Self-Regulatory Organizations Flashcards
Which of the following describes statutory disqualification of a registered person under SEC rules?
[A] An investor invests enough to qualify for the sales load discount required by a mutual fund.
[B] The suspension of a registered person from registration with a FINRA member due to SEC rule violations.
[C] The failure to determine adequate suitability information from a customer as required by securities law.
[D] Violations of a broker-dealer firm’s policies by a registered person.
[B] The suspension of a registered person from registration with a FINRA member due to SEC rule violations.
Statutory Disqualification results in suspension of a registered person with an FINRA member firm for violation of SEC rules. Reinstatement of registration would have to come from the SEC.
Ch.10 Sec.3
An unregistered individual may perform all of the following functions EXCEPT:
[A] Call a client to clear up an administrative inquiry made on the account.
[B] Hold a semi-annual meeting with a registered representative’s client and update the investment objectives of the account.
[C] Speak with walk-in clients and ask them if they would be interested in discussing investment ideas with a registered representative of the firm.
[D] Process and physically mail out a registered representative’s invitations to an upcoming seminar on investing.
[B] Hold a semi-annual meeting with a registered representative’s client and update the investment objectives of the account.
Holding a semi-annual meeting with an RR’s clients to update their investment objectives or goals would not fall under activities that are permissible by an unregistered individual. Administrative and clerical duties would not require registration, and these are what we are seeing when the unregistered individual clears up an administrative inquiry, asks prospective clients if they would like to speak with an RR, or physically mails out an RR’s invitations.
Ch.10 Sec.2
Cam is an RR who wants to open an account at another member firm. According to FINRA rules, how must Cam notify the executing member firm (where the account will be opened) that he is an employee of another member firm?
[A] Notification must be made within seven calendar days of the initial transaction.
[B] Notification is satisfied by sending a duplicate confirmation to the employing member firm.
[C] Notification is satisfied by sending a duplicate account statement at the end of the month.
[D] Notification must be made in writing before the account is opened.
[D] Notification must be made in writing before the account is opened.
FINRA Rule 3210 requires the employee to receive written approval from his employer before opening an account at another member firm (executing member firm). The employee is also required to notify the executing member firm that he is employed at another member firm in writing before the account is opened.
Ch.10 Sec.2
Riskless or simultaneous transactions by broker-dealers are:
[A] not permitted unless they are profitable for the client.
[B] permitted if they conform to the 5% Markup Policy.
[C] not permitted.
[D] permitted only in connection with an underwriting.
[B] permitted if they conform to the 5% Markup Policy.
Riskless or simultaneous transactions by broker-dealers are transactions where the firm is not a market maker in the security being traded and the firm goes to another firm to acquire the stock for a client. This transaction would have to conform to the 5% Mark-up policy.
Ch.10 Sec.8
Ernie receives a list of all of the shareholders of ABC Company. He wants to use this list to prospect for new clients. Before he does this, he must
[A] receive written approval from his supervisor.
[B] contact FINRA for approval.
[C] obtain permission from ABC Company.
[D] wait 30 calendar days before contacting the shareholders.
[C] obtain permission from ABC Company.
FINRA rules require that the member firm receive permission from the issuer (ABC Company) before using the list. Supervisor and FINRA approval are not required, and there is no wait period.
Ch.10 Sec.10
If an employee of an FINRA member firm wants to engage in business activities similar to the business activities offered by the firm, this may be done
[A] With written permission of the member firm.
[B] If it is not a conflict of interest with the employee’s regular duties.
[C] If the employee is not compensated for such activities.
[D] Only if the activities are for a non-profit organization.
[A] With written permission of the member firm.
This could only be done with written permission of the member firm and generally the firm will not allow such activities. This would be considered to be “selling away” which is covered under the Private Securities Transactions rules of FINRA
Ch.10 Sec.2
Which of the following communications between a registered representative and individual investors would be considered a retail communication according to FINRA?
[A] During the course of a business day, a registered representative composes a mass instant message to more than 25 prospects and sends the message on an instant messaging system.
[B] Over a 30-day period, a registered representative sends one specific prospect an email which is personalized in nature and addresses the specific client’s needs.
[C] During the course of a business day, a registered representative sends one specific prospect an instant message using an instant messaging system.
[D] In one business day, a registered rep sends out a hard copy summary of investment highlights regarding a stock recommendation to fewer than 25 current customers only.
[A] During the course of a business day, a registered representative composes a mass instant message to more than 25 prospects and sends the message on an instant messaging system.
According to FINRA, a “retail communication” includes any written (including electronic) communications to more than 25 retail investors (whether customers, prospects or both) within any 30 calendar day period. This category includes advertisements and sales literature and independently-prepared reprints.
Ch.10 Sec.16
Declan had a business in Ireland and recently sold his business and moved to the United States. He opens a new account with Patrick who is a registered representative with ABC Broker-Dealer. Patrick is reviewing Declan’s investment objectives and financial needs. Which of the following statements would be inappropriate for Patrick to tell Declan?
[A] “There are advantages to investing in mutual funds from the same family of funds.”
[B] “Growth funds carry the potential for higher levels of returns than balanced funds, but growth funds also carry more risk.”
[C] “The performance of this fund over the past 10 years is well in-line with your investment objectives, but past performance is not always indicative of future performance.”
[D] “Variable annuities are insurance-based products, so these investment products offer growth related to the market and also essentially insure the holder against significant loss.”
[D] “Variable annuities are insurance-based products, so these investment products offer growth related to the market and also essentially insure the holder against significant loss.”
RRs are never permitted to tell clients that securities products are “insured” or “essentially insured” against loss. Variable annuities are insurance-based products, but the holder of a variable annuity can experience investment losses that can completely deplete the investor’s principal invested. Each of the other statements would be acceptable.
Ch.10 Sec.18
Under the FINRA Retail Communications rules, all of the following communications must be filed with FINRA at least 10 days prior to first use EXCEPT:
[A] Investment companies that use self-created rankings
[B] Option retail communications used prior to the delivery of the ODD
[C] CMOs
[D] Securities futures
[C] CMOs
All choices except “C” must be filed with Finra “prior” to first use. Retail communications regarding CMO’s must be file “within 10 days of first use”.
Ch.10 Sec.16
A broker-dealer’s Business Continuity Plan is designed to address
[A] fraudulent activity of customers and how this activity may negatively affect a firm’s finances.
[B] margin deficiencies associated with the firm’s account.
[C] issues such as natural disasters that can affect the most basic aspects of how the firm functions.
[D] potential obsolescence tied to technological changes in the financial services industry.
[C] issues such as natural disasters that can affect the most basic aspects of how the firm functions.
Business Continuity Plans are designed to address natural disasters and other forms of disruption that may occur due to unforeseen circumstances. They include planning for alternative means of communication, data back-up and recovery methods, and even alternative physical locations for an office. BCPs do not deal with day-to-day business issues such as customer fraud, margin deficiencies, or technological advancements.
Ch.10 Sec.4
All of the following Retail Communications must be filed for approval with FINRA within 10 days of first use EXCEPT
[A] public direct participation programs.
[B] registered CMOs.
[C] registered investment companies.
[D] securities futures.
[D] securities futures.
Retail communications for securities futures must be filed with FINRA at least 10 business days PRIOR to first use. All other choices require filing within 10 business days of first use.
Ch.10 Sec.16
Advertising and sales literature concerning registered investment companies and variable annuities must be filed with FINRA
[A] 10 days prior to use.
[B] within 10 days of first use.
[C] 15 days prior to use.
[D] within 15 days of first use.
[B] within 10 days of first use.
Advertising and sales literature relating to investment companies must be filed with FINRA within 10 days of first use.
Ch.10 Sec.16
Which of the following statements about Self-Regulatory Organizations (SROs) is FALSE? SROs
[A] are funded by member firms.
[B] are part of a Federal agency.
[C] allow member firms to vote.
[D] set penalties for rule violations.
[B] are part of a Federal agency.
SROs are NOT part of a federal agency. SROs are funded by member firms, set rules, regulations, and penalties, and allow their members to vote on certain matters. SROs regulate the industry, but do not regulate profitability or set specific transaction costs such as commissions and mark-ups/mark-downs. Examples of SROs include FINRA, the MSRB, and national exchanges such as the NYSE and AMEX.
Ch.10 Sec.1
All of the following are TRUE statements regarding the use of investment analysis tools by a FINRA member firm EXCEPT:
[A] The member firm must provide FINRA’s Advertising Regulation Department with access to the tool.
[B] There are no filing requirements.
[C] They include a description of the tool’s limitations and key assumptions.
[D] They include disclosures that predictions or projections of future performance are based on actual results obtained by others.
[D] They include disclosures that predictions or projections of future performance are based on actual results obtained by others.
Hypothetical scenarios are permitted in reports produced by investment analysis tools that meet certain standards. Predictions or projections, however, cannot be based on actual results obtained by others.
Ch.10 Sec.16
Tanu, a registered representative, has a firm-provided mobile device. He texts a customer after market close about a research report just published by the firm in which the analyst upgraded Daegu Inc. shares. The RR receives no response. The next day the clients texts the RR inquiring whether Tanu bought the shares for her account. The RR replies he received no such instruction and the client gripes that the RR owes her an execution. According to FINRA rules, would this be considered a customer complaint?
[A] There is no basis for a customer complaint because texting does not qualify as a “written complaint” given FINRA’s guidance on this topic.
[B] Because the RR failed to follow the customer’s instruction this would be considered a customer complaint.
[C] The customer’s concern is invalid as the RR communicated with the customer after market close and would not have been able to buy shares even if he had received the text.
[D] A customer grievance expressed in a text message would be considered a customer complaint.
[D] A customer grievance expressed in a text message would be considered a customer complaint.
The customer has expressed a grievance (complaint) via text messaging. Similar to email, a grievance in a text messages would be considered a written complaint. Regarding the answer choice on the RR failing to follow a customer’s instruction, that is a conclusion that cannot be determined at this point as the member firm must review and respond to the customer complaint. The grievance that the customer states in the text (that she feels she is owed an execution) makes it a complaint not the presumption of the RR’s guilt.
Ch.10 Sec.4
