Industry Regulations Flashcards

Under FINRA's rules on communications with the public, which category requires principal pre-approval before use?

Answer: Retail communications, which are defined as any written communication distributed to more than 25 retail investors within 30 days

Retail communications, defined as written communications distributed or made available to more than 25 retail investors within any 30-day period, generally require principal approval before first use.

FINRA Rule 4370 requires broker-dealers to create and maintain a Business Continuity Plan (BCP). Which scenario most clearly triggers BCP obligations?

Answer: A significant business disruption such as a natural disaster or systems failure

BCPs are designed to address significant business disruptions (SBDs) such as natural disasters, system failures, or other emergencies that could impair normal operations.

Under SEC Rule 10b-5, which of the following elements must generally be proven to establish securities fraud?

Answer: Material misrepresentation or omission, scienter, reliance, and damages

Rule 10b-5 fraud claims typically require proof of a material misstatement or omission, scienter (intent), reliance by the plaintiff, and resulting damages.

The MSRB's Rule G-37 prohibits municipal securities dealers from engaging in municipal securities business with a municipal entity for two years after making a political contribution to an official of that entity. This is known as a:

Answer: Pay-to-play restriction

MSRB Rule G-37 is the primary 'pay-to-play' rule for the municipal securities industry, designed to prevent quid pro quo arrangements between dealers and issuer officials.

A registered representative who becomes aware that a customer is engaging in money laundering should first:

Answer: File a Suspicious Activity Report (SAR) and NOT tip off the customer

When suspicious activity is detected, the firm must file a SAR with FinCEN and is legally prohibited from disclosing the filing ('tipping off') to the subject of the report.

Under FINRA Rule 3240, a registered representative wishing to borrow money from a customer must generally:

Answer: Get prior written approval from the firm and meet specific conditions such as a personal relationship or the customer being in the lending business

Rule 3240 prohibits borrowing from customers unless the firm has a written policy permitting it and specific conditions are met, such as the customer being a financial institution or having a close personal relationship with the representative.

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

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.