Series 24 — General Securities Principal — All Questions
37 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.
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.
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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.
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Under FINRA Rule 3240, how long must a firm keep the written notice and approval of a customer loan?
- a.Until the customer closes the account
- b.Three years after the loan ends✓
- c.At least six years after approval
- d.At least one year after approval
Rule 3240.01 requires members to keep the written notice and approval for at least three years after the arrangement ends or three years after the registered person's association ends.
A representative trades through an account at a bank's brokerage affiliate without telling her firm. What rule does this implicate?
- a.FINRA Rule 3210✓
- b.FINRA Rule 4512
- c.FINRA Rule 3270
- d.FINRA Rule 3280
Rule 3210 requires an associated person to obtain the employer member's prior written consent before opening an account at another member or financial institution in which securities transactions can be effected and in which the person has a beneficial interest.
Which statement about insider trading under SEC Rule 10b5-1 is correct?
- a.The rule applies only to corporate officers
- b.Awareness of the information while trading is enough✓
- c.Liability requires proof the trader used the information
- d.The rule applies only to exchange-listed stocks
Rule 10b5-1 provides that a purchase or sale is on the basis of material nonpublic information if the person was aware of the information when trading, subject to the rule's affirmative defenses.
An issuer buys back 30% of its stock's average daily trading volume in one day. What is the consequence under SEA Rule 10b-18?
- a.The issuer must report to FINRA within 24 hours
- b.The safe harbor is lost for that day✓
- c.The purchases are automatically illegal
- d.Nothing, because issuers may buy their own stock freely
Rule 10b-18's safe harbor requires daily volume of no more than 25% of ADTV, among other conditions. Exceeding it removes the safe harbor but does not by itself make the purchases unlawful.
A member pays a former representative, now retired and unregistered, continuing commissions on his old accounts. When is this permitted under FINRA Rule 2040?
- a.Under a pre-retirement written contract✓
- b.Only if FINRA approves each payment
- c.Only if he refers new accounts
- d.Never, because he is unregistered
Rule 2040 generally bars payments to unregistered persons who would need to register because of them, but its retiring-representative provision permits continuing commissions under a bona fide contract entered into before the representative retired, subject to the rule's conditions.
A member gives a client's employee a $40 umbrella with the firm's logo. Does it count toward the gift limit?
- a.No, if it is of nominal value✓
- b.Yes, unless the employee's firm approves
- c.Yes, every item of value counts
- d.No, but only if given in December
Rule 3220.06 excludes promotional items of nominal value that display the member's logo, such as umbrellas or tote bags, if their value is substantially below the $300 limit.
A member's networking agreement with a bank must allow whom to access the bank premises where the member operates?
- a.Only the bank's auditors
- b.Only the member's customers
- c.Its supervisors, the SEC and FINRA✓
- d.The state banking regulator only
Rule 3160 requires the written networking agreement to permit supervisory personnel of the member and representatives of the SEC and FINRA to access the financial institution's premises where the member conducts broker-dealer services.
Which document governs a deferred variable annuity sale's principal review deadline?
- a.FINRA Rule 2330✓
- b.FINRA Rule 2342
- c.FINRA Rule 2210
- d.SEC Rule 22c-1
FINRA Rule 2330 requires a registered principal to review and approve or reject a recommended purchase or exchange of a deferred variable annuity no later than seven business days after the OSJ receives a complete and correct application package.
A diversified management company holds 12% of one issuer's voting securities within the 75% portion of its assets. What is the problem?
- a.Nothing; only the 5% asset test applies
- b.It exceeds the 25% single-issuer limit
- c.Diversified funds may not hold voting stock
- d.It exceeds the 10% voting-securities limit✓
The Investment Company Act defines a diversified company as one with at least 75% of its assets in cash, government securities, other investment companies and other securities limited, per issuer, to no more than 5% of the fund's total assets and no more than 10% of the issuer's voting securities.
A firm receives a customer's written complaint alleging theft by her representative. Besides the 30-day report, what quarterly obligation applies?
- a.Filing a Form U5 for the representative
- b.Notifying the customer's bank
- c.Sending the complaint to the SEC
- d.Including it in quarterly statistics✓
FINRA Rule 4530(d) requires statistical and summary information about written customer complaints by the 15th day of the month after each quarter, and complaints reported under Rule 4530(a) must also be included in those statistics.
An associated person is indicted for a felony unrelated to securities. What must he do under FINRA Rule 4530?
- a.Nothing, because it is unrelated to securities
- b.Report it himself to the SEC
- c.Tell his firm, which reports it✓
- d.Wait for a conviction before disclosing it
Rule 4530(a) requires reporting when an associated person is indicted for any felony, and Rule 4530(c) requires the associated person to promptly report such events to the member.
A FINRA disciplinary decision is appealed by the respondent to the SEC. Which sanction takes effect anyway while the appeal is pending?
- a.A fine
- b.A bar✓
- c.A suspension
- d.A censure
FINRA Rule 9370 provides that filing an application for SEC review stays the effectiveness of any sanction other than a bar or an expulsion.
A firm stores its email with a third-party cloud provider. Who may sign the undertaking to furnish records to regulators?
- a.The customer whose records are stored
- b.The provider's sales representative
- c.Any associated person
- d.A designated executive officer✓
SEA Rule 17a-4(f) requires undertakings signed by a designated executive officer or a designated third party, with access to the electronic recordkeeping system, to be on file with the firm's designated examining authority.
A broker-dealer that acts as a dealer in securities for its own account, but carries no customer accounts, must keep at least what net capital?
- a.$25,000
- b.$100,000✓
- c.$250,000
- d.$5,000
SEA Rule 15c3-1 requires a dealer to maintain net capital of not less than $100,000, with higher requirements for firms carrying customer accounts.
An introducing firm that neither clears nor carries customer accounts files which part of the FOCUS report, and when?
- a.Part I, within 10 business days after each month
- b.Part II, within 60 days after year-end
- c.No FOCUS report, because it holds no customer assets
- d.Part IIA, within 17 business days after each quarter✓
SEA Rule 17a-5 requires a broker-dealer that neither clears transactions nor carries customer accounts to file Part IIA of Form X-17A-5 within 17 business days after the end of each calendar quarter; monthly Part I filings apply to firms that clear or carry customer accounts.
A customer has $50,000 of fully paid securities at a firm. What must the firm do with them?
- a.Lend them to other firms without consent
- b.Pledge them to finance customer margin debits
- c.Keep them in possession or control✓
- d.Deposit their value in its operating account
SEA Rule 15c3-3 requires a broker-dealer to promptly obtain and maintain physical possession or control of all fully paid and excess margin securities it carries for customers.
A customer buys $20,000 of stock in a cash account on Monday. Under Regulation T, by when must the customer pay?
- a.Within 30 days
- b.On trade date
- c.Within three business days✓
- d.Within five business days
Regulation T defines the payment period as the number of business days in the standard settlement cycle under SEC Rule 15c6-1 plus two business days; with T+1 settlement, that is three business days after trade date.