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Series 27 - Other SEC & FINRA Rules

Study notes for FINRA Series 27 Exam
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Insider Trading Regulations: Definition
Investors suffering monetary damage due to insider trading have legal recourse against insider and other party in control of nonpublic information
Insider Trading Regulations: Insider Information
Any info that has not been disseminated or is not readily available, to the general public
Insider Trading Regulations: Tipper
One who gives inside information
Insider Trading Regulations: Tippee
The recipient of inside information
Insider Trading Regulations: Basic Rules
1) Tipper and Tippee are liable
2) Giving info isn't illegal
3) Acting upon it to earn profit or avoid loss is illegal
Insider Trading Regulations: Liability Elements
1) Owes and compromises fiduciary duty to stakeholders
2) Meet personal benefit test (tipper)
3) Clear info was inside or confidential (tippee)
4) Info Material and Nonpublic
Written Supervisory Procedures: Basics
1) FINRA and SROs require written procedures designed to detect and prevent misuse of inside information
Blue Sheets: Definition
SEC sends to member firms that have customers that might be involved
Blue Sheets: Required Info
1) Customer Identity
2) Num of Shares Bought/Sold
3) Timing
4) Derivative Transactions
5) Address and Phone
Insider Trading: Civil Liability
Filed in US District Court by Anyone who bought/sold at same time:
- Maximum Penalty = 3 times profit/loss avoided
- Member firm = treble damages or $1MM
Insider Trading: Statute of Limitations
5 years after violation
B/D Registration & Regulation: Securities Exchange Act of 1934 - Definition
B/D that transact securities business must apply & be registered with the SEC
B/D Registration & Regulation: Securities Exchange Act of 1934 - Sanctions
1) Censure
2) Impose limits
3) Suspend Registration & Licenses (1 yr)
4) Revoke Registration
5) Fine
6) Civil Monetary penalties
B/D Registration & Regulation: Criminal Penalties
1) Up to $1MM
2) Prison up to 10 years
3) Maximum Fine $2.5MM (company)
FINRA: Established
1) Maloney Act of 1938 established the SRO
2) Regulates OTC market in nonexempt securities
3) Oversaw by SEC
FINRA: Regulatory Framework
1) Establish/Interpret Rules
2) Compliance
3) Examine/Investigate
4) Arbitrate
5) Administer Exams
6) Operate CRD
7) Examine Applicants
8) Establish Fees
FINRA: Membership
1) Form NMA, 180 day application review period
2) Must be entitled
3) Form B/D
4) New Member Contact Survey
5) Form U-4
6) Fingerprint Cards
7) Check
FINRA: Form BD Includes
1) Business Plan
2) Organization Chart
3) Financial Projections
4) Supervisory System & Procedures
5) Recordkeeping Systerm
6) FInancial Controls
7) List of Associated Persons
FINRA: Statutory Disqualifications
1) Previously expelled or suspended by SRO
2) Subject to SEC order regarding registration
3) Filed False Application
4) Conviction of money/securities crime in 10 years
FINRA: Membership Agreement - 30 Day Notices
1) Merger with another Member
2) Acquisition by another Member
3) M/A with nonmember
4) Material change in business
5) Change in Equity > 1 person 25% of Equity
FINRA: Membership Agreement - 10 Day Notices
1) Violated Federal Securities Law
2) Subject to Customer Complaint
3) Suspended/Expelled by SRO
4) Criminal Offense
5) Subject to Disqualification
6) Subject to In-house Discipline Actions
FINRA: Form BD Changes
Must be filed within 30 days
FINRA: Fees & Assessments
Members pay annual based on:
- Number of Branches, Reps and Principals
- Annual 0.125pct of OTC Securities Revenue
- Revoked if not paid on timely basis (15 days)
FINRA: Registered Rep Categories
6 - Inv Co Products
7 - All types of Securities
11 - Sales Assistant (can't do suitability)
22 - Direct Participation Programs
55 - OTC Equity Trader
62 - Corporate Securities & Closed-End Funds
FINRA: Principal Registrations
4 - Options
9/10 - Sales
24 - Supervise most activities
26 - Inv Co Products
27 - Financial
39 - Sales of DPP
51 - Muni Fund Securities
55 - Muni Sales
FINRA: Exempt from Registration
1) Clerical
2) Not engaged in IB or Securities Biz
3) Nominal Corporate Officers
4) Exchange Floor or Commodities
FINRA: Form U-4
1) Name, Address Aliases
2) 5 Year Residence History
3) 10 Year Employment
4) Investment Charges History
FINRA: Verification
1) Verify Employment for 3 years
2) Attest to Character and Repuation
3) Changes filed in 30 days after awareness
4) Statutory Disqualification, 10 biz days
FINRA: Form U-5
1) Submitted within 30 days of termination of registered member
2) Provides employee with copy in 30 days
3) Must indicate reason and explanation
4) Amended filed within 30 days of notice
License & Jurisdiction Retention
1) Valid License - registered person maintains status for 2 years
2) License Parking - leads to sanctions
3) CE - w/i 120 days of 2nd anniversary and every 3 years after
4) Firms plan training in-house for registered people
General Supervision: Supervisory System
1) Designate registered principals with authority to enforce written policies
2) Tell FINRA the offices designated as Supervisory Jurisdiction
3) Tell FINRA which principals revview system & take action
General Supervision: Office of Supervisory Jurisdiction
Office at which 1 or more of the following happens:
1) Order Execution or Market Making 2) Formation/Structure of Offerings/Placements 3) Custody 4) New Account Approval 5) Customer Order Review 6) Marketing Approval 7) Branch Supervision
General Supervision: General Principal Responsibilities (RIME)
1) Review Customer Accounts
2) Inspect Branches
3) Maintain Records
4) Enforce Written Policy
General Supervision: Conduct Near Retail Deposits
1) Distinguish Member Services from Retail
2) Written Agreement
3) Clear Signage
4) Disclose: No FDIC, Obligations and Risk
General Supervision: Customer Loans
No associated persons may lend to customers unless:
1) Member has written procedures allowing
2) Customer is a member of the immediate family
3) Customer is a financial institution that provides credit
4) Customer and RP are RPs of same firm
General Supervision: Annual Compliance Meeting
Required annually for registered reps and principals
General Supervision: Internal Inspections
NASD Rule 2010 - OSJs inspected no less than annually.
Branch (Supervise) - Annual
Branch (NonSupervise) - 3 years
Nonbranch - Internal
Records Maintained - 3 years
General Supervision: Compliance Officer
1) Principal must serve as chief compliance officer
2) CEO must certify annually that: (1) firm has a process (2) CEO met with CCO to discuss process
General Supervision: Business Continuity Plan
1) FINRA Rule 4370
2) Each member must create & maintain
3) Plan includes: Data, Communications, Location, Access and Response
General Supervision: Special Procedures
1) Phone Monitor required in 60 days if RP comes from disciplined firm
2) Level A: RRs 5 - 9 Disciplined RRs 40pct+
3) Level B: RRs 10-19 Disciplined RRs 4+
4) Level C: RRs 20+ Disciplined RRs 20pct+
Procedural Rules/Investigations: Code
1) Within filing, Department names hearing officer
2) Respondent has 25 days after receipt to file answer
3) 2nd notice, response within 14 days
Procedural Rules/Investigations: Settlement
1) Must be in writing
2) Describe Rule Violated
3) Describe Acts Committed
4) Consenting Statement
5) Propose Sanctions
Procedural Rules/Investigations: Pre Conference
1) Held within 21 days of receipt of respondent's answer
2) Deals with: Simplification of issues, Lists (Witness and Exhibit), Criteria for Evidence and Hearing Date Determination
Procedural Rules/Investigations: Sanctions
Censure, Fine, Suspend, Expel Membership, Bar and Sanction