General Securities Sales Supervisor (Series10) Practice Exam

In relation to the 5% Policy, which of the following applies?

1. It applies to riskless and proceeds transactions

2. It applies to primary distributions only

3. It applies to all transactions in the primary market

4. It applies to all transactions in municipal securities

The correct answer is: It applies to riskless and proceeds transactions

The 5% Policy is a guideline established by the Financial Industry Regulatory Authority (FINRA), which serves to provide fair pricing and adequate disclosure in the trading of municipal securities and the secondary market of different securities. It is primarily focused on ensuring that customers receive a fair market value when transactions are executed on their behalf. The correct response acknowledges that the 5% Policy applies to both riskless principal transactions and proceeds transactions. Riskless principal transactions occur when a broker-dealer buys or sells a security and immediately offsets the trade by entering into a simultaneous buy or sell order, thereby taking no market risk. Proceeds transactions involve selling a security and using the proceeds to purchase another security. In these scenarios, the policy ensures that the broker-dealer does not charge excessive markups or markdowns, maintaining a standard that reflects fair and consistent pricing practices regardless of whether the trades are considered riskless or involve proceeds from another transaction. This is vital for maintaining investor trust and encouraging transparency within the market. In contrast, the other options inaccurately define the scope of the 5% Policy. It does not limit its application strictly to primary distributions, nor does it encompass all transactions in the primary market or exclusively apply to municipal securities, as the policy serves a broader