Module 14 - FINRA Rules Flashcards
FINRA
Financial Industry Regulatory Authority
B/D Acting as a Broker (Agent)
Whenever the firm effects a transaction between two customers accounts or between a customers account and the firm
REMEMBER: A, B, C - An AGENT or BROKER effects a transaction and receives a COMMISSION
Financial Industry Regulatory Association (FINRA)
Primarily responsible for establishing rules and regulating the activities of Broker/Dealers (B/D’s) and their registered reps
- SRO (self regulatory organization)
- Oversee the Over-The-Counter market (OTC)
- Regulate and oversee B/D’s and Reps
- Promote just and equitable principles of trade
- Foster cooperation and coordination with regulatory bodies and clearing organization
- FINRA members may transact business on a preferential discount basis with other FINRA members, but not with the public
FINRA Board of Governors
- Establishing and maintaining the membership criteria for FINRA
- Adopting and establishing rules when necessary
B/D Acts as a Dealer (principal party to the transaction)
When buying securities from a customer for its own account or selling securities to a customer from its own account. For this service the B/D charges a MARKUP
Registered Representitive
- Sales Persons
- If in a supervisory position they must be registered as Principals
- If a registered rep leaves the employment of a B/D, FINRA retains jurisdiction over that rep for 2 years after the rep registration is terminated
Series 7
General securities registration. It permits a registered rep to sell most types of securities, including stocks, bonds, and mutual funds
Person NOT Registered with FINRA
May not contact or talk with customers, and if the are working with a registered rep, they can only be paid a salary, either hourly or monthly
Series 9&10
Required for registration as a BRANCH OFFICE MANAGER (BOM)
Each B/D dealing with the public must establish a what?
Firm Element
Series 11
This license is a limited form of registration called an Assistant Representative/Order Processing Registration
- Allows individuals to except unsolicited orders from customers with existing accounts They CANNOT: - Solicit Accounts - Open Accounts - Make recommendations or advise
Regulatory Element
Consists of taking a computer based exam that has information supplied by FINRA.
Persons must take the regulatory exam within 120 days of the second anniversary of their registration approval and then every 3 years
Conduct Rules
Ensure that FINRA member B/D’s adhere to just and equitable principles of trade
Establish guidelines for B/D’s and registered representatives when dealing with customers and with other member firms
Communication under NASD’s Old Rule 2210
Broke communications down into 6 categories:
- Advertisements
- Sales Literature - 25 or more
- Correspondence - 25 or more
- Institutional Sales Material
- Independently prepared reprints
- Public appearance
Communications Under FINRA’s New Rule 2210
The new rule consolidates the old rule into 6 categories
- Retail communications
- Correspondence
- Institutional sales material
- Interactive forums/public appearances
Retail Communications
Any written (including electronic) communication that is distributed or made available to MORE than 25 retail investors within any 30 day calendar period
Examples of communication with no control over who will be viewing the material are:
- newspapers, radio, television, and public websites
Examples of communication with limited control over the audience are:
- Brochures, notices, circulars, research reports, form letters, and reprinted unaltered published articles
Correspondence
Anything written (including electronic) communication that is distributed or made available to 25 or FEWER retail investors within a 30 calendar day period
Institutional Sales Material
Any communicatin that is delivered only to institutional investors
- It does not need to be approved by a principal prior to the material being used
Institutional Investors
- Bank, savings and loan association, insurance company, registered investment company
- An Investment adviser
- Governmental entity or subdivision
- FINRA B/D
Interactive Forums/Public Appearances
Participation in:
- Seminar
- Interactive electronic forum (Chat room, online seminar)
- Radio or television interview
- other public speaking activity
Interactive Content
If allowed by the firm, is considered an interactive forum and is typically supervised much like emails and must comply with supervision and record retention rules
Example:
- Social Networking and Blogs
Static Content
Considered “ratail communications” and must be preapproved by a principal before it is posted.
Examples:
- Blog Postings, profile information, content that stays posted until the poster changes it.
Recommendations made during a public appearance or electronic public forum must have?
A reasonable basis for the recommendation, meaning the recommendation must be suitable for the entire audience.
Recomendations in communication with the public must?
- There must be reasonable basis for a recommendation
- Your firm must provide, or offer to furnish upon request, available investment information supporting the recommendation
- Your firm must disclose its relationship with the issuer
Communications used with the public by member firms must?
- Be based on principles of fair dealing, good faith, and must be fair and balanced
- Cannot omit information that would cause the communication to be misleading
- Communication that use testimonials cannot guarantee or imply future performance
The following material must be filed with FINRA 10 days prior to first use, and must wait for a FINRA staff response?
- Retail communications from firms within their first year
- Retail communication from established firms that have never filed advertisments
- Retail communications for mutual funds, ETF’s Variable insurance prducts, UIT’s, and closed ended funds
- Retail communications discussing sercurities futures and bond mutual fund volatility ratings
The follwing communications must be filed with FINRA within 10 days of first use?
Retail communications for:
- Mutual funds, ETF’s, variable insurance products, UIT’s, and closed end funds
- CMO’s
- Derivative securities
The following documents are excluded from the filing requirements?
- Institutional Communications
- Offering documents previously filed with the SEC or any state such as: Prospectuses, preliminary prospectuses
- Reprint or excerpt of an article
Communications Record Keeping
Files containing retail communications, correspondence, institutional communication, and public appearance materials must be maintained for 3 years, the most recent 2 years in a readily accessible location.
FINRA rules regarding telemarketing require a firm’s procedures to include the following?
- No person from the firm can make an outbound solicitation cal to residences except between 8 a.m. and 9 p.m.(in the prospects time zone) without prior consent from the prospect
- Telemarketer must promptly disclose (Identity of the telemarketer and the member firm, the telphone number or address at which the telemarketer may be contacted)
Interpositioning
Placing a third party in a transaction between the buyer and the seller
- FINRA rules prohibit interpositioning unless the cutomer benefits
Regular Way
Ammount of time allowed between the trade and the settlement of a transaction
Trade Date
Day the customer’s trade is executed
Settlement
The completion of a trasaction
Settlement Date
Day of the completed transaction
FreeRiding
Buying securities one day, selling the exact same securities later that day (or before settlement), and not depositing the funds required to settle the orginal purchase
Groups of people restricted from buying new issues
- Registered reps from any member firm
- Officers, directors, partners, or other employees of any member firm
- Financially dependant, immediate family member of any employees of a member firm
Recommendations to Customers
All recommendations made by a B/D to a customer must be suitable to that customer
Unsolicited Order
When a client wishes to purchase a security that has not be recommended by the registered rep
Solicited Order
Where a registered rep recommends a transaction
The following are violation of FINRA suitability rules
- Making blanket recommendations of low-priced securities to every customer
- Churning: Causing excessive amounts of trades in a customer’s account
- Inducing the trading of a mutual fund shares (i.e, trading the mutual funds like stock)
Backing Away
When a B/D offers a firm quote on an issue and then refuses to sell at that quoted price.
-This is a violation of FINRA conduct rule
FINRA member CANNOT charge customers for?
- Forwarding proxies to street name customers (they can charge the company sending out the proxies)
All charges an commissions must be reasonable - Charges and commissions cannot discriminate between customers
The FINRA 5% Policy
It is a guideline rather than a rule that Commissions should be less than 5%
Riskless and Simultaneous Transaction
One in which a B/D acts a dealer and buys a security from a market maker to fill and already-confirmed customer order
All new issues are sold at a Publice Offering Price (POP). The POP includes a sales charge
Remember for Test
Office of Supervisory Jurisdiction (OSJ)
A location registered with FINRA and directly supervised by a supervisory principal who can approve transactions and other B/D activities
FINRA is the examining authority for all B/D member firms
Remember for Test
The NYSE and FINRA are referred to as self-regulatory organization (SRO’s), because membe firms are “self regulated” by examiners of the regulatory agency
Remember for Test
Gifts
A B/D or registered rep CANNOT receive gifts with a value of more than $100 from a single person in one year. This is face value, not the amount that is paid for the gift. Nor can a B/D or registered rep give fits with a value of more than $100 to a single person in one year
Entertainment
- You must accompany your client/business associate to the event. In addition, you must be in an environment hwere a business benefit could be realized
- You may not request or solicit any type of business entertainment from a client/business associate
Advisory Activities
Activities in which and agent advises and investor with regard to securities
B/D’s or representatives who charge an advisory fee must be registered with either the state in which they conduct business or the SEC, depending on the ammount of assets under management
Remember for Test
A registered rep CAN borrow or lend money to a customer if?
- The customer is a member of the registered rep’s family
- The customer is a personal friend of the registered rep
- The registered rep is in another business relationship with the customer
- The customer is a lending institution
- ** To borrow from or lend to a customer, the registered rep must have prior written permission from the B/D
Margin Agreement or Hypothecation Agreement
Requires the customer’s written consent
Rehypothecate
Think 140% of the debit balance.
Reports
- All firms are required to provide customers with a statement, at LEAST quarterly, that sets for the the status of the customer’s account
- If there is no activity and no cash and/or securities in the account for the last quarter, the firm no longer needs to send the quarterly statement, unless requested by the client
Supervisory Procedures Manual
- It must contain the procedures for the supervision of registered reps.
- A registered principal must review and endorse all transactions in writing by the end of the day, unless the firm has computerized surveillance tools in place to monitor trading
- A registered principal must review all correspondence with the public written by the registered rep
- The firm must retain all registered reps correspndence and the names of person who prepared and reviewed the correspondence
A registered rep muc submit a written request and receive written permission from the firm to engage in a compensated outside business activity or a private securities transaction
Remember for Test
Outside Business Activities
Any employment in which the representative receives compensation of any form
Private Securities Transactions
Any involvement in a securities transaction
- If the rep receives compensation for the activity, the transaction must be recorded on the B/D’s books and records
Continuing Commissions
Registered reps may continure to receive (after retirement) commissions on sales of investment company shares if the sales were initiated before retirement and a bona fide contract with the firm has been signed for receiving commissions
All customers fully paid securities must be kept segregated by the firm
Remember for Test
Concerning Customer Account a Firm May NOT
- Combine firm securities with customers securities
- Combine different customers securities unless prior written permission has been granted
- Lend out or hypothecate (Pledge) a customers securities uless it has prior written authorization
B/D’s can provide customers with Numbered Accounts as long as?
- Records must be kep detailing the owndership of such accounts
- Account owners must stop by the office to prove their existence
The following are violations of FINRA rules regarding customer suitability
- Making recommendations of low-priced securities to customers without determining if the investment is suitable for them
- Making recommendations without obtaining information regarding a suctomers financial situation, other securities holdings, or other necessary information
- Recommending perchases that exceed a customers ability to pay
- Churning
- Inducing or recommending frequent trading of mutual fund shares
The B/D’s first responsibilities upon the death of an account owner are to?
- Cancel all open orders
- Freeze the account
- Mark the account Deceased
- Not make any trades without proper documents on file and without instruction from the executor of the account
Order Ticket
- Name and account number
- The identification of securities that are purchased or sold
- The amount of securities bought/sold
- The price, if the order is a limit order
- Any restrictions on the order: Market, limit, and so on
- The market where the order is submitted for execution
- The time and date the order was received as well as when the order was entered
- ** After the order is filled, the order ticket must be completed. The following must be filled in:
- The contra B/D
- The price of the transaction and the actual amount purchased/sold
- The time and date that the order was executed
SEC rules specifically require the following information be included on the confirmation
- The firm must state whether it has acted as an agen or a principal in the transaction
- The firm must state the commission it charged the customer in an agency transaction and any other charges associated with it
- If a firm acts in a principal capacity (as a dealer) and if the firm executed the transaction on a riskless basis, it must specify the markup or markdown that was charged
- The firm does not have to disclose the amount of markup if it sells to a customer from its own inventory
- The firm is acting as a dealer in the transaction, which must be diclosed, thus excluding the requirement to show the markup
The purchase and sales department is responsible for keeping records for each clients holdins for 6 years
Remember for Test
After every transaction, the B/D must send a trade confirmation describing the trade and final price to the customer
Remeber for Test
If the firm holds securities, and/or money is in the account, the B/D must send out an account statement Quarterly
Remember for Test
Representatives CANNOT correct or submit corrections for orders without supervisory approval
Remember for Test
If the ticket is for the wrong account number
- Tell your supervisor
2. Then, cancel the order on that ticket and reenter the correct amount
If the trade was for more shares that the customer wanted
- Tell your supervisor
- Then, cancel the trade, reenter two new order tickets with the correct shares for the customer and the remainder for the firm
If the trade was less shares than the customer wanted
- Tell your supervisor
- Then the firm must fill the order and the customer pays or receives the actual prices for the trade. If there is a loss, the firm can reimburse the customer with a “difference check” or a credit to the account
If the amount the customer ordered is correct, but now the customer wantes less than the amount purchased
- Notify your supervisor
- The representative and the firm have to deal with the cutomer to meet the margin requirement
- Or cancel the trade
If the trade goes through and the wrong securities are purchased
- Tell your supervisor
- The firm buys the stock purchased for its own account and reenters a new order ticket for the correct shares with no extra charges to the customer
If the trade occurs at one price and then is reported incorrectly to the cutomer at another price, the type of trade determines at which price the trade is finally executed
- A customer who gives a buy order to a registered rep pays the price at which the order is executed, regardless of what is reported back to the customer
- A cutomer who give a sell order to a registered rep receives the price at which the order is executed regardless of what is reported back to the customer
- If a trade “at the market” is executed at one price and then later reported to the client at a different price, the customer must take the actual price of execution
- If the representative tells the cutomer the wrong price, then it is too bad for the cutomer - the price of the trade still stands, whether the price benefits or hurts the customer
If the order was a limit order and the price exceeds the limit price, then the customer only has to pay the limit price
- If the price is better than the limit price (which would make the customer happy) then the customer pays the price at which the trade occurred
Fraudulent Behavior
Result in presecution by the SEC or the State Attorney General for criminal charges
Insider Trading
Making trades on information that has not yet been made public
Front Running
The action of trading ahead of research reports or trading on information about a transaction that may have an impact on the price of a security. This action attempts to gain from using the information to a persons unfair advantage
Painting the Tape
Refers to market manipulation. Any method of creating a false demand for a stock or indication that the price is different through concerted efforts of more than one person or other manipulation is a violation of FINRA rules as well as other securities rules
Unethical Behavior
Result in expulsion from FINRA, but no criminal charges
Selling Away
engaging in a private securities transaction without the B/D’s approval
Breakpoint Sales
Selling mutual funds at or below a price where a quantity discount is offered iwthout disclosing a possible discount
Churning a customers account
Recommending transactions in a frequent manner solely to generate commissions for the rep
Shadowing a customers trades
When reps copy an investors trading activity to use to the reps advantage
Prohibited Behavior
Result in fines, suspensions, or other sanctions by FINRA
Selling Dividends
Promoting the purchase of a security that has declared a dividend by falsely representing that the dividend is a yield from the investment
Switching Investments to generate commissions
Sometimes defined as an unsuitable transaction because the investment ovjectives of the customer may not align with the investment
Twisting
Term applied to unsuitable insurance replacements
Code of Procedure (COP)
The processes that FINRA must follow in disciplining a firm or registered rep.
If the complaint is a written complaint to the firm, the firm must?
- Make a note of the complaint
- Attempt to work out the problem
- After resolving or not resolving the complain, make a note of actions take
- Send a copy of the complaint to FINRA
Settlement Under Minor Rule Violation Letter
The fine imposed on the registered rep or the firm is limited to $2,500 and/or a letter of censure; no appeal is allowed
Violations of securities rules or failureto respond to an investigation may result in one or more of the following?
- Censure
- Fines against the registered rep, or the firm, or both
- Suspension of the registered rep, or the firm, or both
- Suspension or barring of the individual or fimr from association with any FINRA member
- Any other appropriate sanctions
Disputes of the following must be resolved through the Code of Arbitration
- A dispute between a member firm and a registered rep
- A dispute among registered reps
- If a dispute is between a customer and a B/D, the customer can force the member firm or registered rep to resolve the complaint through arbitration
- A member firm or registered rep cannot force a customer to submit to arbitrations, unless the customer has signed the binding arbitration agreement
Simplified Arbitration
Claims of $50,000 or less
All findins by the arbitration panel are final and binding and cannot be appealed
Remember for Test
The statute of limitations for submission to arbitration is 6 years from the occurrence of the event
Remember for Test
FINRA’s date for delivery of securities is 13 Business days after the trad
Remember for Test
If the B/D sells out the transaction or liquidates the transaction in the customer’s cash or margin account, Reg T requires that the account be FROZEN for 90 Calendar days
Remember for Test
Units of Delivery
- Round Lot = 100 shares
- Odd Lot = Less that 100 shares
Good Delivery
Means the delivery is in multiples of 100 shares
For all cash dividends, the ex-dividend date is two business days prior to the record day
Remember for Test
Record Date
The date the company compiles the list of stockholder names to mail the dividend
*** Who will receive the dividend
All B/D firms are required to post or purchase a Fidelity Bond to protect the firm against lost due to theft or other misplacement of cash or securities
Remember for Test
Termination from FINRA
After voluntary termination, a member remains subject to the jurisdiction of FINRA for 2 years
