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Series 2024 > Series 24: Chapter 1 Registration Rules > Flashcards

Series 24: Chapter 1 Registration Rules Flashcards

1
Q

FINRA

A
  • FINRA is the name for the “merged” regulator that combined the NASDs and NYCSE regulatory unites in 2007.
  • Responsiblity for overseeing the equity trading markets in the US
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2
Q

What is the purpose of FINRA?

A
  • Promote through cooperative effort the investment banking and securities business.
  • Standardize business principles and practices and promote high standards of commercial honor
  • Promote just and equitable principals of trade for the protection of investors and to prevent fraudulent and manipulative acts.
  • Provide a medium through membership for conferring with governmentatl and oter agencies in the solution of problem affecting market participants.
  • Promote self-discipline among members and to investigate and adjust grievances between the public and members
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3
Q

What bodies of Rules does FINRA enforce?

A
  1. Conduct Rules
  2. Uniform Practice Code
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4
Q

Conduct Rules

A
  • Regulations that control relations between the public and FINRA memer firms.
  • Require that customers be treated “in a just and equitable manner consistent with high standards of ethical conduct”
  • ## Disputes between customers and members are handled through the FINRA code of procedure.
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5
Q

FINRA Code of Procedure

A

Handles disputes between customers and members

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6
Q

Uniform Practice Code

A
  • Regulations that control member-to-member relationships
  • e.g. settlements, good delivery, etc.
  • Disputes among members are handled through FINRA Code of Arbitration
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7
Q

FINRA Code of Arbritration

A

Handles disputes among members

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8
Q

Displinary Power of FINRA

A

FINRA has the power to censure, suspend, excel and fine members.

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9
Q

Who needs needs to register with FINRA?

A

Every broker-dealer that deals in non-exempt securites must be registered, as required byt he Securities Exchange Act of 1934

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10
Q

Who is not required to registered with FINRA?

A

Broker-dealers who:
* consist solely of dealing in the exempt securities (e.g. gov sec dealers)
* business performed solely outside of the US

Also
Foreign Broker-Dealers Can Deal with Institutional Investors in U.S Without Registration

*note : packaged products of underlying expemt securities are not exempt

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11
Q

Who regulates broker dealers that solely deal in gov securites?

A

Bank regulators

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12
Q

SEC Rule 15a-6

A

Allows foreign broker-dealers to conduct specified activities in the US with institutional Investors (limited)

Recongizes the increased globalization of the securites market and makes it easier for a foreign broker-dealer to do business in the U.S. without having to register a U. S. broker dealer

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13
Q

Foreign Firms are permitted to do the following without registering:

A
  • Effect unsolicited transactions with U.S. customers
  • Distribute research reports diretly to major US institutional investors and effect trades in those secrutites for those investors
  • solicit and effect trades with institional investors with the assistance of registered “chaparone” U.S. borker-dealer
  • Solicit and effect trades with U.S. broker dealers, banks acting in a broker-dealer capacity, and foreign persons temporarily in the U.S.
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14
Q

What are the advantages of FINRA membership

A
  • Only Members are only premitted to join in domestic underwritings of non-exemt securities with other members.
    e.g. aa non-member bank cant join with a BD in a common stock underwriting
  • Non-members are to be given “public prices”
    *e.g. members can only deal with other members in stocks quoted on Nasdaq at the “inside price” The public would pay the “inside price” plus an appropriate mark-up or commission as determined by the 5% policy.
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15
Q

How to FINRA members register?

A
  • From BD must be files (membership application
  • As part of form BD the firm agrees to abide by FINRA rules and be subject to FINRA disciplinary actions.
  • If there are changes to form BD contents and amendment must be filed promptly
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16
Q

What are the reasons for denying membership:

A

Firms that:
* have been suspended or expelled from other self-regulatory organizations (foreign or dom)
* is the subect of an SEC order suspending/revoking registration
* willfully filed a false application or omitted to state material facts
* willfully voilated or aided in the violation in the violation of fed securites or commodities laws, or failed to supervise those who committed the violation
* has been convicted of any securites or “money” related midemeanor or any felony (includes DUI felony) within the past 10 years
* has been temorarily or permenantly enjoined from enaging in the securities business

*known as statutory disqualification

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17
Q

Eligibility Proceeding

A
  • FINRA permits a disqualified person to request permission to enter into, or remain in, the securities industry through an eligility proceeding.
  • The member firm must file an application for the approval of a new or continued registration.
  • If FINRA approve the registration, SEC must also approve
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18
Q

What is evaluated as part of the Eligibiltiy Proceeding?

A
  1. All relevant information surrounding the disqualification.
  2. Nature and Gravity of the evnt
  3. Length of time since the event occured
  4. Any mitgating or aggravating circumstances
  5. The disciplinary history of the member firm and associated person
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19
Q

What happens if FINRA:
1. denies a registation
2. approves registration
as part of the eligbiltiy proceeding.

A
  1. if approved:
    * SEC is also required to review and approve
  2. if denied:
    * The applicant may request a review of the decision with FINRA’s’ National Adjucicatroy Council (NAC) within 25 days
  • If denied further appeal may be filed with the SEC
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20
Q

What is part of the application for an Eligibility proceeding?

A
  1. A copy of the applicants submission to the SEC
  2. Trial balance and net capital computation
  3. Member’s written supervisory procedures
  4. List of officers, partners and asssociated personas at the time of the application.
  5. Any other information requested by FINRA District Office
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21
Q

What occurs during the pre-memership interview as part of the Eligibility proceeding?

A

Before an applicant is admitted, a pre-membership interview is conducted at a FINRA office (11 district offices)

The review includes:
* level of net capital and any future capital requirements, internal procedures and compliance procedures, familiarity with FINRA
* business plan, included number, experience and qualifications of person associated with the firm
* planned facilities, clearing arrangements, and supervisory personnel.

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22
Q

How long after the Eligibility Procedure pre-memership interview is a determination made?

A
  • Within 30 days of the interview
  • Notification is provided by the District Office
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23
Q

Executive Representative

A
  • Members are required to appoint Executive Representatives to represent, and vote for the member in FINRA affairs.
  • An executive representative ( executive office or partner of the member firms) is preferred.
  • Contact information changes must be updated no later than 30 days after a change and reviewed annually, within 17 business days of the clendar year end.
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24
Q

FINRA Contact System

A

Maintains current info on each member’s:
* Exec representative
* AML Compliance person
* Emergency Contact Person ( as part of BCP)
* Continuing Ed Conact Person

Updates need to be made no later than 30 days after change and reviewed annually wihtin 17 business days before year end

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25
Q

SEC Rule 15b2-2

A

Requires FINRA to examine newly registered broker dealers:
* within 6 months of registration: determine if its operating in conformity wiht the applciable finanical responsiblity laws
* within 12 months of registration - all other provisions of the Sec Ex Act of 1934

If the firm has not commenced acutal operations within 6 months it will delay inspection until the second 6 month period from registration.

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26
Q

Membership Resignation

A

Voluntary resignation in writing

Not effective:
* until 30 days after notice
* if any complaint or action is pending
* if monies are owed to FINRA
* if a customer files a complaint within 2 years of resignation

Cannot be transferred to another firm.

Corporate reorganizations do not require a new resignation if the company is a successor of the old company

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27
Q

What are the oligations of FINRA membership?

A
  • Payment of Dues
  • Payment of Fees
  • Proper use of FINRA name
  • Designate an OSJ
  • Register all branche offices and other offices (back offices, primary residence representatives, Offices of conveniend and satellite offices.
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28
Q

How does FINRA assess dues:

A
  • $75 per branch / year
  • $150 per reg individual / year (reduced for larger firms)
  • Trading Activity Fee for security sales , security futures, and munis for secondary market transacations
  • Basic annual membership fee:
    greater of $1,200 or .1215% of annual gross income (up to $25MM in rev lower for fifrms over $50MM
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29
Q

Gross Income used to determine dues

A
  • It is the Total Income on the firms FOCUS report
  • Includes:
  • commissions on exchange traded issues
  • options
  • all other sec commissions
  • gains/ losses on prop trading
  • undewriting of selling group profit and losss
  • sales charges earned on investment company shares
  • account servicing and clearing fees

**No deductions for expenses

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30
Q

Exclusions from Gross Income

A
  • commodities income
  • income earned outside of the US

No deductions for expenses

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31
Q

What fees does FINRA impose?

A
  • initial membership
    *examinations
    filing any documents with FINRA (e.g. filings with Committee on Corp financing)
  • other FINRA services

*member firms that only deal with other members on the exchange floor ar

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32
Q

What is the penalty for non-payment of dues?

A
  • suspension or expelled upon 15 day’s written notice from FINRA.
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33
Q

What is the proper use of the FINRA name?

A

The firm can only state that it is a member firm.

It can be used:
* as a matter of record in trade directories
* on the firm’s letterhead, market letters, sales literature as long as it is seperate and given lesser emphasis.
* in general adverstising as long as it is used solely for identify the firm as a member
* on the entrance way to the member’s principal office or any registered branch office
* on the firm’s webiste, as long as the FINRA name is hyperlinked to FINRA’s website

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34
Q

What is misuse of the FINRA name?

A

A member cannot:
* state that it is endorsed by FINRA
* state approved by FINRA
* state that FINRA guarantees the member’s business practices
* represent itself as FINRA

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35
Q

Office of Supervisory Jurisdication (OSJ)

A
  • Creates and enforces written supervisory procedures
  • Must be supervised by a resident principal
  • FINRA requires member firms to desingate and OSJ
  • Several models:
    • Each branch can be an OSJ
    • a regional OSJ supervising several branches
    • a main / home office acting as an OSJ for all branches
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36
Q

Branch Office

A
  • Must be registered with FINRA and properly supervised
  • A location where:
    • one or more associated persons regularly conducts securities business.
    • a place where the member firm conducts investment banking or securities business and advertises the location to customers or the public
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37
Q

Form BR

A
  • Member firms must register by filing a form BR with CRD
  • Any changes require and amendement be filed with the CRD no later than “30 days after the applicant learns of the facts and circumstances giving rise to the amendment”
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38
Q

What offices are excluded from Branch Definition?

A

Back offices, primary residences of representatives, “offices of convenience”, and satellite offices

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39
Q

Residence Office

A

Not a branch, as long as:
* only one associated person, or immediate family members, conduct business there
* not advertised as a branch
* do not meet customers at the location
* all electronic communications and customer orders go through the firm’s electronic system
* the address used on all stationary / busiess cards and comms is that of the associated persons branch office
* the member kees a list of residence locations and has wsp’s for supervising activities at these locations
*

40
Q

Vacation Homes are a branch if:

A
  • they are non-branch locations as long as they are used for less than 30 business days per year.
  • If they are used for more than 30 days they must be registered and supervised
41
Q

Office of Convenience

A

Not considered a branch as long as they are used occaisonlly and by appointment (i.e. meeting a client at a restaurant)

If the RR sets up regular work hours each day it would be considered a branch.

42
Q

Satellite Office

A
  • A location used to engage in non-securites activities (e.g. used to sell life insurance) and that effects no more than 25 securities trades in a year
  • Orders taken must still be processed through and supervised by the registered branch location
43
Q

What are the rules for a branch location in a bank setting?

A
  • The location where the member’s services are conducted should be disctinct from the areas where deposits are takend
  • The member’s name shoudl be clearly displayed
  • at or prior to opening a customer account the member must give (orally and in writing) the “not-not-may” disclosure that:
  • the account is NOT FDIC Insured
  • securities products are NOT disposits and are NOT guaranteed
  • securities products MAY lose value and are subject to investment risk
44
Q

what license is required for “general securities borker-dealers that trade and underwrite securities?

A

Series 24 General Securities Principal

45
Q

Series 24 General Principal

A

Persons in a general securities firm who is engaged in:
* management of the member’s business
* training of persons associated with the member

Include
* Sole Proprietors
* Partners
* Managers of Offices of Supervisory Jurisdiction
* Directors of BD Corporations

Newly appoingted Principal must pass the exam wihtin 120 days.

46
Q

How many Series 24 Principals are required?

A

Each new member applicant must have at least two principals, unless the firm is a sole proprietoriship.

47
Q

What are the prior requirements for a series 24 ?

A
  • Series 7
  • Must have functioned as an RR for 18 months during the preceeding 5 year window.
48
Q

Limited Principal

A
  • Required for specialized areas
  • Limited Principal registrations are:
  • Series 9/10 General Sales Supervisor
  • Series 27 Financial and Operations
  • Series 28 Limited Financial and Operations Principal
  • Series 4 - Registered Options Principal
  • Series 26 - Inv Companies and Var Annuties Principal
  • Series 39 - Direct Participation Program
49
Q

General Sales Supervisors Series 9 and 10

Who is it?
What can’t they do?
what is the pre-requsite?

A
  • Supervise the sales and activities of a member with no other management functions
  • They cannot:
  • be involved in underwriting activities
  • be involved in market making activities
  • approve advertising or sales literature
  • have responsiblity for overall compliance
  • essentially a branch manager
  • pre-requisite is the series 7
50
Q

Financial and Operations Principal Series 27

What is the pre-requisite?

Who are they?
What is the pre-requisite?

A
  • Each clearing firm must have at least one.
  • Generally the firm’s supervising accountant.
  • Responsible for supervising the prepartion of the firm’s finanical reports that are filed with FINRA and the SEC
  • No pre-requisite exam
51
Q

Registered Options Principal Series 4

Who are they?
What is the pre-requisite?

A
  • Responsible for options compliance
  • The firm must have a desingated ROP by name to FINRA who is the main office compliance individual in charge of options compliance and approval of options advertising and sales literature.
  • Must approve each options account, Review options transactions and provide general supervision over options accounts
  • Prerequisite: Series 7
52
Q

Investment Companies and Variable Annuities Principal Series 26

Who are they?
What is the pre-requisite?

A
  • A principal of a firm that is solely engaged in the sale of redeemable secuirties of investment companies and variable annuiteis and has no other securities business
  • Allowed to participate in the orgianl distribution of closed-end funds only (no trading)
  • Pre-requisite: Series 6 or the Series 7
53
Q

Direct Participation Program Principal Series 39

What is the pre-requisite?

Who are they?

A
  • A principal of a firm that solely engages in the sale of limited partnership direct participation program offerings only
  • Pre-requisite: series 22 or the series 7
54
Q

Who does not have to register

A
  • Persons whose duties are solely clerical or who solely handle exempted securites
  • Foreign associates that deal exclusivly outside of the US
55
Q

Representative

A

Any person who solicits or conducts business in securities for a member

56
Q

General Securities Series 7

A
  • Licenses an individual to sell all types of securities
57
Q

Investment Companies Series 6

A

Licenses an individual to sell:
* redeemable shares of investment companies
* variable contracts
* and initial public offerings of closed end funds.

58
Q

Direct Participation Series 22

A

Licenses an individual to purchase and sell limited partnership offerings only

59
Q

Municipal Bond Series 52

A

Licenses an individual to sell municipal bonds only.

60
Q

Securities Trader Series 57

A

Licenses and individual to be an “over-the-counter” equity and options trader

61
Q

Back Office Professional Series 99

A
  • Customer facing, back office personnel
  • and personnel responsible for computer programming
62
Q

Supervisory Analyst Series 16

A
  • Licenses an individual to approve the content of research reports on debt and equity securities.
  • A series 24 is also required to approve the distribution of these reports.
63
Q

U4

A
  • Uniform Securities Application
  • to register a representative or principal a U4 must be filed
  • Registration continues until they leave the firm
64
Q

Waiting Period of you Fail the Exam

A

30 day waiting period prior to a new attempt
After 3 failures, 180 day wiating period for any other failures

65
Q

What information is included in the U4?

A
  • applicants name and address
  • BD name and address
  • Name and Address of the old BD (if transferring)
  • 5 year residence history
  • 10 year consecutive employement history
  • Other businesses
  • Any other names
  • Disclosure of any arrests / convictions
  • Any customer complain settlef for more than $15K
  • Disclosure of any customer complaint alleging a sales practice violation in an arbitration or civil proceeding (required before the case is heard / decided / settled)
66
Q

Udpates to the U4 for Changes

A
  • the U4 must be amended “promptly”
  • within 30 days after learning the facts or circumstances
  • if the event would cause statutory disqualification it must be amended within 10 days
67
Q

Statutory Disqualification

A
  • Requires amendment within 10 days
  • re: arrests, convictions, felonies
  • includes felonies such as DUI, poession of controlled substance)
68
Q

Non-securities felonies and registration

A
  • FINRA may approve (permitted by the SEC) someone convicted of a non-securities felony to be registered
  • done on a case-by-case basis
  • The principal must ascertai the “good character ad business reputation” of the individual
69
Q

Verification of Employment

A
  • The principal must verify the prior 3 years of employement history
  • Part of this includes ascertaining the “good character and business reputation of the applicant.
  • Must be completed wihtin 30 calendar days after the form is filed with FINRA (firms are encouraged to do this before the U4 is filed)
  • the verification must include a public records search by either the firm or 3rd party
  • includes criminal records, bankruptcy records, civil litigation and business records, credit report
    -
70
Q

Dual Registration

A
  • Many states prohibit concurrent registration with more than one BD, some allow it.
  • the name of each BD must be disclosed on the U4
  • Approval by employer is required
71
Q

Outsourcing

A
  • Outsourcing is permitted
  • Any functions that can only be performed by an RR cannot be outsourced to non-member firms.
  • The member firm is still responsible for supervision and compliance over the functions.
  • e.g. Broadridge outsources certain functions for smaller BDs providing things like workstations, account opening and maintenace software, AA , account analysis software, and backoffice clearing.
72
Q

Functions that require registration

A
  • sales solicitation
  • determining suitability
  • making a recommnedation
  • writing an order ticket
73
Q

CRD

A
  • Central Registration Depository
  • Each U4 is maintained on file at CRD
  • Any disciplinary action taken against the RR is part of the U4 and recorded in the file.
74
Q

Two components of CE

A
  1. Regulatory Element
  2. Firm Element
75
Q

Regulatory Element of CE

A
  • Annual reguirement (effective 1/1/23)
  • Completed by 12/31 each year
  • If not completed that person’s registration become inactive until completed
    • during the suspension period the person cannot perform function of RR and cannot be paid
76
Q

Firm Element CE Annual Training

A
  • Requires an anutl training plan be prepared and implemented by firm members
  • Should cover relevant products, registrations, and compliance issues.
  • Sales training does not meet this requirement.
77
Q

What happens to an RR’s registration if they are called to military duty?

A
  • RR is inactive
  • CE oblications are suspendded
  • Employing BD must send a letter to CRD
    • providing the name, CRD number and the data they received notification
  • The firm can pay the individual while they are on military duty including commision earned prior to being called
  • Another RR at the same firm can service their customers and share commission
  • Inactive status applies to those currently registered or those called for active servcie within the 24 post termination with an member firm.
78
Q

What happens to an RR’s registration when they return from active military duty?

A
  • A copy of the discharge notice must be sent to CRD
  • FINRA will reactivate their registration status
  • The RR must reassociate wiht a firm **within 90 days **or they will be terminated.
  • the RR will resume RR status at the point they left off
  • They can return to the same BD or another BD
79
Q

What happens if an RR leaves a member firm?

A

*U5 must be filed within 30 days of termination.
* the reason for termination is included
* a copy of the U5 must be supplied to the individual and should be reviewed

80
Q

When rejoining a BD after termination the new BD must:

A
  • revew the individuals U5 within 60 business days
  • U5 is obtained through web CRD
  • Termination via U5 is not allowed if there is any complaint or action being taken against that person. The issue must be resolved first.
81
Q

U5 Amendments

A
  • The member firm must amend a U5 wihtin 30 days of discovering new information
  • It is an ongoing obligation with no cut-off date
82
Q

U5 for Bank Employees registered through A BD

A
  • FINRA requires bank employees registered through a BD to be notified if an RR is terminated by the member firm (in addition to the U5 filing
83
Q

When will an RR who has left a member firm ned to requalify by taking exams ?

A

2 years

  • FINRA prohibits “hanging or parking” a license with a BD to keep registration current after leaving the business
84
Q

MQP

A
  • Maintaining Qualifications Pogram
  • Allows a registered individual leavign he industry to extend the period during which they can return to the industry without having to requalify
  • Up to 5 years
  • Must complete annual continuing education
    • consists of a regulatory element and a practical element
  • Must be enrolled within 2 years of their termination data and make up any missed CE Requirement
  • Individuals that were subject to statuatory disqualification or were registered for less than 1 year are not eligiblegoo for enrollment
85
Q

FINRA jurisdiction once terminated

A
  • FINRA retains jurisdiction over that person for 2 years after termination.
86
Q

Who is not eligible for MPQ

A

anyone:
* subject to a statutory disqualification

  • registered for less than 1 year
87
Q

Reportable Event

10 items

A

The firm or a person associted with the firm is:
1. found to have violated securities law
2. subject of a writte customer complaint (theft, missapropriation of funds, forgery)
3. named a defendet / respondet in any legal proceeding alleging violations of the Securities Act brought on by a reg authority
4. denied reg, expelled, suspended, disciplined by any self-regulatory org
5. indicted, convicted, pled guilty to any criminal offense (ex misdemeanor traffic violations/ dui)
6. asociated with any BD, Inv company, investment advisor or ins company that has been suspended, expelled or had its registration denied, or was convicted, pled no contest to a felony or misdemeanor
7. a defendant or respondent in any securities or comodities related civil litigation or arbitration settled for an amount exceeding $15K / or $25K if it involved the member firm itself
8. subject to statutory disqualification
9. the subject of disciplinary actions by their firm involving suspension, termination, withholding of commission, or imposition of fines in excess of $2,500
10. the firm or person associated with the firm has violated any securities-,insurance-,comodities-, financial- or investment- related law (domestic or foriegn)

88
Q

What is the requirement for notification of a reportable event?

A
  • Promptly but no later than 30 days after the emmber firm knows or should have known of the event.
  • A written report must be filed
  • The reports are required while the event is happening - prior to conviction or proof
  • FINRA will assess sevrity to determine action
89
Q

FINRA Broker Check

A
  • A website where the general public can get info on a borker or member firm.
  • For individuals, the webiste uses U4/U5 info to provide:
    1. employement history
    10 year, inside and outside the sec industry
    2. Outside Business Activities
    3. Liscences
    sec licenses and state registrations
    4. Complaints and Disciplinary Records
    both resolved and unresovled
  • It includes info on representatives currently working in the industry and those that have left within 10 years.
  • For member firms (both current / previous)it provides a profile that includes disciplinary record.

*info is also available via toll-free number

  • FINRA requies a “readily apparent reference” and hyperlink to BrokerCheck be included on the intial web page that firms use for retail investors and other we pages that include professional profiles of RRs.
90
Q

What is excluded from BrokerCheck?

A

U4 info regarding:
* residence
* SS#
* physical characteristics

91
Q

FINRA Rule 2267

A

Requires a customer be provided annually with:
* FINRA broker check hotline number
* FINRA website address
* A statemetn as to the availability ofan investor brochure that includes information describing FINRA BrokerCheck

92
Q

What does FINRA require regarding BrokerCheck on BD websites?

A
  • FINRA requies a “readily apparent reference” and hyperlink to BrokerCheck be included on the intial web page that firms use for retail investors and other we pages that include professional profiles of RRs.
  • “Readily apparent” means the referece:
    • must be of simliar font size to surrounding text (or larger)
    • cannot be ‘burried’ in a paragraph or text,
    • canot be in a color that blends into the surrounding background
    • cannot be placed in a footer.
  • The BrokerCheck icon may be used for the link
  • Applies to sites operated by RRs
93
Q

Rule 17f-2

A
  • Requires fingerprinting as part of the registration process.

Applies to:
* The following roles for BDs, clearing agencies and transfer agents:
- partners
- directors
- officers
- employees

  • RRs as well as accounting and back-office personnel **
    (people who handle funds/ securities / books ad records)
  • Sales personnel of BDs that only sell mutual fuds, variable annuities, limited partnerships, or REITS
94
Q

Who does not have to be fingerprinted?

A

Anyone who:
* is not engaged in the sale of securities
* do not have access to the keeping, hadlig or processig of securities, monies, or the books or records relating to securities or monies
* have direct supervisory responsibility for the above-mentioned persons.
* Partners/offices/directors/employees of BDs that sell mutual funds, variable annuities, limited partnerships, or real estate investment trusts
- sales personnel at these are not exempt

95
Q

What does rule 17f-2 require for processing of fingerprints:

who processes them?
where are the fingerprint cards stored?

A
  • The rule requires fingerprints to be sumitted to the Attorney General of the US or its designee for identification and appropriate processing”
  • The actual fingerprints are sent to the FBI as a designee
  • Finger print cards must be easily accesssible i the member firm’s principal office.
96
Q

What is the procedure for unreadable fingerprints?

A
  • If fingerprints are rejected another submission is requested
  • after 3 requests, FIRA will provide the FBI with ame, SS etc and they do a dep web search to see if they have a arrest or convicatio
97
Q
A

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