Chapter 18/19/20 Flashcards
True or false: To initiate registration w/ FINRA, a person must file a U-4?
True
How long do people who file U4s have to file amendments?
30 days
True or false: The failure to provide complete disclosure of facts and circumstances on the U4 could potentially result in a person being barred from the securities industry?
True
Abritration Disclosures
When signing a U4, a person agrees to use arbitration as the process for resolving disputes that involve his employer, other member firms and associated persons, and customers.
Disclosures that a member firm must make w/ arbitration:
- Agreement to arbitrate, which means you are giving up the right to sue a member, customer, or another associated person in court
- A claim alleging employment discrimination, including a sexual harassment claim, in violation of a statute is not required to be arbitrated
- A dispute arising under a whistleblower statute that prohibits the use of predispute arbitration agreements is not required to be arbitrated
- Arbitration awards are generally final and binding; a party’s ability to have a court reverse or modify an arbitration award is very limited.
- The ability of the parties to obtain documents, witness statements, and other discovery is generally more limited in arbitration than in court proceedings.
- The arbitrators are not required to explain the reason(s) for their award unless, in an eligible case, a joint request for an explained decision has been submitted by all parties to the panel at least 20 days prior to the first scheduled hearing date.
- The panel of arbitrators may include private arbitrators (people who were previously involved w/ the securities industry) or public arbitrators.
- The rules of some arbitration forums may impose time limits for bringing a claim in arbitration. In some cases, a claim that’s ineligible for arbitration may be brought in court.
Process a disqualified person may take to rejoin the securities industry
The disqualified person may apply for a waiver from an SRO, but the waiver can only be granted in an elibility proceeding. If the SRO grants the waiver, it must notify the SEC. Ultimately, the SEC has the authority to overturn the waiver. If the SEC allows the person back in, they are subject to heightened supervision.
- Generally, a prospective employee who is subject to disqualification may not associate with a FINRA member in any capacity unless/until the waiver is granted.
- If a person is currently employed by the member when the disqualifying event occurs, she may be permitted to continue to work in a limited capacity pending the outcome of the Eligibility Proceeding.
Review of new hires
Firms must perform a background check within 30 days after the U4 was filed to ensure U4 info is accurate.
Central Registration Depository (CRD)
An automated database that contains information concerning the employment and disciplinary histories of registered persons. Data can be expunged if info is false. Once deleted, the info is gone forever.
Form U5
After a registered person resigns or is terminated from a member firm, the firm is required to notify FINRA within 30 days on Form U5. An employee must also be given a copy of this form. This form includes the reason and details of the departure.
Even after termination, FINRA maintains jurisdiction over any associated persons previously employed by the broker-dealer for two years. For this reason, a person who terminates her registration, but wants to return to a brokerage firm as a registered representative without having to requalify by examination, must do so within a two-year period. However, if any registered persons apply under the previously referenced Maintaining Qualifications Program (MQP), they’re given five years before being required to requalify.
True or false: If a broker-dealer receives a written customer complaint after the RR has left the firm, the firm is no longer required to notify FINRA?
False, if a broker-dealer receives a written customer complaint after the RR has left the firm, it’s still required to notify FINRA regardless of how long ago the RR had left the firm. There’s no requirement to send a copy of the complaint to the RR.
Form U6
Regulators, states, and/or jurisdictions use Form U6 to report disciplinary actions against registered representatives and/or firms. Any arbitration awards are also listed here.
BrokerCheck
FINRA’s public disclosure program and provides info about the disciplinary history of member firms or registered representatives. The system provides info on individuals who are currently registered or have been registered within the last 10 years.
What can person do if they disagree with info on BrokerCheck
If currently registered: File an amended U4
If previously registered: submit a Broker Comment Request Form with FINRA to provide an update or add context to the info
FINRA’s Investor Education and Protection Rule
requires member firms, at least once every calendar year, to provide to each customer, in writing (which may be electronic), the following:
* BrokerCheck hotline
* FINRA website address
* A brochure regarding BrokerCheck
MSRB Investor Education Rule
MSRB requires the following disclosures be made annually:
* That the regulated entity is registered with the MSRB and the SEC
* MSRB website
* A brochure regarding the MSRB
FINRA complaint
Anytime a customer or representative of a customer files a grievance w/ a member firm in connection with the solicitation or execution of any transaction or the disposition of securities or funds of that customer. The supervising principal’s responsibility is to review and initial the complaint. Member firms must maintain all complaints for 4 years. Response to the comlpaint can be written or oral.
- Member firms may be required to file a report with FINRA regarding certain customer complaints and other incidents that may arise. If the reporting requirement is triggered, a member firm must report these events promptly, but by no later than 30 calendar days after learning of them.
When must a complaint be filed w/ FINRA:
- Allegations of theft or forgery
- Violation of any securities law or reg.
- A person was denied registration or expelled.
- A domestic body or SRO alleges violation of law or reg.
- Any felony or bad misdameanor
- When a director, controlling stockholder, partner, officer, or sole proprietor of, or an associated person with, a broker-dealer, investment company, investment advisor, underwriter, or insurance company has their registration denied or revoked.
- When a person/firm is involvev as a defendant or respondent in any securities or commodities-related civil litigation or arbitration- that resulted in an award or a settlement of more than $15,000 (for any associated persons) or more than $25,000 (for member firms)
- When a person is the subject of any action taken by the member firm against an associated person of that firm that results in a suspension, termination, withholding of commissions, or the imposition of fines in excess of $2,500
True or false: FINRA members are required to provide FINRA with statistical and summary information about customer complaints on a quarterly basis, even if the complaint doesn’t trigger the preceding reporting requirement. The report is due on the 15th of the month following the end of the calendar quarter in which the complaints were received. However, if no complaints were received during the quarter, no report is required to be filed?
True
What must a supervisor do when identifying a red flag?
- Investigate the situation
- Document the situation
- Pursue the investigation to a conclusion
The employee’s prior conduct should always be taken into account.
Selling away
When an employee of a member firm makes private transactions w/o first notifying their employer.
- Personal transactions involving investment company and variable annuity securities are not covered by this rule.
- If the associated person will receive compensation for the transaction, the member must specifically approve the transaction in writing for the person to be permitted to participate. In this case, the transaction must be recorded on the member firm’s books.
- If the associated person will not receive compensation for the transaction, the employee is still required to provide written notification to her employer.
Gift limit rule
FINRA member firms and their associated persons may not provide gifts that exceed $100 per year to any person of another firm if the payment is business-related.
Generally, a gift should be valued at the greater of its cost or its market value at the time it was given. If a gift is given to a group, a pro rata amount is deemed to have been given to each of the individuals.
This rule does not apply to gifts a firm makes to its own employees
Personal, De Minimis, Promotional, or Commemorative Gifts
Personal gifts or gifts of very low value (De Minimis (ex: a pen)) do not apply to the gift limit rule.
True or false: Business entertainment expenses apply to the gift limit rule?
False, as long as an employee of the member firm is present at the evenet, it’s not considered a gift. However, if an employee of the event is not present, it’s a vioation
Member Compensation Related to the Sale of Securities Products
Broker-dealers that create investment companies (e.g., mutual funds) may not pay other broker-dealers a commission in the form of securities (e.g., stocks and/or options). RRs are NOT allowed to receive compensation for the sale of direct participation programs.
ex: an RR cannot accept compensation directly from a mutual fund distributor for selling its funds. Instead, the distributor should make payments to the RR’s broker-dealer, which then determines the RR’s compensation.
True or false: Cash compensation includes any discount, concession, commission, service or other fee, asset-based sales charge, loan, override, or cash employee benefit received in connection with the sale and distribution of DPPs, REITs, investment company or variable contract securities?
True, RRs may only accept De Minimis gifts.
The Training and Education Exception
FINRA permits firms to pay or reimburse other firms for meetings that serve an educational function.
- RRs must have their broker-dealer’s permission to attend the meeting.
- Attendance may not be tied to the achievement of a sales target.
- The location of the meeting must be appropriate.
- Payments or reimbursements for guests of RRs, such as spouses, are not permitted.
Rule G-37
Applies to any political contribution (cash or non-cash). G-37 applies municipal finance professionals: associated persons of a broker-dealer who primarily engage in underwriting, trading, sales, financial advisory or consulting services, and research or investment advice related to munis. RRs who simply recommend municipal securities to retail investors are generally excluded. Any representative who solicits municipal securities business from issuers is considered an MFP.
If a municipal securities broker-dealer makes certain political contributions to officials of issuers, it’s prohibited from engaging in negotiated municipal securities business with that issuer for two years. However, MFPs of the broker-dealer may make certain contributions without triggering the two-year ban. No violation occurs for MFPs is the MFP is entitled to vote and doesn’t exceed $250 of contributions per election.
What happens if an MFP triggers the 2 year ban but then leaves the frim?
The ban remains in place. If that MFP is hired at a new firm and is still defined as an MFP, the new firm will also be prohibited from engaging in negotiated municipal securities business based on the date of the contribution. However, if the MFP is hired at a new firm and is not defined as an MFP, the two-year ban doesn’t apply to the new firm.
What happens if an MFP contributes $200 to a candidate while working at firm A, but then leaves to firm B and contributes another $200 in a short time-span?
The two-year ban will only apply to Dealer B.
