General Securities Regulations

Question 1

SEC rules related to record keeping require that broker-dealers whose primary business is investment banking:
Send copies of all records to the SEC and the broker-dealer’s Designated Examining Authority
Maintain a paper copy to back up all records maintained in an electronic storage medium
Maintain all required documents in an easily accessible location for at least two years
Maintain all required documents in an easily accessible location for at least three years

Answer 1

C: According to SEC rules, all records, whether maintained for a minimum of six years, or three years, must be kept for the first two years in an easily accessible place. Records may be kept in electronic storage media or microfilm if a backup copy of the microfilm is maintained in a separate location. When using electronic storage, the electronic media must be in a nonrewritable format and be nonerasable. Copies of documents need not be sent to the SEC, or the broker-dealer’s designated examining authority. [60735]

Question 2

An investment banking representative would like to borrow funds from a neighbor who is a customer of his firm. Which of the following statements is TRUE?
He is not required to notify or receive approval from his firm
He is only required to notify his firm
He is required to notify FINRA
He is required to notify and receive approval from his firm

Answer 2

D:
Registered individuals may not borrow money from, or lend money to, a customer unless certain conditions are met. These conditions include implementing written procedures permitting such activity and satisfying any one of the following provisions.

The customer and the registered person are immediate family members.
The customer is a financial institution regularly involved in the business of extending credit or providing loans.
Both parties are registered with the same firm.
The loan is based on a personal relationship between the customer and the registered person.
The loan is based on a business relationship independent of the customer-BD relationship.
If the conditions indicated in provisions 3, 4, or 5 prevail (such as borrowing from a neighbor), the firm must approve the lending activity prior to the execution of the loan. If the loan is based on provision 1 or 2, firm notification or firm approval is not required.

Question 3

A broker-dealer is required to maintain a record of all of the following items for a three-year period, EXCEPT:
A red herring prospectus
E-mails between an investment banking representative and an M&A client
Confirmations of IPO shares purchased by clients
Advertising concerning the firm’s standing as an underwriter

Answer 3

A: According to SEC rules, a broker-dealer is required to keep a record of all confirmations for a minimum of three years. According to FINRA rules, all advertisements used by the firm, as well as all correspondence (including e-mail and instant messaging) must be also be kept on file for a minimum of three years. Registration statements, prospectuses, and other documents written by an issuer are not required to be kept on file by broker-dealers. [61375]

Question 4

A customer contends that his investment banking representative conducted an unauthorized trade in a new issue in his account. The issue subsequently declined in value by 80%. The firm and client have agreed to go to arbitration to settle the dispute. Regarding the composition of the arbitration panel, which of the following statements is TRUE?
All arbitrators may come from within the securities industry
A majority of the arbitration panel will come from within the securities industry
A majority of the arbitration panel must come from outside the securities industry
All arbitrators must come from outside the securities industry.

Answer 4

C: Under the Code of Arbitration, if a public customer takes a member firm to arbitration to resolve a dispute, the majority of the panel must come from outside the securities industry, unless the customer requests a panel with a majority of industry arbitrators. Neither the broker-dealer nor the customer may actually pick the arbitrators. Arbitrators do not need to be attorneys. [60906]

Question 5

Which of the following statements is FALSE regarding a firm’s anti-money laundering program?
The program must comply with a blueprint or template supplied by the SEC
The program must be designed to comply with the Bank Secrecy Act
The program must provide for annual testing of the system
The firm must designate a specific individual responsible for implementing the firm’s anti-money laundering program and must identify the person to FINRA

Answer 5

A: There is no anti-money laundering blueprint or template supplied by either the SEC or FINRA to broker-dealers. However, any program implemented by the broker-dealer must be designed to comply with the provisions of the Bank Secrecy Act and must provide for annual testing of the systems. Broker-dealers must appoint a compliance person to oversee anti-money laundering regulation compliance, and must identify that person to FINRA. [60408]

Question 6

An account is opened for an investment banking representative of another FINRA member firm. Which TWO of the following activities must be completed?
The employer of the person opening the account must be notified
FINRA must be notified
The employer must receive duplicate confirmations and statements, if requested
A Form U4 must be completed
I and III
I and IV
II and III
II and IV

Answer 6

A: If a member firm intends to open an account for an employee of another member firm (including investment banking personnel), the employer of the person opening the account must be notified, and duplicate statements and confirmations regarding the transactions must be sent upon request. FINRA need not be notified; however, the employee must be notified that the employer will be contacted regarding the opening of the account. [61235]

Question 7

Which of the following statements is TRUE concerning the restricted and watch lists that are maintained by a broker-dealer?
The restricted list does not apply to solicited transactions with customers of the broker-dealer
The restricted and watch lists must be distributed to all employees of the broker-dealer
An explanation of the reason for a security’s addition or deletion from a restricted or watch list must be included
A broker-dealer that does not conduct investment banking business, do research, or engage in arbitrage activities does not maintain restricted and watch lists

Answer 7

D: Only firms that engage in investment banking, research, or arbitrage activities are required to maintain restricted and watch lists. However, these firms must have written procedures to address the use of material nonpublic information by its employees. The restricted and watch lists include securities that employees are either restricted or prohibited from trading, or issues that are subject to closer scrutiny by the member firm. The restrictions or limitations associated with the lists apply to both employees and to solicited transactions with customers. The restricted list must be distributed to employees, while the contents of the watch list are generally known only to selected members of the legal and compliance departments. The firm’s written supervisory procedures should include a description regarding when and why securities have been added or removed from the lists. The restricted and watch lists should include the name of the contact person who added to, or deleted the security from, the list; however, the rationale for the decision is not required. [60446]

Question 8

An investment banking representative is the owner of a marina on the North Shore of Long Island. She wants to build an apartment complex on this property in order to increase the property’s cash flow. If she receives a loan from family members, which of the following statements is TRUE?
Her broker-dealer is required to approve the loan
She is required to notify her firm of the loan
She is required to notify FINRA
She is not required to notify her firm about the loan

Answer 8

D: If the loan is based on provision 1 (borrowing from family members), firm notification or firm approval is not required. If the conditions indicated in provisions 3, 4, or 5 prevail, the firm must approve the lending activity prior to the execution of the loan. [99908]

Question 9

All of the following statements are TRUE regarding supervisory procedures, EXCEPT:
Every investment banking representative must be assigned to a particular principal who is responsible for that representative’s activities
Every investment banking representative must participate at least annually in a meeting or interview at which compliance issues are discussed
A copy of the member’s written supervisory procedures must be kept in each Office of Supervisory Jurisdiction
Each office in which investment banking registered representatives solicit investment advisory business must be designated an Office of Supervisory Jurisdiction

Answer 9

D: Each branch of a member is not necessarily an Office of Supervisory Jurisdiction (OSJ). If an office is involved in the structuring of public offerings, it must be designated an OSJ. If a branch is soliciting investment banking business, but is not involved in the structuring of those offerings, then it does not require a designation as an OSJ. A branch must be supervised by an OSJ. [60422]

Question 10

An investment banking representative has been communicating with a client about the progress of an upcoming equity underwriting. There have been numerous pieces of correspondence between the representative and the client. Is this correspondence subject to review by a principal?
Only outgoing correspondence is subject to review by a principal
Review by a principal of both incoming and outgoing correspondence is required
Outgoing correspondence is subject to approval by a principal, while incoming correspondence must only be reviewed
No review of correspondence by a principal is required

Answer 10

B: Each member must develop written procedures that are appropriate to its business, size, structure, and customers, for the review of incoming and outgoing written (i.e., nonelectronic) and electronic correspondence with the public, relating to its investment banking or securities business. [60407]

Question 11

repurchases its own stock in the marketplace?
The issuer must limit its daily repurchase amount to 30% of its ADTV
Only one market maker may be used, and the market maker may not execute any transactions with other broker-dealers
The purchase price is limited to one cent above the highest independent transaction price
Purchases are permitted in after-hours trading using a different market maker

Answer 11

D: According to SEC Rule 10b-18, an issuer may repurchase its securities in the marketplace provided:

The issuer purchases an amount not exceeding 25% of the average daily trading volume
The issuer uses only one broker-dealer or ECN to execute the transactions on any single day. That broker-dealer may execute transactions with any number of other market participants.
The issuer purchases the securities at a price no higher than the highest independent transaction price
After-hours trading is allowed and the issuer is permitted to use a broker-dealer that is different from the one used during normal business hours. [61261]

Question 12

Under anti-money laundering requirements, brokerage procedures should provide for:
Notifying the exchange whenever a Currency Transaction Report (CTR) is filed
Posting the Office of Foreign Assets Control (OFAC) list in a conspicuous place
Subjecting AML procedures to an outside audit
All of the above`

Answer 12

C: The validity and thoroughness of the AML procedures must be verified through an independent audit. Exchange notification is not required. The OFAC list contains the names of known and suspected terrorists. There is no requirement to post the list. [60419]

Question 13

A broker-dealer’s AML compliance program must be approved:
In writing by a member of senior management
By FINRA and a member of senior management of the broker-dealer
By the SEC and the head of compliance for the broker-dealer
In writing by both the CEO and the CFO

Answer 13

A: Each member’s anti-money laundering program must be approved in writing by a member of senior management. [60412]

Question 14

ccording to FINRA rules, an e-mail complaint:
Does not constitute an official complaint and does not need to be retained by the broker-dealer
Must be maintained for four years
Must be maintained for six years
Must be maintained for the life of the member firm

Answer 14

B: Records of customer complaints must be maintained for four years according to FINRA record-keeping rules. Complaints can be delivered in any written format, including letters, e-mails, and text messages. [66216]

Question 15

An issuer would like to buy back shares under SEC Rule 10b-18. The last transaction was $36.12 and the current bid/ask quote is $36.10 - $36.15. Which TWO of the following statements are TRUE concerning the issuer buyback?
The highest price the issuer could buy at would be $36.10
The highest price the issuer could buy at would be $36.12
The maximum number of shares the issuer could buy in a day is 25% of the ADTV for the previous four weeks
The maximum number of shares the issuer could buy in a day is 25% of the ADTV for the previous four months
I and III
I and IV
II and III
II and IV

Answer 15

C: When an issuer buys back shares under SEC Rule 10b-18, purchases may not exceed the higher of the independent bid or last transaction, in this case $36.12. Daily purchases may generally not exceed 25% of the average daily trading volume (ADTV) in the previous four weeks. [61358]

Question 16

An issuer would like to repurchase its shares in the market under the safe-harbor provisions of Rule 10b-18. You would advise the issuer that it should limit the amount of stock purchased on any single day to no more than what percent of the ADTV for that security?
5%
10%
15%
25%

Answer 16

D: Under the safe-harbor provisions of Rule 10b-18, an issuer should limit its purchases for that security to no more than 25% of the average daily trading volume (ADTV) on any single day. The issuer should also use only one broker-dealer during any trading session, although different broker-dealers may be used for normal trading hours and after-hours trading. [60370]

Question 17

When a broker-dealer hires an individual who was previously employed by a different broker-dealer, the hiring firm is required to:
Verify the employment status of the individual with the prior employer before filing a new Form U4
Check with the human resources department of the previous employer to confirm that the employment record of the individual was clean
Review the Termination Notice filed by the previous employer
Inquire as to whether the individual made any political contributions to local elected officials

Answer 17

C”: FINRA Rule 3010(e) requires firms to investigate the qualifications of the newly hired individual by reviewing the U5 submitted by the previous securities industry employer, within 60 days of filing the U4 with FINRA. [60387]

Question 18

An investment banking representative leaves his current firm and is given a copy of his Form U5. When applying for a new position at another broker-dealer, his potential employer asks for a copy of the document. The applicant should supply this document within:
2 business days
3 business days
5 business days
30 business days

Answer 18

A: Form U5 should be supplied to the new employer within 2 business days, provided the applicant has received a copy. If the former employer failed to provide the Form U5 to the applicant for registration, it should be provided within 2 business days of the request. [60415]

Question 19

An investment banking principal has received a letter from a customer complaining about a recent new issue that declined substantially on its first day of trading. The client purchased the shares based on a recommendation by an associated person of the firm. The customer contends that the recommendation was unsuitable. Which of the following statements is TRUE?
The firm must keep a copy of the complaint for six years
The principal must review the complaint and submit a written response to the customer
A memo must be prepared describing any action taken in response to the complaint
The firm must enter promptly into arbitration (or mediation) with the customer to determine whether a reimbursement is warranted

Answer 19

C: All written complaints must be reviewed by a principal and must be kept in a file, along with a memo describing any action taken in response to the complaint. There is no requirement to respond to the client in writing or to enter into arbitration or mediation. Under FINRA rules, records of complaints must be kept for a minimum of four years. [66219]

Question 20

Covenant Capital Advisors, Inc. wants to give Jack Halo, a newly hired associate in the investment banking area, a wedding gift to celebrate his impending nuptials. Which of the following gifts may be given by the firm?
Any gift, as long as the nominal value is $100 or less
A 10-day cruise to the Isle de Pelosa, valued at $2,500
An insubstantial allocation in the firm’s next deal
Any gift valued under $1,000 since he is an employee, provided it relates to the performance of Jack’s regular duties

Answer 20

B: Gift rules do not limit the amount that a broker-dealer may provide to its own employees. There is no $100 limitation, as would be the case if Jack were an employee of a different member firm. Allocations in new deals generally may not be given to employees. The gift by the broker-dealer can be unrelated to Jack’s regular duties. [61233]

Question 21

An investment banking representative of a member firm has purchased a security that is on her firm’s watch list. According to industry rules, the firm must:
Conduct a review of the trade
Conduct a review of the trade only if it involved the use of material nonpublic information
Submit a written statement regarding the trade to its SRO
Submit a written statement regarding the trade to its SRO only if disciplinary actions result
I and III only
I and IV only
II and III only
II and IV only

Answer 21

A: Since the trade involved a security on the firm’s watch list, it must conduct a review of the trade. A written statement must be submitted to the firm’s SRO within one week following the review, and a written statement of the firm’s findings must be submitted to its SRO by the 15th of the month following the calendar quarter in which the trade occurred. [60452]

Question 22

A Suspicious Activity Report (SAR) must be filed within:
10 days
15 days
30 days
60 days

Answer 22

C: A Suspicious Activity Report (SAR) is also called a FinCEN Form101. According to the Bank Secrecy Act (BSA), it is filed by a financial institution if a transaction has involved at least $5,000, and the member firm knows, or has reason to believe, the funds are derived from an illegal activity, designed to avoid filing of other forms, or has no legitimate, lawful purpose. It must be filed no later than the 30th day after the member firm discovers the activity. In addition, the firm would not notify the person who entered into the transaction about which the report is being filed. [61333]

Question 23

A person qualified as an investment banking representative is NOT permitted to:
Provide advice concerning the structure of debt offerings sold under 144A
Provide advice concerning corporate restructurings
Supervise personnel involved in the marketing of initial public offerings
Structure equity offerings to retail investors

Answer 23

C: if you work as a supervisor, need to take supervisor test

FINRA registration rules require all persons involved in the investment banking or securities business, who function as representatives of a member firm, to be registered in a category appropriate to the function they perform. Individuals who supervise representatives at a broker-dealer are required to register as a principal. The rule defines investment banking activities as work performed by associated persons of a broker-dealer whose activities primarily involve:

Advising on or facilitating debt or equity securities offerings through a private placement or a public offering, including but not limited to origination, underwriting, marketing, structuring, syndication, and pricing of such securities and managing the allocation and stabilization activities of such offerings, or
Advising on or facilitating mergers and acquisitions, tender offers, financial restructurings, asset sales, divestitures or other corporate reorganizations or business combination transactions, including but not limited to rendering a fairness, solvency or similar opinion.
The rule does not cover individuals whose investment banking work is limited to public (municipal) finance offerings or direct participation program offerings. The registration category further would not cover individuals whose investment banking work is limited to effecting private securities offerings. An individual working in the public finance department generally will advise municipalities issuing revenue bonds. Since this person is acting in a supervisory capacity, she would be required to register as a principal. [60405]

Question 24

Form U5 must be filed by a member firm within:
10 days
30 days
60 days
Two years

Answer 24

30 days

Question 25

Selling away takes place when an investment banking representative:
Sells his firm’s client list to nonaffiliates without his firm’s permission
Engages in private securities transactions outside his regular scope of employment and without his firm’s permission
Engages in reverse churning of client accounts
Purchases speculative securities for his own account
Explanation:

Answer 25

B: Selling away occurs when a registered representative (including investment banking representatives) engages in private securities transactions, selling securities outside his regular scope of employment without his firm’s approval. [60431]

Question 26

Jake lost $14,000 on a new issue and complained to his investment banking representative. The firm provided a written response, and although Jake did not receive any reimbursement, he was satisfied with the response. The firm is required to:
Report the complaint promptly to FINRA
Report information concerning the complaint quarterly to its SRO
Have the compliance department conduct an investigation within 30 days
Do nothing, since resolved issues do not trigger reporting requirements

Answer 26

B: Member firms are required to report to the appropriate SRO statistical and summary information regarding customer complaints, on a quarterly basis. If the complaint from a customer involves theft, forgery, or misappropriation of funds, the firm must notify the SRO promptly. [60901]

Question 27

An investment banking representative sent a private equity client written information concerning the oil and gas sector. The representative followed up with an e-mail to see if the client had any interest in meeting to discuss possible acquisitions in this sector. The investment banking representative’s broker-dealer is required to:
Have a principal approve the e-mail and retain it for three years
Review the e-mail and retain it for three years
Have a principal review, approve, and retain the e-mail for six years
Retain the e-mail for three years

Answer 27

B: Industry rules classify e-mail as a form of correspondence. All correspondence sent by representatives to customers is subject to review by a supervisor. The record-keeping requirement for correspondence is three years. [60423]

Question 28

Member firms must execute a compliance and supervision certification:
Annually
Quarterly
Signed by the Chief Executive Officer
Signed by the Chief Compliance Officer
I and III only
I and IV only
II and III only
II and IV only

Answer 28

A: According to SRO rules, the CEO of a member firm must execute annual certification, signed by the CEO, attesting to the fact that the firm has in place written compliance and supervisory procedures that are designed to comply with FINRA, the MSRB, and federal securities regulations. The annual certification must be filed with FINRA no later than the anniversary date of the previous year’s certification. [60413]

Question 29

Amy Angree is unhappy with her registered representative. The client feels that her $500,000 loss was due primarily to several unsuitable IPO recommendations. Amy has offered to mediate the issue with the firm. Which of the following statements concerning this process is TRUE?
Amy will give up her rights under the Code of Arbitration, if she pursues mediation
The process is voluntary for both parties
Mediation panels typically have at least 3 members
The mediator may not be a FINRA member

Answer 29

B: Mediation is a voluntary process entered into in an effort to solve a dispute. There is a single mediator who may be any neutral third party agreed to by the participants. Parties may withdraw from mediation and pursue other remedies, such as arbitration, or civil court proceedings. [61241]

Question 30

An accountant obtains material nonpublic information about XYZ Corporation while performing an outside audit of the company. The accountant mentions the information to a registered representative of Broker-Dealer A. The representative executes a personal account transaction based on the information. Which of the following persons may have violated federal regulations regarding insider trading?
The accountant
The registered representative
The broker-dealer
I only
II only
I and II only
I, II, and III

Answer 30

D: All of the parties involved in this situation may have violated insider trading prohibitions. The registered representative violated the rules by executing a transaction while in possession of material nonpublic information. The accountant passed on inside information that was used by another person. This is a violation even if the accountant did not personally profit from the transaction. Broker-dealers are responsible for the actions of their representatives, even if they do not use the information to trade for their own accounts. [60453]

Question 31

All of the following choices would meet the definition of an Office of Supervisory Jurisdiction (OSJ), EXCEPT:
An office where order execution takes place
An office solely involved with the structuring of initial public offerings
An office where one or more associated persons regularly conduct the business of effecting securities transactions
An office maintaining custody of a client’s funds or assets

Answer 31

C: Choices (a), (b), and (d) are activities that would classify the office as an Office of Supervisory Jurisdiction (OSJ). Choice (c) would be considered a branch office. A branch office is any location where one or more associated persons of a member regularly conduct the business of effecting any transactions in, or inducing or attempting to induce the purchase or sale of, any security, or is held out as such. [60406]

Question 32

Emperor LLC has an office location whose sole function is to solicit investment banking services. The status of the office is a(n):
Office of convenience
Nonbranch office
Branch office
OSJ

Answer 32

B: An office whose sole function is to solicit investment banking services confers nonbranch status. One of the exceptions from the definition of a branch office is a non-sales location. This office would be considered a non-sales location. If investment banking services are performed in this office, registration as a branch would be required. If the office structures investment banking deals, it would be an OSJ. [60418]

Question 33

Chester Tetley, an investment banking representative with May B. Enside, Inc., a FINRA member firm, is involved in an underwriting of Nanorobotics, Inc. Chester has revealed to numerous family members the effect that this offering may have on other companies in the industry, including some that are on his firm’s restricted list. Numerous short positions were established based on this information. According to industry rules, if Enside becomes aware of these trades, it must:
File a quarterly report with its SRO concerning the trades in question
File a quarterly report with the SRO only if disciplinary action is taken
Suspend Chester until the issue has been resolved
Sign a written statement that the firm has procedures in place to monitor trading of employees and family members of employees
I and III only
I and IV only
II and III only
II and IV only

Answer 33

B: Because these trades may involve the misuse of material nonpublic information, the firm must file a report with the SRO by the 15th day of the month following the calendar quarter in which the trade occurred. A report must be filed regardless of whether any action has been taken. Chester need not be suspended, but the firm must sign a written statement that it has procedures in place to monitor trading by employees, family members of employees, and trades executed for the firm’s proprietary accounts. [60449]