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Flashcards in Regulations Deck (131):

Commission that is responsible for supervision of capital markets. They write laws that govern financial markets, and has the ability to enforce the laws. This entity governs publicly traded companies as well as industry professionals. This entity can revoke registration of a broker/dealer, but refers crimincal cases to the judicial system. POTUS appoints board members for 5 year terms.

Securities and Exchange Commission (SEC)


Act that was established to regulate the trading of securities after being issued and to regulate exchanges and broker/dealers.

Securities Exchange Act of 1934


What are the four main categories of FINRA bylaws?

  • Uniform Practice Code
  • Conduct Rules
  • Code of Procedure
  • Code of Arbitration


FINRA bylaw that relates to dealings between member firms, covering all transactions in nonexempt securities while providing orderly completion of dealer-to-dealer transactions.

Uniform Practice Code (UPC)


FINRA bylaw that relates to a member firm's dealings with the public

Conduct Rules


FINRA bylaw that outlines the procedural process in the event of violations and complaints

Code of Procedure


FINRA bylaw that is concerned with settling disputes between dealers or brokers and the public.

Code of Arbitration


Bylaw definition of a firm who is registered with the SEC under the Act of '34

Registered Broker/Dealer


This is an individual who is registered under the rules of FINRA or is directly or indirectly controlled by a member firm, regardless if the person is a registered.

Associated Person


What are the two categories of FINRA personnel that requires registration and the passing of a qualifying exam?

Principals and Representatives


These people must be registered as what with FINRA?

  • Sole proprietors
  • Officers
  • Partner
  • Manager of Offices of Supervisory Jurisdiction
  • Directors of Corporations




This is a person who deals with investment companies and variable contracts if activities are limited to dealings of open end shares, closed end investments during IPOs, and variable contracts and insurance premium funding programs. They must pass the Investment Company and Variable Products Qualification Exam (Series 26)

Limited Principal


According to FINRA Membership and Registration rules, continuing education is required for registered persons, and consists of what two elements?

Regulatory and Firm


Education element that must be completed by registered persons on the second anniversary date of their original registration and every 3 years thereafter. They have 120 days from registration date for completion. Anyone who fails to complete this will have their registration deemed inactive and must cease all activities as a registered person and cannot perform duties in any capacity requiring registration

Regulatory Element


Education element that applies to a continuing and current education program maintained by members for their covered persons to enhance their securities knowledge, skills and professionalism. At a minimum, each member must develop a written training plan at least annually.

Firm Element


What happens to a rep on active military duty?

  • 120 day window to complete CE is frozen
  • Can continue earning commissions from existing clients
  • 90 days to reassociate if terminating registration while on leave


Which persons are not required to register with FINRA?

  • Those with clerical or ministerial duties
  • Not actively engaged in the investment banking or securities business
  • Associated persons of a member firm whose only participation within the firm is the need for a nominal corporate officer
  • Those who effect securities transactions only on the floor of an exchange


Resource provided through FINRA's Public Disclosure Program that allows public persons to research the professional backgrounds of current and former FINRA-registered brokerage firms and brokers. Accesible by phone or online, it provides information that has been stored in the Central Registration Depository.



What information is available for search through BrokerCheck

  • The person's employment history and other business experience required to be reported on Form U-4
  • Currently approved registrations for the member or associated person
  • Main office, legal status and type of business engaged in by the member
  • Any event or proceeding required to be reported under the Rule


  • Separate file of all written complaints of customers with explanation of action taken by the member, if any
  • Separate file of all written complains and a clear reference to the files containing the correspondence related to them

Where do these files need to be kept

Each office of supervisory jurisdiction


Material used in media (newspapers, magazines, radio, television, telephone recordings or other public media). General information to the general public is an indirect audience.



Participation in seminars, radio or television interviews, or other public speaking activities. This interaction is included in the definition of retail communication since they are directed or made abailable to the public.

Public Appearance


Reprint of an article or its excerpt issued by a publisher not affiliated with the member using the reprint, or to any report concerning a registered investment company prepared by an independent entity. These are considered retail communication, and must be approved by a principal before first use.

Independently Prepared Reprint


Any written or email messages distributed to either existing customers or to fewer than 25 prospective customers within an 30 calendar day period



Any testimonial or endorsement of a security by a third party must state which three things?

  1. If any fee or other compensation was paid for the testimonial or endorsement
  2. If the statement implies that the person is qualified by special experience or knowledge, such qualifications must be listed
  3. Include the statement "past performance does not indicate future results"


How long must retail communication be kept on file for?

3 years


Member firms that have not previously filed retail communication must file their initial retail communication with FINRA at least how many days prior to use, and must continue to file how many days prior to use for a period of 1 year?

10 Business Days


What is communication with insitutional investors, who are defined as any 

  • Government entity or subdivision
  • Employee benefit plan with at least 100 participants
  • Qualified plan with at least 100 participants
  • FINRA member, registered associated person or person acting solely on behalf of any such insititutional investor


Insitutional Sales Material


Transactions effected outside the normal business of an associated person's employment with a member firm. These are transactions that are not recorded on the firm's books and records.

Private Securities Transactions


Private securities transaction that is a violation of FINRA conduct rules, which includes transactions among family members for which an associated person receives no compensation, or personal transactions in investment company and variable annuity securities.

Selling Away


An associated person of a member firm must provide written notice to the member firm that describes what in detail?

  • Proposed transaction
  • Person's proposed role
  • Compensation conditions


Any compensation paid directly or indirectly as a result of the purchase or sale of a security, including commissions, finder's fees, rights of participation in profits, tax benefits, expense reimbursement.

Selling Compensation


A customer with a complain against a member firm or its personnel may submit a written complaint to whom? This entity has initial jurisdiction for the handling of complaints. The National Adjudicatory Council (NAC) has appellate and review jurisdiction.

The Department of Enforcement (DOE)


The broker/dealer must keep a file of written customer complaints. A report of these must be submitted to FINRA each calendar quarter, no later than the last day of the month following Quarter's end. If a complaint results in a statutory disqualification, a report must be sent to FINRA within how many days?

10 Days


What happens when a written customer complaint has been received by the DOE, they start the process by advising representatives and broker/dealers in writing, and conducts hearings to gather enough facts to make a fair decision. If a violation has occurred, a censure or fine may result. What happens for more serious violations?

Suspension, expulsion, or bar from association with a member firm.


Why do member firms prefer the Code of Arbitration for settling inter-industry disputes?

It is cost effective and disputes are settled much sooner than they would be if pursued through the courts.


What is the statute of limitations for a submission to arbitration after the event giving rise to the claim?

6 Years


The NAC appoints how many people to the panel of arbitrators for hearings?

Odd numbers starting from 1, 3 and 5


Proceeding for disputes involving $50,000 or less, where there is no opportunity for a hearing. One arbitrator renders a decision on the case based upon a review of written submissions by both parties.

Simplified Arbitration


Awards under arbitration are final and binding without opportunity for appeal. Any resulting monetary award is required to be paid when? If the firm or rep fails to pay, what happens?

30 days or subject to suspension


  • Any act which operates or would operate as a fraud or deceit upon any person
  • Any untrue statement of a material fact and any omission of a material fact necessary for the investor to have known in order for them to make a resonable decision
  • Any manipulative acts that are misleading or deceptive, including churning, which is excessive trading in time or frequency with the sole purpose of generating commissions.

What act are these in direct violation of?

Securities Exchange Act of 1934


Violations of the Act of 1934 or SEC rles and regulations, including the use of false or misleading statements, are subject to criminal penalties. What are the maximum fines?

$1 mil for individual, 10 years imprisonment, or both


$2.5 mil for business entity


How often must a publicly held company, broker/dealer engaging in interstate business, national securities exchanges and FINRA must file a report to the SEC how often?



As defined by the 1934 Act, this is an individual, corporation or other legal entity engaged in transacting securities business for the account of others. When acting in this capacity, the firm is acting as a middle man and charges a commisison.



As defined by the 1934 Act, this is an individual, corporation or legal entity that performs securities transactions from their own account as a part of regular business.



In 1939, a proposal was submitted to the SEC for the registration of a national securities association, thus forming the National Association of Securities Dealers (NASD). This act provides that the SEC can review FINRA disciplinary actions, disapprove rulings and suspend or revoke FINRA registration for failure to comply with its rules.

Maloney Act of 1938


This act requires that every corporate bond of more than $5 mil and 5 years maturity or longer must have a trust document stating whether the bond is secured or unsecured. If secured, the trust indenture must specify the kind of property and whether the indenture is open or closed end. 

Trust Indenture Act of 1939


Act that was established to regulate investment advisory activities and define requirements for registration.

Investment Advisers Act of 1940


Firm that is paid a fee to advise others, either directly or indirectly, as to the advisability and merit of purchasing or selling securities. Also included in the definition is any firm who, in the regular course of business, issues reports or analyses concerning securities.

Investment Adviser


What would a financial planner be defined as if they

  • Provide advice, analysis or reports concerning securities
  • Provide these services as a regular course of their business
  • Receive compensation for those services

Investment Adviser


An investment adviser must register by filing an application with the SEC. What must it include?

  • Name and form of organization under which the investment adviser engages or intends to engage in business
  • Name of the state where the investment adviser is organized and the location the principal business office and branch offices
  • Names and address of partners, officers, directors and persons performing similar functions


Advisers with assets under management in excess of _____ are required to register with the SEC, and are known as federally registered advisers. Advisers with assuts less than ______ are required to register at state level.

$25 Million


Rule that applies to any offering or sale of non-NASDAQ OTC securities priced at $5 bid or lower. These equities are only quoted in Pink Sheets. Because these securities are highly speculative, penny stock sales require use of strict customer suitability determination and risk understanding prior to the placement of a buy order.

SEC Rule 15c2-6, Penny Stock Rule


Document that must be furnished to the customer before any transactions are made. The customer must complete this form and return it to the firm, and the broker/dealer must indicate why it concluded that the customer is suitable.

Formal Suitability Statement


Customer who has established and funded an account with the broker/dealer for more than a year. The definition also includes a customer who has done three trades on three different days in three different penny stocks with the broker/dealer.

Experienced, or established customer


Who or what transactions are exempt from the Penny Stock Rule?

  • Does not apply to accredited investors
  • Unsolicited trade instructions
  • Transacations with a mark-up in the security that has not exceeded 5% for 3 months
  • Securities in which the broker/dealer has not made a market for 12 months


Piece of legislation enacted on October 26, 2001, that enabled a sweeping review of homeland security; addressing several social, economic and global initiatives to fight and prevent terrorist activities. 

Uniting and Strengthening America by Providing Appropriate Tools Required to intercept and Obstruct Terrorism Act (USA PATRIOT ACT)


Entity that requires banks, broker/dealers and several other financial institutions to establish new anti-money laundering (AML) standards. This entity implemented an AML program that requires the monitoring of all financial transactions and reporting of any suspicious activity to the government, along with prohibiting correspondent accounts with foreign shell banks.

Financial Crime Enforcement Network (FinCEN)


FinCEN requires a comprehensive customer identification and verification proedure is also to be set in place. To comply, firms are required to...

  • Establish policies, procedures and internal controls based on an in-house risk assessment
  • Appoint a qualified AML compliance officer responsible for administering the AML proram and ensuring all employees are aware of their duties
  • Provide continual training for applicable employees, prodcuers
  • Schedule independent test of the program on a regular basis


Customer Identification Programs (CIPs) require complete and truthly information for authentication of all customer identities. What is the minimum information that must be collected before account opening?

  • Name
  • Address
  • Date of Birth
  • Location of Birth
  • Social Security Number


What are the responsibilities of a broker/dealer relating to identity verification?

  • Determine whether a customer appears on any US Treasury list of known or suspected terrorist organizations designated by treasury
  • Provide each customer with adequate notice, prior to opening an account, that information is being requested to verify the customer's identity


Report that identifies and describes suspicious transactions. Deposits, withdrawals, transfers or any other business deals involving $5,000 or more are required to be reported if the financial company or insurer "knows, suspects or has reason to suspect" that the transaction

  • Has no business or lawful purpose
  • Obtained to exaggerate other reporting constraints
  • Uses the financial institution or insurer to assist in criminal activity
  • Is obtained using fraudulent funds from illegal activities
  • Is intended to mask funds from other illegal activities


Suspicious Activity Report (SAR)


When must relevant SAR reports be filed with FinCEN using form 108?

30 Days of initial discovery


Act designed to help identify the source, volume, and movement of currency transported into or out of the US, or deposited in financial institutions. This act authorizes the US department of the Treasury to require financial institutions to maintain records of financial transactions and to report any suspicious transactions.

Bank Secrecy Act


A broker/dealer obtained and kept specified information about the transmitter and recipient of a recent wire tranfer. How much money was transmitted?

Excess of $3,000


A financial insitution had to verify the identity of the person conducting the wire transmittal. How much was the wire transfer?

Excess of $10,000


Broker/dealers are required to file this report for single transactions involving currency that exceeds $10,000, or multiple transactions during any one business day that total more than $10,000.

Currency Transaction Report (CTR)


CTR's must be filed with the Financial Crimes Enforcement Network (FinCEN) with the Bureau of the US treasury within how many days? How long must records be kept?

Within 15 days


Records kept for 5 years


What are some transactions that are generally seen as susceptible to laundering or manipulation include, but are not limiteed to payments, rollovers, loans, transfers, partial withdrawals, surrenders, and death claims.

  • Payments
  • Rollovers
  • Loans
  • Transfers
  • Partial withdrawals
  • Surrenders
  • Death Claims


A broker/dealer cannot share a customer's nonpublic personal information with nonaffiliated third parties, unless...

  • The institution (such as a joint marketer or service provider) provides certain information to the customer
  • The customer has not elected to opt out of the information sharing program


Regulation that makes broker/dealers to implement privacy policies with respect to consumer nonpulic information. Consumers must be provided with an initial privacy notice, and those who become customers must receive annual privacy notices. Broker/dealers must establish safeguards to ensure that customer records and information are secure and confidential.

Regulation S-P Customer Privacy


Customers must be given a reasonable means and a reasonable way and amount of time to opt out of sharing with nonaffiliated third parties. What would these reasonable means be?

  • Response link in an email
  • Prepaid postcard addressed to the broker/dealer
  • Toll-free phone number


For purposes of Regulation S-P, this is an individual who obtains products or services from a financial institution, but who usually has no contact with that institution beyond the one-time deliver of products or services to be used for person or family purposes. This individual only needs to receive the privacy act the time that the service or transaction is performed.



Individual or entity with which a financial institution expects to have a continuing relationship



Telephone call or message directed toward an individual with whom the marketing organization has no relationship, for the purpose of encouraging the purchase or rental of, or investment property, goods or services.

Telemarketing (Telephone Solicitation)


Act that says telemarketing calls may be initiated when a telemarketer has establishe a business or personal relationship with another person, or received an expressed written consent from the caller's party. This act includes two restrictions: Time of Day and Firm-Specific/National Do-Not-Call lists

Telephone Consumer Protection Act of 1991


What TCPA restriction says that no private residence can be contacted before 8 AM or after 9 PM, unless specific arrangements were made with the called party?

Time of Day Restriction


TCPA restrcition that says any persons that have stated that they do not with to receive outbound telephone calls made by or on behalf of the member, or have registered their phone number on the Federal Trade Comission's national do-not-call registry may not be contacted.

Firm-Specific and National Do-Not-Call lists


What must a telemarketer disclose to the person they contacted?

  • Identify their name
  • Name of person or entity on whose behalf the call is being made
  • Telephone number 
  • Address at which the perso or entity can be contacted


Act that prohibits the use of information that is unavailable to the general public (nonpublic information) for the purposes of manupulating or exploiting a market opportunity. Investment advisers, broker/dealers and their representatives must not participate in this usage.

Insider Trading Act of 1988


The civil penalties for insider trading violations are determined by the court, and vary according to the circumstances. The maximum civil penalty is three times the profit gained or the loss avoided from the use of the information. What is this known as?

Treble Damages


What is the criminal penatly for insider trading violations for individuals? For corporations?

Individual: $5 mil, 20 years in prison

Corporation: $25 mil


Persons who become insiders are required to notify the SEC within how many days of becoming an insider? Insider are also required to report changes in their postions within how many days of the change?

10 Days


2 Days


Profit that results from trades or sales of securities held by a company insider for less than 6 months. These profits must be paid back to the corporation. 

Short Swing Profits


When an insider remains responsible for taxes owed on the profit, the insider must provide the profit to the corporation; however the insider is still reqired to pay taxes on the profit. What is this called?



Internal procedures established by the Securities and Exchange Act of 1934, which limit and control the passing of sensitive, potentially nonpublic information between the departments of a firm. 

Chinese Walls


Plan that must be updated annually and approved by senior management, which includes disaster recovery. The concept is to have plans in place in case disaster strikes due to firm responsibility of customer records, assets and regulatory reporting.

Business Continuity Plan


Plan that must provide for backup documentation and storage location. The plan must also address how trading continues if the firm is shut down due to natural or manmade disaster. Typically, firms store their documents and have a backup trading facility at another location to increase the chance of uninterrupted operation in the event of disaster.

Disaster Recovery Plan


A NYSE member firm that provides research must ensure that their research is either written or approved by who?

Supervisory Analyst, Series 16


Under NYSE rules, the approval of a new account is done by who?

Partner or a principal of the firm


Who is responsible for keeping track of the customer's positions in the securities whether the customer is long or short, and must keep customers positions records by individual security?

Registered Representative


In cases involving a representative with outside employment, or a rep with dual registration or opening an account at another firm, FINRA reuquires what?

Disclosure and duplicate confirmations


How long can a NYSE member firm hold customer mail if travelling domestically, or internationally?

Domestic: 60 days

Internation: 90 days


Resolution of written and oral customer complaints that are held in the central file at the home office are supervised by who?

Compliance Professional qualified under Series 14


Associated persons with NYSE member firms have an apprenticeship period in which they are not allowed to communicate with the public for how many days?

120 Days


Associated persons with the NYSE member firms have to wait how many days prior to take their qualifications exam?

60 Days


A branch manager for a NYSE member firm must work in the industry for three years prior to taking which exam?

Sales Supervisor Series 9/10


In order to open a securities account at another broker/dealer, an employee of an NYSE member must what?

Receive permission to open the account, send duplicate trade confirmations to employing member firm


In order for an employee of a member firm to accept a second job away from the member firm, what must the employee do?

Submit a written request and receive written permission from the member


Practice where a securities professional executes personal or firm trades prior to the client's trade. It is a violation of SEC rules for members and associated persons to use nonpublic information to trade ahead of block trades and customer orders.



A practice where investment advisers, broker/dealers, and their associated persons copies the trades in the client's account



Executing false trades with no change in beneficial ownership to create the illusion of trading volume in a security. For example, a customer owns a stock and trades it back and forth with a reigstered rep numerous times throughout the day. At the end of the day, the customer still owns the stock. This was done to create the appearance of high traffic in the stock.

Painting the Tape


Prohibited practice that involves an employee of a broker/dealer buying a stock just before the firm's analyst issues a buy recommendation on that stock. Broker/dealers and associated persons are not allowed to trade a security in which the firm will soon release research.

Trading Ahead of the Public Distribution


Prohibited practice where a broker/dealer places another broker/dealer between itself and its customer. For example, to fill a customer purchase, Broker A instructs Broker B to buy the security and sell to Broker A, who then sells to its customer. This is bad for the customer because they pay two sales charges instead of one.



Broker that is used to protect the identity of the buyer/seller and to get a better price for the customer, that trades only with other dealers, on a wholesale basis. In an instance where a customer needs only a small amount of the bond, this broker achieves a better price because it can combine this small trade into a larger block.

Muncipal Dealer Broker's Broker


Prohibited trade practice, in which an associated person or a public customer places buy orders either at or just above the strike price to ensure that short put option positions will not be exercised. 



Prohibited trade practice in which an associated person or a public customer puts sell pressure at or just below the strike price keeping the price from going up. This is designed to ensure that short calls don't get exercised.



Board that creates rules for municipal firms and brokers-dealers involved in municipal activities. This board is made up of 15 individuals, five who repreesnt broker/dealers, five who represent bank dealers and five who represent members of the public.

Municipal Securities Rule Making Board (MSRB)


If the MSRB writes the rules and regulations and hae no enforcement authority, who enforces MSRB rules?

SEC and appropriate SRO


FINRA over NYSE reps


MSRB rules require that credit analysts working with the Separately Identifiable Division or Department of the bank, training personnel, anyone handling orders, money or securities, or anyone alayzing or making recommendations, should be registered and take which exams?

Series 7 or Series 52


Who requires full and fair disclosure for 

  • Control Persons of a brokerage working or associated with the municipality
  • Control persons of the municipality working or associated with the brokerage
  • Conflicts of interest, such as an adviser serving as an underwriter in a negotiated underwriting, or a firm recommending the munis to a discretionary account that they have an inventory, or an underwriter submitting orders which may benefit the retail operations of the firm, orders called member or member related



In order for a general securities broker/dealer to engage in municipal activity, it must have at least one of these people on staff.

Municipal Principal, Series 53


If broker/dealer's business is limited to doing just municipal fund such as 529 plans, what role is assumed and what exam is passed?

Limited Municipal Principal, Series 51


A Series 52 qualified representative may only sell what?

UITs that hold munis and treasuries, and management companies


How long is the MSRB required apprenticeship period for newly hired employees who are brand new to the securities business?

90 Days


This individual may receive no compensation based on securities activities and can receive no compensation based on securities activities. Individuals must take qualifying exam and have 180 days from date of employment to pass.

Muni Rep Apprentice


Policy that mirrors the FINRA rule. Individuals that have been convicted of a felony or a security-related or theft-related misdemeanor in the last 10 years are given this punishment. Individuals that lie on their U4 application, or are barred from the industry by another SRO are subject to this punishment.

MSRB Statutory Disqualification Policy


If the municipal firm has cause to discipline an associated person in-house, a report must be made to the SRO if the fine exceeds how much?



Any arbitration case or disciplinary action that is reported to the appropriate SRO must exceed how much?



What are the records that must be permanently kept accourding to the MSRB?

  • Stock Certificates
  • Partnership Papers
  • Articles of Incorporation
  • Minutes of meetings


Document that is sent out by a muni broker/dealer as a result of a registered representative receiving a written customer complain. The purpose of this document is to give the customer a detailed description of their rights or the actions they can take against the firm or its associated persons.

Investor Brochure


The financial adviser must get the issuer's permission to bid on the offering and disclose the relationship. What issue is this?

Competitive Bid


The financial adviser must terminate the financial advisory relationship, as well as disclose any conflicts of interest and any remuneration, or underwriting spread, which they've received. What issue is this?

Negotiated Underwriting


Quote that is the actual price at which the municipal dealer is willing to buy or sell the securities. In the case where the firm is acting as a dealer, a markup from the offering price is charged. A markdown from the bid price applies when the firm is selling to a customer. If the firm was going to be acting in an agency capacity or as a broker, a commission would be charged.

Firm Quote


Quote that indicates more information is needed. Also called a nominal quote, these quotes are nonbinding. They are for information purposes only.

Subject Quote


The dealer who is the recipient of this quote has a firm quote which is good for an hour, so it can attempt to sell the bonds before it must buy them. However, the dealer who owns the bonds and gave the quote may accelerate the deadline to 5 minutes at any time through this hour. If deadline is accelerated, second broker/dealer has only five remaining minutes to accept the firm quote.

Quote "Out firm for an hour with a five-minute recall"


Likely bid, which is a nonbinding estimate. This quote is used to price a bond for a portfolio or to determine a buyer's interest level before pursuing a more specific, binding quote.

Workable Indication


When quoting a bond yield, it is important to always quote the lower yield between YTM and YTC. This yield must be disclosed on the trade confirmation. Premium quotes YTC, discount quotes YTM. What is this yield?

Yield to Worst


Municipal bond dealers report secondary market trades through what system? MSRB rules require that only trades which actually occurred are reported to the system. 

Short-Term Obligation Rate Transparency System (SHORT)


When an investor sells outstanding municipal bonds in the secondary market, the investor must deliver the bond certificates in order to settle the trade. These bond certificates must be in good deliverable, or negotiable form. The certificates must be in propert denomination and must be legible. What must be legible on the certificate, or else it is considered mutilated?

  • Name of issuer
  • Coupon rate
  • Maturity date 


Certificates must contain legal opinion and all future interest payment coupons. If next coupon is missing, what can be done?

A check may be attached for that interest payment