NASAA Series 63 — All Questions

An account holds margin securities worth $36,000 against a $30,000 debit balance and no new purchase is pending. Using only the FINRA 25 percent minimum, how large is the maintenance call?

• a.$9,000, since the maintenance requirement itself is called when equity drops below it.
• b.$12,000, since the equity of $6,000 falls $12,000 short of a 50 percent requirement.
• c.$3,000, since the equity of $6,000 falls $3,000 short of the $9,000 maintenance requirement.✓
• d.$6,000, since the call equals the existing equity that remains in the account.

Equity is $36,000 - $30,000 = $6,000. The maintenance requirement is 25 percent of $36,000, or $9,000, so the shortfall is $3,000. The 50 percent figure is the initial requirement for new purchases and does not drive a maintenance call, and a call covers the deficiency rather than the whole requirement or the remaining equity.FINRA Rule 4210(c)(1)

A customer buys 200 shares at $50 on 50 percent margin and later sells at $60. Ignoring interest and commissions, what is the return on her own equity?

• a.Ten percent, since the stock gained $10 against a $100 total cost per round lot.
• b.Twenty percent, since the stock rose by one fifth and borrowing does not change the return.
• c.Eighty percent, since the gain is measured against a 25 percent maintenance equity of $2,500.
• d.Forty percent, since the $2,000 gain is measured against her own $5,000 deposit, not the cost.✓

She paid $10,000 and deposited 50 percent, or $5,000. The gain is 200 x $10 = $2,000, and $2,000 / $5,000 = 40 percent, twice the stock's 20 percent rise because of the leverage. Ignoring leverage gives 20 percent, and using the 25 percent maintenance figure as her deposit overstates the return.12 CFR 220.12(a)

A customer opening a margin account wants to buy $3,000 of margin stock. Regulation T alone would require $1,500. What is the least she must deposit under FINRA Rule 4210?

• a.$3,000, because the account minimum equals the full cost of the first purchase made.
• b.$1,500, because Regulation T is the only initial requirement that applies to the purchase.
• c.$2,000, because the account needs equity of that much, though cash need not exceed cost.✓
• d.$750, because the FINRA maintenance figure of 25 percent applies to the first purchase.

FINRA initial margin is the greater of the Regulation T amount, the maintenance requirement, and equity of at least $2,000, except that cash need not be deposited beyond the cost of the security bought. Here $1,500 is less than $2,000 and the $3,000 cost exceeds it, so $2,000 governs. The 25 percent figure is a maintenance percentage and does not set the initial deposit.FINRA Rule 4210(b)(4)

A margin account holds securities worth $20,000 against an $8,000 debit balance. Using the 50 percent Regulation T requirement, what is the most cash the customer may withdraw?

• a.$8,000, the amount of the debit balance already owed to the firm.
• b.$2,000, the equity above the $10,000 Regulation T requirement for the account.✓
• c.$7,000, the equity remaining above the $5,000 maintenance minimum.
• d.$12,000, the whole equity, because the account stays above maintenance afterward.

Equity is $20,000 - $8,000 = $12,000 and the Regulation T requirement is 50 percent of $20,000, or $10,000. Cash may be withdrawn only to the extent it does not create or increase a margin deficiency, so the margin excess of $2,000 is the limit. The maintenance minimum of $5,000 would leave a deficiency under Regulation T, and neither the full equity nor the debit is the measure.12 CFR 220.4(e)

A customer's securities are worth $20,000 against a $14,000 debit. The firm raises its house maintenance requirement to 35 percent, effective immediately and without advance notice. What follows?

• a.A call for $7,000, because the full house requirement must be deposited as new cash.
• b.No call, because equity of 30 percent already exceeds the 25 percent FINRA minimum.
• c.A call for $1,000, because the firm may set a higher house requirement and apply it right away.✓
• d.No call until the firm has given the customer written notice and a reasonable period to adjust.

Equity is $6,000, or 30 percent of $20,000. FINRA's minimum is 25 percent, but a firm may set higher house requirements, and the margin disclosure statement tells customers the firm may raise them at any time without advance written notice. At 35 percent the requirement is $7,000, so the call is $7,000 - $6,000 = $1,000. A call covers the shortfall, not the entire requirement.FINRA Rule 4210(d)(1); FINRA Rule 2264

A customer tells his representative the firm cannot sell any of his stock until it has called him and the deadline it gave for meeting his margin call has passed. How should the representative respond?

• a.The firm may sell after it sends written notice, which most firms mail the same day.
• b.The firm must wait until the stated deadline passes, but it may then sell with no further notice.
• c.The firm may sell only securities he chooses, since he owns the stock and bears the loss.
• d.The firm may sell his securities without contacting him, even after it has given a deadline.✓

The margin disclosure statement warns that a firm is not required to contact a customer for a margin call to be valid, may sell securities without contacting him, and may do so immediately even after giving a date to meet the call. The customer also has no right to choose which securities are sold, and no written-notice step is required.FINRA Rule 2264

A broker-dealer's customers owe it $8 million in margin debits. The firm wants to pledge customers' securities to secure a $10 million bank loan for its own use. What does SEC Rule 15c2-1 provide?

• a.It may pledge them for up to 125 percent of the customers' aggregate indebtedness.
• b.It may pledge them for any amount, since the rule limits only commingling of securities.
• c.It may not pledge customers' securities for more than customers' aggregate indebtedness to it.✓
• d.It may pledge them for the full $10 million if every customer signed a hypothecation agreement.

The rule treats it as a fraudulent practice to pledge customers' securities for a sum exceeding the aggregate indebtedness of all customers in respect of those securities, here $8 million. Customer consent addresses commingling, not the cap, and the rule contains no percentage cushion above the indebtedness.SEC Rule 15c2-1(a)(3)

Under the current T+1 settlement cycle, a customer's margin purchase on Monday creates a Regulation T margin deficiency. If no holiday falls that week, by what day must the call be satisfied?

• a.Tuesday, because the call must be met by the date the purchase settles.
• b.Wednesday, because the call must be met within two business days of the purchase date.
• c.Thursday, because the payment period is one business day of settlement plus two more.✓
• d.Friday, because the payment period still equals the old two-day settlement plus two.

Regulation T defines the payment period as the number of business days in the standard settlement cycle plus two business days. With T+1 settlement that is three business days, and a margin call must be met within one payment period after the deficiency arises, so Monday's call is due Thursday. Friday reflects the earlier T+2 cycle, and settlement day alone is not the deadline.12 CFR 220.2; 12 CFR 220.4(c)(3)

A customer's purchase creates a Regulation T margin deficiency of $800, and she does not meet the call. What does Regulation T require of the firm?

• a.Liquidate enough securities to eliminate the deficiency, because no minimum amount excuses the call.
• b.No action need be taken, because a deficiency of $1,000 or less may be disregarded.✓
• c.Freeze the account for ninety calendar days, because the call was not met within the period.
• d.Wait fifteen business days and then liquidate, because that is the full period allowed.

When a margin call is not met in time, the creditor must liquidate enough securities to meet it or remove the deficiency, but if the deficiency created or increased is $1,000 or less, no action need be taken. The 90-day freeze applies to cash-account purchases sold before payment, and the 15-business-day period belongs to FINRA's separate mark-to-market rule.12 CFR 220.4(d)

A cash-account customer buys shares on Monday, sells them on Tuesday, and has not paid by the end of the payment period. What follows?

• a.The account is restricted only until the next settlement date, which is a thirty-day limit.
• b.The firm may extend credit, because the sale proceeds cover the cost of the shares sold.
• c.The purchase must be cancelled, but the customer may continue trading on credit afterward.
• d.The purchase must be cancelled or liquidated, and the account is restricted for ninety days.✓

A creditor must promptly cancel or liquidate a transaction not paid for in full within the payment period. Selling a nonexempt security that was not paid for withdraws the privilege of delaying payment for 90 calendar days, which means purchases must be paid in advance. The proceeds do not cure the missed payment, and the restriction is 90 days, not 30.12 CFR 220.8(b)(4) and (c)(1)

A customer asks to buy, in her margin account, an equity security that is not margin eligible, expecting to put up half the cost. What is required?

• a.Half the cost, since any equity bought in a margin account is subject to 50 percent.
• b.Thirty percent of the cost, since the shorter requirement applies to speculative issues.
• c.The full cost, since a security that is not margin eligible has no loan value.✓
• d.Twenty-five percent of the cost, since the maintenance minimum applies on purchase.

Regulation T requires 100 percent of the current market value for a nonmargin, nonexempted equity security, and FINRA's maintenance rule likewise requires 100 percent. The 50 percent initial requirement applies only to margin equity securities, and 25 or 30 percent are maintenance percentages that do not apply to a security that cannot be margined.12 CFR 220.12(e); FINRA Rule 4210(c)(6)

A customer's account has been approved for options trading, but the firm has never given her an options disclosure document. She phones her representative and asks to buy two calls. May he accept the order?

• a.Yes, because approval of the account already shows that the customer understands the risks involved.
• b.No, he may not accept it until the firm has furnished her the current options disclosure document.✓
• c.No, unless a Registered Options Principal first confirms by telephone that she understands the risks.
• d.Yes, provided the firm sends the document within fifteen days after the order is executed.

A member may not accept an order to buy or write an option, or approve the account for options trading, unless the appropriate options disclosure document has been or is furnished to the customer and the account has been approved. The 15-day period in the rule applies to obtaining the account agreement after approval, not to delivering the document, and a principal's phone call does not replace delivery.FINRA Rule 2360(b)(16)(A)

A branch manager who is not a Registered Options Principal approves a new customer's options account in writing. By when must the approval be submitted to a Registered Options Principal for approval or disapproval?

• a.Within ten business days after the manager approves it in writing.✓
• b.By the close of business on the day of her first order.
• c.Within fifteen days, the period for verifying background data.
• d.Within thirty days, when the first statement has been mailed.

When the approving branch manager is not a Registered Options Principal or Limited Principal - General Securities Sales Supervisor, approval or disapproval must be submitted to one of those principals within ten business days. The 15-day period belongs to verifying background information and obtaining the account agreement, and no rule ties this step to the first order or the first statement.FINRA Rule 2360(b)(16)(B)

A natural person's account is approved for options trading on March 3. Her background and financial information is not part of her account agreement. By when must the firm send it to her for verification?

• a.By April 2, thirty days after approval, when the first statement is sent out.
• b.By March 3, before the account is approved, since verification must come first.
• c.By March 18, which is fifteen days after the account was approved.✓
• d.By March 13, ten days after approval, once the diligence review is done.

For a new options customer who is a natural person, the background and financial information on which the account was approved must be sent to her for verification within 15 days after approval, here March 18, unless the information is in the account agreement. Unless she advises otherwise, the information is deemed verified. The firm does not wait for a monthly statement or verify before approval.FINRA Rule 2360(b)(16)(C)

A customer's account is approved for options trading on November 10. By when must the firm obtain from him a written agreement that he is aware of and bound by FINRA and Options Clearing Corporation rules?

• a.By December 10, within thirty days after the account was approved for trading.
• b.By November 10, since he must sign it as a condition of the approval itself.
• c.By November 25, fifteen days after the account was approved for options trading by the firm.✓
• d.By November 17, within seven days after the account was approved for trading.

The firm must obtain the written account agreement within 15 days after the account is approved for options trading. In it, the customer agrees to be bound by the applicable FINRA and OCC rules, acknowledges receipt of the disclosure document, and agrees not to violate position and exercise limits. A 30-day or 7-day period is not what the rule states, and the agreement is not a condition of approval.FINRA Rule 2360(b)(16)(D)

A natural-person customer applying for options trading declines to disclose her net worth. What does the options account rule require of the firm?

• a.The refusal must be noted on her records at opening and weighed with other information.✓
• b.The firm may approve buying options only, once a principal signs the refusal form.
• c.The firm must enter an estimate based on her address and occupation, marking it verified.
• d.The firm must refuse options approval of any kind, since net worth is a required item.

A refusal to provide any of the required background information must be noted on the customer's records when the account is opened, and the information that was provided is considered together with other available information in deciding whether and to what extent to approve the account. The rule does not make approval impossible, call for invented estimates, or limit her to buying options.FINRA Rule 2360(b)(16)(B)(iv)

A firm that lets customers write uncovered short options adopts procedures for approving those accounts. Who must give written approval of an account engaged in uncovered writing?

• a.The customer's own representative, once the customer has signed the agreement.
• b.The financial and operations principal, since the exposure affects net capital.
• c.The branch manager, if he has supervised the customer's account for over a year.
• d.A Registered Options Principal, who must approve the account in writing before any such trade.✓

A member transacting in uncovered short options must have written procedures that include specific criteria for judging suitability and written approval of such accounts by a Registered Options Principal. A branch manager's tenure, the representative's own approval, and the financial principal's concern with capital do not satisfy the requirement.FINRA Rule 2360(b)(16)(E)

A customer buys one XYZ 50 call at a premium of 3.20 with the stock at 49. What are her maximum loss and her breakeven price at expiration?

• a.An unlimited loss, and a breakeven of $53.20 (strike plus premium).
• b.A loss of $320, the premium paid, and a breakeven of $53.20.✓
• c.A loss of $320, and a breakeven of $46.80 (strike less premium).
• d.A loss of $320, and a breakeven of $50.00 (the strike itself).

The premium is 3.20 x 100 = $320, which is the most a buyer can lose. The call pays nothing until the stock passes the strike by enough to recover the premium, so the breakeven is 50 + 3.20 = $53.20. Subtracting the premium gives the put formula, the strike alone ignores the cost of the option, and a buyer's loss is limited to the premium.FINRA Rule 2360(a)(2) and (a)(27) (call; premium)

A customer buys one ABC 40 put at a premium of 2.50. What is the most she can gain, and at what stock price is the breakeven?

• a.A gain of $250 at most, equal to the premium paid; the breakeven is $37.50.
• b.An unlimited gain as the stock falls; the breakeven is $37.50.
• c.A gain of $4,000 if the stock falls to zero, with a breakeven at $42.50.
• d.A gain of $3,750 if the stock falls to zero; the breakeven is $37.50.✓

A put buyer gains as the stock falls below the strike less the premium. At a price of zero the put is worth 40 x 100 = $4,000 and the premium cost $250, so the most she can gain is $3,750, and the breakeven is 40 - 2.50 = $37.50. The strike plus the premium is the call formula, the premium is the buyer's maximum loss, and a stock cannot fall below zero, so the gain is not unlimited.FINRA Rule 2360(a)(28) and (a)(27) (put; premium)

With XYZ trading at 66, a 60 call is priced at 8.25. What are the option's intrinsic value and time value?

• a.Intrinsic value of 8.25, with no time value left in the premium.
• b.Intrinsic value of 2.25, and time value of 6.00, the split reversed.
• c.Intrinsic value of 6.00, and time value of 2.25, the remainder of the premium.✓
• d.Intrinsic value of 6.00, and time value of 14.25, the sum of both.

A call's intrinsic value is the amount by which the stock exceeds the strike: 66 - 60 = 6.00. Time value is the premium less intrinsic value: 8.25 - 6.00 = 2.25. The premium is not wholly intrinsic when it exceeds the in-the-money amount, the two components are not interchangeable, and time value is not found by adding the intrinsic value to the premium.FINRA Rule 2360(a)(2) and (a)(27) (call; premium)

With ABC trading at 41, a 45 put is priced at 5.10. How is the put described, and what is its time value?

• a.It is in the money by 4.00, and its time value is the entire 5.10.
• b.It is in the money by 4.00, and its time value is 1.10 of the premium.✓
• c.It is out of the money by 4.00, with 1.10 of time value left over.
• d.It is in the money by 5.10, and has 4.00 of time value in the price.

A put is in the money when the stock is below the strike: 45 - 41 = 4.00 of intrinsic value. Time value is the premium less intrinsic value: 5.10 - 4.00 = 1.10. The put is not out of the money because the stock is below the strike, and the premium of 5.10 includes the 4.00 intrinsic value rather than counting entirely as time value.FINRA Rule 2360(a)(28) and (a)(27) (put; premium)

An investor owns 100 shares bought at 48 and writes one 50 call at a premium of 2.40. What are her maximum gain and her breakeven on the position?

• a.A gain of $200, and a breakeven of $48.00, her cost.
• b.A gain of $440, and a breakeven of $50.40, strike plus premium.
• c.A gain of $440 if called away, and a breakeven of $45.60.✓
• d.A gain of $240, the premium alone, and a breakeven of $45.60.

If the stock is called away at 50, she gains 2.00 on the shares plus the 2.40 premium, or 4.40 x 100 = $440, the most the position can earn. The premium lowers her cost to 48 - 2.40 = $45.60, the breakeven. The premium alone is not the maximum gain, adding the premium to the strike is a call buyer's breakeven, and ignoring the premium understates both figures.FINRA Rule 2360(a)(10) (covered)

An investor buys 100 shares at 62 and also buys one 60 put at a premium of 1.80. What is the most he can lose on the combined position?

• a.$6,200, the cost of the shares if the stock falls to zero.
• b.$200, the drop from the purchase price to the strike.
• c.$180, the premium he paid for the protective put alone.
• d.$380, the 2.00 drop to the strike plus the 1.80 premium paid.✓

With the put, he can sell the stock at 60 whatever happens. His loss is the 2.00 fall from 62 to 60 plus the 1.80 premium, 3.80 x 100 = $380. Counting only the drop or only the premium omits half the cost, and $6,200 is the loss without the put's protection.FINRA Rule 2360(a)(28) and (a)(17) (put; long position)

An investor buys a 40 call at 5.00 and sells a 45 call at 2.00 on the same stock and expiration. What is the maximum gain, and where is the breakeven?

• a.$200, with a breakeven of $47.00 (45 plus 2.00).
• b.$200, with a breakeven of $43.00 (the 40 strike plus 3.00).✓
• c.$300, the net debit, with a breakeven of $43.00.
• d.$500, with a breakeven of $45.00 (the higher strike here).

The spread costs 5.00 - 2.00 = 3.00, or $300, which is the most that can be lost. The widest it can pay is the 5.00 gap between strikes, so the most that can be gained is (5.00 - 3.00) x 100 = $200, and the breakeven is the lower strike plus the net debit: 40 + 3.00 = $43.00. The net debit is the maximum loss, the strike gap is gross not net, and adding it to the higher strike misplaces the breakeven.FINRA Rule 2360(a)(2), (a)(17) and (a)(31) (call; long and short positions)

A customer sells one uncovered 30 put at a premium of 1.80. What is the most she can lose, ignoring margin and commissions?

• a.$2,820, if the stock falls to zero and she must buy at 30 a share.✓
• b.$3,000, the strike price times 100, since the premium is returned.
• c.$180, the premium she received, since a seller cannot lose more.
• d.An unlimited amount, because a short put loses more as the stock rises.

If assigned, she buys at 30 something that may be worth nothing, a loss of $3,000 offset by the $180 premium: (30 - 1.80) x 100 = $2,820. The premium is her maximum gain, not her loss. The $3,000 omits the premium she keeps, and the put loses as the stock falls, not as it rises, so the loss has a limit.FINRA Rule 2360(a)(36) and (a)(28) (uncovered; put)

An investor buys one 50 call at 3.00 and one 50 put at 2.00 on the same stock and expiration. At what stock prices does the position break even at expiration?

• a.At $48 and at $52, the strike less and plus the 2.00 smaller of the premiums.
• b.At $45 and at $55, the strike less and plus the 5.00 combined premium.✓
• c.At $50 only, since the call and the put offset each other at the strike.
• d.At $47 and at $53, the strike less the put premium and plus the call premium.

The combined cost is 3.00 + 2.00 = 5.00, so the stock must move 5.00 away from the strike for either side to recover it: 50 - 5 = $45 on the downside and 50 + 5 = $55 on the upside. Using each premium on its own side understates the move, and at $50 both options expire worthless, which is the maximum loss of $500.FINRA Rule 2360(a)(2) and (a)(28) (call; put)

In a single month, a broker-dealer emails the same written market commentary to 31 retail customers and prospects. How does FINRA Rule 2210 classify the commentary?

• a.As a retail communication, because it reached more than 25 retail investors within a 30-calendar-day period✓
• b.As correspondence, because every email was addressed to a named recipient rather than posted publicly
• c.As an institutional communication, because all 31 recipients already hold accounts at the firm
• d.As correspondence, because the cutoff is 50 recipients when the material is delivered electronically

More than 25 retail investors in any 30 calendar days makes a written piece a retail communication, however it is addressed or delivered. Naming each recipient does not turn it into correspondence, which is capped at 25 or fewer. Account status is irrelevant, because a retail investor is anyone who is not an institutional investor, and the rule sets no separate 50-recipient threshold for email.FINRA Rule 2210(a)(2), (a)(5)

A registered representative emails a short note about a bond fund to nine retail customers during one month. What does FINRA Rule 2210 require of the firm for that note?

• a.Pre-approval signed by the firm's chief compliance officer, who must retain the signed copy
• b.Supervision and review under Rule 3110(b), with no prior principal approval and no required filing✓
• c.A filing with FINRA's Advertising Regulation Department within 10 business days of the date it was sent
• d.Approval by a registered principal before the note is sent, as is required for every retail communication

Nine recipients in the month makes the note correspondence, which is subject to supervision and review under Rule 3110(b) rather than to prior principal approval. Principal approval before use is the retail-communication rule, and the 10-business-day filing attaches only to certain retail pieces. Nothing in Rule 2210 requires the chief compliance officer, as such, to sign off on correspondence.FINRA Rule 2210(b)(2); Rule 3110(b)

A firm sends a research summary to the investment staff of a city pension fund. The firm knows the fund routinely forwards such summaries to its individual plan participants. How must the firm treat the summary?

• a.As a retail communication, since the firm has reason to expect retail investors to see it✓
• b.As an internal communication, because the plan participants belong to the pension fund itself
• c.As correspondence, because the firm itself delivered the summary to only one recipient organization
• d.As an institutional communication, because its direct recipient is a governmental entity and so qualifies

A member may not treat a communication as institutional when it has reason to believe the communication or an excerpt will reach retail investors, and plan participants are retail investors. The governmental recipient would qualify on its own, but the forwarding practice defeats that treatment. Correspondence is defined by the number of retail recipients, and an internal communication means the member's own personnel.FINRA Rule 2210(a)(3), (a)(4)

A broker-dealer became a FINRA member eight months ago. It wants to run a newspaper advertisement that is a retail communication. When must it file the advertisement with FINRA's Advertising Regulation Department?

• a.Only on request, since newspaper advertising is covered by the spot-check procedure alone
• b.At least 10 business days before first use, because it is still in its first year of membership✓
• c.No filing is needed once a registered principal has approved the advertisement before publication
• d.Within 10 business days after first use, the same as established firms that advertise funds

For one year from the date membership became effective, a new member files retail communications that appear in public media, such as newspapers, at least 10 business days before first use. The after-use window applies to specific fund, DPP and CMO pieces of any member. Principal approval is a separate requirement, not a substitute for filing, and spot-check requests are an addition to filing duties rather than a replacement.FINRA Rule 2210(c)(1)(A)

A long-established member firm distributes a retail communication that promotes a specific open-end mutual fund. Absent any other special filing rule, when must the piece be filed with FINRA?

• a.Within 30 calendar days after the end of the quarter in which it was first used
• b.It need not be filed, because the fund's prospectus has already been filed with the SEC
• c.Within 10 business days after first use, as for pieces promoting a specific fund✓
• d.At least 10 business days before first use, so FINRA can require changes beforehand

Retail communications promoting or recommending a specific registered investment company are filed within 10 business days of first use. The advance 10-business-day filing is reserved for new members and for items like unpublished performance rankings. The prospectus exclusion covers the prospectus itself, not advertising about the fund, and Rule 2210 has no quarterly filing cycle.FINRA Rule 2210(c)(3)(A)

Which of the following retail communications is excluded from FINRA's Rule 2210 filing requirements?

• a.A mailer that recommends a specific registered exchange-traded fund to its customers
• b.A brochure that was filed earlier and is now being reused without any material change✓
• c.A flyer that promotes a public direct participation program to retail investors
• d.A web page that promotes a specific collateralized mortgage obligation offering

Retail communications that were previously filed and are used without material change are excluded from the filing requirements. Pieces concerning public direct participation programs, registered collateralized mortgage obligations, and a specific registered investment company, including an ETF, must be filed within 10 business days of first use.FINRA Rule 2210(c)(7)

A firm's website quotes a customer who praised the investment advice she received. The firm gave her a $75 gift card for the quote. Which disclosures must appear with the testimonial?

• a.None, because a testimonial given in exchange for a gift card is excluded from the rule
• b.Those two statements, plus a paid-testimonial statement because a gift card was given
• c.Only that it is no guarantee of future performance, because a gift card needs no further disclosure
• d.That it may not reflect other customers' experience and is no guarantee of future performance✓

A testimonial about investment advice or performance must prominently say it may not be representative and is no guarantee of future performance or success. The paid-testimonial statement is required only when more than $100 in value is paid, and $75 does not reach it. The rule makes no exception for non-cash compensation, and the representativeness statement is mandatory, not optional.FINRA Rule 2210(d)(6)(B)

A firm's retail communication recommends the common stock of Delta Corp. Nine months ago the firm co-managed Delta's secondary public offering. What must the communication disclose?

• a.That the firm co-managed a public offering of Delta's securities in the past 12 months✓
• b.Nothing about the offering, because it closed more than six months before the recommendation
• c.That the firm earned an underwriting spread, stated as a percentage of the offering proceeds
• d.Nothing about the offering, because only a lead underwriter's role triggers disclosure of it

A recommendation must disclose, if applicable, that the member managed or co-managed a public offering of the issuer's securities within the past 12 months. The rule covers co-managers as well as lead managers and uses a 12-month window, not six. It requires disclosure of the role, not the amount of the spread.FINRA Rule 2210(d)(7)(A)(iii)

A firm's retail communication recommends only two registered open-end mutual funds. Which statement about Rule 2210(d)(7) is correct?

• a.The communication is exempt from every part of paragraph (d)(7), reasonable basis included
• b.The firm still needs a reasonable basis, but the (d)(7)(A) disclosures are not required✓
• c.The firm must instead provide a list of every fund recommended in the preceding year
• d.The market-making and financial-interest disclosures apply in full, as they do for any other security

A communication recommending only registered investment companies or variable insurance products is excused from the (d)(7)(A) disclosures and the (d)(7)(C) limit on past profitable recommendations, but it must still have a reasonable basis. The exemption is not complete, and no substitute list of earlier recommendations is demanded.FINRA Rule 2210(d)(7)(D)(ii)

A retail piece for a variable annuity says earnings inside the contract 'grow tax-free.' Taxes are due when money is withdrawn. What is wrong with the statement?

• a.Annuity earnings are exempt from federal tax, so the claim only needs a state-tax caveat
• b.The phrase is allowed if the piece also shows the investor's assumed tax bracket
• c.Returns may not be called tax-free when the tax is merely postponed until the money is withdrawn✓
• d.The headline lacks the contract's surrender-charge schedule printed right beside it

Rule 2210 bars characterizing income or returns as tax-free or exempt when tax liability is merely deferred, as it is for annuity earnings taxed on withdrawal. Adding a surrender-charge schedule or a tax bracket does not cure the mislabel, and annuity earnings are deferred rather than exempt.FINRA Rule 2210(d)(4)(B)

A firm drafts an illustration comparing a taxable account with a tax-deferred account, with identical contributions and a 12% assumed annual gross return for both. Which part of the design is not allowed?

• a.Using actual federal income tax rates, since the illustration must rely on blended hypothetical rates
• b.Showing more than one year of deferral, since only a one-year illustration is permitted
• c.Using the same assumed return for both accounts, since the deferred one must assume a lower rate
• d.The assumed gross return of 12%, because the rule caps an assumed gross return at 10% per year✓

A tax-deferred versus taxable comparison must use identical amounts and identical assumed gross returns, and the assumed return may not exceed 10 percent a year. Identical returns are required, actual federal rates must be used and identified, and the rule bars only an unreasonable deferral period, not a multi-year one.FINRA Rule 2210(d)(4)(C)(i)

After FINRA's Advertising Regulation Department reviews a filed retail communication, which reference to that review may the firm place on the piece?

• a.'Endorsed by FINRA,' provided the letter finds the piece consistent with standards
• b.'Approved by FINRA,' provided the Department's letter states that no changes are needed
• c.'FINRA Reviewed and Cleared,' provided the firm adds the date of the review letter
• d.'Reviewed by FINRA' or 'FINRA Reviewed,' with no other wording about the review✓

A reference to the Department's review is limited to 'Reviewed by FINRA' or 'FINRA Reviewed.' Approval, endorsement and clearance claims are all barred, because the communication may neither state nor imply that FINRA endorses the member's business practices or the securities offered, whatever the review letter says.FINRA Rule 2210(e)(1)

At a community seminar, a registered representative speaks without a script and recommends a stock in which she holds a significant long position. What does Rule 2210(f) require?

• a.A transcript of the entire seminar filed with FINRA's Advertising Department within 10 business days
• b.Nothing further, because unscripted public appearances fall outside the scope of Rule 2210
• c.A registered principal's written approval of her planned remarks before the seminar begins
• d.A reasonable basis, and disclosure of her financial interest in the stock and its nature✓

Unscripted public appearances are not retail communications, but the associated person must follow the general standards, have a reasonable basis for any recommendation, and disclose a financial interest in the recommended issuer unless it is nominal. Principal pre-approval and filing apply to retail communications such as written slides or scripts, not to extemporaneous remarks.FINRA Rule 2210(f)(1)-(2)

Four days after an issuer's registration statement was filed with the SEC, the managing underwriter places a tombstone announcement. The registration statement is not yet effective. Which content must the announcement carry?

• a.The issuer's expected earnings for the coming fiscal year, as a guide to the offering price range
• b.A statement that the registration statement is not yet effective, plus the source of a written prospectus✓
• c.A statement that the SEC has reviewed the offering and found the prospectus to be accurate
• d.A notice that orders will be filled only for investors who hold accounts with the underwriter

While the registration statement is uneffective, a Rule 134 communication must say that it has been filed but is not yet effective and that securities cannot be sold or offers accepted until then, and it must say where a written prospectus may be obtained. SEC review never implies approval, and earnings projections are outside the limited items Rule 134 allows.Securities Act Rule 134(b)

On Monday, an underwriter wants to publish a tombstone announcement for an IPO. The issuer expects to file its registration statement on Thursday. May the announcement run on Monday?

• a.Yes, provided it carries the statement that the registration is not yet effective
• b.Yes, because a tombstone announcement is never treated as a prospectus under the Securities Act
• c.No, since a Rule 134 announcement may be published only after the registration is filed✓
• d.Yes, if it names only the issuer and the number of shares that it plans to offer

Section 5(c) bars offers before filing, and Rule 134 protects a limited announcement only if it is published after the registration statement is filed. The protection is conditional, not automatic. The legend that the registration is not yet effective presupposes a filing, and trimming the content does not make a pre-filing announcement lawful.Securities Act Section 5(c); Rule 134

A mutual fund distributor wants to rely on Rule 134 to publish a tombstone announcement for a new open-end fund once its registration statement is filed. Is Rule 134 available?

• a.Yes, because any issuer that has a registration statement on file may rely on the rule
• b.Yes, provided the announcement also states the fund's sales charge and expense ratio
• c.No, because open-end funds may not advertise at all until their registration is effective
• d.No, since the rule excludes investment companies other than closed-end funds✓

Rule 134 excludes registered investment companies other than registered closed-end funds, so an open-end fund must look to other communication rules such as Rule 482. Filing alone does not qualify an issuer, and cost disclosure does not change the exclusion. Funds are not barred from all advertising before effectiveness.Securities Act Rule 134(g)

A registered representative posts a message recommending a stock in a public online chat forum. How does Rule 2210 treat the post?

• a.It must be filed with FINRA's Advertising Regulation Department within 10 business days of posting
• b.A registered principal must approve it before it is posted, as with every retail communication
• c.No pre-approval is needed, but the firm must supervise and review it like correspondence✓
• d.It falls outside the rule, since the forum is public and not controlled by the firm

A retail communication posted on an interactive electronic forum is excepted from prior principal approval, provided the firm supervises and reviews it in the manner required for correspondence. It is still a communication subject to the content standards, and interactive-forum posts are excluded from the filing requirements.FINRA Rule 2210(b)(1)(D)(ii)

A representative who texts clients from a personal phone sends one client the price of an executed order, and another client an invitation to a family barbecue. Which text must the firm retain?

• a.Only the order-price text, because a message's content decides whether it must be kept✓
• b.Only the barbecue invitation, because it was the one sent directly to a customer
• c.Neither text, because the retention rules reach email but do not reach text messaging
• d.Both texts, because the same device and the same client list were used to send each one

Regulatory Notice 17-18 explains that firms must be able to retain business-related texts and chat messages under the SEC and FINRA recordkeeping rules, and that the content of the communication decides what must be kept. A social invitation is not a business communication, while an order price relates to the firm's business.SEC Rule 17a-4(b)(4); Regulatory Notice 17-18

A broker-dealer pays a social media influencer to post a video praising the firm's new trading app. How does FINRA treat the post?

• a.As correspondence exempt from content standards, because the video is directed to no more than twenty-five retail investors in thirty days
• b.As a personal post outside Rule 2210, because the influencer is not an associated person
• c.As an unsolicited third-party post, because the influencer created and uploaded the video himself on his own account
• d.As a communication the firm is entangled with, identified as an advertisement and naming the firm✓

When a firm arranges for a comment or post, FINRA regards the firm as entangled with the resulting communication, and Rule 2210's standards apply. Influencer posts should be clearly identified as advertisements and name the broker-dealer. Payment removes the post from the unsolicited category, the influencer's lack of registration does not matter, and correspondence (25 or fewer retail investors in 30 days) is not exempt from content standards.Regulatory Notice 17-18, Q7

A customer posts an unsolicited comment on a representative's supervised business page praising his investment advice. The representative clicks 'like' on it. What is the effect?

• a.The comment becomes a communication only if the representative also shares it with his followers
• b.None, because an unsolicited post by a customer is never a communication of the representative
• c.He has adopted it, so the communications rules apply, including testimonial disclosures✓
• d.The firm must delete the comment, because testimonials may never appear on a representative's business page

FINRA does not treat unsolicited third-party comments as communications of the firm or representative, but liking or sharing a comment adopts it, bringing in the content standards, testimonial requirements, supervision and recordkeeping. Liking, not only sharing, is adoption, and testimonials may appear if the required disclosures accompany them.Regulatory Notice 17-18, Q9

Over two weeks, a representative texts 60 prospects an invitation to a seminar promoting the firm's retirement-income service. How is the text treated?

• a.As an excluded item, because text messages are not written communications
• b.As a retail communication that a registered principal must approve before use✓
• c.As correspondence, because each text was delivered to an individual's phone number
• d.As an institutional communication, because it was not published in a periodical

A written communication, including an electronic one, sent to more than 25 retail investors in 30 days is a retail communication, and a registered principal must approve it before use. Individual addressing does not create correspondence, and electronic messages are written communications. The recipients are prospects, not institutional investors.FINRA Rule 2210(a)(5), (b)(1)(A)

A firm's website has a page of professional biographies of several registered representatives who serve retail investors. What does Rule 2210(d)(8) require?

• a.A link only on the home page, since profile pages inherit it through the site menu
• b.A BrokerCheck reference only for those representatives who have reportable disclosure events
• c.A readily apparent BrokerCheck link on that page and on the initial page meant for retail investors✓
• d.A link to each representative's Form U4 on that page, with the reps' disciplinary history

Each website must carry a readily apparent BrokerCheck reference and hyperlink on the initial page meant for retail investors and on any other page with a professional profile of registered persons serving retail investors. The link goes to BrokerCheck, not to Form U4, and it is not limited to representatives with disclosures.FINRA Rule 2210(d)(8)

A firm's website has a permanent link to a financial news site. The link is always available, visitors can use it whether or not the site flatters the firm, the site updates freely, and the firm has no control over its content. How is the content treated?

• a.The firm has adopted it unless a leaving-our-site disclaimer appears on the linked pages
• b.The firm has adopted it, because every link on a firm's website is its own communication
• c.The firm has not adopted it, because the link is ongoing and the firm cannot influence the site✓
• d.The firm has adopted it, since the news site is not itself a member firm of FINRA or the SEC

A link is not adoption when it is ongoing, meaning continuously available, usable regardless of favorable content, and open to updates by the third party, and when the firm has no influence or control over the content. Links in general are not adoption, a disclaimer is not the test, and the third party need not be a member.Regulatory Notice 17-18, Q5

A firm's web page links to one news article, chosen by the firm because it praises the firm's fund. How does FINRA treat the article?

• a.The firm has not adopted it, provided the page states that the outlet is unaffiliated
• b.The firm has not adopted it, since the article was written and published by an independent outlet
• c.The firm has adopted the article by linking to that specific content, so Rule 2210 applies to it✓
• d.The firm has adopted it only if it edited the headline or the text of the article

By sharing or linking to specific third-party content, the firm adopts it, and the content becomes subject to the communications rules. Independent authorship and a disclaimer of affiliation do not prevent adoption, and editing is not required for it.Regulatory Notice 17-18, Q4