Chapter 1: Sales Supervision Flashcards
FINRA is…
“Merged regulator” that combines NYSE and NASD regulatory units
FINRA Conduct Rules
Govern the relationship between customers and member-firms. Clients are to be treated in a “just” and “equitable” manner with a high degree of ethical standard.
FINRA Uniform Practice Code
Governs relationship between member firms. Settlements, good delivery, disputes among members, etc.
FINRA Code of Procedure
The rules by which customers can dispute infractions against member firms
FINRA Code of Arbitration
Rules by which member firms can dispute infractions between one another.
FINRA Disciplinary Powers
Can censure, suspend, expel, and/or fine member firms
Exempt from FINRA membership
Deal solely in exempt securities: Govt, municipals
Or
Business exclusively outside US
Exempt securities under FINRA
Government and Municipal secs; unless packaged products
When would you need to join FINRA if you only deal on exempt securities?
When packaging exempt securities in products such as mutual funds, unit trusts, or CMOs
Form for FINRA membership application
Form BD
Statutory Disqualification
Disqualified from FINRA membership by:
- previously suspended or expelled from any other SRO domestic or foreign
- subject to SEC order suspending or revoking registration or associated with such a firm or entity
- willfully filed false or misleading application or material omission of fact
- willfully violated federal securities or commodities law or aided or abetted or counseled or commanded such acts; also failed to supervise such individuals
- convicted of any securities or “money” related misdemeanor or felony within the past 10 years
- temporarily or permanently enjoined from engaging in the securities business
Eligibility Proceeding
Form can appeal FINRA after statutory disqualification; If approved, SEC must also approve the re-admittance
FINRA Application Information
- Copy of Registration submission to SEC
- Trial balance and net capital computation
- member’s written supervisory procedures
- list of officers, partners, and associates persons at time of application
- any other info requested by FINRA district office
FINRA pre-membership interview
- Level of Net capital and any future requirements
- internal and compliance procedures
- familiarity with FINRA rules
- business plan; including details about persons associated with the firm
- planned facilities, clearing arrangements, and supervisory personnel
of FINRA district offices
11 - same as federal reserve banks
Notification of applicant occurs within ___ days after the interview
30
Membership termination procedure
Given in writing and not effective until 30 days after submission of written notice
Resignation term with customer complaints
Resignation is not effective for 2 years after submitted in writing if there are any complaints or pending actions against the member firm
Transfer of registration to another firm
NO transfers are permitted. New firm must go through application and approval process
Designation of OSJ
Office of Supervisory Jurisdiction (OSJ) must be designated by member firm. Any branch or centralized branch may act as OSJ but must be supervised by resident principal.
Creates and enforces written supervisory practices.
OSJ
Office of Supervisory Jurisdiction; creates and enforces written supervisory procedures for member firm branches
Form BR
Branch registration form for FINRA with CRD.
Form BR changes submitted within ___ days
30 days after applicant learns of facts and circumstances giving rise to amendment
Exceptions to “branch” definition
Back offices, primary residences of representatives, “offices of convenience” and satellite offices
When is a vacation home considered a branch?
If used 30 or more business days out of the year
Satellite office definition
No more than 25 securities are traded per year
“Not-Not-May” rule
RSNIP; Must be displayed in any location where bank products are also offered
NOT FDIC insured
NOT deposits and not guaranteed
Securities are subject to risk and MAY lose value
General Principal
Sole Proprietor Officer Partner Managers of OSJ Directors of Corporations
Must be Series 24 registered
Series 24 registration
For General Principals of securities firms
To become “Principal”
Must be series 24 registered and have been a registered rep for at least 18-months out of a preceding 5 year window
Principal has ____ days to pass qualifications exams
120 days after being appointed principal
General Sales Supervisor
Series 9/10 registered BOM, only supervises general sales practices.
“FinOP” Financial and Operations Principal
Must have at least 1 for clearing firm, Series 27 registered. Generally, the firm’s supervising accountant and preparer of financial reports for FINRA and SEC
Limited FinOP
Series 28 registered; each non-clearing firm must have at least 1. Prepares firm’s financial reports for FINRA and SEC
Registered Options Principal
Series 4 and 7 registered; for any firm engaging in options trading with customer accounts. Must have a “designated ROP” - name given to FINRA. Main office compliance individual for options advertisements, sales literature, and general supervision.
Investment Companies and Variable Annuities Limited Principal
Series 26; allows initial offering of CEFs and sale of redeemable securities and Variable annuities
Series 39
Direct Participation Program; Series 22 or Series 7 required
Exemptions to registered rep
Dealing solely with clerical work or exempt securities and foreign associates who do not deal in US.
Series 6
Limits authority to deal on redeemable shares or variable annuity contracts
Series 22
Direct participation program representative exam
Series 52
Muni bonds license
Waiting periods for failed exams
30 days after failure, must wait 180 days after 3 successive failures. Another 180 days for each successive failure after 3
Statutory disqualification of Rep with amendment
Must be submitted within 10-days if rep would be disqualified by changes to U4.
**Normally 30 days without disqualifying event
Principal must verify ___ years of employment history and applicant’s will ___________ _________
3 years; applicants good character
CE requirement
Regulatory on 2nd anniversary of registration and then every 3 years thereafter
Regulatory element may be completed within ____ days of notice
120 days; thereafter, license is considered “inactive” until requirement is complete
Registration with military duty
Considered “inactive.” CE requirements are suspended and firm must submit notice to CRD in writing. Upon return from service, registration is reactivated at point left off.
Can return to another B/D, can maintain clients with another broker and share commissions.
Must reassociate within 90 days before registration is terminated.
Returning military must reassociate within ___ days to prevent registration termination.
90 days
Special inactive status for called-up military
FINRA will place a 24 month hold on termination if active military rep has terminated association with member firm.
U5
Termination form
U5 must be filed with FINRA within ___ days of termination
30 days. A copy must also be supplied to terminated individual
New employer must review U5 of new employee within ___ days of association
60 days. Also a new U4 must be submitted
U5 obtained from
Web-CRD
U5 must be amended within ___ days of discovery
30 days. Same as U4, without statutory disqualifying event
Must regularity by exam after __ years of non-association with member firm
2 years. FINRA also retains jurisdiction over the individual if there is a customer complaint for this same period.
U5 cannot be filed if
There is a customer complaint or pending action until such issues are resolved. Then begins the 2 year waiting period
Generally, changes to any material information must be given to FINRA within ____ days
30 days, **Unless U4 is amended with potentially disqualifying event - 10 days.
FINRA Rule 2267
Requires customer be provided information on checking Broker records through BrokerCheck and FINRA, annually
Customer account conduct rules
1) cannot guarantee against loss
2) cannot share in G/L
3) must share in proportion unless immediate family member
4) cannot borrow or lend to client
Installment Sales allowed?
No, Prohibited
Client Gift Limit
$100/yr/client
FINRA Rule 2030
Anti-bribery rule discouraging pay-to-play practices with state and local governments
Maximum political contribution (able to vote)
$350/candidate/election with potential to vote
Maximum Political Contribution (not able to vote)
$150/candidate/election
Ban on political contributions if over limit
2 years if contribs. exceed minimum
Problems with Registered Non-Traded REITs
Distributions not guaranteed
Illiquid
High Fees
Lack of Transparency
Inspect Supervisory Branch
Every year
Inspect non-supervisory branch
Every 3 years
Branch Inspection Report Items (at a minimum)
- Safeguarding of customer securities
- Maintenance of books and records
- Supervision of customer accounts services by branch managers
- Transmittal of funds between representatives and customers and to third parties
- Validation of customer account changes
- Validation of changes in customer info
When hiring new rep…
Must review U5 within 60 days of filing the U4
SIPC required on Sales Literature?
No
SEC research interpretation
Provides information reasonably sufficient upon which to base an investment decision
And
Is distributed to +15 people
Rule 134a
“Amended Tombstone Rule”
Rule 135a
“Generic Advertising Rule”
Rules 134a and 135a govern:
Mutual Fund and Options Advertising
-Basically cannot add any ameliorative, promotional language beyond basic description of the issue and the companies and functions associated.
FINRA Taping Rule
If sales force of member firm contains 20-40% employees from previously expelled or revoked registration firms, that firm is required to tape conversations
Adherence to taping rule
If determined by FINRA:
Must comply within 60 days and retain records for 3 years
Answer to a complaint
Must be given to OHO within 25 days; thereafter another notice is sent and 14 days allowance.
If no answer is received it is treated as default and decision is made by Chief hearing officer
Pre-hearing conference held within ___ days of answer to complaint.
21 days
Decision on complaint rendered within ___ days of hearing panel
60 days
Hearing panel consists of
Chief Hearing Officer and 2 other industry panelists
First appeal after hearing panel
Goes to NAC - National Adjudicatory Council
Hearing panel decisions can be appealed for ____ days
25 days after Hearing Panel decision rendered
The decision is not final until 25 days after hearing decision with no appeal
When is a hearing decision final?
25 days after decision rendered with no appeals
NAC can review hearing panel decision for ____ days.
45 days after decision rendered
Second appeal of hearing panel decision
To SEC after NAC decision
Third appeal of Hearing panel decision
To Federal Appeals court after SEC decision
How many appeals possible of Hearing Panel Decision?
3
1) NAC within 25 days, NAC has 45 days to review
2) SEC after NAC decision reached
3) Federal appeals court after SEC decision reached
MRVP
Minor Complaints - “Minor Rule Violation Plan”
Max $2,500 fine
FINRA may summarily suspend a member who:
Was suspended or expelled from another SRO.
Or
Experiences financial or operating difficulties
After summary suspension, member firm may:
Request a hearing within 7 days, and hearing will be held within 7 days of submission for hearing
Dispute between 2 associated persons must go to:
Arbitration
Optional All Public Panel Rule
Customer can elect 3 public arbitrators if desired
Statute of limitations for Arbitration
6 years from the event
Arbitration awards paid:
Within 30 days, 15 day grace period with threat of suspension or revocation of firm registration if missed
Mediation can be used if:
Both parties agree to mediation
Technical insider defined as:
Officer
Director
>10% shareholder of equity secs
Insiders required to report trades to SEC within ___ days
2 days of event
Short swing disgorgement
Any profits from trades within 6-month period must be paid back to corporation
Insiders cannot short stock but can…
“Short against the box” at year end to lock on gains, but must close position within 20 days
Rule 10b-5
“Catch-all” fraud rule; covers all undefined activity that would operate as fraud
Penalties for Insider Misuse of Information
Up to 3 times the profit or up to $5,000,000 and up to 20 years in prison
Penalty for firm with controlling person knowing of misuse of information
$25,000,000
Controlling person knowing of misuse of information by insider?
Will not be penalized unless they knew or recklessly disregarded the fact
Fines are payable to:
The US Treasury
Informer bounty
10-30% of amount recovered under civil penalties
Insiders can be sued by any person that traded the security for ___ years
6 years
10b5-1 is what?
Trading plan or “safe harbor” rule
2 & 5 rule
Unlawful practices suits statute of limitations, 2 years within discovery but no more than 5 years after violation occurred
Rule 10b-1
Covers manipulation of exempt and non-exempt securities
Rule 10b-3
Unlawful for broker-dealers and municipal bd’s to employ deceptive or manipulative practices
Rules 14e-1 through 14e-5
Cover tender offer unlawful practices
When must a company submit opinion to shareholders under tender offer?
Within 10 days
During a tender offer:
Insiders cannot buy stock nor can maker of offer buy company shares in the market.
SEC Section 15
Rules on broker dealers
Penny stock rules
15g-1 through 15g-6
Penny stock defined as
Equity securities that are not exchange listed or are not included in NASDAQ and have a price of
Unsolicited calls times
Between 8:00am and 9:00pm
Cold calling statements needed
Name, firm name, address or telephone from which the caller is dialing
Cold calling rules also cover…
Unsolicited faxes and anything conducted over telephone
Who enforces cold calling rules?
FTC
Established business relationship (cold calling)
“EBR” person contacted made a transaction or had a security with firm within the past 18 months
Or
Has contacted member firm to inquire about products or services within the past 3 months
Exemption from out-of-state registration
Customers vacationing in state or effects trades with other BDs, banks, institutions
Research report restriction for (co)manager of issue
10 days for IPO, 3 days for secondary
