Module 4: Overview of the Regulatory Framework

• Topic 01

  Registration and Continuing Education

  130 questions
• Topic 02

  Employee Conduct and Reportable Events

  132 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. A registered representative's firm approves her participation in a private securities transaction involving a pooled real estate fund after she discloses she will receive a placement fee. Six months later, a customer who invested in the fund files a complaint alleging the representative made unsuitable recommendations. Under FINRA Rule 3280, which party bears supervisory responsibility for the transaction?

   • A
     The firm bears no responsibility because the transaction occurred outside its normal operations
   • B
     Responsibility is shared equally between the firm and the SEC because a pooled real estate fund is a registered security
   • C
     The member firm bears supervisory responsibility because it approved the transaction and was required to supervise it as its own
     Correct answer
   • D
     The representative bears sole responsibility because she initiated the transaction outside the firm's normal business
   Explanation

   Once a firm approves a compensated private securities transaction under Rule 3280, it must supervise the transaction as if it were the firm's own. This means the firm assumes supervisory responsibility for the activity, including ensuring that recommendations are suitable. The firm cannot disclaim responsibility simply because the transaction originated outside its normal business channels — approval triggers full supervisory obligation.

2. A registered representative holds shares in a publicly traded company as a personal investment. Is this an outside business activity requiring disclosure under FINRA Rule 3270?

   • A
     No — passive investments such as holding publicly traded stock are not considered outside business activities and do not trigger Rule 3270's disclosure requirement
     Correct answer
   • B
     No — only board positions or management roles at outside companies require disclosure; passive stock ownership is generally excluded
   • C
     Yes — holding stock in public companies is an outside business activity if the shares represent more than 1% of the company
   • D
     Yes — any financial relationship with an outside entity requires prior written disclosure to the firm
   Explanation

   Holding a passive investment in a publicly traded company — such as owning shares — is not an outside business activity under Rule 3270. The rule targets activities that involve employment, management, or regular participation in an outside enterprise. Passive investments without managerial involvement do not constitute an OBA, though firms may have their own more restrictive policies.

3. Under FINRA Rule 3220, a registered representative sends a $60 gift basket to a client's assistant in February, and a $55 gift card to the same assistant in October of the same year. Which statement best describes whether these gifts comply with the rule?

   • A
     Both gifts are permissible because they are given on separate occasions separated by several months
   • B
     Both gifts are permissible because each individual gift is below $100
   • C
     The gift card is impermissible because cash equivalents are rarely permitted under Rule 3220 regardless of amount
   • D
     The combined gifts total $115 for the year, which exceeds the $100 annual per-person limit, making the second gift impermissible
     Correct answer
   Explanation

   Under FINRA Rule 3220, the $100 gift limit is measured per person per year on an aggregate basis. Individual gifts that each fall below $100 can still collectively exceed the annual cap. Here, $60 + $55 = $115, which exceeds the $100 annual limit. The second gift (the $55 gift card) pushes the total over the threshold and makes it impermissible. The limit does not reset quarterly, and there is no rule automatically barring a second gift — it is the cumulative total that matters.