FINRA Series 6 — All Questions

The principal purpose of the Securities Act of 1933 is to:

• a.Regulate trading on exchanges and in the over-the-counter market, which is actually the role assigned to the Securities Exchange Act of 1934
• b.Set minimum capital requirements for investment companies
• c.Establish the SEC and require broker-dealer registration
• d.Require full and fair disclosure of material facts when securities are offered to the public for the first time✓

The 1933 Act governs the primary market, requiring registration of new offerings and delivery of a prospectus so investors can judge the offering for themselves. Secondary market regulation, SEC creation, and broker-dealer registration come from the Securities Exchange Act of 1934. Fund capital requirements come from the Investment Company Act of 1940.Securities Act of 1933

Registration of a securities offering with the SEC means that:

• a.The SEC guarantees the accuracy of the statements in the prospectus
• b.The issuer's financial condition has been certified as sound by the SEC
• c.The SEC has approved the offering as suitable for retail investors
• d.The issuer has filed the required disclosure and the SEC has not objected; the SEC does not approve the offering or vouch for its merits✓

The SEC's review is a disclosure review only; it never passes on the merits of an offering and it is unlawful to tell a customer otherwise. Suggesting approval, a guarantee of accuracy, or certification of financial strength misrepresents the agency's role. Every prospectus carries a disclaimer to this effect.Securities Act of 1933

Which of the following is an exempt security under the Securities Act of 1933?

• a.Common stock of a listed manufacturing company
• b.General obligation bonds issued by a state or municipality✓
• c.Units of a unit investment trust holding corporate bonds, which are exempt from registration as government-related instruments
• d.Shares of a newly organized open-end investment company

Municipal and U.S. government securities are exempt from the registration requirements of the 1933 Act, though the antifraud provisions still apply. Investment company shares, including UIT units, must be registered and sold with a prospectus. Corporate equity offerings are the classic example of securities that must be registered.Securities Act of 1933

During the cooling-off period for a registered offering, a representative may:

• a.Send a preliminary prospectus and accept non-binding indications of interest✓
• b.Confirm sales at the anticipated offering price once indications of interest have been collected
• c.Accept payment from customers who commit to buy
• d.Send research reports praising the issuer to prospective buyers to build early demand for the issue

Between filing and effectiveness, the only permitted activities are distributing the preliminary prospectus, or red herring, and gathering indications of interest that bind no one. Taking money, confirming sales, or circulating promotional material would be an illegal offer or sale of an unregistered security. Sales may occur only after the registration is declared effective and the final prospectus is available.Securities Act of 1933

The Securities Exchange Act of 1934 is best known for:

• a.Requiring a prospectus for every new issue of securities sold to the public in the primary market
• b.Establishing IRA contribution limits and the annual deferral caps for retirement accounts
• c.Defining the three classes of investment companies named in the Investment Company Act of 1940
• d.Creating the SEC and regulating the secondary market, broker-dealers, and exchanges✓

The 1934 Act created the SEC and gave it authority over trading markets, broker-dealer registration, reporting by public companies, and market manipulation. New-issue prospectus requirements belong to the 1933 Act, investment company classifications to the 1940 Act, and IRA rules to the Internal Revenue Code.Securities Exchange Act of 1934

Under the Investment Company Act of 1940, what portion of a registered fund's board must consist of directors who are not affiliated with the fund's adviser or underwriter?

• a.At least 40%✓
• b.No minimum is specified
• c.At least 10%
• d.At least 25%

The Act requires that non-interested, independent directors make up at least 40% of the board so that shareholder interests have meaningful representation when advisory contracts are reviewed. Many funds voluntarily exceed this level, but 40% is the statutory floor. The lower percentages and the claim that no minimum exists both understate the requirement.Investment Company Act of 1940

Before a newly formed open-end fund may offer shares to the public, the Investment Company Act of 1940 requires it to have:

• a.At least $1 million of net assets and a five-year performance record
• b.A minimum of 500 shareholders and a state banking charter
• c.Approval from FINRA's board of governors
• d.At least $100,000 of net assets and at least 100 shareholders✓

The Act sets a modest seed-capital requirement of $100,000 in net worth and a minimum of 100 shareholders before a public offering may begin, ensuring the fund is a genuine going concern. There is no performance-record or million-dollar requirement, and a new fund by definition has no track record. FINRA reviews underwriting arrangements but does not authorize the fund's existence.Investment Company Act of 1940

A fund's board wants to change the fund from a growth objective to an aggressive high-yield bond objective. This change requires:

• a.SEC approval, but no shareholder involvement
• b.Written notice to shareholders 30 days in advance, with no vote required
• c.Only a majority vote of the board of directors
• d.Approval by a majority vote of the fund's outstanding shares✓

A change in a fundamental investment objective or policy is reserved to shareholders and requires a majority vote of outstanding voting securities. Investors bought into a stated strategy, so the board alone cannot redirect their money. Notice without a vote and SEC approval without shareholder input both bypass the required shareholder franchise.Investment Company Act of 1940

Breakpoint selling is best defined as:

• a.Recommending Class A shares to a customer with a short time horizon
• b.Selling shares of two different fund families to the same customer
• c.Charging a sales load on reinvested dividends
• d.Recommending a purchase just below the amount that would qualify for a reduced sales charge, without disclosing the discount✓

Breakpoint selling deprives the customer of a quantity discount so the representative earns a larger commission, which is why it is treated as a sales practice violation. Diversifying across fund families is permissible when suitable, though it may forfeit breakpoints and should be discussed. Charging loads on reinvested dividends and mismatching share classes are separate problems.FINRA Rule 2341 (Investment Company Securities)

A representative repeatedly redeems a customer's shares in one fund family and reinvests the proceeds in a similar fund at another family, generating a new sales charge each time. This practice is called:

• a.Switching, and it is prohibited✓
• b.Selling dividends, a fully permissible way to boost a client's income before the record date
• c.Rights of accumulation, the recognized industry term for churning a fund position for extra commissions
• d.Front-running, the specific name the rules give to this repeated redemption-and-reinvestment pattern

Moving a customer between funds with substantially similar objectives solely to generate additional sales charges is switching, and absent a documented benefit to the customer it is a prohibited practice. Front-running involves trading ahead of a known block order. Selling dividends concerns timing a purchase around a distribution, and rights of accumulation is a legitimate breakpoint feature.FINRA Rules

Urging a customer to buy fund shares immediately so the customer can "capture" an upcoming distribution is prohibited because:

• a.The customer would be required to hold the shares for 12 months
• b.Distributions cannot be paid to shareholders of record for the first 30 days
• c.The share price drops by the amount of the distribution, so the customer gains nothing and incurs a current tax liability✓
• d.Funds are not permitted to pay distributions more than once a year

Selling dividends is deceptive because the NAV falls by the distribution amount on the ex-date, leaving the investor with the same total value but an immediate taxable event. There is no 30-day record-date restriction, no annual limit on distributions, and no mandatory holding period. The customer is worse off after tax, which is why the pitch is prohibited.FINRA Rules

A representative learns that an institutional customer is about to place a very large buy order and immediately buys the same security for a personal account. This is:

• a.Permitted, because personal trades are unrelated to customer business
• b.Front-running, a prohibited practice and a form of market abuse✓
• c.Permitted if the representative discloses the trade to a supervisor afterward
• d.Permitted if the personal order is smaller than the customer's order

Trading ahead of a customer's known block order to profit from the expected price move misuses confidential customer information and is prohibited regardless of size or after-the-fact disclosure. The prohibition applies to accounts in which the representative has any beneficial interest. Supervisors cannot bless conduct that is itself a violation.Securities Exchange Act of 1934

A customer is nervous about market volatility and the representative offers to personally reimburse any losses in the first year. This offer is:

• a.Acceptable only for accounts under $25,000
• b.Acceptable if the branch manager approves it in writing and the firm files the required disclosure
• c.Prohibited, because a registered person may not guarantee a customer against loss✓
• d.Acceptable if the representative documents it in the client file and also notifies the branch office manager

Guaranteeing a customer against loss is flatly prohibited; it misrepresents the risk of the investment and creates an obligation the firm has not sanctioned. No amount of documentation, supervisory approval, or account size makes the promise permissible. Sharing in losses is permitted only under narrow joint-account rules with written firm and customer approval and proportionate capital contribution.FINRA Rules

A registered representative may share in the profits and losses of a customer's account only if:

• a.The account is a joint account with an immediate family member of the customer
• b.The firm and the customer give prior written approval and sharing is proportionate to the representative's financial contribution✓
• c.The representative contributes at least 50% of the account's capital
• d.The customer requests it verbally and the representative keeps notes

Profit sharing is permitted only with written consent from both the member firm and the customer, and the representative's share must match the money actually contributed. Verbal permission is never sufficient. There is no 50% contribution rule, and a family relationship between customer and representative does not by itself authorize sharing.FINRA Rules

A representative tells a prospect, "Buy this fund before Friday's record date so you get the $0.40 per share distribution for free." This statement is:

• a.Prohibited, because it is selling dividends and misrepresents an economic benefit✓
• b.Prohibited only if the customer holds the shares less than 60 days measured after the record date
• c.Acceptable if the customer is in a low tax bracket and does not itemize any deductions on the return
• d.Acceptable because the distribution is a real benefit to shareholders who buy in just before the record date

The pitch is selling dividends: the fund's NAV declines by the distribution amount, so the investor simply converts part of the investment into a taxable payment. A low tax bracket reduces the harm but does not make the misrepresentation acceptable. The violation lies in the misleading sales pitch, not in any holding period.FINRA Rules

Which of the following would most likely be viewed as a prohibited practice by a registered representative?

• a.Sending a customer a copy of the fund's current prospectus
• b.Depositing a customer's check into the representative's own bank account overnight before forwarding it✓
• c.Documenting a customer's risk tolerance before a recommendation
• d.Recommending a Class A purchase at a breakpoint the customer qualifies for under the fund's published breakpoint schedule

Commingling customer funds with a representative's personal funds, even briefly, is a serious violation and can constitute conversion. Recommending a breakpoint-qualified purchase, delivering a prospectus, and documenting risk tolerance are all required or encouraged practices. Customer checks must be forwarded promptly to the firm.FINRA Rules

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

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

The 25-recipient threshold in a rolling 30-day window separates correspondence from retail communications, and exceeding it triggers the stricter principal approval and filing framework. Institutional communications are those directed only to institutional investors. A public appearance covers unscripted live presentations rather than written material.FINRA Rule 2210 (Communications with the Public)

A representative emails an identical market update to 18 individual retail clients in one month. This communication is categorized as:

• a.An advertisement requiring filing with FINRA
• b.An institutional communication exempt from review, because it went to more than the retail delivery threshold of recipients
• c.Correspondence, subject to supervision and review procedures✓
• d.A retail communication requiring pre-use principal approval within ten business days of first use

Because the message reaches 25 or fewer retail investors within 30 days, it is correspondence, which firms must supervise and review under their written procedures but need not approve before use. Crossing the 25-recipient line would convert it into a retail communication. Retail clients are not institutional investors, and correspondence is not filed with FINRA.FINRA Rule 2210 (Communications with the Public)

An institutional communication is one distributed exclusively to:

• a.Prospective retail customers who have signed a suitability waiver
• b.Institutional investors such as banks, insurance companies, registered investment companies, and qualifying entities✓
• c.Employees of the member firm
• d.Any customer with an account balance over $250,000

The institutional category depends on the type of recipient, not on account size or paperwork, and covers entities such as banks, insurers, registered investment companies, and other qualifying institutions. A wealthy individual is still a retail investor. Suitability obligations cannot be waived by a customer signature.FINRA Rule 2210 (Communications with the Public)

Retail communications must generally be:

• a.Approved by the SEC before use and formally cleared for public distribution first
• b.Approved by the customer in writing before the firm may distribute the material to anyone
• c.Approved by an appropriately registered principal before first use or filing✓
• d.Reviewed by the fund's board of directors and the fund's transfer agent before distribution

A registered principal of the firm must sign off on retail communications before they are used or filed, which places accountability inside the member firm. The SEC does not pre-approve sales material, and fund boards oversee the fund rather than a distributor's advertising. Customers never approve communications directed at them.FINRA Rule 2210 (Communications with the Public)

How long must a member firm retain records of its communications with the public?

• a.Permanently, with no exception, the same standard the SEC applies to a firm's audited financial reports
• b.One year from the date of first use, after which the material may be discarded from all firm systems
• c.Five years from the date of creation, consistent with the anti-money-laundering recordkeeping period
• d.Three years from the date of last use, and the first two years in an easily accessible place✓

Communications records must be kept for three years from last use, with the earliest two years readily accessible for examination. The one-year and permanent options misstate the requirement. The five-year period applies to certain anti-money laundering records, not to general communications.FINRA Rule 2210 (Communications with the Public)

A retail communication concerning a registered investment company that includes fund performance generally must be filed with FINRA:

• a.Only if a customer complains about it
• b.Within 90 days after the end of the calendar quarter
• c.Within 10 business days of first use✓
• d.At least 10 business days before first use, in every case

Most investment company retail communications are filed with FINRA's Advertising Regulation Department within 10 business days after first use. Pre-use filing applies to specific categories, such as material from a firm in its first year of membership or communications about certain complex products. Quarterly batching and complaint-triggered filing are not part of the rule.FINRA Rule 2210 (Communications with the Public)

Which practice is permitted when presenting mutual fund performance in a retail communication?

• a.Describing a bond fund's yield as guaranteed because the portfolio is investment grade and of very high investment-grade credit quality
• b.Projecting the fund's expected return over the next five years
• c.Showing only the fund's best three-year period
• d.Showing standardized average annual total returns for 1-, 5-, and 10-year periods, or the life of the fund✓

Standardized total returns for the required periods, current as of the most recent quarter end, give investors a consistent basis for comparison. Cherry-picking a favorable period, projecting future performance, and calling any return guaranteed are all misleading and prohibited. Communications must also disclose that past performance does not predict future results.FINRA Rule 2210 (Communications with the Public)

A firm wants to include a customer testimonial in a retail communication. Which requirement applies?

• a.The testimonial must be notarized by the customer
• b.The testimonial must be filed with the SEC before use
• c.Testimonials are prohibited in all securities communications
• d.The communication must disclose that the experience may not be typical and, if compensation was paid, that fact must be disclosed✓

Testimonials are allowed with clear disclosure that the quoted experience is not necessarily representative and that any material payment to the person was made. Notarization is not required, and pre-use SEC filing is not part of FINRA's advertising framework. Testimonials about technical securities advice also require disclosure of the speaker's qualifications.FINRA Rule 2210 (Communications with the Public)

A customer deposits $12,000 in cash in a single business day. The firm must file:

• a.Nothing, because the deposit is under $25,000
• b.Form 1099-B with the IRS
• c.A Suspicious Activity Report only
• d.A Currency Transaction Report✓

Currency transactions of more than $10,000 in one business day trigger a Currency Transaction Report under the Bank Secrecy Act, regardless of whether anything appears suspicious. A SAR is required only when the activity itself raises suspicion. Form 1099-B reports proceeds of sales, not deposits.Bank Secrecy Act

When a firm files a Suspicious Activity Report on a customer's transactions, the firm:

• a.Must not notify the customer that a SAR was filed✓
• b.Must close the account immediately
• c.Must give the customer a copy within 10 business days
• d.May notify the customer only with the customer's written consent

Tipping off a customer about a SAR filing is prohibited because it would compromise any resulting investigation. SARs generally apply to suspicious transactions of $5,000 or more and are filed with FinCEN, typically within 30 days of detection. Filing does not automatically require closing the account, though the firm may choose to do so.Bank Secrecy Act

A firm's customer identification program must, at a minimum, collect which information from a new individual customer?

• a.Employer name, annual income, net worth, and investment experience collected and retained for the firm's own records
• b.Name, date of birth, physical address, and taxpayer identification number✓
• c.Passport number and two professional references
• d.Credit score, marital status, and number of dependents collected for the customer's new-account file

The customer identification program requires name, date of birth, a street address, and a government identification number so the firm can form a reasonable belief that it knows the customer's identity. Financial profile items such as income and net worth are gathered for suitability purposes, not identity verification. Credit scores and references are not CIP elements.USA PATRIOT Act

Before opening an account, a firm must check the prospective customer's name against the list of Specially Designated Nationals maintained by:

• a.The Office of Foreign Assets Control✓
• b.FINRA's Central Registration Depository
• c.The Municipal Securities Rulemaking Board
• d.The Securities Investor Protection Corporation

OFAC publishes the Specially Designated Nationals list, and firms are prohibited from doing business with parties named on it. The CRD holds registration records for individuals and firms, the MSRB writes municipal rules, and SIPC provides limited account protection if a broker-dealer fails. None of those three maintains sanctions lists.USA PATRIOT Act

Under the Investment Company Act of 1940, a fund's investment advisory contract must be:

• a.Approved once and then continue automatically for the life of the fund
• b.Approved only by the fund's investment adviser
• c.Approved initially by shareholders and the board, then renewed at least annually by the board, including a majority of the independent (non-interested) directors✓
• d.Filed with and approved by the Federal Reserve

The Act ties the adviser's compensation to periodic review: the contract needs initial shareholder and board approval and then annual renewal by the board, specifically a majority of the non-interested directors. It does not renew automatically, cannot be approved by the adviser alone, and is not subject to Federal Reserve approval. This annual review protects shareholders from excessive fees.Investment Company Act of 1940

The Investment Company Act of 1940 generally prohibits an affiliated person of a fund, such as its investment adviser, from:

• a.Selling securities to, or buying securities from, the fund for the affiliate's own account✓
• b.Voting the fund shares the affiliate personally owns at the annual shareholder meeting alongside other investors
• c.Receiving any advisory fee
• d.Attending the fund's board meetings even when the adviser holds an interested-person seat on the board

To prevent self-dealing, the Act bars affiliated persons from principal transactions with the fund, such as selling securities to it or buying securities from it for their own account. Affiliates may still vote shares they own, attend board meetings, and receive contractually approved advisory fees. The prohibition targets conflicts that could harm shareholders, not ordinary governance.Investment Company Act of 1940

A mutual fund's 12b-1 distribution plan must be:

• a.Approved by the SEC each year before it may be used
• b.Approved initially and renewed at least annually by the board, including a majority of the non-interested directors, and may be terminated by those directors or by a vote of the outstanding shares✓
• c.Guaranteed to increase the fund's performance
• d.Unlimited in the amount it may charge shareholders

A 12b-1 plan is a governance matter: it needs board approval, annual renewal by a board that includes a majority of independent directors, and it can be ended by those directors or by shareholders. The SEC does not annually approve individual plans, no plan can guarantee performance, and FINRA caps 12b-1 charges. Ongoing independent oversight is the safeguard.Investment Company Act of 1940

Under Regulation Best Interest (Reg BI), a broker-dealer making a securities recommendation to a retail customer must satisfy four component obligations. They are:

• a.Suitability, Diversification, Liquidity, and Disclosure
• b.Registration, Reporting, Recordkeeping, and Renewal
• c.Know-Your-Customer, Anti-Money-Laundering, Privacy, and Advertising
• d.Disclosure, Care, Conflict of Interest, and Compliance✓

Reg BI, effective since June 2020, requires firms to act in the retail customer's best interest through four obligations: Disclosure, Care, Conflict of Interest, and Compliance. It raised the standard above the older suitability rule, so listing suitability as one of the four is outdated. The other choices mix in unrelated regulatory concepts.Regulation Best Interest

Form CRS (the Customer or Client Relationship Summary) must be:

• a.Filed with FINRA within ten days after each recommendation
• b.Delivered to retail investors and summarize the firm's services, fees, conflicts of interest, standard of conduct, and disciplinary history✓
• c.Signed by a principal before every trade
• d.Prepared only for institutional clients

Form CRS is a short relationship summary given to retail investors that plainly describes the firm's services, fees, conflicts, legal standard of conduct, and whether the firm or its people have disciplinary history. It is a disclosure delivered at the start of the relationship, not a per-trade filing or approval, and it is aimed at retail, not institutional, clients.Regulation Best Interest

FINRA's gift rule generally limits gifts given to another person in connection with that person's business to a maximum of:

• a.$300 per person per year✓
• b.$500 per person per year
• c.$1,000 per person per year
• d.No limit, as long as the gift is disclosed

Effective March 30, 2026, FINRA raised the Rule 3220 gift limit from its long-standing $100 to $300 per recipient per year for gifts tied to the business of the recipient's employer; the increase reflects inflation since the rule's 1992 adoption. The former $100 amount applied before 2026. Ordinary business entertainment and certain personal gifts are treated separately, and disclosure does not raise the ceiling.FINRA Rule 3220 (Gifts and Gratuities)

A registered representative wants to sell a private investment away from the firm and be compensated for it. Before participating, the representative must:

• a.Simply keep a record of the transaction in a personal file for the representative's own later reference
• b.Provide written notice to the employing firm and receive the firm's written approval✓
• c.Obtain only the customer's verbal consent
• d.Wait until after the deal closes to inform the firm

Participating in a securities transaction outside the firm for compensation, known as selling away, requires prior written notice to the firm and the firm's written approval, after which the firm supervises the activity as its own. A personal file, verbal customer consent, or after-the-fact notice all fail the rule. Unapproved selling away is a serious violation.FINRA Rule 3280 (Private Securities Transactions)

A registered representative takes a paid weekend job as a real estate agent. Regarding this outside business activity, the representative must:

• a.Do nothing, because it is unrelated to securities, since real estate licensing falls entirely outside FINRA's jurisdiction
• b.Obtain SEC approval before starting, filing a Form U4 amendment with the Commission for its clearance
• c.Provide prior written notice to the employing member firm✓
• d.Resign the securities registration

Any outside business activity for compensation requires prior written notice to the employing firm so it can assess conflicts and supervisory concerns, even when the work has nothing to do with securities. The SEC does not approve individual outside jobs, and the representative need not resign; the firm may impose conditions or object. Silence is the violation.FINRA Rule 3270 (Outside Business Activities)

A representative wants to borrow $5,000 from a customer who is neither a family member nor a financial institution. Under FINRA rules, this loan is:

• a.Generally prohibited unless it fits a narrow permitted category and the firm's written procedures allow and approve it✓
• b.Always permitted if repaid within 30 days
• c.Permitted as long as the interest rate is at market
• d.Permitted with the branch manager's verbal approval

Borrowing from or lending to customers is generally prohibited unless the arrangement falls within limited exceptions, such as certain family or lending-institution relationships, and the firm's written procedures permit it with proper notice and approval. A quick repayment, a market interest rate, or verbal approval does not cure the conflict. The rule protects customers from exploitation.FINRA Rule 3240 (Borrowing From or Lending to Customers)

A summary prospectus for a mutual fund:

• a.May be used only with institutional investors
• b.Is a short document that can satisfy prospectus delivery if the full statutory prospectus is available online and provided on request✓
• c.Eliminates the need for any prospectus whatsoever
• d.Must be filed with the MSRB

The summary prospectus gives investors the key facts, such as objectives, fees, risks, and performance, in a few pages, and delivering it satisfies the prospectus requirement provided the full statutory prospectus is posted online and sent on request. It supplements rather than eliminates the statutory prospectus and is used with retail investors. Mutual fund filings go to the SEC, not the MSRB.Securities Act of 1933

In the money laundering process, the stage at which illicit cash is first introduced into the financial system, for example through cash deposits, is called:

• a.Integration
• b.Placement✓
• c.Layering
• d.Reconciliation

Placement is the entry point, where dirty cash first enters the financial system. Layering then moves the funds through complex transactions to obscure their origin, and integration returns them to the economy looking legitimate. Structuring deposits just under the $10,000 reporting threshold is a placement tactic firms must watch for; 'reconciliation' is not an AML stage.Bank Secrecy Act

The Securities Investor Protection Corporation (SIPC) protects a customer when:

• a.The customer's mutual fund declines in value
• b.The overall market falls into a bear market
• c.A member broker-dealer fails and customer cash and securities are missing, up to $500,000 including a $250,000 limit for cash✓
• d.The customer is defrauded by a private individual outside any brokerage

SIPC steps in when a member broker-dealer becomes insolvent and customer property is missing, covering up to $500,000 per customer with a $250,000 sublimit for cash. It does not insure against market losses; a fund that simply drops in value is not a SIPC event. Fraud unconnected to a failed member firm is outside SIPC's scope.Securities Investor Protection Act

The Securities Act of 1933 is chiefly concerned with:

• a.Regulating secondary-market trading on exchanges, the market activity the statute was chiefly written to oversee under federal law
• b.Requiring full and fair disclosure through registration and a prospectus when securities are first offered to the public✓
• c.Setting IRA contribution limits
• d.Defining the classes of investment companies

The 1933 Act governs the primary market, requiring registration of new offerings and prospectus delivery. Secondary-market regulation comes from the Securities Exchange Act of 1934.

SEC registration of a securities offering means that:

• a.The SEC has judged the offering suitable for retail investors
• b.The SEC certifies the issuer's financial strength
• c.The SEC guarantees the prospectus is accurate and stands behind every material statement the document contains, so investors may rely on it as an official endorsement
• d.The issuer has filed the required disclosure and the SEC has not objected; the SEC does not approve the offering or vouch for its merits✓

SEC review is a disclosure review only; the agency never passes on the merits, and telling a customer otherwise is unlawful (Securities Act of 1933). Every prospectus carries this disclaimer.

The Securities Exchange Act of 1934 is primarily responsible for:

• a.Requiring a prospectus for every new issue
• b.Setting 401(k) contribution limits
• c.Creating the SEC and regulating the secondary market, broker-dealers, and exchanges✓
• d.Defining the three classes of investment companies

The 1934 Act created the SEC and gave it authority over trading markets, broker-dealer registration, public-company reporting, and market manipulation. New-issue prospectus rules belong to the 1933 Act.

Which security is exempt from the registration requirements of the Securities Act of 1933?

• a.U.S. Treasury securities✓
• b.Shares of a new open-end investment company
• c.Common stock of a listed company
• d.Units of a corporate-bond unit investment trust

U.S. government and municipal securities are exempt from the registration requirements of the 1933 Act, though the antifraud provisions still apply. Investment company shares, including UIT units, must be registered and sold with a prospectus.

During the cooling-off period of a registered offering, a representative may:

• a.Send a preliminary prospectus and accept non-binding indications of interest✓
• b.Accept payment from committed buyers
• c.Confirm sales at the expected offering price
• d.Distribute research reports praising the issuer to build early demand among prospective buyers before the effective date

Between filing and effectiveness, only a preliminary prospectus (red herring) and non-binding indications of interest are permitted (Securities Act of 1933). Sales may occur only after the registration is effective and the final prospectus is available.

Under the Investment Company Act of 1940, independent (non-interested) directors must make up at least what portion of a fund's board?

• a.40%✓
• b.51%
• c.10%
• d.25%

The Act requires at least 40% of directors to be non-interested so shareholder interests are represented when advisory contracts are reviewed. Many funds voluntarily exceed this statutory floor.

Before a newly formed open-end fund may offer shares to the public, the Investment Company Act of 1940 requires:

• a.500 shareholders and a bank charter
• b.A five-year performance record
• c.FINRA board approval of the fund's existence
• d.At least $100,000 of net assets and at least 100 shareholders✓

The Act sets a seed-capital requirement of $100,000 in net worth and a 100-shareholder minimum before a public offering may begin. A new fund by definition has no track record.

Changing a fund's fundamental investment objective requires:

• a.Thirty days' written notice, with no vote
• b.SEC approval, with no shareholder vote
• c.A majority vote of the board of directors only
• d.Approval by a majority vote of the fund's outstanding shares✓

A change in a fundamental objective or policy is reserved to shareholders and requires a majority vote of outstanding voting securities (Investment Company Act of 1940). Investors bought a stated strategy, so the board alone cannot redirect their money.

A fund's investment advisory contract must be:

• a.Approved by the investment adviser itself
• b.Approved once and then continue automatically for the life of the fund, with no further shareholder or board involvement required once it is first put in place
• c.Filed with and approved by the Federal Reserve
• d.Approved initially by shareholders and the board, then renewed at least annually by the board, including a majority of the independent directors✓

The Investment Company Act of 1940 ties adviser compensation to review: initial shareholder and board approval, then annual renewal by the board including a majority of non-interested directors. It does not renew automatically.

The Investment Company Act of 1940 generally prohibits an affiliated person, such as the adviser, from:

• a.Selling securities to, or buying securities from, the fund for the affiliate's own account✓
• b.Receiving any advisory fee for the portfolio-management services the affiliate provides under the contract
• c.Attending the fund's board meetings
• d.Voting fund shares the affiliate personally owns

To curb self-dealing, the Act bars affiliates from principal transactions with the fund. Affiliates may still vote shares they own, attend board meetings, and receive contractually approved advisory fees.

A fund's 12b-1 distribution plan must be:

• a.Guaranteed to improve the fund's performance
• b.Approved by the SEC each year before use, which reviews and clears every distribution plan annually
• c.Approved initially and renewed at least annually by the board, including a majority of the non-interested directors, and terminable by them or by a shareholder vote✓
• d.Unlimited in the amount it may charge

A 12b-1 plan needs board approval, annual renewal by a board including a majority of independent directors, and can be ended by those directors or by shareholders (Investment Company Act of 1940). FINRA separately caps the charges.

Regulation Best Interest imposes four component obligations on a broker-dealer recommending securities to a retail customer. They are:

• a.Know-Your-Customer, Anti-Money-Laundering, Privacy, and Advertising
• b.Disclosure, Care, Conflict of Interest, and Compliance✓
• c.Suitability, Diversification, Liquidity, and Disclosure
• d.Registration, Reporting, Recordkeeping, and Renewal

Reg BI requires firms to act in the retail customer's best interest through the Disclosure, Care, Conflict of Interest, and Compliance obligations, a standard above the older suitability rule.

Form CRS (the Customer or Client Relationship Summary) must:

• a.Be signed by a principal before every trade
• b.Be filed with FINRA after each recommendation within ten business days of giving the advice to a retail customer for each account
• c.Be delivered to retail investors, summarizing services, fees, conflicts, standard of conduct, and disciplinary history✓
• d.Be prepared only for institutional clients

Form CRS is a short relationship summary given to retail investors describing the firm's services, fees, conflicts, legal standard of conduct, and disciplinary history (Regulation Best Interest). It is a disclosure, not a per-trade filing.

FINRA's gift rule limits gifts given in connection with the recipient's business to a maximum of:

• a.No limit if the gift is disclosed
• b.$300 per person per year✓
• c.$500 per person per year
• d.$100 per person per year

Effective March 30, 2026, FINRA Rule 3220 raised the gift limit from its long-standing $100 to $300 per recipient per year for gifts tied to the recipient's business. Disclosure does not raise the ceiling.

Before participating in a private securities transaction away from the firm for compensation, a representative must:

• a.Obtain the customer's verbal consent
• b.Give prior written notice to the employing firm and receive the firm's written approval✓
• c.Keep a personal record only of the transaction in a file the representative keeps privately
• d.Inform the firm after the deal closes

Selling away for compensation requires prior written notice and the firm's written approval, after which the firm supervises the activity (FINRA Rule 3280). Unapproved selling away is a serious violation.

A registered representative who takes a paid weekend job unrelated to securities must:

• a.Provide prior written notice to the employing member firm✓
• b.Do nothing, since it is outside FINRA's reach
• c.Resign the securities registration
• d.Obtain SEC approval before starting

Any outside business activity for compensation requires prior written notice to the firm so it can assess conflicts, even when unrelated to securities (FINRA Rule 3270). The firm may impose conditions; silence is the violation.

A representative wants to borrow $5,000 from a customer who is not a family member or a financial institution. This is:

• a.Permitted as long as the interest rate is at market
• b.Permitted with the branch manager's verbal approval
• c.Generally prohibited unless it fits a narrow permitted category and the firm's written procedures allow and approve it✓
• d.Always permitted if repaid within 30 days so long as the customer agrees to the short repayment schedule agreed to in writing

Borrowing from or lending to customers is generally prohibited unless it fits a limited exception (such as family or a lending institution) and the firm's procedures permit and approve it (FINRA Rule 3240). Quick repayment or a market rate does not cure the conflict.

A representative offers to personally reimburse any first-year losses in a nervous customer's account. This is:

• a.Acceptable if documented in the client file
• b.Acceptable with written branch-manager approval
• c.Prohibited, because a registered person may not guarantee a customer against loss✓
• d.Acceptable for accounts under $25,000

Guaranteeing a customer against loss misrepresents investment risk and is flatly prohibited (FINRA Rules). No documentation, supervisory approval, or account size makes the promise permissible.

A registered representative is permitted to share in the gains and losses of a customer's account only when:

• a.The representative contributes at least 50% of the account's capital
• b.The customer requests it verbally
• c.The account is joint with a family member
• d.The firm and the customer give prior written approval and sharing is proportionate to the representative's financial contribution✓

Profit sharing requires written consent from both the member firm and the customer, with the representative's share proportionate to the money actually contributed (FINRA Rules). Verbal permission is never sufficient.

Urging a customer to buy fund shares just before a distribution to capture it is prohibited because:

• a.The customer must then hold the shares for 12 months
• b.Distributions cannot be paid for the first 30 days after purchase
• c.Funds may distribute only once a year
• d.The NAV falls by the distribution amount, so the customer gains nothing and incurs a current tax liability✓

Selling dividends is deceptive: the NAV drops by the distribution on the ex-date, leaving total value unchanged but creating an immediate taxable event (FINRA Rules). The customer is worse off after tax.

Repeatedly redeeming a customer's shares in one fund family and reinvesting in a similar fund at another family, generating a new sales charge each time, is:

• a.Switching, which is prohibited absent a documented customer benefit✓
• b.Front-running, the recognized term for repeatedly moving a customer between fund families
• c.Rights of accumulation
• d.Selling dividends

Moving a customer between funds with substantially similar objectives solely to generate sales charges is switching, prohibited without a documented benefit (FINRA Rules). Front-running and selling dividends are different violations.

A representative learns a customer is about to place a large buy order and immediately buys the same security in a personal account. This is:

• a.Permitted if the personal order is smaller than the customer's
• b.Permitted, since personal trades are separate from customer business
• c.Permitted if disclosed to a supervisor afterward
• d.Front-running, a prohibited practice✓

Trading ahead of a customer's known block order to profit from the expected price move misuses confidential information and is prohibited regardless of size or after-the-fact disclosure (Securities Exchange Act of 1934).

Which practice would most likely be viewed as a prohibited practice by a registered representative?

• a.Documenting a customer's risk tolerance before a recommendation
• b.Recommending a breakpoint-qualified Class A purchase
• c.Depositing a customer's check into the representative's own bank account overnight before forwarding it✓
• d.Delivering the fund's current prospectus to a customer

Commingling customer funds with a representative's personal funds, even briefly, is a serious violation that can amount to conversion (FINRA Rules). Customer checks must be forwarded promptly to the firm.

A written message distributed to more than 25 retail investors within any 30 calendar-day period is classified as:

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

Exceeding the 25-retail-recipient threshold in a rolling 30-day window makes a communication a retail communication, triggering the stricter principal-approval and filing requirements (FINRA Rule 2210).

A representative emails the same market update to 20 individual retail clients in one month. This communication is categorized as:

• a.An advertisement that must be filed with FINRA
• b.Correspondence, subject to supervision and review procedures✓
• c.A retail communication requiring pre-use principal approval under the rule
• d.An institutional communication exempt from review

Because it reaches 25 or fewer retail investors within 30 days, it is correspondence, which firms must supervise and review under their procedures but need not approve before use (FINRA Rule 2210).

A communication qualifies as an institutional communication when it is distributed only to:

• a.Employees of the member firm
• b.Any customer with an account over $250,000
• c.Retail prospects who have signed a suitability waiver
• d.Institutional investors such as banks, insurers, and registered investment companies✓

The institutional category depends on the recipient's type, not on account size or paperwork (FINRA Rule 2210). A wealthy individual is still a retail investor.

Retail communications generally must be:

• a.Approved by an appropriately registered principal before first use or filing✓
• b.Approved by the customer in writing
• c.Reviewed by the fund's board of directors
• d.Approved by the SEC before use, which must clear all sales literature before a firm distributes it

A registered principal must approve retail communications before use or filing (FINRA Rule 2210). The SEC does not pre-approve sales material, and customers never approve communications aimed at them.

A member firm must retain records of its communications with the public for:

• a.Five years from the date of creation
• b.Permanently, with no exception
• c.One year from the date of first use
• d.Three years from the date of last use, the first two years in an easily accessible place✓

Communications records must be kept three years from last use, with the earliest two years readily accessible (FINRA Rule 2210). The five-year period applies to certain AML records, not general communications.

Which is an acceptable way to present a fund's past performance in a retail communication?

• a.Showing only the fund's best three-year period
• b.Describing a bond fund's yield as guaranteed
• c.Showing standardized average annual total returns for 1-, 5-, and 10-year periods, or since inception✓
• d.Projecting the fund's expected return over the next five years based on the portfolio manager's stated performance targets

Standardized total returns for the required periods, current to the most recent quarter-end, allow fair comparison (FINRA Rule 2210). Cherry-picking, projecting, or guaranteeing returns is prohibited, and past-performance disclaimers are required.

A firm wants to use a customer testimonial in a retail communication. The rule requires that:

• a.The testimonial be filed with the SEC before use
• b.The testimonial be notarized by the customer
• c.Testimonials be prohibited in all securities communications
• d.The communication disclose that the experience may not be typical and that any compensation paid was made✓

Testimonials are allowed with clear disclosure that the experience is not necessarily representative and that any material payment was made (FINRA Rule 2210). Testimonials about technical advice also require disclosure of the speaker's qualifications.

A customer brings in $12,000 of cash and deposits it on a single business day. What must the firm file?

• a.Nothing, because the deposit is under $25,000
• b.A Suspicious Activity Report only
• c.A Currency Transaction Report✓
• d.Form 1099-B with the IRS

Cash transactions over $10,000 in one business day trigger a Currency Transaction Report under the Bank Secrecy Act, whether or not anything seems suspicious. A SAR is required only when the activity itself raises suspicion.

After a firm files a Suspicious Activity Report on a customer, the firm:

• a.May notify the customer with the customer's written consent
• b.Must give the customer a copy within 10 business days
• c.Must close the account immediately
• d.Must not notify the customer that a SAR was filed✓

Tipping off a customer about a SAR filing is prohibited because it would compromise any investigation (Bank Secrecy Act). SARs generally cover suspicious transactions of $5,000 or more and are filed with FinCEN.

A firm's customer identification program must, at a minimum, collect from a new individual customer:

• a.Passport number and two professional references
• b.Employer, annual income, and net worth
• c.Credit score and marital status
• d.Name, date of birth, physical address, and taxpayer identification number✓

The CIP requires name, date of birth, a street address, and a government identification number to form a reasonable belief about identity (USA PATRIOT Act). Income and net worth are gathered for suitability, not identity.

Before opening an account, a firm must check the customer's name against the Specially Designated Nationals list maintained by:

• a.FINRA's Central Registration Depository
• b.The Municipal Securities Rulemaking Board
• c.The Securities Investor Protection Corporation
• d.The Office of Foreign Assets Control✓

OFAC publishes the Specially Designated Nationals list, and firms may not do business with parties on it (USA PATRIOT Act). The CRD holds registration records, the MSRB writes municipal rules, and SIPC provides limited account protection.

The stage of money laundering at which illicit cash is first introduced into the financial system is called:

• a.Layering
• b.Placement✓
• c.Reconciliation
• d.Integration

Placement is the entry point where dirty cash first enters the system; layering then obscures its origin and integration returns it looking legitimate (Bank Secrecy Act). Structuring deposits just under $10,000 is a placement tactic.

In which situation does the Securities Investor Protection Corporation (SIPC) protect a customer?

• a.The customer is defrauded by a private individual outside any brokerage
• b.A mutual fund the customer owns declines in value during a broad market downturn that reduces the account balance in any given year
• c.A member broker-dealer fails and customer cash and securities are missing, up to $500,000 including a $250,000 cash limit✓
• d.The overall market falls into a bear market

SIPC steps in when a member broker-dealer becomes insolvent and customer property is missing, covering up to $500,000 per customer with a $250,000 cash sublimit (Securities Investor Protection Act). It does not insure market losses.

Which statement about a mutual fund summary prospectus is correct?

• a.Eliminates the need for any prospectus whatsoever
• b.Is a short document that satisfies prospectus delivery if the full statutory prospectus is available online and sent on request✓
• c.May be used only with institutional investors and never delivered to ordinary retail customers
• d.Must be filed with the MSRB

The summary prospectus gives key facts in a few pages and satisfies delivery when the full statutory prospectus is posted online and provided on request (Securities Act of 1933). Mutual fund filings go to the SEC, not the MSRB.

Under ERISA, private-sector employer retirement plans are required to:

• a.Be offered to government and church employees
• b.Follow fiduciary standards and minimum participation, vesting, and funding rules to protect participants✓
• c.Invest exclusively in the employer's own stock
• d.Guarantee participants a fixed annual return

ERISA imposes fiduciary duties and minimum eligibility, vesting, and funding standards. Concentrating a plan entirely in employer stock would breach diversification and prudence duties; government and church plans are generally exempt.

Under FINRA's anti-reciprocal rule, a broker-dealer may NOT:

• a.Receive normal sales-charge concessions disclosed in the prospectus
• b.Provide customers a fund's prospectus
• c.Sell shares of funds managed by unaffiliated advisers that compete directly with the firm's own proprietary fund lineup
• d.Favor the sale of a particular fund's shares because the fund directs portfolio brokerage commissions to the firm✓

The anti-reciprocal rule bars a firm from selling fund shares as a quid pro quo for the fund's portfolio brokerage business (FINRA Rule 2341). Disclosed sales concessions and ordinary prospectus delivery are permitted.

FINRA's telemarketing rule generally prohibits an unsolicited cold call to a prospective customer's residence:

• a.Only during the customer's lunch hour
• b.Only on weekends
• c.At any time without exception, since securities solicitations are exempt from calling-hour limits under current guidance
• d.Before 8:00 a.m. or after 9:00 p.m. in the called party's local time, absent an existing relationship or consent✓

FINRA Rule 3230 restricts unsolicited telemarketing calls to between 8:00 a.m. and 9:00 p.m. local time and requires honoring do-not-call requests, unless there is an established business relationship or prior consent.