Series 24 - Chapter 4

Front 1

Self Regulatory Organization

Back 1

1. Supported by its own members

2. Sets rules, regulations, and penalties

3. Allows its members to vote

**SROs are NOT government agencies

**All disciplinary actions taken by SRO's are subject to SEC review

Front 2

FINRA Executive Representative

Back 2

Each membership applicant is required to designate a FINA executive member who will represent, vote, and act for the member in all FINRA affairs.

Must be a registered principal in the applicant's senior management.

Must have an email account.

Front 3

FINRA Action Timeline

Back 3

Has jurisdiction to bring disciplinary actions against member firms and associated persons for 2 years following the resignation, termination, cancellation, or revocation of their membership or registration.

Front 4

FINRA Action Response

Back 4

Still have to file a complaint if the action started while you were still a member BD. Have to track all complaints up to 2 years after the effective date of the resignation, cancellation, or revocation.

Front 5

Successor Registration

Back 5

If a BD takes over for another, has 30 days to file Form BD, predecessor files a notice of withdrawal on Form BDW, can continue their registration.

Requires that the registration of the predecessor broker or dealer will cease to be effective as the registration of the successor broker or dealer 45 days after the application for registration on Form BD is filed by such successor.

Front 6

Correcting Errors on Registration

Back 6

BD shall promptly file with the Central Registration Depository (CRD) an amendment on Form BD correcting such information. Every amendment filed with the CRD will be deemed to have been filed with the SEC.

Front 7

Registration Review

Back 7

Within 6 months of the date of granting of registration to a BD, SEC, etc. shall conduct an inspection of the BD to determine whether it is operation in conformity with the provisions of the rules and regs.

Review cannot go beyond 6 months.

Front 8

Application is Required For (1-3)

Back 8

1. Merger of the member with another member

2. The direct or indirect acquisition by the member of another member

3. The direct of indirect acquisition or transfer of 25% or more in the aggregate of the member's assets or any asset, business, or line of operation that generates revenues comprising 25% or more in the aggregate of the member's earnings measure on a 36 month rolling basis.

Front 9

Application is Required For (4-5)

Back 9

4. A change in the equity ownership or partnership capital of the member that results in one person or entity directly or indirectly owning or controlling 25 percent or more of the equity or partnership capital.

5. A material change in business operations.

Front 10

Filing and Content of Application

Back 10

1. The member shall file the application with FINRA's department of member regulation.

2. An applicant shall submit an application that includes a Form CMA including a detailed description of the change in ownership, control, or business operations.

Front 11

Change in Ownership Filing Requirement

Back 11

Member shall file an application for approval of a change in ownership or control at least 30 days prior to such change.

Change cannot happen until approved.

Front 12

Rejection of Application

Back 12

If rejected within 30 days, get your filing fee back minus $500 for a processing fee.

If want to try again must submit a new application.

Front 13

Office of Supervisory Jurisdiction (OSJ)

Back 13

Any office of a member at which an one or more of the following functions take place:

1. Order execution and market making

2. Structuring of public offerings or private placements.

3. Maintaining custody of customer's funds and/or securities

4. Approval of (not the opening of) new accounts on behalf of the member.

Front 14

OSJ (5-7)

Back 14

5. Review and endorsement of customer orders

6. Final approval of advertising or sales literature for use by persons associated with the member

7. Responsibility for supervising the activities of persons associated with the member at one or more other branch offices of the member.

Front 15

OSJ Exemptions

Back 15

Locations that solely conduct final approval of research reports are exemption from the OSJ definition.

Front 16

OSJ Additional Requirements

Back 16

Each OSJ, including main office, must have designated one or more RP, whereas each Non-OSJ office must have designated a "Person in Charge" to carry out the supervisory responsibilities of each office.

Front 17

OSJ Supervision

Back 17

If a RP is going to supervise multiple OSJ's the RP must have a physical presence on a regular and routine basis.

Front 18

Supervisor

Back 18

A RP who is physically located at the OSJ Branch Office.

Front 19

Person in Charge

Back 19

A Registered person (RR or Principal) who is physically located at and manages activities of individuals working at a Non-OSJ Branch Office.

Front 20

Branch Office

Back 20

Any location where one or more associated persons of a member regularly conducts the business of effecting any transactions, purchase or sale of any security or is held out as such.

Front 21

Branch Office Exclusions

Back 21

1. Any location that is established solely for customer service and or back office type functions where no sales activities are conducted and is not held out to the public as a branch office.

Front 22

Branch Office Exclusions (Home Office) (1-3)

Back 22

1. Only one associate person, or multiple associated persons, who reside at that location and are members of the same immediate family, conducts business at that location.

2. The location is not held out to the public as an office and the associated person does not meet with customers at that location. (Using Home # on card is ok)

3. Neither customer funds nor securities are handled at that location.

Front 23

Branch Office Exclusions (Home Office) (4-6)

Back 23

4. Associated person is assigned to a designed branch office, and that office is reflected on all business cards and stationary.

5. Associated person's correspondence and communication with the public are captured.

6. Electronic communications are made through the member's electronic system.

Front 24

Branch Office Exclusions (Home Office) (7-9)

Back 24

7. All orders are entered through the designated branch office or an electronic system that is reviewable.

8. Written supervisory procedures pertaining to supervision of sales conducted at the residence are maintained by the BD

9. A list of residence locations is maintained by the BD

Front 25

Branch Office Exclusions (Traveling)

Back 25

Any location, other than primary residence, that is used for securities business for less than 30 business days in any calendar year. (Subsequent 30 calendar day window to register as a branch if you go over the 30 business day exemption)

Front 26

Branch Office Exclusions (Public Place)

Back 26

Public place such as a coffee shop is excluded. May not establish regular business hours at such location or hold out the location in any way.

Holding out provision is waived if you must meet in a bank that requires disclosure signage.

Front 27

Branch Office Exclusion (Errands)

Back 27

Any location that is used primarily to engage in non securities activities and from which the AP effects no more than 25 securities transactions in any one calendar year.

Ex: gym.

Front 28

Branch Office Exclusions (Extraneous)

Back 28

Floor of a registered national securities exchange.

A temporary location established in response to the implementation of a business continuity plan. (Disaster response)

Front 29

Updating Branch Information

Back 29

If branch office information becomes inaccurate or incomplete amendments must be filed with FINRA not later than 30 days after the firm learns of the facts giving rise to the amendment.

Front 30

FINRA Supervisory Regulations for Branch Office Inspections (1-3)

Back 30

1. Must establish mandatory inspection cycles and the firm's written supervisory procedures (WSP) must be independently tested and verified.

2. CEO must certify annually that they can review compliance policies and procedures of the firm

3. OSJ and branches supervising non branch locations must be inspected ANNUALLY.

Front 31

FINRA Supervisory Regulations for Branch Office Inspections (4-6)

Back 31

4. Non-OSJ Branches inspected every 3 years

5. Non-Branch locations must be inspected on a regular periodic schedule based upon the complexity of what they do.

6. Inspection must be conducted by a person independent of the branch and cannot be conducted by the branch office manage.

Front 32

WSP and Inspection Procedures Verified

Back 32

1. Safeguarding of customer funds and securities.

2. Maintaining books and records.

3. Supervision of customer accounts serviced by branch managers.

4. Transmittal of funds between customers and registered representatives or 3rd parties.

5. Validation of customer address changes

6. Validation of changes in customer account information

7. In inspection done by principal because firm is small additional disclosures and documentation needed.

Front 33

FINRA Supervisory Regulations for Branch Office Inspections (7-9)

Back 33

7. Verify and Check WSP

8. Inspection reports must be retain for 3 YEARS

9. FINRA Rule 8110 means firm must have copy of FINRA manual readily available. Online works.

Front 34

Producing Manager

Back 34

Any branch office manager, who services customer accounts in a manner that requires registration.

Front 35

Prime Brokerage Services

Back 35

Services offered to the largest customers of brokerage firms such as hedge funds, institutions, etc.

Front 36

Supervision of Producing Branch Manager

Back 36

1. Must be supervised on a day to day basis, unless only does Prime Brokerage Services.

2. Also include any transactions cancellations and rebels for the accounts serviced.

Front 37

Who Reviews Producing Branch Managers

Back 37

1. A person senior to the producing manager. Can be in same office.

OR

2. A person independent of the producing manager. Cannot be in same office. Same office does not include different department even if in same building on same floor, etc.

Front 38

Supervision of Producing Manager Restriction

Back 38

1. Cannot be located in same office

2. Cannot report to producing manager

3. Cannot have their compensation determined by the PM

4. Be in the same chain of authority as the PM

5. Must be able to terminate

6. Must rotate every 2 years or less

**Again if small firm principal may be able to review.

Front 39

Producing Branch Manager Minimums

Back 39

1. No minimum dollar amount

2. No min number of accounts

3. No restriction on types of accounts

4. Compensation levels or methods is not a factor in determining if they have to be reviewed

Front 40

Producing Branch Manager Exceptions

Back 40

1. Occasionally enters orders for someone out of the office.

2. If PBM supervises Prime Brokerage accounts

Front 41

Specific Review and Monitoring

Back 41

Applies firm wide:

1. All transmittal of funds and or securities that result in a change of beneficial ownership; from customer accounts to outside entities; from customer accounts to locations other than primary residence; between customer and rr; changes of address; changes of investment objectives

Front 42

Customer Complaints

Back 42

Each BD must have procedures to capture, acknowledge, and respond to all written customer complaints and the action taken by the member if any.

**Do not have to capture oral complaints

**Have to capture email (written)

Front 43

Complaint Timeline

Back 43

Each branch must keep a written record of each complaint and any action taken. Must acknowledge complaint within 15 business days. Report to FINRA within 30 calendar days.

*Even if complaint unfounded still must be kept.

Front 44

Customer Complaint Documentation

Back 44

1. Name address and account number

2. Date

3. Name of RR or AP identified

4. Description

5. Disposition of complaint (including tweets and text messages)

Front 45

Summary of Complaint Filing

Back 45

Each BD must file with FINRA a summary of information regarding complains by the 15th day of the month following the calendar quarter in which the plaints are received. Actual copies not included, only summary.

**Must be kept for 4 YEARS

Front 46

Mark-Up Policy

Back 46

1. 5% is a guide not a rule

2. The percentage markup is only one factor in the determination of the fairness of mark-ups.

3. The policy DOES apply to all OTC principal and or agency trades.

Front 47

Higher Percentage Markup Factors (1-4)

Back 47

1. Type of security (stocks higher than bonds)

2. Availability of security (thinly traded higher)

3. Price of security (Lower price security = higher percentage markup)

4. Amount of money in the transaction (smaller purchase = higher percentage)

Front 48

Higher Percentage Markup Factors (5-7)

Back 48

5. Disclosure does not justify higher markup.

6. Patterns of markups play a factor and deviation from them.

7. Nature of BD business (if offering other services too may charge more)

Front 49

Not Justifications for Higher Markups

Back 49

1. Excessive expenses of the BD

2. Market volatility

3. BD cost basis

**Markup is determined from the current market value of a security, not from the cost basis of the market maker.

Front 50

Types of Transactions where the Markup Policy Applies

Back 50

1. Riskless and simultaneous transaction

2. Principal transaction from inventory

3. Principal transaction put into inventory

4. Matching and acting as an agent.

Front 51

Markup Policy Does Not Apply to

Back 51

1. Securities listed on an exchange

2. New issues, registered secondary distributions or open end investment companies

3. Government Securities

4. Reg A Offerings

Front 52

Agency Transaction

Back 52

Exchange

Agent

Broker

Commission

Front 53

Principal Transaction

Back 53

Over the Counter (OTC)

Principal

Dealer

Markup

Front 54

Reporting of a Riskless Transaction

Back 54

1. Trade will be reported as one transaction excluding the markup or markdown

2. If met on exchange will be reported by the exchange and not the market maker

Front 55

Riskless Transaction Notes

Back 55

3. The markup in a diskless transaction is determined from the member's cost.

4. Member must disclose to and obtain consent from the customer on an order by order basis. Cannot get a negative consent letter, unless by an institution.

5. If a markup is charged it must be disclosed to the customer.

Front 56

Supervision of BD Supervision

Back 56

Each BD must have WSP which allow them to oversee all activities.

1. WSPs are required for all businesses

2. Final responsibility for proper supervision rests with FINRA member firm.

3. When WSPs updated, must maintain old ones for 3 YEARS.

Front 57

Supervision of BD Supervision

Back 57

4. Can use computer systems must be reviewed by principal.

5. Procedures to identify insider trading

Front 58

Covered Account

Back 58

Any account held by:

1. Spouse of a person associated with the firm.

2. A child of a person associated with the firm or that persons spouse provided the child resides in the same household.

3. Any other related or individual person over whose account the associated person has control or materially contributes financial support.

Front 59

FINRA Rule 3130 (Annual Certification)

Back 59

1. Reach BD must designate one or more principals as CCO

2. CEO must meet with CEO annually

3. CCO can have other jobs.

Front 60

Clearing Agreements

Back 60

Annually, no later than July 31st, a clearing member firm must provide in writing a notice regarding exception reports to its introducing member's CEO and CCO, and the SRO. Exception reports are created by firms as a key aspect in maintaining their supervisory procedures and complaints.

Front 61

Clearing Firm vs. Introducing Firm

Back 61

If the clearing firm receives a complaint, must pass along a copy to Introducing Firm. Must notify customer complaint was received. Forward to SRO.

The SEC is not notified nor does it received a copy of the complaint.

Front 62

Contact Information Requirements

Back 62

CCO is responsible for receiving regulatory email notifications. Must update who is point person not later than 30 days following change of such information. Firms must also update this contact information with FINRA within 17 business days after the end of each calendar YEAR.

Must comply with a FINRA request for such information no later than 15 days following request.

Front 63

Indicating Membership in FINRA

Back 63

1. As a matter of record in trade directories

2. Identification purposes and smaller type and separate from regular text.

3. On the door or entranceway of a members office.

4. CANNOT be used in any promotion of a security.

Front 64

FINRA Membership Restriction (Except by Order of the SEC)

Back 64

1. BD has been suspended or expelled from Exchange.

2. SEC or exchange has an order revoking registration.

3. Individual have been convicted in the last 10 years of felony or misdemeanor involving embezzlement, etc.

4. Where individuals do not meet the training and experience standards (pass the tests)

Front 65

FINRA Dues

Back 65

Any member firm may be suspended for failure to pay an dues, fines or assessments.

Generally will NOT be suspended for failure to pay fines for minor rule violations.

Front 66

FINRA Association

Back 66

May put hyperlink on website. MAY NOT USE LOGO.

Front 67

Disclosure of Financial Condition

Back 67

1. Any member or association who is in transaction can get most recent updated balance sheet.

2. Any customer can get balance sheet.

3. Prospect cannot get balance sheet until actual customer.

Front 68

Authority of Adjudicator

Back 68

Has the right to:

1. Make member provide information or testify under oath.

2. Inspect and copy the books, records, of any such member or person.

3. If information is provided electronically it must be encrypted and cannot be assigned with a confidential process or key.

**Member or person associated with the BD will not be suspended while the investigation is being done.

Front 69

Dealing with Non-Members

Back 69

1. If a BD suspended by FINRA other BD must treat as if non member.

2. Selling concessions and discounts may be given only to other FINRA members.

3. No member can join with any non member in any distribution of an issue of securities to the public.

4. No member can buy or sell with non member at non public price.

5. Eligibility in FINRA is limited to BD handling transactions in any branch of the investment banking or securities business.

**These rules do not apply to BD that deal exclusively with US govt and muni securities.

Front 70

Continuing Commissions Policy

Back 70

1. Can be paid to someone no longer at firm if contract existed beforehand

2. Cannot be paid to suspended person.

3. Cannot be paid to revoked person.

Front 71

BD's in Banks

Back 71

1. Separate physical location

2. Brokerage services separate

3. BD's name clearly displayed

4. NOT FDIC insured disclosure

5. Notify FI if any person of BD is terminated for cause.

Front 72

Business Continuity Plan

Back 72

Required to establish and maintain with annual updates a business continuity plan. Approved by a registered principal who is also senior management. Must address:

1. Data back up and recovery

2. All mission critical systems

3. Financial and operational assessments

4. Regulatory reporting

5. Communications between BD and customers

6. Communications between BD and employees

7. Alternative physical locations

8. Critical business contacts

9. Communication with regulators

10. How to give access to customers funds

Front 73

Business Continuity Plan Disclosure

Back 73

Made to customers in writing at the account opening, posted on the firm's website and mailed to customer upon request.

Front 74

Investment Banking Services (Insider Trading)

Back 74

Firms engaging in investment banking services are required to file written reports with FINRA within 10 business days of each calendar quarter regarding internal investigations regarding insider trading which includes:

1. Firm's identity

2. Commencement of investigation

3. Status of investigation

4. Resolution

**If a firm finds insider trading, must notify FINRA by written report within 5 business days of the completion of the investigation.

Front 75

Investor Education Requirements

Back 75

Must provide annually:

1. Brokercheck Disclosure hotline

2. FINRA regulation website address

3. Statement as to the availability of the investor brochure.

**If clear through another BD, exempt from above requirements.

Front 76

Disclosure of Financial Condition to Customer

Back 76

Must send semi-annually:

1. Unconsolidated balance sheet

2. Statement of net capital

3. Subordinated loan information

Front 77

Disclosure of Control Relationship with Issuer

Back 77

BD controlled by or under common control with issuer, giving or sending off written disclosure to the customer at or before the completion of the transaction.

Front 78

Soft Dollar Arrangement - Acceptable

Back 78

Research

Analytical Software

Holding Seminars for Customers

Front 79

Soft Dollar Arrangement - Unacceptable

Back 79

Computer Hardware

Telecommunication Lines

Office Equipment

Reimburse of travel expenses

Operational overheard

Front 80

Reimbursement

Back 80

Purpose of training or education, permitted provided that:

1. Record keeping requirements are met.

2. AP obtains the BD approval prior attending the meeting. Must not be preconditioned but the BD on sales target.

3. Appropriate location

4. Reimbursement is not for guests

5. Not sales target related

Front 81

AML Stages

Back 81

Placement

Layering

Integration

Front 82

Currency Transaction Report (CTR)

Back 82

$10,000 transactions

wire transfers over $10,000

Multiple currency transactions totally over $10,000

**Must be filed within 15 calendar days after transaction.

Front 83

Record keeping Requirements AML

Back 83

BD's that transfer funds of $3,000 or more must collect:

1. name and address of transmitter and recipient

2. Recipients financial institution, account number and amount.

Front 84

Written AML Compliance Program

Back 84

1. detect and report

2. Establish policies to comply with BSA

3. Independent test

4. Designator a person or persons to implement day to day operations and internal controls

5. Provide ongoing training for employees

Front 85

Money Laundering Abatement Act of 2001

Back 85

Customer Identification Program (CIP) must:

1. Verify the identity of any customer seeking to open an account with 5 business days.

2. Maintain customer identity records

3. Not on terrorist list or embargoed country

Front 86

Suspicious Activity Report (SAR)

Back 86

$5,000 or more for suspicious activity.

Must file SAR within 30 days.