Series 24 — General Securities Principal — All Questions
26 questions
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.
A company's CEO gives a newspaper interview about the company's growth plans 10 days before filing an IPO registration statement. What is the concern?
- a.It may be an illegal pre-filing offer✓
- b.None, if the interview does not mention a price
- c.None, because interviews are never offers
- d.It is permitted if FINRA approves the article
Rule 163A's safe harbor covers only issuer communications made more than 30 days before filing that do not reference the offering. A communication 10 days before filing falls outside it and may be treated as an offer in the quiet period.
A tombstone notice is published during the waiting period. What may it include?
- a.A recommendation to buy the shares
- b.Projections of the issuer's earnings
- c.Performance of the underwriter's past IPOs
- d.The price range and underwriters✓
Rule 134 permits a limited communication after a registration statement is filed, including items such as the issuer's name, the security, the price or price range, the names of the underwriters and where a prospectus may be obtained.
Which person faces Section 11 liability for a material misstatement in an effective registration statement?
- a.An underwriter of the offering✓
- b.A customer who bought in the aftermarket
- c.A research analyst at a non-participating firm
- d.The issuer's landlord
Section 11 makes the issuer, its signing officers and directors, experts for their certified parts, and every underwriter liable for material misstatements or omissions in an effective registration statement, with a due-diligence defense for all but the issuer.
Which of the following is a qualified institutional buyer under Rule 144A?
- a.An insurer investing $150 million in unaffiliated securities✓
- b.An individual with $5 million in securities
- c.A small business with $10 million in revenue
- d.A bank with $50 million in securities
Rule 144A defines qualified institutional buyers to include specified institutions that in the aggregate own and invest on a discretionary basis at least $100 million in securities of unaffiliated issuers; individuals are not QIBs.
An issuer's offering is structured as all-or-none. What must the offering materials make possible if the condition is not met?
- a.Payment of the underwriter's fee from escrow
- b.Conversion to a best-efforts offering
- c.Prompt refund of the purchasers' money✓
- d.Delivery of partial shares to investors
SEA Rule 10b-9 prohibits representing an offering as all-or-none unless the consideration paid will be promptly refunded if all of the securities are not sold at a specified price within a specified time.
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Which FINRA rule requires a member to file most public offerings for review of underwriting compensation?
- a.Rule 5190
- b.Rule 5110✓
- c.Rule 5130
- d.Rule 5150
FINRA Rule 5110, the corporate financing rule, requires filing of public offerings in which members participate, generally within three business days after the SEC filing, and governs underwriting terms and compensation.
Under FINRA Rule 5121, what disclosure is always required when a member has a conflict of interest in a public offering it underwrites?
- a.Disclosure of every customer's allocation
- b.Prominent disclosure of the conflict's nature✓
- c.Disclosure of the underwriter's research ratings
- d.Disclosure of the member's net capital
Rule 5121 requires prominent disclosure of the nature of the conflict of interest in the prospectus or offering document, plus either an exception or the participation of a qualified independent underwriter.
Under FINRA Rule 5123, what must a member do if it sold a private placement using no written offering document?
- a.Prepare a document after the fact
- b.Notify FINRA that none was used✓
- c.Obtain FINRA approval of the sale
- d.Nothing, since there is nothing to file
Rule 5123 requires a member selling a private placement to file the offering document and promoting retail communications within 15 calendar days of first sale, or to notify FINRA that no such documents were used.
Which account is eligible to buy a new issue under FINRA Rule 5130's de minimis exception?
- a.A broker-dealer's proprietary account
- b.A fund whose restricted-person owners hold 15% in total
- c.An account owned by a portfolio manager for his own benefit
- d.A fund whose restricted-person owners hold 7% in total✓
Rule 5130 exempts an account in which the beneficial interests of restricted persons do not exceed 10% in the aggregate; broker-dealers' own accounts and portfolio managers are restricted persons.
How long must a member keep the records it relies on to determine an account's eligibility for new issues?
- a.At least one year after the representation
- b.At least six years after account opening
- c.Until the account is closed
- d.Three years after the last sale✓
FINRA Rule 5130 requires members to keep all records and information about an account's eligibility to purchase new issues for at least three years following the member's last sale of a new issue to that account.
A firm allocates IPO shares to the CFO of a company it expects to hire it for a bond deal next month. What rule is violated?
- a.FINRA Rule 5130's restricted-person rule
- b.FINRA Rule 5141's fixed price rule
- c.FINRA Rule 5131's spinning prohibition✓
- d.No rule, because the bond deal is not yet signed
Rule 5131 prohibits allocating new-issue shares to an executive officer or director of a company if the person making the allocation knows or has reason to know that the member expects to be retained for investment banking services within the next 3 months.
Which activity by distribution participants does Regulation M Rule 101 restrict during the restricted period?
- a.Bidding for the security✓
- b.Selling the covered security to customers
- c.Filing the registration statement
- d.Publishing a tombstone
Rule 101 prohibits distribution participants and affiliated purchasers from bidding for, purchasing or attempting to induce others to purchase a covered security during the applicable restricted period, subject to exceptions.
Which records must a firm keep of stabilizing activity?
- a.SEA Rule 17a-2 records✓
- b.A FINRA Form 211
- c.Only the final prospectus
- d.No records are required
SEA Rule 17a-2 sets recordkeeping requirements relating to stabilizing activities, syndicate covering transactions and penalty bids in connection with offerings.
A shareholder acquires 6% of a company's stock and plans no involvement in management. Which schedule may it be eligible to file instead of Schedule 13D?
- a.Schedule 13G✓
- b.Form 13F
- c.Form 4
- d.Schedule 13E-3
Rule 13d-1 permits certain eligible persons, including passive investors meeting the rule's conditions, to file the short-form Schedule 13G in lieu of Schedule 13D, on the deadlines the rule sets.
What is the minimum period a tender offer must remain open?
- a.10 business days
- b.30 calendar days
- c.20 business days✓
- d.60 calendar days
SEA Rule 14e-1 prohibits holding a tender offer open for less than twenty business days from the date it is first published or sent to security holders.
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Under the Bankruptcy Code's Chapter 7 distribution, which claims are paid first from the estate?
- a.Claims of common stockholders
- b.General unsecured claims
- c.Late-filed unsecured claims
- d.Section 507 priority claims✓
Under 11 U.S.C. 726, property of the estate is distributed first to claims of the kind and in the order specified in Section 507, then to allowed general unsecured claims, with later categories after that.
A research analyst's compensation must be reviewed at least how often, and by whom?
- a.Quarterly, by the head of investment banking
- b.Annually, by a committee✓
- c.Monthly, by the analyst's clients
- d.Every three years, by FINRA
FINRA Rule 2241 requires the compensation of a research analyst primarily responsible for a research report to be reviewed and approved at least annually by a committee, and prohibits investment banking control over analyst compensation.
Which communication is excluded from the definition of research report under FINRA Rule 2241?
- a.A report with a price target on a listed stock
- b.A communication distributed to fewer than 15 persons✓
- c.A company analysis posted on the firm's website
- d.An analysis of an industry sent to all clients
Rule 2241's definition of research report excludes, among other things, any communication distributed to fewer than 15 persons; broadly distributed company or industry analyses with enough information to base an investment decision are research reports.
Which disclosure must a research analyst make in a public appearance?
- a.Its compensation from the company✓
- b.The analyst's home address
- c.The analyst's personal net worth
- d.The firm's quarterly profits
FINRA Rule 2241(d) requires analysts to disclose in public appearances, among other things, whether the analyst received any compensation from the subject company in the previous 12 months and any household financial interest in its securities.
Under Section 28(e), a money manager may pay more than the lowest commission for what?
- a.Marketing materials for the manager's funds
- b.Brokerage and research services✓
- c.Gifts to the manager's employees
- d.Personal travel for the portfolio manager
Exchange Act Section 28(e) provides a safe harbor for a person exercising investment discretion who pays a commission determined in good faith to be reasonable in relation to the value of the brokerage and research services provided.
Which issuer disclosure triggers Regulation FD's public disclosure requirement?
- a.Information given to the issuer's outside counsel
- b.A Form 8-K filing
- c.A press release sent to a wire service
- d.Material nonpublic information given selectively to analysts✓
Regulation FD requires public disclosure when an issuer, or a person acting for it, discloses material nonpublic information to market professionals or certain security holders; broad public release is the cure, and disclosures to persons owing a duty of confidence such as counsel are excluded.