FINRA Core Knowledge and Fundamentals 2 — Questions and Answers
Question 1: Under FINRA rules, which entity is primarily responsible for overseeing broker-dealers in the United States?
- The Federal Reserve
- The SEC only
- FINRA, as a self-regulatory organization (Correct answer)
- The U.S. Department of Treasury
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 2: What is the primary purpose of the Customer Protection Rule (SEC Rule 15c3-3)?
- To limit commissions charged to customers
- To safeguard customer funds and securities held by broker-dealers (Correct answer)
- To require disclosure of conflicts of interest
- To prevent insider trading by registered representatives
Correct answer: To safeguard customer funds and securities held by broker-dealers
Rule 15c3-3 requires broker-dealers to maintain customer funds and fully paid securities separate from firm assets to protect customers if the firm fails.
Question 3: Which of the following best describes a 'market maker' in FINRA terminology?
- A firm that sets national exchange listing standards
- A dealer that stands ready to buy and sell a particular security on a continuous basis (Correct answer)
- A regulator who enforces trade reporting rules
- An analyst who recommends securities to retail investors
Correct answer: A dealer that stands ready to buy and sell a particular security on a continuous basis
A market maker is a dealer firm that continuously quotes bid and ask prices for a specific security, providing liquidity to the market.
Question 4: Under FINRA Rule 4512, member firms must maintain customer account records for a minimum of how many years?
- 3 years
- 5 years
- 6 years (Correct answer)
- 10 years
Correct answer: 6 years
FINRA Rule 4512 requires customer account records to be kept for at least six years after the account is closed.
Question 5: What does the term 'nominal yield' refer to in fixed income securities?
- The yield adjusted for inflation
- The coupon rate stated on the face of the bond (Correct answer)
- The yield to maturity of the bond
- The current yield based on market price
Correct answer: The coupon rate stated on the face of the bond
Nominal yield is simply the coupon rate printed on the bond certificate, expressed as a percentage of face value.
Question 6: Which type of order instructs a broker to buy or sell a security immediately at the best available current price?
- Limit order
- Stop order
- Market order (Correct answer)
- Good-till-canceled order
Correct answer: Market order
A market order is executed immediately at the best available price without any price restrictions.
Question 7: FINRA's arbitration process is primarily designed to resolve disputes between which parties?
- FINRA and the SEC
- Customers and broker-dealers, or between broker-dealers (Correct answer)
- Foreign governments and U.S. broker-dealers
- State securities regulators and registered representatives
Correct answer: Customers and broker-dealers, or between broker-dealers
FINRA arbitration resolves disputes between investors and broker-dealers or between industry participants, offering an alternative to litigation.
FINRA Core Knowledge and Fundamentals 2
Under FINRA rules, which entity is primarily responsible for overseeing broker-dealers in the United States?