Series 24 - Facts & Information Flashcards
1
Q
Minimum Maintenance Margin Required in Long Accounts
_____________________
Minimum Maintenance Margin Required in Short Accounts
A
=25%
___________________
=Greater of $5/share or 30%
2
Q
Restricted Margin Account
___________________
Regulation T Requirement For Initial Purchases
A
- % equity (Margin) fallen below initial 50% requirement
- Can buy additional securities on margin, but must put up initial margin requirement (50% of new purchase)
________________
Initial Trade Size Reg T Required Deposit
$4000 Long & Short: $4000
3
Q
Aggregated Indebtedness
A
All unsecured liabilities and all customer related liabilities (all monies the BD must pay if liquidates)
Included:
- Accounts Payable
- Customer Credit Balances
- Fails to Receive - Customer Accounts (Customer has paid for securities not yet received, firm owes these securities to the customer)
- Fails to Receive - Firm Account (Sold)
- Stocks Loaned - Customer Account
- Bank Loans - Customer Collateral (Margin Securities)
Not Included:
*Fails to Receive - Firm Account (Unsold) [FINRA close out procedures would cancel these transactions]
*Subordinated Loans (loans only repaid after all other creditors
____________
Important Note: For AI/NC Ratio, subtract the special reserve bank account from AI balance
4
Q
Maximum AI/NC Ratio
_________
Early Warning Ratio Level
A
8:1 for First Year Firms
15:1 for Established Firm
_______________
Early Warning if exceeds 12:1
5
Q
Market Value Where Account Will Be at Maintenance Margin - Long & Short Accounts
A
Long = Debit Balance/0.75 Short = Credit Balance/1.3
6
Q
Restrictions on Member Activity
FINRA Rule 5121
A
Members Cannot Expand Business If:
*Net Capital < 150% of Minimum Requirement
*AI/NC >10:1
For 15 consecutive business days
Members May Have to Reduce Business If:
*Net Capital 12:1
For 15 consecutive business days
IF NET CAPITAL IS LESS THAN MINIMUM REQUIREMENT, FINRA CAN SHUT THE FIRM DOWN
7
Q
Minimum Net Capital Requirements
A
Clearing BD $250,000
Fully Disclosed BD (receives securities) $50,000
Fully Disclosed BD (does not receive securities) $5,000
Clearing Prime Broker $1,500,000 Executing Broker (in Prime Relationship) $1,000,000
Market Maker BD (NASDAQ, OTCBB, Pink)
$1000 for each security with bis $5
and
Min $100,000 - Max $1,000,000
Mutual Fund Firms
- accept wire orders $25000
- only accept subscriptions $5000
8
Q
Net Capital - Definition
A
Liquid Net Worth
Liquid Assets Less Total Liabilities
Allowable Assets:
- Cash
- Cash in Reserve Account
- Customer Debit Balance
- Receivable (if secured)
- Stock Borrowed
Allowable with Haircut
* Aged Fails to Deliver - 15% haircut if over 4 bus days after settlement
* Inventory (Securities)
- 15% if >4 market makers
- 40% if 2-3 market makers
- 100% if you are only market maker
PLUS: if single security accounts for more than 10% of tentative net capital, extra 15% haircut on amount over 10%
9
Q
Debt/Equity Ratio
A
Subordinated Debt/Total Available Capital
Cannot Exceed 70% for Greater than 90 Days
10
Q
Subordinated Debt
A
Minimum Term of 1 Year
Repayment is suspended if AI/NC increases above 12:1
Prepayment prohibited if AI/NC increases above 10:1 or NC falls below 120% of minimum
11
Q
Temporary Subordinated Debt
A
Maximum duration of 45 days
Maximum number of loans per year = 3
Cannot get a temporary loan if AI/NC > 10:1 or net capital is below 120% of minimum
12
Q
Eastern Syndicate vs Western Syndicate
A
Eastern Syndicate: Undivided as to selling responsibility and liability
Western Syndicate: Divided as to selling responsibility and liability
13
Q
New Issue Prospectus Delivery
A
Provided to customers at or prior to confirmation
Required to provide a Final Prospectus to all initial purchasers for a 90-day period.
For the first registered offering of an issuer:
* the final prospectus must be provided to all purchasers (primary or secondary market) for 90-days * only 25 days if issue is listed on an exchange
14
Q
Securities Act of 1933
A
Regulates Primary Market (issuance of securities)
15
Q
Securities Act of 1934
A
Regulates the Secondary Market (trading of securities)
16
Q
Forms F-3 & F-6
A
F-3 Foreign Issues that wish to directly register shared for sale in the US
F-6 ADRs (US banks that create ADRs from foreign securities held on deposit in an overseas branch)
17
Q
Regulation D
A
Allows a “private placement” exemption if an issue is sold to a maximum of 35 non-accredited investors. The issue can be sold to an unlimited number of accredited investors under this exemption and still be considered a private placement.
18
Q
Rule 144 Exemption
vs
Rule 144A
A
Rule 144 Exemption allows small amounts of restricted stock to be sold periodically without formal registration.
Rule 144A Allows large institutional purchasers to trade private placement securities.
19
Q
Rule 144 Exemption Requirements and Other Implications
A
Requires:
- Issuer must be registered with SEC
- Seller files Form 144 with SEC prior to sale date
- Securities are fully paid for at least 6 months
- Files Form 144 no more than 4x per year
- Max sale is greater of 1% of shares outstanding or weekly average of last four weeks trading volume.
Rule 144 extends to control stock, but without the 6 month holding period.
No filing required for sales of 5000 shares or less, with market value of no more than $50,000 (once every 90 days)
Once shares are sold they are considered registered.
20
Q
Rule 144A
A
Rule permits any QIB (qualified institutional buyer) to purchase unregistered security directly from the issuer or from a BD.
QIBs can sell to other QIB
21
Q
Reg A Exemption
A
Reg A - Small Dollar Offering
Issuer can sell $5,000,000 of its own securities in a 12 mo period.
Affiliates can sell $1,500,000 of securities under the Exemption
No prospectus but
- Form1A and a copy of the Offering Circular must be filed 20 calendar days prior to the proposed effective date.
- Offering Circular provided to purchaser at least 48 hours prior to confirmation of sale.
Reports of sales must be made within 30 days of the end of each 6-mo period.
Issues are registered.
22
Q
Exemptions that Require Filing
vs.
No Filing Requirement
A
Private Placements are exempted from full registration under Reg D
Sale of Restricted Stock are exempted from full registration under Rule 144
Sale of Small dollar amounts of securities are exempted under Reg A
No Filing for transactions between private parties as these are not covered under the Act.
23
Q
Rule 405
A
Well Known Seasoned Issuer
24
Q
Rule 405/WKSI Requirements
A
Min Mcap of $700mil or at least $1Bil in non-convertible senior securities registered with the SEC in past 3 yrs.
Can only be used for add on offerings
Automatic Shelf Registration (S-3)
Pay as you go registration fees
3-Yr Shelf Registration
Electronic Prospectus Delivery Permitted (assuming meets access equals delivery requirements)
Free Writing Prospectus Allowed - can be used before or after the registration statement is filed. must be filed with the SEC prior to or at first use.
25
Section 4(6) of Securities Act of 1933
Offers of no more than $5,000,000 made only to accredited investors where no advertising is done, are exempt
26
Section 4(6) of Securities Act of 1933
Generic private placement exemption stating transactions by an issuer not involving a pubic offering are exempt.
Details of what is required to meet this general exemption are provided in Reg D and Rule 144A
27
Shelf Registration Rules
Rule 415 & Rule 405 (WKSI)
Rule 405 is newer and more liberal
These are also "natural offerings"...allow issuers to sell based on natural demand in the market (there is no cooling off period).
28
Rule 415
An issuer can sell securities on a continuous or delayed basis.
Only securities reasonably expected to be sold in the following 3 yrs can be included in the registration
No IPOs (only add on offerings)
Only seasoned issuers can do a primary offering
Unseasoned issuers can do a secondary offering (where proceeds go to shareholders (PIPE))
29
Section 12g of the 1934 Act
Requires issuers of non-exempt securities with assets greater than 10mil and at least 2000 shareholders, must register shares with the SEC
30
Underwriters who are Market Makers
| Under Reg M
Requires firms that are market makers and in the syndicate for an additional issue offering to either seek an excused withdrawal from making a market in that issue or elect to operate as a passive market maker.
Passive market makers are limited to making daily net purchases of 30% of ADV or 200 shares, whichever is greater.
Passive market maker cannot bid any higher for a security than the current highest independent bid.
31
Insider Forms
FORM 3 - any person must notify the SEC on becoming an insider within 10 business days
FORM 4 - insider trades are reporting within 2 business days
32
Investor Holding Filings (13_ filings)
13d - accumulate 5% or more with intent to exercise control...must file with 10 days of crossing the threshold
13g - accumulate 5% of more as passive investor...must file annually within 45 calendar days of year end.
33
Information to be filed with the Committee on Corporate Financing
Registration Statement
Amendments to the Registration Statement
Underwriting Agreement
Agreement Among Underwriters
All forms of Compensation:
* Exact or Estimated POP
* Exact or Estimated Underwriting Discount (spread)
* Exact or Estimated Reimbursement for underwriter's expenses, underwriter's counsel's fees, advisory fees, finder's fees, etc.
* Any other type of compensation that may accrue to the underwriter and related persons
* Details of ownership of any of the issuer's securities acquires during the 180 days prior to the filing date by the member firm, its officers, and employees
* Details of any other arrangement entered into with the issuer during the 180-day period preceding the filing that provides for the transfer of warrants, options or other securities to the member firm, its officers or employees.
34
When Does Filing with the Committee on Corp Financing Need to Occur?
If Filing Required:
15 days in advance of offering date
Except for Intrastate Offerings and Filing under Reg A exemption where 1 business day in advance is required.
No Filing Required For:
* Add-On Offerings
* Straight Debt Issues Rated BBB or better with at least a 4-yr maturity
* Securities registered under Rule 415
* Securities that may be purchased under a Standby Underwriting
* Any Financing Backed Instrument rated BBB or better
35
Issues Required to/Exempt from Filing with Committee on Corporate Financing
Exempt From Filing:
* Private Placements under Reg D with appropriate Rule 144 resale restriction legend
* Open End Mgt Co Shares
* Unit Investment Trusts
* Variable Annuitie
* Issues under Section 14D tender offer
* Competitively Bid Utility Issues
Issues Requiring Filing:
* Equities
* Convertible Debt
* Straight Debt Rated BB or lower
* Direct Participation Programs
* REITs
* Rights
* Intrastate Issues
* Reg A Filings
* Issues of Banks, S&Ls, Charitable Institutions, Common Carriers, even if exempt under the '33 Act
36
FINRA Rule 1530
Only prohibits industry insiders from purchasing IPOs of common stock. It does not apply to new preferred stock or debt issues; secondary offerings; or private placements
37
Unreasonable Compensation or Terms for Underwriters
* Convertible Securities, Options or Warrants granted in an offering exercisable at a price lower than identical publically traded securities
* Options or Warrants with life longer than 5 years
* "Free Stock"
* "Green Shoe Clauses" -overallotment clauses that allow for more than 15% extra shares to be issued
* Agreement giving underwriter the right to handle subsequent offerings for more than 3 years in the future.
* Expense allowances to cover such accountable expenses as overhead, salaries and supplies
* Non-accountable expenses in excess of 3% are expressly forbidden
All Offering Costs (including legal, accounting, and underwriting fees) cannot exceed 15%
38
Rule 145 Reorganizations
Corporate Reorganizations requiring filing of a registration statement:
* involving substitution of one security for another
* merger or consolidation in which existing securities will be exchanged for a new entity
* transfer of assets from one person to another in consideration for the issuance of new securities
Rule 145 Exemptions:
* stock split
* change in par value
* stock dividend
39
Reg MA
Covers required disclosures and procedures for tender offers and takeover transactions
40
Rule 5150
Requires all member firms to disclose all potential conflicts of interest that they may have when rendering a "fairness opinion"
6 items that must be disclosed:
* contingent compensation
* other compensation
* material relationship
* verification of information
* fairness committee
* insider compensation
41
Hart-Scott-Rodino Act
Provides for Federal Review of any possible anti-competitive effects of the merger or acquisition.
Maker of the offer must file with the FTC and Department of Justice Anti-Trust Division
42
Reg AC
Analyst Certification on research reports and public appearances
43
SOX
Major provisions relating to issuers and brokerage firms:
* accounting firm cannot provide consultant services
* accounting firm must report to independent audit committee at the issuer
* CEO & CFO cannot have been employed by auditor with past year
* CEO & CFO must certify to appropriateness of financial statements
* No personal loans to officers
* Speed up disclosures of special events to 4 days (from 15)
* Insiders prohibited from trading during blackout period
* insiders must report trades within 2 days
44
SOX Section 15D
Established Research Analyst Conflict of Interest Rules
45
Reg S
Permits offshore distribution of US securities to non-US residents without registration of the issue with the SEC
...sold outside the US to non-US residents
Resale of securities:
- if offshore, no problems
- if in the US, must either be registered or sold under an exemption (typically Rule 144 or Rule 144A)
46
Trust Indenture Act of 1939
Requires each non-exempt (under '33 Act) issuer of debt who publicly offers an issue of $5,000,000 or more must:
* be sold under a Trust Indenture that spells out the obligations of the issuer
* independent trustee be appointed
* trustee is a fiduciary to the bondholders
* trustee must have combined capital and surplus of at least $150,000 and cannot have conflicting interests with the issuer
Applies to both convertible and non-convertible debt. Does not apply to government or municipal debt.
47
Reg SK vs Reg SX
SK - covers required corporate disclosures in registration statements for offerings of securities
SX - details requirements for the issuer's audited financial statements included in a registration statement.
48
Stop & Limit Orders - Executed When?
OSLOBS (Open Sell Limit & Open Buy Stop) - placed above market and executed in rising market
OBLOSS (Open Buy Limit & Open Sell Stop) - placed below market and executed in falling market
Note only OBLOSS orders are reduced on ex-date.
49
First Market
Exchange Trading
50
Second Market
OTC Trading (OTCBB & Pink Sheets)
51
Third Market
OTC Trading for Exchange Listed Stocks
52
Fourth Market
ECNs/ATSs (listed stocks)
53
Network A Tape
Trades of NYSE Listed Issues (wherever trade took place)
54
Network B Tape
Trades of AMEX (NYSE-MKT) and Regional Exchange Listed Issues (wherever trade took place)
55
Network C Tape
Trades of NASDAQ Listed Issues (wherever trade took place)
56
Reg NMS Rule 605
Requires market centers prepare monthly reports on the quality of their trade executions. Report is posted on each exchange's website.
57
Reg NMS Rule 606
Requires each BD
* disclose payments for order flow (on trade confirm)
* disclose, on request, routing of customer orders for prior 6 months that were "non-directed"
* quarterly report detailing order routing procedures
58
Reg ATS
Requires any ATS
* that display orders to anyone other than ATS employees
and
* with average daily volume in an NMS security 5%+ of agg volume
... Must link with a national securities exchange so the ECN quote is displayed and can be accessed under Reg NMS
59
ADF
Alternative Display Facility - created to display ECN quotes if the ECN was not going to post the quote in an exchange order book.
60
CQS
Consolidated Quotations Service
Provides current price quotes for exchange listed stocks (except NASDAQ), regardless of the source
Also includes quotes for OTC stocks with exchange trading priviledges
Any OTC market maker that trades 1% or more of the trading volume in an exchange listed security in a calendar quarter us obligated to register as a CQS market maker
61
UQDF
UTP Quote Data Feed
| Provides current price quotes for NASDAQ listed securities, regardless of the source
62
Floor Brokers - Prohibitions
Prohibited
* initiate a trade as a principal
* initiate a trade for an account s/he has an interest
* initiate discretionary transactions
Prohibitions do not apply to:
* specialists on the exchange floor
* odd lot transactions
* stabilizing transactions
* bona-fide arbitrage transactions
63
Single Stock Limit Up Limit Down Rule
and
Limit State
Tracks each NMS stock's price movement in 5-minute windows
Tier 1 Stocks (actively traded) - trades that are 5% above/below the average price for the preceding 5 minutes are prohibited for stocks included in the S&P 500, Russell 1000 and specified ETFs
Tier 2 Stocks (less actively traded) - trades that are 10% above/below the average of the preceding 5-minute window are prohibited
Note: Bands are doubled during opening and closing periods and broader bands apply to stocks priced less than $3
If NBO = lower price band or NBB = upper price band, limit state exists
If security remains in limit state for 15 seconds, security enters a 5 minute trading pause
64
Marketwide Circuit Breakers
Level 1 Drop = 7%
Level 2 Drop = 13%
Level 3 Drop = 20%
Results:
Level 1 or 2 Drop before 3:25pm = 15min market close
Level 1 or 2 Drop after 3:25pm = No close
Level 3 drop, anytime = close for rest of day
65
Orders accepted by NYSE and NASDAQ automated trading systmes
NYSE accepts market orders, limit orders, and stop orders. They do not accept stop limit orders
NASDQ only accepts market and limit orders
66
5% Policy
FINRA requires commissions and mark-ups in OTC and exchange transactions be fair and reasonable...5% is a guideline not a rule.
Applies to all OTC and exchange trades
67
Disclosure of Mark-Ups and Commissions
Must be disclosed in all agency trades and all riskless or simultaneous trades.
In principal transactions, mark-ups are required to be disclosed on NASDAQ stocks ONLY.
No requirement to disclose the mark-up in OTC stocks not included in NASDAQ
68
Primary Peg
Order that tracks to the same side of the inside market
- buy tracks bid
- sell tracks ask
69
Market Peg (Reverse Peg)
Order that tracks to the opposite side of the inside market
- buy tracks ask
- sell tracks bid
70
ACT & Display Modifiers
ACT = Automated Confirmation of Transactions service
reports trades for all equity and equity related issues traded OTC (NASDAQ, OTCBB or Pink Sheets)
```
Time of Trade - Reporting - Designation
12 Mid-8am - 8am-8:15am that day - .T
8am-9:30am - 10 sec - .T
9:30am-4pm - 10 sec - no designation
4pm-8pm - 10 sec - .T
8pm-12 Mid - 8am-8:15am next day - as/of
```
Other designations:
.Z trade takes place during regular market hours but reported after 10 second limit (designates "late")
.U for late reports occurring outside of normal market hours. Actual time of trade must be included in the report.
71
Short Interest
FINRA requires members to maintain a record of each outstanding short position in all OTC securities (NASDAQ, OTCBB, and Pink Sheets). Positions reported to FINRA 2x/month (15th and last day), and must be filed within 2 days of the reporting settlement date.
72
Trading Halt Indicators
```
T.1 = Trading is halted, news pending
T.2 = Trading is halted, news is released
T.3 = Trading is halted, news has been released and two times shows (time when quotes will start being displayed and time when trading will resume (5min later - aka 5 min window)
```
73
NASDAQ Market Center
Trading system form NASDAQ Global Market and Capital Market issues only.
74
Disclosure on Customer Confirmations
```
Customer name and address
Firm name, address, and phone
Name of security purchased & CUSIP
Size of trade
Price of trade
Settlement date
Accrued interest (if bond trade)
Commission (if agency trade)
Mark-up (if NASDAQ principal trade only)
Payment for order flow
```
75
Dividend Dates (Stocks)
Declaration Date
Record Date
Payable Date
ex-Date for Cash Dividends in 2 business days prior to record date (if purchase 3-days prior, will be on record to receive the dividend... stock is trading "cum-dividend")
76
Ex-Dates
Cash Dividends - 2 business days prior to record date
Stock Splits - Day after payable date (stock will trade with a due bill from the record date until the pay date - first day without due bill with be ex-date)
77
Bond Trades - Cash Trade Settlement Cycle
same day
78
Decisions of NASDAQ MarketWatch regarding clearly erroneous trade
can be appealed to the Market Operations Review Committee (MORC)
79
Execution of Short Sales of Securities
Can be executed at prevailing market price UNLESS the security has dropped more than 10% in a day...then the stock can only be sold short on an up-bid for the remainder of the day and the next day (up-bid rule)
80
Intermarket Sweep Order
exempt from the "trade-through" rule of Reg NMS
Order electronically sweeps the exchange's limit order book.
An ISO is limit order sent to a particular exchange when another market center is posting a better quote. The recipient exchange is alerted by the ISO the trader will also be sending the ISP to the other exchanges in an attempt to access their better priced orders. The first exchange then is not required to reroute the order to the better priced markets and can attempt a fill, subject to best ex requirements.
81
Exemptions from Reg NMS Trade Through Rules
Intermarket Sweep Orders
VWAP
Block Trades stopped at a guaranteed price
82
Legal List Securities
```
Are applicable to Fiduciary Accounts (one where a third party is acting for, and in the best interests of, the owner of the account). examples are:
Trust account
Guardian account
Administrator of Estate
Executor of Estate
Conservator of Incompetent
Receiver in Bankruptcy
**fiduciary accounts require additional documentation**
```
Generally legal list securities are debt securities rated BBB or better
83
Types of Suitability
Reasonable Basis
Customer Specific
Quantitative
84
Discretionary Accounts
Power of Attorney must be obtained in writing prior discretion being exercised
Each order ticket must be marked as discretionary and must be approved promptly by the principal
85
Joint Tenants with Rights of Survivorship
- Orders can be given by either party
- Mail can be sent to either party
- In the event of death, the other party assumes whole ownership
- Checks are drawn in the full account name (both parties)
86
Pattern Day Trader
Person who engages in at least 4 day trades in 5 business days
87
Definition Market Not Held Order
A market or limit order that gives the broker or floor trader both time and price discretion to attempt to get the best possible price.
88
ACATS
Automated Customer Account Transfer System
If a member firm receives an account transfer instruction it must freeze the account. The carrying member then has 1 business day to validate the positions and 3 business days to physically complete the transfer.
89
Fixed Fee Accounts
vs
Wrap Accounts
Fixed Fee Accounts (non-managed fee based accounts) only cover trading costs. Considered brokerage products
Wrap Accounts include asset allocation and portfolio management. Considered investment advisor products
90
Durable vs Non-Durable Power of Attorney
Both are terminated on death
Durable remains in force if the grantor is mentally incapacitated.
91
SAR
Suspicious Activity Report - Must be filed with FinCEN within 30 days.
92
Timing of Verification of Customer Account Information
Basic customer account information collected at account opening must be sent to the customer for verification within 30 days of account opening
and
sent for verification and updating (if needed) every 36 months.
93
Reg T
Controls credit from broker to customer (sets margin requirements)
94
Reg U
Controls credit from bank to broker
95
Broker Loan Rate
Brokers borrow from banks using customer securities as collateral at the Broker Loan Rate
Interest charged to customers on loans made by brokers is based on the Broker Loan Rate
96
Maximum Amount of Customer Securities that can be Rehypothicated by a Broker
140% of the debit balance
This amount results in the bank almost exactly funding the amount of money loaned by the broker to the customer.
The brokers is prohibited from obtaining a higher loan amount from the bank than he actually lends to the customer
97
Days before new issues can be margined
30 days after issuance. at that point, deemed "seasoned"
98
Reg T extension on payment
Reg T allows a customer to pay promptly, but no later than Settlement + 2 (T+5)
If funds not collected on S+2, an extension must be requested or the position will be sold and account frozen for 90 days.
99
Frozen Account
For 90 days:
- Customer must pay cash in advance for purchases
- Securities for sale must be delivered to broker before th sell order is entered
100
Cheap Stock Rule
For all stocks trading at less than $5/share, minimum margin required is 100% of market value or $2.50/share, whichever is greater.
101
Margin Account Equity Calculation
Long Margin Account
Long Market Value - Debit Balance = Equity
Margin & = Equity/Long Market Value
Short Margin Account
Credit - Short Market Value = Equity
Without a margin deposit equity equals zero at account opening because the credit is equal to the proceeds from the security sold short
(Credit = proceeds from short sale + margin deposit)
(Equity = margin deposit)
102
Frequency of Customer Statements
SEC requires
- at least quarterly, in no transactions
- monthly if transactions have occurred
103
"When Issued" Transaction in a Cash Account
Exempted from payment in full, until securities are issued
* Min maintenance margin amount (greater of 25% MV or $2000) until securities issued
After issuance customer must pay "promptly" (no later than 5 days (settlement + 2))
104
Frequency of Notice of Free Credit Balance
At least Quarterly per Rule 10-b-16
105
Day Trading Account
Min Equity = $25,000
Minimum Margin = 25% of Highest Intra-Day Market Value
Buying Power = 4 x Maintenance Margin Excess
(Maintenance Margin Excess is excess equity above the 25% minimum maintenance margin)
106
Portfolio Margining
Risk based margin method that gives substantially lower margin requirements for lower risk positions
Requirements:
* Sophisticated Investors
* Minimum Account Equity
- Individuals: $100,000
- Prime Brokerage Account: $500,000
- Accounts Carrying Unlisted Derivatives: $5mil
* Account Approved for naked options writing by ROP
* Payments to meet margin calls must be made within 3 days
* Customer must receive Portfolio Margining risk Disclosure Statement and sign an acknowledgement
* Brokerage firm must receive FINRA approval to offer portfolio margins
107
Leveraged ETF Margins
Minimum margin requirement is multiplied by the ETF's leverage
108
Code of Arbitration
Covers disputes between Members about settlements, good deliveries, etc.
Note: Customer/member disputes are handled through arbitration if the customer explicitly agrees to this
109
Code of Procedure
Covers disputes between customers and members
110
Suspended vs Inactive License
Suspended - BAD - if fail to complete continuing ed. Must get relicensed, cannot be paid
Inactive - Okay - License becomes inactive if called up for active military duty
111
Business Continuity Plan Must Be Provided To:
Each new customer at account opening
| Does not need to be provided to FINRA annually
112
Fully Paid Securities
Must be segregated and placed in safekeeping
113
BD Entering into Repurchase Agreements With Customer Allowed Under FINRA Rules?
Only OK under FINRA for exempt (e.g. government bonds) securities
114
When Recommending A Security Disclosure Must Be Made To Customer Of:
Control relationships
Existence of financial advisory relationships
Information received in a fiduciary capacity cannot be used/disclosed
115
Proxy Transmittal
Transmittal costs born by the Issuer
Issuer sends directly to registered owners
For stocks in margin accounts (ie, held in street name), BD is obligated to forward the proxies to the beneficial owner (and is compensated by the issuer for this)
116
Financial Information Provided To Customers on Request
Statement of Financial Condition (not income statement)
| Net Capital Computation
117
Record Keeping Requirements
6 Years
* General Ledger
* Original Entry Blotter (Daily Transactions)
- Purchases & Sales
- Cash Receipts & Disbursements
- Stock Received & Delivered
* Customer Statements
* Stock Record
* SIPC Assessment Records
4 Years
*Customer Complaint Records (at the OSJ)
3 Years
* Other Subsidiary Blotters
* Fail to Receive/Deliver
* Interest & Dividends
* Records of Taped Conversations (Taping Rule)
* Terminated Employees (from termination date) including fingerprints
Timing of Recording on Blotters:
Purchase & Sales - all trades recorded no later than day after trade date
Cash Receipts & Disbursements - all monies must be recorded no later than the business day after receipt of payment
Stock Receive & Deliver - all receipts and deliveries of securities must be recorded no later than the business day after settlement
118
Filing of Retail Communications
Filed 10 days BEFOR first use:
- security futures (options)
- mutual fund with member prepared performance rankings
- bond mutual fund with volatility ranking
Filed 10 days AFTER first use:
- CMO
- publicly traded structured product
- DPP
- Other mutual fund communications
- investment analysis tool template
- broadly disseminated free writing prospectus
All other communications are not required to be filed after first year in business but are subject to spot checking
119
FINRA Suspension
Person cannot work for any FINRA member in any capacity during the period of suspension and cannot be paid by the member during this period.
120
Taping Rule
Taping Rule does not apply if:
* 20+ Reps: Less than 20% associated with disciplined firms during the past 3 years
* 10-19 Reps: Less than 4 associated with disciplined firms during the past 3 years
* 1-9 Reps: Less than 40% associated with disciplined firms during the past 3 years
Firm notified by FIRNA has 60 days to begin complying with the rule (begin taping and adopting procedures to review and take action as necessary)
First time notice - firm may avoid the obligation by reducing its staffing levels to fall below the threshold levels within 30 days.
121
Roll-Up Transactions
LP "roll-up" transactions provide limited partners an opportunity to tender their illiquid units into an MLP or REIT that will be listed and traded.
FINRA limits compensation of member firms to 2% of the exchange value of the newly created securities and compensation cannot be contingent on closing of the offering.
122
Statute of Limitations for Arbitration Claim
6 years
123
Definition Non-Public Arbitrator
Any person who
* within the last 5 years was associated with a securities BD (inc. gov and municipal dealers) or with a commodities firm
* is retired from a BD or commodities firm
* any other professional who has devoted 20% or more of his/her professional work in the last two years to a securities BD or commodities firm.
124
Investment Advisor Definition
A person who receives compensation for advising others about securities, or about the advisability of investing in securities
Excluded from the definition:
* Any person who gives advise solely about US Gov obligations.
* Banks and Bank Holding Companies
* Lawyers, Accountant, Engineers or Teachers whose performance of such services is solely incidentl to the practice of their profession.
* BDs and their registered reps who receive no compensation (services are incidental to the securities business)
* Publishers of bona-fide media
Additional Exemptions:
* Intrastate
* Adviser to Insurance Co
* Less than 15 clients with 12 months
125
Types of Investment Companies
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Face Amount Certificate
Management Company
* Open End Mutual Fund
* Closed End Mutual Fund
Unit Investment Trust
* Fixed UIT
* Participating UIT (Variable Annuity Plan Co.)
```
126
Letter of Intent
Allows customer to receive breakpoints before getting to the required investment level (if customer doesn't complete the required investment needed for the breakpoint, purchases are recalculated on the actual breakpoint level achieved)
Allows:
13-month length
90-day backdate
127
Sales Charges/Breakpoints
Two alternatives under FINRA allowed to charge the maximum 8.5% sales charge:
Purchase Amount (Sales Charge)
$0 -$10,000 (8.5%)
$10,001 - $25,000 (7.75%)
$25,001+ (6.25%)
Purchase Amount (Sales Charge)
$0 -$15,000 (8.5%)
$15,001 - $25,000 (7.5%)
$25,001+ (6.25%)
If rights of accumulation (cumulative quantity discounts) do not meet schedule, then max sales charge 8%
If breakpoints do not meet schedule, then max sales charge 7.75%
If both rights of accumulation and breakpoints do not meet schedule, then max sales charge 7.25%
128
Share Classes
Class A - Most suitable for large investments and long investment horizon
* higher up front sales charge, but no or very low annual 12b-1 fees
Class B - Most suitable for intermediate term investment
* contingent deferred sales charge that declines to 0, but annual higher 12b-1 fees.
Class C - Most suitable for short term investment
* no up-front sales charge, smaller "rear-load", but highest annual 12b-1 fees.
129
Max Sales Charge: Mutual Funds vs VAs
Mutual Funds = 8.5%
| VAs = "fair and reasonable"
130
Frequency of Tax Free IRA Rollover
Once Annually
131
Coverdell Education Savings Accounts
Max Contribution $2000/year with after tax dollars
Distributions to pay qualified expenses are tax deductible
Contributions can be made up to age 18
Distributions must be completed upon reaching age 30
132
Minimum Investment Period for ROTH IRA to qualify for tax free distribution
5 years and beneficiary is 59 1/2 or older
133
Filing Requirements for Subordinated Debt
SEC
* 10 days prior for both temporary and regular
FINRA
* 10 days prior for temporary
* 30 days prior for regular
134
Filing of Clearing Agreement
Clearing Firm - Files with FINRA for review and approval
| Newly Formed Introducing BD - Files with FINRA for review only
135
Special Reserve Bank Account
* Computation must be performed weekly (unless firm meets stringent requirements for monthly computation)
* Deposit required if Customer Credits (funds owed to customers) exceed Customer Debits (funds owed by customers)
* Deposits can only be made in Cash or Gov Securities
* If deposit required, must be made by 1 hour after banks open on the second business day following the computation
136
Reduce to Possession or Control
Customer protection rule includes a DAILY requirement to "reduce all fully paid customer securities and all excess margin securities to possession or control"
Possession or Control means the firm physically has the security or knows the whereabouts of the security.
All fully paid customer securities myst be segregated and placed in safekeeping
137
Excess Margin Securities
Those in excess of 140% of the customer debit balance.
138
Short Securities Difference
Long Securities Difference
Short
* If not found, reduce net capital
* Must be bought in after 45 days
Long
* If not sold, no effect on net capital
* If sold, deducted from net capital
* Must find true owner
139
SIPC Liquidation
In an SIPC Liquidation, the trustee will
* Verify books and record
* Notify firm's customers of liquidation
* Distribute all registered securities
* Distribute all street name securities to margin customers on a pro-rata basis
* Any uncovered claims will then be covered up the the maximum $500,000 in equity, with cash coverage not to exceed $250,000
140
Fidelity Bond Coverage
Firms not members of an exchange and:
* Introducing BD with Net Capital Less than $250,000 = greater of $100,000 or 120% of required Net Capital
* Clearing BD with Net Capital Greater than $250,000 = set by FINRA with minimum coverage of $600,000 for a firm req NC of $250-300k and max of $5mil for any firm with req NC of $12mil+
If member of an exchange, follow the exchange membership rules on fidelity bond coverage
141
Registered Rep Categories
7 - General Securities
11 - Sales Assistant (unsolicited orders, new account info)
22 - Direct Participation Program
55 - OTC Equity Trader (also needs a 7)
62 - Corporate Securities (inc. closed end funds)
86/87 - Research Analyst
42 - Options (Call & Put Only, Also need 62)
52 - Muni Bonds
72 - US Gov't Securities
6 - Investment Co's & Variable Products (Open-End). New (primary) issuance of closed end funds OK (but no trading secondary market)
142
Principal Registration Categories
```
24 - General Securities
4 - Options
26 - Investment Co's/Variable Products
27 - Financial & Operations Principal (Clearing Firm)
28 - Limited Financial & Operations Principal (non-clearing firm)
51 - Municipal Fund Securities
53 - Municipal Securities
79 - Investment Banking
9/10 - General Securities Sales Supervisor
16 & 86/87 - NYSE Supervisory Analyst
14 - NYSE Compliance Official
39 - Limited Principal - DPPS
```
143
Definition Diversified Investment Company (Fund)
At least 75% of assets invested in securities
No more than 5% of assets invested in any one issuer
Holds no more than 10% of an issuer's voting stock
144
Fingerprinting
Rule 17f-2 requires all officers and employees of BDs to be fingerprinted. Except:
* Persons not engaged in the sale of securities
* Persons who do not regularly have access to the keeping, handling or processing of monies, securities, or the records of original entry.
A rep who solely processes customer transactions need not be fingerprinted.
145
Stabilizing Bids
Can only be made at or below the POP, if no current independent bid exists.
If independent market exists, the stabilizing bid cannot be entered any higher than last reported trade (as long as current ask price is equal to or higher than last reported trade)
No time limit on stabilization, but must stop when manager disbands the syndicate.
Cannot be made in an "at the market offering" (where securities are sold other than at a fixed price)
146
U-5
Applicant must provide previously employed at a member firm, must provide a copy to the prospective employer firm in 2 Bus Days.
General Principal must review the U-5 within 60 days if filing a U-4 on a hired individual
Former employer must give, or make available, a copy of the U-5 for FINRA and the ex-employee. It is the employee's responsibility to get a copy to the new BD
147
Securities vs Insurance Product
Securities - purchaser assumes investment risk
Insurance Product - insurer assumes investment risk (e.g., fixed annuity or whole life where return is guaranteed)
148
Notification of Free Credit Balance
Must be made at least quarterly.
However, if monthly statements are provided to the client a notice must be included in each statement.
149
OSJ Responsibilities
* Annual compliance review with each registered rep (review recent regulations, firm policies, etc.)
* Customer account records must be inspected periodically (more frequent than annual)
* OSJ Principal must review and endorse each customer order
* If no Correspondence Compliance Program, then review and endorse each piece of correspondence. / If Correspondence Compliance Program, then only review (not endorse) correspondence.
150
OATS Report
Order Audit Trail System
FINRAs system to electronically capture order information and match it against the resulting trade
Applies to NYSE, NASDAQ, OTCBB and Pink Sheets
151
BD Trial Balance - Frequency Required Under SEC Rules
Must be prepared at least monthly (as part of FOCUS II report)
152
Number of Specialists/DMMs under NYSE Rules
Only ONE Specialist/DMM is assigned the market making function for a given security.
The only time a specialist/dmm can make a market in a security it is not assigned, is if it is acting as a relief or replacement for the regular specialist/dmm firm. This only occurs if the regular specialist/dmm is unable to meet its market making obligations.
153
Security Types Eligible for Inclusion in NASDAQ
```
common stocks
convertible bonds
rights
warrants
put warrants
units that consist of preceding securities
ADRs
```
154
Requirement for an NYSE stock to dual list on NASDAQ
Issuer must meet the NASDAQ initial listing standards
Since NYSE requirements are more stringent, any NYSE listed issuer will meet the NASDAQ standards
155
Keogh Contribution for Employees Calculation
The employee must receive an equal percentage of salary contribution as the employer, based on the employers first $260,000 of salary less his/her keogh contribution
E.g., employer earns 300k and contributes the maximum permitted to the plan.
Percentage allocation for employees equals
$52,000/($260,000-$52,000) = 25%
156
Uniform Practice Rules - Time Limits for Reclaiming Securities with Irregularities
Minor Irregularities = 15 days
Sever Irregularities = 30 months
157
Requirements for transferring assets of a deceased account holder to the name of the estate (or remaining tenants)
Certified Copy of Death Certificate
Letters of Testamentary (court papers or copy of will appointing executor)
Affidavit of Domicile (not required in all states - show the estate to be handled under the laws of the state)
Inheritance Tax Waiver (not required in all states - proof the state has no liens against the estate assets)
158
Reg D
Private Placements Rules 501-506
Can be sold to a maximum of 35 non-accredited investors and an unlimited number of accredited investors
Provides for escalating level of disclosure based on dollar amount of the offering
Rule 504 - up to $1mil
Rule 505 - up to $5mil
Rule 506 - Unlimited dollar amount
Non-accredited investors need to be sophisticated, except for offering under rule 505.
159
MSRB G-37/G-38
G-37
Only applies to negotiated underwritings and advisory services (not to competitive bid underwritings)
Contributions of up to $250 per election if donor eligible to vote....if violate, prohibited from engaging in municipal securities business for 2 years.
Does not apply to clean up contributions
Reports filed quarterly with MSRB detailing contributions (records must be kept for 6 years).
G-38 deals with outside consultants
160
Penny Stock Rule
Exempt if revenues from penny stocks transactions are less than 5%
Rule requires if a firm solicits orders for non-exchange listed, non-NASDAQ issues under $5/share it must complete a detailed suitability questionnaire showing the investment is appropriate for the customer AND customer must sign and return the suitability determination before the transaction can be confirmed.
161
Piggybacking exemption
Allows a new market maker in an OTCBB stock to quote immediately without filing a form 211 IF:
...an existing market maker in an OTCBB issue has met the continue quote rules (quoted the stocks in 12 business days of the preceding 30 with no more than 4 consecutive days without a quote), there exists a "proven" market for the stocks ("active" shows on the OTCBB screen for the stock).
If the original market maker pulls out after another market maker has begun quoting based on the piggybacking exemption, the additional market maker is not required to now file a form 211.
162
Requirements to make a market in an OTCBB stock
SEC Rule 15c-2-11 requires BDs who wish to make markets in non-NASDAQ securities must perform due diligence by obtaining, reviewing and maintaining financial information (10K, 10Q, 8K filings, or prospectus no older than 90 days) on the issuer.
Firm must
- file Form 211 at least 3 bus days prior to the quotation being published
- include in the filing the issuer's name, type of security, where the quote will be published, initial quote price, and basis for determining the price
- general principal must sign the form
