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
• b.Sell the securities to customers
• c.Collect non-binding indications of interest✓
• d.Guarantee the offering price

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, but no money or binding commitments may be accepted until the registration is effective.Securities Act of 1933

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

• a.Constitutes an offer to sell the securities
• b.Contains the final public offering price and effective date
• c.May be used to accept customer payments
• d.Omits the final offering price and effective date and is used to gauge investor interest✓

A red herring is a preliminary prospectus circulated during the cooling-off period; it omits the final public offering price and the effective date and includes a legend noting it is not an offer to sell. It is used to solicit non-binding indications of interest, not to make sales.Securities Act of 1933

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 public offering requiring a full prospectus
• b.A guaranteed government security
• c.A municipal bond offering
• 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 investors depending on the specific rule used. These securities are typically restricted and cannot be freely resold without meeting conditions.Securities Act of 1933

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.Solely social media posts and other electronic messages that are sent to the public
• b.Only advertisements
• c.Retail communications, correspondence, and institutional communications✓
• d.Only formal statutory prospectuses and other official written offering documents

FINRA classifies public communications as retail communications (distributed to more than 25 retail investors in 30 days), correspondence (to 25 or fewer retail investors in 30 days), and institutional communications. Each category carries different approval, review, and recordkeeping requirements, with retail communications facing the most oversight.

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

• a.Specifically designed and worded to guarantee investors a positive future rate of return
• b.Fair, balanced, and not misleading, presenting risks along with benefits✓
• c.Permitted to omit material risks whenever those particular risks would be unfavorable
• d.Approved only after distribution

FINRA content standards require that communications be fair, balanced, and not misleading, providing a sound basis for evaluation and disclosing material risks alongside potential benefits. Promissory statements, guarantees of performance, and omission of material risk information are prohibited.

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

• a.$1,000
• b.$50,000
• c.$10,000 in a single business day✓
• d.$100,000

Under the Bank Secrecy Act, financial institutions must file a Currency Transaction Report for cash transactions exceeding $10,000 in a single business day, aggregating multiple related transactions. Structuring transactions to evade this reporting threshold is itself illegal.Bank Secrecy Act

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 only if the customer requests it
• c.Destroyed after 30 days
• d.Stored only in paper form

FINRA and SEC recordkeeping rules require firms to preserve books, records, and communications for specified periods, commonly several years, in an accessible format for regulatory examination. Records such as blotters, customer account information, and communications must be retained and readily retrievable.

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.Do so only if it is unpaid
• c.Keep it secret from the firm
• d.Provide prior written notice to the employing firm as required by FINRA rules✓

FINRA rules require a registered person to provide prior written notice to the member firm before engaging in outside business activities, and private securities transactions ('selling away') require prior written notice and firm approval. This lets the firm assess conflicts and supervisory responsibilities.

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

• a.Required by FINRA
• 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.Always fully permitted whenever only accredited investors happen to 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.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.Eliminate the need for compliance
• b.Replace customer suitability obligations
• c.Ensure the firm supervises its associated persons and business for compliance with securities laws and rules✓
• d.Increase commissions

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.

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.Insures municipal bonds against issuer default
• d.Sets federal tax policy on municipal bond interest

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. It neither insures bonds nor sets tax policy, making choices a, c, and d incorrect.Securities Exchange Act of 1934

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 cap that permits exactly 5% on every trade
• c.A rule that applies only to municipal bonds
• d.A federal tax on securities transactions

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%. It does not apply to securities sold by prospectus (such as mutual funds and new issues). Trap: it is not a rigid 5% ceiling (choice b).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.Cap underwriting spreads
• b.Deliver an investor brochure describing how to file complaints and the protections available through the MSRB✓
• c.Establish and enforce the 5% markup and markdown policy that governs fair pricing in all municipal principal transactions
• d.Limit political contributions

Rule G-10 requires dealers to promptly provide certain customers with a statement noting that the dealer is registered with the MSRB and SEC and directing them to the MSRB's investor brochure describing complaint procedures and investor protections.

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.Trade only in round lots
• b.Deposit 50% margin on all trades
• c.Observe high standards of commercial honor and just and equitable principles of trade✓
• d.Limit municipal gifts to $300

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.

'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.A permitted hedging strategy
• c.A method of settling trades
• d.Buying securities on margin

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.

'Marking the close' is:

• a.A type of limit order
• b.An adjustment for dividends
• c.Entering orders at or near the close to manipulate a security's closing price, a prohibited manipulative practice✓
• d.A legitimate closing auction procedure

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 provisions of the securities laws.

'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 settlement delay
• c.A margin call
• d.A permitted routine quote update

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 FINRA rules. Firm-quote obligations protect the reliability of displayed markets.

'Matched orders' or wash trades involve:

• a.Legitimate index arbitrage
• b.Automatic dividend reinvestment
• c.Placing a routine stop order
• 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 manipulative practices under the Securities Exchange Act of 1934.

'Interpositioning' is:

• a.A required best-execution step
• b.A margin financing technique
• c.Needlessly inserting a third party between the firm and the best available market, adding cost to the customer, which is prohibited✓
• d.A type of firm-commitment underwriting

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.

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

• a.$250,000 total, including $100,000 for cash
• b.Unlimited
• c.$100,000 total
• 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. SIPC covers custodial loss from firm failure, not ordinary market losses.

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

• a.Prepare a marketing plan
• b.Make a tax election
• c.Provide a margin agreement
• d.Verify the identity of each customer at account opening under anti-money-laundering rules✓

Under the Bank Secrecy Act and USA PATRIOT Act, a firm's CIP must collect and verify identifying information (such as name, date of birth, address, and taxpayer ID) for each customer at account opening and check against government lists, as part of its AML program.

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

• a.Register options with OFAC
• b.Report all profits to OFAC
• c.Screen customers and transactions against the Specially Designated Nationals (SDN) list and block prohibited persons✓
• d.List their shares on a foreign exchange

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.

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

• a.24 hours a day
• b.On weekends only
• c.From 6 a.m. to midnight
• d.Between 8 a.m. and 9 p.m. in the called party's local time, while honoring do-not-call requests✓

Telemarketing rules restrict unsolicited sales calls to the hours of 8 a.m. to 9 p.m. in the recipient's local time zone, require firms to maintain a do-not-call list, and mandate that callers identify themselves and their firm. These protect consumers from abusive calling practices.