FINRA Safety and Compliance 2 — Questions and Answers
Question 1: Under FINRA Rule 3110, how often must a member firm conduct inspections of its non-OSJ branch offices?
- Monthly
- Quarterly
- At least annually
- At least every three years (Correct answer)
Correct answer: At least every three years
FINRA Rule 3110 requires member firms to inspect non-OSJ branch offices at least every three years.
Question 2: Which of the following best describes 'selling away' under FINRA rules?
- Selling securities at a discount to preferred clients
- A registered representative selling securities outside the scope of their employment without firm approval (Correct answer)
- Selling securities to customers in other states without proper licensing
- Discounting commissions below the firm's published schedule
Correct answer: A registered representative selling securities outside the scope of their employment without firm approval
Selling away occurs when a registered representative sells securities not held or offered by their member firm without prior written approval.
Question 3: A customer complains that a registered representative churned their account. Which element is NOT required to prove churning?
- Excessive trading occurred
- The representative controlled the account
- The customer suffered a net loss (Correct answer)
- The trading was inconsistent with the customer's investment objectives
Correct answer: The customer suffered a net loss
Churning can occur even if the customer did not suffer a net loss, as long as trading was excessive and unsuitable.
Question 4: Under FINRA Rule 4512, how long must member firms retain customer account records?
- 3 years
- 4 years
- 6 years (Correct answer)
- 10 years
Correct answer: 6 years
FINRA Rule 4512 requires customer account records to be retained for at least six years.
Question 5: What is the purpose of a 'red flag' checklist in a firm's AML program?
- To identify securities that are overvalued
- To flag accounts with excessive trading activity for commissions review
- To identify indicators of potentially suspicious or money-laundering activity (Correct answer)
- To monitor for insider trading violations
Correct answer: To identify indicators of potentially suspicious or money-laundering activity
Red flag checklists help compliance staff identify transaction patterns or account behaviors that may indicate money laundering or other financial crimes.
Question 6: Which FINRA rule governs the borrowing and lending of money between registered persons and customers?
- FINRA Rule 2010
- FINRA Rule 3240 (Correct answer)
- FINRA Rule 4210
- FINRA Rule 2111
Correct answer: FINRA Rule 3240
FINRA Rule 3240 specifically restricts registered persons from borrowing money from or lending money to customers, with limited exceptions.
Question 7: Under Regulation S-P, broker-dealers must provide customers with a privacy notice:
- Only when the customer opens an account
- Annually and at the time of establishing a customer relationship (Correct answer)
- Only if the firm shares nonpublic personal information with affiliates
- Only upon customer request
Correct answer: Annually and at the time of establishing a customer relationship
Regulation S-P requires broker-dealers to provide an initial privacy notice when the customer relationship is established and annually thereafter.
FINRA Safety and Compliance 2
Under FINRA Rule 3110, how often must a member firm conduct inspections of its non-OSJ branch offices?