Securities Industry Regulations Flashcards
All the following would be a red flag for possible identity theft, except:
A
Customer presents a driver’s license that appears to have been altered
B
Warnings received from consumer reporting agencies
C
Old address on driver’s license
D
Customer provides suspicious personal identifying information
C
Old address on driver’s license
Firms must have reasonable policies and procedures to train employees on how to detect potential identity theft. A fraud alert can make it harder for an identity thief to open accounts so representatives will look for alerts, notifications, or other warnings received from consumer reporting agencies or service providers, such as fraud detection services. At account opening, presentation of suspicious documents, such as documents that appear to have been altered or forged would be a red flag. People do move and don’t always update their address immediately, so an old address on a driver’s license, by itself, may not indicate a potential problem. The representative may ask for confirmation of address change if the address provided does not match the identification or seems suspicious in nature. Unusual use of, or other suspicious activity related to, a covered account may also be a red flag
Which of the following is not a requirement of the Bank Secrecy Act?
A
A SAR must be filed by the broker-dealer to the Financial Crimes Enforcement Network
B
Each member firm must establish and maintain procedures that will detect money laundering
C
Firms must establish and maintain policies to comply with the Bank Secrecy Act
D
Member firms must review these procedures quarterly
D
Member firms must review these procedures quarterly
While the procedures must be reviewed and kept up to date, there is no requirement for quarterly review.
What type of firms are not members of SIPC?
A
Broker-dealers that clear trades for other firms
B
Broker-dealers that sell bonds
C
Broker-dealers that sell only mutual funds or variable annuities
D
Broker-dealers that sell stocks
C
Broker-dealers that sell only mutual funds or variable annuities
All broker-dealers that sell stocks or bonds or clear these transactions must be members of SIPC. Member firms must advise all new customers in writing at the time of opening an account that they may obtain more information and the SIPC brochure by contacting SIPC. They must provide the SIPC website address and telephone number. Members must provide all customers with this same information in writing at least once per year. Member firms must display an official sign showing membership at each location. They cannot imply that SIPC membership confers approval or a recommendation concerning any security. Broker-dealers that sell only mutual funds or variable annuities only are not members. Firms that are not members must disclose that they are not members.
Who is responsible for approving retail communications regarding mutual funds which are mailed to a customer?
A
The fund’s sponsor
B
FINRA
C
The associated person provided the piece goes to 49 or fewer retail investors
D
A registered principal
D
A registered principal
The approval of all advertising and sales literature, is the ultimate responsibility of a firm’s designated principal. An RR would never approve their own sales literature.
All the following statements are true regarding recordkeeping requirements, except:
A
Member firms may preserve records in non-erasable format
B
If a time period is not specifically stated for a particular record, the default time period of retention is 3 years
C
A separate duplicate copy can be maintained in an alternate location
D
Member firms may preserve records in a non-rewritable format
B
If a time period is not specifically stated for a particular record, the default time period of retention is 3 years
Acceptable storage media includes original hard copies, microfilm, microfiche, and optical disc. As an alternative, firms may maintain a time-stamped audit trail system. A separate duplicate copy needs to be maintained in an alternate location or a backup electronic recordkeeping system must be in place. Firms are allowed to utilize a third party to maintain records if the third party provides proper maintenance and allows unlimited and unhindered access of these records to the firms. If a time period is not specifically stated for a particular record, the default time period of retention is 6 years. Member firms must keep the most recent 2 years’ records readily accessible and available for inspection.
Regulation Best Interest (BI) was established to protect:
A
Principals that sign customer new account forms
B
Retail customers
C
Institutional investors
D
Earnings on investments
B
Retail customers
To bring more transparency to investors regarding their relationships with broker-dealers, the SEC created Regulation Best Interest (BI) and mandated the use of a new customer relationship summary form (Form CRS). Investment advisers are currently under similar regulation based on fiduciary obligation standards. Regulation BI established new standards for investment firms when dealing with retail customers. The goal was to increase transparency when recommending an investment or investment strategy and insure that firms are acting in the best interest of all customers. It stated that there are 4 components needed to meet the general obligations of Regulation BI.
A registered representative has decided to help their cousin sell units of a condominium limited partnership for which the RR will be compensated. Which of the following is not required by FINRA rules?
A
The RR must provide written notification of these activities to her employer
B
The RR must receive FINRA approval to perform these activities
C
The RR must receive written permission to perform these activities from her employer
D
The transactions must be recorded on the broker-dealer’s books
B
The RR must receive FINRA approval to perform these activities
Since limited partnership interests are securities, such transactions would be private securities transactions. Under FINRA rules, the actions that must be taken depend on whether the RR is being compensated for the transaction. If the RR will receive compensation, the rep must give their firm written notification of involvement and receive written permission to participate in the transaction. The transaction must be recorded on the broker-dealer’s books and supervised in the usual fashion.
Which of the following does not need to be supplied to customers at account opening and at least once per calendar year?
A
FINRA website address
B
FINRA’s BrokerCheck hotline number
C
A registered representative’s history of residence and social security number which is not included on FINRA’s BrokerCheck
D
A statement regarding the availability of an investor brochure that includes information describing FINRA’s BrokerCheck
C
A registered representative’s history of residence and social security number which is not included on FINRA’s BrokerCheck
Personal information, such as history of residence and Social Security number, are not included on FINRA BrokerCheck. If a customer cannot access BrokerCheck, a FINRA toll-free number must be provided. Broker-dealers must supply customers with the following information at account opening and least once per calendar year: FINRA’s BrokerCheck hotline number; FINRA website address; A statement regarding the availability of an investor brochure that includes information describing FINRA’s BrokerCheck
All the following are required by FINRA when submitting a request for initial registration for an associated person, except:
A
Proof of successful completion of background and drug screens
B
Obtaining the applicant’s manual signature on Form U4
C
Submission of the applicant’s fingerprints
D
Electronic submission of Form U4 through the Central Registration Depository
A
Proof of successful completion of background and drug screens
FINRA requires that member firms submit a completed Form U4 for each newly registered associated person. This form is submitted electronically through the Central Registration Depository, sometimes known as CRD or WebCRD. Each applicant must submit their fingerprints and a manually signed copy of Form U4 to their member firm as part of their application process. Although many broker-dealers require background checks and/or drug testing of their employees or potential employees, neither is required by FINRA.
According to FINRA’s rules on communications, how long must correspondence be retained by a member firm?
A
3 years
B
2 years
C
5 years
D
1 year
A
3 years
Copies of retail communications and correspondence must be kept for 3 years total, with the first 2 years in an easily accessible location.
Which of the following communications with the public does not need to be approved by a principal?
A
Research report that recommends the purchase of a specific stock
B
Form letter that will be sent to all customers recommending investing in stocks, bonds, and money market investments
C
Prospectus sent to customer who requested information about a mutual fund
D
Advertisement placed in the newspaper that states “Now is the perfect time to open an IRA account”
C
Prospectus sent to customer who requested information about a mutual fund
Communications with the public can be defined as either correspondence or retail communications. Correspondence is defined as a communication made available to 25 or fewer existing or prospective clients and is subject to post use review and approval (provided the firm has appropriate supervisory procedures in place). Retail communications are defined as a communication made available to more than 25 existing or prospective retail clients which includes advertising and sales literature. Retail communication must be approved by a principal before the earlier of its filing with FINRA or first use. Sales literature is a type of retail communication where the broker-dealer controls the distribution of this material. It is provided to a targeted audience, such as group emails, text messages, and form letters to more than 25 prospects. Research reports and brochures are other examples of sales literature. Advertising is retail communication that is distributed via mass media.
Member firms must establish, implement, and maintain a business continuity plan that:
A
Is specific to their own business model and that meets the minimum requirements set by FINRA
B
Ensures that clients are unaware of any business disruption
C
Must be sent to FINRA on an annual basis for review and approval
D
Meets the specific guidelines set by FINRA
A
Is specific to their own business model and that meets the minimum requirements set by FINRA
FINRA rules mandate that member firms create and maintain business continuity plans. The basis of the rule is to ensure that all customers are provided with a document that explains how a business interruption will be handled. Each firm should prepare a plan that is specific to their own business model. FINRA states the minimum requirements but allows firms to customize their BCP to meet their needs.
Which of the following is not an acceptable method of allowing consumers to opt out under Regulation S-P if it is the only method provided?
A
Requiring the consumer to write their own letter to exercise their opt-out right
B
Providing a reply form with the opt-out notice
C
Providing a toll-free telephone number for consumers to call and opt out
D
For consumers agreeing to electronic delivery of information, providing a form that can be sent by email or through a procedure on the firm’s web site
A
Requiring the consumer to write their own letter to exercise their opt-out right
Consumers must be given the ability to opt out of the firm’s policies on disclosing nonpublic financial information to nonaffiliated third parties. The opt-out procedures must be reasonable. Opt-out procedures that are not reasonable include requiring a consumer to write their own letter to exercise their opt-out right, if that is the only opt-out method provided.
Which of the following statements concerning a text message is correct?
A
Due to their written form, all text messages are considered sales literature and subject to internal approval prior to distribution
B
A text message is considered correspondence and must be filed with FINRA within 10 days of being sent
C
A text message is considered correspondence and may be subject to spot checks or random sampling by the firm
D
Text messaging is exempt from FINRA rules since the medium is unregulated
C
A text message is considered correspondence and may be subject to spot checks or random sampling by the firm
An individual text message is considered correspondence under FINRA rules. Correspondence is subject to house rules which may involve spot checks or sampling. Correspondence is not required to be filed with either FINRA or SEC. If a text message is sent to a large group (more than 25 prospective retail customers), the communication would be considered a retail communication and subject to internal review as well as FINRA filing rules.
Under FINRA rules, which of the following actions would constitute “selling away?”
A
Selling an international mutual fund in an IRA to a BD’s customer
B
Buying and selling the same security in different markets
C
Failing to obtain a firm’s written permission prior to engaging in any outside employment
D
Selling limited partnerships not offered by their firm without notifying their employer
D
Selling limited partnerships not offered by their firm without notifying their employer
In some cases, an RR may wish to sell a product that is not typically offered by their firm (e.g., private placements, or limited partnerships). FINRA requires all RRs to notify their employer of these activities and obtain written permission if compensated. The term “selling away” refers to an RR who engages in these outside sales without notifying their employer. Buying and selling the same security in different markets is known as arbitrage.
