Lesson 12.1: Joining and Leaving a Member Firm and Ongoing Expectations

Form U4

  • Used to register an associated person of a member firm with FINRA.
  • Registration is effective only after passing the appropriate qualification exam(s).
  • If an exam is failed, a 30-day wait is required before a second attempt.
  • Three consecutive failures require a 6-month (180 days) wait before the fourth attempt.
  • Information required:
    • Name, address, and any aliases.
    • 5-year residency history.
    • 10-year employment history (including full-time education).
    • Information on any charges or convictions relating to the investment business.
    • Detailed explanation for affirmative answers regarding charges or convictions on Disclosure Reporting Pages (DRP).
  • Registration is also required in each state where the representative does business, including fees and qualification exams.
  • If the firm is a member of an exchange like NYSE or CBOE, it must be noted on Form U4, along with applicable fees and exams.
  • Marital status or educational background (degrees) are not required.
  • A U4 filing to request an exam opens a 120-day window for completion.
  • A new U4 is required when a registered person joins a different firm.
  • Changes to U4 information require filing an amended form with the Central Registration Depository (CRD) within 30 days of awareness; 10 business days if it involves statutory disqualification.
  • Requirements for Form U4:
    • Sponsorship by a broker-dealer (BD) member firm.
    • Complete and truthful disclosure on all required forms.
  • Willful misstatement on the U4 may result in being barred from the industry for life.
  • Before submitting a U4, a member firm must ascertain the person's business reputation, character, education, qualifications, and experience and must certify that it has made an investigation (background check) and that the candidate's credentials are in order.

Fingerprint Requirements

  • Registered BDs must have fingerprint records for most employees, directors, officers, and partners, submitting them to the U.S. attorney general (Justice Department).
  • Those involved in sales and those who handle cash or customer securities must be fingerprinted.
  • Clerical (ministerial) persons typically do not need to be fingerprinted, unless their position involves handling cash or securities.
  • Example: A receptionist handling incoming mail needs fingerprinting due to potential access to cash or securities.
  • Exemptions from fingerprinting:
    • Those selling only mutual funds, variable annuities, or direct participation programs (DPPs).
    • Certain clerical BD employees who:
      • Are not involved in securities sales.
      • Do not handle or have access to cash, securities, or original entry books relating to money and securities.
      • Do not supervise other employees engaged in these activities.

Form U5

  • Filed with the CRD within 30 days of termination (resignation or termination).
  • A copy of the form must also be provided to the former employee within the same timeframe.
  • Failure to file within 30 days results in a late-filing fee.
  • The form requires the member to indicate the reason for termination and provide an explanation.
  • Failure to provide accurate information could lead to severe disciplinary action.
  • Reasons for termination:
    • Discharged
    • Permitted to resign
    • Deceased
    • Voluntary
    • Other
  • If discharged, permitted to resign, or other is checked, details surrounding the termination must be disclosed.
  • Voluntary resignation is assumed to not affect future eligibility.
  • The form includes any state registrations, which end at the same time.
  • Partial termination is possible, ending some but not all registrations.
  • Example: A principal stepping down from supervision to work as a representative selects partial termination.
  • As with Form U4, an amendment to Form U5 involving statutory disqualification must be filed within 10 business days of discovery.

Licensing Expiration

  • After Form U5 is filed, FINRA and other regulators retain jurisdiction for two years.
  • During this period, they may require the terminated person to provide evidence and answer questions.
  • Within two years, a person can associate with another member firm without requalifying (retaking exams).
  • If a person does not re-affiliate within two years, they must pass the qualifying exams again.
  • Passing the SIE exam allows a person to take a top-off exam and affiliate with a member firm for up to four years without retaking the SIE.
  • If more than four years elapse after taking the SIE before passing a top-off, the person would need to take the SIE exam again.
  • When a person terminates association with a member firm, they have four years to re-affiliate before they must retake the SIE exam.

Military Service

  • If a representative leaves for regular military service, their license is placed in a special inactive status.
  • This status continues until 90 days after leaving military service.
  • The two-year time frame to associate with a firm begins at the end of the 90-day period.
  • This allows extended military service without requiring retesting to return to the industry.

Continuing Commissions

  • After termination, representatives no longer receive commissions.
  • However, continuing commissions may be allowed under a contract existing before termination, normally for retirees and may allow for payments to heirs.
  • These payments are for existing business relationships only, not new business.

Disqualifying Events

  • A person may not act as an RR or principal unless FINRA's eligibility standards regarding training, experience, and competence are met.
  • Certain disqualifying events may prevent registration.

Statutory Disqualification

  • Disciplinary sanctions by the SEC, a state regulator, an SRO, a foreign financial regulator, or a foreign equivalent of an SRO may cause statutory disqualification.
  • An individual applying for registration will be rejected if they:
    • Have been expelled or suspended from membership or participation in any other SRO or foreign equivalent.
    • Are under an SEC order or an order of a foreign financial regulator denying, suspending, or revoking registration or barring them from association with a BD.
    • Have been found to be the cause of another BD or associated person being expelled or suspended by another SRO, the SEC, or a foreign equivalent of an SRO.
  • The following also automatically disqualify an applicant:
    • Willful misstatements in an application for membership or registration.
    • A felony conviction (domestic or foreign) or a misdemeanor conviction involving securities or money within the past 10 years.
    • Court injunctions prohibiting them from acting as an investment adviser, underwriter, or BD or in other aligned capacities.
  • Example: Conviction for a Ponzi scheme statutorily disqualifies an individual from registering as an associated person because the conviction involves money and fraud.
  • The CRD maintains information on the disciplinary history of all registered persons.
  • Customers can access this information toll-free through BrokerCheck, with a link required on all FINRA member firm websites.