Series 9/10 Practice Exam.
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1. A common shareholder and a preferred shareholder both hold securities in the same company. Which statement generally reflects their relative claim on dividends?

• A. Common shareholders typically receive dividends before preferred shareholders
• B. Both classes always receive a guaranteed fixed dividend simultaneously
• C. Neither class is entitled to dividends under any circumstances
• D. Preferred shareholders typically have priority over common shareholders for dividend payments

2. Which of the following best characterizes the general effect of rising market interest rates on the price of an outstanding fixed-rate bond?

• A. The bond's price tends to fall
• B. The bond's price is unaffected
• C. The bond's coupon rate automatically increases to match
• D. The bond's price tends to rise

3. An investor holds a diversified portfolio and a single-security portfolio of equal total value. Which statement best reflects the general concept of diversification with respect to unsystematic risk?

• A. Diversification eliminates all systematic (market) risk
• B. Diversification has no effect on any type of risk
• C. Diversification tends to increase unsystematic risk
• D. Diversification tends to reduce unsystematic (security-specific) risk

4. A registered representative wants to describe the overarching purpose of the rules governing customer accounts and prohibited activities. Which statement best captures that purpose?

• A. To maximize the firm's commission revenue on each account
• B. To eliminate the need for supervision of associated persons
• C. To protect investors and promote fair, orderly markets by constraining abusive conduct
• D. To guarantee that every customer earns a positive return

5. A representative excessively trades a customer's account primarily to generate commissions rather than to serve the customer's objectives. This prohibited practice is known as:

• A. Churning
• B. Hedging
• C. Rebalancing
• D. Netting

6. A representative recommends a security while omitting material negative information in order to induce a purchase. This conduct is best described as:

• A. A prohibited material misrepresentation or omission
• B. A permissible sales technique
• C. A form of allowed puffery with no consequences
• D. Required suitability analysis

7. A customer instructs a representative to buy a large block of a thinly traded stock at successively higher prices near the close, with the apparent purpose of raising its reported price. Acting on this to distort the market would constitute:

• A. An acceptable arbitrage strategy
• B. Prohibited market manipulation
• C. A required best-execution step
• D. Legitimate price discovery

8. A candidate is preparing for a securities licensing exam and wants to know how many multiple-choice items the exam contains. What is the correct count?

• A. 100 questions
• B. 150 questions
• C. 250 questions
• D. 200 questions

9. On an exam with 200 items and a 70 percent pass requirement, what is the minimum number of items a candidate must answer correctly to pass?

• A. 150 items
• B. 130 items
• C. 120 items
• D. 140 items

10. Which of the following best describes the relationship between an equity security and a debt security in a firm's capital structure?

• A. Equity holders are creditors of the firm, while debt holders are owners
• B. Debt holders always have voting rights, while equity holders never do
• C. Equity represents an ownership interest, while debt represents a creditor claim
• D. Both equity and debt confer identical priority in liquidation

11. In the context of capital markets, which statement most accurately distinguishes the primary market from the secondary market?

• A. The primary market is where securities are issued to investors for the first time; the secondary market is where existing securities trade among investors
• B. The two markets are identical and the terms are interchangeable
• C. The primary market involves resale between investors; the secondary market involves new issuance by the company
• D. The primary market is where only bonds trade; the secondary market is where only stocks trade

12. Which statement best describes the general role of a secondary market in supporting capital formation?

• A. It prevents any trading of securities after issuance
• B. It exclusively determines the coupon rate of all future bond issuances
• C. It eliminates the need for issuers ever to raise new capital
• D. It provides liquidity that makes investors more willing to purchase newly issued securities in the primary market

13. An associated person effects a transaction in a customer's account without first obtaining the customer's authorization, and the account is not discretionary. This conduct is BEST characterized as:

• A. An unauthorized transaction, which is a prohibited activity
• B. A standard practice for active accounts
• C. Acceptable so long as the trade is profitable
• D. A permissible accommodation trade

14. Before a representative may exercise discretion over the timing and price of an order in a customer's account without a prior conversation each time, what is generally required?

• A. Nothing; discretion is automatic once an account is opened
• B. Approval from the customer's tax advisor
• C. A verbal hint from the customer at some point in the past
• D. Prior written authorization from the customer and firm acceptance of the account as discretionary

15. A firm shares in the profits of a customer's account. In general, such profit-sharing arrangements by a member or its associated persons are:

• A. Permitted only if the customer loses money
• B. Freely permitted with no conditions
• C. Required for every managed account
• D. Generally prohibited except under narrowly defined, authorized conditions

16. When opening a new customer account, obtaining essential facts about the customer (such as financial situation and investment objectives) primarily supports which obligation?

• A. Guaranteeing investment gains
• B. Eliminating the need for account approval
• C. Avoiding any supervision of the account
• D. Making suitable recommendations appropriate to the customer

17. A supervisor is establishing the framework a branch will use to supervise its registered representatives. What document must the firm create and maintain?

• A. Written supervisory procedures reasonably designed to achieve compliance with applicable rules
• B. A schedule of commission rates by product
• C. A list of the firm's most profitable representatives
• D. A marketing plan approved by the board

18. What is the general requirement for a firm to conduct an internal inspection of a branch office where retail business is conducted?

• A. Inspection only when a customer complaint is received
• B. Inspection once every ten years
• C. No inspection is required if the branch has no complaints
• D. Periodic inspection on a cycle set by the firm's risk assessment, with offices of supervisory jurisdiction inspected at least annually

19. A supervisor conducting a branch inspection reviews the branch manager's own customer accounts. What conflict must the firm address?

• A. The manager may review their own accounts if they document the review
• B. No conflict exists because the manager is a registered principal
• C. The conflict is resolved by having the manager's assistant perform the review
• D. A person may not supervise their own activities, so the inspection of a producing manager's accounts must be conducted by someone independent

20. A firm must designate an office as an office of supervisory jurisdiction. Which activity conducted at a location triggers that designation?

• A. Only the firm's headquarters
• B. Final approval of new accounts, or review and endorsement of customer orders
• C. Any location where a registered representative maintains a desk
• D. Only locations with more than twenty registered persons

21. A supervisor is reviewing a registered representative's Form U4 disclosure obligations. Within what general timeframe must a reportable event be disclosed by amendment?

• A. Only upon request from a regulator
• B. Within 90 days of the event
• C. At the next annual compliance meeting
• D. Within 30 days of learning of the event

22. A firm is hiring a registered representative from another member. What background investigation obligation applies?

• A. No investigation is required if the applicant is already registered elsewhere
• B. The firm must investigate the applicant's good character, business reputation, qualifications and experience, including obtaining the prior Form U5
• C. The firm may rely entirely on the applicant's own representations
• D. The firm must wait one year before hiring from a competitor

23. A registered representative's registration has been inactive for more than two years. What is the general consequence?

• A. The qualification examination must generally be retaken unless a continuing education program preserves eligibility
• B. The person may never register again
• C. Only a supervisor's attestation is required
• D. The registration reactivates automatically upon rehire at any time

24. A supervisor must ensure registered persons complete continuing education. What are the two components of the program?

• A. A single annual seminar hosted by the regulator
• B. An examination element and an interview element
• C. A regulatory element administered on a required cycle, and a firm element the member designs annually
• D. A product element and a marketing element

25. A supervisor learns that a registered representative has an outside business activity. What must occur?

• A. The activity is prohibited in all circumstances
• B. The representative must provide prior written notice, and the firm must evaluate and record the activity
• C. No action is needed if the activity is unrelated to securities
• D. Notice is required only if the activity generates more than a stated income

26. A supervisor is reviewing whether a representative's proposed private securities transaction may proceed. What distinguishes the required handling when the representative will receive selling compensation?

• A. Compensated transactions are always prohibited
• B. The firm must approve or disapprove in writing, and an approved transaction is recorded on the firm's books and supervised as if it were firm business
• C. Approval may be given verbally
• D. Only notice is required, with no firm decision

27. A supervisor is designing a review of a branch's discretionary accounts. What review obligation applies?

• A. No review, because discretion transfers responsibility to the representative
• B. Annual review only, since the customer granted authority
• C. Frequent review of discretionary accounts by a designated principal to detect excessive trading
• D. Review only when the customer complains

28. A supervisor is evaluating whether trading in a customer account is excessive. Which measures are most relevant?

• A. The total number of trades alone, with no reference to account size
• B. Turnover rate and cost-to-equity ratio, considered against the customer's objectives and resources
• C. The representative's ranking among branch producers
• D. Whether the account has produced a profit

29. A supervisor reviews a representative's recommendation of a complex product to a retail customer. What must the suitability analysis include?

• A. Only that the customer requested the product
• B. Only that the product is registered with the SEC
• C. Only that the customer signed an acknowledgment of risk
• D. A reasonable basis that the product is suitable for some investors and that it is suitable for this particular customer

30. A representative recommends that a customer liquidate a mutual fund position held eight months and purchase a similar fund from a different family, incurring a new sales charge. What supervisory concern arises?

• A. No concern, since the customer may hold any fund they choose
• B. No concern, provided the new fund has better past performance
• C. Potential switching, which requires scrutiny of the rationale and of the costs imposed on the customer
• D. The transaction is automatically prohibited

31. A supervisor reviews a proposed communication that will be distributed to more than 25 retail investors within 30 calendar days. How is this classified?

• A. Correspondence, subject only to post-use review
• B. A retail communication, subject to principal approval before use
• C. An institutional communication, exempt from retail standards
• D. A private placement memorandum

32. A representative wants to send a research-based email to 12 retail clients. What supervisory treatment applies?

• A. It requires principal pre-approval as a retail communication
• B. It requires filing with the regulator before use
• C. It is correspondence, subject to the firm's review and supervision procedures rather than pre-approval
• D. It is exempt from any supervisory review

33. A supervisor reviews a retail communication that projects the future performance of a recommended security. What is the general rule?

• A. Projections are permitted if based on past performance
• B. Projections are permitted if labeled as estimates
• C. Projections are permitted if a principal approves them
• D. Projections of performance are generally prohibited in retail communications, with narrow exceptions

34. A supervisor receives a written customer complaint alleging unauthorized trading. What is the required handling?

• A. Resolve it informally with the customer and discard the letter
• B. Take no action unless the customer files an arbitration claim
• C. Record it in the complaint file, investigate, report it as required, and amend the representative's Form U4 if the criteria are met
• D. Forward it to the representative to answer directly without firm involvement

35. A supervisor is reviewing the firm's obligation to send account statements to customers. What is the general frequency requirement?

• A. Weekly for all accounts
• B. Only when the customer requests one
• C. At least quarterly, and monthly for accounts with activity during the month
• D. Annually only

36. A customer asks that duplicate confirmations and statements be sent to a third party. What supervisory step is required?

• A. Send duplicates only to the representative
• B. Accept a verbal instruction from the customer
• C. Refuse all third-party duplicates
• D. Obtain the customer's written instruction and retain it, and consider whether the arrangement signals a conflict

37. A supervisor is establishing the firm's anti-money laundering program. Which element is required?

• A. Reliance on the clearing firm's program with no firm program of its own
• B. Annual training with no testing requirement
• C. A designated compliance officer, written policies, ongoing training, and independent testing
• D. A designated compliance officer only

38. A supervisor identifies a pattern of transactions with no apparent business purpose in a customer account. What is the appropriate action?

• A. Escalate for suspicious activity evaluation and possible reporting, without alerting the customer
• B. Ask the customer to explain why a report may be filed
• C. Take no action unless a single transaction exceeds a dollar threshold
• D. Close the account and take no further action

39. A supervisor is reviewing employee trading in a security about which the firm possesses material nonpublic information. Which control addresses this directly?

• A. Publishing the firm's deal pipeline internally
• B. Requiring employees to trade only through the firm
• C. Maintaining restricted and watch lists with surveillance of employee and proprietary trading
• D. Prohibiting all employee securities ownership

40. A supervisor is reviewing markups on principal transactions in thinly traded debt securities. What standard applies?

• A. Markups must be fair and reasonable considering all relevant circumstances, measured from the prevailing market price
• B. Any markup under 5 percent is automatically acceptable
• C. Markups are measured from the firm's own cost in all cases
• D. Markups are unregulated in principal transactions

41. A supervisor discovers that a representative accepted an order from a customer's spouse who holds no trading authority. How should this be handled?

• A. Ratify the trade if the customer does not object
• B. Take no action because the spouse is family
• C. Have the spouse sign a trading authorization after the fact
• D. Treat it as an unauthorized transaction, investigate, remediate with the customer, and address the representative's conduct

42. A supervisor reviews a representative's sale of a variable annuity to a 79-year-old customer with a long surrender period. What is the central concern?

• A. Whether the product produced the highest commission available
• B. Nothing, since annuities are insurance products outside supervision
• C. Whether the insurer has the largest market share
• D. Whether the surrender period and liquidity terms are suitable given the customer's age, time horizon and need for access to funds

43. A representative is selling securities in a private placement to firm customers. What supervisory obligation applies to the offering itself?

• A. No diligence is required because the offering is exempt from registration
• B. Diligence is required only if a customer asks for it
• C. The issuer's representations may be relied on without independent inquiry
• D. The firm must conduct reasonable due diligence on the offering and have a reasonable basis to believe it is suitable for at least some investors

44. A supervisor must handle a customer's request to transfer their account to another firm. What is the general obligation?

• A. Refuse the transfer if the account has an outstanding balance of any size
• B. Require the customer to close all positions first
• C. Delay the transfer while the representative attempts to retain the customer
• D. Expedite the transfer and validate or take exception promptly; the transfer may not be delayed to retain the account

45. A supervisor is asked to approve an arrangement in which a representative shares commissions with an unregistered person. What is the general rule?

• A. It is permitted if the amount is under a stated threshold
• B. Sharing transaction-based compensation with an unregistered person is generally prohibited
• C. It is permitted if the customer consents in writing
• D. It is permitted if the unregistered person is a relative

46. A supervisor reviews the firm's obligation regarding gifts given to employees of an institutional customer. What limit generally applies?

• A. No limit for institutional customers
• B. 100 dollars per recipient per year for gifts in relation to the business of the recipient's employer, with records maintained
• C. 500 dollars per recipient per year
• D. No limit provided the gifts are disclosed annually

47. A supervisor must certify annually regarding the firm's compliance processes. Who is responsible for that certification?

• A. The chief executive officer, based on a process that includes consultation with the chief compliance officer
• B. Each branch manager independently
• C. The chief compliance officer alone
• D. The firm's outside auditor

48. A supervisor learns of a potential violation by a representative. What does a reasonable supervisory response require?

• A. Delegating the entire matter to the representative's own explanation
• B. Prompt investigation, appropriate follow-up including remediation and discipline, and documentation of the actions taken
• C. Noting the concern and awaiting a regulatory inquiry
• D. Terminating the representative without inquiry

49. What defense is generally available to a supervisor charged with failure to supervise?

• A. That the supervisor was unaware of the rule at issue
• B. That the firm had reasonable procedures and systems in place and the supervisor reasonably discharged the duties those procedures assigned
• C. That the representative concealed the conduct skillfully
• D. That the firm was profitable during the period

50. A supervisor is reviewing the firm's obligation to report certain events to the regulator. Which event requires prompt reporting?

• A. The firm or an associated person being subject to a written customer complaint alleging theft or misappropriation of funds
• B. A routine change in a representative's residential address
• C. A decline in the firm's revenue
• D. A customer closing an account for ordinary reasons

51. A supervisor is designing controls over the review of correspondence. What approach satisfies the requirement?

• A. Reading every message before it is sent, with no exceptions
• B. A documented risk-based method such as lexicon-driven surveillance and sampling, applied consistently and evidenced
• C. Relying on annual attestations from representatives
• D. Reviewing only messages the representative flags

52. A supervisor is reviewing new account documentation. Which information must be obtained for a retail account before or promptly after opening?

• A. Only an acknowledgment of the firm's privacy notice
• B. Only the customer's tax identification number
• C. Customer name and residence, whether of legal age, and the names of associated persons responsible for the account, with additional profile information for recommendations
• D. Only the customer's name and telephone number

53. A supervisor is asked whether a customer's stated objective alone establishes suitability for a recommendation. What is the correct view?

• A. No; only age and net worth matter
• B. Yes; a stated objective is dispositive
• C. No; the objective is one factor alongside financial situation, risk tolerance, time horizon, liquidity needs and experience
• D. Yes, provided the objective is documented in writing

54. A supervisor identifies that a representative has been designating trades as unsolicited when the representative in fact recommended them. Why is this significant?

• A. It is acceptable if the customer later agrees the trade was their own idea
• B. It falsifies firm records and evades suitability review by removing the trade from recommendation-based supervision
• C. It has no supervisory consequence, since the customer approved each trade
• D. It only affects the commission calculation

55. A supervisor must decide how long to retain the firm's written supervisory procedures after they are superseded.

• A. Only the current version must ever be retained
• B. They must be retained for the period the records rules require, so prior versions remain available for examination
• C. Retention is at the supervisor's discretion
• D. Superseded versions may be discarded immediately

56. A supervisor is reviewing a representative's use of a personal messaging application to discuss securities business with customers. What is the concern?

• A. Business communications on unapproved channels escape the firm's retention and supervision obligations
• B. There is no concern because personal devices are outside firm authority
• C. The concern is limited to the cost of the application
• D. There is no concern if the content is accurate

57. A supervisor reviews a customer's request to designate a trusted contact person. What is the firm's obligation?

• A. Require a trusted contact before the account may be opened
• B. Obtain a trusted contact only for customers over a stated age
• C. Make reasonable efforts to obtain the name and contact information of a trusted contact when opening or updating an account
• D. Treat the trusted contact as holding trading authority

58. A supervisor must decide whether a proposed transaction constitutes a prohibited practice because the firm would trade ahead of a customer's large order. What is this called?

• A. A permitted proprietary hedge in all circumstances
• B. Front running, which is prohibited
• C. Best execution
• D. Bona fide market making

59. A supervisor is reviewing allocations of a hot new issue among customer accounts. What practice is prohibited?

• A. Declining to allocate to a customer whose profile does not fit the issue
• B. Documenting the allocation methodology in advance
• C. Allocating pro rata among indicating customers
• D. Allocating shares to accounts of restricted persons, or conditioning allocations on the customer's agreement to buy other securities

60. A supervisor is asked to approve the firm's participation in a customer's outside investment club that trades securities. What should be evaluated first?

• A. Only whether the club is profitable
• B. Nothing, since customer activities are outside supervision
• C. Only the club's membership size
• D. Whether any associated person's involvement constitutes an outside business activity or private securities transaction requiring notice and approval

61. A supervisor notices that a customer approved only for covered call writing has begun entering uncovered short call orders. What is the supervisor's obligation?

• A. Permit the trades if the account has sufficient equity
• B. Permit the trades since the account already has options approval
• C. Block the activity until the account is reviewed and, if appropriate, formally approved for the higher-risk strategy tier
• D. Permit the trades if the customer signs a risk acknowledgment afterward

62. A corporation issued long-term callable bonds several years ago when prevailing interest rates were substantially higher than today's rates. Which action by the issuer should current bondholders most reasonably anticipate?

• A. The issuer will call the bonds and refinance the debt at today's lower rates
• B. The issuer will extend the bonds' maturity to lock in the old coupon
• C. The issuer will raise the coupon to match current market yields
• D. The issuer will exchange the bonds for common stock at par

63. A company has skipped two years of dividends on its cumulative preferred stock. The board now wants to declare a dividend on the common stock. What must happen first?

• A. Only the current year's preferred dividend must be paid before the common dividend
• B. All preferred dividends in arrears plus the current preferred dividend must be paid before any common dividend
• C. The common dividend may be paid immediately because dividends are discretionary
• D. The preferred shares must be converted to common before any payment

64. An investor holds a corporate zero-coupon bond in a fully taxable account. What tax consequence should the investor expect while holding the bond to maturity?

• A. Annual taxation on accreted interest even though no cash interest is received
• B. Conversion of all gains into tax-free income at maturity
• C. Taxation only on the semiannual coupon payments
• D. No taxation until the bond matures or is sold

65. A portfolio manager wants to identify which bond in the portfolio will show the greatest price change for a given shift in market interest rates. Which bond fits that description?

• A. A short-maturity zero-coupon bond
• B. A long-maturity bond with a low coupon
• C. A long-maturity bond with a very high coupon
• D. A short-maturity bond with a high coupon

66. A municipality issues bonds to build a toll bridge, with debt service to be paid solely from bridge tolls. How are these bonds best characterized?

• A. Double-barreled bonds backed by both taxes and tolls automatically
• B. General obligation bonds backed by the issuer's full taxing power
• C. Revenue bonds whose credit depends on the earnings of the financed facility
• D. Moral obligation bonds requiring legislative appropriation each year

67. A supervisor reviewing market commentary sees that short-term Treasury yields currently exceed long-term Treasury yields. What does this yield-curve shape conventionally suggest?

• A. That short-term instruments have become riskier than long-term bonds
• B. Market expectations of slower economic growth and lower future rates
• C. An imminent surge in long-term inflation expectations
• D. That long-term bonds now carry no interest-rate risk

68. A U.S. investor buys American Depositary Receipts of a Japanese company. Beyond ordinary equity risk, which additional risk does this position carry?

• A. Inability to sell the position in U.S. markets
• B. Elimination of dividend eligibility because the shares are held abroad
• C. Exposure to U.S. state tax on foreign earnings only
• D. Currency exchange risk between the yen and the U.S. dollar

69. When comparing preemptive rights offerings with warrants, which statement accurately captures a key distinction?

• A. Rights are typically short-term and priced below the stock's current market price, while warrants are long-term with exercise prices initially above the market
• B. Warrants are issued only to existing shareholders and expire within weeks
• C. Warrants obligate the holder to purchase shares, while rights do not
• D. Rights always trade for decades while warrants expire at once

70. A dealer sells securities to a counterparty and simultaneously agrees to buy them back at a slightly higher price on a specified near-term date. What is the economic substance of this arrangement?

• A. An interest-rate swap between the two parties
• B. A collateralized short-term borrowing known as a repurchase agreement
• C. An equity underwriting commitment
• D. A permanent sale that transfers all market risk to the buyer

71. A bond is currently trading at a discount to its par value. Which relationship among its yield measures is correct?

• A. Yield to maturity is higher than current yield, which is higher than the nominal yield
• B. Current yield equals the nominal yield exactly
• C. Nominal yield is higher than yield to maturity
• D. All three yield measures are identical for a discount bond

72. A customer sells short shares of a listed common stock. What is the customer's maximum potential loss on this position if no other positions are held?

• A. The difference between the sale price and zero
• B. Unlimited, because the stock's price can rise without any ceiling
• C. The proceeds received from the short sale
• D. The margin deposit posted for the position

73. How do high-yield corporate bonds generally compare with investment-grade corporate bonds of similar maturity?

• A. They carry identical default risk but different tax treatment
• B. They offer lower yields because they are more actively traded
• C. They eliminate interest-rate risk in exchange for credit risk
• D. They carry greater default risk, for which investors demand higher yields

74. A customer wants to buy a large position in an equity that trades only a few hundred shares per day. Which risk should the representative emphasize first?

• A. Liquidity risk, including wide spreads and price impact when entering or exiting
• B. Reinvestment risk on the position's dividends
• C. Purchasing-power risk from long-term inflation
• D. Regulatory risk from foreign exchange controls

75. An investor is worried that rising consumer prices will erode the real value of investment income over the next several decades. Which holding is most exposed to that concern?

• A. A short-term instrument rolled over as it matures
• B. A broadly diversified common stock portfolio
• C. A long-term fixed-rate bond held to maturity
• D. Direct ownership of income-producing real estate

76. A public company sells newly created shares in a follow-on offering, while several early investors simultaneously sell existing shares through a registered secondary offering. What distinguishes the two components?

• A. Both components deliver proceeds to the issuer equally
• B. Proceeds from the new shares go to the issuer, while proceeds from the existing shares go to the selling shareholders
• C. Only the secondary component requires registration
• D. The secondary component creates new shares while the follow-on does not

77. A stock has exhibited price swings consistently larger than those of the overall market. In portfolio terms, how is this characteristic described?

• A. A beta of zero, indicating independence from the market
• B. A beta greater than one, indicating above-market volatility
• C. A guarantee of above-market long-term returns
• D. Pure unsystematic risk that diversification has already removed

78. A convertible bond's underlying stock has risen far above the bond's effective conversion price. How will the bond's market price now primarily behave?

• A. It will track its conversion value, moving largely in step with the stock
• B. It will become insensitive to both rates and the stock price
• C. It will trade close to its straight-bond value regardless of the stock
• D. It will fall to par because conversion is now certain

79. A corporate treasurer needs a place to invest surplus cash for a few weeks with minimal price risk. Which instrument belongs on the recommendation list?

• A. High-grade commercial paper
• B. A twenty-year subordinated debenture
• C. Long-term equity anticipation options
• D. Common stock of a small-cap growth company

80. A corporate bond and a Treasury security have identical maturities, yet the corporate bond consistently yields more. What primarily explains the difference?

• A. Treasuries always carry higher coupons by statute
• B. Corporate bonds are exempt from all taxation
• C. Investors demand a premium for the corporate issuer's credit (default) risk
• D. The corporate bond has no interest-rate risk to compensate

81. A customer purchases shares of a dividend-paying stock on its ex-dividend date. Who is entitled to the recently declared dividend?

• A. The seller, because the buyer purchased without the dividend and the price reflects that
• B. The buyer, because ownership transfers immediately at trade time
• C. Neither party; the dividend reverts to the issuer
• D. The buyer and seller split the dividend proportionally

82. In a cash account, a customer buys stock and sells it two days later, then fails to deposit the funds to pay for the original purchase. How is this activity characterized?

• A. Freeriding, a prohibited practice that results in restrictions on the account
• B. A wash sale governed solely by tax rules
• C. Ordinary day trading permitted in any cash account
• D. A bona fide covered transaction with no consequences

83. After a recommended stock declines sharply, a representative tells the customer in writing that the firm will repurchase the shares at the customer's original cost if the price has not recovered within a year. How should a supervisor treat this?

• A. As acceptable provided the amount is small relative to the account
• B. As permissible because it involves the firm rather than the representative personally
• C. As a prohibited guarantee against loss that must be addressed immediately
• D. As an acceptable goodwill gesture if the customer agrees in writing

84. A trader repeatedly enters large limit orders away from the market with no intention of executing them, canceling them moments later once other participants react and move the price toward his smaller genuine orders on the other side. What is this pattern?

• A. Legitimate liquidity provision rewarded by exchanges
• B. Permissible use of immediate-or-cancel orders
• C. Spoofing or layering, a prohibited manipulative practice
• D. Acceptable algorithmic market testing

85. A representative asks a wealthy longtime customer, who is neither a family member nor in the lending business, for a personal loan to cover a home renovation. What is the general standard governing this request?

• A. The loan is permitted automatically once the customer agrees
• B. Borrowing from a customer is generally prohibited unless firm procedures permit it and the relationship falls within narrow recognized categories
• C. Loans between representatives and customers are always permitted if repaid with interest
• D. The loan is acceptable as long as it is documented in writing

86. A trader simultaneously enters buy and sell orders for the same security through accounts he controls, so that executions occur with no change in beneficial ownership, creating the appearance of active volume. What is this conduct?

• A. An acceptable cross transaction if commissions are charged
• B. Legitimate hedging between related accounts
• C. Permissible portfolio rebalancing
• D. A prohibited wash trade intended to create misleading market activity

87. Two traders at different firms privately agree that one will enter buy orders while the other enters corresponding sell orders in the same security at coordinated times and prices to generate the appearance of rising demand. What have they engaged in?

• A. Matched orders, a form of prohibited market manipulation
• B. Permissible coordinated block positioning
• C. Lawful market making in a thinly traded security
• D. Bona fide arbitrage between market centers

88. A customer learns from a close friend, a company insider who breached his duty by sharing the information, that an unannounced merger is imminent, and the customer buys the stock knowing how the information was obtained. What is the customer's exposure?

• A. Liability as a tippee who traded on material nonpublic information knowing it came from a breach of duty
• B. None, because the customer paid nothing for the tip
• C. Liability only if the merger is ultimately completed
• D. None, because only company employees can commit insider trading

89. Two unrelated business partners hold a brokerage account as joint tenants with rights of survivorship. When one partner dies, what happens to the account assets?

• A. The deceased partner's share passes to his estate for distribution under his will
• B. Half the assets are frozen permanently pending litigation
• C. The account is liquidated and split between the estate and the survivor
• D. The deceased partner's interest passes directly to the surviving joint tenant

90. A grandmother opens a custodial account for her ten-year-old grandson under the Uniform Transfers to Minors Act and later asks to take back part of the funds for herself. What should she be told?

• A. She may withdraw the funds at any time because she funded the account
• B. The minor can authorize the withdrawal by signing a consent form
• C. The account can simply be retitled into her name
• D. Gifts to the custodial account are irrevocable; the assets belong to the minor and must be used for the minor's benefit

91. A corporation wants to open a securities trading account with a member firm. Which documentation establishes who may enter orders for the account?

• A. A verbal assurance from the chief executive officer
• B. Personal identification from any employee placing orders
• C. A corporate resolution identifying the individuals authorized to trade for the corporation
• D. A copy of the corporation's most recent annual report

92. A representative deposits a customer's check into his own bank account, intending to forward the money to the firm the following week, and does eventually forward the full amount. How is the representative's conduct viewed?

• A. Acceptable because the funds were ultimately delivered in full
• B. A serious violation involving conversion and commingling of customer funds, regardless of eventual repayment
• C. A minor administrative error requiring no action
• D. Acceptable if the customer is later informed

93. A market maker publishes a firm quote in an OTC equity, but when another dealer attempts to trade at that quote, the market maker refuses to honor it without having updated the quotation. What is this conduct called?

• A. Permissible quote refreshing
• B. Ordinary price improvement
• C. Backing away, a violation of firm-quote obligations
• D. An acceptable subject quote

94. Trading in a stock is halted pending a material news announcement. A customer immediately calls to sell shares at the last printed price. What should the representative explain?

• A. The firm will buy the shares into inventory at the halted price
• B. No order can be executed until trading resumes, and the reopening price may differ substantially from the last sale
• C. The customer must convert the order to a market-on-close order
• D. The order can be executed at the last sale price during the halt

95. To conceal a position from regulators and avoid reporting obligations, a trader sells securities to an accommodating counterparty with a secret understanding that he will repurchase them at a prearranged price after the reporting date. What is this scheme?

• A. Parking, a prohibited practice used to disguise true ownership
• B. Bona fide window dressing permitted at period end
• C. An ordinary riskless principal transaction
• D. A legitimate repurchase agreement executed at market terms

96. Before executing a customer's short sale in an equity security, what must the firm generally have done with respect to the shares being sold?

• A. Obtained reasonable grounds to believe the security can be borrowed and delivered by settlement (a locate)
• B. Purchased the shares into firm inventory in advance
• C. Confirmed the customer already owns the shares outright
• D. Received written approval from the exchange where the stock trades

97. A customer keeps a substantial free credit balance at the firm after recent sales and asks whether he can have the money sent to him whenever he chooses. What is the firm's obligation?

• A. The funds may be released only at quarter end
• B. The firm may hold the funds until the customer's next purchase
• C. Free credit balances are payable to the customer upon demand
• D. The firm may convert the balance into firm stock automatically

98. A supervisor discovers that a representative has been raising money from firm customers for a real-estate note program run by his brother-in-law, without ever informing the firm. The representative argues the sales happened on weekends using personal email. How is this conduct classified?

• A. Permitted personal networking outside business hours
• B. An outside business activity that required only verbal notice
• C. Selling away — private securities transactions conducted without the required notice to the firm
• D. Acceptable because the customers signed subscription documents

99. A customer asks that her account be identified only by a number on all records and correspondence for privacy reasons. What must the firm obtain to maintain the account this way?

• A. Approval from the customer's attorney
• B. Nothing beyond the customer's verbal request
• C. A court order authorizing anonymous trading
• D. A written statement signed by the customer attesting to her ownership of the numbered account

100. A dealer facing a loss on bonds in inventory arranges for a customer institution to buy them at an above-market price, compensating the institution by selling it different bonds at prices below market, so no loss appears on either record. What is this practice?

• A. A bona fide exchange offer
• B. A permissible portfolio swap between dealer and institution
• C. Adjusted trading, a prohibited practice that falsifies the records of both parties
• D. Legitimate position hedging

101. A margin customer has begun buying and selling the same securities within single trading days on a frequent, recurring basis. The firm's system flags the account under its day-trading criteria. What obligation does this status trigger for the firm?

• A. The customer must move all positions to a cash account
• B. The firm must reimburse the customer's trading losses
• C. The account becomes subject to special day-trading margin requirements, including a higher minimum equity standard
• D. The firm must close the account within one week

102. A branch representative has accumulated several customer complaints alleging aggressive sales tactics within a short period, though none has yet been adjudicated. What is the appropriate supervisory response to this pattern?

• A. Transfer the representative to another branch to give him a fresh start
• B. Reduce the representative's commission payout as the sole response
• C. Place the representative under a tailored heightened supervision plan while the concerns are evaluated
• D. Wait for a regulatory finding before altering supervision

103. A firm's compliance department is planning its required annual compliance meeting. Which population must participate in this meeting?

• A. Only employees who joined the firm during the year
• B. Only branch office managers and principals
• C. Each registered representative and registered principal of the firm
• D. Only representatives with disciplinary histories

104. A busy sales manager delegates daily trade blotter review to a qualified assistant principal. Months later, problematic trading surfaces that the assistant repeatedly overlooked. How is the delegating manager's responsibility affected?

• A. Responsibility shifted to the firm's compliance department automatically
• B. The manager remains responsible because delegation requires reasonable follow-up to ensure the delegated function is being performed
• C. The manager is excused if the assistant held the proper license
• D. Delegation transferred all responsibility to the assistant principal

105. A branch manager personally services a large book of retail customers while also supervising the branch. Under a sound supervisory structure, who should review this producing manager's own sales activity?

• A. A qualified senior principal who is independent of the producing manager's own production
• B. The manager himself, since he holds a principal registration
• C. No one, because branch managers are exempt from review
• D. A junior representative in the same branch

106. A branch opens a stream of new retail accounts each week. Under the firm's supervisory system, what treatment must each new account receive?

• A. Review only if the first trade exceeds a size threshold
• B. Review and acceptance by a qualified registered principal in accordance with the firm's procedures
• C. Automatic activation once the customer signs the application
• D. Approval by the customer's own representative

107. A firm is onboarding a new operations employee who will handle customer securities certificates. Which screening requirement applies to this associated person?

• A. Fingerprinting for a criminal-history check, as required for personnel who handle securities, funds, or related books and records
• B. None, because operations staff are outside all screening rules
• C. A qualification examination in sales supervision
• D. Only a standard credit check

108. A representative works primarily from a home office that is not held out to the public and where no customer funds are handled. How should the firm treat this location in its supervisory system?

• A. Ignore it because unregistered locations are outside the supervisory system
• B. Require the representative to cease all work from home
• C. Treat it as an office of supervisory jurisdiction automatically
• D. It remains subject to the firm's supervision and to periodic, risk-based inspection even though it is not a branch office

109. A firm files a suspicious activity report concerning transactions in a customer's account. The customer's attorney later calls the branch demanding to know whether any such report was filed. What may the firm disclose?

• A. Only the filing date may be revealed
• B. A copy may be provided to the attorney upon written request
• C. Nothing — the firm is prohibited from disclosing the existence of the report to the customer or the customer's representatives
• D. The filing may be confirmed once the customer signs a release

110. Under a firm's customer identification program, what must the firm do when a new individual customer opens an account?

• A. Obtain a credit report before any account may be opened
• B. Photograph the customer at the branch
• C. Verify identity only for accounts that will trade on margin
• D. Collect identifying information such as name, date of birth, address, and identification number, and verify the customer's identity within a reasonable time

111. A retail customer asks how she would reach the firm and access her assets if a disaster shut down its main offices. What obligation does the firm have on this subject?

• A. The firm must share its full internal contingency procedures on request
• B. The firm need only insure its office buildings
• C. None, because contingency planning is voluntary
• D. The firm must maintain a business continuity plan and disclose a summary of it to customers

112. A supervisor is reviewing the firm's handling of nonpublic personal information about retail customers. Which combination of obligations applies to the firm?

• A. Customer data may be sold freely once an account is closed
• B. Privacy obligations apply only to institutional accounts
• C. The firm may share customer data with any marketer that signs a confidentiality agreement
• D. The firm must safeguard customer records, deliver required privacy notices, and honor applicable opt-out rights before sharing with nonaffiliated third parties

113. A firm outsources its trade confirmation mailing and parts of its books-and-records processing to a third-party vendor. What is the supervisory consequence of this outsourcing?

• A. The firm remains fully responsible for the outsourced functions and must conduct due diligence and ongoing oversight of the vendor
• B. Oversight is required only if the vendor is located overseas
• C. The functions are no longer subject to regulatory requirements
• D. Regulatory responsibility transfers to the vendor under the service contract

114. A firm's investment banking group is quietly advising an issuer on an unannounced acquisition. Compliance wants to monitor firm and employee trading in the issuer's securities without signaling to anyone that something is pending. Which tool fits this purpose?

• A. Sending a notice to all customers holding the security
• B. Publishing the issuer on the firm's restricted list
• C. Placing the issuer on a confidential watch list monitored by compliance
• D. Announcing a firmwide trading ban in the security

115. Beyond maintaining written supervisory procedures, what does a firm's system of supervisory controls require with respect to those procedures?

• A. Testing and verifying that the procedures are reasonably designed, and reporting on the system to senior management
• B. Filing the procedures with the regulator for pre-approval each year
• C. Outsourcing the procedures to an independent consultant
• D. Distributing the procedures to customers annually

116. At a small branch, the resident principal is also the representative on several large retail accounts, and the daily trade review queue includes his own transactions. How must the firm handle the review of those transactions?

• A. Route his transactions to another qualified principal so he does not review his own activity
• B. Exempt his transactions from daily review entirely
• C. Have his sales assistant initial the reviews
• D. Allow self-review as long as it is documented

117. A branch receives an emailed request, apparently from a longtime customer, to wire a large sum to a third party's overseas account, attaching a signed letter of authorization. Before releasing funds, what should the supervisory procedures require?

• A. Independent verification of the request's authenticity, such as a callback to the customer at a known number, plus scrutiny for fraud red flags
• B. Processing if the email address matches the one on file
• C. Denial of all third-party wires as a matter of policy
• D. Immediate processing because a signed authorization is attached

118. An operations employee notices a customer routing funds through a series of unrelated third-party accounts in a pattern that makes no business sense. To whom should this observation be escalated under the firm's program?

• A. The branch's most senior producing representative
• B. The customer, to request an explanation directly before any internal step
• C. The firm's marketing department
• D. The firm's designated anti-money laundering compliance officer

119. A firm discovers that an intruder accessed a database containing customer names, account numbers, and Social Security numbers. What does a properly supervised response look like?

• A. Take no action unless customers complain of losses
• B. Publicly deny that any incident occurred while investigating quietly
• C. Activate the incident response plan, contain and assess the breach, and make the notifications the firm's procedures and applicable requirements call for
• D. Delete the affected database to eliminate the evidence

120. A large firm cannot manually read every one of the millions of business emails its personnel send each year. Which electronic correspondence review approach can satisfy its supervisory obligations?

• A. Reviewing only emails that customers later complain about
• B. Reading every message in full with no sampling permitted
• C. A documented risk-based approach combining lexicon screening with sampling of message traffic
• D. Reviewing only messages sent by unregistered staff

121. A firm's operations principal reports that a processing failure may have caused customer funds reserved for clients to be used in the firm's own business for several days. What must the supervisor overseeing this area do?

• A. Escalate the matter immediately to the firm's financial and compliance leadership so the segregation failure is assessed and corrected without delay
• B. Wait to see whether the shortfall recurs next month
• C. Treat it as immaterial if no customer noticed
• D. Log the issue for discussion at the next quarterly meeting

122. A growing firm has recently hired a large proportion of its sales force from a firm that was expelled for sales-practice fraud. What supervisory consequence can this hiring pattern trigger?

• A. Loss of the firm's membership without any process
• B. An obligation to adopt special supervisory procedures for its sales activity, including recording of representatives' telephone conversations with customers
• C. An automatic ban on hiring any additional representatives
• D. Nothing, provided each individual passed the qualification exams

123. A firm is arranging the required independent testing of its anti-money laundering program. Who may perform this testing?

• A. The AML compliance officer who runs the program day to day
• B. No one, because AML programs are exempt from testing
• C. Any employee who volunteers, regardless of reporting lines
• D. Qualified internal personnel independent of the AML function, or a qualified outside party

124. During a periodic review, a supervisor notices repeated transfers of funds from an elderly customer's account to an outside account that public records link to the customer's representative. What does this pattern demand?

• A. A reminder email to the representative about documentation standards
• B. Immediate investigation as a potential misappropriation, with escalation under the firm's procedures
• C. No action, because customers may send funds wherever they wish
• D. Closure of the customer's account without inquiry

125. A firm seeks municipal securities business from a city whose treasurer is running for reelection. A managing director asks whether he may make a sizable personal contribution to the treasurer's campaign. What should supervision flag?

• A. A requirement that contributions be routed through the syndicate desk
• B. Pay-to-play restrictions, under which certain personal contributions to officials who can award municipal business may bar the firm from that business for a period
• C. Only contributions made in the firm's name matter
• D. Contributions are purely personal and never affect the firm

126. A firm maintains accounts from which customers can direct payments and withdrawals. Which program addresses the risk that an impostor uses stolen personal information to take over such an account?

• A. An identity theft red flags program that identifies, detects, and responds to warning signs on covered accounts
• B. The annual branch inspection calendar alone
• C. The firm's advertising review program
• D. The continuing education program

127. A customer hands a representative a personal check for an investment, written out to the representative's own name at the representative's suggestion for convenience. What should happen when a supervisor learns of this?

• A. Nothing, if the representative promptly endorses the check to the firm
• B. The practice must be stopped and investigated immediately, because customer payments must never be made payable to the individual representative
• C. The customer should be charged a processing fee
• D. The check may be accepted if under a modest amount

128. A compliance analyst proposes aggregating all customer complaints quarterly by representative, product, and branch. What supervisory value justifies this exercise?

• A. It replaces the need to respond to individual complaints
• B. It exists only to prepare marketing statistics
• C. Trend analysis can reveal patterns — a representative, product, or office generating disproportionate complaints — that individual complaint handling would miss
• D. It lets the firm delete duplicate complaints from its records

129. An assistant branch manager resigns on Friday afternoon. The following week, her login credentials still allow remote access to customer account records. What control failed?

• A. The annual compliance meeting requirement
• B. The firm's advertising approval workflow
• C. Prompt termination of systems access for departed personnel, part of safeguarding customer records
• D. The continuing education deadline schedule

130. A firm wants to hire an experienced trader who was convicted of a securities-related felony a few years ago. What is the effect of that history on his prospective association with the firm?

• A. He is subject to statutory disqualification, and the firm must obtain regulatory approval through an eligibility proceeding before he may associate
• B. It bars him from the industry permanently with no avenue for relief
• C. It is irrelevant once any criminal sentence is complete
• D. It only requires an additional qualification exam

131. A firm terminates a representative after concluding he falsified customer documents, but the branch manager suggests recording the departure as voluntary to help him find a new job. What is wrong with this suggestion?

• A. The termination filing must disclose the true reason; a sanitized filing misleads regulators and future employers and violates the firm's reporting obligations
• B. The only issue is the timing of the filing
• C. It is acceptable if the representative signs a release
• D. Nothing, because termination characterizations are discretionary

132. An unregistered sales assistant supports two busy representatives. Which set of activities may the assistant lawfully perform?

• A. Recommending only conservative securities to existing clients
• B. Clerical and administrative tasks, but not soliciting business, recommending securities, or accepting customer orders
• C. Prospecting for new accounts by telephone if reading from a script
• D. Accepting unsolicited orders when the representatives are at lunch

133. A firm promotes its top-producing representative to run a branch, where she will approve new accounts and review trades. She holds only representative-level registrations. What must occur before she performs these functions?

• A. She must register as a principal and pass the applicable principal qualification requirements to perform supervisory functions
• B. Nothing, because branch appointments are internal personnel matters
• C. She needs only a letter of delegation from the compliance department
• D. Her production record can substitute for the supervisory qualification

134. A representative fails to complete his required continuing education Regulatory Element within the prescribed window. What is the consequence while the requirement remains unmet?

• A. His registration becomes CE-inactive, and he may not perform any registered functions or receive related compensation until he completes the training
• B. Only new-customer solicitation is restricted
• C. A fine is imposed but registered activity may continue
• D. His registration is permanently revoked

135. A former representative left the industry to run a restaurant, but his old firm keeps his registration active by listing him as an associated person even though he performs no securities functions and has no intention of returning. What is this arrangement?

• A. Acceptable if he pays his own registration fees
• B. A permitted courtesy registration for alumni
• C. Required to preserve his customers' account history
• D. Prohibited parking of a registration for someone not functioning in the securities business of the firm

136. A representative is named as a respondent in a customer-initiated arbitration alleging misrepresentation in the sale of bonds. What obligation does this event create with respect to his registration record?

• A. No obligation until the arbitration concludes
• B. The event is disclosed only on the firm's own filings, never the individual's
• C. His registration form must be amended to disclose the reportable event within the required timeframe, and the supervisor should confirm the filing occurs
• D. Disclosure is needed only if he loses the case

137. A supervisor learns during a routine conversation that one of her representatives filed for personal bankruptcy last month and never mentioned it to the firm. Why does this matter to the supervisory function?

• A. Bankruptcy automatically terminates his registration
• B. It does not; personal finances are entirely private
• C. It matters only if customers learn about it
• D. A personal bankruptcy is a disclosable financial event requiring a registration form amendment, and the supervisor must ensure it is reported

138. A registered representative also serves as an investment adviser representative of an unaffiliated advisory firm, directing securities transactions for advisory clients away from his broker-dealer. How should his firm analyze this arrangement?

• A. As a hobby exempt from any notice requirements
• B. As both an outside business activity and, to the extent securities transactions occur away from the firm, potential private securities transactions requiring notice and firm evaluation
• C. As permissible without review because advisory work is regulated elsewhere
• D. As prohibited under all circumstances

139. A retiring representative asks to keep receiving trail commissions on the book of business she built. Under what condition can the firm continue paying her after she leaves the industry?

• A. Only if payments are routed through her spouse
• B. Never, because payments to former representatives are always barred
• C. Only if she keeps making occasional sales to her old clients
• D. Under a bona fide contract entered into while she was registered, covering continuing commissions on business she generated, with no new business solicited after retirement

140. A firm wants to keep an experienced back-office executive registered as a representative even though her current role involves no sales activity, so she can move between roles flexibly. Is this permissible?

• A. Only if she requalifies by examination every year
• B. Yes — permissive registration is allowed for such personnel, but the firm must still assign supervision and include her in compliance obligations like continuing education
• C. Yes, and she is exempt from all compliance obligations while non-producing
• D. No, registration always requires current sales duties

141. A supervisor discovers that a representative maintains a personal brokerage account at another firm that he never disclosed to his employer. Why do the rules require disclosure of such outside accounts?

• A. Because representatives may never invest personally
• B. To let the employer charge fees on outside assets
• C. Only to verify the representative's net worth annually
• D. So the employer firm can monitor the account for insider trading, front running, and other misconduct that outside trading could conceal

142. An unregistered management trainee, eager to build a future book, begins messaging his social network that he can get friends 'into great investments' at the firm and asks them to contact him to open accounts. What should the supervisor do upon discovering this?

• A. Permit it as long as no trades have occurred yet
• B. Congratulate the initiative and forward the leads to registered staff
• C. Require the trainee to add a disclaimer to future posts
• D. Stop the activity immediately, because soliciting securities business requires registration, and address the violation under firm procedures

143. A registered representative is called to extended active military duty. How do the registration rules treat her status while she serves?

• A. Her registration is placed in a special inactive status that preserves it during the period of active service
• B. She must retake all qualification exams upon return regardless of timing
• C. Her firm must file a termination notice within days of deployment
• D. Her registration terminates immediately upon deployment

144. The sole registered principal of a small branch resigns with two weeks' notice. The firm cannot permanently replace him before he leaves. What must the firm do about supervision of the branch?

• A. Designate another qualified principal — even one located elsewhere — to assume supervisory responsibility so coverage never lapses
• B. Promote the senior representative into the role immediately without principal qualification
• C. Suspend all branch communications but continue trading normally
• D. Let the branch operate unsupervised until a permanent hire is made

145. As part of its supervisory system, a firm requires every registered person to complete an annual attestation covering outside activities, outside accounts, and compliance with firm policies. What supervisory purpose does this attestation serve?

• A. It surfaces undisclosed conflicts and activities, creates accountability, and gives supervisors a periodic checkpoint to update each person's risk profile
• B. It fulfills the firm's obligation to inspect branch offices
• C. It substitutes for all transaction surveillance
• D. It transfers compliance liability to the individual signer

146. During a new hire's onboarding, the firm's background review reveals that the incoming representative made a compromise with creditors two years ago that does not appear on his registration form. What must the supervisor ensure?

• A. That the representative repays the creditors before starting work
• B. That the registration form is amended to disclose the event accurately, and that the omission itself is evaluated
• C. The event is noted only in an internal file
• D. Nothing, because pre-hire events belong to the prior firm

147. A representative deliberately omitted a reportable regulatory action from his registration form for years, believing it would cost him job offers. Beyond the original action itself, what additional consequence can the deliberate omission create?

• A. None, because omissions merge into the underlying event
• B. Willfully failing to disclose material information on the registration form can itself result in statutory disqualification
• C. The omission is excused if no customer was harmed
• D. Only a modest late-filing fee applies

148. One representative spends weekends as a paid salesman at his cousin's car dealership; another invests her own savings in rental property she manages passively with no compensation from anyone else. Which representative must provide the firm prior written notice of an outside business activity?

• A. Only the car salesman, because compensated outside employment requires notice, while passive personal investments generally do not
• B. Both representatives equally
• C. Neither, because weekend activities are exempt
• D. Only the rental property investor

149. A branch wants to distribute a newly drafted brochure promoting the firm's bond ladder strategy to its retail mailing list. What must happen before the brochure is first used?

• A. An appropriately qualified registered principal must approve the brochure before its first use
• B. The brochure must be mailed to the regulator for pre-clearance in all cases
• C. The drafting representative must simply initial the final version
• D. Nothing, if the brochure contains no performance figures

150. A firm prepares a detailed strategy piece that will be sent exclusively to bank trust departments and large pension plans. How does the required supervisory treatment differ from a retail piece?

• A. Institutional communications require pre-approval while retail pieces do not
• B. Institutional communications need not be pre-approved by a principal before use, provided the firm has procedures, training, and surveillance for them and the material is not distributed to retail investors
• C. There is no regulatory distinction between the audiences
• D. Institutional communications are entirely outside the firm's supervisory system

151. A representative maintains a professional social media presence: a static profile page describing his services, plus frequent real-time interactive posts responding to followers. How do the supervision requirements differ between the two?

• A. The static profile content is treated like a retail communication requiring principal approval, while interactive real-time posts are supervised after the fact like correspondence
• B. Only posts that mention specific securities are ever reviewed
• C. Neither is subject to any supervision because social media is personal
• D. Both require pre-approval before every individual post

152. A draft marketing email tells prospects that a recommended strategy 'guarantees steady returns with no possibility of losing money.' What should the reviewing principal do with this language?

• A. Approve it with a footnote citing past results
• B. Approve it for existing customers only
• C. Approve it if the strategy has historically been profitable
• D. Reject it, because promising guaranteed returns and the absence of loss is false and misleading for any securities strategy

153. A proposed retail flyer for a high-yield bond fund lists its income, its experienced management team, and its convenient monthly distributions, with no other substantive content. What defect should the reviewing principal identify?

• A. Monthly distributions may not be mentioned in retail material
• B. The management team may not be described without their consent
• C. The flyer presents only benefits and omits the material risks, violating the requirement that communications be fair and balanced
• D. The flyer is too short to qualify as a communication

154. A firm wants to run introductory advertising about options strategies aimed at prospects who have not yet received the options disclosure document. What constraint applies to this advertising?

• A. It may recommend specific options positions to act on immediately
• B. It is limited to general, educational descriptions of options, and must tell readers how to obtain the disclosure document before more detailed promotion can be directed at them
• C. It may include projected options returns if labeled hypothetical
• D. No options advertising of any kind is ever permitted

155. A representative plans a public retirement-income seminar using slides he built himself and intends to improvise additional product recommendations if the audience seems receptive. What supervisory problems does this plan raise?

• A. The seminar is permissible if attendance is free
• B. Only the seminar invitation needs review, not the slides
• C. None, because live events are exempt from communication rules
• D. The slides are retail communications requiring principal approval before use, and improvised product pitches would bypass the review the content rules require

156. A firm distributes a third-party research report on a stock to its retail customers under cover of the firm's own branding. What responsibility does the firm assume for the report?

• A. Responsibility only for typographical accuracy
• B. The firm adopts the material it distributes and is responsible for reviewing it and ensuring it meets content standards
• C. Responsibility passes to the customers who read it
• D. None, because the content was created by an outside author

157. A mutual fund promotional piece describes investing in a load fund as 'effectively free' because charges are deducted from the investment rather than billed separately. What should the reviewing principal conclude?

• A. The piece is misleading because it obscures real sales charges and expenses; costs must be disclosed fairly, not characterized away
• B. The description is acceptable if the fund's returns are strong
• C. The description is acceptable because no invoice is ever sent
• D. The piece needs only a bold headline to be compliant

158. A firm processes a customer's address change, and days later receives instructions from the new address to wire out most of the account. Which control should have accompanied the address change?

• A. Sending a confirmation of the address change to the customer's prior address so the true customer would learn of an unauthorized change
• B. No control; address changes are routine data entry
• C. Charging a fee for the address change
• D. Freezing the account for a year after any address change

159. A customer traveling abroad extensively asks the firm to hold all account mail rather than deliver it. Under what conditions may the firm honor this request?

• A. Freely and indefinitely upon a phone request
• B. With written instructions from the customer, for a limited duration tied to the stated circumstances, and with firm actions ensuring the customer can still receive account information
• C. Never; mail can never be held for any customer
• D. Only for institutional accounts

160. An elderly customer with no history of large withdrawals suddenly requests a substantial disbursement to a recently met 'financial helper,' and the representative suspects exploitation. What tools do the rules give the firm in this situation?

• A. The firm's only option is to close the account
• B. The firm may permanently seize the account assets
• C. The firm must process the disbursement immediately in all cases
• D. The firm may place a temporary hold on the suspicious disbursement, notify the trusted contact person, and escalate internally while it investigates

161. A branch receives a call from an executor reporting that a longtime customer has died. The customer's account holds open good-til-canceled orders and a margin balance. What are the firm's immediate obligations?

• A. Cancel open orders, mark the account to prevent further activity, and await the estate documentation required to act on the assets
• B. Immediately liquidate all positions and mail a check to the caller
• C. Execute the open orders quickly before the account is retitled
• D. Let the deceased's spouse continue trading informally

162. A customer granted her son full trading authorization over her account years ago using a standard power of attorney. She has now been declared legally incompetent. Under what circumstance would the son's authority survive her incapacity?

• A. It survives if he simply notifies the firm of her condition
• B. It always survives because he is an immediate family member
• C. Only if the power of attorney was durable, meaning it expressly remains effective upon the principal's incapacity
• D. It survives automatically for accounts below a certain size

163. A widowed customer wants her individual account assets to pass directly to her daughter at death without going through probate, while retaining full control during her lifetime. Which account feature accomplishes this?

• A. A margin agreement in the daughter's name
• B. A transfer-on-death designation naming the daughter as beneficiary
• C. Relying on the state's intestacy statutes
• D. Adding the daughter as a full joint owner with trading rights today

164. One holder of a joint account with two unrelated co-owners requests a disbursement check made payable solely to himself. How should the firm respond?

• A. Decline the request; disbursements from a joint account must be payable to all account holders as titled, even when one holder places the request
• B. Split the balance automatically and send half to each owner
• C. Issue the check as requested because any joint holder may direct disbursements
• D. Refuse all disbursements from joint accounts

165. A representative misplaces a customer's buy order and executes it a day late at a worse price. The branch uses its error account to adjust the customer to the intended price. What supervisory requirements govern this correction?

• A. None, because errors are inevitable in a busy branch
• B. The representative may quietly absorb the loss in his personal account
• C. The customer must accept the inferior execution price
• D. The correction must be documented and approved by a principal, and error account activity must be monitored for patterns that could conceal misconduct

166. A customer opening her first margin account asks why she is receiving a special disclosure before trading. Which risks must that margin disclosure communicate?

• A. That maintenance calls always come with a lengthy grace period
• B. Only the current interest rate on debit balances
• C. That she can lose more than she deposits, that the firm can liquidate her positions to meet a call — potentially without prior notice — and that she is not entitled to choose which positions are sold
• D. That margin losses are capped at her initial deposit

167. A customer phones a branch manager, angrily accusing his representative of misrepresenting a bond fund, but sends nothing in writing. A week later a different customer emails the same accusation about the same representative. How do these two grievances differ under the firm's complaint obligations?

• A. The email is a written complaint subject to complaint recordkeeping and handling requirements, while the verbal call is addressed under firm procedures but does not meet the written-complaint definition
• B. Neither requires any response until litigation begins
• C. Both are outside the complaint rules because neither used the firm's official form
• D. The phone call is a complaint but the email is not

168. A proposed advertisement features a customer stating that the firm's representative doubled her portfolio. She was paid for the appearance, and her result was far better than typical clients experienced. What does compliant use of this testimonial require?

• A. Broadcasting it only outside market hours
• B. Disclosure that the testimonial was paid and that her experience is not representative of what other customers should expect
• C. Removal of her name only
• D. Nothing beyond her signed consent

169. A representative wants his retail newsletter to feature the three best-performing model portfolios from the past year while omitting the two that lost money. What is wrong with this presentation of past performance?

• A. Past performance may never appear in any communication
• B. Nothing, because all the featured numbers are real
• C. The only problem is the absence of color charts
• D. Selectively showcasing winners while hiding losers is misleading cherry-picking, and past results must be presented fairly without implying they predict future returns

170. A customer calls her representative to say her goals have changed from growth to capital preservation. Beyond noting the conversation, what must the firm do with this information?

• A. Update the account record to reflect the new investment objective and furnish the customer documentation of the updated information
• B. Nothing until the customer's next trade
• C. Refuse to change objectives more than once per decade
• D. Wait for the annual account review cycle

171. To reduce paperwork, a customer asks the firm to stop generating trade confirmations for his account entirely, saying he trusts his representative completely. How should the firm respond?

• A. Route the confirmations to the representative instead of the customer
• B. Stop confirmations but double the frequency of statements
• C. Honor the request if it is made in writing
• D. Explain that required confirmations cannot be waived, though delivery alternatives such as electronic documents are available

172. A customer tells his representative, 'Buy about ten thousand dollars of whichever semiconductor stock you think is best sometime this week.' The account has no discretionary documents on file. May the representative accept this order?

• A. No — choosing which security to buy requires written discretionary authority; only choices limited to time and price of a fully specified order are excepted
• B. No, because customers may never give any latitude on orders
• C. Yes, because week-long instructions are always treated as market orders
• D. Yes, because the customer specified the industry and the amount

173. A retail customer applies to trade options in her account. Before the account may be approved for options trading, who must act on the application?

• A. The customer's representative may self-approve the application
• B. The exchange must approve each retail options account
• C. A qualified principal designated for options account approval must review the customer's information and approve the account for options trading
• D. No approval is needed if the customer trades only small quantities

174. When opening an account, a customer names her neighbor as the trusted contact person. Later, the neighbor calls the firm and attempts to place a sell order 'because the customer would want it.' What authority does a trusted contact person actually hold?

• A. Full trading authority equal to the account owner's
• B. Authority that activates automatically once the customer turns a certain age
• C. None over the account — the trusted contact is someone the firm may reach out to about concerns such as suspected exploitation or diminished capacity, not an authorized party on the account
• D. Authority to withdraw funds but not to trade

175. A firm promotes a program built around frequent intraday equity trading to retail customers. Before opening accounts under this program for individuals, what obligation applies?

• A. The firm must furnish a risk disclosure about day trading and reasonably determine that the strategy is appropriate for the customer before approving the account for it
• B. Customers must first trade for a year in a practice simulator
• C. None beyond the standard new-account form
• D. A guarantee of profitability must be provided

176. After receiving a customer's written complaint about a bad fill, a representative offers to pay the customer the disputed amount from his own pocket if the customer withdraws the letter and keeps the matter between them. What supervisory violation is unfolding?

• A. Settling a customer complaint away from the firm, which conceals the complaint from required records, supervision, and reporting
• B. A violation only if the payment exceeds the disputed amount
• C. Nothing, because the customer would be made economically whole
• D. A minor issue the branch can ignore if isolated

177. A prospective customer refuses to disclose her income, net worth, or other financial information but wants to open a brokerage account. Which statement describes the firm's position?

• A. The firm must fabricate reasonable estimates to complete the profile
• B. The account may generally be opened and unsolicited orders accepted, but recommendations are constrained because the firm lacks the profile information needed to support suitability
• C. The account must be declined entirely
• D. The account may be opened with full recommendations permitted immediately

178. A supervisor is auditing the firm's public website for required investor-protection references. Which item must the site make available to retail investors?

• A. The firm's internal supervisory procedures manual
• B. A list of the firm's most profitable customers
• C. The personal cell numbers of all branch managers
• D. A readily accessible reference or link to the public database where investors can research the background of firms and registered persons

179. A customer with modest income, limited savings, and no options experience applies for approval to write uncovered calls. How should the designated options supervisor evaluate this application?

• A. Approve it automatically because option premiums generate income
• B. Deny it solely because of the customer's age
• C. Apply the firm's most stringent approval standards, recognizing that uncovered call writing carries theoretically unlimited risk that this customer's finances and experience likely cannot support
• D. Approve it if the customer signs an extra risk acknowledgment

180. A customer buys both a call and a put on the same stock with identical strike prices and expirations. What market view does this position express?

• A. An expectation of a large price move in either direction
• B. A desire to collect premium income from a flat market
• C. Certainty that the stock will rise sharply
• D. An expectation that the stock will stay locked at the strike price

181. An executive holds a heavily concentrated position in her employer's stock, fears a near-term decline, but wants to keep the shares and their upside. Which strategy directly addresses her objective?

• A. Buying protective puts on the employer stock
• B. Writing uncovered calls against other securities
• C. Selling the entire position immediately
• D. Buying additional shares to average down

182. A representative recommends that a retiree write covered calls against her long-held blue-chip shares for extra income. Which trade-off must the retiree understand before approving this strategy?

• A. Premium income is earned, but upside beyond the strike price is surrendered and the shares may be called away
• B. The strategy doubles her exposure to the stock
• C. The premiums received are always tax-free
• D. The strategy removes all downside risk from the shares

183. An exchange assigns an exercise notice to a firm on a customer-written option series. How may the firm allocate that assignment among its customers who are short the series?

• A. To whichever customer generates the least commission revenue
• B. By a fair method the firm has established — such as random selection or first-in, first-out — disclosed and applied consistently
• C. To the largest account automatically in every case
• D. To the account the branch manager selects by judgment call each time

184. An eighty-year-old customer who was previously sharp begins calling his representative several times a day with contradictory instructions, forgetting earlier conversations and expressing confusion about what he owns. How should the representative and supervisor respond?

• A. Quietly stop taking the customer's calls
• B. Execute every instruction immediately to respect customer autonomy
• C. Escalate the observations under the firm's procedures for possible diminished capacity — which may include contacting the trusted contact person — rather than simply executing contradictory instructions
• D. Have the representative assume discretion informally to protect the customer

185. A supervisor notices that a customer holds substantial call positions in one equity across accounts at the firm, and reliable information indicates the customer also controls similar positions at other firms and coordinates trading with a business partner. Why does this matter for options compliance?

• A. Coordinated option trading is exempt from limits when done with a partner
• B. Position limits apply to the aggregate of positions in accounts under common control or acting in concert, so the combined positions could breach the limit even if each account alone does not
• C. It does not matter as long as each single account stays small
• D. Options positions at other firms are invisible to regulation

186. The day before a stock's ex-dividend date, a customer short deep-in-the-money calls on that stock is assigned an exercise notice. What most likely explains the timing of the assignment?

• A. Deep-in-the-money calls cannot be exercised early, so the notice must be invalid
• B. Call holders often exercise deep-in-the-money calls just before the ex-date to capture the dividend when it exceeds the option's remaining time value
• C. The exchange randomly accelerates all expirations near dividends
• D. The counterparty made an error, since early exercise is always irrational

187. A representative persuades a risk-averse retiree who depends on portfolio income to commit a substantial share of her savings to buying short-dated out-of-the-money call options on volatile stocks. What is the core supervisory problem?

• A. The recommendation contradicts the customer's profile — speculative positions that can expire worthless are inconsistent with a conservative income objective and limited risk capacity
• B. Nothing, because options are suitable for anyone once approved
• C. The commissions on options are too low to justify the trades
• D. The trades settle too quickly for the firm's systems

188. A representative recommends a mutual fund purchase in an amount just beneath the level at which the customer would qualify for a reduced sales charge, without mentioning that a slightly larger purchase would lower the rate. What violation does this describe?

• A. An issue solely for the fund company, not the firm
• B. A permissible rounding of the order size
• C. A breakpoint sale — recommending a quantity just below a sales-charge discount threshold without disclosure deprives the customer of an available reduction
• D. A violation only if the fund later declines in value

189. A supervisor reviewing daily trades sees a customer purchase of several hundred thousand dollars of an equity fund's back-end-loaded share class, when the same fund's front-loaded class offers steep quantity discounts at that size. Why does this trade demand scrutiny?

• A. At large purchase sizes, the front-loaded class with quantity discounts is usually far cheaper over time, so choosing the class with higher ongoing costs suggests the customer's interest was subordinated to compensation
• B. Back-end-loaded classes settle more slowly than other classes
• C. The customer should have been directed into a different fund family entirely
• D. Large fund purchases are prohibited in all share classes

190. A representative proposes that a customer exchange her existing variable annuity for a new one offering an upfront bonus credit. The exchange restarts a long surrender period and raises annual costs. What must the supervisory review of this recommendation weigh?

• A. Only the size of the bonus credit
• B. Only whether the paperwork was signed in the right order
• C. Whether the tangible benefits of the new contract genuinely outweigh the fresh surrender period, higher ongoing charges, and any surrender cost on the old contract — bonus credits alone do not make an exchange beneficial
• D. Nothing, because tax-free exchanges are automatically suitable

191. A buy-and-hold retirement investor has held a triple-leveraged inverse exchange-traded fund for many months on his representative's advice to 'hedge the market long-term.' Why is this holding problematic?

• A. Inverse products may never be sold to any retail customer
• B. The only concern is the fund's expense ratio
• C. Leveraged and inverse ETFs reset daily, so over long periods compounding causes returns to diverge significantly from the index multiple, making them generally unsuitable as long-term buy-and-hold positions
• D. The position fails because hedging is prohibited in retirement accounts

192. A firm routes nearly all customer equity orders to a market center that pays the firm for order flow. What obligation governs this routing arrangement?

• A. Routing may follow payments as long as executions occur eventually
• B. The firm must route wherever customers individually direct, and otherwise has no duty
• C. The firm owes best execution — it must regularly and rigorously review execution quality and cannot let payment for order flow subordinate the quality of customer executions
• D. Payment for order flow makes routing decisions exempt from review

193. A firm's research department will publish a significant ratings upgrade on a covered stock tomorrow morning. The proprietary trading desk learns of it and wants to build a position today. What must supervision prevent?

• A. The firm trading ahead of its own research — establishing positions based on the unpublished report exploits customers and the market and is prohibited
• B. Only trades larger than the desk's normal size
• C. Nothing, because the desk trades firm capital rather than customer funds
• D. Publication of the upgrade until the desk finishes buying

194. A representative urges a customer to buy fund shares quickly 'to capture the big dividend' being paid next week. Why is this pitch a sales-practice violation?

• A. The pitch is fine as long as the dividend is actually paid
• B. Funds never pay dividends to new shareholders
• C. The share price drops by the distribution when paid, so the customer gains no economic benefit but incurs an immediate tax liability — the practice known as selling dividends
• D. Dividends may only be discussed with institutional customers

195. A customer with a cash-only account asks his representative to sell short a stock he believes is overvalued. What should the representative explain about executing this request?

• A. Short sales must be effected in a margin account, because the customer must borrow the shares for delivery and the account must support the obligation to return them
• B. The trade is permitted if the customer deposits extra cash first
• C. Short selling is prohibited for all retail customers
• D. The short sale can proceed in the cash account if the position is closed within a week

196. A review of a customer's portfolio shows that stock in a single company she once worked for makes up the overwhelming majority of her liquid net worth, and her representative keeps recommending additional purchases of it. What should the supervisor require?

• A. Only that commissions on future purchases be discounted
• B. Nothing, because loyalty to a former employer is a valid strategy
• C. That the concentration be addressed — the customer must understand the single-issuer risk, and continued recommendations to add to the position need justification against her profile
• D. Automatic liquidation of the entire position without consulting the customer

197. A representative sells a customer a structured note marketed as 'principal-protected,' and the customer believes repayment is certain. What must the supervisory review ensure the customer actually understood?

• A. That principal protection eliminates the need for any risk discussion
• B. That the promised protection is only as good as the issuing institution's credit — if the issuer fails, the customer can lose principal despite the label
• C. That the note's return formula is irrelevant to its value
• D. That the note trades on an exchange with continuous liquidity

198. A branch begins actively cold-calling customers to solicit purchases of very low-priced, thinly quoted OTC stocks. What heightened obligations attach to soliciting such securities?

• A. Only an obligation to call after business hours
• B. Heightened suitability determinations and specific disclosure obligations designed for low-priced speculative securities, given their susceptibility to fraud and price manipulation
• C. A requirement that customers buy in round lots
• D. None, because all equities are treated identically

199. During allocation of a sought-after equity IPO the firm is distributing, a representative asks to place shares into an account owned by his spouse at the firm. What is the supervisory answer?

• A. Allowed if the spouse's account predates the offering
• B. The allocation must be refused — accounts of industry insiders and their immediate family members are restricted from purchasing new issue equity offerings
• C. Allowed up to a small percentage of the deal
• D. Allowed if the spouse pays the full offering price

200. A favored hedge fund client asks the trading desk to accept mutual fund orders shortly after the market close while still receiving the net asset value calculated as of that same close. Why must the firm refuse?

• A. Because fund orders may only be placed in the morning
• B. Because hedge funds may not invest in mutual funds at all
• C. Because granting the same day's price to orders received after the pricing point is late trading, an illegal practice that lets the late trader exploit post-close information against the fund's other shareholders
• D. Because the desk would earn no commission on such orders

201. Surveillance shows a customer rapidly exchanging in and out of the same mutual fund far more frequently than the fund's prospectus policies on frequent trading contemplate. What should the supervisor direct?

• A. Nothing, because exchange privileges are unlimited by definition
• B. Only a note in the file for the annual review
• C. Encouragement, because frequent exchanges generate fund-level activity
• D. Intervention — market timing contrary to the fund's disclosed policies harms long-term shareholders, and the firm should restrict the activity and review whether anyone facilitated it

202. A margin customer fails to meet a regulation call arising from a new purchase, and no extension has been granted. The representative suggests just waiting a few weeks to see if the market recovers. What does proper handling require?

• A. Waiting indefinitely, since calls lapse if ignored
• B. Borrowing the deficiency from another customer's balance
• C. Timely action on the unmet call — obtaining a valid extension where available or liquidating sufficient securities to satisfy it — rather than informal forbearance
• D. Having the representative personally lend the customer the deficiency

203. A customer entered a sell stop order on a volatile stock and complains that his execution came in meaningfully below his stop price during a fast decline. What explains the outcome the supervisor should convey?

• A. A stop order becomes a market order once the stop price is reached, so in a rapidly falling market the execution occurs at the next available price, which can be well below the stop
• B. The order should have executed exactly at the stop price in all conditions
• C. Stop orders can never execute below their trigger
• D. The firm guaranteed the stop price and owes the difference

204. A customer's good-til-canceled buy limit order, resting below the market, is adjusted downward on the morning a stock begins trading without its declared cash dividend. The customer asks why his order price changed. What should he be told?

• A. The exchange repriced his order by error and it will be restored
• B. His representative modified the order using personal judgment
• C. All open orders are cancelled whenever any dividend is paid
• D. Open buy orders below the market are reduced by the distribution amount on the ex-date, absent do-not-reduce instructions, so the order stays economically equivalent after the price adjustment

205. After a due-diligence trip, a representative emails an identical message to every customer in his book — regardless of age, objectives, or finances — urging each to buy a speculative mining stock 'as a core holding today.' Why does this conduct fail even if the stock is a legitimate company?

• A. Mining stocks are prohibited for retail accounts
• B. Recommendations must be suitable for each particular customer based on that customer's profile; an identical speculative recommendation broadcast to every customer cannot satisfy customer-specific suitability
• C. Email may not be used to make recommendations
• D. The message merely needed a longer risk disclaimer

206. A representative urges a departing employee to roll her entire workplace retirement plan into an IRA at the firm, mentioning only the convenience of consolidation. Under the applicable best-interest standard, what does a compliant rollover recommendation require?

• A. Only a verbal assurance that fees are comparable
• B. Proof that the IRA will always outperform the plan
• C. A comparison of the costs, services, investment options, and protections of the plan versus the IRA — including the option of leaving assets in the plan — with a basis to conclude the rollover serves the customer's best interest
• D. Nothing beyond the customer's signature on the transfer form

207. A customer wants to use options inside his individual retirement account. Which use is most consistent with the constraints of a retirement account?

• A. Covered strategies such as writing calls against stock held in the account, which involve defined obligations fully supported by account assets
• B. Strategies that require borrowing beyond the account's assets
• C. Unlimited naked index option writing
• D. Writing uncovered calls for premium income

208. A customer who places only a couple of trades per year and holds a static long-term portfolio was moved into a fee-based advisory-style account charging a percentage of assets annually. What supervisory issue does this account placement raise?

• A. Reverse churning — parking an inactive customer in an asset-based fee arrangement can cost far more than commissions would, so account-type selection must fit the customer's actual activity and needs
• B. That the customer should trade more often to justify the fee
• C. Only that fees must be collected monthly rather than quarterly
• D. None, because fee-based accounts are inherently superior

209. To fill a customer's order in a security where the firm could deal directly with the market maker, a trading desk first routes the order through an affiliated dealer that adds its own markup before the final execution. What violation does this routing create?

• A. A breakpoint sale violation
• B. None, because affiliates may always participate in executions
• C. Interpositioning — inserting an unnecessary intermediary between the customer and the best market, increasing the customer's cost, breaches the duty of best execution
• D. A late-trading violation

210. A representative with limited trading authorization enters block orders each morning and decides at day's end how to allocate the fills, routinely assigning profitable executions to his personal account and unprofitable ones to customers. What control defeats this scheme?

• A. Requiring allocation instructions to be fixed at or before order entry, with any post-execution reallocations documented, justified, and principal-approved
• B. Prohibiting customers from participating in block orders
• C. Reviewing allocations once a year
• D. Allowing allocation decisions only on winning trades

211. A review of long-standing accounts finds customers who have held level-load mutual fund shares with elevated ongoing expenses for well over a decade, never receiving advice to consider the share class designed for long holding periods. Why does this pattern warrant supervisory attention?

• A. Because every fund position must be sold after ten years
• B. Because level-load share classes trade at higher costs over long horizons than front-load classes, extended holdings in them can quietly erode returns, making share-class review part of ongoing suitability oversight
• C. Because share class choices can never be revisited once made
• D. Because ongoing expenses are refunded automatically over time

212. A representative persuades a risk-averse retiree living on fixed income to open a margin account and borrow against her portfolio to buy additional dividend stocks, describing the strategy as 'income enhancement.' What is the fundamental supervisory objection?

• A. The strategy fails only if dividends are cut
• B. Dividend stocks may not be purchased on margin
• C. The interest rate charged is the only relevant consideration
• D. Leverage magnifies losses and adds interest costs and margin-call risk, which contradicts a conservative fixed-income retiree's profile regardless of the income framing

213. A representative wants to thank the portfolio manager of an institutional client. He proposes two alternatives: taking the manager to a baseball game that they attend together, or sending the manager a luxury watch of significant value. How do the conduct rules treat these two gestures?

• A. The game is prohibited but lavish gifts are permitted
• B. Both are prohibited in all circumstances
• C. Both are unlimited as long as they are documented
• D. Attended business entertainment is evaluated under the firm's entertainment policies rather than the gift limit, while the unaccompanied luxury item is a gift subject to strict value limitations — so the watch is the problem

214. A mutual fund sponsor hints that it will direct its portfolio brokerage business to the firm if the firm's representatives push the sponsor's funds harder than competing funds. What must supervision prevent?

• A. Nothing, because reciprocal business benefits both firms
• B. Executing any brokerage for fund sponsors under any conditions
• C. Conditioning the firm's fund sales efforts on receipt of the sponsor's brokerage commissions, an arrangement prohibited because it puts compensation ahead of customers' interests in fund recommendations
• D. Selling that sponsor's funds at all, forever