chapter 2 Flashcards
1
Q
Supervision
A
Each member is required to establish, in writing, a supervisory system to manage the business in which it engages and the activities if its RR and AP’s Designate Principals to enforce the firms written procedures ID to FINRA which of its offices are designated as OSJ’s ID to FINRAwhich principles are responsible for reviewing and taking action to achieve compliance Suitability is high on the list
2
Q
Supervisors must take reasonable steps to prohibit manipulative and deceptive practices in either exempt or non exempt?
A
Both are correct
3
Q
If a customer refuse to provide financial information….
A
the member firm may use whatever information is available to decide whether to open the account. Recommendations must be suitable….if information is not provided, the account may be opened but no investment recommendations may be made.
4
Q
OSJ
A
Order execution or market making public offerings or private placements Custody of customer funds and securities Final approval by principal Review and endorsement of orders approval retail comms, except office that solely conducts final approval of research reports
5
Q
FINRA requires members to id other offices as OSJ’s. To make this determination….
A
Whether RR at location have regular contact with public # of RR at location Location is geographically distant from another OSJ Whether Securities activities are diverse and complex Whether the members RR are geographically diverse
6
Q
Responsibilities of OSJ managed by at least one resident general securities principal are to:
A
Enforce written procedures of the firm periodically review customer accounts Maintain copies of customer records ( new account forms signed by principle, order tickets, confirms) Periodically inspect the branch offices beneath it
7
Q
FINRA examines records at an OSJ the review all activities at location but also the activities of all non OSJ branch locations reporting to that OSJ…. TRUE/FALSe
A
TRUE- a copy of the MEMBERS written supervisory procedures and a copy of the FINRA manual mus tbe kept in each OSJ and at each location where supervisory activities are conducted. A copy of of the manual must be made available to customer on request. Access to FINRA manual electronically is ok too
8
Q
How long must firms preserve a record of the names of all person who are designated as supervisory personnel and the dates the designation was effective
A
not less than 3 years
9
Q
Designation Record which is appended to the firms written procedures must be retained for how long?
A
6 years
10
Q
True/False A firms procedures must prohibit supervisory personnel from supervising their own activities or having their compensation or continued employment determined by a person they are supervising
A
TRUE
11
Q
If the firms size or a supervisory personnel’s position within the firm makes compliance with self supervision impracticable
A
Sole proprietorship. Firm must document the factors the firm used to make determination and how supervision with respect to supervisory personnel complies with rule
12
Q
Firms supervisory control policies must include reviews OSJ NON-OSJ NonBRanch Non-OSJ Branch NONbranch
A
OSJ-annually NON-OSJ Supervising NON-branch locatins- Annually Non OSJ branch- 3 years Non Branch- periodically subject to complexity
13
Q
Recording rule- if a firm is notified by Finra for the 1st time that it is subject to recording rule, it has a onetime opportunity to do what?
A
Reduce staffing levels. It can only do so by terminating reps from disciplined firms and cannot do so by hirring additional stall to fall below threshold. Must do so withing 30 days of receiving written notice.
14
Q
A branch Office is defined as any location heldout to be where one or more AP’s of a member regularly conduct business of effecting transaction in or inducing the purchase or sale of a security except:
A
- The primary residence of an AP’s ( can’t meet customers and no securities handled, AP assigned to a branch office which is reflection on stationary, orders must go thru branch office)
- Any location that is used for less than 30 bd’s annually (including vacation and 2nd home)
- Any location of convenience used occassionally, or backoffice, exchng floor
- location used primarily for non securities business
- temporary location as part of a business continuity plan
- If office conconvience is a bank, signage is neccessary to comply with rules of bank regulators, FINRA may be displayed and not deemed holding out as branch office under rule 3110
15
Q
Any location responsible for supervising the activities of persons at one or more nonbranch locations is considered to be……
A
a branch office, in this case, a supervising branch office.
16
Q
Finra rules require that there be at least how many principals at an OSJ?
A
at least one.
17
Q
FINRA rules require that all RR and principals meet how many times a year to discuss compliance matters?
A
Once. Can held individually, groups by video, telephone class setting.
18
Q
Networking arranagements
A
an agreement between a BD and a financial institution such as a federal or ste charted bank, savings bank, credit union that is contract that offers member services on or off the premises.
a Memeber must be clearly identified and to the extent possible that clearly displays the members name and to the extent practiable a location physically separate from the the banks normal routine.
FINRA and SEC must be permitted access to site.
19
Q
Networking arrangements signage
A
Customers must be made aware that products are not FDIC insured, not deposits of the bank, subj to investment risk.
Confirms must state the members is provifing service, not FDIC, may lose value no bank guarentee
20
Q
Recommendations to Non Institutiomnal accounts
A
Must be suitable in light of:
- Financial situation
- Tax status
- investment objectives
- risk tolerence
- other holdings
- FAIR dealing
21
Q
Due diligence by member in obtaining new book of business with regards to customer suitablity
A
- Due dilegence concerning a prospective RR book, learn nature of business, new dealer agreements
- Advise cutomer that new firm is unwilling to service existing products, option to continue holding at old firm before liqudating
- New firm should review recommendations for a reasonable time following hiring.
22
Q
Private securities transaction is any transaction executed outside the scope of an associated persons member firm.
A
Selling away
- Written notice to member describing role, comp, role
- if no comp… may require restrictions upon his particpiation
Exception - benfit for family member and no comp
23
Q
Rule 3270 outside business activities
A
Registered person must provide written notice to member, member may impose conditions
finra does not require written consent only notification. The firm must maintain record for 3 years.
24
Q
When a member firm is acting as a fiduciary on behalf of an issue of securities, such as a list of shareholders. Can member use for other activities?
A
No
25
Customer complaints be mainted in a file at the supervising OSJ but the rule does allow member to keep complaint file at office of origination.
What must file contacts n and how long must be kept?
* Each complaint must be accompanied by a statement of resolution and be endorsed by a principal.
* Member must file complaint electronically with finra
* filings must be made within 15 days end of each calendar quarter
* records must be maintained for 4 years
* all complaints resolved or not must be submitted to finra
* finra decides what hits broker check
*
26
Repurchase agreements are permissible only if:
They are in writing
they involve exempt securities
the time and price of the repurchase are specified
27
Firms cannot have joint accounts with customers. RR can have joint accounts with customer only if:
* The arrangement has been approved in writing by the member
* and customer and account proceeds are shared in proportion to each party’s contribution
*
28
Code of procedure. How long does respondent have to respond to complaint.
Respondent has 25 days after receiving complaint to respond.
answers must specifically admit, deny or state not enough information to submit to admit or deny.
if respondent doesnt answer the department will send a second notice requiring an answer within 14 days. If no answer hearing officer to enter a guilty as charged
amened answer is 14 days
29
Investigations
provide info orally
testimony under oath
access to books and records
how many days if associated person or member fails to comply with NAC?
30
If complaint is a minor rule violation, the fine does not exceed how much?
$2500
31
If a customer requests a comply of the predispute arbitration agreement signed on account opening, how many days must a firm respond within
32
Arbitrators for cases between 50k-100k one arbitrator is selected from where
The arbitrator will be a public arbitrator selected from the public chairperson roster.
33
FOr claims of more than 100k or for unspecified or non monetary claims, how many arbitrators are selected?
the parties will select and fines will appoint three arbitrators. FINRA rule 12403 allows any party to select an all public panel of arbitrators.
34
Arbitration involving only industry parties and that do not contain a statutory discrimination claim arbitrators are selected how?
* Disputes between BD's 50k-100k- single nonpublic from nonpublic chairperson roster
* \>100k or unspecified or non-monetary claims 3 non-public arbitrators
* 50-100k betwen and among a single public arbitrator
* \>100k 1 non public 2 public arbitrators
35
Simplified arbitration
any dispute involving 50k or less.
* Customers-single chair qualified public arbitrator and renders a binding decision with in 30 days.
* Industry parties single non public arbitrator
36
Do customers have a right to request a written explanation as to why a claim was granted or denied?
Yes the request for a written explanation must be made before the arbitation panel holds its firs meeting,
Known as an explained Decision.mmThe parties must submit a joint request
37
Mediation- Once mediation begins can either party withdraw at any time without the consent of the oother party?
Yes. ( both parties must agree to a mediation prior to opening of hearings)
Mediators are prohibited from seving on an arbitration pannel regarding any matter in which that person served as a mediator.
Matter settled with a MOU
38
RULE 3130
required to designate and notify FINRA on form BD a principal to serve as CCO and to have a CEO certify that member has in place supervisory procedures.
CEO must conduct one or more meeting with CCO during 12 months and submit a report to BOD and Audit within 45 days of certification.
39
True or False
Any member who is a party to an open transaction or who has on deposit cash or securities of another member must, on written request, provide the other member with a statement of its financial condition as disclosed in its mist recently prepared balance sheet.
TRUE
40
Rule 4370
Business Continuity Plan
Rule 1160 Firms required to update the contact info properly no later than 30days and must review with 17 bd's at end of each calendar year.
41
Control relationship
if member controls or is controlled by an issuer than before any recommendations must disclose to customer and if not made in writing at that time then it must be disclosed on confirm. Also applies to discretionary accounts.
42
DPP Roll-Up
Disclose all risks, diclose partners belief concerning fairness, include all reports, opinions and appraisals
Members are prohibited from soliciting votes from limited partners unless any compensation:
* is payable and equal in amount regardless of outcome and
* does not exceed 2%
43
Value of DPP's
Member Firms may not participate in public offerings that is not subject to ICA of 1940 or of a REIT unless the issuer at a minimum discloses annually a per share estimated value. Must be accompanied by a written methodology.
44
Direct Registration System (DRS)
Is an offering of DTC that provides registered owners the option of holding their assets on the books and records of the issuer or their transfer agents in BE form. Alternative to being held in street name.
Offers Speed, accuracy and cost effeciency in transfers vs phsical
45
Non Durable vs Durable Powers of attorney
* Non Durable are cancled if the grantor becomes mentally ill, incompetent or dies.
* Durable power of attorney cxled on death but remains in forces during mental incompetence
46
True or False. A new account form requires the signatures of the customer, RR and the Principle approving the accoutn.
False- there is no requirement for the customers signature to be on the account. The only required signature is the principle approving the account.
47
TRUE/FALSE If a member firm is recommending an issuers securities to a customer and a control relationship exists between the issuer and the member the reltionship must be disclosed either in writting before the recommendation or on the customers confirm
TRUE
48
TRUE/FALSE- A discetionary trade is one in which the member chooses the action, the security or the price.
Discretionary authority is required if the member chooses the action (buy or sell), the security, or the number of shares being bought or sold.
49
A principle must approve all discretionary order tickets before executions
False. Discretionary tickets must be reviewed by a principle promptly after execution. In addition a principle must frequently review all discretionary accounts to detect potential abuses
50
DVP/RVP accounts under rule 2340
If customer account is carried solely for the purpose for execution on a DVP/RVP basis and all trades are done on a DVP/RVP basis, not neccessary to send quarterly statements.
Mahor exception to the rule... Confirms still delivered t+1
51
Prime Brokerage accounts
SEC rules, minimum of $500k of equity in the account.
52
Regulation T
sets the intial margin requirement for nonexempt securities at 50% of the market value of the securities being purchased.
53
Margin accounts with respect to Principals
It is principals responsibility to keep an eye open for how much leverage is used in the customers account.
* Red flags with regards to suitability include unexplained increase in leverage.
54
True/false Celasring firms that submit requests for extension of time to satisfy Reg T or the reserve equirements of the Customer Protection Rule must submit the request to FINRA
TRUE
A clearing Firm must file monthly report denoting as BD's for which it clears that have overall ratio of requests for extension of time to total transaction\>2%.
Also must submit a report indicating that no extensions were requested
55
Before letting a customer trade on margin, the customer must sign a margin agreement which has what components?
* Hypothecation Agreement
* Credit Agreement
* Loan consent agreement
56
Of the 3 section of margin agreemnts, which need to be signed.
While Hypothecation and credit agreemnts must be signed to open a margin account, the loan consent form is options.
At or before opening a margin account to noninstitional customers, members must deliver a disclosure document that addresses risk and must be provided on an annual basis
57
Margin Disclosures
* you can lose more funds than you deposit
* Forced sales
* Sell without consent
* Cant choose which securities are sold
* can increase its house margin at any time
* not entitled to an extension of time on a margin call
* might be able to extend but it is not a right
Not permitted for misnors and generally for sophiticated investors
58
Margin Requirements
LMV-Debit= Equity (50%)
59
140% Rule
The amount of securities that can be pledged for a loan is limited to 140% of the customers debit balance.
Altho the firm can hypothecate 140% of the customer debit balance, it can never borrow from the bank more than 100% of the debit balance. it cant borrow more than it reloans to customer.
60
Commingling of funds
Securities of one customer can be comingled with those of another customer, it can never be commingled with proprietary securities
61
Restricted margin account
is one in which the % of equity ( margin) in the accoun has fallen below the initial 50%
* Resticted only needs to provid addiional money if the account falls below maintenance margin requirement of 25%
* Customer is permitted to make addtl purchases if they put up 50%
* When sold at least half or proceeds must be retained to reduce the debate balance.
62
SMA
If the MV of securities rises above initial cost a SMA is created, Each $1 rise, 50 cents of sma is created.
Can use SMA to buy additional securities or you can withdraw SMA
2k of SMA=4K in buying power
63
SMA
Is not equity or cash, it is a line of credit created when MV increases and when used as buying buyer or withdrawal increase.
Subsequent declines in market value has no effect on SMA, Can be used in restricted accounts
maintence calls must be met promptly,
64
Maintenance snd FED calls
To meet a $12k FED call, the customer can either deposit cash of $12k or deposit $24k of fully paid for securities.
To meet a a maintenance call, customer can deposit cash or can deposit fully paid for marginable securities with a MV equal to 4/3 of the call ( 1.333)
65
Short stock lender privileges
lender retains right to stock dividends, stock splits
66
Cheap Stock Rule
For stocks trading less than $5.00 per share the minimum margin required to short is 100% of MV or $2.50 per share. whatever is greater
67
Leap options marginable
LEAPS are marginable as long as there more than nine months to expiration. In this siutation, REG T minimum is 75% of the premium
68
When a customer buys stock member expects payment when?
By regular way settlement but REGT allows customers an additional 2 business days to pay for securities, On the 5th day position is sold out and account is frozen for 90 days.
69
Extension Requests
for an intriducing BD are made by its clearing firm, FINRA requires clearing firms to keep a daily recordof required margin and extension of time requests and to file monthly reports within 5 bd's of month end indicating which of its introducing firms requested extensions that exceeded 2% of total transactions.
Firms with a Ratio of 3% will be prohibited from further extensions requests for 90 days if it does not reduce ratio by next mmonthly report
70
Day Traders
Minimum equity for day traders is $25k and minimum margin rquiremnet is 25% ( same as regular customers)
Buying power for day traders is 4x maintenance margin excess
Cant use cross guarantees
71
Portfolio Margin accounts
* A firm must file an application and receive approval from DEA
* Only customers that have been approved for uncovered options are eligible
* Must recieve and acknoledge in writing a risk disclosure statement at or prior to initial transaction
100k min with realtime monitor, 150k with out monitoring, 500k for PB
72
Portfolio Margin accounts, what can they margin?
Equities, listed options, leaps warrantes futures derives and ETF's.
Debt securities are subject to convential margin rules
Margin Maintence must be met within 3 bd's
73
ETF Margin
Long ETF is 25%
Short ETF is 30%
Margin requirement are % commensurate with the leverage of the ETF, not to exceed 100% of the value of ETF
10% or 15% haircut
74
RULE 4560 reporting short positions
Report short positions on the 15th and last business day of the month. Reports made on those positions settling as of those reporting dates.
Recvd no later than 6pm on the 2nd bd after reporting
75
All BD's registered with the SEC must be SIPC members except?
* Banks that just deal in MUNI's
* Firms that deal in just US govies
* Firms thatt deal exclusively in redeemable investment company(open ended)
* Firms whose principle business is conducted outside the US
76
SIPC Coverage as of when is an account covered and what is covered.
Accounts are valued as of the filing date, the date for which a protection decree is filed, noth the date the customer files a claim
The equity in the margin account, not the LMV, is used to determine coverage.
77
What is an insider and what are the prohibited from doing?
Officers, directors as well as any person that owns beneficially owns more than 10% of voting shares.
* SS ( they are permited to sell short against the box at year as long a closed out within 20 days
* Short tem profit swings
* trading on inside information
78
BLUE SHEETS, what are they?
SEC or FINRA will send to member firms that may have customers involved in insider trading
ID custoemrs who bot or sold
of shares
Timing
Transaction in derivative securities
home address and tele of customers making transactions
79
Insider trading penalties
* 3x profit made or penalty lost
* upto 5mm and or upto 20 years
* Firm can be fined upto $25mm
Bounties cannot exceed 10% of that penalyty
80
Form 144
must be transmitted concurrently with the placement of a sell order and is effective for a maximum of 3 months so sales over longer periods under a 10b5-1 could involve multiple filings
81
Carrying firms
Carries customer accounts and accepts funds and securities from customers. Minimum net capital is $250k or 6.667 of aggregate indebtedness (IA).
Including firms that do a commission recapture.
\>20mm in net capital must document procedures for managing risk and liquidity
82
Introducing Firms
Introduces customers to a clearing firm. Either 5k or 50k
Recving Customer securities for prompt fowarding-50k
Best efforts underwriting 5k or50k
Participation asa selling group member in a firm commitment underwriting 50k
50k can receive but not hold securities in house and partcipate in a firm commitment underwriter. %k can do neither
83
True/False If an introducing firm effets more than 10 trades per year or writes OTC options, its minimum bet capital is ?
100k
## Footnote
Members that deal solely in mutual funds or other invent compnay products its 5k or 25k
Accepting wire orders from customers the minimum is 25k
Subscription basis only is 5k
Both is 25k
84
Market Makers
Min of $100k and a Maxmimum of $1mm
$5 or less $1000 in net capital per security
$5 or more, $2500 per secruity
85
Net capital minimums for M&A work, PBs and executing Brokers in a PB relationship
5k
1.5mm for PB
executing brokers 1mm
Block positioning 1mm
86
Minimum net capital required for an introducing firm that effects more than 10 transactions per year in its investment account
100k
87
Minimum net capital required for a firm that deals exclusively in investment company securities and accepts customer wire orders.
25k
88
Minimium net capital required for an introducing BD that can not receive customner orders
$5k
89
Minimum net capital required for a firm that caries customer accounts
$250k
90
Minimum net capital required for a market maker that makes a market in 200 STOCKS OVER $5
500K
91
Minimum net capital for a market maker tha makes a market in 400 stocks over $5 and a 100 stocks under $5
$1mm
92
Minimum net capital required for an introducing broker that receives customer securities and participates as a selling group member in a firm commitment underwritting
$50k
93
Net worth= total assets- total liabilites
Net capital excludes the value of illquid assets
Net capital = liquid assets - total liabilities
Newt worth + sub debt= total available capital
subordinated debt recieves favorable net capital treatment
94
Nonallowable assets
Includes equityin real estate, exchange memberships furniture and fixtures, goodwill, prepaid expenses and other assets that cant be converted to cash.
Net worth + sub Debt= Total available capital- nonallowable assets= tentative net capital- haricuts= net capital
95
Haircuts
15% on active stocks
Limited ownership ( 1 or 2 MM) 40%
No market 100%
Undue concentration\>10% = additional haircut on the amount that exceeds 10% of net cap threhold ( no Govies)
$1mm net capital. $250k stock position
Haircut = 250kx 15%=$37500
undue concentration= 250k-(net capital \*10%)\* 15%= $22500
96
Aggregate Indebtedness
$250k or 1/15 which ever is greater!!!
Established firms 15:1 (6.667%)
First year firms 8:1
97
Subordinated Loan, if approved by reg authorities, can add net worth in computing net cpital.
Subordination agreements are 2 types:
* Subordinated loan agreement- lender gives the member cash in exchange for interest payments
* Secured demand note agreement- the lender gives the member negotiable securities to pledge on it own nehalf to a bank for a loan.
Must be filed with FINRA 10 days before effective date
98
Standards for a subordinated Loan
* Minimum term of 1 year
* In written form, valid and binding
* For a specific amount
* Lenders claim must be subordinated to other claims
* Proceeds must be used in the business
Secured Demand note- Only fullpaid securities, street name bearer form or in the name of member. Cant be subj to 144a
Specific amount and if value declines must notify FINRA
99
Temporary Subordinated Loans
Are for short term needs and normally used in conjuction with a firm commitment underwriting. SEC rules require that member firms when acting as a syndicate member in a firm commitment, haircut as of the close of business on the day before the effective date
IPO haircut 30%
Additional issue offerings is 15%
100
Filing of Subordination agreements with FINRA:
* At least 10 days before the anticpated effective date. FINRA then renders a written opinion as to whether loans are approved for capital purposes
* Repayment at maturity is suspended if AI:NC exceeds 12:1 or its net capital is less than 120% its minimum
* Prepayment is permitted 10:1 or less than 120% its minimum
101
Debt to equity
Net worth 600k
Subordinated Debt 200k
Total available capital =800k
D/E = 200/800=25%
102
FOCUS Reports
BD's Must file FOCUS monthly and quarterly within 17 bd's of the month or quarter end.
Carrying Firms must file FOCUS II reports monthly and quarterly
Noncarrying firms file Quarterly unless notifed by finra
Must file Schedule 1 within 17 bd's of year end by midnite
If yearend is not calendar, then must file a 5th report.
If terminates must file a FOCUSII within 2 bd's of termination.
103
SSO1 is a supplementary filing , what does it do?
it helps FINRA better deduce a firms revenue source and expense composition on an ongoing basis. File with 20 bds
Finra designates who files
Firms with 100k min net capital and carry inventory ( other than money market and mutal funds) thru FINRA's firm Gateway
FOGS is same thing but used by govie security brokers
104
When are members required file Audited FOCUSII orIIA reports?
within 60 days of year end with a FOCUSIII facing page.
Similarly if a firm wants to change its Year end date, request must be made to the firms designated examing authority as well as the SEC's Washington DC and regional office with Explanation. DEA has to approve.
Filed as follows: 2 copies with SEC, 1copy regional, 1 copy FINRA
Extensions not to exceed 90 s, max 30 days request 3 days before due date
105
Carrying are required to provide customers with statement ( an unaudited balance sheet) how often?
Semiannual unaudited balance sheet and statement of Net capital plus Annual statement of audited balance sheet and audited statement of net capital.
Upon request, all firms must provide customers with a balance sheet
106
Trial Balances how often must members prepare?
Trial balance taken from a firms general ledger, that includes the firms balance sheet, income statement, and net worth accounts which can prepare a net capital computation. Most be done monthly.
107
Notifications provisions for BD's toSEC and FINRA if a member has violated the net capital rule.
1. Net capital falls below its minimum requiremnet
2. The firms AI to NC exceeds 15:1 or 8:1
3. The firms debt/equity exceeds 70% for than more 90 days
4. The firms books and records are not current
5. Material inadequacies in its accounting system
6. The firm has a total amount of money payable against all securities loaned to repurchase agreement exceeds net capital by 25x ( 2500%)
1234 notification immediately, 5 24 hours 4 or5 48 hours
108
Early Warning reports
Capital falls below 120% of its minimum requirement
AI to NC exceeds 12:1
109
Maintaining Electronic records.
Firms may wish to use micrographic media, microfilm or microfiche( so long as a reading device is available) or electronic media such as dvds. Must have capability is obligated to notify FINRA at least 90 days prior to utilizing electronic storage for recordkeeping.
Whenever there is a differing recordkeeping requirement, SEC's view is to preserve the record for the longer period.
110
Records that must be kept for the life of the firm.
1. Partnership Articles
2. Articles of Incorporation
3. Minute Book
4. stock certificate books
5. organizational documents ( form BD and mendments)
111
Records that must be kept for 6 years
1. Blotters
2. General Ledger
3. Stock records
4. Customer Ledgers
5. Customer Account Records
6. Principle Designation record must be kept for 6 years
Members must preserve for at least 6 years those FINRA books and records for which there is no specific perfiod mentioned
112
3 year records
1. Communications with the public
2. Focus Reports
3. Trial Balances
4. Form U-4, U5 fingerprints for terminated personnel
5. Customer Confirms, order tix,
6. Subsidiary Ledgers stock loan monies, Fail to delivers, div and int recvd
7. Office locations, AP's comp, supervisory procedures recordings, supervisory personnel
113
True /False
## Footnote
No member or AP may submit for payment a check or other form of negotiable paper drawn on a acustomer's checking or savings account without that persons express written authorization which may include the customers signature on the negiotable instrument.
true
## Footnote
Where the written authorization is seprate from the negotiable instrument, the member is required to preserve the authorization for a period of mthree years following the date authorization expires. This provision does not require members to preserve copies of negotiable instruments signed by customers.
114
4 years and 5 year Records
1. Customer Complaints- 4 years
5 years retention
1. Form 112 filings
2. SAR filings
3. Information obtained to verify a customers identity
115
True/False
Credit unions and savings and loans are not good control locations
True
116
Special Reserve Bank Account for the Exclusive Benefit of Customers
Excess cresit must be deposited with in 1 hour after banks open on the 2nd business day following computation.
Must be qualified securities: Tbill, T-notes, T-bonds and Ginnie Mae securities.
Failure to make deposit requires special electronic notice and member must respondly promptly
Can withdraw if there is an excess on deposit
117
True/False
Firm that has credits of more than 1mm and its AI:NC does not exceed 8:1 can make computation monthly.
True
Exempt
1. k1 Redeemable securities of registered investment companies and it promptly transmit all funds and delivers all securities
2. k2 to firms that carry no margin and promptly all customer funds and securities. min capital 100k
1. k2ii introducing BD that clear all customer trans on a fully disclosed basis
118
Terms for which focus reports must be retained
3 years
119
Typical frequency for a firms customer reserve calculation
Weekly
120
Term for which customer accounts must be retained
6 years
121
Term for which minute books must be retained
Lifetime
122
Number of days after which unresolved short securities nust be bot in
45 days
123
Amount of excess credits over debits mist be deposited by monthly reserve account calculators
105%
124
Number of days after which unresolved short differences must be bought in
45 days
125
Date by which customers ledgers must be posted
Settlement date
126
Frequency with which trial balances must be prepared
Monthly
127
frequency of Securities counts
quarterly
128
A fail to receive must be bought in immediately after this many days passed settlement
10 days
129
Fidelity Bond requires all members to join SIPC ( including 1 man firms) and to secure fidelity noding insurance against employee theft. What does the rule require
Rule requires a member with a net capital of less than $250k to maintainmin coverage of 120% of the firms net capital requirement or $100k whichever is greater. Firms with NC greater than 250k ,ust purchase a higher amount.
130
Determing Fidelity bonding requirement, firms must use their highest net capital requirement over the preceding 12months that ends how many days before the yearly anniversisary date of the bond
60 days
A deductable provision may be included in the bond upto $5k or 10% of the minimum required coverage.
Members are required to promptly ( within 10days) advise FINRA if its bond is substanially modified, cancelled or terminated
131
Finra may prhibit a member from expanding its business if either of the following had existed for 15 BD's
1. Net capital is less than 150% of min
2. AI to NC exceeds 10:1
Reduce business if exist for 15bds
1. NC is les than 125% of the minimum
2. AI to NC ratio exceeds 12:1
132
what are the indications that a member may be approaching difficulity :
1. 25% reduction in excess net capital in the preceding 2 months or 30% reduction in the preceding 3 months
2. Members books and records are not current
3. Unable to settle and clear transactions promptly
133
TRUE/FALSE
To function as a clearing firm, a broker-dealer must be a member of the DTC and DTCC and the National Securities Clearing cORP
tRUE
134
The Trust Indenture act of 1939 requires corporate bond issues of $50mm or more to sold inder what?
Trust indenture- a legal contract between the bond issuer and a trustee representing bondholders
Muni's and Govies are exempt... altho Munis typically are issued with trust indenture to make them more marketable
135
UNIT INVESTMENT TRUSTS
2 kinds
1. Fixed selects a portfolio of securities ( usually munis0and places the bonds in a trust. Not traded, proceeds distrubuted pro-rata. Self liquidates over time ( Closed End Trusts)
2. Partcipating unit trust- purchases mutual fund shares-variable annuities
136
Diversified vs non diversified
75-5-10
## Footnote
Diversified- 75% of total assets invested in securities other than itself or affiliates
5% no more invested in aany 1 security
10% may not own more than 10% of outstanding voting secruities of any 1 issuer
No conditions on the 25%, just the 75%
137
True / False
An affiliated person is anyone who directly or indrectly owns 5% or more of the outstanding voting shares
True
138
A mutual fund is required to periodically update its prospectus, How old can the financial information be?
a prospectus in use for 9 months cannot cotain financial ifnformation older than 16 months
139
Interest person
* affiliated person of the company( excluding certain board members)
* Member of the affiliates immediate family, parent, spouse of a parent, child, spuse of a child, spuse, brother or sister ( including step and adoptive relationships
* Legal counsel last 2 fiscal years
* broker dealer registered under securites exchange act of 1934 who during last 2 years had a business interest with issuer
* Someone SEC determines to be interested person
140
TRUE/ FALSE
No person will be deemed to be interest person of the an investment company by reason of his being a member of its board of directors or advisory board or an owner of its securities. Without this provision, there could be no noninterested members of funds board.
141
True /False
For funds that charge 12b-1 fees, a majority of directors must be unaffiliated with the fond
True
For non12b-1 funds at least 40% of the directors mus be unaffiliated.
142
12b-1 Charges include?:
* Advertising
* Printing and mailing of prospectus to person other than shareholders
* compensation of sales personnel
Maximum permissible sales charge under FINRA is 8.5%
Finra limits 12b-1 to .75%
Based on POP
143
Breakpoints
* Class A - Front-end load on the initial ppurchase can charge 12b-1 lower than class B or C
* Class B back end load that declines over time higher 12b-1 than A can convert to A fees expire 6-8 years
* Class C Back endload that is elimnated after 1 year 1%
144
Letter of Intent.
Non binding to investor is good for 13 months and may be backdated 90 days
145
To charge the maximum sales charge of 8.5% the fund cannot impose 12b-1 fees, offer breakpoints, rights of accumulation and dividend re-investment at NAV per share.
TRUE
