sie Flashcards
(32 cards)
As long as the firm has written policies and procedures covering borrowing from customers, a registered representative can borrow money without getting the firm’s prior approval from a customer who is a:
A. Cousin
B. Friend
C. Colleague
D.Neighbor
COUSIN
registered representatives can not lend money to, or borrow money from, customers. However, as long as the firm has written policies and procedures covering this, a representative can borrow money from, or lend money to, an immediate family member who is a customer without having to give prior notice to the firm and get the firm’s prior approval.
For purposes of this rule, “immediate family” means parents, grandparents, mother-in-law or father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or nephew, and any other person whom the registered person supports, directly or indirectly, to a material extent.
A registered representative has a long-term client who works in a bank. The representative tells the client that he wants to buy a new house and has started to look for a mortgage. The client informs the representative that because of their relationship, she can get the representative a better mortgage interest rate than is available to the general public. Which statement is TRUE about this?
A This is prohibited because representatives cannot borrow from their clients
B This is prohibited because representatives cannot borrow from bank clients at preferential rates
C This is permitted because banks are in the business of lending money
D This is permitted because there is a long-standing client relationship
B. This is prohibited because representatives cannot borrow from bank clients at preferential rates
permitted exceptions to the rule of RR’s borrowing from customer:
- immediate family members who are clients (such as a husband borrowing from a wife or vice-versa); and
- banks who are clients, as long as the terms and conditions of the loan are the same as those given to the general public.
The problem here is that the loan from the bank is being given on preferential terms. Because of this, the loan to the representative is prohibited.
A representative who has a bank as a client is permitted to borrow from that bank:
A. under no conditions
B. As long as the loan is documented in writing
C. as long as the loan is offered on the same terms and conditions as those that apply to the general public
D. without restriction because the bank is an institutional lender
C. as long as the loan is offered on the same terms and conditions as those that apply to the general public
permitted exceptions to the rule of RR’s borrowing from customer:
- immediate family members who are clients (such as a husband borrowing from a wife or vice-versa); and
- banks who are clients, as long as the terms and conditions of the loan are the same as those given to the general public.
What item given from a mutual fund sponsor to a registered representative is NOT considered to be “non-cash compensation”?
A. 4 Super Bowl tickets
B An all-expense paid trip to a resort hotel
C An expense-paid trip to an educational conference
D 2 bottles of vintage wine valued at $200 each
C. An expense-paid trip to an educational conference
FINRA prohibits registered representatives from accepting a gift in the amount of more than $100, and also prohibits representatives from accepting “non-cash compensation” from someone other than their employer that exceeds this $100 limit.
Note that an exception to the prohibition is given to sponsor-held educational seminars. The sponsor can pay for the registered representative’s travel, accommodations, and meals at the conference. However, the conference cannot be promotional - it must be educational. Furthermore, the sponsor cannot pay for friends and family of the registered representative to come along.
Which action is permitted under FINRA rules?
A registered representative accepts a $300 gift from a customer
B A registered representative pays for a $1200 sushi meal with a customer
C A registered representative gives a customer $200 tickets to a show
D A registered representative accompanies a customer to a show, for which the representative paid $200 for the tickets
D A registered representative accompanies a customer to a show, for which the representative paid $200 for the tickets
Business entertainment does not fall under the $100 gift limit. Business entertainment is permitted as long as it is not too excessive ($1200 for raw fish seems excessive!) or too frequent and it must comply with the firm’s policies and procedures. Business entertainment means that the representative and the customer are together at some type of event.
A registered representative at another member firm has a client who wishes to buy a Direct Participation Program (DPP) unit, a product that is not offered through his firm. He has a friend that is a registered representative at another member firm where DPPs are sold, and offers to refer the prospective client in exchange for a small fee. Which statement is TRUE?
A.This is permitted since the referral payment is small
B. This is permitted because the recipient of the referral fee is a registered individual
C. This is permitted as long as the client is informed that a referral fee has been paid
D. This is prohibited
D. This is prohibited
Registered representatives can only share commissions or pay referral fees to other registered persons at the same broker-dealer. Because these 2 representatives work for different firms, payment of the referral fee is prohibited.
If a registered representative fails to complete the Regulatory Element of the Continuing Education requirement within the stated time period, that person:
A. can continue to perform all of the functions of a registered representative
B can only accept unsolicited orders from customers
C can only be compensated on a salary basis; commission compensation is prohibited
D must cease performing all of the functions of a registered representative
D must cease performing all of the functions of a registered representative
If a registered representative fails to complete the Regulatory Element of the Continuing Education requirement within 120 days of the notification date, that person’s registration is suspended and that person cannot continue to perform any of the functions of a registered representative.
Which of the following statement is TRUE regarding a registered individual who recently left the employment of a FINRA member firm?
A The individual is allowed to maintain his license at another member firm without being employed by that firm
B The individual’s registration is terminated when the U-5 is filed and he must pass the “Top-Off” Exam again to reenter the business
C The license remains active for an indefinite time period if the individual does not affiliate with another member firm
D The license lapses if the individual remains unaffiliated for 2 years
D The license lapses if the individual remains unaffiliated for 2 years
FINRA prohibits “parking” of licenses when an individual is not affiliated with a member firm. If that person remains unaffiliated for 2 years, all licenses lapse.
A registered representative has spent 10 years working at his broker-dealer and has sold customers many mutual funds that pay trail commissions from 12b-1 fees. The registered representative is thinking about leaving his firm to do charitable work. He would like to collect the trail commissions on the funds after he terminates his employment from the firm. Is this possible?
A. No, because only individuals who are currently registered can collect commissions
B No, because the representative must currently be servicing accounts to receive commissions
C Yes, if there is a written agreement between the member firm and the registered representative that is executed prior to termination
D Yes, because the representative will now be doing charitable work
C Yes, if there is a written agreement between the member firm and the registered representative that is executed prior to termination
As a general rule, only currently registered individuals can be paid commissions. However, there is an exception to this FINRA rule that typically applies to “RRRs” – Retiring Registered Representatives. It is designed to give these persons an income stream in retirement, where if the registered representative retires, then he or she can contractually agree with the firm to continue to pay trail commissions in retirement. However, it can be used in a situation like this as well – but, of course, the member firm must agree to this.
A registered representative is the subject of a written complaint from a customer alleging that he stole $12,000 from her account. Which statement is TRUE?
A This must be reported to FINRA promptly
B No report to FINRA is required because this complaint is not verified
C No report to FINRA is required because the amount involved is under $15,000
D The representative can settle the complaint by offering to pay the customer $12,000
A This must be reported to FINRA promptly
Reportable events” to FINRA include the case where a registered representative is the subject of a customer complaint that alleges a felony - and stealing is a felony. A report must be made to FINRA promptly, but no later than 30 days after the event occurs. The report basically lays out the representative’s side of the story - and FINRA uses this to decide whether to take follow-up action. Note that the fact that the allegation is not proven is meaningless here - the report is still required.
The list of reportable events is long. If one is the subject of a written customer complaint involving theft or embezzlement; if one is arrested, arraigned, indicted, convicted, or pleads guilty to any criminal offense (except for minor traffic violations); or if one is sued under the Securities Acts; notification to FINRA is required.
In addition, notification to FINRA is required if the registered representative is suspended or expelled by any other self-regulatory organization; is denied registration by another self-regulatory organization; or is the subject of a customer complaint that is settled for more than $15,000; or is the subject of disciplinary action by the member firm involving suspension, termination, or the withholding of commissions in excess of $2,500.
When FINRA gets the report, they review it to see if they should do nothing, suspend the person’s registration, or expel the registered representative.
A registered representative services the brokerage account of her father-in-law at her broker-dealer. The father-in-law has asked the registered representative to act as the trustee in a trust account for her spouse and children.he registered representative has agreed not to charge a trustee’s fee to do this. Which statement is TRUE about this?
A The registered representative is prohibited from acting as trustee
B The registered representative can do this without further action required because she is not being compensated
C The registered representative must get permission of her firm and must amend her U4 filing for this
D The representative can do this without further action required because the assets involved are not securities
C The registered representative must get permission of her firm and must amend her U4 filing for this
Any “OBA” – Outside Business Activity – must be reported to the firm and must be approved by the firm. Furthermore, it must be reported on that registered representative’s U4 Form and is disclosed in that individual’s BrokerCheck report. Remember that an individual does not have to be paid for an OBA to exist. If the representative is in the position to steer investment activities of the outside business entity – that makes it an OBA. The fact that the registered representative, as trustee, would get to oversee the activities of an office building and a construction company – and both of these entities could have operating and investment accounts – makes this an OBA.
A registered representative who had been doing well for many years has now hit some hard times. He is having trouble making the payments on the auto loan arranged by the dealer and voluntarily surrenders the car to the dealer where it was purchased. The dealer has agreed to sell the car, apply the proceeds to the loan balance, and write-off any balance due. Does this have to be reported to his broker-dealer and be reported on his U4 Form?
A No
B No, because the representative is not personally responsible for any loss on the sale of the property
C No, because securities are not involved in the transaction
D Yes, because he had made a compromise with a creditor
D Yes, because he had made a compromise with a creditor
Regulators are worried that registered representatives who are in “money trouble” might be a risk to investors because they would attempt to get money from customers illegally (say, by churning their accounts to generate commissions, or by simply stealing from them). Financial disclosures required on a U4 Form include whether the applicant has, within the past 10 years, filed for bankruptcy, made a compromise with creditors, or been the subject of an involuntary bankruptcy petition.
Because the registered representative returned the car to the dealer, who will sell it and apply the proceeds to the loan balance, and then will write-off any balance due, this is “compromise with a creditor” that must be reported to the firm and also must be reported on the individual’s U4 filing.
A registered representative is employed by a broker-dealer that is a publicly traded company, listed on the New York Stock Exchange. Which statement is TRUE? The registered representative may:
A recommend the purchase of his employer’s stock to existing customers
B solicit new customers to buy his employer’s stock
C write and distribute a research report recommending the purchase of the employer’s stock
D accept unsolicited orders for his employer’s stock; but cannot solicit orders for, nor recommend the security
D accept unsolicited orders for his employer’s stock; but cannot solicit orders for, nor recommend the security
If a registered representative is employed by a publicly traded member firm (say Raymond James), generally speaking he or she cannot recommend the purchase of that company’s shares; nor can he solicit customers to buy the shares. This is not an explicit SEC or FINRA regulation; rather it is industry practice that ensures compliance with FINRA’s “suitability” requirements; and the requirement to disclose control relationships at or prior to confirmation. However, it is permitted to accept unsolicited customer orders for the shares.
A customer instructs a registered representative to “Buy 100 shares of IBM whenever you think the price is right.” Under industry regulations this order:
A. must be refused unless a written power of attorney is on file from the customer
B can be accepted as given
C is considered to be discretionary and must be approved by a branch manager prior to execution
D is given the same treatment as a market order
can be accepted as given
This order states the number of shares to be bought and the security to be purchased. The registered representative is left to choose price and time of execution. This is the same as a “not held” order and can be accepted as given. If the representative were to choose the number of shares or the security, then the order would be discretionary, and would require a written power of attorney on file from the customer.
Which decision by a registered representative requires specific customer authorization?
A Determining time of execution in a cash account
B Determining the number of shares purchased in a margin account
C Determining price of execution in a margin account
D Determining the execution venue for a trade in a margin account
B Determining the number of shares purchased in a margin account
Generally, a written power of attorney is required only if a registered representative chooses more than price and/or time of execution in a customer transaction. (The firm/rep may however choose the trading venue without a POA) Thus, if the registered representative chooses the security to be traded or the size of the trade, a discretionary power of attorney is required. It makes no difference if the transaction is effected in either a cash account or a margin account.
An order ticket is filled out and sent to the New York Stock Exchange floor for execution. After being executed on the floor, it is discovered that the account number is incorrect. Under FINRA rules, the account number may be changed to the correct one by the:
A. Registered Representative
B Specialist
C Branch Office Manager
D Floor Governor
Branch Office Manager
Under FINRA rules, alterations to executed order tickets are prohibited, unless the alteration is approved in writing by a “designated person” such as a branch manager. This person must understand all the facts of the situation before approving of the change, and is responsible for the change.
Which of the following is a violation of FINRA rules?
A Sharing in the profits and losses of a customer’s account while contributing proportional capital
B Selling exempted securities to a customer with a written agreement to buy back the securities at a later date
C Orally guaranteeing to buy back customer securities at a preset price
D charging a customer a $25 commission to execute a $200 trade
C Orally guaranteeing to buy back customer securities at a preset price
A registered representative cannot guarantee a customer’s account against loss nor share in the account unless he or she opens a joint account with the customer; contributes capital proportional to any sharing agreement; and obtains the approval of a principal for the account.
Selling exempted securities such as U.S. Governments with a written agreement to buy them back at a later date is a “repurchase” agreement, and is allowed (however, such repurchase agreements are typically for very large amounts, and are entered into by U.S. Government securities dealers).
The FINRA 5% Policy on fairness of commissions and mark-ups is a guide, not a rule. Firms may impose minimum commissions on very small trades that may exceed 5% of the transaction amount and will NOT be in violation.
A registered representative employed by ABC broker/dealer is good friends with an independent venture capitalist. The venture capitalist asks the registered representative to obtain investors for a private placement that he is forming. Which statement is TRUE?
A The registered representative can direct customers to the private placement since this is an exempt transaction
B The registered representative cannot direct customers to the private placement since his broker-dealer is not the private placement sponsor
C The registered representative can direct customers to the private placement only if the venture capitalist is a member of FINRA
D The registered representative can direct customers to the private placement only with the prior written approval of his employer
D The registered representative can direct customers to the private placement only with the prior written approval of his employer
nder FINRA rules, registered representatives are prohibited from effecting “private securities transactions.” As a registered representative, one is an agent for the firm and all transactions must be effected through the firm in one’s agency capacity.
However, FINRA does allow an exemption from this prohibition. If a registered representative:
- provides written notice to the member of the transaction
- details in writing any compensation to be received, and
- obtains express approval in writing from the member firm
Then the associated person can perform the transaction. In addition, the member must record the transaction on its books as if it had been effected through the firm.
If a registered representative wishes to engage in a private securities transaction, which statement is TRUE?
A Prior written permission of the employing member firm is required
B There is no requirement for prior permission from the employing member firm
C Notification must be given to the employing member firm within 10 business days
D Notification must be given to FINRA promptly, but no later than 30 days after entering into the transaction
A Prior written permission of the employing member firm is required
The FINRA rule is that if a representative wants to engage in a private securities transaction (“selling away”), he or she must give prior written notice to the firm; the firm must approve in writing; and the firm must record the transaction on its books and records and supervise it. (And this would happen when hell freezes over!).
A registered representative presents a seminar to a group of 35 prospective retail investors about investing in mutual funds. At the seminar, he makes recommendations of various funds, based on their objectives and performance. The seminar is defined by FINRA as:
A correspondence
B an internal memorandum
C advertising
D sales literature
D sales literature
FINRA defines communications with the public as either:
Correspondence: A communication made available to 25 or fewer existing or prospective retail clients
Retail Communication: A communication made available to more than 25 existing or prospective retail clients
-Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to “post use review and approval” (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA.
A “Retail Communication” is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience).
Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards
Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective retail clients, scripted speeches delivered to more than 25 existing or prospective retail clients, password-protected websites
All of the following time stamps are on an order ticket EXCEPT the time of:
A order entry
B trade execution, if executed
C order cancellation, if canceled
D trade reporting to the Consolidated Tape
FINRA requires that all order tickets sent to an exchange be stamped with the time of:
Order entry;
Order execution; and
Order cancellation, if canceled.
Under FINRA rules, a registered representative:
A. may borrow money from a customer only with the permission of FINRA
B may borrow money from a customer only with the permission of the branch manager
C may borrow money from a customer only with the permission of the customer
D may not borrow money from a customer
FINRA prohibits registered representatives from borrowing money personally from a customer.
Exceptions to the rule are permitted if the customer is an immediate family member; if the customer is a “significant other” such as a live-in girlfriend or boyfriend; or if the customer is a bank, making the loan on the same conditions that it would give to anyone else.
A registered representative has a dispute with his firm. Under FINRA rules, this will be settled by:
A litigation
B arbitration
C mediation
D negotiation
B arbitration
Disputes between registered representatives and brokerage firms are handled by binding (non-appealable) arbitration.
Outside Business Activity
Any “OBA” – Outside Business Activity – must be reported to the firm and must be approved by the firm. Furthermore, it must be reported on that registered representative’s U4 Form and is disclosed in that individual’s BrokerCheck report.
Remember that an individual does not have to be paid for an OBA to exist. If the representative is in the position to steer investment activities of the outside business entity – that makes it an OBA. The fact that the registered representative, on the Board of Directors of the cooperative apartment house, would be in a position to steer the investment activities of the coop’s operating and reserve funds – makes this an OBA.
