Regulations Flashcards
Commission that is responsible for supervision of capital markets. They write laws that govern financial markets, and has the ability to enforce the laws. This entity governs publicly traded companies as well as industry professionals. This entity can revoke registration of a broker/dealer, but refers crimincal cases to the judicial system. POTUS appoints board members for 5 year terms.
Securities and Exchange Commission (SEC)
Act that was established to regulate the trading of securities after being issued and to regulate exchanges and broker/dealers.
Securities Exchange Act of 1934
What are the four main categories of FINRA bylaws?
- Uniform Practice Code
- Conduct Rules
- Code of Procedure
- Code of Arbitration
FINRA bylaw that relates to dealings between member firms, covering all transactions in nonexempt securities while providing orderly completion of dealer-to-dealer transactions.
Uniform Practice Code (UPC)
FINRA bylaw that relates to a member firm’s dealings with the public
Conduct Rules
FINRA bylaw that outlines the procedural process in the event of violations and complaints
Code of Procedure
FINRA bylaw that is concerned with settling disputes between dealers or brokers and the public.
Code of Arbitration
Bylaw definition of a firm who is registered with the SEC under the Act of ‘34
Registered Broker/Dealer
This is an individual who is registered under the rules of FINRA or is directly or indirectly controlled by a member firm, regardless if the person is a registered.
Associated Person
What are the two categories of FINRA personnel that requires registration and the passing of a qualifying exam?
Principals and Representatives
These people must be registered as what with FINRA?
- Sole proprietors
- Officers
- Partner
- Manager of Offices of Supervisory Jurisdiction
- Directors of Corporations
Principals
This is a person who deals with investment companies and variable contracts if activities are limited to dealings of open end shares, closed end investments during IPOs, and variable contracts and insurance premium funding programs. They must pass the Investment Company and Variable Products Qualification Exam (Series 26)
Limited Principal
According to FINRA Membership and Registration rules, continuing education is required for registered persons, and consists of what two elements?
Regulatory and Firm
Education element that must be completed by registered persons on the second anniversary date of their original registration and every 3 years thereafter. They have 120 days from registration date for completion. Anyone who fails to complete this will have their registration deemed inactive and must cease all activities as a registered person and cannot perform duties in any capacity requiring registration
Regulatory Element
Education element that applies to a continuing and current education program maintained by members for their covered persons to enhance their securities knowledge, skills and professionalism. At a minimum, each member must develop a written training plan at least annually.
Firm Element
What happens to a rep on active military duty?
- 120 day window to complete CE is frozen
- Can continue earning commissions from existing clients
- 90 days to reassociate if terminating registration while on leave
Which persons are not required to register with FINRA?
- Those with clerical or ministerial duties
- Not actively engaged in the investment banking or securities business
- Associated persons of a member firm whose only participation within the firm is the need for a nominal corporate officer
- Those who effect securities transactions only on the floor of an exchange
Resource provided through FINRA’s Public Disclosure Program that allows public persons to research the professional backgrounds of current and former FINRA-registered brokerage firms and brokers. Accesible by phone or online, it provides information that has been stored in the Central Registration Depository.
BrokerCheck
What information is available for search through BrokerCheck
- The person’s employment history and other business experience required to be reported on Form U-4
- Currently approved registrations for the member or associated person
- Main office, legal status and type of business engaged in by the member
- Any event or proceeding required to be reported under the Rule
- Separate file of all written complaints of customers with explanation of action taken by the member, if any
- Separate file of all written complains and a clear reference to the files containing the correspondence related to them
Where do these files need to be kept
Each office of supervisory jurisdiction
Material used in media (newspapers, magazines, radio, television, telephone recordings or other public media). General information to the general public is an indirect audience.
Advertisements
Participation in seminars, radio or television interviews, or other public speaking activities. This interaction is included in the definition of retail communication since they are directed or made abailable to the public.
Public Appearance
Reprint of an article or its excerpt issued by a publisher not affiliated with the member using the reprint, or to any report concerning a registered investment company prepared by an independent entity. These are considered retail communication, and must be approved by a principal before first use.
Independently Prepared Reprint
Any written or email messages distributed to either existing customers or to fewer than 25 prospective customers within an 30 calendar day period
Correspondence
Any testimonial or endorsement of a security by a third party must state which three things?
- If any fee or other compensation was paid for the testimonial or endorsement
- If the statement implies that the person is qualified by special experience or knowledge, such qualifications must be listed
- Include the statement “past performance does not indicate future results”
How long must retail communication be kept on file for?
3 years
Member firms that have not previously filed retail communication must file their initial retail communication with FINRA at least how many days prior to use, and must continue to file how many days prior to use for a period of 1 year?
10 Business Days
What is communication with insitutional investors, who are defined as any
- Government entity or subdivision
- Employee benefit plan with at least 100 participants
- Qualified plan with at least 100 participants
- FINRA member, registered associated person or person acting solely on behalf of any such insititutional investor
Insitutional Sales Material
Transactions effected outside the normal business of an associated person’s employment with a member firm. These are transactions that are not recorded on the firm’s books and records.
Private Securities Transactions
Private securities transaction that is a violation of FINRA conduct rules, which includes transactions among family members for which an associated person receives no compensation, or personal transactions in investment company and variable annuity securities.
Selling Away
An associated person of a member firm must provide written notice to the member firm that describes what in detail?
- Proposed transaction
- Person’s proposed role
- Compensation conditions
Any compensation paid directly or indirectly as a result of the purchase or sale of a security, including commissions, finder’s fees, rights of participation in profits, tax benefits, expense reimbursement.
Selling Compensation
A customer with a complain against a member firm or its personnel may submit a written complaint to whom? This entity has initial jurisdiction for the handling of complaints. The National Adjudicatory Council (NAC) has appellate and review jurisdiction.
The Department of Enforcement (DOE)
The broker/dealer must keep a file of written customer complaints. A report of these must be submitted to FINRA each calendar quarter, no later than the last day of the month following Quarter’s end. If a complaint results in a statutory disqualification, a report must be sent to FINRA within how many days?
10 Days
What happens when a written customer complaint has been received by the DOE, they start the process by advising representatives and broker/dealers in writing, and conducts hearings to gather enough facts to make a fair decision. If a violation has occurred, a censure or fine may result. What happens for more serious violations?
Suspension, expulsion, or bar from association with a member firm.
Why do member firms prefer the Code of Arbitration for settling inter-industry disputes?
It is cost effective and disputes are settled much sooner than they would be if pursued through the courts.
What is the statute of limitations for a submission to arbitration after the event giving rise to the claim?
6 Years
The NAC appoints how many people to the panel of arbitrators for hearings?
Odd numbers starting from 1, 3 and 5
Proceeding for disputes involving $50,000 or less, where there is no opportunity for a hearing. One arbitrator renders a decision on the case based upon a review of written submissions by both parties.
Simplified Arbitration
Awards under arbitration are final and binding without opportunity for appeal. Any resulting monetary award is required to be paid when? If the firm or rep fails to pay, what happens?
30 days or subject to suspension
- Any act which operates or would operate as a fraud or deceit upon any person
- Any untrue statement of a material fact and any omission of a material fact necessary for the investor to have known in order for them to make a resonable decision
- Any manipulative acts that are misleading or deceptive, including churning, which is excessive trading in time or frequency with the sole purpose of generating commissions.
What act are these in direct violation of?
Securities Exchange Act of 1934
Violations of the Act of 1934 or SEC rles and regulations, including the use of false or misleading statements, are subject to criminal penalties. What are the maximum fines?
$1 mil for individual, 10 years imprisonment, or both
$2.5 mil for business entity
How often must a publicly held company, broker/dealer engaging in interstate business, national securities exchanges and FINRA must file a report to the SEC how often?
Annually
As defined by the 1934 Act, this is an individual, corporation or other legal entity engaged in transacting securities business for the account of others. When acting in this capacity, the firm is acting as a middle man and charges a commisison.
Broker
As defined by the 1934 Act, this is an individual, corporation or legal entity that performs securities transactions from their own account as a part of regular business.
Dealer
In 1939, a proposal was submitted to the SEC for the registration of a national securities association, thus forming the National Association of Securities Dealers (NASD). This act provides that the SEC can review FINRA disciplinary actions, disapprove rulings and suspend or revoke FINRA registration for failure to comply with its rules.
Maloney Act of 1938
This act requires that every corporate bond of more than $5 mil and 5 years maturity or longer must have a trust document stating whether the bond is secured or unsecured. If secured, the trust indenture must specify the kind of property and whether the indenture is open or closed end.
Trust Indenture Act of 1939
Act that was established to regulate investment advisory activities and define requirements for registration.
Investment Advisers Act of 1940
Firm that is paid a fee to advise others, either directly or indirectly, as to the advisability and merit of purchasing or selling securities. Also included in the definition is any firm who, in the regular course of business, issues reports or analyses concerning securities.
Investment Adviser
What would a financial planner be defined as if they
- Provide advice, analysis or reports concerning securities
- Provide these services as a regular course of their business
- Receive compensation for those services
Investment Adviser
An investment adviser must register by filing an application with the SEC. What must it include?
- Name and form of organization under which the investment adviser engages or intends to engage in business
- Name of the state where the investment adviser is organized and the location the principal business office and branch offices
- Names and address of partners, officers, directors and persons performing similar functions
Advisers with assets under management in excess of _____ are required to register with the SEC, and are known as federally registered advisers. Advisers with assuts less than ______ are required to register at state level.
$25 Million