistered foreign representative employed by a nonmeber affiliate overseas can do all of the following except:
A. Accept unsolicited orders from U.S. customers
B. Visit a U.S. customer accompanied by one of your respresentatives
C. Effect trades through the U.S. firm
D. Have the U.S. member distribute research prepared abroad as long as the appropriate third-party disclosures are made
A
T or F: WSPs must be maintained in the Office of Supervisory Jurisdiction for at least 3 years, beginning from the date they were created.
F
The 3-year retention requirement begins from the date of last use, not the date of creation.
ABC Brokerage has purchased a box of 4 season-ticket seats at MSG. On the street, these tickets are worth $200-300 each. The idea is to let the registered reps invite their clients to the games by offering them free tickets, and then be able to socialize and deepen personal relationships with them. Which of the below are requirements that must be met for this plan to meet FINRA’s rules on gifts?
A. Document with the teams the FMV of each ticket.
B. Make clients pay for any ticket value above $100 per ticket.
C. Make sure reps attend each game with their clients.
D. Gifts must be occasional.
E. The firm must document that clients were under no pressure to buy products as a result of the gifts.
F. The gift must be for a special occasion, such as a client’s wedding anniversary or birthday.
G. Records of the gift must be maintained for at least 3 years.
H. The firm must document that some business resulted from the gift-giving program.
C, D, G
May a registered representative continue to collect commissions after retirement, which will then pass on to his spouse upon his death? If so, under what circumstances?
Yes, with a written agreement entered into at or prior to retirement.
In what types of securities transactions is it important for a bank to meet the SEC’s “chiefly compensated” test?
Fiduciary and trust accounts
A mutual fund company wants to reimburse travel expenses and enrollment fees for registered reps of ABC Securities who are attending an educational seminar. This can be an acceptable arrangement under FINRA’s rule for non-cash compensation, provided that:
A. The seminar content is not 100% related to mutual funds.
B. The representatives who receive reimbursements aren’t “cherry-picked.”
C. Reimbursements aren’t linked to a specific sales target or level.
D. Reimbursements don’t exceed $1,000 per representative.
C
Which of the below are the 3 important disclosures that must be made to bank customers who are considering securities products offered through the bank under a networking relationship with a broker-dealer?
A. FDIC coverage may be limited on securities offered through the bank.
B. Securities are not deposits or other bank obligations.
C. The bank may receive sales commissions on securities products sold.
D. Securities are subject to investment risk.
E. Securities are not FDIC-insured.
F. Annuities sold by the bank may not be guaranteed.
B, D, E
Must a registered person receive approval from the BD before engaging in a private securities transaction?
If he is compensated, yes.
Must a registered person receive approval from a BD prior to engaging in an OBA?
No, they just need to provide prior notification.
Must a registered person receive approval from a BD before opening an account at another BD?
Yes
May registered persons borrow from or lend to customers?
Yes, if the firm has WSPs allowing it and the client is an immediate family member or a bank; or, with written consent, if the client is a registered person at the same firm or if the loan is based on an outside or personal business relationship.
If FINRA rules regarding private securities transactions are not followed, who is vulnerable to FINRA-imposed fines?
The registered rep and the member firm
What type of notice or approval is required for a private securities transaction?
Prior notification to or approval by a registered principal
Which of these are approved methods under Reg FD to satisfy a responsibility to promptly disclose any MNPI that has been accidentially leaked or distributed?
A. File a Form 8-K with the SEC
B. Contact at least 3 local media outlets
C. Post information on a leading industry blog
D. Hold a press conference, after giving adequate notice
E. Release information to at least 2 analysts who follow the company
F. Post information on the company’s website
G. Release a press release broadly to media outlets
A, D, F, G
A broker-dealer must notify FINRA within [____] days of a branch office relocation.
30
In which offices must the FINRA manual be maintained?
Each office
I think this is wrong and it’s actually every OSJ.
In which offices must a broker-dealer’s WSPs be maintained?
Each OSJ
What is the minimum number of emergency contact persons a broker-dealer must identify in the BCP?
2
How often must a firm’s BCP be reviewed and approved?
Annually
Who is required to approve and review a firm’s BCP?
A member of senior management who is a registered principal
When must broker-dealers make the first written disclosure to customers about their BCPs?
At account opening
The BCP must identify an uninterruptable communications channel between the broker-dealer and [____] during an emergency.
Regulators
The BCP must identify an alternate way for broker-dealers to communicate with certain people during an emergency – which people?
Employees, customers, other broker-dealers
After FINRA has identified a broker-dealer as restricted, which one of the following is NOT a valid way for the firm to address the situation?
A. Request a FINRA hearing
B. Consult with FINRA on remediation steps
C. Agree to a legally binding arbitration process
D. Voluntarily reduce staff
C
FINRA does not offer aribtration as an opportunity to address restricted firm obligations.
Which of the following factors should a broker-dealer consider carefully in deciding whether to use risk-based testing of SCPs?
A. Trading desks that generate relatively high volume turnover
B. Product areas previously identified by regulators as red flags
C. Newly offered products and services
D. Areas of the firm with historic deficiencies
E. Units of the firm that produce research reports made available to the public
F. Units of the firm that have experienced customer complaints or disciplinary actions
G. Product areas generally not suitable for unsophisticated investors
B, C, D, F
What is the deadline for broker-dealers to complete an annual verification of their contact information, as reported on the FINRA Gateway Filing & Reporting System?
Within 17 BDs after the end of each calendar year
How does the broker-dealer formally identify the entity responsible for the firm’s SCPs to the SEC?
Form BD (Schedule A)
What entity of a broker-dealer is responsible for testing and amending the firm’s SCPs?
CCO
T or F: When WSPs are changed, a record of the prior version must be maintained in an OSJ for at least 2 years from the date of the change.
F
A record of the prior version must be maintained for at least 3 years from the date of change.
75-5-10 rule
75% of a mutual fund’s total assets must be invested in securities issued by [____].
Companies other than the investment company or its affiliates
75-5-10 rule
Within the 75%, no more than 5% of the fund’s total assets can be invested in [____].
Securities of a single issuer
75-5-10- rule
Within the 75%, the fund can own no more than 10% of [____].
Outstanding voting securities of any one issuer
For each criteria below, which offers the better benefit - mutual funds, UITs, or neither one over the other?
A. Predictable holdings
B. Diversification among holdings
C. Professional management
D. Fixed termination date
E. Lower continuing cost
F. Daily valuation
G. Tracking liquidity
H. Attractive yield
A. UITs
B. Mutual funds
C. Mutual funds
D. UITs
E. UITs
F. Mutual funds
G. Mutual funds
H. Neither one over the other
Why, at times, is the market price of ETF shares above or below the published NAV of shares?
Supply and demand
What price will I receive if I offer to sell my ETF shares?
Market price (or limit price)
What causes the market price of ETF shares to stay fairly near the published NAV over time?
Authorized participants can trade large blocks or baskets of the underlying stocks of ETF shares and vice versa.
This arbitrage helps to keep market price and NAV aligned.
Can I exchange my ETF shares and receive a basket of the underlying portfolio stocks?
No, only “authorized participants” can.
Which of the following statements is true about the tax treatment of DPPs?
A. Income distributions are federally tax-exempt.
B. Gains are taxable but losses can’t be deducted.
C. Losses can be used to offset passive gains.
D. Taxes are paid at the fund level, not the individual investor level.
C
What is the average maturity of a typical investment in a CMO?
A. Short-term, under 5 years
B. Long-term, over 20 years
C. It depends on whether the CMO holds 15-year or 30-year mortgages
D. It depends on which tranche an investor buys, and also prepayments
D
T or F: The cash values of VUL are guaranteed to exceed a stated minimum amount.
F
Cash values depend on investment account (subaccount) performance and are not guaranteed.
T or F: The death benefit of a VUL is paid to the named beneficiary.
T
T or F: Illustrations of VUL must always reflect the minimum mortality expenses and administrative fees the insurer can impose.
F
Illustrations must reflect the maximum mortality expenses and administrative fees.
T or F: VUL programs can offer customers a high degree of liquidity for short-term financial needs.
F
A VUL should not be purchased by customers with short-term liquidity needs.
T or F: Any guarantees in a VUL program are backed solely by the issuing life insurance company.
T
T or F: VUL combines life insurance coverage with investments that can participate in stock and bond market returns.
T
For the annuitization payout described below (from a variable annuity), indicate the payout option from these choices: straight-life, life with period certain, joint with last survivor.
Also indicate whether the payout is fixed or variable annuitization.
In all cases, John is the contract owner and his wife, Helen, is the annuitant.
John will receive $385 per month for as long as he lives. If he dies within 10 years of annuitization, payouts will continue to Helen for the balance of the 10-year period.
Life with period certain
Fixed
For the annuitization payout described below (from a variable annuity), indicate the payout option from these choices: straight-life, life with period certain, joint with last survivor.
Also indicate whether the payout is fixed or variable annuitization.
In all cases, John is the contract owner and his wife, Helen, is the annuitant.
John will receive a payout of 24.5 annuitization units per month, payable for as long as he lives. No payments will be made to Helen after his death.
Straight life
Variable
For the annuitization payout described below (from a variable annuity), indicate the payout option from these choices: straight-life, life with period certain, joint with last survivor.
Also indicate whether the payout is fixed or variable annuitization.
In all cases, John is the contract owner and his wife, Helen, is the annuitant.
John will receive a payout of $900 per month for as long as either he or Helen are alive. After the first death (of the two), the surviving spouse will receive a payout of $600 per month for as long as he/she lives.
Joint with last survivor
Fixed
In this example, both John and Helen are annuitants.
For the annuitization payout described below (from a variable annuity), indicate the payout option from these choices: straight-life, life with period certain, joint with last survivor.
Also indicate whether the payout is fixed or variable annuitization.
In all cases, John is the contract owner and his wife, Helen, is the annuitant.
John will receive a payout of 60 annuitization units per month for as long as he lives, but in no case less than 20 years. Each year, the amount of annuitization units payable will increase by 3%.
Life with period certain
Variable
Under the Trust Indenture Act of 1939, in which case is a corporate bond issuer required to name a trustee to safeguard the rights of bondholders?
A. When any bonds are sold to retail investors
B. When the corporate bond issuer sells bonds worth more than $50 million
C. When daily bond trading volume exceeds $1 million
D. When there are no sinking fund provisions for retiring bonds
B
How do broker-dealers meet regulatory requirements to train associated persons concerning products and services?
Design and implement Firm Element training that reflects the firm’s business and needs
Who conducts a reasonable basis suitability review?
Broker-dealer
When must a reasonable basis suitability assessment be conducted and what must it conclude?
Before recommending a security to any customer. That it is suitable for at least some of the firm’s customers.
Who conducts a customer-specific suitability review?
Registered rep
How long is a Letter of Intent good for? How long can it be backdated for?
13 months
90 days
Premiums for a VWL are [?] while premiums for a VUL are [?].
Fixed minimum
Flexible
Is an arbitration process required for resolution of the below under the Code of Arbitration Procedures? (yes, no or maybe)
A dispute between two registered representatives over commissions.
Yes
Is an arbitration process required for resolution of the below under the Code of Arbitration Procedures? (yes, no or maybe)
A dispute between a customer and a registered representative alleging fraud.
Maybe (if the customer signed a predispute arbitration agreement).
Is an arbitration process required for resolution of the below under the Code of Arbitration Procedures? (yes, no or maybe)
A dispute between two broker-dealers over IPO allocations.
Yes
Is an arbitration process required for resolution of the below under the Code of Arbitration Procedures? (yes, no or maybe)
A dispute between a customer and a broker-dealer involving sexual harrassment.
No
Is an arbitration process required for resolution of the below under the Code of Arbitration Procedures? (yes, no or maybe)
A dispute between a registered representative and a broker-dealer over trail commissions.
Yes
Can one party in a mediation require that their attorney be present in the hearing?
Yes, if it’s ok with the other side.
Do the parties to a mediation have to be bound by a mediator’s decision?
No, it’s not binding until they sign an agreement.
If a mediation begins and one party doesn’t feel the process is fair, what remedy do they have?
They can discontinue the process at any time.
What is the main advantage of a mediation process?
It’s faster and cheaper than arbitration.
Which of the following sanctions is FINRA allowed to impose on an associated person or securities firm for a rule violation, under FINRA’s Code of Procedure?
A. Temporary cease and desist order
B. Cancellation of membership
C. Fine
D. Permanent termination from the securities industry
E. Prison sentence
F. Suspension of association with other FINRA members
G. Freezing of certain customer accounts
H. Censure
A, B, C, F, H
The Code of Procedure gives FINRA broad powers to enforce its rules. However, FINRA can’t imprison anyone or terminate anyone’s SEC registration for a rule violation. FINRA’s sanctions are limtied to its own members, not customers.
T or F: A registered rep can attempt to settle a complaint personally with a customer, befire he is required to bring it to his firm’s attention.
F
Representatives are prohibited from using private communications or settlement offers to resolve written complaints.
T or F: If a customer admits there are “gray areas,” this is not considered a customer complaint under FINRA rules.
F
Any customer complaint made in writing is still a complaint.
T or F: If a registered rep believes a complaint is without merit, he is not required to forward it to a registered principal at his firm.
F
**ALL ** written complaints involving a registered rep must be forwarded to a registered principal for review.
T or F: A firm is required to address a customer complaint and keep a record of how it is resolved.
T
T or F: A firm can decide to dismiss a complaint, without redress or disciplinary action, if it is found to be lacking in merit.
T
T or F: All complaints must be included on the firm’s quarterly Customer Complaint Report filed with FINRA.
T
ABC Securities has just been notified by FINRA that it has been designated a “taping firm.” Which telephone calls must it tape and store?
A. Calls made by or to associated persons who have been specially designated as having disciplinary records.
B. Outbound calls made by all registered representatives to customers.
C. Outbound and inbound calls, to and from customers or prospects.
D. All calls between registered reps and their customers.
D
Indicate the records retention requirement for each type of record listed below.
A. Sales and securities blotters
B. AML records providing customer identity
C. Net capital and aggregate indebtedness calculations
D. Powers of attorney and discretionary authority forms
E. Receipts and disbursements of cash
F. Stock certificate books
G. Customer complaints
A. 6 years
B. 5 years
C. 3 years
D. 3 years
E. 6 years
F. Life of broker-dealer
G. 4 years
What is the main requirement broker-dealers must meet in choosing the format of electronic records storage systems?
A. Formats must be non-rewritable and non-erasable.
B. Formats must be cloud-accessible.
C. Vendors of formats must be FINRA-certified.
D. The same formats must be used consistently for all required records storage.
A
How long must records of customer complaints be maintained ?
4 years under FINRA rules (but 6 years under MSRB rules)
What fundamental problem did the passage of SOX in 2002 aim to prevent in the future?
Lack of accuracy and accountability in financial reporting by public companies
An attestation as to the accuracy of a firm’s periodic reports must be reviewed and signed by two executive officers of public companies. They are [?].
CEO & CFO
Which periodic reports are covered by the requirements of SOX?
10-Q, 10-K, 8-K, etc.
How often does SOX require that internal controls of public companies be evaluated and deemed effective by the signing officers?
Annually
What is the minimum net capital requirement for a full-service broker-dealer (carrying firm)?
$250,000
What is the minimum net capital requirement for a qualified block positioner?
$1,000,000
What is the minimum net capital requirement for a small introducing firm that does not have custody of customer funds or securities?
$5,000
What is the minimum net capital requirement for a qualified third market maker that makes a market in 10 securities?
$200,000
The requirement is the lesser of $500k or $100k + $20k per security in excess of 5. $100k + ($20k x 5) = $200k
What is the minimum net capital requirement for a firm that does not carry customer margin accounts and transmits all customer funds and securities promptly?
$100,000
Brokerage account customers with free credit balances must receive quarterly notices that include 3 key disclosures. Which disclosures below are among the 3?
A. “Free credit balances are not segregated.”
B. “Free credit balances are payable to the customer on demand.”
C. “Free credit balances do not earn interest.”
D. The amount of the free credit balance.
E. The amount of the free credit balance that can’t be accessed immediately.
A, B, D
ABC Corp., a Nasdaq-listed stock, currently has a short interest of 857,242. What does this mean?
That 857,242 shares have been borrowed and sold short.
What action would cuase the short interest in ABC Corp. to fall?
Short covering
What is the risk of being short a stock with a high short interest?
A short squeeze (panicked covering leads to higher prices, which leads to bigger losses)
Under a clearing arrangement, indicate which firm, introducing or clearing, usually has responsibility for each function listed below.
A. Account opening
B. Order execution
C. Trade confirmations and account statements
D. Financial advice and recommendations
E. Cashiering
F. Holding securities in safekeeping
A. Introducing
B. Clearing
C. Clearing
D. Introducing
E. Clearing
F. Clearing
The clearing firm serves as a full-service securities back office. The introducing firm usually handles account opening and customer interactions, such as portfolio advice and recommendations.
Reese opens a margin account by depositing $10,000. For her first purchases, she wants to buy 200 shares of ABC Co. stock, long at $40 per share, and 200 shares of XYZ mutual fund at $20 per share.
Are both the securities (the stock and the fund shares) marginable?
No, only the stock.
Reese opens a margin account by depositing $10,000. For her first purchases, she wants to buy 200 shares of ABC Co. stock, long at $40 per share, and 200 shares of XYZ mutual fund at $20 per share.
What initial margin requirement is applicable?
50% on the stock purchase
Per Reg T
Reese opens a margin account by depositing $10,000. For her first purchases, she wants to buy 200 shares of ABC Co. stock, long at $40 per share, and 200 shares of XYZ mutual fund at $20 per share.
Can she purchase both the 200 shares of long stock and 200 shares of the mutual fund with the $10,000 she has deposited?
Yes
$4k for mutual fund shares and $4k for stock (50% of $8k)
Reese opens a margin account by depositing $10,000. For her first purchases, she wants to buy 200 shares of ABC Co. stock, long at $40 per share, and 200 shares of XYZ mutual fund at $20 per share.
What is the FINRA minimum maintenance requirement?
25%
Certification of a firm’s compliance controls by its CEO must be presented to [?] within [?] days.
The Board of Directors and audit committee
45
What is the minimum net capital requirement for a small introducing BD?
$5,000
What is the minimum net capital requirement for a mid-size introducing BD?
$50,000
What is the minimum net capital requirement for a Section (k)(2)(i) BD?
$100,000
What is the minimum net capital requirement for a prime broker?
$1,500,000
A BD who is in business for less than one year must maintain an aggregate indebtedness to net capital ratio of no more than [?].
8:1
A BD must notify FINRA promptly (within 24 hours) when it fails to maintain net capital that is [?] of its required minimum.
150%
What is the restriction on a BD’s business activities when its net capital is:
A. 150%
B. 125%
C. 120%
D. 100%
of the required minimum?
A. Cannot expand business
B. Must reduce business
C. Early warning
D. SEC Violation
What is the fidelity bond amount a BD with a minimum net capital requirement of $250,000 must carry?
$600,000 - $5 million, depending on its net capital requirement
Does a customer’s free credit balance need to be segregated from a firm’s net capital?
No
