SIE chapter 9 Security Industry Regulations:

Exemptions from FINRA Registration

-Any person whose functions are solely clerical ministered or not actively engaged in securities business -Persons associated w/ members who effect transactions on the floor of a national securities exchange + are registered as floor members w/ such exchanges

SEC's Record-keeping Requirements for: Correspondence + Communications Customer complaints CTR + SAR Customer account records, blotters, municipal complaints, POAs Business Docs

-Correspondence and communications including emails, instant messages, records of gifts 3 years -Customer complaints 4 years -CTR & SAR 5 years -Customer account records, blotters, municipal complaints, POAs 6 years -Articles of incorporation/partnership agreement, board meeting minutes, stock certificate books, amendments (Business Docs) Life + 3 years

Personal Identifiable Information (PII)

-Drivers license # -Passport # -Street address -Email address

3 Steps involved in money laundering

-Placement -Layering -Integration

Restricted Persons

.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 Defines:

Form U4

.Form used for individual registration .Creates a person's CRD or IARD file .Must be updated annually within 30 days of year end

Form U6

.Form used to report disciplinary action taken by a regulator .Includes serious written customer complaints .Pending items are still filed .If resolved without action, to clear an individual's name, it's reported on a _____ amendment form

Annual conference meeting

Addresses compliance issues that directly impact registered personnel -Required by FINRA -May be conducted in-person or virtual -Must keep a record of attendee names + topics presented

Disclosure Obligations

All required disclosures must be made, before or at the time of the recommendation, about the recommendation and the relationship with the retail customer.

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.

Maintaining Qualifications program (MQP)

Allows RR's up to 5 years to re-register w/ a firm w/o having to retake the associated qualification exams -RR's will be required to complete requirements during the time their licenses are active

Municipal Finance Professional (MFP)

An associated person who solicits business from municipal issuers, renders advice to municipal issuers, or prepares research + reports on municipal issues

Bank Secrecy Act (BSA)

Authorizes treasury to require financial institutions to keep records + file reports about the source, volume, + movement of funds into and out of the country and through domestic financial institutions

Member Firms

Broker-dealer members of FINRA -Must pay required dues, assessments, and other charges -Must agree to comply: .By-Laws + Rules .Regulations + Dispute resolutions .Rulings, Orders, Directions, Decisions issued, and Sanctions imposed

Regulatory Element

Covers relevant rules, regulations, and industry practices; compute based training session administered by FINRA -RR's required to complete on 2nd anniversary of their initial securities registration + every 3 years there after

Municipal securities business

Engaging in negotiated underwriting; the offer or sale of a primary offering of municipal securities on behalf of any issuer, providing financial advice or consultant services to or on behalf of an issuer with respect to a primary offering of municipal securities

Business Continuity Plan

Ensures all customers are provided with a document that explains how a business interruption will be handled -FINRA rule firms must obtain -Each firm should have a plan specific to their business model -Customers provided a copy at account opening

Regulation Best Interest

Established new standards for investment firms when dealing with retail customers 4 Components: -Disclosure obligation -Care Obligation -Conflict of interest obligation -Compliance obligation

Security Investor Protection Act of 1970

Established the Securities Investor Protection Corporation (SIPC)

Conflict of Interest Obligation

Firms must establish, maintain, and enforce written policies designed to address conflicts of interest associated with any recommendations

Compliance Obligations

Firms must establish, maintain, and enforce written policies to achieve compliance with Regulation BI

Customer Complaint

Grievance that is received in writing and must be reported in 30 days

Specially designated nationals (SDNs)

Individuals + companies on OFAC's list; U.S. persons are generally prohibited from dealing with them

placement

Introducing funds to be laundered into the legitimate financial system

Registered Representatives share commissions

Only when both are associated with the same BD or affiliated BD

What WSP must include

Procedures for all of the following: -Review of all transactions -Review + approve new accts. -Review of incoming + outgoing communication -safeguard customer funds + securities -Monitor the outside activities of RR's -Handle customer written complaints -Maintain required books + records

FINRA Rule 3241

Prohibits registered persons from being named as a customer's beneficiary + from holding a position of trust for a customer.

Telephone Consumer Protection Act of 1991 (TCPA)

Protects consumers from telemarketing abuses Requirements concerning Unsolicited calls: -Cold calls done between 8am + 9pm -RR must state name, purpose of call, + provide return # - "Do-not-call" list

Securities Investor Protection Corporation (SIPC)

Protects customer assets in the event BD goes bankrupt -non profit, funded by member assessment -does not protect in event of decline in security value, market loss, fraud, or embezzlement -up to $500k, $250k for cash

Selling away

Registered representatives may not sell investments the broker-dealer does not offer unless they disclose the transaction to their firm. This is an example of

Integration

Reintroducing the now clean funds back into the financial system by providing an apparently legitimate explanation for the illicit proceeds.

Regulation S-P

Requires financial regulators (includes SEC) to implement policies + procedures that restrict a financial institution's ability to disclose non public information about a consumer -Created after Gramm-Leach-Bliley Act was passed

Securities exempt from 5% markup policy

Securities that require a delivery of a prospectus or offering document includes: -IPOs -Municipal bonds -Mutual funds

Layering

Separating the proceeds of criminal activity from their origins through layers of complex financial transactions to hide the source of the funds.

How long a RR has to retake qualifying exam

Terminated RR's will have 2 years to associate w/ a new member -Form U5 must be filed by terminating employee before new employee can file form U4

Principal that applies to member firms

They carry out the supervisory responsibilities relating to solicitation + training. -Required to pass special exams

Reason Regulation BI + Form CRS was established

To bring more transparency to investors regarding their relationships with BD's + investment advisors

Primary Responsibility of all member firms

To supervise the actions of associated persons who represent the firm in its dealings w/ the public.

FINRAs registration Forms

U4- Individual registration; updated annually U5- Terminates an individuals registration; filed within 30 days of termination U6-Reports disciplinary action taken by regulator; includes serious customer complaints

Form U5

Used by employing firm to terminate a registered rep. -Must be filed w/ FINRA -Terminated employee must receive a copy within 30 days

Continuing Commissions

When a RR retires, BD's can pay commissions for activity conducted while employed -Must be a written contract -Can be paid to RR or heirs

Disclosure of Financial Condition

When member firms must disclose their current financial condition every 6 months through their annual + semiannual reports

Disclosure control

a broker-dealer is said to have "control" Relationship w/ a security when they are somehow affiliated w/ the issuer; this must be disclosed w/ investors as it creates a conflict of interest. -Verbal disclosures must be followed-up by written disclosures by settlement date

Fair Credit Reporting Act (FCRA)

a consumer has the right to say "no" to the sharing of certain information with the institution's affiliates or 3rd part affiliates

Restricted Person

a person to whom the underwriter may not sell shares of a new issue to

Retail communications

are any printed or electronic communication directed to more than 25 retail investors in any 30-day period. Is any party other than an institutional investor. Filed with FINRA within 10 business days of first use; not before hand Includes: -Sales literature -Advertising

Institutional Communications

are any printed or electronic communications that are directed only to institutional investors. Includes: -printed media -websites -emails -texts -faxes

Broker-dealers written supervisory procedures (WSP)

based on the types of business the firm is engaged in; includes procedures principals must follow when they carry out their supervisory responsibilities. -Must be reviewed annually

Customer Relationship Summary Form (Form CRS)

briefly describes the firm's relationship with their client's -must be delivered to customer + filed with SEC -Record keeping requirement of 6 years for BDs and 5 years for Investment Advisors

Penny Stocks

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.

Correspondence

consists of written or electronic communication that is targeted to one individual. Additionally, it can be sent to 25 or fewer retail customers within 30 calendar days. Examples include letters, emails, and text messages.

FINRA BrokerCheck

consumers can research current and former BDs and RRs registered with FINRA within the past 10 years. -History of residence + SSN are NOT included

Affinity Fraud

is 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.

Advertising

is a type of 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.

Sales literature

is 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 as well

Independently Prepared Reprint (IPR)

is any reprint or excerpt of any article written by a publisher, if 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.

Fidelity Bond

is blanket coverage purchased by brokerage firms to protect against employee dishonesty (theft or embezzlement) or other acts not covered by SIPC. -must be reviewed annually -120% of firm's min. net capital requirement

Monetary Instrument Log (MIL)

is required for 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. -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.

Suspicious Activity Report (SAR)

is to report known or suspected violations of law or suspicious activity observed by financial institutions subject to the Bank Secrecy Act (BSA) 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) -Must be filed with financial crimes enforcement network within 30 calendar days (cash of 5k or more)

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

Currency Transaction Report (CTR)

must be completed by the financial institution to file reports of deposits, withdrawals, exchanges of currency, or other payments or transfers involving a transaction in cash totaling more than $10,000. -The report must be filed within 15 days

Office of Foreign Assets Control (OFAC)

publishes a list of individuals and companies associated with certain targeted countries. -Must be checked regularly to block or freeze asset's of any specially designated nationals (SDNs)

Regulation S-ID "Red Flags Rule"

requires firms to have reasonable policies and procedures for identifying relevant red flags of possible identity theft

5% markup policy

says an investor should not be charged more than 5% for buying or selling a security Does NOT apply to: -low priced securities -small dollar transactions -difficult to locate securities -additional services in connection with business

Rule G-37

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

Considered Outside Business Activity (OBA)

unless you have provided a written notice, a RR must not be a(n) 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 the firm.