FINRA SIE/6/7 Regulatory Overview

FINRA SIE/6/7 DUMP SHEET

Regulators, Laws, and Rules

Overview

• Securities and Exchange Commission (SEC)

  • Federal agency regulating securities markets and participants.

  • 3 Prong Mission:

  • Protect investors.

  • Maintain fair, orderly, and efficient markets.

  • Facilitate capital formation.

  • Enforces all federal securities legislation, including:

  • Securities Act of 1933

  • Securities Exchange Act of 1934

  • Investment Company Act of 1940

  • Insider Trading Act of 1988

Securities Act of 1933

• Primary market legislation.

• Requires issuers to make disclosures by prospectus.

• Registration form is filed requiring a 20-day cooling off period.

• Allowed Activities:

  • Indications of interest.

  • Tombstone ads.

  • Red herrings.

• Prohibited Activities:

  • Sales.

  • Recommendations.

  • Advertisements.

Exempt Securities

• Regulation A:

  • Small dollar offering rules.

  • Tier 1: Up to $20 ext{ million}$.

  • Tier 2: Up to $75 ext{ million}$.

  • Subject to purchaser limits (10% rule).

• Regulation D:

  • Private placement exemption.

  • May offer to unlimited accredited investors.

  • No more than 35 non-accredited investors allowed.

• Accredited Investor Criteria:

  • Individual with $1 ext{ million}$ net worth (excluding residence).

  • Income of $200,000$ (individual) or $300,000$ (joint).

  • Financial institutions.

  • Non-financial organizations with $5 ext{ million}$+ in assets.

  • Officers, directors, or partners of issuer.

  • Holders of Series 7, 65, or 82 licenses.

Rule 144

• Intrastate Offering Rule:

  • Avoids SEC registration if offered in one state only.

  • May re-sell to another state resident immediately.

  • Must wait 6 months to re-sell outside of state.

Financial Industry Regulatory Authority (FINRA)

• A self-regulatory organization regulating securities firms and registered representatives.

• Controls the registration process.

• Requires representatives to register via Form U4.

  • Form U4 Disclosure Requirements:

  • 10-year employment history.

  • 5-year residence history.

  • Relevant criminal history (no time limit).

  • All financial history.

  • Outside business activities (OBAs).

• Regulatory Penalties:

  • Censure.

  • Fine.

  • Registration suspension or revocation.

Municipal Securities Rulemaking Board (MSRB)

• A self-regulatory organization governing the municipal market.

• Writes municipal regulations but does not enforce them.

• Enforces MSRB rules through:

  • Securities firms.

  • The Federal Reserve Board.

  • Office of Comptroller of the Currency.

  • Federal Deposit Insurance Corporation (FDIC).

Securities Exchange Act of 1934

• A secondary market legislation regulating securities markets and their participants.

• Established the SEC.

• All forms of fraud are illegal and prohibited, including:

  • Market manipulation.

  • Spreading false rumors.

  • Pump and dump schemes.

  • Painting the tape / matched orders.

  • Marking the open or close.

Insider Trading Act of 1988

• Prohibits trading on material, non-public information.

• Penalties:

  • Firms: max fine of $25 ext{ million}$.

  • Individuals: max fine of $5 ext{ million}$ and up to 20 years in prison.

  • Treble civil penalties (3x profit made or loss avoided).

Regulation S-P

• Firms must safeguard non-public customer information.

• Must provide an easy “opt-out” mechanism.

• Privacy notices are required at account opening and annually thereafter.

North American Securities Administrators Association (NASAA)

• Regulates the financial industry at the state level.

• Enforces provisions of the Uniform Securities Act.

FINRA Rules on Communication

Types of Communication

• Correspondence:

  • 25 or fewer retail investors in 30 days (e.g., emails, small group letters).

  • No principal pre-approval required.

  • Not filed with FINRA, but subject to review.

• Retail Communication:

  • More than 25 retail investors in 30 days (e.g., websites, billboards, mass mailings).

  • Principal pre-approval required.

  • Filed with FINRA 10 days before use (pre-filing) if firms are in their 1st year of business.

• Investment Company Performance Ranking Communications:

  • RCs filed with FINRA within 10 days of use (post-filing).

  • Only compliant ratings may be used.

Special Communication Types

• Institutional Communication:

  • Only made available to institutional investors.

  • No principal pre-approval or filing with FINRA.

• Public Appearances:

  • Includes unscripted seminars or interviews in media programs.

  • No pre-approval or filing with FINRA.

  • Subject to written supervisory procedures (firm-based).

Continuing Education (CE)

• Regulatory Element:

  • Conducted and facilitated by FINRA.

  • Must be completed annually.

• Firm Element:

  • Conducted and facilitated by the member firm.

  • Must also be completed annually.

Maintaining Qualifications Program (MQP)

• Allows former representatives to retain FINRA licenses for 5 years.

• Must continue CE after leaving the industry.

Outside Business Activities (OBAs)

• Representatives must disclose earnings outside of the firm.

• Written disclosure to the firm is required, and the firm may deny the OBA.

Gift Regulations

• Maximum $100$ in gift value may be given.

• Business entertainment is not subject to the $100$ limit but must not be excessive.

Securities Transactions Outside of Firm

• Performing securities transactions outside of the firm is considered “selling away.”

• Written disclosure to the firm is required, along with written approval if receiving compensation.

Recordkeeping Requirements

• 3 Years:

  • Employee records, trade confirmations, statements.

• 4 Years:

  • Complaints (FINRA).

• 5 Years:

  • CTRs, SARs, CIP information.

• 6 Years:

  • Customer account records and complaints (MSRB). Blotters, General Ledgers, Etc.

• Lifetime:

  • Important documents such as stock certifications, partnership agreements, articles of incorporation, and meeting minutes.