FINRA Series 16 – Quiz 05

Correct Answer: C) Ensure that the report complies with Regulation AC regarding analyst certification.
Explanation: Regulation AC requires that research reports include a certification by the analyst stating that the views expressed accurately reflect their personal views about the securities and issuers discussed in the report. Therefore, Ms. Garcia should review the report to ensure it complies with Regulation AC before distributing it to clients or publishing it on the firm’s website. This certification helps maintain the integrity and accuracy of the information provided to investors, thus promoting transparency and investor confidence in the research.

Correct Answer: C) Exclude any information that could be considered a material non-public fact.
Explanation: Before distributing the research report, Mr. Anderson should ensure that it does not contain any material non-public information about the company or the acquisition. Material non-public information is information that could significantly affect the company’s stock price if disclosed to the public. Inclusion of such information in a research report could violate Regulation FD, which prohibits selective disclosure of material non-public information. Therefore, Mr. Anderson should carefully review the report and exclude any potentially sensitive information to comply with regulatory requirements and avoid legal and ethical issues.

Correct Answer: D) Obtain legal review to confirm that the report does not disclose material non-public information.
Explanation: Before distributing the research report, Mr. Carter should ensure that it does not contain any material non-public information (MNPI) about the company, particularly regarding the clinical trial results. MNPI is information that has not been made available to the general public and could influence investors’ decisions if disclosed. Obtaining legal review helps ensure compliance with securities laws, including Rule 10b-5, which prohibits the use of manipulative or deceptive devices in connection with securities transactions. By confirming that the report does not disclose MNPI, Mr. Carter can help prevent potential legal and regulatory issues.

Correct Answer: B) Ensure that the report complies with Regulation FD regarding selective disclosure.
Explanation: Before distributing the research report, Ms. Lee should ensure that it complies with Regulation FD, which prohibits selective disclosure of material non-public information (MNPI). While information about a stock buyback program may be publicly available, any additional analysis or insights provided in the report should not include MNPI that has not been disclosed to the public. By ensuring compliance with Regulation FD, Ms. Lee can help prevent the inadvertent disclosure of sensitive information and maintain the integrity of the firm’s research practices.

Correct Answer: A) Obtain approval from the firm’s legal department before distributing the report.
Explanation: Before distributing the research report, Mr. Rodriguez should ensure that it complies with legal requirements and firm policies, particularly regarding the disclosure of material non-public information (MNPI) related to the merger. Obtaining approval from the firm’s legal department helps mitigate the risk of disseminating information that could potentially violate securities laws or regulations. This step ensures that the report is accurate, fair, and compliant with all relevant legal and regulatory requirements, thereby maintaining the integrity of the firm’s research practices.

Correct Answer: C) Ensure that the report complies with Regulation AC regarding analyst certification.
Explanation: Before distributing the research report, Ms. Nguyen should ensure that it complies with Regulation AC, which requires that research reports include a certification by the analyst stating that the views expressed accurately reflect their personal views about the securities and issuers discussed in the report. By complying with Regulation AC, Ms. Nguyen helps maintain the integrity and accuracy of the information provided to investors, promoting transparency and investor confidence in the research. This step also ensures that clients receive reliable and objective analysis from the firm’s analysts.

Correct Answer: D) Include a disclaimer stating that the projections are speculative and subject to change.
Explanation: Before distributing the research report, Ms. Taylor should ensure that it includes appropriate disclaimers to caution investors about the speculative nature of the projections provided. Including a disclaimer stating that the projections are speculative and subject to change helps manage investors’ expectations and mitigate the risk of reliance on potentially uncertain forecasts. This step promotes transparency and helps protect the firm from potential legal and regulatory issues related to the dissemination of forward-looking information.

Correct Answer: D) Include a disclaimer stating that the projections are speculative and subject to change.
Explanation: Before distributing the research report, Mr. Rodriguez should ensure that it includes appropriate disclaimers to caution investors about the speculative nature of the projections provided. Including a disclaimer stating that the projections are speculative and subject to change helps manage investors’ expectations and mitigate the risk of reliance on potentially uncertain forecasts. This step promotes transparency and helps protect the firm from potential legal and regulatory issues related to the dissemination of forward-looking information.

Correct Answer: D) Include a disclaimer stating that the analysis is based on publicly available information.
Explanation: Before distributing the research report, Mr. Khan should ensure that it includes appropriate disclaimers to clarify that the analysis is based on publicly available information and does not contain material non-public information (MNPI). This disclaimer helps manage investors’ expectations and mitigates the risk of disseminating potentially sensitive information. By including such a disclaimer, Mr. Khan promotes transparency and helps protect the firm from potential legal and regulatory issues related to the dissemination of information about corporate actions like stock splits.

Correct Answer: C) Obtain approval from the firm’s compliance department before distributing the report.
Explanation: Before distributing the research report, Ms. Lopez should ensure that it complies with regulatory requirements and firm policies. Obtaining approval from the firm’s compliance department helps ensure that the report adheres to all relevant laws and regulations, including those regarding the disclosure of material non-public information (MNPI). This step helps maintain the integrity of the firm’s research practices and ensures compliance with securities laws and regulations. Additionally, given the sensitive nature of merger information, obtaining compliance approval is crucial to mitigate the risk of potential legal and regulatory issues.

Correct Answer:
C) Approve the research report but ensure that it is clearly labeled as not participating in the registered distribution of securities.
Explanation:
According to FINRA Rule 137, brokers or dealers who are not participating in an issuer’s registered distribution of securities may publish or distribute research reports about those securities. However, it’s essential to ensure that these reports are clearly identified as not being associated with the distribution. This is to prevent any potential conflicts of interest or misleading information. Mr. Rodriguez should approve Sarah’s research report but make sure it is labeled appropriately to indicate that XYZ Securities is not participating in the registered distribution of securities for the company being analyzed.
Regulation AC (Analyst Certification) pertains to disclosures made by analysts to ensure the integrity and objectivity of their research reports. However, it does not directly address the situation described in the question.
Rejecting the research report outright (option B) may not be necessary if it can be appropriately revised and labeled to comply with regulations.
Obtaining written consent from the issuer (option D) is not explicitly required in this scenario but may be necessary in other contexts, such as when issuing a research report on securities involved in a distribution where the firm is a participant.

Correct Answer:
B) Reject the research report, as it may be considered a violation of Rule 138.
Explanation:
FINRA Rule 138 prohibits brokers or dealers from publishing or distributing research reports about securities other than those they are distributing, unless certain conditions are met. Since the firm is currently engaged in a registered distribution of securities for one of the companies discussed in the report, it would likely be considered a violation of Rule 138. Ms. Patel should reject the research report to ensure compliance with regulatory requirements.
Regulation FD (Selective Disclosure and Insider Trading) pertains to the fair disclosure of material nonpublic information and does not directly apply to the situation described in the question.
Approving the research report with appropriate labeling (option C) may not be sufficient to address the potential violation of Rule 138.
While obtaining written consent from the issuer (option D) may be advisable in some situations, it does not address the specific regulatory concerns raised by Rule 138 in this scenario.

Correct Answer:
C) Approve the research report but ensure that it is clearly labeled as being intended for institutional investors only.
Explanation:
FINRA Rule 135a governs generic advertising in connection with proposed registered offerings and does not directly apply to the situation described in the question.
Regulation M pertains to activities by distribution participants and prohibits certain activities that could artificially manipulate the market during the distribution process. While Regulation M does not directly address the situation described in the question, Mr. Thompson should ensure that the distribution of the research report complies with Regulation M to avoid any potential market manipulation.
Approving the research report with appropriate labeling (option C) is the correct course of action. This ensures that the report is clearly designated for institutional investors only, aligning with the planned private resale of securities to institutions.
Rejecting the research report outright (option B) may not be necessary if it can be appropriately revised and labeled to comply with regulations.
While obtaining written consent from the issuer (option D) may be advisable in some situations, it does not address the specific regulatory concerns raised by the situation described in the question.

Correct Answer: b) Mr. Rodriguez must ensure that the research report complies with Rule 137 if XYZ Securities is not participating in an issuer’s registered distribution of securities.
Explanation: According to FINRA Rule 137, brokers or dealers not participating in an issuer’s registered distribution of securities must comply with certain requirements when distributing research reports. This includes disclosing any potential conflicts of interest and ensuring the research report is not misleading. Therefore, Mr. Rodriguez must ensure that the research report complies with Rule 137 to avoid any violations.

Explanation: According to FINRA rules, particularly Rule 2241 (Supervisory Analysts of Research Reports) and Rule 2242 (Debt Research Analysts and Debt Research Reports), supervisory analysts like Mr. Thompson have a duty to ensure the integrity and objectivity of research reports. In the scenario described, Mr. Thompson must be aware of potential conflicts of interest since XYZ Securities is considering underwriting the IPO of the technology company mentioned in the report. Option (b) is correct as it aligns with this requirement. Requiring the analyst to include a disclaimer about potential conflicts of interest maintains transparency and helps manage the perception of bias in the report. Options (a), (c), and (d) are incorrect as they either neglect the conflict of interest issue or compromise the objectivity of the report.
Correct Answer: b) Require the analyst to include a disclaimer stating that XYZ Securities may have a conflict of interest.

Explanation: In this situation, Ms. Garcia must adhere to FINRA regulations, specifically Rule 137 (Publications or Distributions of Research Reports by Brokers or Dealers That Are Not Participating in an Issuer’s Registered Distribution of Securities). This rule prohibits the distribution of research reports about a security that is the subject of a registered offering until after the offering is complete, unless certain conditions are met. Option (b) is the correct answer, as Ms. Garcia should refuse to provide the research report until it has been published and made available to the general public. Options (a), (c), and (d) are incorrect because they either violate FINRA rules or do not address the regulatory requirements regarding the distribution of research reports during registered offerings.
Correct Answer: b) Refuse to provide the research report until it has been published and made available to the general public.

Correct Answer: A) Mr. Smith sends an email to the client containing a link to the company’s website where the prospectus can be found.
Explanation: Rule 134 of the Securities Act of 1933 provides guidelines for communications that are not deemed a prospectus. According to this rule, providing a link to a website where the prospectus can be accessed is considered appropriate. However, directly providing the prospectus, as in option D, might be misleading as it may imply that the offering is already available for purchase. Options B and C are not compliant with Rule 134, as verbal communication or providing research reports by other brokerage firms may not meet the requirement of providing access to the prospectus.

Correct Answer: B) Ms. Rodriguez includes a disclaimer at the end of the research report stating that ABC Investment Bank may have a financial interest in the securities discussed.
Explanation: Regulation AC requires analysts to disclose any conflicts of interest or biases in their research reports. Option B aligns with this requirement by including a disclaimer about the financial interests of ABC Investment Bank. Option A violates Regulation AC by failing to disclose conflicts of interest. Option C involves a potential violation of ethical standards by offering favorable coverage in exchange for underwriting fees. Option D may raise concerns about fair dealing and equal access to research information among different types of investors.

Correct Answer: C) DEF Securities provides material nonpublic information about a client’s upcoming merger to a select group of analysts without disclosing the information to the public.
Explanation: Regulation FD prohibits selective disclosure of material nonpublic information. Option C violates Regulation FD by providing material nonpublic information to a select group of analysts without simultaneously disclosing it to the public. Options A, B, and D involve communication methods that do not constitute selective disclosure or insider trading violations under Regulation FD.

Correct Answer: a) Provide Ms. Johnson with the requested information along with a copy of the prospectus for the new issue.
Explanation: According to FINRA Rule 134, communications that are not deemed a prospectus, including those that provide factual business information, may be shared with potential investors before the prospectus is available. However, when providing such information, registered representatives must also provide the prospectus for the new issue. This ensures that investors have access to all relevant information before making an investment decision.

Correct Answer: c) Regulation AC requires LMN Securities to disclose the methodology used to develop the projections and any material assumptions or limitations.
Explanation: Regulation AC (Analyst Certification) requires broker-dealers to disclose in research reports the basis of valuation methods, including the material assumptions and limitations used in preparing any price targets or projections. This ensures that investors are provided with sufficient information to evaluate the reliability of the projections included in the report.

Correct Answer: b) The report must include a disclaimer stating that XYZ Securities is not participating in any registered distribution of securities for the company.
Explanation: According to Rule 137 of FINRA, when a broker or dealer prepares and distributes research reports about securities not involved in a registered distribution, they must include a disclaimer disclosing that the broker or dealer is not participating in any such distribution. This disclaimer ensures transparency and helps investors understand the context in which the research report is prepared and distributed.

Correct Answer: a) Ms. Taylor should ensure that the report contains a disclosure stating ABC Investments’ involvement in the distribution of the security.
Explanation: According to Rule 139 of FINRA, when a broker or dealer prepares and distributes research reports about securities they are distributing, the report must include a disclosure stating the involvement of the broker or dealer in the distribution of those securities. This disclosure is necessary to provide transparency to investors regarding any potential conflicts of interest.

Correct Answer: c) Mr. Davis should verify that the report complies with Rule 135a, which governs generic advertising of proposed registered offerings.
Explanation: Rule 135a of FINRA governs generic advertising of proposed registered offerings. When a broker or dealer prepares and distributes research reports that contain generic information about the industry in which a company operates and that company is planning a registered offering, it must comply with this rule. Mr. Davis should ensure that the report meets the requirements outlined in Rule 135a to avoid any violations and ensure compliance with regulatory standards.

Correct answer: b) Analysts must certify that their research reports accurately reflect their personal views.
Explanation: Regulation AC (Analyst Certification) requires analysts to certify that their research reports accurately reflect their personal views. This certification is aimed at ensuring transparency and integrity in the research process. Analysts must not misrepresent their opinions or allow their reports to be influenced by conflicts of interest. By certifying their reports, analysts provide investors with confidence in the objectivity and reliability of the information presented.

Correct Answer: B) Mr. Thompson must disclose his compensation arrangement with the company he is analyzing.
Explanation: Regulation AC, or Analyst Certification, requires securities analysts to disclose any material conflicts of interest and compensation arrangements related to the companies they cover in their research reports. By disclosing such information, analysts provide transparency to investors, allowing them to assess the objectivity and reliability of the research. It is essential for analysts to comply with Regulation AC to maintain integrity in their analysis and uphold investor trust in the securities market.

Correct Answer: A) Mr. Williams may selectively disclose material nonpublic information to certain clients who request it.
Explanation: Regulation FD, or Selective Disclosure and Insider Trading (Fair Disclosure), prohibits the selective disclosure of material nonpublic information to certain individuals or entities. Mr. Williams must refrain from selectively disclosing information contained in the research report to specific clients before its public release. Instead, he should ensure that all clients receive the information simultaneously upon its public dissemination to prevent unfair advantages in the market. Compliance with Regulation FD is essential for maintaining fairness and transparency in the securities market.

Correct Answer: C) Mr. Johnson must certify that he has conducted an independent review and analysis of the information presented in the report.
Explanation: Regulation AC requires securities analysts to certify that they have conducted an independent review and analysis of the information presented in their research reports. This certification helps ensure the integrity and objectivity of the analysis provided to investors. Analysts must maintain independence from the companies they cover and conduct thorough research to provide accurate and unbiased assessments. Compliance with Regulation AC is essential for promoting investor confidence in the integrity of the securities market.

Correct Answer: B) Ms. Lee must disclose any conflicts of interest related to the securities being analyzed in the reports.
Explanation: Rule 139 requires broker-dealers distributing research reports to disclose any conflicts of interest related to the securities being analyzed in the reports. This disclosure helps investors assess the objectivity and reliability of the information provided. By disclosing conflicts of interest, broker-dealers enhance transparency and promote trust in the research they distribute. Compliance with Rule 139 is crucial for maintaining integrity in the securities market.

Correct Answer: C) A communication that contains factual information about the offering, such as the size and price of the securities.
Explanation: Rule 134 specifies that certain communications are not deemed prospectuses under the Securities Act of 1933. Communications that contain factual information about the offering, such as the size and price of the securities, are exempt from being considered prospectuses. This exemption allows issuers and underwriters to provide essential information to potential investors without triggering the full prospectus requirements. It’s important for securities professionals to understand Rule 134 to ensure compliance with securities regulations when communicating information about registered offerings.