FINRA Series 7 — All Questions

FINRA Rule 2010 requires that members and associated persons:

• a.Execute each customer order at the best price displayed on any market, with no exceptions
• b.Never charge a markup above 5% of the prevailing market price on any customer transaction
• c.Observe high standards of commercial honor and just and equitable principles of trade✓
• d.Segregate customer cash and fully paid securities away from the firm's own assets

Rule 2010 is FINRA's broad ethical standard, requiring members and their associated persons, in the conduct of their business, to observe high standards of commercial honor and just and equitable principles of trade. It underpins many specific conduct rules but does not itself set an execution standard, a 5% markup ceiling (the 5% policy is only a guideline) or customer-asset segregation, which are covered by other rules.

'Front running' is:

• a.Trading ahead of a customer's or a known block order to profit from the expected price move, which is a prohibited practice✓
• b.Trading a security while holding material nonpublic information about the issuer's pending earnings announcement, in breach of a duty
• c.Selling a security to a customer out of the firm's inventory at an undisclosed markup well above the prevailing market price
• d.Entering offsetting buy and sell orders in the same stock to create the appearance of active trading in it

Front running is entering a proprietary or personal order ahead of a customer order or an imminent block trade that is expected to move the price, exploiting knowledge of that order. It breaches the duty to customers and is prohibited. Trading on material nonpublic information about the issuer is insider trading, an undisclosed excessive markup is a pricing violation, and offsetting orders that fake activity are matched orders or wash trades.

'Marking the close' is:

• a.Entering orders just after the open to push a stock higher so that momentum buyers follow it into the first hour
• b.Placing large orders near the close with the intent to cancel them before they can execute
• c.Entering orders at or near the close to manipulate a security's closing price, a prohibited manipulative practice✓
• d.The exchange's closing auction, which matches market-on-close orders at one official closing price

Marking the close means executing trades near the end of the session to artificially influence the closing price, often to affect valuations, margin, or index levels. It is a manipulative practice prohibited under the antifraud and anti-manipulation provisions of the securities laws, including Exchange Act Section 9(a)(2). Pushing the price up after the open is a different tactic, placing orders with the intent to cancel them is spoofing, and the closing auction is a legitimate procedure that trades at the official closing price.Securities Exchange Act of 1934 Section 9(a)(2), 15 U.S.C. 78i(a)(2)

'Backing away' by a market maker refers to:

• a.A prohibited failure to honor a firm published quote for at least the displayed size✓
• b.A market maker's refusal to fill an order larger than its displayed size, which the firm-quote rule allows
• c.A market maker's withdrawal of its quotes after notifying the exchange in advance of the withdrawal
• d.Selling short ahead of a known customer sell order, using advance knowledge of the order

A market maker's displayed quote is firm, and refusing to trade at its own published bid or offer for up to the quoted size is 'backing away,' a violation of the firm-quote rule. Declining an order larger than the displayed size is permitted, a properly communicated withdrawal or revision of quotes is not backing away, and trading ahead of a known customer order is front running, a different violation.Regulation NMS Rule 602, 17 CFR 242.602

'Matched orders' or wash trades involve:

• a.Buying and selling the same security within 30 days, which triggers the tax wash-sale disallowance of a loss
• b.Crossing one customer's buy order with another customer's sell order at the current market after exposing both to the market
• c.Entering a buy order and a protective stop order on the same security to limit a possible loss
• d.Prearranged or simultaneous buy and sell orders that create the false appearance of trading activity or price movement, a prohibited manipulation✓

Matched orders and wash trades are coordinated buying and selling designed to generate fictitious volume or move a price without genuine change in ownership. They mislead other investors and are prohibited by Exchange Act Section 9(a)(1). The tax wash-sale rule only disallows a loss deduction and is not a market-manipulation concept, an exposed cross of two real customer orders is a legitimate trade, and pairing a buy with a protective stop is ordinary risk management.Securities Exchange Act of 1934 Section 9(a)(1), 15 U.S.C. 78i(a)(1)

'Interpositioning' is:

• a.Executing a customer order against the firm's own inventory at the best price available in the market
• b.Routing a customer order to another exchange in order to obtain a better price than the one displayed
• c.Needlessly inserting a third party between the firm and the best available market, adding cost to the customer, which is prohibited✓
• d.Splitting a large customer order into smaller pieces to keep other traders from learning its size

Interpositioning places an unnecessary dealer between the firm and the best market so an extra markup or commission is charged, harming the customer's execution price. It violates best-execution duties unless it results in a better net price, which it generally does not. Filling an order from inventory at the best price, seeking a better price on another market, and working a large order in pieces are ordinary execution practices, not interpositioning.

SIPC coverage for a separate customer of a failed member broker-dealer is:

• a.$500,000 total, of which no more than $100,000 may be cash claims
• b.$250,000 per account, the same limit that the FDIC applies to bank deposits
• c.$500,000 for securities plus a separate $250,000 for cash, for $750,000 in all per customer account
• d.Up to $500,000 per separate customer, including a maximum of $250,000 for cash claims✓

The Securities Investor Protection Corporation protects up to $500,000 per separate customer for securities and cash combined, of which no more than $250,000 may be for cash. The $100,000 cash sub-limit is the pre-2010 figure. $250,000 is the FDIC deposit limit, a different protection, and the cash limit is inside the $500,000 total rather than added to it. SIPC covers custodial loss from firm failure, not ordinary market losses.Securities Investor Protection Act, 15 U.S.C. 78fff-3(a)

A Customer Identification Program (CIP) requires a firm to:

• a.Obtain a Form W-9 from each customer and begin backup withholding on every new account
• b.File a currency transaction report on every new account opened with more than $10,000 in cash or securities
• c.Confirm that each recommended product is suitable for the customer's investment objectives
• d.Verify the identity of each customer within a reasonable time before or after the account is opened✓

Under the Bank Secrecy Act and USA PATRIOT Act, a firm's CIP must collect identifying information (such as name, date of birth, address, and taxpayer ID) and verify the identity of each customer within a reasonable time before or after the account is opened, as part of its AML program. Tax certification on Form W-9, currency transaction reporting, and suitability reviews are separate obligations, not the CIP.31 CFR 1023.220 (broker-dealer customer identification program)

The Office of Foreign Assets Control (OFAC) is relevant to broker-dealers because firms must:

• a.File a suspicious activity report with OFAC within 30 days of detecting any transaction that appears to involve illicit funds
• b.Report each cash transaction of more than $10,000 to OFAC within 15 days of the transaction
• c.Screen customers and transactions against the Specially Designated Nationals (SDN) list and block prohibited persons✓
• d.Obtain OFAC's approval before opening an account for any customer who lives outside the United States or holds foreign accounts

OFAC, part of the U.S. Treasury, administers economic sanctions and maintains the SDN list. Firms must screen customers and transactions against OFAC lists and block or reject dealings with sanctioned persons, entities, or countries as part of AML/sanctions compliance. Suspicious activity and large currency reports go to FinCEN, not OFAC, and there is no general requirement to obtain OFAC approval to open an account for a non-U.S. customer.

Under telemarketing rules, cold calls to solicit new customers may generally be made only:

• a.Between 9 a.m. and 5 p.m. in the called party's local time on business days only
• b.Between 8 a.m. and 9 p.m. in the firm's own local time, wherever the called party lives or works
• c.Between 6 a.m. and midnight, so long as the firm keeps its own internal do-not-call list and honors it
• d.Between 8 a.m. and 9 p.m. in the called party's local time, while honoring do-not-call requests✓

Telemarketing rules bar unsolicited sales calls to residential subscribers before 8 a.m. or after 9 p.m., measured in the local time at the called party's location, and require honoring do-not-call requests, including the national registry. A 9-to-5 window is not the rule, the clock runs on the called party's time and not the firm's, and an internal list alone does not extend the calling hours to 6 a.m. through midnight.47 CFR 64.1200(c) (telephone solicitation hours and national do-not-call registry)

A mutual fund share has a net asset value (NAV) of $19.05, and the maximum sales charge is 5% of the public offering price. What is the public offering price?

• a.$20.00, found by adding 5% of the NAV to the NAV
• b.$19.05, the NAV itself with no sales charge added
• c.$20.05✓
• d.$18.10, found by subtracting 5% of the NAV from the NAV

Sales charges are expressed as a percentage of the offering price (FINRA Rule 2341), so POP = NAV / (1 - 0.05) = $19.05 / 0.95 = $20.05. The $1.00 sales charge is about 5% of the $20.05 offering price. Adding 5% of the NAV treats the charge as a markup on NAV and gives only $20.00, which is just 4.76% of the price the customer actually pays. The NAV alone is the price of a no-load share, and subtracting 5% of the NAV moves the price the wrong way.FINRA Rule 2341(d)

An investor is bullish on a stock but wants to cap both the premium paid and the maximum possible loss. Which position fits best?

• a.Debit call spread (buy a lower-strike call, sell a higher-strike call)✓
• b.Long straddle (buy a call and a put at the same strike and expiration)
• c.A bearish credit call spread that is established for a net premium credit received
• d.Long put spread (buy a higher-strike put, sell a lower-strike put) for a net debit

A debit call spread (bull call spread) buys a call and sells a higher-strike call for a net debit. The net debit is the most the investor can lose, and the gain is capped at the strike difference less the debit, so it is a cheaper bullish position than buying the call outright. A long straddle profits from a large move in either direction and costs more, not less. A credit call spread is bearish and gains when the stock stays below the short strike. A long put spread also has capped cost and loss but profits when the stock falls.

To meet the care obligation under Regulation Best Interest, a broker-dealer recommending a security to a retail customer must consider the customer's investment profile, which includes the customer's:

• a.Investment objectives, financial situation, risk tolerance, and time horizon✓
• b.Stated investment objective alone, with nothing else required
• c.Net worth and annual income only, with no need to consider time horizon, liquidity needs, or risk tolerance
• d.The firm's current inventory needs and its goal of reducing unwanted proprietary positions

Under Regulation Best Interest the retail customer investment profile includes, but is not limited to, the customer's age, other investments, financial situation and needs, tax status, investment objectives, investment experience, time horizon, liquidity needs and risk tolerance, and the recommendation must be in the customer's best interest in light of that profile. A single stated objective, or net worth and income alone, leaves out required factors. The firm's own inventory or desire to move proprietary positions is a conflict of interest to be managed and cannot drive the recommendation. (FINRA Rule 2111 suitability does not apply to recommendations covered by Reg BI.)17 CFR 240.15l-1(a)(2)(ii), (b)(2)

Under FINRA Rule 4210(d)(2), which replaced the day trading margin rules effective June 4, 2026, what must a member do when a customer's margin account has an intraday margin deficit after a transaction that reduces the account's intraday margin level?

• a.Require the deficit to be satisfied as promptly as possible✓
• b.Count day trades: four or more in five days needs $25,000
• c.Liquidate every position opened that day by the next close
• d.Freeze the account for 90 days after any single deficit, whatever the customer's history

Rule 4210(d)(2) requires the member to require an intraday margin deficit to be satisfied as promptly as possible (FINRA Regulatory Notice 26-10, effective June 4, 2026; members that need more time may phase in until October 20, 2027). The old test of four day trades in five business days and the $25,000 pattern day trader minimum were eliminated, so a deficit is not tied to a day-trade count. The rule does not require automatic liquidation. The 90-day freeze applies only when a customer makes a practice of failing to satisfy deficits and misses the fifth-business-day deadline, not after any single deficit.FINRA Rule 4210(d)(2); Regulatory Notice 26-10

Under MSRB Rule G-20 as amended and operative June 1, 2026 for dealers that are FINRA members, gifts given in connection with municipal securities business are generally limited to a maximum of:

• a.$100 per recipient per year, the limit that applied before the 2026 amendment
• b.$500 per recipient per year, regardless of who the recipient is
• c.$300 per recipient per year✓
• d.$300 per recipient per transaction, with no overall limit for the year

Rule G-20(c) now prohibits a dealer or its associated persons from giving a person anything of value in excess of $300 per year in relation to the municipal securities activities of the recipient's employer, matching the FINRA Rule 3220 limit. The limit applies per recipient per year, not per transaction. The old $100 limit was raised to $300, though it still applies to bank dealers and municipal advisors until December 1, 2026. $500 is not a figure in the rule.MSRB Rule G-20(c)

A callable bond is purchased at a discount, and its call price is at or above par. Of the four measures, which yield is the highest?

• a.Current yield (annual interest divided by the price paid)
• b.Yield to maturity (return if held to the maturity date)
• c.Yield to call✓
• d.Nominal yield (the stated coupon rate on par)

For a bond bought at a discount the ranking from lowest to highest is nominal yield, current yield, yield to maturity, then yield to call. A call returns par or more, which is above the discounted purchase price, sooner than maturity does, so the same gain is earned over a shorter period and the annualized yield is higher. Nominal yield ignores the discount and the price paid, current yield counts only the interest, and yield to maturity spreads the gain over the longest period. On a discount bond yield to maturity is the yield to worst; on a premium bond the order reverses and yield to call is the lowest.

A short margin account in a stock priced above $5 has a credit balance of $45,000. A maintenance call would be triggered when the short market value rises to approximately:

• a.The credit balance divided by 1.30, about $34,615✓
• b.The credit balance divided by 1.50, or $30,000, the initial short market value
• c.The credit balance divided by 1.25, or $36,000, the long-account 25% rule
• d.The credit balance times 0.70, or $31,500, applying 30% to the credit balance

A short account reaches the 30% maintenance minimum when equity = 30% of short market value, i.e., short market value = credit balance / 1.30 = $45,000 / 1.30 = about $34,615. Dividing by 1.50 gives the initial short market value of $30,000, where equity is still 50% and no call exists. Dividing by 1.25 applies a 25% requirement, the long-account figure. Multiplying the credit balance by 0.70 applies the 30% to the wrong base. Above $34,615, equity falls below 30% and a call is issued.

A long margin account has a market value of $50,000 and a debit balance of $20,000. Under Regulation T at 50%, how much excess equity (the amount that can be credited to SMA) does the account have?

• a.$10,000
• b.$5,000✓
• c.$25,000
• d.$30,000

Equity = $50,000 - $20,000 = $30,000. The Regulation T requirement is 50% x $50,000 = $25,000. Excess equity, which can be credited to the special memorandum account (SMA), = equity - Reg T requirement = $30,000 - $25,000 = $5,000. $30,000 is the equity before subtracting the requirement, $25,000 is the requirement itself, and $10,000 is 50% of the debit balance, which is not part of the calculation.Regulation T, 12 CFR 220.12 (50 percent initial margin)

Under Regulation T and FINRA margin rules, standard listed options with nine months or less to expiration:

• a.Must be paid for in full because such options are not marginable✓
• b.Must be paid in full only when out of the money; in-the-money options may be margined
• c.Require only a 25% deposit, with the broker-dealer lending the balance
• d.May be purchased on 50% margin, the same as the underlying stock

Listed options with nine months or less until expiration are not marginable and must be paid for in full; Regulation T leaves option margin to the self-regulatory rules, and those rules do not allow financing of short-dated long options. Moneyness makes no difference. A 25% deposit and 50% margin are the requirements for other instruments. Only longer-dated options (more than nine months) may be carried on margin.

Under FINRA's intraday margin rule, a customer makes a practice of failing to satisfy intraday margin deficits as promptly as possible and does not satisfy one by the close of business on the fifth business day after it occurs. For how long must the member enforce procedures preventing the customer from creating or increasing a short position or debit balance?

• a.90 calendar days, or until the deficit is satisfied✓
• b.30 calendar days from the day it first occurred
• c.15 business days, the period after which an unsatisfied deficit stops being outstanding
• d.5 business days, the same period as the trigger

Regulatory Notice 26-10 provides that, once a customer who makes a practice of missing deficits fails to satisfy one by the close of business on the fifth business day, the member must enforce procedures preventing the customer from creating or increasing a short position or debit balance for 90 calendar days after that fifth business day, or until the deficit is satisfied. Thirty days is not in the rule. Fifteen business days is the point at which an unsatisfied deficit stops being counted as outstanding, which is a different concept. Five business days is the trigger for the restriction, not its length.FINRA Rule 4210(d)(2); Regulatory Notice 26-10

Under FINRA Rule 2111, the customer-specific suitability obligation owed to an institutional customer:

• a.Never applies, because Rule 2111 exempts every institutional account whatever the customer says about its own judgment
• b.Is met automatically once the account holds at least $50 million in assets, with no statement from the customer needed
• c.May be met when the institutional customer affirmatively indicates it is exercising independent judgment and is capable of evaluating investment risks✓
• d.Requires the same customer-specific investment-profile analysis and documentation as an individual retail account, with no exception

Rule 2111(b) lets a firm fulfil the customer-specific obligation for an institutional account when it has a reasonable basis to believe the customer is capable of evaluating investment risks independently and the customer affirmatively indicates it is exercising independent judgment. The firm must still have a reasonable basis to believe the recommendation is suitable in general. The obligation is not removed for institutions, and the $50 million total-assets figure is part of the definition of an institutional account, not an automatic exemption. Individual retail accounts get fuller profile analysis, and retail recommendations are now governed by Reg BI.FINRA Rule 2111(b)

For a stock priced at $250 or less per share, an odd-lot order is one for:

• a.Exactly 10 shares, the old trading unit for inactive stocks
• b.A multiple of 100 shares of any size, such as 500 or 1,000 shares
• c.Exactly 100 shares, the standard trading unit
• d.Fewer than 100 shares✓

A round lot for a stock priced at $250 or less is 100 shares, so an odd lot is any order for fewer than 100 shares. For higher-priced stocks the round lot is smaller under Regulation NMS Rule 600(b)(93): 40 shares from $250.01 to $1,000, 10 shares from $1,000.01 to $10,000, and 1 share at $10,000.01 or more. Exactly 100 shares, or any multiple of 100, is made up of round lots, and 10 shares is not the unit for a stock at this price level.Regulation NMS Rule 600(b)(93) (17 CFR 242.600)

A company reports current assets of $600,000, of which $200,000 is inventory, and current liabilities of $250,000. What is its acid-test (quick) ratio?

• a.1.6 to 1✓
• b.1.2 to 1
• c.2.4 to 1
• d.0.8 to 1

Quick assets exclude inventory: $600,000 less $200,000 is $400,000, and $400,000 divided by $250,000 is 1.6. A ratio of 2.4 is the current ratio, which leaves inventory in. A ratio of 0.8 divides inventory alone by current liabilities. A ratio of 1.2 removes far more than the inventory.Financial statement analysis (liquidity ratios)

A stock trades at $50 per share and pays a quarterly dividend of $0.40. What is its current dividend yield?

• a.3.2%✓
• b.6.4%
• c.0.8%
• d.1.6%

Annual dividends are $0.40 x 4 = $1.60, and $1.60 / $50 = 3.2%. A yield of 0.8% divides a single quarterly payment by the price. A yield of 1.6% is the annual dollar dividend, not a percentage. A yield of 6.4% doubles the correct result.Fundamental analysis (dividend yield)

A company earned net income of $10 million, paid $2 million of preferred dividends, and has 4 million common shares outstanding. The common stock trades at $45. What is its price-earnings ratio?

• a.90.0
• b.18.0
• c.22.5✓
• d.11.25

Earnings available to common are $10 million - $2 million = $8 million, so EPS is $2.00 and the P/E is $45 / $2.00 = 22.5. A ratio of 18.0 ignores the preferred dividends (EPS of $2.50). A ratio of 11.25 divides price by shares outstanding. A ratio of 90.0 treats the preferred dividend as the earnings figure.Fundamental analysis (price-earnings ratio)

A company has total assets of $120 million, of which $10 million is intangible, total liabilities of $50 million, preferred stock of $10 million at par, and 5 million common shares outstanding. Using the standard method that excludes intangible assets, what is its book value per common share?

• a.$12.00
• b.$14.00
• c.$10.00✓
• d.$8.00

Book value per share = (total assets - intangibles - liabilities - preferred) / common shares = ($120M - $10M - $50M - $10M) / 5M = $10.00. A figure of $12.00 forgets to subtract the preferred stock. A figure of $14.00 also ignores the intangibles. A figure of $8.00 deducts the preferred stock twice.Fundamental analysis (book value per share)

A corporation has $40 million of bonds outstanding, $15 million of preferred stock, and $45 million of common equity, for total capitalization of $100 million. What is its bond ratio?

• a.55%
• b.66.7%
• c.40%✓
• d.88.9%

The bond ratio is bonds divided by total capitalization: $40M / $100M = 40%. A ratio of 55% adds the preferred stock to the debt. A ratio of 66.7% divides bonds by the equity accounts without the preferred, which is not total capitalization. A ratio of 88.9% divides bonds by common equity alone.Fundamental analysis (bond ratio)

An investor buys 1 ABC 40 call for 3 and exercises it when ABC trades at 55. What is the investor's cost basis per share in the stock acquired?

• a.$55
• b.$43✓
• c.$40
• d.$52

On exercise of a long call, the premium is added to the strike price: $40 + $3 = $43 per share. A basis of $40 ignores the premium paid. A basis of $52 subtracts the premium from the market price. A basis of $55 uses the market price on the exercise date, which is not what the investor paid.Options tax and cost basis

An investor sells 1 DEF 60 put for 4 and is assigned when DEF trades at 52. What is the investor's net cost per share, counting the premium received?

• a.$56✓
• b.$52
• c.$64
• d.$60

The writer must buy at the 60 strike but keeps the 4 premium, so the net cost is $60 - $4 = $56. A cost of $60 ignores the premium received. A cost of $52 uses the market price, but the assigned writer pays the strike. A cost of $64 adds the premium instead of subtracting it.Options tax and cost basis

An investor owns 100 shares of GHI bought at $50. The investor buys 1 GHI 45 put for 1.50 and sells 1 GHI 55 call for 2.00. What is the maximum loss on the position?

• a.$500
• b.$550
• c.$450✓
• d.$150

The put costs $1.50 and the call brings in $2.00, a net credit of $0.50. The most the stock can lose below the 45 put strike is $5.00, reduced by the credit, so the maximum loss is $4.50 x 100 = $450. A loss of $500 ignores the credit. A figure of $550 is the maximum gain. A figure of $150 is the put premium alone and ignores the fall in the stock.Options strategies (collar)

An investor buys 1 JKL 50 call for 8, sells 2 JKL 55 calls for 5 each, and buys 1 JKL 60 call for 3. What is the maximum gain?

• a.$100
• b.$400✓
• c.$500
• d.$1,000

The net cost is 8 + 3 - 10 = a 1 point debit. The position peaks if JKL closes at 55: the 50 call is worth 5, so the gain is 5 - 1 = 4 points, or $400. A gain of $500 ignores the debit. A figure of $100 is the maximum loss. A figure of $1,000 is the premium collected on the short calls.Options strategies (butterfly spread)

An investor buys 1 MNO 55 call for 2 and buys 1 MNO 45 put for 1. At expiration, at which two stock prices does the position break even?

• a.$42 and $58✓
• b.$47 and $53
• c.$45 and $55
• d.$43 and $57

The combined premium is 3 points. The put side breaks even at 45 - 3 = 42, and the call side at 55 + 3 = 58. Breakevens at the strike prices ($45 and $55) ignore the cost of the premiums. The $43 and $57 pair uses only the larger premium. The $47 and $53 pair moves the breakevens inside the strikes, where the position still loses money.Options strategies (long strangle)

An investor sells short 100 shares of PQR at $40 and buys 1 PQR 45 call for 2. What is the investor's maximum loss?

• a.$200
• b.$700✓
• c.$500
• d.Unlimited

If PQR rises above 45 the call offsets further loss, so the most the investor can lose is the 5-point rise to the strike plus the 2-point premium: 7 points, or $700. A loss of $500 leaves out the premium. A loss of $200 counts only the premium. A short sale without a hedge has unlimited risk, but the purchased call caps it.Options strategies (protective call)

A TIPS has a $1,000 par value, a 2% coupon, and an inflation-adjusted principal of $1,050. What is each semiannual interest payment?

• a.$21.00
• b.$10.00
• c.$5.25
• d.$10.50✓

TIPS pay the coupon rate on the adjusted principal: 2% x $1,050 = $21.00 a year, or $10.50 each half year. A payment of $10.00 applies the coupon to the original par. A payment of $21.00 is the full annual amount. A payment of $5.25 divides the semiannual amount a second time.Treasury inflation-protected securities

Which of the following debt securities is backed by the full faith and credit of the U.S. government?

• a.Freddie Mac (FHLMC) participation certificates
• b.Federal Home Loan Bank consolidated obligations
• c.Fannie Mae (FNMA) mortgage-backed securities
• d.Ginnie Mae (GNMA) pass-through certificates✓

GNMA certificates carry the explicit full faith and credit guarantee of the U.S. government. Fannie Mae and Freddie Mac are government-sponsored enterprises whose securities are not backed by the government's full faith and credit. Federal Home Loan Bank obligations are likewise debts of a government-sponsored system, not direct obligations of the Treasury.Government agency securities

A fund meets the 75-5-10 diversification test for 75% of its assets. On that portion, what are the limits on one issuer?

• a.No more than 10% of total assets and no more than 5% of its voting shares
• b.No more than 10% of total assets and no more than 10% of its voting securities
• c.No more than 5% of total assets and no more than 10% of its voting stock✓
• d.No more than 5% of total assets and no more than 5% of the issuer's voting stock

For at least 75% of its assets, a diversified fund may hold no more than 5% of its total assets in any one issuer and no more than 10% of that issuer's outstanding voting securities. The other pairings reverse the two limits or set them to the same percentage, which is not what the statute provides.Investment Company Act of 1940, Section 5(b)(1)

Apart from narrow emergency exceptions, what is the longest period an open-end fund may postpone paying redemption proceeds after a shareholder tenders shares?

• a.Fifteen days
• b.Three days
• c.Thirty days
• d.Seven days✓

Section 22(e) of the Investment Company Act bars a fund from postponing payment of redemption proceeds for more than seven days after tender, except in specified cases such as an exchange closing or an emergency affecting valuation. Three, fifteen and thirty days do not match the statutory limit.Investment Company Act of 1940, Section 22(e)

Which parties create and redeem exchange-traded fund shares in large blocks called creation units?

• a.The exchange specialist assigned to the fund
• b.Authorized participants, usually large broker-dealers✓
• c.The fund's custodian, using cash from shareholders
• d.Individual investors who buy shares on an exchange

ETF shares are created and redeemed in creation units by authorized participants, typically large institutional broker-dealers that deliver or receive baskets of securities. Individual investors trade existing shares in the secondary market. The custodian holds assets but does not create units, and an exchange market maker does not issue shares.Exchange-traded funds

Commercial paper issued to finance current transactions is exempt from Securities Act registration only if its maturity at issuance does not exceed:

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

Section 3(a)(3) exempts notes and similar paper arising from current transactions with a maturity at issuance of not more than nine months. Six months and two months are shorter than the statute allows, and one year is longer, which would take the paper outside the exemption.Securities Act of 1933, Section 3(a)(3)

An investor buys an 8% preferred stock with a $25 par value at a market price of $20. What is the current yield?

• a.12.5%
• b.10%✓
• c.6.4%
• d.8%

The annual dividend is 8% of the $25 par, or $2.00, and $2.00 / $20 = 10%. A yield of 8% is the stated rate on par, not the yield on the lower market price. A yield of 6.4% applies the 8% to the market price and then divides by par. A yield of 12.5% uses a $2.50 dividend, which is not 8% of par.Preferred stock yield

A customer can sell an interest in a thinly traded limited partnership only at a steep discount, if at all. Which risk does this describe?

• a.Reinvestment risk
• b.Purchasing power risk
• c.Credit risk
• d.Liquidity risk✓

Liquidity risk is the difficulty of selling an asset quickly without a large price concession, which is typical of partnership interests with no active market. Reinvestment risk concerns falling rates on reinvested income, purchasing power risk concerns inflation, and credit risk concerns an issuer's ability to pay.Investment risks (liquidity risk)

A stock has a beta of 1.4. If the overall market rises 10%, the stock's expected change is approximately:

• a.A 10% gain
• b.A 1.4% gain
• c.A 7% gain
• d.A 14% gain✓

Beta measures sensitivity to the market, so a beta of 1.4 implies about 1.4 x 10% = 14%. A 10% gain would be a beta of 1.0. A 7% gain divides by the beta instead of multiplying. A 1.4% gain confuses the beta with a percentage move.Investment risks (beta)

A corporate bond has an 8% coupon and $1,000 par. Interest was last paid on March 1, and the trade settles on May 16. Using the corporate 30/360 day count, how much accrued interest does the buyer pay?

• a.$16.67✓
• b.$6.67
• c.$20.00
• d.$13.33

From March 1 to May 16 is 75 days on a 30-day-month basis. Accrued interest is $1,000 x 8% x 75/360 = $16.67. A figure of $13.33 counts only 60 days, and $20.00 counts 90 days. A figure of $6.67 counts only 30 days.Corporate bond accrued interest

A retiree paid $60,000 of after-tax money for an annuity with an expected return of $100,000. How is each $1,000 monthly payment taxed under the exclusion ratio?

• a.$600 is a tax-free return of investment and $400 is taxable✓
• b.$400 is a tax-free return of investment and $600 is taxable
• c.All $1,000 is tax-free because the contract was bought with after-tax dollars
• d.All $1,000 is taxable as capital gains

The exclusion ratio is the investment in the contract divided by the expected return: $60,000 / $100,000 = 60%. So $600 of each payment is excluded and $400 is taxed as ordinary income. Reversing the split gets the ratio backwards. Annuity earnings are ordinary income, not capital gains, and buying with after-tax dollars exempts only the return of basis.Annuity taxation (exclusion ratio)

A customer buys stock in a cash account on Monday, and no holiday falls that week. Under Regulation T's current payment period, by which day must full payment be received?

• a.Tuesday of that week
• b.Thursday of that week✓
• c.Wednesday of that week
• d.Friday of that week

Regulation T defines the payment period as the standard settlement cycle plus two business days. With T+1 settlement that is three business days after the purchase, so Monday's trade is due Thursday. Tuesday is the settlement date, not the payment deadline. Wednesday is only two days out. Friday reflects the old four-day period that applied before the move to T+1.Regulation T, 12 CFR 220.2 and 220.8

What is the purpose of the trusted contact person a firm asks a retail customer to name?

• a.To give that person authority to place trades if the customer is away
• b.To give the firm a contact for suspected exploitation or customer details✓
• c.To make that person responsible for margin calls the customer cannot meet
• d.To let that person receive tax documents for the customer

Under Rule 4512 the firm may contact the trusted contact to address possible financial exploitation and to confirm the customer's contact information, health status, or the identity of a guardian, executor, trustee or attorney-in-fact. The person has no trading authority, no liability for the account, and no right to receive the customer's tax documents.FINRA Rule 4512

A firm reasonably believes a 72-year-old customer is being financially exploited and places a temporary hold on a requested disbursement. Absent any extension, how long can the initial hold last?

• a.30 business days
• b.15 business days✓
• c.10 business days
• d.5 business days

Rule 2165 allows a temporary hold that expires no later than 15 business days after the firm first placed it. The firm may extend it by 10 business days if it reasonably believes exploitation is continuing, and by a further 30 business days if a regulator or court is involved. The other periods are not the initial limit.FINRA Rule 2165

Under FINRA Rule 2165, which customer is a "specified adult"?

• a.A 55-year-old who names a trusted contact and a power of attorney
• b.A 64-year-old customer with no known impairment and a long history
• c.A 62-year-old retiree whose account holds over $1 million in securities
• d.A 45-year-old the firm believes has an impairment and cannot protect himself✓

A specified adult is a natural person age 65 or older, or a person age 18 or older whom the firm reasonably believes has a mental or physical impairment that leaves him unable to protect his own interests. The 62- and 64-year-olds are under 65 with no impairment, and naming a trusted contact or holding a large account does not make a customer a specified adult.FINRA Rule 2165

After a firm opens a new account for a natural person, it must send the customer a copy of the account record within 30 days. After that, how often must the firm furnish the record?

• a.At least once every 12 months
• b.At intervals of up to five years
• c.At least once every 24 months
• d.At intervals no greater than 36 months✓

Rule 17a-3(a)(17) requires the account record to be furnished within 30 days of opening and then at intervals no greater than 36 months. Twelve and twenty-four months are more frequent than required, and five years is longer than the rule permits.SEC Rule 17a-3(a)(17)

A customer sends a registered representative a written complaint alleging an unauthorized trade. What must the representative do?

• a.Report it to FINRA first and tell the firm only afterward
• b.Forward it promptly to a principal or to compliance✓
• c.Try to settle it privately by reimbursing the customer's loss
• d.Hold it until the customer repeats the complaint by phone

Written complaints belong to the firm, which must log them and handle them through a principal. A representative who pays a customer privately violates settlement and recordkeeping rules. Waiting for a repeat call delays a complaint the firm is obliged to record, and bypassing the firm to report to FINRA skips the required supervisory review.FINRA Rules 4513 and 3110