FINRA Series 7 — All Questions

How long must a broker-dealer keep a copy of a SAR and its supporting documents?

• a.Five years from the date of the filing✓
• b.Seven years from the date of the filing
• c.Three years from the date of filing
• d.Until the customer's account has been closed

A SAR and its supporting documentation must be kept for five years from filing. Three years is shorter than required, seven years is longer than the rule, and the life of the customer's account is not the measure.Bank Secrecy Act recordkeeping

Under MSRB Rule G-37, how much may a municipal finance professional contribute to a candidate they can vote for without triggering the ban on municipal business?

• a.$250 per election✓
• b.$25 per election
• c.$100 per year
• d.$1,000 per election

Rule G-37 lets a municipal finance professional give up to $250 per election to an official for whom the person can vote, and a larger amount triggers a two-year ban on negotiated business with that issuer. A $1,000 gift would trigger the ban. The $100 and $25 figures are not the limit, since the de minimis amount is per election, not per year.MSRB Rule G-37

An issuer's officer unintentionally gives material nonpublic information to an analyst. How soon must the issuer make public disclosure?

• a.Promptly, within 24 hours or by the next NYSE open, if later✓
• b.Within five business days, in the issuer's next periodic report
• c.At the next annual meeting of shareholders, in the proxy statement
• d.Within 10 days, by filing a current report on Form 8-K with the SEC

For a non-intentional selective disclosure, Regulation FD requires prompt public disclosure, meaning as soon as reasonably practicable and within the later of 24 hours or the next opening of NYSE trading. The longer periods are not allowed.Regulation FD

Which sharing of customer information requires the firm to give the customer an opportunity to opt out?

• a.Selling customer names and balances to an unaffiliated marketing firm✓
• b.Sending a copy to the customer's accountant at the customer's own written request
• c.Responding to a subpoena or document request from a regulator
• d.Sending account details to the clearing firm to carry out a trade

Sharing nonpublic personal information with a nonaffiliated company for its own marketing requires notice and a chance to opt out. Processing transactions, complying with legal process and acting at the customer's direction are exceptions.Regulation S-P

Which describes churning?

• a.Selling from the firm's inventory at a markup above the market
• b.Excessive trading in a customer account to generate commissions✓
• c.Trading ahead of a customer order using knowledge of it
• d.Recommending a security without giving a prospectus

Churning is trading that is excessive in size or frequency in light of the customer's objectives, done to earn commissions. Trading ahead of a customer order is front running, an excessive markup is a pricing violation, and prospectus delivery is a separate rule.Securities Exchange Act of 1934

A firm terminates a registered representative. By when must the firm file Form U5?

• a.Within 30 days after termination✓
• b.Within 60 calendar days after termination
• c.Within 10 business days after termination
• d.Within 90 calendar days after termination

Form U5 must be filed within 30 days after the representative's registration is terminated. Ten business days is shorter than the by-law requires, while 60 and 90 days would let the filing run past the deadline.FINRA By-Laws Article V

How long after a representative's registration terminates does FINRA keep jurisdiction to bring a disciplinary complaint?

• a.Six months
• b.Two years✓
• c.One year
• d.Five years

Under the by-laws FINRA keeps jurisdiction over a former registered person for two years after the effective date of termination. Six months, one year and five years are not that period.FINRA By-Laws Article V

A representative recommends a security because the firm pays a larger bonus for selling it. Which obligation is most directly at issue?

• a.The duty to settle each trade within one business day of execution
• b.The duty to give a prospectus before any sale
• c.The duty to put the customer's interest ahead of the firm's✓
• d.The duty to amend Form U4 within 30 days of a change

Recommending a product mainly for the bonus is a conflict of interest, which the best-interest standard requires the firm and representative to address by putting the customer first. Prospectus delivery, settlement and U4 amendments are unrelated to why the product was chosen.Regulation Best Interest

An issuer plans a Rule 506(b) private placement and wants to include a few investors who are not accredited. Which condition applies?

• a.Non-accredited purchasers are barred, and every buyer must be verified as an accredited investor
• b.Any number of non-accredited purchasers, provided the issuer advertises the offering publicly
• c.Up to 100 non-accredited purchasers, provided the offering is registered with a state regulator
• d.No more than 35 non-accredited purchasers, each financially sophisticated, and no general solicitation✓

Rule 506(b) allows up to 35 non-accredited purchasers, each of whom must be sophisticated (alone or with a purchaser representative), and bars general solicitation. Unlimited non-accredited buyers and public advertising are not allowed under this exemption, a ban on non-accredited buyers plus verification describes the 506(c) approach instead, and there is no 100-purchaser state-registration alternative.SEC Rule 506(b)

An issuer wants to advertise its private offering on social media and still rely on Regulation D. Which approach fits?

• a.Rule 506(b): advertise to accredited investors only, relying on each buyer's own written certification
• b.Rule 506(c): sell only to accredited investors, with reasonable steps to verify their status✓
• c.Rule 506(c): sell to any investor who signs a statement describing their financial sophistication
• d.Rule 506(b): advertise freely, then file Form D before the first sale for state review

General solicitation is permitted only under Rule 506(c), and then every purchaser must be accredited and the issuer must take reasonable steps to verify that status. Rule 506(b) prohibits general solicitation whether or not Form D is filed or buyers certify, and a sophistication statement does not replace accredited status and verification.SEC Rule 506(c)

A prospective investor owns a home worth $800,000 with a $300,000 mortgage, a brokerage account worth $700,000, a retirement account worth $400,000, and $50,000 of other debts. She earned $150,000 in each of the last two years. Under the net worth test, is she an accredited investor?

• a.No; the net worth test applies only to those whose income is also above $200,000 a year
• b.No; subtracting the $300,000 mortgage leaves her net worth excluding the home at $750,000
• c.No; her net worth excluding the home is $1,050,000, but the test requires $5,000,000
• d.Yes; her net worth excluding the home is $1,050,000, which is above the $1,000,000 threshold✓

The primary residence is excluded from net worth, and a mortgage on it up to the home's value is not counted as a liability. Her assets of $1,100,000 less $50,000 of other debts gives $1,050,000, above $1,000,000. The net worth test stands on its own, separate from the income test, and the $5,000,000 figure applies to certain entities, not individuals. Subtracting the home mortgage while excluding the home is the error in the first alternative.SEC Rule 501(a)

A non-affiliate has held restricted shares of a reporting company for 8 months. May she resell them under Rule 144?

• a.Yes, but only after filing Form 144 and waiting through a 90-day SEC review period
• b.Yes, but sales in any three-month period are limited to 1% of the outstanding shares
• c.No; a one-year holding period applies to every restricted security, whoever holds it
• d.Yes, if the issuer has current public information available; no volume limit applies to her✓

For a reporting issuer the holding period is six months. A non-affiliate who has held for more than six months but less than a year may sell if current public information about the issuer is available, and has no volume limit. Volume limits and Form 144 apply to affiliates, and no review waiting period exists.SEC Rule 144

An affiliate of a Nasdaq-listed issuer wants to sell restricted shares. The issuer has 2,000,000 shares outstanding and the average weekly trading volume over the last four weeks was 25,000 shares. What is the most she may sell in the three-month period?

• a.25,000 shares, the greater of 1% of shares outstanding or the average weekly volume✓
• b.45,000 shares, found by adding 1% of the outstanding shares to the average weekly volume
• c.20,000 shares, which is 1% of the shares outstanding, because that is the stricter measure
• d.100,000 shares, found by multiplying the average weekly volume by four weeks

For listed securities the affiliate limit is the greater of 1% of the shares outstanding (20,000) or the average weekly volume over the four calendar weeks before the sale notice (25,000). The greater figure, 25,000, governs. The measures are alternatives, not additive, and the volume figure is a weekly average, not a monthly total.SEC Rule 144

An affiliate plans to sell 4,000 restricted shares at $15 a share within a three-month period and has made no other sales. Must she file Form 144?

• a.No; the sale is under the 5,000-share threshold, so no Form 144 is required
• b.Yes; every sale by an affiliate requires Form 144, no matter how small the amount
• c.Yes; the sale proceeds exceed $50,000, even though the share count is under 5,000✓
• d.No; Form 144 applies only when an affiliate sells at least 10,000 shares in the period

An affiliate must file Form 144 when sales in any three-month period exceed 5,000 shares or $50,000 in aggregate sale price. 4,000 shares at $15 is $60,000, so the dollar test is met although the share test is not. Either test is enough, there is no 10,000-share threshold, and small sales do fall under the thresholds.SEC Rule 144

A company plans an offering under Regulation A, Tier 2. What is the most it may raise in a 12-month period?

• a.$75 million, counting sales by selling security holders in the same 12 months✓
• b.$10 million, the ceiling for every small issuer in the exemption
• c.$150 million, the ceiling once an issuer is an Exchange Act reporting company
• d.$20 million, the Tier 1 ceiling for the same 12-month period

Tier 2 of Regulation A permits offerings of up to $75 million in 12 months, and secondary sales count toward the cap. $20 million is the Tier 1 limit, and the other two figures do not match any Regulation A tier.SEC Regulation A

To keep its pass-through tax treatment, a real estate investment trust must generally:

• a.Hold at least 90% of its assets in residential mortgages rather than owned property
• b.Distribute at least 90% of its taxable income, excluding net capital gains, to shareholders✓
• c.Pass its tax losses to shareholders, who deduct them against ordinary income
• d.Reinvest at least 90% of its rental income in newly acquired properties each year

A REIT avoids entity-level tax on income it distributes, and it must distribute at least 90% of taxable income other than net capital gains. Reinvestment is not the test, losses stay inside the REIT and are not passed to shareholders, and a REIT may own property directly and may hold commercial or residential assets.IRC Section 856

A $400 million fund wants to qualify as diversified under the 75-5-10 test. Looking only at the 75% portion of its assets, what is the most it may hold in one issuer?

• a.$300 million, which is the entire 75% portion of assets
• b.$15 million, which is 5% of the 75% portion alone
• c.$20 million, which is 5% of total fund assets✓
• d.$40 million, which is 10% of total fund assets

In the 75-5-10 test, 75% of total assets must be in cash, government securities and other securities, with no more than 5% of total assets in any one issuer and no more than 10% of an issuer's voting stock. 5% of $400 million is $20 million. The 5% applies to total assets, not the 75% portion, and 10% is a voting-stock limit, not an asset limit.ICA Section 5(b)(1)

An investor sold 100 shares at $40 that cost $60 a share, then bought 100 shares of the same stock 20 days later at $42. What is the basis of the new shares?

• a.$6,000, the original cost carried over to the replacement shares
• b.$6,200, the price paid plus the $2,000 disallowed loss✓
• c.$2,200, the price less the $2,000 disallowed loss
• d.$4,200, the price paid, with the $2,000 loss deductible this year

A repurchase of substantially identical stock within 30 days before or after a loss sale is a wash sale. The $2,000 loss is disallowed and added to the new shares' basis: $4,200 + $2,000 = $6,200. The holding period also carries over. Deducting the loss now, carrying over the old cost, or subtracting the loss all misapply the rule.IRC Section 1091

A mother, a father and a grandparent each want to fund Coverdell ESAs for the same 10-year-old. What is the most that may be contributed for her in one year?

• a.$2,000 per account, so $6,000 if each person opens a separate account
• b.$2,000 per contributor, so $6,000 across the three of them combined
• c.$2,000 in total for the beneficiary, however many accounts or donors there are✓
• d.$2,000 from each of the two parents, plus $1,000 from the grandparent

The Coverdell limit is $2,000 per beneficiary per year in total, however many accounts exist and however many people contribute. Contributor-by-contributor, account-by-account and family-role limits do not exist. Contributors must also meet income limits and contributions stop at age 18 unless the beneficiary has special needs.IRC Section 530

A 529 plan account has been open for 16 years, and the beneficiary has unused funds. How much may be rolled over to the beneficiary's Roth IRA?

• a.A lifetime maximum of $15,000, and within each year's Roth contribution limit
• b.A lifetime maximum of $35,000, and within each year's Roth contribution limit✓
• c.No lifetime maximum; only the annual Roth IRA contribution limit applies
• d.A maximum of $35,000 each year, regardless of the annual Roth IRA contribution limit

A 529 account open at least 15 years may roll unused funds to the beneficiary's Roth IRA, up to a lifetime total of $35,000, with each year's rollover limited by the annual IRA contribution limit. It is not $35,000 a year, $15,000 is the open-years requirement mixed up with a dollar cap, and a lifetime cap does exist.IRC Section 529

A parent takes $10,000 from a 529 plan for a vacation. The withdrawal consists of $7,000 of contributions and $3,000 of earnings. What are the federal tax consequences?

• a.The $3,000 of earnings is taxed as income, and the 10% additional tax does not apply
• b.The $3,000 earnings are taxed as income, plus a 10% additional tax of $300✓
• c.The full $10,000 is taxed as income and carries a 10% additional tax of $1,000
• d.The $7,000 of contributions is taxed as income, and the $3,000 of earnings escape tax

On a nonqualified withdrawal only the earnings portion is taxable, plus a 10% additional tax on those earnings: $300 here. Contributions come back tax-free because they were made with after-tax dollars. Taxing the full amount, omitting the additional tax, and taxing contributions instead of earnings are each incorrect.IRC Section 529

An investor is short 3 XYZ calls with a $50 strike. XYZ declares a 2-for-1 stock split. After the standard OCC adjustment, the position is:

• a.Short 6 calls with a $50 strike, each covering 100 shares
• b.Short 3 calls with a $25 strike, each covering 200 shares
• c.Short 6 calls with a $25 strike, each covering 100 shares✓
• d.Short 3 calls with a $50 strike, each covering 100 shares

For a 2-for-1 split the OCC doubles the number of contracts and halves the strike, so 3 calls at $50 become 6 calls at $25, each still covering 100 shares. The aggregate exercise value stays at $15,000. Leaving the strike or contract count unchanged would create an artificial gain or loss.OCC By-Laws Art. VI

An investor sells one XYZ 40 put for 3 and is assigned when XYZ trades at 36. What is the investor's effective purchase price per share?

• a.$36, the market price on the day the put was assigned
• b.$37, the $40 strike less the $3 premium the investor kept✓
• c.$43, the $40 strike plus the $3 premium, treating the premium as a cost
• d.$40, the strike alone, since the premium was earned when the put was sold

The put writer must buy at the 40 strike, but the 3-point premium received offsets the cost, so the effective price is 40 - 3 = 37 ($37 per share). Adding the premium reverses its effect, ignoring the premium overstates the cost, and the market price at assignment is irrelevant to what the writer is obligated to pay.Option assignment

An investor buys a municipal bond with 10 full years to maturity at 98 in the secondary market. The $20 discount per $1,000 bond is a market discount. How is it treated at maturity?

• a.As $20 of ordinary income, as municipal market discount always is
• b.As $20 of ordinary income, because the de minimis limit is 0.25% of the $1,000 redemption price, or $2.50
• c.As a $20 capital gain, because it is under the $25 de minimis amount✓
• d.As tax-exempt interest, because the bond is a municipal bond and its interest is exempt

Market discount is treated as zero (de minimis) if it is less than 0.25% of the redemption price times the number of complete years to maturity: 0.0025 x $1,000 x 10 = $25. The $20 discount is below that, so the gain is capital. Municipal market discount is not always ordinary income, because the de minimis rule applies. Forgetting to multiply by the 10 years gives a $2.50 limit and the wrong ordinary-income result. Market discount is never tax-exempt interest, even on a municipal bond.IRC 1278(a)(2)(C)

A $1,000 par TIPS has a 2% coupon, and its adjusted principal is $1,030 on both interest dates in the year after inflation adjustments. What interest is paid for the year?

• a.$50.60, because interest is the coupon plus the inflation adjustment
• b.$20.00, because the coupon rate applies to the original par value
• c.$30.00, because interest equals the inflation adjustment to principal
• d.$20.60, because the coupon rate applies to adjusted principal✓

TIPS pay a fixed rate on the adjusted principal: 2% x $1,030 = $20.60 for the year. The inflation increase in principal is a separate item, taxed in the year it occurs, and is not part of the interest payment.Treasury TIPS

A closed-end fund has net assets of $240 million and 12 million shares outstanding. Its shares trade on an exchange at $18.00. The shares are trading at:

• a.A 10% discount, because the $2 gap is measured against $20 NAV✓
• b.An 11.1% discount, because the $2 gap is measured against the $18 price
• c.A 10% premium, because the shares trade $2 away from the $20 NAV
• d.A 90% discount, because the price is 90% of the $20 NAV

NAV per share is $240 million / 12 million = $20. Shares at $18 sit $2 below NAV, a 10% discount ($2 / $20). A premium would require a price above NAV. Dividing the gap by the $18 price uses the wrong base, and 90% is the price-to-NAV ratio, not the discount.Investment Company Act

A stock trades at $50 with rights attached. The subscription price is $40 and four rights are needed to buy one share. What is the theoretical value of one right while the stock still trades cum-rights?

• a.$5.00, found by (50 - 40) / 2
• b.$2.00, found by (50 - 40) / (4 + 1)✓
• c.$2.50, found by (50 - 40) / 4
• d.$10.00, the full gap between market and subscription price

Before the ex-rights date the value of one right is (market - subscription) / (rights per share + 1) = 10 / 5 = $2.00. Dividing by 4 is the ex-rights formula, the full gap ignores the number of rights needed, and dividing by 2 has no basis.Rights offerings

A registered broker-dealer owns and invests on a discretionary basis $30 million in securities of unaffiliated issuers. Under Rule 144A, is it a qualified institutional buyer?

• a.Yes, because a registered dealer needs only $10 million of such securities✓
• b.Yes, but only when the dealer buys for its own account rather than for other buyers
• c.No, because every qualified institutional buyer must own and invest $100 million
• d.No, because a dealer must also show an audited net worth of at least $25 million

Rule 144A sets the dealer threshold at $10 million of unaffiliated securities, so $30 million qualifies. The $100 million test applies to institutions such as insurance companies and investment companies. The audited net worth requirement belongs to the bank test, and a registered dealer may act for its own account or for the accounts of other qualified institutional buyers.SEC Rule 144A

A variable annuity is annuitized with an assumed interest rate of 4%. If the separate account earns 6% in the year, the annuity payments will:

• a.Increase only if the owner exchanges the contract for a fixed annuity
• b.Stay level, because annuitizing fixes the dollar amount of each payment
• c.Increase, because the 6% actual return exceeded the 4% assumed interest rate✓
• d.Decrease, because a return above the assumed rate lowers the unit value

Payments vary with the annuity unit value: when the separate account earns more than the AIR, payments rise; when it earns less, they fall. A fixed payment describes a fixed annuity, a return above the AIR cannot reduce the payment, and no exchange is needed for payments to rise.Variable annuities

A limited partner in a direct participation program has passive losses for the year. Those losses may generally be used to:

• a.Offset ordinary income without limit, since the partner bears the economic loss
• b.Offset wages and portfolio income up to $3,000 each year
• c.Offset passive income from other sources, with any excess carried forward✓
• d.Be carried back to earlier years to recover tax already paid on portfolio income

Passive losses offset only passive income. Unused amounts are suspended and carried forward until passive income arises or the interest is sold. The $3,000 allowance applies to capital losses, not passive losses, and the loss cannot offset wages or portfolio income without limit or be carried back against portfolio income.IRC Section 469

A customer buys 1,000 shares at $40 in a margin account. Under Regulation T, what is the minimum initial payment?

• a.$20,000, which is 50% of the $40,000 purchase✓
• b.$10,000, which is 25% of the $40,000 purchase price
• c.$30,000, which is 75% of the $40,000 purchase price
• d.$2,000, which is the minimum equity for a margin account

Regulation T sets initial margin on a long purchase at 50%, so the customer must deposit $20,000 and may borrow the rest. 25% is the long-account maintenance level, 75% is not a Regulation T figure, and the $2,000 minimum equity is a floor, not the Regulation T requirement for a $40,000 purchase.Regulation T

A long margin account holds securities worth $26,000 with a debit balance of $20,000. Does the account meet FINRA's minimum maintenance requirement?

• a.Yes; equity of $6,000 is above 20% of market value, which is the required minimum
• b.No; equity of $6,000 is below the $6,500 required, which is 25% of the $26,000 value✓
• c.Yes; the $20,000 debit is under 80% of market value, which is the permitted maximum
• d.No; equity of $6,000 is below the $13,000 required, which is 50% of $26,000

Minimum maintenance on long positions is 25% of current market value: 0.25 x $26,000 = $6,500. Equity is $26,000 - $20,000 = $6,000, so the account is short and a maintenance call results. 20% and 80% are not the FINRA minimum, and 50% is the Regulation T initial level, not the maintenance level.FINRA Rule 4210

A customer sells short 1,000 shares at $30 in a margin account. Under Regulation T, what initial deposit is required in addition to the sale proceeds?

• a.$7,500, the 25% figure used for long maintenance
• b.$30,000, a full 100% of the sale proceeds
• c.$15,000, half of the $30,000 sale value, paid on top of the proceeds✓
• d.$45,000, 150% of the sale proceeds, counting the sale credit itself

A short sale must be margined at 150% of its value: $45,000. The $30,000 sale proceeds count toward that, leaving $15,000 for the customer to deposit, which is 50% of the value. Depositing 100% or 150% in addition to the proceeds overstates the requirement, and 25% is a long-position maintenance level.Regulation T

A customer is short 1,000 shares of a stock trading at $3.00 in a margin account. What is the minimum maintenance margin on the position?

• a.$5,000, which is a flat $5 a share on the 1,000 shares sold short
• b.$3,000, the greater of $2.50 a share or 100% of market value✓
• c.$2,500, which is a flat $2.50 a share on the 1,000 shares sold short
• d.$900, which is 30% of the $3,000 market value of the short position

For short stock selling below $5 the maintenance requirement is the greater of $2.50 per share or 100% of market value. Here 100% of $3,000 exceeds $2,500, so $3,000 applies. 30% and $5 a share are the requirements for shorts priced at $5 or more, and $2.50 a share is only the floor.FINRA Rule 4210

A new customer opens a margin account and buys $3,000 of stock on margin. Regulation T requires $1,500. What is the least the customer must have in the account?

• a.$2,000, because FINRA's minimum equity exceeds the Regulation T amount✓
• b.$750, because only 25% of the purchase is due in a new account
• c.$3,000, because the full cost is due when the purchase is below $5,000
• d.$1,500, because Regulation T alone governs a margin purchase of this size

FINRA requires at least $2,000 of equity in a margin account (or the full purchase price if that is lower). The Regulation T amount of $1,500 is below the floor, so $2,000 must be deposited. The purchase exceeds $2,000, so full payment is not required, and 25% is a maintenance level, not an initial one.FINRA Rule 4210

A firm believes a 72-year-old customer is being financially exploited and places a temporary hold on a requested disbursement. How long may the initial hold last?

• a.30 business days from the date the hold was first placed
• b.10 business days from the date the customer was notified
• c.30 calendar days from the date the hold was first placed
• d.15 business days after the hold is first placed✓

Rule 2165 permits an initial hold of up to 15 business days, with the firm required to notify the parties authorized on the account, and the trusted contact, no later than two business days after the hold begins. Extensions are available only under the rule's own conditions, so a longer first hold is not permitted.FINRA Rule 2165

Which statement about a trusted contact person under FINRA Rule 4512 is correct?

• a.The firm must refuse to open any non-institutional account until the customer names a trusted contact
• b.The requirement applies equally to institutional and non-institutional accounts, with no exceptions
• c.The trusted contact may enter orders and withdraw funds if the customer becomes seriously ill
• d.Reasonable efforts to get one for non-institutional accounts; the account may open without it✓

Rule 4512 requires reasonable efforts to obtain the name and contact information of a trusted contact aged 18 or older for non-institutional accounts, but the firm may open and maintain the account if the customer declines. Institutional accounts are excluded, and a trusted contact has no trading authority; the person is only someone the firm may contact about the customer's well-being.FINRA Rule 4512

Which Regulation Best Interest obligation requires a firm to maintain written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest as a whole?

• a.The Disclosure Obligation
• b.The Care Obligation
• c.The Compliance Obligation✓
• d.The Conflict of Interest Obligation

Regulation Best Interest has four component obligations. The Compliance Obligation is the one covering written policies and procedures aimed at the regulation overall. Disclosure concerns material facts about the relationship and recommendation, Care concerns diligence and a best-interest basis, and Conflict of Interest concerns identifying and addressing conflicts.SEC Regulation Best Interest

A representative recommends a security to the owner of a small business for the brokerage account of the owner's corporation. Does Regulation Best Interest apply to that recommendation?

• a.No; it covers recommendations to natural persons for personal use, not a company✓
• b.Yes; it covers every recommendation to any account holder, whatever the type
• c.No; it covers only margin and options recommendations to natural persons
• d.Yes; it covers any account whose owner is a natural person, even when the account is used for business

A retail customer under Regulation Best Interest is a natural person (or that person's legal representative) who uses the recommendation primarily for personal, family or household purposes. A corporation's account is outside that definition. The rule is not limited to margin or options, and it does not cover all account types.SEC Regulation Best Interest

When must a broker-dealer deliver Form CRS (the relationship summary) to a retail investor?

• a.Before or at the earliest of a recommendation, an order, or the account opening✓
• b.Once a year, with the January account statement of each retail investor
• c.Only when the investor requests it in writing after the account is open
• d.Within 30 days after the account is opened and the first trade settles

A broker-dealer must deliver Form CRS to a retail investor before or at the earliest of: a recommendation of an account type, transaction or strategy; placing an order for the investor; or opening a brokerage account. Delivery after the fact, on request only, or annually does not satisfy the timing requirement.SEC Rule 17a-14

When must the options disclosure document (ODD) be given to a customer?

• a.At or before the time the customer's account is approved for options trading✓
• b.Within 30 days after the customer's first options transaction has been executed
• c.Within 15 days after the customer's account has been approved for options trading
• d.Only when the customer first writes an uncovered option, not before then

Rule 2360 requires the ODD to be furnished at or before the time the account is approved for options trading, so the customer sees the risks before trading begins. The 15-day period relates to returning the signed options agreement, and delivery after the first trade or only for uncovered writing is too late or too narrow.FINRA Rule 2360

A firm's supervisory office receives a complete and correct application package for a deferred variable annuity. By when must a registered principal review and decide whether to approve it?

• a.No later than seven business days after the office receives the package, and before transmittal✓
• b.No later than seven business days after the insurer receives the package from the firm
• c.No later than three business days after the office receives the package, and before transmittal
• d.No later than 15 business days after the office receives the package, and before transmittal

Rule 2330 requires a registered principal to review and decide on the recommended purchase or exchange before the application goes to the insurer, and no later than seven business days after an office of supervisory jurisdiction receives a complete and correct package. Three or fifteen business days do not match the rule, and the clock does not start when the insurer receives the application.FINRA Rule 2330

Which factor must a principal consider when reviewing the exchange of one deferred variable annuity for another?

• a.Whether the issuing insurer carries the highest credit rating available
• b.Whether the customer is older than 59 1/2, in every case
• c.Whether the customer had another deferred variable annuity exchange within 36 months✓
• d.Whether the customer has an active margin account at the firm

Rule 2330 directs the principal to weigh the exchange's costs and benefits, including surrender charges, new fees and lost benefits, and whether the customer had another deferred variable annuity exchange within the preceding 36 months. Age 59 1/2 is not a universal test, margin status is unrelated, and the rule does not require the top insurer rating.FINRA Rule 2330

A brokerage firm fails, and a customer's account holds $420,000 of securities and $90,000 of cash. What is the maximum SIPC protection for the account?

• a.$420,000, because SIPC protects securities only and does not cover cash
• b.$510,000, because cash within the $250,000 limit is covered in full
• c.$500,000, of which no more than $250,000 is cash, leaving $10,000 unprotected✓
• d.$250,000, because that is the total limit for any one customer

SIPC protects up to $500,000 per customer in a separate capacity, including up to $250,000 of cash. The account's $510,000 exceeds $500,000 total, so $10,000 is unprotected, though the $90,000 of cash is within the cash sublimit. Cash is covered, and $250,000 is only the cash portion of the limit.SIPA

For an account of a natural person where a firm makes recommendations, how often after the initial 30-day mailing must the firm send the customer the account record for verification?

• a.At intervals of no more than 12 months
• b.At intervals of no more than 36 months✓
• c.At intervals of no more than 60 months
• d.At intervals of no more than 24 months

Rule 17a-3(a)(17) requires the firm to furnish the account record to the customer within 30 days of opening the account and at least every 36 months afterward, and to send notice of changes of name or address. Annual, biennial and five-year cycles do not match the rule.SEC Rule 17a-3(a)(17)

Which item must a trade confirmation show?

• a.The firm's net capital position on the trade date of the transaction
• b.Whether the firm acted as agent or as principal in the transaction✓
• c.The customer's total portfolio value immediately after the trade settles
• d.The firm's inventory position in the security before the trade was executed

Rule 10b-10 requires a confirmation to disclose the date, time or a statement that time will be furnished, the identity, price and quantity of the security, and the firm's capacity as agent or principal. Inventory, total portfolio value and net capital are not confirmation items.SEC Rule 10b-10

A representative recommends a penny stock to a customer who is not an established customer. After sending the required suitability statement and obtaining the customer's signed agreement, when may the firm execute the order?

• a.No sooner than two business days after sending the suitability statement✓
• b.Immediately after the customer signs and returns the statement
• c.No sooner than five business days after the agreement is signed
• d.No sooner than 30 days after the account is approved

Rule 15g-9 requires the firm to send a written statement of the basis for its suitability determination, obtain the customer's signed and dated copy and a written agreement to the transaction, and then wait: it is unlawful to effect the transaction less than two business days after the statement (or the agreement) is sent. The signed return does not remove the waiting period, and the rule contains no five-business-day or 30-day period.SEC Rule 15g-9(a)(2), (b)(4)(ii)

Which security is most clearly a penny stock under the SEC definition?

• a.A stock priced at $4 that is quoted over the counter, with no exchange listing or exemption✓
• b.A mutual fund share priced at $4 issued by a registered investment company
• c.A stock priced at $4 that is listed on a national securities exchange meeting its standards
• d.A stock priced at $6 that is quoted over the counter, with no exchange listing or exemption

A penny stock is generally an equity security priced below $5 that is not listed on a national exchange meeting listing standards and does not fall within another exclusion. The exchange-listed stock is excluded, $6 is above the price test, and shares of registered investment companies are excluded.SEC Rule 3a51-1

Under SEC Rule 15c3-3, margin securities carried for customers are excess margin securities, which the firm must keep in its possession or control, when their market value exceeds what amount relative to the customers' debit balances?

• a.140% of the aggregate debit balances✓
• b.100% of the aggregate debit balances, the ceiling on pledging customer securities under Rule 15c2-1
• c.125% of the aggregate debit balances shown in the customers' margin accounts
• d.150% of the customers' aggregate debit balances after netting free credit balances

Rule 15c3-3(a)(5) defines excess margin securities as margin securities carried for a customer with a market value in excess of 140 percent of the total of the customer's debit balances, which the firm identifies as not constituting margin securities. Those securities must be kept in the firm's possession or control. The 100% figure is the limit Rule 15c2-1 places on pledging customer securities against customers' aggregate indebtedness, a different rule. The 125% and 150% figures do not appear in the definition.SEC Rule 15c3-3(a)(5)

A customer takes a check from her traditional IRA, payable to her, intending to roll it over to another IRA. What is the deadline for completing the rollover?

• a.Within 60 days after she receives the distribution✓
• b.Within 30 days after she receives the distribution of funds
• c.Within 90 days after she receives the distribution of funds
• d.By the end of the tax year following the distribution

An indirect rollover must be completed within 60 days after the distribution is received. Thirty and ninety days, or the end of the next tax year, do not match the rule. Only one indirect IRA-to-IRA rollover is allowed in any 12-month period across all of a person's IRAs.IRS Topic 413