Series 24 Flashcards
Securities Act of 1933
Enacted to regulate how securities are registered, issued, and distributed to the public for the first time
Investment Adviser
defined by the Investment Advisers Act of 1940 as any person or firm that is in the business of providing advice or reports about securities for compensation
Forms of compensation for Investment Advisers (2)
Advisory fees or compensation
Advisers excluded from the Investment Advisers Act (8)
1) banks, 2) lawyers, 3) accountants, 4) teachers, 5) engineers, 6) broker-dealers (if they do not receive special compensation for advisory service), 7) publishers of newspapers as long as it is not directed toward any specific person, 8) firms that provide advice to U.S. government securities or government sponsored organizations
Investment Advisers with >$110mm in AUM
Investment Advisers that must register with the SEC
Form ADV
Form that must be filed by Investment Advisers registered with the SEC - has two parts including i) general information and ii) information relevant to the customer
Investment Adviser Registration Depository (IARD)
Operated by FINRA - is a internet-based filing system for all SEC applications for Investment Adviser registration
Statutory Disqualification
Occurs when a company or registered person makes false or misleading statements in its application for registration, has been convicted of a felony within the past 10 years, or has been convicted by a court or found by the SEC to have violated a securities-related statute or rule.
Investment Adviser Registration with AUM is
Investment Advisers that must register with the states in which they operate.
Investment Adviser Registration with AUM >$100mm but
Investment Advisers that can choose to register with either the SEC or the states in which they operate
How to be exempt from SEC and FINRA registration as a Broker-Dealer
Intrastate Broker-Dealers cannot participate in any transaction executed on a national securities exchange or NASDAQ. Nor can they post information on the internet that is accessible in another state.
Foreign broker-dealer activities that qualify them as exempt from SEC registration
Effecting transactions initiated by the customer, providing research reports to American institutional investors, soliciting and effecting transactions through a registered broker-dealer
Securities Investor Protection Corporation (SIPC)
A nonprofit corporation that provides insurance for the assets contained in investors’ securities accounts. All registered broker-dealers must be members unless their principal business is conducted outside of the U.S. or consists exclusively of the sale or distribution of mutual fund shares, variable annuities, government securities, or insurance. Also exempt are broker-dealers that offer investment advice to investment companies and insurance companies
Mandatory Inspection of a New Broker-Dealer
Conducted within six (6) months of the date that a new firm registers
Definition of Broker-Dealer
any “person” (an individual or a firm) that is engaged in the business of effecting transactions in securities for the account of others or for the person’s own account.
Definition of Broker
Acts as the intermediary between two parties in a transaction.
Definition of Dealer
Buys securities from customers and puts those securities in its own inventory or sells securities to customers from its own inventory.
Principal Definition
A person actively engaged in the management of the member’s investment banking or securities business, including sole proprietors, officers, partners, and managers
Representative Definition
any other person who solicits or conducts business in the investment banking or securities business, including research analysts and broker-dealer trainers
Number of Principals Required for FINRA Member Firms
two registered principals with respect to each aspect of the firm’s investment banking and securities business
General Securities Principal (Series 24) Definition
a person engaged in managing or supervising registered employees with respect to all activities of her office, except those involving options accounts or financial reporting to regulators
Membership Agreement Requirements
A firm must agree to provide FINRA with an application for approval at least 30 days before any change in ownership or control, such as a merger with another entity (whether with another member firm or not), an acquisition by another entity, or any change in the member’s equity ownership that results in one person or entity controlling 25% or more of its equity
Permissive Registration
Makes it possible for certain securities personnel to maintain their registration when they no longer perform the duties associated with that registration.
License and Jurisdictional Retention Rule
A registered person’s license remains valid for two years after leaving the industry. Individuals who return after two years must requalify by passing the appropriate exam - similarly, when a registered person leaves the business, FINRA retains jurisdiction over that person for two years
Regulatory Element of Continuing Education
Registered persons complete a computer-based training session within 120 days of a person’s second registration anniversary, and every three years thereafter
Form U5
Form that must be filed with FINRA within 30 days of the termination date or within two business days of associating with another member firm
Form BDW
Form a broker-dealer must file when it decides to go out of business
Notice of withdrawl effective date
0th day after the filing of Form BDW
FINRA Rule 3110
Rule that outlines in detail a procedural framework by which a supervisor’s responsibilities will be known and procedures set in place for their execution
Office of Supervisory Jurisdiction (OSJ)
An office that demands special supervisory attention from the firm because FINRA deems that the activities conducted there have particular regulatory significance or because the member firm itself may believe it is prudent or necessary based on certain FINRA guidelines. Member firms must designate at least one of its offices as this office type.
Branch Office
Any location where one or more associated employees are in the business of soliciting or effecting (but not executing) the purchase or sale of any security.
Supervisory System
A defined structure that specifies how a member firms oversight responsibilities for the activities of its employees are carried out.
Written Supervisory Procedures (WSPs)
Instruct the supervisor as to how those responsibilities must be performed
Taping Rule
The tape-recording of all telephone conversations between the member firm’s registered persons and existing and potential customers. Tape recordings must be held for at least three years.
Disciplined Firm
A member firm that has been expelled from membership in any self-regulatory organization or is subject to a SEC order revoking its registration as a broker-dealer or FCM
Supervisory Controls
Police and enforce compliance of its own supervisory system
Rule 10b5-1 Trading Plan
Allows for scheduled trading by the corporate insider
Maximum Civil Penalty related to Insider Trading
The greater of $1 million or three times the amount of the profit gained or loss avoided as a result of the violation.
Maximum Criminal Charges related to Insider Trading
5 million for each willful violation and/or 20 years in prison. Firms may be fined up to $25 million.
Regulation FD
Adopted by the SEC in 2000, this regulations attempts to curb the selective disclosure of material, nonpublic information by issuers
Money Laundering
The concealment of the origins of illegally obtained money, typically by means of transfers involving foreign banks or legitimate businesses.
Bank Secrecy Act (BSA)
Also known as the Currency and Foreign Transactions Reporting Act, requires financial institutions in the United States to assist U.S. government agencies in detecting and preventing money laundering. The legislation is enforced by FinCEN
Office of Foreign Assets Control (OFAC)
Part of the Treasury, this office administers sanctions against trading with enemies of the U.S. Enemies — such as terrorists, narcotics traffickers, or money launderers—or they could be foreign governments. Financial institutions must report all blockings and rejections of sanctioned activities within 10 days of identifying them.
Suspicious Activity Reports (SAR)
Report must be filled out whenever a client makes a transaction in excess of $5,000 and the broker-dealer knows or suspects foul play. Report must be filed with FinCEN no later than 30 days after the date the suspicious activity was detected.
Customer Complaint
Any written statement from a customer alleging a grievance that involves the activities of a member firm or its associated persons in connection with the solicitation or execution of a securities transaction. Records shall be kept at the OSJ and maintained by the firm for at least four years.
Restrictions on Customer Gifts and Gratuities
$100 limit, records must be kept for 6 years
Networking Arrangement
An agreement between a member firm and a banking institution under which the firm offers its brokerage services on the premises of the bank
Three Components of Suitability Obligations
Reasonable-basis, customer specific and quantitative suitability obligations
Institutional Client
An account of a bank, savings and loan association, insurance company, registered investment company, registered investment adviser, or individual with total assets of >$50mm
Retail Customer
Any natural person who receives a recommendation from the broker-dealer for the person’s own account
The Disclosure Obligation
Reg BI requirement to provide retail customers with a full and fair disclosure of all material facts about the terms and relationship between the broker-dealer and the retail customer before or at the time of recommendation
Form CRS
a 1-2 page summary of broker-dealers and investment advisers relationship with a customer or client provided when they are on-boarded
Direct Participation Programs (DPP)
A common type of limited partnership set up to fund high-risk and capital-heavy businesses, such as real estate, oil and natural gas, and equipment leasing
Real Estate Limited Partnership (RELP)
A real estate direct participation program that passes losses as well as gains on to investors
DPP Roll-up
A transaction involving the combination or one or more non-exchange traded DPPs into another public DPP, public corporation, or public trust
Records to be held for a lifetime
partnership articles if it is a partnership, articles of incorporation if a corporation, minutes of partners’ or directors’ meetings, and stock certificate books
Records to be held for a 6 years
Records associated with blotters, ledgers, and securities
Records to be held for a 5 years
All reports and documentation related to MILs, CTRs, and SARs
Records to be held for a 4 years
Customer complaint records and related info.
Net Capital
Net worth + subordinated debt - non-allowable assets - haircuts
Non-allowable assets
Illiquid assets, assets that cannot be quickly sold at fair market value
Tentative Net Capital
Net worth + subordinated debt – non-allowable assets
Carrying Firm Net Capital Requirement
$250,000
Introducing firms that do not receive customer securities
must carry $5,000 in net capital
Introducing firms that do receive customer securities
must carry $50,000 in net capital
Dealer Net Capital Requirement
$100,000
Dealer limited to mutual funds net capital requirment
$5,000
Market Maker Net Capital Requirement
$100,000
Haircuts
Discounts the SEC applies to the market value of securities held by a broker-dealer. This provides a cushion to account for a possible decrease in valuate at the time of liquidation
Securities that receive haircuts equal to 15% current market value when calculating net capital
commonly traded equity securities and undue concentation
Securities that receive haircuts equal to 40% current market value when calculating net capital
equity securities in a limited trading market
Securities that receive haircuts equal to 100% current market value when calculating net capital
non-marketable securities
Aggregate Indebtedness requirement for first year firms
indebtedness is not more than eight times the amount of their net capital
Aggregate Indebtedness requirement for established firms (over one year old)
indebtedness up to 15 times the amount of their net capital
Aggregate indebtedness
defined as liabilities that are not secured by any of the firm’s assets
Broker-dealers debt-to-equity ratio requirement
No more than 70%, although there is a 90-day grace period that gives members time to lower their ratios if needed.
Customer Protection Rule ( Rule 15c3-3)
Requires broker-dealers to promptly obtain and maintain the physical possession or control of all fully paid and excess margin customer securities - and to segregate all customer monies obtained from the use of customer property that has not been used to finance transactions on behalf of other customers.
FOCUS reports
financial and operational combined uniform single report - required to be filed by member firms annually
Securities Information Center (SIC)
An arm of the SEC, handles the reporting of stolen, missing, lost, or counterfeit securities
Securities Investor Protection Corporation
A member-owned, nonprofit corporation whose membership consists of virtually every brokerage firm registered with the SEC. Exempt broker-dealers include firms that exclusively sell mutual funds, variable annuities, U.S. securities, or investment advice, and firms whose principal business is conducted outside the U.S.
Five categories of separate customers defined by SIPC
individual account, joint accounts, accounts ed by executors, administrators, or guardians/custodians, and trust accounts
Fidelity Bond
type of business insurance that protects the business form employees’ dishonest acts. FINRA Rule 4360 requires that all member firms that are members of SIPC carry this as coverage.
