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SRS practice questions

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Question 1Fundamentals, Terminology, and Core Concepts

In reliability engineering, what is a service level indicator (SLI)?

  1. An internal target range that a team aims to keep a measure within
  2. A measured quantity describing one aspect of service behavior Correct answer.
  3. The annual cost of running a service in production
  4. A contractual commitment to customers that carries financial penalties

Explanation

An SLI is the underlying measurement itself, expressed as a ratio of good events to valid events, such as the proportion of requests served under 300 ms. It is the raw signal from which targets and agreements are built. Targets are objectives, and penalty-bearing promises are agreements.

Question 2Fundamentals, Terminology, and Core Concepts

What is a service level objective (SLO)?

  1. A target range for a service level indicator that the team aims to meet Correct answer.
  2. A single raw measurement of request latency
  3. A legally binding agreement that specifies refunds when uptime falls short
  4. A dashboard that displays traffic volume by region

Explanation

An SLO states the target value or range that an SLI should achieve over a defined window, for example 99.9% of requests succeeding over 28 days. It is an internal engineering commitment that guides prioritization. Agreements with customers and raw measurements are different artifacts.

Question 3Fundamentals, Terminology, and Core Concepts

How is an error budget best described?

  1. The unreliability a service is allowed to show within an SLO period Correct answer.
  2. The budget line item reserved to cover the cost of incident response
  3. The number of open defect tickets in the engineering backlog
  4. Spare capacity held back for traffic spikes

Explanation

The error budget is the complement of the SLO: if the objective is 99.9%, then 0.1% of events may fail within the window. It converts an abstract target into a concrete allowance that teams can spend on risk-taking such as releases. It is measured in failed events or time, not money or tickets.

Question 4Fundamentals, Terminology, and Core Concepts

Which activity is the clearest example of toil?

  1. Hand-restarting the same stuck batch job every morning Correct answer.
  2. Designing a capacity model for next quarter's projected growth
  3. Reviewing an architecture proposal with peers
  4. Writing a postmortem for last week's outage

Explanation

Toil is manual, repetitive, automatable work that scales linearly with service growth and produces no lasting improvement. Repeatedly restarting the same job by hand fits every criterion and could be automated. Design, review, and analysis are engineering work that builds durable value.

Question 5Fundamentals, Terminology, and Core Concepts

What is the primary purpose of a blameless postmortem?

  1. To determine which engineer should be held accountable for the outage
  2. To record the financial cost of the outage for each team
  3. To find systemic causes of the failure and prevent a repeat Correct answer.
  4. To satisfy auditors that the incident was formally logged

Explanation

A blameless postmortem assumes people acted reasonably given the information available and focuses on how systems, tooling, and processes allowed the failure. Removing fear of punishment is what makes honest, detailed accounts possible. The output is action items that reduce future risk.

Question 6Fundamentals, Terminology, and Core Concepts

A service advertised as 99.9% available permits roughly how much unplanned downtime per year?

  1. About 8.8 hours Correct answer.
  2. About 5 minutes
  3. About 52 minutes
  4. About 3.65 days

Explanation

The nines scale is cumulative: 99% allows about 3.65 days per year, 99.9% allows about 8.8 hours, 99.99% allows about 52 minutes, and 99.999% allows about 5 minutes. Each additional nine cuts the permitted downtime by a factor of ten.

Question 7Fundamentals, Terminology, and Core Concepts

Which set lists the four golden signals used for monitoring a user-facing service?

  1. CPU, memory, disk, and network utilization
  2. Throughput, uptime, cost, and staffing
  3. Latency, traffic, errors, and saturation Correct answer.
  4. Logs, metrics, traces, and events

Explanation

The four golden signals are latency, traffic, errors, and saturation, chosen because together they describe how users experience a service and how close it is to its limits. Resource metrics are useful supporting data but do not themselves describe user impact. Logs, metrics, and traces are telemetry types, not signals.

Question 8Fundamentals, Terminology, and Core Concepts

What does mean time between failures (MTBF) measure?

  1. The average operating time between failures of a repairable part Correct answer.
  2. The elapsed time of a scheduled maintenance window
  3. The share of requests that complete without returning an error
  4. The average time taken to restore normal service after an outage occurs

Explanation

MTBF measures the average uptime interval separating consecutive failures of a repairable component, so it describes how often failures occur. The complementary measure, time to restore service, describes how long recovery takes. Together they characterize availability for repairable systems.

Question 9Fundamentals, Terminology, and Core Concepts

A service has a 30-day SLO and consumes its entire error budget in 6 days. What is the error budget burn rate?

  1. 0.2x
  2. 30x
  3. 5x Correct answer.
  4. 1x

Explanation

Burn rate expresses how fast budget is being spent relative to the rate that would exactly exhaust it over the SLO window. Spending a 30-day budget in 6 days is five times the sustainable pace, so the burn rate is 5x. A burn rate of 1x would last exactly the full window.

Question 10Fundamentals, Terminology, and Core Concepts

Under a typical error budget policy, what happens when a service has exhausted its error budget?

  1. Feature releases pause and work shifts to reliability Correct answer.
  2. The on-call rotation is suspended until the next quarter
  3. The service is decommissioned at the end of the quarter
  4. The SLO is automatically lowered to match the current performance

Explanation

An error budget policy is a pre-agreed rule that ties release velocity to reliability outcomes. When the budget is gone, risky changes are frozen and engineering effort is redirected to reliability until the service is back within objective. Lowering the target instead would defeat the purpose of the policy.

Question 11Fundamentals, Terminology, and Core Concepts

Which statement best captures the relationship between SRE and DevOps?

  1. SRE and DevOps are competing standards bodies with separate certifications
  2. SRE is a vendor certification track for DevOps pipeline tooling
  3. SRE implements DevOps principles using SLOs and engineering work Correct answer.
  4. DevOps replaces SRE once a platform reaches maturity

Explanation

DevOps describes a philosophy of shared ownership and fast, safe flow of change; SRE is a concrete implementation of that philosophy. It does so with prescriptive practices such as SLOs, error budgets, toil limits, and blameless postmortems. The two are complementary rather than competing.

Question 12Fundamentals, Terminology, and Core Concepts

A widely cited SRE guideline caps operational toil at what share of a team's time?

  1. 25 percent
  2. 50 percent Correct answer.
  3. 80 percent
  4. 10 percent

Explanation

The guideline holds that SRE teams should spend no more than about half their time on toil, leaving the other half for engineering work that permanently reduces operational load. Exceeding the cap signals that the team is drifting toward pure operations. The exact figure is a guideline, not a hard law.

Question 13Fundamentals, Terminology, and Core Concepts

Why do reliability teams often alert on the 99th percentile latency rather than the average?

  1. Averages cannot be collected across distributed systems
  2. Averages hide the slow tail that frustrates users Correct answer.
  3. The 99th percentile is always lower than the mean value
  4. Percentiles are cheaper to compute than averages are

Explanation

A mean is dominated by the bulk of fast requests, so a small population of very slow requests can be invisible in the average while still damaging the user experience. High percentiles expose that tail. They are not inherently cheaper or always lower than the mean.

Question 14Fundamentals, Terminology, and Core Concepts

Which statement distinguishes observability from traditional monitoring?

  1. Monitoring is a strict superset of observability
  2. Observability supports novel questions about internal state Correct answer.
  3. Observability applies only to batch processing systems
  4. Observability relies on user-submitted bug reports rather than telemetry

Explanation

Monitoring checks known conditions against predefined dashboards and alerts, answering questions you anticipated. Observability is the property of a system whose rich telemetry lets you interrogate unanticipated states, such as why one shard is slow for one customer segment. It depends on telemetry, not user reports.

Question 15Fundamentals, Terminology, and Core Concepts

During a major incident, what is the primary responsibility of the incident commander?

  1. Negotiating service credits with affected customers
  2. Diagnosing the root cause by reading application logs
  3. Coordinating the response and its communication Correct answer.
  4. Writing the customer-facing status page updates

Explanation

The incident commander maintains the overall picture, assigns roles, drives decisions, and keeps communication flowing so that responders can focus on their own tasks. Command is deliberately separated from hands-on debugging to avoid losing situational awareness. Customer credit negotiation happens long after the incident.

Question 16Fundamentals, Terminology, and Core Concepts

A canary release reduces deployment risk primarily by doing what?

  1. Freezing all changes during business hours
  2. Shortening the change window by deploying to all regions at once
  3. Eliminating the need for rollback procedures
  4. Sending a small slice of traffic to the new version first Correct answer.

Explanation

A canary limits blast radius: a small, controlled portion of traffic exercises the new version while health signals are compared with the baseline. If the canary degrades, the change is rolled back before most users are affected. It complements rather than replaces rollback planning.

Question 17Fundamentals, Terminology, and Core Concepts

Which configuration creates a single point of failure?

  1. Two application servers behind a load balancer with health checks
  2. Stateless front ends spread across three availability zones
  3. Every instance in one rack on a single power feed Correct answer.
  4. A primary database with a synchronous standby in a second zone

Explanation

A single point of failure is any component whose loss takes down the whole service. Co-locating every instance in one rack on one power feed means a single rack or power fault removes all capacity at once. The other options distribute risk across independent failure domains.

Question 18Fundamentals, Terminology, and Core Concepts

Graceful degradation means that a service does what?

  1. Fails completely but recovers quickly
  2. Scales out automatically to absorb any load
  3. Serves a reduced but useful function when a dependency fails Correct answer.
  4. Shuts itself down early to protect downstream systems from overload

Explanation

Graceful degradation preserves the most valuable parts of the user experience when a dependency is unavailable, for example by serving cached content or hiding a non-essential feature. Users notice reduced functionality instead of a full outage. Complete failure and protective shutdown are the opposite of graceful behavior.

Question 19Fundamentals, Terminology, and Core Concepts

A service must keep meeting its SLO even if one availability zone is lost. Which capacity posture is required?

  1. Autoscaling reacts within a few seconds of a spike
  2. Total capacity covers average load across all zones
  3. One zone is sized for twice the normal peak
  4. Remaining zones absorb peak load after one is lost Correct answer.

Explanation

Surviving a zone loss while holding the objective means the surviving zones must be able to carry the peak demand that remains, which is why headroom is provisioned above the everyday peak. Sizing only for average load leaves the system short during the failure. Autoscaling helps but may be too slow or itself constrained during a zone event.

Question 20Fundamentals, Terminology, and Core Concepts

What is a runbook?

  1. A log of every production change made this quarter
  2. A step-by-step procedure for handling a known alert Correct answer.
  3. A synthetic probe run from several regions
  4. A long-term roadmap for reliability investment and staffing

Explanation

A runbook documents the concrete steps for diagnosing and resolving a specific known alert or recurring operational task, so that any on-call engineer can act consistently. It differs from a playbook, which is often broader guidance for a class of incidents. Roadmaps, change logs, and probes are different artifacts.

Question 21Fundamentals, Terminology, and Core Concepts

Why do teams use multiwindow, multi-burn-rate alerting instead of a single static error-rate threshold?

  1. Longer windows always produce fewer alerts than shorter windows do
  2. It removes the need to define an SLO for the service
  3. It matches the billing cycle used by the finance team
  4. It pairs a long window for recall with a short one for speed Correct answer.

Explanation

A short window catches fast, severe budget consumption quickly, while a longer window confirms that the condition is sustained and suppresses brief spikes that would otherwise page. Combining burn-rate thresholds with multiple windows balances precision against recall. Such alerting depends on an SLO rather than replacing it.

Question 22Fundamentals, Terminology, and Core Concepts

A request path calls four services in sequence. Each has 99.9% availability and they fail independently. What is the approximate end-to-end availability?

  1. 96.0%
  2. 99.96%
  3. 99.6% Correct answer.
  4. 99.99%

Explanation

For independent components in series, availabilities multiply: 0.999 raised to the fourth power is about 0.996, or 99.6%. Serial dependencies therefore reduce end-to-end availability, which is why teams add caching, fallbacks, or parallelism to break the chain. Ninety-nine point nine nine percent would be higher than any single component.

Question 23Fundamentals, Terminology, and Core Concepts

When computing a fleet-wide error-rate SLI, which approach is correct?

  1. Average the per-instance error rates, weighting each instance equally
  2. Take the median of the per-instance error rates
  3. Use the highest per-instance error rate as the fleet value
  4. Divide total good events by total events across instances Correct answer.

Explanation

SLIs are ratios, and ratios aggregate by summing numerators and denominators, not by averaging ratios. Averaging per-instance rates lets a low-traffic instance with a few failures distort the fleet figure. The worst-instance value answers a different question and is not the fleet SLI.

Question 24Fundamentals, Terminology, and Core Concepts

Why do experienced practitioners often avoid the phrase 'root cause' in incident analysis?

  1. Incidents never have a single trigger that can be identified
  2. Engineers are not permitted to name causes in reports
  3. Root cause analysis is only valid for hardware failures
  4. Failures typically arise from several contributing factors Correct answer.

Explanation

Complex systems fail through combinations of latent conditions, triggering events, and missing defenses, so a single root cause usually oversimplifies the picture. Naming contributing factors instead encourages defenses at several layers. A single trigger can often be identified, but it is rarely the whole story.

Question 25Fundamentals, Terminology, and Core Concepts

A nightly pipeline must deliver all records by 06:00 each day. Which SLI best captures user-perceived reliability for this pipeline?

  1. Average number of records processed per hour
  2. Median CPU utilization of the pipeline workers
  3. Count of pipeline code commits merged into the main branch each week
  4. Share of runs that finish successfully before 06:00 Correct answer.

Explanation

For batch and pipeline systems, users care about freshness and completeness: the data is present and correct by the deadline. A success-and-timeliness ratio expresses exactly that. Resource utilization, throughput, and development activity describe the machinery rather than the delivered outcome.

Question 26Fundamentals, Terminology, and Core Concepts

Which term describes a quantitative measure of some aspect of service reliability, such as the fraction of requests served faster than 300 ms?

  1. An error budget
  2. A service level indicator Correct answer.
  3. A service level objective
  4. A service level agreement

Explanation

A service level indicator is the measured number itself, expressed as a ratio of good events to valid events. Objectives are targets placed on that measurement, agreements are contractual commitments, and an error budget is the shortfall the objective tolerates.

Question 27Fundamentals, Terminology, and Core Concepts

Which activity is the clearest example of toil as SRE defines the term?

  1. Manually restarting a stuck job twice a week Correct answer.
  2. Writing a script that removes a recurring manual task
  3. Recording and reviewing a postmortem after an outage
  4. Designing an SLO for a newly launched service

Explanation

Toil is manual, repetitive, automatable work that produces no enduring value and scales linearly with service growth. Repeated manual restarts have all of those properties. Designing SLOs, running postmortems, and writing automation either add lasting value or permanently reduce future effort.

Question 28Fundamentals, Terminology, and Core Concepts

Which pair of measures captures how quickly a problem is noticed versus how quickly service is restored?

  1. MTBF and MTTR
  2. MTTA and SLA attainment
  3. MTTD and MTTR Correct answer.
  4. MTTF and MTBF

Explanation

Mean time to detect measures the interval between the onset of a failure and its discovery, while mean time to repair measures the interval from discovery to restored service. Splitting detection from repair shows whether an outage was prolonged by weak monitoring or by slow remediation. MTBF and MTTF describe how often failures occur, not how fast they are handled.

Question 29Fundamentals, Terminology, and Core Concepts

An alert pages the on-call engineer whenever CPU utilization on any host exceeds 80%. What is the main weakness of this alert?

  1. It pages on a cause rather than on user-visible impact Correct answer.
  2. It cannot be measured by standard monitoring tools
  3. It fires only when the whole service is unavailable to every user
  4. It requires distributed tracing to evaluate

Explanation

Utilization is a cause-side signal: a host can sit at high CPU while serving every request within its objective, and it can be idle while users fail because of a downstream dependency. Alerting on symptoms tied to the service level objective keeps pages actionable and tied to user harm. Cause metrics are useful for diagnosis, not for waking people up.

Question 30Fundamentals, Terminology, and Core Concepts

A service has a 99.9% availability objective over a 30-day window. Expressed in time, how large is its error budget?

  1. 43.2 minutes Correct answer.
  2. 0 minutes, because the SLO is a target rather than a limit
  3. 4.32 minutes
  4. 7 hours 12 minutes

Explanation

A 30-day window contains 43,200 minutes, and an objective of 99.9% allows 0.1% of that window to be in violation. That allowance is 42.3 to 43.2 minutes depending on how the window is counted. The error budget is the concrete amount of unreliability the objective permits.

Question 31Fundamentals, Terminology, and Core Concepts

Which statement best captures the difference between an SLA and an SLO?

  1. An SLA and an SLO describe the same commitment and differ only in name
  2. An SLA is an internal target that is always stricter than the SLO
  3. An SLA is a contract with penalties; an SLO is an internal target Correct answer.
  4. An SLA defines how errors are counted; an SLO defines who carries the pager

Explanation

A service level agreement is a business contract with a customer that specifies consequences when commitments are missed. A service level objective is an internal reliability target that the team manages day to day, and it is usually set stricter than the contractual threshold so the contract is not breached first. The two serve different audiences and carry different stakes.

Question 32Fundamentals, Terminology, and Core Concepts

Which practice most directly limits the blast radius of a faulty configuration change?

  1. Keeping the vendor's default configuration so the change is standard
  2. Rolling out region by region with automatic rollback on SLO breach Correct answer.
  3. Deploying to every region at once so all users run the same version
  4. Reviewing the change in a weekly meeting before shipping it everywhere

Explanation

Blast radius shrinks when a change reaches a small population first and exposure grows only while health signals stay within objective. Staged rollout combined with automated rollback bounds both the number of affected users and the duration of their exposure. Review alone cannot limit impact once a defect is live everywhere.

Question 33Fundamentals, Terminology, and Core Concepts

Why do SRE teams generally avoid targeting 100% availability?

  1. Availability above 99.9% cannot be measured reliably
  2. Each extra nine costs more than users would notice Correct answer.
  3. SLOs are not permitted to be set above 99.95%
  4. Users always value new features more than marginal uptime gains

Explanation

Reliability improvements get exponentially more expensive as the target approaches perfection, while the marginal benefit to users flattens because they already depend on their own networks and devices. Past a point, the cost of another nine is better spent on features or on other services. The objective should sit where users can no longer tell the difference.

Question 34Fundamentals, Terminology, and Core Concepts

A request fans out to 20 backend shards and must wait for the slowest one to respond. Each shard's median latency is 10 ms. As fan-out grows, what happens to the overall p99 latency?

  1. It equals the arithmetic mean of the individual shard p99 values
  2. It falls, because the shards are queried in parallel
  3. It drifts toward the slowest shard's tail as fan-out grows Correct answer.
  4. It stays close to the median latency of a single shard

Explanation

When a request waits for the slowest of many parallel responses, its latency is the maximum across shards, so the chance that at least one shard is slow rises with the number of shards. The aggregate tail therefore approaches the tail behaviour of the slowest shard even if every median is fast. Parallelism bounds the mean but not the maximum.

Question 35Fundamentals, Terminology, and Core Concepts

Why do teams often measure service level indicators at the client or edge rather than inside the service?

  1. Client-side measurement is always cheaper to store and to query at scale
  2. Server-side metrics cover only batch jobs that run on a nightly schedule
  3. Edge measurement removes any need to define SLOs for reliability
  4. Server metrics miss failures that never reach a server, such as DNS faults Correct answer.

Explanation

Users experience the whole path, including name resolution, load balancer rejections, and connection resets, and those failures generate no request at the application server. Measuring near the user captures these gaps, while server-side counters can show healthy traffic during an outage that never arrives. The choice of measurement point defines which failures the objective can see.

Question 36Fundamentals, Terminology, and Core Concepts

A team's quarterly error budget for its availability SLO is fully spent. Under a conventional error budget policy, what is the expected response?

  1. The SLO target is relaxed to match the performance the service currently delivers.
  2. The service is moved to a lower criticality tier with no objective at all.
  3. Feature releases pause while the team prioritizes work that restores reliability. Correct answer.
  4. The measurement window is shortened so that the budget refills sooner.

Explanation

An error budget is the amount of unreliability an SLO permits over its window, and an error budget policy is a pre-agreed rule for what happens when it runs out. The conventional rule is that risky, feature-driven change is frozen and engineering effort shifts to the work needed to get back inside the objective. This ties the pace of change to how reliably the service is actually behaving.

Question 37Codes, Standards, and Regulatory Compliance

Under the Securities Act of 1933, which section contains the general prohibition against offering or selling a security before a registration statement has been filed and has become effective?

  1. Section 10
  2. Section 17(a)
  3. Section 12(a)(2)
  4. Section 5 Correct answer.

Explanation

Section 5 is the general prohibition on offers and sales of unregistered securities absent an exemption. Section 10 specifies what a prospectus must contain, while Section 12 and Section 17 address civil liability and antifraud liability respectively.

Question 38Codes, Standards, and Regulatory Compliance

Which federal statute established the Securities and Exchange Commission?

  1. Securities Act of 1933
  2. Investment Company Act of 1940
  3. Trust Indenture Act of 1939
  4. Securities Exchange Act of 1934 Correct answer.

Explanation

The Securities Exchange Act of 1934 created the SEC and gave it authority over the secondary markets, broker-dealers, and periodic reporting by issuers. The 1933 Act dealt with primary distributions and predates the Commission's creation.

Question 39Codes, Standards, and Regulatory Compliance

A firm designs a product feature that is misleading, even though no specific FINRA rule expressly addresses it. Which rule is the primary basis for discipline in that situation?

  1. FINRA Rule 3110
  2. FINRA Rule 2210
  3. FINRA Rule 2111
  4. FINRA Rule 2010 Correct answer.

Explanation

FINRA Rule 2010 requires members to observe high standards of commercial honor and just and equitable principles of trade, and it reaches misconduct not covered by a specific rule. The other rules address suitability, communications, and supervision respectively.

Question 40Codes, Standards, and Regulatory Compliance

Absent a delayed suspect identification, a suspicious activity report must be filed no later than how many calendar days after a member initially detects the suspicious activity?

  1. 15 calendar days
  2. 30 calendar days Correct answer.
  3. 10 calendar days
  4. 45 calendar days

Explanation

Bank Secrecy Act rules require the SAR to be filed within 30 calendar days after initial detection of facts constituting a suspicious transaction. The period may be extended to 60 days only when no suspect has been identified.

Question 41Codes, Standards, and Regulatory Compliance

Which SEC regulation governs how broker-dealers and investment advisers handle nonpublic personal information about their customers?

  1. Regulation S-ID
  2. Regulation S-P Correct answer.
  3. Regulation S-AM
  4. Regulation SHO

Explanation

Regulation S-P implements the privacy provisions of the Gramm-Leach-Bliley Act for brokers, dealers, and investment advisers, covering notice and safeguards for nonpublic personal information. The other regulations address identity theft, affiliate marketing, and short sale delivery and locate requirements.

Question 42Codes, Standards, and Regulatory Compliance

A registered representative is promoted to a role that requires a new disclosure on Form U4. Within what period must the member firm file an amendment after learning of the change?

  1. 90 calendar days
  2. 30 calendar days Correct answer.
  3. 60 calendar days
  4. 10 calendar days

Explanation

Under FINRA Rule 1122, a member must amend a Form U4 within 30 calendar days of learning of facts that cause the form to be inaccurate or incomplete. Prompt internal escalation is necessary because the clock starts when the firm learns of the event.

Question 43Codes, Standards, and Regulatory Compliance

SEC Rule 17a-4 generally requires a broker-dealer to preserve most required books and records for how long, and with what accessibility?

  1. Five years, with the first two years easily accessible
  2. Three years, with the first year easily accessible
  3. Six years, with the first two years easily accessible Correct answer.
  4. Ten years, with the first five years easily accessible

Explanation

Rule 17a-4 sets a general preservation period of six years, with the first two years maintained in an easily accessible place. Shorter or longer periods apply to specific record categories.

Question 44Codes, Standards, and Regulatory Compliance

A member firm begins offering a new product but has no written procedures describing who reviews the activity or how exceptions are escalated. Which FINRA rule is most directly implicated?

  1. FINRA Rule 2231
  2. FINRA Rule 2111
  3. FINRA Rule 3110 Correct answer.
  4. FINRA Rule 2264

Explanation

Rule 3110 requires a supervisory system, including written supervisory procedures reasonably designed to achieve compliance with applicable rules for each business in which the firm engages. A new product line launched without written procedures leaves the required system incomplete.

Question 45Codes, Standards, and Regulatory Compliance

Which rule, adopted under Section 10(b) of the Securities Exchange Act of 1934, is the principal antifraud provision applied to insider trading and other deceptive conduct in connection with the purchase or sale of a security?

  1. Rule 15c3-1
  2. Rule 17a-3
  3. Rule 10b-5 Correct answer.
  4. Rule 144

Explanation

Rule 10b-5 prohibits any manipulative or deceptive device or contrivance in connection with the purchase or sale of any security and is the basis for most insider trading enforcement. Rule 144 addresses resale of control and restricted securities, while the other rules concern net capital and record creation.

Question 46Codes, Standards, and Regulatory Compliance

Which individual would be a retail customer for purposes of Regulation Best Interest?

  1. A registered investment company buying for its portfolio
  2. A municipality buying securities for its general fund
  3. A defined benefit pension plan investing member contributions
  4. An individual investing to fund a child's college education Correct answer.

Explanation

Regulation Best Interest defines a retail customer as a natural person, or the legal representative of such a person, who receives a recommendation and uses it primarily for personal, family, or household purposes. Entities such as municipalities, pension plans, and funds are not natural persons and therefore fall outside the definition.

Question 47Codes, Standards, and Regulatory Compliance

A written communication about securities that is sent to 25 or fewer retail investors within any 30-calendar-day period is classified under FINRA Rule 2210 as:

  1. Institutional communication
  2. Retail communication
  3. Correspondence Correct answer.
  4. Public appearance

Explanation

Rule 2210 defines correspondence as a written communication distributed to 25 or fewer retail investors within any 30-calendar-day period. Retail communications reach more than 25 retail investors, and public appearances are unscripted spoken or broadcast events.

Question 48Codes, Standards, and Regulatory Compliance

Before a member firm can execute the initial purchase of a deferred variable annuity, a registered principal must review and approve the transaction within how many business days of the representative's suitability determination?

  1. Five business days
  2. Seven business days Correct answer.
  3. Ten business days
  4. One business day

Explanation

FINRA Rule 2330 requires a registered principal to review and approve or reject the initial deferred variable annuity purchase within seven business days of the representative's determination that the purchase is suitable. The review focuses on suitability, including surrender of an existing annuity and the customer's time horizon.

Question 49Codes, Standards, and Regulatory Compliance

A firm allocates shares of a hot new issue to the chief financial officer of a company that recently selected the firm as lead underwriter. Which FINRA rule most directly prohibits this practice?

  1. FINRA Rule 5121
  2. FINRA Rule 5110
  3. FINRA Rule 5131 Correct answer.
  4. FINRA Rule 5130

Explanation

FINRA Rule 5131 addresses abusive practices in the allocation of new issues, including spinning, which is the allocation of IPO shares to corporate executives in exchange for investment banking business. Rule 5130 restricts sales to persons with specified relationships to the offering, and the other rules concern conflicts and corporate financing filings.

Question 50Codes, Standards, and Regulatory Compliance

Under Regulation T, a customer purchasing a marginable equity security must deposit initial margin equal to at least what percentage of the purchase price?

  1. 75%
  2. 25%
  3. 50% Correct answer.
  4. 60%

Explanation

Regulation T sets the initial margin requirement at 50% of the purchase price for marginable securities, subject to the firm's ability to require more. Maintenance requirements are lower and are set by FINRA Rule 4210.