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

11/10/17

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].