FINRA Series 7 – General Securities Representative Examination — Questions and Answers

Question 1: A broker-dealer's net capital falls below the required minimum. Under SEC Rule 15c3-1, the firm must:

Cease opening new accounts and notify regulators immediately (Correct answer)
Continue operations while seeking additional capital
File a report within 5 business days
Immediately cease operations and notify FINRA

Correct answer: Cease opening new accounts and notify regulators immediately

When net capital falls below the required minimum, the firm must immediately cease opening new accounts and promptly notify FINRA and the SEC.

Question 2: Under FINRA Rule 3110, which of the following best describes the 'inspection' requirement for branch offices?

All branch offices must be inspected annually regardless of size
Only branches with customer complaints must be inspected
OSJs must be inspected at least annually and non-OSJ branches on a regular periodic schedule (Correct answer)
Branch inspections are optional if the firm has a robust supervisory system

Correct answer: OSJs must be inspected at least annually and non-OSJ branches on a regular periodic schedule

FINRA Rule 3110 requires OSJs to be inspected at least annually, while non-OSJ branches must be inspected on a regular periodic schedule based on risk.

Question 3: Under FINRA rules, when must a registered representative update their Form U4 to reflect a new outside business activity?

Before the year-end Form U4 amendment deadline
Annually during the firm's compliance review
Promptly, within 30 days of starting the activity (Correct answer)
Only if the activity generates income exceeding $10,000

Correct answer: Promptly, within 30 days of starting the activity

FINRA requires prompt disclosure of outside business activities on Form U4, generally within 30 days.

Question 4: Under Regulation Best Interest (Reg BI), how does the standard for broker-dealers differ from the traditional FINRA suitability standard?

Reg BI applies only to institutional investors, not retail customers
Reg BI requires only that recommendations be suitable, not necessarily in the customer's best interest
Reg BI imposes a 'best interest' standard that is higher than mere suitability (Correct answer)
Reg BI eliminates the need for customer profile information

Correct answer: Reg BI imposes a 'best interest' standard that is higher than mere suitability

Reg BI requires broker-dealers to act in the retail customer's best interest and not place their own financial interests ahead of the customer's, exceeding the older suitability standard.

Question 5: Why is documentation of practical work important?

Documentation is an administrative burden with little value
Only supervisors need to document their work
It creates an accurate record, supports learning, and provides legal protection (Correct answer)
Documentation is only necessary for billable activities

Correct answer: It creates an accurate record, supports learning, and provides legal protection

Thorough documentation serves clinical, educational, legal, and quality improvement purposes.

Question 6: A registered representative learns that a client is planning to make a large securities transaction. Before the client executes the trade, the rep purchases the same security for their own account. This practice is known as:

Churning
Front-running (Correct answer)
Painting the tape
Matched orders

Correct answer: Front-running

Front-running occurs when a broker trades for their own account ahead of a client's known pending order to benefit from the anticipated price movement.

Question 7: Under FINRA Rule 2360, which factor is used to evaluate whether an options recommendation is appropriate for a customer?

The customer's preference for call versus put options
The notional value of the options contract relative to the S&P 500
The customer's investment objectives, financial situation, and options trading knowledge and experience (Correct answer)
Whether the options are listed on the CBOE or other national exchange

Correct answer: The customer's investment objectives, financial situation, and options trading knowledge and experience

Options suitability under Rule 2360 requires assessment of the customer's financial situation, objectives, and specific knowledge and experience with options.

Question 8: A registered representative discusses a new investment product via a recorded phone call with a retail customer. Under FINRA communication standards, which statement is accurate?

Phone calls are classified as internal communications regardless of the recipient
Recorded calls are exempt from communication content standards
The communication must still meet fair and balanced content standards even if recorded (Correct answer)
Recorded calls require pre-approval as retail communications

Correct answer: The communication must still meet fair and balanced content standards even if recorded

All communications with customers, regardless of medium, must comply with FINRA's content standards for fairness, accuracy, and balance.

Question 9: Which of the following describes a 'selling away' violation under FINRA rules?

A representative solicits customers from a competing firm
A registered representative sells securities to customers in transactions not recorded on the member firm's books without prior written approval (Correct answer)
A representative sells a customer's securities without authorization
A firm sells securities at prices above the prevailing market price

Correct answer: A registered representative sells securities to customers in transactions not recorded on the member firm's books without prior written approval

Selling away occurs when a registered representative sells, or solicits investment in, securities not offered by their firm without the firm's prior written approval, violating FINRA Rule 3280.

Question 10: Under FINRA Rule 2232, what must a firm disclose to retail customers in connection with fixed income transactions?

The identity of all counterparties in the transaction
The mark-up or mark-down on fixed income transactions (Correct answer)
The firm's credit rating and financial condition
The firm's total revenue from fixed income trading that quarter

Correct answer: The mark-up or mark-down on fixed income transactions

FINRA Rule 2232 requires firms to disclose mark-ups and mark-downs on retail fixed income transactions on customer confirmations.

Question 11: A quality assurance review reveals that customer suitability reviews are not being documented at the point of sale. Which corrective action aligns BEST with FINRA's expectations?

Notify all affected customers and offer refunds
Retroactively document all prior transactions within 30 days
Suspend the relevant registered representatives pending a full investigation
Implement a system requiring real-time documentation and train staff on proper procedures (Correct answer)

Correct answer: Implement a system requiring real-time documentation and train staff on proper procedures

FINRA expects firms to implement prospective controls—such as systems requiring real-time documentation and staff training—to ensure ongoing compliance with suitability requirements.

Question 12: A rep learns that a large institutional client is about to place a massive buy order for a thinly traded stock. The rep buys the stock for his personal account before executing the client's order. This practice is known as:

Spoofing
Front-running (Correct answer)
Churning
Painting the tape

Correct answer: Front-running

Front-running involves trading for one's own account ahead of a large client order that is expected to move the stock price.

Question 13: An investor sells short 100 shares of XYZ at $60. The stock rises to $75. What is the investor's unrealized loss?

$750
$1,500 (Correct answer)
$1,500 gain
$6,000

Correct answer: $1,500

The investor sold at $60 and the stock is now $75; the loss is ($75 - $60) × 100 = $1,500.

Question 14: Withdrawals from a non-qualified variable annuity taken before age 59½ are generally subject to:

Ordinary income tax on earnings plus a 10% IRS early withdrawal penalty on the taxable portion (Correct answer)
No tax consequences if the contract has been held for more than five years
A flat 20% withholding tax on the entire withdrawal amount
Only ordinary income tax on all amounts withdrawn

Correct answer: Ordinary income tax on earnings plus a 10% IRS early withdrawal penalty on the taxable portion

Withdrawals of earnings from a non-qualified variable annuity before age 59½ are taxed as ordinary income and subject to a 10% IRS penalty tax, similar to other tax-deferred accounts.

Question 15: Which of the following describes the 'bid-ask spread' in securities trading?

The penalty for settling a trade late
The annual fee charged by a mutual fund
The commission paid to a broker on a trade
The difference between the highest price a buyer will pay and the lowest price a seller will accept (Correct answer)

Correct answer: The difference between the highest price a buyer will pay and the lowest price a seller will accept

The bid-ask spread is the difference between the bid price (what buyers will pay) and the ask price (what sellers will accept), representing transaction cost.

Question 16: Under FINRA rules, which of the following is considered a 'restricted person' prohibited from purchasing shares in a hot IPO?

A hedge fund with no broker-dealer ownership
An institutional investor with no affiliation to the underwriter
A retail customer with a long-standing account
A broker-dealer employee and member of their immediate family (Correct answer)

Correct answer: A broker-dealer employee and member of their immediate family

FINRA Rule 5130 restricts broker-dealer employees and their immediate family members from purchasing new issue equity securities in a public offering.

Question 17: Under FINRA Rule 3110, how often must a member firm conduct inspections of its non-OSJ branch offices?

Monthly
At least every three years (Correct answer)
At least annually
Quarterly

Correct answer: At least every three years

FINRA Rule 3110 requires member firms to inspect non-OSJ branch offices at least every three years.

Question 18: Under FINRA Rule 4370, member firms must maintain a Business Continuity Plan (BCP) that at minimum addresses:

Daily reconciliation of customer accounts and margin calls only
Succession planning for key executives and FINRA notification within 24 hours
Quarterly stress testing and annual FINRA submission of BCP documentation
Data back-up, mission-critical systems, alternate communications, and customer notifications (Correct answer)

Correct answer: Data back-up, mission-critical systems, alternate communications, and customer notifications

FINRA Rule 4370 requires BCPs to address data backup, critical systems recovery, alternate communications, and procedures for customer access to funds.

Question 19: In evaluating whether an annuity recommendation is suitable under FINRA guidance, which of the following must be specifically considered?

Whether the customer has other retirement assets outside the annuity (Correct answer)
The registered representative's commission structure on the sale
The issuing insurance company's stock price
The annuity's historical performance relative to the S&P 500

Correct answer: Whether the customer has other retirement assets outside the annuity

FINRA guidance on annuity suitability requires evaluating a customer's entire financial picture, including other retirement assets, to avoid over-concentration.

Question 20: A customer complains that a registered representative churned their account. Which element is NOT required to prove churning?

The trading was inconsistent with the customer's investment objectives
The customer suffered a net loss (Correct answer)
Excessive trading occurred
The representative controlled the account

Correct answer: The customer suffered a net loss

Churning can occur even if the customer did not suffer a net loss, as long as trading was excessive and unsuitable.

Question 21: Which factor most significantly affects the reliability of assessment findings?

The time of day the assessment is performed
Standardized procedures and consistent methodology (Correct answer)
The color of assessment forms used
The size of the examination room

Correct answer: Standardized procedures and consistent methodology

Using standardized procedures and consistent methodology ensures reliable, reproducible assessment findings across different practitioners.

Question 22: Which disclosure document must a state-registered investment adviser deliver to clients under the 'brochure rule'?

Form U4
Form ADV Part 2A (Correct answer)
Form ADV Part 1A
Form BD

Correct answer: Form ADV Part 2A

Form ADV Part 2A is the 'brochure' that investment advisers must deliver to clients, containing information about services, fees, conflicts of interest, and disciplinary history.

Question 23: Which regulatory body sets the minimum maintenance margin requirement for long stock positions in margin accounts?

The SEC
The Federal Reserve
The Treasury Department
FINRA (Correct answer)

Correct answer: FINRA

FINRA Rule 4210 sets the minimum maintenance margin at 25% for long equity positions, though individual firms may impose higher requirements.

Question 24: A customer's account is designated as 'discretionary.' This means the registered representative may:

Execute trades only during extended hours sessions
Execute trades without obtaining client approval for each transaction (Correct answer)
Change the customer's investment objective without written authorization
Waive suitability requirements for the account

Correct answer: Execute trades without obtaining client approval for each transaction

In a discretionary account, the registered representative has written authorization to select the security, quantity, and timing of trades without prior client approval for each order.

Question 25: FINRA Rule 4511 requires member firms to preserve most broker-dealer records for a minimum of how many years?

6 years (Correct answer)
3 years
2 years
10 years

Correct answer: 6 years

FINRA Rule 4511 generally requires member firms to preserve books and records for a minimum of six years.

Question 26: Under FINRA rules, which entity is primarily responsible for overseeing broker-dealers in the United States?

The U.S. Department of Treasury
FINRA, as a self-regulatory organization (Correct answer)
The Federal Reserve
The SEC only

Correct answer: FINRA, as a self-regulatory organization

FINRA is the self-regulatory organization (SRO) that oversees broker-dealers and registered representatives in the U.S. securities industry.

Question 27: A registered representative voluntarily terminates employment. The member firm must file a Form U5 within:

60 calendar days
10 business days (Correct answer)
30 calendar days
24 hours

Correct answer: 10 business days

Member firms are required to file a Form U5 termination notice within 10 business days of the termination of an associated person's registration.

Question 28: When should documentation of a service or intervention be completed?

Within 30 days of service
Only when requested by a supervisor
As soon as possible after the service is provided (Correct answer)
At the end of the week in a batch

Correct answer: As soon as possible after the service is provided

Timely documentation ensures accuracy and completeness, as details are freshest immediately after service delivery.

Question 29: A corporation issues additional shares to existing shareholders in proportion to their current holdings at no cost. This is called a:

Stock split
Rights offering
Secondary offering
Stock dividend (Correct answer)

Correct answer: Stock dividend

A stock dividend distributes additional shares to existing shareholders proportionally, typically expressed as a percentage of shares held.

Question 30: Which of the following transactions would be subject to FINRA Rule 5110, the Corporate Financing Rule?

A public offering of securities where a FINRA member acts as underwriter or placement agent (Correct answer)
A municipal bond offering managed by an MSRB-registered dealer
A private placement sold exclusively to qualified institutional buyers under Rule 144A
A secondary market sale of outstanding shares between investors

Correct answer: A public offering of securities where a FINRA member acts as underwriter or placement agent

Rule 5110 governs underwriting compensation and terms in public offerings where FINRA members participate as underwriters or placement agents.

FINRA Series 7 – General Securities Representative Examination

The FINRA Series 7 qualifies candidates to act as a General Securities Representative, authorizing them to solicit, purchase, and sell a broad range of securities products including corporate securities, options, government securities, and investment company products. It is administered by FINRA and required for most registered broker-dealer representatives.

Questions

50 min

Time Limit

72%

To Pass

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