Chapter 10- Self Regulatory Organizations Flashcards
Securities and Exchange Commission (SEC)
Federal regulator
Main purpose to protect investors, maintain fair orderly and efficient market, and facilitate capital formation
SEC jurisdiction
Exchanges, certain regulators (FINRA) and financial firms that conduct securities business and their employees are under SEC jurisdiction
SEC also has an enforcement arm to prosecute offenders
Self Regulator Organizations (SROs)
are supported by its own members
Sets rules, regulations, and penalties
Allows its members to vote
Examples are FINRA, CBOE, MSRB as well as all National Exchanges
These are NOT government agencies
Financial Industry Regulatory Authority (FINRA)
non-profit SRO, whose members include virtually all securities firms doing business in the US
Firms that are a part of FINRA are refereed to as a “member firm”
Purpose of FINRA
Standardize practices in the industry
Establish and enforce fair and equitable rules for trading of securities
establish a disciplinary body to enforce the rules to protect investors
FINRA’s main rule
“A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade”
This rule can be applied to any facet of a RR’s behavior
Municipal Securities Rule making Board (MSRB)
SRO Charged with primary rule making authority over municipal securities dealers and municipal advisors in connection with their municipal securities and municipal advisory activities
Rules are approved by the SEC and enforced by SEC and FINRA
North American Securities Administration Association (NASAA)
Voluntary Association. Represents the concerns of the states, Canada, Mexico, us virgin islands, and Puerto Rico
Seek to investigate violations, and pursue enforcement actions and educate the public about investment fraud
All disciplinary Actions taken by an SRO are…
Subject to SEC review
Series 7 exam is for…
qualifies individual to work with the public in the solicitation, purchase and/or sale of most securities products.
AKA- Registered Representative license or Stock Brokers License
Series 6
License which qualifies individual to work with public in redeemable securities of investment companies (mutual funds), securities of closed end companies during distribution, and variable contracts by insurance companies
For closed end funds they can only sell New Issues
Series 82
Limited to solely effecting sales of private securities offerings
Series 79
Limited Representative investment banking,
Required for advising on or facilitating debt or equity securities offerings though a private placement or a public offering
Series 22
Direct Participation Representative
required for activities in the investment banking or securities business that are limited solely to the solicitation, purchase, and or sale of equities interests in or debt of direct participation programs
Series 57
Securities trader and algorithmic trading strategy developers
Required for OTC equity trading, NASDAQ equity trading, Proprietary trading and persons primarily responsible for design development or significant modification to an algorithmic trading strategy
Series 99
Operations Professionals
The supervisor of the back office of a Brokerage firm
Series 27
Financial and Operations Principal (FINOP)
required for the person responsible for the preparation of a firm’s financial statements and net capital computations
Series 24
Principals registration
actively engaged in management of the firms investment banking and securities business
Series 65 or 66
An Investment Advisor
Required if you are paid for your advice even if no transactions take place
Some exceptions if advice is incidental and no additional charge for the advice. Lawyers, Accountants, Teachers, and Engineers (LATE).
Associated persons
Persons affiliated with a member firm who have obtained a special knowledge licenses (s-6 or s-7) or persons servicing as partner, officers, directors, or branch managers, for a member firm are considered “Associated Persons”
Employees in a clerical or ministerial capacity are not associated person
Persons who have passed only the SIE are not associated persons
Unregistered persons (non-associated persons) may not
Discuss investment products or services offered by the firm
solicit new accounts or orders
pre-qualify prospective customers as to financial status and investment objectives
Unregistered persons (non-associated persons) may
Extend invitations to firm-sponsored events
Inquire whether the customer wishes to discuss investments with a registered person
Determine whether the customer wishes to receive investment advice
Preform general clerical or ministerial functions
The following person are not required to be registered with FINRA
Persons whose functions are solely clerical and ministerial
Members who are not actively engaged in the investment banking or securities
Persons whose function is exclusively to effecting transactions on the floor of the exchange and are registered as a floor member with that exchange
transactions in commodities or futures provided that they are registered with a registered futures association
Form U-4
used to become registered in the appropriate jurisdiction and/SROs.
Form U-5
Used if you are terminated with a firm.
Notification of Termination
Member firm must notify FINRA within 30 days of termination using form U-5
Form U-6
Uniform Disciplinary Action Reporting Form
Used to report disciplinary actions against broker-dealers and associated persons
also used to report final arbitration by FINRA
SEC Rule 12F-2
Every person of a member firm must be fingerprinted
U-4 Form important facts
You agree to arbitrate any disputes or claims (can not sue)
Arbitration is final and binding
Ability to obtain documents is limited
Arbitrators do not have to explain reasoning for awards
Arbitrators may affiliated with securities industry or public arbitrators
limited time to bring arbitration
Claims alleging employment discrimination, including sexual harassment, are not required to be arbitrated but could go to arbitration if all parties agree to it
U-4 disclosure
Have you even been convicted or plead guilty to any felony
Have you even been charged with a felony
Have you even been convicted or plead guilty to a misdemeanor to a financially related crime
Have you ever been charged with a financially related crime
Previously Registered person returning to the industry
If they left more then 2 years ago they will have to re-qualify (take exams)
Maintaining Qualification Program (MQP)
Program that allows Registered persons who have terminated their association with a member firm to extend the 2 year qualification period by completing annual continuing education through this new program. This can extend the time up to 5 years
To qualify for the MQP
you must have held your designation for at least 1 year prior to termination
You must make the election at the time the U-5 is submitted or within 2 years from the termination
Must not have been subject to statutory disqualification
Registered Status of Persons in the armed forces
Registered person person who is called to active duty shall be placed on an inactive list and does not have to re register upon return.
They can receive commissions while on duty
The firm may allow someone else to take over their accounts and share in the compensation
Termination Status of Persons in the armed forces
If the person who was terminated U-5, before going on active duty but is on active duty when their 2 year registration lapses will have their re-registration period extended until either 90 days after active duty end or re-registration with a member firm, whichever comes first
Continuing education requirements are deferred while a person i in inactive status
FINRA membership is not avaiable (expect by order of SEC) in the following situation
Have been convicted in the last 10 years of a felony or misdemeanor involving embezzlement, misappropriation of fends, fraud, etc.
The individual does not meet the training and experience standards
If SEC revokes registration
FINRA will automatically terminate membership
Independent Contractors
May sell securities or mutual funds
Are considered employee of the broker dealer
Must be licensed as registered reps and supervised by registered principals
Unregistered Sales Assistance
Perform clerical duties only
Registered Sales Assistance
Can assist with sales
Continuing Education
The RR must complete the regulatory element of their requirement annually by December 31st every year in which the person remains registered
If failed to complete with in deadline they are automatically designated as Continuing Education Inactive by FINRA
Firm must maintain a firm element Continuing education program
Continuing Commissions may be paid to retiring RR if…
A bona fide written contract exists before the RR leaves the firm and that the RR is prohibited from soliciting new business, opening accounts, or serving the accounts
Reporting on a U-4
Only regulatory or legal matters are reported on a U-4
Violations of a firms policy do not have to be reported
FINRAs 10 disclosure and reporting events
Firm must report withing 30 CALENDAR days if the member:
1. Has been found to have violated any provisions of any security law
2. is the subject of any written customer complaint of theft, misappropriation of funds or securities, or forgery
3. Is named as a defendant or respondent in any proceedings brought by a regulatory agency
4. is denied or expelled from an organization
5. Is indicted or convicted of any felony or any misdemeanor evolving securities
6. Is a higher up in a firm that had it’s registration denied or revoked
7. Is a defendant or respondent in a securities or commodities related civil litigation or arbitration with judgement exceeding $15,000 (if firm and not individual must be $25,000)
8. Is the subject of a claim for damages settling for $15,000 or more ($25,000 for a firm)
9. Is associated in any business with another who is subject to statutory disqualification
10. Subject of disciplinary action taken by the firm involving suspension, termination or fine in excess of $2,500
FINRA will release to the public disciplinary Decisions when..
The suspension or revocation of a person associated with a member firm
the suspension or barring of a member or a person from associating with all other member firms
the imposition of a monetary penalty of $10,000 or more
BrokerCheck
Program to provide information about a registered firm or individual that is permanently available while registered and remains available for 10 years after the broker leaves the industry
FINRA, and BrokerCheck, will not release
Social Security Number
Residential History Information
Physical Description
Proceedings or investigations which were vacated or withdrawn
Internal review disclosures
Reasons for termination
Form U-5 disclosure information for 15 days following filing
Outside Business activity
Can not accept compensation for work other than passive income unless Registered Rep has provided prior written notice to a member firm
NOTICE: it does not say approval, you only need to give notice
Customer Complaint Records must be kept for
4 years
Commissions are consider…
Cash payments and therefore must be included in the prospectus
When a RR makes a written recommendation to a customer they must disclose…
The current price of the security
The date of the recommendation
That the firm is a market maker in the security if that is the case
The price of the security over the last 12 months does not have to be disclosed
Public Seminars
Scripted public seminars given to more then 25 retail investors must be approved by the firm and a record of the seminar must be maintained by the firm
RR can be suspended for
Failure to pay arbitration award
Failure to respond to a regulatory inquiry
Excessively trading (churning) a customer account
If a customer requests a copy of the firm’s financial condition it must be provided…
immediately
When a RR changes firm they must send FINRA produced educational material …
With the first written contact
A hyperlink with the first electronic communication
Within 3 days if the communication is oral (and must tell the client then that it is being sent)
These rules apply for the first 3 months following the date the RR begins employment at a new firm
Chain of hearings for customer complaints against FINRA member
Department of Enforcement or Department of Market regulation- 3 person panel (hearing officer and 2 panelists) must give opinion within 60 days of hearing. respondent has 25 days to appeal
National Adjudicatory Council - can uphold, reverse or modify sanctions. These opinions can be appealed to SEC
SEC is the final level of appeal
Maximum penalty a hearing panel can impose for a minor violation is…
$2,500 and/or a censure
Taping Riles
Apply to a member firm that has been disciplined or hired a certain percentage of registered persons who had been employed by from disciplined firms. Requires special written supervisory procedures
Must tape record all telephone conversations between existing and potential customers
Have 60 days to install taping system and must be maintained for 3 years from the period it was installed
And all recordings must be maintained for 3 years from the date the tape was created
Amount of arbitrators in a hearing
If the amount is less then $50,000 -1 arbitrator
50,000- 100,000 - 1 arbitrator unless both parties agree to 3
100,000 or more (or does not request monetary damages) - 3 arbitrators unless both parties agree to 1
Arbitration Rules
Must present all documents at least 20 days before hearing date
Retail Communication requires
qualified registered principal approval BEFORE the earlier of its use or filing with FINRA
