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Flashcards in Other Relevant Regulations and Interpretations Deck (32)
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1

FINRA Conduct Rules require a member firm to:
a. Send customers a quarterly balance sheet and income statement
b. Send customers a quarterly balance sheet
c. Make available a balance sheet and income statement to a customer
d. Make available a balance sheet to a customer

D- A member firm is required under FINRA Conduct Rules to send a balance sheet to a customer if the customer requests one. There is no requirement to send an income statement to a customer.

2

The Alexandria, Virginia Sewer Authority just sold $20,000,000 of its revenue bonds to a syndicate managed by Wilson & Company, a municipal securities dealer. It is a serial bond issue with par values of $1,000,000 scheduled to mature annually, beginning exactly six months after the dated date. Wilson & Company must therefore pay the MSRB an underwriting assessment fee based on a:
a. $1,000,000 par value
b. $2,000,000 par value
c. $19,000,000 par value
d. $20,000,000 par value

D- The underwriting assessment is based on the face amount of the securities purchased from the issuer. It applies only to issues with a stated maturity of more than nine months. It is imposed on the face amount of all securities purchased from the issuer if any part of the issue has a final stated maturity of more than nine months. Therefore, this entire issue of $20,000,000 would be assessed, despite the fact that $1,000,000 worth has a maturity of less than nine months.

3

A firm's written supervisory procedures must provide for the prompt review and written approval by a municipal securities principal of:
I. The opening of each customer account in which transactions for municipal securities may be effected
II. Each transaction in municipal securities
III. The handling of all written customer complaints pertaining to transactions in municipal securities
IV. All advertising relating to municipal securities activities
a. I only
b. I and II only
c. I, II, and III only
d. I, II, III, and IV

D- All of these statements are true. However, the rule should not be interpreted to mean that the principal must personally answer all written complaints. Instead, the principal should supervise all activities regarding complaints and their remedies. Also, accounts should be reviewed on a regular and frequent basis in order to detect and prevent irregularities and abuses. This does not necessarily mean reviewing accounts on a daily basis.

4

The maximum penalty for failure to disclose material information in a transaction in the over-the-counter market is a:
a. One-year suspension
b. Bar from the securities industry
c. $1,000,000 fine and/or 5 years in prison
d. $5,000,000 fine and/or 20 years in prison

D- The most severe penalties for securities law violations are found under the Securities Exchange Act of 1934. Violations of antifraud or other provisions of the Act could result in a fine of not more than $5,000,000, imprisonment for not more that 20 years, or both.

5

A broker-dealer is controlled by a publicly-held corporation. If a customer wishes to purchase stock of the parent company, the broker-dealer:
a. Must disclose the relationship to the parent company in writing
b. Must refuse to accept the order
c. Must disclose the amount of control by the parent company over the broker-dealer
d. May accept the order in the same manner as any other order

A- If a broker-dealer who is controlled by a public company has a customer who wishes to purchase the stock of that company, the broker-dealer must disclose the control relationship prior to accepting the order. If this initial disclosure was verbal, written disclosure must also be provided prior to settlement (completion of the transaction).

6

The 5% Policy applies to which of the following?
I. Agency sales in the OTC market
II. Principal transactions in municipal bonds
III. Mutual fund sales
IV. New issues of corporate securities
a. I only
b. I and IV only
c. II and III only
d. I, II, and III only

A- The 5% Policy applies to both agency and principal OTC transactions. However, it does not apply to any sale under a prospectus, such as a mutual fund or a new issue, or to transactions in governments or municipals.

7

Which TWO of the following statements regarding disciplinary proceedings under the Code of Procedure are TRUE?
I. Original jurisdiction rests with a Hearing Panel.
II. Original jurisdiction rests with the National Adjudicatory Council.
III. Appellate jurisdiction rests with a Hearing Panel.
IV. Appellate jurisdiction rests with the National Adjudicatory Council.
a. I and III
b. I and IV
c. II and III
d. II and IV

B- Under the Code of Procedure, original jurisdiction rests with a FINRA Hearing Panel. It is the Hearing Panel that holds hearings, considers complaints, and assesses penalties. If a respondent disagrees with the findings of the Hearing Panel, the respondent may appeal to the National Adjudicatory Council, which has both appellate and review jurisdiction.

8


Which of the following individuals are in violation of the Insider Trading and Securities Fraud Enforcement Act of 1988?
I. A director of a company who trades the company's securities on the basis of material, nonpublic information
II. An officer of a corporation who tells an associate in a different company of an upcoming announcement that the first company plans to make
III. An individual who sells shares in XYZ after being told by an employee of XYZ that the company has just lost two major clients
IV. An employee of a broker-dealer who purchases a stock for her personal account based on a recommendation from the firm's research department after it has been disseminated to the public
a. I and III only
b. II and III only
c. I, III, and IV only
d. I, II, III, and IV

A- The Insider Trading and Securities Fraud Enforcement Act of 1988 holds that any individual who purchases or sells a security while in possession of material, nonpublic information, or has communicated such information to another party in connection with a transaction, may be held liable for a trading violation under the Act. In Choice (II), there is no reference to a transaction occurring, and in Choice (IV), there is no reference to material, nonpublic information.

9

The notice pursuant to SEC Rule 17a-5(f)(2) addresses:
a. The accuracy of a firm's books and records
b. The amount of excess net capital a firm has
c. The designation of an independent public account
d. Year 2000 problems

C- By December 10 of each year, a broker-dealer must provide a statement indicating an agreement with an independent public accountant to conduct the broker-dealer's annual audit for the following calendar year.

10

All the following statements are TRUE under the Code of Arbitration EXCEPT:
a. Customers, but not member firms, may appeal arbitration decisions to a court
b. A person may initiate arbitration by filing a Submission Agreement, a Statement of Claim, and the required deposit fee
c. Respondents may file a counterclaim against the person initiating the arbitration
d. If a customer is involved in an arbitration, a majority of the arbitrators must be from outside the securities industry

A- The Code of Arbitration does not provide for appeals by any party

11


During a routine audit, an examiner for a self-regulatory organization has found what she believes is a pattern of excessive corporate underwriting fees charged by the firm's investment banking department. Disciplinary actions for such violations would be imposed under:
a. State blue-sky laws
b. FINRA's Code of Procedure
c. FINRA's Code of Arbitration
d. SEC Corporate Finance Department

B- The underwriting of corporate securities is governed by FINRA rules. Disciplinary actions for violations of FINRA rules are imposed under FINRA's Code of Procedure.

12

In which of the following cases would a financial advisory relationship exist according to the MSRB?
I. A broker-dealer, while acting as an underwriter for a municipal offering, gives advice to the issuer regarding the structure of the issue.
II. A broker-dealer gives a municipal issuer advice about a new issue with respect to the issue's timing and terms and is compensated for this advice under a written agreement.
III. A broker-dealer not involved in a new municipal offering informally gives advice to the issuer regarding the timing of the issue for no charge.
a. I only
b. II only
c. I and II only
d. I, II, and III

B- A financial advisory relationship is deemed to exist when a broker-dealer or dealer bank, for compensation or the expectation of compensation, gives an issuer advice about a new issue with respect to the issue's structure, timing, or terms of the offering. However, this does not include situations in which a municipal securities firm gives such advice to an issuer in its role as an underwriter, which is why Choice (I) is not correct. Choice (III) is incorrect because there is no charge.

13


Mr. Harris sells 300 shares of Dunkirk Industries at 60. He has physical possession of the securities but does not bring them into the firm by the settlement date. The firms records will indicate:
a. Mr. Harris has a fail to deliver
b. The firm is failing to receive from Mr. Harris
c. The firm has a fail to deliver
d. Mr. Harris has a credit balance of $18,000

D- Mr. Harris's account is credited for $18,000 on the settlement date. He would not get paid until he brought in the securities. If the broker-dealer sold the securities to another broker-dealer, the selling broker-dealer would have a fail to deliver.

14

An individual convicted of insider trading four years ago has served time in jail. She arrives at your office looking for a position on the trading desk. You would inform her that:
a. She could be hired but could not talk to the public.
b. She may not be hired on a trading desk for at least six more years.
c. She may trade munis or governments since these are exempt securities.
d. Her order tickets must be approved in advance.

B-A convicted felon is barred from the securities business for 10 years. This type of ban is referred to as a statutory disqualification. However, a disqualified person may apply to an SRO to enter or reenter the securities industry before the 10-year period has elapsed. If the SRO grants the waiver, it must notify the SEC, which can overturn the waiver if it chooses

15


Affirmative determination is NOT applicable in the sale of which of the following?
a. Common stock
b. Preferred stock
c. Corporate bonds
d. Convertible preferred stock

C- Affirmative determination relates to a broker-dealer's delivery responsibilities in a short sale (marking order tickets short and determining that the securities are available for borrowing). The requirement is applicable to equity securities and equity equivalents. Affirmative determination does not apply to the sale of nonconvertible debt instruments.

16

What is the statute of limitations on arbitration claims?
a. One year for simplified arbitration
b. Three years for industry arbitration
c. Six years for all arbitration claims
d. 10 years for dealer-to-dealer activities

C- Six years is the statute of limitations in all arbitration claims.

17

Supervisory control procedures established by broker-dealers are NOT specifically required to address:
a. Changes in a customer's investment objectives
b. Transmittals of funds and securities from customers to third-party accounts
c. A wire transfer of funds from a client's account to his designated bank
d. Mailing a check to a customer's home address

D- All broker-dealers are required to establish, maintain, and enforce a system of supervisory control procedures that test and verify that the firm's supervisory procedures are sufficient to carry out general oversight of all firm activities. The firm must designate a principal to FINRA whose responsibilities include carrying out this function. These procedures must contain provisions to review and monitor all transmittals of funds or securities between customers and third-party accounts, between customers and outside entities (banks, trust companies, etc.), between customers and locations other than a customer's primary residence (post office box, other address, "in care of" accounts, etc.), and between customers and registered representatives. Other points that should be addressed are changes in customer addresses and changes in customer investment objectives.

18

Broker-dealers must designate a principal to oversee their firm's supervisory control system and report to senior management on the results of such surveillance. Senior management must be apprised of the status of the supervisory control system every:
a. Month
b. Three months
c. Six months
d. Twelve months

D- Senior management must receive a report from the designated principal in charge of the firm's supervisory control system at least once each year. This report must provide details of any tests conducted and resulting changes made, based on an analysis of the firm's supervisory systems.

19

Which of the following types of securities is regulated under the order marking requirement of Regulation SHO, Rule 200?
I. Nasdaq
II. OTCBB
III. NYSE
IV. Pink Sheet
a. I and III only
b. II and IV only
c. I, II, and III only
d. I, II, III, and IV

D- Under the order marking requirement, a broker-dealer must mark all orders for equity securities, over-the-counter and exchange-listed, as long, short, or short exempt. Orders are marked accordingly, under the following conditions.
• Long -- The seller owns the security being sold, and it is either in the possession or control of the broker-dealer or it is reasonably expected that the security will be delivered no later than settlement day.
• Short -- The seller owns the security being sold but does not reasonably believe that it will be in the possession or control of the broker-dealer prior to settlement day, or the seller does not own the security being sold or any sale that is effected by the delivery of a borrowed security

20

A broker-dealer may use borrowed securities to make delivery for settlement purposes on a long sale transaction if the:
a. Seller fails to deliver the security
b. Seller does not own the security
c. Broker-dealer is having operational difficulties
d. Broker-dealer is net-long the security

A- There are three instances in which a broker-dealer may use borrowed securities to make delivery. These instances include times during which:
• That broker-dealer is lending a security to another broker or dealer
• That broker-dealer knows or has been led to believe that the seller owns the security being sold and will deliver the security by the scheduled settlement date, but the seller fails to deliver
• Before a loan arrangement for a security to make delivery or before a fail to deliver, an exchange or a securities association discovers that the sale originated from a good-faith mistake, although the broker dealer used due diligence regarding the sale, and the requirement of a buy-in would create an undue hardship or the sale had been effected at an unacceptable price
• In instances where a broker-dealer knows or has been led to believe that the seller owns the security being sold and will deliver the security by the scheduled settlement date, but the seller fails to deliver, the broker-dealer must borrow securities or close out the short position by buying securities of a like kind and quantity. This close-out must take place within 35 days after trade date

21

For an equity security to be considered a threshold security, there must be an aggregate fail to deliver position for:
a. 4 consecutive settlement days
b. 5 consecutive settlement days
c. 10 consecutive settlement days
d. 13 consecutive settlement days

B- A threshold security is any equity security that is registered in accordance with Section 12 of the Securities Exchange Act of 1934 or for which the issuer must file reports in accordance with section 15(d) of the Act and:
• There is an aggregate fail to deliver position for 5 consecutive settlement days at a clearing firm for 10,000 shares or more and equal to at least .5% of the total outstanding shares of the issuer.
• A self-regulatory organization has included the security on a threshold securities list sent to its members.
A broker-dealer must close out any fail to deliver in a threshold security after 13 settlement days.

22

Jeff Willingham has a margin account with Doverton Securities. On January 5, 20XX, he placed an order to sell 10,000 shares of XYXY at 15 with his broker. He owns the securities but will not be able to deliver them by the settlement date. If the firm marks the order ticket short and has not made delivery, within how many days would Doverton Securities be required to close out the position?
a. 10
b. 13
c. 30
d. 35

D- In instances where a broker-dealer knows or has been led to believe that the seller owns the security being sold but the seller will not be able to deliver the security by the scheduled settlement date, broker-dealer must borrow securities or close out the short position by buying securities of a like kind and quantity. This close-out must take place within 35 days after the trade date.

23


Which TWO of the following features are requirements of an arbitration hearing?
I. All of the broker-dealer's trading/customer records
II. All of the records pertaining to the case or issue at hand
III. Filing fees paid by the party initiating the claim
IV. Depositions made by both parties
a. I and III
b. I and IV
c. II and III
d. II and IV

C- Requirements for arbitration include the records pertaining to the case or issue at hand and filing fees paid by the party initiating the claim. Depositions are not part of the arbitration procedure. There is no requirement that a broker-dealer provide all of its trading/customer records.

24

Revere Brokerage receives an ACAT transfer request from Lighthouse Brokerage. Under SRO rules, how many days does Revere have to protest, or validate, the transfer request?
a. One calendar day
b. One business day
c. Three business days
d. Three calendar days

B- Eligible securities are transferred by the National Securities Clearing Corporation (NSCC) using the Automated Customer Account Transfer (ACAT). Under SRO rules, the carrying broker-dealer has one business day to either protest or validate a transfer request. If validated, the transfer must take place within three business days.

25


What is the maximum fine that may be levied by a self-regulatory organization (SRO)?
a. $250,000
b. $1,000,000
c. $5,000,000
d. No limit

D- SROs, such as FINRA, may fine their member firms and employees for violations of their rules. Although FINRA publishes its Sanctions Guidelines publication, there is no limit as to the monetary fine that it may levy against a member firm or its employees.

26

Which of the following statements is NOT TRUE concerning broker-dealer compliance with anti-money laundering regulations?
a. Broker-dealers must appoint a compliance person to oversee anti- money laundering regulation compliance.
b. Broker-dealers must have anti-money laundering written procedures.
c. Firms must file reports with their Designated Examining Authorities (DEAs).
d. Personnel must be educated about money-laundering techniques.

C- Anti-money laundering regulations do not require broker-dealers to file reports with their DEAs.

27

A Series 11 registered individual may be compensated in which TWO of the following manners?
I. Salary
II. Commission
III. Hourly wage
IV. Bonus based on number of accounts opened
a. I and III
b. I and IV
c. II and III
d. II and IV

A- A Series 11 registered individual may be compensated by way of hourly wage or salary but not on a commission basis. These individuals may receive a bonus based on the firm's profits, but not based upon the number of accounts opened. Accounts may not be opened by a person with a Series 11 license.

28


A registered representative who has been in the securities industry for 9 years is subject to the Regulatory Element of Continuing Education:
a. On her 10th anniversary
b. Every 2 years
c. In two more years
d. In one more year

C- The Regulatory Element of continuing education begins on the second anniversary after a registered person's initial registration. The Regulatory Element training reoccurs every three years after the first anniversary. Therefore, the registered person in the question has had Regulatory Element training on her second, fifth, and eighth anniversary. The next sitting for the training would be on her eleventh anniversary.

29

A registered principal is permitted to borrow from, or lend funds to, customers in all of the following situations, EXCEPT:
a. The customer is an immediate family member of the investment banking representative
b. The customer is an institutional investor
c. The loan is based on a business relationship independent from the member firm customer relationship
d. The customer has a personal relationship with the investment banking representative

B- Registered personnel of a member firm are generally prohibited from borrowing money from, or lending money to, any customer. However, if the firm has written rules and procedures that allow borrowing and lending between registered personnel and their customers that meet the following conditions, the activities are permissible.
• The customer is an immediate family member of the registered person.
• The customer is a financial institution or other entity that engages in the business of providing credit, financing, or loans in the course of its business.
• The customer and the registered person are both registered with the same member firm.
• The customer has a personal relationship with the registered person wherein the loan would not have been solicited, offered, or given if the relationship did not exist.
• The loan is based on a business relationship other than that of a member firm customer.
There is no exception based on the type of customer -- for example, an institutional investor.

30

An exemption from the Member Private Offering disclosure requirements would NOT be available in an offering sold only to:
a. Investors with total assets of $65,000,000
b. Qualified institutional buyers
c. Accredited investors
d. Mutual funds

C- FINRA Rule 5122 relates to a private placement of securities where a member firm issues the securities and conducts the placement on its own behalf. It is also referred to as a Member Private Offering (MPO). Due to potential conflicts of interest, when a member firm attempts to raise capital for itself or for a firm it controls, the member firm is required to provide a term sheet, or a private placement memorandum, or a disclosure document that contains certain disclosures. The rule provides two types of exemptions. One is based on the types of investors, and the other is based on the types of offerings.
Types of investors exempt from the rule are:
• Institutional investors, such as banks, insurance companies, investment companies (mutual funds), and investors with total assets of at least $50,000,000
• Qualified institutional buyers as defined under Rule 144A
• Types of offerings exempt from the rule are:
• Exempt securities defined under the Securities Act
• Exempt offerings under Regulation S, or Rule 144A
• Offerings of variable contracts
• Offerings of securities in a commodity pool
• Offerings of equity and credit derivatives
• Offerings of unregistered, investment-grade debt, or preferred securities
• Offerings of a member firm's securities sold in a public offering