16.1 FINRA Rules

15.1 on SIE

who needs to register w FINRA (long version)

• broker-dealers

• any broker-dealer employees who accept or solicit customer orders

• operating officers (not officers who are passive owners)

• equity traders

• operations supervisors (back office)

• individuals involved in investment banking activities

• individuals who submit financial reports to SROs and SEC

• individuals who supervise or train registered persons

• NOT people who do clerical duties

who needs to register w FINRA (short version)

• anyone who does anything around trading or investing

• big guys like operating officers and operations supervisors

• anyone who trains or manages registered people

• basically anyone who is not a clerical worker

how to become a registered representative

1. take and pass SIE (can do alone or w sponsorship)

2. be sponsored by a broker dealer firm

3. passa appropriate representative qualification exam (series 6 or 7 and you need sponsorship to take this)

4. complete U4 form

whats on the U4 form (long version)

• physical characteristics

• 10 yr employment history

• 5 yr residence history

• outside business activites

• criminal history

• civil judicial proceedings

• bankruptcy judgements, liens and compromises w creditors

• customer complaints

• prior terminations due to improper behavior

• attestation that the person has been or will soon be fingerprinted

• any compromises w credits

whats on the U4 form (short version)

• all of your personal info

• 10 yr employment history

• 5 yr residence history

• all of your mistakes related to money or legal issues

• outside business activities

• fingerprints or soon to be

U4 amendment

• when any of U4 info changes, employee and member firm must amend the U4 within 30 days

• if disciplinary events may lead to a statutory disqualification from membership, U4 must be amended within 10 days

rules for reporting reportable events

FINRA requires to be notified in writing promptly but no later than 30 calendar days after the member firm knows or should have known. reportable events also require a U4 update.

what are the reportable events (long version)

• violated any provision or any securities law

• subject of written customer complaint alleging theft, misappropriation of funds, or forgery

• named as defendant or respondent in any legal proceeding alleging violations of the securites act brought by a regulatory authority

• denied registration or is expelled, suspended, or disciplined by any SRO

• indicted, convicted, or pleads guilty to any criminal offense

  • EXCEPT misdemeanor traffic violations and DUIs. ONLY misdemeanors. criminal duis must be reported

• associated with any broker-dealer, investment company, investment advisor, or insurance company that was suspended, expelled, or had its registration denied or that was convicted of or pleaded no contest to any felony or misdemeanor

• defendant or respondent in any securities or commodies related civil litigation or arbitration settled for an amount exceeding $15K ($20K if involved member firm itself)

• subject to statutory disqualification

• subject of disciplinary actions by their firm involving suspension, termination, witholding of commissions, or imposision of fines over $2.5K

• any compromises w creditors

what are reportable events (short version)

• if you fuck up, are accused of fucking up, or are associated with someone or some entity that fucks up

• misdemeanors are NOT reportable but criminal shit and convicted stuff is

• commissions are withheld or you are fined over $2.5K

• you are fired or suspended by firm or any SRO

• compromises w creditors

whats on broker check

• 10 yr employment history

• licenses and registrations

• complaint and disciplinary record

• outside business activities

investor education

member firms must provide the following annually to customers in writing

• FINRA broker check hotline number

• statement describing availability of an investor brochure that describes FINRA broker check

• FINRA website adress

outside business activity

any activity that involves compensation or may take up a lot of time. exlusion is charitable work without compensation. firms may approve or disapprove. passive investments are exempt

U5

termination of registration. needed if someone leaves their firm, must be updated within 30 days

continuing education requirement

completed annually. two components, regulatory and firm.

• regulatory: FINRA created. if not done registration is inactive and person cant perform any duties of registered person and cant be paid

• firm: requires that annual training plan prepared and implemented by member firms to cover relevant products, regluations, and compliance issues

how long does someone have to reregister with another firm before they lose their license

2 years

maintaining qualifications program MQP

allows individuals to leave the business for up to 5 years and keep their registration active by completing annual regulatory element CE

keeping customer complaint

should be kept in a separate file including any action taken by the firm, kept at an office of supervisory jurisdiction OSJ for at least four years and must be accessible for review by FINRA and other regulators.

code of procedure

details the process for handling serious customer grievances against member firms or associated persons that involve the violation of FINRA rules. starts with filing complaint with teh FINRA department of enforcement DOE

FINRA hearing panel

if complainant is not satisfied with response and Office of hearing office (OHO) determination it can request a hearing in front of a FINRA hearing panel. after the hearing a decision is rendered

appeal process

if either party is displeased with hearing panel, and appeal can be made in the following order.

1. National Adjudicatory Council (NAC)

2. SEC

3. Federal Court

FINRA penalties

FINRA can impose censure, suspension, expulsion, and fines. FINRA cant impose criminal penalties like jail time. for criminal offenses the case is forwarded to the SEC and handled by the department of justice

maximum fine for a minor complaint

$2.5K

acceptance, waiver, and consent process

respondent accdetps the findings, waices their right to appeal, and consents to any penalty. they do not admit guilt

correspondence

any written or electronic communication to 25 or fewer retail investors within a 30 day calendar period. subject to pose use review and approval by principal. not subject to FINRA filing. must be retained for 3 years. includes discussing securities on social media platforms

retail communication

any written or electronic communication to more than 25 retail investors within a 30 day caendar period. must be approved by principal prior to distribution and subject to FINRA filing requirements

institutional communication

written or electronic communication that is only made to institutional investors. post use review and approval by principal and not subject to FINRA filing requirements

public appearance or public forum

participation in public appearance or speaking activity. made in real time and interactive with third parties. subject to post use review and approval by a principal.

retail investor

anyone who is not an institutional investor. less than $50 million in assets

institutional investor

companies, enteties, advisors, or individuals with over $50 million in assets

using FINRA name in communication

can be used but can only state the firm is a member of FINRA not the registered representative. FINRA logo must be smaller font than firms name and there must be a hyperlink to FINRA website

brokercheck reference

required readily apparent reference to broker check and hyperlink to brokercheck website be shown on a member firms main webpage and on any webpage that includes a professional profile of a registered person who conducts business with retail investors

predicting future performance

prohibited in all communications. cant state or imply past performance will recur

testimonials

allowed. disclosure must be made if compensation of more than $100 was paid to the maker

gift limit

prohibited in receiving gifts values over $100 per person per year related to work activities. does not prohibit business entertainment as long as it is not excessive. this does not apply to promotional items

noncash compensation

prohibited. allowed for things like educational seminars to tray for travel and accommodation however family cant be paid for

paying for work

a firm can pay another firms employee to do part time work with a written agreement describing the work and compensation and it is approved in writing by the principal of both firms prior to the start and records are maintained for 3 years

rules for registered representatives relating to customers and their accounts

• cannot guarantee customers against losses

• cannot share in the gain or loss of costomer account (can open joint account with cusotmer with written approval of employer if profit and loss are shared in direct proportion to contribution)

• must share in proportion except for a family account

• cannot lend or borrow from a customer unless the customer is immediate family or if a personal business relationship exists or if customer is lending institution

• cannot share in commission with an unregistered person, to share with registered person need a written notice. (exception is retired representatives. can enter into contract to pay trail commissions on mutual funds accounts prior to their retirement)

• selling away is prohibited. cannot enter orders for a customer through another firm. exception is if the firm is given prior or written notice of a proposed transaction and specifically approves in writing. the firm is obligated to supervise this transactoin

3 year record retention

retail communications, advertising, correspondence, customer orders, any other records not listed

4 year record retention

written customer complaints

5 year record retention

AML recors and customer identification records

6 year record retention

customer account info including statements, records associated with blotters, ledgers, and securities

lifetime records of firm

articles of incorporation, partnership articles if applicable, minutes of partners or directors meetings, stock certificate books

taping rule

a firm is subject if it employs an excessive number or representatives who worked for a disciplined firm (expelled from membership in any SRO) within the past 3 years which requires the tape recording of all telephone conversations between the firms registers representatives and any existing / potential customers. these procedures must be implemented within 60 of the firm learning it is subject, firm must submit a report to FINRA on supervision of telemarking activities within 30 days of end of quarter, recordings must be retained for 3 years

supervisory system

FINRA requires a supervisory system must

1. identify offices of supervisory jurisdiction and how they will be managed

2. establish a managerial chain of command

3. create and maintain written supervisory procedures

4. conduct annual compliance meeting with each principals and reps

when must an office be designated as an OSJ

if any of the following take place at the firm

• order execution or market making

• structuring of public offerings or private placements

• maintaining custody of customer funds or securities

• final approval of new customer accounts

• review and endorsement of customer orders

• final approval of retail communications

• supervision of activities of associated persons at one or more of member firms branch offices

general principal who is responsible for the supervision of registered reps responsibilities are

1. enforce written supervisory procedures

2. periodically review customer accounts

3. maintain customer records, including complaints

4. periodically inspect its branch offices

branch office

any location where one or more reps solicit (not execute) the purchase or sale of any security or an offie that supervises the activities of reps at one or more non-branch locationsbusiness activities involving solicitation of securities

written supervisory procedures

must record the names, titles, registration status, and locations of all its supervisory personnel and their responsibilities. should also document procedures for review and endorsement of all transactions and the review of all incoming and outgoing written and electronic correspondenceThe procedures must outline the firm's compliance programs and include detailed steps for addressing violations and ensuring regulatory adherence.

OSJ Inspections

done by registered principals annually at every OSJ and every branch and supervises a non branch. other branch offices must be inspected every 3 years. these inspections must review customer account records to detect any irregularities or abuses and test and verify policies and procedures regarding books and records equipment as well as handling of customer funds and securities. each inspection must include a written report which must be kept on file for 3 years

non branch locations

also known as unregistered offices. these include

• any office location established solely for customer service or back office type functions where no sales activities are conducted

• locations used for fewer than 30 business days per year for securities business

• floor of a registered exchange

• an employees private residence

when does a customer complaint need to be reported to FINRA

• if the complaint involves allegations of theft, forgery, or misappropriation of funds

• claims of damages of over $15K against an associated person

• claims of damages of over $25K when against a member firm

• reports must be made no latter than 30 days after the member firm has learned or should have learned of the event, by the 15th day of the month following the calendar quarter in which the complaint was received

sales literature

type of retail communication directed to a specific audience. includes market letters, research reports, seminar texts, speeches about investing, password protected websites, and form letters

advertising

type of retail communication intended for general audience. non password protected websites, television, radio, newspapers, magazines, recommendations are prohibited in advertisng

volatility rankings

bond mutual fund volatility ranking relates to the sensitivity of a funds net asset value, must be made clear a 5-star volatility rating has nothing to do with a funds investment performance

entity rankings

FINRA rule 2212 covers use of investment company rankings by 3rd parties in retail communications. permits the use as long as ranking is currant as most recent calendar quarter, covers a year, includes all info and does not omit any, discloses who published and its no guarantee of future results, and rankings based on total return ranking includes a comparison of 1, 5, 10, or life of fund if shorter.

options communications

must be limited to general descriptions of the options unless accompanied by an options disclosure document. retail communications about options must be filed within 10 business days after first use, if being sent to those who have not received the ODD they must be filed 10 calendar days before first use

CMO communications

may not compare to other investment vehicles, must disclose government backing only applies to face value of CMO not any premium paid, must disclose a CMOs yield and average life will fluctuate

can a registered rep use their personal email account

only if the firm can monitor those communications (usually no)

can clients enter orders via text, email, or instant messaging?

no

static content communications

post on internet stock bulletin board, retail communications, require approval by registered principal before posted

interactive communications

real time, stock chat room, public appearance and doesnt need principal approval unless contain a recommendation then they do need principal approval

10 day prior filing with FINRA

performance ratings or rankings that compare investment company performance, security futures, any retail communication from a firm in its first year of operation

within 10 days of first use FINRA filing

registered investment companies, DPP, CMO, options, investment analysis tools, drafts or storyboards of television or video retail communication that requires filing, free writing prospectuses that have been filed w SEC

research reports

• if a firm participated in an IPO it may not distribute a research report and research analysts may not make any public appearances regarding the company until 10 calendar days following the date of the offering (3 for follow on offering) these are called quiet periods and do not apply to emerging growth companies

emerging growth companies EGC

businesses with less than $1.235 billion in revenue

independent third party research

unlike regular third party research the member firm has no influence over the content and there is no requirement for a member firm to perform due diligence on this, no principal approval is required as long as they are made available on request, through a member maintained website, or to a customer in a solicited transaction where the customer was informed of the availability of the research report and requested it

when does the options risk disclosure document need to be delivered

customer must be given an ORDD titled characteristics and risks of standardized options and must be delivered no later than the date of principals approval

what financial statements need to be available on customer request

latest balance sheet and net capital computation

soft dollar arrangements

investment companies and investment advisors often contract with broker dealers to provide research and brokerage services, payment for these is soft dollars. must meet 3 part test

1. services provided must be for research or brokerage, payment for tangible or items overhead costs (legal, admin, record keeping) is not permitted

2. services provided must be used for benefit of the managers customers, not the benefit of the money manager, analyses used for marketing purposes is not allowed

3. manager must determine that commission paid for service is reasonable

distribution of educational communication when a representative moves to a new firm

do it for 3 months from reps first day at new job

info received in a fiduciary capacity

cannot be used to solicit purchases or sales