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What is front-running?
Making a trade for a proprietary account ahead of a customer's block order
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What's marking the open/close?
Affecting trades near the open/close to impact stock closing/opening prices.
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What is churning?
Excessive trading in a client's account for the purpose of generating additional fees/commissions.
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What is interpositioning?
Insertion of a third party between a customer and the best market. Prohibited if detrimental, accepted if advantageous.
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What is trading ahead?
- After accepting an order, a dealer executes an order for the same security on the same side of the market.
- Must fill the customer firsts unless this was done by a different division in the same company where information barriers exist.
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What is a MM quote violation?
Failing to honor a quote prices/size. Quoting different prices on different exchanges.
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What must a BD have in place to prevent insider trading?
- Systems to monitor employee's personal trading
- Information barriers to prevent people with confidential info from spreading it
- Trading restriction/monitoring of sertain securities where the firm has insider info
- Restricted list: distributed to employees
- Watch list: available only to legal/compliance
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What are the civil/criminal penalties for insider trading?
- Civil - SEC may demand disgorgement of profits and payment of 3x damage
- Criminal - maximum fine of $5M and 20 yrs in prison
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What is the insider trading bounty?
10% of the penalty
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What is the New Issue Rule?
Member firms can't sell equity IPOs to any account in which restricted persons have beneficial interest.
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Who are restricted persons under the new issue rule?
- Member firms, member firm employees
- Immediate family members of firm employees if there is (marital support [25% of income], sharing of a household, or the purchase is made through the family member's firm)
- Finders and fiduciaries
- Portfolio managers purchasing for their own accounts
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What are the preconditions under the New Issue Rule?
- Must verify account eligibility with a written statement
- Re-verification of eligibility every 12 weeks
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What are general exemptions to the New Issue Rule?
- An account that includes restricted persons, provided their combined ownership does not exceed 10%
- Issuer-directed sales that allow restricted persons to purchase if they are immediate family of the issuer's employee
- Portfolio managers purchasing for a fund
- BD purchasing for its own account after making an IPO
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When can a BD borrow/lend without notification?
- If customer is an immediate family member
- If the institution is a bank that regularly provides loans
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When must a BD borrow/lend with notification?
- When the customer and RR are both registered with the same firm
- A personal relationship exists
- A business relationship exists outside of the firm
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Who is vulnerable to financial exploitation?
- 65+ years
- 18+ years with a mental/physical impairment
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What should a firm do if a customer has signs of dementia?
- Notify a trusted contact
- Place a temporary hold on disbursement of funds/securities
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What must a member firm employee do before opening a brokerage account with another firm?
- Employer's prior written consent
- Written notification to the executing firm
- Do the above within 30 days of getting a new job
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What must the executing firm do for restricted employees?
- Send duplicate confirms and statements to the employing firm.
- Also applies to accounts for employee's spouse and children if they have control of them.
- Doesn't apply to mutual funds, variable contracts, UITs, or 529s
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How long is the SIE valid?
4 years, S57 only 2
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What can cause a statutory disqualification (SD)?
- Conviction within 10 years of any felony or securities-related misdemeanor
- Denial or revocation by SEC or CFTC
- Expulsion
- Omitting a fact on an application
- Maintaining a business relationship with a banned person
- An SD person can be hired through an eligibility proceeding.
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How often must the BrokerCheck Hotline number be provided to customers?
- Annually and when opening an account
- Must have a link on website main page
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What must you do with a customer complaint?
- Can be in any written form (not voicemails)
- Forward to a supervisor
- Maintain tthe file for four years
- Send a quarterly report to FINRA with compaints
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What are the requirements for OBAs?
- OBAs are outside business activities (doesn't include volunteering)
- Written notice to employer if they're being compensated or expect to be compensatede
- Update the U4 and disclose through BrokerCheck.
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What is a private security transaction?
A security transaction done by an associated person outside of their role with a member firm, including public and private offerings.
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If you're not receiving compensation for a private security transaction, what needs to be done?
Must notify the employing firm of he trade and obtain a written acknowledgement.
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If you are receiving compensation for a private security transaction, what needs to be done?
- Must receive written permission from the employing firm and the firm must record the transaction.
- Violation = selling away
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What is the gift limit for an RR to people who can direct business back to them?
- $100/person/year
- Entertainment is excluded
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What is required to make a training/education gift acceptable?
- BD must give RR permission
- No sales targets
- Location is appropriate
- RRs can be compensated, but not their guests
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What in-house incentive is allowed?
Non-cash gift, but must be based on total sales and not a specific product.
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What is rule G-37?
- This is the political contributions rule that limits any municipal finance professional (MFP)
- They can contribute $250/candidate to candidates they may actually vote for
- A violation means a two year ban on underwriting business
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