Series 28 Introducing Broker-Dealer Financial and Operations Principal Exam

Correct: Under FINRA Article IV, Section 8 of the By-Laws and Rule 3110, member firms are required to register each branch office and report other business locations. Form BR (Uniform Branch Office Registration Form) is the specific document used to coordinate registration with FINRA, the SEC, and state regulators. Even if a location is part of a networking arrangement with a financial institution like a credit union, the physical presence where securities business is conducted must be properly identified in the CRD system. Incorrect: Amending Form BD is necessary for firm-level changes but does not satisfy the requirement to register individual branch locations via Form BR. While networking agreements may allow for certain shared services, they do not exempt a broker-dealer from registering the physical space where its representatives conduct business. Registration of new locations is an ongoing requirement and cannot be deferred until the annual renewal period, as firms must generally update their registration information within 30 days of a change. Takeaway: Member firms must use Form BR to register or report every physical location where securities business is conducted, regardless of whether the location is a standalone office or part of a networking arrangement.

Correct: Under SEC Rule 168, reporting issuers are provided a safe harbor to continue releasing factual business information during the registration process. To qualify, the issuer must have previously released this type of information in the ordinary course of business, and the timing, manner, and form of the release must be consistent with the issuer’s historical practice. Since the bank has released this specific report on the 10th of every month for three years, it meets the criteria for the safe harbor and is not considered an illegal offer or ‘gun-jumping.’ Incorrect: Suspending all communication is not required because the SEC provides specific safe harbors for factual business information to ensure market transparency. Filing the report as a Free Writing Prospectus is incorrect because factual business information released under Rule 168 is explicitly excluded from the definition of a prospectus. Restricting the information to existing customers is not a requirement of Rule 168; the focus is on the consistency of the disclosure with prior ordinary course of business practices. Takeaway: Reporting issuers may continue to release factual business information during a registration period without violating gun-jumping rules if the disclosure is consistent with their established historical practices.

Correct: Under SEC Rule 17a-5(f), an independent public accountant must be registered with the Public Company Accounting Oversight Board (PCAOB) and be in good standing under the laws of their place of residence or principal office. Additionally, the broker-dealer is required to file a written notice of the designation of the accountant with the SEC’s principal office in Washington, DC, the appropriate SEC regional office, and the firm’s Designated Examining Authority (DEA). This notice must include a representation that the accountant has agreed to provide the reports required by the rule and is registered with the PCAOB. Incorrect: The approach suggesting that state-level licensure alone is sufficient fails because the SEC specifically mandates PCAOB registration for all broker-dealer audits, regardless of whether the firm is a clearing or introducing broker. The suggestion that introducing brokers are exempt from PCAOB requirements is a common misconception; while some reporting exemptions exist for non-carrying firms, the auditor qualification standards remain stringent. The claim that a notice of designation is only required when changing auditors is incorrect, as the regulation requires a valid, current notice to be on file with the regulators to ensure the audit is conducted by a qualified and recognized entity. Takeaway: Broker-dealers must ensure their independent auditor is PCAOB-registered and that a formal notice of designation is filed with both the SEC and the DEA.

Correct: Under FINRA Rule 3110, a branch office is any location where one or more associated persons of a member regularly conducts the business of effecting transactions in, or inducing or attempting to induce the purchase or sale of, any security. While there are exclusions for a primary residence (subject to specific conditions), a secondary seasonal residence or any other location used for securities business for more than 30 business days in a calendar year must be registered as a branch office via Form BR. Since the representative used the location for 45 business days, it no longer qualifies for the exclusion. Incorrect: Maintaining the location as a non-branch is incorrect because the 30-day usage limit for a secondary residence was exceeded, regardless of whether the representative holds themselves out to the public. Updating only the Form U4 is insufficient as the location itself meets the definition of a branch office once the time threshold is crossed; furthermore, the 25-transaction limit is a condition for the primary residence exclusion, not a general rule for all residential locations. Amending Form BD is the incorrect procedure for registering individual branch locations; Form BR is the specific form used for this purpose in the CRD system. Takeaway: A secondary residence used for securities business for more than 30 business days in a calendar year must be registered as a branch office using Form BR.

Correct: FINRA Rule 2040(d) explicitly prohibits any member from paying compensation to a person who is subject to a statutory disqualification. This rule is absolute and overrides the general allowance for paying retired representatives for their previous book of business under Rule 2040(b).

Correct: The best option distinguishes itself by recognizing that OFAC compliance is not a ‘one-size-fits-all’ or purely automated task. A risk-based approach is essential; while automated tools are necessary for efficiency, they are not infallible. Firms must exercise due diligence, especially in high-risk scenarios, to ensure that potential matches are properly investigated. This includes manual intervention to resolve ‘near-misses’ that automated systems might overlook, ensuring the firm meets its regulatory obligation to not deal with sanctioned parties. Incorrect: Relying solely on a clearing firm is incorrect because the introducing broker-dealer maintains its own independent regulatory responsibility for OFAC compliance. Setting a tool to 100% exact-match is dangerous because it fails to account for common misspellings, aliases, or transliteration differences used by sanctioned individuals to evade detection. Automatically rejecting all foreign transactions is an inappropriate strategy as it may lead to ‘de-risking’ that is not required by law and fails to follow specific OFAC requirements regarding the ‘blocking’ of assets, which requires holding funds in an interest-bearing account rather than simply rejecting the transfer. Takeaway: Effective OFAC compliance requires a risk-based combination of automated screening and manual due diligence to accurately identify and handle sanctioned parties and their assets.

Correct: Under FINRA Rule 3110(e), a location is generally defined as a branch office if it is used for the business of effecting transactions in or inducing the purchase or sale of any security. While certain exemptions exist for primary residences and non-branch locations, using a location for more than 30 business days in a calendar year for securities activities typically triggers the requirement to register it as a branch office. Furthermore, Section 3(a)(5) of the Securities Exchange Act of 1934 defines a dealer as any person engaged in the business of buying and selling securities for their own account, through a broker or otherwise, as part of a regular business. Incorrect: The other options are incorrect because they misapply the thresholds and definitions. One option incorrectly suggests that public advertisement is the only factor for branch registration, ignoring the 30-day rule. Another option confuses the definition of a broker (who acts for others) with a dealer (who acts for their own account). Other options incorrectly state that handling funds or the number of employees are the primary triggers for these specific registration classifications under the Exchange Act and FINRA rules. Takeaway: Branch office registration is triggered when securities activities at a location exceed 30 business days annually, and a dealer is defined by the practice of trading for its own account as a regular business.

Correct: Rule 17a-4(l) of the Securities Exchange Act of 1934 requires every member, broker, or dealer to furnish promptly to a representative of the Commission (SEC) legible, true, complete, and current copies of those records that are required to be preserved under the rule. This production must occur at the office where the records are requested or at another location designated by the Commission, regardless of where the data is physically stored. Incorrect: The suggestion of a 48-hour grace period is incorrect because the regulatory standard is ‘promptly,’ which often implies immediate or near-immediate availability for records required to be kept in an easily accessible place. Requiring the SEC to travel to a third-party data center is incorrect as the burden of furnishing the records lies with the broker-dealer at the requested location. Providing direct administrative login credentials is not a requirement of the rule and would likely violate other security and privacy protocols; the firm’s duty is to furnish the copies of the records themselves. Takeaway: Under Rule 17a-4(l), broker-dealers are strictly required to promptly furnish accurate and complete copies of required records to SEC representatives at the location where the request is initiated.

Correct: Section 37 of the Investment Company Act of 1940 specifically addresses larceny and embezzlement, stating that whoever steals, unlawfully abstracts, or willfully converts to his own use or to the use of another any moneys, funds, securities, or assets of any registered investment company shall be deemed guilty of a crime. Because this is a federal offense, the principal must ensure the activity is reported to the appropriate authorities and the fund’s board to fulfill fiduciary and regulatory duties. Incorrect: Attempting to recoup funds through private arbitration before disclosure fails to address the criminal nature of the violation and the mandatory reporting requirements. Classifying the event as a simple books and records violation minimizes the severity of a federal crime under the 1940 Act. Delaying notification until an annual audit is completed is inappropriate, as suspected criminal activity involving fund assets requires immediate escalation and reporting to protect shareholders. Takeaway: Under Section 37 of the Investment Company Act of 1940, the embezzlement or willful conversion of a registered investment company’s assets is a federal crime requiring immediate regulatory and board-level reporting.

Correct: Under the Securities Exchange Act of 1934, specifically Rule 15c3-1 (the Net Capital Rule), assets must be readily convertible into cash to be considered allowable. Clearing deposits held at a clearing broker-dealer are considered allowable assets because they are essential to the firm’s operations and are generally liquid. Commissions receivable from a clearing organization that are less than 30 days old are also treated as allowable. However, unsecured receivables, such as loans to affiliates or Material Associated Persons (MAPs), and prepaid expenses (like regulatory fees or insurance) are considered non-allowable because they cannot be immediately liquidated to pay customer claims or firm obligations. Incorrect: Treating an unsecured loan to a Material Associated Person as allowable is incorrect because Rule 15c3-1 requires the deduction of all unsecured receivables from net worth, regardless of the entity’s regulatory status under risk assessment rules. Classifying prepaid regulatory fees as allowable is incorrect as they represent a deferred expense rather than a liquid asset. Suggesting that clearing deposits are non-allowable based on the affiliation of the clearing member is a misunderstanding of standard industry practice where such deposits are recognized as allowable. Finally, claiming that commissions must be collected in cash to be allowable ignores the regulatory provision that permits receivables from clearing firms to be allowable for up to 30 days. Takeaway: In a trial balance review, liquid assets like clearing deposits and recent clearing receivables are allowable, while illiquid items like unsecured loans and prepaid expenses must be treated as non-allowable for net capital purposes.

Correct: Under FASB ASC 606 (Revenue from Contracts with Customers), revenue must be recognized when or as the entity satisfies a performance obligation. In this scenario, the marketing support payments are tied to a service agreement that includes ongoing performance obligations over a 24-month period. Therefore, the revenue cannot be recognized immediately upon receipt; it must be deferred and recognized systematically over the life of the contract as the services are rendered. This approach ensures that the financial statements accurately reflect the firm’s economic reality and prevents the overstatement of revenue and net capital in the current period. Incorrect: Recognizing the full amount upon receipt fails to account for the ongoing performance obligations required by the contract, leading to an overstatement of current earnings and a violation of the matching principle under GAAP. Offsetting the payments against direct costs (netting) is generally inappropriate under ASC 606, as revenue and expenses should be reported gross to provide transparency into the firm’s operations. Recording the entire amount as a liability until the end of the 24-month term and then recognizing it as a gain is also incorrect, as it ignores the periodic satisfaction of obligations and results in understated revenue during the actual service periods. Takeaway: Revenue recognition under ASC 606 requires that payments for multi-period services be deferred and recognized as the specific performance obligations are satisfied over time.

Correct: Under FINRA Rule 3110 and Article IV of the FINRA By-Laws, broker-dealers are required to keep their registration information current and accurate. Form BR is specifically used to register and update branch office information. When a branch office changes its name or uses a DBA, an amendment must be filed via the CRD system. Furthermore, Rule 3110 requires firms to establish and maintain Written Supervisory Procedures (WSPs) that are reasonably designed to achieve compliance with applicable securities laws and regulations, which includes ensuring that regulatory filings are accurate and timely. Incorrect: Submitting a new Form BD is an incorrect procedure because Form BD is for the firm’s overall registration, whereas branch-specific details are handled via Form BR. Waiting for an annual renewal is insufficient as amendments are generally required within 30 days of the change. Notifying the SEC by letter is not the prescribed method for updating branch information, which must be done through the CRD. Terminating registration via Form BDW and attempting to re-register as an RIA is an inappropriate regulatory maneuver that does not address the underlying compliance failure of the broker-dealer. Takeaway: Broker-dealers must use Form BR to promptly update branch office details in the CRD and maintain WSPs that ensure the ongoing accuracy of these regulatory filings.

Correct: FINRA Rule 2263 requires that whenever an associated person is asked to sign or acknowledge a new or amended Form U4, the member firm must provide them with a specific written disclosure statement regarding the nature of the predispute arbitration clause. This disclosure must be provided separately from the Form U4 itself. If a firm identifies that this disclosure was missed during a filing or amendment process, the immediate corrective action is to provide the disclosure and obtain a record of acknowledgment to satisfy the rule’s requirements. Incorrect: Waiting until the next annual compliance cycle is incorrect because Rule 2263 requires the disclosure to be provided at the time of the Form U4 signing or acknowledgment. Relying on a general employee handbook is insufficient because the rule specifies a particular set of disclosures that must be provided whenever a Form U4 is signed or acknowledged. While Rule 4530 deals with reporting certain events, it does not absolve the firm of its immediate obligation to provide the required disclosures to its associated persons under Rule 2263. Takeaway: Member firms must provide a specific written disclosure regarding the predispute arbitration clause every time an associated person signs or acknowledges an initial or amended Form U4.

Correct: According to FINRA Rule 11361, the standard unit of delivery for stock is 100 shares. For a delivery to be considered ‘good,’ certificates must be in 100-share units, multiples of 100, or in denominations that can be aggregated to form 100-share units. In the scenario provided, the 350-share and 150-share certificates can be combined to make 500 shares (five 100-share units), and the 100-share certificate is already a standard unit, making the total delivery acceptable. Incorrect: Option b is incorrect because certificates in multiples of 100 (such as a 500-share certificate) are standard and do not require restrictive legends. Option c is incorrect because the Uniform Practice Code provides a standardized requirement for all member firms that does not depend on individual firm instructions in a buy-in notice. Option d is incorrect because the rule explicitly allows for multiple certificates as long as they meet the unit of delivery requirements (100-share lots). Takeaway: FINRA Rule 11361 defines the unit of delivery for stocks as 100 shares, allowing for certificates that are multiples of 100 or that can be combined into 100-share lots.

Correct: Under FINRA Rule 3220, no member or person associated with a member shall give anything of value in excess of $100 per individual per year to any person where such payment is in relation to the business of the employer of the recipient. From an operations and supervisory standpoint, the firm must maintain a separate record of all such gifts and gratuities. A centralized system is necessary to aggregate gifts given by different departments or individuals within the firm to the same recipient to ensure the $100 annual limit is not breached. This falls under the general operations function of maintaining accurate books and records as required by FINRA Rule 4511 and ensuring that supervisory procedures are sufficient to detect and prevent violations of conduct rules. Incorrect: The approach of classifying door prizes as marketing expenses to bypass the gift limit is incorrect because the regulatory focus is on the value received by the individual, not the internal accounting classification used by the firm. Relying on decentralized spreadsheets maintained by individual department heads is an operational weakness that fails to provide the necessary aggregation to monitor the annual limit effectively across the entire organization. Suggesting that the limit only applies to single transactions over $100 ignores the cumulative nature of the rule, which tracks the total value given to an individual throughout a calendar year. Takeaway: Operational compliance with gift and gratuity rules requires a centralized recordkeeping system capable of aggregating all business-related gifts to an individual to ensure the $100 annual limit is not exceeded.

Correct: Under FINRA Rule 6830 (the CAT reporting rule), Industry Members are required to record and report the details for each Reportable Event to the Central Repository by 8:00 a.m. Eastern Time on the Trading Day following the day the Industry Member records such information (T+1). This includes both the order event data and the associated Customer Identifying Information (CII) required to link the order to a specific customer. Incorrect: The reporting requirements for CAT do not allow for a rolling 24-hour window or a T+2/T+3 delay for Customer Identifying Information. The 8:00 a.m. ET deadline on T+1 is a strict regulatory requirement designed to provide regulators with timely access to audit trail data. Deferring CII until the end of the calendar week or using a settlement-cycle-based timeline (T+2) would be a violation of the reporting timelines established in the CAT NMS Plan and FINRA Rule 6830. Takeaway: All CAT reportable events and customer identifying information must be submitted to the Central Repository by 8:00 a.m. ET on the next trading day (T+1).

Correct: According to the SEC’s 2003 Letter regarding Expense Sharing Agreements (ESA) and FINRA’s interpretation of Rule 17a-3, a broker-dealer is required to record all expenses related to its business on its own books and records, regardless of whether a third party (such as a parent company) is paying those expenses. If the broker-dealer is not expected to repay the parent, the payment is recognized as an expense with a corresponding credit to additional paid-in capital. If the broker-dealer is expected to repay, it must recognize a liability. This ensures that the FOCUS report and the firm’s net capital computation reflect the true economic costs of the broker-dealer’s operations, preventing the firm from appearing more well-capitalized than it actually is by shifting operational burdens to an affiliate. Incorrect: Excluding expenses because the parent company is the primary obligor to the vendor is a common misconception; regulatory standards require the broker-dealer to reflect the costs of its own business activities to prevent ‘window dressing’ of the financial statements. Recording expenses only as a year-end adjustment fails to meet the requirement for accurate monthly FOCUS filings and daily net capital compliance. Classifying a parent’s payment of expenses as an allowable asset is incorrect because the payment of an expense does not create a liquid asset that can be converted to cash for the protection of customers or creditors; rather, it is a reduction of the firm’s equity or an increase in its liabilities. Takeaway: Broker-dealers must recognize all expenses related to their business operations on the FOCUS report, even if paid by an affiliate, to ensure financial statements accurately reflect the firm’s true operational costs and net capital position.

Correct: Rule 22c-1 of the Investment Company Act of 1940, often referred to as the ‘forward pricing rule,’ requires that any order for the purchase or redemption of a mutual fund share be executed at the Net Asset Value (NAV) next computed after receipt of the order. Since the orders were not received and recorded until 4:05 PM ET, they missed the Friday 4:00 PM ET cutoff. Therefore, the next computed NAV would be the one calculated on the next business day, which is Monday. Incorrect: Using the Friday NAV based on the time the customer attempted to call (backward pricing) is a violation of Rule 22c-1, as it allows for potential arbitrage and dilutes the fund for other shareholders. Averaging NAVs or applying the Friday NAV with commission forfeitures are not permitted under the rule, which strictly mandates the use of the ‘next computed’ price without exception for firm-side delays or technical issues. Takeaway: Rule 22c-1 mandates forward pricing, requiring all redeemable security transactions to be processed at the NAV next calculated after the order is officially received.

Correct: Under FINRA Rule 3130, the Chief Executive Officer (CEO) must certify annually that the firm has in place processes to establish, maintain, review, test, and modify written compliance policies and written supervisory procedures. A mandatory requirement for this certification is that the CEO must have one or more meetings with the Chief Compliance Officer (CCO) in the 12 months preceding the certification to discuss these processes. Furthermore, the report evidencing the processes must be submitted to the firm’s Board of Directors and Audit Committee. Incorrect: The CEO is not required to personally conduct the testing of controls; rather, they certify that the firm has processes in place for such testing. The certification is about the adequacy of the compliance processes, not a guarantee of absolute compliance with every rule, and it is the CEO, not the CCO, who must sign the certification. While firms may choose to use third-party auditors, FINRA Rule 3130 does not mandate an independent audit as a prerequisite for the CEO’s certification. Takeaway: FINRA Rule 3130 requires an annual CEO certification of compliance processes, supported by mandatory CEO-CCO meetings and reporting to the Board of Directors.

Correct: Rule 482, often referred to as the ‘omitting prospectus’ rule, allows investment companies to advertise performance data provided they follow strict disclosure requirements. These include providing standardized average annual total returns for 1, 5, and 10-year periods (or since inception if the fund is newer). Additionally, the rule mandates a legend that informs investors where they can obtain a prospectus and urges them to read it carefully to consider the fund’s risks, charges, and expenses. Incorrect: Option B is incorrect because Rule 135a applies to generic advertising that does not name a specific fund, whereas Rule 482 is specifically designed for advertisements that do name a fund. Option C is incorrect because while Rule 482 advertisements must be filed with FINRA (usually within 10 days of first use), they do not require a 10-day pre-approval from the SEC. Option D is incorrect because Rule 482 is intended to allow advertisements to exist without the simultaneous delivery of a statutory prospectus, provided the ad itself meets the disclosure and legend requirements. Takeaway: Under Rule 482, any investment company advertisement featuring performance data must include standardized returns for specific timeframes and a mandatory legend regarding the prospectus.

Correct: Rule 10b-17 of the Securities Exchange Act of 1934 requires issuers of publicly traded securities to provide notice to FINRA (or the appropriate exchange) at least 10 days prior to the record date for dividends, stock splits, or rights offerings. From a supervisory perspective under FINRA Rule 3110, a broker-dealer cannot outsource its ultimate regulatory responsibility. The firm must have adequate systems and oversight to ensure these announcements are timely, as failure to provide notice is considered a manipulative or deceptive device. Incorrect: Option B is incorrect because regulatory responsibilities and the duty to supervise cannot be delegated or contracted away to a third party. Option C is incorrect because Rule 10b-17 does not provide for an automatic extension of the 10-day window due to vendor technical issues. Option D is incorrect because a public press release does not satisfy the specific regulatory filing requirement to the SRO, and notification on the record date itself is considered untimely and a violation of the rule. Takeaway: Broker-dealers retain full regulatory responsibility for Rule 10b-17 compliance and must ensure that 10-day advance notice of record dates is provided, regardless of any outsourcing arrangements.

Correct: Under SEC Rule 17h-1T and 17h-2T, a broker-dealer is required to maintain records and file reports regarding Material Associated Persons (MAPs). A MAP is defined as an associated person whose business activities are reasonably likely to have a material impact on the financial or operational condition of the broker-dealer, including its net capital, liquidity, or ability to conduct business. When a parent organization acquires a new entity, especially one with a high-risk profile such as a leveraged trading unit, the Financial and Operations Principal (FINOP) must perform a qualitative and quantitative assessment to determine if that entity meets the MAP criteria. If deemed material, the firm must update its risk assessment records and include the entity in its quarterly and annual Form 17-H filings. Incorrect: Automatically designating every affiliate as a MAP without an individual assessment is an inefficient application of the rule and does not satisfy the requirement for a reasoned materiality determination. While certain affiliates regulated by banking authorities may have streamlined reporting, the broker-dealer is not exempt from the fundamental obligation to identify and document its MAPs. Deferring the update until the annual audit is a regulatory failure, as Form 17-H is a quarterly filing requirement and risk assessment records must be maintained on a current basis to reflect material changes in the organization’s risk profile. Takeaway: The identification of a Material Associated Person (MAP) requires a proactive assessment of an affiliate’s potential impact on the broker-dealer’s financial stability, triggering specific recordkeeping and Form 17-H reporting obligations.

Correct: Under FINRA Rule 3110, a firm’s supervisory system must be reasonably designed to achieve compliance with securities laws and firm policies. When a violation of Written Supervisory Procedures (WSPs) regarding product-specific training is identified, the firm must immediately stop the non-compliant activity to prevent further risk. Furthermore, because the representatives sold products they were not fully trained on, the firm must perform a retrospective suitability review to ensure that the recommendations made to clients were appropriate and aligned with their investment profiles. Incorrect: Amending Form U4 is premature as internal policy breaches do not always necessitate a regulatory filing unless they meet specific disciplinary thresholds. Allowing representatives to continue selling while they catch up on training is a failure of supervision and exposes the firm to significant suitability risk. While Rule 4530 requires reporting of certain events, the immediate priority is to remediate the risk and assess the impact on clients; reporting should occur after the firm has gathered sufficient facts to determine if the threshold for reporting has been met. Takeaway: Firms must ensure associated persons are specifically trained on the products they sell, and any identified training gaps require an immediate halt to sales and a retrospective suitability review.

Correct: According to FINRA Rule 9311(a), any party to a disciplinary proceeding may file a written notice of appeal with the National Adjudicatory Council (NAC) within 25 days after service of a decision issued by a Hearing Officer or Hearing Panel. Filing this notice is a critical procedural step that generally stays the effectiveness of the sanctions imposed by the initial decision, allowing the firm to maintain its current status while the NAC reviews the case.

Correct: Under Rule 134 of the Securities Act of 1933, certain communications (tombstone ads) are excluded from the definition of a prospectus if they contain only limited, factual information about the offering. Including subjective or forward-looking information, such as a CEO’s growth projections, exceeds the ‘safe harbor’ provisions. This would cause the advertisement to be considered a prospectus that does not meet statutory requirements, resulting in a violation of Section 5 (gun-jumping). Mitigation requires strictly adhering to the permitted categories of information and including the required legend regarding the availability of a full prospectus. Incorrect: Including financial summaries or risk factors would also likely exceed the factual limitations of Rule 134 and create a non-conforming prospectus. Filing with FINRA is a procedural requirement for certain retail communications but does not address the underlying legal definition of a prospectus under the 1933 Act. While quiet periods are relevant during an IPO, the specific issue here is the content of the public notice and its status as a prospectus, not the involvement of research analysts. Takeaway: To maintain the exclusion from the definition of a prospectus, public notices must be strictly limited to factual offering details and avoid promotional or forward-looking statements.

Correct: FINRA Rule 2010 is a broad, ethical ‘catch-all’ rule that requires members to observe high standards of commercial honor and just and equitable principles of trade. It does not require a violation of a specific underlying rule, nor does it require proof of client harm or loss. Circumventing firm protocols, such as signature verification, undermines the integrity of the industry and the firm’s supervisory system, thus failing the standard of commercial honor. Incorrect: Option B is incorrect because verbal consent does not override the requirement to follow established firm protocols and maintain high ethical standards. Option C is incorrect because Rule 2010 applies to all aspects of a member’s business conduct, including internal operations and adherence to firm policies. Option D is incorrect because conduct does not need to be ‘dishonest’ in a criminal sense to violate Rule 2010; the intentional bypass of internal controls is sufficient to constitute a failure to observe high standards of commercial honor. Takeaway: FINRA Rule 2010 serves as a broad ethical mandate that applies to all business conduct, meaning that behavior lacking integrity can be a violation even if no other specific rule is broken.

Correct: Under OFAC regulations, if a potential match to the SDN list is identified, the firm must not engage in any transactions or dealings with the party until the match is cleared. If the match is confirmed, the firm must block the assets and report the hit to OFAC within 10 business days. Allowing a trade to proceed before clearing the match would constitute a violation of federal law, as SDNs are subject to a total asset freeze. Incorrect: Allowing the account to open or trades to execute while only restricting outgoing funds is insufficient because any ‘dealing’ in the property of a sanctioned individual is prohibited. Filing a SAR is a separate requirement under the Bank Secrecy Act and does not satisfy the immediate blocking requirements of OFAC. While the SSI list has narrower restrictions than the SDN list, a potential match to an SDN requires a full stop and verification before any business can be conducted, regardless of the client’s urgency. Takeaway: Firms must ensure that no transactions occur and assets are blocked immediately upon identifying a confirmed SDN match, regardless of commercial deadlines or client pressure.

Correct: Under FINRA Rule 6240 and Regulation NMS Rule 610(d), market participants are prohibited from displaying quotations that lock or cross any protected quotation in an NMS stock. The most effective and compliant way to display a quote that would otherwise lock the market is to use Intermarket Sweep Orders (ISOs). By sending ISOs to execute against the full displayed size of all protected quotations at that price level, the member firm clears the existing liquidity, ensuring that their new quote no longer locks the market when it is displayed. Incorrect: Relying on a flickering quote exception is only valid if the quote was actually flickering and the firm did not intend to lock the market; it is not a proactive strategy for updating quotes. Delaying the display for one second does not guarantee the lock will be avoided and does not meet the regulatory requirement to avoid displaying a locking quote. Converting a quote to dark liquidity avoids the display requirement but does not address the firm’s objective of updating its public quote to attract sellers, and the rule specifically governs the display of quotations. Takeaway: To display a quote that would lock or cross the market, a firm must clear all protected quotations at that price level using Intermarket Sweep Orders (ISOs).