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.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.

Which information must the account record for a natural-person customer be sent to the customer to verify?

• a.The customer's credit report
• b.The representative's compensation
• c.The firm's net capital
• d.Its account information✓

SEA Rule 17a-3(a)(17) requires the firm to furnish each natural-person customer a copy of the account record — including items such as investment objectives — within 30 days of opening and at least every 36 months, and after changes.

A firm's AML program must designate an individual responsible for day-to-day operations. To whom must that person be identified?

• a.The firm's clearing bank
• b.The state securities regulator
• c.FINRA✓
• d.The SEC's Division of Enforcement

FINRA Rule 3310(d) requires each member to designate and identify to FINRA the individual or individuals responsible for implementing and monitoring the day-to-day operations and internal controls of its AML program.

Which customer detail is part of risk-based customer due diligence under FINRA Rule 3310?

• a.The customer's employer's net worth
• b.The customer's credit card limits
• c.The relationship's nature and purpose✓
• d.The customer's political affiliation

Rule 3310(f) requires risk-based procedures for ongoing customer due diligence, including understanding the nature and purpose of customer relationships to develop a customer risk profile and conducting ongoing monitoring.

A customer's wire of $2,500 to a foreign account is the firm's only concern. Must the firm file a SAR?

• a.Yes, every foreign wire requires a SAR
• b.No, the SAR threshold is $5,000✓
• c.No, SARs apply only to cash
• d.Yes, if the customer is new

31 CFR 1023.320 requires broker-dealers to report suspicious transactions that involve or aggregate funds of at least $5,000; firms may still report voluntarily below that amount.

Under the BSA recordkeeping rules, a transmittal of funds requires records at what amount?

• a.$1,000 or more
• b.$5,000 or more
• c.$3,000 or more✓
• d.$10,000 or more

31 CFR 1010.410 applies funds-transfer recordkeeping requirements to transmittals of funds of $3,000 or more.

Which is a red flag under an identity theft program required by Regulation S-ID?

• a.A customer who prefers email statements
• b.A customer who calls to ask about fees
• c.A request for new account access right after an address change✓
• d.A customer who holds only index funds

Regulation S-ID requires a written Identity Theft Prevention Program to detect, prevent and mitigate identity theft. The SEC's guidelines list as a red flag a request for a new or additional means of accessing an account shortly after a change-of-address notice, along with identification documents that appear altered or forged.

A representative leaves and a customer asks to move her account with him. Her account owes the firm $5,000 on a margin loan. What does FINRA Rule 2140 say?

• a.The lien takes it outside Rule 2140's protection✓
• b.The customer may not transfer until the representative is registered
• c.The firm must waive the debt and transfer the account
• d.The firm may seek a court order to stop any transfer

Rule 2140 prohibits interfering with a customer's transfer request tied to a representative's change of employment where the account is not subject to a lien for monies owed or another bona fide claim; an account owing the firm is outside that protection.

What does a Rule 2165 temporary hold permit a firm to do?

• a.Freeze an account permanently
• b.Seize a customer's assets for the firm
• c.Pause a disbursement while it investigates✓
• d.Sell a customer's securities without consent

FINRA Rule 2165 permits a member to place a temporary hold on a disbursement of funds or securities, or a transaction, from the account of a Specified Adult when it reasonably believes financial exploitation is occurring, subject to notice and time limits.

A firm posts a blog article promoting its managed account program. Who must approve it and when?

• a.No one, because blogs are correspondence
• b.A qualified principal, before use✓
• c.FINRA before it is posted
• d.Any registered representative after it is posted

FINRA Rule 2210 requires an appropriately qualified registered principal to approve each retail communication before the earlier of its use or filing with FINRA; a blog available to the public is a retail communication.

Which communication with the public must be filed with FINRA at least 10 business days before first use?

• a.An email to 15 retail clients about market conditions
• b.A newspaper ad promoting the firm's general services by a 10-year member
• c.An institutional presentation about bond funds
• d.A fund retail communication with a non-standardized performance ranking✓

Rule 2210(c)(2) requires pre-filing at least 10 business days before first use for, among others, investment company retail communications that include rankings or comparisons not generally published or created by the fund or firm, and for security futures communications.

What must a member do with a customer's do-not-call request received during a telemarketing call?

• a.Honor it only if the person is on the national registry
• b.Record it on the firm's list at once✓
• c.Record it only if the person is not a customer
• d.Honor it only if made in writing

FINRA Rule 3230 requires a member that receives a do-not-call request to record it and place the person's name and number on its do-not-call list at the time the request is made, and to honor it within 30 days.

Which obligation is part of Regulation Best Interest's care obligation?

• a.Delivering Form CRS within 30 days of the trade
• b.Recommending the lowest-cost product in every case
• c.A basis tied to the customer's profile✓
• d.A guarantee that the recommendation will be profitable

Reg BI's care obligation requires reasonable diligence, care and skill to understand the risks, rewards and costs of a recommendation and to have a reasonable basis to believe it is in the best interest of the particular retail customer based on the customer's investment profile.

Under Reg BI, what must a firm's policies do about material limitations on the products it offers, such as a proprietary-only shelf?

• a.Obtain FINRA approval of the product list
• b.Eliminate the limitations
• c.Nothing, if the products are registered
• d.Disclose them and prevent resulting harm✓

Reg BI's conflict of interest obligation requires firms to identify and disclose material limitations on the securities that may be recommended and any associated conflicts, and to prevent those limitations from causing recommendations that put the firm's interest ahead of the customer's.

A representative churned an institutional account, which is not a Reg BI retail customer. Which obligation applies?

• a.Regulation Best Interest's care obligation
• b.No obligation, because the customer is institutional
• c.FINRA Rule 2124 on net transactions
• d.FINRA quantitative suitability under Rule 2111✓

FINRA Rule 2111's quantitative suitability obligation requires a reasonable basis that a series of recommended transactions is not excessive and unsuitable when taken together; it covers customers outside Reg BI's retail definition.

A customer says, "Sell my 300 shares of ABC today, whenever you think the price is best." Is written discretionary authority required?

• a.Yes, any discretion requires written authority
• b.No, this is time-and-price discretion✓
• c.Yes, unless a principal approves the order
• d.No, but the order must be executed within an hour

FINRA Rule 3260 does not apply to discretion only as to the time or price of executing an order for a definite amount of a specified security, and that discretion lasts only until the end of the business day unless the customer signs and dates a written contrary indication.

A customer confirmation for an equity trade must disclose the time of the transaction or what alternative?

• a.That the time will be furnished on written request✓
• b.That the time is confidential
• c.Nothing about time
• d.The time at which the order was received only

SEA Rule 10b-10 requires the confirmation to show the date and time of the transaction, or that the time will be furnished upon written request, along with the security, price, quantity and capacity.

A firm wants to hold a customer's mail for five months while she recovers from surgery at a relative's home. What is required?

• a.Written instructions with a valid reason✓
• b.Nothing more than an oral request
• c.A court order
• d.FINRA approval

FINRA Rule 3150 permits holding mail on written instructions stating the period; a request longer than three consecutive months must include an acceptable reason such as safety or security, and convenience is not acceptable.

Which statement about a day-trading risk disclosure under FINRA Rules 2130 and 2270 is correct?

• a.It is required only for institutional customers
• b.Every firm must give it to every customer each year
• c.It replaces the margin disclosure statement
• d.It is given before a promoting firm opens the account✓

FINRA Rule 2130 requires a member promoting a day-trading strategy to furnish the Rule 2270 risk disclosure statement to a non-institutional customer before opening the account, and to approve the account or obtain a written agreement.

A firm sends each margin customer a year-end letter with the bolded margin disclosures. Which rule does this satisfy?

• a.FINRA Rule 2267's BrokerCheck notice
• b.Rule 2264's annual requirement✓
• c.FINRA Rule 2266's SIPC notice
• d.SEA Rule 10b-10's confirmation requirement

Rule 2264 requires members, at least once each calendar year, to deliver the margin disclosure statement or its bolded disclosures to all non-institutional customers with margin accounts.