Try 10 focused Series 26 questions on Sales Practice Supervision, with explanations, then continue with the full Securities Prep practice test.
Series 26 Sales Practice Supervision questions help you isolate one part of the FINRA outline before returning to a mixed practice test. The questions below are original Securities Prep practice items aligned to this topic and are not copied from any exam sponsor.
| Item | Detail |
|---|---|
| Exam | FINRA Series 26 |
| Official topic | Function 2 — Supervises Associated Persons and Oversees Sales Practices |
| Blueprint weighting | 45% |
| Questions on this page | 10 |
A Series 6 registered rep at your firm is also a volunteer on a local charity committee. During a committee call, a participant who works for a financial printing vendor says ABC Corp’s quarterly earnings release (under embargo) shows a large miss and asks the group to “keep this confidential until tomorrow.” Two hours later, the rep buys ABC Corp stock in his personal brokerage account and messages another rep, “ABC is going to drop tomorrow—get ready.”
As the Series 26 principal, what is the primary supervisory risk/red flag that should drive your immediate escalation and controls?
Best answer: C
Explanation: He appears to have traded while aware of confidential earnings information obtained through a relationship imposing a duty of trust/confidence, which is a classic misappropriation red flag.
The key red flag is possible insider trading: the rep received confidential, market-moving earnings information and traded soon after, suggesting trading “on the basis of” MNPI. Because the information came from an outside source with an expectation of confidentiality, the supervisory concern aligns with misappropriation theory and requires prompt escalation and controls such as restricting trading and preserving evidence.
Insider trading risk is triggered when a person trades while aware of material nonpublic information (MNPI). Conceptually, “on the basis of” is evaluated by awareness and surrounding facts (timing, communications, pattern), not by proving the MNPI was the only motive.
This scenario fits the misappropriation theory because the rep is not an ABC corporate insider, but appears to have obtained MNPI through a relationship where confidentiality was explicitly expected (and then traded and tipped another rep). By contrast, the classical theory generally involves a corporate insider (or temporary insider) trading the issuer’s securities while breaching a duty to the company’s shareholders. The immediate supervisory response is to escalate to compliance, consider restricted/watch list action, stop further trading/tipping, and document the review.
A 72-year-old customer files a written complaint alleging she was pressured to exchange one variable annuity for another with a new 7-year surrender schedule. The OSJ receives the complaint and an exception alert shows the representative texted another rep, “We need to get our story straight before Compliance calls,” and the branch manager suggests on a chat, “Call her today and tell her to drop it.” As the Series 26 principal, you must reduce regulatory risk, protect the integrity of any investigation, and ensure proper documentation of your supervisory actions. What is the single best supervisory action to take next?
Best answer: A
Explanation: This immediately stops potential intimidation or story-coordination, preserves investigation integrity, and creates a documented control with prompt escalation.
Potential intimidation of a complaining customer and coordination among witnesses undermines an investigation and can itself be a serious conduct violation. The principal’s best next step is to immediately stop the behavior, preserve the record, and route the matter to Compliance/Legal for independent handling and any required reporting. A written directive also creates clear documentation of supervisory controls and expectations.
Anti-intimidation/anti-coordination principles require firms and associated persons to avoid interfering with investigations—internal or regulatory—by pressuring customers or witnesses, retaliating, or “getting stories straight.” Here, the manager’s suggested customer contact and the reps’ “get our story straight” message are red flags of potential intimidation and witness-coordination.
The best supervisory response is to promptly:
The key takeaway is to isolate the investigation and prevent interference immediately, not after facts are “aligned” or a regulator asks questions.
Which activity is most clearly an example of prohibited mutual fund breakpoint avoidance?
Best answer: A
Explanation: Intentionally dividing a purchase to avoid reaching a breakpoint is a classic breakpoint-avoidance practice.
Breakpoint avoidance is a prohibited sales practice where a representative deliberately structures transactions so the customer does not receive an available breakpoint discount. The hallmark is breaking up what is effectively one purchase into separate smaller purchases to stay below a breakpoint level.
Mutual fund breakpoints provide reduced front-end sales charges as the purchase amount increases. Breakpoint avoidance occurs when a representative intentionally prevents a customer from qualifying for a breakpoint discount, typically by splitting a customer’s intended larger purchase into multiple smaller transactions or otherwise failing to apply available discount mechanisms. By contrast, applying permitted discount methods (such as rights of accumulation, letters of intent, and eligible account aggregation/householding) is generally appropriate when properly disclosed, documented, and consistent with firm procedures. The key supervisory focus is whether the transaction was structured to deny, rather than achieve, the customer’s entitled sales-charge reduction.
A product sponsor offers registered reps an all-expenses-paid trip if they sell at least $50,000 of one specific mutual fund to retail customers during a month. Which supervisory control most directly addresses the non-cash compensation risk created by this offer?
Best answer: C
Explanation: Controls should prevent non-cash awards from being conditioned on selling a particular security to retail customers and require documented supervision.
Non-cash compensation arrangements can improperly influence recommendations when tied to selling a specific product. A core supervisory control is requiring prior principal approval and structuring (or rejecting) incentives so eligibility is not based on sales of a particular mutual fund to retail customers. This directly mitigates the sales-practice conflict the trip creates.
The key risk with trips, prizes, and awards is that they can create a conflict of interest and pressure associated persons to favor a particular product, potentially undermining best-interest and suitability/Reg BI processes. Effective supervision focuses on preventing non-cash compensation programs that are conditioned on the sale of specific securities to retail customers and on documenting oversight.
Practical controls commonly include:
Logging or tax handling may be necessary administrative steps, but they do not, by themselves, address the core conflict created by product-specific sales qualifiers.
A registered representative returned to the firm after a FINRA suspension for unsuitable mutual fund switching. The firm’s WSPs required a written heightened-supervision plan for any rep returning from a sales-practice suspension, but the OSJ manager did not implement the plan and did not perform the required trade reviews. Within three months, the rep completed multiple variable annuity exchanges that generated new commissions and resulted in customer complaints alleging unnecessary surrender charges.
As a result of this supervisory failure, which outcome is most likely?
Best answer: A
Explanation: Failure to implement required heightened supervision can lead to firm/supervisor fines and suspensions, and repeated misconduct can result in stronger sanctions on the rep, including a bar.
Not having procedures is a problem, but not following your own written heightened-supervision requirements is a classic failure-to-supervise issue. FINRA can discipline the firm and the responsible principal(s) with fines and suspensions, and it can impose additional sanctions on the representative for repeat sales-practice violations, potentially including a bar in serious cases.
When a firm’s WSPs call for heightened supervision—especially after a rep returns from a prior sales-practice suspension—supervisors must implement and document those controls (e.g., targeted transaction review, pre-approval, exception reporting). If the firm fails to carry out its required reviews and the rep repeats the same type of misconduct, FINRA commonly treats this as a failure to supervise and may impose meaningful sanctions on multiple parties.
Possible outcomes include:
The key takeaway is that supervisory/control failures can expand regulatory exposure beyond the producing rep to the firm and the supervising principals and can affect individuals’ ability to remain registered through suspension or bar.
You are the Series 26 principal reviewing a draft retail social media post for a mutual fund. Firm WSPs require any retail communication that includes performance to (1) present standardized average annual total returns for 1-, 5-, and 10-year (or since inception) periods as of the most recent quarter-end and (2) reflect the effect of fees and sales charges. Which supervisory interpretation is best supported by the draft below?
Exhibit: Draft post (not yet published)
ABC Equity Fund (Class I) returned 18.2% in 2025.
Get in before the next rally.
Source: Morningstar
Best answer: B
Explanation: The post cherry-picks a single period, omits standardized fee-adjusted performance, and implies future gains.
The exhibit presents only a single calendar-year return and does not provide the standardized average annual total returns required by the firm’s WSPs, nor does it indicate performance reflects fees and charges. In addition, the wording encourages an expectation of future performance (“Get in before the next rally”), which can make the presentation misleading.
A principal must ensure mutual fund performance communications are fair and balanced and not misleading. A single highlighted period (like one calendar year) can “cherry-pick” favorable results unless it is accompanied by the standardized average annual total returns for required time periods as of a stated, current measurement date (commonly quarter-end) and presented in a way that reflects the effect of fees and charges. Separately, performance discussions cannot be framed to imply investors should expect similar or better results in the future; promotional language that suggests an imminent “next rally” can create an unjustified expectation. The appropriate supervision is to require revisions before approval and use.
As the Series 26 principal at an OSJ, you are reviewing a registered representative’s recommendation to a new retail customer to purchase Class A shares of a mutual fund in a brokerage account. The rep documented the share-class/breakpoint analysis and provided the fund prospectus.
Exhibit: E-delivery exception report (same day as recommendation)
Acct 7741 Retail Recommendation: MF purchase
Form CRS delivery status: NO RECORD
Prospectus delivery status: SENT
Under the firm’s WSPs, what is the best next supervisory step before approving the recommendation?
Best answer: D
Explanation: Form CRS must be delivered to retail investors and the firm should evidence delivery before allowing the recommendation to proceed.
Form CRS is a required relationship summary for retail investors that explains the broker-dealer relationship, key fees, conflicts, and standards of conduct. When an exception report shows no delivery record, the supervisor should pause approval, ensure Form CRS is delivered promptly, and retain evidence of delivery before the recommendation is finalized.
Form CRS is designed to give retail investors a short, standardized summary of the firm’s relationship and services, fees and costs, conflicts of interest, applicable standards of conduct, and where to find more information. Supervisory controls should ensure Form CRS is delivered at the required point in the relationship (including in connection with a recommendation where delivery hasn’t been evidenced) and that the firm can demonstrate delivery.
In this scenario, the key supervisory workflow is:
Delivering after execution is too late for a missing pre-recommendation delivery record, and AML escalation is not the appropriate channel for this disclosure control failure.
Which statement is most accurate regarding a private securities transaction (PST) and an associated person who participates without providing required notice/obtaining approval?
Best answer: B
Explanation: A PST involves securities activity away from the firm, and failing to provide required notice/approval is a selling-away violation with disciplinary consequences.
A private securities transaction is participation in a securities transaction outside the scope of the member firm’s regular business. FINRA expects prior written notice to the firm (and firm approval/supervision when compensation is involved). Engaging in the activity without following these requirements is commonly treated as prohibited “selling away,” creating disciplinary exposure for the representative and supervisory issues for the firm.
The core concept is that a PST is securities activity conducted “away from” the broker-dealer—i.e., not executed through, recorded on, or supervised by the firm as part of its regular business. Because away activity can bypass suitability/Reg BI processes, books-and-records capture, and supervision, FINRA requires the associated person to provide advance written notice to the firm, and the firm must decide whether to approve the activity and, if approved (particularly where compensation is involved), supervise it and maintain appropriate records.
Participating without the required notice/approval is a classic selling-away scenario and can lead to internal discipline (including termination) and regulatory sanctions, and it typically triggers heightened supervisory and remediation steps by the principal.
A broker-dealer allows registered reps to send customer emails and firm-approved archived texts about mutual funds and variable annuities. The Series 26 principal wants to move from 100% pre-review to a risk-based post-review model and delegate day-to-day review to OSJ supervisors.
Which action best aligns with durable supervision standards for correspondence review and delegation?
Best answer: B
Explanation: A risk-based post-review program is acceptable when qualified supervisors review higher-risk items and the firm keeps evidence (who/when/outcome) and escalation records.
A risk-based correspondence program can replace 100% pre-review if it is reasonably designed to detect problematic communications and escalates higher-risk items for qualified principal review. Delegation is permitted, but the firm must retain clear evidence of supervisory review (reviewer identity, timing, disposition, and follow-up). Surveillance tools support supervision but do not replace it.
Correspondence (including email and archived texting) is typically supervised using a risk-based approach that matches review intensity to risk. Moving from pre-review to post-review can be reasonable when the firm uses surveillance to identify higher-risk messages (e.g., product recommendations, performance claims, replacements/exchanges, breakpoint/share-class discussions) and routes them to appropriately registered OSJ supervisors for timely review.
Even when review is delegated, the firm remains responsible for supervision and should retain auditable records showing:
A key takeaway is that retention/archiving and rep attestations are controls, but they are not substitutes for documented supervisory review by qualified personnel.
During an OSJ review, a rep submits a purchase of Fund Family X Class A shares for $48,000. The customer states she has $10,000 already invested at another firm in the same fund family in her spouse’s IRA and plans to invest an additional $25,000 within the next 13 months. Fund Family X permits combining eligible household accounts for rights of accumulation (ROA) and permits letters of intent (LOIs).
Which supervisory action or statement is INCORRECT under these facts?
Best answer: D
Explanation: Breakpoint discounts should not be applied based solely on an unverified verbal assertion of ROA/LOI eligibility.
Breakpoint eligibility must be supported by reasonable documentation before the discount is applied. ROA generally requires evidence of existing eligible holdings, and LOI pricing generally requires an executed LOI and related records. A principal should not approve discounted pricing based only on a customer’s unverified verbal representation.
Supervision of breakpoint discounts focuses on ensuring the customer receives the appropriate sales charge reduction and that the firm can substantiate why the discount was applied. For ROA, the rep/principal should verify and document eligible existing holdings (including at other firms if the fund family permits it) and the relationship that supports household aggregation. For an LOI, the firm should obtain an executed LOI and retain supporting records consistent with the fund’s LOI terms and the firm’s WSPs. Applying a breakpoint discount without documentation creates a supervisory and books-and-records problem and can result in under- or over-charging sales loads. The key control is “verify and document before applying,” not “apply now and fix later.”
Use the Series 26 Practice Test page for the full Securities Prep route, mixed-topic practice, timed mock exams, explanations, and web/mobile app access.
Use the Series 26 Cheat Sheet on SecuritiesMastery.com when you want a compact review before returning to the FINRA Series 26 Practice Test page.