Chapter 1 - Sales Supervision Flashcards
FINRA Code of Procedure
Disputes between customers and members
Uniform Practice Code
Regulations the control member-to-member relationships
Doesn’t need FINRA Registration
If their business consists solely in exempt securities (Govt/Muni dealers)
OR
If their business is performed exclusively outside United States
Non-member restrictions
Cannot join in common stock underwriting.
Can only receive public prices.
Form BD
Application to become a member (broker-dealer)
Statutory Disqualification for FINRA membership
- suspended/expelled from any other SRO
- person caused another firm’s suspension/expulsion
- lied on application
- willfully violated or failed to supervise securities or commodities laws
- convicted of securities misdemeanor or any felony within past 10 years
- temporarily or permanently enjoined
Reverse Statutory DQ?
Must request permission from FINRA, and if approved will then be reviewed by SEC. If denied by FINRA, SEC can be appealed.
Member resignation
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.
OSJ
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.
Branch Office
Securities business is conducted regularly.
The location is advertised to the public.
Form BR
Must be submitted to register branch. Any changes must be submitted within 30 days of learning.
Primary Residence location exception
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
Vacation Home exclusion
Not a branch if used for less than 30 business days a year
Office of convenience
isnt a branch if only used occasionally and by appointment only.
Satellite Office
isnt a branch if it engages in non-securities activities and 25 or less securities trades.
Not Not May
Not FDIC Insured
Not deposits guaranteed
May lose value as securities products
Branch in bank
- physical location must be separate from deposit area
- member’s name shall be clearly displayed
- must give not-not-may orally and in writing
Form U4
Reps, IAs, or Issuers must use this form to become registered in appropriate jurisdictions and/or SROs
U4 changes
Must be amended promptly- within 30 days, or if it will result in statutory DQ, 10 days.
U4 Form info
5 yrs of residence history
10 yrs of employment history
OBAs
Arrests
Convictions
Complaints over $15K
Sales violation proceedings
Verify U4
Member must do this within 30 days.
Verify prior 3 yrs employment, ascertain good character, search public records,
Regulatory Element
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.
Firm element
Annual training plan that covers relevant product, regulatory and compliance issues.
Military Duty
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
U5 form
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
Hanging Licenses
is explicitly prohibited.
Maintaining Qualifications Program (MQP)
Effective March 2022,
Registered persons who leave the business have 5 years to retain licenses by completing annual Regulatory Element CE.
Reportable Events
Must be reported to FINRA as event is happening, whether there is proof or conviction. Promptly- within 30 days
BrokerCheck content
is derived from U4 and U5. Employment history, licenses, complaints, OBAs.
BrokerCheck notice
Annual notice to clients regarding:
1. hotline
2. website
3. brochure
Guarantee against loss exception
Repo agreement for Exempt security.
Sharing in Gain/Loss
is prohibited, except through joint account with written approval & directly proportional to capital contributed (or immediate family).
Hedge Fund Rule
- account at least 1,000,000 & client net work 2,100,000
- prior written agreement with approved compensation arrangement
- covers gains/losses for at least 1 year
- member has disclosed any conflict of interest
Exceptions for lending/borrowing with customer
- immediate family member
- lending institution
- both are registered at same member
- based on personal relationship
- based on business relationship outside of B/D
3, 4, 5 need written notice and prior approval from member
Statements available upon customer request
- FINRA manual, physical copy or web access
- latest balance sheet
- net capital computation
2 & 3 provided unaudited semi-annually and audited annually.
“customer” can include other B/Ds if transacting, doesnt include prospective customers
Completion of Transaction
If payment/delivery, or entries, are made before settlement, this does NOT complete the transaction.
All Transactions
must be reviewed and approved in writing by series 24 or 9/10 and kept for 3 years
Gift limit exception
Limit doesnt apply if personal gift, or if offeror’s logo is engraved.
Paying customer for work
is permitted with written agreement spelling out terms & is approved in writing by principal
Selling Away
prohibited unless firm specifically approves transaction in writing, then firm must supervise transaction. uncompensated transactions still need written approval.
Political Contribution limits
$350 per candidate per election if you can vote, $150 if not. Exceeding puts two-year timeout on issuer for any underwriting.
RR/Firm disputes
must be handled through binding arbitration, exceptions include: harassment, discrimination, and whistleblowing.
Distributing proxy materials
If held in street name, firm must forward materials at no charge to client. issuer will reimburse firm.
Private & non-traded REITs
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.
Copy of WSP
must be kept in the OSJ. Series 24 must carry out WSP
OSJ defined
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
Supervisor supervision
cannot supervise own activities, must be someone they are not supervising, nor someone who determines their compensation.
Supervisory branches
are branches that supervise other branches, they must be inspected annually in person
Non-supervisory branches
do not supervise other branches, must be inspected every 3 years in person.
Heightened Supervision
- proximity of supervisor to associated person
- frequent contact and review of communications
- frequent inspection of offices
- expedited handling of complaints
Annual Review for OSJ
individually or collectively,
in person or remote,
can be pre-recorded if Q&A follows.
must be “interactive”
Customer complaints retained at OSJ
for 4 years in separate file. All info must be filed with FINRA every quarter.
Correspondence
Any written or electronic communication to less than 25 customers within 30 day period
Retail Communication
Any written or electronic communication made available to more than 25 customers within 30 days.
Institutional Communication
Any written or electronic communication distributed only to institutional investors.
Advertising
material intended for mass markets.
Excluded are tombstones, prospectus and purely informational advertising
Sales Literature
material for a specific audience, like speech text, research reports, password protected websites, circulars.
Independently Prepared Reprints
A reprint or excerpt from any article issued by a publisher not associated with or commissioned by the member.
Public Appearance or Public Forum
unscripted spontaneous talks. subject to post review and approval, but firm must establish guidelines to be followed.
Correspondence Compliance Program
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
Retail Communication approval
must be done by 24, prior to use. exceptions are non-promotional communications (no recommendations)
Free-Writing Prospectuses (FWP)
Approved in advance by 24.
if on password-protected site, not considered “broadly disseminated”
Institutional communication approval
does not require prior approval, but must be reviewed and approved by 24
Institutional Communication forwarding
Member should cease distributing to recipient until it can conclude they will not redistribute going forward
General Retail Comm Filing rules
10 days in advance for first year of business. no filing requirement thereafter, but subject to spot checks.
Always in advance retail communication filings
Options Communications
Investment Company communications with member-prepared performance.
Always post use retail communication filings
CMO, Structured product, DPP/BDC, Investment Company w/ out member performance, broadly disseminated FWPs.
Communications Standards
fair and balanced, not misleading, sound basis for evaluating facts. No projections unless “investment analysis tool”
Investment Analysis Tool
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.
Testimonials are allowed if these disclosures are made:
experience may not be indicative of other clients or future performance and if client was paid more than $100 for testimony.
SIPC Logo
Required on all advertisements larger than 10 sq inches. NOT required for sales literature.
Marketing prepared by third party
this must be disclosed so that the rep isn’t viewed as the author or an expert
Market Letter Standards
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
Research Report
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
Research Report past performance
- at least 12-month period
- indication of general market trends
- if comparable recs shown, all past recs must be shown
- transaction costs included
- disclosure about future performance
Research Personnel Prohibitions
- Cannot buy companies in same industry prior to IPO
- Cannot trade contrary to firm’s recommendation
- Underwriting manager cannt issue report within 10 days of IPO or 3 days of secondary offering
Recommendation conflict disclosures
- if member own 1% or more common stock
- assoc person has financial interest in company
- any other material conflict of interest
Member disclosures for research reports
- if they have managed an equity offer for that issuer in past 12 months
- received compensation from IB services for that issuer in past 12 months or expects to in next 3 months
- is an IB services client
- is a market maker in issuer’s stock
SEC Research Report Definition
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.
Third-Party research
free of conflicts
identity of firm must be disclosed
but still need to disclose if there is conflict with issuer
Approved forms of Mutual Fund advertising
Explanatory info of investment company offers, products, or services without mentioning the desirability of these investments
Approved forms of options advertising
Description of security offered, nature of markets, OCC, and invitation to inquire for more information & options disclosure document
Fidelity Bond coverage
to insure against loss from employee theft or misappropriation, amount increases as required net capital increases. must be reviewed anually.
Taping Rule
- If sales force consists of too many members from an expelled firm, then calls must be recorded.
- Firms have 60 days to comply and must record for 3 years.
- Firm can avoid if they reduce staff within 30 days
- Must file report quarterly regarding telemarketing activities
Complaint process
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
Types of penalties FINRA can apply
Censure, Fines, Suspend, Expel, or any other sanction. Cannot send to jail.
Suspended or Expelled Person
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
Complaint response
Complaints must be answered in 25 days. If not, notice will be sent giving another 14 days
Hearing Panel
Consists of CHO (FINRA employee) and two other industry panelists. Decision rendered within 60 days.
Appealing complaints
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
Complaint Settlement
At any point, the respondent can offer to settle complains. it must be in writing, state the cause, sanction, and waive rights of appeal.
dispute between 2 associated persons
MUST be settled by arbitration
Non-Public Arbitrator
- Associated with firm in past 5 years, but now retired.
- Or, attorney, accountant, or other professional with 20% or more of professional work in financial services.
- 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
Member-Member Dispute panels
Panel must consist of 3 non-public arbitrators
Associated Person Dispute panel
1 non-public and 2 public arbitrators
Customer dispute panel
1 non-public and 2 public
Claims under $100,000 panel
is only 1 non-public arbitrator
simplified arbitration
disputes under $50,000. Both parties file their case with Director of Arbitration who renders a binding decision
Arbitration awards paid
within 30 days of decision, and 15 day extension, before FINRA suspends the firm
Code of Mediation
both parties must consent, is generally cheaper than arbitration. if no settlement is met, mediator cannot serve on arbitration panel
Statutory Insider
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
Tipper/Tippee
Giving someone inside information is not a violation. It is only a violation if the recipient uses the information to trade for profit.
Inside info becomes public
when it has been disseminated by the news media. Simply giving the info to the media does not make it public.
Preventing misuse of MNPI
B/Ds must have written procedures in place to prevent misuse of MNPI
Information barrier
research and investment banking must have separate information flows
insider trading penalties
civil penalty- 3x profit
criminal penalty- up to $5,000,000 and up to 20 years in jail
Informer Bounty
Can be paid 10-30% amount recovered for insider trading
suing insiders
private parties have 6 years to sue insiders for profits missed or loses insured due to their inside trading
Pre-arranged Trading Plan
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.
Regulation FD
designed to promote full and fair disclosure from issuers.
Prohibition of Selective Disclosure
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
Defenses against insider trading
person had entered into binding contract to buy/sell, which specified amount, date, and price, prior to learning of MNPI
Family Member Inside Trading
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.
Regulation SP
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
“2&5”
Under Section 9 of ‘34 act, suit must be made within 2 years of discovery, but no later than 5 years after violation occurred.
Manipulation is fraud
- applies to non-exempt and exempt securities
- brokers cannot use or employ deceptive practices
- any and all fraudulent actions are illegal
Tender offer opinion
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.
During Tender offer
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.
Requirement for Selling Penny Stocks
Brokers must pre qualify new customers buying penny stocks.
Designated Securities
not exchange listed
not included on NASDAQ
and have price below $5/share
Written Suitability Statement for penny stocks
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.
Established customer
has effected securities transaction or deposited funds over a year ago
OR
made 3 separate purchases of designated securities on separate days
Other penny stock disclosures
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
Penny stock account statements
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.
Cold Calling Rules
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
Established Business Relationship, EBR
Made a transaction or held a security at firm in past 18 months
Inquired with firm about products in past 3 months
3 Exceptions to National Do Not Call list
EBR
Express Written Consent
Personal Relationship with Rep
Uniform State Law (blue sky laws)
Must be registered in state you are trying to sell in
Blue Sky exception
Broker has no office in state
Effects trades only with other brokers/institutions
Customer is only vacationing in state
Dual registration
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
Static internet comments
Are retail communication and require prior principal approval
Small branches
One of the reps must “act” as supervisor, while a BOM at another branch is responsible for supervision
Who can approve mutual fund ads?
Series 24 or 26 (IC/Variable annuity principal)
Internet chat room is considered
Public appearance
U4, subject to court action
must amend U4, but doesnt necessarily involve FINRA.
referral, but on “do not call” list
Rep cannot call, but can send written correspondence
do not call list is maintained by…
FTC, federal trade commission
new customer wanting immediate execution
can be done without verification of identity. sol/unsol doesnt matter
FINRA summarily suspending a firm…
if they have financial difficulties or suspended/expelled by another SRO. cannot suspend for written complaints (must follow code of procedure)
MSRB vs FINRA “all other” records rules
FINRA - all other records are 3 years
MSRV - all other records are 6 years
Code of Procedure escalation path
hearing panel»_space; national adjudicatory council»_space; SEC»_space; Federal Court
customer must be given notice that their name…
will be matched against the federally maintained terrorist watch list
before hearing panel…
pre-hearing conference must be scheduled within 21 days of responding to complaint.
