FINRA Series 23 Practice Test & Mock Exam

Series 23 is the General Securities Principal Exam - Sales Supervisor Module alternative to Series 24 for candidates already coming through the sales-supervisor path. If you are searching for Series 23 sample questions, a practice test, mock exam, or simulator, this is the main Securities Prep page to start on web and continue on iOS or Android with the same account. This page includes 24 sample questions with detailed explanations so you can validate the supervisory style before opening the full simulator.

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What this Series 23 practice page gives you

• a direct route into the Securities Prep simulator for Series 23
• 24 blueprint-aligned sample questions focused on principal-level top-off decisions
• exam-map guidance for registration, broker-dealer controls, customer supervision, trading oversight, and investment-banking or research supervision
• a clear free-preview path before you subscribe
• the same subscription across web and mobile

Series 23 exam snapshot

• Provider: FINRA
• Exam: General Securities Principal Exam - Sales Supervisor Module
• Practice reference: 100 practice questions in 150 minutes
• Registration context: practical top-off route for candidates already coming through the sales-supervisor path

Topic weighting for Series 23 practice

How Series 23 fits the stack

Series 23 is not an entry-level sales exam. It is a principal-control exam for candidates who already carry the sales-supervisor base and now need the broader broker-dealer, trading, and investment-banking or research supervision layer.

How Series 23 differs from similar routes

How to use the Series 23 simulator efficiently

1. Start with general broker-dealer controls and trading supervision because they drive most of the top-off logic.
2. Review every miss until you can explain what the principal should approve, document, escalate, or stop.
3. Move into mixed sets once you can switch between customer, trading, and IB or research scenarios without losing the supervisory thread.
4. Finish with timed runs so the 150-minute pace feels stable.

Free preview vs premium

• Free preview: 24 public sample questions on this page plus the web app entry so you can validate the question style and explanation depth.
• Premium: the full Series 23 practice bank, focused drills, mixed sets, timed mock exams, detailed explanations, and progress tracking across web and mobile.

Free samples and full bank

• Live now: this exact practice route is available in Securities Prep on web, iOS, and Android.
• On-page sample set: this page includes 24 public sample questions from the current practice coverage.
• Full app: open the Securities Prep web app or mobile app for broader timed coverage.

Good next pages after Series 23

• Series 24 if you want the broader general-securities-principal page beside the Series 23 top-off route
• Series 9 and Series 10 if you need to revisit the underlying sales-supervisor path
• Series 39 or Series 26 if the real target is a narrower DPP or packaged-products principal route
• FINRA if you want the broader principal and specialist route map first

Free review resources

Use these free SecuritiesMastery.com resources for concept review, then return to this page when you are ready to practice in Securities Prep.

• Series 23 Cheat Sheet
• Series 23 Study Guide

Focused sample questions

Use these focused Series 23 sample-question pages when you want to isolate one official topic area before returning to the mixed simulator.

• Registration and Personnel
• General Broker-Dealer Activities
• Customer Activity Supervision
• Trading and Market Making
• Investment Banking and Research
• Free Series 23 Full-Length Practice Exam

24 Series 23 sample questions with detailed explanations

These 24 questions are selected from the live FINRA Series 23 practice coverage and span the main blueprint areas shown above. Use them to test readiness here, then continue into the full Securities Prep simulator for broader timed coverage.

Question 1

Topic: Function 2 — Supervision of General Broker-Dealer Activities

During a branch inspection, a principal learns that a registered representative used a personal phone and a disappearing-message app to send recommendations and receive two customer order changes last week. The firm’s WSPs permit business communications only through archived firm email and an approved texting platform, and the firm cannot capture the app’s messages. Customers in the affected accounts still need service today, and the principal must address record retention and supervision immediately. What is the single best supervisory action?

• A. Stop the app use, preserve available messages, switch customers, and escalate.
• B. Rely on order blotters and confirmations, then cover it in annual training.
• C. Allow temporary personal texting with daily screenshots to the branch manager.
• D. Have the rep summarize the messages and continue using the app briefly.

Best answer: A

Explanation: The principal should immediately stop business use of the disappearing-message app, preserve whatever communications can still be captured, and move the customers to approved, retained channels. Because the firm’s WSPs allow only archived systems, this is a books-and-records and supervision issue that requires escalation, not just coaching. Business communications involving recommendations and customer order instructions must occur on channels the firm can retain and supervise. Here, the representative used a personal device and a disappearing-message app that the firm cannot capture, so the principal must first stop any further business use of that channel. The principal should also preserve and collect whatever records remain available, move customer communications to an approved retained system so service can continue, and escalate the incident under the firm’s supervisory procedures for review and remediation.

• Direct immediate cessation of business use of the app.
• Preserve available device data or messages.
• Review affected activity and escalate to compliance/supervision.

After-the-fact summaries or execution records do not cure the original retention failure because they do not create a complete, contemporaneous supervisory record.

Question 2

Topic: Function 4 — Supervision of Trading and Market Making Activities

During a supervisory control review, a general securities principal finds that one branch routes nearly all retail equity market orders to a single market center. The branch manager says the venue is used because it is easier to track fills, and the firm receives higher rebates there than from other venues. The firm’s WSPs do not require a periodic comparison of execution quality across venues for this routing pattern. What is the best next step?

• A. Direct the branch to send all orders to the listing exchange instead of any wholesaler.
• B. Disclose the rebate arrangement to customers and allow the branch to keep using its preferred venue.
• C. Conduct and document a best-execution review of the venue, including execution-quality and conflict analysis, and revise routing controls as needed.
• D. Keep the routing unchanged unless a customer complaint or failed trade occurs.

Best answer: C

Explanation: The principal should first test whether the routing practice is actually delivering best execution. Convenience and higher rebates create a potential conflict, so the firm needs a documented venue review and appropriate supervisory controls rather than assumptions or delay. Best execution is an ongoing supervisory obligation, not a one-time routing choice. When a branch favors one venue because it is easier operationally or because the firm receives higher rebates, the principal should not accept that preference without evidence that customers still receive favorable execution. The proper next step is to perform and document a review of execution quality across relevant venues, assess the conflict created by the rebate incentive, and then update routing controls or WSPs if the practice is not adequately supported.

A principal should generally:

• compare execution quality data for the routed orders
• assess whether the venue preference is conflict-driven
• document the review and any corrective action
• revise monitoring or WSPs if needed

Waiting for complaints, relying on disclosure alone, or assuming one venue category is always best all miss the required best-execution review.

Question 3

Topic: Function 5 — Supervision of Investment Banking and Research

A broker-dealer is selling a 7-year illiquid Regulation D private fund. The firm’s WSPs require a second principal review before approval if a customer has substantial existing alternative investments, near-term liquidity needs, or incomplete accredited-investor documentation. During an inspection, the firm finds that a producing manager approved several subscriptions without that additional review. The offering materials themselves are accurate. What is the most likely consequence of this control gap?

• A. FINRA findings for deficient supervision and remediation of potentially unsuitable or ineligible sales
• B. Automatic loss of the issuer’s private-offering exemption for the entire deal
• C. A required amendment to the offering materials because suitability concerns make the PPM misleading
• D. Only a minor records exception, since signed subscription documents cure the missed review

Best answer: A

Explanation: Missing the required second review is a supervisory failure tied directly to private-placement suitability and investor-eligibility controls. The most likely immediate consequence is a regulatory finding and a review of affected accounts for possible unsuitable or ineligible sales, with remediation if needed. In a private offering, signed subscription documents do not replace the firm’s duty to supervise recommendations and account approvals. When WSPs require added principal review for concentration, liquidity, or accredited-investor red flags, skipping that step means the firm may have approved purchases without adequately evaluating whether the investment fit the customer or whether the customer was eligible to participate.

That creates an immediate supervision issue and a customer-protection issue. The most likely consequence is that regulators would cite deficient supervision and the firm would need to review the affected transactions, determine whether any sales were unsuitable or made to ineligible investors, and provide remediation where appropriate. More severe outcomes, such as losing the issuer’s exemption, would require additional facts not stated here.

Question 4

Topic: Function 3 — Supervision of Retail and Institutional Customer-Related Activities

A broker-dealer’s account maintenance procedure requires a supervisor to independently verify any address or bank-instruction change on a long-dormant retail account before accepting a same-week liquidation and wire request. This control is primarily designed to detect and prevent which risk?

• A. Trade-reporting errors in the firm’s order execution process
• B. Unsuitable recommendations based on the customer’s profile
• C. Account takeover or identity-theft fraud causing unauthorized disbursement
• D. AML structuring intended to avoid currency reporting thresholds

Best answer: C

Explanation: The control matches customer-protection and fraud prevention, not sales-practice or trading surveillance. Sudden maintenance changes on a dormant account, especially right before liquidation and a wire, are red flags for possible identity theft or unauthorized account access. This type of procedure is an account-maintenance and customer-protection control. A dormant account that suddenly shows changes to contact or payment instructions, followed immediately by liquidation and a disbursement request, presents a classic risk of account takeover, impersonation, or other fraud. The supervisory purpose of independent verification is to confirm that the real customer authorized the changes before assets leave the account.

A principal should recognize this pattern as a heightened-verification event, not as a suitability, communications, or trade-reporting issue. The key takeaway is that unusual maintenance activity in a dormant account can signal identity-theft or unauthorized-disbursement risk and should trigger escalation and confirmation procedures.

Question 5

Topic: Function 1 — Supervision of Registration of the Broker-Dealer and Personnel Management Activities

A member firm is making two office changes. It will move an existing registered branch to a new address in the same city with no change in staff or business lines. It will also keep a small satellite office open, but that location will now review customer orders and have an on-site principal supervise representatives there. Which response best matches these changes?

• A. Make only an internal address update for the branch move, and leave the satellite office’s status unchanged because the office is not new.
• B. Amend Form BR for the branch move, but no registration or supervisory change is needed for the satellite office because customer-order review does not affect office status.
• C. Close the old branch registration and wait to file a new Form BR after the moved branch opens, and handle the satellite office change through training only.
• D. Amend Form BR for the branch move, and update the satellite office’s registration and supervisory assignment because its activities now include supervisory functions.

Best answer: D

Explanation: A registered branch’s address change requires a Form BR amendment. Separately, when an office takes on customer-order review and on-site principal supervision, the firm must reassess that office’s registration status and supervisory assignment based on its new functions. The core concept is that office registration and supervisory structure depend on what the office does, not just whether the office is newly opened. Moving an existing registered branch to a new address requires updating its Form BR information. A separate office that begins reviewing customer orders and housing on-site principal supervision has changed its regulatory profile, so the firm must evaluate and update its office registration and supervisory assignment to reflect those activities.

A good principal-level approach is:

• Update Form BR when a registered office relocates.
• Reassess office status when activities expand into supervision or order review.
• Align the designated supervisor and written supervisory coverage with the office’s actual functions.

The tempting error is treating the satellite office as unchanged just because the physical location stayed the same.

Question 6

Topic: Function 2 — Supervision of General Broker-Dealer Activities

A broker-dealer’s WSPs require each critical department to participate in a quarterly remote-work and system-failover drill, document any gaps, and revise recovery steps based on the results. This control is primarily designed to support which supervisory objective?

• A. Satisfying record-retention requirements
• B. Testing the firm’s business continuity plan
• C. Conducting the periodic branch inspection program
• D. Completing the firm’s annual compliance certification

Best answer: B

Explanation: The described control is a business continuity plan test. Quarterly drills, failover exercises, and follow-up revisions show the firm is checking whether the plan works during an actual disruption, not merely keeping a written plan on file. The core concept is the difference between maintaining a written business continuity plan and testing it. A written plan on file is documentation; a drill that simulates remote work and system failover, captures gaps, and requires corrective updates is a validation exercise. That is what testing looks like from a supervisory perspective: the firm is assessing operational readiness for disruption and improving the plan based on results.

A principal should recognize that evidence of scenario-based exercises, post-test findings, and remediation supports BCP testing. By contrast, retaining records is a books-and-records function, annual certification addresses supervisory process review, and branch inspections evaluate office supervision. The key takeaway is that exercises plus documented corrections distinguish a tested BCP from a plan that merely exists in writing.

Question 7

Topic: Function 4 — Supervision of Trading and Market Making Activities

A general securities principal reviews a monthly dashboard that combines CAT rejects and TRACE late reports. The firm’s WSP requires immediate escalation and a written remediation plan when a desk’s combined reporting exception rate, calculated as \(\frac{\text{CAT rejects + TRACE late reports}}{\text{reportable events}}\), is greater than 2% for two consecutive months.

Which desk should the principal escalate now under the WSP?

• A. Retail Fixed Income desk
• B. Institutional Equities desk
• C. Retail Equities desk
• D. Market Making desk

Best answer: A

Explanation: The only desk above the firm’s 2% trigger in both April and May is Retail Fixed Income. Its rates are 10/400 = 2.5% and 9/420 \(\approx\) 2.14%, so the recurring cross-system pattern requires immediate escalation. This tests supervisory use of a quantitative exception trigger. The WSP requires a combined CAT-and-TRACE exception rate greater than 2% for two consecutive months, so the principal must look at both the percentage and the pattern over time. Retail Fixed Income meets that standard because 10/400 = 2.5% in April and 9/420 \(\approx\) 2.14% in May.

Retail Equities does not qualify because 18/900 = 2.0%, which is exactly at the threshold, not greater than it. Institutional Equities and Market Making each exceed 2% in April but fall below 2% in May. The key takeaway is that recurring reporting weakness across systems should be escalated when the firm’s stated trigger is met, rather than waiting for another review cycle.

Question 8

Topic: Function 5 — Supervision of Investment Banking and Research

A general securities principal is reviewing a draft pitch book for a private placement that will be shown to prospective purchasers. The deck includes management projections, selected financial metrics, and a summary of business risks. Which statement in the deck would be NOT appropriate to approve?

• A. Pair growth claims with material concentration and liquidity risks.
• B. Describe key assumptions underlying management’s projections.
• C. Identify EBITDA as non-GAAP and provide a reconciliation.
• D. State investors can expect stable returns with limited downside.

Best answer: D

Explanation: Investor disclosure materials must be fair and balanced and cannot imply assured investment results. Saying investors can expect stable returns with limited downside overstates certainty and understates risk, which raises anti-fraud concerns even if general risk disclosures appear elsewhere in the deck. When a principal reviews offering communications, the key issue is whether a reasonable prospective purchaser could be misled by what is stated or omitted. Fair-balance allows the deck to present favorable information, projections, and selected metrics, but those points must be accompanied by material assumptions, limitations, and risks. Anti-fraud principles prohibit statements that suggest predictable performance or reduced risk without adequate support. In this scenario, language promising stable returns with limited downside is the problem because it conveys unwarranted certainty about investment outcomes. By contrast, disclosing projection assumptions, identifying non-GAAP measures, and pairing upside statements with material risks are all steps that make the material more balanced and less misleading. General risk language does not cure a specific promissory claim.

Question 9

Topic: Function 3 — Supervision of Retail and Institutional Customer-Related Activities

A firm’s transfer desk routes exceptions to either routine operations follow-up or principal escalation for customer-protection review. Which situation best fits the principal-escalation path?

• A. A non-ACATS transfer form is otherwise complete but lacks a required signature guarantee.
• B. An ACATS request is submitted hours after the account’s email, phone number, and mailing address were changed, and the customer cannot be reached at the prior phone number.
• C. An ACATS request is rejected because the receiving account is joint while the delivering account is individual.
• D. An ACATS request includes a position that is not ACATS eligible.

Best answer: B

Explanation: The decisive factor is whether the transfer problem suggests possible unauthorized activity, not whether it is ACATS or non-ACATS. A transfer request that closely follows changes to contact information and cannot be confirmed through prior contact channels raises an account-takeover concern and warrants principal escalation. Transfer problems usually stay in routine operations when they involve paperwork defects, registration mismatches, or asset-transfer limitations. Principal escalation for customer-protection follow-up is more appropriate when the facts suggest possible fraud, identity theft, or an unauthorized transfer request. Here, the transfer request follows sudden changes to multiple contact fields, and the customer cannot be reached through the prior phone number. That pattern is a meaningful red flag for possible account takeover, so the firm should move beyond normal exception processing and follow its supervisory and fraud-escalation procedures.

• Review the recent profile changes and transfer request together.
• Attempt independent customer verification using established channels.
• Escalate under the firm’s WSPs for fraud or identity-theft review.

By contrast, ordinary ACATS eligibility issues, missing transfer documentation, and account-title mismatches are typically operational exceptions unless other suspicious facts are present.

Question 10

Topic: Function 1 — Supervision of Registration of the Broker-Dealer and Personnel Management Activities

A general securities principal is updating the firm’s CRD office records and WSPs for several locations. Which statement is INCORRECT under standard branch, OSJ, non-branch, and remote supervision principles?

• A. A representative’s primary residence may be non-branch if exception conditions are met.
• B. Remote supervision from another office eliminates branch or OSJ status for that site.
• C. Final new-account approval or supervisory responsibility generally makes a location an OSJ.
• D. Regular customer meetings and securities business generally make a site a branch office.

Best answer: B

Explanation: The inaccurate statement is the one claiming remote supervision changes the registration status of a location. Branch and OSJ status are determined by the functions and activities carried on at the site, not simply by where the supervisor sits. Branch and OSJ classification turns on what occurs at the location. A site where associated persons regularly conduct securities business with the public is generally a branch office, and a location performing core supervisory functions such as final approval of new accounts or supervision of associated persons is generally an OSJ. A representative’s home office may qualify for a non-branch exception, but only if the firm satisfies the conditions for that exception.

Remote supervisory arrangements may be part of the firm’s control structure, but they do not reclassify a location that otherwise meets the branch or OSJ definition. The key takeaway is to classify the site by its activities first, then apply the proper registration and supervisory controls.

Question 11

Topic: Function 2 — Supervision of General Broker-Dealer Activities

Which statement is most accurate about a FINRA member’s networking arrangement with a bank branch?

• A. Required disclosures apply only if bank employees receive transaction-based compensation for securities referrals.
• B. A permanent physical barrier is required whenever securities are offered on bank premises.
• C. The member must supervise the arrangement and provide disclosures that securities are not FDIC-insured, are not bank deposits or guarantees, and may lose value, while clearly distinguishing the brokerage area from deposit-taking activities.
• D. Written disclosures may be delayed until the first trade confirmation if oral disclosures were given at account opening.

Best answer: C

Explanation: Networking arrangements with banks are designed to prevent customers from confusing securities products with insured bank deposits. The member must use supervisory controls, provide the standard nondeposit investment product disclosures, and clearly separate or identify the brokerage area from deposit-taking activities. The key issue in a bank networking arrangement is customer confusion. When securities are offered on the premises of a financial institution, the member firm must supervise the arrangement and ensure customers receive disclosures that the products are not FDIC-insured, are not deposits or other obligations of the bank, are not guaranteed by the bank, and involve investment risk, including possible loss of principal. The firm also must clearly distinguish the brokerage services area from the bank’s retail deposit-taking area through signage or other means, with physical separation used where practical.

Compensation structure does not determine whether these protections apply. Likewise, oral disclosure alone does not eliminate the need for timely written disclosure, and the rule does not require a permanent wall in every branch. The core supervisory goal is clear customer understanding of who is offering the product and what risks apply.

Question 12

Topic: Function 4 — Supervision of Trading and Market Making Activities

A broker-dealer routes 92% of its marketable retail equity orders to one wholesaler because the order management system defaults to that venue. The wholesaler pays payment for order flow, and the firm has not compared execution quality against other venues for 9 months. Exception reports also show slower executions during volatile markets. Which response by the general securities principal is INCORRECT?

• A. Require periodic venue comparisons by order type and market conditions
• B. Treat payment for order flow disclosure as sufficient supervision
• C. Review whether the default router still supports best execution
• D. Escalate the volatile-market exceptions for supervisory follow-up

Best answer: B

Explanation: Best execution requires a firm to regularly evaluate whether its routing practices are designed to obtain favorable customer executions under the circumstances. A disclosed conflict, such as payment for order flow, does not permit a firm to rely on convenience or a default venue without ongoing comparative review. The core issue is whether routing decisions are being supervised for best execution rather than left on autopilot because of operational convenience or conflicted incentives. Here, the firm routes most orders to one wholesaler, receives payment for order flow, has not done recent comparative venue review, and already has exception data showing weaker results in volatile markets. Those facts call for principal oversight and documented analysis, not passive reliance on disclosure.

A reasonable supervisory response would include:

• comparing execution quality across available venues
• reviewing whether the default routing logic remains appropriate
• investigating exception patterns by order type and market conditions
• addressing the conflict created by payment for order flow

The key takeaway is that disclosure may inform customers about a conflict, but it does not satisfy the firm’s independent best-execution duty.

Question 13

Topic: Function 5 — Supervision of Investment Banking and Research

A broker-dealer’s investment banking department is advising a corporate bidder on a planned cash tender offer for a public target company. The offer has not been announced, and the firm now holds material nonpublic information about the transaction. The general securities principal is deciding what controls to impose firmwide. Which action would be INCORRECT?

• A. Require heightened review or suspension of research and public commentary on the target.
• B. Place the target on a restricted list and limit internal access on a need-to-know basis.
• C. Direct registered representatives to use only approved communications and avoid speculation about the target.
• D. Permit a favorable research note on the target if it does not mention the tender offer.

Best answer: D

Explanation: Planned tender-offer work creates acute MNPI and conflict concerns. A principal should impose restricted-list and communication controls, not allow ordinary research publication on the target simply because the report avoids mentioning the deal. When a firm is working on an unannounced tender offer, the key supervisory response is to prevent misuse of MNPI and control market-facing communications. That typically means placing the target on a restricted or similar control list, limiting internal access to those with a business need, and heightening review of research, sales communications, and public commentary.

Allowing research to publish a positive note on the target is not cured by leaving out any reference to the tender offer. The firm still possesses MNPI, and the research could influence trading in the very security affected by the pending transaction. The better supervisory approach is to restrict or closely control that communication until the conflict and MNPI issues are resolved.

Question 14

Topic: Function 3 — Supervision of Retail and Institutional Customer-Related Activities

During a branch review, a principal learns that a registered representative has been using a personal messaging app with disappearing messages to send retail customers trade ideas and account updates. The app is not on the firm’s approved list, and the firm’s archive does not capture those messages. Which action by the principal would be INCORRECT?

• A. Require the representative to stop using the app immediately and preserve any available messages.
• B. Escalate the matter, document the issue, and review affected accounts and customers.
• C. Assess whether additional retention, content review, or customer remediation steps are needed.
• D. Treat the issue as minor if no customer complaint exists and close it after verbal counseling.

Best answer: D

Explanation: Business communications with customers on an unapproved disappearing-message app create an immediate principal-level concern because the firm cannot supervise or retain them properly. The principal should stop the conduct, escalate it, and assess scope and remediation rather than dismiss it just because no complaint has surfaced. The core issue is off-channel customer communication that the firm has not approved and cannot retain. When an associated person uses a disappearing-message app for trade ideas or account updates, the principal must treat that as a supervision and books-and-records problem, not just a sales-practice issue. Appropriate steps include stopping the activity, preserving any available records, escalating internally, determining which customers and accounts were affected, and considering whether further review, remediation, or discipline is needed.

A lack of customer complaints does not make the conduct minor. The concern exists because the firm may have unreviewed recommendations or account-related communications that were sent outside approved channels and outside required retention processes. The key takeaway is that off-channel, inadequately retained business communications require investigation and supervisory action, even before customer harm is proven.

Question 15

Topic: Function 1 — Supervision of Registration of the Broker-Dealer and Personnel Management Activities

A general securities principal is reviewing proposed filing instructions for firm-level changes. Which pairing is matched correctly?

Assume the broker-dealer remains registered and in business unless the option states otherwise.

• A. A new broker-dealer seeking its first registration should file Form BDW.
• B. An existing broker-dealer dropping one line of business but staying active should file Form BDW.
• C. A broker-dealer ending all operations and surrendering registration should file Form BD.
• D. An existing broker-dealer adding new state jurisdictions should file a Form BD amendment.

Best answer: D

Explanation: A Form BD amendment is used when an already registered broker-dealer changes information on its existing registration, such as jurisdictions or lines of business. Form BD is for initial registration, while Form BDW is for withdrawal rather than ongoing updates. The core distinction is whether the firm is entering, updating, or leaving broker-dealer registration. If an existing broker-dealer adds jurisdictions or changes other disclosed registration information while remaining active, the principal should update the existing filing through a Form BD amendment. Form BD is the initial application for a firm seeking broker-dealer registration for the first time. Form BDW is used when the firm is withdrawing its broker-dealer registration, not when it is expanding or modifying its business while staying registered. The key takeaway is that changes to an active firm’s regulatory footprint are generally handled by amendment, while a true exit from registration uses Form BDW.

Question 16

Topic: Function 2 — Supervision of General Broker-Dealer Activities

A general securities principal is triaging new legal matters for complaint and escalation tracking: a retail customer files a claim over alleged unsuitable recommendations under an account agreement arbitration clause; a former registered representative claims unpaid compensation; and another customer dispute is being considered for mediation before any hearing. Which statement is INCORRECT?

• A. Mediation produces a binding award without settlement documentation.
• B. The former representative’s pay dispute is generally industry arbitration.
• C. A dispute not subject to arbitration may proceed in litigation.
• D. The retail claim is generally customer arbitration.

Best answer: A

Explanation: The inaccurate statement is the one treating mediation like binding arbitration. Mediation is a voluntary, nonbinding process, so the firm must still document any settlement and continue appropriate supervisory follow-up. Supervisors need to classify disputes correctly because tracking, escalation, and corrective-action review depend on the forum. A retail investor’s claim against the firm or its associated person is generally handled as customer arbitration when arbitration applies. A compensation or employment dispute between the firm and an associated person is generally an industry arbitration matter. Mediation is different: the mediator helps the parties negotiate, but does not issue a binding award. If the parties settle in mediation, the settlement must still be documented and reviewed for any supervisory, disclosure, or reporting implications. If arbitration does not apply, a dispute may instead proceed in court as litigation. The key distinction is that mediation seeks a negotiated resolution, while arbitration and litigation decide the dispute.

Question 17

Topic: Function 4 — Supervision of Trading and Market Making Activities

A firm’s equity order-entry system uses these supervisory alerts for a customer order in the same stock:

• Buy limit: alert if the entered price is more than 6% above the inside offer
• Sell limit: alert if the entered price is more than 6% below the inside bid
• Buy stop: alert if the entered stop price is more than 10% above the inside offer
• Sell stop: alert if the entered stop price is more than 10% below the inside bid

At 10:15 a.m., ABC is quoted at $50.00 bid and $50.20 offered. Which order should trigger the supervisory alert?

• A. Buy stop at $55.10
• B. Buy limit at $52.90
• C. Sell limit at $47.10
• D. Sell stop at $44.80

Best answer: D

Explanation: The sell stop at $44.80 breaches the firm’s sell-stop control because it is 10.4% below the $50.00 inside bid. Each other order remains within its stated alert band when compared with the correct side of the market. The key control is to compare each order instruction to the correct reference quote and then test the percentage deviation. For a sell stop, the reference is the inside bid.

Because 10.4% is more than the firm’s 10% sell-stop threshold, that entry should be flagged. The other orders do not exceed their limits: the buy limit at $52.90 is about 5.4% above the $50.20 offer, the sell limit at $47.10 is 5.8% below the $50.00 bid, and the buy stop at $55.10 is about 9.8% above the $50.20 offer. A sound supervisory control must map the order type to the correct side of the inside market before applying the percentage test.

Question 18

Topic: Function 5 — Supervision of Investment Banking and Research

The firm is the book-running manager for an IPO. Based only on this allocation review memo, which account is the only one the principal could approve for a new-issue allocation?

Account                   Review note
North Shore Family LP     15% beneficial owner is a registered rep at another broker-dealer
Alder Creek LLC           100% owned by CFO of a public company for which the firm currently provides investment banking services
Beacon State Pension Plan Independent investment discretion; no broker-dealer affiliates or executive officers/directors of investment banking clients disclosed
Harbor Point Trust        12% beneficial owner is a portfolio manager at the member firm

• A. Beacon State Pension Plan
• B. North Shore Family LP
• C. Harbor Point Trust
• D. Alder Creek LLC

Best answer: A

Explanation: The only fully supported eligible account is the pension plan. The exhibit shows no restricted-person ownership and no executive officer or director link that would create a spinning concern, while the other accounts each show a disqualifying relationship. New-issue allocations must be screened for both customer eligibility and spinning concerns. An account with a beneficial owner who is associated with a broker-dealer can be restricted from receiving IPO shares, and an account owned by an executive officer or director of a company that receives the firm’s investment banking services raises a spinning prohibition concern. Here, two accounts show beneficial owners tied to broker-dealers, and one account is owned by the CFO of a current investment banking client. The pension plan is the only account described as having independent investment discretion and no disclosed broker-dealer affiliate or executive-officer/director conflict.

The key is to rely only on what the exhibit affirmatively states, not to assume missing exceptions or additional facts.

Question 19

Topic: Function 3 — Supervision of Retail and Institutional Customer-Related Activities

A principal reviews the following exception log for a customer’s cash account. No written discretionary authorization is on file, and the account has not been accepted as discretionary. On Monday at 9:00 a.m., the customer told the registered representative, “Buy the four stocks we discussed when you think the prices make sense.” No other standing authority was granted.

Mon 11:00 a.m.  Alpha Co.    $18,000  no further customer contact
Tue 10:30 a.m.  Beta Inc.    $22,000  no customer contact Tuesday
Wed 9:15 a.m.   Gamma Corp.  $15,000  customer texted approval at 9:05 a.m.
Thu 2:00 p.m.   Delta Ltd.   $25,000  no customer contact Thursday

For supervisory purposes, what amount should the principal treat as discretionary trading activity requiring escalation?

• A. Treat $65,000 as discretionary activity.
• B. Treat $62,000 as discretionary activity.
• C. Treat $47,000 as discretionary activity.
• D. Treat $40,000 as discretionary activity.

Best answer: C

Explanation: Without written discretionary authority and principal acceptance, the representative may rely only on same-day time-and-price discretion from the customer’s Monday instruction. The Tuesday and Thursday orders lacked fresh approval on those days, so $22,000 + $25,000 = $47,000 should be escalated as discretionary activity. The key distinction is between limited same-day time-and-price discretion and a true discretionary account. Because this account had no written discretionary authorization and no principal acceptance, the representative could work the Monday instruction that same day, but trades entered on later days required fresh customer approval before entry.

• Monday Alpha: same-day time/price discretion, so not treated as discretionary account activity.
• Tuesday Beta: no Tuesday contact, so include $22,000.
• Wednesday Gamma: customer approved that morning, so treat it as solicited.
• Thursday Delta: no Thursday contact, so include $25,000.

Total discretionary activity for escalation is $47,000. A common trap is to include all post-Monday trading, but the Wednesday order had a new customer approval.

Question 20

Topic: Function 1 — Supervision of Registration of the Broker-Dealer and Personnel Management Activities

A general securities principal supervises an affiliated SEC-registered investment adviser that wants to add a new revenue line. Which proposed activity most clearly must be conducted through broker-dealer registration rather than relying on investment-adviser status alone?

• A. Soliciting private-offering investors for a percentage of proceeds
• B. Managing ETF accounts for an annual AUM fee
• C. Publishing model portfolios for a flat subscription fee
• D. Preparing issuer valuation reports for a fixed project fee

Best answer: A

Explanation: The key differentiator is participation in a securities transaction with transaction-based compensation. Soliciting investors in a private offering for a percentage of proceeds is broker-dealer activity, even if the person is also associated with an investment adviser. Investment-adviser status covers advisory services, such as managing accounts for an asset-based fee or providing impersonal investment content for a flat fee. It does not permit a person to act as an intermediary in the sale of securities for others while receiving compensation tied to the transaction.

In the stem, the private-offering proposal has the two strongest broker-dealer indicators: soliciting investors and being paid based on proceeds raised. That combination generally means the activity must be done through a registered broker-dealer and supervised as broker-dealer business. By contrast, advisory fees, subscription fees, and fixed consulting fees are not themselves compensation for effecting securities transactions. The practical test is to ask: is the person helping sell securities, and is the pay tied to the sale?

Question 21

Topic: Function 2 — Supervision of General Broker-Dealer Activities

A broker-dealer uses an electronic branch-inspection program. The firm’s WSPs require records that show the inspection was completed, exceptions were tracked to resolution, remediation was verified, and supervisory closure was documented. Which record would be NOT appropriate evidence of that process?

• A. An exception log showing each finding, owner, due date, follow-up notes, and closure approval
• B. A final inspection report showing date, scope, reviewer, findings, and branch acknowledgment
• C. An email saying all items were fixed, without item-by-item support or supervisory verification
• D. Screenshots of corrected settings with a supervisor’s re-test note attached to the exception file

Best answer: C

Explanation: Records for branch inspections must show more than a statement that issues were resolved. The firm needs documentation of what was inspected, what exceptions were found, how each item was remediated, and who verified and closed the matter. The core concept is evidencing supervisory completion, not merely asserting it. For branch inspections and remediation, the record should support the full control trail: the inspection occurred, exceptions were identified, responsibility and timing were assigned, corrective action was taken, and a supervisor verified the fix before closing the item. A simple email from the branch manager saying everything was fixed is not enough because it does not tie the statement to specific findings or show independent supervisory review.

Good evidence typically includes:

• the completed inspection report
• an exception-tracking log with ownership and follow-up
• documentation of re-testing or verification
• a dated supervisory sign-off or closure record

The closest distractors all provide documentary support for one or more of those required steps, while the unsupported email does not.

Question 22

Topic: Function 4 — Supervision of Trading and Market Making Activities

A broker-dealer accepts retail customer equity orders and, at times, fills them through an internal facilitation desk acting from firm inventory. The firm’s general securities principal is revising surveillance reports and WSPs. Which statement is INCORRECT?

• A. The facilitation desk should have separate controls for principal pricing and conflicts management.
• B. When the firm acts as principal, the trade no longer needs customer-order supervisory review.
• C. Facilitated customer orders still require review for handling, routing, and best execution.
• D. The firm may use distinct exception reports for customer orders and proprietary activity if each is reasonably designed.

Best answer: B

Explanation: Internal facilitation does not convert a customer order into a purely proprietary event. A principal must supervise the customer-order aspects, such as handling and best execution, while also maintaining separate controls over the firm’s proprietary role and related conflicts. The key distinction is that internal facilitation creates two supervisory lenses, not one. Because the order originated from a customer, the firm still must supervise customer-order handling, routing decisions, execution quality, and best execution. At the same time, because the firm is trading as principal from its own inventory, the firm also needs controls over proprietary activity, including pricing, conflicts, and how the desk interacts with customer flow.

A reasonable supervisory design can separate reports and reviews by activity type, as long as both risks are covered. What is not reasonable is treating an internally facilitated customer order as outside customer-order review merely because the firm was the contra party. The firm’s principal capacity adds supervisory obligations; it does not eliminate customer-order obligations.

Question 23

Topic: Function 5 — Supervision of Investment Banking and Research

A broker-dealer is advising an acquirer in a publicly announced tender offer for a listed target. Information barriers are in place, and branch offices are receiving customer questions after the press release. Which supervisory response is INCORRECT?

• A. Provide customers the filed offer materials through approved firm channels.
• B. Escalate an analyst’s social-media comment on the offer to legal/compliance before use.
• C. Allow reps to email that shareholders should tender because terms are public.
• D. Require staff to route unusual deal questions to legal/compliance.

Best answer: C

Explanation: Tender-offer communications are highly sensitive even after public announcement. A principal should escalate persuasive or interpretive messaging about whether shareholders should tender, rather than let registered representatives create their own sales-oriented email. The core issue is that pending acquisition and tender-offer communications require tight supervisory control, especially when they go beyond distributing already filed materials. Once a deal is public, the firm may still need legal/compliance review before anyone uses commentary, recommendations, or promotional language about the transaction. In this scenario, telling customers that they should tender is not a neutral relay of public information; it is persuasive deal-related communication that can create regulatory, disclosure, and conflict concerns.

Acceptable supervision includes:

• escalating analyst or social-media commentary before use
• limiting customer distribution to approved, filed materials
• directing unusual inquiries to legal/compliance

The closest trap is assuming that “public” means “freely promotable,” but public disclosure does not remove the need for controlled review.

Question 24

Topic: Function 3 — Supervision of Retail and Institutional Customer-Related Activities

A firm’s daily transfer exception log shows that a customer’s full ACATS transfer request was rejected twice for an account-title mismatch. The only difference between the two registrations is a missing middle initial, and $18,000 of settled cash remains at the carrying firm after other positions moved. The customer has called twice saying no one can explain the delay. Which response by the supervising principal is NOT appropriate?

• A. Document and escalate the repeated transfer exception
• B. Wait for a written complaint before principal review
• C. Update the customer on status and next steps
• D. Investigate the mismatch and seek prompt correction

Best answer: B

Explanation: This is more than a routine back-office item. Repeated ACATS rejections over a minor discrepancy, retained settled cash, and customer confusion create a supervisory and customer-protection issue, so principal review and customer follow-up should occur promptly. Transfer problems may begin as operations issues, but they require principal attention when the facts suggest customer harm, a control breakdown, or unresolved delays. Here, the request was rejected twice for an immaterial difference, settled cash remains behind, and the customer has already called twice without a clear explanation. A supervising principal should review the basis for the rejection, coordinate correction with operations, document the exception, and make sure the customer receives a timely status update and next steps. That approach applies to ACATS and to non-ACATS transfer problems alike when assets or cash may be delayed or stranded. Waiting for a written complaint is not appropriate because supervisory follow-up is triggered by the exception and customer impact, not by the formality of the complaint.

In this section

• Series 23: Registration and Personnel
  Try 10 focused Series 23 questions on Registration and Personnel, with explanations, then continue with the full Securities Prep practice test.
• Series 23: General Broker-Dealer Activities
  Try 10 focused Series 23 questions on General Broker-Dealer Activities, with explanations, then continue with the full Securities Prep practice test.
• Series 23: Customer Activity Supervision
  Try 10 focused Series 23 questions on Customer Activity Supervision, with explanations, then continue with the full Securities Prep practice test.
• Series 23: Trading and Market Making
  Try 10 focused Series 23 questions on Trading and Market Making, with explanations, then continue with the full Securities Prep practice test.
• Series 23: Investment Banking and Research
  Try 10 focused Series 23 questions on Investment Banking and Research, with explanations, then continue with the full Securities Prep practice test.
• Free Series 23 Full-Length Practice Exam: 100 Questions
  Try 100 free Series 23 practice questions across the official topic areas, with answers and explanations, then continue with the full Securities Prep question bank.