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Flashcards in Industry Rules Deck (60):

Within a member firm, who must be a RR?

All persons engaged in the investment banking or securities business must be registered except those whose work is solely clerical or ministerial


What are forms U4 and U5?

U4 is for a new registration (amended on disciplinary sanction)
U5 is for a resignation or termination

A firm employing someone previously registered with FINRA must request their U5


How long after resignation of an RR does FINRA's jurisdiction last?

Two years


What crimes lead to statutory disqualification?

Any felony in last 10 years, or misdemeanour involving false reports, bribery, perjury or crimes related to funds or securities


What must a BD do in regards to FINRA's Investor Education and Protection Rule?

In writing, provide details of BrokerCheck hotline, FINRA website and availability of a brochure describing BrokerCheck


What's the Regulatory Element of Continuing Education?

Regulator administered program where RR's must participate in training on second anniversary of qualification and every three years thereafter


What's the firm element of Continuing Education?

Annual analysis, prioritisation of training needs and provision of training.


What's a WSP?

Written Supervisory Procedures manual where a firm documents its policies and procedures


What defines an OSJ?

One or more of
- market making/ execution
- structuring of public offerings or private placements
- maintaining custody of funds/securities
- final acceptance of new accounts
- final approval retail Comms
- review and endorsement of orders


A branch office is where one or more firm personnel...

Regularly conduct business of inducing purchase or sale of any security


Locations not considered a branch office include:

- Non-sales office
- location primarily used for non-securities business where fewer than 25 securities transactions handled annually
- RR's primary residence not used as an office for public


When can a client be considered long in regards to a sale of securities?

If they're at the BD or RR believes client will bring them in by settlement date, or in a binding contract to buy


What's the difference in charging mechanism between broker and dealer activity?

Broker acts as agent and charges commission (which it must disclose)

Dealer acts as principal and adds markup, which generally doesn't have to be disclosed


What does the 5% markup policy cover?

- Transactions as agent or principal
- Guide not mandatory
- Based on current market price not dealer's inventory cost
- The relation to actual cost (so inactively traded stocks or small transactions justify higher commissions)


What's not covered by 5% markup policy?

- Transactions requiring a prospectus (new issues, registered secondaries and mutual funds)
- municipal and US government securities


Markups and markdowns on debt securities must be based on prevailing market price. If the dealer's contemporaneous cost is obsolete (eg through news about issuer) how determined?

1. Contemporaneous inter dealer transactions in same security, then transactions with institutions, then quotes.
2. Contemporaneous price of similar securities
3. Pricing models


Four different capacities in which BDs may operate when executing customer traded... And how compensated for each

1. Agent - commission
2. Principal - markup
3. Riskless principal (buy into inventory to fill pre-existing orders)
- markup on BD's price paid
4. Net basis (as 3 but sold at different price to price paid)


What are disclosure and consent requirements on riskless principal and net basis transactions?

Riskless principal - must be disclosed to customer, with markup disclosed on customer confirmation.
Net basis - for retail customers, written consent on order by order basis; institutional, written or oral consent, or blanket consent


What's front running?

Executing an option order for an account in which BD has an interest or over which it has discretion, when they have nonpublic knowledge about an imminent block transaction (10,000 shares it more). Doesn't apply to market makers accepting automatic executions)


What is Trading Ahead?

Establishing, increasing, decreasing or liquidating an equity position (or derivative thereof) based on nonpublic advanced knowledge of timing/content of a research report


How must firms ensure they are providing best execution?

Requirement is to use reasonable diligence to obtain best price. Firms must conduct a rigorous review at least quarterly.
For stocks with limited quotes or pricing information, use three quote rule


How is correspondence defined by FINRA?

Written or electronic messages sent to 25 or fewer retail investors within any 30day calendar period


How is retail communication defined by FINRA?

Written or electronic communication to more than 25 retail investors


What's the key feature defining a public appearance?

It's unscripted. Otherwise it would be a retail communication.


What must be supervised and monitored, but not approved by a principal in advance?

Correspondence and institutional communication. Retail communication must generally be approved in advance unless no recommendation made or products/services mentioned


What is FINRA's requirement and objective about incoming correspondence?

Requirement is written procedures, generally that RR does not open their own correspondence.
Objective is ensuring complaints identified, and finds handled properly.


Three instances where retail communication does not require principal pre-approval...

1. Another firm has filed with FINRA and no material change
2. Comm posted on online interactive electronic forum (social media)
3. Comm does not make financial or investment reco, nor promote firm products/services, nor research report


Retail comms with a recommendation must have reasonable basis and include supporting information plus four things...

1. Price at time of recommendation
2. Whether firm is market maker or intends to act as principal
3. Whether firm or individuals have financial interest
4. If manager or co-manager of any related issue within last 12 months


What are rules on investment analysis tools?

No filing if for institutional investors only.
For retail investors, provide access plus templates of reports within 10 business days of first use.


Under Regulation AC (analyst certification) what must research analysts and their firms do?

Make certifications about conflicts of interest and basis of compensation


What's the rule on gifts to personnel at another BD?

No more than $100 per recipient per year
Exempt from this: occasional meals and events if RR attends.
Written records kept of all gifts made


Can payments for referrals be made to an unregistered party?

Under no circumstances


What are rules on cold calls?

- Only between 8am and 9pm
- State name, entity and contact details
- Create and maintain do not call list


RRs can only lend money to / borrow money from a customer if...

- Immediate family members
- Customer is a financial institution regularly in business of extending credit/loans
- Both parties registered with same firm
- Based on a personal relationship or a business relationship independent of broker relationship


What must two dealers transacting with each other do on T+1?

Send a comparison notice

Securities complete T+3, government bills T+1


What constitutes good delivery for stock?

- Properly endorsed or with an endorsed stock power form
- Tax stamps attached
- in units of 100, multiples of 100 or units totalling 100


When will most stocks go ex-dividend?

Second business day prior to record date.
Price will be adjusted to reflect pending dividend.


What's a mark to the market?

For short sales (and other margin situations) a comparison of market price to the contract price when transacted securities have not been issued or distributed.
(If one BD sends a m-to-m to another the required cash must be deposited As promptly as possible)


What's the ladder up on disciplinary proceedings?

1. Dept of Enforcement issues complaint
2. Hearing Panel
3. National Adjudicatory Council
4. SEC
5. Federal Courts


What's an AWC?

Letter of Acceptance, Waiver and Consent that a respondent may sign to accept complaint and stop disciplinary process.


How does Code of Procedure differ from Code of Arbitration?

CoP is discipline for violation of rules and regulations.
CoA settles disputes between members, public customers and RRs


Key features of SEC Regulation SHO on short sales...

- All orders marked long or short
- Long means security with BD or reasonable expectation it will be by settlement date
- Prior to short sale, BD must locate securities for settlement (eg use a current - 24hr - Easy to Borrow list)
- on a fail to deliver, must borrow after 13 days


OTC equity securities are primarily the responsibility of which regulator?



Starting outside non-BD employment requires a RR to...

Provide written notification to his employer


Fingerprinting requirements include...

All except those not involved in sale of securities or only engaged in sale of REITs


According to Uniform Practice Rules acceptance of securities delivered before fifth business day is...



Where are transactions in Nasdaq securities reported?

TRF - by the seller within 10 seconds


What's the statute of limitations on arbitration claims?

Six years


What is SEC Rule 610 on access fees to quotations?

Market Center may only charge $0.003 for stocks prices over $1
Under $1, no more than 0.3% of dollar value of quote


What does FINRA require on communications from a firm in its first year of registration?

File all communications 10 days before first use


What's a fiduciary?

A person vested with power and authority to act for another


What's disclosure requirement on prior felonies?

All must be disclosed. Any within 10 years will result in statutory disqualification


Profit disclosure rules for riskless principal and net basis?

Riskless principal - disclose markup
Net basis - no disclosure


Key features of arbitration?

- claimant pays filing fee
- awards do not need to be supported by legal reasoning
- no provision for triple damages
- in simplified arbitration, no hearing required


What are the disclosure rules on BD's transacting in securities with which they have a control relationship?

Must be disclosed before entering into contract. If this is verbal, must be written at or before completion.


Rules on Day Trading Risk Disclosure Document?

- Provide prior to approval for day trading
- Disclose commissions will be substantial
- State requirement for knowledge of firm's operations
- Provided in physical or electronic form


When after settlement must a BD receive stock (or if necessary buy it in)?

10 business days after settlement


In a stock loan between BDs, who has voting right?

The lendee. All other rights remain with the lender.
Lendee must deposit full market value of the stock with lender and will mark to market.


How often must an OSJ be inspected by a principal?

Once a year


Does SIPC cover fraud, embezzlement and theft?

No. BDs must have a separate insurance for this - a fidelity bond