Unit 17 – Self-Regulating Organizations

Self-regulatory organizations (SROs)

an organization that helps regulate and oversee the securities industry under the supervision of the SEC, create and enforce rules designed to protect investors and promote fair markets, based on the idea that the industry is in the best position to monitor itself (largest is FINRA)

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 FINRA member firms and associated - has been delegated authority by the SEC to administer qualification exams for associates of member firms

Member firms

BD that apply for membership to FINRA and if granted they must abide by FINRA’s rules and regulations, may only do business with other BDs with FINRA membership or with institutions that meet exceptions

FINRA exceptions

bank in the underwriting of a municipal issue or a foreign firm that is a member of its nation’s FINRA equivalent

Associated persons

those who work for FINRA member firms and also agree to FINRA rules

FINRA objectives

regulate broker-dealers, protect investors, promote fair markets, and enforce securities laws and industry rules

• promote fair and ethical business practices

• standardize industry rules and procedures

• enforce federal and state securities laws

• prevent fraud and manipulative practices

• regulate and discipline member firms

• resolve disputes between investors and member firms

• facilitate communication among industry participants and regulators

FINRA rules

designed to protect the integrity of the securities markets, divided into 4 groups > conduct rules, code of procedure, uniform practice code, and code of arbitration

FINRA Conduct Rules

cover the relationship between firms and their customers 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

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 DOE

FINRA’s Department of Enforcement (DOE)

investigates suspected violations (often from audits or customers complaint) where a hearing will be held to determine the outcome of any violation such as suspend, expel, or bar from membership, impose fines, censure, or any other action deemed appropriate – decisions my be appeal process through NAC>SEC>federal appellate courts

National Adjudicatory Council (NAC)

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

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)

Code of Arbitration (COA)

FINRA-run dispute resolution process to settle monetary disputes, goal is to provide a faster and cheaper resolution than is found by going through the 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 customer may agree to arbitration before dispute happens

Pre-dispute arbitration agreement

clause in a BDs new account agreement in which the customer agrees to resolve disputes by arbitration

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)

Municipal bonds

enable communities access to the capital needed to build libraries, schools, roads, and bridges, and to fund other essentials for economic growth

Municipal securities

authorized by state and local legislatures or the voters within the municipality, exempt from registration with the SEC regulated by the MSRB

Exchanges

SROs that are market centers (i.e. NYSE), regulates trading activity that occurs and has some authority over the securities that are listed and the issuers of those securities – having power to remove a listed security (delisting) and to suspend trading on a listed security

SEC rules

mandate which records must be prepared by broker-dealers and for how long the records must be retained, some paper but most digital storage, storage must have the capability to maintain records in a non-rewritable and nonerasable format

Indefinitely

records that are part of the life of the BD that are retained for as long as the firm exists – COMPAS > corporate charter or articles of incorporation, organizational records, minutes, partnership agreement, amendment, and stock certificate books

Corporate charter or articles of incorporation

used when BD is organized as a corporation, name varies depending on the laws of the state of incorporation, foundational document of a corporation - if there is no charter, there is no corporation

Organizational records

other records/forms related to the organization or founding of the firm (i.e. Form BD, the registration application for a BD)

Minutes

a record of the meetings of the BOD (corporation) or the partners (partnership), required to recall and document important information

Partnership agreement

used when the BD is organized as a partnership, the foundational document -if there is no written agreement, partnership doesn’t exist

Amendments

any amendments/changes to any of COMPAS docs are kept with the original record

Stock certificate books

used if BD is a closely held corporation where the stock is owned or held by a smaller group of individuals, are actual books where the certificates are held until they are issued - a record of who the certificates are issued to is also found

Six-year records

those having to do with the BD's holdings and assets it holds for customers, also including a BD's financial records most recent two years must be kept readily accessible after which they can be stored at an offsite location but must be retrievable – BGS-CCD > blotters, general ledger, stock record, customer ledgers, customer account records, and designation of principal

Blotters

record of original entry of the purchase and sale of securities, the receipt and delivery of securities, and the receipt and disbursement of cash - must reflect transactions as of trade date (or event date) and must be prepared no later than the following business day

General ledger

contains accounting records of the firm's assets, liabilities, and net worth, used to prepare a firm’s financial statements and must be prepared as frequently as necessary to comply with regulations but no less frequently than monthly

Stock record

shows all securities held by the firm, the ownership of those securities, and where the securities are held - must be prepared no later than the business day after settlement date

Customer ledgers

customer statements, cash accounts and margin accounts are shown on separate ledgers - must be prepared no later than the settlement date.

Customer account records

might include the new account form and margin agreement

Designation of principals

show when an associate is appointed to a principal position and what areas they will supervise, 6 years from the time the person leaves the principal position

Written complaints

records normally maintained at the BD's OSJ for the office where the complaint originated and must be retained for four years after resolution, FINRA and SEC regulations apply but not to verbal complaints – can come in any form of communication (paper, email, text, tweet, social media post, etc.)

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 - where structuring an offering, order execution, market making, maintaining custody of funds or securities, final approval of new accounts, and retail communication takes place

FINRA Rule 4513

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

SEC Rule 17a-3

three-year retention requirement regarding complaints and readily available for at least two years

Three-year records

almost all other records, the most recent two years must be kept readily accessible (branch office, OSJ, or headquarters) after which they can be stored at an offsite location but must be retrievable - examples

• advertising

• trial balances (monthly financial report)

• Forms U4 and U5, and fingerprint cards for terminated personnel (from separation)

• customer confirmations

• order tickets

• other ledgers (securities borrowed & loaned, monies borrowed & loaned, and dividends and interest received)

• list of every office where each associated person regularly conducts business

• associated persons' compensation records

• firm's compliance and procedures manual

Customer confirmations

printed document stating the trade date, settlement date, and money due from or owed to a customer, sent or given on or before the settlement date

• Order tickets

• Other ledgers (securities borrowed & loaned, monies borrowed & loaned, and dividends/interest received)

• List of every office where each associated person conducts business

• Associated persons’ compensation records

• Firm’s compliance and procedures manual