Series 7 STC Customer Communications (Ch. 3) Flashcards
Filing with FINRA is required for all of the following, EXCEPT:
A retail communication concerning an oil and gas direct participation program
A retail communication that provides retail clients with a new phone number for a member firm
A retail communication concerning a specific tranche of a CMO
A retail communication that provides information on the separate account of a variable product
A retail communication that provides retail clients with a new phone number for a member firm
A retail communication concerning direct participation programs (DPPs), collateralized mortgage obligations (CMOs), and investment companies are all required to be filed with FINRA. Investment companies include variable insurance products, mutual funds, closed-end funds, unit investment trusts (UITs), and exchange-traded funds (ETFs). A retail communication that doesn’t make any financial or investment recommendation and doesn’t promote a product or service (e.g., providing clients with a new phone number for a firm) is not required to be filed with FINRA.
To solicit a new service being introduced by his firm, a registered representative (RR) is sending an e-mail to all of his customers. If the RR’s customers consist of a large group of individual investors with assets ranging from $100,000 to $100 million, which of the following statements is TRUE?
This is considered correspondence.
This is considered institutional communication.
This is considered both retail and institutional communication.
This is only considered retail communication.
This is only considered retail communication.
FINRA’s Communications with the Public Rule defines different types of communication.
Correspondence is defined as any written or electronic communication that’s distributed or made available to 25 or fewer retail investors within any 30 calendar-day period.
Institutional communication is defined as any written or electronic communication that’s distributed or made available only to institutional investors. This category doesn’t include any internal communication by the broker-dealer.
Retail communication is defined as any written or electronic communication that’s distributed or made available to more than 25 retail investors within a 30 calendar-day period.
Public appearances are situations in which employees who are associated with a broker-dealer or sponsor participate in a television or radio interview, seminar, or forum, or make a public appearance, or engage in speaking activities that are unscripted and are not otherwise considered retail communication. Social media sites, which permit real-time communication or interactive, electronic forums, fall under the guidelines of a public appearance (e.g., Facebook, Twitter, and LinkedIn).
An institutional investor under this rule is any bank, S&L, insurance company, registered investment adviser, investment company (mutual fund), any person with total assets of at least $50 million, government entity, employee benefit plan, any member firm or registered person of the firm, and any person acting solely for any institutional investor.
In this question, since the e-mail is being sent to both retail (those with assets of less than $50 million) and institutional investors (those with assets of at least $50 million), it’s considered retail communication. If the communication is made available only to customers with total assets of at least $50 million, then it would be considered institutional communication.
To promote his brokerage firm’s services, a registered representative intends to conduct a presentation that’s open only to supervising principals of other member firms. What’s this type of communication considered?
Internal communication
Retail communication
Correspondence
Institutional communication
Institutional communication
Any communication that’s directed only to supervising principals and registered representatives of other member firms is considered institutional communication. For rules related to communication, the definition of an institutional investor includes a FINRA member firm and its registered persons. On the other hand, if the audience consisted of only employees of the member firm that’s providing the seminar, it would be considered internal communication.
Which of the following statements is NOT TRUE concerning the use of bond volatility ratings for mutual funds?
The ratings are issued by independent third parties to measure the sensitivity of a fund’s NAV to changes in economic and market conditions.
The evaluation is based on credit quality of a portfolio’s holdings, the fund’s performance, and specific risks.
These ratings may account for NAV changes due to currency fluctuations.
The ratings may be included in a fund’s advertisements that are intended for public dissemination.
The ratings may be included in a fund’s advertisements that are intended for public dissemination.
Bond volatility ratings are independently produced ratings that attempt to quantify how sensitive a given bond fund’s NAV is to changes in the economy (e.g., interest rate and/or currency fluctuations). There’s no standardized scale for this measurement, and these ratings cannot be referred to as risk ratings. A firm may only use bond volatility ratings in its supplemental sales literature, but not in advertisements that are intended for public dissemination.
If included in an investment company retail communication, which of the following is likely to be considered misleading?
Exaggerated claims about the skill of the fund managers or their investment techniques
Statements regarding the fund’s investment objectives along with a disclosure that the objectives may not be met
Positive statements regarding the fund’s potential benefits balanced with statements about its risks or limitations
Displaying one-year, five-year, and 10-year performance figures
Exaggerated claims about the skill of the fund managers or their investment techniques
Exaggerated or unwarranted claims about the skills of a fund manager or its investment techniques is considered misleading. Such statements are not permitted in investment company retail communications. All of the other statements or displays are acceptable.
If an investment company includes a ranking in its retail communication, which is the following is NOT required to be disclosed?
The name of the category for the fund (e.g., growth)
The number of investment companies in the category
The length of the period for measurement
The names of all ranking entities
The names of all ranking entities
All retail communications containing an investment company ranking must disclose:
-The name of the category (e.g., growth, asset allocation, balanced)
-The number of investment companies in the category
-The name of the ranking entity
-The length of the period (or the beginning and ending date of the period)
-The criteria (total return or yield) on which the rankings are based
-The fact that past performance is no guarantee of future results
-If a front-end sales loads is assessed, whether the ranking takes those loads into account
-Whether the ranking is based on total return or the current SEC standardized yield
-The publisher of the ranking data (i.e., the name of the magazine)
Please note, the name of the ranking entity that provided the ranking must be provided, but not the names of all of the potential ranking entities.
Under the “omitting prospectus rule” related to investment company advertisements, which of the following should NOT be included in an advertisement?
The disclosure that the fund’s investment objectives, risks, charges, and expenses should be considered before investing
The disclosure of the source from which a prospectus may be obtained
An application to invest in the fund
The disclosure that the prospectus should be read before investing
An application to invest in the fund
According to the SEC Rule 482 (the omitting prospectus rule), an offer to sell securities can only be made through a prospectus. An application to receive a prospectus can be placed in the advertisement; however, an application to invest cannot be included. All of the other choices represent disclosures that must be included in the advertisement.
A brokerage firm’s research department has issued a buy recommendation for XYZ Corporation’s common stock. Which of the following information is NOT required to be included in the report?
Whether firm was the managing underwriter in a recent public offering of XYZ stock
The number of shares of XYZ stock that the firm owns
Whether an analyst of the firm is an officer, director, or advisory board member of XYZ Corporation
Whether the firm makes a market trading in XYZ stock
The number of shares of XYZ stock that the firm owns
The report must contain all of the items listed with the exception of the number of shares of XYZ stock the firm owns. The firm is required to disclose that it has ownership in the subject company, but not the actual number of shares.
A member firm intends to place a blind recruitment advertisement. Which of the following statements is NOT TRUE regarding this advertisement?
Recruitment advertising is not permitted since a firm’s name is not included.
Recruitment advertising is not subject to filing with FINRA.
Recruitment advertising is not subject to preapproval by a principal of the firm.
This type of ad allows a firm to attempt to recruit employees while maintaining its anonymity.
Recruitment advertising is not permitted since a firm’s name is not included.
Advertising by a member firm falls under the definition of retail communication. However, as long as a member firm’s recruitment advertisement doesn’t promote a product or service of the broker-dealer, it’s not subject to principal preapproval or filing with FINRA. Such an advertisement cannot contain exaggerated claims about opportunities in the securities business.
If an analyst of a member firm conducts public appearances (radio and TV interviews) and makes predictions regarding a subject company’s stock, which of the following disclosures is NOT required?
Whether the subject company is an investment banking client of the member firm
Whether the analyst owns more than 10% of the subject company’s stock
Whether the member firm has 1% or greater ownership in the subject company’s stock
Whether the analyst or any member of the analyst’s household is an officer, director, or advisory board member of the subject company
Whether the analyst owns more than 10% of the subject company’s stock
When an analyst of a member firm conducts public appearances, including television and radio interviews during which predictions may be made, the following disclosures must be made:
-Whether the subject company is an investment banking client of the member
-Whether the analyst (or a member of the analyst’s household) has a financial interest in the security that’s the subject of the report (subject security)
-Whether the member firm has 1% or greater ownership of the outstanding stock of the subject company
-Whether the analyst or any member of the analyst’s household is an officer, director, or advisory board member of the subject company
-Any material conflict of interest about which the analyst or member firm knows or has reason to know
Please note, a member firm must disclose its ownership in the subject company’s stock if it represents 1% or more; however, the analyst is only required to indicate that she (or a member of her household) has a financial interest in the subject company (not the specific ownership percentage).
Which of the following statements is NOT TRUE regarding collateralized mortgage obligations (CMOs)?
Retail communications related to CMOs must be preapproved by a principal.
Retail communications related to CMOS must be filed with FINRA within 10 business days of first use.
CMOs may be compared to any other types of investments.
Retail communications and correspondence must include the term “collateralized mortgage obligation” within the name of the product.
CMOs may be compared to any other types of investments.
Due to their unique characteristics, CMOs may not be compared to any other types of investments, such as certificates of deposit. Retail communications related to CMOs must be approved before initial use by a principal and the communications must be filed with FINRA within 10 business days of first use.
A registered representative invites 20 prospective clients and 10 existing clients to an investment seminar that her firm is sponsoring. The slides being presented at the seminar are considered:
An interactive electronic forum
Correspondence
A public appearance
Retail communication
Retail communication
Since the communication is being delivered to 30 total investors (and there’s no reference to any of the investors being institutional), the slides being used at the seminar are considered retail communication. Remember, retail communication is any communication that’s distributed or made available to more than 25 retail investors (existing or prospective). Correspondence is defined as any communication that a member firm distributes or makes available to 25 or fewer retail investors within a 30-calendar-day period.
A brokerage firm sends a recommendation regarding a proprietary offering to all of its institutional clients as well as 10 prospective high-net-worth retail clients. According to FINRA rules, this communication is considered:
Correspondence
Institutional communication
Retail communication
Advertising
Correspondence
FINRA defines retail communication as any communication that’s sent to more than 25 retail investors. On the other hand, communication that’s sent to 25 or fewer retail investors is defined as correspondence. In this question, since the recommendation was sent to only 10 retail investors (and NOT more than 25 retail investors), it’s categorized as correspondence. Institutional communication can only be sent to institutions. If communication is sent to both retail and non-retail (institutional) investors, it must be either correspondence or retail communication, which is determined by the number of retail investor recipients.
T/F. FINRA defines retail communication as any communication that’s sent to more than 25 retail investors.
True
T/F. Communication that’s sent to 25 or fewer retail investors is defined as correspondence.
True
According to FINRA and SEC rules, if a firm provides hypothetical illustrations of the performance of its variable life policy, which of the following statements is NOT TRUE?
Assumed rates of return are not required to be based on current market conditions.
An assumed rate of return cannot exceed 12%.
One of the assumed rates of return must be 0%.
A disclosure must be included to state that the illustration does not predict or project actual investment results.
Assumed rates of return are not required to be based on current market conditions.
When providing hypothetical illustrations of the performance of its variable life policy, both the SEC and FINRA require a firm to adhere to the following guidelines:
-An assumed rate of return cannot exceed 12%.
-One of the assumed rates of return must be 0%.
-The assumed rates of return must be reasonable based on current market conditions.
The illustration must also include a prominent statement explaining that it doesn’t project or predict investment results.
A member firm is required to file which of the following with FINRA?
Advertising regarding a new proprietary mutual fund
Correspondence
Institutional communication
Advertising to announce a change of address
Advertising regarding a new proprietary mutual fund
If a firm intends to distribute advertising regarding a new proprietary product, it must be filed with FINRA. However, correspondence, institutional communication, and retail communications that don’t make a financial or investment recommendation and don’t promote a product or service of the member firm (e.g., advertising related to a change of address) are not required to be filed.
The ABC Stock Fund is permitted to invest in which of the following ways?
50% of its assets in stock and 50% of its assets in bonds
70% of its assets in bonds and 30% of its assets in stock
80% of its assets in stock and 20% of its assets in bonds
60% of its assets in stock and 40% of its assets in government-backed securities
80% of its assets in stock and 20% of its assets in bonds
An investment company with a name that suggests a particular investment emphasis is required to invest in a manner that’s consistent with its name. For example, an investment company with a name that suggests that the company focuses on a particular type of security (e.g., the ABC Stock Fund, the XYZ Bond Fund, or the QRS U.S. Government Fund) must invest at least 80% of its assets in the type of security indicated by its name. On the other hand, if an investment company wants flexibility with respect to its investments, it should select a name that doesn’t indicate a particular investment emphasis.
