FINRA Series 6 — All Questions

An investor buys 1,000 shares in the aftermarket at $30. The shares were offered to the public at $24 under a registration statement containing a material misstatement. The investor sells all 1,000 at $20 before filing suit, and the whole loss results from the misstatement. What is the maximum Section 11 recovery?

• a.$10,000, found by subtracting the $20 sale price from the $30 the investor actually paid
• b.$6,000, found by subtracting the $24 offering price from the $30 the investor actually paid
• c.$24,000, found by returning the full offering price on all 1,000 shares to the investor
• d.$4,000, found by capping the price paid at $24 and subtracting the $20 sale✓

Section 11 damages are the difference between the amount paid, not exceeding the offering price to the public, and the price at which the security was sold before suit. The cap limits the amount paid to $24, so the recovery is $24 less $20, or $4 a share, and $4,000 on 1,000 shares. Using the $30 actually paid ignores the cap and overstates the recovery at $10,000. The $6,000 figure is only the aftermarket premium over the offering price, which is not a measure of damages. Returning the whole offering price would ignore the $20 the investor received on the sale.Securities Act Section 11(e)

What time limit applies to a purchaser's suit under Section 12(a)(1) for a sale made in violation of Section 5?

• a.Ninety days after the purchaser receives the confirmation, and no more than one year after the sale
• b.One year after discovery of the problem, and no more than three years after the sale
• c.One year after the violation, and no more than three years after the security was first offered✓
• d.Two years after discovery of the problem, and no more than five years after the sale took place

Section 13 requires a Section 12(a)(1) action to be brought within one year after the violation, and in no event more than three years after the security was bona fide offered to the public. The one-year-from-discovery and three-years-from-sale pair applies to Section 12(a)(2) suits, not to Section 12(a)(1). The two-year and five-year limits belong to the general fraud claims under the Exchange Act, not to the 1933 Act provisions. No 90-day confirmation limit exists in Section 13.Securities Act Sections 12(a)(1) and 13

A purchaser sues the seller under Section 12(a)(2) over a material misstatement made orally while selling a registered public offering. The purchaser did not know the statement was untrue. Who bears the burden on the seller's knowledge?

• a.Neither side, because liability attaches to the seller automatically once the statement is shown to be false
• b.The purchaser must prove that the seller intended to deceive and that the purchaser relied on the statement
• c.The seller must prove it did not know, and with reasonable care could not have known, the statement was untrue✓
• d.The purchaser must prove that the seller knew the statement was untrue at the time it was made

Section 12(a)(2) covers misstatements in a prospectus or oral communication and puts the burden on the seller to prove it did not know, and in the exercise of reasonable care could not have known, of the untruth. The purchaser does not have to prove the seller's knowledge. Intent to deceive and reliance are elements of fraud claims brought under other provisions and are not required here. Liability is not automatic either, since the seller keeps the reasonable-care defense.Securities Act Section 12(a)(2)

A newsletter publisher writes a favorable article on a bond issue and receives $5,000 from the underwriter. The article says 'sponsored content' but gives no amount. The article does not offer the bonds for sale. Is Section 17(b) violated?

• a.No, because the label 'sponsored content' discloses the receipt of consideration and is enough
• b.Yes, but only if the bonds are not exempt under Section 3, since exempt securities fall outside Section 17
• c.No, because an article that does not purport to offer the bonds falls outside Section 17(b)
• d.Yes, because the receipt of consideration and its amount must be fully disclosed, even without an offer to sell✓

Section 17(b) targets a communication that describes a security, though it does not purport to offer it, for consideration received from an issuer, underwriter or dealer, without fully disclosing both the receipt and the amount. The absence of an offer is the very situation the provision addresses. A bare 'sponsored' label discloses neither the amount nor, necessarily, the source, so it does not satisfy the section. Section 17(c) states that the Section 3 exemptions do not apply to Section 17, so exempt bonds are covered too.Securities Act Section 17(b)

Four firms form an undivided (Eastern) syndicate for a 2,000,000-share offering. Firm Q has a 25% participation and sold its entire 500,000-share allotment. At the close, 400,000 shares of the syndicate's total remain unsold. How many of the unsold shares is Firm Q responsible for?

• a.None, because Firm Q has already sold every share of its own allotment to the public
• b.400,000 shares, because the manager can require one member to take all the unsold shares
• c.100,000 shares, because each member in an undivided account answers for its percentage of the unsold total✓
• d.500,000 shares, because each member takes back its entire allotment when the issue stalls

In an undivided (Eastern) account each member is liable for its percentage participation in whatever is left unsold, even if that member sold its own allotment in full. Firm Q's 25% of 400,000 unsold shares is 100,000 shares. Liability limited to a member's own unsold shares belongs to a divided (Western) account, so zero would be right only there. Nothing in the undivided structure lets the manager push the whole unsold block onto a single member, and no member takes back its full allotment merely because the issue is not fully sold.Agreement among underwriters (undivided, Eastern account)

Four firms with equal 25% shares form a divided (Western) syndicate for a 2,000,000-share offering. Firm Q sells 420,000 of its 500,000-share allotment. The other members leave 220,000 shares unsold in total. How many shares must Firm Q take?

• a.220,000 shares, since a member that sold well must take what the other members could not sell
• b.80,000 shares, since a Western member answers only for the unsold part of its own allotment✓
• c.75,000 shares, since a member answers for 25% of the 300,000 shares the syndicate left unsold
• d.300,000 shares, since the manager may assign the whole unsold balance to any member it chooses

In a divided (Western) account each member is responsible only for the unsold portion of its own allotment, here 500,000 less 420,000, or 80,000 shares. The 75,000-share figure applies the undivided (Eastern) method to a total of 300,000 unsold shares, which is the wrong account structure. Nothing makes one member answer for the entire unsold amount. A member that sold well in a divided account is not required to cover the shares that other members could not sell.Agreement among underwriters (divided, Western account)

A registered representative sells 5,000 shares of a hot IPO to a customer, who sells them nine days later for a quick gain. The firm wants to take back the commission it paid the representative. Under Rule 5131, may it do so?

• a.Yes, but only if the customer signed an agreement at purchase not to sell the shares quickly
• b.No, because a member may never recoup a commission once it has been paid to the representative
• c.Yes, because a sale within 30 days is a flip, which lets any member recoup the commission
• d.Only if the managing underwriter has assessed a penalty bid on the whole syndicate✓

Rule 5131(c)(1) bars a member from recouping a commission paid to an associated person for selling flipped shares unless the managing underwriter has assessed a penalty bid on the entire syndicate. A sale within 30 days is a flip as the rule defines it, but the flip alone does not authorize a charge-back. Recoupment is not forbidden outright, because the penalty-bid condition opens the door. A customer agreement is not part of the rule's test, so its absence or presence changes nothing.FINRA Rule 5131(c)(1)

A firm received investment banking fees six months ago from a public company. Executive officers of that company together hold 20% of the beneficial interests in a private fund, and the fund asks for a new-issue allocation. The fund is not within the Rule 5130(c)(1) through (3) and (5) through (13) accounts. May the firm allocate shares to it under the spinning rule?

• a.Yes, because executive officers and directors hold no more than 25% of the fund in the aggregate✓
• b.No, because compensation was received from the company in the past 12 months and the fund is not an exempt account
• c.No, because any beneficial interest held by the executive officers of a banking client bars the allocation
• d.Yes, because the fees were received more than three months ago and the spinning window has closed

Rule 5131(b) bars allocations to accounts of a client company's executive officers when the firm was paid for investment banking in the past 12 months, but paragraph (b)(2) does not apply to an account in which those officers and directors hold, in the aggregate, no more than 25%. At 20%, the fund is under the cap, so the allocation is permitted. Any interest alone does not bar the allocation, which is why a blanket no is wrong. The 12-month look-back, not three months, governs the compensation test, so the six-month-old fees would matter if the account were over the cap.FINRA Rule 5131(b)

A member must decide which of four hedge funds may buy shares of an IPO under the restricted-person rule. Each fund is not within any other Rule 5130(c) exemption. Which fund may buy?

• a.An $80 million fund in which restricted persons hold $20 million of the interests
• b.A $40 million fund in which restricted persons hold $4.4 million of its beneficial interests overall
• c.A $25 million fund in which restricted persons hold $3 million of its beneficial interests
• d.A $60 million fund in which restricted persons hold $5.4 million of the beneficial interests✓

Rule 5130(c)(4) permits an account to buy a new issue only if restricted persons' beneficial interests do not exceed 10% of the account in the aggregate. $5.4 million of $60 million is 9%, which qualifies. $4.4 million of $40 million is 11% and $3 million of $25 million is 12%, so both exceed the limit. $20 million of $80 million is 25%, the cap used in the spinning rule, and it is far over the 10% limit here.FINRA Rule 5130(c)(4)

A registered representative at Firm X has a brother who lives in another state and supports himself. The brother opens an account at Firm Y, an unrelated broker-dealer, and buys an IPO there. The representative does not support him, is not associated with Firm Y, and has no say in Firm Y's allocations. Is the brother a restricted person?

• a.Yes, because the representative works for a broker-dealer and shares in the industry's access to new issues
• b.No, because a family member is restricted only if one of the support, selling-firm or allocation-control conditions is met✓
• c.Yes, because a brother of any associated person of a broker-dealer is a restricted person under the rule
• d.No, because only the representative, a spouse and children can ever be treated as restricted persons

Rule 5130(i)(10)(B)(iii) makes an immediate family member of a broker-dealer's associated person restricted only if the associated person materially supports or is supported by that relative, is employed by or associated with the member selling the new issue to the relative, or can control the allocation. None of those conditions applies to the brother, so he is not restricted. Family status alone is not enough, which defeats the blanket yes. Brothers and sisters are immediate family members under the definition, so the limit to a spouse and children is wrong as well.FINRA Rule 5130(i)(10)(B)(iii)

Which of the following offerings is a 'new issue' to which the FINRA Rule 5130 restrictions on purchases by restricted persons apply?

• a.A rights offering of common stock to current shareholders of a company that already trades publicly
• b.A registered initial public offering of common stock by a company that has never been publicly traded✓
• c.A registered initial offering of shares in an open-end investment company that has just launched
• d.A registered initial public offering of preferred stock by a company that has never been publicly traded

Rule 5130(i)(9) defines a new issue as an initial public offering of an equity security made under a registration statement or offering circular. The definition excludes preferred securities, rights offerings and offerings of registered investment companies, among others. An IPO of common stock fits the definition. The preferred stock, rights offering and new open-end fund each appear on the exclusion list, so the restrictions do not apply to them.FINRA Rule 5130(i)(9)

Fourteen months ago a member received a written representation from a hedge fund that it was eligible to buy new issues. The fund now places an order for an IPO that the member is distributing. The member has no reason to doubt that nothing has changed. What must the member do?

• a.Fill the order, because a representation lasts two years when the member has no reason to doubt it
• b.Fill the order only after confirming eligibility orally, since oral confirmation updates the written record
• c.Fill the order, because a representation that was valid when given remains valid until the fund changes
• d.Obtain a new representation first, because the member needs one from within the prior twelve months✓

Rule 5130(b) requires that, before selling a new issue to an account, the member have in good faith obtained a representation within the twelve months before the sale that the account is eligible. A representation 14 months old is outside that window, so a new one is needed even though nothing is known to have changed. The rule has no two-year period and no provision for an open-ended representation. An oral confirmation does not substitute for the representation the rule calls for.FINRA Rule 5130(b)

A book-running lead manager decides to waive a lock-up so that an officer of the issuer may sell shares in the open market on a Monday with no holidays nearby. The waiver is not for a transfer made without consideration or to a family member. What is the latest day on which the manager must notify the issuer and announce the waiver through a major news service?

• a.The following Wednesday, because notice may follow the release by two business days
• b.The preceding Thursday, because notice is due at least two business days before the release✓
• c.The preceding Friday, because the rule requires notice one business day before any release
• d.The Monday of the release itself, because announcement is due before the market opens that day

Rule 5131(d)(2)(B) requires the book-running lead manager to notify the issuer and announce through a major news service at least two business days before a lock-up release or waiver, except for transfers that are not for consideration or are to an immediate family member who agrees to the same terms. This waiver allows an open-market sale, so no exception applies. Counting back two business days from Monday gives Thursday. Friday is only one business day ahead, announcing on the day itself is too late, and notice after the release defeats the purpose of advance warning.FINRA Rule 5131(d)(2)

A firm-commitment offering is planned for 4,000,000 shares. The underwriters ask for an overallotment option. What is the largest number of shares the option may cover without being an unreasonable term under FINRA Rule 5110?

• a.600,000 shares, which is 15% of the 4,000,000 shares offered before the option✓
• b.800,000 shares, which is 20% of the 4,000,000 shares offered before the option is added
• c.400,000 shares, which is 10% of the 4,000,000 offered before the option
• d.690,000 shares, which is 15% of the 4,600,000 shares including the option shares

Rule 5110(g)(9) treats an overallotment option covering more than 15% of the securities offered in a firm-commitment deal as unreasonable, and the base is computed excluding the option shares. 15% of 4,000,000 is 600,000. Applying the percentage to the 4,600,000 total including the option gives 690,000, which counts the option inside its own base. Ten percent is below the permitted size, and 20% is above it.FINRA Rule 5110(g)(9)

A firm-commitment public offering is expected to raise $40 million. The lead underwriter proposes a non-accountable expense allowance as part of its compensation. What is the largest allowance that avoids an unreasonable term under FINRA Rule 5110?

• a.$800,000, since 2% of the offering proceeds is the ceiling
• b.$1.2 million, since 3% of the offering proceeds is the ceiling✓
• c.$2.0 million, since 5% of the offering proceeds is the permitted ceiling
• d.$4.0 million, since 10% of the offering proceeds is the ceiling

Rule 5110(g)(3) prohibits any non-accountable expense allowance in excess of 3% of offering proceeds. Three percent of $40 million is $1.2 million. The 5% and 10% figures would exceed the cap, while 2% is below the cap and so is allowed but is not the maximum asked for.FINRA Rule 5110(g)(3)

An underwriter received warrants as part of its compensation in an IPO. The issuer is not eligible to use Form S-3, the underwriter holds more than 1% of the offering, and the stock is not actively traded. Sales began 121 days ago, and the underwriter wants to sell the warrants to an unaffiliated buyer. May it?

• a.No, because compensation securities may never be sold once an underwriter has accepted them
• b.Yes, because the lock-up on compensation securities lasts 90 days from the start of sales
• c.No, because compensation securities must be locked up for 180 days starting when sales of the offering begin✓
• d.Yes, because the lock-up ended with the 60-day review period that follows the effective date

Rule 5110(e)(1) bars sale, transfer, hedging or other effective economic disposition of securities received as underwriting compensation for 180 days beginning on the date sales of the public offering commence. None of the listed exceptions applies to this issuer or this holding, and 121 days is short of 180, so the sale is prohibited for now. A 90-day lock-up is not in the rule, and the 60-day review period concerns what compensation counts, not when securities may be sold. The restriction is temporary, so a permanent bar is wrong.FINRA Rule 5110(e)(1)

In a 90-day Rule 506(b) offering an issuer sells to 28 non-accredited individuals, 4 accredited individuals, 3 relatives who share a home with purchasers and each bought, and one operating corporation that is not an accredited investor. How many purchasers count toward the 35-purchaser limit?

• a.36, since every person and entity that bought counts as one purchaser toward the limit
• b.29, since accredited investors and household relatives drop out and the corporation counts once✓
• c.32, since only the household relatives are excluded from the count of purchasers here
• d.33, since only the accredited investors are excluded from the count of purchasers here

Rule 501(e)(1) excludes accredited investors and relatives who share the primary residence of a purchaser, and 501(e)(2) counts a corporation as one purchaser. That leaves 28 individuals plus 1 corporation, or 29. Counting everyone would give 36 and appear to break the limit, but the exclusions bring the total well under 35. Excluding only the accredited investors gives 33 and excluding only the relatives gives 32, and each leaves out one of the two exclusions the rule provides.Securities Act Rules 501(e) and 506(b)(2)(i)

An issuer plans a Rule 506(b) offering to 20 accredited investors and 3 non-accredited investors. Under Rule 502(b), to whom must it furnish the specified disclosure information, and when?

• a.To the SEC alone, because the Form D filing replaces any delivery to the purchasers
• b.To all 23 purchasers, because the rule applies equally to every purchaser in the offering
• c.To the non-accredited purchasers, a reasonable time before the sale to them✓
• d.To no one, because a private offering is exempt from every disclosure requirement

Rule 502(b)(1) requires the issuer to furnish the specified information to a purchaser that is not an accredited investor a reasonable time before sale, and it excuses delivery to accredited investors. The three non-accredited purchasers must therefore receive it. The note encourages giving the information to accredited investors as well, but the rule does not require it. A Form D notice does not take the place of delivery to purchasers, and the exemption does not erase the disclosure condition when non-accredited investors take part.Securities Act Rule 502(b)(1)

An issuer running a Rule 506(c) offering wants a method that is deemed reasonable steps to verify that a natural person qualifies as an accredited investor by net worth. Which method meets the rule?

• a.Review tax returns for the two most recent years, plus a written statement that expected income will continue at the same level this year
• b.Review bank and brokerage statements from the prior twelve months, plus a written statement that all liabilities are disclosed
• c.Obtain a signed questionnaire in which the investor states a net worth above $1,000,000, with no documents attached
• d.Review bank and brokerage statements from the prior three months, a consumer report, and a written statement that all liabilities are disclosed✓

Rule 506(c)(2)(ii)(B) deems a net-worth verification reasonable when the issuer reviews asset documents such as bank and brokerage statements dated within the prior three months and a consumer report from a nationwide reporting agency on liabilities, and obtains a written representation that all liabilities are disclosed. Statements dated up to twelve months back are too old, and a bare questionnaire gives no verification at all. Tax returns and an expected-income statement are the income method in paragraph (A), not a way to verify net worth.Securities Act Rule 506(c)(2)(ii)(B)

A non-reporting operating company sold $4.2 million of securities in a Rule 504 offering seven months ago. It now begins a second Rule 504 offering. What is the most it can raise in the new offering?

• a.$4.2 million, because a second offering is capped at the amount of the first
• b.$0, because only one Rule 504 offering is allowed within any 12-month period
• c.$10 million, because each Rule 504 offering carries its own separate $10 million cap again
• d.$5.8 million, because the $10 million cap is reduced by sales in the prior 12 months✓

Rule 504(b)(2) caps the aggregate offering price at $10,000,000 less the aggregate offering price of all securities sold within the 12 months before the start of and during the offering. The earlier $4.2 million sale falls inside the 12 months, leaving $5.8 million. A fresh $10 million cap for each offering would defeat the aggregate limit. Nothing ties the second offering to the size of the first, and the rule does not bar a second offering; it only counts the earlier sales against the cap.Securities Act Rule 504(b)(2)

A purchaser in a Rule 506(b) offering asks the issuer what it can do with the securities it bought. Which statement is correct under Rule 502(d)?

• a.The securities are freely tradable once the issuer has filed Form D with the SEC after the first sale
• b.The securities become freely tradable on a national exchange once the offering has closed
• c.The securities may be resold to any buyer once the purchaser has held them for a period of 30 calendar days
• d.The securities have Section 4(a)(2) status and cannot be resold without registration or an exemption✓

Rule 502(d) gives securities bought in a Regulation D transaction the status of Section 4(a)(2) securities, which cannot be resold without registration or an exemption, and it directs the issuer to use reasonable care such as inquiry, written disclosure and a restrictive legend. A Form D filing is only a notice and does not free the securities for resale. The rule sets no 30-day period, and closing the offering does not register the securities or permit exchange trading.Securities Act Rule 502(d)

A court has enjoined an issuer from further violating Rule 503, which governs the Form D notice of sales. The issuer later plans a new offering under Rule 506(b). Is the exemption available?

• a.No, and the SEC has no power to waive the disqualification for any reason
• b.Yes, because an injunction about a notice filing has no effect on later offerings
• c.Yes, because a disqualification lasts only 12 months from the date of the injunction
• d.No, unless the SEC finds good cause that the exemption should not be denied✓

Rule 507(a) denies the Rule 504 and Rule 506 exemptions to an issuer, or its predecessors or affiliates, that has been enjoined by a court for failure to comply with Rule 503. Rule 507(b) lets the SEC find good cause that denial is not necessary, so a waiver is possible. An injunction over the notice filing therefore does matter. The rule has no 12-month limit, and the SEC's waiver power rules out the claim that the bar is absolute.Securities Act Rule 507(a)

A Delaware corporation has its principal place of business in Ohio and earns 85% of its revenue there. It wants to advertise a stock offering on national social media but sell only to Ohio residents. Which exemption fits?

• a.Rule 147A, since it permits general solicitation and does not require organization in the issuer's state✓
• b.Rule 147A, but only if the issuer first reincorporates in Ohio before it makes the first offer
• c.Rule 147, since the issuer meets the 80% revenue test in the state where it does business
• d.Rule 504, since an intrastate offering by a small company needs no state residency conditions

Rule 147A allows offers by any form of general solicitation and does not require the issuer to be organized in the state, so a Delaware corporation based in Ohio can sell to Ohio residents after a national advertisement. Rule 147 requires the issuer to be incorporated or organized in the state as well as based there, and it limits offers to residents of that state, so national advertising defeats it. Rule 504 is an unrelated Regulation D exemption, not an intrastate one. Reincorporation is not a condition of Rule 147A.Securities Act Rules 147 and 147A

A company based in Texas seeks to qualify under Rule 147A as doing business in Texas. Which single fact satisfies the 'doing business' test?

• a.70% of its consolidated gross revenues come from Texas operations
• b.75% of its assets and its subsidiaries' assets are located in Texas
• c.40% of its employees work at offices that are located in the state of Texas
• d.It will use and does use 85% of the net proceeds of the sales in Texas✓

Rule 147A(c)(2) deems an issuer to be doing business in the state if any one test is met: at least 80% of consolidated gross revenues from the state, at least 80% of assets located there, intended and actual use of at least 80% of net proceeds there, or a majority of employees based there. Use of 85% of net proceeds meets the 80% threshold. Revenues of 70% and assets of 75% fall short of 80%, and 40% of employees is not a majority.Securities Act Rule 147A(c)(2)

Which of the following primary offerings of municipal securities is exempt from Rule 15c2-12 because of its denominations and its buyers or maturity?

• a.A $5 million offering in $5,000 denominations sold to 20 sophisticated institutions buying for themselves
• b.A $5 million offering in $100,000 denominations sold to 50 sophisticated institutions that each buy for their own accounts only
• c.A $5 million offering with a maturity of 12 months, sold in $5,000 denominations to retail customers in the general public market
• d.A $5 million offering in $100,000 denominations sold to 20 sophisticated institutions that each buy for their own accounts✓

Rule 15c2-12(d)(1) exempts a primary offering in authorized denominations of $100,000 or more if the securities are sold to no more than 35 persons who are sophisticated and not buying for more than one account or with a view to distributing. It also exempts securities maturing in nine months or less. The first offering meets the denomination and 35-buyer conditions. Denominations of $5,000 fail the $100,000 requirement, selling to 50 buyers exceeds 35, and a 12-month maturity is longer than nine months.Exchange Act Rule 15c2-12(d)(1)

Before bidding for a municipal offering of $20 million, a participating underwriter reviews a preliminary official statement the issuer deems final. Which items may that document omit under Rule 15c2-12(b)(1)?

• a.The offering prices, interest rates, selling compensation and ratings, with the other pricing-dependent terms✓
• b.The terms of the continuing disclosure undertaking, so long as the issuer later discloses them to investors
• c.The security for the bonds and the source of repayment, so long as they appear in the final document
• d.The issuer's financial information and operating data, because only the underwriter needs those figures

Rule 15c2-12(b)(1) requires the underwriter to obtain and review an official statement the issuer deems final as of its date, except for the omission of no more than the listed items: offering prices, interest rates, selling compensation, aggregate principal amount, principal amount per maturity, delivery dates, competitive-bid terms, ratings, other terms depending on those matters, and the underwriters' identity. Financial and operating data, the security for the bonds and the undertaking terms are not on that list, so a preliminary document that leaves them out is not deemed final.Exchange Act Rule 15c2-12(b)(1)

In a negotiated municipal offering, a firm has agreed to become the participating underwriter, and the final official statement is not yet available. A potential customer requests the preliminary official statement on Tuesday. By when must the underwriter send it?

• a.No later than the next business day, by first-class mail or an equally prompt means✓
• b.By the date of the pricing of the issue, since the preliminary document may not be sent earlier
• c.Within three business days of the request, by any delivery method the underwriter selects
• d.Within seven business days of the request, together with the confirmation of the customer's order

Rule 15c2-12(b)(2) requires a participating underwriter in a negotiated offering, from the time it reaches an understanding with the issuer until a final official statement is available, to send a single copy of the most recent preliminary official statement to a potential customer on request no later than the next business day, by first-class mail or other equally prompt means. Three business days is not the rule's standard. The seven-business-day period belongs to the issuer's delivery of the final statement to the underwriter. Delivery cannot wait for pricing.Exchange Act Rule 15c2-12(b)(2)

An underwriter makes a final agreement to purchase a municipal offering on Wednesday, March 4. With no holidays, the underwriter's contract with the issuer must require copies of the final official statement to be delivered within seven business days. What is the last day for delivery?

• a.Wednesday, March 18, ten business days after the agreement
• b.Thursday, March 12, counting March 4 as the first of seven business days
• c.Wednesday, March 11, seven calendar days after the agreement
• d.Friday, March 13, the seventh business day after the agreement✓

Rule 15c2-12(b)(3) has the underwriter contract to receive final official statements within seven business days after any final agreement to purchase, offer or sell the securities. Counting March 5 as day one gives March 5, 6, 9, 10, 11, 12 and 13, so the last day is Friday, March 13. March 11 treats seven calendar days as the period and only reaches the fifth business day. Counting March 4 itself as day one lands on March 12, one business day early. Wednesday, March 18 uses a ten-business-day period, which is the period for event notices.Exchange Act Rule 15c2-12(b)(3)

An obligated person's municipal bonds are downgraded by a rating agency on Tuesday, April 7. Assume no holidays. Under the continuing disclosure undertaking required by Rule 15c2-12, what is the last day for the event notice to reach the MSRB?

• a.Tuesday, April 21, which is ten business days after the rating change✓
• b.Tuesday, April 14, which is seven days after the rating change
• c.Friday, April 17, which is ten calendar days after the rating change
• d.Monday, April 20, which counts April 7 as the first business day

Rule 15c2-12(b)(5)(i)(C) requires notice of listed events, including rating changes, in a timely manner not in excess of ten business days after the event. Counting from April 8, the tenth business day is Tuesday, April 21. April 14 is only five business days after the event, and April 17 counts calendar days rather than business days. Counting the day of the event as the first day produces April 20, one business day short of the full ten.Exchange Act Rule 15c2-12(b)(5)(i)(C)

An underwriting period for a municipal offering ends on June 1. The final official statement became available to any person from the MSRB on the closing date, before the underwriting period ended. Through what date must the underwriter send the final official statement on request?

• a.July 1, because the duty ends 30 days after the end of the underwriting period
• b.June 8, because the duty ends 7 days after the underwriting period when the MSRB has the document
• c.June 26, because the period lasts at least 25 days after the end of the underwriting period✓
• d.August 30, because the duty runs for 90 days from the end of the underwriting period

Rule 15c2-12(b)(4) runs the duty to send the final official statement on request until the earlier of 90 days from the end of the underwriting period or the time the statement is available from the MSRB, but never less than 25 days after the end of the underwriting period. Availability from the MSRB shortens the 90 days, and the 25-day floor then governs, which makes June 1 plus 25 days equal to June 26. The 90-day date of August 30 ignores the MSRB availability. Seven and 30 days are not periods in the rule.Exchange Act Rule 15c2-12(b)(4)

A dealer wants to recommend a municipal bond in the secondary market to a customer. Under Rule 15c2-12(c), what must the dealer have in place before it makes the recommendation?

• a.Audited financial statements for every obligated person, obtained from the issuer on request every fiscal year
• b.Procedures that give reasonable assurance of prompt notice of the continuing disclosure events in the rule✓
• c.A copy of the issue's final official statement, kept in the customer's file before the sale is made
• d.A signed acknowledgment from the customer that the continuing disclosure filings can be obtained on request

Rule 15c2-12(c) makes it unlawful to recommend the purchase or sale of a municipal security unless the dealer has procedures that provide reasonable assurance it will receive prompt notice of events disclosed under the continuing disclosure undertaking, including the listed material events and failure to file annual information. A copy of the official statement in the file does not give the dealer notice of later events. The rule does not require audited statements for every obligated person or a customer acknowledgment.Exchange Act Rule 15c2-12(c)

A customer opens a brokerage account at a bank branch under a networking arrangement. The member gives the customer the written disclosures at account opening. Does Rule 3160 require anything further for this account?

• a.Yes, the member must also give the not-insured and no-guarantee disclosures orally when the account is opened✓
• b.No, because oral disclosure is required only for customers who open accounts by telephone rather than in person
• c.Yes, the member must also have the bank officer repeat the disclosures to the customer when the first trade settles
• d.No, because a written disclosure delivered at or before account opening satisfies the rule for every customer

Rule 3160(a)(3)(B) requires the written disclosures to be made orally as well for any customer account opened on the premises of a financial institution. Written delivery alone therefore does not finish the job at the branch. The rule puts the duty on the member, not the bank officer, and ties it to account opening rather than to the first settlement. The oral requirement turns on where the account is opened on the premises, not on whether the customer used the telephone.FINRA Rule 3160(a)(3)(B)

A member that sells funds in a bank branch under a networking arrangement is reviewing its retail communications. Which one must include the 'Not FDIC Insured, No Bank Guarantee, May Lose Value' disclosures?

• a.A 30-second radio spot that names the bank, where omitting the disclosures would not mislead
• b.A sign used only to show where in the branch the member's services are, where omission would not mislead
• c.An electronic sign showing time and temperature that names the bank, where omission would not mislead
• d.A brochure handed out at the bank's teller windows that promotes the member's funds✓

Rule 3160(a)(4)(B) requires the disclosures in retail communications that promote the name or services of the financial institution or that the member distributes on the institution's premises, such as a brochure. Paragraph (a)(4)(C) excuses them in radio broadcasts of 30 seconds or less, in electronic billboard-type signs, and in location-indicator signs, so long as omitting them would not make the communication misleading. The brochure is the only item outside those exceptions.FINRA Rule 3160(a)(4)(B), (C)

A member has 40 registered persons. Nine of them were associated in a registered capacity with disciplined firms within the last three years. Two of those nine were registered with a disciplined firm for a total of 60 days and have no disciplinary history. Is the member a taping firm?

• a.No, because a member becomes a taping firm only after FINRA has formally designated it as one
• b.Yes, because 9 of 40 is 22.5%, which is above the threshold for a firm of this size
• c.Yes, because a firm with ten or more registered persons is a taping firm if four qualify
• d.No, because the count is 7 of 40, or 17.5%, which is below the 20% threshold✓

Under Rule 3170(a)(5)(A)(iii) a member with 20 or more registered persons is a taping firm when 20% or more were associated with disciplined firms in the last three years. Paragraph (a)(5)(B) excludes persons registered with disciplined firms for 90 days or less in total who have no disciplinary history, so two of the nine drop out, leaving 7 of 40, or 17.5%. Using all nine gives 22.5% and overstates the count. The four-person test is the tier for firms with 10 to 19 registered persons. A firm that has actual knowledge it is a taping firm is bound without a formal designation.FINRA Rule 3170(a)(5)(A)(iii), (B)

A taping firm records the telephone conversations of its registered persons as Rule 3170 requires. How long must it keep the recordings, and how must they be stored?

• a.Not less than three years from the date of creation, with all three years kept in an easily accessible place, cataloged by customer account number
• b.Not less than three years from the date of creation, with the first two years in an easily accessible place✓
• c.Not less than six years from the date of creation, with the first two years kept in an easily accessible place at the main office
• d.Not less than two years from the date of creation, with the first year easily accessible

Rule 3170(b)(4) requires a taping firm to keep the recordings for not less than three years from the date they were created, the first two years in an easily accessible place, and to catalog them by registered person and date. Keeping all three years accessible is not required, and cataloging by customer account does not satisfy the rule. Six years is the retention period for certain other broker-dealer records, not tapes. Two years is shorter than the rule requires.FINRA Rule 3170(b)(4)

A fund relies on delivery of its summary prospectus to satisfy its delivery obligation. An investor receives the summary prospectus on June 1. What is the earliest date through which current versions of the fund's documents must remain on the website?

• a.July 1, which is 30 days after delivery of the document
• b.July 31, which is 60 days following the delivery
• c.August 30, which is 90 days after the investor receives it✓
• d.September 29, which is 120 days from the day it was delivered

Rule 498(e)(1) requires the fund's current summary prospectus, statutory prospectus, statement of additional information and latest shareholder reports to be publicly accessible on the specified website, and current versions to remain there through the date at least 90 days after the security is carried or delivered. June 1 plus 90 days is August 30. July 1 and July 31 are 30 and 60 days, shorter than required, and September 29 is 120 days, longer than the rule needs.Securities Act Rule 498(e)(1)

A fund relies on its summary prospectus. An investor asks, and the fund or intermediary receives the request on Monday, for a paper copy of the statutory prospectus. With no holidays, by what day must it be sent?

• a.Friday, which is four business days following the request
• b.Thursday, which is three business days after the request arrives✓
• c.The following Monday, which is five business days out
• d.Wednesday, which is two business days from when the fund received it

Rule 498(f)(1) requires the fund or a financial intermediary to send a paper copy of the statutory prospectus, statement of additional information and latest reports, at no cost, within three business days after receiving the request. Counting Tuesday, Wednesday and Thursday gives Thursday. Wednesday is one day sooner than the rule requires, and Friday and the following Monday are later than the deadline allows.Securities Act Rule 498(f)(1)

A registered open-end fund proposes to hire a compliance officer who, seven years ago, was convicted of a misdemeanor arising out of work as a municipal securities dealer. Under Section 9(a) of the Investment Company Act of 1940, the hire is:

• a.Permitted if a majority of the fund's independent directors votes to accept the person
• b.Permitted, because Section 9(a) reaches only persons convicted of a felony, not a misdemeanor
• c.Barred, because a securities-related misdemeanor within the past 10 years disqualifies a person✓
• d.Permitted, because a securities-related conviction disqualifies a person for only five years

Section 9(a)(1) makes it unlawful for anyone convicted within 10 years of a felony or misdemeanor involving the purchase or sale of a security, or arising from work as a broker, dealer, municipal securities dealer, adviser and similar roles, to serve a registered fund as an employee, officer, director or adviser. Seven years is inside the 10-year window, and a misdemeanor counts, so the felony-only reading and the five-year reading are both wrong. Only the SEC, by order under Section 9(b), can lift the bar; a vote of the fund's independent directors cannot.Investment Company Act of 1940 Section 9(a)(1)

An investment adviser to a registered fund learns that one of its affiliated persons was enjoined by a federal court last year from acting as an investment adviser because of misconduct. Under Section 9(a), what is the effect on the adviser firm?

• a.The firm may continue serving if a majority of the fund's independent directors approves
• b.Only the enjoined individual is barred, so the firm may keep serving as the fund's adviser
• c.The firm is itself ineligible to serve the fund, unless the SEC grants an exemption✓
• d.The firm may continue for one year while it removes the affiliated person

Section 9(a)(3) bars a company, not just a person, when any affiliated person of the company is ineligible under Section 9(a)(1) or (2). A court injunction against acting as an adviser is a Section 9(a)(2) disqualification, so the firm becomes ineligible too. The statute gives the board no power to waive this and sets no one-year grace period; relief comes only from an SEC exemption order under Section 9(b).Investment Company Act of 1940 Section 9(a)(3)

A fund with a 10-member board uses as its principal underwriter a broker-dealer firm of which several directors are interested persons. Under Section 10(b)(2), at most how many directors may be interested persons of that underwriter?

• a.Two, because 75% of the board must be unconnected to the underwriter
• b.Four, so that a majority of the board has no tie to the underwriter✓
• c.Six, because the Act lets interested persons hold 60% of seats
• d.Five, because half of the board is enough to satisfy the Act

Section 10(b)(2) allows a fund to use a director's affiliated firm as principal underwriter only if a majority of the board is not that underwriter or interested persons of it. A majority of 10 is six, which leaves at most four seats for directors tied to the underwriter. Five would leave only half, which is not a majority. Six borrows the Section 10(a) cap on interested directors, a different test. Two borrows the 75% figure from the Section 15(f) safe harbor.Investment Company Act of 1940 Section 10(b)(2)

A fund with $300 million in total assets wants to buy shares of one other registered fund, whose outstanding voting stock is worth $2 billion. The buyer holds no other fund shares. Under the general limits of Section 12(d)(1)(A), the largest purchase it may make is:

• a.$9 million, the cap of 3% of the buyer's total assets, any fund
• b.$30 million, the cap of 10% of the buyer's total assets
• c.$60 million, the cap of 3% of the other fund's voting stock
• d.$15 million, the cap of 5% of the buyer's total assets✓

Section 12(d)(1)(A) caps what an acquiring fund may own at 3% of the acquired fund's voting stock ($60 million here), 5% of the acquirer's total assets in that one fund ($15 million), and 10% of the acquirer's total assets in all funds combined ($30 million). The lowest applicable cap controls, and for a single fund that is the 5% test. The $30 million figure is the aggregate cap across all funds. The $9 million figure applies the 3% to the wrong base.Investment Company Act of 1940 Section 12(d)(1)(A)

The parent company of a fund's investment adviser sells a controlling interest in the adviser to a new owner. Under Section 15 of the Investment Company Act of 1940, what happens to the existing advisory contract?

• a.It continues for 60 days and then lapses unless the SEC extends the contract
• b.It continues until the board's next annual renewal vote on the contract
• c.It continues, because only a change of the fund's directors can end an advisory contract
• d.It terminates automatically, because the sale is an assignment of the contract✓

Section 15(a)(4) requires every advisory contract to provide for automatic termination on its assignment, and a transfer of a controlling block of the adviser counts as an assignment. The fund must therefore have a new contract approved as Section 15 requires, with the safe harbor of Section 15(f) available to the sellers. A director change plays no role. The 60-day period is the notice period for terminating a contract without penalty, not a grace period. The annual renewal vote cannot revive a contract that has already terminated.Investment Company Act of 1940 Section 15(a)(4)

An adviser's owners will receive a premium when they sell the adviser's business and want the Section 15(f) safe harbor. For three years after closing, a fund's 12-member board must include at least how many directors who are not interested persons of either the old or the new adviser?

• a.Nine, which is 75% of the seats✓
• b.Five, which is 40% of the seats
• c.Eight, which is two-thirds of the seats
• d.Seven, which is a majority of the seats

Under Section 15(f)(1)(A), the sellers may profit from a sale that assigns the advisory contract only if, for three years, at least 75% of the fund's board are not interested persons of the old or new adviser. Seventy-five percent of 12 is nine. Two-thirds is the Section 16(a) vacancy test, a majority is the Section 10(b) test, and 40% is the Section 10(a) floor for non-interested directors; none of those governs the safe harbor.Investment Company Act of 1940 Section 15(f)(1)

A fund's nine-member board has five directors elected by shareholders and four appointed by the board. One appointed director resigns. May the remaining directors fill the seat themselves under Section 16(a)?

• a.Yes, because a majority of the directors in office were elected by shareholders
• b.No, because fewer than two-thirds of the directors would then be shareholder-elected✓
• c.Yes, provided a majority of the independent directors approves the choice
• d.No, because every board vacancy must be filled by a shareholder vote within 60 days

Section 16(a) lets the board fill a vacancy only if, immediately afterward, at least two-thirds of the directors in office were elected by shareholders. Here only five of nine would be, which is 56%, so the seat must go to a shareholder vote. A bare majority of elected directors is not enough, and independent-director approval does not substitute for the two-thirds test. The 60-day meeting requirement is triggered only when fewer than a majority of directors in office were shareholder-elected, which is not the case here.Investment Company Act of 1940 Section 16(a)

Under Section 17(f), which of the following may serve as custodian of a registered management company's portfolio securities?

• a.The fund's transfer agent, if it carries a fidelity bond covering its employees
• b.A qualified bank or a national securities exchange member, under SEC rules✓
• c.The fund's principal underwriter, if the underwriter is a registered broker-dealer
• d.The fund's investment adviser, under a written custody agreement the board approves

Section 17(f)(1) limits custody of a management company's securities to a qualified bank, a member of a national securities exchange under SEC rules, or the fund itself under SEC rules. Allowing the adviser or underwriter to hold the assets would put the people who gain from the fund's fees in control of its securities, which is the conflict the section is written to prevent. A transfer agent and a fidelity bond do not make an entity an eligible custodian.Investment Company Act of 1940 Section 17(f)(1)

A registered management company's fidelity bond covers officers and employees who have access to fund securities or cash. If the bond is to be canceled, how much advance written notice must go to the SEC?

• a.Not less than 60 days before the cancellation is effective✓
• b.Not less than 30 days before cancellation is effective
• c.Not less than 10 business days before the cancellation is effective
• d.Not less than 90 days before the cancellation becomes effective

Rule 17g-1(c) requires the bond to provide that it cannot be canceled, terminated or modified unless written notice goes to the affected party and to the SEC at least 60 days before the effective date. Thirty days and ten business days are too short, and the rule does not require 90 days.17 CFR 270.17g-1(c)

A registered management investment company with $120 million in gross assets at the end of its most recent fiscal quarter carries a single insured fidelity bond. Under Rule 17g-1, the minimum bond amount is:

• a.$1,200,000, because the minimum is set at 1% of gross assets
• b.$450,000, the tier for gross assets of $75 million to $100 million
• c.$600,000, the tier for gross assets of $150 million to $250 million
• d.$525,000, the minimum tier for gross assets of $100 million to $150 million✓

Rule 17g-1(d) sets a schedule of minimum single insured bond amounts by gross assets at the end of the latest fiscal quarter. For $100 million up to $150 million, the minimum is $525,000. The $450,000 and $600,000 figures belong to the tiers below and above that range. The schedule is not a percentage of assets, so 1% is wrong. The independent directors must approve the bond's form and amount at least once every twelve months, and they may require more than the minimum.17 CFR 270.17g-1(d)

An open-end fund expects heavy redemptions next week and wants to raise cash by borrowing. Which arrangement does Section 18(f)(1) permit?

• a.A bank loan, if asset coverage is at least 300% immediately after the borrowing✓
• b.A loan from the fund's adviser, if asset coverage is at least 200% after it
• c.Notes sold to the public, if asset coverage is at least 300% immediately after the sale
• d.A bank loan, if asset coverage is at least 200% immediately after the borrowing

An open-end company may not issue senior securities, with one exception: it may borrow from a bank if asset coverage is at least 300% immediately after the borrowing. If coverage later drops below 300%, it has three days, not counting Sundays and holidays, to cut the borrowing back. Public notes are a senior security an open-end fund cannot sell. An adviser loan is not a bank loan. The 200% figure is the closed-end preferred stock standard, not the open-end bank-loan standard.Investment Company Act of 1940 Section 18(f)(1)

A closed-end fund will hold total assets of $120 million immediately after a preferred stock offering, with no borrowings. Under Section 18(a), what is the largest preferred issue, by liquidation preference, that it may have outstanding?

• a.$40 million, which leaves asset coverage of 300%
• b.$60 million, which leaves asset coverage of 200%✓
• c.$120 million, which leaves asset coverage of 100%
• d.$80 million, which leaves asset coverage of 150%

A closed-end fund issuing a senior security that is stock needs asset coverage of at least 200% immediately after the sale. With total assets of $120 million, preferred stock of $60 million yields exactly 200% coverage. The 300% standard is for senior securities that represent indebtedness, which would limit the issue to $40 million. Coverage of 150% or 100% falls below the 200% minimum for stock.Investment Company Act of 1940 Section 18(a)(2)

A multiple-class open-end fund offers Class A and Class C shares under Rule 18f-3. Which statement about the two classes is correct?

• a.Each class may negotiate its own base advisory fee rate with the fund's adviser
• b.Class C holders alone vote on a change to the Class C distribution plan✓
• c.Class A shares may carry a senior claim on portfolio assets in a liquidation
• d.Class C shares may follow a different investment objective from Class A shares

Rule 18f-3(a)(2) gives each class exclusive voting rights on matters that relate solely to its own distribution or service arrangement, and (a)(3) gives it a separate vote where its interests differ from another class. Under (a)(4) every class has the same rights and obligations in all other respects, so no class may hold a senior claim on the portfolio, and the classes share one portfolio and one objective. Advisory fees may differ between classes only when the same performance-fee provision is applied to each class's different performance under (a)(1)(iii); a class cannot negotiate its own base advisory rate.17 CFR 270.18f-3(a)