Supervising Associated Persons (APs) Flashcards
True / False: Outside Business Activities require prior notification and approval before an associated person can engage?
False
1) only applies to Registered Reps
2) only requires prior notification (permission not needed)
The rules of Outside Business Activities applies to
registered reps only
If a RR is engaged in an outside activity and does NOT receive compensation, what is their duty?
No duty - not an outside BUSINESS activity. Can freely engage
If a RR is engaged in an outside activity and DOES receive compensation, what is their duty?
Duty to provide firm prior notification (but does NOT need permission)
True / False: Private Securities Transactions rules only apply to registered reps
False
Applies to any associated person (broader than RR)
What are two theories of insider trading?
Misappropriation - trading on information that has been misappropriated
Duty of trust - trading on information that is known or should be known to be confidential (i.e. an M&A banker trading on MNPI)
True / False: Insider trading only comes with criminal penalties?
False, violations of insider trading laws can result in both civil and criminal penalties
What are the civil penalties for violating insider trading laws?
The GREATER of $1mm or treble damages (3x the value of profits earned / losses avoided)
What are the criminal penalties for violating insider trading laws?
For WILLFUL violations
For natural persons - up to 20 YEARS in prison and / or a $5mm fine
For non-natural persons - fine up to $25mm
What policies and procedures must a BD take to prevent the misuse of MNPI?
1) information barriers (physical and electronic)
2) restricted lists - lists of securities where firm has MNPI and no one at firm can trade
This plan allows insiders to purchase and sell secures on a PRE-ARRANGED basis to avoid allegations of insider trading liability (safe harbor)
10b5-1 plans
What are the three key components of a 10b5-1 plan?
1) a binding contract (before possessing the inside information)
2) specific instructions (number of shares, prices, and trading dates - formulae ok)
3) No influence over the trading once set (set and forget)
True / False: 10b5-1 plans must be disclosed to the public
false - no need for public disclosure
However insiders file form 4s after the fact
True / False: in general it is permissible to make personal loans to clients
false
Can a RR make a personal loan to / take a loan from a family member (broadly defined)?
Yes and can do so FREELY
Can a RR make a personal loan to / take a loan from a bank / financial institution (i.e. savings account / mortgage)?
Yes and can do so FREELY
Can a RR make a personal loan to / take a loan from outside personal (friends) or business relationships?
Yes BUT only with permission of BD
Can a RR make a personal loan to / take a loan from other registered reps at the BD?
Yes BUT only w permission of BD
If a AP of BD A wants to open a securities / brokerage account at BD B, what steps must be taken?
1) AP must receive prior written consent of its BD
2) Opening firm (the “executing member”) must send duplicate trade confirmations and account statements to BD A upon written request
BD accounts limited to the following securities do NOT require permission or duplicate statements / confirmations
1) mutual funds
2) variable contracts (annuities)
3) 529 plans
In order to share in a joint account with a client, what kind of permission is required?
1) permission from the customer (that they want the account)
2) permission from the BD (that they are ok with the arrangement)
True / False: In joint accounts w clients, sharing in gains and losses must be proportionate
True - generally speaking
What are circumstances where the sharing in gains / losses need not be proportional?
1) if a RR is sharing an account with a family member (narrowly defined)
2) hedge funds / investment companies (meeting certain requirements)
This regulation requires public companies to disclose material, non public information to investors on an equal basis
Reg FD
True / false: a Reg FD disclosure is required if information is given to individuals with a “duty of trust” to the reporting company (i.e. investment bankers)
False
True / false: a Reg FD disclosure is NOT required if information is given to individuals executing an NDA prohibiting trading on such information
true
True / false: a Reg FD disclosure is NOT required if information is given to journalists and other members of the press
true
For intentional disclosure, Reg FD requires disclosure to all investors
immediately / simultaneously
For UNINTENTIONAL disclosure, Reg FD requires disclosure to all investors
”promptly” i.e. w/in 24 hours OR before open of trading on the next business day WHICHEVER IS LATER
True / false: a violation of Reg FD can lead to criminal penalties
false - a violation can lead to civil but not criminal penalties
Civil liabilities for COMPANIES found in violation of Reg FD are
The SEC may issue a cease and desist order
A civil action injunction
Monetary damages from $250k to $1mm (willful misconduct)
Civil liabilities for INDIVIDUALS found in violation of Reg FD are
Cease-and- desist order
Aiding and abetting
Monetary damages of $50k
What are the four conditions required to get safe harbor (Rule 10b-18) in connection with issuer share repurchases?
1) must use a single BD PER DAY to buy back shares
2) PER DAY buy backs may NOT occur at opening at trading or the last half hour of trading (for highly traded, large stocks, last 10 mins)
3) May not purchase at a price higher than 1) highest independent published bid or 2) last independent transaction price (whichever is higher)
4) may repurchase UP TO 25% of the ADTV (determined over a 4 week period)
Upon discovering a violation or insider trading a BD must submit written report to FINRA in how many days?
5 BUSINESS days
What involves the offer to sell securities by an AP which are not offered for sale by a BD?
A private securities transaction (PST)
“Selling away”
To effect a private securities transaction (PST) what must occur (3 things)?
1) prior notification by the RR to a s24 principal of the BD
2) approval from the s24 principal to engage in the PST
3) the ability for the BD to record the transaction on its books / record
True / false: a list of shareholders obtained by a BD in a fiduciary capacity (e.g., to deliver proxies) CAN be used to solicit new business
false
True / false: under Reg FD a CEO may disclose MNPI to an analyst if there is an NDA in place with the analyst
true
When can insiders modify / amend 10b5-1 (insider trading) plans?
only when they are not in possession of any inside information (e.g., the window immediately following quarterly earnings announcement)
When a person becomes an insider (executive, board of directors, >10% shareholder) what form must they file AND by when?
must file Form 3 within 10 days of becoming an insider
