Regulations to know Flashcards
Research reports must disclose whether the firm that’s issuing the report has
Whether the firm that’s issuing the report has an ownership interest in the issuer of 1% or greater. Note, the reports must also disclose whether the research analyst has any amount of ownership interest in the issuer.
According to the Access Rule (SEC Rule 610), the maximum fee a market center may charge to permit access to quotations is
According to the Access Rule (SEC Rule 610), the maximum that an SRO trading facility or market center is permitted to charge an order router for accessing its quotes is $0.003. This rule applies regardless of stock price or share amount. The rule was designed to prevent market centers from charging discriminatory prices for access to protected quotations, which would be unfair to market participants complying with the Order Protection Rule
The time limitation for submitting disputes to arbitration is
Six years from the time the act occurred
The brother-in-law of a registered representative may purchase shares of an initial public offering
Non-supported immediate family members may purchase new issues (IPOs) if the purchase is made though a different broker-dealer.
Equity research reports must
A Supervisory Analyst (Series 16) may approve research reports related to debt and equity securities, as well as other research-related communications
When does a principal need to approve an order in a discretionary order
By end of day A principal of a broker-dealer must approve all trades promptly, which means on the day the trade is executed. It is not required to obtain principal approval for a discretionary transaction before the trade, unless it is required under a specific broker-dealer’s internal procedures
In which of the following situations would an exemption be available to the locate requirement under Regulation SHO
There are exceptions under Regulation SHO to the locate requirement regarding the acceptance of a short sale by a broker-dealer. They are:
Short sales effected by a market maker in connection with bona fide market making activities
Short sales accepted from another broker-dealer in which that broker-dealer accepted responsibility to comply
Short sales of restricted securities under Rule 144 in which the person intends to deliver as soon as the restrictions have been removed
A broker-dealer that extends credit to a customer must disclose which of the following details
A broker-dealer that extends credit to a customer must disclose the annual rate that may be charged and the method of determining the debit balance on which interest will be charged. Since the rate will fluctuate, the amount of interest cannot be determined. A firm is not obligated to pay interest on a client’s credit balance.
A person who has violated the insider trading rules is subject to a maximum civil penalty of
Disgorgement and up to three times the amount gained or loss avoided
The Trust Indenture Act of 1939 applies to certain
The Trust Indenture Act of 1939 regulates the public issuance of the debt of corporate securities that are sold on an interstate basis if the value exceeds $10 million. Exempt are offerings that are sold under Rule 144A to qualified institutional buyers (QIBs) and offerings that are sold outside of the U.S. under Regulation S.
An associated person has left her firm and a Form U-5 has been filed. For how long is her former employer required to report event(s) that are discovered subsequent to her termination?
Member firms are under an ongoing obligation to report rule violations that are discovered after an employee has left the firm.
Under the Public Disclosure Program
The Public Disclosure Program is a service enabling private investors to obtain information pertaining to registered individuals in the securities industry. By calling a toll-free telephone number or visiting a website (BrokerCheck), investors can inquire into the backgrounds of securities professionals, including brokers who may be soliciting new customers through cold calling.
If a firm places a temporary hold on a customer’s account
If a firm places a temporary hold on a customer’s account, it can apply to either the entire account or specific disbursements. If the firm places the temporary hold, it must permit disbursements from the account if there is no reasonable belief that financial exploitation is occurring (e.g., paying normal bills).
The SIPC logo must be displayed at which of the following locations?
At each branch office
Pursuant to SEC Rule 15c3-3, an introducing broker-dealer must take which of the following actions upon receipt of customer funds and securities?
An introducing broker-dealer may accept funds and securities from customers but may not hold them. Such items must be transmitted promptly to the clearing broker.
The Securities Exchange Act of 1934 is concerned with
Registration of broker-dealers
Which of the following organizations provides clearing services for equity securities?
The National Securities Clearing Corporation (NSCC) provides clearing services for the majority of broker-to-broker trades in the United States. The NSCC is also a subsidiary of the Depository Trust and Clearing Corporation (DTCC) that provides custodial services.
When does a principal need to approve an order in a discretionary account?
By day’s end
A registered representative’s registration was terminated one year ago. If this person changes his residential address, what’s his obligation?
FINRA maintains jurisdiction over a person’s registration for two years after the person leaves a firm; therefore, the representative is required to report any residential address changes that occur within that two-year period.
Final determination on whether a security is in good deliverable form is made by the
The ultimate decision on whether a security is in good deliverable form is made by the transfer agent.
Nasdaq Level 1 provides subscribers with
The inside market on a security for which there is a minimum of two market makers
Which of the following statements is TRUE regarding the process by which an associated person can apply for eligibility if he’s notified that he’s subject to statutory disqualification?
FINRA evaluates the application and makes a recommendation to the National Adjudicatory Council (NAC) to either approve or deny special permission. If FINRA approves the application, the SEC must review and acknowledge this decision prior to it becoming effective.
A broker-dealer acting for a customer purchases stock from a market maker at $25 and sells it to a customer at $25 plus commission. The broker-dealer
If the broker-dealer is charging a commission, it is acting in an agency capacity. The amount of the commission must be disclosed to the customer.
A clearing broker-dealer must file a notice under the provisions of Rule 17a-11 if which of the following situations occurs?
Rule 17a-11 requires a broker-dealer to file a notice if its aggregate indebtedness exceeds 12 times its net capital or if the dollar amount of net capital is less than 120% of the minimum requirement. If a clearing broker-dealer’s net capital is less than $300,000 (120% of the $250,000 minimum), a notice must be filed within 24 hours. The broker-dealer must also file if it has books and records that are not current or has material inadequacies in its accounting or control procedures. Rule 17a-11 requires a broker-dealer to send immediate telegraphic notice to the SEC, followed by a written report if its books and records are not current. If it is informed of any material inadequacy in its internal procedures, notice must be filed within 24 hours followed by a proposed solution within 48 hours. A system outage would need to be reported and would result in an excused withdrawal from market making.
What’s the primary objective of Regulation SHO?
In early 2004, the SEC adopted Regulation SHO, which modernizes the rules and creates uniform standards regarding short sales. Regulation SHO applies to equity securities and any security that’s convertible into an equity security
Under Rule 103 of Regulation M, a passive market maker’s daily purchase limit (DPL) is the
Greater of 30% of its average daily trading volume (ADTV) or 200 shares
For a broker-dealer, the total amount of subordinated loans outstanding cannot exceed
70% of the broker-dealer’s total capital for a period exceeding 90 days
Broker-dealers are required to
Report both customer and proprietary short positions twice per month
Under the anti-dilution provisions of the New Issue Rule, a restricted person may purchase shares of an equity IPO if
He owned the shares for at least one year prior to the effective date and agrees not to sell the shares for three months following the effective date
Which of the following is considered a blockbuster trade?
A blockbuster trade is one involving $1 million or more to be executed through a broker-dealer’s clearing firm. This trade can be held for 15 minutes. If the clearing firm doesn’t respond by the end of that period, the trade is accepted
DTCC clear’s and settles transactions in Nasdaq securities through the
Market makers must clear and settle transactions through a clearing agency that uses a Continuous Net Settlement (CNS) System.
Which of the following types of accounts is permitted to purchase an initial public offering of equity securities?
One of the exemptions that’s found in the New Issue Rule allows an equity IPO (initial public offering) to be sold to an account if the beneficial owners are restricted persons and their ownership of the account doesn’t exceed 10%. The rule doesn’t distinguish between the job titles of employees of a broker-dealer
Under FINRA’s communication rules, which of the following is considered an institutional customer?
All investors with assets of at least $50 million
Notification to the SEC regarding sales that are executed under Rule 144 are NOT required to be filed if the amount of securities being sold does NOT exceed
5,000 shares and the dollar amount does not exceed $50,000
Which of the following situations BEST describes Painting the Tape?
Individuals entering into transactions in which ownership does not actually change to give the impression of trading volume in a security
Which of the following statements is TRUE concerning the margin requirements for portfolio margin accounts?
If the client wants to maintain a position in unlisted derivatives, the minimum equity is $5,000,000.
Two market makers sequentially buy and sell the same security with each other to increase the ADTV for a thinly traded issue
Painting the Tape
American Depositary Receipts
American Depositary Receipts (ADRs) facilitate U.S. investment in foreign securities. When the foreign securities are deposited in a U.S. bank based in that country, a receipt for those securities is issued and traded in the U.S. as if it were the foreign security itself.
Confirmations on regular-way transactions must be sent to customers no later than the
Completion of the transaction
A prospective customer wants a broker-dealer to stop calling. When must the firm place the prospect on it’s Do Not Call List?
Within 30 days
Reclamation
he process of returning securities that were previously accepted on the settlement date.
If the buying broker-dealer fails to pay for securities that have been delivered by settlement date
The selling broker-dealer may without notice initiate a sell-out immediately
What’s the maximum fine that may be imposed by FINRA if an RR is found guilty of violating a rule?
Unlimited
Which of the following statements is TRUE regarding the disclosures on the account statement of a customer who owns shares of an unlisted REIT?
Firms may use an estimated value based on the assets and liabilities of the REIT that’s performed at least annually, conducted by a third-party expert or service, and derived from a methodology that conforms to standard industry practice.
Due to the unique characteristics of collateralized mortgage obligations (CMOs), FINRA requires specific disclosures in their advertisements, including:
the CMO cannot be compared to any other types of investments,
the term collateralized mortgage obligation must be included in the product name,
the yield-to-average life will fluctuate due to mortgage repayments and changes in interest rates, and
that any applicable government agency backing only relates to the face value of the securities, not any premium paid.
Under Regulation M, which of the following are the minimum standards for a stock to be classified as actively traded?
Under Regulation M, an actively traded security has an ADTV of at least $1 million and a public float of at least $150 million.
13D
Filed when an individual or group acquires more than 5% of an issuer’s equity securities
Within five business days after the acquisition, the issuer, the exchange on which the
securities are traded, and the SEC must be notified of the following:
▪ The identity of the person or group that’s acquiring the securities
▪ The source of the funds
▪ The purpose of the transaction
13G
This abbreviated filing to 13D is typically filed by institutional investors that don’t plan on
influencing or controlling the issuer (mutual funds)
13F
Filed when an institutional investment manager exercises discretion over at least
$100 million in equity securities
A quarterly filing which identifies the Section 13(f) securities being held by the
institutional investment manager. These securities include:
▪ Exchange listed stocks, as well as certain options and warrants
▪ Shares of closed-end investment companies (NOT open-end)
▪ Certain convertible debt securities
Form 8-K
(current report for major events)
– Company must file within four business days of
the event
FORM U6
Form U6 is used by a regulator to report:
Disciplinary actions against representatives and firms
Final arbitration awards against representatives and firms
Bank Secrecy Act Currency Transaction Report (BCTR)
Filed for all cash transactions executed by a single customer during one business day that exceed $10,000 (also
filed for structured transactions)
Filed within 15 calendar days
Suspicious Activity Report (SAR)
Filed whenever a transaction (or group of transactions) equals or exceeds $5,000 and the firm is suspicious
Filed within 30 calendar days
Suspicious activity should also be reported to a principal
Maximum sales charge that may be assessed for a fund without a 12b-1 fee is
8.5%, however, the fund must offer:
- Quantity discounts (breakpoints)
- Rights of accumulations
Form 3
Filed when a person initially becomes an insider.
Form 4
Filed by any insider of a corporation who buys or sells shares of his company. The form must be filed no later than the second business day following the transaction.
Form 5
An annual filing by insiders. An insider is defined as any person who is an officer, director, or owner of more than 10% of the equity.
Section 13(d) of the Exchange Act requires any person that acquires more than 5% of an issuer’s equity securities to notify the following:
The issuer
Each exchange on which those securities are traded
The SEC
Which orders are reduced on the ex-dividend date?
buy limits, sell stops, and, if the market permits them, sell stop limit orders.
A broker-dealer that extends credit to a customer must disclose which of the following details?
The annual interest rate that may be charged and the method of determining the debit balances on which interest will be charged
Which of the following may suspend or expel a member firm from FINRA membership?
Both a hearing panel and the National Adjudicatory Council may suspend or expel a FINRA member firm.
Stock that’s acquired by an underwriter as compensation may be sold
If a broker-dealer receives securities as compensation in connection with the sale of a new issue, the securities cannot be sold for a period of six months from the effective date. Options or warrants that are received as compensation may be exercised at any time.
Which of the following statements is TRUE concerning the reporting of riskless principal and net basis transactions?
A riskless principal transaction is a trade in which a broker-dealer executes a customer’s order that it is holding by buying (or selling) a security and then simultaneously selling (or buying) that security for the customer at the same price (plus a markup, which must be disclosed to the customer). A securities transaction for a riskless principal trade is reported under a single report. A net basis transaction involves a broker-dealer filling a customer’s order that it is holding by buying (or selling) a security at one price and selling (or buying) that security for a customer at a different price. (Only the net price is disclosed to the customer.) A net basis trade requires two separate reports. There are specific consent requirements for a broker-dealer to engage in net basis trading with customers. Customer consent varies depending on whether the customer is institutional or retail.
