FINRA SIE — Securities Industry Essentials — All Questions

A firm's branch is supervised from an office of supervisory jurisdiction (OSJ), and the branch receives a written customer complaint. Where must the firm keep a record of the complaint, and for how long?

• a.At the branch itself only, for at least two years
• b.At the main office only, for at least six years
• c.At the OSJ, until the complaint has been resolved
• d.In the OSJ's complaint file, for at least four years✓

Rule 4513 requires a firm to keep, at each OSJ, a file or record of written customer complaints relating to that office, including activities it supervises, and to preserve it for at least four years. The branch alone is not the required location, since the OSJ supervises it. Six years is the period for some other firm records, not complaints. A record cannot be discarded when the complaint is resolved, because the four-year period applies either way.FINRA Rule 4513

A customer tells a firm's compliance officer by phone that a representative stole money from her account, but she never puts the accusation in writing. Does the call alone trigger a Rule 4530(a)(1)(B) report?

• a.No, because that provision covers only written customer complaints✓
• b.Yes, within 30 days, because a theft claim is always reportable
• c.No, because the customer never stated how much was taken
• d.Yes, but only in the quarterly statistical report that follows

A written customer complaint involving allegations of theft, misappropriation or forgery is what triggers Rule 4530(a)(1)(B). An oral accusation does not meet that definition, although the firm should still investigate it and may have to report later if it concludes a violation occurred. A theft claim is not reportable in every form, and the quarterly report summarizes written complaints, so it would not capture a phone call. The amount alleged has no bearing on the writing requirement.FINRA Rule 4530(a)(1)(B)

On November 3, a firm learns that one of its registered representatives has been indicted on a felony charge. By what date must the firm report this under Rule 4530?

• a.Not required, because only a conviction is reportable
• b.December 3, 30 calendar days after the firm learns of it✓
• c.January 15, in the next quarterly statistical report
• d.December 13, 40 calendar days after the firm learns of it

Rule 4530(a)(1) requires a report within 30 calendar days after the firm knows or should have known that an associated person has been indicted for, convicted of, or pleaded guilty or no contest to a felony. November 3 plus 30 calendar days is December 3. An indictment alone is enough, so waiting for a conviction would miss the deadline. Forty days is not a period the rule uses, and the quarterly statistical report covers written customer complaints, not criminal events.FINRA Rule 4530(a)(1)

A municipal finance professional (MFP) of a dealer is entitled to vote in the district and gives $200 to a candidate for state treasurer in the primary and $200 to the same candidate in the general election. The office can influence the selection of dealers. Does MSRB Rule G-37 impose its two-year ban on the dealer?

• a.Yes, because the two gifts total $400, which is more than $250
• b.No, because each election has its own $250 de minimis limit✓
• c.No, because primary contributions are never covered by the rule
• d.Yes, because any contribution to such an official triggers the ban

Rule G-37 lets an MFP who is entitled to vote contribute up to $250 per election to an official without triggering the two-year ban, and the primary and the general election are separate elections. Each $200 gift is within its own limit, so no ban follows. The $400 total is not the test, because the limit does not add up across elections. The ban does follow contributions above the de minimis amount, but these are not above it, and primary contributions are covered by the rule rather than exempt from it.MSRB Rule G-37(b)

A covered associate of an investment adviser cannot vote for a candidate for state treasurer and contributes $200 to the campaign. The office can influence the hiring of advisers. What follows under SEC Rule 206(4)-5?

• a.Nothing, because the limit is $350 for every covered associate
• b.A two-year ban on pay for advising that government entity✓
• c.Nothing, because the rule reaches only the adviser's own gifts
• d.A permanent bar on the adviser managing any public pension money

Rule 206(4)-5 lets a covered associate contribute up to $350 per election to a candidate the associate may vote for, and up to $150 if the associate cannot vote for the candidate. A $200 gift from someone who cannot vote is over the $150 limit, so the adviser may not receive compensation for advisory services to that government entity for two years. The $350 figure does not apply to non-voters. The consequence is a two-year time-out, not a permanent bar, and contributions by covered associates count along with the adviser's own.SEC Rule 206(4)-5(b)(1)

A dealer's MFP who is not entitled to vote gave $200 to an official on February 1. The dealer discovers the contribution on May 15, within four months of the gift. By what date must it be returned for the automatic exemption from the two-year ban to apply?

• a.July 14, 60 calendar days after discovery✓
• b.June 14, 30 calendar days after discovery
• c.August 13, 90 calendar days after discovery
• d.June 1, four months after the contribution

The automatic exemption in Rule G-37 covers a contribution of $250 or less that the dealer discovers within four months of the date it was made, provided the contribution is returned within 60 calendar days after discovery. The dealer found it on May 15, within four months of February 1, so the return deadline is 60 calendar days after May 15, which is July 14. June 14 counts only 30 days and August 13 counts 90. June 1 is the end of the four-month discovery window, not the return deadline.MSRB Rule G-37(j)

A dealer's MFP organizes a fundraiser for a mayoral candidate who can influence the choice of dealers. Friends write $150 checks to the campaign, and the MFP contributes nothing personally. Is this permitted under MSRB Rule G-37?

• a.No, and the dealer is automatically banned for two years
• b.Yes, because the MFP did not personally contribute anything
• c.No, because soliciting contributions is barred by G-37(c)✓
• d.Yes, because each check is within the $250 de minimis amount

Rule G-37(c) prohibits a dealer and its MFPs from soliciting or coordinating contributions to an official of an issuer with which the dealer does or seeks to do municipal securities business, and the $250 de minimis exception covers only an MFP's own contributions, not solicited ones. Whether the MFP gave personally is therefore not the test, and small checks do not cure the violation. The conduct breaches the rule, but a solicitation violation does not by itself trigger the two-year ban, which attaches to contributions made by the dealer or its MFPs above the de minimis amount.MSRB Rule G-37(c)

In the same year, a firm's registered representative gives a client's purchasing manager a $180 gift in March, and the firm's trader gives the same manager a $150 gift in June. Do the gifts violate FINRA Rule 3220?

• a.No, because each gift is under $300 when taken alone
• b.No, because the rule restricts only gifts made in cash
• c.No, because the limit applies to each giver separately
• d.Yes, because they total $330, over the $300 limit✓

Rule 3220 caps gifts at $300 per individual per year, and Supplementary Material .03 treats the firm and all its associated persons together for that cap. The $180 and $150 gifts, given to the same person in the same year, total $330, which is more than $300. Looking at each gift alone, or at each giver separately, misses the aggregation. The rule is not limited to cash, since it covers anything of value.FINRA Rule 3220.03

A firm pays $220 for two ball-game tickets whose face value is $320, and a representative gives them to a client's employee without attending the game. Do the tickets exceed the Rule 3220 limit?

• a.No, because the firm's actual cost was only $220
• b.No, because tickets are entertainment and outside the rule
• c.Yes, because gifts of tickets are always prohibited
• d.Yes, because they count at the higher face value of $320✓

Under Supplementary Material .02, a gift of tickets is valued at the higher of cost or face value when the giver does not attend with the recipient. The face value of $320 is more than $300, so the gift exceeds the limit even though the firm paid only $220. Tickets given away without the giver attending are gifts, not entertainment, so the rule applies. The rule does not prohibit ticket gifts outright, since it limits their value.FINRA Rule 3220.02

A firm gives a $500 holiday gift to a retail customer who holds an account at the firm. Does the $300 limit in FINRA Rule 3220 prohibit it?

• a.No, because the rule excludes the firm's own retail customers✓
• b.Yes, unless the firm records it as a business expense and discloses it
• c.Yes, because any gift over $300 in a year is prohibited by the rule
• d.No, but only because the gift is below a $1,000 threshold in the rule

Supplementary Material .09 says Rule 3220 does not apply to gifts a firm gives to its own retail customers, so the $500 holiday gift is outside the limit. The rule targets gifts to the employees and representatives of other businesses, where the influence concern arises. The $300 cap therefore does not decide this case, and recording the gift as an expense does not create a requirement under the rule. The rule has no $1,000 threshold.FINRA Rule 3220.09

A representative gives a client's employee a $450 wedding gift, and the firm reimburses her for it. Does the personal-occasion exclusion in Rule 3220 apply?

• a.Yes, because a wedding is a personal event, so it is always excluded
• b.No, because personal gifts are never excluded from the limit
• c.Yes, because gifts below $500 are excluded for life events
• d.No, because the firm paid, so it is presumed business-related✓

Supplementary Material .04 excludes gifts for infrequent personal life events such as a wedding, but when the member bears the cost, FINRA presumes the gift is business-related. Because the firm reimbursed the representative, the gift is presumed business-related and the $300 limit applies, so $450 is over it. A wedding is not automatically excluded. The rule contains no $500 exception, and saying personal gifts are never excluded ignores the exclusion that applies when the giver pays personally.FINRA Rule 3220.04

A fund sponsor tells representatives at several broker-dealers it will fly them to a resort if they sell $1 million of its fund shares. Does FINRA's non-cash compensation rule allow this?

• a.Yes, because the sponsor pays rather than the reps' firms
• b.No, because it is tied to reaching a sales target✓
• c.Yes, provided the reps' firms tell customers about it
• d.Yes, if each trip is worth no more than $300 apiece

FINRA Rule 2341 permits non-cash compensation only in limited forms, such as gifts of $300 or less per individual per year that are not preconditioned on sales. A trip awarded only for selling $1 million of fund shares is conditioned on a sales target, so it falls outside what the rule permits. It is not cured by the sponsor paying in place of the firms, by a small per-trip value, or by telling customers about it.FINRA Rule 2341

A broker-dealer is participating in the initial public offering of a company that has never reported under the Exchange Act. How far ahead of sending the confirmation must a copy of the preliminary prospectus be delivered to any person expected to receive it?

• a.At least 48 hours before the confirmation is sent✓
• b.At least 24 hours before the confirmation is sent
• c.At least 72 hours before the confirmation is sent
• d.At least 5 business days before the confirmation is sent

Rule 15c2-8(b) requires delivery of the preliminary prospectus at least 48 hours before the confirmation of sale is sent for an IPO of a company that is not already reporting. Other delivery periods in the securities laws, such as the dealer prospectus periods of 25, 40 or 90 days, are about different obligations.17 CFR 240.15c2-8

Before or at the time of a recommendation to a retail customer, which item must a broker-dealer disclose in writing under Regulation Best Interest's Disclosure Obligation?

• a.The personal tax returns of the associated person making the recommendation, filed each year
• b.The material fees and costs that apply to the customer's transactions, holdings and accounts✓
• c.The firm's complete list of every other customer who holds the recommended security today
• d.A guarantee that the recommended investment will not lose value over the holding period

Under the Disclosure Obligation, a broker-dealer must provide in writing full and fair disclosure of all material facts about the scope and terms of the relationship, including that it is acting as a broker-dealer, the material fees and costs, and the type and scope of services and any limits on what it may recommend, plus material conflicts of interest. Neither a personal tax return nor a guarantee of results is part of the required disclosure.SEC Regulation Best Interest, 17 CFR 240.15l-1(a)(2)(i)

Which type of account is not subject to required minimum distributions during the original owner's lifetime?

• a.A SEP IRA
• b.A SIMPLE IRA
• c.A Roth IRA✓
• d.A traditional IRA

The IRS says required withdrawals apply to IRAs including SEP and SIMPLE IRAs and to employer plans, but not to Roth IRAs or designated Roth accounts while the owner is alive. Beneficiaries of Roth accounts are, however, subject to the RMD rules.IRC 408A(d)(1)

Under FINRA Rule 4370, which statement about a member's written business continuity plan (BCP) is correct?

• a.The firm must review it at least annually and update it after any material change to its operations, structure, business or location✓
• b.The firm needs to review it only when FINRA examines the firm and asks to see it
• c.The firm must file the plan with the SEC each year, and it may not be shown to FINRA staff
• d.The firm may leave out any category the rule lists without documenting its reasons

FINRA Rule 4370 requires a written BCP, an update after any material change in operations, structure, business or location, and an annual review to decide whether modifications are needed. The plan must be available promptly to FINRA staff on request, and a member that leaves out a listed category as not applicable must document why. A senior manager must approve the plan.FINRA Rule 4370

An issuer is planning a Rule 506(b) private placement. Which condition must it satisfy?

• a.It may advertise freely, but every purchaser must be an accredited investor
• b.It may sell to any number of non-accredited purchasers if each one signs a risk acknowledgment
• c.It may not use general solicitation, and it may sell to no more than 35 non-accredited purchasers in any 90-day period✓
• d.It must register the offering with the SEC but may omit the prospectus delivery requirement

Rule 506(b) is a safe harbor with no general solicitation and a cap of 35 non-accredited purchasers in any 90 days; accredited investors are not counted toward that cap. Allowing advertising is the 506(c) route, which requires all purchasers to be accredited and verified. A signed acknowledgment does not lift the 35-purchaser limit.17 CFR 230.506

A taxable money market fund has 22% of its total assets in daily liquid assets and 55% in weekly liquid assets. Under Rule 2a-7, what may it do?

• a.It may not buy anything other than a daily liquid asset until it has at least 25% in daily liquid assets✓
• b.It may buy any security, because the weekly liquid asset minimum of 30% is the only test that applies to the fund
• c.It may not buy anything at all until it has at least 50% in daily liquid assets again
• d.It may buy any security at all, because 22% daily liquid assets is above the 10% minimum

Rule 2a-7 prohibits a fund from acquiring a security other than a daily liquid asset if, afterward, it would hold less than 25% of total assets in daily liquid assets (tax-exempt funds are excepted). It likewise requires at least 50% in weekly liquid assets. The fund here meets the weekly test but falls short on the daily one.17 CFR 270.2a-7(d)(4)(ii)-(iii)

Under the SAR rule for broker-dealers, a transaction requires reporting only if it involves or aggregates at least what amount, and the firm knows, suspects or has reason to suspect that it is suspicious?

• a.$3,000
• b.$5,000✓
• c.$10,000
• d.$25,000

Under 31 CFR 1023.320, a broker-dealer must file a SAR on a transaction conducted or attempted by, at, or through it that involves or aggregates funds or other assets of at least $5,000, where it knows, suspects, or has reason to suspect that the transaction falls into one of the listed suspicious categories. The $10,000 figure belongs to the currency transaction report.31 CFR 1023.320(a)(2)

An equity-indexed annuity typically promises a minimum guaranteed value of what portion of the premium paid, at a low guaranteed interest rate?

• a.100% of the premium at the index return, never less than zero
• b.50% of the premium at 5 to 7 percent interest
• c.At least 87.5% of the premium at 1 to 3 percent interest✓
• d.No minimum, because the return is tied only to the index

FINRA notes that equity-indexed annuities generally offer a guaranteed minimum interest rate, typically on at least 87.5% of the premium paid at 1 to 3 percent, plus an additional rate tied to a market index. The principal is guaranteed, but the market-linked interest is not.FINRA investor education: Annuities (indexed)

Investors who bought in an offering sue because the registration statement contained a material misstatement. Which party can be held liable under Section 11 of the Securities Act?

• a.Every underwriter of the offering, subject to a due diligence defense✓
• b.Only the issuer, because it alone files the statement
• c.The investor's registered representative, because he recommended the purchase
• d.The transfer agent that recorded the new shares

Section 11 reaches those who signed the registration statement, directors, experts for the parts they prepared, and every underwriter. Everyone except the issuer can defend by showing a reasonable investigation, the due diligence defense. The issuer's liability is essentially absolute. Registered representatives and transfer agents are not listed among the Section 11 defendants.Securities Act of 1933 Section 11

A traveler carries $12,000 in cash and traveler's checks from a trip abroad into the United States. What does the Bank Secrecy Act require?

• a.Nothing, because only amounts above $25,000 are reportable
• b.A report only if the money came from a foreign bank
• c.He must file a report only if he deposits the money within 24 hours
• d.He must file a report of the transportation, because the currency and monetary instruments exceed $10,000✓

31 CFR 1010.340(a) requires a report from each person who physically transports, mails or ships currency or other monetary instruments in an aggregate amount exceeding $10,000 at one time into or out of the United States. The reporting threshold applies to the total, not to each item.31 CFR 1010.340(a)

A customer bought 300 shares of a stock this morning and, before they have been delivered to her account, enters an order to sell those 300 shares. How does Regulation SHO treat the sale?

• a.She is deemed to own the shares because she has purchased them but has not yet received them, so it can be marked long✓
• b.It must be marked short, because she does not yet have the shares in her account
• c.It must be marked short exempt, because the purchase has not yet settled
• d.It cannot be accepted, because she does not hold title

Under Rule 200(b), a person is deemed to own a security if she has purchased it, or entered into an unconditional contract binding on both parties to purchase it, even though she has not yet received it. A sale order may be marked long when the seller is deemed to own the security and it is reasonably expected to be in the firm's possession or control by settlement.17 CFR 242.200(b)

A woman inherits 100 shares that her father bought for $20 per share. The shares were worth $90 per share on the date of his death, and she sells them for $95 per share. What is her gain per share?

• a.$75, because she takes over her father's $20 cost basis and pays tax on the gain
• b.$5, because her basis is the fair market value on the date of death✓
• c.$70, because the gain is measured from the $25 gift-tax value of the shares
• d.$0, because inherited property is never taxed when sold

Property acquired from a decedent generally takes a basis equal to its fair market value at the date of death. Her basis is therefore $90, not her father's $20, and her gain is $95 minus $90, or $5 per share. The step-up removes the appreciation that occurred during her father's lifetime from taxable gain.26 U.S.C. 1014(a)

A cash account customer buys and sells the same shares before paying. Within the payment period the customer's check clears, and the sale proceeds were not withdrawn before then. What happens to the 90-day freeze?

• a.It does not apply, because full payment cleared and the proceeds were not withdrawn first✓
• b.It applies in full for 90 calendar days, because the stock was sold before it was paid for
• c.It applies for 30 calendar days instead of 90, because the customer later paid in full
• d.It applies only if the customer uses a second broker-dealer to complete the sale of the stock

The 90-day freeze does not apply if, within the payment period, full payment is received or a check in payment has cleared and the sale proceeds were not withdrawn before the payment or clearance. The freeze targets selling before paying, not a timely payment.12 CFR 220.8(c)(2)(i)

A client wants to buy a nonqualified annuity with after-tax savings. Which statement is correct?

• a.She can deduct up to $7,500 a year, like an IRA, since the contribution lowers her taxable income
• b.She cannot deduct the contribution, but there is no annual contribution limit on the annuity itself✓
• c.She is limited to the 401(k) deferral limit, because every annuity contribution counts toward that cap
• d.She can deduct the contribution only if she annuitizes within one year

Investments in nonqualified annuities are made with after-tax dollars, so the contributions are not deductible. Unlike IRAs and 401(k) plans, annuities don't have annual contribution limits, although an annuity held in a qualified plan is subject to that plan's limits.FINRA investor education: Annuities (taxes)

A company will act on a matter by written consent of holders of a majority of its voting shares, without a proxy solicitation. How far in advance must it send shareholders an information statement before the action may be taken?

• a.At least 5 business days before the action, and only if the holders ask for a statement
• b.At least 10 business days after the action is taken, as a notice to the holders of record
• c.At least 60 calendar days before the action, in every case without any exception at all
• d.At least 20 calendar days before the earliest date the action may be taken✓

Rule 14c-2 requires that an information statement be sent at least 20 calendar days before the meeting date or, where holders act by consent, at least 20 calendar days before the earliest date on which the corporate action may be taken. It is a disclosure document, not a request for the holder's vote.17 CFR 240.14c-2(b)

Regulation M Rule 105 restricts short selling before certain follow-on offerings. A person who sold the security short may not buy it in the offering if the short sale occurred during what restricted period?

• a.The 30 days before the registration statement is filed
• b.The shorter of the five business days before pricing or the period from the registration filing to pricing✓
• c.The 10 business days before the offering becomes effective
• d.The 90 calendar days before the first closing

Rule 105 prohibits buying offered securities from an underwriter, broker or dealer if the buyer sold short during the restricted period. That period is the shorter of the five business days before pricing, or the time from initial filing of the registration statement to pricing. The intent is to prevent depressing the market to get a lower offering price.17 CFR 242.105

A retail investor sells a gold coin collection, held for four years, at a net gain. What is the maximum federal rate on that net long-term capital gain, according to the IRS?

• a.15%
• b.28%✓
• c.20%
• d.The investor's ordinary income rate, with no cap

The IRS states that net capital gains from selling collectibles such as coins or art are taxed at a maximum 28% rate. Most other long-term gains are taxed at lower rates of 0%, 15% or 20%.IRS Topic 409

A foreign issuer sells securities offshore under Regulation S Category 2 or 3 restrictions. What does the 40-day distribution compliance period generally restrict?

• a.Offers and sales to U.S. persons, other than distributors, during the period✓
• b.Any sale to a person located outside the United States, including one made by a distributor
• c.Any resale after the period by the original purchaser to another person in the market
• d.Any advertising of the issuer's products or services in overseas markets or media

Regulation S offers and sales made outside the United States can qualify for the safe harbor if offering restrictions are in place and, where a 40-day distribution compliance period applies, the offer or sale before the period expires is not made to a U.S. person or for a U.S. person's account, other than a distributor. The period does not bar sales to people outside the U.S.17 CFR 230.903(b)

A mutual fund has adopted a Rule 12b-1 plan with an asset-based sales charge and also pays service fees. What limits its total front-end, deferred and asset-based sales charges under FINRA Rule 2341?

• a.8.5% of total new gross sales
• b.3% of total new gross sales
• c.No cap, because shareholders approved the plan
• d.6.25% of total new gross sales plus interest charges, with a 6.25% cap on any one transaction✓

For funds with an asset-based sales charge that pay service fees, Rule 2341 caps the aggregate of those charges at 6.25% of total new gross sales plus interest at the prime rate plus 1%. Any single front-end or deferred charge cannot exceed 6.25% of the amount invested.FINRA Rule 2341(d)(2)(A)

A 401(k) participant turned 73 this year but is still working for the plan sponsor, and the plan allows delayed required minimum distributions until retirement. When is the first RMD generally due?

• a.April 1 following the year she turns 73, whether or not she is still working
• b.December 31 of the year she turns 73
• c.April 1 following the year she turns 70 1/2
• d.April 1 following the later of the year she turns 73 or the year she retires✓

For a 401(k), profit-sharing or other defined contribution plan, the IRS sets the required beginning date as April 1 following the later of the year the participant reaches age 73 or retires, if the plan allows delaying until retirement. For IRAs the date is April 1 after the year the owner turns 73, with no retirement delay.IRC 401(a)(9)

Under Regulation SHO Rule 201, a stock falls 11% from the prior day's close and the short-sale circuit breaker is triggered. For how long do the short-sale price restrictions stay in effect?

• a.For the remainder of that day and the following day✓
• b.For one hour after the decline occurs, with no limit on the types of orders
• c.For the remainder of that day only, and trading resumes the next morning
• d.For the next five trading days following the decline in the price

Rule 201 applies when a covered security's price falls 10% or more from the prior day's closing price. The restriction then requires short sales to be priced above the national best bid and remains in force for the rest of that day and the following day. It is not limited to a single session, and it does not last a week.17 CFR 242.201(b)

A customer gives a firm a separate written authorization to issue checks drawn on her bank account. How long must the firm keep that authorization under FINRA Rule 4514?

• a.Six years after the first check is issued
• b.One year after the authorization was first given to the firm
• c.Until the last check drawn under the authorization clears the bank
• d.Three years after the authorization expires✓

FINRA Rule 4514 requires express written authorization before a member draws negotiable paper on a customer's checking, savings or similar account; the customer's signature on the instrument itself can serve. Where the authorization is a separate document, the member must preserve it for three years after the authorization expires. The general six-year period applies only to records with no specified period.FINRA Rule 4514

A company issues convertible securities whose conversion price floats with the market, so a falling stock price means more shares are issued at conversion. What is the principal risk for existing shareholders?

• a.Dilution that can deepen as the price falls, sometimes called a death spiral✓
• b.Loss of voting rights for all common stockholders as soon as the first conversion takes place
• c.Mandatory conversion of the existing common stock into debt owed to the new lenders of the company
• d.A guaranteed increase in earnings per share, because the company has more shares to spread costs over

With a market-price-based conversion formula, lower prices mean more shares are issued, which dilutes existing holders and can push the stock price down further. Such deals are colloquially called floorless, toxic, death spiral or ratchet convertibles. A fixed conversion price is the conventional structure.SEC Investor.gov, Convertible Securities

On June 10 an investor sells 200 shares of ABC at a loss. On June 25 she buys call options on ABC. How does the wash sale rule treat the loss?

• a.The loss is disallowed, because acquiring an option to buy substantially identical stock within 30 days counts as a repurchase✓
• b.The loss is allowed, because options are not stock
• c.The loss is allowed, because the options were bought after 10 days
• d.The loss is disallowed only if she exercises the options within 30 days

The wash sale rule disallows a loss when, in the period beginning 30 days before and ending 30 days after the sale, the taxpayer acquires, or enters into a contract or option to acquire, substantially identical stock or securities. Buying call options on the same stock within that window triggers it.IRC 1091(a)

Which approval does Rule 12b-1 require before an open-end fund may pay distribution expenses from fund assets under a plan?

• a.Approval by a simple majority of the fund's transfer agents
• b.Approval by the fund's investment adviser alone
• c.Approval by the full board and by the directors who are not interested persons, voted in person at a meeting called for that purpose✓
• d.Approval by the SEC staff after a public comment period

A Rule 12b-1 plan must be approved by the board of directors and also by the directors who are not interested persons and have no financial interest in the plan, cast in person at a meeting called for the purpose. The plan continues beyond one year only if approved at least annually, and the board must review written reports of expenditures at least quarterly.17 CFR 270.12b-1(b)

A retail broker-dealer sells shares of a load mutual fund to an individual customer. At what price may the dealer sell under Section 22(d) of the Investment Company Act?

• a.Any price the dealer and the customer negotiate between themselves at the time of sale
• b.The current public offering price described in the prospectus✓
• c.The net asset value less the dealer's discount, as stated in the prospectus
• d.The price the dealer paid for the shares in the market, plus a markup of up to 5%

Section 22(d) bars a dealer from selling a fund share to anyone other than another dealer, the principal underwriter or the issuer except at the current public offering price described in the prospectus. This keeps the price uniform; negotiating a different price breaches the section.15 U.S.C. 80a-22(d)

An actively managed fund has management and administrative fees of 1.5% of assets, and its benchmark returns 9%. What return must the manager's portfolio earn before fees to beat the benchmark?

• a.More than 10.5%✓
• b.More than 9.0%
• c.More than 7.5%
• d.More than 13.5%

Fees reduce what shareholders keep, so a fund charging 1.5% must earn more than the benchmark's 9% plus 1.5%, or 10.5%, before fees to beat it. That handicap is a reason many investors choose lower-cost index funds.FINRA investor education: Mutual funds

A 45-year-old with $100,000 of adjusted gross income (AGI) has $14,000 of unreimbursed medical expenses and takes an IRA distribution to pay them. The 10% additional tax exception for unreimbursed medical expenses applies to which portion?

• a.All $14,000, because the expenses are for medical care
• b.The part above 10% of AGI, which is $4,000
• c.The part of the expenses above 7.5% of AGI, which is $6,500✓
• d.Nothing, because medical expenses are never an exception before age 59 1/2

The IRS exception covers unreimbursed medical expenses only to the extent they exceed 7.5% of AGI. Here 7.5% of $100,000 is $7,500, so $14,000 minus $7,500 leaves $6,500 that can be withdrawn without the 10% additional tax. The distribution is still subject to regular income tax.IRC 72(t)(2)(B)

A 66-year-old owner of a deferred annuity annuitizes it for a lifetime payout. What should her representative tell her about this decision?

• a.She can reverse it within 3 years and return to the accumulation phase
• b.She keeps the right to withdraw any lump sum on demand
• c.She can change the payout option each year without charge
• d.It is generally irrevocable, because she gives up control of the investment in return for guaranteed income✓

The decision to annuitize is generally irrevocable. The owner gives up control of the investment to the insurer in exchange for a steady income stream, and the insurer takes on the risk that she will outlive her money. Systematic withdrawals or a lump sum keep control but forfeit the guarantee.FINRA investor education: Annuities (payout)

An investor holds a registered index-linked annuity with a 10% buffer. The index it tracks falls 15% over the term. What loss does the investor absorb?

• a.15%, because a buffer protects only against gains being capped and never limits losses
• b.10%, because the buffer is the amount of loss the investor must absorb first
• c.5%, because the insurer absorbs the first 10% of the index decline✓
• d.0%, because registered index-linked annuities guarantee principal

In a registered index-linked annuity, a buffer is the percentage loss of the index that the insurance company absorbs before the investor absorbs anything. With a 10% buffer and a 15% index decline, the investor bears the 5% beyond the buffer. Buffers often come with caps on the gains the investor can earn.FINRA investor education: Annuities (RILAs)

An individual is convicted of willfully violating the Securities Exchange Act of 1934. What is the maximum criminal penalty for a natural person under Section 32(a)?

• a.A fine of up to $25,000,000 and no prison term
• b.A fine of up to $100,000 or imprisonment of up to one year
• c.A fine of up to $5,000,000, imprisonment of up to 20 years, or both✓
• d.Only a civil penalty, because criminal penalties apply to firms and not individuals

Section 32(a) provides that a person who willfully violates the Exchange Act or its rules may be fined up to $5,000,000, imprisoned up to 20 years, or both; if the offender is not a natural person, the fine can reach $25,000,000. The larger fine applies to firms and other entities, not to an individual.Exchange Act Section 32(a) (15 U.S.C. 78ff(a))

A mutual fund has no asset-based sales charge but pays a service fee. Under FINRA Rule 2341, what is the maximum aggregate sales charge it may impose?

• a.8.5% of the offering price
• b.6.25% of the offering price
• c.7.25% of the offering price✓
• d.9.0% of the offering price

FINRA Rule 2341(d)(1)(D) caps the aggregate sales charge of an investment company with no asset-based sales charge that pays a service fee at 7.25% of the offering price. A fund with neither a service fee nor an asset-based charge may go as high as 8.5% if it offers quantity discounts, and a fund with an asset-based sales charge and service fees is capped at 6.25% of gross sales.FINRA Rule 2341(d)(1)(D)

An underwriting syndicate is stabilizing the market for a newly offered stock. Which limit applies to its stabilizing bid?

• a.It may not be higher than the lower of the offering price or the stabilizing bid in the principal market✓
• b.It may be set at any price up to 10% above the offering price if the manager approves it
• c.It may be set at the public offering price or higher, to signal confidence in the issue to buyers and dealers
• d.It may be set at any price if the syndicate discloses the bid in a footnote on confirmations sent to buyers

Under Rule 104 stabilizing is meant only to prevent or slow a decline, so a bid may not exceed the lower of the offering price or the stabilizing bid in the principal market. Stabilizing is also prohibited in an at-the-market offering. A bid above the offering price would push the price up, which is manipulation rather than stabilization.17 CFR 242.104

A person trades on material nonpublic information. Who may bring a private action for damages under Section 20A of the Securities Exchange Act of 1934?

• a.Only the SEC, because Section 20A creates no private right of action for traders who were on the other side
• b.Only the issuer's shareholders of record on the first day of the year in which the violation happened
• c.Only customers of the violator's own broker-dealer who held the security during the trading day in question
• d.Anyone who traded the same class of securities on the opposite side at the same time as the violator✓

Section 20A gives a private right of action to any person who, contemporaneously with the unlawful purchase or sale, sold or bought securities of the same class on the other side of the trade. Damages are capped at the profit gained or loss avoided, and an action must be brought within five years of the last transaction.Exchange Act Section 20A (15 U.S.C. 78t-1)

Under Regulation A, what is the maximum amount a company may raise in a 12-month period in a Tier 2 offering?

• a.$75 million✓
• b.$20 million
• c.$50 million
• d.$10 million

Regulation A Tier 2 allows offerings of up to $75,000,000 in 12 months, with no more than $22.5 million offered by selling security holders who are affiliates. Tier 1 is capped at $20,000,000. The Rule 504 exemption under Regulation D has a separate $10 million cap, which is the usual source of confusion.17 CFR 230.251

A cash account customer buys $3,000 of stock, then cancels the purchase before paying in order to fix a clerical error made by the firm. How does Regulation T treat the cancellation for the 90-day freeze?

• a.Any cancellation is a sale, so the freeze starts at once
• b.It is a sale, but the freeze is shortened to 30 days
• c.It is a sale only if the amount exceeds $1,000
• d.A cancellation to correct an error is not treated as a sale, so the freeze is not triggered by it✓

Regulation T treats cancellation of a transaction as a sale for purposes of the 90-day freeze, but not when the cancellation is made to correct an error. A cancellation to fix a genuine error therefore does not by itself trigger the freeze.12 CFR 220.8(c)(1)

A dealer sells 50 corporate bonds from its inventory to a retail customer. On the same day, it bought 100 of the same bonds in an offsetting trade. What must the customer's confirmation show?

• a.The dealer's mark-up as a total dollar amount and as a percentage of the prevailing market price✓
• b.Only the net price, because the dealer acted as principal and no markup disclosure is required then
• c.The dealer's mark-up only if the customer asks for it in writing within thirty days of the trade date
• d.The dealer's mark-up as a percentage only, with no dollar amount, shown on the customer's confirmation

FINRA Rule 2232(c) requires a confirmation to include the mark-up or mark-down, as a total dollar amount and as a percentage of the prevailing market price, when a member trades as principal in a corporate or agency debt security with a non-institutional customer and has offsetting trades in at least the same size on the same trading day. Neither a customer request nor a net-price confirmation is the test.FINRA Rule 2232(c)

A public employee takes an early distribution, before age 59 1/2, from his governmental 457(b) plan balance that came entirely from his own salary deferrals. What is the 10% additional tax treatment?

• a.The 10% additional tax applies to the full distribution, including the amount that was deferred from his pay
• b.The distribution is fully tax-free to him if he is separated from service in or after the year he turns 55
• c.The distribution is taxed at 25% like a SIMPLE IRA's first two years, with no exceptions for the plan
• d.The 10% additional tax does not apply to the deferral portion, though income tax is still due✓

The IRS states that distributions from a governmental 457(b) plan are not subject to the 10% additional tax, except for amounts attributable to rollovers from another type of plan or IRA. Ordinary income tax still applies to pre-tax money withdrawn.IRC 457(b)