Series 31 Futures Managed Funds Exam

Correct: FINRA Rule 2020 prohibits any member from effecting transactions or inducing the purchase or sale of securities through manipulative, deceptive, or fraudulent means. In this scenario, publishing a report based on unverified, non-public information that contradicts internal data to support an investment banking deal constitutes a deceptive device. The immediate priority must be to halt the communication to prevent market manipulation and ensure that any published research has a reasonable basis and is not misleading to investors. Incorrect: Updating prospectus disclosures while allowing a misleading report to proceed fails to address the fraudulent nature of the research communication itself. Adding generic disclaimers does not cure the lack of a reasonable basis for the projections or the deceptive intent. Removing specific figures while maintaining an unjustified recommendation still results in a report that is unfair, unbalanced, and potentially manipulative under Rule 2020. Takeaway: Rule 2020 mandates that firms must proactively prevent the dissemination of any research or communication that serves as a manipulative or deceptive tool to influence investor behavior or security prices.

Correct: Under FINRA Rule 2241, a research report that includes a price target must have a reasonable basis. The rule specifically requires the report to disclose the valuation methods used to determine the price target (such as discounted cash flow or price-to-earnings multiples) and to provide a clear explanation of the individual risks that could impede the achievement of that target. Incorrect: Option B is incorrect because disclaimers do not absolve a firm of the requirement to have a reasonable basis and provide risk disclosures. Option C is incorrect because there is no regulatory requirement for a price target to align with competitors’ consensus; the basis must be independent and reasonable. Option D is incorrect because analysts are permitted to use projections and assumptions (like pending legislation) as long as they are disclosed and have a reasonable basis, rather than being forced to remove them entirely. Takeaway: Supervisory Analysts must ensure that every price target is supported by a disclosed valuation methodology and a balanced discussion of the specific risks that could prevent the target from being met.

Correct: Under FINRA Rule 1210.02, member firms are allowed to register or maintain the registration of any associated person in a permissive capacity, even if the person is not performing a function that requires registration. This includes individuals working in technology, legal, or compliance roles. These permissively registered individuals are considered ‘registered persons’ and are subject to all FINRA rules, including continuing education and supervision requirements. Incorrect: The claim that registration is prohibited based on a 50% time threshold is incorrect as Rule 1210 focuses on the nature of the function rather than a time-based percentage. Technology officers are not automatically exempt if their functions evolve to require registration, and NDAs do not substitute for regulatory registration requirements. Permissive registration is not limited to those with prior registrations; it is available to any associated person of the firm regardless of their previous registration history. Takeaway: Rule 1210 allows firms to permissively register associated persons in any category to ensure they remain subject to regulatory standards and supervision, even if their current roles do not mandate registration.

Correct: FINRA Rule 2010 is a broad ethical mandate requiring members to observe high standards of commercial honor and just and equitable principles of trade. In the context of research, this necessitates absolute independence from investment banking influence. When a Supervisory Analyst identifies a potential breach of this independence—such as a rating change following pressure from the banking side—the only appropriate action is to escalate the matter to Compliance or Legal. This ensures that the firm’s gatekeeping functions can investigate the conflict and prevent a violation of the principles of fair dealing and commercial honor. Incorrect: Requesting a supplemental memo is insufficient because it does not address the underlying ethical concern of improper influence and may simply result in a ‘manufactured’ justification. Requiring investment banking to pay for a third-party valuation creates further conflicts of interest and does not resolve the breach of Rule 2010. Using a generic disclosure is inadequate because disclosures cannot be used to ‘cure’ or permit actual unethical conduct or the lack of a reasonable basis in research reports. Takeaway: Rule 2010 acts as a foundational ethical standard that requires the immediate escalation of any activity that threatens the independence and integrity of professional conduct.

Correct: Under the Jumpstart Our Business Startups (JOBS) Act, the quiet periods for research reports and public appearances by research analysts are eliminated for Emerging Growth Companies (EGCs). Specifically, the 10-day post-IPO and 3-day post-secondary quiet periods do not apply to members participating in the offering of an EGC, allowing for immediate publication after the pricing of the transaction. Incorrect: Enforcing a 10-day quiet period is incorrect because it fails to account for the specific regulatory relief provided by the JOBS Act for EGCs. Limiting the report to factual updates is a misunderstanding of the exemption, which allows for full research coverage including recommendations. The 25-day prospectus delivery period is a separate requirement under the Securities Act of 1933 and does not override the research-specific exemptions for EGCs. Takeaway: The JOBS Act exempts research reports on Emerging Growth Companies from the standard post-offering quiet periods typically required for managers and co-managers.

Correct: Under FINRA Rule 2241, research reports must be fair and balanced and are strictly prohibited from containing exaggerated or promissory language. Claiming a product is “guaranteed” to prevent regulatory penalties is a promissory statement that cannot be substantiated, as no tool can offer an absolute guarantee against regulatory actions. Such language is misleading to investors and fails the requirement for a balanced presentation of risks and benefits. Incorrect: Projecting future earnings based on historical data is a standard analytical practice, provided the basis is reasonable and the report distinguishes between fact and projection. Having a “Buy” rating that differs from market sentiment is a matter of analyst opinion and is permitted if it has a reasonable basis and proper disclosures. Listing analyst credentials is not a specific requirement for the content of the report under the rules governing fair and balanced communications. Takeaway: Research reports must avoid absolute claims or guarantees of performance to remain fair, balanced, and compliant with FINRA standards regarding promissory language.

Correct: Under FINRA Rule 2241, during a public appearance, a research analyst must disclose if the member firm or its affiliates received compensation from the subject company for investment banking services in the prior 12 months. Furthermore, firms are required to maintain records of these appearances, including the date, venue, and the specific disclosures made, for a period of three years to demonstrate compliance with conflict-of-interest regulations. Incorrect: The requirement to disclose financial interests does not have a $50,000 de minimis threshold; any financial interest of the analyst or household members must be disclosed regardless of value. Filing transcripts with FINRA is a requirement for certain types of retail communications but is not the primary disclosure obligation for an analyst’s live public appearance. Providing a full research report to a producer does not satisfy the analyst’s obligation to make verbal or written disclosures directly to the audience during the appearance. Takeaway: Research analysts must disclose specific conflicts of interest, such as investment banking compensation received by the firm within the last 12 months, during public appearances and ensure the firm maintains appropriate records of the event.

Correct: Under FINRA Rule 2241, research reports must have a reasonable basis for any recommendation or price target. This requires the analyst to disclose the valuation methods used (such as discounted cash flow or price-to-earnings multiples) and to provide a balanced presentation by including a discussion of the risks that may impede the achievement of the price target. Incorrect: Standardized disclaimers do not satisfy the requirement for a specific discussion of risks related to the security. Involving investment banking in the review or alignment of price targets is a violation of the rules requiring the independence of research from investment banking influences. While historical performance disclosures are required in certain contexts, they do not fulfill the specific requirement to provide a reasonable basis and risk discussion for a current price target. Takeaway: Research reports must justify price targets through disclosed valuation methodologies and provide a balanced view by detailing specific risks that could hinder the security’s performance.

Correct: Under FINRA Rule 2241, a firm must ensure that research reports are distributed in a manner that is fair and not discriminatory. Selective dissemination, which involves providing research to a subset of clients before others, is generally prohibited. The firm must have systems in place to ensure that all clients entitled to receive the report have access to it at substantially the same time to prevent any unfair trading advantage. Incorrect: Updating disclosures does not mitigate the underlying regulatory violation of selective dissemination. Non-disclosure agreements are irrelevant to the requirement for simultaneous distribution to all eligible clients. Tiered access based on commission levels or client status is a direct violation of the principle of fair and equitable dissemination of research information. Takeaway: Firms must maintain systems that ensure research reports are disseminated simultaneously to all eligible clients to prevent selective disclosure and unfair trading advantages.

Correct: Under FINRA Rule 2241, a research report must disclose if the firm is a market maker in the subject security, if the firm received compensation for investment banking services from the subject company within the previous 12 months, and if the research analyst (or a member of the analyst’s household) has a financial interest in the company. Additionally, firms must provide a distribution of their research ratings (Buy, Hold, Sell) updated as of the end of the most recent calendar quarter. Incorrect: The disclosure of financial interests by an analyst or household member is required even if the shares are in a managed account, as long as there is a beneficial interest. The look-back period for investment banking compensation is 12 months, not 24 months. While price charts are required for companies that have been covered for at least a year, naming individual investment banking staff members is not a required disclosure under Rule 2241, and claiming that policies ‘prevent’ all conflicts can be seen as misleading or promissory. Takeaway: Regulatory compliance for research reports requires specific, transparent disclosures regarding firm-level conflicts like market making and investment banking fees, as well as analyst-level financial interests.

Correct: Under FINRA and NYSE rules, research reports must be approved by a Supervisory Analyst (Series 16) or a Research Principal who has met the specific qualification requirements to supervise research. A General Securities Principal (Series 24) who has not passed the Series 16 exam does not have the regulatory authority to approve research reports, regardless of their market experience or the existence of a business continuity event. The integrity of the research review process requires a qualified individual to ensure compliance with disclosure and content standards. Incorrect: The other options are incorrect because they suggest that licensing requirements can be bypassed or substituted. Coordinating with legal (option b) or using a product specialist (option c) does not satisfy the specific licensing mandate for a Supervisory Analyst. While certain communications are exempt from the definition of a research report (option d), if a document is categorized as a research report, it must be approved by an appropriately qualified principal regardless of whether it contains a price target, and a Series 24 alone is not sufficient for this task. Takeaway: Regulatory standards strictly require that research reports be approved by a qualified Supervisory Analyst (Series 16), and this requirement is not waived during business continuity disruptions.

Correct: Under FINRA Rule 2241 and NYSE standards, research reports must be fair, balanced, and provide a reasonable basis for any recommendations. They must strictly distinguish between factual information and rumors or opinions. Furthermore, the use of promissory or exaggerated language, such as stating a price will undoubtedly double or calling a metric a guaranteed signal, is strictly prohibited as it is misleading and lacks balance. Incorrect: Adding a general disclosure does not mitigate the use of prohibited promissory language or the failure to distinguish rumor from fact. Verifying sources internally does not satisfy the requirement to present information transparently to the reader as a rumor. Simply softening the language to highly probable still fails to address the underlying issue of using unverified rumors as a basis for specific, promissory price targets. Takeaway: Supervisory Analysts must ensure research reports avoid promissory or exaggerated language and clearly differentiate between substantiated facts and speculative rumors.

Correct: Under FINRA Rule 2241 and the JOBS Act, firms must manage conflicts of interest and adhere to specific quiet periods following an IPO or secondary offering. For a manager or co-manager in a secondary offering, a quiet period typically applies (subject to exceptions for Emerging Growth Companies). The Supervisory Analyst is responsible for coordinating with the legal or compliance department to ensure that research is not published during a restricted window and that all required disclosures regarding the firm’s investment banking relationship with the issuer are clearly stated in the report. Incorrect: Providing a certification of independence does not waive the regulatory requirement to observe a quiet period. Delaying a report until the end of a fiscal quarter is an arbitrary timeframe that does not specifically address the regulatory windows defined by FINRA and the SEC. Redacting a price target or recommendation does not automatically exempt a document from being classified as a research report if it still contains an analysis of a security and provides information reasonably sufficient upon which to base an investment decision. Takeaway: Supervisory Analysts must strictly enforce quiet periods and ensure comprehensive disclosure of investment banking relationships to maintain the integrity of research and comply with FINRA Rule 2241.

Correct: Under FINRA Rule 2241 and general dissemination standards, member firms are required to distribute research reports to their clients at substantially the same time. Providing preferential access to institutional clients over retail clients, even for reasons like liquidity preparation, violates the principle of fair and equitable treatment of all clients entitled to receive the research. Incorrect: Trading blackouts do not remedy the violation of simultaneous dissemination requirements. Delaying release for verification is a separate compliance issue and does not justify tiered distribution. Disclosures about earlier dissemination do not waive the requirement to provide the report to all entitled clients at substantially the same time. Takeaway: Firms must distribute research reports to all entitled clients at substantially the same time to ensure fair access and prevent preferential treatment.

Correct: Under FINRA Rule 1240, any registered person who fails to complete the Regulatory Element within the prescribed timeframes will be designated as ‘CE Inactive’ by FINRA. While in this status, the individual is prohibited from performing any duties that require registration and cannot receive compensation for such activities. This includes authoring or approving research reports and making public appearances in a professional capacity. Incorrect: There is no 30-day grace period for continuing registered activities once the deadline has passed; the inactive status is immediate. Supervision by a Supervisory Analyst does not mitigate the prohibition on performing registered functions while CE Inactive. The rule applies to all registered functions, not just client-facing or public roles. While a firm may choose to terminate an employee for compliance failures, Rule 1240 itself mandates the ‘CE Inactive’ status rather than immediate mandatory termination or a 90-day waiting period for re-registration. Takeaway: Failure to satisfy the Regulatory Element of Continuing Education results in an immediate ‘CE Inactive’ status, which legally bars the individual from performing any registered duties or being compensated for them.

Correct: Under SEC Rule 17a-4 and FINRA Rule 2241, broker-dealers are required to maintain records that demonstrate compliance with the rules governing research analysts. This includes records of personal trading, pre-clearance requests, and duplicate statements from external accounts. These records must generally be preserved for a period of not less than three years, the first two years in an easily accessible place. Incorrect: Relying solely on a third party is insufficient as the employing firm has an independent regulatory obligation to maintain its own supervisory records. Limiting records to blackout periods is incorrect because all covered trading activity must be documented to prove ongoing compliance. The retention period for these specific records is typically three years, not five, and pre-clearance logs are essential regulatory records, not optional working papers. Takeaway: Broker-dealers must maintain comprehensive records of research analyst personal trading and pre-approvals for at least three years to satisfy regulatory oversight and conflict-of-interest monitoring requirements.

Correct: According to FINRA Rule 2241, during a public appearance, a research analyst must disclose if the member firm or any affiliate has received compensation from the subject company for investment banking services in the previous 12 months, provided the analyst knows or has reason to know of this fact. This ensures that the audience is aware of potential conflicts of interest that might influence the analyst’s recommendations. Incorrect: Providing a list of all ratings for a sector over 24 months is not a standard requirement for public appearances; the focus is on specific conflicts related to the companies discussed. Pre-filing transcripts of live media appearances with FINRA is not required, as these are generally treated differently than prepared retail communications. There is no regulatory ’72-hour rule’ regarding the timing of the most recent research report in relation to mentioning price targets in a public appearance, as long as the analyst has a reasonable basis for the target and provides the necessary disclosures. Takeaway: During public appearances, research analysts are required to disclose material conflicts of interest, including recent investment banking compensation received by the firm from the subject companies.

Correct: FINRA Rule 2241 prohibits research analysts from trading in a manner inconsistent with their most recent recommendation (trading against the recommendation) and generally imposes blackout periods around the issuance of research reports. Even if a trade was mistakenly pre-cleared by a junior staff member, the analyst and the firm remain responsible for adhering to the substantive restrictions of the rule to maintain the integrity of the research. Incorrect: Retroactive approval is not a valid remedy for a violation of trading against a recommendation, as it undermines the purpose of the rule. Financial hardship does not provide an automatic exemption from FINRA trading restrictions. Focusing solely on the compliance officer’s error ignores the analyst’s primary responsibility to ensure their personal trades do not conflict with their published research and firm policy. Takeaway: Research analysts are strictly prohibited from trading against their own recommendations or during blackout periods, and administrative pre-clearance errors do not waive these regulatory obligations.

Correct: Under FINRA Rule 6480, while a member firm may be permitted to use multiple MPIDs for quoting and trading OTC equity securities, these identifiers must not be used to engage in manipulative practices. The immediate priority is to ensure that the desks are not inadvertently or intentionally engaging in wash sales (trading with themselves) or ‘layering’ the book to create a misleading impression of market depth or liquidity, which is a high risk when multiple MPIDs from the same firm are active in the same security. Incorrect: Restricting supplemental MPIDs to passive liquidity is not a regulatory requirement; they can be used for various legitimate business strategies. There is no requirement under Rule 6480 to disclose specific algorithmic parameters to the SEC simply because a supplemental MPID is used. Furthermore, there is no regulatory percentage threshold (like 75%) for volume distribution between primary and supplemental MPIDs to maintain market maker status. Takeaway: While firms may use supplemental MPIDs for legitimate business reasons, they must implement strict controls to prevent manipulative activity such as wash sales or the creation of artificial market depth.

Correct: Under SEC Rule 15g-3, broker-dealers are required to disclose the ‘inside’ bid and offer prices for a penny stock to customers before a transaction. If an inside market does not exist (which typically requires at least two market makers displaying consistent quotes), the rule mandates that the broker-dealer disclose its own current bid and offer prices for that security to the customer. Incorrect: Providing a volume-weighted average price is incorrect because the rule specifically requires current quotation information rather than historical averages. Issuing a disclaimer that no data is available is a violation of the rule, as the firm must provide its own quotes if no inside market exists. Disclosing the last sale price is insufficient because it represents a historical transaction rather than the current bid and offer prices required for investor protection in the penny stock market. Takeaway: In the absence of an inside market for a penny stock, Rule 15g-3 requires broker-dealers to disclose their own current bid and offer prices to the customer prior to execution.

Correct: A stop-limit order consists of two distinct components: the stop price and the limit price. When the stop price ($45.00) is reached or surpassed by a trade in the market, the order is activated (triggered) and becomes a limit order. For a sell stop-limit, it becomes a limit order to sell at the limit price ($44.50) or higher. The trader’s obligation is to ensure the trade is only executed if the price remains at or above the specified limit price of $44.50, protecting the customer from selling at an unacceptably low price during a rapid decline. Incorrect: Executing immediately at the prevailing market price describes a standard stop order, which converts to a market order upon being triggered; a stop-limit requires a specific price floor. Treating the order as a market-on-close order is incorrect because the order type was specifically designated as stop-limit and must follow those execution parameters. Prioritizing proprietary orders over a customer’s triggered limit order violates FINRA Rule 5320 (the Manning Rule), which prohibits a firm from trading ahead of a customer limit order. Takeaway: A stop-limit order becomes a limit order once the stop price is triggered, requiring execution at the limit price or better.

Correct: Under FINRA Rule 6480, a member firm is generally permitted to use only one MPID for quoting and reporting. However, a firm may request additional MPIDs for legitimate business reasons, such as segregating the activity of an Alternative Trading System (ATS) from its market-making desk. This requires prior written approval from FINRA and a clear demonstration that the identifiers will be used for distinct purposes to maintain an accurate audit trail. Incorrect: Consolidating all activity under a single MPID is not required and can actually hinder the ability to distinguish between different types of order flow, such as proprietary versus agency crossing. Qualified Block Positioner status, defined under SEC Rule 3b-8, relates to capital requirements and the ability to facilitate large blocks, but it does not provide a blanket exemption from Regulation ATS Fair Access rules. There is no regulatory requirement for a 30-day cooling-off period when reassigning the internal function of an MPID. Takeaway: Firms operating an ATS while engaging in market making must secure FINRA approval for multiple MPIDs to ensure clear segregation and regulatory transparency of trading activities.

Correct: Under NYSE American Rule 900.3NY, a Stop Order is a contingent order that remains inactive until the stop price is reached. Once the stock trades at or through the stop price, the order is ‘elected’ and immediately becomes a market order. This means it will be executed at the next available price, which may be significantly different from the trigger price in a fast-moving market, as it prioritizes execution over price protection. Incorrect: The description of an order becoming a limit order that must be filled at the trigger price or better refers to a Stop Limit Order, not a standard Stop Order. Suspending an order for manual confirmation is not a standard feature of exchange-traded stop orders and would interfere with automated execution protocols. Converting a triggered stop order into a Market-on-Open (MOO) instruction is incorrect, as MOO orders are distinct order types used specifically for the opening auction and are not the result of a triggered stop during the trading session. Takeaway: A stop order becomes a market order immediately upon being triggered, ensuring execution but offering no protection against price slippage.

Correct: According to FINRA Rule 6276, an ADF Market Maker that voluntarily terminates its registration in a security by withdrawing its quotations from the ADF is prohibited from re-registering as a market maker in that specific security for a period of twenty (20) business days. Incorrect: A five business day period is insufficient and does not meet the regulatory threshold established to prevent frequent flipping in and out of market-making obligations. Thirty calendar days is a common timeframe for other regulatory filings but does not align with the business-day count specified in Rule 6276. Ninety business days is an overly restrictive period typically associated with more severe regulatory sanctions or specific penny stock rules rather than voluntary termination. Takeaway: Voluntary termination of registration in a security on the ADF triggers a mandatory 20-business-day waiting period before a firm can re-register for that security.

Correct: According to FINRA Rule 6480, a member firm may be permitted to use supplemental MPIDs for bona fide business reasons, such as the separation of different trading desks or business units. However, the rule explicitly prohibits the use of multiple MPIDs to engage in any deceptive or manipulative practice, including the creation of a false appearance of market activity or depth. In this scenario, using a secondary MPID to influence the spread for the benefit of a proprietary position on the primary MPID would be considered a violation of market integrity rules. Incorrect: The suggestion that net capital is the primary constraint for multiple MPIDs is incorrect because Rule 6480 focuses on the conduct and purpose of the quoting rather than the financial responsibility rules of SEC 15c3-1. The idea that MPIDs can be used interchangeably without notification is false, as firms must provide a written request to FINRA and receive approval for supplemental MPIDs. Finally, stating that multiple MPIDs are strictly prohibited is incorrect, as the rules do allow for them provided there is a legitimate business justification and they are not used for manipulation. Takeaway: While firms may obtain multiple MPIDs for legitimate business purposes, they are strictly prohibited from using them to create a false appearance of market activity or to engage in manipulative quoting practices.

Correct: FINRA Rule 4590 requires that member firms synchronize their business clocks used to record the time of any event that must be recorded under FINRA rules. For electronic business clocks, the synchronization must be within 50 milliseconds of the National Institute of Standards and Technology (NIST) atomic clock. While the rule requires synchronization at least once a day before the start of business, firms are also expected to maintain that synchronization throughout the day to ensure the integrity of the audit trail. Incorrect: The suggestion that a 1-second tolerance is acceptable for electronic systems is incorrect, as that standard applies only to manual time stamps. The idea that a firm is exempt from intra-day drifts if the morning calibration was successful is false; firms must ensure ongoing accuracy. Increasing the threshold to 200 milliseconds during high latency is a violation of the strict 50-millisecond regulatory requirement for electronic records. Takeaway: Member firms must synchronize electronic business clocks to within 50 milliseconds of the NIST standard and maintain this accuracy to ensure reliable audit trail data.

Correct: Under CFTC Regulation 4.22 and NFA Compliance Rule 2-13, a Commodity Pool Operator (CPO) is required to provide periodic account statements to all participants. For pools with a net asset value (NAV) exceeding 500,000 USD at the beginning of the fiscal year, these reports must be distributed monthly. The regulations specifically require that the account statement include a detailed itemization of all management fees, advisory fees, brokerage commissions, and any other expenses charged to the pool during the reporting period. This ensures that participants can clearly see how expenses, including those related to promotional or entertainment activities if charged to the pool’s assets, affect the net asset value and overall performance. Incorrect: The suggestion that detailed itemization is only required quarterly for pools over 500,000 USD is incorrect because the NAV threshold mandates monthly reporting for all required disclosures. The approach of aggregating expenses into a single miscellaneous line item fails the regulatory requirement for a clear, itemized breakdown of fees and expenses, which is intended to prevent the masking of specific costs. The claim that detailed expense breakdowns are reserved solely for the certified Annual Report is inaccurate, as periodic account statements must also provide sufficient detail to reflect the total change in net asset value for the specific period covered. Takeaway: CPOs of pools with a net asset value over 500,000 USD must issue monthly account statements that provide a detailed itemization of all fees and expenses charged to the pool.