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Ser 7 > Ch 15 - Regulators > Flashcards

Ch 15 - Regulators Flashcards

(63 cards)

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1
Q

Securities and Exchange Commission (SEC)

A

-Prominent securities industry regulator
-Regulates the primary and secondary markets
-Enforces:
—Securities Act of 1933
—Securities Exchange Act of 1934
—Investment Company Act of 1940
-Main goals:
—Protect investors
—Maintain fair, orderly, and efficient markets
—Facilitate capital formation

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2
Q

Financial Industry Regulatory Authority (FINRA)

A

Regulates the financial industry and its participants

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2
Q

Statutory disqualifications

A

Events that may prevent or revoke a registration

Most commonly cited:
-Any felony conviction in the past 10 years
-Securities-related misdemeanor in the past 10 years
-Punishment from other regulators
-suspension/revocation from another SRO/MSRB/SEC
-proof of false statements made to SROs

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2
Q

U-4

A

Registration form for persons in finance
Filled out and filed when joining a firm
submitted and housed in FINRA’s CRD - central registration depository
Requires extensive background information - must be independently veried by firm through background check
Must be updated if information changes
Arbitration agreement is embedded

-5yr of residence history
-10year of employment history
-disclose history of felonies (charges and convictions)
-disclose securites related misdemeanors (charges and convictions)
(NOT needed —> if non secuties related misdemeanors_
—only convictions within last 10yr result in statutory disqulifiation

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3
Q

U-5

A

Removes registration status
Filled out and filed when leaving a firm

-filed within 30 days of last day of work
-fina retains jurisdiction over them for 2 years after reg cancelled

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4
Q

U-6

A

Reports the following:
-Disciplinary actions
-Reportable events
-Arbitration results

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5
Q

Municipal Securities Rulemaking Board (MSRB)

A

Self-regulatory organization governing the municipal markets
Writes municipal regulations, does not enforce

Enforces MSRB rules (securities firms):
-SEC
-FINRA

Enforces MSRB rules (banks):
-The Federal Reserve Board
-Office of Comptroller of the Currency
-Federal Deposit Insurance Corporation (FDIC)

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6
Q

General FINRA public communication rules

A

Written supervisory procedures must exist
No false or exaggerated statements
Don’t hide important information in the footnotes
Must be clear and make necessary disclosures
Nature of the audience must be considered
Cannot project performance

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7
Q

North American Securities Administrators Association (NASAA)

A

Regulates financial industry at the state-level
Enforces provisions of the Uniform Securities Act

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8
Q

Research report

A

Written communication sent to 15 or more persons
Includes a securities-related recommendation

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8
Q

Recordkeeping

A

Communications must be kept on file for 3 years
Communications from the last 2 years are easily accessible

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9
Q

Correspondence

A

Written communication sent to 25 or fewer retail investors in 30 days
Not filed with FINRA
No principal pre-approval is required
Subject to review

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10
Q

Retail communications

A

Written communication sent to more than 25 retail investors in 30 days
Generally filed with FINRA (some exceptions)
Principal pre-approval required

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11
Q

Institutional communications

A

Written communications with institutions
Not filed with FINRA
No principal pre-approval is required
May not be treated as institutional communications if received by retail investors

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12
Q

finra requires firm to files retail communications

A

written or electronic, sent to more than 25 retail customer , in 30 days grace period

the following must file 10days prior to use (PRE-file)
-in firm’s first year of business
-material relating to invest comp containing performance ranking/comparisons
-relateding to security future

the following must file 10days AFTER to use (PST-file)
-materials related to investment companies NOT containing performance ranking/comparisons
-DPP related
-CMO related
-securities derivatives comm

**correspondence and institution comm not files with finra

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13
Q

Ranking entities

A

Independent organizations ranking investment companies for risks and/or returns
Example - Morningstar

utilized 1,5,10 returns

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14
Q

Investment company rankings

A

May be provided by ranking entities
Investment companies may provide their own as long as solely based on performance

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15
Q

Bond fund volatility ratings

A

Measures the volatility in a bond fund’s NAV
May be displayed

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16
Q

Variable insurance products communication rules

A

Products should be specifically identified
Lack of liquidity disclosed
Guarantees may not be exaggerated
Hypothetical illustrations of returns allowed if balanced

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16
Q

Surrender period

A

Period of time a surrender charge applies if funds withdrawn
Must be clearly disclosed in communications

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17
Q

Recommendations of insurance exchanges

A

Customer must be informed of all features
Representative must believe the exchange is truly suitable
Lack of exchange taxation is not the only consideration

36m = 3yr is the time frame - don’t recommend a client X if they had X last 3yr

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18
Q

1035 exchanges

A

Insurance exchanges are generally tax-free

Applies to:
-Annuity to annuity exchanges
-Life insurance to life insurance exchanges
-Life insurance to annuity exchanges

Does not apply to:
-Annuity to life insurance exchanges

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19
Q

Annuity bonus

A

Insurance company match on premium payments
Used to encourage purchases of annuities

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19
Q

Social media communications

A

Generally subject to the same rules as general communications
Records kept for 3 years, records created in the past 2 years must be easily available
Rules don’t apply to personal social media posts
Firms must create a robust supervisory system to ensure compliance

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20
Static content
Longer-term and fixed content, not an interactive communication Must be pre-approved by a principal May be required to file with FINRA
20
Interactive communications
Real-time dialog with third parties No principal pre-approval or FINRA filing is required Subject to periodic review
20
Third-party posts and websites
Must be vetted and reviewed by the firm Subject to typical recordkeeping requirements Applies to adopted and entangled third-party content
20
Adopted third-party content
Endorsed or approved third-party content Firm not involved in the creation of the content
21
Entangled third-party content
Third-party content created with or funded by a firm
21
General guidelines for ethical practices
All communications must be fair and balanced Communications cannot omit material information False, misleading, promissory, exaggerated, or unwarranted statements or claims are prohibited Material information cannot be hidden from plain view (e.g. buried in the footnotes) Statements must be clear and provide a balanced treatment of risks and benefits Communications must be appropriate for the audience
22
adoption vs entanglement
adoption =endorses or approves 3rd pty content entanglement =involed in creation of the 3rd pty content
23
static vs interactive communications
static -treated like retail communications -pre-approve by principle prior to post & require finra copy filed interactive -no principle preapproval or finra filing -treated like correspondences
24
Regulation BI
Applies to broker-dealers and reps making recommendations to **retail** investors General requirements: -Disclose material facts, fees, trading capacity, and conflicts of interest -Determine the risk & benefit profiles of recommendations -Ensure recommendations are in the client’s best interest DOES NOT apply to UNsolicited trades
24
Conflict of interest
Any circumstance that puts the priority to the client at risk -proprietary products recommendation is considered a conflict of interest, altho allowed with proper disclosure sales quotas, contexts, noncash compensation (paid vacation) for sales activities are conflict of interest, allowed but requires dislcosures
24
4 Regulation BI components
1/ Disclosure obligation All material facts The trade capacity (agency or principal) All associated fees and costs The type and scope of services provided Any conflicts of interest associated with the recommendation 2/ Care obligation BD and/or rep must understand risk & benefit profile of recommendations 3/ Conflict of interest obligation Identify, eliminate if possible, and disclose if not eliminated 4/ Compliance obligation Broker-dealer must establish, maintain, and enforce written policies and procedures to ensure compliance
25
form CRS
customer relatioship summary -all material facts related to the relatioship -capacity the BD/rep are acting -associated fees and costs -type and scope service provided -conflicts of interest associated with recommendation
26
Financial license lapse
Occurs if out of the industry for more than 2 years (most licenses) SIE exam license lapses after 4 years out of the industry
27
Outside business activities
Agents must inform their employer if making money outside of the firm Firm can bar an employee from an activity if a conflict of interest exists
27
Private securities transaction
Securities transaction facilitated by rep outside of employing firm Requirements: -Must notify firm in writing -Firm must keep a record of the transaction -Written approval is required if the rep is compensated
27
Selling away
Performing a private securities transaction without notifying the firm FINRA violation / prohibited action
28
Business gifts
Limited to $100 per person, per year
29
Business entertainment
Costs related to entertaining clients does not have dollar limit but Cannot be excessive May exceed the $100 gift limit
30
Ethics
Professionals generally cannot borrow from or lend money to customers Does not apply to: -Clients in the business of lending money -Personal relationships
31
Disputes with employing firms
Typically subject to arbitration Workplace discrimination and sexual harassment may involve lawsuits
32
Networking arrangements with banks
Must identify broker-dealer and representative Must disclose they are not part of the bank Must be physically separate from bank tellers within the bank Offer this disclosure (not-not-may) --Not FDIC insured ---Not bank deposits or guarantees ---May lose value due to risk
33
Taping requirement
Required if firms hire representatives previously employed by “offending firms” (OF) Thresholds: --5 - 9 reps = 40% or more from OFs --10 - 19 reps = 4 or more OFs --20+ reps = 20% or more from OFs Must institute procedures within 60 days of FINRA notice Phone calls kept on file for 3 years, with the first 2 years readily available once exceeds, will be notified by FINRA, firm then has 30 days to terminate enough employee with offending firms. May NOT hire additional employees to avoid taping requirement.
33
employed outside of the firm
whether securities related or NOT must provide firm in writing permission not necessary, but firm may deny if there is conflict of interest
34
Trusted contact person
Close friend or family member of the investor May be contacted if the representative suspects exploitation, fraud, or diminished capacity Must be at least 18 years old
34
Fund disbursement holds
Firm may restrict transactions & withdrawals if suspecting fraud or exploitation Original hold is 15 business days May extend hold another 10 business days if additional time is needed May extend hold another 30 business days if authorities are notified -15 days -25 days allowed without notifying authorities -55 days if authorities are notified -unlimited restrictions with court order
34
“Red flag” investments
Investments with: -High risk -Low liquidity -Complex components Generally avoid recommending these to senior investors
35
Unethical activities with senior investors
Creating fake designations
36
Elder abuse
Abuse of a senior citizen in some form Must be reported if suspected
37
legitimate designations
Certified financial planner (CFP) Chartered financial analyst (CFA) Chartered financial consultant (ChFC) Certified Investment Management Analyst (CIMA)
38
Regulation S-P
Safeguards non-public customer info Firms must disclose when giving non-public info to third parties Privacy notices provided: -At account opening -Annually after Firms must provide easy “opt-out”
39
Code of Procedure
FINRA’s process of handling rule violations May result in: -Censure -Fine -Registration suspension -Registration revocation
40
FINRA’s Department of Enforcement (DOE)
Argues for penalties against respondent
41
National Adjudicatory Council (NAC)
Hears appeals from DOE or respondent May adjust penalties if warranted first appeal is made to NAC NAC decision can be appealed one last time @ SEC
42
registered rep rec notice of potential rule violation, how many days to respond
25
43
Recordkeeping - 3 years
employee record trade confirmations customer statements public communications
44
Recordkeeping - 4 years
complaints finra
45
Recordkeeping - 5 years
Currency transaction reports (CTRs)* Suspicious activity reports (SARs)* Customer identification program (CIP) information*
46
Recordkeeping - 6 years
blotters =internal trading records that keep track of the securities the broker-dealer bought and sold on any given day. Y customer account records, New account forms Customer agreements Trading authorization forms complaints (MSRB)
47
Recordkeeping - life time
stock certs, partnership agreement, article of incorp, meeting minutes

Ser 7 (16 decks)

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