FINRA Safety and Compliance 3 — Questions and Answers
Question 1: A registered representative receives a gift worth $125 from a client as a thank-you. Under FINRA Rule 3220, this gift is:
- Permissible because it is from a client, not a third party
- Impermissible because it exceeds the $100 annual per-person limit (Correct answer)
- Permissible if the representative reports it to compliance
- Impermissible only if the representative solicited the gift
Correct answer: Impermissible because it exceeds the $100 annual per-person limit
FINRA Rule 3220 prohibits giving or receiving gifts in excess of $100 per person per year in connection with the business of the employer.
Question 2: Which of the following is an example of market manipulation prohibited under FINRA rules?
- Placing limit orders that are not immediately executed
- Entering buy and sell orders simultaneously in the same security to create the appearance of active trading (Correct answer)
- Recommending a security that has recently increased in price
- Executing a large block trade that temporarily moves the market
Correct answer: Entering buy and sell orders simultaneously in the same security to create the appearance of active trading
Entering matched orders to create artificial trading volume is a classic form of market manipulation known as wash trading.
Question 3: Under FINRA Rule 4370, a member firm's Business Continuity Plan (BCP) must be reviewed and updated:
- Every five years
- Whenever the firm changes its address
- At least annually (Correct answer)
- Only after a significant business disruption
Correct answer: At least annually
FINRA Rule 4370 requires member firms to review and update their BCPs at least annually.
Question 4: What does FINRA's suitability rule (Rule 2111) require before a registered representative makes a recommendation?
- The customer must sign a suitability waiver
- The representative must have a reasonable basis to believe the recommendation is suitable based on the customer's profile (Correct answer)
- The representative must obtain supervisory pre-approval for every recommendation
- The customer must have a minimum net worth of $100,000
Correct answer: The representative must have a reasonable basis to believe the recommendation is suitable based on the customer's profile
Rule 2111 requires representatives to have a reasonable basis for believing a recommended strategy is suitable given the customer's financial situation, needs, and investment objectives.
Question 5: A registered representative discovers that a colleague may be misappropriating client funds. The representative's FIRST obligation under FINRA standards is to:
- Confront the colleague directly
- Report the suspicion to the firm's compliance department or supervisor (Correct answer)
- Notify the affected clients immediately
- File a report directly with the SEC
Correct answer: Report the suspicion to the firm's compliance department or supervisor
Representatives must promptly escalate concerns about misconduct to their firm's compliance department or supervisors, who are responsible for further action.
Question 6: Under FINRA Rule 2010 (Standards of Commercial Honor), a registered representative who makes false statements on a Form U4 would be in violation because:
- Form U4 is filed with the SEC, making false statements a federal crime only
- Dishonest or unethical conduct in the securities industry violates the standard of commercial honor (Correct answer)
- Form U4 falsification only violates state securities laws
- Rule 2010 only applies to customer-facing conduct
Correct answer: Dishonest or unethical conduct in the securities industry violates the standard of commercial honor
Rule 2010 requires members and associated persons to observe high standards of commercial honor, and falsifying regulatory filings is considered dishonest and unethical conduct.
Question 7: Which of the following is the PRIMARY goal of FINRA's Office of Fraud Detection and Market Intelligence (OFDMI)?
- Licensing registered representatives
- Detecting potential fraud and market manipulation through tips, complaints, and referrals (Correct answer)
- Arbitrating customer disputes
- Approving new member applications
Correct answer: Detecting potential fraud and market manipulation through tips, complaints, and referrals
OFDMI serves as FINRA's intake point for tips, complaints, and referrals, and is responsible for identifying potential fraud and market manipulation for further investigation.
FINRA Safety and Compliance 3
A registered representative receives a gift worth $125 from a client as a thank-you.
Under FINRA Rule 3220, this gift is: