Sample Questions
Question 1
Easy
At a firm without a Rule 2241 exemption, the principal must limit research-budget decisions to:
Solution
A is correct. FINRA Rule 2241(b)(2)(D) assigns research-budget decisions to senior management and excludes senior managers engaged in investment banking activities. The principal must reflect that separation in the firm's procedures.
Question 2
Medium
Under FINRA Rule 5130, a member may sell shares of an equity IPO to each of the following accounts EXCEPT:
Solution
D is correct. FINRA Rule 5130 bars a member from selling a new issue to an account in which a restricted person has a beneficial interest, unless a general exemption applies. Restricted persons include portfolio managers, meaning any person with authority to buy or sell securities for a bank, savings and loan institution, insurance company, investment company, investment adviser or collective investment account. A bank portfolio manager's personal account is therefore restricted. No exemption covers that account. Before allocating, the principal must confirm through the required representation that the account is not a restricted account.
Question 3
Hard
Your firm will lead-manage a non-reporting operating company's IPO. Which communication may the principal treat as exempt from Section 5(c) under Rule 163A?
Solution
A is correct. Securities Act Rule 163A exempts communications from Section 5(c) only when every condition is met. (1) The communication must be made by or on behalf of the issuer. Under Rule 163A(c), approval by an underwriter or dealer in the offering does not make a communication the issuer's. The CEO speaks for the issuer. (2) It must be made more than 30 days before the registration statement is filed. Thirty-five days qualifies. (3) It must not refer to the securities offering. A general discussion of business strategy does not. (4) The issuer must be eligible. An operating company is not one of the excluded issuers, such as blank check, shell or penny stock issuers and registered investment companies other than closed-end funds. (5) The issuer must take reasonable steps to prevent further distribution of the communication during the 30 days before filing. With all conditions met, the interview falls within the safe harbor.
