Series 7 Unit 15
All of the following records must be retained for 3 years except A) fingerprint cards for terminated personnel. B) audio tapes of orders handled by the trading room. C) customer statements. D) copies of retail communication. Explanation Customer statements must be retained for 6 years. The other choices are all 3-year records.
Answer is C E: Customer statements must be retained for 6 years. The other choices are all 3-year records.
Confirmation Contents
A trade confirmation is a document that confirms a trade of a security. It applies if the customer is buying or selling a security. On the face of the confirmation is the amount of money due from or owed to the customer. It will also include the date the money changes hands. That is the settlement date. The basic requirements for confirmation are found in SEC rule 10b-10 and FINRA Rule 2232 Appropriate to the specific trade, those rules require the confirmation to contain: -whether the member acted as agent or principal (capacity) -whether the member acted as dual agent -the source and amount of commission in an agency trade -whether a control relationship exists between the issuer and member -a description of the deferred sales load, if any -the markup or markdown charged retail customers when acting in a principal capacity -the identity of the shares or units as well as the price and number of shares -the total par value of the trade of debt securities -the accrued interest in a trade of debt securities -if the member is a market maker in the security -the date and time of the transaction execution or a statement that it will be furnished upon request -the lower of yield to call or yield to maturity when a transaction in a debt security is done on a yield or dollar basis
A retail customer purchases a municipal bond from your firm. According to Municipal Securities Rulemaking Board rules, the confirmation must disclose which of the following? Where your firm acquired the bonds Whether your firm acted as agent or principal Your firm's address The price your firm paid for the bonds A) II and III B) II and IV C) I and IV D) I and III
Answer is A E: The broker-dealer must always disclose the capacity in which it acted (principal or agent). The confirmation must show the name of the person for whom the trade was executed (the customer). The name, address, and telephone number of the broker-dealer must be shown so the customer may easily contact the firm. The settlement date is also required. The broker-dealer is not required to disclose where it acquired the bonds or the price it paid.
A customer purchases a noncallable municipal bond at a discount in the secondary market. All of the following must be on the customer's confirmation except A) the rating. B) the CUSIP number. C) the capacity in which the dealer acted. D) the yield to maturity.
Answer is A Explanation: The rating is not a required disclosure. Committee on Uniform Securities Identification Procedures (CUSIP) numbers are used in all trade confirmations and correspondence regarding specific securities. Indicating whether the firm acted as a broker or dealer is always required and the yield to maturity would be shown. Why doesn't it say, "the lower of YTM or YTC?" Because a bond purchased at a discount will never have a lower YTC than its YTM.
Paying for a securities transaction with all of the following could raise concern about the possibility of money laundering except A) cash. B) a personal check. C) a travelers' check. D) a postal money order.
Answer is B E: If the amount is large enough, the use of currency to pay for a securities transaction could be a "red flag" indicating potential money laundering. Personal checks are not included as currency for purposes of the money laundering rules because the source of funds is easily traceable.
Under SEC rules, all of the following information must be on a customer confirmation except A) whether the member acted as agent or principal. B) whether the trade was solicited or unsolicited. C) whether the member has a control relationship with the issuer. D) whether the member is a market maker in the security bought or sold.
Answer is B E: Under SEC Rule 10b-10, a customer trade confirmation must include whether the member acted as agent or principal, if the member is a market maker in the security, if a control relationship exists between the member and the issuer. Whether the trade was solicited or unsolicited is not a required disclosure (although many firms do disclose this information). Confusing fact: This information must be on the order ticket, but not on the confirmation.
A member firm's client has issued instructions for the assets held in an account at another member to be transferred to this account. The member firm has received the proper ACATS validation from the carrying firm. Therefore, it is expected that the transfer will be completed within A) five additional business days. B) one additional business day. C) two additional business days. D) three additional business days.
Answer is C E: When using the ACATS system, validation takes place in one business day and the transfer in three business days. Please note the question states that validation has been received. That means the transfer will take place in two more business days (making it a total of three business days). Follow this trail. On Monday, the receiving firm sends the TIF to the carrying firm. On Tuesday, the carrying (delivering) firm validates the TIF and has three business days to make delivery (by Friday). On Wednesday, the validation gets to the receiving firm. Yes, the exam can be that tricky.
Which of the following are required to be given to retail customers at settlement in municipal new issue transactions? Confirmation showing the purchase price Official statement Names of syndicate members with their participation amounts Copy of the agreement among underwriters A) III and IV B) I and III C) II and IV D) I and II
Answer is D E: Municipal Securities Rulemaking Board rules state that a confirmation and an official statement must be sent to the investor no later than at settlement.
Which of the following is not a requirement to be included on a customer confirmation by the Municipal Securities Rulemaking Board (MSRB)? A) The amount of the dealer's markup or markdown B) Whether the trade was made as an agency transaction C) Whether the sale was made from the dealer's inventory D) The location of the trust indenture
Answer is D E: The trust indenture is not required by the MSRB to be included on a customer confirmation. The official statement must include the location of the trust indenture and a statement that bondholders may review it if they choose. MSRB rules require that all confirmations include the firm's capacity in the trade (agent/principal). The amount of the dealer's markup or markdown on a principal trade must be disclosed. The commission on an agency trade must be disclosed.
Appraised Value
At any time, the member may include a per share estimated value reflecting an appreaised valuation, which must be -based on valuations of the assets and liabilities of the DPP or REIT performed at least annually, by, or with the material assistance or confirmation of a third-party -derived from a methodology that conforms to standard industry practice.
AML Compliance Program
BDs are required to establish internal compliance procedures to detect abuses. There are signs--or red flags-- that might suggest the possibility of money laundering. If one is detected, prompt reporting to the appropriate principal is required. Examples of red flags include a customer -exhibiting a lack of concern regarding risks, commissions, or other transaction costs -attempting to make frequent or large deposits of currency or cashier's checks -making a large number of wire transfers to unrelated third parties -engaging in excessive transfers between unrelated accounts -designing currency deposits or withdrawals to fall under the $10,000 cash transaction report filing threshold. This practice is known as STRUCTURING -
6 Year Records
Blotters General Ledger Stock Ledger Customer Ledger Customer Account Records Designated Principals
Updating Customer Account Information
Each retail customer who opens a new account must receive a copy of the account record within 30 days. For updating purposes, the member firm must send a copy of the account record to customers at least every 36 months thereafter. Supervisors always must, however, look for red flags, which may indicate something has changed in the circumstances of the customer. If the customer should notify the firm of any changes to the account record, such as a change in name, address, or investment objectives, the firm must send a copy of the update record within 30 days of receiving notice of the change. Another important update is when the client's employment situation changes. There are two reasons for that. First: It may have an effect on suitability. Promotion may enable a client to be more aggressive. A demotion or unemployment would have the opposite effect. Second: BDs always have to be aware of client's being employed by publicly traded companies. That dramatically increases the possibility of the client acquiring MNPI. That raises a red flag if the client makes a trade in that stock. A BD must retain records of all of the identification information obtained from the customer for 5 years after the account is closed. By contrast, records made about the information verifying a customer's identity have to be retained for only 5 years after the record is made.
Anti-Money Laundering(AML) Compliance
FINRA RULE 3310 requires member firms to develop, implement, and monitor AML programs designed to achieve compliance with the Bank Secrecy Act and related regs. The firm's AML program must be approved in writing by a member of senior management. The rules require member firms to -establish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of transactions that raise a suspicion of money laundering -establish and implement policies, procedures, and internal controls reasonably designed to achieve compliance with the Bank Secrecy Act -designate to FINRA an individual or individuals responsible for implementing and monitoring the day to day operations and internal controls of the program -provide ongoing training for appropriate personnel
Approval and Documentation of Changes in Account Name or Designation
FINRA RULE 4515 says "before any customer order is executed, there must be placed upon the order form or other similar record, the name or designation of the account (or accounts) for which such order is to be executed. No change in such account name(s) or designation(s) shall be made unless the change has been authorized by a registered principal."
Electronic Delivery of Information
FINRA allows for E delivery of confirmations and account statements, to customers as long as certain conditions are met. To do so, the firm must have procedures in place to show that the information sent has been delivered as intended and that the confidentiality and security of personal information are protected. Furthermore, customers must provide written consent to electronic delivery. In addition, a customer who consents to receive information and documents electronically must be provided with the information in paper form, upon request. ***Copies of customer confirmations must be retained for three years.***
Holding Customers' Mail
FINRA rules permit member firms to hold mail for a customer who will not be receiving mail provided that: -the member firm RECEIVES WRITTEN instructions that include the time period and request is being made for up to 3 months (can be granted for longer for reasons such as safety or security concerns but not merely for sake of convenience) -the member firm informs the customer of any alternate methods that the customer may use to receive or monitor account activity such as email or through the member firm's website -the member verifies at reasonable intervals that the customer's instructions still apply During that time, the firm must be able to communicate with the customer in a timely manner to provide important account information. Also the firm must take reasonable action to keep the customer's mail safe and not tampered with. This rule of holding mail is NOT required by BDs but they can offer this as a courtesy for customers.
Disclosures
In January of each year, members must send statements to customers showing a summary of all interest and dividends credited to the account as well as the gross proceeds of all sales made the prior year. The statement is sent to the account owner and to the IRS on Form 1099. With respect to joint accounts, the statement is sent to the person whose Social Security number is on the account. Although the member collects information on all parties in a joint account, each account has a primary Social Security Number. Customer account statements must include a statement advising customers to promptly report any discrepancy or inaccuracy to the brokerage firm and if applicable, the clearing firm.
Customer Account Statements
Members are required to send statements to customers at least QUARTERLY. *Penny stocks, statements are sent monthly even when there is no account activity* Account activity includes, but is not limited to, purchases, sales, interest credits or debits, charges or credits, dividend payments, transfer activity, securities receipts or deliveries, and/or journal entries relating to securities or funds in the possession or control of the member. In addition to the obvious activity just mentioned, there are some other requirements that might be tested. For most securities, the positions are shown at current market value. But, what if the customer's account contains illiquid investments? The FINRA rule specifically refers to DPPs and unlisted REITs. A general securities member must include in a customer account statement a per share estimated value of a DPP or unlisted REIT security, developed in a manner reasonably designed to ensure that the per share estimated value is reliable.
Net Investment
Net investment is based on the "amount available for investment" percentage in the Estimated Use of Proceeds section of the offering prospectus. When the issuer provides a range of amounts available for investment, the member may use the maximum offering percentage unless the member has reason to believe that such percentage is unreliable, in which case the member must use the minimum offering percentage.
For all records 6, 4, or 3 years
Records for the 2 most recent years must be in a readily accessible location.
Confirmation Delivery
SEC Rule 10b-10 includes the requirements for confirmation deliveries. For each transaction, the customer must be sent or given a written confirmation of the trade at or before the completion of the transaction (settlement date)
Record Keeping
SEC Rules 17a-3 and 17a-4 address what records must be prepared by members, when such records must be prepared, and for how long such records must be retained. For retention purposes, records are either lifetime records, 6 month records, or 3 year records. One exception is customer complaints which are 4 year records.
Lifetime Records
Stock Certificate Book Partnership Agreement or Articles of Incorporation Minutes of Board or Partnership Meetings
Currency Transaction Report (CTR)
The Bank Secrecy Act requires BDs to report on Form 112 any currency deposited or received in excess of $10,000 on a single day. This requirement applies to cash transactions used to pay off loans, the electronic transfer of funds, or the purchase of certificates of deposit, stocks, bonds, MFs, or other investments. The act also requires the reporting of wire transfers of $3,000 or more. Though paying for purchased securities with currency is not prohibited, many firms do not permit this. Failure to report can result in fines up to $500,000, 10 years in prison, or both. The record retention requirements for Form 112 are 5 years. CTRs Form 112 must be E-filed within 15 days of receipt of the currency. This rule is part of the regulatory efford to deal with money laundering. The 2 federal agencies empowered to deal with this abuse are the Federal Reserve and the Department of the Treasury.
Transferring Customer Accounts Between Member Firms
The customer must sign an account transfer form to transfer their account (and securities) from one member to another. This form is called the Transfer Initiation Form (TIF). The Automated Customer Account Transfer Service (ACATS) automates and standardizes the procedure for the transfer. The TIF is sent to ACATS by the receiving firm. Wet sig or e sig is fine for authorization. Carrying firm is losing the account to the receiving firm. Once forwarded and received by the carrying firm, it has one business day to validate the securities listed on the TIF or take exception to the transfer instructions. If there are no exceptions, within 3 business days following validation, the carrying firm must complete the transfer of the account. No member may interfere with a customer's request to transfer an account in connection with the change in employment of the customer's registered representative when the account is not subject to any lien for monies owed by the customer or other bona fide claim.
Death of an Account Holder
The firm must cancel all open orders once it learns of the death of the account owner. The account must be marked DECEASED, and freeze the assets in the account until receiving instructions and the necessary documentation from the executor of the decedent's estate. If the account has a 3rd party power of attorney, the authorization is revoked. Discretionary ends at the death of the account owner. Depending on the type of account, the documents necessary to release the assets of a decedent are -a certified copy of the death cert -inheritance tax waivers -letters testamentary For a JTWROS, only a certified death cert needs to be presented for the account to be transferred to the name of the new owner. The account is not frozen when one dies. For TIC, the executor for the decedent needs to present the proper documents before the assets can be released to the estate. W/ regard to partnership accounts, if one partner dies, the member needs written authority from the remaining partners before executing any further orders. This written authorization generally takes the form of an amended partnership agreement.
Customer Confirmations
There are two principal tested items on this topic. What is included on a customer confirmation? When is the confirmation sent?
TTA***
Three basic steps apply at the death of a customer -cancel open orders -freeze the account(mark it deceased) -await instructions from the executor of the estate
When-, As-, and If-Issued Contracts (When-Issued Trades)
Typically, new muni bond issues are sold to investors before the bonds are issued and available for delivery. An investor receives a when-issued confirmation describing the bonds. The confirmatino does not include a total dollar amount or settlement date b/c, until the settlement date is known, the accrued interest can't be calculated to determine the total dollar amount. Once the bonds are issued, the investor receives a new confirmation stating the purchase price and settlement date. A When-Issued transaction confirmation must include: -a description of the security -the purcahse price (dollar bond) or yield (serial bond) -the trade date B/c the settlement date is unknown, a when-issued confirmation for bonds cannot include accrued interest. That means it will not show the total dollar amount due.
3 Year Records
Virtually all other records FOCUS reports Trial balances--prepared at least monthly Forms U-4 and U-5 Fingerprint cards Confirmations of trades Order Tickets Security and cash loan records Failed-to-receive and failed-to-deliver records Long and short securities differences
Following a Registered Representative From One Member Firm to Another
When a rep moves from one firm to another and tries to convince former customers to move with them, FINRA Rule 2273 requires certain disclosures to be made. Those disclosures are provided in educational material outlining things for the customer to consider, including financial incentives that could rise to a conflict of interest for the rep. The FINRA required educational communication highlights the following potential implications of transferring assets to the new firm. -Whether financial incentives received by the rep may create a conflict of interest -that some assets ma not be directly transferrable to the recruiting firm and, as a result, the customer may incur costs to liquidate and move those assets or account maintenance fees to leave them with his current firm. -potential costs related to transferring assets to the recruiting firm, including differences in the pricing structure and fees imposed by the customer's current firm and the recruiting firm -differences in products and services between the customer's current firm and the recruiting firm The rule states that a member who hires a registered person must provide to a form customer, in paper or electronic form, the educational communication when -the member, directly or through that registered person, individually contacts the former customer to transfer assets -the former customer, absent individualized contact, transfers assets to an account assigned to the registered person associated with that member firm The communication is required at the time of contact with a former customer by the registered person or the member firm regarding transferring assets. The delivery of the communication applies for THREE MONTHS following the date the registered person beings employment or associates with a new member. This rule does not apply to institutional accounts, only natural persons.
