FINRA Practice and Application 2 — Questions and Answers
Question 1: A registered representative receives an order from a customer to buy 500 shares of a NYSE-listed stock at the market. The rep should execute this order:
- At the next available price on the exchange (Correct answer)
- At the closing price of the prior trading day
- Only after confirming the order in writing
- At a price no higher than the current ask
Correct answer: At the next available price on the exchange
A market order must be executed promptly at the best available price in the market.
Question 2: Under FINRA rules, when must a registered representative update their Form U4 to reflect a new outside business activity?
- Promptly, within 30 days of starting the activity (Correct answer)
- Annually during the firm's compliance review
- Only if the activity generates income exceeding $10,000
- Before the year-end Form U4 amendment deadline
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 3: A customer instructs her broker to sell her 1,000 shares of ABC at $50 or better. This is classified as a:
- Limit order (Correct answer)
- Market order
- Stop order
- Stop-limit order
Correct answer: Limit order
A limit order specifies a minimum acceptable price for a sell order or maximum for a buy order.
Question 4: Which document must a broker-dealer provide to a new customer that outlines how the firm handles customer funds and securities?
- The FINRA Customer Information Disclosure
- The SEC Form ADV Part 2
- The Customer Account Agreement including margin and securities disclosure
- The Regulation Best Interest disclosure (Form CRS) (Correct answer)
Correct answer: The Regulation Best Interest disclosure (Form CRS)
Form CRS (Customer Relationship Summary) must be delivered to retail customers and discloses services, fees, conflicts, and legal obligations.
Question 5: A rep recommends a variable annuity with a 7-year surrender charge to a 68-year-old customer in poor health who needs liquidity within 2 years. This recommendation most likely violates:
- FINRA's suitability and Regulation Best Interest standards (Correct answer)
- SEC Rule 10b-5 regarding market manipulation
- FINRA Rule 4512 on customer account information
- The Investment Advisers Act of 1940
Correct answer: FINRA's suitability and Regulation Best Interest standards
Recommending a long-surrender-period product to a customer needing near-term liquidity violates suitability and Reg BI best interest standards.
Question 6: A customer's account shows repeated purchases followed by quick sales at a loss to generate tax losses, which are then used to buy substantially identical securities. This practice is subject to the:
- Wash sale rule (Correct answer)
- Pattern day trader rule
- Short-sale rule (SEC Rule 10a-1)
- Net capital rule
Correct answer: Wash sale rule
The wash sale rule disallows claiming a tax loss when a substantially identical security is purchased within 30 days before or after the sale.
Question 7: Under FINRA Rule 2010, a registered representative who borrows money from a customer without firm approval most directly violates:
- Standards of commercial honor and principles of trade (Correct answer)
- Regulation T margin requirements
- FINRA Rule 4512 recordkeeping obligations
- MSRB Rule G-37 on political contributions
Correct answer: Standards of commercial honor and principles of trade
FINRA Rule 2010 requires members to observe high standards of commercial honor, and borrowing from customers without approval breaches this standard.
FINRA Practice and Application 2
A registered representative receives an order from a customer to buy 500 shares of a NYSE-listed stock at the market.
The rep should execute this order: