General Broker-Dealer Activities

Question 1

Alpha Securities, a member firm based in the U.S., has a correspondent relationship with Delta Securities, a non-U.S. based broker-dealer. Which statement regarding the activities of Delta Securities in the U.S. is true?

A. Delta can issue a research report in the U.S. under the name of Alpha.
B. Delta can join a syndicate underwriting nonexempt securities in the U.S.
C. If Delta visits its clients in the U.S., it must be accompanied by Alpha.
D. Delta can enter buy and sell orders direclty into Nasdaq Book for its clients.

Answer 1

A

Question 2

A nonregistered foreign representative employed by a nonmeber affiliate overseas can do all of the following except:

A. Accept unsolicited orders from U.S. customers
B. Visit a U.S. customer accompanied by one of your respresentatives
C. Effect trades through the U.S. firm
D. Have the U.S. member distribute research prepared abroad as long as the appropriate third-party disclosures are made

Answer 2

A

Question 3

T or F: WSPs must be maintained in the Office of Supervisory Jurisdiction for at least 3 years, beginning from the date they were created.

Answer 3

F

The 3-year retention requirement begins from the date of last use, not the date of creation.

Question 4

ABC Brokerage has purchased a box of 4 season-ticket seats at MSG. On the street, these tickets are worth $200-300 each. The idea is to let the registered reps invite their clients to the games by offering them free tickets, and then be able to socialize and deepen personal relationships with them. Which of the below are requirements that must be met for this plan to meet FINRA’s rules on gifts?
A. Document with the teams the FMV of each ticket.
B. Make clients pay for any ticket value above $100 per ticket.
C. Make sure reps attend each game with their clients.
D. Gifts must be occasional.
E. The firm must document that clients were under no pressure to buy products as a result of the gifts.
F. The gift must be for a special occasion, such as a client’s wedding anniversary or birthday.
G. Records of the gift must be maintained for at least 3 years.
H. The firm must document that some business resulted from the gift-giving program.

Answer 4

C, D, G

Question 5

May a registered representative continue to collect commissions after retirement, which will then pass on to his spouse upon his death? If so, under what circumstances?

Answer 5

Yes, with a written agreement entered into at or prior to retirement.

Question 6

In what types of securities transactions is it important for a bank to meet the SEC’s “chiefly compensated” test?

Answer 6

Fiduciary and trust accounts

Question 7

A mutual fund company wants to reimburse travel expenses and enrollment fees for registered reps of ABC Securities who are attending an educational seminar. This can be an acceptable arrangement under FINRA’s rule for non-cash compensation, provided that:
A. The seminar content is not 100% related to mutual funds.
B. The representatives who receive reimbursements aren’t “cherry-picked.”
C. Reimbursements aren’t linked to a specific sales target or level.
D. Reimbursements don’t exceed $1,000 per representative.

Answer 7

C

Question 8

Which of the below are the 3 important disclosures that must be made to bank customers who are considering securities products offered through the bank under a networking relationship with a broker-dealer?
A. FDIC coverage may be limited on securities offered through the bank.
B. Securities are not deposits or other bank obligations.
C. The bank may receive sales commissions on securities products sold.
D. Securities are subject to investment risk.
E. Securities are not FDIC-insured.
F. Annuities sold by the bank may not be guaranteed.

Answer 8

B, D, E

Question 9

Must a registered person receive approval from the BD before engaging in a private securities transaction?

Answer 9

If he is compensated, yes.

Question 10

Must a registered person receive approval from a BD prior to engaging in an OBA?

Answer 10

No, they just need to provide prior notification.

Question 11

Must a registered person receive approval from a BD before opening an account at another BD?

Answer 11

Yes

Question 12

May registered persons borrow from or lend to customers?

Answer 12

Yes, if the firm has WSPs allowing it and the client is an immediate family member or a bank; or, with written consent, if the client is a registered person at the same firm or if the loan is based on an outside or personal business relationship.

Question 13

If FINRA rules regarding private securities transactions are not followed, who is vulnerable to FINRA-imposed fines?

Answer 13

The registered rep and the member firm

Question 14

What type of notice or approval is required for a private securities transaction?

Answer 14

Prior notification to or approval by a registered principal

Question 15

Which of these are approved methods under Reg FD to satisfy a responsibility to promptly disclose any MNPI that has been accidentially leaked or distributed?
A. File a Form 8-K with the SEC
B. Contact at least 3 local media outlets
C. Post information on a leading industry blog
D. Hold a press conference, after giving adequate notice
E. Release information to at least 2 analysts who follow the company
F. Post information on the company’s website
G. Release a press release broadly to media outlets

Answer 15

A, D, F, G

Question 16

A broker-dealer must notify FINRA within [____] days of a branch office relocation.

Answer 16

30

Question 17

In which offices must the FINRA manual be maintained?

Answer 17

Each office

I think this is wrong and it’s actually every OSJ.

Question 18

In which offices must a broker-dealer’s WSPs be maintained?

Answer 18

Each OSJ

Question 19

What is the minimum number of emergency contact persons a broker-dealer must identify in the BCP?

Answer 19

2

Question 20

How often must a firm’s BCP be reviewed and approved?

Answer 20

Annually

Question 21

Who is required to approve and review a firm’s BCP?

Answer 21

A member of senior management who is a registered principal

Question 22

When must broker-dealers make the first written disclosure to customers about their BCPs?

Answer 22

At account opening

Question 23

The BCP must identify an uninterruptable communications channel between the broker-dealer and [____] during an emergency.

Answer 23

Regulators

Question 24

The BCP must identify an alternate way for broker-dealers to communicate with certain people during an emergency – which people?

Answer 24

Employees, customers, other broker-dealers

Question 25

After FINRA has identified a broker-dealer as restricted, which one of the following is NOT a valid way for the firm to address the situation? A. Request a FINRA hearing B. Consult with FINRA on remediation steps C. Agree to a legally binding arbitration process D. Voluntarily reduce staff

Answer 25

C ## Footnote FINRA does not offer aribtration as an opportunity to address restricted firm obligations.

Question 26

Which of the following factors should a broker-dealer consider carefully in deciding whether to use risk-based testing of SCPs? A. Trading desks that generate relatively high volume turnover B. Product areas previously identified by regulators as red flags C. Newly offered products and services D. Areas of the firm with historic deficiencies E. Units of the firm that produce research reports made available to the public F. Units of the firm that have experienced customer complaints or disciplinary actions G. Product areas generally not suitable for unsophisticated investors

Answer 26

B, C, D, F

Question 27

What is the deadline for broker-dealers to complete an annual verification of their contact information, as reported on the FINRA Gateway Filing & Reporting System?

Answer 27

Within 17 BDs after the end of each calendar year

Question 28

How does the broker-dealer formally identify the entity responsible for the firm's SCPs to the SEC?

Answer 28

Form BD (Schedule A)

Question 29

What entity of a broker-dealer is responsible for testing and amending the firm's SCPs?

Answer 29

CCO

Question 30

T or F: When WSPs are changed, a record of the prior version must be maintained in an OSJ for at least 2 years from the date of the change.

Answer 30

F ## Footnote A record of the prior version must be maintained for at least 3 years from the date of change.

Question 31

# 75-5-10 rule 75% of a mutual fund's total assets must be invested in securities issued by [____].

Answer 31

Companies other than the investment company or its affiliates

Question 32

# 75-5-10 rule Within the 75%, no more than 5% of the fund's total assets can be invested in [____].

Answer 32

Securities of a single issuer

Question 33

# 75-5-10- rule Within the 75%, the fund can own no more than 10% of [____].

Answer 33

Outstanding voting securities of any one issuer

Question 34

For each criteria below, which offers the better benefit - mutual funds, UITs, or neither one over the other? A. Predictable holdings B. Diversification among holdings C. Professional management D. Fixed termination date E. Lower continuing cost F. Daily valuation G. Tracking liquidity H. Attractive yield

Answer 34

A. UITs B. Mutual funds C. Mutual funds D. UITs E. UITs F. Mutual funds G. Mutual funds H. Neither one over the other

Question 35

Why, at times, is the market price of ETF shares above or below the published NAV of shares?

Answer 35

Supply and demand

Question 36

What price will I receive if I offer to sell my ETF shares?

Answer 36

Market price (or limit price)

Question 37

What causes the market price of ETF shares to stay fairly near the published NAV over time?

Answer 37

Authorized participants can trade large blocks or baskets of the underlying stocks of ETF shares and vice versa. ## Footnote This arbitrage helps to keep market price and NAV aligned.

Question 38

Can I exchange my ETF shares and receive a basket of the underlying portfolio stocks?

Answer 38

No, only "authorized participants" can.

Question 39

Which of the following statements is true about the tax treatment of DPPs? A. Income distributions are federally tax-exempt. B. Gains are taxable but losses can't be deducted. C. Losses can be used to offset passive gains. D. Taxes are paid at the fund level, not the individual investor level.

Answer 39

C

Question 40

What is the average maturity of a typical investment in a CMO? A. Short-term, under 5 years B. Long-term, over 20 years C. It depends on whether the CMO holds 15-year or 30-year mortgages D. It depends on which tranche an investor buys, and also prepayments

Answer 40

D

Question 41

T or F: The cash values of VUL are guaranteed to exceed a stated minimum amount.

Answer 41

F ## Footnote Cash values depend on investment account (subaccount) performance and are not guaranteed.

Question 42

T or F: The death benefit of a VUL is paid to the named beneficiary.

Answer 42

T

Question 43

T or F: Illustrations of VUL must always reflect the minimum mortality expenses and administrative fees the insurer can impose.

Answer 43

F ## Footnote Illustrations must reflect the **maximum** mortality expenses and administrative fees.

Question 44

T or F: VUL programs can offer customers a high degree of liquidity for short-term financial needs.

Answer 44

F ## Footnote A VUL should not be purchased by customers with short-term liquidity needs.

Question 45

T or F: Any guarantees in a VUL program are backed solely by the issuing life insurance company.

Answer 45

T

Question 46

T or F: VUL combines life insurance coverage with investments that can participate in stock and bond market returns.

Answer 46

T

Question 47

For the annuitization payout described below (from a variable annuity), indicate the payout option from these choices: straight-life, life with period certain, joint with last survivor. Also indicate whether the payout is fixed or variable annuitization. In all cases, John is the contract owner and his wife, Helen, is the annuitant. John will receive $385 per month for as long as he lives. If he dies within 10 years of annuitization, payouts will continue to Helen for the balance of the 10-year period.

Answer 47

Life with period certain Fixed

Question 48

For the annuitization payout described below (from a variable annuity), indicate the payout option from these choices: straight-life, life with period certain, joint with last survivor. Also indicate whether the payout is fixed or variable annuitization. In all cases, John is the contract owner and his wife, Helen, is the annuitant. John will receive a payout of 24.5 annuitization units per month, payable for as long as he lives. No payments will be made to Helen after his death.

Answer 48

Straight life Variable

Question 49

For the annuitization payout described below (from a variable annuity), indicate the payout option from these choices: straight-life, life with period certain, joint with last survivor. Also indicate whether the payout is fixed or variable annuitization. In all cases, John is the contract owner and his wife, Helen, is the annuitant. John will receive a payout of $900 per month for as long as either he or Helen are alive. After the first death (of the two), the surviving spouse will receive a payout of $600 per month for as long as he/she lives.

Answer 49

Joint with last survivor Fixed ## Footnote In this example, both John and Helen are annuitants.

Question 50

For the annuitization payout described below (from a variable annuity), indicate the payout option from these choices: straight-life, life with period certain, joint with last survivor. Also indicate whether the payout is fixed or variable annuitization. In all cases, John is the contract owner and his wife, Helen, is the annuitant. John will receive a payout of 60 annuitization units per month for as long as he lives, but in no case less than 20 years. Each year, the amount of annuitization units payable will increase by 3%.

Answer 50

Life with period certain Variable

Question 51

Under the Trust Indenture Act of 1939, in which case is a corporate bond issuer required to name a trustee to safeguard the rights of bondholders? A. When any bonds are sold to retail investors B. When the corporate bond issuer sells bonds worth more than $50 million C. When daily bond trading volume exceeds $1 million D. When there are no sinking fund provisions for retiring bonds

Answer 51

B

Question 52

How do broker-dealers meet regulatory requirements to train associated persons concerning products and services?

Answer 52

Design and implement Firm Element training that reflects the firm's business and needs

Question 53

Who conducts a reasonable basis suitability review?

Answer 53

Broker-dealer

Question 54

When must a reasonable basis suitability assessment be conducted and what must it conclude?

Answer 54

Before recommending a security to any customer. That it is suitable for at least some of the firm's customers.

Question 55

Who conducts a customer-specific suitability review?

Answer 55

Registered rep

Question 56

How long is a Letter of Intent good for? How long can it be backdated for?

Answer 56

13 months 90 days

Question 57

Premiums for a VWL are [?] while premiums for a VUL are [?].

Answer 57

Fixed minimum Flexible

Question 58

Is an arbitration process required for resolution of the below under the Code of Arbitration Procedures? (yes, no or maybe) A dispute between two registered representatives over commissions.

Answer 58

Yes

Question 59

Is an arbitration process required for resolution of the below under the Code of Arbitration Procedures? (yes, no or maybe) A dispute between a customer and a registered representative alleging fraud.

Answer 59

Maybe (if the customer signed a predispute arbitration agreement).

Question 60

Is an arbitration process required for resolution of the below under the Code of Arbitration Procedures? (yes, no or maybe) A dispute between two broker-dealers over IPO allocations.

Answer 60

Yes

Question 61

Is an arbitration process required for resolution of the below under the Code of Arbitration Procedures? (yes, no or maybe) A dispute between a customer and a broker-dealer involving sexual harrassment.

Answer 61

No

Question 62

Is an arbitration process required for resolution of the below under the Code of Arbitration Procedures? (yes, no or maybe) A dispute between a registered representative and a broker-dealer over trail commissions.

Answer 62

Yes

Question 63

Can one party in a mediation require that their attorney be present in the hearing?

Answer 63

Yes, if it's ok with the other side.

Question 64

Do the parties to a mediation have to be bound by a mediator's decision?

Answer 64

No, it's not binding until they sign an agreement.

Question 65

If a mediation begins and one party doesn't feel the process is fair, what remedy do they have?

Answer 65

They can discontinue the process at any time.

Question 66

What is the main advantage of a mediation process?

Answer 66

It's faster and cheaper than arbitration.

Question 67

Which of the following sanctions is FINRA allowed to impose on an associated person or securities firm for a rule violation, under FINRA's Code of Procedure? A. Temporary cease and desist order B. Cancellation of membership C. Fine D. Permanent termination from the securities industry E. Prison sentence F. Suspension of association with other FINRA members G. Freezing of certain customer accounts H. Censure

Answer 67

A, B, C, F, H ## Footnote The Code of Procedure gives FINRA broad powers to enforce its rules. However, FINRA can't imprison anyone or terminate anyone's SEC registration for a rule violation. FINRA's sanctions are limtied to its own members, not customers.

Question 68

T or F: A registered rep can attempt to settle a complaint personally with a customer, befire he is required to bring it to his firm's attention.

Answer 68

F ## Footnote Representatives are prohibited from using private communications or settlement offers to resolve written complaints.

Question 69

T or F: If a customer admits there are "gray areas," this is not considered a customer complaint under FINRA rules.

Answer 69

F ## Footnote Any customer complaint made in writing is still a complaint.

Question 70

T or F: If a registered rep believes a complaint is without merit, he is not required to forward it to a registered principal at his firm.

Answer 70

F ## Footnote **ALL ** written complaints involving a registered rep must be forwarded to a registered principal for review.

Question 71

T or F: A firm is required to address a customer complaint and keep a record of how it is resolved.

Answer 71

T

Question 72

T or F: A firm can decide to dismiss a complaint, without redress or disciplinary action, if it is found to be lacking in merit.

Answer 72

T

Question 73

T or F: All complaints must be included on the firm's quarterly Customer Complaint Report filed with FINRA.

Answer 73

T

Question 74

ABC Securities has just been notified by FINRA that it has been designated a "taping firm." Which telephone calls must it tape and store? A. Calls made by or to associated persons who have been specially designated as having disciplinary records. B. Outbound calls made by all registered representatives to customers. C. Outbound and inbound calls, to and from customers or prospects. D. All calls between registered reps and their customers.

Answer 74

D

Question 75

Indicate the records retention requirement for each type of record listed below. A. Sales and securities blotters B. AML records providing customer identity C. Net capital and aggregate indebtedness calculations D. Powers of attorney and discretionary authority forms E. Receipts and disbursements of cash F. Stock certificate books G. Customer complaints

Answer 75

A. 6 years B. 5 years C. 3 years D. 3 years E. 6 years F. Life of broker-dealer G. 4 years

Question 76

What is the main requirement broker-dealers must meet in choosing the format of electronic records storage systems? A. Formats must be non-rewritable and non-erasable. B. Formats must be cloud-accessible. C. Vendors of formats must be FINRA-certified. D. The same formats must be used consistently for all required records storage.

Answer 76

A

Question 77

How long must records of customer complaints be maintained ?

Answer 77

4 years under FINRA rules (but 6 years under MSRB rules)

Question 78

What fundamental problem did the passage of SOX in 2002 aim to prevent in the future?

Answer 78

Lack of accuracy and accountability in financial reporting by public companies

Question 79

An attestation as to the accuracy of a firm's periodic reports must be reviewed and signed by two executive officers of public companies. They are [?].

Answer 79

CEO & CFO

Question 80

Which periodic reports are covered by the requirements of SOX?

Answer 80

10-Q, 10-K, 8-K, etc.

Question 81

How often does SOX require that internal controls of public companies be evaluated and deemed effective by the signing officers?

Answer 81

Annually

Question 82

What is the minimum net capital requirement for a full-service broker-dealer (carrying firm)?

Answer 82

$250,000

Question 83

What is the minimum net capital requirement for a qualified block positioner?

Answer 83

$1,000,000

Question 84

What is the minimum net capital requirement for a small introducing firm that does not have custody of customer funds or securities?

Answer 84

$5,000

Question 85

What is the minimum net capital requirement for a qualified third market maker that makes a market in 10 securities?

Answer 85

$200,000 ## Footnote The requirement is the lesser of $500k or $100k + $20k per security in excess of 5. $100k + ($20k x 5) = $200k

Question 86

What is the minimum net capital requirement for a firm that does not carry customer margin accounts and transmits all customer funds and securities promptly?

Answer 86

$100,000

Question 87

Brokerage account customers with free credit balances must receive quarterly notices that include 3 key disclosures. Which disclosures below are among the 3? A. "Free credit balances are not segregated." B. "Free credit balances are payable to the customer on demand." C. "Free credit balances do not earn interest." D. The amount of the free credit balance. E. The amount of the free credit balance that can't be accessed immediately.

Answer 87

A, B, D

Question 88

ABC Corp., a Nasdaq-listed stock, currently has a short interest of 857,242. What does this mean?

Answer 88

That 857,242 shares have been borrowed and sold short.

Question 89

What action would cuase the short interest in ABC Corp. to fall?

Answer 89

Short covering

Question 90

What is the risk of being short a stock with a high short interest?

Answer 90

A short squeeze (panicked covering leads to higher prices, which leads to bigger losses)

Question 91

Under a clearing arrangement, indicate which firm, introducing or clearing, usually has responsibility for each function listed below. A. Account opening B. Order execution C. Trade confirmations and account statements D. Financial advice and recommendations E. Cashiering F. Holding securities in safekeeping

Answer 91

A. Introducing B. Clearing C. Clearing D. Introducing E. Clearing F. Clearing ## Footnote The clearing firm serves as a full-service securities back office. The introducing firm usually handles account opening and customer interactions, such as portfolio advice and recommendations.

Question 92

Reese opens a margin account by depositing $10,000. For her first purchases, she wants to buy 200 shares of ABC Co. stock, long at $40 per share, and 200 shares of XYZ mutual fund at $20 per share. Are both the securities (the stock and the fund shares) marginable?

Answer 92

No, only the stock.

Question 93

Reese opens a margin account by depositing $10,000. For her first purchases, she wants to buy 200 shares of ABC Co. stock, long at $40 per share, and 200 shares of XYZ mutual fund at $20 per share. What initial margin requirement is applicable?

Answer 93

50% on the stock purchase ## Footnote Per Reg T

Question 94

Reese opens a margin account by depositing $10,000. For her first purchases, she wants to buy 200 shares of ABC Co. stock, long at $40 per share, and 200 shares of XYZ mutual fund at $20 per share. Can she purchase both the 200 shares of long stock and 200 shares of the mutual fund with the $10,000 she has deposited?

Answer 94

Yes ## Footnote $4k for mutual fund shares and $4k for stock (50% of $8k)

Question 95

Reese opens a margin account by depositing $10,000. For her first purchases, she wants to buy 200 shares of ABC Co. stock, long at $40 per share, and 200 shares of XYZ mutual fund at $20 per share. What is the FINRA minimum maintenance requirement?

Answer 95

25%

Question 96

Certification of a firm's compliance controls by its CEO must be presented to [?] within [?] days.

Answer 96

The Board of Directors and audit committee 45

Question 97

What is the minimum net capital requirement for a small introducing BD?

Answer 97

$5,000

Question 98

What is the minimum net capital requirement for a mid-size introducing BD?

Answer 98

$50,000

Question 99

What is the minimum net capital requirement for a Section (k)(2)(i) BD?

Answer 99

$100,000

Question 100

What is the minimum net capital requirement for a prime broker?

Answer 100

$1,500,000

Question 101

A BD who is in business for less than one year must maintain an aggregate indebtedness to net capital ratio of no more than [?].

Answer 101

8:1

Question 102

A BD must notify FINRA promptly (within 24 hours) when it fails to maintain net capital that is [?] of its required minimum.

Answer 102

150%

Question 103

What is the restriction on a BD's business activities when its net capital is: A. 150% B. 125% C. 120% D. 100% of the required minimum?

Answer 103

A. Cannot expand business B. Must reduce business C. Early warning D. SEC Violation

Question 104

What is the fidelity bond amount a BD with a minimum net capital requirement of $250,000 must carry?

Answer 104

$600,000 - $5 million, depending on its net capital requirement

Question 105

Does a customer's free credit balance need to be segregated from a firm's net capital?

Answer 105

No