customer relationships & managing accounts

reasonable basis obligation

firm and representative must understand complexity and risks of a security or investment strategy and determine whether it is suitable for at least some investors

customer specific obligation

a broker-dealer must believe that a recommendation is suitable for each customer based on the customers personal and investment profile. blanket recommendations and blast emails recommending specific securities both of which are not targeted to specific customer goals are generally prohibited

quantitative suitibility obligation

a broker dealer must believe that a series of recommended securities transactions are not excessive

suitability for institutinal customers

less strict, req are met if a broker dealer has a reasonable basis to believe that

• institutional customer can independently evaluate risk on a particular transaction and investment transactions in general

• customer has positively affirmed that it is acting independently

institutional customer

account of a bank, savings and loan association, insurance company, registered investment company, or registered investment advisor. or any other entity (not individuals) with total assets of at least $50 million

regulation best interest

requires broker-dealers and associates to act in retail customers best interest. firm or registered individual cant place their financial interests ahead of a customers interests. firms must identify, eliminate, or disclose and mitigate potential conflicts of interest between the firm and its retail customers

retail customer requirements for reg BI

• customer is natural person (not corporation) or natural persons legal representative

• customer receives a recommendation from a broker-dealer about any securities or any strategy involving securities

• customer uses the recommendation primarily for their personal investing (or that of family household)

note that accredited investors are considered retail customers. also reg BI cannot be waived under any circumstances

recommendations

statements involving a call to action to make a specific investment or follow a particular investment strategy. also involves things like which account type to open. does not include providing general information

reg BI obligations

• disclosure obligation

• care obligation

• conflict of interest obligation

• compliance obligation

disclosure obligation

broker-dealers are required to provide in writing full and fair disclosure of the following before or at the time of making a recommendation

• firm is acting in broker-dealer capacity

• material fees and costs

• type and scope of services provided

• any material limitations on the securities or investment strategies

• all material facts relating to conflicts of interest associated with a recommendation

care obligation

SEC defines under 3 components (similar to FINRAs 3 suitability obligations)

• reasonable basis

• customer specific

• quantitative suitability

conflict of interest obligation

broker-dealers must establish, maintain, and enforce procedures to address conflicts of interest. specifically they must

• identify and mitigate conflicts that might create an inventive for a broker-dealer to put its interests ahead of the customers

• identify and disclose material limitations on offerings and prevent the limitations from putting the firms interest ahead of a customers

• identity and eliminate sales contests, quotas, bonuses, and non cash compensation based on the sales of specific securities. (ex: sales contest for mutual funds from specific sponsor is prohibited. but general categories of securities are exempt from this rule. like contest for overall sales of all mutual funds is acceptable)

compliance obligation

reg BI requires broker-dealers to establish, maintain, and enforce written policies and procedures designed to achieve compliance with Reg BI

form CRS

broker-dealers and investment advisers must deliver a summary of their relationship with a customer. this is provided in form CRS (customer relationship summary). new customers should receive this at th beginning of the relationship. it must contain info about:

• relationship and services (BD or investment adviser)

• fees and costs

• conflicts of interest

• standards of conduct

• disciplinary history of the firm and its professionals

• how a customer can obtain additional info on the firm (ex: broker check)

form CRS must be delivered by broker-dealers before or at earliest of

• making recommendation for a specific type of account

• executing a securities transaction or implementing an investment strategy involving securities

• placing an oder for a retail investor

• opening a brokerage account for a retail investor

form CRS must be filed with FINRA through FINRA gateway. any changes must be sent to existing customers within 60 days. upon request it must be provided to any customer. must also be posted prominently on broker dealers website

3 categories of options communications

• correspondence

• retail communication

• institutional communication

correspondance

any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30 day period (25 includes both existing and prospective customers). does not require principal approval if firm has correspondence compliance program as part of written supervisory procedures. subject to post-use approval by a principal

retail communication

any written or electronic communication distributed or made available to more than 25 retail investors within 30 calendar days. ROOP must approve most retail options communications before issue. most are subject to CBOE filing requirements

must maintain post-approval records which must include

• copy of communication and dates of first and last use of communication

• name of registered principal who approved and date of approval

• supporting source for info related to any recommendations made

retail communications include

• advertising

• sales literature

• independently prepared reprint

• options worksheets

if a retail communication was not accompanied or preceded by the latest ODD it must be filed with the CBOE at least 10 days in advance and must received CBOE approval before it can be used. FINRA filing requirement is the same. so advertisements intended for public must be pre-filed with CBOE and FINRA. in contrast most options sales literature distributed to existing customers who have already received the ODD does not need to be filed with CBOE. FINRA required options retail communication sent to customers who have received the ODD to be filed within 10 business days of first use.

institutional communication

any written or electronic communication distributed or made available only to institutional investors. do not require advance principal approval if firm has policies and procedures for post use review and approval. not subject to FINRA filing req

advertising

material intended for a mass market like newspapers, magazines, website content, internet bulletin boards, TV, billboards, etc

sales literature

any written or electronic communication concerning options directed to a specific audience such as firms customers. includes circulars, market letters, research reports, social media posts, texts, emails directed towards customers, and content on password protected website

independently prepared reprint

reprint or excerpt of any article issued by a publisher where the publisher is not affiliated with member firm and report was not commissioned by the member

options worksheets

documents that discuss specific options, strategies, and potential outcomes. in initial template form these are considered sales literature and must be approved by a principal

• note that when a representative adds market data to a previously approved template options worksheet the “completed” worksheet is not considered sales literature and will not need approval

no filing requirement for

• communications that have been filed with and approved by another SRO with similar standards

• communications in which the only reference to options is a listing of a firms ervices

• ODD

• prospectuses

public appearances or public forms

real-time interactive communications made with third parties including

• participation in a seminar or forum (including electronic like chat rooms)

• radio or television interviews

• other public appearances or speaking activities

representative must have a reasonable basis for any security recommended in pubic appearance. must disclose when they have a financial interest in any of issuers securities mentioned during appearance or if any other material conflict of interest arises. firms must supervise public appearances. if firm has policies and procedures covering these principal review and approval can be post use only. exception occurs if person uses a pre-made script, slides, handout, or other materials. in this case if material used in appearance is seen or heard by more than 25 investors its a retail communication and is subject to prior principal approval

content rules

• cant contain forecasts of future events which are unwarranted or not clearly labeled as forecasts

• cant contain cautionary statements or caveats that are not legible or are inconsistent with opinions expressed in document

• must include warning that options are not suitable for all investors

• must include a statement that supporting documentation for any claims, comparisons, recommendations, statistics, or other technical data will be supplied on request

last two are not required for institutional communications

record retention

communications must be kept on file for 3 years, including name of who prepared, approved, and made any recommendations

complaints

• copy at branch to which it was directed

• copy must be forwarded to central file no later than 30 days after receipt

• central file must be located at principal business office of firm

• central file must include name of complainant, date, name of registered rep servicing account, description of complaint, and record of actions taken if any

• copy must be kept for 4 years

account statements

customers must receive quarterly statements showing all positions in the account at current market value. doesn’t need to be sent during quarter which no balance or securities in account. if customer owns penny stocks must be sent monthly. statement should include

• security and money positions

• special charges to account

• margin accounts must show a mark to market price and market value of each option position and total for all positions

• outstanding debit and credit balances and resulting account equity

also bear a legend stating that info regarding commissions and charges was included on trade confirmations and further info will be made available upon request

phone number given to report inaccuracies or discrepancies cannot be that of representative

trade confirmations

• type of option

• underlying security

• expiration month

• exercise price

• number of contracts

• premium per share or underlying unit

• commission

• trade date

• settlement date

• designation of opening or closing transaction

• whether transaction was affected on agency or principal basis

required disclosures

• financial info about firm (unaudited semiannual report and audited annual report. may be posted on website)

• delivery of amended options risk disclosure document (amendment delivered no later than time of trade confirmation for any trade in category of options covered by amendment)

• margin acct risk disclosure (before or when opening acct. annually)

• extended hours trading disclosure (before customers can engage, must include advantages and disadvantages)

extended hours trading disclosure

risks

• lower liquidity, higher volatility, changing prices, unlinked markets, wider spreads

advantages

• greater flexibility, news announcements

broker check

once a year most provide to customers

• FINRA broker check hotline number

• statement describing availability of investor brochure that describes FINRA brokercheck

• FINRA website address

arbitration agreement

• give up right to due broker or registered reps or have trial by jury unless recommended by arbitration panel

• awards and generally final and binding. minimal ability to have a court reverse or modify

• ability to obtain documents, statements, and other discovery is more limited under arbitration than in court of law

• arbitrators dont have to explain reasons for award unless both parties request it at least 20 days before first hearing date

• arbitration panel may include a minority of arbitrators who were or are affiliated with securities industry (nonpublic arbitrators). typically panel will be one or three total arbitrators

• arbitration forum rules may impose time limits for bringing cases. in some cases ineligible claims may be made in court of law

• arbitration forum rules in which the claim is filed and any amendment to those rules are automatically included in customer agreement