1
Q
New member firms should have at least what as officers?
A
- at least two registered principals and one financial/operations principal unless exemption is granted.
2
Q
FINRA Executive Representative
A
- each membership required to have one, who will represent, vote, and act for member in all affairs related to FINRA. Required to be a registered principal, and must have an e-mail account
3
Q
If a broker-dealer has applied for registration and has to amend its registration because of inaccurate info, who does that have to be filed with?
A
Promptly with the CRD
4
Q
Application for approval of change in ownership, control, or business operations of a broker dealer is required for:
A
- merger of member with another member
- direct or indirect acquisition by member of another member
- direct or indirect acquisition or transfer of 25% or more of assets that generates revenues of 25% of more of members earnings in a 36 month basis.
- change in equity ownership or partnership capital of member results in an individual owning or controlling 25% or more of equity or partnership capital
- material change in business operations
5
Q
A member shall file application for approval of change in ownership or control when?
A
- at least 30 days prior to such change.
6
Q
Office of Supervisory Jurisdiction refers to office of a member where any of what functions take place:
A
- order execution / market making
- structuring of public offerings or private placements
- maintaining custody of customer funds/securities
- approval of (NOT OPENING) new accounts on behalf of member
- review / endorsement of orders
- final approval of retail communications (advertising/sales literature)
- responsibility for supervising activities of persons associated with member
7
Q
Exemptions from OSJ Definition
A
- locations that SOLELY conduct final approvals of research reports
- each OSJ must have one or more registered principals, each non-OSJ must have a ‘person-in-charge’
- registered principal supervise multiple OSJ’s, principal must have physical presence on a regular and routine basis
- supervisor is registered principal physically located at OSJ branch office
- person in charge is a registered person (RR or Principal), located at, manages activities, individuals working at Non-OSJ branch office.
supervisor- principal
person in charge- principal or registered rep
8
Q
Branch Office Definition
A
- any location where one or more associated persons of a member regularly conducts any transactions or inducing or attempting to induce the purchase or sale of a security or a location that is held out as such.
example:
- branch manager hires new senior RRs and has to rent new office space for new RRs, new office space must be identified as a branch office
- location responsible for supervising activities of persons associates w member at one or more non-branch locations
9
Q
Exclusions to ‘Branch Office’ Definition
A
- location established solely for customer service/back office, no sales activities
- location associated w a persons primary residence.
- any location, other than a primary residence, that is used for securities business for less than 30 business days (30 day calendar day window to register as a branch if location exceeds 30 business day exemption)
- any office of convenience (lets go out for a cup of coffee and discuss your portfolio)
- any location used primarily to engage in non-securities activities which associated person effects no more than 25 securities transactions in any calendar year.
- floor of registered national securities exchange
- temporary location in response to business continuity plan
10
Q
FINRA Supervisory Regulations for Branch Office Inspections
A
- must establish mandatory inspection cycles, firms written supervisory procedures (WSP) must be tested and verified independently
- CEO certify annually that senior exec management has processes to review compliance policies
- OSJs and branches supervising non-branch locations inspected ANNUALLY
- non-OSJs inspected once every 3 years
- non-branch inspected regular, periodic schedule based on complexity
- inspection conducted by someone independent of branch
- WSPs set forth for all inspections
- inspection reports retained for 3 years.
- keep copy of FINRA manual in each branch in readily accessible place, made available to customers upon request
11
Q
Member firm must have written supervisory procedures to prohibit its supervisory personnel from:
A
- supervising their own activities
- reporting to or having their compensation or continued employment determined by person that supervisor is supervising
12
Q
Specific review and monitoring of the following activities relating to customer protection is required:
A
- all transmittal funds and / or securities:
1) that results in change of beneficial ownership
2) from customer accts to outside entities
3) from customer accounts to location other than customers primary residence
4) between customers and RRs including hand deliveries
b. customer changes of addresses and validation of changes
c. customer changes of investment objections and validation
13
Q
FINRA rules state each member must have procedures to capture, acknowledge, respond to all written customer complaints and action taken by member. complaints against a BD may be registered by all of the following:
A
- SEC
- FINRA
- PUBLIC CUSTOMERS
- OTHER MEMBER FIRMS
- Emailed complaints are subject to all rules. does not require capture of oral complaints
14
Q
If a member firm knows of the existence of any written complaint involving theft, misappropriation of funds or securities, or of forgery when?
A
- not later than 30 calendar days after the member knows of existence of complaint
15
Q
Summary complaint filing
A
- must file with FINRA summary of info regarding customer complaints by 15th day of the month following calendar quarter complaints are received.
- should take place on FINRA firm gateway
- Actual copies of complaints are NOT filed with FINRA. Oral complaints not included since they are difficult to capture and assess.
16
Q
Customer complaints must be preserved for how long in an OSJ?
A
At least 4 years, formally 3.
17
Q
Relevant Factors which justify a higher percentage mark-up:
A
- type of security being traded (mark up on stocks higher than bonds)
- availability of security in market
- price of securities
- amount of money involved
- disclosure
- patterns of mark ups
- nature of members business
excessive expenses of broker dealer or market volatility are NOT justification for higher mark up
18
Q
Transactions to which the mark-up policy applies:
A
- transaction to buy a security to fill an order for the same security received from a customer. ‘riskless’ and ‘simultaneous’ transaction
- transaction where member sells security to customer from own inventory
- transaction where member purchases a security from customer, puts it in its own inventory
- transaction where the member acts as agent bringing buyer and seller together and charges commission, must be fair and reasonable.
- govt. securities transactions
19
Q
Transactions to which mark up policy does NOT apply to:
A
- securities listed and traded on floor of stock exchange
- securities where prospectus or offering circular must be delivered, securities sold at specific public offering price.
- reg A offerings
20
Q
Net Transaction Trade
A
- handled the same way a riskless principal transaction is handled, except in a net transaction, the initial and offsetting transactions are executed at different prices
- mark up is NOT disclosed on a net transaction (it is disclosed on a riskless principal transaction)
21
Q
Spoofing
A
- trader enters a visible order, which creates a new best bid or offer and during the time that the first order is entered, the first order is cancelled.
- the same trader executes a trade on the opposite side of the market after. form of market manipulation
- trader ends up with an execution at a price better than before.
22
Q
Layering
A
- Trader enters multiple visible orders on one side of the market at multiple price levels. this causes the mid point of the spread between bid and ask to move away from those multiple orders
- then, the same trader executes a trade on the opposite side of the market.
- manipulative because the execution takes place at a better price than the trader would have received if they didnt do this.
23
Q
Written Supervisory Procedures (WSP)
A
- Each member must establish, maintain, enforce WSPs
- enables member to properly supervise activities of each principal, RR, associates person
- when broker dealer updates supervisory policies and practices manuals, it must keep copies of old manuals for 3 years.
24
Q
Firms must have procedures to identify if any insider trading laws or rules have been violated for all securities transactions including those taking place in:
A
- accounts of firm
- accounts introduced or carried by firm
- covered accts
25
Covered Account is any account held by:
- spouse of person associated w the firm
- child of person associates w firm, or that person's spouse, provided child resides in same household
- any other related or individual person whose account the associates person has control or whom associated person materially contributes financial support
26
Correspondence and Internal Communications Reviews
- firms must have supervisory procedures for review of all incoming/outgoing written correspondence in order to identify customer complaints, instructions, funds, and securities matters which require review
- must have supervisory procedures for review of internal communications to properly identify communications of a subject matter that requires review
- reviews of correspondence and internal communications must be conducted by registered principal and evidence in writing, electronically or on paper
27
Annual Certification of Compliance and Supervisory Procedures
- each firm must designate one or more principals as CCOs
- each CEO must certify annually that member has procedures/processes in place and modify written compliance policies to comply with FINRA, MSRB, federal securities laws and regulations
- CEO must have meetings with CCOs every 12 months. CCOs must be registered as principals. They are NOT prohibited from having other job responsibilities
28
Clearing Agreements
- at time of agreement and annually thereafter, a clearing member firm must provide exception reports to its introducing members CEO and CCO.
- exception report would note if introducing members books are not balancing
- if a clearing firm receives complaint from customer of one of its introducing firms, clearing firm must send copy of complaint to introducing firm and notify customer that complaint has been received and copies have been sent to introducing firm. SEC is not notified nor does it receive a copy
- no later than july 1st of each year, carrying firm shall notify introducing firms CEO and CCO in writing, of list of reports supplied to introducing firm and designated examining authority.
29
Contact Information Requirements
- FINRA members must designate a contact person (CEO/CCO) who is responsible for receiving regulatory email notifications
- firms must update info not later than 30 days following any change in info
- must also update contact info with FINRA within 17 business days after end of each calendar year (annually, not quarterly)
- member firm must comply with FINRA request for info no later than 15 days after request
30
Member firms can indicate membership in FINRA according to the following rules and guidelines:
- solely as matter of record in trade directories or other business listings
- solely w identification on letterheads, booklet covers, and sales literature, as long as the use is only for identification purposes and is in smaller type and separate from regular text
- on the door of entranceway of members principal or branch office
- cannot be used in promotion of any security
31
FINRA Membership or registration is NOT available to applicants except by order of the SEC in what situations?
- BD been suspended or expelled from national securities exchange
- SEC/Stock exchange has order revoking/denying registration of BD
- Individuals convicted in last 10 years of felony or misdemeanor involving embezzlement, misappropriation of funds, etc.
- individuals do not meet training and experience standards of FINRA.
32
Dues and assessments
- any member firm may be suspended for failure to pay any assessed dues, fines, assessments.
- a member will generally NOT be suspended for failure to pay fines for minor rule violations
33
Disclosure of Financial Condition to Customers and Other members:
- any member who is a party to open transaction or who has on deposit, cash or securities of another member, must furnish upon written request of other member, statement of its financial condition as disclosed on most recent balance sheet
- firm must make available to bona fide customer upon request. Does not have to be provided to prospective customers
34
For the purpose of any investigation, complaint, examination, or proceeding authorized by FINRA, an adjudicator or FINRA staff has the right to:
- require member to provide info orally, in writing, or electronically, and to testify at location under oath
- if info is provided electronically it MUST be encrypted and have a password
- inspect books, records, accounts of such member. the person will also not be suspended while investigation is underway
35
Payments to Unregistered Persons
- term 'non member' includes suspended or expelled dealers or BDs not members of FINRA. If member firm is suspended by FINRA, must treat member as a non-member firm
- no selling concession, discount, or allowance. Selling concessions and discounts may be given only to FINRA members
- no members can join w non-member in any distribution of issue to public
- no member can sell or buy securities from non-member at any price other than what it would be done with general public.
- eligibility in FINRA is limited to broker-dealers handling transactions in any branch of investment banking or securities business.
Rules do NOT apply to broker dealers that deal exclusively w US Govt/muni securities
36
Continuing commissions policy
- continuing commissions may be paid to RRs after no longer employed or totally disabled (or to their widows or direct beneficiaries) if bona fide contract exists before RR leaves firm
- no commissions or comp may be paid if RR is expelled or suspended from FINRA.
- if a registration is revoked, an individual can not be registered again until SEC approves. Individual can seek employment with a non-member financial institution
37
Networking arrangements between broker-dealers conducting business in financial institutions (broker dealer and a bank selling securities) rule requires that:
- brokerage services must be conducted in separate distinct physical location from area where retail deposits are made
- services must be clearly identified as being separate from deposit activities
- members name must be clearly displayed where brokerage activities conducted.
- if account is opened, BD must disclose in writing that securities are not FDIC insured and deposits on securities are subject to investment risk and not guaranteed
- member firm must promptly notify institution if any associated person is terminated
38
Business continuity plan:
Required to establish and maintain with annual updates, approved by registered principal who is also part of senior management of member. at a minimum, each plan must address:
- data back up and recovery
- all mission-critical systems
- financial and operational assessments
- regulatory reporting
disclosure of firms continuity plan must be made available to customers at account opening, posted on firms website, and mailed upon request
39
When must firms file reports with FINRA regarding internal investigations around insider trading? and what do reports include?
- within 10 business days of each calendar quarter
- includes:
firms identity
commencement date of investigation
status of investigation
resolution of any investigations
40
If a firm determines an insider trading violation has occurred, the firm must notify FINRA:
- by filing a written report, within 5 business days of completion of investigation
41
At least annually, member firms must provide the following:
- FINRA brokercheck disclosure hotline number
- FINRA regulation website address (brokercheck) and
- statement as to availability of investor brochure
member firms that do not carry customer accounts (clear through another BD) are exempt from above requirements
42
Disclosure of financial condition to customer:
- FINRA members must send statement of firms financial condition to customers SEMI ANNUALLY
- statement includes:
unconsolidated balance sheet
statement of net capital
subordinated loan info
if existing customer requests copy of firms financial statement, must be provided upon request. prospective clients do NOT have to be provided
43
Soft dollar arrangements
- way for financial institutions to pay for services by BDs with order flow rather than institution paying cash (hard dollars) for services like research. SEC has determined what is acceptable and not acceptable soft dollar arrangements
44
Acceptable soft dollar arrangements
- research
- analytical software
- holding seminars for customers
45
Payment or reimbursement by investment company in connection w meetings held for purpose of training or education would be allowed if:
- records are kept in line w rules
- associated persons obtain members prior approval to attend meeting and attendance is not preconditioned by member on achievement of a sales target or any other incentives.
- location is appropriate.
- payment or reimbursement not applied to expenses of guests
46
Political contribution or pay-to-play rules
- refers to various situations where advisers, 'covered members' and 'covered associates' seek to influence award of advisory business by making or soliciting political contributions.
- it is unethical and could be construed as bribery.
47
Contribution means:
- any gift, subscription, loan, advance, or deposit of money or anything of value made for:
- the purpose of influencing any election, payment of debt incurred in connection with election, or transition or inaugural expenses of successful candidate
- FINRA would not consider a contribution to include: donation of time or charitable donation provided rules are followed
48
3 key prohibitions to the pay to pay/political contributions rule:
- two year prohibition on engaging in activities with the entity you made a contribution in. Look back - rule attributes to a person within 2 years of becoming a covered associate and / or 2 years of making a contribution. prohibition cannot be longer than 2 years from date of contribution
- prohibition on the use of third party solicitors who are not themselves regulated or covered persons are subject to same rules.
- prohibition on bundlind and other efforts by associates to solicit political contributions to certain officials of govt entity where the person or adviser is seeking to provide services.
49
3 exceptions to two year time out period under pay to play/political contributions rule:
- contributions of 350 or less per election for any election where associate is entitled to vote
- de minimis contributions of 150 or less per election, for person not entitled to vote
- new covered associate exception if natural person made contribution more than 6 months prior to becoming covered associate
50
Certain returned contributions
- provides exception from pay to play rules restrictions if restriction is due to a contribution made by covered associate AND:
- Contribution was made within four months of it being made
- contribution was less than $350
- contribution is returned within 60 days
51
MSRB Political contribution limits
- MSRB Governs contributions made by securities dealers and municipal finance professionals to officials of an issuer. an official of the issuer covers any person who was at the time of contribution an incumbent, candidate, or successful candidate. If candidate loses, person would still be an official of the issuer.
- contributions cannot exceed $250 per election and MFP must be able to vote in it
- if violation occurs, MFP associated is prohibited from engaging in negotiated municipal securities business for 2 years. rule does not apply to competitively bid deals
- MFPs are individuals associated w dealer who are primarily involved in underwriting, sales, trading
- contributions by spouses of MPS not subject to rule.
52
Money laundering occurs in 3 stages:
- placement stage: cash enters financial system
- layering stage: funds moved into other accounts
- integration stage: funds are reintroduced into the economy to purchase legitimate assets.
can happen with new and existing accounts
under FinCEN
53
Under AML, BDS Must file Currency Transaction Reports which are:
- for transactions involving currency over $10k for one person in aggregate in a single business day, as well as wire transfers over 10,000 and multiple currency transactions totaling over 10k.
- multiple transactions must be treated as single transaction if firm has knowledge that transactions are conducted by or on behalf of same person.
- if person has acct in foreign country, person must report relationship if value of acct exceeds 10k.
- CTR must be filed within 15 calendar days after the day of transaction. supporting documentation generally not included in submission of report.
54
Member firms must have a written AML compliance program. Member firms at a minimum must:
- establish policies to detect and report suspicious transactions
- establish policies to comply with bank secrecy act
- independently test for compliance using member firm personnel or qualified outside party
- designate a person or persons to implement day-to-day operations and internal controls
- provide ongoing training for employees.
55
Money laundering abatement act of 2001 imposes additional customer ID requirements on member firms including:
- in accordance with the CIP (Customer ID program) verification of identity of any customer seeking to open acct within 5 business days
- maintenance of customer identity records
- checking that customer does not appear on any terrorist list or list of embargoed countries
- customer identification program requires account records to be kept for 5 years after account is closed.
56
Member firms must monitor accounts for suspicious activity and file a suspicious activity report (SAR):
- for any transaction involving funds or assets of 5k or more where BD detects any known or suspected federal criminal violation
- if broker dealer knows or suspects illegal activity or no business or lawful purpose.
- if member firm becomes aware of suspicious transaction, must file a SAR within 30 days. (MAY NOT disclose to the client or institution that it was filed)
57
Money Laundering 'red flags'
- customer concerned that transaction will be reported to govt and refuses to reveal any info
- lacks business sense
- customer wont identify source of funds or provides false or misleading source
- has questionable background and lack of concern regarding risks or commissions
- appears to be acting for undisclosed principal
- makes large deposits and insists on dealing in cash or appears to be structuring deposits to avoid 10k govt reporting requirements
- customer has multiple accounts under a single name or multiple names, has sudden extensive wire activity
58
AML compliance officer
- each firm must designate one. does not have to be the compliance officer. must help resolve due diligence and red flag issues.
59
Member firms are required to provide SAR info to FINRA staff in connection with:
- examinations
- investigations
- risk assessment efforts within the examination program.
Series 24
flashcards
Decks in class (13)
# Cards
-
Chapter 184
-
Chapter 257
-
Chapter 336
-
Chapter 459
-
Chapter 556
-
Chapter 11 Improvement Areas32
-
Chapter 10 Improvement Areas27
-
Chapter 9 Improvement Areas0
-
Chapter 9 Improvement Areas12
-
Chapter 8 Improvement Areas8
-
Chapter 7 Improvement Areas0
-
Chapter 6 improvement Areas33
-
Chapter 3 Section 4 study deck0
