U3 - Key Points

Question 1

When must an established member file retail communications relating to investment company products (mutual funds, UITs, closed end funds, DPP’s, ETF’s)?

Answer 1

Within 10 days of 1st use (post-filing).

Question 2

When must a receiving member firm forward the transfer initiation form (TIF) to the carrying firm?

Answer 2

Immediately.

Question 3

Do member firms need to disclose risk associated with after-hours/extended trading systems?

Answer 3

Yes. Firms must furnish a customer (in paper or electronic form), a disclosure statement highlighting the risk specific to extended hours trading.

Question 4

When do advertisements that contain bond fund volatility ratings need to be filed?

Answer 4

They must be pre-filed 10 days before use and retained for 3 years after last use.

Question 5

If the member places a temporary hold on a customer’s account how, and when, must the member notify affected parties?

Answer 5

The member firm must notify orally or in writing to all parties authorized to transact business in the account of the whole and the reason for the hold within 2 business days of placing the hold.

Question 6

When will a temporary hold on a senior customers account expire?

Answer 6

The temporary hold authorized would expire not later than 15 business days after the date that the
member first placed it unless otherwise terminated or extended.

Note: this could be extended by a regulator, court, etc.

Question 7

When the retail communications relating to options and security futures need to be filed?

Answer 7

These must be pre-filed 10 business days prior to use.

Question 8

If mutual fund advertisements or retail communications include a ranking that is a creation of the mutual fund company or the underwriter, when must they be filed?

Answer 8

Must be pre-filed 10 days prior to use.

Question 9

A limited power of attorney accomplishes what for the client?

Answer 9

It gives a third-party trading authority, but prohibits that party from withdrawing assets from the account.

No, it expires upon mental incapacity or death

Question 10

If the beneficial owner of street name stock returns assigned proxy but fails to indicate how the shares are to be voted what happens?

Answer 10

The member must vote the shares as recommended by management of the issuer.

Question 11

When most customers who are approved to trade options receive their Options Disclosure Document (ODD)?

Answer 11

Customers must receive the ODD AT OR BEFORE THE TIME THE ACCOUNT IS APPROVED to trade options.

Question 12

Under federal rules, the prevailing market price for markups on corporate bonds is based on what?

Answer 12

Absent other information to the contrary, the prevailing market prices the firm’s contemporaneous costs.

Note: the prevailing market price is the same thing as the firm’s contemporaneous cost-or in the case of a sell transaction, contemporaneous proceeds.

Question 13

A suspicious activity report (SAR) filing is required for suspicious transactions involving at least how much money?

Answer 13

$5000.

Question 14

What is the retention requirement regarding a cold call recipients request to opt out of telemarketing calls (do not call list)?

Answer 14

Indefinitely.

Question 15

What factors are taken into account when the principal marks up a transaction?

Answer 15

Under the 5% policy, factors would include dollar amount of the trade, size and difficulty of the trade and any special cost incurred.

Note: actual cost of shares in inventory are not a factor.

Question 16

If a member firm, or any financial institution, receives actual currency (cash) in an amount of more than $10,000 on a single day, how and when do they need to report this event?

Answer 16

Financial institutions are required to file a Form 112 within 15 days of receiving the currency

Question 17

Who approves a firm’s anti-money laundering program and how frequently does this need to happen?

Answer 17

Senior management of a firm approves the anti-AML program annually. It must be reviewed by an independent examiner who is knowledgeable in the Bank Secrecy Act

Question 18

When does retail communication/advertising for investment company securities (mutual funds) need to be filed if it includes a ranking by an independent entity?

Answer 18

Within 10 days of 1st use (post-filing) is okay.

Question 19

A retail “not held” order, in the absence of instructions to the contrary, is considered what type of an order?

Answer 19

A day order.

Question 20

How long does the carrying member, after receiving account transfer instructions from the receiving member, have to validate the positions in the account?

Answer 20

They have one business day following receipt of the Transfer Instruction form (TIF).

They have 3 days to effect the transfer.

Question 21

A member firm must provide FINRA and update any change in emergency contact persons within how much time?

Answer 21

30 days.

Question 22

How often do firms need to conduct anti-money laundering training?

Answer 22

On an ongoing basis.

Question 23

After opening a new account, how many days is a firm has to provide the customer with a copy of the account record?

Answer 23

30 days.

Question 24

If retail communication has already been filed with the registered stock exchange, what type of filing with FINRA is required?

Answer 24

Nothing. Filing with FINRA is not necessary if it’s already been filed with the registered stock exchange.

Question 25

Members must file a Suspicious Activity Report (SAR) within how many days of becoming aware of the suspicious transaction?

Answer 25

30 days.

Question 26

What happens in a partnership account if one partner dies?

Answer 26

The partnership account is automatically frozen until a new or amended partnership agreement is received.

Question 27

If an RR chooses time and/or price for a trade is that considered discretion?

Answer 27

Price and time of execution would not require previous approval and is not considered discretion under FINRA.

Note: Which security and the number of shares would require discretion.

Question 28

If the firm, in a research report, wishes to boast its winning recommendations, what is it required to do under FINRA?

Answer 28

It must provide balance by disclosing ALL selections of a SIMILAR investment class and suitability over a 12 month period.

Question 29

How frequently must affirm test and review their AML compliance program? Who does this need to be conducted by?

Answer 29

AML compliance programs should be tested ANNUALLY. It needs to be independently tested from those people involved in AML compliance at the firm.

Question 30

Regarding the PATRIOT ACT, procedures for verification and identification of customer accounts should be applied to what type of customers?

Answer 30

All NEW customers-whether individuals or businesses.

Question 31

When can members join with nonmembers in the underwriting of securities?

Answer 31

Members can join with non-members for exempt securities-like US government municipal debt obligations

With regard to the domestic underwriting of nonexempt securities (such as corporate bonds), all members of the underwriting group must be federal members.

Question 32

Who sets breakpoints for mutual funds?

Answer 32

The fund itself, through the managing underwriter of the fund.

Question 33

Under the Patriot Act, records relating to the verification of customers identity must be retained for how long?

Answer 33

5 years.

Question 34

When should accounts that are acquired through the acquisition of another member firm be subject to the customer identification procedures?

Answer 34

They don’t need to. It can be presumed that the other member fulfilled its obligation.

Question 35

What are the 2 services that members cannot charge customers for?

Answer 35

Providing research and for forwarding proxy material.

Please note that the issuer actually pays for the cost of forwarding proxies but the member handles it.

Question 36

If the member chooses the price or timing of an order, it is not discretionary, but rather, it is termed what type of order?

Answer 36

A “not held” order.

Question 37

Holding a customers mail is acceptable under what circumstance?

Answer 37

The member receives written instructions from the customer that includes the time. For holding the mail.

Note: if the requested time. In the instructions is longer than 3 consecutive months, the customers instructions must include acceptable reason for the request (e.g. safety or security concerns).

Question 38

When do confirmations for DVP/RVP trades need to be delivered to customers?

Answer 38

No later than T +1 .

Question 39

With the Tenants in Common (TIC) account, the death of a tenant requires that the member firm do what?

Answer 39

The member firm needs to freeze the account and acceptance of orders until the required documents are presented.

Question 40

With the Joint Tenants with Rights of Survivorship account, the death of a tenant requires that the member firm do what?

Answer 40

With a JTWROS account, the death of one tenant does not preclude the remaining tenet from entering orders.

Question 41

With regards to Regulation S-P, firms need to take identity theft seriously and have adequate safeguards in place. What methods are allowable for members to provide an opt out notice?

Answer 41

Electronic means are fine if a customer has agreed to electronic delivery of information, and a toll-free number the customers may call.

Note that the SEC has stated that members are not providing the reasonable means topped out if the ONLY method to do so is by writing a letter to the member.

Question 42

Free credit balance notification is required how frequently in ACTIVE accounts?

Answer 42

Monthly.

Question 43

What is the default notification requirement for free credit balances?

Answer 43

Quarterly.

This is the same as INACTIVE accounts. The only exception is that if the question specifically says active. Then it’s monthly.

Question 44

In reviewing an order ticket, a principal might discover that a RR solicited a clearly unsuitable trade for a customer. Under what circumstances me a customer recind the trade.

Answer 44

An offer of rescission must be made by the firm, to the customer, in WRITING and include an agreement to: buy back the securities for the original consideration paid and pay interest to the customer based on cost from date of purchase to date of repurchase.

Question 45

Offers of rescission must be accepted or rejected by the customer within how many days?

Answer 45

30 days. They must accept or reject it or they give up the right to future legal action regarding the purchase.

Question 46

FINRA adopted a rule (Rule 2121) also known as the 5% policy. What type of transaction does this apply to?

Answer 46

It applies to both agency and principal transactions. It applies to markups, markdowns and commissions but NOT to securities sold by prospectus.

Question 47

What is a Proceeds Transaction and how does the 5% policy applied?

Answer 47

When a customer enters in order to sell and instructs the RR to use the proceeds to buy something else, Finn reviews this as a single trade for markup commission per purposes.

To calculate the markup do the following: determine the compensation earned on the sell side add the compensation of the buy side and apply the total to the inside market on the buy side (the 2nd trade).

Question 48

In a dominated/controlled market markups and markdowns are determined by what?

Answer 48

Members cost.

Question 49

In an INACTIVE market, markups and markdowns are determined by what?

Answer 49

Contemporaneous sales to other dealers (markups) or contemporaneous purchases from other dealers (markdowns).

Question 50

In an ACTIVE and competitive market markups and markdowns are determined by what?

Answer 50

Markup is computed from the inside offer (the MM is selling and the customer is buying)

Markdown is computed from the inside bid (the MM is buying and the customer is selling).

Example: inside market is $31.25 by $31.30.

If the customer is selling, the market maker is buying at $30.70 net, the markup would be $.55-based on the highest bid.

The customer is buying, meaning that the market maker is selling at $31.80 net, the markdown is $.50-computed from the inside offer of $31.30.

Question 51

What is “Structuring”?

Answer 51

It refers to handling currency transaction the way designed to avoid reporting requirements.

Question 52

What is the retention requirement of SAR filings and related documentation?

Answer 52

5 years from the date of filing.

Question 53

Of the 3 stages of money-laundering: placement, layering and integration, which stage is the easiest for a member to detect/get in front of?

Answer 53

The placement stage. The act of moving money through otherwise legal accounts and institutions.

Question 54

FinCen will email BDs, banks and other financial institutions to provide a list of available people and businesses that are subject to a high level of scrutiny by law enforcement. The firm will then to compare this list with the firm’s list of customers to see if there is a match. If there is the firm is required to respond to the 314 (a) request within what time frame?

Answer 54

14 calendar days.

Question 55

How often is customer account information updated by a member firm?

Answer 55

Every 36 months.

Question 56

What is the threshold regarding the number of people that a communication is distributed to that characterizes it as a “retail communication”?

Answer 56

26 and more customers.

Note: communication to 25 or fewer is considered correspondence and prefiling is not required

Question 57

Under federal rules, discretionary accounts must be reviewed when?

Answer 57

FREQUENTLY.

Note: non-discretionary counts must be reviewed PERIODICALLY.

Question 58

Before opening a securities account, the Department of Treasury requires RRs to get 4 critical pieces of information about a customer’s identity. What are they?

Answer 58

Customer name, address, Social Security number and date of birth.

Question 59

Member firms must provide an updated customer account record to a client how many days after a change in investment objectives?

Answer 59

30 days.

Question 60

Firms may not make telephone solicitations to persons on the National Do Not Call list with 3 exceptions. What are they?

Answer 60

The firm has an established business relationship with the recipient of the call, the firm has obtained the person’s prior written consent, or the person making the call has a personal relationship with recipient of the call.

Question 61

Pursuant to the do not call rules, and “established business relationship” exist if the person to be contacted has had an account with the member within what time frame preceding the call?

Answer 61

18 months.