There are a number of FINRA Rules (previously known as NASD Rules) that clarify what actions a registered representative may or may not take in regard to customer accounts.
Rule 2330 - Customer Securities and Funds
This rule details improper uses of customer funds, including performance guarantees and sharing in investment performance. The only exceptions apply to accounts owned by members of the representative's family or to registered investment advisers who receive written authorization from an advisory client.
Rule 2370 - Borrowing From or Lending to Customers
The general rule is that borrowing between the registered representative and the customer is strictly forbidden. The only exception has two parts: first, the broker-dealer must have a written policy that permits such borrowing under specified conditions. Second, one of the following conditions must be met:
- The customer must be a member of the representative's immediate family (defined as parents, grandparents, mother-in-law or father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or nephew, and also includes any other person whom the registered person supports, directly or indirectly, to a material extent.
- The loan has been made on commercial terms that the customer generally makes available to members of the general public similarly situated as to need, purpose and creditworthiness.
Rule 2420 - Dealing with Non-Members
This rule requires that representatives deal with any non-member (someone not affiliated with a broker-dealer) in the same way as they would with anyone in the general public. In essence, a representative can't offer a discount or share commissions with anyone who is not affiliated with a broker-dealer. This includes the purchase or sale of any security on any terms other than those available to anyone else.
Rule 3050 - Transactions For or By Associated Persons
As a general rule, FINRA, NYSE and Municipal Securities Rulemaking Board (MSRB) require that broker-dealers grant permission to other broker-dealers when the employees of broker-dealers or the spouses and minor children of broker-dealer employees establish investment accounts.
However, each self-regulatory organization (SRO) has its own requirements; it is easiest to remember that the FINRA is the least "labor intensive" of the three organizations when it comes to these rules. FINRA requires notification from the account-holding broker-dealer to the employer and only requires the receipt of duplicate confirmations upon the request of the employer. The MSRB requires notification and the receipt of duplicate confirmations. Only the NYSE requires prior permission before opening the account and duplicate confirmations.
Exam Tips and Tricks
Make sure that you understand the FINRA conduct rules, which state that when a firm member knows that a person associated with an employer member has a financial interest in or discretionary authority over any existing or proposed account carried by the executing firm; that firm member must notify the employer member in writing of the intention to open the account, send duplicate confirmations and statements to the employer member, (if requested), and notify the person opening the account that these procedures will be followed.
This rule prohibits the registered representative from accepting a customer's purchase order for any security unless it has first ascertained that the customer placing the order or its agent agrees to receive securities against payment in an amount equal to any execution. In particular, the rule is especially concerned with short sales. The representative is required to make an affirmative determination that the security will be either delivered or borrowed prior to the settlement date before accepting a customer's order to sell a security "short".
Rule 8210 - Complaints
Broker-dealers are required to maintain a separate file of all written complaints in each office of supervisory jurisdiction. The file must contain a description of action taken by the broker-dealer in regard to the complaint, and it must contain or refer to another file containing any correspondence regarding the complaint. FINRA defines a complaint as follows:
"Any written statement of a customer or any person acting on behalf of a customer alleging a grievance involving the activities of those persons under the control of the member in connection with the solicitation or execution of any transaction or the disposition of securities or funds of that customer."
Code of Arbitration Procedure
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