Ch 2 S1 Broker-Dealer supervision Flashcards
GENERAL SUPERVISORY RULES
members must establish, maintain, and enforce
written supervisory procedures over activities of all
registered personnel
copy of written procedures is kept in each OSJ
OFFICE OF SUPERVISORY JURISDICTION (OSJ) • office where the following may occur:
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
OFFICE OF SUPERVISORY JURISDICTION (OSJ) • office where the following may occur,
other factors when designating a finn as an OSJ
include whether:
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
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:
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
all transactions effected by the RRs must be
reviewed and approved by the registered
principal (Series #24)
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
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
Periodic Account Inspection occurs
at branches
SUPERVISION OF PRODUCING BRANCH MANAGERS
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
Non-Supen,isory branches (where the branch
does not supervise other branches) must be
inspected
every 3 years
Note: Supervisory Branches are inspected
annually
each completed inspection must be dated
and documented in writing
Branch Inspection Reports
must cover the (at a minimum):
• 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)
Risk-Based Supervision
FINRA allows a member to use risk-based
criteria in its supervisory procedures to:
• 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
Annual Reviews:
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
Applicant’s Registration Review
a Series #24 is responsible for investigating
and ascertaining the applicant’s:
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
Applicant’s Registration Review
the OSJ prepares and delivers Continuing
Education (Firm Element) annually to all RRs
(except those who don’t deal with public)
Regulatory Element for Continuing Education
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
CHIEF COMPLIANCE OFFICER (CCO) is…
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
ANNUAL C0MPLIANCE CERTIFICATION
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
BUSINESS CONTINUITY PLAN
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
the Business Continuity Plan must cover:
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)
AT ACCOUNT OPENING, CUSTOMERS MUST BE
GIVEN DISCLOSURE,
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
member FIRMS MUST DESIGNATE 2 EMERGENCY
SERIES #24 CONTACTS to FINRA
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
CONDUCT OF CUSTOMER ACCOUNTS
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…
CANNOT GUARANTEE CUSTOMER AGAINST Loss
though one can recommend repurchase
agreements for exempt securities, as this is NOT
a prohibited guarantee
CANNOT SHARE IN CUSTOMER ACCOUNT UNLESS
IN DIRECT PROPORTION TO THE CAPITAL
CONTRIBUTED AND PRINCIPAL APPROVES
• EXCEPTIONS to Direct Proportion Test::
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
