FINRA Professional Standards and Ethics 3 — Questions and Answers
Question 1: Under FINRA Rule 4512, member firms are required to make reasonable efforts to obtain which of the following for each non-institutional customer account?
- Tax identification number, date of birth, employment status, and annual income (Correct answer)
- A copy of the customer's most recent tax return
- A bank reference letter and two years of account statements
- The customer's net worth certified by a CPA
Correct answer: Tax identification number, date of birth, employment status, and annual income
FINRA Rule 4512 requires firms to collect specific customer information including tax ID, date of birth, employment status, annual income, net worth, investment objectives, and contact information.
Question 2: Which of the following is an example of an unethical practice known as 'painting the tape'?
- Executing wash sales among related accounts to create the appearance of active trading (Correct answer)
- Recommending unsuitable investments to elderly clients
- Charging excessive markups on principal transactions
- Failing to disclose a conflict of interest in a research report
Correct answer: Executing wash sales among related accounts to create the appearance of active trading
Painting the tape involves executing fictitious trades among related parties to create artificial trading volume and give a false impression of market activity.
Question 3: A registered representative who is subject to a statutory disqualification may still be associated with a FINRA member firm if:
- FINRA approves a membership continuance application or eligibility proceeding (Correct answer)
- The firm's compliance department provides written consent
- The disqualification occurred more than five years ago
- The representative passes a remedial FINRA examination
Correct answer: FINRA approves a membership continuance application or eligibility proceeding
A person subject to a statutory disqualification can only remain associated with a member firm if FINRA approves an eligibility proceeding under FINRA Rule 9522.
Question 4: FINRA Rule 2241 governs research analyst conflicts of interest. Which of the following is required under this rule?
- Research reports must disclose whether the firm makes a market in the covered security (Correct answer)
- Analysts must be supervised by the investment banking department
- Research must be reviewed by the subject company before publication
- Analysts may personally trade in covered securities during blackout periods with supervisor approval
Correct answer: Research reports must disclose whether the firm makes a market in the covered security
Rule 2241 requires disclosure of material conflicts, including whether the firm makes a market in the security covered in the research report.
Question 5: A customer files a written complaint alleging that a registered representative misappropriated $500 from their account. The member firm is required to:
- Acknowledge the complaint and investigate within required timeframes under firm procedures (Correct answer)
- Immediately terminate the registered representative pending investigation
- Report the complaint to FINRA within 24 hours via the CRD system
- Refund the $500 immediately before conducting an investigation
Correct answer: Acknowledge the complaint and investigate within required timeframes under firm procedures
Member firms must have procedures for acknowledging and addressing written customer complaints in a timely manner, though regulatory reporting thresholds and timing depend on the specific facts.
Question 6: Under FINRA's suitability rule, which of the following transactions would be most clearly unsuitable for a 78-year-old retired investor with a conservative risk profile and fixed income needs?
- A leveraged inverse ETF designed to return three times the inverse of a daily index (Correct answer)
- A diversified portfolio of investment-grade corporate bonds
- A CD ladder with maturities of one to five years
- A money market mutual fund
Correct answer: A leveraged inverse ETF designed to return three times the inverse of a daily index
Leveraged inverse ETFs are complex, high-risk products with daily rebalancing that can cause rapid value erosion, making them clearly unsuitable for a conservative, income-focused retiree.
Question 7: Which of the following best describes the purpose of FINRA's Books and Records rules (Rules 4510 series)?
- To ensure member firms maintain accurate records that allow FINRA to examine and reconstruct transactions (Correct answer)
- To require firms to archive all employee emails for 10 years
- To standardize accounting methods across broker-dealers
- To mandate public disclosure of all customer account balances
Correct answer: To ensure member firms maintain accurate records that allow FINRA to examine and reconstruct transactions
The Books and Records rules require member firms to maintain accurate, complete records so that FINRA examiners can reconstruct transactions and verify compliance with applicable rules.
FINRA Professional Standards and Ethics 3
Under FINRA Rule 4512, member firms are required to make reasonable efforts to obtain which of the following for each non-institutional customer account?