Series 57 Securities Trader Representative Exam

Correct: Regulation S-P requires broker-dealers to provide an initial privacy notice to customers at the time the customer relationship is established. Furthermore, if the firm intends to share nonpublic personal information with nonaffiliated third parties, it must provide an opt-out notice and a ‘reasonable’ means for the customer to exercise that right. The SEC considers methods like a toll-free telephone number or a check-off box to be reasonable, whereas requiring a customer to write their own letter is considered unreasonable. Incorrect: Option B is incorrect because Regulation S-P specifically addresses sharing with nonaffiliated third parties and applies to all individual customers, including accredited investors. Option C is incorrect because the notice must be provided when the relationship is established, and requiring a formal letter is explicitly defined as an unreasonable opt-out method. Option D is incorrect because the requirement is based on the establishment of the customer relationship and annual updates, not the delivery of each private placement memorandum, and accredited status does not waive these privacy rights for individuals. Takeaway: Regulation S-P requires firms to provide initial and annual privacy notices to individual customers and must offer a convenient, reasonable method for them to opt out of sharing nonpublic personal information with nonaffiliated third parties.

Correct: Under ERISA’s ‘look-through’ rule, the assets of an entity (like a private equity fund) are considered ‘plan assets’ if benefit plan investors own 25% or more of any class of equity interest. If the assets are deemed plan assets, the fund manager becomes an ERISA fiduciary, which carries significant liability and restrictive prohibited transaction rules. Therefore, the most effective way to address this risk is to ensure participation stays below the 25% threshold. Incorrect: Ensuring investors are Accredited Investors (option b) relates to exemptions from registration under the Securities Act of 1933, but does not prevent a fund from being subject to ERISA. Regulation A+ (option c) is a method for public offerings and does not provide a safe harbor for ERISA’s plan asset rules. Restricting the offering to QIBs under Rule 144A (option d) facilitates secondary market liquidity for private placements but does not impact the determination of whether a fund’s assets are considered ERISA plan assets. Takeaway: To avoid the complexities of ERISA fiduciary status, private funds must typically limit benefit plan ownership to less than 25% of any class of equity.

Correct: Rule 137 provides a safe harbor for broker-dealers who are not participating in a distribution. For the publication of a research report to be exempt from being considered an ‘offer’ under Section 5 of the Securities Act, the broker-dealer must not receive any compensation or consideration from the issuer, a selling security holder, or any other participant in the distribution in connection with the report. Incorrect: The requirement to have participated in prior distributions is incorrect because Rule 137 specifically applies to non-participants in the current distribution. SEC pre-approval of individual research reports is not a requirement for this safe harbor. While other rules may limit distributions to QIBs, Rule 137 does not impose an investor-type restriction, focusing instead on the independence of the broker-dealer and the lack of compensation from the issuer. Takeaway: Rule 137 allows non-participating broker-dealers to maintain independent research coverage during a distribution provided they receive no compensation from the issuer or the underwriting group.

Correct: SEC Rule 10b-10 requires broker-dealers to provide customers with a written confirmation of a transaction at or before the completion of that transaction. This confirmation must include critical information such as the date, time, identity, and price of the security, as well as the capacity in which the broker-dealer acted (e.g., agent for the customer, agent for another person, or principal) and the source and amount of any remuneration received. An automated system that triggers these disclosures upon execution ensures the timing and content requirements of the rule are met. Incorrect: Relying on a PPM is insufficient because Rule 10b-10 requires a transaction-specific confirmation rather than a general offering document. Delivering confirmations 10 days after the final closing is a violation of the rule, which requires delivery at or before the completion of the specific transaction. Verbal confirmations do not satisfy the requirement for a written disclosure, and sending information only to a registered representative does not fulfill the obligation to provide the confirmation directly to the customer. Takeaway: SEC Rule 10b-10 mandates that broker-dealers provide customers with specific written transaction details, including the firm’s capacity and compensation, at or before the completion of the trade.

Correct: Rule 604 of Regulation NMS, known as the Limit Order Display Rule, requires market makers to display a customer limit order immediately—defined as within 30 seconds—if the order improves the market maker’s bid or offer or adds to the size of the bid or offer when the firm is at the National Best Bid or Offer (NBBO). In this scenario, the 500-share order improved the firm’s offer price, and the one-minute delay in updating the quote exceeds the 30-second regulatory threshold. Regulatory standards for ‘immediate’ display are not automatically suspended or extended due to internal business continuity transitions or manual processing constraints unless specific exemptive relief has been granted by the SEC or the relevant self-regulatory organization. Incorrect: The suggestion that a one-minute delay is acceptable under ‘exceptional circumstances’ is incorrect because the 30-second standard is a firm requirement that does not provide a blanket extension for documented system failovers. The claim that the order is exempt due to being handled by a block trading desk is inaccurate because the order size of 500 shares does not meet the ‘block size’ definition under Rule 604, which requires at least 10,000 shares or a market value of at least $200,000. The argument regarding a de minimis price exception is also false, as Rule 604 does not provide any exemption based on the specific cent-increment of price improvement; any improvement to the firm’s quote must be reflected in the public quote. Takeaway: Market makers must display non-exempt customer limit orders that improve their quote within 30 seconds, and internal operational disruptions do not waive this immediate display obligation.

Correct: SEC Rule 17a-3 and FINRA Rule 4511 require broker-dealers to create and maintain accurate records of every order, specifically including the exact time of receipt, entry, and execution. Pre-time stamping is a violation of these requirements because it creates a false record of the sequence of events. Even if the execution price is favorable, the integrity of the audit trail is compromised, which is essential for regulatory oversight and the detection of prohibited activities like front-running or late trading. Professional standards dictate that records must be contemporaneous and reflect the actual time of the transaction events without exception. Incorrect: Focusing exclusively on whether the client received a price within the NBBO fails to address the underlying recordkeeping violation; price improvement does not mitigate the regulatory failure of maintaining inaccurate books and records. Distinguishing between institutional and retail clients for the purposes of time-stamping accuracy is not permitted under federal securities laws, as the requirement for accurate records applies to all transaction types. Implementing a grace period for time-stamping in written supervisory procedures would constitute a formalization of a regulatory violation, as firms do not have the authority to waive the SEC requirement for contemporaneous and accurate record-keeping during periods of market volatility. Takeaway: Accurate and contemporaneous time-stamping of order receipt and entry is a non-negotiable recordkeeping requirement that cannot be bypassed for execution efficiency or price considerations.

Correct: In a best-efforts offering, the broker-dealer acts as an agent for the issuer rather than a principal. The firm is only obligated to use its best efforts to sell the securities and does not have a legal or financial obligation to purchase any shares that are not sold to investors. This is the standard structure for most private placements and PIPEs where the issuer bears the risk of the offering not being fully subscribed. Incorrect: A principal role where the firm purchases unsold shares describes a firm commitment underwriting, not a best-efforts placement. PIPEs are private placements exempt from initial registration; the requirement to register the shares typically applies to the resale of the securities after the private closing, not before solicitation. A standby underwriting agreement is a specific type of firm commitment used in rights offerings, which is not applicable to the best-efforts PIPE scenario described. Takeaway: In a best-efforts private placement, the placement agent facilitates the transaction without the obligation to purchase unsold securities, leaving the financial risk of an under-subscribed offering with the issuer.

Correct: Purchasing power risk, also known as inflation risk, is the risk that the value of the currency will decrease over time. For fixed-income securities like private placement bonds, this means the ‘constant dollar’ value of the fixed interest payments and the principal returned at maturity will buy fewer goods and services in the future than they do today. This effectively lowers the investor’s real rate of return.

Correct: Under Regulation SHO Rule 203(b)(1), broker-dealers are prohibited from accepting or executing short sale orders unless they have located the securities. Rule 203(b)(2)(iii) provides a narrow exception for bona fide market making, but this is strictly limited to the specific security in which the market maker is currently providing liquidity and maintaining quotes. Furthermore, Rule 203(b)(3) mandates that if a participant of a registered clearing agency has a fail-to-deliver position in a threshold security for 13 consecutive settlement days, the participant must take immediate action to close out the fail-to-deliver position by purchasing securities of like kind and quantity. This close-out requirement is a hard mandate designed to reduce the number of persistent fails in the marketplace. Incorrect: The approach suggesting that market maker status in related symbols grants a sector-wide exemption is incorrect because the bona fide market making exception is activity-based and symbol-specific. The suggestion that the threshold list automatically revokes the market maker exemption or mandates a pre-borrow for all participants is a misunderstanding of the rule; while threshold status triggers stricter close-out requirements, the locate exception for bona fide market making remains valid as long as the activity meets the regulatory definition. Finally, the idea that a 35-day close-out period applies to threshold fails is incorrect, as the 35-day window is specifically reserved for fails related to Rule 144 restricted securities, not general threshold security fails which must be closed out in 13 days. Takeaway: The bona fide market making exemption from locate requirements is security-specific, and persistent fails in threshold securities trigger a mandatory 13-day close-out requirement.

Correct: Under FINRA Rule 11892, the numerical guidelines for determining a clearly erroneous transaction during regular trading hours are tiered based on the reference price of the security. For NMS stocks with a reference price greater than 50.00 dollars, the execution must deviate from the consolidated last sale price by more than 3 percent to be eligible for a clearly erroneous filing. In this specific scenario, an execution at 63.50 dollars against a reference price of 62.00 dollars represents a deviation of approximately 2.42 percent. Because this percentage is below the mandatory 3 percent threshold for securities in this price bracket, the transaction does not meet the minimum criteria for a clearly erroneous determination. Incorrect: One approach incorrectly suggests that a flat 2 percent threshold applies to all securities, but the regulatory framework establishes specific tiers (10 percent for stocks up to 25.00 dollars, 5 percent for stocks between 25.01 and 50.00 dollars, and 3 percent for stocks above 50.00 dollars). Another approach mistakenly identifies the previous day’s closing price as the primary reference point, whereas the rule generally requires the use of the consolidated last sale price immediately preceding the execution. A third approach incorrectly posits that filings are only permitted for multi-stock events; however, the rule provides clear guidelines for single-stock events, though it does apply different numerical thresholds (10 percent or 30 percent) when a large number of securities are involved in a coordinated event. Takeaway: To qualify as clearly erroneous during regular trading hours, a transaction in a stock priced above 50.00 dollars must deviate from the reference price by more than 3 percent.

Correct: Under FINRA Rule 6438, if a member firm displays priced quotations for an OTC equity security in two or more quotation mediums, the member must display the same priced quotation in each medium. This regulatory requirement is designed to ensure price integrity and prevent market fragmentation from causing confusion or unfair advantages. In the scenario described, the firm failed to maintain identical bid prices across both the OTC Link ATS and the secondary inter-dealer quotation system, which constitutes a direct violation of the rule regardless of the trader’s intent or the market volatility. Incorrect: The approach suggesting that price discrepancies are permissible as long as best execution is achieved is incorrect because Rule 6438 is a standalone transparency requirement that does not offer an exception for best execution performance. The suggestion that the rule only applies to exchange-listed securities is a fundamental misunderstanding, as Rule 6438 specifically governs OTC equity securities. Finally, the idea that designating a quote as an indication of interest allows for price variance is flawed because the rule applies to any priced quotation; unpriced indications are a separate category, but once a price is attached and displayed in multiple mediums, parity is mandatory. Takeaway: FINRA Rule 6438 mandates that priced quotations for the same OTC equity security must be identical across all quotation mediums utilized by a member firm.

Correct: Rule 134 provides a safe harbor for certain communications (often called tombstone ads) that are not deemed to be a prospectus. However, the rule is very specific about what can be included, such as the issuer’s name, the title of the security, the amount being offered, and a brief description of the general type of business. Qualitative analysis, promotional summaries, and competitive comparisons are strictly prohibited because they transform the factual notice into a selling document that would require a full statutory prospectus. Incorrect: Distributing a notice before a registration statement is filed is a separate violation (gun-jumping), but Rule 134 specifically applies to the period after filing; the core issue here is the content violation. Listing every member of a selling group is not a requirement for the Rule 134 safe harbor. The SEC provides the required language for legends within the rule itself, but it does not individually approve legends for every firm’s specific communications. Takeaway: Rule 134 communications must be strictly limited to factual and administrative information to avoid being classified as a non-conforming prospectus during the cooling-off period.

Correct: Under SEC Rule 17a-14 (Form CRS), broker-dealers are required to deliver the relationship summary to each retail investor at or before the earliest of: (i) a recommendation of an investment strategy involving securities or an account type; (ii) placing an order for the retail investor; or (iii) the opening of a brokerage account for the retail investor. Furthermore, broker-dealers must file their Form CRS electronically through the Central Registration Depository (Web CRD) operated by FINRA. Incorrect: The approach of delivering the form at the time of closing is incorrect because the rule requires delivery at the earliest point of recommendation or account opening, which occurs much earlier in the sales process. Limiting delivery only to non-accredited investors is incorrect because the definition of a retail investor for Form CRS purposes includes any natural person who receives a recommendation for their own account, regardless of their net worth or accredited status. Relying solely on website posting or paper-based filing is non-compliant as the rule mandates direct delivery to the investor and electronic filing via Web CRD. Takeaway: Form CRS must be delivered to retail investors at the earliest point of recommendation or account opening and must be filed electronically through Web CRD.

Correct: In a PIPE (Private Investment in Public Equity) transaction, a public company issues securities in a private placement to a select group of investors. These securities are ‘restricted’ because they have not been registered with the SEC. To provide liquidity, the issuer typically agrees to file a resale registration statement (often on Form S-3) shortly after the closing. The investors cannot sell these shares into the public market until that registration statement is declared effective by the SEC, or unless an exemption such as Rule 144 is met (which involves a holding period). Incorrect: The assertion that securities are registered at issuance is incorrect because PIPEs are by definition private placements of unregistered shares. The claim that a 12-month holding period cannot be shortened is incorrect because the filing and effectiveness of a registration statement specifically allows for earlier public resale. The suggestion that shares can be sold immediately under volume limitations is incorrect because restricted securities must first meet the applicable holding period requirements of Rule 144 (typically 6 months for reporting companies) before volume-limited sales can occur, unless a registration statement is effective. Takeaway: PIPE transactions involve restricted securities that require a subsequent SEC registration statement to be declared effective before they can be resold by investors in the public market.

Correct: Under FINRA Rule 5130, a member firm is prohibited from selling a new issue (IPO) to any account in which a restricted person has a beneficial interest, unless an exemption applies. To ensure compliance, the firm must obtain a written representation from the account holder or an authorized representative (such as a fund manager) stating that the account is eligible to purchase new issues. This representation must be obtained within the 12 months prior to the sale and must be re-verified annually. For collective investment accounts like hedge funds, the representation must confirm that the aggregate beneficial interests of restricted persons do not exceed the 10 percent de minimis threshold. Incorrect: Relying on general Know Your Customer (KYC) or Anti-Money Laundering (AML) data is insufficient because these processes do not specifically capture the nuanced definitions of restricted persons under Rule 5130, such as finders, fiduciaries, or certain family members of broker-dealer employees. Implementing a post-trade audit or disgorgement process is a reactive measure that fails to meet the regulatory requirement of preventing the sale to restricted persons before it occurs. Limiting the allocation size to 10 percent of the total offering is a misunderstanding of the de minimis exception; the 10 percent threshold applies to the ownership percentage of restricted persons within the purchasing entity, not the size of the allocation relative to the entire IPO. Takeaway: Before allocating IPO shares, firms must obtain and annually re-verify a specific written representation of eligibility to ensure the purchasing account does not violate restricted person prohibitions.

Correct: In a contingency offering such as an All-or-None placement, the dealer manager and the escrow agent must ensure that all subscriptions are bona fide. The appearance of a last-minute selling group member providing funds from an unrelated third-party account is a significant AML red flag. Releasing funds before verifying the legitimacy of these subscriptions could lead to a violation of both AML regulations and SEC Rule 15c2-4, which governs the handling of customer funds in contingency offerings. Incorrect: Proceeding with the distribution ignores the firm’s obligation to investigate suspicious activity and ensure that the minimum threshold was met through legitimate, bona fide sales. Removing the member without investigating the funds does not resolve the potential regulatory breach regarding the escrowed money. Converting the offering structure to a Mini-Max would require a rescission offer to all existing subscribers and updated disclosures, and it does not address the underlying suspicious activity. Takeaway: Compliance officers must verify the legitimacy of all subscriptions in a contingency offering before releasing escrowed funds, particularly when late-joining selling group members provide suspicious third-party payments.

Correct: Under FINRA Rule 14402 and 14410, mediation is a voluntary process. Unlike arbitration, which may be mandatory for member firms and associated persons, mediation requires the consent of all parties. Furthermore, any party may withdraw from the mediation process at any time prior to the execution of a written settlement agreement by providing written notice to the mediator and all other parties. Incorrect: The assertion that parties must continue until a binding decision is issued is incorrect because mediation is non-binding and the mediator facilitates negotiation rather than adjudicating the case. The claim that mediators can compel document production is incorrect as mediators do not have the subpoena or discovery powers granted to arbitrators. The statement regarding an automatic stay of arbitration is incorrect because mediation does not stay an arbitration unless the parties mutually agree to a stay and notify the Director of Mediation or the arbitration panel. Takeaway: FINRA mediation is a voluntary, non-binding process that allows any party to withdraw at any time before a formal settlement is signed.

Correct: Regulation S-P requires firms to provide an initial privacy notice at the time the customer relationship is established. If the firm intends to share nonpublic personal information (NPI) with non-affiliated third parties (outside of specific exceptions like service providers), it must provide an opt-out notice and a reasonable period, typically 30 days, for the customer to exercise that right before the information is shared. Incorrect: Requiring a signed non-disclosure agreement for every investor is a higher standard than Regulation S-P requires, which is based on notice and the right to opt out. The registration status of the consultant does not waive the privacy notice requirements for the broker-dealer. Providing the notice only upon request violates the requirement that the notice be provided at the start of the relationship and annually thereafter. Takeaway: Under Regulation S-P, firms must provide customers with a privacy notice and a reasonable opportunity to opt out before sharing nonpublic personal information with non-affiliated third parties.

Correct: According to FINRA Rule 2210, ‘retail communication’ is defined as any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period. Because the representative sent the brochure to 28 retail clients, it meets this threshold and requires a registered principal’s approval prior to its first use, regardless of the business continuity status. Incorrect: The correspondence classification is incorrect because that category is limited to 25 or fewer retail investors; exceeding this number triggers the retail communication rules. The institutional communication classification is incorrect because the brochure was sent to retail investors, and institutional rules only apply when the communication is distributed solely to institutional entities. There is no safe harbor under FINRA rules that allows for the bypass of communication approval requirements during business continuity events. Takeaway: Any written communication distributed to more than 25 retail investors within a 30-day period is classified as retail communication and requires prior principal approval under FINRA Rule 2210.

Correct: The fiduciary duty of care, as outlined in MSRB Rule G-42, requires a municipal advisor to exercise due professional care and perform a reasonable inquiry into the facts. This includes having a reasonable basis for any recommendation and evaluating whether the proposed strategy is suitable for the client’s specific needs and circumstances. By comparing the complex derivative to alternatives and assessing its risks and costs, the principal ensures the advisor has performed the necessary diligence to protect the municipal entity’s interests. Incorrect: The option regarding disclosure of conflicts of interest relates primarily to the duty of loyalty rather than the duty of care in evaluating the substance of a recommendation. Verifying continuing education and registration filings is a general supervisory and regulatory requirement but does not satisfy the specific fiduciary obligation to provide sound, well-researched advice. Confirming the presence of an IRMA is irrelevant for a firm already acting as a municipal advisor, as fiduciary duties cannot be delegated or shifted to another party when a firm is engaged to provide advice. Takeaway: The fiduciary duty of care requires municipal advisors to perform a rigorous, evidence-based analysis of recommendations and their alternatives to ensure they align with the client’s best interests.

Correct: FINRA Rule 5240 (Anti-Intimidation/Coordination) explicitly prohibits any member or person associated with a member from engaging in conduct that threatens, harasses, coerces, or intimidates another member for the purpose of influencing their market activities. This includes any attempt to induce another member to alter a price or size, or to refrain from competing. In this scenario, the trader’s attempt to use their influence in liquid markets as leverage to force a competitor to widen spreads in a different security constitutes a clear violation of the anti-intimidation provisions, as it seeks to suppress legitimate price competition through coercive threats. Incorrect: The belief that a violation only occurs if a formal agreement or ‘meeting of the minds’ is reached is a common misconception; the rule prohibits the act of intimidation or the attempt to influence itself, regardless of the outcome. The argument that such communications are acceptable negotiation tactics for maintaining price stability is invalid, as the regulatory framework prioritizes unhindered competition over a trader’s subjective view of market orderliness. Furthermore, the medium of communication, such as private instant messaging, does not exempt a trader from compliance; all professional interactions between market participants are subject to FINRA’s conduct rules regardless of the platform used. Takeaway: FINRA Rule 5240 prohibits any attempt to influence a competitor’s quotes or trading behavior through coercion or threats, regardless of whether the attempt is successful or which communication channel is utilized.

Correct: Under SEC Rule 15Ba1-1(d)(2)(i), the underwriter exclusion is limited to advice on the structure, timing, and terms of a particular municipal securities issuance. Advice regarding the investment of bond proceeds, including recommendations on guaranteed investment contracts (GICs) or other investment strategies for the funds raised, is explicitly outside the scope of the underwriter exclusion. Such activities constitute municipal advisory services, requiring the firm to register as a municipal advisor and adhere to a fiduciary duty. Incorrect: The timing of the engagement letter does not expand the scope of the underwriter exclusion to include investment advice on proceeds. While underwriters can advise on the structure and timing of a bond, providing advice on how to invest the money once it is raised is a separate regulated activity. Financial feasibility advice is also generally a municipal advisory function unless it is strictly limited to the terms of the issuance itself. The scenario specifically involves the investment of proceeds, which is a ‘bright-line’ activity that falls outside the underwriter’s safe harbor. Takeaway: Underwriters lose their registration exclusion if they provide advice on the investment of bond proceeds or municipal derivatives, as these are considered core municipal advisory activities.

Correct: Under SEC Rule 15Ba1-1(d)(3)(vi), the IRMA exemption allows a person to provide municipal advice without registering as a municipal advisor if the municipal entity is represented by an independent registered municipal advisor. The person seeking the exemption must receive a written representation from the municipal entity stating it is represented by and will rely on the advice of an IRMA. Furthermore, the person seeking the exemption must not have been associated with the IRMA firm or its individuals within the previous two years to satisfy the independence requirement. Incorrect: The requirement for the IRMA exemption is based on independence and written representations, not the specific RIA status of the advisor or waivers of fiduciary duty, which are generally not permitted to bypass registration. Verbal disclosures are insufficient as the rule requires written disclosure that the person is not a municipal advisor and has a financial interest. There is no provision in the Dodd-Frank Act or SEC rules for a 12-month blanket authorization to provide advice without registration. Takeaway: To validly rely on the IRMA exemption, a firm must ensure the municipal entity’s advisor is truly independent (no association for two years) and obtain written confirmation of the entity’s reliance on that advisor.

Correct: Under Regulation NMS Rule 611, also known as the Order Protection Rule, trading centers are required to establish and enforce policies to prevent trade-throughs of protected quotations. The Intermarket Sweep Order (ISO) is a critical exception to this rule. To validly use the ISO designation, the party sending the order must take responsibility for ‘clearing out’ all better-priced protected quotes. This is achieved by simultaneously routing additional limit orders to execute against the full displayed size of any protected quotation with a price superior to the limit price of the ISO. This ensures that the priority of the best prices in the National Market System is respected even when a trader needs to execute a large order across multiple price levels or venues immediately. Incorrect: Providing post-trade notifications to the primary listing exchange is not a requirement for the ISO exception; the responsibility is proactive and simultaneous with the order routing. While latency can be a factor in market operations, there is no ‘automatic’ system-wide sweep exemption based on a 100-millisecond threshold; firms must instead follow specific ‘self-help’ procedures under Rule 611(b)(1) to bypass a venue that is experiencing systemic failures. Routing exclusively to dark pools does not exempt a firm from the Order Protection Rule if those venues are executing trades at prices inferior to protected quotes displayed on public exchanges, unless another specific exception applies. Takeaway: To legally utilize the Intermarket Sweep Order exception under Regulation NMS, a firm must simultaneously route orders to satisfy the full size of all superior protected quotations across the national market system.

Correct: Under Section 15B(e)(9) of the Exchange Act, solicitation is defined as a communication with a municipal entity or obligated person, made by a person for direct or indirect compensation, on behalf of a municipal advisor, dealer, or investment adviser for the purpose of obtaining or retaining an engagement. Because the consultant is being paid by the broker-dealer to facilitate an engagement with the credit union (an obligated person), they meet the definition of a solicitor and must register as a municipal advisor. Incorrect: The argument that the consultant is exempt because they do not provide technical advice is incorrect; the act of solicitation itself triggers the registration requirement regardless of whether advice is given. The method of compensation (fixed retainer versus contingent fee) does not change the status, as the rule applies to any direct or indirect compensation. Finally, a third-party consultant is not automatically treated as an employee or associated person for registration purposes; third-party solicitors must generally register as municipal advisors independently. Takeaway: Any individual or firm receiving compensation for communicating with a municipal entity to obtain business for a dealer or advisor is generally required to register as a municipal advisor under the definition of solicitation.

Correct: The underwriter exclusion under SEC Rule 15Ba1-1(d)(2)(i) applies when a broker-dealer is engaged to act as an underwriter on a specific issuance of municipal securities. The exclusion is transaction-specific, meaning the firm must be engaged for that particular deal, and the advice must be limited to the structure, timing, and terms of that specific issuance. Unlike municipal advisors, underwriters do not owe a fiduciary duty to the issuer. Incorrect: The suggestion that the firm must act as a fiduciary is incorrect because underwriters are specifically exempt from the fiduciary standard, instead operating under the fair dealing standard of MSRB Rule G-17. A general master underwriting agreement is insufficient because the exclusion requires engagement for a specific, identified transaction. Relying on an Independent Registered Municipal Advisor (IRMA) refers to a separate statutory exemption (the IRMA exemption) rather than the underwriter exclusion itself. Takeaway: The underwriter exclusion is transaction-specific and requires a formal engagement for the particular issuance to which the advice relates.

Correct: Under FINRA Rule 4590, members are required to synchronize their business clocks used for recording the date and time of any event that must be recorded under FINRA rules or the Securities Exchange Act. The synchronization must be within 50 milliseconds of the National Institute of Standards and Technology (NIST) atomic clock. This synchronization must be performed at least once every business day before the market opens, and the firm must maintain a record of these synchronizations, including the date, time, and any drift identified, for a period of at least three years. Incorrect: Approaches that suggest a one-second tolerance or a 100-millisecond threshold are incorrect because they do not meet the specific 50-millisecond standard mandated by FINRA Rule 4590. Proposing a weekly synchronization schedule is insufficient as the rule requires synchronization at least once every business day to account for potential clock drift. Furthermore, relying solely on a third-party provider’s general uptime guarantees or internal protocols without maintaining specific firm-level synchronization logs fails to meet the regulatory requirement for the member firm to document its own compliance and retain those records for the three-year statutory period. Takeaway: FINRA Rule 4590 requires all business clocks to be synchronized daily to within 50 milliseconds of the NIST atomic clock with a three-year record retention requirement.

Correct: Under SEC Rule 3b-8, a qualified block positioner is defined as a dealer who facilitates a customer’s order by purchasing a block of stock with a market value of 200,000 dollars or more. To maintain this status and the associated regulatory treatment, the firm must meet a minimum net capital requirement of 1,000,000 dollars. Furthermore, the firm is under a regulatory obligation to liquidate the position acquired through the block trade as rapidly as possible under prevailing market conditions, rather than holding the security for investment purposes or long-term speculation. Incorrect: The suggestion that a firm must hold a position for a specific duration like 24 hours is incorrect, as the regulatory framework for block positioning emphasizes the immediate facilitation of liquidity and rapid divestment. Requiring registration as a primary market maker confuses two distinct market participant roles; while a block positioner acts as a dealer, they do not necessarily have the same continuous two-sided quoting obligations as a registered market maker in that specific security. Mandating delta-neutral hedging is a risk management strategy but is not a specific regulatory requirement for achieving or maintaining qualified block positioner status under the Securities Exchange Act of 1934. Takeaway: A qualified block positioner must maintain at least 1,000,000 dollars in net capital and is required to liquidate the facilitated block position as rapidly as market conditions permit.

Correct: To establish a valid IRMA exemption under SEC Rule 15Ba1-1(d)(3)(vi), the person seeking to rely on the exemption must receive a written representation from the municipal entity or obligated person that it is represented by, and will rely on the advice of, an independent registered municipal advisor. Furthermore, the person must provide written disclosures to the municipal entity (and the IRMA) stating that by providing such advice, the person is not a municipal advisor and is not subject to the fiduciary duty imposed by Section 15B of the Exchange Act. Incorrect: Verbal confirmations are insufficient because the SEC rules explicitly require a written representation from the municipal entity to qualify for the IRMA exemption. While the IRMA must be registered, the firm’s primary obligation for the exemption is the written representation and the firm’s own disclosures. Requiring the IRMA to certify the underwriter’s recommendations is not a regulatory requirement for the exemption. Filing a Form MA-I would indicate the firm is registering as a municipal advisor, which contradicts the goal of utilizing an exemption to avoid such registration and the associated fiduciary duties. Takeaway: A valid IRMA exemption requires a written representation from the client regarding their reliance on an independent advisor and specific written disclosures from the firm regarding their non-fiduciary status.