Test Alerts

Exam Alert: FINRA Revises Series 26 Exam

Effective June 16, 2014, FINRA will modify the outline for the Series 26 exam. The changes affect the structure of the outline, the distribution of the exam questions, and the content tested on the exam. The total number of scored and unscored questions and the score required to pass remain unchanged. Continue reading

Effective June 16, 2014, FINRA will modify the Series 26 exam. The changes affect the structure of the outline, the distribution of the exam questions, and the content tested on the exam. The total number of scored and unscored questions and the score required to pass remain unchanged.

The structure of the new outline places topics into three “functions” (job responsibilities of an investment company and variable contracts products principal). These functions are then broken down into specific tasks as subsections. This is in contrast to the old outline, which has five broad sections and had subsections based on topics and/or rules.

The question distribution for the exam will change alongside the outline format. There is less of a focus on hiring and qualification and training of representatives. There is an increased focus on supervision, sales practices, and business processing and recordkeeping rules. According to FINRA, “the questions on the revised Series 26 examination place greater emphasis on key tasks such as supervision of registered persons, sales practices and compliance.” FINRA states that this adjustment “better reflects the key tasks performed by an Investment Company and Variable Contracts Products Principal.”

New content that may be tested on the revised exam includes the USA PATRIOT Act and associated anti-money laundering rules, the Fair and Accurate Credit Transaction Act of 2003 (FACT Act) and associated anti-identity theft rules, the Office of Foreign Assets Control (OFAC) Specially Designated National List (SDN), and Federal Deposit Insurance Corporation (FDIC) disclosures. Several new FINRA and SEC rules are on a wide range of topics may also be tested. These topics include disclosures during registration, deferred variable annuities, networking arrangements, proxies, business continuity plans, and holding customer mail, among others.

While some content that was listed on the old outline is not explicitly included on the new outline, test takers should still learn the material. For example, while the new outline does not specifically mention 529 plans or retirement plans, test takers will still be expected to know the rules regarding those products so that they may properly supervise individuals that sell such products.

Source: FINRA Regulatory Notice 14-18: FINRA Revises the Investment Company and Variable Contracts Products Principal (Series 26) Examination Program

This alert applies to the Series 26.

Exam Alert: FINRA Updates and Consolidates Rules Regarding Customer Protection, Callable Securities, and Securities Loans

Effective May 1, 2014, FINRA will put into place new consolidated financial and operational rules, based on existing NYSE and NASD rules. The rules cover requirements regarding customer protection, callable securities, and securities loans. Continue reading

Effective May 1, 2014, FINRA will put into place new consolidated financial and operational rules, based on existing NYSE and NASD rules.

The new customer protection rule requires firms to:
-obtain written authorization from a customer before lending out securities in that customer’s margin account
-notify FINRA in writing at least 30 days prior to borrowing fully paid or excess margin securities from a customer account
-make an appropriateness determination prior to first entering into a securities borrowing arrangement with a customer and provide specified written disclosures
-prior to first entering into a securities borrowing arrangement with a customer, provide the customer with a written notice stating that the Securities Investor Protection Act of 1970 may not protect the customer in the securities loan transaction, along with other disclosures (note: this last requirement will go into effect October 28, 2014).

The new callable securities rule requires a firm to:
-identify its held callable securities and establish a lottery allocation system for determining which customers will be impacted in the event of a partial redemption or call
-share the allocation procedures on its website
-provide written notice to new customers when opening an account and to all customers annually of where to access the allocation procedures
-not allocate securities to its accounts and the accounts of associated persons in the event of a redemption that is favorable to the security holders until all other customer positions in the securities have been satisfied
-not exclude its accounts and the accounts of associated persons in the event that the redemption is unfavorable to the security holders.

The securities loans and borrowings rule requires firms to:
-have consistent disclosure and recordkeeping for its securities lending activities
-when lending or borrowing securities from non-FINRA members, have a written agreement that gives the firm the right to liquidate the transaction under specified conditions.

Source: FINRA Regulatory Notice 14-05: SEC Approves Consolidated FINRA Rules 4314 (Securities Loans and Borrowings), 4330 (Customer Protection – Permissible Use of Customers’ Securities) and 4340 (Callable Securities)

This alert applies to the Series 24, Series 62, Series 82, and Series 99.

Exam Alert: Hart-Scott-Rodino Act Thresholds Updated for 2014

The Hart-Scott-Rodino Act specifies filing requirements for mergers and acquisitions based on certain monetary thresholds. These thresholds are adjusted for inflation on an annual basis. As of February 24, 2014, the thresholds are now as follows… Continue reading

Original threshold …………….. Adjusted threshold ($ million)
$10 million ………………………. 15.2
$50 million ………………………. 75.9
$100 million …………………….. 151.7
$110 million …………………….. 166.9
$200 million …………………….. 303.4
$500 million …………………….. 758.6
$1 billion …………………………. 1,517.1

Source: Current 2014 Thresholds

This alert applies to the Series 24 and the Series 79.

Exam Alert: FINRA Updates Regulatory Extension (REX) System

Effective April 2, 2014, FINRA has updated its Regulatory Extension (REX) system for allowing firms to submit extension of time requests under the Customer Protection rule. Firms should submit for a time extension request either the first or second business day after the 30 day period under the rule has passed. Continue reading

Effective April 2, 2014, FINRA has updated its Regulatory Extension (REX) system for allowing firms to submit extension of time requests under the Customer Protection rule. The rule requires firms to obtain physical possession or control of securities that are in a short position for more than 30 days in either the dealer’s account or a customer account. Note that the firm is not required to buy-in the security – they may borrow the security instead.

Firms should submit for a time extension request either the first or second business day after the 30 day period has passed. In order to submit a time extension request, the firm must have an active user ID and password to access the online REX system. Additional details about what information is required in the time extension request may be found here.

Source: Regulatory Notice 14-13: Extension of Time Requests Relating to New SEA Rule 15c3-3(d)(4)

This alert applies to the Series 7, Series 24, Series 26, and Series 99.

Exam Alert: FINRA Establishes Exemption from Spinning Rule for Certain Funds of Funds

Effective February 3, 2014, FINRA has put in place a modification to its issue allocation rules. The change provides an exemption from the “anti-spinning” provision of FINRA Rule 5131. Continue reading

Effective February 3, 2014, FINRA has put in place a modification to its issue allocation rules. The change provides an exemption from the “anti-spinning” provision of FINRA Rule 5131.

Spinning refers to the practice of a firm allocating shares of a new issue to an investor’s account in exchange for that investor directing their company’s investment banking business to the firm. Spinning is generally prohibited.

The new exemption allows for a firm to allocate shares of a private fund (such as a fund of funds) to an account (such as a hedge fund) if both the account and the fund meets certain conditions. These conditions include that the fund:
-is managed by an investment adviser;
-has assets greater than $50 million;
-owns less than 25 percent of the account;
-is not a fund in which a single investor has a beneficial interest of 25 percent or more; and
-was not formed for the specific purpose of investing in the account.
The account must not look through to the beneficial owners of unaffiliated private funds invested in the account, except for beneficial owners that are control persons of the investment adviser managing the fund.

In addition, the adviser managing the account must be unaffiliated with the investment adviser managing the fund.

Source: FINRA Regulatory Notice 13-43: SEC Approves a Limited Exception From FINRA Rule 5131(b) to Permit Firms to Rely Upon a Written Representation From Certain Unaffiliated Private Funds

Further reading: Mondaq.com: FINRA Amends Its Rule 5131 To Ease “New Issues” Compliance Related To Certain Funds-Of-Funds

This alert applies to the Series 7 and Series 55.

Exam Alert: FINRA Revises ADF Market Participant Registration Rules

Effective February 3, 2014, FINRA has implemented changes to the requirements for registering as an Alternative Display Facility (ADF) market participant. An applying firm must now agree to submit an ADF Deposit Amount, execute a Participant Agreement with FINRA, and execute a Certification Record. Continue reading

Effective February 3, 2014, FINRA has implemented changes to the requirements for registering as an Alternative Display Facility (ADF) market participant. An applying firm must now agree to submit an ADF Deposit Amount of $250,000 into escrow (raised to $500,000 under certain conditions). The firm may lose some of the deposit if they fail to submit at least 75% of its quoting or trading volume to the ADF. The firm must also provide monthly projections of the volume of data it expects to submit to the ADF.

The rule provides for ways to earn back the deposit. The rule also specifies what happens to the deposit if the firm is sold, stops doing business, or fails to become or remain an ADF market participant.

A firm seeking registration as an ADF market participant must also execute a Participant Agreement with FINRA and execute a Certification Record. The Certification Record has the firm attest that it can comply with certain requirements of Regulation NMS.

Source: FINRA Regulatory Notice 14-04: SEC Approves Amendments to FINRA Rules 6271 and 6272 Regarding the Requirements For Firms Seeking Registration as FINRA Alternative Display Facility (ADF) Market Participants

This alert applies to the Series 7, Series 55, and Series 62.

Exam Alert: FINRA Revises Proxy-forwarding Fee Rules

Effective January 1, 2014, FINRA has amended FINRA Rule 2251, Forwarding of Proxy and Other Issuer-related Materials. The changes apply to the rates of reimbursement for processing and forwarding proxy and other issuer-related materials. The changes also establish a “success fee” that will go to developing Internet platforms for proxy voting. Continue reading

Source: FINRA Regulatory Notice 14-03

This alert applies to the Series 6, Series 7, and Series 24.

Exam Alert: SEC Delays Compliance Date of Municipal Adviser Registration Rules, Responds to FAQs

The SEC has announced that compliance with the final municipal adviser registration rules will not be required until July 1, 2014. The SEC has also released interpretive guidance for the municipal adviser registration rules, in the form of responses to frequently asked questions. Continue reading

The SEC has announced that compliance with the final municipal adviser registration rules will not be required until July 1, 2014. This date is when the first set of advisers will be required to register under the rule.

The SEC has also released interpretive guidance for the municipal adviser registration rules, in the form of responses to frequently asked questions. The FAQs cover a wide range of topics, including the advice standard, various exemptions and exclusions, issuance of municipal securities, remarketing agent services, and more. The FAQs can be found here.

For more information on the municipal adviser registration rules, see our two prior exam alerts on the topic, here and here.

Sources:

SEC Release 2014-8: SEC Announces New Date for Compliance with Final Municipal Advisor Registration Rules

SEC Release 2014-7: Interpretive Guidance on Municipal Advisor Registration Rules

This alert applies to the Series 7, Series 52, and Series 53.

Exam Alert: Municipal Advisor Registration Rules Take Effect

On January 13, 2014, the SEC will put into effect new rules to require the ongoing registration of municipal advisers. A municipal adviser is defined as a person that either:

– gives advice to a municipal entity or obligated person regarding municipal securities, or

– solicits a municipal entity or obligated person.

The SEC has released a guide (http://www.sec.gov/info/smallbus/secg/muni-advisor-reg-secg.htm) on who is and is not required to register… Continue reading

On January 13, 2014, the SEC will put into effect new rules to require the ongoing registration of municipal advisers. A municipal adviser is defined as a person that either:

gives advice to a municipal entity or obligated person regarding municipal securities, or
solicits a municipal entity or obligated person.

The SEC has released a guide on who is and is not required to register – certain firms and professionals are exempt while acting in their regular capacity. The guide also specifies the filing requirements for municipal adviser registration.

See also our prior alert on this topic for additional information.

This alert applies to the Series 7, Series 52, and Series 53.

Exam Alert: MSRB Prohibits Municipal Dealers from Consenting to Changes to Authorizing Documents

Effective February 3, 2014, the Municipal Securities Rulemaking Board (MSRB) will amend one of its rules to help protect municipal bond investors from unexpected changes in bond authorizing documents. The amendments prohibit broker-dealers from agreeing to changes to authorizing documents when acting as an underwriter or remarketing agent, or acting as an agent for bondholders. Continue reading

Effective February 3, 2014, the Municipal Securities Rulemaking Board (MSRB) will amend one of its rules to help protect municipal bond investors from unexpected changes in bond authorizing documents. The amendments prohibit broker-dealers from agreeing to changes to authorizing documents when acting as an underwriter or remarketing agent, or acting as an agent for bondholders.

The rule allows for exceptions in certain situations. These situations include:

the authorizing document explicitly permits an underwriter to provide bond owner consent, and this was disclosed in the offering documents;
the broker-dealer owns the securities outside of its capacity as an underwriter or remarketing agent;
the securities are held by the remarketing agent due to a mandatory tender of the securities;
the bond owners have provided written consent; or
the underwriter provides consent on behalf of prospective purchasers, if the changes will not become effective until all current bondholders have provided consent.

The “authorizing document” refers to the trust indenture, resolution, ordinance, or other document under which the securities are issued.

Source: MSRB Enhances Protections for Investors Against Unexpected Changes to Bond Authorizing Documents

This alert applies to the Series 7, Series 52, and Series 53.