Chapter 17- SEC And sRO Rules And Regs 15-20 Flashcards
Securities and exchange Commission
Primary regulatory body
Must apply and be approved by SEC to trade
Cannot claim that the SEC has passed upon or approved a broker dealer financial standing, business or conduct
Broker dealers that do not comply with SEC rules will be:
Censured
Limited in activities, functions, operations
Suspended of registration
Revocation of registration or
Fined
Associated persons
May also be disciplined individually
SEC can bar an associated person from working unless approved by the commission
Member firm can also suspend
Fingerprinting
Registered broker/dealers must be fingerprinted along with most employees
Submit to US attorney general
Exceptions:
Not involved in securities sales
Do not have access to cash or securities or to the books and records of original entry
Do not supervise other employees engage in these activities
Clerical workers do not need fingerprinted
Self regulatory organizations
Function under oversight of SEC
Accountable to SEC for enforcing securities laws
Some of the largest SROs are:
1. FINRA- regulates investment banking, trades in OTC, NYSE and FINRA member firms. Also Invest companies and LPs
- Municipal Securities Rulemaking board (MSRB)- all maters related to trading of state and municipal securities
3 Chicago Board Options Exchange (CBOE)- matter related to options and related contracts
FINRA overview of objectives
Promote I banking, standardize principals and practices, promote commercial honor, encourage Fed and state securities laws
Provide medium for communication amongst members
Adopt, administer and enforce rules to prevent fraud
Promote self discipline among member and investigate resolve grievances
FINRA funding
Funded by membership dues, assessments of member firms registered reps and annual fees
Basic membership fee
Assessment based on gross income
Fee for each rep and principal
Charge for each branch
Failure to pay results in suspended/revocated license
Four rules/codes of FINRA
Conduct rules- fair and ethical trade practices in regards to dealing with public
Uniform Practice Code- establishes settlement, good delivery, ex date, confirmations, don’t know procedures and other guidelines
Code of procedure- how violations will be heard and handles
Code of Arbitration Procedure- governs resolutions of disagreements and addresses monetary claims between member and the the public
National Adjudicatory Council
Establishes rules, regs, and membership standards
Any broker dealer registered with SEC can be member of FINRA, municipal bond firms can also register.
Members will comply with law and regulations and pay dues
District committee must approve membership
Home offices are allowed if approved by specific SRO
Associated person registration with NAC and FINRA
Any person associated with a member firm who intends to engage in investment banking or securities must be registered
Must be sponsored by member
Member firm must do a background check before
Continuing education and annual compliance reviews
- Continuing Education
Regulatory and firm elements
Regulatory- computerized training session within 120 days of second anniversary and every three years after. (FINRA inactivates registration if not completed)
Firm element- annual training in regulatory developments, business activities, performance
- Annual compliance review
Must ensure rep was there for entire meetings and be able to ask questions periodically
Must also complete annual training program
Registered persons changing firms
Nontransferable
Must fill out a U-5 to terminate registration
Reapply on U-4
Must register with another firm within 2 years or will have to re qualify for exams
Continuing commissions
Registered reps may continue to receive commission after retirement for business placed
Must have contract in place
Heirs can also receive
Notification of disciplinary action
Member firm must notify FINRA if an associated person is subject to disciplinary action
Must include name and nature of action
Must notify of action taken against employee
Terminations
Must notify FINRA within 30 days
Member firms cannot cease business relationship until investigations are completed
Registered reps
All associated persons engaged in investment banking and securities business are registered reps including:
Assistant officer not acting as principal
Supervise solicit or conduct business in securities
Series 7 allows reps to solicit, purchase, and/or sell almost all Security products,
Registered principals
Anyone who manages/supervises ibank or securities business must register as a principal with FINRA (including trainers)
Must employ at least two registered principals unless sole proprietorship
Must pass the Series 24
Statuatory Disqualification of membership
Disciplinary action may be cause for disqualification of FINRA membership
An individual applying for registration will be rejected if:
Been expelled or suspended by any SRO or foreign equivalent
Under SEC order or foreign revoking or barring from broker/dealer
Been found to be cause of another person being expelled or suspended
Auto disqualified if
- Misstatements willfully made on application
- Felony or misdemeanor related to securities in past 10 years
- Court injunctions
Central Registration Depository
Info on all discipline history
Website called Broker Check
Hyperlink must be on all member firms on initial web page for retail investors and on any other pag that includes a professional profile
Goes back 10 years
Investigation by FINRA
Must provide information, testimony under oath and access to books if a complaint, examination or investigation takes place
If not complying, National Adjudicatory Council will give 20 days notice before suspending member and revoking registration of associated persons
Code of procedure
Deals with alleged violations of FINRA, MSRB and fed securities laws
If a violation is found, Department of Enforcement will issue a formal complaint
Will also form a panel led by an officer to preside over hearing
Respondent has 25 days to admit, deny or state that they do not know
Designated supervisor is usually also charged
Offer of settlement
Respondent can propose to settle by writing letter describing the:
Rule allegedly broken
Acts alleged to have engaged in
And include statement consenting to findings
And proposal of sanctions consistent with guidelines
Submitting offer of settlement waives right of a hearing and right to appeal
Unconsentted offer- the offer was accepted
Contested offer- department of enforcement rejects. Arbitration hearing takes place or NAC accepts offer. If sent to NAC and rejected then hearings take place and offer of settlement is thrown out
Acceptance, Waiver and Consent-
Respondent does not dispute and must sign letter accepting violations, imposition of sanctions and waiving of a right to a hearing
Minor Rule violation- Respondent may have to sign MRV letter and will pay a max fine of 2500
Minor rule violations
Failure to:
- Get advertising approved by principal
- Maintain file for advertising and sales lit
- File ad/sales lit with FINRA in time
- File timely reports on short positions
- Accurate accounts for options and exercise limits with OCc
- No books and records in accordance with SEC
- Submit trading date requested by FINRA
Hearing and Sanctions and appeals
Prosecution (Department of Enforcement) proceeds first in hearing, cross examination of witnesses permitted, will get verdict in 60 days
Sanctions may include: Censure Fine Suspension for defined period (begins at least 30 days after written decision) Expulsion of member Barring Association with members Any fitting sanction
During a suspension, no payment to the associated person can be made
Appeals are made to NAC, within 25 days of decision date
May escalate appeal to NAC, SEC or Fed courts
Stays effective date on everything but a bar or expulsion
Code of arbitration
Mandatory with anyone but the client
Meant to resolve industry disputes
Clients must sign arbitration form to be mediated by code of arbitration (may request form and firm must give in 10 business days)
Class action law suits are not included or sexual harassment
Saves time, money and saves against appeals
Pre dispute arbitration agreement is regularly signed upon opening new accounts now
Statement of Claim
Filed with Director of Arbitration at FINRA
Details the complaint, includes documentation in support of claim, and states remedy being sought
Respondent has 45 calendars days to respond to both director and claimant
Hearing is still had if respondent files nothing
Party seeking relief must have a solid claim
Mediator can be brought in to settle dispute before hearing if both parties agree
Selection of arbitrators for code of arbitration
FINRA maintains list of nonpublic and public arbitrators
Nonpublic- anyone who has worked in financial industry
Any financial industry professional who regularly reps or provides services to investor parties in disputes (can become public if 5yrs out on own or 2yrs out by someone else
Public- anyone else
Arbitration thresholds and simplified arbitration
50k or less- 1 arbitrator
50-100K- 1 unless both parties agree to three
100k plus- 3 unless agrees to one (customer can request public for all 3)
Simplified arbitration take place for disputes under 50k… 30 business days for a decision
6 year statute of limitations
30 days after decision to pay monetary awards
NYSE board of directors
10 exchange members
10 public representatives
And a chair person
Sets policy
Supervises exchange and member activities
Lists Securities
Oversees transfer of member seats on exchange
Whether someone is qualified to be a specialist
NYSE membership
Set number of seats Must buy a seat to become a member Must be board approved Only individuals allowed Most seat ownerships are sponsored and funded by firms
Allied members on NYSE
Executive officers, directors or holders of more than 5% of a member firms voting stock
Not allowed to trade on exchange floor
Unlimited amount
NYSE training program
No longer imposed by NYSE
120 days to pass series 7 after enrollment notification unless an extension is granted
Not likely to be granted
May not receive commissions until registered
Retail, correspondence and institutional communications from FINRA
- Retail Communications- any communication to more than 25 retail investors within any 30 calendar day period. Any investor other than institutional
- Correspondence- 25 or fewer within 30 day window
- Institutional- only distributed to institutional investors excluding internal communication
Ex: bank, registered rep, insurance company any entity over 50MM in assets
If a communication will make its way to public, then retail
Public appearances
Must be principal supervised or approval of material is required
Approval and filling requirements
Prefiling
Retail communication: Must be approved by member firm of FINRA ad Reg department
Pre approval not needed if:
Another member firm filed with FINRA
Member is using ad based on FINRA letter already received and is following conditions
Posted online in interactive forum
Does not promote a product or service
Filing with FINRA Ad Reg Department must be done 10 days in advance during BD first year
Still 10 days if not a regularly published PER is used or one investment company publishes itself
Not pre-filling, within 10 days of first use
Applies to retail communications concerning:
- Registered investment companies
- Direct Partnership Programs
- Collateralized Mortgage obligations
- Securities registered under securities act derived from single security, securities, index, commodities, debt issuance or foreign currency
Firm procedures must be made or employees must be trained
Filing correspondence with FINRA not required
Filling institutional communications must be supervised and is subject to review with FINRA
Investment Companies and DPPs and Options filling requirements retail communications
10 days prerefiling if not a normal performance ranking or if company created
Within 10 business days of first use if communication not including a performance ranking
DPPs-
10 business days of first use
Options-
10 prefiling required
Exempt retail communications
Previously filed with FINRA not materially changing
Non financial communications
Listing of products and services offered
Retail communications posted online
Prospectuses, red herrings, fund profiles and other material filed with SEC proviously
Record keeping
All communications should be held for at least 3 years and media held for 2, readily available for two
Recommendations should include stocks current price
If referencing past performance in recommendation, should include:
Price or price range
Market general direction
Information supporting recommendation
Any recommendations similar in past 12 months and nature
All recommendations made over the time period
Recommending investment companies
Broker dealer should:
- Use charts of PER showing variations of market (10 years or more)
- Reveal source of graphic
- Separate cap gains and dividends when stating Dollar return
- Not comparing to other securities
- Reveal highest sales charge even if there is a breakpoint
- No misleading facts
Should also give average annual retrun which includes reinvestment of dividends and cap gains, not deducting expenses
Performance figures must be at least 1 5 and 10 yr or life of fund
Should use POP price not NAV when calculating yield
Current yield should always be annual
Testimonials used by a firm
The person must have the knowledge and experience to form a valid opinion
Must note that the testimony may not represent all customers
That the testimony is no guarantee of future performance or success
If it is a paid testimonial paying over $100
FINRA membe websites
Do not have to include FINRA logo
If it does, must be of same character as member firm name
Hyperlink to broker check is required
Umbrella names
May be displayed if FINRA member name is also displayed
Relationship with member name is clear
No implication that umbrella name is broker dealer
Recruitment advertising
Salaries of top sales people must be noted as not being representative of all members are
May run the advertisement blind and not list the firm
Sarbanes Oxley Act on research analyst conflicts of interest
Must reflect honest view and not a conflict of interest
Prohibits ibanks from controlling research analysts
Bars discussion between analyst and banks before release
Precludes pay for rating scales
Analysts may not show draft reports with issuers other than for fact checking
Prohibits analysts from withholding ratings for future business
Quiet period of 40 days (IPO) or 10 (secondary offering) for manager or comanagers
Must clearly explain ratings
Requires disclosure of compensation ties
Disclosure of financial interest of household or financial firm in the company above 1%
Disclose whether in next 12 months or 3 months after publication whether a fee will be received for Ivan king services
Restrictions on trading by analysts and related persons
Prohibited if:
Investing before IPO if company is in analyst sector
30 days before or 5 days after a report is released
Analyst made recommendation opposite to most recent recommendation
Telephone Consumer Protection Act of 1991 TCPA
Administered by Federal Communications Commission
Restricts solicitations made by commercial call, recorded message and to fax machines/modem
Must maintain do not call list Train reps on using such list Must acknowledge those who request Ensure cold callers inform prospects of their name, firm name and telephone number Solicitation only between 8am and 9 pm
Exempts calls: Made to parties whom caller has business relationship with Made on behalf of tax exempt orgs Not made for commercial purpose Made for legit debt collection
Subject to 5 year retention requirement
FINRA mandated disaster recovery plan/business continuity
Must designate senior management to update annually
Supply FINRA with two contacts in case of major business disruption (must be principal and member of senior management, update contact within 30 days of change)
Suspensions should be
Reported to the proper designated examining authority
