4.1 SRO Regulatory Requirements for Associated Persons

4.1.1 Registration and Continuing Education

• SRO qualification and registration requirements
  • Definition of registered vs. non-registered person
    • Registered Person: An individual who is associated with and registered through a member firm of an SRO, having passed the necessary qualification exams.
    • Non-Registered Person: An individual who hasn't registered or passed the qualifying exams with an SRO and thus cannot perform specific regulated activities.
  • Permitted activities of registered and non-registered persons
    • Registered Persons: Can engage in activities such as soliciting business, handling client funds, and executing trades.
    • Non-Registered Persons: Generally restricted from activities reserved for registered representatives. They might, however, perform roles like administrative or clerical tasks.
  • Ineligibility for membership or association
    • Persons who have been barred by regulatory authorities or who have committed certain crimes may be ineligible for membership with SROs or association with member firms.
  • Background checks
    • Firms are required to conduct thorough background checks on individuals before registration to ensure they meet the eligibility criteria.
  • Fingerprinting
    • Most SROs require fingerprinting for new applicants to check against FBI records, ensuring that the individual has no disqualifying criminal history.
  • Statutory disqualification
    • Refers to a person who is prohibited from associating with member firms due to specific events or conditions in their background, such as certain criminal convictions or regulatory actions.
  • Failing to register an associated person
    • Member firms can face penalties for failing to register individuals who are engaged in activities that require registration.
• State registration requirements (e.g., blue-sky laws)
  • Apart from SRO requirements, individual states have their registration requirements for securities professionals, often referred to in the context of "blue-sky laws." These laws protect investors from fraudulent activities at the state level.
• Continuing Education (CE) requirement
  • Firm Element
    • Firm Element: Refers to the annual in-house training programs that member firms provide to their registered personnel. This training is tailored to educate employees about job-specific subjects and recent industry developments.
  • Regulatory Element
    • Regulatory Element: Involves periodic training mandated by regulatory bodies. For example, FINRA requires registered individuals to complete a regulatory element program on the second anniversary of their registration date, and every three years thereafter.

---

4.2 Employee Conduct and Reportable Events

4.2.1  Employee Conduct

• Form U4 and Form U5 (e.g., purpose, when to update forms)

  • Form U4 (Uniform Application for Securities Industry Registration or Transfer):

    • Purpose: Used by broker-dealers, investment advisers, or issuers of securities to register, and by SROs to license, individuals in the appropriate jurisdictions and SROs. It includes information about the applicant's background, work history, and any past disciplinary actions.
    • When to Update: Must be updated whenever there are material changes in the information it contains. This can include changes in employment, disciplinary actions, or other significant events.

  • Form U5 (Uniform Termination Notice for Securities Industry Registration):

    • Purpose: Used by firms to report the termination of a registered individual's association with the firm. It might include reasons for termination and any related details.
    • When to Update: Filed when an individual's association with a firm ends. If additional relevant information is discovered after the filing, the form may need to be amended.

• Consequences of filing misleading information or omitting information

  • Regulatory Actions: Providing false information or omitting material facts can lead to regulatory actions, including fines, suspension, or expulsion from SROs like FINRA.

  • Civil Liability: In certain cases, misleading or omitting information can expose individuals or firms to civil lawsuits, especially if a third party relied on that information to their detriment.

  • Reputational Damage: Beyond legal and regulatory consequences, providing misleading information can severely damage an individual's or firm's reputation in the industry.

• Customer complaints

  • Broker-dealers and associated individuals are required to report written customer complaints. These complaints can relate to various issues, including potential violations of securities regulations, sales practices, or other misconduct.

  • Such complaints are tracked by regulators and SROs and can lead to investigations, disciplinary actions, or other regulatory responses.

• Potential red flags

  • Frequent Job Changes: If an individual frequently changes firms, especially under questionable circumstances, it can be a red flag.

  • Multiple Customer Complaints: An unusually high number of complaints might indicate problematic behavior or practices.

  • History of Disciplinary Actions: Past actions by regulators or legal authorities can be a sign of potential future issues.

  • Unexplained Gaps in Employment: Significant unexplained gaps might indicate periods when an individual was under investigation or disciplinary action.

  • Financial Difficulties: Personal financial issues might be seen as a potential conflict of interest or a motivation for unethical behavior.

4.2.2  Reportable Events

• Outside business activities

  • Registered representatives and other securities professionals must disclose any business activities outside of their association with their member firm. This ensures that potential conflicts of interest or other issues are identified and managed.

• Private securities transactions

  • Often referred to as "selling away," these are transactions that registered individuals engage in outside of their regular association with their broker-dealer. Such transactions must be disclosed and can only proceed with the approval of the broker-dealer.

• Reporting of political contributions and consequences for exceeding dollar contribution thresholds

  • Some regulatory bodies require disclosure of political contributions to prevent "pay-to-play" scenarios, where firms make political donations to gain business advantages.
  • Exceeding certain thresholds can result in penalties or prohibitions on conducting business with the recipient of the contribution for a specified duration.

• Dollar and value limits for gifts and gratuities and non-cash compensation

  • To prevent potential conflicts of interest, there are limits on the value of gifts or gratuities that securities professionals can give or receive. These limits aim to ensure that business decisions aren't unduly influenced by gifts.

  • Non-cash compensation, like trips or other incentives related to business performance, might also have restrictions.

  • The FINRA Rule 3220 (Influencing or Rewarding Employees of Others) (the Gifts Rule) prohibits any member or person associated with a member, directly or indirectly, from giving anything of value in excess of $100 per year to any person where such payment is in relation to the business of the recipient’s employer.

     

• Business entertainment

  • Business-related entertainment, such as meals or events, can be a gray area. While such activities can be part of building client relationships, they must not be excessive or create a perception of impropriety. Firms often have policies in place to define acceptable limits and conditions for business entertainment.

• Felony, financial-related misdemeanors, liens, bankruptcy

  • Felonies and certain misdemeanors must be reported, as they can impact an individual's fitness to be in the securities industry.
  • Financial difficulties, including liens or bankruptcies, must also be disclosed. Such difficulties can be viewed as potential conflicts of interest, or they might indicate potential issues with an individual's ability to manage financial matters.

---

Rules

FINRA By-Laws

• Article I – Definitions
• Article III – Qualifications of Members and Associated Persons Article IV – Membership
• Article V – Registered Representatives and Associated Persons Article VI – Dues, Assessments, and Other Charges
• Article XII – Disciplinary Proceedings
• Article XV – Limitations of Power

FINRA Rules

• 0100 Series – General Standards
• 1000 Series – Member Application and Associated Person Registration
• 1122 – Filing of Misleading Information as to Membership or Registration
• 1250 – Continuing Education Requirements
• 2060 – Use of Information Obtained in Fiduciary Capacity
• 2263 – Arbitration Disclosure to Associated Persons Signing or Acknowledging Form U4
• 2267 – Investor Education and Protection
• 2310(c) – Non-cash Compensation
• 2320(g)(4) – Non-cash Compensation
• 2341(l)(5) – Non-cash Compensation
• 3110(e) – Responsibility of Member to Investigate Applicants for Registration
• 3220 – Influencing or Rewarding the Employees of Others
• 3270 – Outside Business Activities of Registered Persons
• 3280 – Private Securities Transactions of an Associated Person
• 4513 – Written Customer Complaints
• 4330 – Customer Protection – Permissible Use of Customers' Securities
• 4530 – Reporting Requirements
• 5110(h) – Non-cash Compensation
• 8312 – FINRA’s BrokerCheck Disclosure

CBOE Rule

• 7.10 – Fingerprint-based Background Checks of Exchange Directors, Officers, Employees and Others

MSRB Rules

• G-2 – Standards of Professional Qualifications
• G-3 – Professional Qualification Requirements
• G-7 – Information Concerning Associated Persons
• G-10 – Delivery of Investment Brochure
• G-20 – Gifts, Gratuities and Non-cash Compensations
• G-37 – Political Contributions and Prohibitions on Municipal Securities Business

SEC Rules and Regulations

• Securities Exchange Act of 1934

  • Section 3(a)(39) – Definitions and Application of Title (Statutory Disqualification)

  • 17f-2 – Fingerprinting of Securities Industry Personnel