1
Q
Alternative Uptick Rule
A
Designed to protect long holders trying to sell.
- Triggered once stock falls 10% from previous close
- Once triggered, is in effect for remainder of that day and next trading session
- Applies to both listed and OTC securities
- MMs must report shorts in retail and proprietary accts once a month to FINRA
2
Q
Reg SHO
A
Requires firm to locate shares to be borrowed before initiating a short sale
-It is important to note that if an introducing BD initiates a short to its clearing firm, it is the introducing firm that is subject to Reg SHO
3
Q
Threshold Security
A
When a stock has a significant number of shares short that have not been delivered
-If short is open for 13 consecutive business days, the shares must be bought back to close the short
4
Q
Rule 204
A
Applies to shorts not threshold securities. Securities that have been shorted but not delivered must be closed out by settlement+1 (S+1) or if shares can be borrowed by that time.
5
Q
Combined Equity
A
Add result of long and short (LMV-DR) + (CR-SMV)
6
Q
Reg T in a Combined Account
A
Calculate Reg T for long positions and Reg T for short. Add the 2 together. Be sure to look out for short positions below $5
7
Q
Maintenance Req in a Combined Account
A
Calculate separately and add together
8
Q
Non-securities Credit Account
A
Account in which a BD conducts transactions, maintains commodities and FOREX and extends non purpose credit for employee stock option plans (ESOP)
9
Q
Omnibus Account
A
Account used to effect transactions for the customers of another BD. The BD holding the omnibus account must have written statement from outside BD that transactions are for customers
10
Q
BD Credit Account
A
A trading account used by a BD to effect transactions with outside creditors and those affiliated with them
11
Q
Market Functions Account
A
Accounts used to finance transactions of MMs, underwriters, OTC MMs, and odd lot dealers
12
Q
How can a cover call be met if exercised
A
- Account holds the shares
- An escrow agreement by an approved bank testifying that the shares can be delivered
- A security that can be converted into shares without additional funds
- A long call on the same stock with the same or later expiration and the same or lower exercise price
- A warrant to purchase the stock, so long as the warrant’s strike is less that the option and does not expire before the option
13
Q
How is a short put covered?
A
- Account has enough cash to cover exercise
- Bank guarantees deposits on hand equal to exercise price
- Client is short the stock and the proceeds from the short and existing cash is enough to cover the price of exercise
- Long a put with same or higher strike of same or later expiration or both
14
Q
Rules for Letter of Credit (LCs)
A
- No more than 50% of a members margin on deposit can be backed by LCs
- No more than 20% of a members margin on deposit can be backed by the LCs of a single issuer
15
Q
Short Puts in a cash account
A
Are allowed if there is sufficient cash on hand to cover exercise. There are certain hold placed on the account until the option is exercised or expires
16
Q
Requirements for naked options
A
Investor must maintain:
- an amount equal to the current option premium
- plus a percentage of the underlying security’s market value
- minus any amount the option is out of the money
17
Q
Margin Req (naked option) listed stock
A
Current Premium+20% current market value–dollar amount out of the money
18
Q
Maintenance Req for naked option
A
Only is an issue for out of the money options. In some cases, may be higher than initial requirement:
Premium+10% of underlying market value
Note: Shorts are still subject to 2000 minimum rule
19
Q
Required Cash Deposit (naked options)
A
Margin Requirement-premium received
20
Q
Margin Req for short straddles/strangles
A
The greater of the two margin requirements plus the other option’s current market value (premium)
21
Q
Customer Portfolio Margining-CPM (risk-based margin)
A
Calculates margin requirement by analyzing overall risk of portfolio, thus allowing for less stringent margin requirements
- May lead to more risk
- Accounts must have a min liquidation value
- Firms are not required to offer CPM if they do not choose to
22
Q
How does a firm become a FINRA member?
A
- Complete NMA form
- Complete new member contact questionnaire
- Submit fingerprint cards
- Submit U4 for applicable employees
- Pay registration fee
23
Q
Fingerprint Cards
A
Must be maintained at company HQ. Principal office must provide written notification that prints have been processed from FBI
24
Q
Member Application
A
Is submitted to the Department of Member Regulation (DMR) in the district office in the district of the firm’s principal office.
-The DMR then schedules a premembership interview to evaluate scope of business, understanding of FINRA rules, etc.
25
How long after premembership interview will the DMR render a decision
30 days
- Grant application
- Grant with restrictions
- Deny applications
26
Statutory Disqualifications
- Having been expelled or suspended by another SRO
- Subject to SEC order denying registration
- Lying about material facts on application or failing to disclose material facts
- Been convicted of money related misdemeanor or any felony in previous 10 years
27
Membership Agreement
Signed by firm once application is approved. Essentially states that firm will abide by FINRA rules and will stay within the scope of it designated business activities
28
When must a firm notify FINRA of a material change?
At least 30 days prior to the material event
29
A member must notify FINRA within 10 business days if a member or associated person
- Has been found to have violated fed securities law
- Subject to a customer complaint involving theft, embezzlement, or misappropriation of funds
- Beed suspended or expelled by another SRO
- Indicted, convicted, plead guilty to a criminal offense
- Is defendant for securities/commodities litigation settled for more than 15000 (ind) or 25000 (firm)
- Becomes subject to statutory disqualification
- Subject to in-house disciplinary action involving suspension, termination, fine, etc in excess of 2500
30
NYSE Rule 351 and form RE-3
Rule requires member firms to notify exchange of any disciplinary action. This disclosure is done on form RE-3
31
Retail Communication
Written communication sent to more than 25 individuals within 30 calendar days
32
Correspondence
Written communication sent to 25 or fewer individuals within 30 calendar days
33
Institutional communication
Written communication made available only to institutional clients (banks, S&L, govt entity, any entity with 50 mil+ in assets)
34
Options Advertisements
- brief description of options, exchanges, and how premiums are determined
- disclose that OCC is issues
- describe general options terms and strategies
- must include name an address of an individual who can provide a current OCC disclosure
- may include other statements as required by state law
- may include logos, banners, etc so long as they are not deemed to be miseleading
- Must be approved by ROP and receive exchange approval 10 days before first use (unless approved by another SRO)
35
Sales literature
- Can be written, oral, or electronic
- Must state that supporting documentation for any claims, comparisons, etc are available upon request
- Any sales literature sent to a customer must be proceeded with or accompanied by a OCC disclosure doc
36
Electronic communication
Remember, FINRA cares about what the content is and to whom it is delivered--not the method by which it is delivered. An instant message is the same as a written letter
37
Performance Projections are ok so long as....
- No implication of certainty
- parameters and formulas are clearly disclosed
- Cost, fees, commissions are disclosed
- Any annualized rate of return is based on a minimum of 60 day experience
- Any risks are disclosed
- Any mention of annualized return is dependent on results being duplicated, which is not a guarantee
38
Past performance is cool so long as....
- It is displayed in a balanced, universal manner (cannot simply cite past profitable recommendations)
- Must cover at least last 12 months
- Include date of initial transaction, price at the time, and when liquidation was recommended (these can be summarized so long as detailed reports are stated to be available)
- Shows overall market direction during the period
- Discloses commissions, interest
- Past performance does not guarantee future results
- Hedge clauses, caveats, disclaimers are not permitted if they are misleading
- ROP signs off that the statistics used fairly represent the overall report
39
Option Programs
- Often used in discretionary accounts
- Systematic use of a certain option strategy
- Any communication relating to an options program must disclose cumulative history of the program and its unproven nature
- Any risks and underlying assumptions must also be disclosed
40
Options Worksheet
- Usually a matrix used by firms to explain different options strategies/levels
- These must be uniform within the firm
- Worksheets are considered a communication. The firm's sales office must have easy access and be able to monitor the accounts of those who have received the worksheet
41
Option Seminars
Firms that host option seminars must ensure all attendees receive a disclosure document.
- This can be mailed prior to the seminar (with a record of the mailing list)
- The disclosure doc must be distributed at the seminar again with each recipient being recorded
42
Testimonials
If testimonials are used, FINRA requires the person must have:
- The proper knowledge/experience to form an opinion
- Testimonial may not represent the experience of other customers
- The testimonial does not guarantee future performance
- The fact that a testimonial is paid if more than $100 in cash or value is given
43
Educational Materials
- Considered sales literature
- If using past or projected performance, must be sent with disclosure doc
- If NOT using past performance/projections, ODD is not needed, but must list name and address where one can be requested
- Must disclose risk
- Must be approved by ROP and exchange before use
- Cannot make a recommendation
- Cannot include annualized rate of return
44
Option Ads and Sales Lit
All ads, sales lit, and educational material pertaining to options must be approved by an ROP before use
45
Insider trading--things to consider
- Is the info material and non-public?
- Does the tipper gave a fiduciary responsibility to the firm?
- Does the tipper/tippee know (or should they have known) that the info was inside?
46
Civil Liability for insider trading
For an individual, 3x profit made or loss avoided
- For a member firm that is supposed to have WSPs in place, 3x profit/loss or $1 million (whichever is greater)
- All fines paid direct to U.S. Treasury
47
Statute of Limitations
A person can bring suit against any insider who bough (when they sold) or sold (when they bought) 5 years after the violation
-Under Dodd-Frank, the SEC can award bounties up to 30% of money recovered from insider trading
48
AML Program
- Member firms must designated a CCO to monitor AML program
- Frim must provide to FINRA name, mail, email, title, and phone of AML officer and notify promptly if this position changes
- AML program must be reviewed annually and approved by senior management
49
Currency Receipt (form 112)
In order to comply with BSA, firms must report any currency deposit of 10000 or more in a single day
- Failure to report can result in 500K fine, 10 years in prison, or both
- Form 112 records must be kept for 5 years
- Form 112 must be filed within 15 days of receipt of currency
- Fed Reserve and Dept of Treasury handle currency receipt issues
50
Suspicious Activity Report and FinCEN
Any transaction that alone or in aggregate amounts to at least 5,000
- may come from illegal activity
- is designed to evade BSA (structuring)
- serves no rational business purpose
- uses firm to facilitate criminal activity
- Wires of 3000 or more must be documented including name and address of sender and recipient, amount, name of bank, and account number of recipient
51
SAR Reporting
- Must be made within 30 days of becoming aware of the suspicious activity
- Cannot divulge to suspect
- Firm must refuse any subpoena and notify FinCEN of request unless disclosure is mandated by FinCEN, SEC, an SRO, or other law enforcement agency
- Records must be kept for 5 years
52
Exchange Approval
- Option advertisement must be submitted to exchange for approval at least 10 days before first use. This can be waived if the material has already been approved by another reg body with same standards
- Exchange does not approve sales literature
- Ads and sales lit must be kept for 3 years, documenting who prepared and who approved (2 years readily available)
53
Options Compliance
- All firms must have a series 4 ROP to supervise options business,
- ROP must make sure all clients have received an signed an options agreement within 15 days of approval
- An ROP can delegate some responsibilities to a branch office, so long as he/she has a procedure for monitoring delegated authority
54
Recruitment Advertising
- Must be fair and informative and contain no unwarranted claims
- BDs can run blind ads
55
Cold Calling
-a persons name is on do not call list for 10 years
Firms must have a WSP readily available to show compliance with do not call
-make sure reps record name and number of those who ask not to be called
-calls can only be made between 8AM and 9PM in the prospect's time zone
56
Do not call exemptions
- Calls made to parties with whom there is an existing business relationship or permission has been granted
- Calls for debt collection
- Calls that are not made for a commercial purpose
57
Reg FD
- Required firms to make a public disclosure when non-public info gets out
- If unintentional, issuer must make a public disclosure before next trading day by filing an 8-K, holding a press conference, webcast, etc.
58
Customer Complaints
- No action needed if firm and client reach a resolution
- If not resolved, referred to FINRA Dept of Arbitration
- Must immediately notify FINRA if complaint involves theft, embezzlement, forgery, etc.
59
Statute of limitations
6 years from when the act occurred and within 1 year of discovery
60
Code of Procedure (COP)
If FINRA's Dept of enforcement believes a violation has occurred, it will issue a formal complaint, appoint a hearing officer, and empanel a jury of industry personel
- Respondent has 25 days to address complaint
- Respondent has 14 days to respond to 2nd notice
- If no response received, can be deemed guilty
- Respondent has 14 days to address any amended complaint filed by the Department of Enforcement
61
Offer of Settlement
Allows respondent to propose a settlement by stating in writing:
-Law that was violated
-Acts that lead to the law being violated
-Statement accepting the complaint
-Proposing sanction consistent with FINRA's guidelines
If offer is accepted by NAC, issue is considered closed
-If the offer is rejected, it cannot be entered into evidence during a hearing
62
Uncontested Offer
Essentially, once an Offer of Settlement has been made and is accepted, the respondent can not demand a hearing or appeal the issue
63
Contested Offer
When the Dept of Enforcement rejects an offer of settlement.
- When this happens, the original offer and the DOE's rejection are submitted to a hearing officer who may call parties to a negotiation or forward offer to NAC
- If NAC accepts offer, issue is closed. If not, hearing begins
64
Acceptance, Waiver, and Consent
A written acknowledgement by a respondent to a violation, waiving of hearing/appear, and accepting sanctions
- Issue is closed is accepted by NAC
- If rejected, hearing begins (extremely rare)
65
Minor Rule Violation (MRV)
When a respondent accepts violation that is minor in nature (failing to update U4 in a timely manner)
- Respondent signs an MRV letter
- NAC may impose fine not to exceed $2500
66
Pre-hearing conference
- When there is no offer of settlement, AWC, or MRV
- Must be held within 21 days of respondent's response to claim
- Primarily spells out charges, submits witness lists and evidence, and sets hearing date
67
Hearing and Verdict
Hearing are typical. DOE goes first
-Cross-examination is permitted
-Jury will deliver verdict within 60 days (majority opinion)
NOTE: Juries can issue immediate cease and desist orders if there is a clear threat to investing public
68
When do sanctions take effect
Depends, but no earlier than 30 days after the decision has been rendered
-The exception is a bar or expulsion, which goes into effect on the decision date
69
Appeals
- Must be made to NAC within 25 days of decision
- Stays any sanction (except for bar/expulsion)
- If NAC does not intervene, can appeal to SEC and then to federal court
70
Release of Disciplinary Action
FINRA will disclose
- Any expulsion of a member of revocation of associate's registration
- Imposes any monetary fine of 10,000 or more
71
Investor Education and Protection
Once a year, firms that take custody must send a letter to clients with the phone to FINRAs public disclosure hotline, FINRA's address, and a statement on the availability of the investor brochure
72
Code of Arbitration
Geared towards interindustry issues:
-Member v member
-Member v associate
-Associate v associate
NOTE: Most client complaints are handled in arbitration. Without an arbitration agreement, a customer can force a firm to arbitration, but not the other way around
-Class actions, and allegations of harassment cannot be arbitrated unless parties agree
-There are no appeals to arbitration
73
When must a firm provide the arbitration clause to customers?
Within 10 business days of it being requested
74
Arbitration Proceedings
- Claimant files with FINRA director of arbitration spelling out claim, presenting evidence, and specifying dollar amount sought. They must also include a check for the filing fee
- Respondent has 45 days to respond to director and claimant. If they fail to do so, they may be barred from presenting evidence at a hearing
- When the respondent does respond, the claimant then has 10 business days to send written acknowledgement
75
Simplified Arbitration
Single arbitrator presides over claims of 50K or less
- Arbitrator than issues a binding decision within 30 days
- Both parties must agree to this format
76
When must arbitration awards be paid?
Within 30 days of decision date. After that, interest accrues
77
Statute of limitation for arbitration
6 years
78
Market Maker
Provide liquidity to the options in which they are registered.
- Trades for his own account (principal)
- Can withdrawal so long as written notice is given to the exchange (failure to do so can result in disciplinary action.
- Minimum quote size is 10 contracts
79
Designated Primary MM
Acts as both a MM and a floor broker
- All listed options have a DPMM
- Responsible for maintaining 2-sided market for specific options
80
Floor Brokers
- Accept all types of orders from member firms
- Trade with MMs, other brokers, and electronic book
- Can accept any order type but cannot trade their own account
- Execute trades as agents
- Can decide time, price, and size up to a total specified size
81
Trading Permit Holder (TPH)
- Allows BD to conduct business on the options exchange
- CBOE can expand or limit number of permits out there
- BDs pay monthly fees to CBOE to hold permits
82
Market Maker Permits
Allows holder to stream quotes to the exchange and submit orders
83
Electronic Access Permit
Allows holder to submit orders only
84
Qualified Contingent Cross Order
- An arranged order of at least 1000 contracts
- A cross should not take place at the current market price on the order book. As such, most crosses take place slightly away from the market
85
BrokerCheck
Maintained by FINRA, allows anyone to research the history of those who have been registered in the last 10 years
86
Pre-Hire Individual Snapshot Report
Available to members to investigate potential hires who were previously registered but are currently not
-Prior to pulling, the hiring firm must get written authorization from individual to pull report
87
Retail Automatic Execution System (RAES)
System used by CBOE to fill market orders and instantly executable limit orders for retail customers for 10 or fewer contracts (occasionally 20)
- Orders are filled and confirmations sent almost instantly
- It is an SEC violation to submit multiple orders for the same option issue within any 15 second period for an account of the same owner
88
Financial Risk Controls SEC 15c3-5
Mandates WSPs be in place to limit a BD from financial exposure due to access to market:
- Trades that exceed net cap
- Erroneous trades
- Preventing trades that BD is not allowed to make
- Sending accurate trade confirmations
- Establishing risk management procedure for both manual and auto-entered trades
89
Immediate Or cancel
-Order must be executed immediately. Partial fills accepted. Remainder is cancelled
90
All or None
Whole order must be filled-but not immediately
91
Alternative (order type)
Essentially a bracket (sell at limit or sell at stop)
92
Orders to DMMs
DMMs can accept limits, stops, and stop limits
| -They CANNOT accept straddles or spreads
93
Option Order Priority
1) Customer complex (spreads, straddles, combos)
2) Customer Market
3) Customer Limit
4) Firm Market
5) Firm Limit
94
Cabinet Trading
Allows customers to get out of options that are deeply out of the money
- Must be placed at price of $.01 per contract
- All orders must be handled in priority of time of receipt
- Not reported on tape but must be reported to exchange at end of day
- Cabinet trades generate a confirm sent to customers which can be good for tax records
95
Trading Rotation
Options will not start trading until stock does
- nearest term lowest strike for call and nearest term highest strike for puts are traded first
- Once the first series is complete, the next series is traded
- Market order have priority over limits
- Spreads have priority over single legs
- If trading is halted, rotation is used again when trading resumes
- Rotation is also used to close the trading day
96
Fast market
When 2+ floor officials believe the market is becoming disorderly.
- Solved by imposing another rotation
- Depending on the exchange, rotations can be ordered by:
- DPMM
- Exchange floor official
- Any market maker so entitled by the exchange
- Can also be triggered by Screen Based Trading system (when the data for the underlying has been lost)
- Is lifted when 2 officials believe the feed as been restored
97
Rapid Opening System (ROS)
Exchanges automated system for opening option classes at the beginning of the day. All pre-open orders will be calculated in the ROS system
98
Hybrid Opening System (HOSS)
Disseminates info about orders from the previous day or pre-opening orders
-After the underlying stock has traded for the day or has a current quote, the system initiates opening procedure and sends a notice to participants for their own quotes
99
Lvl 1 Halt
7% decline in S&P
Before 3:25---15 minutes
After 3.25---trading continues, unless lvl 3 halt
100
Lvl 2 Halt
13% decline in S&P
Before 3:25---15 minutes
After 3.25---trading continues, unless lvl 3 halt
101
Lvl 3 Halt
20% decline in S&P
| -At anytime of day, trading is halted for remainder of session
102
Trading Halt specifics
A level 1 or 2 can only happen once a day
- Listed stocks are usually halted by the exchange or SEC
- OTC stocks are usually halted by trading venue like NASDAQ or FINRA
- Only SEC can halt bulletin and pink stocks
- During a halt, orders may be cancelled and options exercised
103
Error Report
Required by FINRA when a trade error occurs
- Must be made in writing to the person in charge of receiving errors (branch manager/principal)
- Must be retained for 3 years
104
Error in Reporting
When the details of the trade are reported incorrectly to customer
-Trade is still binding to client
105
Error in Execution
A typical TERR. The order was executed in a manner opposed to the client's instructions
-Not binding
106
Cancel/Rebill
Moving a trade that has been posted to the wrong account
- Must detail reason for move
- Must be principal approved
- Two confrms will be generated
107
Error Account
Used to house securities that are the results of errors while the firm investigates who is responsible and/or what course of action should be taken
- Must be reported as a proprietary account
- Must be continually monitored by a principal
108
Trade Confirms
- Type of option
- Name of underlying (but not mkt price)
- Expiration month and year (but not exact date)
- Exercise price per share
- number of contracts
- premium/commissions
- purchase or sale
- principal or agent
109
Statements
Sent monthly or quarterly
- Since shorts are marked to market daily, any short account must generate monthly statements
- Must prompt the client to make known any financial/objective change
110
Lifetime Records
- Form BD
- Articles of Incorporation
- Partnership Agreement
- Meeting minutes and stock cert books
111
Six Year Records
-Blotters
-General Ledger
-Stock Record (13F reports)
-Customer Ledgers (statements)
-Customer account records (NAF, margin agreement, etc.)
-Firm principal designations
NOTE: If a retention period is not specified, the default is 6 years
112
Three Year Records
- Ads
- Trial Balances
- Order tickets and confirms
- Subsidiary ledgers (money/stock borrowed or loaned)
- Associate compensation records
- Firm's compliance manual
- Discretionary Order report
- List of every office where associated persons regularly conduct business
113
Five Year Reports
-Form 112 filings
-SAR filing
-Info used to verify a customer's ID
NOTE: Exception reports must be retained for 18 months
114
Customer Complaints
-Receiving office must forward to central office within 30 days
-Receiving office must keep a record of the complaint
-Firms must file complaints with FINRA within 15 days of each quarter with:
-Customer name
-Date complaint was received
-RR's name
-general description of complaint
-summary of firm's response
Records kept for 4 years
Each complaint must be accompanied by a statement of its resolution and be endorsed by a principal
115
Networking Arrangement (BD rep working in a bank)
- Must be clearly marked as a separate institution, activities should be conducted in a separate area, and signs should clearly distinguish the BD section
- SEC and FINRA personnel must be allowed to enter the premise for supervisory business
116
Customer Disclosures (when invest account is opened through a bank networking)
- BD services are provided by member, not the bank
- Investments are not FDIC insured
- Subject to investment Risk/may lose value
117
When are networking disclosures not required
- radio ads 30 seconds or less
- signs to indicate time/temp
- signs, banners, and posters when only used as location indicators
118
Regulatory CE
Required within 120 days of the registrant's 2nd anniversary and ever 3rd anniversary thereafter
- Content is prepared by FINRA based on role (rep or principal)
- If not completed within 120 days, license suspended until completed
- If person leaves and reaffiliates within 2 years, the original registration date is kept
- If reaffiliate after 2 years, reg element will be based on date of reassosication
119
Frim Element CE
Given once a year to all registered persons who have contact with clients/public
120
Options Sales Supervisor
9/10s who are working in the branch can act as an options sales supervisor that covers FINRA, MSRB, and SEC rules
-Can approve discretionary accounts but that approval must be reviewed by ROP
121
Termination of ROP
-Must be promptly reported to designates examination authority (DEA) with a statement regarding termination
122
Mandatory Vacation
Used by firms for those in sensitive roles (prop trading) to make sure no unauthorized trades have taken place
-Though recommended as a best practice, it is not required by FINRA
123
OBA Activity
Must be submitted in writing to member
- Employer's permission is not required, but it may deny or restrict OBA activity
- Passive investment such as purchases of an LP does not constitute an OBA
124
If an associated person want to participate in a private securities transaction, they must
- provide prior written notice
- detail the proposed transaction
- detail their role in the transaction
- whether or not there will be compensation
125
Private transaction with compensation
-If approved, the transaction must be conducted on the member's books and the associate must be supervised by the member during the transaction
126
Private transaction without compensations
Employing member must send written acknowledgement that it has been notified by employee
-May still specify certain conditions
NOTE: If the transaction is for an immediate family member and no compensation is involved, the definition of private securities transaction does not apply
127
Heightened supervision may be imposed when:
- A new complex product is being offered
- A rep has been sanctioned
- A rep exceeds trading limits
- When suitability is disregarded in favor of profitability
128
Issuer options transactions
Members cannot accept short call orders from corporations that issue the underlying stock
-Issuers can sell puts on their own stock, subject to regulation
129
Restricted Stock
Members cannot accept restricted (unregistered) stock to satisfy:
- exercise notice on short call
- exercise of put
- covering a short call
130
Rule 144 Basics
Restricted stock cannot be sold under rule 144 unless held fully paid for 6 months from issue date
- Once 6 months has passed, insider can file form 144 with SEC to lift restriction
- The greater of 1% shares outstanding or avg trading volume from last 4 weeks can be sold once every 90 days
131
Rule 144 Options
- If a put option is purchased during the holding period, the holding period is paused until the contract expires or is sold
- Insiders cannot write naked calls on company they are an insider
- Insiders cannot buy puts on company unless they own the stock themselves
132
Rule 5130
Protects the integrity of public offerings
- Only applies to IPOs of common stock
- ADRs, secondary offerings, REITS, debt securities etc are not included
133
People who cannot buy IPOs (Restricted Persons)
-FINRA members
-Employees of members
-fiduciaries of the underwriter (lawyers, accountants)
-Portfolio Managers
-Any person who owns 10% or more of a member firm
NOTE: Immediate family members and those who receive material support from those listed above are also restricted
134
5130 Exemption
Employees of a limited BD can purchase IPOs
- A limited BD deals exclusively in mutual funds, variable products, and DPPs only
- The employee gets the exception, not the firm itself
135
De Minimus Rule
An investment club account (in which one of the holders is a restricted person) can buy a new issue so long as their beneficial ownership in the account does not exceed 10% and no more than 10% of the account owners are restricted people
136
Capping
Keeping a stock price from rising by selling short
- Often employed by call writers
- Order does not have to be filled to be deemed manipulative
137
Pegging
- Keeping stock price from falling by placing buy orders
| - Common with naked put writers
138
Supporting
Used by long option holders who place either buy or sell orders to keep their existing options in the money
139
Uneconomic trades
ROPs need to be able to identify when an options trade has no chance of being profitable
140
Rule 10b-18
Deals with safe harbor of issuers buying their own stock
141
10b-18 Rules
-Issuer cannot trade in first half hour of the day or last half hour
-Can only make use of one MM
-Issuer cannot buy at a price higher than independent bid or last reported sale
-Cannot trade more than 25% of day's trading volume
NOTE: Block orders outside of the normal order flow do not count against the 25%
142
Gifting Rules
- Cannot give or receive gifts in excess of $100 for services provided as an employee member
- Does not apply to wedding/bereavement gifts
- Does not apply to de minimis gifts like pens, desk ornaments
- Does not apply to occasional meal ticket or sporting event, so long as it is not contingent on a sales target
- Does not apply to tombstones to commemorate business achievement
- does not apply to gifts from firm to its own employees
- Records kept for 3 years
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Covered Security
A security that is subject to a distribution (IPO)
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Reg M Rule 101
Prohibits MMs, BDs underwriters, selling agreement members, etc from bidding or influence others to bid during the restricted period
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Restricted Period
Under Rule 101, 5 business days before effective date
- -If the stock has $100K in daily trading volume with a float of at least 25 million, restriction period is day before effective date
- Trading is not prohibited in options or convertibles during this period
- The exchange also forgives an inadvertent buy by a syndicate member, so long as it is not more than 2% of trading volume
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Actively Traded Securities
ADTV of 1 million and a $150 million float are not subject to restriction period
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Rule 101 exemptions
- Research Reports (but recipient needs to be someone who consistently receives research reports)
- Unsolicited trades
- Option/warrant exercise
- Basket transactions (so long as covered security is not more than 5% of basket value)
- Transactions involving mutual funds, gov debt, munis, and preferreds
- Odd lot transactions
- Transactions to QIB or persons not deemed US persons
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Rule 102
Places restrictions on issuers, insiders, and their buyers from inducing others to bid during the restriction period
-Rule 102 does not exempt actively traded securities. Even with a high float, insiders are restricted for 1 business day before the effective date
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Rule 103
Allows passive market makers to maintain liquidity for new issues even if they are part of the underwriting group
- Bids displayed cannot exceed highest independent bid (exception of limit orders)
- Underwriting must be fixed price/firm commitment
- Must be at least 1 other independent market maker
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Rule 104
Stabilizing bid are made by market makers to make sure new IPO does not plummet
- Cannot bid higher than POP
- All stabilizing activity must be disclosed as an option either in the prospectus or on client trade confirm
- Cannot be higher than the bid at an independent market maker
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Record Keeping for new issues
Documentation of stabilizing bids, syndicate covering bids, etc must be kept for 3 years
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Rule 105
Prohibits purchase of shares on the effective date to cover a short position established within 5 business days of the effective date
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When is an analyst allowed to talk to the IB department
When the analyst is trying to confirm factual accuracy of a pending research report. The communication must be made through the firm's legal department or compliance.
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Research Analysts and Issuers
Analyst cannot:
- Share draft reports (unless to confirm information)
- Share info dealing with rating, price target, etc
- Offer positive or threaten negative rating in an attempt to solicit future IB business
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Quiet Periods
A member firm/analyst involved in a IPO cannot publish research, nor the analyst make a speech about the subject company for 40 days after IPO or 10 days after a secondary offering
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Exceptions to Quiet Periods
- There is a significant news worthy event during the quiet period
- The company is already actively traded as defined by REG M (the 10 day quiet period is suspended)
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Disclosures for Research Reports
- Firm states its rating system
- Analyst must disclose if his revenue is tied to firm's IB revenues
- Disclose if analyst, their immediate fam members owned the stock or the firm owned 1% or more of any class
- Whether, in the last 12 months, the firm has received IB fees from the company
- Whether the company is (or was in last 12 months) a client of the company
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Analyst Trading Restriction
- Cannot invest in a company IPO if the company is in a sector the analyst covers
- Cannot trade 30 days before and 5 days after the release of his own research report or change in rating/price target
- Cannot trade against his own recommendation
- Rules apply to members of household
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Booster Shots
Offering managers cannot release a research report or make a public appearance regarding a company 15 days before or after a insider lock-up period expires
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5% Policy
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More of a guideline than a rule. Relates to markups, markdowns, and commission on standard OTC trades
Does not apply to:
-Govt issues
-IPOs
-VA
-Mutual Funds
-Munis
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SEC Rule 17f-1
The Securities Information Center (SIC)
| -The central database regarding lost, stolen, counterfeit, or missing certs
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What is done when securities go missing without suspected criminal activity?
-Member has 2 business days to find securities
-If missing on 3rd day, must notify SIC and transfer agent
NOTE: If missing certs are discovered in quarterly securities count, member has 10 business days to inform SIC
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What happens if securities go missing and are believed to have been stolen?
- The member has 1 business day to notify the SIC and transfer agent
- FBI must also be promptly notified
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When is a member exempt from contacting SIC when receiving new certs?
- Received directly from issuer
- Received from another member firm
- Received by customer and registered in customer's name or recently sold to customer and verified by records
- Part of a transaction valued at less than 10,000
