Series 24 - Sample Questions

Question 1

In order for an issuer to be eligible for listing on the NYSE, the issuer must have at least how many publicly held shares outstanding?

a) 100,000
b) 1,000,000
c) 1,100,000
d) 2,200,000

Answer 1

C. 1,100,000

Question 2

Which of the following licenses allow the holder to approve mutual fund advertising (can be multiple)?
I Series #9/10
II Series #24
III Series #26
IV Series #27

Answer 2

Series #24 (General Principal) and Series #26 (Invest Co. Principal) can approve investment company advertising

Series #9/10 Branch Office Manager cannot approve advertising, only correspondence

Series #27 Financial and Operations Principal prepares the firm’s FOCUS reports and cannot approve advertising

Question 3

Trades of securities through the PORTAL system can be effected by FINRA member firms that are:
I QIBs
II Agents for QIBs
III Registered NASDAQ Market Makers
IV Registered OTCBB Market Makers

a. I only
b. I & II
c. III & IV
d. I, II, III, & IV

Answer 3

B. The PORTAL system is an electronic order execution system for Rule 144A securities that can only be traded in large blocks by QIBs. These securities are not registered with the SEC, and cannot be traded in the US unless the trade takes place among QIBs. Thus, any market makers using the system must be QIBs; or acting as agent for customers that are QIBs.

Question 4

Municipal unit investment trusts are:
I Open-End
II Closed-End
III Diversified
IV Non-Diversified

a. I & III
b. I & IV
c. II & III
d. II & IV

Answer 4

C. Municipal unit trusts are closed-end. The trust consists of a diversified portfolio of bonds. As the bonds make interest payments, these are paid to the unit holders; as the bonds in the trust are redeemed, principal repayments are made to the unit holders.

These trusts are self liquidating, as the bonds in the portfolio mature.

Question 5

Which of the following securities are qualifies for inclusion in the NASDAQ system?
I Unlisted Common Stocks
II Unlisted Convertible Bonds
III Unlisted Rights
IV Unlisted Warrents

Answer 5

All of the securities are eligible for inclusion in NASDAQ. The eligible securities are common stocks, convertible bonds, rights, warrants, put warrants, units that consist of preceding securities and ADRs.

Question 6

Under FINRA Rule 5130, if a “stand-by” purchaser buys an IPO from the underwriters, the ‘lock-up” period is:

a) 1 mo
b) 3 mo
c) 6 mo
d) 9 mo

Answer 6

B.

Question 7

A member firm buys securities from a customer to generate the funds necessary to purchase a new issue being sold by the member. The firm is presumed to be in compliance with FINRA rules as long as the amount paid to the customer by the member is:

a) equal to, or more than, the aggregate dollar amount of the new issue being bought by the customer
b) equal to, or less than, the aggregate dollar amount of the new issue being bought by the customer
c) no higher than the highest current independent bid for that security
d) no higher than the lowest current independent offer for that security.

Answer 7

C.

Question 8

All of the following statements are true about ADRs EXCEPT:

a) ADR holders can demand delivery of the underlying shares as a “Foreign Internal Security”
b) ADR holders can choose whether to receive cash distributions made by the issuer in US currency or foreign currency
c) ADR holders cannot subscribe to rights offerings related to the underlying foreign security
d) ADR holders do not have the right to vote the underlying shares

Answer 8

B

Question 9

Under FINRA Rule 5130 covering IPO distributions, a precondition for sale of a new issue to a customer, the member firm must obtain a representation that the account is eligible to buy new issues within the:

a) 3 months prior to such sale
b) 6 months prior to such sale
c) 9 months prior to such sale
d) 12 months prior to such sale

Answer 9

D

Question 10

B-D reports of lost or stolen US Government securities must be filed with:

a) Securities Investor Protection Corporation
b) Department of Treasury
c) Securities Information Center
d) Federal Deposite Insurance Corp

Answer 10

C

Question 11

Form 104 CTR reports of currency transactions MUST be filed with FinCEN within:

Answer 11

15 Calendar Days

Question 12

A registered rep that has passed the Series 7 exam divulges questions from the exam to another trainee in that firm. Which statements are true:
I The registered rep is subject to suspension or expulsion by FINRA
II The registered rep’s supervisor is subject to FINRA disciplinary action
III The firm’s compliance department is subject to FINRA disciplinary action

Answer 12

All are true

Question 13

Under NASDAQ System rules, all of the following statements are true during regular market hours EXCEPT a market maker:

a) must maintain a 2-sided quote
b) may withdraw after its quote is decremented to zero
c) must accept automatic executions
d) may maintain more than one quote

Answer 13

B. During regular market hours, a NASDAQ market maker must maintain a firm 2-sided quote, must be willing to accept automatic executions at the inside market.
Market makers may have multiple quotes orders in the system.
During market hours, the market maker MUST maintain at least 1 quote in the system, even if it is the worst quote in the market.

Question 14

Primary responsibility for enforcement of the Federal Telephone Consumer Protection Act rests with the:

a) SEC
b) FTC
c) FCC
d) FINRA

Answer 14

B

Question 15

Good delivery of registered bonds is in:
I minimum denominations of $1,000/bond
II minimum denominations of $5,000/bond
III maximum denominations of $100,000/bond
IV maximum denominations of $1,000,000/bond

Answer 15

I & III

Question 16

Which statements are generally true when comparing NASDAQ ACT system to OATS

a) The executing side of a transaction reports to ACT and the initiating side reports to OATS
b) The initiating side of a transaction reports to ACT and the executing side reports to OATS
c) The executing side of a transaction reports to ACT and the both sides reports to OATS
d) Both sides of a transaction report to ACT and OATS

Answer 16

C

Question 17

Buying power in a margin account for a pattern day trader is:

a) 2x SMA
b) 4x SMA
c) 2x excess maintenance margin
d) 4x excess maintenance margin

Answer 17

D

Question 18

True of False: A customer with an existing individual margin account can use the excess equity in the margin account to open a day trading margin account

Answer 18

TRUE.

Though customer cannot use excess equity in a joint margin account or equity in a IRA account.

Question 19

Money laundering regulations are established by all of the following EXCEPT:

a) FINRA
b) SEC
c) Federal Reserve Board
d) Department of Treasury

Answer 19

B

Question 20

A market maker displaying a quote are obligated to display customer order except if:

a) customer order is an odd-lot limit order
b) order is de minimus (10% or less of the displayed size) at the same limit price
c) never
d) both a & b

Answer 20

D

Question 21

Investments in VA contracts made at a BD are:

a) FDIC insured
b) SIPC insured
c) insured by both
d) insured by neither

Answer 21

B

Note fixed annuities are not a security and do nto receive SIPC coverage

Question 22

Which of the following underwritings requires the deposit of subscription monies to an imprest account?

a) best efforst
b) stand by
c) firm commitment
d) mini-maxi

Answer 22

D Imprest account is an escrow account…. only offers that are contingent upon a specific amount being sold require investor subscriptions to be placed in an escrow account.

Question 23

A customer buys mutual fund shares in a margin account. this position has:

a) no loan value
b) loan value of 25% after being held in the account for 30 days
c) loan value of 50% after being held in the account for 30 days
d) an immediate loan value of 50% as of settlement date

Answer 23

C Mutual fund shares held must be paid in full, but the SEC does allow them to be margined (under Reg T) at 50% after 30 days.

Question 24

Reg T and Reg U
Which controls the extension of credit from Banks to their customers?
Which controls the extension of credit from Brokers to their customers?

Answer 24

Reg T - Brokers to customers

Reg U - Banks to customers

Question 25

The SEC is empowered to suspend trading:
I in any security for 10 business days
II in any security for 90 calendary days
III on any national exchange for 10 business days
IV on any national exchange for 90 calendary days

Answer 25

I & IV

Question 26

Under Reg M, passive market making is prohibited in all of the following situations EXCEPT:

a) “additional issue offerings” of Capital Market stocks
b) “at the market” offerings
c) “best effort” offerings
d) the time window when a stabilizing bid is in effect

Answer 26

A
Passive market making is only permitted
- in an additional issue offerings that are fixed price, underwritten on a firm commitment basis
- is permitted for “add-on” offerings of listed stocks and NASDAQ stocks

Is not permitted for:

• at the market offerings
• best effort offerings
• when a stabilizing bid is in effect

Question 27

Every clearing BD is required to notify each introducing brokers chief executive and compliance officers of the reports offered to the introducing firm by:

a) July 1st of each year
b) July 1st of every second year
c) December 1st of each year
d) December 1st of every second year

Answer 27

A

Question 28

As compared to regular margin accounts, pattern day traders are subject to:
I Higher minimum margin to open the account
II The same minimum margin to open the account
III Higher minimum maintenance margin percentage
IV The same minimum maintenance margin percentage

Answer 28

I & IV

Question 29

A member firm is a market maker in ABCD stock - an OTCBB listed issue. The member firm joins a syndicate that will be handling a secondary add-on offering. The trading desk would like to continue to make a market in the issue during the restricted period. Upon signing the syndicate agreement, the member firm, under the provisions of Reg M:

a) should apply to FINRA for an excused withdrawal from making a market in ABCD stock and cannot make a market during the restricted period.
b) should notify FINRA that it will only engage in passive market making during the restricted period
c) should notify FINRA that it will only engage in stabilizing purchases during the restricted period
d) can continue to make a market in ABCD stock without any restrictions since it is an OTCBB issue

Answer 29

B
Under Reg M firms that are existing market makers in an issuers that is going to make a secondary offering of shares must either cease making a market during the restricted period (entire 20 day cooling off period prior to the effective date) or must elect to act as a passive market maker

Question 30

A member firm that wishes to make a market in an OTCBB stocks can avoid filing a Form 211 by:

a) piggybacking if the security is identified as “active”
b) piggybacking if the security is identified as “passive”
c) free riding if the security is identified as “hot”
d) free riding if the security is identified as “sticky”

Answer 30

A

Question 31

A company that has been delisted from NASDAQ

a) can be relisted is it meets NASDAQ initial listing standards
b) can be relisted is it meets NASDAQ continued listing standards
c) cannot be relisted until 3 months elapse from the date of delisting
d) cannot be relisted until 12 months elapse from the date of delisting

Answer 31

A

Question 32

What does ACES stand for

Answer 32

Advanced Computerized Execution System

ACES Pass-Through allows order entry firms to contract with a specific market maker to access that market maker’s internal trading systems for order placement and execution in the NASDAQ system.

The market maker pays the order entry firm for order flow, usually in soft dollars. The order entry firm then no longer has to deal with the hassle of order entry and order maintenance in the System and the market maker gets a chunk of internalized order flow.

Question 33

Circuit breaker rules with S&P 500

closure times and causes

Answer 33

Drop from previous day’s close
7% drop = 15 min closure
13% drop (after 7 % drop) = second 15 min closure
20% drop = closed for rest of day

Question 34

Registered Rep in a branch office has been fined $5k in withheld commissions for not following firm procedures. Which statement is TRUE:

a) a report of the incident must be filed with FINRA
b) a report of the incident must be filed in the OSJ
c) a report of the incident must be filed with the SEC
d) a report of the incident is not required to be filed

Answer 34

A
FINRA requires the report to be filed promptly, but no later than 30 days after the member knows of the event, if any registered individual associated with the firm is subject to disciplinary action involving suspension, termination, withholding commissions, or impositions of fines over $2500.

Question 35

Your firm deals primarily in exchange listed and NASDAQ stocks, but 15% of revenue comes from penny stock transactions. An established customer that has never traded penny stocks before, decides to make this type of investment. If the registered rep recommends a penny stock to this customer:
I a detailed suitability must be completed and signed prior to purchase
II a risk disclosure doc must be provided to the customer
III the current bid and ask, and compensation earned byt the broker must be disclosed on the request
IV account statements must be sent to the customer monthly

Answer 35

II, III, & IV

I does not apply due to the established customer exemption to the penny stock rule…. if a customer has had an account for more than a year, a detailed suitability does not need to be prepared and signed by the customer.

Question 36

A market maker in a non-NASDAQ issue has relied on the “piggyback” exemption from filing Form 211. All of the other market makers in the issue have stopped quoting the stock. Which statement is True:

a) the market maker must withdraw its quotes until it files Form 211
b) The market maker can continue quoting the stock, but must file a Form 211 immediately
c) The market maker can continue quoting the stock and is not required to file a Form 211
d) The market maker can continue quoting the stock only if it can arrange for a second market maker to maintain a bid-ask

Answer 36

C

Question 37

Code of Procedure

Answer 37

settles disputes between BDs (and their agents) and their customers

Question 38

Code of Arbitration

Answer 38

settles disputes between a registered rep and their BD, and between BDs

Question 39

Uniform Practice Code

Answer 39

establishes uniform rules for dealer to dealer settlement, good delivery, reclaimation, accrued interest computations, etc.

Question 40

A passive market maker’s daily purchase limit under Reg M is:

a) 25% of Average Daily Trading Volume (ADTV) or 200 shares, whichever is greater.
b) 25% of Average Daily Trading Volume (ADTV) or 300 shares, whichever is greater.
c) 30% of Average Daily Trading Volume (ADTV) or 200 shares, whichever is greater.
d) 30% of Average Daily Trading Volume (ADTV) or 300 shares, whichever is greater.

Answer 40

C

Question 41

Under Reg S, an issuer of securities is NOT deemed to be “foreign” if more than which of the following is held by US persons:

a) 20% equity / 50% debt
b) 30% equity / 40% debt
c) 40% equity / 30% debt
d) 50% equity / 20% debt

Answer 41

D

Question 42

Which of the following can be trustees under the Trust Indenture Ace of 1939:
I  Commercial Banks
II Trust Attorney
III  Trust Company
IV  Broker-Dealer

Answer 42

I & III Only
Must be large enough, well established enough to be able to maintain independence as a trustee despite being paid by the issuer

Question 43

What does OATS stand for

Answer 43

Order Audit Trail System

It is FINRA’s system for electronic capture of order information (both initiating and execution for member firms). This information is later compares to the actual trade execution via the ACT (automated trade confirm) system.

Question 44

What does ACT stand for

Answer 44

Automated Trade Confirmation System

reports completed trades for clearance, settlement, and last sale report purposes

Question 45

What does ADF stand for

Answer 45

Alternative Display Facility

used by ECNs that chose not to display their quote on NASDAQ

Question 46

What type of orders does NASDAQ accpet

Answer 46

Market Orders
Marketable Limit Orders
Limit Orders

NASDAQ does not accept stop orders

Question 47

A member firm receives a cancellation notice of its fidelity bond coverage from its insurance carries. This action:

a) does not require notice to FINRA
b) must be reported to FINRA immediately
c) must be reported to FINRA within 30 calendar days
d) must be reported to FINRA within 60 calendar days

Answer 47

B

Question 48

Under FINRA Rules, the presumptive basis for computing the mark-up on a debt security is:

a) the NBBO
b) contemporaneous purchases or sales of that security by that dealer
c) contemporaneous purchases or sales of that security by other dealers
d) the pricing of similar securities currently available in the market

Answer 48

B

Question 49

Which of the following MUST be disclosed by a member firm that issues a “fairness opinion” in connection with the purchase of another company?
I Whether the member firm will receive compensation contingent on the closing of the transaction
II Whether the member firm will receive any significant non-monetary compensation contingent on the closing of the transaction
III Whether the opinion covers compensation that the company’s officers will receive upon completion of the transaction
IV Whether the member firm had a material relationship with any party to the transaction within the past 2 years

Answer 49

I, II, III & IV

Question 50

13d vs 13f vs 13g

Answer 50

13d - filed by anyone who accumulates 5% or more with intention of exercising control
13f - filed by institutional managers with $100+mil
13g - filed by a passive investor who accumlates a 5% ir greater holding

Question 51

The ADF provides all of the following except:

a) quotation display
b) trade reporting
c) trade comparison
d) order routing and execution

Answer 51

D

ADF = alternative display facility
is used by ECNs and ATS to quote NASDAQ, NYSE & AMEX issues.
when trade occurs, ECN/ATS reports via TRACS (trade reporting and compliance service) that is part of the ADF
TRACS compares the resulting trade and feeds the trade report to the appropriate network tape

Question 52

Under FINRA rules, the maximum finders fee that can be paid in a DPP REIT offering is:

a) 0%
b) 5%
c) 8.5%
d) 10%

Answer 52

D (finders fees are included in the underwriting expenses, which are limited to 10%)

Question 53

A registered rep wishes to open an account to buy securities at another member firm. Which statement is TRUE

a) the employer member must be notified, in writing, prior to execution of a transaction for such an account
b) the employer member must be notified, in writing, prior to the opening of such an account
c) the employer member must be notified, in writing, prior to settlement of the first transaction for such an account
d) no notification to the employer member is required

Answer 53

A. Wording of the rule is prior to execution of a transaction.

Answer B is incorrect as an account could be opened with cash and no transaction made…thus not violating the rules.

Question 54

Which of the following actions by an investment advisor are prohibited under the 40 Act:
I Making cash payment to a solicitor that is undisclosed to the customer for signing that customer as an advisory client
II Using an advertisement that includes a testimonial from a famous personality
III Entering into an oral advisory contract with a customer
IV Accepting a prepaid advisory fee from a client

Answer 54

I, II, & III

IV prepaid advisory fees are permitted, though the contract must explain how much of the fee will be refunded if the contract is canceled prematurely.

I - ok only if disclosed, and receive solicitor’s brochure
II - no testimonials by anyone
III - contracts only in writing

Question 55

Under FINRA rules, a contract which has not been completed by the seller according to its terms may be closed by the buyer (“bought in”) no sooner than the:

a) first business day following the date delivery was due
b) second business day following the date delivery was due
c) third business day following the date delivery was due
d) fifth business day following the date delivery was due

Answer 55

C. Under Uniform Practice Code
no earlier than noon on 2nd business day notification of proposed buy-in can be given…on the third day the purchaser can buy the position.

Question 56

A customer, age 48, earns $50k in 2014. He wishes to make a contribution to an IRA on behalf of himself and his non-working spouse. The maximum contribution that can be made is:

a) $4,500
b) $5,500
c) $10,000
d) $11,000

Answer 56

D
Max contribution for an individual is $5,500 (if working and earning compensation). However, if that individual is married, another $5,500 can be contributed for the spouse regardless of if the spouse works.

Question 57

A customer, age 53, earns $50k in 2014. He wishes to make a contribution to an IRA on behalf of himself and his non-working spouse. The maximum contribution that can be made is:

a) $4,500
b) $5,500
c) $11,000
d) $13,000

Answer 57

D
Max contribution for an individual (if working and earning compensation) is $5,500 + $1000 “catch up contribution” = $6,500. However, if that individual is married, another $6,500 can be contributed for the spouse regardless of if the spouse works.

Question 58

Which of the following individuals would be defines as a pattern day trader? An individual that performs:

a) 3 day trades in 1 business day
b) 1 day trade in 3 business days
c) 3 day trades in 4 business days
d) 7 day trades in 5 business days

Answer 58

D A pattern day trader is one who effects 4+ day trades within 5 business days.

Question 59

Under SEC Rule 606 of Reg NMS, B-Ds are required to compile statistical information on routing of customer non-directed orders to market venues, and make the information available to customers:

a) monthly
b) quarterly
c) semi-annually
d) annually

Answer 59

B
BDs must report STATISTICAL information on order routing procedures for all customer trades quarterly.

This is separate from rule requiring BDs to give customers an annual notice the customer can request detailed information on the routing of that customer’s orders over the prior 6 mos.

Question 60

A FINRA member firm, or person associated with a FINRA member firm can be summarily suspended or expelled by the:
I SEC
II National Adjudicatory Council
III District Hearing Panel

Answer 60

II & III

SEC will not suspend or expel a FINRA member, though if a National Adjudicatory Council decision is appealed to the SEC the SEC can approve or modify FINRA’s action

Question 61

Which of the following is a primary function of an investment bank?

a) advising on M&A for corporate clients
b) acting as underwriter for corporate clients
c) giving corporate CEOs advise on business plan strategy
d) giving corporate treasurers advise on investment strategy

Answer 61

B
Primary function is to act as an underwriter on either a firm commitment or best efforts basis.

all other functions are secondary

Question 62

Regarding the representation that the purchaser of a new issue must provide to the member firm within the 12 months prior to a new issue purchase under Rule 5130, the:

a) initial and subsequent annual representation must be positive affirmations
b) initial and subsequent annual representation must be negative affirmations
c) initial representation must be a positive affirmation and subsequent annual representation must be negative affirmation
d) initial representation must be a negative affirmation and subsequent annual representation must be positive affirmation

Answer 62

C
Initial representation must be positive…customer must sign a statement
Subsequent representations can be negative….firm can send the customer a notice that it has the customer on record as eligible and if this has changed, the customer must notify the firm.

Question 63

In order to open a margin account, a customer must be provided with a credit disclosure document:

a) at, or prior to, the first trade in the account
b) at, or prior to, the opening of the account
c) at, or prior to, settlement of the first trade in the account
d) within 15 business days of the account opening

Answer 63

B
when opening the account, the customer must be provided with a credit disclosure document (truth in lending, describing how the debit balance will be computed and interest charged) at or prior to account opening.

Question 64

A BD that uses the Alternate Method of computing net capital must maintain a minimum of:

a) $50k NC
b) $100k NC
c) $250k NC
d) $300k NC

Answer 64

C.
BD that uses the Alternate Method of computing net capital must maintain capital equal to at least 2% of debits in the Customer Reserve formula, but never less than $250k

Question 65

An NYSE listed issuer is considering floating a new issue debt offering to finance the construction of a new manufacturing facility that is planned to break ground in 9 mos. The issuer wants to sell the bonds during this time window when interest rates are at a low point. In order to accomplish this goal, the issuer should file a(n):

a) Form D under Reg D with the SEC
b) S-1 with the SEC
c) Shelf registration under Rule 415 with the SEC
d) Form 1A under Reg A with the SEC

Answer 65

C.

shelf registration allows large established issuers flexibility to issue when the conditions are favorable

Question 66

Under MSRB Rule G-37, reports of political contributions must be filed with the MSRB:

a) monthly
b) quarterly
c) semi-annually
d) annually

Answer 66

B

Also true for G-38 filings
Only filed for contributions that exceed the de minimis amount ($250 for campaigns in which the MFP can vote and $0 in campaigns in which the MFP is not entitled to vote).

Question 67

If an analyst makes a public appearance, under Reg AC, the analyst must:

a) make a verbal certification to the group being addressed
b) distribute written certifications to each person in the group being addressed
c) give a blanket certification to all appearances made each month
d) give a blanket certification to all appearances made each quarter

Answer 67

D

Question 68

A Third Market trade takes place in an NYSE issue that is quoted on the CQS, 1/2 hour prior to market opening. Which statement is TRUE about reporting this trade?

a) The trade is not required to be reported
b) The trade is reported through ACT within 10 seconds as a “.T” trade
c) The trade is reported to the Consolidated Network A Tape within 10 seconds of execution
d) This trade must be reported “as/of” via ACT on the following business day

Answer 68

B

Question 69

In order to participate in the Opening Cross, orders must be received by

a) 9:00am ET
b) 9:25am ET
c) 9:28am ET
d) 9:30am ET

Answer 69

C

Question 70

As a result of a hearing conducted under the Code of Procedure, a series 24 lic individual is suspended from acting in a supervisory capacity for 6 months. Which statements are TRUE regarding this individual’s actions during the suspension:
I This individual may work as a representative and be compensated
II This individual may not work as a representative and may not be compensated
III This individual may work as an investment adviser and be compensated
IV This individual may not work as an investment adviser and may not be compensated

Answer 70

I & III

In this question, the individual was only suspended from acting in a supervisory capacity.

Question 71

SEC Rule 15c-2-1 covers:

a) net capital requirements
b) hypothecation of securities
c) penny stock transactions
d) short sales

Answer 71

B

Question 72

SEC Rule 15c-3-1 covers:

a) net capital requirements
b) hypothecation of securities
c) penny stock transactions
d) short sales

Answer 72

A

Question 73

SEC Rules 15g-1 through 15g-6 cover:

a) net capital requirements
b) hypothecation of securities
c) penny stock transactions
d) short sales

Answer 73

C

Question 74

SEC Rule 10a-1 covers:

a) net capital requirements
b) hypothecation of securities
c) penny stock transactions
d) short sales

Answer 74

D

Question 75

Which of the following mutual fund expenses could be charges against net assets for a fund that has adopted a 12b-1 plan?
I Advertising
II Sales Literature
III Mailing of prospectuses to prospects
IV Mailing of prospectuses to current clients

Answer 75

I, II & III.
Under a 12b-1 plan, the first three listed advertising expenses are deductible from net assets and therefore are borne by the shareholders. These deductible items include advertising, sales literature, and mailing of prospectuses to potential clients. The theory is that these expenditures will attract new investors, increasing the NAV of the fund. As the net assets increase, the fund’s expense ratio should decrease, benefiting all shareholders.

Mailings to current shareholders are not deductible under a 12b-1 plan, since this is not aimed at increasing the size of the investor base in the fund.

Question 76

Upon receipt of a trade report to TRACE, NASDAQ will disseminate the report of the bond transaction:

a) immediately
b) within 10 seconds
c) within 15 minutes
d) within 30 minutes

Answer 76

A
When TRACE receives trade reports, it immediately disseminates the transaction via BTDS (Bond Trade Dissemination Service)

Bond trades must be reported to TRACE within 15 minutes

Question 77

A member firm’s business continuity plan must be:

a) disclosed to customers in writing at the time of account opening.
b) posted on the member firm’s Website
c) mailed to customers on request
d) all of the above

Answer 77

D

Question 78

Which of the following cannot post orders directly in the NASDAQ Market Center
a) Order entry firm
b) Market Maker
C) ECN
D) Exchange specialist/DMM

Answer 78

D
NASDAQ participants are order entry firms, market makers, and linked ECNs.

Each exchange specialist/DMM maintains its quote on the exchange floor, not on NASDAQ

Question 79

A discretionary order to sell at $10.50 is entered into the NASDAQ system with a discretionary price of $10.00. A limit order to buy at $10.25 is received by NASDAQ. This order will:

a) not be executed
b) be executed at $10
c) be executed at $10.25
d) be executed at $10.50

Answer 79

C.
A discretionary order is displayed on the book at one price, but also includes a more aggressive “discretionary price” that is not displayed. The undisplayed price can only be $.99 higher than the displayed bid and $.99 lower than the displayed ask. The passive discretionary price is not displayed and only becomes active as an IOC order when share are available within the discretionary range. An incoming market order that is not executable at the display price, but within the discretionary range, executes at the limit price. This is a discretionary order to sell with a displayed price of $10.50 and an undisplayed ask of $10.00. If a limit order to buy at $10.25 is received, it will be filled at $10.25 - since the maker of the quoted ask is really willing to sell at $10 or higher, and will accept the $10.25 execution price since it is in range.

Question 80

During the hours that ACT is open, NASDAQ trades are reported:
I Through TRF
II Through ACT
III within 10 seconds of execution
IV by 8pm on the day of the transaction

Answer 80

I & III

NASDAQ Trades are reported through NASDAQ TRF (Trade Reporting Facility)

Question 81

What type of orders does NYSE accept

Answer 81

The NYSE accepts
Market orders
Limit orders
Stop orders

Stop Limit orders are not accepted into the NYSE trading systems

Question 82

Which order would be educed on ex-date for a cash dividend?

a) market order to buy
b) limit order to buy
c) stop order to buy
d) limit order to sell

Answer 82

B

Orders placed below the market (OBLOSS) are reduced on ex-date for cash dividends

Question 83

The 180 day look back under the corporate financing rule covers:
I stock received by an underwriter from the issuer
II listed stock of the issuer acquired by the underwriter in the open market
III convertible debt securities received by the an underwriter from the issuer
IV nonconvertible debt securities of the issuer acquired by the underwriter in the open market

Answer 83

I & III

Securities purchased by the underwriter in the open market are excluded as long as these are held for investment and are not being included in the registered securities offering.

Question 84

A market maker must act as agent only when selling a stock to which of the following accounts held by that firm?

a) employee account
b) fiduciary account
c) managed account
d) custodian account

Answer 84

C

The firm can only effect transactions for managed accounts as a principal if it discloses, prior to completion of the transaction, that the adviser is actin in the capacity of a BD and obtains client consent

Question 85

Which of the following is a manipulative practice?

a) placing successive order to buy the same stock at $50, $55, $60, $65, and $70
b) placing successive orders to buy and then sell the stock
c) placing order to buy stock for the firm’s proprietary account while holding customer orders to buy that security
d) placing orders to short a stock for the firm’s proprietary account while holding a customer order to buy that security

Answer 85

A. “painting the tape”

Incorrect answers
B = day trading
C = front running, illegal but not manipulative
D = legal trade

Question 86

An NYSE listed issuer places an order to buy its common stock with 12 hour of the close of the market. Which statement is TRUE regarding the handling of this order:

a) This order can be accepted with no further action necessary
b) This order cannot be accepted
c) This order can only be accepted with the permission of the NYSE
d) This order can only be accepted if the issuer is informed that this transaction may be viewed as “manipulative”

Answer 86

D

Question 87

A registered CQS market maker who voluntarily terminates registration in a reported security, my reregister as a CQS market maker in that security:

a) immediately
b) after 1 business day has elapsed
c) after 2 business days have elapsed
d) after 5 business days have elapsed

Answer 87

B

Question 88

If a broker-dealer wishes to make a market in a non-NASDAQ security, which statement is True?

a) no filing of market maker status in that security is required with FINRA
b) a filing must be made with the SEC prior to display of any quotes
c) a filing, signed by a principal, must be made with FINRA at least 3 business days prior to the display of any quotes
d) a filing, signed by a principal, must be made with FINRA at least 3 business days after the display of any quotes

Answer 88

C

Form 211 must be filed 3 business days prior

Question 89

A registered representative wishes to sell a customer a limited partnership interest in a private placement that is not being offered through your firm. The registered rep will be compensated in this transaction. This is known as:

a) backing away
b) selling away
c) free riding
d) interpositioning

Answer 89

B
Effecting a transaction that is not performed through the member firm with which the registered person is associated is known as “selling away” and is prohibited unless the registered rep gets the express approval of the member firm

Question 90

An individual applying for registration fails a licensing exam 3 successive times must:

a) wait 30 days between each subsequent reattempt
b) wait 90 days between each subsequent reattempt
c) wait 180 days between each subsequent reattempt
d) exit the securities business

Answer 90

C

Question 91

Under the 1934 Act, the penalty for insider trading violations by controlling persons is the greater of treble damages or :

a) $250k
b) $1mil
c) $5mil
d) $25mil

Answer 91

D

damages = profit made of loss avoided.

Question 92

A passive bid, under Reg M Rule 103, can be higher than the highest current independent bid:

a) without restriction
b) if the bid represents trading interest of 1,000 shares or more
c) if the bid reflects a customer limit order
d) if the subject security is a Global Market issue

Answer 92

C

Question 93

Which of the following is considered to be a fraudulent and manipulative practice

a) Buying ABCD stock, selling long ABCD stock, buying ABCD stock, selling long ABCD stock, in a customer account
b) Placing an order to buy ABCD stock for the firm account ahead of a customer limit order to buy ABCD at the same price
c) Selling short ABCD stock for a customer without first locating the stock and determining that it can be delivered on settlement
d) Quoting a Bid and Ask price for ABCD stock to a customer for a minimum quantity and changing the quote if the customer accpets

Answer 93

C

All are prohibited but C is “Naked short selling” which is deemed manipulative

Question 94

A 51 year old woman owns a rental property that generated $40k of net income per year. If she has no other earnings, the maximum permitted contribution to an IRA in 2013 is

a) $0
b) $2000
c) $5500
d) $6500

Answer 94

A

IRA contributions are based solely on earned income. income from investment or rents is deemed to be unearned income.

Question 95

Which of the following is NOT a consideration in determining whether a location should be designated as an OSJ? Whether:

a) a substantial number of registered individuals conduct securities activities at the location
b) the location is geographically distant from another OSJ of the firm
c) registered persons at the location engage in retail sales involving regular contact with public customers
d) the location conducts cashiering functions for public customers

Answer 95

D

Question 96

Under the supervision rule, which of the following must be inspected for compliance with applicable securities laws and regulations?
I OSJ
II Supervisory Branch
III Non-Supervisory Branch
IV Non-Branch Location

Answer 96

D
The supervision rule requires inspections of every physical location over varying time frames
OSJ - at least annually
Supervisory Branch - at least annually
Non-Supervisory Branch - at least every 3 yrs

Question 97

If the securities underlying a secured demand note fall sharply in value:

a) FINRA is not require to be notified
b) FINRA must be notified immediately
c) FINRA must be notified by noon the next business day
d) FINRA must be notified within 15 business days

Answer 97

B
If the securities that collateralize a secured demand note agreement fall in value so that their haricutted value is less than the face amount of the note, immediate notice must be given to the lender and FINRA

Question 98

The SEC regulation that covers required disclosures to be made by the maker o a tender offer is:

a) Reg FD
b) Reg SX
c) Reg MA
d) Reg SK

Answer 98

C

Question 99

An issuer that is filing a registration statement with the SEC is
I permitted to include performance projections
II prohibited from including performance projections
III permitted to include the issuer’s rating form S&P or Moody’s
IV prohibited from including the issuer’s rating form S&P or Moody’s

Answer 99

I & III

Question 100

Which of the following is not qualified as a participant in DTCC

a) member of a national securities exchange
b) bank of trust co
c) registered investment co
d) registered investment adviser

Answer 100

D

Question 101

The specialist/DMM is prohibited from accepting which of the following orders?

a) market order
b) not held order
c) stop order
d) limit order

Answer 101

B
Specialist/DMM cannot have discretion over price and time of a customer order. Can execute market orders entered through the Super Display Book, and takes limit orders and stop orders onto his book.

Question 102

All of the following documents must be completed to open a new margin account except

a) new account form
b) hypothecation agreement
c) stock loan consent agreement
d) credit agreement

Answer 102

C
No legal requirement for a customer to sign a stock loan consent agreement, but most firms will not open a margin account without it.

Question 103

All of the following are specifically defined as “investment companies” under the 1940 Act

a) management co
b) unit investment trust
c) face amount certificate co
d) mutual fund

Answer 103

D.

The act specifically names three types of companies: face amount certificate, unit investment trust, and management company.

The “common name” for an open-end management company is a “mutual fund” and for a closed end management company is a “publicly traded fund”. These common names are not found in the Act.

Question 104

An employee of a FINRA member firm wishes to sell mutual funds part time for another member firm. Which statement is TRUE?

a) it is acceptable for the employee to be dual registered if there is a prior written agreement between the members.
b) the SEC must be given prior notification of the dual registration via FORM U-4
c) FINRA must be given prior notification of the dual registration via FORM U-4
d) Dual registration with 2 different BDs is prohibited

Answer 104

C

In many states an individual can only be registered with one firm at any time to sell securities. However, other states do permit dual registration.

Question 105

A NASDAQ stock is being delisted for failure to meet maintenance listing standard. An eligible market maker in the stock can become an OTCBB market maker in that issue without having to file Form 211, as long as the OTCBB registration takes place:

a) by the close of business on the day the delisting is announced
b) by the close of business on the trading day after the delisting is announced
c) within 2 business days of the announcement of the delisting
d) within 3 business days of the announcement of the deslisting

Answer 105

B

must register with FINRA by close of the business day/trading day following delisting.

Question 106

A market maker holds a customer limit order to buy 500 shares of ABCD @ 50.25. In its market making capacity, the firm purchases 200 shares of ABCD @ $50.15. Under SEC rules, the market maker:

a) must execute 200 shares of the limit order and protect the remaining 300 shares
b) must execute 200 shares of the limit order and cancel the remaining 300 shares
c) must execute the limit order in its entirety
d) is not obligated to execute the order, either in full or in part.

Answer 106

A.

Question 107

Under the FINRA 5% policy, in an inactive competitive market, the prevailing market price to be used for mark down purposes is the:

a) last sale
b) contemporaneous purchases from other dealers
c) contemporaneous sales to other dealers
d) highest bid price

Answer 107

B

If a security is trading in an inactive competitive market, the FINRA 5% policy states the basis for the computation of the mark-up/mark-down percentage is:

• For Sales where a mark up is charges = contemporaneous Sales to other dealers
• For Purchases where a mark down is charged = contemporaneous Purchases from other dealers

Question 108

The ACT system:

a) is used to report backing away violations to FINRA for real-time resolution
b) permits NASDAQ Order entry firms to contract with a market maker to enter and maintain its limit orders
c) routes market and limit orders electronically to market makers for locked-in execution
d) intakes entries of completed trades for reporting, matching, and clearance

Answer 108

D

ACT system is where completed trades are entered by market participants (NASDAQ system does ACT reporting automatically, manually entered for OTCBB and Pink Sheets)
ACT system reports the trade to the tape, to the contra party for matching, and to the clearing corp.

Question 109

What is FQCS

Answer 109

Firm Quote Compliance System - used to report backing away violations

Question 110

A firm already registered as a NASDAQ market maker is permitted to register in another NASDAQ issue an can make a market in that issue:

a) on the day the registration request is entered
b) on the business day after the registration request is entered.
c) on the 2nd business day after the registration request is entered.
d) on the 5th business day after the registration request is entered.

Answer 110

A

Question 111

Which of the following securities can be held in a margin account?

a) new issues
b) unregistered issues
c) mutual funds owned more than 30 days
d) direct participation programs

Answer 111

C

question implies held as margin

Question 112

Under NASDAQ rules, the “Trade of Move” message has been replace by the:

a) Opening Cross
b) Closing Cross
d) Opening Rotation
d) Closing Rotation

Answer 112

A

The “Trade of Move” message (no rescinded) was used in the 10-min window prior to market opening to “discover” the appropriate opening market price for a NASDAQ security. If a market maker entered a quote that either locked or crossed another market maker’s quote, then the market maker whose quote was locked or crossed received a “Trade or Move” message - to either trade in full or move the quote away.

Question 113

An OATS report that has been matched by ACT after trade execution includes all of the following EXECPT:

a) where the order was routed for execution
b) aggregated orders
c) date and time of receipt of each order
d) name of contra party

Answer 113

B
Reports made into OATS are order0by-order, cannot be aggregated.

Trade reports through ACT can be aggregated

Question 114

The Board of Directors of an open-end management company that has been segregated into classes, must have minimum terms of:

a) 1 yr
b) 2 yrs
c) 3 yrs
d) 5yrs

Answer 114

A

Question 115

The Board of Directors of an open-end management company that has been segregated into classes, must have maximum terms of:

a) 1 yr
b) 2 yrs
c) 3 yrs
d) 5yrs

Answer 115

D

Question 116

As an initial transaction in a cash account, a customer buys 200 shares of ABC at 15. ABC is a “when issued” security, where the physical certificates have not yet been issued. The customer must deposit:

a) $750
b) $1500
c) $2000
d) $3000

Answer 116

C

Must put up minimum maintenance margin greater of 25% or $2000)

Question 117

All of the following statements are true regarding the NASDAQ system EXCEPT:

a) short selling is permitted
b) decrementation occurs upon the execution of an order
c) the aggregation of orders within the size limits of the system is permitted
d) all OTC securities are eligible for trading in the system

Answer 117

D

system can be used to trade all NMS stocks (NASDAQ, NYSE, AMEX) but not OTCBB and Pink Sheets

Question 118

The NASDAQ modified SYND indicates

a) non-penalty stabilizing bid
b) penalty stabilizing bid
c) pre-effective stabilizing bid
d) passive market maker bid

Answer 118

A

Question 119

A customer informs a registered rep that he is moving an gives the rep a new street address to use for all written communications sent by the member firm. Which statement is TRUE

a) the rep can make the change in the customer account information without any other action being taken
b) the change can be made only if the principal validates it by contacting the customer
c) the change can only be made if the customer’s identity is verified
d) the change cannot be made unless the customer gives a signed written instruction

Answer 119

B

Question 120

Trades of NASDAQ securities executed on an unlinked ECN are reported by:

a) CAES
b) TRACS
c) ACT
d) TRACE

Answer 120

B

Question 121

Under the LULO rules, excluding market open and close, the price band percentage for an S&P 500 stock is set at:

a) 1%
b) 3%
c) 5%
d) 7%

Answer 121

C

Question 122

A customer has a margin account that shows $25,000 of securities and a $10,000 debit balance. How much can the broker borrow against this position?

a) $10k
b) $14k
c) $20k
d) $25k

Answer 122

A
Brokers are limited to borrowing funds using customer securities as collateral, to the amount of the customer debit. Since this customer debit is $10k the broker can only use enough of the customers securities to get a maximum $10k loan from the bank

Question 123

A BD that makes a market in securities is a dealer in 150 stocks under $5 and 150 stocks over $5. The minimum net capital requirement for this firm is:

a) $100k
b) $250k
c) $525k
d) $1mil

Answer 123

C

150 stocks $5 *$2500 = $375k
= $525k

Question 124

Under NYSE rules, a block transaction subject to handling via Rule 127 must be at least

a) 1,000 shares or a value of $1,000
b) 1,000 shares or a value of $100,000
c) 10,000 shares or a value of $100,000
d) 10,000 shares or a value of $200,000

Answer 124

D

Question 125

Under Rule 144, a customer wishing to sell must file the 144 Notice of Sale with the SEC

a) 10 bus days prior to the placement of the sell order
b) concurrent with the placement of the sell order
c) 10 business days after the placement of the sell order
d) 90 days after the placement of the sell order

Answer 125

B
Form 144 is simply a notification to the SEC that the stock will be sold in compliance with the rule. there is not need for approval of the sale

Question 126

Simplified arbitration is available to settle disputes where the amount involved does not exceed a maximum of

a) $25k
b) $50k
c) $75k
d) $100k

Answer 126

B

Question 127

Form 1099s for joint accounts are sent to:

a) each customer who is a party to the account
b) the largest participant in the account
c) the account holder whose social security number appears on the account
d) account owners who maintain at least a 35% interest in the accoutn

Answer 127

C

Question 128

A registered person resigns from a BD in order to finish grad school. 3 years later, this individual reassociates with another BD. This person MUS T participate in the Regulatory Element of CE on a cycle based on

a) date of initial registration
b) date of reassociation
c) date determined by FINRA
d) date determined by a general principal

Answer 128

B

If a registered person reassociated AFTER 2 years, that person is subject to the regulatory element of CE based on the date of reassociation (i.e., most recent registration date)

Question 129

A registered person resigns from a BD in order to finish grad school. 18 mos later, this individual reassociates with another BD. This person MUS T participate in the Regulatory Element of CE on a cycle based on

a) date of initial registration
b) date of reassociation
c) date determined by FINRA
d) date determined by a general principal

Answer 129

A
If a registered person reassociated WITHIN 2 years, that person is subject to the regulatory element of CE based on the initial registration

Question 130

Customer transactions MUST be reviewed for suspicious activity

a) daily
b) monthly
c) quarterly
d) annually

Answer 130

A

Question 131

Which securities are included in the NASDAQ System
I NASDAQ Global Market
II NASDAQ Capital Market
III OTCBB
IV Pink Sheet

Answer 131

I & II Only

Question 132

A market maker is quoting a stock at 67.68 - 68.75, which represents the inside market. The market maker’s bid is an agency bid. The firm receives a customer market order to sell, which it executes at $67.68. This transaction is:

a) not reportable under ACT rules
b) a violation of SEC rules
c) a principal trade
d) an agency cross

Answer 132

D

Matching a customer order to buy with a customer order to sell is an example of an agency cross.

Question 133

An institutional customer places an order to buy 10,000 shares ABCD at 15 GTC with a FINRA member firm that is a market maker in the issue. Which statement is TRUE regarding the handling of the order if the member firm wishes to trade alongside the order:

a) member firm is prohibited
b) member firm can only trade alongside if it buys ABCD for its only account at any price higher than $15
c) member firm can only trade alongside if it immediately fills the customer order at $15 or higher
d) member firm can only trade alongside if it immediately fills the customer order at $15 or lower

Answer 133

D

Question 134

If a member firm is required by FINRA to tape orders, these records must be maintained for:

a) 2 yrs
b) 3 yrs
c) 6 yrs
d) life of firm

Answer 134

B

Question 135

The Federal Reserve Regulation that governs lending on securities to US persons by non-US lenders is:

a) Reg T
b) Reg U
c) Reg G
d) Reg X

Answer 135

D
Reg X requires the provisions of Reg T and Reg U be followed

Reg G has been rescinded

Question 136

If a member firm fails to pay a monetary award resulting from an arbitration decision within the prescribed time period, FINRA ca:
I immediately suspend the firm’s membership
II suspend the firm’s membership within 15 days of written notice
III immediately revoke the firm’s membership
IV revoke the firm’s membership within 15 days of written notice

Answer 136

II & IV

Question 137

All of the following statements are true about the OTCBB EXCEPT:

a) there are no listing standards for issuers to be included in the OTCBB
b) foreign equity issues are not included in the OTCBB
c) price quotes for equity securities are firm
d) one sided quotes may be displayed

Answer 137

B

quotes for ADRs and foreign issues (eg, Nestle) are shown

Question 138

A non-clearing market maker in a Global Market stock inadvertently fails to maintain its clearing agreement and is removed from registration in NASDAQ and ACT. The market maker can re-enter quotes:

a) once a clearing agreement has been re-established
b) after 2 business days elapse from the re-establishment of the clearing agreement
c) after 20 business days elapse from the re-establishment of the clearing agreement
d) upon recertification as a NASDAQ market maker

Answer 138

A

No 20 day wait since this is treated as an excused withdrawal

Question 139

A market maker quoting $10.00 - $10.50 (10x10) holds an undisplayed order to buy 800 shares at $10.60, which includes an agreed upon mark-up of $.25. The firm then receives a market order to sell 500 shares. Which statement is true:

a) The market maker must fill the order at $10
b) The market maker must fill the order at $10.25
c) The market maker must fill the order at $10.35
d) The market maker must fill the order at $10.50

Answer 139

C

The undisplayed order to sell is at $10.35 (10.60-.25)… the market order comes in and hits the undisplayed order. remainder of the undisplayed order is protected

Question 140

Annual testing of a member firm’s AML program may be conducted by:

a) designated AML compliance person
b) person who performs the functions being tested
c) qualified outside party of member personnel
d) any of the above

Answer 140

C

Testing must be performed by an independent person

Question 141

Which of the following are true statements regarding passive market makers under Reg M Rule 103
I Passive bids can be no higher than the highest current independent bid
II Passive bids reflecting customer limit orders may be higher than the highest current independent bid
III Passive bids must be identified as such on Level II of NASDAQ
IV Passive market makers are subject to daily volume restrictions

Answer 141

I, II, III and IV

Question 142

True or False

Orders that lock the market (on NASDAQ) are not filled and returned to the system

Answer 142

FALSE

are treated as immediately executable and filled at the inside market

Question 143

Payment for order flow for a preference order:

a) must be disclosed on the order ticket
b) must be disclosed on the confirmation
c) must be disclosed on the order ticket and confirm
d) is not required to be disclosed on either the order ticket or confirm

Answer 143

B

Question 144

NASDAQ will delist a stock if tis price falls below

a) $5 for at least 30 consecutive days
b) $3 for at least 30 consecutive days
c) $2 for at least 30 consecutive days
d) $1 for at least 30 consecutive days

Answer 144

D

Question 145

Forward looking information released in compliance with SEC Rule 168
I must be released in the ordinary course of business of the issuer in the same manner as perviously released information
II can only be released prior to the filing of a registration statement or after the effective date of the securities registration
III must be released in a manner, form, and timing that is materially consistent with past disclosures
IV can be released in any manner or form that complies with the requirements for a free-writing prospectus

Answer 145

I & III

Question 146

Under the Investment Advisers Act of 1940, which of the following persons are EXEMPT from registration with the SEC

a) investment advisor whose only clients are insurance companies
b) investment advisor whose only clients are investment companies
c) investment advisor whose only clients are pension plans
d) all of the above

Answer 146

A

Question 147

Under FINRA rules, a member that wishes to reclaim delivery of securities, must send the securities along with a reclamation form to the:

a) transfer agent
b) delivering member
c) receiving member
d) Uniform Practice Committee

Answer 147

B

Question 148

Under the Hart Scott Rodino Act, the “size threshold transaction” minimum threshold for filing if one party has sales of at least $141.8mil in 2013 is:

a) $14.2 mil
b) $70.9 mil
c) $141.8 mil
d) $283.6 mil

Answer 148

B - minimum merger value of $50mil adjusted for inflaction (2013 = $70.9mil)

Under the H-S-R Act, proposed mergers and takeovers must be filed with the FTC and DoJ for review of any potential anti-trust effect. Any transaction valued over $200mil, adjusted for inflation annually, must be filed. A merger or takeover where the value falls between $50 mil and $200 mil adjusted annually for inflation, must also file IF one party has sales or assets of $100mil AND the other party has sales or assets of $10mil. This is known as the 10/100 test.

The 2013 values adjusted for inflation are:
$10 mil becomes $14.2 mil
$50 mil becomes $70.9 mil
$100 mil becomes $141.8 mil
$200 mil becomes $283.6 mil

Question 149

Mutual funds are:
I Purchased at the Ask Price
II Purchased at the Ask Price plus a commission
III redeemed at the Bid Price
IV redeemed at the Bid Price less a commission

Answer 149

I & III

Question 150

When must a dealer-to-dealer confirmation be sent out in a DVP transaction?

a) trade date
b) trade date + 1
c) trade date + 2
d) no later than 35 days from trade date

Answer 150

B

dealer to dealer confirms must be sent on the business day after trade date unless a cash transaction, in which case confirm must be sent on trade date

Question 151

Which statement is TRUE regarding NASDAQ Closing Cross

a) the latest time that a MOC order is accepted is 3:50pm
b) the latest time that a Imbalance Only (IO) order is accepted is 3:50pm
c) Both MOC and IO orders are not accepted after 3:50pm
d) Both MOC and IO orders are accepted until the 4:00pm Closing Cross

Answer 151

A

MOC orders must be place by 3:50pm

IO orders can be placed until 4:00pm

Question 152

Rule 605 of Reg NMS requires:

a) each market center to prepare monthly electronic reports about its quality of executions and effective spreads
b) each BD to prepare quarterly reports on its routing of non-directed orders, including the 10 largest venues where orders were routed
c) market makers in OTC stocks to display any customer limit orders that are better-priced than the dealer’s own quote
d) any order execution facility to execute the order at the NBBO even if that execution facility is posting an inferior quote

Answer 152

A

Question 153

The purpose of a DPP roll up is to:

a) return invested capital to the limited partners
b) make the newly created MLP more marketable
c) reduce potential tax liability for the limited partners
d) improve the credit rating of the newly created MLP

Answer 153

B

take an illiquid DPP and transform into a more liquid MLP

Question 154

Which statements are true regarding DB plans?
I Contribution amounts are actuarially defined
II Contribution amounts are not actuarially defined
III Benefit amounts are actuarially defined and will continue for the life of the retiree
IV Benefit amounts are not actuarially defined and are based on a payout model chosen by the retiree

Answer 154

I & III

Question 155

Heightened branch office inspections are required under FINRA rules if a branch manager generates which percentage (or more) of the revenues of all the branches supervised by a district manager?

a) 5%
b) 10%
c) 15%
d) 20%

Answer 155

D

Question 156

An “established customer” under the penny stock rule is defined as an individual that has:
I had an account at that BD for more than 1 year
II had and account at that BD for more than 3 years
III made at least 3 purchases of different designated securities at that firm
IV made at least 5 purchases of different designated securities at that firm

Answer 156

I & III

Question 157

All of the following bond trades would be reported to TRACE EXCEPT a trade of a(n):

a) convertible debenture
b) mortgage bond
c) equipment trust certificate
d) general obligation bond

Answer 157

D

TRACE reports corporate and agency bonds, no government or municipals

general obligation bond is a municipal bond

Question 158

A customer that has not signed an arbitration agreement wishes to file a lawsuit against the registered rep, alleging the rep lied to induce trading for purposes of earning commissions. Which statement is TRUE?

a) the customer is not permitted to file a lawsuit and must enter binding arbitration
b) the customer may file a lawsuit in Federal court as long as the alleged violation did not occur more than 3 years ago
c) the customer may file a lawsuit in Federal court as long as the alleged violation did not occur more than 5 years ago
d) the customer may file a lawsuit in Federal court as long as the alleged violation did not occur more than 10 years ago

Answer 158

C

Question 159

Under NYSE Rule 76, a member firm that wishes to cross a customer order:

a) is prohibited from doing so
b) must offer the stock on the exchange at 1 penny higher than the bid held by the firm prior to crossing the order
c) must offer the stock to the specialist/dmm as an accommodation prior to crossing the order
d) may do so without restriction

Answer 159

B

NYSE Rule 76 states that if a member firm holds an order to buy and an order to sell from different customers at the same price, it cannot simply be crossed within the firm. The security must first be offered in the trading market at a price that is one trading increment higher than the bid held by the firm. If the offer is not taken, then the cross may be performed

Question 160

Which of the following information is needed on a new account form to open a new account?  Customer:
I DOB
II Education
III Marital Status
IV  SS Number

Answer 160

Only I & IV

Education not required
Marital Status only required for options account or pattern day trading account….

Question 161

Registered Rep called to active duty returns to civilian life. How many days does she/he have to return to work at the member firm before having registration suspended

Answer 161

90 days

Question 162

Which securities are included in the NASDAQ intraday Cross

a) NASDAQ listed
b) NYSE listed
c) AMEX listed
d) all of the above

Answer 162

D

NASDAQ intraday cross can include any stock in the S&P 500 Index or NASDAQ 100 Index

Question 163

Trading in a NASDAQ stock has been halted pending a news announcement. a customer wishes to place a limit order to sell short shares during this trading halt. Which statement is TRUE

a) Customer order cannot be accepted until trading resumes
b) Customer order cannot be accepted because it is a short sale
c) Customer order can be accepted by the member firm, but customer should be notified trading is currently halted
d) Customer order can be accepted by the member firm and executed through an unlinked ECN

Answer 163

D

Question 164

A new client wishes to open a new account at the BD, and wants to place a market order for immediate execution. Which is TRUE:

a) cannot be entered for immediate execution until full payment is received
b) can be entered if marked as unsolicited
c) can only be entered after customer identity has been verified
d) can be entered for immediate execution prior to verification of customer identity

Answer 164

D

Question 165

All of the following are functions of the Series 24 Except:

a) inspection of branch offices
b) approval of new accounts
c) establishment of written supervisory procedures
d) designation of an office as an OSJ

Answer 165

B

Question 166

The sale of which of the following investment company does not require the delivery of a prospectus:

a) unit investment trust
b) open-end fund
c) closed-end fund
d) face amount certificate

Answer 166

C

Question 167

All of the following statements are true about offerings of securities made under Reg S EXCEPT:

a) investors buy Reg S securities at a discount to the price of the same issue offered in the US market
b) the offering is permitted to be advertised to non-US residents
c) the offering can only be made to accredited investors
d) the security must contain a legend detailing US resale restrictions

Answer 167

C

Discount noted in A is due to lower costs to the issue since not not registered with the SEC

Question 168

An issuer will sell securities under the terms of an “investment letter” because:

a) it does not wish to go through the cost and time of registering the issue with the SEC
b) it is a WSKI and exempt from registration
c) the purchasers all reside in the same state
d) the offering is limited to no more than $5mil in a 12-mo period

Answer 168

A

Letter stock is a private placement sold under Reg D

Question 169

A corporation has established a profit sharing plan. In a year when the company has no profit, a plan contribution:

a) cannot be made by the company
b) can be made at the company’s discretion
c) must be made by the company
d) must be made only if the plan is underfunded

Answer 169

B

Question 170

SOX did which of the following:

a) extended the statue of limitations for filing lawsuits alleging insider trading violations
b) expanded the definition of a statutory insider to include securities personnel
c) extended liability for insider trading to the tipper as well as tippee
d) increased the informer bounty for successful insider trading prosecutions

Answer 170

A

Others were already part of the Insider Trading Act Amendment of 1988

Question 171

Who sets the maximum sales charges and minimum required quantity discounts on single purchases of mutual funds?

Who sets the actual sales charges and minimum required quantity discounts on single purchases of mutual funds?

Answer 171

Max/Min - FINRA

Actual - Fund Sponsor

Question 172

Under a section 4(2) exemption, all of the following are eligible purchasers of private placement offerings EXCEPT:

a) QIBs
b) Accredited Investors
c) Qualified clients
d) Issuers

Answer 172

D

qualified client is defined in the 40 Act under the “hedge fund rule” and while not specifically given safe haven under Reg D or Rule 144A, would probably qualify as being able to fend for itself under Section 4(2).

Question 173

Under the terms of a mini-maxi underwriting agreement, customer ernest money can be deposited in all of the following accept:

a) bank time deposits
b) bank money market account
c) commercial paper
d) CDs

Answer 173

C

Question 174

The uniform definition of a branch office would NOT include a(n):

a) registered rep’s home office where customers are occasionally met
b) insurance agent’s office from which an associated person effects 25 or fewer securities transactions in a year
c) location where an associated person meets with customers periodically
d) call center location where one or more associated persons conducts sales activities

Answer 174

B

(B) is a satellite office…not a branch as long as less than 25 trades are effected from that location in a year.

(A) would be excluded only if the registered person didn’t meet customers there

Question 175

Under Reg M, Rule 105, covering add-on offerings of securities, any short sales effected by persons within how many days of the effective date are prohibited from being closed by the purchase of the same security

a) 1
b) 2
c) 3
d) 5

Answer 175

D

Question 176

Anyone who becomes an officer, director, or holder of 10% or more of the outstanding shares of a company’s stock myst file a:
I Form 3
II Form 4
III within 2 business days of attaining such status
IV within 10 business days of attaining such status

Answer 176

I & IV

Form 3 is notification of status as an insider
Form 4 reports trades by an insider, and must be filed within 2 days of each trade

Question 177

When an introducing BD uses a clearing BD to generate its account statements, the required notice on the statement directing customer to promptly report inaccuracies or discrepancies in their accounts should direct customers to:

a) introducing BD
b) clearing BD
c) both introducing and clearing BDs
d) FINRA

Answer 177

C

Question 178

Customer versus Consumer

Answer 178

Customer has an account holding funds or securities with the member firm

Consumer simply wants the member firm to sell securities s/he holds and remit a check…does not hold an account

Question 179

Prearranged trades by insiders are:

a) prohibited
b) permitted under Rule 10b-5
c) permitted under Rule 10b-5-1
d) permitted under Reg FD

Answer 179

C

Question 180

The Letter of Intent is
I  signed by the underwriter
II signed by the underwriter and the syndicate
III binding on the underwriter
IV not binding on the underwriter

Answer 180

I & IV

Letter is not binding and subject to signing of the contract (underwriting agreement)

Question 181

SOX requires attestation as to the truthfulness of the company’s 10Q and 10K filings be made:
I quarterly
II annually
III by the CEO and CFO
IV by the Chairman of the audit committee and Chairman of the Board of Directors

Answer 181

II & III

Question 182

Which of the following would use Rule 415 to register a securities offering?
I WKSI
II Seasoned Issuer
III Ineligible Issuer
IV Unseasoned Issuer registering shares of a PIPE

Answer 182

II & IV

WKSI is rule 405

Question 183

SEC rule 10b-5-1

Answer 183

gives officers of publicly held companies a safe harbor from being charges with insider trading violations if they establish a pre-arranged trading plan for that issuer’s securities

Question 184

Under SEC Rule 168, forward looking information released by an issuer includes all of the following EXCEPT:

a) projections of the issuer’s revenues, income, or loss and EPS
b) statements about management’s plans and objectives
c) statements about the issuer’s future economic performance
d) information released as part of an anticipated offering of securities

Answer 184

D

Question 185

All of the following statements are true about box counts EXCEPT the count must:

a) be performed at least quarterly
b) include securities in transit
c) include securities in transfer
d) include securities in reclamation

Answer 185

B

Box count must include securities a firm does not physically have nut which are under the firm’s control. This does not include securities in reclamation

Question 186

Which of the following criteria are used to determine if a corporation can list its securities on the NASDAQ Global Market
I Agg MV of the issuers equity securities
II Reported income and net worth of the issuer
III Share price of the issuers stock
IV Number of shareholders

Answer 186

All are criteria

Question 187

The Hart-Scott-Rodino Act requires:
I filing of a proposed merger or takeover that exceeds the threshold limit with the SEC
II filing of a proposed merger or takeover that exceeds the threshold limit with the FTC
III the completion of a 20 day review period before the proposed merger or takeover transaction can be closed
IV the completion of a 30 day review period before the proposed merger or takeover transaction can be closed

Answer 187

II & IV

Question 188

A carrying firm that is engaged in market making in 50 stocks valued at more the $5 bid. The firm’s minimum net capital requirement is:

a) $50,000
b) $100,000
c) $125,000
d) $250,000

Answer 188

D

Min net capital for a market maker is $100,000 and Max is $1,000,000…. based on $1,000 for each stock with bid under $5 and $2,500 for each stock with bid over $5.
For this firm, $125,000
HOWEVER, minimum net capital for a carrying BD is $250,000.

Question 189

A privately held carrying member firm that uses the Alternate Method of computing Net Capital is performing a self-underwriting of its own securities. After completing the offering, the member firm finds that its computed Net Capital is less than 7% of debits in the Reserve Formula. Which statement is TRUE:

a) the member firm can take possession of the funds held in escrow and use them
b) the member firm must transfer the funds held in escrow into the Special Reserve Bank Account for Benefit of Customers
c) the member firm must return the escrowed funds to the purchasers of the offering
d) The member firm must give immediate electronic notice to FINRA and cease business operations

Answer 189

C

Rule 2720 sets guidelines for a member firm that wishes to take itself public.
Proceeds from the offering must be held in escrow with release conditioned upon the member firm performing a net capital computation after the offering has settled.
IF after taking into account the additional capital raised by the offering, the member firm’s:
NC is below 120% of the minimum
Ratio AI/NC > 10:1
NC falls below 7% of debits for firms under the Alternate Method
THEN funds raised must be returned to the purchasers and offering must be withdrawn

Question 190

A natural offering of securities is one made via a(n)

a) PIPE transaction
b) ATM transaction
c) Reg D transaction
d) Rule 144A transaction

Answer 190

B

ATM is at the market
typically made by “name brand” companies under a shelf registration

Question 191

Which of the following account information MUST be confirmed with a client within 30 days of account opening?

a) social security number
b) income of spouse if joint account
c) DOB
d) Security positions tak in in account

Answer 191

B

Rule 17a-3 requires customer account record contain:
name
tax id
address
phone
DOB
employment status, including occupation
annual income
net worth
investment objectives

In joint account, must contain this info for both owners

Question 192

Which statement is TRU regarding member private offerings (MPOs)

a) minimum of 85% of the offering proceeds must be used for business purposes
b) no more than 25% of the offering proceeds can be used for expenses
c) at least 50% of the offering amount must be made available to employees of the issuer
d) no more than 10% of the offering proceeds can represent selling compensation to the member firm

Answer 192

A

Intent of Rule 5122 covering MPOs is to ensure investors get full disclosure and member firm handling the private placement does not receive excessive compensation.

Question 193

When recommending a high yield security to a customer, which of the following is of the LEAST concern:

a) tax implications associated with the investment
b) yield to maturity offered by the investment
c) effect on credit quality of adding the investment to the customer’s portfolio
d) effect of interest rate movements on the value of the investment

Answer 193

B

Considerations for non traditional investments:
lack of liquidity
existence (or lack of) a secondary market
interest rate risk
credit risk
tax consequences
transaction costs

Yield (or return) vs risk is assumed to be covered in the “product level suitability” done before an investment is even considered for individual customers

Question 194

A registered rep only deals in stocks and other equity investments. As a one time event, he helps the firm negotiate a municipal underwriting with a municipal issuer official he knows from other business dealings. He receives a finder’s fee for his help. Which of the below is true:

a) because 1-time event, he is not considered an MFP
b) he now considered an MFP
c) all registered reps at the firm are considered MFPs
d) all registered reps at the firm are excluded from the definition of MFP

Answer 194

B

Question 195

Reporting of trades to TRACS within 10 seconds is require until:

a) 4:30pm ET
b) 6:30pm ET
c) 8:30pm ET
d) 10:30pm ET

Answer 195

B

TRACS reports trades of securities quoted in the ADF

• between 8am and 6:30pm, trades must be reported in 10 seconds
• between 6:30pm and 8am, trades must be reported in 15 minutes

Question 196

Under Reg M, Tier 1 securities are those with a minimum:
I daily trading volume of $100,000
II  daily trading volume of $1,000,000
III  market float of $25mil
IV  market float of $150mil

Answer 196

II & IV

Tier 1 = ADTV of $1mil and public float of $150mil
Tier 2 = ADTV of $100k and public float of $25mil
Tier 3 = everything else

syndicate members who are not market markers in that stock that are in the underwriting group for an add on offering
Tier 1 - no restrictions placed on market makers trading the issue
Tier 2 - restricted to the business day prior to the effective date
Tier 3 - restricted for 5 business days prior to the effective date

Question 197

All of the following are account activities that will obligate a firm to send a monthly account statement:

a) mutual fund dividend
b) liquidation of a security position
c) receipt of a cash dividend
d) interest debit

Answer 197

A

Question 198

SEC Rule 153A states that in a merger or reorg, existing shareholders must be delivered a prospectus prior to the:

a) registration statement filing
b) shareholder vote
c) record date
d) effective date

Answer 198

B

Question 199

A listed company has asked a BD to buy its own shares in the market under a Treasury stock repurchase plan. the inside market is 15.00-15.25. The last reported sale was at $15.10. At what price can the stock be purchased?

a) $15.00 or lower
b) $15.10 or lower
c) $15.25 or lower
d) any price as long as the trade is effected on an agency basis

Answer 199

B

purchases must be at the higher of the last reported sale or independent bid

Question 200

Which position CANNOT be held in a portfolio margin account

a) common stock
b) long option
c) short option
d) debt instrument

Answer 200

D

Portfolio margin accounts are only used to hold equity securities

Question 201

The annual certification that the firm has procedures and processes to achieve compliance with all securities laws and regulations is performed by the BD’s

a) CEO
b) CCO
c) CFO
d) CIO

Answer 201

A

CEO must sign the attestation

Question 202

Under the Uniform Practice Code, upon failure of the buyer to accept delivery of securities in accordance with the terms of the contract, the seller may:

a) immediately sell out the securities without notice in the best available market
b) sell out the securities only after giving the buyer notice of the proposed sell out
c) sell out the securities no earlier than 3 business days from settlement date
d) not sell out the securities unless a written request is made to, and approval is received from FINRA

Answer 202

A

Question 203

The term DNR would apply to:
I     Buy Limit Orders
II    Buy Stop Orders
III   Sell Limit Orders
IV  Sell Stop Orders

Answer 203

I & IV

Question 204

Under the provisions of Rule 10b-16, it is unlawful for any broker or dealer to make any change to the terms or conditions under which credit charges will be made in a margin account that would result in higher interest charges to the customer unless the customer receives written notice:

a) promptly
b) no less than 10 business days prior to the change
c) no less than 30 business days prior to the change
d) no less than 60 business days prior to the change

Answer 204

C

Question 205

All of the following information is included in an OATS report EXCEPT:

a) alphanumeric order identifier
b) MPID
c) TIF
d) CUSIP

Answer 205

D

Major items on an OATS report:
Order Receiving Firm Market Participant ID (MPID)
Order Receiving Firm Order ID
Order Received Time Stamp
Issue Symbol/Buy or Sell/Quantity/Limit or Stop Price
Time in Force (TIP)
Expiration Date & Time
DNR or DNI

Question 206

A customer shorts stock prior to the ex-date. Who will receive the dividend from the issuer

a) buyer of shares
b) seller of shares
c) lender of shares
d) borrower of shares

Answer 206

A

Question 207

An adverse ruling in a complaint regarding NASDAQ System practices being handled under the code of arbitration may be appealed to the:
I District Hearing Panel
II National Adjudicatory Council
III SEC

Answer 207

D

Decisions of arbitration panels are final and cannot be appealed

Question 208

An associated person of ABC securities maintains her personal account at the firm. The associated person leaves to join XYZ and ABC files a U-5 Form with CRD on a timely basis. Under SEC rules, ABC must keep copies of the associated person’s account records for:

a) 2 yrs
b) 3 yrs
c) 5 yrs
d) 6 yrs

Answer 208

D

Account records, not personnel records

Question 209

Which of the following individuals is permitted to sell a variable annuity
I  Insurance Co Rep
II Insurance Co BD - Limited
III General Securities Rep
IV  Limited Rep - Corporate Securities

Answer 209

II & III

Question 210

Which of the following orders for ABCD stock can be accepted into the NASDAQ System when ABCD is trading at $10.50
I  Buy 100 shares of ABCD @ $10
II  Sell 100 shares of ABCD @ $10 Short
III  Buy 100 shares of ABCD @ $11
IV Sell 100 shares of ABCD @ $11 Short

Answer 210

I & IV

(II) is order to Buy @ 11 or better and will be filled immediately
(III) is order to Sell @10 or better and will be filled immediately

(I) will go into the books and be executed if the market falls(
(IV) will go into the books and be executed if the market rises

Question 211

A partner of a BD has a personal account at the firm. Are his assets insured by the SIPC?

Answer 211

No.

An owner’s (partner) personal account does not receive SIPC coverage. The assets are considered at risk and would be used to pay claims in bankruptcy

Question 212

FINRA Code of Procedure would be used by FINRA to:

a) resolve a dispute between two members regarding partial delivery of stock
b) handle the processing of Form BDs filed with FINRA by new BD applicants
c) determine the penalty to be applied to a member firm for failing to report transactions in eligible securities to TRACE
d) handle a customer complaint against a BD alleging suitability violations and the customer has signed an arbitration agreement

Answer 212

C

Code of procedure is used to resolve complaints regarding rule violations…typically filed by FINRA Department of Enforcement or FINRA Department of Market Regulation.

Question 213

Customers who are not BDs that wish to cary unlisted derivatives in a portfolio margin account must maintain at least:

a) $1mil of equity
b) $2.5mil of equity
c) $5mil of equity
d) $10mil of equity

Answer 213

C

Portfolio margin rules:
Min $100k equity to open portfolio margin account
Min $500k equity for prime brokerage account
Min $5mil equity for customers who are not BDs or futures firms if they wish to carry unlisted derivatives or conduct day trading in the portfolio margin account

Question 214

A customer order to sell can be marked LONG in each of the following except:

a) securities held in street name by BD
b) securities held in safe deposit box and customer will deliver on settlement
c) securities are held registered in the name of the customer in book entry form by DTCC
d) securities were previously purchases by that customer at the same BD that received the customer sell order

Answer 214

D.

answer doesn’t indicate where the securities are…if their location is not known, the order can’t be marked LONG

Question 215

A FINRA member firm:

a) is prohibited from issuing fairness opinions on the price of a proposed transaction
b) can only issue a fairness opinion on the price of a transaction if the member firm had no business dealings with the issuer for the last two years
c) can only issue a fairness opinion on the price of a transaction if the member firm discloses whether it was compensated for this by any party to the transaction
d) can only issue a fairness opinion on the price of a transaction if it uses a “fairness committee” to approve or issue the opinion

Answer 215

C

Question 216

The president of PDQ donates restricted shares to a charity after holding them for 3 years fully paid. The charity can sell the stock without restriction:

a) immediately
b) after holding the securities for 90 days
c) after holding the securities for 1 yr
d) after holding the securities for 2 yrs

Answer 216

A

As long as the 6mo holding requirement was met prior to donation, there is no requirement to hold for an additional 6 mos

Question 217

Private Placements comply with Reg D if:
I sale is limited to a total of 35 investors (both accredited and non-accredited)
II an offering circular is provided to all purchasers of the issue
III the issue is not advertised to the general public
IV all non-accredited investors are sophisticed

Answer 217

II, III, & IV

Reg D allows for an unlimited number of accredited investors and max of 35 non-accredited investors

Question 218

A member firm that executes a “net transaction” for a non-institutional customer:

a) has violated the FINRA conduct rules
b) must get the customer’s written consent prior to executing each net transaction
c) must get the customer’s oral consent prior to executing each net transaction
d) must have the customer sign a blanket consent letter authorizing any net transaction

Answer 218

B

Net transaction is where a market maker fills the order by buying the security in the market rather than out of inventory.

Question 219

Under the Buy-In procedure permitted under the Uniform Practice Code, a contract may be closed by purchasing the issue:
I   for cash
II  in a regular way trade
III  at the contract value
IV at the current market value

Answer 219

I & IV

Question 220

Predispute arbitration agreements between member firms and their customers are:

a) prohibited
b) permitted only if the firm provides the customer with a copy of the agreement at the time of signing and gets written customer acknowledgement of receipt
c) permitted only if the firm provides the customer with a copy of the agreement with 30 days of signing and gets written customer acknowledgement of receipt
d) permitted without restriction or condition

Answer 220

C

Question 221

Currently the market price of ABC is $50 and DEF is $27. In which choice can both of the following orders from customers be immediately executed?

a) Buy 200 shares of ABC at the market; Sell 200 shares of ABC @ $55
b) Sell short 200 shares of ABC @ $55; Sell 200 shares of ABC @$45
c) Buy 200 shares of DEF @ $30; Sell short 200 shares of ABC @ $45
d) Buy 200 shares of DEF @$30 stop; Sell short 200 shares of ABC @ $45 stop

Answer 221

C

Question 222

Employer contributions for Keogh Plan for employees require:
I  at least 18 years of age
II at least 21 years of age
III completed at least 1 yr of service
IV completed at least 3 yrs of service

Answer 222

II & III

Question 223

If there is a deficiency in a portfolio margin account, the customer has how many busienss days to meet the margin call?

a) 1
b) 3
c) 5
d) 7

Answer 223

B

Question 224

Notification to the SEC AFTER first sale is permitted under

a) Rule 144
b) Rule 147
c) Reg A
d) Reg D

Answer 224

D

Rule 144 - notice at or prior to sale
Rule 147 - exemption filed 10 business days prior
Reg A - Form S1-A filed 20 days prior
Reg D - up to 15 after first sale

Question 225

Which activity requires the designation of that location as an OSJ:

a) review and approval of retail communications
b) opening of new accounts for clients of the member firm
c) answering of client inquires in a call center
d) preparation and distribution of customer account statements

Answer 225

A

Question 226

Under FINRA rules, a BD underwriting its own securities offering must disclose which of the following on its registration statement/offering document:

a) computed net capital
b) name of the qualified independent underwriter
c) names of syndicate members
d) names of BD employees that have agreed to buy the issue

Answer 226

B

Question 227

Which of the following are defined as “branch” offices of your firm by FINRA?
I A home office of a registered representative where the representative regularly meets with customers
II An office sublet by your firm to another FINRA member firm
III An office location of your firm listed in a telephone directory
IV An office shared with another company that is not in the securities business

Answer 227

I, III, & IV

FINRA defines a branch office as a location where underwriting or securities business is performed or one that is advertised as such. Under this definition, a home office of a registered representative is not a “branch” as long as the location is not advertised as a branch; the representative does not meet customers at that office; and the representative does not accept cash or securities at that office. Since this representative is meeting customers at his or her home office, this falls under the branch definition. An office listed in a phone directory is being “advertised” and therefore is a branch; and an office shared with another type of business is also your branch (since you would be paying your share of expenses). An office sublet by your firm to another FINRA firm is the other firm’s branch office - not your firm’s.

Question 228

A FINRA member is OBLIGATED to accept which of the following orders for a NASDAQ security?
I Market
II Limit
III Stop

Answer 228

I only

FINRA members are only obligated to accept market orders from customers. They can accept limit orders, subject to the execution restrictions of the limit order protection rule. Regarding stop orders, a trade must occur at the stop (trigger) price for the order to become executable. Some FINRA member firms accept these orders; others will not. Also note that while the NASDAQ System has the capability of handling market and limit orders, market makers and order entry firms are only obligated to take market orders under NASDAQ rules. They accept limit orders at their own discretion for entry in the System. Currently, the NASDAQ System does not accept stop orders; however, a member firm can accept a stop order at its own discretion placing it on its internal order book for execution if the market moves to or through the stop price.

Question 229

All of the following statements are true regarding the entry of a stabilizing bid on the NASDAQ system EXCEPT:

A) Only one market maker is allowed to enter a stabilizing bid
B) Notification must be given to NASDAQ in writing prior to the first day that the stabilizing bid will appear on the system
C) Market makers are prohibited from maintaining a regular bid and offer at the same time that a stabilizing bid is entered
D) No identification is given on NASDAQ that the bid is a stabilizing bid

Answer 229

D.
When a stabilizing bid is entered into the NASDAQ system, it must be identified as such. The other statements are true. Only one market maker is allowed to enter a stabilizing bid; notification must be given to NASDAQ in writing prior to the first day that the stabilizing bid will appear on the system; and market makers are prohibited from maintaining a regular bid and offer at the same time that a stabilizing bid is entered by that market maker.

Question 230

A firm electing to use the alternative method of computing net capital must maintain minimum dollar net capital of:

a) $50,000
b) $250,000
c) $500,000
d) $1,000,000

Answer 230

B.

Under the alternative net capital method, a firm must maintain net capital equal to at least 2% of aggregate debit balances in the Customer Reserve computation, but not less than $250,000 of net capital.

Question 231

Which statement is TRUE regarding margin on over-the-counter securities?

a) All over-the-counter securities are marginable under Federal Reserve regulations
b) All NASDAQ Global Market securities are marginable under Federal Reserve regulations
c) All over-the-counter Bulletin Board securities are approved for margin by the Federal Reserve Board
d) Only exchange listed securities traded over-the-counter are marginable

Answer 231

B.

The Federal Reserve approves all NASDAQ securities for margin. Any other over-the-counter security must be on the “over-the-counter margin list” approved by the Federal Reserve to be marginable. Any exchange listed security is marginable under Federal Reserve rules.

Question 232

Members must make which of the following available to regular bona fide customers and other members upon request?
I Copy of the firm’s latest statement of financial condition
II Copy of the firm’s latest income statement
III Copy of the firm’s latest FINRA audit results

Answer 232

I only

Under FINRA rules, bona fide customers must be provided with the latest copy of the firm’s balance sheet upon request. Members must also provide this information to other member firms. A bona fide customer is defined as one who has cash or securities in the possession of the broker-dealer.

Question 233

A member firm that is a market maker in ABCD stock has numerous accounts for which it acts as an investment adviser. Under the Investment Advisers Act of 1940, a transaction for one of these accounts in ABCD stock must be:

a) effected on an agency basis
b) effected on a principal basis
c) executed by another independent market maker in that security
d) executed by the dominant market maker in that security

Answer 233

A.

The Investment Advisers Act of 1940 requires that market makers, when effecting trades for accounts where it acts as investment adviser, can only effect those trades in an agency capacity. One must remember that this rule was written over 60 years ago, when the OTC market was in its infancy, and transaction prices of OTC securities were not readily available. Thus, trades in OTC issues that were done on a principal basis might be at prices that were not reasonable related to the current market. However, trades done on an agency basis require that a contra-broker be found to take the other side of the trade - thus a true market price is determined.

Question 234

A proprietary trading desk trades ahead of a customer limit order placed with the firm’s market making desk. Which statement is TRUE?

a) This is permitted without restriction
b) This is permitted only if the firm has a “Chinese Wall” in place between the trading desk and market making desk
c) This is permitted only if the firm is a bona fide market maker in the stock
d) This is prohibited under all circumstances

Answer 234

B.
If the firm did NOT have a Chinese Wall in place between its proprietary trading desk and its market making desk, then the customer limit order must be filled first. However, if a Chinese Wall is in place, then the proprietary trading desk would have no knowledge of the customer limit order, and the trading desk could place orders to buy or sell that security “at will”.

Question 235

A customer directs your firm to sell 100 shares of ABCD stock, for which your firm charges a commission of $85.00. The customer directs the firm to use the proceeds to buy 100 shares of PDQR, a stock included on NASDAQ. Your firm is a market maker in PDQR, and confirms to the customer at $21 Net. What is the combined markup?
(Below is the NASDAQ market for PDQR stock at the time of the transaction.)

PDQR
BID	ASK
Dealer 1	$20.00	$20.10
Dealer 2	$19.75	$20.25
Dealer 3	$19.90	$20.40

a) 2.14%
b) 4.35%
c) 8.70%
d) 9.00%

Answer 235

C.

This is a proceeds transaction. In a proceeds transaction, a customer liquidates a position and uses the proceeds to buy into another position. In these circumstances, a combined markup is charged. The formula for the combined markup is:

(Commission Sell + Commission Buy)/Inside Ask or Purchase = combined mark up

On the sale, a commission of $85.00 was charged on 100 shares = $.85 per share. On the purchase, the customer was charged 21 net. The inside ask price is 20.10; so the markup is $.90 per share. The combined markup percentage is:

($.90 (per share) + $.85 (per share))/$20.10 (per share) = 8.70%

Question 236

SEC Rule 10b-18 allows an issuer to buy its shares in the open market:

a) at any price that is reasonably related to the current market
b) at the highest independent bid or the last reported sale price, whichever is higher
c) at the lowest independent offer or the last reported sale price, whichever is lower
d) under no circumstances, since this is considered to be market manipulation

Answer 236

B.

SEC Rule 10b-18 sets ground rules for issuers or affiliated persons who wish to buy their shares in the open market. If an issuer aggressively buys its stock in the market, or bids for its stock, it can manipulate the market price upwards. Bids and purchases that are made in compliance with Rule 10b-18 will not be considered manipulative activities under Rule 10b-5 (“catch-all” fraud rule).
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 (covered next); 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).

Question 237

Under SEC Rule 10b-10, all of the following information is required on customer confirmations for NASDAQ trades EXCEPT:

a) whether the firm acted as agent or principal in the transaction
b) difference between the reported trade price and the price to the customer
c) whether the order was solicited or unsolicited
d) dual agency, if applicable

Answer 237

C.
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 capacity (agent or principal) in which the firm acted must be disclosed. The commission must be disclosed in agency trades for all securities; and the markup or markdown must be disclosed for principal transactions in NASDAQ securities. If dual agency is applicable (an agency cross - that is, crossing an order to buy and an order to sell at the prevailing market), this must be disclosed as well.

Question 238

Rule 144 allows a broker to contact which of the following potential buyers of 144 stock?
I Existing customers of the firm that already have positions in that security
II All existing customers of the firm that have cash or securities positions
III A customer who has indicated an unsolicited bona fide interest in the securities within the preceding 10 business days
IV A broker-dealer who has indicated an unsolicited bona fide interest in the securities within the preceding 60 calendar days

Answer 238

III & IV

As a general rule, solicitation of orders to buy Rule 144 stock is prohibited. However, if a customer has indicated an unsolicited bona fide interest within the preceding 10 business days; or a broker-dealer has indicated an unsolicited bona fide interest within the preceding 60 calendar days; these persons can be recontacted to buy the stock.

Question 239

In order for an issuer to qualify for a “safe harbor” under SEC Rule 168, factual or forward-looking information disclosure is:
I permitted prior to the filing of a registration statement
II not permitted prior to the filing of a registration statement
III permitted after the filing of a registration statement
IV not permitted after the filing of a registration statement

Answer 239

I & III

Under Rule 168, which was passed in 2005, the SEC gave a “safe harbor” to a reporting issuer’s forward-looking statements and factual statements that are made in the normal course of business. Thus, these issuers did not have to worry about investor lawsuits that they were making these statements as part of an offering of securities. The rule permits these disclosures anytime - as long as they are not being made in connection with a securities offering and as long as they are being made in the regular, normal fashion in which prior similar disclosures were made.

Question 240

A market maker effects an agency cross transaction of 400 shares at $41.00, charging the buyer a commission of $.50; and the seller a commission of $.50. Under ACT rules, the transaction would be reported as:

a) 400 shares at $40.50
b) 400 shares at $41.00
c) 400 shares at $41.50
d) 400 shares at $40.50; $400 shares at $41.50

Answer 240

B.

This is an agency cross transaction - where a buy order for a customer and a sell order for another customer are “crossed” by the market maker. There is only 1 report of the trade made to ACT - that is, for the sell side. If there was a report made of both the buy and sell, there would be a double report of the same trade. All trade reports are made at the price of the trade excluding commissions, markups; markdowns; or service fees.

Question 241

Under SEC Rule 606 of Regulation NMS, customers must be notified in writing of their right to request order routing information:

a) monthly
b) quarterly
c) semi-annually
d) annually

Answer 241

D.
Under SEC Rule 606 of Regulation NMS, customers must be notified, in writing, at least once per year, of their right to request information on how and where their orders were routed for execution. The information provided to a requesting customer must cover the prior 6 month’s trades.

Question 242

Under the Securities Exchange Act of 1934, persons defined as insiders are permitted to:
I sell long the stock of that company
II sell short the stock of that company
III sell short “against the box” the stock of that company if the short position is covered within 20 days

Answer 242

I & III

Insiders are prohibited from selling short the stock of that company. However, they are permitted to go “short against the box” to lock in a gain (yet defer the tax event until a later time if very specific conditions are met) as long as the short position is closed out within 20 days. There is no prohibition against an insider selling a long position. Of course, both purchases and sales by insiders (defined under the Act as officers, directors, and 10% shareholders of public companies) must report their trades to the SEC.

Question 243

NASDAQ Level II shows the following quotes for market makers in ABCD stock:
Raymond James 10.00 10.50
Morgan Stanley 10.20 10.60
UBS Cap. Mkts 10.25 10.60
Wells Fargo Sec. 10.15 10.75
The entry of which of the following quotes will result in a crossed market?

I 9.25 - 9.75
II 10.50 - 10.75
III 9.90 - 10.00
IV 10.50 - 11.00

Answer 243

I & III

A crossed market is one where the inside bid is higher than the inside ask. If quote I is entered ($9.25 - $9.75), the inside market becomes $10.25 - $9.75 - a crossed market. If quote II is entered ($10.50 - $10.75), the inside market becomes $10.50 - $10.50 - a locked market. If quote III is entered ($9.90 - $10.00), the inside market becomes $10.25 - $10.00 - a crossed market. If quote IV is entered, the inside market becomes $10.50 - $10.50 - a locked market.

Question 244

A broker-dealer is recommending the purchase of shares of a corporation that is affiliated with the broker-dealer. The firm can buy these shares for its discretionary customer accounts:

a) under no circumstances
b) if the firm has on file discretionary power of attorney signed by the customer
c) if the control relationship is disclosed to the customer prior to entering into the contract to buy the security
d) if each discretionary order ticket is approved by a principal in writing prior to the execution of the trade

Answer 244

C.

There is no explicit prohibition to the firm’s buying the shares of the corporation with which it has a control relationship for its discretionary accounts. However, the existence of the control relationship must be disclosed to the customer prior to entering into the contract to buy the security (that is, prior to the placement of the order); and if the disclosure was not made in writing, then written disclosure must be given at, or prior to, completion of the transaction (that is, by settlement). Of course, the trade must be suitable for the account or a violation of the Conduct Rules will exist.

Question 245

The FINRA 5% Policy applies to which of the following transactions?
I A member purchases an over-the-counter stock to fill a customer buy order
II A member buys mutual fund shares to fill a customer order
III A member sells a customer 100 shares of a new issue of common stock
IV A member performs a riskless transaction in the same stock between two different customers

Answer 245

I & IV

The FINRA 5% Policy only applies to over-the-counter and exchange transactions in non-exempt securities. It does not apply to new issue offerings. FINRA regulates the compensation that underwriters earn selling new issues through the Review of the Committee on Corporate Financing. FINRA regulates mutual fund issues (which are “new” issues as well, since the fund continuously offers new shares) through the maximum sales charge limitation of 8 1/2% of the Public Offering Price.

Question 246

Trade confirmations MUST disclose which of the following:
I The amount of any commission charged in an agency trade
II The amount of any markup 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

Answer 246

I, III, & 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 markup 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.

Question 247

A market maker in an OTCBB stock is quoting the stock at:
$10.00 - $10.25 (10 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:

a) must sell 200 shares at $10.00
b) must update its quote size to 10 x 12
c) must update its quote size to 12 x 10
d) is not required to take any action

Answer 247

C.

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 1000 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 1200 shares at $10 in the market. SEC rules require that the quote be updated within 30 seconds to reflect this. (Note - do not confuse this 30 second updating rule with the 10 second trade reporting rule.)

Question 248

Under Rule 144, control stock that is purchased in the open market can be sold:

a) immediately
b) after a 6 month holding period has elapsed
c) after a 1 year holding period has elapsed
d) after a 2 year holding period has elapsed

Answer 248

A.

Under Rule 144, control stock that is purchased in the open market can be sold immediately (if they are bought in the open market, the shares must be registered). However, the 1% and 4 week trading average limits on sale must still be met. Restricted stock (unregistered stock acquired through a private placement) can only be sold under Rule 144 after having been held for 6 months, fully paid.

Question 249

All of the following information must be obtained from a customer prior to account opening EXCEPT:

a) Name
b) Address
c) W-9
d) Birthdate

Answer 249

C.

The W-9 Form is a “Formal Request for Taxpayer Identification Number.” If a company makes payments that must be reported to the IRS on Form 1099 or Form 1096, it must include the taxpayer’s I.D. number on the report. By using the W-9, the company will have the proper tax I.D. number on file to make the report. The W-9 must also be used to get the tax I.D. number from non-resident aliens. If the form is not completed, then the company is obligated to take back-up withholding from any disbursements made to that person. For a typical customer opening a brokerage account, a W-9 is not required. The required 4 critical pieces of information that must be obtained prior to account opening are: the customer’s name, street address, social security or tax I.D. number and date of birth. This is the information used to verify the customer’s identity (CIP program) promptly after account opening.

Question 250

Under FINRA rules regarding advertising, all of the following statements are true EXCEPT:

a) If a recommendation of a security is made, the price at the time must be included
b) If a testimonial is given, it must be stated whether the maker has been paid for the testimonial, if more than a nominal sum was paid
c) The performance of previous recommendations may not be shown in the report
d) It must be disclosed if the firm was a manager or co-manager in an underwriting of any of that company’s securities within the past 12 months

Answer 250

C. Under FINRA advertising rules, if a recommendation of a security is made, the price of the security at the time and the date must be included. If a testimonial is given, it must be stated if the maker has been paid, if more than a nominal amount is involved. It also must be disclosed if the firm owns the security or options, warrants, etc.; if the firm is a market maker in the security; or if the firm was a manager or co-manager in an underwriting of any of the company’s securities within the past 12 months. There is no prohibition on showing past performance of recommendations - as long as all recommendations of that type are shown (one cannot be deliberately selective and only show the “good” ones) and a statement is made that past performance does not predict future results.

Question 251

Under the FINRA Conduct Rules regarding mutual fund breakpoints, the maximum sales charge on single purchases of non-12b-1 mutual funds up to $10,000 is:

a) 8 1/2% of the Public Offering Price
b) 8 1/2% of Net Asset Value
c) 9% of the Public Offering Price
d) 9% of the Net Asset Value

Answer 251

A.

The maximum sales charge that can be imposed on single purchases of non-12b-1 mutual funds is 8 1/2% of the Public Offering Price under the FINRA Conduct Rules. If the fund has a 12b-1 plan in effect, the maximum sales charge percentage is reduced.

Question 252

Under NYSE rules, the latest time that an MOC order can be entered or canceled is:

a) 3:30 PM ET
b) 3:45 PM ET
c) 3:50 PM ET
d) 4:00 PM ET

Answer 252

B. The NYSE allows “MOC” - Market On Close - orders to be entered, or canceled, until 3:45 PM ET. Note, in contrast, that NASDAQ allows MOC orders to be entered or canceled until 3:50 PM ET.

Question 253

Current 8K filings must be made for material changes in financial or operating condition occurring in which of the following?
I	 	Registered issuers of securities
II	 	Registered broker-dealers
III	 	Registered investment advisers
IV	 	Registered investment companies

Answer 253

I Only

8K reports must be filed by domestic issuers of registered securities for any material change in the status of the issuer - within 4 business days of the change. Investment companies, broker-dealers and foreign issuers of ADRs are not required to file 8K reports.

Question 254

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

Answer 254

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.

Question 255

Which two of the following statements are TRUE about NASDAQ limit order rules?
I Member firms must accept limit orders
II Member firms are not obligated to accept limit orders
III If accepted, limit orders may be subject to special handling charges
IV If accepted, limit orders cannot be subject to special handling charges

Answer 255

II & III

NASDAQ market makers are not under the obligation to accept limit orders from customers - they only have to accept market orders. This way, if the market maker does not want to comply with the requirements of the Limit Order Protection Rule, it does not have to do so. If they do accept limit orders (which the vast majority of market makers do), they can impose special charges for the additional work of executing this type of order.

Question 256

Time extensions for the collection of monies resulting from Reg. T initial margin calls are requested from the:

a) Federal Reserve Board
b) Self-Regulatory Authority (FINRA)
c) Member Firm
d) Securities and Exchange Commission

Answer 256

B.

Time extensions for collection of monies due under Reg. T calls are granted by the self-regulatory authority. For over-the-counter transactions, FINRA grants the extensions. FINRA will typically grant a 3-business day 1st extension; and if needed under truly extraordinary circumstances, will grant a 2nd extension if the funds were not collected.

Question 257

Which of the following statements are TRUE regarding the FINRA Conduct Rule on sharing in customer accounts? Sharing in an account:
I is prohibited in all circumstances
II is not permitted unless the member firm gives prior written approval to the account
III is only allowed in direct proportion to the capital contributed by the person associated with the member
IV of the “immediate family” of the person associated with the member is permitted and need not meet the “proportionate test”

Answer 257

II, III, & IV

Sharing in a customer account is prohibited under FINRA rules unless the member firm gives prior written approval to the account; and sharing in the customer account occurs in direct proportion to the capital contributed by the person associated with the member. Sharing in an account of the “immediate family” of the person associated with the member is permitted and need not meet the “proportionate test”. This account also needs approval of a principal.

Question 258

Which of the following orders are permitted to be entered into the NASDAQ Market Center Execution System?
I	 	Riskless principal trade
II	 	Marketable limit order
III	 	Proprietary orders
IV	 	Agency orders

Answer 258

All are permitted

The NASDAQ Market Center Execution System accepts market, marketable limit, and limit orders. It allows proprietary trades and agency trades.

Question 259

Under MSRB rules, an MFP is defined as any:

a) employee of the municipal broker-dealer
b) associated person of the municipal broker-dealer
c) associated person of the municipal broker-dealer except one who solely sells to natural persons
d) associated person of the municipal broker-dealer except one who solely sells to natural persons and any supervisors of these individuals

Answer 259

D.
An MFP (Municipal Finance Professional) is any associated person engaged in municipal securities representative activities EXCEPT the sale of municipal securities to “natural” persons - meaning human beings. Municipal securities representative activities include:
the underwriting or sales of municipal securities;
the solicitation of municipal securities business;
financial advisory or consultant services with respect to the issuance of municipal securities;
research of investment advice regarding municipal securities; and
any other activities which involve communication with public investors in municipal securities.
In addition, any principal that supervises these persons are defined as MFPs. It is important to note that since sales activities with “natural persons” are not considered to be MFP activities, retail representatives are excluded from the definition and do not fall under the political contribution rules.

Question 260

Under SEC Rule 17a-11, reporting is INITIATED if a clearing broker-dealer’s net capital falls below:

a) $500,000
b) $300,000
c) $250,000
d) $50,000

Answer 260

B.

Rule 17a-11 covers violation reporting. Under this rule’s early warning provisions, if a broker dealer’s net capital falls below 120% of the minimum ($300,000 for a $250,000 clearing broker-dealer) or if the firm’s ratio of aggregate indebtedness to net capital exceeds 1200%; then the firm must give electronic notice to the Designated Examining Authority (FINRA) within 24 hours; and must file any reports requested by that authority.

Question 261

Under the Uniform Practice Code, a firm that has a fail to receive can give written notice of “buy-in” to the contra-broker no later than 12 noon (contra-broker’s time):

a) 1 business day prior to the proposed buy in
b) 2 business days prior to the proposed buy in
c) 3 business days prior to the proposed buy in
d) 7 business days prior to the proposed buy in

Answer 261

B. Under the Uniform Practice Code, if a firm buys securities and does not receive them from the contra-broker on settlement, it can give a written notice of buy-in. The notice must be delivered by 12 noon, 2 business days prior to the proposed buy in.

Question 262

Regulation SHO applies to:
I Qualified market makers
II FINRA member firms
III Customers of FINRA member firms

Answer 262

II & III
Regulation SHO is a body of rules covering short sales. Qualified market makers engaging in bona fide market making activities are exempt from the short sale rule (as are Specialists/DMMs on stock exchanges). These firms take short positions for reasons other than speculating on a price downturn. They might take short positions to fill customer buy orders; they might take short positions to balance out long positions that they hold, removing market risk from their inventory positions. Regulation SHO applies to those who speculate - that is customers and non-market making member firms.

Question 263

Regarding FINRA Rule 5130 on IPO purchases of common stock from underwriters, which statement is true?

a) A FINRA member firm is allowed to buy a new issue for the firm’s investment account
b) An underwriter in the syndicate is allowed to buy and retain a portion of the issue
c) The self-supporting spouse of a bank President is permitted to buy the issue
d) The self-supporting father of a registered representative whose firm is in the underwriting group is permitted to buy the issue

Answer 263

C.

FINRA Rule 5130 on IPO distributions prohibits the following industry “insiders” from buying new issues from underwriters:
Member firms for their own accounts, officers of member firms, associated persons, or any other employee of a member firm are restricted. Also prohibited are “agents” of broker-dealers; and immediate family members of the officers and employees of broker-dealers. (“Immediate family” is anyone that is 1 step removed from that officer or employee and includes spouses, siblings, parents, and children, as well as in-laws of these individuals. Also note that “immediate family” members are only prohibited if they live in the same household as the registered representative, or if they contribute to the material support of the representative (or vice versa), or if they are buying an IPO being sold by the representative’s firm.)
Fiduciaries to member firms are restricted, such as lawyers, accountants and financial consultants who provide services to member firms. In a similar vein, finders are restricted as well. A finder is a person who finds a new company that wishes to go public and introduces it to the member firm that will act as the underwriter. For this service, the finder is paid a “finder’s fee” by the underwriter - but the finder cannot get stock of the IPO that results. Also note that this prohibition applies to the immediate family of lawyers, accountants, financial consultants and finders for the underwriter.
Portfolio managers who have authority to buy or sell securities for institutional investors are restricted. These individuals are typically investment officers of banks, savings and loans, insurance companies, investment companies, investment advisers or collective investment accounts. Also restricted are the immediate family members of these individuals.
Passive owners of broker-dealers that are not included in Category 1 are restricted as well.

Question 264

A member firm that wishes to have a clearly erroneous trade nullified, must make a request to NASDAQ MarketWatch:

a) within 30 minutes of the transaction
b) within 60 minutes of the transaction
c) no later than 4:00 PM ET on the day of the transaction
d) no later than 4:00 PM ET on the day after the transaction

Answer 264

A.

Under FINRA rules, a member firm that wishes to have a clearly erroneous trade nullified, must make a request of NASDAQ MarketWatch within 30 minutes of the transaction.

Question 265

Another name for prearranged trading is:

a) painting the tape
b) interpositioning
c) block positioning
d) dual capacity

Answer 265

A.

Prearranged trading is a prohibited manipulative practice. Another name for this is “painting the tape” - since prearranged trades that are reported represent fictitious pricing and trading activity and are used to induce trading by others to move market prices up or down.

Question 266

Which two of the following statements are TRUE under Regulation M if there is no independent market for the security?
I Stabilization is permitted
II Stabilization is not permitted
III Passive market making is permitted
IV Passive market making is not permitted

Answer 266

II & IV

Question 267

An OTCBB trader at a large market making firm routinely telephones his counterparts at smaller firms to inquire as to why they don’t route their non-NMS orders to his firm, stating that:
“With our large institutional client base orders directed to our firm will result in quick, profitable executions for both of us. Furthermore, I’m sure you want to be included in some of our syndicate deals, which I can arrange if we begin to see order flow”.

These phone calls are an example of:

a) front running
b) harassment
c) collusion
d) interpositioning

Answer 267

B

Question 268

All investment company advertising must be filed with FINRA:

a) 10 business days prior to 1st use
b) 10 business days prior to use for the 1st year of operations; no filing is required thereafter
c) 10 business days after 1st use
d) 10 business days after 1st use for the 1st year of operations; no filing is required thereafter

Answer 268

C.

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.

Question 269

The Customer Protection Rule (15c3-3) exempts certain broker dealers from its provisions. Under the K-2-i exemption:

a) fully disclosed broker-dealers that do not carry customer accounts are exempted
b) broker-dealers that carry no margin accounts and effect all transactions through a Special Reserve Bank Account For Customers are exempted
c) clearing broker-dealers that carry both cash and margin accounts are exempted
d) broker-dealers that limit their business to the sale of registered investment company securities are exempted

Answer 269

B. T

he K2-i exemption provides that broker-dealers that carry no margin accounts and that transfer all customer monies through a Special Reserve Bank Account do not have to comply with the Customer Protection Rule requirements. The K2-ii exemption provides that fully disclosed broker-dealers are exempt from the requirements of the Rule, since all customer monies would be handled by the clearing firm.

Question 270

There are two market makers aside from your firm in an over-the-counter stock. In your firm’s Net Capital computation, the stock must be haircutted:

a) 0%
b) 15%
c) 40%
d) 100%

Answer 270

C

If there are one or two market makers in a security aside from one firm, then the trading market is considered to be “limited”. The haircut percentage on these positions is increased to 40% (from the regular 15% haircut applicable if there are 3 or more market makers aside from that firm). Note that if there are no market makers aside from that one firm, the haircut is 100% (since there is no one to buy the security if that firm closes).

Question 271

Written supervisory procedures MUST provide that the principal:
I review and endorse in writing all transactions effected by registered representatives
II review all incoming and outgoing written and electronic correspondence of registered representatives relating to the member’s securities business
III periodically review customer accounts to detect and prevent irregularities and abuses
IV ascertain the good character, qualifications and experience of each person applying for registration with FINRA

Answer 271

I, II, III & IV

FINRA’s rules on written supervisory procedures to be created and enforced by the Office of Supervisory Jurisdiction include the written endorsement of all transactions effected by registered representatives; the review of all correspondence sent and received by registered representatives relating to the member’s investment banking or securities business; the periodic review of customer accounts to detect irregularities and abuses; and the ascertainment of the good character, qualifications, and experience of each person applying for registration with FINRA through that firm.

Question 272

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 Discretion given by a customer over price and time of execution for more than one day requires a written power of attorney

Answer 272

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. An order is not considered to be discretionary if the registered representative solely selects the price and time of execution. Each discretionary account must have a written power of attorney from the customer on file. Verbal discretion is permitted if the customer wants the representative to choose only price and/or time in a transaction - but that verbal discretion is only good for that day. If the time length for discretion over price and time is to exceed one day, then a written power of attorney is required from the customer. (Also note that this is only true for retail customers - institutional customers can give a verbal power of attorney over price and time of execution for longer than one day.)

Question 273

Under the Net Capital Rule 15c3-1, which of the following is(are) prohibited?
I $750,000 of subordinated loans; $250,000 of equity for over 1 month
II $750,000 of subordinated loans; $250,000 of equity for over 3 months
III $1,500,000 of aggregate indebtedness; $100,000 of net capital for a 1st year “fully-disclosed” broker-dealer
IV $1,500,000 of aggregate indebtedness; $100,000 of net capital for a 3rd year “fully-disclosed” broker-dealer

Answer 273

II & III

Violations of the net capital rule occur if the broker-dealer’s:
Net Capital falls below the minimum;
or

Ratio of Aggregate Indebtedness to Net Capital exceeds 1500% after the first year or 800% during the first year of operations;
or

Ratio of subordinated debt to total capital exceeds 70% for over 90 days
A broker-dealer with $250,000 of equity and $750,000 of subordinated loans has $1,000,000 of total capital and is at a 75% ratio. However, no violation occurs unless this ratio persists for over 90 days (choice II). A first year broker-dealer with a 1500% ratio is in violation (choice III). A third year broker dealer with a 1500% ratio is exactly at the maximum level. Any further increase in the ratio and the firm is in violation.

Question 274

Under FINRA rules, a When, As and If Issued transaction settles:

a) 1 business day after the seller gives written notice of intention to deliver
b) 3 business days after the seller gives written notice of intention to deliver
c) on a date set by the Uniform Practice Code Committee
d) on a date set by the Market Operations Review Committee

Answer 274

C.

A “When, As and If Issued” security is a new issue that has not yet been issued for trading. These are most often exempt bond offerings that are “presold” to investors before the actual issuance date of the securities. When the securities are actually issued, the FINRA Uniform Practice Code Committee sets a settlement date - typically 3 business days from, issue date.

Question 275

Broker-dealers are required to keep daily logs for:

a) 2 years
b) 3 years
c) 6 years
d) the life of the firm

Answer 275

C.

Daily logs are another name for the daily blotters - the cash receipts and disbursement blotter; the purchase and sales blotter; and the securities receive and deliver blotter. These must be retained for 6 years.

Question 276

Under the Conduct Rules, FINRA prohibits a member firm from selling a domestic security for a customer if the firm has a fail to deliver in that security that is older than:

a) 10 days
b) 30 days
c) 60 days
d) 90 days

Answer 276

C.

FINRA prohibits a member firm from accepting a customer order to sell, or from selling for its own account, if it has a fail to deliver in that security that is older than 60 days. This time period is extended to 90 days if the firm has a fail to deliver in a foreign security.

Question 277

Under Rule 144, no filing is required if the sale amount every 90 days does not exceed:

a) 500 shares worth a maximum of $10,000
b) 1,000 shares worth a maximum of $50,000
c) 5,000 shares worth a maximum of $50,000
d) 10,000 shares worth a maximum of $1,000,000

Answer 277

C.

No filing is required under Rule 144 if 5000 shares or less, worth $50,000 or less, are sold every 90 days.

Question 278

Under the Customer Protection Rule 15c3-3, customer fails to deliver must be bought in after:

a) 5 business days from settlement
b) 7 business days from settlement
c) 10 business days from settlement
d) 30 business days from settlement

Answer 278

C.

The Customer Protection Rule requires that customer fails to deliver be bought in after they are 10 business days old. Any loss caused by the buy in would be charged to the customer’s account.

Question 279

Under Rule 17f-2, which of the following employees of a broker-dealer must be fingerprinted?
I Registered representatives
II Registered principals
III Unregistered employees that process securities
IV Unregistered employees that process monies

Answer 279

All must be fingerprinted

Rule 17f-2 requires that all personnel of a broker-dealer must be fingerprinted EXCEPT those that are partners, directors, officers, or employees that are not engaged in the sale of securities; or do not have access to the keeping, handling or processing of securities; or do not have access to the keeping, handling or processing of monies; and do not have direct supervisory responsibility over these persons.

Question 280

In addition to commissions or markups, members are allowed to charge separately for all of the following services EXCEPT:

a) appraisals of securities
b) safekeeping of securities
c) exchange or transfer of securities
d) recommendations of securities

Answer 280

D.

Members cannot charge separately for recommendations of securities. Charges for this service are included in a fair and reasonable commission or markup. Members can charge separately for clerical services such as safekeeping of securities; appraisals of securities; and transfer of securities.

Question 281

Which statements are TRUE regarding SMA in a margin account?
I SMA cannot be borrowed if it causes the account to be restricted
II SMA cannot be borrowed if it causes the account to receive a maintenance call
III Buying power is 2 times the SMA amount
IV Buying power is 4 times the SMA amount

Answer 281

II & III

Question 282

A file of written customer complaints and their resolution must be kept in:

a) each branch office
b) each Office of Supervisory Jurisdiction
c) the headquarters office of the firm
d) a central location

Answer 282

B.

Written customer complaints must be handled by a principal and a file of these complaints with their resolution must be kept in each Office of Supervisory Jurisdiction. These files must be kept for 4 years, unless the complaint involves municipal securities.

Question 283

In the absence of other bona fide evidence of the market price of a security, which of the following is the best indicator of the prevailing market price?

a) Last trade of that issue
b) Contemporaneous cost
c) Last trade of a similar issue
d) Dealer’s best judgment of value

Answer 283

B.

If there is no prevailing market for a security, then under the 5% Policy, the basis for computing a markup or markdown percentage is the contemporaneous cost of that security.

Question 284

Under NASDAQ rules, short interest reports must be filed by the:

a) 2nd business day after the reporting settlement date
b) 3rd business day after the reporting settlement date
c) 5th business day after the reporting settlement date
d) 10th business day after the reporting settlement date

Answer 284

A.

NASDAQ requires the reporting of outstanding short positions maintained at member firms as of the 15th and last business day of each month. NASDAQ aggregates the information and reports it as the outstanding short interest. The report must be filed by the member on the 2nd business day after the reporting settlement date.

Question 285

Under the FINRA 5% Policy, the markup percentage for a transaction in a stock that is actively traded is calculated based upon the:

a) lowest bid price at that moment
b) lowest ask price at that moment
c) highest bid price at that moment
d) highest ask price at that moment

Answer 285

B.

Under the 5% policy, markdown and markup percentages are to be calculated from the current “inside” market for securities trades in active, competitive markets. The inside market is the highest bid and lowest ask. Thus, markdown percentages are calculated from the highest bid; while markup percentages are calculated from the lowest ask.

Question 286

An Office of Supervisory Jurisdiction is responsible for 5 branch offices. Under the Conduct Rules, which of the following procedures are required?
I The periodic inspection of customer account records in the branches
II The approval of each order by a principal
III Compliance testing of each office with Federal, State and FINRA rules

Answer 286

I, II & III

The Office of Supervisory Jurisdiction is responsible for creating and enforcing written supervisory procedures over the branches. These procedures would include the periodic inspection of customer account records in the branches; the approval of each order by a principal; and compliance testing of each office with Federal, State and FINRA rules.

Question 287

In a firm commitment underwriting, the underwriting agreement between the issuer and the underwriters is typically signed:

a) when the letter of intent is prepared
b) just prior to the filing of the registration statement
c) just prior to the effective date
d) during the cooling off period at the first due diligence meeting

Answer 287

C.

In a firm commitment underwriting, the actual underwriting agreement is signed between the issuer and the underwriters just prior to the effective date, when the final public offering price and spread have been set. Prior to this, all work has been conducted under a Letter of Intent signed by the issuer and the managing underwriter.

Question 288

Which of the following is NOT a graphic communication under SEC rules?

a) Facsimile
b) DVD video
c) Website
d) Presentation at a seminar

Answer 288

D.

SEC “quiet period” rules for issues in registration, which restrict firms in the syndicate from promoting the sale of the issue, cover both “written” and “oral” communications. The SEC defines a graphic communication as a written communication. The SEC list of graphic communications includes any form of electronic media, including videotapes, audiotapes, facsimiles, CD-ROM, electronic mail, Internet web sites and computer networks. Under SEC Rule 405 (shelf registration for WKSIs - Well Known Seasoned Issuers), these graphic communications are defined as “free-writing prospectuses” that do not require advance SEC filing and review. Rather, these can be distributed to potential clients as long as a copy is also filed with the SEC. Note, in contrast, that a presentation at a seminar would be defined as an oral communication.

Question 289

Under SEC Rule 168, forward-looking information released by an issuer includes all of the following EXCEPT:

a) projections of the issuer’s capital structure
b) statements about management’s plans and objectives
c) statements about the issuer’s future economic performance
d) factual information about the issuer’s business or financial developments

Answer 289

D.

Under Rule 168, which was passed in 2005, the SEC gave a “safe harbor” to a reporting issuer’s forward-looking statements and factual statements that are made in the normal course of business. Thus, these issuers did not have to worry about investor lawsuits that they were making these statements as part of an offering of securities. Under Rule 168, forward looking information includes:
projections of revenue, income and loss, earnings or loss, capital expenditures, dividends. capital structure or other financial items; statements as to the management’s plans and objectives for future operations, products or services; and statements as to the issuer’s future economic performance.

The Rule states that factual information includes:
factual information about the issuer, its business or financial developments; advertisements about the issuer’s products or services; dividend notices; and factual information included in the issuer’s 10K, 10Q, and 8K reports.

Question 290

All of the following are requirements for a NASDAQ Global Market listing EXCEPT:

a) minimum share price
b) minimum market value of public float
c) minimum number of market makers in that issue
d) minimum price / earnings ratio

Answer 290

D.

NASDAQ Global Market listing standards include:
Minimum Stockholder’s Equity;
Minimum Revenues and Total Assets;
Minimum Number of Outstanding Shares;
Minimum Market Capitalization;
Minimum Share Price;
Minimum Number of Shareholders; and
Minimum Number of Market Makers.
Note that there is no minimum price/earnings ratio requirement to be listed on the NASDAQ Global Market.

Question 291

A customer buys $100,000 face amount of general obligation bonds with 20 years to maturity at 80. The minimum maintenance margin requirement is:

a) $5,000
b) $12,000
c) $15,000
d) $20,000

Answer 291

B.

There is no Reg. T initial margin requirement for municipal bonds since they are exempt securities. Reg. T only applies to non-exempt securities. However, FINRA does set a minimum maintenance margin requirement for municipal bonds. The minimum maintenance margin is the greater of 15% of the market value of the bonds (15% of $80,000 = $12,000) or 7% of the face of the bonds (7% of $100,000 = $7,000). The greater amount is $12,000, and so this is the minimum maintenance margin requirement.

Question 292

Minimum maintenance margin for municipal bonds:

Answer 292

• exempt from Reg T, but set by FINRA

= greater of 15% of Market Value or 7% of Face Value

Question 293

Under Rule 17f-2, which of the following employees of a member firm must be fingerprinted?
I Registered representatives selling redeemable investment company shares only
II Registered principals
III Clerical employees handling monies or securities
IV Clerical employees preparing customer confirmations

Answer 293

I, II & III

Rule 17f-2 requires that employees of broker-dealers who have access to the books and records of original entry or who handle cash and securities, must be fingerprinted. In addition, all sales personnel (registered representatives) at broker-dealers must be fingerprinted, and all officers of broker-dealers (principals) who supervise sales personnel or persons handling cash or securities must be fingerprinted. Please note that employees that do not have access to cash, securities, or the books and records of the broker-dealer need not be fingerprinted under the rule, nor must their supervisors.

Question 294

In order to participate in the Opening Cross, orders must be received by:

a) 9:00 AM ET
b) 9:25 AM ET
c) 9:28 AM ET
d) 9:30 AM ET

Answer 294

C.

Orders received before 9:28 AM ET fully participate in the Opening Cross. These include market orders, on open (OO) orders and imbalance only (IO) orders. The cross occurs right after 9:28 AM; the official opening bid and ask are set; and regular trading commences at 9:30 AM.

Question 295

Fairness opinions” issued by investment bankers cover the:

a) fairness of the underwriter’s compensation in a new issue offering
b) fairness of the public offering price in a new issue offering
c) fairness of the proposed transaction price in a takeover or merger transaction
d) fairness of the compensation and benefits packages for the officers of a publicly held company

Answer 295

C.

Fairness opinions are issued by investment bankers covering the proposed transaction price in a merger, takeover, or purchase of assets of another company. Typically, the “target” company hires the investment banker to value the company, to insure that the transaction price is not “too cheap.”

Question 296

Which of the following is defined as a “Municipal Finance Professional”?

a) An attorney retained by the issuer to give a legal opinion on a new municipal securities offering
b) A consultant who advises the issuer on matters pertinent to the structure, timing, marketing and terms of a proposed new municipal securities offering
c) An associated person who lobbies for underwriting, trading, financial advisory or consultant services business from municipal issuers
d) A person retained by a broker-dealer to obtain or retain municipal securities business through communication by such person with an issuer on behalf of the broker-dealer

Answer 296

C.

A Municipal Finance Professional (MFP) is someone who is an associated person (that is, a registered representative) who solicits municipal securities business from issuers. Municipal securities business takes the form of underwritings for issuers, trading of securities for issuers, sales of securities for issuers, financial advisory work for issuers and consultant services for issuers. Also, the supervisors of these individuals are MFPs. Note that the key here is that there is a relationship between the MFP and the issuer. MFPs are prohibited from making political contributions in excess of $250 to the election campaigns of municipal officials for which they are entitled to vote. If this limit is exceeded, then the municipal securities firm is subject to a 2-year ban on doing business with that municipal issuer. The intent is to make sure that MFPs do not give big political contributions as a “quid pro quo” for getting future municipal business from that issuer. Associated persons who only sell securities to individual retail clients and that do not deal with issuers are not MFPs. Choice A defines a bond counsel; Choice B defines a financial advisor; and Choice D defines a consultant for a broker-dealer.

Question 297

An individual who was previously employed as a registered representative at a broker-dealer seeks employment at another member firm. The new employer member requests a copy of that individual’s U-5 form. The applicant must provide the copy of the U-5 to the prospective employer within:

a) 1 business day of request
b) 2 business days of request
c) 3 business days of request
d) 5 business days of request

Answer 297

B.

If a person who has left a member firm associates with another member; and the new member requests a copy of that individual’s U-5 form from the new employee; the new employee must provide a copy of the U-5 to the new employer within either 2 business days of the request if the U-5 has been obtained from the ex-employer; or 2 business days of receipt from the ex-employer. Under the Supervision rule, FINRA requires the general principal to review the U-5 within 60 days of filing a U-4 on the hired individual as part of the requirement that the principal ascertain by investigation the good character, business repute, qualification and experience of the registered individual.

Question 298

A non-exempt issuer must register its securities with the Securities and Exchange Commission if it has at least:

a) 1000 shareholders and $1,000,000 of assets
b) 1000 shareholders and $10,000,000 of assets
c) 2000 shareholders and $1,000,000 of assets
d) 2000 shareholders and $10,000,000 of assets

Answer 298

D.

The Securities Exchange Act requires any non-exempt issuer to register with the SEC and file annual reports if it has at least 2000 shareholders and $10,000,000 of assets.

Question 299

Which of the following statements are true about orders entered into the NASDAQ system?
I Orders may be aggregated up to maximum order size limits
II Orders may be split to conform to maximum order size limits
III Orders of any size can be accepted
IV Orders must either be market or limit

Answer 299

I & II Only

The NASDAQ system permits orders to be aggregated and permits them to be split (though with a maximum order size of 999,999 shares, who would bother?). Orders of any size cannot be accepted, since 999,999 is the maximum size. Orders entered into the System can be market orders, executable limit orders, or limit orders. Note that the NASDAQ system currently does not accept stop orders.

Question 300

All of the following tests must be met to be included on the NASDAQ Capital Market list EXCEPT a minimum:

a) of 400 shareholders
b) of 1,000,000 shares outstanding
c) $4 market price per share
d) of 3 market makers in the issue

Answer 300

A.

The NASDAQ Capital Market has lower numerical listing standards than the NASDAQ Global Market. The requirements include a minimum number of shareholders (300), minimum number of outstanding shares (1,000,000), minimum share price ($4), and a minimum number of market makers in the issue (3). Please note, however, that there is no requirement for a minimum operating history period to be listed on the Capital Market. Remember, the Capital Market is NASDAQ’s “breeding ground” for new small companies to list on NASDAQ.

Question 301

Which statements are TRUE regarding the selling group agreement signed when conducting a public offering of securities?
I It states that the selling group member has no liability for any unsold amount of the offering
II It can either be divided or undivided
III It sets compensation for the selling group member at the selling concession amount only for each security sold
IV It sets compensation for the selling group member at the underwriting fee and the selling concession amount for each security sold

Answer 301

I & III

Selling group members are “hired guns” that find customers for the syndicate. They take no liability for unsold shares - only syndicate members share in liability. For each share sold, selling group members earn a selling concession, leaving the syndicate member earning the underwriter’s fee only.

Question 302

A non-12b-1 mutual fund has a net asset value of $9.15 per share. If the customer makes a single purchase of $20,000 of this fund’s shares, the maximum offering price per share is:

a) $9.15
b) $9.50
c) $9.92
d) $10.00

Answer 302

C.

FINRA requires that a breakpoint be given for purchases that exceed $10,000. Two alternative schedules are permitted:
Purchase Amount	Sales Charge
0 - $10,000	                8 1/2%
> $10,000 - $25,000	7 3/4%
> $25,000	                6 1/4%
Purchase Amount	Sales Charge
0 - $15,000	                8 1/2%
> $15,000 - $25,000	7 1/2%
> $25,000	6 1/4%

The maximum sales charge for single purchases of fund shares of $20,000 is 7 3/4% of the Public Offering Price under FINRA rules. Therefore, a customer who buys $20,000 of a fund as a single purchase will pay an offering price of:
NAV/(100%- sales charge%) = POP

$9.15/(100% - 7 3/4%)	= $9.15/.9225	= $9.92

Question 303

An issuer that is filing a registration statement with the SEC is:
I permitted to include performance projections
II prohibited from including performance projections
III permitted to include the issuer’s rating from Standard and Poor’s or Moody’s
IV prohibited from including the issuer’s rating from Standard and Poor’s or Moody’s

Answer 303

I & III

Under Regulation SK, which covers the detailed disclosures that issuers must make in registration statement filings with the SEC, performance projections are encouraged by the SEC; and the issuer may show its rating from Moody’s or Standard and Poor’s. Such disclosures are typically surrounded with all the legal caveats that the projection is not a guarantee of results; that assumptions and conditions can change; and that any rating shown is not a recommendation to buy that security.

Question 304

A PIPE investor has engaged an underwriter to handle the registration and public sale of shares that it obtained in XXX Corp when it made its private equity investment. The underwriter intends to price the shares at $20, which is the current market price of the company’s stock. Just prior to the effective date, the underwriter believes that the issuance of the additional public shares will have a negative effect on the stock’s price and wants to short the stock for its proprietary account. Is the underwriter permitted to do this?

a) No, because any short position established within 5 days of the effective date cannot be covered
b) No, because an underwriter cannot take a short stock position in a company that it is underwriting
c) Yes, because this is a legitimate trading strategy
d) Yes, because short sales are permitted under the Securities Exchange Act of 1934

Answer 304

A.

Rule 105 of Regulation M effectively prohibits shorting a stock being underwritten in the 5-day window prior to the effective date for a secondary share offering (which could be manipulative, pushing the stock price down), since any such short positions cannot be covered by purchasing the shares in the market.

Question 305

All of the following are requirements of a k(2)i exemption under SEC Rule 15c3-3 EXCEPT the broker-dealer must:

a) promptly transmit all customer funds in connection with its activities as a broker or dealer
b) carry customer margin accounts
c) effect all customer transactions through an account designated as a “Special Account for the Exclusive Benefit of Customers”
d) promptly transmit all customer securities in connection with its activities as a broker or dealer

Answer 305

B.

Section k of the Customer Protection Rule (15c3-3) spells out the broker-dealers that are exempt from the requirement to maintain a “Special Reserve Bank Account for the Benefit of Customers” weekly and from the requirement to reduce all fully paid and excess margin securities to possession or control daily. Section k(1) exempts mutual fund broker-dealers, since the Investment Company Act of 1940 requires that all funds and securities be held by a custodian bank. Section k(2)i exempts broker-dealers that have no margin accounts; that promptly transmit customer funds and securities; and that effect all customer trades through a “Special Account for the Exclusive Benefit of Customers.” Section k(2)ii exempts fully disclosed broker-dealers, since they do not hold customer funds or securities.

Question 306

In a Regulation A offering, the SEC will integrate the current offering with any securities offerings of the same issuer occurring:

a) 6 months prior to 6 months following that offering
b) 12 months prior to 12 months following that offering
c) 18 months prior to 18 months following that offering
d) 24 months prior to 24 months following that offering

Answer 306

A.

Regulation A allows an exemption for an issuer selling a small dollar amount within a 12-month period. An issuer is limited to selling $5,000,000 within 12 months to qualify for the exemption. The SEC will “add up” all offerings of that issuer occurring within the past 6 months and the following 6 months to see if the limitation is exceeded. This is termed “integrating” the offering. If the limitation is exceeded, a full registration statement must be filed.

Question 307

TRACE reports trades of all of the following EXCEPT:

a) Corporate bonds
b) Ginnie Mae pass-through certificates
c) Agency bonds
d) Municipal bonds

Answer 307

D.

TRACE reports trades of corporate bonds and agency bonds. It does not report trades of municipal bonds - this is done by an MSRB system called “RTRS” - Real Time Reporting System - that is not covered on this exam.

Question 308

A broker-dealer that is a Registered Reporting Market Maker in a stock for the past year receives a customer order to sell that stock under Rule 144. Which statement is TRUE regarding the actions of the firm when handling this order?

a) The firm must act as an agent when executing this transaction and cannot buy the stock into its inventory
b) The firm is allowed to buy the stock into its own inventory
c) The firm must execute the transaction through a third party broker-dealer because a control relationship exists
d) The firm is prohibited from executing 144 transactions, either on an agency or principal basis in the stocks in which it is a market maker

Answer 308

B.

As a general rule, a broker-dealer is prohibited from acting as a market maker in 144 stock, unless that firm is a bona fide market maker. This stops FINRA members from buying 144 shares into their inventory as an “accommodation” to the sellers of 144 stock. The rule requires them to act as agents in the transaction, selling the stock to another customer or to a bona fide market maker. A bona fide market maker is one which has made a market in the stock for at least 12 of the preceding 30 calendar days, with no more than 4 successive days without making two-way quotes. A Registered Reporting Market Maker meets this requirement.

Question 309

he subscription service that permits orders to be routed through a market maker’s internal trading system is known as:

a) ACES
b) ACT
c) OATS
d) ADF

Answer 309

A.

ACES (Advanced Computerized Execution System), known as the ACES Pass-Through system, allows order entry firms to contract with a specified market maker to access that market maker’s internal trading system for order placement and execution in the NASDAQ System. The market maker pays the order entry firm for the order flow, usually in soft dollars. The order entry firm no longer has to deal with the hassle of order entry and order maintenance in the System. The market maker gets a chunk of internalized order flow against which it can trade.

Question 310

Form 8K must be filed by:
I	 	Domestic issuers
II	 	Investment companies
III	 	Broker-dealers
IV	 	Foreign issuers of ADRs

Answer 310

I Only

8K reports must be filed by domestic issuers of registered securities for any material change in the status of the issuer - within 4 business days of the change. Investment companies, broker-dealers and foreign issuers of ADRs are not required to file 8K reports.

Question 311

Under Regulation T, full payment in a cash account must be made:

a) promptly
b) within 5 business days of trade date
c) within 35 calendar days of trade date
d) within 90 calendar days of trade date

Answer 311

A.

Under Regulation T, full payment in a cash account must be made promptly - defined under Regulation T interpretations as 2 to 3 business days after trade date. The funds must be collected no later than 5 business days after trade date (“Settlement + 2”) under Regulation T.

Question 312

If a recommendation of a security is made in a communication with customers, which of the following statements are TRUE?
I The firm must disclose any expected commissions or markups it will receive from the recommendation
II The firm must disclose the fact that its officers own the security being recommended or own options on that security
III The firm must disclose the amounts and lengths of time the security has been held in its inventory
IV The firm must disclose if it has been in a selling group in the past 12 months in an underwriting of any of that company’s securities

Answer 312

II Only

If a recommendation of a security is made in sales literature, it must be disclosed if the firm or its officers own the security or own options, warrants or rights on the security being recommended. There is no requirement to disclose the amounts and length of time the security has been owned. There is no requirement to disclose expected commissions to be received from the recommendation. The firm must disclose if it has been a manager or co-manager in an underwriting of any of that company’s securities within the past 12 months. There is no requirement to disclose if the firm has been a syndicate member or a selling group member in an underwriting of that company’s securities within the past 12 months.

Question 313

Rule 605 of Regulation NMS requires:

a) each market center to prepare monthly electronic reports about its quality of executions and effective spreads
b) each broker-dealer to prepare quarterly reports on its routing of non-directed orders, including the 10 largest venues where orders were routed
c) market makers in OTC stocks to display any customer limit orders that are better-priced than the dealer’s own quote
d) any order execution facility to execute the order at the NBBO, even if that execution facility is posting an inferior quote

Answer 313

A.

Rule 605 of Regulation NMS requires market centers to make monthly electronic reports about the quality of execution in each stock traded, including how market orders of various sizes are executed relative to public quotes. The reports must also include information about effective spreads. In addition, market centers must provide reports on the extent to which they were able to “improve” execution prices for limit orders as compared to the public quote at that time. Do not confuse Rule 605 with Rule 606.

Rule 606 requires member firms to prepare a quarterly report on the routing of their non-directed customer orders. The report, which is publicly available, details the percentage of customer orders that were “non-directed;” the identity of the 10 largest markets or market makers to whom non-directed orders were routed; and details the member firm’s relationship with that market maker (for example, many larger retail member firms own their own market maker subsidiaries to whom they route orders); and any arrangement for payment for order flow or profit-sharing.

Question 314

Which of the following MUST be disclosed in the main body of a fairness opinion?

a) The amount of the fee payable to the member firm that prepared the fairness opinion
b) Whether the member firm expresses an opinion about the fairness of compensation to insiders relative to compensation to the client’s public shareholders
c) For each category of data provided by the issuer with respect to transaction participants, disclosure of whether the member firm has independently verified the data provided by the issuer
d) The specific procedures and valuation methodologies employed to determine the fairness of the proposed deal price

Answer 314

B.

The FINRA “fairness opinion” rule is meant to address potential conflicts of interest when member firms are hired by either the acquiring company or the target company to render an opinion as to the “fairness” of the deal price and terms. The basic conflict is that the member firm may receive compensation that is contingent on the successful completion of the deal, biasing the member firm to give a favorable opinion. The rule requires the member firm to disclose 6 items when it gives a “fairness opinion:”

Contingent Compensation: The member firm must disclose whether it acted as financial advisor to any party to the transaction and if it will receive compensation that is contingent on the successful completion of the transaction - note that there is no requirement to disclose the amount of compensation to be earned;

Other Compensation: The member firm must disclose if it will receive any other significant compensation contingent on the successful completion of the transaction - e.g., the member firm will arrange financing for the transaction and earn a fee for this;

Material Relationships: The member firm must disclose any material relationships that existed in the past 2 years with any party to the transaction in which any compensation was received by the member;

Verification of Information: The member firm must disclose whether it has independently verified any of the information provided by the client or give a blanket statement that no information has been verified - this is a general disclosure or non-disclosure item - there is no requirement for a “verification” statement for each category of data provided by the issuer;

Fairness Committee: The member firm must disclose if the fairness opinion was approved or issued by a fairness committee - note that the rule does not require a member firm to use or have a fairness committee; and

Insider Compensation: The member firm must disclose whether it expresses an opinion on the amount of compensation to be received by insiders (officers and directors of the issuer) as part of the deal, as compared to the compensation to be received by the shareholders.
This last point is the one covered by the question. The issue here is whether the officers and directors of the companies involved are receiving “rich” compensation as compared to the price per share to be received by the acquired company’s shareholders. This is an area that is usually covered by compensation consultants and typically is not covered in a fairness opinion - so most member firms that give fairness opinions will state that the opinion does not cover such payments.

Also note that the required disclosures are very general in nature. The question gives 3 “very specific” possible disclosures and 1 “general” disclosure. There are no “specific” disclosures required by the rule, and understanding this helps when answering the question.

Question 315

A person who is a full time Series #7 registered representative decides to resign to take a full-time position as a Domino’s Pizza deliverer. Which statements are TRUE?
I The employing broker-dealer may cancel that person’s registration at its discretion
II The employing broker-dealer is obligated to cancel that person’s registration within 30 days
III The employee’s registration may be put on “hold” for an indefinite period, and if he returns to the industry, no new exams need be taken
IV If the employee returns to the industry within 3 years, no new exams need be taken

Answer 315

II Only

If an employee is terminated by a broker-dealer, FINRA must be notified of the termination within 30 days by filing a U-5 form. If that person remains unassociated with a firm for over 2 years, he must take the qualification exams again (e.g. Series #7).

Question 316

A due bill is required for trades that are effected:

a) before ex-date that settle before record date
b) before ex-date that settle after record date
c) after ex-date that settle before record date
d) after ex-date that settle after record date

Answer 316

B.

Due bills are required when a security is bought before ex-date (so the buyer expects to receive the dividend), but settlement is delayed and occurs after the record date (so the seller shows on record as the one to receive the dividend instead of the buyer). When the security is actually delivered to the buyer, it must be accompanied by a due-bill check for the dividend that the buyer deserves.

Question 317

A company that is listed on NASDAQ is in registration for an additional share offering. Just after the effective date, the company makes an acquisition of a medium-size privately held company. Which actions MUST the issuer take prior to announcing the news?
I The issuer must amend its S-1 registration statement
II The issuer must notify NASDAQ
III The issuer must notify its shareholders
IV The issuer must notify the members of the syndicate

Answer 317

I & II Only

The acquisition is a material event that requires the issuer to amend its registration statement. In addition, notice of material events must be given to the exchange where the issuer trades. There is no requirement to give notice of material events directly to the shareholders by the issuer (think how expensive that would be - in theory, the shareholders can get the information from the amended SEC filing), nor is there a requirement for the issuer to notify the syndicate members.

Question 318

A higher than usual markup to a customer is justifiable under the 5% Policy if:

a) the security has a higher than usual level of risk
b) trading in the security is inactive
c) the security has a high unit cost
d) the spread between the bid and offered price is large

Answer 318

B.

The level of risk associated with a security has no bearing on the markup charged for executing a transaction in that security. If a security is thinly traded, executing a trade is more difficult and a higher markup is justified under the 5% Policy. The higher the unit cost of a security, the smaller the percentage markup is taken under the 5% Policy. The spread between bid and ask quotes has no bearing on the markup charged for executing a transaction in that security. The basis for computing a markup is the inside ask price; the basis for computing the markdown on a security is the inside bid price.

Question 319

The “Firm Element” of the Continuing Education requirement MUST be completed:

a) annually
b) semi-annually
c) on the 2nd anniversary of registration and every 3 years thereafter
d) on the 3rd anniversary of registration and every 5 years thereafter

Answer 319

A - FIRM ELEMENT annually

Regulatory element is 2nd anniversary and every 3 yrs.

Question 320

Under Rule G-37/G-38, reports of political contributions must be made on Form G-37/G-38:

a) monthly
b) quarterly
c) semi-annually
d) annually

Answer 320

B.

Rule G-37/G-38 requires that quarterly reports of political contributions made by municipal dealers and their professionals must be filed with the MSRB quarterly by the last day of the month following each calendar quarter. The report is only required for contributions that exceed the “de minimis” amount ($250 if the MFP is entitled to vote; 0 if the MFP is not entitled to vote).

Question 321

Under OATS rules, recording of order information is required for BOTH sides of a trade between which of the following?
I Reporting Member transmitting an order to another Reporting Member
II Reporting Member transmitting an order to another Reporting Member operating an ECN
III Reporting Member transmitting an order to another department within the member, other than the trading department
IV Reporting Member transmitting an order to a non-member

Answer 321

I & II Only

“OATS” is a FINRA system for automated order information capture. Records relating to each order must be maintained by both the transmitting side of the order and the receiving side of the order for trades effected between two different FINRA members; and for trades between members and ECNs. For trades routed within 1 firm, only 1 record of the trade need be recorded (makes sense!); and for trades between a reporting member firm and a non-member, only the reporting member firm must keep the trade record (since FINRA does not have jurisdiction over non-member firms) it cannot compel them to follow OATS rules.

Question 322

A customer of a broker-dealer sells short 500 shares of PDQR stock on the ex-date for a dividend distribution. The dividend will be:

a) received by the lender
b) received by the borrower
c) received by the buyer
d) paid to the lender by the borrower

Answer 322

A.

If securities are sold on or after the ex-date, the trade will settle after the record date. Thus, the lender of the securities, who was the holder of record on the record date, will receive the dividend directly from the corporation.

The buyer is not entitled to the dividend and the borrower will not have to pay the dividend to the lender, because the lender received the dividend directly from the corporation.

Question 323

An “established customer” under the penny stock rule is defined as an individual that has:
I had an account at that broker-dealer for more than 1 year
II had an account at that broker-dealer for more than 3 years
III made at least 3 purchases of different designated securities at that firm
IV made at least 5 purchases of different designated securities at that firm

Answer 323

I & III

The “penny stock rule” requires that the customer sign a detailed suitability determination prior to confirmation of a recommended penny stock transaction (a penny stock is an OTCBB or Pink Sheet Stock under $5 bid). There is an “established customer” exemption to this requirement. An “established customer” under the penny stock rule is defined as an individual that has had an account at that broker-dealer for more than 1 year; or that has made at least 3 purchases of different designated securities (meaning that 3 suitability determinations were signed) at that firm.

Question 324

Which of the following transactions is NOT EXEMPT from TRACE reporting?

a) Transactions in corporate bonds executed on a national securities exchange that are reported to the exchange and the information is disseminated publicly
b) Transactions in corporate bonds that are listed and quoted on NASDAQ when such transactions are reported to NASDAQ and the transaction information is disseminated publicly
c) Transactions in corporate bonds where the buyer and seller have agreed to trade at a price that is substantially unrelated to the current market
d) Transactions in corporate bonds in the secondary market that are TRACE-eligible

Answer 324

D.

TRACE reports are required for OTC corporate bond trades and for agency bond trades, both asset-backed and non-asset backed. If a corporate bond is traded on either an exchange floor or NASDAQ, and the exchange or NASDAQ reports the trade, then there is no requirement to report the trade to TRACE (since a publicly disseminated trade report is already being made by the exchange or NASDAQ). Another exemption from reporting to TRACE is given to trades effected at a price that is substantially away from the market, such as to allow the seller to make a gift.

Question 325

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

Answer 325

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.

Question 326

A new client with whom a broker-dealer has never done business wishes to open a new account at a broker-dealer and wants to place a market order for immediate execution. Which statement is TRUE?

a) The order cannot be entered for immediate execution until full payment is received in the account
b) The order can only be entered for immediate execution if it is marked unsolicited
c) The order can only be entered for immediate execution after the customer’s identity has been verified
d) The order can be entered for immediate execution prior to verification of the customer’s identity

Answer 326

D.

When opening a new account for a customer, the customer’s identity must be verified promptly after account opening. There is no requirement for verification prior to entering the first trade. There is no requirement to collect funds for a purchase transaction from a customer prior to execution - the funds must be collected on settlement. Finally whether the trade is solicited or unsolicited has no bearing on whether it can be executed immediately

Question 327

The 5% Policy applies to which of the following?
I Riskless or simultaneous transactions
II Proceeds transactions
III Primary distributions
IV Secondary distributions

Answer 327

I & II

The 5% Policy applies to all over-the-counter and exchange transactions that take place in the secondary market in non-exempt securities. It applies to over-the-counter riskless transactions (a dealer buying a security for a customer after receiving a sell order in the same security from another customer - since the dealer is “matching” the orders and is not taking the position into inventory, it is a riskless trade). It applies to proceeds transactions (where a customer directs a dealer to sell one position and use the proceeds to buy another position). The 5% Policy does not apply to prospectus offerings, so it does not apply to registered primary distributions or registered secondary distributions.

Question 328

Broker-dealers must review excess or deficit securities positions in segregated accounts:

a) daily
b) weekly
c) monthly
d) quarterly

Answer 328

A.

The Customer Protection Rule requires that broker-dealers compute the amount of all customer fully paid and excess margin securities daily, and these broker-dealers must insure that such securities are in the firm’s possession or control. Excess margin securities are defined as those in excess of 140% of customer debit balances.

Question 329

The Board of Directors of a mutual fund that has adopted a 12b-1 plan must review amounts expended under the plan at least:

a) monthly
b) quarterly
c) semi-annually
d) yearly

Answer 329

B.

Any person authorized to disburse funds under a 12b-1 plan must provide the company’s Board of Directors with a quarterly report for its review of amounts expended, and the purposes for which the expenditures were made.

Question 330

Which paperwork is needed to transfer the assets of an account held "TOD" into the name of the beneficiary?
I	 	Copy of the death certificate
II	 	Letters testamentary
III	 	Copy of probate court filing
IV	 	Power of attorney

Answer 330

I Only

When an account is held “TOD” - Transfer on Death - the name of the beneficiary is known - since it is specified in the account documentation. The only paperwork that is needed to transfer the assets of the account into the name of the beneficiary is a certified copy of the death certificate. Please note that if there is no known beneficiary, then a copy of the will is needed (letters testamentary, as in last will and testament); proof that a copy of the will was filed in Probate Court is required; and proof of domicile is needed. A power of attorney is never needed, since it would have died with the customer.

Question 331

Under NYSE Rule 127, which of the following is (are) defined as a block trade?
I	 	2,000 shares @ $10
II	 	5,000 shares @ $10
III	 	10,000 shares @ $10
IV	 	20,000 shares @ $10

Answer 331

III & IV

NYSE Rule 127 defines a block as a trade of at least 10,000 shares or a trade with a market value of at least $200,000. Thus, choices III and IV are both defined as blocks under the rule.

Question 332

An employee of a $25,000 broker-dealer, whose business is solely limited to the sale of investment company shares and variable contracts, wishes to buy a new stock issue offering from a general securities broker-dealer. Which statement is TRUE?

a) The employee is absolutely prohibited from buying the issue on the initial offering
b) The employee can buy the issue if it can be documented he is a sophisticated investor
c) The employee can buy the issue if it is his normal investment practice to buy new issues and he buys an insubstantial amount of the offering
d) The employee can buy the issue without restriction

Answer 332

D.

Under FINRA Rule 5130, member firms, officers of member firms, and employees of member firms are prohibited from buying a new issue equity offering from the underwriter. However, an exception is given to individuals who are employed by FINRA member firms that solely sell investment company securities or limited partnerships. They are excluded from the policy’s prohibitions since they are not deemed to have access to privileged information about new issues in registration, and are treated as the general public.

Question 333

Which of the following MUST be disclosed when a firm recommends a security?
I If the firm owns or its officers own that security
II The price of the security at the time of the recommendation
III If the firm or its officers own options or warrants on that security
IV If the firm has been a manager or co-manager in any underwriting of that company’s securities within the past 12 months

Answer 333

All must be disclosed

All of the listed information must be disclosed when making a recommendation - whether the firm or officers own the stock, or options or warrants on the stock; the date and price of the stock at the time; and if the firm acted as a manager or co-manager in any underwriting for that issuer within the past 12 months.

Question 334

Which of the following would meet the definition of a “WKSI” under SEC Rule 405? An issuer that:

a) has annual gross sales of at least $1 million for each of the past 3 years
b) has at least 35 seasoned investors
c) had never issued common stock but that has issued $1 billion of non-convertible debt in the past 3 years
d) has previously registered at least $100 million of common stock with the SEC under Rule 415 in the past 3 years

Answer 334

C.

A “Well Known Seasoned Issuer” (WKSI) under SEC Rule 405 qualifies for automatic shelf registration of its securities. It is an issuer that is currently reporting to the SEC that either:
has at least a $700 million world-wide market capitalization; or
has issued at least $1 billion in non-convertible senior securities (preferred stock or bonds) in the past 3 years; or
is a majority owned subsidiary of a parent company that is a “WKSI” and is issuing either non-convertible stocks or bonds.

Question 335

When deciding whether a location should be designated as an OSJ, the member should be LEAST concerned with whether the:
I securities activities at the location are diverse or complex
II location has a large number of institutional clients
III location is geographically distant from another OSJ of the firm
IV location accepts orders from customers on a regular basis

Answer 335

II & IV

FINRA provides a “laundry list” of considerations to determine if a location should be an OSJ. These include whether:
registered persons at the location engage in retail sales or have regular contact with customers;
a substantial number of registered persons conduct securities activities;
the location is geographically distant from another OSJ;
the member’s registered persons are geographically dispersed; and
the securities activities at such location are diverse and/or complex.
This question spits back the list. Not on it are whether the location has institutional clients (though one could argue that this could be a consideration) and whether the location accepts customer orders (which is basically the definition of a branch office).

Question 336

When will a Limit State exist under the Limit Up Limit Down (LULD) rule?
I National Best Offer equals the Lower Price Band
II National Best Offer equals the Upper Price Band
III National Best Bid equals the Lower Price Band
IV National Best Bid equals the Upper Price Band

Answer 336

I & IV

The Limit Up Limit Down rule is designed to stop extraordinary market volatility. The rule establishes upper and lower price bands that are calculated continuously throughout the day for each stock. For more actively traded securities with a price greater than $3, the variation percentage is 5% (“Tier 1” securities). For less actively traded securities with a price greater than $3, the band is 10% (“Tier 2” securities). If the National Best Offer equals the Lower Price Band (so offered prices are falling rapidly) or the National Best Bid equals the Upper Price Band (so bid prices are rising rapidly), then a “so-called” Limit State exists. If the security remains in the Limit State for 15 seconds, then the security enters a 5-Minute Trading Pause. Once the Trading Pause is completed, the security re-opens for trading with an auction in its Primary Listing Exchange - and this auction price should, hopefully, be reflective of the current market price.

Question 337

Under the provisions of the Uniform Practice Code, if a buying broker-dealer receives a partial delivery of 200 shares out of a round lot purchase of 500 shares, the buying broker-dealer:

a) must accept the partial delivery
b) can reject the partial delivery
c) can either accept or reject the partial delivery
d) must file a complaint with the Uniform Practice Code Committee

Answer 337

A.

The FINRA Uniform Practice Code covering dealer to dealer relations, requires that a buying dealer accept a partial delivery, as long as it is in round lots. The member must set up a fail to receive for the balance of securities due; and will buy in the shares if the seller fails to deliver, charging any loss incurred on buy-in to the seller.

Question 338

Under Rule 104 of Regulation M, which of the following information must be provided to NASDAQ when requesting the entry of a 1-sided stabilizing bid?
I Effective date of the offering
II Copy of the cover of the prospectus
III Whether the bid will be a penalty bid

Answer 338

I, II, & III

All of the information is required under Rule 104 of Regulation M when a market maker is requesting the entry of a 1-side stabilizing bid for a new issue. Prior to placing a stabilizing bid, the syndicate manager must submit a request to NASDAQ for the entry of a 1-sided bid. The manager must confirm this request in writing and must provide NASDAQ with the following information:

• identity of the security
• effective date of the offering
• whether the bid is either a “penalty” (“PBID” identifier) or “non-penalty” (“SYND” identifier)
• a copy of the cover page of the prospectus

Question 339

If a FINRA member firm’s net capital is less than 125% of the minimum requirement, the member:
I can maintain its current volume of customer transactions
II must reduce its current volume of customer transactions
III can maintain its current level of proprietary trading
IV must reduce its current level of proprietary trading

Answer 339

II & IV

FINRA requires that member firms whose net capital is less than 150% of the minimum requirement cannot expand their level of business; and that member firms whose net capital is less than 125% of the minimum must reduce their level of business.

Question 340

Which written procedure is NOT applicable to charitable solicitations?

a) Prior approval of customer- solicited charitable contributions exceeding a threshold amount
b) A prohibition from linking the amount of charitable contributions given to the actual or anticipated business done by the customer soliciting the contribution
c) Obtaining specific approval from an appropriate representative of the customer for contribution requests above a specific threshold
d) Quarterly reporting to FINRA of charitable contributions made by the member firm which were solicited by employees of customers acting in a fiduciary capacity

Answer 340

D.

FINRA is concerned that employees of institutional customers who act in a fiduciary capacity (meaning employees who are in a position to award business to the broker-dealer) might solicit charitable contributions to seek an improper benefit for themselves individually, rather than the customer organization (such as a mutual fund or investment adviser) with which they are affiliated. This could occur if such a charitable contribution satisfies a personal pledge or obligation of the employee soliciting the contribution. This employee, who has a fiduciary obligation to his or her employer, is breaching that obligation when this occurs. This is a situation that is similar to those that led to FINRA’s gift limit and entertainment rules.

The FINRA interpretation on charitable solicitation only applies to employees of institutional customers seeking charitable contributions from broker-dealers. FINRA recommends that written procedures be created by the member firm that:
require prior broker-dealer approval for institutional customer-solicited charitable contributions that exceed a threshold amount or that exceed a stated frequency;

require that specific approval be obtained from an appropriate representative of the institutional customer for requests above a threshold amount (meaning that approval is obtained from someone at the mutual fund or investment adviser who is not involved in directing business to broker-dealers);

prohibit linking the amount of charitable contribution given to the level of business done by the institutional customer soliciting the contribution; and

require frequent reviews by the broker-dealer of the nature and amount of business received from customers whose employees have solicited charitable contributions.
Note that there is no requirement to report solicited charitable contributions made by member firms to FINRA.

Question 341

NYSE Rule 92 prohibits:

a) short sales of listed stocks on a down-bid
b) trading ahead of customer orders
c) trading based on hearsay or rumor
d) trading based on material non-public information

Answer 341

B.

NYSE Rule 92 prohibits trading ahead of customer orders - member firms cannot execute an order for their own account if they are holding a customer order that is priced the same, or better. The customer order must be filled first.

Question 342

A customer wants to invest in ASTROs. The primary concern about making such an investment would be the:

a) potential risk of default by the issuer
b) inability to liquidate the position
c) tax efficiency of the investment
d) susceptibility of the investment to interest rate risk

Answer 342

A.

“ASTRO” is the acronym for an “Asset Return Obligation Security.” These are a structured product created by Wachovia (now Wells Fargo) that gives a return tied to an equity index (e.g., there is a Nikkei 225 Index ASTRO) and these notes are issued with a 7-year maturity. One of the issues with structured products is that they are illiquid. This product solves this problem by listing the product on the AMEX as an “ETN” - an Exchange Traded Note. The big problem with any structured product is that there is no underlying portfolio. The bank is simply promising to pay back a return based on the equity index (7 years in the future) and a lot can go wrong in 7 years. Structured products and ETNs are subject to risk of default (ask the customers who bought Lehman Brothers structured products!). They are only as sound as the issuing bank, and this is the main concern for a purchaser.

Question 343

A BD wishes to sell short a stock subject to the circuit breaker rule of Reg SHO. Which statement is TRUE?

a) BD cannot short the sotck
b) BD can only short the stock if marks ticker “short exempt”
c) BD can only short the stock if sale is made at a price higher than the current national best bid
d) b&c

Answer 343

D

Question 344

NASDAQ Market Center is open for quote and order entry at:

a) 7am
b) 8am
c) 9am
d) 9:30am

Answer 344

A

NASDAQ market center premarket trading from 7-9:30am
NASDAQ market center aftermarket trading from 4-8pm

Question 345

Under SEC Rule 405, a WKSI can file

a) S-1 w/ immediate effectiveness
b) S-1 effective after 20 days
c) S-3 w/ immediate effictiveness
d) S-3 effective after 20 days

Answer 345

C

Question 346

Which of the following issuers is NOT eligible for Rule 168 “safe harbor” from gun jumping provisions of the 33 Act

a) registered reporting issuers
b) asset backed issuers
c) foreign private issuers
d) investment co issuers

Answer 346

D

Rule 168 is safe harbot to forward looking statements

Question 347

True of False: FINRA can issue a cease and desist order

Answer 347

FALSE - only a court of law or government authority can

Question 348

Which are TRUE for RULE 505 of Reg D
I The exemption is available for companies that sell no more than $5mil of securities within 12 months
II The issue can be sold to an unlimited number of accredited investors and 35 non-accredited who need not be sophisticated
III Purchasers receive restricted securities
IV Issuer cannot solicit or advertise to the public

Answer 348

I, II, III, & IV

Question 349

Which are TRUE for RULE 506 of Reg D
I The exemption is considered a “safe harbor” from registration for issuers that want to sell an unlimited amount
II The issue can be sold to an unlimited number of accredited investors and 35 non-accredited who must be sophisticated
III Purchasers receive restricted securities
IV Issuer cannot solicit or advertise to the public

Answer 349

I, II, III, & IV

Question 350

True or False : Free Lunch Seminars to Senior Citizens have special requirements

Answer 350

Trust - must be appropriately supervised by the firm’s compliance department

Question 351

Under Rule 411
An order not executed, but reported in error as being executed is/is not binding
An order executed, but reported in error as being not executed is/is not binding

Answer 351

if not executed, not binding

if executed, binding

Question 352

Ways to meet a maintence call

Answer 352

• depositing the call amount in cash
• depositing 1.333x the call amount in marginable stocks
• selling 4x the call amount in securities from the account

Question 353

Section 4(6) of the 33 Act exempts which from SEC registrations

a) secondary market transactions
b) broker txns executed on customer orders
c) offers or sales of securities no more than $5mil made solely to accredited investors
d) Txns by an issuer not involved in a public offering of securities

Answer 353

C

Question 354

Short sale of 144 securities on the threshold list where there is a fail to deliver must be closed out in

a) 10 settlement days
b) 17 settlement days
c) 25 settlement days
d) 35 settlement days

Answer 354

D

mandatory buyin for securities on threshold list is 13 settlement days UNLESS a Rule 144 security…then extended to 35 settlement days

Question 355

Under FINRA Rules Customer Compliant Records must be retained for?

Answer 355

4 yrs

Question 356

Min Margin for a levereage ETF

Answer 356

3x the FINRA minimum Margin

Question 357

Other than the first reference price of the day, the reference price is calculated how (for LULD)

Answer 357

continuously based on eligible trades that occurred over the pasts 5 minutes