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45 Cards in this Set

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If a member firm suspends a registered representative, the member firm must report the suspension to the:



A) SEC


B) News Media


C) State Securities Commissioner


D) Designated Examining Authority

Answer: D



If a member firm suspends a registered representative, the firm must report the suspension to its designated examining authority (DEA), which typically is FINRA or the exchanges where the firm is a member. Each DEA is a self-regulatory organization. The notice must be made within 10 business days of the suspension.

A registered representative wants to place ads in his daughters youth athletic league quarterly sponsorship booklet and in the weekly bulletin at his church, describing that he specializes in retirement planning and 529 plans. Which of the following statements regarding these advertisements is TRUE?



A) No approval is required because both organizations are recognized as bona-fide non-profit by the IRS.


B) Pre-approval by a principal of the broker dealer is required.


C) The ad is considered institutional communications because it is placed in literature being distributed by orgs such as the youth athletic league and church org, and therefore no pre-approval is required.


D) The piece will be regulated as correspondence because it is only being forwarded to two organizations.

Answer: B



Any piece promoting securities services and/or products intended to be received by more than 25 retail customers within any 30 calendar-day period must be pre-approved by a principal before use. Given the intended placements of the piece, there is no way to determine the exact number of retail customers who will be exposed to it and within what time frames and therefore it must be regulated as retail communications. It fits neither the definition of correspondence or institutional communications.

In compliance with FINRA's requirement to maintain a plan to continue conducting business in the event of a significant occurrence, all of the following statements regarding a business continuity and disaster recovery plan are accurate EXCEPT:



A) The plan must document how the firm will continue to communicate with clients.


B) The plan must document how the firm will continue to communicate with employees.


C) The member firm must designate a senior member of management who is also a principal of the firm to initially approve the plan and to conduct a review of the plan annually.


D) The member firm must designate as contact persons any 2 employees of the firm.

Answer: D



FINRA requires that firms create and maintain business continuity plans to be utilized in the event of a significant occurrence. All of the items listed would be requirements, except that the 2 individuals designated as contact persons to FINRA must be members of senior management who are also principals of the firm.

In reviewing prospectuses and registration statements, the SEC:



A) passes on the merits of a particular security covered by a registration statement.


B) does not approve or disapprove of the issue.


C) guarantees the adequacy of the disclosures made in a prospectus.


D) certifies the accuracy of the disclosures made in a prospectus.

Answer: B



The SEC requires full disclosure regarding a new issue so that investors can make informed decisions on the security. The SEC does not, however, guarantee the accuracy or adequacy of the information, nor does it approve or disapprove of the issue.

FINRA requires that each RR and principal receive compliance training on an annual basis. Regarding the FINRA requirement, which of the following statements are TRUE?



1. The meeting delivery method can be individually or in groups.


2. Webcast must be live and may not be recorded.


3. Participants must be able to ask questions in a live format.


4. The meeting can be in person or by Webcast.

Answer: 1 &4



Annual compliance reviews can be done individually or in groups, either in person or by Webcast. If by Webcast, the presentation may be live or recorded. In any format, the participants must have the opportunity to ask questions or engage in dialogue either live or electronically or be told where they can send questions to be answered.

A statutory disqualification applies to an employee or an officer of a broker/dealer who, within the past 10 years has:



A) been convicted of a misdemeanor and then sued in civil court regarding the same charge.


B) been convicted of securities-related fraud.


C) been charged with driving under the influence (DUI).


D) been convicted of a minor traffic violation.

Answer: B

An individual who has worked as a RR must requalify for registration if he subsequently takes a job outside the securities industry for more than:



A) 18 months


B) 24 months


C) 6 months


D) 12 months

Answer: B



A resigned RR may reenter the industry without passing an exam if his resignation lapse is less than 2 years.

An employee involved in the management of a FINRA member's business, particularly in the supervision of business solicitation or in training, must be registered as a:



A) principal


B) broker


C) compliance officer


D) partner

Answer: A



Supervision of business solicitation or training requires that a person be registered as a principal.

Under FINRA rules, a RR must complete the regulatory element of continuing education within how many days of a registration anniversary date?



A) 120


B) 30


C) 60


D) 90

Answer: A



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.

If an individual fails a FINRA qualification exam 3 consecutive times, a 4th attempt may NOT be made for:



A) 30 days


B) 60 days


C) 90 days


D) 6 months

Answer: D

If an individual is convicted of a money or securities related fraud, FINRA will deny registration to that individual for how many years from the conviction date?



A) 2


B) 5


C) 10


D) 1

Answer: C



Conviction within the past 10 years for any felony or securities/money related misdemeanor will lead to statutory disqualification of an applicant for registration with a FINRA member firm.

The firm element of the continuing education requirement must be completed:



A) on the 2nd registration anniversary and every 3 years thereafter.


B) on the 3rd registration anniversary and every 2 years thereafter.


C) annually.


D) every 3rd year.

Answer: C



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

The regulatory element of continuing education must be completed:



A) every 3rd year.


B) within 120 days of the 3rd registration anniversary and every 2 years thereafter.


C) within 120 days of the 2nd registration anniversary and every 3 years thereafter.


D) annually.

Answer: C

A RR who does not complete the regulatory element of continuing education within the prescribed time frame:



A) is limited to accepting unsolicited orders only until the CE requirement is met.


B) is required to take a 120 day leave of absence.


C) cannot function as a RR until the CE requirement is met.


D) can continue to function as a RR with the written permission of a principal.

Answer: C



If a RR does not complete the regulatory element of CE within the prescribed time frame, the RR's license will be suspended by FINRA until the CE is completed.

A customer can make a toll-free inquiry to determine the disciplinary history of a RR by contacting the:



A) SIA


B) SIPC


C) CRD


D) SEC

Answer: C



The Central Registration Depository (CRD), through BrokerCheck, maintains information on the disciplinary history of all persons currently registered.

FINRA fees paid by a member firm are based on which of the following?



1. Number of RRs employed.


2. Number of trades carried out per year.


3. Annual revenue from over-the-counter securities transactions.


4. Number of branch offices registered with FINRA.

Answer: 1 & 4



FINRA fees are determined by the number of RRs, principals, and branch offices registered with FINRA. Assessments are based on annual revenue from OTC securities transactions.

Before becoming registered, a rep may:



A) effect trades for customers with commissions deferred until registration.


B) compile a prospect list.


C) send research reports to prospective clients.


D) solicit indications of interest from prospective purchasers.

Answer: B



A rep may not solicit any orders before registration. Compiling a prospect list is a passive procedure that is not soliciting.

A member firm has decided to allow a RR to operate from his residence. Which of the following statements are TRUE?



1. Prior consent of the member's self regulatory organization (SRO) is required.


2. Prior consent of the member's SRO is not required.


3. The residence may be advertised.


4. The residence may not be advertised.

Answer: 1&3



Prior approval of the member firm's SRO is required when opening any office, including a private residence. The home address and phone number may be advertised in any normal manner such as: business cards, stationery, local newspapers and so forth.

To which of the following persons may a broker/dealer pay commissions under a continuing commission contract?



1. to a retired employee, for past business.


2. to the widow of a former employee, for past business.


3. to a retired employee who refers a neighbor to the broker/dealer.


4. to a retired employee who, in the course of his travels, acquires new business for the broker/dealer.

Answer: 1 & 2



A FINRA member firm may continue to pay commissions to either a retired employee or a former employee's widowed spouse if a prior written contract exists. Commissions may be paid only on business generated while employed.

Which of the following violations could bar an agent from employment in the securities industry?



A) being convicted of a traffic violation.


B) associating with a known felon.


C) conviction for the misdemeanor of petty theft of money from a client.


D) failing to qualify by examination as an agent.

Answer: C



Conviction of a felony or a misdemeanor involving money within the past 10 years may subject an individual to a statutory disqualification from the industry. Failing to pass the exam would prohibit the individual from acting as an agent, but would not disqualify that individual from performing other duties.

An arbitration proceeding involving a customer in an amount over $100K has been agreed to. In such an arbitration dispute, which of the following is TRUE?



A) Both parties must agree before three arbitrators can be used in disputes involving amounts greater than $100K.


B) The customer can request that all 3 of the arbitrators selected be from the public sector.


C) Only nonpublic (industry) arbitrators can be used for disputes in amounts over $100K.


D) Disputes in amounts greater than $100K are always heard by a single arbitrator.

Answer: B



In disputes involving a customer for amounts greater than $100K, 3 arbitrators will be used unless both parties agree to one. In the case where 3 arbitrators are used, the customer can request that all 3 arbitrators be selected from the public sector.

Your broker/dealer has received a written complaint from a customer. FINRA rules require that a record of the written complaint be kept on file by the B/D for how long?



A) As long as the B/D is in existence or continues to be a FINRA member firm.


B) 4 years


C) 3 years


D) Until the complaint is resolved.

Answer: B



4 years is required.

FINRA may take which of the following actions against members or associated persons who violate the Conduct Rules?



1. imprisonment


2. censure


3. indictment if the charge involves a violation of criminal law


4. suspension

Answer: 2 & 4



FINRA members or employees of members who violate the Conduct Rules are subject to procedural penalties only. No SRO may arrest, indict, convict or imprison a violator.

Which of the following disputes must be resolved using the Code of Arbitration?



1. Dispute between 2 FINRA members


2. Dispute between 2 banks


3. Dispute between a member and an associated person


4. Dispute between 2 customers

Answer: 1 & 3



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.

Under the Code of Procedure, the maximum fine for a minor rule violation (MRV) is:



A) $1000


B) $7500


C) $10K


D) $2500

Answer: D



According to the Code of Procedure, the max fine for a MINOR rule violation is $2500.

Rulings under the Code of Arbitration Procedure:



A) are binding on members but not on customers.


B) may be appealed to the FINRA National Adjudicatory Council.


C) may be appealed to the SEC.


D) are binding on all parties.

Answer: D



A customer or member who chooses to submit a claim or dispute to arbitration under the Code of Arbitration Procedure is bound by the arbitration decision, which is not subject to appeal by either party.

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


B) 45


C) 25


D) 30

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.

Under the Code of Arbitration, all monetary awards must be paid within how many days of the decision date?



A) 45


B) 60


C) 30


D) 15

Answer: C



All monetary awards in a Code of Arbitration decision must be paid within 30 days of the decision date. If payment is not made, the amount of the award begins to accrue interest as of the decision date.

Penalties resulting from a Code of Procedure hearing may include all of the following EXCEPT:



A) prison sentence


B) censure


C) expulsion


D) suspension

Answer: A



Penalties under the Code of Procedure may include censure, expulsion, suspension and/or fines, but not a prison sentence.

Which of the following statements regarding the Code of Arbitration are TRUE?



1. Simplified arbitration is available for claims of $50K or less.


2. Simplified arbitration is available for claims of $25K or less.


3. The statute of limitations for filing a claim is 3 years from the event.


4. The statute of limitations for filing a claim is 6 years from the event.

Answer: 1 & 4



Simplified arbitration is available for claims of $50K or less. The statute of limitations for filing a claim is 6 years from the event giving rise to the claim.

You have just received a statement of claim from the Director of Arbitration. One of your customers is claiming that your failure to follow his instructions led to a loss of $36K. Under FINRA rules, you must respond within:



A) 45 days


B) 24 business hours


C) the business day the claim was received


D) 60 days

Answer: A



Under the Code of Arbitration, a respondent has 45 days to respond to both the director and the claimant.

Arbitration and mediation are 2 services provided by FINRA to settle disputes between members. Regarding these services, which of the following statements are NOT true?



1. Mediation is mandatory; arbitration is not.


2. Arbitration always results in a binding decision; mediation may not.


3. If arbitration is unsuccessful, the dispute moves on to mediation.


4. A mediator in a dispute may not serve as an arbitrator in the same dispute.

Answer: 1 & 3



Arbitration is mandatory in disputes between members. If mediation takes place and is not successful, the dispute moves on to arbitration. The person who served as mediator may not be an arbitrator in the same dispute.

The Code of Arbitration Procedure would be mandatory to settle disputes between:



1. a member and a registered clearing corp.


2. a member and one of its associated persons.


3. an associated person with a statutory discrimination claim against a member.


4. a member and a client who has signed a predispute arbitration clause.

Answer: 1, 2 & 4



Disputes between anyone in the industry, including registered clearing corps, must go to arbitration, with the exception of statutory discrimination claims, which are claims alleging sexual harassment or discrimination on the basis of, among other things, age, sex or ethnicity. Such claims may be taken to a court instead of arbitration. When a client has signed a predispute arbitration agreement, arbitration is mandatory.

A customer has filed a serious complaint against your firm and is threatening to take the firm to court. When informed that he has signed a predispute arbitration agreement, he demands to see a copy of it. How long does your firm have to supply the customer with a copy of the signed agreement upon receipt of his request?



A) 3 business days


B) 5 business days


C) 7 business days


D) 10 business days

Answer: D



The member firm has 10 business days to supply the copy of the signed predispute arbitration agreement.

Which of the following are differences between the Code of Procedure and the Code of Arbitration Procedure?



1. The Code of Procedure deals with violations of the Conduct Rules, whereas arbitration is used to settle disputes.


2. Mediation is not required with the Code of Procedure, but is mandatory with Arbitration.


3. Code of Procedure decisions may be appealed, whereas decisions reached under Arbitration cannot.


4. Arbitration is used for violations that are more serious than those for which the Code of Procedure is used.

Answer: 1 & 3



The Code of Procedure is used to deal with violations of the Conduct Rules, whereas the Code of Arbitration is used to settle disputes. Adverse decisions and penalties under the CoP can be appealed to the National Adjudicatory Council, then to the SEC, and eventually to the federal appellate court system. Settlements under arbitration are not subject to appeal and mediation is not mandatory.

If a RR is suspended by FINRA's Department of Enforcement, his first appeal would be to:



A) the SIPC


B) a federal court


C) the National Adjudicatory Council


D) the SEC

Answer: C



A RR may appeal decisions of the DoE to FINRA's National Adjudicatory Council. Appeals may then go to the SEC and finally to the federal appellate court system.

Which of the following best describes the disciplinary actions a SRO such as FINRA or an exchange can impose upon a RR who has violated its rules?



A) The SRO has authority to censure, fine or expel the RR.


B) The SRO has full authority to impose a jail sentence, if warranted.


C) The SRO must coordinate all disciplinary actions with the employing member firm who must then impose them on the RR.


D) The SRO can only recommend disciplinary actions that must then be imposed by the SEC.

Answer: A



A SRO such as FINRA or an exchange, may censor, fine or expel a RR directly, but it cannot impose a jail sentence.

During a period of suspension, a suspended member must:



A) restrict its securities activities to mutual funds.


B) be treated as a nonmember by other members.


C) have no securities dealings of any kind.


D) restrict its securities activities to investment banking.

Answer: B



A member firm under suspension is essentially a nonmember during the period of suspension. Accordingly, during that period, other FINRA members must treat the suspended firm as a nonmember. For example, during the period of suspension, other firms may sell new issues to the suspended firm only at the public offering price.

Under NYSE rules, an associated person who wishes to accept outside employment must notify the:



A) NYSE in writing.


B) member firm in writing.


C) member firm.


D) NYSE.

Answer: B



Notification must be made to the member firm in writing and written consent must be received before accepting outside employment.

Once a broker/dealer receives an enrollment notification for an employee to test for the Series 7 licensing exam, the employee will have how long to successfully complete (pass) the exam?



A) 3 months


B) 6 months


C) 4 months


D) 2 months

Answer: C



The candidate has 120 days (4 months) to pass the exam. This is commonly referred to as the "testing window".

Each of the following is a category of communications with the public designated by FINRA EXCEPT:



A) institutional


B) correspondence


C) retail


D) market letters

Answer: D



The 3 categories of communications with the public designated by FINRA are retail, correspondence and institutional. Market letters, as all sales or advertising pieces would, can fall under any of the 3 communications categories, depending on to whom they are sent or made available to, and the number of recipients.

Which of the following statements regarding investment companies is TRUE?



A) Pre-filing for investment co. retail communications is never required.


B) Pre-filing for investment co. retail communications is always required.


C) Retail communications for investment companies must be filed within 10 business days of first use if the communication does not include a performance ranking.


D) Retail communications for investment companies must be pre-filed 10 business days before first use when the communication does not include a performance rating.

Answer: C



Retail communications for investment companies must be filed within 10 business days of first use if the communication does not include a performance ranking. For retail communications that do include a performance ranking, a 10 day pre-filing is required.

Which of the following statements could legally appear in mutual fund advertising or sales literature?



A) The fund never yielded less than 8% and will continue at that rate in the future.


B) Our managers are dedicated to giving you the very best service.


C) Our management is unequaled in the investment industry.


D) Our growth fund NAV will increase faster than the market in general.

Answer: B



"Our managers are dedicated to giving you the very best service" makes no promises and is therefore not in violation of the Conduct Rules. Exaggerated claims about the management's investment expertise are prohibited, as are predictions of future fund performance or unsubstantiated claims of superiority.

In making a sales presentation to a prospective customer, a RR selling open-end investment company shares may compare the shares to a savings account at a bank if:



A) a statement is made concerning the risk of fluctuation in share market price.


B) a statement is made concerning the variable amounts of dividend return.


C) All of these are true.


D) the purpose of the comparison is to point out the risks and advantages of common stock investment versus the lack of risk and advantages of deposits in savings institutions.

Answer: C



All of these are true.

In making unsolicited cold calls to prospects, a RR must disclose which of the following to the called party?



1. The caller's name.


2. The name of the member firm.


3. The address at which the caller may be contacted.

Answer: All of the above.