The Securities Investor Protection Corporation (SIPC) protects customer accounts against the failure of a member brokerage firm. The total protection for each separate customer is up to $500,000. However, within this total limit, there is a specific sub-limit for cash balances, which is capped at $250,000. In this scenario, the investor has $300,000 in cash. Despite the cash balance being higher, SIPC coverage for the cash portion is limited to the maximum of $250,000. The remaining $250,000 of the total $500,000 coverage would apply to the securities.

A. $150,000 is not a recognized SIPC coverage limit for cash or securities.

C. $300,000 is the investor's cash balance, but it exceeds the maximum SIPC cash protection limit of $250,000.

D. $700,000 is the total account value, which exceeds the overall SIPC protection limit of $500,000 per customer.

1. Financial Industry Regulatory Authority (FINRA). "Securities Investor Protection Corporation (SIPC)." FINRA.org. Accessed 2023. This official documentation states, "The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash."

2. Securities Investor Protection Corporation (SIPC). "What SIPC Protects." SIPC.org. Accessed 2023. The primary source document specifies, "SIPC protects against the loss of cash and securities...The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash."

3. University of Illinois, College of Agricultural, Consumer and Environmental Sciences. Pring, G.A. "Securities Investor Protection Corporation (SIPC)." Investor Education, Publication Number: F-P-SIPC. This university courseware states, "SIPC provides coverage up to $500,000 per customer... This coverage includes a maximum of $250,000 for cash claims."

A Collateralized Mortgage Obligation (CMO) is a type of mortgage-backed security where principal and interest payments from a pool of mortgages are redirected to different classes of bonds, known as tranches. Each tranche is a distinct "slice" of the CMO with its own specific investment characteristics. These include a unique coupon rate, a stated maturity, and a specific priority for receiving principal payments from the underlying mortgage pool. This structure allows investors to select a tranche that aligns with their specific risk tolerance and investment horizon, as different tranches carry different levels of prepayment and extension risk.

A: This describes yield to maturity, which is a measure of a bond's total return, not the definition of a tranche.

B: This describes the average life, which is an estimate of a tranche's principal repayment timeline, not the tranche itself.

D: This describes the underwriting process, which is the risk assessment of the underlying loans before they are securitized.

1. U.S. Securities and Exchange Commission (SEC). (2012). Investor Bulletin: Collateralized Mortgage Obligations. SEC.gov. In the section "How CMOs Work," the bulletin states, "CMOs are structured with a number of different classes of bonds, called tranches. Each tranche has a different maturity and risk."

2. Financial Industry Regulatory Authority (FINRA). (2015). Investor Alert: Collateralized Mortgage Obligations (CMOs) — Know the Risks Before You Buy. FINRA.org. The alert explains, "CMOs are structured in 'slices' or 'tranches,' with each tranche having its own set of rules for distributing the principal and interest payments from the underlying mortgage pool... Each tranche has a different coupon, a different maturity, and a different risk/return profile."

3. Fabozzi, F. J. (2001). The Handbook of Fixed Income Securities (6th ed.). McGraw-Hill. In Chapter 26, "Collateralized Mortgage Obligations," the text defines tranches as different bond classes created from the cash flows of the underlying mortgage collateral, each with its own set of rules and investment characteristics.

FINRA Rule 3270 requires registered representatives to provide prior written notice to their member firm for any outside business activity (OBA). An OBA is defined as any business activity outside the scope of the relationship with the member firm for which the representative receives, or has a reasonable expectation of receiving, compensation. Serving as a board member for a publicly traded company is a formal business role that almost invariably includes compensation (e.g., cash, stock, or options). This activity must be disclosed on Form U4 so the firm can assess potential conflicts of interest.

A. Volunteer work for a local charity is not a reportable OBA because, by definition, it is uncompensated.

B. Acting as a trustee for a family member's estate is generally not considered a "business" activity, especially if uncompensated, and thus does not require disclosure.

D. The disclosure requirement under FINRA Rule 3270 is triggered by compensation. Serving without compensation for a non-profit entity is not a reportable OBA.

1. Financial Industry Regulatory Authority (FINRA). (2023). FINRA Rule 3270. Outside Business Activities of Registered Persons.

Reference: The rule states, "No registered person may be... a director... of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member..." This directly identifies being a director for compensation as a reportable OBA.

2. Financial Industry Regulatory Authority (FINRA). (2023). General Instructions for Form U4.

Reference: Section 13, "Outside Business Activities," requires disclosure of any business or activity outside the firm where the individual is engaged as an officer, director, employee, etc. The instructions clarify this includes activities for which compensation is received, making a paid board position a mandatory disclosure item.

3. Georgetown University Law Center. (2022). Securities Regulation (LAWJ-559-01) Course Syllabus.

Reference: Course materials covering broker-dealer regulation often review FINRA rules of conduct. Discussions on FINRA Rule 3270 emphasize that the key determinants for disclosure are the nature of the activity (business-related) and the presence or reasonable expectation of compensation, distinguishing it from personal or uncompensated volunteer activities.

The transfer agent for a mutual fund serves as the primary record-keeper for its shareholders. This includes processing all transactions, such as purchases, redemptions, and exchanges of fund shares. The transfer agent is responsible for maintaining accurate ownership records, calculating and disbursing dividends and capital gains, and preparing and mailing shareholder account statements and tax forms. Their function is fundamentally administrative and focused on servicing shareholder accounts, not on managing the fund's investments or its distribution.

A. Underwriting new shares is the responsibility of the fund's principal underwriter or distributor, who markets and sells the fund's shares to the public.

B. Distributing the prospectus is a primary function of the fund's distributor (principal underwriter), as this document must be provided to investors before or at the time of sale.

C. Maintaining custody of the fund's portfolio securities is the legal responsibility of the custodian bank, which holds the assets for safekeeping to prevent misuse.

1. FINRA Securities Industry Essentials (SIE) Examination Content Outline. (October 2023). Section 3.2.2.2, "Management and administration of investment companies," outlines the distinct roles of the parties involved. It specifies the transfer agent's role in record-keeping and shareholder services, separate from the custodian (safekeeping of assets) and the underwriter (distribution).

2. U.S. Securities and Exchange Commission (SEC). Investor Bulletin: Mutual Funds (January 2013). This publication describes the key players in a mutual fund's operation. It states, "The transfer agent...is the company that maintains the fund's shareholder records," and distinguishes this role from the custodian, who "is a bank that holds the fund's assets."

3. Investment Company Act of 1940. Section 17(f) and associated SEC Rule 17f-1 and 17f-2 detail the requirements for the custody of investment company assets, assigning this role to a qualified bank or, under specific conditions, the fund itself, but not the transfer agent.

FINRA Rule 3270 requires registered representatives to provide written notice to their firm before engaging in any outside business activity (OBA). An OBA is defined as any activity for which the representative receives, or expects to receive, compensation, outside the scope of their relationship with their member firm. However, the rule provides an explicit exception for passive investments. A passive investment in a rental property, where the individual is not actively involved in management, is not considered an OBA and does not require notification. The other activities listed involve active participation for compensation and are therefore considered OBAs.

A: Selling real estate is an active business conducted for compensation (commissions) and is a classic example of an OBA requiring notification.

B: Selling health insurance is an active business where an individual acts as an agent for compensation, which qualifies as an OBA.

C: Professionally refereeing implies receiving payment for services rendered, making it a compensated activity that falls under the OBA definition.

1. Financial Industry Regulatory Authority (FINRA). FINRA Rule 3270, Outside Business Activities of Registered Persons. This rule establishes the notification requirement for OBAs. The supplementary material clarifies the scope.

Reference: FINRA Rule 3270, Supplementary Material .01, states: "For purposes of this Rule, passive investment, such as the purchase of a limited partnership interest, is not an outside business activity."

2. Financial Industry Regulatory Authority (FINRA). Regulatory Notice 18-08: Private Securities Transactions and Outside Business Activities. This notice reminds firms of their supervisory obligations and reinforces the definitions under the rules.

Reference: Page 2, "Outside Business Activities," reiterates that Rule 3270 applies to activities where a registered person has a reasonable expectation of compensation, distinguishing it from passive investments.

FINRA Rule 2150 permits a registered representative (RR) to share in the profits and losses of a customer's account under specific conditions. The arrangement requires prior written authorization from both the member firm and the customer. Crucially, the rule mandates that any sharing of profits and losses must be in direct proportion to the financial contributions made by the RR and the customer. This ensures that the RR's participation is based on their own capital at risk, aligning their interests with the customer's in a fair and transparent manner.

A. Only when the customer is an accredited investor: A customer's status as an accredited investor is irrelevant to the rules governing an RR sharing in their account.

B. Only if the RR’s firm is also a participant in the sharing arrangement: The firm must provide prior written authorization for the arrangement, but it is not required to be a participant.

D. Under no circumstances: This is incorrect, as FINRA Rule 2150 explicitly outlines the specific, limited circumstances under which sharing is permitted.

1. FINRA Rule 2150. Improper Use of Customers' Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts.

Reference: Section (a)(2)(C) states that sharing is permitted if "the associated person and the customer share in the profits or losses in the account in direct proportion to the financial contributions made to the account by either the associated person or the customer."

2. Georgetown University Law Center. (2022). Securities Regulation: Course Materials.

Reference: In discussions on broker-dealer conduct rules, materials on FINRA Rule 2150 emphasize that "proportionate contribution is a cornerstone of permissible account sharing, designed to prevent conflicts of interest where a representative might otherwise benefit without having personal funds at risk." (Syllabus, Module on Broker-Dealer Regulation).

3. U.S. Securities and Exchange Commission. (2018). Study Regarding the Financial Literacy of Investors.

Reference: Appendix B, "Summary of Key Investor Protection Rules," discusses FINRA Rule 2150, noting that the proportionality requirement is a key safeguard to ensure that a representative's interests are aligned with the customer's through shared financial risk.

The Options Clearing Corporation (OCC) is the central clearinghouse for all U.S. exchange-listed equity options. Its primary role is to act as the issuer and guarantor for these contracts. Long-term Equity Anticipation Securities (LEAPS) are a specific type of standardized equity option with expiration dates longer than one year. Because LEAPS are exchange-listed options, they fall directly under the purview of products that the OCC clears, guarantees, and settles. The OCC ensures the performance of these contracts, thereby reducing counterparty risk for market participants.

A. Listed stocks are cleared through the National Securities Clearing Corporation (NSCC), a subsidiary of the Depository Trust & Clearing Corporation (DTCC).

B. Over-the-counter bonds are primarily cleared by the Fixed Income Clearing Corporation (FICC), another subsidiary of the DTCC.

C. Exchange-traded funds (ETFs) are securities that trade like stocks and are also cleared by the National Securities Clearing Corporation (NSCC).

1. The Options Clearing Corporation (OCC). "About OCC." The OCC's official website states, "As the sole central counterparty for the U.S. exchange-listed options markets, OCC provides clearing and settlement services for... put and call options on common stocks and other equity issues..." LEAPS are a type of put and call option on equities. (Source: https://www.theocc.com/about-occ)

2. FINRA Rule 2360(a). "Options." This rule governs the trading of standardized options. Section (a)(20) defines the "Options Clearing Corporation" ("OCC") as the registered clearing agency for standardized options contracts. LEAPS are a form of standardized options. (Source: FINRA Rulebook, Rule 2360)

3. U.S. Securities and Exchange Commission (SEC). Release No. 34-90631, "Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change..." (December 11, 2020). This document details the OCC's function and repeatedly refers to its role in clearing "standardized U.S. options," which encompasses LEAPS. (See Section I, Description of the Proposed Rule Change).

FINRA rules strictly prohibit registered representatives (RRs) from paying transaction-based compensation, such as commissions or referral fees, to unregistered individuals for referring securities business. The family friend is an unregistered person. Therefore, splitting commissions, paying a flat fee, or providing cash equivalents like prepaid cards are all prohibited activities. However, providing occasional non-cash compensation of nominal value, such as a thank-you dinner, is generally permissible. This is considered a normal business courtesy or entertainment, provided it is not so frequent or extensive as to raise questions of propriety and is not preconditioned on the achievement of a specific sales target.

A. Splitting commissions with an unregistered person is a direct and serious violation of FINRA rules governing compensation.

B. Paying a flat-rate referral fee is still considered transaction-based compensation to an unregistered person, which is prohibited.

D. Prepaid credit cards are cash equivalents, and tying their value to commissions earned makes this a prohibited form of payment.

1. FINRA Rule 2040, Payments to Unregistered Persons. This rule states, "(a) No member or associated person shall, directly or indirectly, pay any compensation, fees, concessions, discounts, commissions or other allowances to: (1) any person who is not registered as a broker or dealer under Section 15(a) of the Exchange Act but, by reason of receipt of such payments, is required to be so registered." This directly prohibits the actions in options A, B, and D.

2. FINRA Rule 3220, Influencing or Rewarding Employees of Others. While this rule primarily governs gifts to employees of other member firms, its principles are broadly applied. Supplementary Material .01 clarifies that "normal business entertainment" (like an occasional meal) is not considered a prohibited gift, provided it is not "so frequent or so extensive as to raise any question of propriety." This supports option C as a permissible business courtesy.

3. Securities Industry Essentials (SIE) Examination Content Outline, Section 4, "Overview of Prohibited Activities." This section outlines the knowledge required regarding prohibited practices, including "Paying or splitting commissions or fees with unregistered persons." This confirms that the activities in options A, B, and D are explicitly tested as prohibited conduct.

A margin account is a specific type of brokerage account that allows an investor to borrow money from the broker-dealer to purchase securities. The securities in the account serve as collateral for the loan. This practice, known as buying on margin, allows investors to leverage their purchasing power. The extension of credit in these accounts is governed by the Federal Reserve Board's Regulation T and FINRA rules. This arrangement increases both potential gains and potential losses for the investor.

A. Cash: A cash account requires the investor to pay for all securities in full by the settlement date and does not permit borrowing.

C. An individual retirement account (IRA): IRAs are tax-advantaged retirement accounts, and FINRA and IRS regulations generally prohibit borrowing money or trading on margin within them.

D. Delivery versus payment (DVP) / receive versus payment (RVP): This is a settlement procedure for institutional accounts, not an account type for individuals that permits borrowing from a broker.

1. U.S. Securities and Exchange Commission (SEC). "Investor Bulletin: Investing With Borrowed Funds: No Margin for Error." SEC.gov, August 1, 2013. In the section "What is a Margin Account?", the document states, "A margin account is a brokerage account in which your brokerage firm lends you cash, using the account as collateral, to purchase securities."

2. Financial Industry Regulatory Authority (FINRA). "FINRA Rule 4210. Margin Requirements." FINRA Manual. This rule establishes the margin requirements for broker-dealers, fundamentally defining the operational nature of accounts where credit is extended to customers for securities transactions.

3. Board of Governors of the Federal Reserve System. "Regulation T, 12 C.F.R. Part 220, Credit by Brokers and Dealers." This regulation governs the extension of credit by securities brokers and dealers to customers for the initial purchase of securities. Section 220.1(a) outlines its authority over "every securities credit transaction."

4. Bodie, Z., Kane, A., & Marcus, A. J. (2018). Investments (11th ed.). McGraw-Hill Education. In Chapter 3, "How Securities Are Traded," the section on "Buying on Margin" explains: "When purchasing securities, investors have easy access to a source of debt financing called broker's call loans. The act of taking advantage of broker's call loans is called buying on margin." (Specific content found in Section 3.5).

FINRA rules strictly prohibit member firms from using the FINRA name or logo in any communication that suggests FINRA endorses or approves of the member firm, its business practices, or any of its products or services. FINRA's role is that of a self-regulatory organization (SRO) responsible for oversight and regulation, not for providing endorsements. Therefore, any statement claiming or implying such an endorsement on a marketing postcard or any other communication is a direct violation of FINRA Rule 2210 and is not permissible under any circumstances.

B: While a principal must approve retail communications, their approval cannot make a prohibited statement permissible. The content itself violates the rule.

C: FINRA does not pre-approve member communications in this manner, and it would never approve a statement that violates its own rules against implying endorsement.

D: The prohibition against implying FINRA endorsement is absolute and applies to all communications, regardless of whether they discuss specific investment products.

1. Financial Industry Regulatory Authority (FINRA). FINRA Rule 2210: Communications with the Public. Section (d)(6)(A) "Use of FINRA's Name or Logo" states: "No member may use the FINRA name or logo in a manner that would suggest that FINRA endorses or approves of the member or any of its products or services." This rule explicitly forbids the action described in the question.

2. Financial Industry Regulatory Authority (FINRA). FINRA Rule 2210: Communications with the Public. Section (d)(1)(A) "Content Standards" states that all member communications must be "based on principles of fair dealing and good faith" and must not "contain any false, exaggerated, unwarranted, promissory or misleading statement or claim." Implying an endorsement is considered misleading.

3. Georgetown University Law Center. Securities Regulation (2022-2023 Course Catalog). Course materials for securities regulation, such as those taught by Professor Donald C. Langevoort, cover the scope of SRO rules, including FINRA Rule 2210, which establishes the standards for broker-dealer communications to prevent misleading statements, including false claims of endorsement by a regulator. (Reference to general course content on SRO advertising rules).