Industry Rules

Question 1

According to FINRA rules, list some of the persons that are considered institutional investors. 6

Answer 1

1. Banks,
2. insurance companies,
3. investment companies,
4. investment advisers,
5. FINRA members
6. RRs of FINRA members

Question 2

What actions may the hearing panel take regarding rule violations? 5

Answer 2

1. Censure,
2. fine,
3. suspension,
4. request to requalify, or
5. expulsion of the respondent

Question 3

When a minor dispute is handled through simplified arbitration, is the ruling final and binding?

Answer 3

Yes, all arbitration decisions are final.

Question 4

According to the TCPA, what information must telephone solicitors provide to clients? 4

Answer 4

1. Their name,
2. firm name,
3. telephone number or address where they can be contacted, and
4. the purpose of the call

Question 5

Under Penny Stock Rules, when does a customer become established? 2

Answer 5

1. When they have purchased 3 different penny stocks on 3 different occasions, or
2. they have been a customer for one year

Question 6

Define institutional communication.

Answer 6

Written or electronic communication that is distributed or made available only to institutional investors

Question 7

List the three forms of communications with the public.

Answer 7

1. Retail communication,
2. Institutional communication, and
3. Correspondence

Question 8

True or False: On request, institutional communication may be provided to a retail client.

Answer 8

False. Institutional communication may never be provided to a retail investor.

Question 9

All forms of communication with the public must be kept for _____ years, but easily accessible for the first ___ years.

Answer 9

All forms of communication with the public must be kept for three years, but easily accessible for the first two years.

Question 10

Is correspondence subject to principal approval?

Answer 10

No, but it must be reviewed by the firm.

Question 11

Churning is described as _____________________ designed to _____________________.

Answer 11

Churning is described as excessive trading designed to generate commissions.

Question 12

Define research reports.

Answer 12

Written or electronic communication about equities, including information for a client to make an investment decision.

Question 13

Is the 5% policy based upon the current market value of the security or the dealer’s cost?

Answer 13

Generally, the current market value

Question 14

Industry disputes are handled through ______________.

Answer 14

Industry disputes are handled through Arbitration.

Question 15

If a BD’s investment company communications include self-created rankings, when must they be filed with FINRA?

Answer 15

At least 10 business days prior to use

Question 16

When arbitration involves public customers, __________ of arbitrators must be from outside the securities industry.

Answer 16

When arbitration involves public customers, a majority of arbitrators must be from outside the securities industry.

Question 17

If a client seems confused and demands an unsuitable change of objective, what step should an RR take?

Answer 17

Confusion and/or dementia are concerns that may warrant an RR to request a meeting with the client and a family member.

Question 18

Define correspondence.

Answer 18

Material that a member firm makes available to 25 or fewer retail investors within any 30-calendar-day period.

Question 19

For a firm’s first year as a FINRA member, when must its broadly disseminated retail communications be filed with FINRA?

Answer 19

10 business days prior to their first use

Question 20

May firms allow for the free flow of information between their research department and investment banking department?

Answer 20

No, these two departments must be separated to avoid conflicts of interest.

Question 21

What are some of the special standards that firms follow in regard to soliciting sales of penny stocks? 4

Answer 21

1. Determine suitability,
2. principal approval,
3. send risk disclosure,
4. client’s written authorization for the first 3 trades

Question 22

What is exempt from the 5% policy? 4

Answer 22

1. Trading of municipal bonds,
2. new issues,
3. registered secondary offerings, and
4. mutual funds

Question 23

May a customer be forced to use arbitration?

Answer 23

No, but signed pre-dispute arbitration agreements are binding.

Question 24

May an RR and a client share in an account?

Answer 24

Yes, with firm approval and provided the sharing in gains and losses is proportionate to their investment.

Question 25

True or False: Institutional communication must be preapproved by a principal and filed with FINRA.

Answer 25

False. Institutional communication is not required to be preapproved or filed with FINRA.

Question 26

True or False: An RR may sell stock from a client's non-discretionary account if a negative report is released.

Answer 26

False. Without written authorization, an RR may not choose the security to buy for or sell from a client's account.

Question 27

A client's name and number must be kept on the Do Not Call List ____________.

Answer 27

A client's name and number must be kept on the Do Not Call List indefinitely.

Question 28

What forms of communication are required to be approved by a principal, but NOT filed with FINRA? 4

Answer 28

1. Email recommendations, 2. telemarketing or sales scripts, 3. independently prepared reprints, and 4. ads promoting products

Question 29

Which forms of communication are NOT required to be approved by a principal or filed with FINRA? 3

Answer 29

1. Retail communications that do not recommend or promote a BD's services, 2. institutional communications, and 3. correspondence

Question 30

Retail communication generally requires __________ ____________.

Answer 30

Retail communication requires principal preapproval.

Question 31

True or False: Firms writing research reports must disclose potential conflicts of interest.

Answer 31

True (e.g., firm makes a market in the stock or has had or will have an investment banking relationship with the issuer)

Question 32

True or False: The findings of an arbitration panel may be appealed.

Answer 32

False. Arbitration decisions are final and binding.

Question 33

Under FINRA's communication rules, what is meant by the term broadly disseminated?

Answer 33

That material has been created for generally accessible Web sites, print media, and television or radio

Question 34

Hearing Panel findings may be appealed to the ___________________________,then the _____, and then ________________.

Answer 34

Hearing Panel findings may be appealed to the National Adjudicatory Council (NAC), then the SEC, and then federal court.

Question 35

May an RR write a research report and not hold the title research analyst?

Answer 35

Yes

Question 36

What action should be taken if a senior investor requests a meeting to make a significant change to her objectives?

Answer 36

Request that the client have a family member accompany her to the meeting

Question 37

The hearing panel may not impose a ___________________ due to rule violations.

Answer 37

The hearing panel may not impose a prison sentence due to rule violations.

Question 38

Under the TCPA, how is an established customer defined?

Answer 38

One that has made an unsolicited inquiry or effected a transaction with the firm

Question 39

When must a research report be approved?

Answer 39

Prior to first use by a Supervisory Analyst

Question 40

If an RR suspects that a client may be showing signs of dementia, what is the best course of action?

Answer 40

To request a meeting with both the client and a family member

Question 41

Does the 5% policy apply when a BD is acting in an agency capacity, a principal capacity, or both?

Answer 41

Both

Question 42

An unlisted, non-Nasdaq stock priced below $5.00 per share is called a ____________________.

Answer 42

An unlisted, non-Nasdaq stock priced below $5.00 per share is called a penny stock.

Question 43

Who must approve a research report?

Answer 43

Supervisory analyst

Question 44

What trades would be covered by the 5% policy?

Answer 44

Secondary market trades of stocks, corporate bonds, and Treasuries

Question 45

True or False: For an RR, a good business practice is to meet with a confused elderly client alone.

Answer 45

False. The best practice is to request that a family member of the client accompany her to meetings.

Question 46

True or False: The 5% Policy is a rule that may not be exceeded.

Answer 46

False, it's a guideline, not a rule.

Question 47

May an RR in the research area be supervised by the investment banking department?

Answer 47

No

Question 48

For how long must retail communication, institutional communication, and correspondence be maintained?

Answer 48

For three years, but easily accessible for the first two years

Question 49

Retail communication concerning an investment company must be filed with FINRA within ___________ days of use.

Answer 49

Retail communication concerning an investment company must be filed with FINRA within 10 business days of use.

Question 50

Which retail communications are required to be filed with FINRA WITHIN 10 days of first use? 4

Answer 50

Those related to 1. DPPs, 2. CMOs, and 3. ETNs, 4. as well as templates for reports produced by investment analysis tools

Question 51

According to FINRA, the guideline for determining commission or markup on transactions is ___%.

Answer 51

According to FINRA, the guideline for determining commission or markup on transactions is 5%.

Question 52

Which retail communications are required to be filed with FINRA at least 10 business days PRIOR to first use? 3

Answer 52

1. Those for investment companies with self-created rankings, 2. bond funds including volatility ratings, and 3. security futures

Question 53

The Telephone Consumer Protection Act (TCPA), allows calls from ________ to ________ local time of the called party.

Answer 53

The Telephone Consumer Protection Act (TCPA), allows calls from 8:00 a.m. to 9:00 p.m. local time of the called party.

Question 54

What must be checked before a BD makes telephone solicitations?

Answer 54

The firm's Do Not Call List

Question 55

What factors could justify a larger markup than 5%? 3

Answer 55

1. The type of security, 2. the availability of the security, or 3. the total transaction amount