Lesson 12.2: Ongoing Expectations of Registered Representatives

The Role of a Principal

  • Anyone managing or supervising a member's investment banking or securities business must register as a principal with FINRA. This includes those solely involved in training.
  • Firms (excluding sole proprietorships) must employ at least two registered principals.
  • Principals supervise representatives, ensuring adherence to firm policies and regulations.
  • Duties include:
    • Accepting/approving new accounts.
    • Approving accounts for margin or options trading.
    • Approving/reviewing communications.
    • Reviewing trading activity.
    • Hiring/training new representatives.
    • Responding to written complaints.
  • RRs must pass a principal exam to become a principal; several exams cover specific areas.

Handling Customer Complaints

  • Notify proper personnel (representative, principal, branch manager, compliance) upon receiving a complaint or identifying a potential red flag.
  • A principal addresses complaints.
  • A complaint is defined as a written statement alleging a grievance related to securities transactions; written communication includes electronic forms.
  • No further action is needed if a complaint is resolved to the customer's satisfaction.
  • A report listing all written complaints is filed with FINRA within 15 days of each calendar quarter's end.
  • Copies of complaints must be held for four years after resolution.

Continuing Education (CE) Requirements

  • Registered persons must participate in CE programs, comprising a firm element and a regulatory element.

Firm Element

  • Member firms must prepare an annual training plan.
  • This plan considers regulatory developments, business activities' scope, personnel performance in the regulatory element, and supervisory needs.
  • Annual in-house training must be given to all registered persons with direct public contact.
  • The firm element CE must be completed by December 31st, but a member firm may require it earlier.
  • Failure to complete may result in the suspension of a representative's license.
  • A significant portion of the firm element CE should relate to normal business activities and the representative's duties.

Regulatory Element

  • Registered persons must complete a computer-based training session by December 31st of every year.
  • FINRA determines content, appropriate to RR or principal status.
  • Failure to complete leads to deactivation of registration until requirements are met.

Outside Business Activities (OBAs)

  • Associated persons cannot work for another business without their firm's knowledge.
  • Prior written notice to the employing BD is required if a registered person wants to be employed by or accept compensation from another entity.
  • The firm can reject or restrict outside affiliations if conflicts of interest arise.
  • Affiliations requiring notice include serving as an officer/director of a company or owning interest in another financial services company. *Example:
    • An RR wants to teach night classes in business and finance at a local community college to earn extra income while building her securities practice. Under the rules governing outside business activity, she would need to make prior written notice to the employing member BD.
    • The same RR wants to volunteer for her son's little league association, serving in any way she can be of help (coaching, committees, etc.). As long as no compensation is involved, notice to the employing member would not need to be made for participation in this activity.
  • Passive investments (e.g., limited partnership unit, investment company share) do not constitute OBAs; written notice is not required.

Private Securities Transactions

  • Private securities transactions (aka "selling away") are sales of securities outside an associated person's regular business and employing member.
  • If an associated person wishes to enter into such a transaction, they must:
    • Provide prior written notice to their employer.
    • Detail the proposed transaction.
    • Describe their role in the transaction.
    • Disclose any received or expected compensation.

With Compensation

  • The employing member may approve or disapprove the associated person's participation if the transaction involves compensation.
  • If approved, the member must treat the transaction as if it is being done on its own behalf.
  • If disapproved, the associated person cannot participate.

Without Compensation

  • The employing member must acknowledge written notification and may require adherence to specific conditions.
  • Transactions on behalf of immediate family members without compensation are excluded.
  • Employer BDs can place restrictions on non-compensated private securities transactions, including prohibition.
Supervision of Private Securities Transactions
  • The employing member firm is responsible for supervising all aspects of a private securities transaction, not the BD accommodating the transaction.
Test Topic Alert:
  • Selling away without your firm's knowledge is a serious violation of the Conduct Rules.

Gifts and Gratuities

  • BDs may not distribute business-related compensation (cash or noncash) to employees of other member firms, except if:
    • Compensation is not conditional on sales or promises of sales.
    • The employing member gives prior approval.
    • The total value does not exceed the annual limit (currently 100100 per year).
  • The 100100 limit may be exceeded for:
    • Occasional noncash expenditures (e.g., dinners, seminars, tickets).
    • Reminder advertising items (e.g., pens, mouse pads with the firm's logo).
    • Items given for life events (weddings, birth of a child, retirement, etc.).
  • All gifts must be reasonable. (e.g., Placing your logo on the side of a new car does not make it reminder advertising).
  • The annual limit is per individual employee of another member firm.
  • Business entertainment is allowed if a representative of the firm providing tickets or paying covers the event or the meal. *Example:
    • Twice each year, a mutual fund sales associate likes to sit down at a nice restaurant with a few BD representatives to discuss new funds that his company is offering and explore possible suitable recommendations for their clients. These dinners can sometimes cost 400−500400-500. This would be permitted because it is occasional and business is being discussed with the mutual fund sales associate present (a.k.a. an allowable business entertainment expense).
    • A mutual fund sales associate sends an RR two tickets for all of the home games of the RR's favorite sports team. The value of the two tickets is approximately 4,5004,500. This would be considered a violation because it is not occasional—and further, there can be no assumption that the sales associate would be present at each game to discuss business, nor would there be a reasonable need to do so that often.

Political Contributions

  • Political contributions should never be used to procure business; awards should be merit-based, not based on political favor.
  • Industry rules aim to preserve investor confidence and market integrity.

MSRB Rule G-37

  • The MSRB was established as an SRO to enact/interpret rules for municipal securities and advise municipal issuers.
  • Rule G-37 prevents "pay to play"; FINRA enforces these rules.
  • The rule addresses the influence of political contributions on underwriter selection.
  • It focuses on:
    • Negotiated underwritings: municipal issuer selects an underwriter and negotiates a deal.
    • Financial advisory work: municipal issuer selects a firm to help structure a new issue.
  • Rule G-37 prohibits municipal firms from engaging in municipal securities business (negotiated underwritings/financial advisory work) with an issuer for two years after a contribution is made to an official of that issuer by:
    • The municipal firm.
    • A municipal finance professional (MFP) associated with the firm.
    • Any political action committee (PAC) controlled by the firm.
  • An MFP is an associated person engaged in municipal securities underwriting, trading, sales, financial advisory, etc.
  • Those solely with sales to individuals or clerical/ministerial functions are not MFPs.
  • MFPs can contribute up to 250250 per election to officials they can vote for; this de minimis exemption does not apply to firms. *Example:
    • A municipal securities firm routinely makes political contributions to candidates in local municipalities. Later, the firm wants to take part in the underwriting of a new issue of municipal bonds in one of those municipalities. The municipality is requiring that bids be made by member firms in order for the municipality to select the underwriters. Because this isn't a negotiated underwriting, the municipality would be allowed to submit a bid to participate in underwriting the issue of new bonds.
    • Had it been a negotiated underwriting, the member firm would have been unable to negotiate with the municipality for a period of two years after the last contribution was made.