Test Alerts

Exam Alert: Federal Agencies Implement Volcker Rule

Effective April 1, 2014, five federal agencies will implement a provision of the Dodd-Frank Act known as the Volcker rule. This rule prohibits a bank from making short-term trades in financial instruments for its own account. The rule also limits the relationships a bank can have with hedge funds and private equity funds. Continue reading

Effective April 1, 2014, five federal agencies* will implement a provision of the Dodd-Frank Act known as the Volcker rule. This rule prohibits a bank from making short-term trades in financial instruments for its own account. The rule also limits the relationships a bank can have with hedge funds and private equity funds.

The rule provides exemptions for certain activities, including underwriting, market making, hedging risk, trading in certain government securities, trading in a fiduciary capacity, and riskless principal trading. Foreign banks are exempt if the trades meet certain requirements. Insurance companies are exempt when trading for their general or separate accounts.

The rule requires banks engaging in the activities covered by the rule to put in place a compliance program. The level of detail of the compliance program depends on the size of the bank, with larger banks needing more detailed compliance programs.

*The five agencies are the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

Source: SEC Release 2013-258: Agencies Issue Final Rules Implementing the Volcker Rule

This alert applies to the Series 6, Series 7, Series 24, Series 55, Series 62, and Series 79.

Exam Alert: SEC Requires Municipal Advisers to Register

Effective January 13, 2014, the SEC will put into place permanent 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.

Municipal entities and their employees are not considered municipal advisers. Continue reading

Effective January 13, 2014, the SEC will put into place permanent 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.

Municipal entities and their employees are not considered municipal advisers.

An “obligated person” essentially refers to an entity that is obligated to repay some or all of the amount borrowed in a municipal securities offering. For example, a non-profit university or non-profit hospital could be an obligated person if they borrow from the proceeds a municipal securities offering and are then legally required to pay back what they borrowed.
Note that certain entities are exempt from the registration requirement if they provide advice while acting in their regular capacity. This exemption applies to underwriters, registered investment advisers, registered commodity trading advisors, attorneys, engineers, banks, accountants, and swap dealers. For more details, see the SEC release.

Source: SEC Press Release 2013-185: SEC Approves Registration Rules for Municipal Advisors
This alert applies to the Series 7 and Series 52.

Exam Alert: FINRA Revises Series 6 Outline

On December 16, 2013, FINRA will implement a revision to the Series 6 Investment Company and Variable Contracts Products Representative examination. If you will be taking the Series 6 exam before December 16th you will not be affected, but if not, keep on reading! Continue reading

On December 16, 2013, FINRA will implement a revision to the Series 6 Investment Company and Variable Contracts Products Representative examination. Periodically, FINRA revises its qualification exams to parallel changes made to laws, rules, and regulations associated with the content tested on the exam. If you will be taking the Series 6 exam before December 16^th you will not be affected, but if not, keep on reading!

The most significant change will be to the organization of the Series 6 exam. Rather than having six sections covering individual topics, there will be four sections relating to job functions:

Function 1 — Regulatory fundamentals and business development (22 questions)
Function 2 — Customers’ financial information, identifies investment objectives, provides information on investment products, and makes suitable recommendations (47 questions)
Function 3 — Opens, maintains transfers and closes accounts, and retains appropriate account records (21 questions)
Function 4 — Obtains, verifies, and confirms customer purchase and sale instructions (10 questions)

All of the information on the present outline (and Solomon Exam Prep’s current study materials) will still be covered on the updated Series 6 exam. However, FINRA is adding several rules that anyone sitting for the exam after December 16 should know, including:

FINRA Rule 8312 – FINRA BrokerCheck Disclosure
FINRA Rule 2266 – Disclosure of SIPC Information
FINRA Rule 3220 – Influencing or Rewarding Employees of Others
FINRA Rule 11870 – Customer Account Transfer Contracts
NASD 2510 – Discretionary Accounts
NASD 3110(i) – Holding of Customer Mail
NASD 2340 – Customer Account Statements

Solomon Exam Prep continually updates materials to mirror the changes in the exams so a new Series 6 study guide will be available soon (and the exam simulator even sooner). Until then, a detailed summary of the additions to the Series 6 is available to Solomon customers in the Solomon Exam Prep online system, located in the “resources” folder.

The revised study outline is available on FINRA’s website.

Source: http://www.finra.org/

Exam Alert: SEC clarifies supervisory liabilities of legal and compliance personnel

On September 30, 2013, the Division of Trading and Markets of the SEC put out an FAQ detailing when legal and compliance personnel would or would not be held responsible for failing to supervise a broker-dealer employee that commits a violation. Legal and compliance personnel are not, by default, considered supervisors, so they are not held responsible unless their position places them in a supervisory role. This can be determined by considering whether the personnel has the “requisite degree of responsibility, ability or authority to affect the conduct of another employee.” The Division lists several questions that can be used to ascertain whether the personnel has such responsibility, ability, or authority, but key elements are:

whether the company is structured in such a way that the personnel is clearly designated with responsibility,
whether the personnel can hire, reward, punish, or fire the employee, and
whether the personnel knew or should have known that he or she was responsible for preventing the violation.

Source: Frequently Asked Questions about Liability of Compliance and Legal Personnel at Broker-Dealers under Sections 15(b)(4) and 15(b)(6) of the Exchange Act

Further reading: United States: When Legal Or Compliance Personnel May Be Subject To Failure To Supervise Liability Under The Securities Laws

This alert applies to the Series 24, Series 26, Series 62, and Series 82.

Exam Alert: SEC changes broker-dealer financial responsibility rules

On October 21, 2013, the SEC will put into effect amendments to its financial responsibility rules for broker-dealers. These amendments include changes to the customer protection rule, net capital rule, books and records rules, and notification rule. Continue reading

On October 21, 2013, the SEC will put into effect amendments to its financial responsibility rules for broker-dealers. These amendments include the following changes:

Customer Protection Rule (Rule 15c-3-3)

-Carrying broker-deals that maintain customer securities and funds will be required to maintain a new segregated reserve account for broker-dealer accounts.

-The reserve requirement to protect customer cash will exclude cash deposits at affiliated banks and limit cash held at non-affiliated banks to no more than 15% of the bank’s equity capital.

-The rule will require disclosure, notice, and affirmative consent from the customer when their cash is “swept” to a money market or bank deposit product.

Net Capital Rule (Rule 15c3-1)

-The rule will require a broker-dealer to include liabilities assumed by a third party in the broker-dealer’s net worth if the third party is reliant on the broker-dealer to pay the liabilities.

-The rule will require a broker-dealer to count as a liability any contributed capital that may be withdrawn by an investor. Contributed capital that is withdrawn within a year of contribution must also be treated as a liability, unless the broker-dealer receives written permission for the withdrawal from its designated examining authority.

-Broker-dealers will be required to deduct from net capital the excess of any deductible amount over the amount permitted by SRO rules.

-Insolvent broker-dealers will be required to cease conducting a securities business.

Books and Records Rules (Rules 17a-3 and 17a-4)

-Large broker-dealers will be required to document their risk management controls.

Notification Rule (Rule 17a-11)

-The rule will establish new notification requirements for when a broker-dealer’s repurchase and securities lending activities exceed a certain threshold. Alternatively, a broker-dealer may instead report such activity monthly to its designated examining authority.

Source: SEC Release 2013-140: SEC Adopts Amendments to Financial Responsibility Rules for Broker-Dealers

This alert applies to the Series 24, Series 26, Series 7, Series 99, Series 82, Series 79, and Series 55.

Exam Alert: FINRA requires firms to report trades within 10 seconds

Effective November 4, 2013, FINRA will require firms to report OTC trades in equity securities within 10 seconds of execution. Firms must also report cancellations of trades within 10 seconds. Continue reading

Effective November 4, 2013, FINRA will require firms to report OTC trades in equity securities within 10 seconds of execution. Firms must also report cancellations of trades within 10 seconds.

Note that trades should be reported “as soon as practicable.” 10 seconds is the cut-off after which the trade report will be considered late. FINRA recognizes, however, that certain trade reports may need to be entered manually – in these situations, FINRA will consider the complexity and size of the trade in determining whether there is “reasonable justification” for manually entering the trade report.

Source: Regulatory Notice 13-19: SEC Approves Amendments to Require Firms to Report OTC Transactions in Equity Securities as Soon as Practicable, But No Later Than 10 Seconds, Following Execution

This alert applies to the Series 24, Series 55, and Series 62.

Exam Alert: NASAA revises qualified client standard

Effective April 15, 2013, NASAA revised its model rules specifying who was considered a “qualified client.” The changes bring the rules in line with changes made to federal rules. Continue reading

Effective April 15, 2013, NASAA revised its model rules specifying who is considered a “qualified client.” A qualified client may enter into a performance-based compensation arrangement with an investment adviser.

The changes bring the rules in line with changes made to federal rules (updates on those changes can be found here).

The changes are as follows:

-Clarifies that advisers that are exempt from registration may charge performance-based fees.

-Ties the definition of a qualified client to the definition provided by the federal rule. The standard is currently $1 million in assets under management with the adviser or $2 million in net worth, excluding the value of the client’s primary residence. These amounts will be adjusted for inflation every five years.

-Clarifies that an investor in a private fund must be a qualified client in order for an adviser to charge them performance-based fees. An adviser cannot simply consider the fund itself a “qualified client” in order to charge the investors performance-based fees. If a fund consists of both qualified and non-qualified clients, the adviser may only charge performance-based fees to the qualified clients.

-Put transitional rules into place so that if the rules change, existing contracts will not suddenly be in violation of the new rules. The contract must be in compliance with the rules as of the last time it was entered into, extended, or otherwise renewed.

Sources: Model Rule 102(f)-3

Notice of Request for Public Comment: Proposed Changes to Performance Fee Model Rules Under the Uniform Securities Acts of 1956 and 2002

This alert applies to the Series 63, Series 65, and Series 66.

Exam Alert: FINRA modifies Series 55 outline and passing score

Effective August 12, 2013, FINRA will revise the Series 55 exam program. This includes significant changes to the Series 55 content outline, along with a change in the passing score. Continue reading

Effective August 12, 2013, FINRA will revise the Series 55 exam program. This includes significant changes to the Series 55 content outline, along with a change in the passing score. The current passing score is 70% – the new passing score will be 67%. The breakdown of questions by topic will also change, though the total number of questions will remain at 100 scored plus 10 unscored. The new breakdown is as follows:

-Trading: 45 questions

-Order Handling: 36 questions

-Record Keeping and Regulatory Reporting: 19 questions

The new exam outline can be found here.

Source: Regulatory Notice 13-22: FINRA Revises the Series 55 Examination Program

This alert applies to the Series 55.

Exam Alert: FINRA revises who can qualify as “public arbitrators”

Effective July 1, 2013, FINRA will revise its arbitration rules to impose additional limits on who may be considered a public arbitrator. Continue reading

Effective July 1, 2013, FINRA will revise its arbitration rules to impose additional limits on who may be considered a public arbitrator. The changes prohibit people associated with mutual funds or hedge funds from serving as public arbitrators. The changes also require individuals to wait for at least two years after ending certain affiliations before they are considered public arbitrators.

Source: FINRA Regulatory Notice 13-21: SEC Approves Amendments to Arbitration Codes to Revise the Definition of Public Arbitrator

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

Exam Alert: FINRA modifies TRACE trade dissemination and reporting rules

Effective July 22, 2013, FINRA will alter its rules for reporting and disseminating certain trades in mortgage-backed securities and asset-backed securities. Continue reading

Effective July 22, 2013, FINRA will alter its rules for reporting and disseminating certain trades in mortgage-backed securities and asset-backed securities. The transactions must be reported within 120 minutes of execution during a pilot period that lasts until January 20, 2014 – after the pilot period ends, they must be reported within 60 minutes. A new dissemination method for pool transactions will include various pieces of information about the pool, such as the weighted average coupon.

Source: FINRA Regulatory Notice 12-56: SEC Approves Amendments to TRACE Rules and Dissemination Protocols to Disseminate Specified Pool Transactions and SBA-Backed ABS Transactions and to Reduce the Time to Report Such Transactions

This alert applies to the Series 7, Series 24, and Series 62.