Series 99 – Flashcard
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NYSE was founded in
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1792
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Securities Act of 1933
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Covered new issue in primary markets; IPOS; Full Disclosure; Prospectus; Red Herring
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Securities Act of 1934
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Covered trading in secondary markets. Formed the SEC; Antifraud Rules; Margin: Regulation T; Registers People (Exchanges, Firms, Individuals).
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Maloney Act of 1938
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Enabled the creation of non-exchange SROs.
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Item
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Date/Number
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CHAPTER 1 - OVERVIEW OF REGULATION
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NYSE was founded in
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1792
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Securities Act of 1933
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Covered new issue in primary markets; IPOS; Full Disclosure; Prospectus; Red Herring
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Securities Act of 1934
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Covered trading in secondary markets. Formed the SEC; Antifraud Rules; Margin: Regulation T; Registers People (Exchanges, Firms, Individuals).
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Maloney Act of 1938
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Enabled the creation of non-exchange SROs.
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NASD
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Created in 1938 for NASD to act as SRO for OTC market.
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Trust Indenture Act of 1939
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Added security for Bond investors which requires and agreement (indenture) between the issuing corporation and the trustee who acts on the behalf of the bond owners.
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The Investment Company Act of 1940
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Covers companies that formed to pool investor's money, e.g., Open-end Investment companies called Mutual Funds; More than 100 shareholders; Minimum $100,000 in assets; Annual reports to SEC; Semiannual reports to Shareholders.
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The Investment Advisors Act of 1940
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Regulate firms that sell their investment advice for a fee; includes managers of Wrap accounts where a single fee is paid for investment advice and transaction costs; ABC Test (Advice, Business, Compensation).
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SIPA - Securities Investor Protection Act of 1970
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Covers industry funded insurance which covers the customers of BDs (Brokers /Dealers) where a BD might go bankrupt; $500,000 coverage per Separate Customer; $250,000 limitation on Cash Coverage; Industry-Funded; Not part of U.S. government.
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ERISA - Employee Retirement Income Security Act of 1974
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Provides standards for funding, vesting, fiduciary responsibilities of pension and 401(K) plans.
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MSRB (Municipal Securities Rulemaking Board) of 1975
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To write rules and regulation for the municipal markets.
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Insider Trading Sanctions Act of 1984
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See below.
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Insider Trading Act of 1988 (ITSFEA)
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In response to 1980 scandals of Insider Trading of material and non-public information. No penalties existed before; now (a) Criminal from DOJ - $5mm fines and/or 20 years imprisonment; (b) Civil from SEC - Treble (3x) damages on amount gained or loss avoided; disgorgement of profits; covers both Tippers and Tippees - any person can be violated of this law; (c) Bounties - May not exceed 10% of the penalty.
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TCPA - Federal Telephone Consumer Protection Act of 1991
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Discourage cold callings of consumers and those who calls must maintain a Do NOT Call list. Can call only from 8 am to 9 pm in customer time zone
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Penny Stock Rule of 1991
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Defined Penny Stocks to be less than $5 and requires a firm to have a signed disco lure document from buyers stating they understand the risks.
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The USA Patriot Act of 2001
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"Covers Anti-Money Laundering
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CTRs: $10,000 Currency Transaction Reports
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SARs: Suspicious Activity Report
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CIP Procedures"
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FINRA
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"Created in 2007 by merging NYSE and NASD regulatory functions.
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FINRA is the primary SRO for the securities industry."
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Balance sheet has to be created before filing for IPO registration
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90 days
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Disclose share ownership of offers and underwritings as part of pre-filing in IPO
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If they own at least 10% of the securities
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IPO cooling off period after registration process
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20 days
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Effective Date in IPO
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20 days after the last amendment in response to a deficiency letter as part of the IPO
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Public Offering Price (POP) in IPO
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Set in the morning of the effective date and also called the Post Effective Date
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In IPO purchaser must be delivered the final Prospectus
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No later than the time a sale is confirmed
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"Prospective Delivery Requirements
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(1) Non-reporting (will be listed)
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(2) Non-reporting (will not be listed; not an IPO)
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(3) Non-reporting (will not be listed but an IPO)
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(4) Reporting (currently Listed)"
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"Continue to deliver Prospectus for:
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(1) 25 days
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(2) 40 days
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(3) 90 days
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(4) N/A (aftermarket prospectus does NOT apply)"
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Accredited Investor
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"Net worth $1,000,000.
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Individual gross income of $200,000; joint $300,000"
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Regulation D Private Placement securities may NOT be sold to
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More than 35 Non-Accredited Investors
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Lock-Up period before Securities from pre-IPO investors, private placement buyers, etc., can be sold
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6 months
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Restricted Securities Rule 144
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"Holding Period
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(1) 6 months - no resale
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(2) 6 months to 1 year - volume restriction (maximum of 1% of total outstanding shares OR the average weekly trading volume of the past 4 weeks
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(3) After 1 year - no restrictions"
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Rule 147 for exemption of securities sold within the borders of one state
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"(1) 80% of gross revenue from that state
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(2) 80% of assets located within that state
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(3) 80% proceeds used to expand facilities within that state
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(4) 100% of the purchasers are principal residents of the state."
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CHAPTER 2 - REGULATORY REQUIREMENTS FOR MEMBER FIRMS
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Firms must keep names of Supervisory personnel and dates for their designation
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"Must be maintained for 3 years, AND
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Kept in an easy accessible location for the first 2 years."
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Nonbranch Location definition includes
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"A temporary location for securities business for less than 30 business days in any calendar year
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If person spends at least 4 hours at this branch during a given day then that will not count towards the annual total
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Can transaction only less than 25 securities annually from such a location"
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"Inspection Requirements at location per WSP:
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(1) OSJ (Office of Supervisory Jurisdiction)
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(2) Non-OSJ Branch that supervises other locations
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(3) Non-OSJ Branch with no supervisory functions
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(4) Nonbranch Location
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(5) Personal Residence"
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"(1) Annually
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(2) Annually
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(3) Every 3 years
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(4) Periodically
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(5) Periodically"
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SRO rule for trade subject to investigation
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"(1) Written statement to SRO within 1 week after completion of investigation
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(2) A written statement of the firm's finding by the 15th of the month following the calendar quarter of the trade
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(3) Statement must be filed even if no disciplinary action was taken by the firm"
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"Series Exams:
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(1) Series 7 - General salesperson
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(2) Series 6 - Variable products salesperson
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(3) Series 4 - ROP
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(4) Series 53 - Municipal Securities Principal
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(5) Series 27 - Operations Principal (FINOP)"
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3 categories of FINRA defined personnel
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RRs, Registered Principals, and unregistered employees
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3 categories of FINRA defined Communications
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"Correspondence - with <= 25 prospective retail customers within any 30 calendar-day period or with existing customers
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Sales Literature - written or electronic intended for more than 1 person
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Advertisements - Intended for the public
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Communications approved by FINRA to be kept in a file for
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3 years after the last date of use
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Correspondence to more than 25 people in a 30 calendar day period used to promote a product or financial recommendations then
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Principal must approve it as a correspondence is subject to review but needs no FINRA approval
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Customer complaints to be kept at each office of Supervisory Jurisdiction in a file for
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4 years
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Customer complaints to be reported to FINRA in
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10 business days of learning it
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Customer complaints Summaries must be sent to FINRA by
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"on a quarterly basis
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due on 15th of month following the end of the calendar quarter"
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FINRA must be notified if a person is involved in a civil litigation that resulted in an award or settlement of
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> $15,000
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Same as above but for a member firm
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> $25,000
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Same as above but for an associated person of the member firm involving suspension, termination, disciplinary actions with fines in excess of
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$2,500
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Advertisements and Sales Literature must be approved in writing by a Principal and kept for
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The last 3 years as well as kept in a readily accessible location for the first 2 years
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Communications Summary (Begin)
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Sales Literature (Group correspondence)
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No FINRA filing; Keep records for 3 years
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General Sales Literature and Advertisement
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File with FINRA for 1 year; Keep records for 3 years
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Investment Co. Sales Literature and Advertisement
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Within 10 Biz days after use; Keep records for 3 years
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Options Advertisements
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10 Biz days prior to use; Keep records for 3 years
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CMO Advertisements
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10 Biz days prior to use; Keep records for 3 years
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Preapproved Sales Literature
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No need if preapproved; Keep records for 3 years
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Institutional Sales Literature and Correspondence
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No need if preapproved; Keep records for 3 years
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BCP (Business Continuity Plan) must be reviewed
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Annually
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CHAPTER 3 - REGISTRATION AND REGULATION OF BROKER-DEALER EMPLOYEES
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FINRA says that BCP plan must mention how many Emergency contacts minimally
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2 (1 person must be a member of Senior management and Registered Principal).
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FINRA retains jurisdiction of a registered person (Form U4) for how many years
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2 years; if person leaves the industry and comes back in 2 years then no need to re-register
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When a RR leaves the firm the firm is required to notify FINRA by
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30 days via Form U5
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Central Registration Depository (CRD) that reviews Form U4 has BrokerCheck system that maintains employment history of
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10 years for each broker; involved in Civil settlement of $10,000 or more; sales violation damages of $5,000 or more filed with the last 24 months.
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Negative events about a person after post hiring should be reported to FINRA in
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No later than 30 calendar days from discovery
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If a person of a FINRA member firm is subject to action by a State or Federal Securities, Insurance or Commodities regulator (SD - Statutorily Disqualified Employee)
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Within 10 Biz days.
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The Regulatory Element of the Continuing Education of a RR requirements RR to take training
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2nd anniversary of their registration and then every 3 years after. FINRA will notify the RR 30 days before the anniversary date and RR has 120 days to complete the training. RRs doing military service are exempted from this.
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For Accounts that purchase IPOs (new Issues) a member firm that sells the new Issues must
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Re-verify account eligibility every 12 months and must retain all copies for at least 3 years.
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For an IPO an immediate family member would be considered a Restricted person if..
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The employee gives/receives material support to/from the immediate family member where Material Support is defined as providing 25% of the person's income or living in the same household as the person associated with the member firm
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A person is considered restricted if he/she owns how much percentage of the Brokerage firm
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10%
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Member firm personnel may NOT give a gift exceeding
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$100 per recipient; legitimate biz expenses are exempted so long the gift giver attend that event
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Political contributes by members are limited to
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$250 per candidate per election (Primary and General elections are separate events) and a violation occurs if the person cannot vote (out-of-state) for that official. Penalty is 2 years of prohibition from engaging in municipal securities business.
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Reports to MSRB on Political Contributions should be sent
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2 copies to be sent to MSRB on Form G-37/G-38 by the last day of the month following the end of each calendar quarter
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CHAPTER 4 - EQUITIES and DERIVATIVES SECURITIES
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Issued Stock - Treasury Stock
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Outstanding Stocks
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Dividends are typically paid
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Quarterly
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Current Yield = Dividend Yield = Annual Dividend Yield
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(Quarterly Dividend * 4) / (Current Market Price for a share)
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Par value of a Stock
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$100
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Par value of a Bond
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$1,000
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A 5% preferred stock gives a dividend of $5 annually
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implies, 5% of the par value of $100
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3 types of Derivatives covered
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Rights, Warrants, Options
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Each stockholder receives how many rights for 1 common stock held
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1 right
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Rights are valid for
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Limited period; usually weeks or months
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Warrants are valid for
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Number of years; some are perpetual
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Options are valid for
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Limited period till expiry; fixed lifespan
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Option Premium
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Intrinsic Value + Time Value
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CHAPTER 5 - FIXED INCOME SECURITIES
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Most bonds are issued in multiples of
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$1,000
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Bonds pay interests usually
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Twice a year (semiannually); typically paid on the 1st OR 15th of the month
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Long/short coupon
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First coupon is for more than 6 months is a long couple; else short coupon
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Bonds settle in
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T+3 biz days
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Interest on Bonds is calculated based on
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30 days a month on a basis of 360 days a year
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Accrued Interest Rate
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(Principal * Rate * Days of Interest) / 360
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Interest on Treasury Bonds and Treasury Notes are calculated based on
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Actual days per month on a basis of 365 days a year
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Zero coupon Bonds pay interest when?
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At maturity
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The credit risk of a U.S. Government security is
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Virtually zero risk of defaulting as the government has the ability to print money and collect taxes
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Investment Grade Bond Ratings
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Stops at Medium Grade (Baa from Moody and BBB from S&P)
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Speculative/Junk Grade Bond Ratings
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Starts at Ba and BB
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The price of a Bond is expressed in terms of points
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Each point is equal to 1% of the bond's part value, or $10. So 90 points = $900.
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As interest rate increases
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Price of bond decreases (and vice versa)
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What are the 3 different ways of calculating a Bond Yield?
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Nominal Yield, Current Yield, Yield to Maturity
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Nominal Yield
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Same as the coupon rate
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Current Yield
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(Annual Interest Rate) / (Market Price)
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CHAPTER 6 - TYPES OF INVESTMENT COMPANIES
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The way the Investment Companies are organized and operated is governed by
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The Investment Company Act of 1940; registration required for more than 100 shareholders and fund must have a net worth of $100,000
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Mutual Funds (MFs) provide tax summaries to shareholders
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Annually
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MFs send detailed financial reports to shareholders
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Semiannually
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POP (Public Offering Price)
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= NAV + Sales Charge
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NAV
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= (Total Net Assets) / (# of Shares Outstanding)
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Maximum Sales Charge PERMITTED per FINRA Rule
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8.50%
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Class B Shares charges Contingent Deferred Sales Charge
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If held less than 6 to 8 years
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Class C Shares have
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an up-front sales charge of usually 1% and an annual fee of usually 1% of the fund's assets and also may pay a contingent deferred sales charge if he shares are sold in less than 12 to 18 months.
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LOI (Letter of Intent) for applying for BreakPoints in Sales Charge
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Pledge must be met in 13 months and letter of intent can be back-dated 90 days
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UITs (Unit Investment Trusts) are generally sold to investors in minimum denominations of
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$1,000
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REITs (Real Estate Investment Trusts) have a favorable tax treatment if
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90% of the ordinary income generated from the portfolio is distributed to the investors; at least 95% of gross income must be dividends, interest and rents from real property; at least 75% of gross income must be real property income; no more than 30% of the gross income may come from the sale or disposition of stock or securities held for less than 12 months
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CHAPTER 7 - CLIENT ACCOUNTS
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3 important types of client accounts
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Cash, Margin, Options
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When buying stocks in a margin account the customer has to pay at least
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50% of the purchase and BD will finance the rest
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When opening an Options account client has to sign the form and return it to the broker in
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15 days else no new open positions allowed; only closing transactions are allowed.
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If a BD sells a penny stock as of the e last trading day of any month then the BD must
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Provide a Monthly statement to the customer that includes the shares and the estimated market value of each penny stock
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Penny stock exemptions on disclosure exists
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If the transaction is with an owner who owns 5% of the penny stock; transactions by BDs whose commissions and markups from penny stock do not exceed 5% of its total commissions and markups.
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An established Customer for a BD dealing in penny stock is
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Customer has account for one year or has made 3 purchases of penny stocks from 3 different issues on 3 separate days.
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Each Discretionary order must be approved by a principal
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Promptly on the day of the trade.
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Each Discretionary account must be reviewed for churning
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Frequently
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Not-held orders (Time and Price Discretion) is limited to
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the trading day (Not-held orders are NOT discretionary orders!)
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Not-held orders over 1 day
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client must give RR written permission
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CTRs (Currency Transaction Reports) must be filed for all cash transactions by a single customer during
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1 biz day that exceeds $10,000, in aggregate
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CMIR ( International Transportation of Currency or Monetary Instruments) must be filed whenever anyone physically transports, sends, or receives cash, cash equivalents, or monetary instruments in an aggregate amount of more than
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$10,000 into or out of the United States
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BDs who transfer or transmit funds (wire transfers) must collect information about any transfer of
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$3,000 or more
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SARs (Suspicious Activity Reports) are to be filed by BDs is to be filed whenever a transaction or group of transactions equals or exceeds
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$5,000
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Independent audit called Stress Test targeted towards AML is to be conducted
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Annually, unless the BD does not execute transactions for customers or otherwise hold customer accounts (Proprietary Trading firm) - in which case it has to be done every 2 years
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The BD must verify the customer's identity for a new account
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within a REASONABLE period before or after the account is opened OR before the customer is permitted to a transaction in the account.
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A BD must maintain records of the Methods used to verify a customer's identity for
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5 years following the closing of the new account
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If a BD discovers that one of its client is on the C (Office of Foreign Assets Control) (terrorism suspect list) then the BD must
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Immediately block ALL transactions and must inform the federal law enforcement authorities
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Penalties for AML violation
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20 years in prison and fines of $500,000 per transaction or twice the amount of the funds involved, whichever is greater; civil fines are also applicable
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Documents on client accounts must be sent to the customer
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either within 30 days of opening the new account or with the client's next statement
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Updates to documents on client accounts must be sent
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at least every 36 months
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Investment objective changes in an account will lead to notification to customers and RRs by
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30 days or the next statement
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Change to account name and address must be sent to the RR by
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30 days
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Regulation SP(customer and consumer privacy ruling) dictates that BD furnish a privacy notice
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First when a relationship is established with a consumer or a customer and then updated versions annually
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Evidence for appointment of incumbency on an account for an incumbent must be dated no more than
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60 days prior to the presentation, with the exception of a list will and testament
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Under UGMA the amount of gift to a minor can be
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Unlimited but after $13,000 taxes apply
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Minors who are at least 14 years old may suggest
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a new custodian to the court
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A BD has up to 35 calendar days to
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complete delivery of the security for a DVP customer
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BDs must provide a Statement of Account to a customer
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at least quarterly
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How many states have adopted the TOD (Transfers on Death policy
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About 2/3rds
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During Transfer of Accounts
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The receiving firm must submit the transfer request immediately and the carrying firm must either validate the instructions or take exception with 1 business day. Then within 3 days of validation the carrying party must complete the transfer of the account to the receiving party.
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If a nontransferable asset is liquidated, distributions must be made within
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5 biz days of the client's liquidation instructions; all orders with the exception of options positions that expire within 7 biz days
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Residual credits on an account must be transferred within
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6 months
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SIPA - Securities Investor Protection Act of 1970, protects customers to
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a maximum of $500,,000 of which $250,0000 may be for cash holdings
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Vedic protection limit
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$250,000
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CHAPTER 8 - OVERVIEW OF CLEARING
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DTC has how many subsidiaries
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10
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DTC was established in
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1974
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NSCC was crated in
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1976
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Each participant submit trade data to the NSCC
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At the end of each day
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FICC (Fixed Income Corporation) has
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2 divisions: Government Securities division and the Mortgage-Backed securities division (MBSD).
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Equity Options are typically issued with expirations of up to
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9 months
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OCC's cutoff time for Options Expiry is
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At 11:59 pm, Eastern Time (ET), on the Saturday following the 3rd Friday of the expiration month
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Customers MUST initiate their right to exercise by
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5:30 pm ET, on the last Biz day prior to the above expiration date
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An expiring Option will cease Trading on
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The day before expiration at 4 pm ET
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On expiration, Options that are in the money
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by 1 cent will be exercised automatically, per OCC, unless the client has given instructions to the contrary
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Option Trade settles in
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T+1
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But the exercise of an option, which involves the purchase or sale of stock settles in
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T+3 biz days
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Clearing firms MUST notify each Introducing Firm of the Clearing reports it offers by
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July 31st, annually
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Prime Brokerage customers must maintain a minimum Net Equity of
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$500,000 unless the account is managed by a registered Investment Advisor (IA) in which case it is $100,000
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CHAPTER 9 - ORDER PROCESSING AND TRADING MARKETS
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Short seller is obligated to return the borrowed shares by
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No set period so long the account maintains the required minimum Equity
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Market orders will get executed
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Immediately block ALL transactions and must inform the federal law enforcement authorities
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If a limit order is not executed end of day then the client will receive
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A nothing-done notification from his firm
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Every order is a DAY order unless otherwise specified and subject to market exposure from
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9:30 am to 4:00 pm.
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How many market markers are needed for Listing on Nada
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At least 3
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Transactions in Nada securities must be reported within
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30 seconds
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Many active stocks have how many Market Makers (MM)
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More than 50
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When do BDs have to send information about all its trades to NSCC
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End of day (same day)
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Complex transactions that require Comparison (non-electronic) and settled ex-clearing must have Comparisons sent within
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1 biz day of the trade
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For unrecognized trades anytime that a difference is found and subsequently resolved, the party in error should send a corrected confirmation within
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1 Biz day
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For unrecognized trades (DKs - Don't Know) the party receiving the confirmation needs to notify the confirming party
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Promptly by Telephone and then within 1 Biz day send a written notice with return receipt requested indicating non-recognition of the transaction and then within 4 Biz days send the contrabroker a DK notice.
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FINRA's markup policy sets a
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5% guideline that also applies to markups, markdowns and commissions
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Payment for Order flow where BD receives payment from a MM must be disclosed to the customer
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At the time of opening the account and then annually thereafter
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Marking the close violation refers to a series of transactions
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at or near the close of trading, i.e., at or within MINUTES of 4:00 pm
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Some firms raise margin requirements when
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stock goes to$5 and may even ask for 100% equity
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CHAPTER 10 - SETTLEMENT DATES
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Corporate Securities in Cash or Margin Accounts
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Settlement = T+3 Biz days; Customer Payment = T+5 Biz days
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Municipal Securities(Municipal Bonds)
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Settlement = T+3 Biz days; Customer Payment = Exempt from Reg T
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U.S. Government Securities(T-Bills)
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Settlement = T+1 Biz day; Customer Payment = Exempt from Reg T
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Cash
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Same day
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Option Trades
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Settlement = T+1 Biz day; Customer Payment = T+5 Biz days
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FINRA can grant exceptions on delays due to exceptional circumstances but request must be filed with FINRA
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prior to the REG T deadline and if no extension is granted then the BD is required to SELL out the position and FREEZE the account for 90 days. Customers who pay up in this time period is considered to have reestablished credit and can again be extended normal credit terms.
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Firms that transaction in Investment Company Shares must transmit payments received from customers to the Investment Company
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" - By the end of the 3rd Biz day following receipt of a customer's order
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- By the end of 1 Biz day following receipt of customer's payment (whichever is the later date)
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- If payment is received from yet another BD then within 2 Biz days"
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Variable Contract Payments to the Issuer
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Promptly
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Variable Contract Payments to the Issuer involving wholesale transactions
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2 Biz days
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Unit of Delivery for Stock Transactions
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100 Shares
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Unit of Delivery for Bond Transactions
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in $1,000 denominations, but NO denomination larger than $100,000
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Cashier's checks usually clear
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the next day
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All checks received by a BD must be
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Promptly processed; Cashiering Dept. cannot delay processing; BDs may NOT accept post dated checks from clients!
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Wire Transfers are viewed as
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Immediate Funds and no clearing delay
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Bu-in (When a selling BD has failed to make proper delivery to a buying BD) then the buying BD will purchase the securities in the Open market and charge the selling BD of differences
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Must be done SOONER than the 3rd Biz day following the Settlement Date and Bu-In notice to selling BD must be sent no later than 12:00 noon 2 Biz days before the execution of the proposed Buy-In.
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Sell-Out
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Selling BD has the right to do this immediately, without notice
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Notice of Closeout for a FINRA member that buys in or sells out another member
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must notify the other member of such an action on the SAME day
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CHAPTER 11 - MARGIN
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Reg T requires that a trade executing in a Cash account
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Must be paid for full within 5 Biz days
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Reg T requires that a trade executing in a Margin account
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50% must be paid within 5 Biz days
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Margin requirements on Government Securities
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1% with less than 1 year of maturity and a maximum of 6% for scurrilities with 20 years or more to maturity (both initial and maintenance requirements)
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Margin requirements on Municipal Securities
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7% of the market value
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Margin requirements on Corporate Bonds
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"Investment Grade: 10% of the market value
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Non-Investment Grade: MaxOf(20% of market value, 7% of Principal Amount)"
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...
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Margin requirements on Convertible Corporate Bonds
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50% of the market price of the Bond
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Margin requirements on Arbitrage Positions
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" - If long a security that is convertible into an equal number of shares of a short position then 10% of the market value of the long position
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- If client is long and short an equal number of shares then it is equal to 5% of the long position"
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...
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Margin requirements on Options
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100% (as a wasting asset, options have no loan value)
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Margin requirements on New Issues (IPOs)
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Investor has to wait 30 days to purchase a primary offering on margin
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Margin Loan Consent Agreement changes
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Must be sent to clients at least 30 days prior to the changes.
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Margin Disclosure Document to be sent to clients
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At the time of opening the account and then annually thereafter. Also needs 30 days advance written notice prior to change.
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Amount that may be Rehypothecated
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The Customer Protection Rule permits BDs to use stock with a value of 140% of the customer's debit balance as a Collateral for a Bank loan. This 140% applies to the amount of stock that may be used as collateral, not the amount that may be borrowed. The BD is allowed to borrow only the amount that it lent the customer!
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Excess Margin Securities are those whose value exceeds
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140% of the debit balance (loan amount) of a customer.
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If a customer has fully paid for the stock and BD wants to loan it out then a separate written consent agreement needs to be in place besides the signed loan consent
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This needs to be done before the BD can send the stock.
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When a BD lends stock to another BD the lender has the right to
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recall the stock at any time.
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When a BD lends stock to another BD the borrower
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has to deposit the full market value of the stock at the time of the loan and NOT the Reg T requirement
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The minimum initial deposit for a short position is
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MinOf( $2000, 100% of the purchase price)
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The maintenance requirement for a LONG margin stock position is
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25%
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SMA (Special Memorandum Account) will be credit with dividends of
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100%
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An individual is permitted to withdraw from SMA
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100% of any cash dividends credited to the account.
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A Margin Account becomes RESTRICTED when
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the Equity falls below the 50% Reg T requirement but is still greater than the 25% minimum maintenance requirement.
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For Sales in a Restricted Account
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An amount equal to only 50% of the sale is credited to SMA and may be withdrawn by the customer. If the withdrawal causes the account equity to fall below the maintenance requirement, the account is now a Phantom SMA.
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Prior to effecting a short sale, per REG SHO, a BD must
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locate securities that can be used for delivery by Settlement Date (SD).
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Easy to Borrow list must be less than
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24 hours old and provide reasonable grounds for belief that a security on the list will be available to be borrowed.
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If a person does not deliver the borrowed security within 35 days
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the BD that effected the transaction must borrow the security or buy a security that is in like kind and quantity to close out the position.
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A Threshold security is put on the threshold securities list if there is an aggregate fail to deliver position
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for 5 consecutive settlement days at a clear firm for 10,000 shares or more AND equal to at least 0.5% of the total outstanding shares of the issuer.
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Per REG SHO, a BD that fails to deliver position at a clearing firm in a THRESHOLD SECURITY for a
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continuous period of 13 settlement days or 35 consecutive settlement days then the BD must close out the fail to delivery IMMEDIATELY, by purchasing securities of like kind and quantity.
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Per SEC Rule 204 (Close-out Requirements) a BD that have a fail to deliver by Settlement date is required to
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IMMEDIATELY (beginning of T+4 trading day) purchase or borrow the security to close out the fail. If not compliant then NO short shares on this security is permitted by the BD. This rule applies to ALL securities, whereas the 13-settlement-day rule applies to THRESHOLD securities only.
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The minimum initial deposit for a short position is
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MinOf( $2000, Reg T which is 50%)
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The maintenance requirement for a SHORT margin stock position is
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generally, 30%.
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Maintenance requirements on Leveraged ETFs
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Multiply by leverage factor: For a double long portfolio it is 2x25%; for a triple short portfolio it is 3x30%.
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Margin Disclosure Document updates
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Must be sent to clients at least 30 days prior to the changes.
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A pattern day trader is a customer who day-trades
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4 or more times in a 5 Biz day period.
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Pattern day trader have a minimum initial equity requirement of
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$25,000 (instead of the $2,000). This minimum must be deposited in the account before any day-trading begins!
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Day-Trading buying power is limited to
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4 times the trader's maintenance margin excess, determined as of the close of the previous day.
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If a day trader exceeds her buying power limitations then she
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must meet a day-trading margin call within 5 Biz days.
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If margin call is not met within 5 biz days for a day trader then
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Trading in the account is restricted to a cash-available basis for 90 days or until the call is met.
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Funds deposited in Day-trading account to meet the minimum equity requirements or a day-trading margin call must
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remain on deposit in the account for at least 2 biz days.
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CHAPTER 12 - CUSTODY AND CORPORATE ACCOUNTS
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...
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DTC reconciliation is done
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each day between what the firm believes is held at DTC and the actual quantity on deposit at DTC.
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A BD is required to maintain physical possession or control of all fully paid and excess margin securities that belong to its customers
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Promptly
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Amounts put in Special Reserve Account (SRA), also called the Reserve Bank Account (RBA), are for customers only and
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pay not be used by the BD for any other purposes and the amount deposited equals to the difference in customer related credits and debits.
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Special Reserve Account (SRA) computations must be made
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Weekly as of the close of the last business day of the week and the deposit must be made no later than 1 hour after the opening of banking business on the 2nd business day following the determination.
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If a BD fails to make the required deposit in the Reserve Bank Account within 1 hour after the opening of banking business on the 2nd day following the computation then
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The BD must notify the SEC by telegram immediately and must follow up by a notification in writing. This notice must also be sent to the BD's Designated Examining Authority.
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Clients receive Free Credit Balance Statements
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at least quarterly
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Box counts of physical examination and a count of all securities must be made
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at least once in each calendar quarter
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During a Box Count the BD must verify the status of all securities subject to its control but NOT in its physical possession, such as securities in transfer or in transit, where this situation has existed for
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more than 30 days.
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A BD must record on its books and records all security differences that are unresolved
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not later than 7 business days after the security count.
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A short securities difference is subject to a partial net capital deduction (a haircut) after
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7 Business Days
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A full haircut arising for a short securities differences is done
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if unresolved after 28 Business days.
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If securities are missing but no criminal activity is suspected, reports must be submitted to the SIC (Securities Information Center) and the Transfer Agent within
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2 business days of discovery (1 Biz day after a 2 day search).
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If securities are missing as a result of an internal audit and criminal activity is not suspected, a report must be filed
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no later than 10 business days after discovery.
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If securities are suspected to be Stolen or Counterfeit then
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report to FBI, SIC and Transfer agent within 1 Biz day of discovery.
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If securities that were reported lost or stolen are subsequently recovered then a notice must be sent to the SIC and to FBI, if applicable
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within 1 Biz day of recovery
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FINRA member firms are required to send Balance Sheets of Financial Condition Disclosure to customers
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Every 6 months.
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FINRA member s are required to carry a Blanket Fidelity Bond covering officers and employees for loss of fidelity (misplacement, forgery, securities loss, fraudulent trading, etc., coverage should be
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"25000 for EACH SECTION of the bond
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If net capital is less than $600,00 then 120% of the requirement
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...
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If net capital greater than $1 million then $5 million"
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...
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FINRA member firms must review their Fidelity Bond coverage
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Annually, as of the anniversary date of the issuance of the bond.
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Any adjustment required in the amount of the Fidelity Bond must be
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made within 60 days of the Anniversary date of issuance.
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Member firms must notify FINRA if any Fidelity Bond is cancelled, terminated or substantially modified
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within 10 Biz days.
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The date a Dividend is authorized is know as the
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Declaration Date.
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Dividends are usually paid
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Quarterly
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Dividends are taxable in
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the year in which they are paid/received.
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The date on which the shareholder must officially own the stock to be entitled to receive the dividend is know as the
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Record Date
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The Ex-Dividend date (ex-date) is typically
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the 2nd Biz day prior to the Record Date.
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The Ex-Dividend date is set by
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the SROs, e.g., FINRA
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On the Ex-Dividend date the stock price will be
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Reduced by an amount equal to the dividend to be paid
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A buyer can still obtain the dividend after the normal ex-date
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by purchasing the security in cash up to and including the record date.
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SEC Rule 10b-17 requires Issuers of Securities to report to FINRA (not the SEC) all dividends and other distributions
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at least 10 days prior to the Record Date.
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The majority of Bonds pay Interest
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Semiannually
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Some securities like GNMA pass-through certificates pay Interest
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Monthly
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Callable Bonds often contain a restriction on how soon the call feature can be exercised, which is typically
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5 to 10 years from the date of the issue.
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CHAPTER 13 - RECORD KEEPING AND FINANCIAL RESPONSIBILITY
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...
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Blotters are created on
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a trade-day basis with all transactions being posted no later than the next Biz day.
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A supervisor is required to review each account to make sure it is current and accurate
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as frequently as necessary but at least monthly.
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General ledger items must be updated
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at least monthly.
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Items to the general ledger must be posted
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within 10 Biz days of the month's end.
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Suspense accounts used to post problem items not yet resolved must have the word "suspense" included in the title of the accounts and the records must be kept for
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a period of not less than 6 years.
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All records created by a BD must be kept in an easily accessible place for the
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first 2 years of their existence.
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Partnership articles (BD organized as a Partnership) and articles of incorporation, minute books and stock certificate books (BD organized as a Corporation) must be maintained for
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the Lifetime of the firm.
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Record Types that must be maintained for 3 YEARS
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Posting Requirements
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Fail to receive, fail to deliver
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Posted no later than 2 Biz days after the SD (Settlement) Date
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Long and short stock record difference
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Posted no later than 7 Biz days after the discovery
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Securities in Transfer, Dividends, Interest Received, securities borrowed and loaned, monies borrowed and loaned
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Posted no later than 2 Biz days after the date of the securities or monies involved
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Order Ticket
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Prepared before the execution of the transaction
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Confirmation, Comparisons
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No later than the Biz day after the transaction
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Option Record
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No later than the Biz day after the Option was written
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WSP (Written Supervisory Procedures)
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Former version must be retained when updating
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Associated person's application
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Prepared prior at or prior to the beginning of employment
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Record Types that must be maintained for 6 YEARS
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Posting Requirements
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Blotters are created on
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Must reflect transactions as of the trade date and must be prepared no later than the following Biz day.
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General Ledger
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Must be posted as frequently as is necessary to determine compliance with the Net Capital Rule, but NOT less frequently than once per month.
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Customer Account Ledger
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Posted no later than the Settlement Date
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Position Record
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No later than the Biz day after the SD of the date of Securities movement
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Cash and Margin Account Records
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Must be prepared before the execution of a transaction
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If a firm decides to use a form of electronic storage media other than the Optical Disk Technology then the firm must notify its DEA
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at least 90 days prior to the using the other method.
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A firm that uses micrographic or electronic storage media must have a place where the SEC and its SRO can review stored files
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Immediately
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If a BD fails to maintain Books and Records (Noncurrent Books and Records) then it must give notice to the SEC and its DEA
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that very day and must file a report within 48 hours detailing steps being taken to correct the situation. This report must be transmitted by overnight delivery.
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Type of Broker-Dealer (BD)
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Minimum Dollar of Net Capital
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Carrying Firm
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$250,000
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Prime Broker
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$1,500,000
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Firm-Commitment-Underwriters
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$100,000
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Market Makers (MMs)
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$100,000
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Introducing Firm (fully disclosed basis to another firm)
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$5,000
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Introducing Firm (fully disclosed that receive customer securities)
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$50,000
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Mutual Fund Firms
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$5,000
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M&A Firms
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$5,000
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For a Carrying BD the FOCUS (Financial and Operational) Combined Uniform Single) Report Part I must be field
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Monthly, within 10 Biz days of month-end.
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For a Carrying BD the FOCUS Report Part II must be filed
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Quarterly, within 17 Biz days of the end of the quarter.
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For a non-carrying broker dealer the Focus Part I is NOT required and the FOCUS Part IIA must be filed
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Quarterly, within 17 Biz days of the end of the quarter.
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The ANNUAL financial report must be filed
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no later than 60 days after the date of the financial statement.
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Member firms are required to send Balance Sheets to Customers
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Every 6 months.
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Audited Annual statements must be sent to Customers
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within 45 days after the BD files its annual report with the SEC.
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BD should advise customers regarding their Free Credit Balances
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Quarterly
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Members are required to maintain a separate file of all written complaints in each office of Supervisory Jurisdiction
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for 4 years (increased previously from 3 years).
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Customer complaints can trigger a requirement for the member firm to report the event to FINRA
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within 10 Biz days.
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Such an event of customer complaint for civil litigation involves
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a person involved in an award or settlement of more than $15,000 OR $25,000 if a member firm is involved.
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Such an event of customer complaint for a member firm withholding of commissions or imposition of fines in excess of
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$25,000
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Statistical and Summary information about customer Complaints must be provided to FINRA
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"on a quarterly basis
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due on 15th of month following the end of the calendar quarter"
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...
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Firms must maintain a file containing all Approved Communications for
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3 years after the last date of use and also 2 years in a readily accessible location.
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Syndicate Records must be kept for
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a minimum of 3 years.
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If a Syndicate Member, other than the manager, effects a transaction , the firm is required to notify the manager
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within 3 Biz days of effecting the transaction.
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Research Records must be created
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within 30 days after each calendar quarter in which its Research Analysts make a public appearance.
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A BD who does not obtain the certifications regarding public appearances must
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for the next 120 days disclose, in all research reports prepared by the analyst that the analyst did not provide certifications regarding public appearances.
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Time synchronization is done
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on a daily basis before the market opens and must be within 3 seconds of the NIST (National Institute of Standards Technology) standard. And must be recorded for OATS in military format.
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OATS reports must be transmitted
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on the same day that the order was received or the day that such information first becomes available.
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Confirmations are given to the clients
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after the trade is executed in printed paper or delivered electronically
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BDs are required to provide customers with a statement of account
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at least quarterly; usual practice is to send it monthly in any account in which there was activity.
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Upon written instructions from a customer, a BD may hold up a client's mail for
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up to 2 months for domestic travel and up to 3 months for travelling abroad.
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BDs are required to provide a consolidated Form 1099 for Tax Records to the customers and this form is typically generated
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by Feb 15 for the prior tax year.
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An Investment Advise Brochure that n contains information about its background and business practices must be delivered to clients and prospective clients
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no less than 48 hours prior to entering into a written or oral advisory contract (Exemptions: Investment Company clients or contracts requirement payment of less than $200.)
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Investment Advisers often generate independent performance reports
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On a Quarterly basis
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Mutual Finds must send detailed Financial Reports to their Shareholders
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at least twice a year; The Semiannual report and the annual report.
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CHAPTER 14 - RETIREMENT AND EDUCATION SAVINGS ACCOUNT
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...
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For prohibited transactions in an ERISA (Employee Retirement Income Security Act) account the IRS may impose
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a 15% excise tax.
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ERISA standard age for coverage is
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21 years or older and have worked for the employer for at least 2 years (one year for the 401(k) plans).
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ERISA standard for vesting schedule is
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fully vested after 5 years or they must be 20% vested after 3 years and fully vested after 7 years of service.
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The maximum annual, tax-deferred contribution that employees may make to a 401(k) is
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$17,000 ($16,500 in 2011).
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Employees age 50 and above may contribute up to
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$22,500 ($22,000 in 2011).
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Retirement Plan Type
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Contribution Limit
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Profit Sharing
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25% of employee's salary
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410(k)
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$17,000
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Keogh (HR-10)
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MinOf($50,000, 20% of self-employed income is deductible)
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Traditional IRA
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$5,000 or $10,000 if nonworking spouse
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Roth IRA
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"$5,000 or $10,000 if nonworking spouse for income less than $110,000
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Gradually lowered to $110,000 and $125,000
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...
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Married couple $173,000 and $183,000"
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...
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SEP IRA
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Employer: 25% of employee's salary OR $50,000, whichever is less
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SIMPLE (Savings Incentive Match Plan for Employees) IRA
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Deferrals limited to no more than $11,500 indexed for inflation); employer matches dollar for dollar up to 3% of pay
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403(b)/457 Plans
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$17,000 (Typically the same as 401(k) plans)
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Penalty for withdrawal prior to 59.5 years in 401(k), Keogh, IRAs
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10% (not applicable for 457 plan) and the amount withdrawn will be added to the taxable income if the plan was tax deferred
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Distributions in Keogh (HR-10) plans must
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begin by April 1 of the year following the later of (a) the calendar year in which the employee turns 70.5 years, or (b) the calendar year in which the employee retires.
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IRA contributions for any given year must be made by the deadline for filing income tax returns for that year or on
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April 15th
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An investor may also roll over distributions from qualified retirement plans such as 401(k)s into IRAs without incurring taxes but
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the rollover must be made within 60 days and may only be done once every 12 months.
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IRA investors can withdraw money without paying penalty
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if they are under the age of 59.5 and restricted to $10,000 for the purchase of a home for the first time or the account owner becomes disabled or the money is used to pay for medical expenses not covered by insurance or medical insurance premiums when the owner is unemployed.
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Under the RMDs (Required Minimum Distribution) clause Investors who have not begun withdrawals from their Traditional IRAs
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by the age of 70.5 years may also incur a tax penalty.
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Roth IRA investors may perform early withdrawal without paying penalties
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if the owner is 50.5 years or older or becomes disabled or money used for purchase of a first home or money is used to cover certain medical expenses or medical insurance premiums or for qualified higher education expenses.
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A parent, grandparent, or complete strange, which adjusted gross income is within certain limits may contribute to the ESA (Coverdell Educating Savings Account) Plan
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a maximum of $2,000 per year to the account. (The total from various people cannot exceed $2,000 during any given year).
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If money in ESA is not withdrawn
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by 30th birthday then it is subject o ordinary income taxes plus a 10% penalty.
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529 Plan contributions are
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limited to $13,000 to avoid the gift tax rule but depends on state laws
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CHAPTER 15 - ANNUTIES AND DIRECT PARTICIPATION PROGRAMS
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...
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An Annuity contract owner who withdraws from an annuity
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before the age of 50.5 years may be required to pay a tax penalty
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For Mutual Funds the FINRA rules specify a maximum sales charge of
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8.5% (NOTE: No such maximum sales charge on a Variable Annuity).
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In an Annuity the Annuitant receives payments for
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Life
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For a Variable Product a FINRA Member must transmit all Applications and Premium Payments to the Issuer (Insurance company issuing the contract)
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Promptly
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To determine the suitability of a Variable Annuity the BD has
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up to 7 Biz days from receipt of the application package to make the determination
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1035 Exchanges which are contracts funded with existing client asset transfers by RRs are often viewed as inappropriate
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if the client has made another 1035 deferred Variable Annuity transfer with the prior 36 months.
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In a Limited Partnership, General Partners (GPs) must contribute
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at least 1% to the capital.
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The maximum underwriting compensation for a public IPO is
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10% of the gross dollar amount sold
