Chapter 13 study notes Flashcards
Definition of Penny Stock
According to SEC rules, a penny stock is any equity security, EXCEPT:
Exchange-traded stocks (listed on the NYSE, ASE or Nasdaq)
Investment company securities
OCC-listed puts and calls
Securities with a market value of at least $5 per share
Securities whose issuer has net tangible assets exceeding $2 million, if in continuous operation for at
least three years, net tangible assets exceeding $5 million if in continuous operation for less than
three years, or average revenue of at least $6 million for the last three years
Penny Stock Transaction Exemptions
Transactions with institutional accredited investors (For the rule, institutional means accredited
investors [not individuals] as defined in Regulation D on private placements.)
Private placements
Transactions with the issuer, officers, directors, general partners, or 5% owners of the company’s
stock
Transactions that are not recommended by the broker-dealer
Transactions by a broker-dealer whose commissions and markups from penny stocks do not exceed
5% of its total commissions and markups
FINRA has established the following three main suitability obligations:
- The reasonable basis obligation – Requires a member firm and its RRs to have a reasonable
basis to believe that a recommendation is suitable for at least some investors. If the firm or its
RRs do not understand a product, it should not be recommended to customers. - The customer-specific obligation – Requires a member firm and its RRs to have a reasonable
basis to believe that a recommendation is suitable for a particular customer based on the
customer’s investment profile - The quantitative obligation – Requires a member firm and its RRs to have a reasonable basis to
believe that a series of recommended transactions, even if they are suitable for a customer, are
not excessive when considering the customer’s investment profile
Verifying client info
To ensure that an RR has properly characterized a client’s profile and investment objective, copies
of the account record or the documentation of the information collected must be sent to the
customer either within 30 days of opening the account or with the client’s next statement. Thereafter,
periodic updates of account information must be sent to the customer at least every 36 months.
aml penalties
20 years in prison, in addition to fines of $500,000 per transaction or twice the
amount of the funds involved, whichever is greater. Plus any civil penalties
Regulation SP
requires all broker-dealers, investment companies, and investment advisers registered
with the SEC to adopt policies and procedures reasonably designed to protect the privacy of the
confidential information that they collect from their clients. They must also give their clients a
description of these policies (a privacy notice).
Regulation SP
Customer vs. Consumer
A customer is someone who has an ongoing
relationship with the firm. A consumer is someone who provides information to the firm in
connection with a potential transaction.
Consumer Vs. Customer Privacy Notices
Firms must furnish every customer with a privacy notice when the relationship is first established.
They must also give the customer an updated version of this notice annually.
A firm must give every consumer a privacy notice before it discloses non-public, personal
information to any non-affiliated third party. (A firm does not need to give consumers anything, if it
does not intend to disclose any of this information to a non-affiliated third party.)
Identity Theft─FTC Red Flags Rule
Identify relevant patterns, practices, and specific forms of activity red flags that signal possible
identity theft
Incorporate business practices to detect red flags
Detail appropriate responses to any red flags detected to prevent and mitigate identity theft
