Chapter 8.4

Question 1

Supervision of Broker/Dealer activities

Answer 1

Each member must establish, maintain, and enforce WSP’s which will enable them to properly supervise the activities of each principal, RR, and associated persons. WSPs are required for all businesses conducted by the member firm. Final responsibility for proper supervision rests with the FINRA member firm. When a B/D updates it’s supervisory policies and practices manuals, copies of the old manuals must be maintained for 3 years after termination of use.

**The assignment of each registered person to an appropriately registered principal who shall be responsible for the review and supervision of that persons activities, including the review of all transactions

Question 2

Risk based review systems

Answer 2

Firms are permitted to use risk based review systems to review its transactions in the firm’s investment banking and securities business. Such procedures and systems must be reviewed by a principal, and such review must be documented in writing.

Question 3

Insider trading

Answer 3

Firms must have procedures in place to identify if any insider trading laws or rules have been violated for all securities transactions including:

• Accounts of the firm
• Accounts introduced or carried by the firm
• Covered accounts

Question 4

Covered Account

Answer 4

A covered account is any account held by:

• The spouse of a person associated with the firm
• A child of a person associated with the firm, or that persons spouse, provided the child resides in the same household
• Any other related or individual person over whose account the associated person has control or materially contributes financial support

Question 5

Annual certification of compliance and supervisory procedures

Answer 5

• Each member firm must designate one or more principals as chief compliance officer
• Each member firm’s CEO must certify annually that the member has in place procedures and processes to establish, maintain, review, test, and modify written compliance policies and procedures to comply with FINRA, MSRB, and federal securities laws and regulations
• The CEO must have one or more meetings with every CCO either individually or collectively, every 12 months. CCO must be registered as principals. These individuals are not prohibited from having other job responsibilities

Question 6

Clearing Agreements

Answer 6

• Annually, no later than July 31st, a clearing member firm must provide in writing a notice regarding “exception” reports to its introducing member’s CEO and CCO and the introducing firm’s designated examining authority. “Exception” reports are created by firms as a key aspect in maintaining their supervisory procedures and complaints.
• If a clearing firm receives a complaint from a customer of one of it’s introducing firms, the clearing firm must send a copy of the complaint to the introducing firm and must notify the customer that the complaint has been received and copies have been sent to the introducing firm and it’s designated examining authority. The SEC is not notified nor does it receive a copy of the complaint.

Question 7

Contact Information Requirements

Answer 7

FINRA member firms must identify and designate a contact person who is responsible for receiving regulatory email notifications. Firms must update such information not later than 30 days following any change in such information. Firms must also update this contact information with FINRA within 17 business days after the end of each calendar year, annually.

**The member firm must comply with a FINRA request for such information no later than 15 days following the request.

Question 8

Membership in FINRA

Answer 8

Member firms can indicate membership in FINRA according to the following rules and guidelines:

• Solely as a matter of record in trade directories or other business listings
• Solely with identification on letterheads, booklet covers, sales literature, as long as the use is only for identification purposes and is in smaller type and separate from the regular text
• On the door or entranceway of a member’s principal or branch office
• But such indications cannot be used in the promotion of a security.

Question 9

FINRA membership or registration is NOT available to applicants except by order of the SEC in the following situations:

Answer 9

• Where the B/D has been suspended or expelled from a national securities exchange for violating just and equitable principles of trade
• Where the SEC or a stock exchange has an order revoking or denying the registration of the B/D.
• Where the individuals have been convicted in the last 10 years of a felony or misdemeanor involving embezzlement, misappropriation of funds, etc.
• Where the individuals do not meet the training and experience standards or other standards that the FINRA Board of Governors may feel necessary

Question 10

Dues and Assessments of FINRA

Answer 10

Any member firm may be suspended for failure to pay any assessed dues, fines, or assessments except that a member will generally will not be suspended for failure to pay fines for minor rule violations.

Question 11

FINRA Hyperlink

Answer 11

Member firms or persons associated with member firms that reference their FINRA membership on their website are required to provide a hyperlink to FINRA.org where the reference is made. However, member firms may not use the FINRA logo under any circumstances.

Question 12

Disclosure of financial condition to customers and other members

Answer 12

• Any member of the FINRA association who is a party to an open transaction or who has, on deposit, cash or securities of another member, must furnish upon written request of the other member, a statement of its financial condition as disclosed in its most recently prepared balance sheet.
• Any member firm must make available to a bona fide customer, upon request, the member’s financial condition as disclosed on its most recent balance sheet, either in hard copy or electronically, if the customer has consented to electronic delivery.

**The financial condition of the firm does not have to be provided to “prospective customers”

Question 13

An adjudicator or FINRA staff has the right to do what?

Answer 13

• Require the member or person associated with a member to provide information orally or in writing or electronically and to testify at a location specified by FINRA, under oath with respect to the matter
• Inspect and copy the books, records, and accounts of such member or person with respect to the matter
• If information is provided electronically it must be “encrypted” and cannot be assigned without a confidential process or key.

**The member or person associated with the member will not be suspended while the investigation is being done.

Question 14

Dealing with Non-Members

Answer 14

• The term “non-member” includes suspended or expelled dealers or B/D’s that are not members of FINRA. If a member is suspended by FINRA other member firms must treat that firm as if it were a non-member firm.
• No member can allow any non-member any selling concession, discount, or allowance not allowed to members of the general public. Selling concessions and discounts may be given only to other FINRA members.
• No member can join with any non-member in any distribution of an issue of securities to the public.
• No member can sell or buy any securities from a non-member at any price other than that at which business would be done with the general public
• Eligibility in FINRA is limited to B/D’s handling transactions in any branch of the investment banking or securities business.

**These rules do not apply to B/D’s that deal exclusively with U.S. Government and municipal securities.

Question 15

Continuing Commissions Policy

Answer 15

• Continuing commissions may be paid to RR’s after they are no longer employed by a member(or to their widows or beneficiaries) if a bona fide contract exists before the RR leaves the firm.
• No commissions or other form of compensation may be paid if the RR is suspended or expelled from FINRA. A suspended person cannot remain associated with members in any capacity. Also, if a registration is revoked, an individual cannot be registered again until and unless approval is given by the SEC. The individual can however, seek employment with a non-member financial institution.

Question 16

B/D’s conducting business in financial institutions

Answer 16

• Brokerage services must be conducted in a separate distinct physical location from the area where retail deposits are made
• Brokerage services must be clearly identified as being separate from the deposit activities
• The member’s name must be clearly displayed in the area where brokerage activities are conducted
• At or prior to the time that a customer account is opened, the B/D must disclose in writing to each customer that securities transactions are NOT FDIC insured and that deposits on securities are subject to investment risk and are not guaranteed by the financial institution
• The member firm must promptly notify the financial institution if any person of the B/D is terminated for cause

Question 17

Business Continuity Plan

Answer 17

Member firms are required to establish and maintain, with annual updates, a Business Continuity Plan. Such plans must be approved by a registered principal who is also senior management of the member. Each plan must address:

• Data back-up and recovery
• All mission critical systems
• Financial and operational assessments
• Regulatory Reporting

**Disclosure of the firm’s business continuity plan must be made to customers in writing at the account opening, posted on the firm’s website and mailed to customers upon request.

Question 18

Firms engaging in investment banking services are required to do what with FINRA?

Answer 18

Required to file written reports with FINRA by filing a written reports with FINRA within 10 business days of each calendar quarter regarding internal investigation regarding insider trading which includes:

• The firm’s identity
• Commencement date of the investigation
• Status of the investigation
• Resolution of any investigations

Question 19

Insider trade violation

Answer 19

If a firm determines an insider trade violation has occurred, the firm must notify FINRA by filing a written report, either hard copy or electronic, within 5 business days of the completion of an investigation.

Question 20

Investor Education and Protection

Answer 20

At least annually member firms must provide the following information to customers:

• The FINRA brokercheck disclosure hotline phone number
• The FINRA regulation website address, and
• A statement as to the availability of the investor brochure

**Member firms that do not carry customer accounts are exempt from the above requirements

Question 21

Disclosure of financial condition to customer

Answer 21

FINRA member firms must send a statement of the firm’s financial condition to their customers semi-annually. The statement must include:

• An unconsolidated balance sheet
• A statement of net capital
• Subordinated loan information

**If an existing customer with cash or securities positions with the firm requests a copy of the firm’s financial statement, then it must be provided upon request. Perspective clients do not have to be provided with the firm’s financial statements.

Question 22

Disclosure of control relationship with issuer

Answer 22

A member firm which is controlled by or under common control with, the issuer of any security, shall, before entering into any contract with or for a customer for the purchase or sale of that issuer’s security, disclose to the customer the existence of such control, and if such disclosure is not made initially in writing, it shall be supplemented by the giving or sending of written disclosure to the customer at or before the completion of the transaction.

Question 23

Soft Dollar arragements

Answer 23

A way for financial institutions like investment advisory firms and mutual funds to pay for services provided by B/D’s with order flow rather than the institution paying cash for services like research.

• Acceptable: Research, Analytical software, holding seminars for customers.
• Not Acceptable: Computer hardware, telecommunication lines, office equipment, reimbursement of travel expenses, operational overhead, meals

Question 24

Payment or reimbursement by an investment company is connection with meetings held by an investment company or by a member for the purpose of training or education of associated persons of a member would be permitted provided that:

Answer 24

• The record keeping requirements are met
• Associated persons obtain the member’s prior approval to attend the meeting and attendance by a member’s associated persons is not preconditioned by the member on the achievement of a sales target or any other incentives pursuant to a non-cash compensation arrangement
• The location is appropriate to the purpose of the meeting, which means an office of the investment company or the member, or a facility located in the vicinity of such office, or a regional location with respect to regional meetings
• The payment or reimbursement is not applied to the expenses of guests of the associated person; and
• The payment or reimbursement by the investment company is not preconditioned by the investment company on the achievement of a sales target or any other non-cash compensation arrangement permitted

Question 25

Disclosure of Participation or interest in a primary or secondary distribution

Answer 25

Member firms that participate or have a financial interest in either a primary or secondary offering must disclose such participation or financial interest in writing at or before the completion of the transaction with the customer

Question 26

Definition of “Covered Member” under Pay-to-Play Rules

Answer 26

Any member that solicits a government entity for investment advisory services.

Question 27

Definition of “Covered Associate” under Pay-to-Play Rules

Answer 27

• Any general partner, managing member or executive officer of a covered member or other individual with a similar status or function;
• Any associated person of a covered member who engages in distribution or solicitation activities with a government entity for such covered member; and
• Any political action committee controlled by a covered member or a covered associate

Question 28

Definition of “Governmental Entity” under Pay-to-Play Rules

Answer 28

Includes all state and local governments, their agencies and instrumentalities, and all public pension plans and other collective governmental funds, including participant-directed plans such as 403b, 457 and 529 plans.

Question 29

Definition of “Official of Government Entity” under Pay-to-Play Rules

Answer 29

Includes an incumbent, candidate or successful candidate for elective office of a government entity if the office is directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser or has authority to appoint any person who is directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser.

Question 30

Definition of “Contribution” under Pay-to-Play Rules

Answer 30

Any gift, subscription, loan, advance, or deposit of money or anything of value made for:

• The purpose of influencing any election for federal, state or local office
• Payment of debt incurred in connection with such election; or
• Transition or inaugural expenses of the successful candidate for state or local office.
• *FINRA would not consider a contribution to include:
• A donation of time by an individual
• A charitable donation made by a covered member or an organization that qualifies for an exemption from federal taxation under IRS rules

Question 31

Prohibitions under Pay-to-Play Rules

Answer 31

• A two-year prohibition on engaging in distribution and solicitation activities with the government entity following a political contribution made to that entity. The rule attributes to a covered member contributions made by a person within 2 years of becoming a covered associated and/or becoming a covered person within 2 years of making a contribution. The 2 year time out is triggered by contributions.
• A prohibition on the use of third-party solicitors who are not themselves covered persons
• A prohibition on “bundling” and other efforts by covered associates and advisers to solicit political contributions to certain officials of a government entity.

Question 32

Exceptions to the two-year time-out period

Answer 32

• Contributions of $350 or less per election, for any election in which the covered associate is entitled to vote.
• De minimis contributions of $150 or less per election, for any election in which the covered associated is NOT entitled to vote.
• There is a new covered associate exception if a natural person made a contribution more than 6 months prior to becoming a covered associate.

Question 33

Covered Investment Pools

Answer 33

Provides that a covered member that engages in distribution or solicitation activities with a government entity on behalf of a covered investment pool, such as a registered investment company, hedge fund, private equity fund, venture capital and investment trust, in which a government entity invests or is solicited to invest shall be treated as though the covered member was engaging in or seeking to engage in distribution or solicitation activities with the government entity on behalf of the investment adviser to the covered investment pool directly.

Question 34

Returned Contributions

Answer 34

Provides an exception from the rule’s restrictions for covered members if the restriction is due to a contribution made by a covered associate and

• The covered member discovered the contribution within 4 months of it being made;
• The contribution was less than $350; and
• The contribution is returned within 60 days of the discovery of the contribution by the covered member