Series 39: Sales and Employee Supervision

Series 39 Sales and Employee 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.

Topic snapshot

Sample questions

Question 1

A broker-dealer that sells only direct participation programs is reviewing who must be covered by its written supervisory procedures. Which person best matches someone whose securities activities fall within the firm’s supervisory scope?

• A. A self-directed IRA participant choosing his own DPP investment
• B. An issuer employee attending due-diligence meetings only
• C. An employee with discretion over customer DPP purchases
• D. An outside accountant preparing investor K-1 summaries

Best answer: C

Explanation: An employee of the member who exercises investment discretion over customer securities transactions is within the firm’s supervisory scope.

The key point is whether the person is acting for the member in its securities business, especially with authority over customer transactions. An employee who can decide customer DPP purchases is subject to the firm’s supervision, even if the question focuses on function rather than title.

A member firm’s supervisory scope covers its associated persons and others acting for the firm in its securities business. A person who has investment discretion over customer purchases of DPP interests is performing a core securities function for the member, so the firm must supervise that activity through its WSPs, registrations as required, and principal review.

By contrast, a customer or retirement-plan participant making decisions for his own account is not firm personnel. An unaffiliated accountant doing tax reporting work is a service provider, not an associated person of the broker-dealer based on that fact alone. Likewise, issuer personnel who attend due-diligence meetings without selling or acting under the member’s control are not automatically within the member firm’s supervisory chain. The deciding factor is the person’s role in the member’s securities business and the firm’s control over that role.

• Own-account choice A plan participant selecting his own investment is acting as a customer, not as supervised firm personnel.
• Tax service role Preparing K-1 information is an outside service function, not investment discretion or supervised securities activity for the member.
• Issuer-only presence Attending due-diligence meetings for the issuer, without selling activity or member control, does not by itself place that person in the firm’s supervisory scope.

Question 2

A DPP-only broker-dealer reviews two recommendation programs:

• Program 1: Representatives recommend DPPs in commission-based brokerage accounts and receive no separate fee for monitoring.
• Program 2: Associated persons recommend, monitor, and periodically adjust clients’ DPP holdings for a separate annual advisory fee.

Which supervisory conclusion best matches the firm’s obligations?

• A. Program 2 requires advisory-capacity analysis and advisory supervision; Program 1 remains brokerage supervision.
• B. Both programs require advisory supervision because each involves personalized DPP recommendations.
• C. Neither program requires advisory analysis because DPPs are sold through a broker-dealer.
• D. Program 1 requires advisory supervision because transaction commissions are compensation for advice.

Best answer: A

Explanation: A separate advisory fee plus ongoing monitoring and adjustment makes Program 2 potential investment-advisory activity, unlike ordinary commission-based brokerage recommendations.

The key difference is whether the DPP advice is provided for special compensation and goes beyond being solely incidental to brokerage. Program 2 adds a separate annual fee and ongoing management features, so the firm should analyze investment-adviser registration and apply advisory supervision there.

DPP interests are securities, so recommending them can become investment-advisory activity when the firm or associated persons provide advice for compensation outside the ordinary brokerage relationship. In the comparison, the decisive factor is Program 2’s separate annual advisory fee combined with ongoing monitoring and periodic adjustments. That moves the activity toward advisory-capacity recommendations and requires the firm to evaluate Investment Advisers Act registration implications and supervise the activity under an advisory framework.

Program 1, by contrast, describes traditional commission-based brokerage recommendations with no separate monitoring fee. Those recommendations still require normal brokerage supervision, but they do not, on these facts alone, create the same advisory-capacity trigger. The main takeaway is that special compensation and ongoing advice—not the DPP label itself—drive the firm’s added supervisory obligations.

• Personalized advice alone: Personalized recommendations do not automatically require advisory supervision if they remain solely incidental to brokerage and lack separate advisory compensation.
• Broker-dealer status alone: Selling DPPs through a broker-dealer does not eliminate possible adviser-status issues when the firm charges separately for ongoing advice.
• Commissions alone: Transaction-based commissions, without a separate advisory program or ongoing management role, do not by themselves create the stronger advisory-capacity trigger described here.

Question 3

A Series 39 principal at a broker-dealer that sells only DPP offerings receives an internal email from a sponsor wholesaler stating that an affiliated limited partnership will announce a major asset sale next week that is expected to increase investor distributions. The email urges representatives to contact prospects immediately, and the information has not been publicly released. The principal allows representatives to keep recommending the offering without any restriction or escalation. What is the most likely consequence?

• A. SEC and FINRA scrutiny for possible insider-trading and supervisory violations
• B. Liability would likely fall only on the sponsor wholesaler who sent the email
• C. No regulatory issue, because DPP interests are not covered by MNPI rules
• D. The issue would most likely be cured by updating sales literature disclosures

Best answer: A

Explanation: Allowing recommendations to continue after a clear MNPI red flag can trigger insider-trading-related scrutiny and separate supervisory-failure exposure.

The email presents a clear red flag of material nonpublic information: an undisclosed event expected to affect distributions. If the principal lets recommendations continue without restricting activity or escalating the issue, the firm can face insider-trading-related scrutiny as well as supervisory liability.

The core concept is that a firm cannot ignore red flags suggesting associated persons may be recommending securities while in possession of material nonpublic information. Here, the expected asset sale is both nonpublic and potentially material because it is described as likely to increase investor distributions. Once the principal receives that information, the proper supervisory response is to halt or restrict recommendations, escalate the matter, and assess whether a restricted list or other information barrier control is needed.

Private-placement or DPP status does not remove anti-fraud or MNPI concerns. A principal who permits continued solicitation after receiving such a warning creates exposure not only for the underlying misuse of MNPI, but also for failure to supervise. The closest distractor is the idea that only the wholesaler is at risk, but the broker-dealer and its principal can also be liable for allowing the conduct to continue.

• Private placement confusion fails because DPP interests are still securities, and MNPI rules are not limited to exchange-traded products.
• Sponsor-only liability fails because the broker-dealer and supervising principal also have exposure when they permit recommendations after a red flag.
• Disclosure cure fails because adding or revising sales literature does not fix the misuse of undisclosed material information.

Question 4

A Series 39 principal reviews a subscription for a SEC-registered public DPP limited partnership before acceptance. The representative collected 25% of the purchase price and noted that the member firm will finance the remaining 75% for 90 days so the customer can complete the purchase in installments. What is the best supervisory response?

• A. Approve it if the customer initials the installment arrangement.
• B. Approve it if the sponsor is told the balance will arrive later.
• C. Reject the subscription unless the customer pays in full without firm financing.
• D. Place the partial payment in escrow and accept the subscription now.

Best answer: C

Explanation: A public DPP purchase cannot be accepted on an improper installment plan financed by the member firm, so the principal should reject it unless funded compliantly.

The key red flag is the firm’s planned extension of credit to complete a public DPP purchase. The principal should stop the transaction and require compliant funding rather than rely on disclosure, sponsor notice, or escrow mechanics.

This tests supervisory response to an improper installment sale under Regulation T concepts. When a representative structures a public DPP purchase so the member firm finances the unpaid balance, the problem is the extension of credit itself. A principal who identifies that structure before acceptance should reject or halt the subscription unless the customer can pay in a compliant cash arrangement.

Disclosures do not legalize prohibited credit, and telling the sponsor does not change the nature of the transaction. Escrowing a partial payment also does not solve the issue if the subscription is being accepted based on an installment plan financed by the firm. The supervisory duty is to prevent the improper structure from being used at all, not to document it more carefully.

• Customer initials do not cure an impermissible credit arrangement.
• Sponsor notice is irrelevant because sponsor awareness does not make firm financing permissible.
• Escrow only misses the core problem: the sale is still being structured as an improper installment purchase.

Question 5

A Series 39 principal at a broker-dealer limited to direct participation programs is issuing onboarding instructions. One hire has requested a qualification-exam waiver, one registered person is CE-inactive, and one employee just completed a FINRA qualification exam. Which instruction is INCORRECT?

• A. Use the recent test taker’s memory to brief coworkers on specific questions.
• B. Keep the waiver applicant from acting as qualified unless approval is granted.
• C. Tell the recent test taker not to share remembered exam questions.
• D. Keep the CE-inactive person out of functions requiring active registration.

Best answer: A

Explanation: Qualification exam content is confidential, so recalling and sharing specific questions is prohibited even if no materials were copied.

The inaccurate instruction is the one allowing a recent candidate to reconstruct and share specific exam questions. FINRA qualification exam content is confidential, while waiver requests and CE status must be handled through formal supervisory controls.

In a supervisory setting, the principal must separate four ideas: required qualification, waiver requests, exam confidentiality, and continuing education. A person is not treated as fully qualified just because the firm believes a waiver should be granted; the firm must wait for approval. A CE-inactive registered person cannot continue performing functions that require active registration until the CE deficiency is cured. And qualification exam content remains confidential after the test session, so candidates may not disclose, memorize for reuse, or debrief others on specific questions.

The key supervisory takeaway is that internal convenience never overrides FINRA’s qualification, CE, or exam-security requirements.

• Waiver pending is acceptable because prior experience does not let the firm bypass qualification requirements while a waiver request is unresolved.
• CE inactive status must be addressed by keeping the person out of activities that require active registration until the obligation is satisfied.
• Do not share questions is accurate because exam confidentiality applies even after the candidate leaves the testing center.

Question 6

A broker-dealer markets limited partnership interests in a DPP through a private placement under Regulation D. No registration statement is filed, and the offering is sold only under the private-placement exemption. For supervisory purposes, the interests are best classified as:

• A. Exempt securities because no public registration statement was filed
• B. Non-exempt securities sold in an exempt transaction
• C. Exempt securities sold in an exempt transaction
• D. Registered securities because a broker-dealer participates in the sale

Best answer: B

Explanation: A private placement exemption applies to the transaction, but the limited partnership interests themselves are not exempt securities.

A Regulation D private placement generally makes the transaction exempt from registration, not the security itself exempt. DPP limited partnership interests are typically securities, and absent a separate statutory exemption for the security, they remain non-exempt securities sold in an exempt transaction.

The key distinction is between an exempt security and an exempt transaction. In the stem, the DPP interests are sold through a private placement under Regulation D, which is a transactional exemption from Securities Act registration. That means the issuer can sell the securities without filing a registration statement for that offering, but it does not change the underlying character of the limited partnership interests into exempt securities.

For a Series 39 principal, the supervisory point is to classify the offering correctly:

• The DPP interests are still securities.
• The sale is being made under a private-placement exemption.
• Therefore, the proper treatment is non-exempt securities sold in an exempt transaction.

The common trap is assuming that “not registered” automatically means “exempt security.” It usually means the security was sold under an exempt offering transaction instead.

• Exempt security confusion fails because Regulation D usually exempts the offering transaction, not the security itself.
• No filing equals exempt fails because the absence of a registration statement does not by itself make a security exempt.
• Broker-dealer participation fails because using a broker-dealer does not convert an exempt offering into a registered one.

Question 7

A Series 39 principal is reviewing procedures for customers who want to use assets from a former employer’s 401(k) plan to buy a DPP through a self-directed IRA. Which statement is most accurate about preserving tax-deferred status?

• A. An indirect rollover preserves full tax deferral even if the investor redeposits only the net amount received.
• B. Once employment ends, any plan distribution used for a DPP is automatically treated as a tax-free rollover.
• C. A customer may buy the DPP personally first and transfer it into the IRA later without tax consequences.
• D. A direct rollover to a self-directed IRA before the DPP purchase generally preserves tax-deferred status.

Best answer: D

Explanation: Keeping the assets in a direct custodian-to-custodian rollover allows the IRA, rather than the customer personally, to make the DPP investment.

The cleanest way to preserve tax-deferred status is a direct rollover from the former employer plan to a self-directed IRA, followed by the IRA’s purchase of the DPP. If the money is distributed to the customer first or the investment is made outside the IRA, tax deferral can be lost or reduced.

The core concept is that retirement assets should stay inside a qualified retirement arrangement while moving to the account that will hold the DPP. A direct rollover from the former employer’s plan to a self-directed IRA generally preserves tax-deferred status because the funds do not pass through the customer’s hands, and the IRA becomes the purchaser of the DPP interest.

If the distribution is made to the customer, rollover rules become riskier. Eligible plan distributions typically involve withholding, and the customer would need to complete a timely rollover and replace any withheld amount to keep the full balance tax-deferred. Buying the DPP in the customer’s personal name first is not the same as having the IRA buy it and can create taxable or prohibited handling issues. The key takeaway is to have the retirement account, not the individual, own the DPP from the start.

• Net-check problem fails because redepositing only the amount received does not roll over the full distribution when withholding was taken out.
• Personal-name purchase fails because the DPP should be purchased by the IRA itself, not acquired personally and moved later.
• Automatic rollover myth fails because ending employment does not make every distribution tax-free; the distribution still must satisfy rollover requirements.

Question 8

A Series 39 principal at a broker-dealer that sells public DPP limited partnership interests receives a signed letter from an IRA customer alleging that a representative overstated liquidity and understated fees. The customer’s account form includes a predispute arbitration clause, but the clause is buried in ordinary text and does not include the required Rule 2268 disclosures in a compliant manner. No arbitration claim or FINRA inquiry has been filed. What is the best action for the principal?

• A. Send the matter to the DPP sponsor because the subscription package came from the issuer.
• B. Open a written-complaint review and stop using the form until the arbitration clause is corrected.
• C. Rely on the customer’s signature because the arbitration clause is still enforceable.
• D. Wait for a FINRA inquiry before treating the letter as a compliance matter.

Best answer: B

Explanation: The letter requires supervisory complaint handling now, and the deficient predispute arbitration language should not continue to be used until brought into Rule 2268 compliance.

A signed customer letter alleging sales misconduct is a written complaint that requires firm supervision and review, even before any FINRA inquiry or arbitration filing occurs. Because the predispute arbitration clause is described as noncompliant, the principal should also halt its use until it is corrected under Rule 2268.

The key issue is separating three duties: complaint supervision, Rule 2268 form review, and any later regulator response. A signed customer letter alleging misstatements in the sale of a public DPP interest is a written customer complaint, so the firm must handle it through its supervisory and recordkeeping process right away. The principal should investigate the representative’s conduct and ensure the complaint is logged and reviewed.

The arbitration-clause problem is separate but immediate. If the firm’s predispute arbitration agreement is not presented in a Rule 2268-compliant manner, the principal should not continue using that form until it is corrected. A formal FINRA response is not triggered merely because the customer complained; that comes if FINRA later sends an inquiry or request. The closest wrong approach is waiting for FINRA, which ignores the firm’s immediate supervisory duty.

• Wait for FINRA fails because a written customer complaint must be supervised when received, not only after a regulator asks about it.
• Rely on signature fails because customer signature does not cure a predispute arbitration clause that is not used in a compliant Rule 2268 manner.
• Send to sponsor fails because the broker-dealer remains responsible for supervising its representatives and its own customer documentation.

Question 9

A Series 39 principal oversees a private placement DPP LLC offering. During a sponsor due-diligence call, the principal learns that the issuer is in final negotiations to acquire a major asset that would materially change projected cash flow, but the information is not yet public and has not been added to the PPM. The firm is still soliciting investors. Which action best aligns with proper supervisory handling of this information?

• A. Let representatives share the information with current prospects because it arose from a valid due-diligence inquiry.
• B. Restrict the information to need-to-know diligence and compliance staff, bar its use in solicitations, and require updated disclosure before continuing sales.
• C. Continue the offering unchanged because a pending transaction is not material until it is signed.
• D. Allow wholesalers to mention the possible acquisition if they avoid discussing projected returns.

Best answer: B

Explanation: Legitimate due diligence does not permit sales use of undisclosed material information, so the principal should contain it, escalate it, and require proper disclosure before further solicitations.

The key distinction is between obtaining information for due diligence and using undisclosed material information to sell securities. A principal should keep the information on a need-to-know basis, prevent tipping or selective use, and make sure offering documents are updated before solicitations continue.

A DPP principal may receive nonpublic information during legitimate due diligence, but that does not make the information available for sales use. If the information is material and not yet disclosed in the PPM or other approved offering materials, the principal’s job is to contain it, involve compliance and the appropriate supervisory process, and prevent representatives or wholesalers from using it with investors. That response addresses both insider-trading risk and communications risk, because selectively sharing favorable undisclosed facts can mislead investors and undermine fair disclosure in the offering process.

A sound supervisory response is to:

• limit access to personnel with a real business need,
• stop sales use of the information,
• determine whether the offering materials must be amended or supplemented, and
• resume solicitations only after disclosure is properly updated.

The closest distractors confuse legitimate inquiry with permission to tip or selectively promote the offering.

• Due diligence is not a sales exception: obtaining the information properly does not allow representatives to share it with prospects before disclosure is updated.
• Wholesaler limits still apply: avoiding return talk does not cure the problem when the core fact itself is material and undisclosed.
• Not only at signing: a pending deal can be material before final execution if a reasonable investor would view it as important.

Question 10

A Series 39 principal reviews two retirement-account DPP subscriptions. Firm procedure requires a rollover comparison memo for any recommendation to move retirement assets into a self-directed IRA.

Exhibit: Subscription-review worksheet

Account                         Decision maker              File status
Former 401(k) rolled to IRA     Customer, self-directed     DPP recommended; no rollover comparison memo
Harbor Machine Pension Plan     Independent ERISA fiduciary DPP recommended to fiduciary; fiduciary appointment,
                                                          IPS, and allocation approval in file; no participant questionnaires

Which supervisory action is fully supported by the exhibit?

• A. Approve the IRA because it is self-directed, but reject the plan because DPPs are unsuitable for ERISA plans.
• B. Hold both files until participant questionnaires are collected for each retirement investor.
• C. Approve both files because recommendations to retirement accounts do not require any additional documentation once a subscription is signed.
• D. Hold the IRA file for the missing rollover analysis, but do not delay the plan solely for missing participant questionnaires.

Best answer: D

Explanation: The self-directed IRA recommendation triggers the firm’s required rollover review, while the fiduciary-directed plan file already shows fiduciary authority and plan-level approval.

The exhibit supports different supervisory treatment for the two retirement arrangements. A self-directed IRA recommendation still requires the firm’s rollover analysis, while a fiduciary-directed plan can be reviewed at the fiduciary and plan level rather than through participant questionnaires.

The key distinction is who is making the investment decision. For the former 401(k) assets moved to a self-directed IRA, the recommendation is to the customer, so the principal should expect customer-level retirement recommendation documentation, including the firm’s required rollover comparison memo. That file is not complete.

For the pension plan, the exhibit shows an independent ERISA fiduciary made the decision and that the file includes the fiduciary appointment, the investment policy statement, and allocation approval. Under those facts, the absence of participant questionnaires does not by itself make the plan file deficient, because the recommendation was not made to individual participants.

The main takeaway is that self-directed IRA recommendations require investor-specific review, while fiduciary-directed plan recommendations are evaluated through the authorized plan fiduciary and plan documents.

• Participant-level forms are not automatically required when an independent ERISA fiduciary directs the plan investment.
• Self-directed confusion fails because a self-directed IRA does not eliminate review of a recommended rollover into a DPP.
• Blanket prohibition fails because ERISA plans are not categorically barred from DPP purchases under the facts shown.
• Signed subscription only fails because supervisory review still depends on the required retirement-account documentation.

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