4. Supervising Associated Persons (APs)

Question 1

True / False: Outside Business Activities require prior notification and approval before an associated person can engage?

Answer 1

False

1) only applies to Registered Reps
2) only requires prior notification (permission not needed)

Question 2

The rules of Outside Business Activities applies to

Answer 2

registered reps only

Question 3

If a RR is engaged in an outside activity and does NOT receive compensation, what is their duty?

Answer 3

No duty - not an outside BUSINESS activity. Can freely engage

Question 4

If a RR is engaged in an outside activity and DOES receive compensation, what is their duty?

Answer 4

Duty to provide firm prior notification (but does NOT need permission)

Question 5

True / False: Private Securities Transactions rules only apply to registered reps

Answer 5

False

Applies to any associated person (broader than RR)

Question 6

What are two theories of insider trading?

Answer 6

Misappropriation - trading on information that has been misappropriated

Duty of trust - trading on information that is known or should be known to be confidential (i.e. an M&A banker trading on MNPI)

Question 7

True / False: Insider trading only comes with criminal penalties?

Answer 7

False, violations of insider trading laws can result in both civil and criminal penalties

Question 8

What are the civil penalties for violating insider trading laws?

Answer 8

The GREATER of $1mm or treble damages (3x the value of profits earned / losses avoided)

Question 9

What are the criminal penalties for violating insider trading laws?

Answer 9

For WILLFUL violations

For natural persons - up to 20 YEARS in prison and / or a $5mm fine

For non-natural persons - fine up to $25mm

Question 10

What policies and procedures must a BD take to prevent the misuse of MNPI?

Answer 10

1) information barriers (physical and electronic)

2) restricted lists - lists of securities where firm has MNPI and no one at firm can trade

Question 11

This plan allows insiders to purchase and sell secures on a PRE-ARRANGED basis to avoid allegations of insider trading liability (safe harbor)

Answer 11

10b5-1 plans

Question 12

What are the three key components of a 10b5-1 plan?

Answer 12

1) a binding contract (before possessing the inside information)

2) specific instructions (number of shares, prices, and trading dates - formulae ok)

3) No influence over the trading once set (set and forget)

Question 13

True / False: 10b5-1 plans must be disclosed to the public

Answer 13

false - no need for public disclosure

However insiders file form 4s after the fact

Question 14

True / False: in general it is permissible to make personal loans to clients

Answer 14

false

Question 15

Can a RR make a personal loan to / take a loan from a family member (broadly defined)?

Answer 15

Yes and can do so FREELY

Question 16

Can a RR make a personal loan to / take a loan from a bank / financial institution (i.e. savings account / mortgage)?

Answer 16

Yes and can do so FREELY

Question 17

Can a RR make a personal loan to / take a loan from outside personal (friends) or business relationships?

Answer 17

Yes BUT only with permission of BD

Question 18

Can a RR make a personal loan to / take a loan from other registered reps at the BD?

Answer 18

Yes BUT only w permission of BD

Question 19

If a AP of BD A wants to open a securities / brokerage account at BD B, what steps must be taken?

Answer 19

1) AP must receive prior written consent of its BD

2) Opening firm (the “executing member”) must send duplicate trade confirmations and account statements to BD A upon written request

Question 20

BD accounts limited to the following securities do NOT require permission or duplicate statements / confirmations

Answer 20

1) mutual funds

2) variable contracts (annuities)

3) 529 plans

Question 21

In order to share in a joint account with a client, what kind of permission is required?

Answer 21

1) permission from the customer (that they want the account)

2) permission from the BD (that they are ok with the arrangement)

Question 22

True / False: In joint accounts w clients, sharing in gains and losses must be proportionate

Answer 22

True - generally speaking

Question 23

What are circumstances where the sharing in gains / losses need not be proportional?

Answer 23

1) if a RR is sharing an account with a family member (narrowly defined)

2) hedge funds / investment companies (meeting certain requirements)

Question 24

This regulation requires public companies to disclose material, non public information to investors on an equal basis

Answer 24

Reg FD

Question 25

True / false: a Reg FD disclosure is required if information is given to individuals with a “duty of trust” to the reporting company (i.e. investment bankers)

Answer 25

False

Question 26

True / false: a Reg FD disclosure is NOT required if information is given to individuals executing an NDA prohibiting trading on such information

Answer 26

true

Question 27

True / false: a Reg FD disclosure is NOT required if information is given to journalists and other members of the press

Answer 27

true

Question 28

For intentional disclosure, Reg FD requires disclosure to all investors

Answer 28

immediately / simultaneously

Question 29

For UNINTENTIONAL disclosure, Reg FD requires disclosure to all investors

Answer 29

”promptly” i.e. w/in 24 hours OR before open of trading on the next business day WHICHEVER IS LATER

Question 30

True / false: a violation of Reg FD can lead to criminal penalties

Answer 30

false - a violation can lead to civil but not criminal penalties

Question 31

Civil liabilities for COMPANIES found in violation of Reg FD are

Answer 31

The SEC may issue a cease and desist order A civil action injunction Monetary damages from $250k to $1mm (willful misconduct)

Question 32

Civil liabilities for INDIVIDUALS found in violation of Reg FD are

Answer 32

Cease-and- desist order Aiding and abetting Monetary damages of $50k

Question 33

What are the four conditions required to get safe harbor (Rule 10b-18) in connection with issuer share repurchases?

Answer 33

1) must use a single BD PER DAY to buy back shares 2) PER DAY buy backs may NOT occur at opening at trading or the last half hour of trading (for highly traded, large stocks, last 10 mins) 3) May not purchase at a price higher than 1) highest independent published bid or 2) last independent transaction price (whichever is higher) 4) may repurchase UP TO 25% of the ADTV (determined over a 4 week period)

Question 34

Upon discovering a violation or insider trading a BD must submit written report to FINRA in how many days?

Answer 34

5 BUSINESS days

Question 35

What involves the offer to sell securities by an AP which are not offered for sale by a BD?

Answer 35

A private securities transaction (PST) “Selling away”

Question 36

To effect a private securities transaction (PST) what must occur (3 things)?

Answer 36

1) prior notification by the RR to a s24 principal of the BD 2) approval from the s24 principal to engage in the PST 3) the ability for the BD to record the transaction on its books / record

Question 37

True / false: a list of shareholders obtained by a BD in a fiduciary capacity (e.g., to deliver proxies) CAN be used to solicit new business

Answer 37

false

Question 38

True / false: under Reg FD a CEO may disclose MNPI to an analyst if there is an NDA in place with the analyst

Answer 38

true

Question 39

When can insiders modify / amend 10b5-1 (insider trading) plans?

Answer 39

only when they are not in possession of any inside information (e.g., the window immediately following quarterly earnings announcement)

Question 40

When a person becomes an insider (executive, board of directors, >10% shareholder) what form must they file AND by when?

Answer 40

must file Form 3 within 10 days of becoming an insider