Series 24 — General Securities Principal — All Questions

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.

A firm internalizes retail orders and reviews execution quality order by order. Must it also do a quarterly regular and rigorous review?

• a.Yes, both are always required
• b.Yes, and it must file the review with FINRA
• c.No, internalizing firms are exempt from best execution
• d.No; it applies only without order-by-order review✓

FINRA Rule 5310's supplementary material requires regular and rigorous reviews, at least quarterly, for members that route or internalize orders and do not conduct an order-by-order review.

Which is a condition of the Manning riskless principal exception?

• a.The customer order was received before the offsetting trade✓
• b.The customer paid a commission of at least 1%
• c.The trade was for more than 10,000 shares
• d.The trade was executed on an exchange

FINRA Rule 5320.03's riskless principal exception requires contemporaneous reporting of the trade as riskless principal and written procedures, which at a minimum require that the customer order was received before the offsetting principal transaction.

Information about a pending block becomes publicly available when?

• a.When the customer signs the order ticket
• b.When the trader tells his supervisor
• c.When a last sale system disseminates it✓
• d.At the end of the trading day

FINRA Rule 5270.02 treats information about a block transaction as publicly available when it has been disseminated via a last sale reporting system or a similar system of an exchange, or the high-speed communications line of one of those systems.

Under FINRA Rule 5220, when may a member make an offer to buy a security at a stated price?

• a.Whenever it has a customer order at that price
• b.Only during regular trading hours
• c.Only if the offer is below the national best bid
• d.Only when it is prepared to buy at that price✓

Rule 5220 prohibits offering to buy or sell at a stated price unless the member is prepared to buy or sell at that price and under the conditions stated at the time of the offer.

A market maker asks another to widen his quote. The other refuses, and the first threatens to stop trading with him. What rule addresses this?

• a.FINRA Rule 5290
• b.FINRA Rule 5240✓
• c.FINRA Rule 5320
• d.FINRA Rule 5250

Rule 5240 prohibits directing or requesting another member to alter a price and prohibits coordination of quotations; its anti-intimidation provisions also address threats and harassment against members that refuse.

Which order handling practice does FINRA Rule 5290 target?

• a.Combining orders for the same security
• b.Splitting orders to earn more✓
• c.Executing orders as riskless principal
• d.Routing orders to exchanges

Rule 5290 prohibits conduct that splits an order into multiple smaller orders, or an execution into smaller executions for reporting, primarily to maximize amounts received by the member or associated person.

Under Regulation NMS Rule 612, what is the minimum increment for an order priced at $0.75 per share?

• a.$0.005
• b.$0.01
• c.$0.001
• d.$0.0001✓

Rule 612 prohibits displaying, ranking or accepting orders priced under $1.00 in increments smaller than $0.0001. The $0.01 increment applies at $1.00 or more; the amended rule's $0.005 tier for tight-spread stocks is exempted from compliance until the first business day of November 2027.

Which Regulation NMS report shows statistics on how market centers execute orders?

• a.The quarterly Rule 606 report
• b.The annual Rule 611 report
• c.The FOCUS report
• d.The monthly Rule 605 report✓

Regulation NMS Rule 605 requires market centers and brokers to make available standardized monthly reports of statistics on order executions. Rule 606 addresses order routing.

A trading center is subject to the order protection rule. What must its procedures address?

• a.Preventing trade-throughs of protected quotations✓
• b.Guaranteeing price improvement on every order
• c.Publishing all orders on its website
• d.Routing all orders to the primary listing market

Regulation NMS Rule 611 requires trading centers to establish, maintain and enforce written policies and procedures reasonably designed to prevent trade-throughs of protected quotations in NMS stocks, subject to exceptions.

A customer's short sale order arrives but the firm cannot locate shares to borrow. What must it do?

• a.Mark it long and execute it
• b.Execute it and locate shares by settlement
• c.Execute it only at an uptick
• d.Reject the short sale order✓

Regulation SHO Rule 203(b) forbids a broker-dealer from accepting a short sale order unless it has borrowed or arranged to borrow the security, or has reasonable grounds to believe it can be borrowed for timely delivery.

When is the Rule 201 short sale price test triggered?

• a.When a market-wide circuit breaker occurs
• b.When a stock falls 5% in one hour
• c.A 10% drop from the prior close✓
• d.When a stock trades below $5

Regulation SHO Rule 201 is triggered when the price of a covered security decreases by 10% or more from its prior day's closing price, and then applies for the rest of that day and the following day.

Which control is part of the pre-trade risk controls required by SEA Rule 15c3-5?

• a.Reporting all trades to the SEC daily
• b.Obtaining customer consent for each order
• c.Reviewing trades at the end of each month
• d.Blocking orders that exceed price or size limits✓

Rule 15c3-5 requires risk management controls that prevent erroneous orders by rejecting orders that exceed appropriate price or size parameters, as well as orders exceeding credit or capital thresholds.

Which FINRA rule requires member trading centers to keep procedures for complying with the Limit Up-Limit Down plan?

• a.Rule 6121
• b.Rule 6190✓
• c.Rule 5260
• d.Rule 6432

FINRA Rule 6190 requires a member that is a trading center in an NMS stock to establish, maintain and enforce written policies and procedures reasonably designed to comply with the Regulation NMS Plan to Address Extraordinary Market Volatility, known as Limit Up-Limit Down. Rule 6121 addresses market-wide circuit breakers.

Under SEA Rule 15c2-11, the issuer information a broker-dealer relies on to quote an OTC stock must generally be what?

• a.Audited within the past 30 days
• b.Confidential to the broker-dealer
• c.Current and publicly available✓
• d.Filed with FINRA only

Rule 15c2-11 generally requires the specified issuer information on which a broker-dealer relies to publish a quotation to be current and publicly available, with limited exceptions.

Which requirement applies before a firm sells a penny stock to a new, non-exempt customer?

• a.FINRA approval of the customer
• b.An agreement and a two-day wait✓
• c.A 30-day cooling-off period
• d.A $25,000 minimum account balance

SEA Rule 15g-9 requires, among other things, account approval, a written statement and agreement, and a wait of at least two business days after sending the written statement before the first penny stock sale.

A customer buys a bond from a firm on Thursday in a regular-way corporate bond trade. Absent a different agreement, when does it settle?

• a.Tuesday
• b.Monday
• c.Friday✓
• d.Thursday

SEA Rule 15c6-1 prohibits settlement later than the first business day after the contract date for most securities unless otherwise expressly agreed, so a Thursday trade settles Friday.

A POD order is accepted from an institutional customer. What must the member have before accepting it?

• a.A margin agreement
• b.FINRA approval of the order
• c.The customer's trusted contact
• d.The customer's agent and account details✓

FINRA Rule 11860 requires a member accepting a POD or COD order to have received, before or when accepting it, the name and address of the customer's agent and the customer's account number with that agent, among other requirements.

A member executes an over-the-counter trade in an OTC equity security, one that is not an NMS stock. Where must it report the trade?

• a.To TRACE, FINRA's bond reporting system
• b.To FINRA's OTC Reporting Facility✓
• c.To the issuer's transfer agent
• d.Nowhere, because only exchange trades are reported

FINRA Rule 6622 requires OTC Reporting Facility participants to report transactions in OTC equity securities to the OTC Reporting Facility no later than 10 seconds after execution. TRACE is for eligible debt securities, and over-the-counter equity trades are reported, not exempt.

A member makes a riskless principal trade in a Treasury security. Which facility receives the report?

• a.The OTC Reporting Facility
• b.The FINRA/Nasdaq TRF
• c.The Alternative Display Facility
• d.TRACE✓

FINRA Rule 6730 governs reporting of TRACE-eligible securities, which include Treasury securities under its paragraph on Treasuries, while the TRF and OTC Reporting Facility handle equity trades.