On July 7, 2017 the Securities and Exchange Commission (“SEC”) approved the Financial Industry Regulatory Authority (“FINRA”) proposed rule changes to adopt consolidated registration rules. The new rules restructure the representative-level qualification examination program, allow permissive registration, establish an exam waiver process for persons working for a financial services affiliate of member, and amend the continuing education requirements. Although approved, FINRA has not established an effective date for these new rules.
FINRA Rule 1210
FINRA has streamlined the provisions of National Association of Securities Dealers ("NASD") Rules 1021(a) and 1031(a) and adopted them as FINRA Rule 1210.
For those firms that limit the scope of their business, FINRA is providing greater flexibility to satisfy the two-principal requirement. A summary of notable changes and clarifications provided by FINRA Rule 1210.01 follows:
- Provides that any member with only one associated person will be excluded from the two-principal requirement.
- Clarifies that existing members as well as new applicants may request a waiver of the two-principal requirement.
- a member engaged in investment banking activities designates an Investment Banking Principal;
- a member engaged in research activities designates a Research Principal;
- a member engaged in securities trading activities designates a Securities Trader Principal; and
- a member engaged in options activities with the public designates a Registered Options Principal.
FINRA is expanding the scope of permissive registrations and clarifying a member’s obligations regarding individuals who maintain such registrations. Notably, FINRA Rule 1210.02 allows any associated person to obtain and maintain any registration permitted by the member. Based on the changes to the rules, the provisions against “parking” representative registration licenses has been removed.
FINRA is consolidating the provisions of NASD Rules 1021(a) and 1031(a), which currently set forth general requirements that an individual shall pass an appropriate qualification examination before his or her registration, as FINRA Rule 1210.03. In addition, FINRA will adopt a restructured representative-level qualification examination program. Notable changes provided by FINRA Rule 1210.03 and 1210.04 include:
- Representative-level registrants would be required to pass a general knowledge examination, the Securities Industry Essentials (“SIE”),1and a specialized knowledge examination appropriate to their job functions at the firm with which they are associating. The SIE will be effective for 4 years after an individual is terminated from registration.
- Principal-level registrants must also pass an appropriate principal-level qualification examination, in addition to meeting the requirements of a representative-level registrant.
The current FINRA representative-level examination program, which consists of 16 examinations, will be condensed to the series 6, 7, 22, 57, 62, 72, 79, 82, 86, 87 and 99.
- Individuals who are registered on the effective date of the rule change would be eligible to maintain those registrations without being subject to any additional requirements.
- Individuals who had been registered within the past two years prior to the effective date of the rule change would be eligible to maintain those registrations without being subject to any additional requirements, provided that they reregister with FINRA within two years from the date of their last registration.
- Provisions of NASD Rule 1021(d), which allow for a registered representative to act as a principal for 90 calendar days before he or she is required to pass the appropriate qualification examination, will be expanded to 120 days. However, that registered representative must have at least 18 months of experience functioning as a registered representative within the five-year period immediately preceding the designation to principal.
Waiver of Examinations for Individuals Working for a Financial Services Industry Affiliate of a Member
NASD Rule 1031 requires representatives and principals to retake and pass any qualification examination that has expired as a result of the individual having been terminated from that registration for two or more years. According to supplemental material .09 of Rule 1210, FINRA will waive such examinations for individuals working for an affiliate within the financial services industry. Specifically, a FINRA member will be able to ask FINRA to waive the applicable qualification examination for an individual if the following conditions are met:
- Prior to the individual’s initial designation, the individual was registered as a representative or principal with FINRA for a total of five years within the most recent 10- year period, including for the most recent year with the member that initially designated the individual.2
- The waiver request is made within seven years of the individual’s initial designation.
- The initial designation and any subsequent designations were made concurrently with the filing of the individual’s related Form U5.
- The individual has continuously worked for financial services industry affiliates of a firm since the individual’s last Form U5 filing.
- The individual has complied with the Regulatory Element of the continuing education requirements specified in FINRA Rule 1240(a).
The individual does not have any pending or adverse regulatory matters or terminations that are reportable on the Form U4 and has not otherwise been subject to a statutory disqualification as defined in Section 3(a)(39) of the Securities Exchange Act of 1934 while the individual was designated as eligible for a waiver.
FINRA Rule 1220
FINRA is integrating the various registration categories and related definitions under the NASD rules into a single rule, FINRA Rule 1220. A summary of notable changes and clarifications provided by FINRA Rule 1220 are noted as follows:
- Clarifies that a member’s chief executive officer (“CEO”) and chief financial officer (“CFO”) (or equivalent officers) are considered principals based solely on their status.
Establishes that the phrase “actively engaged in the management of the member’s investment banking or securities business” includes:
- the management of, and the implementation of corporate policies related to, such business;
- managerial decision-making authority with respect to the member’s business; and
- management-level responsibilities for supervising any aspect of such business (i.e., serving as a voting member of the member’s executive, management or operations committees).
- Establishes a Compliance Officer qualification exam.3
- Establishes a Government Securities Representative and Principal qualification exam.
- Establishes an Investment Company and Variable Contracts Products Principal qualification exam.
- Establishes a Private Securities Offerings Principal qualification exam.
Eliminates the United Kingdom Securities Representative and Canada Securities Representative registration categories, and associated Series 17, Series 37 and Series 38 examinations.4
FINRA Rule 1230
FINRA is adopting NASD Rule 1060(a) as FINRA Rule 1230. NASD Rule 1060(a) exempted from registration those associated persons who are not actively engaged in the investment banking or securities business. Rule 1060(a) also included those associated persons whose functions are related solely and exclusively to a member’s need for nominal corporate officers or for capital participation. FINRA is removing these exemptions. In addition, FINRA is repealing the guidance provided in NTM 87-47 and instead adopting FINRA Rule 1230.01 to clarify that the function of accepting customer orders is not considered a clerical or ministerial function and that associated persons who accept customer orders are required to be appropriately registered.5
FINRA Rule 1240
FINRA is renumbering FINRA Rule 1250 as FINRA Rule 1240. A summary of notable changes provided by FINRA Rule 1240 is below:
- Replaces the term “registered person” under current FINRA Rule 1250(a) with the term “covered person.”6
- Provides that any person whose registration has been deemed inactive under the rule may not accept or solicit business or receive any compensation for the purchase or sale of securities.7
- Requires that each Research Analysts and their immediate supervisor(s) cover training in ethics and professional responsibility to meet the minimum standards for the Firm Element training program.
FINRA will announce the effective date of the rule change in a Regulatory Notice to be published no later than 90 days after July 7, 2017. The effective date will be no later than 18 months from July 7, 2017.
For More Information
For more information on this rule change, please contact your ACA consultant or Dee Stafford at (561) 628-5288 or firstname.lastname@example.org
1The SIE will cover the four major areas below:
- Knowledge of Capital Markets
- Understanding Products and Their Risks
- Understanding Trading, Customer Accounts and Prohibited Activities
- Overview of the Regulatory Framework
2The individual must have been registered with a FINRA member firm for a total of five years within the past 10 years, the most recent year of which being with their current employer.
3 All individuals registering as Compliance Officers after the effective date of the rule change must:
- become registered as a General Securities Representative; and
- pass the General Securities Principal qualification exam or the Compliance Official qualification exam.
4Individuals who are in good standing as representatives with the Financial Conduct Authority in the United Kingdom or with a Canadian stock exchange or securities regulator would be exempt from the requirement to pass the SIE, and thus would be required only to pass a specialized knowledge examination to register with FINRA as a representative.
5 Continues to provide that an associated person is not accepting a customer order where occasionally, when an appropriately registered person is unavailable, the associated person transcribes the order details and the registered person contacts the customer to confirm the order details before entering the order.
6 Defines the term “covered person” under FINRA Rule 1240(a) as any person, other than a Foreign Associate, registered pursuant to FINRA Rule 1210, including any person who is permissively registered pursuant to FINRA Rule 1210.02, and any person who is designated as eligible for an FSA waiver pursuant to FINRA Rule 1210.09.
7 However, such person may receive trail or residual commissions resulting from transactions completed before the inactive status.