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Series 87 practice questions

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Question 1Research Report Content, Preparation, and Standards

Under FINRA Rule 2241, which communication qualifies as a "research report"?

  1. A fund prospectus describing the investment objectives, risks and expenses of a registered investment company
  2. A statistical summary of general market activity that contains no analysis of any individual issuer or security
  3. A written analysis of an issuer containing information reasonably sufficient to base an investment decision Correct answer.
  4. A trade confirmation that a member sends to a retail customer promptly after execution of a securities order

Explanation

The definition requires both an analysis of a security or issuer and information reasonably sufficient upon which to base an investment decision. Confirmations, prospectuses and pure market statistics lack that combination. The test turns on content, not on whether the piece is labeled research.

Question 2Research Report Content, Preparation, and Standards

A research report must include a certification by the research analyst that:

  1. the investment banking department has reviewed and approved both the recommendation and the price target before the report is published
  2. the member will refrain from trading the subject security in the open market for at least 30 days after the report has been published
  3. the views expressed accurately reflect the analyst's personal views and that no part of the analyst's compensation is tied to the specific recommendation Correct answer.
  4. the analyst holds no position in the recommended security and maintains no brokerage account of any kind at any firm, including accounts held by household members at other firms

Explanation

The certification addresses the independence of the analyst's views and the absence of a link between pay and the specific recommendation. Holdings are handled through disclosure rather than through a prohibition on owning securities. Review or approval by investment banking is forbidden, not certified.

Question 3Research Report Content, Preparation, and Standards

A research report that assigns a rating to a security must disclose:

  1. the identity of each institutional client that holds the subject security in a managed account
  2. the analyst's detailed five-year forecast of the issuer's earnings and revenue
  3. the definition of each rating used and the time horizon on which the rating is based Correct answer.
  4. the member's trading volume in the subject security for the most recently completed calendar quarter

Explanation

Readers must be told what a "buy," "hold" or "sell" means at that firm and over what horizon the view is expressed. Earnings forecasts and client identities are not required elements. Trading volume is unrelated to the required content.

Question 4Research Report Content, Preparation, and Standards

An analyst is dismissed shortly after publishing a downgrade that caused an investment banking client to withdraw a financing mandate. Under FINRA rules, the dismissal is:

  1. prohibited, because firms may not retaliate against research analysts for unfavorable research Correct answer.
  2. permissible, provided the analyst is given 30 days' written notice before the termination
  3. permissible, provided compliance documents the revenue impact in the analyst's personnel file
  4. permissible, because firms may weigh investment banking revenue when making personnel decisions about research staff

Explanation

Rule 2241 contains an anti-retaliation provision protecting analysts who produce unfavorable research. Adverse action taken because a report harmed a business relationship is the conduct the rule forbids. Documentation or notice does not cure a retaliatory motive.

Question 5Research Report Content, Preparation, and Standards

Which statement best describes the required separation between a member's research and investment banking departments?

  1. Analyst bonuses must be calculated from investment banking fees generated by the issuers the analyst covers
  2. The head of investment banking must sign off on every rating change before the report is published to retail and institutional customers
  3. Investment banking may not direct or pre-approve research, and information barriers must separate the departments Correct answer.
  4. Analysts must be supervised by, and report directly to, the investment banking department at all times, with research treated as a support function

Explanation

Information barriers must keep investment banking personnel from directing or clearing research content before publication. Reporting lines and pay must also be insulated from investment banking influence. Sign-off rights and fee-based bonuses are exactly the conflicts the rule targets.

Question 6Research Report Content, Preparation, and Standards

A research report states that an issuer's bonds "will deliver a minimum 8% annual return to holders." This language is improper because communications with the public may not:

  1. describe the historical performance of a security over a stated period
  2. predict or project performance or imply that an investment result is guaranteed Correct answer.
  3. disclose the risks that could cause an investment to lose value
  4. summarize the published opinions of independent rating agencies

Explanation

Communications with the public may not project performance or imply that a result is assured; research must be fair and balanced. Past performance may be discussed if it is not presented as a promise. Naming risks is required for balance, not prohibited.

Question 7Research Report Content, Preparation, and Standards

At the time a research report is published, the member is making a market in the subject security. The report must:

  1. obtain the issuer's written consent before the report is published
  2. disclose that the member makes a market in the security Correct answer.
  3. state that the analyst's rating was reviewed by the trading desk that makes the market
  4. suspend market-making activity until the rating is withdrawn or changed

Explanation

Market making in the subject security is a potential conflict of interest that must be disclosed in the report. The firm is not required to stop making a market, and the requirement is disclosure rather than trading desk review.

Question 8Research Report Content, Preparation, and Standards

Which of the following is a "public appearance" under FINRA Rule 2241?

  1. A written research report delivered to the member's retail customers
  2. A draft report submitted to the issuer for verification of factual accuracy
  3. A television interview in which an analyst discusses a security the member covers Correct answer.
  4. An internal email circulated only among the member's research staff

Explanation

A public appearance is a forum such as television, radio, a seminar or an internet chat in which an analyst discusses a security or issuer. Internal emails, written reports and drafts sent for fact checking are not public appearances.

Question 9Research Report Content, Preparation, and Standards

A member acted as co-manager of an initial public offering with an offering date of March 1. On April 5 the covering analyst wants to publish an initiating report on the issuer. What is the firm's position?

  1. The report may be published because the quiet period for co-managers is only 25 days
  2. The report may not be published until the 40-day quiet period following the offering date has expired Correct answer.
  3. The report may not be published until 90 days after the offering date have passed
  4. The report may be published if the analyst holds no position in the issuer's securities

Explanation

A manager or co-manager of an IPO is subject to a 40-calendar-day quiet period measured from the offering date, so April 5 falls inside the restricted window. The restriction does not turn on the analyst's personal holdings. Neither 25 days nor 90 days is the applicable period for an IPO manager.

Question 10Research Report Content, Preparation, and Standards

A member was a co-manager of a follow-on common stock offering that had its offering date on June 1. The analyst wants to publish a report on the issuer on June 8. The report:

  1. may not be published until 10 calendar days after the offering date have elapsed Correct answer.
  2. may be published, because quiet periods apply only to initial public offerings of common stock
  3. may be published, because the analyst was not a member of the underwriting team for the offering
  4. may not be published until 40 calendar days after the offering date have elapsed

Explanation

For a secondary offering, the quiet period applicable to a manager or co-manager is 10 calendar days from the offering date, so June 8 remains inside the restricted window. The longer 40-day period is reserved for IPOs. The restriction runs to the member, not just the individual analyst.

Question 11Research Report Content, Preparation, and Standards

A research report that contains a rating must include a chart or table showing:

  1. the analyst's historical accuracy in forecasting the issuer's quarterly earnings
  2. the percentage of the member's total net revenue that was attributable to the subject company during the most recent fiscal year
  3. the percentage of all rated securities that are buy, hold or sell and, in each category, the percentage that are banking clients Correct answer.
  4. the number of shares of the subject security that the member holds in inventory as of the report date

Explanation

The ratings distribution disclosure lets readers see how skewed a firm's ratings are and how many rated issuers are investment banking clients; it must be updated quarterly. Revenue attribution, inventory and forecast accuracy are not part of this requirement.

Question 12Research Report Content, Preparation, and Standards

A report that assigns a rating or price target to a security must include a price chart that:

  1. covers at least ten years of trading history in every case, regardless of when the member began publishing research on the issuer or assigning ratings
  2. plots the analyst's published quarterly earnings estimates against the issuer's subsequently reported results
  3. shows the price over time with the dates ratings and price targets were assigned, covering the period of coverage or three years, whichever is shorter Correct answer.
  4. displays the intraday bid-ask spread for each trading day during the period covered by the report

Explanation

The price chart shows how ratings and price targets relate to actual market prices, for a maximum of three years or the period the member has assigned ratings or targets, whichever is shorter. It is not a decade-long history, an estimate-versus-actual plot, or a spread display.

Question 13Research Report Content, Preparation, and Standards

A member's research report covers an issuer in which the member beneficially owns 2% of a class of common equity. The report must:

  1. state the exact number of shares the member intends to buy or sell in the next calendar quarter
  2. say nothing, because disclosure of a member's beneficial ownership is triggered only at a 5% threshold under the rule
  3. disclose that the member or its affiliates own 1% or more of the class, as of the specified month-end date Correct answer.
  4. disclose the ownership percentage only if the customer specifically requests it in writing

Explanation

The disclosure threshold is 1% of a class of common equity, measured as of a month-end date tied to publication. The statement must appear in the report itself rather than on customer request. Future trading intentions are not the subject of the disclosure.

Question 14Research Report Content, Preparation, and Standards

Which must be disclosed in a research report about an issuer that has used the member's investment banking services?

  1. The profit margin the member earned on the issuer's most recent securities offering
  2. The names of the issuer's investment banking clients and the fees those clients have paid to the member
  3. Whether the member received investment banking compensation from the issuer in the past 12 months and whether it seeks such compensation in the next three months Correct answer.
  4. The amount of every investment banking fee the member has ever received from the issuer, including fees earned before the current analyst began covering the company

Explanation

The required disclosure covers a 12-month look-back for investment banking compensation received and a three-month forward look for compensation the member expects to receive or intends to seek. Exact fee amounts, the issuer's own clients, and deal margins are not required.

Question 15Research Report Content, Preparation, and Standards

While appearing on a financial news program, a research analyst discusses a stock she rates buy. Which disclosure is required in connection with the appearance?

  1. A 30-day blackout on the analyst's personal trading in that security must begin on the date of the television appearance and continue through the month
  2. The issuer's written consent to the analyst's comments must be obtained by the member and retained in its books and records
  3. A full written research report on the security must be filed with FINRA before the analyst is permitted to appear on the program
  4. Whether the analyst has a financial interest in the security, and whether the member received investment banking fees from the issuer in the past year Correct answer.

Explanation

Rule 2241 requires analysts making public appearances to disclose specified conflicts, including personal and household financial interests in the security and recent investment banking compensation from the issuer. Pre-filing with FINRA and issuer consent are not conditions of the appearance.

Question 16Research Report Content, Preparation, and Standards

A research report includes a 12-month price target for the subject stock. The report must also disclose:

  1. the valuation method used to derive the target and the risks that may prevent it being reached Correct answer.
  2. the probability, stated as a percentage, that the target will be reached within the stated time frame
  3. the exact calendar date on which the analyst expects the target price to be achieved
  4. the amount of the member's assets under management that is invested at the target price

Explanation

A price target must be accompanied by the valuation methodology used and the risks that could impede achievement; if no target is given, the report must explain why. Stated probabilities and precise achievement dates suggest a certainty the analyst cannot support.

Question 17Research Report Content, Preparation, and Standards

For purposes of the conflict disclosures in FINRA Rule 2241, "investment banking services" includes:

  1. acting as an underwriter, placement agent or initial purchaser of an offering, or as an M&A advisor Correct answer.
  2. executing retail brokerage orders for the issuer's employees and their family accounts
  3. making markets in the issuer's common stock and providing continuous liquidity to institutional clients and retail customers
  4. extending margin loans to the issuer's officers and directors against pledged securities

Explanation

The term covers capital-raising and strategic advisory roles such as underwriting, placement agency, initial purchaser status and merger or acquisition advice. Brokerage execution, market making and margin lending are securities services but not investment banking services for disclosure purposes.

Question 18Research Report Content, Preparation, and Standards

The investment banking department asks a research analyst to join a pitch meeting to a prospective issuer to help win an underwriting mandate. Under FINRA rules, the analyst:

  1. may attend and present the analyst's rating and price target to help the member win the mandate
  2. may not participate in efforts to solicit investment banking business, including pitches Correct answer.
  3. may attend if investment banking agrees in advance to favorable coverage after the deal closes
  4. may attend only if the analyst's compensation is tied to the outcome of the pitch

Explanation

Research analysts are barred from participating in the solicitation of investment banking business, and research cannot be used as an inducement for a mandate. Promising coverage in exchange for business would also violate the independence requirements. Tying pay to a pitch outcome compounds the violation.

Question 19Research Report Content, Preparation, and Standards

Which arrangement for compensating a research analyst is consistent with FINRA Rule 2241?

  1. A bonus based on the member's overall profitability, not on specific banking deals Correct answer.
  2. A payment from an issuer whose securities the analyst rates and recommends
  3. A bonus based on investment banking revenue from the issuers the analyst covers
  4. A bonus tied to the number of buy ratings the analyst assigns to issuers that are banking clients

Explanation

Analyst pay may reflect the firm's overall profitability but may not be tied to specific investment banking transactions or to the analyst's contribution to banking business. Issuer payments and bonuses keyed to ratings on banking clients create prohibited conflicts.

Question 20Research Report Content, Preparation, and Standards

Before a research report is published, FINRA rules require that it be:

  1. approved by the head of the investment banking department before distribution
  2. reviewed and approved by a qualified supervisory analyst Correct answer.
  3. filed with FINRA at least 15 days before the report is distributed to customers
  4. approved by the issuer's investor relations department before distribution

Explanation

Supervisory review by a qualified supervisory analyst must precede publication. This internal control is distinct from the prohibition on investment banking approval. Neither issuer approval nor advance filing with FINRA is required.

Question 21Research Report Content, Preparation, and Standards

A member publishes a daily commentary that summarizes broad-based index levels, interest rate moves and general market activity, with no analysis of any individual issuer. Under Rule 2241, this commentary is:

  1. a research report, because it is written and distributed to the member's customers and the public
  2. not a research report, because commentary on broad-based indices, market conditions and statistics is excluded Correct answer.
  3. a research report, because any commentary about market conditions provides a sufficient basis for an investment decision
  4. a research report only if it is posted on the member's public website rather than sent by email

Explanation

The definition excludes communications concerning only broad-based indices, economic or market conditions, general market activity, or statistical information. The method of distribution does not change the analysis. Content, not the channel used, determines whether a piece is a research report.

Question 22Research Report Content, Preparation, and Standards

Under Rule 2241, a person is a "research analyst" if the person:

  1. holds a general securities registration and regularly speaks with retail customers about securities
  2. is employed in the research department in a clerical, administrative or technology support capacity
  3. principally prepares the substance of a research report, or reports directly or indirectly to someone who does Correct answer.
  4. supervises the firm's trading desk and reviews research reports for factual accuracy before they are published to customers

Explanation

The definition reaches those who principally prepare the substance of a research report and those who report, directly or indirectly, to such persons in connection with that work. General registration status and clerical or administrative roles are outside it. Trading desk supervisors are not research analysts.

Question 23Research Report Content, Preparation, and Standards

A member publishes a research report on August 5. For purposes of the required ownership and ratings disclosures, the information must be accurate as of:

  1. December 31 of the calendar year immediately preceding the year in which the research report is published to the member's customers
  2. the date of the issuer's most recent quarterly report filed with the SEC
  3. the most recent month-end before publication, or the prior month-end if publication falls within 30 days of a month-end Correct answer.
  4. the date on which the analyst first initiated coverage of the issuer with a rating

Explanation

Disclosures must be current as of the end of the month preceding publication, or the end of the second most recent month when the report is published less than 30 days after a month-end. Initiation dates, year-end figures and issuer filing dates are not the measuring points.

Question 24Research Report Content, Preparation, and Standards

A member's fixed income desk prepares a report on a corporate bond that will be distributed only to institutional investors. Which statement is correct?

  1. Debt research may be distributed without regard to conflicts of interest, provided the bonds carry an investment grade rating
  2. Debt research is covered by Rule 2242, which allows alternative delivery of required disclosures to institutions Correct answer.
  3. Debt research is entirely exempt from regulation, because Rule 2241 by its terms applies only to research on equity securities
  4. Debt research distributed to institutional investors must follow the same page-one disclosure format required of retail equity research

Explanation

Rule 2242 governs debt research and permits institutional debt research to satisfy disclosure obligations through alternative delivery methods, while retail debt research carries requirements comparable to equity research. Debt research is not unregulated, and investment grade status does not eliminate conflicts.

Question 25Research Report Content, Preparation, and Standards

A member was a co-manager of an initial public offering with an offering date of March 1. On March 20 the firm's analyst is invited to discuss the issuer on a television program. Under FINRA rules, the appearance is:

  1. permitted, because the analyst is expressing a personal opinion rather than issuing a formal recommendation
  2. permitted, because quiet-period restrictions apply only to written research reports and not to spoken commentary
  3. prohibited for one full year after the offering, because the member served as an underwriter
  4. prohibited, because the 40-day quiet period restricts public appearances as well as research reports Correct answer.

Explanation

The quiet period bars both publishing research reports and making public appearances concerning the issuer during the restricted window. For an IPO managed or co-managed by the member, that window runs 40 calendar days from the offering date. It is not a one-year prohibition.

Question 26Research Report Content, Preparation, and Standards

Under FINRA Rule 2241, which communication is excluded from the definition of "research report"?

  1. A summary of an issuer's earnings with a buy recommendation.
  2. A report recommending the purchase of shares of an open-end mutual fund. Correct answer.
  3. A written analysis of a NYSE-listed stock that recommends purchase.
  4. An electronic report on a corporate bond that includes a price target.

Explanation

The definition excludes communications regarding securities issued by open-end management investment companies or unit investment trusts. A report on a listed stock, bond, or issuer with a recommendation generally is a research report.

Question 27Research Report Content, Preparation, and Standards

Each research report must include a certification by the research analyst that:

  1. the price target will be achieved within 12 months.
  2. the analyst owns no securities of the subject company.
  3. the investment banking department approved the rating.
  4. the views are the analyst's own and compensation is not tied to the specific recommendation. Correct answer.

Explanation

Rule 2241 requires the analyst to certify that the views are personal and that compensation was not, is not, or will not be tied to the specific recommendation. It does not require IB approval, zero ownership, or a guarantee.

Question 28Research Report Content, Preparation, and Standards

A research report that assigns a rating to a security must:

  1. explain the rating system, including the definition of each rating category. Correct answer.
  2. state only whether the rating is buy, hold, or sell.
  3. list the analyst's personal holdings in the stock.
  4. include a 12-month price target.

Explanation

Rule 2241 requires a report with a rating to explain the rating system and define each rating. A price target is not mandatory, and personal holdings are not the required element here.

Question 29Research Report Content, Preparation, and Standards

A member is paid by an issuer to publish a research report about the issuer's stock. Under Section 17(b) of the Securities Act of 1933, the report must disclose:

  1. the names of the issuer's officers who approved the payment.
  2. the member's total annual revenue from all issuers.
  3. the amount and type of compensation and whether it is cash or securities. Correct answer.
  4. only that the report was paid for by the issuer.

Explanation

Section 17(b) requires disclosure of the amount and type of consideration received for publishing a communication about a security. A vague statement that the report was paid for is insufficient.

Question 30Research Report Content, Preparation, and Standards

Which item may a research analyst accept from a company covered in the analyst's research?

  1. A cash consulting fee for advising the company.
  2. Stock options granted by the company.
  3. A copy of the company's public annual report. Correct answer.
  4. Reimbursement for a personal vacation.

Explanation

Analysts may not accept compensation from subject companies, but public information such as an annual report is not compensation. Cash, options, and personal travel reimbursement create impermissible conflicts.

Question 31Research Report Content, Preparation, and Standards

Before publication, a member's investment banking department may review a research report for the purpose of:

  1. delaying publication until after the offering.
  2. changing a negative rating to a positive rating.
  3. verifying factual accuracy. Correct answer.
  4. adding a price target favorable to the issuer.

Explanation

Rule 2241 permits investment banking personnel to review a draft only to verify facts. They may not influence the rating or price target or use the review to delay publication.

Question 32Research Report Content, Preparation, and Standards

Which conduct by a member is prohibited under FINRA Rule 2241?

  1. Including a price chart in a rated report.
  2. Disclosing that the member makes a market in the security.
  3. Promising a prospective issuer a favorable research rating to win an underwriting mandate. Correct answer.
  4. Publishing a report with a hold rating.

Explanation

Rule 2241 prohibits explicit or implicit promises of favorable research to obtain investment banking business. Hold ratings, price charts, and market-making disclosures are permitted or required.

Question 33Research Report Content, Preparation, and Standards

For purposes of FINRA Rule 2241, a "research analyst account" includes:

  1. accounts of the analyst's adult siblings.
  2. only the analyst's personal brokerage account.
  3. accounts of the analyst's neighbors.
  4. accounts of the analyst's spouse and minor children. Correct answer.

Explanation

A research analyst account includes accounts of the analyst and immediate household members, such as a spouse and minor children. Siblings and neighbors are not included unless they are part of the analyst's household and controlled by the analyst.

Question 34Research Report Content, Preparation, and Standards

A research report that contains a price target must also disclose:

  1. the analyst's personal bank account balance.
  2. the issuer's internal budget projections.
  3. the valuation methods used and the basis for the target. Correct answer.
  4. the exact date the target will be reached.

Explanation

When a price target is included, the report must disclose the valuation methods and the basis for the target so readers can evaluate it. The rule does not require an exact date or personal financial information.

Question 35Research Report Content, Preparation, and Standards

A member may submit a draft research report to the subject company before publication for factual verification only if the draft:

  1. has been approved by the investment banking department.
  2. is accompanied by a promise of favorable coverage.
  3. contains no rating, price target, or forecast. Correct answer.
  4. includes a buy rating to show the issuer.

Explanation

Rule 2241 allows submitting a draft to the subject company for factual review only when it does not contain a rating, price target, or forecast. Otherwise pre-publication review by the issuer is prohibited.

Question 36Research Report Content, Preparation, and Standards

If a member has a conflict of interest that is not specifically listed in FINRA Rule 2241's disclosure items, the member must:

  1. wait until the next quarter to disclose it.
  2. ignore it because the rule lists all conflicts.
  3. resign from research coverage of the issuer.
  4. disclose the nature of the conflict in the research report. Correct answer.

Explanation

Rule 2241 requires disclosure of the listed conflicts and any other conflict of interest that could reasonably affect the report. A residual catch-all requires describing the nature of that conflict.

Question 37Research Report Content, Preparation, and Standards

Which statement about a research analyst's personal trading in a security the analyst covers is consistent with FINRA Rule 2241?

  1. The analyst may sell the security only after publishing a sell rating.
  2. The analyst may buy the security immediately before publishing a buy rating.
  3. The analyst must pre-clear trades and not trade against the recommendation. Correct answer.
  4. The analyst may trade without pre-clearance if the trade is small.

Explanation

Analyst accounts are subject to pre-clearance and restrictions on trading in a manner inconsistent with the analyst's recommendations. Trading ahead of a rating change or against the published view is prohibited.

Question 38Research Report Content, Preparation, and Standards

The ratings distribution table required in a research report must present the percentages as of:

  1. the end of the most recent calendar quarter. Correct answer.
  2. the date the analyst was hired.
  3. the end of the most recent fiscal year of the issuer.
  4. the date the investment banking department approved the report.

Explanation

The ratings distribution disclosures are measured as of the end of the most recent calendar quarter. This gives a consistent, recent snapshot of the member's ratings and IB relationships.

Question 39Research Report Content, Preparation, and Standards

The quiet-period restrictions on publishing research after a public offering apply to a member that acted as:

  1. a selling-group member with no management role.
  2. a market maker in the security before the offering.
  3. a manager or co-manager of the offering. Correct answer.
  4. a retail customer of the lead underwriter.

Explanation

The post-offering research quiet period applies to members that managed or co-managed the offering. Selling-group members and ordinary market makers are not subject to that manager/co-manager quiet period.

Question 40Research Report Content, Preparation, and Standards

A research analyst may not accept which of the following from a company the analyst covers?

  1. Attendance at a public earnings conference call.
  2. A copy of the company's audited financial statements.
  3. Reimbursement for the analyst's personal vacation travel. Correct answer.
  4. A tour of the company's plant open to all analysts.

Explanation

Analysts may not accept compensation or benefits from subject companies. Personal vacation reimbursement is a benefit that creates a conflict, while public information and widely available events are permissible.

Question 41Research Report Content, Preparation, and Standards

A research report must disclose if the member or an affiliate has:

  1. a customer who owns the subject security.
  2. a financial interest in the subject company. Correct answer.
  3. a branch office in the same state as the issuer.
  4. an employee who attended the same university as the issuer's CEO.

Explanation

Rule 2241 requires disclosure of the member's or an affiliate's financial interest in the subject company. Customer ownership, shared alma maters, and branch locations are not the required conflict disclosure.

Question 42Research Report Content, Preparation, and Standards

A research report must disclose if the research analyst or a member of the analyst's household has:

  1. a friend who works at a competitor.
  2. a subscription to a financial newspaper.
  3. a checking account at a bank the issuer uses.
  4. a financial interest in the subject company's securities. Correct answer.

Explanation

Rule 2241 requires disclosure when the analyst or a household member has a financial interest in the subject company's securities. Ordinary bank accounts, subscriptions, and friendships are not the required disclosure.

Question 43Research Report Content, Preparation, and Standards

Which standard applies to the substance of a research report under FINRA Rule 2241?

  1. The report must be approved by the subject company.
  2. The report must be reasonable and not omit material facts. Correct answer.
  3. The report must include a guaranteed return.
  4. The report must contain only positive conclusions.

Explanation

Research must be based on a reasonable factual foundation and must not be misleading by omitting material facts. Positive-only conclusions, issuer approval, and guarantees are inconsistent with the rule.

Question 44Research Report Content, Preparation, and Standards

Under FINRA recordkeeping requirements, research reports must be retained for at least:

  1. 3 years. Correct answer.
  2. 10 years.
  3. 30 days.
  4. 6 months.

Explanation

FINRA Rule 4511 generally requires books and records, including research reports, to be preserved for at least three years. Shorter periods do not satisfy the rule.

Question 45Research Report Content, Preparation, and Standards

Under FINRA Rule 2241, research analysts must not be supervised by:

  1. investment banking personnel. Correct answer.
  2. the compliance department.
  3. senior management outside research.
  4. the legal department.

Explanation

Rule 2241 requires research analysts to be supervised by research management, not by investment banking personnel. Legal and compliance review is permitted, but IB must not control research.

Question 46Research Report Content, Preparation, and Standards

A written communication limited to a single security and distributed to 14 persons is:

  1. a research report requiring a price chart.
  2. excluded from the research report definition. Correct answer.
  3. an investment banking communication subject to quiet-period restrictions.
  4. a public appearance requiring conflict disclosures.

Explanation

The definition excludes a communication limited to a single security distributed to fewer than 15 persons. Fourteen is fewer than 15, so the communication is not a research report.

Question 47Research Report Content, Preparation, and Standards

A research report assigns a buy rating but does not include a price target. The report must:

  1. omit any explanation because no price target is given.
  2. explain the rating and not imply that a price target exists. Correct answer.
  3. include a price chart showing the rating's history only.
  4. state that the rating is valid for only 30 days.

Explanation

When a report assigns a rating without a price target, the member must explain the rating and must not imply that a price target has been set. The price-chart requirement is triggered by a rating or target, but the content must be clear.

Question 48Research Report Content, Preparation, and Standards

During the applicable post-offering quiet period, a manager or co-manager is restricted from:

  1. only publishing a written research report.
  2. only making a public appearance.
  3. neither if the analyst's rating is hold.
  4. both a research report and a public appearance about the issuer. Correct answer.

Explanation

The quiet period restricts both research reports and public appearances concerning the issuer. The restriction is not avoided by using a hold rating.

Question 49Research Report Content, Preparation, and Standards

A research analyst may participate in a meeting with a prospective issuer's management in connection with an investment banking transaction only if the participation is:

  1. to help solicit the investment banking mandate.
  2. to set the underwriting fee.
  3. for due diligence purposes and the analyst does not solicit the business. Correct answer.
  4. to promise favorable coverage.

Explanation

Analysts may engage with issuers for due diligence, but they may not solicit investment banking business or promise favorable research. Fee setting and promises of coverage are prohibited.

Question 50Research Report Content, Preparation, and Standards

A research report that assigns a rating must include which pair of percentages?

  1. The percentage of institutional versus retail ownership of the subject security.
  2. The issuer's debt-to-equity ratio and the industry average.
  3. The ratings distribution and investment banking services percentages for each category. Correct answer.
  4. The analyst's win rate and the firm's market share.

Explanation

Rule 2241 requires a ratings distribution table showing the percentage of all securities the member rates in each category, plus the percentage of subject companies in each category for which the member provided investment banking services in the past 12 months.