Series 99

Study Question of the Week: October 23, 2012 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available (Relevant to Series 6, 7, 65, 66, 24, 26 and 99). Be sure to submit your answers in the comments section and check back tomorrow for the correct answer and rationale. Continue reading

This week’s study question from the Solomon Online Exam Simulator question database is now available. Be sure to submit your answers in the comments section and check back tomorrow for the correct answer and rationale. Happy studying!

Question (Relevant to Series 6, Series 7, Series 65, Series 66, Series 24, Series 26 and Series 99):

Which of the following is true of UGMA/UTMA accounts?

I. Only family members may contribute to a UGMA/UTMA
II. Annual contribution limit of $13,000 per year, per child
III. Assets may only be used for education expenses
IV. Earnings reported under adult custodian’s tax identification

Answers:

A: I, II

B: III, IV

C: II, III

D: None of the choices listed

Exam Alert: SEC identifies concerns, good practices regarding nonpublic information

On September 27, 2012, the SEC identified situations ripe for abuse of inside information at broker-dealers so that industry professionals will know what to avoid. The SEC also provided examples of good policies put in place at some broker-dealers that minimize the risk of insider trading violations. Continue reading

Potentially problematic situations include the following:

-Lots of informal, undocumented interaction between departments with MNPI (material nonpublic information) and sales/trading departments that could abuse that information

-Having senior executives that supervise multiple departments and could spread MNPI from one department to another without oversight, due to being “above” the information barriers

-Lack of review of situations where MNPI is provided from one department to another for business purposes

-Lack of review of trading in customer and affiliate accounts

-Lack of review of situations where MNPI is received from an outside source

Effective practices included:

-Having a system that distinguishes MNPI based on source or type of information (possibly even having individualized reports specific to certain pieces of information)

-Expanded review of potential misuse of MNPI, including looking at trading in swaps, loans, components of pooled securities (such as UITs and ETFs), warrants, and bond options

-Monitoring access to electronic sources of MNPI to see which employees access the information

-Monitoring access levels granted via key cards and computer networks to ensure that only authorized personnel have access to restricted areas

Source: SEC Issues Report on Brokerage Firms’ Handling of Confidential Information (SEC Release 2012-200)

This alert applies to the Series 24, Series 26, Series 6, Series 7, Series 55, Series 62, Series 79, Series 82, Series 99, Series 63, Series 65, Series 66, and Series 56.

Exam alert: SEC issues risk alert on “Pay-to-Play” practices

On August 31, 2012, the SEC issued a risk alert regarding compliance with MSRB rules. Specifically, the alert looks at failures to comply with Rule G-37, which prohibits a firm from doing business with a municipal issuer if a municipal finance professional of the firm donated money to an official of that issuer within the past two years. Continue reading

The alert identifies good practices implemented by brokers to ensure compliance with the rule. These practices include training programs for municipal finance professionals, self-certification of compliance with the rule, surveillance of unreported political contributions, and restriction on political contributions (when permitted by state or local law).

Source: SEC Issues Risk Alert on “Pay-to-Play” Prohibitions Under MSRB Rules (SEC Release 2012-173)

This alert applies to the Series 24, Series 7, and Series 99.

Study Question of the Week: September 19, 2012 Edition

Happy studying!

Question (Relevant to Series 7, Series 79, Series 24, Series 62, Series 99, and Series 82):

Before allowing a customer to buy shares in an IPO, the member firm must receive a representation that the account is not restricted by the account owner. How can this form be obtained initially?
I. Negative consent letter
II. Positive affirmation letter

Answers:

A: I

B: II

C: Either I or II

D: Neither I nor II

Exam Alert: SEC and CFTC define “swap,” “security-based swap,” and “mixed swap”

Effective October 12, 2012, the SEC and CFTC will put into effect rules that specify whether a given product counts as a “swap,” “security-based swap,” “mixed swap,” or none of the above. The new rules also require market participants to keep the same books and records for “security-based swap agreements” as would be required for swaps. Continue reading

The CFTC regulates swaps, the SEC regulates security-based swaps, and both agencies regulate mixed swaps. The CFTC regulates security-based swap agreements, but the SEC has antifraud authority over those products.

Products that are not swaps or security-based swaps include:

-insurance that falls under 1) the grandfather provision, 2) the product safe harbor, or 3) the enumerated product safe harbor

-security forwards

-consumer transactions

-commercial transactions

Products that are considered swaps include:

-Title VII instruments on interest rates and other monetary rates

-Title VII instruments on rates or yields of U.S. Treasuries and certain other exempt securities

-Title VII instruments on futures (other than futures on foreign government debt securities)

-broad-based index credit default swaps that require cash settlement or auction settlement

Products that are considered security-based swaps include:

-Title VII instruments on yields of a non-exempt debt security, loan, or narrow-based security index

-Total Return Swaps on a single security, loan, or narrow-based security index

-Title VII instruments on security futures

Products that are considered mixed swaps include:

-Total Return Swaps that include interest-rate optionality or a non-securities component

-broad-based index credit default swaps that require mandatory physical settlement

Products that may be swaps or security-based swaps:

-Title VII instruments based on futures contracts on certain foreign government debt securities

-index credit default swaps

-foreign exchange forwards

-foreign exchange swaps

-foreign currency options (other than foreign currency options traded on a national securities exchange)

-non-deliverable forward contracts involving foreign exchange

-currency and cross-currency swaps

-forward rate agreements

-contracts for differences

-certain combinations and permutations of (or options on) swaps and security-based swaps

Market participants may request a determination from the SEC and the CFTC of whether a product is a swap, a security-based swap, or a mixed swap.

Sources:

SEC Approves Rules and Interpretations on Key Terms for Regulating Derivatives (SEC Release 2012-130)

Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping (Federal Register publication)

This alert applies to the Series 62, Series 79, Series 99, Series 7, Series 66, and Series 65.

Exam Alert: Test takers with limited English proficiency must submit a form to FINRA to receive extra time

Effective September 1, 2012, FINRA will implement a new policy for providing additional time to people with limited English proficiency on qualification exams and on Regulatory Element Continuing Education sessions. The new policy requires that people requesting additional time must submit an LEP Request Form to FINRA and receive confirmation from FINRA that the form has been processed before scheduling the exam or Continuing Education session. Continue reading

This new policy replaces the current policy covering people who speak English as a second language. Test center personnel will no longer be authorized to provide additional time to people who speak English as a second language or to people with limited English proficiency.

A person is considered to have “limited English proficiency” if they “(1) do not speak English as their primary language; and (2) have limited ability to read, speak, write and understand the English language.”

Further details on the new policy may be found on FINRA’s website.

Sources:

FINRA Information Notice 8/1/2012

Candidates with Limited English Proficiency (FINRA website)

This alert applies to all FINRA-administered exams. This includes (among others) the Series 24, Series 26, Series 6, Series 7, Series 55, Series 62, Series 79, Series 82, Series 99, Series 56, Series 63, Series 65, and Series 66.

Exam Alert: Operations Professionals must pass the Series 99 by October 17

Anyone who was identified by their firm as an Operations Professional as of October 17, 2011, must pass the Series 99 (or other appropriate qualification exam) by October 17, 2012. Those who need to pass the exam should note the 30-day waiting period for retaking the exam. The waiting period increases to 180 days if an individual fails the exam three or more times in succession. Continue reading

If an individual fails to pass the Series 99 (or other qualification exam) by October 17, then the individual must stop functioning as an Operations Professional until he or she passes the exam. FINRA has stated that it will not grant exceptions or waivers to the waiting period rule.

Sources:

“Operations Professional Qualification Exam” (FINRA website)

“Qualifications FAQ-Operations Professional” (FINRA website)

NASD Rule 1070, Qualification Examinations and Waiver of Requirements

This alert applies to the Series 99.

Exam Alert: FINRA to implement new communications rules

The SEC has approved new FINRA rules governing communication with the public. The rules will take effect February 4, 2013. While the rules are generally based on current communications rules, several significant changes will be made. Continue reading

Communication Categories

-The six current types of communications will be replaced with three types: institutional communication, retail communication, and correspondence.

-Institutional communication is communication that is only distributed to institutional investors. In order for a communication to count as institutional communication, the firm must not have “reason to believe” that the communication will be forwarded to non-institutional investors (“retail investors”).

-Retail communication consists of communications to more than 25 non-institutional investors within a 30 calendar day period.

-Correspondence includes communications to 25 or fewer non-institutional investors.

-Replacements for current rules may apply to different categories of communication than the present rules do. For full details on which rules will change, see the FINRA Notice.

Approval, Review, and Recordkeeping Requirements

-There are modified standards for pre-approval of communication by principals.

-Series 16 supervisory analysts may approve research that is not a “research report” if they have technical expertise in the product area and the product does not require licenses they do not have.

-The following are exempted from pre-approval: research/analysis on certain broad, limited topics; forum posts; and communications that do not make recommendations or promote a product or service of the firm.

-FINRA may grant an exemption from pre-approval requirements for good cause.

-Any communication filed with the Advertising Regulation Department must be pre-approved.

-Records must include information on the sources of tables, graphs, and charts.

-If a communication wasn’t pre-approved, records must include the name of the person who prepared and distributed the communication.

Filing Requirements and Review Procedures

-The one-year pre-filing period for new firms will start on the date the firm’s FINRA membership becomes effective. Under the current rule, the period starts when a firm first files an advertisement with FINRA.

-The Advertising Regulation Department may require a firm to file any type or types of communications prior to use.

-The pre-use filing requirement is revised to include retail communications regarding investment companies that include self-created rankings, retail communications concerning securities futures, and retail communications that include bond mutual fund volatility ratings.

-All retail communications concerning closed-end registered investment companies, registered CMOs, and derivatives must be filed with FINRA within 10 business days of first use.

-A present requirement to file advertisements concerning government securities within 10 business days of first use has been eliminated.

-An exclusion from filing exists for:

–Retail communication based on a template that has been filed with FINRA, if the only changes are updating statistical or other “non-narrative” information;

–Retail communications that do not make recommendations or promote a product or service of the firm;

–Online forum posts; and

–Press releases issued by closed-end investment companies listed on the NYSE that are subject to the “immediate release policy.”

-Free writing prospectuses that are prepared by broker-dealers and that will be widely disseminated must be filed with FINRA.

-FINRA may grant an exemption from the concurrent-with-use filing requirement (requirement that states a communication must be filed within 10 business days of first use) for good cause.

Content Standards

-FINRA has added new specifications for illustrations that compare tax-deferred investments with taxable compounding investments. These requirements include using actual federal income tax rates, making a fair comparison, and making appropriate disclosures – the full list of requirements may be found on pages 17-18 of the FINRA Notice.

-A firm must disclose that a testimonial is a paid testimonial if more than $100 is paid for a testimonial (the current rule requires disclosure if more than a “nominal sum” is paid).

-A retail communication that contains a recommendation of securities must disclose if the firm or any associated person involving in preparing the communication has a non-nominal financial interest in the issuer of the security. This is in place of a prior requirement that required disclosure if any of the firm’s officers or partners had a non-nominal financial interest in the issuer.

-Firms are now subject to similar requirements as investment advisers in regards to retail communications about past recommendations – generally specific past recommendations are not allowed. Lists of past recommendations that cover at least one year are acceptable if they include all recommendations for a given type, kind, or classification of security.

Public Appearances

-Public appearances will no longer require pre-approval or filing with FINRA. They still require a reasonable basis for recommendations, proper disclosure, and written supervisory procedures.

Guildlines for Communications With the Public Regarding Security Futures

-Communications about securities futures must be accompanied or preceded by a risk disclosure document if it contains the names of specific securities.

Source: FINRA Regulatory Notice 12-29

This alert applies to the Series 6, Series 62, Series 26, Series 24, Series 7, Series 79, Series 99, and Series 82.

Exam Alert: SEC adopts definitions for security-based swap rules

Under the Dodd-Frank Act, the SEC and CFTC (Commodity Futures Trading Commission) regulate the OTC swaps market. On April 18, 2012, the SEC adopted rules that provide definitions for terms used in the law, specifying who will be subject to regulation. Continue reading

The rules provide two categories of persons subject to SEC registration: “security-based swap dealers” and “major security-based swap participants.” In essence, a security-based dealer is a person that regularly trades security-based swaps for their own account. A de minimis exemption exists for dealers who traded up to $3 billion worth of credit default swaps over the past year and up to $150 million worth of other security-based swaps. Note that there is a different de minimis threshold of $25 million for security-based swaps involving “special entities,” including certain government agencies.

A major security-based swap participant is a person who maintains a “substantial position” in any of the major security-based swap categories, or whose outstanding security-based swaps create “substantial counterparty exposure.” Note that hedging positions are not counted towards the “substantial position” threshold if the person is not a “highly leveraged financial entity,” meaning a financial entity with a ratio of liabilities to equity in excess of 12-to-1. Two tests are provided for determining “substantial position,” and two thresholds are provided for “substantial counterparty exposure.” The specifics of these tests and thresholds may be found in the SEC release, along with background information, a plan to phase-in the de minimis rule, a safe harbor to avoid being considered a major participant, and other details.

The rule will become effective 60 days after publication in the Federal Register, though the deadline for registration will be given in SEC’s final rules for registration of dealers and major participants.

Source: SEC Release 2012-67

This exam alert applies to the Series 62, Series 79, Series 99, Series 65, and Series 66.

Exam Alert: SEC releases risk alert on unauthorized trading

On February 27, 2012, the SEC released a risk alert providing suggestions for techniques and controls a firm may use to help avoid conducting unauthorized trades. The alert has a large focus on supervisory procedures, but also addresses other ways in which firms can make it harder for employees to engage in unauthorized trading. The alert identifies alternative methods to more readily detect unusual trading activity and stresses the importance of a culture of openness and compliance. Continue reading

Suggestions for supervisory procedures include:

-Have more than one chain of control be responsible for monitoring the integrity of the business, i.e. don’t have all your compliance personnel report to the same person.

-Managers and supervisors should understand any complex products and strategies being employed by traders.

-Supervisors should engage in discussions with traders and portfolio managers and address positions that are unusual (given the strategies and/or client objectives involved).

-Make sure the payment structure for traders and supervisors encourages responsible risk-taking.

-Try to avoid having one person or desk fulfill multiple roles.

-Have an “open-door” policy that encourages traders to report unexpected losses promptly.

-Limit trader access to their appropriate portfolios – don’t let them keep access to ones that they are no longer authorized to trade in.

-Consider additional controls (several are listed in the alert).

Other suggestions include:

-When an employee transfers into the trading department, remove any prior system access he or she had.

-Have controls in place to confirm extended settlement trades and rollovers.

-Review delays and discrepancies in the customer trade confirmation process to check for unauthorized trading.

-Require mandatory vacations for traders with no remote access to accounts, then assign their portfolio(s) to a supervisor or experienced trader for the duration. Use this time to check for unusual activity.

-Have the audit and compliance departments review trading strategies, business performance, and risk profile.

-If the firm has multiple recordkeeping systems, try to integrate them.

-Test the controls put in place to discourage unauthorized trading.

-Maintain a corporate culture of honesty, integrity, accountability, and responsible risk-taking.

Source: SEC Release 2012-33

This exam alert applies to the Series 24, Series 26, Series 6, Series 7, Series 62, Series 79, Series 82, and Series 99.