written supervisory procedures - inlet...
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(Rev. 102007)
WRITTEN SUPERVISORY PROCEDURES
Revised 10/2007
____________________________________________________________________________________________
Authorized Approval Signature: ________________________________________________
Printed Name & Title: Jessica Gilday, Managing Member/Compliance Officer___
Date: _____________________________
This Manual is effective from the date approved until the date of its authorized revision, update, or replacement.
Date this Manual was no longer effective (date of revision, update or replacement): _______________________ Recordkeeping: Discard after ___________________________ (date three years from termination of use)
(Rev. 102007)
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TABLE OF CONTENTS
PART I: INTRODUCTION
PART II: COMPLIANCE FUNCTIONS
SECTION 1: N/A
SECTION 2: SUPERVISORY PERSONNEL
2.1 Chief Compliance Officer
2.2 Executive Representative
2.3 Financial and Operations Principal 2.4 Assigned Areas of Supervision
2.5 Home Office and Branch Office Supervision
SECTION 3: STANDARDS OF SUPERVISION
3.1 Supervisory Review System
3.1.1 Qualifications of Supervisory Personnel
3.2 – 3.4 N/A 3.5 Supervision of Branch, OSJ and Unregistered Office Personnel
3.5.1 Branch Supervision
3.5.2 OSJ Supervision 3.5.3 Unregistered Office Supervision
3.6 Special Supervision
3.6.1 The Taping Rule 3.7 N/A
3.8 Steps to Remedy Deficiencies
3.8.1 N/A
3.9 N/A
SECTION 4: LICENSING
4.1 Registered Representatives/Associated Persons 4.1.1 Who Is Required to be Registered
4.1.2 Documentation
4.1.3 N/A
4.1.4 State Registrations 4.1.5 Dual Registration
4.1.6 Foreign Licensing
4.1.7 N/A 4.1.8 Designated Supervisors
4.1.9 Special Representative/Supervision
4.1.10 Statutorily Disqualified Persons 4.1.11 Termination of Registration; Continuing Commissions
4.1.12 N/A
4.2 Investment Advisors (RR/RIA‘s)
4.3 Investment Advisor Representatives (IARs) 4.4 Branch Offices
4.5 Offices of Supervisory Jurisdiction
4.6 Branch and OSJ Supervision 4.7 Unregistered Offices
4.8 N/A
SECTION 5: SUPERVISORY PROCEDURES
5.1 Daily Review of Customer Transactions and Accounts 5.2 N/A
5.3 Periodic Customer Account Supervision
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5.4 Annual Account Reviews
5.5 Disciplinary Procedures 5.6 – 5.9 N/A
5.10 Review of Correspondence
5.10.1 Incoming Correspondence
5.10.2 Outgoing Correspondence 5.10.3 Electronic Mail
5.11 Annual Compliance Meeting
5.12 Continuing Education 5.13 Business Continuity
5.14 Supervisory Control System: Rule 3012
SECTION 6: REGISTERED REPRESENTATIVE CONDUCT
6.1 Outside Business Activities and Private Securities Transactions (―Selling Away‖) 6.2 Personal Accounts and Trading
6.3 Insider Trading
6.3.1 – 6.3.4 .. N/A 6.5 Commission/Fee Splitting
6.6 Sharing Profits and Losses
6.7 Receipt of Non-Cash Compensation, Sales Incentives, Gifts and Gratuities 6.7.1 – 6.7.5 N/A
6.8 FIRM POLICY On Improper Conduct
SECTION 7: CUSTOMER RELATIONS
7.1 ―Know Your Customer‖
7.2 Suitability in General
7.3 Portfolio Suitability 7.4 Fiduciary Duty
7.5 Documentation and Follow-Up
7.6 N/A 7.7 Death
7.8 FIRM POLICY On ―Cold Calling‖
7.9 Customer Securities or Funds; Loans/Guarantees
7.10 – 7.12 N/A
7.13 Investor Education
SECTION 8: CUSTOMER COMPLAINTS
SECTION 9: OPENING NEW ACCOUNTS; ACCOUNT TRANSFERS
9.1 New Account Form - General
9.2 Tips in Completing the NAF
9.3 N/A
9.4 Discretionary Accounts; Unauthorized Trading 9.5 ACATS and Other Account Transfers
9.5.1 N/A
9.6 N/A 9.7 Short Sales
9.8 Accounts of Registered Reps of Other Firms
9.9 Transactions Involving FINRA or AMEX Employees 9.10 N/A
9.11 ―Household‖ Prospectus Delivery
9.12 Anti-Money Laundering Compliance Program
9.12.1 Customer Identification Program (CIP)
9.13 N/A
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SECTION 10: TRANSACTIONS
10.1 Commission, Fees and Mark-Ups/Downs Charged for Brokerage Services
10.2 N/A
10.3 Churning 10.4 N/A
10.5 Restrictions on IPO Transactions
10.6 – 10.7 N/A 10.8 ―Parking‖
10.9 Penny Stocks/Designated Securities
10.10 N/A
SECTION 11: COMMUNICATIONS WITH THE PUBLIC
11.1 Definitions
11.2 Content Standards and Guidelines 11.3 Approval and Recordkeeping
11.4 Filing Requirements
11.5 – 11.6 N/A
11.7 Use of Electronic Media 11.7.1 General Guidelines
11.7.2 Customer Consent
11.7.3 Internet Communication
11.7.4 Websites
SECTION 12: TRADING
12.1 In General
12.2 ―Best Execution‖
12.2.1 Best Execution, Defined
12.2.2 Order Routing 12.2.3 Technological Developments re: ―Reasonably Available Prices‖
12.2.4 N/A
12.3 N/A 12.4 Order Audit Trail System (OATS)
12.4.1 – 12.4.6 N/A
12.5 - 12.6 N/A 12.7 Margin Requirements
12.7.1 In General: Reg T and FINRA Rule 2520
12.7.2 – 12.7.7 N/A
12.8 Confirmations 12.9 – 12.11 N/A
12.12 Currency Transactions, ―Travel Rule‖ and Blocked Accounts
12.13 N/A 12.14 ―On Line‖ Trading; Day Trading
12.15 – 12.16 N/A
12.17 Market Center and Order Routing Reporting
12.18 Exception Reports
12.19 N/A
SECTION 13: CUSTODY AND CLEARING
13.1 In General
13.2 The Securities Investor Protection Corporation (SIPC)
13.3 N/A
SECTION 14: INVESTMENT BANKING
14.1 – 14.3 N/A
14.4 Rule 144A Transactions
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14.5 N/A
SECTION 15: PARTICULAR INVESTMENT PRODUCTS
15.1 Mutual Funds
15.1.1 Advertising and Sales Literature
15.1.2 Suitability 15.1.3 Correspondence/Disclosure of Fees and Expenses
15.1.4 Breakpoint Sales
15.1.5 Letters of Intent 15.1.6 Rights of Accumulation and Grouping of Family Orders
15.1.7 ―Trails‖ and Other Contingent Deferred Charges
15.1.8 Repurchases and Redemptions 15.1.9 Switching
15.1.10 Selling Dividends
15.1.11 Selling Compensation; Reciprocal Activity
15.1.12 Late Trading 15.2 Variable Product
15.2.1 Product Identification
15.2.2 Suitability 15.2.3 Disclosures in Communications with the Public
15.2.4 Switching (―Twisting‖)
15.2.5 – 15.2.6 N/A 15.3 Direct Participation Programs
15.3.1 Suitability Requirements
15.3.2 N/A
15.3.3 Due Diligence Procedures 15.3.4 Rollups
15.3.5 Secondary Market Trading
15.3.6 Valuation of DPP Units for Reporting Purposes 15.4 – 15.9 N/A
SECTION 16: N/A
SECTION 17: RECORD KEEPING and REPORTING
17.1 -17.2 N/A
17.3 FINOP Responsibilities and Net Capital Requirements 17.3.1 – 17.3.3 N/A
17.4 Annual Financial Audit
17.5 Focus Reports
17.6 Reporting Required Under SEC Rule 17a-11and FINRA Rule 3170 17.7 Customer Account Statements
17.8 Record of Written Complaints
17.9 N/A 17.10 Customer Account Information
17.10.1 N/A
17.10.2 Furnishing Account Record Information
17.10.3 Written Customer Agreements 17.11 Privacy of Consumer Financial Information – Regulation SP
17.11.1 Who is Protected?
17.11.2 What is Protected? 17.11.3 How Is It Protected?
17.11.4 Notice Requirements
17.11.5 – 17.11.6 N/A 17.12 – 17.14 N/A
17.15 Records of Examination Reports
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17.16 Records of Cash and Non-Cash Compensation
17.17 Preservation of Required Records 17.18 – 17.21 N/A
17.22 Cash or Currency Transactions
17.23 N/A
SECTION 18: N/A
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PART I. INTRODUCTION
Consistent with the requirements of the FINRA, and in order to remain in compliance with the applicable securities laws, rules, regulations, and statements of policy promulgated hereunder, the procedures set forth in this memorandum shall govern
the supervision of the activities of Inlet Securities, LLC‘s (hereinafter referred to as ISL) Registered Representatives
(Representatives) and associated persons. Each person granted supervisory responsibility in this memorandum and the
attached ―designation of Supervisory Responsibility‖ schedule shall be responsible for ensuring that all laws, regulations, rules and policies applicable to ISL‘s business are adhered to in the office or department which he or she manages. This
requires that each principal be familiar with, and remain current concerning, all such laws, regulations, and policies. Such
person must comprehend and be thoroughly familiar with this document as amended from time to time, which shall serve as a guide for carrying out his supervisory role.
At this time, ISL engages in equities, bonds, annuities, direct participation programs (DPPs), real estate investment trusts (REITs), limited partnerships, IRAs, mutual funds. Should the Company wish to change the nature of its securities business
outside the scope of approved business as described in its Membership Agreement, it will request and obtain prior FINRA
approval. The Company clears all its transactions through its clearing firm, Emmett A. Larkin, Inc.
The primary location for supervision of the company‘s activities is the home office located at: 233 North Causeway, Suite B,
New Smyrna Beach, Florida 32169. The phone number is 1-386-426-2440, fax number 1-386-426-2442.
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PART II. COMPLIANCE FUNCTIONS
SECTION 1. N/A
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SECTION 2: SUPERVISORY PERSONNEL
Designated Company personnel must review and, if necessary, update ISL Contact information quarterly (within 17 business
days after the end of each calendar quarter), until December 31, 2007. After this date, firms will be required to update contact information within 30 days of a change, and to verify such information on an annual basis, no later than 17 business
days after the end of each calendar year. This review is to be conducted on-line at the designated FINRA site.
2.1 Chief Compliance Officer
The Chief Compliance Officer of ISL is JESSICA GILDAY, who shall serve as the Registered Principal with responsibility for establishing supervisory systems and overall oversight of all compliance functions. These include:
COMMUNICATION - Provide instructions as to how to operate within the guidelines.
CONFIRMATION - Establish and enforce procedures for checking on activities of all personnel to determine that the guidelines are being followed.
CONSEQUENCES - Determine action to be taken in the event the guidelines are not followed.
2.2 Executive Representative
The Executive Representative of ISL is JESSICA GILDAY. Pursuant to FINRA requirements, the Company must designate an Executive Representative to whom official FINRA notifications will be sent and who will have responsibility within the
Company for notifying applicable personnel. The Executive Representative is responsible for updating the Contact
information as required by FINRA.
2.3 Financial and Operations Principal
The Financial and Operations Principal (FINOP) for ISL is JESSICA GILDAY.
Under the supervision of the Financial & Operations Principal (FINOP), ISL will maintain a fidelity bond with minimum
coverage in excess of 120% of its required minimum net capital (subject to a minimum of $6,000), and will ascertain that the policy contains a cancellation rider stipulating that the underwriter will notify the FINRA if the policy is terminated or
cancelled..
ISL‘s fidelity bond will be reviewed by the FINOP, on the anniversary date of the bond, to ensure that coverage requirements are met under all insuring agreements. Further, the coverage must extend to all associated persons, including independent
contractors.
The FINOP is also responsible for determining that financial statement filings are made on a timely basis, including the filing
of annual reports. The FINOP and Accounting Department will also accurately prepare and file FINRA and SIPC assessment
forms, and pay all fees and assessments on a timely basis.
2.4 Assigned Areas of Supervision
All supervisory responsibilities of ISL are designated as follows (a separate Designation of Supervisors table is attached):
Advertising/Marketing/Sales/Recruitment: Frank Gilday
Manuals (business continuity plan, written supervisory procedures): Jessica Gilday Chief Compliance Officer (including customer complaints): Jessica Gilday
Continuing Education (Regulatory and Firm Element): Jessica Gilday
Product types (equities, mutual funds, direct participation programs, variable annuities/insurance, etc.): Frank Gilday
AML: Jessica Gilday Trading/OATS: Frank Gilday
License/Registration: Jessica Gilday
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Responsibilities include establishing policies and procedures designed to ensure compliance with regulations respective to
each area of supervision, as well as compliance in conducting the type of business ISL has been approved for.
* Lost and Stolen Securities Program. Pursuant to SEC Rule 17f-1, the firm is registered as an indirect inquirer of the
Securities Information System. The Compliance Officer is responsible for ensuring the firm continues its‘ registration as
required, as well as properly reporting all lost and stolen securities within the required time frames.
2.5 Branch Office Supervision
ISL‘s registered OSJ‘s and Branch Offices are supervised by the following Principals:
Branch Location Name of
Branch
Supervisor
Licensing of
Supervisor
Designation: OSJ
or Branch
Home Office
233 North Causeway Suite B
New Smyrna Beach, Fl 32169
Frank Gilday
7,24, Variable
Annuities/Insurance
OSJ
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SECTION 3: STANDARDS OF SUPERVISION
3.1 Supervisory Review System
ISL conducts a review, at least annually, of the businesses in which it engages, which is designed to detect and prevent violations of, and achieving compliance with, applicable securities laws and regulations. ISL also reviews the activities of
each office, as applicable, including periodic examinations of customer accounts to detect and prevent irregularities or abuses
and an annual inspection of each office of supervisory jurisdiction.
3.1.1 Qualifications of Supervisory Personnel
NTM 99-45 reminds members that paragraph (a)(6) of the Rule 3010 sets the standard for determining the qualifications of supervisors. The Rule requires that members make reasonable efforts to determine that all
supervisory personnel are qualified to fulfill their assigned responsibilities. At a minimum, the supervisor must be
properly licensed to conduct the assigned responsibilities. However, passing the appropriate licensing examination does not, in and of itself, qualify a supervisor.
When designating supervisory personnel and responsibilities, ISL shall ensure that each Principal shall have proper licensing and employment qualifications. The Compliance Officer is responsible for hiring or appointing designated
supervisors. In doing so, the Compliance Officer must determine that supervisors understand and can effectively
conduct their requisite responsibilities. In this regard, ISL will consider the experience the supervisor possesses and
either determine that the individual is qualified by experience or that it is necessary to arrange training to ensure the person is qualified to supervise.
3.2 Overall Supervision
In accordance with FINRA regulations, each Registered Representative of ISL is assigned to appropriately Registered
Representatives(s) and/or Principals of ISL who shall be responsible for supervising that person's activities. The Compliance Department shall maintain a record of all such assignments.
The Compliance Officer implements the following procedures:
All registered personnel have a current copy of this Manual;
Periodic review and amendment of this Manual if and when applicable. Any new insertions are sent to all Manual
owners;
Required amendments to Form BD are filed with the Registration Department who in turn files within 30 days of
changes requiring FINRA notification;
Proper licensing of all sales personnel in the jurisdictions where required; and
Periodic review of the adequacy and completeness of the supervisory procedures, the compliance of registered
personnel with the supervisory procedures and the adequacy and timeliness of the ISL‘s required SEC, FINRA or state Blue Sky filings.
3.3 N/A
3.4 N/A
3.5 Supervision of Branch, OSJ and Unregistered Office Personnel
The SEC‘s definition of ―office‖ includes any location where an associated person regularly conducts business. Offices may
be registered, as in the case of Branch Offices and Offices of Supervisory Jurisdiction, or unregistered, as in the case of, for instance, a Registered Representative‘s residence. To follow are descriptions of ISL‘s supervisory procedures relating to
offices outside the Home Office. Record keeping requirements are described in Section 17, ―Record keeping and Reporting.‖
The Compliance Officer is responsible for all branches, OSJ or non-OSJ, and for unregistered office personnel, including but not limited to:
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Providing appropriate qualification and training for Branch Office Supervisors;
Conducting periodic reviews of the securities business conducted by the Branch Office Supervisors, if any
supervisor is a producing supervisor;
Establishing where required a set of written procedures applicable to the operation of each branch;
Implementing and operating supervisory procedures to review the compliance oversight conducted by
Branch Office Supervisors;
3.5.1 Branch Supervision
A Branch Office shall be defined as any location identified by any means to the public or customers as a location at
which ISL conducts investment banking or securities business, with certain exceptions. Each Branch Office, if
applicable, shall be inspected according to a cycle.
ISL has designated a Branch Office Supervisor for each registered branch. In turn all Branch Office Supervisors are
supervised as to compliance matters by the Compliance Officer. See Section 2.5, above, for a list of the Company‘s Branch Offices and designated Principals.
The Branch Office Supervisor for each branch will perform the following supervisory functions:
Implement branch supervisory procedures;
Periodically review all personal accounts and personal trading;
Review Registered Representative transactions in customer accounts;
Review and approve all communications with customers;
Supervise compliance with Section 3040 FINRA Conduct Rules (―Selling Away‖); and
Supervise compliance with Section 3060 FINRA Conduct Rules (payments to non-registered personnel).
If the Branch Office Supervisor is not a licensed 24 Principal, he will report directly to the Principal assigned to his
branch.
ISL will keep an updated list of Registered Representatives, their respective branches and assigned Principals for
supervision.
3.5.2 OSJ Supervision
ISL has registered certain of its Branch Offices (see Section 2.5, above, for a list of registered OSJ‘s) as ―Offices Of Supervisory Jurisdiction‖ (―OSJ‘s‖) due to the functions taking place at those offices, as described in Section 4.5,
below.
The Branch Office Supervisor for each OSJ must be a licensed 24 Principal and will perform the following
supervisory functions:
Implement OSJ supervisory procedures;
Review and approve any of the following, if carried out at the OSJ:
o Final acceptance (approval) of new accounts on behalf of ISL;
o Customer orders, within certain restrictions;
o Advertising or sales literature for use by persons associated with ISL, within certain restrictions;
o Activities associated with ISL at one or more designated Branch Offices of ISL; and o All personal accounts and personal trading;
Review Registered Representative transactions in customer accounts;
Review and approve all communications with customers;
Supervise compliance with Section 3040 FINRA Conduct Rules (―Selling Away‖); and
Supervise compliance with Section 3060 FINRA Conduct Rules (payments to non-registered personnel).
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Customer account activity by producing managers will be reviewed by the Compliance Officer. Records of such
reviews will be filed at the home office.
3.5.3 Unregistered Office Supervision
ISL does not have any unregistered offices. However, in the case that any of ISL‘s registered personnel operate from offices not registered with the SEC and FINRA (see Section 2.5, above, for a list of unregistered offices, if any),
there will be greater supervisory challenges than those posed by Branch Offices and Offices of Supervisory
Jurisdiction.
ISL shall:
o Maintain a record of all Unregistered Offices;
o Assign a Principal of ISL (Home Office or Branch) as office supervisor;
o Educate all Registered Representatives working in the offices as to their obligations to ISL and to the public,
including prohibited sales practices; o Maintain regular and frequent professional contact with such individuals;
o Implement special supervisory practices applicable to the office, including records reviews, inspections and
audits; o Adopt and implement a regular schedule for inspecting Unregistered Offices; and
o Make unannounced visits to "red flag" offices (see below).
Inspection of Unregistered Offices shall include at a minimum a review of any on-site customer account
documentation and other books and records, meetings with Registered Representatives to discuss the products they
are selling and their sales methods and examination of Correspondence and sales literature.
In addition, where there are "red flag" indications of misconduct or potential misconduct at the office, the supervisor
and/or Compliance Officer will make unannounced visits with the specific purpose of identifying any problem areas
and implementing corrections. Such "red flag" indications would include:
repeated failure to document activity properly or to provide documentation for review,
receipt of significant customer complaints,
personnel with disciplinary records,
indications of "selling away,"
questions as to suitability of recommendations,
excessive or inappropriate trading activity,
trade corrections, extensions, liquidations, and/or
"switching" or variable contract replacements.
Records will be kept of such visits, including any findings and action taken and acknowledgments of any remedial action signed by the Representative(s) involved.
See Section 17, below, for record keeping requirements. Note that if the unregistered office is an associated person‘s
residence, ISL is not expected to produce records at that office, under revised SEC books and records rules.
3.6 Special Supervision
In the course of a Registered Representative becoming licensed or after a Representative has been licensed with ISL and is
engaged in business on its behalf, there may come to ISL‘s attention circumstances that would warrant Special Supervision
for that person. These circumstances are such as to indicate that, while the person can function well within the regulatory
regime, certain aspects of the person‘s history point to a need for more than the usual level of attention by supervisory personnel.
Indicators of such a need would include (but are not limited to):
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A history of customer complaints, disciplinary history or arbitration;
A prior termination for a significant sales practice or regulatory violation;
A frequent change of broker-dealers within the industry;
Excessive trade corrections, extensions and liquidations;
Personal or financial stress;
Former employment at a ―disciplinary firm‖; and/or
Statutory disqualification pursuant to Article III, Section 4 of the FINRA By-Laws (see section entitled ―Statutorily
Disqualified Persons‖ below).
The foregoing considerations would as well apply to personnel hired in a non-representative capacity that had formerly been
Registered Representatives and had experienced any of the foregoing ―red flags.‖
Supervisory and compliance personnel at ISL, once having identified the need, will develop Special Supervision for this
person (a ―Special Representative‖) designed to diminish the concerns raised by the ―red flags.‖ The designated Principal
will carry out the terms of this Special Supervision, which will be documented in the personnel records of the Special Representative and might include:
Restrictions on the kinds of activities engaged in;
Monitoring customer account activity, correspondence and phone calls;
Special training (possible re-take of series exams, etc);
Assignment to a supervisor responsible for administering the special supervision;
Increased level of visits, inspections, reviews of records and transactions;
Initial meeting to obtain commitment of special representative to the program;
Agreed upon consequences if program does not work; and
Time line and periodic progress review to determine success.
In the case of statutorily disqualified persons, registration approval will be necessary before the employee conducts business
activities for ISL; additionally, the supervisor will carry out special supervision as required under an agreement with the
applicable SRO reviewing the disqualified person.
3.6.1 The Taping Rule
If ISL is notified by FINRA Regulation or otherwise acquires actual knowledge that it meets one of the criteria in paragraph (b)(2)(viii) of Conduct Rule 3010 relating to the employment history of its registered persons at a
―Disciplined Firm‖ (as defined), it shall, within 60 days of notification, implement a taping system and establish,
maintain, and enforce special written procedures for supervising the telemarketing activities of all of its registered persons. Alternatively, if ISL triggers, for the first time, application of the Taping Rule, it may reduce its staffing
levels (within 30 days) to avoid application of the Rule. The Company currently is not subject to the requirements of
this Rule, and therefore has not established such written procedures, nor has it implemented a required taping system.
3.7 N/A
3.8 Steps to Remedy Deficiencies
The Compliance Officer takes the following steps in cases where deficiencies are identified in (1) supervisory procedures, (2)
supervisory systems or (3) compliance by individuals with the procedures or systems:
Review and/or investigation designated Principal(s) involved;
Report and/or review by Compliance Officer;
Change (if required) in procedures or systems;
Change (if required) in duty assignments;
Replace (if required) personnel;
Any required reports filed with regulatory agencies; and/or
Discipline (if required) individuals involved, including:
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U5 or reassignment or suspension,
Fine or other monetary penalty,
Restriction in business activities or types of customers,
Assignment to special supervision or monitoring,
Re-take one or more Series exams, and/or
Special Continuing Education.
3.8.1 N/A
3.9 N/A
3.10 Internal Audit
An internal audit of ISL‘s home office activities will be conducted at least annually, with emphasis on approvals granted by
operations principals and required bookkeeping. As part of ISL‘s annual internal audit, the following will apply:
An independent accountant will audit the firm‘s financial statements annually, per FINRA regulation.
A review of all branches, registered and non-registered is to be conducted. Specifically, steps for the reviews shall
include reviewing branches on CRD, compiling a list of all Representatives in each branch, and a list of respective
Supervisors, ensuring that designated Supervisors are qualified for the position. A separate list of producing managers will be kept. The Compliance Officer, Ms. Gilday will be responsible for such reviews and will keep written record of
all findings. Reviews will be conducted by the anniversary of the prior review and will be evidenced by signature on the
branch, representative and producing manager lists.
A review of the Operation Department‘s order processing, recordkeeping, and other functions will be conducted. A
record of each internal audit is to be maintained at the home office.
With the exception of the accountant‘s audit, all areas will be reviewed by the use of the firm‘s Internal Audit Form, and will
be prepared and signed by Ms. Gilday.
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SECTION 4: LICENSING
The Form BD will be maintained with all states and regulatory agencies to accurately reflect business activities, branch
locations, and personnel, and to register ISL in all states where business is conducted. The requirements of each individual
jurisdiction will be met in initial filings, annual renewals, and amendments as necessary.
4.1 Registered Representatives/Associated Persons
REPRESENTATIVES
The hiring, conduct, and actions of ISL Registered Representatives and associated persons will be supervised by the assigned
OSJ Principals, Recruitment Principal, and/or Compliance Officer.
4.1.1 Who Is Required to be Registered
In General. Code of Conduct Rule 1031 states that all persons engaged or to be engaged in the investment banking
or securities business who are to function as representatives shall be registered as such with FINRA. Specifically,
this is to include persons associated with the Company, including assistant officers other than principals, who are engaged in investment banking or securities business for the Company including the functions of supervision,
solicitation or conduct of business in securities or who are engaged in the training of persons associated with the
Company for any of these functions. This includes administrative personnel engaged in accepting and processing
unsolicited customer orders for execution. The Company will not make application for the registration of any person as representative where there is no intent to employ such person in its investment banking or securities business (in
other words, the Company will not ―park‖ any registrations). The Compliance Officer, Jessica Gilday, will review
every Representative, annually, to ensure there is no indication of registration ―parking‖. Production runs for each Representative will be reviewed, as well activities conducted throughout the year. The Annual Audit Form will
indicate all Representatives reviewed and whether ―parking‖ is suspected. Ms. Gilday must initial/sign the audit
forms, which will show evidence of securities parking reviews.
The Exchange Act provisions define associated person to include any partner, officer, director, or branch manager of
a broker-dealer (any person occupying a similar status or performing a similar function), any person directly or
indirectly controlling, controlled by, or under common control with a broker-dealer, or any employee of a broker-dealer. This includes order-takers. The SEC interprets the term associated person to include any independent
contractor, consultant, franchisee, or other person providing services to a broker-dealer equivalent to those services
provided by the persons specifically referenced in the statute.
Exempt from registration are several very specific categories of personnel:
Persons associated with the Company whose functions are solely and exclusively clerical or ministerial;
Persons associated with the Company who are not actively engaged in the investment banking or securities
business;
Persons associated with the Company whose functions are related solely and exclusively to the need for
nominal corporate officers or for capital participation; and
Persons associated with the Company whose functions are related solely and exclusively to:
effecting transactions on the floor of a national securities exchange and who are registered as floor
members with such exchange;
transactions in municipal securities;
transactions in commodities; or
transactions in security futures, provided that any such person is registered with a registered futures
association.
Also, the Company may direct transaction-related referral compensation to non-registered foreign persons under
certain circumstances set forth in Rule 1060.
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Research Analyst Registration. Research activity by and of itself does not require registration. However, FINRA
Rule 1050 requires each "research analyst" of the Company to be registered. ―Research analyst‖ is defined as an associated person who is primarily responsible for the preparation of the substance of a research report or whose
name appears on a research report. Before their registrations can become effective, research analysts must pass a
Qualification Examination (Series 86/87) for Research Analysts, as specified by the FINRA. In certain cases, waivers
or exemptions may be granted; analysts should discuss this possibility with the Home Office Supervisor. This registration requirement applies only to equity securities analysts; fixed-income analysts do not require registration.
Principal Registration. Code of Conduct Rule 1021 requires that the Company register as a principal all persons who are actively engaged in the management of the Company‘s investment banking or securities business, including
supervision, solicitation, conduct of business or the training of persons associated with the Company. Every Office
of Supervisory Jurisdiction shall be supervised by at least one registered principal. ―Actively engaged‖ means day-to-day conduct of the member‘s securities business and the implementation of corporate policies related to such
business. Thus, directors or persons with a similar official position who have a role to play but are not ―actively
engaged‖ need not register. A General Counsel who officially participates in decision-making and supervisory
responsibilities must register.
4.1.2 Documentation
All persons who desire to become affiliated with ISL will have a background check. The following documents must
be obtained and/or reviewed in connection with becoming a Registered Representative:
Signed Pre-Hire Consent Form,
Signed ISL Application,
Signed Form U4 (including employment and disciplinary history),
Fingerprint cards, At least three (3) references (part of the ISL application),
Prior employer Form U5 (where appropriate, reviewed within 60 days of becoming registered),
Registered Representative Agreement (where appropriate), and Copies of any criminal complaint or plea agreement, private civil complaint or arbitration claim (see below
under ―U4 Disclosure Rules‖).
A file for each employee and/or associated person will be maintained by the Company. Files will include all the above documents, as well as any other pertinent information/documentation. Each Representative will also receive a
copy of ISL‘s Written Supervisory Procedures, AML Compliance Program, and any company manual(s) which
contains necessary information regarding the conduct of business, including but not limited to, outside business activities, private securities transactions and insider trading. A signed form acknowledging a) receipt of all Manuals,
and b) an agreement to adhere to the policies outlined is required. A new signed acknowledgement form will be
obtained for all amendments made to any of the above procedures/programs.
ISL is required to file Forms U4 and U5 with FINRA, as well as all amendments and supplements. This filing is
required to be completed electronically (see NTM 99-63) either directly or through a third party. The Compliance
Officer is responsible for overseeing these electronic filings, and is required to sign the paper record of each U4 amendment. Representatives are not required to sign U4 amendments, except in the case of amendments to DRP
pages.
All registered personnel and any other personnel that would be required under SEC Rule 17(f)(2) will be required to
be fingerprinted. Fingerprint cards are forwarded to the FINRA for review; copies of the cards will be maintained in
employee files. Personnel not required to be registered will be pre-screened to ensure they are not statutorily disqualified.
The Compliance Officer will ascertain that copies of all employee-related forms, such as Forms U4 and U5,
fingerprint cards and FINRA/CRD status reports, are maintained in employee files.
(Rev. 102007)
17
No Registered Representative may solicit or conduct securities transactions before such individual has been approved
by the FINRA. The designated Principal shall ascertain that all requirements have been met before any business is conducted by receiving the Representative‘s status report from CRD demonstrating approval by the FINRA and
applicable states (see below).
4.1.3 N/A
4.1.4 State Registrations
Registered Representatives must be registered in the state from which they conduct business and may be required to
be registered in other states where customers are domiciled. Most states require successful completion of the Series
63 Uniform State Agent Securities Law Examination. Successful completion of the exam does not automatically confer registered status on the examinee. Application must be made to the CRD to obtain each state registration.
No Registered Representative may solicit or conduct securities transactions in a given state before such individual
has been approved to conduct securities business in that state. The designated Principal shall ascertain that these requirements have been met before any business is conducted by the Registered Representative.
4.1.5 Dual Registration
A ―dual licensing‖ situation exists where a Registered Representative maintains a license with another broker-dealer
as a Registered Representative, a registered investment advisor or an investment advisor representative. Any Registered Representative desiring to obtain or maintain ―dual licensing‖ status must contact the designated Principal
and/or Compliance Officer in advance for approval. It is noted that many state jurisdictions restrict or prohibit ―dual
licensing‖ and any such activity must be conducted with full knowledge of these state restrictions. ISL‘s dual
registration policies will be in accordance with the requirements of individual jurisdictions.
4.1.6 Foreign Licensing
FINRA and certain foreign jurisdictions have rules that prohibit persons who are unlicensed in these jurisdictions
from ―cold calling‖ or otherwise conducting or soliciting securities business. Under no circumstances is a Registered
Representative of ISL to engage in ―cold calling‖ or any other sales activities in a foreign jurisdiction without being
properly licensed. Registered Representatives desiring to engage in such activities must contact the designated Principal in order to request and subsequently secure such licensing.
The FINRA has rules that apply to U.S.-based member firms conducting business in foreign locations, to member firms based in other countries that do business in the United States, and to foreign representatives who wish to
engage in securities business in the U.S. Collectively, these rules and programs make it easier for FINRA members
to conduct business abroad. These rules include the following:
The FINRA permits firms to register certain persons working in foreign offices as Foreign Associates
without requiring qualification examinations (FINRA Rule 1100).
The FINRA authorizes member firms to maintain registrations for persons who are engaged in the
investment banking or securities business of a foreign securities affiliate or subsidiary (FINRA Rules 1021(a)
and 1031(a)).
The FINRA allows, in limited circumstances, member firms and persons associated with a member to pay
transaction-related compensation to non-registered foreign persons, or foreign finders (FINRA Rule
1060(b)).
The FINRA permits persons registered in certain foreign countries to work in the U.S. as general securities
representatives after taking an abbreviated examination (FINRA Rule 1032).
(Rev. 102007)
18
The FINRA also offers examinations and continuing education programs abroad. In many cases foreign jurisdictions
will bring unlicensed activities directly to the attention of ISL or the FINRA, leading to swift disciplinary penalties. ISL will refuse to process any transactions proposed to be undertaken where the Company or the Representative has
not complied with applicable licensing requirements. Certain FINRA Notices to Members provide guidance
concerning the conduct of business abroad. The Company and its employees should consult NTM‘s 98-91, 00-20
and 01-81 for reminders related to foreign licensing and securities conduct issues.
The Company and all persons associated with it are obligated to comply with applicable U.S. laws and foreign laws
when soliciting business in any foreign jurisdiction. The designated Principals of the Company, in conducting their respective supervisory duties described throughout this WSP Manual, will take note of any perceived violations of
such laws and will immediately report such observations to the Compliance Officer for further review and
investigation.
4.1.7 N/A
4.1.8 Designated Supervisors
Each Representative will be assigned to a Licensed Principal for supervision. The Compliance Officer will keep a
current record of all Representatives assigned to each supervisor.
4.1.9 Special Representative/Supervision
Special review procedures are required for all registered representatives who have a disciplinary history. A thorough
investigation will be conducted of the issues and merits surrounding the reportable event on Form U4. This will
include personal interviews, inspection of legal documents, and letters of representation. Based on these
investigations, restrictive agreements, closer than normal supervision, or other action deemed necessary will be in force and documented in the Representative‘s records. At ISL‘s discretion, Representatives with disciplinary
histories who may be subject to special supervision requirements may be rejected from registration by ISL.
4.1.10 Statutorily Disqualified Persons
In the event the Company considers hiring an applicant subject to statutory disqualification, it will take steps to
conform to the FINRA By-Laws, Article III, Section 4. The designated Principal will complete and file Form MC-400 with the FINRA. Registration approval will be necessary before the employee conducts business activities for
the Company; additionally, the employee‘s supervisor will carry out special supervision as required under an
agreement with the applicable SRO reviewing the disqualified person. Records of such supervision will be kept by the designated Principal. Please refer to ―Special Supervision‖ herein for further details on supervision.
4.1.11 Termination of Registration; Continuing Commissions
When a Representative resigns or his registration with ISL is terminated, ISL‘s Licensing & Registration Department
will submit a U5 to the FINRA within 30 days, disclosing the reasons for the termination, and a copy will be sent to
the Representative.
FINRA Rule IM-2040-2 allows ISL to pay continuing commissions to persons who remain registered representatives
and, after they cease to be registered, such persons, their beneficiaries or their estates provided that there is in existence a bona-fide contract for such payment. No arrangement shall cover the solicitation of new business or the
opening of new accounts. The provisions of the Rule should be consulted before any arrangements are entered into.
4.1.12 N/A
4.2 Investment Advisors (RR/RIA’s)
ISL is not itself a registered investment advisor under federal or state statutes, nor is it affiliated with one. However,
Registered Representatives are permitted to act as independent investment advisors if properly licensed and registered. All
(Rev. 102007)
19
Registered Representatives will be regularly asked about their activities by their respective designated Principals. Those
Registered Representatives who are deemed by ISL to be engaged in activities which constitute providing ―investment advisory services‖ subject to registration will be asked to evidence their proper licensing and registration (or become licensed
and registered) or resign from the Company. Registered Representatives engaged in independent advisory activities
(―RR/RIA‘s) will be expected to maintain all required licenses and to advise ISL in advance as to advertising, customer
disclosures, documentation, fees and billing, customer reporting, portfolio activities and the like in accordance with guidelines provided by ISL.
If any Registered Representative is in doubt about his or her status as advisor, the RR should immediately consult his or her designated Principal before transacting any business that could subject the RR to registration or licensing requirements.
The FINRA has made it clear that member firms have supervisory responsibilities over the investment advisory activities of their Registered Representatives. In various NTM‘s the FINRA has clarified: where the Registered Representative in the
exercise of his or her advisory activities ― participates in the execution of a securities transaction‖ such that his or her actions
go beyond a mere recommendation, then the FINRA requires the Company to: (A) supervise the transactions involved
(whether or not they are accomplished at the Company) and (B) maintain records appropriate to demonstrate this supervisory activity. (Absent this ―participation,‖ the RR/RIA need only inform the Company of his or her intent to engage in this
business as required by Rule 3030 of the Conduct Rules. No further supervision or record keeping is formally required.)
ISL imposes the following basic supervisory requirements for RR/RIA‘s participating in their advisory customers‘
transactions. First, ISL must receive a prior written notice from each RR/RIA requesting approval to conduct an investment
advisory business for an asset-based or a performance-based fee. The notice must contain, at a minimum:
A declaration that the individual is involved in independent investment advisory activities;
Identification of each customer to which the notice would apply;
The types of securities activities that would be executed away from the Company;
A detailed description of the role of the RR/RIA in the independent investment advisory activities and services to be
conducted;
Information regarding any discretionary trading activity;
A description of compensation arrangements;
Identity of the broker-dealers through which trades away will be executed; and
Customer financial information (for suitability review purposes).
Only after receiving approval in writing from ISL may the RR/RIA engage in this business. An amendment to the written notice must be received and approved if there is any change thereto.
Second, the designated Principal must review and approve the RIA activity of the Representative where he or she ―participates in the execution‖ of securities transactions. NTM 96-33 specifically states, “IF THE RR/IA RECEIVES
TRANSACTION BASED COMPENSATION, THE MEMBER’S PRIOR APPROVAL OF EACH TRADE ISL
REQUIRED.” Thus, where a Registered Representative is also registered as an independent RIA and receives commissions, ALL his or her trades must be approved in advance by the designated Principal of the Company. Records of these approvals
must be maintained in accordance with the record keeping requirements described in these WSP.
In addition, Seminars, newsletters and other promotional material used by the RR/RIA in the conduct of business are subject to review by the designated Principal of the ISL under the ―advertising‖ rules. Performance reports and other information
provided to advisory clients, whether individualized or general, are subject to review. Individualized reports are treated as
―customer Correspondence‖ and must be reviewed and approved by the designated Principal. Generalized reports are treated as ―advertising‖ and are subject to pre-review by the designated Principal.
Finally, where ISL employs RR/RIA‘s, it must be sure to include a module in its continuing education program covering the
subject.
FINRA Rule 2330(f)(2), as amended, permits FINRA members and associated persons that act as investment advisors
(whether or not registered as such) to receive compensation based on a share in the customer account profits and gains, subject to the provisions of Rule 205-3 under the Investment Advisors Act of 1940. Any associated person of the Company
(Rev. 102007)
20
seeking such compensation, must request and obtain prior written authorization from his or her designated Principal. Both
ISL and any of its associated persons (if permitted), prior to sharing in customer account profits and gains, must obtain prior written authorization from the customer. The designated Principal must ensure that copies of all such authorizations are
received prior to profit sharing and are filed in the appropriate, respective customer files. Procedures relating to fee-based
accounts are described under Section 10.1, below.
4.3 Investment Advisor Representatives (IARs)
Persons who represent registered advisors in providing advisory services may in many cases be required to register as ―investment advisor representatives‖ (IAR‘s) in states where such activities occur. Where Registered Representatives wish to
provide ―third party manager wrap account‖ or similar services for their clients they are cautioned that providing such
services is considered ―selling away‖ subject to required prior approval by ISL. The FINRA expects that in the ordinary course of business the ―third party‖ provider of services will contract with the Company to provide the services through the
Representatives in question rather than contracting directly with the Registered Representative.
No Registered Representative will be allowed to provide such services unless the Representative is properly licensed as an IAR. If any doubt exists, Registered Representatives should consult their supervisors at ISL relative to IAR registration.
4.4 Branch Offices
See Sections 2.5 and 3.5, above, entitled, respectively, ―Home Office and Branch Office Supervision‖ and ―Supervision of
Branch, OSJ and Unregistered Office Personnel,‖ for detailed information on supervisory personnel and their responsibilities (if applicable).
A Branch Office shall be defined as any location identified by any means to the public or customers as a location at which
ISL conducts investment banking or securities business, with certain exceptions. Each Branch Office, if applicable, shall be inspected according to a cycle. All OSJ branches and branches that supervise one or more branches shall be reviewed at least
annually, while non-OSJ branches not supervising any other branch shall be reviewed at least every three years.
ISL shall designate one or more appropriately registered Principals in each OSJ, including the main office, and one or more
appropriately Registered Representatives or Principals in each non-OSJ Branch Office with authority to carry out the
supervisory responsibilities assigned to that office by ISL. The Company will ensure that the supervisor(s) assigned to a
branch office are appropriately qualified to supervise the activities conducted or supervised from that office.
As part of company policy, a copy of this Supervisory Procedures Manual shall be kept and maintained at every branch and
office (registered or unregistered) doing business under ISL.
4.5 Offices of Supervisory Jurisdiction
See Sections 2.5 and 3.5, above, entitled, respectively, ―Home Office and Branch Office Supervision‖ and ―Supervision of
Branch, OSJ and Unregistered Office Personnel,‖ for detailed information on supervisory personnel and their responsibilities
(if applicable).
Any Branch Office of ISL at which one or more of the following functions take place may be designated as an office of
supervisory jurisdiction (OSJ):
Order execution;
Final acceptance (approval) of new accounts on behalf of ISL;
Review and endorsement of customer orders, within certain restrictions;
Final approval of advertising or sales literature for use by persons associated with ISL, within certain restrictions; and
Responsibility for approving the activities associated with ISL at one or more other Branch Offices of ISL.
Once designated and registered as an OSJ, the branch will be assigned a Branch Office Supervisor who will perform required
supervisory and review functions for the branch, under the direction of the Compliance Officer. The Company will ensure
(Rev. 102007)
21
that the supervisor(s) assigned to an OSJ are appropriately qualified and licensed to supervise the activities conducted or
supervised from that OSJ.
4.6 Branch and OSJ Supervision
ISL shall assign each Registered Representative to a Branch Office Supervisor who shall be responsible for supervising that person‘s activities. Reasonable efforts will be used to ensure that all supervisory personnel are qualified by virtue of
experience or training to carry out their assigned responsibilities. Supervisory procedures are described under Section 3.5,
above, as well as throughout this Manual, where applicable.
4.7 Unregistered Offices
An ―Unregistered Office‖ is any office at which a Registered Representative conducts a securities business but which does
not fall within the definition of an Office of Supervisory Jurisdiction or a Branch Office. Unregistered offices may include
the residences of Registered Representatives. A variety of non-securities businesses may be conducted at these offices, some
of which operate as separate business entities under names different from the Company.
See Sections 2.5 and 3.5, above, entitled, respectively, ―Home Office and Branch Office Supervision‖ and ―Supervision of
Branch, OSJ and Unregistered Office Personnel,‖ for detailed information on supervisory personnel and their responsibilities (if applicable).
4.8 N/A
(Rev. 102007)
22
SECTION 5: SUPERVISORY PROCEDURES
5.1 Daily Review of Customer Transactions and Accounts
In compliance with Section 3010(d) of the Conduct Rules, the designated Principal shall promptly review each transaction. Evidence of such review, and approval if granted, shall be noted by initialing either the purchase or sales blotter or order
memorandum. The designated Principal shall review all order tickets to ascertain that the tickets are properly prepared
containing necessary time stamps and description. ―Promptly review‖ is defined as review of the transactions by the next business day, except in the case of transactions in discretionary accounts. Section 2510 of the Conduct Rules requires prompt
approval in writing of each discretionary account order, which shall be noted by initialing the order memorandum on or
before the close of business on the day when entered. Such daily reviews will include an assessment of the nature of the
trades, in an effort to confirm suitability. (See Section 10 for more information on reviewing Order Tickets.)
On a daily basis, the designated Principal shall review all documentation associated with opening new accounts, such as New
Account Forms, investor profiles, risk disclosure documentation and investor checks. See Section 9 for a detailed description of compliance requirements related to new accounts.
5.2 N/A
5.3 Periodic Customer Account Supervision
The Compliance Officer and/or designated OSJ Principal for each branch shall periodically monitor customer account statements and maintain records of such reviews. Reviews will be evidenced through the use of the Periodic Account Review
Form, which must be signed by the Compliance Officer and/or OSJ Principal, or by initializing the month-end statements.
Principals will review the designated month-end clearing firm statements for:
Churning
Free-riding by a Representative or associated person
Non-prompt payment
Reg-T violations; late payments
Unauthorized trades
Investment‘s compatibility with customer‘s stated objectives
Size and frequency of transactions
Commission activity
Inside information violations
Unusual transactions or trends
Restricted securities: restricted or ―legend‖ stock must be sold in conformity with SEC Rule 144
5.4 Annual Reviews
The Company conducts an annual review of its supervisory system to confirm adequate measures are being taken to ensure
full compliance with all applicable FINRA Rules. Changes will be made in writing via internal notices and updated manuals.
In addition, the Company reviews the businesses in which it engages, designed to assist in detecting and preventing violations of and achieving compliance with applicable securities laws and regulations, and with FINRA Rules. The Compliance
Officer will certify annually its review of the business and its supervisory system, regardless of whether changes were made
or not.
These reviews shall also include reviews of branch and non-branch offices/locations. Specifically, the designated Principal
and/or Compliance Officer will conduct an annual examination of: client files; branch office centralized files and logs; office sales and operational practices; anti-money laundering procedures; and specific regulations and important issues (such as
selling away, insider trading policies, outside business activities, branch personnel, registration and licensing concerns,
advisory registration status, etc.). All OSJ branches and branches that supervise one or more branches shall be reviewed at
least annually, while non-OSJ branches not supervising any other branch shall be reviewed at least every three years.
(Rev. 102007)
23
ISL and/or regional OSJ principals will monitor the following at branch locations to ensure that:
The SIPC decal is displayed in a prominent location;
The ISL name is displayed in a prominent location;
Forms are being promptly submitted through ISL‘s Licensing Department to register offices with the FINRA and
other regulatory agencies;
Proper sales practices are being followed; and
The necessary books and records are being retained.
Non-branch locations must maintain all necessary files/logs at their designated branch location. OSJ Principals are
responsible for reviewing all necessary files for non-branch locations assigned to them.
Records of each inspection will be maintained, including notation of deficiencies, examiner‘s name, and the branch‘s
response to those deficiencies, at the home office and branch/location inspected.
Per FINRA Rule 3010(c)(3), office inspections/reviews may not be conducted by the branch office manager or any person within that office who has supervisory responsibilities or by any individual who is supervised by such person(s). However, if
a member is so limited in size and resources that it cannot comply with this limitation, the member may have a principal who
has the requisite knowledge to conduct an office inspection perform the inspections. If ISL deems this necessary, it will document the criteria it has relied upon in using this ―limited in size and resources‖ exception.
In addition, FINRA Rule 3010 requires that all members ―have in place procedures that are reasonably designed to provide
heightened office inspections if the person conducting the inspection reports to the branch office manager‘s supervisor or works in an office supervised by the branch manager‘s supervisor and the branch office manager generates 20% or more of
the revenue of the business units supervised by the branch office manager‘s supervisor.‖ When calculating the 20%
threshold, all of the revenue generated by or credited to the branch office or branch office manager shall be attributed as revenue generated by the business units supervised by the branch office manager‘s supervisor irrespective of the Company‘s
internal allocation of such revenue. The Company must calculate the 20% threshold on a rolling, twelve-month basis.
By "heightened inspection", the FINRA refers to ―those inspection procedures that are designed to avoid conflicts of interest
that serve to undermine complete and effective inspection because of the economic, commercial, or financial interests that the
branch manager‘s supervisor holds in the associated persons and businesses being inspected.‖ Although ISL does not
anticipate needing heightened office inspections, the Company will ensure to fully comply with this Rule if such a situation arises. Should heightened supervision be necessary, procedures to comply with this rule may include, depending on the
situation:
Documented approval by the Compliance Officer for use of the exception. Documentation is to be kept on file at the
branch and Home Office.
The Compliance Officer may choose to outsource the review of the branch needing the use of the exception, to a
company/individual qualified to perform such reviews.
If not outsourced, the principal conducting the inspection and the branch supervisor will be required to give written
oaths ascertaining to the truthfulness of the report. The Principal will report his findings directly to the Compliance Officer first. Inspections will be conducted with minimal notice given to the branch supervisor. The Principal
conducting the inspection may not be terminated for any reasons related directly or indirectly to his findings during
the inspection, unless the Compliance Officer finds violations committed by him directly. The Principal will receive
separate compensation for conducting the review, unrelated to commissions generated by the branch.
5.5 Disciplinary Procedures
Where a violation of the company‘s compliance procedures has occurred, it is the responsibility of management to investigate
the matter and initiate disciplinary action against the appropriate individual(s) either in the form of, but not limited to, a
written warning, suspension, termination, non-payment of related commission, and/or fine(s). Where required by law or regulation or where otherwise deemed necessary, the proper regulatory authorities shall be notified. (FINRA By-Laws
Schedule C, Article IV) A record of any disciplinary actions will be maintained in the Representative‘s file.
(Rev. 102007)
24
It is the duty of every Representative to immediately notify the Compliance Officer in writing of any complaint, disciplinary
proceedings, legal proceedings, or other inquiry made as to such persona by any governmental or regulatory agency, a court, or a customer.
Each Representative is expected to fulfill the obligations contained in his/her written agreement with the company and to
abide by the compliance rules of the company and any other procedures/rules which may be issued from time to time.
Upon receipt of any information concerning any violation or alleged violation of any rule of the firm, or, upon the receipt of
information concerning any disciplinary or other regulatory body proceedings or upon the receipt of a complaint or other adverse allegation from any source, the OSJ Principal and Compliance Officer shall immediately initiate an investigation of
the matter.
Upon completion of the initial investigation, the Compliance Officer shall then be responsible for:
Reporting his/her findings and recommending a course of action to other members of management, if applicable.
Preparing a report on the final action taken as a result of any investigation and placing a copy in the Representative‘s file.
Implementing any disciplinary action decided upon.
Notifying regulatory authorities of the disciplinary action where required by the applicable law or regulations.
5.6 – 5.9 N/A
5.10 Review of Correspondence
The term "Correspondence" refers to any written letter or e-mail message distributed by the Company to one or more of its
existing retail customers and fewer than 25 prospective retail customers within any 30 calendar-day period (thus, both
individual and ―Group Correspondence,‖ consisting of form letters and group e-mail). Group Correspondence sent to more than 25 prospective retail customers within 30 days would be characterized as ―sales literature‖ and is subject to review and
pre-approval procedures described in Section 11, below. Correspondence does NOT include items prepared for distribution
to institutional clients, either existing or prospective.
In addition, SEC books and records rules require maintenance of inter-office memoranda and communications relating to the
Company‘s business. The requirements described below with regard to the record keeping of incoming, outgoing and e-mail
correspondence also apply to internal communications. Reviews of inter-office memoranda and communications will be conducted randomly by the designated Principal and will be evidenced by his or her initials and the date of review on copies
or by other, electronic notation, if applicable.
5.10.1 Incoming Correspondence
Home Office. ISL‘s Operations Department will open all incoming mail, facsimile and electronic mail immediately
upon receipt to assure that customer complaints or regulatory inquiries are promptly routed to the Compliance Department.
In that ISL operates under the K(2)(ii) exemptive provisions of SEC Rule 15c3-3, it is the firm‘s intent and method of conducting its business to neither solicit funds nor securities for payment or delivery to the firm. Customers will
always be directed to make their remittance payable to the respective wholesaler or the clearing firm. In NO instance
will a customer ever be directed to remit payment directly to ISL.
In the event that client funds and/or securities are ever received by the firm, the Operations Department, supervised
by a principal, will ensure that they have been logged in the appropriate journals and have been promptly (by the next
business day after receipt) forwarded to the product wholesaler or clearing firm in accordance with the provisions of SEC Rules 15c3-1(a)(2)(vi) and 15c3-3(k)(2)(ii).
If the firm ever receives a customer check made payable to the firm, the firm will either a.) endorse the check to the clearing firm, log it into the Cash Received and Disbursed blotter, transmit the check to the clearing firm by the next
(Rev. 102007)
25
business day after receipt, and advise the customer to make checks payable to the clearing firm, or b.) return the
check to the customer and ask him/her to send a new check made payable to the clearing firm.
The method of shipment for checks or securities will always be next day air, and the airbill will be kept on file in
order to facilitate tracking, should the need arise. In addition, the customer will then be notified in writing that funds
and/or securities will be returned if received by the firm again. This documentation will be signed by the Principal and kept on file.
Branch Offices. All branch mail will be opened by the branch manager/compliance representative, or his designee, who will follow the same procedures as the home office.
5.10.2 Outgoing Correspondence
All client correspondence, including but not limited to, relating to the solicitation or execution of a security
transaction shall be approved by the Home Office Compliance Department or the OSJ Principal PRIOR to mailing.
Examples of letters of a solicitory nature would include, but not be limited to, suggesting specific stocks, industries, or products, or those telling a potential customer of the services available through the Representative‘s relationship
with ISL. Principal approval will be evidenced by initialing the correspondence document. If an OSJ Principal
approves the document, he/she will forward a copy to the home office.
A centralized file will be maintained for all outgoing correspondence to customers pertaining to solicitation or
execution of a transaction. Copies of such letters will be kept in the home office and the branch office for a period of three years.
5.10.3 Electronic Mail
Representatives are strictly prohibited from using outside vendor electronic mail systems, i.e. Yahoo, AOL, for
business purposes. ISL encourages the use of hard copy correspondence whenever possible. Any representative
wishing to receive business related e-mails must use an ISL based mail system. Contact the Compliance Officer for further details. All incoming and outgoing electronic mail will be reviewed by the branch principal. A hard copy
should be maintained in the central correspondence file.
5.11 Annual Compliance Meeting
ISL shall provide for the participation of each Registered Representative, either individually or collectively, no less often
than annually, in an interview or meeting conducted by the designated Principal(s) and/or Compliance Officer at which continuing education is undertaken and compliance matters relevant to the activities of the Representative(s) are discussed.
Such interview or meeting can occur in conjunction with the discussion of other matters and may be conducted at a central or
regional location or at the Representative‘s place of business.
The Company may also from time to time conduct the annual meeting or portions thereof by electronic means. Compliance
conferences conducted other than in person with Representatives must ensure that the communication means used permit
interactive communication. The Representatives who attend such a compliance conference must be able to hear presenters live and, in an interactive environment, ask questions and engage in dialogue with the presenters. Presenters may use
supplemental learning and communications tools such as videotapes or computer programs that include informational or
instructional materials from persons who are not physically present.
As with all compliance conferences, supervisory personnel shall ensure that Representatives scheduled to appear at a
particular location in fact arrive at and stay for the entire conference and that a record of attendance is maintained and kept at.
5.12 Continuing Education
All ISL Representatives will be responsible for meeting the FINRA‘s requirements for Continuing Education as a condition
for ongoing registration with the firm. Continuing Education is handled by the firm‘s Compliance Officer, Jessica Gilday.
(Rev. 102007)
26
The Continuing Education has two separate elements: Regulatory and Firm (both supervised by Jessica Gilday). Failure to
comply with either element of Continuing Education may result in suspension or termination of ISL registration.
REGULATORY ELEMENT
The Regulatory Element focuses on compliance, regulatory, ethical and sales practice standards. The Regulatory Element is delivered through a computer-based training program which employs a series of realistic situations and interactive
instruction. The FINRA administrates the program at a Prometric Technology center. Every Representative, within 90 days
of his 2nd
anniversary and every 3 years thereafter of the initial registration with the FINRA, must complete this element. The Compliance Officer verifies with the FINRA, through Web CRD, when a Representative‘s anniversary is approaching and
notifies the Representative immediately in writing. The CRD check is conducted weekly, at a minimum, in order to avoid
compliance problems from arising. The Compliance Officer will check all associated persons, including persons who become subject to the Regulatory Element because they have been the subject of a significant disciplinary action. In addition
to CRD checks, the Compliance Officer will maintain a list of all Representatives and a date of their of their Regulatory
Element anniversary. By reviewing the CRD system and the list of anniversaries, the firm will be able to monitor any
inactive registrations, and inform the Representative if his/her registration becomes inactive. Once a Representative reaches his anniversary and written notice has been provided, the Compliance Officer will monitor his registration through CRD to
ensure classes have been completed.
Should a Representative fail to complete the Regulatory Element by his deadline, he/she will be prohibited from conducting
any activities requiring registration. The Compliance Officer will maintain a list of any Representatives that have become
inactive and inform the Representative, appropriate OSJ Supervisor and clearing firm, in writing, that the Representative may not conduct any business until further notice. Records will be kept at the home office.
FIRM ELEMENT
Every year, the Compliance Officer, Jessica Gilday, is required to conduct a needs analysis and provide a written training
plan based on the firm‘s conduct of business and needs.
The written training plan will always include:
1. The objective of the training program,
2. The knowledge/skills to be trained on, 3. Classifications of individuals to receive training (depending on licenses and areas of business for ISL at the given year ,
i.e. mutual funds, general securities),
4. Education in the Anti-Money Laundering Program, especially as it pertains to ISL, 5. Specific delivery resources needed to conduct the training (i.e. seminars, computer training, conference calls, etc.),
6. Specific time scheduled for delivery,
The firm will either sponsor or approve a continuing education training meeting for all to attend. All registered persons who
have direct contact with customers and their immediate supervisors must fulfill the Firm Element requirement.
Those required to complete the Firm Element will be advised of the details of the required training session(s). The Compliance Officer will maintain a list of everyone required to fulfill the firm element, and a list of those who actually
fulfilled the requirement, along with dates of completion and actual training conducted. In addition, attendees will be required
to provide program feedback.
All records relating to the Firm Element, including the needs analysis, training plan, attendee list, and program feedback will
be maintained at the home office.
5.13 Business Continuity
The Business Continuity Plan is required under Rule 3510 and must identify procedures relating to an emergency or significant business disruption, designed to enable the Company to meet its existing obligations to customers. The
procedures must address the Company 's existing relationships with other broker-dealers and counter-parties. The Company
(Rev. 102007)
27
must update its Business Continuity Plan upon any material change and, at a minimum, must conduct an annual review of its
Plan. The Company, per Rule 3520, must list two emergency contacts and must submit this information electronically to FINRA. The Executive Representative will ensure that original contact information has been provided to the FINRA, per
Rule 3520, and will review and update, if necessary, this contact information in the time constraint required by FINRA.
The Company‘s Business Continuity Plan is maintained under separate cover and has been approved by the Compliance Offier. The Compliance Officer is responsible to review, or appoint someone to review, the Plan at least annually in order to
assess its continued accuracy. If necessary, changes must be made to update the Plan. The Compliance Officer must review
proposed changes and the final, updated version of the Plan and will maintain a record of his or her approval.
5.14 Supervisory Control System: Rule 3012
Per FINRA Rule 3012, all members must establish a Supervisory Control System, in addition to the Written Supervisory
Procedures, designed to ensure that the member‘s procedures are accurate and effective while covering all areas of business
for the member. Inlet Securities‘ supervisory control system entails the following:
A. The principal responsible for establishing, maintaining, testing and enforcing the supervisory control policies and
procedures is the Compliance Officer, Jessica Gilday. The FINRA will be kept informed should this individual
change in the future.
B. Testing of the written supervisory procedures will be conducted at least annually, by the anniversary of the last test
date. Testing will include:
Compiling a list of all activities of ISL, registered representatives and associated persons.
Determining which FINRA Rules and laws and regulations apply to such activities.
Reviewing all FINRA updates via website, including Notice to Members.
Subscribing with a third party source which will also provide WSP updates twice a year.
Ensure that there is a supervisory procedure for all applicable activities, including but not limited to: steps for
review, person responsible, timeframe of review and how documented.
Compare the current WSP with the applicable FINRA Rules and laws and regulations, FINRA updates and
Notice to Members, and purchased bi-annual WSP updates to ensure all rules have been addressed.
Determining if changes to the current WSP must be made.
If changes are to be made, design the necessary procedures. If not, indicate so and update the date of the
WSP to reflect its test date.
Determining and noting which rules/laws/regulations the firm is excluded from.
Compiling a written report indicating the firm‘s supervisory controls, date of the test, results of the test
(whether or not the WSP was up to date, and if not, what changes were made), and any identified exceptions. If changes are made, the report will be specific as to what the changes are. The report will be signed by the
Compliance Officer to show evidence of the WSP test. The Compliance Officer will submit and review the
report with Frank Gilday, Managing Member and/or other members of senior management (if applicable).
The new WSP will be distributed to all representatives and principals, and a written acknowledgement of
such receipt will be kept on file.
C. FINRA Rule 3012 requires the establishment of supervisory procedures designed to review and supervise the customer account activity conducted by the member‘s branch office managers, sales managers, regional or district
sales managers, or any person performing a similar supervisory function. Every producing manager must be
supervised by a person who is either senior to, or otherwise independent of, the producing manager. For purposes of
this Rule, an "otherwise independent" person: may not report either directly or indirectly to the producing manager under review; must be situated in an office other than the office of the producing manager; must not otherwise have
supervisory responsibility over the activity being reviewed (including not being directly compensated based in whole
or in part on the revenues accruing for those activities); and must alternate such review responsibility with another qualified person every two years or less. However, if a member is so limited in size and resources that there is no
qualified person senior to, or otherwise independent of, the producing manager to conduct the reviews (e.g., a
member has only one office or an insufficient number of qualified personnel who can conduct reviews on a two-year rotation), the reviews may be conducted by a principal who is sufficiently knowledgeable of the member's
supervisory control procedures by taking the ―Limited Size and Resources‖ exception.
(Rev. 102007)
28
At this time, ISL must make use of this exception for one of its producing managers. Factors used to determine use of the exception include:
The person conducting the reviews for one of the producing managers is situated in the same office as one
the producing manager. The Compliance Officer, Jessica Gilday, will be conducting the reviews for Frank
Gilday, producing manager at the home office.
With only 3 representatives and 2 managing principals, there is currently an insufficient number of qualified
personnel who can conduct reviews on a two-year rotation.
Per FINRA rule, ISL must notify FINRA through an electronic process (or any other process prescribed by FINRA)
within 30 days of the date on which the member first relies on the exception, and annually thereafter. If ISL
subsequently determines that it no longer needs to rely on the exception to conduct any of its producing managers‘
supervisory reviews, it will, within 30 days of ceasing to rely on the exception, notify FINRA by using the electronic
process or any other process prescribed by FINRA. The factors used to determine use of the exception must be documented annually and kept current in the Supervisory Control System.
Procedures for supervising producing managers will include:
Producing managers will be identified and compiled on a list. Each will be assigned a qualified supervisor in
charge of monitoring the manager‘s activities.
Customer account activity will be reviewed on an on-going basis by the Compliance Officer, Jessica Gilday.
Specifically, steps taken for review will include: review of purchase and sales blotters (checking for unusual
or high trading activity, unauthorized trading, commission activity); review of customer statements; review
of new account forms and required client paperwork.
Such reviews will be conducted at every account opening, and at a minimum, quarterly.
Reviews will be evidenced by Ms. Gilday‘s signature and/or initials on the reports reviewed, or on the
periodic audit form, which will list reports reviewed and all findings.
In addition to the above, ISL has designed additional procedures to provide heightened supervision over the activities
of each producing manager who generates 20% or more of the revenue of the business units supervised by the producing manager‘s supervisor. Such procedures include the following, in addition to the above:
A list of producing managers requiring heightened supervision will be compiled.
Reviews of customer statements and transaction blotters (for the branch in whole) will be conducted on a
more frequent basis, monthly at a minimum.
Reviews will be evidenced by Ms. Gilday‘s signature and/or initials on the reports reviewed, or on the
periodic audit form, which will list reports reviewed and all findings.
Any negative findings will require a written notice to the Principal, with the Principal providing a written
response.
Any continuous pattern of negative findings (with the monthly reviews and annual reviews) will require the
Compliance Officer to re-evaluate the Principal‘s position and determine a course of action, including but not
limited to, additional training or education, and/or removal from the Principal position.
All documentation for reviews, findings, responses and courses of action, if applicable, will be kept on file at
the branch and home office.
D. Inlet Securities will not be holding customer funds and securities. The clearing firm will enforce all rules and
regulations when disbursing funds and securities.
Customers will always be directed to make their remittance payable to the respective wholesaler or the clearing firm.
In NO instance will a customer ever be directed to remit payment directly to ISL.
In the event that client funds and/or securities are ever received by a representative or the firm, the designated OSJ
principal will ensure that they have been logged in the appropriate journals and have been promptly (by the next
business day after receipt) forwarded to the product wholesaler or clearing firm in accordance with the provisions of SEC Rules 15c3-1(a)(2)(vi) and 15c3-3(k)(2)(ii).
(Rev. 102007)
29
If the firm ever receives a customer check made payable to the firm, the firm will either a.) endorse the check to the
clearing firm, log it into the Cash Received and Disbursed blotter, transmit the check to the clearing firm by the next business day after receipt, and advise the customer to make checks payable to the clearing firm, or b.) return the
check to the customer and ask him/her to send a new check made payable to the clearing firm.
The method of shipment for checks or securities will always be next day air, and the airbill will be kept on file in order to facilitate tracking, should the need arise. In addition, the customer will then be notified in writing that funds
and/or securities will be returned if received by the firm again. This documentation will be signed by the Principal
and kept on file.
E. Any client wishing to conduct an address change must follow one of two methods:
Provide a signed, written notice and/or
Provide a New Account Update Form, which must be signed by the client, Registered Representative and
designated principal.
Address changes may only be made by the OSJ Principal, who in turn must go through the clearing firm. ISL does
not have the capability of changing a customer‘s address. By submitting a change of address request to the clearing
firm, the OSJ Principal certifies that written notification has been provided by the client. Documentation reflecting address changes must be kept on the client‘s file.
F. All Registered Representatives will continually determine each client‘s investment objectives and desires. These will be evaluated with respect to each client‘s circumstances and financial condition. Investments will neither be allowed
nor recommended which are not compatible with the objectives, desires and conditions of the respective client. (See
Section 7.2) Clients may provide written notice to change their investment objectives; however, changes that deal specifically with investment objectives can only be effected through the use of a New Account Update Form, which
must be signed by the client, Registered Representative and designated Principal. Any written notices by the client
as well as the New Account Update Form must be kept on file.
5.15 Annual Certification of Compliance & Supervisory Processes: Rule 3013
In order to ensure full compliance with Rule 3012, FINRA has created additional provisions to assist members. FINRA Rule 3013 addresses further steps to take so that members can verify the effectiveness of their Supervisory Control System. Rule
3013 requires each member to:
1. Designate one, or multiple, chief compliance officer(s) to discharge the requirements of Rule 3013. Such CCO(s) must be identified on Schedule A of Form BD.
2. Require the chief executive officer (CEO), or equivalent officer, to execute an annual certification that the member
has in place processes to establish, maintain, review, test, and modify written compliance policies and written supervisory procedures and that the CEO has conducted one or more meetings with the CCO in the preceding 12
months to discuss such processes, the member‘s compliance efforts to date and significant compliance problems and
plans for emerging business areas. 3. Prepare a report, PRIOR to certification, evidencing the member‘s processes and have it reviewed by the CEO, CCO
and any other applicable officers.
4. Provide the report in final form to the board of directors and audit committee, or equivalent bodies, either prior to
execution of the certification or at the earlier of their next scheduled meetings or within 45 days of execution of the certification.
Further information can be found in IM-3013.
(Rev. 102007)
30
SECTION 6: REGISTERED REPRESENTATIVE CONDUCT
6.1 Outside Business Activities And Private Securities Transactions (“Selling Away”)
Outside Business Activities. All Representatives are required to notify the Compliance Officer in writing of all outside compensation derived from business activities that are not under ISL‘s supervision. These activities neither involve
securities, nor are placed through or supervised by ISL, and therefore require only written notification. In addition, all
Representatives will provide ISL with an annual written notice regarding any outside business activities, or lack thereof.
In addition, the following policies must be adhered to:
No Registered Representative may accept any employment or render any investment advisory service for a fee without
prior discussion with ISL‘s Compliance Department. The consent of regulatory authorities may also be required.
All relationships for which a Representative is remunerated shall be disclosed to ISL prior to entering into such
relationship.
Directorship on any other corporation, whether publicly or privately held, must be reported to ISL‘s Compliance
Officer.
No Representative may share office space with Representatives who are registered with other broker/dealers except as
approved in writing by ISL‘s Compliance Department.
No Representative may use knowledge or expertise gained in the course of his relationship with ISL for private benefit
(other than for personal securities investments). Neither shall any Representative use such knowledge or expertise for
the benefit of any enterprise which is, or could be in direct or indirect competition with ISL, regardless of whether the
Representative is connected, directly or indirectly, with such enterprise.
Private Securities Transactions. Any Representative who participates in a private securities transaction, except mutual
funds or variable annuity contracts where such transaction occurs neither at this firm nor at any other member firm, must,
prior to such participation, provide written notice to ISL, describing the proposed activity and stating whether a selling compensation will be received. ISL must then respond in writing whether it approves or disapproves of the activity. If
approval is not given, the Representative will NOT participate in the transaction in any manner, directly or indirectly. In
addition, all Representatives will provide ISL with an annual written notice regarding any private securities transactions, or lack thereof.
* Note that a mere disclosure of such activities (i.e., reporting on ISL‘s Outside Business Activities Questionnaire) is not sufficient.
ISL is required to record and supervise private securities transactions, so compensation may be subject to standard ISL
payout sharing agreements.
6.2 Personal Accounts and Trading
Any associated person of this firm who opens an account or places an order for the purchase or sale of securities with another
member firm, shall notify that firm of his or her association with this firm and shall supply written notice to the Compliance
Officer. ISL requires the executing firm to supply duplicate copies of confirmations, statements or other information with
respect to such account(s). All Representatives will provide ISL with an annual written notice regarding any outside personal accounts, or lack thereof.
All personal and family-related accounts maintained with ISL will require supervision by the assigned OSJ Principal. All transactions must be approved through the use of the order ticket. In addition, the Principal will periodically (monthly at a
minimum) review the accounts for evidence of:
Trading in IPO‘s;
Trading ahead of customers;
Illegal participation in trading profits;
Manipulative trading activity; or
Trading on Inside Information.
(Rev. 102007)
31
Evidence of reviews will be indicated by the Principal‘s initials/signature on the order tickets and monthly statements.
6.3 Insider Trading
Each Representative is responsible for taking whatever steps necessary to be reasonably certain neither a Representative nor a
customer is using material, non-public information to effect, or influence, purchases or sales of any security. Information is
―material‖ if an investor would consider it important in making an investment decision; or, it would substantially affect the market price if generally disclosed, such as:
Mergers, acquisitions, tender offers or restructuring; Securities offerings or share purchases;
The appointment of an investment banker or signing a letter of intent with an underwriter;
Possible proxy fights; Asset valuations;
Dividends or earnings changes (or changes in estimates);
Significant shifts in operating or financial circumstances such as write-offs, cash flow reductions, changes in accounting
methods and the like; Imminent change in credit rating by agency;
Voluntary calls of debt or preferred stock issues;
Major new products, discoveries or services or loss of any of these; Significant new contracts or loss of business;
Regulatory developments (such as FDA approvals);
Significant litigation or litigation developments; Extraordinary management developments; and
Forthcoming publications or articles that may affect market prices.
Extreme caution must be exercised when the customer is known to be an officer, a holder of restricted stock, associated through corporate or business affiliations, etc., with a company in which a transaction is being contemplated.
In the case of investment clubs, partnerships, etc. the Representative should know the employment and business connection of each member of the club to insure against inadvertently executing a transaction violating the prohibition on trading on
―inside information‖.
In an effort to prevent insider trading, the following provisions will apply:
As discussed in Sections 6.1 and 6.2, Personal/Private Securities Transactions and Outside Business Activities, any
Representative employed by, or receiving compensation from, any individual or entity as a result of any business activity
outside the scope of his/her relationship with this firm must provide prompt written notice to the Compliance Officer describing such affiliation.
All Representatives must provide ISL with duplicate statements of accounts held at another firm. These statements will
show all transactions which will aid in detecting any insider trading activity.
If a client is an officer/director, policy-making executive, or 10% shareholder of a public company, or if he is affiliated
with or employed by a securities firm, bank, trust or insurance company, this information must be disclosed on the New Account Form.
Information received by the Representative which is represented, or can be construed, as ―inside‖, ―to date undisclosed‖,
―not yet public‖, etc. is to be immediately communicated to the Compliance Officer ONLY. The Representative will be
permitted to effect a transaction based on such represented or construed information only upon the written approval of the
Compliance Officer.
If the Compliance Officer determines the information is, or could reasonably be construed as, ―inside‖ or ―material and
non-public‖ he will notify the Representative of such determination and remind the Representative of the prohibition
against using such information as the impetus for any transaction.
Information deemed to be ―inside‖ in nature will disseminated only to those individuals who ―need to know‖ as
determined by the Compliance Officer and will be informed that the information is considered ―inside‖ and, thus, must not be given to any other individual without prior approval by the Compliance Officer.
All trades are reviewed before they are executed. In addition, periodic reviews of customer and associated person‘s
account statements are conducted.
(Rev. 102007)
32
During the annual audit, transactions of any client who is an officer/director, policy-making executive, or 10%
shareholder of a public company, or if he is affiliated with or employed by a securities firm, bank, trust or insurance
company will be reviewed for any indications of insider trading.
An annual written attestation regarding insider trading is required.
The Compliance Officer will be responsible for training and informing all Representatives and associated persons about
any new regulations concerning insider trading.
If any transaction(s) seem suspicious, the Compliance Officer, with the help of the OSJ Principal, will research the
transaction(s) by reviewing the Representative‘s client book, which details conversations with the client, and all past trades of the suspected person(s) involved. The Compliance Officer will make a determination as to whether he believes any material,
non-public information was used in the decision to process the transaction(s). Any Representative believed to be involved in
such activity is subject to termination.
6.3.1 – 6.3.4 N/A
6.4 N/A
6.5 Commission/Fee Splitting
FINRA regulations absolutely prohibit any Registered Representative from sharing fees or commissions with a non-
registered person, including clients, persons who refer business, accountants, attorneys, family members, etc. Any Registered
Representative engaging in these activities is subject to severe disciplinary action by ISL as well as fines and penalties imposed by regulatory authorities.
Fees and commissions can of course be shared with other Registered Representatives of ISL, provided the arrangement is pre-approved by the designated Principal.
Registered Representatives may not forward or share securities commissions with any individual who is not appropriately
registered and licensed with the member firm that effected the securities purchase. In the case of a variable life insurance policy or variable annuity contract, the commissions earned can only be shared with those who are also licensed by the
issuing insurance Company in the appropriate state.
It is not sufficient that an individual merely have a securities license and an insurance license. In order to share in the
commissions earned through a particular securities transaction, the Registered Representative must also be appointed an
agent of the appropriate insurance Company in the state where the application was taken. In some states, the unauthorized
sharing of insurance commissions by customers can be considered rebating, which is generally not permitted under insurance regulation. The proper FINRA license or insurance product license is also required. For example, a Series 7 Representative
(General Securities Representative) cannot share general securities commissions with a Series 6 Representative.
Similarly, only those qualified to receive compensation for the sale of a direct participation program (limited partnership -
Series 22) can receive those commissions. Further, managerial overrides can only be paid to individuals who hold the
appropriate license and registration that would be necessary to sell the product individually. In accordance with Section 1031 of the FINRA Membership and Registration Rules, persons associated with a member, including officers other than
Principals, who are engaged in the investment banking or securities business for the member firm, including those who
perform the functions of supervisor or trainer, are designated as Representatives.
6.6 Sharing Profits and Losses
Neither ISL nor any associated person shall make improper use of a customer‘s securities or funds nor shall guarantee a customer against loss in connection with any securities transaction or in any securities account of such customer.
ISL prohibits a Registered Representative from: maintaining a joint account with a customer (other than a family member); agreeing to repurchase a security to guarantee any account or against any loss; borrowing securities from customers; or acting
as personal custodian of securities, stock powers or money. The OSJ Principal assigned to the Representative will conduct
on-going reviews to ensure full compliance. Such reviews will be in written format and kept on file.
(Rev. 102007)
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Under certain controlled circumstances, the Company or any of its associated persons may enter into an arrangement whereby s/he shares in the profits and losses of a customer account (carried by the Company or another broker-dealer). Prior
to entering any such arrangement, the Company or associated person must receive prior written authorization from the
customer. In addition, any associated person must request and obtain prior written authorization of such arrangements from
his or her designated Principal and/or the Compliance Officer. The Company or associated person sharing in the profits or losses in any customer account must do so only in direct proportion to the financial contributions made to such account by
either the member or associated person (except in the case of accounts of immediate family members). All written
authorizations will be maintained in the respective customer files and in the respective Representative files, where applicable. Please see Sections 4.2 and 18.11 for requirements related to performance-based fees received by investment advisors.
The Compliance Officer, Jessica Gilday, will review Representatives annually to ensure Representatives are not sharing in
customer accounts (unless the proper paperwork is on file). All Representative/accounts will be reviewed for such activities. Reviews will be evidenced through the use of the Annual Audit Form and will be initialed/signed by the Compliance Officer.
6.7 Receipt of Non-Cash Compensation, Sales Incentives, Gifts and Gratuities
Non-cash compensation, sales incentives, gifts and gratuity items (including travel bonuses, prizes, and awards offered by
any sponsor or program) CANNOT BE PAID DIRECTLY OR INDIRECTLY to ISL or to any associated person, in excess
of one hundred dollars ($100) per person, per issuer annually. The Company, itself, however, is permitted to provide non-cash compensation to its Representatives provided no sponsor, affiliate of a sponsor, or program, including an affiliate,
directly or indirectly participates or contributes to providing such non-cash compensation. Cash compensation must be paid
directly to ISL with distribution to Representatives controlled by the Company, disclosed in the prospectus, and reflected on the Company‘s books and records, in accordance with NTM 88-88. These rules apply to officers and directors and principals
of ISL as well as Registered Representatives. The Compliance Officer, Jessica Gilday, will review all prospectuses for
proper disclosure and will monitor all compensation arrangements in order to assure compliance with the rules described
herein. Prospectuses will be reviewed on an on-going basis, as new ones are used; approved prospectuses will be initialed to evidence approval and kept on file.
Rule 3060 prohibits any member or person associated with a member from giving, or permitting to be given, anything of value in excess of $100 per individual per year where such payment is in relation to the business of the recipient‘s employer.
The Rule does not apply to a). personal gifts, provided that they are not ―in relation to the business of the employer of the
recipient.‖, b). gifts of de minimis value (i.e. pens, notepads) or promotional items with logos, below the $100 limit, c).
customary Lucite tombstones, plaques, or other solely decorative item commemorating a business transaction, even if the cost is more than $100. Representatives are prohibited from giving ANY gifts or gratuities without written permission from
their assigned OSJ Supervisor. OSJ approval will indicate compliance with Rule 3060. The OSJ Supervisor must file such
approvals and report them to the Compliance Officer. In turn, the Compliance Officer, Jessica Gilday, will be responsible for keeping a record of all gifts and gratuities in relation to the business of the employer of the recipient given by the firm and
associated persons. Records will include item given, value or cost, individual given to, and company name. In order to
achieve compliance with Rule 3060, ISL will aggregate all gifts given by the firm and associated persons on fiscal year basis. Annual branch audits will include a specific question on the gift approval file, and will be signed by the Compliance Officer
to evidence review. In addition, annual internal reviews on the company‘s financials/registers will be conducted at least
annually to check for any gifts and gratuities paid out. These reviews will be evidenced by Ms. Gilday‘s initials/signature on
the annual internal audit form, which will include specific questions on this subject.
6.7.1 – 6.7.5 N/A
6.8 Improper Conduct
Consistent with the FINRA, and certain federal and state securities laws, ALL registered persons and/or representatives are prohibited from engaging in the following:
1. Acceptance of cash or negotiable investments. Registered persons and/or Representatives are prohibited from
accepting cash or accepting a negotiable instrument or security from a client made payable to the Representative or
an entity in which the Representative has any interest or control.
(Rev. 102007)
34
2. Agent or purchaser representative. Registered persons and/or Representatives are prohibited from acting as an agent
or purchaser representative on behalf of a client.
3. Avoidance of customer losses. Registered persons and/or Representatives are prohibited from agreeing to
repurchase, presently or at some future time, a security from a client or to guarantee or in any way represent that he
or ISL will protect any customer against loss in any account or on any transaction. ISL may repurchase a customer‘s securities to correct an error or settle a complaint, but an individual representative may not do so. Registered persons
and/or Representatives are prohibited from settling errors or disputes directly with a client without the express
written approval of the Compliance Department.
4. Registered persons and/or Representatives are prohibited form soliciting or selling of any security in a state for which
the Representative is not properly licensed or soliciting or selling any security type for which the Representative is not properly licensed.
5. Business transactions with clients. Registered persons and/or Representatives are prohibited from entering into ANY
business transaction involving any investment, directly or indirectly, with a client without the specific written approval of the Compliance Department. This transaction applies to all transactions and relationships and is not
limited to securities transactions.
6. Client loans. Registered persons and/or Representatives are prohibited form borrowing or lending money or
securities from or to a client.
7. Commingling. Registered persons and/or Representatives are prohibited from commingling of funds or securities
with customers.
8. Confirmations. Registered persons and/or Representatives are prohibited from forwarding confirmations or statements of accounts to any other person, entity or official post office address of a client, unless an authorization
signed by the customer is on file in the customer record retention area.
9. Credit. Registered persons and/or Representatives are prohibited from arranging for the extension or maintenance of
credit for any customers.
10. Custodian. Registered persons and/or Representatives are prohibited form acting as a personal custodian of a security, stock power, money, or other property belonging to a client.
11. Directorship. Registered persons and/or Representatives are prohibited from accepting a membership on a board of directors or associating himself officially or unofficially with any other business without ISL‘s prior approval.
12. Discretionary authority. Registered persons and/or Representatives are prohibited from holding discretionary authority, power of attorney, or acting as a trustee, personal representative, executor custodian, guardian, or
otherwise possessing the power to direct trades or exercise control over assets in a client account, unless approved in
writing by the Compliance Department.
13. Distribution of internal materials. Registered persons and/or Representatives are prohibited from distributing to
clients internal material, including material marked ―for internal use only,‖ ―for broker/dealer use only,‖ ―for
representative use only,‖ or similar terms.
14. Client correspondence. Registered persons and/or Representatives are prohibited from distributing any
correspondence to clients without the written approval of the Compliance Department.
15. Advertisement and Sales Literature. Registered persons and/or Representatives are prohibited from using any
advertisement or sales literature unless it has been approved in writing by the Compliance Department.
16. Exaggerated or untrue statements. Registered persons and/or Representatives are prohibited form making any
statement or representation that is untrue or that exaggerates the advantages of any security.
(Rev. 102007)
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17. Failure to comply with suitability standards. Registered persons and/or Representatives are prohibited from recommending to a client the purchase, sale or exchange of any security without a reasonable basis to believe that the
recommendation is suitable or consistent with the customer‘s investment objective.
18. Registered persons and/or Representatives are prohibited from accepting directly or indirectly, from any person, or entity other than ISL, compensation of any nature as a bonus, commission, fee, gratuity, or other consideration, in
connection with any securities transaction, except with the prior express written authorization of the Compliance
Department. Because many investment vehicles may under some circumstances be classified as securities, Registered persons and/or Representatives are required to obtain the express written consent of the Compliance
Department prior to receiving the aforementioned compensation and prior to engaging in any in any outside activity.
19. Guarantee of future performance. Registered persons and/or Representatives are prohibited from warranting or
guaranteeing the future value or price of any security, or indicating that any company, sponsor, or issuer will meet its
promises, predictions, projections, forecasts, or obligations.
20. Holding funds/securities. Registered persons and/or Representatives are prohibited from personally holding a
customer‘s funds or securities.
21. Inconsistencies with offering document. Registered persons and/or Representatives are prohibited from making any
statement which is in addition to or inconsistent with any current memorandum or current prospectus.
22. Insider trading. Registered persons and/or Representatives are prohibited from effecting transactions influenced by,
or based on, any material, non-public information.
23. Inducement. Registered persons and/or Representatives are prohibited from giving any item that could be considered as an inducement for the sale of securities.
24. Orders. Registered persons and/or Representatives are prohibited from entering orders for a customer without the customer‘s prior approval.
25. Private information. Registered persons and/or Representatives are prohibited from revealing to any outsider private
information relating to the financial affairs of any clients without their written approval.
26. Private securities transactions. Registered persons and/or Representatives are prohibited from processing securities
transactions through other than the books and records of ISL.
27. Personal transactions. Under no circumstance may a Representative receive a better execution price than the client
on similar trades placed on the same day. Representatives should not trade to the contrary of any advice he is offering to his clients.
28. Hot issues. Registered persons and/or Representative‘s personal purchase of ―hot issues‖ is prohibited, and no
Representative may purchase a stock on an offering until all public customers have been satisfied. Hot issues are defined as securities of a public offering that trade at a premium in the secondary market whenever such trading
commences. This prohibition extends to all Registered Representatives‘ personal brokerage accounts, whether held
at ISL or any other broker/dealer.
Note: The ―free-riding and withholding‖ regulations restrict the involvement of Representatives, members of their
families, and FINRA member firms from participating in the ―hot issue‖ market. The regulation is based upon the premise that the broker/dealer firms have an obligation to make a bona fide public distribution at the public offering
price of securities which trade at a premium in the secondary market. The failure to distribute ―hot issues‖ to the
public when there is a demand for such issues can be a factor to artificially raise the price. Thus, failure to distribute
such securities publicly, especially when the brokerage firm may have information relating to the demand for the securities which is not generally known to the public, is inconsistent with high standards of commercial honor and
(Rev. 102007)
36
just and equitable principles of trade. Also, such trade practices lead to an impairment of public confidence in the
fairness of the securities business.
29. Registered persons and/or Representatives are prohibited from raising money, or participating in the raising of money
for any company, individual or venture other than as approved by ISL.
30. Profits interest. Registered persons and/or Representatives are prohibited from receiving, directly or indirectly, a
share in the profits or losses of any customer account.
31. Rebating commissions. Registered persons and/or Representatives are prohibited from rebating any commissions to
a customer.
32. Private settlements. Registered persons and/or Representatives are prohibited from resolving any claims with a
client. The Compliance Department must be informed of any complaint or claim from a client, and must review and
approve the resolution.
33. Written recommendations. Unless written authorization is provided by the Compliance Department, Representatives
are prohibited from providing written securities recommendations or research reports.
34. Registered persons and/or Representatives are prohibited from conducting transactions in futures, commodities, and
options.
35. Registered persons and/or Representatives are prohibited from ―parking‖ inactive licenses.
36. Registered persons and/or Representatives are prohibited from receiving or giving items of value in excess of
$100.00 to or from anyone where such gift is in relation to the business of this firm or the employer of the recipient.
37. Registered persons and/or Representatives are prohibited from opening any ―correspondent accounts‖ for, or on
behalf of, a foreign shell bank (a bank with not physical presence in any country).
(Rev. 102007)
37
SECTION 7: CUSTOMER RELATIONS
7.1 “Know Your Customer”
The Company intends to comply with all applicable requirements under Rule 2110 of the FINRA Conduct Rules, and in doing so, shall observe high standards of commercial honor and just and equitable principles of trade.
The basic rule of broker-customer relationships is ―know your customer.‖ A detailed knowledge of the customer‘s assets, income, investment objectives and risk tolerance is not only in compliance with FINRA and other regulations but is good
business as it leads to confidence in serving the customer‘s needs.
The surest indication of failure to follow the rules in customer relationships is a pattern of sales or other transactions obviously designed to reward the Registered Representative rather than meet the customer‘s needs.
While such conduct may not immediately result in an overt violation of FINRA or other rules, its presence will prompt ISL to seriously question the Representative‘s capability to function in a responsible manner; continuing patterns of self-benefiting
activity will be grounds for a request to leave.
7.2 Suitability in General
Pursuant to Section 2310 of the FINRA Conduct Rules, in recommending to a customer the purchase, sale or exchange of any
security, the Company and each Registered Representative involved shall have reasonable grounds for believing that the recommendation is suitable for such customer on the basis of the facts, if any, disclosed by such customer as to his other
security holdings and as to his financial situation and needs. Prior to the execution of any transaction the Company and
Registered Representative(s) involved shall make reasonable efforts to obtain information concerning (a) the customer‘s financial status, (b) the customer‘s tax status, (c) investment objectives and (d) such other information used or considered to
be reasonable in making recommendations to the customer.
Another set of ―suitability‖ guidelines applies to ―Institutional Customers‖ defined in IM 2310-3 as ―any entity other than a
natural person‖. Where a recommendation to an Institutional Customer is involved a Principal of the Company and the
Registered Representative(s) making the recommendation must make a determination in advance of the recommendation,
based on the information reasonably available to them, (a) that the customer has the capability to evaluate investment risk independently and (b) that the customer (or an agent to which the decision making has been delegated) is actually exercising
independent judgment in evaluating the recommendation. These determinations are to be made under the guidelines on a
―case by case‖ basis by the designated Principal immediately supervising the Registered Representative. The Principal‘s pre-approval under the IM 2310 guidelines must be noted on the order ticket.
7.3 N/A
7.4 Fiduciary Duty
Under some circumstances a Registered Representative is held to have a ―fiduciary duty‖ to the client. This is a higher than normal standard of conduct which says that the Representative is responsible for watching over his or her client‘s account in
much the same way as he or she would watch over his or her own investments. A Representative with a ―fiduciary duty‖ for
example, could be held liable for not causing the client to sell out of an investment that was rapidly declining in value, even though he or she had no formal advisory or management contract with the client.
The concept of broker ―fiduciary duty‖ stems from the so-called ―shingle theory‖ under which a Registered Representative
can acquire additional responsibility/liability as a result of his or her conduct toward the client. In particular, fiduciary liability arises from a course of dealing in which the Representative ―hangs out a shingle‖ as a financial advisor or counselor
and purports to provide management or planning or other services to the client that go beyond the normal services of a
Registered Representative in recommending, buying and selling securities. Under these circumstances, courts and arbitrators have held that clients are entitled to rely on the Representative to oversee their accounts for them and to be responsible for
losses due to negligent failure to act.
(Rev. 102007)
38
It is for these reasons that Registered Representatives of ISL must be particularly careful with clients who become dependent
on them for financial advice, trading recommendations and the like. Under these circumstances the duties of the Representative go well beyond mere ―suitability‖ determinations and extend to overseeing the health and well being of the
client‘s account.
ISL procedures cannot identify each and every one of these ―fiduciary‖ relationships and it is up to the Representative to conduct himself or herself in a manner appropriate to the client‘s needs. If in any doubt, Registered Representatives should
consult their designated Principals as to how to act. In some cases it may be desirable to correspond with the client clarifying
the obligations of the Representative.
7.5 Documentation and Follow-Up
The foregoing discussions should make it clear that it is important in most cases to document to the client and the file the
recommendations made by the Representative. Documentation can take the form of hard copy of actions, notes or other
communications in the customer or Representative files or it can be electronic in a form which is backed up and readily
accessible. At a minimum some electronic or other file notation of the conversation with the client, the research done, the recommendation, etc. is in order.
The designated Principal as part of his or her regular review of the Representative‘s activities will examine the extent to which the Representative is diligent in documenting recommendations made to clients. Additional supervisory review
procedures include tests of Representative-client interaction to determine that the Representative has followed up on client
requests, recommendations, etc.
7.6 N/A
7.7 Death
Death of a customer automatically freezes all activity in the customer‘s individual accounts and joint accounts without rights
of survivorship until such time as letters testamentary or other evidence of authorization by an executor are presented. Death of a customer should be immediately brought to the attention of the designated Principal and the Trade Desk.
7.8 Firm Policy on “Cold Calling”
The Company requires its registered personnel to adhere to the following guidelines if and when conducting cold calling:
When conducting telemarketing, associated persons must abide by FINRA Rule 2212, FCC telemarketing rules, and Rule 2010, which establishes that it is contrary to high standards of commercial honor and just and equitable principles of trade for
members and their associated persons to engage in communications with customers that constitute threats, intimidation, the
use of profane or obscene language or calling the person repeatedly on the telephone to annoy, abuse or harass the called party.
Neither the Company nor any person associated with it shall initiate any telephone solicitation to:
Any residence of a person before the hour of 8 a.m. or after 9 p.m. (local time at the called party's location), unless
the Company has an established business relationship with the person, as defined below,
the Company has received that person's prior express invitation or permission, or
the person called is a broker or dealer;
Any person on the Company‘s ―Do Not Call‖ List, as described below (including those who have an existing business
relationship with the Company); or
Any person who has registered his or her telephone number on the FTC‘s national do-not-call registry, unless:
The Company has an established business relationship with the recipient of the call.
The Company has obtained the person's prior express invitation or permission. Such permission must be
evidenced by a signed, written agreement between the person and Company which states that the person
agrees to be contacted by the Company and includes the telephone number to which the calls may be placed; or
(Rev. 102007)
39
The associated person making the call has a personal relationship with the recipient of the call.
An established business relationship exists between the Company and a person if:
the person has made a financial transaction or has a security position, a money balance, or account activity with the
Company or its clearing firm within the previous 18 months immediately preceding the date of the telemarketing call;
the Company is the broker-dealer of record for an account of the person within the previous 18 months immediately
preceding the date of the telemarketing call; or
the person has contacted the Company to inquire about a product or service it offers within the previous three months immediately preceding the date of the telemarketing call.
Registered Representatives and the Company must maintain a ―Do Not Call‖ list. This list consists of persons and their
telephone numbers who do not wish to receive telephone solicitations. Company personnel are prohibited from making telephone solicitations to anyone listed on the Do Not Call List, even if an existing business relationship exists. The
Company must honor a request by a person to be placed on the Do Not Call List within 30 days of the request.
When making telemarketing calls, RR‘s must consult the current national do not call registry (a version no more than three
months old at the time of calling). The Company must keep records to document its accessing of the national do not call
registry. The registry is accessible at www.telemarketing.donotcall.gov. Each OSJ Principal is responsible for maintaining a
current list at their branch. Such supervisor currently responsible is: Frank Gilday. Each supervisor must review the list every 3 months, at a minimum. Reviews shall be evidenced by dating and initialing the current list, to be kept on file.
All personnel engaged in telephone solicitation must be trained concerning the ―Cold Calling‖ rules and the existence and maintenance of both the Company and national ―Do Not Call‖ lists. The penalties for violating these rules include treble
damages and FCC action against the violator.
When making an outbound telephone call to any person for the purpose of soliciting the purchase of securities or related
services, associated persons must disclose promptly and in a clear and conspicuous manner to the called person the following
information: the identity of the caller and the Company; the telephone number or address at which the caller may be
contacted; and that the purpose of the call is to solicit the purchase of securities or related services. The company does not allow the use of telemarketing scripts.
7.9 Customer Securities or Funds; Loans & Guarantees
Section 2330 of the FINRA Conduct Rules prohibits improper use of a customer‘s securities or funds, and, in general,
requires adherence to the provisions of SEC Rule 15c3-3. Neither Registered Representatives nor the Company must lend securities carried for the account of a customer; all customers‘ fully paid or excess margin securities must be properly
segregated. This does not, of course, prevent the Company from extending margin credit under proper circumstances.
Neither the Company nor any Registered Representative is permitted to guarantee a customer against loss in any securities account of such customer or in any securities transaction affected by the Company with or for such customer. On a daily
basis, assigned OSJ Supervisors will monitor all correspondence, including electronic media, to customers to ensure no
written guarantees are given. All correspondence must be initialed or signed by the assigned Principal to show evidence of review. Any indication of guarantees will require disciplinary action to the Representative.
Rule IM-2330 includes requirements related to segregation of customer funds and securities and should be reviewed and
understood by associated persons of the Company, if the Company holds customer securities. Inlet Securities will not be holding customer funds and securities and therefore qualifies for exemptive provisions of the Rule. In addition, the clearing
firm will enforce all rules and regulations when disbursing funds and securities.
Rule 2370 describes requirements related to loans between customers and associated persons. The Company permits its
registered persons to lend money to, or borrow money from, its customers, under any of the following conditions ONLY:
The customer is a member of such person's immediate family (including 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,
(Rev. 102007)
40
grandchildren, cousin, aunt or uncle, or niece or nephew, and any other person whom the registered person supports,
directly or indirectly, to a material extent);
The customer is a financial institution regularly engaged in the business of providing credit, financing, or loans, or other
entity or person that regularly arranges or extends credit in the ordinary course of business;
The customer and the registered person are both registered persons of the Company;
The lending arrangement is based on a personal relationship with the customer, such that the loan would not have been
solicited, offered, or given had the customer and the associated person not maintained a relationship outside of the
Company/customer relationship.
Annual Audits will include reviews on Representatives to search for any indications that a loan may have taken place.
Reviews will include searching for any indications in client correspondence, files, Representative notes, and trading activity.
Reviews will be evidenced by Ms. Gilday‘s, Compliance Officer, initials/signature on the audit form.
7.10 N/A
7.11 N/A
7.12 N/A
7.13 Investor Education
Registered Representatives, in offering services and securities to customers and the public, must attempt to provide educational material on the products and services under consideration. As described elsewhere in these WSP, items such as
disclosure documents, prospectuses, offering memorandums, sales literature and research reports, among others, should be
distributed when required. In addition, RR‘s must attempt to verbally describe the characteristics and risk profiles of all products presented to investors, in order that the products are fully understood. Each designated Principal, in his or her
review and approval of new accounts and investments, must attempt to discern whether RR‘s are making sufficient attempts
to educate the public.
(Rev. 102007)
41
SECTION 8: CUSTOMER COMPLAINTS
Article III, Section 21(c) of FINRA Rules of Fair Practice requires that a member shall keep and preserve in each OSJ a file
of all written complaints of customers, including a record of any action taken by the firm. A complaint is defined as ―any
written or verbal statement by a customer or person acting on behalf of such customer alleging a grievance involving the activities of those persons under control of the member in connection with the solicitation or execution of any transaction or
the disposition of securities or funds of that customer.‖
A designated principal is responsible for ascertaining that all written customer complaints are reviewed and responded to
promptly in writing.
Any complaint received at a branch office (OSJ or Non-OSJ) will be day stamped as to when received and immediately
(same day) forwarded to the ISL Compliance Department, who will also day stamp the complaint and research the
matter. The OSJ Principal, branch manager, or compliance representative will immediately fax to the home office any
written complaint, and advise by phone or in writing of any potential complaint.
The Compliance Officer is responsible for receiving, investigating, corresponding with the complainant and resolving all
routine complaints where he/she can do so. All client complaints shall be handled expediently and in a manner consistent
with the doctrine of fairness and reasonableness toward the customer. Where potential litigation is involved or the
possibility of a law violation exists, counsel should be consulted. During the investigation of a complaint, any related commissions may be withheld or charged to the Representative account pending settlement of the dispute.
A central, chronological complaint file of customer complaints and written responses will be maintained in the home
office (for each branch office) and branch office for at least three years.
REPORTING
FINRA requires that all customer complaints be reported quarterly. Certain events must be reported within 10 business days, in addition to the quarterly reporting. The Compliance Officer is responsible for reporting all complaints to the FINRA
within these time frames. Events which require the prompt reporting to FINRA include:
1. the member or associated person has been found to have violated any provision of any securities law or regulation, any
rule or standards of conduct of any governmental agency, self-regulatory organization, or financial business or
professional organization, or engaged in conduct which is inconsistent with just and equitable principles of trade; and the member knows or should have known that any of the aforementioned events have occurred;
2. the member or associated person is the subject of any written customer complaint involving allegations of theft or
misappropriation of funds or securities or of forgery; 3. the member or associated person is named as a defendant or respondent in any proceeding brought by a regulatory or
self-regulatory body alleging the violation of any provision of the Act, or of any other federal or state securities,
insurance, or commodities statute, or of any rule or regulation thereunder, or of any provision of the By-laws, rules or
similar governing instruments of any securities, insurance or commodities regulatory or self-regulatory organization; 4. the member or associated person is denied registration or is expelled, enjoined, directed to cease and desist, suspended or
otherwise disciplined by any securities, insurance or commodities industry regulatory or self-regulatory organization or is
denied membership or continued membership in any such self-regulatory organization; or is barred from becoming associated with any member of any such self-regulatory organization;
5. the member or associated person is indicted, or convicted of, or pleads guilty to, or pleads no contest to, any criminal
offense (other than traffic violations);
6. the member or associated person is a director, controlling stockholder, partner, officer or sole proprietor of, or an associated person with, a broker, dealer, investment company, investment advisor, underwriter or insurance company
which was suspended, expelled or had its registration denied or revoked by any agency, jurisdiction or organization or is
associated in such a capacity with a bank, trust company or other financial institution which was convicted of or pleaded no contest to, any felony or misdemeanor;
7. the member or associated person is a defendant or respondent in any securities or commodities-related civil litigation or
arbitration which has been disposed of by judgment, award or settlement for an amount exceeding $15,000. However, when the member is the defendant or respondent, then the reporting to the Association shall be required only when such
judgment, award, or settlement is for an amount exceeding $25,000;
(Rev. 102007)
42
8. the member or associated person is the subject of any claim for damages by a customer, broker, or dealer which is settled
for an amount exceeding $15,000. However, when the claim for damages is against a member, then the reporting to the Association shall be required only when such claim is settled for an amount exceeding $25,000;
9. the member or associated person is associated in any business or financial activity with any person who is subject to a
―statutory disqualification‖ as that term is defined in the Act, and the member knows or should have known of the
association. The report shall include the name of the person subject to the statutory disqualification and details concerning the disqualification;
10. the member or associated person is the subject of any disciplinary action taken by the member against any person
associated with the member involving suspension, termination, the withholding of commissions or imposition of fines in excess of $2,500, or otherwise disciplined in any manner which would have significant limitation on the individual‘s
activities on a temporary or permanent basis.
The Compliance Officer shall report to the FINRA detailed information regarding customer complaints on a quarterly basis.
FINRA requires such reporting by the 15th of the month following the calendar quarter in which customer complaints are
received by ISL. Such reporting shall be submitted electronically, per FINRA Rule 3070.
* In addition, a U4 amendment on the parties involved must be filed within 30 days of when the complaint was received.
(Rev. 102007)
43
SECTION 9: NEW ACCOUNT PROCESSING
9.1 New Account Form - General
A request to open any type of new account must be accompanied by a New Account Form (NAF), which shall be reviewed by a principal within one day of being received by the ISL home office or an OSJ location. The principal will attest to his
review, according to the following, by signing the New Account Form in the designated area. Depending on the type of
account, supporting documents may need to be filled out.
Once the NAF and its supporting documentation have been completely filled out and signed, the Registered Representative
shall forward the NAF and supporting documentation to the appropriate OSJ Principal or home office. In the event that all
documents are not received within the required time frames, the OSJ Principal or home office shall so advise the Registered Representative who shall advise the customer that ISL may freeze the account until the documents are received. The NAF
will be reviewed by the designated Principal. Once approved, the OSJ Principal will forward a copy of the NAF plus any
required supporting documents to the home office. Any changes to the new account form, such as address changes, employer updates, etc. must be made by 1.) signed, written notice and/or 2.) the use of the New Account Update Form, which must be
signed by the client and designated principal. Documentation reflecting any changes must be kept on the client‘s file.
Address changes may only be made by the OSJ Principal, who in turn must go through the clearing firm. By submitting a
change of address request to the clearing firm, the OSJ Principal certifies that written notification has been provided by the
client.
Clients wishing to use a different mailing address may provide a second address, including a P.O. Box.
As a general rule, ISL does not hold mail for clients. Any requests by a client for the firm to hold all mail
(confirmations, statements, etc.) will be denied.
All Registered Representatives will continually determine each client‘s investment objectives and desires. These will be
evaluated with respect to each client‘s circumstances and financial condition. Investments will neither be allowed nor recommended which are not compatible with the objectives, desires and conditions of the respective client. (See Section 7.2)
Changes that deal specifically with investment objectives must be made with the use of New Account Update Form.
Factors to be utilized to determine these include, but are not limited to:
Client‘s relative financial position.
Income and type of employment.
Level of sophistication as evidenced by past investments and current variety of investment vehicles.
9.2 Tips in Completing the NAF
TYPES OF ACCOUNTS
Cash Accounts
The principal shall review the New Account Form to ensure that it includes:
Name.
Street Address – not a P.O. Box (P.O. Boxes may only be used as a mailing address if there is a street address on file
in addition to the P.O. box).
Signature of Representative introducing the account.
Signature of the Registered Principal and Officer accepting the account on behalf of the firm.
Tax ID or Social Security Number.
Occupation.
Net worth and annual income.
Tax bracket.
Investment objectives.
(Rev. 102007)
44
Any other information necessary for making investment recommendations.
The Registered Representative of record and principal shall also ascertain whether the customer is of legal age, whether he is an employee of another broker/dealer, and whether he has a greater than 10% ownership in a publicly traded company.
The New Account Form, which includes a pre-dispute arbitration agreement and a W9 section, must be signed by the
customer. By signing this agreement, the customer is verifying the accuracy and completeness of the information provided and is acknowledging his receipt of a copy of the arbitration agreement. No account will be accepted if the client refuses to
sign the New Account Form.
In addition, every new account also receives the following:
1. Copy of the new account form,
2. Welcome letter, 3. Privacy notice,
4. SIPC notice (must advise customers of SIPC web address and tel. number so they can get SIPC info),
5. Summary of Business Continuity Plan, and
6. FINRA Customer Identification Program Notice.
Margin Accounts
In addition to the information required to open a cash account, the principal will confirm that:
The customer has executed a customer margin agreement and loan consent.
A disclosure statement has been provided, and the date on which document was given is noted on the margin
agreement.
The customer appears suitable for margin activity.
Municipal or Option Accounts
Currently, ISL does not conduct any municipal or option transactions.
Transactions by or for Associated Persons
To determine that a transaction will not adversely affect the interests of a broker/dealer operation, ISL will take the following
steps when a new account is applied for by an associated person of another broker/dealer:
Notify the associated person‘s employing broker/dealer.
Transmit duplicate confirmations, statements, and/or other information in accordance with the other broker/dealer‘s
request.
Transactions for Representatives’ Personal Accounts
All such accounts will be coded with special account numbers to distinguish them from regular client accounts.
TYPES OF REGISTRATIONS
Joint Accounts
For all joint accounts where both parties are to be empowered with authority to enter orders, the account document must be completed in full and signed by both parties before it will be approved.
Corporate Accounts
In addition to the required forms for all new accounts, the following document is also required for corporate accounts:
(Rev. 102007)
45
Corporate resolution.
Depending on the activity of a corporate account, additional forms may be required, i.e. a corporate authorization to trade, or corporate authorization to transfer.
Partnership Accounts
In addition to the required forms for all new accounts, partnership accounts also require:
A copy of the partnership agreement.
If the Registered Representative is a member of the partnership, there needs to be a clear designation of percentage
partnership participation according to FINRA regulations.
Foreign Accounts
In addition to the required forms for all new accounts, the following document is also required for foreign accounts:
W8-BEN (instead of a W9)
For any foreign accounts which are set up as joint, a separate W8-BEN is required for each person on the account. Any
foreign accounts set up as corporate also require the additional form(s) named above, under CORPORATE ACCOUNTS.
Trust Accounts
Accounts to be registered in the name of any trust, including, but not limited to, pension and profit sharing plans, require:
A copy of the trust instrument, and
A letter (signed by an authorized trustee) which lists the names of the trustees authorized to enter instructions and
orders.
Foreign Bank Correspondent Accounts
All such accounts will require certification that they are NOT a shell bank. In addition, all foreign bank correspondent accounts MUST give the name and address of an agent residing in the US who is authorized to accept service of legal process
for records on its behalf. Any account not providing such information will not be opened.
Forms required for any type of account/registration may change without advance notice. Any questions should be directed to
the home office. Representatives are responsible for ensuring all necessary paperwork is completed at the time the account is
opened.
9.3 N/A
9.4 Discretionary Accounts; Unauthorized Trading
As mentioned in Section 6.8, Improper Conduct, Representatives are prohibited from holding discretionary authority, power
of attorney, or acting as a trustee, personal representative, executor custodian, guardian, or otherwise possessing the power to
direct trades or exercise control over assets in a client account, unless approved in writing by the Compliance Department. Branch Supervisors will review and approve each new account, ensuring that the New Account Form is filled out correctly
and that the Representative is not entitled to any control over the account. In addition, Representatives must indicate on
every order ticket that discretionary authority has not been used. Should a special circumstance arise, the Branch Supervisor will speak directly to the Compliance Officer to ensure that discretionary power has been granted. In order for such approval
to take effect, written permission must be in the client file, and the Branch Supervisor must sign off on it as well. Evidence of
reviews shall include Supervisor signatures on new account forms and the order ticket. Reviews are conducted at every client transaction.
(Rev. 102007)
46
Unauthorized trading in customer accounts occurs when the Registered Representative enters orders without any discretionary or other authority. Unauthorized trading is a severe violation of FINRA and ISL Rules and Regulations and
when discovered will be swiftly and severely remedied. Upon conducting his daily reviews of order tickets and transactions,
the designated OSJ Principal will look for any signs of unauthorized transactions. Potential indicators of unauthorized
transactions may include a pattern of:
Cancellations of transactions,
Cancellations and rebilling between accounts,
Sellouts for failure to pay for purchases, and
Numerous extensions.
Reviews are conducted at every client transaction, and are evidenced by the Principal‘s initials on the order tickets, which indicate review and approval. In the event of an unauthorized or disputed trade incident involving a customer, the
Representative will be asked to provide written documentation describing the events and circumstances of the situation. The
designated Principal and Compliance Officer will review the facts and make a determination as to resolving any conflict. Review and corrective action will include, depending on the circumstances:
Confer with Registered Representative,
Contact customers directly to confirm authorization of transactions,
Cancellation of unauthorized transactions, and/or
Confer with Compliance regarding any identified unauthorized transactions.
Where it is determined that restitution is called for, all or part of the disputed trade will normally be placed in the Company‘s error account and made whole. Any profit resulting from any subsequent trade(s) will go to the Company; losses will be the
responsibility of the Representative(s) at fault as determined at the exclusive discretion of the designated Principal and/or
Compliance Officer. In addition, the Representative will receive disciplinary action which may include suspension or termination. Documentation for reviews of all unauthorized trading, whether or not the Representative was found to be at
fault, will be kept on file at the branch and Home Office.
9.5 ACATS
When a customer whose securities account is carried by a member firm (the carrying member) wishes to transfer the entire
account to another member firm (the receiving member) and gives written notice of that fact to the receiving member, both member firms must expedite and coordinate activities with respect to the transfer. If a customer wishes to transfer a portion
of the account, a letter of authorization should be transmitted to the carrying member indicating such intent and specifying
the portion of the account to be transferred. Although such transfers are not subject to the provisions of Section 11870 of the FINRA Uniform Practice Code, member firms must expedite authorized partial transfers of customer securities accounts and
coordinate their activities with respect to the transfer.
In the case of a Registered Representative‘s departure from the Company in order to work for a different broker-dealer, the
Company will not create unnecessary delays in transferring customer accounts, including delays accompanied by attempts to
persuade customers not to transfer their accounts. FINRA makes it clear in IM-2110-7 that it is inconsistent with just and
equitable principles of trade for the Company or its associated persons to interfere with a customer's request to transfer his or her account in connection with the change in employment of the customer's registered representative, provided that the
account is not subject to any lien for monies owed by the customer or other bona fide claim. Prohibited interference includes,
but is not limited to, seeking a judicial order or decree that would bar or restrict the submission, delivery, or acceptance of a written request from a customer to transfer his or her account.
Upon receipt from the customer of a signed broker-to-broker transfer instruction to receive such customer‘s securities from
the carrying member, the receiving member must immediately submit such instruction to the carrying member. The carrying member must, within THREE (3) business days following receipt of such instruction:
• Validate and return the transfer instruction to the receiving member with an attachment reflecting all positions and money balances; or
(Rev. 102007)
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• Take exception to the transfer instruction.
The carrying member and the receiving member must promptly resolve any exceptions taken with regard to the transfer
instruction.
Account transfers accomplished under the Uniform Practice Code are subject to the following conditions which the customer must be informed of, affirm, or authorize through their inclusion in the transfer instruction form which is required to be
completed and signed in order to initiate the account transfer:
• To the extent that any assets in the account are not readily transferable, with or without penalties, such assets may not be
transferred within the time frames required by the rule and the customer will be contacted in writing by the carrying
member with respect to the disposition of any assets in the account that are nontransferable; • With respect to transfers of securities accounts other than retirement plan securities accounts, the customer affirms that he
or she has destroyed or returned to the carrying member any credit/debit cards and/or any unused checks issued in
connection with the account; and
• The carrying member and the receiving member must promptly resolve and reverse any nontransferable assets that were not properly identified during validation.
In all cases, each member shall promptly update its records and bookkeeping systems and notify the customer of the action taken.
In the case of non-transferable assets described above, FINRA has amended Uniform Practice Code Rules 11870(c) and 11870(d) to conform to recent modifications to the Automated Account Transfer Service (ACATS). The new procedures
expedite the transfer of accounts containing third party and/or proprietary products. Specifically, the carrying member who
takes exception to the instructions: (1) identifies any assets in the account that it knows are nontransferable, including any
asset that is a proprietary product of the carrying member, (2) identifies these assets to the customer in writing, and (3) requests instructions from the customer with respect to the disposition of such assets. The customer may ask the carrying
member to liquidate the asset, continue to retain the asset, or transfer the asset in the customer's name to the customer.
Under the amendments to Rule 11870(c) and 11870(d), the receiving member will review the asset validation report,
designate those proprietary and/or third party assets it is unable to receive/carry, provide the customer with a list of those
assets, and request instructions from the customer regarding their disposition. The customer may instruct the receiving
member to liquidate the asset, continue to retain the asset, transfer the asset in the customer's name to the customer, or transfer the asset to the third party that is the original source of the product. Most importantly, the transfer of the other assets
in the account will occur simultaneously with the receiving member's designation of nontransferable assets. These
procedures should eliminate the need for reversing the transfer of third party and/or proprietary products, thereby reducing delay and the cost of customer transfers incurred by members under the current system. These procedures also will
substantially reduce customer confusion in that customers will no longer receive multiple account statements from the
carrying and receiving firms as they transfer and then reverse transactions.
If the customer has authorized liquidation or transfer of such assets, the carrying member must distribute the resulting money
to the customer or initiate the transfer within five (5) business days following receipt of the customer‘s disposition
instructions.
The provisions of the Rule should be consulted in the case of transfer of retirement plan securities accounts.
The FINRA recently established expedited procedures governing ACATS where both the carrying member and the receiving
member are participants in a registered clearing agency having ACATS capabilities. Where the capabilities are non-
electronic, the Rule simply mandates that the facilities procedures, whatever they may be, should be utilized. Where the capabilities are electronic, the Rule requires that the parties execute an Immobilization Program Agreement designated by the
Uniform Practice Code Committee setting forth standardized procedures, including the use of a uniform transfer instruction
form (TIF) to be executed by the customer.
If cost basis information is electronically available for transfer (for instance, through the Cost Basis Reporting Service), and
the customer has decided to change firms, it is a violation of Rule 2110 for the Company to refuse to transfer the information
(Rev. 102007)
48
upon request or take any steps to interfere with its transfer to the customer's new firm. The designated Principal must make
sure that operations personnel are complying with this requirement, if applicable (the Company is not required to create cost basis records upon customer request if electronically transferable records do not already exist).
9.51 N/A
9.6 N/A
9.7 Short Sales
Selling securities short is allowed only for clients who have an approved margin account.
Representatives accepting and/or executing orders for short sales must review the FINRA ―Short Sale Rule‖ (Rule 3350) in
order to become familiar with the many requirements and exceptions related to short selling. In general, the rule prohibits any
person, including a professional trader, from selling certain securities short in a declining market. When applicable, the ―bid test‖
or ―tick test‖ rule must be adhered to in all short sales by customers and the Company, as follows:
(1) With respect to trades executed on or reported to the ADF, no short sale shall be effected in a Nasdaq National Market
security at or below the current national best (inside) bid when the current national best (inside) bid is below the preceding national best (inside) bid in the security. FINRA has determined that in order to effect a "legal" short sale
when the current best bid is lower than the preceding best bid the short sale must be executed at a price of at least $0.01
above the current inside bid when the current inside spread is $0.01 or greater. The last sale report for such a trade would, therefore, be above the inside bid by at least $0.01.
(2) With respect to trades executed on or reported to Nasdaq, no short sale shall be effected in a Nasdaq National Market
security at or below the current best (inside) bid displayed in the Nasdaq National Market Execution System when the
current best (inside) bid is below the preceding best (inside) bid in the security. Nasdaq has determined that in order to effect a "legal" short sale when the current best bid is lower than the preceding best bid the short sale must be executed
at a price of at least $0.01 above the current inside bid when the current inside spread is $0.01 or greater. The last sale
report for such a trade would, therefore, be above the inside bid by at least $0.01.
Certain exceptions exist—for instance, for any person selling a security which he owns and intends to deliver as soon as is
possible without undue inconvenience and expense; any broker or dealer executing a sell order marked ‗long‘ for an account
in which he has no interest; any sale of an odd lot; and certain sales by specialists or market makers--and must be reviewed and understood by Company personnel. The Compliance Officer must distribute the Short Sale Rule and all other relevant
information, including regulatory announcements and rule modifications, to RR‘s and others who require it.
The following procedures must be followed by registered personnel. Enforcement will be evidenced by the documentation
produced and required approvals noted; should procedures not be followed, the Compliance Officer will make records
describing non-compliance and will take steps necessary to correct resulting trade errors or deficient record keeping. Disciplinary action will follow, if required.
All order tickets for customer short sales will be marked to show that it is ―short.‖
The RR must confirm that the customer has entered into a margin account agreement and that such agreement is on
file; no short sales may be conducted otherwise.
Before entering an order for a short sale the RR must review the customer‘s account to ascertain that there is adequate
equity to comply with all applicable margin rules.
Before executing any short sale for a customer or non-member broker-dealer, the RR must make an affirmative
determination (in accordance with Rule 3370) that the Company will receive delivery of the subject security, or be able
to borrow or otherwise provide delivery of the security, by settlement date (this requirement does not apply, however,
to transactions in corporate debt securities or transactions in security futures).
If the Company suspects that a customer‘s assurance is not reasonable (based on prior fails to deliver, for instance), the
Company must locate the stock before accepting a short sale order from that customer.
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49
Rule 3370 permits members and associated persons to rely on ―blanket‖ or standing assurances (―Easy to Borrow‖ lists) that
certain, specified securities will be available for borrowing on settlement date to satisfy their affirmative determination obligations, provided that the information is less than 24 hours old and the member delivers the security on settlement date.
Blanket assurances for ―all‖ securities are not permitted.
In addition, ISL may rely on a ―Hard to Borrow‖ list, which includes all securities that are difficult to borrow or unavailable for borrowing. A user of a ―Hard to Borrow‖ list may reasonably infer, under appropriate circumstances, that a specific
security absent from the list is easy to borrow. ISL may rely on a ―Hard to Borrow‖ list for any short sales executed in
NASDAQ NM or exchange-listed securities, provided that certain conditions are met.
FINRA Rule 3360 requires the Company to maintain a record of total short positions in all customer and proprietary firm
accounts in NASDAQ securities (and listed securities if not reported to another SRO) and requires the Company to report such information to FINRA on a monthly basis. Short positions held by the Company for other broker-dealers must also be
reported under this Rule, as amended. The Company‘s clearing firm conducts all short position reporting on behalf of the
Company.
It is imperative that Registered Representatives consult the FINRA ―Short Sale Rule‖ and other informational material in
order to become familiar with the many requirements and exceptions related to short sales, including information on the following topics: availability rules, new issue securities, short interest reporting and mandatory closeouts.
9.8 Accounts of Registered Reps of Other Firms
All accounts of registered reps and other firms must be pre-approved by the Compliance Department. The New Account
Form will indicate when the person is associated with a member firm. Branch Supervisors will consider this when approving
the account and reviewing the order tickets. Approval will be evidenced by the Supervisor‘s and Compliance Officer‘s signature/initials on the account form. Order tickets must be initialed by the Supervisor to indicate approval and evidence of
review. ISL, when knowingly executing a transaction for the purchase or sale of a security for the account of a person
associated with another member (employer member), or for any account for which such associated person has discretionary authority, shall use reasonable diligence to determine that the execution of such transaction will not adversely affect the
interests of the employer member.
9.9 Transactions Involving FINRA or AMEX Employees
Where ISL, acting as an executing member, knows that an employee of the FINRA or American Stock Exchange has a
financial interest in, or controls trading in, an account, the Company shall obtain and implement an instruction from the employee directing that duplicate account statements be provided by the Company to the FINRA.
In addition, the Company will not directly or indirectly make any loan of money or securities to any such FINRA or AMEX employee (except where loans are made in the context of disclosed, routine banking and brokerage agreements, or loans that
are clearly motivated by a personal or family relationship). Also, the Company will not directly or indirectly give, or permit
to be given, anything of more than nominal value (notwithstanding the annual dollar limitation set forth in Conduct Rule 3060(a)), to any FINRA or AMEX employee who has responsibility for a regulatory matter that involves the Company (such
as examinations, disciplinary proceedings, membership applications, etc.).
The designated Principal, in his or her reviews of new accounts, will ensure that these procedures are followed and that
records are kept to evidence such compliance. Should evidence be found of prohibited loans or gifts or gratuities, the designated Principal will investigate and take disciplinary action, if necessary.
9.10 N/A
9.11 “Household” Prospectus Delivery
When delivering prospectuses to two or more customers at a shared address, the Company may send a single prospectus to the address if certain conditions are met. The specific conditions are described in Rule 154 of the SEC Exchange Act of
(Rev. 102007)
50
1933, and include conditions related to how recipients are addressed, consent of customers, notification of deliveries and
definition of address.
9.12 Anti-Money Laundering Compliance Program
FINRA requires all broker/dealers to develop internal policies, procedures, and controls to ensure compliance with the Anti-Money Laundering (AML) laws.
ISL‘s AML Program is covered under separate cover, titled ―ISL AML Compliance Program‖.
9.12.1 Customer Identification Program (CIP)
Section 326 of the USA PATRIOT Act requires broker/dealers, by October 1, 2003, to implement reasonable
procedures to: (1) verify the identity of any person seeking to open an account, to the extent reasonable and
practicable; (2) maintain records of the information used to verify the person's identity; and (3) determine whether
the person appears on any lists of known or suspected terrorists or terrorist organizations provided to brokers or dealers by any government agency. Each broker/dealer is to establish a written Customer Identification Program
(CIP) to verify the identity of each customer who opens an account. The written CIP must also include recordkeeping
procedures and procedures for providing customers with notice that the broker/dealer is requesting information to verify their identity.
ISL‘s CIP is covered in conjunction with the AML Compliance Program.
9.13 N/A
(Rev. 102007)
51
SECTION 10: TRANSACTIONS
Article III, Section 2 of FINRA Rule of Fair Practice requires that ―in recommending to a customer the purchase, sale or
exchange of any securities, a member shall have reasonable grounds for believing that the recommendation is suitable for
such customer upon the basis of the facts, if any, disclosed by such customer as to his other securities holdings and to his financial situation and needs."
All order tickets must contain the following information:
The account for which it is entered,
The time of entry (whether electronically or verbally) and execution,
Type of order, long or short,
Location of security (if long sell),
Security symbol,
Price limit, if any,
Whether solicited or unsolicited,
The price at which executed, and
In order for tickets to be marked ―long‖, (sell order), the security must be in the customer‘s account in good deliverable form, or the customer agrees to deliver the security within three (3) business days of trade date. Changes to the account name or
designation for all order tickets MUST be approved by a Principal and/or Compliance Officer, who in turn must show his
approval in writing and document the reason(s) for the change. Records must be maintained for 3 years.
For both cash and margin transactions, the assigned Branch Principal will review each transaction for:
Frequent purchases or sales of a lower-priced issue
Frequent/excessive transactions or excessively large positions
Any indications of unauthorized transactions
Transactions for the Representative, associated persons, or related accounts
Rule 144 sales transactions/trading in any restricted security
Large short-sale transactions
Blue sky requirement compliance
Suitability for type of investment and objectives, proper net worth/income; appropriate investment for client‘s age
and client‘s investment experience
Unregistered securities
Excessive commissions
Reg-T violations
Concentration of low-priced securities or direct participation program products
Sharing in customer accounts
Letter of intent, Rights of Accumulation, breakpoints, switching, prospectus delivery (mutual fund transactions)
1035 exchanges (replacing variable contracts to improve customer‘s position NOT to generate commissions)
Customer signature/approval (efforts will be made to verify customer signatures for account transfers, ACATs,
change of address, etc.) If a signature guarantee is required by the sponsor, client must provide it to Representative.
Order tickets will be reviewed daily and approval will be evidenced by the Branch Principal‘s initials and/or signature on the ticket. In instances where customer signature is required (as in account transfers, change of address, signature guarantees),
ISL procedures for proper implementation include:
OSJ Principals must verify that signatures match the signatures on file, to the best of his/her ability.
All margin transactions require a separate Margin Agreement, indicating receipt of the Margin Disclosure, to be
signed by the customer, Representative and the Principal. The clearing firm will not effect any margin transactions without the required paperwork.
(Rev. 102007)
52
ISL does not have capabilities to change a customer‘s address. The clearing firm will only effect such changes with
written request, approved by the OSJ Principal.
Changes to customer information are summarized in a monthly report provided by the clearing firm, and reviewed by
the OSJ Principal.
By initialing/signing and approving the transaction and/or report, the Principal certifies he has reviewed the
necessary documentation.
All signed ACATs, requests to change address and signature guarantees must be kept on the client‘s file.
Commission, Fees & Mark-Ups/Downs Charged
As a "broker/agent" (executing orders on an ―agency" basis for customers on an exchange or in the OTC market), the
Company is compensated via commissions on customer trades. ISL does NOT conduct principal trades. ISL‘s commission
charges are based upon a consideration of all relevant factors, including:
Type of security
Availability of the security in the market
Price of the security
Disclosure to the customer
Profit resulting from the transaction and amount of money involved
Number of shares
It is understood that the 5% commission policy represents a guideline only, and that the principal‘s judgment is necessary in fulfilling their responsibility in determining the fairness of the commissions. Any exceptions to the 5% guideline should be
fully documented, and a copy maintained as part of books and records.
10.2 N/A
10.3 Churning
―Churning,‖ which refers to executing trades in a client‘s account for the primary purpose of generating commissions, is
forbidden. Rule 2510 states that where ISL has any discretionary power over an account there should be no transactions that
are ―excessive in size or frequency in view of the financial resources and character of such account.‖
The designated Principal, in his daily review of trades and periodic reviews of commission runs, shall attempt to identify any
churning in customer accounts. The OSJ Principal will initial trade logs/blotters to evidence his daily reviews. Unusual
trading activity will be investigated further to discover if churning is taking place and interviews of Registered Representatives will be conducted for clarification and/or to remedy the situation. Documentation of any unusual activity
and investigations will documented and kept on file.
10.4 N/A
10.5 Restrictions on IPO Transactions
Rule 2790 prohibits ISL or any person associated with it from: selling, or causing to be sold, a new issue of equity securities
(―IPO‖) to any account in which a restricted person has a beneficial interest; purchasing an IPO security in any account in
which the Company or person associated with it has a beneficial interest; and continuing to hold new issues acquired by the Company as an underwriter, selling group member, or otherwise, except as otherwise permitted within the Rule.
Therefore, neither ISL nor any person associated with it shall be permitted to participate in the purchase or sale of a new issue
except when purchases are by, and sales are to, the following accounts or persons, whether directly or through accounts in which such persons have a beneficial interest:
1. An investment company registered under the Investment Company Act of 1940; 2. A common trust fund or similar fund as described in Section 3(a)(12)(A)(iii) of the Act, provided that:
the fund has investments from 1,000 or more accounts; and
(Rev. 102007)
53
the fund does not limit beneficial interests in the fund principally to trust accounts of restricted persons;
3. An insurance company general, separate or investment account, provided that:
the account is funded by premiums from 1,000 or more policyholders, or, if a general account, the insurance
company has 1,000 or more policyholders; and
the insurance company does not limit the policyholders whose premiums are used to fund the account principally to
restricted persons, or, if a general account, the insurance company does not limit its policyholders principally to
restricted persons;
4. An account if the beneficial interests of restricted persons do not exceed in the aggregate 10% of such account;
5. A publicly traded entity (other than a broker/dealer or an affiliate of a broker/dealer where such broker/dealer is authorized to engage in the public offering of new issues either as a selling group member or underwriter) that:
is listed on a national securities exchange;
is traded on the Nasdaq National Market; or
is a foreign issuer whose securities meet the quantitative designation criteria for listing on a national securities
exchange or trading on the Nasdaq National Market;
6. An investment company organized under the laws of a foreign jurisdiction, provided that:
the investment company is listed on a foreign exchange or authorized for sale to the public by a foreign regulatory
authority; and
no person owning more than 5% of the shares of the investment company is a restricted person;
7. An Employee Retirement Income Security Act benefits plan that is qualified under Section 401(a) of the Internal Revenue
Code, provided that such plan is not sponsored solely by a broker/dealer; 8. A state or municipal government benefits plan that is subject to state and/or municipal regulation;
9. A tax exempt charitable organization under Section 501(c)(3) of the Internal Revenue Code; or
10. A church plan under Section 414(e) of the Internal Revenue Code.
The Rule describes further exemptions related to: issuer directed securities, issuer-sponsored programs, anti-dilution
provisions, stand-by purchasers, and under-subscribed offerings. RR‘s and their supervisors must consult the Rule for
specific guidance on these exemptions.
Company personnel, when considering a purchase or sale of new issue securities, whether for a customer, the Company or an
associated person, must review Rule 2790 or consult their supervising Principal for guidance. Every prospective transaction in IPO securities must undergo detailed scrutiny in order to identify restricted persons, as defined in the Rule. Prior to
conducting a transaction in a new issue, the RR must ensure that the following preconditions have been met. Before selling a
new issue to any account, the Company must in good faith have obtained within the twelve months prior to such sale, a
representation from:
Beneficial Owners--The account holder(s), or a person authorized to represent the beneficial owners of the account, that
the account is eligible to purchase new issues in compliance with this Rule (in the case of accounts that are funds of
funds, the Company need only receive this representation from the master fund); or
Conduits--A bank, foreign bank, broker-dealer, or investment adviser, or other conduit that all purchases of new issues
are in compliance with this Rule.
The Company may not rely upon any representation that it believes, or has reason to believe, is inaccurate. The first such representation from an account must be a positive affirmation; thereafter, the Company may use annual negative consent
letters to affirm the account‘s non-restricted status. Oral representations and affirmations are not acceptable; they must be in
writing or via electronic communication. The Company must maintain a copy of all records and information relating to
whether an account is eligible to purchase new issues (for instance, the exemption relied upon) in its files for at least three years following its last sale of a new issue to that account. All purchases and sales of new issue securities must be pre-
approved by the designated Principal, who shall evidence his or her approval by initialing the order ticket.
10.6 N/A
10.7 N/A
10.8 Parking
(Rev. 102007)
54
"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.
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 Penny Stocks/Designated Securities
SEC Rule 15g-9 establishes sales practice requirements for the sale of certain low-priced securities by broker/dealers. The
SEC has said the essential purpose of the rule is to bring an end to the use of high pressure tactics in the sale of low-priced securities and to provide greater assurance that broker/dealers will make a determination of the suitability of such result by
requiring a broker/dealer to carry out specific account opening procedures before certain low priced securities are sold to new
or unsophisticated customers. While the Commission recognizes the potential for abuse in the sale of any security, the rule focuses on the sale of low-priced securities or ―penny stocks‖ where such abuse, in the SEC‘s view, is most prevalent.
When placing order tickets for low-priced securities, the order processing will require additional attention. The SEC rule provides that is unlawful for a broker/dealer to sell a ―designated security‖ unless :
1. the broker/dealer has approved the person‘s account for transactions in ―designated securities‖; and,
2. the broker/dealer has received from the person a written agreement to the transaction setting forth the identity and quantity of the security to be purchased.
For the purposes of this rule, ―designated securities‖ means any equity security other than a security:
1. registered, or approved for registration, on a National Securities Exchange or on the NASDAQ System;
2. issued by a registered Investment Company;
3. that is a put or call option issued by the OCC; or 4. whose issuer has net tangible assets in excess of $2,000,000.
To further limit the rule‘s application to transactions where the risk of fraudulent sales tactics is most likely, it exempts from its requirements transactions:
1. where the price of the security is $5.00 or more; 2. in which the purchaser is an ―established customer‖ of the broker/dealer (an established customer is defined as a
customer who had a transaction more than a year ago OR has made three (3) purchases of penny stocks on separate
days with different issuers);
3. that are not recommended by the broker/dealer; 4. by a broker/dealer whose total compensation from the sale of the designated security is no more that 5%; and,
5. by a broker/dealer which has not been a market maker in the securities.
In order to approve a person‘s account for transactions in ―designated securities‖, the Representative must first obtain
information concerning the person‘s financial situation, investment experience and investment objectives. Based on the
information received from the potential investor, the Representative must then make a ―reasonable determination‖ whether: the securities are suitable for the person; the person has sufficient knowledge and experience in financial matters; and, the
person reasonably may be expected to be capable of evaluating the risk of transactions in such ―designated securities‖.
If the transaction is considered suitable, the Representative must then deliver to the person a written statement setting forth its determination and the basis on which he/she made the determination. The Representative must receive back a signed copy of
the suitability statement before the order ticket is approved. For designated security orders, the Branch Supervisor will
(Rev. 102007)
55
review the order ticket and check for suitability and the required paperwork; reviews are evidenced by (the branch
supervisor) initialing and/or signing the order ticket. By doing so, the Supervisor approves the transaction and confirms procedures were in place.
The Recommendation Rule—FINRA Rule 2315. Rule 2315, approved in August 2002, requires the Company, prior to
recommending that a customer purchase or sell short microcap or penny stocks, to review the current financial statements of the issuer and current material business information about the issuer, and to make a determination that such information, and
any other information available, provides a reasonable basis under the circumstances for making the recommendation. This
review will be conducted by the Compliance Officer and a written, dated record of the review will be maintained, including the name of the reviewer. Securities subject to this Rule include equity securities that are published or quoted in a quotation
medium and that either (1) are not listed on Nasdaq or on a national securities exchange or (2) are listed on a regional
securities exchange and do not qualify for dissemination of transaction reports via the Consolidated Tape. The information reviewed should be current, as defined in the Rule, and will generally mean information within the 15 months prior to the
recommendation (the reviewer must consult the Rule to understand and abide by the specific requirements).
The requirements of Rule 2315 do not apply to:
A. Private transactions (exempt under Reg D or Section 4(2) of the Securities Act);
B. Transactions with or for an account that qualifies as an "institutional account," "qualified institutional buyer" or "qualified purchaser";
C. Transactions in an issuer's securities if the issuer has at least $50 million in total assets and $10 million in shareholder's
equity as stated in the issuer's most recent audited current financial statements, as defined in this Rule; D. Transactions in securities of a bank and/or insurance company subject to regulation by a state or federal bank or
insurance regulatory authority;
E. A security with a worldwide average daily trading volume value of at least $100,000 during each month of the six full
calendar months immediately before the date of the recommendation; F. A convertible security, if the underlying security meets the requirement of Section (e)(1)(E) of this Rule; or
G. A security that has a bid price, as published in a quotation medium, of at least $50 per share. If the security is a unit
composed of one or more securities, the bid price of the unit divided by the number of shares of the unit that are not warrants, options, rights, or similar securities must be at least $50.
Registered Representatives who wish to recommend microcap or penny stocks must first consult their designated Principals
in order to determine if such stocks are subject to the Recommendation Rule and, if so, have been approved for recommendation by the Compliance Officer.
The Company‘s review required by the Recommendation Rule does not take the place of its other required reviews, including, most notably, customer suitability.
10.10 N/A
(Rev. 102007)
56
SECTION 11: COMMUNICATIONS WITH THE PUBLIC
11.1 Definitions
Communications with the public, including customers of the Company, include the following categories:
An ―advertisement‖ is any material that is published or used in any electronic or other public media, including any website,
newspaper, magazine or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures, or telephone directories (other than routine listings). It does NOT include an independently prepared reprint
or institutional sales material.
―Sales literature‖ is any written or electronic communication that is generally distributed or made generally available to customers or the public, including circulars, research reports, market letters, performance reports or summaries, form letters
(sent to 25 or more prospective retail customers within 30 days), telemarketing scripts, seminar texts, reprints (that are not
independently prepared reprints) or excerpts of any other advertisement, sales literature or published article, and press releases concerning the Company‘s products or services. It does NOT include an advertisement, independently prepared
reprint, institutional sales material or correspondence.
―Correspondence‖ consists of any written letter or e-mail message distributed by the Company to one or more of its existing
retail customers and fewer than 25 prospective retail customers within any 30 calendar-day period. Letters to individuals and
Group Correspondence (form letters and group e-mails) are included in this definition; however, letters to institutions are not.
See Section 5.10, above, for Correspondence review and approval procedures.
―Institutional sales material‖ is any communication that is distributed or made available only to institutional investors.
Institutional investor means a bank, savings and loan association, insurance company or registered investment company; an investment adviser registered either with the SEC or a state; any other entity with total assets of at least $50 million; a
governmental entity or subdivision thereof; an employee benefit plan that has at least 100 participants, but does not include
any participants of such a plan; a qualified plan that has at least 100 participants, but does not include any participant of such a plan; an FINRA member or registered associated person of such a member; and a person acting solely on behalf of any such
institutional investor.
“Public appearance” refers to participation in a seminar, forum (including interactive electronic forums, such as chat rooms), radio or television interview, and other public appearance or public speaking activity. An appearance before fewer
than 15 investors would not be categorized by the FINRA as a pubic appearance.
An “Independently prepared reprint” is any reprint or excerpt of any article issued by a publisher (the publisher must be
truly independent—for instance, not affiliated with or commissioned by the Company--as defined in the Rule) and any report
prepared by an independent research firm concerning a registered investment company (again, it must be truly independent,
as defined). Article reprints or research reports that do not meet the independence standards must be treated as sales literature and therefore must meet all requirements applicable to sales literature.
11.2 Content Standards and Guidelines
General Standards Applicable to All Communications with Public. In all communications with the public and its
customers, ISL and its Registered Representatives must follow these standards:
They shall observe principles of fair dealing and good faith while providing a sound basis for evaluating the particular
merits of any security or service offered.
Communications must be fair and balanced and must not be misleading, omit material facts or contain inaccurate
statements.
The Company and its RR‘s must not make any false, exaggerated, unwarranted or misleading statement or claim in any
communication with the public; nor must it publish, circulate or distribute any public communication known or suspected
to contain any untrue statement of a material fact or is otherwise false or misleading.
Information may be placed in a legend or footnote only in the event that such placement would not inhibit an investor's
understanding of the communication.
(Rev. 102007)
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Communications with the public may not predict or project performance, imply that past performance will recur or make
any exaggerated or unwarranted claim, opinion or forecast. A hypothetical illustration of mathematical principles is
permitted, provided that it does not predict or project the performance of an investment or investment strategy. If any testimonial in a communication with the public concerns a technical aspect of investing, the person making the
testimonial must have the knowledge and experience to form a valid opinion.
Registered Representatives disseminating, and Principals charged with approving communications with the public should heed the following guidelines:
The context must be considered. A statement made in one context may be misleading even though such a statement
could be appropriate in another context. Communications must present a balanced treatment of risks and potential benefits, including considerations of the risks of fluctuating prices and the uncertainty of dividends, rates of return and
yield inherent to investments;
The nature of the target audience must be considered. Different levels of explanation or detail may be necessary
depending on the audience to which a communication is directed. Additional information or a different presentation of information may be required depending upon the medium used for a particular communication and the possibility that the
communication will reach a larger or different audience than the one initially targeted.
Communications must be clear. A statement made in an unclear manner can cause a misunderstanding. A complex or
overly technical explanation may be more confusing than too little information.
Income or investment returns may not be characterized as tax-free or exempt from income tax when tax liability is
merely postponed or deferred, such as when taxes are payable upon redemption.
With regard to recommendations: the Company must provide, or offer to furnish upon request, available investment
information supporting any recommendation made. Recommendations on behalf of corporate equities must provide the
price at the time the recommendation is made. Also, the Company may use material referring to past recommendations if
it sets forth all recommendations as to the same type, kind, grade or classification of securities made by it within the last year. Longer periods of years may be covered if they are consecutive and include the most recent year. Such material
must also name each security recommended and give the date and nature of each recommendation (e.g., whether to buy
or sell), the price at the time of the recommendation, the price at which or the price range within which the recommendation was to be acted upon, and indicate the general market conditions during the period covered. Also
permitted is material that does not make any specific recommendation but which offers to furnish a list of all
recommendations made by the Company within the past year or over longer periods of consecutive years, including the
most recent year, if this list contains all the information specified in the bullet point above. Neither the list of recommendations, nor material offering such list, shall imply comparable future performance. Reference to the results of
a previous specific recommendation, including such a reference in a follow-up research report or market letter, is
prohibited if the intent or the effect is to show the success of a past recommendation, unless all of the foregoing requirements with respect to past recommendations are met.
The Company may indicate FINRA membership in any communication with the public if it neither states nor implies
that FINRA or any other regulatory organization endorses, indemnifies, or guarantees the Company's business practices,
selling methods, the class or type of securities offered, or any specific security; in confirmations for OTC transactions, the following may be used: "This transaction has been executed in conformity with the FINRA Uniform Practice Code."
Standards Applicable to Advertisements and Sales Literature. The following standards are specific to advertisements
and sales literature, as defined above. In addition, all advertising and sales literature is of course expected to the meet the general content standards and guidelines described immediately above.
All advertisements and sales literature must prominently disclose the Company‘s name (and commonly recognized dba,
if applicable); must reflect the relationship between the Company and any non-member or individual who is named; and, if it includes other entity names, it must reflect which products and services are being offered by each entity.
When providing testimonials as to the Company or its products, the Company must prominently disclose that the
testimonial may not represent the experience of other clients, is no guarantee of future performance, and is a paid
testimonial (if more than a nominal sum was paid).
When including comparisons between investments or services, the Company must disclose all material differences between them, such as investment objectives, costs and expenses, liquidity, safety, guarantees or insurance, fluctuation of
principal or return and tax features.
(Rev. 102007)
58
References to tax-free or tax-exempt income must indicate which income taxes apply, or which do not, unless income is
free from all applicable taxes. For example, if income from an investment company investing in municipal bonds is
subject to state or local income taxes, this fact must be stated, or the illustration must otherwise make it clear that income is free only from federal income tax.
When making or referring to recommendations in advertisements and sales literature, the Company must have a
reasonable basis for the recommendation and it must disclose any of the following situations which are applicable:
o that at the time the advertisement or sales literature was published, the Company was making a market in the
securities being recommended, or in the underlying security if the recommended security is an option or security future, or that the Company or associated persons will sell to or buy from customers on a principal basis;
o that the Company and/or its officers or partners have a financial interest in any of the securities of the issuer whose
securities are recommended, and the nature of the financial interest (including, without limitation, whether it consists of any option, right, warrant, future, long or short position), unless the extent of the financial interest is nominal; and
o that the Company was manager or co-manager of a public offering of any securities of the recommended issuer
within the past 12 months.
All of the Company‘s advertising, which meets the standards set forth in the SIPC By-Laws, must include a notation that
the Company is a member of SIPC (unless the Company is exempt from SIPC registration). This may be achieved by
including one of the following: a reproduction of the official symbol, the official advertising statement or the official
explanatory statement (revised in 2002 to include reference to SIPC‘s website). These choices are described in Article
11, Section 4 of the SIPC by-laws, obtainable on the SIPC website: www.sipc.org.
11.3 Approval and Record Keeping
Advertisements, Sales Literature and Independently Prepared Reprints. The designated Principal must approve by
signature or initial and date each advertisement, item of sales literature and independently prepared reprint before it is used or
filed with FINRA's Advertising Regulation Department, if applicable, (whichever comes first). Research reports concerning debt or equity securities (including non-corporate securities) may be approved by a supervisory analyst under NYSE Rule
344.
In reviewing advertisements, sales literature and reprints, the designated Principal must ensure adherence to all content standards and guidelines, both general and specific, as outlined above as well as all standards set forth in applicable FINRA,
SEC, State and Federal Rules and Regulations. The language used in recommendations, testimonials, comparisons,
references to FINRA and SIPC, and all other statements and disclosures must be reviewed for accuracy and regulatory compliance. If the designated Principal does not approve an item, s/he will return the item to the preparer with an
explanation as to disapproval and will include recommended changes, if any, required to bring the item into compliance. The
final revised item must be again forwarded to the designated Principal for final review and approval. No unapproved items
must be used or distributed, and altered versions of previously approved materials may not be used without Principal approval of the alterations.
Following approval, filing may take place as described below. If filing is required prior to use, the designated Principal must withhold the material from publication or circulation until approved, or changed as specified, by the FINRA. All approved
advertisements, sales literature and independently prepared reprints must be maintained in a separate file for a period of three
years from the date of last use. This file must include the name of the Principal who approved each such piece, and the date approval was given. The names of the preparers of such materials need not be maintained.
Public Appearances. With regard to each activity that meets the definition of public appearance (see above):
The designated Principal must provide advance permission for the Representative's activity;
The designated Principal must review and approve all announcements or other publicity surrounding the event;
The designated Principal of the Company must review and pre-approve all agendas, sales material presentations or other
"hand outs" or web page downloads. Copies of these materials will be retained in a file dedicated to the event;
Representatives and the designated Principal should consult rules and regulations of the state in which the presentation
will occur to determine if state registration is required (many states have held that conducting public forums in which
generic investment information is presented may be considered an investment advisory activity);
Only products or services approved by the Company for sale by Registered Representatives may be presented by those
Representatives;
(Rev. 102007)
59
Prospectuses, other offering circulars and approved sales material for approved products and services must be available
physically or electronically for participants;
Registered Representatives of the Company must clearly identify themselves, the Company and the registered branch
location through which their securities activities are supervised, "on the record" so that there can be no possibility of mistaking their presence;
The designated Principal must ensure that all general content standards and guidelines described herein and contained in
applicable FINRA and SEC Rules are adhered to in all public appearance statements and materials;
It is the responsibility of the Representative involved to make sure that the Company has a complete record of the event
in its files including a list of participants.
When statistical information is included in any communications with the public, a file must be maintained containing the
source of any statistical table, chart, graph or other illustration used by the Company. The underlying data need not be
maintained.
―Internal use only‖ material is designed for use only by Registered Representatives and other associated persons and does
not have to be reviewed as advertising. Nevertheless, it is subject to internal review by the designated Principal for compliance with ISL policies and content standards.
“Broker-dealer use only” material,” consisting of advertisements or sales literature sent by the Company only to other
members or their registered persons, is included in the definition of institutional sales material. Therefore, these materials are not subject to the advertising review and approval process described above. Rather, they are subject to the standards
described below under ―Institutional Sales Material.‖ Any material marked ―broker-dealer use only‖ should NEVER be
given to customers as it may contain information which would not be allowed in a prospectus or under FINRA or SEC advertising rules. Failure to observe these rules could void any sales made and led to severe discipline and penalties.
11.4 Filing Requirements
After the designated Principal has approved ads or sales literature for use and distribution, s/he will ensure that any
advertisement or sales literature requiring review by the FINRA Advertising Regulation Department will be filed. Rule
2210(c) should be consulted for clarification of specific filing requirements.
All filings must include: the actual or anticipated date of first use, the name of and title of the registered principal who
approved the advertisement or sales literature, a brief description of the material, whether of not it will be used with a prospectus and the approval date. Previously filed advertising and sales literatures that are used without material change need
not be filed again.
In general, materials requiring filing within 10 days of first use or publication (i.e., post-use filing) include the following:
Advertisements and sales literature concerning registered investment companies (including mutual funds (except bond
mutual funds), variable contracts, continuously offered closed-end funds, and unit investment trusts). If reference to a
performance ranking or performance comparison is included, the filing must include a copy of such ranking or
comparison.
Advertisements and sales literature concerning public DPP‘s.
Advertisements concerning government securities.
In general, the following materials requiring filing at least 10 days prior to first use or publication (i.e., pre-use filing). The
designated Principal must withhold any material from publication or circulation until approved, or changed as specified, by the FINRA.
Advertisements and sales literature concerning registered investment companies (including mutual funds, variable
contracts, continuously offered closed-end funds, and unit investment trusts) that include or incorporate a performance
ranking or performance comparison category not generally published or that is the creation of the investment company, its underwriter or affiliate. These filings must include data to substantiate the ranking or comparison.
Advertisements concerning CMO‘s.
Advertisements concerning securities futures.
(Rev. 102007)
60
Sales literature concerning bond mutual funds that include or incorporate bond mutual fund volatility ratings, as defined
in Rule IM-2210-5. The Company may be asked to provide supplemental information requested by the FINRA pertaining
to the rating that is used.
If the Company has filed a required draft version or "story board" of a television or video advertisement, the designated
Principal must ensure that the final filmed version is filed within 10 business days of first use or broadcast.
The following types of material are excluded from filing requirements:
Advertisements and sales literature solely related to recruitment or changes in a member's name, address, ownership or
personnel information.
Advertisements and sales literature that do no more than identify the NASDAQ or a national securities exchange symbol
of the Company or identify a security for which the Company is a NASDAQ registered market maker.
Advertisements and sales literature that do no more than identify the Company or offer a specific security at a stated
price.
Prospectuses, preliminary prospectuses, fund profiles, offering circulars and similar documents that have been filed with
the SEC or any state, or that is exempt from such registration, except that an investment company prospectus published
pursuant to SEC Rule 482 will not be considered a prospectus for purposes of this exclusion.
Announcements as a matter of record that the Company has participated in a private placement, unless the advertisements
are related to direct participation programs or securities issued by registered investment companies.
Press releases that are made available only to members of the media.
Independently prepared reprints.
Correspondence.
Institutional sales material.
Material that refers to investment company securities, direct participation programs, or exempted securities solely as part
of a listing of products or services offered by the Company.
The designated Principal must ensure that the Company has complied with initial advertising requirements described under
the Rule and that the Company complies with all additional filing requirements, if any, imposed on the Company by the
FINRA. Also, please refer to specific product sections within these WSP for further, respective filing requirements.
11.5 N/A
11.6 N/A
11.7 Use of Electronic Media
11.7.1 General Guidelines
In NTM 98-3 the SEC and FINRA issued general guidelines as to the use of electronic media for delivery of
information to customers and record keeping.
Where communication is available electronically, all communications with customers shall identify its availability
and any alternate, optional or "backup" means of information delivery. The customer should be provided with an opportunity to specify a choice of alternate (written) communication if so desired, including capability to
"download.‖ All such electronic communication shall provide the customer with full access to the kind of
information that the customer would otherwise have obtained if the communication had been written, including order
of presentation. The mechanics of delivery of such communication should not be so burdensome as to present significant obstacles to those not technically proficient.
Where electronic communications with customers are being used the Company shall record and store internal evidence of (a) the customers assent to such communication, (b) any conditions or particular customer requests and
(c) the actual transmission to, and receipt by, the customer of each particular communication.
(Rev. 102007)
61
All electronic communication with customers shall be subject to the following policies and procedures designed to
safeguard generally the integrity and confidentiality of electronic information, including restricted access, passwords, systems to detect and thwart a security breach, etc.:
Customers shall be made aware that electronic communication is password protected.
The Company and/or the Registered Representative(s) or associated person(s) utilizing any system of electronic
communication shall password-protect access to such system so that unauthorized persons can neither (a) access
the system to communicate or (b) access the system's records to pull up confidential information.
The Compliance Department shall be informed of each such system and the password or other protection for that
system.
Each Registered Representative's supervising Principal (or his/her qualified designee) shall have the password
and free access to each system being used by that Representative to communicate with clients or others on behalf
of the Company in order to discharge supervisory responsibilities for review of correspondence and other communications.
The Company‘s designated IT personnel shall have in place programs to detect and deter security breaches of the
Company‘s electronic communications systems and to assess system capacity and augment it, if required.
11.7.2 Customer Consent
Registered Representatives are required to obtain consent from customers to use electronic means of communication.
This consent may be received telephonically or in writing, via separate language on an account opening agreement that authorizes electronic delivery of information. The customer must be given the option of refusing this form of
communication and information delivery (presently or in the future) and a record of the customer‘s choice must be
maintained in its respective file.
11.7.3 Internet Communication
The FINRA has made it clear that Internet and other electronic communications relative to securities sales or services
are considered a special form of advertising.
The FINRA has stressed the need to identify the suitability issues raised by the promotion of securities product to unknown parties, in particular the need for the member:
To engage in careful investigation or research before recommending a security;
To determine the suitability of the security with respect to each customer who responds before effecting a
transaction; and
To include a notice in each transmission alerting the recipients of the need to assess the security in the context of
each customer‘s individual circumstances.
Hyperlinks. When electronic delivery is used it is often difficult to establish whether multiple documents may be considered delivered together. It should be understood that documents in close proximity on the same website menu
are considered delivered together and Documents hyperlinked to each other are considered delivered together as if
they were in the same paper envelope. Therefore, by linking documents via hyperlinks, issuers and intermediaries
are delivering multiple documents simultaneously to investors when so required by the federal securities laws.
When providing prospectuses to customers electronically, the following distinctions should be understood.
According to the SEC, information on a website is part of a prospectus only if an issuer (or person acting on behalf of the issuer, including an intermediary with delivery obligations) acts to make it part of the prospectus. For example, if
an issuer includes a hyperlink within a prospectus, the hyperlinked information would become a part of that
prospectus. When embedded hyperlinks are used, the hyperlinked information must be filed as part of the prospectus
in the effective registration statement and will be subject to liability under Section 11 of the Securities Act. In contrast, a hyperlink from an external document to a prospectus would result in both documents being delivered
together, but would not result in the non-prospectus document being deemed part of the prospectus. When the
Company is responsible for prospectus content, the designated Principal will ensure proper use of hyperlinks in electronic information delivery.
(Rev. 102007)
62
PLEASE NOTE: "Broker-dealer use only" material should never be sent over the Internet unless to a clearly designated broker-dealer or Registered Representative under confidential protection.
11.7.4 Websites
The SEC, FINRA and other regulators have made it clear that "websites" fall in the category of "advertising" and
must be pre-approved by a Company principal and may require review by the FINRA‘s Advertising Department.
Similar forms of Internet presence, such as "chat rooms,‖ "bulletin boards" and other forms of interactive media, are considered ―public appearances.‖ Websites are, therefore, required to undergo the same kind of pre-clearance and
review procedures set forth above.
Websites are qualitatively different from written communications in that they are subject to constant change.
Registered Representatives and other Company personnel operating websites are reminded of the following:
The identity, content, sample format and operating mechanics of each website must be presented for advertising
review and approved before it is used. Failure to obtain pre-approval is grounds for remedial action, including shutting down the site.
Any material changes in the content, format or mechanics of the website must be similarly approved before they
are implemented.
Because of the global nature of the Internet and the inability of the Company and Representatives to control
access by visitors in locations where the Company or the Representatives may not be licensed, unless the website is password protected and not available through search engines, specific disclosure regarding the ability of the
Company and the Representative to conduct business in various locales must be included.
"Chat Room" or similar websites, if operated by the Company or any Registered Representative or affiliate, must
be operated in accordance with procedures and rules applicable to public appearances and must present balanced, complete and not misleading information and recommendations about securities or other similar products.
The presence of any Registered Representative or other person purporting to represent the Company at any "chat
room" or other interactive site and the conditions of such presence must be specifically cleared in writing in
advance by the person's designated Principal and a record of such approval must be kept.
Any Registered Representative or other person purporting to represent the Company at any "chat room" or other
interactive site must clearly and periodically identify him/herself to the site participants as a representative of the Company and provide the name of the Company and the address and telephone number of the registered branch
location through which his/her securities business is supervised.
Any recommendations for "new issue" securities (including mutual funds) must be pre-cleared with the
Compliance Department.
An electronic record of the e-mails recorded in the "chat room" or other site must be maintained by the person(s)
operating the site and may not be deleted until reviewed and approved by the designated Principal of the
Company.
Any reference by the firm or any associated person of its membership to FINRA on a website must include a
hyperlink to FINRA‘s home page, www.finra.org.
The Compliance Department shall maintain a comprehensive address list of all websites in use for the business of
the Company and it‘s Registered Representatives (including associated entities such as registered investment
advisors, insurance agencies, etc.).
The Compliance Department will monitor all websites on a regular basis to identify and correct any variances
from Company policies and procedures.
In addition, ISL requires that individual Registered Representatives obtain advance approval from the Compliance
Department before they initiate or change their own websites, whether or not involving the securities business.
Included in such approval would be (a) any hyperlinks to other sites such as the ISL site and (b) hyperlinks allowed on to the Registered Representative website.
Website Content. Broker dealers are responsible for the accuracy of their statements that reasonably can be expected to reach investors or the securities markets regardless of the medium through which the statements are made,
including the Internet. According to the SEC, broker dealers are responsible if they have involved themselves in the
(Rev. 102007)
63
preparation of the information or explicitly or implicitly endorsed or approved the information. In the case of site
owner liability for statements by third parties such as analysts, the courts and the SEC have referred to the first line of inquiry as the "entanglement" theory and the second as the "adoption" theory. In view of the potential liabilities
attendant upon the use if hyperlinks, ISL requires that the Compliance department review and approve in advance the
use of each hyperlink on the ISL website.
(Rev. 102007)
64
SECTION 12: TRADING
12.1 In General
The Company does not a have a ―Trade Desk,‖ per se; however, because it receives and routes customer orders to its clearing firm, and because it routes customer checks (if received) and applications to various product sponsors and issuers, certain
sections herein are considered applicable. ―Trade Desk Supervisor‖ is used herein to describe the Principal whose functions
include review of trades and trade execution. In some cases, ―Trade Desk‖ functions, as described, are completed by the clearing firm‘s trade desk.
Emmett A. Larkin, the clearing firm, subscribes to TAG to ensure the assessment of best execution. TAG produces daily
reports which determine whether trades are within the market for best execution. Larkin‘s trading department reviews these reports daily, researches any trades that are not executed at the best prices and makes any adjustments necessary. ISL
receives notification of any trades not within the market for best execution. The OSJ Principal approving the order tickets is
responsible for reviewing these notices and working with Larkin to ensure the client has received the best execution. In addition, every OSJ Principal is responsible for doing random checks on order tickets. The prices the trades were executed at
are to be checked with the bid and ask at the time the order was placed.
If a transaction error is discovered by either ISL‘s Operation Department or the Representative, a determination will be made
as to how to cover the trade. An error may be discovered at the time of comparison of the ticket and the confirm, or upon
report of the execution of the trade. As ISL operates under the K(2)(ii) exemption to SEC Rule 15c3-3, all trades clear
through Emmett A. Larkin, or any other clearing firm used by ISL. Therefore, when the error is that of ISL or the Representative, the initial trade is moved to ISL‘s error account for correction and subsequently returned to the customer‘s
account. When the customer makes the error, the trade is corrected in the customer‘s account and the customer is responsible
for any loss.
12.2 Best Execution
12.2.1 Best Execution, Defined
FINRA Rules require that ISL and its clearing firm, if applicable, obtain ―best execution‖ for each trade done on
behalf of a client. The Trade Desk Supervisor is responsible for overseeing the selection of the best market for each trade and for ensuring that the customer receives the best price, even in event the Company‘s trades are cleared
through a clearing firm.
As part of its obligations to deal fairly and equitably with customers, and as required by applicable regulations
(including FINRA Rule 2320), the Company must always look for opportunities to execute customer orders at the
"best execution price available," while taking into account all relevant factors, such as general market conditions,
market liquidity and depth and the size of a particular order. ISL requires all Branch Supervisors, currently Frank Gilday, to conduct ongoing Best Execution Reviews, which entail reviewing trades with the clearing firm to ensure
best prices were obtained. Such reviews must be conducted monthly at a minimum and will be evidenced through
the use of the Best Execution Review Form, which will be initialed/signed by the corresponding Supervisor. The form will also be reviewed annually by the Compliance Officer through the Audit Form.
12.2.2 Order Routing
The Company executes all its transactions through its clearing firm and/or requests such through certain third market
firms, and therefore does not conduct order routing. The Company expects that its clearing firm and other firms
utilized for execution services (if any) will periodically assess the quality of competing markets to assure that order flow is directed to markets providing the most beneficial terms for the Company‘s customers' orders.
12.2.3 Technological Developments re: “Reasonably Available Prices”
In NTM 01-22, FINRA reiterates best execution obligations and provides guidelines for compliance. The Company
routes and executes all its transactions through its clearing firm, and/or requests such through select third market
(Rev. 102007)
65
firms, and therefore does not conduct order routing. The Company expects that its clearing firm and other firms
utilized for execution services (if any) will comply with the guidance offered by the FINRA related to technological developments as they effect reasonably available prices.
12.2.4 N/A
12.3 N/A
12.4 Order Audit Trail System (OATS)
Per FINRA requirement regarding the implementation of an Order Audit Trail System (OATS), ISL will follow the
procedures outlined in this section when accepting order tickets.
In compliance with Article III, Section 27(d) of the FINRA, all securities transactions will be reviewed by a designated
principal, usually the OSJ, who will attest to his approval by initialing the order ticket. Transactions originating in non-OSJ
branches which report to the ISL home office must be sent to the home office for approval and processing. Transactions may, under supervision of the OSJ principal, be sent from an OSJ office directly to the fund or sponsor. Copies of the paperwork
must be sent the same day to ISL‘s home office.
Prior to recommending an investment to a customer, the Representative must make a reasonable effort to obtain information
concerning the customer‘s financial status, tax status, investment objectives, and other such information in order to determine
that the recommendation is suitable for the particular customer based on the information obtained. It is the Representative‘s ultimate responsibility to know his customer; the burden for establishing this knowledge is placed heavily on the
Representative.
After reviewing and approving the ticket order (evidenced by initials and/or signature on the order ticket), the OSJ Principal or the home office Operations Department will either a) input the order on-line through the clearing firm, or b) call the order
in to the clearing firm. As mentioned above, the ticket order will be marked with the time the order was called in or input,
and whenever possible, the time of execution. The transaction will be posted to the trading log. In addition, the clearing firm has implemented an OATS as well. They perform OATS reporting for all data commencing at the time an order is received
by them, whether electronically or orally.
12.4.1 N/A
12.4.2 Clocks
Per FINRA Rules, all members receiving instructions to effect transactions in covered securities shall synchronize all
clocks used to record the time of receiving orders/changes (OATS Clocks). Synchronization shall be within three (3)
seconds of the National Institute of Standards (NIS) standard. ALL TIME WILL BE EXPRESSED AS EASTERN STANDARD TIME (EST). Inlet Securities will synchronize all clocks used to record time of orders each day before
market opening. Mr. Frank Gilday will check the Company‘s clocks to ensure continued synchronization at the
following times each day: on or about 9:00 am. A Daily Synchronization Log will be kept on file at the Home
Office evidencing the times synchronization took place. As an introducing firm, ISL also relies on its clearing firm to synchronize its clocks daily to within three seconds of the National Institute of Standards and Technology's atomic
clock.
12.5 N/A
12.6 N/A
12.7 Margin Requirements
12.7.1 In General: Reg. T and FINRA Rule 2520
(Rev. 102007)
66
The Company offers margin accounts to its customers, however, as it is a fully-disclosed introducing firm, it is the
Company‘s clearing firm that is extending credit to its customers. Federal Reserve Board Regulation T governs the extension of credit to customers by broker-dealers and includes provisions concerning the initial margin requirements
for most types of securities transactions. In general, Regulation T requires 50 percent initial margin for long
purchases of marginable equity securities. In addition, Regulation T requires 150 percent margin for short sales of
equity securities, of which 100 percent can be from sales proceeds.
FINRA Rule 2520 imposes additional margin requirements on customer accounts. Rule 2520 generally requires
maintenance margin of 25 percent of the current market value for all long positions in marginable equity securities, meaning that the equity must not fall below 25 percent of the current market value of the securities in the account.
For short securities positions where the stock sells at $5 per share or above, Rule 2520 requires maintenance margin
of $5 per share or 30 percent of the current market value of the stock, whichever amount is greater. In addition, for a short securities position where the stock sells at less than $5 per share, a customer must maintain margin of $2.50 per
share or 100 percent of the current market value, whichever amount is greater. Where the same security is carried
long and short by the same customer, Rule 2520 permits maintenance margin of five percent of the current market
value of the long security.
Rule 2520 also permits customers to guarantee each other's accounts for maintenance margin purposes. In cross-
guaranteed accounts, the amount of maintenance margin excess in one account may be used to offset a maintenance margin deficit in the other cross guaranteed account. In addition, if the cross-guaranteed accounts are long and short
the same securities, including the same number of shares, the maintenance margin requirement on the combined
positions is five percent.
Notice to Members 01-11 describes amendments to Rules 2520 and 2522 that were approved by the SEC and became
effective in late February 2001. The amendments relate to cash and margin treatment for certain types of options
positions. If applicable to ISL‘s business, the Trade Desk Supervisor and Registered Options Principal are responsible for understanding the scope of these amendments and ensuring that all relevant information is conveyed
to, and understood by, respective personnel.
12.7.2 – 12.7.7 N/A
12.8 Confirmations
At or before completion of each transaction, Emmett A. Larkin, ISL‘s clearing firm, shall send to each customer a written
confirmation. Each designated OSJ Principal shall review all confirmations for his branch(es), on a daily basis, ensuring that
they are accurate, and to check for unusual activity. Currently, the OSJ Principals include Frank Gilday. Such reviews will be evidenced by the Principal‘s initials on the confirmations. Confirmations will include, at a minimum, the following
information:
The date and time of the transaction;
The identity, price and number of shares or units (or principal amount) of such security purchased or sold;
Whether the Company is acting as agent for the customer, or agent for some other person or for both, or as principal for
its own account and, if the Company is acting as principal, whether as market maker (other than by reason of acting as
block positioner);
If the Company is acting as agent, the name of the person from whom the security was purchased or to whom is was sold
or that it will be furnished on request;
If the Company is acting as agent, the remuneration received by the Company from the customer, unless remuneration is
determined pursuant to written agreement (which may be the customer account form), otherwise than on a transaction basis;
If the Company is acting as agent, a statement as to whether payment for order flow is received by the Company for
transactions in such securities and that the source and nature of the compensation received in connection with the
particular transaction will be furnished on request;
If the Company is acting as agent, the source and amount of any other remuneration received or to be received by the
broker in connection with the transaction;
(Rev. 102007)
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There are a number of exceptions contained in SEC Rule 10b-10, mainly having to do with odd-lot sales, debt securities and
reporting by non-SIPC members as well as periodic investment plans.
12.9 – 12.11 N/A
12.12 Currency Transaction, Travel Rule and Blocked Accounts
Currency Transactions. The Bank Secrecy Act requires the Company to file currency transaction reports (―CTR‖ or IRS
Form 4789) in accordance with Treasury regulations. These regulations require the Company to file a CTR whenever a currency transaction exceeds $10,000 (whether in one lump sum or aggregating amounts). This form must be filed even if
the transaction is not suspicious; if it is suspicious, a Suspicious Activity Report must be filed in addition to the CTR. Copies
of all such files must be kept in respective customers‘ files.
Foreign Currency/Currency Transportation. Pursuant to SEC Rule 17(a)-8, it is the policy of ISL to require the
designated Principal‘s approval prior to accepting any cash payments in foreign currency or from foreign transactions for
stock purchases or amounts to be credited to the customer‘s account. Furthermore, if the Company receives any transport, mail, or shipment of currency, or other monetary instrument from outside the U.S. in an aggregate amount exceeding
$10,000, the designated Principal must report the receipt on a Currency and Monetary Instrument Transportation Report
(CMIR), U.S. Customs Form 4790, to the Commissioner of Customs. This form must be filed regardless of the nature (suspicious or not) of the respective transaction. Additionally, foreign currency transactions in excess of the equivalent of
US$10,000 must be disclosed on the CTR, IRS Form 4789. Copies of all forms filed must be retained in the customer‘s file.
“Travel Rule.” The ―Travel Rule‖ arises under the Treasury Department regulations issued by the Financial Crimes
Enforcement Network (FinCEN) pursuant to the 1996 amendments to the Bank Secrecy Act (BSA). Where the Company is
transmitting funds equal to or greater than US$3,000 (or its foreign equivalent), it must include in its transmittal order the
following records, to be maintained for a period of five (5) years:
Name, address and account number of transmitter;
Identity of transmitter‘s financial institution;
Amount of the transmittal order;
Execution date of order;
Identity of the recipient‘s financial institution; and,
If received, the name, address and account number of recipient and any other specific identifier.
Blocked Accounts. In conducting securities transactions with existing accounts, Registered Representatives should be confident that such accounts are not ―blocked‖ or subject to certain controls. The Department of the Treasury issued rules
under the Office of Foreign Assets Control (OFAC). Under these regulations, the Company cannot deal in securities issued
from certain identified target countries. The Company must block or freeze accounts, assets and obligations of blocked entities and individuals when their property is in their possession or control. ―Blocking‖ is a legally enforceable freeze on the
utilization of any account or asset without authorization from OFAC. The Company is prohibited from creating debits to
blocked accounts although credits are authorized. Blocked SEC securities may not be paid, withdrawn, transferred (even by
book transfer), endorsed, guaranteed or otherwise dealt in. RR‘s or their supervisors can consult the OFAC ―Specially Designated Nationals and Blocked Persons‖ (SDN) list by going to www.FINRA.com/1200-OFAC-form.asp or by visiting
the OFAC website directly at www.ustreas.gov/ofac.
RR‘s and designated Principals should consult OFAC lists in order to ascertain if existing or new customers are listed.
Where assets or accounts are identified as subject to OFAC regulations, the RR‘s and designated Principals must inform the
designated anti-money laundering supervisor, who will then make an effort to confirm the finding. If confirmed, this
information must be given to the CCO, who will immediately inform the customer and other appropriate parties that the assets or accounts are blocked and who will then inform OFAC by fax (202) 622-0077. Questions may be directed to OFAC
at (202) 622-2490.
12.14 On-Line Trading; Day Trading
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68
The wide availability of electronic trading systems permits brokers-dealers to provide customers with direct access to
NASDAQ and other markets so that they may place orders ―on line‖ on a ―discount‖ basis without going through the Company‘s Trade Desk. The easy availability to customers of these ―unsolicited‖ trades poses unique compliance challenges
for registered broker-dealers. ISL does not presently permit the opening of ―on line‖ accounts by customers.
In NTM 01-23 FINRA makes clear that the Suitability Rule (2310) applies to all ―recommendations‖ made by the Company to customers—including those made via electronic means—to purchase, sell or exchange a security. Whether or not a
communication constitutes a ―recommendation‖ depends on an analysis of all relevant facts and circumstances. The
Company, in its electronic communications with the public, will comply with the Suitability Rule and will make use of the guidelines outlined in NTM 01-23 when determining its obligations under Rule 2310.
The speed with which transactions can be executed on major exchanges and the relatively low execution charges posted by many firms has prompted an explosion in ―day trading‖, the process whereby investors aggressively attempt to profit from
intra-day price movements in securities. The ability to engage effectively in ―day trading‖ requires not only sufficient capital
but also a sophisticated understanding of securities markets and trading techniques. ISL does not presently provide ―day
trading‖ facilities for its customers and customers who actively engage in unauthorized ―day trading‖ will be asked to close their accounts and move them elsewhere.
12.15 – 12.16 N/A
12.17 Market Center and Order Routing Reporting
In an effort to increase visibility of execution quality and promote competition in the securities markets, the SEC in
November 2000 adopted Exchange Act Rules 11Ac1-5 and 11Ac1-6. NTM‘s 01-16 and 01-30 describe how, generally, the
Rules seek to improve the ability of public investors to monitor orders after they are submitted to a broker-dealer for
execution.
The Company is not a Market Maker or ―market center‖ and is therefore not required to prepare the monthly, electronic
reports required under SEC Rule 11Ac1-5.
Rule 11Ac1-6 requires the Company, if it routes customer orders in equity and option securities, to make publicly available
quarterly reports that disclose the venues to which it routes non-directed orders in certain covered securities, including, unlike
in Rule 11Ac1-5, listed options. The Rule further requires the Company to disclose the nature of any relationship it has with those venues, including any payment for order flow arrangements. Finally, the Rule requires the Company to disclose, upon
customer request, the venues to which individual orders were sent for execution. The Rule differs from 11Ac1-5 in that it
includes more securities, it applies to all broker-dealers routing orders on behalf of customers (not only those who execute orders), and it applies to all types of orders, provided they are ―non-directed.‖ Details of the Rule can be found in NTM‘S
01-30 and 01-44.
The Company routes all its equity securities trades through its clearing firm. It therefore relies on its clearing firm to make
available the necessary reports to its customers.
12.18 Exception Reports
The Trade Desk Supervisor makes use of automated reports to assist in his or her review of customer and firm trade activity.
These reports should consider the transaction size, location, type, number and the nature of the activity reported. Reports used by the Company include exception and other reports provided by the Company‘s clearing firm, as required under the
Company‘s written clearing agreement.
All items appearing on such reports must be reviewed by the Compliance Officer to determine if any further action or more
in-depth reviews are warranted in any instance. If necessary, focused reviews of subsequent customer activity should take
place to understand trading patterns or abnormalities indicated on exception reports. All reports reviewed and records of
actions taken, with notated evidence (initials and date) of the supervisor‘s review, should be maintained with other required trade records.
(Rev. 102007)
69
SECTION 13: CUSTODY AND CLEARING
13.1 In General
Pursuant to SEC Rule 15c3-3, broker-dealers that physically possess or control their customers‘ securities must promptly obtain and thereafter maintain physical possession or control of all fully-paid securities and excess margin securities carried
by the broker-dealer for the accounts of customers.
The Company operates under the ―(k)(2)(ii)‖ exemption of this Rule, because it meets the following condition:
The broker-dealer is an introducing broker-dealer who clears all transactions with and for customers on a fully-disclosed
basis with a clearing broker or dealer, and who promptly transmits all customer funds and securities to the clearing broker or dealer which carries all of the accounts of such customers and properly maintains and preserves such books and
records.
ISL‘s associated persons are required to fully understand and comply with the following:
Customers are instructed to mail checks directly to the clearing firm. Should the firm receive any checks made payable
to the clearing firm, they should be forwarded promptly to the clearing firm after logging them in the Cash Receipt and Disbursement Blotter; accepting cash from a client is not permitted;
In the event a check made payable to ISL is received from a client, it must be recorded in the cash receipts blotter before
being returned promptly to the client. The Company must then notify the client to subsequently make any and all checks
payable to the clearing firm;
Checks representing customer funds may not be written on a Registered Representative‘s own personal or business
account;
Customers are instructed to send all securities directly to the clearing firm. Any securities received by ISL should be
forwarded promptly to the clearing firm after logging them in the Securities Receipt and Delivery Blotter.
With regard to redeeming securities, there may not be a sharing in the profits and losses of a client or an agreement to
purchase a security from a client at some future date; and
Misappropriation, stealing, or conversion of customer funds is prohibited and constitutes serious fraudulent and criminal
acts. Examples of such acts include unauthorized wire or other transfers in and out of customer accounts, borrowing customer funds, converting customer checks that are intended to be added or debited to existing accounts, or taking the
cash values of insurance contracts or other liquidation values of securities belonging to customers.
ISL has several procedures in place to deter conversions and misappropriations of customer funds by Registered
Representatives, employees and others:
Proceeds from sales are only made out to the name(s) on the account title and mailed directly to the address of the
account. Only a properly executed Letter of Authorization (LOA) signed by the customer will allow the Company to alter this procedure. An individual LOA for each instance is required;
All checks are mailed from the clearing firm directly to the client; and
Customers are instructed to send funds directly to the clearing firm.
Clearing Arrangements. The Company is an ―Introducing Broker‖ and all its customer transactions are executed through its clearing firm. At the opening of every account, each customer receives a welcome letter from ISL and from the clearing
firm, disclosing the relationship between ISL and the clearing firm.
Pursuant to FINRA Rule 3230, the clearing agreement between ISL and Emmett A. Larkin specifies the following
responsibilities of both parties:
Clearing Firm: (1) extension of credit,
(2) assisting in the monitoring of accounts,
(3) maintenance of certain books and records (specified in Section 17), (4) receipt and delivery of customer funds and securities,
(Rev. 102007)
70
(5) confirmations and statements,
(6) safeguarding of funds and securities, (7) execution of transactions and OATS,
(8) customer notification.
Inlet Securities: (1) opening, approving and monitoring customer accounts,
(2) maintenance of certain books and records (specified in Section 17),
(3) acceptance of orders, (4) designation of customers under financial responsibility rules, and
(5) customer notification (for any customers not maintained by the clearing firm).
ISL will maintain a copy of the clearing agreement with Larkin, specifying the subjects above.
Proprietary Accounts; Net Capital Computation. Introducing brokers are generally required by the terms of the clearing
agreement to maintain specified cash and/or securities on deposit with the clearing firm. Introducing brokers should be aware of the FINRA and SEC rules governing proprietary accounts of introducing brokers and dealers (PAIB). These accounts on
deposit with the clearing firm have never been subject to the ―custody‖ rules as the introducing broker is not technically a
―customer‖ of the clearing firm. Consequently the clearing firm is free to count PAIB in its net capital base absent the FINRA and SEC rulings in this area. These rulings identify which introducing firm deposits may be used by the introducing firm as
allowable net capital, and therefore may not be used by the clearing firm as part of its net capital. For an introducing firm‘s
assets, which are on deposit with a clearing firm, to count as allowable net capital, the introducing firm must have on file a PAIB Agreement with its clearing firm specifying which deposit assets will be allowable PAIB. ISL‘s clearing firm has set
aside a separate reserve account for the PAIB assets. The clearing firm must notify the SEC and its designated examining
authority immediately if the ISL PAIB allowable deposits fall below the designated minimums and a corrective plan must be
developed which is acceptable to all parties.
Clearing Firm Reporting Responsibilities. It is the responsibility of the clearing firm promptly to report all customer
complaints to the introducing firm and FINRA. The clearing services agreement must contain provisions expressly authorizing the clearing firm to do this.
Clearing Firm Exception Reports. FINRA rules now require that the clearing services agreement contain a provision
requiring the clearing firm at the commencement of the relationship and annually thereafter to provide a list or description of all exception or other reports that it offers to the introducing firm to assist it in supervising its activities, monitoring accounts
and carrying out its functions and responsibilities under the clearing services agreement. The introducing firm must promptly
notify the clearing firm of the reports it requires in order to carry out its supervisory responsibilities. On or before July 31 of each year the clearing firm must report to the chief executive officer and chief compliance officer of the introducing firm as
to the reports offered and the reports requested by the introducing firm, with a copy to FINRA. Clearing firms must retain
records of all reports provided.
13.2 The Securities Investor Protection Corporation (SIPC)
The Securities Investor Protection Corporation (SIPC) was established to restore public confidence in the securities industry and to protect customers‘ assets held by members. SIPC provides up to $500,000 protection for claims of cash and securities
with a limit of $100,000 for claims of cash. The Chief Compliance Officer of the Company will determine if the Company is
required to be a member of SIPC, due to the nature of its securities business, and if so, will take steps necessary to ensure ongoing membership.
Membership is composed of all persons registered as brokers or dealers with the SEC as well as all members of any national security exchange. The protection is per ―separate customer‖ and the SIPC account is funded by brokerage firms based on
their gross sales volume. In general, a different name should appear if it is to be considered a separate customer.
Only bona fide customers (persons who have stock or cash in their account as a result of or in anticipation of executing trades in the securities market) are eligible for protection under SIPC. Persons, such as providers of services, whose claims for cash
(Rev. 102007)
71
or securities are by operation of law and are subordinated to claims of creditors of an SIPC member firm, and persons who
are associated with a firm, such as a partner or broker, are examples of persons ineligible for protection.
13.3 N/A
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SECTION 14: INVESTMENT BANKING
14.1 – 14.3 N/A
14.4 Rule 144A Transactions
ISL shall not sell any control or restricted stock (―144 Stock‖) unless the following conditions are met (when applicable):
There must be current information available to the public about the company;
In some instances only a limited quantity of the stock can be sold in any three-month period;
The securities must be sold in a broker‘s transaction or directly to a market maker;
In some instances a notice of intention to sell the stock must be transmitted to the SEC and the stock exchange where the
stock is listed; on Form 144.
In the case of restricted stock, the stock must have been owned and fully paid for a specified period of time.
The certificates of the stock must have been re-issued free of any restrictive legends.
The Registered Representative handling this transaction is responsible for contacting the Compliance Officer, Jessica Gilday, and obtaining the necessary documentation from the customer before the transaction is executed. The clearing firm will not
execute transactions without the proper documentation. The Compliance Officer must review every transaction, even if the
transaction is for the same customer. The ticket must indicate that it is a ―Rule 144‖ or ―Restricted Stock‖ transaction and
approval will be evidenced by the Compliance Officer‘s initials/signature on the ticket. Such transactions will be reviewed as they occur, and during the Annual Branch Audit; the order tickets and required documentation will be reviewed for
completeness. The Audit will list these transactions separately and the Compliance Officer will attest to the Review by
signing the Audit Form.
14.5 N/A
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SECTION 15: PARTICULAR INVESTMENT PRODUCTS
Exempted Securities: Note that on July 31, 2001, the SEC approved FINRA Rule 0116, which enumerates those FINRA
Rules and interpretive materials that apply to transactions and business activities involving exempted securities, other than
municipal securities. Please refer to Rule 0116 for a complete listing of applicable rules and materials. In conducting transactions in such exempted securities, the Company‘s supervisory personnel will comply with all the Rules outlined under
Rule 0116 in the same fashion as described specifically throughout this WSP Manual.
15.1 Mutual Funds
Mutual funds, for purposes of these policies and procedures, refer to open-end investment companies. Registered
Representatives are responsible for recommending mutual fund transactions in compliance with these policies. The designated Principal is responsible for reviewing mutual fund transactions on a daily basis, taking the following areas into
consideration.
15.1.1 Advertising and Sales Literature
Besides general FINRA guidelines related to advertising as outlined in Section 11, there are specific requirements relating to the use of investment companies advertising and sales literature. ISL generally follows these mutual fund
sales policies:
Advertising and sales literature prepared by the sponsor, underwriter or Company must have FINRA approval
and be free of misleading and false information;
The use of rankings in all advertisements and sales literature will comply with the standards set forth in IM-2210-
3 concerning permitted types of rankings, necessary disclosures, time periods and categories (these standards are
complex and should be consulted by the designated Principal when reviewing sales literature and advertising for
approval);
For registered investment companies (including mutual funds, variable contracts, and unit investment trusts) as
well as other securities representing investments in pools of securities, such as municipal fund securities, sales
materials containing certain statements related to performance, investment objectives, experience, benefits and
risks, and/or fees must be reviewed and filed in accordance with Rule 2210 (see NTM 03-17 for specifics);
―482 advertisements‖ are advertisements defined under SEC Rules 482 of the 33 Act that are not necessarily the
statutory prospectuses required to be presented to potential investors in all investment company offerings, but
that refer to such prospectuses. These advertisements must not be accompanied by an application to purchase
fund shares. 482 advertisements that contain performance data must include the following information: (i) a
statement that past performance does not guarantee future results; (ii) a statement that current performance may be lower or higher than the performance data quoted; and (iii) a toll-free or collect telephone number or a website
where an investor may obtain performance data current to the most recent month-end, unless the advertisement
includes total return quotations current to the most recent month ended seven business days prior to the date of use. These advertisements must also include a statement that advises the investor to carefully consider the fund‘s
investment objectives, risks, and charges and expenses before investing; explains that the prospectus contains this
and other information about the investment company; identifies the source from which the investor may obtain a
prospectus; and states that the prospectus should be read carefully before investing. All these disclosures—whether in print, electronically, or on TV/radio, must be presented prominently in accordance with the standards
imposed under Rule 482, so as to not minimize their presentation (i.e., they must meet required type size, style,
placement and emphasis guidelines). The designated Principal must ensure that all advertisements used to promote mutual funds meet these requirements or be revised and re-field with the FINRA.
A return of principal (capital gains distributions) should never be represented as income; and
When dealing with customers, ISL shall not mislead by implying that the investment will provide a guaranteed
income or a particular rate of return, or that past asset values and dividends can be depended on in the future.
In addition, Rules IM-2210-5 and 2210(c) (3) govern the use of bond mutual fund volatility ratings in member sales
literature. These Rules permit the Company and its associated persons to include bond mutual fund volatility ratings
in supplemental sales literature, subject to certain conditions, and require supplemental sales literature containing
bond mutual fund volatility ratings to be filed with FINRA‘s Advertising Regulation Department for review and
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approval at least 10 days prior to use. The designated Principal, when reviewing mutual fund advertising and sales
literature for approval, should consult IM-2210-5 to ensure specific requirements are met.
15.1.2 Suitability
FINRA Rules require that Registered Representatives inquire as to the suitability of a mutual funds transaction for a customer. The Representative should consider the customer‘s tax status, financial situation and investment
objectives before making recommendations on particular funds. If the customer is making a selection of funds, the
Representative must ensure that each fund, as well as all the funds in the selection, is suitable, and that the proportions are also suitable.
In NTM 01-23, FINRA describes its Policy Statement issued in March 2001 concerning online suitability. The Statement provides guidance concerning member broker-dealers‘ obligations under the Suitability Rule (2310) in
light of the dramatic increase in Internet use in the brokerage industry. Please refer to Section 9.13.1 for details.
15.1.3 Correspondence/Disclosure of Fees and Expenses
When reviewing correspondence related to mutual funds, the designated Principal will watch for the following and
investigate further any perceived violations:
Selling dividends;
Representing a back-end load fund as ―no-load‖;
Representing a fund with an asset-based sales or service fee exceeding .25 of 1% as ―no-load‖;
Representations regarding yield and performance;
Recommendations that include switching or appear to recommend unsuitable diversification among funds;
Dealer-use-only material;
Excerpts out of context from the prospectus that may be misleading; and/or
Required disclosures about the fund‘s investment profile, charges, hedging strategy, tax consequences and other
pertinent factors.
The Representative must provide the customer with a current prospectus of all mutual funds under consideration. A
copy of the fund prospectus will be sent to each purchaser of a mutual fund. The customer must be advised to review
the prospectus and keep it for reference. A Prospectus Receipt Form, confirming that the prospectus was received,
must be signed by the customer prior to purchasing the mutual fund. OSJ Principal review must be made by the following day of the transaction. By signing/initialing the order ticket, the Principal confirms that the customer
received the prospectus and the Prospectus Receipt Form is on file.
Materials provided by fund distributors for dealer use only may not be provided to customers and must not be
displayed in a public area such as a reception area. Dealer-use-only material is often provided as educational
material for dealers and their Representatives. All dealer-use-only material will be marked as such with limited distribution.
In accordance with recent FINRA interpretations it is the Representative's responsibility to make sure that the
customer is aware of ALL fees and expenses associated with a particular investment product, particularly mutual funds. It is inappropriate to use sales presentations or material which give the impression that certain sales charges or
"loads" do not apply without a full and fair disclosure of fee and expense requirements that do apply. For example,
the term "no load" by itself, with no disclosure of "trails" or other fees, would be inappropriate.
Effective April 1, 2000, any fund or combination ―fund of funds‖ structure in the aggregate must observe a maximum
aggregate limit on asset based sales charges of 0.75% of average net assets and service fees of 0.25% of average net
assets. Aggregate front-end and deferred sales charges in any transaction are limited to 7.25% of the amount invested (6.25% if either the acquiring fund or any underlying fund pays a service fee). Also effective for funds obtaining
SEC clearance after April 1, 2000, ISL may no longer sell securities of funds that impose a front end or deferred sales
charge on reinvested dividends.
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15.1.4 Breakpoint Sales
Open-end mutual funds establish points at which the aggregate sales charge is reduced on quantity transactions.
These are called "breakpoints." The breakpoint can be reached:
In a single purchase,
Over a period of 13 months, with a Letter of Intent, or
From the time of the initial purchase, under Rights of Accumulation.
The Representative must ensure that a customer entitled to volume discounts by reaching breakpoints is charged the
lower sales charge. A customer must always be informed of the next available quantity discount breakpoint at which the sales charge is reduced. Selling mutual fund shares just below the breakpoint to receive the higher sales charge is
prohibited. ISL requires each Representative to give any client purchasing a mutual fund a Mutual Fund Breakpoint
disclosure Statement.
Representatives are required to gather complete information when assisting a customer with the purchase of mutual
funds, in an effort to ensure that the customer is incurring the lowest front-end sales charge percentage. This
information relates to the customer‘s account and related and linked accounts and includes the dollar size of the pending transaction, the dollar size of anticipated transactions, and amounts previously invested in the specific fund
and other related funds, valued as specified in the prospectus. Representatives must ensure that customers receive the
appropriate breakpoint, by understanding the terms of offerings and reinstatements, as well as understanding the entire scope of the customer‘s mutual fund investments. Should a customer refuse to take advantage of an available
breakpoint, the Representative should make note of such refusal in the customer‘s file.
The Representative must be sure the customers making large purchases fully understand breakpoints and the
implications of buying ―B‖ or ―C‖ shares rather than ―A‖ shares. Discussions with the customer should be
documented, especially if the customer elects not to take advantage of breakpoints. The Registered Representative,
when in doubt about a customer‘s suitability to purchase ―B‖ or ―C‖ shares or the customer‘s foregoing breakpoint advantages, should consult his or her designated Principal for review and approval of transactions with the customer.
All customers purchasing ―B‖ or ―C‖ shares must sign and return to the Representative a ―B and C Shares Purchase
Form‖ (or other, similar document).
NOTE: The Company‘s clearing firm assumes the obligation to ensure that the Company‘s customers are receiving
all available breakpoints. However, it is ultimately the Company‘s responsibility to ensure that its clients are not
overcharged for mutual fund purchases. In addition, in some cases, mutual fund orders will go directly to the mutual fund company, and not through the clearing firm; in these cases, it is imperative that Registered Representatives
comply with these breakpoint procedures.
Sales of investment company shares in amounts just below a breakpoint can be a serious violation and have been the
subject of strong penalties imposed by the SEC and FINRA. Therefore, where a customer is purchasing funds fairly
close to a breakpoint, it is incumbent on each Registered Representative to explain where the breakpoint takes place and how additional money could be saved and/or additional shares could be purchased with a smaller sales charge.
Where the amount of money involved would reach a breakpoint if only one fund were purchased (rather than a few
funds), this must be pointed out even if more than one fund was recommended. In this way the customer may then
weigh the advantages of the reduced sales charge versus that of diversification among funds.
With respect to sales at or just above the breakpoint, the Registered Representative should determine that the fund
accepts dollar orders or orders for fractional numbers of shares. Care must be taken to ensure that the fund does not automatically convert a dollar order to an order for a specific full number of shares, which could result in a purchase
price below the breakpoint. It is the Registered Representative's responsibility to review his or her copy of each
customer confirmation for a mutual fund transaction involving a breakpoint to make certain that the customer received the benefit of the breakpoint. Any problems or discrepancies must be brought to the immediate attention of
the mutual fund trading desk.
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In funds where there is no "right of accumulation," when a customer purchases enough shares to achieve a
breakpoint, a letter of intent must be obtained. This allows the customer to buy additional shares of the same fund(s) within 13 months at the reduced sales charge.
Recent FINRA pronouncements indicate that sales under a genuine "asset allocation" program offered by the
Company in which the size of the purchase is determined by asset-based investment strategies will not be automatically labeled as "breakpoint" sales, even though the customer might have gotten a lower commission if
he/she had a greater concentration of assets in a particular fund or funds. The record must show that the customer
was informed of the options and chose not to take advantage of the "breakpoint.‖
The designated Principal is responsible for regularly reviewing its records of mutual fund sales activity by Registered
Representatives to ascertain whether investors are being charged the correct sales loads and that breakpoint and other rules are being observed. For every mutual fund transaction, ISL requires OSJ Principals to make a subsequent call
to the client to discuss breakpoints for that particular trade, and the Letter of Intent. The Principal must make the call
at the time of the transaction approval, which is evidenced by his signature on the Mutual Fund order ticket. (The
mutual fund order ticket states that by signing the form, the Principal certifies he has made the subsequent phone call on breakpoints and the LOI.)
Refunds to Customers. ISL must make prompt refunds to those customers who were identified during a Principal‘s review of trade activity (or during a self-assessment process) as having been overcharged, as well as other customers
who come forward seeking refunds on their own and are owed a refund based on the Company's assessment.
Refunds must be made in accordance with the following FINRA guidelines:
Refunds should be made in cash sent to the customer, or through cash deposits made to an existing customer's
account with notice to that customer (in some cases, within two days of determining the proper refund amount);
Refunds should be equal to the amount of the sales load overcharge plus interest at a simple rate of at least 2.5%,
for overcharges that occurred between January 1, 2001, and the present. For transactions that took place prior to
that time, members should use a comparable interest rate; and
Refunds should be made regardless of the performance of the mutual fund purchased by the customer.
The Mutual Funds Principal must review records of refunds and refund requests in order to ensure proper processing
and that these guidelines have been met, when warranted. This Principal must also ensure proper record keeping of all refund-related documentation in accordance with SEC Books and Records Rules (records should be maintained in
an easily accessible place for the first two years). In addition, the FINOP must ensure that Net Capital Computations
include refunds payable as liabilities, and that funds necessary to refund customers are segregated correctly and in
timely fashion, in accordance with the Customer Protection Rule (see NTM 03-47 for guidance).
[NOTE: RR‘s selling Unit Investment Trusts must understand, inform customers of, and correctly apply all available
price breaks, as in the case of mutual fund breakpoints.]
15.1.5 Letters of Intent
Nearly all open-end funds at the time of initial purchase permit a purchaser to execute a "Letter of Intent" (LOI)
stretching usually over a 13 month period. Representatives are required to inform every client that a letter of intent,
while not obligating the purchaser to make additional commitments, nevertheless permits them to purchase enough
shares to secure a reduced sales charge. Letters of intent vary widely between fund managements as to the offering price paid on each purchase, the amount of the breakpoint and methods of adjusting if the complete purchase is not
made. Each should be studied carefully by the Representative prior to presentation. The mutual fund order ticket
should indicate if the customer will execute a letter of intent. The Representative must confirm on the order ticket that he/she has discussed Letters of Intent with the customer. In addition, ISL requires the OSJ Principal to make a
subsequent call to the client re-iterating the option to use a LOI, before approving the order ticket. LOI reviews are
to be done at every transaction, by the next business day, and are evidenced by the Principal‘s initials/signature on the order ticket. The signature certifies that the Principal has spoken to the client regarding Letters of Intent.
15.1.6 Rights of Accumulation and Grouping of Family Orders
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Aggregating purchases of a particular fund or family of funds by one investor (and sometimes family-related purchases) may qualify for rights of accumulation. In these cases, a lower sales charge may apply based on the total
dollar amount invested.
The mutual fund purchase records must indicate rights of accumulation if available and the customer‘s desire to aggregate purchases to qualify for a lower sales charge. Some funds permit members of immediate families to group
their orders in order to achieve breakpoints or to complete letters of intent. General provisions of this grouping are
found in the prospectus of the various funds and must be consulted prior to making an offering to see if grouping is permitted and to what extent. The designated Principal will conduct reviews at every transaction, by the next
business day, along with informing the client of the appropriate breakpoints and LOI. Reviews are evidenced by the
designated Principal‘s signature on the order ticket.
15.1.7 Trails and Other Contingent Deferred Charges
FINRA rules carefully regulate the amount of sales and other charges that can be collected by the Company and its Registered Representatives from the sale of mutual fund shares. The rules define a "sales charge" to include all
charges or fees that are paid to finance sales or sales promotion expenses, including front-end, deferred and asset-
based sales charges, excluding charges and fees for ministerial, record keeping or administrative activities and investment management fees. A ―deferred sales charge‖ is any amount properly chargeable to sales or promotional
expenses that is paid by a shareholder after purchase but before or upon redemption. Sales charges are generally
taken out of the proceeds of investor payments. ISL may no longer sell securities or funds that carry a Contingent Deferred Sales Load (―CSDL‖) unless the CSDL is calculated so that shares not subject to the CSDL are redeemed
first and other shares are then redeemed in the order purchased (FIFO redemption).
The rules also define "service fees" as payments by an investment company for personal service and/or the maintenance of investor accounts. These fees, known generally as "trails" are paid directly by the issuer to the
broker-dealer as a percentage of average annual net assets of the particular investment. FINRA rules presently limit
the amount of "trails" to .25 of 1% of average annual net asset value.
FINRA personnel carefully review the prospectus and selling literature of each fund (and any updates or
amendments) prior to use to make sure that the rules are being observed and proper disclosures are made. The
Company and its Registered Representatives are generally entitled to rely on such pre-cleared material for an accurate description of all sales and other charges.
Registered Representatives and other persons involved in the sale of mutual fund shares should exercise extreme care in the use of the term "no load,‖ especially where there are "trails" involved. If the total charges (including sales
charges and "trails") exceed .25 of 1% of net assets per annum the investment cannot be described as "no load" under
FINRA rules.
All confirms for sales of mutual fund shares with a deferred sales charge must clearly state: ―On selling shares you
may pay a sales charge. For the charge and other fees, see the prospectus." This statement must appear on the front
of the confirmation and in, at least, 8-point type.
15.1.8 Repurchases and Redemptions
Mutual funds may at all times be redeemed by tendering shares directly to the issuer (with or without a charge as set
forth in the prospectus) in exchange for the net asset value (NAV) per share. The Company may also arrange for a
sale by the customer to an underwriter or the issuer at the quoted bid price plus a disclosed sales charge, as long as the availability of a direct redemption is also disclosed. If a customer requests liquidation of an outside open-end
fund held by the fund, the Registered Representative must obtain the customer‘s signed letter of authorization.
Required signature guarantees must be obtained from operations, if required, before forwarding the letter to the fund.
Occasionally there will be a "repurchase" transaction in which the issuer or an underwriter voluntarily repurchases
shares from the investor or from a dealer acting as principal. Such "repurchase" transactions cannot be undertaken
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78
unless the investor or dealer (if it is not a member of the selling group) is the record owner of the shares tendered for
repurchase. (ISL is NOT a dealer and therefore would not have situations as these)
15.1.9 Switching
Shares of one investment company cannot be exchanged for those of another without the designated Principal‘s written approval. An exception to this rule is made in cases where funds share the same management and there is
only a nominal charge for the exchange. Registered Reps, prior to recommending or accommodating a switch in a
customer‘s account, must do the following:
Verify that the change of funds is suitable in light of the customer‘s financial circumstances and consistent with
the customer‘s stated investment objectives by assessing the customer‘s current and past trade activity, fund
objectives, and investment preferences, and comparing the features of the proposed product to those of the existing investment to determine whether the customer will benefit from the switch (if the RR determines that
switch may disadvantage the customer, the switch must not be accommodated);
Try to minimize the customer‘s cost by switching within the same family of funds;
Apprise the customer that such switch may result in shrinkage of the customer‘s capital through additional sales
charges and the possibility of capital gains tax liability; and
Obtain a Switch Letter signed by the customer.
In the Switch Letter the customer acknowledges his understanding of the consequences of the switch. The letter will
be retained with or in at least one of the following: the record of the order; the customer file; or a file designated for
switch letters. The designated Principal will ensure switch letters are obtained for switch transactions and that switches are justified prior to approving any transactions involving switches and in his periodic review of customer
accounts. After reviewing switch letters (or the lack thereof), current and past trade activity, fund objectives and
investment preferences, if the Principal determines a switch is not in the best interest of the customer, the transaction will not be approved. In reviewing the customer account, if the designated Principal determines that switches made in
the customer‘s account were unjustified and/or costly, the customer will be notified and additional information will
be requested. If deemed appropriate, the customer will be provided with relief and disciplinary action will be taken
against the account Registered Representative. In addition, the Principal will take extra precautions when reviewing recommendations to existing customers made by a newly registered representative. Principals must ensure that the
Representative is not recommending a switch purely because of a change of employment. The Principal will
maintain records of his or her review and will evidence this review by initialing and dating reports and/or notes generated.
15.1.10 Selling Dividends
―Ex dividend‖ mutual funds reflect that a dividend has been announced. Section 2830 of the FINRA Conduct Rules
specifically prohibits the practice of recommending the purchase of mutual fund shares just prior to their going "ex
dividend", unless there are specific, clearly described tax or other advantages to the purchaser. No Registered Representative shall represent that any capital gains distributions are part of the income yield. No Registered
Representative shall withhold placing a customer‘s order for any mutual fund so as to personally profit from such a
withholding. If the designated Principal notes any patterns of purchases just prior to funds going "ex dividend" he or she shall contact the Representative to ascertain that the customers understand the benefits and consequences of such
purchases. Mutual fund transactions will be reviewed by the following day; such reviews will be evidenced by the
OSJ Principal‘s initials/signature on the mutual fund order ticket.
15.1.11 Selling Compensation: Reciprocal Activity
The FINRA severely restricts promotional payments or consideration. Pursuant to Rule 2830 of the Conduct Rules governing mutual funds sales practices, ISL will not:
Demand or accept directed brokerage business in exchange for favoring the sale of such product;
Use the prospect of sales of such product as a means of negotiating favorable concessions on price or
commissions from portfolio transactions;
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79
Provide incentive or additional compensation for the sale of specific variable product to selected Registered
Representatives;
Establish ―recommended‖ or ―preferred‖ lists of such product on the basis of brokerage commissions received or
expected; or
Circulate information as to the level of brokerage commissions received from a particular sponsor.
Procedures to comply with this rule include the following:
All cash or non-cash compensation or reimbursements to be provided directly or indirectly by sponsors to ISL or
to selected Representatives in connection with the sale of such product shall be paid or provided directly to ISL and not to the Representatives.
These payments or benefits shall be treated as cash compensation subject to full prospectus disclosure and to the
limitations described above.
ISL will not enter into any special compensation arrangements with individual dealers/sponsors.
During its annual reviews, the Compliance Officer will review the company‘s financials/registers to check for
any compensation or reimbursements provided by a sponsor.
These reviews will be evidenced by Ms. Gilday‘s initials/signature on the annual internal audit form, which will
include specific questions on this subject.
15.1.12 Late Trading
Mutual fund shares must be redeemed and sold at a price based on the net asset value (NAV) of the fund calculated
after the receipt of orders—that is, after the close of trading. Steps taken to comply with this rule include:
The assigned OSJ Principal will not forward to the clearing firm after-close mutual fund purchases or
redemptions at the same day‘s NAV.
As part of their internal policies, the clearing firm will not accept mutual fund orders placed after the market closing; any such orders will be executed the following day. Should one effect in error, late trades must be
cancelled or corrected.
The designated Principal will review each transaction, by the following business day, to detect for repeated
orders placed by customers at or just prior to the market close. Such patterns may be an attempt to conduct late
trading. Occasional orders executed after market close will be tolerated only in the event such orders are not deemed to be late trades placed for advantage. As evidence of his review, the Principal will initial/sign each
mutual fund ticket.
15.2 Variable Products
A variable annuity is an insurance contract that is subject to regulation under state insurance and securities laws. Although
variable annuities offer investment features similar in many respects to mutual funds, a typical variable annuity offers three basic features not commonly found in mutual funds: (1) tax deferred treatment of earnings; (2) a death benefit; and (3)
annuity payout options that can provide guaranteed income for life. A customer's premium payments to purchase a variable
annuity are allocated to underlying investment portfolios, often termed sub accounts. The variable annuity contract may also include a guaranteed fixed interest sub account that is part of the general account of the insurer. The general account is
composed of the assets of the insurance company issuing the contract. The value of the underlying sub accounts that are not
guaranteed will fluctuate in response to market changes and other factors. Because the contract owners assume these investment risks, variable annuities are securities and generally must be registered under the Securities Act of 1933.
Underlying sub-accounts that are not guaranteed are funded by a separate account of a life insurance company that, absent an
exemption, is required to be registered as an investment company under the Investment Company Act of 1940. Variable annuities assess various fees including fees related to insurance features, for example, lifetime annuitization and the death
benefit. The fees are typically deducted from customer assets in the separate account.
Typically, variable annuities are designed to be long term investments for retirement. Withdrawals before a customer reaches
the age of 59 1/2 are generally subject to a 10 percent penalty under the Internal Revenue Code. In addition, many variable
annuities assess surrender charges for withdrawals within a specified time period after purchase. Generally, variable annuities have two phases: the "accumulation" phase when customer contributions are allocated among the underlying
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investment options and earnings accumulate; and the "distribution" phase when the customer withdraws money, typically as a
lump sum or through various annuity payment options.
FINRA rules and pronouncements state that under Code of Conduct Rule 3010, when recommending variable annuities or
variable life insurance, the member and its Registered Representatives are required to make reasonable efforts to obtain
information concerning the customer's financial and tax status, investment objectives, and such information used or considered reasonable in making recommendations to the customer. The myriad features of variable insurance products
make the suitability analysis required under FINRA rules particularly complex. FINRA Regulation has addressed suitability
issues in variable insurance products sales in Notices to Members 96-86 and 99-35.
Retention of this customer information can be made in conjunction with the maintenance of basic customer account
information that is required in FINRA Rule 3110. Recent variable product statements will be kept on file to be made readily available for inspection by regulators and others. In addition, a copy of the completed contract MUST be delivered to the
customer. In his daily reviews of annuity business, assigned OSJ Principals will check client‘s file for a customer signed
Annuity Contract Delivery Receipt Form, confirming receipt of the contract. By signing the application, the Principal
confirms the form is on file.
15.2.1 Product Identification
In order to assure that customers of ISL understand what security is being discussed, all communications with the
public should clearly describe the product as either a variable life insurance product or variable annuity, as
applicable. ISL may use proprietary names in addition to this description. In cases where the proprietary name includes a description of the type of security being offered, there is no requirement to include a generalized
description.
Any communication discussing the tax-deferral benefits of variable life insurance should not obscure or diminish the importance of the life insurance features of the product. Any variable life insurance communication that
overemphasizes the investment aspects of the policy or potential performance of the sub-accounts may be
misleading.
Considering the significant differences between mutual funds and variable products, the presentation should not
represent or imply that the product being offered or its underlying account is a mutual fund.
15.2.2 Suitability
In NTM‘s 96-86 and 00-44 the FINRA sets forth specific suitability requirements under Rule 2310 of the Conduct Rules applicable to the sale of variable product. ISL requires that the designated Principal review sales of variable
product by Registered Representatives for compliance with these guidelines. They include:
Whether the customer represents that his or her life insurance needs have been adequately met;
Whether the customer has an express preference for an investment other than an insurance product;
Whether the customer adequately appreciates how much of the purchase payment or premium is allocated to
cover insurance or other costs;
The customer‘s ability to understand the complexity of variable product generally;
The customer‘s willingness to invest a set amount on a yearly basis;
The customer‘s need for liquidity and short term investment;
The customer‘s immediate need for retirement income;
The customer‘s investment sophistication; and
Whether the customer is able to monitor the investment experience of the separate account.
ISL requires that its Registered Representatives document this type of information in a customer account information
form and submit it with every variable life insurance application. The Registered Representative must forward the completed application and any other information provided by the customer to the designated Principal for review.
ISL also requires the Representative to submit a Variable Annuity Customer Suitability Statement, which must be
signed by the customer, Representative and OSJ Principal. The registered principal should compare the information
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in the account application with other relevant information sources, e.g., an account information form, to check for
apparent accuracy and consistency prior to approving the transaction. The review should also verify that the recommendation of both the policy and the sub-account allocation is consistent with the customer‘s investment
objectives and risk tolerance. Principal review and approval will be evidenced by his/her initials/signature on the
contract AND the customer suitability statement. Such review and approval must be made by the following day of
the transaction. Similar approval is required for liquidations and transfers.
In addition, the product must be on ISL‘s approved list of products and there must be a selling agreement between the
appropriate parties. For each specific variable product offered, ISL follows guidelines established by the respective product sponsor, determining limitations and parameters on transactions with customers. These limitations may
include maximum age or percentage of net worth or household income, for instance, and are designed to assist in the
review of variable life insurance affordability and excessive amounts of coverage.
Registered Representatives should not recommend that a customer finance a variable life insurance policy from the
value of another life insurance policy or annuity, such as through the use of loans or cash values, unless the
transaction is otherwise suitable for the customer. Such financing raises the risk that the required premium for the new variable life insurance policy will exceed the dividend stream or cash value of the original policy. When
financing is recommended, Registered Representatives should disclose to the policy owner the potential
consequences to both the existing and new policy. The Registered Representative must document the customer‘s informed consent to the financing. The form should include the customer‘s acknowledgment, the Registered
Representative‘s signature, and the designated Principal‘s signature.
15.2.3 Disclosures in Communications with the Public
Company representatives should discuss all relevant facts with the customer, including liquidity issues such as
potential surrender charges and the Internal Revenue Service penalty; fees, including mortality and expense charges, administrative charges, and investment advisory fees; any applicable state and local government premium taxes; and
market risk. Communications must also include a disclosure that the investment is not FDIC insured.
To the extent practical, a current prospectus should be given to the customer when a variable annuity is
recommended. Prospectus information about important factors, such as fees and expenses and the lack of liquidity of
the product, should be discussed with the customer.
The Registered Representative should have a thorough knowledge of the specifications of each variable annuity that
is recommended, including the death benefit, fees and expenses, sub-account choices, special features, withdrawal
privileges, and tax treatment.
For registered investment companies (including variable contracts) representing investments in pools of securities,
sales materials containing certain statements related to performance, investment objectives, experience, benefits and risks, and/or fees must be reviewed and filed in accordance with Rule 2210 (see NTM 03-17 for specifics). Under
FINRA Rule 2210, the Company must file with FINRA Advertising Regulation Department all variable contract
advertisements and sales literature within 10 days of first use or publication. The Company is also required to file the
format for hypothetical illustrations used in the promotion of variable life insurance policies, since these formats qualify as sales literature. ISL requires that such material be pre-filed and that all advertisements and sales literature
regarding variable life insurance are approved in writing by the designated Principal prior to use with the public.
FINRA Rule IM-2210-2 provides interpretive guidance regarding communications with the public about variable life
insurance and variable annuities. It is important to note that these guidelines apply to not only sales literature and
advertisements, but also to individualized communications such as personalized letters and computer generated illustrations, whether printed or made available on screen. The Company‘s Representatives, in conducting sales of
these products, must comply with the restrictions noted in IM-2210-2, including those related to claims about
guarantees, performance reporting, product comparisons, use of rankings, investment features and hypothetical
illustrations of rates of return. In his or her daily review of documentation of sales activities, the designated Principal will make an effort to detect and halt non-compliant communications with the public. All forms of communications
must be reviewed prior to dispensing to the public. Assigned Principals will keep a file of all approved
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correspondence and communications with the public. As evidence of his approval, communications must be signed
and dated by the Principal and/or Compliance Officer.
When preparing hypothetical illustrations that are designed to depict the tax-deferral feature of variable annuities, the
Company must ensure that (1) illustrations designed to show the comparative tax benefits of variable annuities are
based upon tax rate and investment return assumptions that are consistent, fair and reasonable at all times while the communication is in use, and (2) the tax rate assumptions in such illustrations are accurate in all respects as of both
the date the material is prepared and throughout the period during which the material is in use. Such illustrations
must also fully and fairly disclose all underlying assumptions as well as the fact that changes in tax rates and tax treatment of investment earnings may impact the comparative results. The designated Principal must routinely review
these marketing communications to ensure compliance with these guidelines. Preparers and reviewers of illustrations
are encouraged to consult FINRA‘s Member Alert dated May 10, 2004 for specific reminders.
Lack of liquidity, which may be caused by surrender charges or penalties for early withdrawal under the Internal
Revenue Code, may make a variable annuity an unsuitable investment for customers who have short term investment
objectives. Moreover, although a benefit of a variable annuity investment is that earnings accrue on a tax deferred basis, a minimum holding period is often necessary before the tax benefits are likely to outweigh the often higher
fees imposed on variable annuities relative to alternative investments, such as mutual funds.
The Registered Representative should inquire about whether the customer has a long term investment objective and
typically should recommend a variable annuity only if the answer to that question, with consideration of other
product attributes, is affirmative. In general, the Registered Representative should make sure that the customer understands the effect of surrender charges on redemptions and that a withdrawal prior to the age of 59 1/2 could
result in a withdrawal tax penalty. In addition, the Registered Representative should make sure that customers who
are 59 1/2 or older are informed when surrender charges apply to withdrawals.
Some tax qualified retirement plans (e.g., 401(k) plans) provide customers with an option to make investment choices
only among several variable annuities. Customers should be made aware that while these variable annuities provide
most of the same benefits to investors as variable annuities offered outside of a tax qualified retirement plan, they do not provide any additional tax deferred treatment of earnings beyond the treatment provided by the tax qualified
retirement plan itself. Registered Representatives recommending the purchase of variable annuities for any tax
qualified retirement account (e.g., 401(k) plan, IRA) should disclose to the customer that the tax deferred accrual
feature is provided by the tax qualified retirement plan and that the tax deferred accrual feature of the variable annuity is unnecessary. The Registered Representative should recommend a variable annuity only when its other
benefits such as lifetime income payments, family protection through the death benefit, and guaranteed fees, support
the recommendation.
15.2.4 Switching (Twisting)
ISL will review all sales of variable product to make sure that the customer is not being subjected to the practice of
simply replacing the customer‘s existing variable policy or contract with a new one that does not materially improve
the customer‘s existing position but generates a new sales commission for the Representative. Newly registered
Representatives, in particular, must not use a change of employment as a suitable basis for recommending a switch from one product to another. Registered Reps, prior to recommending or accommodating a switch of a customer‘s
variable product, must do the following:
Verify that the change of product is suitable in light of the customer‘s financial circumstances and consistent
with the customer‘s stated investment objectives by assessing the customer‘s current and past replacement
activity and investment objectives, and comparing the features of the proposed contract to those of the existing
contract to determine whether the customer will benefit from the switch (if the RR determines that switch may disadvantage the customer, the switch must not be accommodated);
Apprise the customer that such switch may result in shrinkage of the customer‘s capital through additional sales
charges.
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Representatives should not recommend the switching or replacement of an existing variable contract unless it is in
the best interest of the customer because:
the new contract offers the customer features not available in their existing contract;
the customer‘s investment objectives have changed and cannot be met by the existing contract;
the existing issuer is experiencing some type of difficulties, such as financial or regulatory, that could place the
customer‘s contract at risk;
the customer no longer has the need for the insurance coverage afforded by the existing contract and wishes to
switch to another type of investment vehicle; and/or
the performance of the existing contract does not meet the customer‘s expectations.
Where the purchase of variable product is funded by a withdrawal from, or liquidation of, a similar product, a
Replacement Form provided by the product sponsor or required by the State, in some instances, must be completed
and submitted with the application for review. This Form should be completed in its entirety and signed by the customer and the Registered Representative. The designated Principal during his review must determine, based on
the information provided by the customer and his knowledge of the product features, that replacing the existing
contract with a new contract is suitable for the customer. This review should also include a consideration of such matters as product enhancements and improvements, lower cost structures, and surrender charges. In addition, the
Principal will take extra precautions when reviewing recommendations to existing customers made by a newly
registered representative. Principals must ensure that the Representative is not recommending a switch purely
because of a change of employment. The Principal‘s review will be evidenced by his signature on the application and replacement form.
When the purchase of a variable product is funded by a withdrawal from, or liquidation of, another type of investment vehicle, such as a mutual fund or CD, a switch letter must accompany the application documents. This
letter should outline the customer‘s understanding of the fees and charges related to the switch, including tax
consequences, surrender charges and product costs. The customer must acknowledge that they understand these matters and the reason for the switch. The designated Principal during his review must determine, based on the
information provided by the customer and his knowledge of the product features, that the switch is suitable for the
customer. 1035 exchanges, a section of the IRS code that allows for the non-taxable exchange of non-qualified funds
from one insurance carrier to another, are not allowed for liquidations from annuity contracts to purchase life insurance contracts. Each variable contract will indicate if a 1035 exchange applies. The Principal will review each
transaction, and if a 1035 exchange applies, he will ensure it is not to purchase a life insurance contract. The
Principal‘s review will be evidenced by his signature on the application and initials on the switch letter.
Registered Representatives whose clients have a particularly high rate of variable annuity replacements or rollovers
may be subject to Special Supervision.
15.2.5 – 15.2.6 N/A
15.3 Direct Participation Programs (DPPs)
A direct participation program (DPP) is a type of investment whereby the income would generally flow through to the
investors. These offerings may be sold as public offerings or private placements. DPP‘s are predominantly structured as limited partnerships. Limited partners are viewed as passive investors with little or no say in the managerial decision-
making.
The current prospectus of each DPP should be delivered to the customer prior to, or at the time of, the sales presentation. The customer should be encouraged to read the prospectus prior to making an investment decision. Outdated prospectuses should
not be used and amendments to prospectuses should be provided promptly to customers. A Prospectus Receipt Form must be
signed by the customer and kept on file.
ISL will examine carefully the suitability of these investments since they may not be appropriate if an individual does not
meet certain accredited or sophisticated investor requirements. Unlike mutual funds and annuities, direct participation
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programs are not extremely liquid investments. Thus, the Company should view these as more long-term investments. Final
approval of all DPP accounts must be given by the designated Principal.
15.3.1 Suitability Requirements
In recommending to a customer the purchase, sale or exchange of any direct participation program security, Registered Representatives must have reasonable grounds for believing that the recommendation is suitable for such
customer upon the basis of the facts, if any, disclosed by such customer as to his or her other security holdings and as
to his financial situation and needs, among other criteria.
Prior to the execution of a transaction recommended to a non-institutional customer, Registered Representatives of
ISL shall make reasonable efforts to obtain information concerning:
The customer‘s financial status,
The customers tax status,
The customers investment objectives, and
Such other information used or considered to be reasonable by the Company or Registered Representative in
making recommendations to the customer.
15.3.2 N/A
15.3.3 Due Diligence Procedures
When deciding whether or not to approve a Direct Participating Program (DPP), ISL reviews the following aspects of
DPPs:
The prospectus, which must disclose the standards of suitability for participants.
Financial statements of the sponsor.
Overall industry outlook.
Fairness of the subscription agreement.
Business relations.
Conflicts of interests.
A Due Diligence Form must be filled out for each sponsor/company. The Compliance Officer, or his designated
Principal, must evidence his/her approval by signing the Due Diligence Form. By signing the form, he/she certifies
that the review has been conducted, including but not limited to, review of the subscription agreement.
15.3.4 Rollups
FINRA Rules prohibit ISL from participating in a "limited partnership rollup transaction" unless in conformity with
the Rules. A "rollup" is a transaction in which limited partners of Partnership A are solicited to vote to "roll up" the
partnership into Partnership B or some other entity in which they will receive substitute securities. The structure of the transaction can take any number of different forms, whether a sale of assets, exchange of interests, combination
into a new entity, etc. The Rules are complex and designed to ensure that the terms and conditions of the "rollup" are
fair and properly disclosed to the partners. Compensation to participating broker-dealers is subject to stated limits.
ISL does not intend on conducting any rollups. In any case, all proposals for ISL or any of its Registered
Representatives to engage or participate in a "rollup" must be carefully reviewed in advance by the designated
Principal and the Compliance Department to determine that the transaction complies with the Rules. Written documentation disclosing the details of the rollup to the partners must be on file, signed and dated by the Compliance
Officer. By signing and approving the transaction, the Compliance Officer certifies he has conducted a full review.
15.3.5 Secondary Market Trading
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Many DPP investments are quoted and traded on the ―secondary market.‖ Recently the FINRA established a
quotation system on the NASDAQ system for such trades. Transactions are to be reported through the ACT system pursuant to FINRA Rule 6920. Representatives should be cautioned that quotations and trades are not necessarily
indicative of underlying value and extreme care should be taken before executing a ―secondary‖ transaction in a DPP
investment. The FINRA has recently mandated the use of standardized Limited Partnership Transfer Forms under
the Uniform Practice Code. See NTM 97-8 for a complete discussion of procedures.
All DPP investments quoted on the NASDAQ system will be conducted through the clearing firm. The clearing firm
reports any eligible transactions through the ACT system on behalf of ISL. The designated Principal reviews all transactions by the following business day and documents reviews by initialing/signing the order ticket.
15.3.6 Valuation of DPP Units for Reporting Purposes
FINRA Regulation has adopted amendments to FINRA Rule 2340 to require general securities members to provide
valuations and disclosures relating to direct participation program (DPP) and real estate investment trust (REIT)
securities on customer account statements under certain circumstances. The amendments became effective April 16, 2001 and do not apply to members that do not carry customer accounts and do not hold customer funds and
securities. Thus, the Rule only applies to members that self-clear or that clear for other members ("general securities
members").
15.4 – 15.9 N/A
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SECTION 16: N/A
(Rev. 102007)
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SECTION 17: RECORDKEEPING AND REPORTING
As a fully disclosed firm, the majority of books and records required by FINRA are handled by the clearing firm. Such books
and records handled by the clearing firm include:
Blotters: purchases and sales of securities, receipts and deliveries of securities, receipts and disbursements of cash.
Customer ledger accounts
Securities in transfer
Dividends and interest received
Securities borrowed and securities loaned
Monies borrowed and monies loaned
Securities failed to receive and failed to deliver
Long and short stock record differences
Position records
Confirmations and comparisons
Cash account records
Margin account records
ISL handles the following books and records and keeps copies of such for the period of time prescribed by SEC Rules 17a-3
and 4:
General ledger: posted as frequently as may be necessary to determine compliance with the net capital rule; but, in any
event, not less than once each month. Maintained for at least six years, the first two years in an easily-accessible place.
Principal sales tickets: prepared before the execution of the transaction. Maintained for at least three years, the first two
years in an easily-accessible place.
Trial balance: prepared not later than ten business days after the end of every month. Maintained for at least three years,
the first two years in an easily-accessible place.
Associated persons application: prepared at, or prior to, commencement of employment. Maintained for at least three
years after termination of employment.
Purchase and sales blotter: ISL will keep a trade log of all transactions for all representatives, including for any business
not cleared through a clearing firm, for example transactions in mutual funds cleared through a sponsor (checks will
always be made payable to the fund or program). ISL will log all transactions into the blotter within 24 hours of their receipt at ISL‘s home office. Blotters are maintained at least six years, the first two years in an easily-accessible place.
Receipts and disbursements of securities and money: though ISL does not accept any securities or monies, a log will be
kept in the event that the firm receives them.
In addition, every OSJ office must keep the following books and records:
Daily trade log (purchase & sales blotter)
Receipt and retransmission logs for checks and securities
Complaint file
Advertising file
Correspondence file
Cash/Non-cash file
Branch Audit File
Client files: containing copies of applications, checks or securities, order forms, confirmations, customer statements, ISL
new account forms, and all other documentation required based on account registration or transactions.
Speaking activity file
The annual audit will include the reviewing of the records above.
17.1 – 17.2 N/A
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17.3 FINOP Responsibilities and Net Capital Requirements
The calculation and monitoring of net capital is the responsibility of the FINOP, Jessica Gilday, who also is
responsible for ensuring the accurate and timely reporting of periodic net capital report. Computations will be
performed at least once per month and will be retained on file, as review evidence, for three (3) years. The audited
financial statements on Form X 17A-5 (the ―Focus Report‖) contain a net capital computation under Securities Exchange Act Rule 15c3-1; this format can be used for the basic computation. State filings are also required, as are
registration amendments and renewals. Some of the FINOP‘s specific responsibilities include:
Review and filing of the Company‘s financial reports;
Periodic consideration of whether the Company‘s minimum net capital requirements have changed because of
changes in the Company‘s business;
Reporting borrowings and subordinated loans for capital purposes;
Establishing procedures for retention of required financial books and records;
Determining necessary fees and assessments due under the provisions described in Schedule A of the FINRA By-
Laws; and
Reviewing at least annually the Company‘s Fidelity Bond to ensure adequate coverage and compliance with the
requirements under Conduct Rule 3020.
If the Company‘s net capital becomes deficient, the FINOP is responsible for filing the necessary reports with
regulators and communicating any resulting restrictions in business activity.
Under the provisions of the federal securities laws and under state Blue Sky regulations, ―net capital‖ is defined as
net worth adjusted as follows:
Adding unrealized profits (or deducting unrealized losses) in the accounts of the Company;
Subtracting federal or state tax liabilities (if any) stemming from accrued income or unrealized appreciation;
Adding future income benefits resulting from unrealized losses (if any);
Subtracting the excess of any deductible amount on the Company‘s required Fidelity Bond over the maximum
permissible amount; and
Subtracting fixed assets and assets that cannot readily be converted into cash, including, but not limited to, real
estate, furniture, fixtures (if any), prepaid rent, insurance expenses (if any), prepaid administrative expenses,
goodwill and organization expenses, unsecured advances and loans, and mutual concessions receivable that are outstanding longer than 30 days.
The Securities Exchange Act requires varying sums contingent on the nature of the business conducted by the
Company. Note, however, that some states require a greater amount of net capital. SEC and Blue Sky regulations also state that the ratio of aggregate indebtedness to net capital cannot exceed 15:1 under applicable regulations.
ISL, if and when so directed by the FINRA, shall not expand its business during any period in which any of the following conditions exist, or have existed for more than fifteen consecutive business days:
The Company‘s liquid capital is less than 150 percent of the total haircuts or such greater percentage thereof as
may from time to time be prescribed by the FINRA;
The Company‘s liquid capital minus total haircuts is less than 150 percent of its minimum dollar capital
requirement; or
The deduction of ownership equity and maturities of subordinated debt scheduled during the next six months
would result in any of the above two conditions.
The FINRA may direct ISL to reduce its business to a point enabling its available capital to comply with the standards set forth above if any of the following conditions continue to exist, or have existed for more than fifteen
consecutive business days:
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89
The Company‘s liquid capital is less than 125 percent of the total haircuts or such greater percentage thereof as
may from time to time be prescribed by the FINRA;
The Company‘s liquid capital minus total haircuts is less than 125 percent of its minimum dollar capital
requirement; or
The deduction of ownership equity and maturities of subordinated debt scheduled during the next six months
would result in any of the above two conditions.
17.3.1 – 17.3.3 N/A
17.4 Annual Financial Audit
ISL shall file annually, on a calendar or fiscal year basis, a report that shall be audited by an independent public accountant qualified in accordance with SEC's Rule 17a-5. The annual report shall be filed not more than sixty (60) days after the date
of the financial statements. One copy of the report shall be filed at the regional or district office of the SEC, two copies at the
SEC‘s principal office in Washington D.C. and to all self-regulatory organizations and states (if required) of which ISL is a member.
According to SEC Rule 17a-5(f)(3), the accountant hired by the Company to conduct its annual audit must be independent to
render an audit opinion on the Company‘s financial statements. In keeping with the SEC‘s emphasis reiterated in NTM 02-19, the Company‘s audit firm cannot be in a position in which it is, or appears to be, auditing its own work—in other words,
the auditor‘s independence must not be impaired and it is prohibited from providing accounting and bookkeeping services to
the Company. The Company‘s auditor is permitted by the SEC to perform certain financial system services, only if the Company has explicitly acknowledged its responsibility to actively maintain, monitor, and evaluate the financial information
and reporting system.
The FINOP of the Company will annually review the services provided by the Company‘s outside auditor to ensure that the
auditor's independence is not impaired. In his or her review, the FINOP will consult the FINRA‘s guidelines published in
NTM 02-19. In addition, the FINOP will seek to obtain (or has obtained) an engagement letter from the auditor outlining the
services to be provided and the respective responsibilities of both parties as well as a representation from the auditor that he or she is either a certified public accountant duly registered or a public accountant entitled to practice in good standing under
the laws of his or her place of residence or principal office.
17.5 Focus Reports
On behalf of ISL, the FINOP shall file Part IIA of form X-17A-5 within 17 business days after the end of each calendar
quarter and within 17 business days after the date selected for the annual audit of financial statements where said date is other than the end of the calendar quarter. In addition, in certain situations, the Company may be required by the FINRA to file
Part IIA of form X-17A-5 on a monthly basis. The required Part IIA of Form X-17a-5 shall be filed electronically, utilizing
the FINRA‘s Web based FOCUS system..
17.6 Reporting Required Under SEC Rule 17a-11and FINRA Rule 3170
Additional financial reporting may be required in order to comply with SEC Rule 17a-11 if the Company finds itself in net
capital violation, approaches financial difficulties and/or experiences a books and records problem. Rule 17a-11 is designed
to function as an all-encompassing reporting vehicle. Additionally, under Rule 3170, all reporting requirements under Rule
17a-11 must be met through electronic means, using the Regulatory form filing website. The Company is required to send immediate (same day) electronic notice to the SEC and the FINRA at any time when:
The dollar amount of the Company‘s net capital is less than its required minimum; or
The Company fails to make and keep current the books and records specified under SEC Rule 17a-3; the electronic
notice shall state which books and records are not current; and, within 48 hours of the electronic notification, the Company must file a report stating what corrective actions have been taken.
(Rev. 102007)
90
Additionally, in accordance with Rule 17a-11 and Rule 3170, the Company will promptly (within 24 hours) file electronic
notification with the SEC and the FINRA if at any point in time:
The Company‘s aggregate indebtedness exceeds 1,200 percent (12 to 1) of its net capital; or
Its net capital is less than 5 percent of aggregate debit items; or
Its net capital is less than 120 percent of its required net capital; or
The Company discovers or is notified by an independent public accountant, pursuant to paragraph (b)(2) of SEC Rule
17a-5, of the existence of any material inadequacies in its accounting system, internal accounting control, or the
procedures for safeguarding securities. Within 48 hours of the electronic notification, a report shall be filed stating the corrective steps which have been and are being taken.
Other provisions of FINRA Rule 3170 require the Company to file electronically the following notices:
Rule 15c3-1(e) Withdrawals of equity capital,
Rule 15c3-3(i) Special Reserve Bank Account,
Rule 17a4(f)(2)(i); Rule 17a-4(f)(3)(vii) Electronic storage media,
Rule 17a-5(f)(4) Replacement of accountant
17.7 Customer Account Statements
Pursuant to Rule 2340 of the FINRA Conduct Rules, ISL‘s clearing firm, on behalf of the Company, provides no less frequently than each calendar quarter a customer account statement showing securities positions, money balances and
account activity during the period.
17.8 Record of Written Complaints
In accordance with SEC Rule 17a-3, the designated Principal of ISL shall ensure that the Company keeps and preserves (for
at least three years) in each of its offices of supervisory jurisdiction, a record of all customer complaints concerning each associated person, including the complainant's name, address, and account number; the date the complaint was received; the
name of each associated person identified in the complaint; a description of the nature of the complaint; and the disposition of
the complaint (or, alternatively, files kept by name of associated person that include a copy of each original complaint and a record of the disposition of each complaint). Additionally, the Company will maintain a record of whether customers were
provided with an address and phone number where they should direct complaints.
17.9 N/A
17.10 Customer Account Information
17.10.1 N/A
17.10.2 Furnishing Account Record Information
SEC Rule 17a-3 now requires the Company to furnish account record information to their customers who are ―natural
persons,‖ as defined in the Rule (accounts that are entities are not included in this definition), as follows:
Upon opening a new account;
For existing accounts as of May 2, 2003 (effective date of the rule change), within three years of this date;
Upon periodically updating the account record (at least once every 36 months);
Following a change in customer name or address (sent to the old address only); and
Following a change in any other customer information.
This requirement will serve to reduce the number of misunderstandings between customers and the Company regarding the customer‘s situation or investment objectives. When furnishing account records to customers, the
Company should request that the customer review the information and immediately provide the Company with any
necessary corrections or changes to the information provided.
(Rev. 102007)
91
The Company is not required to include the customer‘s tax ID number and date of birth in this furnished information (in order to avoid potential perpetration of fraud by unauthorized recipients).
The Company will use all reasonable efforts to update customer records at least once every three years and will
forward such updated records to customers within 30 days of the updating (such as a change in name, address or investment objectives).
Exemption from the Account Record Information and Furnishing Requirements:
The account record and furnishing requirements of Rule 17a-3(a)(17) will only apply to accounts for which a firm is,
or has within the past 36 months been, required to make a suitability determination under the federal securities laws or under the requirements of a self-regulatory organization of which it is a member. (See, for example, FINRA Rules
2310 and 2860 (b)(16)(B), NYSE Rule 723, Chicago Board Options Exchange Rule 9.9 and MSRB Rule G-19.)
17.10.3 Written Customer Agreements
The Company will furnish to each customer with whom the Company has entered into any written agreement (on or
after May 2, 2003) a copy of such agreement. Should a customer request a copy of a written agreement, the respective associated person (or designee) will provide the copy and will record in the customer file that it was
provided.
17.11 Privacy of Consumer Financial Information – Regulation S-P
ISL has adopted the following supervisory procedures in order to comply with Regulation S-P (adopted by the SEC in
November 2000) and to protect the privacy of customer financial information.
The designated Principal shall ensure compliance of these procedures, and shall use the following text in order to
comprehensively train employees with regard to their obligations under the regulation. Employees are encouraged to review Regulation S-P and NTM 00-66 to augment their comprehension of privacy requirements.
17.11.1 Who Is Protected?
The regulation protects only individuals; thus, trusts, partnerships and corporations are not protected. Beneficiaries
of trusts, 401(k) participants, shareholders of corporations or partners of partnerships are not protected. IRA
beneficiaries are protected since they are individuals. Institutional investors are not covered by the regulation and no disclosures are required to be made to institutional customers.
17.11.2 What Is Protected?
With certain exceptions set forth below, ISL is required to protect ―Nonpublic Personal Information‖ (―NPI‖) defined
as ―Personally Identifiable Financial Information‖ (―PIFI‖) acquired from the customer PLUS any list, description or
other grouping of customers derived from using any PIFI. In general, PIFI would include all information of a personal nature supplied on account applications, questionnaires and other information provided in order to obtain
accounts, obtain credit, enter into advisory or other relationships, etc.
NPI does not include information that ISL has taken steps to verify and reasonably believes could lawfully be
obtained from federal, state or local government records, widely distributed media (telephone book, television,
website or radio program) or disclosures to the general public required to be made by federal state or local law.
In addition, regulation S-P protects account number information. The Regulation (with certain exceptions) prohibits
ISL under any circumstances from disclosing to any non-related third party (―NTP‖) other than a consumer reporting
agency, a customer account number or similar form of access number or access code for a credit card account, deposit account or transaction account if such disclosure is for use in telemarketing, direct mail marketing or other
electronic mail marketing. Regulation S-P also controls ―re-disclosure and reuse‖ of any NPI.
(Rev. 102007)
92
Regulation S-P specifically requires the Privacy Notice to state that ISL may disclose NPI about former customers as well as current ones. The Regulation does not require that a Privacy Notice be provided to any former customer.
17.11.3 How Is It Protected?
With certain exceptions (consult Rule) ISL may not disclose NPI of any customer to any NTP without prior notice
and consent by the customer. An NTP is any person, firm or corporation that is not controlled by, controlling or
under common control with ISL. NOTE: if any other government regulator treats ISL as an ―affiliate‖ of a company regulated by it, then ISL is also an ―affiliate‖ of that company for purposes of regulation S-P and may disclose NPI to
that company.
ISL AS A POLICY DOES NOT DISCLOSE ANY CONSUMER OR CUSTOMER NON-PUBLIC
INFORMATION TO NON-RELATED THIRD PARTIES OTHER THAN IN CONTROLLED CIRCUMSTANCES
AS SPECIFICALLY ALLOWED BY REGULATION S-P.
Procedures for protecting available customer information includes the following:
ISL does not maintain any client non-public information on its computers. All customer information
available electronically to ISL is accessed through a secure website, which is maintained by the firm‘s
clearing firm. Customer paperwork is filed in a separate office, at the home office, under lock and key.
The clearing firm ensures that client information is protected on their site by requiring all users to change
passwords to their system on a monthly basis.
ISL maintains a small network at its home office, which consists of a Lynx router that provides built-in
firewall protection. In addition, all computers on the network are protected through the Norton AntiVirus
Program.
Any paperwork containing customer information which needs to be disposed of is put through a paper
shredder prior to disposing.
Testing for the effectiveness of the above procedures consists of:
Compiling a list of all Representatives/employees with access to the clearing firm‘s customer information
system (SIS). Reviewing such list against the clearing firm‘s list of authorized users.
Compiling a list of all Representatives/employees with access to New Account records and those who open
mail. Review: a) procedures to keep records under lock and key when out of the office, b) procedures on
disposing of client information.
Compiling a list of all computers on the office network. Ensure that every PC on the list has an active
subscription to the Norton AntiVirus program (renewals will be conducted on as needed basis).
Testing will be evidenced through the use of Regulation S-P Annual Test Report, which will include written
documentation on the information above and a signed acknowledgement by the Compliance Officer.
17.11.4 Notice Requirements
Initial Privacy Notice Requirement. The Regulation requires ISL to provide an Initial Privacy Notice to (a) every
customer at all times and (b) every customer and ―consumer‖ (see note below) where ISL intends to disclose that
customer‘s NPI to any NTP under any non-exempt circumstances. Each recipient must also be provided with a ―reasonable‖ time to ―opt out‖ or not. If the Company does not share NPI, it does not have to provide initial and
annual notices or opt-out choices to each ―consumer‖—that is, an individual who obtains or has obtained a financial
product or service from the Company that is to be used primarily for personal, family, or household purposes. Typically, a ―consumer‖ has no further contact with the Company other than the one-time delivery of products or
services (versus a customer, who has an on-going relationship with the Company). The designated Principal must
ensure that this distinction is well understood and accurately applied.
The Initial Privacy Notice must be provided to the customer, with certain exceptions, AT OR BEFORE the time ISL
establishes the customer relationship or BEFORE ISL makes any disclosures of that customer‘s NPI to a NTP. The
Initial Privacy Notice may be provided in written or electronic form.
(Rev. 102007)
93
The exceptions are as follows: The Initial Privacy Notice may be provided at a ―reasonable‖ later time where (a) the
customer relationship has been established without the customer‘s knowledge or consent (i.e., an ACATS transfer or SIPC trustee transfer); (b) where to provide the Notice would substantially delay the customer‘s transaction and the
customer has agreed to receive the Notice at a later date; or (c) where the NTP establishes an account or purchases
securities on behalf of the customer.
Joint Notices. ISL has made arrangements with its clearing firm to deliver a joint notice covering NPI obtained by
the Company and the other notifying entity or entities. In the case of joint accounts, Notices need be provided only
to one account holder. Also, individuals living in the same household can receive only one Notice as long as SEC regulations allow them to receive only one prospectus or other disclosure document.
Once provided to a particular individual, the Initial Privacy Notice does not have to be provided again every time a new product or service is obtained by that individual, as long as the Initial Privacy Notice and any subsequent Annual
Privacy Notices (see below) are current and accurate as to that product or service.
“Opt Out” Provision. Because the Company does not share NPI, it does not offer an opt-out provision in its Privacy Notice.
The Privacy Notice must include the disclosure that NPI may be shared among affiliated entities, in compliance with the notice requirements of Section 603 of the Fair Credit Reporting Act, and that the customer may ―opt out‖ of this
sharing provision.
Annual Privacy Notice. ISL is required to provide an Annual Privacy Notice to each Customer every 12 months,
and when revisions are made, as long as he/she remains a customer. Once he/she ceases to be a customer no further
Notice is required.
17.11.5 – 17.11.6 N/A
17.12 – 17.14 N/A
17.15 Records of Examination Reports
The Company shall keep and retain for three (3) years copies of all reports requested or required by any securities or
regulatory authority and any securities regulatory authority examination reports.
17.16 Records of Cash and Non-Cash Compensation
ISL must maintain records of all compensation, cash and non-cash, received from offerors. The records must include the
names of the offerors, the names of the associated persons, and the amount of cash and the nature and, if known, the value of
non-cash compensation received. Records regarding the "nature" of non-cash compensation received shall disclose whether the non-cash compensation was received in connection with a sales incentive program or a training and education meeting.
Thus, for example, records for a training and education meeting shall include information demonstrating that the
requirements of a training and education meeting were complied with, including the date and location of the meeting, the fact that attendance at the meeting was pre-approved by a Company Principal and was not conditioned on the achievement of a
previously specified sales target, the fact that the payment was not applied to the expenses of guests of associated persons of
the Company, and any other relevant information.
17.17 Preservation of Required Records
ISL shall preserve for a period of not less than six years, the first two years in an easily accessible place, the following records, as applicable:
Blotters (or other records of original entry);
Ledgers (or other records) reflecting all assets and liabilities, income and expense and capital accounts; and,
(Rev. 102007)
94
Ledger accounts (or other records) itemizing separate entries as to each cash and margin account of every customer and
of ISL, broker or dealer and partners thereof (if appropriate) all purchases, sales receipts and deliveries of securities and
commodities for such account and all other debits and credits to such account.
ISL‘s clearing agent must preserve for a period of not less than five years the transfer notice records required to be kept under
the Bank Secrecy Act.
ISL or its clearing agent shall preserve for a period of not less than three years after the date of the respective document, the
first two years in an accessible place, the following records:
Ledgers (or other records) required to be made pursuant to SEC Rule 240.17a-3(a)(4);
Memoranda of brokerage orders required to be made pursuant to SEC Rule 240.17a-3(a)(6);
Memoranda of purchases and sales required to be made pursuant to SEC Rule 240.17a-3(a)(7);
Copies of confirmations of all purchases and sales of securities required to be made pursuant to SEC Rule 240.17a-
3(a)(8);
Records of each cash and margin account with ISL required to be made pursuant to SEC Rule 17a-3(a)(9);
Records of all puts, calls, spreads and other options required to be made pursuant to SEC Rule 17a-3(a)(10);
All checkbooks, bank statements, canceled checks and cash reconciliations;
Originals of all communications received and copies of all communications sent by the Company, including interoffice
memoranda and communications relating to its business (whether electronic or paper);
All trial balances, computations of aggregate indebtedness and net capital (and accompanying working papers), financial
statements, Branch Office reconciliation‘s and internal audit working papers relating to its business;
All guarantees of accounts and all powers of attorney and other evidence of the granting of any discretionary authority
given in respect of any account and copies of resolutions empowering an agent to act on behalf of a corporation;
All manuals describing the Company‘s policies and practices with respect to compliance and supervision, including any
updates, modifications and revisions (for three years after termination of their use);
Certifications of research analysts in connection with public appearances and/or notifications to authorities and related,
required disclosures, in the event certifications are not received, as required under SEC Regulation AC, in addition to other required records under FINRA Rule 2711, governing research analysts; and
A copy of all reports that a securities regulatory authority has requested or required the Company to create, including
each examination report.
In addition, ISL maintains for a period of three (3) years after receipt the express signed authorization of each customer to submit for payment a check, draft or any other form of negotiable paper drawn on a customer‘s checking, savings, share or
similar account.
ISL shall preserve, for a period of not less than six years after the closing of any customer account, any account cards or
records that relate to the terms and conditions with respect to the opening and maintenance of such account.
For 18 months after the date the report was generated, the Company must maintain (or must be able to recreate, or simulate if necessary) reports created to review unusual activity in customer accounts (―exception reports‖).
The company shall maintain and preserve in an easily accessible place, all questionnaires or applications for employment pursuant to SEC Rule 240.17a-3(a)(12), until at least three years after the ―associated person‖ has terminated his or her
employment and any other connection with ISL.
All organizational records of the Company, including, but not limited to, articles of incorporation or charters, minute books
and stock certificate books, shall be preserved during the life of the enterprise and of any successor enterprise. In addition,
the Company shall maintain, for the life of the entity, copies of Forms BD and all amendments thereto (only those portions of
the Form that were amended must be kept).
If the Company maintains its records electronically on CD-ROM, the discs must be non-re-writable and non-erasable, and
must allow for retrieval of data in a reasonable amount of time. The Company, if it chooses to maintain its required records via electronic storage media other than optical disk technology, including CD-ROM, must notify the FINRA 90 days prior to
(Rev. 102007)
95
employing such media and must be prepared to immediately provide a facsimile enlargement upon request by securities
regulatory authorities. If the Company maintains its records exclusively on electronic media (other than optical disk technology, including CD-ROM), the Company must contract with an independent, off-site, third party download provider
(not affiliated with the Company and on a separate power grid than the Company) who will allow for the authorized
downloading of Company information by the designated examining authority. The third party provider must notify the
FINRA that it will provide access or furnish data to regulators as stipulated.
17.18 – 17.21 N/A
17.22 Cash or Currency Transactions
The Company will comply with the reporting, record keeping, and record retention requirements under the Bank Secrecy Act and the Foreign Currency Transactions Reporting Act of 1970, as enforced by the SEC. The Company does not accept cash
or currency from customers; customers will be advised of the Company‘s policy and will be requested to submit checks in
lieu of cash.
17.23 N/A
(Rev. 102007)
96
SECTION 18: N/A
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