Series 99 Regulatory Compliance & Reporting 5 — Questions and Answers
Question 1: Under FINRA's consolidated audit trail (CAT) requirements, which entities are required to report order and trade data to the CAT system?
- Only equity market makers
- FINRA member broker-dealers and national securities exchanges (Correct answer)
- Only SEC-registered investment advisers
- Clearing agencies and custodian banks only
Correct answer: FINRA member broker-dealers and national securities exchanges
The CAT system requires all FINRA member broker-dealers and national securities exchanges to report order lifecycle data to facilitate market surveillance.
Question 2: A broker-dealer receives a subpoena from the SEC requesting trading records. Under SEC Rule 17a-4, the firm must produce these records:
- Within 5 business days regardless of volume
- Promptly and in the format requested by the regulator (Correct answer)
- Only after obtaining a court order confirming the subpoena's validity
- Within 30 calendar days
Correct answer: Promptly and in the format requested by the regulator
SEC Rule 17a-4 requires broker-dealers to produce records promptly upon regulatory request and in the format specified by the examiner.
Question 3: Which of the following best describes the purpose of FINRA Rule 3120?
- To establish minimum net capital requirements
- To require firms to test and verify their supervisory control systems annually (Correct answer)
- To mandate AML training for all associated persons
- To set rules for outside business activities
Correct answer: To require firms to test and verify their supervisory control systems annually
FINRA Rule 3120 requires member firms to conduct annual testing of their supervisory control systems and report findings to senior management.
Question 4: Under SEC Regulation NMS Rule 606, broker-dealers must publish quarterly reports disclosing:
- Net capital computations
- Order routing practices for non-directed orders (Correct answer)
- All customer account balances
- Commission schedules and payment for order flow details
Correct answer: Order routing practices for non-directed orders
Regulation NMS Rule 606 requires broker-dealers to publish quarterly reports on where they route non-directed customer orders, including any payment for order flow arrangements.
Question 5: A broker-dealer acting as a prime broker must establish and maintain procedures to ensure compliance with which key requirement?
- Filing a Form PF with the SEC
- Providing a prime brokerage disclosure document to customers before establishing the relationship (Correct answer)
- Obtaining FINRA approval for each prime brokerage customer
- Registering each prime brokerage customer as an associated person
Correct answer: Providing a prime brokerage disclosure document to customers before establishing the relationship
SEC and FINRA rules require prime brokers to provide customers with a disclosure document outlining the nature and risks of the prime brokerage relationship before it is established.
Question 6: Under FINRA Rule 4340, customer accounts must be carried and maintained in accordance with:
- The customer's verbal instructions only
- A written customer agreement and applicable SEC and FINRA rules (Correct answer)
- MSRB rules regardless of the securities involved
- CFTC regulations for all account types
Correct answer: A written customer agreement and applicable SEC and FINRA rules
Customer accounts must be carried per written agreements and in conformity with applicable SEC and FINRA rules governing account maintenance and operations.
Question 7: When a FINRA member firm undergoes a material change in business operations, it must provide FINRA with prior written notice under which rule?
- FINRA Rule 1017 (Correct answer)
- FINRA Rule 2010
- FINRA Rule 3110
- FINRA Rule 4512
Correct answer: FINRA Rule 1017
FINRA Rule 1017 requires member firms to provide prior written notice and obtain approval from FINRA before implementing material changes in business operations.
Series 99 Regulatory Compliance & Reporting 5
Under FINRA's consolidated audit trail (CAT) requirements, which entities are required to report order and trade data to the CAT system?