55 Regulations & Ethics Practice Questions & Answers

1. 1. Which statement accurately describes the relationship between the SEC and FINRA?

   • A.FINRA is a self-regulatory organization whose rules and disciplinary actions are subject to SEC oversight✓ Answer
   • B.The SEC is a self-regulatory organization that FINRA supervises
   • C.FINRA is a federal government agency created by the Securities Exchange Act of 1934
   • D.FINRA operates independently of the SEC, and its rules do not require SEC approval

   FINRA is a registered national securities association under Section 15A of the Securities Exchange Act of 1934, not a government agency. Under the self-regulatory model, FINRA writes and enforces rules for broker-dealers, but every proposed rule change must be filed with and approved by the SEC, and FINRA disciplinary decisions can be appealed to the SEC. The SEC therefore remains the ultimate federal statutory regulator.

   Source: Securities Exchange Act of 1934, Section 15A (registered national securities associations); SEC oversight of SROsReport a problem with this question

2. 2. The SEC has declared an issuer's registration statement effective. Which statement is accurate?

   • A.The SEC has determined that the offering is suitable for retail investors
   • B.The SEC has verified that the information in the prospectus is accurate
   • C.The SEC has evaluated and endorsed the investment merits of the security
   • D.The SEC has neither approved the security nor passed on the accuracy or adequacy of the disclosure✓ Answer

   SEC review under the Securities Act of 1933 is a full-and-fair-disclosure review, not a merit review. Effectiveness means only that the filing appears complete on its face; Section 23 makes it unlawful to represent that the SEC has approved a security or passed on its merits, which is why every prospectus must carry the standard disclaimer legend.

   Source: Securities Act of 1933, Section 23 (unlawful representations); SEC "no approval" disclaimer legendReport a problem with this question

3. 3. Which of the following is NOT a self-regulatory organization (SRO)?

   • A.The New York Stock Exchange (NYSE)
   • B.FINRA
   • C.The Municipal Securities Rulemaking Board (MSRB)
   • D.The Securities and Exchange Commission (SEC)✓ Answer

   An SRO is a private, industry-funded body that regulates its own members under SEC oversight; FINRA, the MSRB, and the registered exchanges such as the NYSE all fit that description. The SEC is not an SRO — it is the federal government agency created by the Securities Exchange Act of 1934 that oversees the SROs themselves.

   Source: Securities Exchange Act of 1934, Sections 6, 15A and 15B (registration of exchanges, securities associations and the MSRB)Report a problem with this question

4. 4. The MSRB writes the rules governing the municipal securities market. Who enforces those rules against a broker-dealer that is a FINRA member?

   • A.FINRA and the SEC✓ Answer
   • B.NASAA, acting on behalf of all state administrators
   • C.The municipality that issued the securities
   • D.The MSRB, through its own enforcement division

   The MSRB was given rulemaking authority only — it has no examination or enforcement arm. Its rules are enforced against securities firms by FINRA and the SEC, and against bank dealers by the federal banking regulators. The MSRB also does not regulate municipal issuers themselves.

   Source: Securities Exchange Act of 1934, Section 15B; MSRB rulemaking authority without enforcement powerReport a problem with this question

5. 5. Which regulator has primary jurisdiction over commodity futures contracts and the futures markets?

   • A.The Municipal Securities Rulemaking Board (MSRB)
   • B.The Commodity Futures Trading Commission (CFTC)✓ Answer
   • C.The Securities and Exchange Commission (SEC)
   • D.FINRA

   The CFTC is the independent federal agency created under the Commodity Exchange Act to regulate commodity futures and options on futures. Futures contracts are not securities, so they fall outside the SEC's and FINRA's securities jurisdiction — which is also why futures positions are excluded from SIPC protection.

   Source: Commodity Exchange Act; CFTC jurisdiction over futures and options on futuresReport a problem with this question

6. 6. A firm is already registered with the SEC and is a FINRA member. Before it may transact business with residents of a particular state, what is generally also required?

   • A.Nothing further; federal registration preempts all state requirements for broker-dealers
   • B.Approval from NASAA, which registers broker-dealers on a nationwide basis
   • C.Registration with the MSRB for that particular state
   • D.Registration with that state's securities administrator under the state's blue-sky law✓ Answer

   State blue-sky laws, patterned on the Uniform Securities Act, operate in addition to federal and SRO requirements. A broker-dealer and its agents must register with the securities administrator of each state in which they do business. NASAA is a voluntary membership association of those administrators that drafts model rules — it does not itself register or license anyone.

   Source: Uniform Securities Act; state blue-sky registration of broker-dealers and agentsReport a problem with this question

7. 7. A customer's account has dropped sharply in value because the stocks she holds have fallen in price. Her brokerage firm is financially sound. What protection does SIPC provide?

   • A.It covers the loss if the decline resulted from unsuitable recommendations
   • B.It reimburses the decline in the market value of the positions
   • C.None; SIPC covers the loss of cash and securities when a member broker-dealer fails, not declines in market value✓ Answer
   • D.It guarantees the customer's principal, the same way FDIC insurance does

   SIPC, created by the Securities Investor Protection Act of 1970, exists to return missing customer cash and securities when a member broker-dealer becomes insolvent and is liquidated. It is a custodial backstop against firm failure, not insurance against investment risk, so ordinary market losses are never covered.

   Source: Securities Investor Protection Act of 1970 (SIPA); scope of SIPC coverageReport a problem with this question

8. 8. Which of the following held in an account at a failed SIPC-member broker-dealer would NOT be protected by SIPC?

   • A.Shares of common stock
   • B.Commodity futures contracts✓ Answer
   • C.Corporate bonds
   • D.Cash left in the account awaiting reinvestment

   SIPC protection extends to securities and to cash held in the account for the purpose of buying securities. Commodity futures contracts are not securities and are expressly outside SIPC's definition of protected property, as are currency, fixed annuity contracts and investment contracts not registered with the SEC.

   Source: Securities Investor Protection Act of 1970 (SIPA); definition of protected property, exclusion of commodity futuresReport a problem with this question

9. 9. During the cooling-off period between the filing of a registration statement and its effective date, a registered representative may do which of the following?

   • A.Send the customer a preliminary prospectus and record a non-binding indication of interest✓ Answer
   • B.Accept payment from the customer and place the funds in escrow
   • C.Accept a customer's order and hold it until the registration becomes effective
   • D.Send the customer the firm's research report on the issuer to help evaluate the deal

   Section 5 of the Securities Act of 1933 makes it unlawful to sell, accept orders for, or accept money for a security before the registration statement is effective. The only permitted activity is soliciting non-binding indications of interest, and the preliminary prospectus (red herring) is the sole offering document that may be used during that period.

   Source: Securities Act of 1933, Section 5(a) and 5(b); Rule 430 (preliminary prospectus)Report a problem with this question

10. 10. Which of the following is TRUE of a preliminary prospectus, also known as a red herring?

    • A.It may be delivered only after the registration statement is effective
    • B.It contains the final public offering price and the effective date
    • C.It may be used to accept binding customer orders
    • D.It omits the final public offering price and the effective date✓ Answer

    The red herring is filed and circulated before the offering price has been set and before the SEC declares the filing effective, so those two items are necessarily missing. It carries a legend in red ink stating that the registration statement is not yet effective and that the document is not an offer to sell.

    Source: Securities Act of 1933, Rule 430 (preliminary prospectus requirements)Report a problem with this question

11. 11. A customer buys shares in a registered public offering. What is the firm's prospectus obligation?

    • A.Deliver the prospectus within 30 days after the trade settles
    • B.Deliver the final prospectus to the customer no later than with the confirmation of the transaction✓ Answer
    • C.Deliver a prospectus only if the customer requests one in writing
    • D.Deliver a copy of the full registration statement filed with the SEC

    Section 5(b)(2) of the Securities Act of 1933 makes it unlawful to deliver a security sold in a registered offering unless a final prospectus accompanies or precedes it, so in practice the prospectus must reach the buyer no later than the confirmation. Delivery is mandatory and does not depend on a customer request.

    Source: Securities Act of 1933, Section 5(b)(2) (prospectus delivery requirement)Report a problem with this question

12. 12. Which of the following securities is NOT exempt from registration under the Securities Act of 1933?

    • A.U.S. Treasury notes
    • B.Securities issued by a commercial bank
    • C.Debentures issued by a publicly traded manufacturing corporation✓ Answer
    • D.General obligation bonds issued by a city

    Section 3(a) of the Securities Act of 1933 exempts categories of issuers whose securities Congress judged not to need federal disclosure protection, including U.S. government and agency securities, municipal issues, and securities issued by banks. Corporate debt such as a debenture enjoys no such exemption, so it must be registered unless it is sold in an exempt transaction.

    Source: Securities Act of 1933, Section 3(a) (exempt securities)Report a problem with this question

13. 13. An issuer raises capital by selling unregistered securities to a limited group of accredited investors without any general advertising. This is best described as:

    • A.An exempt security under Section 3(a) of the Securities Act of 1933
    • B.An intrastate offering under Rule 147
    • C.An offering exempted because the issuer filed a Form BD
    • D.An exempt transaction under Regulation D (a private placement)✓ Answer

    The distinction is between exempt securities, which are exempt because of what they are, and exempt transactions, which are exempt because of how they are sold. Regulation D implements the Section 4(a)(2) private-placement exemption: the stock itself is an ordinary corporate security, but the manner of sale — no public solicitation, sales to accredited investors — removes the need to register the offering.

    Source: Securities Act of 1933, Section 4(a)(2) and Regulation D (private placements)Report a problem with this question

14. 14. A large insurance company buys unregistered securities and later resells them to another qualified institutional buyer (QIB) without SEC registration. Which rule permits this resale?

    • A.Rule 147
    • B.Rule 144
    • C.Regulation S
    • D.Rule 144A✓ Answer

    Rule 144A creates a safe harbor for the resale of restricted securities among qualified institutional buyers, on the theory that QIBs are sophisticated enough not to need registration-driven disclosure. Rule 144 governs public resales of restricted and control stock, Rule 147 covers purely intrastate offerings, and Regulation S covers offshore offerings.

    Source: Securities Act of 1933, Rule 144A (resales to qualified institutional buyers)Report a problem with this question

15. 15. A corporate officer wants to sell shares of her own publicly traded employer that she purchased in the open market. Which rule governs her sale?

    • A.Rule 147, because she works for the issuer
    • B.Regulation A, because she is selling a small amount
    • C.Regulation S, because affiliate sales must be made offshore
    • D.Rule 144, because as an affiliate she holds control stock✓ Answer

    Rule 144 applies to two things: restricted stock, however acquired, and control stock — shares of any kind held by an affiliate such as an officer, director or large shareholder. Because the seller is an affiliate, her freely purchased shares are control stock, and the sale is subject to Rule 144's volume, manner-of-sale, current-information and notice conditions.

    Source: Securities Act of 1933, Rule 144 (restricted and control securities)Report a problem with this question

16. 16. A new firm intends to begin operating as a broker-dealer. Which form does it file to register with the SEC?

    • A.Form U4
    • B.Form BD✓ Answer
    • C.Form 10-K
    • D.Form ADV

    Section 15(b) of the Securities Exchange Act of 1934 requires a broker-dealer to register with the SEC on Form BD, which discloses the firm's ownership, control persons, business lines and disciplinary history. Form U4 registers individuals, Form ADV registers investment advisers, and Form 10-K is an issuer's annual report.

    Source: Securities Exchange Act of 1934, Section 15(b); SEC Rule 15b1-1 (Form BD)Report a problem with this question

17. 17. Which of the following falls under the Securities Exchange Act of 1934 rather than the Securities Act of 1933?

    • A.The required content of the prospectus used in an initial public offering
    • B.The cooling-off period that follows the filing of a registration statement
    • C.Trading of already-outstanding securities on national securities exchanges✓ Answer
    • D.The registration statement filed by an issuer for a new issue of stock

    The 1933 Act is the primary-market statute: it governs new issues, the registration statement, the cooling-off period and prospectus disclosure. The 1934 Act is the secondary-market statute: it created the SEC and governs exchanges, the national market system, broker-dealer registration and the trading of securities already outstanding.

    Source: Securities Exchange Act of 1934 (secondary market); Securities Act of 1933 (primary market)Report a problem with this question

18. 18. The Investment Company Act of 1940 classifies investment companies into which three categories?

    • A.Open-end funds, closed-end funds, and hedge funds
    • B.Face-amount certificate companies, unit investment trusts, and management companies✓ Answer
    • C.Mutual funds, exchange-traded funds, and real estate investment trusts
    • D.Load funds, no-load funds, and index funds

    Section 4 of the Investment Company Act of 1940 establishes exactly three statutory classifications: face-amount certificate companies, unit investment trusts, and management companies. Open-end and closed-end are subdivisions within the management company category, not separate statutory classes.

    Source: Investment Company Act of 1940, Section 4 (classification of investment companies)Report a problem with this question

19. 19. Which factor most clearly indicates that a firm must register as an investment adviser rather than solely as a broker-dealer?

    • A.It receives ongoing fees for providing investment advice as a regular part of its business✓ Answer
    • B.It earns commissions when customers buy and sell securities
    • C.It takes custody of customer securities and cash
    • D.It executes customer orders on an agency basis

    Under Section 202(a)(11) of the Investment Advisers Act of 1940, an investment adviser is a person who, for compensation and as part of a regular business, advises others about securities. Broker-dealers are excluded when their advice is solely incidental to brokerage and they receive no special compensation for it — so charging a separate, ongoing advisory fee is what pushes a firm into adviser registration.

    Source: Investment Advisers Act of 1940, Section 202(a)(11) (definition of investment adviser and broker-dealer exclusion)Report a problem with this question

20. 20. Which federal law requires that most corporate bond issues sold to the public be issued under an indenture that names an independent trustee to act for the bondholders?

    • A.The Securities Act of 1933
    • B.The Investment Company Act of 1940
    • C.The Trust Indenture Act of 1939✓ Answer
    • D.The Securities Investor Protection Act of 1970

    The Trust Indenture Act of 1939 exists because bondholders are dispersed creditors who cannot police an issuer individually. It requires a written indenture setting out the terms of the debt and an independent trustee charged with enforcing the issuer's covenants on the holders' behalf. Municipal and U.S. government debt is outside its scope.

    Source: Trust Indenture Act of 1939Report a problem with this question

21. 21. Which statement about the Securities Industry Essentials (SIE) exam is accurate?

    • A.A candidate must be sponsored by a member firm in order to sit for the SIE
    • B.Passing the SIE permits a candidate to accept unsolicited customer orders
    • C.Registration requires passing the SIE, passing a representative-level qualification exam, and having a member firm file a Form U4✓ Answer
    • D.Passing the SIE by itself registers a candidate with FINRA as a representative

    The SIE is a corequisite knowledge exam open to anyone 18 or older, with no firm sponsorship required — but it confers no registration and no authority to do securities business. A person becomes a registered representative only after also passing a top-off qualification exam such as the Series 7 or Series 6 and having a member firm file a Form U4 on their behalf.

    Source: FINRA Rule 1220; SIE as a corequisite to representative-level qualification examinationsReport a problem with this question

22. 22. Who is responsible for filing the Form U4 that registers an individual as an associated person?

    • A.The individual applicant, filing directly with FINRA
    • B.The securities administrator of the applicant's home state
    • C.The SEC's Division of Trading and Markets
    • D.The member firm with which the individual will be associated✓ Answer

    Registration flows through the firm: the member files the Form U4 electronically on the applicant's behalf, and it is the firm that certifies the filing. This is why FINRA also places the duty to investigate the applicant's character and verify the U4 information on the member, and why an individual cannot register without being associated with a firm.

    Source: FINRA By-Laws Article V, Section 2; FINRA Rule 1010 (electronic filing of Form U4)Report a problem with this question

23. 23. A member firm terminates an associated person. What does FINRA require with respect to Form U5?

    • A.File it within 30 calendar days; the individual receives a copy only upon written request
    • B.File it within 10 business days; no copy to the individual is required
    • C.File it within 30 calendar days of the termination and provide a copy to the terminated individual✓ Answer
    • D.File it only if the individual was terminated for cause

    The Uniform Termination Notice (Form U5) must be filed within 30 calendar days of termination for every separation, whatever the reason, and the firm must deliver a copy to the individual. The copy requirement exists because the U5 states the reason for termination and feeds BrokerCheck, so the person needs the chance to see and dispute what was reported.

    Source: FINRA By-Laws Article V, Section 3 (Form U5 filing and copy to the individual)Report a problem with this question

24. 24. For how long after a Form U5 is filed does FINRA generally retain jurisdiction over a formerly associated person?

    • A.One year
    • B.Six years
    • C.Two years✓ Answer
    • D.Jurisdiction ends as soon as the Form U5 is filed

    FINRA By-Laws preserve jurisdiction for two years after the effective date of termination so that misconduct discovered after someone leaves the industry can still be investigated and sanctioned. During that window the former associated person must also keep FINRA informed of changes to their residential address.

    Source: FINRA By-Laws Article V, Section 4 (retention of jurisdiction)Report a problem with this question

25. 25. Which of the following would subject an individual to statutory disqualification from associating with a member firm?

    • A.An unsatisfied civil judgment arising from a car accident
    • B.A conviction for any misdemeanor within the past 10 years
    • C.A conviction for any felony within the past 10 years✓ Answer
    • D.A personal bankruptcy filed within the past 10 years

    Section 3(a)(39) of the Securities Exchange Act of 1934 sweeps in ANY felony conviction within the past 10 years, regardless of subject matter, but only investment-related or specified misdemeanors. Bankruptcies and unsatisfied judgments are Form U4 disclosure events that appear on BrokerCheck, but they are not by themselves disqualifying.

    Source: Securities Exchange Act of 1934, Section 3(a)(39) (statutory disqualification)Report a problem with this question

26. 26. Under FINRA rules, what must a member firm do when it files a Form U4 for a registration applicant?

    • A.Wait for the state administrator to complete a background check before submitting the filing
    • B.Nothing beyond accepting the applicant's own certification that the information is true
    • C.Obtain the SEC's written approval before the applicant may be registered
    • D.Investigate the applicant's good character and business repute and verify the Form U4 information within 30 calendar days of the filing✓ Answer

    FINRA Rule 3110(e) places the gatekeeping duty on the firm: it must ascertain by investigation the good character, business reputation, qualifications and experience of every applicant, and verify the Form U4 information no later than 30 calendar days after the form is filed. The verification process includes a fingerprint-based criminal background check under SEC Rule 17f-2.

    Source: FINRA Rule 3110(e) (responsibility of member to investigate applicants); SEC Rule 17f-2 (fingerprinting)Report a problem with this question

27. 27. Which statement correctly distinguishes the two components of FINRA's continuing education requirement?

    • A.The Regulatory Element is FINRA-designed training that must be completed annually, by December 31, for each registration category held, while the Firm Element is annual training the member designs for its covered registered persons✓ Answer
    • B.The Regulatory Element is the firm's own product training, and the Firm Element is FINRA's regulatory training
    • C.The Firm Element applies only to principals, and the Regulatory Element applies only to representatives
    • D.Both elements are designed by FINRA and must be completed once every three years

    FINRA Rule 1240 splits continuing education by who authors it and why. The Regulatory Element is content written by FINRA on regulatory requirements and delivered online, now due annually by December 31 for each registration held; missing the deadline makes the registration CE inactive, so the person may not perform or be paid for activities requiring registration. The Firm Element is training the firm builds each year from its own needs analysis and written training plan, covering its products, services and its people's job responsibilities.

    Source: FINRA Rule 1240 (Continuing Education Requirements: Regulatory Element and Firm Element)Report a problem with this question

28. 28. An attorney at a law firm representing an acquiring company learns of an unannounced tender offer for a target company and buys the target's shares before the announcement. He has no relationship with the target company. This conduct is best analyzed under which theory of insider trading liability?

    • A.The classical theory, because he owed a fiduciary duty directly to the target company's shareholders
    • B.No theory applies, because he is not an officer, director or employee of either company
    • C.The shingle theory, because by holding himself out as a professional he implicitly promised to deal fairly
    • D.The misappropriation theory, because he traded on information taken in breach of a duty of trust and confidence owed to the source of the information✓ Answer

    Under the misappropriation theory, a person violates Rule 10b-5 by trading on material nonpublic information taken in breach of a duty of trust or confidence owed to the source of the information — here his law firm and its client — even though he owes no duty at all to the target's shareholders. The classical theory reaches insiders and temporary insiders of the company whose stock is traded, which is why it does not fit these facts.

    Source: SEA Rule 10b-5 and Rule 10b5-2; misappropriation theory (SEC v. O'Hagan)Report a problem with this question

29. 29. A person who trades on material nonpublic information received from a corporate insider (a tippee) is liable for insider trading when:

    • A.the tippee paid the insider cash for the information, which is the only form of personal benefit the law recognizes
    • B.the insider breached a duty by disclosing the information for a personal benefit and the tippee knew or should have known of that breach✓ Answer
    • C.the tippee's profit is larger than any profit realized by the insider
    • D.the tippee is a registered representative, because registration by itself creates the duty

    Tippee liability is derivative of the tipper's breach: it attaches only if the insider disclosed the information in breach of a duty and in exchange for a personal benefit — which can be reputational advantage or a gift to a friend or relative, not just cash — and the tippee knew or had reason to know of that breach. Registration status and the relative size of the profits are irrelevant to whether liability attaches.

    Source: SEA Rule 10b-5; Dirks v. SEC tippee/personal-benefit standardReport a problem with this question

30. 30. At a family gathering, a registered representative overhears a relative who is an officer of a public company say that the company will report a large unexpected loss next week. What is the representative's BEST first course of action?

    • A.Immediately report the information to his supervisor or the firm's compliance department, and neither trade in nor recommend the security✓ Answer
    • B.Take no action other than waiting for the public announcement, since no report is required as long as he does not trade
    • C.Sell only a small position for his largest customers, because a small order will not move the market
    • D.Treat the information as freely usable, because it was overheard socially rather than obtained at work

    An associated person who comes into possession of material nonpublic information must not trade on it or pass it to anyone and must escalate it promptly under the firm's written policies designed to prevent the misuse of such information, so that compliance can place the security on a watch or restricted list. How the information was obtained does not matter, and trading a "small" amount or tipping only favored customers is still a violation.

    Source: ITSFEA of 1988; SEA Section 15(g) (written policies to prevent misuse of MNPI); FINRA Rule 2010Report a problem with this question

31. 31. Which statement correctly distinguishes a member firm's watch list from its restricted list?

    • A.Neither list may be used, because information barriers must be built into trading systems instead
    • B.Both lists are distributed firm-wide and both prohibit all trading in the listed securities
    • C.The watch list prohibits solicited recommendations, while the restricted list is kept confidential within compliance
    • D.The watch list is confidential to a small compliance group that surveils trading in the security, while the restricted list is circulated firm-wide and halts proprietary trading and solicited recommendations in that security✓ Answer

    Information barriers are supported by two different lists serving opposite purposes. A watch list must stay highly confidential — distributing it broadly would itself leak the material nonpublic information — and lets compliance surveil trading; a restricted list is deliberately published throughout the firm and stops proprietary trading, solicited recommendations and often research coverage in the named security.

    Source: ITSFEA of 1988 / SEA Section 15(g); FINRA Rule 3110 supervisory procedures for information barriersReport a problem with this question

32. 32. Which statement about the consequences of insider trading is correct?

    • A.Consequences are limited to a FINRA fine and suspension, because insider trading is handled as a self-regulatory matter
    • B.The SEC must elect either a civil or a criminal remedy and cannot pursue both avenues
    • C.A violator may face SEC civil penalties of up to three times the profit gained or loss avoided, disgorgement of the profits, and a separate criminal prosecution carrying fines and imprisonment✓ Answer
    • D.Only the person who actually placed the trade can be penalized; an insider who tipped but never traded faces no liability

    Insider trading exposure is cumulative rather than exclusive: the SEC may seek a civil penalty of up to three times the profit gained or loss avoided in addition to disgorgement, the Department of Justice may separately bring criminal charges carrying fines and imprisonment, and FINRA may bar the person. Tippers are liable for the profits their tippees make, and controlling persons who fail to supervise can be penalized as well.

    Source: SEA Section 21A (civil penalties), Section 32(a) (criminal penalties) and Section 20A; ITSFEA of 1988Report a problem with this question

33. 33. A registered representative learns that his firm's institutional desk is about to execute a very large block purchase of ABC common stock for a customer. Before that order is executed, he buys ABC call options for his own account. This is BEST described as:

    • A.Permitted, because he purchased options rather than the underlying common stock
    • B.Interpositioning, prohibited by FINRA Rule 5310
    • C.Trading ahead of a research report, prohibited by FINRA Rule 5280
    • D.Front running of a block transaction, prohibited by FINRA Rule 5270✓ Answer

    FINRA Rule 5270 prohibits trading for an account in which one has a beneficial interest while in possession of material nonpublic information about an imminent block transaction, and it expressly reaches related financial instruments such as options, so switching to the derivative does not help. Trading ahead of a customer's own order in the same security is Rule 5320, trading ahead of the firm's research is Rule 5280, and interpositioning means needlessly inserting a third party between the customer and the best available market.

    Source: FINRA Rule 5270 (Front Running of Block Transactions)Report a problem with this question

34. 34. In the last few minutes of the trading session, a trader enters a series of buy orders intended to push the closing price of a thinly traded stock higher so that his firm's month-end position is valued more favorably. This activity is:

    • A.Permitted, because the orders are genuine trades that actually execute
    • B.Backing away, prohibited by FINRA Rule 5220
    • C.Capping, because the trader is trying to keep the price from falling
    • D.Marking the close, a prohibited manipulative practice✓ Answer

    Entering transactions at or near the close for the purpose of setting an artificial closing price is "marking the close," a manipulative and deceptive device prohibited by FINRA Rule 2020 and SEA Rule 10b-5; the fact that the trades are real and settle normally does not cure the violation, because the wrong lies in the manipulative purpose. Capping means pressing a price down to hold it below a level, and pegging means supporting it — neither describes these facts.

    Source: FINRA Rule 2020 (Use of Manipulative, Deceptive or Other Fraudulent Devices); SEA Rule 10b-5Report a problem with this question

35. 35. Two traders agree in advance to enter offsetting buy and sell orders in the same security, in the same size and at the same price and time, so that the transactions cancel each other out and create the appearance of active trading. This practice is BEST described as:

    • A.Interpositioning
    • B.Freeriding
    • C.A permitted cross transaction
    • D.Matched orders, a form of prohibited market manipulation✓ Answer

    Matched orders — and the closely related wash trade, in which there is no genuine change in beneficial ownership — are prohibited because they publish transactions that create a false or misleading appearance of active trading or of an artificial price, contrary to FINRA Rules 5210 and 2020 and SEA Rule 10b-5. A legitimate cross pairs two genuine, unrelated customer orders at a bona fide market price and involves a real transfer of ownership.

    Source: FINRA Rule 5210 (Publication of Transactions and Quotations) and Rule 2020; SEA Rule 10b-5Report a problem with this question

36. 36. A market maker publishes a firm quotation in a security. When another member calls to trade at that displayed price and size, the market maker refuses to honor the quote. This is:

    • A.Interpositioning, a violation of FINRA Rule 5310
    • B.Backing away, a violation of FINRA Rule 5220✓ Answer
    • C.Permitted, because published quotations are only indications of interest
    • D.Freeriding, a violation of Regulation T

    FINRA Rule 5220 provides that a member who makes an offer or bid at a stated price must be prepared to trade at that price for at least the size quoted; failing to do so is "backing away." A displayed quotation is firm, not an indication of interest, and the market maker's remedy is to update or withdraw the quote before an order arrives. Interpositioning is the different violation of needlessly inserting a third party between the customer and the best available market.

    Source: FINRA Rule 5220 (Offers at Stated Prices)Report a problem with this question

37. 37. Churning is established primarily by showing that the registered representative:

    • A.held written discretionary authority that the member firm had accepted
    • B.recommended securities that later declined in value
    • C.used margin in the customer's account
    • D.exercised control over the account and traded it excessively in light of the customer's investment objectives and financial resources✓ Answer

    Excessive trading requires two elements: control over the account — either formal discretion or de facto control where the customer routinely follows the representative's recommendations — and a level of trading activity that is excessive in view of the customer's objectives, resources and the character of the account. Losses alone do not prove churning, and the customer's approval of each individual trade does not cure a pattern of trading driven by commission generation.

    Source: FINRA Rules 2111 and 2020 (excessive trading / churning)Report a problem with this question

38. 38. A registered representative wants to sell interests in a private real estate limited partnership to several clients away from his firm, and he will receive selling compensation. Under FINRA rules he must:

    • A.do nothing, because limited partnership interests are not listed securities
    • B.provide prior written notice only, because a firm may not prohibit an outside investment opportunity
    • C.notify the firm in writing within 30 days after the first sale is completed
    • D.provide prior written notice to his firm and obtain the firm's prior written approval; if approved, the transactions must be recorded on the firm's books and supervised as if the firm had executed them✓ Answer

    FINRA Rule 3280 governs private securities transactions, commonly called selling away. Where the associated person will receive selling compensation, prior written notice AND the member's prior written approval are both required, and approved transactions must be recorded on the member's books and supervised as though the member had executed them. This is the critical contrast with outside business activities under Rule 3270, which require prior written notice but not affirmative approval.

    Source: FINRA Rule 3280 (Private Securities Transactions of an Associated Person)Report a problem with this question

39. 39. A registered representative accepts a paid evening position keeping the books for a friend's landscaping company. The work involves no securities of any kind. What must he do?

    • A.Give prior written notice to his member firm, which may then impose conditions on the activity or prohibit it✓ Answer
    • B.Obtain the firm's prior written approval before beginning the activity
    • C.Disclose the activity on his next annual compliance questionnaire
    • D.Nothing, because the activity is unrelated to securities

    FINRA Rule 3270 requires an associated person to give prior written notice to the member before engaging in any outside business activity for which he receives compensation, even one with no securities element; the firm must then evaluate the activity and may impose conditions or prohibit it. The distinguishing point is that notice — not affirmative written approval — is the trigger; written approval is what Rule 3280 requires for private securities transactions.

    Source: FINRA Rule 3270 (Outside Business Activities of Registered Persons)Report a problem with this question

40. 40. A registered representative wishes to borrow money from a customer who has been a close personal friend since long before any brokerage relationship existed. Under FINRA rules the loan is:

    • A.always prohibited, because a customer may never lend money to an associated person
    • B.permitted only if the member has written procedures allowing such loans and the representative gives prior notice to the firm and obtains its written pre-approval✓ Answer
    • C.permitted as long as the loan is documented by a written promissory note bearing a market rate of interest
    • D.permitted with no notice at all, because the friendship exists independently of the brokerage relationship

    FINRA Rule 3240 prohibits borrowing from or lending to a customer unless the member has written procedures permitting such arrangements and the arrangement fits one of the rule's enumerated exceptions. A personal relationship that exists independent of the brokerage relationship is one of those exceptions, but that category requires the representative to give prior notice to the firm and obtain the firm's written pre-approval; papering the loan with a promissory note does not satisfy the rule.

    Source: FINRA Rule 3240 (Borrowing From or Lending to Customers)Report a problem with this question

41. 41. Which of the following is PERMITTED under FINRA rules?

    • A.Reimbursing a customer for a loss caused by an ordinary market decline
    • B.Guaranteeing a customer against loss in the customer's account
    • C.Sharing in the profits and losses of a customer's account in proportion to the representative's own financial contribution, with prior written authorization from both the customer and the member firm✓ Answer
    • D.Splitting profits equally with a customer on the basis of the customer's oral consent

    FINRA Rule 2150(b) flatly prohibits guaranteeing a customer against loss or sharing in a customer's losses, and Rule 2150(c) permits sharing in an account only where both the customer and the member have given prior written authorization and the sharing is proportionate to the associated person's own financial contribution to the account (the proportionality element is relaxed only for immediate family). Oral consent is never sufficient, and covering a market loss is a prohibited guarantee, not a courtesy.

    Source: FINRA Rule 2150(b) and (c) (Prohibition Against Guarantees and Sharing in Accounts)Report a problem with this question

42. 42. A customer telephones her representative and says, 'Buy 500 shares of XYZ for me sometime today, at whatever price you think is best.' The representative holds no written discretionary authority over the account. He may:

    • A.accept the order and work it over the next several days until a favorable price is available
    • B.accept the order only if a registered principal approves it in advance in writing
    • C.accept the order and choose the time and the price of execution, but only for that business day✓ Answer
    • D.not accept the order, because any exercise of judgment requires prior written discretionary authorization

    Discretion exists when the representative chooses the security, the number of shares, or whether to buy or sell; those choices require prior written authorization from the customer and the member's written acceptance under FINRA Rule 3260. Here the customer specified the security, the size and the side, so the representative is exercising only time and price discretion, which is not treated as discretionary — but that limited authority expires at the end of the business day on which it was given.

    Source: FINRA Rule 3260 (Discretionary Accounts), including the time-and-price exceptionReport a problem with this question

43. 43. Which statement about gifts and business entertainment under FINRA Rule 3220 is correct?

    • A.A gift routed to the spouse or family member of another firm's employee falls outside the rule
    • B.The limit applies separately to each individual gift, so any number of gifts may be given as long as no single gift exceeds it
    • C.The limit applies per person per year, firms must aggregate and keep records of gifts given and received, and legitimate business entertainment is evaluated separately and must not be so frequent or extensive as to raise any question of propriety✓ Answer
    • D.Ordinary and usual business entertainment is always counted against the gift limit

    Rule 3220 caps gifts and gratuities given in relation to the business of the recipient's employer on a per-person, per-year basis, so multiple gifts to the same person must be aggregated and recorded by the firm; routing a gift through a family member does not avoid the rule. Ordinary and usual business entertainment at which the associated person is present is treated separately under the firm's supervisory policies, but it must not be so frequent or so extensive as to raise any question of propriety.

    Source: FINRA Rule 3220 (Influencing or Rewarding Employees of Others); FINRA Rule 3110 supervision of business entertainmentReport a problem with this question

44. 44. A municipal finance professional makes a political contribution to an issuer official that exceeds the de minimis amount permitted by MSRB Rule G-37. The principal consequence for the dealer is:

    • A.a monetary fine only, because a personal political contribution is beyond regulatory reach
    • B.no consequence, provided the contribution is disclosed to the MSRB within 30 days
    • C.the immediate barring of the municipal finance professional from the industry
    • D.a two-year prohibition on the dealer engaging in municipal securities business with that issuer✓ Answer

    MSRB Rule G-37 is a pay-to-play rule that works by disqualification rather than by intent: a contribution by a municipal finance professional above the narrow de minimis exception (available only for a candidate for whom that professional is entitled to vote) triggers a two-year ban on the dealer engaging in municipal securities business with that issuer, whether or not the contribution actually influenced anyone. Quarterly disclosure of contributions is separately required and does not cure the ban.

    Source: MSRB Rule G-37 (Political Contributions and Prohibitions on Municipal Securities Business); FINRA Rule 2030Report a problem with this question

45. 45. A member firm emails a market commentary piece to 40 retail investors during a single 30-day period. Under FINRA Rule 2210, this communication is classified as:

    • A.a retail communication✓ Answer
    • B.a public appearance
    • C.correspondence
    • D.an institutional communication

    Rule 2210 classifies a written communication (including electronic) that is distributed or made available to more than 25 retail investors within any 30 calendar-day period as a retail communication; 25 or fewer retail investors in that period makes it correspondence, and a communication distributed only to institutional investors is an institutional communication. The classification matters because it determines the approval, filing and supervisory requirements that attach to the piece.

    Source: FINRA Rule 2210(a) (definitions of correspondence, retail communication and institutional communication)Report a problem with this question

46. 46. Which statement about the approval of communications with the public is correct?

    • A.Retail communications generally must be approved by an appropriately qualified registered principal before the earlier of use or filing, while correspondence and institutional communications may instead be supervised under the firm's written review procedures✓ Answer
    • B.Institutional communications require prior principal approval, but retail communications do not
    • C.Approval is required only for those communications that must also be filed with FINRA's Advertising Regulation Department
    • D.Every communication, including a firm's internal memoranda, requires prior principal approval

    Under FINRA Rule 2210(b), retail communications generally require approval by an appropriately qualified registered principal before the earlier of use or filing, subject to limited exceptions, whereas correspondence and institutional communications may be handled through written supervisory review and training procedures instead of pre-approval. Filing with FINRA is a separate obligation applying only to specified categories of retail communications, so approval and filing must not be equated.

    Source: FINRA Rule 2210(b) (approval and review) and Rule 2210(c) (filing requirements)Report a problem with this question

47. 47. An email that a representative sends to prospective retail customers states that a particular mutual fund 'will return at least 12% next year.' This statement is:

    • A.acceptable if the representative adds a disclaimer that past performance does not guarantee future results
    • B.prohibited, because communications may not predict or project investment performance or make exaggerated, unwarranted or promissory claims✓ Answer
    • C.acceptable if it is sent to 25 or fewer retail investors
    • D.acceptable, because the fund's past performance supports the figure

    FINRA Rule 2210(d)(1) requires communications to be fair and balanced and forbids false, exaggerated, unwarranted, promissory or misleading statements, and it separately prohibits predictions or projections of investment performance except in narrowly defined circumstances. Neither a small audience nor a boilerplate disclaimer can rehabilitate a promise of a specific future return, because the defect is the promise itself.

    Source: FINRA Rule 2210(d)(1) content standards, including the prohibition on performance predictions and projectionsReport a problem with this question

48. 48. A firm wishes to include a customer testimonial in a retail communication. Which of the following is required?

    • A.Prominent disclosure that the experience described may not be representative of other customers' experience, that the testimonial is not a guarantee of future performance or success, and, if more than a nominal sum was paid, that compensation was paid✓ Answer
    • B.Testimonials are prohibited in all retail communications
    • C.The testimonial must be verified by an independent auditor before it is used
    • D.The customer giving the testimonial must be a registered person of the firm

    FINRA Rule 2210(d)(6) permits testimonials in retail communications but conditions them on prominent disclosure that the experience may not be representative of other customers, that the testimonial is no guarantee of future performance or success, and — where more than a nominal sum was paid — that compensation was paid. If the testimonial concerns a technical aspect of investing, the maker's qualifications and experience must also be disclosed, because otherwise the endorsement misleads by implying expertise.

    Source: FINRA Rule 2210(d)(6) (Testimonials)Report a problem with this question

49. 49. A customer moves funds rapidly among several accounts at different institutions in multiple countries, with no apparent business purpose, in order to obscure where the money originally came from. This activity is characteristic of which stage of money laundering?

    • A.Layering✓ Answer
    • B.Remittance
    • C.Placement
    • D.Integration

    Money laundering is conventionally described in three stages: placement, where illicit cash first enters the financial system; layering, where a chain of complex transfers, conversions and cross-border movements separates the funds from their criminal origin; and integration, where the money re-enters the economy looking legitimate. Rapid, purposeless movement of funds across accounts and jurisdictions is the classic layering red flag that a firm's AML program must detect.

    Source: Bank Secrecy Act / USA PATRIOT Act AML framework; FINRA Rule 3310 (three stages of money laundering)Report a problem with this question

50. 50. A firm files a suspicious activity report (SAR) after a customer makes a pattern of cash deposits that appear designed to stay below the currency reporting requirement. The customer later asks his representative whether the firm reported him. The representative must:

    • A.disclose the filing only if the customer submits a written request for the information
    • B.confirm that a SAR was filed, because customers have a right to know about reports made about them
    • C.refer the customer to FinCEN so that he can obtain a copy of the SAR
    • D.decline to confirm or deny the SAR, because a broker-dealer and its personnel are prohibited by law from disclosing a SAR or its existence to the subject of the report✓ Answer

    Federal law makes suspicious activity reports strictly confidential: no broker-dealer, and no officer, director, employee or agent of one, may disclose a SAR or any information that would reveal its existence to the subject of the report. Doing so is unlawful "tipping off" and carries its own penalties, and it defeats the investigation. Structuring deposits to evade the currency reporting requirement is itself a federal crime and a classic SAR trigger, but the customer is never told.

    Source: 31 CFR 1023.320(e) (SAR confidentiality); Bank Secrecy Act anti-tipping-off provisionsReport a problem with this question

51. 51. Under a broker-dealer's customer identification program, which set of information must be obtained from a natural-person customer before the account is opened?

    • A.Name, employer, annual income and net worth
    • B.Name, investment objectives, risk tolerance and time horizon
    • C.Name, email address and a copy of a recent utility bill
    • D.Name, date of birth, a physical residential or business street address, and a taxpayer or other government identification number✓ Answer

    The customer identification program required by the USA PATRIOT Act obliges the firm, before opening an account, to collect at a minimum the customer's name, date of birth, a street address (a post office box alone is not sufficient), and an identification number such as a Social Security or taxpayer identification number, and then to verify identity and check government lists. Income, objectives and risk tolerance are collected for suitability and know-your-customer purposes under different FINRA rules and do not satisfy the CIP.

    Source: USA PATRIOT Act Section 326; 31 CFR 1023.220 (Customer Identification Programs for broker-dealers)Report a problem with this question

52. 52. A firm's screening identifies that a proposed wire transfer involves a party appearing on OFAC's Specially Designated Nationals (SDN) list. The firm's obligation is to:

    • A.close the account and destroy the related records to end the relationship
    • B.process the transfer but file a currency transaction report at the same time
    • C.block or reject the transaction as the sanctions program requires and report the action to OFAC, rather than simply declining the business✓ Answer
    • D.process the transfer once the customer supplies additional identification

    OFAC sanctions are administered separately from the Bank Secrecy Act and bind all U.S. persons: property of a blocked party must be frozen, or the transaction rejected, as the applicable sanctions program directs, and the blocking or rejection must be reported to OFAC. Quietly declining the business without blocking and reporting would violate the sanctions rules, and records must be retained rather than destroyed.

    Source: OFAC sanctions regulations (31 CFR Chapter V); SDN List blocking, rejection and reporting requirementsReport a problem with this question

53. 53. A registered representative discusses securities recommendations with customers using a personal messaging application that his firm cannot capture or review. This practice is:

    • A.acceptable as long as he forwards a summary of the messages to his branch manager each quarter
    • B.acceptable, because the messages are sent from his own device rather than from firm systems
    • C.prohibited, because business-related communications must be captured, retained and supervised regardless of the device or platform used✓ Answer
    • D.acceptable if the customers consent in writing to communicating through the application

    A member firm must review, supervise and preserve all communications relating to its securities business, and that obligation is content-based rather than device-based, so using an off-channel application defeats the firm's ability to supervise and to produce records to regulators. Customer consent or after-the-fact summaries do not substitute for capture and retention, which is why off-channel communications have been a recurring enforcement subject.

    Source: SEA Rule 17a-4; FINRA Rules 3110(b)(4) and 4511 (review, supervision and preservation of communications and records)Report a problem with this question

54. 54. Under Regulation S-P, a broker-dealer that intends to share a customer's nonpublic personal information with a nonaffiliated third party for marketing purposes must:

    • A.do nothing further, because privacy notices are required only when an account is closed
    • B.obtain clearance from FINRA's Advertising Regulation Department
    • C.deliver a privacy notice and give the customer a reasonable opportunity to opt out before the information is disclosed✓ Answer
    • D.obtain the customer's written opt-in consent in every case

    Regulation S-P is an opt-out regime: the firm must deliver an initial privacy notice when the customer relationship is established and periodic notices thereafter, and it must provide a clear opt-out notice plus a reasonable opportunity to opt out before disclosing nonpublic personal information to nonaffiliated third parties. The regulation also requires written policies and procedures reasonably designed to safeguard customer records and information.

    Source: SEC Regulation S-P (17 CFR Part 248) — privacy notices, opt-out and safeguards requirementsReport a problem with this question

55. 55. A customer sends a branch office a signed letter alleging that her representative executed trades she never authorized. Her new account agreement contains a predispute arbitration clause. Which statement is correct?

    • A.The predispute arbitration agreement bars the customer from ever pursuing the claim in any forum
    • B.The firm may resolve the matter informally without creating any record of the letter
    • C.The firm must record and retain the written complaint and handle it under its supervisory procedures; if the dispute is not resolved, it proceeds under the FINRA Code of Arbitration Procedure, where the award is final and binding, while mediation remains voluntary and non-binding unless a settlement is signed✓ Answer
    • D.The letter is not a customer complaint unless the customer expressly demands money damages

    Any written grievance from a customer concerning the firm's or an associated person's securities activities is a customer complaint that must be recorded and retained at the office of supervisory jurisdiction and reviewed under the firm's supervisory system, whether or not damages are demanded. A valid predispute arbitration agreement channels an unresolved dispute into the FINRA Code of Arbitration Procedure instead of court; arbitration awards are final and binding with very limited grounds for appeal, whereas mediation is a voluntary, non-binding process that becomes binding only if the parties sign a settlement.

    Source: FINRA Rule 4513 (records of written customer complaints), Rule 2268 (predispute arbitration agreements) and the FINRA Code of Arbitration Procedure for Customer Disputes (Rule 12000 series)Report a problem with this question

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