Damage Control

Securities Industry Essentials (SIE) Exam

A co-requisite qualification exam required before or with a Specialized Knowledge Licensing exam (e.g., Series 6, 7, 99); tests fundamental knowledge of the securities industry.

What is the validity period of the SIE exam?

4 years prior to passing a specialized knowledge licensing exam.

Does an individual need to be associated with a member firm to take the SIE?

No

What are the 4 knowledge areas tested on the SIE?

Knowledge of Capital Markets; Understanding Products and their Risks; Understanding Trading, Customer Accounts, and Prohibited Activities; Overview of the Regulatory Framework.

Who must register with FINRA or NASAA?

Persons associated with a member firm engaged in investment banking or securities business, including supervision, solicitation, conduct of business, or training of others.

Series 27 (FINOP)

Financial and Operations Principal license; required for preparing financial statements and net capital computations (FOCUS Report).

Series 24

Principal license; required for management of investment banking or securities business, including supervision and training.

Series 7

General Securities Representative license; qualifies individuals to work with the public in solicitation, purchase, and sale of most securities products (stockbroker’s license).

Series 6

Limited Representative license; qualifies individuals to sell redeemable securities of investment companies (mutual funds), new issues of closed-end funds, and variable contracts from insurance companies.

Series 82

Limited Representative license for sales of private securities offerings.

Series 79

Limited Representative license for investment banking, advising on offerings, mergers & acquisitions, restructurings, and other corporate transactions.

Series 22

Direct Participation Representative license; covers solicitation, purchase, or sale of direct participation programs.

Series 57

License for Nasdaq Equity Trading, OTC Equity Trading, Proprietary Trading, and Algorithmic Trading Strategy Developers.

Series 99

Operations Professional license for senior managers responsible for covered operations functions or authorizing work that commits firm capital.

Series 65 / 66

Investment Adviser licenses for fee-based advice on securities; required if compensated for giving investment advice (except exempt professionals like Lawyers, Accountants, Teachers, Engineers).

Municipal Fund Advisor

Provides advice or solicits on behalf of municipal entities regarding municipal securities or products.

Associated Person

Anyone affiliated with a member firm who holds a license (Series 6, 7, etc.), or serves as a partner, officer, director, or branch manager.

Non-Associated Person

Clerical/ministerial employees, or those who have only passed the SIE without being licensed.

Unregistered Person

An employee who has not met licensing requirements; cannot give investment advice, solicit accounts, or discuss products, but can perform limited duties like sending invitations or clerical tasks.

Form U4

Uniform Application for Securities Industry Registration or Transfer; used to register representatives with CRD/IARD.

Form U5

Uniform Termination Notice; used to terminate registration and notify FINRA within 30 days.

Form U6

Uniform Disciplinary Action Reporting Form; used by regulators and SROs to report disciplinary actions or arbitration awards.

SEC Rule 17F-2

Requires fingerprinting of partners, officers, directors, or employees of a member firm (except exempt clerical employees).

What does signing Form U4 mean?

The applicant agrees to arbitration for disputes, accepts limited discovery, understands awards are binding, and acknowledges certain rights waived.

What disclosures are required on Form U4?

Criminal history (felonies, misdemeanors involving fraud, investments, property crimes, etc.), and related charges.

What happens if a registered rep leaves the industry?

Registration is terminated (U5 filed); requalification required if returning after 2+ years.

Maintaining Qualifications Program (MQP)

Allows former reps to maintain qualification for up to 5 years with annual CE, instead of re-examining after 2 years.

What happens to registered persons in active military service?

They are placed on inactive status, exempt from CE during service, and can continue to receive commissions.

Who cannot register with FINRA?

Individuals convicted of a felony or certain misdemeanors within 10 years, or those failing to meet training/experience standards.

What happens if SEC revokes a broker-dealer’s registration?

FINRA membership is automatically terminated.

Retention of Jurisdiction

FINRA retains jurisdiction for 2 years after termination for any violations during employment; address changes must be reported for 2 years.

Expungement of CRD records

Requires a court order from a court of competent jurisdiction.

Independent Contractors

Considered employees of broker-dealers; must be licensed and supervised as Registered Representatives.

Sales Assistants

Unregistered = clerical duties only; Registered = can assist in sales (U4 must be updated if charged with a crime).

FINRA Rule 1240 (Continuing Education)

Registered persons must complete Regulatory Element annually by Dec 31 or be marked “CE inactive”; firms must also provide Firm Element CE tailored to their business.

What investor protection disclosures must member firms provide annually?

FINRA Public Disclosure Hotline number, FINRA website address, and Investor Brochure availability statement.

Private Securities Transactions (FINRA Rule 3280)

Associated persons must give written notice to their firm; if approved, transactions must be recorded and supervised. If disapproved, the person may not participate (“selling away”).

Transactions for or by Associated Persons (FINRA Rule 3210)

Employees opening accounts at another firm must notify both firms; employer must approve/disapprove; employer can require duplicate statements. Spouse/family accounts must be disclosed. #

Regulatory Inquiries

Requests from regulators for information and documentation; prohibited actions include altering/falsifying documents, failing to provide info timely, or knowingly giving incomplete information.

Who typically responds to regulatory inquiries at financial institutions?

Compliance or Legal Departments, with input and cooperation from employees.

Business Continuity Plan (FINRA Rule 4370)

A plan that member firms must establish, maintain, and update annually to address data backup/recovery, mission-critical systems, and financial/operational assessments; must be approved by senior management.

How must firms disclose their Business Continuity Plan?

In writing at account opening, posted on the website, and mailed to customers upon request.

Borrowing or Lending to Customers (FINRA Rule 3240)

Prohibited unless member has written procedures and one of the following: customer is immediate family, customer is a financial institution, customer and registered person are registered with same firm, or based on personal/business relationship outside the broker-dealer relationship.

Who is considered “immediate family” under FINRA rules?

Parents, grandparents, in-laws, spouse/domestic partner, siblings, children, grandchildren, cousins, aunts/uncles, nieces/nephews, and any person financially supported or residing in the same household, including step and adoptive relationships.

When is pre-approval required for borrowing/lending transactions?

When the transaction involves two registered persons in the same firm, or personal/business relationships outside the broker-dealer relationship.

Registered Person as Customer Beneficiary or Trustee (FINRA Rule 3241)

A registered person may act as beneficiary, executor, or trustee only if the customer is immediate family, or with written notice to and approval from the member firm; must comply with any conditions set by the firm.

Outside Business Activities (FINRA Rule 3270)

Registered persons must provide prior written notice to their member firm before accepting compensation from business activities outside their employment; passive investment income does not require notice.

Record of Written Complaints

Each member firm must maintain a separate file or clear reference of all written customer complaints and actions taken, preserved at each Office of Supervisory Jurisdiction (OSJ).

Complaint Definition

Any written statement from a customer (or their representative) alleging a grievance related to solicitation, execution of transactions, or disposition of securities/funds under the member’s control.

Who can register complaints against a broker-dealer?

SEC, FINRA, public customers, and other member firms.

Customer Complaint Record Retention

Must be kept for at least 4 years.

Chief Executive Officer Responsibilities

Must annually certify that the firm has processes to establish, maintain, review, test, and modify policies/procedures to ensure compliance with securities laws, regulations, and FINRA rules. #

Fair Dealing with Customers

Sales efforts must be judged on whether they represent fair treatment to the customer, not on potential profits to the customer.

What are examples of manipulative practices prohibited under FINRA rules?

Wash sales, matched orders (painting the tape), misleading statements, pump and dump, marking the open or close, backing away, freeriding, spoofing, and front running.

What is “painting the tape”?

Placing buy and sell orders simultaneously in a security to mislead investors into believing there is greater trading activity than actually exists.

What is “churning” or “overtrading”?

Excessive trading activity in a customer’s account, determined based on the customer’s objectives, financial situation, account turnover, and broker motivation.

What is “market manipulation”?

Creating a false or misleading appearance of active trading or market conditions in a security, unless it is a bona fide agency cross.

What is “front running”?

Executing an order to buy or sell a security when having material, non-public information about an imminent block transaction before the information is publicly available.

What transactions are permitted under front running rules?

Transactions unrelated to the block order, transactions to facilitate the execution of the customer block order, and transactions executed on a national securities exchange that comply with its rules.

What is “pump and dump”?

Inflating a stock’s price through fictitious trading or false stories to sell at an artificially high price.

What is “marking the close” and “marking the open”?

Placing orders at artificially high or low prices at the close or open of the market to influence the security’s price.

What is “backing away”?

A market maker failing to honor a bid for the minimum quantity in a security that it quotes as a firm quote.

What is “freeriding”?

Buying and selling a security before paying for it, prohibited under Federal Reserve Board Regulation T; the broker may freeze the account for 90 days.

What is “spoofing”?

Entering orders to create the appearance of liquidity, then canceling them to execute at a better price, a form of market manipulation.

Best Execution (FINRA Rule 5310)

Member firms must use reasonable diligence to find the best market and execution for customer orders, considering market character, transaction size and type, number of markets checked, accessibility of quotations, and order terms.

What is “interpositioning”?

Placing a second broker between a customer and market maker to generate unnecessary commissions; unethical and prohibited.

Executing unauthorized trades

Executing trades without customer authorization is unethical and prohibited, even if profitable for the customer.

Falsification of records

Examples include having clients pre-sign blank forms, altering signed forms without initials, or forging client signatures.

Corporate Actions

Include stock splits, dividends, rights offerings, spin-offs, and mergers/acquisitions; require notices and disclosures to shareholders.

Who handles corporate actions for OTC companies?

FINRA processes corporate action announcements for OTC-traded companies and publishes them on the Daily List.

Who handles corporate actions for exchange-listed companies?

The exchanges notify shareholders and ensure the announcements are available online.

Cash payments to associated persons

Must be disclosed in the prospectus and paid only by the member firm; include discounts, fees, commissions, overrides, loans, and employee benefits.

Non-Cash Compensation

Allowed if not tied to sales targets; includes gifts up to $100 per person per year, merchandise, prizes, travel and lodging for educational meetings, and occasional meals.

Guaranteeing a customer against loss

Registered Representatives may not guarantee against loss or buy back shares that fail to meet investment objectives. #