Series 24 — General Securities Principal — All Questions

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

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

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

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

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.FINRA maintenance margin rules
• b.The individual broker-dealer only
• c.The SEC net capital rule
• d.Regulation T of the Federal Reserve Board✓

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

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.