Chapter 15/16/17 Flashcards
What info is required to be obtained by a RR during the account opening process?
- Customer’s name & address
- Whether customer is of legal age
- Name of RR(s) - this doesn’t apply to institutitonal accounts
- The signature of the partner, officer, or manager (principal) who approves the account
- If account is for a business, names of authorized individuals for transactions is required.
- Verification of this info must be sent to the customer within 30 days of the account opening
Institutional account
Any account > $50MM
What info must RRs make a reasonable effort to obtain prior to the settlement date of the initial transaction?
- Taxpayer ID #
- Occupation, name, & address of employer
- Whether the customer is associated w/ another member firm
This doesn’t apply to institutional accounts
True or false: FINRA mandates that a principal must provide a signature on all new cash, margin, and option account openings?
False, just for magin and option accounts
Rule 17a-3
Details information that broker-dealers must keep about their clients
- RRs must make a best effort in obtaining all the info. The customer may refuse
Trusted contact person
When opening an account, customers must list a trusted contact person. he purpose of any disclosure is to address possible financial exploitation or to confirm the specifics of the customer’s current contact information, health status, or the identity of any legal guardian, executor, trustee, or holder of a power of attorney.
True or false: Periodic updates and verification of account information must be sent to the customer at least every 36 months?
True
What must RRs do if a customer revises their info after account opening?
The broker-dealer must send a copy of the revised account record to the customer. Member firms are required to send the updated documentation within 30 days after it received notification of the change or at the time the next statement is mailed to the customer.
Suitability
An ethical, enforceable standard regarding investments that financial professionals are held to when dealing with clients. Every investment recommendation should be in the client’s best interest. Just because a customer agrees to a recommendation does NOT relieve a RR of their suitability obligation.
FINRA’s 3 primary suitability obligations
- Reasonable basis obligation: RRs must have a reasonable basis to believe that an investment is suitable for the investor
- Customer-specific obligation: RRs must believe that an investment recommendation is suitable for the specific customer
- Quantitative obligation: RRs must believe that the amount of the given investment is appropriate for each investor
True or false: An investor’s age is a factor when determining the suitability of a risk?
True
Guidelines for suitability obligations regarding institutional customers
- RRs ust have reason to believe that the institutional customer can evaluate investment risks independently.
- The institutional customer must affirmatively state that it’s exercising independent judgment in evaluating the recommendations.
- When dealing with institutional customers, firms are exempt from the customer-specific obligation that was listed previously. However, the reasonable basis and quantitative obligations standards still apply.
Retail customer
a natural person, or this person’s non-professional legal representative who uses investment recommendations primarily for personal, family, or household purposes.
Client relationship summary (CRS)
Provides retail investors with info about the nature of their relationship w/ their financial professional in a understandable format. New retail investors must receive a copy of Form CRS by no later than the time they open a brokerage account, place an order, or receive a new recommendation for an account type, securities transaction, or investment strategy.
- Broker-dealers must file Form CRS with the Central Registration Depository (CRD), while registered investment advisers must file Form CRS with the Investment Adviser Registration Depository (IARD)
3 phases of money laundering:
- Placement: illegal cash is placed into the flow of a broker-dealer’s business, most often through the purchase of securities.
- Layering: transactions occur separately to avoid detection.
- Integration: proceeds from the transactions back into the stream of commerce, making them appear to be from a legitimate source.
Structuring
A type of layering in ML that invovles the purchase of several blocks of securities each with cashier’s checks that are drawn on different institutions and in amounts of less than $10,00
True or false: Every firm must have a control person that reports to FINCEN?
True
CTRs vs SARs
CTRs: Firms must file if customer transactions are > $10,000 or aggreate to $10,000 in one day
SARs: a firm must file an SAR whenever a transaction (or group of transactions) equals or exceeds $5,000 and the firm suspects suspicious activity.
CTR and SAR filing is confidential
AML Compliance Programs
Every broker-dealer must have an AML Compliance program that includes policies/procedures, a compliance officer in charge of the firm’s AML program, employee training program, independent audit function. FOUR PILLARS.
- The independent audit occurs annually, unless the member firm doesn’t execute transactions for customers, then it can be performed every two years.
Specially Designated Nationals and Blocked Persons List
Firms cannot do business w/ customer names on OFAC’s SDN list.
True or false: A broker-dealer that receives an application to open an account may waive the obligation of obtaining a taxpayer ID number if the person has applied for, but not yet received, the number. However, in lieu of the number, the broker-dealer must retain a copy of the person’s taxpayer identification application?
True
True or false: Under the CIP rules, a broker-dealer must maintain records of the methods it used to verify a customer’s identity for ten years following the closing of the account?
False, five years, and broker-dealers are required to retain records related to transmittals or transfers of funds that exceed $3,000.
Penalties for violating AML
A RR who is found guilty of facilitating money laundering may be sentenced to 20 years in prison and may receive a fine of up to $500,000 per transaction or twice the amount of the funds involved—whichever is greater.
- RRs and their firms may be held liable for being willfully blind to the activity.
Reg SP
Firms are required to have policies and procedures addressing the protection of customer information and records. Firms must have policies/procedures for this. Firms must provide their customers with a description of their privacy policies at the account opening and annually thereafter. Reg SP divides clintel into:
A consumer is a person who is in the process of providing information to the firm in connection with a potential transaction. A customer is a person who has an ongoing relationship with the firm.
A firm MUST provide a privacy notice if the firm intends to disclose information about the consumer
- Disclosure of a customer’s publicly available information is not restricted under the regulation.
Federal Trade Commission (FTC) Red Flag Rules
Requires many financial institutions, to create and implement a written Identity Theft Prevention Program. Each firm must have policies and procedures that address the appropriate actions to take if identity theft is suspected and/or detected.
Can a firm that’s acting as a trustee for a corporation use a shareholder list to cold-call or prospect in other matters?
No, this is generally a violation. SRO rules don’t allow a trustee to use stockholder information for solicitation purposes unless the member firm is specifically directed to do so by, and for the benefit of, the corporation.
True or false: At least quarterly, broker-dealers are required to provide customers with account statements. Most firms provide monthly statements for any account in which activity has occurred?
True, the account statement should contain a description of the security position, balances, and all account activity.
Confirmation statements
The SEC requires broker-dealers to provide customers with a detailed confirmation of each purchase or sale at or before the completion of any transaction- generally the settlement date.
- Even if an RR has discretion over a customer’s account, confirmations for all transactions must be sent to the customer.
- Statements and trade confirms may also be sent to an investment adviser or other third party, but only if the written consent of the customer is obtained.
Can a firm hold mail for a client?
Yes, provided that the firm receives written instructions from the customer. If the period requested exceeds three consecutive months, the customer’s instructions must include the valid reason for this request. The firm must also give written disclosure of alternative method the client can monitor their account.
Correspondance
1/3 types of communications according to FINRA. This is written or electronic messages that a member firm sends to 25 OR FEWER retail investors within any 30-calendar-day period.
* These are subject to review butnot approval by a principal
- DO NOT have to be filed w/ FINRA
Institutional communications
1/3 types of communications according to FINRA. This is written or electronic communication that’s distributed or made available only to institutional investors, but doesn’t include a member firm’s internal communications.
* These are subject to review but not approval by a principal
- Do NOT have to be filed w/ FINRA
- If a member firm becomes aware that an institutional investor (e.g., another broker-dealer) is making institutional communications available to retail investors, the firm is required to treat future communications to that institutional investor as retail communications.
Retail communications
1/3 types of communications according to FINRA. This is written or electronic communications that are distributed or made available TO MORE THAN 25 retail investors within a 30-calendar-day period.
* These are subject to review & pre-approval by a principal
- These communications may be subject to filing w/ FINRA
SRO rules regarding cold calling
- Cold calling can only be done between 8am and 9pm local time, unless given prior approval by the household.
- The callers must give basic info about themselves and the firm
- Each broker-dealer is responsible for creating a Do Not Call List.
- RRs may not harrass the people being called.
- Firms must ensure that the phone # is not being blocked by caller ID.
- Pre-recorded messages are prohibited unless the person being called gives consent.
True or false: The 8am-9pm rule applies to the firm’s clients as well?
False
SEC Rule 15c3-3
Contains provisions to ensure the safekeeping of both customer securities and customer funds. A broker-dealer is required to promptly obtain and thereafter maintain physical possession or control of all fully paid and excess margin securities that belong to its customers in a secure location (the firm’s office or DTC).
Excess margin securities
securities whose value exceeds 140% of the debit (loan) balance of a customer
ex: A customer who owns stock worth $10k and has a debit balance of $5k would have an excess margin balance of [ $10k - (.14 * $5k) ] = $3k
True or false: On a daily basis as of the close of the preceding business day, a broker-dealer is required to compute the quantity of fully paid and excess margin securities that are in its possession or control and those that are not in its possession or control?
True, if not in their posession they must promptly take action. If a customer sells securities and fails to deliver the securities within 10 business days of the settlement date, the broker-dealer must buy in the customer. Under exceptional circumstances, the broker-dealer may apply to FINRA for an extension.
Free credit balances
the funds that are available to customers, but that are currently on deposit in their accounts (e.g., sales proceeds that haven’t been reinvested or withdrawn). Broker-dealers must advise clients on free credit balances at least quarterly.
True or false: FINRA requires member firms and MSRB firms to send clients the firm’s b/s every six months or more upon request?
True
Business Continuity Plan (BCP)
Essentially a disaster plan. Should include data backup/recovery, financial assessments, alternative communications, alternative physical locations, and regulatory reporting. The BCP is not required to be filed with FINRA, but it must be made available to an SRO upon request.
- Each member firm must disclose to its customers how its business continuity plan addresses the possibility of a future significant business disruption and how the member plans to respond to these events. This disclosure must be provided in written format at the time an account is opened and must be posted on the member’s website.
Firm record lengths:
Records that should be kept for the entirety of the firm’s lifetime: Corporate/partnership docs
Records that should be kept 6 years: records of original entry), municipal complaints, new account forms, account statements, PoAs
Records that should be kept 3 years: Trade tickets, confirms, Forms U4/U5 and employee records, all communications, trial balances, etc.
- FINRA requires that complaint records be maintained for four years at the OSJ.
Rule 10b-5
A section of The Securities Exchange Act of 1934 that deals w/ manipulative and deceptive practices.
Rule 10b-1
states that the prohibition cited in 10b-5 also applies to securities that are exempt from SEC registration.