FINRA Series 7 — All Questions

A bidder makes a tender offer for a company's shares. For at least how long must the offer stay open?

• a.30 calendar days
• b.5 business days
• c.20 business days✓
• d.10 business days

Rule 14e-1 requires that a tender offer remain open for at least 20 business days from its commencement. Ten and five business days are too short, and a calendar-day measure is not how the rule counts.Exchange Act Rule 14e-1

An issuer's CFO unintentionally discloses material nonpublic earnings information to an analyst on a call. Under Regulation FD, when must the company make the information public?

• a.Within one hour, because the analyst may trade immediately
• b.Only if the analyst actually trades on the information
• c.By the release of the following quarter's earnings report
• d.Promptly, meaning the later of 24 hours or the next NYSE open✓

For a non-intentional selective disclosure, Regulation FD requires public disclosure promptly, defined as as soon as reasonably practicable and no later than the later of 24 hours or the start of the next day's NYSE trading. Waiting for a later earnings release is too slow, and trading by the recipient is not a condition.Regulation FD

How long must dealers deliver a prospectus after an initial public offering of a company whose stock is listed on a national exchange?

• a.25 days after the offering date✓
• b.30 days after the offering date
• c.90 days after the offering date
• d.40 days after the effective date

Rule 174(d) ends the prospectus delivery period 25 calendar days after the offering date when the issuer was not already a reporting company and its security is listed on a national exchange (or authorized for an interdealer quotation system) as of the offering date. Thirty days has no basis in the rule, and 90 days and 40 days after the effective date are longer periods that do not apply once Rule 174(d) is satisfied.Securities Act Rule 174(d), 17 CFR 230.174(d)

A registration statement is filed on March 1 and the SEC issues no stop order or acceleration. On what day does it become effective?

• a.On the 5th business day after filing
• b.On the day it is filed
• c.On the 20th day after filing✓
• d.On the 90th day after filing

Under Section 8(a) a registration statement becomes effective on the 20th day after filing unless the SEC accelerates it or delays it. Immediate effectiveness is not automatic, and neither a 90-day nor a five-business-day period appears in the statute.Securities Act Section 8(a)

An affiliate plans to sell 4,000 shares of restricted stock priced at $15 in a three-month period. Must a Form 144 be filed?

• a.Yes, because the $60,000 sale exceeds $50,000✓
• b.No, because the share count is under 5,000
• c.No, because affiliates never file Form 144
• d.Yes, but only after the sale is completed

Form 144 is required if an affiliate's sales in any three-month period exceed 5,000 shares or $50,000. Here 4,000 x $15 = $60,000, so the dollar threshold is met even though the share count is not. Affiliates are the persons the filing applies to, and the notice is filed at the time the order is placed.Securities Act Rule 144(h)

Which entity is a qualified institutional buyer for Rule 144A purposes?

• a.An individual investor who owns and invests $100 million in securities
• b.A broker-dealer that owns and invests $10 million in unaffiliated securities✓
• c.An insurance company that owns and invests $5 million in securities
• d.A broker-dealer whose total assets are $10 million on its balance sheet

A registered broker-dealer qualifies as a QIB if it owns and invests on a discretionary basis at least $10 million in securities of unaffiliated issuers. Most other institutions need $100 million. Total assets is the wrong measure, $5 million is too little, and individuals are not QIBs.Securities Act Rule 144A

Which person qualifies as an accredited investor?

• a.A single person earning $180,000 in each of the last two years
• b.A couple with $250,000 joint income in each of the last two years
• c.A person whose $1.4 million net worth includes a $600,000 home
• d.A single person with $210,000 income in each of the last two years✓

A natural person qualifies with individual income over $200,000 in each of the past two years, or $300,000 joint, with the same expected this year. Net worth must exceed $1 million excluding the primary residence, so $1.4 million with a $600,000 home is only $800,000. $180,000 and $250,000 joint fall short of the income tests.Regulation D, Rule 501(a)

What is the limit on non-accredited purchasers in a Rule 506(b) offering?

• a.35 purchasers in total, including accredited investors
• b.35, with no limit on accredited investors✓
• c.No limit if the offering is advertised generally
• d.500 non-accredited purchasers in any 12-month period

Rule 506(b) allows sales to an unlimited number of accredited investors and no more than 35 non-accredited purchasers who must be sophisticated. It is not a limit on all purchasers, 500 is not part of the rule, and general advertising is not allowed in a 506(b) offering.Regulation D, Rule 506(b)

Under FINRA's anti-money laundering rule, how often must a member firm with customer accounts have its AML program independently tested?

• a.Every two years, on the firm's fiscal-year basis
• b.Every three years by an outside accountant
• c.At least annually, on a calendar-year basis✓
• d.Only after a regulatory examination finds a deficiency

Rule 3310 requires independent testing at least annually on a calendar-year basis for firms with customer accounts. The two-year interval applies to firms that do not carry customer accounts. Testing after an exam, or every three years, is not what the rule says.FINRA Rule 3310

A broker-dealer detects a suspicious transaction of $20,000 by a known customer. By when must it file a SAR?

• a.Always 60 calendar days after detection
• b.15 business days after detection
• c.30 calendar days after initial detection✓
• d.Within 24 hours after detection

A SAR is due within 30 calendar days after initial detection of the facts. The period can extend to 60 days only when no suspect has been identified, and this customer is known. Fifteen business days and 24 hours are not the deadline.31 CFR 1023.320

A customer deposits $9,000 in cash on three consecutive days to avoid a currency transaction report. This conduct is:

• a.Structuring, a crime even when the funds are lawful✓
• b.Illegal only if the funds came from criminal activity
• c.Legal, because each deposit is below the $10,000 threshold
• d.Legal, provided the customer discloses the pattern afterward

Breaking up cash transactions to evade reporting is structuring and is a crime regardless of the source of the money. The size of each deposit does not make it lawful, disclosure afterward does not cure it, and illegal funds are not an element.31 USC 5324 (structuring)

A firm sends the same market commentary to 40 retail investors in a 30-day period. How is it classified, and what review is required?

• a.Correspondence that needs no principal approval
• b.A retail communication that a principal must approve before use✓
• c.Correspondence that a principal approves after it goes out
• d.Institutional communication that needs only filing with FINRA

Rule 2210 treats a written communication distributed to more than 25 retail investors in a 30-day period as a retail communication, and a registered principal must approve it before use. Correspondence is 25 or fewer. Institutional communications go only to institutional investors.FINRA Rule 2210

Under the Exchange Act's insider trading penalty provision, what is the maximum civil penalty for a person who trades on material nonpublic information?

• a.Ten times the dollar value of the trade itself
• b.Three times the profit gained or loss avoided✓
• c.An amount equal to the profit gained or loss avoided
• d.A flat $25,000 civil penalty for each violation

Section 21A authorizes a civil penalty of up to three times the profit gained or loss avoided. A penalty equal to profit is the disgorgement amount only, and neither a ten-times multiple nor a flat figure appears in the statute.Exchange Act Section 21A

A corporate officer adopts a Rule 10b5-1 trading plan. Before the first trade, how long must she wait under the cooling-off rule?

• a.One year after adopting the plan, regardless of her filings
• b.None, because a written plan allows trading the same day
• c.90 to 120 days, depending on when her periodic report is filed✓
• d.30 days after adopting the plan, the same as for other persons

Directors and officers must wait the later of 90 days after adoption or two business days after the 10-Q or 10-K for the quarter of adoption, capped at 120 days. The 30-day period is for other persons. A written plan does not remove the wait, and a one-year requirement does not exist.Rule 10b5-1(c)

A municipal bond is sold in a new issue. How is it treated under the Securities Act of 1933?

• a.It is exempt from both registration and antifraud provisions
• b.It is exempt only if sold solely to accredited investors
• c.It must be registered with the SEC just like a corporate bond
• d.It is exempt from registration but not from antifraud rules✓

Municipal securities are exempt securities and need no SEC registration, but the antifraud provisions still apply. Being exempt from registration does not remove liability for fraud, and the exemption does not depend on investor status.Securities Act Section 3(a)(2)

A member firm learns it has been found by a securities regulator to have violated securities laws. By when must it report the event to FINRA?

• a.By the 15th day of the month after the calendar quarter in which the finding occurred
• b.Within 30 calendar days after it knew or should have known✓
• c.Within 90 days after the fiscal year ends
• d.Within 24 hours after the firm's compliance officer learns of it

Rule 4530(a) requires a member to report promptly, and in any event not later than 30 calendar days after it knows or should have known, that it has been found to have violated securities laws by a regulator. The quarter-end 15th-day deadline belongs to the separate quarterly customer-complaint statistics under Rule 4530(d). A year-end deadline and a 24-hour deadline do not apply to this event.FINRA Rule 4530

A firm receives several written customer complaints during the third quarter. When is its quarterly statistical report due?

• a.By the 15th day of the month after the quarter ends✓
• b.Within 30 days after each complaint is received
• c.By the 15th day of the month after the year ends
• d.By the 30th day after each quarter ends

Rule 4530(d) requires statistical and summary information on written customer complaints to be reported to FINRA by the 15th day of the month following the calendar quarter in which the complaints were received. The deadline is not set by the date each individual complaint arrives, it is not an annual report, and the 30th day of the month is not the cutoff.FINRA Rule 4530(d)

A registered representative of a different FINRA member firm asks to buy shares in a hot IPO from your firm. Under the new issue rule, the sale is:

• a.Permitted if the shares are held for 30 days
• b.Prohibited, because the buyer is a restricted person✓
• c.Permitted if the buyer pays the full price in advance
• d.Permitted, because the buyer is a registered representative

Rule 5130 bars sales of new equity issues to restricted persons, a group that includes personnel of broker-dealers. Their registration does not make them eligible, and neither prepayment nor a short holding period changes that.FINRA Rule 5130

Which person is a statutory insider for Section 16 purposes?

• a.A beneficial owner of more than 10% of a registered equity class✓
• b.A bank lender that holds the issuer's unsecured promissory note
• c.A customer who receives research from the issuer
• d.A beneficial owner of exactly 5% of a registered equity class

Section 16 covers officers, directors and holders of more than 10% of a registered class of equity securities. Five percent triggers Schedule 13D but not Section 16. Receiving research or lending does not make someone an insider.Exchange Act Section 16

An investor buys one XYZ 40 call for a premium of $2.50. What is the breakeven price at expiration?

• a.$42.50, strike plus the premium paid✓
• b.$37.50, the strike less the premium paid
• c.$45.00, the strike plus twice the premium paid
• d.$40.00, the strike price with no premium added

A call buyer needs the stock to rise far enough to recover the premium, so breakeven is the $40 strike plus the $2.50 premium, or $42.50. Subtracting the premium is the breakeven formula for a put buyer. The strike alone ignores the cost of the option, and doubling the premium has no basis in the contract.OCC Options Disclosure Document

A customer sells one ABC 60 put for a premium of $4. What is the customer's maximum possible loss, ignoring commissions?

• a.$6,000, the strike times 100, no premium credit
• b.Unlimited, because the stock has no upper price limit
• c.$5,600, the strike less the premium, all times 100✓
• d.$400, the premium collected on the contract

A put writer may have to buy 100 shares at $60 if the stock falls to zero, a $6,000 outlay, but the $400 premium collected offsets part of it, so the worst case is $5,600. Ignoring the premium overstates the loss. The premium is the writer's maximum gain, not the loss. Unlimited loss belongs to an uncovered call writer, because a stock can fall only to zero.OCC Options Disclosure Document

An investor owns 100 shares bought at $48 and sells one 50 call for $3. What is the maximum gain on this position?

• a.$200, the stock gain up to the strike only
• b.Unlimited, as the stock can rise without any limit
• c.$300, the premium collected with no stock gain
• d.$500, the $3 premium plus the $2 gain up to the strike✓

If the stock finishes at or above $50 the shares are called away at $50, giving a $2 gain per share plus the $3 premium, or $500 in total. The premium alone ignores the stock gain, and the stock gain alone ignores the premium. The upside is capped at the strike because the shares are delivered at $50 however high the price rises.OCC Options Disclosure Document

An investor buys one ABC 50 call for 3 and one ABC 50 put for 2. At expiration, at what stock prices does the position break even?

• a.$50 only, since the call and the put offset each other
• b.$47 and $52, the strike less the call premium and plus the put premium
• c.$45 and $55, the strike less and plus the $5 combined premium✓
• d.$48 and $53, the strike less the put premium and plus the call premium

A long straddle must recover both premiums, so the stock must move $5 either way: $45 on the downside and $55 on the upside. Applying only one premium to each side mixes the legs and gives the wrong prices. At $50 both options expire worthless and the investor loses the full $5, so the strike itself is the point of maximum loss.OCC Options Disclosure Document

A bond pays a fixed 5% coupon. Market rates on new comparable bonds then rise to 6%. How will the existing bond trade?

• a.At a premium until the first call date, then at par
• b.At a premium, because higher rates lift the price of older bonds
• c.At a discount, since its coupon is below the new market rate✓
• d.At par, since the coupon is fixed for the life of the bond

Buyers will not pay full price for a 5% coupon when 6% is available, so the price falls until the yield to a new buyer matches the market, which means a discount. A fixed coupon does not keep the price at par; it is why the price must move. Prices of existing bonds move opposite to rates, so a premium would require falling rates.Fixed income pricing

A $1,000 par bond with a 6% coupon trades at $800. What is its current yield?

• a.6.7%, the annual interest divided by the average of price and par
• b.25.0%, the $200 discount divided by the $800 price
• c.7.5%, the $60 annual interest divided by the $800 price✓
• d.6.0%, the stated coupon rate printed on the face of the bond

Current yield is annual interest divided by current market price: $60 over $800 is 7.5%. The coupon rate is measured against par, not the price paid. Averaging price and par does not produce current yield. The $200 discount is a one-time gain at maturity, not annual income.Fixed income pricing

Rates are expected to rise. Which bond would lose the most value?

• a.A 30-year bond with an 8% coupon, since a higher coupon raises risk
• b.A 5-year Treasury note, since Treasuries lose value fastest
• c.A 30-year zero-coupon bond, paying nothing until maturity✓
• d.A 2-year zero-coupon bond, since zeros are always the most volatile

Interest rate risk grows with the time until cash is received. A 30-year zero pays nothing until maturity, so its present value falls the most. The coupon on the 30-year bond returns cash along the way and shortens its effective life, and the 5-year note and 2-year zero have far shorter lives. A zero is most volatile only when maturities are comparable.Fixed income pricing

What backs a general obligation municipal bond?

• a.The issuer's taxing power, together with its full faith and credit✓
• b.Only the revenues of the facility the bond financed
• c.A federal government guarantee of principal and interest
• d.A pledge of a single excise tax such as the state fuel tax

General obligation bonds are repaid from the issuer's ability to tax, usually property taxes, backed by full faith and credit. Repayment from a facility's revenues describes a revenue bond. Municipal bonds carry no federal guarantee, and a pledge of one dedicated tax describes a special tax bond.Municipal securities

An investor in the 28% federal bracket is comparing a 4.5% municipal bond to a taxable bond. What taxable yield equals the municipal yield?

• a.6.25%, found by dividing the 4.5% yield by 0.72✓
• b.4.50%, since municipal interest is free of federal tax
• c.5.76%, found by multiplying 4.5% by 1.28
• d.3.24%, found by multiplying 4.5% by 0.72

Tax-equivalent yield is the tax-free yield divided by one minus the tax rate: 4.5% over 0.72 is 6.25%. Multiplying by 1.28 understates it, and multiplying by 0.72 gives the after-tax yield of a taxable bond, not the equivalent. A tax-free 4.5% is worth more than 4.5% to someone paying 28%, so the nominal figure is not equivalent.Municipal securities

How is interest on U.S. Treasury notes taxed?

• a.No income tax applies when the note is held to maturity
• b.State and local income tax applies, but federal income tax does not
• c.Federal income tax applies, but state and local income taxes do not apply✓
• d.Federal, state and local income taxes all apply to the interest

Treasury interest is taxed by the federal government and exempt from state and local income tax. The reverse describes no federal obligation. Taxing at every level would defeat the state exemption, and holding to maturity does not remove the federal tax on interest.IRC and Treasury securities

A fund has $52 million in assets, $2 million in liabilities and 2.5 million shares outstanding. What is its net asset value per share?

• a.$20.00, $50 million of net assets over the shares✓
• b.$19.20, with liabilities subtracted from assets twice
• c.$20.80, total assets divided by the shares outstanding
• d.$21.60, with the liabilities added to total assets

NAV is assets minus liabilities, divided by shares: $50 million over 2.5 million is $20. Dividing total assets ignores what the fund owes. Subtracting liabilities twice or adding them both misstate net assets.Investment company mathematics

A mutual fund quotes a net asset value of $19.00 and charges a 5% sales charge, expressed as a percent of the public offering price. What is the public offering price?

• a.$19.95, found by adding 5% of the NAV to the NAV
• b.$18.05, the NAV less 5% of the NAV
• c.$20.00, found by dividing the NAV by 0.95✓
• d.$19.00, since the NAV is what every buyer pays

A sales charge stated as a percent of the offering price means NAV equals 95% of that price, so $19.00 over 0.95 is $20.00. Adding 5% to the NAV treats the charge as a percent of NAV. Subtracting it would give a price below NAV. Paying only NAV applies to no-load funds.FINRA Rule 2341

What is the highest sales charge an open-end investment company may impose under FINRA's sales charge rule?

• a.10% of the public offering price
• b.5.75% of the public offering price
• c.8.5% of the offering price✓
• d.7.0% of the total amount invested

FINRA caps the sales charge on open-end fund shares at 8.5% of the offering price, and lower caps apply when the fund lacks certain features such as breakpoints. The 5.75% figure is a common front-end load in practice, not the cap. The other figures are not limits in the rule.FINRA Rule 2341

Which statement describes a closed-end investment company's shares?

• a.They trade in the secondary market at supply-and-demand prices✓
• b.They are offered continuously by the fund at the public offering price
• c.They are redeemed by the issuing fund at net asset value on request
• d.They are priced once per day at the close of the market

Closed-end funds issue a fixed number of shares that then trade on an exchange or over the counter, often at a premium or discount to NAV. Redemption at NAV, continuous offering and once-a-day pricing all describe open-end funds.Investment Company Act of 1940

To avoid tax at the corporate level, a real estate investment trust must distribute at least what share of its taxable income?

• a.50%, with the balance kept as retained earnings
• b.75%, after deducting property depreciation
• c.90%, distributed to shareholders as dividends each year✓
• d.100%, with no income retained by the trust at all

A REIT that distributes at least 90% of its taxable income receives a dividends-paid deduction and avoids corporate tax on that income. Lower figures do not qualify, and the law does not require a full 100% payout. Depreciation is already part of figuring taxable income.Internal Revenue Code Section 857

During the accumulation period of a variable annuity, who bears the investment risk of the separate account?

• a.The state guaranty fund, up to the owner's cost basis
• b.The contract owner, as accumulation units rise and fall✓
• c.The insurer, which guarantees the value of each unit it issues
• d.The selling broker-dealer, which holds the units

A variable annuity passes investment performance directly to the owner through accumulation units in a separate account. An insurer guaranteeing unit value describes a fixed annuity. Guaranty associations cover insurer failure, not market losses, and a broker-dealer does not bear contract performance.Variable annuity regulation

A 50-year-old owner paid $50,000 into a nonqualified annuity now worth $70,000 and withdraws $10,000. How is the withdrawal taxed?

• a.All $10,000 is taxed at long-term capital gains rates
• b.All $10,000 is ordinary income, since earnings come out first✓
• c.Only $2,857 is taxable, the earnings fraction of each withdrawal
• d.None is taxable, since $10,000 is below the $50,000 cost basis

Withdrawals from a nonqualified annuity are treated as earnings first, and earnings are ordinary income, so the entire $10,000 is taxable. An owner under 59 and a half generally owes a 10% additional tax as well. The pro-rata method applies to annuitized payments, not withdrawals, and annuity earnings never receive capital gains treatment.Internal Revenue Code Section 72

How are new shares of an exchange-traded fund created?

• a.The fund sells shares through an initial public offering only
• b.Authorized participants swap baskets of stock for creation units✓
• c.The exchange itself issues new shares as demand rises
• d.Retail investors buy new shares directly from the fund at NAV

Authorized participants, usually large firms, deliver a basket of securities to the fund in return for a creation unit of ETF shares and can redeem units the same way. Retail investors buy and sell on the exchange. An ETF is not limited to one offering, and the exchange does not issue shares.Exchange-traded products

A customer asks about holding a 3x leveraged ETF for several months. What should the representative explain?

• a.It targets its multiple for a single day, so longer results may differ✓
• b.It reduces losses because the fund resets and removes risk
• c.It holds the index stocks directly, so the holding period is irrelevant
• d.It delivers three times the index return over any period held

Leveraged and inverse ETFs reset daily, so compounding can make multi-day returns differ sharply from the stated multiple of the index return. They do not promise the multiple over longer periods, they use derivatives and borrowing rather than simple index holdings, and they increase risk rather than removing it.FINRA Regulatory Notice 09-31

An issuer skipped two quarterly dividends on its cumulative preferred stock and now wants to pay a common dividend. What must happen?

• a.The preferred holders rank ahead of the bondholders for the arrears
• b.The arrears are paid only after bondholders vote to approve
• c.The common dividend may be paid, since skipped dividends lapse
• d.Preferred dividends in arrears must be paid first✓

Cumulative preferred accumulates unpaid dividends, and the issuer must pay the arrears, plus the current dividend, before any common dividend. They do not lapse. No bondholder vote is needed, and preferred stockholders never rank ahead of bondholders in a claim on the issuer.Preferred stock features

Which describes a rights offering to existing shareholders?

• a.It is short-lived, with a subscription price below market✓
• b.It is long-lived, with a subscription price below the market price
• c.It is short-lived, with a subscription price above the market price
• d.It is long-lived, with an exercise price above market

Rights let current holders buy new shares ahead of the public at a discount, and they expire within weeks. Long-term life with an exercise price above market describes a typical warrant. A price above market gives holders no reason to subscribe, and rights do not last for years.Equity features

What is the longest time to expiration for LEAPS?

• a.Up to 36 months after the date they are listed
• b.Up to 39 months after listing✓
• c.Up to 60 months after the date they are listed
• d.Up to 24 months after the date they are listed

LEAPS are long-term equity options with expirations up to 39 months after listing. Shorter figures such as 24 or 36 months and the 60-month figure are not the contract maximum.OCC Options Disclosure Document

An investor holds five ABC 80 calls when ABC announces a 2-for-1 stock split. How will the position be adjusted?

• a.Five calls with a strike of 80, each covering 200 shares
• b.Five calls with a strike of 40, each covering 200 shares
• c.Ten calls with a strike of 80, each on 100 shares
• d.Ten calls with a strike of 40, each still covering 100 shares✓

For an even split such as 2-for-1, the OCC doubles the number of contracts and halves the strike, so the investor holds ten calls at 40, each still covering 100 shares. Keeping five contracts with 200 shares each, or keeping the 80 strike, would change the value of the position.OCC Rules

ABC pays its regular quarterly cash dividend while an investor holds listed ABC call options. What happens to the option terms?

• a.The strike is reduced by the dividend amount on the ex-date
• b.The expiration date moves back by one dividend period
• c.Nothing, since ordinary cash dividends do not adjust option terms✓
• d.The number of contracts rises to reflect the dividend that is paid out

Listed options are not adjusted for ordinary cash dividends, which is one reason call holders sometimes exercise early. Strike reductions, added contracts and shifted expirations are used for splits and certain other corporate actions, not regular dividends.OCC Rules

A customer buys 400 shares of a stock at $30 in a margin account. What is the initial Regulation T requirement?

• a.$12,000, the full purchase price in cash
• b.$6,000, which is 50% of the $12,000 purchase✓
• c.$3,000, which is 25% of the purchase
• d.$2,000, the minimum equity for a margin account

Regulation T sets initial margin on stock purchases at 50%, so a $12,000 purchase requires $6,000. The 25% figure is a maintenance percentage for long positions, not the initial deposit. The $2,000 figure is a minimum equity amount that applies in addition. Paying the full price describes a cash account.Regulation T

A customer sells short 200 shares of a stock at $40 in a margin account. What is the Regulation T requirement?

• a.$2,000, the minimum equity for any margin account
• b.$8,000, the full amount of the sale proceeds
• c.$4,000, which is 50% of the proceeds✓
• d.$2,400, which is 30% of the sale proceeds

Regulation T requires 50% of the short sale proceeds as initial margin, here $4,000. The 30% figure is the maintenance level for most short positions. The proceeds are held by the broker, and the customer is not asked to deposit them again. The $2,000 minimum applies to equity in the account, not as a substitute for the percentage.Regulation T

A customer has a long margin account with a $14,000 debit balance. Below what long market value does the account fall under the 25% maintenance requirement?

• a.$18,200, found by adding 30% to the debit
• b.$18,667, found by dividing the debit by 0.75✓
• c.$17,500, found by dividing the $14,000 debit by 0.80
• d.$28,000, found by dividing the $14,000 debit by 0.50

Equity must be at least 25% of long market value, so the debit can be at most 75% of it, and $14,000 over 0.75 is about $18,667. Dividing by 0.80 or by 0.50 uses the wrong percentage, and adding 30% to the debit has no basis in the rule.FINRA Rule 4210

A customer sells short 100 shares of a stock now trading at $20. What is the maintenance requirement under FINRA's rule?

• a.$500, which is 25% of the $2,000 market value
• b.$200, which is 10% of the $2,000 market value
• c.$600, which is 30% of the current $2,000 market value✓
• d.$1,000, which is 50% of the $2,000 market value

FINRA requires 30% of the current market value for a short position in a stock priced at $5 or more, so 30% of $2,000 is $600. The 25% figure applies to long positions. The 50% figure is the initial Regulation T requirement, and 10% is not a maintenance level for stock.FINRA Rule 4210

What is the minimum equity required to open a margin account for margin purchases?

• a.$20,000 in cash or eligible securities
• b.$2,000 in cash or eligible securities✓
• c.$15,000 in cash or eligible securities
• d.$10,000 in cash or eligible securities

FINRA requires minimum equity of $2,000 for a customer to buy on margin, and Regulation T and the maintenance rules apply on top of that. The other figures are not the opening minimum for ordinary margin trading.FINRA Rule 4210

Two investors hold a joint account as joint tenants with rights of survivorship, and one dies. What happens to the decedent's interest?

• a.It is frozen until a court appoints a trustee for the account
• b.It passes to the decedent's estate and heirs under the will
• c.It is split equally between the survivor and the children
• d.It passes automatically to the surviving owner by operation of law✓

A joint tenancy with rights of survivorship transfers a deceased owner's share to the survivor by operation of law, outside the will. Passing through the estate describes tenants in common. A court-appointed trustee and automatic division with the children have no basis in a survivorship account.Customer account types

Who owns securities held in a UTMA custodial account for a minor?

• a.The donor, who may revoke the gift and take the assets back later
• b.The minor, managed by a custodian until the age of majority✓
• c.The parents, who may withdraw funds for their own use
• d.The custodian, who may reclaim the gifted assets at any time

A gift to a UTMA account is irrevocable and belongs to the minor, while the custodian manages it for the minor's benefit. The custodian and donor give up ownership and may not take the assets back. A parent who is custodian must still use the money for the child.Uniform Transfers to Minors Act