Ch 2 S1 Broker-Dealer supervision

Question 1

GENERAL SUPERVISORY RULES

Answer 1

members must establish, maintain, and enforce
written supervisory procedures over activities of all
registered personnel

copy of written procedures is kept in each OSJ

Question 2

OFFICE OF SUPERVISORY JURISDICTION (OSJ) • office where the following may occur:

Answer 2

order execution or market making

structuring of new issue offerings

final approval of new accounts

review and approval of customer orders, ads,
sales literature

responsibility for supervising activities at
one or more branch oflices

Question 3

OFFICE OF SUPERVISORY JURISDICTION (OSJ) • office where the following may occur,

other factors when designating a finn as an OSJ
include whether:

Answer 3

registered persons at the location engage in
retail sales with customers;

a substantial # of registered persons conduct
or are supervised from the location;

the location is geographically distant from
another of the firm’s OSJ;

the member’s registered persons are
geographically dispersed; and

the securities activities of the location are
diverse/complex

Question 4

generally, firms must have an on-site #24
principal at the OSJ, though an exception is
granted if the member finds it needs to assign a
principal to supervise 2 or more OSJs
here, the member must consider:

Answer 4

whether the principal is qualified by
experience to supervise the activities
and associated persons in each
location;

• whether the principal has the capacity
and time to supervise;

• whether the principal is a producing
rep having less time, then, to
supervise;

• whether the OSJ locations are in close
proximity to ensure the principal is
physically present at each location on
a regular basis: and

• the nature of the activities at each
location

regardless, the member must document in its
WSPs whether it has one #24 principal per
OSJ or one supervising a number ofOSJs;

and must justify why it is using one
principal to supervise multiple OSJs

Question 5

all transactions effected by the RRs must be

Answer 5

reviewed and approved by the registered
principal (Series #24)

Question 6

all correspondence (incoming and outgoing)
regarding investment banking or other securities
business received from or sent by the RRs is
reviewed by the registered principal

Answer 6

the review includes procedures that identify
and handle customer complaints
NOTE: advance written approval of
correspondence sent out by the RRs is only
required if the finn does not implement a
“Correspondence/Communications
Compliance” program

Question 7

Periodic Account Inspection occurs

Answer 7

at branches

Question 8

SUPERVISION OF PRODUCING BRANCH MANAGERS

Answer 8

every person selling/soliciting must be
supervised, including BOMs (Branch Office
Managers)

• BOMs must have their account activity
supervised by a person who is either senior to,
or is independent of, them

i.e. a regional sales manager, and if it is a
small firm without this person, it would be
carried out by a person in the firm’s
compliance dept.

to be an “independent person”, the person:
• 1) cannot report to the producing
manager
• 2) must be located in a different office
from the producing manager
• 3) cannot have supervisory
responsibility for the activity being
reviewed (i.e. the compensation
cannot be based on the producing
manager”s sales)
• 4) must alternate responsibility every
2 years or less

Question 9

Non-Supen,isory branches (where the branch
does not supervise other branches) must be
inspected

Answer 9

every 3 years

Note: Supervisory Branches are inspected
annually

each completed inspection must be dated
and documented in writing

Question 10

Branch Inspection Reports
must cover the (at a minimum):

Answer 10

• safeguarding of customer funds and
securities;

• maintenance of books and records;

• supervision of customer accounts
serviced by branch managers;
• transmittal of funds between the r.r .

and customer; and the customer and
third parties;

• validation of customer account
changes;and

• validation of changes in customer
account information

note that the resident branch manager cannot
perform the inspection ( or prepare the
report)- it must be done by an independent,
non-resident Series #24 licensed individual
( unless the finn is small and has only 1
office)

Question 11

Risk-Based Supervision
FINRA allows a member to use risk-based
criteria in its supervisory procedures to:

Answer 11

• determine the authenticity of customer
transfer instructions;

• comply with the requirement that a
principal review all transactions
relating to investment banking or
securities business of the member;

• decide the extent to which additional
policies and procedures are needed for
correspondence

Question 12

Annual Reviews:

Answer 12

of each OSJ by main office of firm

of businesses in which firm engages to
detect violations

with each RR and each registered principal
of compliance issues relevant to the person’s
activities

the review can be done individually or
collectively; and can be done remotely (i.e.
teleconference) or in person, but the review
must be “interactive”

• the finn must keep a record of the
• person conducting the annual
compliance review (who would
be either the #9/#10 or the #24);
• topics discussed (which must be
regulatory in nature. NOT salesrelated);
and
• the participants

Question 13

Applicant’s Registration Review
a Series #24 is responsible for investigating
and ascertaining the applicant’s:

Answer 13

character,
business repute, qualifications, & experience
the #24’s signature on the U-4 certifies that
this occurred
• if the applicant was previously
associated with another member firm
• the principal must get a copy of the
person’s U-5 and review it within 60
daysof filing the U-4 for the
individual

Question 14

Applicant’s Registration Review

Answer 14

the OSJ prepares and delivers Continuing
Education (Firm Element) annually to all RRs
(except those who don’t deal with public)

Question 15

Regulatory Element for Continuing Education

Answer 15

must be completed by every registered
person on the 2nd anniversary of registration
and every 3 years thereafter

if the registrant does not complete the
training, his license becomes inactive until
completion occurs

• during the suspension period. the
individual may not be compensated in
ANY form by the member firm

• a separate file of written customer complaints.
with any action taken by the member, must be
kept at each OSJ and kept on file for 4 years
also, members must electronically file
information onALL customercomplaints
with FINRA quarterly

Question 16

CHIEF COMPLIANCE OFFICER (CCO) is…

Answer 16

a registered Series #24 Principal must be
assigned as the CCO who is responsible for
establishing, maintaining, reviewing. and testing
the firm’s supervisory procedures

Question 17

ANNUAL C0MPLIANCE CERTIFICATION

Answer 17

the Chief Executive Officer (not the CCO) must
sign an annual certification filed with FINRA
which states that the member:

has procedures in place to achieve
compliance with FINRA and MSRB rules,
and federal securities laws;

modifies its procedures for relevant rule
changes; and

tests the effectiveness of the procedures

• thus, FINRA can go after the CEO AND CCO
for any compliance-related shortfalls

Question 18

BUSINESS CONTINUITY PLAN

Answer 18

member firms must create and maintain a business
continuity plan that identifies procedures that must
be followed in an emergency or business disruption

• there is NO requirement to file the plan with
FINRA, but it must be available upon FINRA
request; and a copy of the plan must be
maintained at a secure, off-site facility

• if there is a material change in a firm’s
operations, the plan must be updated

• the plan is approved by a Series #24 Principal;
and there is an annual #24 principal review of
the plan

Question 19

the Business Continuity Plan must cover:

Answer 19

data back-up and recovery; mission critical
systems; financial and operations assessments;
alternate communications between member and
customers - and member and employees;
alternate physical location of employees; critical
business, bank, and counter-party impact;
regulatory reporting and communications with
regulators; and assurance that customers have
prompt access to their funds in the event that the
member ceases business

for introducing members (that introduce
their accounts into a clearing firm), the
clearing firm normally performs these
functions, HOWEVER, a plan must still be
created by the finn (the plan COULD use
information found within the clearing firm’s
continuity plan for this purpose)

Question 20

AT ACCOUNT OPENING, CUSTOMERS MUST BE
GIVEN DISCLOSURE,

Answer 20

in writing, ABOUT how the
FIRM’S CONTINUITY PLANS address the possibility
of business disruption and the proposed response
• the disclosure is also on the firm’s website and
must be mailed to customers upon request

Question 21

member FIRMS MUST DESIGNATE 2 EMERGENCY
SERIES #24 CONTACTS to FINRA

Answer 21

if the firm is a sole proprietorship, the second
contact is also an employee of the firm; or if
there is only 1 employee, the second contact
should be an individual with knowledge of the
member’s business operations (i.e. lawyer,
accountant, … )

this information must be filed electronically
through the FINRA CONTRACT SYSTEM and
must be updated promptly in the event of a
material change

to ensure accuracy. the member must review/update
infonnation (as needed) promptly, but no later than
30 days after the change

also, the member must review and update the info
within 17 business days after the end of each year

Question 22

CONDUCT OF CUSTOMER ACCOUNTS

Answer 22

SUITABILITY

CANNOT GUARANTEE CUSTOMER AGAINST LOSS

CANNOT SHARE IN CUSTOMER ACCOUNT UNLESS
IN DIRECT PROPORTION TO THE CAPITAL
CONTRIBUTED AND PRINCIPAL APPROVES

CANNOT BORROW FROM/ LEND To CUSTOMERS

CANNOT CHARGE FOR INVESD1ENT ADVICE, BUT
CAN CHARGE FOR CLERICAL SERVICES

B-D MUST PROVIDE UPON CUSTOMER REQUEST:

CANNOT BUY OR SELL UNLESS THE FIRM
BELIEVES CUSTOMER CAN SETTLE IN 2 BUSINESS
DAYS

COMPLETION OF A TRANSACTION {PURCHASE OR
SALE)

ORDER TIX MARKED LONG/SHORT

CORRESPONDENCE AND TRANSACTIONS

GIFT LIMIT= $100

OUTSIDE WORK

PROHIBITED ACTS:

CONTROL RELATIONSHIPS

well, that was a crap ton of stuff on a card…

Question 23

CANNOT GUARANTEE CUSTOMER AGAINST Loss

Answer 23

though one can recommend repurchase
agreements for exempt securities, as this is NOT
a prohibited guarantee

Question 24

CANNOT SHARE IN CUSTOMER ACCOUNT UNLESS
IN DIRECT PROPORTION TO THE CAPITAL
CONTRIBUTED AND PRINCIPAL APPROVES

• EXCEPTIONS to Direct Proportion Test::

Answer 24

sharing with immediate family members

another exception for an account provided
that the (a.k.a. **Rich Man's Exemption or
Hedge Fund Rule**):

• account is opened with at least
$ 1,00,000 of customer funds by a
customer with a net worth of
$2,000,000;

• member enters into a prior written
agreement with customer regarding
the compensation arrangement;

• agreement covers gains and losses for
at least 1 year; and

• member has disclosed any potential
conflicts of interest

the rule essentially allows hedge fund
managers and their reps to share profits with
their wealthy clientele

Question 25

CANNOT BORROW FROM/ LEND To CUSTOMERS

Answer 25

HOWEVER. the rule does not apply to:
1) immediate family:
2) lending institutions ( on the same
terms/conditions that are granted to others);
3) a customer and a rep at the same member:
4) a lending arrangement based on a
personal relationship with the customer; and
5) a lending arrangement based on a
business relationship outside of the brokercustomer
relationship
regarding 3,4, & 5, these require prior written
notice be given to the firm; and pre-approval
must be obtained

FREE SEX with cookies…just seeing if you’re paying attention

Question 26

CANNOT CHARGE FOR INVESTMENT ADVICE, BUT
CAN CHARGE FOR

Answer 26

CLERICAL SERVICES

Question 27

B-D MUST PROVIDE UPON CUSTOMER REQUEST:

Answer 27

latest balance sheet and Net Capital
computation and FINRA Manual copy

• a “customer” is defined as someone who has
cash and/or securities with your firm; also, if
another member firm requests a copy of a firm’s
latest balance sheet and Net Capital
computation in writing, it must be furnished

Question 28

CANNOT BUY OR SELL UNLESS THE FIRM
BELIEVES CUSTOMER CAN SETTLE IN

Answer 28

2 BUSINESS
DAYS

Question 29

No INSTALLMENT SALES

Answer 29

when a customer buys a security, the provision
of Reg. T must be met

Question 30

COMPLETION OF A TRANSACTION {PURCHASE OR
SALE)

Answer 30

security is purchased/sold, customer
pays/delivers on settlement date or the brokerdealer
makes appropriate accounting entries to
customer’s account

• settlement completes the transaction (NOT
once payment is received)

Question 31

ORDER TIX MARKED LONG/SHORT

Answer 31

I got nothing. No question. Bonus! You didn’t get it wrong!

Question 32

CORRESPONDENCE AND TRANSACTIONS

Answer 32

Transactions
all order tickets effected by the RRs must be
approved and reviewed by a principal and
kept on file for 3 years

Correspondence

if the firm has a communications
compliance program in place that trains RRs
with regards to what can and cannot be said;
and the finn audits these communications
for compliance;
• then no prior approval is required
otherwise, prior written principal approval is
required for both written and electronic
correspondence

Question 33

GIFT LIMIT= $100

Answer 33

registered individuals are prohibited from
giving or receiving gifts in excess of $100

• business entertainment is not subject to the
limitation as long as it is not too frequent or too
excessive

• FINRA has implemented a rnle requiring
member finns to:
create written policies and procedures
covering business entertainment: and
audit these expenses for compliance
NOTE that the gift limit does NOT apply to
gifts:

based on a personal relationship rather than
a business relationship (i.e. if a RR is invited
to a wedding, that person can give a
wedding present valued at more than $100);
or
with a corporate logo on it, regardless of the
cost

• member firms are required to keep a record of
and retain (for 3 years) all gifts given or
received by associated persons that are related
to the firm’s business

• paying for work is allowed as long as there is a
written agreement spelling out the work to be
done and the compensation to be received; and
the agreement is approved in writing by a
principal before it takes into effect

Question 34

OUTSIDE WORK

Answer 34

registered persons cannot be employed by
anyone other than the member firm, UNLESS
the person provides prompt written notice to the
member and follows any instructions of the
employer

here, the employer assesses the impact of the
outside work on the employee’s ability to
perform his duties

• note that this also applies to working
for a charity or being on the Board of
Directors of a charity, whether the
person is compensated or not

Question 35

PROHIBITED ACTS:

Answer 35

• making blanket recommendations oflow priced
stocks

• churning
• trading in mutual fund shares

• recommending securities beyond a customer’s
financial capacity

• selling dividends

• “selling away”
handling securities transactions for a
customer through another firm
no private securities trades

• generally, all trades that the RR
handles must be executed through the
firm or be known to the member

• an EXCEPTION is granted if the firm is
given prior written notice of the
proposed transaction and the
compensation received - the firm
must approve in writing

any infonnation received in a fiduciary capacity
cannot be used by member firm unless issuer
approves

Question 36

CONTROL RELATIONSHIPS

Answer 36

• any control relationships must be disclosed in
writing at or prior to entering into a contract to
buy or sell
i.e. financial advisory relationship disclosed
(if firm acts as underwriter)

• usu. the disclosure is given verbally at the time
of the recommendation; and then in writing on
the trade confirmation

Question 37

DISPUTES

Answer 37

Ain’t nobody got time for that.

Question 38

Disputes Between a R.R. and a Firm:

Answer 38

must be handled through Binding
Arbitration ( which cannot be appealed)

• so you’re screwed.

Question 39

Customer Disputes

Answer 39

handled through Binding Arbitration only if
the Arbitration Agreement has been signed
by customer (most firms will not allow the
account to be opened unless signed!);
otherwise the FINRA Code of Procedure is
used

furthermore, within ten days of receiving a
customer request, firms must provide the
customer with a copy of any predispute
arbitration agreement clause or agreement
that the customer had signed

Question 40

PROXY MATERIALS

Answer 40

• (for street name securities) must be distributed
to customers at no charge

• issuer will reimburse broker-dealer for out-ofpocket
expenses incurred

Question 41

FINRA PROHIBITED PRACTICES
common sense things, like:

Answer 41

• payments designed to influence the market price
of a security

• manipulative devices when trading securities or
dealing with customers

• improper use of customer funds and securities

• giving concessions or discounts that apply to
members to the public does NOT apply to:
• transactions in exempt securities
• transactions performed on an
exchange floor
• transactions perfonned outside the
U.S.

• placement of orders for mutual funds purchases
unless the fim1 has an existing customer order
or is buying the shares for its own investment
account

, accepting a gift of more than SI 00 from an
investment company or related person
known as the “Anti-Reciprocal Rule”,
established to prevent investment companies
from giving “extra” compensation to FINRA
members above and beyond sales charges
for selling their shares

• selling mutual fund shares just below a “breakpoint”
• selling dividends

• trading in mutual fund shares • accepting continuing commissions, such as
annual concessions paid out of 12b- 1 fees, after
leaving the finn UNLESS there is a prior
written agreement (here the rep agrees NOT to
solicit new business or service accounts - this is
mainly for retiring reps who are in good
standing with FINRA)

• sending any written communication to
prospective mutual fund customers without a
copy of the latest fund prospectus

Question 42

FINRA DEFINED COMMUNICATIONS
FINRA defines 3 major categories of
communication (and 4 other categories):

Answer 42

CORRESPONDENCE

RETAIL COMMUNICATION

INSTITUTIONAL COMMUNICATION

ADVERTISING

SALES LITERATURE

INDEPENDENTLY PREPARED REPRINT

PUBLIC APPEARANCE/ PUBLIC FORUM

Question 43

FINRA DEFINED COMMUNICATIONS

CORRESPONDENCE

Answer 43

any written or electronic commw1ication
distributed or made available to 25 or fewer
retail investors, existing OR prospective. within
any 30 calendar time frame

Question 44

FINRA DEFINED C0MMUNICATIONS

RETAIL COMMUNICATION

Answer 44

any written or electronic communication
distributed or made available to more than 25
retail (i.e. non-institutional) investors within a
30 calendar time frame (specifically an investor
with less than $50MM of assets)

Question 45

FINRA DEFINED COMMUNICATIONS

INSTITUTIONAL COMMUNICATION

Answer 45

any written or electronic communication
distributed or made available only to
institutional investors
these include banks, savings and loans,
investment companies, investment advisers,
government entities, FINRA members, or
any person with assets of S50MM or more

the basic rule is that CORRESPONDENCE AND
INSTITUTIONAL COMMUNICATION DO NOT
REQUIRE PRIOR PRINCIPAL APPROVALprior to
distribution, while RETAIL COM\UJNICATION DOES

Question 46

Other Communication Categories

ADVERTISING

Answer 46

material intended for a mass market

i.e. newspapers, magazines, TV, tape
recordings, websites, billboards, …

also included would be static, “noninteractive”
information on Internet Bulletin
Boards, social networking sites, …

Question 47

Other Communication Categories

SALES LITERATURE

Answer 47

material sent to more than 25 investors

more specific in nature (i.e. directed to a
specific audience, like a firn1’s customers)
[

i.e. market letters, circulars, seminars,
research reports, form letters, •..

note password protected websites would be
included (though websites accessible to the
general public are considered advertising)

Question 48

Other Communication Categories:

INDEPENDENTLY PREPARED REPRINT

Answer 48

a reprint or excerpt of any article issued by a
publisher not affiliated with the FINRA
member and not commissioned by the
FINRA member
l

if distributed to more than 25 investors. it is
retail communication

if distributed to 25 or less, it is
correspondence

Question 49

Other Communication Categories:

PUBLIC APPEARANCE/ PUBLIC FORUM

Answer 49

participation in a seminar, fornrn (including
electronic venues, such as internet chat
rooms), radio, TV, or other public
appearance

these are spontaneous, unrehearsed
“appearances”

note, “interactive”, real-time content on
biogs, social networking sites, and chat
rooms are deemed “public appearances”
(versus static content is advertising)

note a public appearance attended by more
than 25 investors would follow rules for
retail communications; 25 or fewer would
follow that of correspondence

Question 50

APPROVAL OF COMMUNICATIONS

types:

Answer 50

CORRESPONDENCE

INTERACTIVE CONTENT ON WEBSITES

RETAIL COMMUNICATION

EXEMPT FROM PRIOR PRINCIPAL APPROVAL

BROADLY DISSEMINATED FREE-WRITING
PROSPECTUS (FWP)

INSTITUTIONAL COMMUNICATION

Question 51

CORRESPONDENCE

approval of communications…

Answer 51

• if the firm doesn’t have a communication
compliance program in place that trains reps
with regards to what can and cannot be said;
and that audits this for compliance, then all
correspondence must be pre-approved

• however, if the firm DOES have a
communications compliance program in place,
FINRA only requires a “post-use review and
approval” by a principal

Question 52

INTERACTIVE CONTENT ON WEBSITES

APPROVAL OF COMMUNICATIONS

Answer 52

• similar to correspondence - as long as there are
policies in place, there is no advance approval
required by a principal

• HOWEVER, static information on biogs (for
instance) are treated as advertising that must be
approved in advance

Question 53

RETAIL COMMUNICATION

approval of communications…

Answer 53

must be approved in writing by a principal prior
to use or filing with FINRA (ifrequired)

Question 54

EXEMPT FROM PRIOR PRINCIPAL APPROVAL:

approval of communications

Answer 54

• market letters or other communications not
making financial or investment
recommendations or otherwise promoting a
product or service of the member (i.e. a report
on the US economic outlook); and

• postings in an online interactive electronic
forum (i.e. chart room)

Question 55

BROADLY DISSEMINATED FREE-WRITING
PROSPECTUS (FWP)

approval of communications

Answer 55

• needs principal approval and filing with the
SEC at, or prior to, use

• this is used for Well-Known Seasoned Issuers
under SEC Rule 405

• FWPs also include ones posted on an
unrestricted website or one released to the news
media

a FWP posted on a restricted passwordprotected
website, however, does NOT fall
under the definition of something “broadly
disseminated”

Question 56

INSTITUTIONAL COMMUNICATION

approval of communications…

Answer 56

• there is no requirement for prior principal
approval as long as the firm has implemented a
supervisory procedure

FlNRA. requires a post-use review and approval
by a principal
the firm must keep a record of these
communications with the dates of first and last use
and include the name of the principal who approved
the communication along with the date

• if the communication was not required to be
approved by a principal, the name of the
preparer or distributor of the communication
must be included in the record

all are kept on file for 3 years

the web-based system for filing advertising with
FINRA is called Advertising Regulation
Electronic Filing - AREF

Question 57

FILING COMMUNICATIONS WITH FINRA

Answer 57

FIRST YEAR BROKER-DEALERS must FILE RETAIL
COMMUNICATIONS 10 DAYS IN ADVANCE

COMMUNICATIONS THAT MUST ALWAYS BE
FILED 10 BUSINESS DAYS IN ADVANCE OF USE

RETAIL COMMUNICATIONS THAT l'llJST ALWAYS
BE FILED 10 BllSlNESS DAYS AFTER USE FOR:

EXEMPT FROM APPROVAL AND FILING

Question 58

FILING COMMUNICATIONS WITH FINRA
FIRST YEAR BROKER-DEALERS must FILE RETAIL
COMMUNICATIONS 10 DAYS IN ADVANCE

Answer 58

after which, no filing is required, but they are
subject to “spot checks”; AND FINRA can
reinstitute advance filing requirements for these
at any time

Question 59

FILING COMMUNICATIONS WITH FINRA

COMMUNICATIONS THAT MUST ALWAYS BE
FILED 10 BUSINESS DAYS IN ADVANCE OF USE • Retail Communication for:

Answer 59

Options & Security Futures;

Invest. Co. that include member-prepared
performance rankings (thus including a
Morningstar ranking would preclude the
requirement of advance filing); or

• these cannot be published until FlNRA
approves!

Question 60

FILING COMMUNICATIONS WITH FINRA

RETAIL COMMUNICATIONS THAT MUST ALWAYS
BE FILED 10 BllSlNESS DAYS AFTER USE FOR: • Retail Communications.for:

Answer 60

CMOs;

Registered Structures Products that can be
traded

Registered DPPs

Investment Co. that do NOT include
performance rankings

Broadly disseminated Free-Writing

Prospectuses

Draft version of a TV or video “storyboard”
and the final version is also filed

Question 61

FILING COMMUNICATIONS WITH FINRA

EXEMPT FROM APPROVAL AND FILING

Answer 61

• communications that have previously been
filed

non-promotional sales announcements
i.e. change of address. promotion of
employees …. ;

recruitment ads;

communications that just identify a member
firm and offer a security at a specific price - or
the security in which the member makes a
market;

• prospectuses, tombstones, offering
circulars, … filed with the SEC; and

• independently prepared reprints, press releases,
institutional sales materials, correspondence,
and communications posted on an online
interactive forum

Question 62

FINRA COMMUNICATIONS STANDARDS

Answer 62

PREDICTIONS / PROJECTIONS OF PERFORt’VIANCE

TESTIMONIALS

CMO DISCLOSURE

MUTUAL FUND ADS SHOWING RANKING-ENTITY
RATINGS

SIPC LOGO

FINRA MEMBER FIRM

Question 63

FINRA COMMUNICATIONS STANDARDS

Answer 63

obviously, communications must be fair and
reasonable and cannot be misleading

Question 64

FINRA COMMUNICATIONS STANDARDS

PREDICTIONS / PROJECTIONS OF PERFORt’VIANCE

Answer 64

are prohibited (though price targets in research
reports do not come under the prohibition - go
figure!)
lnvestment Analysis Tools
can be offered to customers without
violating this prohibition as long as the
member:
• gives access to FINRA of the tool
upon request;

•describes the methodology used and
its limitations and assumptions;

explains that results will likely vary
over time; and

includes the disclaimer that
“projections generated by the tool are
hypothetical; do not reflect actual
investment results; and do no project
investment results”

Question 65

FINRA COMMUNICATIONS STANDARDS

TESTIMONIALS

Answer 65

TESTIMONIALS may be used as long as the person
making the testimonial has the knowledge to form a
valid opinion; also, it must be disclosed that the:

• maker’s experience may not be indicative of
other clients;

• testimonial is not an indicator of future results;
and

• maker was paid for the testimonial. if more than
$100 was paid

Question 66

FINRA COMMUNICATIONS STANDARDS

CMO DISCLOSURE

Answer 66

CMO DISCLOSURE
retail communication and correspondence
relating to CMOs: ·

must include the term “Collateralized
Mortgage Obligation”;

may not compare CMOs to any other

investment vehicle (including bank CDs);

must disclose that a government agency
backing only applies to the face value of the
CMO and not to any premium paid; and

must disclose that a CMO’s yield and
average life will fluctuate based upon
prepayments made by the underlying
mortgage holders and changes in current
interest rates

Question 67

FINRA COMMUNICATIONS STANDARDS

MUTUAL FUND ADS SHOWING RANKING-ENTITY
RATINGS

Answer 67

• FINRA Rule 2212 allows the use of such
rankings in member-prepared retail
communications as long as:

the info was created and published by an
independent ratings firm (i.e. a ‘“Ranking
Entity”);

prominent disclosure is made of the name of
the category to which the mutual fund is
assigned (i.e. growth and income), the
number of companies in the category, length
of time used for the ranking, and criteria on
which the ranking is based (i.e. total return,
risk-adjusted performance);

disclosure is made that past performance is
no guarantee of future results;

the publisher of the data is disclosed;

the ranking is current as the most recent
calendar qum1er;

the ranking covers a period of at least l
year; and

rankings based on Total Return must include
a comparison of 1-, 5-, and 10-year Total
Returns ( or the life of the fund, if shorter)

Question 68

FINRA COMMUNICATIONS STANDARDS

SIPC LOGO

Answer 68

required on all advertisements larger than l 0
square inches

• this is NOT required for sales literature

Question 69

FINRA COMMUNICATIONS STANDARDS

FINRA MEMBER FIRM

Answer 69

all ads and sales literature must state the name
of the firm which prepared the material

if the firm states it is a member of FINRA in
its communications, it can only state that the
firm is a FIN RA member (note, only FIRMS
are members, not the agents)

• if the FINRA name is used on the firm’s
website, it must be hyperlinked to the FINRA
site

Question 70

RESEARCH REPORT /MARKET LETTER RULES

MARKET LETTER STANDARDS

RESEARCH REPORT STANDARDS

MEMBER FIRM DISCLOSURE WHEN MAKING
RECOMMENDATIONS OF AN ISSUER’S SECURITIES

ASSOCIATED PERSON DISCLOSURE WHEN
MAKING RECOMMENDATIONS OF AN ISSUER’S
SECURITIES

FOREIGN BROKER-DEALER RESEARCH REPORT
RULES

Answer 70

Got nothing here.

Question 71

RESEARCH REPORT /MARKET LETTER RULES
MARKET LETTER STANDARDS

Answer 71

• may include a listing of recommendations sent
to a broker-dealer’s clients

• these are excluded from the definition of a
“research report” as long as the
recommendation includes:

whether the finn makes a market in the
security; or if the member will buy or sell
the security on a principal basis;

if the member involved in the preparation of
the report has a financial interest in the
issuer’s securities;

if the member managed or co-managed a
public offering of the issuer’s securities in
the past 12 months

• note also, that market letters making
recommendations of mutual funds or variable
products are NOT required to make these
disclosures

Question 72

RESEARCH REPORT /MARKET LETTER RULES

RESEARCH REPORT STANDARDS • Specific Recommendations must

Answer 72

be “reasonable” aka female ;-)

include the market price of the stock at the
time of recommendation; and

provide that supporting documentation will
be furnished upon request

Question 73

RESEARCH REPORT /MARKET LETTER RULES

RESEARCH REPORT STANDARDS

Past Performance must include:

Answer 73

at least the past 12 months:

an indication of current general market
trends:

if past perfommnce of comparable
recommendations is shown, then ALL
recommendations made within the prior 12
months must be shown;

applicable transaction costs; and

a statement that past perfonnance is not
indicative of future results

• price targets can be shown

• advantages. of course, must also mention
relevant risks

• all reports must be dated; ifinfom1ation is not
reasonably cunent (within the past 6 months),
this must be noted in the report

Question 74

RESEARCH REPORT /MARKET LETTER RULES

MEMBER FIRM DISCLOSURE WHEN MAKING
RECOMMENDATIONS OF AN ISSUER’S SECURITIES

Answer 74

the member must disclose if it:

owns l % or more of the issuer’s stock

has a financial interest in the issuer

has any conflicts of interest

has managed or co-managed an equity
offering of that issuer within the past 12
months

has received compensation from investment
banking from that issuer in the past 12
months ( or will receive in the next 3
months)

is a market maker in the issuer’s stock

Question 75

RESEARCH REPORT /MARKET LETTER RULES

ASSOCIATED PERSON DISCLOSURE WHEN
MAKING RECOMMENDATIONS OF AN ISSUER’S
SECURITIES

Answer 75

the associated person must disclose if he/she is

• an officer, director or advisory board
member of the issuer

compensated based on the firm’s overall
investment banking business

Question 76

RESEARCH REPORT /MARKET LETTER RULES

FOREIGN BROKER-DEALER RESEARCH REPORT
RULES

Answer 76

a foreign broker-dealer doesn’t have to register
with the SEC as long as it only:

accepts unsolicited transactions; and

distributes research reports to U.S.
institutions with at least $100MM of assets

furthermore, the research report cannot
recommend the use of the foreign b-d to effect
trades; and the foreign b-d cannot initiate
follow-up with the recipients

unsolicited trades resulting from the
issuance of the report, though, ARE allowed

however, if a foreign b-d has an arrangement
with a U.S. b-d (i.e. a “chaperoning
arrangement’’) who is responsible for:

trade executions, sending confirms to U.S.
investors. maintaining books and records
and net capital requirements, then:

if the foreign broker-dealer’s personnel wants to
visit institutions in the U.S .. they must be
accompanied by an associated person of the
chaperoning broker-dealer unless the institution
visited has $100MM of assets under
management

• this “chaperoning” arrangement allows the
foreign b-d to distribute research reports directly
to U.S. institutional investors (i.e. they don ·t
have to go through the U.S. chaperoning b-d)

Question 77

RULE 134A AND 135A - MUTUAL FUND AND
OPTIONS ADVERTISING

MUTUAL FUND ADVERTISING

OPTIONS ADVERTISING

Answer 77

Cute poms

Question 78

RULE 134A AND 135A - MUTUAL FUND AND
OPTIONS ADVERTISING
MUTUAL FUND ADVERTISING

Answer 78

• limited to:

explanatory information about investment
co.

offers or explanations of products and
services without mentioning the desirability
of the investments

invitation to inquire for more information

OPTIONS ADVERTISING • limited to:
general description of the security

description of the nature and functions of the
options markets
description of the Options Clearing
Corporation
invitation to inquire for more information

Question 79

FINRA TAPING RULE

Answer 79

a member firm, whose sales force consists of too
many individuals previously associated with an
expelled member, must tape its phone conversations
with current and potential customers

note that the rule does NOT apply if the firm with
( only a general understanding is req.):

• 20+ reps has less than 20% of these reps
having been associated with a disciplined firm
during the past 3 years

• 10-19 reps with less than4 of these reps having
been associated with a disciplined firm during
the past 3 years

• 1-9 reps with less than 40% of these reps
having been associated with a disciplined firm
during the past 3 years

once FINRA determines that a fim1 is subject to the
rule. the finn has 60 days to comply - and the firm
must adopt special written procedures to supervise
the telemarketing activities of all its registered
personnel for a period of 3 years

if notified (for the first time) that the fim1 must start
taping its conversations it can avoid the obligation
ifthe firm reduces itsstaffing levels to below the
thresholdlevelswitltin 30 days after receiving the
notice from FIN RA

at the end of the calendar quarter. the member must
file a FJNRA report on the member’s supervision of
the telemarketing activities of its registered person

records of taped conversations must be retained for
3 years