Rules and Regulations

Question 1

What is the role of the SEC?

Answer 1

To regulate the securities industry broker dealers, protect investors from fraud and manipulation, and enforcing fair trade practices.

Question 2

Who must register with the SEC?

Answer 2

All broker dealers that want to do business w the public must register with the SEC and their home state. All investoment advisors with over 25 million in assets or that provide advise to investment companies.

Question 3

What happens if a firm does not comply with SEC regulations?

Answer 3

A firm caught not complying will be subject to fines, Censures, limits on activity, suspensions of themselves or one or more registered persons, or have their registration revoked.

Question 4

What happens if the action committed was not within SEC regulations and illegal?

Answer 4

SEC investigation may lead to a civil financial complaint which leads to a criminal investigation by the US Attorneys office and a grand jury, if it was illegal then they take away any ill gained earnings, levy civil penalties, and force injunction relief (cease an desist)

Question 5

What is the Securities act of 1933 and who enforces it?

Answer 5

SEC enforces the Securities act of 1933 - Laws establishing full and fair disclosure of all material information for securities entering the market.

Question 6

What is the Securities exchange act of 1934 and who enforces it?

Answer 6

The SEC enforces the securities exchange act of 1934 - this law established the SEC to protect investors, also set rules around extensions of credit to margin accounts, registration and regulation for broker dealers, regulations for OTC exchanges such as NYSE, Transactions by insiders, customer accounts, trading activities.

Question 7

What is the Trust indenture act (TIA) and who enforces it?

Answer 7

THE SEC - Formerly the trust indenture act of 1939, establishes rules around bond issues of over 50 million. This requires issuers to also issue a written legal document called the trust indenture. The trust indenture lists important information about the issue such as the coupon rate, maturity, any collateral, etc. A trustee must also be assigned to oversee the individuals rights.

Question 8

What is the investment company act of 1940 and who enforces it?

Answer 8

The SEC enforces the investment companies act establishing regulations around registration requirements and activities for investment companies

Question 9

What is the investment advisors act of 1940 and who enforces it?

Answer 9

The SEC enforces the investment advisors act of 1940, anyone that provides paid advise to investment companies or has 25 million in assets under their umbrella is required to register with the SEC.

Question 10

Who is FINRA? And what are their responsibilities ?

Answer 10

FINRA is a SRO that gets their power from the SEC. FINRA is responsible for regulations and operations of the OTC markets, NYESE trades, Investment banking (underwriting), Investment companies, and limited partnerships.

FINRA ensures the SEC rules are followed, they also have rules of their own and membership requirements.

FINRA is also responsible for handling complaints about its member firms, FINRA administers exams like the SIE, and has strict rules around misleading, incomplete, or incorrect information concerning membership, registration of firms, and their associates.

Question 11

Who is the MSRB? What are their responsibilities?

Answer 11

The Municipal Securities Rulemaking Board oversees firms and banks looking to buy, sell, recommend, and underwrite municipal securities.

The MSRB is overseen by the SEC, the MSRB makes rules, FINRA enforces those rules.

Question 12

Who is the NYSE and what is their role?

Answer 12

The Ney York Stock Exchange is the oldest exchange in the US. They supervise the exchange and members, listing securities, and sets exchange policy.

The NYSE does have the power to discipline member firms.

Question 13

Who is the CBOE?

Answer 13

The Chicago Board Options Exchange is responsible for making rules and overseeing the options exchange.

Question 14

What are SROs like FINRA and the NYSE capable of doing to their members?

Answer 14

Fine, suspend, reprimand, expel members.

They cannot imprison individuals, that’s the SEC

Question 15

Member firms may NOT claim they have been BLANK by the SEC or an SRO

Answer 15

Approved - No member firm or security is approved by the SEC or an SRO, they simply clear them do do business with the public.

Question 16

Who is the NASAA?

Answer 16

The north American securities administration association oversees securities registration at the state level, advocating for passage of state securities laws, providing education to investors so they make informed decisions.

Other responsibilities include, assisting with prosecution of criminals, licensing brokers and small investment firms (managing less than 100 million in assets), and security firms doing business in the state.

Question 17

All brokerage firms and their representatives must register with FINRA, what must those reps file?

Answer 17

Registered reps must have a U4, get fingerprinted, pass exams, and must pass several background checks

Question 18

What is part of Filing the U4 form?

Answer 18

Includes 10 year employment history, 5 year residential history, background check, states you want to register in, if you’re registered with another member (firm, bank, principal, exchange ,etc), and fingerprints

Question 19

What is the arbitration clause in the U4 form?

Answer 19

U4 form includes an arbitration clause meaning you won’t take the member firm to court for disputes.

Question 20

What is the 10 year disqualification rules?

Answer 20

10 year disqualification rules - if convicted of felony or misdemeanor you are not eligible

Question 21

How long do you have to provide fingerprints before the U4 is deemed inactive?

Answer 21

30 days of filing U4

Question 22

What is the required continued education firm element?

Answer 22

Firms must offer continued education to all registered reps
Must have yearly interactive meeting to discuss strategy and regulatory developments, all registered reps must attend.

Question 23

What is the required continued education regulatory element?

Answer 23

All registered reps must take and pass a FINRA regulatory exam by DEC 31st every year, if not their registration is put on hold until they do so.

If the hold has been for two years, individuals will be required to re-register w FINRA.

Question 24

What happens when a rep resigns or is terminated?

Answer 24

Former employer files U5 form that includes why you left/were terminated, you get a copy. If moving to a new firm, the new firm files a U4 and has to recieve a copy of the U5 from your previous employer.

If you dont get pair up with a new firm within two years of a U5 getting filed, you will need to re-register.

Question 25

What individuals are exempt from FINRA registration?

Answer 25

Certain individuals who work for a member firm are not required to register. If you work EXCLUSIVELY with, commodities, municipal securities, or futures (must be registered w futures association) you dont need to register. Persons whos job is clerical only Persons doing transactions on a national exchange floor and are registered with that exchange

Question 26

FINRA rule 4530 - goes over reporting requirements, what are those requirements?

Answer 26

FINRA must report quarterly summaries and statistics on complaints, civil and criminal actions made to them and their registered rep employees within 30 days of... Knowing an individual broke US or Foreign investment laws A customer complaint regarding misuse, forgery, or theft of assets by a registered rep. A rep having been named a defendant or respondent in US or foreign investment regulators suite. A rep being denied, expelled, suspended, disciplined by any regulatory body US or foreign. A rep being convicted of a misdemeanor or felony Basically breaking the law.

Question 27

What other activities are firms required to report to FINRA?

Answer 27

Private activities - doing things outside of their employment at a firm (written disclosure is required) Outside business activities - Reps getting second jobs need permission Political contributions exceeding dollar amount $250 Felonies, financial related misdemeanors, liens, and bankruptcies

Question 28

Can an individual have a brokerage account at another firm?

Answer 28

Yes but they must disclose to both the employer and the firm they are opening the account with. Also monthly statements may may be required to send your employer.

Question 29

What is required if conducting a private securities transaction outside of your employment?

Answer 29

Provide written notice Explain their role in the transaction Describe complete details of the transaction Disclose if they received compensation Transactions by immediate family members where a rep does NOT receive compensation is not required to be disclosed.

Question 30

How is an order ticket most commonly submitted? What's the other way?

Answer 30

Electronic or paper

Question 31

What transaction details must an order ticket include?

Answer 31

Registered rep ID Customers account number Description of the security ticker symbol Number of Shares Whether Buying or selling long (owned shares) or selling short (borrowed shares) If option, Buying or Writing, Covered or non covered, Opening or closing transaction Timing of the order (day, good till canceled, etc) Type of order (market, stop, limit, etc) Execution price Cash or margin Discretionary (we chose some of the specifics except timing) or non discretionary (client chose everything) Solicited (we called them) or non solicited (they called us)

Question 32

Who must sign all orders? What is their role at the firm?

Answer 32

A managing principal must sign all orders SAME DAY. All firms are required to have two principals unless firm is sole proprietorship. Principal signs new accounts or traded accounts, literature and advertisements, trade orders. Principals also handle all complaints, oversee employees, and watch for red flags

Question 33

What is the proportionate sharing rule?

Answer 33

Registered reps are not allowed to take part in the gains or losses of a customers account UNLESS the rep made a contribution into the account and has written permission from the customer and the managing principal. In that case, the gains or losses must be proportionate to the contributed amount. Transaction from immediate family is exempt from this rule.

Question 34

What is regular way settlement?

Answer 34

T+1 for Stock, Corporate bonds, Municipal bonds, US Treasury Securities, Options, ETFs, Mutual Funds

Question 35

What is the WHEN,AS, IF ISSUED in regards to delivery method?

Answer 35

This is used when a security has been sold to investors but the certificates of ownerships have not been delivered on settlement, usual for stock splits, IPOs, municipal, and US treasury.

Question 36

What is Regulation S-P?

Answer 36

All broker dealers, investment companies, and advisors must adopt written policies and procedures regarding the safeguard of personal identifiable information when dealing with digital, physical, and administrative access.

Question 37

What is the trade confirmation and when must it be delivered?

Answer 37

A trade confirmation must be is a recipe of the trade submitted by a broker on behalf of a client. The client receives a copy that includes the specifics of the trade including the account, rep ID, time and date, securities being transacted, type of transaction, and in what capacity you acted (broker or dealer). Also must contain the CUSIP number

Question 38

What is the CUSIP number

Answer 38

Committee of Uniform Identification procedure number is a transaction identifier used to identify securites trades that have been conducted.

Question 39

What additional information must a trade confirmation include for municipal securities?

Answer 39

In addition to standard trade confirmation details, if the security was a municipal bond, the following is required - Whether rep acted as agent for both the customer and another person for the same trade - Time of executions for institutional investors - Credit backing (like user fees if rev bond, or insurance) - yield to worst - Settlement date - special features (callability, puttability, convertibility) - status of securities (in escrow, default, prefunded) - Tax information (AMT, non taxable, taxable)

Question 40

What is the AMT?

Answer 40

The alternative minimum tax was used to ensure high income individuals, corporations, trusts and estates pay at least a minimum amount off taxes.