Registered Representatives & Other Securities Industry Professionals

Introduction

 

FINRA welcomes you to your new career as a FINRA member firm registered representative. This brochure—tailored for prospective and currently employed registered representatives and other securities industry professionals—addresses testing and qualifications issues, how registered representatives are to conduct business, and the need for professionalism and fair dealing with investors. Not every situation you encounter can be covered in a publication of this size and some of the points covered may not apply to your firm's business. In your training, you will learn that there is an extensive support system available to help you comply with these requirements.

 

Authorized by an act of Congress in 1938, FINRA is a membership self-regulatory organization (SRO) of securities firms. FINRA sets the overall strategic direction and policy agendas of the whole organization, oversees the effectiveness of its subsidiaries, and ensures that the organization's statutory and self-regulatory obligations are fulfilled.

 

FINRA regulates the securities markets for the ultimate benefit and protection of the investor. Regulation helps ensure that member firms and their employees comply with FINRA and Municipal Securities Rulemaking Board (MSRB) rules, as well as federal and state securities laws and regulations.

 

Among FINRA's many functions is the maintenance of the qualification, employment, and disciplinary histories of registered securities employees of member firms through the Web Central Registration Depository (CRDSM) system. This system was developed jointly by the North American Securities Administrators Association (NASAA) and NASD. It is a registration data bank and application processing facility. In addition to FINRA representative and principal registrations, the Web CRD system also processes applications for agent registration in all states, the District of Columbia, Puerto Rico, and for the securities exchanges. The Web CRD system permits individuals seeking registration with multiple organizations and states to do so by submitting a single form and a combined payment of fees to FINRA. In addition to individual registration, the Web CRD system also processes the membership registration and withdrawal forms for broker/dealers.

 

Records of securities professionals are available to the public through FINRA BrokerCheck, which pulls data from the Web CRD system. Information is free to investors for personal use. The telephone number of FINRA BrokerCheck is (800) 289-9999.


Registration, Testing, and Qualifications

 

Any securities professional associated with a member firm—including partners, officers, directors, branch managers, department supervisors, and salespersons—must register with FINRA. The registration application requires information about the individual's prior employment and disciplinary history. FINRA prescribes two levels of qualification and registration:

  • Registered representatives, generally sales personnel.
  • Principals, generally officers of the firm and other management personnel involved in the day-to-day operation of the firm's investment banking or securities business.

As part of the registration process, securities professionals must pass examinations administered by FINRA to demonstrate competence in the areas in which they will work. These mandatory qualification examinations cover a broad range of subjects on the markets, as well as the securities industry and its regulatory structure, ensuring a minimum level of understanding and expertise. The areas in which candidates are tested include federal securities laws; Securities and Exchange Commission (SEC) and FINRA rules and regulations; securities products; the operation and interrelation of financial markets; economic theory and kinds of risk; corporate financing, accounting, and balance sheet analyses; portfolio theory and analysis; fair sales practices, including solicitation and presentation; types of customer accounts; and tax treatment of various investments.

 

Prospective principals of securities firms must pass additional examinations that test their knowledge of supervisory rules in the areas of investment banking, trading and market making, retail sales activities, and financial responsibility rules. Financial and operational principals must further demonstrate a thorough knowledge of the requirements regarding recordkeeping, net capital, customer reserves, financial reporting, and credit.

 

In addition to its own examinations, FINRA administers for the securities industry and the states approximately 30 different examinations to individuals seeking to become registered representatives or principals of securities firms.

 

PROCTOR System

 

PROCTOR® is a computer system specifically designed for the administration and delivery of computer-based testing and training. The PROCTOR system is currently delivering over 440,000 exams and over 175,000 training sessions per year. PROCTOR exams and training are provided at FINRA-authorized delivery locations nationwide. For more information, contact the Gateway Call Center at (301) 590-6500 or (240) 386-4400.

 

You should be aware of two major features of PROCTOR-administered sessions:

  1. The system delivers exams and training sessions daily. Once enrolled on the PROCTOR system, you can make an appointment at a FINRA-authorized delivery location or center at your convenience.
  2. You receive your score as soon as you complete the exam. FINRA posts your score on the Web CRD system within two business days following your exam/continuing education session.

By using the PROCTOR system, FINRA has reduced significantly the turnaround time associated with the qualification and registration of representatives and principals in the securities industry.

 

Exam/Training Sessions Available

 

FINRA administers the following sessions on the PROCTOR system:

 

Client-Series ID/Title
1-3 National Commodity Futures Exam
1-4 Registered Options Principal Exam
1-5 Interest Rate Options Exam
1-6 Investment Company Products/Variable Contracts Representative Exam
1-7 General Securities Representative Exam
1-9 General Securities Sales Supervisor—Options Module
1-10 General Securities Sales Supervisor—General Module
1-11 Assistant Representative—Order Processing Qualification Exam
1-12 NYSE Branch Manager Exam
1-14 NYSE Compliance Officer Examination
1-15 Foreign Currency Options Qualification Exam
1-16 NYSE Supervisory Analyst Exam
1-17 Limited Registered Representative Exam
1-22 Direct Participation Programs Representative Exam
1-24 General Securities Principal Exam
1-26 Investment Company Products/Variable Contracts Principal Exam
1-27 Financial and Operations Principal Exam
1-28 Introducing Broker/Dealer Financial and Operations Principal Exam
1-30 Branch Managers Exam—Futures
1-31 Futures Managed Funds Exam
1-32 Limited Futures Exam—Regulation
1-33 Financial Instruments Exam
1-37 Canada Module of the General Securities Registered Representative Exam (with options questions)
1-38 Canada Module of the General Securities Registered Representative Exam
1-39 Direct Participation Programs Principal Exam
1-42 Registered Options Limited Representative Exam
1-51 Municipal Fund Securities Principal Exam
1-52 Municipal Securities Representative Exam
1-53 Municipal Securities Principal Exam
1-55 Limited Representative—Equity Trader Exam
1-62 Corporate Securities Limited Representative Exam
1-63 Uniform Securities Agent State Law Exam
1-64 Uniform Real Estate Securities Exam
1-65 Uniform Investment Adviser Law Exam
1-66 Uniform Combined State Law Exam
1-72 Government Securities Representative
1-82 Limited Representative—Private Securities Offerings
1-91 FDIC Examiner Technical Evaluation

 

Continuing Education Regulatory Element Programs
2-101 General Program
2-106 Series 6 Program for Investment Company Products/Variable
         Contracts Representatives
2-201 Supervisor Program

 

Appointments/Enrollment

 

Before you can schedule an appointment to take an exam, your firm must file the proper application form through the Web CRD system. A scheduling window will be posted on the Web CRD system upon approval. For persons associated with non-FINRA member firms, FINRA Field Support Services mails a PROCTOR enrollment confirmation to your firm.

 

For the Continuing Education Program, you automatically become registered upon your anniversary date. The Web CRD system notifies your firm of the enrollment period via an electronic notification to your "CE Required" Firm Queue.

 

After your firm receives your enrollment notification, you can call a conveniently located delivery location to schedule an appointment for the session. Due to the many sessions administered, you should schedule your session as far in advance as possible. This way you can secure an appointment on the desired date. In addition to the desired appointment date, the location staff will need to know:

  • your name and Social Security number;
  • name of your firm;
  • telephone number where you or your employer can be reached; and
    client ID, the name of the session, or its identifying series ID. Note: The client ID for all exams is "1" and the client ID for Continuing Education is "2".

The location staff will not schedule an appointment for a date past the expiration date stated on your enrollment confirmation. If your enrollment expires, FINRA will re-enroll you upon receipt of another exam request form.

 

An enrollment is valid for the period stated on the enrollment notification when it is issued. You must accept any appointment time available within the remaining enrollment period. However, if you call a location at least 10 business days before your enrollment expires, and there are no appointment times available, FINRA may extend your enrollment to the next available appointment at the location.

 

In these examples, extensions would not be granted:

  • You call before your enrollment expires, and there are appointment times available before the expiration date, and you are unable or unwilling to accept the available opening(s).
  • You call before the enrollment expires, and there are no appointments available before the expiration date and you are unable or unwilling to take the first available appointment after the expiration date.
  • You call after the expiration date.

In no case will more than one extension be granted for an enrollment.

 

An appointment can be made for you before you receive your enrollment notification; however, the appointment will not be honored unless your enrollment is valid on the PROCTOR system at least seven business days before your appointment.

 

You may make an appointment for two or more different exams on the same day (for example, a FINRA exam and the state law exam), but you must make an appointment for both exams before the exam date. Such arrangements will also depend on the availability of computer scheduling at the delivery location.

 

You may cancel an appointment on a timely basis without penalty before the scheduled session. An appointment cancellation will be considered timely if effected according to the following schedule:

 

If Appointment is Scheduled for Cancellation Must be Effected No Later Than Noon On:
Monday Thursdayof the preceding week
Tuesday Friday of the preceding week
Wednesday Monday of the same week
Thursday Tuesday of the same week
Friday/Saturday/Sunday Wednesday of the same week


If a holiday occurs during the normal cancellation period, this schedule adjusts to define "timely cancellation" as one day earlier than stated above.

 

If your cancellation is not timely, FINRA will charge a cancellation fee equal to the exam fee to your firm. FINRA also will charge a cancellation fee to your firm if you do not appear for an appointment. Similarly, if you arrive so late that your session cannot begin without disturbing the delivery location schedule for that date, FINRA will charge your firm a cancellation fee.

 

All of the above events that cause FINRA members to be penalized also trigger penalties for non-FINRA members. For candidates associated with non-FINRA members, the penalty is the invalidation of the candidate enrollment itself. Such candidates must then reapply for the exam and submit a new exam fee before the generation of another enrollment on the PROCTOR system.

 

Taking the Exam/Training

 

You should arrive at the authorized PROCTOR delivery center about 30 minutes before your scheduled appointment time. To gain admission to the center, you must provide one valid form of identification with your signature and your picture as issued by a government agency, such as a valid driver's license, passport, or military ID. If you do not have ID that is adequate, you must cancel your appointment until you obtain proper ID. You are also required to sign the center's "sign-in log," agree to the rules of conduct through your signature, and provide a single finger imprint.

 

FINRA sessions are closed-book. When you enter the center, you are not allowed to bring personal possessions, such as books, briefcases, and notes into the testing/training room. You may take only authorized material issued by center staff to the testing/training room. Neither the center staff nor FINRA is responsible for articles you are not allowed to bring to your session. The center staff will provide as much scratch paper as needed during the session. All materials, including used and unused scratch paper, must be returned to the center staff at the end of the session.

 

Calculators will be provided by the center staff to you upon request. Do not bring calculators with you for your exam—you will not be allowed to use them.

 

Severe penalties are imposed on you if you cheat on a FINRA -administered exam. These include suspension or bar from registration and a fine-usually in the thousands of dollars. After the suspension period, you will be required to re-qualify to activate your registration status.

The process for taking an exam or training on the PROCTOR system is easy-no previous computer experience is necessary. Before starting your session, an introductory lesson will familiarize you with the PROCTOR system and help you understand how the system operates.

 

Features of the PROCTOR system used for exam delivery include:

  • Scroll bars that allow you to move the questions up or down at your convenience.
  • A clock display that can be turned on to help you track the amount of time remaining during the session.
  • A confirmation box that appears each time you answer a question so you can confirm your answer before proceeding to the next question.
  • The ability to answer questions by either using the keyboard to type the letter corresponding to your answer or the mouse to point and click on your answer.
  • The ability to mark questions you wish to review later so you can easily go back to them during your session.

FINRA identifies the appropriate sections and the number of questions in each section in the exam specifications. The PROCTOR system then randomly selects the questions for your exam on a section-by-section basis from the appropriate question bank. The system automatically tracks the difficulty level of each question and enforces selection criteria that will assure that each candidate receives an exam of comparable difficulty. Once the system measures and accepts an exam for presentation to you, it sequences the questions. The PROCTOR system places the difficult questions in the middle and the easier ones at the beginning and at the end of the exam.

 

You may review any question at any time (PDF 36 KB) before the allowed testing time for your exam expires. The introductory lesson demonstrates how to answer questions and flags them if you want to review them later. View an illustration of how an exam question appears on the PROCTOR system.

 

At the end of the allowed testing time or when you voluntarily stop your exam, the system determines your score and displays a grade result on the computer. The grade report will show whether you passed the exam. Within two business days, FINRA posts the results to the Web CRD system. For non-members, results will be mailed to the address as it appears on the Form U-10.

 

When completing a continuing education session you will be shown how to progress through the scenarios that are presented. Features include:

  • A tool bar that provides you access to a help sequence and clock display.
  • Feedback to your responses to the scenarios presented indicating their appropriateness for the situations.

For continuing education, at the end of your session, you will be given a report indicating whether you completed the session. The next business day, FINRA posts the results to the Web CRD system.

 

Equipment problems do occasionally occur; normally center staff can quickly correct any difficulty you experience while taking a session. If you notice any malfunction with your computer, tell the center administrator immediately.

 

If the system malfunction lasts more than 30 minutes, you may choose to end your session. FINRA will re-enroll you and you will have to schedule a new appointment with the center staff. The staff will schedule as timely an appointment as possible.

 

FINRA Special Arrangements Procedures

 

Americans with Disabilities Act (ADA) Candidates

Special arrangements can be made to administer FINRA sessions to candidates with physical or learning disabilities. The FINRA Special Accommodations Eligibility Questionnaire and Special Accommodations Verification Request Form must be submitted to FINRA Field Support Services. The sponsoring firm should contact FINRA Field Support Services at (800) 999-6647 with any questions or for more information regarding this procedure.

 

Note: Candidates with transitory or temporary conditions that are not "impairments or disabilities" (e.g., pregnancy, sprains, fractures) are not eligible for special testing accommodations under the ADA. Those in need of accommodations should contact FINRA for information about a possible special testing arrangement that can be handled on a case-by-case basis.

 

English as a Second Language (ESL)
If English is your second language, you may request additional time for your session when scheduling your appointment. You must provide the location staff with an original letter from your firm on company letterhead indicating that English is your second language when you arrive at the appointment. The letter must also include your name, your Social Security number, the date of the exam, the client ID, and the Series ID, or name of the session you are taking, and bear the original signature of your supervisor/manager. Faxed or photocopied letters will not be accepted as authorization.

 

FINRA-Authorized Delivery Locations

 

Prometric Registration
Exam and training sessions are provided at many convenient delivery locations. To schedule an appointment at a testing center near you, contact the Prometric National Call Center at (800) 578-6273. Make sure you confirm the location/address when you schedule your appointment. You can also make an appointment by calling the local Prometric center of your choice directly.

 

Holiday Schedule

 

The following holidays will be observed by all exam/training locations:

  • New Year's Day
  • Martin Luther King Day
  • Presidents' Day
  • Good Friday
  • Memorial Day
  • Independence Day
  • Labor Day
  • Thanksgiving Day
  • Christmas Day

 

Foreign Exams

 

Exam and training sessions are being provided in Europe and the Pacific Rim. FINRA has contracted with VUE, Inc. to provide session delivery in London, Paris, Frankfurt, Seoul, Tokyo, Hong Kong, and Sydney.

 

Toll-free numbers are available internationally for appointment scheduling. You may obtain phone numbers and addresses for these international locations via this Web Site. Appointments may also be scheduled by calling the VUE National Reservation Center at (877) 619-2096. You may also view additional information on foreign test center procedures/policies on this Web Site or contact FINRA Field Support Services at (800) 999-6647.

 

Note: At a foreign exam location, a candidate may use an electronic pocket calculator provided it has an independent power source, operates silently, and has no print mechanism. Programmable calculators capable of capturing alphanumeric characters are not allowed.

 

Questions/More Information on PROCTOR

 

If you have questions on PROCTOR enrollments, PROCTOR appointment scheduling problems, or grade reports, inform the appropriate office personnel of your sponsoring firm. They are authorized to deal directly with FINRA Registration & Disclosure (CRD/IARD).

 

Questions on the substantive content of any FINRA-administered exam may be directed to the FINRA Qualifications Department at (240) 386-4681.

 

Obligations to Your Firm

 

As a qualified securities professional, you have an obligation to your firm to supply accurate information on the proper registration forms. You are also obliged to continue your education throughout your career under the Securities Industry Continuing Education Program.

 

Registration

 

Your firm registers you by filing a Uniform Application for Securities Industry Registration or Transfer, Form U4, with FINRA. This Form also lists other SROs, such as the securities and options exchanges, and the states with which you are to be registered. It is important that all of the information you supply to your member firm in the preparation of the Form U4 is complete and accurate. If, during its routine review of Form U4 filings, FINRA discovers that any portion of the Form U4 information you submit, especially relating to your personal history and past disciplinary or law enforcement encounters, is misleading or omits material information, disciplinary action may be taken and you could be barred from the securities industry. Now is a good time for you to review that filing with your supervisor and supply your firm with any missing information. You have a continuing obligation to update your Form U4 promptly if any of the information changes or becomes inaccurate. This includes your home address or any of the questions involving customer complaints, criminal disclosure, regulatory disciplinary actions, civil judicial actions, terminations, or financial judgments. You promise to do this when you sign the Form U4.

 

If you leave your firm for any reason, the firm has up to 30 days to supply you with a copy of the Uniform Termination Notice for Securities Industry Registration, Form U5, which it files with FINRA. The Form U5 indicates the date you left the firm and a brief reason why you left. You should review this Form for accuracy. If the information supplied on the Form U5 is inaccurate or incomplete, you should notify your prior employer promptly. Also, your next FINRA member employer must obtain and review a copy of your most recent Form U5. If your prior employer does not respond satisfactorily to a written request for a copy of your Form U5, please notify FINRA.

 

Your firm is required to report on the Form U5 any customer complaint, criminal action, regulatory action, investigation, internal review alleging rule violations, any investigation it may currently be conducting, and the reason for any involuntary termination.

 

It is important for you to understand that as a registered representative, you are an agent of your member firm. Whether you are an employee or a so-called "independent contractor" (for regulatory purposes there is no distinction between the two terms), you are obligated to follow all applicable securities laws and regulations. For example, you must get clearance from your member firm for certain personal financial activities. Accordingly, you should discuss with your supervisor any financial accounts that you or members of your immediate family have with other securities firms, relationships with other businesses, and any forms of compensation you receive from any source other than your firm.

 

As a registered representative, your work-related documents, such as correspondence with customers, new account forms, and copies of customer statements, must be reviewed and retained by your firm in special ways according to rules applicable to securities industry participants. Regardless of the name on the incoming envelope, these documents are also the property of the firm.

 

If you leave your firm, you may not take these documents without the permission of the firm. In addition, you need to discuss with your supervisor the conditions under which you may communicate with customers-especially during your training period.

 

Industry rules require that a registered principal supervise you and that you meet with this supervisor at least annually to formally discuss regulatory and compliance matters. If you do not know who your supervisor is, find out now. Your supervisor should familiarize you with your firm's written compliance procedures and guidelines, which every firm must maintain. You are expected to know and understand them.

 

After your registration is effective, you may conduct a securities business as an agent only while under the direct supervision of your firm. You cannot conduct any securities transactions other than with your member firm unless you get prior written approval to do so. Before accepting an offer to work part-time or off-hours with any other business concern, discuss this relationship with your supervisor.

 

Even if you are registered to sell only insurance-related securities products, you must be aware of FINRA rules and comply with them. Further, as an insurance agent you must familiarize yourself with, and obey, any restrictions that your firm may have concerning selling other companies' insurance products.

 

Continuing Education

 

As a registered representative, you are also required to adhere to certain continuing education requirements during the course of your career. On July 1, 1995, NASD and other SROs adopted the Securities Industry Continuing Education Program (Program). The program includes periodic computer-based training in regulatory matters (the Regulatory Element) and annual training programs provided by your firm to keep you informed on job- and product-related subjects (the Firm Element).

 

The Regulatory Element requires you to complete one of the Regulatory Element computer-based training programs on the second anniversary of your initial securities registration and then every third year thereafter. Note, this schedule changes if you become the subject of a significant disciplinary action, which is a suspension, fine of $5,000 or more, or a statutory disqualification. If you become the subject of a significant disciplinary action or are otherwise ordered by a securities regulator, you will be required to complete a Regulatory Element computer-based training session immediately and your subsequent requirement anniversaries will be determined by the date of the significant disciplinary action and not your initial securities registration date.

 

All Regulatory Element programs focus on compliance, regulatory, ethical and sales practice standards. Their content is derived from rules and regulations applicable to all, as well as standards and practices widely accepted within the industry.

 

There are currently three different Regulatory Element programs: the S201 Supervisor Program for registered principals and supervisors; the S106 Series 6 Program for Investment Company Products/Variable Contracts Representatives; and the S101 General Program for all other registrations. If you have more than one securities registration, you take only one Regulatory Element program. Your firm will advise you which Regulatory Element Program to take and when you must take it.

 

The S101 General Program and the S106 Series 6 Program each comprise seven subject areas or modules. The content in each module relates to the respective registration category covered by each program.

 

The General and the Series 6 Programs have a similar design, while the Supervisor Program is different. The General and Series 6 programs feature scenarios depicting situations faced by registered persons in the course of their business. Scenarios in the General Program(S101) are text-based, while the Series 6 Program (S106) also features audio segments. After reading a scenario, you must demonstrate understanding of the issues by choosing the most appropriate response(s) to questions concerning the facts in the scenario. If you do not answer a sufficient number of questions correctly, you will view a tutorial about the topics in the module and you must try again with another scenario from that module. You must successfully complete one scenario in the module before you can advance to the next module.

 

Neither the S101 General Program nor the S106 Series 6 Program requires advance preparation, however it may be beneficial for you to familiarize yourself with the Regulatory Element Content Outline.

 

The Supervisor/Principal Program (S201) is specifically designed to enhance a supervisor’s problem-detection and resolution skills. The program incorporates multimedia features that allow you to observe live situations, and view various documents such as account statements, portfolios and industry forms, in order to solve the problems presented in the exercise. Specific preparation for the S201 is not necessary and there is no content outline for this program.

 

If you fail to satisfy a Regulatory Element requirement within 120 days beginning with your anniversary date, your securities registration(s) becomes inactive until the requirement is satisfied. If your registration is inactive you will not be permitted to perform, or be compensated for, any activities that require a securities registration. If your registration remains inactive for two years it will be administratively terminated and you will be required to requalify for your registration by examination.

 

Firm Element continuing education has a different but complementary focus to the Regulatory Element training. Every year, your firm will evaluate and prioritize its training needs and prepare a written training plan designed to enhance your securities knowledge, skill, and professionalism. The training programs in your firm's Firm Element plan will generally cover the general investment features and associated risk factors, suitability and sales practice considerations, and applicable regulatory requirements of the securities products, services, and strategies you offer to the public.

 

Failure on your part to participate in the training programs stipulated by your firm will result in sanctions imposed on you by your firm, including possible termination.

 

For more information on the Securities Industry Continuing Education Program, contact:

 

FINRA
Continuing Education
9509 Key West Avenue
Rockville, MD 20850
Phone: (240) 386-4685

 

Obligations to Your Customers

 

The foundation of the securities industry is fair dealing with customers. Whether your work is with individuals, institutions, or business entities, your obligation in this profession is to serve your customers with honesty and integrity by putting their interests first and foremost.

 

The first step in serving your customers properly is to obtain a clear understanding of each customer's financial condition. You will obtain some of this information when opening a new customer's account with your firm. You may learn other information through conversations with your customer or checks your firm makes with credit agencies or other financial institutions. Because a customer's financial status is constantly changing, account records should be updated whenever necessary.

 

The second step in serving customers properly is for both you and the customer to have a clear understanding of the customer's investment objectives. As a professional, you will be trained to recognize the risks of various types of investments and to discuss with the customer which strategies are most suitable. Once you determine these objectives and record them in your customer's account records, you must make certain that specific recommendations for that customer fall within these objectives and would, therefore, be suitable. Just as your customer's financial position may change, your customer's investment objectives may change as well. You should, therefore, review your customer's investment objectives periodically, and make a written record of any changes as they occur.

 

Securities Transactions

 

During your training period, you will learn about the "settlement" of securities transactions, when the seller delivers the securities sold and the buyer pays for the securities purchased. Depending on the security traded, settlement is usually three business days but may be the same day, the next day, or some other time period. It is important that you know Regulation T, margin, and the "prompt receipt and delivery" rules for the securities you sell and that you inform your customer of the consequences if timely settlement does not occur. To avoid misunderstandings later, it is advisable to do this prior to entering any order.

 

Orders for securities transactions are contracts. Unlike many business contracts, which are usually written, most securities orders are given orally. In your training, you will learn the terms used in the securities industry to describe how to place an order and, thereafter, settle it. Until you feel comfortable that your customer understands this process, take a few moments with each customer order to explain the mechanics of the transaction and the market conditions that may delay or prohibit its execution.

 

You must discuss each order with your customer prior to entering it, unless the customer has given written discretionary authority to you, which has been approved by your firm. An oral grant of discretionary authority is not sufficient and acting on such authority violates FINRA rules. Discretionary orders, you will learn, require more frequent supervisory review. You are strongly advised to first discuss the solicitation and opening of discretionary accounts with your supervisor before engaging in such activity.

 

Fees Charged for Services

 

Federal and state securities laws, SEC rules, and FINRA regulations affect the fees charged for all transactions including, for example, placing new securities issues, secondary market offerings, and transactions involving mutual funds and variable contracts. You should always question situations in which you are asked to market securities with extraordinarily high markups, sales charges, or payouts.

 

Remember, if your customer is to benefit, the investment's performance must first overcome the initial charges. When in doubt, ask your supervisor, consult the rule manuals, or call FINRA—you could be in violation of FINRA pricing rules and become subject to significant disciplinary sanctions.

 

During your training, you will learn that FINRA and other regulators have rules regarding how much you can charge a customer for services. Generally, charges must be reasonable and not unfairly discriminatory among customers. For transactions in The Nasdaq Stock Market, exchange-listed securities traded in the over-the-counter market, and other OTC equity securities, markups (the amount charged above the market value) on principal transactions may take into account the type of security involved; its availability in the marketplace; its price; the size of the order; disclosure prior to effecting the transaction; the type of business in which your firm specializes; and the general pattern of markups at your firm. Rarely is a markup on equity securities above 5 percent considered fair or reasonable. Indeed, depending on the circumstances and the type of security involved, markups at or even below 5 percent may be considered unfair or unreasonable.

 

The 5 percent policy applies equally to agency transactions in that the amount of commissions charged for such transactions must meet the same "fair and reasonable" standard. Commissions approaching or exceeding 5 percent are subject to close regulatory scrutiny and must be justified, taking into account all relevant circumstances.

 

FINRA BrokerCheck

 

The overwhelming majority of securities professionals conduct a fair and honest business. However, as with all professions, some organizations and individuals at times may not. FINRA is committed to providing investors with an opportunity to make informed decisions in today's complex investment landscape. Toward that end, FINRA provides BrokerCheck for investors to gain convenient access to information about securities firms and their associated personnel.

 

Created by FINRA in 1987, BrokerCheck allows investors (and others) to learn about the professional background, business practices, and conduct of FINRA member firms or their brokers. Investors may request disclosable information under BrokerCheck by calling (800) 289-9999-a toll-free hotline operated by FINRA—or by visiting the FINRA BrokerCheck Web pages on this site.

 

Through the hotline or Internet site, investors can request a public report of background information that is disclosable under BrokerCheck. This information is provided by brokers, firms, and regulators as part of the securities industry's registration and licensing process. Today there are over a half-million persons actively registered. Approximately 90 percent of these securities professionals have no reportable incidents.

 

BrokerCheck reports contain information required to be reported under securities industry rules, which generally include:

  • Final disciplinary actions (relating to securities or commodities businesses) that have been taken by FINRA and other SROs, or by federal, state, and foreign securities agencies.
  • Civil judgments and arbitration decisions in securities and commodities disputes involving public customers.
  • Certain criminal convictions, information, and indictments.
  • Settlements of $10,000 or more of customer complaints, arbitration claims, or civil suits involving securities or commodities transactions and allegations of sales practice.
  • violations.
  • Employment terminations after allegations were made involving violations of investment-related statutes or rules, fraud, theft, or failure to supervise investment-related activities.
  • Bankruptcies filed within the last 10 years and outstanding judgments and liens.
  • Bonding company denials of coverage, payout, or revocation.
  • Any suspension or revocation to act as an attorney, accountant, or federal contractor.
  • Pending disciplinary actions taken by industry regulators that relate to securities or commodities business.
  • Pending arbitrations and civil proceedings involving securities or commodities transactions.
  • Pending complaints alleging sales practice violations and compensatory damages of $5,000 or more.
  • Open examinations that are deemed formal investigations involving regulatory or criminal matters.

When evaluating the information in the BrokerCheck report, it is important to remember that a number of items involve pending actions or allegations that may be contested and have not been resolved or proven. The items may, in the end, be withdrawn or dismissed, resolved in favor of the registered person, or concluded though a negotiated settlement with no admission or conclusion of wrongdoing.

 

Other Regulated Areas

 

Advertising, sales literature, business cards, email, communications with the public (such as seminar announcements), and most print and electronic correspondence in the securities industry are subject to regulatory review and approval. Some items may require scrutiny by your compliance officer or even advance filing with FINRA. Other items require formal recordkeeping. Always have your supervisor approve any written material you prepare or wish to use before delivering it to your customer or prospect.

 

Never use the Internet or other electronic means to solicit or conduct any securities-related activities unless your member firm grants its prior approval to do so.

 

Microcap fraud has been an area of increased regulatory, enforcement, and rulemaking efforts. The issuers of microcap securities are generally thinly capitalized, and there may be little information available about these issuers' financial results and business operations. These securities are not listed on a registered exchange or The Nasdaq Stock Market. They trade on the OTC Bulletin Board,® in the "Pink Sheets" published by The National Quotation Bureau, and in other over-the-counter quotation media where there are no qualitative or quantitative listing standards. As in all recommended transactions, prior to recommending a purchase of these securities, ensure that you have adequate information about the issuer to form a reasonable basis for your recommendation and ensure that the recommended purchase is suitable for your customer. Proposed rules, if adopted, will require the review of specific information prior to such recommendations.

 

"Penny stock" fraud in also an area of regulatory focus, and there are a number of very specific federal laws and regulations that are applicable. Transactions in certain "designated" low-priced securities may require special account documentation, customer disclosure, and suitability review. Stocks not listed on The Nasdaq Stock Market or a national securities exchange and selling for less than $5 per share may fall into this category.

 

Before recommending microcap or penny stock securities to customers, ask your supervisor whether specific sales practice requirements apply.

 

Sample Practices that Violate Regulations

FINRA rules require you to observe high standards of commercial honor and just and equitable principles of trade. FINRA rules also prohibit any manipulative, deceptive, or fraudulent actions (NASD Rules 2110 and 2120).

 

The following are examples of specific practices with which new representatives should be familiar since they constitute serious violations of industry regulations. These practices may harm the customer; another member firm; the integrity of the marketplace; the issuer of the securities; or the public in general; and, they could end your career in the securities business. In your training, you should learn more about these and other situations and how to avoid them.

  1. Rumors, knowingly false and misleading statements, incomplete information—Recommendations, analyses, and statements to customers must have a reasonable basis in fact. Withholding material information from a customer could be considered fraud. If you tell your customer to buy or sell a security based on a "hot tip," you may have committed securities fraud. If the "hot tip" is not real, or is not "hot," you have misled your customer. If it is a "hot tip," you may be violating insider-trading rules (see below). Either way, you can be subject to civil liability, disciplinary action, and even criminal charges.

  2. The SEC, FINRA, and the exchanges have developed a series of trade practice rules to ensure that traders and market makers execute orders at the best prices and exercise market discretion in the interest of their customers.

    These include:
    • Insider Trading (SEC Rule 10b-5)—It is illegal to use or pass on to others material, nonpublic information or enter into transactions while in possession of such information.
    • Backing away (NASD IM-3320)—A market maker in a given security is obliged to honor the quoted bid and ask prices for a minimum quantity.
    • Trading ahead of customer limit orders (NASD IM-2110-2)-FINRA members acting as market makers are prohibited from trading ahead of customer limit orders and must ensure that such orders are executed at the most favorable price possible under prevailing market conditions.
    • Front-running (NASD IM-2110-3)—A broker/dealer is prohibited from buying or selling a security or an option on a security while in possession of material, non-public information concerning an imminent block transaction in the security or option on the security.
      Trading ahead of research reports (NASD IM-2110-4)—FINRA member firms are prohibited from trading activity that changes the firm's position in a Nasdaq® or exchange-listed security traded in the third market, or in any derivative security based on or related to the underlying security, in anticipation of the issuance of a research report in that security.
    • Anti-Intimidation/Coordination (NASD IM-2110-5)—A FINRA member firm may not coordinate its prices (including quotations), trades, or trade reports with any other member; direct or request another member to alter a price (including a quotation); or engage, directly or indirectly, in any conduct that threatens, harasses, coerces, intimidates, or otherwise attempts improperly to influence another member. This includes any attempt to influence another member to adjust or maintain a price or quotation and refusals to trade or other conduct that retaliates against or discourages the competitive activities of another market maker or market participant.

  1. Commingling—You are not permitted to place customers' checks or money intended for transactions involving securities into your own bank account or your insurance business account, regardless of the amount of money or the length of time involved. Mishandling customer funds, such as money intended for insurance products, is a serious violation of FINRA rules and could result in prosecution by state or federal criminal agencies.

  2. Churning (NASD IM-2310-2)—Frequent trading, or trading that is not consistent with the financial goals and risk tolerance of your customer, in a discretionary account (or an account over which you exercise de facto discretion) is an abuse of your control over the customer's account. You can be found liable to your customer for damages and may be disciplined by FINRA.

  3. Suitability (NASD Rule 2310)—You must have reasonable grounds for believing each recommendation to a customer is suitable on the basis of the customer's other securities holdings and financial situation, among other factors.

  4. Free-riding and withholding (NASD Rule 2110-1)—New issues of securities that immediately begin trading at a higher price than originally offered must be distributed to the public. They may not be placed in your account under any circumstances, and only under strict guidelines may they be placed in the accounts of financial services industry personnel or their immediate families.

  5. Selling away (NASD Rule 3040)—Selling securities without processing the order through your firm and without your firm's permission or knowledge is a violation of FINRA rules. Even products that you may not consider to be securities, such as leasing arrangements or promissory notes, may be securities under federal or state law. Check with your firm before engaging in any securities transactions for any purpose.

  6. Sharing in accounts—The sharing of profits or losses in an account with a customer is generally prohibited. Before contemplating entering into such an arrangement, you should read and become familiar with the appropriate provisions of NASD Rule 2330.

  7. Conflicts of interest—Avoid even the appearance of conflict, let alone any actual conflict of interest, in transactions with your customers. For instance, if you own shares of a thinly traded stock in your personal account, one has to question your true motivation in recommending large purchases of those shares to your customers when such a recommendation is likely to drive up the price of that stock.

  8. Switching and break-point sales for mutual funds (NASD Rule 2830)—Mutual funds are typically long-term investments. Switching your customer among funds with similar investment objectives is usually a violation if it has no legitimate investment purpose and may needlessly impose another commission charge and increased tax liability on the customer. Recommending to a customer a mutual fund purchase for a quantity just beneath the point where the customer could save commission charges significantly by purchasing a few more shares may mean a bigger payment for you, but is not normally in the customer's best interests and is usually a violation.

  9. Unauthorized trades—No matter how noble your intentions may be, never enter an order without the expressed and detailed permission of the customer unless you and your firm have been granted written discretionary authority by the customer.

  10. Parking securities and maintaining fictitious accounts—Holding or hiding securities in someone else's or a fictitious account is misleading and strictly prohibited.

  11. Failure to cooperate—If the FINRA staff asks you to provide information or testify in person, you must cooperate. Failure to cooperate or respond in a full, complete, and honest manner to any such request will normally result in a fine and a suspension or bar from the industry. In addition, under FINRA regulations, you must keep FINRA informed of your home address so that you may be reached in the event of a staff investigation; failure to do so may deny you the ability to provide input to the staff and have an impact on your registration status with FINRA.

  12. Cheating on exams (NASD Rule 1080)—This rule prohibits an applicant from receiving assistance while taking a qualification examination. In instances where cheating or possession of unauthorized materials is demonstrated, the registered person or applicant found guilty of such behavior is normally barred from the securities industry.

 

Overseers of the Securities Industry

 

The Congress of the United States of America

Over the decades, Congress has enacted and periodically revised several major laws that structure the U.S. securities markets. These statutes define which financial instruments are considered securities, how these securities are registered for initial placement as new issues, and how markets such as The Nasdaq Stock Market may operate. The statutes also provide for SROs such as FINRA. Congress oversees the SEC which, in turn, performs a similar function for all of the country's SROs, including FINRA.

 

Securities and Exchange Commission
The SEC is the federal agency charged with administering federal securities laws and providing federal oversight of the securities industry. The SEC enacts rules to implement the provisions of the federal securities laws. It also oversees the adoption of rules and the administration of discipline by SROs such as FINRA.

 

Self-Regulatory Organizations
FINRA, the MSRB, and the stock exchanges are referred to as SROs because of their statutory mandate to regulate this nation's securities markets, brokerage firms, and their personnel. FINRA and the exchanges have regulatory and enforcement powers to help monitor and maintain compliance with rules of fair practice for the industry and promote high standards of business conduct for the benefit of investors, member firms, and issuers of securities. The MSRB is an SRO with rulemaking authority for banks and securities firms engaged in municipal securities activities, but has no inspection or enforcement authority. Instead, FINRA is charged with inspection responsibility and enforcement of the MSRB's rules for its members. The qualification tests you will take to become registered are all administered by FINRA and were created by one or several of these SROs.

 

State Legislatures and Commissions
All states have "blue sky" laws regulating securities activities in their respective states. Generally, both you and your firm must be registered in each state in which you do business with customers. The rules of these jurisdictions are well-developed and often lengthy. Before you accept an order from a customer, you must check with your supervisor to be sure that both you and your firm are properly registered to do business in that state. Similarly, states have registration and exemption requirements concerning the securities offered to their residents. When in doubt about a particular security, ask your supervisor before executing a transaction.

 

FINRA Investigations

 

Examiner staff are located in 15 district offices and in the Executive Office in Washington, DC. Their primary responsibilities include monitoring the activities of FINRA members and their associated persons for compliance with FINRA, federal, MSRB, and other SRO rules and regulations.

 

When FINRA staff investigate allegations of wrongdoing (routine examinations of member firms, reports of an associated person's termination from a member firm, customer complaints, and/or any other indications of rule violations) they normally and routinely contact the member firm, registered representative, customers, and other involved parties to obtain information about the events being investigated. Should you be contacted by FINRA staff as the result of an examination or investigation, you must cooperate fully and answer all written and oral inquiries clearly and truthfully. This requirement continues for up to two years after you leave the securities industry, during which time FINRA retains regulatory and enforcement jurisdiction over you. However, the running of the two-year period can begin anew in the event an amendment is filed within two years of your original notice of termination, disclosing certain reportable misconduct. Your firm should be apprised of any FINRA investigation in which you may be involved. You will, in most cases, have to update and amend your Form U4 with your firm as a result of a FINRA investigation or customer complaint, among other factors.

 

At the conclusion of a FINRA staff investigation, a report is prepared, and apparent violations of rules and regulations are considered for possible disciplinary action. If a formal disciplinary action is initiated, the firm and individuals named as respondents will receive a written statement of all charges and will be entitled to a hearing before a three-person panel consisting of two industry peers and chaired by a Hearing Officer who is an attorney employed by FINRA. Respondents have the right to be represented by counsel and to present witnesses and evidence in their defense. If violations are deemed to have been committed, penalties may include substantial monetary fines; suspension of an individual's registration for days, weeks, months, or years; or even a permanent bar from holding any job in the industry.

 

The media and the membership are also notified if a fine greater than $10,000 or a suspension or bar is imposed. The Board of Governors has published and made available to all member firms a listing of sanction guidelines that sets forth the typical sanctions that may be expected for various rule violations. You are strongly encouraged to obtain the sanction guidelines from your employer and become familiar with these as a means of better understanding the importance of maintaining compliance with FINRA rules and regulations.

 

FINRA informs state or federal authorities if it uncovers suspected egregious violations by member firms and their associated persons. Federal and state regulatory authorities likewise have the power to discipline firms and registered representatives and may bring civil or criminal proceedings for violations of their laws and rules.

 

FINRA Ombudsman

 

The FINRA Office of the Ombudsman provides a forum for member firms and their associated persons, public investors, and FINRA staff members to voice their concerns of unfair practices or disparate treatment. The objective of the Ombudsman's Office as an independent, neutral, and confidential source of assistance, is to receive and address concerns and complaints from any source concerning the operations, enforcement, or other activities of FINRA or any of its staff members. Where established procedures exist currently regarding the application of rules, policies, procedures, or interpretations, the Ombudsman will direct the matter to the appropriate office, department, or company. The function of the Ombudsman's Office is not intended to be an appeals forum for unpopular decisions made in other forums, or an arbitrary alternative to a program that already exists.

 

The Ombudsman will always attempt to assist you in identifying the appropriate method of resolving your problem or complaint, even if the Office does not become directly involved in the matter.

 

The Ombudsman's Office was created in response to a recommendation from the FINRA Select Committee on Structure and Governance and ratified by the NASD Board of Governors Audit Committee, as an alternative channel of communication—complementing, but not replacing, FINRA's comprehensive program of formal resolution channels that include adjudication and dispute resolution. It has unrestricted access to all company functions, records, and personnel. The Ombudsman Office does not have direct authority over FINRA personnel or the departments it reviews.

 

The Office of the Ombudsman is a department staffed with several Ombudsmen, men and women who are trained and have experience in handling a variety of matters. The Ombudsman, as a designated neutral party, has the responsibility of maintaining strict confidentiality concerning matters that are brought to his/her attention unless given explicit permission to do otherwise. The only exception, at the sole discretion of the Ombudsman, is where a threat of serious physical harm to individuals appears imminent or a critical breach of security is probable. The Ombudsman will take all reasonable steps to protect any records or files pertaining to confidential discussion from inspection by all other persons, including management.

 

For more information, contact the FINRA Ombudsman's office at:

 

FINRA Office of the Ombudsman
P.O. Box 9492
Gaithersburg, Maryland 20898-9492
Phone: (301) 212-2515
Toll-Free Number: (888) 700-0028
Email

 

Dispute Resolution

 

FINRA Dispute Resolution operates the largest arbitration and mediation forum in the securities industry. FINRA Dispute Resolution resolves disputes in a fair, expeditious, and cost-effective manner between customers and securities firms and their associated persons and between associated persons and securities firms.

 

In arbitration, impartial persons who are knowledgeable in the areas in controversy decide disputes between two or more parties. At the hearing, each party gets a full and fair opportunity to present its position through documentary evidence and testimony. Thereafter, the arbitrators render a final and binding decision subject only to review by a court on a very limited basis. For most disputes with an amount in controversy less than $25,000, an arbitrator decides the case based upon the parties' written submissions.

 

Although filing, processing, and hearing fees are required, arbitration is typically less expensive and less time-consuming than court proceedings.

 

FINRA rules require that all brokers and brokerage firms submit to arbitration to resolve investment-related disputes with their customers. Mediation, however, is a voluntary process in which the mediator, an impartial person trained in facilitation and negotiation techniques, helps the parties reach a mutually acceptable resolution. In mediation, as distinguished from arbitration, the mediator does not impose a solution, but rather, works with the parties to create their own solution.

 

Mediation is an informal, flexible process that is generally less expensive than arbitration. Mediation proceeds expeditiously and approximately 80 percent of the cases in the FINRA Mediation Program result in settlement. However, in the unlikely event that a settlement is not reached, the parties may still arbitrate their dispute.

 

Arbitrations at FINRA are conducted in accordance with the Code of Arbitration Procedure as developed by the Securities Industry Conference on Arbitration. Mediations are conducted in accordance with the rules developed by the FINRA Arbitration and Mediation Committee. The SEC has oversight authority over both processes.

 

Arbitration and mediation are separate from the functions performed by the District Offices, which include surveillance and enforcement functions that may result in the assessment of sanctions or other disciplinary measures against member firms or their associated persons.

 

Conclusion

 

You are beginning a potentially rewarding career, both personally and professionally, in a high-profile service industry. The key to your long-term success is integrity and service.

 

You have a legal and moral obligation to place the interests of your customers above all else, particularly your own financial interests. You hold the investor's confidence in your hands. Do not engage in acts or practices that could destroy that confidence not only in you but also in your firm and the U.S. securities markets.

 

Remember: You are not alone. Your firm, its supervisory and compliance staff, its management, and your FINRA District Office staff are always available to help you. You may access our Web site and use any of these resources whenever questions or doubts exist. Best wishes in your new profession.