Lesson 14: Business Conduct Rules

insider trading

• when someone receives material nonpublic information through either misappropriation or duty of trust to place a trade

• the potential penalties are treble damages, up to $5M fine or 20 years in jail

BD policies against insider trading

1. Information barriers (physical + electronic)

2. Restricted list - list of securities the firm has inside information on

money laundering

1. Placement: depositing illegal funds into financial institutions

2. Layering: financial transactions to obscure the source of funds

3. Integration: the illegal funds are reintroduced into the economy

Bank Secrecy Act

• an anti-money laundering law that requires forms to be filed with FinCen

• the two forms are the currency transaction report and suspicious activity report

currency transaction report (CTR)

1. filed for transactions exceeding $10,000 per day

2. customers may be informed of CTR filing

3. filed within 15 calendar days

suspicious activity report (SAR)

1. filed for suspicious transactions

2. customer cannot be informed of SAR filing

3. filed within 30 calendar days

USA Patriot Act

• requires that financial institutions take additional steps to fight money laundering

• specially designated nationals (SDN) list → no accounts or transactions with any party on this list

• AML compliance programs → subject to annual independent testing

• customer identification program → verify customer identity within a reasonable time

private securities transaction

• refers to securities transactions outside the scope of the AP’s employment

• if for compensation → permission required, transaction is supervised

• without compensation → notification required

selling away

a violation where you receive compensation to sell securities but did not receive permission from your employer

outside business activities (OBA)

• any employment outside the scope of the relationship with the member firm

• you are required to notify the firm

transactions with other members

• employee must receive prior written consent from employer member

• opening firm must send duplicate trade confirmations and account statements upon written request

continuing commissions

• this occurs during retirement and provided the agreement was entered while still registered with the firm

• once retired can still receive commissions from accounts of customers served while registered

• cannot solicit new business, open new accounts, or service existing accounts

sharing in customer accounts

• requires permission from the customer and firm

• sharing must be proportionate to contributions → exception to this rule is w/ immediate family members

loans involving customers

• in general reps may not make personal loans to their customers except when the firm has written procedures allowing such loans and the loans meet one of the following conditions

1. customer is a bank (no permission required)

2. customer is a family member (no permission required)

3. loan is for outside personal/business relationship (permission required)

4. loan is for someone registered at the same firm (permission required)

gifts and gratuities

• firms and reps can give business gifts to others

• these gifts can only be worth $100 per person per year

• travel + entertainment are not considered gifts but the rep must attend

customer complaint

• must be a written grievance

• a rep cannot resolve the dispute themselves and must forward it to a principal even if they believe it is without merit

• FINRA receives a quarterly summary of the complaints received by firms

annual compliance meeting

• to ensure that a firm’s supervisory procedures and all FINRA rules are being adhered to

• it is led by the firm’s chief compliance officer (CCO) and all registered employees must attend

MSRB Rule G-37 - political contributions

• limits political contributions by broker-dealers, municipal advisors, and municipal finance professionals

• no financial advisory or negotiated underwritings with the municipality for 2 years following a political contribution

Exceptions to Rule G-37

• competitive underwritings (awarded on price)

• de minimis contributions → MFPS can contribute $250 per election and are entitled to vote for the official

• spouses of MFPS are not subject to limit

retail communication

• any communication reaching more than 25 clients in a 30 day period

• requires pre-approval from principal

correspondence communication

• instant messaging, chats and texts

• communication reaching less than 25 clients in a 30 day period

• requires a spot check by a principal

institutional communication

• defined as institutional clients only

• requires a spot check by a principal

retail communication rules

• cannot project the performance of a security

• use of a price target is permitted but only in research reports

• exaggerated claims are not permitted

• hypothetical illustration of mathematical principles are permitted

static social media content

• fixed and rarely changed

• examples like a website company, blog post, or info posted on Facebook wall

• treated as retail communication

interactive social media content

• dynamic, real-time communications like tweets, comments, responses to comments

• treated as correspondence

business continuity plan (BCP)

• must be reasonably designed to permit the firm to meet its existing obligations to customers, other BDs, and regulators in an emergency or significant business disruption

• customers receive a summary at account opening, on request, and on the firm’s website

liability for insider trading

under insider trading regulations, both the tipper who provides the non-public information and the tippee who trades on the information are liable

role of the IRS

responsible for the collection of taxes and enforcement of tax laws

Office of Foreign Asset Control (OFAC)

part of the US Treasury Department that maintains a list of individuals with whom transactions are prohibited

unregistered person compensation

BDs and their RRs are not permitted to compensate unregistered persons in connection with securities transactions or business

heightened supervision

a firm would likely do this for a RR who has a history of notable events on their U4 (e.g. customer complaints)