Investment Companies Flashcards
1
Q
Unit Investment Trust (UIT)
A
Investment company organized under a trust indenture. Have trustees instead of board of directors.
Create a portfolio of debt or equity securities - then sell redeemable interests (units, shares).
UIT is fixed or nonfixed.
Not managed.
Does not trade in the secondary market
2
Q
Close-end Investment Company
A
Raises capital for its portfolio by common stock offering.
Initial offering, registers a fixed number of shares with the SEC and offers to the public, with prospectus for a limited time.
May also issue bonds and preferred stock.
- Also called “publicly traded funds”. After initial offering - anyone can buy or sell shares in the secondary market.
- Supply and demand determine bid and ask price.
- Only investment company to trade in secondary market.
- Issues common, preferred and debt securities
3
Q
Open-end Investment Company
A
- Issues only common stock.
- Registers an open offering with the SEC (continuous primary offering).
- Does not trade in secondary market
- Sellers received calculated NAV
- Buyers pay next calculated POP
4
Q
Mutual Fund Characteristics
A
- Professional investment advisor manages the portfolio
- Provides diversification by investing in different companies or securities
- Allow a min. investment ($500) to open an account.
- Investor retains voting rights similar to those extended to common stockholders (changes in board, approval of investment advisor, changes in funds investment objective, changes in sales charge/load).
- **Must offer reinvestment of dividends and capital gains at NAV (without a sales charge), but reinvestments are taxable.
- Fund may offer various withdrawal plans that allow different payment methods at redemption.
- Funds may offer reinstatement provisions that allow investors who withdraw funds to reinvest up to the amount withdrawn within 30 days with no sales charge. *Provision must be in prospectus and is available one time only.
5
Q
Prospectus must contain:
A
- Fund’s objective
- Investment policies
- Sales charge
- Management expenses
- Services offered
- 1, 5, 10-year performance history
6
Q
Expense Ratio
A
Funds Expense / Average Net Assets
- Compares the mgmt. fees and operating expenses (including 12b-1 fees), with the fund’s net assets.
- The expense ratio is calculated by dividing a fund’s expense by its average net assets.
7
Q
Current Yield
A
Annual income/current market value
Applies to stocks and bonds. Measurement of the amount of income investor will receive as a percentage of the cost of the investment.
8
Q
T + 1
A
Regular Way Settlement
(securities)
9
Q
T + 2
A
Regulation T Payment
(S + 2
10
Q
Transfer Agent
A
- responsible for ensuring that its securities are issued in the correct owner’s name
- canceling old certificates and issuing new ones
- maintaining records of ownership
- handling problems relating to lost, stolen, or destroyed certificates.
11
Q
Calculations for gains or losses for tax purposes?
A
Proceeds - cost basis
12
Q
Customer New Account Forms must be kept for how many years?
A
6
13
Q
Advertising the firm has published must be kept for how many years?
A
3
14
Q
Stock records must be kept for how many years?
A
6
15
Q
Minute books must be kept for how many years?
A
Lifetime
16
Q
Index Options
A
Nonequity options - underlying instruments are NOT shares of stock.
Allows investors to profit from movements of markets or market segments and hedge against these market swings. (broad-based, narrow-based, or other focus indexes)
17
Q
Freeriding
A
when securities are purchased and then sold before making payment for the purchase.
- Prohibited in cash and margin accounts.
- account will be frozen for 90 days, and no new transactions can occur unless there is cash or marginable securities in the account before the purchase is made.
18
Q
Matching Orders
A
aka Painting the tape.
one party selling stock to another with the understanding that the stock will be repurchased later (usually same day) at the same price. Makes it look like more activity in a stock than there actually is.
19
Q
How long do blotters, general ledgers, and stock records need to be maintained?
A
6 years
20
Q
12b-1 Fee
A
open-end investment company (mutual fund) to levy an ongoing charge for advertising and sales promotional expenses, prospectus. NOT fund mgmt. expenses.
This fee may not exceed .75% (average net assets) and, if above .25%, the fund may not describe itself as no-load.
When 12b-1 fees are being charged, the BOD must be composed of a simple majority of noninterested members.
*Expressed as an annual amount, but charged and reviewed quarterly.
21
Q
Clearing Broker Dealer
A
clears (settles) its own trades, holds customer cash and securities, bills trades, maintains customer accounts, and provides a full complement of back-office support services. In the language of the SEC, clearing broker-dealers are referred to as carrying firms.
22
Q
Institutional Communication
A
any written (including electronic) communication that is distributed or made available only to institutional investors, but it does not include a member’s internal communications.
Institutional sales material is not required to have prior principal approval, however each member shall establish written procedures for the review of institutional communications used by the member and its associated persons by an appropriately qualified, registered principal.
23
Q
Retail Communication
A
any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30-calendar-day period.
-A copy of all retail communication must be filed with FINRA.
- For a new member firm, the filing must occur at least 10 days before use.
- For established member firms, the filing must happen within 10 days of first use.
24
Q
Correspondence
A
any written (including electronic) communication that is distributed or made available to 25 or fewer investors within any 30-calendar-day period.
- Procedures may allow for pre- or post review by principal.
- Exempt from FINRA spot checks
25
The sales charge for Class A shares may not exceed
8.5% of the total investment.
26
Mini-Max
Underwriting that sets a floor or minimum (the least amount the issuer needs to raise to move forward with the underwriting), as well as ceiling or maximum on the dollar amount of securities the issuer is willing to sell.
*Best efforts underwriting
27
Independently Prepared Reprint (IPR)
Article reprint that meets certain standards designed to ensure that the reprint was issued by an independent publisher and was not materially altered by the member.
*A member may alter the contents only to make it consistent with applicable regulatory standards or to correct factual errors.
**Must be preapproved by a principal but exempt from FINRA filing requirements.
28
Qualified Dividends are taxed at...
long-term capital gains rate
29
Nonqualified Dividends are distributed as _____, and taxed at _______
short-term capital gains and taxed as ordinary income
30
Net Investment Income (NII)
Dividends + interest - expense of the fund.
| *Distributed to shareholders as dividends. May be reinvested or taken in cash.
31
Accumulation Units are computed......
Daily on a forward pricing basis.
32
Annuity Unit Values are computed....
Monthly based on actual performance versus the AIR.
33
Immediate Variable Annuity
An immediate annuity has no accumulation period. A single lump-sum investment is made, and payments begin immediately, since the investor has purchased annuity units.
34
A distribution from a corporate pension plan to be rolled over into an IRA must be completed within how many days to maintain its tax-deferred status?
60 days
35
Class C Shares
Level Load and also back end load. 1% CDSC, 0.75% 12b-1 fee and a 0.25% shareholder services fee.
*Appropriate for investors with short time horizons; become too expensive if investing for more than 4-5 years.
36
Dollar Cost Averaging
Invest a fixed amount of money at regular intervals - regardless of market price fluctuation.
-
Allows investor to purchase more share shares when price is low and fewer shares when prices are high.
*Results in a lower cost per share than the average price per share.
37
Index Annuity
Market participation but with a guarantee against loss.
-Pays interest based on performance of market index (S&P 500).
* Participation Rate: The participation rate can be as high as 100%, meaning the account is credited with all of the gain, or as low as 25%. Most indexed annuities offer a participation rate between 80% and 90%—at least in the early years of the contract.
* Cap Rate: A typical cap of 12% in a year the index increased by 30%....your gain would still be capped at 12%
* Usually have longer surrender charge periods.
38
Transfer Information Form (TIF)
Form that facilitates the transfer of securities from one trading account to another at a different brokerage firm or bank.
* has 1 day to validate the securities listed on the TIF
* Within 3 days after validation, the carrying firm must complete the transfer of the account.
39
How long should trade confirmations be retained?
3 years
40
For an owner to be paid a dividend, his name should be recorded on the stock record book of the issuer's transfer agent by the:
Record Date
41
Required Approval: Institutional Communication
- No preapproval of principal.
| - if procedures do not require review, must have provision for training on use of inst. comm.
42
Required Approval: Retail Communication
Preapproval of principal is required.
25 or more retail investors within 30 days.
43
Required Approval: Correspondence
Pre- or post-review of by principal.
25 or fewer retail investors within 30 days.
44
Required Approval: Public Appearance
Preapproval may be required but is not mandated.
- Scripts, slides, handouts or other written (including electronic materials) used in public appearance are retail communications - preapproval.
- Must have procedures
45
Required Approval: IPR
Preapproval required if the communication meets the definition of retail comm.
46
Required Approval: Research Reports
Approval requirements depend on whether it is defined as institutional, retail or correspondence.
47
Mutual Fund Sales Charge
POP - NAV
48
What brings about a change in the NAV of a mutual fund?
1. The fund pays a dividend.
| 2. The portfolio increases in market value.
49
The over-the-counter market could be characterized as what type of market?
The OTC market is an inter-dealer market.
50
Ex-date
The first date on which a security is traded that the buyer is not entitled to receive distributions previously declared.
51
Dividend Distribution
- The declaration date is the day on which the board of directors announces the dividend.
- The ex-date or ex-dividend date is the trading date on (and after) which the dividend is not owed to a new buyer of the stock. The ex-date is one business day before the date of record.
***If you buy a stock one day before the ex-dividend, you will get the dividend. If you buy on the ex-dividend date or any day after, you won't get the dividend.
-The date of record is the day on which the company checks its records to identify shareholders of the company. An investor must be listed on that date to be eligible for a dividend payout.
52
What type of investment accounts must be opened as cash accounts?
- Personal retirement accounts (individual and tax-sheltered annuities).
- Corporate retirement accounts
- Custodial accounts (UGMA, UTMA)
53
The death benefit of a variable life policy must be calculated at least:
Annually
54
What fees are no-load funds permitted to charge?
- purchase fees
- exchange fees
- account fees
- redemption fees
*permitted to pay its annual operating expenses, but 12b-1 fees or separate shareholder service fees cannot exceed .25%.
55
Class C shares are appropriate for what type of investors?
Those who have short term horizons (would be expensive to own if investing for more than 4-5 years).
56
The cash value of a variable life policy must be calculated at least:
Monthly
57
FINRA Rule 2330
Recommended purchases and 1035 exchanges of deferred variable annuities, and recommended initial subaccount allocations.
Must inform customer:
-potential surrender period and charges
-potential tax penalties (sell or redeem prior to 59 1/2)
-mortality and expense fees
-investment advisory fees
-potential charges and features of rider
-market risk
58
Mutual funds that offer automatic reinvestment of dividends and gains distributions must do so at
NAV (net asset value)
59
Bonus Annuity
- Bonus variable annuities tend to have higher annual fees
| - Bonus variable annuities generally have longer surrender charge periods.
60
Code of Procedure
FINRA's formal procedure for handling trade practice complaints involving violations of conduct rules.
*The Department of Enforcement is the first body to hear and judge complaints.
61
How are prices arrived at in the securities markets?
By auction in the exchanges.
By negotiation in the OTC markets.
62
Calculate the POP
NAV / (1 - sales charge)
63
Pricing Mutual Fund Shares
1. Total assets - liabilities = net assets of the fund
2. Net Assets / Shares Outstanding = NAV
3. NAV + SC = POP
64
How to calculate the value of interest in the separate account?
multiply the number of accumulation units by the value of each unit.
Example: 1,000 accumulation units valued at $5 each = $5,000.
65
Simplified industry arbitration
used in disputes between member firms or their associated persons when the amount in dispute does not exceed $50,000. If the dispute involves a customer, then it goes to simplified arbitration.
66
How much of an investment company's assets must be invested in securities before it must register with the SEC as an investment company?
At least 40%.
67
Who sets a mutual fund's ex-date?
The fund's board of directors
68
Three major dates in the process of a dividend distribution:
1. The declaration date is the day on which the board of directors announces the dividend.
2. The ex-date or ex-dividend date is the trading date on (and after) which the dividend is not owed to a new buyer of the stock. The ex-date is one business day before the date of record.
3. The date of record is the day on which the company checks its records to identify shareholders of the company. An investor must be listed on that date to be eligible for a dividend payout.
69
Once a member has been advised by FINRA that special supervisory procedures are required, the firm has ____ days to implement them by tape recording, and must maintain the procedures for ___ years.
60 days
3 years
70
Sales Charge for variable contracts....
may not exceed 9% of the payments made over the life of the contract (20 years)
71
Violation of Rule 34b-1, the Name Rule, would happen if the fund didn't have at least what percentage of its assets invested in government securities?
80%
72
A contractual plan company is what type of investment company?
A contractual plan company is a unit investment trust that purchases mutual fund shares for its customers on a contractual basis.
73
Changes that require a majority vote of the shares outstanding include
- Issuing or underwriting other securities
- Changes in borrowing by open-end co.
- Changing subclassification (e.g., from open-end to closed-end or from diversified to nondiversified)
- Changing sales load policy
- Changing the nature of business
- Changing investment policy (e.g., from income to growth or from bonds to preferred stock).
74
The cost basis of mutual fund shares includes
The total cost, including sales charges, plus dividends or capital gains reinvested in the fund.
75
Diversified Company
75-5-10 test.
'Must have 75% of total assets invested so that securities of any one issuer are not great than 5% of total assets, and not more than 10% of the outstanding voting securities of any issue held.
76
Form BD
Used to register a broker-dealer with the SEC. A change to information contained in it, must be changed promptly.
**must be accompanied by:
-new member assessment report
-new member contact questionnaire
-Form U-4
-Fingerprint cards for each associated person
-check for fee
77
Branch Office Registration (Form BR)
Firms must register each of their branch offices with FINRA, NYSE and states that required branch registration.
-File Form BR on WebCRD within 30 days of opening a new branch office.
78
(Form BR) Membership Interview
Applicant has 60 days to respond to FINRA's initial request letter for information or documentation.
-Within 30 days of receipt of this info, FINRA can make subsequent request for information.
-Prior to a decision on the application, the FINRA examiner will schedule a membership interview and may schedule a pre-membership examination.
79
Investor Protection and Education
Each member firm that holds customer funds or securities must annually:
-Provide a statement as to the availability of an investor brochure that includes information describing the Public Disclosure Program.
-The FINRA Public Disclosure Program Hotline number
-The FINRA website address
-BrokerCheck contact information
80
FINRA Membership Fee
-Membership fee for each registered person
-Firm pays a separate ANNUAL ASSESSMENT based on gross income generated from activity in the OTC and/or NYSE markets.
81
Form BD-W (resignation of members)
Voluntarily terminate. Must file Form BD-W electronically.
-Resignation will not take effect until 30 days after receipt and all indebtedness due has been paid in full, and no complaint/action is pending.
*subject to FINRA jurisdiction for 2 years after
82
The financial statement in a prospectus must not be more than how old?
16 months
83
After its first year in business, a broker-dealer's maximum ratio of aggregate indebtedness to net capital may not exceed
The SEC allows broker-dealers that have been in business for more than one year to carry debt equal to 1,500% of their net capital.
For new broker-dealers, debt may not exceed 800% of net capital.
84
Net Capital
Net Worth + Subordinated Debt = Total Available Capital - Nonallowable assets = Tentative net capital - Haircuts = Net Capital
85
Carrying (clearing) broker-dealers
Hold customer monies and securities
(mails confirms, statements, etc. and customers write checks to the carry bd)
86
Introducing (fully disclosed) broker-dealers
May receive customer assets but must promptly transmit these assets to a carrying member.
-Must have NC of $50,000 if receive customer assets
- best efforts or all-or-none underwriting.
**Introducing BD's that do not receive customer securities have an NC requirement of $5,000.
is a marketing organization with no back office that contracts with a clearing broker-dealer to handle its back-office work, including customer confirmations and statements and account posting. Introducing broker-dealers' customers (names and account information) are fully disclosed to the clearing firm.
87
Mutual Fund broker-dealers
act as agents for customers and transact business in investment company shares and variable annuities.
88
Office of Supervisory Jurisdiction
-Order execution or market making
-Formation or structuring of public offerings or private placements
-Custody of customer funds or securities
-Final approval of new accounts
-Review and endorsement of customer orders
-Final approval of retail communications
-Supervision of activities of members at branch offices
89
FINRA Rule 5130
Prohibits member firms from selling a new common stock issue to any account in which restricted persons have a beneficial interest.
Restricted persons:
-Any FINRA member BD
-officer, director, general partner, associated person, or an employee of a member
-Portfolio managers
-Any person owning 10% or more of a member firm -includes immediate family.
***Immediate Family - parents, in-laws, spouse, brother/sister, children, or any person to whom is being provided support.
90
Fidelity Bonding
FINRA rules require a member firm to secure fidelity bonding insurance.
Minimum coverage is 120% of the net capital requirement or $100,000, whichever is greater.
-Must review coverage annually.
91
Department of Enforcement complaint response time
25 days
92
Customer account information is updated every
36 months
93
FINRA Rule 4530
Member must report to FINRA within 30 days whenever the member or associated person:
-violates securities law
-subject of customer complaint - theft, forgery, misappropriation of funds.
-Denied registration or expelled by securities, insurance, SRO organization
-Indicted for, convicted, pleads guilty for any offense other than traffic
-Defendant in securities/commodities civil litigation or arbitration
-Association with any person subject to statutory disqualification status
94
Trade Confirmation Approval
Customer must be sent or given a written confirmation of the trade at or before the completion of the transaction (settlement date).
**Order tickets must be approved by a principal no later than the trade date, but orders are not required to be approved before they are entered**
95
Trade Confirmation must contain
-Whether the member acted as a agent or principal
-Whether the member acted as a dual agent (represented the buyer and seller)
-the source and amount of commission in an agency trade
-whether a control relationship exists between the issuer and member
-Deferred sales load, if any.
96
Focus II for Carrying Firm
-Due within 17 days of months end and quarters end, or within 2 business day of termination of membership.
-Annual audited report due within 60 calendar days of fiscal year end.
-Unaudited semiannual report and annual audited report sent to customers.
97
FinCen Form 12
records large cash transactions, and must be retained by a broker-dealer for 5 years.
98
SEC Rule 17a-5
a general securities broker-dealer must prepare a trial balance MONTHLY
99
Conduit Theory of Taxation
A means for an investment company to avoid taxation on net investment income distributed to shareholders. If a mutual fund acts as a conduit for the distribution of net investment income, it may qualify as a regulated investment company and be taxed only on the income the fund retains.
**a fund is liable for taxes only on the income retained, provided it distributes at least 90% of its net investment income. The investor benefits because the income is taxed only twice (at the corporate level and at the individual level) and avoids taxation at the fund level.
100
Investment Adviser Exclusions
-Banks and bank holding companies
-Publishers of newspaper, magazine
-BD's whose investment advice is incidental to business and does not receive special compensation for the advice.
-Advisement solely on US gov't or agency securities
-Lawyers, accountants, teachers, engineers
101
N1-A registration form must contain
a provision to provide semiannual reports to shareholders, one of which must be audited.
Part 1 is also called an N1-A prospectus
102
A FINRA member firm's fees are based on which of the following?
Number of registered representatives
Number of branch offices
103
Regulatory Element of continuing education must be completed...
Annually
104
According to SEC rules, a statement for an inactive account should be sent to each customer
Quarterly
105
Under the Code of Arbitration Procedure, how much time does a client have to submit a claim against a registered representative or member firm?
6 years
106
12b-1 plan must initially be approved by
-majority of outstanding shares
-majority of the BOD
-majority of the noninterested directors
107
12b-1 plan must be terminated at any time by
-majority of the non-interested directors
-majority of the outstanding shares
108
Securities Exchange Act of 1934
It regulates the secondary market.
It requires registration of broker-dealers with the SEC
created the SEC and mandated the creation of SROs
(the people act)
109
Securities Act of 1933
(Paper Act) Regulates new issues
110
Changes that require a majority vote of outstanding shares
-changes in borrowing by open-end companies
-issuing or underwriting other securities
-changing sub classification (eg. open end to close end or diversified to non diversified)
-changing sales load policy
-changing the nature of the business
-changing investment policy
111
Investment adviser contract
-approved initially by majority of outstanding shares and noninterested BOD
-initial max term of 2 years - may be extended on an annual basis by approval of BOD OR majority vote of the shares
-Termination no more than 60 days written notice
112
Non-supervisory branch offices must be inspected
Once every three years
113
6 Year Records
-Blotters (Journals, Day Books)
-General Ledger
-Stock Ledger
-Customer Ledger
-Customer Account Records
-Designated Principals
114
3 Year Records
-Most all records
-FOCUS IIA
-Trial balances - prepared monthly
-Forms U4 and U5
-Fingerprint cards
-Confirmations of trades
-Order tickets
-Security and cash loan records
-Failed to receive and failed-to-deliver
-Long and short security differences
115
Lifetime Records
-Stock Certificate Book
-Partnership Agreement or Articles of Incorporation
-Minutes of Board or Partnership Meetings
116
Trade Blotter
Daily records of all activity - including cash received and disbursed, securities received and delivered, and identification of securities bought and sold that day. **does not contain client information, net capital or settlement dates.
**Blotters must be posted no later than the 1st business day following the activity. (6 year record)
117
Exception reports must be kept for
18 months
118
Compliance and Procedure manuals must be kept for
3 years after any changes
119
Form BD and any amendments must be retained for
Lifetime of the firm
120
Customer Complaints
-retained for 4 years
-Complaint file must have resolution and endorsed by a Principal
-Member firms must electronically file with FINRA - within 15 days of the end of each calendar quarter
121
Arbitration: Investor (customer) cases
-$50,000 or less -simplified arbitration; FINRA appoints 1 arbitrator
-$50,000-$100,000- FINRA appoints 1 public arbitrator - unless parties agree on 3.
-over $100,000 -FINRA appoints 3 public arbitrators
122
Arbitration: Industry cases - Brokerage Firms
-$50,000-$100,000 - non-public arbitrator
-Over $100,000 - 3 non-public arbitrators
123
Arbitration: Industry cases- Between Brokers or Between Brokers and Brokerage Firms
-$50,000-$100,000 - public arbitrator
-Over $100,000 - mix of 3 non-public AND public arbitrators
124
Time limit for submission of arbitration
6 years or more from the time of event
125
General Securities Firms
-Also operate as clearing broker-dealer
-$250,000 minimum Net Capital OR 1/15 of AI, whichever is greater
126
Minimum Net Capital for Introducing BD that receives funds or securities
$50,000
127
Minimum Net Capital for Introducing BD that DOES NOT receive funds or securities
$5,000
128
Minimum Net Capital for mutual fund dealer that accepts wire orders
$25,000
129
Minimum Net Capital for mutual fund dealer that accepts subscription orders only
$5,000
130
Subordinated loan
Loan made to the firm for net capital purposes. Lender agrees not to be paid back if doing so will cause the firm to fall below current capital requirements.
131
Terms of Subordinated Loan Agreements
-Minimum term of 1 year
-must be in written form, binding all parties
-Specific amount
-Must specify that lender's claims are subordinate to all other claims
-Meet FINRA standards - must be approved prior to becoming effective (generally filed 10 days prior)
132
Focus IIA for Fully Disclosed Firms
-Due within 17 days of quarter's end or within 2 business days of termination of membership.
-Due within 60 calendar days of fiscal year end.
133
Eligibility Proceeding for statutorily disqualified person
-Filing form MC-400 (individual); MC-400A (member firms)
-$1500 filing fee
-Decision rendered by Dept. of Member Regulation
-Review and approval by National Adjudicatory Council (NAC)
134
Class A Shares
-Offer breakpoints, letters of intent, rights of accumulation and combination privileges.
-Front end sales load, not to exceed 8.5%
-Most suitable for investors with large amounts to invest and long time horizon.
135
Class B Shares
-Sold at NAV
-Back end load- sales charge levied when shares are redeemed- CDSC
-May have 12B-1 fee up to 0.75% of net assets per year
-After 6-8 years, Class B shares usually convert to Class A
-suitable for investors with small amount to invest, long time horizon
136
Class C Shares
-Sold and redeemed at NAV
-Level load - 12b1 fee up to 0.75% for life of account
-May have back-end load, but levied only in first year
-Most suitable for investors with short time horizon
137
Sales Load
the difference between the price of a security to the public and the net portion of the proceeds from its sale that is received and invested or held for investment by the issuer, minus any portion that is deducted for trustees' or custodians' fees, insurance premiums, administrative expenses, or fees that are not properly chargeable to sales activities.
138
Rule 3220
no member or person associated with a member broker-dealer must, directly or indirectly, give or permit to be given anything of value, including gratuities, in excess of $100 per individual per year to any principal, employee, or representative of another member firm where the payment or gratuity is in relation to the business of the employer of the recipient of the payment or gratuity. A gift of any kind is considered a gratuity.
139
Rule 3270
Outside Business Activity - This rule states that no person associated with a member in any registered capacity may be employed by, or accept compensation from, any other person as a result of any business activity (other than as an investor) outside the scope of the relationship with the employer firm, unless prior written notice is provided to the employing member. Approval of a principal is not required; however, note that after notice the firm may restrict or deny the activity.
140
Rule 3280
A private securities transaction is any securities transaction outside the regular course or scope of an associated person's employment with a member including, though not limited to, new offerings of securities that are not registered with the SEC. The practice is frequently referred to on the exam as selling away or trading away. It refers to an associated person selling away from his firm.
The rule states that no one associated with a member firm may participate in any manner in a private securities transaction except by giving written notice to the member before participating in any such transaction. That written notice must state whether he has received or may be receiving selling compensation in connection with the transaction.
141
Rule 3210
Requires that an associated person must obtain the prior written consent of her employer when opening an account at another member or other financial institution.
142
Rule 2273
FINRA Rule 2273 requires brokers to send educational material outlining things to consider, including financial incentives that could give rise to a conflict of interest, for the broker who moves to a new firm and tries to convince former customers to move with her.
The FINRA-prepared educational communication highlights the following potential implications of transferring assets to the new firm:
whether financial incentives received by the representative may create a conflict of interest;
that some assets may not be directly transferrable to the recruiting firm and, as a result, the customer may incur costs to liquidate and move those assets or account maintenance fees to leave them with his current firm;
potential costs related to transferring assets to the recruiting firm, including differences in the pricing structure and fees imposed by the customer's current firm and the recruiting firm; and
differences in products and services between the customer's current firm and the recruiting firm.
143
Rule 5130
Applies to IPOs of common stock. Prohibits member firms from selling a new common stock issue to any account in which a restricted persons have beneficial interest.
144
SEC Notification Rule 17A-11, report to?
SEC in D.C.
SEC Regional Office
FINRA in D.C.
145
Under Rule 17a-11, what must a member that has been in business longer than one year report within 24 hours of discovery?
Inadequacy in the accounting system
Net capital falling below the minimum required
146
According to Rule 17a-11, a broker-dealer must file reports if the ratio of aggregate indebtedness to net capital exceeds the maximum?
SEC Rule 17a-11 requires a broker-dealer to file a report with its DEA and the SEC on the same day (24 hrs) if its aggregate indebtedness to net capital ratio exceeds 15:1 for an established firm or 8:1 for a first-year firm.
147
Under SEC rules, the minimum net capital requirement for an introducing firm that accepts customer securities for prompt forwarding to the clearing firm is
$50,000
148
Net Capital Requirement for BD that exclusively sells mutual funds by wire order?
$25,000
149
Net Capital Requirements for BD carry customer accounts?
$250,000
150
Net Capital Requirements for BD that receives funds or securities?
$50,000
151
Net Capital Requirement for Introducing BD that does not receive funds or securities?
$5,000
152
Net Capital Requirements for a mutual fund dealer that accepts subscription orders only?
$5,000
153
A member firm files a continuing member application (CMA) with FINRA. If FINRA does not require the firm to participate in a membership interview or request additional information or documents, the department must serve a written decision within how many days after the filing of the application?
45 days
154
If a broker-dealer were to change its outside auditor for any reason, the member must provide written notice to the SEC and FINRA in ____ days?
15
155
BD Financial Reports Summary: Carrying Firm
FOCUS II
Annual audited report
Unaudited semiannual report and annual audited report sent to customers
156
BD Financial Reports Summary: Fully Disclosed (Introducing)
FOCUS IIA
Annual audited report
157
How often must a broker-dealer prepare a trial balance?
monthly
158
OSJ activities
order execution and market making
structuring of public offerings or private placements
maintaining custody of customer funds or securities
review and endorsement of customer orders
final approval of public communications.
159
An early warning report must be filed by an established broker-dealer under SEC Rule 17a-11 if its AI is in excess of
SEC Rule 17a-11 requires that an early warning report be filed within 24 hours if a broker-dealer's aggregate indebtedness exceeds 1,200% of its net capital. (12:1)
160
Under FinCEN rules, any report generated must be maintained for a period of no less than
5 years
Whether a CTR (currency transaction report for amounts exceeding $10,000) or an SAR (suspicious activity report), FinCEN rules require maintaining those reports for a minimum of five years.
161
Fidelity Bonding (Rule 4360)
-Minimum coverage is 120% of net capital requirements
or $100,000 (whichever is greater)
-Must review coverage annually - determines the highest net capital requirement for the previous 12 months (high-water mark)
162
SRO
NYSE, MSRB, FINRA and registered clearing agencies
163
Affiliated Person
-owns, controls, or holds with the power to vote, 5% or more of the outstanding voting securities
-Any officer, director, partner or employee
-Investment adviser or member of the advisory board of an investment company
164
Interested Person
-Affiliated person
-Member of affiliates immediate family (parent, spouse of parent, child, spouse of child, spouse, brother/sister
-Legal counsel to company within last 2 years
-BD within last 2 years that has maintained a business relationship with company
-Person whom SEC deems to be interested person
