Unit 5 - Other SEC and FINRA Rules

Question 1

Insider Trading
Question ID: 48621
At a social gathering, an officer of a publicly traded company confides to his neighbor, a registered representative, that his company will announce a major acquisition in the coming week. Which of the following statements regarding the SEC’s insider trading rules is TRUE?

A) The registered representative is in violation.
B) Both the officer and the registered representative are in violation.
C) Neither the officer nor the registered representative is in violation.
D) The officer is in violation.

Answer 1

Answer: C

Simply giving someone material, nonpublic information (while imprudent) is not a violation. However, if the information is used to trade for profit or to avoid a loss, both the tipper and the tippee would have violated the law.

Reference: 5.1 in the License Exam Manual.

Question 2

Insider Trading
Question ID: 48626
Broker/dealers are required to have written procedures to prevent the misuse of material, nonpublic information by:

I. employees of the broker/dealer.
II. associated persons of the broker/dealer.
III. suppliers to the broker/dealer.
IV. disinterested parties.
A) II and IV.
B) III and IV.
C) I and II.
D) I and III.

Answer 2

Answer: C

FINRA rules require member firms to establish written supervisory procedures designed to detect and prevent the misuse of inside information by persons affiliated with members.

Reference: 5.1.1 in the License Exam Manual.

Question 3

Insider Trading
Question ID: 48649
As the result of a conversation with an officer of a publicly traded company, a registered representative comes into possession of material, nonpublic information indicating a high probability that the company’s stock will increase substantially in value. If the following morning the registered representative buys call options on the stock, which of the following statements is TRUE?

A) Neither the officer nor the registered representative violated insider trading rules.
B) Both the officer and the registered representative violated insider trading rules.
C) The officer violated insider trading rules.
D) The registered representative violated insider trading rules.

Answer 3

Answer: B

A violation occurs if insider information is used to trade for profit or to avoid a loss. In such cases, both the tipper and the tippee are liable.

Reference: 5.1 in the License Exam Manual.

Question 4

Insider Trading
Question ID: 48754
Which of the following persons involved in an underwriting are subject to the provisions of the Insider Trading Act of 1988?

I. Accountant for the issuer.
II. Employee of the issuer.
III. Attorney for the issuer.
IV. Financial printer for the issuer.

A) I, II, III and IV.
B) I, II and III.
C) I and III.
D) II only.

Answer 4

Answer: A

Any persons associated with the issuer in an underwriting of new securities are subject to the provisions of the Insider Trading Act of 1988; all could be aware of information not yet released to the public. Anyone who has access or could have access to material, nonpublic information would be considered an insider under insider trading rules.

Reference: 5.1 in the License Exam Manual.

Question 5

Insider Trading
Question ID: 48763
Which of the following conditions must be present for a violation of the Insider Trading Act of 1988 to occur?

I. The insider must have known the information is nonpublic.
II. The insider must have breached his fiduciary responsibility to the issuer.
III. The insider must have derived personal benefit from the use of the information.
IV. The transaction must occur in an account in the name of the insider.

A) I only.
B) II only.
C) I, II, III and IV.
D) I, II and III.

Answer 5

Answer: D

A violation of the Insider Trading Act of 1988 occurs if any benefit is derived (not just financial) from the misuse of material, nonpublic information by persons that have a fiduciary responsibility to the issuer.

Reference: 5.1 in the License Exam Manual.

Question 6

Insider Trading
Question ID: 49094
A research analyst attends a meeting where the chief financial officer of ABC inadvertently discloses nonpublic, material information about ABC. Once disclosed to the public, the information would likely have a significant impact on the company’s stock price. The analyst would be permitted to do all of the following EXCEPT:

A) discuss the information with her firm’s institutional clients.
B) discuss the information with her immediate supervisor.
C) update, but not release, her report on the company.
D) update, but not release, her rating on the company.

Answer 6

Answer: A

Regulation FD was designed to curb the selective disclosure of nonpublic, material information by issuers to analysts and institutional investors. Regulation FD requires that when an issuer discloses material information, it do so publicly to provide a level playing field. In this question, there is no indication that the issuer made the required public disclosure. Therefore, the analyst would be prohibited from discussing or disclosing this information to anyone other then her immediate supervisor and/or compliance and legal personnel. To do otherwise would be a violation of insider trading rules.

Reference: 5.1.1 in the License Exam Manual.

Question 7

Distribution of Securities of Member Firms
Question ID: 48639
Under FINRA rules, an independent qualified underwriter must have been actively engaged in the investment banking or securities business for how many years prior to filing a registration statement?

A) 10 years.
B) 5 years.
C) 2 years.
D) 3 years.

Answer 7

Answer: B

An independent qualified underwriter must have been actively engaged in the investment banking or securities business for at least 5 years immediately preceding the filing of the registration statement. Further, the firm must have acted as manager or co-manager of offerings with gross proceeds of not less than 50% of the proceeds of the proposed offering, or gross proceeds of $50 million or more.

Reference: 5.10.1.1 in the License Exam Manual.

Question 8

Distribution of Securities of Member Firms
Question ID: 48667
All of the following statements are true regarding the sale of a member’s securities to the public EXCEPT:

A) in an additional issue, an independent underwriter must be engaged.
B) information on the offering must be filed with the Corporate Financing Department.
C) in an IPO, an independent underwriter must be engaged.
D) written customer permission is required prior to purchasing the securities in a discretionary account.

Answer 8

Answer: A

Information on the offering must be filed with the Corporate Financing Department. In an IPO, an independent underwriter must be engaged. In an additional issue, the member is permitted to price its own issue. Prior to purchasing these securities in a discretionary account, the member must first receive a customer’s written permission.

Reference: 5.10.1 in the License Exam Manual.

Question 9

Distribution of Securities of Member Firms
Question ID: 49024
Under FINRA Rule 5121, all customer checks received to purchase newly issued shares of a member firm:

A) may be pledged to a bank to support member indebtedness.
B) must be placed in an escrow account.
C) may be immediately placed in a syndicate account of the member firm.
D) must be placed in a reserve account under SEC Rule 15c-3-3.

Answer 9

Answer: B

When a member firm itself goes public, customer checks must be placed in an escrow account pending a net capital computation. If the firm’s capital is below 120% of minimum or its AI-to-NC ratio exceeds 10:1, the offering is cancelled, and the checks must be returned to the purchasers.

Reference: 5.10.1.1 in the License Exam Manual.

Question 10

Distribution of Securities of Member Firms
Question ID: 49128
A member firm is offering its stock to the public in an IPO. Under FINRA Rule 5121, which of the following statements are TRUE?

I. The offering will be canceled if its AI-to-NC exceeds 12:1.
II. The offering will be canceled if its AI-to-NC exceeds 10:1.
III. The offering will be canceled if its capital is less than 7% of aggregate debits in its reserve computation.
IV. The offering will be canceled if its capital is less than 5% of aggregate debits in its reserve computation.

A) II or IV.
B) II or III.
C) I or III.
D) I or IV.

Answer 10

Answer: B

In a member offering, all customer checks must be placed in escrow pending a net capital computation. Proceeds from the sale, although in escrow, may be taken into consideration when computing net capital. For firms using the standard method, if capital is less than 120% of minimum or AI-to-NC exceeds 10:1, the offering must be cancelled. For firms using the alternative method, if capital is less than 120% of minimum or is less than 7% of aggregate debits, the offering must be cancelled.

Reference: 5.10.1 in the License Exam Manual.

Question 11

Corporate Financing Dept.
Question ID: 48526
According to FINRA’s Corporate Financing Department, stock acquired as compensation will not be considered unreasonable if the amount does not exceed what percentage of the total offering?

A) There is no limitation.
B) 10%.
C) 5%.
D) 15%.

Answer 11

Answer: B

The Corporate Financing Department considers shares acquired by an underwriter in excess of 10% of the total offering to be unreasonable compensation.

Reference: 5.11.1.2 in the License Exam Manual.

Question 12

Corporate Financing Dept.
Question ID: 48553
Under FINRA’s filing review directive, the Corporate Financing Department will examine all of the following EXCEPT:

A) municipal bond offerings.
B) Regulation A offerings.
C) convertible bond offerings.
D) non-convertible debt offerings.

Answer 12

Answer: A

The FINRA Committee on Corporate Financing requires a review of all new offerings except in the case of investment companies (except for closed-end management companies), straight corporate bonds rated investment grade, and exempt securities. Regulation D offerings are also exempt from filing.

Reference: 5.11.1.1 in the License Exam Manual.

Question 13

Corporate Financing Dept.
Question ID: 48617
Reimbursement by the issuer of which of the following expenses borne by the underwriter would be considered compensation by the Corporate Financing Department?

A) Blue-sky fees.
B) Legal fees.
C) Printing costs.
D) Solicitation costs.

Answer 13

Answer: D

Reimbursement from issuer to underwriter is commonplace and is not considered compensation if the expense is normally borne by the issuer. Blue-sky fees, legal fees, and printing costs are expenses normally paid by the issuer. Therefore, if paid by the underwriters and subsequently reimbursed, this is not considered compensation. However, the underwriters generally pay solicitation costs. If the underwriters are reimbursed for these expenses, the Corporate Financing Department will consider the reimbursement to be compensation.

Reference: 5.11.1.2.1 in the License Exam Manual.

Question 14

Corporate Financing Dept.
Question ID: 48635
The responsibility for filing the required information with the Corporate Financing Department rests with the:

A) syndicate manager.
B) issuer.
C) legal counsel for the syndicate.
D) legal counsel for the issuer.

Answer 14

Answer: A

Information to be filed with the Corporate Financing Department is filed by the syndicate manager on or about the date the registration statement is filed with the SEC.

Reference: 5.11.1.1 in the License Exam Manual.

Question 15

Corporate Financing Dept.
Question ID: 48648
If the syndicate manager is advised by the Corporate Financing Department that the underwriter’s compensation in a proposed offering is unfair or unreasonable, the manager must immediately:

A) notify Nasdaq.
B) cancel the offering.
C) notify the other members of the underwriting group.
D) notify the issuer.

Answer 15

Answer: C

If notified by the Corporate Financing Department that the compensation is unreasonable, the syndicate manager must immediately notify the other members of the underwriting group.

Reference: 5.11.1.1 in the License Exam Manual.

Question 16

Corporate Financing Dept.
Question ID: 49020
If a clearing firm receives a customer’s complaint regarding the activities of an associated person at one of its introducing broker/dealers, the clearing firm must do all of the following EXCEPT:

A) forward the complaint to FINRA.
B) notify the customer that the complaint was received and forwarded.
C) forward the complaint to the SEC.
D) forward the complaint to the introducing firm.

Answer 16

Answer: C

The clearing firm must immediately forward the complaint to both the introducing firm and FINRA. It must also notify the customer that the complaint was received and forwarded as stated.

Reference: 5.11.1.3 in the License Exam Manual.

Question 17

Corporate Financing Dept.
Question ID: 49111
An introducing firm amends its carrying agreement with a clearing firm whose DEA is the CBOE. Under FINRA rules, the responsibility to file the amended agreement with FINRA for review rests with:

I. the introducing firm.
II. the clearing firm.

A) Both I and II.
B) Neither I nor II.
C) I only.
D) II only.

Answer 17

Answer: C

The key to this question is the DEA of the clearing firm. If it is FINRA, the clearing firm is responsible for submitting the agreement to FINRA for review. If it is not FINRA, as in this situation, then the responsibility to submit the amended agreement for review rests with the introducing firm.

Reference: 5.11.1.3 in the License Exam Manual.

Question 18

PAIB
Question ID: 49073
An introducing broker/dealer has no PAIB agreement with its clearing firm. Which of the following statements are TRUE?

I. Clearing deposits are considered allowable assets in the computation of net capital.
II. Clearing deposits are considered non-allowable assets in the computation of net capital.
III. Net equity, in its investment account, is considered an allowable asset in the computation of net capital.
IV. Net equity, in its investment account, is considered a nonallowable asset in the computation of net capital.

A) II and IV.
B) I and III.
C) I and IV.
D) II and III.

Answer 18

Answer: A

If an introducing broker/dealer has not entered into a PAIB agreement with its clearing firm, both clearing deposits and net equity in its investment account must be treated as nonallowable assets in the computation of net capital.

Reference: 5.12 in the License Exam Manual.

Question 19

PAIB
Question ID: 49112
Under SEC rules, if a clearing broker is unable to make a required deposit into its PAIB reserve account, it must notify all of its correspondent introducing firms:

A) within five business days.
B) promptly.
C) within two business days.
D) within three business days.

Answer 19

Answer: A

If a clearing firm is unable to make a required deposit into its PAIB reserve account, it must notify the SEC and its DEA immediately. Unless a corrective plan is acceptable to both the SEC and the DEA, the clearing firm must provide written notice to its introducing firms within five business days.

Reference: 5.12 in the License Exam Manual.

Question 20

PAIB
Question ID: 49175
All of the following statements are true regarding PAIB rules EXCEPT:

A) the PAIB reserve computation is performed on the same schedule as the customer reserve computation.
B) an introducing firm’s proprietary assets held by the clearing firm are always allowable.
C) an introducing firm’s clearing deposit is allowable only if a PAIB agreement is in place with its clearing firm.
D) an introducing firm’s proprietary assets are only allowable if a PAIB agreement is in place with its clearing firm.

Answer 20

Answer: B

Without a PAIB agreement, proprietary assets of an introducing firm held by its clearing firm are nonallowable.

Reference: 5.12 in the License Exam Manual.

Question 21

PAIB
Question ID: 49192
Which of the following statements regarding PAIB rules are TRUE?

I. A PAIB deposit requirement can be satisfied with excess debits in the customer reserve computation.
II. A PAIB deposit requirement cannot be satisfied with excess debits in the customer reserve computation.
III. A customer reserve deposit requirement can be satisfied with excess debits in the PAIB reserve computation.
IV. A customer reserve deposit requirement cannot be satisfied with excess debits in the PAIB reserve computation.

A) I and III.
B) II and III.
C) II and IV.
D) I and IV.

Answer 21

Answer: D

If the PAIB reserve computation results in a deposit requirement, the requirement can be satisfied to the extent of any excess debits in the customer reserve formula of the same date. However, a deposit requirement resulting from the customer reserve formula cannot be satisfied with excess debits from the PAIB reserve computation.

Reference: 5.12 in the License Exam Manual.

Question 22

FINRA
Question ID: 48495
If a registered representative is convicted of a felony involving the sale of a security, for how many years will this person be disqualified from associating with a FINRA member firm?

A) 7 years.
B) 10 years.
C) 1 year.
D) 3 years.

Answer 22

Answer: B

A felony conviction within the 10 years preceding application for registration is considered a statutory disqualification. The same restriction applies to convictions for misdemeanors if they involve securities- or money-related offenses. However, this person could be readmitted under certain conditions.

Reference: 5.3.2.1 in the License Exam Manual.

Question 23

FINRA
Question ID: 48569
An individual will be statutorily disqualified if convicted of money or securities-related fraud within the previous:

A) 10 years.
B) 2 years.
C) 3 years.
D) 5 years.

Answer 23

Answer: A

If convicted of a money- or securities-related fraud within the prior 10 years, FINRA will deny an applicant registration.

Reference: 5.3.2.1 in the License Exam Manual.

Question 24

FINRA
Question ID: 48575
FINRA charges members with assessments and fees based on which of the following?

I. Revenue from municipal bond transactions.
II. Revenue from over-the-counter equity transactions.
III. Revenue from U.S. government securities transactions.
IV. The number of registered branch offices.

A) I and III.
B) II and III.
C) II and IV.
D) I, II, III and IV.

Answer 24

Answer: D

FINRA fees are based on the number of registered representatives and principals associated with a member, and the number of branch offices registered with FINRA. Assessments are based on revenue (net of certain costs) from securities transactions.

Reference: 5.3.2.4 in the License Exam Manual.

Question 25

FINRA
Question ID: 48625
A FINRA member firm’s fees are based on which of the following?

I. Net capital.
II. Number of registered representatives.
III. Number of branch offices.
IV. Gross revenue.

A) I and IV.
B) III and IV.
C) II and III.
D) I and II.

Answer 25

Answer: C

FINRA’s membership fees are based on the number of branch offices registered with FINRA as well as the number of registered representatives and principals registered with the association. Assessments, as opposed to fees, are made against revenue generated from securities transactions.

Reference: 5.3.2.4 in the License Exam Manual.

Question 26

FINRA
Question ID: 48638
Which of the following individuals associated with a member firm must be registered as principals?

I. Branch office managers.
II. Managers of offices of supervisory jurisdiction.
III. Officers with active roles in the investment banking or securities business of a member firm.
IV. Clerical employees handling cash or securities.

A) I and IV.
B) III and IV.
C) II and III.
D) I and II.

Answer 26

Answer: C

All managers of OSJs and all officers of a member firm must be registered as principals. Branch office managers need not be registered as principals.

Reference: 5.3.4.1 in the License Exam Manual.

Question 27

FINRA
Question ID: 48670
A customer complaint alleging which of the following requires members to immediately notify FINRA?

I. A registered representative soliciting an unsuitable penny stock trade.
II. Misappropriation of customer funds or securities.
III. Forgery.
IV. A registered representative executing an unauthorized trade.

A) I and III.
B) I and IV.
C) II and IV.
D) II and III.

Answer 27

Answer: D

If a member receives a customer complaint alleging theft, misappropriation of customer assets, or forgery, the member must immediately (within ten business days) notify FINRA.

Reference: 5.3.2.3 in the License Exam Manual.

Question 28

FINRA
Question ID: 49012
FINRA must be notified promptly if a registered representative becomes the subject of any disciplinary action taken by a member involving:

I. suspension.
II. termination for cause.
III. the withholding of commissions in excess of $2,500.
IV. the imposition of a fine in excess of $2,500.

A) I and II.
B) II and III.
C) III and IV.
D) I, II, III and IV.

Answer 28

Answer: D

Under FINRA rules, suspension, termination for cause, the withholding of commissions in excess of $2,500, or the imposition of a fine in excess of $2,500 all require that FINRA be promptly notified (within 10 business days).

Reference: 5.3.2.3 in the License Exam Manual.

Question 29

License and Jurisdictional Retention
Question ID: 48572
Under FINRA rules, a registered representative must complete the regulatory element of continuing education within how many days of a registration anniversary date?

A) 30 days.
B) 60 days.
C) 90 days.
D) 120 days.

Answer 29

Answer: D

The regulatory element requires that all registered persons complete a computer-based training session within 120 days of their second registration anniversary and every third anniversary thereafter.

Reference: 5.4.7.1 in the License Exam Manual.

Question 30

License and Jurisdictional Retention
Question ID: 48574
A registered person leaves the industry and 18 months later reassociates with another member firm. Under FINRA rules, this person’s cycle for determining the dates for the regulatory element of continuing education is based on:

I. initial registration date.
II. reassociation date.

A) I only.
B) II only.
C) both I and II.
D) neither I nor II.

Answer 30

Answer: A

Provided reassociation occurs within two years; the cycle for determining the dates for the regulatory element of continuing education is based on the initial registration date. If reassociation occurs after two years, the cycle is based on the reassociation date.

Reference: 5.4.7.1 in the License Exam Manual.

Question 31

License and Jurisdictional Retention
Question ID: 48674
The firm element of the continuing education requirement must be completed:

A) annually.
B) every third year.
C) on the second registration anniversary and every three years thereafter.
D) on the third registration anniversary and every two years thereafter

Answer 31

Answer: A

The firm element of continuing education must be completed each year by all registered persons who have direct contact with the public.

Reference: 5.4.7.1 in the License Exam Manual.

Question 32

License and Jurisdictional Retention
Question ID: 48675
The regulatory element of continuing education must be completed:

A) annually.
B) every 3rd year.
C) within 120 days of the 3rd registration anniversary and every 2 years thereafter.
D) within 120 days of the 2nd registration anniversary and every 3 years thereafter

Answer 32

Answer: D

The regulatory element must be completed within 120 days of the person’s 2nd registration anniversary and every 3 years thereafter.

Reference: 5.4.7.1 in the License Exam Manual.

Question 33

General Supervision of Employees
Question ID: 48494
Which of the following individuals must register as principals with FINRA?

I. Officer of a member firm.
II. Registered representative that manages a branch office.
III. Director actively engaged in a member firm’s securities business.
IV. Director of human resources for a member firm.

A) II and IV.
B) III and IV.
C) I and III.
D) I and II.

Answer 33

Answer: C

Any person actively engaged in the management of a member’s securities business-including supervising, soliciting, or approving retail communication must be registered with FINRA as a principal. A branch office may be managed by a registered representative, and managers and directors not engaged in the firm’s securities business need not register.

Reference: 5.5.1.3 in the License Exam Manual.

Question 34

General Supervision of Employees
Question ID: 48523
A written record of customer complaints must be maintained:

A) by a registered representative.
B) at each member firm’s home office.
C) at each office of supervisory jurisdiction.
D) by a registered principal.

Answer 34

Answer: C

Each OSJ must maintain a file of customer complaints.

Reference: 5.5.1.2 in the License Exam Manua

Question 35

General Supervision of Employees
Question ID: 48524
Customer accounts carried in each branch office must be inspected:

A) monthly.
B) quarterly.
C) annually.
D) periodically.

Answer 35

Answer: D

Each office must periodically inspect customer account records.

Reference: 5.5.1.2 in the License Exam Manual.

Question 36

General Supervision of Employees
Question ID: 48570
Under FINRA rules, which of the following must be reviewed annually?

I. Nonsupervisory branch offices.
II. OSJs.
III. Registered representatives.
IV. Clerical employees.

A) I and IV.
B) III and IV.
C) II and III.
D) I and II

Answer 36

Answer: C

NASD Rule 3010 requires every FINRA member to inspect each OSJ at least once a year. In addition, the same rule requires that each registered representative (and principal) receive an annual compliance review. A nonsupervising branch must be inspected at least once every three years.

Reference: 5.5.1.6 in the License Exam Manual.

Question 37

General Supervision of Employees
Question ID: 48573
Under FINRA rules, nonsupervisory branch offices must be inspected:

A) semiannually.
B) annually.
C) at least once every three years.
D) quarterly.

Answer 37

Answer: C

FINRA rules require the supervising OSJ to inspect nonsupervisory branch offices at least once every three years.

Reference: 5.5.1.7 in the License Exam Manual.

Question 38

General Supervision of Employees
Question ID: 48678
A member firm is advised by regulators that because of the prior association of some of its representatives with disciplined firms, it is required to record the telephone conversations of all of its representatives. Once the recording begins, it must be maintained for a period of:

A) six months.
B) one year.
C) two years.
D) three years.

Answer 38

Answer: D

If a member is required to record the telephone conversations of all of its registered representatives because it has too many representatives who were previously associated with disciplined firms, it must do so for a period of three years. It also must make quarterly reports to FINRA on its telemarketing supervision.

Reference: 5.5.1.10 in the License Exam Manual.

Question 39

General Supervision of Employees
Question ID: 48943
A written record of customer complaints must be maintained:

A) at each office of supervisory jurisdiction.
B) by a registered principal.
C) at each branch office.
D) at each member firm’s home office.

Answer 39

Answer: A

Each OSJ must maintain a file of customer complaints.

Reference: 5.5.1.2 in the License Exam Manual.

Question 40

General Supervision of Employees
Question ID: 49019
A member firm has offices in all of the branches of a local bank. When the member opens a customer account, which of the following statements are TRUE?

I. The member must orally disclose that the securities purchased or sold are not FDIC insured, are not obligations of the bank, and are subject to investment risk.
II. The member must disclose, in writing, that the securities purchased or sold are not FDIC insured, are not obligations of the bank, and are subject to investment risk.
III. The member must make a reasonable effort to obtain from the customer written acknowledgment of the receipt of these disclosures.

A) I, II and III.
B) I and III.
C) I and II.
D) II and III.

Answer 40

Answer: A

FINRA rules require both oral and written disclosure of the risks. In addition, members must make a reasonable effort to obtain written acknowledgment.

Reference: 5.5.1.4 in the License Exam Manual.

Question 41

General Supervision of Employees
Question ID: 49092
Under FINRA rules, once a firm is advised that it must tape-record the telemarketing activities of its registered persons, how soon must the firm put taping procedures in place?

A) Immediately.
B) Within 30 days.
C) Within 45 days.
D) Within 60 days.

Answer 41

Answer: D

Once a member firm is advised by FINRA that special supervisory procedures are required, the firm has 60 days to put them in place.

Reference: 5.5.1.10 in the License Exam Manual.

Question 42

General Supervision of Employees
Question ID: 49092
Under FINRA rules, once a firm is advised that it must tape-record the telemarketing activities of its registered persons, how soon must the firm put taping procedures in place?

A) Within 60 days.
B) Immediately.
C) Within 30 days.
D) Within 45 days.

Answer 42

Answer: A

Once a member firm is advised by FINRA that special supervisory procedures are required, the firm has 60 days to put them in place.

Reference: 5.5.1.10 in the License Exam Manual.License Exam Manual.

Question 43

Procedural Rules
Question ID: 48551
The Code of Procedure covers:

A) trade practice complaints regarding violations of the Conduct Rules.
B) arbitration between broker/dealers.
C) grievances between a registered representative and a brokerage firm.
D) disputes between a broker/dealer and a clearing house.

Answer 43

Answer: A

The Code of Procedure is the method for handling complaints involving violations of the Conduct Rules.

Reference: 5.6.1.1 in the License Exam Manual.

Question 44

Procedural Rules
Question ID: 48568
If a member wishes to appeal an adverse decision in a Code of Procedure hearing, the member first must appeal to the National Adjudicatory Council within how many days of the decision date?

A) 40 days.
B) 45 days.
C) 25 days.
D) 30 days.

Answer 44

Answer: C

If either side is displeased with a Code of Procedure decision, an appeal must be made within 25 days of the decision date.

Reference: 5.6.1.8 in the License Exam Manual.

Question 45

Procedural Rules
Question ID: 48577
Penalties resulting from a Code of Procedure hearing may include:

I. censure.
II. expulsion.
III. suspension.
IV. fines.

A) I and IV.
B) II and IV.
C) I, II, III and IV.
D) I and III.

Answer 45

Answer: C

Penalties under the Code of Procedure may include censure, expulsion, suspension, and/or fines.

Reference: 5.6.1.7 in the License Exam Manual.

Question 46

Arbitration Rules
Question ID: 48496
Which of the following describes findings under the Code of Arbitration?

A) Binding on members, but not on customers.
B) May be appealed to the National Adjudicatory Council.
C) May be appealed to the SEC.
D) Binding on all parties involved in a dispute.

Answer 46

Answer: D

Members and associated persons must submit disputes to arbitration. Customers are subject to arbitration only if they agree to submit to arbitration. Findings under the Code of Arbitration are considered binding on all parties involved, with no right of appeal.

Reference: 5.7.1.5 in the License Exam Manual.

Question 47

Arbitration Rules
Question ID: 48497
Which of the following disputes must be resolved using the Code of Arbitration?

I. Dispute between two FINRA members.
II. Dispute between two banks.
III. Dispute between a member and an associated IV. person.
Dispute between two customers.
A) II and IV.
B) I and III.
C) I and IV.
D) II and III.

Answer 47

Answer: B

The Code of Arbitration is mandatory in member-against-member disputes, and in disputes involving a member and an associated person. FINRA has no jurisdiction over banks or over disputes between nonmembers such as customers.

Reference: 5.7.1 in the License Exam Manual.

Question 48

Arbitration Rules
Question ID: 48498
The Code of Arbitration is mandatory when disputes arise between a broker/dealer and:

A) the general public.
B) FINRA.
C) another broker/dealer.
D) the SEC.

Answer 48

Answer: C

The Code of Arbitration requires mandatory arbitration for unresolved disputes between member firms.

Reference: 5.7.1 in the License Exam Manual.

Question 49

Arbitration Rules
Question ID: 48576
The statute of limitations for submitting a claim under the Code of Arbitration Procedure is how many years?

A) Six years.
B) One year.
C) Two years.
D) Five years.

Answer 49

Answer: A

No claim is eligible for arbitration if six or more years have elapsed from the event that inspired the claim.

Reference: 5.7.1.7 in the License Exam Manual

Question 50

Arbitration Rules
Question ID: 48671
Which of the following statements regarding the Code of Arbitration are TRUE?

I. Simplified arbitration is available for claims of $50,000 or less.
II. Simplified arbitration is available for claims of $25,000 or less.
III. The statute of limitations for filing a claim is three years from the event.
IV. The statute of limitations for filing a claim is 6 years from the event.

A) I and III.
B) II and IV.
C) II and III.
D) I and IV.

Answer 50

Answer: D

Simplified arbitration is available only for claims of $50,000 or less. The statute of limitations for filing a claim is six years from the event giving rise to the claim.

Reference: 5.7.1.4 in the License Exam Manual.

Question 51

Arbitration Rules
Question ID: 48818
Under MSRB rules, any dispute must be submitted to arbitration at the insistence of a:

I. dealer against another dealer.
II. customer against a dealer.
III. dealer against a customer who signed an arbitration agreement.
IV.dealer against a customer who had not signed an arbitration agreement.

A) I and III.
B) II and IV.
C) III and IV.
D) I, II and III.

Answer 51

Answer: D

All unresolved interdealer disputes must be submitted to binding arbitration. In addition, all disputes with customers who have signed an arbitration agreement must be submitted to binding arbitration.

Reference: 5.7.1 in the License Exam Manual.

Question 52

Arbitration Rules
Question ID: 49023
Which of the following statements regarding the Code of Arbitration Procedure are TRUE?

I. Claims alleging employment discrimination must be arbitrated.
II. Claims alleging employment discrimination may be arbitrated only if the parties agree.
III. Claims alleging sexual harassment must be arbitrated.
IV. Claims alleging sexual harassment may be arbitrated only if the parties agree.

A) I and IV.
B) II and III.
C) II and IV.
D) I and III.

Answer 52

Answer: C

Claims alleging employment discrimination or sexual harassment are not required to be arbitrated unless the parties agree. Class action claims are not subject to arbitration.

Reference: 5.7.1 in the License Exam Manual.

Question 53

Arbitration Rules
Question ID: 49071
The Code of Arbitration was designed for all of the following purposes EXCEPT:

A) resolving disputes between members.
B) resolving disputes between registered reps and members.
C) resolving disputes between customers and members.
D) resolving when-, as-, and if-issued securities transactions between member firms.

Answer 53

Answer: D

The Code of Procedure is a mechanism for handling trade practice violations. The Uniform Practice Code establishes standard operating procedures for the settlement of transactions.

Reference: 5.7.1 in the License Exam Manual.

Question 54

Arbitration Rules
Question ID: 49145
A lawyer devoting 20% of his time to securities business matters wishes to act as an arbitrator for FINRA. Which of the following statements regarding this situation is TRUE?

A) If accepted, the lawyer will be considered a public arbitrator.
B) If accepted, the lawyer will be considered a nonpublic arbitrator.
C) Lawyers are prohibited from serving as arbitrators.
D) Lawyers are prohibited from serving as arbitrators unless they are members of the Bar Association in the state where the matter is heard.

Answer 54

Answer: B

A nonpublic arbitrator is one who is, or within the past five years was, associated with a broker/dealer. Attorneys, accountants, or other professionals whose firms have derived 10% or more of their annual revenue in the last two years from clients involved in the securities industry also fit this category.

Reference: 5.7.1.3 in the License Exam Manual.

Question 55

FINRA Rule 5130
Question ID: 48480
FINRA Rule 5130 states that each of the following is considered immediate family EXCEPT:

A) parents-in-law.
B) brothers and sisters.
C) aunts and uncles.
D) parents.

Answer 55

Answer: C

FINRA Rule 5130 defines immediate family as spouses, parents, brothers, sisters, in-laws, and children. Aunts and uncles are among those excluded.

Reference: 5.8 in the License Exam Manual.

Question 56

FINRA Rule 5130
Question ID: 48481
If a registered representative buys a new equity issue that his firm is underwriting, but does so through an outside broker/dealer that is also participating in the underwriting, which of the following statements is (are) TRUE?

I. The member firm employing the representative has violated FINRA rules.
II. The member firm that sold the stock to the representative has violated FINRA rules.
III. The representative who bought the stock has violated FINRA rules.
IV. No violation has occurred if the representative has an investment history of buying new equity issues.

A) II and III.
B) IV only.
C) I, II and III.
D) I and II.

Answer 56

Answer: C

Both member firms and the registered representative have violated FINRA rules regarding freeriding and withholding. Member firm employees can never buy new equity issues.

Reference: 5.8 in the License Exam Manual.

Question 57

FINRA Rule 5130
Question ID: 48525
A member firm may sell a new equity issue of its own securities to all of the following EXCEPT:

A) public customers.
B) owners, officers, and employees of the firm.
C) family members of owners, officers, and employees of the firm.
D) employees of other full-service member firms.

Answer 57

Answer: D

When member firms sell their own securities, FINRA Rule 5130 does not apply to the issuer’s employees,but does apply to the employees of other full-service member firms.

Reference: 5.8 in the License Exam Manual.

Question 58

FINRA Rule 5130
Question ID: 48564
Under the 5% policy, an OTC firm that is a market maker considers all of the following in determining a markup to a customer EXCEPT the:

A) purchase amount.
B) inventory cost.
C) cost of services the firm provides.
D) security price.

Answer 58

Answer: B

Any inventory profit or loss is not considered under the 5% policy.

Reference: 5.8.1 in the License Exam Manual.

Question 59

FINRA Rule 5130
Question ID: 48583
In an active, competitive market, the prevailing market price for determining a markdown is the:

A) highest offer.
B) lowest offer.
C) highest bid.
D) lowest bid.

Answer 59

Answer: C

In an active, competitive market, the prevailing market price for determining markup or markdown is the inside market at time of sale. For markups, it is the lowest offer. For markdowns, it is the highest bid.

Reference: 5.8.1 in the License Exam Manual.

Question 60

FINRA Rule 5130
Question ID: 48584
Standby purchasers are NOT subject to FINRA Rule 5130 provided which of the following is done?

I. The standby arrangement is disclosed in the final prospectus.
II. The standby arrangement is in writing.
III. The syndicate manager represents, in writing, that it was unable to find any other purchasers for the securities.
IV. The securities are locked up for 3 months.

A) I, II, III and IV.
B) I and III.
C) II and III.
D) II and IV.

Answer 60

Answer: A

If the issue is not moving well, the syndicate manager may allow standby purchasers (individuals or firms who would otherwise be restricted under FINRA Rule 5130) to buy at the offering price. Securities purchased in a standby arrangement are not subject to FINRA Rule 5130 provided the arrangement is disclosed in the final prospectus and the syndicate manager represents in writing that it was unable to find any other purchasers for the new issue. Securities purchased pursuant to a standby arrangement are subject to a 3-month lockup.

Reference: 5.8 in the License Exam Manual.

Question 61

FINRA Rule 5130
Question ID: 48609
The five percent policy applies to all of the following EXCEPT:

A) spreads in new issues.
B) markups.
C) markdowns.
D) commissions.

Answer 61

Answer: A

The five percent policy applies to nonexempt securities in the OTC market. It applies equally to agency transactions and principal transactions. It does not apply to prospectus offerings.

Reference: 5.8.1 in the License Exam Manual.

Question 62

FINRA Rule 5130
Question ID: 48618
The 5% policy applies to the sale of all of the following EXCEPT:

A) the sale of a Capital Market stock under Rule 144.
B) the sale of a listed security in the third market.
C) the sale of a closed-end fund in the OTC market.
D) the sale of U.S. government securities.

Answer 62

Answer: D

The 5% policy does not apply to exempt securities (such as U.S. government securities) but does apply to nonexempt securities transactions in the OTC market.

Reference: 5.8.1 in the License Exam Manual.

Question 63

FINRA Rule 5130
Question ID: 48623
Under which of the following circumstances may a member firm sell a new equity issue to one of its nonregistered employees?

A) Amount purchased is small and not disproportionate to the size of the issue.
B) Transaction is consistent with the employee’s normal investment practice.
C) Permission of a principal is obtained.
D) Under no circumstances.

Answer 63

Answer: D

Member firms and employees of members (registered and nonregistered) are prohibited from buying a new equity issue at the public offering price.

Reference: 5.8 in the License Exam Manual.

Question 64

FINRA Rule 5130
Question ID: 48646
In dominated and controlled trading markets, markup is computed based on:

A) average inventory cost.
B) highest bid.
C) contemporaneous cost.
D) lowest ask.

Answer 64

Answer: C

In a dominated and controlled trading market, markup is computed from cost. In other words, the market maker is not entitled to a spread for markup purposes. In inactive competitive markets, markup is computed from contemporaneous sales to other dealers. In active competitive markets, markup is computed from the lowest ask price.

Reference: 5.8.1 in the License Exam Manual.

Question 65

FINRA Rule 5130
Question ID: 48660
Under FINRA Rule 5130, which of the following are restricted purchasers?

I. Aunts and uncles.
II. In-laws.
III. Supported persons.
IV. Grandparents.

A) I and III.
B) I and IV.
C) II and IV.
D) II and III.

Answer 65

Answer: D

Restricted purchasers include spouses, parents, children, siblings, and in-laws. Aunts and uncles, as well as grandparents, are excluded. A person supported by an employee of a member can never buy a new equity issue.

Reference: 5.8 in the License Exam Manual.

Question 66

FINRA Rule 5130
Question ID: 48664
An issuer may direct sales of a new issue to all of the following EXCEPT:

A) officers of the managing underwriter.
B) officers of the issuer.
C) officers of its largest supplier.
D) officers of its largest customer.

Answer 66

Answer: A

Issuer-directed sales are permitted if the persons to whom the new issue is sold are not restricted. Officers of the managing underwriter are restricted.

Reference: 5.8 in the License Exam Manual.

Question 67

FINRA Rule 5130
Question ID: 48673
Which of the following persons are restricted under FINRA Rule 5130?

I. Brother of a registered representative.
II. Brother-in-law of a registered representative.
III. Spouse of a registered representative.
IV. Uncle of a registered representative.

A) I, II and III.
B) I and IV.
C) II and III.
D) III and IV.

Answer 67

Answer: A

Restricted persons include spouses, parents, children, siblings, and in-laws. Persons supported by an employee of a member are also included. Grandparents, aunts, and uncles are excluded.

Reference: 5.8 in the License Exam Manual.

Question 68

FINRA Rule 5130
Question ID: 48811
If a market maker sells stock to a customer in a principal transaction, the amount of the markup is based on:

A) highest bid.
B) lowest bid.
C) highest ask.
D) lowest ask.

Answer 68

Answer: D

Markups and markdowns are based on the inside quote that is the highest bid and lowest asked of all market makers in the security. Since customers buy at the ask, the markup is based on the lowest asked price.

Reference: 5.8.1 in the License Exam Manual.

Question 69

FINRA Rule 5130
Question ID: 48822
Which of the following statements about the five percent policy are TRUE?

I. It applies to third-market trades.
II. It does not apply to third-market trades.
III. It applies to Capital Market trades.
IV. It does not apply to Capital Market trades.

A) II and IV.
B) I and III.
C) I and IV.
D) II and III.

Answer 69

Answer: B

The five percent policy applies to nonexempt securities in the OTC market.

Reference: 5.8.1 in the License Exam Manual.

Question 70

FINRA Rule 5130
Question ID: 49137
Under the de minimis exemption, an initial public offering of common stock may be sold to an account where restricted persons have a beneficial interest as long as their interest in the account does not exceed:

A) 25%.
B) 10%.
C) 5%.
D) 20%.

Answer 70

Answer: B

If the beneficial interests of restricted persons do not exceed 10% of an account, the account may purchase a new equity issue.

Reference: 5.8 in the License Exam Manual.

Question 71

FINRA Rule 5130
Question ID: 49138
Under FINRA Rule 5130, all representations from account owners attesting that they are eligible to purchase a new equity issue at the public offering price must be obtained within how many months before the sale?

A) 9 months.
B) 12 months.
C) 3 months.
D) 6 months

Answer 71

Answer: B

All representations must be obtained within 12 months before the sale of the new equity issue. Put another way, representations must be updated annually.

Reference: 5.8 in the License Exam Manual.

Question 72

FINRA Rule 5130
Question ID: 49139
All representations relating to whether an account is eligible to purchase new equity issues at the public offering price must be retained for how many years?

A) One year.
B) Five years.
C) Six years.
D) Three years.

Answer 72

Answer: D

Representations obtained to determine the eligibility of an account to purchase a new equity issue must be retained for three years.

Reference: 5.8 in the License Exam Manual.

Question 73

FINRA Rule 5130
Question ID: 49140
The managing partners of a hedge fund collectively own 15% of the fund’s shares. Under which of the following circumstances may a member firm sell an initial offering of common stock to the fund?

A) Under no circumstances.
B) If the fund has carve-out procedures in place.
C) Without restriction.
D) If the fund’s trades are placed in offshore accounts.

Answer 73

Answer: B

FINRA rule 5130 allows hedge funds in which restricted persons own more than 10% of the fund’s shares to buy new equity issues if the fund has carve-out procedures in place. A carve-out procedure enables the fund to segregate the interests of restricted and nonrestricted persons, and to direct the profit from a new issue investment, so that restricted persons will not receive a benefit in excess of 10%.

Reference: 5.8 in the License Exam Manual.

Question 74

FINRA Rule 5130
Question ID: 49141
A member firm receives an order from an investment adviser to purchase shares in a common stock IPO. Under FINRA Rule 5130, the member must:

A) refuse to accept the order.
B) obtain a representation from the conduit that the purchaser is not a restricted person.
C) obtain a list of all of the adviser’s clients to determine eligibility.
D) obtain a list of the client(s) whose account(s) will be credited with the shares in order to determine eligibility.

Answer 74

Answer: B

When receiving an order to buy a new equity issue from a bank, investment adviser, or other conduit, a member must obtain a representation from the conduit that all purchasers are in compliance with the rule (i.e., they are not restricted persons).

Reference: 5.8 in the License Exam Manual.

Question 75

Ethics in the Securities Industry
Question ID: 48527
When executing an OTC agency transaction for a customer, a member:

A) may interposition a third party if the total cost or proceeds of the transaction are better than the prevailing interdealer market for the security.
B) may interposition a third party if the total cost or proceeds of the transaction are equal to the best prevailing interdealer market for the security.
C) may interposition a third party if the total cost or proceeds of the transaction are reasonably related to the prevailing interdealer market for the security.
D) may not participate in such transactions.

Answer 75

Answer: A

Interpositioning (placing a third party between a customer and the best available market) is normally a violation of FINRA rules because it often raises the price to a customer. However, interpositioning is not a violation if it results in a better price for the customer.

Reference: 5.9.8 in the License Exam Manual.

Question 76

Ethics in the Securities Industry
Question ID: 48534
If an associated person enters into an investment joint venture or shared trading profit arrangement with a customer, which of the following statements is TRUE?

A) This is a violation of FINRA’s Conduct Rules.
B) The profit split must be in proportion to each party’s capital contribution unless the account is held jointly by two or more family members.
C) The arrangement must be between family members.
D) The express prior approval of FINRA is required.

Answer 76

Answer: B

Joint accounts between associated persons and clients are permitted, provided a principal approves and profits and losses are shared in direct proportion to each party’s capital contribution. The proportionate test does not apply to joint accounts between associated persons and their immediate family members.

Reference: 5.9.2.1 in the License Exam Manual.

Question 77

Ethics in the Securities Industry
Question ID: 48538
Under what terms may FINRA members sell public offering stock to nonmember securities firms?

A) Sales of public offering stock to nonmember firms must be made at the public offering price with no selling concession allowed.
B) If nonmember firms sign a selling group agreement, sales can be made to these firms at the public offering price less a selling concession.
C) Public offering stock must not be sold to nonmember firms until after the syndicate closing date.
D) Member firms are prohibited from selling public offering stock to nonmembers without exception

Answer 77

Answer: A

Nonmember firms are considered members of the public. FINRA members are free to sell public offering stock to these firms at any time, but only at the public offering price without a selling concession.

Reference: 5.9.7 in the License Exam Manual.

Question 78

Ethics in the Securities Industry
Question ID: 48539
A registered representative opens an account at another FINRA member firm in the name of a customer who has granted full power of attorney to the representative. Which of the following actions must the executing member firm take in the process of accepting the account?

I. Notify the employer firm in writing before the execution of any orders that the registered representative is opening a discretionary account for a customer.
II. Notify the registered representative that his employer firm has been alerted to the fact that a discretionary account is in the process of being opened.
III. Open the account only on the condition that duplicate confirmations on all trades and monthly statements be sent to the employer firm without fail.
IV. Open the account only on the condition that the customer sign a waiver acknowledging the fact that the representative is an employee of another firm.

A) II and IV.
B) III and IV.
C) I and II.
D) I and III.

Answer 78

Answer: C

The same rules that govern a registered representative opening an account at another firm apply if a representative holds power of attorney (trading authority) over a customer’s account that is being opened at another firm. Duplicate confirmations and statements are sent to the employer firm only if requested.

Reference: 5.9.4 in the License Exam Manual.

Question 79

Ethics in the Securities Industry
Question ID: 48549
Which of the following statements regarding a registered representative engaging in private securities transactions is (are) TRUE?

A) The representative must present the intended private transaction to the employing member firm in writing.
B) The member firm must record the transaction on its books.
C) All of these.
D) Such arrangements are only permitted if the employing member firm approves in writing.

Answer 79

Answer: C

A registered representative engaging in private securities transactions must present the intended transaction to the employing member firm in writing, obtain written approval from the employing member firm, and have the transaction recorded on the employing member firm’s books.

Reference: 5.9.1 in the License Exam Manual.

Question 80

Ethics in the Securities Industry
Question ID: 48557
A registered representative of a member firm opens an account at another member firm. The executing member must do all of the following EXCEPT:

A) send duplicate confirmations upon request.
B) notify the account holder that his employer will be notified of the account.
C) obtain permission from the employing member.
D) notify the employer in writing.

Answer 80

Answer: C

The rules are to notify the employing firm; send duplicate confirmations, statements, and other account-related information if requested in writing; and notify the account holder that this will be done. No prior permission is needed for FINRA member firms.

Reference: 5.9.4 in the License Exam Manual.

Question 81

Ethics in the Securities Industry
Question ID: 48558
As a FINRA member, a firm may engage with a nonmember in an underwriting of which of the following types of issues?

A) Municipal bonds.
B) Preferred stock.
C) Common stock.
D) Nonconvertible bonds.

Answer 81

Answer: A

FINRA members are not normally allowed to participate in underwritings with nonmembers except when underwriting exempt securities, including municipals. Preferred stock, common stock, and nonconvertible bonds are corporate, nonexempt securities.

Reference: 5.9.7 in the License Exam Manual.

Question 82

Ethics in the Securities Industry
Question ID: 48567
Information on customer complaints must be electronically filed with FINRA:

A) quarterly.
B) weekly.
C) monthly.
D) semiannually.

Answer 82

Answer: A

FINRA rules require members to electronically file information on customer complaints within 15 days of the end of each calendar quarter. If the complaint involves allegations of theft, misappropriation of funds or securities, or forgery, the member must immediately (within 10 business days) report it to FINRA.

Reference: 5.9.3.1 in the License Exam Manual.

Question 83

Ethics in the Securities Industry
Question ID: 48615
A FINRA member firm is allowed to participate in which of the following underwritings?

I. Domestic common stock underwriting with another member firm.
II. Domestic municipal underwriting with a non-member bank.
III .Foreign common stock underwriting with a non-member.

A) I, II and III.
B) I and II.
C) I and III.
D) II and III.

Answer 83

Answer: A

Only member firms can be part of an underwriting group offering nonexempt securities. A member can join with a non-member in underwriting exempt securities such as municipal bonds. In addition, underwritings outside the United States are not regulated by FINRA.

Reference: 5.9.7 in the License Exam Manual.

Question 84

Ethics in the Securities Industry
Question ID: 48619
Which of the following statements regarding a registered person seeking weekend employment by an entity other than the employing member are TRUE?

I. FINRA rules require written notification to the employing member.
II. FINRA rules require prior written consent from the employing member.
III. SEC rules require written notification to the employing member.
IV. SEC rules require prior written consent from the employing member.
A) I, II, III and IV.
B) I only.
C) I and II.
D) I and III.

Answer 84

Answer: B

Only FINRA requires that a registered person provide written notification to the employing member.

Reference: 5.9.2 in the License Exam Manual.

Question 85

Ethics in the Securities Industry
Question ID: 48620
The costs associated with forwarding proxy material to the beneficial owners of stock held in street name are paid by the:

A) member.
B) beneficial owners.
C) FINRA.
D) issuer.

Answer 85

Answer: D

Member firms are reimbursed by issuers for all costs relating to the forwarding of proxy material.

Reference: 5.9.6 in the License Exam Manual.

Question 86

Ethics in the Securities Industry
Question ID: 48659
Under FINRA rules, to open an account for a person associated with another member, the executing member must:

I. determine whether there is any adverse interest.
II. notify the employing member in writing.
III. notify the associated person that written IV. notification will be made to the employing member.
provide duplicate statements and confirmations if requested by the employing member.

A) I and II.
B) II and III.
C) II and IV.
D) I, II, III and IV.

Answer 86

Answer: D

Before the initial transaction, the executing member must, under FINRA rules, notify the other member in writing and notify the associated person that written notification will be made to the other member. Upon written request from the employing member, the executing member must send duplicate statements and confirmations. If the account is opened, reasonable diligence must be used to determine that any trades will not adversely affect the interests of the employing member.

Reference: 5.9.4 in the License Exam Manual.

Question 87

Ethics in the Securities Industry
Question ID: 48669
All of the following are included under the definition of a private securities transaction EXCEPT:

A) a registered representative selling variable life insurance policies in the evening for an unrelated insurance company.
B) a registered representative handling a private offering, not sponsored by the member, for a client.
C) a registered representative handling a private offering, not sponsored by the member, for a nonclient.
D) a registered representative investing in a real estate DPP.

Answer 87

Answer: D

Investing in a real estate DPP constitutes a passive investment, which does not require notice to a FINRA member firm. Before engaging in any private securities transaction, however, a registered representative must provide written notice to the member. If he will be compensated, he must receive written permission, and the member must supervise and carry the transactions on its books.

Reference: 5.9.1 in the License Exam Manual.

Question 88

Ethics in the Securities Industry
Question ID: 48767
A FINRA member, acting as syndicate manager, wishes to include a suspended member in the selling group. This action is:

A) permitted.
B) permitted if the suspension ends prior to the effective date.
C) permitted if selling concessions are withheld until the suspension ends.
D) prohibited.

Answer 88

Answer: D

Suspended member firms may not participate as selling group or syndicate members in a distribution of new securities. They must be treated as nonmembers.

Reference: 5.9.7 in the License Exam Manual.

Question 89

Ethics in the Securities Industry
Question ID: 49013
A registered representative owns a vacation home on the South Carolina coast that he wants to sell. Which of the following statements is TRUE?

A) No notification is required.
B) The NYSE must be notified.
C) The branch manager must be notified.
D) FINRA must be notified.

Answer 89

Answer: A

Selling real estate does not require notification to, or approval from, the firm or any SRO.

Reference: 5.9.1 in the License Exam Manual.

Question 90

Ethics in the Securities Industry
Question ID: 49021
In determining whether a firm has met its best execution responsibilities, FINRA will review the:

I. character of the market for the security.
II. size and type of transaction.
III. number of primary markets checked.
IV. accessibility to markets and quotation sources.

A) II and IV.
B) I, II, III and IV.
C) I and II.
D) I and III.

Answer 90

Answer: B

All of the factors listed are used to determine whether a member firm has used reasonable diligence to ascertain the best interdealer market for the subject security.

Reference: 5.9.9 in the License Exam Manual.

Question 91

Ethics in the Securities Industry
Question ID: 49093
A registered representative is approached by a friend to sell promissory notes issued by privately held companies. The representative is told that the notes carry a high rate of interest and are guaranteed by issuer collateral, and that sales commissions would be paid. Under FINRA rules, the representative may:

A) sell the notes only to existing clients.
B) sell the notes to both existing and prospective clients.
C) not sell the notes under any circumstances.
D) sell the notes only with written permission of the employer member.

Answer 91

Answer: D

NASD Rule 3040 on private securities transactions (selling away) deals with securities transactions outside the scope of a representative’s employment with a FINRA member firm. Before participating in any private securities transaction, a representative must provide written notice to the member, describing in detail the proposed transaction and the representative’s role. If compensation is to be received, the firm must approve the proposed transaction in writing and carry the trades on its own books.

Reference: 5.9.1 in the License Exam Manual.

Question 92

Procedural Rules
Question ID: 48536
Disciplinary actions levied by FINRA under the Code of Procedure against a member or an associated person charged with rule violations take effect:

A) no sooner than 10 business days from the decision date.
B) no sooner than 45 calendar days from the decision date.
C) no sooner than 30 calendar days from the decision date.
D) immediately.

Answer 92

Answer: C

Decisions reached by the Department of Enforcement become final 30 calendar days after formal issuance, when time has run out for filing an appeal and setting possible redress motion in action. Under the Code of Procedure, the respondent has 25 days from the issue date of the Department of Enforcement’s formal decision to file an appeal with the National Adjudicatory Council. This 25-day period runs concurrently with the 30-calendar-day waiting period for the Department of Enforcement’s decision to become final.

Reference: 5.6.1.7.1 in the License Exam Manual.