Self Regulatory Organizations Chapter 10

Question 1

SEC

Answer 1

Securities and Exchange Commission. This is a Federal level regulator.

Question 2

SRO

Answer 2

Self-Regulatory Organization- include FINRA, CBOE, and MSRB.

SRO’s ARE NOT GOVERNMENT Agencies and do not set minimum commission rates.

FINRA- Financial Industry Regulatory Authority
MSRB- Municipal Securities Rulemaking Board
NASAA- North American Securities Administrators Association

Question 3

Form U4

Answer 3

used and filed when hiring a new Investment Advisor(IA)

Question 4

Form U5

Answer 4

Used and filed WITHIN 30 DAYS when TERMINATING a IA

If a Registered Rep decides to leave the securities industry, the U-5 must be filed and decides to come back longer than 2 years from the date of termination, the RR must RE-Take the exam.

Question 5

FORM U6

Answer 5

Disciplinary Action Report

Question 6

SEC Rule 17F-2

Answer 6

requires every person who is a partner, officer, director, or employee to be fingerprinted.

Question 7

When you are Terminated, a RR or Associated Person(AP) is subject to FINRA

Answer 7

for TWO YEARS after the effective date of termination for any violation that occurred while still employed. This includes ADDRESS changes within two years. Report to FINRA

Question 8

FINRA Rule 1240

Answer 8

Continuing Education Requirements of Registered Persons
* Must complete the REGULATORY Element within 120 days after the anniversary of either:
* The second anniversary date of their initial registration
* Every three years thereafter as long as the person remains registered.
Continuing Education MUST occur ANNUALLY within a member firm ti evaluate training needs and develop a training plan.

Question 9

Investor Education and Protection
Member firms MUST provide the following information ANNUALLY to customers

Answer 9

• FINRA Regulation Public Disclosure Hotline Phone number
• FINRA Regulation Website Address
• Statement as to the availability of the investment brochure

Question 10

If an RR wants to OPEN an account with another firm

Answer 10

the RR MUST notify in writing BOTH firms. The employing firm must advise in writing of approval or disapproval of the request.

Question 11

Disciplinary Rules

Answer 11

Any DUI’s must be disclosed as this is an arrest
Certain misdemeanor and all FELONY criminal convictions for a period of ten years from date of conviction

Question 12

FINRA’s 10 Disclosure and reporting events

Answer 12

MUST REPORT WITHIN 30 CALENDAR DAYS of learning of the existence of the conditions set forth below.

Question 13

BrokerCheck System( FINRA Rule 8312)

Answer 13

To provide information about FINRA-registered firms and brokers to help investors determine whether to continue to conduct business. All information is permanently available. Full records of brokers leaving the industry remain available for 10 years.

Question 14

Supervision Under FINRA Rules

Answer 14

Business Continuity Plan

Must be approved by a registered principal who is also a senior management of the member: ach plan must have at a minimum

• Data back up and recovery
• All mission critical systems
• Financial and operational assessments
• Regulatory reporting
  Disclosure of the firms business continuity plan must be made to customers in writing at the account opening, posted on the firms website and mailed to customers upon request.

Question 15

Borrowing or Lending to Customers

Answer 15

Pre-approval is not REQUIRED for IMMEDIATE FAMILY from the firm

Question 16

Outside Business activities of an AP( associated person)

Answer 16

No registered person may accept compensation from any other business activity outside of his employment with the member firm, other than passive investment income, unless the registered person provides prior written notice to the member firm

Basically , you have to ask your firm if you are going to have another job outside the firm…

FINRA notification is not required.

Question 17

CUSTOMER COMPLAINT RECORDS are kept for

Answer 17

4 YEARS.

Question 18

CEO must certify

Answer 18

annually the firm processes to establish, maintain, review and modify policies that are designed to comply with FINRA rules, securities laws and regulations

Question 19

Gifts and Gratuities

Answer 19

No member shall give or permit to be given anything of value, including gratuities, in excess of $100 per person per year in relation to the business of the employer. This includes gifts of any kind.

Question 20

Interpositioning

Answer 20

is the placement of a second broker between a customer and a market maker to generate unnecessary commissions.

Question 21

NYSE Regulations

Answer 21

Opening an account for an employee of the NYSE, whether it be a cash or a margin account, requires the approval of the NYSE.

If a RR requests more than 10 security holders vote for, vote against, or abstain from voting for any proposal.

Question 22

FINRA Mark Up policy

Answer 22

Known as the 5% policy, this is a guide, not a RULE. Only applies to OTC transactions. OTC principal and or agency trades. ( off the floor of an exchange)

Factors which justify a higher percentage

1. Type of Security
2. Market Availability
3. Price of securities
4. Transaction amount
5. Disclosure
6. patterns of Mark-ups
7. Nature of members business

Question 23

Member Firm Regulations

Answer 23

Scripted Public seminars delivered to more than 25 retail investors must be approved by a principal of the firm and a record of the seminar must be maintained by the firm

A RR cannot predict a specific rise in the price of a security under any circumstances.

A suspended person may not receive commissions or other form of compensation may be paid if the RR is suspended or expelled from FINRA.

Suspended person cannot associate with members in any capacity.

Question 24

A member firm( broker dealer) MUST send

Answer 24

SEMI-ANNUAL statements of financial condition to customers.

Question 25

Recruitment Practices

Answer 25

When an RR leaves a firm and moves to another firm, the rule requires the firm that hires or associates with a registered rep coming from another firm to provide to that RR former customers, individually in paper, or electronic form an educational communication prepared by FINRA. NOTE: Firms may NOT use an alternative format When a RR moves to ANOTHER firm, the firm must send out FINRA approved communication and here are the options in which a RR can be in contact with a former customer. 1. Contact in writing- send educational communication along with any other written communication 2. E-mail- firm must hyperlink directly to the educational communication 3. If contact is oral- must send documentation NLT 3 business days after contact 4. No contact is made- Rule is applied for 3 months following date the RR begins employment or associates with the recruiting firm 5. WOULD NOT APPLY- if customer states not interested in transferring assets to the firm

Question 26

General FINRA Supervisory Procedures

Answer 26

One a year, each office of Supervisory Jurisdiction must be examined by a member or designated person. Basically, each office needs to examined by an independent member.

Question 27

The Code of Procedure

Answer 27

Office of the OMBUDSMAN- a neutral and confidential forum for member firms and employees to address an independent review of the situation ad works toward the identification and evaluation of positive solutions for all parties.

Question 28

Taping Rules

Answer 28

Apply to firms that have been disciplined or hire certain percentage of RR who have been employed by “disciplined firms” After becoming subject to Taping Rules, a member firm has 60 days to install a taping system and 3 years to maintain taping procedures from the date the member establishes the procedures. All tape recording must be maintained for 3 years from the date the tape was created. Firms who become subject to taping rules have an opportunity to reduce staff within 30 days after receiving notice from persons who were hired from disciplined firms.

Question 29

FINRA Code of Arbitration

Answer 29

Only Arbitrators are permitted to issue subpoenas for both parties and non-parties Simplified Arbitration procedure- dollar amount involved is 50,000 or less . One single arbitrator will be appointed. 50,000-100,000- one arbitrator will be appointed unless parties agree in writing to three arbitrators. 100,000 or more or does not request monetary damages, three will be appointed unless they want one arbitrator in writing. Panel Composition- Majority-public panel Optional All Public panel Arbitration agree to exchange any documents at least 20 days prior to a hearing date.

Question 30

Pre-dispute Arbitration Agreement

Answer 30

when a customer opens an account, a customer will sign the agreement. Upon the request of the agreement, the firm has 10 business days to provide a copy to the customer Under FINRA Arbitration procedures, the code states that a controversy is not eligible for submission if 6 or more years have elapsed from the date of the event.

Question 31

Institutional Communication

Answer 31

Retail Communication- any written communications to more than 25 retail investors within any 30-calendar day period. Supervisory Analyst are allowed to approve research reports on debt and equity securities.

Question 32

Advertisements

Answer 32

require principal approval publicly available website RR personal profile on the member firm website Logs with static content such as profiles, background and wall information

Question 33

Correspondence

Answer 33

any written (including electronic) communication to 25 or fewer retail investors within any 30 calendar day period.

Question 34

Record Keeping Rules- all approved advertisements, sales literature and independently prepared reprints must be kept on file for

Answer 34

3 years

Question 35

Soft Dollar

Answer 35

a way for financial institutions like investment advisory firms and mutual funds to pay for services provided by broker dealers with order flow rather than the institution paying cash( hard dollars) for services like research. The SEC has determined what it considers acceptable and not acceptable soft dollar items Acceptable – Research, Analytical software, holding seminars for customers Not acceptable- computer hardware, telecommunication lines, office equipment, reimbursement of travel expenses, meals and operational overhead.

Question 36

advisor over 100M

Answer 36

may register with SEC, at 110M must file under SEC

Question 37

frontrunning

Answer 37

advisor sells ahead of its customers