Chapter 1 - Sales Supervision Flashcards
True or False
FINRA is responsible for overseeing the equity trading markets of the United States ONLY.
TRUE
What is the regulatory unit of the NASD and NYSE called?
FINRA
Advertisements dealing with which of the following products must be pre-filed with FINRA?
- Options
- CMOs
- Public DPPs
- Treasury securities
- Options
The following advertisements must be pre-filed with FINRA 10 days prior to first use:
Options;
Mutual fund retail communications with member-prepared performance rankings;
and
Bond mutual funds with volatility rankings.
If it is determined that damages must be paid as a result of insider trading, who is the check made payable to?
The Department of Treasury
Not the SEC - this way the SEC cannot be accused of prosecuting insider trading cases to generate revenue for itself
How long is the statute of limitations for a private party to sue a person guilty of insider trading?
5 years
True or False
All retail communications involving securities futures (options) must be filed with FINRA 10 business days after first use.
False.
All retail communications involving security futures (options) must be filed with FINRA 10 business days prior to first use.
True or False
All retail communications involving security futures (options) must be filed with FINRA 10 business days prior to first use.
True
True or False
Mutual fund retail communications with member-prepared performance rankings must be filed with FINRA 10 business days after first use.
False
Mutual fund retail communications with member-prepared performance rankings must be filed with FINRA 10 business days prior to first use.
This is also the case for bond mutual fund retail communications with volatility rankings.
True or False
Bond mutual fund retail communications with volatility rankings must be filed with FINRA 10 business days after first use.
False
Bond mutual fund retail communications with volatility rankings must be filed with FINRA 10 business days prior to first use.
Mutual fund retail communications with member-prepared performance rankings must also be filed 10 days prior to first use.
True or False
Mutual fund retail communications with member-prepared performance rankings must be filed with FINRA 10 business days prior to first use.
True
True or False
Bond mutual fund retail communications with volatility rankings must be filed with FINRA 10 business days prior to first use.
True
When must retail communications regarding CMOs be filed with FINRA?
Within 10 business after first use.
The retail communications that must be filed 10 days after first use (always) are CMO, publicly traded-structured products, DPP and other mutual fund retail communications.
When must retail communications regarding publicly traded structured products (like ETNs) be filed with FINRA?
Within 10 business after first use.
Registered structured products (such as Exchange
Traded Notes - ETNs) based on a single security,
basket of securities, an index, a commodity, a debt
issuance or a foreign currency. Note that this does
not apply to privately placed structured products -
only to registered offerings which can be traded;
When must retail communications regarding registered direct participation programs (DPPs) be filed with FINRA?
Within 10 business days after first use.
Registered direct participation program (DPP) retail communications. Filing does not apply to privately placed DPPs
When must mutual fund retail communications (that do NOT include member-prepared performance rankings or bond fund volatility ratings) be filed with FINRA?
Within 10 business days of first use
Investment Company retail communications that do not include member-prepared performance rankings and bond fund retail communications that do not include fund volatility ratings. Note, as well, that an Omitting Prospectus under SEC Rule 482 must be filed;
When must templates for written reports produced by, or concerning an investment analysis tool be filed with FINRA?
Within 10 business days after first use.
When must broadly disseminated free-writing prospectuses be filed with FINRA?
Within 10 business days after first use.
Under rule 405 (Automatic Shelf Registration)
When must tombstone ads that comply with SEC Rule 134 be filed with FINRA?
There are no filing rules for tombstone ads that comply with SEC Rule 134.
When must recruitment ads be filed with FINRA?
They don’t have to be filed
When must non-promotional change announcements, such as change of office address or phone number be filed with FINRA?
Never. No filing rules.
Yes or No
Do independently prepared reprints, press releases, institutional sales material, correspondence, and communications posted on an online interactive forum need to be filed with FINRA? If so, when must they be filed by?
No.
True or False
After a firm’s first year of operations, retail communications do not need to be filed with FINRA (but are subject to spot check). Unless the communication is regarding options, CMOs, publicly traded structured products, DPPs, mutual funds, investment analysis templates, and broadly disseminated free-writing prospectuses, limited partnerships, and government securities.
True
During a firm’s first year in operations, when must they file retail communications with FINRA?
10 business days prior to first use.
FINRA requires that __________ be kept in each branch office, available for customer inspection.
A copy of the FINRA rule manual
Web-access from a branch to the FINRA website is permitted.
True or False
FINRA requires that each branch office keep written supervisory procedures, customer complaint files, and a general principal present.
False
Written supervisory procedures; customer complaint files; and a general principal must be present in an Office of Supervisory Jurisdiction - not in each branch office.
What is required to be kept in each Office of Supervisory Jurisdiction?
(3 items)
- Written supervisory procedures
- Customer complaint files
- A general principal
Disputes between the public and FINRA members are handled through the Code of __________?
The Code of Procedure
Disputes between two FINRA members is handled through the Code of Arbitration.
Disputes between two FINRA members is handled through the Code of ____________.
Code of Arbitration
Disputes between FINRA members and the public are handled through the Code of Procedure.
Regulations which control relationships between the public and FINRA members are called ______________.
Conduct Rules
Regulations which control relationships between two member firms: Uniform Practice Code
Regulations which control relationships between two member firms are referred to as _______________.
Uniform Practice Code
Under the Uniform Practice Code, if a member firm is found to have violated the rules, what disciplinary actions may FINRA enact?
FINRA has the power to:
Censure
Expel
Suspend
Fine
Under what conditions does a broker/dealer not have to register with FINRA?
If a firm deals only in exempt securities; or
Performs business activities exclusively outside of the US,
the firm does not need to register with FINRA.
True or False
FINRA members may have an advantage in receiving discounts from public prices.
True
Non-members may not participate in any non-exempt securities underwritings or receive discounted prices - must pay public pricing.
After returning home from military duty, how long does a representative have to reassociate with the member firm before having their registration terminated?
90 days.
Investors who willfully violate the prohibitions in the Insider Trading and Fraud Enforcement Act of 1988 may be liable for damages. What is the statute of limitations for such charges?
Any suit must be brought within 2 years of discovery of the event, but no later than 5 years after the violation occurred.
True or False
Rule 10b-1 in the Act of 1934 states that the section only applies to non-exempt securities.
False.
Rule l0b-1 - States that this section of the Act applies to manipulation of both exempt and non exempt securities.
True or False
Rule 10b-3 is known as the “catch-all” fraud rule, makes it illegal for any person to commit undefined actions that would operate as a fraud.
False
Rule 10b-5 is known as the “catch-all” fraud rule.
Rule 10b-3 states that it is unlawful for broker-dealers, including municipal broker-dealers, to use or employ any deceptive or manipulative device.
True or False
Rule l0b-3 states that it is unlawful for broker-dealers,
including municipal broker-dealers, to use or employ any deceptive or manipulative device.
True
What does Rule 10b-1 state in the Act of 1934?
Rule 10b-1 states that this section of the Act applies to manipulation of both exempt and non exempt securities.
Therefore, if a person manipulates U.S. Government bond transactions, a violation under the Act has occurred.
Under rules 14e-1 through 14e-5 in the Act, a company that is the subject of a tender offer must do what within 10 business days of the date of the offer?
The company must give an opinion to its shareholders on the offer.
When the subject company in a tender offer gives its opinion to shareholders, what are the three options it may give regarding the acceptance/rejection of the tender offer?
- recommend acceptance or rejection of the tender offer;
- Expresses no opinion and is remaining neutral toward the bidder’s tender offer.
- is unable to take a position with respect to the bidder’s tender offer
True or False
During the life of a tender offer, recipients of information about the offer’s progress are considered “Insiders” and are prohibited from trading the security until the knowledge becomes public.
True
What does Section 15 of the Act of 1934 outline?
Section 15 of the Act places requirements on broker-dealers. Section 15a-1 requires broker-dealers that effect transactions in securities (other than exempt securities) to be registered.
It also allows the SEC to censure, suspend, or revoke the registration of a broker-dealer or associated person.
True or False
Broker-dealers are under no obligation to pre-qualify new customers who wish to purchase penny-stock as the result of a solicitation.
False
Broker-dealers· are required to pre-qualify new customers that wish to purchase penny stock as the result of a solicitation.
SEC Rules 15g-1 through 15g-6 are designed to prevent high pressure telephone sales tactics when selling low price securities.
True or False
If an agent resides in a state, he must be registered in that state, whether the offers of securities are made in that state or another state.
True
True or False
Regulation FD requires financial institutions to provide customers with a copy of their privacy policies and procedures, including whether customer information is provided to third parties; and requires that customers be given the ability to “opt out” of any such disclosures.
False. This describes Regulation SP.
Regulation FD (fair disclosure) prohibits issuers from making selective disclosure of non-public information to research analysts, mutual fund managers, and other industry professionals, unless at the same time, the information is broadly disseminated to the public.
True or False
Regulation SP requires financial institutions to provide customers with a copy of their privacy policies and procedures, including whether customer information is provided to third parties; and requires that customers be given the ability to “opt out” of any such disclosures.
True
The requirement for broker/dealers to maintain Chinese Walls comes under:
A. Insider Trading Act amendments of 1988
B. SEC Rule 10b-5
C. Uniform Securities Act
D. PATRIOT Act of 2002
A. The requirement for broker-dealers to maintain a Chinese Wall as a barrier to information flow between a member firm’s investment banking group and the member firm’s trading desk was made explicit in the Insider Trading Act Amendments of 1988.
True or False
NYSE Rule 342 - requires each office, department, or business activity of a member firm to be under the supervision and control of the member organization.
True
Overall supervision and compliance is the responsibility of the Compliance Officer. The compliance officer must pass which Series Exam?
Series 14 exam
Supervisors of branches must pass which series exam?
Series 9 and Series 10
Duties of Branch Supervisors (Series 9/10) are?
List 3
- Approval of new accounts
- Review of correspondence of registered representatives
- Review of transactions and customer accounts
True or False
Under NYSE rules, only a member firm’s main office must be registered with the exchange.
False.
Other than a member firm’s main office, each office of the member firm must be registered with the exchange.
The exchange must give prior consent for each new office.
The Exchange wishes to know about each office (since it sends auditors to check them out) and because it charges an annual fee per office.
True or False
Under NYSE rules, the exchange must give prior consent for each new office of a member firm.
True
The Exchange wishes to know about each office (since it sends auditors to check them out) and because it charges an annual fee per office.
True or False
Under the NYSE rules for office registration, foreign branch offices of member firms are subject to being registered with the exchange.
True
Foreign branch offices
AND
Registered representatives operating out of their homes.
Each year, by which date must the member firm prepare, and submit to its chief executive officer, a report on the member firm’s compliance effort for the preceding year?
By April 1st of each year.
Which NYSE rule requires that each branch office of a member firm be used exclusively by that firm; the office cannot be occupied jointly with another broker-dealer, investment adviser, or other person who conducts a commodities or securities business with the public.
Rule 343
True or False
Under NYSE rules, branch offices are not required to be open during all NYSE trading hours.
False
Branch offices must be open on every business day during the trading hours of the NYSE.
True or False
Branch offices must display the FINRA membership certificate that is given by FINRA to your firm for each branch office that it registers.
False.
Branch offices must display the NYSE membership certificate that is given by the NYSE to your firm for each branch office that it registers.
True or False
Branch offices must display the NYSE membership certificate that is given by the NYSE to your firm for each branch office that it registers.
True
Which NYSE rule requires member organizations to register with the Exchange, all persons performing the following functions:
Registered representatives;
Securities lending representatives;
Securities traders;
and
All supervisors of these persons.
Rule 345
NYSE Rule 345 requires what?
Rule 345 requires member organizations to register with the Exchange, all persons performing the following functions:
Registered representatives;
Securities lending representatives;
Securities traders;
and
All supervisors of these persons.
If a new applicant was previously registered with another firm, a U5 form must be obtained and reviewed within how many days from the date of the U4 filing?
Within 60 days.
True or False
If an employee is terminated, the discharge, with the reasons therefor, must be reported to the Exchange on a U-5 Form within 90 days.
False
If an employee is terminated, the discharge, with the reasons therefore, must be reported to the Exchange on a U-5 Form within 30 days.
Which NYSE rule requires that any controversy between a registered representative and a member arising out of employment, or termination of employment, be settled by the NYSE Arbitration Procedure?
NYSE Rule 347
What does NYSE Rule 347 state?
Rule 347 states that any controversy between a registered representative and a member arising out of employment, or termination of employment, be settled by the NYSE Arbitration Procedure.
True or False
Under the NYSE Arbitration procedure, decisions made by the panel are non-binding and are appealable.
False.
Decisions made by the panel under the arbitration procedure are binding and non-appealable.
True or False
“Soft-dollar” remuneration is prohibited under FINRA rules.
False.
The practice of “soft dollar” remuneration continues to this day and is not prohibited under FINRA rules as long as the services provided to the investment adviser or investment company by the broker benefit the customers of the investment adviser or investment company.
A registered representative who participates in an Internet chat room is defined as:
A. Advertising
B. Sales literature
C. Public appearance
D. Correspondence
C. Public Appearance
FINRA defines interactive (real-time) content on blogs, social networking sites, and chat-rooms as a public appearance.
Non-interactive (static) content is defined as advertising.
What are the duties of an Office of Supervisory Jurisdiction?
4 items
- Maintenance of required records of the firm’s written supervisory procedures.
- Periodic/frequent inspection of customer account records in branches.
- Must review and approve all customer transactions and review sales related correspondence.
- Must go through an annual inspection by the member.
True or False
Any communication analyzing individual stocks that provides information that allows an investment decision to be made, if it is distributed to at least 15 persons is defined as “sales literature”.
False.
Any communication analyzing individual stocks that provides information that allows an investment decision to be made, if it is distributed to at least 15 persons is defined as a research report.
All of the following are prohibited practices under FINRA rules except;
A. Backing away
B. Interpositioning
C. Free riding and withholding
D. Arbitrage trading
D. Arbitrage trading
Arbitrage is a basic trading activity.
A registered representitive is called up for active military duty. During the time period that the individual is on military leave, the person’s registration is:
A. Terminated
B. Suspended
C. Inactive
D. Active
C. inactive
True or False
Upon request, a broker-dealer must furnish a customer with its latest net capital computation.
True
True or False
Upon request, a broker-dealer must furnish a customer with its latest balance sheet.
True
Upon request, firm must provide its latest net capital computation and its latest balance sheet.
They are NOT required to furnish an income statement.
What happens if a registered rep fails to complete the Regulatory element of the Continuing Education requirement within the 120-day window given?
The rep will have their license suspended and they cannot be compensated by the member firm.
What causes the “taping rule” to be triggered?
The taping rule requires that member firms tape conversations of its registered representatives. It is triggered if a broker/dealer hires a significant number of previously registered representatives from a member that was expelled due to “cold calling rule” violations.
What is the statute of limitations for filing an arbitration claim?
6 years from the event
If FINRA expels or suspends a member firm, who will it notify?
(2 answers)
- FINRA membership
2. News services
When a firm recommends a security, it must disclose whether the firm, or its officers own the stock, options, or warrants on the stock.
What else must be disclosed?
(Two answers)
- The price of the security at the time of recommendation
- Whether the firm has been a manager or comanager in any underwriting of that company’s securities in the past 12 months.
True or False
The following are all prohibited under FINRA rules:
- Trading mutual fund shares
- Selling dividends
- Making blanket recommendations of low price securities
- Recommending purchases beyond a customers financial capacity.
True
A location where a registered representative meets a customer by appointment on a non-regular basis is defined as what?
An office of convenience
True or False
During a dispute, if both parties agree to attempt to settle the dispute through mediation, but the mediator fails to resolve the dispute, the dispute will then be handled under the Code of Procedure.
False
During a dispute, if both parties agree to attempt to settle the dispute through mediation, but the mediator fails to resolve the dispute, the dispute will then be handled under the Code of Arbitration.
True or False
During a dispute, if both parties agree to attempt to settle the dispute through mediation, but the mediator fails to resolve the dispute, the dispute will then be handled under the Code of Arbitration.
True
Under the Code of Procedure, once a hearing is requested in front of the District Hearing Panel, a(n):
A. pre-hearing conference must be scheduled
B. hearing must be scheduled
C. settlement offer must be made
D. appeal to the National Adjudicatory Council may be made
A.
Under the Code of Procedure, before the District Hearing Panel will schedule a hearing date, a pre-hearing conference must be held. The conference must be held within 21 days of the respondent’s answer to the complaint that initiated the Code of Procedure.
Under the Code of Procedure, A pre-hearing conference must be held within how many days of the respondent’s answer to the complaint that initiated the Code of Procedure?
Within 21 days
If an individual is terminated, FINRA must be notified by the firm within ____ days of termination on a U-5 form; and a copy of the form must be supplied to the ex-employee.
30
True or False
Repurchase agreements are permitted for non-exempt securities only.
False.
Repurchase agreements are permitted for exempt securities, since FINRA has no jurisdiction. However, for non-exempt securities (such as corporate bonds), a repurchase agreement, at a stated price, constitutes a guarantee.
True or False
Repurchase agreements are permitted for exempt securities only.
True.
Repurchase agreements are permitted for exempt securities, since FINRA has no jurisdiction. However, for non-exempt securities (such as corporate bonds), a repurchase agreement, at a stated price, constitutes a guarantee.
A customer complaint to be handled through the Code of Procedure is defined as any:
A. oral complaint of a customer
B. Written complaint on a customer’s stationery
C. Written complaint on the prescribed form established by the Board of Governors
D. Communication from a customer to a member expressing a grievance
C.
The only customer complaints that are handled by the Code of Procedure are those written on a Standard Complaint Form provided by the FINRA Board of Governors which are submitted to FINRA.
An attorney is defined as a “non-public arbitrator” if he or she has devoted:
A. 20% or more of his or her professional work to securities firm clients within the past 2 years
B. 20% or more of his or her professional work to securities firm clients within the past 3 years
C. 50% or more of his or her professional work to securities firm clients within the past 2 years
D. 50% or more of his or her professional work to securities firm clients within the past 3 years
A.
Any professionals such as accountants and attorneys, who devoted at least 20% of their professional work to securities firm clients within the past 2 years, are defined as non-public arbitrators.
Which of the following are violations of FINRA rules?
I Sharing in the profits and losses of a customer’s account without contributing proportional capital
II Selling exempted securities to a customer with a written agreement to buy back the securities at a later date
III Orally guaranteeing to buy back customer securities at a preset price
A. I only
B. I and III
C. II and III
D. I, II, III
B.
A registered representative cannot guarantee a customer’s account against loss or share in the account unless he opens a joint account with the customer; contributes capital proportional to any sharing agreement; and obtains the approval of a principal for the account. Selling exempted securities with a written agreement to buy them back at a later date, which defines a “repurchase” agreement, is allowed.
Which of the following is NOT defined as an OSJ?
A. A location where new issue offerings are structured
B. A location where final review of new accounts occurs
C. A location where advertising and sales literature is approved
D. A location where orders are accepted from customers
D.
A location where orders are accepted from customers is a “branch office.” An Office of Supervisory Jurisdiction is a location where any of the following activities take place:
Order execution and/or market making;
Structuring of new issue offerings;
Final approval of new accounts;
Review and approval of customer orders;
Review and approval of advertising/sales literature;
Responsibility for supervising activities at one or more branch offices.
Generally, arbitration panels to hear disputes with industry personnel where the amount is $100,000 or more, consist of:
A. 3 public arbitrators
B. 3 non-public arbitrators
C. 1 public; 2 non-public arbitrators
D. 2 public; 1 non-public arbitrator
B.
Generally, arbitration panels to hear disputes with customers where the amount in dispute is $100,000 or more, consist of 3 arbitrators - 2 public and 1 non-public. In contrast, arbitration panels to hear disputes with industry personnel where the amount in dispute is $100,000 or more, consist of 3 non-public arbitrators.
Which of the following has the authority to suspend, expel or fine a member?
I District Hearing Panel
II Uniform Practice Committee
III FINRA National Adjudicatory Council
IV Securities and Exchange Commission
A. I and II
B. II and III
C. I, III, IV
D. I, II, III, IV
C.
The FINRA District Hearing Panel as well as the National Adjudicatory Council, have the power to suspend, expel, or fine a member.
The Uniform Practice Committee is concerned with dealer to dealer practices such as settlements, and is not involved in trade practice disputes since these are handled through binding arbitration. Of course, the SEC always has the power to suspend or expel a member.
Generally, arbitration panels to hear disputes with industry personnel where the amount is $100,000 or more, consist of:
A. 3 public arbitrators
B. 3 non-public arbitrators
C. 1 public; 2 non-public arbitrators
D. 2 public; 1 non-public arbitrator
B.
Generally, arbitration panels to hear disputes with customers where the amount in dispute is $100,000 or more, consist of 3 arbitrators - 2 public and 1 non-public. In contrast, arbitration panels to hear disputes with industry personnel where the amount in dispute is $100,000 or more, consist of 3 non-public arbitrators.
True or False
The statute of limitations for filing a claim for settlement by arbitration is 2 years from discovery of the event, no longer than 5 years from when event occurred.
False.
The statute of limitations for filing a claim for settlement by arbitration is 6 years from the event.
True or False
The statute of limitations for filing a claim for settlement by arbitration is 6 years from the event.
True
Under the Insider Trading and Fraud Enforcement Act of 1988, informants may be paid a bounty for information leading to the arrest of inside traders. What percentage of the amounts recovered under civil penalties may be paid out to the informant?
10% to 30%
True or False
Under the Insider Trading and Fraud Enforcement Act of 1988, informants may be paid a bounty for information leading to the arrest of inside traders.
True
All of the following disputes will be handled by binding arbitration EXCEPT:
A. member firm versus member firm
B. associated person versus associated person
C. clearing corporation versus member firm
D. FINRA versus member firm
D.
FINRA does not come after member firms or associated persons under the Code of Arbitration. Rather, they file a complaint under the Code of Procedure through the Department of Enforcement or the Department of Market Regulation.
Any intra-industry dispute is handled by the Code of Arbitration.
True or False
The established customer exemption from the requirement of the “penny stock” rule applies to customers who have had an account at the firm for at least 1 year; customers who have already signed 3 suitability determinations at that firm; and customers that are effecting transactions in penny stocks that are unsolicited.
True
The Minor Rules Violation procedure can be used if the:
I member admits guilt
II offense is minor
III penalty is limited to a maximum $2,500 fine for a first offense
A. I and II
B. II and III
C. III only
D. I, II, III
D
