Chapter 10: The Self Regulatory Organizations

MSRB (Municipal Securities Rulemaking Board)

Regulates underwriting and trading for state and muni securities. Make rules, but do not enforce. They can regulations for broker-dealers and banks buying and selling municipal securities, but have no authority of Municipalities themselves.

What are the Four FINRA Rules?

1) Conduct Rules 2) Code of Procedure (COP) 3) Uniform Practice Code (UPC) 4) Code of Arbitration (COA)

What is the order of COP appeals?

1) National Adjudicatory Council, 2) SEC, 3) appellate courts

Which of the following sets of FINRA rules focuses on broker-dealers doing business with other broker-dealers? A) Uniform Practice Code B) Code of Arbitration C) Conduct Rules D) Code of Procedures

Ans: C) Uniform Practice Code The Uniform Practice Code deals with interactions with other broker-dealers. (The Conduct Rules deal with a broker-dealer's (and representative's) relationship with the customer and the public) (LO 10.a Question ID: 1280032)

In which circumstances may a FINRA member firm conduct securities business with a nonmember broker-dealer? A) If the broker-dealer is a Canadian firm without regard to registration. B) If the broker-dealer is temporarily suspended and any transaction is related to ongoing business. C) If the nonmember broker-dealer is a foreign firm and properly registered in their home jurisdiction. D) Under no circumstances

Ans: C. The properly registered foreign member exception is one of the few exceptions to the rule. A suspended member is also treated as a nonmember. (LO 10.a - Question ID: 1271964) (Checkpoint)

An exchange has some degree of regulatory authority over all of the following except: A) dealers in the third market. B) exchange members. C) floor traders. D) designated market makers.

Answer: A Firms that make a market, in listed stocks in the OTC market, are under FINRA oversight. Those who do transactions on the floor are under the exchanges regulations. (LO 10.c - Question ID: 1271971)

All of these enforce MSRB rules except: A) the MSRB Enforcement Department. B) the Securities Exchange Commission. C) FINRA. D) the Federal Reserve Board.

Answer: A MSRB has no enforcement department. FINRA and the SEC enforce MSRB rules for broker-dealers, and the Fed and the Office of the comptroller do so for banks. (LO 10.b - Question ID: 1271970)

Bob's Discount Brokerage has applied for FINRA membership and was denied. Bob wants to appeal this decision. The first appeal goes to: A) the NAC. B) the SEC. C) the courts. D) the DOE.

Answer: A Appeals on FINRA decisions first go to an internal group called the National Adjudicatory Council. NAC decisions may be appealed up to the SEC, and then the courts. (LO 10.a - Question ID: 1271965)

The authorities delegated to FINRA by the SEC include all of these except: A) establishing initial margin requirements. B) establishing membership requirements. C) establishing testing and standards for associates of broker-dealers. D) investigating complaints.

Answer: A. The initial margin requirement is set by the Federal Reserve under Regulation T. FINRA creates and administers securities licensing requirements (e.g., the SIE), sets its own membership requirements, and may investigate complaints from customers. (LO 10.a - Question ID: 1271966)

The MSRB has jurisdiction for making rules in all of the following cases EXCEPT: A) municipalities selling their own securities. B) banks selling municipal securities. C) broker-dealers underwriting municipal securities. D) broker-dealers trading municipal securities.

Answer: B The MSRB makes regulations for broker-dealers and banks buying and selling municipal securities but does not have authority over the municipalities. (LO 10.b - Question ID: 1280036)

The Uniform Practice Code (UPC) establishes uniform trade practices pertaining to all of the following EXCEPT: A) don't know (DK) procedures. B) communications with the public. C) settlement and ex-dates. D) good-delivery procedures.

Answer: B The UPC established uniform trade practices and other guidelines for broker-dealers to follow when they do business with other member firms, including transaction settlement, good delivery, ex-dates, trade confirmations, and DK procedures. (LO 10.a - Question ID: 1269516)

Financial Industry Regulatory Authority (FINRA)'s Conduct Rules are designed to promote: A) efficient and just handling of trade practice violations. B) fair and ethical trade practices when dealing with the public. C) settlement of disputes between member firms without resorting to the courts. D) uniform trade practices for firms to follow when dealing with other member firms.

Answer: B The Conduct Rules specify trade practices that are fair and ethical when dealing with the public. Events that must be reported are also described. (LO 10.a, QID 1269517)

MSRB rules apply to all of the following EXCEPT: A) FINRA member firms performing trades with municipal bonds. B) municipalities. C) municipal dealers. D) investment bankers.

Answer: B. The MSRB has no authority over municipal governments. They do make rules for underwriters (investment bankers) bringing municipal bonds to market, and municipal bond trading for both dealers and brokers acting on a customer's behalf. (LO 10.b - Question ID: 1271969)

FINRA is the primary regulator in the United States for which two of the following? I. broker-dealers II. registered representatives III. bankers IV. the SEC

Answer: Broker Dealers and Registered Representatives. FINRA oversees broker-dealers and their associated persons, like registered representatives. FINRA's authority is delegated from the SEC, and they do not regulate banks, though they do regulate broker-dealers that are owned by banks. Investment banking activities performed by broker-dealers do fall under FINRA's jurisdiction. (Test Id: 149833820)

All of the following self-regulatory organizations (SROs) function under the Securities and Exchange Commission's (SEC's) oversight except: A) the Financial Industry Regulatory Authority (FINRA). B) the Municipal Securities Rule Board (MSRB). C) the Federal Savings and Loan Insurance Corporation (FSLIC). D) the Chicago Board Options Exchange (CBOE).

Answer: C SROs function under the SEC's oversight. Each SRO is accountable to the Commission for enforcing federal securities laws, as well as supervising securities practices within an assigned jurisdiction. These include FINRA, MSRB, and CBOE. (LO 10.a ; Question ID: 1269507)

All of these are rules set down by an exchange except A) order priority. B) listing and delisting of a security. C) revoking a corporate charter. D) capital requirements for members.

Answer: C. A corporate charter is granted by a government entity, usually the state. An exchange can not revoke it. However, a firm whose corporate charter has been revoked will likely see a delisting shortly thereafter. (LO 10.c - Question #2 of 10 - Question ID: 1271972)

Investigations and hearings into alleged violations of FINRA's Code of Procedure are performed by: A) the National Adjudicatory Council. B) the Division of Engagement. C) the Arbitration Panel. D) the Department of Enforcement.

Answer: D. This is the job of the Department of Enforcement (DOE). DOE decisions may be appealed to the NAC. Code of Procedure violations do not go to the arbitration panel. There is no Division of Engagement. (LO 10.a Question ID: 1271967)

Which of the following sets of FINRA rules focuses on disputes in the industry and with customers who have filed a predispute agreement? A) Code of Procedures B) Conduct Rules C) Uniform Practice Code D) Code of Arbitration

Answer: D. The Code of Arbitration covers disputes over money between representatives, member firms, banks, and customers. (LO 10.a, Question ID: 1280033)

If an arbitration agreement has not been signed, under which two of the following circumstances would a dispute between a Financial Industry Regulatory Authority (FINRA) member firm and a retail customer go to arbitration? I. The dispute cannot otherwise be resolved to the satisfaction of both parties. II. The customer requests that the dispute go to arbitration. III. The amount under dispute is less than $50,000. IV. The FINRA director of arbitration so rules.

Answer: I & II Generally speaking, a broker-dealer firm has the customer sign a binding arbitration agreement before opening the account. In the absence of such an agreement, if a dispute cannot otherwise be resolved, the dispute can go to arbitration if the customer wishes it so. (LO 10.a , Question ID: 1269520)

What are people who work with FINRA Firms called?

Associates

Each self-regulatory organization (SRO) functions under the Securities and Exchange Commission's (SEC's) oversight and is accountable to the commission for enforcing federal securities laws. While the Municipal Securities Rule Board (MSRB) regulates all matters related to the underwriting and trading of state and municipal securities, it does not have enforcement powers of its rules. Which of the following does the MSRB rely on for enforcement of these rules? A) Federal Deposit Insurance Corporation (FDIC) B) Financial Industry Regulatory Authority (FINRA) C) Chicago Board Options Exchange (CBOE) D) Securities and Exchange Commission (SEC)

B) FINRA. The MSRB regulates all matters related to the underwriting and trading of state and municipal securities but does not have enforcement powers. It depends on other SROs (e.g., FINRA) for the enforcement of its rules. (LO 10.b - Question ID: 1269522)

Who enforces MSRB rules?

BD Enforcement: SEC or FINRA. Bank Dealer Enforcement: FRB, FDIC, or the Comptroller of the Currency

What are "Member Firms", and who can they do business with?

Broker Dealers who are registered with FINRA. They can only do business with themselves.

Should a member firm or an associated person be found in violation of Financial Industry Regulatory Authority (FINRA)'s Conduct Rules, a number of sanctions may be imposed. However, under the Code of Procedure, FINRA may not: A) issue a fine to a member firm or associate. B) censure the violator. C) impose a prison sentence on the violator. D) bar an associated person from the industry forever.

C) Only a court can issue a prison sentence. Each of the remaining answer selections, bar, fine, and censure, are sanctions FINRA could impose under the Code of Procedure. (LO 10.a Question ID: 1269513)

(1) Conduct Rules (FINRA)

Conduct Rules established the Relationship between firm and client. It set out fair and ethical trade practices that member firms and representatives must follow (when dealing with the public)

(3) Uniform Practice Code (UPC)

Covers technical aspects of our business regarding trading and payment. - defines what a good Delivery is - defines what a round lot is - Defines the payment procedures for dividends for stocks and interests on Bonds - defines settlement dates

Department of Enforcement (DOE)

DOE is FINRA's investigation unit If the DOE finds a violation and issues a notice to an agent or B/D, the agent or B/D has 25 days to respond The agent or B/D can admit guilt and offer to settle, or they can go to a hearing If they settle, they give up the right to appeal

What are examples of Exchanges that Regulate?

Exchanges are SROs who regulate trading activity, traders, and companies whose securities are listed on the exchange. This includes: - NYSE - CBOE (Chicago Boards of Options Exchange)

Primary SRO for BDs and registered employees?

FINRA

What is the Largest SRO in the securities industry?

FINRA

Which of the following is the largest self-regulating organization (SRO)?

FINRA. All broker-dealers in the United States who deal in corporate securities are required to be members of FINRA. (The SEC has jurisdiction over all securities business in the United States, but it is not an SRO)

Which regulatory body oversees trading in the over-the-counter (OTC) market?

FINRA. FINRA regulates all matters related to investment banking (securities underwriting), trading in the OTC market, trading in NYSE-listed securities, and the conduct of FINRA member firms and associated persons. FINRA also regulates investment companies and limited partnership transactions. (LO 10.a; Question ID: 1269509)

Which of the following organizations looks to promote self-discipline among members and investigate and resolve grievances between the public and members and between members?

Financial Industry Regulatory Authority (FINRA) FINRA regulates all matters related to investment banking, trading in the over-the-counter (OTC) markets and some exchange markets, and the conduct of FINRA member firms and associated persons including the promotion of self-discipline among members. It also investigates and looks to resolve grievances between the public and members and between members. The MSRB relies upon FINRA to perform dispute resolution. (LO 10.a - Question ID: 1269510)

FINRA (Financial Industry Regulatory Authority)

Regulates all matters related to Investment Banking (securities Underwriting), Trading in OTC Market, Trading in Exchange-listed securities, and conduct of FINRA member firms (and associated persons)

Which of the following regulatory authorities relies exclusively upon other examining authorities to enforce its rules? A) New York Stock Exchange (NYSE) B) Chicago Board Options Exchange (CBOE) C) Municipal Securities Rule Board (MSRB) D) Financial Industry Regulatory Authority (FINRA)

Municipal Securities Rule Board (MSRB) The MSRB differs from other regulatory bodies in that it writes its own rules, but by law, it cannot enforce them. Rather, the board must rely entirely upon other designated examining authorities to enforce its rules. (Question ID: 1269523)

Where can you appeal to for COP (Code of Procedure) decisions?

National Adjudicatory Council (FINRA Committee)

(4) Code of Arbitration (COA)

Settles Monetary Disputes, all about money. Decisions are binding and may not be appealed, and that the parties must agree to binding arbitration - you either win or lose. (FINRA run dispute resolution process)

Which of the following sets of FINRA rules focuses on disputes in the industry and with customers who have filed a predispute agreement?

The Code of Arbitration, which covers disputes over money between representatives, member firms, banks, and customers. (LO 10.a - Question ID: 1280033)

Accusations of Financial Industry Regulatory Authority (FINRA) Conduct Rule violations will heard and handled under the A) Uniform Securities Act. B) Uniform Practice Code. C) Code of Procedure. D) Code of Arbitration Procedure.

The Code of Procedure describes how member violations of the Conduct Rules will be heard and handled. (LO 10.a - Question ID: 1269519)

Which of the following sets of FINRA rules focuses on fair dealing with the public? A) Uniform Practice Code B) Code of Arbitration C) Code of Procedures D) Conduct Rules

The Conduct Rules. Conduct Rules deal with a broker-dealer's (and representative's) relationship with the customer and the public. The Uniform Practice Code deals with interactions with other broker-dealers. (LO 10.a Question ID: 1280031)

Financial Industry Regulatory Authority (FINRA) staff must submit new rules and await approval from which of the following regulatory bodies prior to becoming effective?

The SEC, Securities and Exchange Commission (SEC). All SROs must first petition the SEC for approval of a new rule. (LO 10.a - Question ID: 1269511)

Uniform Practice Code (UPC)

The UPC established uniform trade practices and other guidelines for broker-dealers to follow when they do business with other member firms, including transaction settlement, good delivery, ex-dates, trade confirmations, and DK procedures.

Louise Ripley is a customer of Seacoast Securities, Inc., a FINRA member firm. While she was away on a long trip, several limit and stop orders were executed. She believes that these orders were not executed properly and cost a significant loss. She has requested that Seacoast make financial amends. Seacoast maintains that it performed correctly and as instructed by Louise. An arbitration panel found Seacoast at fault in one instance and awarded Louise $2,000. Seacoast maintains they did nothing incorrectly. How long does the firm have to file an appeal? A) There is no appeal in an arbitration hearing B) 30 days C) 90 days D) 60 days

There is no appeal to an arbitration award. Such awards must be paid within 30 days. (Question ID: 1271968)

(2) Code of Procedure (COP)

This covers the enforcement of FINRA rules, details punishment of member violations. The DOE (Department of Enforcement) investigates the violations (police)