CSLB General Building (B) — All Questions

Which federal agency has ultimate authority to oversee the U.S. securities markets and the self-regulatory organizations that operate within them?

• a.The Federal Reserve Board
• b.The Securities and Exchange Commission (SEC)✓
• c.The Financial Industry Regulatory Authority (FINRA)
• d.The Commodity Futures Trading Commission (CFTC)

The SEC, created by the Securities Exchange Act of 1934, is the top federal regulator of the securities industry. Self-regulatory organizations such as FINRA and the MSRB write and enforce their own rules but operate under SEC oversight, and their rules must be approved by the SEC.Securities Exchange Act of 1934

A broker-dealer wants to begin conducting a securities business for the first time. Which form must the firm file to register as a broker-dealer?

• a.Form U4
• b.Form ADV
• c.Form BD✓
• d.Form U5

A firm registers as a broker-dealer by filing Form BD (Broker-Dealer). Form U4 and U5 apply to individual associated persons, and Form ADV is used by investment advisers. Form BD is filed through the Central Registration Depository (CRD) system.FINRA Rules

When a person applies to become registered as an associated person of a member firm, which form does the firm submit on their behalf?

• a.Form U4 (Uniform Application for Securities Industry Registration)✓
• b.Form BD
• c.Form U5 (Uniform Termination Notice)
• d.Form 10-K

Form U4 is the Uniform Application for Securities Industry Registration or Transfer, filed by a member firm to register an associated person. It collects the applicant's employment, disciplinary, and background information. Form U5 is used later, upon termination of employment.FINRA Rules

A registered representative resigns from her broker-dealer to take a job in a different industry. Within how many days must the firm file a Form U5 to report her termination?

• a.10 days
• b.60 days
• c.45 days
• d.30 days✓

A member firm must file Form U5 within 30 days of an associated person's termination. The firm must also provide a copy of the U5 to the individual. The U5 reports the reason for termination and any disclosures that arose.FINRA Rules

Which self-regulatory organization has primary jurisdiction over rules governing the municipal securities market, including the conduct of municipal securities dealers?

• a.FINRA
• b.The Municipal Securities Rulemaking Board (MSRB)✓
• c.The Chicago Board Options Exchange (CBOE)
• d.The SEC

The MSRB writes rules for the municipal securities market and for dealers and advisors in that market. However, the MSRB does not conduct examinations or enforcement itself; FINRA and bank regulators enforce MSRB rules for the firms they oversee.FINRA Rules

The Securities Industry Essentials (SIE) exam differs from a qualification exam such as the Series 7 in that the SIE:

• a.Requires association with a member firm before it can be taken
• b.Permits an individual to transact securities business immediately
• c.Assesses basic securities industry knowledge and does not require sponsorship by a firm✓
• d.Must be retaken every two years to remain valid

The SIE is an introductory exam covering fundamental securities knowledge and can be taken by anyone 18 or older without firm sponsorship. To actually transact business, a person must also pass a qualification (top-off) exam like the Series 6 or 7, which does require association with a member firm.FINRA Rules

Under FINRA's continuing education requirements, the Regulatory Element is designed primarily to:

• a.Train representatives on new products the firm intends to sell
• b.Satisfy state insurance licensing renewals
• c.Provide sales and marketing skills training
• d.Keep registered persons current on regulatory, compliance, and ethical standards✓

The Regulatory Element is a FINRA-administered continuing education program that keeps registered persons up to date on regulatory, compliance, and ethical topics. It must be completed annually. The Firm Element is separately administered by each firm and focuses on products, services, and business practices.FINRA Rules

The Firm Element of continuing education is:

• a.Developed and administered by each member firm based on an annual needs analysis✓
• b.Administered directly by the SEC for all firms
• c.A one-time requirement completed only at initial registration
• d.Required only of a firm's principals, not its representatives

The Firm Element is a continuing education program that each member firm develops and administers itself, based on an annual needs analysis of its business and the securities its covered persons handle. It must, at minimum, address investment features, risks, suitability, and applicable regulatory requirements.FINRA Rules

A registered representative accepts a part-time job as a bookkeeper for a friend's restaurant on weekends, receiving compensation. Under FINRA rules on outside business activities, the representative must:

• a.Do nothing, because the activity is unrelated to securities
• b.Provide prior written notice to their employing member firm✓
• c.Obtain approval from the SEC before starting
• d.Register the restaurant as a branch office

FINRA Rule 3270 requires a registered person to provide prior written notice to their member firm before engaging in any outside business activity for compensation, even if unrelated to securities. The firm can then evaluate the activity and impose conditions or prohibit it if necessary.FINRA Rules

A registered representative wants to help set up private investments in a startup for several clients, outside of and without notice to her firm, receiving selling compensation. This activity is best described as:

• a.A permissible outside business activity
• b.An acceptable gift under the gift rule
• c.A private securities transaction ('selling away') requiring prior written notice and firm approval✓
• d.A standard brokerage transaction requiring no disclosure

Effecting securities transactions outside the regular course of one's employment for compensation is a private securities transaction, commonly called 'selling away.' FINRA Rule 3280 requires prior written notice to, and written approval from, the member firm; the firm must then supervise and record the transactions. Doing so without notice is a violation.FINRA Rules

Under FINRA's gift rule, what is the maximum value of gifts a member or associated person may give to a single person per year in relation to the recipient's business?

• a.$50
• b.$250
• c.$500
• d.$100✓

FINRA Rule 3220 limits gifts to $100 per person per year when the gift relates to the recipient's business. Ordinary business entertainment and certain de minimis or personal gifts are treated separately. Firms must keep records of gifts given and received.FINRA Rules

MSRB Rule G-37 addresses political contributions by municipal securities dealers. What is the primary consequence if a dealer's covered associate makes a disqualifying political contribution to an official of an issuer?

• a.The dealer is banned from municipal securities business with that issuer for two years✓
• b.The associate must pay a $100 fine
• c.The contribution is refunded automatically
• d.The dealer must file a Form BD amendment within 10 days

MSRB Rule G-37 generally bans a municipal securities dealer from engaging in municipal securities business with an issuer for two years after certain political contributions by the dealer or its covered associates to officials of that issuer. The rule is meant to curb 'pay-to-play' practices. A de minimis exception allows small contributions to candidates the contributor can vote for.FINRA Rules

A person applying for registration in the securities industry was convicted of a securities-related felony four years ago. This individual is most likely:

• a.Automatically approved after a 30-day waiting period
• b.Subject to statutory disqualification✓
• c.Required only to complete extra continuing education
• d.Exempt from filing a Form U4

A felony conviction, or a securities-related misdemeanor, within the past ten years can cause a person to be statutorily disqualified under the Securities Exchange Act of 1934 and FINRA rules. A statutorily disqualified person generally may not associate with a member firm unless FINRA grants relief through an eligibility proceeding. Other triggers include certain regulatory bars and injunctions.Securities Exchange Act of 1934

Before a person can be fingerprinted and registered as an associated person, fingerprinting is required primarily to:

• a.Confirm the applicant's citizenship status
• b.Determine the applicant's credit score
• c.Support a criminal background check for the registration process✓
• d.Verify the applicant's educational credentials

Under the Securities Exchange Act and FINRA rules, associated persons who handle securities, funds, or supervise such activities must be fingerprinted. The fingerprints support a criminal background check that helps identify statutory disqualifications. Firms submit fingerprint information through FINRA to the FBI.FINRA Rules

A customer and a member firm have a monetary dispute arising from the customer's account. The customer signed an account agreement containing a predispute arbitration clause. The dispute will most likely be resolved through:

• a.A jury trial in federal court
• b.Mediation binding on both parties
• c.An SEC administrative hearing
• d.FINRA arbitration under the Code of Arbitration Procedure✓

Most customer-firm disputes are resolved through FINRA's Dispute Resolution forum under the Code of Arbitration Procedure, especially when a predispute arbitration agreement exists. Arbitration decisions are generally final and binding with very limited grounds for appeal. Mediation is voluntary and non-binding unless a settlement is reached.FINRA Rules

FINRA's Code of Procedure (the Rule 8000 and 9000 series) primarily governs:

• a.How FINRA investigates and disciplines members for rule violations✓
• b.How customers and firms arbitrate monetary disputes
• c.How firms register new associated persons
• d.How issuers register securities with the SEC

The Code of Procedure governs FINRA's disciplinary process: how alleged rule violations are investigated, how complaints are brought, hearings held, and sanctions imposed. It is distinct from the Code of Arbitration Procedure, which handles monetary disputes between parties such as customers and firms. Sanctions can include fines, suspensions, and bars from the industry.FINRA Rules

A registered representative changes her residential address and also is charged with a felony. Which of these events requires an amendment to her Form U4?

• a.Only the change of residential address
• b.Both the change of address and the felony charge✓
• c.Only the felony charge
• d.Neither event requires an amendment

Form U4 must be kept current, so material changes such as a residential address change and reportable events like a felony charge both require timely amendments. Disclosure events generally must be updated within 30 days of the firm learning of them, and certain statutory disqualification events must be reported promptly. Keeping the U4 accurate is a shared responsibility of the firm and the individual.FINRA Rules

Which of the following best describes the jurisdiction of the Chicago Board Options Exchange (CBOE) as a self-regulatory organization?

• a.It writes rules governing all municipal securities dealers
• b.It supervises investment adviser registration nationwide
• c.It operates an options exchange and enforces trading rules for its markets✓
• d.It approves all broker-dealer registrations before FINRA

The CBOE is a national securities exchange and self-regulatory organization focused on options trading and, through its exchange, enforces rules for trading on its markets. Exchanges like the CBOE and NYSE are SROs with jurisdiction over activity conducted on their platforms. FINRA and the MSRB handle broader member-firm and municipal rulemaking respectively.FINRA Rules

An individual passed the SIE exam but has not yet been hired by a member firm. How long do SIE exam results generally remain valid?

• a.1 year
• b.2 years
• c.10 years
• d.4 years✓

SIE exam results are generally valid for four years. Within that period, an individual who is hired and passes the appropriate qualification (top-off) exam can complete registration. If more than four years pass without registration, the SIE would need to be retaken.FINRA Rules

A candidate wants to sell mutual funds and variable annuities but not general equities or options. In addition to the SIE, which qualification exam is the appropriate 'top-off' for this limited scope?

• a.Series 6 (Investment Company and Variable Contracts Products Representative)✓
• b.Series 7 (General Securities Representative)
• c.Series 24 (General Securities Principal)
• d.Series 63 (Uniform Securities Agent State Law)

The Series 6 is a top-off qualification exam for representatives who sell packaged products such as mutual funds and variable annuities. The Series 7 covers a broader range of securities including equities, options, and bonds. Both are taken in addition to the SIE, and a firm must sponsor the candidate.FINRA Rules

A member firm receives a written customer complaint alleging misconduct by a registered representative involving the customer's funds. What is the firm's general obligation regarding this complaint?

• a.Discard it if the representative denies wrongdoing
• b.Keep a record of the complaint and report it as required, including on the representative's Form U4 if applicable✓
• c.Forward it directly to the SEC for prosecution
• d.Refer it immediately to FINRA arbitration

Firms must keep records of written customer complaints and, depending on the nature and allegations, report them to FINRA and update the representative's Form U4 disclosures where required. Certain complaints involving allegations of theft, forgery, or misappropriation are individually reportable. Proper recordkeeping and reporting help regulators monitor conduct.FINRA Rules

Which statement about the relationship between FINRA and the SEC is most accurate?

• a.FINRA is a government agency that supervises the SEC
• b.FINRA and the SEC are independent with no oversight relationship
• c.FINRA is a self-regulatory organization whose rules and disciplinary actions are subject to SEC oversight✓
• d.The SEC enforces FINRA rules directly against individual representatives

FINRA is a non-governmental self-regulatory organization registered with and overseen by the SEC. FINRA proposes rules that require SEC approval, and its disciplinary decisions can be appealed to the SEC. The SEC retains ultimate statutory authority over the securities markets.FINRA Rules

Under general recordkeeping rules of the Securities Exchange Act of 1934, certain fundamental broker-dealer records, such as blotters and ledgers, must generally be retained for a minimum of:

• a.1 year
• b.2 years
• c.3 years
• d.6 years✓

SEC Rules 17a-3 and 17a-4 set recordkeeping and retention requirements for broker-dealers. Certain core records such as blotters, general ledgers, and customer account records must generally be retained for at least six years, with the first two years in an easily accessible place. Other records have shorter retention periods, such as three years.Securities Exchange Act of 1934

A newly hired individual will supervise the firm's general securities sales activities and approve new accounts. To act as a supervisor, this person must typically qualify as a:

• a.Principal (for example, by passing the Series 24)✓
• b.Representative only (SIE plus Series 7)
• c.Registered options trader
• d.Municipal advisor representative

Individuals who supervise the securities business of a member firm must generally register as principals, such as by passing the Series 24 General Securities Principal exam. Representatives handle sales to customers, while principals manage and supervise those activities and approve certain firm actions. Both must also pass the SIE.FINRA Rules

A registered representative gives a client four tickets to a concert worth $80 total as a thank-you related to their business relationship. Under the FINRA gift rule, this gift is:

• a.A violation because all gifts to clients are prohibited
• b.Permissible because it is under the $100 annual limit and should be recorded✓
• c.Permissible only if approved by the SEC in advance
• d.A violation because entertainment can never be given to clients

The $80 gift is within FINRA's $100 annual per-person gift limit under Rule 3220, so it is generally permissible, though the firm should record it. If the representative had given multiple gifts to the same person exceeding $100 in a year, that would violate the rule. Business entertainment where the rep attends may be evaluated under separate standards.FINRA Rules

How does the Form U5 filed by a departing representative's firm affect the individual's ability to move to a new member firm?

• a.It permanently bars the person from re-registering
• b.It has no effect on future registration
• c.The new firm reviews the U5, and any disclosures on it may need to be addressed during the new registration✓
• d.It automatically transfers all customer accounts to the new firm

When a representative leaves a firm, the firm files Form U5, which may include disclosures about the reason for departure or any pending matters. A new hiring firm reviews the U5 as part of due diligence and must address any disclosed issues in the new Form U4. Inaccurate U5 disclosures can create liability for the filing firm.FINRA Rules

Which of the following is generally NOT within FINRA's direct regulatory jurisdiction?

• a.The conduct of a broker-dealer's registered representatives
• b.Sales practices of member firms
• c.Advertising and communications with the public by members
• d.The rulemaking authority over the U.S. futures markets✓

FINRA regulates broker-dealers and their associated persons, including sales practices and communications with the public. The U.S. futures markets are regulated by the CFTC and the National Futures Association, not FINRA. Understanding which regulator governs which market is a core SIE concept.FINRA Rules

A registered person fails to complete their required Regulatory Element continuing education by the applicable deadline. What is the typical consequence?

• a.The person's registration becomes CE inactive, and they cannot perform activities requiring registration until it is completed✓
• b.The person is permanently barred from the industry
• c.The person must retake the SIE exam
• d.There is no consequence as long as the Firm Element is complete

If a registered person does not complete the Regulatory Element by the deadline, their registration becomes 'CE inactive,' and they may not perform activities requiring registration until they complete it. The Regulatory Element must be completed annually for each registration category held. This is separate from the Firm Element, which the firm administers.FINRA Rules

The Central Registration Depository (CRD) system, operated by FINRA, primarily serves to:

• a.Clear and settle securities trades between firms
• b.Store registration, employment, and disciplinary information about firms and associated persons✓
• c.Set margin requirements for customer accounts
• d.Approve securities for listing on exchanges

The CRD is the central licensing and registration system for the U.S. securities industry, maintained by FINRA. It houses information from Forms BD, U4, and U5, including employment history and disciplinary records. Much of this information is made available to the public through BrokerCheck.FINRA Rules

A representative wants to participate in a private securities transaction on behalf of a customer and will NOT receive any selling compensation. Under FINRA rules, the representative must at minimum:

• a.Do nothing, since no compensation is involved
• b.Obtain written approval and firm supervision as if compensation were received
• c.Provide prior written notice to the firm, which may then require it to be supervised✓
• d.Report the transaction to the SEC directly

Under FINRA Rule 3280, when a representative engages in a private securities transaction without selling compensation, they must still provide prior written notice to the firm. The firm may, at its discretion, require that the transaction be recorded and supervised. When compensation IS received, the firm must approve and supervise the transaction and record it on its books.FINRA Rules

In a FINRA arbitration involving a public customer, which statement is generally TRUE about the outcome?

• a.The decision can be freely appealed and retried in state court
• b.The arbitrators must always include a majority of industry members
• c.Only monetary damages up to $10,000 may be awarded
• d.The arbitration award is final and binding with very limited grounds to challenge it✓

FINRA arbitration awards are final and binding, and courts will overturn them only on very narrow grounds such as fraud or arbitrator misconduct. Customer disputes are heard by panels structured under FINRA rules, often allowing customers to choose an all-public panel. Arbitration is generally faster and less formal than court litigation.FINRA Rules

The Securities Exchange Act of 1934 is best known for:

• a.Regulating the secondary trading of securities and creating the SEC✓
• b.Requiring registration of securities before their initial public offering
• c.Governing the structure of mutual funds
• d.Setting rules exclusively for municipal bond issuers

The Securities Exchange Act of 1934 regulates the secondary market (trading of already-issued securities), broker-dealers, and exchanges, and it created the SEC. By contrast, the Securities Act of 1933 focuses on the primary market and the registration of new securities offerings. Understanding this distinction is fundamental to the SIE.Securities Exchange Act of 1934

A firm discovers that one of its representatives opened a brokerage account at another member firm without notifying either firm. Under FINRA rules on accounts at other broker-dealers, the representative generally must:

• a.Close the account immediately with no other obligation
• b.Notify the executing firm of their association and notify their employer of the account✓
• c.Report the account only to the SEC
• d.Take no action because personal accounts are private

Under FINRA Rule 3210, an associated person who opens an account at another firm must generally notify their employing member firm and inform the executing firm of their association. The executing firm must, upon request, send duplicate confirmations and statements to the employer. This allows firms to monitor associated persons' personal trading.FINRA Rules

Which of the following registration categories would a person most likely need to sell general securities, including stocks and bonds, to retail customers?

• a.Series 6 Investment Company Products representative
• b.Series 24 General Securities Principal
• c.Series 7 General Securities Representative✓
• d.Series 27 Financial and Operations Principal

The Series 7 General Securities Representative registration, taken together with the SIE, qualifies a person to sell a broad range of securities including stocks, bonds, and options to retail customers. The Series 6 is limited to packaged products. Principal categories such as Series 24 and 27 are for supervisory and financial-operations roles, not general retail sales.FINRA Rules

A representative is offered, and wants to accept, an appointment to the board of directors of a private company in exchange for a fee. Under FINRA rules, this is best handled as:

• a.A private securities transaction requiring firm approval
• b.A reportable gift under the $100 limit
• c.A political contribution subject to MSRB G-37
• d.An outside business activity requiring prior written notice to the firm✓

Serving as a director of an outside company for compensation is an outside business activity under FINRA Rule 3270, requiring prior written notice to the employing member firm. The firm then evaluates whether the activity raises conflicts or must be limited. This is different from a private securities transaction, which involves effecting securities transactions away from the firm.FINRA Rules

FINRA's BrokerCheck tool is best described as:

• a.A free public service that discloses registration and disciplinary information about firms and brokers✓
• b.A private database available only to member firms
• c.A system for placing securities trades
• d.A tool used only by the SEC for enforcement

BrokerCheck is a free online tool operated by FINRA that lets the public research the background, registration status, and disciplinary history of brokerage firms and individual brokers. Much of its information is drawn from the CRD system, including data from Forms U4 and U5. It helps investors make informed decisions before doing business with a firm or representative.FINRA Rules