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When the market opens the morning of an IPO effective date, secondary market trading in the issue:
May begin immediately
Will begin after the IPO shares have all been sold to the public.
May not begin until the end of the "quiet period"
Must wait until the stock has applied for and been accepted for inclusion in either the NYSE system or the NASDAQ market.
Question 1 Explanation:
When an IPO becomes effective and new shares begin selling to the investing public, there is no restriction upon when those initial public investors may place orders with their B/D’s to resell the new share they’d just bought at the POP (public offering price) – the resale takes place in the secondary market, where the price is determined by supply & demand, not by a prospectus.
In the course of discussing an IPO, the issuer might divulge sensitive, non-public information to a select group of investors. If this occurs:
Regulation S-P mandates the issuer immediately reveal this information to the public.
Regulation FD mandates the issuer immediately reveal this information to the public.
Regulation T requires the Lead Underwriter disclose the information widely to the public
None of the above is correct.
Question 2 Explanation:
Any information furnished must be made widely available to the public.
Though it is rare in practice, when a member firm believes a registered market maker has backed away from its quote, in such cases, the member firm will contact:
The Securities Information Center
The money center in which the stock regularly trades
FINRA’s firm quote compliance system within 5 minutes of the alleged infraction
No contact is required – firms are permitted to alter or adjust their quotes when necessary to reflect market conditions
Question 3 Explanation:
Market makers must abide by strict compliance regulations when it comes to their firm quotes. Failure to do so could subject the firm to an accusation of "backing away."
OATS or CATS are systems which attempt to achieve maximum disclosure of trading activity in NMS securities. The frequency of OATS/CATS reports is set at:
After the close of market business each day
No later than 10 seconds after trade execution
No later than 15 minutes after trade execution
These reports are required to be filed weekly.
Question 4 Explanation:
OATS/CATS are daily audit information reports, filed with FINRA each evening.
Open-end investment management companies are quoted based upon the
Supply & demand for the shares of the issuing fund
Forward pricing rule
Most recent NAV for the fund
Most recently computed POP
Question 5 Explanation:
The forward pricing rule states that transactions in mutual fund shares (open-end inv. co.) will take place at the "next computed net asset value" after receipt of the purchase or redemption order.
Investment banking involves working with an Issuer in facilitating an offering of securities in an effort to raise capital, either equity or debt. Occasionally, the banker cannot agree to engage in firm commitment underwriting, and the underwriting agreement will reflect the ‘lesser’ best efforts contingency commitment being taken by the selling group manager and its member participants. Which of the following statements is incorrect?
Rule 10b-18 dictates that those distributing the new issue shall not engage in market purchases of their own stock within ½ hour of market close.
Rule 10b-4 makes it clear that short-tendering is a prohibited practice
Rule 15c2-4 advises that those involved in the distribution to escrow all money received from customer by noon of the business day following the transaction.
Rule 15c3-1 advises the member firms in the group may be an impact upon their net capital of haircuts on the new issue.
Question 6 Explanation:
When an offering is not being done as a firm commitment, escrowing of investor purchases is required in the event the deal fails to go through, whereupon the money in escrow is returned in full to the customer.
Under normal conditions, a member firm wishing to become a market-maker in a non-NMS stock will:
I. First have to file Form 15c2-11 with the SEC
II. Have to wait for a minimum of 3 business days after filing the proper form, before entering quotes on that stock
III. FINRA prohibits members from taking an inventory position in non-NASDAQ stocks.
I & II only
Question 7 Explanation:
Non-NASDAQ equities have special, more stringent rules for market makers to satisfy. These are specified under SEC Rule 15c2-11, and the filing of Form 211 is among the requirements.
When engaging in trades with other member firms where both agree to do the trade on other than a regular way basis, which of the following encompasses the rules handling settlement in such situations?
A client will have to be "cleared" by the firm to engage in DVP transactions.
Only institutional clientele may settle trades beyond T + 2.
FINRA’s rules on "buyer’s option" and "seller’s option" are designed to cover this.
In order that the good delivery rules are adhered to, settlement cannot go beyond 10 business days after the trade date.
Question 8 Explanation:
FINRA’s Uniform Practice Code spells out how optional delayed delivery dates can be set up between two B/Ds for specific transactions.
In the instance that a member firm has received a formal notification from the FINRA Division of Enforcement regarding charges against the firm for one or more violations, the member is required to respond in writing no later than:
within 21 days
within 25 days
within 10 days
within 30 days
Question 9 Explanation:
Under FINRA’s Code of Procedure, member firms have to respond to charges filed by FINRA against the B/D within a specific time period.
When a member firm is notified of a set of charges being alleged against the firm by FINRA under the Code of Procedure, and the firm fails to respond to FINRA within the required time period:
Immediate suspension of the firm’s membership will result
A 15-day warning notice is provided to the firm
A default judgment will be entered against the firm unless it responds within an additional 14-day period
Charges of violations are filed under the Code of Conduct, not the Code of Procedure
Question 10 Explanation:
To fail to respond to notification by FINRA that charges have been filed against the B/D is, in essence, an admission of guilt. The firm is given a limited amount of extra time to respond to the charges before the entry of a default judgment against the firm.
The Act of ’33 contains specific filing requirements for registered offerings as well as certain lesser filing requirements for unregistered Regulation D offerings.
I. Form D must be filed with the SEC 15 days after the initial sale of the securities.
II. A final Form D is to be filed no later than 30 days after the conclusion of the offering
III. A truncated Form S-1 is to be filed identifying the Issuer and the intended dollar amount of the offering
I, II, and III
I and II only
Question 11 Explanation:
Regulation D private placements do not require "registration" under the Act of 1933. However, the SEC insists on being notified of the private placement, and Form D is how they are notified.
FINRA routinely requests member firms to furnish books and records maintained by the firm in order to conduct its investigation. In a situation in which the firm fails to comply and furnishes no legitimate rationale for its refusal,
FINRA will obtain a subpoena to retrieve the required records
FINRA will request a court of competent jurisdiction to issue a court order and demand the records being sought
FINRA may suspend the member firm 20 calendar days after written notice
FINRA may suspend the member firm 20 business days after written notice
Question 12 Explanation:
FINRA conducts investigations of its member firms and, in doing so, will request the B/D furnish documents. To fail to provide the requested materials can lead to a suspension of the firm’s membership in FINRA.
Under FINRA’s Taping Rule, once it notifies a member that it has become subject to the rule:
I. The firm may request an exemption which would need to be promptly filed
II. The firm has 30 days in which to comply, initiating their taping regime
III. The firm has the option of trimming its staff to a point below the threshold which has triggered the Taping requirement and has 30 days in which to do so
IV. The Taping rule only applies to member firms who are also members of the NYSE
I and III
II, III, and IV
I and II only
I, II, and III
Question 13 Explanation:
Finra’s "Taping Rule" was implemented for those firms who have hired a significant number of registered reps who had worked for "disciplined firms."
According to FINRA regulations, a DPP is most similar to which of the following?
A non-traded REIT
A publicly-traded REIT listed on the NYSE
A Reg D offering
Question 14 Explanation:
A DPP is a program providing limited liability to the investor with flow-through tax and other benefits. An LLC is a limited liability company providing the investor with those same features.
Under the trading protocols of NASDAQ, which B/D in a firm-to-firm transaction will report the trade to the appropriate ticker tape?
The selling firm
The buying firm
The executing member firm
Question 15 Explanation:
A trade between two member firms shall be reported to the appropriate reporting mechanism (the ticker tape) by what FINRA refers to as "the executing firm."
From time to time, a member finds it necessary to conduct an investigation into one of the firm’s registered reps. If a particular investigation does not turn up any infractions or violations, it needs to be reported to FINRA in no more than:
15 days after the end of the current quarter
No report to FINRA is required
Question 16 Explanation:
Though the firm will keep records of its internal investigation, if it finds no infractions or violations have occurred, nothing is reported to FINRA.
The exchanges have implemented the LULD (Limit Up/Limit Down) rules for which of the following circumstances?
When a stock makes a substantial move in price compared to its previous day’s close, or during the trading day, certain limitations will apply to trading which could include restrictions on short sales
When a stock opens lower, no short selling will be permitted until there is an uptick
When a stock fails to open due to a pending news release, the price at which market makers will open the stock must comply with certain guardrails
All of the above are correct
Question 17 Explanation:
Stock price movements which exceed certain thresholds from one transaction in that stock to the next transaction are cause for concern, and the Limit Up/Limit Down rules set forth the criteria for subjecting a stock to the possible cessation of trading in that stock for a period of time.
In accordance with newly-revised limitations for reporting of movements of cash from one account to another, wire transfers must be reported if they are:
$3,000 or more
$5,000 or more
$10,000 or more
All wire transfers are to be reported
Question 18 Explanation:
A wire transfer of $3,000 or greater will set off the requirements for reporting.
FINRA may do which of the following when investigating a member firm?
Temporarily require the firm to cease operations
Temporarily suspend the firm
Require certain personnel of the firm to provide testimony in one or more locations chosen by FINRA
Suspend all new hiring
Question 19 Explanation:
Being "under investigation" carries no presumption of guilt. However, the firm can be required to cooperate with the investigation, and that includes having certain personnel provide testimony to FINRA to aid in its investigation.
With regard to a customer complaint:
The customer will likely submit the complaint to FINRA Arbitration
The customer may choose to settle the matter with the firm
The customer may elect to go to Mediation in order to resolve the dispute
All of these are possible
Question 20 Explanation:
A customer who has complained against the firm or any of its associated persons can elect to Mediate the dispute, go forward with formal Arbitration, or simply come to an agreement with the firm to "settle" the dispute.
A Form 144 is required to be filed with the SEC under which of the following situations?
A sale of control stock
A re-sale of stock from a Reg. D offering that has been held in fully-paid condition for at least 6 months
A sale of an Issuer’s securities by an Officer or Director
Any of the above
Question 21 Explanation:
SEC Rule 144 governs the re-sale of securities under a number of circumstances: resales by Officers & Directors of the stock of that issuer; re-sale of Reg. D private placement securities; and resale of stock by Control Persons. Filing with SEC of Form 144 is normally required.
A customer completed a transaction in their account with your B/D. Later that day, the customer contacts their RR to say they’ve changed their mind about the transaction. Which of the below represents the proper handling of this situation?
As long as it’s done same-day, the trade may be cancelled
Under no circumstances may a customer reverse or cancel an already-executed trade
The member firm will allocate the trade to the firm’s Error Account
The client’s account will be subject to the 90-day frozen account rule
Question 22 Explanation:
Customers must understand that purchasing securities is a contract. There is no "free-look" period; they can’t change their minds and un-do the purchase.
When one of your RRs has been working the desk on bank premises and the Rep is terminated, under what circumstances must your firm notify the bank of the termination?
Under no circumstances
Under all circumstances
If the termination was "for cause" only.
If the termination was the result of a FINRA order.
Question 23 Explanation:
Your Registered Rep was not and is not an employee of the Bank, even if the business of the B/D is conducted on bank premises. Only if your RR is terminated "for cause" would it be incumbent on the firm to notify the Bank about those circumstances.
In situations which a private securities transaction by an RR has been approved by firm management, this selling away event requires that
Each customer being sold the securities be notified that the firm has no liability for the accuracy of the disclosure docs
FINRA be notified with 10 business days of the event
The RR will be prohibited from buying any of the securities being transacted
None of the above are true
Question 24 Explanation:
A "private securities transaction" is a situation better known as "selling away." If the employing B/D, however, grants permission for the transaction to go forward, there are conditions imposed by the B/D: all transactions must be run through the books of the B/D, and customers of the firm must be made aware that the documents associated with the transaction were not put together by the firm.
When a firm has one or more OMSJ’s (Offices of Municipal Supervisory Jurisdiction), each such office must have no less than one registered principal possessing a:
Series 27 license
Series 53 license
Series 26 license
Series 4 license
Question 25 Explanation:
Though test questions involving which license covers what securities activities are not generally part of this exam, it is possible you’ll need to be aware that the Series 53 is the Municipal Securities Registered Principals license.
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