Series 24 — General Securities Principal — All Questions

Under FINRA Rule 3110, a broker-dealer's supervisory system must, at a minimum, include:

• a.A guarantee that no rule violations will ever occur
• b.Approval of the firm's business plan by the SEC
• c.Written procedures and qualified principals to carry them out✓
• d.Daily approval of every trade by the firm's CEO

Rule 3110 requires a supervisory system reasonably designed to achieve compliance, including written supervisory procedures (WSPs) and designated, appropriately registered principals. A system cannot guarantee zero violations, and there is no requirement for CEO approval of every trade or SEC approval of the business plan.

The SEC's net capital rule (Rule 15c3-1) is primarily designed to ensure that a broker-dealer:

• a.Holds all customer securities in physical certificate form
• b.Earns a minimum level of annual profit
• c.Can wind down without harming customers✓
• d.Charges customers uniform commission rates

The net capital rule requires a firm to keep minimum net liquid assets so that, if it fails, it can meet obligations and liquidate in an orderly way without loss to customers. It does not mandate profits, set commission rates, or require physical certificates.

The SEC customer protection rule (Rule 15c3-3) requires a firm to safeguard customer assets primarily through:

• a.The reserve formula and possession or control requirements✓
• b.Purchasing insurance from a private carrier for each account
• c.Reporting each customer's tax basis to the IRS
• d.Holding all customer funds in the firm's operating account

Rule 15c3-3 protects customers by requiring firms to maintain a special reserve bank account under the reserve formula and to keep fully paid and excess-margin securities in the firm's possession or control. Commingling customer funds with firm operating funds would violate the rule.

Under FINRA Rule 2210, a retail communication that promotes a specific investment product must generally be:

• a.Sent only to institutional investors
• b.Approved by a principal before it is used or filed✓
• c.Filed with the SEC before first use in all cases
• d.Kept confidential and never retained

Retail communications generally require principal approval before first use (or filing). They must be fair, balanced, and not misleading, and firms must keep records of them. Institutional communications and certain correspondence have different, lighter requirements.

Under FINRA Rule 3310, a firm's anti-money-laundering program must be:

• a.Approved by FINRA staff before adoption
• b.Approved in writing by a member of senior management✓
• c.Limited to accounts of foreign nationals
• d.Reviewed only when a customer is suspected of a crime

Rule 3310 requires the AML program to be approved in writing by senior management and to include a designated AML officer, a customer identification program, ongoing monitoring, independent testing, and SAR filing. It applies to the firm's business generally, not only to foreign accounts.

SEC Rules 17a-3 and 17a-4 require that certain electronic records be preserved:

• a.In WORM format or with a complete audit trail✓
• b.Only at the firm's clearing bank
• c.For no more than 90 days
• d.In any editable format the firm prefers

SEA Rule 17a-4(f) lets a firm keep required electronic records either with a complete time-stamped audit trail that can re-create modified or deleted records, or exclusively in a non-rewriteable, non-erasable (WORM) format, for the required retention period. Records cannot be kept for only 90 days, only at a bank, or in freely editable form.

A principal reviewing the firm's compliance program discovers the WSPs have not been updated after a major rule change. The most appropriate action is to:

• a.Update the procedures and document the change✓
• b.Delete the outdated procedures without replacement
• c.Refer the matter to the SEC for approval before acting
• d.Wait until the next annual cycle to make any changes

Supervisory procedures must be kept current so the system remains reasonably designed to achieve compliance. When rules change, the principal should promptly amend the WSPs and document the update rather than waiting or leaving a gap.

When making a recommendation to a retail customer, an associated person must comply with Regulation Best Interest, which requires the firm to:

• a.Guarantee the recommended security will not lose value
• b.Recommend the product that generates the highest commission
• c.Obtain written SEC approval of the recommendation
• d.Act in the customer's best interest when recommending✓

Regulation Best Interest requires broker-dealers to act in the retail customer's best interest at the time of a recommendation and not to put firm or representative interests ahead of the customer's, satisfying disclosure, care, conflict, and compliance obligations. It does not guarantee performance.

FINRA Rule 2090, the Know Your Customer rule, requires a firm to use reasonable diligence to:

• a.Know each customer's essential facts✓
• b.Match every customer to the firm's most profitable products
• c.Guarantee the customer a minimum rate of return
• d.Predict the future performance of the customer's investments

The Know Your Customer rule requires firms to know and retain the essential facts about each customer needed to service the account and to understand the authority of anyone acting on the customer's behalf. It is about diligence, not performance guarantees.

A principal notices an account with frequent in-and-out trading that appears designed to generate commissions rather than benefit the customer. This is a red flag for:

• a.Regulation T compliance
• b.Freeriding in a cash account
• c.Churning (excessive trading)✓
• d.Best execution

Excessive trading intended to generate commissions rather than serve the customer's objectives is churning, an unsuitable and prohibited practice. A principal must supervise for it. Best execution and Regulation T address different issues.

The initial margin requirement for a purchase of marginable securities is set by:

• a.The individual broker-dealer only
• b.FINRA maintenance margin rules
• c.The Fed's Regulation T✓
• d.The SEC net capital rule

Regulation T, issued by the Federal Reserve Board, governs the initial extension of credit and sets the initial margin requirement. FINRA sets minimum maintenance margin, and firms may impose stricter house requirements.

Most disputes between a customer and a member firm are resolved through:

• a.Binding mediation by the Federal Reserve
• b.FINRA arbitration✓
• c.A hearing before the SEC commissioners
• d.A jury trial in federal district court

Customer agreements typically require that disputes be resolved through FINRA's arbitration forum, with mediation available. This provides a faster, industry-specific process rather than court litigation.

Under FINRA Rule 5310, a firm handling a customer order must use reasonable diligence to:

• a.Seek the most favorable price under prevailing market conditions✓
• b.Match the order against the firm's proprietary position first
• c.Execute the order only on the firm's own trading desk
• d.Delay the order until the end of the trading day

The best execution rule requires firms to use reasonable diligence to obtain the most favorable terms reasonably available for a customer order. Firms must conduct regular and rigorous reviews of execution quality and may not simply route to their own desk if better prices exist elsewhere.

A market maker in an equity security is obligated to:

• a.Publish firm two-sided quotes and honor them✓
• b.Buy shares only when the price is rising
• c.Report trades once per week
• d.Guarantee customers a profit on every trade

A market maker holds itself out as continuously willing to buy and sell and must display firm two-sided (bid and ask) quotations. This provides liquidity and continuous pricing. Trades must be reported promptly, generally within a short time after execution.

The Manning rule generally prohibits a firm from:

• a.Charging any markup on a principal trade
• b.Trading ahead of a held customer limit order✓
• c.Displaying a customer limit order to the public
• d.Making a market in more than one security

The Manning rule protects customer limit orders: a firm may not trade for its own account at a price that would satisfy the customer's limit order without also executing that customer order at the same or a better price. This prevents the firm from profiting at the customer's expense.

Entering matched orders to create the false appearance of active trading in a security is:

• a.Manipulation prohibited by the Exchange Act✓
• b.Required by Regulation M during a distribution
• c.A permitted market-making technique
• d.Allowed if disclosed to customers afterward

Wash trades and matched orders that fabricate the appearance of trading activity are manipulative and prohibited under the Securities Exchange Act and Rule 10b-5. They deceive other market participants and cannot be cured by later disclosure.

During the cooling-off period of a registered public offering, which document may be distributed to prospective investors?

• a.A confirmation of sale
• b.A final prospectus with the effective price
• c.A preliminary prospectus (red herring)✓
• d.A research report recommending the issuer

During the cooling-off period only a preliminary prospectus, or red herring, may be circulated to gauge interest; it omits the final price and states that the registration is not yet effective. No sales may be finalized until the registration is effective.

In a firm-commitment underwriting, the underwriting syndicate:

• a.Guarantees the price of the stock after it begins trading
• b.Is prohibited from earning any compensation
• c.Buys the whole issue and bears resale risk✓
• d.Acts only as the issuer's agent with no financial risk

In a firm-commitment deal, the syndicate purchases the whole issue from the issuer and assumes the risk of reselling it to the public. In a best-efforts arrangement, underwriters act only as agents and bear no purchase risk.

FINRA Rule 5130 generally restricts the sale of new equity IPO shares to:

• a.All individual retail customers
• b.Restricted persons, such as industry insiders✓
• c.Institutional investors only
• d.Foreign investors

Rule 5130 prohibits selling shares of a new equity IPO to restricted persons, including broker-dealers and their associated persons and certain immediate family members, so that industry insiders cannot exploit access to hot new issues at the expense of the public.

Under FINRA Rule 2241, to protect research analyst objectivity, investment banking personnel are prohibited from:

• a.Communicating with the issuer at any time
• b.Attending any meeting where research is discussed
• c.Supervising analysts or controlling their pay✓
• d.Reading any published research report

Rule 2241 separates research from investment banking so that banking cannot supervise analysts or tie their pay to specific deals, and analysts cannot promise favorable coverage to win business. This preserves the independence and integrity of research.

Regulation M is primarily intended to:

• a.Require registration of all private placements
• b.Prevent price support during a distribution✓
• c.Limit the compensation paid to research analysts
• d.Set the initial margin requirement for new issues

Regulation M restricts issuers, underwriters, and other distribution participants from bidding for or purchasing the security being distributed, preventing them from propping up its market price during the offering. It is an anti-manipulation rule for distributions.

When a registered representative's employment with a member firm ends, the firm must file a Form U5:

• a.Within 30 days, stating the reason for termination truthfully✓
• b.Only if the representative requests it
• c.Within one year of the departure
• d.Within 5 business days and only if the person was terminated for cause

The firm must file Form U5 within 30 days of an associated person's termination, giving a truthful reason for the departure, and must amend it if new information later comes to light. Form U4 is the corresponding registration filing that must be kept current.

Nothing in a member's FINRA contact information changed during the year. What does FINRA Rule 4517 still require after year-end?

• a.No action until something changes
• b.An audited contact report by March 31
• c.A new Form BD within 30 days
• d.A review within 17 business days✓

FINRA Rule 4517 requires each member to review and, if necessary, update its required contact information within 17 business days after the end of each calendar year, even if nothing changed. Changes during the year must be reported no later than 30 days after they occur; Form BD and audited reports are separate obligations.

A branch manager with 10 years as a Series 7 representative is named acting principal on March 1 but has not passed the Series 24. What is the last day she may act as a principal without passing?

• a.August 31, six months later
• b.March 31, 30 days later
• c.There is no deadline while she studies
• d.About June 29✓

FINRA Rule 1210.04 permits a qualified registered representative to function as a principal for 120 calendar days before passing the principal exam. Counting 120 calendar days from March 1 lands on about June 29.

A candidate fails the Series 24 for the third time in a row within 18 months. How long must she wait to test again?

• a.30 calendar days
• b.180 calendar days✓
• c.One year
• d.60 calendar days

FINRA Rule 1210.06 imposes a 30-day wait after a failed attempt, rising to 180 calendar days after three or more failures in succession within a two-year period.

A principal who left the industry wants to keep her Series 24 qualification without retesting if she returns within a few years. What program allows this?

• a.Heightened supervision under Rule 3110
• b.A Rule 19h-1 filing with the SEC
• c.The Maintaining Qualifications Program under Rule 1240✓
• d.The Firm Element training plan

FINRA Rule 1240(c) lets a person who terminates a registration category keep the qualification for up to five years by completing continuing education, if the person was registered for at least a year and was not statutorily disqualified.

Which activity would require a person associated with a member to be registered rather than exempt?

• a.Answering general mail
• b.Filing account documents
• c.Taking customer orders✓
• d.Scheduling client meetings

FINRA Rule 1230 exempts persons whose functions are solely clerical or ministerial, and its supplementary material states that accepting customer orders is not a clerical or ministerial function, so that person must register.

What must each OSJ keep on site regarding the firm's written supervisory procedures?

• a.A copy signed by every representative
• b.Nothing, if the procedures are on the firm's website
• c.Only a summary approved by FINRA
• d.A copy of the procedures, or the relevant portions✓

FINRA Rule 3110(b)(7) requires a copy of the written supervisory procedures, or the relevant portions, to be kept at each OSJ and at each location where supervisory activities are conducted, and requires prompt amendment when rules or the supervisory system change.

A member conducts its annual compliance meeting as an on-demand webcast. What must it be able to show?

• a.FINRA pre-approved the webcast
• b.Each person passed a written test
• c.Full attendance and a chance to ask questions✓
• d.The meeting was recorded on video

Rule 3110.04 permits compliance meetings by webcast or other electronic means if the member ensures each registered person attends the entire meeting and can ask questions and receive answers.

A firm uses a risk-based system to review transactions instead of looking at every trade. Is this permitted?

• a.Yes, if reasonably designed✓
• b.Yes, but only for institutional accounts
• c.No, unless FINRA grants an exemption
• d.No, every trade must be reviewed by a principal

Rule 3110.05 allows a reasonably designed risk-based review system that lets the member focus on the areas posing the greatest numbers and risks of violation, instead of detailed review of each transaction.

Which location is excluded from the definition of a branch office?

• a.A site used 20 business days a year✓
• b.A location that supervises two non-branch locations
• c.An office where representatives meet clients three days a week
• d.An office that approves retail communications

Rule 3110(f)(2) excludes a location, other than a primary residence, used for securities business fewer than 30 business days in a calendar year if the rule's conditions are met. A location that supervises non-branch locations is a branch office, and final approval of retail communications makes an office an OSJ.

A firm sets a non-branch location's inspection cycle at five years. What does Rule 3110 require?

• a.Documenting why the longer cycle fits✓
• b.Inspecting it annually
• c.Nothing, because non-branch locations need no inspection
• d.Getting FINRA approval of the schedule

Rule 3110.13 creates a general presumption that non-branch locations are inspected at least every three years; a member that sets a longer cycle must document the factors that make it appropriate.

A one-office firm's CEO inspects the office himself. What must the firm do?

• a.Hire an outside inspector
• b.Document the reasons for the exception✓
• c.Close the office until an independent inspection occurs
• d.Nothing, because small firms are exempt from inspections

Rule 3110(c)(3) bars an associated person assigned to the location from conducting its inspection, but a member that determines compliance is not possible, such as a firm with only one office, must document the factors and how the inspection otherwise complies.

Which FINRA rule requires a firm to test and verify that its supervisory procedures are reasonably designed?

• a.Rule 3120✓
• b.Rule 4530
• c.Rule 4370
• d.Rule 3130

Rule 3120 requires designated principals to establish supervisory control policies that test and verify the member's supervisory procedures and to report at least annually to senior management. Rule 3130 is the CEO certification and chief compliance officer designation.

Who must a member designate under FINRA Rule 3130?

• a.An independent director
• b.A FINRA liaison in each branch
• c.One or more chief compliance officers✓
• d.An outside auditor

Rule 3130 requires each member to designate and identify one or more principals as chief compliance officer and to have its CEO certify annually that it has processes to establish, maintain, review, test and modify compliance and supervisory procedures.

What must a firm's business continuity plan disclosure to customers include?

• a.The location of backup servers
• b.The names of the firm's emergency contacts
• c.The firm's net capital
• d.How it will respond to a disruption✓

Rule 4370(e) requires members to disclose to customers how their business continuity plans address the possibility of a significant business disruption and how they plan to respond, in writing at account opening, on the website and by mail on request.

A registered representative plans to teach a paid evening class on personal budgeting at a community college. What must he do?

• a.Register the class as a private securities transaction
• b.Obtain FINRA's approval
• c.Nothing, because it is not securities business
• d.Give his firm prior written notice✓

FINRA Rule 3270 requires prior written notice before a registered person is compensated for any business activity outside the relationship with the member, whether or not it involves securities; passive investments are exempt.

A firm disapproves a representative's request to sell interests in a real estate partnership for a commission. What follows?

• a.He may participate without compensation
• b.He may not participate in any manner✓
• c.He may appeal to FINRA for approval
• d.He may participate if he tells investors the firm disapproved

Rule 3280(c) provides that if the member disapproves a person's participation in a private securities transaction for compensation, the person shall not participate in it in any manner, directly or indirectly.

A representative guarantees a customer that he will make up any losses on a new stock recommendation. What rule is violated?

• a.FINRA Rule 3240
• b.FINRA Rule 2040
• c.FINRA Rule 3160
• d.FINRA Rule 2150✓

Rule 2150(b) prohibits members and associated persons from guaranteeing a customer against loss in any securities transaction or account.

Which borrowing arrangement between a registered person and a customer does not need to be one of FINRA Rule 3240's permitted types?

• a.None; every such loan must fit a permitted type✓
• b.A loan from a customer who is a longtime client
• c.A loan repaid within 30 days
• d.A loan documented with a promissory note

Rule 3240 prohibits borrowing from or lending to customers unless the firm's procedures permit it and the arrangement is one of the listed types, such as immediate family, a lending institution in its business, a fellow registered person of the member, or a bona fide personal or business relationship outside the brokerage relationship.