SIE Chapter 9: Securities Industry Regulations

Opt-Out Provisions

A firm can provide a toll-free number or a detachable form with a preprinted address so that customers and consumers can easily opt out from the BD disclosing any nonpublic personal information to non-affiliated third parties. The privacy notice must offer a reasonable way for a customer or consumer to opt out. In those states where an opt-in provision has been substituted, the notice must explain that failure to opt-in can result in an adverse action, such as having a loan application denied. Even if a consumer opts out of sharing information with a non-affiliated third party, the firm can still share the consumer's information with affiliate firms. Under the Fair Credit Reporting Act (FCRA), a consumer has the right to say "no" to the sharing of certain information, such as a credit report or application information, with the financial institution's affiliates and with affiliated third parties. It is important to understand that affiliates must have access to certain information such as the data necessary to process transactions or create statements.

Public Appearances

A public appearance is any participation in a seminar, forum (including an interactive electronic forum), radio or television interview, or other public appearance or public speaking activity. Any scripts, presentation materials, or handouts are subject to FINRA communication rules. If the appearance is attended by more than 25 people, it is considered retail communication.

FINRA Retention Requirements

Broker-dealer communications are subject to spot check by FINRA for up to 3 years from last use. Broker-dealers must retain copies of all retail communications, institutional communications, correspondence, independently prepared reprints, research reports, and scripts of public appearances for 3 years after last use.

Gifts

Broker-dealers and RRs are not permitted to give or receive gifts in excess of $100 per person per year if the gift is given in relation to the business of that person's employer. an investment company employee is permitted to take an RR out to dinner at a fine dining restaurant if the bill exceeded of $100, or to a sporting event if the tickets were valued at more than $100. The giving firm employee must attend the event with the receiving RR, and it must be considered a business expense to keep from violating the gift rule. The gift limit also does not apply to gifts with a corporate logo on them. For example, if a registered representative received a gift, such as a picture frame or travel mug with the logo of the mutual fund sponsor, the gift rule would not be violated. Even though certain gifts are allowed, members still need to keep records of all gifts received.

Disclosure of Financial Condition

Member firms are required to disclose their current financial situation to customers every 6 months through their annual and semiannual reports and at any time upon request. If the firm receives a request that is out of the 6-month time frame, they must honor that request and can do so by sending their most recent balance sheet.

Customer Confirmations

The SEC requires that member firms provide their customers with confirmations of each transaction. Confirmations are generally sent on or before the settlement date. The confirmation must include the price and identity of the security, the number of shares, date of transaction, time of execution, capacity of the firm (agent or principal), commission, markup or markdown, price and yield and the settlement date. Confirmations may only be sent to a third party with written consent of the customer.

municipal finance professional (MFP)

The term municipal securities business includes engaging in negotiated underwriting; the offer or sale of a primary offering of municipal securities on behalf of any issuer, such as a private placement; providing financial advice or consultant services to or on behalf of an issuer with respect to a primary offering of municipal securities. The rule does not prohibit those engaging in competitive underwriting services. An MFP is an associated person who solicits business from municipal issuers, renders advice to municipal issuers, or prepares research and reports on municipal issues.

Exam Retake Requirements

There is a 30-day waiting period to retake the exam if a person fails the first or second attempt. After the third attempt, there is a 180-day waiting period for a retake.

Lapse of Registration

Any person whose registration has been revoked or has terminated for a period of 2 or more years immediately preceding the date of a new application, is required to re-qualify by examination. If an associated person is called to active duty in the U.S. Armed Forces, the RR's firm must properly notify FINRA. This situation will be treated differently than other circumstances where RRs leave the industry. While the RR's registration will be considered inactive, it will remain in force during the service, and the RR will not have to re-register when returning to the industry. The associated person's continuing education requirements will also be suspended. The associated person may not perform duties that require registration but may split commissions with another registered representative and receive transaction related compensation, including continuing commissions.

Annual Compliance Meeting

Broker-dealers are required by FINRA rules to conduct an annual compliance meeting for all registered personnel. This meeting may be conducted in person or via video conference, interactive classroom setting, or other electronic means. The firm must address compliance issues that directly impact registered personnel. The firm must keep a record of attendee names and the topics presented.

Outside Business Activities

FINRA regulations require representatives to notify their firms of any outside business activities or private security transactions prior to their start. FINRA states that you may not be an employee, independent contractor, trustee, sole proprietor, officer, director, or partner of another person because of any business activity outside the scope of the relationship with your firm, unless you have provided written notice to your firm. Acting as a trustee for a trust account as a registered representative would have several potential conflicts of interest. Therefore, it is considered an OBA and must be disclosed to the firm in writing and treated as any other outside business activity. You must also disclose any offer to work with any other business or receipt of any form of compensation from a source other than your employing BD firm. These notifications are necessary to prevent misconduct or conflicts of interest that could harm the firm or their customers. Firms may or may not allow these activities. Representatives are required to follow the instructions of their employing firm.

Research Reports

Information compiled by an analyst associated with an investment bank or broker-dealer that focuses on specific securities, or on market sectors, and may contain specific or nonspecific buy, sell, or hold recommendations.

Currency Transaction Report (CTR)

The Currency Transaction Report includes: Identity of the person(s) involved in the transactions, including the Social Security number, date of birth, address, and other described methods of individual identification The identity of the individual conducting the transactions (if different than the person involved in the transaction) The amount and type of transaction(s) The financial institution where the transaction(s) takes place The report must be filed within 15 days

customer

a consumer who has an ongoing relationship with the financial institution. A consumer who obtains products or service from a broker-dealer on a one-time basis is not a customer.

Affinity fraud

a tool used by criminals to gain the trust of victims by claiming to be members of the same identifiable group, such as a religious affiliation, race, national origin, or profession, or to have similar interests. While affinity fraud has always been common, social media gives con artists a rapid and largely anonymous way to identify, and identify with, target groups.

Firm-Specific Do-Not-Call List

A list of any person who previously stated that they do not wish to receive an outbound telephone call made on behalf of the member FINRA established the firm-specific do-not-call requirements. Broker-dealers are required to have a written policy on their cold call procedures and to provide training to their RRs concerning the use of the firm's do-not-call list. BDs are required to maintain an internal "do-not-call" list to track prospects not wishing to be contacted. Firms must update the internal do-not-call list by adding the information from the national list. RRs should consult this list prior to making their first phone call of the day. According to FINRA Rules on telemarketing, those requesting to be placed on a BD's do-not-call list must remain on the list indefinitely. A member making telephone solicitations before 8 a.m. or after 9 p.m. will not be liable under the firm-specific do-not-call rules if the member has an established business or personal relationship with the recipient of the call OR the member received prior written consent from the person to be contacted. Members must honor a person's do-not-call request within a reasonable time from the date the request is made. This period may not exceed 30 days from the date of request.

Private Securities Transactions

Another potential conflict of interest is an RR's involvement in securities transactions that are outside of the normal scope of their duties as a representative. RRs must, at a minimum, notify their supervisors of such activities. Selling compensation involves any compensation paid in connection to a purchase or sale of a security, including commissions, finder's fees, securities, or rights to acquire securities, expense reimbursements, rights of participation in profits, tax benefits, and dissolution proceeds as a general partner. If a BD approves an RR's participation in private securities, and the RR is receiving selling compensation, the transaction will be recorded on the books and records of the firm, and the member firm will be responsible for the supervision of the RR's participation in the transaction as if the transaction were executed on behalf of the BD. In the case of a transaction in which an RR will not receive any selling compensation, a BD will inform the RR that it has received notification and might require the person to meet certain specified conditions in connection with their participation in the transaction.

personally identifiable information (PII)

Any information about an individual maintained by an agency, including (1) any information that can be used to distinguish or trace an individual's identity, such as name, Social Security number, date and place of birth, mother's maiden name, or biometric records; and (2) any other information that is linked or linkable to an individual, such as medical, educational, financial, and employment information." Other examples of PII include, but are not limited to: Driver's license number Passport number Street address Email address Not all PII is created equal, however. Some types of PII would be more damaging to an individual if compromised than other types Firms should make it a point to collect only as much PII as is necessary for their specific needs, and to identify, for each piece of data collected, whether the information poses a low, moderate, or high risk. The firm's security policies and procedures should include more stringent safeguards and restrictions around PII that would potentially have a greater impact on customers if it were compromised.

Member firms

As members, these firms agree to abide by the rules set by FINRA, as well as all federal and state laws regarding the securities industry. Membership must always be kept current, with any changes filed within 30 days. Members must pay required dues, assessments, and other charges, and must agree to comply with all: By-laws and rules Regulations and dispute resolutions Rulings, orders, directions, decisions issued, and sanctions imposed

Identity Theft

Because of the Dodd-Frank Act, the SEC created Regulation S-ID, known as the "Red Flags Rule," which requires firms to have reasonable policies and procedures for: Identifying relevant red flags of possible identity theft, including: Alerts, notifications, or other warnings received from consumer reporting agencies or service providers, such as fraud detection services Presentation of suspicious documents, such as documents that appear to have been altered or forged Presentation of suspicious personal identifying information, such as a suspicious address change Unusual use of, or other suspicious activity related to, a covered account Notice from customers, victims of identity theft, law enforcement authorities, or other persons regarding possible identity theft relating to covered accounts held by the financial institution or creditor Detecting these red flags Responding appropriately to red flags once detected and updating the identity theft program

Regulation S-P

Because of the passage of the Gramm-Leach-Bliley Act, Regulation S-P requires financial regulators, including the SEC, to implement policies and procedures that restrict a financial institution's ability to disclose nonpublic personal information about consumers. Under Securities and Exchange Commission (SEC) Rule 30 of Regulation S-P, members, as well as other financial institutions, are required to adopt written policies and procedures that address the protection of customer information and records. Specifically, the policies and procedures must be reasonably designed to: Ensure the security and confidentiality of customer records and information Protect against any anticipated threats or hazards to the security or integrity of customer records and information Protect against unauthorized access to, or use of, customer records or information that could result in substantial harm or inconvenience to any customer As part of normal business practices, and because of regulatory requirements such as the need to positively identify customers to thwart money launderers and other criminals, financial institutions and financial services firms collect a great deal of potentially sensitive personal information about customers. As a result, firms must take special care to protect customers' personally identifiable information (PII). In Special Publication (SP) 800-122, The National Institute of Standards and Technology (NIST) defines PII as:

Disclosure

Broker-dealers, investment companies, and investment advisers must provide their customers with an initial notice of their privacy policies and practices at the time the relationship is established and an annual notice every year after. The institution must refrain from sharing nonpublic personal information about a consumer with a third party unless the consumer was provided the initial notice, an additional notice describing that practice, the consumer's right to "opt-out" of disclosure to nonaffiliated third parties, and the available methods of opting out.

Correspondence

Correspondence consists of written or electronic communication that is targeted to one individual. Additionally, correspondence can be sent to 25 or fewer retail customers within 30 calendar days. Examples include letters, e-mails, and text messages. For example, a letter sent to a single prospect an RR met at a networking event would be considered correspondence. Correspondence and institutional communications must be reviewed by a principal of the member firm. They do not need to be pre-approved by a principal if they have a training program in place and do not need to be filed with FINRA. They are subject to spot checks by FINRA

Securities Investor Protection Corporation (SIPC)

Created by the Securities Investor Protection Act of 1970 to protect customer accounts in the event their BD goes bankrupt SIPC is a non-profit entity funded by broker-dealer member assessments SIPC provides insurance coverage on customer accounts held in "street name" in the event the customer's cash and securities are liquidated after the broker-dealer declares bankruptcy. An account held in "street name" refers to accounts held under the broker-dealer's name at the firm to facilitate trading activities more effectively for both the firm and customer. The broker-dealer is responsible for retaining a list of all beneficial owners. SIPC offers no protection for the decline in value of a security, market loss, or against fraud or embezzlement. Commodity accounts and personal accounts of senior officers of the firm are not covered under SIPC. Assume cash claims are settled first, followed by securities claims. When a member firm becomes insolvent, SIPC will ask a court to appoint a bankruptcy trustee to oversee the bankruptcy proceedings and the firm is closed. Securities registered in a customer's name are returned to the customer. Securities in street name and cash are distributed to customers on a proportional basis, according to SIPC guidelines. The date on which the broker-dealer is declared insolvent is the date of security valuation for customer claims. SIPC coverage provides each separate customer with protection up to $500,000, of which no more than $250,000 can be for cash claims. Determining what constitutes a separate customer is sometimes difficult to define. Each of the following are considered a separate customer: Individual accounts, regardless of how many are at the firm for that specific customer Retirement accounts, such as IRAs Joint accounts Custodial accounts Each separate customer under SIPC will receive the maximum coverage. If a customer has more invested with the broker-dealer, the investor will become a general creditor of the broker-dealer for the excess portion. All broker-dealers that sell stocks or bonds or clear these transactions must be members of SIPC. Member firms must advise all new customers in writing at the time of opening an account that they may obtain more information and the SIPC brochure by contacting SIPC. They must provide the SIPC website address and telephone number. Members must provide all customers with this same information in writing at least once per year. Member firms must display an official sign showing membership at each location. They cannot imply that SIPC membership confers approval or a recommendation concerning any security. Broker-dealers that sell only mutual funds or variable annuities only are not members. Firms that are not members must disclose that they are not members.

No Trading Ahead of Customers

Customer orders must be placed ahead of firm trading in their own accounts. The only way that a firm could place their order ahead of a customer order is if the customer's order is executed immediately following the firm's order and executed at the same price or better.

consumer

Defined under regulation S-P as an individual (or that individual's legal representative) who obtains, or has obtained, a financial product or service from a financial institution that is to be used primarily for personal, family, or household purposes

The 5% Markup Policy

FINRA and SEC regulations state that commissions and fees charged to customers must be reasonable. FINRA developed the 5% Markup Policy. This policy applies to markups, markdowns, and commissions and applies to broker-dealers acting in a principal or agency capacity. This is only a guideline, and it may be necessary and justified to charge higher amounts in certain circumstances, or 5% may be too high in other circumstances. In most situations, investors should not be charged more than 5% for buying or selling a security. There are several specific occasions that FINRA recognizes as ones that the 5% Policy may not apply. Those include securities that are difficult to locate, very low-priced securities small dollar transactions the offer of additional services in connection with doing business In these cases, higher charges may be justified. Securities that require the delivery of a prospectus or offering document are exempt from this policy. Those would include IPOs, municipal bonds, and mutual funds.

Statutory Disqualification

FINRA has the authority to bar a person from becoming or remaining associated with a FINRA member if the person is or becomes subject to a statutory disqualification. Disqualifying events include, but are not limited to: Securities and theft-related misdemeanor convictions, and all felony convictions for a period of 10 years from the date of conviction Temporary and permanent injunctions (regardless of their age) issued by a court of competent jurisdiction, involving a broad range of unlawful investment activities Expulsions and current suspensions from membership or participation in a self-regulatory organization (SRO) Bars and current suspensions ordered by the SEC or SRO Denials or revocations of registration by the SEC or Commodity Futures Trading Commission (CFTC) Findings that a member or person has made certain false statements in applications or reports made to, or in proceedings before, self-regulatory organizations No member can continue membership if they are disqualified. No person can be associated with a member, continue to be associated with a member, or transfer association to another member if they are disqualified. Resignations from membership in FINRA take effect 30 days after receipt of a letter of resignation. A member that has resigned, or had its membership cancelled or revoked, remains subject to regulation following the filing of a complaint within 2 years after the effective date of resignation, cancellation, or revocation.

Beneficial interest rule

FINRA requires that all associated persons receive written consent from their broker-dealer before opening an account at another firm. Additionally, a person affiliated with an associated person must get prior written consent from the member if that member has beneficial interest in the other person's account. The beneficial interest rule would apply not only to the associated person's account, but also accounts held by: The spouse of the associated person A child of the associated person and/or spouse, if the child lives in the same household as the associated person Any accounts for family members the associated person has control over Any accounts where the associated person provides financial support to the account holder Once the account is open, the employee must notify the carrying firm of their association with their employing member firm. The carrying member must tell the employee that the employing firm will be notified of the account opening and send duplicate account confirmations and statements to the employing broker-dealer upon request. If an associated person had a brokerage account before working for the member firm, the associated person must notify the employer within 30 calendar days of becoming an employee of the firm, and in return must receive written consent from the firm to continue to have the account. A notification must be sent to the carrying member regarding the associated person's new employment with the broker-dealer. Security transactions exempt from this requirement include transactions in unit investment trusts, mutual funds, variable annuities, variable life insurance, municipal fund securities, and Section 529 plans. This exemption includes all accounts, including brokerage accounts, that are limited solely to transactions in these types of securities.

Business Continuity Plans

FINRA rules mandate that member firms create and maintain business continuity plans. The basis of the rule is to ensure that all customers are provided with a document that explains how a business interruption will be handled. Each firm should prepare a plan that is specific to their own business model. The FINRA rule states that the plan must provide, at a minimum, the following: The protection, backup, and recovery of books and records All mission critical systems Financial and operational assessments Alternate communications between customers and the firm, and between the firm and employees Alternate physical location for employees Critical business constituent, bank, and counterparty impact Regulatory reporting Communications with regulators How the firm will assure customers' prompt access to funds and securities in the event the firm is unable to continue business FINRA requires that the plan be delivered to every customer in writing at account opening, available on the firm's website, and mailed to customers if requested. This plan is required to be reviewed annually and though a copy is not required to be sent to FINRA, it must be made available upon request and emergency contact information must be provided.

Sharing Commissions

No member will deal with any non-member, except at the same prices, and for the same commissions, fees, and terms as accorded to the general public. Firms and RRs are prohibited from paying commissions to any individual who is not registered with FINRA. There are no rules prohibiting any FINRA member from granting to any other member of any securities association a dealer's discount, allowance, commission, or special terms. A registered representative may share commissions with another registered representative only when they are both associated with the same broker-dealer or an affiliated broker-dealer. When a registered representative retires from a broker-dealer, it is permissible for the broker-dealer to pay continuing commissions to the retired representative only for business which the representative conducted while employed at the broker-dealer (not new business). There must be a written contract between the representative and the broker-dealer outlining the agreement. These continuing commissions may be paid to the retired registered representative or to the representative's heirs. Under no circumstances may commissions be paid to unregistered persons. Registration is required to effect securities transactions, or attempt to effect securities transactions, including soliciting and taking orders. Member firms are permitted to employ unregistered persons for the purposes of determining whether a prospective customer wants to receive information from the firm, inquire whether a prospect wishes to discuss investment products and strategies with a registered person, and invite individuals to firm-sponsored events at which presentations and account or order solicitation is offered by the licensed personnel.

principal

One of the primary responsibilities of all member firms is to supervise the actions of associated persons who represent the firm in its dealings with the public. A principal is a person involved in the management of the firm's business activities; primarily, they carry out the supervisory responsibilities relating to solicitation and training, and they are required to pass special exams for these positions. Principals must carry out their supervisory responsibilities as described in the broker-dealer firm's written supervisory procedures (WSP). Customer complaints against registered representatives may be a red flag that the representative is acting carelessly or criminally. Potential red flags that may indicate unethical or fraudulent activity include excessive trading (churning), making blanket recommendations (including selling only one share class of mutual funds to all customers), repeated customer complaints of the same or similar nature, and improper suitability determination for the sole purpose of generating revenue (selling only products that generate the highest revenue).

Penny Stock Considerations

Penny stocks are common stocks that are typically priced below $5 and are not actively traded. They are not listed on an exchange or Nasdaq. There are fewer details available to the public regarding these securities and their issuers. Therefore, they are considered to have significantly higher risk than securities that are traded on the exchanges or Nasdaq. This additional risk caused the SEC to create specific rules that broker-dealers and their registered representatives must follow before recommending or selling penny stocks to investors. Customers must be given a risk disclosure document that outlines the risks of investing in penny stocks and questions to ask concerning the stocks being considered Customer must be provided with a current quote on the security being considered Customer must be provided with the information concerning the broker-dealer's compensation in connection with a trade A suitability analysis must be conducted on any "NEW" customer prior to recommending or selling a penny stock that obtains the customer's financial situation and objectives along with their investment experience Customers must be given a report on the analysis and the reasons for determining suitability of the penny stock transaction Established customers are exempt from the suitability analysis requirement Established customers are those with assets held at the firm for more than 1 year or has done at least 3 unsolicited penny stock transactions from separate issuers on 3 separate occasions These rules do not apply to trades with institutional investors, accredited investors, insiders of the issuer, and unsolicited transactions.

Continuing Education

RRs are required to complete FINRA-mandated continuing education (CE). The regulatory element is a computer-based training session administered by FINRA. The training covers relevant rules, regulations, and industry practices. All information in the training module must be satisfactorily reviewed and completed within the allotted time period. RRs are required to complete the regulatory element training on the 2nd anniversary of their initial securities registration, and every 3 years thereafter. RRs failing to complete the training within a 120-day grace period from their anniversary date will have their registration deemed "inactive." RRs with an inactive status may not perform in any capacity that requires a securities registration. They are also prohibited from collecting compensation tied to their registration. The firm element of continuing education is required for any registered person who has direct client contact. FINRA members are required to evaluate the firm's training needs annually and provide training based on those findings. Training should cover areas such as suitability, product information, and regulation. It cannot include sales practices or closing techniques.

Anti-Money Laundering

The USA PATRIOT Act makes it easier to detect, prevent, and prosecute international money laundering and the financing of terrorism by requiring that broker-dealers (and every financial institution) establish an anti-money laundering program that includes, at a minimum: The development of internal policies, procedures, and controls Anti-money laundering compliance program to be supervised by a designated compliance officer An ongoing employee training program An annual independent audit, testing for compliance, conducted by member personnel or by a qualified outside party Money laundering involves 3 independent, and often simultaneous, steps: Placement - Introducing funds to be laundered into the legitimate financial system. Layering - Separating the proceeds of criminal activity from their origins through layers of complex financial transactions to hide the source of the funds. Integration - Reintroducing the now clean funds back into the financial system by providing an apparently legitimate explanation for the illicit proceeds. Proper AML procedures include following the guidelines of the Customer Identification Program whereas financial institutions are required to implement procedures to verify the identity of each customer opening an account, maintain records used to identify the customer, and consult government-provided lists of known or suspected terrorists. Through the CIP, customer verification of name, date of birth, physical address, and tax ID number will all be accomplished. Non-U.S. citizens must provide a passport and U.S. tax identification number to open an account. The Office of Foreign Assets Control (OFAC) publishes a list of individuals and companies associated with certain targeted countries. It also lists individuals and entities, including terrorists and narcotics traffickers, who are not country-specific. Together, these individuals and companies are called specially designated nationals (SDNs) and U.S. persons are generally prohibited from dealing with them. Financial institutions must regularly check OFAC's list, block or freeze assets of any SDNs on the list, and report these incidents within 10 days of occurrence. Each broker-dealer must designate a compliance officer to oversee execution of its customer identification program.

written supervisory procedures (WSP)

The WSP is based on the types of business in which the firm engages and the activities of its RRs. The WSP must include, but is not limited to, procedures for all the following: Review, by a registered principal, of all transactions. There is an exception to this rule, however: if the firm uses a "risk-based review system," enabling the firm to focus on the areas that pose the greatest risks of violation, they are not required to conduct detailed reviews of every individual transaction. Review and approve of new accounts Review of incoming and outgoing written correspondence and internal communications by a registered principal Safeguard customer funds and securities, including procedures for review of transmittal of funds and securities into and out of customer accounts Monitor the outside activities of registered representatives Handle customers written complaints Maintain required books and records The WSP and the businesses in which a BD engages must be reviewed at least annually.

Telephone Consumer Protection Act of 1991

This act was passed in response to public concerns about perceived telemarketing abuses. The rules generally apply to cold calls, which are telephone solicitations initiated by a broker-dealer to encourage an investment in property, goods, or services. No member or person associated with a member can initiate any telephone solicitation in violation of the standards under the Act or established by the member firm. Requirements Concerning Unsolicited Calls All cold calling must be done between the hours of 8 a.m. to 9 p.m. in the customer's time zone RRs must state their name, the name of the firm, the purpose of the call, and provide a return phone number or address where they can be reached Prospects not wishing to be contacted must be placed on a "do-not-call" list

FINRA BrokerCheck Disclosure

Through FINRA BrokerCheck, consumers can to research current and former BDs and RRs registered with FINRA within the past 10 years. The following information is made available to people inquiring over the telephone, in writing, or electronically: Any information available in filed uniform forms, such as Form U4 Approved registrations Arbitration awards Information about qualification exams passed, including the corresponding date Information about the broker's disciplinary history Information about current and former affiliations with member firms Complaints Personal information, such as history of residence and Social Security number, are not included. If a customer cannot access BrokerCheck, a FINRA toll-free number must be provided. Broker-dealers must supply customers with the following information at account opening and least once per calendar year: FINRA's BrokerCheck hotline number FINRA's website address A statement regarding the availability of an investor brochure that includes information describing FINRA's BrokerCheck

Political Contributions

Under Rule G-37, the MSRB addresses political contributions made by the municipal securities industry. This rule specifically prohibits brokers, dealers, or municipal securities dealers from engaging in municipal securities business with an issuer within 2 years after any contribution is made to an official of the issuer by either the broker, dealer, municipal securities dealer, or any municipal finance professional (MFP) associated with these firms. There is one exception to this rule, which is considered a de minimis rule. The prohibition would not apply if the only contributions to officials of issuers are made by MFPs entitled to vote for such officials, provided the contributions are not more than $250 by each MFP to each official, per election.

Customer Protection Rule

Under SEC Rules, broker-dealers must ensure the safe keeping of customer funds and securities does not apply to other broker-dealers, partners, officers, or directors The firm is required to obtain and hold all customer funds and securities in a timely and efficient manner while abiding by all settlement and delivery rules. The firms must also provide customers with their free credit balances with every statement but, at a minimum, quarterly. The concern is the proper segregating, recordkeeping, and accounting of customer funds and securities in situations where the firm can use them in the conduct of their business.

customer complaint

a grievance that is received in writing. If an RR receives a written complaint, they must give it to a manager immediately; it is the manager's responsibility to resolve the complaint. A record of the complaint must be retained for 4 years. If the customer later wants to rescind the complaint, the original must be kept, and a copy returned to the customer Under FINRA rules, certain customer complaints must be reported to FINRA. These complaints need to be reported within 30 days of the discovery of the event. Written customer complaints that involve theft of funds or securities must be reported. Member firms are also required to provide quarterly reports summarizing the customer complaints received by the firm. The report is due on the 15th of the month following the calendar quarter. No complaints, no report is necessary. Statements or correspondence sent to a customer must be sent to the mailing address that was provided by the customer. It cannot be kept in a branch, held, or sent to a different address designated by the RR. This is intended to keep the customer informed of any account activity and to help prevent fraud.

Restricted Person

a person to whom the underwriter may not sell shares of a new issue. Each share of a new issue must be offered to the investment public, and a restricted person is considered an "industry insider," rather than a member of the public. Restricted persons include: Broker-dealers and associated persons (registered representatives) Associated persons' immediate family members, including spouses, parents-, brothers-, and sisters-in law, children, parents, and any person who is at least 25% financially supported by a restricted person Underwriters and their finders and fiduciaries Banks, savings and loans, and insurance companies

Advertising

a type of retail communication that is distributed via mass media; the broker-dealer has no control over who receives this material. Examples include newspaper ads and commercials on TV or radio. FINRA requires all retail communications be filed with FINRA within 10 business days of first use, not beforehand. All retail communications must be approved by a principal prior to first use or at the time of filing with FINRA, whichever is earlier. Records of retail communications must be maintained for 3 years from the date of last use. These records must indicate who prepared and who approved each piece of sales literature and advertising

Sales literature

a type of retail communication where the broker-dealer controls the distribution of the material. It is provided to a targeted audience, such as group emails, text messages, and form letters to more than 25 prospects. Research reports and brochures are other examples of sales literature.

Institutional communications

any printed or electronic communications that are directed only to institutional investors. Such investors include banks, trust companies, insurance companies, investment companies, employee benefit plans with at least 100 participants, government entities, investment advisers, and other broker-dealers and registered persons. This type of communication includes printed media, websites, emails, texts, and faxes. Institutional communications are not required to be filed with FINRA.

Independently Prepared Reprints

any reprint or excerpt of any article written by a publisher, as long as the publisher is not an affiliate of the member using the reprint or an affiliate of any underwriter or issuer of a security mentioned in the reprint. In addition, the article must not have been commissioned by the member, an underwriter, or an issuer of a mentioned security. The member may not materially alter the article, except to make it consistent with a relevant regulation, or to correct factual errors. Independently prepared reprints and public appearances can be classified as retail communications or correspondence depending on the number of recipients of the communications. More than 25 recipients will require principal pre-approval. If 25 or fewer recipients, principal approval is necessary after first use.

Retail communications

are any printed or electronic communication directed to more than 25 retail investors in any 30-day period. A retail investor is any party other than an institutional investor. All individuals, including accredited individuals, are considered retail investors. Retail communications include sales literature and advertising.

Bank Secrecy Act (BSA)

authorizes the Treasury to require financial institutions, including broker-dealers, to keep records and file reports about the source, volume, and movement of funds into and out of the country and through domestic financial institutions. A monetary instrument log is required of wire transfer cash purchases of monetary instruments, such as money orders, cashier's checks, and traveler's checks, totaling between $3,000 and $10,000. This form must be kept on record at the financial institution for 5 years and produced at the request of examiners or auditors to verify compliance.

Fidelity Bonds

blanket coverage purchased by brokerage firms to protect against employee dishonesty (theft or embezzlement) or other acts not covered by SIPC. Proceeds from the bond are used to compensate any affected customers and the broker-dealer. Member firms must review their fidelity coverage annually. Fidelity bond coverage is equivalent to 120% of the firm's minimum net capital requirement.

Securities Investor Protection Act of 1970 (SIPA)

created the Securities Investor Protection Corporation (SIPC) to protect customer accounts in the event their broker-dealer goes bankrupt

Regulation Best Interest (BI)

established new standards for investment firms when dealing with retail customers. The goal was to increase transparency when recommending an investment or investment strategy. It stated that there are 4 components needed to meet the general obligations of Regulation BI. Disclosure Obligation - All required disclosures must be made, before or at the time of the recommendation, about the recommendation and the relationship with the retail customer. This obligation also includes material facts relating to any conflicts of interest involved with the recommendation. Care Obligation - All those making recommendations must use reasonable diligence, care, and skill. Firms must understand the potential risks, rewards, and costs involved with the recommendation. Any recommendations must take into consideration the customer's investment profile and be in the customer's best interest. Conflict of Interest Obligation - Firms must establish, maintain, and enforce written policies designed to address conflicts of interest associated with any recommendations Compliance Obligation - Firms must establish, maintain, and enforce written policies to achieve compliance with Regulation BI

U5

filed when RR leaves the firm If the new hire has previously been employed by another member firm, the principal must also review the applicant's U5 form. used by the employing firm to terminate a registered representative, voluntarily or involuntarily, and discloses the reason(s) for termination. The terminating firm must file the form with FINRA and provide a copy to the terminated employee within 30 days. Failure to notify FINRA could result in a fine. A new employing firm must obtain a copy of Form U5 from the prospective employee or FINRA. Terminated registered persons have 2 years to associate with a new member without having to retake a qualifying exam. If an RR is changing employers, Form U5 must be filed by the terminating employer before a new U4 can be filed with the hiring employer. The registration is held by the firm and is not transferable. Even after a person is terminated, they are still subject to FINRA's discipline for violations that occurred prior to their termination: For 2 years after the effective date of a revocation or cancellation of registration In the case of an unregistered person, for 2 years after the date upon which they ceased to be associated with the member

registration forms (U4)

in reviewing this form, the principal must investigate the good character, business reputation, and experience of every applicant. The supervising principal must review, sign, and date all new hire registration forms (Form U4) and must verify the prior 3 years of employment history. Member firms must also conduct background checks for all new hires. FINRA does not place limits on the scope of the background investigation. The firms must obtain all the necessary information to make an evaluation and may outsource the information gathering to third-party providers. They may also run credit reports or seek reference letters. All background investigations must be in accordance with state and federal laws. Firms must complete the verification process no later than 30 calendar days after filing the U4 with FINRA. Form U4 is the application used to register an associated person with the firm. It includes the following information: Name, address, aliases 5-year residency history 10-year employment history Outside employment, including employment with another broker-dealer Securities-related complaints and disciplinary issues Felony convictions and misdemeanor convictions relating to handling money or securities Financial information, including bankruptcies, that could put investors at risk Form U4 must be amended promptly to reflect any material changes, such as change of name or address, change of employer or outside employment, new felony or misdemeanor convictions, new customer complaints, or changes in relevant financial status. All associated persons filing Form U4 must be given a statement providing detailed disclosures regarding the pre-dispute arbitration clause, and the RR should understand this communication. Any monetary-related securities dispute that an RR may have with their BD, another RR, or a client must be handled by arbitration and not taken to court (litigation). This does not apply to cases involving sexual harassment or employment discrimination. The associated person must also be informed of the details of how the arbitration process works. Uniform forms, such as Form U4, are subject to SEC record retention requirements. The records must be retained by the BD for 3 years total, with the first 2 years in an easily accessible location.

Selling Away

selling investments the BD does not offer only okay if they disclose the transaction to the firm RRs may not even realize they are involved in selling away. They may believe an outside business venture in which they are participating does not involve securities transactions, when, in fact, it might be an unregistered securities transaction. For this reason, RRs should inform their broker-dealers of their involvement in any outside business activity, not just to follow the rules, but also to protect themselves.

Suspicious Activity Report (SAR)

the purpose is to report known or suspected violations of law or suspicious activity observed by financial institutions subject to the Bank Secrecy Act (BSA) red flags include: customer wishes to engage in transactions that are inconsistent with their stated objectives or that lack economic sense. Customers reluctant to reveal information about business activities, or supply unusual or suspicious identification or business documents Customers seem unconcerned about investment risks, commissions, or other transaction costs Customers have multiple accounts under a single name or multiple names for no apparent reason, with numerous inter-accounts or third-party transfers Customers' account is involved in a sudden increase in wire transfer activity Customers' account shows many currency or cashier's check transactions, totaling a significant sum Customers request transaction processing in a manner that avoids the firm's normal documentation requirements Customers structure deposits (known as structuring)—several small deposits in one business day that are close to, equal to, or greater than $10,000 If an employee suspects such activity, a report must be filed with the broker-dealer, who will in turn file with the Financial Crimes Enforcement Network (FinCEN), a branch of the Treasury Department. SARs include detailed information about transactions that appear to be suspicious and must be filed with FinCEN within 30 calendar days if a broker-dealer suspects such activity involving $5,000 or more. Financial institutions and their employees face civil and criminal penalties for failing to properly file suspicious activity reports. Under criminal law, a representative found guilty of violating AML laws may be sentenced to 20 years in prison and receive a fine of twice the amount of funds involved or $500,000, whichever is greater

Customer Relationship Summary Form (Form CRS)

which is a form that briefly describes the firm's relationship with their clients, must be delivered to each retail customer and filed with the SEC. Firms that are registered as both broker-dealers and investment advisers are encouraged to create separate forms that pertain to their relationships under each entity. Firms must provide the information in a specific order using specific headings for each category, which are in question and answer format. The categories include conversation starters for investors. These give customers the precise questions to ask to obtain the desired information. The following lists the categories required and the specific headings that are to be used in each category: -Introduction -Relationship and Services -Fees, Costs, Conflicts, and Standard of Conduct -Disciplinary History -Additional Information IA firms must deliver the document to retail customers before or at the time the advisory contract relationship is established. This has become Form ADV Part 3 and is included with disclosure document delivery requirements. BDs must deliver the document to retail customers at the time of making a recommendation of an account type, securities transaction, or an investment strategy involving securities. The document must be delivered before placing an order or opening an account for a retail customer. Existing retail customers opening new accounts must receive Form CRS prior to the new account opening. Firms must update their form CRS with the SEC within 30 days of the event causing a material change. Customers must receive the updated Form CRS within 60 days. Firms must deliver Form CRS to a retail customer within 30 days of a request. The recordkeeping requirement for Form CRS is 6 years from date of last use for broker-dealers and 5 years for investment advisers.