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Flashcards in Chapter 9.2 Deck (20):

Qualifications Investigated for registration

Each member firm is required to learn, by investigation, the good character, business reputation, qualifications, and experience of any person prior to making such a certification in the application(Form U-4) of such person for registration with FINRA and verify such information not later than 30 calendar days after initial or transfer of Form U-4 with FINRA. Firms must also specify the firm's process for verifying the information on form U-4.
-Where an applicant for registration has previously been registered with FINRA, the member must obtain from the Firm Access Query System(FAQs) or from the applicant, a copy of the Form U-5 filed with FINRA by such person's most recent previous FINRA member employer, together with any amendments thereto that may have been filed.
-The member must obtain the Form U-5 as required by this section no later than 60 days following the filing of the application for registration or demonstrate to FINRA that it has made reasonable efforts to comply with the requirement. A member receiving a form U-5 must review the Form and any amendments and take such action as may be deemed appropriate.


Disclosure to associated persons when signing Form U-4

Persons who sign a U-4, must be provided with a written statement by the employing member that includes:
-You are agreeing to arbitrate any dispute, claim or controversery
-Arbitration awards are generally final and binding
-The ability of parties to obtain documents, witness statements, and other discovery is limited
-Arbitrators do not have to explain the reasons for their award
-Arbitrators may include persons affiliated with the securities industry or public arbitrators
-There may be time limits for bringing claims to arbitration
-Claims alleging employment discrimination, including sexual harassment claims, are NOT required to be arbitrated under FINRA rules(but could go to arbitration if all parties agree to arbitrate).


Termination of a registered person

The member firm must report the termination of a registered person to FINRA in writing within 30 calendar days through means of a U-5 form.

**When a person associated with a member is terminated for disciplinary reasons, that person continues to be subject to the disciplinary jurisdiction of the SROs for 2 years following termination.


Statutory disqualification events

Must be disclosed on Form U-4 and includes:
-Investment related misdemeanors and all felony criminal convictions for a period of 10 years from the date of conviction
-Temporary and permanent injunctions issued by a court of competent jurisdiction involving a broad range of unlawful investment activities
-Expulsions from membership or participation in a SRO
-Bars ordered by the SEC or SROs
-Denials or revocations of registration by the SEC
-Findings that a member or person has made certain false statements in applications or reports made to, or in proceedings before, self-regulatory organizations
-Any final order of a state securities commission that bars a person from engaging in the business of securities based on violation of laws or regulations that prohibit fraudulent manipulation or deceptive conduct
-Findings by the SEC, CFTC or an SRO that a person:
-"Willfully" violated federal, SOR or commodities rules or laws
-"Willfully" aided, abetted, counseled, commanded, induced or procured such violations
-Failed to supervised another who commits violation of such laws or rules
-DUI's must be disclosed on an original filing and an amendment on an existing registration if the DUI resulted in the person being charged or convicted of a felony.
-Any registered person named in allegations of sales or other violations is required to report such allegations on their U-4 form. If such allegations are dismissed, the U-4 form may be amended to reflect the dismissal.
-If an RR was initially charged with a felony that was later lessened to a misdemeanor or dismissed, the felony charge still needs to be reported


What is/isn't reported on form U4?

-Violations of a "firm's" policies do not have to be reported on U-4 form. Only regulator and legal matters have to be reported
-A change in marital status would not have to be updated on the U-4
-A change in a persons name would have to be updated on the U-4
If an RR resigns or is terminated, they continue to be subject to FINRA jurisdiction for 2 years from their termination date
-U-4 forms must be amended for non-disciplinary events within 30 days, and for disciplinary events within 10 days
-If FINRA receives and approves an application by a member firm to hire or retain a person who is subject to disqualification, the SEC must review and approve the application before it takes effect.
-Failure of an associated person to take sick days or vacations would not be a violation or cause extra scrutiny on the associated person


Fidelity Bonding

A form of insurance that protects B/D's from dishonest, fraudulent actions of their employees. Specifications include:
-The minimum coverage must be at least $100,000 but may be higher depending on the B/D's net capital requirement
-A deductible provision may be included of up to 25% of the fidelity bond coverage
-Each member shall make required adjustments annually as of the yearly anniversary date of the issuance of it's fidelity bond. The adequacy and adjustment is based on the firm's highest net capital requirement during the 12 month period that ends 60 days before the yearly anniversary date to provide the firm time to determine it's required coverage by it's anniversary date
-Each member must, within 10 days, report any cancellation, termination or substantial modification of the bond to FINRA
-Fidelity bond does not cover the firm against a decline in the value of it's inventory
-A brokerage firm with a minimum net capital requirement that is less than $250,000 must maintain minimum coverage of the greater of 120% of it's required net capital or $100,000.


Qualification Exams and Waivers

-Waivers to exams are allowed for exceptional cases where the applicant has experience in the investment banking or securities business
-Advanced age or physical infirmity will not constituted grounds for a waiver
-Any person who fails to pass a qualification must wait 30 calendar days prior to testing again except that a person who fails 3 or more times must wait 180 calendar days prior to testing again.


Leaving or returning to the securities Industry

-If a RR decides to leave the securities industry, he must be informed that his registration will be terminated with the member
-Registration cannot be carried(parked) by a firm in an inactive status
-If a previously registered person decides to return to the securities industry, they will be required to re-qualify if their return is longer than 2 years from the date of termination(U-5)
-If the registered person does not complete the Regulatory Element within the allotted time period, his registration will be suspended or become inactive until he completes the program


Continuing Education Requirement of Registered Persons

-Registered persons must complete the regulatory element of their requirement within 120 days after the anniversary of either:
-The 2nd anniversary date of their initial registration and
-Every 3 years thereafter
-Firm element continuing education: Each member must maintain a firm-wide, written continuing education program for it's covered registered persons. Covered persons include those who have direct contact with customers in the conduct of the member's securities sales, trading, and investment banking activities, any person registered as a research analyst, and the immediate supervisors of these persons.
-At least annually member firms must evaluate training needs and develop a training plan which includes the scope of the firm's business activities including investment products and associated risks, sales practices, suitability, and rule changes.

**Generally corporate organizational charts are not part of continuing education materials


All registered personnel must participate in what?

An Annual compliance interview


Records of Commissions

SEC rules require B/D's to make a record of all commissions, concessions, overrides, and other compensation for each associated person. If compensation is non-monetary, a description of such compensation and an estimated value of such compensation are required.



Every person who is a partner, director, officer, or employee of a B/D, registered transfer agent, or clearing agency must be fingerprinted except if the person meets ALL of the following conditions:
-They are not engaged in the sale of securities
-They do not have access to handling of securities or monies or original books and records
-They do not have direct supervisory responsibility over persons engaged in the activities mentioned in 1 and 2 above.


Fingerprint records of terminated associated persons must be kept for how long?

3 years

**Interns would have to be fingerprinted if they:
-Sell securities
-Have access to the keeping, handling, or processing of securities, monies or original books and records
-Have direct supervisory responsibility over those who sell securities


Recruitment Practices

When a RR leaves a firm and moves to another firm, the rule requires the firm that "hires" or "associates" with a RR coming from another firm to provide to that RR's former customers an educational communication prepared by FINRA.


Delivery of the Communication

The rule requires delivery of the educational communication when:
-The firm, directly or through a representative, individually contacts a former customer of that representative to transfer assets; or
-A former customer of the representative, absent of individual contact, transfers assets to an account assigned, or to be assigned, to the representative of the firm

**The FINRA-created communication must be delivered. Firms may not use an alternative format.


The educational communication highlights the following potential implications of transferring assets to the recruiting firm:

-Whether financial incentives the representative receives may create a conflict of interest
-That some assets may not be directly transferable to the recruiting firm and as a result, the customer may incur costs to liquidate and move those assets or incur account maintenance fees to leave them with his or her current firm
-Potential costs related to transferring assets to the recruiting firm, including differences in the pricing structure and fees the customer's current firm and the recruiting firm impose; and
-Differences in products and services between the customer's current firm and the recruiting firm


Trigger the delivery of the educational communication

These communications may include oral or written communications by the transferring representative:
-Informing the form customer that he or she is now associated with the recuriting firm
-Suggesting that the former customer consider transferring his or her assets or account to the recruiting firm
-Informing the former customer that the recruiting firm may offer better of different products or services; or
-Discussing with the former customer the fee or pricing structure of the recruiting firm
-Oral or written communications to a group of former customers including:
-Mass mailing of information
-Sending copies of information via email; or
-Automated phone calls or voicemails


Timing and means of delivery of educational communication

The rule requires a firm to deliver the educational communication at the time of first individualized contact with a former customer by the firm regarding the former customer transferring the assets to the firm. The requirements include:
-If such contact is in writing, the rule requires the educational communication to accompany the written communication. If the contact is by electronic communication, the rule permits the firm to hyperlink directly to the educational communication
-If the first contact with the former customer is oral, the rule requires the firm or representative to notify the former customer orally that an educational communication that includes important considerations in deciding whether to transfer assets to the firm will be provided not later than 3 business days after the contact or with any other documentation sent to the form customer, whichever is earlier.


No individualized contact

If the former customer wants to transfer assets to an account assigned to the representative at the firm, but not individualized contact with the former customer by the representative or firm occurs before the former customer seeks to transfer assets, the educational communication must be delivered to the former customer with the account transfer approval documentation. The educational communication requirement in the rule applies for a period of 3 months following the date that the representative beings employment or associates with the recruiting firm.


When does the educational communication requirement not apply?

When the former customer expressly states that he or she is not interested in transferring assets to the firm.