Name of Supervisor (“designated Principal”):
Chief Compliance Officer
And assigned supervisors/designated Branch Office Managers if applicable (see Section 3.5)
How Conducted: Review New Account documentation; Trade Reviews; Commission Reviews; Correspondence reviews; Employee supervision
How Documented: Trade Reports; Investigation Records
3010 Checklist: Consolidated FINRA Rule 2010, 2510, Notice 08-57
Establishing fictitious accounts in order to execute transactions is strictly prohibited and considered a fraudulent practice. For example, such accounts could be used to conduct securities transactions based on insider information or to illegally purchase new issues since neither the selling broker-dealer nor the Registered Representative’s broker-dealer would have knowledge of the transaction. Similarly, a Registered Representative could conceal his/her involvement in an account of an immediate family member in order to execute transactions which otherwise would be prohibited. The term immediate family shall include parents, 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, and children. In addition, the term shall include any other person who is supported, directly or indirectly, to a material extent by the Company or an associated person.
Company Principals, in the daily course of their supervisory duties, will make every effort possible to identify fictitious accounts. Should any such accounts be suspected, this information will be brought to the attention of the Chief Compliance Officer, who will investigate the matter and forward it for regulatory review, if necessary.
10.7 “Soft Dollar” Arrangements – Not Applicable 10.8 "Parking" of Securities
Name of Supervisor (“designated Principal”):
Trade Desk Supervisor
And assigned supervisors/designated Branch Office Managers if applicable (see Section 3.5)
Frequency of Review:
Continuous; in course of doing business
How Conducted: Trade Reviews
Transfer of asset forms; letters of authorization How Documented:
Investigation Records
3010 Checklist: Consolidated FINRA Rule 2010, 2510, Notice 08-57
"Parking" is a process whereby a broker-dealer or Representative arranges for securities actually owned or controlled by one person, company or corporation to be held or "parked" in street name or record name of another, giving the misleading impression that they are really owned by that other person, company or corporation. Whether the device is called a "loan,” a "pledge" or a "transfer" the effect is the same: the person doing the "parking" has the capacity to exert ownership or control over the securities under an arrangement which allows that person to direct their sale, pledge, voting or other disposition as if he/she were the record owner. Often the person and those involved in this activity expect to benefit from an anticipated appreciation in value once the total transaction is accomplished.
"Parking" is often utilized to conceal trading activity, to avoid 13D reporting to the SEC of acquisition of a "control" block, to evade net capital requirements, limits on percentage ownership applicable to mutual funds and the like.
It is a violation of SEC and FINRA rules (including the net capital rules) for a broker-dealer to "park" securities. Any Registered Representative involved in a scheme to "park" securities will be subject to severe disciplinary sanctions by the Company.
10.9 “Microcap” Securities and Penny Stocks
Name of Supervisor (“designated Principal”):
Designated Principal: CCO
Designated Branch Office Managers and Producing Managers’ Supervisors (see Section 3.2 and 3.5)
Frequency of Review: During daily trade reviews and approvals; How Conducted: Pre-trade approvals
How Documented: Approvals noted on trade documentation, new account forms or blotters Completed Penny Stock Required Disclosure Documents; and risk disclosure letters
3010 Checklist: Consolidated FINRA Rule 6400 series; SEA Rules 15g-2-6; 15g-9 Notices 93-55, 92-42, 92-38, 03-28
Microcap Securities There are many securities, which do not qualify for listing on
NASDAQ, due to the small size of the company or stockholder base, lack of current information, etc. Stocks of these companies, sometimes known as “microcap” or “bulletin board” stocks, often trade below $5 per share and are thus categorized as “penny stocks” (see below). While legitimate “startup” operations often make their debut as “bulletin board” stocks there are a large number of such securities which are prey to manipulation by unscrupulous operators and promoters who run “pump and dump” schemes.
SEA Rule 3a51-1 defines the term “penny stock” as any equity security other than the
following excluded securities:
• “Reported securities”—those for which last-sale reports are collected and made available pursuant to an effective transaction reporting plan. Included are NASDAQ/NMS securities, securities listed on the NYSE and the AMEX, and securities meeting NYSE and AMEX listing standards that are listed on other national stock exchanges;
• Securities registered or approved for registration upon notice of issuance on a national securities exchange provided that price and volume information is required to be reported on a current and continuing basis and is made available to vendors;
• Securities authorized or approved for authorization upon notice of issuance for quotation in the regular NASDAQ market known as “NASDAQ Small-Cap Market”; • Securities priced at $5 per share or more, excluding any broker-dealer commission,
commission equivalent, mark-up or markdown; • Securities of an issuer having either:
more than $2 million of net tangible assets (total assets less intangible assets less liabilities); or
average revenue of at least $6 million for the last 3 years;
• Securities issued by an investment company registered under the Investment Company Act of 1940; or
• Put and call options issued by the Options Clearing Corporation.
SEC Penny Stock Rules apply to the Company’s penny stock business. Rule 15g-9 requires the Company to do the following, unless exempt (see below):
• Obtain information on the customer’s investor experience, financial background and investment objectives;
• Use this information to determine the suitability of penny stock transactions for the customer; also determine that the customer or his/her adviser has sufficient knowledge and experience in financial matters such that he/she may reasonably be expected to evaluate the risks of transactions in penny stocks. The designated Principal must pre- approve new penny stock customers;
• Before executing a transaction, provide the customers with a documentation regarding the suitability determination and disclosures relating to the Company’s requirements and receive this statement, signed by the customer; and
• Obtain a written agreement from the customer stating the quantity and identity of the stock being purchased.
These last two requirements are met by providing the customer with the “Penny Stock Risk Acknowledgement Letter.” This letter must include information regarding the penny stock purchase and must be signed by the customer and received by the RR prior to completing the transaction.
10.10 The Recommendation Rule: OTC Equities – Not Applicable