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71 Cards in this Set
- Front
- Back
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What is a supervisory system? |
A system used to manage the types of business in which the member engages and the activities of its registered reps and associated persons. |
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What are the minimum requirements for a member firm? |
1) designate registered principals w/ the authority to enforce the firm's written supervisory procedures 2) identify to FINRA which offices are designated as offices of supervisory jurisdication (OSJ) 3) Identify which FINRA offices are branch offices 4) Identify which principals are responsible for reviewing the firm's supervisory system and taking action |
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How many principals does FINRA require a member firm to have? |
At least two unless the firm is operating as a sole proprietorship (or other business with only one employee). |
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What does a fin-op (financial and operations principal) do? |
Supervise back-office operations |
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How long must a firm maintain the designation record for recordkeeping purposes? |
Must be retained for three years following any change and appended to the firm's written procedures (do not confused w/ Rule 17a-3 where a record must be preserved for 6 years) |
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What has to take place for an office to be designated as an Office of Supervisory Jurisdiction (OSJ)? |
1) Market making 2) Structuring of public offerings 3) Custody of customer assets 4) Final approval of communications w/ the public 5) Final approval of new accts on behalf of member 6) Review and endorsement of customer orders 7) Inspect supervising and non-supervising branch offices |
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What is the exception for an office not to be an OSJ? |
If the office solely conducts final approval of research reports. |
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What are the responsibilities of an OSJ managed by at least one principal? |
1) enforce written supervisory procedures 2) periodically review customer accounts 3) maintain copies of customer records 4) periodically inspect the branch offices under jurisdication |
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What does FINRA require members to use to identify other offices as OSJs? |
1) Whether registered reps have regular contact w/ the public 2) The # of registered persons at one location 3) The location is geographically distant from another OSJ 4) If the securities activities are diverse & complex 5) If the member's registered persons are geographically dispersed |
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What must be kept at each OSJ and at each location where supervisory activities are conducted? |
A copy of the member's written supervisory procedures, as well as a copy of the FINRA manual. A copy of the manual must be made available to customers upon request. |
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What is a branch office? |
Identified to the public as a place where securities business is conducted. A registered principal is not required to manage this office. |
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What are the exemptions for the definition of branch office (aka unregistered locations)? |
1) Locations that are used for fewer than 25 securities transactions or fewer than 30 days per year 2) Locations not used for sale (primary residence) 3) Locations used occasionally and by appt |
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What happens if an office is listed in the telephone directory in the white or yellow section? |
It is a branch office. Unless, the lists includes the telephone number & address of the OSJ and directs inquiries there, the location is not a branch office and need not be registered w/ FINRA. |
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What is a nonbranch or unregistered office? |
Any location at which a member is conducting securities business that does not fall w/in the definition of OSJ or branch office. Can be classified as independent contractor. |
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Is the home of a registered rep a branch office? |
No, provided there is no advertising or signage indicating that securities business is conducted on the premises. |
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What is a satellite office? |
A nonbranch member location not identified as an OSJ or a branch office, or held out to the public as a place of business for the member. |
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How often is a member obligated to review the businesses in which it engages? |
At least annually |
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How often should offices be inspected? |
1) Home office by SRO once every 2 years 2) OSJ & supervising branch - annually 3) Nonsupervising branch - every 3 years 4) Nonbranch office - periodically
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How long should the written report of the inspection be kept on file? |
For a minimum of 3 years; must be available for spot-check by FINRA. Must be conducted by arm's-length supervisor; exceptions available for members of limited sized and resources. |
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Who does FINRA designate to establish, maintain, & enforce supervisory control procedures? |
One or more principals that will test and verify that the firm's supervisory procedures are sufficient. Must submit a report at least once annually to senior management that summarizes the results of testing & details of any amended procedures to be implemented. |
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How often does the person reviewing supervisory controls procedures alternate their position? |
Every two years or less with another qualified person |
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What are heightened supervision requirements? |
Supervision over activities of a producing manager responsible for generating 20% or more of the revenue of the location being reviewed. Based on a rolling 12-month threshold. |
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What specific activities does FINRA mandate review to protect customers from criminal activity? |
1) all transmittal of funds or securities from customer accounts 2) customer changes of address and the validation of such change 3) customer changes of investment objectives and the validation of such changes |
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What does FINRA Rule 3130 designate? |
A principal must serve as the firm's chief compliance officer (CCO) and the member's CEO must certify annually that the firm has in place a process to establish, maintain, review, test, and modify written supervisory procedures to apply with FINRA rules and federal securities laws & regulations. CEO and CCO may be the same person. |
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What must the CEO's annual certification represent that the firm's senior executive management has in place? |
1) establish, maintain, & review policies and procedures 2) Modify such policies & procedures as business, regulatory, & legislative changes and events dictate 3) Test the effectiveness of policy & procedures |
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What happens to a written complaint that can't be resolved? |
Referred to the director of arbitration of FINRA |
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What are the guidelines for complaints? |
1) Rules only apply to written complaints 2) Complaints must be shown and endorsed by the principal 3) File must be kept four year in each OSJ 4) File with FINRA w/in 15 days of quarter's end or 30 days for complaints alleging criminal activity 5) Central registration depository (CRD) receives information 6) FINRA Broker Check hotline number - allows public access on customer complaints and disciplinary history |
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How long does customer complaints have to be retained? |
Four years for both the branch level and the supervising OSJ. This includes complaints that have been satisfactorily resolved. |
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What is the Code of Procedure? |
It was created to address alleged violations of FINRA rules and federal securities laws. |
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When does the Department of Enforcement issue a formal complaint? |
When after an investigation or audit, FINRA believes a member of its associated persons have violated one or more rules or laws. |
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What is the process when the Department of Enforcement files a complaint? |
1) Name a hearing officer (an attorney who is an employee of FINRA) to preside over the disciplinary proceeding 2) Hearing officer appoints 2 panelists to serve along w/ him as a 3-person jury 3) All panelists in Code of Procedure hearings are currently in or retired from the securities industry 4) Notifies respondent in writing |
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What happens after the respondent is notified that a complaint was filed against them from the Department of Enforcement? |
1) they have 25 calendar days to respond 2) must admit, deny, or state they do not have sufficient information 3) 2nd notice sent after 25 days requesting a response w/in 14 days 4) failure to apply results in default decision that the respondent committed the violation 5) Amended complaints require response in 14 days
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What happens if a member or associated person fails to comply with FINRA procedural rules? |
The National Adjudicatory Council may suspend the member and revoke the registration of any associated person after providing 20 days written notice. |
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What is a minor rule violation (MRV)? |
When a relatively minor violation has occurred and the member firm or associated person does not dispute the violation. Through an MRV letter, the respondent accepts the finding of the violation. |
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What is the fine for a minor rule violation? |
The fine will not exceed $2,500 per violation, and/or issue a letter of censure once the respondent accepts and signs an MRV letter. Signing the letter waives the right to a hearing or appeal. |
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What is an offer of settlement? |
An offer to settle; which is done in writing and must describe the specific rule or law that they alleged have violated, describe the act or practices the alleged has engaged, include a statement consenting to findings of fact and violations, and propose sanctions |
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What is an uncontested offer? |
When a respondent waives the right to a hearing and the right to appeal. If accepted by DOE, it is sent to the NAC for review. If uncontested by NAC, the offer is accepted & final. |
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What is a contested offer? |
When DOE opposes the offer, the offer is contested, and the offer and the department's written opposition are submitted to the hearing officer. Hearings are required if the NAC rejects the offer. |
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What is an acceptance, waiver, and consent? |
When respondent does not dispute the allegations and signs a letter accepting a finding of violation, waiving their right to a hearing and the right to appeal, and consenting to the imposition of sanctions. If agreed by the respondent, it's sent to the NAC. Once approved, it becomes final. |
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What is a prehearing conference scheduled? |
When respondent does not make an offer of settlement or one is made but rejected, and assuming the DOE does not offer either Acceptance, Waiver, & Content or minor rule violation. It must be held w/in 21 days of receipt of respondent's answer to the complaint. Attendance is mandatory. |
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What happens at the hearing? |
Set up as a courtroom proceeding, the prosecution (DOE) presents case first. Cross-examination of witness is permitted. At conclusion, panelists convene and, within 60 days, render a written decision reflecting a majority view. |
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What sanctions are included under the Code of Procedure? |
1) Censure* 2) Fine, w/ no upper limit* 3) Suspension (max 2 years)* 4) Expulsion (effective immediately) 5) Bar associated person (effective immediately) 6) Any other penalty deemed appropriate* *Effective on date specified by hearing officer but no earlier than 30 days after the decision |
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What is the appeal process? |
1) Respondent begins appeal within 25 days 2) Either side may appeal a decision 3) Goes from DOE to NAC to SEC to Federal Appeals Court |
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What is the Code of Arbitration Procedure? |
Offers participants a simple way to settle disputes at a costs that is lower than most formal procedures. No appeals to arbitration findings. |
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What issues are addressed under the Code of Arbitration Procedure? |
1) Member against member or registered clearing agency 2) Member against an associated person 3) An associated person against another associated person 4) Customer can force a member to arbitration, but member cannot force customer |
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What must the customer know about the predispute arbitration agreement? |
1) disclosure signed in new account agreement 2) delivery & customer acknowledgement take place at time of the signing of the agreement - must be in writing 3) firm must provide cust copy w/in 10 bus days 4) Upon request, the arbitrator will supply an explained decision. 20 days before hearing, parties must submit joint request for an explained decision. |
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How does a claimant begin the proceedings for resolution and settlement to FINRA's National Arbitration Committee? |
Files a statement of claim, a signed submission agreement, and any supporting documents with the director of arbitration. Statue of limitations is 6 years. |
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What claims are not subject to arbitration? |
1) Class action claims 2) Employment discrimination 3) sexual harassment
*unless parties agree |
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How many days does the other party have to respond to an unresolved dispute claim? |
45 days. May be barrred if he/she does not respond. Claimant will provide a reply to both parties w/in 10 days. |
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What is the mediation process? |
Both parties must agree and know it is not mandatory. The mediator facilitates the discussion. Either party may w/d at either time. If mediation fails, matters move to arbitration and the mediator may not be the arbitrator. |
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What are the types of arbitrators? |
Nonpublic (known as industry arbitrators) 1) Associated w/ B/D in past 5 years 2) Registered w/ Commodity Exchange Act 3) A professional that spends 20% of their time in securities industry 4) A professional that has $50K or more in $ 5) 10% (Ten-Percent Rule) or more of $ in past 2 years from clients in securities industry 6) Associated w/ mutual or hedge fund w/in last 2 years.
Public - no significant affiliation w/ the securities industry and not related to anyone w/ significant affiliation |
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How many arbitrators are tied to a claim? |
1) Claim of $50,000 or less - one arbitrator (eligible for simplified arbitration) 2) Claim of more than $50K up to $100K - one unless the parties agree in writing to use 3 3) Claim of more than $100K - three arbitrators |
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What are the composition standards for the Code of Arbitration Panel? |
Cust/Member disputes - 1 public arbitrator or 2 public (including chair) and 1 nonpublic Disputes between members - Always nonpublic Disputes including an associated person - Same as cust/member disputes Statutory discrimination claims - 1 public w/ law degree or 3 public (chair w/ law degree) |
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What is a simplified arbitrator? |
When one arbitrator reviews all the evidence and renders a binding decision w/in 30 days. For claims that are $50K or less. Both parties must agree or formal hearing is required. |
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When should awards be paid? |
Within 30 days of decision date. Any award not paid will accrue interest. Information made public. FINRA may provide a letter stating a failure to comply within 21 days will result in suspension or cancellation. Cannot accept the claim of inability to pay. |
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What is the Insider Trading & Securities Fraud Enforcement Act of 1988 (ITSFEA)? |
Expanded the penalties for insider trading and securities fraud. Tippers (person who gives the tip) and tippees (person receiving the tip) are liable. No trade needs to be made for a violation to occur. |
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What are the guidelines for Insider Trading & Securities Fraud Enforcement Act of 1988? |
1) Firm must have written supervisory procedures 2) Civic penalty: the greater of $1 million or 3 times profit made or loss (treble damages) 3) Criminal penalty: up to 20 years in jail 4) The SEC is authorized to pay bounties to informants up to 30% of any civic penalties collected 5) Contemporaneous traders can sue to recover losses up to 5 years 6) Firms must establish procedures & Chinese walls to prevent the sharing material between departments |
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What is Regulation FD (fair disclosure)? |
The intentional and unintentional disclosure of material nonpublic information. Intentional disclosure requires immediate notification to the public (may use Form 8-K). Unintentional disclosure means notification to the public should occur no later than 24 hours or the next day's opening of the NYSE |
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What is fidelity bonding? |
FINRA requires insurance to protect a member firm from theft, larceny, embezzlement, fraudulent trading, and forgery of securities or checks. Bond amount is based on firm's net capital requirement. Minimum coverage is 120% of net capital or $100K, whichever is greater. |
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What is the highwater mark? |
When firm uses the highest net captial requirement in previous 12 months for use with fidelity bonding insurance. |
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What type of notification is given to the principal about outside business activities? |
1) Prior written notification 2) Earning, or possible earning, or compensation 3) Principal approval is not required 4) Firm may restrict or deny the activity |
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What are private securities transactions? |
Any securities transaction outside the regular course or scope of an associated person's employment with a member including, new offerings of securities that are not registered with the SEC. Referred to as selling away or trading away. |
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What is required for someone associated w/ a member firm to participate in a private securities transaction? |
1) Give written notice before participating 2) Written notice must include compensation involved 3) Member advises in writing if approves or disapproved the person's participation 4) If approves, transaction must be recorded on the books and supervised |
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What is selling compensation? |
Any compensation paid directly or indirectly from whatever source in connection with or as a result of a purchase or sale of the security. |
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What is not considered a private securities transaction or outside business activity? |
1) Passive income (rental income) 2) direct participation program (DPP) 3) profiting from your own investment |
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What is required by the executing member when an employee executes a transaction from another member? |
1) Firm notifies employee in writing of intent to notify employer 2) Firm provides written notification to employer member 3) Duplicate confirms or statement sent if requested by employer, if requested
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What is required by the person opening a securities account with a nonmember firm? |
1) Notify his employer member in writing before execution of the transaction 2) Provide duplicate copies of all documents
*Excludes investment companies/variable contracts (reedemable securities, not closed-end) |
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What is the annual amount allowed for payment of gratuity? |
$100 per individual per year. All gifts are considered gratuities. |
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Is reminder advertisement in excess of $100 acceptable? |
Yes, it does not fall within the jurisdiction of gifting rules as these items would be for distribution to customers or prospects. |
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What gifts are allowed? |
1) Gifts less than $100 (not preconditioned on an achievement of a sales goal) 2) An occasional meal, ticket to a sporting event or theater, or comparable entertainment 3) Payment or reimbursement by fund underwriters in connection w/ meetings held by the underwriter for training or education |
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What must be reported to FINRA w/in 30 days after being done by the member or associated person? |
1) violates any provision of securities laws 2) subject of any written customer complaint 3) named as a defendant in any securities case 4) Is denied registration or expelled by any securities firm 4) Indicted, convicted, or pleads guilty to any criminal offense (not traffice violations) 5) Associated in mgmt position w/ suspended entity in securities or insurance industry 6) defendant in any securities litigation exceeding $15K or $25K if member firm 7) associated with an SD person 8) subject of disciplinary action involving a suspension or termination or fines more than $2,500 |
