Understanding Supervision On The Series 10 Exam
One of the keys to passing the Series 10 exam is to make sure that you have a complete understanding of how supervision will be tested on the Series 10 Exam. This article which was produced from material contained in our Series 10 textbook and will help you master the material so that you pass the Series 10 exam.
If a registered representative wants to obtain employment outside of their position with a member firm, the registered representative must first provide written notification to the employing member firm. The member firm may reject or limit the representative’s outside employment. Exceptions to this rule are if the registered representative is a passive investor in a business or if the representative owns rental property. All other outside business activities must be disclosed to the member firm. If the member is a NYSE member, they must provide the representative with prior written approval before the representative engages in any outside activity.
Private Securities Transactions
A registered representative may not engage in any private securities transactions without first obtaining the broker dealer’s prior written approval. The registered representative must provide the employing firm with all documentation regarding the investment and the proposed transaction. An example of a private securities transaction would be if a representative helped a start-up business raise money through a private placement. If the representative is going to receive compensation, the employing member firm must supervise the transaction as if the firm itself executed the transaction. If a representative sells investment products that the employing member does not conduct business in without the member’s knowledge, then the representative has committed a violation known as selling away. An exception to this is if the representative is helping an immediate family member raise money and the representative receives no compensation for their role in the private transaction. In this case, the notification and permission of the member is not required.
Broker dealers may not pay compensation to employees of other broker dealers. If a broker dealer wants to give a gift to an employee of another broker dealer, it must:
- Be valued at less than $100 per person per year
- Be given directly to the employing member firm for distribution to the employee
- Have the employing member’s prior approval for the gift
The employing member must obtain a record of the gift, including the name of the giver, the name of the recipient, and the nature of the gift. These rules have been established to ensure that broker dealers do not try to influence the employees of other broker dealers. An exception to this rule would be in cases where an employee of one broker dealer performs services for another broker dealer under an employment contract. The following are also excluded from the $100 limit:
- Occasional meals
- Occasional tickets to sporting events
- Business-related travel
Records of gifts and employment contracts must be retained for three years. Prior FINRA approval is not required for employment contracts between members. The gift rule also applies to gifts given to or received from customers of the firm or agent. In the case of a mutual fund holding a seminar, the mutual fund may pay for registered representative’s travel related expenses and the seminar must be held at a “reasonable” location. Spouses of agents are allowed to attend; however, the mutual fund may only pay for the travel expenses of the agent. The agent’s expenses may not be paid for by the fund in exchange for past sales or the promise of sales in the future.
Note: Firms and agents also may not give a gift to influence any report or dissemination of information designed to influence the price of a security.
Advertising and Sales Literature
Member firms will seek to increase their business and exposure through the use of advertising and sales literature. There are strict regulations in place in order to ensure all communications with the public adhere to industry guidelines.
Advertising is defined as public communications where the firm does not control or select the specific audience. Advertising includes:
- Television / radio
- Motion Pictures
- Newspapers / magazine
- Telephone directory listings
- Signs / billboards
- Publicly accessible websites
- Computer / internet postings
- Video tape displays
- Other public media
- Recorded telemarketing messages
Sales literature is any communication that is disseminated to customers or prospective customers and is designed to increase the firm’s business generated by the targeted audience. Sales literature includes:
- Market reports
- Telemarketing scripts
- Form letters (sent to more than 25 people)
- Password protected websites
- Research reports
- Printed materials for seminars
- Option worksheets
- Performance reports
- Prepared scripts for TV or radio
- Reprints of ads or sales literature
- Broadcast emails
FINRA considers form letters sent to more than 25 people to be sales literature. The SEC considers sales literature to be both written and verbal while FINRA considers only written material to be sales literature.
Blind Recruiting Ads
A blind recruiting ad is an ad placed by the member firm for the specific purpose of finding job applicants. Blind recruiting ads are the only form of advertising that does not require the member’s name to appear in the ad. The ads may not distort the opportunities or salaries of the advertised position. All other ads are required to disclose the name of the member firm, as well as the relationship of the member to any other entities that appear in the ad.
Generic advertising is generally designed to promote firm awareness and to advertise the products and services generally offered through the firm. Generic ads will generally include:
- Securities products offered, i.e. stocks, bonds, mutual funds
- Contact name, number and address
- Types of accounts offered, i.e. individual, IRA, 401K
Filing and Retention Requirements
A member firm must maintain all advertising and sales literature for three years and two years in a readily accessible location. The information retained must also include the name of the preparer, as well as the name of the party who approved the use of the material. New members of less than 12 months and members who have not advertised before must file their ads 10 days prior to first use. After 12 months, members need only to file their ads 10 days after they’re first used.
Should FINRA determine that a member firm is making false or misleading statements in its advertising or sales literature, they may require the member to file all of its advertising and sales literature with the association 10 days prior to its first use. The NYSE requires that an associated person registered with the exchange as a member, allied member or a designated person approve all advertising, sales literature and other communications with the public prior to their use. Specific standards are also in place for advertising relating to options, securities futures and CMOs. All advertising relating to options, securities futures and CMOs must always be filled with the exchange 10 days prior to their use due to the risks and complex nature of the products.
From time to time, firms will use testimonials made by people of national or local recognition in an effort to generate new business for the firm. If the individual giving the testimonial is quoting past performance, relating to the firm’s recommendations, it must be accompanied by a disclaimer that past performance is not indicative of future performance. If the individual giving the testimony was compensated in any way, the fact that the person received compensation must also be disclosed. Should the individual’s testimony imply that the person making the testimony is an expert, a statement regarding their qualifications as an expert must also be contained in the ad or sales literature. Research prepared by outside parties must disclose the name of the preparer.
If a member firm advertises free services to customers or to people who respond to an ad, the services must actually be free to everyone and with no strings attached.