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Series 53 > Unit 3-Sales Supervision > Flashcards

Unit 3-Sales Supervision Flashcards

1
Q

Rule G-17

A

Muni firms must deal fairly with all persons and not engage in deceptive practices

  • This rule also applies to statements made by underwriters
  • Dictates the need for detailed WSPs
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2
Q

Form A-12

A

Electronic form used to:
-Initiate the registration of a muni dealer before conducting muni business (effective in 45 days)
-Initiate registration as a muni advisor
-Update material changes within 30 days
-Affirm registration info during Annual Affirmation Period
-Notify MSRB of intent to withdrawal muni business
-Identify key personnel: Regulatory contact, account administration, billing contact, CCO, and data quality analyst
NOTE: If a firm withdrawals registration voluntarily, or due to ban or suspension, it must file A12 promptly. All remaining dues must be paid at time of filing

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3
Q

Required Disclosures on A12

A
  • Name, Address, and Website
  • SEC ID, Muni advisor ID (if applicable), and CRD #
  • Org Type
  • Intended Activities (muni fund, trading, muni advisor activities)
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4
Q

G-27

A

Mandates supervision of those involved in municipal business to comply with SEC and MSRB rules

  • Requires new hires submit a U4 to be signed by a S53 or S24
  • Also states that anyone disseminating correspondence not pre-reviewed must be properly trained on relevant regulations, policies and procedures and that this education be documented and retained in the firms records. These procedures must be monitored and tested
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5
Q

U4 Required Info

A

-Name, Address, SSN, DOB
-10 years of employment
-Residency last 5 years
-Any denials, suspensions, revocations
-Any disclosures/injunctions relating to money (forgery, bribery, counterfeiting, etc)
-10 years of securities related convictions
-Other criminal disclosures (including charges)
-Any aliases
-Any bankruptcies, liens, refusal of fidelity bond
NOTE: BDs must dig into at least the last 3 years of an applicant’s history for accuracy

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6
Q

How long do U4s need to be kept?

A

3 years after end of employment

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7
Q

Reporting changes to U4

A

Must be done within 30 days of event

NOTE: Marriage and education do not need to be disclosed

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8
Q

How long does a BD have to respond to another BD regarding info of a former employee?

A

10 business days of receiving request

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9
Q

G-44

A

Mandates that municipal advisors maintain up-to-date WSPs and have a system in place to regularly test them
-Mandates the need for a dedicated, competent CCO
-WSPs must document supervisory principals and their responsibilities
NOTE: The CCO may serve other roles within the firm, so long as he can dutifully carry out his role as CCO as well

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10
Q

Minimum Number of Principals (and exceptions)

A

Each muni BD must have at least 2 muni principals (S53) unless
-Firm is registered with another SRO (FINRA) and does other general securities business
-The are 10 or fewer people performing muni securities activities
-Bank municipal dealers
NOTE: A qualified S7, S52, or S24 (9/10) can act as MSP so long as they pass the S53 within 90 days (Brett was right)!
NOTE: In the event one of the above exceptions applies, at least one S53 is needed

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11
Q

Who monitors overall compliance?

A

S53

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12
Q

Who can handle a customer complaint?

A

S53 of 9/10

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13
Q

Who can approve new accounts?

A

S53 of 9/10

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14
Q

Who can perform branch examinations?

A

S53

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15
Q

Who can maintain books and records?

A

S53

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16
Q

Who can supervise processing and clearing of muni transactions?

A

S53

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17
Q

Who can review new accounts, trade activity for discretionary accounts, correspondence pertaining to the solicitation of muni business, and 529 plans?

A

S53 or 9/10

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18
Q

What is a 9/10 prohibited from doing?

A
  • Underwriting
  • Approving advertisement
  • Trading
  • Pricing inventories
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19
Q

Series 51

A

Common in FINRA BDs who do not do muni business and who do not have a staffed S53
-Can supervise sale of municipal fund securities
-Must be used in conjunction with a S24 or S26
NOTE: A S51 can be used as a required number of principals for municipal securities firms.
NOTE 2: If a firm is only dealing in muni fund securities, the 2 required principals can be S51s

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20
Q

Series 27/28 (FinOp)

A
  • Not required by MSRB. But if the firm is registered with FINRA as well, a FinOp is required
  • Prepare financial reports
  • Maintain books and records
  • Review processing and clearing functions of firm
  • Provide safekeeping of firm records
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21
Q

Municipal Advisors

A

-Provide advise to state and local entities as well as hospitals, colleges, and 529 plans
-Solicit business from municipalities such as pension funds, LGIPs, 529 plans on behalf of BDs, Muni Advisory firms, and RIAs for investment banking activities, financial advisory, and investment advisory work
-Also known as consultants, finders, 3rd party marketers, or placement agents
NOTE: Muni advisors cannot be a municipality or an employee of a municipality

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22
Q

Forms MA and MA-1

A

Required forms that are submitted by municipal advisory firms to designate their muni advisory representatives. Also includes fees

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23
Q

Series 50

A

Municipal Advisor Representative (like the 52)

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24
Q

Series 54

A

Municipal Advisory Principal (like the 53)

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25
Q

Series 52

A
  • Underwriting, trading, and sales of muni securities
  • Financial advisory or consulting services to new muni issues
  • Research and investment advise in regards to municipal securities
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26
Q

How long does an aspiring S52 have to pass the exam?

A

Within 180 days of association with a municipal firm (or face termination)
-Waivers are extremely rare
NOTE: The trading/sale of packaged muni securities (UITs, muni bond fund) cannot be done by a S52 alone. They must also have either a S6 or S7
NOTE 2: A S6 does not need a S52 if the are only selling muni fund securities (mutual funds)

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27
Q

Requalification

A

Required if you have been out of the industry for 2+ years (exception is made for military service)

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28
Q

Rule G-4: Statutory Disqualification

A

-Expelled or suspended from an SRO
-Subject to an SEC order suspending or revoking registration
-Caused suspension/expulsion of another firm
-Willful filed false, misleading, or omitting U4
-Has been denied registration by an SRO
-Has been convicted of any securities/money offense in the last 10 years
-Any felony conviction
-Has been temporarily/permanently enjoined from engaging in securities business
NOTE: While a dismissed felony charge is not disqualifying, failure to disclose it could be

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29
Q

G-5

A

States that if the SEC or any SRO has placed a restriction on any muni BD, AP, they cannot attempt to circumvent said restriction(s)

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30
Q

Reg Ed CE

A

Must be done within 120 days of 2nd registration anniversary and every 3 years after (e.g., 2, 5, 8)

  • Content is selected by FINRA
  • If not done within 120 days, registration is suspended until completed
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31
Q

Firm CE

A
  • Required annually for all registered persons who have direct contact with the public
  • Should consider new regulatory developments, the firms business, and supervisory needs
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32
Q

Updating Procedures

A

A firm that wants to add muni securities business to its practice must be able to prove to FINRA that it can satisfy all requirements
-This is demonstrated through amended WSPs

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33
Q

How often to WSPs need to be reviewed?

A

At least annually to determine overall compliance with SEC and MSRB rules

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34
Q

How long do muni firms have to keep records of their designated principals?

A

6 years per MSRB

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35
Q

Tape Recording of Registered Persons

A

If a muni firm hires people from a previously disciplined firm (expelled by an SRO or subject to an SEC suspension) they may need to record phone calls relating to telemarking activity

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36
Q

Tape Recording Thresholds

A

5-9 Registered Persons 40%+ from disciplined firm
10-19 Registered Persons 4+ from disciplined firms
20+ Registered Persons 20%+ from disciplined firms

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37
Q

Rule 17f-2: Fingerprinting of Personnel

A

The following people must be fingerprinted:
-Those applying for registration
-Those who handle customer funds and securities (also applies to transfer agent employees)
-Those who prepare firm’s books and records (blotters)
-Anyone who supervises the above listed
NOTE: Prints are sent to FINRA for review

38
Q

What happens if fingerprints are not sent to FINRA

A

If not received within 30 days of filing of U4, registration will be changed to “inactive prints.”
-The AP must cease all business until prints are received and documented in WebCRD
NOTE: A person who is not registered but has access to the firm’s books and records may also need to be printed. These are known as NRFs
NOTE: If an NRF leaves the firm, there is no required filing to FINRA unless the reason was due to a statutory disqualifying event

39
Q

Additional Fingerprint Rules

A

If the prints submitted to the FBI are illegible, the firm must promptly resubmit again (up to 3 sets).
-The 3 sets cannot all be submitted at once
-Interns do not need to be printed unless they have access to books and records, securities, and customer funds
NOTE: If fingerprints are rejected 3 times, the AP is exempt from the fingerprint requirement. The prints must be in black ink and signed by the AP and the person taking the prints
NOTE: Outside partners/directors with no direct involvement with the firm other than contributing capital are still considered APs and need to be printed

40
Q

How long do fingerprint records need to be retained?

A

3 years after employment or associated ends

41
Q

Form U5

A
  • Required by FINRA to be submitted by a member when an employee resigns or is terminated
  • Must be submitted within 30 days of term date
  • Copy must be sent to former employee within 30 days
  • Must disclose reason for term and specify details (in the event of termination/permitted to resign)
42
Q

Complaint Liability Post-Termination

A

Per FINRA, termed APs are subject to complaint filings for 2 years after they leave the industry
-If found credible, the termed AP may be suspended from registration with another firm
NOTE: If the complaint is regarding criminal activity (fraud, embezzlement, theft, etc.), the SEC and criminal justice system can pursue charged long after the 2 years specified by FINRA

43
Q

Amending a U5

A

If the former employer discovers their originally filed U5 is inaccurate or incomplete, and amended U5 must be filed and copy sent to the former employee within 30 days of the discovery of inaccuracy/omission
NOTE: There is no statute of limitations for filing an amended U5

44
Q

U5 Rules for AP Leaving to Join Another Firm

A

-New employer must obtain old employer’s U5 within 60 days of filing new U4

45
Q

Who delivers U5 to new employer

A

Typically, the new employee is not required to provide U5. The new firm should obtain U5 from the CRD

  • However, if the new employer asks the new employee for U5, he must deliver it within 2 business days of request
  • If a U5 was never provided, the employee must request it from previous employer and then forward to new employer within 2 business days of receipt
  • All amendments to the U5 sent to the former employee must be promptly sent to new employer if one is received
46
Q

G-20 Gifts and Gratuities

A

BD gifts are limited to $100/year/person (excluding their own employees

  • Payment for services rendered is allowed
  • Occasional meal tickets, entertainment tickets are allowed
  • Sponsorship of legit business functions is also allowed (e.g., business lunch)
47
Q

Guarantees Against Loss

A

Not permitted in any occasion

-APs may disclose the advantage of puttable bonds and protective calls/puts to hedge existing position

48
Q

Repurchase Agreement

A

NOT a guarantee against loss

  • Client lends money to BD and loan is collateralized with exempt securities (US bonds or munis)
  • The BD then repurchases the securities at a premium at a preset date and price
  • Cannot be conditional on any market activity
49
Q

Sharing in Customer Account

A

Only permitted if:
-Preapproved by a S24 or S53
-Profit and loss is shared as a proportion or contribution
NOTE: The proportional rule is not mandated if the client is an immediate family member of AP. However, account would still need to be preapproved by a principal

50
Q

Info Obtained in Fiduciary Duty

A

Fiduciaries to a issuer often obtain client info. This info cannot be used to solicit business unless the issuer gives consent
-Fiduciaries may be: underwriters, paying agents, transfer agents, bond indenture trustee, etc.

51
Q

Advertising

A

Any printed material made to clients or the public that is promotional in nature
-Includes: Form letter, circulars, seminar texts, market letters, description of the BDs products and services, abstracts of OS and POS

52
Q

What is not Advertising

A
  • General list of available securities

- Issuer OS or POS

53
Q

Disclosing Yield in Advertising

A

Ads cannot show current yield unless YTM or YTC is also disclosed
-If YTC is shown, call date and price must also be shown

54
Q

Advertising Bonds BD does not have

A

Allowed so long as the ad states “Subject to Availability” and “Prices and Yields Subject to Change”
NOTE: BD cannot advertise bonds it knows are not available

55
Q

Advertising New Issues

A

A syndicate can advertise initial reoffering price/yield for new issues so long as the piece contains the date the syndicate purchased bonds from the issuer
-This date is the date of sale (competitive) or the date contract was signed (negotiated)
-If the prices/yields advertised differ from the initial reoffering yield/price, the ad must disclose the new price/yield as of the date the ad was submitted for publication
NOTE: Muni Funds are exempt from these rules

56
Q

Municipal Fund Advertising and Disclosures

A

Must disclose in some way:

  • Investors should carefully consider objectives, risks, fees, etc.
  • More info is available on issuer’s OS
  • Where to find OS
  • If BD is underwriter
  • Investor should read OS carefully
57
Q

More Muni Fund Advertising Rules

A
  • An OS may not have been provided by issuers exempt from 15c2-12
  • If a 529 product, inform investors should consider their state residency and potential tax implications
  • If advertised as a money market, the security is not FDIC insured, that NAV may fall below $1, and that the investment could lose money
58
Q

Performance Date in Muni Fund Advertising

A
  • Past performance does not guarantee future results
  • Unless total performance is shown and the ad is disseminated within 7 business days before first use, a telephone number or website must be provided where total return can be obtained
  • Maximum amount of any potential load/fee
  • If performance data does not factor in loads/fees, this must be disclosed (font must be different, but just as prominent as the rest of the piece)
  • Any listed advantage of a muni fund should also list potential disadvantages/risks in close proximity, and no less prominent than advantages
59
Q

Who approves advertisements? And when?

A

-Either a S53 or S24 prior to first use

60
Q

Tax Advantages in Advertising

A
  • Must not be misleading
  • Must also state tax advantages may be conditional (state residency)
  • May say interest is exempt from federal tax, but must also say subject to AMT
61
Q

Advertising Products and Services

A
  • Ad must clearing name firm providing products and services

- If a 3rd party is mentioned in the ad, the relationship between the 3rd party and BD issuing the ad

62
Q

529 Ads

A

-Before investing, client should consider tax advantages/disadvantages depending on state residency
NOTE: This is not required if the ad is only sent to the residents of the state and pertains to issues of that state

63
Q

Availability of MSRB Rules

A

Must be made available (upon request) where the following activities take place:

  • Underwriting, trading, selling muni issuer
  • Financial advisory/consulting services for issuer
  • Research or investment advise regarding munis
  • Activities that involve indirect or direct communication with the public
64
Q

MSRB Rules Format

A
  • Soft cover
  • Loose Leaf
  • MSRB website or software where they are contained (screen must be provided if digital)
65
Q

Telemarketing Rule

A
  • Only between 8:00AM and 9:00PM in called persons time zone

- Not applicable if one BD is calling another OR there is an existing business relationship

66
Q

Established Business Relationship Definition

A
  • The person made a transaction, maintains a balance or positions, or other activity within the last 18 months preceding call
  • The person proactively called the BD about products and services within last 3 months
  • The person has an account with the BD within last 18 months (does not extend to BD affiliates)
67
Q

Safe Harbor Provision (Do Not Call Violation)

A
  • Must be an honest error
  • The BD has WSPs addressing DNC List
  • The BD has trained its personnel regarding DNC List
  • The BD maintains a list of numbers it cannot call
  • The BD does not use a version of the DNC List beyond 31 days
68
Q

Process for Adding Name to DNC List

A
  • BD must record request and immediate document phone number and name (if given)
  • The BD must honor DNC request within 30 days
  • If a 3rd party handles a BD’s DNC List, the BD is ultimately responsible for any violations
69
Q

Disclosures by Telemarketers

A
  • Name of caller and BD
  • Address or toll-free telephone number by which BD may be contacted
  • Purpose of call is to solicit securities business
70
Q

How long must DNC Requests be Honored

A

5 years from date request was made

71
Q

Who approves AML programs?

A

A member of the firm’s senior mgmt. annually and when any changes are made. If the approving manager leaves the firm, the new manager should re-certify upon appointment

72
Q

How do firms identify CCO, AML officer to FINRA?

A

Through FINRA Contact System (FCS)

  • Name, title, mail, email, phone, & facsimile number
  • Firm must report any changes within 30 days
  • Firm must reverify annually 17 business days after calendar year end
73
Q

Who audits AML program? How often?

A

Annually by an outside auditor who is familiar with the BSA and relevant regulation based upon it

74
Q

CTR (Form 112)

A

Mandated through FinCEN, which is a subsidiary of Dept. of Treasury.

  • Filed electronically
  • Any cash deposit of 10K or more in a single day
  • Failure to report can result in 500K fine and/or 20 years
75
Q

How long are CTR records kept?

A

5 years

76
Q

When must CTRs be filed?

A

Within 15 calendar days of the deposit

77
Q

Who investigates CTRs?

A

FED and Dept. of Treasury

78
Q

Wires (CTR Purposes)

A
  • Any amount or 3K or more
  • Name and address of sender and recipient
  • Name and account at receiving firm
  • Amount
79
Q

Staged of Money Laudering

A

Placement, Layering, Integration

80
Q

Interdealer Transactions

A

Must be reported to NSCC by both firms of trade date

  • Includes names of both firms
  • If settlement date is known, accrued interest must also be disclosed
  • Time of trade
  • Securities lacking a CUSIP do not need to be reported
  • If a introducing broker places trade that is cleared through another firm, the introducing BD is still responsible for reporting transaction
81
Q

What transactions are exempt from assessment?

A
  • Maturing in 9 months or less

- Bonds that can be tendered/put at least every 9 months until maturity

82
Q

Supervision of 529s (selected items)

A
  • Form BD must be amended to declare firm as muni BD
  • Notify MSRB of new status and pay $1000 fee
  • File A-12
  • File with SIPC (of not already)
  • Obtain fidelity bond
  • File quarterly G-37 for political contributions
  • Provide new customer with OS and existing customers new, amended, or stickered IS
83
Q

What licenses supervise 529s?

A

Since April 1, 2003, a 53 or 51. Before that, a 24 or 26 could supervise for firms whose only muni business is exclusively 529s

84
Q

529 Suitability Considerations

A 
A questionnaire and/or written analysis should be conducted per firm's guidelines
-General objectives and risk tolerance
-Tax consequences
-Plan limitations
-Investment options
-Share classes
-General investment knowledge
-Contributions
NOTE: If your firm does not provide a 529 that matches customer's objectives, you can advise them to consider buying a plan direct or referring to other BD
85
Q

Reporting Customer Trades

A

Required of all BD unless a muni fund security or a bond with no CUSIP

  • CUSIP
  • Date and time of trade
  • Executing BD symbol
  • Whether BD was buyer or seller
  • Par
  • Dollar price (excluding commissions)
  • Yield
  • BD was agent or principal
  • Settlement (if known)
  • Commission (as its own line item)
86
Q

Arbitrations

A

Since 2002, the MSRB refers all arbitration matter to FINRA

87
Q

Markups and Markdowns (Principal Transactions)

A

Markups/Downs must be fair and reasonable and should consider:

  • Fair market value at time of trade
  • Total dollar amount of transaction
  • Any special handling requirements
  • Fact dealer is entitles to profit

EX. If a firm buys (from another BD or customer) a security and ends up paying more than fair value, it is a violation to then pass its miscalculation on to another customer

NOTE: A thinly traded issue does not exempt BDs from diligently determining fair value
NOTE 2: The fair pricing requirement is not applicable for sophisticated muni market professionals

88
Q

Reporting Retail Order Period Trades (new issues)

A

Executing BD must report to EMMA:

  • Was client eligible for retail order period?
  • Was the order for a client already conditionally committed?
  • Did the BD receive more than one order from the same customer for the same CUSIP?
  • Any identifying info about the client (but not including SSN or client name)
  • Par value of the order
89
Q

Broker’s Broker

A

A firm that executes trades for another member

  • Fair pricing rules apply
  • If the broker’s broker is part of the same large firm, it must be separately operated and supervised
  • Must post (on its website) policy for commission structure and provide them in writing annually to all sellers and bidders
90
Q

Prohibitions for Broker’s Broker and ATS

A
  • Prop accounts (unless used for basic settlement)
  • Self-dealing
  • Spoofing
  • Giving preferential bid information
  • Changing bid/offer without buyer/seller permission
  • Failing to inform seller of highest bid
  • Providing bid/offer info to those outside of buyer and seller until the bid wanted is completed UNLESS info is disseminated freely to all parties and discloses that current bid prices may not represent fair market value

Series 53 (5 decks)

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