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Posts Tagged ‘FINRA’

New FINRA Rules to Bring Significant Changes to Qualification & Registration Process for Representatives and Principals

Posted on: November 10th, 2017

By: Patrick Y. Yoo

In October, 2017, the Securities and Exchange Commission approved a new set of Rules proposed by the Financial Industry Regulatory Authority (FINRA) that will go into effect October 1, 2018.  The changes enacted by these Rules may be reviewed in FINRA’s Regulatory Notice 17-30.

For the past several years, FINRA (formerly the National Association of Securities Dealers or “NASD”) has been in the process of consolidating the NASD and New York Stock Exchange (“NYSE”) Rules into a single, uniform set of FINRA rules. Pursuant to Section 15A(g)(3) of the Securities Exchange Act of 1934, FINRA is empowered to prescribe standards of training, experience, and competence for persons associated with FINRA members.  Accordingly, some of the central focuses of this consolidation effort concerned the issues of qualification, registration and testing of persons associated with FINRA members.  These newly approved Rules seek to revise and streamline the exam process and makes significant changes to the registration categories for registered persons and principals.  According to the Regulatory Notice, “FINRA’s registration rules ensure that associated persons attain and maintain specified levels of competence and knowledge pertinent to their function.”

These new rules, which add to and amend FINRA Rules 1200 et seq, will directly affect many newcomers’ admission into the securities industry, as well as continued registration in their respective functions for those already in the industry.  For broker-dealers and their personnel, the most salient components of these new changes will bear on the registration and proficiency testing requirements of representatives and principals of FINRA member broker-dealer firms.

1. The SIE

For new representative- and principal-level applicants on or after October 1, 2018, the most noticeable change will be the implementation of the all-new general knowledge exam, called the Securities Industry Essentials (“SIE”) exam.  This exam is aimed at eliminating duplicative testing of general securities knowledge each time an individual takes an additional representative-level exam, by moving that general content into the SIE. The SIE will consist of 75 questions testing basic securities industry knowledge, including products, the structure and function of the securities industry, the regulatory agencies and their functions, and regulated and prohibited practices.  The SIE is required of representative-level and principal-level applicants, but may also be taken by all associated persons whose functions are solely and exclusively clerical or ministerial, as well as by members of the general public who are not associated persons of a member firm (i.e., not sponsored).  However, FINRA specifically advises that passing the SIE alone will not qualify an individual for registration with FINRA, and in order to be eligible for registration, the individual must be associated with a firm and pass the appropriate qualification examinations.  The SIE will be subject to a four-year expiration period.

2. Changes to the Qualification Exams

In addition to the implementation of the SIE, the new rules will also eliminate several representative-level registration categories and their associated exams. Specifically, the following registration categories will be eliminated: (1) Order Processing Assistant Representative; (2) United Kingdom Securities Representative; (3) Canada Securities Representative; (4) Options Representative; (5) Corporate Securities Representative; (6) Government Securities Representative; and (7) Foreign Associate.

Beginning October 1, 2018, FINRA will retain only the following registration categories, which will be tested by the revised versions of their relevant exams as indicated below:


FINRA Representative-Level Registration Categories and Qualification Exams


Registration Category Current Examination(s) (prior to October 1, 2018) Future Examination(s) (on or after October 1, 2018)
Investment Company and Variable Contracts Products Representative Series 6 (100 questions) SIE (75 questions) + Revised Series 6 (50 questions)
General Securities Representative Series 7 (250 questions) SIE (75 questions) + Revised Series 7 (75 questions)
Direct Participation Programs Representative Series 22 (100 questions) SIE (75 questions) + Revised Series 22 (50 questions)
Securities Trader Series 57 (125 questions) SIE (75 questions) + Revised Series 57 (50 questions)
Investment Banking Representative Series 79 (175 questions) SIE (75 questions) + Revised Series 79 (75 questions)
Private Securities Offerings Representative Series 82 (100 questions) SIE (75 questions) + Revised Series 82 (50 questions)
Research Analyst Series 7 (250 questions) + Series 86 (Part I: Analysis) (100 questions) + Series 87 (Part II: Regulatory Administration and Best Practices) (50 questions) SIE (75 questions) + Revised Series 86 (Part I: Analysis) (100 questions) + Revised Series 87 (Part II: Regulatory Administration and Best Practices) (50 questions)
Operations Professional Series 99 (100 questions) SIE (75 questions) + Revised Series 99 (50 questions)

(Posted Table from FINRA Reg. Notice 17-30)


However, individuals who apply for registration for any category being eliminated, or any individual maintaining the eliminated representative-level registrations prior to October 1, 2018, will be “grandfathered” in (i.e., they may continue to maintain their current registration on or after October 1, 2018, unless the registration lapses). As is the case currently, representative-level registrations will lapse after two years of non-registration.

3. New Principal Registration Categories

The newly approved rules affect not only representatives and representative-level applicants, but principals as well. Per these rules, effective October 1, 2018, firms will be required to designate a Principal Financial officer and a Principal Operations Officer, which designation replaces the current requirement of designating a CFO and COO for dual-FINRA and NYSE-registered members, or designating a CFO for FINRA members.  But the greatest change comes in the form of three new principal categories.

First, any individual designated Chief Compliance Officer (“CCO”) will be required to register as the new principal category, “Compliance Officer.”  Designated CCOs who are registered as a General Securities Representative (Series 7) and a General Securities Principal will automatically be registered as a Compliance Officer, while any individuals maintaining the General Securities Representative and General Securities Principal or Compliance Official registrations on October 1, 2018 are qualified to register as Compliance Officers without taking any further exams.  The second of these new categories applies to principals responsible for supervising specified investment banking activities, who will be expected to register as “Investment Banking Principals.”  This category is available to any individual maintaining an Investment Banking Representative (Series 79) registration and a General Securities Principal registration.  For those maintaining these registrations on October 1, 2018, the registration will be automatic.  The last of the new principal registration categories applies to principals solely responsible for supervising specified activities relating to private securities offerings.  These individuals may register as a Private Securities Offerings Principal if they maintain a Private Securities Offerings Representative registration and a General Securities Principal registration.  As with the other principal categories, if the individual maintains the requisite registrations on October 1, 2018, registration will be automatic.

In sum, Regulatory Notice 17-30 and the newly approved FINRA Rules continue FINRA’s practice of consolidating and streamlining registration and testing requirements in its pursuit of maintaining standards of competence and knowledge of those involved in the securities industry. With the elimination of a sponsorship requirement and the elimination of duplicative testing via implementation of the SIE, FINRA’s new rules appear poised to attract greater numbers of people to the securities industry.

If you have any questions or would like more information, please contact Patrick Yoo at [email protected].


FINRA Tightens Expungement Requirements

Posted on: October 12th, 2017

By: Brett C. Safford

On September 25, 2017, the Financial Industry Regulatory Authority (FINRA) issued a “Notice to Arbitrators and Parties on Expanded Expungement Guidance” (hereafter, the “Notice”). The Notice continues the recent pattern of FINRA issuing rules and notices which further limit a broker’s ability to expunge his or her Central Registration Depository (CRD) record.

In 2015, FINRA launched an extensive advertising campaign for its BrokerCheck website. FINRA describes BrokerCheck as “a free tool to research the background and experience of financial brokers, advisers and firms.” However, as BrokerCheck becomes an increasingly utilized resource for customers and potential employers, the impact of a broker’s disclosures on his or her career becomes more significant. With the increased impact of a broker’s disclosures, the necessity of ensuring that those disclosures are accurate likewise increases. Consequently, expungement—a legal action which allows brokers to remove inaccurate disclosures—has taken on greater importance.

FINRA’s expungement procedures are governed by FINRA Rules 12805 and 13805. In the Notice, FINRA advises, “The procedures are intended to ensure that expungement occurs only when the arbitrators find and document one of the narrow grounds specified in Rule 2080.” The three “narrow” grounds specified in FINRA Rule 2080 are: (1) the claim, allegation or information is factually impossible or clearly erroneous; (2) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or (3) the claim, allegation or information is false.”

By describing the grounds for expungement set forth in Rule 2080 as “narrow,” FINRA is signaling to its arbitrators that expungements are the exception, not the norm. The Notice further advises, “Expungement is an extraordinary remedy that should be recommended only under appropriate circumstances. Customer dispute information should be expunged only when it has no meaningful investor protection or regulatory value.” Yet, FINRA fails to define “appropriate circumstances” or how to assess “meaningful investor protection” or “regulatory value.” Arbitrators are also instructed to request a copy of the broker’s BrokerCheck report and to “carefully review the report when considering whether expungement is appropriate.” Arbitrators are to “pay particular attention to the ‘Disclosure Events’ section of the report.” The Notice, however, is unclear as to what arbitrators should take away from their review the BrokerCheck report. No guidance is offered as to what extent arbitrators should factor a broker’s prior disclosures into their analysis of the pending request for expungement.

The Notice also emphasizes that “[i]t is important to allow customers and their counsel to participate in the expungement hearing in settled cases if they wish to” and instructs arbitrators to allow the customer and their counsel to appear at the hearing; allow the customer to testify (in person, telephonically, or by other method); and allow the customer’s counsel or a pro se customer to introduce documents and evidence, cross-examine the broker and witnesses, and present opening and closing arguments at the hearing. In expungement only cases where an associated person files arbitration claims solely for the purpose of seeking expungement, the Notice advises arbitrators to “order the associated persons to provide a copy of their Statement of Claim to the customer(s) involved in the customer’s arbitration case that gave rise to the customer dispute information (underlying arbitration).”

Finally, the Notice states, “A broker may not file a request for expungement of customer dispute information arising from an underlying customer arbitration until the underlying customer arbitration has concluded.” When the broker is a named respondent in the underlying customer arbitration and he or she can present a defense, this rule prevents inconsistent rulings, i.e., the broker is found liable for claims in the underlying customer arbitration while obtaining expungement of that claims in the expungement-only arbitration, or vice versa. However, this rule also applies to brokers who are not named in the underlying customer arbitration. This means that before bringing an action to expunge a meritless disclosure from his or her CRD records, an unnamed, falsely-accused broker must sit on the sideline and await the resolution of an arbitration which he or she cannot present a defense. As such, a broker’s BrokerCheck report can include a false and erroneous disclosure for years before expungement is obtained—causing significant harm to the broker’s professional reputation.

In sum, the Notice continues the trend of FINRA toughening the requirements for expungement. Public protection against crooked brokers is essential and needed, but FINRA’s expungement guidance is increasingly creating a framework in which innocent brokers may struggle to obtain necessary and justified expungements.

If you have any questions or would like more information, please contact Brett Safford at [email protected].

FINRA Puts the Vice Grip On Confidentiality Provisions Customer Settlements and Customer Arbitrations and Litigation

Posted on: December 10th, 2014








By: John Goselin


FINRA’s Notice to Members 14-40  revises the regulator’s position on the permissible scope and nature of confidentiality provisions that broker-dealers can agree to relating to the discovery process in legal proceedings or as a term in a settlement agreements ostensibly designed to resolve disputes and obtain peace. Although FINRA pays lip service to the concept that broker-dealers are free to enter into acceptable confidentiality provisions, FINRA has now staked out the position that any resolution with a customer that restricts the customer from initiating contact with a regulator is “inconsistent with just and equitable principles of trade” in violation of FINRA Rule 2010 and subjects the broker-dealer to a regulatory disciplinary action. Thus, NTM 14-40 dramatically re-writes the prior guidance provided by FINRA in 2004 in NTM 04-44

Prior to October 2014, a confidentiality provision was consistent with just and equitable principles of trade so long as the customer (or the customer’s lawyer) was free to respond to an inquiry from a regulator without requiring the regulator to obtain a subpoena or invoke some court process. Under the new guidance, the customer (or the customer’s lawyer) must be free to initiate contact with the regulators. NTM 14-40 provides the “magic words” which FINRA has deemed (at least for the moment) to be acceptable for confidentiality provisions:

Any non-disclosure provision in this agreement does not prohibit or restrict you (or your attorney) from initiating communications directly with, or responding to any inquiry from, or providing testimony before, the S.E.C., FINRA, any other self-regulatory organization or any other state or federal regulatory authority, regarding this settlement or its underlying facts or circumstances.

Why the sudden change in policy regarding the scope of confidentiality provisions? NTM 14-40 provides no hint as to the rationale. What is clear is that it just got more difficult for a broker-dealer to obtain a complete and final resolution of a customer dispute. Even after agreeing to a monetary settlement, a customer or a customer’s lawyer will be free to contact regulators in an effort to stir the pot and encourage the regulator to intervene in some manner in what the broker-dealer had hoped was a resolved issue.


FINRA Continues Push for Massive, All-Encompassing Securities Transaction Database

Posted on: October 10th, 2014

474509859By: John H. Goselin, II

On September 30, 2014, FINRA issued NTM 14-37  which updated FINRA’s December 2013 proposal (see NTM 13-42 )to develop the Comprehensive  Automated Risk Data System (CARDS).   FINRA proposes to compile a database that tracks every security transaction undertaken within the United States.   It will take years to obtain regulatory approval and implement the CARDS program, but upon completion it will rival what the National Security Administration (NSA) purportedly is doing with analyzing email communications.   By requiring all carrying and clearing firms to periodically submit, in an automated and standardized format,  data relating to the securities and account transactions, holdings, account profile information (excluding personal identifying information) and securities reference data for every securities transaction undertaken by every broker-dealer in the United States, FINRA apparently believes  CARDS  will ultimately permit FINRA to more systematically monitor securities transactions, enhance FINRA’s oversight role and advance investor protection.  The goal is to apply advanced surveillance analytics across the wide expanse of securities transactions and facilitate earlier, and arguably more effective, intervention to protect investors.  As a carrot to help get industry buy-in for CARDS, FINRA even proposes to “share” at least some of these advanced analytics with member firms to enhance supervision and compliance before the regulator feels compelled to intervene and the Firm’s liability costs increase.

CARDS, however, presents a number of problems.  Indeed, the initial proposal resulted in more than 800 comment letters from across the industry.   Cyber security is at the top of the list of concerns for those commenting on the proposal.  The ability of FINRA to protect CARDS and the massive amount of customer data that will be funneling through the system remains subject to much debate.  It should be clear to everyone that a comprehensive database of the nature proposed by FINRA is certain to draw the attention of those countries intent on spying on and/or attacking the U.S. (Russia, China, North Korea, etc.), cyber-terrorists and plain old-fashion thieves.   What is not clear is who will answer to the customers – FINRA or the broker-dealers – when the inevitable security breach occurs.   A second major concern is the uncertain, but likely substantial costs, the 4,100 member firms will incur to both standardize and submit data for use in CARDS.

Yet, the most valuable of CARDS’ purported benefits will be deferred until some uncertain date in the future, and only after a second round of un-quantified costs have been incurred.  CARDS will not, as presently contemplated for its initial stages, be collecting data on the products that FINRA considers the highest risk to retail investors and in the most need of enhanced surveillance and enforcement activity.   Data regarding variable annuities, private placements, direct participation programs, PIPES, non-exchanged traded REITS, unregistered securities, precious metals and direct mutual fund transactions will not  be collected in Phase 1 or 2 of CARDS implementation.  Rather, given the substantial complexities and costs associated with attempting to gather data on these products, FINRA proposes to defer consideration of the who, what, when and where of how CARDS could ever effectively and efficiently aggregate the data that FINRA most needs to some date several years in the future and after substantial investment has already been made into CARDS.    Thus, CARDS will create substantial immediate costs, but without substantial, immediate benefits to consumer protection.

NTM 14-37 requests further industry commentary regarding the revised CARDS proposal.  The comment period is set to expire on December 1, 2014.  And FINRA has been talking directly to clearing firms and industry participants to try to refine its proposal.  Leading industry groups, such as the Financial Services Institute (FSI), are attempting to work with FINRA to more fully shape the CARDS concept.   Once a final proposal for CARDS is prepared, FINRA will need to submit CARDS to the Securities and Exchange Commission for approval before FINRA can implement it.


FINRA Clarifies “Know Your Customer” and “Suitability” Rules

Posted on: September 17th, 2012

By: Joyce Mocek

FINRA Rule 2090, effective July 9, 2012, has streamlined and replaced the former NASD Rule 405, the “Know Your Customer” standard.  The new rule contains a “reasonable diligence” standard, compared to the old rule requirement of “use due diligence.”  Rule 2090 provides that “Every member shall use reasonable diligence, in regard to opening and maintenance of every account, to know (and retain) the essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer.”  “Essential facts” are now defined.  The new Rule places additional obligations on member firms to not only comply with the “Know Your Customer” rule when opening an account, but also in maintaining an account.

Working in conjunction with the “Know Your Customer” rule, is a new “Suitability” rule, FINRA 2111.  The new Suitability rule, which replaced NASD Rule 2310, expands the scope of information that a broker must attempt to obtain through reasonable diligence.  It also requires firms and associated persons to document with specificity their reasonable basis for believing a factor is not relevant in order to be relieved of the obligation to obtain further information on that factor.  It expands the suitability obligations and requires “reasonable basis” to believe, based on “reasonable diligence” that an investment is suitable.  These new rules expand the obligations of member firms and associated persons, and also provide more clarity and structure in understanding the rules.