FINRA Series 6 — All Questions

A firm will file a retail communication with FINRA's Advertising Regulation Department on March 3 and will first use it on April 14. By when must a registered principal approve it?

• a.Within 10 business days after March 3, once the Department has returned its comments
• b.At any time before the Department finishes its review of the March 3 filing
• c.Before the March 3 filing, because approval comes before the earlier of use or filing✓
• d.Before April 14, the first-use date, since first use is the event that triggers approval

An appropriately qualified registered principal must approve a retail communication before the earlier of its use or its filing with the Department, and a principal must approve a communication before the member files it. Filing on March 3 comes before use on April 14, so approval is due first. Waiting until first use ignores the filing date. Approval after the Department's comments reverses the order, since the principal approves what is filed. Approval at any point during FINRA's review also comes too late.FINRA Rule 2210(b)(1)(A), (b)(1)(F)

A broker-dealer's FINRA membership became effective seven months ago. It wants to publish a retail communication on its public website. When must it file the piece with FINRA?

• a.Not at all, because the piece promotes no registered investment company or security future
• b.At least 10 business days before first use, since it is in its first year of membership✓
• c.Only if FINRA requests it in a spot check of the firm's communications in the coming year
• d.Within 10 business days after first use, the period for communications about registered funds

For one year from the date FINRA membership became effective, a new member must file any retail communication used in public media, including a generally accessible website, at least 10 business days before first use. The post-use 10-business-day period belongs to fund-family and certain product communications. A spot check is an extra tool and does not replace the new-member filing duty. The absence of fund or security-futures content matters for other filing rules but does not excuse a first-year member.FINRA Rule 2210(c)(1)(A)

Last quarter a firm filed a mutual fund retail communication. This quarter it reuses the layout and changes only the performance figures, the holdings table, and a paragraph recapping market events during the period. Must it be filed again?

• a.No, because fund communications are never filed once the fund's prospectus is on file with the SEC
• b.Yes, at least 10 business days before first use, because the market recap is new narrative text
• c.No, because updated statistics and non-predictive narrative are the only changes to a previously filed template✓
• d.Yes, within 10 business days of first use, because every new performance figure is a new communication

Retail communications based on a template that was previously filed are excluded from the filing requirements when the changes are limited to updated statistical or other non-narrative information and non-predictive narrative describing market events in the period or factual portfolio changes. New performance figures and a factual market recap fit that exclusion. Treating each new figure as a new filing ignores the template exclusion. The pre-use timing applies only to the narrower categories in the rule. A fund prospectus on file does not remove the filing duty for other fund communications.FINRA Rule 2210(c)(7)(B)

A firm mails 300 unaltered copies of a magazine article praising a fund family it sells. An unaffiliated publisher wrote it independently, and neither the firm nor the funds commissioned it. What is the filing result?

• a.It must be filed at least 10 business days before use because it praises a specific fund
• b.It must be filed within 10 business days of first use because it promotes a fund family
• c.It must be filed only if the article quotes performance figures for the funds
• d.Filing is excluded because the piece is an independently prepared reprint✓

A reprint or excerpt of an article issued by a publisher is excluded from filing when the publisher is not an affiliate of the member or of an issuer or underwriter of a security mentioned, nobody commissioned the article, and the member has not materially altered it. The fund-family and specific-fund filing rules therefore do not reach it. Quoted performance figures do not create a filing duty for a qualifying reprint either. If the firm paid for the article or edited its content, the exclusion would be lost.FINRA Rule 2210(c)(7)(I)

A seminar handout shows how $10,000 grows at assumed annual rates of 4%, 6% and 8% to explain compounding. It names no security and states that the rates are not predictions. Under Rule 2210, the handout is:

• a.Permitted only if the firm files it with FINRA at least 10 business days before first use
• b.Permitted only if the highest assumed rate matches the long-run average return of the stock market
• c.Permitted as a hypothetical illustration of a mathematical principle that predicts nothing about an investment✓
• d.Prohibited, because every assumed rate of return is treated as a projection of how some investment will perform

Rule 2210 bars predictions or projections of performance but does not prohibit a hypothetical illustration of mathematical principles, provided it does not predict or project the performance of an investment or strategy. Compounding at assumed rates with no product named fits that exception. Calling every assumed rate a projection ignores the exception. The rule sets no requirement that assumed rates track a market average. No pre-use filing is triggered by this kind of illustration alone.FINRA Rule 2210(d)(1)(F)(i)

A print ad headlines a fund's 9% yield in 36-point type. A footnote in 6-point type says the yield includes a return of capital and may not be sustainable. What is wrong with the ad?

• a.The footnote is acceptable because it sits on the same page as the headline claim
• b.Nothing needs to change once a principal has approved the footnote wording as accurate and complete
• c.Footnotes are banned in all retail communications, so the qualifying text has to be deleted from the ad
• d.A footnote cannot limit the headline when that placement inhibits the investor's understanding✓

Information may be placed in a legend or footnote only if the placement would not inhibit an investor's understanding of the communication. A tiny footnote that undercuts a large headline yield does exactly that. Footnotes are not banned outright. Being on the same page does not cure the contrast in prominence. Principal approval is required for retail communications but does not make a misleading layout acceptable.FINRA Rule 2210(d)(1)(C)

A bond fund flyer shows a 5.4% 30-day yield in bold type and never mentions that the fund's share price falls when interest rates rise. What must the firm do before using it?

• a.Remove the yield from the flyer, since a yield may never be emphasized in bold type
• b.Leave it as written, since an accurate yield figure satisfies the content standards by itself
• c.File it with FINRA at least 10 business days before use, which cures the omission
• d.Add the interest-rate risk, as omitting a material qualification is misleading✓

Communications must be fair and balanced, may not omit a material fact or qualification that makes them misleading, and must treat risks and benefits in balance, including the risk of fluctuating prices. A flyer that touts yield and hides interest-rate risk fails that test even if the yield is accurate. A yield can be shown, subject to the performance rules, so deleting it is not the remedy. Filing is a separate duty and does not repair content.FINRA Rule 2210(d)(1)(A), (d)(1)(D)

A flyer compares a bond mutual fund's 4.8% yield with a bank certificate of deposit's 4.1% rate and says nothing else about either. What must the comparison disclose?

• a.The reader's likely tax bracket, since comparisons must be shown after tax
• b.All material differences, including safety, insurance, liquidity and fluctuation of principal✓
• c.Only the difference in yield, since yield is the sole figure being compared
• d.Only the fund's sales charge, since costs are the one required difference

Any comparison of investments in a retail communication must disclose all material differences between them, as applicable including objectives, costs, liquidity, safety, guarantees or insurance, fluctuation of principal or return, and tax features. A fund's price can fall and it is not FDIC-insured, while a CD is insured and has a fixed return. Limiting the disclosure to yield or to sales charges leaves out the other material differences. The rule does not require an after-tax comparison.FINRA Rule 2210(d)(2)

A firm plans to send the same dense, jargon-heavy brochure on a covered-call strategy to retirees who have never traded options. What must the firm consider under Rule 2210?

• a.Whether the readers have signed an options agreement, which would reclassify the brochure as correspondence
• b.The nature of the audience, supplying details and explanations suited to the readers who will receive it✓
• c.Nothing beyond accuracy, because the content standards apply identically to every reader
• d.The readers' ages alone, since the rule sets a separate content standard for seniors

Members must consider the nature of the audience to which a communication is directed and provide details and explanations appropriate to it. A brochure written for experienced traders does not meet that standard for first-time options readers. Accuracy is necessary but the audience duty is separate. Classification as correspondence depends on the number of retail recipients, not on options paperwork. The rule contains no separate age-based standard.FINRA Rule 2210(d)(1)(E)

Which retail communication is not required to prominently disclose the name of the member?

• a.A brochure that also names the firm's insurance affiliate
• b.A blind advertisement used to recruit personnel✓
• c.A web page promoting a mutual fund the firm underwrites
• d.A radio spot announcing the firm's investment seminar

Retail communications and correspondence must prominently disclose the member's name, and if they name any non-member or individual, they must describe that person's relationship with the member. The only carve-out is for so-called blind advertisements used to recruit personnel. Fund promotion, seminar announcements and brochures naming an affiliate all must show the member.FINRA Rule 2210(d)(3)

A firm pays a customer $150 to appear in a video praising the firm's investment advice. Besides saying the testimonial may not be representative and is no guarantee of future success, what must the video disclose?

• a.That the customer's returns for the period were higher than the firm's average client
• b.That the testimonial is paid, because more than $100 in value was given for it✓
• c.Nothing more, because payment disclosure is required only when the amount paid exceeds $500
• d.That the customer holds a financial interest in the firm's own securities

A testimonial about a member's investment advice or performance must prominently disclose that it may not be representative of other customers' experience, that it is no guarantee of future success, and, if more than $100 in value was paid for it, that it is a paid testimonial. The $150 payment crosses the $100 line. The $500 figure is wrong. The rule does not require comparing the customer's returns with the firm's average, and it does not require disclosing a financial interest in the firm.FINRA Rule 2210(d)(6)(B)

A flyer says, 'Last year we told clients to buy Zeta Corp at $20; it now trades at $31.' What would make a reference to a past profitable recommendation permissible?

• a.Adding a line that past performance does not guarantee future results, which cures the claim
• b.Setting out or offering a list of all similar recommendations from the prior year, with the legend✓
• c.Principal approval of the flyer with a file copy of the supporting price data
• d.Listing the three best recommendations of the past year beside the same cautionary legend

A retail communication may not refer to past specific recommendations that were or would have been profitable, unless it sets out or offers to furnish a list of all recommendations of the same type, kind, grade or classification made within the preceding period of at least one year, with name, date, nature, prices, and the legend that it should not be assumed future recommendations will be profitable. A generic disclaimer, a cherry-picked list, or internal approval alone does not meet that condition.FINRA Rule 2210(d)(7)(C)

At an unscripted public seminar, a representative hands out slides and recommends a stock in which he holds a non-nominal position. What does Rule 2210 require?

• a.Only disclosure of his position, since a seminar is exempt from the reasonable-basis standard that applies elsewhere
• b.Principal approval of his spoken remarks before he delivers them, as with any other retail communication
• c.Nothing, because unscripted remarks fall outside the content standards of this rule entirely
• d.A reasonable basis, disclosure of his financial interest, and treating the slides as communications✓

A public appearance must follow the general content standards, a recommendation in one needs a reasonable basis, and the associated person must disclose a non-nominal financial interest in the recommended issuer and other material conflicts. Scripts, slides and handouts are communications judged by their audience, content and use. Unscripted remarks are not exempt, and the rule requires written supervisory procedures for appearances rather than principal pre-approval of spoken words.FINRA Rule 2210(f)

A variable annuity brochure says its investment options 'are the mutual funds you already know, just held inside an insurance contract.' What does Rule 2211 say about this presentation?

• a.It is improper, because the piece must not imply that the product or its underlying account is a mutual fund✓
• b.It is proper, because the brochure also uses the product's proprietary name in its opening paragraph
• c.It is proper, because the subaccounts invest in mutual funds, which makes the product a mutual fund in substance
• d.It is improper only because annuity brochures may not mention mutual funds in any context at all

Communications about variable annuities and variable life must clearly describe the product as such, and considering the significant differences between mutual funds and variable products, may not represent or imply that the product or its underlying account is a mutual fund. Investing through funds does not turn the contract into one. A proprietary name may be added to the product description but does not permit the mutual fund comparison. The rule does not ban all mention of mutual funds.FINRA Rule 2211(a)(1)

A variable annuity ad says, 'Your money is always available: withdraw whenever you need it.' What must the ad do under Rule 2211?

• a.Limit the claim to owners past age 59 and a half, because they face no tax penalty or surrender charge
• b.Replace the claim with a statement that withdrawals are guaranteed by the insurance company's assets
• c.Nothing, because annuity contract values are as liquid as a savings account, so the claim is accurate
• d.Balance it with clear language on surrender charges, tax penalties and possible loss of principal✓

Because variable annuities and variable life often carry substantial charges or tax penalties for early withdrawal, there must be no representation or implication that they are short-term, liquid investments, and any presentation about access to values must be balanced by clear language on the negative impact of early redemptions such as contingent deferred sales loads and tax penalties and the possibility of receiving less than the amount invested. An insurer's guarantee does not make separate account withdrawals risk-free, and an age limit does not remove the surrender charge.FINRA Rule 2211(a)(2)

A variable life insurance ad says, 'Our insurer holds an A++ financial-strength rating, so every dollar in your policy's investment accounts is protected.' What is the problem?

• a.The problem is cured if the ad names the rating agency and the date of the rating it quotes
• b.The rating may be mentioned only in communications that are sent to institutional investors
• c.The insurer's guarantees and ratings may not be presented as covering the separate account's value or return✓
• d.There is no problem, because the insurer's rating stands behind every value credited in the policy

An insurer's guarantees, such as a minimum death benefit or a fixed account, depend on its claims-paying ability and must not be overemphasized. There must be no representation or implication that a guarantee applies to the investment return or principal value of the separate account, or that the insurer's financial rating applies to the separate account. Naming the rating agency does not change that. The rule contains no institutional-only limit on citing a rating.FINRA Rule 2211(a)(3)

A firm's variable life illustration shows assumed gross returns of 4%, 8% and 14%. What does Rule 2211 say about it?

• a.It exceeds the 12% gross ceiling and also leaves out the required 0% gross return✓
• b.It is acceptable, since the highest assumed rate may be any figure the firm calls reasonable
• c.It lacks the required 0% rate only, because gross rates may be as high as 15%
• d.It breaks the 12% gross ceiling only, because a 0% rate is optional in an illustration

A variable life illustration may use any combination of assumed gross returns up to and including 12%, and one of the returns must be 0%, to show how a lack of growth affects values and to underline the hypothetical nature of the illustration. Personalized illustrations may not use a rate above 12% either. The 14% assumption exceeds the ceiling, and no 0% case is shown. The ceiling is not a matter of the firm's judgment, and 15% is not a limit in the rule.FINRA Rule 2211(b)(5)

An insurer adds a new subaccount that copies the strategy of a well-known retail mutual fund run by the same manager. May its brochure show that mutual fund's past performance to promote the new subaccount?

• a.Yes, provided the brochure also shows the fees of both the mutual fund and the subaccount
• b.Yes, provided the mutual fund's returns are shown after deducting the insurance contract charges
• c.No, because an existing fund's record may not promote a similar but new option such as a clone fund✓
• d.Yes, because the same manager and strategy make it the same investment for performance purposes

A fund's performance that predates its inclusion in a variable product may be shown only if the existing fund itself became the option without significant changes. Communications may not include the performance of an existing fund to promote investment in a similar but new option, such as a clone or model fund. Showing fees or deducting contract charges does not change that, and using the same manager and strategy does not make two different vehicles one.FINRA Rule 2211(b)(1)

A variable life hypothetical illustration shows cash values using only the insurer's current charges, which are below the maximums stated in the policy. What does Rule 2211 require?

• a.Every assumed rate must use the maximum guaranteed charges; current charges may be added✓
• b.Charges need to be shown only at the 0% rate, since the other rates are purely hypothetical
• c.Charges are left out entirely, so the illustration shows only the separate account's gross return
• d.Current charges are enough, as long as the illustration labels them clearly as current charges

The illustrations must reflect the maximum guaranteed mortality and expense charges for each assumed rate of return, and current charges may be illustrated in addition. An illustration built only on lower current charges overstates values. The charges are not limited to the 0% case, and omitting charges would mislead about the policy's actual cash value and death benefit.FINRA Rule 2211(b)(5)(A)(iii)

A customer who bought a deferred variable annuity last year on a firm's recommendation now moves $40,000 from a bond subaccount to an equity subaccount of the same contract. Does Rule 2330 apply to the move?

• a.Yes, because every subaccount allocation needs principal review within seven business days of the move
• b.Yes, because the move counts as an exchange of one annuity for another contract
• c.Yes, but only when the reallocation exceeds 10% of the contract value at the time of the move
• d.No, because the rule does not cover reallocations among subaccounts after the initial purchase✓

Rule 2330 applies to recommended purchases and exchanges of deferred variable annuities and to recommended initial subaccount allocations. It does not apply to reallocations among subaccounts made after the initial purchase or exchange, or to later funds paid in. The seven-business-day principal review is tied to the application package for a purchase or exchange. No percentage threshold exists in the rule, and moving money within one contract is not an exchange of one annuity for another.FINRA Rule 2330(a)(1)

A firm recommends a deferred variable annuity to the trustees of a 403(b) plan that will offer it to all employees. It makes no recommendation to any individual employee. Does Rule 2330 apply?

• a.No, because plan transactions are exempt in every circumstance, even advice to a single participant
• b.Yes, but only for employees who reach age 59 and a half while the plan holds the annuity
• c.Yes, because the plan holds the annuity as a retirement product regardless of who receives the advice
• d.No, unless the firm makes recommendations about the annuity to an individual plan participant✓

Rule 2330 does not apply to deferred variable annuity transactions made in connection with a tax-qualified, employer-sponsored plan such as a qualified plan or one meeting Internal Revenue Code Sections 403(b), 457(b) or 457(f), unless the member or associated person makes recommendations to an individual plan participant. In that case the rule applies as to that participant. Advice to the plan trustees alone does not trigger it. The exemption is therefore not absolute, and age 59 and a half is not the test.FINRA Rule 2330(a)(1)

A customer's check payable to an insurer arrives before a principal has approved the recommended deferred variable annuity. May the broker-dealer forward it to the insurer?

• a.Yes, if the customer is told and the insurer agrees in writing to segregate the funds until approval or rejection✓
• b.Yes, with no further steps required, since the check is already made payable to the insurance company
• c.No, because customer funds may never leave the broker-dealer's possession before the principal approves it
• d.Yes, if the insurer promises to refund the money within 10 days should the principal reject the sale

Rule 2330 does not prohibit forwarding a check payable to the insurer before principal approval if the member discloses the proposed transfer to the customer and has a written agreement with the insurer under which it segregates the customers' funds, in an account equivalent to a special account for the exclusive benefit of customers, until it is told of approval or rejection. A flat ban is not in the rule, and neither is a bare refund promise. Simply forwarding the check without those conditions does not satisfy the supplementary material.FINRA Rule 2330, Supplementary Material .03

A broker-dealer's data show one representative handles far more deferred variable annuity exchanges than the rest of the sales force. What does Rule 2330 require the firm to have in place?

• a.Surveillance that flags exchange rates for review, plus corrective measures for inappropriate exchanges✓
• b.A shorter principal review of one business day for every exchange that representative proposes
• c.An automatic ban on exchanges by that representative until the next annual compliance review
• d.A quarterly report of each representative's exchange rate filed with FINRA's Advertising Regulation Department

Beyond its written supervisory procedures, a member must implement surveillance procedures to identify associated persons whose rates of deferred variable annuity exchanges raise questions about inappropriate exchanges, and must have policies and procedures reasonably designed to implement corrective measures for inappropriate exchanges and the conduct of the persons involved. The rule does not mandate an automatic ban, a regular filing with FINRA, or a different review period.FINRA Rule 2330(d)

A customer asks to exchange one deferred variable annuity for another. The firm's records show no exchange at the firm. What must the representative do about exchanges at other broker-dealers within the preceding 36 months?

• a.Nothing, because only exchanges completed at the recommending firm count toward the factor
• b.Make reasonable efforts to find out, such as asking the customer, and document the answer✓
• c.Ask only if the customer is older than 59 and a half, when the early-withdrawal tax penalty ends
• d.Obtain written confirmation from each other broker-dealer where the customer has held an account

The member must determine whether the customer had another deferred variable annuity exchange within the preceding 36 months at the member itself and must make reasonable efforts to learn whether one occurred at any other broker-dealer. An inquiry to the customer counts as a reasonable effort, and the member must document in writing both the nature of the inquiry and the customer's response. Ignoring other firms or demanding confirmation from every firm goes beyond or short of what the supplementary material says.FINRA Rule 2330, Supplementary Material .05

A fund company's ad says its fund is 'ranked first among funds with more than $5 billion in net assets,' using a category an independent ranking firm publishes. May the ad use that category?

• a.No, because no category may be based on a fund's asset size, even one a ranking entity publishes✓
• b.No, but only because the fund company, and not the ranking firm, picked the asset-size cutoff used
• c.Yes, if the asset threshold is printed prominently beside the rank so readers can judge it
• d.Yes, because the category is published by a ranking entity that is independent of the fund company

A retail communication must not use any category or subcategory based on the asset size of an investment company or investment company family, whether or not a ranking entity created it. Independence of the publisher does not make an asset-size category acceptable. Disclosing the threshold does not cure the problem, because the prohibition is on the category itself and not on a missing disclosure. The prohibition also does not turn on who picked the cutoff, so a category the ranking firm built is barred just as one the fund company built would be.FINRA Rule 2212(e)(3)

A growth fund in existence for 12 years is advertised as ranked 3rd of 1,204 funds on three-year total return by an independent ranking entity. No other ranking appears. What does Rule 2212 require?

• a.Nothing more, because a three-year ranking is longer than the one-year minimum the rule sets
• b.A one-year ranking only, because one year is the shortest ranking period that the rule allows
• c.The fund's own ten-year average annual return, which can stand in for the missing rankings
• d.One-, five- and ten-year total return rankings from the same ranking entity, category and period✓

A total return ranking must be accompanied by total return rankings for one year, one and five years, or one, five and ten years, depending on how long the investment company has existed, all from the same ranking entity, in the same category and on the same time basis. A fund in existence 12 years needs all three. Exceeding the one-year minimum does not remove the duty to show the longer periods. Showing only a one-year ranking would satisfy the rule for a fund less than five years old, not for this one. The fund's own return figure is not a ranking from the ranking entity and cannot replace the required rankings.FINRA Rule 2212(d)(2)(B)

A headline over a fund ad says 'The Best Performing Intermediate Bond Fund.' The ranking entity places the fund second of 310 in that category. May the ad run?

• a.Yes, because second place of 310 funds puts the fund in the top one percent of its category
• b.No, because rankings may appear in the body of an ad but are never allowed in a headline
• c.No, because a headline may call a fund the best only if it is actually ranked first✓
• d.Yes, if the body of the ad discloses the fund's actual rank and the number of funds ranked

A headline or other prominent statement must not state or imply that a fund is the best performer in a category unless the fund is actually ranked first. Second place does not qualify, however high the percentile. Disclosure of the true rank in the body cannot repair a prominent statement that overstates it, because the rule governs the headline itself. The rule does not bar rankings from headlines altogether; a fund that is ranked first may say so there.FINRA Rule 2212(c)(1)

A bond fund flyer prints an independent rating firm's volatility rating next to the words 'our risk rating.' What is the problem under Rule 2213?

• a.The rating must be dropped, because bond funds may not use volatility ratings in any retail communication
• b.A volatility rating may not be identified or described as a risk rating by the firm that prints it✓
• c.None, because a rating from an independent third party may be labeled any way the firm chooses to
• d.The flyer is acceptable if the label is followed by the rating firm's name and rating date

A retail communication may include a bond mutual fund volatility rating only if, among other conditions, the rating does not identify or describe volatility as a risk rating. Independence of the rating firm does not give the member freedom to relabel the rating. Volatility ratings are not banned; they are allowed when the conditions are met, so dropping the rating is not required. Naming the rating firm and the date are separate disclosures that the rule requires, and they do not cure a mislabeled rating.FINRA Rule 2213(b)(1)

A firm's online retirement-projection tool is used by retail customers. Its printed report explains the methodology and limitations but nothing else. What else must it show under Rule 2214?

• a.The 'IMPORTANT' legend only, because the statement about results varying is optional for every retail tool
• b.A statement that FINRA has reviewed the tool and approved its methodology for retail customers
• c.Nothing more, because describing the methodology and limitations satisfies every disclosure that the rule lists
• d.A statement that results vary with each use and over time, plus the 'IMPORTANT' hypothetical-results legend✓

A tool, its written reports and related retail communications must describe the criteria and methodology, including limitations and key assumptions, explain that results may vary with each use and over time, and display the 'IMPORTANT' legend saying that projections are hypothetical, do not reflect actual results and are not guarantees. A report with only the methodology is missing two items. The rule forbids a member from implying that FINRA endorses or approves a tool, so a statement of FINRA approval would add a violation. Neither of the two missing disclosures is optional.FINRA Rule 2214(c)(2), (c)(4)

A fund-screening tool offered to retail customers searches only funds from the firm's affiliated fund family. How must the firm treat that feature?

• a.Disclose in narrative form that the tool is limited to those funds, with the reason for the limit✓
• b.Disclose it only when the affiliated funds pay the firm revenue sharing on assets invested through the tool
• c.No disclosure is needed, because a tool that customers run on their own is outside the rule's disclosure duty
• d.Disclose it in the account agreement customers sign at opening, which then covers every later tool they use

The disclosure for a tool must say whether the tool searches or favors certain securities and, if so, why. Supplementary Material .06 adds that the disclosure must indicate whether the tool is limited to securities in which the member has a direct or indirect interest, and it must be clear, prominent and in written narrative form. The rule covers tools customers use independently as well as with assistance, so self-service use gives no exemption. An account agreement is not the tool, report or related communication in which the disclosure must appear. Revenue received is one trigger, but a limit to securities in which the member has any interest also requires disclosure, so revenue sharing is not the only case.FINRA Rule 2214(c)(3), Supplementary Material .06

A print ad for a stock fund charts the fund's five-year return in the body of the page. The required performance legend sits in a footnote at the foot of the page. Does the ad comply with Rule 482?

• a.No, because in a print ad the legend must be in the body, close to the performance data, not in a footnote✓
• b.Yes, because the legend appears on the same page as the performance data that it qualifies
• c.Yes, if the footnote is printed in a type size no smaller than the chart that presents the performance
• d.No, because the legend must sit on the first page of the ad ahead of any performance data

In a print advertisement the performance legend must be placed in close proximity to the performance data and in the body of the advertisement, not in a footnote. Matching the type size of the data helps with legibility, but the footnote placement is itself the defect. Appearing on the same page is not enough for the same reason. The rule asks for proximity to the data and does not require the legend to lead the ad or to appear on its first page.Securities Act Rule 482(b)(5)

A bond fund ad shows its 30-day SEC yield of 4.6% in large bold type, with the one-, five- and ten-year average annual total returns beneath it in small type. Which Rule 482 requirement does the ad break?

• a.Yield must be a trailing twelve-month figure instead of a yield computed on the Form N-1A basis
• b.Yield may be quoted only in sales literature, not in an advertisement for an open-end fund
• c.Yield may be set out in no greater prominence than the required total return quotations✓
• d.Total return must be quoted for one year only whenever a yield appears in the same ad

A current yield in an advertisement must be computed by the Form N-1A method, accompanied by the standardized average annual total returns, and set out with no greater prominence than the total return quotations. The bold, larger yield breaks the prominence limit. Open-end funds may quote yield in advertisements when these conditions are met. The accompanying total return covers the one-, five- and ten-year periods, not one year only. The yield method is the standardized Form N-1A computation over a base period, not a trailing twelve-month figure.Securities Act Rule 482(d)(1)

A fund's ad carries every required Rule 482 legend and also includes a tear-off application for new investors. What is the effect of the application?

• a.The ad stays valid, but only for investors who already own shares of the same fund today
• b.None, provided the application is marked as not binding until the registration statement is effective
• c.The ad loses Rule 482 status, because it may not contain or come with an application✓
• d.None, because the legends already tell the investor to read the prospectus before applying

An advertisement that complies with Rule 482 may not contain or be accompanied by an application through which a prospective investor can invest. Once an application is included, the piece cannot rely on the rule. The legends do not change that bar. A non-binding label echoes the Rule 134 mechanism for non-fund offerings but gives no relief here. Existing shareholders are not carved out of the prohibition either.Securities Act Rule 482(c)

A money market fund ad quotes the fund's one-year total return. What must accompany that quotation?

• a.Nothing further, because total return is the only performance measure money market funds use
• b.An effective yield alone, set beneath the total return in a smaller size of print
• c.A quotation of current yield, placed beside the total return in the same size print and type style✓
• d.A tax-equivalent yield at the investor's top bracket, set beside the total return in a box

A money market fund ad that quotes total return must accompany it with the fund's current yield, place the two next to each other in the same size print, and add a statement that the yield more closely reflects current earnings if the two figures differ materially. Money market funds may quote yield, so total return is not their only permitted measure. An effective yield may appear only alongside a current yield of the same base period, so it cannot take the place of the current yield. A tax-equivalent yield is likewise permitted only with a current yield and a stated tax rate.Securities Act Rule 482(e)(2)

A broker-dealer runs a newspaper ad explaining that balanced, income and no-load funds suit different goals and inviting readers to call for information. It names no fund and gives the firm's name and address. How is it treated under Rule 135a?

• a.It is allowed only if the broker-dealer is also the principal underwriter of the funds described
• b.It is a prospectus under Section 2(a)(10) and must satisfy Section 10 first
• c.It is an offer, so it must carry the Rule 482 performance legend and a prospectus source
• d.It is not deemed an offer for Section 5 purposes, so no prospectus has to come with it✓

Generic advertising that names no particular fund, limits itself to explanatory information, types of funds or an invitation to inquire, and shows the sponsor's name and address is not deemed an offer for Section 5. It therefore needs no accompanying prospectus. Because it is not an offer, the Section 10 and Rule 482 content requirements do not apply to it. No underwriter relationship is needed; the sponsor must be a registered broker-dealer or another person who actually offers the type of product described.Securities Act Rule 135a

A sponsor's generic ad invites inquiries, and the sponsor will send prospectuses on eight funds for which it is the principal underwriter. What must the ad state under Rule 135a?

• a.The largest sales load among the eight funds and the date of each prospectus
• b.The name and five-year total return of each one of the eight funds that are offered
• c.The number of funds, eight, and that the sponsor is their principal underwriter✓
• d.Nothing more than the sponsor's name and address, because the ad names no fund at all

When a generic ad solicits inquiries and prospectuses will be sent in response, it must state the number of investment companies and, if applicable, that the sponsor is their principal underwriter or investment adviser. Naming the funds or quoting their returns would take the piece outside the generic safe harbor, because it would then refer to particular securities. Sales loads and prospectus dates are not part of the requirement. The name and address alone are enough only when the ad does not solicit inquiries that lead to prospectuses.Securities Act Rule 135a(b)

A registration statement for a new corporate bond issue has been filed but is not yet effective. What must an underwriter's Rule 134 announcement of the issue include?

• a.Summary financial data for the issuer's last two fiscal years, in the order used by the prospectus
• b.The 'Subject to Completion' legend, printed in red ink along the left margin of the announcement
• c.That the registration statement is not yet effective, so no sale or acceptance may occur, and a prospectus source✓
• d.A statement that the SEC has not approved the securities, which then replaces any other legend

A Rule 134 communication used before effectiveness must state that a registration statement has been filed but has not yet become effective and that the securities may not be sold, nor offers to buy accepted, until it is, and it must give the name and address of a person from whom a written prospectus can be obtained. The red-ink legend belongs to a preliminary prospectus, not to a Rule 134 announcement. Financial data is not among the items the rule permits. The Commission legend is not a substitute for the statements the rule requires.Securities Act Rule 134(b)

Which of these communications cannot rely on Rule 134 to avoid being a prospectus?

• a.An announcement for asset-backed securities issued by a trust with a registration statement on file
• b.An announcement for an open-end mutual fund offering shares at net asset value✓
• c.An announcement for a registered closed-end fund offered in an initial public offering
• d.An announcement for a bond issue by an industrial company with a registration statement on file

Rule 134 does not apply to a communication relating to an investment company registered under the Investment Company Act, other than a registered closed-end company. An open-end mutual fund therefore must use other routes, such as Rule 482 or the summary prospectus rules. A registered closed-end fund is the stated exception and can use Rule 134. Corporate bond issuers and asset-backed issuers are ordinary registrants and are covered; the rule even lists items specific to asset-backed issuers.Securities Act Rule 134(g)

A fund's sales literature shows a rising three-year chart under the caption 'Steady growth you can count on year after year.' Why may this be misleading under Rule 156?

• a.Past results may appear in sales literature only as a table, because a chart cannot show returns accurately
• b.The caption implies that the gains realized in the past will be repeated in the future by the fund✓
• c.Charts of past results are misleading unless they cover at least ten years of the fund's history
• d.The caption would be acceptable only if it also named the benchmark the fund is measured against

Rule 156 treats representations about future performance as potentially misleading, including portrayals of past performance that imply gains realized in the past will be repeated. A caption promising growth you can count on year after year does exactly that. The rule contains no ban on charts and no preference for tables. It sets no ten-year minimum, although advertisements that quote standardized total return use one-, five- and ten-year periods. Naming a benchmark does not remove the implied promise.Securities Act Rule 156(b)(2)

A fund's sales literature quotes an expense ratio of 0.62% net of a fee waiver. The gross ratio before the waiver is 0.95%. What else must the piece include?

• a.Only the 0.62% figure, because the net ratio is what shareholders actually pay while the waiver lasts
• b.The gross 0.95% ratio and the maximum sales load, as prominent as the 0.62%, plus the waiver's end date✓
• c.The 0.95% gross ratio in a footnote, since a net figure may lead if the gross appears somewhere in the piece
• d.The waiver's expected end date alone, because that date replaces the need to show the gross ratio

Sales literature that gives fee or expense figures must include the maximum sales load or other nonrecurring fee and the total annual expenses without any waiver, shown at least as prominently as any other fee figure, and, when it gives net figures, the expected termination date of the waiver. Showing only the net ratio omits the gross ratio and the load. A footnote is less prominent than the lead figure and so fails the standard. The end date is an additional requirement and does not take the place of the gross ratio.Investment Company Act Rule 34b-1(c); Securities Act Rule 482(i)

A trust wants one summary prospectus that covers its Growth Fund and its Income Fund, two separate series. Is that permitted?

• a.Yes, if the cover page names both funds and gives an exchange ticker symbol for each one of the two
• b.Yes, if each fund's Item 2 through Item 8 section begins on its own page of the same combined document
• c.No, because a summary prospectus may describe only one fund, though it may cover several classes✓
• d.Yes, because both series belong to the same trust and are sold under a single registration statement

A summary prospectus may describe only one fund, although it may describe more than one class of that fund. Two series require two summary prospectuses. A shared trust or registration statement does not combine them, naming both on the cover does not change the one-fund limit, and starting each fund's information on a separate page does not either.Securities Act Rule 498(b)(4)

After the last required section, a fund adds a manager biography page and a market commentary essay to its summary prospectus. What is wrong under Rule 498?

• a.The additions are allowed if they come from the fund's SAI and are labeled as supplemental material
• b.A summary prospectus may hold only what Items 2 through 8 of Form N-1A require or permit, in the form's order✓
• c.Nothing, because accurate extra narrative may follow the Item 8 information in a summary prospectus
• d.The additions are allowed if the cover page legend tells investors that the extra pages are optional

A summary prospectus supplies the information required or permitted by Items 2 through 8 of Form N-1A, and only that information, in the order the form requires. A biography page and a commentary essay are outside those items. Accuracy does not bring extra material within the rule. The SAI may be incorporated by reference, which is different from reprinting extra material in the document, and a label or a legend cannot make unauthorized content permitted.Securities Act Rule 498(b)(2)

A city sells general obligation bonds that are exempt from registration under Section 3(a)(2). A salesperson tells buyers the city faces no litigation that could affect debt service, a statement she knows is false. Which provision of the 1933 Act reaches her statement?

• a.None, because securities exempt under Section 3(a)(2) fall wholly outside the 1933 Act
• b.Section 11, because the false statement was made while selling a security that the city issued
• c.Section 17(a), because the Section 3 exemptions do not apply to the antifraud provisions✓
• d.Section 12(a)(2), which gives every purchaser a right of rescission for a misstatement made in an oral sale

Section 17(c) says the Section 3 exemptions do not apply to Section 17, so the antifraud prohibitions of Section 17(a) reach the sale of exempt securities such as municipal bonds. Exemption from registration is not exemption from fraud liability. Section 12(a)(2) excludes securities exempt under Section 3(a)(2), so it gives the buyers no rescission claim here. Section 11 applies only to misstatements in a registration statement, and none was filed for these bonds.Securities Act Sections 3(a)(2), 12(a)(2) and 17(a), (c)

A manufacturer sells notes with a 12-month maturity at issuance and uses the proceeds to buy inventory, a current transaction. Does Section 3(a)(3) exempt the notes from registration?

• a.No, because the exemption covers only paper issued by banks and not paper issued by manufacturers
• b.Yes, because the exemption depends only on the proceeds being used for a current transaction
• c.No, because the exemption covers current-transaction paper with a maturity of nine months or less at issuance✓
• d.Yes, because paper may carry any maturity at issuance if the issuer expects to renew it every nine months

Section 3(a)(3) exempts a note, draft or bill of exchange that arises out of a current transaction or whose proceeds are used for current transactions and that has a maturity at issuance of not more than nine months. The use of proceeds is one test, but the maturity test also has to be met, and 12 months fails it. A renewal is exempt only if its own maturity is likewise limited, so expected renewals do not lengthen the permitted initial term. The exemption is not limited to banks; ordinary businesses can use it.Securities Act Section 3(a)(3)

Which of these securities is exempt from registration under Section 3(a)(4) of the 1933 Act?

• a.Notes of a charitable organization run only for charitable purposes, with no earnings paid to individuals✓
• b.Shares of an educational services corporation whose net earnings are paid to private stockholders as dividends
• c.Notes of a company that leases buildings to churches and spends part of its rent income on scholarships
• d.Bonds of a hospital company that operates for profit but donates a share of its profits to charity

Section 3(a)(4) exempts securities issued by a person organized and operated exclusively for religious, educational, benevolent, fraternal, charitable or reformatory purposes, not for pecuniary profit, where no part of the net earnings benefits any private person. A hospital company that operates for profit does not qualify merely because it gives to charity. Dividends to private stockholders defeat the exemption directly. A landlord that serves churches but exists to earn rent is a business, not an organization operated exclusively for exempt purposes.Securities Act Section 3(a)(4)

A company that has never sold securities under a registration statement completes its first public offering. The shares are not listed or quoted anywhere. The offering became effective and the shares were first offered to the public on March 3. On May 20 a dealer that is not an underwriter sells shares from its own inventory to a customer. Is a prospectus required?

• a.Yes, but only if the customer asks for a copy of the prospectus in writing before the sale
• b.No, because a dealer that is not an underwriter owes no prospectus on sales from its own inventory
• c.Yes, because the sale falls within 90 days of the offering of a first-time registrant✓
• d.No, because the 40-day dealer prospectus period ended on April 12, well before the sale

A dealer's transactions lose the Section 4 exemption during 40 days after the effective date or first bona fide offering, whichever is later, and the period is 90 days if the issuer has not previously sold securities under an earlier effective registration statement. March 3 plus 90 days ends on June 1, so a May 20 sale is inside the period. The 40-day rule, which ends on April 12, applies to issuers that have registered before. A dealer need not be an underwriter to owe a prospectus in this period. The duty to deliver does not depend on a written request by the customer.Securities Act Section 4(a)(3)

Ten days after an offering becomes effective, a dealer that is not an underwriter sells the issuer's shares to a customer. The issuer has filed Exchange Act reports for years and was a reporting company immediately before it filed the registration statement. Must the dealer deliver a prospectus?

• a.No, because Rule 174 excuses delivery when the issuer was a reporting company before filing✓
• b.Yes, because every dealer must deliver a prospectus for 40 days after the effective date of any offering
• c.No, but only because the shares are also listed on a national securities exchange
• d.Yes, because the 25-day period under Rule 174 for listed securities has not yet ended for this sale

Rule 174(b) provides that a dealer need not deliver a prospectus in the Section 4(a)(3) period if the issuer was subject to the Exchange Act reporting requirements immediately before filing the registration statement. The 40-day period is therefore not a universal duty. The 25-day period in Rule 174(d) is for an issuer that was not a reporting company and whose security is listed or quoted, so it does not apply to this issuer. Listing is not the basis for the excusal here.Securities Act Rule 174(b)

Before a company has filed any registration statement, an underwriter's representative phones a retail client to say the company's planned IPO 'will be a winner' and asks whether the client wants shares. What is the status of the call?

• a.It violates Section 5(b), because the client did not first receive a prospectus meeting Section 10
• b.It violates Section 5(c), which prohibits offers to sell before a registration statement is filed✓
• c.It is permitted, because no sale occurred and no money changed hands during the call
• d.It is permitted, because oral offers are allowed at every stage of an offering

Section 5(c) makes it unlawful to offer to sell or buy a security by any means of interstate commerce, including the telephone, unless a registration statement has been filed. The call is an offer made in the pre-filing period. Oral offers become permissible only after filing, during the waiting period. An offer is covered even if no sale or payment takes place. Section 5(b) concerns prospectuses used after a registration statement has been filed, so it is not the provision that applies when nothing has been filed.Securities Act Section 5(c)

A registration statement has been filed but is not yet effective. A customer tells a registered representative she wants 500 shares of the offering and offers a check. What may the representative do?

• a.Note an indication of interest, but take no order or payment before the statement is effective✓
• b.Accept the order and the check, and hold both in escrow until the effective date has arrived
• c.Decline to discuss the offering, because oral offers are barred until the registration statement is effective
• d.Accept the order but not the check, because written orders are binding once a preliminary prospectus is delivered

During the waiting period a representative may make oral offers and may record an indication of interest, but no sale may be made and no offer to buy may be accepted until the registration statement is effective. Rule 134 says the same thing in its required statement: no offer to buy can be accepted and no part of the purchase price can be received until effectiveness. Holding the check in escrow is still receiving it. Delivering a preliminary prospectus does not make an order binding. Oral offers are lawful once the registration statement is filed, so the representative need not refuse to talk about the offering.Securities Act Section 5(a), (c); Rule 134(d)

Purchasers sue under Section 11 over a material misstatement in a registration statement. The issuer argues that it made a reasonable investigation before the statement became effective. How does that argument fare against the issuer?

• a.It fails, because the issuer is liable for a material misstatement whatever investigation it made✓
• b.It succeeds, because every defendant under Section 11 may avoid liability by proving a reasonable investigation
• c.It succeeds if the issuer's independent auditors certified the financial statements that contain the error
• d.It fails only because the issuer's directors signed the registration statement, which removes the defense

Section 11(b) provides defenses, including reasonable investigation, to every person liable except the issuer. The issuer is liable for a material misstatement in the registration statement regardless of its care. Directors, signers, experts and underwriters may prove due diligence, so the defense is not open to all defendants. An auditor's certification gives the auditor an expert defense for its own part but gives the issuer none. The issuer's lack of a defense does not depend on who signed the statement.Securities Act Section 11(a), (b)