WSP Checklist

Written Supervisory Procedures Review Checklist

                         

The Written Supervisory Procedures Checklist ("WSP Checklist") is an outline of selected key topics representative of the range of business activities typically proposed by applicants seeking approval to become FINRA members or to expand their existing securities business under NASD Membership and Registration Rules (Note - Though part of the current FINRA Manual, these rules have not yet been consolidated, please see http://www.finra.org/Industry/Regulation/FINRARules/ for more information).

                         

As part of the application process, applicants are required to submit a completed WSP Checklist, together with a copy of their Written Supervisory Procedures ("WSPs"). FINRA staff reviews the checklist and the WSPs in conjunction with its determination of whether the applicant meets the standards for admission specified in NASD Rule 1014(a).

                         

Note that the outline of topics in the WSP Checklist is not all-inclusive, and does not necessarily represent all of the areas of inquiry that the staff will make when evaluating supervisory procedures proposed in an application. The full extent of the staff's inquiry and evaluation will depend on a number of factors, including the precise nature of the proposed business activities.

                         

In addition, applicants are advised that acceptance of a firm's proposed WSPs during the application process is not a safe harbor with respect to potential supervisory deficiencies. Among other things, the nature of the business actually conducted by a firm, the manner in which the WSPs are implemented and followed, and the extent to which the firm updates and revises its procedures to reflect operating experience and change (both regulatory and operational) are important factors in determining future compliance with applicable rules. The WSPs are a "living" document and should provide a road map for the supervisory personnel to follow when they conduct each review. WSPs should not be updated only to reflect changes to rules and regulations, but also when changes are made to the supervisory process.

                         

IMPORTANT NOTE: This outline of topics should not be considered by the user to include all topics and issues applicable to the user's business. It is merely to be used as an aid in preparing WSPs.

                         

Certain references to specific rules and other guidance have been provided for some topics and line items contained within the checklist, although the list of references may not be exhaustive. Please review all references relevant to the firm's business plan prior to completing and submitting the checklist.

                         

ADVISORY: Members should be aware that the requirements of NASD Rule 3012 (Supervisory Control System) and FINRA Rule 3130 (Annual Certification of Compliance and Supervisory Processes) are separate and distinct from the requirements pursuant to NASD Rule 3010(b) (Written Procedures) that members create and maintain WSPs.

                         

Members seeking guidance on compliance with NASD Rule 3012 and FINRA Rule 3130 are encouraged to visit the Supervisory Control web page FINRA has created to assist members in complying with these Rules (http://www.finra.org/Industry/Issues/SupervisoryControl/). The Supervisory Control web page contains rule filings, Notices, and other publications relating to these Rules. Included in this material is an outline of the requirements of NASD Rule 3012 and FINRA Rule 3130. The outline is located in the "Additional Guidance" section of the Supervisory Control web page.

Written Supervisory Procedures Checklist

Section

Topic

Item Required to be Addressed

Reference

Applicable to Firm's Business?

Page No.

Note

I. GENERAL ADMINISTRATION

 

A. Form Filings

General Administration

Form Filings

Form BD Amendments

FINRA By-Laws, Art. IV, Section 1 - Application for Membership

     

General Administration

Form Filings

Form U4/Form U5

FINRA By-Laws, Art. V, Sections 2 (Application for Registration) and 3 (Notification of Termination; Amendments to Notification); FINRA Rule 4530 - Reporting Requirements

     

General Administration

Form Filings

Fingerprint Cards

SEA Rule 17f-2 - Fingerprinting of Personnel

     

General Administration

Form Filings

Designation of principal responsible for supervision of form filings

FINRA Rule 1010(b) - Electronic Filing Requirements for Uniform Forms

     

Firm Supervision and Oversight

Designation of Supervisors

Designation of Executive Representative

FINRA By-Laws, Art. IV, Section 3 - Executive Representative; NASD Rule 1150 - Executive Representative

     

Firm Supervision and Oversight

Designation of Supervisors

Updates to FINRA Contact System

FINRA Rule 4370 - Business Continuity Plans and Emergency Contact Information; NASD Rule 1160 - Contact Information Requirements

     

General Administration

Regulatory Fees

FINRA Fees and Assessments

FINRA By-Laws, Schedule A; MSRB Rules A-13 - Underwriting and Transaction Assessments for Brokers, Dealers, and Municipal Securities Dealers - and A-14 - Annual Fee (if applicable)

     
 

B. Business Continuity Plan

General Administration

Business Continuity Plan

Business Continuity Plan - Content and Standards

FINRA Rule 4370 - Business Continuity Plans and Emergency Contact Information; MSRB Rule G-40 - Electronic Mail Contacts

     

II. PERSONNEL

   

A. Hiring Practices, Registration and Qualifications

Personnel

Hiring Practices

Investigation of Background and Qualifications

NASD Rule 3010(a)(6) - Determining qualifications by experience and training; NASD Rule 3010(e) - Qualifications Investigated; MSRB Rule G-7 - Information concerning associated persons

     

Personnel

Hiring Practices

Screening for SD persons hired in clerical or ministerial positions

NASD Rule 3010(e) - Qualifications Investigated; FINRA By-Laws, Art. III - Qualifications of Members and Associated Persons

     

Personnel

Hiring Practices

Parking of Securities Registrations

FINRA By-Laws, Art. III, Sec. 1; NASD Rules 1021 and 1031 - Registration Requirements

     

Personnel

Qualification and Registration

Determine qualifications of Supervisory Personnel

NASD Rule 3010(a)(6) - Determining qualifications by experience and training; NASD Rule 3010(b)(3) - Written Procedures; Notice 99-45 - Guidance on Supervisory Responsibilities

     

Personnel

Qualification and Registration

Municipal securities personnel, including representatives, principals, apprentices

MSRB Rule G-3 - Classifications of Principals and Representatives

     

Personnel

Qualification and Registration

Registration of trading personnel

NASD Rule 1022 - Categories of Principal Registration; NASD Rule 1032(f) - Limited Representative - Equity Trader

     

Personnel

Qualification and Registration

All associated persons are properly registered

FINRA By-Laws, Art. III, Sec. 2; NASD Rule 1070 - Qualification Exams and Waiver of Requirements; MSRB Rule G-2 - Standards of Professional Qualification; MSRB Rule G-3 - Classification of Principals and Representatives, Numerical requirements, Testing, Continuing Education Requirements; NASD Rules 1021 and 1031 - Registration Requirements; NASD Rule 1022 - Categories of Principal Registration; NASD Rule 1032 - Categories of Representative Registration; NASD Rule 1040 - Registration of Assistant Representatives and Proctors; NASD Rule 1100 - Foreign Associates

     

Recordkeeping

Associated Persons Records

Records for all Associated Persons

SEA Rule 17a-3(a)(12) - Records to be Maintained by Certain Exchange Members, Brokers and Dealers; Notice 01-80 - Amendments to Broker-Dealer Books and Records Rules Under the Act

     
 

B. Continuing Education

Personnel

Continuing Education

Required attendance at annual compliance meeting

NASD Rule 3010(a)(7) - Supervisory System

     

Personnel

Continuing Education

CE Contact person; Person responsible for firm's Continuing Education Program

FINRA Rule 1250 - Continuing Education Requirements; MSRB Rule G-3 - Classification of Principals and Representatives, Numerical Requirements, Testing, Continuing Education Requirements

     

Personnel

Continuing Education

Monitor compliance with the Regulatory Element of Continuing Education

FINRA Rule 1250(a) - Continuing Education; MSRB Rule G-3 - Classification of Principals and Representatives, Numerical Requirements, Testing, Continuing Education Requirements

     

Personnel

Continuing Education

Firm Element of Continuing Education

FINRA Rule 1250(b) - Firm Element; MSRB Rule G-3 - Classification of Principals and Representatives, Numerical Requirements, Testing, Continuing Education Requirements

     

III. Firm Supervision and Oversight

 

A. Supervisory System

Firm Supervision and Oversight

Designation of Supervisors

Designation of Supervisors and Supervisory Duties

NASD Rule 3010(a)(2) - Supervisor for each type of business; 3010(a)(3) - Designation of Offices of Supervisory Jurisdiction; Notice 99-45 - Guidance on Supervisory Responsibilities

     

Firm Supervision and Oversight

General Supervisory Obligations

Assign each registered rep to a supervisor and create a record of all reps supervised by a supervisor

NASD Rule 3010(a)(5) - Supervisory System

     

Firm Supervision and Oversight

Designation of Supervisors

Designation of branch supervisor

NASD Rule 3010(a)(4) - Designation of principals and representatives in each OSJ

     

Firm Supervision and Oversight

General Supervisory Obligations

Distribution of procedures and amendments

NASD Rule 3010(b)(4) - Copy of WSPs at each location

     

Firm Supervision and Oversight

General Supervisory Obligations

Annual review of business and branch inspections

NASD Rule 3010(c) - Internal inspections; MSRB Rule G-27 - Duty to update and review written procedures

     
 

B. General Supervisory Obligations

Firm Supervision and Oversight

Employee Supervision

Gifts & Gratuities

FINRA Rule 3220 - Influencing or Rewarding Employees of Others

     

Firm Supervision and Oversight

Employee Supervision

Non-cash compensation

FINRA Rule 2310(c) - DPPs; FINRA Rule 2320(g)(4)(D) - Variable Contracts of an Insurance Company; NASD Rule 2830(l)(5) - Investment Company Securities

     

Firm Supervision and Oversight

Employee Supervision

Outside Business Activities

FINRA Rule 3270 - Outside Business Activities of Registered Persons

     

Firm Supervision and Oversight

Employee Supervision

Private Securities Transactions

NASD Rule 3040 - Private Securities Transactions of an Associated Person

     

Firm Supervision and Oversight

Employee Supervision

Obligations related to associated persons with accounts at other BDs

NASD Rule 3050 - Transactions For or By Associated Persons; MSRB Rule G-28 - Transactions with Employees and Partners of Other Municipal Securities Professionals

     

Firm Supervision and Oversight

Employee Supervision

Sharing in Customer Accounts

FINRA Rule 2150 - Improper Use of Customers' Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts

     

Firm Supervision and Oversight

Employee Supervision

Borrowing and lending between associated persons and customers

FINRA Rule 3240 - Borrowing From or Lending to Customers

     

Firm Supervision and Oversight

General Supervisory Obligations

Supervision of Outsourcing Arrangements

NASD Rule 3010 - Supervision; Notice 11-14 - FINRA Requests Comment on Proposed New FINRA Rule 3190 to Clarify the Scope of a Firm's Obligations and Supervisory Responsibilities for Functions or Activities Outsourced to a Third-Party Service Provider; Notice 05-48 - Outsourcing

     

Firm Supervision and Oversight

Employee Supervision

Heightened Supervision (including registered persons from a disciplined firm)

NASD Rule 3010 - Supervision; Notice 97-19 Guidance on Heightened Supervision

     

Firm Supervision and Oversight

Employee Supervision

Supervision of Statutorily Disqualified Individuals

FINRA By-Laws, Art. III, Sec. 3 and 4; Form MC-400; FINRA Rule 4530 - Reporting Requirements; MSRB Rule G-4 - Statutory Disqualifications; MSRB Rule G-5 - Disciplinary Actions by Appropriate Regulatory Agencies, Remedial Notices by Registered Securities Associations

     

Firm Supervision and Oversight

Exception Report Utilization

Use of Exception and Other Reports

FINRA Rule 4311 - Carrying Agreements

     
 

C. Review of Accounts and Correspondence

Firm Supervision and Oversight

Correspondence Review

Correspondence -incoming, outgoing, including facsimiles and electronic messages (email, instant messages, etc.)

NASD Rule 3010(d) - Review of Transactions and Correspondence

     

Firm Supervision and Oversight

Employee Supervision

Transaction Review

NASD Rule 3010(d) - Review of Transactions and Correspondence; MSRB Rule G-27(c) - Supervision

     

Firm Supervision and Oversight

General Supervisory Obligations

Opening accounts and transactions involving persons associated with other BDs

NASD Rule 3050 - Transactions For or By Associated Persons; MSRB Rule G-28 - Transactions with Employees and Partners of Other Municipal Securities Professionals

     

Firm Supervision and Oversight

General Supervisory Obligations

Transactions involving FINRA employees

FINRA Rule 2070 - Transactions Involving FINRA Employees

     

Firm Supervision and Oversight

General Supervisory Obligations

Supervision of Municipal Securities Activities

MSRB Rules G-17 to G-27

     

Firm Supervision and Oversight

Taping Rule

Taping Rule Compliance

NASD Rule 3010(b)(2) - Written Procedures

     

Firm Supervision and Oversight

Branch Supervision and Inspections

Designation of Offices of Supervisory Jurisdiction (OSJ)

NASD Rule 3010(a)(3) - Supervisory System; 3010(g) - Definitions

     

Firm Supervision and Oversight

Branch Supervision and Inspections

Branch office inspections

NASD Rule 3010(c) - Internal Inspections; 3010(a) - Supervisory System

     

Firm Supervision and Oversight

Branch Supervision and Inspections

Activities on the Premises of a Financial Institution

FINRA Rule 3160 - Networking Arrangements Between Members and Financial Institutions

     

Firm Supervision and Oversight

Branch Supervision and Inspections

Documentation regarding limited size and resource exemption

NASD Rule 3010(c)(3) - Internal Inspections; NASD Rule 3012(a) - Supervisory Control System

     

Firm Supervision and Oversight

Branch Supervision and Inspections

Heightened office inspections of branch and non-branch locations

NASD Rule 3010(c) - Internal Inspections

     

Firm Supervision and Oversight

Branch Supervision and Inspections

Supervision of Branch Offices - Options Business

FINRA Rule 2360 - Options

     
 

E. Insider Trading

Firm Supervision and Oversight

Monitoring for Insider Trading

Periodically reviewing employee and firm trading

SEA Rule 10b-5 - Employment of Manipulative and Deceptive Devices; FINRA Rule 2010 - Standards of Commercial Honor and Principles of Trade; FINRA Rule 2020 - Use of Manipulative, Deceptive, or Other Fraudulent Devices

     

Firm Supervision and Oversight

Monitoring for Insider Trading

Criteria for investigating suspect trades

Section 15(g) of the '34 Act

     

Firm Supervision and Oversight

Monitoring for Insider Trading

Require employees to sign attestation

Section 15(g) of the '34 Act; Notice 91-45 - Joint Memo on Chinese Wall Policies and Procedures

     

Firm Supervision and Oversight

Monitoring for Insider Trading

Update employees on new or revised insider trading rules and regulations

Section 15(g) of the '34 Act

     

Firm Supervision and Oversight

Monitoring for Insider Trading

Definition of Material, Non-Public Information, Insiders, and other relevant terms and prohibitions

SEA Rule 10b-5 - Employment of Manipulative and Deceptive Devices; FINRA Rule 2010 - Standards of Commercial Honor and Principles of Trade; FINRA Rule 2020 - Use of Manipulative, Deceptive, or Other Fraudulent Devices; Notice 89-05 - Insider Trading and Securities Fraud Enforcement Act of 1988

     

Firm Supervision and Oversight

Monitoring for Insider Trading

Policies and procedures on access to an utilization of material, non-public information

       

Firm Supervision and Oversight

Monitoring for Insider Trading

Tools and methods for inhibiting or monitoring transactions in restricted securities

       

Firm Supervision and Oversight

Monitoring for Insider Trading

Chinese Wall Procedures including: 1) method for determining whether firm trading should be restricted; 2) determining and identifying activities that are restricted while security is on list; 3) monitoring associated persons' trading of restricted securities; 4) time period covered and frequency of review; 5) recording details of associated persons' trade in restricted security; 6) creation and maintenance of documentation to evidence supervisory reviews

NASD Rule 3050 - Transactions for or by Associated Persons; FINRA Rule 5280 - Trading Ahead of Research Reports; Notice 91-45 - Joint Memo on Chinese Wall Policies and Procedures; Notice 91-27 - Associated Person Notifying Employer Prior to Opening a Securities Account With Another Member

     

Firm Supervision and Oversight

Monitoring for Insider Trading

Procedures to detect transactions in restricted/control securities, e.g., Compliance, Gray, or Watch Lists, etc.

SEA Rule 144 - Selling Restricted and Control Securities

     

Firm Supervision and Oversight

Monitoring for Insider Trading

Securities transactions for personal and family-related accounts

FINRA Rule 2010 - Standards of Commercial Honor and Principles of Trade

     
 

F. Anti-Money Laundering Compliance Program

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

Designate AML Contact Person

FINRA Rule 3310(d)Anti-Money Laundering Compliance Program; MSRB Rule G-41 - Anti-Money Laundering Compliance Program

     

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

Written Anti-Money Laundering Compliance Program approved in writing by sr management

FINRA Rule 3310 Anti-Money Laundering Compliance Program; MSRB Rule G-41 - Anti-Money Laundering Compliance Program

     

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

Establish and implement policies and procedures to detect and cause the reporting of suspicious transactions

FINRA Rule 3310(a) Anti-Money Laundering Compliance Program; MSRB Rule G-41 - Anti-Money Laundering Compliance Program

     

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

Bank Secrecy Act policies and procedures

FINRA Rule 3310(b) Anti-Money Laundering Compliance Program; MSRB Rule G-41 - Anti-Money Laundering Compliance Program

     

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

Independent testing of AML Compliance Program

FINRA Rule 3310(c) Anti-Money Laundering Compliance Program; MSRB Rule G-41 - Anti-Money Laundering Compliance Program

     

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

On-going training of firm personnel

FINRA Rule 3310(e) Anti-Money Laundering Compliance Program; MSRB Rule G-41 - Anti-Money Laundering Compliance Program

     

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

Customer Identification Program and verification of customers' identity

Section 326 of the USA Patriot Act; Notice 11-25 - New Implementation Date and Additional Guidance on the Consolidated FINRA Rules Governing Know-Your-Customer and Suitability Obligations; Notice 03-34 - Treasury and SEC Issue Final Rule Regarding Customer Identification Programs for Broker/Dealers

     

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

Determine whether customer appears on any list of known terrorists or terrorist organizations, such as those listed on the Treasury's OFAC web site, as well as those on the list of embargoed countries/regions on the OFAC List

       

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

Responding to information requests from FinCEN concerning money laundering or terrorist financing, including how the firm will protect the security and confidentiality of the information requests

US Patriot Act, Section 314; Bank Secrecy Act

     

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

Sharing information with other financial institutions, if applicable (including requirement to provide annual sharing agreement to FinCEN)

US Patriot Act, Section 314; Bank Secrecy Act

     

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

If firm does not open or maintain correspondent accounts for foreign banks, it must have internal controls implemented to detect any attempt to open such an account

       

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

If firm opens or maintains correspondent accounts for foreign banks: i) identify US agent for service of legal process, ii) identify owners of foreign banks, iii) provide information to federal law enforcement officers, iv) terminate correspondent relationship w/in 10 days of notice by the Treasury or AG that the firm failed to comply with summons or contested a summons, v) due diligence review for correspondent accounts of foreign financial institutions

       

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

Determine the identity of the nominal and beneficial account holders and the source of funds deposited into "private banking accounts," and to conduct enhanced scrutiny of accounts of a senior foreign political figure

       

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

If the firm does not open or maintain private banking accounts for non-US persons, have internal controls in place designed to detect any attempt to open such an account

       

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

Freeze accounts and prohibit transactions with persons who are suspected of terrorist activities pursuant to Executive Order #13224 that was issued through OFAC

       

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

If the firm prohibits the receipt of currency, procedures and internal controls to detect its receipt

       

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

Filing Currency Transaction Reports: Identify cash transactions for filing CTRs; Filings CTRs; Verify the identity of customers for filing CTRs

SEA Rule 17a-8 - Financial Recordkeeping and Reporting of Currency and Foreign Transactions; Bank Secrecy Act

     

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

Filing reports of International Transportation of Currency or Monetary Instruments

SEA Rule 17a-8 - Financial Recordkeeping and Reporting of Currency and Foreign Transactions; Bank Secrecy Act

     

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

Filing reports of Foreign Bank and Financial Accounts

SEA Rule 17a-8 - Financial Recordkeeping and Reporting of Currency and Foreign Transactions; Bank Secrecy Act

     

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

Obtaining all required information regarding the transmittal/re-transmittal of wire transfers that includes the transmitter and recipient of funds

       

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

Verifying the identity of customers in connection with wire transfers

       

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

Procedures to detect and report suspicious transactions by filing Suspicious Activity Reports (SAR-SF)

Notice 02-47 - Treasury Issues Final Suspicious Activity Reporting Rule for Brokers/Dealers

     

Firm Supervision and Oversight

Anti-Money Laundering Policies and Procedures

Record keeping requirements (Currently a 5-year requirement)

SEA Rule 17a-8 - Financial Recordkeeping and Reporting of Currency and Foreign Transactions; Bank Secrecy Act

     

IV. SALES PRACTICES

 

A. Communications with the Public

Sales Practices

Communications with the Public

Advertising and Sales Literature (including email and web sites)

FINRA Rule 2210 - Communications with the Public; FINRA Rule 2220 - Options Communications; FINRA Rule 2357 - Communications with the Public and Customers Concerning Index Warrants, Currency Index Warrants, and Currency Warrants; MSRB Rule G-21 - Advertising; SEA Rule 17a-3(a)(20) - Communications with the public

     

Sales Practices

Communications with the Public

Cold callers/ telemarketing scripts

FINRA Rule 2210 - Communications with the Public; FINRA Rule 3230 - Telemarketing; NASD Rule 3010(b)(2) - Taping Rule; Notice 95-54 - Cold Calling Requirements

     

Sales Practices

Communications with the Public

Institutional Sales Literature and Correspondence

FINRA Rule 2210 - Communications with the Public; Notice 03-38 - SEC Approves Amendments to NASD Rules Governing Member Communications with the Public

     

Sales Practices

Communications with the Public

Speaking Engagements; Scripts; Outlines; Media Participation; Chat Rooms

FINRA Rule 2210 - Communications with the Public

     

Sales Practices

Communications with the Public

Sales Material for Municipal Fund Securities; 529 Plans

Notice 03-17 - Sales Material for Municipal Fund Securities

     

Sales Practices

Communications with the Public

Options Communications with the Public

FINRA Rule 2220 - Options Communications

     

Sales Practices

Communications with the Public

Sales Literature Review

FINRA Rule 2210 - Communications with the Public

     
 

B. Disclosures to Customers

Sales Practices

Customer Information and Disclosures

Customer Disclosure and Written Acknowledgment (Business on the premises of a financial institution)

FINRA Rule 3160 - Networking Arrangements Between Members and Financial Institutions

     

Sales Practices

Customer Information and Disclosures

Communications related to SIPC coverage

SIPC By-Laws, Art. 11, Sec. 4; FINRA Rule 2266 - SIPC Information

     

Sales Practices

Customer Information and Disclosures

Material Event & Customer Complaint Reporting

FINRA Rule 4530 - Reporting Requirements

     

Sales Practices

Customer Information and Disclosures

Regulation SP requirement to provide initial, annual, & revised privacy policy notice; description of how and when distributed to customers; administrative, technical, & physical safeguard of information; testing of firewalls

Regulation SP - Privacy of Consumer Financial Information

     

Sales Practices

Customer Information and Disclosures

Investor Education

FINRA Rule 2267 - Investor Education and Protection

     

Sales Practices

Customer Information and Disclosures

Mortgage-Backed Securities: risk disclosure

Regulation AB - Regulation Asset Backed Securities

     

Sales Practices

Customer Information and Disclosures

CMOs: risk disclosures

FINRA Rule 2216 - Communications with the Public About Collateralized Mortgage Obligations; Notice 93-85 - SEC Approves Amendments to CMO Advertising Guidelines; Notice 93-73 - Members' Obligations to Customers When Selling Collateralized Mortgage Obligations

     

Sales Practices

Customer Information and Disclosures

Delivery of options disclosure documents

FINRA Rule 2360(b)(11) - Delivery of Current Disclosure Documents

     

Sales Practices

Customer Information and Disclosures

Disclosures

SEA Rule 10b-9 - Prohibited Representations in Connection with Certain Offerings

     

Sales Practices

Customer Information and Disclosures

Designated Securities/Penny Stocks

SEA Rules 15g(1) - (9); Notice: 92-38 - SEC Adoption of Penny Stock Disclosure Rules

     

Sales Practices

Customer Information and Disclosures

Payment for Order Flow - Policies, Procedures, and Disclosures to Customers

FINRA Rule 2010 - Standards of Commercial Honor and Principles of Trade; SEA Rule 10b-10 - Confirmation of Transactions; SEC Reg NMS, Rule 607 - Payment for order flow disclosures

     

Sales Practices

Customer Information and Disclosures

Disclosures for bank-affiliated broker-dealers, e.g., statement that investment is not FDIC insured, price fluctuations, etc.

FINRA Rule 3160 - Networking Arrangements Between Members and Financial Institutions

     

Municipal Securities Sales Practices

Customer Information and Disclosures

Disclosures in connection with new issues of municipal securities

MSRB Rule G-32 - Disclosures in connection with new issues

     

Municipal Securities Sales Practices

Customer Information and Disclosures

Municipal securities, disclosure by issuer

SEA Rule 15c2-12 - Municipal Securities Disclosures

     

Sales Practices

Customer Information and Disclosures

Prohibition against guaranteed

FINRA Rule 2150 - Improper Use of Customers' Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts

     

Firm Supervision and Oversight

General Supervisory Obligations

Conduct and fair dealing; Fraud

MSRB Rule G-17 - Conduct of municipal securities activities; SEA Rule 15c1-2 - Fraud and Misrepresentation

     
 

C. Customer Information Controls

Sales Practices

Customer Information Controls

New Account Review and Approval

FINRA Rule 2111 - Suitability; FINRA Rule 4512 - Customer Account Information; NASD Rule 3050; SEA Rule 17a-3; MSRB Rule G-8

     

Sales Practices

Customer Information Controls

Verification of customer's background and financial information for options; maintenance of background information

FINRA Rule 2360 - Options

     

Sales Practices

Customer Information Controls

Review/approve new options accounts

FINRA Rule 2360 - Options

     
 

D. Suitability

Sales Practices

Suitability

Suitability

FINRA Rule 2010 - Standards of Commercial Honor and Principles of Trade; FINRA Rule 2111 - Suitability; FINRA Rule 4511 - General Requirements; FINRA Rule 5121 - Public Offerings of Securities with Conflicts of Interest; FINRA Rule 2310 - Direct Participation Programs; FINRA Rule 2353 - Suitability; FINRA Rule 2360(b)(19) - Options; MSRB Rule G-17 - Prohibition against unfair, dishonest, deceptive activities; MSRB Rule G-19 - Suitability of recommendations and transactions and discretionary accounts

     

Sales Practices

Suitability

Discretionary Accounts

NASD Rule 2510 - Discretionary Accounts; FINRA Rule 4512 - Customer Account Information; MSRB Rule G-19 - Suitability of recommendations and transactions and discretionary accounts

     

Sales Practices

Suitability

Sale of Designated Securities/Penny Stocks

SEA Rules 15g(1) - (9); Notice: 92-38 - SEC Adoption of Penny Stock Disclosure Rules; Notice 92-42 - Penny Stock Risk Disclosure Documents; Notice 93-55 - SEC Amends and Clarifies Penny Stock Rules

     

Sales Practices

Suitability

Suitability; review of subscription agreements

FINRA Rule 2111 - Suitability

     

Sales Practices

Suitability

Identification of Sophisticated Municipal Market Professionals (SMMPs)

MSRB Rule G-17 - Conduct of municipal securities and municipal advisory activities

     

Sales Practices

Suitability

Minimum denomination amounts

MSRB Rule G-15; MSRB Rule G-17; MSRB Rule G-8

     

Sales Practices

Due Diligence

Hedge fund due diligence reviews

Notice 03-07 - Obligations When Selling Hedge Funds

     

Sales Practices

Due Diligence

Due diligence (public/private) review of prospective offerings and files

FINRA Rule 2111 - Suitability; FINRA Rule 2310 - Direct Participation Programs; SEA Rule 10b-5

     

Sales Practices

Suitability

Powers of attorney/authority to act as agent on behalf of account/third party

SEA Rule 17a-4(b)(6) - Records to be preserved by certain exchange members, brokers and dealers

     

Sales Practices

Suitability

Short sale recommendations

FINRA Rule 2130 - Approval Procedures for Day-Trading Accounts

     

Sales Practices

Suitability

Suitability of solicited online transactions

FINRA Rule 2130 - Approval Procedures for Day Trading Accounts; Notice 01-23 - Online Suitability

     
 

E. Fees Charged to Customers

Sales Practices

Fees Charged to Customers

Fair pricing, commissions fees charged to customers, markups

NASD Rule 2430 - Charges for Services Performed; NASD Rule 2440 - Fair Prices and Commissions

     
 

F. Transaction Review and Handling of Customer Complaints

Sales Practices

Reviewing Transactions and Handling Customer Complaints

Customer Complaints

FINRA Rule 4530 - Reporting Requirements; FINRA Rule 4511 - General Requirements; MSRB Rules G-8(a)(xii) and G-10

     

Sales Practices

Reviewing Transactions and Handling Customer Complaints

Trade review (including unauthorized trading, churning, etc.)

SEA Rules 10b-5 and 15c1-7; FINRA Rule 2010 - Standards of Commercial Honor and Principles of Trade; FINRA Rule 2020 - Use of Manipulative, Deceptive, or Other Fraudulent Devices; FINRA Rule 2111 - Suitability; NASD Rule 3010 - Supervision; MSRB Rule G-27(c ) - Supervision

     

Sales Practices

Reviewing Transactions and Handling Customer Complaints

Customer Grievances - Options

FINRA Rule 2360 - Options

     

V. FINANCIAL AND OPERATIONAL ISSUES

 

A. Financial Reporting

Firm Supervision and Oversight

FinOp Responsibilities

FinOp's duties and responsibilities (including FinOps registered with multiple firms

NASD Rule 1022 - Categories of Principal Registration; Notice 06-23 - NASD Reminds FinOps of their Obligations under NASD Rule 1022 and Issues Guidance to FinOps who Work Part-Time, Work Off-Site, or Hold Multiple Registrations

     

Financial and Operational

Filing of FOCUS and Related Forms

Financial Reporting/Backup - Net Capital Computation, FOCUS

SEA Rules 17a-5, 17a-11; FINRA By-Laws, Schedule A;FINRA Rule 4511 - General Requirements

     

Financial and Operational

Filing of FOCUS and Related Forms

Policies and procedures to ensure timely filing of Schedule I annually. Note: if firm has municipal securities revenue, include procedures for ensuring such revenue is recorded on Schedule I.

       
 

B. Handling of Customer Funds and Securities

Financial and Operational

Handling of Funds and Securities

Net Capital Rule: Error procedures for handling customer funds received by fully-disclosed firms; handling customer funds in general; handling customer securities

SEA Rules 15c3-1 - the Net Capital Rule; 17a-11 - Notification Provisions for Brokers and Dealers

     

Financial and Operational

Handling of Funds and Securities

Customer Protection Rule; Reserve Computations; Quarterly Box Count; Safekeeping and Segregation of Customer Securities

SEA Rule 15c3-3 - the Customer Protection Rule; NASD Rule 3140 - Approval of Change in Exempt Status Under SEC Rule 15c3-3; Notice 99-44; SEA Rule 17a-13; SEA Rule 8c-1; SEA Rule 15c2-1; SEA Rule 17a-3; FINRA Rule 2150 - Improper Use of Customers' Securities or Funds, Prohibition Against Guarantees or Sharing in Accounts

     

Financial and Operational

Handling of Funds and Securities

Prohibition against improper use of customer funds & securities

FINRA Rule 2150 - Improper Use of Customers' Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts; MSRB Rule G-25 - Improper Use of Assets

     

Financial and Operational

Handling of Funds and Securities

Escrow account maintenance; transmission or maintenance of payments received in connection with underwritings

SEA Rule 15c2-4 - Transmission or Maintenance of Payments Received in Connection with Underwritings

     

Financial and Operational

Handling of Funds and Securities

Receipt and reporting of cash receipts

SEA Rule 15c3-3 - the Customer Protection Rule

     
 

C. Capital and Credit Regulation

Financial and Operational

Capital & Credit Regulation

Buy-In Procedures

FINRA Rule 11810 - Buy-In Procedures and Requirements

     

Financial and Operational

Capital & Credit Regulation

Sell-Out Procedures

FINRA Rule 11820 - Selling-Out

     

Financial and Operational

Capital & Credit Regulation

Short Sale Close-Out Procedures

Notice 93-53 - SEC Approves Amendments Relating to Close Outs of Short Sales and Bona Fide Fully Hedged or Arbitraged Positions

     

Financial and Operational

Capital & Credit Regulation

Parking of securities for net capital

FINRA Rule 2010 - Standards of Commercial Honor and Principles of Trade; SEA Rules 10b-5 and 15c3-1

     

Financial and Operational

Capital & Credit Regulation

Parking of securities for manipulation

FINRA Rule 2010; SEA Rules 10b-5 and 15c3-1

     

Financial and Operational

Capital & Credit Regulation

Repurchases/ reverse repurchase transactions

SEA Rules 15c3-1 and 15c3-3(b)(4)

     

Financial and Operational

Capital & Credit Regulation

Bonds borrowed & loaned transactions

SEA Rule 15c3-3(b)(3)

     

Financial and Operational

Capital & Credit Regulation

Uniform Practice - Municipals

MSRB Rule G-12 - Uniform Practice

     

Financial and Operational

Capital & Credit Regulation

Disclosure of firm balance sheets upon customer request

SEA Rule 17a-5 - Reports to be made by certain brokers and dealers; FINRA Rule 2261 - Disclosure of Financial Condition

     
 

D. Margin

Capital and Credit Regulation

Margin

Margin Requirements

FINRA Rule 4210 - Margin Requirements; Regulation T - Credit by Brokers and Dealers

     

Capital and Credit Regulation

Margin

Netting positions of accounts that are related or accounts under common control; Letter of authorization regarding guarantees/ cross guarantees

Reg SHO

     

Capital and Credit Regulation

Margin

Joint Back Office Arrangements

FINRA Rule 4210 - Margin Requirements

     

VI. RECORDKEEPING

Recordkeeping

Maintenance of Books and Records

Maintenance of books and records [main office; other offices; and update customer account information]

SEA Rules 17a-3 and 17a-4; FINRA Rule 4511 - General Requirements; MSRB Rule G-8 - Books and Records to be Made by Brokers, Dealers, and Municipal Securities Dealers; MSRB Rule G-9 - Preservation of Records; MSRB Rule G-15 - Confirmation, Clearance, Settlement and Other Uniform Practice Requirements with Respect to Transactions with Customers

     

Recordkeeping

Order Tickets

Order Tickets/Order Ticket Procedures

FINRA Rule 4511 - General Requirements; SEA Rule 17a-3; SEA Rule 10b-10; MSRB Rule G-15

     

Recordkeeping

Confirmations

Confirmations

FINRA Rule 2232 - Confirmations; SEA Rule 10b-10 - Confirmation of Transactions

     

Recordkeeping

Electronic Communications

Instant Messaging

Notice 07-59 - FINRA Provides Guidance Regarding the Review and Supervision of Electronic Communications; Notice 03-33 - Clarification for Members Regarding Supervisory Obligations and Recordkeeping Requirements for Instant Messaging

     

Recordkeeping

Maintenance of Books and Records

Municipal books and records to be created and preserved

MSRB Rule G-8 - Books and Records to be Made by Brokers, Dealers, and Municipal Securities Dealers; MSRB Rule G-9 - Preservation of Records

     

VII. INTERNAL CONTROLS

Internal Controls

Account Transfers

Customer Account Transfers Contracts (ACATS)

NASD Rule 3012 - Supervisory Control System; FINRA Rule 11870 - Customer Account Transfer Contracts

     

Internal Controls

Account Transfers

Verification of customer signature to transfer account, change address, etc.

       

Internal Controls

Branch Office Controls

Review of order entry and account access centers and customer account access at branch offices

       

Internal Controls

Branch Office Controls

Controls over branch office administrative and back-office functions

NASD Rule 3012 - Supervisory Control System; FINRA Rule 11870 - Customer Account Transfer Contracts

     

Internal Controls

Clearing Firm Monitoring of Correspondents

Clearing Agreements (e.g., clearing firm forwarding complaints to introducing firms, etc.)

FINRA Rule 4311 - Carrying Agreements

     

Internal Controls

Customer Information Controls

Approval of account name or designation changes for orders

FINRA Rule 4515 - Approval and Documentation of Changes in Account Name or Designation

     

Internal Controls

Risk Mitigation

Trading Limits

       

Internal Controls

Systems and Operations Controls

Signature guarantee requirements and proper execution

       

Internal Controls

Systems and Operations Controls

Information security measures (e.g., securing equipment, preventing entry of unauthorized orders, controls on system entitlements, limits on password sharing, administrative procedures to change passwords, audit trail for tracking changes in entitlements, etc.)

       

VIII. DIRECT PARTICIPATION PROGRAMS Including Real Estate Syndications; Oil and Gas Interests

Direct Participation Programs

Suitability Determinations and Reviews

Disclosure; Review of subscription agreements

FINRA Rule 2310 - Direct Participation Programs

     

Direct Participation Programs

General Supervisory Obligations

Rollups

FINRA Rule 2310 - Direct Participation Programs

     

Direct Participation Programs

Organization and Offering Expenses

Review and determination for Fair and Reasonable DPP Expenses; Documentation for evidencing review

FINRA Rule 2310 - Direct Participation Programs

     

Direct Participation Programs

Secondary Market Trading

Secondary Trading of DPP Shares

FINRA Rule 2111 - Suitability; NASD Rule 2420 - Dealing with Non-Members; FINRA Rule 2310 - Direct Participation Programs; FINRA Rule 11580 - Transfer of Limited Partnership Securities

     

Direct Participation Programs

Secondary Market Trading

Trade Reporting of DPP Transactions

       

IX. FIXED INCOME SECURITIES

Municipal Securities

Municipal Securities

Financial Advisor Activities

MSRB Rule G-23 - Activities of Financial Advisors

     

Municipal Securities

Municipal Securities

Disclosures in connection with primary offerings

MSRB Rule G-32 - Disclosures in connection with new issues

     

Municipal Securities

Municipal Securities

Underwriting and transaction assessments payable to MSRB

MSRB Rule A-13 - Underwriting and Transaction Assessments for Brokers, Dealers, and Municipal Securities Dealers

     

Municipal Securities

Municipal Securities

Solicitation of municipal securities business

MSRB Rule G-38 - Solicitation of Municipal Securities Business

     

Municipal Securities

Municipal Securities

Primary offering practices

MSRB Rule G-11 - Primary Offering Practices

     

Municipal Securities

Municipal Securities

CUSIP Numbers, New Issue, and Market Information Requirements

MSRB Rule G-34 - CUSIP Numbers, New Issue, and Market Information Requirements; SEA Rule 15c2-12 - Municipal securities disclosure

     

Municipal Securities Business

Delivery of Investor Brochure

Delivery of investor brochure upon receipt of complaint/ customer complaint brochure

MSRB Rule G-10 - Delivery of Investor Brochure

     

Municipal Securities Business

Political Contributions

Political contributions

MSRB Rule G-37 - Political Contributions and Prohibitions on Municipal Securities Business; MSRB Rule G-38 - Solicitation of Municipal Securities Business

     

Municipal Securities Business

Trade Reporting

Reports of sales or purchases

MSRB Rule G-14 - Reports of Sales or Purchases

     

Municipal Securities Business

Municipal Securities Business

Use of ownership information obtained in Fiduciary or Agency Capacity

MSRB Rule G-24 - Use of Ownership Information Obtained in Fiduciary or Agency Capacity

     

Municipal Securities Business

Municipal Securities Business

Customer suitability and fair pricing

MSRB Rule G-18 - Execution of Transactions; MSRB Rule G-19 - Suitability of Recommendations and Transactions, Discretionary Accounts; MSRB Rule G-27 - Supervision; MSRB Rule G-30 - Prices and Commissions;

     

Fixed Income Securities

TRACE

Participation, trade reporting, dissemination of information

FINRA Rules 6700 - 6770 - Trade Reporting and Compliance Engine (TRACE)

     

X. INVESTMENT COMPANY PRODUCTS

Mutual Funds

Fees Charged to Customers

Sales Charges - Investment Company Products

FINRA Rule 2111 - Suitability; NASD Rule 2440 - Fair Prices and Commissions; NASD Rule 2430 - Charges for Services Performed; NASD Rule 2830 - Investment Company Securities

     

Mutual Funds

General Requirements

Prospectus delivery

Securities Act of 1933, Section 5(b)

     

Mutual Funds

Late Trading and Market Timing

Market timing and late trading activities

FINRA Rule 2010 - Standards of Commercial Honor and Principles of Trade; FINRA Rule 2020 - Use of Manipulative, Deceptive, or Other Fraudulent Devices

     

Mutual Funds

Mutual Fund Underwriters/ Dealers

Redemption procedures (Dealers only)

NASD Rule 2830 - Investment Company Securities

     

Mutual Funds

Customer Information and Disclosures

Selling dividends - limitations on disclosures

NASD Rule 2830 - Investment Company Securities

     

Mutual Funds

Fees Charged to Customers

Review of Customer Accounts

FINRA Rule 2342 - Breakpoint Sales; Notices 02-85 and 04-30

     

Mutual Funds

Fees Charged to Customers

Breakpoints, Letters of Intent, Rights of Accumulation

FINRA Rule 2342 - Breakpoint Sales; Notices 02-85, 94-16, and 04-30

     

Mutual Funds

Suitability

Switching

Notices 91-39, 95-80, 94-16

     

Mutual Funds

Employee Supervision

Execution of investment company portfolio transactions; compensation, commissions, reciprocal activity

NASD Rule 2830(k) - Execution of investment company portfolio transactions; MSRB Rule G-31 - Reciprocal dealings with municipal securities investment companies

     

XI. OPTIONS

Options

Recordkeeping

Maintenance of records - central log, index or file for options complaints

FINRA Rule 2360(b)(17) - Maintenance of Records

     

Options

Supervision of Options Accounts

Supervision of options accounts

FINRA Rule 2360(b)(20) - Supervision of Accounts

     

Options

Supervision of Options Accounts

Adjustments to options contracts

Notice 02-17 - Alerting customer to adjustments to option contracts caused by corporate actions

     

Options

Transaction Processing

Allocation procedures

FINRA Rule 2360(b)(23) - Tendering Procedures for Exercise of Options

     

Options

Transaction Processing

Uncovered short option contracts

FINRA Rule 2360(b)(16)(E) - Uncovered Short Option Contracts; Notice 06-54 - Special Statement for Uncovered Options Writers

     

Options

Transaction Processing

Position Limits/ Exercise Limits

FINRA Rule 2360(b)(3) - Position Limits; 2360(b)(4) - Exercise Limits

     

Options

Transaction Processing

Reporting options positions

FINRA Rule 2360(b)(5) - Reporting of Options Positions

     

Options

Transaction Processing

Position Limits Reporting Procedures

FINRA Rule 2360(b)(23) - Tendering Procedures for Exercise of Options

     

Options

Transaction Processing

Cash and Margin Treatment for Certain Types of Options

Notice 06-26 - Amendments to Margin Rules to Reflect Additional Complex Option Spread Strategies; Notice 01-11 - Cash and Margin Treatment for Certain Types of Options

     

XII. RESEARCH

Research

General Supervisory

Research Analysts: Restrictions and Disclosure Obligations

NASD Rule 1050 - Registration of Research Analysts; NASD Rule 2711 - Research Analysts and Research Reports; Notice 07-04 - Codification of Interpretations to Rule 2711; Notice 04-81 - SEC Approves New NASD Qualification Requirements for Supervisors of Research Analysts; Notice 04-18 - NASD and NYSE Provide Further Guidance on Rules Governing Research Analysts' Conflicts of Interest

     

Research

General Supervisory Obligations

Research Reports

NASD Rule 2711 - Research Analysts and Research Reports; FINRA Rule 5280 - Trading Ahead of Research Reports

     

Research

General Supervisory Obligations

Quiet Periods

NASD Rule 2711 - Research Analysts and Research Reports; FINRA Rule 2210 - Communications with the Public

     

Research

Research

Fixed Income Research

Notice 06-36 - NASD and NYSE Joint Interpretive Guidance on Fixed Income Research

     

XIII. UNDERWRITINGS AND PRIVATE PLACEMENTS

Sales Practices

General Obligations

Private Placements

FINRA Rule 5122 - Private Placements of Securities Issued by Members; Regulation A; Regulation D, Rules 501 - 506 of the Securities Act of 1933

     

Underwriting

Types of Offerings

Best Efforts and Private Placement (including procedures for contingent offerings)

FINRA Rule 5110 - Corporate Financing Rule - Underwriting Terms and Arrangements; FINRA Rule 5190 - Notification Requirements for Offering Participants; SEA Rule 10b-9; SEA Rule 15c2-4; Regulation D Rules 501 - 506; Regulation A

     

Underwriting

Types of Offerings

PIPES - Private Investments in Public Equities (including monitoring for impermissible trading in PIPE issuers)

FINRA Rule 5110 - Corporate Financing Rule - Underwriting Terms and Arrangements; FINRA Rule 5190 - Notification Requirements for Offering Participants; SEA Rule 10b-9; SEA Rule 15c2-4; Regulation D Rules 501 - 506; Regulation A

     

Underwriting

Types of Offerings

Self Underwriting

FINRA Rule 5121 - Public Offerings of Securities with Conflicts of Interests; FINRA Rule 5122 - Private Placements of Securities Issued by a Member

     

Underwriting

Types of Offerings

Intrastate Offerings

Securities Act of 1933, Sec. 3(a)(11); Securities Act Rule 147

     

Underwriting

Types of Offerings

SEC Rule 144 Stock

Securities Act of 1933 Rule 144

     

Underwriting

Firm Commitment Charges

Communications with the public about variable life insurance and variable annuities

NASD IM-2210-2 - Communications with the Public About Variable Life Insurance and Variable Annuities

     

Underwriting

Material Event Disclosure

Material Events

SEA Rule 15c2-12 - Municipal Securities Disclosures

     

Underwriting

Securities Registration

Public Offerings (Securities Registration)

Securities Act of 1933, Sec. 5

     

Underwriting

Securities Registration

Misrepresentations as to registration

SEA Rule 15c1-3 - Misrepresentation by brokers, dealers, and municipal securities dealers as to registration

     

Underwriting

Syndicate Settlement

Syndicate Management

FINRA Rule 11880 - Settlement of Syndicate Accounts

     

Underwriting

 

Restricted Period; Underwriting Activity Report

FINRA Rule 5110 - Corporate Financing Rule - Underwriting Terms and Arrangements

     

Underwriting

 

Filings required by Corporate Finance Department

FINRA Rule 5110 - Corporate Financing Rule - Underwriting Terms and Arrangements

     

Underwriting

 

Regulation M - Rules 101 - 105

Regulation M - Anti-Manipulation Rules Concerning Securities Offerings

     

Underwriting

 

Non-cash compensation

FINRA Rule 5110 - Corporate Financing Rule - Underwriting Terms and Arrangements

     

Underwriting

 

Disclosure of affiliation with issuer or interest in distribution

SEA Rule 15c1-5 - Disclosure of control; SEA Rule 15c1-6 - Disclosure of interest in distribution

     

XIV. VARIABLE PRODUCTS

Variable Products

Communications with the Public

Communications with the public about variable life insurance and variable annuities

NASD IM-2210-2 - Communications with the Public About Variable Life Insurance and Variable Annuities

     

Variable Products

General Obligations

Sales of Variable Products

FINRA Rule 2320 - Variable Contracts of an Insurance Company; FINRA Rule 2330 - Members' Responsibilities Regarding Deferred Variable Annuities; Notice 99-35 - NASD Reminds Members of Their Responsibilities Regarding the Sales of Variable Annuities; Notice 00-44 - NASD Reminds Members of Their Responsibilities Regarding the Sale of Variable Life Insurance

     

Variable Products

General Obligations

Variable Annuities

FINRA Rule 2320 - Variable Contracts of an Insurance Company; FINRA Rule 2330 - Members' Responsibilities Regarding Deferred Variable Annuities

     

Variable Products

Suitability

Twisting (trading among mutual funds, insurance products, and variable products)

FINRA Rule 2010 - Standards of Commercial Honor and Principles of Trade

     

Variable Products

Suitability

1035 Exchanges

IRS Code § 1035

     

Variable Products

Suitability

Replacements

FINRA Rule 2010 - Standards of Commercial Honor and Principles of Trade

     

Variable Products

Suitability

Multiple Contract Sales

FINRA Rule 2010 - Standards of Commercial Honor and Principles of Trade

     

XV. TRADING AND TRADING OPERATIONS

 

A. Trading: Supervisory System, Procedures, and Qualifications

Trading

Supervision

Designation of Principal(s) responsible for overall supervisory system and procedures

NASD Rule 3010(b) - Written Procedures; NASD Rule 3012(a) - Supervisory Controls

     

Trading

Supervision

Designation of Principal(s) responsible for supervision of the member's trading area

NASD Rule 3010(a) - Supervisory System; NASD Rule 3010(b) - Written Procedures

     

Trading

Supervision

Designation, as an Office of Supervisory Jurisdiction ("OSJ"), of each location at which the order execution or market making functions are conducted

NASD Rule 3010(a)(3) - Supervisory System; NASD Rule 3010(g)(1) - Definitions

     

Trading

Supervision

Designation of Principal(s) in each OSJ location at which order execution or market making occurs

NASD Rule 3010(a)(4) - Supervisory System; NASD Rule 3010(b)(3) - Written Procedures

     

Trading

Supervision

Procedures to help ensure personnel are properly registered as required by SRO Rules

NASD Rule 3010(a) - Supervisory System

     

Trading

Supervision

Procedures to help ensure a reasonable effort is made to determine supervisory personnel are qualified by virtue of experience or training to execute assigned responsibilities

NASD Rule 3010(a)(6) - Supervisory System; NASD Rule 3010(b)(3) - Written Procedures

     
 

B. Order Handling

Trading

Order Handling

If the firm routes orders to another market center: procedures to ensure compliance and to review for compliance with the Disclosure of Order Routing Information Rule

SEC Reg NMS, Rule 606

     

Trading

Order Handling

If the firm makes markets in covered securities: procedures to ensure compliance, and to review for compliance, with the Limit Order Display and Quote Dissemination Rules

SEC Reg NMS, Rules 604 and 602

     

Trading

Order Handling

If the firm accepts limit orders: procedures to ensure compliance, and to review for compliance, with the Limit Order Protection Rules

FINRA Rule 2010 - Standards of Commercial Honor and Principles of Trade; FINRA Rule 5320 - Prohibition Against Trading Ahead of Customer Orders

     

Trading

Order Handling

If the firm accepts market orders: procedures to ensure compliance and to review for compliance with the Market Order Protection Rule

FINRA Rule 5320 - Prohibition Against Trading Ahead of Customer Orders

     

Trading

Order Handling

For firms that make markets OTC in any exchange-traded security, but are not registered as market makers: procedures to monitor member's trading activity to determine whether it has traded over 1% of the quarterly volume of any exchange-traded security, thereby making the security a "subject security" and the member a "responsible broker-dealer" that is required to communicate its best bid, offer, and size for each subject security to a national securities exchange or association

SEC Reg NMS Rules 600(b)(65) & (73) and 602(b)(2) & (4)

     

Trading

Order Handling

If the firm is an exchange or OTC market maker in NMS securities: procedures to ensure quotations are not communicated to vendors for display on a terminal, unless the security is a subject security with respect to the market maker

SEC Reg NMS Rule 602(b)(4)

     

Trading

Order Handling

If the firm is a market center in NMS stocks: procedures to ensure compliance and review for compliance with the Disclosure of Order Execution Information Rule

SEC Reg NMS Rule 605

     
 

C. Best Execution

Trading

Best Execution

Procedures to ensure compliance and to review for compliance with the requirement execute customer orders and orders for the customers of another broker-dealer at a price as favorable as possible under prevailing market conditions, including:

FINRA Rule 5310 - Best Execution and Interpositioning; MSRB Rules G-17 and 18; FINRA Rule 2020 - Use of Manipulative, Deceptive, or Other Fraudulent Devices; SEA Rule 10b-5

     
   

Execution of customer orders as principal

       
   

Execution of customer orders as principal after acquiring securities to fill the customer's order (i.e., riskless principal trading)

       
   

Execution of customer orders as agent

       
   

Execution of customer block-sized orders, "not-held" orders, and customer orders with special pricing terms/ conditions (e.g., VWAP, MOO, MOC, Capped)

       
   

If member concurrently handles multiple orders subject to time/price trading discretion (e.g., "not held", "working", cost-based VWAP, etc.) establishing a process to ensure best execution obligations are met with respect to all orders and that shares are allocated to concurrently open orders in a fair and non-discriminatory manner

       
   

Execution of orders routed to and executed by other parties, based on order-by-order routing decisions made by the member (a/k/a Regular and Rigorous Reviews)

       
   

Policies and procedures against adjusted trading

       
   

Reallocation of trades/Allocation methodology and procedures

       

Trading

Best Execution

If the firm trades OTC equity securities: procedures to ensure compliance and to review for compliance with the requirements to ascertain the best interdealer market by obtaining and documenting quotations (a/k/a "3-Quote Rule")

       
 

D. Anti-Intimidation/Coordination

Trading

Anti-Intimidation/ Coordination

Procedures to prevent and detect the occurrence of prohibited trading practices including: i) the coordination of quotes, trades, or trade reports with another member through "price/size convention", ii) requesting another member to alter or maintain a price or quote, iii) display of quotes in order to orchestrate artificial price movements, iv) the display of quotes with no intention of trading at the quoted prices, v) display of quotes in order to help another member execute trades, vi) delay of trade reports for the benefit of the member or another party, vii) engaging in any other activity, which improperly benefits the member or other members at the expense of customers

FINRA Rule 5240 - Anti-Intimidation/ Coordination

     

Trading

Anti-Intimidation/ Coordination

Procedures to prevent and detect the occurrence of prohibited conduct including threatening, coercion, or intimidation to improperly influence another person or member including:

FINRA Rule 5240 - Anti-Intimidation/ Coordination

     
   

i. Refusals to honor firm quote obligations or to trade with other members, especially in a selective/ discriminatory fashion

       
   

ii. Executing orders in a manner intended to harass or annoy another member

       
   

iii. Reporting harassment an instances in which threats or attempts at coercion have been received

       
   

iv. Educating personnel as to what constitutes improper conduct

       
 

E. Trade Reporting

Trading

Trade Reporting

If the firm reports trades through a TRF, procedures to ensure compliance and review for compliance with requirements to report trade accurately and timely

FINRA Rule 6181 - Timely Transaction Reporting; FINRA Rule 6622 - Transaction Reporting; FINRA Rule 7330 - Trade Report Input; FINRA Rules 6182 and 6624 - Trade Reporting of Short Sales

     

Trading

Trade Reporting

If the firm reports trades through ADF/TRACS, procedures to ensure and review for compliance with requirements to report trades accurately and timely

FINRA Rule 6182 - Timely Transaction Reporting; FINRA Rule 7130 - Trade Report Input

     

Trading

Trade Reporting

Procedures to ensure and review for compliance with TRF and/or ADF/TRACS requirements regarding:

       
   

1) The proper use of trade modifiers (e.g., .PRP, .SLD, .T, .W, etc.) when required, and refraining from use when not required.

       
   

2) Reporting riskless principal trades

       
   

3) Accepting trades reported by another member (or entering a matching trade) in a timely manner

       

Trading

Trade Reporting

If another member or third party reports trades on the firm's behalf (under an AGU, A2, QSR, or otherwise), procedures to ensure trades have been accurately reported on the member's behalf.

       
 

F. Sale Transactions

Trading

Sale Transactions

Procedures to ensure and review for compliance with requirements to (i) properly determine whether a sale is long or short, and (ii) mark the member's order records accordingly as "long," "short," or "short exempt."

SEC Reg SHO, Rule 200(a)&(g)

     

Trading

Sale Transactions

If the firm will utilize aggregation of units, procedures to ensure the member's organization plan qualifies for independent trading unit aggregation, that each unit engages only in its specified trading strategies and that trading units do not coordinate strategies with each other.

SEC Reg SHO, Rule 200(f)

     

Trading

Sale Transactions

Procedures to ensure and review for compliance with requirements to locate (or arrange to borrow) securities being sold prior to execution

SEC Reg SHO, Rule 203(b)

     

Trading

Sale Transactions

Procedures to ensure and review for compliance with requirements to refrain from accepting short sale order for threshold securities in which the member has aged fails unless the member borrows the securities being sold prior to execution

SEC Reg SHO, Rule 203(b)(3)

     

Trading

Sale Transactions

If the firm reports trades to a TRF and/or the ADF/TRACS, procedures to ensure and review for compliance with requirements to report accurate short sale indicators (i.e., long, short, or short exempt) for customer and proprietary sale transactions

FINRA Rule 6182 - Trade Reporting of Short Sales; FINRA Rule 6624 - Trade Reporting of Short Sales

     

Trading

Sale Transactions

If the firm accepts, displays, and/or executes short sales in NMS securities otherwise than on an exchange, procedures to ensure and review for compliance with the prohibitions on executing non-exempt short sales on a down tick if the price of the security decreases by 10% or more from the prior day's closing price

SEC Reg SHO, Rule 201

     
 

G. Other Trading Rules

Trading

Other Trading Rules

Procedures to ensure and review for compliance with the prohibitions on trading or quoting during a trading halt in Nasdaq-listed, exchange-listed, or OTC equity security

FINRA Rule 5260 - Prohibition on Transactions, Publication of Quotations, or Publication of Indications of Interest During Trading Halt; FINRA Rule 6460 - Display of Customer Limit Orders

     

Trading

Other Trading Rules

Procedures to ensure and review for compliance with the requirements for the member to honor its quotes, refrain from "backing away" from its quotes and adequately staffing its trading desk

FINRA Rule 5220 - Offers at Stated Prices; FINRA Rule 6272 - Character of Quotations; SEC Reg NMS, Rules 602(b)(2)&(b)(3)

     

Trading

Other Trading Rules

Procedures to help ensure and review for compliance with requirements related to locked and crossed markets, including:

       
   

If the member is an ADF participant, properly responding to "trade or move directed orders" during pre-opening trading

       
   

If the member enters quotes in ADF, refraining from entering a quote that would lock or cross an existing quote

       

Trading

Other Trading Rules

If the firm enters quotes for OTC Equity securities in multiple real-time quotation systems, procedures to ensure and review for compliance with requirement to maintain identical quotes for a security in each system

       

Trading

Other Trading Rules

If the firm will use FINRA systems, procedures to ensure and review for compliance with requirements to maintain the physical security of equipment to prevent the improper use of, or unauthorized entry of information into FINRA systems

FINRA Rule 7220A - Trade Reporting Participation Requirements; FINRA Rule 7320 - Trade Reporting Participation Requirements

     
 

H. Soft Dollar Accounts and Trading

Trading

Soft Dollar Accounts and Trading

If the firm provides "soft dollar" credits to customers, procedures to ensure and review for compliance with requirements related to this activity including:

Section 28(e) of the Securities Exchange Act of 1934; Notice 07-04 - Codification of Interpretations to Rule 2711; Notice 05-04 - Directed Brokerage

     
   

(1) Preparing records that reflect which trades were executed by the member pursuant to agreements with customers to generate soft dollar credits

SEA Rule 17a-3 - Records to be made by certain exchange members, brokers and dealers; SEA Rule 17a-4 - Records to be preserved by certain exchange members, brokers and dealers

     
   

(2) Monitoring trades for which soft dollar credits are accrued to determine whether they were within the SEC-established safe harbor for agency transactions and riskless principal transactions reported as such in accordance with FINRA trade reporting rules

Securities Exchange Act of 1934, Sec. 28(e)

     
   

(3) If/When operating outside the SEC-established safe harbor, undertaking reasonable affirmative steps to verify that the member is operating in compliance with all applicable securities rules and regulations, and is not aiding or abetting violations by others

Securities Exchange Act of 1934, Sec. 28(e)

     
   

(4) Preparing records that reflect the cost/value of research or other services provided to customers that reduce/eliminate accrued soft dollar credits

SEA Rule 17a-3 - Records to be made by certain exchange members, brokers and dealers; SEA Rule 17a-4 - Records to be preserved by certain exchange members, brokers and dealers

     
   

(5) Monitoring research or services provided to ensure the items are within the SEC-established safe harbor

Securities Exchange Act of 1934, Sec. 28(e)

     
   

(6) Annual review of research analyst compensation

NASD Rule 2711(d)(2) - Restrictions on Research Analyst Compensation

     
 

I. Order Audit Trail System ("OATS")

Trading

OATS

Procedures to ensure and review for compliance with the requirement to synchronize the member's clock daily, prior to the open, and to monitor for intraday drift

FINRA Rule 7430 - Synchronization of Member Business Clocks

     

Trading

OATS

Procedures to ensure and review for compliance with the requirement that reported OATS data is accurately and timely, whether reported by the firm or by a third party on the member's behalf

FINRA Rule 7440 - Recording of Order Information; FINRA Rule 7450 - Order Data Transmission Requirements

     

Trading

OATS

Procedures to review, correct, and re-submit data initially rejected by OATS

FINRA Rule 7440 - Recording of Order Information; FINRA Rule 7450 - Order Data Transmission Requirements

     

Trading

OATS

Procedures to ensure information reported to OATS is consistent with information submitted to a TRF and/or the ADF/TRACS

FINRA Rule 7230A - Trade Report Input; FINRA Rule 7330 - Trade Report Input; FINRA Rule 7440 - Recording of Order Information; FINRA Rule 7450 - Order Data Transmission Requirements

     

Trading

OATS

Procedures to ensure reported routed order identification numbers are consistent with the numbers received from the sending member

FINRA Rule 7440 - Recording of Order Information; FINRA Rule 7450 - Order Data Transmission Requirements

     
 

J. Other Rules

Trading

Other Rules

Procedures to ensure and review for compliance with the prohibitions on the improper sharing of material, non-public information (including information about pending orders) between the member's trading desk(s)

NASD Rule 3010 - Supervision; FINRA Rule 2010 - Standards of Commercial Honor and Principles of Trade

     

Trading

Other Rules

Procedures to ensure and review for compliance with the requirement to accurately prepare and maintain required books and records pertaining to the trading area(s)

SEA Rules 17a-3 and 17a-4; FINRA Rule 4511 - General Requirements

     

Trading

Other Rules

Procedures to ensure and review for compliance with the prohibitions against accepting payment or other consideration, directly or indirectly, from an issuer, affiliate, or promoter thereof

FINRA Rule 5250 - Payments for Market Making

     
 

K. Use of Multiple Market Participant Identifiers ("MPIDs")

Trading

Use of MPID

If the firm proposes to use multiple MPIDs, procedures to ensure and review for compliance with use of each MPID in accordance with (i) the representations made when requesting supplemental MPIDs, and (ii) the requirements/ limitations related to the use of supplemental MPIDs

FINRA Rule 2010 - Standards of Commercial Honor and Principles of Trade; FINRA Rule 6160 - Multiple MPIDs for TRF Participants

     

Trading

Use of MPID

If the firm proposes to use multiple MPIDs, procedures to ensure and review for compliance with limiting access of each MPID's user(s) to their own order/trading information and ensuring that order/trading information is not improperly shared between multiple MPID user(s)

FINRA Rule 2010 - Standards of Commercial Honor and Principles of Trade

     

Trading

Use of MPID

If the firm proposes to use multiple MPIDs, procedures to ensure the member has incorporated activity conducted under all MPIDs into its supervisory system and procedures as needed (including but not limited to trade reporting, OATS, record keeping, Reg SHO, Reg NMS, and best execution obligations, based upon the activity for which the additional MPIDs are used

NASD Rule 3010 - Supervision; NASD Rule 3012- Supervisory Control System; FINRA Rule 3130- Annual Certification of Compliance and Supervisory Processes

     
 

L. Rules Applicable to ATSs and ECNs

Trading

ATS/ECN

Procedures to ensure and review for compliance with the requirements to file Form ATS-R on a quarterly basis

SEC Reg ATS, Rule 301(b)(9)

     

Trading

ATS/ECN

Procedures to ensure and review for compliance with the requirement to protect subscribers' confidential trading information including, a) limiting information access to ATS employees responsible for operating the ATS or for compliance with applicable rules, and b) implementing standards to control ATS employees trading for their own accounts

SEC Reg ATS, Rule 301(b)(10)

     

Trading

ATS/ECN

Procedures to ensure and review for compliance with the prohibition on charging inconsistent fees

SEC Reg ATS, Rule 301(b)(4)

     

Trading

ATS/ECN

Procedures to monitor trading volume and determine whether the ATS has surpassed the "5% threshold" that would require it to comply with Reg ATS order display, execution access, and fair access requirements

SEC Reg ATS, Rule 301(b)(3) & (b)(5)

     

Trading

ATS/ECN

Procedures to monitor trading volume and determine whether the ATS has surpassed the "20% threshold" that would require it to comply with the Reg ATS requirements for capacity, integrity, and security of automated system

SEC Reg ATS, Rule 301(b)(6)

     

Trading

ATS/ECN

If the firm proposes to be a "Reporting ECN" (as defined in FINRA Rule 7210A) that reports trades to a TRF, procedures to ensure and review for compliance with TRF reporting requirements in FINRA Rules 7230A and 7230B, 7230C, and 7330

FINRA Rules 7230A, 7230B, 7230C, and 7330 - Trade Report Input

     

Trading

ATS/ECN

If the ATS enters quotes in FINRA's ADF, procedures to ensure and review for compliance with the requirement to execute orders in excess of the ECN's displayed quote size, when displaying a quote based on a reserved size order

FINRA Rule 6279 - Alternative Trading Systems

     

Trading

ATS/ECN

Policies and procedures pursuant to which the firm will review and approve applicants seeking to subscribe to the ATS