C1 S1 FINRA STRUCTURE AND MEMBERSHIP PROVISIONS

Question 1

FINRA Combines

Answer 1

NYSE and NASD regulatory units

UNIFORM PRACTICE CODE •

Question 2

FINRA purpose

Answer 2

• promote the investment and securities business; - standardize business principles and practices and promote high standards of commercial honor; - promote observance of Federal and State securities laws; - promote equitable principles of trade and to prevent fraudulent and manipulative acts; - provide a medium to find solutions to problems affecting the securities markets and their participants; and - promote self-discipline and to investigate and adjust grievances between the public and members

Question 3

CONDUCT RULES

Answer 3

regulations that control relations between the public and FINRA members • disputes are handled through the Code of Procedure

Question 4

UNIFORM PRACTICE CODE

Answer 4

regulations that control member-to-member relationships i.e. settlements, good delivery, … applies to all OTC trades of non-exempt securities disputes are handled through the Code of Arbitration

every member agrees to submit to FINRA disciplinary actions

if wrongdoing is found, FINRA has the power to:

• censure, expel, suspend, or fine

Question 5

MEMBERSHIP

Answer 5

MEMBERSHIP
A FIRM CANNOT OPERATE As A BROKER-DEALER
IN THE U.S. WITHOUT BEING A FINRA MEMBER
B-D THAT DOES NOT HAVE TO REGISTER WITH
FINRA:

• firms dealing only in exempt securities

• firns whose activities are performed
exclusively outside US
members have advantages in receiving discounts
from public prices

• non-members cannot participate in any nonexempt
underwritingsand are given “public”
prices - no discounts permitted

Question 6

FOREIGN BROKER-DEALERS (Membership)

Answer 6

Can conduct business in the U.S. without
registering with FINRA as long as they:

effect unsolicited transactions with U.S.
customers;

distribute research reports to U.S.
institutions and effect trades in those
securities for those investors;

solicit and effect trades with institutions
with the assistance of a registered
“chaperone”’ U.S. broker-dealer;

and
solicit and effect trades with U.S. brokerdealers,
banks acting in a broker-dealer
capacity, and foreign persons temporarily in the US

Question 7

MEMBERSHIP APPLICATION

Answer 7

Form B/D must be filed
an amendment is filed promptly for any changes

Question 8

MEMBERSHIP WILL BE DENIED

(CALLED
“STATUTORY DISQUALlFICATI0N”) IF THE
APPLICANT:

Answer 8

-has been suspended or expelled from another
SRO, either domestic or foreign (i.e. if a broker
is expelled by the National Futures Association,
that person could not enter the securities
business by registering with FlNRA)

-is the subject of an SEC order suspending or
revoking registration

-by his conduct caused a firm’s suspension or
expulsion

-willfully filed a false or misleading application

• willfully violated federal securities or
  commodities laws, willfully aided or abetted
  such violations, or failed to supervise those who
  commit such law violations

-has been convicted of any felony or any
securities or money related misdemeanor or any
fraud within the past IO years

-has been temporarily or permanently enjoined
from engaging in the securities business

Question 9

ELIGIBILITY PROCEEDING

Answer 9

generally, a person subject to statutory
disqualification can NOT be associated with a
member in any capacity

however, FINRA aliows a disqualified person to
request permission to enter into, or remain in,
the securities industry
— here the member files an application seeking
approval of a new or continued registration
in an “Eligibility Proceeding”

— FINRA looks at the nature and gravity of the
event; the length of time since the event
occurred; mitigating circumstances; and the
disciplinary history of the member firm and
associated person

• if FINRA approves the application,
the SEC must also review and
approve the decision

• further, if FINRA denies an
application, an appeal can be made to

Question 10

APPLICATION INFORMATION:

Answer 10

• a copy of the registration submission to SEC
• trial balance and net capital computation

-member’s Written Supervisory Procedures
(WSPs)

-list of officers and directors

Question 11

PRE-MEMBERSHIP INTERVIEW REVIEWS:

Answer 11

-level of net capital and future capital
requirements

• internal and compliance procedures
• familiarity with FINRA rules
• business plan - including:
  number, experience. and qualifications of
  persons associated with the firm
  clearing arrangements
  supervisory personnel

Question 12

PRE-MEMBERSHIP INTERVIEW REVIEWS:

Answer 12

within 30 days of the interview, the applicant will
be notified of acceptance or denial and any
specified restrictions

if FINRA denies registration, it can be appealed to
the National Adjudicatory Council within 25 days
after the decision has been rendered

Question 13

EXECUTIVE REPRESENTATIVE

Answer 13

appointed by the new member to represent and
vote for the member in FINRA affairs

• FINRA has a Contact System that keeps info on
this person with the info updated promptly, but
no later than 30 days after any change occurs

-also, the firm must review and update, if
necessary, the contact information within 17
business days of calendar year end

Question 14

FINRA CONTACT SYSTEM

Answer 14

maintains info on each member’s:
Executive Rep

AML Compliance Person

Business Continuity Plan Contact

CE Contact Person

Question 15

RESIGNATION AS A FINRA MEMBER

Answer 15

not effective until 30 days have elapsed from
the written request for tennination
regardless of the resignation, the firm is still
liable for any customer complaints filed
within the 2 year period following
resignation

Question 16

TRANSFERRING REGISTRATION?

Answer 16

it is NOT allowed to transfer a registration from
one firn to another

Question 17

OBLIGATIONS OF MEMBERSHIP

Answer 17

annual fee of $75 per branch

annual fee of S 150 per registered individual
(reduced for finns with a larger number of registered
persons)

TRADING ACTIVITY FEE (T AF) for sales of
registered securities, securities futures, and
municipal securities (note underwriting fees are
excluded)
annual membership fee equal to greater of:

• $1,200; OR

• .1215% of annual gross income for firms with
up to S25MM of gross revenue ( GIA - Gross
Income Assessment) reported in the firm’s
FOCUS report
• note that the % assessment drops for firms with
over $50MM of gross revenue

• the GIA is computed based on the higher of the
current year’s calculation or the average of the
prior 3 years’

Question 18

GROSS INCOME

Answer 18

profits, commissions, concessions, fees in
connection with executing transactions on
exchange traded issues, options, all other
securities commissions, gains on proprietary
trading, underwriting profits, and account
servicing and clearing fees

• EXCLUDED are commodities income and any
income earned outside the U.S.

• NO deductions are allowed for salaries, wages,
or other operating expenses

• NOTE: those excluded from paying these fees
are exchange members dealing exclusively with
other members on the exchange floor (i.e. trades
between a Designated Market Maker
(DMM)/Specialist and floor broker, coming
under NYSE rules that apply to those on the
floor only)

Question 19

NON-PAYMENT OF DUES results in

Answer 19

expulsion or suspension (upon 15
days’ written notice from FINRA)

Question 20

FINRA NAME

Answer 20

member cannot state that it is endorsed or
approved by FlNRA, only that it is a member of
FlNRA

• when used, it must be given lesser emphasis
than to the firm’s name •

and note, if used on a firm’s website (i.e. that the
firm is a FINRA member), the firm must have a
hyperlink to the FlNRA website at
www.finra.org

Question 21

OSJ (OFFICE OF SUPERVISORY JURISDICTION) creates and enforces…

Answer 21

creates and enforces written supervisory
procedures and has resident principal

Question 22

BRANCH OFFICE DEFINITION

Answer 22

any branch office must be registered with
FINRA by filing Form BR
• specifically, a branch is defined as a location:

where one or more associated persons
regularly conducts securities business;
and/or

advertised as a branch or where the member
conducts investment banking or securities
related business

• any change requires an amendment to the Form
BR 30 days after the applicant learns of the
facts and circumstances giving rise to the
amendment

Question 23

OFFICES EXCLUDED FROM THE BRANCH
DEFINITION

Answer 23

back offices, residences ofRRs, “offices of
convenience”, and satellite offices are NOT
defined as branches

Home Office of a RR
this is NOT considered a “branch” as long
as:
• only l associated person conducts
business at the location
• the location is not advertised as a
branch
• customers are not met at the location
• customer funds are not handled at the
location
• the address used on all customer
communications is that of the
associated person’s designated branch
office
• the member keeps a list of residence
locations and supervises the sales
activities at these locations

• Vacation Home of a RR
defined as a “non-branch” location as long
as it is used for less than 30 business days a
year
• there is NO requirement for a principal to be
resident in each branch office, HOWEVER,
FINRA can impose this as a requirement

• Offices of Convenience
i.e. a diner where a RR meets a client
es are NOT considered “branches” as long as
they are only used occasionally
• if a RR sets up regular working hours
each day at the same table at a diner,
this would fall under the “branch”
definition

• Satellite Office
ec: a location used to engage in non-securities
activities (i.e. an office that sells life
insurance) and that effects no more than 25
securities trades in a year is NOT defined
as a branch - this is a “satellite” office
• ANY orders taken in a home office, “office of
convenience”, or satellite office must be
processed through the registered branch
location; and must be under the supervision of
the branch

BRANCH OFFICE LOCATED IN A BANK
physical location of the member’s services
should be conducted in a distinct area from
where the bank takes in deposits
member’s name must be clearly displayed
at, or prior to, opening an account, the member
must disclose:
the account is NOT FDIC insured
@ securities are NOT guaranteed by the bank
is securities are subject to investment risk and
MAY lose value

Question 24

Home Office of a RR
this is NOT considered a “branch” as long
as:

Answer 24

• only l associated person conducts
business at the location
• the location is not advertised as a
branch
• customers are not met at the location
• customer funds are not handled at the
location
• the address used on all customer
communications is that of the
associated person’s designated branch
office
• the member keeps a list of residence
locations and supervises the sales
activities at these locations

Question 25

Vacation Home of a RR

Defined as a “non-branch” location as long as it is used for …

Answer 25

less than 30 business days a
year