Rules/Laws

Anti-money laundering (AML) officer

under the BSA, firms are required to designate (not required to be an RR) a chief officer that will establish compliance procedures to detect money laundering detecting red flags

Bank Secrecy Act of 1970 (BSA)

authorizes the Treasury Department to require financial institutions to maintain records of personal financial transactions that involve the movement of currency in excess of $10k in/out of accounts, also require any financial institution to report any suspicious transaction (terrorist financing/crimes) – developed regulations for AML programs

Business continuity plan (BCP)

required by FINRA for BDs to create & maintain a written plan on how to handle business and stay in contact with clients in the event of a significant business disruption (i.e. natural disaster, cyberattack, etc.)

• designated principal approves, updates, and conduct annual review of the plan

• must be provided to customers at account opening, posted on the firm’s website, and be easily accessible or mailed to customers at their request

• 2 emergency contact persons must > 1) both be associated persons 2) at least one must be principal and part of sr. management (if not principal they must be part of st. management) 3) if firm only has 1 associated persons, an outside contact may be used (must be familiar with firm’s operations such as firm’s attorney or accountant) 4) update contact info no later than 30 days following any changes

• covers data backup and recovery, alternate communications (between firm/customers and firm/employees), alternate physical location of employees, communications with regulators, prompt customer access to funds and securities in the event the firm is unable to continue its business

Central Registration Depository (CRD)

database containing records/info (form U4) regarding licensing status, employment status and history, fingerprints, disciplinary disclosures for all RRs and firms in the U.S. industry

Civil penalties for insider trading

penalties of insider trading may be up to 3x the profits made or losses avoided

• controlling person (i.e. RR) may be fined $1M or 3x the profit made or loss avoided whichever is greater

Code of Arbitration (COA)

FINRA-run dispute resolution process to settle monetary disputes to provide a faster/cheaper resolution than traditional court system

• decisions are final and binding (no appeal)

• settles disputes about money (final decision will involve payments of money)

• customer involved with monetary dispute with a BD must agree and may agree before to arbitration before dispute happens

Code of Procedure (COP)

FINRA’s formal procedure for handling trade practice complaints involving violations of the Conduct Rules covering enforcement and details of punishment by FINRA’s Department of Enforcement (DOE)

Continuing education (CE)

securities industry requirement for RRS to stay current with industry rules and regulations, regulatory element (taken by all registered persons) and firm element (applies to those with public contact who are supervisors)

Criminal penalties for insider trading

penalties of insider trading in which violators may face up to $5 million and up to 20 years in jail, if violator is employee of BD the firm could be fined up to 3x the damages or $25 million whichever is greater

Currency Transaction Reports (CTRs)

report required under the BSA to be filed by firms to the FinCEN for deposits of currency (not check or wires) more than $10k on a single day from the same customer

• must be filed within 15 days of receipt of currency

• failure to report can result in fines up to $500k and/or 10 years in prison

• records must be retained for 5 years

Depository Trust Company (DTC)

a member of the Federal Reserve System that serves the custody needs of securities industry participants in the U.S. and a number of foreign countries, world’s largest depository for securities for virtually all securities except those subject to transfer or ownership restrictions

Dodd-Frank Act

amended payment provisions to informers so awards may now be paid for original info concerning any violations of securities law, including insider trading

Federal Deposit Insurance Corporation (FDIC)

independent agency of the U.S. gov to preserve public confidence by insuring bank deposits where premiums are paid by all participating banks

• covers traditional bank deposit accounts (checking and savings, money market and CDs, and IRAs)

• does not cover investment products that are not deposits (MFs, annuities, life insurance policies, and stocks/bonds)

• insurance coverage up to $250k for each deposit ownership category in each insured bank

Federal Reserve Board (FRB)

central bank of the U.S (aka the Fed), conducts monetary policy by controlling interest rates and the money supply to help manage inflation, employment, and economic growth

• tools used open market ops (buy/sell treasuries), federal funds rate, discount rate, and reserve requirement

• weak economy > increase money supply & buy to decrease interest rates (expands economy)

• high inflation > decrease money supply & sell to increase interest rates (contracts economy)

Financial Crimes Enforcement Network (FinCEN)

bureau of U.S. Dept. of Treasury that administers the BSA to safeguard financial system to combat money laundering, financial crimes (tax evasion, terrorist, etc.), and promote national security through the collection, analysis, and dissemination of financial intelligence

• does not have an enforcement branch more of an intelligence agency, but works with law enforcement

• receives CTRs and SARs

FINRA

largest SRO in the securities industry that regulates all matters related to investment banking (securities underwriting), trading in the OTC market, trading in exchange-listed securities, and the conduct of BDs = industry police

• delegated authority by the SEC to administer qualification exams (SIE, series 7, etc.)

• regulates BDs, protects investors, promote fair markets, and enforce securities laws and industry rules

• min. deposit for margin > 100% for trade value 42k or less or $2k for trade value $2k-$4k

FINRA Conduct Rules

cover relationships between firms and their customers/public including fair dealing with customers, compensation-related issues, standards for communications, and various sales practice violations

• complement and serve as extensions of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940

FINRA Rule 2210

holds BDs to standards on all communications with the public to be fair/balanced and not misleading

• cannot omit material facts, contain false or exaggerated claims, or imply past performance guarantees results

• must discuss risk/benefits and be appropriate for the audience

• 3 categories > institutional, retail, and correspondence

FINRA Rule 4513

4 year retention requirement regarding complaints, copy of complaint is included in written complaint report that must be filed with FINRA on a quarterly basis

FINRA’s Department of Enforcement (DOE)

investigates suspected violations (often from audits or customers complaint) and hold a hearing to determine outcome of any violation

• outcome options >suspend, expel, or bar from membership, impose fines, censure, or any other action deemed appropriate

• appeal process through NAC>SEC>federal appellate courts

Fiscal policy

government's use of taxes and spending to influence the economy by Congress or the President (demand-side theory)

• goal is to encourage economic growth, reduce unemployment, or control inflation (take time to implement)

• lower taxes & increase spending > more consumer spending & business activity, low unemployment (stimulates economy)

• raise taxes & decrease spending > less consumer spending, low inflations, slow activity (slows economy)

Form 1-A

abbreviated notice of sale providing basic information about issuer and proposed offering to investors in lieu of a full prospectus 48 hours before sale, must be qualified by state regulators in any state which issuer plans to offer securities

Form 144

used to determine the number of shares the control persons may sell over a 90-day period

Form CRS (customer relationship summary)

BD/IA obligation introduced by Regulation BI to deliver retail investors a brief summary (disclosure doc.) that provides information about the firm, services, fees, conflicts of interest, and disciplinary history

• must be introduced at or before opening account or entering into a contract

• 2 to 4 pages (2 for a BD or IA & 4 for a firm with dual registrations BD and IA)

Form U4

employing BD completes and submits to CRD registering an associated person with FINRA but is not effective until qualifying exams are passed (i.e. Series 7 and Series 65), not a one-time filing

• must be check marked for each state and if firm is member of an exchange (i.e. NYSE) then exchange requirements must be met

• required info > name (and aliases) 5 yr residency history, 10 yr employment history (including unemployment periods and full-time edu.) , and charges or convictions related to investment business

• not required info > marital status, education, and citizenship (U.S. citizenship not required)

• changes must be filed within 30 days after firm is made aware and those involving statutory disqualifications must be filed within 10 days

• must be kept for 3 years after employee leaves the firm

Form U5

used when a person leaves employment with a member firm including states registrations that will end at the same time

• must be filed within 30 days of termination date and firm must provide a copy to former employee within same time frame (late filing fee charged to member firm if fail to do so)

• reasons > discharged, permitted to resign, deceased, voluntary, other

• details required for > discharged, permitted to resign, or other

• changes must be filed within 30 days after firm is made aware and those involving statutory disqualifications must be filed within 10 days

Holding mail (stmt & confirms) rules

1) BD received written instructions on hold duration and reason (2 months if traveling 3 months for valid reasons)

2) BD informs customer of alternate methods to receive info

3) BD regularly checks customer’s instructions still apply/valid

4) during holding period BD must be able to communicate with customer in timely manner

5) BD takes action to ensure that a customer's mail is not tampered with and held in a secure location

Insider Trading and Securities Fraud Enforcement Act of 1988 (or Insider Trading Act or ITSFEA)

legislation that defines significant penalties for insider trading and securities fraud, prohibiting insiders from trading on or sharing inside information

• amending the Securities Exchange Act of 1934

• liability applies to both tipper and tippee, as well as anyone who trades on information that they know or should know is not public or who has control over the misuse of this information

• requires BDs to establish written policies/procedures and supervise/monitor employees’ trading activities

Internal Revenue Service (IRS)

primary tax enforcement agency of the federal gov. with significant power to investigate potential tax evasion, does not make tax law but enforces it

• BDs and financial services companies are required to submit customer and firm information on demand

Investment Advisers Act of 1940

governs the regulation of firms that earn fees for providing investment advice establishes a fiduciary duty, requiring IAs to act in their client’s best interests

• requires disclosure of fees, conflicts of interest, and business practices

Investment Company Act of 1940

defines investment companies in the U.S. by classifying them into 3 classifications (FACs, UITs, and management companies) and requires registration with the SEC

• regulates packaged products > mutual funds, closed-end funds, and unit investment trusts

Know your customer (KYC) rule

FINRA and other SROs require brokers (RRs) to determine the validity of a customer's information and using it have a reasonable basis to believe that a recommendation is suitable for the customer, they must

• understand customer’s financial status(net worth and income)

• understand customer's financial and nonfinancial circumstances

• understand customer's investment objectives and experience

• know the facts essential in making suitable recommendations (age, risk tolerance, time horizon, and tax status)

Maintaining Qualifications Program (MQP)

RR may keep securities qualifications active for 2 years and keep qualifications for up to 5 years if continuing education is completed annually, rules around good standing and eligibility still apply

Monetary policy

FRB actions that determine the size and rate of the money supply’s growth affecting interest rates, moves made quickly (Keynesian theory)

• tools used > open market operations, discount rates, federal funds rate and reserve requirements

Municipal Securities Rulemaking Board (MSRB)

SRO board of public members and representative of the firms they regulate for underwriting and trading of state and municipal securities/debt

• writes the rules but does not have enforcement/regulatory powers dependent on other regulators for the enforcement of its rules (oversees and protect municipal securities market)

National Adjudicatory Council (NAC)

authorized to act for FINRA with respect to an appeal or review of any proceeding

North American Securities Administrators Association (NASAA)

producing guidelines of model rules that the state administrators use in the enforcement of state regulations with members equivalent to state administrators from Canada and Mexico but has no regulatory authority

• represents state and provincial securities regulators in the U.S., Canada, and Mexico

Office of Foreign Assets Control (OFAC)

publishes and maintains a list of individuals and companies owned or controlled by targeted countries, individuals, or entities, administer and enforce sanctions in its AML efforts

Office of supervisory jurisdiction (OSJ)

designated branch office of a BD that each FINRA firm must identify and register at least one, managed by a principal and is responsible for the activities of RRs in all offices within its region

• activities that take place > structuring an offering, order execution, market making, maintaining custody of funds or securities, final approval of new accounts, and retail communication

Office of the Comptroller of the Currency (Comptroller of the Currency)

supervises nearly 1,400 national banks, federal savings associations, and federal branches and agencies of foreign banks operating in the U.S., ensuring they operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations – also serves as a director of FDIC

Regulation A of Securities Act of 1933

put into place to ease requirements for small- and medium-sized companies to raise capital, providing two offering tiers that are open to the public and general solicitation is permitted

• Tier 1 > up to $20 million in a 12-month period of which no more than $6 million can be sold on behalf of existing shareholders (Regulation A security), subject to review by individual states and the SEC with no investment limits required to file a Form 1-A

• Tier 2 > offerings up to $75 million in a 12-month period of which no more than $22.5 million can be sold on behalf of existing shareholders, subject to SEC review only with no review required at the state level (investors must be qualified investors)

Regulation BI (Reg BI)

established standard of conduct under the Securities Exchange Act of 1934 for BDs and RRs when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer (i.e. disclosure, care, conflict of interest, and compliance obligation) excluding recommendations to institutional customers

Regulation D

exemption under the Securities Act of 1933 that allows companies to sell new issues through a private placement without registering the securities with the SEC by filing a Form D with the SEC, no limit to amount of capital that may be raised but there are restrictions on who may invest and how the offer is marketed

• accredited investor >institutional investors, holders of licensing (7, 65, and 82), and individual with income of $200k and expected to meet that in current year (or $300k for married couples) or $1M net worth

Regulation SP

enacted by the SEC to protect the privacy of customer information dealing specifically with NPI, gives customers control over the sharing of their information – customer has an ongoing relationship

• BDs must provide customer with a description of their privacy policies that state types of info the firm collects and whom they share it with, must be provided at time the relationship is first established and an updated version sent annually

• opt out options > printed form with check boxes & a prepaid return envelope, electronic option to receive info electronically, or toll-free phone number

Regulation T

gives FRB authorization to set minimum deposit in margin accounts (federal gov. expectation for timely payment), payment must occur not later than two business days after the standard settlement period (S+2)

• exempt securities > U.S treasury bills, notes, and bonds, gov. agency issues, and municipal securities (if bought or sold on margin the firm determines the initial deposit requirement)

• minimum deposit > 50% of purchase price if trade value is greater than $4k (more common), can be changed by the FRB anytime it deems appropriate

Regulatory element CE

prepared by the regulator (FINRA) and requires all RRs complete a computer-based training session by December 31st of each year or FINRA will deactivate registration until completed

• content is determined by FINRA and based on either the RR or principal status of the person and requirement will be met at a FINRA designated site

Rule 144

part of the Securities Act of 1933 that restricts the sale of restricted (unregistered) securities and securities when issued to control persons (insiders) of the company (Restricted Stock + Restricted Insiders)

• control persons > directors, offers, or persons who own or control 10% or more of the issuer’s voting stock, families will combine their positions to determine percentage of ownership

• volume limitations is the greater of > 1% of the outstanding shares of the company or average weekly trading volume over the most recent 4 weeks

Rule 147

offerings that take place entirely in one state are exempt from registration when the issuer has its principal office (headquarters) in the state and all purchasers are residents of the state, securities sold may not be resold to nonresidents of the state for 6 months after initial purchase – company must meet 1 of the following criteria

• receives at least 80% of its income in the state

• at least 80% of the issuer's assets are located within the state

• at least 80% of the offering proceeds are used within the state

• majority of the company's employees work in the state

Rule 482 (Omitting prospectus)

another term for a fund advertisement (aka a tombstone ad), allows mutual funds and other investment companies to advertise performance and other information without including the full prospectus

• does not contain enough information to qualify as a full disclosure and thus is not sufficient to solicit a trade

Rule 506 (b)

no general solicitation (advertisement) is allowed, offer may be sold to an unlimited number of accredited investors and up to 35 nonaccredited investors

Rule 506(c)

general solicitation (advertisement) is allowed and all investors must be accredited investors limiting private placement to investors with more experience or resources

• issuer must make reasonable effort to verify that all investors are accredited at time of the sale

Rule 5130

designed to protect the public offering process and public investors by preventing financial industry insiders from having advantages during IPOs of common stock, prohibiting member firms from selling shares of a new issue to any account in which restricted persons are beneficial owners

• RRs make true public offering at the POP

• RRs don’t withhold securities in public offering for their own benefit or use securities to reward those in a position to direct future business to them

• RRs and associated persons don’t take advantage of their insider status to gain access to new issues for their own benefit at the expense of customers

SEC Rule 17a-3

3 year retention requirement regarding complaints and readily available for at least 2 years

Securities Act of 1933

sets rules for primary markets requiring a full and fair disclosure so all investors have complete and accurate information when a new issue is sold to the public

• requires new issue (unless exempt) be registered with the SEC before sale

• governs the new issue (primary) market (involving the money-raising activities of issuers)

Securities and Exchange Commission (SEC)

securities industry's primary regulatory body created under the Securities Exchange Act of 1934 that regulates all exchanges and trading markets

• has regulatory authority over licensing BDs and SIPs, BD must apply and receive registration

Securities Exchange Act of 1934

created the SEC and gave it authority to regulate securities exchanges and the OTC market defining the role of a BD, written in conjunction with the Securities Act of 1933

• governs trading markets for existing securities and registration requirements of BDs, BD employees, and exchanges (concerned with secondary markets)

• puts a stop to manipulations by establishing that an individual would be in violation of federal law if they started rumors and could be held responsible by federal authorities for such rumor

Securities information providers (SIPs)

market data vendor engaged in the business of collecting, processing and distributing transactions in, or quotations for, any nonexempt security

Securities Investor Protection Act of 1970 (SIPA)

covers the protection thresholds for customers in the event of a BD's bankruptcy

Securities Investor Protection Corporation (SIPC)

a nonprofit membership organization created under SIPA where members pay assessments to a general insurance fund used to meet customer claims in the event of a BD bankruptcy, all BDs registered with the SEC must be members and post

• coverage> no more than $500k per separate customer within a separate capacity applying only to securities and cash (not commodities/futures or non-securities holding), out of the $500k SIPC covers no more than $250k in cash

Suspicious Activities Reports (SARs)

financial institutions (BDs, casinos, banks, thrifts) must file a report with FinCEN whenever customer activity appears out of the ordinary or illegal for any transaction that alone or in total involves at least $5k

• must be filed within 30 days and record must be retained for 5 years from the date of filing

• filing remains confidential and customer must be notified

Telephone Consumer Protection Act of 1991 (TCPA)

administered by the Federal Communications Commission (FCC) to protect consumers from telemarketing, rules for cold calling

• governs commercial calls, recorded solicitations from auto-dialers, and solicitations and advertisements to fax machines and modems

• exempts > parties with established business relationship or have expressed prior permission/invitation, calls from a tax-exempt nonprofit organization, calls not made for a commercial purpose, calls for legitimate debt collection purposes

• BDs required to maintain own do not call list that is updated every 30 days

Uniform Practice Code (UPC)

covers trading and payment for securities transactions (i.e. good delivery of securities, the payment of dividends on common stocks, interest on bonds, and settlement)

Uniform Securities Act (USA) of 1956

template for state securities laws requested by the federal gov. to create uniformity in securities regulation at the state level making it possible to do securities business across many states with the following rules

• each state has a state securities administrator

• guides the state administrators’ coordination with the SEC for securities registration and compliance

• covers the registration process for RRs in each state, ensuring consistency and compliance nationwide

USA PATRIOT Act of 2001 (based on the Bank Secrecy Act of 1970)

covers anti-money laundering (AML) policies and procedures that must be followed by firms by requiring them to report to FinCEN when there is an event, transaction, or series of events or transactions that appears to be questionable

• records of wire transfers of $3,000 or more must kept