Series 24 Sales Practice Supervision Practice Questions
Question 1
A registered representative recommends a complex, leveraged ETF to a retail customer as part of a long-term buy-and-hold strategy. When a supervising principal reviews this recommendation for compliance with Regulation Best Interest's Care Obligation, the principal should confirm primarily that the representative:
- A. Verified the product's compensation to the firm is competitive with similar products offered by other firms
- B. Confirmed that a majority of the firm's other retail customers hold a similar position
- C. Obtained the customer's signature on a generic risk-disclosure acknowledgment form
- D. Understood the potential risks, rewards, and costs of the recommendation and had a reasonable basis to believe it was suitable given the customer's investment profile
Show answer and explanation
Correct answer: D. Understood the potential risks, rewards, and costs of the recommendation and had a reasonable basis to believe it was suitable given the customer's investment profile
The Care Obligation under Reg BI requires a recommendation be based on an understanding of the potential risks, rewards, and costs of the security or strategy, evaluated against the customer's investment profile (age, financial situation, experience, time horizon, risk tolerance, and objectives). A leveraged ETF held long-term carries compounding/decay risk often mismatched with a buy-and-hold objective, so that substantive analysis is what supervision must confirm.
- A. Incorrect. Comparing compensation across competing products relates to the Conflict of Interest Obligation, not the Care Obligation's substantive suitability analysis.
- B. Incorrect. Other customers' holdings have no bearing on whether the recommendation is suitable for this particular customer's profile.
- C. Incorrect. A signed acknowledgment form documents disclosure but does not itself satisfy the duty to perform and evidence a substantive suitability analysis.
- D. Correct. This is the core of the Care Obligation: understanding risk/reward/cost and matching it to the customer's specific investment profile.
Question 2
A registered representative's conduct has triggered a red flag requiring heightened supervision. What should the resulting heightened supervision plan look like under FINRA guidance?
- A. Automatic statutory disqualification and immediate termination of the representative
- B. Removal of the representative from all client contact for a minimum of two years
- C. Specific, tailored measures such as more frequent supervisory review of correspondence and trade activity, documented and communicated to the representative
- D. Placing the representative under the electronic communications 'taping rule' requirements applicable to designated 'taping firms,' regardless of the firm's own classification
Show answer and explanation
Correct answer: C. Specific, tailored measures such as more frequent supervisory review of correspondence and trade activity, documented and communicated to the representative
FINRA guidance describes heightened supervision plans as individualized, written, and reasonably tailored to the specific risk presented — commonly including more frequent or granular review of correspondence, order tickets, or trade blotters, closer branch manager involvement, and documented sign-off. It is not an automatic statutory disqualification event, does not require a fixed multi-year removal from client contact, and does not trigger Rule 3170's taping rule, which applies only to firms meeting specific hiring-history criteria — not to an individual rep with a complaint history.
- A. A red flag triggering heightened supervision does not equate to statutory disqualification, which is a distinct, narrowly defined legal status (e.g., certain convictions, bars); termination is not an automatic or required response.
- B. FINRA guidance does not mandate a fixed two-year removal from client contact; the response should be tailored to the specific conduct and risk presented, not a one-size-fits-all suspension period.
- C. Heightened supervision plans must be individualized to the representative's specific red flag, with concrete, documented measures (e.g., increased correspondence and trade review frequency) communicated to the rep and monitored for effectiveness.
- D. The taping rule applies only to firms independently meeting the hiring-pattern thresholds that make them 'taping firms' under Rule 3170; a single rep's red flag does not import taping obligations onto a firm that isn't otherwise subject to that rule.
Question 3
Surveillance finds that one representative placed 75% of several conservative retirees' accounts in a single speculative issuer over two weeks. What is the best immediate principal response?
- A. Investigate suitability/Reg BI concerns, customer circumstances and possible unauthorized or excessive trading, with documented remediation.
- B. Conclude the accounts are compliant because the clients can liquidate the position at any time, so liquidity offsets the concentration risk and no suitability review is needed.
- C. Review the position only if the issuer's market price declines meaningfully, since losses rather than concentration trigger a supervisory response.
- D. Treat the activity as outside supervisory review because the customers are described as accredited and may therefore accept concentrated risk.
Show answer and explanation
Correct answer: A. Investigate suitability/Reg BI concerns, customer circumstances and possible unauthorized or excessive trading, with documented remediation.
Heavy concentration of conservative retirees in one speculative issuer is a red flag for best-interest and suitability problems. The principal should review promptly, document findings and remediate.
- A. The pattern calls for prompt investigation of best interest, customer profiles and trading authority, with documented action.
- B. Ability to sell does not make a concentrated speculative recommendation suitable.
- C. Waiting for a loss ignores the red flag, which is the concentration itself.
- D. Retirees described as conservative are not shown to be accredited, and accreditation would not remove the duty to supervise.
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Explore careers at ParsonexQuestion 4
Under FINRA Rule 3110(a)(7), what is the primary purpose of a firm's mandatory annual compliance meeting with its registered persons?
- A. To review the registered person's compensation and production goals for the upcoming year
- B. To discuss compliance matters relevant to the activities of the registered person
- C. To administer the Regulatory Element of continuing education
- D. To have the registered person re-execute their Form U4 attestations
Show answer and explanation
Correct answer: B. To discuss compliance matters relevant to the activities of the registered person
Rule 3110(a)(7) mandates an annual compliance meeting (which may be conducted in person or through interactive electronic means) at which registered persons discuss compliance matters relevant to their activities, such as sales practices, supervision, and recordkeeping obligations. It is not a compensation review, a Regulatory Element CE session (a separate, distinct requirement), and it does not involve re-executing Form U4.
- A. The annual compliance meeting is not a venue for compensation or production-goal discussions; conflating it with a business-planning meeting misses the rule's compliance focus.
- B. Correct -- Rule 3110(a)(7) requires the meeting to address compliance matters relevant to the registered person's activities, tailoring the discussion to the risks of that individual's business.
- C. Administering the Regulatory Element is a separate continuing education obligation under the CE rules, distinct from the annual compliance meeting requirement.
- D. Re-executing Form U4 attestations is not the purpose of the annual compliance meeting; U4 amendments are handled through separate registration update procedures.
- Source: FINRA Rule 3110 (Supervision)