Chapter 9: Regulations and Disclosures

Accredited Individual Investor

$200k Income/Yr OR $300k Income/Yr Jointly OR $1 Million Min. Net Worth

9.1 BI & Form CRS - 4 Components to meet Obligations of Regulation BI:

1.) Disclosure Obligation: All req. disclosures made before or at recommendation, incl. material facts on conflicts of interest. 2.) Care Obligation: Understand potential Risk/Reward/Cost, while take into consideration Customer Investment Profile & Best Interests. 3.) Conflict of Interest Obligation: Firms Establish/Maintain/Enforce Conflict of Interest Policy. 4.) Compliance Obligation: Firms Establish/Maintain/Enforce Policy to Comply with Reg BI.

E.) Conflicts of Interest - 1.) Disclosure of Control:

1.) Disclosure of Control: A.) BD has a "Control Relationship" in a Security they're Selling. B.) How? -Examples: -Selling Stock in BD's Parent Company. -BD is somehow affiliated with the Issuer of the Security. C.) BD must disclose "Control Relationship" to the Customer: -At-Least Verbally before the Transaction. -Follow-Up IN WRITING, before or by Settlement Date.

E.) Conflicts of Interest - 2.) Fees for Nondiscretionary Fee-Based Accounts

2.) Fees for Nondiscretionary Fee-Based Accounts: Non-Discretionary Fee-Based Advisory Accounts: A.) Charge customers, based on Assets Under Management. ( % of assets under management) B.) Flat Fee, Regardless of how many transactions. C.) Per Regulations: -Fee must be "Reasonable" -Fee should not greatly differ form advisors w/similar services. -Adviser must disclose method of fees to customer. -Adviser must disclose any conflict of interest in fees. Potential Fee-Related Conflicts of Interest: -Commissions, In-Addition to Advisory Fees. -Soft Dollar arrangements with Broker-Dealers.

E.) Conflicts of Interest - 3.) Soft Dollars - Concept, What it is:

3.) Soft Dollars: An alternative way for Investment Advisors to Pay for, Products & Services, Received from a Broker-Dealer, using Client Commission Revenue. Soft Dollars are Metaphorical, but an Unspoken Currency, just the same. Soft Dollar arrangement: BD provides "Free Services" to an Adviser, with "Expectation" said Adviser, will Direct Trades to BD for execution (+fees/commission). (yeah, suitability concerns, advisor must regularly review)

5% Markup Policy (Secondary Market) and Exceptions:

5% Markup Policy FINRA & SEC want commissions/fees to be "Reasonable". FINRA came up with 5% Markup Policy guideline for BD, Principal or Agency transactions: -markups -markdowns -commissions Exceptions: -Difficult to Locate -Very Low-Priced (over 5% would still be peanuts) -Small Dollar Transactions -If BD offers "Additional Services" ----------------------------------------------------------------- 5% POLICY ONLY APPLIES TO SECONDARY MARKET TRANSACTIONS, not Primary Market. So, reasonably, not for: -IPOs (duh) -Muni Bonds -Mutual Funds -Anything that requires a Prospectus or Offering Document.

9.10 Interstate Activities

9.10 Interstate Activities: Interstate Commerce and the Mail: -Unlawful to use Mail to Sell or Deliver Unregistered Securities. -Sales Materials can't cross state lines, unless a registration statement has been filed, AND they include a Prospectus with them. -------------------------------------------------------------- Fraudulent Interstate Transactions: -Unlawful to engage in transactions that operate as fraud or deceit. -Includes obtaining money or property by untrue statements of material fact or omission of material facts.

9.11 Recordkeeping

9.11 Recordkeeping: If not specified, default is 6 Years. Firms keep most recent 2 years readily available. If electronic storage media, must be: -Non erasable -Non rewritable

Chapter 9: Regulations and Disclosures - 9.12 Disciplinary Actions

9.12 Disciplinary Actions: A.) Reporting Requirements B.) FINRA Methods of Formal Resolution

Chapter 9: Regulations and Disclosures - 9.13 Required Customer Disclosures

9.13 Required Customer Disclosures: A.) Tax Implications for Gifted and Inherited Securities B.) Reinvested Distributions C.) Wash Sale Rule D.) Required Disclosures E.) Conflicts of Interest

9.2 FINRA Rule 3241

9.2 FINRA Rule 3241: Prohibits Registered Persons from, being named a Customer's Beneficiary, OR holding a position of Trust for a Customer. Two Exceptions: 1.) Rep. has Written Prior Permission from Member Firm. 2.) Customer is an Immediate Family Member.

9.3 Financial Exploitation of Specified Adults

9.3 Financial Exploitation of Specified Adults: FINRA Rule 2165 Created to protect: -Senior Adults (65-older) -Mental/Physical Impaired (18-older) from abusive or manipulative actions, of investment professionals. Firms are Required to: a.) Get contact info. of a "Trusted Contact Person". b.) Place Temp. Hold on Suspected Fraud (up to 15 DAYS) (and contact the Trusted Contact Person within 2 days) c.) Extend Hold if Suspected Exploitation (addl. 40 DAYS) (55 days total)

Chapter 9: Regulations & Disclosures - 9.4 Customer Complaints

9.4 Customer Complaints: Customer Complaint Definition: "A grievance that is received in writing" a.) Must be given to manager, Immediately. b.) Must be Resolved by the Manager. c.) Documentation of Complaint Retained for 4 years. d.) Reported to FINRA within 30 days of discovery. e.) Quarterly Reports of complaints due 15th of next month. (Due 15th of following month)

9.5 Communication Rules

9.5 Communication Rules: A.) Institutional Communication B.) Retail Communication C.) Correspondence D.) Public Appearance E.) Approval & Recordkeeping (Applicable to Member Firms) F.) Specific Product Communication Rules

9.6 Networking Arrangements Between Members and Financial Institutions

9.6 Networking Arrangements Between Members and Financial Institutions: Broker-Dealer Conducting Services at a Financial Institution: Must PHYSICALLY: a.) Distinguish BD services, FROM financial institution services. b.) Setting clearly displays name of Broker-Dealer. c.) Be Physically Separate from Retail Banking Activities. Must COMMUNICATE: a.) In writing, before opening the account, disclose, BD services are provided by the MEMBER, NOT the financial institution. b.) Securities are not Insured by FDIC. c.) Business handled with the member is, no obligation/no responsibility/no guarantee, of the financial institution. c.) Investments are subject to: -Investment Risk -Possible Loss of Principal Invested

9.6 Networking Arrangements Between Members and Financial Institutions

9.6 Networking Arrangements Between Members and Financial Institutions: Preface: Recall, through Chase training, though advisors operate at retail Bank locations, the Chase banking company and investment company, are different companies; and when they operate under the same roof, they can't operate in the same spaces, and it must be properly marked and enforced as such. That's what we're diving into now.

9.8 Payments Involving Publications that Influence the Market Price of a Security.

9.8 Payments Involving Publications that Influence the Market Price of a Security: Broker-Dealers can't compensate publishers, for communications to influence the price of a security. EXCEPT: 1.) Communication is Clearly Described as "Paid Advertising" 2.) Communication Describes the Compensation. -How much -How/Why 3.) Communication is a Research Report.

9.9 Tape Recording of Registered Persons

9.9 Tape Recording of Registered Persons: Condition: BD1 had issues: -Expelled from SRO or SEC registration was revoked When BD1's RRs got put on the street, some of them when to work for BD2. So-many, that now, BD2 has a qualifying % of RRs from Bad BD1, to a point where FINRA wants all of the phone calls recorded. BD2 has 60 days, from notification, to start/enforce their call recording plan. BD2 also has to: -File Quarterly Reports with FINRA on it. -Continue the recording program for 3 Years. OR, BD2 can just drop their BD1 Levels, below threshold, within 30 days Notice of bad RRs from BD1.

blotter

A record of daily activity such as orders placed and executed, securities received or delivered, etc.

9.5 Communication Rules - A.) Institutional Communication

A.) Institutional Communication: 1.) Printed or Electronic: -Printed Media -Texts -Faxes -Websites -Emails 2.) Directed ONLY at Institutional Investors: -Banks -Trust Companies -Govt. Entities -Insurance Companies -Investment Advisors -Investment Companies -BD /Reg. Persons -Employee Benefit Plan w/100+ Persons 3.) NOT required to be Filed with FINRA.

9.12 Disciplinary Actions - A.) Reporting Requirements

A.) Reporting Requirements: Per FINRA: a.) Member Firms report events within 30 Days. b.) Report Quarterly c.) Associated person must disclose on U4. d.) If its disclosed on the U4, no need to report to FINRA.

A.) Tax Implications for Gifted and Inherited Securities

A.) Tax Implications for Gifted and Inherited Securities: Inherited Securities: 1.) Investor Inherits Securities from deceased's estate. 2.) Cost Basis is: "Stepped-Up Cost Basis" -Fair Market Value ON Deceased's date of death 3.) Holding Period for Invested Securities ALWAYS Long-Term: -regardless of original investor's holding period. -regardless of beneficiary's holding period. 4.) At SALE, any Capital Gains realized, are considered Long-Term, and Taxable. (15% for most investors)

A.) Tax Implications for Gifted and Inherited Securities -

A.) Tax Implications for Gifted and Inherited Securities: The Donor of Gifted Securities: A DONOR could be subject to gift taxes, if the value of the securities is above the Annual Exclusion amount of $16k. Two Exclusions: -Joint Return -Unified Credit

9.13 Required Customer Disclosures - A.) Tax Implications for Gifted and Inherited Securities

A.) Tax Implications for Gifted and Inherited Securities: The Recipient of Gifted Securities: The cost basis for the recipient, will be the lesser of: -the Donor's original cost basis. -the Market Value, on the Date Given. When Market Value, on Date Given, is Greater than Donor's Original Cost Basis, The holding period for the Recipient, would also be the date Donor purchased the security. When Market Value, on Date Given, is Less than Donor's Original Cost Basis, The holding period would begin, on Date Given

9.7 Employees of Broker-Dealers and SROs Account-Opening Rules

Account Opening Rules, Re-Hash: Per FINRA, If a RR employed with a BD, wants to open an account with non-employing BD, they have to get written consent form their employing BD, First. If anyone close to that BD, like a family member/dependent/same household gets an account, at a BD firm where their associated RR doesn't work, then they have to get written consent, from the employing BD too. Next, The new account holding BD, has to send account confirmations to, the employing BD, UPON REQUEST. (MSRB/CBOE Mandate) ------------------------------------------------------ If a RR or close associate had an account, at another BD, from before the Employing BD, the RR/close associate must notify the employing BD, within 30 days, Then the RR has to get written consent, from the employing BD, to keep the old account, at the old non-employing BD Ta-daa!

Municipal Securities Communications: Stable NAV Municipal Fund Securities:

Additional Disclosure Required for Stable NAV Muni Fund Securities: a.) Security not covered by FDIC. b.) While attempting to maintain $1/share value, it's possible to lose money Example Products: Money Market Funds

9.5 Communication Rules - B.) Retail Communication - Advertising

Advertising: a.) Also a type of Retail Communication. b.) Broker-Dealer has NO Control who receives material. c.) Mass Media, Radio, Newspaper, TV d.) duh, and yeah, goes out to way more than 25 folks. ---------------------------------------------------------------- e.) File with FINRA within 10 Days After First Use. (10 Days Prior if First-Year Member) f.) Approved by Principal at Earlier of Two: -Principal Prior to First Use. -FINRA, at time of filing. (so, it'd be Principal for Regular, FINRA for First-Year) g.) Maintain Records for 3 Years from Last Use.

9.7 Employees of Broker-Dealers and SROs Account-Opening Rules

Associated Person Opening Accounts at Other Firms: (per AD Banker lecture slide) 1.) Permitted by FINRA, but some firms prohibit. a.) Must receive written consent from employing firm. b.) Affiliate of associated person needs written consent, if the member has a beneficial interest, in the account. c.) Beneficial Interest Applies to: -Spouse of associated person. -Child living with associated person. -Accounts of Family Members where Assd. Person has control. -Accts where Associated Person Provides financial support to account holder. 2.) RR Notifies "Other Firm" where the Account is opened. 3.) "Carrying Member" notifies RR's employer. 4.) Employing Firm has Right to receive Duplicate Account Information upon request. 5.) Account Opened Before Employment? -Employer notification within 30 days and written consent.

Associated Person

Associated Person: per the textbook: ANY: -partner -officer -director -branch manager -person under common control -employee of a broker -employee of a dealer. A REGISTERED REPRESENTATIVE IS CONSIDERED AN ASSOCIATED PERSON.

9.12 Disciplinary Actions - B.) FINRA Methods of Formal Resolution - Hearing Panel

B.) FINRA Methods of Formal Resolution Hearing Panel: -Office of Hearing Officers assemble (OHO) -3 Panelists: 1 FINRA, 2 from Member Firms. -Must notify the accused of Hearing 28 days before. a.) Decision of the Hearing Panel: 1. Panel announces findings via written decision. 2. Decision becomes final after 45 days. 3. Decision can be appealed to FINRA's National Adjudicatory Council (NAC). b.) Penalties (Sanctions): TYPES: -Censure (reprimand) -Fine (without $ limit) -Suspension -any other fitting sanction -Expulsion of Member Firm from FINRA. -Bar of RR from associating with a Member Firm. Penalty Notes: 1. Expulsions & Bars are Effective Immediately. 2. All other sanctions become effective within 30 days. 3. FINRA is not a Govt. Entity & can't send violators to prison. c.) Appeals: 1. If accused wants to appeal, have to do it within 25 days. 2. NAC (Nat. Adjudicatory Council) hears it within 45 days. 3. NAC appeals made to the SEC. 4. SEC appeals made to Federal Court.

9.12 Disciplinary Actions - B.) FINRA Methods of Formal Resolution - CoP

B.) FINRA Methods of Formal Resolution Code of Procedure (CoP): -Copy of FINRA manual must be on-site for customer review. (electronic version will do) -Any Time: Violation or Written Complaint, 1.) Notify FINRA's Department of Enforcement. 2.) File Complaint with Office of Hearing Officers (OHO) 3.) Due Process for RR or Firm by FINRA's Code of Procedure. a.) Notification of Complaint: 1. Hearing Panel notifies accused member in writing. 2. Accused member has 25 days to respond. 3. Additional 14 days, if amended. 4. If no response, then second notice. 5. Admission of Guilt, if no response after 2nd notice & 14 days. 6. Accused must request a hearing, or get no hearing. b.) Acceptance, Waiver and Consent: 1. Violation is considered minor. 2. Send letter to accused to waive hearing. 3. Accused has 10 days to accept or ask for hearing. 4. If accepted, National Adjudicatory Council accepts letter. 5. Max $2500 fine for "Minor Rule Violation" (MRV) c.) Scheduling of Hearing: Complaints Are: -Heard before Hearing Officer & Hearing Panel. -Can be heard In-Person, by Complainant or Accused. -Either can be represented by Legal Council.

9.12 Disciplinary Actions - B.) FINRA Methods of Formal Resolution - Code of Arbitration:

B.) FINRA Methods of Formal Resolution: Code of Arbitration: a.) Office of Dispute Resolution: -Handles Money-Related disputes. -remember, CoP handles Disciplinary Action. b.) Arbitration Approaches: -Firm/RR can demand another Firm/RR submit to Arbitration. -Customer can demand a Firm/RR submit to Arbitration. (and can submit complaints to Director of Arbitration) -Firm/RR CANNOT demand a Customer submit to Arbitration. c.) Customer can only submit to Arbitration Voluntarily, by signing a "Predispute Arbitration Agreement". (gives up right to take to court)

9.12 Disciplinary Actions - B.) FINRA Methods of Formal Resolution -

B.) FINRA Methods of Formal Resolution: Code of Mediation: 1.) Parties involved voluntarily sign FINRA's "Mediation Submission Agreement". 2.) Parties attempt to reach a dispute resolution without: -Arbitration -Court 3.) Mediator meet with parities in-person or via conf. call. 4.) Mediator notifies all parties/reps of all communications. 5.) Mediator works with parties to create their own solution. 6.) Mediator helps fashion a Solution Satisfactory to All. Additional Mediation Points: -Mediation is typically cheaper/faster than Arbitration. -Parties may mutually amend ground rules at any time. -Written withdrawal notice can be given to the mediator, any time before settlement.

9.12 Disciplinary Actions - B.) FINRA Methods of Formal Resolution -

B.) FINRA Methods of Formal Resolution: Obtaining an Order of Expungement of Customer Dispute Information from the Central Registration Depository (CRD) System: EXPUNGEMENT: a.) BD or RR has info related to a Customer Dispute, expunged/erased from the CRD. b.) Requires BD/RR to get a Court Order, or an Arbitration Award, permitting the expungement.

9.12 Disciplinary Actions - B.) FINRA Methods of Formal Resolution - Simplified Arbitration:

B.) FINRA Methods of Formal Resolution: Simplified Arbitration: 1.) Claim is $50k or Less. 2.) Only ONE Arbitrator. -customer disputes, by one public arbitrator. -industry disputes, by one nonpublic arbitrator. 3.) No Hearing, Unless: -Public Customer Demands Hearing -Public Customer Consents to Hearing -Arbitrator Calls for Hearing 4.) Decision is Based on Evidence Submitted by 2 parties. 5.) Arbitration Awards are Final & Cannot be Appealed. 6.) Binding Decision rendered within 30 DAYS.

9.13 Required Customer Disclosures - B.) Reinvested Distributions

B.) Reinvested Distributions: 1.) Occurs when capital gain distributions, in a Mutual Fund, Reinvest to Buy New Funds. 2.) Holding Period of Each New Share begins. 3.) Selling both Original & New shares, results in Long-Term & Short-Term gains, in the same transaction. 4.) Regardless if Distributions are, Reinvested OR Taken in Cash, Distributions are Taxable for the Year Received.

9.5 Communication Rules - B.) Retail Communication

B.) Retail Communication: a.) Printed or Electronic (Incl. Sales Literature/Advertising) b.) MORE THAN 25 Retail Investors in 30-Day Period. c.) 2 Types -Sales Literature: -Advertising: d.) File with FINRA within 10 Days After First Use. (10 Days Prior if First-Year Member) e.) Approved by Principal at Earlier of Two: -Principal Prior to First Use. -FINRA, at time of filing. (so, it'd be Principal for Regular, FINRA for First-Year) f.) Maintain Records for 3 Years from Last Use.

Blind Advertisement

Blind Advertisement: -type of generic advertising. -can do no firm name. -called "recruitment ads"

9.5 Communication Rules - F.) Specific Product Communication Rules - Blind Advertisements:

Blind Advertisements: A type of generic advertising. "Recruitment Ads" Permits Firm to omit their name in the advertisement.

9.5 Communication Rules - F.) Specific Product Communication Rules - Bond Fund Volatility Rating

Bond Fund Volatility Rating: Read it for what they are, "Bond/Fund, Volatility Ratings" 1.) Volatility Ratings Consider: a.) Credit quality of fund portfolio holdings. b.) Market price volatility of fund securities. c.) Risks: Interest Rate/ Prepayment/ Currency 2.) Independent Third Party: -describes bond fund NAV sensitivity vs. Market/Economy. -Not described as "risk rating" XXX 3.) Is if filed with FINRA? -Yes -10 days before first use. 4.) How is it presented? -After or With a prospectus. -Only in Supplemental Sales Literature. 5.) What do the Bond fund volatility ratings disclose? a.) Name b.) Current Rating & Date c.) Web Link for Criteria/Methods d.) Statement: "no standard method for ratings" e.) Description of Risks Measured. f.) If entity was compensated for that rating. g.) No guarantee to maintain future ratings.

Broker-Dealer

Broker-Dealer Is a Firm, in the business of executing securities trades, for compensation. A "broker" is a firm acting as an agent, executing orders on behalf of customers, and gets paid commission. A "dealer" is a firm acting as a principal, trading for its own account, and charges a markup on purchases, or markdown on sales, instead of being paid commission.

"Member"

Broker-Dealers are Members of Self-Regulating Organizations (SROs) IE FINRA

9.5 Communication Rules - C.) Correspondence

C.) Correspondence: a.) Targeted to One Individual. b.) 25 Or FEWER within 30 Days.(even one single person) c.) Letters, Emails, Texts d.) FINRA required supervision of incoming/outgoing correspondence, by each firm, per own policy. (MUST AT-LEAST BE SPOT-CHECKED BY PRINCIPAL)

9.13 Required Customer Disclosures - C.) Wash Sale Rule

C.) Wash Sale Rule: 1.) Investor wants to attempt to, take a Loss on a security, while still maintaining ownership. 2.) Investor Sells a Security, for a Loss, then Purchases, "Substantially the Same Security" Back, within 30 DAYS of the Sale. 3.) If within the 30 days, The Investor CANNOT take the Loss on the Sold Securities. 4.) Investor can Increase Per Share Cost Basis, by the Amount of the Loss, though they can't take the loss for tax purposes. 5.) Wash Sale Window: a. 30 days before the sale at a loss. b. Date of the sale itself. c. 30 days after the sale.

Chapter 9: Regulations and Disclosures

Chapter 9: Regulations and Disclosures 9.1 Regulation Best Interest (BI) and Customer Relationship Summary Form (Form CRS) 9.2 FINRA Rule 3241 9.3 Financial Exploitation of Specified Adults 9.4 Customer Complaints 9.5 Communication Rules 9.6 Networking Arrangements Between Members and Financial Institutions 9.7 Employees of Broker-Dealers and SROs Account-Opening Rules 9.8 Payments Involving Publications that Influence the Market Price of a Security. 9.9 Tape Recording of Registered Persons 9.10 Interstate Activities 9.11 Recordkeeping 9.12 Disciplinary Actions 9.13 Required Customer Disclosures

Reminder:

Code of Procedure (CoP) pertains to Violations/Complaints. Code of Arbitration pertains to Monetary-Related Disputes.

9.12 Disciplinary Actions - B.) FINRA Methods of Formal Resolution - Key Concepts

Code of arbitration establishes rules for settling monetary-related disputes in the securities industry. FINRA settles disputes with members and/or RRs using the code of procedure. Code of mediation is an alternative to arbitration in which the parties try to settle the dispute without arbitration or the court system. Mediation proceedings may run concurrently with arbitration proceedings.

D.) Required Disclosures - Commissions, Fees, Markups, and Markdowns

Commissions, Fees, Markups, and Markdowns: Broker: "Agency" capacity Middle-man, matching Buyers & Sellers, f for a Commission, while in Client's best interests. COMMISSION Dealer/Principal: Buy/Sell out of own account/inventory, charging reasonable markup/markdown, also treating clients fairly. MARKUP/MARKDOWN

Conflict of Interest

Conflict of Interest: Broker-Dealer CANNOT, in the Same Transaction, act as Broker (earning a commission), AND act as Dealer (earning a markup).

Retail communication, again

Control, over 50 = Sales Literature Loose, over 50 = Advertising Two Types Retail Communication

Remember:

Cost Basis is is considered the investment capital, and will be returned to the investor, tax-free, when the security is sold. "Tax-Free Return of Capital" Only the amount return above cost basis is taxable.

9.5 Communication Rules - D.) Public Appearance

D.) Public Appearance: ANY: -Seminar -Forum -Electronic Forum -Radio Interview -TV Interview -Public Appearance -Speaking Activity Scripts/Handouts/Print = Subject to FINRA Rules. If appearance attended by, MORE THAN 25 PEOPLE, ITS RETAIL COMMUNICATION

9.13 Required Customer Disclosures - D.) Required Disclosures

D.) Required Disclosures:

9.5 Communication Rules - E.) Approval & Recordkeeping (Applicable to Member Firms)

E.) Approval & Recordkeeping (Applicable to Member Firms): RECAP: a.) Retail Communications: Requires Principal Approval, -Before FINRA Filing -Before First Use Whichever is Earlier. b.) Correspondence: -Can be approved by a Principal, before or after use. (remember, 25 or fewer people, within 30 days) c.) Public Appearances/Research Reports/Prepared Re-Prints: 25/Under: Principal Approval Necessary AFTER FIRST USE. Over 25: Require Principal Pre-Approval (Since considered Retail Communication) ALL COMMUNICATIONS RETAINED FOR 3 YEARS, AND SUBJECT TO FINRA SPOT-CHECKS FOR 3 YEARS, FROM LAST USE.

9.13 Required Customer Disclosures - E.) Conflicts of Interest

E.) Conflicts of Interest: 1.) Disclosure of Control: 2.) Fees for Nondiscretionary Fee-Based Accounts 3.) Soft Dollars

9.5 Communication Rules - F.) Specific Product Communication Rules

F.) Specific Product Communication Rules: 1.) All Retail Communications (Sales Literature/Advertising), must be PRE-APPROVED by PRINCIPAL, and FILED with FINRA, within 10 Days of First Use. IF PERTAINING TO IVESTMENT COMPANIES. 2.) Once the Registration Statement is Filed, Investment Companies Must Furnish the Following: a.) "Statement of Additional Information" -Investment Objectives -Where to Obtain a Prospectus -Risks / Fees -Expenses b.) Any Ads used before POP is determined, must have a Legend stating: "Subject to Completion". 3.)Ads with Performance Data must include: a.) Perf. data is past performance. b.) Past Perf. won't guarantee results. c.) Principal & Return invested will fluctuate in value. d.) Current Perf. could be higher/lower than past quote. e.) Toll-Free Number/Website for current data (unless fresh) 4.) Sales Literature Performance Data Format: -Average Annual Return for last 1yr, 5yr, 10yr (or since started, if younger than the 5yr or 10yr) -Current Yield -Tax-Equivalent Yield

Note from Lecture with AD Banker Slides Q?

FINRA note from last two slide: Investment Analysis Tools: FINRA must be given access to the tool within 10 days of first use. Bond Fund Volatility Rating: Must be Filed with FINRA 10 days prior to first use.

Municipal Securities Communications: Variable NAV Municipal Funds:

For Variable NAV Municipal Funds, the following must be included: a.) Total Annual Operating Expense Ratio. b.) Average Annual Returns, Years: 1/5/10. c.) Yield Quotations, Include Current Yield Quotes.

9.1 BI & Form CRS - Form CRS

Form CRS: Form briefly describes Firm-Client Relationship -Given to Each Customer -Filed with the SEC -Provided Info. in Specific Order -In Question/Answer Format -Includes Conversation Starters Section Headings: Introduction 1.) Relationship and Services 2.) Fees, Costs, Conflicts, and Standard of Conduct 3.) Disciplinary History 4.) Additional Information Form CRS Filing: Investment Advisor: Must deliver to Customer at/before contract establishment. Broker Dealer: Must deliver to Customer: -Before Order or Acct. Opening. -At time of Recommendation. Customer: Receives, when? -Prior to New Acct. Opening. -Within 30 Days of Request. -Within 60 Days of Material Change (Firms w/SEC within 30) Recordkeeping for CRS: -Broker Dealers: 6 yrs from last date of use. -Investment Advisors: 5 yrs from last date of use.

Generic Advertising

Generic Advertising: -not refer to specific investment. -includes name/address of BD. -not filed or pre-approved.

9.5 Communication Rules - F.) Specific Product Communication Rules - Generic Advertising:

Generic Advertising: -Notice -circular -advertisement -Letter -sign -other communication a.) Not a specific security sold by an Investment Company. b.) Only covers: -General types of securities offered by Inv. Co. -General Objectives. c.) Can be an Invitation for more info. d.) Must Contain Dealer-Broker: -name -address -or sponsoring entity info. e.) No FINRA/MSRB/CBOE Filing. f.) No Principal Pre-Approval.

9.5 Communication Rules - F.) Specific Product Communication Rules - Investment Analysis Tool

Investment Analysis Tool: Read it for what it is "Investment, Analysis, Tool" a.) Interactive Tool Produces: -Simulations -Statistical Analysis b.) Likelihood of Investment Scenarios. c.) CAN'T IMPLY FINRA -endorsement -approval -recommendation d.) BD can only provide IF, methods are described. e.) Results Vary / Projections Hypothetical f.) No guarantee of results in future. g.) FINRA must get access, within First 10 Days.

9.5 Communication Rules - F.) Specific Product Communication Rules - Investment Company Rankings in Retail Communications:

Investment Company Rankings in Retail Communications: Broker-Dealers can use Rankings in "Retail Communications" if: -Rankings were created/published by a Ranking Entity (above). -They conform to FINRA requirements. Retail Communications w/Investment Co. Rankings MUST show: a.) Title of Category. b.) # of companies in that category. c.) Name of Ranking Entity. d.) Time period of ranking, and end date. e.) Criteria for Ranking. f.) Explanation of ranking symbols used. g.) state PAST PERFOMANCE IS NO GUARANTEE of results. MUST FILE WITH FINRA 10 DAYS BEFORE USE.

Joint Return

Joint Return Exclusion: If the donor is married, and files a joint return, and the spouse consents, they can double the amount of the exclusion, from $16k, to $32k

Mediator Definition

Mediator: A neutral impartial person, trained in facilitation and negotiation techniques, who assists in finding a resolution to an issue for both parties involved.

Municipal Securities Communications: Municipal Funds Containing Perf. Data

Municipal Funds, containing Performance Data, must also state: a.) Past Perf. won't equal Future Results. b.) Value/Return vary over time. c.) Current Perf. may vary from advertisement. d.) What the Max Sales Load/Fee is. e.) If no Fee listed, advise Perf. would be lower.

Municipal Fund Communication Disclosure Rule:

Municipal Securities Communications, MUST be made through EMMA. (EMMA is Muni Securities Resource Website) They're municipal, so they don't have to follow SEC rules.

Municipal Securities Communications: Specific Product

Municipal Securities Communications: If a SPECIFIC PRODUCT is identified in the ADVERTISEMENT: a.) Must Include where Official Statement can be Obtained. b.) 529 Plans directs customers to their home-state resources.

9.5 Communication Rules - F.) Specific Product Communication Rules - Municipal Securities Communications:

Municipal Securities Communications: Per MSRB, Any type of media, using any form of communication, is considered an "Advertisement" Except: -Official Statements. -Preliminary Official Statements. (but, summaries of the the two, are advertisements) Timeout, that's some picky crap. MUST BE APPROVED BY THE SECURITIES PRINCIPAL, BEFORE FIRST USE. (and kept on file)

9.5 Communication Rules - F.) Specific Product Communication Rules - Municipal Securities Communications:

Municipal Securities Communications: We're bouncing around here, to friggin everything. Let's focus on "Municipal" security "Communication" Rules, for just a minute.

9.6 Networking Arrangements Between Members and Financial Institutions

Note: Any Reg. Rep, working for the Bank AND Broker-Dealer, have to notify the customer, AND, can't conduct Bank and Securities business, at the same time.

Consious Thought

Notice, here, how Inherited Securities Cost Basis, are valued differently, than Gifted Securities Cost Basis.

9.11 Recordkeeping - Retention

RETENTION: 3 Years: -Correspondence and Communication (incl. email, instant msg, records of gifts) 4 Years: -Customer Complaints 5 Years: -CTRs (currency transaction reports) -SARs (suspicious activity reports) -From CRS for IA (cust. relationship summary from Inv. Adv.) 6 Years: -Customer Account Records -Blotters (daily log/journal) -Municipal Complaints -POAs (power of attorney) -Form CRS for BD (cust. relationship summary from Broker-Dlr) Life+3: -Articles of Incorporation -Partnership Agreement -Board Meeting Minutes -Stock Certificate Books -Amendments

Ranking Entity

Ranking Entity: -Independent of the Investment Company & Affiliates. -Provides General Information about Investment Companies to the Public. Broker-Dealers can use Rankings in "Retail Communications" if: -Rankings were created/published by a Ranking Entity (above). -They conform to FINRA requirements.

Registered Representative

Registered Representative An individual who is registered, with a Broker-Dealer, and solicits or conducts securities business.

9.1 Regulation Best Interest (BI) and Customer Relationship Summary Form (Form CRS)

Regulation Best Interest (BI) A.) Created by the SEC. B.) Mandated use of Customer Relationship Summary Form (Form CRS) C.) Establish Standards, to Increase Transparency, between Customers and Firms, D.) 4 Components to meet Obligations of Regulation BI: 1.) Disclosure Obligation 2.) Care Obligation 3.) Conflict of Interest Obligation 4.) Compliance Obligation

Better CRS Summary, b/c we have to know it:

Retail Customers get CRS form: From Advisors: (keep 5 yrs) -before/at time relationship established. From BD: (keep 6 yrs) -at time making recommendation (type/trans./strategy) -before placing order. -before opening account. For Existing retail customers: -before new account opening. Firms update CRS: -with SEC within 30 days material change. -with customer within 60 days. -to customer within 30 days of request.

Retail Investor

Retail Investor: Any party other than an institutional investor. -all individuals -accredited individuals Note: Accredited Individual:

Riskless Principal Transactions / Net Basis Transactions

Riskless Principal Transaction: 1.) Existing Customer Orders. 2.) Dealer Buys Securities to Fill those Pre-Existing Orders. 3.) Dealer Sell to Customers at Same Price, Plus Markup. 4.) Dealer Earns the Markup as Profit. 5.) BD/Firm takes-on No Risk. 6.) Must Disclose Method & Markup to Customer. (cust knows dlr is making a little bit, like a fee) Net Basis Transaction: 1.) Dealer Still Buys/Sells to Fill Customer Orders, but not at the same price, with a small markup. 2.) Here, the Dealer Profits from the Price Difference. 3.) Dealer discloses, this is a Net Basis Trans, to Customer. 4.) Dealer Does NOT disclose the Profit. (cust knows they don't get to know how much is cost them)

Key Concepts

Riskless Principal Transactions: The markup or markdown must be disclosed, and the prices are the same. Net Basis Transaction: The profit is not disclosed, and the prices are different. In both transactions the firm is buying/selling from inventory to fill customer orders.

9.5 Communication Rules - B.) Retail Communication - Sales Literature

Sales Literature: a.) A type of Retail Communication. b.) Broker-Dealer Controls the Distribution to TARGET audience. c.) Group Emails, Text Messages, Form Letters, Brochures, Research Reports. d.) Goes out to MORE THAN 25 PEOPLE ------------------------------------------------------ e.) File with FINRA within 10 Days After First Use. (10 Days Prior if First-Year Member) f.) Approved by Principal at Earlier of Two: -Principal Prior to First Use. -FINRA, at time of filing. (so, it'd be Principal for Regular, FINRA for First-Year) g.) Maintain Records for 3 Years from Last Use.

Key Concepts

Sales literature and advertising pertaining to investment companies must be filed with FINRA within 10 days of first use. Sales literature and advertising to investment companies and containing performance rankings must be filed with FINRA 10 prior to first use.

9.5 Communication Rules - Social Media / Digital Communications

Social Media/Digital Communication Sites, used for prospecting/investment business communication, ARE CONSIDERED PUBLIC APPEARANCES. Personnel must be monitored, if permitted. Must comply with FINRA and Firm procedures.

9.5 Communication Rules - Static vs. Interactive Communications

Static Communications: -Not Interactive -No Real-Time Dialogue -Must be Principal-Approved -Requires FINRA Filing, if Making Recommendation. Interactive Communications: -Real-Time with 3rd Parties. -No Principal Approval -No FINRA Filing, if following supervisory procedures.

Wash Sale - Substantially the Same Security:

Substantially the Same Security: A security that is substantially the same as the security sold at a loss can include: 1.) Same mutual fund ownership. 2.) Same underlying common stock. 3.) Anything convertible into a corporation's common stock: Not PREFERRED STOCK -Convertible Preferred Stock -Convertible Bonds -Warrants -Rights -Options

D.) Required Disclosures - Tax Considerations

Tax Considerations: 1.) BDs & RRs have to make clients aware of any tax considerations & possible tax events. (but not give tax advice) a.) How Capital Gain Taxes are calculated for different events. (purchase/sale of securities, gifted, inherited) b.) Dividend Tax, Ordinary vs. Qualified. c.) how Interest Income is Taxed. d.) Tax impact on fund exchange/switch. e.) "Tax Advantaged" Investments (tax-exempt vs tax-deferred) f.) Advantages/Disadvantages of Accounts. (UGMAs, IRAs, 529 Plans, Qual. Ret. Plans, Estate Accounts)

Key Concepts

The 4 components to meet the general obligations of Regulation Best Interest include: 1.) Disclosure Obligation 2.) Care Obligation 3.) Conflict of Interest Obligation 4.) Compliance Obligation

9.5 - C.) Correspondence - Review of Customer Correspondence

Transactions for customers, cannot be completed, without written customer authorization, on a negotiable instrument. a.) Bank Check b.) Bank Draft c.) Signed Letter of Instruction Transaction Instructions On-Record, AT-LEAST 3 YEARS.

Unified Credit

Unified Credit Exclusion: A.) A unification of: -Gift Tax Credits -Estate Tax Credits B.) Current Limit is $12 Million: -Over a Lifetime OR -Upon death C.) Any gifts given, above the annual gift tax exclusion amount, that year, reduces the unified credit, by that amount. D.) Upon death, any amount above that net $12 Mil unified credit cap, could be subject to Estate Tax, up-to 40%.

Unlimited Marital Deduction

Unlimited Marital Deduction: Spouses can pass unlimited value of assets, to each other, upon death, and not be subject to estate taxes.

9.5 Communication Rules - F.) Specific Product Communication Rules - Variable Product Advertising - Q

Variable Product Advertising: 1.) Specify, Life Insurance OR Annuity 2.) Give No Impression of XXX Short-Term Investment XXX 3.) Make Aware of Tax Consequences. 4.) Clear on Penalty/Impact of Early Redemption. 5.) Unrealistic Claims Prohibited. 6.) Illustrations for VARIABLE LIFE policies permitted: -Hypothetical Returns (state it) -Max Growth of 12% Illustrated vs. 0% Growth scenario -CAN'T BE COMPARED TO ANY OTHER PRODUCT.

Key Concepts

Variable policy illustrations are only permitted if the max growth rate shown does not exceed 12% AND it shows 0% growth rate scenario.

Mind Note Checkpoint

We're moving from Arbitration to Mediation, Now.

Key Concepts

When BDs can control who receives a retail communication, it is defined as sales literature. If the BD cannot control who receives the material, the retail communication is defined as advertising.

Key Concepts

When a wash sale occurs, the investor: - Cannot take the loss in the current tax year. - Will increase the cost basis on the new purchase by the loss per share.

A.) Tax Implications for Gifted and Inherited Securities - Key Concepts

When securities are received a a gift, the recipient of the gift retains the same cost basis as the donor or market value of the date of gift, whichever is less. The donor may have gift tax liability. When securities are inherited, the recipient has a cost basis valued at fair market value on the descendants date of death. The holding period is always long term.

Code of Arbitration - Arbitration Panel / Statute of Limitation / Settlement

a.) If Dispute Involves a Customer: -Panel of 3 majority must be civilians (not in securities industry) b.) If Dispute Between Industry Members: -Panel of 3 majority must be Affiliated/Retired from Securities Industry. c.) Statute of Limitations for complaint/arbitration is 6 YEARS. d.) After Panel Hearing, Awards must be Paid within 30 DAYS. (interest & penalties apply after 30 days) e.) "Determinations through the Code of Arbitration are final and binding. They cannot be appealed"

Current Yield

the amount of interest earned on a bond, expressed as a percentage of the bond's current market price

Tax-Equivalent Yield

the rate of return that a taxable bond must offer to equal the tax-exempt yield on a municipal bond. Tax equivalent yield= tax free municipal bond yield/ 1- tax rate