Series 6 Keir-Chapter 13 Finra Rules And Codes

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1. A customer who wishes to file a complaint against a broker-dealer must make the filing within what period of time?
(A) 6 months of discovery of the alleged violation
(B) 2 years of discovery of the alleged violation
(C) 7 years of discovery of the alleged violation
(D) 10 years of discovery of the alleged violation

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B) Under FINRA Rules, customers who wish to file complaints against a broker dealer or associated person must file no later than 2 years after discovery of the violation. Ch 13 ¬3a

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2. Roger, a registered representative, wishes to take a part-time night job as a waiter. Under these circumstances, which of the following statements is true?
(A) The registered representative may take any work outside of the securities business, without employer approval.
(B) The registered representative may take the position if he gives prior written notice to his employer.
(C) The registered representative may take the position ifhe gives prior written notice to FINRA.
(D) The registered representative is prohibited from taking another position outside his regular scope of employment.

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(B) FINRA Conduct Rules require that an associated person who wishes to take a second job must give prompt written notice to the member firm. Ch 13 - 2d

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3. In connection with the sale of mutual fund shares, which of the following actions is prohibited?
(A) The sponsor selling shares to a selling group member at a discount from the public offering price
(B) A selling group member selling shares to the public at a discount from the public offering price, which differs from the breakpoint schedule (C) The sponsor selling shares to a selling group member at net asset value
(D) The sponsor selling shares of a no load fund to the public at net asset value

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(B) Because mutual fund shares are a prospectus offering, the issue must be sold to the public at the public offering price as stated in the prospectus. No discounts are allowed to the public, other than breakpoint formulas in the prospectus. The sponsor can sell shares to a selling group member at less than the public offering price. This is the only way that the selling group member can make a profit on the shares since he or she resells them to the public at the POP. No¬load fund shares are sold directly by the sponsor to the public, without the use of a sales group. In this case, purchases are made from the sponsor at the NA V, and shares are redeemed with the sponsor at the NA V. Ch 13 - 2c

Front 4

4. An individual holding a Series 6 license can effect which of the following transactions?
I Initial offer of open-end investment company shares
II Initial offer of closed-end investment company shares
III Trading of open-end fund shares IV Trading of closed-end fund shares
(A) I only
(B) I and II only
(C) ill and IV only
(D) I, II, III, and IV

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(B) A person holding a Series 6 license can participate in the initial offering of open end funds, closed-end funds, and unit investment trusts. Of these securities, only one is traded after issuance in the secondary market, that is, closed-end funds. An individual with a Series 6 license cannot effect trades in the secondary market. To do so requires a Series 7 General Securities license. Also, please note that FINRA prohibits trading of open-end fund shares. These are redeemable securities that can only be redeemed with the sponsor. FINRA member firms are prohibited from making markets in open-end funds, so no trading can occur. Ch 13 - 1d

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5. All of the following are violations of FINRA mutual fund rules EXCEPT:
(A) Breakpoint sales
(B) Trading of mutual fund shares
(C) Selling dividends
(D) Redemption charges

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(D) Breakpoint sales are sales to customers in amounts just below a breakpoint offered by the fund and are a violation of FINRA rules. The representative must tell the customer that investing a small additional amount will place him or her over the breakpoint and result in a lower sales charge. Trading of mutual fund shares is prohibited. These redeemable securities can only be redeemed with the sponsor. FINRA member firms are prohibited from making markets in open-end funds, so no trading can occur. Selling dividends is the practice of pushing a customer to buy just before an ex-date to receive a dividend. This practice is of no benefit to the customer since the fund reduces the share price on the ex-date for the distribution. The customer really gets nothing, and additional taxes are due. Redemption charges, fees are permitted. Ch 13 - 2c

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6. A retired investor seeks monthly income, along with preservation of capital and minimum risk. Which of the following funds would be a suitable recommendation?
(A) Capital shares in a dual-purpose fund
(B) Specialty fund
(C) U.S. government securities fund (D) Growth fund

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(C) To meet the objective of minimum risk, a government securities fund is suitable
since these securities are considered to be risk-free. Ch 13 - ~b

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7. The registered principal is responsible for reviewing or handling every:

I Customer order
II Piece of customer correspondence
Ill Customer complaint
(A) I only
(B) Ill only
(C) II and ill only
(D) I, II, and ill

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(D) FINRA supervisory rules require that a registered principal review every customer
order, every piece of customer correspondence, and the handling of every customer complaint. Ch 13 - 2d

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8. An individual holding a Series 6 license may sell all of the following investments EXCEPT:
(A) Management companies
(B) Unit investment trusts
(C) Real estate investment trusts
(D) Face amount certificates

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(C) Real estate investment trusts (REITs) are not investment companies. They are
corporate securities that make direct investments in real estate and mortgages. REITs are listed on exchanges or trade over-the-counter. To offer these securities, an individual must have the Series 7 General Securities license or the Series 62 Corporate Securities license. Ch 13 - 1d

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9. Which of the following disputes must be resolved by arbitration?
I FINRA member firm against FINRA
member firm
II Registered representative against that FINRA member firm
III Customer (who has signed an arbitration agreement with FINRA member firm) against that FINRA member firm
IV FINRA member firm against a
clearing corporation
(A) I only
(B) I and n only
(C) II, III, and IV only
(D) I, II, III, and IV

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(D) If a FINRA member has a dispute with another member or a clearing corporation,
the dispute must be handled by arbitration. If a registered representative and a FINRA member have a dispute, it must be handled by arbitration. If a customer has a dispute with a FINRA member firm, he or she can choose arbitration or can use FINRA Code of Procedure for a hearing, or he or she can litigate. However, if a customer signs an arbitration agreement when he or she opens the account, he or she agrees that all disputes will be handled by arbitration and waives his or her right to litigate. Thus, all choices given must use arbitration as the means of settling the dispute. Ch 13 - 3c

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10. FINRA rules prohibit which of the following practices?
I Trading mutual fund shares
II Selling dividends III Making blanket recommendations of low-price speculative stocks
IV Recommending purchases beyond a
customer's financial capacity
(A) I only
(B) I and II only
(C) III and IV only
(D) I, II, III, and IV

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(D) All of the practices listed are manipulative. Mutual funds do not trade - they are
issued by the fund and are redeemed by the fund. Dividends cannot be sold. This means that customers cannot be induced to buy in time to get the dividend because the ex-date reduction causes them to get nothing. Blanket recommendations of low-price speculative stocks do not consider customer suitability. Trades of excessive frequency of size are manipulative and simply a means of generating commissions. Ch 13 - 2c

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11. All of the following are violations of FINRA rules EXCEPT:

(A) Refusal to trade at a stated quote unless the quote has been identified as nominal
(B) Selling mutual fund shares to customers in quantities just below breakpoint levels
(C) Pledging fully-paid customer securities to a bank to secure a loan
(D) Exchanging customer margin securities with other collateral to secure a debit balance

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(D) Under the margin agreement, the firm holds margin securities in street name and can commingle them with the securities of other customers. Thus, collateral at a bank can be changed at any time since it consists solely of commingled street name securities. The firm must segregate fully paid securities and place them in safekeeping. Selling to a customer just below a breakpoint is a violation. Clearly, refusal to trade at stated quotes is a violation since quotes must be bona fide. Ch 13 - 2b

Front 12

12. Which of the following gifts is the maximum permitted under FINRA rules?

(A) One gift of $100 value per person per year
(B) Unlimited number of gifts of $100 value per person per year
(C) One gift of $200 value per person per year
(D) Unlimited number of gifts of $200 value per person per year

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(A) FINRA limits gifts to a maximum of $100 per person per year. Ch 13 - 2c

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13. Which of the following actions constitute violations of FINRA Rules?

I Opening a cash account for a customer without obtaining that customer's signature
II Offering to trade mutual fund shares for a customer .
III Recommending to a customer that he or she should get a group of friends together to buy mutual fund shares at a breakpoint
IV Discussing the purchase of mutual fund shares with a customer before sending a prospectus
(A) I and II only
(B) II and III only
(C) I, II, and III only
(D) II, III, and IV only

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(B) Under FINRA Rules, trading of mutual fund shares is prohibited. These are redeemable securities - not negotiable securities. Recommending that customers group together to buy mutual fund shares at a breakpoint is also prohibited. Breakpoints are only available to individual customers. No customer signature is needed to open a cash account. The signature is needed to open a margin account only. Discussing the purchase of mutual fund shares before sending a prospectus is allowed, but the customer must receive the prospectus either at or prior to confirmation of an order for the shares. Ch 13 - 2c

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14. Which of the following letters does NOT have to be reviewed by a principal?
(A) Form letters mailed to all customers
(B) Form letters marked for internal use within a firm
(C) Letters recommending securities to all clients of a registered representative
(D) Complaint letters received from customers

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(B) Internal documents of a brokerage firm do not have to be approved by a principal.
All letters sent to customers which make recommendations or solicit business must be approved. All customer complaint letters must also be reviewed and handled by a principal. Ch 13 - 2d

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15. All of the following are violations of FINRA Rules EXCEPT:

(A) Guaranteeing a customer account against loss
(B) Selling a customer an exempt security with a written agreement to buy back that security at a fixed price
(C) Making blanket recommendations of low-price speculative stocks to customers
(D) Selling dividends to customers by inducing customers to buy stocks just prior to the ex-date

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(B) Choice (B) defines a repurchase agreement with a broker-dealer, which a broker¬ dealer is permitted to do. Prohibited activities are guaranteeing a customer account against loss, making blanket recommendations of low-price speculative stocks, and selling dividends to customers. Ch 13 - 2b

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16. A customer places an order to buy mutual fund shares directly from the fund wholesaler and, therefore, does not use a
broker-dealer included in the fund's selling group. Under FINRA Rules, all of the following statements concerning this transaction are true EXCEPT:
(A) The wholesaler must be a registered FINRA member.
(B) The customer must pay the public offering price as described in the prospectus.
(C) The wholesaler can offer the customer a lower sales charge since no concession will be paid to a selling group member.
(D) Pricing of the fund shares must conform to the requirements of the Investment Company Act of 1940

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(C) If a customer buys fund shares directly from a fund wholesaler instead of from a
broker-dealer in the fund selling group, the customer still must pay the public offering price as stated in the prospectus. The customer does not get any extra discount by going directly to the wholesaler. Fund wholesalers must be FINRA members. Ail fund shares must be priced in accordance with the rules written under the Investment Company Act of 1940; for example, mutual fund shares must be forward priced under these rules. Ch 13 - 2c

Front 17

17. The Office of Supervisory Jurisdiction is responsible for which of the following activities?

I Creation and enforcement of written supervisory procedures over customer accounts
II Periodic inspection of customer account records
III Annual compliance review with each registered representative
IV Annual review of member firm business to achieve compliance with regulations

(A) I only
(B) I and II only
(C) III and IV only
(D) I, II III, and IV

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(D) The Office of Supervisory Jurisdiction must be manned by a registered principal and is responsible for all of the choices offered. These include the creation and enforcement of written supervisory procedures over customer accounts, periodic inspection of customer account records to detect irregularities and insure compliance, the performance of an annual compliance review with each registered representative to review recent regulations and firm policies, and the performance of an annual review of member firm business to achieve compliance with regulations. Ch 13 - 2d

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18. FINRA will disallow a membership application for which of the following reasons?
I The applicant has been suspended by another self-regulatory organization.
II The applicant has been expelled by another self-regulatory organization.
III The applicant is not qualified due to lack of experience.
IV The applicant has been convicted of securities fraud within the past 10 years.

(A) I and II only
(B) III and IV only
(C) I, II, and IV only
(D) I, II, III, and IV

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(C) FINRA will not allow a person to be registered if they:
-Lie on the membership application
-Have been suspended or expelled by another self-regulatory organization
-Have been convicted of securities fraud, misappropriation of funds, embezzlement, etc. within the past 10 years
Lack of experience is not a basis for denying membership. Ch 13 - 1 b

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19. Which of the following persons are "immediate family members" under FINRA rules restricting loans to customers?
I Uncle
II Cousin
III Brother-in-law IV Grandparent
(A) I and II only
(B) II and III only
(C) III and IV only
(D) I, II, III, and IV

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(D) All of these persons are included in the definition of immediate family for purposes of FINRA Rules on lending money to customers. Ch 13 - 2b

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20. Under FINRA Code of Procedure, decisions of the Hearing Panel:

(A) Are final and not appealable
(B) May be appealed directly to the Securities and Exchange Commission
(C) May be appealed directly to Federal Court
(D) May be appealed to the National Adjudicatory Council

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(D) Under the Code of Procedure, any decision rendered by the Hearing Panel may be appealed to the National Adjudicatory Council. If this decision is unacceptable to either party, it may be appealed to the Securities and Exchange Commission. If the SEC's decision is unacceptable, it may be appealed to a federal appeals court. This is the route of appeal under the Code of Procedure. Ch 13 - 3b

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21. Under FINRA Rules, a member cannot accept an order to sell securities from a customer unless:
(A) The member firm has physical possession of the securities to be sold.
(B) The member firm has received assurance from the customer that he or she will deliver in 1 business day.
(C) The member firm has received assurance from the customer that he or she will deliver in 2 business days.
(D) The member firm either has physical possession of the securities to be sold or has received assurance from the customer that he or she will deliver in 3 business days.

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(D) FINRA Rules require that a customer order to buy securities cannot be accepted unless the member has reasonable assurance that the customer will pay in 3 business days (regular way industry settlement); a customer order to sell cannot be accepted unless the member either has custody of the securities or has reasonable assurance that the customer will deliver the securities in 3 business days. Ch 13 - 2a

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22. Under Rule 2790, restricted persons are not permitted to buy which new issues?
I NYSE preferred stock
II Corporate debentures
III Investment company "shares
IV NASDAQ common stock
(A) IV only
(B) I and IV only (C) III only
(D) I, II, III, and IV

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(B) Restricted persons may not purchase new equity issues directly or through an account of which they are a beneficial owner. NYSE preferred stock and NASDAQ common stock are equity issues. Corporate debentures are not equity issues. An exception permits sales of investment company shares to restricted persons. Ch 2 - Ib

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23. A venture capitalist has approached a registered representative to assist in the marketing and sale of a private placement for which the representative will receive bonuses. Which statement is true?

(A) This activity is absolutely prohibited under FINRA Rules.
(B) This activity requires that the registered representative provide his or her broker-dealer with prior written notice.
(C) This activity requires that the registered representative provide his or her broker-dealer with prior written notice, and the broker-dealer must give written approval prior to the representative's acceptance of the position.
(D) This activity is allowed without any restriction.

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(C) FINRA Rules prohibit a person associated with a member firm from being compensated for a private securities transaction unless that person gives prior written notice to the firm and the firm approves of the transaction in writing. Ch 13 - 2d

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24. Under FINRA Code of Arbitration, any disputes must be filed within:
(A) 6 months of the event
(B) 1 year of the event
(C) 5 years of the event
(D) 6 years of the event

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(D) The statute of limitations for arbitration is 6 years from the date of the event that caused the dispute. Ch 13 - 3c

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25. When securities are pledged as collateral for a margin loan, federal regulations permit the firm to commingle:
(A) The securities of one margin
customer with the securities of another margin customer
(B) The securities of margin customers with securities positions held by the broker-dealer
(C) Customer securities held in cash accounts with the securities of margin customers
(D) Customer securities held in cash accounts with securities positions held by the broker-dealer

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(A) When a customer opens a margin account, he or she pledges the securities in the account as collateral for the margin loan. Under the terms of the hypothecation (pledge) agreement, the broker-dealer places the securities in street name and holds them as collateral. The agreement allows the broker-dealer to commingle (mix up) the margin securities of one customer with those of another customer, and these securities may be rehypothecated to a bank for a loan from the bank to the broker-dealer. Broker-dealers are prohibited from commingling their firm securities positions with customer securities positions, and they are prohibited from commingling customer securities purchased in cash accounts. These must be segregated and placed in safekeeping. Ch 13 - 2b

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26. The fund underwriter for ACME funds gives a $500 sales bonus to a registered representative at another member firm that sold the greatest amount of the fund over the past year. Which statement is true?

(A) This action violates FINRA rules.
(B) This action is permitted if the employer gives prior approval in writing.
(C) This action is permitted if FINRA gives prior approval in writing.
(D) This action is permitted.

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(A) FINRA prohibits the giving or receiving of gifts related to one's activities in the industry if the gift exceeds $100 in value or cash. For gifts between mutual fund sponsors and persons associated with member firms, the limit is even lower - $50. Ch 13 - 2c

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27. Which of the following statements concerning sales charges is correct?
I Under FINRA Rules, the maximum sales charge on a single purchase of open-end fund shares is 811z% of net asset value.
II Under FINRA Rules, the maximum sales charge on a single purchase of open-end fund shares is 811z% of the public offering price.
III Under the Investment Company Act of 1940, the maximum sales charge on periodic purchases of open-end fund shares is 9% of net asset value.
IV Under the Investment Company Act of 1940, the maximum sales charge on periodic purchases of open-end fund shares is 9% of the public offering price.
(A) I and III only
(B) I and IV only
(C) II and III only
(D) II and IV only

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(D) FINRA sets a maximum sales charge on single purchases of mutual fund shares of
8 ½ % of the public offering price. The Investment Company Act of 1940 sets a maximum sales charge on periodic payment plans of 9% of the public offering price. Ch 13 - 2c

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28. Under FINRA Rules, which of the following features is required in an anti money laundering program established by member firms?

I Ongoing training for appropriate personnel
II Structuring of transactions below the IRS cash reporting requirements
III Independent testing by member personnel or outside party
IV Filing of suspicious activity reports with FINRA

(A) I and II only
(B) I and ill only
(C) II and IV only
(D) I, II, III, and IV

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(B) The anti-money laundering program must provide for ongoing training of appropriate personnel and independent testing by member personnel or an outside party. Structuring of transactions to evade IRS cash reporting requirements is a prohibited money laundering activity. Suspicious activity reports are filed with the Treasury Department.
Ch 13 - 2d

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29. All of the following statements concerning the requirements for an anti money laundering program are correct EXCEPT:

(A) It must be in writing.
(B) It must be approved by a person in senior management of the firm.
(C) All transactions over $5,000 must be reported.
(D) A designated person at the firm
monitoring the internal controls must be identified to FINRA.

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(C) Transactions involving $5,000 must be reported if they are suspicious, but all transactions need not be reported. Ch 13 - 2d

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30. Under FINRA Rule 2790, a broker dealer firm can sell new equity issues (not investment company shares) under which of the following circumstances?
(A) A firm asks whether the buyer is a restricted person and records the answer.
(B) The firm obtains a written statement in advance of the sale that the proposed buyer is not a restricted person.
(C) The firm obtains a written statement that the proposed buyer is a sophisticated investor with the minimum required net worth.
(D) Following the sale, the firm verifies, after the sale, that the buyer's account may purchase new issues.

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(B) The firm must obtain a written statement before making the sale that the proposed buyer's account is eligible to buy new issues. This eliminates (A), which describes oral verification. Ch 13 - 2a

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31. New FINRA Rule 2790 changes the way firms transact sales of:
(A) Hot issues
(B) Sticky issues
(C) New equity issues
(D) Mutual fund shares

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C) The new rule eliminates the concept of hot issues and applies to all new equity issues. Sticky issues are new issues that do not sell as expected and "stick" in the hands of the underwriters. The new rule affects all new equity issues, whether or not they are "sticky."
According to the new rule, firms must make sure that no account in which restricted persons have a beneficial interest purchase any new issue (not most). The rule also changed the family ties rule, making all listed family members restricted, and the firm may no longer look at the person's previous buying habits. The rule does not apply to mutual fund shares. Ch 13 - 2a

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32. The Johnson Fund is a FINRA member firm that has a written plan allowing registered representatives to lend and borrow from customers. The registered representatives of the Johnson Fund may loan to or borrow money from all of the following customers EXCEPT:
(A) Immediate family members
(B) A bank
(C) Accredited investors
(D) Registered reps employed by the fund

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(C) The fund may not lend money to unrelated customers, as in (C). There is no exception for accredited investors. A representative may loan money to family members (A) or through an institution regularly engaged in the business of making loans, as in (B), and to registered persons of the same firm (D). Ch 13 - 2c

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33. Which of the following securities is a restricted person prohibited from buying under FINRA Rule 2790?
(A) New corporate bond issue
(B) Primary offering of common stock
(C) Common stock trading on an
exchange
(D) Private placements

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(B) FINRA Rule 2790 prohibits restricted persons from buying new equity issues. A primary offering of common stock is a new equity issue, so (B) is correct. A private placement is not necessarily an offering of a new equity issue, so Rule 2790 may not prohibit a person from buying it, and (D) is wrong. (A) is a bond, not equity issue, so Rule 2790 does not prohibit restricted persons from purchasing it. Choice (C) is an exchange trade, which means a "secondary market" trade. Thus, this is not a new issue. Ch 13 - 2a

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34. Which of the following statements concerning the new class of restricted persons under Rule 2790 is correct?

(A) They may buy new issues directly.
(B) They may not buy new issues at all.
(C) They may buy new issues in an account which they own.
(D) They may buy new issues based on past purchasing patterns.

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(B) Restricted persons may not purchase new equity issues directly or through an account of which they are a beneficial owner. Their past purchases are no longer a factor.
Ch 13 - 2a.

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35. An employee of another FINRA member firm wishes to open an account to purchase securities. The firm opening the account must observe all of the following procedures EXCEPT:

(A) The executing member firm must determine if there is any adverse effect on the other firm.
(B) The employer member must be noticed in writing of the account opening.
(C) If requested, duplicate confirmations must be sent to the employer.
(D) FINRA must receive written account summaries monthly.

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(D) To open an account for an employee of another broker-dealer, the executing member firm must determine whether there will be any adverse effect on the other firm from the employee's transactions. Before the account can be opened, the employer must be sent written notice of the opening of the account. In addition, the firm must send copies of trade confirmations and statements to the employer at the employer's written request. There is no requirement to send account summaries to FINRA. Ch 13'- 2d.