NASAA Series 63 — All Questions

A trader controls two accounts and enters a buy order in one and a sell order of the same size, price and time in the other, hoping to make a thinly traded stock look active. How is this classified?

• a.A manipulative device, since matching orders to create a false appearance of active trading is a listed practice✓
• b.A permitted market-making activity, as long as the commissions on both sides are properly reported
• c.A permitted hedging technique, because both orders are executed at the same price and for the same size
• d.A bona fide agency cross, which the policy expressly allows when the trades are at the same price

Entering orders with knowledge that matching orders of the same size, time and price will be entered, to create a false appearance of active trading, is a manipulative practice. Only bona fide agency crosses are excused, and a purpose to mislead the market defeats that exception.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents 1.p

A broker-dealer mails a glossy flyer headed "Projected 20% annual returns" for a mutual fund. The projection rests on no data, and the flyer downplays the prospectus's risk disclosures. How should it be classified?

• a.Permitted, so long as the flyer states that past performance does not guarantee future results
• b.Permitted puffery, because projections are mere opinions and are not statements of material fact
• c.Deceptive advertising, since unfounded claims that detract from a prospectus are a listed practice✓
• d.A violation only if the flyer is mailed to persons who already own shares of that same fund

Using advertising or sales presentations that are deceptive or misleading, such as unfounded or unrealistic claims designed to detract from or defeat the purpose of a prospectus, is a listed practice. A boilerplate disclaimer does not cure it, and it does not matter whether the recipients already own the fund.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents 1.s

A broker-dealer controlled by an issuer's parent company recommends the issuer's bonds. It tells the customer about the relationship orally before the trade. How and when must it supplement the oral disclosure?

• a.In writing, within thirty days after the customer's next account statement
• b.In writing, at or before the completion of the transaction in question✓
• c.In writing, within ten days after the trade date of the transaction
• d.Only in writing, and only if the customer requests it after the sale

A broker-dealer must disclose control by, control of, or affiliation with the issuer before entering into the contract, and if the disclosure is not in writing it must be supplemented by written disclosure at or before completion of the transaction. Later deadlines or a request requirement fall short.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents 1.t

A broker-dealer loses a customer-initiated arbitration and a final award is issued. The firm neither pays nor reaches any written agreement with the customer. How is the firm's conduct classified?

• a.A listed practice only if the customer first obtains a court order confirming the award in a lawsuit
• b.A listed practice, because a final award must be paid unless the parties agree otherwise in writing✓
• c.Acceptable, so long as the firm intends to pay the award once its next fiscal quarter has fully ended
• d.Acceptable, if the firm has recorded a general denial of liability in its own internal corporate records

Failing to pay and fully satisfy a final judgment or arbitration award from a customer-initiated proceeding is a listed practice unless the parties have agreed in writing to alternative payment arrangements and the firm complies with them. A court confirmation is not a precondition.NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents 1.w

An agent tells a prospect, "The state Administrator registered this security, so it has been reviewed and approved for you." Under the Act, what is the status of that statement?

• a.Lawful, because a state's registration of a security reflects its approval of the issuer's financial condition
• b.Lawful, provided the agent adds that the registration must be renewed every year thereafter
• c.Unlawful, because registration is not a finding or approval by the Administrator of the security's merits✓
• d.Unlawful only if the agent also makes a specific prediction about the security's future price

The Act says the fact of registration is not a finding that the filed documents are true and complete, nor does it mean the Administrator has passed on merits or approved the security; it is unlawful to make a representation to a customer inconsistent with this. A renewal disclaimer or the presence of a price forecast changes nothing.Uniform Securities Act (1956, as amended by NASAA) §405

An agent buys shares from a customer, telling her they are nearly worthless while knowing a buyout offer at triple the price is pending. Does the Act's antifraud provision reach the agent's conduct?

• a.No, because the customer, as a seller, is the party who must exercise caution in the sale
• b.No, §101 applies only to persons who sell or offer to sell securities to members of the public
• c.Yes, but only if the shares involved are registered with the state or are listed on a national exchange
• d.Yes, §101 covers purchases as well as sales, so the misstatement and omission are covered✓

Section 101 makes it unlawful, in connection with the offer, sale or purchase of any security, to make an untrue statement or omit a material fact. It covers buyers as well as sellers, and registration status does not matter because exemptions do not remove antifraud coverage.Uniform Securities Act (1956, as amended by NASAA) §101

An agent phones a retail customer on Tuesday and recommends buying a proprietary mutual fund. The firm plans to mail its written fee and conflict disclosures the following Monday, after the customer's order has been entered. Does that timing satisfy the Disclosure Obligation?

• a.No, but only because the fund is proprietary; for an outside fund a mailing after the order would be acceptable.
• b.Yes, an oral explanation during the call can stand in for the written disclosure when the customer is reached by telephone.
• c.Yes, a written disclosure may follow the recommendation as long as it reaches the customer within seven days of the trade.
• d.No, written disclosure was due before or at the time of the recommendation, so a mailing after Tuesday's call is too late.✓

The Disclosure Obligation calls for full and fair written disclosure of the material facts about the relationship and about conflicts before or at the time of the recommendation. A later mailing does not meet it, and the rule contains no seven-day grace period. Speaking to the customer can supplement the writing but does not replace it. The proprietary character of the fund affects what the conflict disclosure must say, not when it is due.17 CFR 240.15l-1(a)(2)(i) (Regulation Best Interest, Disclosure Obligation)

A broker-dealer lets its representatives recommend only mutual funds from the firm's own family, although outside funds could be bought through the firm's platform. Before or at a recommendation of one of its funds, what must the firm tell the retail customer in writing about this practice?

• a.That it limits its recommendations to its own funds, a material limitation on the type and scope of its services.✓
• b.Nothing about the practice, since the Disclosure Obligation covers fees and costs but not the range of products offered.
• c.That it limits recommendations to its own funds, but only if the customer asks why no outside funds are offered.
• d.That its own funds have outperformed comparable outside funds, since a limit on products must be justified by results.

The Disclosure Obligation requires disclosure of the type and scope of services, including any material limitations on the securities or strategies that may be recommended. A closed product shelf is such a limitation, and it must be disclosed without waiting for a question. The rule asks for disclosure of the limitation, not for a performance comparison to justify it.17 CFR 240.15l-1(a)(2)(i)(A)(3) (Regulation Best Interest, Disclosure Obligation)

A dual registrant offers both brokerage and advisory accounts. One of its representatives recommends a securities transaction in a brokerage account. Among the material facts the firm must disclose in writing at or before that recommendation is:

• a.that the firm is acting in its capacity as a broker-dealer when it makes this recommendation.✓
• b.that the firm will monitor the account continuously and adjust the customer's holdings as market conditions change.
• c.that the firm owes the customer a fiduciary duty under the Advisers Act with respect to this particular recommendation.
• d.that the recommendation is made in the firm's capacity as an investment adviser rather than as a broker-dealer.

The Disclosure Obligation requires the firm to say that it is acting as a broker-dealer, or an associated person of one, with respect to the recommendation, so the customer knows which relationship applies. Continuous monitoring and a fiduciary duty are features of an advisory relationship, and describing the recommendation as advisory would be inaccurate for a brokerage account.17 CFR 240.15l-1(a)(2)(i)(A)(1) (Regulation Best Interest, Disclosure Obligation)

A representative recommends a short-term bond fund to the owner of a small plumbing company. The shares would be bought in the account of the owner's S corporation to invest surplus operating cash. Is the recipient a retail customer under Regulation Best Interest?

• a.Yes, the owner is a natural person who personally received the recommendation from the representative.
• b.Yes, any business account with total assets below $50 million is treated as a retail customer.
• c.No, the recommendation serves a business account, not a natural person's personal, family or household purposes.✓
• d.No, but only because a bond fund is a pooled product and not an individual security being recommended.

A retail customer is a natural person, or the legal representative of one, who uses the recommendation primarily for personal, family or household purposes. Corporate cash is a business purpose, whoever speaks with the representative. The $50 million figure is the threshold for an institutional account under the FINRA account-records rule and does not define retail customers, and the form of the product does not enter the definition.17 CFR 240.15l-1(b)(1) (definition of retail customer)

A man holding a power of attorney manages his elderly mother's household finances. He opens a brokerage account in her name to invest her savings for her living expenses, and a representative recommends a municipal bond fund to him. For Regulation Best Interest, the recipient of the recommendation is:

• a.a retail customer only if the mother also signs the account application in the representative's presence.
• b.outside the rule, because holding a power of attorney makes the account an institutional account.
• c.a retail customer, because a natural person's legal representative qualifies when the advice serves her personal needs.✓
• d.outside the rule, because only the natural person who owns the account can receive a covered recommendation.

The definition reaches a natural person's legal representative as well as the person, so long as the recommendation is used primarily for personal, family or household purposes. Funding the mother's living expenses qualifies. A second signature is not a condition, and a power of attorney does not convert a household account into an institutional one.17 CFR 240.15l-1(b)(1) (definition of retail customer)

A firm pays its representatives a higher payout on its in-house funds than on outside funds. A representative recommends an in-house fund to a retail customer. What does the Disclosure Obligation require about the payout difference?

• a.Full and fair written disclosure of the material facts about that conflict, made before or at the recommendation.✓
• b.Disclosure on the first account statement issued after the purchase, which is sufficient for a payout difference.
• c.Disclosure only if the customer asks, in which case the firm must answer in writing within thirty days.
• d.No disclosure, provided the representative reasonably believes the in-house fund is in the customer's best interest.

The rule requires disclosure of all material facts relating to conflicts of interest associated with the recommendation, in writing and before or at the time it is made. A belief that the product is suitable does not remove the duty to disclose, a later statement is too late, and the duty is not limited to customers who ask.17 CFR 240.15l-1(a)(2)(i)(B) (Regulation Best Interest, Disclosure Obligation)

A prospect with no account at a broker-dealer meets a representative who recommends opening an IRA brokerage account. No account has been opened and no order has been placed. When must the firm have delivered its Form CRS?

• a.Within thirty days after the account is opened, together with the first account statement the firm sends to the customer.
• b.Before or at the recommendation, since delivery is due at the earliest of a recommendation, an order or account opening.✓
• c.Before the first order is placed, since a recommendation alone does not trigger delivery to a prospective customer.
• d.When the account is opened, since that is the only event that triggers delivery to someone who is not yet a customer.

The firm must deliver its current Form CRS to a retail investor before or at the earliest of a recommendation of an account type, transaction or strategy, the placing of an order, or the opening of the account. The recommendation of an account type came first here. Waiting for the account or the first order would put delivery after the earliest trigger.17 CFR 240.17a-14(c)(1) (Form CRS delivery)

A longtime customer holds a taxable brokerage account at her firm. Her representative recommends that she roll her former employer's 401(k) into an IRA at the firm. When must the firm deliver its current Form CRS to her?

• a.Not at all, because the firm gave her Form CRS when her first account was opened years ago.
• b.Before or at the time of the rollover recommendation, even though she is already a customer.✓
• c.Only when the IRA is funded, since an existing customer is covered once the assets arrive.
• d.Within sixty days after the IRA is opened, along with the first statement for the new account.

An existing retail customer must receive the current Form CRS before or at the time the firm recommends a rollover from a retirement account, opens a new account different from the existing ones, or recommends a new brokerage service that would not be held in an existing account. Having received it once does not excuse a fresh delivery at these events, and it is due at the recommendation, not after funding.17 CFR 240.17a-14(c)(2) (Form CRS delivery to existing customers)

A broker-dealer with a public website mails its Form CRS to new customers but keeps the document in a section reachable only after logging in to an account. Does this satisfy the posting requirement?

• a.No, the form must first appear on the SEC's own website before the firm may post it on its website.
• b.Yes, delivery to each new customer fully replaces any requirement to post the document online for the public.
• c.No, the current Form CRS must also appear prominently on the public website where retail investors can easily find it.✓
• d.Yes, posting is required only for firms that accept customer orders through the website, which this firm does not.

A firm that has a public website must post its current Form CRS there prominently, where retail investors can find it easily, and a login wall defeats that purpose. Mailing copies is a separate delivery duty and does not replace posting. The posting rule does not depend on online order taking, and the firm files the form through Web CRD and posts it on its own site without waiting for any SEC web page.17 CFR 240.17a-14(c)(3) (Form CRS website posting)

A broker-dealer amends its Form CRS, and the amendment was required to be made by March 31. By what date must the firm communicate the changes to its existing retail customers?

• a.June 29, a ninety-day period measured from the date of the amendment.
• b.April 30, the thirty-day mark that governs filing the updated summary.
• c.May 30, sixty days after the date on which the amendment was due.✓
• d.December 31, because existing customers get changes with the next annual mailing.

Changes must be communicated to existing retail investors within 60 days after the amendment is required to be made, without charge. Counting from March 31, April has 30 days, which reaches April 30, and 30 more reach May 30. The 30-day figure applies to filing an updated summary when information becomes materially inaccurate, not to telling customers, and there is no annual-delivery alternative.17 CFR 240.17a-14(c)(4) (Form CRS amendments)

Midyear, a broker-dealer's disciplinary history changes, so a statement in its Form CRS becomes materially inaccurate. How soon must it file an updated relationship summary?

• a.Within thirty days after the end of the quarter in which the change occurred.
• b.Within sixty days, the same period allowed for telling existing customers.
• c.Within thirty days, with an exhibit that highlights what changed.✓
• d.At its next annual update, because the form is refreshed once each year.

The instructions require an update, filed within 30 days, whenever information in the relationship summary becomes materially inaccurate, and the filing must include an exhibit highlighting the changes. The 60-day period is the separate deadline for communicating changes to existing customers. There is no annual-only cycle and no quarter-end timing.Form CRS General Instruction 8.A (Updating the Relationship Summary)

A dual registrant decides to prepare one combined relationship summary covering both its brokerage and its advisory services. What is the maximum length of that combined summary?

• a.Six pages, with two for each service and two for the shared items.
• b.No fixed limit, provided every required item is addressed in plain English.
• c.Four pages in paper format, or the electronic equivalent of four pages.✓
• d.Two pages, the same limit that applies to a stand-alone broker-dealer.

A broker-dealer or adviser summary is limited to two pages, and a dual registrant that combines both services in one summary may use four. If it prepares separate summaries instead, each is limited to two pages. The limit is fixed by the instructions, so it is neither open-ended nor six pages.Form CRS General Instruction 1.C (page limits)

A broker-dealer and its financial professionals have no reportable legal or disciplinary history, so the firm answers "No" to the Item 4 question. Must the relationship summary still point investors anywhere?

• a.Yes, it must still direct investors to Investor.gov/CRS, a free search tool for the firm and its professionals.✓
• b.Yes, but only to BrokerCheck, the FINRA database, and not to the SEC's investor website for the purpose.
• c.No, a "No" answer ends the item, so no further reference or question is required of the firm there.
• d.No, the pointer to Investor.gov/CRS is required only when the firm's answer to the question is "Yes."

Regardless of the answer, the item must direct investors to Investor.gov/CRS for a free and simple search tool and must include the conversation starter about disciplinary history. A firm cannot drop the reference because its record is clean. The referral is to the SEC's site, not to BrokerCheck.Form CRS Item 4 (legal or disciplinary history)

A broker-dealer makes recommendations to retail investors. Which statement about its obligations must its Form CRS contain?

• a.Its recommendations are suitable, meaning they match the investor's stated objectives and risk tolerance at the time made.
• b.When it recommends as a broker-dealer it must act in the investor's best interest and not put its interest ahead of theirs.✓
• c.It must disclose every conflict of interest to the investor, so the investor does not need to ask about conflicts.
• d.It acts as a fiduciary to the investor at all times, including when it holds the account and when it makes recommendations.

The mandated language says that when the firm provides a recommendation as a broker-dealer it has to act in the investor's best interest and not put its own interest ahead, and that the way it makes money creates some conflicts the investor should ask about. Calling the firm a fiduciary at all times overstates the broker-dealer standard, and suitability describes the older standard. The text invites the investor to ask about conflicts rather than saying none need to be asked about.Form CRS Item 3 (standard of conduct)

A firm tells its representatives that because every retail customer receives the Form CRS, the separate written fee and conflict disclosures under Regulation Best Interest are no longer needed. Is that correct?

• a.No, delivering Form CRS does not relieve the firm of its other disclosure duties.✓
• b.Yes, Form CRS covers services, fees and conflicts in a document delivered before the recommendation.
• c.Yes, provided the customer signs an acknowledgment that the Form CRS was received.
• d.No, because Form CRS is delivered only after a recommendation, so the two cannot overlap.

The Form CRS rule states that delivering the document does not relieve the firm of other disclosure obligations, including those under Regulation Best Interest. A signed acknowledgment changes nothing, and the premise that Form CRS follows the recommendation is wrong, since delivery is due before or at the earliest trigger.17 CFR 240.17a-14(d) (other disclosure obligations)

A firm opens a margin account for a non-institutional customer. When must the firm first give the customer its margin disclosure statement, and how often must it be provided afterward?

• a.Before or at the time the account is opened, and at least once each calendar year after that.✓
• b.Within thirty days after the account is opened, and then every thirty-six months thereafter.
• c.At or before the first margin call, and afterward only when the customer asks for another copy.
• d.Before the first margin loan is made, and again whenever the firm raises its house requirements.

Rule 2264 requires the written margin disclosure statement, or an abbreviated version, before or at account opening and not less than once per calendar year. The thirty-six month interval belongs to the account-record furnishing rule, and the loan, a margin call or a customer request are not the triggers.FINRA Rule 2264 (Margin Disclosure Statement)

An agent's letterhead reads, "Dana Wells, securities agent registered in this state." The statement is true and says nothing more. Is it a prohibited representation about registration?

• a.No, truthfully stating the fact of registration is lawful as long as it does not suggest the Administrator approved the agent.✓
• b.Yes, any reference to registration in sales material implies approval by the Administrator and is therefore prohibited.
• c.No, and the agent may add that registration reflects the Administrator's review of her character and record.
• d.Yes, unless the Administrator has reviewed and cleared the letterhead before it is used in correspondence.

Section 405 forbids representations inconsistent with its rule that registration is not a finding or approval by the Administrator. Truthfully reporting the fact of registration is not inconsistent with that rule. Adding that the Administrator reviewed and vouches for her character would cross the line, and no advance clearance of letterhead is required.Uniform Securities Act (1956) §405(a)-(b)

A salesperson offering a security that is exempt under the state act tells a client, "The state treats this issue as exempt, which means the Administrator looked it over and found it sound." The statement is:

• a.lawful, provided the exemption the salesperson claims really does apply to this particular security and sale.
• b.unlawful, because an exemption's availability does not mean the Administrator passed on the security's merits.✓
• c.lawful, because the Administrator individually reviews each exempt security before the exemption is available for use.
• d.unlawful only if the salesperson also adds that the security carries no risk of loss to the investor.

Section 405(a) says that the availability of an exemption does not mean the Administrator has passed on the merits of, recommended or approved the security, and it is unlawful to tell a customer otherwise. Exempt securities are not individually reviewed, the exemption's genuine availability does not change what the statement implies, and no additional claim about risk is needed to make it unlawful.Uniform Securities Act (1956) §405(a)

After the registration of an offering becomes effective in the state, a salesperson tells investors, "The Administrator let this registration go effective, so every statement in the offering documents has been verified as accurate and complete." This representation is:

• a.unlawful only if one of the statements in the documents later turns out to be false or misleading.
• b.unlawful, since effectiveness is not a finding that the filed documents are true, complete and not misleading.✓
• c.lawful, because the Administrator cannot let a registration become effective unless the documents are accurate.
• d.lawful, if the salesperson also gives each of the investors a copy of the current prospectus to read.

Under Section 405(a), the fact that a security is effectively registered is not a finding that any filed document is true, complete and not misleading, and representing otherwise to a customer is unlawful. Handing over the prospectus does not cure the false assurance, and the violation lies in the representation, not in whether an error is later found.Uniform Securities Act (1956) §405(a)

An investment adviser's standard advisory agreement says: "Client waives any right to assert claims against the adviser under federal or state securities laws arising from its advice." How is the clause treated?

• a.It is void under the act, and including it in an advisory contract is a listed unethical practice for an adviser.✓
• b.It is enforceable if the adviser also gives the client a brochure that describes the clause.
• c.It is enforceable only against clients who are not natural persons, such as corporations or trusts.
• d.It is enforceable once the client has signed it, provided the client had time to read the full agreement.

Any provision binding a person who receives investment advice to waive compliance with the act or its rules is void, and the model rule on unethical advisory practices lists inserting such a waiver in an advisory contract. Signature, the client's status and brochure delivery do not make a waiver of statutory rights effective.Uniform Securities Act (1956) §410(i); NASAA Model Rule 102(a)(4)-1(r)

An investment adviser representative emails a client, "I guarantee the portfolio I designed for you will not lose money over the next year." Under NASAA's model rule on unethical business practices of advisers, this email is:

• a.acceptable if the portfolio the representative designed holds only investment-grade bonds.
• b.a violation only if the portfolio actually loses money at some point during the year.
• c.a listed unethical practice, because it guarantees a specific result from the advice.✓
• d.acceptable, because a written guarantee gives the client something concrete to rely on when deciding.

The model rule lists guaranteeing a client that a specific result, gain or no loss, will be achieved with the advice as an unethical practice. The promise is the violation, whether it is written or oral, whatever the portfolio holds and whether or not a loss later occurs.NASAA Model Rule 102(a)(4)-1(k)

A broker-dealer's retail brochure has a table titled "Hypothetical illustration of compounding." It shows what $10,000 becomes in 30 years at assumed constant rates of 4%, 6% and 8%, and states that it does not predict any investment's return. Does Rule 2210's ban on predicting or projecting performance prohibit it?

• a.No, because a risk disclaimer placed beside the table cures any projection in a retail communication.
• b.No, a hypothetical illustration of mathematical principles is allowed when it does not project performance.✓
• c.Yes, any table of future values projects performance, whatever disclaimer accompanies it in the brochure.
• d.Yes, unless the firm replaces the three assumed rates with a single rate that the firm itself selects.

Rule 2210(d)(1)(F) bars communications that predict or project performance, but it excepts a hypothetical illustration of mathematical principles that does not predict or project the performance of an investment or strategy. A compounding table at assumed rates, labeled as an illustration, fits that exception. A disclaimer by itself would not rescue a real projection, so the exception is the reason the table is allowed.FINRA Rule 2210(d)(1)(F)(i)

A 72-year-old retail customer opens a brokerage account and declines to name a trusted contact person. The firm explains the purpose and asks again, but the customer refuses. May the firm open and maintain the account?

• a.Yes, the missing information does not bar the account if the firm made reasonable efforts to obtain it.✓
• b.No, a firm may not open an account for a customer aged 65 or older unless a trusted contact person is named.
• c.Yes, but only after a principal signs off in writing on each later trade because the customer refused to name anyone.
• d.No, naming a trusted contact person is a condition of opening any account for a natural person at a member firm.

Rule 4512 requires reasonable efforts to obtain a trusted contact person's name and contact information for non-institutional accounts, but the absence of that information does not prevent a member from opening or maintaining the account if those efforts were made. The duty is not limited to older customers, and the rule imposes no special principal sign-off on later trades.FINRA Rule 4512(a)(1)(F)

At account opening, a customer names her 24-year-old son as her trusted contact person. Which statement about that designation is correct?

• a.It lets him place trades in her absence, since naming a trusted contact person grants a limited power of attorney.
• b.It lets the firm reach him about exploitation or her contact details, but gives him no trading authority.✓
• c.It lets the firm contact him only after a court has declared her unable to manage her own financial affairs.
• d.It makes him a joint owner for purposes of receiving statements, confirmations and tax forms on her account.

A trusted contact person is a resource the firm may call to address possible financial exploitation or to confirm the customer's contact information, health status, or the identity of a legal guardian or holder of a power of attorney. The designation alone gives no trading authority and no ownership, and the firm need not wait for a finding of incompetence.FINRA Rule 4512(a)(1)(F)

A firm collects trusted contact information when a customer opens an account. What must the firm tell the customer in writing about that person?

• a.That the firm will release balances to the person whenever he or she asks for them, without any further purpose.
• b.That the firm may contact the person and disclose account information to address possible exploitation.✓
• c.That the person may approve or reject withdrawals of the customer's assets on the customer's behalf at any time.
• d.That the person will receive a copy of every confirmation and statement the firm sends to the customer.

The written disclosure tells the customer that the firm or its associated person is authorized to contact the trusted person and disclose account information for limited purposes, such as addressing possible financial exploitation, confirming contact information, and asking about health status or the identity of a guardian, executor, trustee or power-of-attorney holder. The person gets no routine copies, has no authority over withdrawals, and cannot demand balances for any reason.FINRA Rule 4512, Supplementary Material .06

A retail customer opens a non-institutional account and places a first order on Monday. The firm has not yet obtained the customer's occupation or employer. By what point must the firm have made reasonable efforts to obtain it?

• a.Before the initial transaction in the account settles, which is the deadline set by the rule.✓
• b.The next update of the account record, which the firm schedules within thirty-six months.
• c.The thirtieth day after the account is opened, when the account record is first sent to the customer.
• d.Before the customer's second purchase, since only a later order is blocked until the information arrives.

For accounts other than institutional accounts, the rule requires reasonable efforts to obtain the tax identification number, occupation and employer, and whether the customer is associated with another member, before settlement of the initial transaction. The 30-day and 36-month periods belong to the SEC's separate rule on furnishing account records to customers, and nothing in Rule 4512 ties the deadline to a second purchase.FINRA Rule 4512(a)(2)

A state-registered investment adviser with $2 million in total assets opens an account at a broker-dealer. Under FINRA's customer account information rule, how is the account classified?

• a.As an institutional account, because a registered adviser qualifies without any minimum asset level.✓
• b.As an institutional account only if the adviser also manages at least one registered investment company.
• c.As a retail account, because the adviser's total assets are well below the $50 million threshold.
• d.As an institutional account only if the adviser is registered with the SEC and not merely with a state.

Rule 4512(c) defines an institutional account to include banks, savings and loan associations, insurance companies, registered investment companies, advisers registered with the SEC or a state, and any other person with total assets of at least $50 million. The asset test applies only to that last category, and state registration is enough for an adviser.FINRA Rule 4512(c)

A married couple opens a joint discretionary account and authorizes their representative to exercise discretion. Under SEC Rule 17a-3(a)(17), whose dated signatures must the firm's record contain?

• a.Each spouse as a grantor of the authority, and the representative to whom discretion was granted.✓
• b.Either spouse alone, since one owner's signature binds a joint account and the representative need not sign.
• c.Both spouses and the representative's supervisor, since a principal must co-sign every grant of authority.
• d.The representative alone, since the spouses' signatures are kept with the account agreement, not in this record.

For a discretionary account, the record must show the dated signature of each customer or owner granting the authority and of each natural person to whom discretion was granted. Both owners sign as grantors and the person exercising discretion signs as well, while a supervisor's co-signature is not part of this requirement.SEC Rule 17a-3(a)(17)(ii)

A firm opened a new retail account on March 1, 2025, for a customer who is a natural person. By when must it furnish a copy of the account record, and how often after that?

• a.By March 31, 2025, then at intervals no greater than thirty-six months after that.✓
• b.By March 15, 2025, then at intervals no greater than twenty-four months for any account.
• c.By May 30, 2025, then at intervals no greater than thirty-six months, the Form CRS period.
• d.By March 31, 2025, then only when the customer asks or objectives change.

A copy of the account record must go to a customer who opened an account within 30 days of opening, which from March 1 is March 31, and then at least every 36 months. A 60-day deadline, a change-driven schedule and a 24-month cycle are not what the rule says, although a change in investment objectives separately triggers its own notice.SEC Rule 17a-3(a)(17)(i)(B)(1)

On June 10, a firm receives notice that a retail customer has moved and updates the account record. By when must it send notification of the change, and to whom?

• a.By August 9, to the old address and to the associated person responsible for the account.
• b.By June 25, to the old address and to the associated person responsible for the account.
• c.By July 10, to the customer's old address and to the associated person responsible for the account.✓
• d.By July 10, to the customer's new address only, since the old address no longer reaches her.

When a record is updated for a change in name or address, the firm must send notification of the change to the customer's old address, or to each joint owner, and to the associated person responsible, on or before the 30th day after receiving notice. Sending only to the new address would not alert the customer if someone else had made the change, and 60 or 15 days is not the period.SEC Rule 17a-3(a)(17)(i)(B)(2)

On September 12, a customer tells her firm that her investment objective has changed from income to speculation. What must the firm do, and by when?

• a.Furnish the updated account record to her and the responsible associated person by October 12.✓
• b.Notify the responsible associated person only, since the customer made the change herself and knows of it.
• c.Nothing, because only a change of name or address requires the firm to notify the customer.
• d.Send the updated record with the regular mailing that comes at the next thirty-six month interval.

Each change in an account's investment objectives requires the firm to furnish the updated account record to the customer and the responsible associated person by the 30th day after it receives notice, here October 12, and it may send the copy with the next statement. The customer's own request does not remove the duty, and waiting for the 36-month cycle would be too late.SEC Rule 17a-3(a)(17)(i)(B)(3)

A married couple opens a joint brokerage account. Which statement about the firm's account record under SEC Rule 17a-3(a)(17) is correct?

• a.Income and net worth must be shown separately for each owner, although the personal information may be combined.
• b.Both personal and financial information must be shown separately for every owner, with no combining permitted.
• c.Personal information is needed for the first-named owner only, since one record covers the whole account.
• d.Personal information is needed for each joint owner, but their financial information may be combined.✓

For a joint account the record must hold personal information for every natural-person owner, while the rule lets the firm combine the owners' financial information. A record covering only the first-named owner, or one forbidding any combined figures, does not match the rule's text.SEC Rule 17a-3(a)(17)(i)(A)

A customer declines to tell her firm her annual income or net worth when she opens an account. What does SEC Rule 17a-3(a)(17) provide?

• a.The firm is excused for thirty days only, after which it must obtain the figures or close the account.
• b.The firm must decline to open the account until every item of the account record is supplied.
• c.Her refusal excuses the firm from obtaining that information for the account record.✓
• d.The firm must fill in estimates from public sources and mark the entries unverified.

The rule says the neglect, refusal or inability of a customer to provide or update required account-record information excuses the firm from obtaining it. The firm need not refuse the account, invent estimates, or set a thirty-day limit, although the missing information can still matter to suitability and to other self-regulatory rules.SEC Rule 17a-3(a)(17)(i)(C)

For three years a customer's account has held only shares she bought on her own initiative. The firm has made no recommendations and has not been required to make any suitability determination. Must it still furnish her an account-record copy every thirty-six months?

• a.Yes, but at sixty-month intervals instead, because an account with no recommendations is treated as inactive.
• b.No, the furnishing duty does not apply to an account with no suitability determination in the last thirty-six months.✓
• c.Yes, every account of a natural person must be furnished a copy at least once in each thirty-six month period.
• d.No, but only if she signs a waiver, since the furnishing duty can be set aside only by the customer's consent.

The furnishing requirement does not apply to an account for which the firm has not been required to make a suitability determination within the last 36 months. The relief turns on the absence of recommendations, not on a longer cycle or a signed waiver.SEC Rule 17a-3(a)(17)(i)(D)

On Monday, a customer tells her representative to buy 500 shares of a named stock and leaves the price and timing to him. She gives no written instruction on how long this lasts. When does the representative's time and price discretion end?

• a.At the close of business on Monday, the same day on which she granted it.✓
• b.Thirty days after Monday, unless the customer renews it in writing before then.
• c.When the customer revokes it in writing, since the discretion continues until she does.
• d.At the end of the next business day, when the order must appear on her next statement.

Discretion over only the price or time of an order for a definite amount of a specified security falls outside the discretionary-account rules, but it lasts only until the end of the business day on which the customer granted it, unless she gives a specific, written, signed and dated instruction to the contrary. Neither a standing revocation rule nor a 30-day period applies.FINRA Rule 3260(d)(1)

A representative completes a new-account form, signs it, and starts trading for the customer the same day. No one else at the firm has signed. Which required element of the account record is missing?

• a.The signature of a partner, officer or manager showing the firm accepted the account under its procedures.✓
• b.A second signature from another representative with at least five years of experience in the same office.
• c.Written approval of the account from the state securities Administrator before the first trade.
• d.The signature of the customer's spouse where the customer is married and the account is not joint.

The account record must show the signature of a partner, officer or manager denoting that the account was accepted in accordance with the firm's account-acceptance policies and procedures. A fellow representative's signature, a spouse's signature and a regulator's approval are not required.FINRA Rule 4512(a)(1)(D)

A broker-dealer opens a brokerage account for a family limited liability company that is not an institutional account. Besides the entity's own identifying information, whose names must the firm record?

• a.Only the manager who signs the application, because an entity needs no one else recorded.
• b.Nobody beyond the entity itself, since entity accounts fall outside the account record duties.
• c.The names of the persons authorized to transact business on the entity's behalf.✓
• d.Every member's spouse and adult children, whether or not they hold any authority over it.

For an entity customer, the record must include the names of any persons authorized to transact business on its behalf, so the firm knows whose instructions it may follow. The rule does not ask for relatives without authority, does not stop at a single signer, and does not exempt entities.FINRA Rule 4512(a)(1)(E)

A firm replaced a customer's old address in the account record on February 2, 2024, and the account was closed on May 1, 2026. Until when must the firm preserve the account record information it replaced?

• a.Until at least May 1, 2029, three years after the account was closed and finally settled.
• b.Until at least May 1, 2032, six years after the account was closed and the file was last used.
• c.Until at least February 2, 2027, three years after the information was replaced in the record.
• d.Until at least February 2, 2030, six years after the earlier of the update and the closing.✓

Account record information required by SEC Rule 17a-3(a)(17) must be kept until at least six years after the earlier of the date the account was closed or the date the information was collected, provided, replaced or updated. The earlier date here is the February 2, 2024 update, so the period runs to February 2, 2030, and the 3-year periods belong to other records.SEC Rule 17a-4(e)(5)

A customer with a margin account buys 400 shares of a margin equity security at $60 a share. Under Regulation T, what is the minimum deposit, and how much does the firm lend?

• a.Deposit $24,000, the full cost; the firm lends nothing, as the stock is bought outright.
• b.Deposit $6,000 as the maintenance level; the firm lends the other $18,000 on it.
• c.Deposit $12,000, which is half the cost, and the firm lends the other $12,000.✓
• d.Deposit $7,200; the firm lends $16,800 under a thirty percent initial requirement.

The purchase costs 400 x $60 = $24,000. Regulation T sets initial margin on a margin equity security at 50 percent of current market value, so the customer deposits $12,000 and the firm lends $12,000. The 25 percent figure is the FINRA maintenance minimum, not the initial requirement, 100 percent would be a cash purchase, and 30 percent is the short-sale maintenance percentage.12 CFR 220.12(a)

A customer buys 1,000 shares at $50, depositing the Regulation T minimum and borrowing the rest. Ignoring interest, at what price per share does her equity fall to the 25 percent maintenance minimum?

• a.$35.71, since the $25,000 debit would equal 70 percent of the market value.
• b.$33.33, since the $25,000 debit equals 75 percent of the market value.✓
• c.$25.00, where the debit equals the market value and her equity is gone.
• d.$37.50, which is 75 percent of the original purchase price of $50.

She deposits 50 percent of $50,000 and owes a $25,000 debit, which stays fixed as the price falls. Equity is the market value minus the debit, so equity equals 25 percent of the market value when the debit equals 75 percent of it: $25,000 / 0.75 = $33,333, or $33.33 a share. Check: equity of $8,333 is 25 percent of $33,333. Taking 75 percent of the purchase price, using a 30 percent requirement, or waiting for zero equity all give a wrong price.FINRA Rule 4210(c)(1)

A customer sells short 500 shares of a margin equity security at $40. Under Regulation T, how much must the customer deposit beyond the sale proceeds?

• a.$10,000, since the requirement is 150 percent of $20,000 and the proceeds supply 100 percent.✓
• b.$5,000, because the requirement is the 25 percent long-position maintenance figure on $20,000.
• c.$6,000, because the requirement is the 30 percent short-sale maintenance figure on $20,000.
• d.$20,000, because a short sale must be margined at 100 percent of the market value of the shares sold.

The short sale is worth 500 x $40 = $20,000. Regulation T requires 150 percent of current market value, or $30,000, and the $20,000 of proceeds counts toward it, leaving $10,000 to deposit, which is the 50 percent initial requirement. The 30 and 25 percent figures are maintenance percentages for short and long positions, and 100 percent is not the short-sale requirement.12 CFR 220.12(c)

A customer is short 1,000 shares of a stock now trading at $4. What is the minimum maintenance margin on the position under FINRA Rule 4210?

• a.$5,000, which is the $5.00 per-share minimum applied to the 1,000 shares.
• b.$4,000, the greater of 100 percent of the market value and $2.50 a share.✓
• c.$1,200, which is thirty percent of the $4,000 market value of the position.
• d.$2,500, which is the $2.50 per-share floor applied to the 1,000 shares sold short.

For a stock sold short at less than $5.00, the maintenance requirement is the greater of $2.50 a share or 100 percent of market value. Here $2.50 x 1,000 = $2,500 and 100 percent of $4,000 is $4,000, so $4,000 governs. The 30 percent and $5.00 figures apply to shorts priced at $5.00 or above.FINRA Rule 4210(c)(2)

A customer is short 200 shares of a stock trading at $12. What is the minimum maintenance margin on the position under FINRA Rule 4210?

• a.$720, because thirty percent of the $2,400 market value is the whole requirement and the $5.00 amount applies only below $5.00.
• b.$1,200, because the maintenance requirement is fifty percent of the market value of the stock sold short.
• c.$1,000, because the $5 per-share amount exceeds 30 percent of the market value.✓
• d.$2,400, because a short position in a stock selling at $5.00 or above must be margined at its full market value.

For a stock sold short at $5.00 or more, the maintenance requirement is the greater of $5.00 a share or 30 percent of market value. Here $5.00 x 200 = $1,000 and 30 percent of $2,400 is $720, so $1,000 governs. Fifty percent of market value is not a maintenance amount in the rule, and full value (100 percent, or $2.50 a share if greater) applies only to a short stock selling under $5.00.FINRA Rule 4210(c)(3) ($5.00 per share or 30 percent of market value, whichever is greater, for a short stock selling at $5.00 or above); (c)(2) for stock under $5.00

A margin account holds securities worth $50,000 against a $20,000 debit balance. Using the 50 percent Regulation T requirement, how much more in margin securities can the customer buy without depositing cash?

• a.$10,000, because $5,000 of excess equity supports purchases at a 50 percent requirement.✓
• b.$5,000, because the excess equity itself is the amount that can be spent on new purchases.
• c.$30,000, because the account's whole equity may be applied to additional purchases.
• d.$20,000, because the customer may borrow again up to the amount already in the debit.

Equity is $50,000 - $20,000 = $30,000. Regulation T requires 50 percent of the $50,000 held, or $25,000, leaving excess equity of $5,000. Each new purchase needs 50 percent margin, so $5,000 of excess supports $5,000 / 0.50 = $10,000 of securities. Spending the excess dollar for dollar, using the entire equity, or matching the old debit all misapply the 50 percent requirement.12 CFR 220.12(a); 12 CFR 220.4(e)