Q&A2

Question 1

Under Rule 103 of Reg M, once a passive market maker’s net purchases => its daily purchase limit, it must ____.

However, a passive market maker near its limit can execute ___, even if execution will cause its daily limit to be exceeded.

Answer 1

withdraw from the market in that stock for the rest of the day

any single order

Question 2

BD may use borrowed securities to make delivery in 3 cases:

1. BD is ___ securities to another B or D
2. BD knows or has reason to believe the seller owns and will deliver the security but the seller ___ (here, BD must close out the short w/in __ days of TD)
3. Exchange or sec assoc discovers the sale originated from a ___ despite BD’s DD and buy-in would created an undue __, or sale was affected at an ___

Answer 2

1. lending
2. fails to deliver (close-out w/in 35 days)
3. good-faith mistake…undue hardship…unacceptable price

Question 3

Any info conveyed to a purchaser after time of sale is ___ when determining whether a prospectus included an untrue statement or omitted a material fact.

Answer 3

not taken into account

Question 4

Are the following req’d to be registered w/ SEC under ‘33 Act?

1. Commercial paper?
2. Eurodollar bonds?
3. ADRs?
4. Stock offered outside the US?

Answer 4

1. No, since commercial paper is corp debt maturing in <= 270 days
2. No, since initially offered outside US
3. Yes
4. No, since exempt under Reg S

Question 5

1. Rule ___ allows resale of restricted securities to QIBs.
2. Offerings (incl IPOs) of up to $50mm in 12-month period can be conducted by filing a short-form registration under Reg ___.
3. Rule ___ exempts offerings from registration if sold w/in one state.

Answer 5

1. Rule 144A
2. Reg A+
3. Rule 147

Question 6

If the Nat’l Uniform Practice Committee has not determined a SD for when/as/if-issued tx, then the seller may deliver to the buyer on [how many days’] written notice.

Answer 6

one

Question 7

Investors who purchase securities in a private placement sign an ___ acknowledging that the securities are ___.

Answer 7

investment letter….unregistered

Question 8

Variable annuity exchanges

1. Inquiry must be made as to whether the customer engaged in an exchange w/in preceding ___ months. Not prohibited but must be ___.
2. Both the __ and __ must be documented in writing.

Answer 8

1. 36 months…suitable

2. inquiry and customer’s response

Question 9

1. A distribution participant is req’d to withdraw its quote for both listed and OTC equities if security is subject to a ___ restricted period.
2. Is a request for an excused withdrawal status req’d?

Answer 9

1. Reg M restricted period

2. Not for OTC since no re-registration penalty

Question 10

FINRA members may give discounts only to ___ when selling shares.

Answer 10

other FINRA members

Question 11

Limit Order Display Rule

1. Can customer request not to have an order displayed?
2. Exceptions for block-size orders: those for at least __ shares or $__ MV

Answer 11

1. Yes, and recommended (but not req’d) that market maker document this (e.g., on the ticket)
2. 10k shares or $200k MV

Question 12

Simplified arbitration

1. Used if the amount in dispute is <= $__
2. Decided by how many / what type(s) of arbitrators for:
   a) simplified industry arb?
   b) simplified customer arb?

Answer 12

1. $50k
2. Decided by:
   a) one nonpublic arbitrator for industry cases
   b) one public arbitrator for customer cases

Question 13

OTC Pink Marketplace

Quotes may not reflect a current quotation for any security.

Markup on a sale to a customer will be based on the dealer’s ____.

Ex: Stock shown w/ bid of $1.75 and offer of $2.10. Dealer buys 1,000 shares at $2.00 from another BD and sells these shares to customer at $2.14 net. Markup is based on price of __.

Answer 13

contemporaneous cost

$2.00

Question 14

FINRA’s Advertising Reg Dept must be provided access to an interactive analysis tool made available through a firm’s website (and any written report templates produced by the tool) w/in ____.

Requirement is waived if the tool is made available only to ___.

Answer 14

10 biz days of first use

inst investors

Question 15

Pay-as-you-go registration

1. Issuer registers an unlimited amt of securities using ___ and then files a prospectus supplement and pays filing fee when selling the securities.
2. Which type(s) of issuers can use pay-as-you-go registration?

Answer 15

1. ASR (S-3)

2. only WKSI

Question 16

1. BD that clears trades or carries customer accounts is req’d to file FOCUS Report Part II ___.
2. Firms that do NOT clear or carry customer accounts must file FOCUS Report Part IIA ___.

Answer 16

1. Part II: quarterly

2. Part IIA: also quarterly

Question 17

Cross-trading

1. Occurs when BD acts as __ for both sides of a trade.
2. Acceptable as long as BD discloses on both customers’ ___ that it represented both buyer and seller.

Answer 17

1. agent

2. confirms

Question 18

When stock is purchased in a restricted margin account, the customer must deposit what and by when?

Answer 18

must deposit the initial Reg T margin req w/in 2 biz days of SD (so by T+5 for reg-way settlement)

Question 19

NYSE Rule 127

Member firm may cross a block outside the prevailing NYSE quotation if following conditions are met:

1. Must inform ___ of its intention to cross at specified price.
2. To effect at the clean-up price, must first trade with the best prices in the ___

Answer 19

1. DMM (inform only)

2. best prices in the display book or from other floor participants

Question 20

How many copies of the prelim prospectus must be included in the filing of a registration statement?

Answer 20

five copies

Question 21

Does the Code of Arbitration apply to disputes b/w a member firm and:

1. FINRA?
2. An employee alleging sexual harassment?

Answer 21

1. No

2. Yes, but based on the preference of the employee

Question 22

Trading suspensions

1. SEC may suspend trading in any stock for up to ___ days
2. SEC may suspend trading on (close) an exchange for up to ___ days

Answer 22

1. 10 biz days for stock

2. 90 cal days for exchange

Question 23

What is min net capital req in order to:

1. Participate in a firm-commitment underwriting (a syndicate)?
2. Have a proprietary trading account that does > 10 trades per calendar year?
3. Establish a reserve account for customers?

Answer 23

1. $100k
2. $100k
3. $250k

Question 24

Stabilizing bid

1. Can a stabilizing bid be initiated at a price higher than the highest independent bid in the security’s principal market?
2. Can a stabilizing bid be initiated at a price higher than the POP?
3. How many syndicate members may stabilize at a time?
4. If a member of a syndicate, other than the manager, effects a stabilizing bid, it must notify the manager w/in __ biz days.

Answer 24

1. Yes, unless:
   - security has traded the day of/before, or
   - current ask => last independent tx price.
2. No
3. Only one
4. w/in 3 biz days

Question 25

1. BDs that do not clear their own trades are called ____.
2. They may operate through a clearing firm on a ___ basis (i.e., share customer info with clearing firm) or on an ___ basis.
3. Carrying firm is req’d to submit to FINRA any agmt for the carrying of accounts when?

Answer 25

1. introducing firms
2. fully disclosed or omnibus
3. prior to agmt becoming effective (FINRA must pre-approve)

Question 26

Are issuers permitted to extend personal loans or other forms of credit to executive officers and directors?

Answer 26

No

Question 27

TRACE reporting

1. Designed to create greater transparency in the ___ mkt
2. Any trade in a TRACE-eligible security executed b/w 8:00am - 6:29:59pm must be reported w/in ___.
3. However, if executed w/in 15 mins of the CLOSE (i.e., at/after 6:15pm), trade may be reported by when?
4. Govt-Sponsored-Enterprise (GSE) debt securities are TRACE-eligible so managing underwriter of GSE offering would need to provide ___ to FINRA.

Answer 27

1. corp bond mkt
2. w/in 15 mins
3. w/in 15 mins after open on next biz day
4. CUSIP

Question 28

Notification to SEC need not be filed for sales under Rule 144 if amount is < ___ shares AND < $___.

Answer 28

< 5k shares AND $50k

Question 29

Proceeds transaction

• One in which a customer sells securities and uses proceeds to purchase other securities. Ex: Sell $10k of ABC and use proceeds to purchase $10k of XYZ.
• The member firm should calculate its % markup as if customers purchase was done for ___, using the total profit to the firm (from both sale and purchase) as a % of the customer’s __ amount.

Answer 29

cash….sale

Question 30

OTC equity securities

1. If executed b/w 8am - 8pm, must be reported to ORF w/in ___.
2. OTC equity trades subject to 5% Policy?

Answer 30

1. 10 secs

2. Yes

Question 31

1. An employee of an issuer of securities would be considered an RR if she ____.
2. An employee of an issuer is NOT deemed an RR as long as:
   a) does not receive ___ in connection w/ offer
   b) is not associated w/ any __
   c) is not subject to ___
   d) is not involved in ___

Answer 31

1. rec’d comp (cash / securities) to help distribute a new issue
2. Conditions:
   a) comp
   b) BD
   c) statutory disqualification
   d) oral solicitation to a potential purchaser (but CAN help prepare written comms)

Question 32

The consolidation or reorg of one/more partnerships into a single entity is a ____ transaction.

Answer 32

rollup transaction

Question 33

BDs are required to prepare what / how often as part of process of calculating net capital?

Answer 33

trial balances monthly

Question 34

A BD may enter into a temporary subordination agreement for purposes of ____.

Such agreements may not exceed __ days.

Answer 34

engaging in an underwriting

45 days

Question 35

OATS business day begins at ___ on one market day and ends at ___ on the next market day.

OATS reports must be submitted [how often]?

Answer 35

4:00:01pm….4:00:00pm

daily

Question 36

Tender offers

1. A company that is subject to a tender offer must notify shareholders w/in __ days.
2. Along w/ the notice, the company must also either:
   a) recommend that shareholders ___, or
   b) express that it ___, or
   c) state that it is ___.

Answer 36

1. 10 biz days

2.

a) accept / decline
b) no opinion and remains neutral
c) unable to take a position on the offer

Question 37

Reg D

1. Rule 504 of Reg D allows an issuer to offer securities of up to $__ in a __ period.
2. Issuer still req’d to file __ no later than __ after first sale.
3. If issuer offers securities > $1mm, any ___ must receive a disclosure doc.

Answer 37

1. $1mm in 12-month period
2. Form D no later than 15 days after first sale
3. non-accredited investor

Question 38

Hearing Panel / Complaints

Adjudicates complaints against a member firm and assesses penalties.

1. Respondents have __ days to answer a complaint from the Dept of Enforcement once rec’d.
2. Hearing Panel must render a decision w/in __ days after all evidence has been rec’d.
3. The penalty becomes effective unless appealed to the Nat’l Adjudicatory Council ___ days from decision.
4. However, a ban or expulsion is effective ___.

Answer 38

1. 25 days
2. 60 days
3. 30 days
4. as soon as the decision is served

Question 39

Books and Records

1. Examples of records that must be maintained for:
   a) Lifetime?
   b) Six years?
   c) Five years?
   d) Four years?
   e) Three years?
   f) Two years?
2. If firm is not current w/ books and records req under Rule 17a-3, it must file notice [when?] and again [when?] stating what it has done to rectify.

Answer 39

1. a) Stock certificate books, corporate charter, minutes books, partnership articles
   b) Blotters / daybooks, customer agmts, general ledgers, muni BD customer complaints
   c) CTRs
   d) Written complaints
   e) Written supervisory procedures, checkbooks, files relating to departed RRs, trial balances, fail to deliver ledger, securities in transfer ledger
   f) ALL records in an easily accessible location (after which retention period depends on record type)
2. immediately…w/in 48 hrs

Question 40

1. Reg __ regulates the amount that a BANK (or other non-BD) may lend to anyone wishing to pledge stock to obtain a loan to purchase other stock.
2. The amount that may be lent is the same as under Reg __ (for BDs).

Answer 40

1. Reg U (of Fed Reserve Board)

2. Reg T

Question 41

Customer Order Protection Rule

BD may trade for its own account at same price as retail customer if an exception applies, such as:

1. Customer order is from an ___; or
2. Large orders, defined as orders for __ shares or more AND value of at least $___

Answer 41

1. institutional account (bank, insurance co, SnL, RIC, RIA, other entity w/ assets >= $50mm)
2. 10k shares AND $100k