The question of who is required to have an active FINRA Series 24 (General Securities Principal) registration is often not as easy to answer as you may think. As a broker-dealer compliance consulting specialist, we encounter this question from seasoned FINRA compliance veterans and new broker-dealers alike.
The licensing requirements for supervisors are often thought of as being reasonably simple. If you supervise a specific line of business or supervise other reps conducting that business, you must be registered as a principal of the firm. However, what if you are going through the New Member Application (“NMA”) process to start a new broker-dealer, or the Continuing Membership Application (“CMA”) process to purchase an existing broker-dealer? Does the fact that you are going through a CMA or NMA affect the requirements from a FINRA standpoint? If you are a new broker-dealer, are interested in buying a broker-dealer, or are tasked with filling out the Form NMA or Form CMA for a FINRA membership application, you need to know your registrations and licensing requirements.
NASD Rule 1021 requires that an individual who is “actively engaged in the management of the member’s investment banking or securities business, including supervision, solicitation, conduct of business or the training of persons associated with a member for any of these functions are designated as principals” and must take and pass the FINRA Series 24 General Securities Principal examination.
FINRA requirements also state that persons designated with the following titles and/or positions are also designated as principals of the firm and need appropriate FINRA registration:
- sole proprietors
- managers of Offices of Supervisory Jurisdiction (“OSJs”), and
- directors of corporations.
Further, NASD Rule 1022 states that “each person designated as a Chief Compliance Officer (“CCO”) on Schedule A of Form BD shall be required to register … as a General Securities Principal.”
Moreover, the following activities also require an active FINRA registration as a General Securities Principal (also referred to as a “Series 24”):
- hiring and firing,
- setting or implementing policies and procedures,
- negotiating or executing agreements,
- functioning as a signatory to a firm bank account,
- participating in management or executive committee meetings, and
- holding oneself out as a person with authority to make decisions.
But, do not want to supervise reps or others or be the CCO for your securities firm? what if you just want to own a broker-dealer? Do you need to pass the series 24 and be a General Securities Principal then? Do you need to update your FINRA registration? The answer: maybe.
We, as FINRA compliance experts, frequently notice that during the NMA and CMA process, the question arises from new broker-dealers as to whether a proposed direct or indirect owner of a broker-dealer needs to be a registered principal of the securities firm in order to maintain such status. The answer is that generally they must. However, FINRA has developed certain principal registration exemptions in specifically defined areas. For instance, directors or shareholders who are not registered with the broker-dealer and will serve only in a passive broker-dealer ownership role (not engaged in decision-making, day-to-day operational issues, management, or broker-dealer compliance) are not required to be registered principals. Yet directors who are registered in any capacity with the broker-dealer cannot avoid maintaining an active principal registration with FINRA. Why the distinction? This is because, in FINRA’s estimation, any registration with a broker-dealer for which you maintain an ownership interest makes you actively involved in the operations and management of the firm.
Simply put, FINRA does not believe it possible for anyone to own a broker-dealer (or buy a broker-dealer) – even in a passive ownership role – and maintain an active FINRA registration with the securities firm.
So then, what do you do if you want to own a broker-dealer but do not want to have to take the Series 24 examination? If you must be licensed with the firm you own, cross your fingers and study hard because you are going to have to take the principal exam and update your FINRA registration!