FINRA SIE — Securities Industry Essentials — All Questions

An individual wants to name specific people to receive her brokerage account assets at her death, without going through probate, while keeping full control during her lifetime. Which account registration accomplishes this?

• a.An UTMA custodial account
• b.A discretionary account
• c.Tenants in common with the beneficiaries
• d.A Transfer on Death (TOD) registration✓

A Transfer on Death (TOD) registration lets the owner keep full control while alive and designate beneficiaries who receive the assets directly at death, bypassing probate. The beneficiaries have no rights to the account while the owner is living.

What is the purpose of the Automated Customer Account Transfer Service (ACATS)?

• a.To automatically route and execute customer stock orders on a national exchange
• b.To register newly issued securities with the SEC before they are sold
• c.To transfer a customer's account positions from one broker-dealer to another✓
• d.To calculate each customer's overnight margin requirement at the clearing firm

ACATS standardizes and automates the transfer of customer account assets between firms. Under FINRA rules, the carrying firm must generally validate or take exception to a transfer request within one business day and complete a validated transfer within about three business days.FINRA Rule 11870

Illegal insider trading generally involves trading a security while in possession of information that is both:

• a.Public and immaterial
• b.Old and widely reported
• c.Optimistic and unverified
• d.Material and nonpublic✓

Insider trading laws prohibit buying or selling securities based on material, nonpublic information (MNPI) in breach of a duty of trust or confidence. 'Material' means a reasonable investor would consider it important; 'nonpublic' means it has not been disseminated to the market.Securities Exchange Act of 1934

An executive tells his neighbor that his company will announce a surprise merger tomorrow. The neighbor buys the stock that afternoon and profits when the news breaks. Which statement is correct?

• a.Insider trading liability applies only when the profits from a single trade exceed one million dollars
• b.No violation occurred because the neighbor is not an officer, director, or employee
• c.The neighbor (a tippee) can be liable for insider trading for using material nonpublic information✓
• d.Only the executive who tipped the news can be liable, since the neighbor owed no duty

A tippee who trades on material nonpublic information tipped in breach of a duty can be held liable for insider trading, and so can the tipper. Liability does not require being a corporate insider or a minimum dollar amount.Insider Trading and Securities Fraud Enforcement Act of 1988

A group spreads false, glowing rumors about a thinly traded stock they own to drive up the price, then sells their shares into the buying frenzy, leaving new buyers with losses. This scheme is called:

• a.Selling away
• b.A pump-and-dump✓
• c.Account churning
• d.Front-running

A pump-and-dump artificially inflates a security's price through false or misleading positive statements, then the promoters 'dump' their shares at the inflated price. It is a form of market manipulation prohibited under the antifraud provisions of the securities laws.Securities Exchange Act of 1934

A trader enters large buy orders he intends to cancel before execution, hoping to trick others into thinking demand is rising so he can sell at a higher price. What is this prohibited practice?

• a.Spoofing✓
• b.Marking the close
• c.Painting the tape
• d.Front-running

Spoofing is placing bids or offers with the intent to cancel them before execution, creating a false impression of supply or demand to manipulate prices. It is an illegal form of market manipulation. Marking the close is buying or selling near the end of the session to set a favorable closing price, and painting the tape is a series of actual trades that creates an appearance of activity; in both, the trades are real, whereas here the orders are meant to be canceled. Front-running is trading ahead of a known pending customer order, not entering orders to be canceled.Securities Exchange Act of 1934

A trader learns his firm is about to place a very large customer buy order that will likely push the price up. He quickly buys the stock for his own account first. This is best described as:

• a.Front-running✓
• b.A permissible hedge
• c.Dollar-cost averaging
• d.Legitimate proprietary trading

Front-running is trading ahead of a known, imminent large order to profit from the expected price move it will cause. It breaches the duty owed to customers and the market and is a prohibited practice.Securities Exchange Act of 1934

Just before the market closes, a trader enters a flurry of small buy orders in a stock solely to push its closing price higher and inflate the value shown on month-end statements. This manipulation is known as:

• a.Riskless arbitrage
• b.Dividend capture
• c.Marking the close✓
• d.Position netting

Marking the close (or 'painting the tape' at the close) is entering trades near the close specifically to influence the closing price. It is a prohibited form of manipulation, often done to affect valuations, indices, or derivative settlements.Securities Exchange Act of 1934

A representative with discretionary authority trades a retiree's account dozens of times a month, generating large commissions but no clear benefit to the customer's stated goals. This is most likely:

• a.Suitable active management
• b.Selling away
• c.Front running
• d.Churning✓

Churning is excessive trading in a customer's account, primarily to generate commissions, that is inconsistent with the customer's objectives. It typically requires control over the account, such as discretion, and trading that is excessive measured against the customer's goals and resources. FINRA Rule 3260(a) bars excessive transactions in a discretionary account, and for retail recommendations Regulation Best Interest's care obligation requires a reasonable basis that a series of transactions is not excessive. Selling away is dealing in securities outside the firm without notice. Front running is trading ahead of a customer's pending order. Suitable active management would benefit the customer's stated goals, which is not the case here.FINRA Rule 3260(a)

Without any written discretionary authority and without calling the client, a representative buys 1,000 shares of a stock in the client's account because he is sure it will rise. What violation is this?

• a.Front-running
• b.A legitimate 'not-held' order
• c.Proper use of discretion
• d.Unauthorized trading✓

Executing a trade in a customer's account without the customer's authorization (and without valid written discretionary authority) is unauthorized trading, a violation of just-and-equitable-principles standards, regardless of whether the trade turns out well.FINRA Rule 2010

A registered representative sells a private investment to several clients on the side, receiving compensation, but never tells her firm or gets its approval. What prohibited activity is this?

• a.Marking the close (entering orders late in the day to set the closing price)
• b.Commingling (mixing customer funds or securities with the firm's own assets)
• c.Churning (excessive trading in a customer account to generate commissions)
• d.Selling away (private securities transactions without firm approval)✓

Selling away is engaging in private securities transactions outside the scope of employment without providing prior written notice to, and receiving approval from, the firm. It denies the firm the ability to supervise the activity and protect customers.FINRA Rule 3280

A firm mixes customer securities with the firm's own securities in a way that puts customer assets at risk if the firm fails. This prohibited practice is called:

• a.Rehypothecation disclosure
• b.Netting
• c.Subordination
• d.Commingling✓

Commingling improperly mixes customer funds or securities with those of the firm, endangering customer property. Rules such as the SEC's customer protection rule require firms to segregate and safeguard customer assets.Securities Exchange Act of 1934

To close a sale, a representative tells a customer that a corporate bond is 'guaranteed by the FDIC and can never lose money.' The statement is false. This is an example of:

• a.Selling away
• b.Misrepresentation✓
• c.A permissible sales puff
• d.Suitable recommendation

Misrepresentation is making a false or misleading statement of material fact to induce a securities transaction. Falsely claiming FDIC backing or a guarantee against loss is a serious violation of the antifraud provisions.Securities Exchange Act of 1934

The Bank Secrecy Act (BSA) and related anti-money-laundering rules primarily require financial firms to do what?

• a.Guarantee every customer a minimum annual rate of return on their account balance
• b.Register every stock trade with the IRS before the order can be entered
• c.Detect, prevent, and report money laundering and other suspicious financial activity✓
• d.Insure each customer's deposits against market losses up to $250,000

The BSA is a cornerstone of U.S. anti-money-laundering law. It requires firms to maintain AML programs, verify customer identity, keep records, and file reports such as SARs and CTRs to help detect and prevent money laundering and terrorist financing.Bank Secrecy Act

A firm's Customer Identification Program is a required component of which broader compliance framework?

• a.The firm's dividend reinvestment program
• b.The firm's anti-money-laundering (AML) program✓
• c.The firm's proxy solicitation procedures
• d.The firm's marketing and advertising review

CIP is a mandatory part of a firm's AML compliance program under the USA PATRIOT Act. By verifying customer identity at account opening, CIP supports the broader goal of preventing money laundering and terrorist financing.USA PATRIOT Act

A firm notices a customer making a pattern of transactions that appear designed to hide the source of funds, with no apparent lawful business purpose. Which report is most appropriate?

• a.A Currency Transaction Report (CTR) only
• b.A Suspicious Activity Report (SAR)✓
• c.A dividend disbursement notice
• d.A Form 10-K

A Suspicious Activity Report (SAR) is filed when a firm detects transactions that appear to involve money laundering, have no apparent lawful purpose, or are otherwise suspicious (generally at or above a dollar threshold). Firms must not 'tip off' the customer that a SAR was filed.Bank Secrecy Act

A Currency Transaction Report (CTR) generally must be filed when a customer conducts a cash transaction exceeding what amount in a single business day?

• a.$10,000✓
• b.$3,000
• c.$1,000
• d.$5,000

A CTR is required for cash (currency) transactions exceeding $10,000 in a single business day, including multiple transactions that aggregate above that amount. It applies to physical currency, not ordinary securities trades settled by check or wire.Bank Secrecy Act

A customer repeatedly deposits cash in amounts of $9,500 to $9,800, seemingly to stay just under the $10,000 CTR threshold. This behavior is a classic AML red flag known as:

• a.Structuring✓
• b.Netting
• c.Rebalancing
• d.Laddering (of bonds)

Structuring is breaking up cash transactions to evade the CTR reporting requirement. It is itself illegal and a strong AML red flag that should prompt further review and likely a Suspicious Activity Report.Bank Secrecy Act

Under FINRA communications rules, a communication distributed to more than 25 retail investors within any 30-calendar-day period is classified as:

• a.An institutional communication
• b.A retail communication✓
• c.Correspondence
• d.A public appearance before an audience

FINRA Rule 2210(a)(5) defines a retail communication as any written communication distributed or made available to more than 25 retail investors within any 30 calendar-day period. Correspondence goes to 25 or fewer retail investors, and institutional communications go only to institutional investors. A public appearance, such as a seminar talk, is a separate topic handled in the rule's paragraph on public appearances and is not defined by an audience count of retail investors in 30 days.FINRA Rule 2210(a)(5)

A firm plans to post an advertisement about a mutual fund on its public website, reaching thousands of retail investors. Generally, what must happen before it is used?

• a.A registered principal must approve the retail communication before first use✓
• b.The SEC must pre-approve the wording of the advertisement in writing
• c.Nothing, because website postings are exempt from principal approval and review
• d.Each customer must sign a new account agreement acknowledging the ad

Retail communications generally must be approved by a registered principal before first use (with limited exceptions). Certain communications, such as those about registered investment companies, may also need to be filed with FINRA within stated timeframes.FINRA Rule 2210

Broker-dealers are required to keep certain business records for specified minimum periods. What is the main regulatory reason for these recordkeeping rules?

• a.To allow regulators to reconstruct activity and supervise for compliance and investor protection✓
• b.To let customers document their orders and avoid paying commissions on disputed trades
• c.To replace the need to send customers trade confirmations and periodic account statements
• d.To help firms substantiate expense deductions and lower their annual corporate tax bills

SEC rules (such as Rules 17a-3 and 17a-4) require firms to create and preserve books and records for set periods so regulators can examine and reconstruct the firm's activities. This supports supervision, audits, and investor protection.Securities Exchange Act of 1934

In a joint brokerage account (JTWROS or TIC), which statement about trading authority is generally true while all owners are living?

• a.Only the owner whose name is listed first may enter any order
• b.Any owner may enter orders, but checks are typically payable to all owners✓
• c.Neither owner may trade without a court order authorizing the account
• d.Only the owner who contributed the larger share of assets may trade

In a typical joint account, each owner can enter orders and access the account, but distributions such as checks are generally made payable to all owners. The specific rights depend on the account agreement and registration type.

A customer's adult son wants authority to place trades in his elderly father's individual account. What is generally required for the son to do so lawfully?

• a.Approval from the firm's branch manager alone, with no signed document from the father
• b.Only the son's verbal assurance, given to the representative over the phone
• c.A written trading authorization (such as a power of attorney) on file with the firm✓
• d.Nothing, because a close relative is presumed to hold trading authority

A third party may trade in another person's account only with proper written authorization from the account owner, such as a limited or full power of attorney, on file with the firm. Being a relative does not by itself confer trading authority. A supervisor's approval cannot substitute for the owner's signed authorization, a telephone assurance from the son is not authorization from the father, and adding no document at all would leave the firm unable to show the father consented.FINRA Rule 3260(b)

A self-employed person with no employees wants a tax-advantaged retirement plan that is simple to set up and allows relatively high contributions. Which is a common fit?

• a.A UGMA account
• b.A Health Savings Account only
• c.A SEP IRA✓
• d.A 529 college savings plan

A SEP IRA is a simplified employer-sponsored retirement plan often used by self-employed individuals and small businesses, allowing tax-deductible contributions with higher limits than a standard IRA. A 529 is for education and an UGMA is a custodial gift account, not retirement plans.Internal Revenue Code

A grandparent wants to make an irrevocable gift of securities to a 10-year-old grandchild, with an adult managing the assets until the child comes of age. Which account best fits?

• a.A 529 plan owned by the grandparent
• b.A tenants-in-common account with the child
• c.A Roth IRA in the grandparent's name
• d.An UGMA/UTMA custodial account✓

An UGMA/UTMA custodial account is designed for an irrevocable gift to a minor, managed by a custodian until the minor reaches the age of majority. A 529 plan is for education savings only, and the grandparent as owner keeps control and can change the beneficiary, so it is not an irrevocable gift managed until the child comes of age. A tenants-in-common account would give the 10-year-old an ownership interest he or she cannot manage, and the child cannot open a Roth IRA without earned income.Uniform Transfers to Minors Act

Why must discretionary accounts be reviewed frequently by a principal?

• a.To increase the number of trades and the commissions they generate
• b.To detect excessive trading (churning) and unsuitable activity✓
• c.To avoid the need to keep order tickets and written account records
• d.To guarantee the customer a refund of any loss the trades produce

Frequent principal review of discretionary accounts helps detect and prevent churning and other abuses, since the representative controls trading. Supervision is a core investor-protection safeguard for accounts where the firm exercises discretion.FINRA Rule 3260

A trustee opens an account for a trust that requires conservative, income-oriented investing. The representative recommends a highly speculative penny stock. What is the core problem?

• a.A trustee cannot open a brokerage account at a broker-dealer without a prior court order
• b.Penny stocks are barred from all trust accounts by SEC rule, regardless of the objectives
• c.There is no problem, because the trustee's approval removes the firm's suitability duty
• d.The recommendation conflicts with the trust's stated objectives and the trustee's fiduciary duty✓

A trustee has a fiduciary duty to invest according to the trust's terms and the beneficiaries' interests. Recommending a speculative security to a conservative, income-focused trust is unsuitable and inconsistent with that duty, even if the trustee could technically authorize it.17 CFR 240.15l-1 (Regulation Best Interest)

During account opening, a firm cannot verify a new customer's identity using the information provided and has no reasonable belief it knows the customer's true identity. Under CIP, what should the firm generally do?

• a.Open the account and verify identity only if margin is later requested
• b.Ask the customer to self-verify identity by emailing a signed statement
• c.Open the account immediately and skip verification until the first trade settles
• d.Decline to open the account (or close it) and consider whether to file a SAR✓

If a firm cannot form a reasonable belief that it knows a customer's true identity, its CIP procedures must address when not to open the account, the terms under which the customer may transact while the firm tries to verify, when to close the account if verification fails, and when to file a SAR (31 CFR 1023.220(a)(2)(iii)). Verifying only for margin accounts leaves cash accounts unchecked, although CIP applies to every new account. Asking the customer to vouch for himself or herself is not a verification method, and postponing verification until after the first settlement ignores that the firm must resolve the identity question under its procedures, with only limited transactions permitted while it does so.31 CFR 1023.220(a)(2)(iii)

Broker-dealers are required to establish, maintain, and enforce written policies to prevent the misuse of material nonpublic information. These are commonly called:

• a.Best-execution and order-routing standards
• b.Information barriers (or 'Chinese Walls')✓
• c.Prospectus delivery and access rules
• d.Registered representative payout grids

Firms must maintain information barriers (historically called 'Chinese Walls') to prevent MNPI from flowing between departments (for example, from investment banking to trading). This is required to control insider trading risk under federal law.Insider Trading and Securities Fraud Enforcement Act of 1988

A representative, worried about losing a client, promises in writing to personally reimburse any losses in the client's account. This is:

• a.Required under FINRA rules whenever a customer complains in writing about any of the losses suffered in the account
• b.Allowed, because a written promise to cover any losses protects the customer from harm
• c.Allowed if the branch office manager verbally agrees to the reimbursement arrangement first
• d.Prohibited, because a representative may not guarantee a customer against loss or share in losses improperly✓

Guaranteeing a customer against loss, or improperly sharing in a customer's account, is prohibited. Representatives may not promise to cover losses; doing so misrepresents the nature of investing and violates FINRA rules.FINRA Rule 2150

Under FINRA rules, a registered representative may generally share in the profits or losses of a customer's account only if:

• a.The representative gives the customer a signed guarantee to reimburse any account losses from personal funds
• b.The firm gives prior written approval and sharing is proportionate to the representative's own financial contribution✓
• c.The customer is an immediate family member, which FINRA says removes the need for the firm's written approval
• d.The account is discretionary and the customer's net worth exceeds $1 million, an automatic FINRA exemption

Sharing in a customer account is permitted only with prior written approval from the firm and generally only in proportion to the representative's own capital contributed to the account. Guaranteeing against loss is never allowed.FINRA Rule 2150(c)(1)(A)

A representative asks a wealthy client for a personal loan to cover his own expenses. Under FINRA rules, this is:

• a.Required to be reported to the SEC in advance through an amended Form U4 filed before the loan
• b.Allowed whenever the client's net worth exceeds the Regulation D accredited-investor threshold
• c.Generally prohibited unless it meets narrow conditions and the firm's written procedures permit and approve it✓
• d.Allowed without any firm approval, as long as the loan amount stays under $100 in total

Borrowing from (or lending to) customers is generally prohibited unless the arrangement fits narrow exceptions (such as an immediate family member or a lending-business relationship) and the firm's written procedures permit it, usually with notice and approval. It presents a serious conflict of interest.FINRA Rule 3240

A customer asks to open an account identified only by a number to keep the account owner's identity secret from the firm. Is this permissible?

• a.Yes, a numbered account is permitted whenever the customer pays for every purchase entirely in cash
• b.No; the firm may use a number for confidentiality, but must still know and document the true account owner's identity✓
• c.Yes, a numbered account is designed to conceal the owner's identity from the firm itself as well
• d.No; FINRA requires every account to be titled with the owner's full legal name on statements

A firm may use account numbers or symbols for confidentiality, but it must still obtain a signed statement of the customer's ownership and know the true identity of the account owner. Hiding the owner's identity from the firm would violate CIP and recordkeeping rules.

Compared with a basic cash account, what added document must a customer sign to open and use a margin account?

• a.A signed copy of the issuer's Form 10-K annual report for each position held
• b.A margin (credit) agreement, and typically a hypothecation agreement✓
• c.Nothing further, because the new account form already authorizes margin trading
• d.A notarized dividend reinvestment election for every position held

Unlike a basic cash account, a margin account requires the customer to sign a margin (credit) agreement, and typically a hypothecation agreement and loan consent. These document the borrowing relationship and the firm's rights, and are a prerequisite to margin trading.

Two traders repeatedly buy and sell the same security to each other, with no change in beneficial ownership, to create the false appearance of active trading volume. This manipulation is known as:

• a.Front-running a customer's order
• b.Churning a retail customer's account
• c.Insider trading on material news
• d.Wash trading (matched orders)✓

Wash trading and matched orders involve transactions that create the illusion of activity without any real change in beneficial ownership, misleading other investors about supply, demand, or liquidity. Front-running is trading ahead of a known pending customer order to profit from it, and churning is excessive trading in a customer's account to generate commissions; neither requires a trade with no change in ownership. Insider trading is trading on material nonpublic information, which is a different offense from faking volume.Securities Exchange Act of 1934

Which of the following is most clearly an AML red flag when opening or servicing an account?

• a.A customer who asks detailed questions about a fund's expense ratio and its breakpoint discount schedule
• b.A customer who provides a valid government ID and documents a clear, verifiable source of the funds
• c.A retiree making regular, modest contributions to an IRA through an automatic monthly payroll deduction
• d.A customer who is reluctant to provide identifying information and wants to move funds quickly with no clear business purpose✓

Reluctance to provide identification, secrecy about the source of funds, and transactions with no apparent business or lawful purpose are classic AML red flags. Providing valid ID and a clear source of funds is normal, expected behavior.Bank Secrecy Act

Under FINRA Rule 2210, 'correspondence' generally refers to a written communication distributed to how many retail investors within a 30-day period?

• a.25 or fewer✓
• b.Over 25
• c.Up to 100
• d.Only institutional investors

Under FINRA Rule 2210(a)(2), correspondence is a written communication distributed to 25 or fewer retail investors within any 30 calendar-day period. Distribution to more than 25 retail investors makes it a retail communication, which carries principal approval and filing requirements that correspondence does not. A communication limited to institutional investors is an institutional communication. There is no 100-recipient threshold in the definition.FINRA Rule 2210(a)(2)

Which statement about institutional communications is generally correct under FINRA rules?

• a.They must be pre-approved by a registered principal and filed with FINRA's Advertising Regulation Department within 10 business days
• b.They are exempt from all FINRA content and supervision rules once the recipient qualifies as an institutional investor
• c.The content standards apply to them only if a retail investor ends up receiving a copy
• d.They are not subject to the same pre-use principal approval requirement as retail communications, but must still be supervised and cannot be misleading✓

Under FINRA Rule 2210(b)(3), institutional communications do not require principal approval before use, but the firm must establish written procedures for their review and supervision. They are not filed with FINRA the way certain retail communications are, and the content standards in Rule 2210(d) still apply to them, so they must be fair, balanced and not misleading whoever receives them. Qualifying the recipient as an institutional investor does not exempt the firm from the content or supervision rules, and the content standards do not depend on whether a retail investor later sees a copy. Firms also must make sure an institutional communication is not forwarded to retail investors.FINRA Rule 2210(b)(3)

Generally, a withdrawal of earnings from a traditional IRA before age 59 1/2, without an exception, is subject to ordinary income tax plus an additional penalty of:

• a.10%✓
• b.20%
• c.15%
• d.50%

Early distributions from a traditional IRA before age 59 1/2 are generally subject to a 10% additional tax on top of ordinary income tax, unless an exception applies (such as certain medical expenses, a first-home purchase up to limits, or disability).Internal Revenue Code

A representative deposits a customer's check into the representative's own personal bank account 'temporarily' before moving it to the brokerage account. This is an example of:

• a.A permissible practice if the customer later confirms it in writing
• b.Improper commingling of customer funds with the representative's own funds✓
• c.A permissible convenience, since the funds reach the brokerage account the same day
• d.A permitted check-handling exception, as long as a supervisor later approves it

Placing a customer's funds into the representative's personal account, even briefly, improperly commingles the customer's money with the representative's own and violates the rule against improper use of a customer's funds (FINRA Rule 2150(a)). The customer's later written confirmation, a supervisor's later approval, and the fact that the money reaches the brokerage account the same day do not cure the violation, because the funds should have been handled through proper firm channels from the start.FINRA Rule 2150(a)

A representative learns that a customer with an individual account has died. What is the appropriate immediate action?

• a.Continue trading the account based on the customer's last verbal instructions
• b.Cancel open orders, freeze the account, and await proper legal documents before releasing assets✓
• c.Sell all positions immediately to lock in gains for the estate's beneficiaries
• d.Immediately transfer all assets to the customer's surviving spouse as next of kin

On learning of a customer's death, the firm should cancel open orders, mark the account deceased, and not permit further trading until it receives the required legal documents (such as letters testamentary or a death certificate) identifying who is entitled to the assets.

Two unrelated investors each want their portion of a joint account to pass to their own heirs, not to each other, upon death. Which registration should they choose?

• a.A single individual account
• b.Tenants in common (TIC)✓
• c.JTWROS
• d.Transfer on Death in one owner's name

Tenants in common lets each owner hold a distinct fractional interest that passes to their own estate/heirs at death, which suits unrelated co-owners. JTWROS, by contrast, passes the deceased's share to the surviving owner.

When gathering information to make suitable recommendations for a new customer, which of the following is LEAST relevant to the customer's investment profile?

• a.Risk tolerance and time horizon
• b.Financial situation and needs
• c.The customer's favorite sports team✓
• d.Investment objectives and experience

Suitability requires understanding the customer's investment profile: age, financial situation, tax status, objectives, experience, time horizon, liquidity needs, and risk tolerance. Personal trivia unrelated to finances, like a favorite sports team, is not part of the profile.FINRA Rule 2111

Which situation is generally NOT illegal insider trading?

• a.An investor trades based on his own analysis of publicly available earnings reports✓
• b.An employee buys shares knowing of an unannounced FDA approval
• c.A lawyer trades using confidential merger details from a client before the deal is public
• d.A director tips a friend about undisclosed quarterly losses

Trading on public information or one's own lawful research is legal. Insider trading requires trading on material nonpublic information in breach of a duty. The other choices all involve MNPI obtained or used improperly.Securities Exchange Act of 1934

What is the key difference between a CTR and a SAR?

• a.A SAR may be filed only with the customer's written consent, while a CTR is kept secret from the customer
• b.Both reports go to FinCEN only when the customer specifically requests that the firm file them for the account
• c.A CTR is voluntary for the firm to file, and a SAR is optional even when the activity clearly looks suspicious
• d.A CTR is filed for cash transactions above a dollar threshold; a SAR is filed for suspicious activity regardless of amount thresholds✓

A CTR is triggered by cash transactions exceeding $10,000 in a business day, based purely on amount. A SAR is triggered by activity that appears suspicious (such as possible money laundering), and firms must not tip off the customer that a SAR was filed.Bank Secrecy Act

A representative has valid written discretionary authority accepted by the firm. She buys a suitable stock in the client's account without calling first. Is this a violation?

• a.No, but discretion like this is permitted only when the customer is an immediate family member of the representative
• b.Yes, because the representative must telephone the customer for approval before each and every order is entered
• c.No, because valid discretionary authority permits trading without prior consultation for each order, if the trade is suitable and properly recorded✓
• d.Yes, because FINRA forbids discretionary authority in any retail brokerage account, whether it is written or oral

With valid, firm-accepted written discretionary authority, the representative may enter suitable orders without contacting the customer for each trade, provided orders are marked discretionary and the account is properly supervised. Without such authority, the same trade would be unauthorized.FINRA Rule 3260

The prohibition on 'selling away' exists primarily to ensure that:

• a.Customers can avoid paying any commissions on outside investment offerings
• b.Representatives earn higher commissions on transactions done outside the firm
• c.A firm can supervise its representatives' securities transactions to protect customers✓
• d.Only institutional investors are allowed to buy private placement securities

Selling away is prohibited because private securities transactions conducted outside the firm's knowledge escape its supervision, exposing customers to unvetted, potentially fraudulent investments. Requiring prior notice and approval lets the firm supervise and protect customers.FINRA Rule 3280

A representative wants to include the phrase 'this fund is guaranteed to double your money in one year' in a brochure sent to retail clients. Under FINRA communication standards, this is:

• a.Required disclosure language that FINRA Rule 2210 mandates in every retail fund brochure a member firm sends to clients
• b.Prohibited, because communications must be fair and balanced and may not be false, exaggerated, or promise specific results✓
• c.Acceptable, because a registered principal's prior written approval cures an exaggerated performance claim
• d.Acceptable as long as the guarantee appears in a small-font footnote among the brochure's disclosures

FINRA communication rules require content that is fair, balanced, and not misleading. Promising guaranteed or specific investment results, or making exaggerated or unwarranted claims, is prohibited regardless of principal approval.FINRA Rule 2210

In which market does an issuer sell newly created securities directly to investors and receive the proceeds of the sale?

• a.The secondary market
• b.The over-the-counter market
• c.The primary market✓
• d.The third market

In the primary market, the issuing company sells new securities and receives the capital raised. Once those securities begin trading among investors, the transactions occur in the secondary market, where the issuer receives no proceeds. The over-the-counter market is a dealer-negotiated venue where already-issued securities trade, and the third market (listed stocks traded over the counter) is a part of the secondary market too. The issuer receives nothing from secondary trading.Securities Act of 1933

An investor buys 100 shares of an already-public company from another investor on an exchange. This transaction takes place in which market?

• a.The primary market
• b.The underwriting market
• c.The new-issue market
• d.The secondary market✓

Trades between investors of securities that are already outstanding occur in the secondary market. The issuing company is not a party to the trade and receives none of the money exchanged.