Chapter 9 Practice Question Answers
- 1. Answer: C. Retail communications and correspondence must disclose that an endorsement has been bought, but not the amount of payment. Comparisons between investments or services must disclose material differences, including investment objectives, costs and expenses, and the liquidity and volatility of the investment products. Disclosures may be footnoted, but only if a footnote will not inhibit understanding of the communication.
- 2. Answer: D. FINRA rules do not allow any of the above transactions under most circumstances. But exceptions do exist. A member firm should never trade ahead of a research report containing nonpublic information.
- 3. Answer: A. Getting his customer the same or better price would have put the broker within the rules if he had executed the customer’s market order immediately after his own transaction. Informing the customer before trading ahead and allowing him the opportunity to refuse the broker’s proposed action only works for institutional accounts. No doubt about it. Our broker violated FINRA rules.
- 4. Answer: A. If a broker-dealer makes trades in either a security or its derivatives (such as options) based on a nonpublic research report in the security, the broker-dealer is trading ahead of the research report.
- 5. Answer: C. FINRA Rule 3240 restricts lending between registered representatives and their customers. Under this rule, in order for a registered representative to be able to take a loan from a customer, the member firm must have written procedures allowing lending agreements, and the member must pre-approve the loan in writing. Moreover, the relationship between the representative and customer must fall into one of five permissible relationships: The customer is a member of the registered representative’s immediate family, the customer is in the business of lending money, the customer and the registered representative work at the same firm, the lending a