Series 24 practice exam

Correct answer: B. Purely clerical or ministerial employees are exempt from registration, but that exemption is narrow. Accepting or relaying a customer's order is not clerical unless it happens occasionally, the registered person is genuinely unavailable, and that registered person promptly calls the customer back to confirm before the order is entered. Miss any of those conditions and the exemption is lost.

Why not the others?
- A (clerical never requires registration, no conditions): This overstates the exemption. The moment order-taking becomes routine, or the confirmation step is skipped, the person is no longer within the clerical carve-out.
- C (must register as a principal): Relaying order details to a registered rep is not a supervisory function and does not require principal registration.
- D (firm must register as a broker-dealer): The firm is presumably already a registered broker-dealer; the question is whether this individual employee must register, not whether the firm's own registration is at risk.

Correct answer: B. A supervisory system requires a firm to establish, maintain, and enforce its written procedures. A manual that describes the right reviews but is not followed in practice leaves the firm exposed to the same violation as if no WSPs existed at all.

Why not the others?
- A (paper procedures are enough): Having a well-drafted manual satisfies only part of the obligation; enforcement is a separate, required element.
- C (only branch managers are liable): The firm itself bears responsibility for its overall supervisory system, in addition to any individual failures by branch managers.
- D (mere recordkeeping issue): Failing to enforce WSPs is a substantive supervisory failure, not a narrow books-and-records technicality.

Correct answer: B. A branch office that itself supervises one or more non-branch locations is bumped to an annual on-site inspection, regardless of its size or business volume. A standalone branch that does not supervise any other location may generally be inspected on a longer cycle. The trigger is the supervisory function performed at that office, not the label "branch."

Why not the others?
- A (identical treatment): Inspection frequency depends on what the office actually does, not simply its classification as a branch.
- C (inspect only the standalone branch): A branch that supervises other locations needs its own independent, more frequent review; supervising others does not exempt it from being inspected.
- D (electronic surveillance replaces on-site review): Remote tools can supplement a firm's inspection program under certain conditions, but they do not eliminate the underlying on-site inspection obligation for offices that meet the annual trigger.

Correct answer: C. A securities transaction conducted outside the regular course of a representative's employment, for which she receives selling compensation, is a private securities transaction. Before participating, she must give her employing firm prior written notice describing the transaction, her role, and any compensation. Doing this without notice, and outside firm supervision, is the classic definition of selling away.

Why not the others?
- A (permitted because the firm does not offer it): The fact that a firm does not carry a particular product is exactly why prior notice and firm approval are required, not a reason to skip them.
- B (customer disclosure is enough): Telling customers about the arrangement does not substitute for giving the employing firm the required written notice.
- D (no supervisory implications): The firm has a direct supervisory interest whenever one of its registered persons is conducting securities business, whether or not the firm is a party to the trade.

Correct answer: B. Product approval that restricts sales to a defined customer profile is only as good as the controls enforcing that restriction. If representatives are recommending the product outside its approved profile with no documented exception, the firm has a supervisory failure even though the underlying product was properly vetted at approval.

Why not the others?
- A (no violation because the product was approved): Proper initial approval does not excuse a failure to enforce the conditions attached to that approval.
- C (only a violation if a customer lost money): The supervisory failure exists independent of outcome; selling outside the approved profile is the violation, regardless of whether the trade happened to work out.
- D (individual disclosure cures it): Disclosing a product's features to the customer does not substitute for the firm's own suitability and exception-monitoring controls.

Correct answer: B. A written customer complaint alleging misappropriation of funds or securities triggers an individual, prompt report to FINRA on top of appearing in the firm's routine quarterly statistical roll-up of all written complaints. Ordinary complaints (for example, general dissatisfaction with performance) go only into the quarterly statistical report; allegations like theft, misappropriation, or forgery require the individual report as well.

Why not the others?
- A (quarterly summary only): The quarterly statistical report captures every written complaint, but allegations of misappropriation specifically require an additional, individually reportable event.
- C (wait until resolution): The reporting obligation is triggered by the firm's knowledge of the allegation, not by the outcome of any investigation or resolution.
- D (only if arbitration is requested): The customer's choice to pursue arbitration is unrelated to the firm's independent reporting duty to FINRA.

Correct answer: C. When no specific retention period applies to a required record, a default retention floor applies, measured from when the record was made (or, for account records, from account closure). That default is a floor, not a ceiling: if a more specific rule requires a longer period, the longer period controls.

Why not the others?
- A (destroy immediately): The absence of a rule-specific period does not eliminate the retention obligation; a default period still applies.
- B (preserve indefinitely): The default retention rule sets a defined period, not an indefinite one.
- D (only if the customer requests it): Retention obligations run to regulators and examiners, not to a customer request.

Correct answer: B. Financial-responsibility rules build in an early-warning tier that requires notification once net capital falls to a specified level above the firm's actual minimum, precisely so regulators have advance visibility before a firm's capital position becomes an actual deficiency. Waiting until the firm is literally below its minimum defeats the purpose of an early-warning system.

Why not the others?
- A (no notification required above the minimum): The early-warning threshold is deliberately set above the bare minimum so that notification happens before an actual violation occurs.
- C (only once actually below the minimum): A same-day notice does apply once a firm is actually below its minimum, but that is a separate, more severe trigger than the earlier warning-tier notice.
- D (handled only through the annual audit): Early-warning notification is an interim, event-driven obligation, not something that waits for the next scheduled annual filing.

Correct answer: B. A compliant AML program must include several required elements working together: written policies and procedures to detect and report suspicious activity, a designated person responsible for administering the program, ongoing training, risk-based customer due diligence, and periodic independent testing. Omitting independent testing leaves the program incomplete regardless of how strong the other elements are.

Why not the others?
- A (testing is only recommended): Independent testing is a required program element, not an optional best practice.
- C (testing only needed after a filed SAR): The independent-testing obligation applies to the program generally and does not depend on whether the firm has ever filed a suspicious activity report.
- D (customer due diligence substitutes for testing): Customer due diligence and independent testing are two distinct required elements; one cannot stand in for the other.

Correct answer: B. A written communication distributed to more than 25 retail investors within any 30-calendar-day period is a retail communication, not correspondence. Retail communications generally require pre-use approval by an appropriately qualified principal before their first use.

Why not the others?
- A (correspondence): Correspondence applies only when distribution is to 25 or fewer retail investors within 30 days; 40 recipients crosses that threshold.
- C (institutional communication): Institutional communications are limited to institutional investors only; any retail recipient, let alone 40 of them, removes the material from that category entirely.
- D (exempt from review): Retail communications are subject to the principal pre-approval requirement regardless of the specific medium used to distribute them.

Correct answer: B. Regulation Best Interest's care obligation requires reasonable diligence to understand a recommendation's risks, rewards, and costs, and a reasonable basis to believe the recommendation is in the retail customer's best interest based on that customer's profile. Cost is an explicit factor the care obligation requires the firm to consider, which is one of the ways the standard goes beyond ordinary suitability.

Why not the others?
- A (recommend the highest-compensation product): The rule is designed specifically to prevent placing the representative's or firm's financial interest ahead of the customer's, which is the opposite of this option.
- C (mere suitability for some investors is enough): That reasonable-basis suitability concept is part of a different standard; Regulation Best Interest requires a best-interest determination specific to the customer, not just suitability for some hypothetical investor.
- D (cost is not a required consideration): Cost is explicitly a factor the care obligation requires the firm to weigh, not something the rule allows a firm to ignore.

Correct answer: B. Exercising discretion requires three separate writings: the customer's written authorization naming who may exercise discretion, the firm's written acceptance of the account by a designated principal, and the principal's prompt written approval of each individual discretionary order as it is entered. Missing any one of the three is a violation.

Why not the others?
- A (verbal permission, confirmed after the fact): Oral authorization confirmed only after trades occur does not satisfy the written-authorization requirement.
- C (only principal approval of the account, no customer involvement): The customer's own written authorization is a required, separate element; the principal's account acceptance does not substitute for it.
- D (discretion is inherent in every account): Discretion is never automatic. It must be affirmatively granted in writing before a representative may exercise it.

Correct answer: B. A firm that does not conduct an order-by-order best-execution review must instead perform a regular and rigorous review of execution quality, at minimum quarterly, broken out by security and by order type, and compare its own executions against competing markets. If the review reveals material differences, the firm must either modify its routing or document why it is not doing so.

Why not the others?
- A (single-venue routing is automatically fine): Routing to one venue does not itself satisfy best execution; the firm still has to demonstrate, through its regular review, that the venue is actually producing quality executions.
- C (annual review, no security or order-type breakdown): The regular and rigorous review must occur at least quarterly and must be broken down by security and order type, not conducted as a single undifferentiated annual check.
- D (rely solely on the venue's self-reported statistics): The firm's review has to independently compare its execution quality against competing markets, not simply accept the venue's own reporting at face value.

Correct answer: B. A firm holding an unfilled customer order generally may not trade for its own account, on the same side of the market, at a price that would satisfy that order unless it immediately executes the customer's order at the same price or better. This protects the customer's price priority over the firm's own trading interest.

Why not the others?
- A (permissible because both trade around the same time): Trading contemporaneously does not cure the violation; the core problem is the firm satisfying its own interest at a price the customer's order was entitled to first.
- C (after-the-fact notice cures it): Notifying the customer later does not substitute for executing the customer's order first.
- D (only a violation for market orders): The prohibition applies to held customer orders generally, including limit orders, not just market orders.

Correct answer: B. Before accepting a short sale order, a broker-dealer must satisfy the locate requirement: it must have already borrowed the security, entered into a bona fide arrangement to borrow it, or have reasonable grounds to believe the security can be borrowed and delivered by settlement date. This locate must be documented before the order is accepted, not worked out afterward.

Why not the others?
- A (marking the order short is sufficient): Correctly marking the order as short is a separate, additional requirement; it does not substitute for actually satisfying the locate requirement.
- C (wait until settlement date): The locate requirement is a pre-acceptance obligation, not something that can be deferred until the settlement date arrives.
- D (confirm same-day buyback intent): Nothing about the customer's plan to cover the short intraday satisfies the locate requirement, which concerns the ability to borrow and deliver the security by settlement.

Correct answer: B. Equity trade reports to FINRA facilities are generally required within 10 seconds of execution during normal market hours. A report submitted 45 seconds after execution exceeds that window and must be marked late, with the late designation carrying through to dissemination.

Why not the others?
- A (minutes rather than seconds): The standard reporting window for equities is measured in seconds, not minutes; a longer, minutes-based window applies to certain fixed income reporting, not to equities.
- C (10-second standard is for fixed income, not equities): This reverses the actual rule. The 10-second window applies to equities; eligible debt securities reported through the fixed income facility have a longer, minutes-based window instead.
- D (off-exchange equity trades need not be reported): Off-exchange NMS-stock executions must be reported to the appropriate trade reporting facility; the obligation exists whether the trade occurs on an exchange or over the counter.

Correct answer: B. When a meaningful share of net offering proceeds flows back to the underwriting member or its affiliates, that arrangement is a defined conflict of interest. The offering may still proceed, but only with prominent disclosure of the conflict and generally the participation of a qualified independent underwriter (or another recognized safeguard, such as the offering already being investment grade or a bona fide independent market existing for the security).

Why not the others?
- A (disclosure anywhere in the registration statement is sufficient): The disclosure must be prominent, and disclosure alone is not enough; a qualifying safeguard is also generally required.
- C (automatic disqualification): The conflict does not bar the firm from participating outright; it triggers specific procedural safeguards rather than an absolute prohibition.
- D (relevant only to the issuer, not the underwriter): The conflict rule is specifically aimed at the underwriting member's own conduct and compensation, not just the issuer's disclosure obligations.

Correct answer: B. Research supervision rules require information barriers that insulate analysts from review or pressure by investment banking personnel on the substance of a report, and they separately prohibit tying an analyst's compensation to specific investment banking transactions or revenue. Both halves of this arrangement, the substantive pre-publication review and the deal-linked compensation, are independently prohibited.

Why not the others?
- A (disclosure in the report cures it): Disclosing a compensation arrangement after the fact does not make an otherwise-prohibited compensation structure permissible.
- C (permissible if limited to factual accuracy review): A narrow factual-accuracy check performed as a gatekeeper function, without touching the report's conclusions, is treated differently than a substantive review of the report's content and recommendations; the question describes a general review of the draft, not a limited factual check.
- D (left entirely to firm discretion): Research analyst independence is a specifically mandated regulatory framework, not an area left open to a firm's own discretion.

Correct answer: A. Firms that acted as underwriter or dealer in an initial public offering are subject to a quiet period following the offering during which they generally may not publish research on that company (subject to specific carve-outs, such as significant company news authorized by legal or compliance, or an exemption for certain smaller or newer reporting companies). The clock runs from the offering itself, not from an earnings release or the syndicate's internal winding down.

Why not the others?
- B (tied to the next earnings release): The quiet period is measured from the offering date, not from whenever the company's next quarterly results happen to be released.
- C (left to the firm's discretion, no quiet period for a lead underwriter): A quiet period does apply to underwriters and dealers in the offering, including the lead underwriter; it is not a matter of unrestricted firm discretion.
- D (tied to syndicate dissolution): The quiet period is measured against the offering date itself, not against an internal, variable event like syndicate wind-down.

Correct answer: B. During the waiting period, oral offers are permitted, and written offers are permitted only in specific recognized forms, principally a preliminary (red herring) prospectus, a tombstone advertisement, or a free writing prospectus meeting the applicable conditions. No actual sales may be completed until the registration statement is declared effective.

Why not the others?
- A (oral offers and completed sales): Sales cannot be completed during the waiting period; only offers, not completed sales, are permitted at this stage.
- C (no offers of any kind): The complete prohibition on offers applies to the pre-filing period, not the waiting period; oral offers and specific permitted written offers are allowed once the registration statement has been filed.
- D (unrestricted written sales materials, cured by later delivery): Written offering materials during the waiting period are limited to specific recognized forms; a firm cannot use unrestricted marketing materials and simply fix the problem later with a final prospectus.