FINRA Series 99 Operations Professional Exam Key Study Note

Establishing SSIs for institutional accounts requires careful attention to detail to ensure accurate and secure settlement of transactions. Key considerations include verifying the legitimacy of the counterparty, confirming bank account details with the institution directly (not solely relying on provided documentation), and documenting the verification process. SSIs should be regularly reviewed and updated, especially after personnel changes at the institution. FINRA Rule 2090, the “Know Your Customer” rule, mandates that firms make reasonable efforts to obtain and maintain current information about their customers. In the context of SSIs, this means not only collecting the necessary information but also verifying its accuracy and ensuring it aligns with the customer’s investment profile and objectives. Failure to properly establish and maintain SSIs can lead to misdirected funds, settlement failures, and potential regulatory violations, highlighting the importance of integrating KYC principles into the SSI process.

ACATS (Automated Customer Account Transfer Service) is a standardized system for transferring customer accounts between broker-dealers, primarily used for securities held electronically. Non-ACATS transfers involve assets not eligible for ACATS, such as physical certificates or certain alternative investments. When a customer initiates a non-ACATS transfer involving physical certificates, the firm must obtain the certificates from the customer, ensure they are in good deliverable form (properly endorsed, no restrictive legends unless appropriately addressed), and then physically deliver them to the receiving firm or its designated transfer agent. This process is manual and can be more time-consuming than ACATS. FINRA Rule 11870 governs customer account transfers but primarily focuses on ACATS transfers. While it doesn’t directly address the specifics of physical certificate transfers, the underlying principle of facilitating timely and efficient transfers still applies. Firms must avoid unnecessary delays and act in the customer’s best interest throughout the non-ACATS transfer process.

Upon discovering a lost or stolen stock certificate, a broker-dealer must immediately initiate procedures to report the incident and safeguard customer assets. This involves notifying the transfer agent, the issuer, and potentially law enforcement. Crucially, the firm must comply with SEC Rule 17f-1(c)(2), which outlines the requirements for reporting missing, lost, counterfeit, or stolen securities. The report must include detailed information about the certificate, such as the issuer’s name, certificate number, denomination, and the date of discovery. The firm must also document the circumstances surrounding the loss or theft, including any internal investigations conducted. Furthermore, the broker-dealer must maintain a record of the reported security and monitor for any attempts to negotiate or transfer it. Failure to comply with these reporting requirements can result in regulatory sanctions and potential liability for losses incurred by the customer.

Front running, as defined under FINRA Rule 5270, occurs when a broker-dealer or associated person, having knowledge of an imminent customer block order, trades in the same security for their own account or the account of another, before the customer’s order is executed. This practice is prohibited because it exploits the customer’s order for personal gain, potentially disadvantaging the customer. To prevent front running, firms must implement robust surveillance procedures to monitor trading activity for suspicious patterns. This includes scrutinizing trades executed shortly before large customer orders, analyzing order entry times, and reviewing communications for any indications of improper information sharing. Firms should also establish clear policies prohibiting employees from trading on non-public information and provide regular training on front-running regulations. Strict adherence to these preventative measures is crucial for maintaining market integrity and protecting customer interests.

Before executing a short sale, a broker-dealer must locate securities available for borrowing to ensure delivery can be made to the buyer. This involves contacting other broker-dealers, custodians, or securities lending firms to determine the availability and terms of borrowing the required shares. The broker-dealer must document the locate and maintain records of the borrowing arrangement. Regulation SHO mandates specific close-out requirements for failures to deliver securities. If a broker-dealer fails to deliver securities within the prescribed timeframe (typically T+2 for most securities), they are required to immediately purchase or borrow the securities to close out the fail. Failure to comply with Regulation SHO’s close-out requirements can result in regulatory penalties, including fines and potential suspension of trading privileges. Furthermore, persistent failures to deliver can negatively impact the firm’s reputation and relationships with customers and counterparties.

Broker-dealers are required to provide customers with confirmations of each transaction, as mandated by SEC rules. These confirmations must include specific information, such as the date and time of the transaction, the identity and quantity of the security, the price at which the transaction was executed, and any commissions or fees charged. The confirmation must also disclose whether the firm acted as agent or principal in the transaction. Confirmations can be delivered physically or electronically, provided the customer consents to electronic delivery. Electronic confirmations must be delivered in a format that is easily accessible and readable by the customer. While the information requirements remain the same, electronic delivery offers advantages such as faster delivery times and reduced paper consumption. Firms must ensure that their electronic confirmation systems comply with all applicable regulations and provide customers with the option to revert to physical delivery if desired.

The Financial and Operations Principal (FINOP) plays a critical role in ensuring a broker-dealer’s financial integrity and compliance with regulatory requirements. Key responsibilities include preparing and filing financial reports, maintaining accurate books and records, supervising the firm’s accounting and treasury functions, and ensuring compliance with net capital and customer protection rules. The FINOP is also responsible for establishing and maintaining internal controls to safeguard the firm’s assets and prevent fraud. SEC Rule 15c3-1, the Net Capital Rule, requires broker-dealers to maintain a minimum level of net capital to ensure they can meet their financial obligations to customers and creditors. The FINOP is directly responsible for calculating the firm’s net capital on a regular basis and ensuring that it remains above the required minimum. This involves accurately determining the firm’s assets, liabilities, and deductions from net worth, as defined by the rule. The FINOP’s expertise and oversight are essential for maintaining compliance with the Net Capital Rule and safeguarding the firm’s financial stability.

ACATS (Automated Customer Account Transfer Service) transfers are standardized and automated, streamlining the process compared to non-ACATS transfers, which are typically manual and can be more time-consuming. ACATS involves standardized forms and electronic communication between firms. FINRA Rule 11870 governs ACATS transfers, placing specific responsibilities on both the carrying (transferring) and receiving firms. The carrying firm must validate or protest the transfer instruction within three business days of receipt. If validated, the carrying firm must transfer the assets to the receiving firm within four business days following the validation. The receiving firm is responsible for promptly reviewing the transfer instruction and ensuring it contains all required information. Delays can lead to violations and potential sanctions. Non-ACATS transfers lack this standardized framework, requiring firms to coordinate directly and potentially leading to longer processing times and increased risk of errors.

Segregating customer securities is crucial for protecting customer assets and preventing their unauthorized use by the broker-dealer. SEC Rule 15c3-3, the Customer Protection Rule, mandates that broker-dealers maintain physical possession or control of fully paid and excess margin securities carried for the accounts of customers. This rule aims to prevent firms from using customer assets to finance their own operations or meet their obligations. Violations of Rule 15c3-3 can have severe consequences, including regulatory sanctions, fines, and even the revocation of a firm’s registration. Furthermore, the rule requires broker-dealers to maintain a reserve account, calculated based on a specific formula, to ensure sufficient funds are available to cover customer claims in the event of the firm’s insolvency. Failure to properly segregate securities and maintain the required reserve can lead to significant financial losses for customers and erode confidence in the market.

Upon discovering a potential front running situation, a firm must immediately investigate the matter to determine if a violation of FINRA Rule 5270 has occurred. Front running involves trading ahead of customer orders based on non-public information about those orders. The firm should review order entry and execution records, communication logs, and employee trading activity to identify any suspicious patterns. If front running is confirmed, the firm must take corrective action, which may include canceling the firm’s trades, compensating the affected customer, and reporting the violation to FINRA. To prevent front running, firms should implement robust internal controls, including information barriers between departments, restricted lists of securities, and employee training on ethical trading practices. Monitoring systems should be in place to detect unusual trading activity and potential conflicts of interest. Strict enforcement of these policies is essential to maintain market integrity and protect customer interests.

Opening a margin account requires specific documentation and disclosures to ensure customers understand the risks involved. Firms must provide customers with a margin disclosure statement outlining the potential for losses exceeding their initial investment, the firm’s right to sell securities without contacting the customer, and the possibility of increased margin requirements. FINRA Rule 4200 Series governs margin requirements and mandates that firms obtain a signed margin agreement from the customer. This agreement details the terms and conditions of the margin account, including interest rates, maintenance requirements, and the firm’s rights in the event of a default. These disclosures protect customers by providing them with the information necessary to make informed decisions about using margin and understanding the potential risks associated with leveraged trading. Furthermore, the rules establish minimum margin requirements to prevent excessive borrowing and protect both customers and the firm from potential losses.

A “Don’t Know” (DK) trade occurs when one party to a trade does not recognize the details of the transaction as presented by the other party. This can arise from discrepancies in price, quantity, security, or other trade terms. FINRA 11200 Series outlines the procedures for resolving DK trades. Upon receiving a DK notice, the receiving party must promptly investigate the discrepancy and either affirm the trade with corrected details or reject the trade. Clear and timely communication is essential to resolve DKs efficiently. Failing to resolve DK trades promptly can lead to settlement failures, inaccurate record-keeping, and potential financial losses for both parties. Unresolved DKs can also indicate systemic issues within a firm’s trade processing operations, potentially triggering regulatory scrutiny. Firms must have robust procedures in place to identify, investigate, and resolve DK trades to ensure accurate and timely settlement of transactions.

Customer account statements are critical for transparency and regulatory oversight. They must include key information such as account activity (purchases, sales, dividends, interest), positions held, cash balances, and any margin balances. Statements must also disclose any fees or charges assessed to the account. FINRA rules mandate the frequency and content of account statements, ensuring customers receive regular updates on their account status. These statements contribute to customer protection by allowing customers to monitor their account activity, identify any unauthorized transactions, and track their investment performance. They also facilitate regulatory oversight by providing a record of account activity that can be reviewed by regulators during examinations. Accurate and timely account statements are essential for maintaining customer trust and ensuring compliance with regulatory requirements.

The Financial and Operations Principal (FINOP) plays a critical role in ensuring the financial stability and regulatory compliance of a broker-dealer. Under FINRA rules and SEC regulations, the FINOP is responsible for maintaining the firm’s books and records, preparing financial reports, and ensuring compliance with net capital and customer protection rules, including SEC Rule 15c3-1. They are also responsible for supervising the firm’s cashiering functions and ensuring the accuracy of customer account statements. The FINOP’s expertise in financial matters and regulatory requirements is essential for maintaining the firm’s financial integrity and preventing violations of securities laws. Their oversight helps protect customer assets, ensures the firm’s ability to meet its obligations, and promotes confidence in the market. A competent and diligent FINOP is crucial for the overall health and stability of a broker-dealer.