FINRA SIE — Securities Industry Essentials — All Questions

For a U.S. individual, the Customer Identification Program (CIP) requires a firm at account opening to collect and verify, at a minimum, the customer's:

• a.Name, date of birth, employer, annual income, net worth, and investment objectives
• b.Name, date of birth, physical address, and taxpayer identification number✓
• c.Name, residential address, occupation, employer, net worth, and risk tolerance
• d.Name, date of birth, physical address, and a reference letter from a prior broker-dealer

The CIP rule (31 CFR 1023.220(a)(2)) requires a broker-dealer to obtain at least the customer's name, date of birth (for an individual), address and identification number before opening an account; for a U.S. person the identification number is a taxpayer identification number, while a non-U.S. person may supply a passport or similar government-issued number. Investment profile items such as income, net worth, employer and objectives are collected for suitability and account-record purposes, not as CIP minimums, and a reference letter from a prior firm is not required.31 CFR 1023.220(a)(2)

A firm's obligation to use reasonable diligence, in opening and maintaining every account, to know the essential facts about each customer is established by:

• a.FINRA Rule 2111 (Suitability)
• b.SEC Rule 17a-3 (broker-dealer recordkeeping)
• c.FINRA Rule 4512 (Customer Account Information)
• d.FINRA Rule 2090 (Know Your Customer)✓

FINRA Rule 2090 requires every member to use reasonable diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer and the authority of each person acting on the customer's behalf. Rule 2111 covers the suitability of recommendations, and Rule 4512 and SEC Rule 17a-3 prescribe what account information must be recorded and kept; none of them is the general know-your-customer duty.FINRA Rule 2090

MNO stock trades at $34, and a customer wants to buy it only if the price falls to $31. Which order fits?

• a.A sell limit order at $31
• b.A buy limit order at $31✓
• c.A market order, good for the day
• d.A buy stop order at $31

A buy limit order at $31 can be filled only at $31 or lower, which matches the customer's goal. A buy stop is placed above the market and becomes a market order when the stock rises to the stop price, so it does not fit a price below the market. A sell limit order is a sale. A market order would fill immediately near $34.

An investor owns ABC stock trading at $75 and wants protection if the price falls further, without selling now. Which order fits?

• a.A sell stop order at $70✓
• b.A buy stop order at $70
• c.A sell limit order at $70
• d.A sell limit order at $80

A sell stop order below the market becomes a market order if the stock trades down to $70, which caps the loss. A sell limit order at $70 sits below the current $75 price and would fill at once, selling the stock now. A buy stop order is for buying, and a sell limit at $80 waits to sell at a higher price, which gives no downside protection.

In a quoted market, the bid-ask spread is:

• a.The fee the exchange charges to match each order
• b.The gap between a limit price and the execution price
• c.The gap between the dealer's bid and ask prices✓
• d.The difference between the day's high and low prices

The bid is what a dealer will pay and the ask is what the dealer will accept, so the spread is the difference between them and is a source of dealer compensation. The daily range compares high and low trades. An exchange fee is a separate charge. The gap between a limit price and the fill price is price improvement or slippage, not the spread.

A market maker quotes XYZ stock at a bid of $25.00 and an ask of $25.05. Which statement is correct?

• a.The dealer buys at $25.00 and sells to customers at $25.05✓
• b.The dealer sells at $25.00 and buys from customers at $25.05
• c.The customer may choose which of the two prices to use
• d.The dealer trades with customers at the midpoint, $25.025

The bid is the price at which the dealer buys, and the ask is the price at which the dealer sells. A customer selling to the dealer receives $25.00, and a customer buying pays $25.05. Reversing the two would have the dealer buying above its selling price. Trades do not occur at the midpoint, and the customer cannot choose the price.

A stock trade is executed on a Monday. Under current SEC rules, regular-way settlement occurs on:

• a.Thursday (T+3)
• b.Monday (same day)
• c.Wednesday (T+2)
• d.Tuesday (T+1)✓

Since May 28, 2024, SEC Rule 15c6-1 sets regular-way settlement of most securities transactions at the first business day after the trade date (T+1), so a Monday trade settles on Tuesday. T+2 and T+3 were earlier standards. Same-day settlement is possible only by agreement at the time of the trade.SEC Rule 15c6-1

Under SEC Rule 10b-10, a broker-dealer must give or send a customer written confirmation of a trade:

• a.With the monthly account statement
• b.At or before completion of the transaction✓
• c.Only when the customer requests it in writing
• d.Within 30 days after the trade date

Rule 10b-10 requires written confirmation at or before completion of the transaction, which is the settlement of the trade. It is not optional, and the customer does not have to ask. A monthly statement does not replace the trade-by-trade confirmation, and a 30-day delay would come long after settlement.SEC Rule 10b-10

A customer deposits $10,000 cash in a new margin account and buys marginable stock. Under Regulation T, how much can the customer borrow from the firm?

• a.$20,000, for a $30,000 purchase
• b.$30,000, for a $40,000 purchase
• c.$10,000, for a $20,000 total purchase✓
• d.$5,000, for a $15,000 purchase

Regulation T sets initial margin at 50% of the purchase price, so the customer's $10,000 supports a $20,000 purchase with a $10,000 loan. Borrowing $20,000 would put the customer's share at one-third. Borrowing $5,000 under-uses the 50% rule. A $30,000 loan would reflect the 25% maintenance level, which does not apply to initial purchases.Regulation T, 12 CFR 220.12

Stock in a customer's margin account falls, and the equity drops below the 25% maintenance requirement. The firm will call for:

• a.Immediate repayment of the entire debit balance owed to the firm
• b.Written consent from the customer to sell the shares
• c.Enough cash or securities to restore the required equity✓
• d.Cash equal to the entire decline in the stock's market value

When equity falls below the maintenance requirement (25% of market value for long stock under FINRA Rule 4210), the firm issues a maintenance call for enough cash or securities to bring equity back up to the requirement. The customer does not have to repay the whole loan. The call is for the shortfall, not the full decline in value. The margin agreement already lets the firm sell if the call is not met, so separate consent is not required.FINRA Rule 4210

A broker-dealer that acts as a principal in an over-the-counter trade:

• a.Holds customer securities for safekeeping and earns custody fees
• b.Trades for its own account and earns a markup or markdown✓
• c.Matches the buyer with a seller and charges a flat commission
• d.Acts as the issuer's selling agent and earns a placement fee

A principal is a party to the trade, buying from or selling to the customer out of its own inventory, and is paid through a markup or markdown. Matching two customers for a commission is agency. Custody is a separate service, and selling a new issue for an issuer is an underwriting or placement function.

Before accepting a customer's order to sell short, a broker-dealer must first:

• a.Confirm that the customer owns the same shares in a cash account
• b.Have reasonable grounds to believe the shares can be borrowed✓
• c.Obtain the issuer's written consent to the short sale
• d.Place the sale proceeds in escrow with the SEC

Regulation SHO requires a locate: reasonable grounds to believe the security can be borrowed and delivered on the settlement date. No consent from the issuer is needed, and the proceeds are not sent to the SEC. A customer who already owns the shares would be selling long, not short.SEC Regulation SHO Rule 203(b)

An investor owns 100 shares of QRS, which pays a regular cash dividend with a Friday record date. The investor sells all 100 shares on Friday, the ex-dividend date. Who is entitled to the dividend?

• a.The buyer, because the sale occurred before the payable date
• b.The seller, who is still the holder of record on the record date✓
• c.The buyer, because the sale settles after the record date
• d.Both of them, in proportion to the days each owned the stock

For a regular cash dividend the ex-dividend date equals the record date, and a Friday sale settles the next business day (T+1), after the record date. The seller is therefore still the holder of record and receives the dividend, because the buyer purchased on or after the ex-date. Settlement after the record date does not give the buyer the dividend, the payable date is irrelevant to entitlement, and dividends are not prorated.FINRA Rule 11140

A customer enters a day order to buy 100 shares at 10:00 a.m., and it is not filled by the close. What happens to the order?

• a.It stays open until the customer confirms in writing
• b.It stays open and becomes good-till-cancelled
• c.It expires unfilled at the close of that day's session✓
• d.It converts to a market order at the closing price

A day order is good only for the session in which it is entered and expires if it is not executed by the close. It does not become a GTC order, which must be entered as GTC. It is not converted to a market order, and no written confirmation is needed.

A customer holds a stock trading at $60 and enters an order that becomes a market sell order only if the stock trades down to $55. This is a:

• a.Sell stop order✓
• b.Buy limit order
• c.Sell limit order
• d.Buy stop order

A sell stop order is placed below the market and is triggered when the stock trades at or below the stop price, becoming a market order. A sell limit at $55 placed while the stock is at $60 would be a different order. Buy orders are for purchasing the stock and not for selling a position already held.

Which statement about short selling is correct?

• a.The seller must hold the position in a cash account
• b.The seller profits only if the stock price rises
• c.The seller's loss is limited to the proceeds of the sale
• d.The seller borrows shares and gains if the price falls✓

A short seller borrows shares, sells them, and later buys them back; the profit comes from a price decline. Losses are theoretically unlimited because the price can keep rising. A short seller profits when the price falls, not rises, and short sales must be made in a margin account, not a cash account.

A margin account holds long stock with a market value of $40,000, a $10,000 debit balance, and $30,000 of equity. If the stock falls 20%, what is the new equity?

• a.$30,000, found by treating the debit balance as unchanged equity
• b.$22,000, found from $32,000 of stock less the $10,000 debit✓
• c.$32,000, found by forgetting to subtract the debit balance
• d.$24,000, found by applying the 20% decline to the $30,000 of equity

The stock falls 20% of $40,000, or $8,000, to $32,000. The debit balance stays at $10,000, so equity is $32,000 - $10,000 = $22,000. Applying 20% to equity understates the loss because the borrowed portion also falls. Using $32,000 forgets the loan. Equity is not unchanged just because the debit stays the same.FINRA Rule 4210

XYZ declares a regular cash dividend with a record date of Friday. Under current rules, when is the ex-dividend date?

• a.Wednesday, two business days before the record date
• b.Thursday, one business day before the record date
• c.Friday, the same business day as the record date✓
• d.Monday, the first business day after the record date

FINRA Rule 11140 sets the ex-dividend date for a regular cash dividend at the record date itself when it falls on a business day, because settlement is T+1. The two-business-day gap was the T+2 rule, and under T+1 a purchase on the business day before the record date still settles in time. Ex-dividend dates are not after the record date.FINRA Rule 11140

A dealer sells a customer shares from inventory at $50.00 that the dealer bought at $49.50. The $0.50 difference is:

• a.A markup, the dealer's pay on a principal sale✓
• b.A markdown, the dealer's pay when buying from a customer
• c.A concession, paid to syndicate members on new issues
• d.A commission, the fee for acting as an agent

A markup is the difference between the dealer's price to the customer and the dealer's cost when selling from its own inventory. A commission is charged when a firm acts as an agent. A markdown applies when the dealer buys from the customer. A concession is paid on the distribution of new issues.

On January 5, a customer enters a GTC order to buy 100 shares at a $30 limit while the stock trades at $34. In March the stock falls to $30. Assuming neither the customer nor the firm has cancelled the order, it:

• a.Became a stop order that fills only if the stock trades above $30
• b.Is still working and fills once the stock trades at $30 or lower✓
• c.Converted to a market order once 90 days had passed
• d.Expired automatically at the close of the first trading day

A good-till-cancelled order stays in force until it is filled or cancelled, subject to the firm's own policy, so a buy limit at $30 remains working and fills once the market reaches $30. Expiration at the close of one day describes a day order. A GTC limit does not turn into a market or stop order with the passage of time.

On the NYSE, which participant has the obligation to maintain a fair and orderly market in an assigned stock?

• a.The designated market maker (DMM) assigned to the stock✓
• b.A two-dollar broker working overflow orders
• c.A third market maker trading away from the NYSE
• d.A floor broker acting only as an agent

On the NYSE a designated market maker is assigned to a stock and must maintain a fair and orderly market in it. A two-dollar broker helps floor brokers with overflow orders. A third market maker is an over-the-counter dealer that trades exchange-listed stocks away from the exchange. A floor broker acts only as an agent for orders.

A customer opens a new margin account and buys marginable stock. What minimum equity does FINRA Rule 4210 generally require in the account?

• a.$2,000, or the full cost if the purchase is smaller✓
• b.$10,000 once the account is approved
• c.$5,000 for every margin account opened
• d.$25,000 before any purchase can be made

FINRA Rule 4210 sets minimum equity of $2,000 for a margin account, except that the customer need not deposit more cash than the cost of the securities purchased. The $5,000, $10,000, and $25,000 amounts are not the general minimum for opening a margin account.FINRA Rule 4210

Under SEC Rule 15c2-1, a broker-dealer wants to pledge a customer's margin securities together with other customers' securities as collateral for a single firm loan. What must it first obtain?

• a.Approval from FINRA before each pledge is made
• b.Oral consent from the customer, noted on the account record
• c.Written consent from each customer whose securities are pledged✓
• d.Sign-off from the supervising principal, with notice to the customer afterward

Rule 15c2-1 bars a firm from pledging a customer's securities under a lien that also secures other customers' securities unless that customer first gave written consent (in practice, the hypothecation clause of the signed margin agreement). Oral consent is not enough, FINRA does not approve individual pledges, and principal sign-off with after-the-fact notice cannot replace the customer's prior written consent.SEC Rule 15c2-1

A customer buys $10,000 of stock in a margin account, paying $5,000 and borrowing $5,000 from the broker-dealer. The stock later falls to $8,000. Ignoring interest and commissions, what is the customer's equity in the account?

• a.$3,000✓
• b.$8,000
• c.$5,000
• d.$2,000

Equity is market value minus the debit balance: $8,000 - $5,000 = $3,000. The $5,000 figure is the customer's original equity before the decline, $8,000 is market value, which ignores the loan, and $2,000 is the size of the loss, not the equity left (original $5,000 equity - $2,000 loss = $3,000).

Under SEC Rule 3a51-1, which description generally fits a penny stock?

• a.A stock priced under $10 that is quoted only in the over-the-counter market
• b.A stock priced under $5 and not listed on a national exchange✓
• c.A stock of a company with market capitalization under $300 million
• d.A stock priced under $1 that trades on any market

Rule 3a51-1 treats an equity security as a penny stock unless an exclusion applies; the core test is a price below $5 and no listing on a national securities exchange (issuers with larger net tangible assets or revenue can be excluded). The $1 figure is a common mix-up with exchange minimum-bid listing standards, $10 is not the threshold, and market capitalization is not part of the definition.SEC Rule 3a51-1

Under FINRA Rule 3110, which of the following must a member firm's supervisory system include?

• a.FINRA's advance approval of each written supervisory procedure
• b.Principal review of only those transactions above a set dollar amount
• c.Annual inspection of every branch, including non-supervisory ones
• d.Written procedures reasonably designed to achieve compliance✓

Rule 3110 requires a supervisory system reasonably designed to achieve compliance, backed by written procedures. Those procedures must provide for principal review of all transactions, not just large ones; FINRA does not pre-approve a firm's procedures; and annual inspection is required only for offices of supervisory jurisdiction and supervisory branches, while non-supervisory branches must be inspected at least every three years.FINRA Rule 3110

A stock closed Monday at $50.00. On Tuesday morning it trades down to $44.50, an 11% decline from Monday's close, which triggers the SEC's alternative uptick rule (Rule 201). Which restriction applies?

• a.Short sales may not execute at or below the national best bid for the rest of Tuesday and all of Wednesday✓
• b.Short sales may execute only on a plus tick or zero-plus tick, for the rest of Tuesday only
• c.Short sales are barred outright for the rest of Tuesday and Wednesday unless the order is marked short exempt
• d.Trading halts for 15 minutes, then short sales resume under normal rules for the rest of Tuesday

Rule 201 applies once a stock falls 10% or more from the prior close: for that day and the next, short sales may not be executed or displayed at or below the national best bid. It restricts price, not all short selling. The plus-tick test is the old rule that was repealed, and a 15-minute pause belongs to a different mechanism (volatility halts), not to Rule 201.17 CFR 242.201

In a cash account with no other funds, a customer buys $5,000 of stock on Monday. On Tuesday, before sending any payment, she sells the same shares and uses the proceeds to cover the purchase. What is the consequence under Regulation T?

• a.For 90 calendar days she must pay in full before the firm will accept any buy order✓
• b.The firm must liquidate the account and bar her from opening another cash account for 90 calendar days
• c.For 30 calendar days she must pay in full before the firm will accept any buy order
• d.None, because the sale proceeds covered the purchase and the position was flat at the close

Selling securities that were never paid for is free-riding, and Regulation T 220.8(c) withdraws the privilege of delaying payment for 90 calendar days, so she must pay up front. The period is 90 days, not 30. Having the proceeds cover the cost does not excuse the violation, and the rule does not require liquidating or barring the account.12 CFR 220.8(c)

A customer buys $30,000 of marginable stock in a margin account, putting up the Regulation T initial requirement of 50% and borrowing the rest. The debit balance stays at $15,000 and no interest accrues. At what market value is the account exactly at the 25% maintenance requirement?

• a.$18,750
• b.$15,000
• c.$22,500
• d.$20,000✓

Equity equals market value minus the $15,000 debit. Setting equity at 25% of market value gives MV - 15,000 = 0.25 x MV, so 0.75 x MV = 15,000 and MV = $20,000. $22,500 is 75% of the original $30,000, $18,750 adds 25% to the debit, and $15,000 is the value at which equity falls to zero.FINRA Rule 4210(c)(1)

A stock goes ex-dividend today with a $0.50 cash dividend. A customer has two open GTC orders: a buy limit at $40.00 and a sell limit at $48.00. Absent a 'Do Not Reduce' instruction, what are the orders after the standard ex-date adjustment?

• a.Buy limit at $39.50; sell limit at $47.50
• b.Buy limit at $40.00; sell limit at $48.00
• c.Buy limit at $39.50; sell limit at $48.00✓
• d.Buy limit at $40.00; sell limit at $47.50

Under FINRA Rule 5330, open buy orders and open sell stop orders are reduced by the cash dividend on the ex-date, so the $40.00 buy limit becomes $39.50. Open sell limit orders are not reduced and stay at $48.00. The other pairings either reduce the sell limit, skip the buy limit, or adjust nothing.FINRA Rule 5330

An investor holds a stock that closed at $52 and has an open sell stop order at $50. Overnight bad news makes the stock open at $46. What generally happens to the order?

• a.It fills at $50, because a stop order guarantees execution at the stop price once triggered
• b.It becomes a limit order at $50 and stays unfilled because $46 is below that price
• c.It stays unfilled because the stock opened below $50 and never traded at exactly $50
• d.It becomes a market order once the stock trades at or below $50 and fills at or near $46✓

A sell stop is triggered when the stock trades at or below the stop price, and it then becomes a market order, so the fill is at or near the $46 opening price. Stop orders do not guarantee the stop price. Becoming a limit order at $50 describes a stop-limit order, not a plain stop. A gap through $50 still triggers the stop.

A customer bought XYZ at $80 and it now trades at $100. She enters a sell trailing stop order with a 10% trail. XYZ rises to $120 and then reverses. At what price does the order become a market order?

• a.$110.00, which is $10 below the $120 high
• b.$72.00, 10% below the original $80 cost
• c.$90.00, 10% below the price at order entry
• d.$108.00, which is 10% below the $120 high✓

A sell trailing stop ratchets upward as the stock makes new highs and never moves back down. With a 10% trail, the stop follows the $120 high to $108.00 (120 x 0.90), so the order becomes a market order when XYZ trades down to $108. The $90 level was only the starting stop and was raised along the way; $110 subtracts a fixed 10 points rather than 10 percent; $72 measures the trail from the purchase price, which a trailing stop does not do.

A customer holds a stock at $60 and enters a sell trailing stop with a $4 trail. The stock rises to $66, falls back to $63, climbs to $69, slips to $66.50 and then drops to $65. What happens when it trades at $65?

• a.The stop, now at $63, is reached and the order becomes a market order
• b.The stop, now at $65, is reached and becomes a market order✓
• c.The stop, still at $56, has not been reached and the order stays active
• d.The stop, now at $62, is reached and the order becomes a market order

The stop only moves up, following each new high by $4. The $69 high placed the stop at $65, so a trade at $65 converts the order to a market order. The $62 level was in force after the $66 high but was replaced when $69 printed; $56 is the starting stop ($60 - $4) that was raised as the stock climbed; $63 was merely the low of the first pullback and has no role in the stop price.

A customer owns 200 shares of ABC at $48 and enters a sell stop-limit order with a $45.00 stop and a $44.50 limit. After bad news, ABC opens at $43.00 and trades between $42.50 and $43.50 all day. What is the result?

• a.Canceled at the open, because the stock gapped through the stop price
• b.Triggered but not filled, because ABC never trades at $44.50 or higher✓
• c.Filled at exactly $44.50, because the limit price is guaranteed to the customer
• d.Filled near $43.00, because a stop becomes a market order when triggered

A stop-limit order becomes a limit order, not a market order, once the stop price trades. Here the limit is $44.50 and the stock never trades that high, so the order stays open unfilled; the price is protected but execution is not. A plain stop order would convert to a market order and fill near $43. A limit price guarantees a floor, not a fill. Gapping through the stop does not cancel the order.

A customer enters a limit order to buy 5,000 shares of DEF at $20.00, marked fill-or-kill (FOK). Only 3,000 shares are offered at $20.00 when the order reaches the market. What is the outcome?

• a.3,000 shares are bought, and the other 2,000 rest on the book until the close
• b.No shares are bought, and the entire 5,000-share order is canceled immediately✓
• c.3,000 shares are bought, and the unfilled 2,000 shares are canceled immediately
• d.No shares are bought, and the order stays on the book until all 5,000 can be filled

A fill-or-kill order must be executed immediately and in its entirety, or it is canceled in full. Buying 3,000 and canceling the rest describes an immediate-or-cancel order. Buying 3,000 and leaving 2,000 on the book describes an ordinary day limit order. Waiting for the full 5,000 describes an all-or-none order, which, unlike FOK, remains working.

A customer places a day order to sell 10,000 shares of GHI with an all-or-none (AON) instruction. At 10:15 a.m., buyers are available for only 6,000 shares at the limit price. What happens?

• a.6,000 shares are sold, and the remaining 4,000 shares keep working until the close
• b.Nothing executes, and the order keeps working until 10,000 shares can be sold or the day ends✓
• c.Nothing executes, and the entire order is canceled immediately because it cannot be completed
• d.6,000 shares are sold, and the remaining 4,000 shares are canceled immediately

An all-or-none order may execute only in its entirety, but it does not have to execute immediately; it stays active until it can be completed or it expires. Selling 6,000 and canceling the rest is an immediate-or-cancel result, canceling everything at once is fill-or-kill, and a partial fill with the balance still working is how an ordinary day limit order behaves.

At 2:00 p.m. a customer enters a market-on-close (MOC) order to sell 500 shares of JKL, which last traded at $30.10. JKL's official closing price is $29.40. At what price does the order execute?

• a.$29.95, the day's volume-weighted average
• b.$30.10, the last price before order entry
• c.$29.40, the official closing price for JKL✓
• d.$30.25, the opening price on that day

A market-on-close order is designed to execute at the closing price, so it fills at $29.40 regardless of where the stock traded when the order was entered. The price at entry, the volume-weighted average price and the opening price are different reference points, and none of them is what a MOC order is tied to.

Under SEC Rule 17a-3(a)(6), which item must a firm's memorandum of a customer's brokerage order show?

• a.The customer's investment objective and risk tolerance
• b.The customer's annual income and total net worth
• c.Whether the order was entered under discretionary authority✓
• d.The customer's taxpayer identification number on file

The order memorandum records the order itself: its terms and any changes, the account, the time of receipt and entry, the price, the responsible associated person, and whether the order was entered under discretionary authority. Income and net worth, investment objectives and risk tolerance, and the taxpayer identification number are customer-account information kept on the account record, not on the individual order ticket.SEC Rule 17a-3(a)(6)

A customer phones her representative and asks to buy 500 shares of a speculative biotech stock that the representative has never mentioned to her. The representative thinks the stock is too risky for her. How should the order be handled?

• a.Execute it as recommended, since voicing concerns is a recommendation
• b.Execute it and mark it unsolicited, as no advice was given✓
• c.Execute it only after a principal reviews and approves the order
• d.Refuse it, because Regulation Best Interest bars risky trades

Regulation Best Interest applies to recommendations. A customer-initiated order the representative never suggested is unsolicited, so it can be executed and should be marked unsolicited; voicing concerns about it does not change that. Refusing, or relabeling the trade as recommended, misreads the rule, and principal pre-approval is not what the rule requires for an unsolicited order.Regulation Best Interest (17 CFR 240.15l-1)

Three buy limit orders at $25.00 sit on an exchange's book in this sequence: 500 shares entered at 9:35, 1,000 shares at 9:40 and 200 shares at 9:42. A seller then sells 1,200 shares at $25.00 into the book. Applying price-time priority, how is the sale filled?

• a.The second order fills 1,000, the first fills 200, and the third gets none
• b.The third order fills 200, then the first and second fill 500 each
• c.The first fills 500, the second fills 700, the third gets none✓
• d.All three orders share the 1,200 shares in proportion to their sizes

At the same price, the order that arrived first has priority, so the 9:35 order fills in full (500) and the 9:40 order receives the remaining 700; the 9:42 order is not reached. Pro-rata sharing and size-based priority are allocation methods used in some other markets but not price-time priority, and nothing about the smallest order going first applies at all.

A member firm reviews the quality of its customer-order executions once a year and believes that satisfies the FINRA Rule 5310 best-execution requirement. Is the firm in compliance?

• a.Yes, if a principal signs off on the annual review each year
• b.Yes, an annual review satisfies best execution for customer orders
• c.No, the rule requires a monthly review of each execution venue
• d.No, regular and rigorous reviews are required at least quarterly✓

Supplementary Material .09 to Rule 5310 requires regular and rigorous reviews of execution quality at a minimum on a quarterly basis, more often if the firm's business warrants. An annual cycle is too infrequent, and principal sign-off does not cure that. The rule sets no monthly, venue-by-venue minimum, so that option overstates the requirement.FINRA Rule 5310

A dealer sells a customer 300 shares of PQR at $41.60. The dealer bought the shares for its own inventory two hours earlier at $40.00, and the prevailing market price has not changed. What is the percentage markup?

• a.3.85%, measured on the $41.60 sale price
• b.4.0%, based on the $40.00 market price✓
• c.5.0%, the figure from the FINRA 5% policy
• d.1.6%, the dollar markup stated as a percent

Markup is measured from the prevailing market price, and the dealer's own contemporaneous cost is the best evidence of that price. The markup is $41.60 - $40.00 = $1.60 per share, and $1.60 / $40.00 = 4.0%. Dividing by the sale price gives 3.85%, which uses the wrong base. Writing $1.60 as 1.6% confuses dollars with a percentage. The 5% policy is a guide to fairness, not a calculation result.FINRA Rule 2121

A customer sells 500 shares of STU to a dealer, and the dealer pays $12.00 per share. The prevailing market price at that time is $12.50. What is the dealer's total markdown?

• a.$0.50, the per-share difference only
• b.$6,250, the value of the shares at the market price
• c.$6,000, the total amount paid to the customer
• d.$250, which is $0.50 per share on 500 shares✓

A markdown is the amount by which the price paid to the customer falls below the prevailing market price. Here it is $12.50 - $12.00 = $0.50 per share, and $0.50 x 500 shares = $250. Stopping at $0.50 skips the multiplication by the share count. $6,000 (500 x $12.00) is what the customer received and $6,250 (500 x $12.50) is the market value; neither is the markdown.FINRA Rule 2121

A firm wants to execute a net transaction with a retail (non-institutional) customer, charging no separate commission. What must the firm obtain before it executes the order?

• a.A negative-consent letter sent when the account was opened
• b.Oral consent given once when the account was opened
• c.Written customer consent for that specific order✓
• d.The customer's signature on the confirmation after execution

For a customer who is not an institutional customer, Rule 2124 requires written consent obtained order by order before the net transaction is executed. A one-time oral consent or a negative-consent letter at account opening does not meet that standard, and a signature on the confirmation comes after execution, too late. Some of those methods are open only for institutional customers.FINRA Rule 2124

The best protected offer for VWX is $20.00 on Exchange A. A broker-dealer executes a customer's market order to buy 100 shares on Exchange B at $20.03 and none of the Rule 611 exceptions applies. What is the issue?

• a.It is a trade-through, because a better-priced protected quote was bypassed✓
• b.It is a locked market, because two exchanges show different offers
• c.It is a free-riding violation by the customer on Exchange B
• d.There is no issue, because a market order accepts any available price

Rule 611 (the Order Protection Rule) requires policies to prevent executions at prices inferior to protected quotations displayed by other trading centers. Buying at $20.03 when $20.00 was protected and accessible is a trade-through unless an exception, such as an intermarket sweep order, applies. A market order does not waive the rule. A locked market is a bid equal to an offer, and free-riding concerns payment for securities, not routing.Regulation NMS Rule 611

A dark pool that matches institutional orders without displaying them to the public operates as an alternative trading system (ATS). Which statement about it is correct?

• a.It must register with the SEC as a national securities exchange
• b.Its executions are exempt from trade reporting
• c.It may not trade securities that are listed on an exchange
• d.It must register as a broker-dealer and comply with Regulation ATS✓

An ATS matches buyers and sellers but is not an exchange. Regulation ATS requires it to register as a broker-dealer, and it then operates under Regulation ATS in place of exchange registration. Dark pools can and do trade exchange-listed stocks, and their trades are reported to a FINRA facility, so exemption from reporting is incorrect.Regulation ATS, 17 CFR 242.301(b)(1)

A Level 2 screen for MNO shows offers of 800 shares at $25.00 and 400 shares at $25.06, with larger sizes at higher prices. A customer enters a market order to buy 1,200 shares, and these are the only offers reached. What is the average execution price?

• a.$25.06
• b.$25.03
• c.$25.02✓
• d.$25.00

A market buy order takes the lowest offers first. The first 800 shares cost 800 x $25.00 = $20,000 and the next 400 cost 400 x $25.06 = $10,024. The total is $30,024, and $30,024 / 1,200 = $25.02. Using only the best offer gives $25.00. Averaging the two prices without weighting gives $25.03, and $25.06 is simply the last price reached.

A customer places an order to buy 400 shares of YZA. After receiving it, the firm buys 400 shares in the market at $48.00 and confirms them to the customer at $49.80 as principal. What is the firm's total markup?

• a.$1.80
• b.$19,920
• c.$19,200
• d.$720✓

When a firm fills a customer order by buying in the market, its contemporaneous cost is the best evidence of the prevailing market price. The markup is $49.80 - $48.00 = $1.80 per share, and $1.80 x 400 = $720. The per-share figure alone is incomplete, $19,200 is the firm's cost (400 x $48.00), and $19,920 is the customer's total price (400 x $49.80).FINRA Rule 2121

A dealer sells a stock from inventory at 4.2% above the prevailing market price. Under FINRA Rule 2121, which statement is correct?

• a.The 5% policy is a hard ceiling, so only markups above it can be unfair
• b.Markups of 5% or less are automatically within the rule
• c.A markup below 5% can still be unfair, because the 5% policy is only a guide✓
• d.The 5% figure is measured from the customer's price, not the market price

The 5% policy is a guide, not a rule. Whether a markup is fair depends on all relevant factors, including the price of the security, the size of the order and the services provided, so even a markup under 5% can be unfair. The policy is not a safe harbor or a hard ceiling, and markups are measured from the prevailing market price.FINRA Rule 2121

A customer sells short 200 shares of BCD at $60.00 and later buys them back at $71.25 to close the position. Ignoring commissions and interest, what is the result?

• a.A gain of $2,250
• b.A loss of $12,000
• c.A loss of $2,250✓
• d.A loss of $14,250

A short seller profits when the price falls and loses when it rises. The loss per share is $71.25 - $60.00 = $11.25, and $11.25 x 200 = $2,250. Calling it a gain reverses the direction. $14,250 (200 x $71.25) is the cost to cover, and $12,000 (200 x $60.00) is the original proceeds; neither is the difference.