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Series 10 > Chapter 1 - Sales Supervision > Flashcards

Chapter 1 - Sales Supervision Flashcards

1
Q

FINRA Code of Procedure

A

Disputes between customers and members

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2
Q

Uniform Practice Code

A

Regulations the control member-to-member relationships

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3
Q

Doesn’t need FINRA Registration

A

If their business consists solely in exempt securities (Govt/Muni dealers)
OR
If their business is performed exclusively outside United States

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4
Q

Non-member restrictions

A

Cannot join in common stock underwriting.
Can only receive public prices.

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5
Q

Form BD

A

Application to become a member (broker-dealer)

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6
Q

Statutory Disqualification for FINRA membership

A
  1. suspended/expelled from any other SRO
  2. person caused another firm’s suspension/expulsion
  3. lied on application
  4. willfully violated or failed to supervise securities or commodities laws
  5. convicted of securities misdemeanor or any felony within past 10 years
  6. temporarily or permanently enjoined
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7
Q

Reverse Statutory DQ?

A

Must request permission from FINRA, and if approved will then be reviewed by SEC. If denied by FINRA, SEC can be appealed.

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8
Q

Member resignation

A

Must be done in writing, but not effective for 30 days and/or up to two years if there are outstanding customer complaints or funds due to FINRA.

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9
Q

OSJ

A

Responsible for creating and enforcing WSPs over branches and firm, including annual (not periodic) compliance meeting
Each branch can be their OSJ, or it can be regional, or the main office for all branches.

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10
Q

Branch Office

A

Securities business is conducted regularly.
The location is advertised to the public.

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11
Q

Form BR

A

Must be submitted to register branch. Any changes must be submitted within 30 days of learning.

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12
Q

Primary Residence location exception

A

Not a branch if:
1. just the rep
2. no customers
3. isnt advertised
4. no funds handled
5. communications through firm
6. stationary has rep’s branch address
7. member has list of rep’s residence and WSP for supervising location

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13
Q

Vacation Home exclusion

A

Not a branch if used for less than 30 business days a year

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14
Q

Office of convenience

A

isnt a branch if only used occasionally and by appointment only.

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15
Q

Satellite Office

A

isnt a branch if it engages in non-securities activities and 25 or less securities trades.

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16
Q

Not Not May

A

Not FDIC Insured
Not deposits guaranteed
May lose value as securities products

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17
Q

Branch in bank

A
  1. physical location must be separate from deposit area
  2. member’s name shall be clearly displayed
  3. must give not-not-may orally and in writing
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18
Q

Form U4

A

Reps, IAs, or Issuers must use this form to become registered in appropriate jurisdictions and/or SROs

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19
Q

U4 changes

A

Must be amended promptly- within 30 days, or if it will result in statutory DQ, 10 days.

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20
Q

U4 Form info

A

5 yrs of residence history
10 yrs of employment history
OBAs
Arrests
Convictions
Complaints over $15K
Sales violation proceedings

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21
Q

Verify U4

A

Member must do this within 30 days.
Verify prior 3 yrs employment, ascertain good character, search public records,

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22
Q

Regulatory Element

A

Due 2nd anniversary, and then every 3 years thereafter.
(Effective 2023, must be completed annually.)
If not completed, registration inactive. Rep cannot perform registered actions & get paid.

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23
Q

Firm element

A

Annual training plan that covers relevant product, regulatory and compliance issues.

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24
Q

Military Duty

A

Registration is inactive, but can still be paid.
CE suspended for 90 days while they reassociate.
If they already left business, their 2 yr inactive status is also put on hold

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25
Q

U5 form

A

for when individual is terminated (whether for cause or otherwise).
Filed within 30 days of termination, copy sent to rep.
New firm has 60 days to review from Web CRD.
If new info found by previous firm, they must update U5 within 30 days

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26
Q

Hanging Licenses

A

is explicitly prohibited.

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27
Q

Maintaining Qualifications Program (MQP)

A

Effective March 2022,

Registered persons who leave the business have 5 years to retain licenses by completing annual Regulatory Element CE.

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28
Q

Reportable Events

A

Must be reported to FINRA as event is happening, whether there is proof or conviction. Promptly- within 30 days

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29
Q

BrokerCheck content

A

is derived from U4 and U5. Employment history, licenses, complaints, OBAs.

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30
Q

BrokerCheck notice

A

Annual notice to clients regarding:
1. hotline
2. website
3. brochure

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31
Q

Guarantee against loss exception

A

Repo agreement for Exempt security.

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32
Q

Sharing in Gain/Loss

A

is prohibited, except through joint account with written approval & directly proportional to capital contributed (or immediate family).

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33
Q

Hedge Fund Rule

A
  1. account at least 1,000,000 & client net work 2,100,000
  2. prior written agreement with approved compensation arrangement
  3. covers gains/losses for at least 1 year
  4. member has disclosed any conflict of interest
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34
Q

Exceptions for lending/borrowing with customer

A
  1. immediate family member
  2. lending institution
  3. both are registered at same member
  4. based on personal relationship
  5. based on business relationship outside of B/D

3, 4, 5 need written notice and prior approval from member

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35
Q

Statements available upon customer request

A
  1. FINRA manual, physical copy or web access
  2. latest balance sheet
  3. net capital computation
    2 & 3 provided unaudited semi-annually and audited annually.
    “customer” can include other B/Ds if transacting, doesnt include prospective customers
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36
Q

Completion of Transaction

A

If payment/delivery, or entries, are made before settlement, this does NOT complete the transaction.

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37
Q

All Transactions

A

must be reviewed and approved in writing by series 24 or 9/10 and kept for 3 years

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38
Q

Gift limit exception

A

Limit doesnt apply if personal gift, or if offeror’s logo is engraved.

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39
Q

Paying customer for work

A

is permitted with written agreement spelling out terms & is approved in writing by principal

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40
Q

Selling Away

A

prohibited unless firm specifically approves transaction in writing, then firm must supervise transaction. uncompensated transactions still need written approval.

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41
Q

Political Contribution limits

A

$350 per candidate per election if you can vote, $150 if not. Exceeding puts two-year timeout on issuer for any underwriting.

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42
Q

RR/Firm disputes

A

must be handled through binding arbitration, exceptions include: harassment, discrimination, and whistleblowing.

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43
Q

Distributing proxy materials

A

If held in street name, firm must forward materials at no charge to client. issuer will reimburse firm.

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44
Q

Private & non-traded REITs

A

Private and non-traded REITs are high risk investments but are often sold to retirees for their income potential. FINRA’s crosshairs
private REIT is a form of non-traded REIT only sold to accredited investors.

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45
Q

Copy of WSP

A

must be kept in the OSJ. Series 24 must carry out WSP

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46
Q

OSJ defined

A

An office with the following activities:
1. market making and order execution
2. structuring new issues
3. final account approvals
4. review/approve orders, retail comm
5. supervising activities at one or more branches

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47
Q

Supervisor supervision

A

cannot supervise own activities, must be someone they are not supervising, nor someone who determines their compensation.

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48
Q

Supervisory branches

A

are branches that supervise other branches, they must be inspected annually in person

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49
Q

Non-supervisory branches

A

do not supervise other branches, must be inspected every 3 years in person.

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50
Q

Heightened Supervision

A
  1. proximity of supervisor to associated person
  2. frequent contact and review of communications
  3. frequent inspection of offices
  4. expedited handling of complaints
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51
Q

Annual Review for OSJ

A

individually or collectively,
in person or remote,
can be pre-recorded if Q&A follows.
must be “interactive”

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52
Q

Customer complaints retained at OSJ

A

for 4 years in separate file. All info must be filed with FINRA every quarter.

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53
Q

Correspondence

A

Any written or electronic communication to less than 25 customers within 30 day period

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54
Q

Retail Communication

A

Any written or electronic communication made available to more than 25 customers within 30 days.

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55
Q

Institutional Communication

A

Any written or electronic communication distributed only to institutional investors.

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56
Q

Advertising

A

material intended for mass markets.

Excluded are tombstones, prospectus and purely informational advertising

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57
Q

Sales Literature

A

material for a specific audience, like speech text, research reports, password protected websites, circulars.

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58
Q

Independently Prepared Reprints

A

A reprint or excerpt from any article issued by a publisher not associated with or commissioned by the member.

59
Q

Public Appearance or Public Forum

A

unscripted spontaneous talks. subject to post review and approval, but firm must establish guidelines to be followed.

60
Q

Correspondence Compliance Program

A

No requirement for prior approval, instead firm must have a program of supervisory procedures in place for “post review and approval” which can be done by 24 or 9/10

61
Q

Retail Communication approval

A

must be done by 24, prior to use. exceptions are non-promotional communications (no recommendations)

62
Q

Free-Writing Prospectuses (FWP)

A

Approved in advance by 24.
if on password-protected site, not considered “broadly disseminated”

63
Q

Institutional communication approval

A

does not require prior approval, but must be reviewed and approved by 24

64
Q

Institutional Communication forwarding

A

Member should cease distributing to recipient until it can conclude they will not redistribute going forward

65
Q

General Retail Comm Filing rules

A

10 days in advance for first year of business. no filing requirement thereafter, but subject to spot checks.

66
Q

Always in advance retail communication filings

A

Options Communications
Investment Company communications with member-prepared performance.

67
Q

Always post use retail communication filings

A

CMO, Structured product, DPP/BDC, Investment Company w/ out member performance, broadly disseminated FWPs.

68
Q

Communications Standards

A

fair and balanced, not misleading, sound basis for evaluating facts. No projections unless “investment analysis tool”

69
Q

Investment Analysis Tool

A

Program that makes projections; must describe methodology and criteria used, state that results may vary, includes disclaimer that projections are hypothetical. Must be able to provide programs rational to FINRA on request.

70
Q

Testimonials are allowed if these disclosures are made:

A

experience may not be indicative of other clients or future performance and if client was paid more than $100 for testimony.

71
Q

SIPC Logo

A

Required on all advertisements larger than 10 sq inches. NOT required for sales literature.

72
Q

Marketing prepared by third party

A

this must be disclosed so that the rep isn’t viewed as the author or an expert

73
Q

Market Letter Standards

A

Excluded from definition of research report with disclosures:
whether firm makes a market or trades on principal basis
if those involved with preparation have financial interest
if member was managing an offering of the security within past 12 months

74
Q

Research Report

A

provides info sufficient to base an investment decision and includes recommendation. must include price and supporting documentation if needed. must be approved by series 16

75
Q

Research Report past performance

A
  1. at least 12-month period
  2. indication of general market trends
  3. if comparable recs shown, all past recs must be shown
  4. transaction costs included
  5. disclosure about future performance
76
Q

Research Personnel Prohibitions

A
  1. Cannot buy companies in same industry prior to IPO
  2. Cannot trade contrary to firm’s recommendation
  3. Underwriting manager cannt issue report within 10 days of IPO or 3 days of secondary offering
77
Q

Recommendation conflict disclosures

A
  1. if member own 1% or more common stock
  2. assoc person has financial interest in company
  3. any other material conflict of interest
78
Q

Member disclosures for research reports

A
  1. if they have managed an equity offer for that issuer in past 12 months
  2. received compensation from IB services for that issuer in past 12 months or expects to in next 3 months
  3. is an IB services client
  4. is a market maker in issuer’s stock
79
Q

SEC Research Report Definition

A

any client communication that provides info sufficient enough to make investment decision & is distributed to at least 15 persons. Rep would need to provide all conflict disclosures.

80
Q

Third-Party research

A

free of conflicts
identity of firm must be disclosed
but still need to disclose if there is conflict with issuer

81
Q

Approved forms of Mutual Fund advertising

A

Explanatory info of investment company offers, products, or services without mentioning the desirability of these investments

82
Q

Approved forms of options advertising

A

Description of security offered, nature of markets, OCC, and invitation to inquire for more information & options disclosure document

83
Q

Fidelity Bond coverage

A

to insure against loss from employee theft or misappropriation, amount increases as required net capital increases. must be reviewed anually.

84
Q

Taping Rule

A
  1. If sales force consists of too many members from an expelled firm, then calls must be recorded.
  2. Firms have 60 days to comply and must record for 3 years.
  3. Firm can avoid if they reduce staff within 30 days
  4. Must file report quarterly regarding telemarketing activities
85
Q

Complaint process

A

makes complaint to FINRA DoE
if merited, forwarded to Office of Hearing Officers
Will then be handled according to Code of Procedure.

Members cannot refuse to submit to investigations

86
Q

Types of penalties FINRA can apply

A

Censure, Fines, Suspend, Expel, or any other sanction. Cannot send to jail.

87
Q

Suspended or Expelled Person

A

Cannot be associated with firm in any capacity.
Can only be paid for earnings prior to suspension period.
FINRA will notify news media for public riducule

88
Q

Complaint response

A

Complaints must be answered in 25 days. If not, notice will be sent giving another 14 days

89
Q

Hearing Panel

A

Consists of CHO (FINRA employee) and two other industry panelists. Decision rendered within 60 days.

90
Q

Appealing complaints

A

Either party can appeal Hearing Panel. 25 days to do so, then goes to NAC. NAC can also review decisions on its own for 45 days

91
Q

Complaint Settlement

A

At any point, the respondent can offer to settle complains. it must be in writing, state the cause, sanction, and waive rights of appeal.

92
Q

dispute between 2 associated persons

A

MUST be settled by arbitration

93
Q

Non-Public Arbitrator

A
  1. Associated with firm in past 5 years, but now retired.
  2. Or, attorney, accountant, or other professional with 20% or more of professional work in financial services.
  3. Employee of bank and effects securities/commodities transactions or monitors those who do
    -includes immediate family members, or anyone who spent over 20 years in the industry
94
Q

Member-Member Dispute panels

A

Panel must consist of 3 non-public arbitrators

95
Q

Associated Person Dispute panel

A

1 non-public and 2 public arbitrators

96
Q

Customer dispute panel

A

1 non-public and 2 public

97
Q

Claims under $100,000 panel

A

is only 1 non-public arbitrator

98
Q

simplified arbitration

A

disputes under $50,000. Both parties file their case with Director of Arbitration who renders a binding decision

99
Q

Arbitration awards paid

A

within 30 days of decision, and 15 day extension, before FINRA suspends the firm

100
Q

Code of Mediation

A

both parties must consent, is generally cheaper than arbitration. if no settlement is met, mediator cannot serve on arbitration panel

101
Q

Statutory Insider

A

Officer, Director, 10% shareholder of equity.

Must report trades to SEC within 2 days of event. Short-swing profits must be paid to company. Cannot short stock, unless short against box

102
Q

Tipper/Tippee

A

Giving someone inside information is not a violation. It is only a violation if the recipient uses the information to trade for profit.

103
Q

Inside info becomes public

A

when it has been disseminated by the news media. Simply giving the info to the media does not make it public.

104
Q

Preventing misuse of MNPI

A

B/Ds must have written procedures in place to prevent misuse of MNPI

105
Q

Information barrier

A

research and investment banking must have separate information flows

106
Q

insider trading penalties

A

civil penalty- 3x profit
criminal penalty- up to $5,000,000 and up to 20 years in jail

107
Q

Informer Bounty

A

Can be paid 10-30% amount recovered for insider trading

108
Q

suing insiders

A

private parties have 6 years to sue insiders for profits missed or loses insured due to their inside trading

109
Q

Pre-arranged Trading Plan

A

safe-harbor that permits statutory insiders to set up a written plan specifying amounts or an algorithm to trade securities. Once it is in affect, they cannot have any further influence.

110
Q

Regulation FD

A

designed to promote full and fair disclosure from issuers.

111
Q

Prohibition of Selective Disclosure

A

If an issuer discloses MNPI to some who might trade on the info, they must make it publicly available to news media or filing 8K with SEC

112
Q

Defenses against insider trading

A

person had entered into binding contract to buy/sell, which specified amount, date, and price, prior to learning of MNPI

113
Q

Family Member Inside Trading

A

Liability exists if a family member trades on inside information. But, an affirmative defense is if the recipient can demonstrate no duty of trust or confidence existed.

114
Q

Regulation SP

A

Firms must disclose privacy policies and practices to retail clients at account opening and annually thereafter.

Must include opt out option on notice, check box, toll free # or electronic means. Cannot make client write letter.

Only applies to individual info, not aggregated info

115
Q

“2&5”

A

Under Section 9 of ‘34 act, suit must be made within 2 years of discovery, but no later than 5 years after violation occurred.

116
Q

Manipulation is fraud

A
  1. applies to non-exempt and exempt securities
  2. brokers cannot use or employ deceptive practices
  3. any and all fraudulent actions are illegal
117
Q

Tender offer opinion

A

Company that is subject of a tender offer must present opinion to shareholders within 10 business days. Must be recommend/reject, neutral, or unable to take position.

118
Q

During Tender offer

A

whoever obtains info about the progress of the offer is an insider and cannot purchase stock. Also, the maker of the offer cannot purchase stock in the market.

119
Q

Requirement for Selling Penny Stocks

A

Brokers must pre qualify new customers buying penny stocks.

120
Q

Designated Securities

A

not exchange listed
not included on NASDAQ
and have price below $5/share

121
Q

Written Suitability Statement for penny stocks

A

Must be signed by customer before trade can be effected. Must state in boldface it is unlawful for broker to effect transaction until client signs an accurate statement.

122
Q

Established customer

A

has effected securities transaction or deposited funds over a year ago
OR
made 3 separate purchases of designated securities on separate days

123
Q

Other penny stock disclosures

A

must include standard “risk disclosure document”
must disclose bid/ask to prevent taking excessive spreads
must disclose compensation earned from transaction prior to effecting trade

124
Q

Penny stock account statements

A

must be sent monthly instead of quarterly.
exceptions: if it makes up less than 5% of broker’s revenue, client is accredited, insider, or unsolicited.

125
Q

Cold Calling Rules

A

Cannot be before 8am or after 9pm in recipient’s time zone
Must state Name, Firm, Address or Number calling from
Must place recipient on do not call list if requested

126
Q

Established Business Relationship, EBR

A

Made a transaction or held a security at firm in past 18 months
Inquired with firm about products in past 3 months

127
Q

3 Exceptions to National Do Not Call list

A

EBR
Express Written Consent
Personal Relationship with Rep

128
Q

Uniform State Law (blue sky laws)

A

Must be registered in state you are trying to sell in

129
Q

Blue Sky exception

A

Broker has no office in state
Effects trades only with other brokers/institutions
Customer is only vacationing in state

130
Q

Dual registration

A

Some states allow it, and FINRA must be given prior notification via Form U4
-if working part time for another broker, will be considered OBA, not dual registration

131
Q

Static internet comments

A

Are retail communication and require prior principal approval

132
Q

Small branches

A

One of the reps must “act” as supervisor, while a BOM at another branch is responsible for supervision

133
Q

Who can approve mutual fund ads?

A

Series 24 or 26 (IC/Variable annuity principal)

134
Q

Internet chat room is considered

A

Public appearance

135
Q

U4, subject to court action

A

must amend U4, but doesnt necessarily involve FINRA.

136
Q

referral, but on “do not call” list

A

Rep cannot call, but can send written correspondence

137
Q

do not call list is maintained by…

A

FTC, federal trade commission

138
Q

new customer wanting immediate execution

A

can be done without verification of identity. sol/unsol doesnt matter

139
Q

FINRA summarily suspending a firm…

A

if they have financial difficulties or suspended/expelled by another SRO. cannot suspend for written complaints (must follow code of procedure)

140
Q

MSRB vs FINRA “all other” records rules

A

FINRA - all other records are 3 years
MSRV - all other records are 6 years

141
Q

Code of Procedure escalation path

A

hearing panel&raquo_space; national adjudicatory council&raquo_space; SEC&raquo_space; Federal Court

142
Q

customer must be given notice that their name…

A

will be matched against the federally maintained terrorist watch list

143
Q

before hearing panel…

A

pre-hearing conference must be scheduled within 21 days of responding to complaint.

Series 10 (5 decks)

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