Series 14 Practice Exam

Answer: C
The MSRB is the SRO charged with writing rules of conduct for dealers in municipal securities, while FINRA examines and enforces those rules against its member firms; the NFA regulates futures and commodities markets and the SEC oversees the securities markets broadly but does not itself draft municipal-dealer-specific conduct rules.

Answer: D
The SEC holds ultimate statutory rulemaking and enforcement authority over broker-dealer registration under the federal securities laws, even though it delegates day-to-day examination to SROs like FINRA; SIPC only steps in to protect customers if a member firm fails financially, and the FDIC insures bank deposits and has no jurisdiction over broker-dealer registration at all.

Answer: A
The standard settlement cycle for most regular-way equity trades is one business day after the trade date; treating the trade as settling the same day ignores the standard clearing and payment process, and the two- or three-day cycles reflect settlement conventions that have since been phased out.

Answer: D
A locate requirement obligates a firm to have reasonable grounds to believe shares can be borrowed before executing a short sale, reducing the risk of a delivery failure; good delivery concerns physical certificate standards, mark-to-market is a periodic valuation process for open positions, and a buy-in is a remedy applied after a settlement failure rather than a pre-trade check.

Answer: A
A market maker continuously quotes and commits its own capital to buy and sell a security, providing liquidity to the market; a transfer agent records ownership changes rather than trading, an introducing broker passes trades to a carrying firm without quoting markets, and a clearing agent settles trades rather than quoting prices for its own account.

Answer: D
An alternative trading system, often called a dark pool, matches orders without displaying quotations before execution, which helps large institutional orders avoid moving the visible market; national exchanges and the primary listing market display quotes publicly, and an inter-dealer quotation system is used for dealer-to-dealer OTC price dissemination rather than concealed order matching.

Answer: D
Securities that trade through dealer networks rather than a centralized exchange listing are OTC-market securities; a dark pool is a specific type of venue that hides pre-trade quotes rather than describing the broader OTC dealer-quoted structure, a primary listing exchange implies formal exchange listing that was ruled out, and a call auction batches orders at set times rather than describing continuous dealer quoting.

Answer: B
The NBBO reflects the best available bid and offer prices aggregated across all market centers trading a security, giving reviewers a benchmark for whether a customer order was filled fairly; the consolidated tape is a trade-reporting feed rather than a price benchmark, the last sale price is a single historical trade, and the opening print is only the day's first trade.

Answer: B
The NSCC nets and clears trades among member firms, standing between counterparties to reduce settlement risk and streamline the exchange of securities and cash; a transfer agent maintains issuer ownership records, an exchange only matches and executes trades without performing central clearing, and the MSRB writes municipal-dealer conduct rules rather than clearing trades.

Answer: C
Customer protection and segregation requirements safeguard fully-paid customer securities from being used to satisfy the firm's own obligations, keeping them free from liens; net capital measures the firm's liquidity rather than custody of customer assets, a fidelity bond insures against employee dishonesty losses, and best execution concerns trade pricing rather than asset custody.

Answer: D
Broker-dealers must disclose payment-for-order-flow arrangements so customers can evaluate the potential conflict inherent in how their orders are routed; treating the arrangement as confidential ignores this public-disclosure duty, banning all such arrangements goes further than what disclosure-based rules actually require, and notifying only a clearing bank does not satisfy the obligation owed to customers.

Answer: A
TRACE is the FINRA facility used to report over-the-counter corporate, agency, and other bond trades to promote pricing transparency in the fixed income market; ACT historically handled equity and OTC trade reporting rather than bonds, and systems tracking order lifecycle events focus on order-audit-trail data rather than bond price reporting.

Answer: C
A buy-in lets the non-defaulting party purchase the securities in the open market and bill any cost difference to the party that failed to deliver, resolving the fail without leaving the firm exposed; a mark-to-market adjustment merely revalues an open position, a DK notice flags a trade the contra-party cannot confirm, and a good delivery objection concerns certificate form defects rather than remedying a failed delivery.

Answer: C
The dividend department calculates and credits dividend and interest payments to street-name holders based on their positions as of the applicable record date; the margin and credit departments manage collateral and lending, and new accounts handles account-opening documentation, none of which distribute dividend payments.

Answer: C
The reorganization department processes corporate actions such as tender offers, exchanges, and conversions, gathering and submitting customer instructions to the issuer or its agent; cashiering moves securities and cash rather than processing corporate-action elections, stock record tracks security positions, and new accounts handles account-opening documentation rather than corporate action instructions.

Answer: D
A DK notice flags a trade a firm cannot confirm because the reported details do not match its own records, prompting investigation before settlement can proceed; a fail to deliver occurs when securities are not delivered by settlement despite an agreed trade, a buy-in is a remedy for such a fail, and a good delivery exception concerns physical certificate defects rather than mismatched trade details.

Answer: A
The proxy department forwards issuer voting materials and tabulates instructions for street-name holders; cashiering handles the receipt and delivery of securities and cash, the reorganization department processes corporate actions like tenders and exchanges, and the margin department monitors collateral and lending, none of which manage proxy distribution.

Answer: B
Cashiering handles the day-to-day movement, receipt, and delivery of securities and cash needed to complete settlement; the proxy department instead handles voting materials, the reorganization department processes corporate actions such as tenders and exchanges, and the credit department oversees margin lending rather than the physical movement of securities and funds.

Answer: C
The stock record is the security-by-security, location-by-location accounting of every position the firm is responsible for, letting the firm reconcile where each share is held; the general ledger tracks the firm's overall financial accounts rather than security locations, a blotter is a chronological record of transactions rather than current holdings, and a customer statement summarizes one client's account rather than the firm-wide inventory.

Answer: D
Regulation U governs credit extended by lenders such as banks, rather than broker-dealers, that is secured by margin stock, applying comparable margin-lending limits outside the broker-dealer context; Regulation T instead governs broker-dealer extensions of credit, Regulation SHO addresses short-sale locate and close-out requirements, and Regulation D concerns exemptions for private securities offerings.

Answer: A
Haircut percentages in the net capital computation are calibrated to a security's price volatility and how readily it could be sold without loss, so a volatile, thinly traded equity warrants a larger deduction than a highly liquid, low-volatility Treasury bill; equities are not excluded outright, haircuts apply to both equity and debt positions, and the percentages vary by instrument type and characteristics rather than staying fixed across all securities.

Answer: B
Regulation T sets the standard initial margin requirement for most margin securities purchases at half of the purchase price, meaning the customer must deposit that portion in cash or eligible collateral; the lower figure describes a maintenance-level concept rather than the initial requirement, and the higher figures overstate what Regulation T itself demands at the time of purchase.

Answer: A
The net capital computation measures a firm's liquid net worth after haircuts on proprietary positions, ensuring sufficient liquidity to protect customers and creditors if the firm must wind down; aggregate indebtedness is only one alternative component used within certain net capital methods rather than the full computation, the customer reserve formula addresses segregation of customer cash rather than firm liquidity, and a fidelity bond insures against employee dishonesty losses rather than measuring capital adequacy.

Answer: A
A supervisor may delegate specific tasks to a qualified designee, but ultimate responsibility for ensuring the function is performed properly remains with the supervisor absent a documented, reasonable system of follow-up; blaming only the assistant, assuming delegation erases accountability, or pointing to an outside auditor all misunderstand that supervisory responsibility is not simply handed off without ongoing oversight.

Answer: B
Registered persons must give notice of outside business activities so the firm can assess conflicts of interest and supervisory implications, even when the activity is not itself securities business; assuming non-securities work is exempt, delaying disclosure until an annual meeting, or waiting for a complaint all ignore the proactive notice obligation tied to outside activities.

Answer: C
Firms use heightened, or enhanced, supervisory plans to apply more frequent or more detailed review of individuals with a history of red flags, such as multiple complaints or disciplinary events; a statutory disqualification is a bar or restriction on registration itself rather than a supervisory review plan, a fidelity bond insures against employee dishonesty losses, and a continuing education waiver would reduce rather than increase oversight.

Answer: C
Reviewing representatives' business-related electronic communications for red flags is a core piece of supervising communications with the public, since improper promises or undisclosed activities often first surface in correspondence; blotter reconciliation checks trade records, net capital computation measures firm liquidity, and proxy tabulation counts shareholder votes, none of which involve reviewing representative correspondence.

Answer: A
Exception reports are automated outputs that flag activity meeting predefined risk criteria, such as high turnover relative to account size, so supervisors can investigate further; confirmations document individual trade terms, a prospectus discloses offering terms for a security, and a tombstone advertisement is a limited-content announcement of an offering, none of which function as ongoing surveillance flags.

Answer: D
Written supervisory procedures document the firm's supervisory system, assigning responsibility, describing review frequency, and creating an evidentiary record that supervision actually occurred; a customer identification program addresses account-opening identity verification, a business continuity plan addresses disaster recovery, and a code of ethics sets conduct standards rather than describing the supervisory review process itself.

Answer: C
Branch office inspections are the structured, on-site reviews used to test whether written procedures are actually being followed in day-to-day practice; a suitability letter documents a single account decision, continuing education addresses training of registered persons, and the annual compliance meeting is a firm-wide discussion of compliance topics rather than a location-specific procedural test.

Answer: D
Participating in securities transactions outside the regular course of the representative's employment without the employer's knowledge and approval is commonly known as selling away, and it deprives the firm of any opportunity to supervise the activity or assess customer suitability; the private and unapproved nature of the arrangement is the concern regardless of the security's registration status, its asset class, or whether it eventually produces a loss.

Answer: A
Deliberately keeping transactions just under a reporting threshold and then quickly moving the funds out is a classic red flag pattern known as structuring, which anti-money-laundering supervision is designed to detect and escalate; a margin call, dividend reinvestment, and options exercise are routine account activities with no inherent pattern of threshold-avoidance or rapid fund movement.

Answer: B
Information barriers, sometimes called Chinese walls, restrict the flow of material nonpublic information between departments, such as investment banking and research, to prevent misuse of confidential deal information; a net capital cushion is a liquidity buffer, a customer identification program verifies account-holder identity, and a best-execution committee monitors order-routing quality, none of which control information flow between departments.

Answer: A
The annual compliance meeting is the firm-wide or individualized session used to review compliance policies, regulatory developments, and areas of concern with registered persons; a branch office inspection tests procedures on-site rather than delivering training, a due diligence meeting concerns investigation of a specific securities offering, and a road show is a marketing presentation to prospective investors in a new issue.

Answer: D
In a firm commitment underwriting, the underwriter buys the full offering from the issuer and assumes the risk of reselling it, unlike a best-efforts deal where the underwriter merely tries to sell as much as possible without buying unsold shares itself; an all-or-none arrangement cancels the deal if the entire offering is not sold rather than describing who bears inventory risk, and standby underwriting relates to backing up a rights offering rather than a general primary distribution.

Answer: A
A greenshoe, or overallotment, option lets underwriters sell additional shares, typically obtained from the issuer, to meet demand beyond the base offering size, helping manage aftermarket price stability; a shelf registration allows an issuer to register securities for sale over time rather than granting underwriters extra shares, a lock-up agreement restricts insiders from selling shares for a period, and a free writing prospectus is a type of offering communication rather than an allotment mechanism.

Answer: C
Publishing promotional research or other publicity while a registration statement is pending can improperly condition investor interest before required disclosures are available, a concern often described as gun-jumping; treating research as categorically exempt, limiting the concern to bond offerings only, or filing with a transfer agent all misstate how offering-communication restrictions actually operate during the pre-effective period.

Answer: D
Rules restricting the allocation of hot new issues are designed to prevent insiders, including underwriting-firm employees, from being favored over public customers in receiving scarce, high-demand shares; assuming employees always have unrestricted access, limiting the concern only to issuer employees, or limiting it only to principals all misstate the broader restricted-persons concept that can apply to a range of industry insiders.

Answer: A
A lock-up agreement is the contractual restriction preventing insiders and pre-IPO holders from selling shares for a specified period after the offering, helping avoid an immediate flood of supply into the aftermarket; a tombstone advertisement is a limited announcement of the offering, a due diligence letter documents the investigative process, and a prospectus supplement updates disclosure for an already-effective shelf registration rather than restricting insider resales.

Answer: A
Due diligence is the investigative process underwriters and counsel undertake to reasonably verify an issuer's disclosures before an offering, supporting a defense against liability for material misstatements; book-building is the process of gauging investor demand and pricing, stabilization refers to permitted post-offering price support activities, and allocation refers to distributing shares among investors, none of which describe the investigative verification process itself.

Answer: B
Shelf registration allows an eligible issuer to register securities in advance and take them "off the shelf" for sale over time as conditions warrant, avoiding a fresh registration for each tranche; a best-efforts underwriting describes the underwriter's sales commitment rather than a registration mechanism, a rights offering grants existing shareholders subscription rights to a specific new issuance, and a private placement is an exempt offering to a limited group rather than a public shelf-registered program.

Answer: C
Linking research opinions to the prospect of winning banking business creates a direct conflict between the duty to provide objective research and the firm's commercial interest in securing banking revenue, which is why information barriers and related conflict-of-interest safeguards exist between research and banking functions; treating any firm-beneficial factor as acceptable, limiting the concern to fixed income, or limiting it to personal stock ownership all miss the structural nature of the conflict.

Answer: B
A recent felony conviction involving securities fraud can trigger statutory disqualification, which requires a firm to complete a heightened review process before the individual can be registered; assuming criminal history is irrelevant, registering the person without review, or applying an arbitrary time cutoff all ignore the specific review obligation this type of history creates.

Answer: A
A termination filing must accurately state why an individual left the firm, including any known sales-practice violation, because the record informs future employers and regulators; listing a for-cause departure as voluntary, omitting the reason, or making disclosure contingent on the individual's agreement would all produce an inaccurate registration record.

Answer: C
A registration that lapses after termination generally remains valid for a set period before prior qualification exams must be retaken, and standard industry practice sets that period at two years; shorter or much longer windows misstate how long a lapsed registration continues to carry forward prior exam credit.

Answer: B
Registration records must be kept current, so a written complaint alleging misconduct such as unauthorized trading generally requires a prompt amendment disclosing the event rather than waiting for a renewal cycle, requiring a particular outcome, or waiting for a regulator to ask; timely disclosure keeps the public record accurate as issues arise.

Answer: B
Approving new accounts and reviewing order tickets are supervisory functions that generally require the individual performing them to hold an appropriate principal registration matching that function, not merely the representative-level registration used for sales activity; assuming no extra qualification is needed, keeping only the prior registration, or limiting principal registration to investment banking roles all misstate the registration category actually required for supervisory work.

Answer: D
Granting a representative trading authority without prior customer approval for each order creates a discretionary account, which must be specifically designated and reviewed more frequently than a non-discretionary account because of the elevated risk of unsuitable or excessive activity; treating it like any ordinary account, relying on annual review alone, or leaving oversight solely to the representative all understate the heightened review this arrangement requires.

Answer: C
When a representative maintains a brokerage account away from their employing firm, the arrangement must be disclosed so the employer can monitor for conflicts, and the outside firm is generally expected to furnish duplicate statements and confirmations to the employer; assuming personal accounts are exempt, limiting the concern to options accounts, or requiring immediate closure all misstate how outside employee accounts are actually handled.

Answer: B
Trading far beyond what a customer's stated objectives would justify, while generating outsized commissions relative to account equity, is a classic red flag for churning that supervision is designed to catch proactively; waiting for a complaint, assuming frequency alone is never relevant, or limiting the concern to margin accounts all miss why this pattern warrants review regardless of account type or complaint status.

Answer: C
Options trading carries risks beyond typical equity trading, so firms require a completed options account agreement and suitability documentation reviewed by a qualified principal before the first options order; accepting only verbal approval, relying on the general new account form alone, or approving after the trade already settled all bypass the heightened pre-approval options trading requires.

Answer: C
Joint account documentation must clearly establish the form of ownership and confirm that each party is authorized to enter orders independently, since the ownership structure determines matters like survivorship and liability; assuming a single signature always suffices, limiting the account to one authorized trader, or treating it identically to an individual account all overlook the extra documentation joint ownership requires.

Answer: A
New account opening documentation must be reviewed and approved by a principal before trading begins, ensuring someone independent of the sales process has evaluated the account information and stated investment profile; letting a representative file the paperwork alone, allowing trading before review, or limiting principal approval to margin accounts all skip this independent check.

Answer: D
A customer's claim that a trade was never authorized points directly to a potential unauthorized-trading issue that compliance must investigate, distinguishing it from routine account events like dividend reinvestment, a margin call, or a proxy vote that do not involve a dispute over who authorized the transaction.

Answer: A
Allowing someone other than the account owner to place trades requires a properly executed trading authorization or power of attorney on file, regardless of the family relationship involved, because the documentation establishes the legal basis for the third party's authority; relying on a verbal statement, assuming a spousal exception exists, or waiving documentation for small accounts all skip this required paperwork.

Answer: D
Converting to a margin account requires a signed margin agreement, delivery of required risk disclosure, and principal approval before margin privileges are extended, because the customer is taking on borrowing-related risk not present in a cash account; skipping the paperwork, relying on equity alone, or accepting approval from any representative all bypass the heightened review margin accounts require.

Answer: A
Before placing unsolicited outbound calls, firms must maintain and check a do-not-call list, including any required registry entries, so representatives avoid contacting individuals who have opted out; assuming no restrictions apply to business calls, checking only existing customers, or limiting the rule to certain hours all misstate the list-checking obligation itself.

Answer: D
Written materials distributed at a public seminar are a form of communication with the public and must go through the firm's supervisory review and approval process before the event, since attendees may rely on the content when making investment decisions; assuming in-person materials are exempt, waiting for a complaint, or relying on venue approval all skip the firm's own required review.

Answer: C
Business-related emails discussing account performance and potential investments are correspondence that must be retained and made available for supervisory review, just like other required business records; deleting them at account closure, exempting email from retention, or making retention optional unless requested all misstate the ongoing recordkeeping obligation attached to such communications.

Answer: C
An order the customer initiates entirely on their own, without a recommendation from the representative, should be coded as unsolicited so the record accurately reflects who originated the trade idea; coding it as solicited misattributes the recommendation, leaving it uncoded ignores that coding applies broadly, and coding it as discretionary confuses order origination with trading authority.

Answer: B
A representative's social media post that identifies them with the firm is generally treated as a business communication subject to the firm's supervisory review, approval, and recordkeeping obligations, since the public may reasonably view it as coming from someone acting in their registered capacity; assuming personal accounts are automatically outside firm oversight, limiting review to specific-stock mentions, or limiting it to paid ads all understate the scope of communications supervision.