FINRA Core Knowledge and Fundamentals 3 — Questions and Answers
Question 1: Which of the following is an example of a 'prohibited practice' under FINRA rules regarding churning?
- Recommending a diversified portfolio of index funds
- Executing excessive trades in a customer account primarily to generate commissions (Correct answer)
- Placing unsolicited trades with written customer consent
- Rebalancing a portfolio once per year
Correct answer: Executing excessive trades in a customer account primarily to generate commissions
Churning occurs when a broker excessively trades a customer's account to generate commissions, violating the obligation to act in the customer's best interest.
Question 2: Under FINRA Rule 2010, registered representatives are required to observe high standards of what?
- Profit generation and revenue growth
- Commercial honor and just and equitable principles of trade (Correct answer)
- Compliance with state tax laws only
- Minimum education requirements
Correct answer: Commercial honor and just and equitable principles of trade
FINRA Rule 2010 requires members to observe high standards of commercial honor and just and equitable principles of trade in all business conduct.
Question 3: What is the settlement period for most U.S. equity transactions under current regulations?
- Same day (T+0)
- One business day (T+1) (Correct answer)
- Two business days (T+2)
- Three business days (T+3)
Correct answer: One business day (T+1)
Since May 2024, U.S. equity trades settle on a T+1 basis, meaning one business day after the trade date.
Question 4: A registered representative who receives a written customer complaint must forward it to the appropriate supervisor within how many business days under FINRA Rule 4513?
- Same day it is received (Correct answer)
- Within 2 business days
- Within 5 business days
- Within 30 calendar days
Correct answer: Same day it is received
FINRA Rule 4513 requires written customer complaints to be reported to a principal promptly, generally the same day they are received.
Question 5: Which of the following best describes a 'bond's duration'?
- The number of years until the bond matures
- A measure of a bond's price sensitivity to interest rate changes (Correct answer)
- The total interest payments made over the bond's life
- The credit rating assigned by a ratings agency
Correct answer: A measure of a bond's price sensitivity to interest rate changes
Duration measures how sensitive a bond's price is to changes in interest rates; a higher duration means greater price volatility.
Question 6: Under FINRA Regulation Best Interest (Reg BI), broker-dealers must act in whose best interest when making a recommendation?
- The broker-dealer's shareholders
- The retail customer at the time of the recommendation (Correct answer)
- FINRA's regulatory standards committee
- The issuer of the recommended security
Correct answer: The retail customer at the time of the recommendation
Reg BI requires broker-dealers to act in the best interest of the retail customer at the time of a recommendation, without placing firm interests ahead of the customer.
Question 7: What is the role of the Securities Investor Protection Corporation (SIPC)?
- To guarantee investment returns for retail investors
- To protect customers if a broker-dealer fails financially by returning missing cash and securities (Correct answer)
- To regulate the trading of government securities
- To set margin requirements for broker-dealers
Correct answer: To protect customers if a broker-dealer fails financially by returning missing cash and securities
SIPC protects customers of failed broker-dealer firms by returning missing cash and securities up to $500,000, including a $250,000 limit on cash.
FINRA Core Knowledge and Fundamentals 3
Which of the following is an example of a 'prohibited practice' under FINRA rules regarding churning?