FINRA Series 7 — All Questions

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

• a.Regulate secondary market trading and exchanges
• b.Create the Federal Reserve
• c.Set margin requirements
• d.Require full and fair disclosure of material information for new securities offered to the public✓

The Securities Act of 1933 governs the primary market, requiring issuers to register new public offerings and provide a prospectus with full and fair disclosure of material facts so investors can make informed decisions. It focuses on disclosure at issuance rather than regulating ongoing trading, which is the domain of the 1934 Act.Securities Act of 1933

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

• a.Accept binding purchase orders and payment from existing customers
• b.Sell the securities to customers who have received the preliminary prospectus
• c.Collect non-binding indications of interest✓
• d.Confirm indications of interest as sales once the preliminary prospectus is delivered

During the cooling-off period (after the registration statement is filed but before it is effective), sales and binding orders are prohibited. Firms may distribute a preliminary prospectus (red herring) and gather non-binding indications of interest. Accepting binding orders or payment, selling to customers who hold the preliminary prospectus, and confirming indications of interest as sales are all barred until the registration is effective.Securities Act of 1933 Section 5 (15 U.S.C. 77e)

A preliminary prospectus (red herring) used before a registration is effective:

• a.Carries the SEC's approval that its disclosures are accurate and complete
• b.Contains the final public offering price and effective date
• c.May be used to accept orders and customer payments before the effective date
• d.Omits the final offering price and effective date and is used to gauge investor interest✓

A red herring is a preliminary prospectus circulated before the registration statement is effective. Under Securities Act Rule 430 it may omit the offering price and other information that depends on it, and because the registration is not yet effective there is no final price or effective date to print. Its use is to gauge non-binding investor interest. It cannot carry final terms, and no sales, orders or payments can be accepted until the registration becomes effective. The SEC does not approve or vouch for the accuracy of a prospectus.Securities Act Rule 430 (17 CFR 230.430)

In a firm commitment underwriting, the underwriter:

• a.Guarantees the securities will rise in price
• b.Purchases the entire issue from the issuer and assumes the risk of reselling it to the public✓
• c.Acts only as an agent and bears no risk
• d.Is exempt from delivering a prospectus

In a firm commitment underwriting, the underwriting syndicate buys the whole issue from the issuer and resells it to the public, assuming the risk of any unsold shares. This differs from a best efforts underwriting, where the underwriter acts as agent and only sells what it can without buying the issue outright.Securities Act of 1933

A private placement conducted under Regulation D of the Securities Act of 1933 is:

• a.A registered public offering that is sold to the general public with a full prospectus delivered
• b.An intrastate offering exempt only if sold to residents of one state
• c.A registered shelf offering sold only to institutional buyers
• d.An exempt offering sold primarily to accredited investors without full SEC registration✓

Regulation D provides exemptions from full registration for private placements sold mainly to accredited investors, with limits on general solicitation and on the number of non-accredited purchasers depending on the rule used. A registered public offering with a full prospectus is the opposite. An intrastate offering is a separate exemption tied to residents of one state, and a shelf offering is itself registered. Regulation D securities are typically restricted and cannot be freely resold without meeting conditions.17 CFR 230.506

The Securities Exchange Act of 1934 is best known for:

• a.Creating the SEC and regulating secondary market trading, exchanges, and broker-dealers✓
• b.Setting federal income tax rates
• c.Exempting all trading from regulation
• d.Registering new issues only

The Securities Exchange Act of 1934 created the Securities and Exchange Commission and governs the secondary market, including exchanges, broker-dealers, reporting by public companies, proxy rules, and antifraud and anti-manipulation provisions. It complements the 1933 Act, which focuses on new issues.Securities Exchange Act of 1934

Trading securities on the basis of material, nonpublic information is prohibited as:

• a.A permissible informational research edge that skilled analysts may lawfully act upon
• b.A form of best execution
• c.Legitimate market making
• d.Insider trading, which violates the antifraud provisions of the Exchange Act✓

Using material nonpublic information to trade, or tipping others who trade, is insider trading and violates the antifraud provisions of the Securities Exchange Act of 1934 and related rules. Penalties can include disgorgement, civil penalties, and criminal prosecution.Securities Exchange Act of 1934

Under FINRA rules, communications with the public are generally categorized as:

• a.Advertisements, sales literature, and correspondence
• b.Written communications and oral communications, with each type reviewed by a principal before first use
• c.Retail communications, correspondence, and institutional communications✓
• d.Communications to customers and communications to non-customers, each filed with FINRA before use

Rule 2210(a) groups member communications with the public into three categories: correspondence (written or electronic communications distributed to 25 or fewer retail investors within 30 calendar days), retail communications (more than 25 retail investors within 30 days), and institutional communications (distributed only to institutional investors). Each carries different approval, review and recordkeeping requirements. The older advertisement and sales literature categories were replaced by this scheme. Splitting by medium or by customer status is not how the rule classifies them.FINRA Rule 2210(a)

A registered representative's communications with the public must be:

• a.Pre-approved by a principal and filed with FINRA in every case
• b.Fair, balanced, and not misleading, presenting risks along with benefits✓
• c.Accurate in every statement of fact, with no duty to present risks alongside the benefits
• d.Approved by a principal within 30 days after first use, for all retail communications

Rule 2210(d)(1) requires communications to be based on fair dealing and good faith, to be fair and balanced, and to provide a sound basis for evaluating the facts, with balanced treatment of risks and potential benefits and no omission of a material fact that would make them misleading. Accuracy of individual statements is not enough. A principal must approve a retail communication before its use, not after, and FINRA filing before use is required only for certain communications, not in every case.FINRA Rule 2210(d)(1)

Under anti-money laundering (AML) rules, a Currency Transaction Report (CTR) must generally be filed for cash transactions exceeding:

• a.$3,000, the threshold for funds-transfer recordkeeping
• b.$5,000, the threshold for filing a suspicious activity report
• c.$10,000 in a single business day✓
• d.$10,000 in cash aggregated over a calendar month

Under the Bank Secrecy Act, financial institutions must file a Currency Transaction Report for cash transactions of more than $10,000 in a single business day, aggregating multiple related transactions. The $3,000 figure is a funds-transfer recordkeeping threshold and $5,000 is the threshold for a broker-dealer's suspicious activity report, so neither triggers a CTR. The aggregation period is one business day, not a calendar month. Structuring transactions to evade the reporting threshold is itself illegal.31 CFR 1010.311 and 1010.313

A Suspicious Activity Report (SAR) is filed by a firm when:

• a.A transaction appears to involve possible money laundering or has no apparent lawful purpose✓
• b.A dividend is paid
• c.A customer earns a large profit
• d.A customer opens a retirement account

Firms must file a Suspicious Activity Report when they detect transactions that appear to involve funds from illegal activity, are designed to evade reporting requirements, or have no apparent business or lawful purpose. Firms generally may not notify the customer that a SAR has been filed (no tipping off).Bank Secrecy Act

Which of the following is a prohibited practice for a registered representative?

• a.Fully disclosing every material risk to the customer before making the trade
• b.Recommending a broadly diversified portfolio suited to the client's objectives
• c.Filing accurate and complete books and records exactly as regulations require
• d.Guaranteeing a customer against loss in a securities account✓

It is prohibited to guarantee a customer against loss or to promise a specific investment result; investment returns cannot be assured. Other prohibited practices include churning, unauthorized trading, commingling customer funds with firm funds, and making unsuitable recommendations.

'Churning' refers to:

• a.Reinvesting dividends automatically
• b.Excessive trading in a customer's account primarily to generate commissions✓
• c.Diversifying a client's portfolio broadly across many different market sectors and assets
• d.Rebalancing once per year

Churning is excessive trading in a customer's account that is driven by the representative's interest in generating commissions rather than the customer's investment objectives. It violates suitability and Reg BI obligations and is a prohibited practice regardless of whether the account gains or loses value.

Commingling a customer's funds or securities with the firm's own assets is:

• a.Permitted whenever the customer provides advance verbal consent to the firm
• b.Prohibited; customer assets must be properly segregated✓
• c.Allowed only within customer margin accounts and not in any other account
• d.Affirmatively required of every member firm under current FINRA rules

Firms must keep customer funds and fully paid securities segregated from the firm's own assets to protect customers, particularly in the event of firm insolvency. Commingling customer property with firm property is a prohibited practice and violates customer protection rules.

The Securities Investor Protection Corporation (SIPC) protects customers by:

• a.Guaranteeing against market losses on investments
• b.Providing limited coverage of customer cash and securities if a member broker-dealer fails✓
• c.Setting margin requirements
• d.Insuring bond issuers against default

SIPC, established under the Securities Investor Protection Act, provides limited protection for customers' cash and securities if a member broker-dealer becomes insolvent, up to statutory limits. It does not protect against ordinary market losses or the decline in value of investments.Securities Investor Protection Act

Under FINRA rules, most customer account records and communications must generally be:

• a.Preserved for specified retention periods, often several years, and made available to regulators✓
• b.Kept for one year and then destroyed, unless the customer asks the firm in writing to retain them
• c.Preserved only while the customer's account remains open, and then destroyed once the account is closed
• d.Stored only in paper form, with no electronic copies permitted

FINRA and SEC recordkeeping rules require firms to preserve books, records and communications for specified periods, commonly several years, and to make them available for regulatory examination. The periods do not depend on a customer's request, and a one-year destroy rule is not the standard. Customer account records are kept after an account closes rather than discarded when it does. Electronic storage is permitted when it meets the rules' format requirements, so records need not be on paper.

A registered representative who wishes to engage in an outside business activity must:

• a.Obtain prior written approval directly from the federal Securities and Exchange Commission
• b.Provide written notice to the firm within 30 days after the activity has begun
• c.Amend Form U4 and wait for FINRA staff to approve the activity before starting it
• d.Provide prior written notice to the employing firm as required by FINRA rules✓

FINRA rules require a registered person to give the member firm prior written notice before engaging in an outside business activity, which lets the firm assess conflicts and supervisory duties. The SEC does not approve individual outside activities, and waiting on a FINRA decision after a Form U4 amendment is not the process. Notice given after the activity has begun is too late. Private securities transactions ('selling away') are a separate matter that require prior written notice and, if compensated, firm approval.

'Selling away,' or participating in private securities transactions without the firm's knowledge and approval, is:

• a.Permitted if the representative receives no compensation from the transaction
• b.Permitted as long as the affected customer signs a written liability waiver first
• c.Prohibited without prior written notice to and approval from the firm✓
• d.Permitted whenever only accredited investors participate

Selling away occurs when a representative participates in securities transactions outside the scope of employment without notifying and obtaining approval from the firm. FINRA rules prohibit this unless the representative gives prior written notice and, for compensated transactions, receives the firm's approval and supervision. Lack of compensation does not remove the notice requirement. A customer's liability waiver cannot replace the firm's knowledge and approval, and the accredited status of other participants does not change the rule.Securities Exchange Act of 1934

The Investment Company Act of 1940 primarily regulates:

• a.Bank deposits
• b.Investment companies such as mutual funds, closed-end funds, and unit investment trusts✓
• c.The issuance of municipal bonds
• d.Commodity futures

The Investment Company Act of 1940 governs the organization and operation of investment companies, including open-end funds (mutual funds), closed-end funds, and unit investment trusts. It addresses disclosure, governance, capital structure, and restrictions on transactions to protect fund investors.Investment Company Act of 1940

A firm's written supervisory procedures and designation of principals are intended to:

• a.Shift legal responsibility for violations from the firm to the individual representative who committed them
• b.Replace the suitability and best-interest obligations that apply to each recommendation
• c.Ensure the firm supervises its associated persons and business for compliance with securities laws and rules✓
• d.Allow the firm to register as a broker-dealer and become a FINRA member

FINRA rules require firms to establish and maintain a supervisory system, including written supervisory procedures and qualified principals, reasonably designed to achieve compliance with applicable securities laws and rules. Effective supervision helps detect and prevent violations such as unsuitable recommendations, unauthorized trading and churning. It does not move responsibility to the individual representative, because the firm remains responsible for supervision. It does not replace suitability or best-interest obligations, and broker-dealer registration and FINRA membership are separate steps.

The Municipal Securities Rulemaking Board (MSRB):

• a.Regulates the borrowing and issuance decisions of state and local governments
• b.Writes rules for municipal securities dealers but relies on FINRA and the SEC to enforce them✓
• c.Provides bond insurance that covers a missed interest or principal payment
• d.Decides which municipal bond interest is exempt from federal income tax

The MSRB is the rulemaking body for the municipal securities market, but it has no examination or enforcement authority of its own; FINRA and the SEC enforce its rules. Under the Tower Amendment it cannot regulate issuers before an offering, so it does not regulate the borrowing or issuance decisions of governments. It does not provide bond insurance, which private insurers sell, and it does not decide the tax status of municipal bond interest, which is set by federal tax law.Securities Exchange Act of 1934 Section 15B(b) (15 U.S.C. 78o-4)

Under MSRB Rule G-37, if a municipal finance professional makes a non-exempt political contribution to an official who can influence the award of municipal securities business, the dealer is generally:

• a.Required to double the size of the contribution
• b.Fined a flat $100 per violation
• c.Free to proceed with the negotiated municipal securities business without any restriction at all
• d.Barred from negotiated municipal securities business with that issuer for two years✓

Rule G-37 imposes a two-year ban on negotiated municipal securities business with an issuer when a covered municipal finance professional makes a non-exempt contribution to an official of that issuer. A de minimis exception permits up to $250 per election to officials the professional can personally vote for. The rule targets pay-to-play; the other choices have no basis in the rule.MSRB Rule G-37

MSRB Rule G-20 generally limits gifts given in connection with municipal securities business to a maximum of:

• a.$25 per recipient per year
• b.$500 per recipient per year
• c.$300 per recipient per year✓
• d.$100 per recipient per year

MSRB Rule G-20, mirroring FINRA Rule 3220, caps gifts and gratuities in connection with municipal securities business at $300 per person per year — the limit was raised from $100 in 2026 (FINRA effective March 30, 2026; MSRB operative June 1, 2026). Ordinary, occasional business entertainment and de minimis promotional items are excluded. The $100 figure is the pre-2026 amount (older exam prep still shows it, and the live item bank may lag during the phase-in), and $25/$500 have no basis in the rule.MSRB Rule G-20

The disclosure document delivered to investors in a new municipal bond offering is called the:

• a.Red herring preliminary prospectus
• b.Official statement✓
• c.Statutory prospectus filed with the SEC
• d.Trust indenture

Municipal offerings use an official statement for disclosure because municipal securities are exempt from Securities Act of 1933 registration and its prospectus requirement. A prospectus and red herring belong to registered corporate offerings, and the trust indenture is the bond contract (munis are also exempt from the Trust Indenture Act of 1939).Securities Act of 1933

FINRA's 5% policy on markups, markdowns, and commissions is best described as:

• a.A flexible guideline requiring that charges be fair and reasonable given all the facts, not a fixed cap✓
• b.A hard ceiling under which any markup above 5% is automatically a violation and any markup below 5% is automatically fair
• c.A guideline that applies only to municipal bond trades, which the MSRB alone enforces
• d.A limit on the compensation underwriters may receive, set at 5% of the offering proceeds

The 5% policy is a guideline, not an absolute limit: markups, markdowns, and commissions must be fair and reasonable considering price, transaction size, security type, and the effort involved, so some charges may reasonably fall below or above 5%. Treating 5% as a rigid ceiling or as a safe harbor is the classic mistake. The policy is not limited to municipal bonds, and it is not an underwriting-compensation cap.FINRA Rule 2121

Under SEC Rule 144, the volume limit on sales by an affiliate over any 90-day period is generally:

• a.Unlimited
• b.The greater of 1% of the outstanding shares or the average weekly trading volume over the preceding four weeks✓
• c.A flat 5% of the total outstanding shares in each and every calendar month, regardless of the average weekly trading volume
• d.10% of the outstanding shares per year

Rule 144 limits an affiliate's sales in any 90-day period to the greater of 1% of the total shares outstanding or the average weekly reported trading volume during the four weeks preceding the filing of Form 144. This throttles resales of control and restricted stock into the market.

Under SEC Rule 144, restricted securities of a reporting company must generally be held for at least:

• a.Six months before they may be resold✓
• b.No minimum period
• c.30 days before resale
• d.Ten years before resale

Restricted securities of an SEC-reporting company must be held for at least six months before resale under Rule 144 (one year for a non-reporting company). The holding period ensures the investor took investment risk before reselling into the public market.

Regulation A under the Securities Act of 1933 provides:

• a.A municipal securities exemption
• b.A private placement exemption limited strictly to accredited investors, prohibiting any form of general solicitation or public advertising
• c.An exemption for smaller public offerings (Tier 1 and Tier 2) using a simplified offering circular instead of full registration✓
• d.A U.S. Treasury borrowing program

Regulation A allows smaller companies to raise capital in a public offering under a streamlined process, with Tier 1 and Tier 2 dollar ceilings and an offering circular rather than a full registration statement. It is sometimes called a 'mini-registration.'

Shelf registration under SEC Rule 415 allows an issuer to:

• a.Set customer margin levels
• b.Register a large amount of securities once and then sell portions over time as market conditions warrant (generally up to three years)✓
• c.Permanently prohibit the sale of the issuer's shares to the public until a fresh, separate registration statement is filed for each individual transaction
• d.Satisfy municipal disclosure requirements

Shelf registration lets an issuer register securities up front and sell them in tranches over an extended period (generally up to three years), taking them 'off the shelf' when timing is favorable, without filing a new registration statement for each sale.

The Trust Indenture Act of 1939 primarily:

• a.Requires that publicly offered corporate bonds above a threshold be issued under an indenture with a qualified trustee that protects bondholders✓
• b.Regulates listed options
• c.Sets margin requirements
• d.Governs the issuance of municipal general obligation and revenue bonds by requiring a formal indenture and an independent, state-appointed bondholder trustee

The Trust Indenture Act of 1939 requires larger public issues of corporate debt to be sold under a trust indenture naming an independent trustee to enforce the bondholders' rights. Municipal and U.S. government securities are exempt from the Act.

A 'tombstone' advertisement for a securities offering is:

• a.A limited announcement of an offering that is not itself an offer to sell the securities✓
• b.The final statutory prospectus
• c.An offer to sell that requires the investor's signature
• d.A preliminary prospectus (red herring)

A tombstone ad is a bare-bones announcement, permitted even during the cooling-off period, that identifies the security, the amount, and where a prospectus can be obtained. It expressly is not an offer to sell; sales require a final prospectus once the registration is effective.

MSRB Rule G-17 requires municipal securities dealers to:

• a.Refrain from making any political contributions
• b.Deal fairly with all persons and not engage in any deceptive, dishonest, or unfair practice✓
• c.Deliver written trade confirmations to customers at or before the completion of every municipal securities transaction
• d.Limit gifts to $300 per year

Rule G-17 is the MSRB's fundamental fair-dealing rule, requiring municipal dealers to deal fairly and honestly with all persons and prohibiting deceptive or unfair practices. It is the municipal-market analog to broad antifraud and fair-dealing obligations.

MSRB Rule G-15 governs:

• a.Margin requirements
• b.The specific dollar limits on political contributions that municipal finance professionals may make to issuer officials
• c.The content and delivery of customer trade confirmations in municipal securities transactions✓
• d.Advertising bans

Rule G-15 requires municipal dealers to deliver a written confirmation to customers at or before the completion of a transaction, disclosing material terms such as price, yield, par, trade and settlement dates, and capacity. It promotes transparency in muni trades.

MSRB Rule G-10 primarily requires municipal dealers to:

• a.Impose a two-year ban on municipal securities business with an issuer after certain political contributions by the dealer
• b.Tell customers at least once each calendar year that an MSRB investor brochure on complaints and rule protections is posted at msrb.org✓
• c.Require that prices and commissions on principal transactions be fair and reasonable in light of all relevant factors
• d.Maintain written supervisory procedures reasonably designed to ensure compliance with municipal securities rules

Rule G-10 requires a dealer, once every calendar year, to give each municipal securities customer a statement that it is registered with the SEC and the MSRB and a statement that an investor brochure on the MSRB's website describes the protections of MSRB rules and how to file a complaint. The two-year ban after political contributions is Rule G-37, the fair-price requirement is Rule G-30, and written supervisory procedures are Rule G-27.MSRB Rule G-10

MSRB Rule G-30 requires that prices in municipal securities transactions be:

• a.Set at exactly par value
• b.Fair and reasonable, considering the market and relevant factors, in principal and agency trades✓
• c.Identical for every customer
• d.Approved in advance by the SEC

Rule G-30 requires that a dealer's prices, including markups and markdowns, be fair and reasonable in light of prevailing market conditions, the dealer's cost, and other relevant factors. It parallels FINRA's fair-pricing standards for other securities.

FINRA Rule 3220 (the gifts rule) currently limits gifts given in relation to the securities business to:

• a.No limit at all
• b.$1,000 per recipient per year
• c.$300 per recipient per year, raised from $100 effective in 2026✓
• d.$50 per recipient per year

FINRA Rule 3220 caps gifts and gratuities related to a person's business at $300 per recipient per year, an increase from the long-standing $100 limit that took effect in 2026. Ordinary business entertainment and de minimis promotional items are generally excluded.

FINRA's continuing education requirement for registered persons consists of:

• a.A Regulatory Element (periodic training on rules and compliance) plus a Firm Element (the firm's annual training plan for covered persons)✓
• b.A voluntary program with no requirements
• c.Training run solely by FINRA
• d.Only a one-time qualifying exam

Continuing education has two parts: the Regulatory Element, periodic computer-based training on regulatory topics that registered persons must complete, and the Firm Element, an annual training program each firm designs for its covered registered persons based on their activities.

When a registered representative leaves a member firm, the firm must file a Form U5 (Uniform Termination Notice):

• a.Never, since the individual files it
• b.Only if the representative requests it
• c.Within 30 days of the termination✓
• d.Within one year

The member firm must file Form U5 within 30 days of a registered person's termination, reporting the reason for departure and any disclosure events. The individual receives a copy, and the information updates the person's CRD/BrokerCheck record.

'Statutory disqualification' refers to:

• a.A condition, such as certain felony convictions or regulatory bars, that can disqualify a person from associating with a member firm✓
• b.A type of margin account
• c.A rule limiting odd-lot orders
• d.A favorable tax status

Statutory disqualification arises from events like certain felony or securities-related misdemeanor convictions within ten years, regulatory bars or suspensions, or willful securities-law violations. A disqualified person generally cannot associate with a member firm without regulatory approval.

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)

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)