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TreatiseTreatise

Broker-Dealer Regulation (2nd Edition)
 by Clifford E. Kirsch
 
 Copyright: 2011-2013
 Last Updated: September 2013

 Product Details >> 

Product Details

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  • ISBN Number: 9781402416897
  • Page Count: 2816
  • Number of Volumes: 3
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  • The purchase of PLI titles may include Basic Upkeep Service, whereby
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Updated to include coverage of the significant FINRA and SEC responses to the economic downturn, the new second edition of Broker-Dealer Regulation provides you with a complete and practical understanding of the many requirements of this highly regulated area. This two-volume work ensures that you satisfy SEC/SRO standards governing your firm, with detailed coverage of:

  • Registration reporting and record-keeping rules
  • Suitability and best execution standards
  • Ways of minimizing liability in the event of legal lapses, by documenting good-faith compliance efforts
  • The implementation of a tailor-made compliance program that can help detect and prevent illegal conduct within the firm

Broker-Dealer Regulation is filled with practical suggestions on how to best comply with requirements in such areas as electronic trading, safeguarding customer information, trading desk activities and business continuity planning. Recent updates have covered new FINRA Rule 2111 which governs what are and what are not suitable customer transactions • the SEC’s renewed emphasis on pursuing insider trading claims under 10b5-2 • the SEC’s recently adopted Rule 15c3-5 on allocation between clearing firm and introducing broker in connection with risk management controls for clearing firms providing market access • and a new Chapter 21A on outsourcing issues for financial services firms.

Updated at least once a year, Broker-Dealer Regulation is an invaluable resource for broker-dealers, securities attorneys, compliance officers, and regulators.

  Preface
  Table of Contents
Chapter 1: Introduction
  • § 1:1 : Overview1-1
  • § 1:2 : The Pattern of Broker-Dealer Regulation1-2
  • § 1:3 : Structure of This Book1-3
Chapter 2: What Is a Broker-Dealer?
  • § 2:1 : Exchange Act Registration Requirement2-4
    • § 2:1.1 : Section 152-4
    • § 2:1.2 : Consequences of Registration2-6
    • § 2:1.3 : Application of Certain Rules to Broker-Dealers Even If Not Registered2-8
    • § 2:1.4 : State Registration Requirements2-9
    • § 2:1.5 : Consequences of Illegally Doing Business As an Unregistered Broker-Dealer2-11
  • § 2:2 : What Is a Broker?2-11
    • § 2:2.1 : Generally2-11
    • § 2:2.2 : Effecting Transactions2-12
    • § 2:2.3 : Clerical and Ministerial Activities2-13
    • § 2:2.4 : “In the Business”2-14
    • § 2:2.5 : Role of Compensation in Analysis2-15
    • § 2:2.6 : Specific Contexts2-19
      • [A] : Finders2-19
      • [B] : Business Brokers, Private Placement Agents, and M&A Advisers2-20
        • [B][1] : Private Placement Agents2-20
        • [B][2] : M&A Advisers2-22
        • [B][3] : Business Brokers2-23
      • [C] : Networking Arrangements2-24
        • [C][1] : Banks2-24
        • [C][2] : Insurance2-27
      • [D] : Issuers and Their Associated Persons2-28
        • [D][1] : Issuers2-28
        • [D][2] : Associated Persons of Issuers2-29
        • [D][3] : Issuers and Associated Persons in Demutualizations, Exchange Offers, Conversions, Proxy Solicitations2-32
      • [E] : Bulletin Boards2-34
      • [F] : ATSs and Securities Exchanges2-35
      • [G] : Payroll Processing Services2-37
      • [H] : Personal Service Companies2-39
      • [I] : Other Service Providers to the Securities Industry, Broker-Dealers or Issuers2-40
        • [I][1] : Communications Services2-40
        • [I][2] : Confirmation and Other Processors2-41
        • [I][3] : Transfer Agents and Stock Plan Services2-42
        • [I][4] : Research Services2-44
        • [I][5] : Accountants2-46
      • [J] : Investment Advisers2-48
  • § 2:3 : What Is a Dealer?2-48
    • § 2:3.1 : Section 3(a)(5)(A)2-48
      • [A] : Generally2-48
      • [B] : Buying and Selling Securities for Own Account2-49
      • [C] : Engaged in the Business2-50
    • § 2:3.2 : “Traders” versus “Dealers”—Section 3(a)(5)(B)2-51
      • [A] : Generally2-51
      • [B] : Funds As Traders2-55
      • [C] : Issuers2-57
      • [D] : Dealers in OTC Derivatives2-58
  • § 2:4 : What Is a Security?2-61
    • § 2:4.1 : Statutory Definition2-61
    • § 2:4.2 : Case Law on “Investment Contracts”2-62
      • [A] : Generally2-62
      • [B] : Investment of Money2-62
      • [C] : Common Enterprise2-63
      • [D] : Expectation of Profits2-64
      • [E] : Solely from the Efforts of the Promoter or a Third Party2-65
    • § 2:4.3 : Case Law on “Notes”2-66
    • § 2:4.4 : OTC Derivatives2-69
      • [A] : Generally2-69
      • [B] : Case Law on Derivatives Prior to the Adoption of the Commodity Futures Modernization Act2-69
      • [C] : CFMA—Section 3A, 15(i)2-70
      • [D] : The Dodd-Frank Wall Street Reform and Consumer Protection Act2-71
        • [D][1] : New and Amended Definitions2-72
          • [D][1][a] : “Swap,” “SBS” and “Security”2-72
          • [D][1][b] : “SBS Dealer,” “SBS MSP” and “SBS SEF”2-76
          • [D][1][c] : Broker-Dealer Registration Issues2-79
        • [D][2] : The Volcker Rule and Swaps Pushout Rule2-80
    • § 2:4.5 : Security Futures2-81
  • § 2:5 : Exempted Securities2-82
    • § 2:5.1 : Generally2-82
    • § 2:5.2 : Government Securities2-83
      • [A] : Definition2-83
      • [B] : Regulation of Government Securities Brokers and Dealers2-83
    • § 2:5.3 : Municipal Securities2-83
      • [A] : Definition2-83
      • [B] : Regulation of Municipal Securities Dealers2-84
    • § 2:5.4 : Other Exempted Securities2-84
  • § 2:6 : Intra-State Broker-Dealers2-84
  • § 2:7 : Other Exemptions from Registration2-86
    • § 2:7.1 : Commercial Paper Dealers2-86
    • § 2:7.2 : Foreign Broker-Dealers Operating Under Rule 15a-62-87
      • [A] : Background2-87
        • [A][1] : Pre-Rule 15a-6 Precedents2-87
        • [A][2] : Jurisdictional Language in Section 15 and Section 302-89
      • [B] : Rule 15a-62-92
        • [B][1] : Generally2-92
        • [B][2] : Unsolicited Transactions2-92
        • [B][3] : Research2-93
        • [B][4] : Rule 15a-6(a)(3) Arrangements2-94
        • [B][5] : Rule 15a-6(a)(4)2-97
      • [C] : Other Cross-Border Issues2-99
      • [D] : SEC 2008 Proposal to Amend Rule 15a-62-99
    • § 2:7.3 : Mutual Recognition of Foreign Broker-Dealers2-99
    • § 2:7.4 : Banks2-101
      • [A] : Pre-GLBA Background2-101
      • [B] : Bank Brokerage Activities2-101
        • [B][1] : Section 3(a)(4)(B)2-101
        • [B][2] : Regulation R2-102
        • [B][3] : Networking Arrangements2-103
        • [B][4] : Trust and Fiduciary Activities2-103
        • [B][5] : Sweep Accounts and Money Market Funds2-104
        • [B][6] : Safekeeping and Custody2-104
      • [C] : Bank Dealer Activities2-106
        • [C][1] : Section 3(a)(5)(C)2-106
        • [C][2] : Bank Riskless Principal Activities—Rule 3a5-12-106
        • [C][3] : Bank Regulation S Transactions—Rule 3a5-22-107
        • [C][4] : Bank Securities Lending—Rule 3a5-32-108
    • § 2:7.5 : Charitable Exemption—Section 3(e)2-109
    • § 2:7.6 : Funding Portals2-110
    • § 2:7.7 : Associated Persons of Registered Broker-Dealers2-111
      • [A] : Section 15(a)(1)2-111
      • [B] : Retired Brokers—SEC and FINRA Guidance Concerning Trailing Commissions2-111
    • § 2:7.8 : Miscellaneous Exemptions—Rule 15a-2 and 15a-52-114
    • § 2:7.9 : General Exemptive Authority2-114
  • § 2:8 : Doing Business As an Unregistered Broker-Dealer2-115
    • § 2:8.1 : SEC and State Enforcement2-115
    • § 2:8.2 : Private Actions—Exchange Act § 29(b)2-116
    • § 2:8.3 : Concerns for Controlling Persons2-118
    • § 2:8.4 : Concerns for Registered Broker-Dealers2-119
      • [A] : Compensation Sharing2-119
      • [B] : Participating in Syndicates with Unregistered Persons2-120
      • [C] : Aiding and Abetting2-121
    • § 2:8.5 : Concerns for Issuers2-121
      • [A] : Liability for Aiding and Abetting2-121
      • [B] : State Liability for Engaging Unlicensed Agents2-121
      • [C] : Section 292-122
Chapter 3: Brokers, Dealers and “Finders”
  • § 3:1 : Overview3-2
  • § 3:2 : The Statutory Scheme3-4
    • § 3:2.1 : Regulatory Requirements3-5
    • § 3:2.2 : What Is a Broker?3-8
      • [A] : “Effecting Transactions in Securities”3-9
        • [A][1] : Structuring Securities Transactions3-11
        • [A][2] : Helping Identify Potential Purchasers3-11
        • [A][3] : Credit-Related Activities3-12
        • [A][4] : Facilitating Negotiation of Transactions3-12
        • [A][5] : Soliciting Securities Transactions3-13
        • [A][6] : Facilitating the Execution of a Transaction, or Participating in Order-Taking and Order-Routing3-16
        • [A][7] : Handling Customer Funds and Securities3-17
        • [A][8] : Post-Execution Securities Activities3-18
      • [B] : “Engaged in the Business”3-18
        • [B][1] : Receiving Transaction-Related Compensation3-18
        • [B][2] : Holding Oneself Out As a Broker3-21
        • [B][3] : Participating in the Securities Business3-21
    • § 3:2.3 : What Is a Dealer?3-22
    • § 3:2.4 : What Is a Finder?3-26
  • § 3:3 : “Finders” No-Action Letters3-30
  • § 3:4 : Finders for Issuers3-31
    • § 3:4.1 : Rule 3a4-1: Associated Persons of an Issuer3-31
    • § 3:4.2 : Non-Associated Persons of an Issuer3-34
    • § 3:4.3 : Business Brokers and Investor Finders3-35
    • § 3:4.4 : Financial Advisers to Issuers3-39
    • § 3:4.5 : Associated Persons of Broker-Dealers3-42
    • § 3:4.6 : Listing, Matching and Trading Systems3-44
      • [A] : Listing Systems and Bulletin Boards3-45
      • [B] : Matching Systems3-48
      • [C] : Trading Systems3-52
  • § 3:5 : Finders for Registered Broker-Dealers3-53
    • § 3:5.1 : Networking Arrangements3-54
      • [A] : Depository Institutions3-55
      • [B] : Insurance Agents3-61
      • [C] : Real Estate Agents3-64
    • § 3:5.2 : Affinity Groups3-66
    • § 3:5.3 : Other Professional Referrals3-68
    • § 3:5.4 : Investment Advisers in Broker-Dealer Activity3-71
    • § 3:5.5 : Internet Portals3-73
    • § 3:5.6 : Financial Service Centers/Communication Links3-78
    • § 3:5.7 : The Intrastate Exemption and Registration Issues Under State Law3-80
Chapter 4: Bank Exemptions from Broker-Dealer Regulation
  • § 4:1 : Background4-2
  • § 4:2 : “Exempted Securities” and Instruments That Are Not “Securities”4-4
  • § 4:3 : What Is a “Bank”?4-5
  • § 4:4 : Bank Exemptions from Securities “Dealer” Status4-6
    • § 4:4.1 : What Is a “Dealer”?4-7
    • § 4:4.2 : 1934 Act Section 3(a)(5) and SEC GLB Act Dealer Rules4-8
      • [A] : Permissible Securities Transactions4-8
      • [B] : Investment, Trustee, and Fiduciary Transactions4-9
      • [C] : Asset-Backed Transactions4-9
      • [D] : Identified Banking Products4-10
      • [E] : Securities Lending “Dealer” and “Broker” Exemption4-11
      • [F] : Riskless Principal 500 Transaction Exemption4-12
      • [G] : Regulation S and Offshore Sales Exemption4-12
  • § 4:5 : Bank Exemptions from Securities “Broker” Status4-12
    • § 4:5.1 : What Is a “Broker?”4-12
    • § 4:5.2 : 1934 Act Section 3(a)(4) and Regulation R4-13
      • [A] : Third-Party Brokerage “Networking” Arrangements4-14
      • [B] : Trust and Fiduciary Activities4-16
      • [C] : Permissible Securities Transactions4-18
      • [D] : Certain Stock Purchase Plans4-18
      • [E] : Sweep Accounts4-19
      • [F] : Affiliate Transactions4-20
      • [G] : Private Securities Offerings4-20
      • [H] : Safekeeping and Custody Activities4-20
      • [I] : Identified Banking Products4-22
      • [J] : Municipal Securities4-22
      • [K] : De Minimis Exception4-23
      • [L] : Regulation S and Offshore Sales Exemption4-23
  • § 4:6 : FINRA Dual Bank Employees Supervision Rule Exemption4-23
  • § 4:7 : Volcker Rule and Title VII of the Dodd-Frank Act4-24
Chapter 5: Broker-Dealer and Associated Person Registration
  • § 5:1 : Overview5-2
  • § 5:2 : SEC Registration Process5-4
    • § 5:2.1 : Requirements in the Statute and Rules5-4
      • [A] : Application for Registration5-4
      • [B] : Grant or Denial of Registration5-5
      • [C] : Registration of Security Futures Broker-Dealers5-6
      • [D] : Six-Month Inspection5-7
    • § 5:2.2 : Form BD5-7
      • [A] : Items 1–135-8
      • [B] : Schedules A, B, and C5-9
      • [C] : Schedule D5-9
      • [D] : Schedule E5-9
    • § 5:2.3 : Form BR—Registration of Branch Offices5-9
    • § 5:2.4 : SIPC5-11
  • § 5:3 : Registration of Personnel5-12
    • § 5:3.1 : Generally5-12
      • [A] : Disqualification5-13
      • [B] : Restriction on Outside Activities5-14
    • § 5:3.2 : Categories of Registration5-14
    • § 5:3.3 : Qualification Examinations5-15
    • § 5:3.4 : Forms U4 and U55-17
    • § 5:3.5 : Warehousing Prohibition5-19
  • § 5:4 : FINRA Membership Process5-20
    • § 5:4.1 : Name of Firm5-23
    • § 5:4.2 : Membership Application5-24
      • [A] : Fidelity Bonding Requirements5-29
    • § 5:4.3 : Processing of Application5-30
    • § 5:4.4 : Interview5-30
    • § 5:4.5 : Decision and Appeals5-31
  • § 5:5 : NYSE and Other National Securities Exchanges5-32
    • § 5:5.1 : Demutualization5-33
    • § 5:5.2 : Affiliated Persons and Entities5-34
      • [A] : Control5-34
      • [B] : Allied Members; Principal Executives5-35
      • [C] : Approved Persons5-35
    • § 5:5.3 : Opinion of Counsel5-36
    • § 5:5.4 : Mandatory Charter Provisions5-37
      • [A] : Limitations on Withdrawals of Capital5-37
      • [B] : Disabling Provision5-37
  • § 5:6 : State Registration Requirements5-38
Chapter 5A: State Regulation of Broker-Dealers and Agents
  • § 5A:1 : Introduction5A-4
  • § 5A:2 : Uniform Securities Acts5A-5
    • § 5A:2.1 : Uniform Sales of Securities Act of 1930 (“USA 1930”)5A-5
    • § 5A:2.2 : Uniform Securities Act of 1956 (“USA 1956”)5A-5
    • § 5A:2.3 : Uniform Securities Act of 1985 (“USA 1985”)5A-5
    • § 5A:2.4 : Uniform Securities Act of 2002 (“USA 2002”)5A-6
    • § 5A:2.5 : Persistence of Non-Uniformity5A-7
  • § 5A:3 : Definitions5A-7
    • § 5A:3.1 : Definition of Broker-Dealer5A-7
    • § 5A:3.2 : Definition of Agent5A-8
    • § 5A:3.3 : Exclusions from the Definitions5A-9
      • [A] : Exclusions from the Definition of Broker-Dealer5A-9
        • [A][1] : USA 19565A-9
        • [A][2] : USA 20025A-10
      • [B] : Exclusions from the Definition of Agent5A-10
        • [B][1] : USA 19565A-10
        • [B][2] : USA 20025A-11
    • § 5A:3.4 : Finders and Auctioneers5A-11
      • [A] : Finders5A-11
      • [B] : Auctioneers5A-12
  • § 5A:4 : Regulatory Jurisdiction, FINRA, and NASAA5A-13
    • § 5A:4.1 : Concurrent Federal and State Jurisdiction5A-13
    • § 5A:4.2 : Foreign Broker-Dealers5A-13
    • § 5A:4.3 : FINRA5A-14
    • § 5A:4.4 : NASAA5A-15
    • § 5A:4.5 : Individual State Securities Administrators5A-15
  • § 5A:5 : State Jurisdiction Over the Itinerant/Internet Client5A-16
    • § 5A:5.1 : Federal Preemption and the Itinerant Client5A-17
    • § 5A:5.2 : USA 2002 and the Itinerant Client5A-17
      • [A] : De Minimis5A-17
      • [B] : Transactions with Pre-Existing Customers5A-18
      • [C] : Transactions with Recently Moved Customers5A-18
    • § 5A:5.3 : NASAA Statement of Policy on Communications by Financial Intermediaries over the Internet5A-19
  • § 5A:6 : Registration and Exemption5A-20
    • § 5A:6.1 : Registration Requirements5A-20
      • [A] : Broker-Dealers5A-20
      • [B] : Agents5A-20
      • [C] : Successor Registration5A-20
    • § 5A:6.2 : Exemptions5A-21
      • [A] : Broker-Dealers5A-21
      • [B] : Agents5A-22
    • § 5A:6.3 : Dual Registration of Agents5A-23
    • § 5A:6.4 : Limitation on Association5A-23
  • § 5A:7 : Registration Process5A-24
    • § 5A:7.1 : Central Registration Depository5A-24
    • § 5A:7.2 : Uniform Forms5A-25
    • § 5A:7.3 : Consent to Service of Process5A-26
    • § 5A:7.4 : Examination Requirements5A-26
    • § 5A:7.5 : Time Period for Action on an Application5A-27
    • § 5A:7.6 : Federal Preemption of Capital, Margin, Books and Records, and Bonding5A-28
    • § 5A:7.7 : FINRA Membership5A-28
    • § 5A:7.8 : Renewal and Transfer of Registrations5A-29
      • [A] : Renewal5A-29
      • [B] : Transfer5A-29
    • § 5A:7.9 : Termination and Withdrawal5A-31
      • [A] : Termination5A-31
      • [B] : Withdrawal5A-31
        • [B][1] : Trail Commissions to Retired Agents5A-32
        • [B][2] : Form U5 and Defamation Actions5A-33
  • § 5A:8 : Post Registration Compliance5A-33
    • § 5A:8.1 : Books, Records, and Net Capital5A-33
    • § 5A:8.2 : Compliance Audits and Inspections5A-34
      • [A] : Regulatory Audits and Inspections5A-34
        • [A][1] : Routine Audits and Inspections5A-35
        • [A][2] : “For Cause” Inspections5A-35
      • [B] : Internal Inspections by Broker-Dealer Compliance Departments5A-35
    • § 5A:8.3 : Continuing Education5A-36
    • § 5A:8.4 : Obligation to Amend Forms BD and U45A-36
  • § 5A:9 : Denial, Suspension, Revocation or Conditioning5A-37
    • § 5A:9.1 : Meeting Any Statutory Criteria Should Not Be Characterized As a Violation5A-37
    • § 5A:9.2 : Statutory Criteria for Administrative Action5A-38
      • [A] : USA 19565A-38
        • [A][1] : Criteria5A-38
        • [A][2] : Constraints on Administrative Action5A-40
      • [B] : USA 20025A-40
        • [B][1] : Applicants5A-40
        • [B][2] : Registrants5A-41
        • [B][3] : Criteria5A-41
        • [B][4] : Limitation on Investigation or Proceeding5A-43
        • [B][5] : Conditioning or Limiting a License5A-44
      • [C] : FINRA Actions5A-45
      • [D] : Additional Criteria5A-46
      • [E] : Discretionary Versus Mandatory Action5A-46
    • § 5A:9.3 : Summary Licensing Orders5A-46
  • § 5A:10 : Administrative Enforcement5A-47
    • § 5A:10.1 : Investigations5A-47
      • [A] : Investigative Authority and Powers5A-47
      • [B] : Confidentiality of Investigative Files5A-48
      • [C] : Sharing of Investigative Information5A-48
      • [D] : State “Right to Know” Laws5A-49
      • [E] : Discovery Requests for Investigative Files in Civil Litigation5A-49
    • § 5A:10.2 : Administrative Subpoena Authority5A-50
      • [A] : Scope, Privilege, and Enforcement5A-50
      • [B] : Compulsion and Immunity5A-51
      • [C] : Reciprocal Subpoena Authority5A-51
    • § 5A:10.3 : Civil Injunctions5A-52
    • § 5A:10.4 : Administrative Orders5A-53
      • [A] : Cease and Desist Orders5A-53
        • [A][1] : Basis for Cease and Desist Order5A-54
        • [A][2] : Contents of a Cease and Desist Order5A-54
        • [A][3] : Summary Process5A-55
        • [A][4] : Hearings and Final Orders5A-55
        • [A][5] : Judicial Enforcement5A-56
      • [B] : Orders to Show Cause5A-56
      • [C] : Notices and Procedures5A-56
      • [D] : Judicial Review5A-57
        • [D][1] : USA 19565A-57
        • [D][2] : USA 20025A-57
        • [D][3] : Judicial Review and Request for Rehearings5A-57
      • [E] : Judicial Stay5A-58
      • [F] : Administrative Enforcement of General Anti-Fraud Provision5A-58
    • § 5A:10.5 : Hearings to Be Public5A-60
    • § 5A:10.6 : Burden of Going Forward, Burden of Proof5A-60
    • § 5A:10.7 : Statute of Limitations on Administrative Actions5A-60
    • § 5A:10.8 : State Actions Giving Rise to Federal Statutory Disqualification5A-61
  • § 5A:11 : Civil Liability5A-63
    • § 5A:11.1 : USA 19565A-63
      • [A] : Registration Liability5A-63
      • [B] : Anti-Fraud Liability5A-63
      • [C] : Joint and Several Liability5A-64
      • [D] : Rescission Offers5A-64
      • [E] : Damages5A-65
      • [F] : Statute of Limitations, Survival, Non-Exclusive Remedy5A-65
    • § 5A:11.2 : USA 20025A-65
      • [A] : Securities Litigation Uniform Standards Act of 19985A-65
      • [B] : Registration Liability5A-65
      • [C] : Anti-Fraud Liability of Seller to Purchaser and Damages5A-66
      • [D] : Anti-Fraud Liability of Purchaser to Seller and Damages5A-66
      • [E] : Joint and Several Liability5A-67
      • [F] : Statute of Limitations, Survival, Non-Exclusive Remedy5A-67
      • [G] : Rescission Offers5A-68
    • § 5A:11.3 : Who Is a Seller?5A-69
    • § 5A:11.4 : No Civil Liability for Meeting Statutory Criteria for Denial, Suspension, or Revocation of License5A-70
    • § 5A:11.5 : Arbitration Clauses in Client Brokerage Agreements5A-71
    • § 5A:11.6 : State Common Law Claims5A-71
  • § 5A:12 : Criminal Liability5A-72
    • § 5A:12.1 : USA 19565A-72
    • § 5A:12.2 : USA 20025A-72
    • § 5A:12.3 : Affirmative Defenses5A-73
    • § 5A:12.4 : Willfulness5A-73
Chapter 6: Duty to Supervise
  • § 6:1 : What Is Supervision?6-4
  • § 6:2 : Why Supervise?6-5
    • § 6:2.1 : Rules Require You to Supervise6-5
    • § 6:2.2 : Reduce Chance of Violation or Loss Occurring6-5
    • § 6:2.3 : Reduce Entity Liability If Violation Occurs6-5
    • § 6:2.4 : Investor Protection6-6
  • § 6:3 : Sources of Affirmative Duty to Supervise6-6
    • § 6:3.1 : Securities Exchange Act of 19346-6
      • [A] : Exchange Act Sections 15(b)(4)(E) and 15(b)(6)6-6
      • [B] : Insider Trading (Sections 15(f), 21A(b) of Exchange Act; 1990 SEC Report)6-7
      • [C] : Controlling Person Liability/Affirmative Defense6-7
      • [D] : SEC Requirements Regarding Standards for Supervision6-8
    • § 6:3.2 : FINRA Rules6-9
      • [A] : FINRA Rules 3130, 3310, FINRA/NASD Conduct Rules 3010–30126-9
      • [B] : FINRA/NYSE Rules (342, 401, 405, 410)6-15
      • [C] : FINRA Membership Process6-16
      • [D] : Examination Checks6-17
    • § 6:3.3 : Criminal Law6-17
      • [A] : Prosecutorial Discretion6-17
      • [B] : Enforcement Matrix/Sentencing Guidelines6-18
    • § 6:3.4 : Other Regulatory Programs—AML, Privacy, Telemarketing6-18
  • § 6:4 : Evolution of Supervisory Duty6-20
    • § 6:4.1 : Respondeat Superior6-20
    • § 6:4.2 : Negligence, Recklessness, and Scienter6-20
    • § 6:4.3 : In re Reynolds & Co. Enforcement Action6-20
    • § 6:4.4 : 1963 SEC Duty to Supervise Report to Congress6-21
    • § 6:4.5 : 1964 Amendments to Exchange Act Adding Section 15(b)(4)(E)6-21
    • § 6:4.6 : ITSFEA of 19886-22
    • § 6:4.7 : Change in SRO and SEC Approach in Mid 1990s6-22
    • § 6:4.8 : Gruttadauria and 2004 Amendments to NASD, NYSE Supervisory Rules6-23
  • § 6:5 : Enforcement/Failure to Supervise6-24
    • § 6:5.1 : As a Form of Derivative Liability/Affirmative Defense6-24
    • § 6:5.2 : As an Additional Offense6-25
    • § 6:5.3 : As a Free-Standing Offense6-25
  • § 6:6 : Functional Roles in Supervision and Internal Controls6-25
    • § 6:6.1 : Line Supervision6-26
    • § 6:6.2 : Compliance6-26
    • § 6:6.3 : Risk Management6-26
    • § 6:6.4 : Financial and Managerial Accounting and Information Systems6-27
    • § 6:6.5 : Internal Audit6-27
  • § 6:7 : Key Elements of Supervisory Program6-27
    • § 6:7.1 : Involvement of Board and Senior Management6-28
    • § 6:7.2 : Inventory What Needs to Be Supervised6-28
    • § 6:7.3 : Written Supervisory Policies and Procedures6-28
    • § 6:7.4 : Assignment of Responsibility to Specific People6-29
    • § 6:7.5 : Qualification and Training of Supervisors and Other Personnel6-29
    • § 6:7.6 : Centralized Versus Distributed Supervision6-29
    • § 6:7.7 : Span of Supervision6-30
    • § 6:7.8 : Automation of Supervisory Functions6-30
    • § 6:7.9 : Daily Routines6-30
    • § 6:7.10 : Monthly, Quarterly, and Annual Routines6-30
    • § 6:7.11 : Process for Tracking and Following Up on Complaints and “Red Flags”6-31
    • § 6:7.12 : Supervision of Change6-31
      • [A] : New Products, Product Changes, and Complex Products6-31
      • [B] : New Offices and Personnel6-37
      • [C] : New Lines of Business6-38
      • [D] : Changes to Regulatory Requirements, Periodic Review and Update6-38
    • § 6:7.13 : Supervision of Client Accounts6-38
    • § 6:7.14 : Supervision of Personnel, Correspondence and Email; Heightened Supervisory Obligations for Personnel and Firms with Past Enforcement Problems6-38
    • § 6:7.15 : Supervision of Offices/OSJs6-40
    • § 6:7.16 : Supervision of Lines of Business and Products6-44
    • § 6:7.17 : Supervision of Adherence to Particular Rules6-44
    • § 6:7.18 : Supervision of Reporting, Books and Records6-44
    • § 6:7.19 : Compensation Systems6-44
    • § 6:7.20 : Role of Compliance Personnel6-45
    • § 6:7.21 : Diligence Regarding Third Parties6-45
    • § 6:7.22 : Verifying and Testing Supervisory Controls6-47
    • § 6:7.23 : Risk Management Policies6-48
    • § 6:7.24 : Glossary of Key Terms6-49
Chapter 7: Establishment and Maintenance of a Supervisory Structure
  • § 7:1 : Introduction7-2
  • § 7:2 : SEC and FINRA Rules Regarding Supervisory Structures7-3
    • § 7:2.1 : Designation of Principals7-4
    • § 7:2.2 : Designation of Offices7-5
      • [A] : Offices of Supervisory Jurisdiction7-5
      • [B] : Branch Offices and Non-Branch Locations7-6
    • § 7:2.3 : Designation of Offices Under State Securities Laws7-7
    • § 7:2.4 : Assignment of Registered Persons to Registered Principals7-8
    • § 7:2.5 : Reflection of a Firm’s Supervisory Structure in Its Written Procedures7-8
  • § 7:3 : Special Supervisory Structure Issues Concerning the Separation Between Research and Investment Banking Personnel7-10
  • § 7:4 : Special Supervisory Structure Issues Concerning Geographically Disbursed and Remote Sales Offices7-11
Chapter 8: Branch Office Supervision
  • § 8:1 : Introduction8-2
  • § 8:2 : Branch Office Defined8-4
    • § 8:2.1 : Exemptions from Branch Office Definition/Registration8-5
      • [A] : Non-Sales Locations/Back Offices8-5
      • [B] : Primary Residences8-6
      • [C] : Locations Other Than Primary Residences8-7
      • [D] : Offices of Convenience8-7
      • [E] : Location Used Primarily to Engage in Non-Securities Activities8-8
      • [F] : Floor of a Registered National Securities Exchange8-8
      • [G] : Temporary Location Used for Business Continuity Purposes8-8
    • § 8:2.2 : FINRA Office of Supervisory Jurisdiction8-8
    • § 8:2.3 : NYSE Small Offices and Limited Purpose Offices8-9
    • § 8:2.4 : Branch Office Registration8-10
  • § 8:3 : Home Office Supervision of Branch Offices8-11
    • § 8:3.1 : Creating Written Supervisory Procedures8-11
      • [A] : General Considerations8-11
      • [B] : Areas of Coverage8-13
    • § 8:3.2 : Hiring a Branch Office Manager8-15
    • § 8:3.3 : Surveillance Activity8-16
      • [A] : General Provisions8-16
      • [B] : Exception Reporting8-17
    • § 8:3.4 : Branch Inspections8-19
      • [A] : Regulatory Requirements8-19
      • [B] : Best Practices8-21
      • [C] : Areas of Coverage8-23
    • § 8:3.5 : Training8-24
      • [A] : General Considerations8-24
      • [B] : Regulatory Requirements8-25
    • § 8:3.6 : Producing Manager Review8-27
      • [A] : Regulatory Requirements8-27
      • [B] : Special Considerations for Small Firms8-28
  • § 8:4 : On-Site Supervision of Branch Offices8-28
    • § 8:4.1 : Hiring Registered Persons for the Branch Office8-28
      • [A] : Employment History8-29
      • [B] : Other Businesses8-29
      • [C] : Disclosure Questions8-30
    • § 8:4.2 : Supervising Accounts Prior to Activity8-31
      • [A] : New Account Information8-32
      • [B] : Customer Identification Programs8-34
      • [C] : Regulation S-P8-34
    • § 8:4.3 : Supervising Sales Activities and Communications8-35
      • [A] : Sales Activities8-35
      • [B] : Communications8-36
      • [C] : Outside Business Activities and Private Securities Transactions8-39
    • § 8:4.4 : Performing Heightened Supervision8-42
    • § 8:4.5 : Maintaining Books and Records8-43
      • [A] : Required Records8-43
      • [B] : Contact Person Records8-43
      • [C] : Record Retention8-44
    • § 8:4.6 : Implementing Back Office Controls8-44
    • § 8:4.7 : Delegating Responsibility8-44
  • § 8:5 : Handling Customer Complaints8-44
    • [A] : General Considerations8-44
    • [B] : Reporting Customer Complaints to Regulators8-45
    • [C] : Investigating Customer Complaints8-46
Chapter 9: Supervision of Registered Representatives’ Outside Business Activities
  • § 9:1 : What Activities Are Covered?9-3
  • § 9:2 : Why Supervise Outside Activities?9-3
  • § 9:3 : The Regulatory Framework9-4
    • § 9:3.1 : FINRA Rule 3270, FINRA/NASD Conduct Rule 30409-5
      • [A] : FINRA Rule 3270—Outside Business Activity9-5
      • [B] : Conduct Rule 3040—“Selling Away”9-5
      • [C] : FINRA Staff Interpretations of FINRA Rule 3270 and FINRA/NASD Conduct Rule 30409-7
        • [C][1] : Coverage of FINRA Rule 3270 and FINRA/NASD Rule 30409-7
        • [C][2] : Interpretation of “Selling Compensation”9-9
        • [C][3] : Required Form of Written Notice and Written Approval9-10
        • [C][4] : Record-Keeping Requirement9-10
        • [C][5] : Application of Net Capital and Customer Protection Requirements to Conduct Rule 3040 Transactions9-12
      • [D] : History and Purpose of FINRA Rule 3270 and FINRA/NASD Rule 30409-12
      • [E] : Disciplinary Actions Under FINRA Rule 3270 and FINRA/NASD Conduct Rule 30409-15
      • [F] : Affirmative Obligation to Conduct Surveillance for Unreported Activities9-18
      • [G] : Interaction with Investment Advisers Act Ethics and Compliance Rules9-18
    • § 9:3.2 : FINRA Conduct Rule 30509-19
      • [A] : Exception for Transactions in Investment Company Securities9-19
      • [B] : Application of FINRA Rule 3270 and FINRA/NASD Conduct Rule 3040 to Transactions Covered by Conduct Rule 30509-20
    • § 9:3.3 : FINRA/NYSE Rule 3469-20
  • § 9:4 : Written Supervisory Procedures9-21
  • § 9:5 : Overlapping Jurisdiction and Conflict with Other Regulatory Regimes9-21
Chapter 10: Standard of Care
  • § 10:1 : Introduction10-2
  • § 10:2 : Chronology—Regulatory Response to Convergence of Broker-Dealer and Advisory Services10-2
  • § 10:3 : Standard of Care Imposed Under the Current Regulatory Structure10-4
  • § 10:4 : Treatment of Broker-Dealers Under the Advisers Act10-6
    • § 10:4.1 : Generally10-6
    • § 10:4.2 : RAND Report10-7
  • § 10:5 : Harmonizing the Broker-Dealer and Investment Adviser Standard of Care10-8
  • § 10:6 : Legislative Proposals10-9
    • § 10:6.1 : Investor Protection Act of 200910-9
    • § 10:6.2 : House Proposal10-9
    • § 10:6.3 : Senate Banking Committee Proposal10-10
    • § 10:6.4 : Dodd-Frank Wall Street Reform and Consumer Protection Act of 201010-11
      • [A] : The SEC Study10-13
      • [B] : SEC’s Request for Cost/Benefit Data10-16
        • [B][1] : Assumptions about a Possible Uniform Fiduciary Standard10-17
        • [B][2] : Possible Uniform Fiduciary Standard10-18
        • [B][3] : Possible Alternatives to a Uniform Standard10-19
        • [B][4] : Key Industry Concerns10-20
        • [B][5] : Information about Changes Made in Response to 2007 Wrap Fee Account Rule Case10-21
        • [B][6] : Information about Further Regulatory Harmonization10-21
  • § 10:7 : Practical Implications to Consider10-22
  • § 10:8 : Other Initiatives10-23
    • § 10:8.1 : Separate Department of Labor Proposed Rule—Definition of the Term “Fiduciary”10-23
    • § 10:8.2 : The GAO’s Financial Planner Study10-24
Chapter 11: Customer Transactions: Suitability, Unauthorized Trading, and Churning
  • § 11:1 : Introduction11-2
    • § 11:1.1 : The Suitability Doctrine and Its Origins11-3
      • [A] : FINRA Rule 211111-4
      • [B] : FINRA Rule 209011-5
    • § 11:1.2 : Practical Considerations in Applying the Suitability Doctrine11-6
      • [A] : Investment Objectives11-6
      • [B] : Investment Risk11-8
      • [C] : Evaluation of Investment Costs11-9
      • [D] : Investigation of Customer Finances and Investment Objectives11-11
      • [E] : Unsolicited Orders11-12
      • [F] : Broker-Dealer Sales Training and Compensation Policies11-13
    • § 11:1.3 : Specialized Application of the Suitability Doctrine11-14
      • [A] : Securities Options11-14
      • [B] : Institutional Investors11-15
      • [C] : Accounts Managed by Third-Party Investment Advisers11-16
      • [D] : Variable Annuities and Mutual Funds11-16
        • [D][1] : Variable Annuities11-17
        • [D][2] : Variable Life Insurance11-22
        • [D][3] : Mutual Funds11-23
        • [D][4] : Variable Annuity and Mutual Fund Switches11-26
      • [E] : Online Trading11-27
      • [F] : Day Trading11-29
      • [G] : Low-Priced Securities11-29
      • [H] : Hedge Funds11-30
      • [I] : Municipal Securities11-31
      • [J] : “New Products” and Non-Conventional Investments11-32
        • [J][1] : Non-Traditional ETFs11-32
        • [J][2] : Principal-Protected Notes11-33
        • [J][3] : Reverse Convertibles11-33
      • [K] : Auction Rate Securities11-34
      • [L] : Direct Participation Programs11-35
    • § 11:1.4 : Liability for Unsuitable Recommendations11-35
      • [A] : Regulatory Enforcement Actions11-35
      • [B] : Private Rights of Action11-36
    • § 11:1.5 : Reasonable-Basis Suitability11-38
  • § 11:2 : Unauthorized Trading11-39
  • § 11:3 : Churning11-43
Chapter 12: Advertising and Communications
  • § 12:1 : Introduction12-3
  • § 12:2 : Broker-Dealer Communications with the Public12-4
    • § 12:2.1 : Approval and Record-Keeping12-8
    • § 12:2.2 : Filing Requirements and Review Procedures12-10
    • § 12:2.3 : Exclusions from Filing Requirements12-12
    • § 12:2.4 : Content Standards12-14
    • § 12:2.5 : Guidelines to Ensure That Communications with the Public Are Not Misleading12-16
    • § 12:2.6 : NASD IM-2210-2: Communications with the Public About Variable Life Insurance and Variable Annuities12-17
    • § 12:2.7 : Use of Rankings in Investment Companies’ Communications12-17
    • § 12:2.8 : Requirements for Use of Bond Mutual Fund Volatility Ratings12-18
      • [A] : Definition12-18
      • [B] : Prohibitions on Use12-18
      • [C] : Disclosure Requirements12-19
    • § 12:2.9 : Requirements for the Use of Investment Analysis Tools12-20
    • § 12:2.10 : Guidelines for Communications with the Public Regarding Securities Futures12-21
      • [A] : Specific Standards12-21
      • [B] : Projections12-22
      • [C] : Historical Performance12-22
      • [D] : Record-Keeping12-23
      • [E] : Guidelines for Communications with the Public Regarding Securities Futures12-24
    • § 12:2.11 : Communications with the Public About Collateralized Mortgage Obligations (CMOs)12-24
      • [A] : SRO Guidance for Supervision of Electronic Communications12-26
        • [A][1] : External Communications—Non-Member Email Platforms12-26
        • [A][2] : Internal Communications12-27
        • [A][3] : Person(s) Responsible for Review of Electronic Communications12-27
        • [A][4] : Methods of Review for Correspondence12-28
        • [A][5] : Random Review of Electronic Correspondence12-29
        • [A][6] : Combination of Lexicon and Random Review of Electronic Correspondence12-29
        • [A][7] : Standards Applicable to All Review Systems12-29
        • [A][8] : Frequency of Review of Correspondence12-29
        • [A][9] : Documentation of Review of Correspondence12-30
        • [A][10] : Social Media12-30
          • [A][10][a] : Introduction: Understanding Social Media Sites12-30
          • [A][10][b] : Regulatory Notice 10-06: Social Media Websites12-30
          • [A][10][c] : Static and Interactive Features12-31
          • [A][10][d] : Third-Party Posts: Adoption and Entanglement12-31
          • [A][10][e] : Regulatory Notice 11-39: Social Media Websites and Use of Personal Devices for Business Communications12-33
      • [B] : FINRA Rule 2220: Options Communications with the Public12-34
        • [B][1] : Definitions12-35
        • [B][2] : NASD Approval—Advertisements and Educational Material12-35
        • [B][3] : Standards Applicable to Communications with the Public12-36
      • [C] : NASD Rule 2711—Research Analysts and Research Reports12-39
        • [C][1] : Restrictions on Relationship with Research Department12-42
        • [C][2] : Restrictions on Communications with Subject Company12-43
        • [C][3] : Prohibition of Certain Forms of Analyst Compensation12-44
        • [C][4] : Prohibition of Promises of Favorable Research12-44
        • [C][5] : Restrictions on Research Publication12-45
        • [C][6] : Personal Trading12-46
          • [C][6][a] : Prohibition of Purchasing or Receiving Pre-IPO Securities12-46
          • [C][6][b] : Blackout Periods12-46
        • [C][7] : Disclosure Requirements12-47
          • [C][7][a] : Third-Party Research Disclosure and Supervision12-49
        • [C][8] : Regulation Analyst Certification12-51
          • [C][8][a] : Certifications in Connection with Research Reports12-51
          • [C][8][b] : Certifications in Connection with Public Appearances12-52
        • [C][9] : Operation and Effectiveness of the Research Analyst Conflict of Interest Rules12-53
      • [D] : Misleading Communications About Expertise12-55
Chapter 13: Customer Accounts
  • § 13:1 : What Is a Customer Account?13-4
    • § 13:1.1 : SEC Broker-Dealer Rules13-5
    • § 13:1.2 : FINRA Rules13-6
    • § 13:1.3 : MSRB Rules13-7
    • § 13:1.4 : Regulation S-P13-8
    • § 13:1.5 : USA PATRIOT Act Rules13-9
    • § 13:1.6 : FTC Red Flag Rules13-9
  • § 13:2 : Establishment and Maintenance of Customer Accounts13-10
    • § 13:2.1 : Customer Account Record Information13-10
      • [A] : SEC Information Collection Requirements13-10
      • [B] : NYSE Information Collection Requirements (Retired)13-13
      • [C] : FINRA Information Collection Requirements13-13
      • [D] : MSRB Information Collection Requirements13-17
      • [E] : USA PATRIOT Act Rules and Bank Secrecy Act Rules13-18
        • [E][1] : CIP Rule13-18
        • [E][2] : AML Rules13-21
      • [F] : OFAC Checks and SARs13-24
      • [G] : Clearing Arrangements13-24
      • [H] : Customers Who Are Associated Persons13-24
      • [I] : Customers Which Are Not Natural Persons13-26
    • § 13:2.2 : Acceptance of Accounts13-26
      • [A] : NYSE Account Opening Rules13-26
      • [B] : FINRA Account Opening Rules13-27
      • [C] : MSRB Account Opening Rules13-28
      • [D] : Special Rules for Certain Types of Accounts13-28
        • [D][1] : Warrants, Options Accounts and Securities Futures Accounts13-28
        • [D][2] : Day-Trading Accounts13-29
        • [D][3] : Penny Stock Trading Accounts13-30
        • [D][4] : Variable Annuity Accounts13-30
        • [D][5] : Fee-Based Accounts13-31
    • § 13:2.3 : Account Opening Disclosures and Notifications13-31
      • [A] : Clearing Arrangements13-32
      • [B] : Customer Account Record Notification13-32
      • [C] : Complaint Department Notification13-32
      • [D] : CIP Notice13-33
      • [E] : Privacy Notice13-33
      • [F] : Payment for Order Flow Disclosures13-34
      • [G] : Bank Networking Arrangements13-34
      • [H] : SIPC Information13-35
      • [I] : Margin Account Disclosures13-35
      • [J] : Special Account and Transaction Disclosures13-36
      • [K] : Business Continuity Plan Notice13-37
      • [L] : Rule Proposals13-38
    • § 13:2.4 : Customer Account Agreements13-38
    • § 13:2.5 : Changes in Account Information13-40
      • [A] : Change of Account Name or Address13-40
      • [B] : Change in Account Investment Objective13-41
      • [C] : Change in Options Account and Security Futures Account Information13-41
      • [D] : Thirty-Six-Month Updating of Account Information13-41
    • § 13:2.6 : Maintenance of Customer Account Information13-42
      • [A] : Retention Requirements13-42
      • [B] : Location Requirements13-42
      • [C] : Reliance on Third Parties13-43
      • [D] : Safeguarding Customer Account Information13-43
    • § 13:2.7 : Customer Account Fees and Charges13-44
    • § 13:2.8 : Monitoring Customer Accounts13-45
  • § 13:3 : Handling Customer Orders, Funds and Securities13-46
    • § 13:3.1 : Handling Customer Transaction Orders13-47
      • [A] : Soliciting and Taking Customer Orders13-47
      • [B] : Entering and Recording Customer Orders13-48
      • [C] : Executing Customer Orders13-50
      • [D] : Approving Orders; Diligence Requirements13-50
      • [E] : Orders for Discretionary Accounts13-51
      • [F] : Settling Customer Transactions13-52
    • § 13:3.2 : Receipt and Holding of Customer Funds and Securities13-53
      • [A] : Record-Making Requirements13-53
      • [B] : Cash Reporting Requirements13-53
      • [C] : Segregation and Control Requirements for Customer Funds and Securities13-54
      • [D] : Escrow Account Requirements13-54
      • [E] : Use of Customer Funds or Securities13-55
    • § 13:3.3 : Disbursements from Customer Accounts13-55
    • § 13:3.4 : Collateral Transactions with Customers13-56
      • [A] : Sharing in Customer Profits or Losses13-56
      • [B] : Sharing Commissions with Non-Members13-57
      • [C] : Extending Credit on New Offerings Where a Broker-Dealer Is a Member of the Selling Group13-57
      • [D] : Broker-Dealer Self-Offerings13-58
    • § 13:3.5 : Dealing with Customers13-58
    • § 13:3.6 : Gifts and Entertainment for Customers13-60
  • § 13:4 : Transferring and Closing Customer Accounts13-61
    • § 13:4.1 : Customer-Initiated Transfers13-61
    • § 13:4.2 : Firm-Initiated Transfers of Customer Accounts13-62
      • [A] : Change in Money Market Sweep Account13-62
      • [B] : Bulk Transfer by Member Firm13-63
      • [C] : Block Transfer of Representative’s Book13-64
      • [D] : AML Considerations13-65
    • § 13:4.3 : Closing Customer Accounts13-66
  • § 13:5 : Customer Communications13-67
    • § 13:5.1 : Transaction Disclosure Requirements13-67
      • [A] : Non-Municipal Securities Transactions13-67
        • [A][1] : Transaction Confirmations13-67
        • [A][2] : Use of Alternative Periodic Account Statements13-73
        • [A][3] : Other Periodic Account Statement Requirements13-75
        • [A][4] : Person Entitled to Confirmations and Account Statements13-76
      • [B] : Confirmations for Municipal Securities13-77
      • [C] : Record Retention Requirements for Confirmations13-78
      • [D] : Proposed Rules13-78
    • § 13:5.2 : Other Notices13-79
      • [A] : Notice of Public Disclosure Program13-79
      • [B] : SIPC Notice13-80
      • [C] : Other Customer Notice and Disclosure Requirements13-80
    • § 13:5.3 : Electronic Delivery to Customers of Required Reports and Information13-81
    • § 13:5.4 : Correspondence and Other Communications with Customers13-82
    • § 13:5.5 : Duty to Forward Communications13-84
  • § 13:6 : Customer Complaints and Disputes13-84
    • § 13:6.1 : Record-Keeping Requirements13-84
    • § 13:6.2 : Response to and Resolution of Customer Complaints13-85
      • [A] : Use of SRO Arbitration Forum13-86
      • [B] : Settlement Agreements13-86
      • [C] : Reserving for Contingencies13-86
    • § 13:6.3 : Reporting Requirements13-86
Chapter 14: Compensation
  • § 14:1 : Introduction14-5
  • § 14:2 : Compensation for Effecting Securities Transactions14-5
    • § 14:2.1 : Common Practices for Compensating Broker-Dealers14-6
      • [A] : Securities Trades14-6
      • [B] : Securities Offerings14-7
    • § 14:2.2 : Disclosure Requirements for Compensation Arrangements14-8
      • [A] : Transaction Confirmation Disclosure Requirements14-8
        • [A][1] : SEC Confirmation Disclosure Rules14-9
          • [A][1][a] : Basic Compensation Disclosure Requirement14-9
          • [A][1][b] : Disclosure of Odd-Lot Fees14-11
          • [A][1][c] : Disclosure of Rebates14-11
          • [A][1][d] : Disclosure of Payments for Order Flow14-11
          • [A][1][e] : Penny Stock Compensation Disclosures14-12
        • [A][2] : Confirmations for Transactions Subject to FINRA Rules14-12
          • [A][2][a] : Mutual Fund Deferred Sales Charge Disclosure14-13
        • [A][3] : Confirmations for Municipal Securities14-13
        • [A][4] : Confirmations for Mutual Fund Transactions14-14
          • [A][4][a] : Evolution of Mutual Fund Compensation Practices14-15
          • [A][4][b] : SEC Staff Inquiry in 199414-16
          • [A][4][c] : Class Action Litigation14-17
          • [A][4][d] : 2003 Enforcement Proceeding14-17
        • [A][5] : Proposed Point-of-Sale and Confirmation Rules14-18
        • [A][6] : Proposed Amendments to SEC Confirmation Rule14-19
      • [B] : Offering Document Disclosure Requirements14-19
        • [B][1] : Disclosures Applicable to Corporate Offerings14-20
          • [B][1][a] : SEC Registration Statement Forms14-21
          • [B][1][b] : FINRA Corporate Financing Rule14-22
          • [B][1][c] : FINRA Direct Participation Program Rule14-24
        • [B][2] : Disclosures Applicable to Mutual Fund Offerings14-25
          • [B][2][a] : SEC Registration Statement Form14-25
            • [B][2][a][i] : Prospectus Disclosure14-25
            • [B][2][a][ii] : SAI Disclosure14-26
            • [B][2][a][iii] : Part C Disclosure14-27
          • [B][2][b] : FINRA Investment Company Rule14-27
          • [B][2][c] : Disclosure Proposals14-28
        • [B][3] : Disclosures Applicable to Variable Insurance Contracts Offerings14-28
        • [B][4] : Disclosures Applicable to Municipal Securities Offerings14-30
        • [B][5] : Private and Exempt Offerings14-31
        • [B][6] : Additional Fees When Participating in Offerings14-31
      • [C] : Antifraud Provisions14-32
        • [C][1] : Rule 10b-5 Under the 1934 Act14-32
        • [C][2] : Section 17(a)(2) of the 1933 Act14-33
        • [C][3] : SRO Antifraud Rules14-33
        • [C][4] : State Antifraud and Business Practice Rules14-34
    • § 14:2.3 : Regulatory Restrictions on Compensation Arrangements14-35
      • [A] : Restrictions on Compensation for Securities Trades14-35
        • [A][1] : Commissions, Markups and Markdowns14-35
          • [A][1][a] : FINRA Fair Prices and Commissions Rule14-37
          • [A][1][b] : MSRB Prices and Commissions Rule14-40
          • [A][1][c] : Best Execution Rule14-43
        • [A][2] : Restrictions on Other Fees and Charges14-44
        • [A][3] : Alternative Fee Structures: Asset-Based Fee Brokerage Accounts14-44
      • [B] : Restrictions on Compensation for Securities Offerings14-47
        • [B][1] : SEC-Registered Offerings14-47
          • [B][1][a] : Corporate Offerings and the FINRA Corporate Financing Rule14-48
            • [B][1][a][i] : Prohibition on Certain Hiring Practices14-49
            • [B][1][a][ii] : Indeterminate Compensation14-50
            • [B][1][a][iii] : Non-Cash Compensation14-50
          • [B][1][b] : FINRA Direct Participation Programs14-51
            • [B][1][b][i] : Indeterminate Compensation14-52
            • [B][1][b][ii] : Non-Cash Compensation14-53
            • [B][1][b][iii] : Rollup Transactions14-54
            • [B][1][b][iv] : Proposals to Amend the Compensation Provisions14-55
          • [B][1][c] : Mutual Funds14-55
            • [B][1][c][i] : Sales Charge Limits14-57
            • [B][1][c][ii] : Fairness Standards14-59
            • [B][1][c][iii] : Rule 12b-1 Fees14-59
            • [B][1][c][iv] : Uniform Sales Charges; Breakpoints and Discounts14-60
            • [B][1][c][v] : Breakpoint Compliance14-61
            • [B][1][c][vi] : B Share Sales14-62
            • [B][1][c][vii] : SEC Rulemaking Initiatives and Industry Developments Relating to Multi-Class Structure14-63
            • [B][1][c][viii] : Compensation Through Portfolio Transactions14-63
            • [B][1][c][ix] : 2004 Ban on Directed Brokerage Arrangements14-68
            • [B][1][c][x] : Receipt of Securities As Compensation14-70
            • [B][1][c][xi] : Non-Cash Compensation14-71
            • [B][1][c][xii] : Additional Charges to Customer14-71
            • [B][1][c][xiii] : The Broker Exception14-72
          • [B][1][d] : Variable Insurance Contracts14-72
        • [B][2] : Private Offerings—Private Placements14-74
    • § 14:2.4 : General Conduct Rules14-75
  • § 14:3 : Sharing in Securities Transaction Compensation14-75
    • § 14:3.1 : When Compensation Triggers Registration Requirements14-76
      • [A] : Exemptions and Exclusions14-77
      • [B] : Safe Harbor for Issuers and Their Associated Persons14-77
    • § 14:3.2 : Regulation of Compensation Sharing Arrangements Among Broker-Dealers14-78
      • [A] : Arrangements with Other Members14-79
        • [A][1] : Generally14-79
        • [A][2] : Rules for Offerings14-79
      • [B] : Compensation Sharing Arrangements with Non-Member Firms14-80
        • [B][1] : Arrangements with Exempt Parties14-81
    • § 14:3.3 : Restrictions on Other Compensation Sharing Arrangements14-82
      • [A] : Owners14-82
      • [B] : Finder’s Fees and Referral Arrangements14-82
      • [C] : Networking Arrangements14-86
        • [C][1] : Gramm-Leach-Bliley Act14-86
        • [C][2] : Financial Institution Networking Arrangements14-88
        • [C][3] : Insurance Agency Networking Arrangements14-89
      • [D] : Affinity Arrangements14-91
      • [E] : Accounting Firm Arrangements14-92
      • [F] : Administrative Services Arrangements14-94
      • [G] : Payroll Processing, Employee Leasing and Paymaster Arrangements14-94
        • [G][1] : Payroll Processing and Employee Leasing Services14-95
        • [G][2] : Affiliated Adviser Paymaster Arrangements14-96
        • [G][3] : Insurance Company Paymaster Arrangements14-96
        • [G][4] : Other Paymaster Arrangements14-98
      • [H] : Payment to Selling Firms on Behalf of Distributor14-98
      • [I] : Sale of a Broker-Dealer Firm or Its Accounts14-99
      • [J] : Rebates and Gifts to Customers14-99
        • [J][1] : Securities Trades14-99
        • [J][2] : Offerings14-100
        • [J][3] : Gifts and Entertainment14-102
  • § 14:4 : Payments to Associated Persons14-104
    • § 14:4.1 : General Rules and Principles Governing Payments to Associated Persons14-105
      • [A] : Compensation Practices and Methodology14-106
      • [B] : Registration Requirements for Associated Persons14-107
      • [C] : Compensation Restrictions Due to Registration Classification14-108
      • [D] : Receipt of Securities Compensation from an Unregistered Person14-110
      • [E] : Receipt of Compensation from Another Member14-111
      • [F] : Assignments of Compensation by Registered Persons14-113
      • [G] : Payments to Former Registered Persons14-114
      • [H] : Sharing Compensation with Other Registered Persons14-116
      • [I] : Receipt of Compensation for Other Business Activities14-117
    • § 14:4.2 : Regulation of Cash Compensation14-118
      • [A] : Tully Committee Report on Compensation Practices14-119
      • [B] : Regulatory Response to the Tully Report14-121
      • [C] : Other Proposals Governing Cash Compensation to Associated Persons14-124
    • § 14:4.3 : Regulation of Non-Cash Compensation for Associated Persons in Securities Offerings14-125
      • [A] : Overview14-125
      • [B] : Definition of Non-Cash Compensation14-126
      • [C] : Applicable to All Associated Persons14-126
      • [D] : “In Connection With” Requirement14-127
      • [E] : Restrictions on Associated Person Receipt of Stock and Other Securities14-127
      • [F] : Exceptions for Permissible Non-Cash Compensation14-127
        • [F][1] : Non-Incentive Small Gifts, Meals and Entertainment14-127
        • [F][2] : Non-Incentive Training and Education14-128
        • [F][3] : Incentive Non-Cash Compensation Programs14-130
          • [F][3][a] : Total Production14-131
          • [F][3][b] : Nature of Non-Cash Compensation14-133
      • [G] : Other Compensation14-133
    • § 14:4.4 : Record-Keeping Requirements14-134
Chapter 15: Mark-Ups
  • § 15:1 : Introduction15-3
  • § 15:2 : Regulatory Schemes15-4
    • § 15:2.1 : Federal Securities Laws15-4
      • [A] : Antifraud Provisions Under the Securities Laws15-5
      • [B] : Mark-Up Disclosure Requirements: SEC Rules 10b-10 and 15g-415-7
        • [B][1] : SEC Rule 10b-10: Confirmations15-7
        • [B][2] : SEC Rule 15g-4: Penny Stock Transactions15-10
      • [C] : Liability for Failure to Supervise15-11
    • § 15:2.2 : FINRA Rules and Interpretations15-11
      • [A] : FINRA & NASD Conduct Rules15-11
      • [B] : FINRA Mark-Up Policy: NASD IM-2440-115-14
      • [C] : FINRA Debt Mark-Up Policy: NASD IM-2440-215-17
      • [D] : Net Trading by Market Makers: NASD Rule 244115-18
      • [E] : Liability for Failure to Supervise15-19
    • § 15:2.3 : MSRB Rules15-20
      • [A] : Pricing Guidelines15-21
      • [B] : Disclosure Requirements15-24
    • § 15:2.4 : Blue Sky Laws15-24
  • § 15:3 : Determining Prevailing Market Price15-26
    • § 15:3.1 : Prevailing Market Price Generally15-26
    • § 15:3.2 : Prevailing Market Price for Firms That Are Not Acting As Market Makers15-27
      • [A] : Contemporaneous Cost15-27
      • [B] : Prices in Inter-Dealer Transactions15-29
      • [C] : Quotations15-29
    • § 15:3.3 : Prevailing Market Price for Firms That Act As Market Makers15-31
      • [A] : Use of Inter-Dealer Prices for Actively Traded Securities15-31
      • [B] : Use of Quotations for Active and Competitive Markets15-33
      • [C] : Use of Contemporaneous Cost for Inactive But Competitive Markets15-35
      • [D] : Dominated and Controlled Markets15-35
      • [E] : Market Maker Status in the Debt Markets15-39
    • § 15:3.4 : Prevailing Market Price for Debt Securities (Except Municipal Securities): FINRA’s Debt Mark-Up Policy15-42
      • [A] : The Contemporaneous Cost Presumption15-43
      • [B] : Overcoming the Presumption15-44
      • [C] : The Hierarchy of Pricing Information15-45
      • [D] : Analysis of “Similar Securities”15-46
      • [E] : Economic Models15-47
      • [F] : Exclusion of Certain Transactions with Institutional Customers15-47
    • § 15:3.5 : Prevailing Market Price for Municipal Securities15-49
  • § 15:4 : Guidelines for Determining Whether a Mark-Up Is “Excessive”15-51
    • § 15:4.1 : General Principles15-51
      • [A] : Relevance of Industry Standards15-52
      • [B] : Relevance of Risk15-53
    • § 15:4.2 : Mark-Ups on Equity Securities15-54
    • § 15:4.3 : Mark-Ups on Debt Securities15-55
      • [A] : Generally15-55
      • [B] : High Yield Bonds15-57
    • § 15:4.4 : Mark-Ups on Municipal Securities15-59
    • § 15:4.5 : Mark-Ups on Zero-Coupon Securities15-62
    • § 15:4.6 : Mark-Ups on Treasury Securities15-64
      • [A] : Generally15-64
      • [B] : Yield Burning15-65
    • § 15:4.7 : Mark-Ups on GNMA Securities15-67
    • § 15:4.8 : Mark-Ups on CMOs15-68
  • § 15:5 : Antitrust Challenges to the Regulation of Mark-Ups15-70
Chapter 16: Insider Trading
  • § 16:1 : Insider Trading Defined16-3
    • § 16:1.1 : Definition by Plain Language of the Statute and Accompanying Rule Promulgated by the SEC16-3
      • [A] : The Statute: Section 10(b)16-3
      • [B] : The Rule: 10b-516-4
      • [C] : Summary of Theories of Liability Under Rule 10b-516-6
        • [C][1] : Traditional Insider Trading16-6
        • [C][2] : Misappropriation Theory16-7
    • § 16:1.2 : The Law As Shaped Through Interpretation of the Courts16-8
      • [A] : Traditional Insider Trading16-8
        • [A][1] : In re Cady, Roberts & Co.: Abstain or Disclose16-8
        • [A][2] : Blue Chip Stamps v. Manor Drug Stores: Implying a Private Right of Action16-10
        • [A][3] : Ernst & Ernst v. Hochfelder: Scienter16-11
        • [A][4] : Santa Fe Industries, Inc. v. Green: All About Fraud16-14
        • [A][5] : Chiarella v. United States: The Case for Fiduciary Duty16-15
      • [B] : Derivative or Tipper/Tippee Liability16-17
        • [B][1] : Dirks v. SEC: Beyond “Insider” Trading16-17
      • [C] : Quasi-Insider Liability16-20
        • [C][1] : Dirks v. SEC: “Temporary Insider” Trading16-20
      • [D] : Misappropriation Theory16-21
        • [D][1] : United States v. O’Hagan: “Outsider Insider” Trading16-21
        • [D][2] : United States v. Newman: Criminal Acts of Insider Trading16-22
        • [D][3] : SEC v. Materia: Misappropriation in the Civil Context16-24
        • [D][4] : Carpenter v. United States: Fraud on the Market16-25
        • [D][5] : United States v. Chestman: What Exactly Is a Fiduciary?16-27
        • [D][6] : United States v. O’Hagan: Misappropriation—No Turning Back16-29
        • [D][7] : United States v. Cassese: Imposing Limitations on Misappropriation16-32
    • § 16:1.3 : Law Prohibiting Trading on Material Nonpublic Information in the Context of a Tender Offer16-34
      • [A] : Section 14(e) and Rule 14e-3(a)16-34
        • [A][1] : Chestman and O’Hagan16-36
        • [A][2] : United States v. Cassese16-38
  • § 16:2 : Establishment of Insider Trading Procedures16-41
    • § 16:2.1 : Types of Procedures Used by Brokerage Firms16-42
      • [A] : Firewalls16-43
      • [B] : Restricted Lists and Other Monitoring Tools16-43
      • [C] : Communication and Education16-45
      • [D] : Recent Enforcement Actions Against Financial Industry Professionals16-45
    • § 16:2.2 : Rule 10b5-1: The SEC’s Solution to the Issue of the Trader’s “Use” or “Knowing Possession” of Material Nonpublic Information at the Time of a Trade16-47
      • [A] : Background16-48
      • [B] : Impact of Rule 10b5-1 on Insider Trading Litigation16-50
      • [C] : Rule 10b5-1 As a Defense16-53
      • [D] : SEC’s Increased Focus on 10b5-1 Plans16-53
      • [E] : Relevance to Brokerage Firms16-54
  • § 16:3 : Additional Developments in Insider Trading Jurisprudence and Enforcement16-54
    • § 16:3.1 : Rule 10b5-2: Duties of Trust or Confidence for Misappropriation Liability16-54
      • [A] : Attempting to Define a “Fiduciary-Like Relationship”16-54
      • [B] : Potential Liability Arising Out of Confidentiality Agreements16-55
    • § 16:3.2 : Insider Trading by Hedge Funds16-60
    • § 16:3.3 : Insider Trading in Connection with Private Investment in Public Equity Transactions16-64
    • § 16:3.4 : SEC’s Renewed Focus and New Specialized Units16-68
      • [A] : Renewed Emphasis on Pursuit of Insider Trading Claims and Creation of New Specialized Units16-68
      • [B] : Insider Trading Alleged in Credit Default Swap Transaction16-69
Chapter 17: Research Analysts
  • § 17:1 : Summary17-4
    • § 17:1.1 : Overview17-4
    • § 17:1.2 : SRO Research Rules17-5
      • [A] : Research Department Separation17-5
      • [B] : Prohibition on Research Soliciting Investment Banking Business17-5
      • [C] : Prohibition on Research Analyst Participation in Road Shows17-6
      • [D] : No Three-Way Meetings Involving Investors17-6
      • [E] : Requirement of Fair and Balanced Communications17-6
      • [F] : Analyst Compensation17-6
      • [G] : Blackout on Research and Public Appearances in Connection with Offerings17-6
      • [H] : Research Blackout When “Lock-Ups” Expire17-7
      • [I] : Termination of Coverage17-7
      • [J] : Analyst Trading Restrictions17-7
      • [K] : Disclosure Requirements17-7
      • [L] : Analyst Exams17-7
      • [M] : Supervisory Procedures17-7
    • § 17:1.3 : SEC’s Analyst Certification Rules17-7
    • § 17:1.4 : Global Research Analyst Settlement17-8
  • § 17:2 : Overview17-9
    • § 17:2.1 : Initial Regulatory Inquiries17-9
    • § 17:2.2 : From Inquiry to Regulation17-10
      • [A] : SRO Rulemaking and SOA Section 50117-10
      • [B] : SEC Rulemaking17-11
      • [C] : Global Research Settlement17-11
  • § 17:3 : SOA Requirements17-13
    • § 17:3.1 : Summary of SOA Section 50117-13
    • § 17:3.2 : Legislative History17-15
  • § 17:4 : SRO Research Rules17-16
    • § 17:4.1 : Summary17-16
      • [A] : The SRO Research Rules17-17
      • [B] : Evolution of SRO Research Rules17-20
    • § 17:4.2 : Definition of Research Report17-22
      • [A] : Excluded Material17-23
      • [B] : Third-Party Research17-25
    • § 17:4.3 : Definition of Public Appearance17-28
    • § 17:4.4 : Definition of Research Analyst17-29
    • § 17:4.5 : Research Department Separation17-31
      • [A] : No Supervision of Research by Investment Banking17-31
      • [B] : Restrictions on Prepublication Review of Research by Non-Research Personnel17-32
      • [C] : Restrictions on Prepublication Review of Research by Subject Companies17-33
      • [D] : Prohibition on Promises of Favorable Research17-34
      • [E] : Prohibition on Directing Analysts to Undertake Selling or Marketing Efforts17-34
    • § 17:4.6 : Prohibition on Research Solicitation of Investment Banking Business17-35
    • § 17:4.7 : Prohibition on Road Show Participation17-36
    • § 17:4.8 : Prohibition on Three-Way Communications Involving Investors17-37
    • § 17:4.9 : Requirement of Fair and Balanced Communications17-38
    • § 17:4.10 : Review of Analyst Compensation17-39
    • § 17:4.11 : Quiet Periods for Research and Public Appearances17-41
      • [A] : Managers and Co-Managers of Securities Offering17-41
      • [B] : Participating Underwriters and Dealers17-43
      • [C] : Upon Expiration of “Lock-Up” Agreements17-44
    • § 17:4.12 : Notice of Termination of Coverage17-45
    • § 17:4.13 : Restrictions on Personal Trading by Research Analysts17-46
      • [A] : Prohibition Against Purchasing or Receiving Pre-IPO Securities17-47
      • [B] : Blackout Periods17-48
      • [C] : Trading Against Recommendation17-48
      • [D] : Limited Exceptions17-49
      • [E] : Application to Supervisors of Research Analysts17-50
    • § 17:4.14 : Disclosure Requirements17-50
      • [A] : Conflicts of Interest17-51
        • [A][1] : Securities Ownership and Employment Disclosures17-51
        • [A][2] : Additional Disclosures by Member Firms17-52
        • [A][3] : Additional Disclosure by Analysts17-55
        • [A][4] : All Other Actual, Material Conflicts17-55
      • [B] : Meaning and Distribution of Ratings17-56
      • [C] : Price Charts and Price Targets17-56
      • [D] : Market Making17-57
      • [E] : Manner of Disclosure17-57
      • [F] : Special Rules for Compendium Reports17-58
      • [G] : SRO Staffs’ Recommendation for Disclosure Presentation17-59
    • § 17:4.15 : Registration, Qualification, and Continuing Education for Research Analysts17-60
    • § 17:4.16 : Supervisory Procedures17-62
    • § 17:4.17 : Permanent Exemption for Small Firms17-62
    • § 17:4.18 : Significant Additions in the 2008 FINRA Proposal17-63
  • § 17:5 : SEC’s Regulation AC (Analyst Certification)17-64
    • § 17:5.1 : Summary17-64
    • § 17:5.2 : Certification of Research Reports17-65
    • § 17:5.3 : Public Appearances17-67
    • § 17:5.4 : “Covered Persons”—Application of Regulation AC to Persons Associated with a Broker-Dealer17-69
      • [A] : Application to Investment Advisers and Banks17-71
      • [B] : Application to the News Media17-71
    • § 17:5.5 : Third-Party Research17-72
    • § 17:5.6 : Interpretive Guidance on What Is and Is Not Research for Regulation AC17-73
    • § 17:5.7 : Who Is a Research Analyst?17-75
    • § 17:5.8 : Application to Research Provided by Non-U.S. Firms17-76
    • § 17:5.9 : Alternative Compliance Methods for Certain Research17-77
      • [A] : Quantitative and Technical Research17-77
      • [B] : Compendium Reports17-78
    • § 17:5.10 : Supervision and Review of Research17-78
    • § 17:5.11 : Enforcement; Fraud Liability Under the Federal Securities Laws17-79
  • § 17:6 : Global Research Analyst Settlement17-80
    • § 17:6.1 : Summary17-80
    • § 17:6.2 : Scope17-83
      • [A] : U.S.-Oriented Applicability17-83
      • [B] : Definition of Research Report17-84
        • [B][1] : Equity Research17-84
        • [B][2] : Excepted Communications17-84
      • [C] : Definition of Research17-86
      • [D] : Definition of Investment Banking17-86
      • [E] : Exempt Investment Adviser Affiliates17-86
    • § 17:6.3 : Physical Separation17-87
    • § 17:6.4 : Reporting Lines17-87
    • § 17:6.5 : Communications Firewalls Between Research and Investment Banking17-88
      • [A] : Views About the Merits of a Proposed Transaction, a Potential Candidate for a Transaction, or Market or Industry Trends, Conditions or Developments17-88
      • [B] : Communications to Commitment or Similar Committee17-90
      • [C] : Confirming the Adequacy of Disclosure17-90
      • [D] : Post-Mandate Communications17-91
        • [D][1] : Views on Pricing and Structuring17-91
        • [D][2] : Sales Force Education17-91
      • [E] : Conferences17-93
      • [F] : Matters of General Firm Interest17-93
      • [G] : Legal and Compliance Issues17-94
      • [H] : Communications Not Related to Research or Investment Banking17-94
    • § 17:6.6 : Prohibition on Soliciting Investment Banking Business17-94
      • [A] : Particular Communications with Issuer at Issuer’s Request17-95
      • [B] : No Three-Way Meetings17-95
    • § 17:6.7 : Prohibition on Road Show Participation17-96
    • § 17:6.8 : Marketing and Selling Efforts17-96
    • § 17:6.9 : Research Coverage Decisions17-97
    • § 17:6.10 : Termination of Research Coverage17-98
    • § 17:6.11 : Research Oversight17-99
    • § 17:6.12 : Research Budget17-99
    • § 17:6.13 : Compensation and Evaluation of Research Personnel17-99
    • § 17:6.14 : Legal and Compliance17-101
    • § 17:6.15 : Policies and Procedures to Restrict Influence over Research17-102
    • § 17:6.16 : Independent Monitor17-102
    • § 17:6.17 : Obligation to Provide Independent, Third-Party Research17-103
    • § 17:6.18 : Additional Disclosures17-104
      • [A] : Disclosures in Research Reports17-104
      • [B] : Disclosures Regarding Analyst Performance17-104
    • § 17:6.19 : Amendments and Compliance Certification17-105
    • § 17:6.20 : Savings Clauses17-106
Chapter 18: Electronic Trading
  • § 18:1 : Overview18-4
  • § 18:2 : General Obligations Related to Trading Activities18-4
    • § 18:2.1 : Generally18-4
    • § 18:2.2 : The Customer Relationship18-5
    • § 18:2.3 : Order Handling and Regulations NMS and ATS18-5
    • § 18:2.4 : Short Sales18-6
    • § 18:2.5 : Single-Stock Circuit Breakers18-9
    • § 18:2.6 : Other Requirements18-10
  • § 18:3 : Rise of Electronic Trading18-11
  • § 18:4 : Exchange Act Section 11A18-13
    • § 18:4.1 : Generally18-13
    • § 18:4.2 : The SEC’s Mandate and the Objectives of Section 11A18-13
    • § 18:4.3 : Multiple Competing Markets18-14
    • § 18:4.4 : Market Developments18-16
    • § 18:4.5 : Recent Market Developments18-18
      • [A] : The 2010 Market Structure Concept Release18-18
        • [A][1] : Undisplayed Liquidity18-19
        • [A][2] : High-Frequency Trading18-21
      • [B] : The “Flash Crash”18-22
  • § 18:5 : Regulation ATS18-24
    • § 18:5.1 : Overview of Regulation ATS18-24
      • [A] : Policy Considerations18-24
      • [B] : Regulatory Framework18-25
    • § 18:5.2 : Definition of Exchange18-27
      • [A] : Generally18-27
      • [B] : Rule 3b-16 Definition18-27
      • [C] : Exclusions18-28
      • [D] : Exemptions18-29
    • § 18:5.3 : Definition of an ATS18-29
    • § 18:5.4 : ATSs That Are Not Required to Comply with Regulation ATS18-30
      • [A] : Systems Subject to Other Appropriate Regulations18-30
      • [B] : Systems Trading Solely Government and Related Securities18-31
      • [C] : Systems Exempted by the SEC18-31
    • § 18:5.5 : Requirements of Regulation ATS18-31
      • [A] : Requirements Applicable to All ATSs18-32
        • [A][1] : Membership in an SRO18-32
        • [A][2] : Notice of Operation As an Alternative Trading System and Amendments18-32
        • [A][3] : Procedures to Ensure Confidential Treatment of Trading Information18-33
        • [A][4] : Filing Requirements18-33
        • [A][5] : Recordkeeping18-34
      • [B] : Additional Requirements for ATSs Meeting 5% Trading Volume Threshold18-34
        • [B][1] : Public Order Display and Execution Access Requirements18-34
          • [B][1][a] : Market Transparency18-34
          • [B][1][b] : Obligations of ATSs Under the Public Display Requirement18-35
          • [B][1][c] : Execution Access to Publicly Displayed Orders18-36
          • [B][1][d] : Execution Access Fees18-36
        • [B][2] : Fair Access Requirement18-37
          • [B][2][a] : Importance of Fair Access18-37
          • [B][2][b] : Fair Access Requirement18-37
      • [C] : Additional Requirements for ATSs Meeting 20% Trading Volume Threshold18-38
    • § 18:5.6 : Regulation of ATSs As Exchanges18-39
      • [A] : Generally18-39
      • [B] : Self-Regulatory Responsibilities18-39
      • [C] : Fair Representation18-39
      • [D] : Limitations on Membership18-40
      • [E] : Prohibitions on Trading Unregistered Securities18-40
      • [F] : Participation in the NMS18-40
      • [G] : Trading Halts18-41
  • § 18:6 : Regulation NMS18-41
    • § 18:6.1 : Generally18-41
    • § 18:6.2 : Order Protection Rule18-42
      • [A] : Generally18-42
      • [B] : Definitions18-43
      • [C] : Requirements18-45
      • [D] : Exceptions18-45
        • [D][1] : Self-Help Exception18-45
        • [D][2] : Intermarket Sweep Order Exception18-46
        • [D][3] : Exception for Flickering Quotes18-46
        • [D][4] : Exception for Single-Price Openings, Reopenings, and Closing Transactions18-46
        • [D][5] : Exception for Benchmark Trades18-47
        • [D][6] : Exception for Stopped Orders18-47
        • [D][7] : Exception for Other Than “Regular-Way” Contracts18-47
        • [D][8] : Exception for Crossed Quotations18-47
        • [D][9] : Exemption for Certain Sub-Penny Trade-Throughs18-47
        • [D][10] : Exemption for Contingent Trades18-48
        • [D][11] : Exemption for Print Protection Transactions18-49
        • [D][12] : Exemption for Error Correction Transactions18-49
        • [D][13] : Exemption for Non-Convertible Preferred Securities18-50
      • [E] : Compliance18-50
    • § 18:6.3 : Access Rule18-51
      • [A] : Generally18-51
      • [B] : Fair and Non-Discriminatory Access18-52
      • [C] : Access Fees18-52
      • [D] : Locked and Crossed Quotations18-52
      • [E] : Regulation ATS Fair Access Requirements18-53
    • § 18:6.4 : Sub-Penny Rule18-53
    • § 18:6.5 : Rule 602—Quote Rule18-54
    • § 18:6.6 : Rule 604—Limit Order Display Rule18-57
    • § 18:6.7 : Rule 605—Disclosure of Order Execution Information18-59
    • § 18:6.8 : Rule 606—Disclosure of Order Routing Information18-61
  • § 18:7 : Sponsored Access18-64
    • § 18:7.1 : Access to Exchange Systems by Non-Members18-64
    • § 18:7.2 : Exchange Act Rule 15c3-518-65
      • [A] : General Requirement18-65
      • [B] : Definition of Market Access18-66
      • [C] : Regulatory Requirements and Financial Risk18-66
      • [D] : Restriction on Delegation of Risk Management Functions18-67
        • [D][1] : Allocation of Regulatory Risk Controls18-67
        • [D][2] : Regular Review of Controls and Procedures18-67
    • § 18:7.3 : SRO Sponsored Access Rules18-68
  • § 18:8 : Dark Pools18-68
    • § 18:8.1 : Generally18-68
    • § 18:8.2 : Dark Pool Proposal18-70
      • [A] : Indications of Interest18-70
      • [B] : Display Obligations Under Regulation ATS18-71
      • [C] : Consolidated Trade Data18-71
    • § 18:8.3 : Regulatory Concerns18-71
      • [A] : Transparency18-72
      • [B] : Indications of Interest and Quotations18-73
        • [B][1] : Use of IOIs18-73
        • [B][2] : The Quote Rule18-73
        • [B][3] : Regulation ATS Requirements18-75
        • [B][4] : Recent SEC Staff Comments Concerning IOIs and Orders18-77
      • [C] : Price Discovery Considerations18-77
      • [D] : Fair Access to Dark Pools18-77
      • [E] : Fragmentation18-78
Chapter 18A: Short Selling
  • § 18A:1 : Definition of Short Selling18A-1
  • § 18A:2 : History of Short Selling18A-2
  • § 18A:3 : Recent Developments18A-6
  • § 18A:4 : Current Regulation: The New Uptick Rule18A-10
    • § 18A:4.1 : Background18A-10
    • § 18A:4.2 : Trigger Level18A-11
    • § 18A:4.3 : Price Restrictions18A-12
    • § 18A:4.4 : Covered Securities18A-13
    • § 18A:4.5 : A Policies and Procedures Approach18A-15
    • § 18A:4.6 : Exceptions: Executing Short Sales While “Circuit Breaker” Price Restriction In Effect18A-18
    • § 18A:4.7 : SEC Goals and Criticisms18A-21
  • § 18A:5 : The Dodd-Frank Act18A-22
    • § 18A:5.1 : Section 929X18A-23
    • § 18A:5.2 : Section 41718A-23
    • § 18A:5.3 : Comment Request18A-24
Chapter 19: Best Execution and Customer Order Handling
  • § 19:1 : Introduction19-3
    • § 19:1.1 : Financial Industry Regulatory Authority (FINRA)19-6
  • § 19:2 : Types of Orders and Execution Forums19-6
    • § 19:2.1 : Agents and Principals19-6
      • [A] : Brokers19-7
      • [B] : Dealers19-7
      • [C] : Market Makers and Specialists19-7
      • [D] : Riskless Principals19-8
    • § 19:2.2 : Types of Orders19-8
      • [A] : Customer Orders Versus Non-Customer Orders19-8
      • [B] : Market Orders19-9
      • [C] : Limit Orders19-9
      • [D] : Orders for Execution at Specific Time19-10
      • [E] : Fill-or-Kill and All-or-None Orders19-10
      • [F] : Directed Orders19-11
      • [G] : Discretionary Orders19-11
      • [H] : Block Trades19-11
      • [I] : Small Orders; Odd-Lot Orders19-12
      • [J] : Short Sales19-12
      • [K] : Cross Trades19-12
    • § 19:2.3 : Markets, Trading Systems, and Other Forums for Execution19-13
      • [A] : Exchanges19-13
      • [B] : OTC Markets19-13
      • [C] : Automated Trading Systems (ATSs)19-14
  • § 19:3 : Best Execution19-15
    • § 19:3.1 : Underlying Legal Basis for the Duty of Best Execution19-15
      • [A] : Origins of the Best Execution Duty19-15
      • [B] : Regulatory Definition of Best Execution19-16
    • § 19:3.2 : Factors in Determining Best Execution19-18
      • [A] : Reasonable Diligence19-18
      • [B] : Best Price19-19
      • [C] : National Best Bid and Offer (NBBO) and the Newton Case19-21
      • [D] : Price Improvement19-22
      • [E] : Speed and Timing of Execution19-22
      • [F] : Certainty of Execution19-23
      • [G] : Anonymity and Other Client-Specific Questions19-23
      • [H] : Interpositioning19-23
    • § 19:3.3 : To Whom and When the Duty of Best Execution Is Owed19-24
      • [A] : Duty Owed to Customers19-24
      • [B] : Evaluation and Procedural Duties in Best Execution19-26
    • § 19:3.4 : Securities Fraud19-28
  • § 19:4 : Addressing Priority of Interests in Execution19-28
    • § 19:4.1 : Conflicts of Interest19-28
      • [A] : Internalization19-29
      • [B] : Preferencing19-30
      • [C] : Related Investment Advisers and Investment Companies19-30
    • § 19:4.2 : Priority of Execution Among Customers19-30
      • [A] : Basic Rule: Execute Customer Orders Chronologically19-31
      • [B] : Block Trades19-31
    • § 19:4.3 : Proprietary Trades19-32
      • [A] : Basic Rule: Never Trade Ahead of Customers19-32
      • [B] : Limit Orders19-33
    • § 19:4.4 : Front Running19-36
  • § 19:5 : Other Order Handling Rules19-37
    • § 19:5.1 : Maintaining Professional Standards in Order Handling19-37
    • § 19:5.2 : Backdrop of the National Market System19-38
    • § 19:5.3 : Trade-Through Rules19-40
    • § 19:5.4 : Other Sources for Regulation19-41
  • § 19:6 : Record Keeping for Order Handling19-42
    • § 19:6.1 : Order Tickets and Trade Confirmations19-42
    • § 19:6.2 : Records of Trade Execution19-44
    • § 19:6.3 : Order Audit Trail System (OATS)19-44
Chapter 20: Soft Dollars and Other Means of Obtaining Business
  • § 20:1 : Introduction20-3
  • § 20:2 : What Are Soft Dollars?20-3
  • § 20:3 : The Basic Legal Framework: Section 28(e)20-6
    • § 20:3.1 : Investment Discretion20-8
    • § 20:3.2 : Brokerage Commissions: Agency and Principal Transactions20-9
      • [A] : Principal Transactions and the 2001 Guidance20-9
      • [B] : Over-the-Counter Agency Transactions20-11
      • [C] : Transactions in Futures20-11
      • [D] : Primary Offerings; Selling Concessions and FINRA Rule 514120-12
    • § 20:3.3 : Brokerage and Research Services20-13
      • [A] : Generally20-13
      • [B] : The Eligibility Finding20-15
        • [B][1] : Research and Publications; the Expression of Reasoning and Knowledge20-15
        • [B][2] : Brokerage20-17
      • [C] : The Use Finding20-18
      • [D] : The Reasonableness Finding20-19
      • [E] : Examples of Services Within and Outside the Safe Harbor20-19
      • [F] : Mixed-Use Items; Proxy Voting Services20-24
    • § 20:3.4 : The “Provided By” and “Effected” Conditions; Step-Out Transactions20-26
      • [A] : Generally20-26
      • [B] : Multiple Brokers: Commission Sharing and Step-Out Transactions20-27
        • [B][1] : Commission-Sharing Arrangements20-27
        • [B][2] : The Goldman Sachs and Capital Institutional No-Action Letters20-28
        • [B][3] : Step-Out Transactions20-30
  • § 20:4 : The Investment Adviser’s Obligations and Potential Liabilities20-31
    • § 20:4.1 : Generally20-31
    • § 20:4.2 : Related Liability Theories20-32
      • [A] : The Investment Advisers Act20-32
        • [A][1] : Section 20620-32
        • [A][2] : Section 20720-34
      • [B] : The Exchange Act20-35
      • [C] : The Securities Act20-35
    • § 20:4.3 : Disclosure Requirements20-35
    • § 20:4.4 : Compliance Procedures and Supervisory Obligations20-38
  • § 20:5 : The Broker-Dealer’s Obligations and Potential Liabilities20-39
    • § 20:5.1 : Aiding and Abetting the Adviser’s Breach of Fiduciary Duty20-39
    • § 20:5.2 : The Duty to Supervise: Supervisory and Compliance Procedures20-41
    • § 20:5.3 : Disclosure—Confirmations20-43
    • § 20:5.4 : FINRA Rules20-44
  • § 20:6 : Documenting Soft-Dollar Arrangements20-45
  • § 20:7 : Arrangements Outside the Safe Harbor: Special Issues20-45
    • § 20:7.1 : Directed Brokerage Arrangements20-45
    • § 20:7.2 : Allocation of Brokerage in Exchange for Distribution of Mutual Fund Shares20-46
  • § 20:8 : Oversight by Mutual Fund Directors20-50
  • § 20:9 : The Future of Soft Dollars20-50
  • § 20:10 : Payment for Order Flow (POF)20-54
    • § 20:10.1 : Overview20-54
  • § 20:11 : Legal Issues Raised by POF20-56
    • § 20:11.1 : Best Execution20-56
    • § 20:11.2 : Agency/Principal Issues20-58
  • § 20:12 : Regulation of POF20-59
  • § 20:13 : Conclusion20-63
Chapter 21: Trading Desk Activities
  • § 21:1 : Introduction21-2
  • § 21:2 : Regulatory Reviews and Examinations of OATS and Trade Reporting Obligations21-3
  • § 21:3 : Member Supervision of Trading Activity21-5
  • § 21:4 : OATS Reporting and Record-Keeping Obligations21-9
    • § 21:4.1 : Description of Securities Reported to OATS21-9
    • § 21:4.2 : Recording of Order Information21-10
      • [A] : Order Origination and Receipt21-10
      • [B] : Order Transmittal21-11
        • [B][1] : Transmittal Within a Member21-11
        • [B][2] : Electronic Transmittal to a Member Other Than an ECN21-11
        • [B][3] : Electronic Transmittal to an ECN21-12
        • [B][4] : Manual Transmittal to a Member Other Than an ECN21-12
        • [B][5] : Manual Transmittal to an ECN21-13
        • [B][6] : Transmittal to a Non-Member21-14
      • [C] : Order Modifications, Cancellations, and Executions21-14
        • [C][1] : Order Modifications21-14
        • [C][2] : Order Cancellations21-15
        • [C][3] : Order Executions21-15
      • [D] : Record Retention Requirements21-16
    • § 21:4.3 : FINRA OATS Reporting Requirements21-16
      • [A] : Reporting Agent Agreements21-16
      • [B] : Exemptions for Reporting Manual Orders21-17
    • § 21:4.4 : The SEC’s Proposed Consolidated Audit Trail21-17
    • § 21:4.5 : The SEC’s Large Trader Reporting Requirements21-20
      • [A] : Large Trader Reporting Obligations21-20
      • [B] : Additional Broker-Dealer Obligations21-24
      • [C] : Confidentiality of Form 13H21-26
  • § 21:5 : Overview of Equity Transaction Reporting21-27
    • § 21:5.1 : Transactions in Listed Securities Effected on a National Securities Exchange21-29
    • § 21:5.2 : Transactions in Listed Securities Effected Otherwise Than on an Exchange21-30
      • [A] : The FINRA/NASDAQ Trade Reporting Facility21-31
      • [B] : The FINRA/NYSE Trade Reporting Facility21-32
      • [C] : The FINRA Alternative Display Facility (ADF) and TRACS Trade Comparison21-32
    • § 21:5.3 : Transactions in Over-the-Counter Equity Securities21-33
    • § 21:5.4 : Transactions in Restricted Equity Securities21-34
    • § 21:5.5 : Transactions in Direct Participation Program Securities21-35
    • § 21:5.6 : Submission of Non-Tape or Clearing-Only Reports for Previously Reported Trades21-36
  • § 21:6 : TRACE Reporting Requirements21-36
  • § 21:7 : MSRB Trade Reporting Requirements21-39
Chapter 22: Financial Obligations—Net Capital, Customer Protection, and Financial Reporting
  • § 22:1 : Overview22-2
  • § 22:2 : Net Capital Requirements22-4
  • § 22:3 : Basic Method22-5
    • § 22:3.1 : Minimum Fixed Amounts for Broker-Dealer Type22-5
      • [A] : Clearing or Carrying Accounts22-5
      • [B] : Dealers22-6
      • [C] : Market-Makers22-6
      • [D] : Introducing Broker-Dealers22-7
      • [E] : Broker-Dealers Limited to Sales of Investment Companies and Variable Products22-8
      • [F] : Municipal Securities “Broker’s Broker”22-9
      • [G] : Futures Commission Merchants22-9
      • [H] : Reverse Repurchase Agreements22-10
      • [I] : Specialists22-10
      • [J] : Exemptions22-10
    • § 22:3.2 : Aggregate Indebtedness22-11
    • § 22:3.3 : Alternative Method22-14
    • § 22:3.4 : Debt Equity Requirements22-16
  • § 22:4 : Computing Net Capital22-17
    • § 22:4.1 : Adjustments to Net Worth22-18
      • [A] : Expense Sharing Agreements22-19
      • [B] : Other Types of Non-Allowable Assets22-20
    • § 22:4.2 : Adjustments to Net Worth: “Haircuts”22-23
  • § 22:5 : Consolidation with Subsidiaries22-28
  • § 22:6 : Compliance, Reporting and Notice Requirements22-29
    • § 22:6.1 : FOCUS Reports22-29
    • § 22:6.2 : Failure to Maintain Minimum Net Capital22-31
    • § 22:6.3 : Financial Statements22-34
  • § 22:7 : Limitations on Withdrawal of Equity Capital22-34
    • § 22:7.1 : Early Warning Notices22-36
    • § 22:7.2 : Withdrawals of Equity Capital22-38
  • § 22:8 : “Brokers’ Broker”22-39
  • § 22:9 : Options and Commodity Issues22-40
    • § 22:9.1 : Listed Options22-40
    • § 22:9.2 : Theoretical Pricing Charges Method22-40
    • § 22:9.3 : Alternative Strategy Based Method22-43
    • § 22:9.4 : Unlisted Options22-45
    • § 22:9.5 : Commodities22-45
  • § 22:10 : Raising Good Capital Through Subordination Agreements22-49
  • § 22:11 : Requirements for OTC Derivatives Dealers22-54
  • § 22:12 : Customer Protection22-56
    • § 22:12.1 : Background22-56
    • § 22:12.2 : Possession and Control of Securities22-57
    • § 22:12.3 : Special Reserve Account for the Exclusive Benefit of Customers22-59
    • § 22:12.4 : Exemptions22-61
Chapter 23: Reserved
Chapter 24: Clearing Broker Liability and Responsibilities
  • § 24:1 : Introduction24-2
  • § 24:2 : The Role of the Clearing Firm in the Brokerage Industry24-3
    • § 24:2.1 : Evolution of Responsibilities of Clearing Versus Introducing Brokers—NYSE Rule 382, NASD Conduct Rule 323024-3
    • § 24:2.2 : Regulatory Developments24-6
    • § 24:2.3 : Anti-Money Laundering Obligations of Clearing Brokers24-11
  • § 24:3 : Litigation Exposure of Clearing Firms24-17
    • § 24:3.1 : Pre-Blech: Most Courts Summarily Rejected a Variety of Customer Claims Against Clearing Brokers24-17
    • § 24:3.2 : In re Blech24-21
    • § 24:3.3 : Post-Blech Decisions24-22
    • § 24:3.4 : Isolated Victories for Customers of Introducing Firms24-30
      • [A] : Breach of Fiduciary Duty/Apparent Authority/Aiding and Abetting Fraud24-30
      • [B] : State Blue Sky Laws24-32
    • § 24:3.5 : Emerging Alternate Theories of Clearing Broker Liability in the Context of a Bankruptcy by the Introducing Firm’s Customer24-34
      • [A] : Overview of Fraudulent Transfer Law24-34
      • [B] : Gredd v. Bear, Stearns Securities Corp.24-38
      • [C] : Additional Cases Reflecting an Emerging Theory of “Transferee” Liability for Clearing Brokers24-52
    • § 24:3.6 : Arbitrations: More Dangerous Ground for Clearing Brokers24-60
  • § 24:4 : Conclusion24-63
Chapter 25: Clearing Arrangements for Introducing Broker-Dealers
  • § 25:1 : Introduction25-3
  • § 25:2 : Background of Clearing and Depository Organizations25-4
  • § 25:3 : Understanding the Arrangement25-7
  • § 25:4 : Key Functions of the Clearing Arrangement25-9
  • § 25:5 : FINRA Rule 4311—Carrying Agreements25-11
  • § 25:6 : Introducing Broker Capital and Financial Responsibility Requirements, in General25-14
    • § 25:6.1 : Exchange Act Rules 15c3-1 and 15c3-325-14
    • § 25:6.2 : Net Capital Rule Requirements25-17
      • [A] : Top Tier Firms That Do Not Have Restrictions on Type of Activity25-17
      • [B] : The Two Most Common Capital Rule Minimum Requirements Used by Introducing Brokers25-17
      • [C] : Additional Alternatives and Provisions25-18
    • § 25:6.3 : Exchange Act Rule 15c3-3: Safeguarding Customer Funds and Securities25-19
      • [A] : Mutual Fund, Separate Account and S&L Solicitation Exemption25-19
      • [B] : Special Account Introducing Brokers25-20
      • [C] : Introducing Brokers25-20
    • § 25:6.4 : Summary25-20
  • § 25:7 : Proprietary Assets Held by Clearing Firm25-20
  • § 25:8 : Clearing Deposits and PAIB Agreements25-21
  • § 25:9 : Check Writing and Local Cashiering25-22
  • § 25:10 : Risk Management and ACT25-23
  • § 25:11 : AML and OFAC Issues25-24
  • § 25:12 : Fair and Accurate Credit Transactions Act of 2003 and Privacy Requirements25-26
  • § 25:13 : Introducing Broker Best Execution25-27
  • § 25:14 : Piggybacking Arrangements25-29
  • § 25:15 : Prime Brokerage Arrangements25-30
    • § 25:15.1 : Introduction25-30
    • § 25:15.2 : Background25-31
    • § 25:15.3 : Execution of the Prime Brokerage Agreements25-34
    • § 25:15.4 : Lack of Appropriate Customer Documentation25-35
    • § 25:15.5 : Customer Credit and Suitability Obligations25-35
    • § 25:15.6 : Executing Broker Risk Control25-36
    • § 25:15.7 : Clearing (Prime) Broker Risk Control25-36
    • § 25:15.8 : Extension of Credit on Syndicated and Other Public Offerings25-36
  • § 25:16 : Allocation Between Clearing Firm and Introducing Broker in Connection with Risk Management Controls for Clearing Firms Providing Market Access25-37
  • § 25:17 : Considerations in Negotiating a Clearing Arrangement25-38
    • § 25:17.1 : Business Activities25-38
    • § 25:17.2 : Due Diligence and Clearing Arrangements Checklist25-39
    • § 25:17.3 : Amount of Clearing Deposit25-39
    • § 25:17.4 : ACT Credit Line25-39
    • § 25:17.5 : Cost of Clearing25-39
    • § 25:17.6 : PAIB25-40
    • § 25:17.7 : Financial Reports and Financial Information25-40
    • § 25:17.8 : Registration25-40
    • § 25:17.9 : Customer Accounts25-40
    • § 25:17.10 : Acceptance of Accounts and Sales Practice Obligations25-41
    • § 25:17.11 : Compliance Procedures and Exception Reports25-41
    • § 25:17.12 : Margin and Extension of Credit25-42
    • § 25:17.13 : Maintenance of Books, Records and Reports25-42
    • § 25:17.14 : Reports by the Introducing Firm to the Clearing Firm25-42
    • § 25:17.15 : Customer Funds and Securities25-43
    • § 25:17.16 : Local Deposit of Funds and Drafting Authority25-43
    • § 25:17.17 : Confirmations and Account Statements25-43
    • § 25:17.18 : Execution of Orders and Transactions25-43
    • § 25:17.19 : Clearing Agreement Allocation of Responsibilities and Obligations Between Clearing Firm and Introducing Broker in Connection with Risk Management Controls for Clearing Firms Providing Direct Market Access25-44
    • § 25:17.20 : Commissions and Fees25-44
    • § 25:17.21 : Return of Clearing Firm Deposit25-45
    • § 25:17.22 : Indemnification25-45
    • § 25:17.23 : Exclusive Services25-45
    • § 25:17.24 : Proprietary Trading, Underwriting, Market Making and Specialist Activities25-45
    • § 25:17.25 : Disciplinary Action, Regulatory Forms and Notices25-46
    • § 25:17.26 : Use of Clearing Firm’s Name25-46
    • § 25:17.27 : Excess SIPC Coverage25-46
    • § 25:17.28 : Termination25-46
    • § 25:17.29 : Confidentiality and Non-Solicitation Provisions25-47
    • § 25:17.30 : Arbitration25-47
    • § 25:17.31 : Anti-Money Laundering, OFAC and Fact Act Coordination Provisions25-47
    • § 25:17.32 : Impact of FINRA Rule 1230 Regarding Registration of Operations Professionals25-48
  • § 25:18 : Negative Consent Letters and Bulk Account Transfers25-49
  • § 25:19 : Third-Party Liability of Clearing Firm and Introducing Brokers25-50
  • § 25:20 : SEC Proposal Regarding Broker-Dealer Annual Reports, PCAOB Audit Requirements for Broker-Dealers, Custody Form, and Broker-Dealer Compliance Assertions25-51
  • Appendix 25A : FINRA Rule 4311App. 25A-1
  • Appendix 25B : SEC Rule 15c3-5App. 25B-1
  • Appendix 25C : International Prime Brokerage Guidance–RN 07-58 (Nov. 2007)App. 25C-1
  • Appendix 25D : Checklist for Clearing Firm and Introducing Firm Due DiligenceApp. 25D-1
Chapter 26: Anti-Money Laundering Regulations Applicable to Broker-Dealers
  • § 26:1 : Overview26-2
  • § 26:2 : The Money Laundering Control Act of 198626-3
  • § 26:3 : The USA PATRIOT Act26-5
    • § 26:3.1 : AML Programs26-5
    • § 26:3.2 : Customer Identification and Verification26-9
      • [A] : Customer Due Diligence26-14
    • § 26:3.3 : Special Due Diligence Requirements for Financial Institutions Providing Private Banking or Correspondent Banking for Foreign Clients26-15
      • [A] : Private Banking Accounts26-17
      • [B] : Correspondent Accounts26-17
    • § 26:3.4 : Prohibition Against Foreign Shell Banks, Foreign Bank Certification and Record Keeping26-20
    • § 26:3.5 : Special Measures for Jurisdictions, Financial Institutions, or International Transactions or Accounts of Primary Money Laundering Concern26-23
    • § 26:3.6 : Suspicious Activity Reports (SARs)26-24
    • § 26:3.7 : Information Sharing26-30
  • § 26:4 : Other BSA Recording and Record-Keeping Provisions26-32
    • § 26:4.1 : Transactions Involving Currency Over $10,000: CTR Reporting26-33
    • § 26:4.2 : Transportation of Currency or Monetary Instruments Over $10,000 Into or Outside the United States: CMIR Reporting26-34
    • § 26:4.3 : FBAR Reporting26-35
    • § 26:4.4 : Reporting of Purchases of Monetary Instruments Over $3,00026-36
    • § 26:4.5 : Funds Transfer Rules26-36
      • [A] : The Joint Rule26-36
      • [B] : The Travel Rule26-38
  • § 26:5 : Office of Foreign Assets Control (OFAC)26-39
Chapter 27: Privacy of Client Financial Information
  • § 27:1 : Introduction27-3
  • § 27:2 : The Gramm-Leach-Bliley Act27-4
  • § 27:3 : Federal Privacy Regulations27-5
  • § 27:4 : The Fair Credit Reporting Act27-5
    • § 27:4.1 : Consumer Reports27-5
    • § 27:4.2 : Consumer Reporting Agencies27-6
  • § 27:5 : Other Applicable Laws27-7
    • § 27:5.1 : State and Local Laws27-7
    • § 27:5.2 : International Laws27-10
  • § 27:6 : Complying with Regulation S-P27-11
    • § 27:6.1 : Broker-Dealers Subject to Regulation S-P27-12
    • § 27:6.2 : Customers and Consumers27-14
      • [A] : Application of the Definition of “Consumer”27-15
      • [B] : Application of the Definition of “Customer”27-16
      • [C] : Examples of Customers and Consumers27-16
    • § 27:6.3 : Nonpublic Personal Information27-17
      • [A] : “Personally Identifiable Financial Information”27-18
      • [B] : “List, Description, or Other Grouping of Consumers”27-19
      • [C] : Does Not Include “Publicly Available” Information27-20
        • [C][1] : Application to Information on the Internet27-21
        • [C][2] : Information That Is Unlawfully Obtained27-21
  • § 27:7 : Complying with Regulation S-P27-21
    • § 27:7.1 : Disclosure Obligations27-21
      • [A] : Information to Be Included in Privacy Notices27-22
        • [A][1] : Clear and Conspicuous27-23
        • [A][2] : Level of Detail Required27-24
        • [A][3] : Written or Electronic Notice27-25
        • [A][4] : Joint Notice by Two or More Financial Institutions27-26
        • [A][5] : Simplified Notice27-26
      • [B] : Timing of Notices27-26
        • [B][1] : Initial Notice27-26
        • [B][2] : Annual Notices27-28
        • [B][3] : Revised Policy Notices27-28
      • [C] : Reasonable Expectation of Delivery27-28
      • [D] : Joint Account Holders and Householding27-29
    • § 27:7.2 : Disclosure of Nonpublic Personal Information and Consumer Report Information to Affiliates27-30
      • [A] : FCRA Opt-Out for Affiliate Sharing27-30
      • [B] : Sharing Exceptions Under the FCRA27-30
      • [C] : 2003 Amendments to the FCRA27-31
      • [D] : State and Local Law Restrictions27-33
    • § 27:7.3 : Disclosures of Nonpublic Personal Information to Nonaffiliates27-34
      • [A] : Reasonable Means to Opt Out27-34
      • [B] : Time to Opt Out27-35
      • [C] : Effect of a Consumer’s Opt-Out Election27-36
      • [D] : Joint Accounts27-36
      • [E] : FCRA Considerations27-37
      • [F] : State and Local Law Restrictions27-37
    • § 27:7.4 : Model Privacy Form to Provide Safe Harbor for GLB Act Disclosures27-38
      • [A] : Proposed Model Privacy Form27-39
      • [B] : Adopted Final Model Privacy Form27-40
    • § 27:7.5 : Exceptions to Notice and Opt-Out Under Regulation S-P27-41
      • [A] : Service Providers and Joint Marketers27-41
      • [B] : Processing and Servicing Transactions27-42
      • [C] : At the Direction of the Consumer or for Other Limited Reasons27-43
      • [D] : Proposed Exception for Limited Information Disclosure When Registered Representatives Change Firms27-44
    • § 27:7.6 : Reuse and Redisclosure by Third Parties27-45
    • § 27:7.7 : Policies and Procedures to Safeguard Information27-45
      • [A] : The Safeguard Rule27-46
      • [B] : The Disposal Rule27-46
      • [C] : Guidance from Other Regulators27-47
      • [D] : Online Activities27-50
      • [E] : Proposed Amendments to the Safeguard and Disposal Rules27-51
        • [E][1] : Proposed Amendments to the Safeguards Rule27-51
          • [E][1][a] : Proposed Objectives of the Information Security Program27-52
          • [E][1][b] : Other Proposed Requirements for the Information Security Program27-53
          • [E][1][c] : Procedures for Security Breach27-53
        • [E][2] : Proposed Amendments to the Disposal Rule27-55
        • [E][3] : Proposed Recordkeeping Requirements27-57
        • [E][4] : Industry Responses to Proposed Amendments27-57
  • § 27:8 : Penalties for Violations of Privacy Laws and Enforcement Actions27-58
    • § 27:8.1 : Recent Enforcement Actions27-58
    • § 27:8.2 : No Private Cause of Action27-61
  • § 27:9 : Regulation S-AM27-63
    • § 27:9.1 : Proper Use of Information Eligibility Information27-64
    • § 27:9.2 : Notice and Opt-Out Requirement27-64
    • § 27:9.3 : Scope and Contents of Opt-Out Notice27-64
    • § 27:9.4 : Delivery of Opt-Out Notice27-66
    • § 27:9.5 : Renewal of Opt-Out Elections27-66
Chapter 28: Practical Implications Regarding the Safeguarding of Customer Information
  • § 28:1 : Introduction28-2
  • § 28:2 : SEC Investigations and Enforcement28-5
    • § 28:2.1 : Improper Recruiting Practices28-6
      • [A] : NEXT Financial Group, Inc.28-6
      • [B] : Woodbury Financial Services, Inc.28-8
    • § 28:2.2 : Unsecure Disposal of Client Records: J.P. Turner & Co. LLC28-8
    • § 28:2.3 : Insufficient Antivirus Protection: Commonwealth Equity Services, LLP28-9
    • § 28:2.4 : Fraudulent Use of Client Information28-9
      • [A] : SEC v. Mondschein & UNCI, Inc.28-9
      • [B] : Merriman Curhan Ford & Co.28-10
    • § 28:2.5 : Inadequate Server and Web Portal Security28-11
      • [A] : LPL Financial Corp.28-11
      • [B] : D.A. Davidson & Co.28-12
      • [C] : Lincoln Financial Securities Inc.28-12
    • § 28:2.6 : Supervisors/Executives Accountable: Gunn Allen Financial28-13
  • § 28:3 : FINRA Enforcement Actions28-13
    • § 28:3.1 : Transmitting Information to Non-Affiliates: Jeffrey N. Lombardi28-13
    • § 28:3.2 : Failure to Safeguard Hard Copy Records: Hernan Chassy, Jr.28-14
    • § 28:3.3 : Failure to Update Written Supervisory Procedures: Patrick Walker28-14
  • § 28:4 : FINRA Guidance28-15
    • § 28:4.1 : Registered Representatives Changing Firms: Regulatory Notice 07-3628-15
    • § 28:4.2 : FINRA Rules: Information Encryption Requirements: FINRA Rule 821028-16
  • § 28:5 : SEC Regulation S-P Safeguards Rule—Proposed Amendments28-16
    • § 28:5.1 : Information Security Programs28-19
      • [A] : Generally28-19
      • [B] : Internal and External Risk Assessment28-20
      • [C] : Developing Safeguarding Policies28-20
      • [D] : Additional ISP Safeguards28-22
    • § 28:5.2 : Responding to Unauthorized Access or Use of Personal Information28-23
    • § 28:5.3 : Disposal of Personal Information28-23
    • § 28:5.4 : Record-Keeping28-24
    • § 28:5.5 : Additional Exception to Notice and Opt-Out Requirements—Limited Information Disclosure When Personnel Leave Their Firms28-24
  • § 28:6 : States’ Efforts to Safeguard Customer Information28-26
    • § 28:6.1 : Breach Notice Statutes28-26
    • § 28:6.2 : Security Freeze Laws28-27
    • § 28:6.3 : Social Security Number Protection Laws28-27
    • § 28:6.4 : Disposal of Personal Information Laws28-28
    • § 28:6.5 : Encryption Statutes28-28
  • § 28:7 : Red Flags Rule: Identity Theft Prevention Programs28-28
  • § 28:8 : Implementing Policies and Procedures28-29
  • § 28:9 : Safeguarding Examinations28-31
  • § 28:10 : Conclusion28-32
Chapter 29: Reserved
Chapter 30: Business Continuity Planning
  • § 30:1 : Introduction30-1
  • § 30:2 : Text of FINRA Rule 437030-2
  • § 30:3 : Business Continuity Plan Requirements30-4
    • § 30:3.1 : Coverage and Required Elements30-4
      • [A] : Reliance on a Parent Corporation’s Plan30-5
      • [B] : Reliance on Others30-6
        • [B][1] : Clearing Firm30-6
    • § 30:3.2 : Approval, Updating, and Annual Review30-6
    • § 30:3.3 : Customer Disclosure Requirements30-6
      • [A] : Plan Modifications30-7
  • § 30:4 : Emergency Contact Information30-7
Chapter 31: Outsourcing by Financial Services Firms
  • § 31:1 : Overview31-3
    • § 31:1.1 : Benefits of Outsourcing Financial Services31-4
    • § 31:1.2 : Risks of Outsourcing Financial Services31-4
  • § 31:2 : Drafting Considerations31-5
    • § 31:2.1 : Compliance with the Law31-5
    • § 31:2.2 : Compliance with Policies and Procedures31-6
    • § 31:2.3 : Subcontracting31-6
    • § 31:2.4 : Key Staff31-6
    • § 31:2.5 : Termination31-7
    • § 31:2.6 : Security31-7
    • § 31:2.7 : Indemnification31-7
    • § 31:2.8 : Audits31-8
    • § 31:2.9 : Data Protection31-8
  • § 31:3 : U.S. Regulatory Framework31-8
    • § 31:3.1 : Federal Reserve Board31-9
      • [A] : Overview31-9
      • [B] : Risk Mitigation in Financial Services Outsourcing31-10
        • [B][1] : Identifying Challenges and Risks31-11
        • [B][2] : Best Practices for Mitigating Risk31-12
      • [C] : FRB Supervisory Letter: Outsourcing of Information and Transaction Processing31-14
    • § 31:3.2 : Office of Comptroller of Currency31-16
      • [A] : Overview31-16
      • [B] : Foreign-Based Third-Party Service Providers31-17
      • [C] : Risk Management for Banks31-18
      • [D] : Standards for Safeguarding Customer Information31-19
      • [E] : Country Risk31-20
      • [F] : Third-Party Relationships31-21
        • [F][1] : Categories of Risk31-21
        • [F][2] : Risk Management31-22
        • [F][3] : Oversight31-23
    • § 31:3.3 : Federal Deposit Insurance Corporation31-24
      • [A] : Overview31-24
      • [B] : Foreign-Based Third-Party Service Providers31-24
        • [B][1] : Categories of Risk31-25
        • [B][2] : Risk Assessment31-25
      • [C] : Offshoring of Data Services31-27
        • [C][1] : Identifying Risks31-27
        • [C][2] : Recommendations and Best Practices31-29
      • [D] : Country Risk Management31-32
      • [E] : Outsourcing Technology Products and Services31-32
        • [E][1] : Effective Practices for Selecting a Service Provider31-33
        • [E][2] : Tools to Manage Technology Providers’ Performance Risk: Service Level Agreements31-34
        • [E][3] : Techniques for Managing Multiple Service Providers31-35
      • [F] : Compliance with Bank Service Company Act31-37
    • § 31:3.4 : Office of Thrift Supervision31-38
      • [A] : Overview31-38
      • [B] : Information Technology and Risk Controls31-38
      • [C] : Third-Party Arrangements31-40
        • [C][1] : Regulation and Examination Requirements31-40
        • [C][2] : Management Responsibilities31-41
        • [C][3] : OTS Supervision31-43
      • [D] : Internal Controls and Outsourcing31-43
    • § 31:3.5 : National Credit Union Administration31-44
      • [A] : Overview31-44
      • [B] : Due Diligence Over Third-Party Service Providers31-45
    • § 31:3.6 : Federal Financial Institutions Examination Council31-45
      • [A] : Overview31-45
      • [B] : Evaluating a Financial Institution’s Risk Management Processes31-46
        • [B][1] : Risk Management31-46
        • [B][2] : Board and Management Responsibilities31-46
        • [B][3] : Risk Assessment and Requirements31-47
        • [B][4] : Service Provider Selection31-47
        • [B][5] : Contract Issues31-48
        • [B][6] : Ongoing Monitoring31-51
        • [B][7] : Business Continuity Plans31-51
        • [B][8] : Information Security/Safeguarding31-52
        • [B][9] : Multiple Service Provider Relationships31-52
        • [B][10] : Outsourcing to Foreign Service Providers31-52
    • § 31:3.7 : Financial Industry Regulatory Authority31-55
      • [A] : Overview31-55
      • [B] : A Member’s Responsibilities Regarding Outsourcing31-55
        • [B][1] : Accountability and Supervisory Responsibility31-56
        • [B][2] : Prohibited Outsourcing Activity31-57
    • § 31:3.8 : New York Stock Exchange31-57
      • [A] : Overview31-57
      • [B] : Proposed Rules Regarding Outsourcing31-58
        • [B][1] : Prohibited Activities31-58
        • [B][2] : Prior Written Notice31-59
        • [B][3] : Due Diligence31-59
        • [B][4] : Oversight31-60
        • [B][5] : Disclosure31-61
        • [B][6] : Renewals31-61
  • § 31:4 : Foreign and International Regulation31-61
    • § 31:4.1 : EU’s Markets in Financial Instruments Directive31-61
      • [A] : Overview31-61
      • [B] : Applicability31-62
      • [C] : Requirements31-62
        • [C][1] : Level 1 Directive31-62
        • [C][2] : Level 2 Directive31-63
        • [C][3] : Obligations on Investment Firms31-63
        • [C][4] : Obligations of Member States31-65
        • [C][5] : Exceptions31-65
        • [C][6] : Application to Existing Outsourcing Arrangements31-65
    • § 31:4.2 : Joint Forum Outsourcing Principles31-66
    • § 31:4.3 : IOSCO Outsourcing Principles31-68
Chapter 31A: SEC and CFTC Whistleblower Rules and Anti-Retaliation Protections
  • § 31A:1 : Introduction31A-3
  • § 31A:2 : Affected Entities31A-4
  • § 31A:3 : Essential Elements of Whistleblower Award Eligibility31A-4
    • § 31A:3.1 : Definition of a Whistleblower31A-5
    • § 31A:3.2 : Voluntary Submission of Original Information31A-5
      • [A] : Voluntary31A-5
      • [B] : Original Information31A-6
      • [C] : 120-Day Look Back Provisions31A-8
    • § 31A:3.3 : Successful Enforcement Action31A-8
      • [A] : Calculating Amount Recovered31A-9
  • § 31A:4 : Exclusions from Award Eligibility31A-10
    • § 31A:4.1 : Principals31A-10
    • § 31A:4.2 : Attorneys31A-10
    • § 31A:4.3 : Compliance Personnel31A-11
    • § 31A:4.4 : Individuals Retained to Conduct Inquiry31A-12
    • § 31A:4.5 : Accountants31A-12
    • § 31A:4.6 : Other Exclusions31A-12
  • § 31A:5 : Exceptions to Exclusion from Award Eligibility31A-13
  • § 31A:6 : Factors Considered in Determining the Amount of an Award31A-13
    • § 31A:6.1 : Factors That May Increase an Award31A-14
      • [A] : Significance of Information31A-14
      • [B] : Degree of Assistance Provided31A-14
      • [C] : Programmatic Interest of SEC or CFTC31A-15
      • [D] : Participation in Internal Compliance Programs31A-16
    • § 31A:6.2 : Factors That May Decrease an Award31A-16
      • [A] : Whistleblower Culpability31A-16
      • [B] : Delay in Reporting Violation31A-16
      • [C] : Interference with Internal Compliance Programs31A-17
      • [D] : Potential Adverse Incentives31A-17
  • § 31A:7 : Treatment of Culpable Individuals31A-17
  • § 31A:8 : Whistleblower Confidentiality and Anonymity31A-18
  • § 31A:9 : Whistleblower Protections: The Anti-Retaliation Provisions31A-18
    • § 31A:9.1 : Relationship Between New Dodd-Frank and SOX Retaliation Claims31A-20
    • § 31A:9.2 : SEC Authority to Enforce Anti-Retaliation Provisions31A-21
    • § 31A:9.3 : Non-Waivability of Anti-Retaliation Protections31A-21
    • § 31A:9.4 : Extraterritorial Application31A-21
  • § 31A:10 : SEC Communications with Whistleblowers and Attorney-Client Privilege31A-22
  • § 31A:11 : Confidentiality Agreements31A-22
  • § 31A:12 : Arbitration and Alternative Dispute Resolution31A-23
  • § 31A:13 : Practical Considerations for Responding to the Whistleblower Rules31A-23
    • § 31A:13.1 : Culture of Compliance31A-23
      • [A] : Promote Compliance31A-25
      • [B] : Codes of Conduct and Training31A-25
      • [C] : Mandatory Reporting of Potential Violations Rules31A-26
    • § 31A:13.2 : Internal Reporting Procedures31A-26
      • [A] : Accessible Internal Reporting Systems31A-26
      • [B] : Communicating Importance of Internal Reporting31A-27
    • § 31A:13.3 : Human Resources31A-27
      • [A] : Screening New Employees31A-27
      • [B] : Employee Evaluations31A-27
      • [C] : Manager Training31A-28
      • [D] : Documenting Whistleblower Employment Actions31A-28
      • [E] : Exit Forms and Separation Releases31A-28
    • § 31A:13.4 : Internal Investigations31A-28
      • [A] : Investigative Plans31A-29
      • [B] : Keeping Whistleblower Appraised31A-29
      • [C] : Employee Interviews31A-29
      • [D] : Use of Counsel31A-29
      • [E] : Policies Regarding Privileged and Confidential Information31A-30
  • § 31A:14 : Implications of the Whistleblower Rules for Enforcement Practice31A-31
    • § 31A:14.1 : Self-Reporting31A-31
    • § 31A:14.2 : Protect the Company’s Privileges31A-32
    • § 31A:14.3 : Assess Public Disclosure Issues31A-32
Chapter 32: Broker-Dealer Compliance Programs
  • § 32:1 : Background32-2
  • § 32:2 : Rule 3012—Supervisory Control System32-3
    • § 32:2.1 : Establishing the Supervisory Control System32-4
      • [A] : Activity Conducted by a Firm’s Producing Manager32-4
      • [B] : Individual Policies and Procedures32-5
    • § 32:2.2 : Maintaining and Testing the Supervisory Control System32-6
    • § 32:2.3 : Miscellaneous Procedures Outside NASD Rule 301232-7
      • [A] : Inspection Procedures32-7
      • [B] : Books and Records Checklist32-10
      • [C] : Discretionary Accounts Checklist32-10
  • § 32:3 : Rule 3130—CCO Designation and CEO Annual Compliance Certification32-10
    • § 32:3.1 : Designation of CCO32-11
    • § 32:3.2 : Report Review and Presentation32-12
    • § 32:3.3 : CEO Annual Compliance Certification32-13
  • § 32:4 : Summary of Required Review Under the Compliance Program Rules32-14
  • Appendix 32A : Text of Relevant RulesApp. 32A-1
  • Appendix 32B : Compliance Checklist—Supervisory Control AmendmentsApp. 32B-1
  • Appendix 32C : Compliance Checklist—Structuring a Broker-Dealer Review ProgramApp. 32C-1
Chapter 33: Record-Keeping
  • § 33:1 : Introduction33-2
    • § 33:1.1 : Legislative History33-3
    • § 33:1.2 : Early Evolution of the Record-Keeping Rules33-3
  • § 33:2 : Rule 17a-3: Records to Be Made by Certain Exchange Members, Brokers, and Dealers33-6
    • § 33:2.1 : Overview33-6
    • § 33:2.2 : Coverage33-7
    • § 33:2.3 : Required Records33-7
      • [A] : Operational Records33-7
      • [B] : Personnel Records33-12
      • [C] : Lost Securities and Fingerprinting33-14
      • [D] : Broker-Dealer Systems33-14
      • [E] : Client Account Records33-16
      • [F] : Customer Complaints33-17
      • [G] : Associated Person Compensation and Agreements33-17
      • [H] : Advertising Materials33-18
      • [I] : Designated Persons to Explain Records; Record of Principals33-18
    • § 33:2.4 : Exceptions to Rule 17a-3(a); Other Miscellaneous Provisions33-18
  • § 33:3 : Rule 17a-4: Records to Be Preserved by Certain Exchange Members, Brokers, and Dealers33-20
    • § 33:3.1 : Operational Records and Other Records Required Under Rule 17a-333-21
    • § 33:3.2 : Financial Records33-23
    • § 33:3.3 : Corporate Records33-24
    • § 33:3.4 : Reports and Manuals33-24
    • § 33:3.5 : Electronic Record Retention33-25
      • [A] : The Advent of Electronic Record Keeping—1970–199033-25
      • [B] : Electronic Storage Media—Release No. 32,609 (July 9, 1993)33-26
      • [C] : The Use of Electronic Media—Release Nos. 33-7233 (October 1995) and 33-7288 (May 1996)33-27
      • [D] : Electronic Storage Media—Release No. 38,245 (February 1997)33-28
      • [E] : Books and Records Requirements for Broker-Dealers—Exchange Act Release No. 44,992 (2001)33-30
      • [F] : The Electronic Signatures in Global and National Commerce Act of 200033-31
      • [G] : The Commission Provides Guidance on Electronic Records Retention and Preservation—Release No. 47,806 (May 2003)33-33
      • [H] : Record-Keeping Compliance and Social Media33-33
    • § 33:3.6 : Exceptions to Rule 17a-4; Other Miscellaneous Provisions33-35
    • § 33:3.7 : Requirement to Make Records Available to the SEC33-36
    • § 33:3.8 : Where Records Must Be Kept33-37
    • § 33:3.9 : Email Record Retention33-37
  • § 33:4 : Recent Enforcement Actions33-37
Chapter 34: SEC and FINRA Inspections
  • § 34:1 : Overview34-2
  • § 34:2 : SEC Examinations34-3
    • § 34:2.1 : Authority to Conduct Examinations34-3
    • § 34:2.2 : Types of Examinations34-3
  • § 34:3 : Mechanics of an Inspection34-4
    • § 34:3.1 : Selection34-4
    • § 34:3.2 : Preparation34-4
      • [A] : SEC Preparation34-4
      • [B] : Preparation by the Firm34-4
      • [C] : Role of the CCO34-5
    • § 34:3.3 : The SEC’s Request for Information34-5
      • [A] : Generally34-5
      • [B] : Scope of SEC’s Authority to Request Documents34-6
    • § 34:3.4 : Issues Related to Document Production34-6
      • [A] : Generally34-6
      • [B] : Production to the SEC Staff—Effect on Privilege34-7
      • [C] : Return of Documents34-8
      • [D] : Seeking Confidential Treatment34-8
    • § 34:3.5 : SEC’s Activity on the Premises34-9
    • § 34:3.6 : Notification of Findings34-10
  • § 34:4 : FINRA Examinations34-11
    • § 34:4.1 : Generally34-11
    • § 34:4.2 : Statutory Authority34-11
      • [A] : Examination Authority Granted to Self-Regulatory Organizations34-11
      • [B] : Allocation of Regulatory Responsibility Among SROs34-12
      • [C] : Scope of FINRA Examination Authority34-13
    • § 34:4.3 : Types of Examinations34-14
      • [A] : Cycle Exams34-14
        • [A][1] : Generally34-14
        • [A][2] : Conduct of the Exam34-16
      • [B] : Cause Exams34-18
      • [C] : Branch Exams34-19
      • [D] : Market Regulation Exams34-19
      • [E] : Sweep Exams34-20
      • [F] : New Member Exams34-20
      • [G] : Letter Exams34-21
      • [H] : Advertising Spot-Check Exams34-21
      • [I] : Product-Based Exams34-21
      • [J] : SEC Quality Exams34-21
    • § 34:4.4 : Rights and Responsibilities Vis-à-Vis Members and FINRA34-22
      • [A] : FINRA Right to Information and Inspection34-22
      • [B] : Duty to Comply34-22
  • § 34:5 : FINRA Disciplinary Program34-23
    • § 34:5.1 : Generally34-23
    • § 34:5.2 : Disciplinary Program34-24
      • [A] : Delegation of Responsibility to FINRA34-24
      • [B] : Enforcement Department Investigation34-25
      • [C] : Authorization of Proceedings34-27
      • [D] : Hearings34-27
      • [E] : Issuance and Review of Decisions34-29
    • § 34:5.3 : Resolution of Disciplinary Proceedings34-30
    • § 34:5.4 : Sanctions34-30
    • § 34:5.5 : SEC Review34-31
    • § 34:5.6 : Statutory Disqualifications34-32
    • § 34:5.7 : Conclusion34-32
Chapter 35: SEC and FINRA Enforcement
  • § 35:1 : Introduction35-3
  • § 35:2 : SEC Enforcement35-4
    • § 35:2.1 : Introduction35-4
    • § 35:2.2 : How the SEC Conducts an Investigation35-5
      • [A] : Informal Inquiries35-7
      • [B] : Formal Investigations35-8
        • [B][1] : Rights of Witnesses During Formal Investigation35-11
          • [B][1][a] : Right to Counsel35-11
          • [B][1][b] : Right to Evidence Provided and Transcript of Testimony35-12
      • [C] : Conclusion of the Investigation35-12
        • [C][1] : The Wells Notice35-12
        • [C][2] : Recommendation to the Commission35-14
        • [C][3] : Settlements35-14
    • § 35:2.3 : Outcomes of an Investigation35-14
      • [A] : Injunctive Actions35-15
        • [A][1] : Money Penalty Awards35-16
      • [B] : Administrative Proceedings35-18
      • [C] : Commission Review of Administrative Proceedings35-19
      • [D] : Referrals to Other Law Enforcement Organizations35-20
      • [E] : Coordinated Investigations and Actions with Department of Justice35-20
    • § 35:2.4 : Consequences of an Enforcement Action35-21
      • [A] : Rights Created by SEC Rules and Releases35-23
      • [B] : Statutory Rights35-24
      • [C] : Constitutional Rights35-25
  • § 35:3 : FINRA Disciplinary Practice and Procedures35-25
    • § 35:3.1 : The Scope of FINRA Enforcement Authority35-25
    • § 35:3.2 : Sources of FINRA Disciplinary Authority35-26
    • § 35:3.3 : Procedural Requirements35-27
    • § 35:3.4 : FINRA Disciplinary Jurisdiction and Typical Grounds for Its Proceedings35-28
      • [A] : Disciplinary Jurisdiction35-28
      • [B] : Disciplinable Acts and Omissions35-28
    • § 35:3.5 : FINRA Investigations35-29
      • [A] : Pre-Investigation Stage35-30
      • [B] : FINRA Investigation Procedures35-30
        • [B][1] : In General35-30
        • [B][2] : Simultaneous Investigations of the Same Matter35-32
        • [B][3] : Confidentiality35-32
        • [B][4] : Representation by Counsel35-33
        • [B][5] : Duty to Cooperate35-33
        • [B][6] : SEC and FINRA Incentives for Cooperation35-35
        • [B][7] : Document Production35-36
        • [B][8] : Privileged Documents35-38
        • [B][9] : Witness Statements35-38
        • [B][10] : Interviews and Testimony35-39
      • [C] : Conclusion of the Investigation35-39
  • § 35:4 : Resolving a Disciplinary Matter35-40
    • § 35:4.1 : Informal Disciplinary Actions35-40
    • § 35:4.2 : Minor Rule Violation Plans35-40
    • § 35:4.3 : Filing the Equivalent of a “Wells Submission”35-40
    • § 35:4.4 : Settlement Procedures35-41
      • [A] : AWC Letter35-42
      • [B] : Offer of Settlement35-42
    • § 35:4.5 : Contested Hearings35-44
      • [A] : The Complaint and Answer35-44
      • [B] : Prehearing Procedures35-46
      • [C] : The Hearing35-48
      • [D] : Post-Hearing Submissions35-49
      • [E] : Prohibition of Ex Parte Contacts35-49
      • [F] : Written Decision and Sanctions35-49
  • § 35:5 : Sanctions35-50
    • § 35:5.1 : In General35-50
    • § 35:5.2 : Censure35-50
    • § 35:5.3 : Monetary Sanctions35-50
      • [A] : Fine35-50
      • [B] : Disgorgement35-51
      • [C] : Restitution35-51
      • [D] : Costs35-51
      • [E] : Failure to Pay Monetary Sanctions35-51
    • § 35:5.4 : Suspension, Expulsion, Revocation, and Bar35-52
    • § 35:5.5 : Undertakings35-52
  • § 35:6 : Review of Actions35-53
    • § 35:6.1 : National Adjudicatory Council Internal Review35-53
    • § 35:6.2 : Discretionary Review by FINRA Board35-54
  • § 35:7 : Special Procedures35-55
    • § 35:7.1 : SEC Review of FINRA Decisions35-55
    • § 35:7.2 : Judicial Review of SEC Decisions35-58
Chapter 36: Handling SEC/SRO Investigations
  • § 36:1 : Hypothetical36-3
  • § 36:2 : Analysis36-4
    • § 36:2.1 : Getting Started36-4
      • [A] : Learning About Investigations36-4
        • [A][1] : Contacting the Staff36-5
        • [A][2] : Reviewing the SEC Enforcement Manual36-6
        • [A][3] : Requesting the Formal Order36-7
      • [B] : Doing an Internal Investigation36-8
        • [B][1] : Interviewing Employees36-8
        • [B][2] : Gathering Documents36-10
        • [B][3] : Privilege/Work Product Concerns36-10
      • [C] : When Is It Necessary to Disclose an Investigation?36-12
        • [C][1] : Disclosure Obligations36-12
          • [C][1][a] : SEC Reporting Obligations36-12
          • [C][1][b] : Other Disclosure Obligations36-13
        • [C][2] : Voluntary Disclosure36-14
    • § 36:2.2 : To What Extent Should the Firm Cooperate?36-15
      • [A] : SEC Issues36-15
        • [A][1] : Delaying the Investigation36-15
        • [A][2] : Responding Completely and Accurately36-16
        • [A][3] : Earning Credit Through Cooperation36-17
          • [A][3][a] : Seaboard Report—A Blueprint for Cooperation36-17
          • [A][3][b] : Post-Seaboard Cases: Examples of “Credit”36-22
          • [A][3][c] : Determining the Extent of Cooperation36-26
      • [B] : FINRA Issues36-29
        • [B][1] : Failing to Respond36-30
        • [B][2] : Objecting to the Request36-31
        • [B][3] : Requesting an Extension36-33
        • [B][4] : Über-Cooperation: How to Earn Credit36-35
    • § 36:2.3 : Document Production Issues36-41
      • [A] : Understanding the Stakes36-41
      • [B] : Developing and Implementing a Plan to Identify and Produce Responsive Documents36-41
        • [B][1] : Analyzing and Narrowing the Scope of the Document Request36-41
        • [B][2] : Identifying and Preserving Responsive Documents36-44
        • [B][3] : The Peculiar Challenge of Email36-48
          • [B][3][a] : Reviewing Responsive Documents for Privilege and Preparing Documents for Production36-51
            • [B][3][a][i] : Legal Limitations on Document Discovery36-52
            • [B][3][a][ii] : Producing Responsive Documents36-53
            • [B][3][a][iii] : Requesting Confidential Treatment36-54
    • § 36:2.4 : Testimony36-57
      • [A] : The Initial Meetings and Document Collection36-57
      • [B] : Attorney/Witness Preparation36-58
      • [C] : Counsel’s Role During Testimony36-64
    • § 36:2.5 : The Wells Process36-66
      • [A] : When to Make a Wells Submission36-67
      • [B] : When Not to Submit a Wells Submission36-69
      • [C] : Type of Wells Submission36-69
      • [D] : Implications for Other Actions36-70
    • § 36:2.6 : Considerations in Establishing Reserves and Making Public Disclosures in Connection with a Regulatory Investigation36-71
      • [A] : Establishing Reserves36-72
      • [B] : Making Public Disclosures36-75
    • § 36:2.7 : Settlement Considerations36-78
    • § 36:2.8 : Impact of Dodd-Frank36-80
      • [A] : Expanding the Scope and Definition of Secondary Liability36-80
      • [B] : Civil Penalties in Cease-and-Desist Proceedings36-81
      • [C] : Collateral Bars36-81
      • [D] : Extraterritorial Jurisdiction36-82
      • [E] : Deadline for Completing Examinations, Inspections and Enforcement Actions36-82
      • [F] : Antifraud Provisions36-82
  • Appendix 36A : Formal OrderApp. 36A-1
  • Appendix 36B : Hold OrderApp. 36B-1
  • Appendix 36C : Privilege LogApp. 36C-1
  • Appendix 36D : FINRA Clawback Agreement TemplateApp. 36D-1
  • Appendix 36E : FOIA Confidential Treatment RequestApp. 36E-1
  • Appendix 36F : Conflicts LetterApp. 36F-1
  • Appendix 36G : FINRA Witness QuestionnaireApp. 36G-1
  • Appendix 36H : SEC Background QuestionnaireApp. 36H-1
  • Appendix 36I : Wells Submission GuidelinesApp. 36I-1
Chapter 37: State Broker-Dealer Record-Keeping, Examinations and Enforcement
  • § 37:1 : Introduction37-2
  • § 37:2 : State Record-Keeping Requirements37-2
    • § 37:2.1 : Background Leading to Uniform Federal and State Record-Keeping Requirements37-2
    • § 37:2.2 : The Uniform Record-Keeping Standard—Amendments to Securities Exchange Act Rules 17a-3 and 17a-437-5
  • § 37:3 : The State Broker-Dealer Examination Program37-6
    • § 37:3.1 : Exam Focus37-7
    • § 37:3.2 : Top Compliance Deficiencies and Recommended Best Practices37-8
    • § 37:3.3 : What Happens if a Problem Is Discovered?37-10
  • § 37:4 : State Enforcement Authority Over Broker-Dealers and Agents37-10
    • § 37:4.1 : Broker-Dealers Subject to State Enforcement Authority37-11
    • § 37:4.2 : Grounds for Initiating Enforcement Actions37-11
    • § 37:4.3 : Principal Considerations for Regulatory Actions37-12
    • § 37:4.4 : General Remedies Available37-14
  • Appendix 37A : NASAA Statement of PolicyApp. 37A-1
Chapter 37A: Collateral Consequences for Broker-Dealers and Associated Persons
  • § 37A:1 : What Are Collateral Consequences?37A-2
  • § 37A:2 : When to Conduct a Collateral Consequences Review37A-4
    • § 37A:2.1 : Settlements or Other Adverse Actions37A-4
    • § 37A:2.2 : Transactions, Significant Investments or Joint Ventures Involving a Broker-Dealer37A-4
  • § 37A:3 : Collateral Consequences, Remediation & Reporting Obligations37A-4
    • § 37A:3.1 : Automatic Disqualifications37A-4
      • [A] : “Statutory Disqualification” Under Section 3(a)(39) of the Exchange Act37A-5
        • [A][1] : Impact of “Statutory Disqualification”37A-6
        • [A][2] : Continuance Applications37A-7
        • [A][3] : Reporting Obligations37A-8
      • [B] : Disqualification Under Section 9(a) of the Investment Company Act37A-8
        • [B][1] : Impact of Section 9(a) Disqualification37A-8
        • [B][2] : Section 9(c) Exemption Applications37A-9
        • [B][3] : Reporting Obligations37A-10
      • [C] : Disqualification from Securities Registration Exemptions37A-10
        • [C][1] : Regulation A Exemptions37A-10
        • [C][2] : Regulation D Rule 505 Exemption37A-11
        • [C][3] : Regulation E Exemptions37A-12
        • [C][4] : Applying for Relief and/or Waivers37A-13
      • [D] : Eligibility for Safe Harbors for Forward-Looking Statements37A-14
        • [D][1] : Section 21E of the Exchange Act & Section 27A of the Securities Act37A-14
        • [D][2] : Applying for Waivers37A-15
      • [E] : Eligibility for Streamlined Offering Process37A-15
        • [E][1] : Rule 405 of the Securities Act37A-16
        • [E][2] : Applying for Waivers37A-16
      • [F] : Receipt of Investment Adviser Solicitation Fees Under Advisers Act Rule 206(4)-337A-17
    • § 37A:3.2 : Permissive Action by the SEC37A-19
    • § 37A:3.3 : Collateral Consequences & State Regulatory Regimes37A-20
    • § 37A:3.4 : Collateral Consequences & Regulated Affiliates37A-21
    • § 37A:3.5 : Dual Registrants37A-22
    • § 37A:3.6 : Transactions, Significant Investments or Joint Ventures Involving a Broker-Dealer37A-23
      • [A] : Due Diligence37A-24
      • [B] : Organizational Structure, Business Activities & Transaction Documents37A-24
      • [C] : Reporting Obligations37A-24
        • [C][1] : Form BD37A-24
        • [C][2] : Rule 1017 Continuing Membership Applications & Rule 1014 Presumption37A-25
  • § 37A:4 : Reporting & Notification Requirements37A-25
    • § 37A:4.1 : Form BD37A-25
    • § 37A:4.2 : Forms U4 and U537A-26
    • § 37A:4.3 : FINRA Rule 453037A-27
    • § 37A:4.4 : Schedule 13D Filing37A-27
    • § 37A:4.5 : Form N1-A37A-28
Chapter 37B: Regulatory Reporting Requirements; and Appendices 37B-A to 37B-D
  • § 37B:1 : Introduction and Brief Overview of the FINRA Rulebook37B-2
  • § 37B:2 : Forms U4 and U537B-3
    • § 37B:2.1 : Mechanics of Filing37B-5
    • § 37B:2.2 : Customer Complaints37B-6
      • [A] : Defined Terms37B-7
        • [A][1] : Reporting of Customer Complaints on Form U537B-9
      • [B] : Customer Complaints Involving $5,000 or More37B-9
      • [C] : Settlements of Customer Complaints37B-10
      • [D] : Oral Complaints37B-11
      • [E] : Forgery, Theft, Misappropriation or Conversion37B-11
      • [F} : Withdrawn Complaints37B-12
    • § 37B:2.3 : Arbitration/Civil Litigation Disclosure37B-12
      • [A] : Awards and Decisions37B-14
      • [B] : Withdrawn Claims and Settlements37B-15
      • [C] : Expunging of Customer Dispute Information37B-15
    • § 37B:2.4 : Criminal Disclosure37B-17
      • [A] : What Is Required to Be Reported with Regard to Criminal Disclosure?37B-18
      • [B] : What Is Not Required to Be Reported with Regard to Criminal Disclosure?37B-19
    • § 37B:2.5 : Regulatory Action and Investigation Disclosure37B-19
    • § 37B:2.6 : Form U4: Civil Judicial Disclosure37B-21
    • § 37B:2.7 : Termination Disclosure37B-21
    • § 37B:2.8 : Financial Disclosure37B-23
    • § 37B:2.9 : Form U5: Internal Review Disclosure37B-23
    • § 37B:2.10 : Deficiencies in Filing37B-23
    • § 37B:2.11 : Signature Requirements37B-25
    • § 37B:2.12 : Privilege for Potentially Defamatory Employer Statements in Form U537B-25
  • § 37B:3 : Member SRO Regulatory Filings Under FINRA Rule 453037B-26
    • § 37B:3.1 : Reporting of Rule Violations37B-27
      • [A] : Findings by External Bodies37B-27
      • [B] : Internal Conclusions37B-28
    • § 37B:3.2 : Reporting Customer Complaints37B-30
    • § 37B:3.3 : Reporting of Regulatory Actions37B-31
    • § 37B:3.4 : Reporting of Criminal Actions37B-32
    • § 37B:3.5 : Reporting of Litigation, Arbitration, and Certain Claims for Damages37B-32
    • § 37B:3.6 : Reporting of Internal Disciplinary Action by the Member Firm37B-34
    • § 37B:3.7 : Failure to Timely File Disclosures37B-34
  • § 37B:4 : Conclusion37B-35
  • Appendix 37B-A : Form U4: Uniform Applications for Securities Industry Registration or TransferApp. 37B-A-1
  • Appendix 37B-B : Form U5: Uniform Termination Notice for Securities Industry RegulationApp. 37B-B-1
  • Appendix 37B-C : NASD Guidance on Forms U4 and U5App. 37B-C-1
  • Appendix 37B-D : Problem and Product Codes for Reporting Rule 351(d) ComplaintsApp. 37B-D-1
Chapter 37C: SEC Reporting Requirements Under Section 13 of the Exchange Act
  • § 37C:1 : Introduction37C-2
  • § 37C:2 : Section 13(d)—Beneficial Ownership Reporting Requirements37C-3
    • § 37C:2.1 : Overview of Beneficial Ownership Reporting Pursuant to Section 13(d)37C-3
      • [A] : Equity Securities37C-3
      • [B] : Definition of “Beneficial Owner”37C-4
      • [C] : Aggregation and Disaggregation of Beneficial Ownership37C-5
        • [C][1] : Parent-Subsidiary37C-5
        • [C][2] : Broker-Customer37C-6
      • [D] : Calculation of Beneficial Ownership37C-7
      • [E] : Group Status37C-7
    • § 37C:2.2 : Section 13(d) Reporting Obligations37C-9
      • [A] : Schedule 13D37C-9
        • [A][1] : Overview37C-9
        • [A][2] : Filing Deadlines37C-10
      • [B] : Schedule 13G37C-12
        • [B][1] : Overview37C-12
        • [B][2] : Qualified Institutional Investors37C-12
          • [B][2][a] : Overview37C-12
          • [B][2][b] : Filing Deadlines37C-14
          • [B][2][c] : Loss of Eligibility to File on Schedule 13G37C-14
        • [B][3] : Passive Investors That Own Less Than 20% of the Security37C-15
          • [B][3][a] : Overview37C-15
          • [B][3][b] : Filing Deadlines37C-15
          • [B][3][c] : Loss of Eligibility to File on Schedule 13G37C-15
        • [B][4] : Exempt Investors37C-16
          • [B][4][a] : Overview37C-16
          • [B][4][b] : Filing Deadlines37C-16
          • [B][4][c] : Loss of Eligibility to File on Schedule 13G37C-16
      • [C] : Control Purpose or Effect37C-17
  • § 37C:3 : Section 13(f)—Reports by Institutional Investment Managers37C-19
    • § 37C:3.1 : Overview of Section 13(f) Reporting Requirements37C-19
    • § 37C:3.2 : Institutional Investment Managers37C-20
    • § 37C:3.3 : Section 13(f) Securities37C-20
    • § 37C:3.4 : Possession of Investment Discretion37C-20
    • § 37C:3.5 : Filing Deadlines37C-22
  • § 37C:4 : Section 13(h)—Large Trader Reporting37C-22
    • § 37C:4.1 : Overview of Section 13(f) Reporting Requirements37C-22
    • § 37C:4.2 : Large Traders37C-23
      • [A] : Focus on Parent/Control Entities37C-24
      • [B] : Identifying Activity Level37C-25
      • [C] : Voluntary Registration37C-26
    • § 37C:4.3 : Form 13H3