FINRA Series 7 (General Securities Representative) — practice that trains suitability, not trivia

A rep sends a form letter promoting an equity fund to 30 retail clients. Under Rule 2210 this is:

1. Retail communication requiring principal approval
2. Institutional communication with no filing needed
3. Correspondence exempt from principal approval rules
4. Public appearance requiring same-day disclosure

Answer: A — Retail communication requiring principal approval

A) Correct — content sent to more than 25 retail persons in 30 days is retail communication. B) Retail investors don't fit institutional definition. C) Above 25 retail investors becomes retail communication. D) Public appearance is a different category.

Which of the following would MOST likely violate FINRA's standards for retail communications?

1. A truthful comparison to a benchmark index with methodology disclosed
2. A statement guaranteeing a minimum annual return on a variable investment
3. Balanced disclosure of both risks and benefits of a product
4. A hyperlink directing readers to the fund's prospectus

Answer: B — A statement guaranteeing a minimum annual return on a variable investment

B) Correct — guaranteeing returns on a variable, market-dependent product is misleading and prohibited. A) A truthful, methodology-disclosed comparison is permitted. C) Balanced risk/benefit disclosure is required, not a violation. D) Linking to the prospectus is a compliant practice.

Before a public offering's effective date, an underwriter may distribute:

1. A final prospectus with pricing and terms specified
2. Only a private placement memo to select clients only
3. Tombstone ads and a preliminary (red herring) prospectus
4. Firm research reports containing pricing predictions

Answer: C — Tombstone ads and a preliminary (red herring) prospectus

A) Final prospectus is only after effectiveness. B) That's a private placement, not a public offering. C) Correct — tombstone ads and preliminary prospectus permitted in cooling-off period. D) Research is restricted in the quiet period.

A UGMA/UTMA account transfers ownership to the minor at the:

1. Signing of the account
2. First cash distribution
3. State age of majority
4. Death of the custodian

Answer: C — State age of majority

A) Signing does not transfer. B) First distribution is unrelated. C) Correct — age of majority under state law. D) Custodian death changes custodian only.

Customer asks to open an account with the neighbor holding full trading discretion. The firm must:

1. Refuse the arrangement; only spouses may hold trading power
2. Have both parties open a joint account with the neighbor
3. Obtain a written third-party trading authorization from customer
4. Route all orders through a firm principal for pre-approval each

Answer: C — Obtain a written third-party trading authorization from customer

A) Third-party trading is permitted with the right documentation. B) A joint account changes ownership; that's not what the customer wants. C) Correct — written third-party trading authorization (POA) is required plus firm review. D) Not the standard control — written authorization is.

When an UTMA minor reaches age of majority in the state:

1. Assets transfer to the now-adult beneficiary fully
2. Assets automatically revert to the custodian estate
3. Assets are transferred to the custodian's IRA plan
4. Assets are locked until age 30 by state law default

Answer: A — Assets transfer to the now-adult beneficiary fully

A) Correct — beneficiary takes full ownership and control at majority. B) Custodian's role ends at majority. C) UTMA assets are the beneficiary's. D) No default lock exists to age 30.

A Currency Transaction Report (CTR) under the Bank Secrecy Act must be filed for cash exceeding:

1. $2,500 in a single transaction event
2. $5,000 in a single transaction event
3. $25,000 in a single business day aggregated
4. $10,000 in a single business day aggregated

Answer: D — $10,000 in a single business day aggregated

A) Below the CTR threshold. B) Below the CTR threshold. C) Above the standard CTR threshold. D) Correct — CTR triggered at more than $10,000 in cash in a business day.

Long 1 XYZ 50 Call at $4 premium. Breakeven and max loss are:

1. BE $46, max loss $400 (put breakeven formula)
2. BE $50, max loss $50 (strike as loss ceiling)
3. BE $54, max loss unlimited (as with short call)
4. BE $54, max loss $400 (equals premium paid)

Answer: D — BE $54, max loss $400 (equals premium paid)

A) That formula is for a put buyer. B) Ignores premium in both places. C) Max loss is capped at premium for a buyer. D) Correct — BE = strike + premium; max loss = premium.

Customer owns 400 shares. Terms: 4 rights + $30 buys 1 new share. Customer can buy at most:

1. 100 new shares
2. 200 new shares
3. 400 new shares
4. 40 new shares

Answer: A — 100 new shares

A) Correct — 400 rights / 4 per share = 100 new shares. B) Off — too many. C) Assumes 1 right per new share. D) Off by an order of magnitude.

A bond is purchased at a discount to par. Which ranking of its yields is correct?

1. Nominal yield > Current yield > Yield to maturity
2. Yield to maturity > Current yield > Nominal yield
3. Current yield > Yield to maturity > Nominal yield
4. All three yields are always equal for a discount bond

Answer: B — Yield to maturity > Current yield > Nominal yield

B) Correct — for a discount bond, YTM is highest (captures price appreciation to par), then current yield, then nominal (coupon) yield lowest. A) This ranking applies to a PREMIUM bond, not a discount bond. C) Current yield does not exceed YTM on a discount bond. D) The three yields are equal only at par, not at a discount.

An ADR holder is MOST exposed to which risk beyond a domestic U.S. shareholder?

1. Interest rate risk on the underlying equity
2. Systematic market risk of the U.S. equity market
3. Sector concentration risk within U.S. equities
4. Currency exchange risk versus the home currency

Answer: D — Currency exchange risk versus the home currency

A) Interest rate risk affects fixed-income primarily. B) All U.S. investors bear market risk equally. C) Sector risk is not unique to ADRs. D) Correct — ADRs bear FX risk on dividends and underlying value.

When market interest rates rise, an outstanding 30-year corporate bond's price will:

1. Rise, because its coupon rate is now more attractive
2. Stay flat, since the coupon rate is contractual
3. Rise, because credit spreads typically narrow first
4. Fall, because its fixed coupon is now less attractive

Answer: D — Fall, because its fixed coupon is now less attractive

A) Reverses the price/yield relationship. B) Prices move as required yields change. C) Higher rates don't automatically narrow spreads. D) Correct — fixed-coupon bonds fall in price when rates rise.

A debenture is BEST described as an:

1. Unsecured corporate bond backed by general credit
2. Secured corporate bond backed by specific assets
3. Federal government note issued for infrastructure use
4. Tax-exempt municipal bond issued by a state entity

Answer: A — Unsecured corporate bond backed by general credit

A) Correct — debentures are unsecured, relying on the issuer's general credit. B) That is a secured bond, not a debenture. C) Debentures are corporate, not federal. D) Munis are separate from corporate debentures.

Section 16 filings apply to:

1. All retail investors alike
2. Municipal advisor firms
3. Corporate insiders (10%+)
4. Fund distributor entities

Answer: C — Corporate insiders (10%+)

A) Retail investors are exempt. B) Muni advisors have MSRB rules. C) Correct — directors, officers, 10% holders. D) Distributors have other rules.

Bonds that trade 'flat' (without accrued interest) include:

1. All investment-grade corporate debt bonds only always
2. Zero-coupon, income bonds, and defaulted bonds now
3. All bonds when the coupon date is close ahead near
4. Only municipal bonds during the trading week only

Answer: B — Zero-coupon, income bonds, and defaulted bonds now

A) Investment-grade bonds pay accrued unless they meet flat criteria. B) Correct — zero-coupon, income, and defaulted bonds trade flat. C) Accrual continues even close to coupon dates. D) Munis pay accrued when trading normally.

A bear put spread is established by:

1. Long higher-K put, short lower-K
2. Buying two calls at same strike
3. Selling two puts at same strike
4. Long stock plus a covered call

Answer: A — Long higher-K put, short lower-K

A) Correct — long higher-K put, short lower-K put. B) Two calls is not this spread. C) Selling both is a short strangle. D) Stock plus call is unrelated.

The intrinsic value of a call option equals the:

1. Strike price minus the current stock price
2. Premium paid to buy the call option
3. Greater of zero or (stock minus strike)
4. Greater of zero or (strike minus stock)

Answer: C — Greater of zero or (stock minus strike)

A) Reverses the direction and ignores the floor at zero. B) Premium equals intrinsic plus time value. C) Correct — a call's intrinsic value is max(0, stock - strike). D) That formula is a put's intrinsic value.

A bull call spread is built by buying a lower-strike call and:

1. Selling a higher-strike call
2. Buying a higher-strike call
3. Selling a lower-strike put
4. Buying a lower-strike put

Answer: A — Selling a higher-strike call

A) Correct — short higher-K call caps profit. B) Buying both is not this spread. C) Short put is a separate strategy. D) Long put is not this spread.

A Direct Participation Program (DPP) is best described as a:

1. Corporate-taxed publicly listed operating entity
2. Guaranteed investment contract issued by insurer
3. Registered mutual fund investing in equities
4. Pass-through investment vehicle for tax items

Answer: D — Pass-through investment vehicle for tax items

A) DPPs avoid corporate-level tax by pass-through. D) Correct — DPPs pass income, losses, and credits directly to investors. C) DPPs are not mutual funds. B) That describes an insurance GIC.

A pooled investment vehicle holding a fixed, unmanaged portfolio with a stated termination date is a:

1. Closed-end fund
2. Unit Investment Trust (UIT)
3. Open-end fund
4. Hedge fund

Answer: B — Unit Investment Trust (UIT)

B) Correct — a UIT holds a fixed portfolio and terminates on a set date. A) A closed-end fund is actively or passively managed and doesn't have a set termination date. C) Open-end funds continuously manage and redeem shares. D) Hedge funds are actively managed, typically without a fixed termination date.

A rep suspecting elder financial exploitation may temporarily hold disbursements under:

1. FINRA Supervision Rule 3110
2. FINRA Reporting Rule 4530
3. FINRA Senior Rule 2165
4. FINRA New Issue Rule 5130

Answer: C — FINRA Senior Rule 2165

A) Rule 3110 covers supervision. B) Rule 4530 covers reporting. C) Correct — Rule 2165 authorizes the hold. D) Rule 5130 covers new-issue eligibility.

A qualified Roth IRA distribution of earnings requires the account:

1. Owner is 59.5+ AND account open for 5 tax years
2. Owner is 59.5+ regardless of the account age
3. Open for 5 tax years regardless of the age
4. Owner is 55 with separation from qualified plan

Answer: A — Owner is 59.5+ AND account open for 5 tax years

A) Correct — both age 59.5 trigger and 5-year rule must be met. B) Age alone insufficient. C) 5-year rule alone insufficient. D) That is the qualified plan Rule of 55.

A customer enters a sell stop-limit order at $48 stop, $47 limit on a stock currently trading at $52. If the stock trades down through $48, the order:

1. Becomes a live limit order to sell at $47 or better
2. Executes immediately as a market order
3. Is automatically canceled
4. Converts into a new stop order at a different price

Answer: A — Becomes a live limit order to sell at $47 or better

A) Correct — once triggered, a stop-limit order becomes a limit order at the specified limit price. B) A stop-limit does NOT become a market order; that describes a plain stop order. C) Triggering doesn't cancel the order; it activates it. D) The order becomes a limit order, not a new stop order.

When an option holder exercises, the Options Clearing Corporation assigns the exercise notice to:

1. The specific investor who originally sold that exact contract
2. A clearing member firm, selected at random or by another approved method among firms with an open short position
3. The exchange floor specialist only
4. The option's original underwriter

Answer: B — A clearing member firm, selected at random or by another approved method among firms with an open short position

B) Correct — the OCC assigns to a clearing member firm, which then assigns to a customer using its own method (often random or first-in-first-out). A) The OCC does not track or match specific counterparties. C) Floor specialists are not part of the OCC assignment process. D) Listed options don't have an 'underwriter' in this sense.

What is a Coverdell ESA?

Education savings allowing $2,000/year after-tax contributions per beneficiary. Tax-free growth for qualified K-12 and higher education expenses.

What is an index fund?

A mutual fund or ETF designed to track a specific market index (S&P 500, Russell 2000). Passively managed with low expense ratios.

Municipal bonds should NEVER be recommended inside which type of account?

A retirement account (IRA, 401k) — muni bond interest is already tax-exempt. Putting them in a tax-deferred account wastes the tax benefit and typically offers lower yields.

What is a bond?

A debt security where the issuer borrows money and agrees to pay interest periodically and return principal at maturity.

What is a debt service reserve fund?

A reserve set aside to make bond payments if revenues fall short. Typically one year's debt service. Required for most revenue bonds.

What is the 5% markup policy?

FINRA guideline suggesting ≤5% markup/markdown on OTC or commission on exchange trades. Not a strict rule — considers transaction type, size, and market conditions.