FINRA Series 6 — All Questions

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

• a.Regulate trading on the exchanges and the over-the-counter market, and supervise the broker-dealers and exchanges that conduct it
• b.Set net capital and customer protection standards for the broker-dealers that sell new issues to the public
• c.Establish the SEC and require the broker-dealers that sell securities to the public to register with it
• d.Require full and fair disclosure of material facts when securities are offered to the public for the first time✓

The Securities Act of 1933 governs the primary market, requiring registration of new offerings and delivery of a prospectus so investors can judge the offering for themselves. Regulation of trading in the secondary market, creation of the SEC, broker-dealer registration, and net capital and customer protection standards all come from the Securities Exchange Act of 1934 and its rules.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.A net worth of at least $250,000 and a performance record of three or more years from its adviser's other funds
• b.More than 100 beneficial owners, the limit for a private fund under Section 3(c)(1)
• c.Written approval from the SEC, confirming that the shares are a sound investment
• d.A net worth of at least $100,000, or firm commitments to buy shares that bring it to that amount✓

Section 14(a) of the Investment Company Act prohibits a newly organized registered fund from making a public offering unless it has a net worth of at least $100,000, or unless firm commitments from a small number of purchasers will bring its net worth to that amount. There is no $250,000 minimum or required performance record, and a new fund has none by definition. The 100-owner figure belongs to the Section 3(c)(1) exclusion for private funds, not to the registered fund's seed requirement. The SEC declares a registration statement effective but does not approve the merits of the shares.Investment Company Act of 1940 Section 14(a) (15 U.S.C. 80a-14(a))

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 if the representative pays the losses from personal funds
• 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

Rule 2150(b) bars any guarantee of a customer against loss. Paying the losses from personal funds, written branch approval, a file note and notifying a manager all fail to cure it, and account size is irrelevant. Sharing in an account is the separate, narrow Rule 2150(c) exception: prior written authorization from the firm and the customer and a share proportionate to the representative's own contribution.FINRA Rule 2150(b)

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 firm approves in writing and the customer is notified within 30 days after the sharing begins
• d.The customer gives prior written approval and the representative shares equally in all gains and losses

Rule 2150(c) allows sharing only with prior written authorization from both the employing firm and the customer, and only in direct proportion to the representative's own financial contribution. A verbal request never meets the written standard, approval or notice after sharing has begun is too late, and an equal split ignores proportionality. A customer's family relationships do not matter: the immediate-family exemption covers only the representative's own family accounts, and it waives the proportionality limit, not the written approvals.FINRA Rule 2150(c)

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.Six years, the same period that applies to customer account records after an account is closed
• b.One year from first use, after which it may be discarded
• c.Five years from the date of creation, consistent with the anti-money-laundering recordkeeping period
• d.Three years, with the first two years in an easily accessible place✓

FINRA Rule 2210(b)(4)(A) requires members to keep communications for the retention period in SEA Rule 17a-4(b), and Rule 17a-4(b)(4) calls for not less than three years, the first two in an easily accessible place. Six years is the period for account record information after an account closes, five years is the period associated with anti-money-laundering records, and a one-year period is not part of the rule at all.FINRA Rule 2210(b)(4)(A); SEA Rule 17a-4(b)(4)

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

• a.Only when FINRA's Advertising Regulation Department asks for it, for example after a customer complaint about the piece
• b.Within 90 days after the end of the calendar quarter in which the communication was first used
• c.Within 10 business days of first use✓
• d.At least 10 business days before first use, because every retail communication about a fund needs pre-use filing

Most investment company retail communications are filed with FINRA's Advertising Regulation Department within 10 business days of first use or publication (Rule 2210(c)(3)). Pre-use filing applies to specific categories, such as comparisons built on a ranking category the firm created rather than one that is published. Quarterly batching and complaint-triggered filing are not part of the rule.FINRA Rule 2210(c)(3)(A)

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

• a.Describing a bond fund's yield as guaranteed because its portfolio holds only investment-grade corporate issuers
• 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(d)(1)(F) and (d)(5); SEC Rule 482 (17 CFR 230.482)

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

• a.The firm must disclose a testimonial as paid whenever the customer received any compensation at all
• b.The testimonial must carry only a statement that past performance does not guarantee future results
• c.Testimonials may appear only in institutional communications and never in retail communications
• d.It must prominently disclose that it may not represent other customers' experience or guarantee results, and that it was paid if more than $100 in value was paid✓

Rule 2210(d)(6) requires a retail communication that carries a testimonial about the member's advice or performance to disclose prominently that the testimonial may not be representative of other customers' experience, that it is no guarantee of future performance, and, if more than $100 in value was paid for it, that it is a paid testimonial. Disclosing payment of any amount over-reads the $100 threshold, a performance disclaimer alone omits the representativeness statement, and testimonials are not limited to institutional communications. If the testimonial concerns a technical aspect of investing, the speaker must have the knowledge and experience to form a valid opinion.FINRA Rule 2210(d)(6)

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 instead of being given to the customer
• b.Delivered to retail investors and summarize the firm's services, fees, conflicts of interest, standard of conduct, and disciplinary history✓
• c.Signed by the customer and a principal before the first trade in a new account, then updated every year
• d.Prepared only for institutional clients and delivered once a year with the account statement

Form CRS is a short relationship summary that describes the firm's services, fees, conflicts, legal standard of conduct and disciplinary history. Under Rule 17a-14 it is filed once with the SEC through Web CRD and amended as needed, and it must be delivered to each retail investor before or at the earliest of a recommendation, an order, or the opening of an account. It is not a per-recommendation filing, a signed account form, or a document for institutional clients.17 CFR 240.17a-14 (Form CRS)

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.Keep a record of the transaction in a personal file and report it on the firm's next annual compliance questionnaire
• b.Provide written notice to the employing firm and receive the firm's written approval✓
• c.Obtain the customer's written consent and give written notice to FINRA instead of the firm
• d.Wait until after the deal closes and then tell the firm in writing what the representative was paid

Rule 3280 requires an associated person to give the employing firm prior written notice of a private securities transaction, describing the deal and the role, and for compensated deals to receive the firm's written approval before participating; the firm then supervises it as its own business. A personal file with a later questionnaire answer, customer consent with notice to FINRA instead of the firm, and telling the firm after closing all fail the rule. Unapproved selling away is a serious violation.FINRA Rule 3280(b) and (c)

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, because retail investors must always receive the full statutory prospectus
• 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 statutory prospectus, which the fund no longer has to prepare or post
• d.Must be filed with the MSRB before it can be sent to any investor

Under Securities Act Rule 498 a summary prospectus with the key facts on objectives, fees, risks and performance can satisfy prospectus delivery when the full statutory prospectus is posted online and sent on request. It supplements rather than replaces the statutory prospectus, so the fund must still prepare and post it, and it is used with retail investors, not only institutions. Mutual fund filings go to the SEC, not the MSRB.Securities Act Rule 498 (17 CFR 230.498)

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 trading in outstanding securities on the exchanges and over-the-counter, and registering the broker-dealers who handle it
• b.Requiring full and fair disclosure through registration and a prospectus when securities are first offered to the public✓
• c.Requiring public companies to file periodic reports, such as annual and quarterly reports, once their securities are trading
• d.Defining investment companies and regulating how mutual funds are organized and operated

The 1933 Act governs the primary market: new offerings must be registered and a prospectus delivered so investors get full and fair disclosure. Regulating trading of outstanding securities, registering broker-dealers and requiring ongoing periodic reports come from the Securities Exchange Act of 1934, and the regulation of mutual funds comes from the Investment Company Act of 1940.Securities Act of 1933, Section 5 (15 U.S.C. 77e)

SEC registration of a securities offering means that:

• a.The SEC has judged the offering suitable for retail investors and approved it as a sound investment on its merits
• b.The SEC certifies the issuer's financial strength and its ability to repay investors
• c.The SEC has independently verified the facts in the prospectus and guarantees that every material statement in it is accurate and complete
• 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✓

Registration is a disclosure filing, not an endorsement: the issuer has filed the required information and the SEC has not objected, but the SEC does not approve the offering, certify the issuer's finances, verify the prospectus or vouch for its merits, and telling a customer otherwise is unlawful (Securities Act of 1933 Section 23). Every prospectus carries a legend to that effect.Securities Act of 1933, Section 23 (15 U.S.C. 77w)

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 a binding order and payment from a customer who has read the preliminary prospectus
• c.Send written confirmations to customers who placed orders at the expected offering price
• d.Sell shares to institutional customers, because the waiting-period limits apply only to retail investors

Between filing and effectiveness, only a preliminary prospectus (red herring) and non-binding indications of interest are permitted (Securities Act of 1933). Accepting a binding order or payment and confirming a sale would be selling before effectiveness, and the waiting-period limits protect every kind of buyer, institutional or retail. Sales may occur only after the registration is effective and the final prospectus is available.Securities Act of 1933, Section 5 (15 U.S.C. 77e)

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.