BROKER-DEALER BASICS
Rainmaker Securities, LLC is a FINRA registered broker-dealer
a registered representative is NOT a broker-dealer
rather, a registered representative is an agent of the broker-dealer
REMEMBER: UNLESS YOU ARE TRADING FOR YOUR PERSONAL ACCOUNT, ONLY A REGISTERED BROKER-DEALER MAY LEGALLY RECEIVE A FEE THAT IS CONTINGENT UPON A TRANSACTION FOR SECURITIES
What is a security? The following is a general guideline:
any shares of equity in an entity
any debt instrument or note, EXCEPT:
consumer financing loans
a note secured by a mortgage on a home
a short term note secured by lien on assets of a business
a character loan to a bank customer
if you are in doubt, contact the General Counsel for an in-depth analysis
SECURITIES TRANSACTIONS OUTSIDE OF THE BROKER-DEALER
Selling Away
Engaging in securities-related activity outside of the broker-dealer ("Selling Away") is a violation of FINRA rules and subject to harsh government sanctions, unless the activity falls under the following exceptions:
firm approved Private Securities Transactions; or
transactions in a firm approved Personal Brokerage Account.
Private Securities Transactions (PST)
Approval Process
provide prior written notice to the firm via the RMS portal.
describe transaction and whether or not you will receive direct or indirect compensation
if compensation is received, firm must record transaction on its books and records
No PST Approval Needed for:
transactions in a firm approved Personal Brokerage Account
transactions among immediate family where no selling compensation is received
personal transactions in an investment company or variable annuity securities
Personal Brokerage Accounts
must provide notice to RMS of any trading account with an outside brokerage in which you have a beneficial interest via the RMS portal
must also provide notice to financial institution holding the account of RMS association
When do you have a beneficial interest in an account?
your own account
your spouse's account
your child's account, if child resides in same household
any account in which you have discretionary authority
OUTSIDE BUSINESS ACTIVITIES
You must receive firm approval prior to engaging in certain activities:
any activity in which you receive compensation
any activity in which you participate in management or control assets (even if non-compensated)
Use the RMS portal to initiate a review of the activity for approval.
CONFLICT OF INTEREST
Broker-Dealers owe their customers a duty of fair dealing. As a part of our duty of fair dealing, a broker-dealer and its broker-dealer agents are required to disclose any conflict of interest to their customers. In the context of a securities transaction, a conflict of interest occurs in a situation where the broker-dealer or broker-dealer agent has a vested interest in the outcome of a transaction.
An actual conflict of interest shall be disclosed prior to the close of any securities transaction if the referring agent owns more than a nominal interest in the issuer of the securities or would derive any direct or indirect benefit from the transaction.
A conflict of interest may be disclosed in any one of the following manners: (i) a message to recipient via RMS monitored email; (ii) signed written agreement; or (iii) providing a link or PDF to the completed, applicable RMS Due Diligence Checklist Form wherein the conflict of interest is disclosed.
If you are unsure whether you have a conflict of interest with a potential client or investor, whether real or perceived, please contact the CCO prior to proceeding with the engagement or the transaction.
FORM U4 MAINTENANCE
update RMS within 30 days of a change
late updates will leave you and RMS vulnerable to FINRA sanctions (e.g. suspension of license and fines of up to $1,750)
Changes/Amendments that must be reported:
Change of residence address
Outside business activities
Investment-related litigation or securities arbitration
Customer complaints
Bankruptcy, tax liens, or compromises with creditors
violation of any law or regulation
All firm U4s subject to annual internal auditing and review
periodic FINRA audits will select from a sample of firm U4s to scrutinize for missing disclosures
GIFTS & GRATUITIES
Disclose via online the RMS portal
limited to $100 annually
Must keep a record of all recipients
Exceptions:
If Rainmaker Securities staff accompanies client to an event, it is not a gift subject to the $100 limit.
occasional meals
tickets to sporting events or theater, which are not frequent or excessive
COMMUNICATIONS
Communications with the Public
Includes: advertising, websites, publications, radio, television, signs, sales literature, public speaking engagements, etc.
Public communications are communications on behalf of the broker-dealer that are disseminated to anyone other than a broker-dealer or broker-dealer agent.
Any materials related to an offering of securities or any communications that are distributed to 25 or more persons must be submitted for principal approval prior to distribution.
Types of Public Communication
Institutional Communications
any written/electronic communications distributed only to institutional investors
Who is an Institutional Investor?
a bank
savings and loan association
insurance company
investment company registered under the Investment Company Act of 1940
registered investment advisor
a FINRA registered broker-dealer
any person (whether a natural person, corporation, partnership, trust or otherwise) with
total assets of at least $50 millionGovernmental entity or subdivision.
Employee benefit plan.
Qualified plan, as defined in Section 3(a)(12)(C) of the Securities Exchange Act of 1934
Retail Communications
any written/electronic communications distributed or made available to more than 25 retail investors within 30 days
any person that is NOT an institutional investor is a retail investor
Correspondence
any written/electronic communications distributed or made available to less than 25 retail investors within 30 days
Prohibited Communications Mediums
When discussing broker-dealer or securities-related matters, you are prohibited from using the following mediums of communication:
Email from domains/addresses that are not archived and monitored by the firm
Blogs, blog posts
Electronic bulletin boards
Chatrooms
Instant messaging
Social networking sites (Facebook, Twitter, etc.)
Social media profiles must be limited to: firm affiliation, title, contact information and employment dates, and a link to the firm’s website
Soliciting or displaying recommendations, endorsements, or other similar features that are in any way related to their work or performance at the firm is prohibited
SUITABILITY
When to establish Suitability?
The suitability rule applies to a broker-dealer's or registered representative's "recommendation" of a security or investment strategy involving a security to a "customer."
When is there a "recommendation"?
it depends on the facts and circumstances. In short, if there is any doubt in your mind whether there was a recommendation, you should establish suitability to be safe and avoid liability.
Distribution of marketing materials or offering materials, by itself, does not constitute a recommendation
Who is a "customer"?
for the purposes of the suitability rule, a "customer" includes anyone (except another broker-dealer) from whom the firm receives compensation
How to Establish Suitability?
There are three aspects of suitability. However, only two of which are applicable to this firm.
Reasonable Basis Suitability
requires a broker to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors. Reasonable diligence must provide the firm or associated person with an understanding of the potential risks and rewards of the recommended security or strategy.
The firm establishes Reasonable Basis Suitability via its tiered due diligence process conducted on the issuer and/or seller of the securities
Customer-Specific Suitability
requires that a broker, based on a particular customer’s investment profile, has a reasonable basis to believe that the recommendation is suitable for that customer. The broker must attempt to obtain and analyze a broad array of customer-specific factors to support this determination.
The firm establishes Customer-Specific Suitability via review of each customers completed Investor Qualification Form.
The firm must analyze the following factors from the completed Suitability form:
customer liquidity needs
time horizon for financial goals
risk tolerance - willingness to lose some or all of investment
Institutional Customers
an institutional customer is a customer which meets one of the following criteria:
a bank
savings and loan association
insurance company
registered investment company
registered investment advisor
any person (natural or entity) with at least $50 million in assets
a customer is exempt from suitability requirements under the institutional customer exemption if:
the customer meets the above requirements for an institutional customer
the customer attests that it "exercises independent judgement for all potential transactions"
qualifications for the institutional customer exemption should be documented via the Investor Qualification Form
ANTI-MONEY LAUNDERING
Suspicious Behavior Warranting Heightened Scrutiny
The client exhibits unusual concern about the Firm’s compliance with government reporting requirements and the Firm’s AML policies (particularly concerning his or her identity, type of business and assets), or is reluctant or refuses to reveal any information concerning business activities, or furnishes unusual or suspicious identification or business documents.
The client wishes to engage in transactions that lack business sense or an apparent investment strategy, or are inconsistent with the customer’s stated business or investment strategy.
The client engages in transactions involving cash or cash equivalents that appear to be unstructured to avoid the $10,000 government Currency Transaction Reporting.
Anti-Money Laundering Reporting
Contact the CCO if you have any suspicions an investor is seeking to participate in money laundering.
Do NOT inform the client.
The CCO will investigate and, if necessary, file a Suspicious Activity Report (SAF-SR) within 30 days of identifying the suspicious activity.
INSIDER TRADING
“Insider trading” is buying or selling a security while having material, non-public information about the issuer security.
What qualifies as "material" information?
Increases or decreases in dividends
Declarations of stock splits or stock dividends
Mergers, acquisitions, or takeovers
Significant changes in operations
Changes in previously disclosed financial information
Changes in backlog orders, award or loss of significant contract(s)
Significant new products to be introduced or new discoveries
Extraordinary borrowings
Major litigation
Liquidity problems
Significant changes in management
Significant regulatory actions
What qualifies as "non-public" information?
Non-public: information that has not been effectively communicated to the market place.
information is public if it has been published and is in general circulation
Penalties for Insider Trading Violations
Civil injunctions
Disgorgement of profits
Criminal prosecution and possible jail time
Fines up to 3x profit gained or loss avoided regardless of whether the person benefited
Firm penalties up to and including termination of employment