Chapter 2 Section 1 Flashcards

Question

Chief compliance officer

Answer 1

* FINRA requires designated CCO * must be series 24 principal * responsible for establishing, maintaining, reviewing and testing the firms supervisory procedures to achieve compliance wiht applicable FINRA rules, MSRB rules and fed sec laws and regs

Answer 2

the CCO and CEO must meet at least annually to discuss compliance matters ensure the firm has policies and procudres that comply with all regs meeting is documented by an annual compliance certification letter, signed by the CEO

Answer 3

* signed by the ceo and documents the annual compliance meeting * the letter states 1. the member firm has processes to: * establish, maintain and review policies and procedures designed to achieve complaince with all industry regs * modfiy compliance policies and proedures as changes dictate * test the effectiveness of its complaicne poilicies and procedures on a periodic basis 2. The CEO has conducted one or more meetings with the CCO in the preceding 12 months 3. the CEO reviews report - the firms processes have been documented in a report reviewed by the CEO and COO 4. the report was filed wiht the BOD within 45 days 5. the CEO has consulted with the CCO and other employees / consutlants/ lawyers etc to attest to statement in the certifcation this makes the CEO personally liable for failures in compliance.

Answer 4

* FINRA requires members to create and maintain a bcp * identifes the procedures to be followed if there is an emergency or significant business disruption * must include procedures covering existing relationships with other BDs

Answer 5

* no requirement to file * must be made available upon request by FINRA * must be maintained at a secure, off-site facility * EVault is a back up repository fir firms that dont have their own (contracted by FINRA)

Answer 6

* changes to ops, structure, etc. require updates * annual review by series 24 to ensure updates are made

Answer 7

* flexible based on needs of firm * Minimum elements: 1. data back up and recovery 2. mission critical systems 3. financial and operational assessments 4. alternate communications between member and customers and member and employees 5. alternate physical lcoation of employees, critical business , bank and counter-party impact 6. regulatory reporting and comms with regulators 7. how the member will assure customers prompt access to their funds in the event the firm ceases business

Answer 8

* must be disclosed to customers at account opening * must be posted on member firms' website * must be mailed to customers on request *Must include only a summarized doc that provides sceniors of increasing severity and how the firm would respond. not required to provide the detailed plan.

Answer 9

* required to designate 2 emergency contact persons to FINRA * both must be members of the firms senior management, one must be a series 24 * for sole proprietorship the second should be naother employee of the firm, if one employee only they shoudl be someone with knowledge of firm opps (i.e. accountant, attorney) * filed electronically with FINRAs contact system * updated promptly when there is a change - no later than 30 days after change

Answer 10

* promptly, not later than 30 days * reviewed annually, within 17 days of the end of the year * must be conducted by an executive representative or written designee

Answer 11

* reg rep cant guarantee agains losses * exception: repurchase agreement that doesnt use non-exempt securities

Answer 12

* reg. rep cant share in gain or loss of a customer account * but can open joint account with employer approval (written) * profit and loss be shared in direct propotion to capital contributed (with exceptions)

Answer 13

* gains and losses must be shared in direct propotion to capital invested with the exception of accounts owned jointly with immidiate fmaily (spouse, DP, parents, grandparents, siblings, children grandchildren (step families included) and HH members financially supported by the rep.

Answer 14

* Exepction to the "sharing in direct proportion rule" for accounts that meet the following: 1. account opened with at least $1MM of customer funds by a customer with a NW of at least $2.1MM 2. prior written agreement with customer, with the compensation agreement approved by firm 3. agreement covers both gains / losses for a period of at least 1 year 4. member has disclosed conflicts of interest

Answer 15

* prohibited from borrowing or lending to customers *Execptions: unless the firm has policies and procedures covering this AND: * the customer is immidiate fmaily member * the customer is a lending institution, lending to the person as they would anyone else * customer and reg rep are both registered persons at the same member * the lending arrangement is based on a personal relationship with the customer * the lending arrangement is based on a business relationship outside of the Broker -customer relationship

Answer 16

opened with at least $1MM for an investor with a networth of at least $2.1MM

Answer 17

covers BOTH gains and losses for at least 1 year

Answer 18

2 and 20 2% annually and 20% of profits

Answer 19

prohibited from borrowing or lending money to customers (exceptions allowed)

Answer 20

1. firm must have a written policy AND a permitted exception: the following do not require notification * immediate family member (no notification) * customer is a lending insitution and treating the rep as it would anyonelse (no notification) the following require notification and prior approval * customer is a registered person at the same member firm * a lending arragement is based on a personal relationship with the customer * the lending arrangement is based on a business relationship outside of the BD

Answer 21

* cannot charge for investment advice * any charges for this service are included in a "fair and reasonable" mark-up or comission computered under the 5% policy * Can charge for clerical services

Answer 22

* register either with the state in which it conducts buseinss or directly with the SEC (larger firms) * must follow a seperate set of rules from BDs in addition to FINRA rules for BDs

Answer 23

at a customer request the firm must make available its latest balance sheet and net capital computation as perpared under the Act 34 does not need to provide an income statement

Answer 24

* they believe they can deliver / pay in 1 buseinss day * Installment sales are prohibited

Answer 25

Prohibited

Answer 26

the customer pays in part (e.g. on margin) or in full on settlement date, or the broker dealer makes the appropriate entries to the customer's account on settlement (e.g. using a customer free credit balanace to "pay" for a purchase). if payment or entries are made before the settlement date it does not complete the transaction.

Answer 27

When a security is sold hte customer delivers the security on the settlement date, or the broker dealer makes hte appropriate accounting entries to the custome's account on settlement. if the securities are delivered or the entries are made before the settlement date this DOES NOT complete the transaction.

Answer 28

order tickets for the sale of a security must be marked long or short (except for corp debt securities) An order ticket to sell may be marked long if the security is held in the customers account or if the customer agrees to deliver the secuirty by settlement

Answer 29

All trades (order tickets) effected by reg reps must be reviwed and approved in writing by a general principal and kept for 3 years.

Answer 30

* If the firm implements a communications compliance program and provides training and audits the communications then prior written approval is not required * if there is no program: prior written approval by a principal is required for both witten and electronic

Answer 31

* giving or accepting gifts limited to $100 per person per year where the gift is realted to their activities as a borker * does not apply to business entertainment as long as this is not to excessive or frequent *does not apply to logo gifts

Answer 32

* keep a record of all gifts and gratuities received or given by an assocaited person related to firm business * all gifts given and recevied must be reported to the firm and recorded * the firm must have procedures for aggregating the avlue of gifts to ensure the $100 per person per year limit is not breached * records must be kept for 3 years

Answer 33

* gift limit does not prohibit an assocated person to pay for work * Must have a written agreement detailing the work and compensation * agreement must be approved bye the principal of the firm * records must be kept of the agreement with payments for 3 years

Answer 34

* outside business activity * reg persons must provide prompt written notice to the member and follow any instructions of the employer * employer must assess the impact of OBA on abilty to perform duties * if the firm rejects the reg rep cant do it.

Answer 35

* OBA definition is broad * a non-compensated control position is considered OBA as they could steer business to the firm BOD of a chairty is OBA volunteering for a charity to solicit contributions is not OBA

Answer 36

* muts be reported to the firm * must be reported on the individuals U4 * are shown on broker check

Answer 37

* reg rep handles securities transactions for a customer thorugh another firm (private securiteis transactions) * prohibited by FINRA * All trades that a reg rep handles must be executed through the firm or be known to the firm * exception if the firm provides prior written approval

Answer 38

* exception is granted if the firm gives prior written notice of the proposed transaction and compensation to be received and the firm specifically approves of the transaction in wirting. * the firm is obligated to supervise

Answer 39

* Reg rep is prohibited from using an info hey receive as a fiduciary to solicit purhcases or sales expect with express consent of the customer. * Any received by the member firm from an issuer in a fiduciary capacity cannot be used to socilit purchases or sales

Answer 40

* the firm must disclose that it is in a control relationship wiht the isseu of a security prior to entering into the contract to buy or sell * if the disclosure is not made in writing written disclosure must be made prior to completion of the transaction/ settlment * most firms give verbal disclousre at the time of the recommenation and written at trade confirmation

Answer 41

* if hte firm receives a fee for advising an issuer on structuring securites offerings and participates as an underwriter in the offering, it must be disclosed to customers purchasing must be notified of particpation or financial interest

Answer 42

FINRA rule 2030 is an anti-bribery rule discourages BDs and certain assocated employees from participating in pay-to-play practices by acting intermediaries between state and local governements and investment advisors assocated employees: general partner, managing member, or executive officer of the BD

Answer 43

*rule 2030 imposes a two-year time out with a given issuer if a contribution exceeds $350 per candidate per election * applies to contributions made to candidates for whom the covered associate is entitled to vote * if the covered associate is not entitled to vote for the official at the time of the contibution the limit is $150 per candidate per election * primary and general elections are considered seperate elections

Answer 44

* gift * subscrioption * loan * advance * deposit of money or anything of value' * payments of election debts or inaugural expsenses for the purposes of influecing any election for federal, state or local office

Answer 45

* binding arbitration, cannot be appealed * exception: employment discrimination claims including sexual harrassment * customer disputes can be handled with arbirtation with customer consent * consent is given when the customer signs the Predispute Arbitration agreeement upon account opening

Answer 46

* firms must forward proxy materials to beneficial owners of stocks at no charge when the firm hols street name stock for margin customers. * reimbursement is made by the issuer to the firm under a schedule set by finra. FINRA requires the issuer to : * furnish sufficient copies of soliciting materials for remailing to registered holders * assure the member that it will be reimbursed for all out of pocket expenses incurred in the mailing

Answer 47

inform the beneficial owner of the time limit placed on voting and the necessity for completing the proxy form and sending it to the soliciting agent prior to expiration

Answer 48

* if a stock is held by a fiduciary the fiduciary can vote the shares * In the case of 401K the ficuciary is the plan trustee if the firm has been named by the plan fiduciary as the investment manger of teh stock then the investment manager votes proxies

Answer 49

* blanket recommendations on low price speculative stocks * exessively trading / churning an acct * trading in mutual fund shares * trading without authorization * manipulative or deceptive devices when trading securities or dealing iwth customers

Answer 50

misappropriating customer funds or trading without authorization

Answer 51

* participants in an underwriting group representing the Public offering price is the prevailing market price unless there is an independent market for the security * paymetns of any kind designed to influence the market price of a stock wher ethe member is participating in the underwriting group

Answer 52

giving concessions or discounts to the public is prohibited. "public" anyone who is not a FINRA member

Answer 53

payments of any kind to influence publications in an effort to influence the market price of a security is prohibited

Answer 54

* cannot place an order for mutual fund shares unless the firm has an existing customer order or is buying for its own account * prohibted from placing a mutual fund in inventory and acting as a market maker * only the fund can be a market maker * can sell mutual fund shares just below breakpoint levels * trading mutual funds is prohibited

Answer 55

prohibits investment companies from giving you extra compensation above and byond the sales charge for seliling their shares can accept a gift of more than $100 from an investmetn company

Answer 56

* prohibited * convincing a customer to buy a stock jsut before the ex-date to get the dividend *

Answer 57

* accepting continuing commissions such as annual concessions paid out of 12b-1 fees after leaving the employ of a firm is prohibited unless there is a prior written agreement specfiying the compensation and the retire rep agrees not to solicit new business, open new accounts or service the accounts generating hte commission if the person is suspended or expelled the continuing comp cant be paid

Answer 58

* reg persons (firms or individuals) * retired reigistered reps (with written prior agreement) * non registered foreign finders

Answer 59

* finder must be a froeign national and not subject to us aw requiring registration * cuostmer must be a foreign national * customer must recdive a disclousre document that a finders fee is being paid and must sign a written acknowledgment of the existence ofthe compensation arrangement * trade confirmation must dislosue the finders fee * reocrds of agreements between the firm and finder, amounts paid must be retained

Answer 60

* prohibited from sending any written communications to prospective mutual fund customres without a copy of the lates fund prospectus exception: form letters, limited in scope to the statement of a funds objective and its management strucutre

Answer 61

1. correspondence 2. retail communications (req pre approval) 3. institutional communications

Answer 62

* any written or electronic communicatino that is distributed or made available to 25 or fewer retail investors within any 30 calendar day period * 25 max is for both existing or prospective customers

Answer 63

any written or electronic communication distributed or made available to more than 25 reatil investors within any 30 calendar day period reatil investor iis anyone that is not an institutional investor (an investor with less than $50MM of assets)

Answer 64

* any written or electronic communication that is distributed or made available only to institutional investors * i.e. bankds, savings and loans, reg invest compaines, reg invest advisors, gov entitities, FINRA members or any persons with $50MM or more

Answer 65

1. adverstising 2. sales literature 3. indpendently prepared reprint 4. public appearance / public forum

Answer 66

* material intended for mass market such as newspapers, magazines, non-password protected internet websites, internet bulletin boards, tv, billboards, signs tape recordings and motion pictures

Answer 67

* written or electronic communication that is directed to a specfici audience * i.e. directed to firms customers * includes: circulars, market letters, researc reports, seminar texts, password-protected websites and form letters sent to more than 25 investors * excludes indpendently prepared reprints

Answer 68

* a preprint or excerpt of any article issued by a publisher, where a publisher is not affliliated with the FINRA member and the report was not commissed by the member * if its disributed to more than 25 investors its retail comm if its less then 25 its correspondence

Answer 69

* participation in a seminar, forum, radio, television interview etc * unscripted / spontaneous tlaks * subject to post use review and approval, simliar to the rule for correspondence * firm must establish and maintain policies and procudures to surpervise them for compliance with standards

Answer 70

* does not require prior principal approval as long as the firm has implemented a program of supervisory procedures for communications * FINRA only requires post use review and approval by a principal * if there is no compliance program each correspondence would need to be reviewed and approved prior to distrbution

Answer 71

* Interactive content on a wesite does not require prior approval or filing but P&Ps must be in place * static conent is treated as advertisitng and is subject to advance approval by a general principal and FIRNA filing requirements

Answer 72

* pre approval required * a reg principal must reveiw and approve, in writing, prior to use or finra filing *

Answer 73

* the follolwing are specfically exempt from the requirement for prior principal approval: * market letters that do not make finanical or investment recommendations * posting in an online interactive electonic forum (chat fooM) * communications that do not make and financial or investmetn recommendatinos or otherwise promote a product or service of the member (eg economic outlook report) * Subjet to same approval rules as correspondence - "post use reveiw and approval) by a principal

Answer 74

Require prior princapal approval free writing prospectuses are used with well known issues that "automatically" register new issues include emails, faxes, term sheets, websites, and recorded road shows. Must be boardly disseminated - Posted on an unrestricted webiste or one released to the news media password protected sites does not qualify as braodly disseminated

Answer 75

Atomatic shelf registration allows WKSI's " well known seasoned issuers" to automaticlaly register new issues without SEC review and to use free writing propsectuses without sec review of content.

Answer 76

does not need prior principal approval if a supervisory program is in place requires only post review and approval by a principal

Answer 77

it no longer qualifies as institutional communication and it becomes retail communications. if the member firm is unaware and then finds out they must "cease distributing intsitutional communications to the recipient BD until it has confirmed they have adopted the appropriate procedures to prevent future redirstribution.

Answer 78

* records of communictions must be kept with the dates of first and last use. * must include the name of the principal that approved the communicatino, along with the date * if approval was not requied then the name of the person that preapred or distributed the commuincation shoudl be included. * must be retained for 3 years

Answer 79

* Filing with FINRA is only required for retail communications * correspondence and institutional communications do not need to be filed.

Answer 80

* first year of business: file 10 days in advance * after the first year of business: no filign but subject to spot check general rules do not apply to certain communications.

Answer 81

* securites futures (options) communications if the communicatino contains the names of specific securities, it must be accompanied or preceded by the latest ODD (options disclosure doc) * Fund retail communications with member - prepared performance rankings cannot be published until FINRA approves

Answer 82

Retail communications for the following: * CMO (collatoralized mortgage obligation * registered structured products * Registered DPP (does not apply to privately placed dpps) * mutual fund retail communication (investment company retail comms that do not include member prepared performance rankings) * Broadly disseminated free writing prospectus (under rule 405) * final verions of filmed television or video retail comms

Answer 83

* comms that have been previously filed * communications that do not make financial or investment recommendations * non-promotional change announcements (i.e. change of office address) * communications that only identify a member's exchange symbol or identify a security for which the member is a market maker * recruitment adds * tombstone ads that comply with SEC rule 134 * Independenlty prepared reprincts, press releasees, insitutional sales material, correspondence and cmoms posted on an online forum

Answer 84

* cannot be misleading * must provide a sound basis for evaluating the facts in regard to the security, industry or service

Answer 85

* false / exagerated cliams are prohibited * placement of information in a legend or footnote to inhibit an investor's understanding is prohibited. * predictions or projections of performance

Answer 86

* firms may offer investment analysis tools (i.e. retirement planning calculator) as long as: * provides FINRA with the templates for written reports produced by, or concerning the investment analysis tool on request * describes the methodology and criteria used, including the tools limitations and key assumptions * explains that hte results may vary with each use and over time * includes the disclaimer that projections generated by the tool are hypothetical ,do not reflect actual investment results and do not project investment results. "

Answer 87

* may be used * the person making the testimonial must have the experiene and knowledge to form a valid opinion * the following must be disclosed: 1. maker's experience may not be indicative of others 2. testimonial is not indicative of future performance or success 3. maker was paid for the testimonial if it was more than $100

Answer 88

all communications regarding CMOS: * must include within the name of the product " collateralized mortgage obligation" * may not compare CMOs to other investmtn vehicle, included a bank CD * must disclose, as applicable, that a government agnecy backing applies only to the face value of the CMO and not to any premium paid * must disclose CMOs yield and average life will fluctuate depending on teh actual rate at which mortgage holders prepay the mortgages underlying the CMO and changes in current interest rates

Answer 89

* covers the use of invesmtent company rankings by firms such as morningstar and lipper in retail communications prepared by that mutual fund. * rankings can be used as long as : * the informatino was creaated and published by a "ranking enitty" (independent ranking firm) * prominent disclosure is made of the name of the category * the number of investment cmopanies in the category, the length of time preiod used for the ranking and the criteria on which the ranking is based (e.g. total return, risk adjusted performance) * the fact that past perfrmance is no guarantee of future results * the publisher of ranking data * the ranking must be current as of the most recent calendar quarter and the ranking covers a period of at least a year * rankings based on total return must include a comparison of 1, 5 and 10 year total returns (or the life of the fund if shorter)

Answer 90

* all retail communications must clearly include the name of the member frim preparing the material. * includes telephone listings, business cards and stationary letterhead * firm may use "blind recruitment advertisments" that omit the firm name

Answer 91

* firms are required to place the SIPC (securities investors protection corporation) logo on all advertisements larger than 10 square inches * NOT REQUIRED for sales literature

Answer 92

firms may only use FINRA by stating that the firm is a FINRA member. only the firm is a member the FINRA name must always be smaller than the firm name

Answer 93

* not required to put FINRA name on the website * may do so but must include hyperlink close by to the FINRA name

Answer 94

* if a reg rep uses marketing materail that was prepared by an outside party to give to clients it must be supervised by the firm (principal review and approval) * it must disclose it was created by a thrid party * and the publication must prominently disclose the member firms name

Answer 95

* sent by BD to provide clietns market commentary and may include a listing of recommendations * excluded from the definition of research reoprt as long as the recommendations include the following disclosures: 1. whether the firm makes a market in the recommended security or if the member or associated person will buy or sell the security on a principal basis 2. if the member or any associated person who is inovled in the preperation of the report content has a financial interest in the securities of the issuer 3. if the member was a manager or co-manager of a public offering of any securities of an issuer whose securities were recommended in the past 12 months *dislcosures are only needed if they make recommendations*

Answer 96

if the communication recommends a specific security then: * the recommendation must have a basis in fact which can be substantiated as reasonable * the market price of the stock at the time must be included * supporting documentation to the recommendation must be furnished upon written request

Answer 97

* if past performance is showing in a research report: * at least a 12 month period must be used * an indication of general market trends during that time must be included * if past performance is comparable recommendations is shown, then all such recommendaitons (both good and bad) made iwhtin the prior 12 months must be included. * transaction costs must be included * a statement that past performance does not indicate future results must be made

Answer 98

* can show price targets * statements of advantages must mention relavant risks * all reports must be dated * if information older than 6 mnoths is used it must be disclosed in the report

Answer 99

* amended tombstone rule * This section says a firm can publish limited, factual notices about an offering without it being considered full-blown “prospectus advertising.” In other words, you can say: The name of the issuer (the company offering securities). Type of security (common stock, preferred, bonds, etc.). Amount being offered. Basic terms (like price range, interest rate, maturity, etc.). The names of the underwriters/brokers involved. Where to get the official prospectus. 👉 Think of it like a “classified ad”: just the who, what, where — no promises, no persuasive language.

Answer 100

* This rule applies when an investment company (like a mutual fund or ETF sponsor) wants to run general ads that talk about investing, without promoting a specific fund. * “generic investment company ads.” * 🔹 What’s Allowed You can talk about broad concepts, such as: The nature or type of investment company (“mutual funds can help diversify your portfolio”). The services the firm provides. Educational info about investing (e.g., how asset allocation works, the role of retirement savings). Encouraging people to think about investing in investment companies generally, not a particular one. Where to get a prospectus if they want details. 👉 Think: “Investing in mutual funds can be a way to grow for retirement. Learn more from XYZ Fund Company.” 🔹 What’s Not Allowed You cannot: Mention a specific security or fund (e.g., “Our ABC Growth Fund has outperformed…”). Include performance data, returns, or comparisons. Use promotional language that makes it a sales pitch for a specific product. 👉 The ad has to stay generic and educational, not an inducement to buy a particular investment.

Answer 101

* explanatory info about investment companies * explanation of the types of investment companies * offers, descriptions, or explanations of products and services without mentioning the desirabiltiy of these investments * invitation to inquire more info and a copy of the prospectus * name and address of BD

Answer 102

* general descrpiton of the security being offered * description of the nature and functions of the options market * description of teh options clearing coporation * invitation to inquire for more information and a copy of the options disclosure document * name and address of sponsoring BD

Answer 103

* if a member firms sales force has too many reps from firms that were expelled or membership revoked then the member firm must tape its phone converstations with prostpects * rule is based on firm size and ranges from 20% for large firms to 40% for small firms

Answer 104

* **firms with 20 or more reps:** less than 20% of the reps were associted with disciplined firms in teh past 3 years * **firms with 10-19 reps:** less than 4 of the reps were associted with disciplined firms in teh past 3 years * **firms with 1-9 reps****:less than 40% of the reps were associted with disciplined firms in teh past 3 years

Answer 105

* FINRA demetermines who needs to comply monthly * FINRA notified BD * BD has 60 days to comply * BD must adopt special written procedures to supervise telemarketing activities for a 3 year period * procedures consider firm size, business, structure * records must be retained for 3 years * firm has 30 days to reduce the nubmer of people to avoid taping rule

Answer 106

* firm is required to report file a report with FINRA on the supervision of telemarketing activities by the 30th of the month folowing the quarter end

Answer 107

retained for 3 years

Chapter 2 Section 1 Flashcards

(131 cards)