NASD Rule 3010

(Branch Offices)

Any location where one or more associated persons regularly conducts business of effecting transactions in or inducing purchase or sale of a security.

Excludes:

- Non-sales locations (back-office)

- Primary residence (must meet certain rules)

- Used less than 30 business days annually

- OOC - occasionally and by appt

- Non-securities location and less than 25 securities transactions annually

- Exchange floor

- Temp location - business continuity plan location

Requires an OSJ to be inspected annually, NSB - every 3 years, NBL - determined by the member firm.  These records are kept for 3 years.

Designate one or more principals to establish, maintain and enforce procedures to test and verify procedures.

Review:

- All transmittal of funds/securities from customer accounts

- Changes of address

- Change of investment objectives with validation

Set procedures for 20% manager producers - heightened supervision.  Based on 12 month rolling value.

Update contact information promptly - no later than 30 days after change.

Update info within 17 business days after the end of the year - if needed.

Firm provides FINRA with 2 emergency contact names.

- registered principal

- member of senior management

Disclose to customers how the member will react to certain situations in writing at account opening, on web and by request.

Business continuity plan:

- data back-up and revovery

- Alternate communication of firm to customer; firm to EEs

- Alternate physical location

- Communication with regulators

- ensure prompt access to funds and securities if firm is unable to continue business

Supervise sales efforts

Cannot oversee investment banking, trading, market making and approving advertising.

Required for branch managers of NYSE Member Firms

Supervise of municipal fund securities.

529 plans and local government investment pools.

Do not confuse with Series 53.

Supervise options business

Must have at least one if member sells options.

Prepare research reports.

86 - Analysis and valuation

87 - Rules/regulations

Sell corporate securities only.

- Common and preferred stock

- Bonds

- Closed-end funds

Trade, as an agent or principal, OTC equities and convertible debt securities.

- Nasdaq market makers

- OTC Proprietary traders

Sell direct participation programs (DPP)

Sell limited partnerships

Sales assistant

- Enter unsolicited orders

- Provide current quotes

- Salaried only

- Job performance bonus allowed (cannot be based on transactions)

Applicant for membership must sign an agreement stating it will abide by FINRA Rules, pay fees and assessments, limit business to those activities outline by the restriction agreement.

- Provide FINRA of written notice at least 30 days before:

  - Merger with another member

  - Acquisition by another member

  - Acquisition or merger with a non-member

  - Material change in the member's business

  - Change in equity ownership that results in one person or entity controlling 25%+ of the firms equity.

  - Amendments to Form BD

- Provide FINRA of written notice within 10 business days:

  - Associated persons have been found to have violated securities laws

  - Customer complain of theft, forgery or misappropriation of funds

  - Suspended or expelled from another SRO

  - Criminal offenses

  - Statutory disqualification

  - In-house discipline involving suspension, termination, withholding of commissions or fines greater than $2,500.

NASD Rule 3010

(Special Procedures)

May be instituted for members that hire EEs of disciplined members - regards telemarketing.

1) If 5-9 RR and 40%+ from disciplined member

2) If 10-19 and 4+ from disciplined member

3) If 20+ RR and 20%+ from disciplined member

- the firm must monitor all phone calls.

- If required - member has 60 days to put into place and maintained for 3 years. - Records kept for 3 years.

- File quarterly reports to FINRA.

- Can adjust staffing levels to fall below the thresholds by firing RR from the disciplined firms.  It CANNOT hire more RR.  Firm has 30 days to adjust staffing levels or file for an exception.

MSRB

Municipal Securities Rulemaking Board

Enacts and interprets rules for the sale and underwriting of municipal securities.

No enforcement power - delegated to FINRA.

Since FINRA enforces - fines are paid to FINRA.

MSRB Rule G-37

(Play for Pay Rule)

- Negotiated underwritings where a municipal issuer selects an underwriter and negotiates the deal.

- Financial advisory work where a municipal issuer selects a municipal firm to structure a new issue.

- Rules don't apply to bid contracts - Winner gives the issuer the lowest net interest cost

Prohibits negotiated work for 2 years if a contribution is made to an official by:

- the firm, municipal finance pro associated with the firm or PAC controlled by the firm.

- Contributions up to $250 are allowed by a reg. person if able to vote for the official. 

- If the official loses the election G-37 does not apply and the firm can make unlimited contributions to pay off campaign debt.

- If a prohibited contribution is made by a registered person - person leaves the firm and joins another - both firms must serve the remainder of the 2 year period.

Written or electronic communication with one customer.

Group correspondence - sent to fewer than 25 persons in any 30 day calender period.

Prior approval is not required.  Must do post approval (on some) and document written training procedures for correspondence.

Incoming correspondence can be pre or post distribution to the rep.  If post there must be a way to insure identifying a complaint or funds/securities.

Instant messaging could be included.

Copy and support graphics intended for use in public media.

Examples:

- Website operated by the member

- Newspapers, magazines and periodicals

- Radio or TV

- Prerecorded telephone marketing messages

- Videotape displays

- Signs or billboards

- Motion pictures or film

- Telephone directories (other than routine listing)

- Any other public media

- Blind recruitment adverts

Sales Literature

Any written or electronic communication, not using public media that is distributed to customers or to the general public.

- Performance reports

- Circulars

- Research reports

- Market letters

- Form letters/emails sent to 25 or more people in a 30 calender day period

- Text prepared and used for educational seminars

- Reprints or excerpts from any advert, sales lit or published news item/article not independently prepared

Regulation FD

(Fair Disclosure)

Requires that when an issuer discloses material information, it does so publicly to provide a level playing field.

Must do so simulaneously to the public if disclosure to anyone outside the issuer was intentional.

Issuer must promptly disclose to the public any non-public material information accidently disclosed to any person outside the issuer. (Before the start of the next trading day)

Can disclose information by filing Form 8-K - filed within 4 business days of event.

Sarbanes-Oxley Act

(SOX)

Section 302 - Officers have review all financial reports and reviewed internal controls within last 90 days and reported finding.

Section 401 - Disclosure in periodic reports - requires inclusion of all material off-balance sheet liabilities, obligations or transactions.

Section 402 - Prohibition of personal loans to executives.

Section 403 - Any new officer, director or 10% shareholder file with the SEC within 10 business days.

Section 404 - Report by issuer and accounting firm on adequacy of issuers internal controls.

NASD Rule 2290

(Fairness Opinions)

Requires specific disclosures related to conflicts of interest when a firm provides a fairness opinion in connection with mergers, acquisitions or purchases of assets.

Disclose:

- If firm acted as financial advisor to any party to the transaction.

- If firm did/will receive compensation based on successful completion of the transaction.

- If information was provided by the party requesting the opinion and if info was independently verified.

- If approved or issued by fairness committee

- Firm must have procedures for when to issue an opinion, selecting personnel and qualifications for the committee, should include names not on the committee

Hart Scott Rodino Act

(HSR)

Requires both parties to a merger or acquisition to file info on the proposed transaction with the FTC and Dept of Justice.  30 waiting period (15 days for all-cash transactions) starts so the info can be reviewed.  Additional time can be can requested and a request for early termination can be filed.

Only filed if transaction is for more than $63.1mm as of 2008.

Form 8-K - Newsworthy events disclosure. Such as, change in management, change of company name, merger, major new product.  Foreign issuers and ADRs are exempt. - 4 business days.

Form 3 - Change in holdings by a corporate insider - initial only. - 10 calender days.

Form 4 - subsequent changes in holdings by corp insider. - 2 business days of change.

Form 13-D - investor, group or other entity acquires 5%+ of issuer securities. Include intentions regarding seeking control of issuer. Filed with issuer and market were stock is principally traded. - does not apply to insiders. - within 10 days.

Form 13-G - investment company and related entities acquires 5%+.  Filed within 45 days of year end as long as the position is held.  These companies may not seek control.

Form 10-K - Annual financial report - 90 days of year end.

Form 10-Q - Quarterly financial report - 45 days of quarter end.

Insiders - officers, directors or 10% shareholders.

Prohibited from:

- Selling short company stock - unless short against the box at year end and the position is closed within 20 days.

- Taking short swing profits - profit realized in a 6-month period from trading company stock - returned to the company.

- Trading on insider information

NASD Rule 2710

(Corporate Financing Department)

Reviews compensation received by underwriters of equity convertible debt issues, closed-end funds, Regulation A offerings, Rule 147 offering, DPP, rights and Rule 2720 offerings in the previous 180 days of the filing.

- Info must be provided within 1 business day of filing.

Investment grade non-convertible debt/preferred stock, Regulation D (505 and 506), government and municipal securities, open-end funds and unit trusts are exempt. 

Info filed:

- spread 

- Reimbursement of expenses (those normally born by underwriter)

- Stock, warrants or options received as payment (below POP or life over 5 years, freely transferable stock cannot be sold for 180 days unless less than 1% of issue, option/warrants will be exercised if stock after is more than 10% of issue)

- Right of first refusal to participate in future offerings. (No longer than 3 years)

- Nonaccountable expense allowances (cannot be more than 3% of spread)

- All other items of value (over allotments of more than 15% of issue)

- Active in securities for 5+ years

- Engage independent qualified underwriter (5+ years in securities industry, co/managed offering of gross proceeds of 50%+ or $50mm+; if not these than must prove that has experience in pricing and due diligence).

- NASD Rule 2790 does not apply.

- No person supervising offering can have been convicted of securities fraud in past 5 years.

- All buyers of issue must be suitable.

- Buying for a discretionary account requires written permission.

- Affiliates (10%+ relationship) is required to follow the rule as well.

- All checks must be put into escrow pending a net capital calculation.

An entity publicly announces its intention to acquire, in a tender offer, shares of a target company.

- Cannot buy target company shares in open market - only those tendered by shareholders.

- Prohibited from buying convertible securities or call options.

- Can make open market purchases of nonconvertible securities.

- Offer must remain open for 20 business days, revised offer for an additional 10 business days, but offer must be open for a total of at least 20 business days.

- Target company has 10 business days to provide a statement to shareholders - accept or reject, express no opinion, state unable to take a position.

- Shareholders can tender only net long position - owns the stock, owns a convertible security and has issued a conversion, owns a call and has issued exercise.

- If tender is less than 100% or a contingent - holders of convertible securities do not have to convert first (does not apply to options).

Buy back of issuer's own stock

- Only through 1 market maker or specialist.

- Transactions cannot exceed 25% of average daily volume of pervious 4 weeks on any single day.

- Block purchases do not count against daily limit.

- Cannot affect opening or closing. Safe harbor if not first transaction and before last 30 min. - Unless actively traded then 10 min.

- One block trade per week but cannot do any other 10b-18 trades that day.

Screen-based quote, trading, settlement and clearing system for securities relying on a Rule 144A exemption.

- QIBs can become dealers, non-QIBs can be brokers acting as agents in a sale to a QIB.

- Equity trades are reported through ACT

- Debt security trades are reported through TRACE.

- Quotes can be firm, one-sided, two-sided or subject.

- Provide a liquid secondary market for securities issued in exempt offerings under Regulation D and Regulation S.

- If investor is a QIB, can buy and sell unregistered securities without concern for the holding period and volume restrictions of Rule 144.

Qualified Institutional Buyer

(QIB)

Institution with a securities portfolio of $100mm+

• pension fund, investment company, insurance company, etc.

Members are QIB if portfolio is $10mm+

Allows shareholders to sell unregistered securities without going through the registration process.

- Nonaffiliates (not affilitated with issuer) - free to sell after holding period of 6 months and don't have to file Form 144.

- Affiliates (officers, directors, 10% shareholders) - free to sell after 6 months but have volume restrictions and must file Form 144. - May sell less than 5,000 shares or <$50K with filing Form 144 in any 90 day period.

- Form 144: Good for 90 days

- Volume restrictions: 1% of issuer's total outstanding share or weekly average of prior 4 weeks trading volume.

- If issuer is not current if filing - holding period is 1 year for affiliates and non-affiliates.

Offers and sales made outside the US are excluded from registration under Act of 1933. Securities distributed offshore by US issuers needn't register.

- Offer and sale must be made in an offshore transaction. - Cannot be to anyone/entity in the US.

- There can be no directed selling efforts in the US in connection with the offering.

- US citizens residing outside US could purchase them.

- All sales reported to SEC on 8-K.

- Cannot be resold in US for 12 months.

- Sales may be made immediately to any SEC-designated offshore securities market.

- Foreign issuers under Reg S if - <50% of voting securities and <20% debt securities owned by US address.  Otherwise regulated by Reg S.

Exempts certain types of corporate reorganizations from having to register shares under Act of 1933.

- Stock split

- Stock dividend

- Change in par value of existing shares.

Do need to register:

- Additional shares issued after a merger by survivor.

- Consolidation where old share are exchange for shares of new entity.

- Acquisition where new shares are issued for the assets of the target.

Permits investors to view private placement memoranda on the internet.

- Must prequalify investors - complete online questionnaire - determine if accredited or sophisticated.

- Investors can view offering documents on a password protected webpage.

- Investors can purchase securities only in transactions posted AFTER they were qualified.

Private Investment in Public Equity

(PIPE)

Investors purchase securities directly from the publicly traded issuer in a private placement.

- Cannot be immediately resold

- After closing the issuer must file a registration statement with the SEC.  Once effective the public resale can begin.

Regulation D

(Private Placements)

Sale of unregistered primary shares by either a publicly traded company or private company.

- Rule 503 - file Form D within 15 days of first sale. If offering continues over time, file within 30 days of last sale.

- Rule 504 - <$1mm - no limitation of purchasers, no suitability or sophistication standards, no restrictions on solicitation or adverts, can be used as public offering, no restrictions to resale, can't be used by a blank check co.

- Rule 505 - <$5mm - unlimited accredited and 35 unaccredited investors.

- Rule 506 - $5mm+ - unlimited accredited and 35 unaccredited investors.

- All investors must receive offering circular and sign the investment letter.  No cold calls. Only a press release (rule 135C). - Member firm must have preexisting relationship with those solicited.

Counting of unaccredited:

- Corp, partnership or other entity is one unless formed to purchase the issue - then each owner counted seperately.

- Any relative or spouse are not counted.

- Trust, estate or corp of purchaser or relative as 50%+ ownership in is excluded form the count.

Institution such as investment company, corp, bank or pension fund.

Individual - annual income of $200K+ in each of two most recent years or net worth of $1mm+.

Joint - annual income of $300K+ in each of two most recent years or net worth of $1mm+.

Officer or director of the issuer.

Unaccredited if don't meet above.  Can purchase private placement with help of purchaser representatives (CPA, attorney - these cannot be affiliated with the issuer).

Intrastate offering - issuer must be resident of a certain state.

- Principal office in the state

- 80% of assets in the state

- 80% of revenue is generated in the state

- 80% of proceeds used in the state (cannot be used to expand out of state).

- No sales of the issue to anyone outside the state.

- Sales by affiliates are not allowed.

- 9 month resale restriction from offer completion.

- Form 147 filed at least 10 business days before effective date.

Dollar amount to be sold by issuer during any 12 month period is $5mm or less.

- Files form 1-A instead of S-1.

- 20 Day cooling off period.

- Offering circular - no prospectus - must be received 48 hrs. prior to confirmation of sale.

- No more than $1.5mm can be by affiliates.

- Sale material is permitted by must be approved by SEC and accompanied by sales circular.

- File semi-annual sales report (Form 2-A) about sales to date and use of proceeds.

- File Form 2-A within 30 days of completion.

Regulation M

(Rule 101)

Deals primarily with additional issue offerings, governs activities of syndicate members, market makers, issuers and affiliates, and others of interest in the outcome of the issue.

SEC Rule 101

- Actively traded security (Tier 1- average daily trading volume of $1mm+ and public float value of $150mm+) - No restrictions placed on market makers or syndicate members prior to the effective date.

- Tier 2 - ADTV of $100K+ and PFV of $25mm+ - subject to restricted period of 1 day - business day before effective date

- Tier 3 - Restricted period of 5 days if not Tier 1 or 2.

- Restricted period - market makers who are syndicate members can either seek and excused withdrawal  or function as passive market maker. Syndicate members are prohibited from purchasing, bidding or inducing the purchase of the security but can execute unsolicited orders.

Regulation M

(Rule 102)

- SEC Rule 102 - Issuer and affiliates can't bid or purchase the security during restricted period (if there is one).

Regulation M

(Rule 103)

SEC Rule 103 - Market maker who is a syndicate member and elects to function as a passive market maker.

- Notification must be made to Nasdaq one business day in advance of the restricted period.

- Quotes over Nasdaq must identify passive market maker (PSMM)

- Passive bids can be no higher than the highest independent bid (bid by market maker not involved in the underwriting), unless it is a customer limit order.

- Daily net purchase limits - 30% of market makers average daily trading volume (info given to syndicate manager by FINRA). - Once reached the firm must seek an excused withdrawal for the remainder of the day.

- Passive market making can only be done in a fixed price offering on a firm commitment basis and only if an independent market maker exists.

Regulation M

(Rule 104)

SEC Rule 104 - Stabilizing bids

- Permitted to ensure an orderly distribution - usually by syndicate manager.

- Permitted only for fixed price offerings on a firm commitment basis (at-the-market cannot be stabilized).

- To place a stabilizing bid an independent market maker must exist

- Notice of stabilization must appear on the prospectus.

- Only one stabilizing bid is permitted, is always one-sided.

- Placed at or below the offering price, but never above highest independent bid

- Can be lowered or raised but not above offering price or highest independent bid.

- Syndicate manager must notify Nasdaq and indicate if the pre-effective bid will be converted to a conventional bid once offering is effective.

- Notify Nasdaq if penalty bid (PBID) or penalty free bid (SYND).

- Give Nasdaq a copy of cover page of prospectus

- Indicate whether the syndicate will engage in any short covering

- Records retained for 3 years

- Stabilizing info provided to syndicate manager within 3 business days of commencement and daily after.

- De facto 90 day limit since syndicate accounts must be settled 90 days after securities delivered by the issuer to the syndicate.

Regulation M

(Rule 105)

SEC Rule 105

- Limits short selling prior to the effective date of an additional issue offering.

- Prohibits purchases at the offering price to cover short positions established within 5 business days of the effective date.

Under Reg M, Rule 104 - where the manager can reclaim the underwriting fee and/or the concession received by a member of the underwriting group if too many customers of that member quickly sell the stock at the stabilizing price.

- If stabilizing doesn't work - manager can release the syndicate and selling group from their commitment to sell at the public offering price. - Lowers the price to accomplish this.

A member firm, in return for letting a customer buy shares at the POP, requires the customer to buy a certain number of shares in the secondary market. (considered fraud under Act of 1934).

A member bank attempts to tie commercial loans made to b/d and others to investment banking service provided by the bank.  (Basically requiring a b/d or other to do other business with the bank in exchange for a commercial loan)

Market order in which the floor trader has the discretion to execute the order when the trader feels it is best (price or timing).

Cannot be accepted by a specialist.

Rule 80B

(Circuit Breaker Rules)

       Before 1pm | 1-2pm | 2-2:30pm | After 2:30

Drop of 10%        1 hr. 1 hr. 1/2 hr    None

Drop of 20%       2 hrs. 1 hr. Close    Close

Drop of 30%      Closed for the day - Any time 30% drop

- Orders pending and received after the halt become GTC.

- At-the-close orders are cancelled

- At-the-close orders should be declined during the halt.

 For Unlinked ECNs

To display quotes for Nasdaq and CQS listed securities as well as ETFs (Exchanged traded funds)

Quote and trade reporting facility - no executions

Open 8 - 6:30 EST

Trades reported with 15 minutes

If trade is effected within 15 minutes of close - report with 15 minute of opening next day.

Both sides of inter-dealer trade report

- Liability order - when the party entering the order does not identify a specific party to which the order should be delivered or against which the order should be executed.

- Must be market orders or market limit orders.

- Matched with the highest ranked quotes on the opposite side of the market and will either be executed or delivered on a liability basis.

OATS

(Order Audit Trail System)

Capture order information reported by members for integration with trade information reported to ACT and quotation information disseminated by members.

Apply to Nasdaq and OTC equity securities.

Reported daily.

Reports last sale information on listed equity securities.

Network A - NYSE

Network B - Other regional exchanges

Reported within 90 seconds

Does not show where trade took place.

Requires that broker/dealers disclose order routing information on their nondirected customer orders. These quarterly reports must disclose the market centers to which these orders were directed for execution and the nature of any relationship between the firm and these market centers, including any payment for order flow arrangements.

An established customer is one who carries an account with a firm and has made a transaction or deposited funds or securities for at least one year or has engaged in at least three different penny stock transactions on three different days with the same firm.

The 5% policy applies both to commission charges on agency transactions and to markups and markdowns on principal transactions, including riskless principal trades.

CQS

(Consolidated Quote Service)

The Consolidated Quotation Service provides quotes on listed equity securities provided by third market makers as well as from specialists on an exchange floor. CQS provided bid and ask quotes, with size, for listed equity securities. The system does not provide last sale information.