Series 24 - Chapter 2 Broker-Dealer Supervision Flashcards

Question

what is required of an OSJ as it relates to customer complaints?

Answer 1

* a seperate file of written customer complaints with actions taken by the member must be kept at each OSJ for 4 years * this includes only complaints in writing *

Answer 2

member firms must file statistical and summary information quarterly - on the 15th of the month following the calendar quarter in which the complaint was received

Answer 3

* member firms are required to designate a Chief Compliance Officer (must be a series 24 for BD) * Responsible for establishing, maintaining, reviewing and testing the firm's supervisory procedures to achieve compliance with applicable FIRNA rules, MSRB rules and fed secuirities laws and regs. * Required to meet at least annually with the CEO

Answer 4

* discuss compliance matters, wiht the intention of ensuring the firm has policies and procedures in place to comply with all industry regs. * this is documented in the annual compliance certification letter signed by the CEO

Answer 5

States that the member has processes in place to: * establish, maintain and review policies and procedures designed to acheive complaince with all industry regs * modify compliance policies and procedures as changes dictate * test the effectiveness of its compliance Policies and procedures periodically * the undersigned CEO has conducted one or more meeting with the CCO in the preceeding 12 months. * The CEO has consulted with the CCO and other employees, outside consultants, lawyers etc as appropriate to attest to the statements in the certification it must be signed by the CEO Note: the memers processes are documented in a report and reviews by the CEO/CCO to make the certification | NOTE: FINRA is making the CEO personally liable for material failures

Answer 6

The final report must be filed wih the BOD the earlier of 45 days of execution or the next meeting.

Answer 7

* Procedures to be followed if there is a business disruption * FINRA requires each member firm to create BCPs in case there is an emergency or significant business disruption in order to ensure they can meet their customer obligations. * The plan must include procedures covering existing relationships with other BDs

Answer 8

* not required to be filed with FINRA * must be made available to FINRA at request (promptly) * a copy must be maintained at a secure, off-site facility * FINRA has contracted with EVault for firms as the back-up repository for firms that dont have their own.

Answer 9

* they must be updated if there are material changes in the firms operations, structure, business or location * An annual review of the plan by a series 24 is required

Answer 10

* The elements are flexible but must include: * data back-up and recovery * mission critical systems * financial and operational assessments * alternate communications between member and customers, and member and employees * alternate physical locations of employees, critical business, bank and counter party impact * regulatory reporting and communicaitons with regulators * how the member will assure customers prompt access to their funds in the event they cease business * series 24 approval * series 24 annual review NOTE: if a clearing firm is used the plan must still have procuedures to be followed and the clearing firms BCP may be used for this purpose

Answer 11

* The member must disclose in writing, at account opening how the member's BCP addresses the possibility of significant business disruption and provide scenarios of severrity that detail how they will respond * The disclosure must be provided on the firms website and mailed to clients on request * No requirement to provide the detailed BCP

Answer 12

* Member firms must desingate two emergency contacts to FINRA * both must be members of the firm's senior managment * One must be a principal * If the firm is a sole proprietorship, the other person should be a firm employee * If the firm has only one employee the second person should be a person familiar wiht the business (i.e. accountant, attorney, etc) * Must be filed electronically through FINRA Contact System * Updates should be made "promptly" - no later than 30 days * Must be reviewed annually (within 17 business days after the end of each year)

Answer 13

* Updates must be made promptly, no later than 30 days after the change * Must be reviewed annually by the firm's executive representative or written designee within 17 business days after the end of each year

Answer 14

* cannot guarantee against loss * cannot share in gain / loss (excpetions) * cannot borrow from / lend to customers (exceptions) * cannot charge for investment advice, can charge for clerical services * make BD financial statements available upon request * provide FINRA manaul upon request * cannot buy/sell unless the firm believes the customer will settle in time * no installation sales

Answer 15

* repurchase agreements where the underlying holdings are exempt * if the repurchase agreement uses non-exempt securities (i.e. common stock) then it it prohited.

Answer 16

* RRs may open a joint account wiht written approval of the employer * Profit and loss must be shared in direct prportion to the capital invesment (with exceptions)

Answer 17

* **Immidate family members** -Includes parents, children, spouses, in-laws or other persons supported by the member * ** "Hedge Fund Rule" ** -Allows hedge fund managers to invest in their funds with clients -Accounts that meet the following requirements: a. the account is opened by a custome with a NW of at least $2.1MM with at least $1MM of customer funds b. prior written agreement, w/ compenstation arrangement approved by firm c. agreement covers gains and losses for at least 1 year d. pontential conflicts of interest are disclosed

Answer 18

1. Customers who are immediate family member 2. Customers who is a lending institution, lending to the associated person with typical terms 3. Customers who is another registered person at the same member (requires pre-approval) 4. the lending arrangement is based on a personal relationship with the customer (requires pre-approval) 5. the lending relationship is based on a business relationshipo outside of the BD (requires pre-approval)

Answer 19

1. the customer and RR are both registered at the same member 2. The lending arrangement is based on a personal relationship with the customer 3. the lending arrangement is based on a business relationship outside of the broker / customer relationship.

Answer 20

RRs cannot charge fees for investment advice.

Answer 21

* fair and reasonable mark-up / commission under the 5% Policy * clerical services (e.g. safekeeping of securities, collection of dividends, or portoflio appraisals)

Answer 22

* register wiht the state (smaller IA) or register with SEC (larger IA) * comply with all of the adviser rules in addition to FINRAs rules.

Answer 23

* the latest balance sheet and net capital computation * (as perpared under the Sec Ex Act 1934) * There is no requirement to provide an income statement * made available upon customer request

Answer 24

* the firm has reasonable assurance that the customer will pay in 2 bus days (buys) or deliver within 2 days (sells) * Installment sales are NOT permitted - reg T must be met

Answer 25

* a security is purchased * the customer pays in part (margin) or in full on the settlement date OR the BD makes accounting entrys on the customers account on settlement * if payment, or entries are made before settlement, this does NOT complete the transcation

Answer 26

* A security is sold * the customer delivers the security on the settlement date OR the BD makes the appropriate account entries on the customer accounts on the settlement date NOTE: if the securities are made before the settlement date this does NOT copmplete the transactions

Answer 27

* all order tickets for sales should be marked long or short EXCEPT for corporate debt securities. * an order ticket can be marked "long" if the customer holds the security in their account or if the customer agrees to deliver the security by settlement.

Answer 28

* All orders effected by an RR must be reviewed and approved in writing by a general principal * must be kept for 3 years

Answer 29

* Piror written principal approval is required for coorespondence (each piece / written and electronic) between an RR and customer related to invest banking and securities business * Piror written approval **is not required IF **the firm has a communications compliance program in place and teh firm audits communications *

Answer 30

* $100 per person per year * gift limits do not apply to - business entertainment (cant be too extravegant or frequent) - gifts based on a personal relationships - logo gifts e.g. an RR can take a client to a dinner costing $300 but cannot gift a $300 gift card to a clients favorite restaurant

Answer 31

* The memer firm must have written policies and procedures regarding business entertainment * This includes P&Ps, training and auditing of expenses

Answer 32

* FINRA requires firms to keep track of all gifts and gratuities given and received related to business. * Procedures must in place to ensure the $100 limit isnt breached within the year * records must be retained for 3 years

Answer 33

* The $100 does not apply to paying for work * Work can be paid for as long as: - there is a written agreement detailing the work and compenstation - their is prior review and approval in writing of the agreement by the principal * Records of the agreement and payment must be kept for 3 years

Answer 34

* RRs must provide prompt wirtten notice to the member firm of any outside business activities and must follow the firms instructions * The firm must assess the impact of the work on the RR's abiltiy to do their job and on the firm * The employer can prohibit an OBA * OBA may be a non-compensated position of influence (i.e. unpaid board position) * is reported on the U4 and shown on brokercheck

Answer 35

* when an RR handles a securites transaction for a customer through another firm * it is prohibited by FINRA * All trades executed by an RR for a customer must be executed through or be known to the member firm they are with * There can be an exception if the firm is given prior written notice of the transaction and compensation and approves of the transaction in writing (the firm must supervise the transaction)

Answer 36

* execeptions can be granted * the firm must recieve written note of the transaction and compensation in advance * the firm must approve in writing * the firm must supervise the transaction

Answer 37

* info received from a customer by an RR in a fiduciary capacity cannot be used to solicit purdchases or sales except with express consent from that customer * info received by a member firm from an issuer in a fiduciary capacity cannot be used to solicit purchases or sales

Answer 38

* the firm must disclose if its in a conttrol relationship with the issuer of a security prior to its being purchased or sold (at the time the order is taken) * must be made in writing and prior the completion of the transaction (no later than settlement) * typicall firms give verbal disclosure at recommendation and written on the trade confirmation * e.g. ML RR makes a recommendation to purchase BOA -there is a control relationship because BOA owns ML - it must be disclosed.

Answer 39

* if a member firm acts as an underwriter they must disclose this to customers purchaing the issue

Answer 40

* anti-bribery rule discouraging BDs/ covered members / covered associates from participating in pay-to-play practices by acting as intermediaries between state and local governments and investment advisers. * associated employees include GP, Managing memer or Exec Officer of the BD

Answer 41

* Max political contribution is: - $350 per candidate per election in which the associate is entitled to vote - $150 per candidate, per election in which the associate is not entitled to vote * There is a 2 year ban on contributions if a contribution exceeds $350 * The primary and general elections are considered separate elections * Contributions can include gifts, subscriptions, loans, advances, or deposit of money or anything of value for the purposes of influcing an election for fed, state or local office. It also includes payment of election debts or inaugural expenses of a successful candidate.

Answer 42

Contributions can include gifts, subscriptions, loans, advances, or deposit of money or anything of value for the purposes of influcing an election for fed, state or local office. It also includes payment of election debts or inaugural expenses of a successful candidate.

Answer 43

* FINRA requires that any disputes between RRs and their fims be handled by binding arbitration which can't be appealed * Exceptions: employment discrimination, sexual harrassment * Customer disputes can be handled by arbitration with client consent at account opening (through Predispute arbitration Agreement)

Answer 44

* FINRA requires that firms forward proxy materials to the beneficial owner of stocks that they hold in "street name" for margin customers. * no charge to customers * reimbursement is made by the issuer under a schedule prescribed FINRA * the issue is required to: - furnish sufficient copies - assue the member firm it will be reimbursed for mailing costs

Answer 45

* if a stock is held by a fiduciary, the fiduciary can vote those shares * If the fiduciary in an ERISA plan is the plan trustee, if the memer frimed has been named the plan fiduciary as the investment manager of the stock held as assets in the plan, then the investment manager votes the proxies - as long as the plan gives the manager discretion to manage, acquire or dspose of any plan assets.

Answer 46

1. making recommedations of highly speculative stocks 2. Account churning 3. Trading in Mutual fund shares 4. recommendations beyond a customer's financial capacity 5. fraudulant activity with customer funds 6. payments to influence anyone in a position to influence the market price of a security 7. participants in an underwriting group to represent the POP as the prevailing market price, unless there is an independent market 8. payment to influence market prices wher they are participating in the underwriting 9. manipulative or deceptive practices with clients 10. imporoper use of customer funds and securities 11. giving concessions or discounts to the public 12. placement of orders for Mutual fund shares unless they have a customer order or they are buying for the its own account (avoid being a market maker) 13. accpeting a gift of more than $100 from an inv company or related persons. 14. Selling mutual funds just bleow the breakpoint levels 15. selling dividends (selling just before the ex-date ) 16. trading mutual fund shares 17. accepting conintuing commissions, suc as annual concessions paid out of 12b-1 fees after leaving the firm (unless there is a prior written agreement) 18. sending any written communication to perspective mutual fund customers wihtout a copy of the latest fund prospectus. (exempt letters limited to the statement of the fund's objective and its management structure)

Answer 47

FINRA prohibits making a blanket recommendation of low priced speculative stock

Answer 48

* FINRA prohibits trading in mutual fund shares * placement of orders for mutual fund shares are prohibited unless the firm has an existing customer order or is buying for their own account (long term investment) * This prohibits firms from placing shares in inventory and acting as a market maker * only the fund can act as a market maker * Selling Mutual funds below the breakpoint is prohibted

Answer 49

* prohibited by FINRA * selling mutual fund shares just below the breakpoint

Answer 50

* Prohibited by FINRA * when a customer is induced to purchase a stock just before the ex-dividend date

Answer 51

* misappropriating customer funds or trading without authorization * manipulative or deceptive practices * Improper use of customer funds and securities. - lending margin securities without a singed loan consent agreement - rehypothecation of unreasonable amounts of customer securities (in excess of 140$ of customer debit balance)

Answer 52

FINRA prohibits: * payments of any designed to influence those that are in a position to influence the market price of a seucirty (i.e. newpaper, investmnent service) * payments of any kind to influence market price wher the member is participating in the underwriting

Answer 53

* FINRA prohibits giving concessions or discounts to the public -*does not apply to exempted securities * Discounts and concessions can only be given to other memer firms e.g. a member can sell a stock at the "inside" price to another member. * member firms can compensate foreign BDs for doing trades outside the US * member firms may compenstate exchange members for performing trades on teh exchange floor

Answer 54

* FINRA prohibits accepting a gift of more than $100 in value from an investment company or related person. * it prohibits investment companies from giving you "extra" compensation about and beyond the sales charge for selling their shares.

Answer 55

* Payments of compensation, concessions or fees to RRs either firms or individuals. * there is an Exception for RRRs (retiring RRs) and to non registered foreign finders * in order to do this there needs to be a prior written agreement specifiying the compensation to be paid and the retired reprsentative must agree to do no new business or service accounts.

Answer 56

* The finder must be a foreing national and not subject to US law requiring registration * the customer must be a foreign national * the customer must receive a disclosure document that a finder's fee is being paid and must sign a written acknowledgement of the existence of the compensation arrangement * the trade confirm must disclose the finders fee was paid * records of the agreements between the firm and finder, the amounts paid must be retained

Answer 57

1. correspondence 2. retail communication 3. institutional communication

Answer 58

* Any written or electronic communication that is distributed or made avilale to 25 or fewer retail investors within any 30 day calendar period. * This includes both existing and propsective customers * *Does not require prior principal approval prior to distribution

Answer 59

* Any written or electronic communication distributed to or made available to more than 25 retail investors in any 30 calendar day period * a retail investor is anyone who not a instiutional investor (anyone with less than $50MM) * *Does require prior principal approval prior to distribution

Answer 60

* Any written or electronic communication distributed/made available to institutional investors. * Instituional investors includes banks, savings and loads, reigstered investment companies, registered invetment advisors, gov entitites, FIRNA members and any persons with $50MM or more. *Does not require prior principal approval prior to distribution

Answer 61

* Advertising * Sales Literature * Independently Prepared Reprint * Public Appearance / Public Forum

Answer 62

* material intende for mass market * Includes: newspapers, magazines, non-password protected internet websites, internet bulletin boards, TV, billboards, sings, tape recordings and motion pictures

Answer 63

* any written or electronic communication directed to a specific audience * includes: circulars, market letters, research reports, seminar texts, password protected websites, and form letters to more than 25 investors. * note: form letters to 25 or less investors is correspondence * Does not include independently prepared reprints

Answer 64

* A reprint or excerpt of an article issued by a publisher, where the publisher is not affiliated with the FINRA member and the report was not commissioned by the FINRA member * if the report is distributed to more than 25 investors it is a retiail communication, if its distributed to less then its a correspondence

Answer 65

* Participation in a seminar, forum, radio or television interview, or other appearance or speaking activity * unscripted, spontaneous talks * subject to post use review and approval (simliar to correspondence) * publich appearances do not require prior principal approval, the firm must maintain poilcies and procedures to supervise them for compliance with applciable standards

Answer 66

* No prior principal approval as long as the Firm has a correspondence compliance program * If the program is in place FINRA requires "post use review and approva" by a principal * If there is not compliance program then each item would require principal approval prior to distribution

Answer 67

* treated similar to a website, blog and "correspondence" * no advnace approval required by a principal * the firm must have P&Ps to review and approve interactive content * not required to FINRA file * NOTE: static content on a website is treated like advertising and requires preapporval by a principal and filing with FINRA

Answer 68

* Requires prior principal approval and filing * treated like advertising * NOTE: interactive content on a wesbsite does not require pre-approval or filing

Answer 69

* Requires prior principal approval

Answer 70

* Do not require pre-approval or FINRA filing * treated like correspondence * Includes: - market letters that do not make financial or investment recommendations - postings on onilne interactive forum (e.g. chat room) - communications that do not make any financial or investment recommendations or otherwise promte

Answer 71

* Requires prior principal approval * include items like emails, faxes, term sheets, internet sites, and recorded electronic road shows * Broadly dissemenated: posted on an unrestricted website or released to the news media

Answer 72

*Automatic Shelf Registration * Permits Well Known Seasoned Issuers (WKSIs) to automatically reister issues withiout SEC review and to use "free-writing prospectuses" (FWPs) without SEC review of the content (still needs to be filed with the SEC) *

Answer 73

Include: * e-mails, faxes, term sheets, internet sites, and recorded electronic road shows

Answer 74

* No prior principal approval if the firm has supervisory procedures * post-review and approval by principal with procuedures in place

Answer 75

*If an institutional communication will be redistributed to retail investors, then they become retail communications * If an institutional communication is redistributed to retail investors and a firm finds out they must cease distrubtion until the BD has adopted the appropriate procedures to prevent redistribution.

Answer 76

* Firm must keep: - a record of the communication - the date of first and last use - the name of the principal that approved the communication * Records must be retained for 3 years.

Answer 77

* Only required for retail communications * **General Rules:** - First year of business: file 10 days in advance of first use - After 10 years in buiness: No filing but retail communications are subject to spot check Note there are some specific retail communications that must e fileed in advance | Not required for insitutional communications or correspondence

Answer 78

**1. Securites Futures (options) communications** - if it contains the names of spec. securities it must include the latest ODD (options disclosure doc) **2. Fund Retail Communcations with Member-Prepared performance ratings** does not apply if it includes independently prepared performance rankings **Must be filed with FINRA 10 days before first use and can't be used utnil FIRNA approves**

Answer 79

**1. CMO communications** *collatoralized mortagage obligation comms **2. Registered Structured Product Communications** *does not apply to privately placed structured products **3. Registered DPP Retail communications** *Registered Direct Participation Progams (DPP) *Does not apply to privately placed DPPs **4. Mutual Fund Retail Communications** *dont include member-prepared performance ranking *an Omitting Prospectus must be filed (SEC Rule 482) **5. Broadly Disseminated Free-Writing Propsectuses** *filed under Rule 405 (automatic shelf registration) *Also if a draft storyboard for TV/Video was filed hthen the final version must be filed within 10 days after first use.

Answer 80

* Comms previously filed * Comms that do not make a financial or investment recommendation * Non-promotional change announcements (i.e. office addres change, employee promotion) * Comms that only identify a member's exchange symbol or identify a security for which the member is a market maker * Recruitment ads * Propsectuses, preliminary prospectuses, oferring circulars that are filed with the SEC * Tombstone ads that comply with SEC rule 134 * Independently prepared reprints, press releases, institutional sales material, correspondence, and communications posted on an online interactive forum

Answer 81

* Must be fair and balanced * Cannot be misleading * Must provide a sound basis for evaluting the facts in regard to a seucirty, industry or service * False or exaggerated claims are prohibted * Placement of information in a legend or footnoe to inhibit an investor's understanding is prohibited * Predictions / projections are prohibited * Member firm name must be included * SIPC logo must be included on all adverisements larger than 10 square inches (not required for sales literature) * FINRA name if used, can only state that the firm is a FINRA member, FINRA name must be smaller than firm name and must include link to FINRA site *

Answer 82

Firms may offer an investment analysis tool (e.g. a retirement planning calculator) so long as: * provide FINRA with the templates for written reports * describes the methodology and criteria used, included limitations and key assumptions * explains that results may vary with each use and over time * include the disclaimer that " projections generated by the tool are hypothetical, do not reflect actual investment results and do not project investment results"

Answer 83

* are permitted * the person making the testimonial must of the knowledge and experience to form a valid opinion * Disclosure must be included: - maker's experience make not be indiciative of other clients - testimonial is not indicative of future performance or success - maker was paid for the testimonial (if more than $100 was paid)

Answer 84

* Must include within the name of the prodcut the term "Collatoralized Mortgage Obligation" * May not compare CMO to any other investment vehicle, including bank CD * must disclose that a gov agency backing applied only to the face value of the CMO and not to any premium paid (where applicable) * must disclose that a CMO's yield and avg life will fluctuate depending on the actual rate at which mortgage holders prepay the underlying mortgages and changes in current interest rates

Answer 85

FINRA rule 2212 covers the use of investment company rankings in retail comms and permits the use as long as: * the infomration was created and published by a "ranking entity - indpendent ratings firm * prominent disclosure is made of the name of the category * the number of investment companies in the category, the length of the time period used for the tranking and criteria on which he ranking is based * the fact that past perfomance is no guarantee of future resutls is disclosed * the publisher of the ranking is disclosed * the ranking is current as of the most recent calendar quarter * the ranking covers a period of at least 1 year * rankings based on total return must include a comparison of 1, 5 10 year Total Returns (or life of the fund, if shorter)

Answer 86

* Must cearly include firm name * also required for telephone listings, usiness cards and stationary letterhead * not required for "blind recruitment advertisements"

Answer 87

* firms are required to place the SIPC logo on all advertisements larger than 10 square inches * NOT required for sales literature

Answer 88

* Firms may only state that they are a FINRA member * Indviduals are not associated with FINRA ONLY the firm can be. * The FINRA name must be small than the firm's name * if included on a website it must include a hyperlink to the FINRA site * Use of the FINRA name is not required but requirements must be met if the firm choses to do so.

Answer 89

* FINRA requires that marketing materials disclouse that it was prepared by an outside party to give to clients * must be supervised (principal must review and approve) * the publication must disclose that it was prepared by a thrid party for the RRs use * the publication must prominently display the member firm's name

Answer 90

* from BD to clients * provides market commentary, may include listing of recommendations * excluded from the definition of a "research report as long as the recommendaitons include key disclosure. * Research reports require different disclosures * if the market letter makes recommendations of investment cmpany or variable products they are not required to make these disclosures.

Answer 91

Disclosures: * whether the firm makes a market in the recommended security or if the member/ associated person will buy or sell the security on a principal basis. * if the member or any associated person who is involved in the preparation of the report content has a financial interest in the securities of the issuer * if the member was a manager or co-manager of a public offering of any securities of an issuer whose securities were recommended in the past 12 months Note: *not required for mkt letters that make recommendations of invest. companies or variable products *disclosures for research reports are more detailed.

Answer 92

* Communication that makes a specific security recommendation * The following is required: - the recommendation must have a basis in fact which can be substantiated as reasonable - the market price of the stock a the time must be included - supporting documentation to the recommendation must be furnished upon written request

Answer 93

1. at least a 12 month period must be used 2. an indication of general market trends during that time must be given 3. if past performance of comparable recommendations is shown, then all of such recommendations (both good and bad) made within the prior 12 months must be shown 4. all transaction costs must be included 5. a statement that past performance does not indicate future results must be made

Answer 94

* Can be included (not considered a projection of performance) * Any statement of advancates must mention relevant risks * Reports must be dated * if information older than 6 months is used it must be noted

Answer 95

* Rule 134 A: Amended Tombstone Rule * Rule 135 B: Generic Advertising Rule * specifies limited conditions under which an announcement regarding Mutual Fund and options securites is not considered an "offer" and therefore no prospectus is required with these announcement:

Answer 96

*Mutual fund advertising is limited to: - explanatory information about investment companies - an explanation of the types of investment companies - offers, descriptions, or explanations of products and services without mentioning the desirability of these investments - an invitation to inquire for more informaiton and a copy of the prospectus, inc. the name and address of the sponsoring BD

Answer 97

Options advertising is limited to: * General description of the security being offered * Description of the nature and functions of options markets * Description of the Options Clearing Corporation * Invitation to inquire for more info and obtain a copy of the options disclosures document, inc. the name and address of the sponsoring BD

Answer 98

* If a firm's sales force has "too many" individuals who previously worked at an expelled member firm, the firm is required to tape phone conversations with current and potential clients * def of too many ranges form 20% to 40% * FINRA determines which firms are subject to the rule and notifies the firm they have 60 days to comply and must write special written procedures to supervise telemarketing activity for 3 years *records must be retained for 3 years *reports must be filed quarter by the 30th of the month following quarter end

Answer 99

* for firms with 20 or more reps: less than 20% were associated with a disciplined firm in the past 3 years * for firms with 10-19 reps: less than 4 of the reps were associated with a disciplined frim in the past 3 years * for firms with 1-9 reps: less than 40% of the reps were associated with a disciplined frim in the past 3 years

Answer 100

adjust staffing to fall below the thresholds within 30 days of first notice

Answer 101

* FINRA requires a copy of the FINRA manual be kept in each branch office OR have internet access to the FINRA website where a copy can fe foudn * Must be made availalbe upon customer request

Answer 102

* Customer complaints are made to the FINRA Dept of Enforcement (DOE) * DOE investigates, valid complaints are then sent to FINRA Office of Hearing Officers (OHO) * The FINRA Code of Procedure dictates how the camplaint is handled.

Answer 103

* Customers * FINRAs surveillance activities * other regulators * other member firms * tips * examination findings

Answer 104

* require the member to report orally or in writing on the matter * investigate the books and records of the market * If the firm refuses they are subject to FINRA penalties

Answer 105

* Electronic reponses must be enrypted and sent separately from the Access Key

Answer 106

* Censure * Fines * Suspention * Expultion * any other fitting sanction

Answer 107

* the person cannot remain asosciated with that firm in any capacity * they cannot be paid a salary, commission or other renumberations resulting from any securities transacation occuring during the suspension or expulsion period *note: renumeration earned before the period can be paid

Answer 108

* FINRA can modify a suspension to apply to specfici activies * i.e. a principal is suspended for "failure to supervise" and remains employed as a reg rep or in a clerical role.

Answer 109

If FINRA suspends or expels a member or person, bars a person from association or imposes a fine over $10K it will notify: * the FINRA membership through a "notice to members" mailing * the news media through a news release

Answer 110

* Used by FINRA to pursue disciplinary action * Internal FINRA court hearing process, with higher levels of appeal. **Process:** - An investigation is open - DOE serves a formal complaint. Filed with the FINRA OHO - The OHO appoints a Chief Hearing Officer - FINRA (may) issue a cease and desist order if it believes the member firm is engaging in illegal or prohibited activities - Complaint must be answered within 25 calendar days. answer to OHO with copy to DOE. If they fail to repsond after 25 calendar days, second notice with 14 day response time - CHO reviews the reponse and decides whether to go to the Hearing Panel. The resondant can request that it go to the hearing panel. - A pre-hearing conference is held within 21 days of the respondents answer - Two person hearing panel w/ decision within 60 days

Answer 111

It is treated as a default and the CHO (Chief Hearing Officer) issues a default decision that the firm or ind. committed the alleged violation and imposes sanctions

Answer 112

* A pre-hearing conference is held within 21 days of the Respondent's answer * Conducted prior to the Hearing Panel * Objective to clarify issues, exchange wintess and exhibit lists, set criteria for evidence and other legal matters

Answer 113

* Held in an agreed upon location * Three person panel: Cheif Hearing Officer (FINRA employee) and two other industry panelist. * Respondent has the opportunity to present evidenc and testimony. * A written decision is rendered based on majortiy vote of the 3 person panel within 60 days of the hearing * Decision is not final until 25 days after the decision (due to appeal window) * Once a decision is final FINRA determines the appropriate penalty (can include censure, suspension, expulsion, or fines)

Answer 114

* Either party can appeal the Hearing Panel decision * The first appeal goes to the FINRA National Adjudicatory Councel (NAC) * Appeal must be filed within 25 days of decision * NAC can appeal within 45 days and overturn the decision * 2nd appeal - SEC * 3rd appeal - federal appeals court

Answer 115

* at any time during the hearing process the respondent can offer to settle the complaint * every settlement offer must: - be in writing - state the action or practice that caused the violation - state the proposed sanction - waive all rights of appeal * FINRA DOE decides if it will accept the settlement offer

Answer 116

* if the DOE determines a complaint to be minor it may request a respondend sign a Minor Rule Violation Plan (MRVP) letter accepting a finding of violation. * The respondent admits guidt to a minor offence and is subject to a max fine of $2500

Answer 117

*FINRA can choose to suspend (wihtout a hearing process) a member that is: - suspended or expelled form another SRO OR - experiencing financial or operating difficulties * the firm may request in writing a hearing within 7 calendar days of notification if this action is taken. The hearing must be held within 7 days of the request.

Answer 118

* Used to settle disputes form member firm to member firm. * Decisions are non-appealable * less costly and quicker than litigation

Answer 119

1. member firm vs another member firm 2. member firm vs clearing corp (or vise-versa) 3. member firm vs associated person (or vise-versa) 4. associated person vs associated person 5. member firm versus cutomer (or vise-versa) where the customer has previously signed an arbitration agreement.

Answer 120

* Must be settled by arbitration * rare * typically when two assoc. persons share a book of business and there is a dispute over income

Answer 121

Code of Arbitration: Disputes between members / members and clients Code of Procedure: used by FINRA to intiate action against a member

Answer 122

* Oversees the appointment of arbitration panels for diputes in each district. * Member firms that have disputes with other member firms AND customers who have signed a predispute arbitration agreement cannot circumvent arbitration

Answer 123

They may choose to go through aribitration, file a complaint under the Code of Procedure, or simply sue the firm.

Answer 124

* Arbitration panels are composed of individiual from inside and outside the industry * Anyone who has relevant experiences can act as an arbitrator * Arbitrators can be either: - non-public arbitrators - public arbitrators

Answer 125

Any person who: * within the past 5 years was associted with a securities BD or with a commodities firm * is retired from engaging in any of the business activies for BD / commodities firm * is an attorney, accountant, or other professional who has devoted 20% or more of his/her professional work in the last 2 years to clients that are BD/commodities firm * employee of a bank or other financial institution and effects transactions in securities or monitors compliance of employees engaged in these activities

Answer 126

* Any person not engaged in the acivities listed for non-public arbitrators * Any individual who met the definition of a non-public arbitrator but has been out of the business for at least 5 years * Anyone who has been associated wtih the industry for at least 20 years, and who has ended his or her association with the industry regardless of how long they have been out of the business

Answer 127

* Three individiuals, where the claim amount is $100K or more Panel Compesition is depended on who the dispute is between: * member / member: three non-public arbitrators * associated person - one non-public / two public * customer: one non-public and two public or customer can elect 3 public

Answer 128

* three non-public arbitrators * becuase the dispute is intra-industry

Answer 129

* One non-public and two public

Answer 130

* one non-public and two-public * Customer can elect 3 public via the "optional all public panel rule"

Answer 131

*Member/Member: 1 non-public arbitrator * Associated or Customer Disputes: 1 public arbitrator

Answer 132

* Disputes not exceeding $50K * claim filed with Director of Arbitration * a copy is sent to the firm that is the object of the claims * The resondent has 45 days to respond and can specify counterclaims * Counterclaims must be answered within another 10 calendar days * Decisions are rendered within 30 days from the date the record is closed

Answer 133

* 6 years from the event

Answer 134

* Paid within 30 days of the decision date * if the firm fails to pay FINRA will give 15 days notice to the firm, after which they may suspend or revoke the firm's registration

Answer 135

* alternative to arbitration * voluntary (neither party compelled to use mediation) * both parties must agree to mediate the dispute * It cannot be used to settle actions taken by FINRA DOE under the Code of Procedure * generally less costly and faster than arbitration *either party can withdraw before a settlement is reached without consent of the other party * private and confidential

Answer 136

* the mediator can from a FINRA supplied list or be an outside person acceptable to both parties * acts as a neutral and impartial party * has no decision making authority and cannot compel a settlement *

Answer 137

* officer * director * 10% shareholder of the issuer's equity securities

Answer 138

* catch-all fraud rule * used by the SEC to bring action against individuals who might not fit the technical insider definition but participates in insider training

Answer 139

* Any person who haseived material non-public information that could be expected to influence the price of a company's stock. *

Answer 140

* Infomraitno is considered to be public once it has been released by the news media

Answer 141

* have procedures to prevent misuse of material non-public information * BDs must establish, maintain, and enforce written P&Ps designed to prevent misuse of material, non-public information by any associated person.

Answer 142

* Between Research and Inv Banking, retail sales, trading * Between Investment banking and Research, retail sales, and trading

Answer 143

* civil penalites: up to 3 X the profit realized or loss avided (treble damages) * criminal penalties: fine up to $5MM and up to 20 years in prison for each violation

Answer 144

* must prove that the person knew or recklessly disregarded the violation * liability up to $25MM

Answer 145

Informants can be paid anywhere from 10% - 30% of the amounts recovered under civil penalties.

Answer 146

* any person who traded in the security during the time period of the insider trading * private parties have the right to institue action against a person violating insider trading rules. * statute of limitations is 6 years (as opposed to 5 years on other provisions of the Act of 34)

Answer 147

6 years (other provisions of the Act of '34 are 5 years)

Answer 148

* Used by insiders to avoid insider trading violations * safe-harbor rule that permists statutory insders to set up a written plan for trading that company's securities. * the plan specific the future date and amount of securites to be bought or sold, or the specifics of the algorithm to be used to determine the amount and date of future sales and purchases. * Once the plan is in place the insider cannot influence the plan

Answer 149

* Insiders cannot start tradigin under their pre-approved trading plan for 30-60 days ("cooling off period")

Answer 150

* passed in 2000 to address specfiic issues related to insider trading rules * designed to address 3 issues: - selective disclosure by issuers - when a trader is deemed to be an insider - family member trades

Answer 151

* selective disclosure to "favored individuals" by issuers of material non-public information * REG FD prohibits selective disclosure by individuals * if material non-public information is made available to sec market professionals and holders of the issuer's securities it must make public disclosure of that information.

Answer 152

1. for an intentional disclosure: simultaneously disclose the information by borad distribution to the public 2. For unintentional disclosure: promptly (within 24 hours) disclose the information by filing an 8K reort wiht the SEC or by broad distribution of the information to the public.

Answer 153

* the person, before becoming aware of the infomratino, had entered into a binding contract to buy/sell the security * this contract must specify the amount, date and price of the trade (or the formula for this) with no futher influence by the person on the trade * the resultant trade happened due to the contract

Answer 154

* a person agrees to maintain information in confidence * two people have a history, attern or practice of sharing confidences so that the recipient of the information should know that the person communicating the information expects the person to maintain confidentiality * a person receives material non-public information from certain close family members, spouses, parents, childrent, and siblings

Answer 155

* liability exists when a family member trades based on inside information * Affirmative defense: the person that received the info demonstrates that no duty of trust or confidence existed

Answer 156

* Wash Trades: effecting transactions in securities where there is no beneficial change of ownership in order to create misleading activitiy for the security * placing an order for a security with the knowledge of orders that have been / will be placed, at substantially the same price * effecting a series of transactions in a security to create an impression of falling or rising prices * offering to buy or sell a secuirty for a customer by giving information to the effect that the price is likely to rise or fall becuase of mkt operations of certain persons. * Including the sale of a secuirty by using false or misleading statements * accepting payment for disseminating information that the price of the security is likely to rise or fall * Pegging: stablizing the price of a security in the makret other than under prescribed SEC rules

Answer 157

* liable for damages sustained by the investors in the security *2 and 5": Suits may be brought within 2 years of discover, and no later than 5 years after the violation occured. *

Answer 158

* Suits pertaining to violations of section 9 * suits may be brought within 2 years of discovery and no later than 5 years from violation

Answer 159

* Prohibited practices in section 10: * Rule 10b-1: applies to manipulation of both exempt and non-exempt securites. * Rule 10b-3: it is unlawful for a BD, including municipal BDs, to use or employ any deceptive or manipulatie practices

Answer 160

Established to: * require the registration of investment advisors with the SEC and; * regulate the actions of invesment advisors at a federal level

Answer 161

(i* Regulation of investment advisors is split between federal and state governments * Larger investment firms (over $100K): Registered at the federal level and are not required to register in each state in which they do business * Smaller investment firms (under $100K): regulated at the state level and must register in each state in which they do business, not required to register with the SEC

Answer 162

The Investment Advisors Act of 1940 devines investment advisor as: A person who recieves compensation for advising others about securiteis, or about the advisablity of investing in securities. NOTE: if a person gives advice about securities but does not charge for it they are NOT an IA If a person gives advice about investing in commodities and charges a fee, they are NOT an IA becuase it is a security

Answer 163

Informally called the ABC TEST Test 1: Providing advice about securities? Test 2: In the Business? Test 3: is the person Compenstated:

Answer 164

The following are not IAs and do not have to register with the SEC: * banks / bank holding companies * lawyers, accountants, engineers, or teachers whose performace of such services is solely incidental to the practice of their profession * BDs and their RRs whose advisory services are indicental to their business and they receive no sepcial compenation for it * publishers of bona fide newpapers, magazines or financial publications of a general and regular circulation * any person who advises solely about U.S. Gov guaranteed obligations

Answer 165

**1. Intrastate Exemption:** an IA with its principal place of business in one state, who only renders advice to residents of that state on "intrastate transactions". **securities cannot be listed on a national exchange. **Adviser to Insurance Companies** An IA whose only clients are insurance companies

Answer 166

*Known as "Federal Covered Advisers" 1. $100 Million of assets under management 2. Advisors to investment companies *note: no registration is reuired at the state level

Answer 167

* cannot provide for compensation to the IA based on capital gains in the account * cannot provide for a reduction in the advisory fee if the account does not reach a specific performance level * Cannot allow for assigenment of the contract to another IA unless the customer consents

Answer 168

* if the majority of the partners chagne this is in "involuntary assignment' of the contract and required customer approval * they must provide notification to customers of changes in compensation of the partnership

Answer 169

IAs are prohibited from using the mail or an other means of interstate commerce to defraud a client. NOTE: These provisions apply in all circumstances, so even if someone is exempt from registration as an IA these rules still apply.

Answer 170

* IA must act as fiduciaries for their clients. * Must always act in the best interest of clients. * Cannot charge amouts greater than other Advisors offering similar services.

Answer 171

* IAs fiduciary standard: always act in the best interest of clients * BD: suitablity standard: recommendations must be suitable, lowest cost is not neccessarily a factor

Answer 172

* When an IA purchases a security from a customer into their own account, or sells a security from their own account

Answer 173

* disclose, prior to the completion of the transaction, that the adviser is acting in the capacity of a broker dealer * obtain consent of the client for the transaction

Answer 174

* When an IA tells one client to sell a security and another client to buy the same security at the same time

Answer 175

* recommend the transaction to only one side of the cross. (if both customers have been solicited then the transaction is prohibited) * act in the best possible interest of the client to obtain the best possible price * obtain a written consent from the customer that discloses that the adviser will be actin ga s a broker for both buyer and seller, that a commission will be received by the adviser from both parties, and that potential conflict of interest exists. * send to each client , at least annually, a written disclosure statement, identifying the total number of agency cross transactions and totoal commissions received from these transactions during the year.

Answer 176

* collects funds from individuals and purchases securities with those funds that are consistent with the investment company's objective. * Three types of companies: 1. Face Amount Certificate Company 2. Management Compay 3. Unit Investment Trust

Answer 177

* Diversification * Professional investment selection

Answer 178

* virtually obsolete * Investors pay a fixed monthly amount to the investment company, which invests the funds in the highest quality obligations (i.e. us gov debt, AAA muni/corp debt). * The certificate promises the investor a guaranteed rate of return and at a fixed date the certificate matures nad the investor receives the stated face value. * These were used in conjunction with bank mortgage loans.

Answer 179

* An investment company organized as a coporation, issuing shares of stock. * The portfolio manager invests the portfolio and is free to manage the portoflio, buying / selling consisent with the funds objective. * Two structures: 1. open end 2. closed end

Answer 180

* Mutual Fund * Most popular investment company structure * the number of common shares that are issues is open ended, as investors place new money in the fund, they are issued additional shares. * The shares are non-negotiable. They cannot be traded. * The shares are redeemable with the fund at any time.

Answer 181

* Publicly Traded * the fund has a one-time issuance of stock. * The stock is listed on an exchange and is traded (it is negotiable) * The funds invest in bonds with shareholders receiving income distributions from interest in addition to capital gains. * Shares are not redeemable

Answer 182

* A type of investment company organized under a "trust indenture" * Issues shares of beneficial interest, which represent undivided interest in a unit' of specified securities. * Two types of UITs 1. Fixed Trusts 2. Participating Trusts

Answer 183

* A trust selects a portfolio of securities (usually bonds) which are placed in trust. * Once selected, the portfolio does not change - there is no management * The sells units ofte fixed portfolio to investors * interest and principal payments are passed to unit holders * When all bonds mature, the trust self-liquidates

Answer 184

* The trust invests in the shares of a management company - specifically mutual fund shares. * Purchasers of units are indirectly buying mutual fund shares. * Used when investors buy mutual funds within an insurance company wrapper to fund variable annuity contracts.

Answer 185

* Generally used as retirement planning vehicles. * Investors make either a lump sum or periodic payments to buy "units" * At retirement age the cusomter can cash out as a lump sum or periodic payments, or in the form of an annuity * payments back to investors are dependent on the performance of the mutual fund shares purchased .

Answer 186

Types of Invesment Companies 1. Face Amount Certificate Company 2. Mangement Company A. Open-End (Mutual Fund) B. Closed-End (Publicly Traded Fund) 3. Unit Investment Trust (UIT) A. Fixed UIT (Fixed Trust) B. Non-Fixed UIT (Variable Annuity)

Answer 187

* Formed when someone conceives as an idea for an investment company objective that is needed by investors.

Answer 188

* Establishes the fund * Underwriter * Can be a large invesment firm (i.e. Morgan Stanley) or a firm that specializes in running funds (i.e. Fidelity/Dreyfus) * The sponsor must register with the SEC before the security can be sold

Answer 189

Details the: * objective of the fund * the Board of Directors * the fees * the track record of the sponsor * The structure of the fund (open- or closed- ended) *POP (public offering price) - NAV plus sales charge Note: becuase open ended funds are continuously issues every pruchaser must recieve the latest propsectus

Answer 190

becuase open ended funds are continuously issues every pruchaser must recieve the latest propsectus

Answer 191

* The Net Asset Value (NAV) per share plus a Sales Charge (the equivalent of a spread)

Answer 192

* Hired by the underwriter to help sell a mutual fund. * Acts as an agent, selling the fund for the sponsor. * The sponsor pays the sales charge as a selling concession to the selling group

Answer 193

* Capitalized like other corp stock offerings * One time issuance of stock, and then the shares are listed and trade on an exchange * The original offering of the stock is made under a prospectus at the offering price * The underwriters earn a spread (disclosued in prospectus) * Once the issue is sold out shares trade in the seconday market * no additional prospectus is required

Answer 194

* The IA managing the fund and the fund objective is identified in the prospectus * The management fee is based on a percentage of all assets under management. * The IAs contract is originally set for 2 years and subject to shareholder vote every year after

Answer 195

* initially set for 2 years * subject to shareholder vote every year thereafter

Answer 196

* A custodian bank is idenfitied to safeguard the assets of the fund * included in the prospectus * usually acts as a transfer agent for the fund, canceling old shares and issuing new shares * Keeps a shareholder list for mailing, reports, proxies, distributions * they earn a custodial fee

Answer 197

* Fund Sponser (underwriter) 1. Custodian Bank 2. Investmet Adviser 3. Selling Group

Answer 198

1. safeguards fund assets 2. act as a transfer agent & paying agent 3. receives custodial fees

Answer 199

* Manages the fund within the objective Note: they do this for a managment fee (% of aum) and their contracts are approved by the shareholders.

Answer 200

* sells fund at the public offering price on initial offering * Its continuous for open-end shares and One-time offer for closed-end shares Note: they earn a selling consession

Answer 201

must have: * 75% or more of its assets invested in securities * a max of 5% of its assets invested in any one issuer * a max holidng of 10% of the voting securities in any one issuer * Most funds are diversified

Answer 202

* Diversification Rule for mutual funds * Fund must have: - 75% or more of its assets invested in securities - a max of 5% of its assets invested in any one issuer - a max holidng of 10% of the voting securities in any one issuermust have:

Answer 203

* States that if a fud focuses on a particular investmet, (stated in its investment policy) at least 80% of its asset must be i that investment type.

Answer 204

* Continuously issued by the sponsor * redeemable at any time * do not trade in the secondary market * non-negotiable

Answer 205

* Computed daily * NAV per common share * All securities held in the fund are marked to market, the total market value is divided by the number of common shares outstanding

Answer 206

* there is no sales charge * customers purchase at NAV * sold diretly by mutual fund sponsors who do not use selling groups or salesmen * almost all MoneyMarket funds are no-load

Answer 207

* fee on top of NAV when the fund sponsor must compensate a selling group or salesmen * Maximum sales charge is 8 1/2 % of POP * POP consides of NAV and sales charge **Sales Charge Percentage = (Ask-Bid)/Ask** **Note:** in order for a fund to charge the maximum sales charge (8 1/2 %)the fund must offer: * breakpoints * letter of intent * rights of accumulation

Answer 208

When customers buy or sell a mutual fund they dont know the exact price of the buy/sell becuase the price is computed based on that days closing.

Answer 209

They must be paid within 7 CALENDAR day *Investment Company act of 1940

Answer 210

* A redemption fee can be charged * Under FINRA Rules the total of all fees (up-front sales charge and the redemption fee) cannot exceed 8 1/2% of POP

Answer 211

* Breakpoints * Letter of Intent * Rights of Accumulation

Answer 212

* A reduced sales charge for large dollar purchases. * FINRA sets brekpoint schedules that it considers to be 'fair and reasonable' * Mutual funds may lower the sales charge percentages in these breakpoints, but may not go higher * Applied on a customer by customer basis **Revised Offering Price = NAV / (100% - sales charge %)**

Answer 213

= NAV / (100% - sales charge %)

Answer 214

= (Ask - Bid) /Ask

Answer 215

* Investment clubs do not qualify for breakpoints based on the group * Breakpoints are applied on a customer-by-customer basis * most funds will give breakpoints to a group of individuals in the same HH * Some funds will allow breakpoints to be applied accross a fund family

Answer 216

* If a client plans to reach a breakpoint in the future (within 13 months), he can receive the breakpoint if they sign a letter of intent * If they dont complete the breakpoint, the purchases are recalculated based on the actual breakpoint level acchieved * letters of intent can be backdated to include purchases in the preceeding 90 days

Answer 217

* Can last 13 months (inclusive of the 90 day backdating) * Can be backdata to the preceedig 90 days

Answer 218

* Additioal shares purchases uder the breakpoit are held in escrow until the breakpoint level is reached. * If the breakpoint level is not reached, the extra shares are not released from escrow.

Answer 219

* The accumulated position counts towards the breakpoint * FINRA allows funds to use the higher of cost or market value to determine the accumulated value e.g. Fund A has a $25,001 breakpoint A client purchases $9K at 8 1/2% He now buys $20K The 9K owned +20K new purchases is above the $25K breakpoint therefor the NEW PURCHASE is at the breakpoint sales charge

Answer 220

FINRA permits fuds to use the higher of the cost or market value (use by most funds)

Answer 221

* Many funds allow swithing between funds in the same fund family at NAV (no sales charge on the new purchase) * not a FINRA requirement / marketing tool * Sale of the fund is still a taxable event

Answer 222

* The price a customer pays is the "next calculated Public Offering Price" inclusive of the appropriate sales charge and considering all of the funds purchase features (breakpoints, letter of intent, rights of accumulation) * This is disclosed in the prospectus * Selling groups may not discount on their own or sell them for more than POP

Answer 223

Annual Statement of dividend distribrutions and capital gains distributions be sent on an annual statement send to shareholders for tax purposes (form 1099)

Answer 224

* Declarations of dividen distributions and capital gains distributions are made by the Board of Directors of the fund * Dividends are paid periodically, and may be paid more than once a year * Capital Gains can only be distributed annually

Answer 225

*Set by FINRA * Distributions for closed-end funds are reported to the exchange where the shares trade * * Provided by the Board of Directors Includes the declaration date, record date and payable date * FINRA then sets an appropriate ex-date and the share price is reduced on that date

Answer 226

* Set by the Board of Directors * The board of directors set the declaration date, the record date, the payable date and the ex-date. * The share price is reduced for distribution on the ex-date

Answer 227

* Recommending the purchase of fund shares to customers just prior to the ex-date to receive a capital gain or dividend distribution * Prohibited by FINRA * Not prudent, as the investor mus pay tax on the distribution, then after the ex-date the sares are reduced in value by the entire before tax distribution. (i.e. receives a return of his own money on which taxes must be paid)

Answer 228

Each shareholder in an investment company has the right to: 1. vote for the board of directors 2. vote for changes in investment objective 3. vote anually on the investment advisor 4. receive annual and semi-annual reports from the investment company

Answer 229

* BoD must be elected by shareholders at an annual meeting * not all board members need to be boted on annually * directors can be divided into classes, with terms from 1-5 years * at least one must come up for re-election each year

Answer 230

Min Total Assets of $100K

Answer 231

* All Investment Companiese must register with the SEC within 3 months after filing the notification of registion with the SEC * Form N-1A

Answer 232

1. Investment objective and policies 2. Classification and subclassification (FAC, UIT, or Mngmt Company, open/closed, div or non div) 3. Policy on borrowing money 4. Policy on Issuing Senior Securities 5. Policy on investmet concentrations 6. Policy on making loans 7. Portoflio turnover for the previous 3 years 8. ames and addresses of all affiliated persons, other companies i which the persons are officers / directors, business experience for last 5 years 9. Any other filing made with the SEC under the '33 and '34 Acts

Answer 233

* Open-end funds cannot borrow more than 1/3 of Net Assets * Funds cannot borrow to make dividend distributions.

Answer 234

* Senior securities can only be issues by closed end funds * bonds & Interest payments: asset coverage is at least 300% * Preferred stock & dividend payments: asset coverage is at least 200%

Answer 235

* requires shareholder vote * a majority vote of outstanding shares is required

Answer 236

* Purchasing shares of companies on margin * Selling short shares of companies * Participating in joint trading accounts in securities

Answer 237

* be made in writing * no longer than an intitial 2 year period duration and be approved by the majority vote of shareholders * Contracts must be re-approved annually by the board of directors or by majority vote of shareholders * Tremination at any time by the board or majority shareholder vote w/ 60 days notice * contracts cannot be assigned to another firm (automatic termination)

Answer 238

* Priced at next computed Net Asset Value of Fund Shares * Any applicable sales load may be added as long as it is fully disclosed in the registration satement and offering materials. * Under Section 22 of the Investment Company Act of 1940, the SEC prohibits a underwriter from selling open-end fund shares at any price other price

Answer 239

* Requires management companies to compute NAV at least once daily, Monday through Friday (business days only) at a specified time set by the Board of Directors. * Most set this as of closing of NYSE

Answer 240

* Permits funds to offer variatios in sales loads (breakpoints) * must be uniformly applied to all offerees * Chanages in sales loads must be fully disclosed in a revised prospectus, and existing shareholders must be advised of the new sales loads within 1 year of the date when it was made availalbe. (done through prospectus mailing)

Answer 241

* Allows for some selling and distribution expenses to be charged to fund shareholders. * Allows investment companies to finance acctivities itended to result i the sales of shares, such as advertising, mailing of propsectuses to persons other than current shareholders, printing and mailing of sales literature and compensation of sales people. * Must have a 12b-1 plan (needs to be approved) *note: typically only operating expenses (not selling expenses) were able to be passed onto the shareholders

Answer 242

* 3 levels of voting are required. * Requires majority vote of the: 1. Shareholders 2. Board of Directors 3. Uninterested Directors (neither affilitated with the fund or receives payments from the fund - e.g. outside attorney)

Answer 243

* A person must be appointed to direct expenditures of the funds allocated to the plan and provide quarterly updates to the Board. * The plan must be reapproved annually.

Answer 244

* Termination of a 12-b1 plan requires 1 level of approval. * The plan may be terminated at any time by majority vote of either: 1. shareholders OR 2. Uninterested Directors * majority bote of the Board is NOT needed to terminate the plan.

Answer 245

* Needs approval by both the shareholders and the board

Answer 246

* provides for a maximum sales charge for funds that impose 12b-1 fees, and a maximum sales charge for funds that do not impose 12b-1 fees.

Answer 247

* 8 1/2% of the offering price * applies to the total of the front-end and deferred sales charges * Additional requirements must be met in order to charge the maximum (offer breakpoints and rights of accumulation)

Answer 248

* The fund must offer both: 1. Rights of accumulation (cumulative quantity discount) 2. Breakpoints (quantity discounts)

Answer 249

* FINRA provides minimum breakpoint schedules (for both cumulative and quantity discounts apply) * Funds can do better than these schedules * Two alternatives are provided:

Answer 250

FINRA reduces the maximum allowable sales charge if: 1. If Rights of Accumulation does not meet schedules: max sales charge is 8% 2. If Breakpoints do not meet schedules max sales charge is 7.75% 3. If both ROA and Breakpoints do not meet schedules: Max sales charge is 7.25% 4. if an investment compnay pays a service fee (payments to 3rd parties for acct maintenance): Max Service Fee is 7/25%

Answer 251

* Maximum sales charge is 6.25% for funds that pay a service fee (fees to 3rd parties for account mainatenance) * Max sales fee is 7.25% for funds that do not impose a sales fee

Answer 252

* Maximum .75% (3/4 of 1% annually) * If a fund wishes to advertise as "no-load" the maximum is .25%

Answer 253

* Share classes impose sales charges and 12b-1 fees in varying ways * Most common share classes: 1. Class A shares : higher up front sales charge, no/low 12b-1 fees 2. Class B shares: contingent deferred sales charges that declies to 0 the longer the investor is invested, higher 12b-1 fees 3. Class C shares no upfornt sales charge, highest 12b-1 fees

Answer 254

* Higher Up-front sales charge & No/Low 12b-1 fees * 12b-1 fees typically about .25% * Suitable for long term investing best for clients with large amounts to invest with a long term time horizon

Answer 255

* Contingent deferred sales charge that declines to 0 the longer the investor stays in the fund & higher 12b1 Fees * 12b-1 fees typically around .5% * Most suitable for intermediate term investing

Answer 256

* Placing orders to buy, redeem, or exchange mutual fund shares after the time as of which the fund calculates that day's closing NAV * Late orders should not be processed at that day's closing NAV, they shoudl be processed at the following days NAV. * Prohibited under the Invest Company Act of 1940

Answer 257

* Frequently buying and selling a fund's shares to exploit inefficiencies in how the mutual fund company computes NAV * e.g. a hedge fund computes NAV faster than the fund and places buy orders for shares it finds to be undervalued * to prevent this most mutual funds have placed restrictions on excessive tradig in their prospectuses and monitor accounts for excessive short term trading * FINRA looks for market timing customers that use multiple accounts to trade just under the audit thresholds.

Answer 258

* the service fees paid by the investment company exceeds .25% of net assets OR * the dividend reinvestment at NAV is not offered (reivnvestment of dividends is not made at NAV)

Answer 259

* FINRA requires any member who joins in a selling group must sign a written selling agreement. * It must specify the cocessios to be received by the selling group member

Answer 260

* a FINRA member that takes an order to buy mutual funds must promptly sumit the order to the underwriter * Orders must be: - to fill a existing customer order - for securities to be placed in the firm's investment account

Answer 261

* Only the fund can be a market maker in mutual fund shares * FINRA members cannot make market in fund shares, cannot hold themselves out as market makers, and canot trade fund shares * Shares may only be purchased and redeemed through the fund

Answer 262

*the later of : within 3 days of receipt of the customer's order to buy, or within 1 day of receitp of payment.

Answer 263

* the memer must forfeit the full concession to the fund underwriter. * if the underwriter is a firm different from the fund, the underwriter must forfeit the concession the the fund * There may be reasonable redemption fees imposed * Redemption takes place at the next computed Net Asset Value *

Answer 264

* prohibited by FINRA * the only compensation to be receied by a FINRA memer is the selling concession. * There may be no toher incentives paid by the issuer or underwriter to sell shares.

Answer 265

Underwriter incentives are prohibited. Underwriters cannot pay salesmen based on sales of a fund. This includes: * Commissions paid by the invesment company to the orker as a condition for selling fund shares * Commissions paid by another FINRA member to the borker as a condition for selling fund shares * Special incentive campaigns promoting the sale of a fund, financed by commissions directed or arranged by underwriters

Answer 266

* Member firms are prohibited from offering incentives to their borkers for selling fund shares other than regular selling concessions. * This includes: - placing specific mutual funds on "recommend" or "preferred" list - Providing sales personnel with additional compensation for the sale of shares of specific investment companies - giving commissions to sales personnel on fund transactions, where the commissions are directed by the investment company

Answer 267

* FINRA prohibits underwriters from directing portoflio trades to a broker based on sales of their fund by the broker * The only basis for a member firm to be selecting for performing portfolio trades is execution capaibilty - and not how many shares of that fund are sold by the member * It does not prohibit a FINRA member form both receiving selling concessions from the fund and erforming portoflio trades

Answer 268

* Member firms are prohibited from selling the shares of a mutual fund, or acting as an underwriter for the fund if the member has a "directed brokerage arrangement that is intended to promote the sale of that investment companies securities. *this was implemented in 2005

Answer 269

* FINRA prohibits fund underwriters from compensating persons for retial distribution of fund shares with: - stock, warrants, or options - merchandise or trips - any compenstation not stated in the prospectus - any item of material value

Answer 270

* cannot hold sales contests for selling group members * cannot compensate RRs within the selling group * cannot direct portoflio trades to a specific selling gropu based on how much of the fund the firm sells

Answer 271

* Each selling group can hold a sales contest within that firm as long as it does not favor sales of one fund over another * Each group member can compenstae RRs within that firm for fund shares sales

Answer 272

* gifts of no more than $100 per person per year * Educational seminars held by the fund underwriter, provided: - prior firm member approval is obtained - the location is appropriate for the purpose of the meeting - the sponsor pays only for the training, education, meals, lodging and tranportation (not for entertainment, no spouses) * Loans or guarantees to a person not controlled by the underwriter or member * Wholesale overrides stated in the prospectus * Occasional meals, sporting tickets, etc. paid by the sponsor as long as they are not frequent, not excessive and not based on a condition of sales.

Answer 273

* FINRA is concerned with employees of Institutional Customers soliciting charitable contributions from member BDs. * FINRA recommneds that written Proceudres be created by the member firm require: - BD approval (above a threshold or frequency) - Approval from the Institutional customer (about a threshold/frequency) - cannot tie contributions to amount of directed borkerage - frequent review of solicited contribution activity

Answer 274

* arrangements are contracts between investment advisers and companies with broker-dealers for research and brokerage services for their managed accounts. "Soft dollars" are client commissions that are used to pay for research and brokerage services

Answer 275

* services provided by soft dollar arrangements must directly benefit the shareholders of the mutual fund. e.g. the BD can provide research, trading software, asset allocation software the BD can't pay rent subsidies because it doesn't directly benefit shareholders.

Answer 276

* Generic Advertising Rule * Investment Companies can distriubute Generic fund advertising without first providing a prospectus if: - the advertisitng does not refer to the specific securities invested by the fund - and is limited to: - explanatory info about inv company secuirties, the nature of investment companies or services offered - explanation of differing inv objectives - explanation of various products / services - invitation to inquire more

Answer 277

* the name of the sponsoring BD * if the sponsor is the principal underwriter or fund adviser it must be disclosed

Answer 278

* if total return is shown for 1-5, and 10 year periods (or the life of the fund if shorter) * the total return is broken down into income and capital components * all sales charges and are reflected

Answer 279

* Sets requirements for investment company sales literature * The following is prohiibited: any person to use sales literature that is materially misleading in connection witj the offer of investment company securities. * Sales literature is materially misleading if it contains an untrue statement of material fact, or omits a fact necessary to make the material not misleading.

Answer 280

* Unit Investment Trust another type of investment company * Issues "shares of beneficial interest"

Answer 281

* issued by UITs * called "units" * represent and undivided interest in the portoflio of securities * Redeemable with the trust sponser at any time for NAV

Answer 282

1. Fixed UIT 1. Particpating UIT

Answer 283

* the sponsor selects a fixed portoflio and puts it in a trust * units of the portfolio are sold to investors * once established, no buying or selling of securities takes place in the portfolio

Answer 284

* The trust buys shares of a management company * once the shares are purchases, they remain in the turst until the unit it redeemed * shares held in trust are used to fund annuity contracts issues by insurance companies (Variable Annuities)

Answer 285

* Issuer guarantees a rate of return * insurance comany assumes risk * not considered a security * an insurance product regulated by insurance laws

Answer 286

* no guarantee of a specific rate of return * annuity amount fluctuates based on the performance of underlying portfolio * the investor assumes "investment risk" * considered a security * regulated by Securities Laws, the Investment Company Act or 1940

Answer 287

* the method used by insurance companies to structure most variable annuities is to create a trust that collects payments from investors * The trust can only invest in investment management companies (stocks or bonds can be bought) * The management companies are tpyically operated susidary of the insurance company

Answer 288

* used to provide the customer with an illustration of the annuity amount they will receive

Answer 289

* investments are held in a seperate account held by the insurance company * they sare seperate from the insurance companies other holdings and are used specificaly to fund the annuity * portoflio operated as a management company with a board of managers

Answer 290

* they are operated as a management compnay * Board of managers oversees the operating of the account * Contract owners vote for managers and to change investment policies

Answer 291

* contract holders purchase accumulation units of a variable annuity * Net Asset Value per unit is calculated dailly * Each payment from a contract holder is used to accumulate more units

Answer 292

* Interest payments, dividend payments, and realized capital gains from the investments in the seperate account (annuity) are automatically reinvested to buy more accumulation units for the contract holder. * income and capital gains cannot be distributed to the unit holders until the contract is completed.

Answer 293

* When the purchase payments are completed, teh purhcased units and the additional accumulated units through reinvestment are converted into annuity units. * Also known as "Annuitization" of the seperate account

Answer 294

* the sex, age, habits (smoker/non-smoker), and annuity payment options selected by the contract holder. * The periodic payment made to the annuitant = numer of annuity units X the annuity value * Annuity payments may fluctuate based the performance of the investments (annuity units are fixed).

Answer 295

* mortality guarantee * expense guarantee

Answer 296

the insurance compnay guarantees to pay the annuity for one's life (or other designated payment option). if a person dies later than the projected mortality, the payments will continue until death

Answer 297

if expenses exceed a given percentage, the insurance company absorbs the excess

Answer 298

* not required for a fixed annuity (that is an insurance product) * required for a variable annuity (it is a security)

Answer 299

* investment objective * policies of the seperate account * management fee * brokerage fees * adminisitrative expense fees * sales charges * breakpoints * early redemption penalties * redemption fees * insurance related mortatlity and expense charges

Answer 300

* guaranteed rate of return on a fixed annuity Note: there is no guaranteed rate of return on the investments in a variable annuity

Answer 301

* Surrender charges imposed by an annuity on accumulation units that are liquidated before a stated time. * Usually the longer the units are held the lower the surrender charges

Answer 302

* can borrow against the value of accumulation units (similar to borrowing against a whole life policy * When annuitized the account value can be taken out as a lump sum and used to purcahsed a fixed annuity (with a fixed monthly payment)

Answer 303

* A type of variable annuity contract * the holder recieves a death benefit, in addition to an investment benefit * the investment benefit is funded by the variable annuity investments * the death benefit is indpendently funded and guaranteed * considered a security, must be registered * sold under prospectus

Answer 304

* a variable annuity purchased in a qualified account * contributions are deductible * earnings grow tax deferred * distributions attriutable to growth are taxed as ordinary income

Answer 305

* purchased in a non-qualified retirement account * contributions are not deductible * earning grow tax deferred * only distributions of growth are taxable at ordinary income tax rates

Answer 306

* FINRA requires sales charges for variable annuities be "fair and reasonable" * not subject to the same maximum 8 1/2% sales charge as mutual funds

Answer 307

* must be sold by FINRA members at the value computed following the receipt of payment. * payments are not recieved until they have been accepted by the insurance company * payments must be promptly send to the insurance company by the FINRA member.

Answer 308

* FINRA requires that members have a written selling group agreement in force wiht the issuing insurance copmany before orders can be placed. * The insurance company must have a registered broker-dealer with FINRA.

Answer 309

The sales agreement must provide that any selling concessions will be returned to the issuer for redemptions that take place within 7 business days of contrct acceptence. remdemption requests must be submitted promptly to the issuer.

Answer 310

Prohibits companies form suspending redemptions for more than 7 business days after the tender of that security exception: when the SEC declares a financial emergency The SEC exempts variable annuity contracts from this provision during the annuity period. note: During the annuity period there is no "formal redemption of shared. Instead the insurance company is making monthly payments so this provision cant apply.

Answer 311

* to recommend a varaiable annuity to a customer, the rep must have a reasonable basis to believe that: 1. the customer has been informed, in general terms, of the features of the product 2. the customer would benefit from one or more features of the product, 3. the particular variable annuity as a whole, the underlying seperate accounts to which funds are allocated at the time of purchase, and the riders to the policy are suitable

Answer 312

FINRA requires customers must be told "clearly" that this is either a variable insurance or variable annuity. Intended to differentiate from a mutual fund

Answer 313

The representative must consider whether the customer: 1. would incur a surender charge, be subject to the commencement of a new surrender period, lose existing benefits or be subject to increased fees /charges 2. would benefit from product enhancements or improvements 3. has had another variable annuity exchange within 36 months

Answer 314

exhange of annuity for another annuity not a taxable event

Answer 315

the appropriate detmerinations were completed

Answer 316

* age * annual income * financial situation / needs * investment experience * investment objective * intended use of the deferred annuity * investment time horizon * liquidity needs * liquid net worth * risk tolerance * tax status and any other information that is needed to make a recommendation to the customer

Answer 317

The associated person who made the recommendation must send the application for review by the principal within 7 business days. the principal must state whether they approve or disapproves of the recommended purchase or exchange

Answer 318

* The BD must promptly forward the check to the insurance company, no later than noon the next business day

Answer 319

* to get better coverage at a lower cost * to get more desirable features or benefits * if the customer is concerned about the solvency of the company that issued the original policy or with the service of the agent that sold the policy

Answer 320

* to use an existing policy's cash avlue to pay for a new policy's first year expenses * if the existing policy is in its early years and cashing out the policy will incur high surrender charges * if the existing plicy is past two-year "contestability period" and a new policy could allow the insurance company to challenge a death claim that occurs in the first two years * if there are unfavorable tax consquences

Answer 321

the statement of the existing whole life policy's cash value, surrender charges, and projections of future death benefit and cash value. used to determine if an exchange is acceptable

Series 24 - Chapter 2 Broker-Dealer Supervision Flashcards

(349 cards)