Chapter Five Study Notes

Question 1

New Member Application Review Process

Answer 1

After receiving a BD membership application
through the Firm Gateway, FINRA must review and process it within 180 calendar days. First,
FINRA conducts preliminary review of the application to determine if it is substantially complete. If
the application is found to be to be deficient, the applicant will be given five days to correct the
deficiency. If the filing is deemed substantially complete, FINRA staff then has 30 days to complete
its review and determine whether more information is needed. If additional information is
required, FINRA staff must issue a written request within this timeframe. The applicant then will
have 60 calendar days to fully respond to FINRA’s initial request.

Question 2

The supervisory manual must also include

Answer 2

titles, registration status, and location of supervisory
personnel and their responsibilities. A record of the names of supervisory personnel and the dates
on which their designation became effective must be prepared and maintained for three years;

Question 3

There are many elements that might comprise a business continuity plan but, at a minimum, the
plan must address the following points:

Answer 3

1. Data backup and recovery
2. Financial and operational assessments
3. Alternative communications between customers and the firm
4. Alternative communications between the firm and its employees
5. Alternative physical location of employees
6. Regulatory reporting
7. Communications with regulators

Question 4

Creation of Additional OSJs

Answer 4

1. Whether registered persons at the location engage in retail sales or other activities involving
   regular contact with public customers;
2. Whether a substantial number of registered persons conduct securities activities at, or are
   otherwise supervised from, such location;
3. Whether the location is geographically distant from another OSJ of the firm;
4. Whether the member’s registered persons are geographically dispersed; and
5. Whether the securities activities at such location are diverse or complex.

Question 5

Non-Branch Locations

Answer 5

 A non-sales office (e.g., back-office sites and operations offices)
 A location of convenience used occasionally and by appointment only
 The floor of an exchange
 A temporary location used in a business continuity plan (i.e., a back-up office)
 A location primarily used for non-securities business and from which less than 25 securities
transactions are effected annually (Advertisements and sales literature generated from this location
must identify the location that supervises the personnel working at the location where the
communication was obtained.)
 A representative’s primary residence that is not used as an office for the public (See Primary
Residence Limitations, discussed shortly.)
 A temporary location used for securities business (excluding a primary residence) for less than 30
business days in any calendar year (See Primary Residence Limitations, discussed shortly.) A business
day does not include a partial business day during which an associated person spends at least four
hours at her branch office during normal business hours.

Question 6

Internal Inspection Schedule

Answer 6

1. Each OSJ and any branch office that supervises one or more
   non-branch locations must be inspected annually by a principal of the member firm.
2. Branch offices
   that do not supervise one or more non-branch locations must be inspected every three years.
3. Every
   non-branch location must be reviewed on a periodic cycle that takes into consideration the nature
   and complexities of the activities conducted at the branch, the volume of business, and the number
   of personnel at the location.

Question 7

SRO Inspection Cycle for Newly Established Broker Dealers

Answer 7

Under SEC rules, each selfregulatory
organization is tasked with responsibility for examining newly established broker dealers
for compliance with all applicable financial responsibility rules. The new member must be
inspected by the SRO within 6 months of the member’s registration with the SEC to assure that the
new firm is operating in conformity with applicable financial responsibility rules. The SRO is also
required to conduct an inspection of the new member firm within 12 months of its registration with
the SEC to determine whether the firm is operating in conformity with all other (non-financial
responsibility) applicable SEC rules.

Question 8

Finra Publicly disclosed info about an RR

Answer 8

 The current employing firm, 10 years of employment history, and all approved registrations
 Certain legal and regulatory charges and actions brought against the RR, such as felonies, certain misdemeanors and civil proceedings, and investment-related violations
 Pending customer-initiated arbitrations and civil proceedings involving investment-related activities,
any arbitrations or civil proceedings that resulted in an award to a customer, and settlements of
$10,000 or more in an arbitration, civil proceeding, or complaint involving investment-related
activities
 Written customer complaints alleging sales practice violations and compensatory damages of $5,000
or more that were filed within the last 24 months
 Formal investigations involving criminal or regulatory matters
 Terminations of employment after allegations involving violations of investment-related statutes or
rules, fraud, theft, or failure to supervise investment-related activities

Question 9

Trainers

Answer 9

If engaged in the training of other principals of the
member firm the trainer must be registered as a principal. This requirement is similar to that requiring a person engaged in the training of a
registered representative to be a registered representative as well.

Question 10

Series 24

Answer 10

The General Securities Principal designation qualifies a person to manage or supervise
the member’s investment banking or securities business for corporate securities, direct
participation programs, and investment company products/variable contracts.

Question 11

Series 24

Can Not

Answer 11

The Series
24 does not qualify an individual to function as a: Registered Options Principal
 General Securities Sales Supervisor for Options and Municipal Securities
 Municipal Securities Principal
 Municipal Fund Securities Principal
 Financial and Operations Principal
 Introducing Broker-Dealer Financial and Operations Principal

Question 12

Series 9/10

Answer 12

The General Securities Sales Supervisor designation permits a person to supervise
sales activities in corporate, municipal, and options securities, investment company products,
variable contracts, and direct participation programs. In addition to branch office managers,
regional and national sales managers may also register in this capacity.

Question 13

Series 26

Answer 13

The Investment Company Products/Variable Contracts Limited Principal designation is
a limited registration that permits a person to supervise the sale of open-end investment companies
(mutual funds), closed-end funds during the distribution period, variable annuities, and variable life
insurance. (To sell life insurance, a person must also obtain a state insurance license.)

Question 14

Series 27

Answer 14

The Financial and Operations Principal is a limited registration that permits a person to
supervise a broker-dealer’s financial responsibility and recordkeeping functions. Areas of supervision
include the preparation of the firm’s FOCUS reports and ensuring compliance with applicable Uniform
Practice rules.

Question 15

Series 99

Answer 15

The Operations Professional Registration designation is established by FINRA for persons
who are subject to the registration, qualification, and continuing education requirements. Persons
who perform a covered function (see the list below), but whose responsibilities are below these
specified levels, are not required to register as Operations Profession

Question 16

Series 99 covered functions

Answer 16

 Client on-boarding (customer account data and document maintenance)
 Collection, maintenance, reinvestment (i.e., sweeps), and disbursement of funds
 Receipt and delivery of securities and funds, account transfers
 Bank, custody, depository and firm account management and reconciliation
 Settlement, fail control, buy-ins, segregation, possession and control
 Trade confirmation and account statements
 Margin
 Stock loan/securities lending
 Prime brokerage (services to other broker-dealers and financial institutions)
 Approval of pricing models used for valuations
 Financial control, including general ledger and treasury
 Contributing to the process of preparing and filing financial regulatory reports
 Defining and approving business requirements for sales and trading systems and any other
systems related to the covered functions, and validation that these systems meet such business
requirements
 Defining and approving business security requirements and policies for information
technology, including, but not limited to, systems and data, in connection with the covered
functions
 Defining and approving information entitlement policies in connection with the covered
functions
 Posting entries to a member’s books and records in connection with the covered functions to
ensure integrity and compliance with the federal securities laws and regulations and FINRA rules

Question 17

Series 16

Answer 17

The Supervisory Analyst designation is for any person whose functions involve the
preparation and approval of research reports.

Question 18

Series 53

Answer 18

The Municipal Securities Principal designation is a limited registration that permits a
person to supervise the activities of Municipal Securities Representatives. These principals
supervise the sale of municipal bonds as well as municipal fund securities (i.e., selling 529 College
Savings Plans or Local Government Investment Pools or LGIPs).

Question 19

Series 4

Answer 19

The Registered Options Principal designation is a limited principal registration that is
required of a person who will be responsible for the supervision of a firm’s options trading, ensuring
compliance with the rules of the Options Clearing Corporation or exchange, and regulations applicable to
the trading of options contracts.

Question 20

Executive Representative

Answer 20

Firms are required to have a point person who interfaces with FINRA. This person is typically a
principal of the firm who has a broad understanding of the firm’s operations. Broker-dealers are
required to review and, if necessary, revise its designation of Executive Representative on a
quarterly basis. This requirement must be met within 17 business days of the end of the quarter.

Question 21

Series 11

Answer 21

The Assistant Representative for Order Processing designation allows sales assistants to
accept unsolicited orders from customers. Persons with this registration may not solicit transactions
or new accounts, give investment advice or recommendations, execute transactions for a firm, or
receive compensation based on the size or number of transactions. Also, any person with this
registration may not hold another registration at the same time.
An assistant representative may be compensated by an hourly wage or salary, but not on a
commission basis. This individual may receive a bonus based on the firm’s profits, but not based on
the number of accounts opened (accounts may not be opened by a person with Series 11
registration).

Question 22

Series 22

Answer 22

The Direct Participation Programs Limited Representative designation permits a
representative to sell direct participation programs (limited partnerships).

Question 23

Series 42

Answer 23

The Registered Options Representative designation permits a person to sell options if
the person also has a Series 62 registration.

Question 24

Series 52

Answer 24

The Municipal Securities Representative designation permits a person to open accounts
for and execute transactions in municipal securities.

Question 25

Series 57

Answer 25

The Securities Trader Representative designation permits a person to trade equity and/or
convertible securities on a principal or agency basis in the over-the-counter market and may also be
taken by a person who supervises traders. This category of registration also requires Series 7 or
Series 62 registration.

Question 26

Series 62

Answer 26

The Corporate Securities Representative designation is a limited registration that
permits a person to sell exchange-traded and OTC corporate securities, but does not allow the
person to sell investment company securities (except money-market funds), variable contracts,
municipal securities, options, or limited partnerships.

Question 27

Series 72

Answer 27

The Government Securities Representative designation permits a person to conduct
business in U.S. Treasury, U.S. government agency, and mortgage-backed securities. Persons with
this registration who wish to engage in business involving options on government securities must
also obtain a Series 42 registration.

Question 28

Series 79

Answer 28

The Investment Banking Representative designation permits a person to advise on or
facilitate equity or debt offerings, mergers and acquisitions, tender offers, asset sales, or business
combination transactions.

Question 29

Non-registered persons may:

Answer 29

 Extend invitations to firm-sponsored events
 Inquire whether a prospective customer wishes to discuss investments with a registered
representative
 Inquire whether a prospective customer wishes to receive investment literature from the firm

Question 30

Under SEC Rule 15a-6

Answer 30

in instances where an associated person of a foreign broker-dealer is
permitted to make sales calls in the U.S., he must be accompanied by a registered representative of
a U.S. broker-dealer. Any sales made must be booked by the U.S. broker-dealer. This exemption is
only available if the customer is a major U.S. institutional investor. It was created to allow a nonregistered
foreign research analyst to accompany a FINRA registered person who would visit a U.S
institutional investor.

Question 31

Regulatory Training Element

Significant Disciplinary Actions

Answer 31

RRs who are subject to the Regulatory Element and incur a significant disciplinary action will have their
base date changed to the effective date of the significant disciplinary action. That person must
participate in an immediate session within 120 days of this new base date, then on the second
anniversary of the base date and every third year thereafter.

Question 32

Member firms that meet the following criteria will be subject to the Taping Rule:

Answer 32

 Employs at least five, but fewer than 10 registered representatives, where 40% or more have been
employed by one or more disciplined firms within the last three years
 Employs at least 10, but fewer than 20 registered representatives, where four or more have been
employed by one or more disciplined firms within the last three years
 Employs at least 20 registered representatives, where 20% or more have been employed by one or
more disciplined firms within the last three years

Question 33

Supervision of an SD

Answer 33

Statutorily Disqualified Employee
you are to be the responsible supervisor for an SD, you should realize that FINRA expects you to
engage in heightened supervision of that individual and expects to see in the application your supervisory
plan for that individual.
 Reviewing and approving of all of the SD’s order tickets, incoming or outgoing correspondence, and
new account forms for suitability
 Keeping written records of all supervisory reviews and approvals
 Meeting periodically with the SD to review his transactions with clients
 Immediate review of customer complaints, whether written or oral, and forwarding the complaints to
the firm’s Director of Compliance

Question 34

When a red flag is discovered, a supervisor must do the following:

Answer 34

1. Investigate the situation
2. Document the investigation
3. Pursue the investigation to a conclusion