As summarized below, FINRA recently filed with the SEC a proposed rule change to adopt, with amendments, the NASD and Incorporated NYSE rules relating to qualification and registration requirements as FINRA rules in the Consolidated Rulebook. The proposed rule change also restructures the current representative-level qualification examinations and creates a general knowledge examination and specialized knowledge examinations. In addition, the proposed rule change amends the Continuing Education (“CE”) requirements.
Registration Requirements
FINRA has adopted registration requirements to ensure that associated persons attain and maintain specified levels of competence and knowledge pertinent to their function. The current FINRA registration rules include both NASD rules and rules incorporated from the NYSE.
In general, the current rules: (1) require that persons engaged in a member’s investment banking or securities business who are to function as representatives or principals register with FINRA in each category of registration appropriate to their functions by passing one or more qualification examinations; (2) exempt specified associated persons from the registration requirements; and (3) provide for permissive registration of specified persons.
As part of the process of developing the Consolidated FINRA Rulebook, FINRA published Regulatory Notice 09-70, seeking comment on a set of proposed consolidated registration rules.
The proposed rules, among other changes, allowed any associated person to obtain and maintain any registration permitted by the member. FINRA also proposed adopting a Retained Associate (“RA”) status in the Central Registration Depository (“CRD®”) system for individuals who would be working for a financial services industry affiliate of a member, and who would not be working in any capacity for the member. Under the proposal, RAs would be able to obtain and maintain any registration permitted by the member, subject to specific requirements.
Further, the proposal created an “active” and “inactive” registration status in the CRD system to distinguish between required and permissive registrations, including the proposed RA status as well as the adoption of a Compliance Officer registration category for Chief Compliance Officers (“CCOs”), and designation of a Principal Financial Officer and Principal Operations Officer.
Based on comments received and discussions with the SEC, FINRA has revised the proposal. Specifically, rather than allowing individuals to obtain and maintain their registrations based on an RA status, the proposed rule change establishes a process whereby individuals who would be working for a financial services industry affiliate of a member would terminate their registrations with that member and would be granted a waiver of their qualification requirements upon re-registering with a member, provided the firm that is requesting the waiver and the individual satisfy specified conditions. FINRA has also eliminated the proposal to create an “active” and “inactive” registration status in the CRD system to distinguish between required and permissive registrations.
Over time, the examination program has increased in complexity to address the introduction of new products and functions, and related regulatory concerns and requirements. Today, there are a large number of examinations, considerable content overlap across the representative-level examinations and requirements for individuals in various segments of the industry to pass multiple examinations.
To address these issues, FINRA published Regulatory Notice 15-20, seeking comment on a proposal to restructure the current representative-level qualification examination program into a more efficient format whereby all potential representative-level registrants would take a general knowledge examination called the Securities Industry Essentials™ (“SIE™”) and a tailored, specialized knowledge examination for their particular registered role. The proposal would eliminate several representative-level registration categories and associated examinations that have become outdated or have limited utility.
Regulatory Element Continuing Education
FINRA is proposing to replace the term “registered person” under current FINRA Rule 1250(a) with the term “covered person”. The purpose of this change is to ensure that all registered persons, including those with “permissive registrations”, keep their knowledge of the securities industry current. Further, FINRA is proposing to codify existing FINRA guidance regarding the impact of failing to complete the Regulatory Element on a registered person’s activities and compensation.
Specifically, proposed FINRA Rule 1240(a)(2) 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. The proposed rule provides, however, that such person may receive trail or residual commissions resulting from transactions completed before the inactive status, unless the member with which the person is associated has a policy prohibiting such trail or residual commissions.
Firm Element Continuing Education
FINRA believes that training in ethics and professional responsibility should apply to all covered registered persons. Moreover, FINRA Rule 1250(a)(2)(A) currently requires that a member maintain a CE program that enhances a covered registered person’s professionalism. Therefore, proposed FINRA Rule 1240(b)(2)(B) requires that a firm’s training program cover training in ethics and professional responsibility.
The proposed rule change combines the proposals set forth in Regulatory Notices 09-70 and 15-20 with a few changes, including those made in response to comments. For further guidance, please refer to SR-FINRA-2017-007.