Cheat Sheet Flashcards
Membership is revoked or suspended if fees are not paid within ____ days of notice
15
Written notice is required within ____ days of any material change to the firm
30
How long do member firms have to report an associated person after learning of a statutory disqualifying event.
Promptly but no later than 30 days
Statutory disqualification is mandatory if convicted money /securities misdemeanor or felony within the past ___ years
10 year - exceptions are available
Firm element of CE must be completed
Annually
Regulatory element of CE must be completed
120 days of second registration - every 3 years thereafter
Active military service
- Inactive status status by notification
- Cannot perform as a RR
- Can receive commissions on book
- CE requirement suspended
- 2 year expiration clock tolled
- Reactivate within 90 days of return
How often must OSJs and supervisory branches be inspected
Annually
How often must non-supervisory branches be inspected
Every three years
Rules of Business Continuity Plans
Business continuity plans must be disclosed to customers on account opening
Firms must designated 2 associated persons as emergency contacts
Changes to contacts must be updated promptly
Form U4
Every broker dealer must obtain, and every associated person must furnish, a completed questionnaire sign end by a municipal or general securities principal containing the following info
Name, address, ss#, 10 year work history, residences for last 5 years, disciplinary actions by federal agency, criminal disclosures, bankruptcies
Changes to central registration depository within 30 days
Form U5
Must be filed within 30 days of termination date to FINRA and former employee
A new employer must get go pay of U5 from FINRA or new employee, not former employer.
New employee must provide copy to new employer within two business days of request
OSJ
At least one principal per OSJ
Customer records, including complains, kept at OSJ
Annual compliance meeting required for RRs and principals
Recording Requirements
If recording calls required by FINRA, procedures and equipment must be in place within 60 days of notification
Definition of a branch excludes the following:
- Primary residence of RR as long as there are no meetings with customers
- Any location, other than a primary residence, used for less than 30 business days annually for the securities business (vacation home)
- Any location of convenience used occasionally for appointments (library or coffee shop)
- Any location used for non-securities business from which no more than 25 securities transactions are handled annually
Private security transactions vs. Passive investments
Private security transactions require written notice to the member firm AND written permission.
Passive investments are not subject to this rule
Sharing in customer accounts
Permitted with principal approval; sharing is proportionate to contribution unless customer is an immediate family member
Borrowing money from a customer
Permitted in three instances
1) customer is an immediate family member
2) customer is a lending institution
3) procedures for loans within the WSPs have been followed.
Rules for members operating on bank premises
Members must disclose to customers - ORALLY and IN WRITING - that securities purchased are not FDIC insured, are not deposits of the bank, and are subject to investment risk.
Retail communications
Retail communication means any written communicate that is distributed or made available to more than 25 retail investors within any 30 day period
Communications related to options and security futures are alway subject to pre-approval by FINRA
Social Media, Twitter - communication rules
If a member firm or AP recommends a security through a social media site or twitter it is subject to principal approval and record keeping rules
Correspondence
Communication sent to 25 or fewer retail investors in any 30 day calendar period
Does not require prior principal appeal if written procedures in place to train and follow up on APs
Instant Messaging
Permitted if members can archive, monitor, and achieve IM traffic
Investment analysis tools must be filed with FINRA within ____ days of first use
10 days
Research reports
Research reports can include price performance, but must go back 12 months
Past recommendations can be shown, but the report must also show comparable recommendations within the past 12 months
Research reports must include price at date of report, disclosure of control relationship, if firm managed any underwritings within the past 12 months, and if firm makes market in the securities
Analyst disclosures
- If the analyst, or a member of his/her household have a financial interest in the subject security
- Investment banking fees received from issuer over last 12 months, and any fees expected in the next 3 months
Code of Procedure - Who issues complaints?
Complaints issued by department of enforcement
Code of Procedure - How long do respondents have to respond?
Respondents must file a response within 25 days
Code of Procedure - When does prehearing conference take place?
21 days of respondents answer
Code of Procedures - Respondent does not dispute allegations
Acceptance, waiver, and consent letter
Code of procedure - minor rule violation fine
Fine of no more than $2,500 if a mint or rule violation
Code of procedure - sanctions
Sanctions effective no sooner than 30 days after written decision
Code of procedure - appeals
Appeals must be made within 25 days of written decision.
Code of Arbitration - Response Time
A response is required within 45 days
Code of Arbitration - Simplified Aribitration
Simplified arbitration is available for amount of $50,000 or less
Code of Arbitration - Award Payment
Award payment within 30 days of decision date
Code of arbitration - statute of limitations
Six years
Code of Arbitration - Dispute between member firms
In disputes between member firms that are over $100,000 three NON-PUBLIC arbitrators are used
A public arbitrator is never involved in the securities industry
Code of Arbitration - Customer Disputes & Arbitration
In customer disputes over $100,000, two public arbitrators and one non-public arbitrator are used
Opening New Accounts - Minimum Required Information
Name
Address
Date of Birth
Social Security Number
Account verification rules
Accounts must be verified within 30 days and every 36 months thereafter
Identify Verification
Military ID or Drivers License - birth certificate won’t work because no picture
Order Tickets
Order tickets must be prepared PRIOR to execution
Account Transfer
Member firms have ONE business day to validate a transfer
Transfers must be complete within three business days of validation
Direct Participation Programs Roll UPS
A business organized so as to pass all income, gains, losses and tax benefits to its owners.
Maximum compensation 2% and CANNOT be CONTINGENT
Not Held Order
If a member chooses the price and timing of an order it is NOT discretionary; rather, it is termed a not held order.
Not held orders are considered day orders
Customer Mail
Customer mail can be held for three months provided the member receives written instructions from the customer that includes the time period during which the member is requested to hold the customers mail
If it is longer than three month the customer’s request must include an acceptable reason for the request
CONVENIENCE is NOT an ACCEPTABLE reason for holding mail longer than 3 months
FINRA Rule 5130 - Trading Restrictions - New Issuance
Firms, employees, finders, fiduciaries, portfolio managers and immediate family members are restricted
Employees of limited business firms are exempt
FINRA Rule 5130 - Representations
Prior to selling a new equity issue to an account, a member must obtain a representation from the account owner that the account is eligible to purchase a new equity issue at the POP
All representations must be obtained within the 12 month period and retained for three year.
The initial verification must be in the form of a positive affirmation letter.
The annual verification may be in the form of a negative consent letter (i.e. unless otherwise informed, we will assume you continue to be eligible to purchase new common stock)
Regulation M - Rule 101 - Restricted Period
Defines the restricted period for underwriters who are also market makers.
In this situation, market makers must get excused withdrawals or act as passive market makers.
Regulation M - Rule 102 - Bidding on security during restricted period
Issuer and affiliates cannot bid for or purchase their securities during the restricted period
Regulation M - Rule 103 - Passive Bids
Passive bids can be no higher than the highest independent bid UNLESS it reflects a customer limit order
Net purchases limited to 30% of MM’s average daily trading volume
Regulation M - Rule 104 - Price Stabilization
Stabilization is permitted for fixed price offerings underwritten on a firm commitment basis.
Can be penalty or penalty free
Support placed as a one sided market
Regulation M - Rule 105 - Short Position
Short positions established within five business days of effective date cannot be covered by stock purchased at the offering price
Regulation A - Raising Capital
Companies can raise up to $20 million on Tier 1 and $50 million on Tier 2 from accredited and non-accredited investors
Rule 145 - M&A
Proxies are required to inform shareholders of M&A and reclassifications
No registration is necessary for shares resulting from stock splits and dividends
Rule 147 - Intrastate Sales
80% of gross revenue OR assets located within state OR net proceeds used in the state OR majority of issuer’s employees in the state
Only state residents can buy; no resale to no residents for 6 months.
Regulation S - Offshore Securities
Securities distributed offshore not subject to SEC registration
No selling efforts in the US
Distribution compliance period up to one year; 40 days for debt before resale in the US.
Regulation D - Raising Capital
Different rules at the $5 million mark
General solicitation and advertising permitted
No more than 35 NON accredited investors
Unlimited accredited investors
Accredited Investores
Individuals with income of at least $200,000 ($300,000 jointly)
Net worth of $1,000,000 or more EXCLUSIVE of primary residence
Officers of issuer
Those licensed with Series 7 or 65
Rule 144 - Control Stock and Non Control Stock
Minimum 6-month hold on restricted securities for both control stock and non-control stock
Volume limitations apply to all control stock sales
Form 144, good for 90 days, filed with SEC no later than the first sale date
Filing waived if amount to be sold is 5,000 shares or less or has a value of $50,000 or less in 90-day period
SEC Rule 10b-13 - Tender Offers
Tender offers must be open for 20 business days
Cannot buy stock, convertibles, or options while offer is open
No short tendering
Shareholder of the target company take permitted to tender share only to the extent of their net long position
Amendments open for 10 business days after change
SEC Rule 10-b-18 - Company Buy Backs
Transactions on any given day can
- only be affected through ONE market maker
- cannot exceed 25% of average daily trading volume
- cannot affect opening or closing price of the security
Safe harbor available if issue is not involved in the first trade of the day or any trade in the last half hour of trading.
Price can be no higher than the highest current independent bid or last sale
Corporate Financing Department - Filing Requirements
Concerned with fairness of underwriting compensation
Manager files information within ONE business day of filing registration statement
Applies to equity AND convertible debt issues
Nonconvertible debt and nonconvertible preferred stock are exempt if considered investment grade
Corporate Finance Department - Reimbursement
Issuer permitted to reimburse the underwriter for those expenses typically paid by the issuer
Corporate Financing Department - Unreasonable Compensation
Freely transferable stock, options, warrants of more than 5 years
Options or warrants with exercise price below the POP
Insider Trading
Both tipper and tipped liability if info is used to traded for profit or loss
Civil liability - three times losses avoided or profits made
Criminal
- Individual - Up to $5 million fine for individual and 20 years in prison
- Firm - Up to $25 million fine
Contemporaneous traders can sue up to five years after violation
Fairness Opinion - Disclosures
If firm was financial advisor to any party to the transaction and if it will receive compensation contingent n the completion of the transaction
Any relationships that existed during the past two years with any party involved in the transaction and whether any compensation was or will be received
If any information that formed the basis for the opinion was supplied by the party requesting the opinion and whether the information was independently verified
Hart-Scott-Rodino
Pre merger notification to FTC for transactions of $94 million or more
Information filed to allow FTC to determine anti-trust laws will be violated
Firms must wait 30 days after filing before consummation
Before order are crossed, they must be offered to crowd at
One cent above current bid
Block of stock
At least 10,000 shares or $200,000 or more
Market on close orders
NYSE market on close orders cannot be entered after 3:45 (NASDAQ 3:50) unless there is an order imbalance
Delisting
Requires approval of board of directors
Form 25 must be filed with the SEC
A security is considered delisted 10 days after filing
OTC Equity Security
A security that is not an NMS stock trade on a national securities exchange
NASDAQ Listing - Minimum Bid and Round Lot
Minimum bid price of $4 per share for Global Select Market listing
400 round lot shares
NASDAQ Market Maker Registration
Application effective upon approval
Must enter quotes within five business days
Excused withdrawal for cause —> must have NASDAQ approval
Voluntary termination for NASDAQ and ADF market makers requires 20 business day wait before registration
Short Interest Reporting
Reported twice monthly for short positions in both customer and proprietary account
Reported on the 15th and last business day of the month
Reported on trades that have settled as of the reporting dates
Order Audit Trail System
Time sequence trail of orders from entry to execution
Applies to NASDAQ and OTC equity securities
Daily reports on an order by order basis
NASDAQ Indicator - T1
News pending
NASDAQ indicator T2
News released
NASDAQ Indicator - T3
Five minute window when quotes can be entered and trading can begin
Limit Up Limit Down
Mechanism is intended to prevent trades in NMS securities from occurring outside of specific price bands
ECN
Registered ATS that provides trading platform for extended hours trading
5% markup policy
Prospectus offering exempt
Calculated from inside market price for active competitive markets
Applies to corporate and US government debt - calculated based on contemporaneous costs
Regulation NMS - Rule 611 - Executing Trades on Behalf of Customers
Prohibits trade-throughs that occur when a firm executes a customer order at a price when a better price is available in another market
Regulation NMS - Rule 612 - Increments for Pricing of Equities
For stocks priced at $1 per share or greater, the minimum increment is 1 cent
For stocks priced less than $1, sub-penny pricing is permitted
Regulation NMS Rule 605 - Market Center Reporting
Market centers that trade listed and NASDAQ securities must prepare MONTHLY reports on execution quality
Regulation NMS - Rule 606 - Routing Method & Payment for Order Flow
Firms must disclose, in QUARTERLY reports, their order routing methods that identify the market centers to which they route a significant percent of their non-directed orders.
They must also disclose within these reports any payment for order flow arrangements that exist.
Manning Rule
Firms cannot trade ahead of customer limit orders
If a market maker receives, as principal, a better price than unexpected customer limit order, price improvement must be passed along to the customer.
For example, if a market maker buys 100 shares at $31.00 when holding a customer limite order to buy at 31.01, the customer’s order must be filled at 31.00.
Trading ahead rule are applicable from 9:30am to 6:30pm
Trading along is OKAY with an agreement in place - no blanket agreements
SEC Rule 604 - Display Rule
Requires a market maker to display a customer order priced better than its current quote within 30 seconds of receipt
OTC Market Regulation
Member firms cannot
- trade ahead of customer block orders
- adjust inventory in advance of non-public knowledge of issuance of research
Interpositioning is prohibited unless it results in better execution for the customers
Regulation SHO - Shorting
Mandates a locate requirement prior to the short sale of a security
Requires close out of fails to deliver in threshold securities after 13 consecutive settlement days
Over the counter bulletin board securities
Electronic inter dealer quotation service for domestic equities not listed on any exchange and foreign equities, ADRs, and equities in the process of delisting
No minimum listing standards
SEC 15c2-11 - Requirements for Non-Nasdaq market making
Form 211 field by market maker at least three business days before entering quotes
Piggybacking exemption available based on continuous quote rule
Quotation entries may be firm, one sided, unpriced indications of interest
Trade Reporting & Compliance Engine
Reporting system for SECONDARY market OTC trading of depository eligible corporate bonds (convertible and non-convertible), US agency debt, and debt resold in a Rule 144a transaction
Trade reports must be made within 15 minutes of execution
FINRA reports trade to the public immediately
CQS - Consolidated Quote System
All stock exchanges and market centers send their trades to the consolidate quote system. The data streams are distributed worldwide and act as the information sources for real time trade and quote information for NMS markets
Registered with SEC as SIP (securities information processor)
Penny Stock Rules
A Penny Stock is a non-NMS traded stock under $5.00 per share
New customers who would like to own penny stocks must SIGN a suitability agreement. Established customers are exempt from this requirement
Customers must receive risk disclosure statement, commission schedule for RR and firm, and monthly statements
Firms whose penny stock revenue is less than 5% of total revenue are exempt from these requirements
Reverse Convertible Bonds
Debt instruments embedded with PUT options allowing issuers right to convert bonds into equity
Issue would exercise the option if shares fall below a set price.
Qualified Institutional Buyer
Any entity acting for its own account or the account of other QIBs that in aggregate owns and invests on a discretionary basis is at least $100 million in securities of issuers that are not affiliated with the entity.
NASDAQ Book Orders - Maximum Order Size
999,999
NASDAQ Book - Assumed Priority
Price and time
Order Time in Force - Market Day
9:30am to 4:00pm
Order time in force - system day
4:00am to 8:00pm
Order time in force - GTC orders
GTC orders may be entered as either market day or system day orders
Order time in force - on the open orders
On the open orders can be entered up until 9:28am
Order time in force - on the close orders
On the close orders can be entered up until 3:50 pm
Trade Reporting - OTC trades
Trade reporting facility (TRF)
Alternative display facility (ADF)
OTC Reporting facility (ORF)
All are used to report trades and are open from 8:00am to 8:00pm
How long do market makes have to report OTC trades
10 seconds
Inter dealer trades
In inter dealer trades, the only time the buy side reports is when the buyer is a market maker in the stock and the selling firm isn’t.
In all other instances, the sell side reports
Inter-dealer trades - T trades
T trades are effected outside of normal business hours but reported the same day
Inter dealer trades - as/of trades
Effected outside of normal business hours
Fixed Annuity
A fixed annuity is NOT a security!
Seminars dealing exclusively with fixed annuities cannot result in securities fraud.
Variable Annuities
Tax deferred way to participate in equity markets
Not suitable for short term investing due to surrender charges
Typically carry higher expenses than mutual funds with similar objectives
May not be suitable for seniors
Index Annuities
Have a participation rate that is usually limited by a cap
Combination Annuity
Investors purchase a combination annuity to receive the advantages of both fixed and variable annuities.
Investors contribute to both the general and separate accounts - provides guaranteed payments and offers possibility of inflation protection
Continuous net settlement
Automated book entry accounting system to centralize trade settlement and maintain orderly flow of security and money balances
Operated by National Securities Clearing Corporation
Using CNS reduces movement of securities AND costs
Allows markets to act efficiently by minimizing the need to deliver actual securities on a trade-by-trade basis to contra parties
