FINRA Series 7 — All Questions

As a general matter, within what time after the time of trade must a dealer report a municipal securities transaction to the MSRB's trade reporting system during the system's business hours?

• a.By the end of the next business day
• b.As soon as practicable but no later than 15 minutes after the time of trade✓
• c.Within 60 minutes after the time of trade
• d.By the end of the trade date

The RTRS procedures require a trade to be reported as soon as practicable but no later than 15 minutes after the time of trade, with defined exceptions such as list-offering-price and takedown transactions, which are reported by end of day. A same-day or next-day deadline applies only to those exceptions.MSRB Rule G-14 RTRS Procedures

Which of the following must a dealer disclose to a customer at or before the time of a municipal securities trade under MSRB Rule G-47?

• a.Only information that the dealer deems to be adverse to the issuer
• b.All material information known about the transaction and material information about the security that is reasonably accessible to the market✓
• c.Only the information in the official statement
• d.Only information the customer requests

Rule G-47 applies to sales and purchases, whether recommended or unsolicited, and in both primary and secondary transactions. The dealer must disclose material information it knows about the transaction and material information reasonably accessible to the market. The duty is not limited to the official statement or to the customer's questions.MSRB Rule G-47(a)(i)

A dealer sells a new issue of municipal bonds to a customer. By when must the customer receive the official statement, or a written notice that none is being prepared?

• a.No later than settlement of the transaction✓
• b.Within 30 days after the issue date of the bonds
• c.Before the customer places the order
• d.Within five business days after the first interest payment

Rule G-32 requires delivery of the official statement, or a notice that none exists together with any preliminary official statement, by no later than the settlement of the transaction. Delivery before the order and delivery after the issue date are not what the rule requires.MSRB Rule G-32(a)(i)

How often must a dealer provide customers with the notice that it is registered with the SEC and the MSRB and that an investor brochure is available on the MSRB website?

• a.Only when the account is opened
• b.With every confirmation of a municipal trade
• c.At least once every calendar year to each customer who has a municipal position or traded in municipal securities✓
• d.Every quarter, with the account statement

Rule G-10 requires a once-per-calendar-year written notice, which may be delivered electronically, to each customer for whom a municipal securities purchase or sale was effected or who holds a municipal position. It is not tied to every confirmation, and a single notice at account opening would not satisfy it.MSRB Rule G-10(a)

A dealer serves as financial advisor to an issuer for a bond issue. Under Rule G-23, what is the dealer's status on that same issue?

• a.It may act as underwriter without restriction, since financial advisors owe no fiduciary duty
• b.It may not also serve as underwriter or placement agent on that same issue✓
• c.It may underwrite the issue only if it resigns as advisor after the pricing
• d.It may underwrite the issue if it discloses the financial advisory role in writing

Rule G-23 requires dealers to evidence financial advisory relationships in writing and prohibits a dealer from serving as both financial advisor and underwriter or placement agent on the same issue. Written disclosure of the advisory role does not cure the conflict, and resigning as advisor after pricing is not a recognized way around the prohibition.MSRB Rule G-23(d)

A syndicate is formed to underwrite a primary offering of municipal bonds. Unless the issuer agrees otherwise, how must the priority provisions treat customer orders and syndicate members' own account orders?

• a.Members' own-account orders get priority because they bear underwriting risk
• b.All orders are treated pro rata with no priority
• c.The manager may set priorities entirely at its discretion without any written provisions
• d.Customer orders must receive priority over members' own-account orders to the extent feasible and consistent with orderly distribution✓

Rule G-11 requires the syndicate to establish priority provisions, and unless the issuer agrees otherwise they must give customer orders priority over members' own and related account orders, to the extent feasible and consistent with orderly distribution. A provision that leaves priority wholly to the manager's discretion does not satisfy the requirement.MSRB Rule G-11(e)

A dealer sells municipal bonds from its inventory to a customer as principal. What standard applies to the price under Rule G-30?

• a.The aggregate price, including any mark-up, must be fair and reasonable✓
• b.The mark-up may not exceed 5 percent in any single transaction, whatever its size
• c.The price must equal the last price reported to the MSRB
• d.The price must be lower than the price at which the dealer bought the bonds

Rule G-30 requires that a dealer's principal transactions be at an aggregate price, including any mark-up or mark-down, that is fair and reasonable in light of all relevant factors. There is no fixed percentage ceiling and no rule tying the price to the last reported trade or to the dealer's cost.MSRB Rule G-30(a)

The minimum denomination of a municipal bond issue is $5,000. A dealer wants to sell a customer $3,000 par of the issue in a customer transaction. What does Rule G-15 say?

• a.The dealer may sell it because the rule applies only to purchases from customers
• b.The dealer may sell it if the customer signs a waiver
• c.The dealer may not effect the transaction, because it is below the issue's minimum denomination✓
• d.The dealer may sell it if the price is adjusted downward to reflect the smaller odd amount of bonds

Rule G-15 bars a customer transaction in an issue below its minimum denomination for issues sold after June 1, 2002. A narrow exception allows buying a customer's entire small position that is already below the minimum. A waiver or price adjustment does not change this.MSRB Rule G-15(f)(i)

Regulation Best Interest requires a broker-dealer to satisfy four component obligations when it makes a recommendation to a retail customer. Which list names them?

• a.Care, Loyalty, Prudence and Compliance, in that order
• b.Disclosure, Know Your Customer, Care and Fiduciary
• c.Disclosure, Care, Conflict of Interest and Compliance✓
• d.Disclosure, Suitability, Supervision and Recordkeeping

Rule 15l-1(a)(2) is satisfied only if the broker-dealer meets the disclosure obligation, the care obligation, the conflict of interest obligation and the compliance obligation. Suitability, supervision and recordkeeping are separate regimes, and Regulation Best Interest does not impose a fiduciary duty or a loyalty-and-prudence test.17 CFR 240.15l-1(a)(2)

A representative recommends a series of trades in a retail customer's account. Each trade looks reasonable in isolation. Under the care obligation of Regulation Best Interest, what else must the firm and representative have a reasonable basis to believe?

• a.That the customer approves a commission schedule in writing before each trade
• b.That the series produces a profit for the customer within one year
• c.That the series of recommended transactions, taken together, is not excessive and is in the customer's best interest✓
• d.That each transaction in the series is a different security

The care obligation covers a series of recommendations: even if each is in the customer's best interest alone, the reasonable basis must extend to the series being not excessive and in the customer's best interest taken together, in light of the investment profile. Reg BI does not require diversification of each trade, and profit is not the test.17 CFR 240.15l-1(a)(2)(ii)(C)

Under the conflict of interest obligation of Regulation Best Interest, what must a broker-dealer do about sales contests?

• a.Identify and eliminate sales contests, sales quotas, bonuses and non-cash compensation based on sales of specific securities or types of securities within a limited period of time✓
• b.Eliminate them only if they are tied to proprietary products
• c.Permit them if awarded only to supervisors
• d.Disclose each contest to the customer and keep it

The conflict of interest obligation requires written policies and procedures reasonably designed to identify and eliminate sales contests, quotas, bonuses and non-cash compensation that are based on sales of specific securities or specific types of securities within a limited period of time. Disclosure alone does not satisfy the requirement, and the prohibition is not limited to proprietary products.17 CFR 240.15l-1(a)(2)(iii)(D)

Regulation Best Interest protects a retail customer. Who is a retail customer under the rule?

• a.Only a natural person who has less than $1 million in assets
• b.Only a natural person who has held an account for at least a year
• c.Any entity that opens an account with a broker-dealer
• d.A natural person who receives a recommendation of a securities transaction or strategy and uses it primarily for personal, family or household purposes✓

Rule 15l-1(b)(1) defines a retail customer as a natural person, or that person's legal representative, who receives a recommendation and uses it primarily for personal, family or household purposes. Entities and asset or tenure tests are not part of the definition.17 CFR 240.15l-1(b)(1)

When must a broker-dealer give a retail customer the written disclosure of material facts about the relationship and conflicts of interest required by the disclosure obligation of Regulation Best Interest?

• a.Within 10 business days after the account is opened
• b.Only after the customer asks for the recommendation in writing
• c.Prior to or at the time of the recommendation✓
• d.Within 30 days after the recommendation

The disclosure obligation requires the broker-dealer, prior to or at the time of the recommendation, to provide the retail customer, in writing, full and fair disclosure of the material facts about the scope and terms of the relationship and the conflicts of interest associated with the recommendation. Disclosure after the fact or on request does not satisfy the timing.17 CFR 240.15l-1(a)(2)(i)

For how long must a broker-dealer generally preserve the records listed in Rule 17a-4(a), such as blotters and general ledgers, and how are they to be kept?

• a.At least three years, the first year in an easily accessible place
• b.At least ten years, the first five years in an easily accessible place
• c.At least six years, the first two years in an easily accessible place✓
• d.At least six years, all of them in an easily accessible place on the premises

Rule 17a-4(a) requires records made under the listed paragraphs of Rule 17a-3 to be kept for not less than six years, the first two in an easily accessible place. The three-year period applies to other records listed in paragraph (b).17 CFR 240.17a-4(a)

For how long must a broker-dealer keep records covered by Rule 17a-4(b), such as originals of communications relating to its business as such, and how are they to be kept?

• a.At least one year, all in an easily accessible place
• b.At least six years, the first two years in an easily accessible place, as with the records in paragraph (a)
• c.At least three years, the first two years in an easily accessible place✓
• d.At least three years, all in an easily accessible place

Rule 17a-4(b) sets a retention period of not less than three years, the first two years in an easily accessible place. The six-year period belongs to the records in paragraph (a).17 CFR 240.17a-4(b)

A broker-dealer wants to sell a penny stock to a new customer. What waiting period applies after the broker-dealer sends the customer the required suitability statement and agreement?

• a.The purchase may be effected on the same day
• b.The broker-dealer must wait until the next account statement date
• c.The broker-dealer may not effect the purchase less than two business days after sending the agreement✓
• d.The broker-dealer must wait 30 days

Rule 15g-9 bars effecting a penny stock purchase for a customer less than two business days after the broker-dealer sends the required written statement and agreement, and it requires a written agreement to the transaction from the customer and a determination that penny stocks are suitable for the person. Same-day and month-long waits are not part of the rule.17 CFR 240.15g-9(a)

Before approving a new customer's account for penny stock transactions, what must the broker-dealer obtain and do under Rule 15g-9?

• a.Obtain only the customer's signature on a margin agreement
• b.Only send the customer a copy of the company's annual report
• c.Obtain a minimum deposit of $10,000 and no other information
• d.Obtain the customer's financial situation, investment experience and objectives and reasonably determine that penny stock transactions are suitable for the customer✓

To approve an account for penny stock transactions, the broker-dealer must obtain information about the customer's financial situation, investment experience and investment objectives, and reasonably determine that penny stock transactions are suitable and that the customer can evaluate the risks. There is no minimum-deposit or annual-report test.17 CFR 240.15g-9(b)

When must a broker-dealer give or send a customer the written confirmation of a securities transaction?

• a.Only if the customer requests it in writing
• b.Within 30 days after settlement
• c.At or before completion of the transaction✓
• d.At the end of the quarter in which the trade occurred

Rule 10b-10 requires a broker-dealer to give or send written notification of the transaction at or before its completion. The notification must identify the security and state whether the firm acted as agent or principal. A quarterly or on-request approach does not meet the timing.17 CFR 240.10b-10(a)

Which fact about its role must a broker-dealer disclose on a customer confirmation?

• a.Only whether the trade was a purchase or sale
• b.Whether the customer's account is subject to margin maintenance calls
• c.Whether it acted as agent for the customer, as agent for another person, as agent for both, or as principal for its own account✓
• d.Whether the firm's capital exceeds $250,000

The confirmation must disclose whether the firm acted as agent for the customer, agent for some other person, agent for both, or as principal, and a principal-capacity trade must also state whether the firm is a market maker in the security. Net capital and margin status are not confirmation items.17 CFR 240.10b-10(a)(2)

For an initial public offering of a security of a company not already subject to Exchange Act reporting, when must a broker-dealer deliver a copy of the preliminary prospectus to a person expected to receive a confirmation?

• a.At least 48 hours before sending the confirmation✓
• b.At least 24 hours before the order is placed
• c.Within 30 days after the offering becomes effective
• d.No later than the settlement date of the transaction, together with the confirmation

For an issuer not already reporting, Rule 15c2-8(b) requires the broker-dealer to deliver a copy of the preliminary prospectus to any person expected to receive a confirmation at least 48 hours before sending the confirmation. Later delivery would not give the investor time to review it.17 CFR 240.15c2-8(b)

A person acquires beneficial ownership of more than five percent of a class of a company's registered equity securities. By when must the person generally file Schedule 13D?

• a.Within two business days after the acquisition
• b.Within five business days after the date of the acquisition✓
• c.Within ten calendar days after the date of the acquisition of the shares
• d.Within 45 days after the end of the calendar year in which the acquisition occurred

Rule 13d-1(a) requires a person who becomes the beneficial owner of more than five percent of a class to file Schedule 13D within five business days after the acquisition. The ten-day deadline is the older rule, and the year-end 45-day period relates to a different type of filing.17 CFR 240.13d-1(a)

A corporate officer subject to Section 16 buys shares of the company's stock. By when must the officer file a Form 4 reporting the transaction?

• a.Before the end of the seventh business day after the transaction
• b.Before the end of the second business day following the day of the transaction✓
• c.Within ten calendar days after the end of the month in which the purchase was made
• d.Within 45 days after the end of the fiscal year

Form 4 must be filed before the end of the second business day following the day on which the subject transaction was executed. Month-end and year-end schedules apply to other reports, not to Form 4.17 CFR 240.16a-3(g)(1)

Under SEC Rules 172 and 173, a firm sells registered shares and sends the customer a written confirmation. Which statement about the Rule 173 notice is correct?

• a.The notice must be sent by the issuer in every case, never by a dealer or an underwriter
• b.Failing to send the notice on time does not, by itself, take away the confirmation's exemption under Rule 172✓
• c.The notice replaces the confirmation required by Rule 10b-10, so the firm needs to send only the notice to each purchaser
• d.A late notice makes the sale void, and the customer may rescind it at any time within the next year

Rule 173(c) says compliance with the notice requirement is not a condition to reliance on Rule 172. The two rules work together, since the confirmation under Rule 172 may even include the notice. The notice does not take the place of the Rule 10b-10 confirmation, and Rule 173 puts the duty on the underwriter or dealer, with the issuer responsible only for its own direct sales.17 CFR 230.172(a)(1); 17 CFR 230.173(c)

A private issuer sells securities under Rule 701 to its employees, and the aggregate sales price in a consecutive 12-month period rises above $10 million. What additional obligation arises?

• a.It must register the sale on Form S-1 before any further securities are sold to employees
• b.It must deliver enhanced disclosure to investors a reasonable period before the sale, including financial statements✓
• c.It must stop relying on Rule 701 for the rest of the year but may use it again after that
• d.It must have the employees' brokers confirm in writing that each employee meets the accredited-investor standards before the sale

Rule 701(e) keeps the exemption available above $10 million but requires the issuer to give investors disclosure a reasonable time before the sale. The disclosure includes a plan summary, risk information and financial statements no more than 180 days old. Rule 701 does not demand registration or accredited status from the employees.17 CFR 230.701(e)

A broker-dealer wants to run a generic advertisement about mutual funds. Which feature allows it to avoid being treated as an offer under Rule 135a?

• a.It describes fund types, and it includes a coupon that guarantees the fund's price for the next twelve months to all readers
• b.It names one fund and states the fund's top-performing results for the past five years
• c.It names the fund the firm sells most, as long as the ad is placed in a financial newspaper
• d.It describes fund types in general, does not name a particular fund, and includes the sponsoring broker-dealer's name and address✓

Rule 135a allows generic communication about investment companies in general, such as their types and objectives, as long as it does not refer by name to a specific investment company and shows the name and address of the registered broker-dealer sponsoring it. An advertisement that names a fund, quotes its results or guarantees a price is a sales communication and falls outside the rule.17 CFR 230.135a(a)

A tombstone-style notice under Rule 134 is published before the registration statement has become effective. Which statement must it carry?

• a.A statement that the SEC has approved the securities and found the prospectus to be accurate
• b.A statement guaranteeing that the price will be the same as the price in the notice
• c.A statement that the underwriters have bought all of the shares and will resell them at a profit
• d.A statement that a registration statement has been filed but has not yet become effective, and that the securities may not be sold until it does✓

Rule 134(b)(1) requires a communication made before effectiveness to say that a registration statement has been filed but has not become effective, and that the securities cannot be sold nor offers to buy accepted before it is. The SEC does not approve securities or pass on the accuracy of a prospectus, and a price in a preliminary notice is not guaranteed.17 CFR 230.134(a)(4); 17 CFR 230.134(b)(1)

An issuer has not reached the $700 million non-affiliate equity float. Under Rule 405, what other test can qualify it as a WKSI if it will register only non-convertible securities other than common equity?

• a.It has issued at least $1 billion in non-convertible securities in registered primary offerings for cash during the last three years✓
• b.It has issued at least $1 billion in convertible preferred stock in any period of five years
• c.It has at least $1 billion in non-convertible debt that was sold privately in the last three years
• d.It has at least $700 million in total assets on its most recent audited balance sheet

Rule 405 provides a debt-based alternative: at least $1 billion aggregate principal amount of non-convertible securities other than common equity issued in primary offerings for cash, registered under the Act, within the last three years. Convertible securities, private placements and a total-assets test do not meet that alternative.17 CFR 230.405 (definition of well-known seasoned issuer), paragraph (1)(i)(B)

An issuer already filed a free writing prospectus with the SEC and now wants to use the same document again in the same offering with no substantive change. What does Rule 433 require?

• a.A new filing that must be made before any person other than the issuer uses it
• b.A new filing, plus a fresh copy of the final prospectus delivered to each person who receives the document and each person who reads it online
• c.A new filing each time the document is used, with the date of each use stated
• d.No new filing, because the filing condition does not apply to a document with no substantive changes from the one already filed✓

Rule 433(d)(3) removes the condition to file a free writing prospectus that has no substantive changes from, or additions to, one previously filed. Filing is not repeated for each use, and the rule does not add a delivery of the final prospectus to each recipient.17 CFR 230.433(d)(3)

Rule 134 requires certain communications to be accompanied or preceded by a section 10 prospectus. How can an electronic communication satisfy that requirement?

• a.By containing an active hyperlink to the prospectus✓
• b.By quoting the price range from the prospectus in the body of the message
• c.By stating the prospectus will be mailed on request, with no link in the message
• d.By including a printed copy of the prospectus attached to the first page

Rule 134(f) says the requirement that a section 10 prospectus precede or accompany a communication is met if the communication is electronic and contains an active hyperlink to the prospectus. Promising a later mailing, or repeating a few figures from the prospectus, does not put the prospectus in front of the reader.17 CFR 230.134(f)

A broker-dealer sponsors a generic advertisement under Rule 135a that describes a type of product, service or security. What must the sponsor do?

• a.Attach a signed order form for each type of product described in the advertisement itself
• b.Offer for sale a security, service or product of the type described in the advertisement✓
• c.File the advertisement with the SEC at least ten days before it is published
• d.State the fund's most recent annual return so readers can compare it with others

Rule 135a(c) says the sponsor of a communication describing a type of security, service or product must offer for sale something of that type. Otherwise the ad would draw inquiries for a product the sponsor does not sell. The rule contains no pre-filing period, and quoting returns would turn the notice into a performance advertisement.17 CFR 230.135a(c)

Holders have deposited shares in a third-party tender offer that is still open. What right do they have under SEC Rule 14d-7?

• a.They may withdraw the shares only during the first ten business days after the offer begins
• b.They have no withdrawal right once a deposit is made, because the shares are committed to the bidder
• c.They may withdraw the deposited shares at any time while the tender offer remains open✓
• d.They may withdraw the shares only if the bidder has not yet accepted any shares from other holders

Rule 14d-7(a)(1) gives any person who has deposited securities in a tender offer the right to withdraw them during the period the offer stays open. The right is not limited to an early window and does not end because other shares have been accepted. The one carve-out is that a bidder need not offer withdrawal rights during a subsequent offering period.17 CFR 240.14d-7(a)

An officer of a listed company is subject to Section 16 and had small exempt transactions during the fiscal year that were not previously reported. By when is the Form 5 due?

• a.Within 45 days after the issuer's fiscal year end✓
• b.Within ten days after the officer's first transaction of the new year
• c.Within two business days after the fiscal year end
• d.Within 90 days after the date the issuer's annual report is filed

Rule 16a-3(f)(1) requires the Form 5 to be filed within 45 days after the issuer's fiscal year end, disclosing exempt transactions and holdings not reported earlier on Forms 3, 4 or 5. The two-business-day period belongs to Form 4, which reports ordinary changes in beneficial ownership.17 CFR 240.16a-3(f)(1)