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Laws and Regulations > Securities Rules and Regulations > Flashcards

Securities Rules and Regulations Flashcards

1
Q

Securities Exchange Act of 1934

A

Regulates

- the secondary market
- industry participants  - created Exchange Commission (SEC) - requires all agents to be fingerprinted
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2
Q

Regulation T

A

Public companies must file 10ks, 10Qs and 8ks

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3
Q

SRO’s (self-regulatory Organizations)

A

Organizations under the SEC that regulate themselves
Ie: FINRA, NYSE

They regulate the broker-dealers and participants in the industry

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4
Q

FINRA Bylaws

A

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)

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5
Q

Who Is A Registered Representative

A

Employees who:
-Handle orders
or
-Supervises a clients business

No compensation may be paid to unregistered people

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6
Q

Disciplinary Actions Against a Rep

A

U-4 form gets updated by the firm and that gets reported to FINRA (should be done immediately)

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7
Q

Retail Communications

A
  • 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
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8
Q

Retail Communications Filing

A

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
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9
Q

Institutional communications

A
  • 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
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10
Q

SIPC (Securities Investors Protection Corporation)

A

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
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11
Q

Investment Advisor Act

A

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
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12
Q

Insider trading Act of 1988

A

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

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13
Q

Telemarketing Rules

A
  • 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
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14
Q

Penny Stock Rules

A

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
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15
Q

The Role of The Principal

A 
(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
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16
Q

Violations and Complaints

A 
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
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17
Q

Arbitration

A

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)
18
Q

Mediation

A

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

19
Q

The US Patriot Act:

A

(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)

20
Q

Annual Compliance Review

A

Every registered rep is required to be inspected by their broker-dealer every year to make sure they are in compliance

21
Q

Business Continuity Plan

A

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…

22
Q

Tender Offers

A

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
23
Q

SEC Filings

A

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.

24
Q

Issuers Repurchasing Their Own Securities

A

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.
25
Q

Compensation For Foreign Agents

A

They have to be on business here in USA

The Broker dealer must ensure:

1) Person in not required to register in the US
2) Would not be barred from registration
3) Provide customer with written disclosure of compensation
4) Make Finders agreement available to FINRA
5) Maintain agreement on its books
26
Q

Broker-Dealer Hosted By Other Financial Institutions

A

Also known as Financial networking arrangements

A Broker-dealer is being hosted by a bank

  • When these arrangements are entered into it has to be made clear to the customers and public that that broker-dealer is not apart of the Original Financial Institution
  • Banks must clearly state that the products by broker dealers are not ensured by the FDIC
  • Banks must allow FINRA & SEC onsite access
27
Q

SARBANES OXLEY

A

These regulations were set in place to hold executives accountable for the reports put out by the companies.

Executives are now required to:

1) Certify they know these reports
2) They certify their reports information is accurate

Also, these companies must have systems and procedures in place for their accounting procedure to assure their information is correct.

Most Companies Use GAAP (Generally Accepted Accounting Principles)
If they don’t they must show what their GAAP earnings would have been

Companies are required to report all off-balance sheet liabilities and assets

Publicly traded companies are now barred from making loans to officers of that company

All publicly-traded companies must have a code of ethics for their senior executives and if they breach that code it is the reason for termination

28
Q

Regulation S-K

A

Talks about information that is released that has to do with a merger or acquisition

1) When a merger or acquisition is announced a tender offer statement is released laying out the terms of the offer in plain English
2) Proxy statements ( they vote on whether they support or reject the acquisition or merger)
3) Registration Statements (new securities that will be issued as a result of this merger)
4) Earnings Projections (statements that show what reasonable projections for the merger)

29
Q

Regulation M-A

A

Also Talks about Mergers and Acquisitions

Requires summary term sheet to be provided to investors

Must be in plain English

Term Sheet Must Be on the 1st or 2nd page of the disclosure document and contain:

1) Description of transaction
2) Price received by holders
3) Reason for transaction
4) Accounting and tax considerations
30
Q

Hart Scott Rodino Act

A

Prior to completing a large merger or acquisition notice must be filed with FTC & DOJ

They can block the merger or do a spin-off

30 - day cooling-off period - minimum of 30 days before the merger/ acquisition can take place

Designed to ensure that companies do not become monopolies

31
Q

Fairness Opinion

A

A Broker-Dealer or advisor issues an opinion on a merger or acquisition deal to see if the price is fair

Required Disclosures:
1) Is compensation for the opinion based upon the success of the merger or acquisition
2) Does the opinion giver have any material relationship to any parties involved
3) If the opinion was approved by a fairness committee
If information was independently verified

32
Q

Institutional Communications - Website

A

if they change a page on the website the old page must be kept for 3 years and 2 years readily accessible.

FINRA Logo can be used on site if it has a hyperlink to the FINRA page

33
Q

Institutional Communications - Blind Recruiting Ads

A

“broker trainee wanted please call this number”

these aren’t required to have the name of the broker-dealer on the ad. ALL other ads are required to have the name.

34
Q

Institutional Communications - Generic Advertising

A

Provides a list of services provided by the firm. That’s it.

35
Q

Institutional Communications - Tomb Stone Ads

A

An announcement of new securities coming to market letting people know where to get the prospectus.

There must be a statement on the ad that says responding to the ad does not obligate the individual to buy the securities and the seller to sell them

36
Q

Institutional Communications - Testimonials

A

Any testimonials by compensated endorsers must be disclosed and any references to past performance must include something that says these results may not be achieved in all cases

37
Q

Institutional Communications - Free Services

A

They must be free to all people no strings attached. If there is a charge for the service it is not free

38
Q

When an advisor wants to discuss a penny stock with a customer

A
  • Customer must sign a suitability statement
  • Firm must supply the current quote
  • Firm must disclose compensation to a firm and agent
39
Q

FINCEN

the Financial Crimes Enforcement Network

A

A Suspicious activity report must be filed with FINCEN for any transaction of more than $5k that appears questionable

Broker-dealers are also required to keep records of international wires of $3k or more

Currency transaction reports - a report written for any receipt of currency that is greater than $10k in cash

40
Q

OFAC

A

FINCEN maintains a list called the OFAC list (Office of Foreign Asset Control) which is a list of known and suspected bad people
ie: terrorists and money launderers

Each Broker-Dealer will designate a person who has the list and will report to the FINCEN any matches of customers within their firm that match the OFAC list

41
Q

Money Laundering Red Flags

A
  • If a customer doesn’t care about losses or expenses
  • If the person moves the money into an account quickly and then out to somewhere else quickly
  • Request to journal money at the same broker-dealer from one account to another account that seems unrelated

Laws and Regulations (5 decks)

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