FINRA Professional Standards and Ethics 2 — Questions and Answers
Question 1: 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:
- Front-running (Correct answer)
- Churning
- 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 2: Under FINRA Rule 3270, a registered representative who wishes to engage in outside business activities must:
- Notify their member firm in writing prior to beginning the activity (Correct answer)
- Obtain written approval from FINRA directly
- Notify the SEC within 30 days of starting
- File a Form U4 amendment within 10 days
Correct answer: Notify their member firm in writing prior to beginning the activity
FINRA Rule 3270 requires registered persons to provide prior written notice to their member firm before engaging in any outside business activity.
Question 3: Which of the following best describes the 'know your customer' (KYC) obligation under FINRA Rule 2090?
- Members must use reasonable diligence to know the essential facts about every customer and account (Correct answer)
- Members must obtain a credit report on every new customer
- Members must verify customer identity through government-issued photo ID only
- Members must conduct annual in-person reviews of all customer accounts
Correct answer: Members must use reasonable diligence to know the essential facts about every customer and account
FINRA Rule 2090 requires members to use reasonable diligence to know essential facts about each customer necessary to service the account effectively and comply with applicable regulations.
Question 4: A broker-dealer allows a customer to open an account using a fictitious name to hide assets from a divorce proceeding. This violates:
- Anti-money laundering rules and FINRA Rule 2010 (Correct answer)
- Only state securities laws
- FINRA advertising standards
- Portfolio margin requirements
Correct answer: Anti-money laundering rules and FINRA Rule 2010
Facilitating the concealment of assets violates AML obligations and FINRA's general standard of commercial honor under Rule 2010.
Question 5: Under the FINRA Code of Procedure, a respondent who receives a complaint from FINRA's Department of Enforcement must file an answer within:
- 25 days after service of the complaint (Correct answer)
- 10 business days after service
- 60 calendar days after service
- 30 business days after service
Correct answer: 25 days after service of the complaint
FINRA's Code of Procedure requires a respondent to file an answer within 25 days after service of the complaint.
Question 6: A registered representative promises a customer that they will be reimbursed for any losses suffered in their account. This violates FINRA rules because:
- Guaranteeing customers against loss is expressly prohibited (Correct answer)
- Such promises require prior FINRA approval
- Only written guarantees are prohibited
- Guarantees are only prohibited for retail customers
Correct answer: Guaranteeing customers against loss is expressly prohibited
FINRA Rule 2150 prohibits registered representatives from guaranteeing customers against loss in any securities transaction.
Question 7: When a registered representative becomes aware that a customer has been making transactions that appear inconsistent with the customer's stated investment profile, the rep's first obligation is to:
- Review the account and consider whether updated customer information is needed (Correct answer)
- File a SAR with FinCEN immediately
- Liquidate all positions to protect the customer
- Notify the SEC within 24 hours
Correct answer: Review the account and consider whether updated customer information is needed
The first step is to review whether customer information needs updating and evaluate whether transactions remain suitable in light of the customer's actual circumstances.
FINRA Professional Standards and Ethics 2
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: