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Series 22 study materials
Series 22 study resources

Series 22 practice questions

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Question 1Seeks Business for the Broker-dealer from Customers and Potential Customers

A registered representative is building a prospect list to market a new direct participation program. Which source of prospects would raise the greatest regulatory concern?

  1. Referrals from existing clients who are satisfied with the firm
  2. Purchasing a list of names from a third-party vendor without knowing its origin Correct answer.
  3. Respondents to a firm-sponsored advertisement who requested information
  4. Attendees at a firm-sponsored seminar who provided their contact information

Explanation

Prospecting lists must be scrubbed against the firm's do-not-call list and the national registry, and a list of unknown origin cannot be scrubbed or shown to have been obtained lawfully. Referrals, ad respondents, and voluntary seminar attendees are ordinary permitted sources of prospects.

Question 2Seeks Business for the Broker-dealer from Customers and Potential Customers

Under FINRA rules, retail communications concerning a direct participation program must be approved before use by:

  1. the issuer's general partner
  2. any registered representative of the member firm
  3. FINRA's advertising department
  4. a registered principal of the member firm Correct answer.

Explanation

FINRA requires that retail communications be approved in writing before use by a registered principal of the member firm. FINRA itself does not approve communications in advance; it reviews them through the filing process after or shortly before use.

Question 3Seeks Business for the Broker-dealer from Customers and Potential Customers

Before recommending a direct participation program to a customer, a representative must have a reasonable basis to believe the recommendation is suitable. That determination must rest primarily on:

  1. the customer's objectives, financial situation, and needs Correct answer.
  2. the size of the commission the transaction generates
  3. the representative's own personal investment in the same program
  4. the issuer's projected returns for the program

Explanation

Suitability requires a reasonable basis derived from the customer's investment objectives, financial circumstances, needs, and risk tolerance, matched against the features and risks of the program. The representative's own holdings and the issuer's projections are not substitutes for that analysis.

Question 4Seeks Business for the Broker-dealer from Customers and Potential Customers

Which individual satisfies the accredited investor standard under Regulation D?

  1. A person with annual income of $150,000 in each of the last two years, individually or jointly
  2. A person with a net worth of $500,000, including a primary residence
  3. A person with individual income exceeding $200,000 in each of the last two years Correct answer.
  4. A person with $250,000 in liquid savings and no other assets

Explanation

The individual income test for accredited investor status is income in excess of $200,000 in each of the two most recent years (or $300,000 jointly with a spouse), with a reasonable expectation of the same in the current year. The net worth test is $1 million excluding the value of a primary residence.

Question 5Seeks Business for the Broker-dealer from Customers and Potential Customers

A testimonial from an investor in a similar program appears in a sales brochure for a direct participation program. The testimonial may be used only if:

  1. the person giving the testimonial is a registered representative
  2. the compliance officer approves the testimonial verbally
  3. the firm discloses that it may not be representative of other clients' results Correct answer.
  4. the testimonial is accompanied by audited financial statements of the program

Explanation

Testimonials in sales material must be accompanied by disclosure that they may not be representative of the experience of other investors and are no guarantee of future performance or success. The registered status of the speaker, verbal approval, or audited statements do not satisfy that condition.

Question 6Seeks Business for the Broker-dealer from Customers and Potential Customers

A direct participation program is registered under the Securities Act of 1933. With respect to delivery of the final prospectus to a purchaser, delivery is:

  1. required only for purchases exceeding $100,000
  2. optional if the purchaser signs a written waiver of delivery
  3. required, with delivery no later than the confirmation of sale Correct answer.
  4. the responsibility of the issuer's transfer agent

Explanation

A final prospectus must be delivered to the purchaser no later than the time the sale is confirmed. The requirement cannot be waived by the customer, has no dollar threshold, and is the selling member firm's obligation.

Question 7Seeks Business for the Broker-dealer from Customers and Potential Customers

Under a member firm's customer identification program, a representative opening an account for a new direct participation program investor must:

  1. collect and verify name, address, date of birth, and ID number Correct answer.
  2. rely on the issuer's subscription documents alone
  3. accept a verbal statement of identity from the customer
  4. verify identity only if the investment exceeds $50,000

Explanation

A customer identification program requires the firm to collect the customer's name, date of birth, address, and identification number, and to verify identity using documentary or non-documentary methods. The obligation applies to all new accounts and cannot be delegated to the issuer.

Question 8Seeks Business for the Broker-dealer from Customers and Potential Customers

Under Regulation S-P, a member firm must deliver an initial privacy notice to a new customer:

  1. only if the customer is a natural person
  2. at the time the customer relationship is established Correct answer.
  3. within 30 days after the first transaction
  4. only upon the customer's written request

Explanation

Regulation S-P requires an initial privacy notice at the time the customer relationship is established, followed by annual notices thereafter. It is not triggered by a customer request or by completion of a first transaction.

Question 9Seeks Business for the Broker-dealer from Customers and Potential Customers

Under FINRA's telemarketing rules, a representative may place a telephone solicitation to a residential prospect only:

  1. between 7:00 a.m. and 10:00 p.m. local time at the called party's location
  2. at any time, if the prospect is an existing customer of the firm
  3. between 9:00 a.m. and 5:00 p.m. local time at the caller's location, on weekdays
  4. between 8:00 a.m. and 9:00 p.m. local time at the called party's location Correct answer.

Explanation

Solicitation calls to residential telephone numbers are limited to the hours between 8:00 a.m. and 9:00 p.m. local time at the called party's location. The window is measured by the prospect's time zone, not the caller's.

Question 10Seeks Business for the Broker-dealer from Customers and Potential Customers

A member firm sponsors a seminar at which a representative presents a direct participation program offering to invited prospects. Which statement is correct?

  1. The seminar content must be filed with the SEC in advance
  2. Seminar materials are exempt from FINRA rules because the audience is invited
  3. Only the oral presentation must be approved by a principal
  4. The seminar is a retail communication subject to approval and supervision Correct answer.

Explanation

Seminar scripts and materials used with retail prospects are retail communications and must be approved by a principal, supervised, and retained under the firm's records. Limiting the guest list does not remove the material from FINRA's communication rules.

Question 11Seeks Business for the Broker-dealer from Customers and Potential Customers

A representative learns of a private direct participation program that her firm does not offer and wants to sell interests to her customers. Under FINRA rules she must:

  1. report the transaction to FINRA within 30 days after it settles
  2. obtain the firm's prior written approval and record the transaction on its books Correct answer.
  3. sell it, provided she earns no commission or other compensation from the sponsor
  4. sell it, provided she discloses the arrangement to each customer verbally before the sale

Explanation

Participating in a private securities transaction outside the firm requires prior written notice to, and approval by, the member firm, with the transaction recorded on the firm's books if compensation is received. Verbal disclosure to customers does not satisfy this obligation.

Question 12Seeks Business for the Broker-dealer from Customers and Potential Customers

Before accepting an outside position as a consultant to a direct participation program sponsor, a representative must:

  1. obtain FINRA's written approval before accepting the consulting position
  2. do nothing, because the consulting position is not a securities activity
  3. give the firm prior written notice, which may approve or reject it Correct answer.
  4. resign from the broker-dealer before accepting the position

Explanation

FINRA's outside business activity rule requires written notice to the member firm before a representative accepts an outside position, whether or not it involves securities, and the firm may approve or reject the activity. Resignation is not required and FINRA does not issue approvals.

Question 13Seeks Business for the Broker-dealer from Customers and Potential Customers

Sales material for a direct participation program includes prior performance of other programs sponsored by the same general partner. To be fair and balanced, the material must:

  1. show only the most successful programs sponsored by the same general partner, with disclosure
  2. include only audited figures for the current offering
  3. present results for all similar programs, including those that performed poorly Correct answer.
  4. omit any statement describing the risks of the offering

Explanation

When prior performance is presented, it must be shown for all comparable programs sponsored by the same sponsor, including unsuccessful ones, so the presentation is not misleading. Cherry-picking winners or dropping risk disclosure violates the fair and balanced standard.

Question 14Seeks Business for the Broker-dealer from Customers and Potential Customers

A representative wants to pay a $500 referral fee to an unaffiliated accountant who introduces a client who then invests in a direct participation program. Which statement is correct?

  1. The fee is permitted because it is a one-time payment
  2. The fee is disclosed to the client in writing only after the settlement date
  3. The fee is permitted if it does not exceed 1% of the investment amount
  4. The payment is generally prohibited unless the accountant is properly registered Correct answer.

Explanation

Compensating an unregistered person for bringing in securities business is generally prohibited because it constitutes paying a finder's fee to an unregistered person. Registration status or an available exclusion, plus firm policy, governs whether any payment may be made.

Question 15Seeks Business for the Broker-dealer from Customers and Potential Customers

A representative posts a comment about a direct participation program offering on a personal social media page that she also uses for business purposes. The post is:

  1. a retail communication subject to supervision, approval, and recordkeeping Correct answer.
  2. exempt from principal approval if fewer than 50 people view the post
  3. permitted only if the post is deleted within 24 hours
  4. not a communication with the public because the page is a personal account

Explanation

When a representative uses a personal page for business, content about the firm's products becomes a firm communication that must be supervised, approved where required, and retained. Neither the personal label nor low viewership removes it from the rules.

Question 16Seeks Business for the Broker-dealer from Customers and Potential Customers

A customer's subscription documents show that a proposed direct participation program investment equals 60% of her liquid net worth. The representative should:

  1. submit the order, because the customer signed the subscription agreement and accepts the risk
  2. decline to sell any direct participation program to that customer in the future
  3. submit the order and note the concentration in the customer's file
  4. discuss the concentration with the customer and escalate for suitability review Correct answer.

Explanation

A heavy concentration in an illiquid program warrants discussion with the customer and escalation under the firm's suitability procedures before the order is accepted. A signed subscription agreement does not relieve the firm of its suitability obligations.

Question 17Seeks Business for the Broker-dealer from Customers and Potential Customers

Interests in a direct participation program are being offered to a customer who resides in another state. With respect to state securities registration, responsibility generally rests with:

  1. the customer, who must verify registration before subscribing
  2. the transfer agent, which handles the state filings
  3. the member firm, which must confirm the offering is registered or exempt Correct answer.
  4. FINRA, which registers direct participation programs nationally

Explanation

State blue sky laws require an offering to be registered or exempt in the state where the purchaser resides, and the selling member firm must confirm that before accepting the order. FINRA does not register offerings, and the customer is not responsible for that confirmation.

Question 18Seeks Business for the Broker-dealer from Customers and Potential Customers

A sales piece for a direct participation program includes projected cash distributions to investors. Under FINRA communication rules, the projections must:

  1. be labeled hypothetical, based on reasonable assumptions, with risk disclosure Correct answer.
  2. include a written guarantee that the projected results will be achieved
  3. show the highest possible return the program could achieve
  4. be based on the general partner's own internal operating budget for the first year

Explanation

Projections must be clearly labeled as hypothetical, rest on reasonable assumptions, and be accompanied by disclosure of the risks and the limits of projected performance. Presenting only best-case figures or guaranteeing results is misleading.

Question 19Seeks Business for the Broker-dealer from Customers and Potential Customers

A representative sends the same email about a direct participation program to 30 retail prospects over a 30-day period. Under FINRA rules, this email is:

  1. a public appearance, because it was delivered to a group
  2. correspondence, because it is a written communication
  3. an institutional communication, because it was sent by email
  4. retail communication, because it went to more than 25 retail investors Correct answer.

Explanation

A written communication distributed to more than 25 retail investors within any 30-calendar-day period is a retail communication, which carries principal approval and filing obligations. Written form alone does not make it correspondence.

Question 20Seeks Business for the Broker-dealer from Customers and Potential Customers

Under applicable recordkeeping rules, a member firm must retain retail communications about direct participation programs for:

  1. five years, the first two of which in an easily accessible place
  2. three years, the first two of which in an easily accessible place Correct answer.
  3. two years, in a readily accessible place
  4. one year from the date of use

Explanation

Retail communications must be preserved for three years, with the first two years in an easily accessible place. Shorter periods do not satisfy the requirement, and a five-year period is not what the rule demands.

Question 21Seeks Business for the Broker-dealer from Customers and Potential Customers

A representative places a solicitation call to a prospect whose number appears on the national do-not-call registry. The call is permitted without prior consent if:

  1. the firm has an established business relationship with the prospect Correct answer.
  2. the representative limits the call to three minutes in length
  3. the call is placed before 9:00 a.m. local time at the prospect's location
  4. the prospect lives in the same state as the representative's branch office

Explanation

An established business relationship or the prospect's prior express written consent creates an exception to the do-not-call registry prohibition. Time of day, geography, and call length do not create exceptions, and calls before 8:00 a.m. are prohibited outright.

Question 22Seeks Business for the Broker-dealer from Customers and Potential Customers

A representative wants to place a newspaper advertisement for a direct participation program being offered under Regulation D, Rule 506(b). Under Regulation D, general solicitation in that offering is:

  1. permitted if all purchasers turn out to be accredited investors
  2. prohibited for all direct participation programs regardless of exemption
  3. permitted if the firm files a Form D within 15 days of first sale
  4. prohibited; Rule 506(b) sales require a pre-existing substantive relationship Correct answer.

Explanation

Rule 506(b) prohibits general solicitation and advertising, so interests may be offered only to investors with whom the issuer or its agents have a pre-existing substantive relationship. Filing a Form D or confirming accredited status afterward does not cure improper solicitation.

Question 23Seeks Business for the Broker-dealer from Customers and Potential Customers

Which retail communication concerning a direct participation program must be filed with FINRA's Advertising Regulation Department at least 10 business days before first use?

  1. A preliminary prospectus delivered to prospective investors before the offering
  2. A communication that merely names the member firm and the program
  3. A retail communication about a program that includes performance data or projections Correct answer.
  4. An annual report mailed to existing limited partners

Explanation

Retail communications concerning direct participation programs that include performance data or projections are subject to pre-use filing with FINRA at least 10 business days before first use. Prospectuses and communications that merely identify the firm and product fall outside that pre-use filing category.

Question 24Seeks Business for the Broker-dealer from Customers and Potential Customers

A representative recommends a non-traded direct participation program to a retail customer with modest income and limited liquidity. Under Regulation Best Interest, the representative must:

  1. disclose conflicts of interest without considering other products
  2. have a reasonable basis to believe the recommendation is in the customer's best interest Correct answer.
  3. recommend only the program that carries the lowest sales charge and expense ratio
  4. act in the customer's best interest only when the customer specifically asks for advice

Explanation

Regulation Best Interest requires a reasonable basis to believe a recommendation is in the retail customer's best interest, considering the customer's investment profile and reasonably available alternatives. Cost alone, or disclosure alone, does not satisfy the care obligation.

Question 25Seeks Business for the Broker-dealer from Customers and Potential Customers

A prospect who received a direct participation program sales brochure calls the firm to complain that the distribution projections were misleading. Under FINRA rules, the firm must:

  1. forward it to FINRA within five business days of receipt
  2. require the representative to resolve the complaint directly with the prospect
  3. log the complaint, which is reviewed under the firm's supervisory system Correct answer.
  4. ignore it because the person is not yet a customer of the firm

Explanation

Complaints must be captured, reviewed, and addressed through the firm's written supervisory procedures, regardless of whether the complainant is an existing customer. Firms do not forward individual complaints to FINRA on a five-day timetable, and resolution is not left solely to the representative.

Question 26Seeks Business for the Broker-dealer from Customers and Potential Customers

A registered representative is seeking new customers for direct participation programs. Which activity is permissible under FINRA rules?

  1. Paying an unregistered friend $50 for each lead that results in an investment.
  2. Using a false firm name to make a more favorable impression.
  3. Calling prospects whose numbers appear on the national do-not-call registry without an exception.
  4. Calling prospects at their homes between 8:00 a.m. and 9:00 p.m. local time. Correct answer.

Explanation

Telemarketing calls to residential prospects are permitted only between 8:00 a.m. and 9:00 p.m. local time and must comply with do-not-call rules. Misrepresenting the firm and paying unregistered persons for securities-related leads are prohibited.

Question 27Seeks Business for the Broker-dealer from Customers and Potential Customers

Under FINRA's telemarketing rules, a representative may place a telephone solicitation to a residential prospect only during which time period?

  1. 7:00 a.m. to 8:00 p.m. local time of the prospect.
  2. 9:00 a.m. to 5:00 p.m. local time of the prospect.
  3. 8:00 a.m. to 9:00 p.m. local time of the prospect. Correct answer.
  4. 8:00 a.m. to 9:00 p.m. Eastern Time regardless of the prospect's location.

Explanation

The telemarketing rules permit calls to residential prospects only between 8:00 a.m. and 9:00 p.m. local time at the prospect's location. The time is not based on the caller's time zone or standard business hours.

Question 28Seeks Business for the Broker-dealer from Customers and Potential Customers

A member firm's telemarketing procedures must include which of the following?

  1. A policy of sharing prospect lists with other member firms.
  2. A requirement to call each prospect at least three times before closing the file.
  3. A list of customers who have requested not to receive future calls. Correct answer.
  4. A list of all prospects who have never purchased a security.

Explanation

FINRA Rule 3230 requires member firms to maintain do-not-call lists and to honor requests from persons who ask not to be called. Firms must have written procedures for maintaining and enforcing the list.

Question 29Seeks Business for the Broker-dealer from Customers and Potential Customers

A written communication about a direct participation program that is distributed to more than 25 retail investors within any 30-calendar-day period is classified as:

  1. Correspondence.
  2. Retail communication. Correct answer.
  3. Internal communication.
  4. Institutional communication.

Explanation

Under FINRA Rule 2210, retail communication includes written communications distributed to more than 25 retail investors within 30 calendar days. Correspondence is limited to 25 or fewer retail investors within that period.

Question 30Seeks Business for the Broker-dealer from Customers and Potential Customers

Before recommending a direct participation program to a customer, a representative must have a reasonable basis to believe that the recommendation is suitable for the customer based on:

  1. The commission the representative will earn.
  2. The representative's own investment goals.
  3. The customer's investment objectives, financial situation, and needs. Correct answer.
  4. The sponsor's marketing projections.

Explanation

Suitability requires a reasonable basis to believe the recommendation fits the customer's investment objectives, financial situation, and needs. The representative's compensation and the sponsor's marketing are not permissible bases for a recommendation.

Question 31Seeks Business for the Broker-dealer from Customers and Potential Customers

A representative wants to compensate an unregistered person for introducing a customer who invests in a direct participation program. Under FINRA rules, this arrangement is:

  1. Permitted if the firm approves the payment in writing.
  2. Permitted if the payment is less than $100.
  3. Prohibited because unregistered persons may not be compensated for securities activities. Correct answer.
  4. Permitted if the payment is disclosed to the customer.

Explanation

FINRA Rule 2040 prohibits paying compensation to unregistered persons for securities transactions, subject to limited exceptions not applicable here. Neither disclosure, a small dollar amount, nor firm approval can authorize the payment.

Question 32Seeks Business for the Broker-dealer from Customers and Potential Customers

In advertising a seminar about a direct participation program, a member firm may:

  1. Describe the program as a 'can't-miss' investment.
  2. Use exaggerated claims about potential returns.
  3. Present a balanced discussion that discloses the risks of the investment. Correct answer.
  4. Omit the risks because the seminar is educational.

Explanation

Seminar advertising and presentations must be fair and balanced and must disclose the risks of the investment. Exaggerated claims and material omissions are misleading and violate FINRA communication standards.

Question 33Seeks Business for the Broker-dealer from Customers and Potential Customers

Sales literature for a direct participation program must be fair and balanced, which means it must:

  1. Include only positive performance data.
  2. Use technical jargon to impress investors.
  3. Present both the benefits and the risks of the investment. Correct answer.
  4. Be limited to one page.

Explanation

Fair and balanced presentation requires that communications disclose both the potential benefits and the risks of the investment. One-sided presentations and obscure language are inconsistent with this standard.

Question 34Seeks Business for the Broker-dealer from Customers and Potential Customers

When making a cold call to a prospect about a direct participation program, a representative must disclose:

  1. The representative's home address.
  2. The representative's personal investment holdings.
  3. The names of other prospects the firm has called.
  4. The name of the firm and the purpose of the call. Correct answer.

Explanation

Telemarketing rules require the caller to promptly disclose the firm's name and the purpose of the call. Other prospects' names and the representative's personal holdings are not required disclosures.

Question 35Seeks Business for the Broker-dealer from Customers and Potential Customers

A customer who has an existing business relationship with a member firm asks not to be called again about new offerings. The firm:

  1. May continue calling because of the existing relationship.
  2. May call only on weekends.
  3. Must honor the request and place the customer on its do-not-call list. Correct answer.
  4. May call if a different representative makes the call.

Explanation

Even when an existing business relationship exists, a firm must honor a customer's affirmative do-not-call request. Using another representative to call would evade the request and is prohibited.

Question 36Seeks Business for the Broker-dealer from Customers and Potential Customers

A direct participation program sales brochure includes a testimonial from an investor who was paid for the endorsement. The brochure must:

  1. Disclose that the testimonial may not be representative of other investors' experiences and that compensation was paid. Correct answer.
  2. Omit the investor's name to protect privacy.
  3. State that the testimonial guarantees similar results.
  4. Include only the investor's positive statements.

Explanation

FINRA Rule 2210 requires testimonials to disclose that they may not be representative of other investors' experiences. If the person giving the testimonial was compensated, that compensation must also be disclosed.

Question 37Seeks Business for the Broker-dealer from Customers and Potential Customers

A representative prepares a flyer for a direct participation program that states the investment is 'guaranteed to produce income.' This statement is:

  1. Prohibited because it is misleading and omits the risks. Correct answer.
  2. Acceptable because DPPs are income-producing investments.
  3. Acceptable if the word 'guaranteed' is in small print.
  4. Acceptable if the sponsor has a strong track record.

Explanation

Communications may not use misleading terms such as 'guaranteed' for investments whose returns are not guaranteed. Such language is deceptive regardless of the sponsor's track record or the print size.

Question 38Seeks Business for the Broker-dealer from Customers and Potential Customers

Sales material for a direct participation program includes a chart projecting future cash distributions to investors. Under FINRA rules, this material is:

  1. Permitted if the projections are based on historical data.
  2. Permitted if approved by a principal.
  3. Prohibited because projections of future performance are not allowed. Correct answer.
  4. Permitted if the chart includes a disclaimer.

Explanation

FINRA rules prohibit projections of future performance in sales material. Only actual past performance may be shown, and it must be accompanied by appropriate disclosures.

Question 39Seeks Business for the Broker-dealer from Customers and Potential Customers

A representative sends the same email about a direct participation program to 30 retail prospects over a 30-day period. This email is:

  1. Correspondence because it is email.
  2. Institutional communication because it is sent to prospects.
  3. Retail communication because it is sent to more than 25 retail investors in 30 days. Correct answer.
  4. Internal communication because it is not printed.

Explanation

Retail communication includes written communications distributed to more than 25 retail investors within 30 calendar days. Email is a written communication, and 30 recipients exceeds the correspondence threshold.

Question 40Seeks Business for the Broker-dealer from Customers and Potential Customers

A representative posts a static message about a direct participation program on a social media page that is available to all retail investors. This post is treated as:

  1. Retail communication subject to principal approval and supervision. Correct answer.
  2. Institutional communication because it is public.
  3. Correspondence because it is on social media.
  4. Not subject to FINRA rules because it is personal.

Explanation

A static social media post that is written and available to more than 25 retail investors is a retail communication. It must be approved by a principal and supervised like other retail communications.

Question 41Seeks Business for the Broker-dealer from Customers and Potential Customers

A member firm sponsors a seminar to present a direct participation program and provides attendees with a free meal. Under FINRA rules, the meal is:

  1. Permitted only if each attendee invests at least $10,000.
  2. Permitted if it is not excessive and is not contingent on the attendee investing. Correct answer.
  3. Prohibited because firms may not give anything of value to prospects.
  4. Prohibited unless the meal costs less than $10.

Explanation

Firms may provide reasonable meals at seminars if the meal is not excessive and is not conditioned on the attendee investing. There is no absolute prohibition or dollar threshold of $10.

Question 42Seeks Business for the Broker-dealer from Customers and Potential Customers

A representative wants to share commissions from a direct participation program sale with another registered representative at the same firm. This is permitted only if:

  1. The customer approves the split.
  2. The other representative is a family member.
  3. The other representative is not licensed.
  4. The firm approves the arrangement and both are registered. Correct answer.

Explanation

Commission sharing is permitted between registered representatives of the same firm when the firm approves the arrangement. Sharing commissions with an unregistered person is prohibited.

Question 43Seeks Business for the Broker-dealer from Customers and Potential Customers

When recommending a direct participation program, a representative should consider which customer factors?

  1. The representative's sales quota.
  2. The customer's age, liquidity needs, net worth, and tax status. Correct answer.
  3. Only the customer's current income.
  4. Only the customer's past experience with stocks.

Explanation

Suitability requires consideration of the customer's financial situation, investment objectives, liquidity needs, age, net worth, and tax status. A single factor such as current income is not sufficient.

Question 44Seeks Business for the Broker-dealer from Customers and Potential Customers

A representative wants to offer a direct participation program to a customer who resides in another state. Before making the offer, the firm must:

  1. Ensure the offering is registered or exempt in the customer's state. Correct answer.
  2. File the offering with the SEC only.
  3. Obtain a waiver from FINRA.
  4. Send the customer a prospectus only.

Explanation

Offers and sales of securities must comply with state blue sky laws; the security must be registered or exempt in the customer's state. SEC filing or delivering a prospectus does not replace state registration requirements.

Question 45Seeks Business for the Broker-dealer from Customers and Potential Customers

Under applicable recordkeeping rules, a member firm must retain retail communications about direct participation programs for at least:

  1. One year.
  2. Five years.
  3. Three years. Correct answer.
  4. Two years.

Explanation

FINRA and SEC recordkeeping rules require retention of communications for three years, with the first two years in an easily accessible place. Shorter periods do not meet the minimum requirement.

Question 46Seeks Business for the Broker-dealer from Customers and Potential Customers

A representative obtains a list of attendees from a seminar on direct participation programs and begins calling them. One attendee had previously asked the firm not to call and is on the firm's do-not-call list. The representative should:

  1. Call the attendee because the seminar created a new business relationship.
  2. Have another representative make the call.
  3. Not call the attendee because the firm must honor its do-not-call list. Correct answer.
  4. Call the attendee only after 9:00 p.m.

Explanation

A firm must honor its do-not-call list; attending a seminar does not override an existing do-not-call request. Using another representative to call would improperly evade the request.

Question 47Seeks Business for the Broker-dealer from Customers and Potential Customers

A sales piece for a direct participation program includes a chart showing the prior performance of similar programs sponsored by the same general partner. To comply with FINRA rules, the piece must:

  1. State that the chart guarantees similar results.
  2. Omit the chart because prior performance may never be shown.
  3. Show only the best-performing prior program.
  4. Disclose that prior performance is not indicative of future results and explain the limitations. Correct answer.

Explanation

Prior performance may be included in sales material but must be accompanied by disclosures that it does not guarantee future results and that the data has limitations. Showing only the best program or implying a guarantee would be misleading.

Question 48Seeks Business for the Broker-dealer from Customers and Potential Customers

A representative promises to split commissions with an unregistered assistant who provides names of potential investors for a direct participation program. This arrangement is:

  1. Permitted if the assistant only provides names.
  2. Prohibited because unregistered persons cannot share in commissions from securities transactions. Correct answer.
  3. Permitted if the firm is notified.
  4. Permitted if the assistant is paid a fixed salary.

Explanation

FINRA Rule 2040 prohibits sharing commissions with unregistered persons. Providing leads in exchange for a share of commissions is compensation for securities activity and violates the rule.

Question 49Seeks Business for the Broker-dealer from Customers and Potential Customers

A representative's sales letter for a direct participation program describes the investment as 'risk-free' and 'principal-protected.' This letter is:

  1. Acceptable if the terms are in bold print.
  2. Misleading because DPP investments are not risk-free or principal-protected. Correct answer.
  3. Acceptable if the sponsor has insurance.
  4. Acceptable if approved by a principal.

Explanation

Communications may not misrepresent the risks of an investment. Direct participation programs carry risk and are not principal-protected, so describing them as risk-free is deceptive regardless of approval or formatting.

Question 50Seeks Business for the Broker-dealer from Customers and Potential Customers

A representative shares a link to a direct participation program's offering page on a personal social media account that is open to the public. Under FINRA rules, this action:

  1. Is prohibited entirely.
  2. Is permitted because links are not communications.
  3. Requires prior principal approval and supervision as a retail communication. Correct answer.
  4. Is not covered because it is a personal account.

Explanation

Sharing a link that promotes a security is a communication subject to supervision. When distributed to retail investors, it may be a retail communication requiring principal approval.