Chapter 13 - FINRA Registration

SEC Mission

To maintain integrity of US markets and protect investors. FINRA is overseen by the SEC and they aim to regulate broker-dealers and registered representatives. FINRA can make rules but they must be approved by the SEC before they are effective. Note that the SEC is a government agency, not an SRO.

Self-Regulatory Organization (SRO)

A regulatory body, empowered by and accountable to the SEC, that has been delegated certain enforcement responsibilities within the securities industry. The primary mission is to provide investor protection and promote market integrity. Examples include FINRA and the MSRB.

Municipal Securities Rulemaking Board (MSRB)

SRO responsible for regulating the municipal securities industry. Importantly, it regulates municipal securities firms, advisors, and professionals, but not municipal issuers. Municipal issuers (e.g. New York City) are not subject to regulation by the SEC or SROs.

MSRB Rules

Although they create rules, it has no enforcement authority. Instead, rules are enforced by FINRA and other regulators.

Pre-dispute Arbitration Clause

FINRA rules require all registered representatives to sign one as part of their Form U4. This clause requires any future dispute between the firm and rep, for example a financial disagreement, to be settled through an arbitration proceeding rather than the court. An exception is that any disputes regarding harassment or discrimination will only go to arbitration if both the firm and employee agree; otherwise, they will go to the court.

Arbitrators

They can be from both inside the industry and outside the industry. Those from outside are called public ones. A law degree is not a required credential for them. Industry cases are decided by industry ones, while cases involving the public must include ones from the public sector. A panel will have no more than three of them.

Fingerprinting Requirements

All registered representatives of a broker-dealer must submit this to FINRA as part of their registration. This requirement also applies to any partners of the firm or clerical staff who are involved in the handling or processing of securities or money. However, a partner of the firm or clerical employee not involved in those activities are exempt from this. For example, a partner of a broker-dealer, who has invested capital into the firm, but has no other involvement (e.g. a silent partner) is not required to submit it.

Fingerprinting Timeline

Must be received within 30 days after a Form U4 is filed. If it is not received within 30 days, the individual's FINRA registration status will be changed to "inactive prints" and the individual will have to cease conducting securities business until the they are processed.

Passing the SIE

When an individual passes the SIE exam, it does not qualify them to engage in securities business (e.g. solicit business or enter transactions). Instead, to become fully registered, the individual must also pass a top-off exam (e.g. Series 7 or Series 79). Note, the SIE credential is valid for four years.

Amended U4

All individuals seeking to be registered must complete a Form U4 upon joining a broker-dealer. Additionally, firms and reps have an obligation to amend and update any information required by Form U4 as changes occur within 30 days. For example, if an individual engages in an outside business activity away from the firm, changes their address, or has lien (e.g. tax lien) filed against them, an amended U4 must be filed. Note that if the individual is subject to a statutory disqualification, the amended U4 must be filed within 10 days.

Registered Rep Credit

Registered reps are required to notify compliance of any activity that may impact their credit. One example of such activity is a short sale of a home (mortgage) by a registered rep. This occurs if a rep sells a home for less than the outstanding mortgage balance owed to the lender (i.e. bank), with the bank then accepting the less-than-full repayment of the mortgage. Because the rep is unable to pay off their mortgage balance in full, this will have a negative impact to their credit.

Form U5

A firm must file this form electronically with FINRA within 30 days of a registered rep's termination. The firm must provide a copy of it to the departing rep within 30 days and keep the terminated rep's file updated for two years after termination.

Registered Rep Termination

The individual must keep their address updated with FINRA for two years after termination.

Statutory Disqualification

Will occur if within the past ten years the individual has been convicted of a felony or a securities related misdemeanor. In this situation, the individual cannot be employed with a broker-dealer unless they receive a waiver from FINRA. If an applicant answers a question on their U4 falsely, the applicant might face possible sanctions from registration.

FINRA Investigation

FINRA will typically send a written request for information to both the firm and rep, which seeks basic information about the event or complaint. Additionally, FINRA can require that the rep submit to an interview and meet with regulators as part of the investigation.

Regulatory Element

Continuing education must be completed annually by December 31st. This is a rule change as of January 1st, 2023.

Firm Element

Continuing education must be completed at least annually, though firm policies can require it to be completed more frequently. It must be completed by all covered persons, meaning all registered individuals and supervisors who interact with customers.

State Securities Laws

In addition to federal regulations, each state has these in place designed to protect the investing public. These state regulations are often referred to as blue sky laws.

NASAA

A membership organization for state securities administrators.

State Registration

Registered reps must be registered in each state they conduct business. If a client of a registered rep moves to another state, the rep cannot make a trade for that client until becoming registered in that state. If the client wishes to trade, the rep should forward the trade to someone at the firm who is registered in that state.

Fiduciary Standard

Fiduciaries are legally obligated to act in the best interest of persons they represent. Examples of fiduciaries includes administrators of pension plans and Investment Advisers. Importantly, representatives of broker-dealers are not subject to a fiduciary standard. Instead, they are subject to a suitability standard.

Investment Advisers

Frms that provide securities related advice for a fee. Larger advisers (defined as those with over $100mm in assets under management) must register with the SEC. Smaller advisers, those with less than $100mm in assets, must register in each state they operate.