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    Series 24 Exam Study Guide 2022 + Test Bank
    Series 24 Exam Study Guide 2022 + Test Bank
    Series 24 Exam Study Guide 2022 + Test Bank
    Ebook1,076 pages8 hours

    Series 24 Exam Study Guide 2022 + Test Bank

    By The Securities Institute of America

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    About this ebook

    This best-in-class series 24 exam prep study guide and test bank details everything you need to know to ensure your success on the series 24 exam. Written by the experts at The Securities Institute of America, this exam review guide will make you a master of all things tested on your series 24 exam. This textbook provides extraordinary deta

    LanguageEnglish
    PublisherThe Securities Institute of America, Inc.
    Release dateFeb 18, 2022
    ISBN9781937841485
    Series 24 Exam Study Guide 2022 + Test Bank

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      Book preview

      Series 24 Exam Study Guide 2022 + Test Bank - The Securities Institute of America

      Series_24_2022_eCover.jpg

      SECURITIES INSTITUTE SERIES

      The Securities Institute of America proudly publishes world class textbooks, test banks and video training classes for the following Financial Services exams:

      Securities Industry Essentials exam / SIE exam

      Series 3 exam

      Series 4 exam

      Series 6 exam

      Series 7 exam

      Series 9 exam

      Series 10 exam

      Series 22 exam

      Series 24 exam

      Series 26 exam

      Series 39 exam

      Series 57 exam

      Series 63 exam

      Series 65 exam

      Series 66 exam

      Series 79 exam

      Series 99 exam

      For more information, visit the website at www.securitiesCE.com.

      Series 24

      EXAM STUDY GUIDE 2021

      + TEST BANK

      The General Securities Principal

      Examination

      The Securities Institute of America, Inc.

      Copyright © by The Securities Institute of America, Inc. All rights reserved.

      Published by The Securities Institute of America, Inc.

      No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of The Securities Institute of America, Inc.

      Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

      Contents

      About the Series 24 Exam

      About This Book

      About the Test Bank

      About The Greenlight Guarantee

      About The Securities Institute of America

      Chapter 1

      Brokerage Office Procedures

      Hiring New Employees

      Resignation of a Registered Representative

      Registration Exemptions

      Persons Ineligible to Register

      Disciplinary Actions Against a Registered Representative

      Termination for Cause

      Outside Employment

      Private Securities Transactions

      Gift Rule

      Sharing in a Customer’s Account

      Borrowing and Lending Money

      Order Tickets

      Executing an Order

      Becoming a Stockholder

      Violation

      Clearly Erroneous Reports

      Execution Errors

      When-Issued Securities

      Government Securities Settlement Options

      Accrued Interest

      Close Outs

      Customer Confirmations

      Rules for Good Delivery

      Rejection of Delivery

      Delivery of Round Lots

      Reclamation

      Marking to the Market

      Customer Account Statements

      Carrying of Customer Accounts

      Dividend Distribution

      Pretest

      chapter 2

      Record Keeping, Financial Requirements, and Reporting

      Blotters

      General Ledger

      Customer Accounts

      Subsidiary (Secondary) Records

      Securities Position Book (Ledger) Stock Record

      Order Tickets

      Confirmations and Notices

      Monthly Trial Balances and Net Capital Computations

      Employment Applications

      Records Required to Be Maintained for Three Years

      Records Required to Be Maintained for Six Years

      Records Required to Be Maintained for the Life of the Firm

      Requirement to Prepare and Maintain Records Under SEC 17a-3 and 17a-4

      Financial Requirements

      Aggregate Indebtedness

      Haircuts

      Box Counts

      Missing and Lost Securities

      The Customer Protection Rule

      The Early Warning Rule

      FINRA Financial Requirements

      Subordinated Loans

      Temporary Subordination Agreements

      Calculating Net Capital

      Fidelity Bonds

      Pretest

      Chapter 3

      Issuing Corporate Securities

      The Prospectus

      The Final Prospectus

      Free Writing Prospectus

      Providing the Prospectus to Aftermarket Purchasers

      SEC Disclaimer

      Misrepresentations

      Tombstone Ads

      Free Riding and Withholding/FINRA Rule 5130

      Underwriting Corporate Securities

      Types of Underwriting Commitments

      Types of Offerings

      Awarding the Issue

      The Underwriting Syndicate

      Selling Group

      Underwriter’s Compensation

      Underwriting Spread

      Factors That Determine the Size of the Underwriting Spread

      Review of Underwriting Agreements by FINRA

      Underwriter’s Compensation

      Unreasonable Compensation

      Offering of Securities by FINRA Members and other conflicts

      Exempt Securities

      Exempt Transactions

      Crowdfunding

      Rule 147 Intrastate Offering

      Rule 137 Nonparticipants

      Rule 138 Nonequivalent Securities

      Rule 139 Issuing Research Reports

      Rule 415 Shelf Registration

      Securities Offering Reform Rules

      SEC Rule 405

      ADDITIONAL COMMUNICATION RULES

      DPP Roll-UP Transactions

      Pretest

      Chapter 4

      Trading Securities

      Types of Orders

      The Exchanges

      Priority of Exchange Orders

      The Role of the Designated Market Maker

      Crossing Stock

      Do Not Reduce (DNR)

      Commission House Broker

      Two-Dollar Broker

      Registered Traders

      Super Display Book (SDBK)

      Short Sales

      Affirmative Determination

      Regulation SHO

      Rule 200 Definitions and Order Marking

      Rule 203 Security Borrowing and Delivery Requirements

      Threshold Securities

      Block Trades

      Trading Along

      Circuit Breakers

      Limit Up Limit Down (LULD)

      Listing Requirements for the NYSE

      Over-the-Counter/Nasdaq

      High Frequency and Algorithmic Trading

      Market Centers

      SEC Regulation NMS

      SEC Regulation ATS

      Direct Market Access

      Nasdaq International

      Non-Nasdaq OTCBB

      Pink OTC Market

      Third Market

      Nasdaq Market Center for Listed Securities

      Fourth Market

      Nasdaq Listing Standards

      Market Maker Regulations and Responsibilities

      Times for Entering a Quote

      Withdrawing Quotes

      Handling and Displaying Customer Limit Orders

      The Order Audit Trail System (OATS)

      The Manning Rule

      Automated Confirmation System (ACT)/Trade Reporting Facility (TRF)

      ACT Trade Scan

      Nasdaq Trade Reporting Facility (TRF)

      Step Out Trades

      Market Making During Syndication

      Regulation M, Rule 101

      Penalty Bids

      Regulation M, Rule 102

      Regulation M, Rule 103

      Passive Market Makers’ Daily Purchase Limit

      Regulation M, Rule 104

      Syndicate Short Positions

      Regulation M, Rule 105

      Trade Reporting and Compliance Engine (TRACE)

      Broker vs. Dealer

      FINRA 5 Percent Markup Policy

      Markups/Markdowns When Acting as a Principal

      Riskless Principal Transactions

      DOMINATED AND CONTROLLED MARKETS

      Firm Quote Rule

      THE FIRM QUOTE COMPLIANCE SYSTEM (FQCS)

      Trade Complaints

      Between Members

      Rogue Trading Prevention

      Arbitrage

      Pretest

      Chapter 5

      Recommendations to Customers

      Investment Objectives

      Capital Asset Pricing Model (CAPM)

      Risk vs. Reward

      Alpha

      Beta

      Developing the Client Profile

      Suitability standards

      Professional Conduct when Making Recommendations

      Recommending Mutual Funds

      Periodic Payment Plans

      Mutual Fund Current Yield

      Fair Dealings with Customers

      Recommendations to an Institutional Customer

      Short Sales in Connection with Recommendations

      Issuing Research Reports

      Regulation FD

      Recommendations through Social Media

      Pretest

      Chapter 6

      General Supervision

      The Role of the Principal

      Supervisor Qualifications and Prerequisites

      Continuing Education

      Tape Recording Employees

      Heightened Supervisory Requirements

      Information Obtained from an Issuer

      Customer Complaints

      Investor Information

      Member Offices

      Annual Compliance Review

      Business Continuity Plan

      Currency Transactions

      The Patriot Act

      U.S. Accounts

      Foreign Accounts

      Identity Theft

      FINRA Rules on Financial Exploitation of Seniors

      Pretest

      Chapter 7

      Customer Accounts

      Holding Securities

      The Depository Trust Company (DTC)

      Mailing Instructions

      Individual Account

      Joint Account

      Joint Tenants with Rights of Survivorship (JTWROS)

      Joint Tenants in Common (JTIC)

      Transfer on Death (TOD)

      Death of a Customer

      Corporate Accounts

      Trust Accounts

      Partnership Accounts

      Trading Authorization

      Operating a Discretionary Account

      Managing Discretionary Accounts

      Third-Party and Fiduciary Accounts

      Uniform Gifts to Minors Act (UGMA)

      ABLE accounts

      Accounts for Employees of Other Broker Dealers

      Numbered Accounts

      Prime Brokerage Accounts

      Account Transfer

      Margin Accounts

      Guaranteeing a Customer’s Account

      Day Trading Accounts

      Commingling Customer’s Pledged Securities

      Wrap Accounts

      Regulation S-P

      FINRA Rule 3241

      Pretest

      Chapter 8

      Margin Accounts

      Regulation of Credit

      House Rules

      Establishing a Long Position in a Margin Account

      An Increase in the Long Market Value

      Special Memorandum Account (SMA) Long Margin Account

      A Decrease in the Long Market Value

      The Minimum Equity Requirement for Long Margin Accounts

      Establishing a Short Position in a Margin Account

      A Decrease in the Short Market Value

      An Increase in the Short Market Value

      The Minimum Equity Requirement for Short Margin Accounts

      Margin Requirements for Day Trading

      Combined Margin Accounts

      Portfolio Margin Accounts

      Securities Backed Lines of Credit

      Minimum Margin for Leveraged ETF

      s

      Pretest

      Chapter 9

      Investment Companies and Other Products

      Investment Company Philosophy

      Types of Investment Companies

      Open-End vs. Closed-End Funds

      Exchange-Traded Funds (ETF

      s

      )

      Exchange-Traded Notes (ETN

      s

      )

      Etf

      s

      That Track Alternatively Weighted Indices

      Diversified vs. Nondiversified

      Investment Company Registration

      Registration Requirements

      Investment Company Components

      Mutual Fund Distribution

      Selling Group Member

      Distribution of No-Load Mutual Fund Shares

      Distribution of Mutual Fund Shares

      Mutual Fund Prospectus

      Additional Disclosures by a Mutual Fund

      Anti-Reciprocal Rule

      Money Market Funds

      Valuing Mutual Fund Shares

      Changes in the NAV

      Sales Charges for Open-End Funds

      Sales Charges for Closed-End Funds

      Front-End Loads

      Back-End Loads

      Other Types of Sales Charges

      Recommending Mutual Funds

      12B-1 Fees

      Calculating a Mutual Fund’s Sales Charge Percentage

      Finding the Public Offering Price

      Sales Charge Reductions

      Breakpoint Schedule

      Letter of Intent

      Breakpoint Sales

      Rights of Accumulation

      Automatic Reinvestment of Distributions

      Combination Privileges

      Conversion or Exchange Privileges

      30-Day Emergency Withdrawal

      Voting Rights

      Yields

      Portfolio Turnover

      Voluntary Accumulation Plans

      DOLLAR-COST Averaging

      Hedge Funds

      Floating Rate Bank Loan Funds

      Structured Retail Products/SRP

      s

      Real Estate Investment Trusts (REIT

      s

      )

      Non-Traded REIT

      s

      Pretest

      Chapter 10

      Variable Annuities and Retirement Plans

      Annuities

      Annuity Purchase Options

      Accumulation Units

      Annuity Units

      Annuity Payout Options

      Factors Affecting the Size of the Annuity Payment

      Taxation

      Sales Charges

      Variable Annuity vs. Mutual Fund

      Retirement Plans

      Individual Plans

      Individual Retirement Accounts (IRA

      s

      )

      Keogh Plans (HR-10)

      Tax-Sheltered Annuities (TSA

      s

      ) and Tax-Deferred Accounts (TDA

      s

      )

      Corporate Plans

      Employee Stock Ownership Plans (ESOP

      s

      )

      Profit-Sharing Plans

      401(

      k

      )

      s

      and Thrift Plans

      Rolling Over a Pension Plan

      Employee Retirement Income Security Act of 1974 (ERISA)

      The Department of Labor Fiduciary Rules

      Pretest

      Chapter 11

      Securities Industry Rules and Regulations

      The Securities Exchange Act of 1934

      The Securities and Exchange Commission (SEC)

      Extension of Credit

      Trading Suspensions

      Issuers Repurchasing Their Own Securities

      Tender Offers

      SEC Reporting

      The National Association of Securities Dealers (NASD)

      Becoming a Member of FINRA

      Foreign Broker Dealers

      Compensation Paid to unregistered Persons

      Registration of Agents/Associated Persons

      Retiring Representatives/Continuing Commissions

      State Registration

      Retail Communications/Communications with the Public

      FINRA Rule 2210 Communications with the Public

      Broker Dealer Websites

      Blind Recruiting Ads

      Generic Advertising

      Tombstone Ads

      Testimonials

      Free Services

      Misleading Communications

      Securities Investor Protection Corporation Act of 1970

      Customer Coverage

      The Securities Acts Amendments of 1975

      The Insider Trading and Securities Fraud Enforcement Act of 1988

      Firewall

      The Trust Indenture Act of 1939

      Telemarketing Rules

      The Penny Stock Cold Call Rule

      Violations and Complaints

      Resolution of Allegations

      Minor Rule Violation

      Electronic Blue Sheets

      Mediation

      Code of Arbitration

      The Arbitration Process

      Political Contributions

      Investment Adviser Registration

      Investment Adviser Representative

      The National Securities Markets Improvement Act of 1996

      Investment Adviser Registration

      Investment Adviser Capital Requirements

      Exams for Investment Advisers

      Investment Adviser Advertising and Sales Literature

      Investment Adviser Brochure Delivery

      Soft Dollars

      Broker Dealers on the Premises of Other Financial Institutions

      The Uniform Securities Act

      Sarbanes-Oxley Act

      SEC Regulation S-K

      SEC Regulation M-A

      The Hart-Scott-Rodino Act

      FINRA Rule 5150 (Fairness Opinion)

      SEC Regulation S-X

      Pretest

      Answer Keys

      Appendix

      Glossary

      About the Series 24 Exam

      Congratulations! You are on your way to becoming a registered principal, licensed to supervise a broker dealer’s general securities business. The Series 24 exam will be presented in a 150-question multiple-choice format. Each candidate will have 3 hours and 30 minutes to complete the exam. A score of 70% or higher is required to pass.

      The Series 24 is as much a knowledge test as it is a reading test. The writers and instructors at The Securities Institute have developed the Series 24 textbook, exam prep software, and videos to ensure that you have the knowledge required to pass the test and to make sure that you are confident in the application of that knowledge during the exam.

      Taking the Series 24 Exam

      The Series 24 exam is presented in multiple-choice format on a touchscreen computer known as the PROCTOR system. No computer skills are required, and candidates will find that the test screen works in the same way as an ordinary ATM machine. Each test is made up of 150 questions that are randomly chosen from a test bank of several thousand questions. The test has a time limit of 3 hours and 30 minutes, which is designed to provide enough time for all candidates to complete the exam. The Series 24 exam is composed of questions that focus on the following areas:

      How to Prepare for the Series 24 Exam

      For most candidates, the combination of the textbook, exam prep software, and video class instruction proves to be enough to successfully complete the exam. It is recommended that the candidate spend at least 60 to 70 hours preparing for the exam by reading the textbook, underlining key points; watching the video class; and completing as many practice questions as possible. We recommend that a candidate schedule the exam no more than one week after completing the Series 24 exam prep.

      Test-Taking Tips

      Read the full question before answering.

      Identify what the question is asking.

      Identify key words and phrases.

      Watch out for hedge clauses, such as except and not.

      Eliminate wrong answers.

      Identify synonymous terms.

      Be wary of changing answers.

      What Type of Positions May a Series 24 Registered Principal Hold?

      A Series 24 registered principal may supervise and manage a firm and its agents, and conduct a general securities business.

      What Score Is Required to Pass the Exam?

      A score of 70% or higher is needed to pass the Series 24 exam.

      Are There Any Prerequisites for the Series 24?

      A general securities principal must have passed the SIE and one of the following series 7, 16, 57, 79, 82, 86 or 87 exams.

      How Do I Schedule an Exam?

      Ask your firm’s compliance department to schedule the exam for you or to provide a list of test centers in your area. You must be sponsored by a FINRA member firm prior to making an appointment. The Series 24 exam may be taken any day that the exam center is open.

      What Must I Take to the Exam Center?

      A picture ID is required. All other materials will be provided, including a calculator and scratch paper.

      How Soon Will I Receive Results of the Exam?

      The exam will be graded as soon as you answer your final question and hit the Submit for Grading button. It will take only a few minutes to get your results. Your grade will appear on the computer screen, and you will be given a paper copy at the exam center.

      If you do not pass the test, you will need to wait 30 days before taking it again. If you do not pass on the second try, you will need to wait another 30 days. If you fail a third time, you must wait six months to take the test again.

      About This Book

      The writers and instructors at The Securities Institute have developed the Series 24 textbook, exam prep software, and videos to ensure that you have the knowledge required to pass the test and to make sure that you are confident in the application of that knowledge during the exam. The writers and instructors at The Securities Institute are subject-matter experts as well as Series 24 test experts. We understand how the test is written, and our proven test-taking techniques can dramatically improve your results.

      Each chapter includes notes, tips, examples, and case studies with key information; hints for taking the exam; and additional insight into the topics. Each chapter ends with a practice test to ensure that you have mastered the concepts before moving on to the next topic.

      About the Test Bank

      This book is accompanied by a test bank of hundreds of questions to further reinforce the concepts and information presented here. The test bank is provided to help students who have purchased our book from a traditional bookstore or from an online retailer such as Amazon. If you have purchased this textbook as part of a package from our website containing the full version of the software, you are all set and simply need to use the login instructions that were emailed to you at the time of purchase. Otherwise to access the test bank please email your purchase receipt to sales@securitiesce.com and we will activate your account. This test bank provides a small sample of the questions and features that are contained in the full version of the exam prep software.

      If you have not purchased the full version of the exam prep software with this book, we highly recommend it to ensure that you have mastered the knowledge required for your exam. To purchase the exam prep software for this exam, visit The Securities Institute of America online at www.securitiesce.com or call 877‐218‐1776.

      About The Greenlight

      Guarantee

      Quite simply the Greenlight guarantee is as follows:

      Pass our Greenlight exam within 5 days of your actual exam, and if you do not pass we will refund the money you paid to The Securities Institute. If you only have access to the Limited Test Bank through the purchase of this textbook, you may upgrade your online account for a small fee to include the Greenlight exam and receive the full benefits of our greenlight money back pass guarantee.

      About The Securities Institute of America

      The Securities Institute of America, Inc. Helps thousands of securities and insurance professionals build successful careers in the financial services industry every year. In more than 25 years we have helped students pass more than 250,000 exams. Our securities training options include:

      Classroom training

      Private tutoring

      Interactive online video training classes

      State-of-the-art exam prep test banks

      Printed textbooks

      ebooks

      Real-time tracking and reporting for managers and training directors

      As a result, you can choose a securities training solution that matches your skill level, learning style, and schedule. Regardless of the format you choose, you can be sure that our securities training courses are relevant, tested, and designed to help you succeed. It is the experience of our instructors and the quality of our materials that make our courses requested by name at some of the largest financial services firms in the world.

      To contact The Securities Institute of America, visit us on the Web at www.securitiesce.com or call 877‐218‐1776.

      Chapter 1

      Brokerage Office

      Procedures

      Hiring New Employees

      A registered principal of a firm will be the individual who interviews and screens potential new employees. The principal will be required to make a thorough investigation into the candidate’s professional and personal backgrounds. With few exceptions, other than clerical personnel, all new employees will be required to become registered as an associated person with the firm. The new employee will begin the registration process by filling out and submitting a Uniform Application for Securities Industry Registration, also known as Form U4. Form U4 is used to collect the applicant’s personal and professional history, including:

      10-year employment history

      Five-year resident history

      Legal name and any aliases used

      Any legal or regulatory actions

      The principal of the firm is required to verify the employment information for the last three years and must attest to the character of the applicant by signing Form U4 prior to its submission to FINRA. All U4 forms will be sent to the Central Registration Depository (CRD) along with a fingerprint card for processing and recording. The employing firm must maintain written procedures to verify the accuracy of the information on the new hire’s U4 form. A comprehensive review of the information must take place within 30 days of the form being submitted to FINRA. Fingerprint cards may be submitted in hard copy or electronically. The candidate’s fingerprints will be submitted to the FBI for review. If after three good faith attempts to submit fingerprints the FBI determines that the fingerprints are ineligible or cannot be read the candidate will not be asked to submit a fourth set of fingerprints and the FBI will conduct a name check to search the candidate’s history. Any applicant who has answered yes to any of the questions on the form regarding his or her background must give a detailed explanation in the DRP pages attached to the form. The applicant is not required to provide information regarding:

      Marital status

      Educational background

      Income or net worth

      Information regarding the employee’s finances will be disclosed on Form U4 if the associated person has ever declared bankruptcy, if the employee has any unsatisfied judgements or liens, or entered into a compromise with creditors. For example, if a registered person entered into a short sale in a real estate transaction, and the bank forgave any portion of the loan, this must be reported on the employee’s form U4. Interestingly, if the representative is in the process of being foreclosed upon for their primary residence, this action need not be reported by the employee. Any development that would cause an answer on the associated person’s U4 to change requires that the member update the U4 within 30 days of when the member becomes informed of the event. In the case of an event that could cause the individual to become statutorily disqualified, such as a felony conviction or misdemeanor involving cash or securities, the member must update the associated person’s U4 within 10 business days of learning of the event. Additionally, broker dealers are required to perform independent background checks on its employees every 5 years to ensure that no judgements, liens or disclosable events have gone unreported by the registered person. Registered persons who fail to disclose any unsatisfied judgements or liens are subject to significant regulatory action that could result in the person being barred from the industry in extreme cases. If a member firm conducts employee drug testing, and a registered person fails the drug test, this is neither reportable on form u4 nor a reason for statutory disqualification.

      Resignation of a Registered Representative

      If a registered representative voluntarily resigns or has his or her association with a member firm terminated for any reason, the member must fill out and submit a Uniform Termination Notice for Securities Industry Registration, which is known as Form U5. The member must submit the form to FINRA within 30 days of the termination. The member firm is also required to give a copy of the form to the representative upon termination. The member must also state the reason for the termination, either voluntary or for cause. Voluntary terminations cover all terminations that were not the result of the agent being fired for violations of industry or company regulations, such as staff reductions. An associated person’s registration is nontransferable. A representative may not simply move his or her registration from one firm to another. The employing firm that the representative is leaving must fill out and submit a Form U5 to FINRA, which terminates the representative’s registration. The new employing firm must fill out and submit a new Form U4 to begin a new registration for the associated person with the new employer. The new employer is required to obtain a copy of the U5 form filed by the old employing member either from the employee or directly from FINRA within 60 days of submitting the new U4. The previous employer is not required to provide a copy to the new member firm. If the new employing member asks the associated person for a copy of the U5, the member has two business days to provide it. If the member requests a copy of the U5 from the agent who has not received a copy of his or her U5 from the old employer, the agent must promptly request it from the old employer and provide it to the new employer within two business days of receipt. Should an agent’s previous employer discover facts that would alter the information on Form U5, the previous employer must file an amended Form U5 within 30 days and provide a copy to the former employee.

      A representative who leaves the industry for more than 24 months is required to requalify by exam. During a period of absence from the industry of two years or less, FINRA retains jurisdiction over the representative in cases involving customer complaints and violations.

      Registration Exemptions

      The following individuals are exempt from registration:

      Clerical

      Nonsupervising officers and managers not dealing with customers

      Non-U.S. citizens working abroad

      Floor personnel

      Persons Ineligible to Register

      Individuals applying for registration must meet the association’s requirements in the following areas:

      Training

      Competence

      Experience

      Character

      Anyone who fails to meet the association’s requirements in any of the above listed areas may not become registered. An individual may also be disqualified by statute or through rules for any of the following:

      Expulsion, suspension, or disciplinary actions by the Securities and Exchange Commission (SEC) or any foreign or domestic self-regulatory organization (SRO).

      The individual caused the expulsion or suspension of a broker dealer or principal.

      The individual made false or misleading statements on the application for registration on Form U4 or Form B-D.

      Felony conviction or misdemeanor involving securities, bribery, falsification of reports, perjury, or any other felony within the last 10 years.

      Court injunction or order barring the individual.

      A member firm may seek to maintain the employment of or to initially hire a person who has been statutorily disqualified by filing an appeal to FINRA’s registration and disclosure (RAD) department. The appeal may be decided by the department or referred to the National Adjudicatory Counsel (NAC). A hearing may be held by the Statutory Disqualification Committee and appealed to the NAC. The position being applied for under the appeal may only be clerical in nature and may not entail duties of a registered agent. A person who has been convicted of a felony that occurred less than 10 years ago may apply for a waiver to FINRA or the broker dealer’s self-regulatory organization. If a waiver is granted the SRO must notify the SEC of the granting of such waiver. The SEC may overturn or object to the waiver being granted. If the waiver is granted the person covered by the waiver will be subject to heightened supervisory procedures. The heightened supervisory procedures should be designed in writing for the specific individual based on their past or pending violations. As part of the supervisory requirements, the individual subject to statutory disqualification must be assigned to a designated principal.

      Disciplinary Actions Against a Registered Representative

      If another industry regulator takes disciplinary action against a representative, the employing member firm must notify FINRA. Actions by any of the following should be immediately disclosed to the association:

      SEC

      An exchange or association

      State regulator

      Clearing firm

      Commodity regulatory body

      Also immediately reportable to FINRA are any of the following:

      A customer complaint alleging theft, forgery, or misappropriation of customer assets

      Indictment, conviction, or plea of guilty or no contest to a criminal matter

      If the agent becomes a respondent or defendant in a matter in excess of $15,000 or if the firm becomes a respondent or defendant in a matter in excess of $25,000

      An agent is disciplined by the employing member firm or commissions are withheld from an agent, or the agent is fined in either case in amounts in excess of $2,500

      FINRA defines immediate notification for the above listed matters as being within 10 days. All disclosures must include the type of action brought as well as the name of the party bringing the actions and the name of the representative involved. The firm will make the disclosure on Form U4. FINRA will submit disciplinary actions that are taken by FINRA on Form U6 and they will be recorded on the employee’s record. All disciplinary actions as well as final arbitration awards, along with a record of the agent’s registrations and employment history, are available through FINRA’s BrokerCheck program. FINRA members are required to regulate the activities of its associated people and must disclose to the association any action that the member takes against a registered representative. Should a registered representative feel that the information disclosed through the BrokerCheck program is inaccurate the representative may request an amendment to the disclosure by filling out and submitting a BrokerCheck comment form. Additionally, should the CRD contain information that is deemed to be inaccurate, factually impossible or otherwise false, that information may be expunged and permanently removed from the agent’s record.

      Termination for Cause

      A member may terminate a registered representative for cause if the representative has:

      Violated firm policy.

      Violated the rules of the New York Stock Exchange (NYSE), FINRA, the SEC, or any other industry regulator.

      Violated state or federal securities laws.

      A firm may not terminate a representative who is the subject of investigation by any securities industry regulator until the investigation is completed.

      Outside Employment

      If a registered representative wants to obtain employment outside of his or her position with a member firm, the registered representative must first provide written notification to the employing member firm. The member firm may reject or limit the representative’s outside employment. Exceptions to this rule are if the registered representative is a passive investor in a business, is a board member of a nonprofit organization or if the representative owns rental property. Neither the rental property nor the income received is required to be reported. However, if a registered representative obtains a real estate license or acts as a property manager for a large rental property, these would qualify as outside business activities and must be disclosed to the employer as well as on Form U4. Note that the representative need not inform his/her employer regarding outside employment of a spouse or other family members.

      Private Securities Transactions

      A registered representative may not engage in any private securities transactions without first obtaining the broker dealer’s prior written approval. The registered representative must provide the employing firm with all documentation regarding the investment and the proposed transaction. An example of a private securities transaction would be if a representative helped a startup business raise money through a private placement. If the representative is going to receive compensation, the employing member firm must supervise the transaction as if the firm itself executed the transaction. If a representative sells investment products that the employing member does not conduct business in without the member’s knowledge, then the representative has committed a violation known as selling away. An exception to this is if the representative is helping an immediate family member raise money and the representative receives no compensation for his or her role in the private transaction. In this case, the notification and permission of the member is not required.

      Gift Rule

      Broker dealers may not pay compensation to employees of other broker dealers. If a broker dealer wants to give a gift to an employee of another broker dealer, the gift must:

      Be valued at less than $100 per person per year.

      Be given directly to the employing member firm for distribution to the employee.

      Have the employing member’s prior approval for the gift.

      The employing member must obtain a record of the gift, including the name of the giver, the name of the recipient, and the nature of the gift. These rules have been established to ensure that broker dealers do not try to influence the employees of other broker dealers. An exception to this rule would be in cases where an employee of one broker dealer performs services for another broker dealer under an employment contract. The following are also excluded from the $100 limit:

      Occasional meals

      Business-related travel

      Lucite prospectus and awards

      Occasional tickets to sporting events

      A key to determine if tickets are a gift or entertainment is if the person providing the tickets attends the event. If the person attends, it is considered entertainment. Records of gifts and employment contracts must be retained for three years. Prior FINRA approval is not required for employment contracts between members. The gift rule also applies to gifts given to or received from customers of the firm or agent. In the case of a mutual fund holding a seminar, the mutual fund may pay for a registered representative’s travel-related expenses and the seminar must be held at a reasonable location. Spouses of agents are allowed to attend; however, the mutual fund may only pay for the travel expenses of the agent. The agent’s expenses may not be paid for by the fund in exchange for past sales or the promise of sales in the future.

      Sharing in a Customer’s Account

      It is permissible for a representative to maintain a joint account with a customer as long as the firm approves it in advance. The representative may share in the profit and loss of the account only in direct relation to his or her contribution to the account. A registered representative is precluded from sharing in the profit and loss of an account without making any financial contribution to the account. The one exception to this rule is when a registered representative establishes a joint account with an immediate family member. A registered representative may share disproportionately in the profits and losses of an account when the joint account is established with an immediate family member.

      Borrowing and Lending Money

      Borrowing and lending of money between registered persons and customers is strictly regulated. If the member firm allows borrowing and lending between representatives and customers the firm must have policies in place that will allow for the loans to be made. Loans may be made between an agent and a customer if the customer is a bank or other lending institution, where there is a personal or outside business relationship and that relationship is the basis for the loan, or between two agents registered with the same firm. The firm must provide the agent with written preapproval for the loan unless the loan is being made between the agent and an immediate family member or a bank. The approval documentation must be maintained for 3 years from the date when the loan was repaid or 3 years from the rep’s termination from the firm.

      Order Tickets

      Prior to executing a customer’s order the representative must fill out the appropriate order ticket and present it to the trading department or wire room for execution. All order tickets will include:

      Buy or sell.

      Name of security.

      Number of shares or bonds.

      Account name and number.

      Account type (i.e., cash or margin).

      Price and time limits, if any.

      Solicited or unsolicited.

      Discretionary authority exercised or discretionary authority not exercised, if applicable.

      Time stamp when entered, executed, changed, or canceled.

      Executing an Order

      An important part of executing a customer’s order lies in the operational procedures that route the order to the markets and handle trade input functions for the order once it has been executed. The brokerage firm assigns specific departments to handle all of the important functions of trade execution and input. The departments are:

      Order room/wire room

      Purchase and sales department

      Margin department

      Cashiering department

      Order Room/Wire Room

      Once a representative has received an order from a client, the representative must present the order for execution to the order room. The order room will promptly route the order to the appropriate market for execution. Once the order has been executed, the order room will forward a confirmation of the execution to the registered representative and to the purchase and sales department.

      Purchase and Sales Department

      Once the order has been executed the purchase and sales department inputs the transaction to the customer’s account. The purchase and sales department, sometimes called P&S, is also responsible for mailing confirmations to the customer and for all billing.

      Margin Department

      All transactions, regardless of the type of account, are sent through the margin department. The margin or credit department calculates the amount of money owed by the customer and the date when the money is due. The margin department will also calculate any amount due to a customer.

      Cashiering Department

      The cashiering department handles all receipts and distributions of cash and securities. All securities and payments delivered from clients to the firm are processed by the cashiering department. The cashiering department will also issue checks to customers and, at the request of the margin department, will forward certificates to the transfer agent.

      Becoming a Stockholder

      Although some people purchase the shares directly from the corporation when the stock is offered to the public directly, most investors purchase the shares from other investors. These investor-to-investor transactions take place in the secondary market on the exchange or in the over-the-counter market. Although the transaction in many cases only takes seconds to execute, trades actually take several days to fully complete. Let us review the important dates regarding transactions for a regular-way settlement.

      Trade Date

      The trade date is the day when the order is actually executed. Although an order has been placed with a broker, it may not be executed on the same day. Certain types of orders may take several days or even longer to execute. A market order, however, will be executed as soon as it is presented to the market, making the trade date the same day the order was entered.

      Settlement Date

      The buyer of a security actually becomes the owner of record on the settlement date. When an investor buys a security from another investor, the selling investor’s name is removed from the security and the buyer’s name is recorded as the new owner. The settlement date is two business days after the trade date. This is known as T + 2 for all regular-way transactions in common stock, preferred stock, corporate bonds, and municipal bonds. Government bonds and options all settle the next business day following the trade date. Any trade done on a cash basis settles on the same day regardless of the security involved in the transaction. Settlement dates are set by the Uniform Practice Code.

      Payment Date

      The payment date is the day when the buyer of the security has to have the money to the brokerage firm to pay for the purchase. The payment date for securities under the industry rules is four business days after the trade date, or T + 4. Payment dates are regulated by the Federal Reserve Board under Regulation T of the Securities Exchange Act of 1934. Although many brokerage firms require their customers to pay for their purchases sooner than the rules state, the customer has up to four business days to pay for the trade.

      Violation

      If the customer fails to pay for the purchase within the four business days allowed, the customer is in violation of Regulation T. As a result, the brokerage firm will sell out and freeze the customer’s account. On the fifth business day following the trade date, the brokerage firm will sell out the securities that the customer failed to pay for. The customer is responsible for any loss that may occur as a result of the sell out and the brokerage firm may sell out shares of another security in the investor’s account in order to cover the loss. The brokerage firm will then freeze the customer’s account, which means that the customer must deposit money upfront for any purchases in the next 90 days. After the 90 days have expired, the customer is considered to have reestablished good credit and may then conduct business in the regular way and take up to four business days to pay for trades. A customer may get an additional four business days to pay for the trade by requesting an extension. An extension request must be submitted to the NYSE or FINRA before the expiration of the fourth business day. A broker dealer may ignore a call for cash of $1,000 or less.

      Clearly Erroneous Reports

      If a registered representative reports the execution of a trade to a customer and that report is clearly an error, then that report is not binding on the agent or the firm. The customer must accept the trade as it actually occurred, not as it was erroneously reported, so long as the transaction was in line with the terms of the order.

      Execution Errors

      If a transaction is executed away from a customer’s limit price or is executed for too many shares of stock, the customer in not obligated to accept the transaction. A registered representative who is informed of an execution error should immediately inform the principal of the error.

      If the firm has executed an order at the wrong price, size, or side of the market or in the wrong security, the trade should promptly be moved into the firm’s error account and offset as soon as possible. Neither the firm nor the agent may solicit trades to resolve the error and remove it from the error account. However, should the firm receive an unsolicited customer order during the time the trade is in the error account, the firm may use those shares to satisfy the unsolicited order. If the error involved a customer order, the order as it was executed will be journaled into the error account and subsequently posted to the customer’s account in line with the customer’s instructions. Execution errors for too many shares or away from a customer’s limit price are examples of trades that will be moved to the error account. The traders or representatives who move trades to the error account must fully document the error for review by the principal.

      If a customer makes an error entering the terms of an order over an online trading platform, the customer is obligated to accept the execution in line with the terms entered, not as intended. The customer in this case should be advised to execute an order to reverse the trade over the online trading portal.

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