WRITTEN SUPERVISORY PROCEDURES

Transcription

1 WRITTEN SUPERVISORY PROCEDURES Revised 10/2007 Authorized Approval Signature: Printed Name & Title: Date: Jessica Gilday, Managing Member/Compliance Officer 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)

2 TABLE OF CONTENTS PART I: PART II: SECTION 1: SECTION 2: SECTION 3: SECTION 4: INTRODUCTION COMPLIANCE FUNCTIONS N/A 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 STANDARDS OF SUPERVISION 3.1 Supervisory Review System Qualifications of Supervisory Personnel N/A 3.5 Supervision of Branch, OSJ and Unregistered Office Personnel Branch Supervision OSJ Supervision Unregistered Office Supervision 3.6 Special Supervision The Taping Rule 3.7 N/A 3.8 Steps to Remedy Deficiencies N/A 3.9 N/A LICENSING 4.1 Registered Representatives/Associated Persons Who Is Required to be Registered Documentation N/A State Registrations Dual Registration Foreign Licensing N/A Designated Supervisors Special Representative/Supervision Statutorily Disqualified Persons Termination of Registration; Continuing Commissions 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 1

3 SECTION 6: SECTION 7: 5.4 Annual Account Reviews 5.5 Disciplinary Procedures N/A 5.10 Review of Correspondence Incoming Correspondence Outgoing Correspondence Electronic Mail 5.11 Annual Compliance Meeting 5.12 Continuing Education 5.13 Business Continuity 5.14 Supervisory Control System: Rule 3012 REGISTERED REPRESENTATIVE CONDUCT 6.1 Outside Business Activities and Private Securities Transactions ( Selling Away ) 6.2 Personal Accounts and Trading 6.3 Insider Trading 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 N/A 6.8 FIRM POLICY On Improper Conduct 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 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 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 Customer Identification Program (CIP) 9.13 N/A 2

4 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 N/A 10.8 Parking 10.9 Penny Stocks/Designated Securities 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 N/A 11.7 Use of Electronic Media General Guidelines Customer Consent Internet Communication Websites SECTION 12: TRADING 12.1 In General 12.2 Best Execution Best Execution, Defined Order Routing Technological Developments re: Reasonably Available Prices N/A 12.3 N/A 12.4 Order Audit Trail System (OATS) N/A N/A 12.7 Margin Requirements In General: Reg T and FINRA Rule N/A 12.8 Confirmations N/A Currency Transactions, Travel Rule and Blocked Accounts N/A On Line Trading; Day Trading N/A Market Center and Order Routing Reporting Exception Reports N/A SECTION 13: CUSTODY AND CLEARING SECTION 14: 13.1 In General 13.2 The Securities Investor Protection Corporation (SIPC) 13.3 N/A INVESTMENT BANKING N/A 14.4 Rule 144A Transactions 3

5 14.5 N/A SECTION 15: PARTICULAR INVESTMENT PRODUCTS 15.1 Mutual Funds Advertising and Sales Literature Suitability Correspondence/Disclosure of Fees and Expenses Breakpoint Sales Letters of Intent Rights of Accumulation and Grouping of Family Orders Trails and Other Contingent Deferred Charges Repurchases and Redemptions Switching Selling Dividends Selling Compensation; Reciprocal Activity Late Trading 15.2 Variable Product Product Identification Suitability Disclosures in Communications with the Public Switching ( Twisting ) N/A 15.3 Direct Participation Programs Suitability Requirements N/A Due Diligence Procedures Rollups Secondary Market Trading Valuation of DPP Units for Reporting Purposes N/A SECTION 16: N/A SECTION 17: RECORD KEEPING and REPORTING N/A 17.3 FINOP Responsibilities and Net Capital Requirements N/A 17.4 Annual Financial Audit 17.5 Focus Reports 17.6 Reporting Required Under SEC Rule 17a-11and FINRA Rule Customer Account Statements 17.8 Record of Written Complaints 17.9 N/A Customer Account Information N/A Furnishing Account Record Information Written Customer Agreements Privacy of Consumer Financial Information Regulation SP Who is Protected? What is Protected? How Is It Protected? Notice Requirements N/A N/A Records of Examination Reports 4

6 17.16 Records of Cash and Non-Cash Compensation Preservation of Required Records N/A Cash or Currency Transactions N/A SECTION 18: N/A 5

7 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 The phone number is , fax number

8 PART II. COMPLIANCE FUNCTIONS SECTION 1. N/A 7

9 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, 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.): AML: Jessica Gilday Trading/OATS: Frank Gilday License/Registration: Jessica Gilday Frank Gilday 8

10 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 Home Office 233 North Causeway Suite B New Smyrna Beach, Fl Name of Branch Supervisor Frank Gilday Licensing of Supervisor 7,24, Variable Annuities/Insurance Designation: OSJ or Branch OSJ 9

11 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 Qualifications of Supervisory Personnel NTM 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: 10

12 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; 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 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). 11

13 Customer account activity by producing managers will be reviewed by the Compliance Officer. Records of such reviews will be filed at the home office 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 o o o o o o Maintain a record of all Unregistered Offices; Assign a Principal of ISL (Home Office or Branch) as office supervisor; Educate all Registered Representatives working in the offices as to their obligations to ISL and to the public, including prohibited sales practices; Maintain regular and frequent professional contact with such individuals; Implement special supervisory practices applicable to the office, including records reviews, inspections and audits; Adopt and implement a regular schedule for inspecting Unregistered Offices; and 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): 12

14 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. 3.7 N/A 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. 3.8 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: 13

15 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. 3.9 N/A 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. 14

16 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 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 brokerdealer. 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

17 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-today 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 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. 16

18 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) N/A 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 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 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). 17

19 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, and 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 N/A 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 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 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 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 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 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 18

20 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 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 under the Investment Advisors Act of Any associated person of the Company 19

21 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 20