Chapter 9 - Other Relevant Regulations/Interpretations Flashcards
Written Supervisory Procedures manual (WSP)
Required under FINRA rules for all policies and procedures that are used to supervise a firm. Manual must cover scope and nature of all business activities, methods of operation, detailed responsibilities of all supervisors and review procedures, and method of documentation. Must be designed so designated supervisor can implement the plan and is able to detect and prevent violations of the procedures. Copy must be kept in each office where supervisory activities are conducted.
Must include titles, registrations, and location of supervisory personnel and their responsibilities. Record of names and dates of effective designation must be prepared and kept for 3 years, including first 2 years in an easily accessible location.
Amendments must be made in a reasonable timeframe.
Old WSP also must be maintained 3 years.
New FINRA member application
FINRA reviews membership applications within 180 days. Preliminary review to determine if application is complete – any deficiencies must be corrected within 5 days. If complete, FINRA has 30 days to complete its review. Must make written request for additional information if needed, then applicant has 60 days to fully respond to FINRA’s request.
FINRA Supervisory control system
BDs must notify FINRA of at least one principal who will establish/maintain a system of policies and procedures to ensure compliance with applicable securities laws and regulations. Must verify that its SCS is effectively monitoring registered person activities. Designated principal must report to senior management at least once a year and must detail the firm’s SCP.
Supervisory control system must include:
Procedures to monitor customer account activity as conducted by branch office managers, sales managers and other personnel. General requirement for oversight of these procedures to be done by a person senior to the manager whose accounts are being monitored. There can be an exception for small firms – then, must be done by a principal who is sufficiently knowledgeable.
Procedures to monitor the following:
- All transmittals of funds/securities from customer accounts to third party accounts, outside entities, alternative addresses, PO boxes
- Transmittals between customers and RRs
- Customer address changes or customer investment objectives and validation of such changes
Annual certification of compliance and supervisory processes
Must designate a CCO (compliance officer). Can have more than one if primary responsibilities of each are documented.
Annually, CEO must certify the firm has policies and procedures in place to achieve compliance with all rules. CEO must meet with the CCO annually to discuss policies and procedures.
Certification report must be submitted to audit committee earlier of next scheduled AC meeting or within 45 days of execution.
FINRA Dues, fees, and assessments
Members pay annual assessment of 0.125% of annual gross revenues from:
- State and muni transactions
- Other OTC transations
- US govt transactions
- Exchange securities transactions (only for firms whose books/records/operations are examined by FINRA)
Also fixed fee per registered person and per branch office.
If fail to pay, will receive a notice of suspension/cancellation of membership effective 21 days after notice.
Dealing with non-members of FINRA
To encourage membership in FINRA, only members may transact on a preferential basis. Non-members must be treated same as general public, substantially limiting ability of non-members to transact (no price concessions or discounts)
Doesn’t apply to exempted securities (includes Treasury/municipal securities) or exchange transactions
A member of FINRA may pay a commission to a non-member for execution of an order on an exchange (but not OTC)
Suspended FINRA members
Become non-member on effective date of expulsion or from date of suspension to termination of suspension.
Revocation of BD registration with SEC (or resignation from FINRA) automatically terminates FINRA membership.
If a BD is a member of FINRA and an exchange and gets suspended from FINRA, it may continue trading on the exchange without violating FINRA rules
Foreign BDs
Restrictions that apply to non-members don’t apply to foreign BDs that are ineligible for membership
Must have an agreement that on subsequent sales in the US, the foreign BD will comply as if it’s a FINRA member
Foreign BD will deal with non-member BDs as it deals with general public
Continuing commissions
Under certain circumstances, a former RR will continue to receive commissions. This is allowed but the former RR may not solicit new orders or accounts during retirement.
Business continuity plan
BDs must establish written BCP identifying procedures to be followed in the event of an emergency/disruption.
Must verify that all customer obligations will be met and must address the firm’s existing relationship with other BDs and counterparties.
Must be reviewed annually
Must be made available promptly after FINRA request
Must include:
- Data backup/recovery (hard copy and electronic)
- All mission critical systems
- Financial/operational assessments
- Alternate communications between customers and BD
- Alternate communications between BD and employees
- Alternate physical location of employees
- Critical business constituent/bank/counterparty impact
- Regulatory reporting
- Communications with regulators
- How the member will assure customers prompt access to their funds and securities in the event that the member determines its unable to continue business
Required to report emergency contact info to FINRA - 2 designated associated persons. At least one must be senior management and registered principal. If there’s a second one, if not registered principal, must be senior management with knowledge of business ops.
Mission critical system
Any system that’s necessary, depending on the nature of the business, to ensure prompt and accurate procession of securities transactions, including order taking, order entry, execution, comparison, allocation, clearance and settlement of securities transactions, the maintenance of customer accounts, access to customer accounts and delivery of funds/securities
Registration of representatives
All persons engaged in the investment banking/securities business of a member firm must be registered, except clerical/admin roles. BDs must investigate the good character/qualifications/experience of potential RRs. Application for registration is accomplished on Form U4.
If person was previously registered with FINRA, BD must obtain latest Form U5 (Termination Notice) within 60 days of application. Applicants must provide U5 within two business days if requested (or if they don’t have a copy, must request from their former employer and provide to new employer within 2 days of receipt)
Qualification exams
RRs must pass the appropriate exam, depending on products they sell. Series 7 is the most inclusive – allows RR to sell any security. Other licenses limit activity.
Exam confidentiality
FINRA considers the content of its exams confidential; therefore, it’s a violation of FINRA rules to:
- Remove an exam or portion of exam from test center
- Reproduce parts of an exam
- Disclose parts of an exam
- Receive parts of an exam
- Compromise contents of exam in any way
Violators are subject to sanctions under Code of Procedure, may include suspension/revocation of registration
Form U4
Uniform Application for Securities Industry Registration or Transfer
Satisfies SEC Rule 17a-3.
Each individual who’s to be licensed under SRO rules must complete Form U4
Filed with/reviewed by FINRA’s CRD
Applicant must answer questions about personal data, history of violations of laws/SRO rules
RR is required to keep Form U4 updated if any info changes
Fingerprint required
Does NOT include education history
SEC Rule 17a-3
Requires a BD to keep a current questionnaire or application for employment executed by each associated person, excluding clerical/admin roles
CRD
Central Registration Depository – digital system maintained by FINRA and provides registration info regarding BDs/RRs to state regulators, other SROs, and the SEC. Disciplinary info about an RR may be requested through the CRD.
Statutory disqualification – Form U4
Yes answer to some questions on Form U4 may result in automatic denial of application, such as:
- Being expelled/suspended from SRO
- Having registration denied/suspended/revoked by SEC or other regulatory agency
- Violating or assisting in violation of securities laws
- Failing to reasonably supervise
- Being convicted of a felony or misdemeanor involving false reports, bribery, perjury, crimes related to securities, or any other felony
A person convicted of a felony or certain misdemeanors is barred from the securities business for 10 years from the date of the conviction. However, a disqualified person may apply to an SRO to enter or reenter the securities industry before the 10-year period has elapsed
Fingerprinting requirements
Any employees of a BD must be fingerprinted if they:
- Engage in sale of securities
- Regularly come into contact with money/securities
- Have access to keeping, handling, or processing of securities, or the firm’s records of original entry
- Have direct supervisory responsibility over someone with the above activities
Requirement may be waived for certain security types
Must be maintained for at least 3 years after RR’s termination
Ineligible fingerprints
After three good faith fingerprint attempts, firms are not required to submit a 4th. FINRA will request for the FBI to conduct a search of its databases based on the associated person’s name rather than fingerprints, to check for criminal history.
Qualifications of supervisors
SRO rules require all supervisory personnel to be qualified to assume their responsibilities by either experience or training. Most supervisors are required to pass either Series 9/10 (General Securities Sales) or Series 24 (General Securities Principal), depending on responsibilities.
Typically, officers, general partners, managers of an office or director who’s actively engaged in securities business of the member firm are required to be registered.
For specialized areas, may be required to take other exams too
Series 24
General Securities Principal – manage or supervise investment banking/securities business for corporate securities, direct participation programs, investment company products/variable contracts.
Doesn’t qualify for roles with options, municipal securities, FinOps principal
Series 9/10
General Securities Sales Supervisor – supervise sales activities in corporate, municipal, options securities, direct participation programs, investment company products, variable contracts