Practice Final#1 Flashcards
A broker-dealer has no policy for paying continuing commissions to retired representatives. A registered representative who is close to retirement has been approached by a colleague in his branch office to “take over” his accounts when he retires, and will pay a portion of the commissions earned to the newly-retired representative for a period of 10 years. Is this allowed by FINRA?
This is prohibited under FINRA rules.
The “problem” in this scenario is that commissions cannot be paid to unregistered persons. FINRA gives an exception to this when a registered representative is retiring (“RRR”), and a contract is entered into prior to retirement between the member firm and the RRR, allowing commissions to be paid in retirement (a nice thing). But this is not permitted between 2 associated persons when one is retiring.
Note that there is a way around this. The RRR could “sell” his or her book of business for a 1-time payment prior to retiring, so there are no continuing commissions. The issues with this are that the buying representative must have the cash to pay for the purchase, and the member firm must approve of the arrangement in writing.
A customer who has a pattern day trading account at a member firm receives a maintenance call. In order to meet the call, the customer:
cannot use a cross guarantee against the equity in any other account held for the customer at the same firm.
If a customer receives a maintenance call, the customer may “cross guarantee” and use the equity in any other accounts that the customer maintains at the same firm, with the exception of a pattern day trading account. Pattern day trading margin requirements are kept independent, and the customer can only use the financial resources available in the pattern day trading account to meet any maintenance calls. (This is another way that the rules “discourage” pattern day trading, aside from the fact that minimum equity is raised from $2,000 to $25,000 in these accounts. The intent of these rules was to get rid of the small customers who tried to exploit inefficiencies in NASDAQ trading systems by trading themselves in NASDAQ Level II, to scalp very small profits. The systems have been upgraded, so this is no longer possible, but the rule still stands!)
Which of the following would violate MSRB Rule G-20 on gifts and gratuities?
I A municipal representative gives his client 2 tickets to a “sold out” rock concert with a value of $175 each
II A municipal representative takes his client to a “sold out” rock concert where the tickets cost $175 each
III A municipal representative takes his largest retail client to lunch at the most expensive restaurant in town twice each month
IV A municipal representative picks up all expenses for his largest client’s weekend gambling excursion to Las Vegas
The best answer is I, III, IV.
Under MSRB Rule G-20, gifts related to the municipal securities business are limited to $100 in value, per person, per year. This makes Choices I and IV violations. However, business entertainment is permitted, as long as it is not too excessive or too frequent. Choice II appears to be a reasonable entertainment expense. However, Choice III appears both “too frequent” and “excessive.”
A municipal dealer receives a written complaint from a customer. Under MSRB rules, which statements are TRUE?
I A principal must personally handle the complaint
II A principal may delegate the handling of the complaint
III A principal must approve the resolution of the complaint
IV Copies of the complaint, and documentation of any action taken, must be retained for 3 years
The best answer II and III.
The principal does not have to personally handle customer complaints - this work can be delegated to someone else. However, the principal is responsible for the complaint’s handling and resolution. Copies of complaints, with actions taken, must be retained for 6 years under MSRB rules.
A registered representative at a FINRA member firm gives a speech to 15 potential customers about investing in high yielding common stocks and gives opinions about specific issues that would allow the attendees to form an opinion as to whether to buy those securities. Which statement is NOT true?
A. The speech must be approved in advance by the Supervisory Analyst
B. The speech must be accompanied by an “Analyst Certification”
C. The speech must be approved in advance by FINRA
D. The speech must disclose any potential conflicts of interest between the member firm or analyst and the recommended issuers
The best answer is C.
The SEC has defined a “research report” to include a speech to 15 or more persons about investing that would allow the attendees to form an opinion as to whether to buy or sell the securities discussed. Thus, FINRA research report requirements must be met, which includes approval of the recommendations by the Supervisory Analyst and disclosure of all potential conflicts of interest. In addition, SEC Regulation AC - Analyst Certification - also applies to research reports, so the representative must certify that the opinion expressed is his or her un-coerced and un-conflicted opinion. There is no requirement for research reports to be approved by FINRA.
In an inter-dealer trade of a Global Market stock between a market maker quoting that stock in the NASDAQ System and a non-market maker that accesses the quote in the System, who is required to report the trade to the NASDAQ TRF?
The Market Maker
Under ACT reporting rules for the NASDAQ TRF (Trade Reporting Facility), the executing member reports the trade. The market maker posting the quote in the NASDAQ system received the report from the non-market maker and executed it, so the market maker is the executing member and reports the trade within 10 seconds (during the hours that ACT is open).
The responsibilities of the BOM include:
I Approval of new accounts and transactions in accounts
II Ascertainment of the good character of applicants for registration
III Maintenance of personnel files for branch employees
IV Review of securities business related incoming correspondence directed to registered representatives
An issuer will sell securities under the terms of an “investment letter” because:
it does not wish to go through the cost and time of registering the issue with the SEC.
So-called “letter stock” is private placement stock sold under Regulation D. An “investment letter” that accompanies these issues explains that the securities are not SEC registered and cannot be resold in the public markets unless they are either registered or sold under an exemption such as Rule 144.
A broker-dealer is permitted to outsource all of the following functions to a non-member third party service provider EXCEPT:
The best answer is solicitation of new clients.
FINRA permits broker-dealers to outsource work functions to third party providers. More and more broker-dealer work functions require expensive computer hardware, software, and support, so a trend has developed among smaller broker-dealers to outsource these functions to a third party provider such as Broadridge, which provides a “menu of outsourcing solutions” for broker-dealers such as broker workstations, account opening and maintenance software, asset allocation and account analysis software, and back office and clearing functions (just to name a few). FINRA states that if functions are outsourced, the member firm is still responsible for supervision and compliance over these functions. FINRA also states that a member cannot outsource functions that require registration, unless these are outsourced to another broker-dealer. Functions that require registration include sales solicitation, determining suitability, making a recommendation, and writing an order ticket.
A municipal dealer who is a FINRA member employs 7 sales representatives, 3 traders, 2 financial advisors and 2 administrative persons. Under MSRB rules, this dealer must have how many Muni Principal’s?
1 municipal principal.
As a general rule, municipal securities firms are required to have 2 municipal securities principals. However, two exceptions are provided:
- If a municipal securities dealer has fewer than 11 full time employees engaged in the municipal securities business, it is only required to have one municipal securities principal. Please note that clerical employees are not included in the “fewer than 11” number.
- If the firm is also a FINRA member with a person licensed as a General Principal (Series 24), then only 1 Series 53 license is required.
Since this firm is a FINRA member, only 1 municipal principal is required.
Under the FINRA Conduct Rule regarding mutual fund breakpoints, the maximum sales charge on single purchases non-12b-1 mutual funds up to $10,000 is:
8 1/2% of POP
The maximum sales charge that can be imposed on single purchases of non-12b-1 mutual funds is 8 ½% of the Public Offering Price under FINRA Conduct Rules. If the fund has a 12b-1 plan in effect, the maximum sales charge percentage is reduced.
The last time to trade a listed equity option contract that is about to expire is:
4:00PM on the Third Friday of the Month
Hint: This is the same time as the closing of the equity markets. The third Friday of the month is also known as “Exercise Friday.”
Which security MUST be registered with the SEC?
A. Port authority revenue bond
B. Bank CD in the amount of $10 million
C. Debenture shelf offering of $100 million
D. Regional bank stock sold in an add on offering
The best answer is C.
Debentures are corporate non-exempt securities that must be registered with the SEC. A revenue bond is a municipal bond and is exempt. Any bank offering or bank stock is also exempt.
An individual is employed by a corporation as a sales manager and participates in her company’s 401(k) plan. Over the years, she has contributed $40,000 into the plan and her employer has made matching contributions totaling $16,000. She retires at age 65, at which point the account value is $82,000. What is this individual’s tax basis in the plan?
$0
All contributions to 401(k) plans represents dollars that have never been taxed, since the contribution amounts reduce taxable income at the time the contribution is made. Earnings build tax deferred. When distributions commence, they are 100% taxable, because none of the dollars in the 401(k) have ever been taxed. The tax basis of the account is “0.” Only “after-tax” contributions are considered to be “cost basis.”
TRUE or False: Variable annuity salesmen must be registered.
TRUE
To sell variable annuity contracts (which are considered to be a non-exempt security by the SEC), not only must an individual be registered with the State Insurance Commission, but he must also be registered with FINRA through a broker-dealer. Persons who have passed the Series 6 (Investment Companies/Variable Annuities exam) or the Series 7 (General Securities) exam are licensed to sell these products. Commodities are not securities and are not regulated by FINRA. U.S. Governments are exempt securities, so they do not fall under FINRA jurisdiction unless the government securities dealer is also an FINRA member. Floor traders on recognized stock exchanges are registered through the exchanges. They are not regulated by FINRA. DMMs (Designated Market Makers) on recognized stock exchanges are registered through the exchanges.
Under MSRB rules, which of the following statements are TRUE regarding discretionary accounts?
I Securities may not be purchased on margin in such accounts
II Once discretion is approved, the customer is prohibited from entering his or her own orders
III A municipal sales principal may approve discretionary accounts
IV Discretionary authority ends upon the customer’s death
The best answer is III & IV.
There is no prohibition on margin transactions in discretionary accounts; nor is there a prohibition on a customer entering an order of his or her own choice in a discretionary account. Approval of such accounts may be made by either a municipal principal or a municipal sales principal. The power of attorney giving discretion to the broker lives until the customer revokes it in writing; or the customer dies.
A corporation wishes to place a large purchase order to buy its own stock for the company’s Employee Stock Option Plan (ESOP). The current inside market for the stock is $20.00 - $20.50. The last trade in the stock occurred at $20.10. What is the highest price at which the company can purchase its own shares?
$20.10
Rule 10b-18 sets the guidelines for corporation that wishes to buy back its stock in the market. The rules gives the company a “safe harbor” from being accused of trying to manipulate up the price of its stock.
Rule 10b-18 purchases, as they are known:
- Must be effected through 1 broker/dealer on any given day;
- Cannot be the opening transaction;
- Cannot be executed within 10 minutes of market close if the security is “actively traded” as designated by Rule 101 of Regulation M, otherwise the purchase cannot be executed within 30 minutes of market close;
- Must be effected at prices no higher than the current highest independent bid for that security or last reported sale price (whichever is higher);
- Cannot exceed 25% of the trading volume in the security that day (except for block purchases handled outside the normal flow of orders).
The last reported trade of $20.10 is higher than the current inside bid of $20.00, so the stock can be purchased at a price no higher than $20.10.
TRUE or False: All OTC securities are marginable
FALSE: All listed securities are marginable. In order for an over-the-counter security to be marginable, it must be approved for margin by the Federal Reserve. Currently, the Fed approves all NASDAQ securities for margin. Other selected OTC issues are also on the OTC “margin list.” All Government and Municipal issues are marginable under the maintenance margin rules of FINRA. The Federal Reserve cannot set margins for the issues because they are exempt from the Securities Exchange Act of 1934. The Act of 1934 only empowers the Fed to set margins for non-exempt securities.
A market maker in an OTC stock is quoting the stock at: $10.00 x 10 - $10.25 x 10
The quote represents the inside market. A customer enters an order to buy 200 shares of the stock at $10. Under SEC rules, the market maker must update its quote size to:
12 x 10
This customer order to buy cannot be filled right now because the best offer price is at $10.25 and this customer wants to pay no more than $10.00 per share. The dealer is already willing to buy 1,000 shares at $10.00. Since the customer wants to buy 200 shares at $10, the dealer’s bid must be updated to reflect the fact that there are now orders to buy 1,200 shares at $10 in the market. SEC rules require that the quote be updated within 30 seconds to reflect this. Do not confuse this with the 10-second trade reporting rule.
TRUE or FALSE: Upon customer request, a municipal dealer in a competitive bid offering must disclose the order priority provisions.
TRUE
There is no requirement to disclose the spread to customers in competitive bid offerings; this is only required for negotiated offerings. Upon customer request, syndicate members must disclose the order priority provisions. Thus, customers will have a better understanding of their chance for a “fill” of a new issue order, since they know the priority in which orders taken will be filled. Takedowns are never disclosed to customers. The names of the syndicate members are nowhere stated by the MSRB as being required to be disclosed to customers; but this information is readily available.
Under MSRB Rule G-27, a municipal principal is responsible for which of the following?
I Reviewing all order tickets promptly
II Reviewing all order tickets daily
III Reviewing customer accounts daily
IV Reviewing customer accounts frequently
The best answer is I & IV.
MSRB Rule G-27 (Supervision) requires that order tickets be approved by the principal “promptly”; and that customer accounts be reviewed “frequently.”
All investment company advertising must be filed with FINRA in what timeframe?
Under FINRA rules, Investment Companies, CMO, registered Structured Products and registered Direct Participation Program (DPP) retail communications must be filed 10 business days after first use. Options retail communications must be filed 10 business days prior to 1st use. All other retail communications must be filed 10 business days prior to first use for the first year of operations; thereafter, no filing is required, but they are subject to spot check.
According to rule SEC Rule 10b-10, which of the following MUST be disclosed on trade confirmations?
I The amount of any commission charged in an agency trade
II The amount of any mark-up in a principal trade of a non-NASDAQ security
III The capacity in which the firm acted
IV In an agency trade, the name of the other party to the trade and the time of the trade; or a statement that such information is available upon request
The best answer is I, III, and IV.
Under SEC Rule 10b-10, disclosure on confirmations must include the amount of any commission disclosed in an agency trade. There is no requirement to disclose the mark-up in a principal transaction unless the security is included in the NASDAQ System. The confirmation must disclose the capacity in which the firm acted (either agent or principal); and in an agency trade, the name of the other party to the trade and the time of the trade must be made available upon request.
A customer holds a mutual fund and receives a dividend distribution of $1,000 that is automatically reinvested. Which is TRUE regarding the tax treatment of the dividend?
The cash dividend of $1,000 is taxable at a maximum rate of 15%. It makes no difference if mutual fund dividends are reinvested or not - they are taxable. The maximum tax rate on cash dividends is currently 15%.
A registered representative enters an order ticket to buy 1,000 shares of ABC stock at $57 per share for a customer. Prior to the execution of the order, the representative discovers that the trade was supposed to be for 100 shares and not 1,000 shares. What must be done?
The old order must be canceled and a new order for the purchase of 100 shares must be entered.
If an order has been entered and is not yet executed, it can be canceled at any time. The proper procedure is to cancel the incorrect order and enter a new order with the correct information
FINRA supervisory rules require annual compliance reviews of the activities of all of the following EXCEPT:
A. Offices of supervisory jurisdiction
B. Non-supervisory branch offices
C. Registered representatives
D. Registered principals
The best answer is B.
Under FINRA supervisory rules, each Office of Supervisory Jurisdiction must be reviewed at least annually to ensure compliance with all industry regulations; and each registered representative and registered principal must be interviewed or participate in an annual meeting at which compliance matters that are relevant are discussed. FINRA’s Supervisory rules require periodic inspection of customer account records in the branch offices. Regarding inspection of the branches, supervisory branches must be inspected at least annually; non-supervisory branches must be inspected at least every 3 years.
Which of the following circumstances DOES NOT require municipal principal approval of a research report prior to distribution?
A. The report is being sent exclusively to individual clients
B. The report is being sent exclusively to an out-of-state bank
C. The report is being sent exclusively to the dealer’s trading department
D. The report is being sent exclusively to accredited investors
The best answer is C.
Research reports sent exclusively within a firm do not require prior municipal principal approval.
TRUE of FALSE: Under rule G-27, a municipal principal need not be physically located at each branch office where municipal business is conducted.
True.
A municipal principal does not have to be physically located at each branch office where municipal business is conducted.
Under which of the following situations would Reg FD not require an officer of a company to give a “disclosure notice”?
A. At a meeting of the company’s Board of Directors, where the officer is going to disclose the latest quarterly results
B. When taking outside analysts to a luncheon, where company results are going to be discussed
C. When talking to the issuer’s outside counsel about company legal matters
D. When talking to company employees in training sessions that include discussions of company results
The best answer is B.
Regulation FD (Fair Disclosure) requires that when an individual that is associated with a company is going to divulge any information that might have a market impact to a group of individuals, simultaneous disclosure must also be made to the general public (that is what is meant by a disclosure notice). The Board of Directors already has a fiduciary responsibility to the company, as does the company’s attorney and the company’s employees, so they do not come under the rule. However, research analysts do not have such a fiduciary responsibility to the issuer, and if any disclosures are going to be made to them, simultaneous disclosure to the public is also required.
A registered representative in your office is also the beneficiary of a trust that directs its securities trades to that representative for execution. This arrangement is:
permitted if the registered representative is the sole beneficiary of the trust.
The trustee is a fiduciary that must act in the best interests of the trust beneficiary or beneficiaries. The trustee chooses the broker to execute the portfolio transactions, and must act in the best interests of the beneficiary when doing so. If the trustee selects the broker that also happens to be the beneficiary of the trust, so be it! Note, however, that this gets stickier if there are multiple beneficiaries to the trust - because one beneficiary (the registered representative) would be getting a disproportionate benefit by earning the commissions on the directed portfolio trades; and the commission cost is being borne by the other beneficiaries in the trust. In such a case, then there is a conflict of interest that would prohibit such an arrangement unless the other beneficiaries approved.
All of the following are true about defined benefit retirement plans EXCEPT:
A. the plan must be written and comply with ERISA requirements
B. a contribution amount is required even if the company does not have a profit
C. if a terminated employee is 100% vested, then at retirement he or she must get 100% of their retirement benefit
D. the amount of annual contribution is actuarially set
The best answer is B.
The amount of annual contribution to a defined benefit plan is set by an actuary. The amount of contribution is based on the projected retirement obligation to the plan participants. It is not based on company profitability (or lack thereof!) The plan must be in writing and must comply with ERISA. Vesting usually occurs over 7 years or so, and once an employee is 100% vested, then at retirement age (even if they have left the company), that person is entitled to 100% of his or her benefit.
TRUE of FALSE: Under SEC Rule 10b-10, it is required to disclose whether or not a trade was solicited on customer confirmations for NASDAQ trades.
FALSE.
There is no requirement to disclose on a customer confirmation if the order was solicited or unsolicited (though many firms choose to do this).
The FINRA 5% Policy applies to all of the following transactions EXCEPT:
A. agency trades of over-the-counter securities
B. principal trades of over-the-counter securities
C. trades of exchange listed securities effected over-the-counter
D. IPO of a security that is NASDAQ listed
The best answer is D.
The FINRA 5% Policy applies to over-the-counter and exchange transactions in all securities except municipals. It does not apply to prospectus offerings (new issues).
TRUE or FALSE: In order for a security to be placed on the “Threshold Securities List”, the issue must exceed defined fail to deliver limits for 5 consecutive settlement days.
TRUE.
A Threshold List security is defined under Regulation SHO and is a security that is “hard to borrow” to effect a short sale. A security goes on the Threshold List if, for 5 consecutive settlement days, there are aggregate fails to deliver at the clearing agency of 10,000 shares or more and the aggregate position has a market value of $50,000 or more on that settlement day.
If a security is placed on the Threshold List and it is sold short, mandatory buy in is required if there is a fail to deliver on settlement and the security is not delivered for 13 consecutive settlement days.
Missing the market on an order placed “not held” would be considered what kind of error?
A market error.
A tender offer is being made for ABC shares. Exercise is required in order for the holder to tender which of the following?
A. ABC call options
B. ABC rights
C. ABC warrants
D. All of the above
The best answer is A.
Do not confuse the requirements for tender offers with the requirements for marking order tickets to sell “long”! Tender offers very often have a contingency where a specified percentage of the shares must be tendered for the deal to go through; and another contingency where if there is an over-tender beyond the stated percentage, the issuer can either accept the overage or can return the overage.
Under Rule 204 of Regulation SHO, if a security that is sold short is not delivered on settlement, mandatory buy-in must occur at the market:
Opening on T+3
Rule 204 of Regulation SHO mandates the buy in of all short sales where there is a fail to deliver on “T+3” (the morning of the business day after settlement), which is the same as S+1.
An 80-year old customer with an existing individual account comes into a branch office and tells his representative that: “My son has been telling me that I need to give him a power of attorney over my account because of my advanced age, and I want to keep him happy and keep him from putting me in a retirement home.” What should the representative do?
The representative should escalate the matter to the branch manager or compliance department of the firm.
FINRA requires that firms have an internal process to permit representatives to get advice from others as to what steps to take. These include:
- the representative should document the suspected diminished capacity and escalate immediately;
- the firm should have a clearly designated individual to whom the matter is escalated.
Under the FINRA 5% Policy, the mark-up percentage is calculated based upon the:
lowest ask price at that moment.
Under MSRB Rule G-32, which of the following must be disclosed to customers in a negotiated offering?
I Underwriting spread
II Initial offering prices of each serial maturity
III Amount of any fee received by the dealer for acting as agent for the issuer
IV Participation percentage of each syndicate member
I, II, & III.
In a negotiated offering, under MSRB Rule G-32, the following must be disclosed to customers:
- underwriting spread
- amount of any fees received in connection with the
underwriting - initial offering price of each maturity
There is no requirement under this rule to disclose the names of the syndicate members, nor their participation percentages.
Under FINRA rules, member firms must verify the accuracy and completeness of information contained in an applicant’s Form U4 no later than:
30 calendar days after the Form U4 is filed.
Which of the following statements are TRUE regarding discretionary accounts?
I Each discretionary order must be approved in writing by a principal prior to entry
II An order is not considered to be discretionary if the registered representative solely selects the price and time of execution
III Each discretionary account must have a written power of attorney from the customer on file
IV If a broker-dealer is underwriting its own securities, it is prohibited from selling that issue to discretionary accounts without the specific authorization of the customer
II, III, & IV
The first statement about discretionary account rules is untrue. Each discretionary order must be approved in writing by a principal “promptly,” that is, by the end of the day the order is entered. The other 3 statements are true.
Subscribers to the Consolidated Quotations Service receive listings of:
bid and ask quotes with their size for exchange listed stocks.
The Consolidated Quotations Service provides bid and ask quotes with sizes for all market makers in exchange listed stocks. These market makers are the Specialists/DMMs on the New York Stock Exchange, Specialists on regional exchanges where the stock may also be listed (e.g., the Philadelphia Exchange), and Third Market Makers such as Weeden and Jefferies and Co.
A market maker engages in transactions for institutional investors, including VWAP transactions where the market maker is permitted to position its inventory account and hedge to fill the institutional customer’s VWAP orders. The market maker must obtain written permission from the institutional client to engage in these transactions:
Annually.
FINRA states that “the member need not obtain such “affirmative consent” on a transaction-by-transaction basis. However, the member should, annually, take steps to have customers confirm consent.”
If correspondence is flagged for review by a firm’s electronic surveillance tool, this review can be done by whom:
can be delegated to an individual, which need not be registered.
