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SIE Exam > Business Conduct Rules > Flashcards

Business Conduct Rules Flashcards

This deck focuses on various business practice rules within the securities industry, including insider trading, anti-money laundering procedures, communications with the public, and business conduct rules.

1
Q

Documents that can confirm identity of a new customer as specified by a firm’s Customer Identification Program

A

Unexpired driver’s license or passport

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2
Q

The organization that maintains a list of known or suspected terrorists that must be checked when a firm verifies a new customer’s identity

A

US Treasury (Office of Foreign Assets Control – OFAC)

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3
Q

When required, a currency transaction report (CTR) is filed with

A

U.S. Treasury Department

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4
Q

The cash amount that triggers the filing of a currency transaction report

A

$10,000

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5
Q

When required, a Currency Transaction Report must be filed within

A

15 calendar days

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6
Q

The Act that requires the filing of Currency Transaction Reports by financial institutions

A

Bank Secrecy Act

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7
Q

How long municipal advertising by broker-dealers must be kept on file

A

Four years

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8
Q

When municipal advertising must be approved

A

Prior to use

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9
Q

Maximum value of gifts permitted from municipal dealers in one year to persons other than employees

A

$100

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10
Q

When written disclosure of municipal control relationships must be made

A

No later than at the time of confirmation

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11
Q

Business activities outside a representative’s relationship with a member firm

A

Outside business activities

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12
Q

Transactions in securities that are not sponsored by a representative’s member firm. Also called selling away.

A

Private securities transactions

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13
Q

Required from a representative who wishes to participate in outside business activities

A

Prior written notice to the member firm

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14
Q

Required for a representative’s participation in private securities transactions

A

Written notice to firm; approval of firm required if rep is to be compensated

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15
Q

Required by member firms for their representatives that wish to open a brokerage account with another member firm

A

Prior written permission to employee and duplicate confirmations and account statements if requested

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16
Q

Associated persons of member firms that open brokerage accounts with other firms must

A

Get prior permission from the employer firm Provide written notice of their employment with another firm to the firm opening the account

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17
Q

Prohibited transaction in which representatives ensure customers that securities transactions will not lose money

A

Guarantee against loss

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18
Q

Three requirements for sharing in customer accounts

A

Written permission from the member firm; written authorization from the customer; sharing in direct proportion to financial contributions made to the account

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19
Q

Joint account that is not subject to account sharing rules

A

Account with immediate family members

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20
Q

Limit on gifts and gratuities given by a firm or its associated persons to employees or representatives of other firms

A

$100 per year

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21
Q

Required when a representative receives a written customer complaint

A

Inform supervisor or principal

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22
Q

Situations where continuing commissions are permitted if a written contract is in place

A

Compensation upon retirement for business placed while employed; payment to beneficiaries upon the death of the registered representative

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23
Q

Amends the Act of 1934 and specifies penalties for the use of non-public material information

A

Insider Trading and Fraud Enforcement Act of 1988

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24
Q

The barrier that must be established between departments to prevent a free flow of sensitive information

A

Firewall (Information barrier, Chinese Wall)

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25
Q

Three stages of money laundering defined by the Bank Secrecy Act

A

Placement, Layering and Integration

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26
Q

Regulation that required broker-dealers to establish written anti-money laundering programs and designate an anti-money laundering compliance officer

A

USA Patriot Act

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27
Q

Civil penalties for violation of the Insider Trading and Securities Fraud Enforcement Act of 1988

A

300% of profits made or losses avoided (i.e. treble damages)

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28
Q

Limit on gifts and gratuities given by a firm or its associated persons to employees or representatives of other firms.

A

$100 per year

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29
Q

Type of plans member firms must maintain to deal with significant business disruptions

A

Business Continuity Plan

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30
Q

FINRA communications category of static social media like Facebook pages

A

Retail communication subject to approval before use

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31
Q

FINRA communications category for email, chat rooms, and instant messages

A

Correspondence subject to spot checks

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32
Q

Regulation that required broker-dealers to establish written anti-money laundering programs and designate an anti-money laundering compliance officer

A

USA Patriot Act

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33
Q

A new associated person is required to get written consent to hold accounts at other financial institutions within how many days of employment with a member firm?

A

30 calendar days

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34
Q

Prior written consent from an employing member firm is NOT required to hold accounts at other financial institutions for what types of securities?

A

Unit investment trusts, mutual funds, or annuities

35
Q

An associated person must get written permission from a new employer firm for a brokerage account held by a financially independent adult child at another financial institution. T or F?

A

FALSE. No permission is required for accounts of children or spouses if the associated person has no control over or beneficial interest in the account.

36
Q

AML compliance program

A

Under the PATRIOT Act, firms must establish AML compliance programs and have a designated AML compliance officer to oversee these anti-money laundering policies, procedures, and training.

37
Q

anti-money laundering (AML) regulations

A

Rules and reports created under the Bank Secrecy Act to help prevent money laundering and other financial crimes. These safeguards include currency transaction reports, suspicious activity reports, and anti-money laundering compliance programs.

38
Q

Bank Secrecy Act (BSA)

A

A federal law that requires financial institutions to help prevent money laundering.

39
Q

borrowing from and lending to customers

A

Occurs when a registered representative wants to personally loan or borrow money from a client. For this activity to be permitted, the firm must have written supervisory procedures in place to allow for it. In addition, loans involving a client that is a bank or a family member do not require permission, whereas all other client loans based on an outside business or personal relationship do.

40
Q

business continuity plan

A

A written plan required by FINRA to ensure that business functions are continually available and that a broker-dealer can continue to meet its obligations to its customer in the case of an emergency or other significant disruption.

41
Q

conflict of interest

A

A situation in which a broker-dealer or registered representative has competing interests or loyalties. When a transaction for which a conflict exists is effected, the customer must receive verbal disclosure of the conflict prior to the trade, and written disclosure of the conflict must appear on the trade confirmation.

42
Q

continuing commissions

A

Allows a retired registered representative to receive commissions after retirement from customer accounts that were opened prior to the retirement. This activity is permitted as long as there is a contract in place detailing the arrangement.

43
Q

control relationship

A

Occurs when a firm selling securities is controlled by, controls, or is under common control with the issuer. This is a conflict of interest that must be disclosed to the customer prior to the trade and printed on the trade confirmation.

44
Q

correspondence

A
  1. One of the three categories of communications under FINRA rules, correspon-dence includes any written or electronic communication distributed to 25 or fewer retail investors within any 30-calendar-day period.
  2. Under MSRB rules, correspondence is any written or electronic message distributed to less than 25 persons within a 90-day period.

According to both the MSRB and FINRA, correspondences must be supervised and spot-checked, but do not require principal approval before first use.

45
Q

currency transaction report (CTR)

A

A report filed by financial institutions with FinCEN for any cash deposits in excess of $10,000 in a single day. It must be filed within 15 days of deposit.

46
Q

customer complaint

A

Written statement from a customer that alleges a grievance against a broker-dealer or its representatives. Written, not verbal, customer complaints must be forwarded to a principal.

47
Q

customer identification program (CIP)

A

The PATRIOT Act requires firms to establish a CIP to help them verify a customer’s identity promptly after an account is opened.

48
Q

do-not-call list

A

A list of individuals that cannot be cold-called by a broker-dealer to be persuaded to become new clients of the firm.

49
Q

duty of trust

A

Applies when two people have a history of sharing sensitive information in confidence and the recipient of the information should understand that it should be kept confidential. If the recipient breaks the duty of trust and trades on nonpublic information, that person is liable for insider trading.

50
Q

FinCEN

A

A division of the US Treasury Department that is responsible for administering the Bank Secrecy Act and helping to prevent money laundering and other financial crimes.

51
Q

gift limit

A

Allows a broker-dealer or its associated persons to give or accept a gift of no more than $100 per year from a client. This limit does not include entertainment expenses, such as meals or sporting events, as long as the rep attends and that the cost is not so egregious as to appear improper.

52
Q

guaranteeing against loss

A

A prohibited activity where a broker-dealer or registered representative promises to reimburse a customer for any investment losses.

53
Q

interactive content

A

Social media content that is delivered in real-time, such as a tweet or Facebook comment. Because it is not practical for this information to be pre-approved prior to first use, it is instead supervised and spot-checked.

54
Q

integration

A

The third and final phase of money laundering, where money that came from illicit origins is fully mixed in with legitimate funds.

55
Q

institutional communications

A

One of the three categories of communications defined under FINRA rules, these include any written or electronic communication distributed to institutional investors only. These communications must be supervised and spot-checked, but do not require principal approval before first use.

56
Q

insider trading

A

A prohibited practice in which a person trades on and benefits from nonpublic information. Both the person who provides the information and the person who trades on the information have potential liability.

57
Q

information barriers

A

Firewalls at a broker-dealer that prevent sensitive, nonpublic information from flowing to different departments (e.g., from investment bankers to research analysts).

58
Q

investor brochure

A

An educational document provided by the MSRB and made available to the customers of municipal firms. It summarizes the key principles of the MSRB’s customer protection rules and provides direction for how to resolve disputes and initiate a formal regulatory proceeding.

59
Q

layering

A

The second phase of money laundering, where money is transferred through complex financial transactions, such as wire transfers, to separate the funds from their illegal origins.

60
Q

money laundering

A

The process of making illegal money obtained from criminal activity appear legal. There are three stages of money laundering:

  1. placement, which is the process of depositing illegal funds into financial institutions;
  2. layering, which is when money is transferred through complex financial transactions to separate the funds from their illegal origins; and
  3. integration, which is when these funds are mixed with legitimate funds.
61
Q

misappropriation theory

A

Extends liability for insider trading violations to those who steal information from their employer and trade on that information in any stock, not just their employer’s stock.

62
Q

municipal finance professional (MFP)

A

An associated person of a municipal securities firm who is engaged in the sales, trading, underwriting, research, solicitation, or supervision of municipal securities business. These individuals are subject to political contribution rules and can contribute a maximum of $250 per election to candidates they are eligible to vote for. Persons who are solely involved in retail sales to individuals are not considered MFPs.

63
Q

Office of Foreign Assets Control (OFAC)

A

A department of the US Treasury that compiles and maintains the Specially Designated Nationals list, which is a list of persons that US citizens and businesses are prohibited from conducting business with. Any attempted transactions with a person on this list must be blocked and OFAC must be notified within 10 days.

64
Q

outside business activity (OBA)

A

Occurs when a registered representative has a second job away from his broker-dealer. This requires prior notification to the rep’s firm.

65
Q

payments to unregistered persons

A

A prohibited practice in which individuals who are not registered with a broker-dealer are compensated in connection with securities business.

66
Q

pay-to-play

A

A prohibited practice within the municipal securities industry where municipal firms and their representatives make political contributions to issuers in exchange for receiving municipal underwriting and advising business opportunities in return.

67
Q

placement

A

The first phase of money laundering, where illegal funds are deposited into financial institutions. This is typically the part of the process that is easiest to detect.

68
Q

post-filing with FINRA

A

The requirement that certain retail communications be filed with FINRA within 10 business days after first use with the public. This includes all retail communications relating to CMOs, DPPs, structured products, options, and certain investment companies.

69
Q

placement

A

The first phase of money laundering, where illegal funds are deposited into financial institutions. This is typically the part of the process that is easiest to detect.

70
Q

pre-filing with FINRA

A

The requirement that certain retail communications be filed with FINRA at least 10 business days before first use with the public. This includes all retail communications for FINRA firms in their first year of business as well as certain retail communications relating to investment companies.

71
Q

private securities transactions

A

Occurs when a registered representative conducts securities-related business away from her firm. This requires prior notification to her firm and, if any compensation is received, permission.

72
Q

restricted list

A

A list of securities in which employees of a broker-dealer cannot trade.

73
Q

retail communications

A

One of the three categories of communications defined under FINRA rules, retail communications include any written or electronic communication distributed to more than 25 retail investors within any 30-calendar-day period. These require principal approval before first use.

74
Q

sharing in customer accounts

A

Occurs when a registered representative wants to have a joint investment account with a customer. It requires permission of both the broker-dealer and the customer, and the sharing must be proportionate to each person’s financial contributions to the account.

75
Q

Specially Designated Nationals (SDN) list

A

A list of individuals, entities, and countries with whom US citizens and businesses are prohibited from conducting business with. Any attempted transactions with a person on this list must be blocked and the US Treasury Department’s Office of Foreign Assets Control must be notified within 10 days.

76
Q

static content

A

Social media content that does not change very often, such as website copy or Facebook profiles. This content is treated as retail communications and must be approved by a principal before first use.

77
Q

suspicious activity report (SAR)

A

A report filed by broker-dealers with FinCEN within 30 days of discovering suspicious activity by a customer that indicates that customer may be engaging in money laundering or other financial crimes. Firms cannot disclose to the customer that this filing is being made.

78
Q

telemarketing rule

A

A regulation that sets limitations on outbound calling activities to persons who are not current customers of the firm. The rule states that cold calls can only be made between 8:00 am and 9:00 pm in the local time of the person being called. Additionally, before making a cold call, the caller must ensure that the potential client is not on a do-not-call list.

79
Q

The Insider Trading and Securities Fraud Enforcement Act of 1988

A

A federal law that established additional regulations to prevent insider trading, such as creating information barriers, keeping restricted lists, and other supervisory procedures to prevent the misuse of material, nonpublic information.

80
Q

transactions with other members

A

Occurs when an employee at a broker-dealer wants to open a bro-kerage account at another firm. To do so, the employee must receive prior written consent from her employer and notify the opening firm of his employment status. In addition, the opening firm must send the employer duplicate account statements and trade confirmations upon written request from the employer.

81
Q

treble damages

A

The civil penalty for insider trading, which is equal to three times the profits gained or losses avoided.

82
Q

USA PATRIOT Act

A

A federal law enacted in response to the September 11, 2001, terrorist attacks that aims to strengthen anti-money laundering rules by requiring the creation of AML compliance and customer identification programs, and prohibiting transactions with individuals and entities on lists of known or suspected terrorists.

83
Q

watch list

A

A current list of securities that are carefully monitored by the broker-dealer to ensure that no wrongdoing or insider trading is taking place surrounding them.

84
Q

What is the system created after 9/11 for customer identification?

A

CIP - Customer Identification plan

Required Post-9/11, all customers’ identification must be verified through this system promptly after account opened. If a customer cannot be identified, the account is not closed, but identification must ultimately be verified.

SIE Exam (14 decks)

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