Series 6 Quotes and Best Execution practice questions

Correct answer: C. Correct. For mutual funds, best execution converges on share-class selection and breakpoint capture. Selling a higher-cost class when a lower-cost class was available for the customer's holding period or investment level is the most common best-execution deficiency.

Why not the others?
- A (Selection of the routing venue for the order): Open-end mutual funds have a single execution destination (the fund itself), so routing venue selection is rarely the best-execution issue.
- B (Comparing iNAV to the market bid/ask at execution): iNAV is an ETF concept, not an open-end mutual fund concept. It is not the dominant best-execution issue for mutual funds.
- D (Negotiating the NAV strike time with the fund's transfer agent): NAV strike times are not negotiated. Forward pricing sets a single daily strike that the rep cannot alter.

Correct answer: A. Correct. In a riskless principal trade, the firm buys (or sells) specifically to fill the customer's order, with the offsetting side already lined up. The compensation is the markup between the firm's offsetting price and the customer's price.

Why not the others?
- B (The commission rate published in the firm's fee schedule): Commission is the measurement for agency trades, not riskless principal trades. A riskless principal trade compensation is measured as the markup between the offsetting price and the customer price.
- C (The difference between the price to the customer and the prevailing market price): That is the measurement for other (non-riskless) principal trades, not for riskless principal trades. Riskless principal uses the contemporaneous offsetting price.
- D (The commission charged by any introducing broker plus a 1% markup): There is no formula that adds commissions plus a fixed percentage markup. Riskless principal compensation is defined as the price-to-customer minus the contemporaneous offsetting price.

Correct answer: A. Correct. NAV is the per-share redemption price the fund pays when a customer redeems, so it functions as the bid in fund-quote shorthand.

Why not the others?
- B (The ask, because NAV is the price the fund charges the customer on purchase): The purchase price (ask) is the POP, which equals NAV plus any front-end sales charge, not NAV itself.
- C (The last sale, because NAV reflects the most recent intraday trade): Open-end fund NAV is calculated once per business day at market close. There is no intraday last sale because fund shares do not trade on a secondary market.
- D (The midpoint, because NAV sits halfway between the bid and the ask): NAV is specifically the bid side in fund-quote shorthand. The midpoint concept applies to continuous market-maker spreads, not to daily-priced fund quotes.

Correct answer: B. Correct. 15g-4 has a two-part disclosure structure: pre-trade disclosure (orally or in writing) before effecting the transaction, and written disclosure at or prior to confirmation delivery. Both parts are required.

Why not the others?
- A (In writing only, at the time the customer opens the account): Disclosure is required at each penny-stock transaction, not only at account opening. And the disclosure structure is two-part (pre-trade plus confirmation-stage), not only in writing at account opening.
- C (Orally, at the conclusion of the transaction): Oral-only at the conclusion does not meet either leg of 15g-4. The pre-trade leg requires disclosure before effecting the transaction, and the confirmation-stage leg requires written disclosure at or before confirmation delivery.
- D (Only upon customer request, within five business days): 15g-4 is an affirmative disclosure obligation, not a request-based obligation. It must be made in the required form at the required time regardless of any customer request.

Correct answer: B. Correct. As-of processing books the correction at the originally-intended NAV date. The firm absorbs any loss from NAV movement so the customer is made whole for the firm's error.

Why not the others?
- A (Monday's NAV, because that is when the correction is entered): Using Monday's NAV would shift the cost of the firm's error onto the customer if NAV moved unfavorably. As-of processing reverts the correction to the NAV the customer should have received.
- C (The average of Friday and Monday NAVs to distribute the loss equitably): As-of processing does not use averaging. The customer is made whole at the originally-intended NAV, and the firm absorbs the difference.
- D (The higher of Friday or Monday NAVs, to protect the fund from loss): The correction is at the originally-intended NAV (Friday's). Using the higher of the two would harm the customer if NAV moved against them during the firm's error.

Correct answer: D. Correct. The duty applies to any transaction for or with a customer (or a customer of another broker-dealer), in agency or principal capacity, and extends across security types, including investment-company securities.

Why not the others?
- A (Agency transactions only; principal trades are excluded): Principal trades are not excluded. The duty applies whether the firm acts as agent or principal.
- B (Only retail customer transactions; institutional transactions are excluded): The duty applies across the customer base. There is no blanket institutional exclusion.
- C (Only transactions in exchange-listed securities): The duty applies across security types, including investment-company securities, variable contracts, and debt securities, not only exchange-listed securities.

Correct answer: B. Correct. 15g-4 requires disclosure of the aggregate amount of compensation the firm will receive in connection with a penny-stock transaction. The purpose is customer transparency about how the firm profits from the trade, not a substantive cap on the amount.

Why not the others?
- A (A cap on the markup a firm may charge on a penny-stock transaction): 15g-4 is a transparency rule, not a markup cap. It requires disclosure of the compensation amount, not a limit on the amount.
- C (An antifraud rule that establishes a new cause of action independent of the general securities antifraud prohibition): The penny-stock compensation disclosure requirement is a disclosure rule under Regulation 15G, not a freestanding antifraud rule. It complements but does not replicate the general securities antifraud prohibition.
- D (A suitability rule requiring a customer's risk profile to be documented before any penny-stock transaction): 15g-4 is about compensation disclosure, not suitability analysis. Penny-stock suitability is covered by other rules in Regulation 15G (such as 15g-9 and the risk disclosure document under 15g-2).

Correct answer: A. Correct. The duty applies whether the firm acts as agent or principal. A firm selling its own inventory to a customer owes the same best-execution duty as a firm routing an agency order to an external market.

Why not the others?
- B (The duty does not apply to principal trades, only to agency orders): Best execution applies to both agent and principal capacities. There is no carve-out for principal trades.
- C (The duty applies only if the markup exceeds 5% of the transaction price): There is no 5% markup gate for the best-execution duty. The duty applies regardless of markup size.
- D (The duty applies only if the customer specifically requests a best-execution evaluation in writing): Best execution is the firm's affirmative duty, not a customer-requested service. The firm owes it on every transaction.