Regulations to know

Question 1

Research reports must disclose whether the firm that’s issuing the report has

Answer 1

Whether the firm that’s issuing the report has an ownership interest in the issuer of 1% or greater. Note, the reports must also disclose whether the research analyst has any amount of ownership interest in the issuer.

Question 2

According to the Access Rule (SEC Rule 610), the maximum fee a market center may charge to permit access to quotations is

Answer 2

According to the Access Rule (SEC Rule 610), the maximum that an SRO trading facility or market center is permitted to charge an order router for accessing its quotes is $0.003. This rule applies regardless of stock price or share amount. The rule was designed to prevent market centers from charging discriminatory prices for access to protected quotations, which would be unfair to market participants complying with the Order Protection Rule

Question 3

The time limitation for submitting disputes to arbitration is

Answer 3

Six years from the time the act occurred

Question 4

The brother-in-law of a registered representative may purchase shares of an initial public offering

Answer 4

Non-supported immediate family members may purchase new issues (IPOs) if the purchase is made though a different broker-dealer.

Question 5

Equity research reports must

Answer 5

A Supervisory Analyst (Series 16) may approve research reports related to debt and equity securities, as well as other research-related communications

Question 6

When does a principal need to approve an order in a discretionary order

Answer 6

By end of day A principal of a broker-dealer must approve all trades promptly, which means on the day the trade is executed. It is not required to obtain principal approval for a discretionary transaction before the trade, unless it is required under a specific broker-dealer’s internal procedures

Question 7

In which of the following situations would an exemption be available to the locate requirement under Regulation SHO

Answer 7

There are exceptions under Regulation SHO to the locate requirement regarding the acceptance of a short sale by a broker-dealer. They are:
Short sales effected by a market maker in connection with bona fide market making activities
Short sales accepted from another broker-dealer in which that broker-dealer accepted responsibility to comply
Short sales of restricted securities under Rule 144 in which the person intends to deliver as soon as the restrictions have been removed

Question 8

A broker-dealer that extends credit to a customer must disclose which of the following details

Answer 8

A broker-dealer that extends credit to a customer must disclose the annual rate that may be charged and the method of determining the debit balance on which interest will be charged. Since the rate will fluctuate, the amount of interest cannot be determined. A firm is not obligated to pay interest on a client’s credit balance.

Question 9

A person who has violated the insider trading rules is subject to a maximum civil penalty of

Answer 9

Disgorgement and up to three times the amount gained or loss avoided

Question 10

The Trust Indenture Act of 1939 applies to certain

Answer 10

The Trust Indenture Act of 1939 regulates the public issuance of the debt of corporate securities that are sold on an interstate basis if the value exceeds $10 million. Exempt are offerings that are sold under Rule 144A to qualified institutional buyers (QIBs) and offerings that are sold outside of the U.S. under Regulation S.

Question 11

An associated person has left her firm and a Form U-5 has been filed. For how long is her former employer required to report event(s) that are discovered subsequent to her termination?

Answer 11

Member firms are under an ongoing obligation to report rule violations that are discovered after an employee has left the firm.

Question 12

Under the Public Disclosure Program

Answer 12

The Public Disclosure Program is a service enabling private investors to obtain information pertaining to registered individuals in the securities industry. By calling a toll-free telephone number or visiting a website (BrokerCheck), investors can inquire into the backgrounds of securities professionals, including brokers who may be soliciting new customers through cold calling.

Question 13

If a firm places a temporary hold on a customer’s account

Answer 13

If a firm places a temporary hold on a customer’s account, it can apply to either the entire account or specific disbursements. If the firm places the temporary hold, it must permit disbursements from the account if there is no reasonable belief that financial exploitation is occurring (e.g., paying normal bills).

Question 14

The SIPC logo must be displayed at which of the following locations?

Answer 14

At each branch office

Question 15

Pursuant to SEC Rule 15c3-3, an introducing broker-dealer must take which of the following actions upon receipt of customer funds and securities?

Answer 15

An introducing broker-dealer may accept funds and securities from customers but may not hold them. Such items must be transmitted promptly to the clearing broker.

Question 16

The Securities Exchange Act of 1934 is concerned with

Answer 16

Registration of broker-dealers

Question 17

Which of the following organizations provides clearing services for equity securities?

Answer 17

The National Securities Clearing Corporation (NSCC) provides clearing services for the majority of broker-to-broker trades in the United States. The NSCC is also a subsidiary of the Depository Trust and Clearing Corporation (DTCC) that provides custodial services.

Question 18

When does a principal need to approve an order in a discretionary account?

Answer 18

By day’s end

Question 19

A registered representative’s registration was terminated one year ago. If this person changes his residential address, what’s his obligation?

Answer 19

FINRA maintains jurisdiction over a person’s registration for two years after the person leaves a firm; therefore, the representative is required to report any residential address changes that occur within that two-year period.

Question 20

Final determination on whether a security is in good deliverable form is made by the

Answer 20

The ultimate decision on whether a security is in good deliverable form is made by the transfer agent.

Question 21

Nasdaq Level 1 provides subscribers with

Answer 21

The inside market on a security for which there is a minimum of two market makers

Question 22

Which of the following statements is TRUE regarding the process by which an associated person can apply for eligibility if he’s notified that he’s subject to statutory disqualification?

Answer 22

FINRA evaluates the application and makes a recommendation to the National Adjudicatory Council (NAC) to either approve or deny special permission. If FINRA approves the application, the SEC must review and acknowledge this decision prior to it becoming effective.

Question 23

A broker-dealer acting for a customer purchases stock from a market maker at $25 and sells it to a customer at $25 plus commission. The broker-dealer

Answer 23

If the broker-dealer is charging a commission, it is acting in an agency capacity. The amount of the commission must be disclosed to the customer.

Question 24

A clearing broker-dealer must file a notice under the provisions of Rule 17a-11 if which of the following situations occurs?

Answer 24

Rule 17a-11 requires a broker-dealer to file a notice if its aggregate indebtedness exceeds 12 times its net capital or if the dollar amount of net capital is less than 120% of the minimum requirement. If a clearing broker-dealer’s net capital is less than $300,000 (120% of the $250,000 minimum), a notice must be filed within 24 hours. The broker-dealer must also file if it has books and records that are not current or has material inadequacies in its accounting or control procedures. Rule 17a-11 requires a broker-dealer to send immediate telegraphic notice to the SEC, followed by a written report if its books and records are not current. If it is informed of any material inadequacy in its internal procedures, notice must be filed within 24 hours followed by a proposed solution within 48 hours. A system outage would need to be reported and would result in an excused withdrawal from market making.

Question 25

What's the primary objective of Regulation SHO?

Answer 25

In early 2004, the SEC adopted Regulation SHO, which modernizes the rules and creates uniform standards regarding short sales. Regulation SHO applies to equity securities and any security that’s convertible into an equity security

Question 26

Under Rule 103 of Regulation M, a passive market maker's daily purchase limit (DPL) is the

Answer 26

Greater of 30% of its average daily trading volume (ADTV) or 200 shares

Question 27

For a broker-dealer, the total amount of subordinated loans outstanding cannot exceed

Answer 27

70% of the broker-dealer's total capital for a period exceeding 90 days

Question 28

Broker-dealers are required to

Answer 28

Report both customer and proprietary short positions twice per month

Question 29

Under the anti-dilution provisions of the New Issue Rule, a restricted person may purchase shares of an equity IPO if

Answer 29

He owned the shares for at least one year prior to the effective date and agrees not to sell the shares for three months following the effective date

Question 30

Which of the following is considered a blockbuster trade?

Answer 30

A blockbuster trade is one involving $1 million or more to be executed through a broker-dealer's clearing firm. This trade can be held for 15 minutes. If the clearing firm doesn't respond by the end of that period, the trade is accepted

Question 31

DTCC clear's and settles transactions in Nasdaq securities through the

Answer 31

Market makers must clear and settle transactions through a clearing agency that uses a Continuous Net Settlement (CNS) System.

Question 32

Which of the following types of accounts is permitted to purchase an initial public offering of equity securities?

Answer 32

One of the exemptions that's found in the New Issue Rule allows an equity IPO (initial public offering) to be sold to an account if the beneficial owners are restricted persons and their ownership of the account doesn't exceed 10%. The rule doesn't distinguish between the job titles of employees of a broker-dealer

Question 33

Under FINRA's communication rules, which of the following is considered an institutional customer?

Answer 33

All investors with assets of at least $50 million

Question 34

Notification to the SEC regarding sales that are executed under Rule 144 are NOT required to be filed if the amount of securities being sold does NOT exceed

Answer 34

5,000 shares and the dollar amount does not exceed $50,000

Question 35

Which of the following situations BEST describes Painting the Tape?

Answer 35

Individuals entering into transactions in which ownership does not actually change to give the impression of trading volume in a security

Question 36

Which of the following statements is TRUE concerning the margin requirements for portfolio margin accounts?

Answer 36

If the client wants to maintain a position in unlisted derivatives, the minimum equity is $5,000,000.

Question 37

Two market makers sequentially buy and sell the same security with each other to increase the ADTV for a thinly traded issue

Answer 37

Painting the Tape

Question 38

American Depositary Receipts

Answer 38

American Depositary Receipts (ADRs) facilitate U.S. investment in foreign securities. When the foreign securities are deposited in a U.S. bank based in that country, a receipt for those securities is issued and traded in the U.S. as if it were the foreign security itself.

Question 39

Confirmations on regular-way transactions must be sent to customers no later than the

Answer 39

Completion of the transaction

Question 40

A prospective customer wants a broker-dealer to stop calling. When must the firm place the prospect on it's Do Not Call List?

Answer 40

Within 30 days

Question 41

Reclamation

Answer 41

he process of returning securities that were previously accepted on the settlement date.

Question 42

If the buying broker-dealer fails to pay for securities that have been delivered by settlement date

Answer 42

The selling broker-dealer may without notice initiate a sell-out immediately

Question 43

What's the maximum fine that may be imposed by FINRA if an RR is found guilty of violating a rule?

Answer 43

Unlimited

Question 44

Which of the following statements is TRUE regarding the disclosures on the account statement of a customer who owns shares of an unlisted REIT?

Answer 44

Firms may use an estimated value based on the assets and liabilities of the REIT that's performed at least annually, conducted by a third-party expert or service, and derived from a methodology that conforms to standard industry practice.

Question 45

Due to the unique characteristics of collateralized mortgage obligations (CMOs), FINRA requires specific disclosures in their advertisements, including:

Answer 45

the CMO cannot be compared to any other types of investments, the term collateralized mortgage obligation must be included in the product name, the yield-to-average life will fluctuate due to mortgage repayments and changes in interest rates, and that any applicable government agency backing only relates to the face value of the securities, not any premium paid.

Question 46

Under Regulation M, which of the following are the minimum standards for a stock to be classified as actively traded?

Answer 46

Under Regulation M, an actively traded security has an ADTV of at least $1 million and a public float of at least $150 million.

Question 47

13D

Answer 47

Filed when an individual or group acquires more than 5% of an issuer’s equity securities Within five business days after the acquisition, the issuer, the exchange on which the securities are traded, and the SEC must be notified of the following: ▪ The identity of the person or group that’s acquiring the securities ▪ The source of the funds ▪ The purpose of the transaction

Question 48

13G

Answer 48

This abbreviated filing to 13D is typically filed by institutional investors that don’t plan on influencing or controlling the issuer (mutual funds)

Question 49

13F

Answer 49

Filed when an institutional investment manager exercises discretion over at least $100 million in equity securities A quarterly filing which identifies the Section 13(f) securities being held by the institutional investment manager. These securities include: ▪ Exchange listed stocks, as well as certain options and warrants ▪ Shares of closed-end investment companies (NOT open-end) ▪ Certain convertible debt securities

Question 50

Form 8-K

Answer 50

(current report for major events) – Company must file within four business days of the event

Question 51

FORM U6

Answer 51

Form U6 is used by a regulator to report:  Disciplinary actions against representatives and firms  Final arbitration awards against representatives and firms

Question 52

Bank Secrecy Act Currency Transaction Report (BCTR)

Answer 52

Filed for all cash transactions executed by a single customer during one business day that exceed $10,000 (also filed for structured transactions)  Filed within 15 calendar days

Question 53

Suspicious Activity Report (SAR)

Answer 53

Filed whenever a transaction (or group of transactions) equals or exceeds $5,000 and the firm is suspicious  Filed within 30 calendar days  Suspicious activity should also be reported to a principal

Question 54

Maximum sales charge that may be assessed for a fund without a 12b-1 fee is

Answer 54

8.5%, however, the fund must offer: - Quantity discounts (breakpoints) - Rights of accumulations

Question 55

Form 3

Answer 55

Filed when a person initially becomes an insider.

Question 56

Form 4

Answer 56

Filed by any insider of a corporation who buys or sells shares of his company. The form must be filed no later than the second business day following the transaction.

Question 57

Form 5

Answer 57

An annual filing by insiders. An insider is defined as any person who is an officer, director, or owner of more than 10% of the equity.

Question 58

Section 13(d) of the Exchange Act requires any person that acquires more than 5% of an issuer's equity securities to notify the following:

Answer 58

The issuer Each exchange on which those securities are traded The SEC

Question 59

Which orders are reduced on the ex-dividend date?

Answer 59

buy limits, sell stops, and, if the market permits them, sell stop limit orders.

Question 60

A broker-dealer that extends credit to a customer must disclose which of the following details?

Answer 60

The annual interest rate that may be charged and the method of determining the debit balances on which interest will be charged

Question 61

Which of the following may suspend or expel a member firm from FINRA membership?

Answer 61

Both a hearing panel and the National Adjudicatory Council may suspend or expel a FINRA member firm.

Question 62

Stock that's acquired by an underwriter as compensation may be sold

Answer 62

If a broker-dealer receives securities as compensation in connection with the sale of a new issue, the securities cannot be sold for a period of six months from the effective date. Options or warrants that are received as compensation may be exercised at any time.

Question 63

Which of the following statements is TRUE concerning the reporting of riskless principal and net basis transactions?

Answer 63

A riskless principal transaction is a trade in which a broker-dealer executes a customer's order that it is holding by buying (or selling) a security and then simultaneously selling (or buying) that security for the customer at the same price (plus a markup, which must be disclosed to the customer). A securities transaction for a riskless principal trade is reported under a single report. A net basis transaction involves a broker-dealer filling a customer's order that it is holding by buying (or selling) a security at one price and selling (or buying) that security for a customer at a different price. (Only the net price is disclosed to the customer.) A net basis trade requires two separate reports. There are specific consent requirements for a broker-dealer to engage in net basis trading with customers. Customer consent varies depending on whether the customer is institutional or retail.