Securities Rules and Regulations Flashcards
Securities Exchange Act of 1934
Regulates
- the secondary market - industry participants - created Exchange Commission (SEC) - requires all agents to be fingerprinted
Regulation T
Public companies must file 10ks, 10Qs and 8ks
SRO’s (self-regulatory Organizations)
Organizations under the SEC that regulate themselves
Ie: FINRA, NYSE
They regulate the broker-dealers and participants in the industry
FINRA Bylaws
1) The Rules of Fair Practice - Deal fairly with the public don’t lie cheat or steal from your clients
2) The Uniform Practice Code - How broker dealers do business with other Broker Dealers
3) The Code of Procedure - Sets forth a method for how FINRA can investigate violations/ complaints
4) The Code of Arbitration - All about money. All disputes are required to be settled through money (except for discrimination or harassment they can sue for those)
Who Is A Registered Representative
Employees who:
-Handle orders
or
-Supervises a clients business
No compensation may be paid to unregistered people
Disciplinary Actions Against a Rep
U-4 form gets updated by the firm and that gets reported to FINRA (should be done immediately)
Retail Communications
- Must be approved by a principle prior to its first use
- general correspondence (it was sent to less than 25 customers within 30 days) doesn’t require approval prior to use
- The firm must review electronically or otherwise a sample of all emails and where appropriate must do an eyes on review by a person
- The firm may limit or restrict the use of social media by employees
- An RR may never post to the Firm’s website without PRIOR principal approval
Retail Communications Filing
Sometimes types of communication need to be approved by FINRA or another regulatory agency
If a member firm files the communication with one regulator it does not need to file the same material with another
THE FOLLOWING ARE REQUIRED TO BE FILED
-Broker-dealers less than one-year-old or who have not advertised in the past are required to file their ads 10 days prior to use
- Firms using testimonials must disclose credential and compensation relating to the testimonial
- Options and CMO’s ads are all required to be filed 10 days before use
- Mutual Funds may file ads 10 days after first use
- All retail communication must be kept for 3 years and 2 years readily accessible
Institutional communications
- Communications sent to customers that are exclusively institutions. If done so it isn’t required to be approved by a principal and filed with FINRA
- The Firm Must train its employees on the use of institutional communication
- Must retain the communication for 3 years and 2 months readily accessible
SIPC (Securities Investors Protection Corporation)
Customer insurance coverage if broker-dealer goes out of business.
All broker dealers are required to be a member of SIPC
$500k Per separate customer Up to $250k may be in cash
If broker-dealer carries excess insurance they must notify customer 30 days prior to any change.
the following is not covered by SIPC
- Commodities,
- Broker-Dealers Account,
- Officers and Directors Accounts,
- Investors who directly own a security registered in their own name not through the broker-dealer, Subordinated Lenders
Investment Advisor Act
Guidelines for business requirements and activities of investment advisers
As defined an investment advisor is anyone who:
1) Gives advice
2) Advertises on investment matters
3) Receives compensation for advice
An investments advisor is not:
- Lawyer
- Accountant
- Teacher
- Engineer
Insider trading Act of 1988
Regulates the flow and use of nonpublic information.
The Tipper (the one who provides the information) - can receive a penalty of as high as $1 million
The Tippee (the one who receives the information) - can receive a penalty of $1million or 300% of the money they made or they saved from losing on the information
You have to have bought or sold based on the information received in order for you to be guilty
Information becomes public when it is released by the company from a medium that is widely accepted
They pay bounties for other people trading on insider information
Telemarketing Rules
- can only call between 8Am and 9PM in the customers time zone (not the advisors time zone)
- Must maintain a DO NOT CALL LIST
- If customer asks to be put on Don’t call list then you cant call them for 5 years firm-wide (ie all of Edward Jones)
- No Caller ID Block allowed
- If a person has an account with the firm and they are on the Don’t call list then the only reason you can call them is to verify their address
- If you are friends with a person on the Do Not Call List then you can call them if its not about investments
- If an existing customer tells you to call them at 11pm then its ok to call them then
Penny Stock Rules
An Unlisted Security Trading less than $5, and trades on the OTC Bulletin Board or Pink OTC
Customers with solicited penny stocks must be given monthly statements Established customers are exempt (must be done for the first 3 penny stocks purchased on 3 separate days)
Exemptions to these rules:
- Firms that receive less than 5% of its revenue from penny stocks
- If it’s an unsolicited order
The Role of The Principal
(the boss of the advisor) Must review and approve - new accounts - Retail Communications - Transactions A properly registered principal is required at each office of supervisory jurisdiction
Violations and Complaints
FINRA's punishments they can deal out: - Censure - Suspend - Expel - Bar - Fine - Other penalties The person is sent a punishment offer from FINRA they can accept or contest in court. If contested and convicted the punishment is usually much worse
Arbitration
Money punishments.
- They must be paid in under 30 days
If not individual can have their license revoked - $50,001-$100k = only one arbitrator
- Over $100k must have either 1 or 3 arbitrators (not 2)
Mediation
Having someone from the outside help resolve the dispute.
Both parties have to agree to do it. It doesn’t guarantee a resolution
Testable point: the mediator cannot also be the arbitrator
The US Patriot Act:
(the bank secrecy act)
Deals with Any Money Laundering
All broker-dealers must have policies and procedures set forth to detect money laundering. The AML program must be approved by senior management.
Every year they must test the AML program.
Penalties for money laundering:
Up to 20 years in prison and $500k fine
Types Of Deposits that could be received from customer:
(These are listed in order of least suspicious to most suspicious)
1) Personal Check
2) Business Check
3) Wire
4) Bank Check
5) Money Order
6) Cash (most Broker dealers don’t even allow these)
Annual Compliance Review
Every registered rep is required to be inspected by their broker-dealer every year to make sure they are in compliance
Business Continuity Plan
Broker-dealer is required to have one
Ensures that customers can still transact business with the firm even if the firm’s office becomes damaged or inaccessible.
It needs to ensure backup communications between
- The firm and its agents.
- The customer and the firm.
- Must make sure the customer has ready access to cash and securities.
- Must list backup office locations for Registered Reps
- Must have a going out of business plan as well
The Firm must have a continuity plan for every type of security it transacts business in ie: stock, bonds, annuities, etc…
Tender Offers
When a company Makes an offer to repurchase its own shares or another company makes an offer to acquire the stock of another company, they announce it to the marketplace.
- That tender offer must be available for a minimum of 20 days
- If terms of the offer change the offer must remain open for at least 10 days from date of change
- The only way they can buy these securities is through the tender. They cannot now go to the marketplace to buy the stock.
- Call options reduce the number of shares you can tender
SEC Filings
13D - any person or entity who now holds 5% or greater of a companies stock
13G - Any Investment Company who now holds 5% or greater of a companies stock
13F - Any adviser who now holds $100 million or more of outside money
This will show you all the securities held by these individual
they must announce quarterly all of their holdings for the previous quarter.
Form 3 - Filed by an officer or director when they initially receive or purchase stock in the employer. Ie: a Firm employs a highly regarded person and when they do they award them 5million stock units and the option to purchase 20 million shares in the future.
Form 4 - Filed by an officer who previously was awarded or purchased stock in their employers company and is now purchasing more or selling or exercising options.
Issuers Repurchasing Their Own Securities
Must meet all of the following requirements:
- Orders - May only enter orders with 1 broker dealer each day during normal market hours. After market hours they may use a 2nd broker dealer
- Volume - 25% of the average daily trading volume or 1 block purchase per week
- Time - If its an actively traded stock they may not buy stock in the last 10 minutes of the trading day. If its not an actively traded stock then they cant buy it in the last 30 minutes of the trading day
- Price - May not exceed best independent bid or last independent trade, whichever is greater.
