FINRA Series 3 Free Practice Questions 69

FINRA Rule 6140. Other Trading Practices
No member or person associated with a member shall, directly or indirectly, hold any interest or participation in any joint account for buying or selling a designated security, unless such joint account is promptly reported to FINRA. The report should contain the following information for each account:
(1) Name of the account, with names of all participants and their respective interests in profits and losses;
(2) a statement regarding the purpose of the account;
(3) name of the member carrying and clearing the account; and
(4) a copy of any written agreement or instrument relating to the account.

FINRA Rule 5320. Prohibition Against Trading Ahead of Customer Orders
The minimum amount of price improvement necessary for a member to execute an order on a proprietary basis when holding an unexecuted limit order in that same security, and not be required to execute the held limit order is as follows:
(c) For customer limit orders priced less than $0.01 but greater than or equal to $0.001, the minimum amount of price improvement required is the lesser of $0.001 or one-half (1/2) of the current inside spread;
(d) For customer limit orders priced less than $0.001 but greater than or equal to $0.0001, the minimum amount of price improvement required is the lesser of $0.0001 or one-half (1/2) of the current inside spread;
(e) For customer limit orders priced less than $0.0001 but greater than or equal to $0.00001, the minimum amount of price improvement required is the lesser of $0.00001 or one-half (1/2) of the current inside spread;
(f) For customer limit orders priced less than $0.00001, the minimum amount of price improvement required is the lesser of $0.000001 or one-half (1/2) of the current inside spread

The ATS demonstrates that:
I. The member subscribers are fully disclosed to one another at all times on the ATS
II. The system does not permit automatic execution, and a member subscriber must take affirmative steps beyond the submission of an order to agree to a trade with another member subscriber
III. The trade does not pass through any ATS account, and the ATS does not in any way hold itself out to be a party to the trade
IV. The ATS does not exchange shares or funds on behalf of the member subscribers, take either side of the trade for clearing or settlement purposes, including, but not limited to, at DTC or otherwise, or in any other way insert itself into the trade

SEA Rule 3b-8 — Qualified Block Positioner
(a) The term Qualified OTC Market Maker in an over-the-counter (“OTC”) margin security means a dealer in any “OTC Margin Security” (as that term is defined in section 2(j) of Regulation U (12 CFR 221.2(j)) who (1) is a broker or dealer registered pursuant to section 15 of the Act, (2) is subject to and is in compliance with Rule 15c3-1 (17 CFR 240.15c3-1), (3) has and maintains minimum net capital, as defined in Rule 15c3-1, of the lesser of (i) $250,000 or (ii) $25,000 plus $5,000 for each security in excess of five with regard to which the broker or dealer is, or is seeking to become a Qualified OTC Market Maker, and (4) except when such activity is unlawful, meets all of the following conditions with respect to such security: (i) He regularly publishes bona fide, competitive bid and offer quotations in a recognized inter-dealer quotation system, (ii) he furnishes bona fide, competitive bid and offer quotations to other brokers and dealers on request, (iii) he is ready, willing and able to effect transactions in reasonable amounts, and at his quoted prices, with other brokers and dealers, and (iv) he has a reasonable average rate of inventory turnover in such security.

FINRA Rule 2124 Net Transactions with Customers
(c) With respect to institutional customers, a member must obtain the customer’s consent prior to executing a transaction for or with the customer on a “net” basis in accordance with one of the following methods:

(1) a negative consent letter that clearly discloses to the institutional customer in writing the terms and conditions for handling the customer order(s) and provides the institutional customer with a meaningful opportunity to object to the execution of transactions on a net basis. If the customer does not object, then the member may reasonably conclude that the institutional customer has consented to the member trading on a “net” basis with the customer and the member may rely on such letter for all or a portion of the customer’s orders (as instructed by the customer) pursuant to this Rule;
(2) oral disclosure to and consent from the customer on an order-by-order basis. Such oral disclosure and consent must clearly explain the terms and conditions for handling the customer order and provide the institutional customer with a meaningful opportunity to object to the execution of the transaction on a net basis. The member also must document, on an order-by-order basis, the customer’s understanding of the terms and conditions of the order and the customer’s consent; or
(3) written consent on an order-by-order basis prior to executing a transaction for or with the customer on a “net” basis and such consent must evidence the customer’s understanding of the terms and conditions of the order.

You should consider the following points before engaging in extended hours trading. “Extended hours trading” means trading outside of “regular trading hours.” “Regular trading hours” generally means the time between 9:30 a.m. and 4:00 p.m. Eastern Standard Time.
I. Risk of Lower Liquidity
II. Risk of Changing Prices
III. Risk of News Announcements

FINRA Rule 7220A. Trade Reporting Participation Requirements
Non-Member Clearing Organization access to and participation in the System shall be conditioned upon the Organization’s initial and continuing compliance with the following requirements:
(i) execution of and continuing compliance with a Non-Member Clearing Organization Participation Application Agreement;
(ii) a Non-Member Clearing Organization shall only have access to the System to operate as a service bureau for its members functioning as Reporting Order Entry Firms, Correspondent Executing Broker-Dealers, Correspondent Executing Brokers, Clearing Broker-Dealers, or Clearing Brokers, as those terms are defined in Rule 7210A;
(iii) registration as a clearing agency pursuant to the Exchange Act, membership in a clearing agency registered pursuant to the Exchange Act, or maintenance of an effective clearing arrangement with a registered clearing agency;
(iv) compliance with all applicable rules and operating procedures of FINRA and the SEC;
(v) maintenance of the physical security of the equipment located on the premises of the Non-Member Clearing Organization to prevent the unauthorized entry of information into the System

2120. Commissions, Mark Ups and Charges
2121. Fair Prices and Commissions
(b) Relevant Factors
Some of the factors which the Board believes that members and the Association’s committees should take into consideration in determining the fairness of a mark-up are as follow:
I. The Type of Security Involved
II. The Amount of Money Involved in a Transaction
III. The Pattern of Mark-Ups
IV. The Nature of the Member’s Business

FINRA Rule 7410. Definitions
“Electronic Order” shall mean an order captured by a member in an electronic order-routing or execution system.

FINRA Rule 5121. Public Offerings of Securities With Conflicts of Interest
(6) Control
(A) The term “control” means:
(i) beneficial ownership of 10 percent or more of the outstanding common equity of an entity, including any right to receive such securities within 60 days of the member’s participation in the public offering;
(ii) the right to 10 percent or more of the distributable profits or losses of an entity that is a partnership, including any right to receive an interest in such distributable profits or losses within 60 days of the member’s participation in the public offering;
(iii) beneficial ownership of 10 percent or more of the outstanding preferred equity of an entity, including any right to receive such preferred equity within 60 days of the member’s participation in the public offering; or
(iv) the power to direct or cause the direction of the management or policies of an entity.