Business Processing And Recordkeeping Rules Flashcards
(95 cards)
0
Q
USA Patriot Act of 2001
A
Requires broker dealers to
1) verify the identity of any new customer
2) maintain records of the information used to verify the customer identity.
3) determine whether the person appears on any list of known or suspected terrorists
Requires bd to obtain at a minimum, the customer name, dob, address and ssn.
1
Q
New Account Form
A
An account opened by a B/D requires a completed new account form or new account card with the following
- full name of each customer
- date of birth with photo ID
- address with phone number
- ssn or tax ID. W-9 for US W-8 for foreigners
- occupation, employer and type of business
- annual income and net worth
- marital status and occupation of spouse
- citizenship
- investment objectives
- bank and brokerage references
- whether the customer is an employee of another bd
- how the account was acquired
- customer’s financial and tax status.
- signature of a principal of the firm
2
Q
Customer Identification Program
A
- The firm must verify the identity of each new customer by obtaining a copy of their DL, Passport, military ID or state issued ID.
- They must contact the US Treasury Office of Foreign Assets Control to verify that the client is not on the list of known terrorists.
- New customers must be informed that their identities are going to be verified. This can be done verbally, on the website or on the new account form.
- The program must have procedures in place if they have a reasonable belief that the customer’s identity maybe in question.
1) the procedures should describe when the firm should not open an account.
2) when the firm should close an open account after attempts to verify the identity fail.
3) they should also describe the terms under which the customer may conduct transactions while the firm verifies their identity.
3
Q
Updating Customer Information
A
A firm must provide the customer with a copy of the account record within 30 days of opening the account. There must be a document where the customer can make any corrections. If the firm receives corrected information they must provide a new account record in 30 days. An update must occur at least every 36 months thereafter.
4
Q
Customer Information and Suitability
A
Reps are encouraged to keep updated customer profiles. Including
- investment objectives
- preservation of capital
- growth for future expenses
- income
- tax advantages
- diversification
- liquidity
- speculation
5
Q
Unsolicited ticket
A
Occurs when a customer places an order that the rep considers unsuitable or has not recommended. The rep must mark the ticket as unsolicited.
6
Q
List the different Types of Trading Authorizations
A
- discretionary - rep has been given authorization from the customer to make trading decisions
- custodial - an adult has been designated to act on behalf of a child who is the beneficial owner of the account.
- fiduciary - a third party has been legally appointed to manage the account on behalf of another person or entity.
7
Q
Cash Accounts
A
Must pay in full for any securities purchased.
- personal retirement accounts. IRA TSA etc
- corporate retirement accounts
- custodial accounts UGMA and UTMA
8
Q
Margin Account
A
The investor may use some cash and some credit to purchase securities.
9
Q
Federal Reserve Regulation T
A
The Securities Exchange Act of 1934 grants the Federal Reserve Board the authority to regulate credit extended for the purchase of securities. It specifies the equity requirements for a securities transaction on a margin account. It also stipulates which securities can be purchased on a margin. Payment is trade plus 5 business days.
10
Q
Individual Account
A
A type of account that Has only 1 beneficial owner.
The owner controls the investments within the account.
And is the only person who may request distributions of cash or securities from the account.
11
Q
Transfer on Death Registration
A
A special case of individual registration that allows securities to be passed directly to another person or entity upon the death of the account holder without going to probate.
12
Q
Joint Accounts
A
An account that has 2 or more adults who have some form of control over the account.
- new account form and joint account agreement must be signed by both adults.
- the account must be designated either Tenants in Common or Joint Tenants with Right of Survivorship
- all documents must be signed by all owners and checks will be made payable to all owners.
13
Q
Tenants in Common
A
The deceased tenant’s portion of the account goes to their estate and not to the other owner. The account may be divided unequally. When an owner passes the account is frozen until probate.
14
Q
Joint Tenants with Rights of Survivorship
A
Ownership stipulates that a deceased tenant’s interest in the account passes to the surviving tenant. Each owner has an equal interest in the account. Probate is not required and the account is not frozen upon the passing of a tenant.
15
Q
Partnership Accounts
A
An unincorporated association of 2 or more individuals.
They can open margin, cash, retirement and other accounts necessary to conduct business.
They must complete a new account form, provide a partnership agreement and a resolution stating which of the partners may trade on the account.
16
Q
Corporate Accounts
A
A corporate resolution is required to open the account.
Margin account trading is permitted if the charter allows it.
A member must obtain both the charter and the corporate resolution which must have the corporate seal and is signed by the secretary of the corporation.
The corporate resolution authorizes the opening of the account and identifies the officers that are allowed to trade on the account.
17
Q
Third Party Accounts
A
Persons other than the account owner can be authorized to buy and sell securities on behalf of the owner. Example = fiduciary or custodian accounts. Written permission is required to open an account for a competent adult.
18
Q
Fiduciary Account
A
Anyone legally appointed and authorized to represent another person.
- they may not use the account for personal benefit but may be reimbursed for expenses incurred in managing the account.
- they enter trades, make all investment and distribution decisions, and must manage the account in the owners best interest.
- speculative transactions are generally not permitted
- examples include: trustee designated to administer a trust, an executor for a will, guardian for a minor, conservator for an incompetent, receiver in a bankruptcy
19
Q
Legal List States
A
These States provide a list of securities that fiduciaries are allowed to purchase. Fiduciaries may only purchase securities on the approved list.
20
Q
Prudent Investor States
A
Fiduciaries may select securities based on the Uniform Prudent Investors Act of 1994 in these states. The fiduciary is not liable for loses as long as the investment was consistent with the investment objectives.
21
Q
Trust Accounts Requirements
A
Must obtain a copy of the trust.
Margin and option transactions may not be used unless the trust specifically states that they can be used.
22
Q
Guardian Accounts
A
A copy of the court order appointing the guardian must be obtained.
These accounts must be opened within 60 days of the court appointment.
23
Q
Full Power of Attorney
A
Allows an adult or organization who is not the owner of an account to deposit and withdraw cash or securities and make investment decisions for the account owner.
Terminates upon death.
24
Limited Power of Attorney
Allows an individual to have some but not total control over an account. Typically it doesn't allow withdrawals from the account.
It allows them to make trades on the account.
25
Wrap Accounts
- An account where a firm charges a fixed fee for portfolio management, transactions and related services.
- Reps handling these accounts must have a series 65 or 66 registration. They must register as investment advisers.
26
Describe Custodial Accounts
An account that is set up for the benefit of a minor.
The custodian has full control over the minors account.
Gift tax applies.
- they can buy and sell securities
- exercise rights or warrants
- liquidate, trade or hold securities.
27
Responsibilities of a Custodial Account
- securities may not be purchased on margin or used as collateral for a loan.
- a custodian must reinvest all cash distributions in a reasonable period.
- investment decisions must consider the minor's age. Options may not be bought.
- the custodian may not let rights or warrants expire because it is not in the best interest of the minor.
- monies may only be removed from the account for reimbursement of expenses for the benefit of the minor.
28
Rules for Custodial Accounts
- all gifts are irrevocable
- managed as cash accounts only
- only 1 custodian and 1 minor per account.
- a donor may serve as custodian or appoint someone else
- minor can sue for improper actions
- if the minor passes, the accounts passes to their estate.
29
What Documents are needed to release the assets of an owner that passed away.
- certificate of domicile
- certified copy of death certificate
- inheritance tax waivers
- letters of testamentary
30
Regulation S-P
- Requires firms to have adequate safeguards to protect customer information from unauthorized use.
- It prohibits firms from providing non public information to third parties unless the firm provided an "opt out" and the customer chose not to opt.
- Firms must deliver an initial privacy notice to new customers when the customer relationship is established.
- Privacy notice must be sent annually to all owners.
31
Cases where customer cannot opt out of notification to non-affiliates.
1) necessary to effect or enforce a transaction that a customer authorized.
2) in connection with processing or servicing a financial product or service a customer authorized
3) maintaining or servicing the customers account with the firm
4) companies that perform marketing services on the firms behalf or other institutions with whom they have a joint marketing agreement.
32
Record Keeping for Customer Transactions
Most records must maintained for 3 years.
33
Trade Confirmations
Must contain
- whether the member acted as an agent or principal
- whether the member acted as duel agent (both buyer and seller)
- source and amount of commission in an agency trade
- whether a control relationship exists between the issuer and member
- deferred sales load if any.
Copies of trade confirms must be kept for 3 years.
34
Statement Requirements
- Firms must send every customer a quarterly statement.
- Monthly statements if there is account activity.
- Must show all activities since the previous statement
- Securities positions (long or short)
- Account balance
35
Settlement Date
The date on which ownership changes between buyer and seller. The bd are required to exchange securities and funds involved in a transaction and customers are requested to pay for securities bought and deliver securities sold.
36
Regular Way Settlement Payment
The 3rd business day following the trade date.
37
Cash Settlement
Requires same delivery of securities from the seller and payment from the buyer.
38
Frozen Account
Under regulation T settlement, if a customer cannot pay by the end of reg t and the amount is greater $1000 the broker dealer must sell the securities and close out the transaction. This is called a sellout and the account is frozen for 90 days. Buys must be in cash.
39
Ex-Dividend Date
Distributions will be made ONLY to those who are shareholders on the date specified by the fund as the record date.
The Ex-Date is the first day on which a purchaser is ineligible to receive a distribution. The BOD or underwriter sets the date. It is usually the first business day after the record date.
40
Clearing Broker Dealer or Carrying Firm
Settles its own trades, holds customer cash and securities, bills trades, maintains customer accounts, and provides a full complement of back office services.
41
Introducing/Fully Disclosed Broker Dealer
A marketing organization with no back office that contracts with a clearing B/D to handle its back office work including customer statements and confirmations. Customer's information is fully disclosed to the clearing firm.
42
Firms using an Omnibus Account
These firms engage a clearing B/D to hold all of their customer securities in an umbrella account. All the securities are held in the firm's name, therefore the clearing firm does not know the names of the customers. Member firm is responsible for statements and confirmations.
* *No Margin Accounts.
* * All financial transactions must be done through a special account and must be sent promptly to the clearing b/d
43
Holding Customer's Mail
A member firm can hold a customer's mail for 2 months for travel in the US and 3 months for travel abroad.
44
Acceptable Signatures
1. Individual - the signature must match the name registered on the face amount certificate.
2. Joint names - signatures of all owners required
3. Corporate name - interchangeable endorsements are acceptable ex: ABC & Co or ABC Co.
4. Deseased person - Executor of the decedent's estate
5. A minor - Custodian's signature
6. Trust - the trustee
45
Records that must be kept for Lifetime
These records must be kept for life:
- Stock certificate book
- Partnership Agreement or Articles of Incorporation
- Minutes of Borad or Partnership meetings
46
6 Year Records
The following must be kept for 6 years
- Blotters- Records of original entry receipts and deliveries.
- General Ledger- Accounting records of assets, liability, and net worth prepared at least monthly.
- Customer Ledgers - Statements for cash and margin accounts posted no later than settlement date
- Stock Ledger- stocked owned by the firm posted the business day after settlement
- Customer Account Records- new account forms, margin agreements etc
- Designated Principals- A record for each office listing the person at the office who can explain the types of records the firm maintains.
47
3 Year Records
The following must be kept for 3 years
- focus reports
- trial balances - prepared monthly
- U-4 and U-5 forms
- Fingerprint cards
- Confirmations of trades
- Order tickets
- Security and cash loan records
- Long and Short Secirities
- Failed to receive and failed to deliver records
48
Micrographic or Electronic Storage Media
If a member uses electronic storage it must
- At all times have facilities for immediate production of the images.
- Be ready to provide a fax of the information to the SEC
- Store a duplicate copy separate from the original.
- Organize and index all the information on both original and duplicate storage media.
49
SEC Records Amendments
- Customer account records - new account information must be provided to the customer in 30 days and at least 36 months there after.
- Order tickets - must identify the time the order was received, the identity of each person responsible for the account.
50
Exception Reports
They detail unusual activity in customer accounts and must be kept for 18 months.
51
Compliance and Procedure Manuals
They must be kept for 3 years after any change.
52
Form BD and Any Amendments
Must be kept for the lifetime of the firm
53
Currency Transaction Report
The bank Secrecy Act of 1970 the US Treasury requires members to submit electronically Form 112 to Financial Crimes Enforcement Network for any cash transaction over $10,000.
- Failure to do so may result in fines of $500,000 or 10 years in prison.
- Records retained 5 years.
- Financial Institutions must also keep records of currency transfers in the amount of $3,000 or more.
54
US Patriot Act
Requires firms to do the following
- implement policies to detect and report transactions that raise suspicion of money laundering
- designate an individual at the firm responsible for implementation of these policies
- provide ongoing training for firm personnel
55
Suspicious Activity Report (SAR)
Firms must file a suspicious activity report to the Financial Crimes Enforcement Network when there is an event, transaction or series of transactions that appear questionable.
56
SAR required for the following
Transactions of at least $5,000 that
- The transaction involves funds derived from illegal activity.
- The transaction is designed to evade the requirements of the Bank Secrecy Act.
- The transaction appears to serve no business or lawful purpose.
- The transaction involves the use of a firm to facilitate criminal activity.
**SAR must be kept for 5 years**
57
Anti Money Laundering
FINRA requires member firms to develop, implement and monitor anti money laundering programs to comply with the Bank Secrecy Act. Regulations are written by the US Department of the Treasury and Federal Reserve Board.
58
Anti Money Laundering programs must do the following
1. Establish and implement procedures and policies that can reasonable be expected to detect and report suspicious transactions.
2. Implement policies to comply with the Bank Secrecy Act.
3. Provide for independent testing for compliance conducted annually.
4. Designate an individual responsible for implementing and monitoring day to day operations of the program
5. Provide on going training for appropriate personnel.
59
US Treasury's Office of Foreign Assets Control (OFAC)
It maintains a list of individuals, organizations and sovereign countries identified as a threat to the US. It requires that the assets of this entities be blocked or frozen when detected.
60
Anti Money Laundering Compliance Testing
Testing for anti money laundering is usually done annually. However for firms that don't hold customer assets like B/Ds, the testing is done every 2 years. Information on the firms anti money laundering person must be updated with in 17 business days of each quarter.
61
Customer Identification Program
Require firms to
- adopt procedures to verify the identity of any person seeking to open an account
- maintain records related to the verification of the person's identity.
- determine whether the person appears on any of the list of know or suspected terrorists on the OFAC list.
**required information- name, dob, address and ssn, tax id, passport number etc***
62
Business Continuity Plan
The purpose of the plan is to identify procedures relating to an emergency or significant business disruption so that a business can meet its obligations.
63
Each Business Continuity Plan must address the following.
- Data backup and recovery
- All Critical systems
- Financial and operational assessments
- Alternate communications between the member and its customers
- Alternate communication with employees
- Critical business constituent, bank and counterparty impact.
- Regulatory reporting
- Communications with regulators
- Ensuring prompt access to customer funds.
Senior management must approve the plan and it must be available for FINRA review upon request.
64
SEC rule 17F-1
This rule designated the Securities Information Center as the central reporting institution for keeping records of lost, counterfeit, missing or stolen securities.
65
Reporting Requirements for missing securities.
- A member has 2 business days to locate a lost security if no criminal activity is suspected.
- If it is still missing after the 3rd day it must be reported to the Securities Information Center.
- If securities are missing and criminal action is suspected, the member has 1 business day to report the loss to the SIC and transfer agent. The FBI must be notified promptly.
- If the securities are later found, all parties must be notified in 1 business day.
66
Exceptions to SIC inquiry on securities coming into a BD
- The Security came directly from issuer
- The security was received from another reporting institution (ex another member firm)
- The security was received from an already verified customer of the bank.
- Market Value of $10,000 or less.
If no exception every member must inquire with the SIC if a security coming into the firm was lost, stolen, missing etc.
67
Fingerprinting Rule 17F-2
All persons registered with FINRA must be fingerprinted.
The following must also be fingerprinted:
- Persons handling customer funds
- Persons involved in the preparation of the firm's original books and records
- Persons who supervise any above.
68
Uniform Net Capital Rules
These rules are the means by which the SEC ensures that member firms have sufficient capital and liquidity to meet their obligations to other members and the investing public.
69
SEC Rule 15C3-1
The net capital rules cover the following
- Definition of and how to compute net capital
- Minimum net capital requirements
- What constitutes aggregate indebtedness of BD
- Maximum aggregate indebtedness to net capital ratios
- Subordinated loan rules
- Maximum debt equity ratios.
71
Net Capital
Represents the LIQUID net worth of a firm.
72
Calculating Net Capital
- First you need the net worth.
Total assets - Total liabilities = Net Worth
-Then you add subornated debt (loans)
Net Worth + Subordinated debt = Total available capital
- Then reduce total available capital by nonallowable assets.
Total Available Capital - Nonallowable Assets = Tentative net capital.
- Finally subtract haircuts
Tentative net capital - haircuts = Net Capital
73
Nonallowable Assets
Assets that are not readily turned into cash.
- The equity portion of a real estate holding.
- Unsecured receivables
- Exchange memberships
- Furniture and Fixtures
- Unregistered Securities
74
Haircuts
A deduction from net worth taken against the value of marketable securities.
- Standard haircut for a common stock is 15%
- Stocks with limited trading market the haircut is 40%
- Unregistered warrants and unregistered stocks, haircut = 100%
75
Net Capital Requirement for General Securities Firms
Broker dealers that carry customer accounts, receive and hold funds, and operate as clearing broker dealers have a minimum NC requirement of $250,000
76
Net Capital Requirement for Introducing B/D that receive customer Securities.
The minimum net capital requirement is $50,000 and they have the following limitations.
- All customer funds and securities must be promptly forwarded to the clearing b/d. They cannot hold customer funds.
- B/D acts as an agent and takes no financial liability. Only participate in best efforts or all or none underwritings or a selling group member in a firm commitment.
77
NC Requirement for BD that do not receive customer securities
NC requirement is $5,000
78
NC Requirements for BD handling Mutual Funds or Variable Annuities
- The NC requirement for firms that accept wire transfers is $25,000.
- For firms that do business based on subscription only the NC requirement is $5,000
79
Aggregate-Indebtedness to Net Capital Ratio
Aggregate Indebtedness represents certain liabilites of a member firm.
The ratio for an established B/D is 15:1 (1500%) meaning that every dollar of net capitial they can have $15 in aggregate indebtedness. For B/D in business less than 1 year it is 8:1 (800%)
80
Subordinated Loan
A loan made to the firm usually by a partner, with the understanding that the loan will not be paid back if paying back the loan will cause the firm to fall below current net capital requirements.
Filed with FINRA 10 days before the effective date.
81
Features of a Subordinated Loan
- Must have a minimum term of 1 year
- Must be in written form and binding on all parties
- Must be for a specific amount
- Must specify that the lender's claims are subordinate to all other claims.
- Must be used for firm business and are subject to the risk of the firm's business.
- Must meet standards that FINRA may require to make sure the firm stays stable.
82
Temporary Subordinated Loans
No more that 3 permitted per year.
Maximum duration of 45 days.
Filed with FINRA 10 days before the effective date.
83
Carrying Firms Financial Reports Filings
- Carrying firms must file FOCUS II reports both monthly and quarterly with FINRA. Reports are due within 17 days of the calendar month/quarter end.
- They file an Audited FOCUS II report within 60 days of the end of the calendar year.
- They must also send an unaudited semiannual and audited annual balance sheet to their costomers.
84
Fully Disclosed Firms Financial Reports Filings
They must file a FOCUS IIA report on a quarterly basis within 17 days of the end of that quarter.
They must also file an audited FOCUS IIA within 60 days of the end of the calendar year
85
Accountant Requirements
Every B/D must identify to FINRA and the SEC which Certified Public Accountant will perform their audit by Dec 10th of each year.
The CPA must have no equity or other business interest with the B/D.
The B/D must provide the following
- name, address, phone number and registration number of the bd.
- name address and phone number of the CPA
- audit date
86
Termination of the Accountant
If a memeber's independent accountant resigns or is fired, FINRA must be notified with in 15 Business days of the termination date.
Notice must include:
- details surrounding the termination
- information on any accounting or auditing disputes
- a letter from the former CPA giving his side
87
Violaton and Early Warning Reports
B/Ds are required to give notice to the SEC if significant changes occur in their financial structures. Reports are sent to SEC in DC, SEC regional office where the firm's home office is located and FINRA executive offices in DC.
88
Net Capital Violations
Any time a B/D's net capital falls below the minimum required or the AI to NC ratio exceeds 15:1. The firm must give same day notification to SEC and FINRA. All securities operations must stop.
89
Early Warning Rules
If at any time during the month a B/D's AI to NC ratio exceeds 12:1 or NC falls below 120% of the minimum the B/D must notify SEC and FINRA within 24 hours.
90
Books and Records not Current Notice
If B/D discovers that its books are not current, the SEC and FINRA must be notified the same day. A plan to rectify the situation must be sent to the SEC and FINRA in 48 hours.
91
Special Reserve Account
Upon opening an special reserve account a member must inform the bank that the monies on deposit are for the exclusive benefit of the member's customers. No Crossliens. The bank cannot use the funds to pay the B/D's obligations.
92
Securities Investor Protection Corporation (SPIC)
Created under the securities investor protection act of 1970. It is a nonprofit membership organization. It supervises the liquidation of securities firms in financial difficulity and arranges for the payment of their clients claims. Maximum of $500,000 of coverage in securities and cash. $250,000 in cash is covered.
It does not cover commodities accounts.
93
Restriction on Expansion
FINRA my direct a member to not expand business if the following have conditions occured for more that 15 consecutive days
- A firm's net capital is less 150% of its minimum net capital requirement.
- A firm's AI to NC ratio exceeds 10 to 1
94
Reduction of Business
FINRA may direct a firm to reduce business it the following has occured for 15 consecutive business days.
- A firm's net capital is less than 125 % of its minimum net capital
- A firm's AI to NC exceeds 12 to 1
- A firm's books are not current
95
Further Restrictions
FINRA may require a firm to take one or more of the following actions
- accept no new customer accounts
- restrict payment of salaries
- promptly make delivery to customers of all fully paid securities in the possession of the member.
