In a long-awaited move, the Securities and Exchange Commission recently approved a set of new rules proposed by the Financial Industry Regulatory Authority (FINRA) that revise and streamline the number and types of proficiency exams broker-dealer personnel must take in order to become registered, and the categories of registration. The new rules also permit persons not yet associated with a broker-dealer or employed in the securities industry to take a preliminary registration exam prior to entering the securities industry, and make other changes intended to modernize the registration and examination regime for broker-dealer personnel
The new rules are detailed in FINRA Regulatory Notice 17-30 and will become effective October 1, 2018.
Over the past several years FINRA has been in the process of consolidating the rules of the National Association of Securities Dealers (NASD), which became FINRA in 2007, and those of the New York Stock Exchange (NYSE), into a single, harmonized set of FINRA Rules. One area of focus in this endeavor has been the rules and requirements for registration of representatives and principals of FINRA-member broker-dealer firms, including the applicable proficiency exams required for registration in various capacities.
Under the new registration/examination regime, all new representative-level personnel will be required to pass a general knowledge exam known as the Securities Industry Essentials (SIE) exam, and one or more revised versions of the representative-level qualification exams such as the General Securities Representative (Series 7) exam. Thus, a person seeking to become a General Securities Representative for the first time will be required to pass both the SIE and the revised Series 7 exams. Persons who apply for registration prior to October 1, 2018, will be required to pass the current representative-level exam appropriate to that registration category, instead of the revised version and/or the SIE. Persons currently or formerly registered as representatives may be eligible for various "grandfathering" provisions that will enable them to continue to function without re-testing and, consistent with current practice, FINRA member firms may request a waiver of the exam requirements for certain persons who otherwise would be required to pass the SIE or certain other exams.
The new structure is intended to bring greater consistency and uniformity to the qualification process. Consequently, the new rules also eliminate several registration categories that either have become outdated or have limited utility.
Interestingly, for the first time, persons not affiliated with a FINRA member firm will be permitted to sit for a FINRA exam. Specifically, all persons will be permitted to sit for the SIE, even persons not currently employed by a FINRA broker-dealer. The new rules will also allow FINRA member firms to register or maintain the registration(s) as a representative or principal of any associated person of the firm, will establish a waiver program for individuals registered with a member firm who move to a financial services industry affiliate of a member firm, and will require firms to designate a Principal Financial Officer and a Principal Operations Officer.
The new regime
The new registration regime eliminates testing of general securities knowledge each time a registered person takes an additional representative-level exam, by moving that general content into the SIE. The SIE will focus on fundamental topics such as basic securities products, the structure and function of the industry, regulatory organizations and their functions, and regulated and prohibited practices. Each representative-level qualification exam (eg, the Series 7) will test knowledge relevant to the day-to-day activities, responsibilities and job functions of representatives seeking registration in that category. All representative-level applicants will take the SIE exam and a specialized knowledge exam for their particular role. This will eliminate duplicative testing of general securities knowledge on representative-level exams. In addition, FINRA has made corresponding changes to its Continuing Education (CE) requirements.
Persons who are not associated persons of firms, including members of the general public, will also be able to take the SIE, as will associated persons of broker-dealers whose functions are solely and exclusively clerical or ministerial. However, passing the SIE alone is not sufficient to qualify for registration. That will require the person to be associated with a broker-dealer firm and to pass the relevant representative-level exam and satisfy the other requirements for registration. All those who take the SIE will be subject to the SIE Rules of Conduct, which will require an attestation that the person is not qualified to engage in investment banking or securities business based solely on passing the SIE, and will prohibit cheating on the exam and/or misrepresenting qualifications to the public subsequent to passing the SIE. Violators who are not associated persons of a broker-dealer may forfeit their exam results and may be prohibited from retaking the exam if FINRA determines that they cheated or that they misrepresented their qualifications after passing it. Violations by an associated person of a broker-dealer will be considered violations of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) and the associated person may forfeit his or her exam results and may be subject to FINRA disciplinary action. Moreover, FINRA may refer cases of misconduct subsequent to passing the SIE to the relevant authorities. The SIE Rules of Conduct will be available on FINRA's website prior to October 1, 2018.
Except for persons registered solely as Order Processing Assistant Representatives or Foreign Associates, certain persons will be deemed to have passed the SIE, including persons who registered as representatives prior to October 1, 2018, and who continue to maintain such registrations on or after October 1, 2018; and those whose registrations were terminated between October 1, 2014, and September 30, 2018, provided they re-register within four years from the date of their last registration. All others must pass the SIE unless they receive a waiver.
As is the case currently, representative-level and principal-level registrations will lapse after two years of non-registration; however, the SIE will be subject to a four-year expiration period. Thus, a person last registered as a representative two or more years before applying for registration as a representative would be required to pass the relevant representative-level qualification exam, but if that individual last passed the SIE or was last registered less than four years before applying for re-registration, the person would not be required to re-take the SIE.
All those taking an exam will receive a passing or failing result. FINRA is evaluating ways to provide feedback to those who fail.
As it does currently, FINRA will consider exam waiver requests for persons seeking registration, and will consider waivers of either the SIE alone or the SIE and representative- and/or principal-level exams. Firms will also be able to request a waiver of the SIE for a person who is in good standing as a representative with the UK Financial Conduct Authority or with a Canadian securities regulator or stock exchange. FINRA will not consider SIE waivers for those who are not associated persons of a firm or for associated persons not seeking registration.
FINRA is also adopting a financial services affiliate waiver program, under which people who terminate their registration and transfer to a foreign or domestic financial services industry affiliate of a FINRA member firm will be able to obtain a waiver of the requalification requirements upon re-applying for registration. Specifically, when a registered person transfers to a financial services industry affiliate, the member firm will designate the person as eligible by notifying FINRA through the Central Registration Depository system (CRD) and filing a Form U5 to terminate that individual's registration. FINRA BrokerCheck will then show the person as no longer registered or associated with the firm. To be eligible for the waiver program, the person must:
- have been registered for a total of five years within the most recent 10-year period prior to the person's initial designation under the waiver program
- have been registered as a representative or principal for at least one year prior to initial designation under the waiver program with the firm designating her or him
- make the waiver request within seven years of initial designation
- have been designated initially (and any subsequent designation must have been made) concurrently with the filing of a related Form U5
- have continuously worked for a financial services industry affiliate of a FINRA-member firm since his or her last Form U5 filing
- have complied with the Regulatory Element of FINRA's CE requirements and
- not have any pending or adverse regulatory matters or terminations reportable on Form U4, and not have been subject to a statutory disqualification as defined in Section 3(a)(39) of the Securities Exchange Act of 1934, as amended, while eligible for a waiver.
Individuals will be eligible for one seven-year waiver period from the date of initial designation, a period that will not be tolled or renewed, but are not required to return to the firm that designated them and may instead return to a different FINRA member firm. During the waiver period, a person is permitted to move back and forth between a member firm and an affiliate, or move to another member firm, and also may move between financial services affiliates of a member firm or from a financial services affiliate of one member firm to the financial services affiliate of another member firm, provided he or she is continuously employed by a financial services affiliate of a member firm since the filing of his or her last Form U5. Eligible persons must transfer between member firms and affiliates (or between affiliates of member firms) promptly, and no later than within 30 calendar days.
Such persons may not be registered with a member firm while working for a financial services industry affiliate, and will not be permitted to take any additional exams while working for such financial services affiliate. Furthermore, all such individuals must satisfy the Regulatory Element requirements relevant to her or his most recent registration category, following the same cycle that would have applied if she or he had remained registered. Failure to timely complete the Regulatory Element will terminate the person's waiver eligibility.
Under the new regime, FINRA member firms will be permitted to "permissively" register or maintain registration of all associated persons, including those working in clerical or ministerial roles, expanding the current regime set forth in NASD Rules 1021(a) and 1031(a). Thus, persons performing functions that do not require registration will be permitted to permissively maintain, for example, a General Securities Representative registration, and persons functioning as General Securities Representatives would be able to permissively maintain General Securities Principal registration. As with the current rules, the firm will be allowed to permissively register persons engaged in the investment banking or securities business of a foreign securities affiliate or foreign securities subsidiary. CRD and BrokerCheck will be enhanced to enable FINRA, the public, firms and other regulators to identify persons who maintain only permissive registration.
Permissively registered persons will be considered associated persons and registered persons of the broker-dealer, and therefore subject to all FINRA rules to the extent relevant to their activities (for example, FINRA rules relating to dealings with customers would be relevant only to permissively-registered persons who have customer contact). However, rules of general application (eg, Outside Business Activities and Private Securities Transactions rules) will apply to all permissively-registered individuals, and permissively registered persons will be required to satisfy CE Regulatory Element requirements.
FINRA member firms will be required to have supervisory systems and procedures reasonably designed to ensure that permissively registered persons do not act outside the scope of their assigned functions. While firms will not be required to assign a registered person as the day-to-day supervisor of a person with only a permissive registration, they will be required to assign a registered supervisor to that person who will be required to contact the person's supervisor periodically to confirm that the person acting within the scope of assigned functions.
Designation of Principal Financial Officers and Principal Operations Officers
Also effective October 1, 2018, firms will be required to designate a Principal Financial Officer, with primary responsibility for financial filings and related books and records, and a Principal Operations Officer, with primary responsibility for the day-to-day operations of the firm including receipt and delivery of securities and funds, safeguarding assets, calculation and collection of margin, processing dividends and reorganization redemptions, and the books and records related to the foregoing activities. This replaces the current requirements that FINRA members designate a Chief Financial Officer (CFO) and dual FINRA/NYSE members designate a CFO and a Chief Operations Officer, and applies to all firms, including those currently exempt from the requirement to have a Financial and Operations Principal (FINOP) or Introducing Broker-Dealer FINOP. Principal Financial Officers and Principal Operations Officers must qualify and register as FINOPs or Introducing Broker-Dealer FINOPs, as applicable, and must be registered as Operations Professionals, although they will not be required to pass the Operations Professional (Series 99) exam if they hold a qualifying registration.
Firms that do not self-clear or provide clearing services may designate the same person as the Principal Financial Officer, Principal Operations Officer and FINOP (or Introducing Broker-Dealer FINOP), but clearing and self-clearing firms must designate separate persons to function as Principal Financial Officer and Principal Operations Officer (although though such persons may also act as FINOPs). Clearing and or self-clearing firms of limited size and resources may request a waiver of the separate persons requirement.
A firm may designate multiple Principal Operations Officers, provided it precisely defines and documents areas of primary responsibility and makes specific provisions for which person has primary responsibility for overlapping areas. A firm may not designate multiple Principal Financial Officers, but instead must have one principal responsible for its financial statements. Day-to-day duties may be delegated to other firm principals, but ultimate responsibility remains with the Principal Financial Officer and/or Principal Operations Officer.
New categories of principal registration
FINRA is also creating three new principal registration categories: (1) Compliance Officer; (2) Investment Banking Principal; and (3) Private Securities Offerings Principal.
1. Compliance Officer registration
Effective October 1, 2018, the person designated as Chief Compliance Officer (CCO) on the firm's Form BD must register as a Compliance Officer, with one exception – the designated CCO of a firm engaged in limited investment banking or securities business may instead register in a principal category relevant to the firm's business.
A CCO registered as a General Securities Representative and General Securities Principal prior to October 1, 2018, who continues to be the designated CCO and to be registered as a General Securities Representative and General Securities Principal, will automatically be registered as a Compliance Officer on October 1, 2018. Others registered as General Securities Representatives and General Securities Principals prior to October 1, 2018, who continue to maintain those registrations on or after October 1, 2018, will be qualified to register as Compliance Officers without additional exams, as will those registered as Compliance Officials in CRD prior to October 1, 2018, who continue to maintain that registration. Those whose General Securities Representative and General Securities Principal registrations, or Compliance Official registration, were terminated between October 1, 2016, and September 30, 2018, will be qualified to register as Compliance Officers without additional exams, provided they do so within two years of the termination date.
All others registering as Compliance Officers beginning October 1, 2018, must satisfy the Series 7 prerequisite (including the SIE) and pass the Series 24 or Compliance Official (Series 14) exam.
2. Investment Banking Principal registration
Beginning October 1, 2018, those who supervise certain investment banking activities will be permitted to register as Investment Banking Principals. A person registered as an Investment Banking Representative and a General Securities Principal as of October 1, 2018, will automatically be registered as an Investment Banking Principal on October 1, 2018. A person whose registrations as an Investment Banking Representative and a General Securities Principal were terminated between October 1, 2016, and September 30, 2018, will be qualified to register as an Investment Banking Principal without any additional exams, provided the person does so within two years from the termination date. All others registering as Investment Banking Principals beginning October 1, 2018, must satisfy the Investment Banking Representative prerequisite (including the SIE) and pass the Series 24 exam.
3. Private Securities Offerings Principal registration
Beginning October 1, 2018, principals who are responsible solely for supervising specified private securities offering activities may register as Private Securities Offerings Principals. A person registered as a Private Securities Offerings Representative and General Securities Principal as of October 1, 2018, will automatically be registered as a Private Securities Offerings Principal and a person whose registrations as a Private Securities Offerings Representative and General Securities Principal were terminated between October 1, 2016, and September 30, 2018, will be qualified to register as a Private Securities Offerings Principal without additional exams, provided that she or he does so within two years of the termination date. All others must satisfy the prerequisites for Private Securities Offerings Representative registration, including successfully completing the SIE, and passing the Series 24 exam.
To reduce administrative burdens, FINRA may enhance CRD to automatically register certain Investment Banking, Research, Securities Trader and Private Securities Offerings Principals.
FINRA will also eliminate certain registration categories and exams perceived to be outdated or to have limited utility. Specifically, FINRA is eliminating:
- Order Processing Assistant Representative
- United Kingdom Securities Representative
- Canada Securities Representative
- Options Representative
- Corporate Securities Representative
- Government Securities Representative
- Foreign Associate
FINRA will grandfather persons registered in these categories so that those registered as of September 30, 2018, in all of the foregoing categories except for Foreign Associate, will be permitted to maintain these same registrations on October 1, 2018, and those persons whose registrations in these categories were terminated between October 1, 2016, and September 30, 2018, will be permitted to re-register in the same categories, provided they do so within two years from the date of termination. Those who terminate such registrations on or after October 1, 2018, and remain so terminated for two or more years, will not be able to re-register in these categories. Persons registered as Foreign Associates as of September 30, 2018, may continue to maintain that registration; however, if the person subsequently terminates that registration, she or he may not re-register as a Foreign Associate.
Persons currently registered as Government Securities Representatives are qualified to register as Government Securities Principals without passing a principal-level exam. Those maintaining Government Securities Representative registration on or after October 1, 2018, likewise will be able to register as Government Securities Principals. Persons registered as General Securities Principals and Corporate Securities Representatives on September 30, 2018, may continue to maintain such registrations and continue to supervise corporate securities activities. Those who terminated such registrations between October 1, 2016, and September 30, 2018, will be permitted to re-register in those categories and supervise corporate securities activities, provided they do so within two years from the termination date.
Research Analyst, Research Principal and Supervisory Analyst
Beginning October 1, 2018, Research Analysts will no longer be required to take the Series 7 as a prerequisite. Instead, they will be required to pass the SIE exam and the revised Research Analyst (Series 86 and 87) exams. To register as a Research Principal, a person will be required to register as a Research Analyst by passing the SIE and revised Series 86 and 87 exams, and the Series 24 exam. A person also will be able to register as a Research Principal by registering as a Supervisory Analyst (Series 16) and passing the Series 24 exam. FINRA is eliminating the experience prerequisite (three years prior experience involving securities or financial analysis within the immediately preceding six) for registration as a Supervisory Analyst. Instead, Supervisory Analysts will only be required to pass the Series 16 exam.
Functioning as a principal for a limited period
Effective October 1, 2018, firms will be permitted to designate registered representatives to act as principals for up to 120 calendar days before passing the relevant principal exam (currently it is 90 calendar days). Such person must have at least 18 months experience as a representative within the immediately preceding five years. This also applies to persons who will function as principals in categories that do not require prerequisite representative-level registration, such as FINOPs.
Firms will be able to designate a principal to function in another principal category for 120 calendar days before passing any applicable exams, without having to satisfy the experience requirement for representatives. Thus, a firm will be permitted to designate a FINOP as a General Securities Principal for 120 calendar days before the person will have to pass the SIE, the revised Series 7 and the Series 24 exams.
Accepting orders from customers
Finally, effective October 1, 2018, unregistered persons will not be permitted to accept orders from customers for any reason. If a customer wishes to place an unsolicited order and a registered person is not available, an unregistered person may record the order information but a registered person must contact the customer and confirm the details before the order is considered accepted.
If you would like to learn more about the new registration and exam requirements, please contact one of the authors or your usual DLA Piper contact. We would be happy to assist you.