Associating
Associating with a member
In this industry, we need to understand the idea of being associated with a broker dealer or similar financial firm. Remember the concept of SROs, Self-Regulatory Organizations. These are organizations under the SEC, and charged by the SEC to oversee their little share of the securities industry. A full list is never going to be tested, there are lots of these in the alphabet soup. You want to know that all national securities exchanges are SROs, including the New York Stock Exchange (NYSE), the Chicago Board Options Exchange (Cboe), and NASDAQ (any of them). Certain other ones you need to be aware of as well, including: Financial Industry Regulatory Authority (FINRA), Municipal Securities Rulemaking Board (MSRB), and Options Clearing Corporation (OCC). Those you likely should recognize by name or acronym. Don’t confuse them with the futures industry: the Chicago Board of Trade (CBOT), a futures exchange, and the National Futures Association (NFA) are overseen by the Commodity Futures Trading Commission (CFTC), not the SEC.
A person associated with a member (an associated person) is any partner, officer, director, or branch manager of a broker dealer, or anyone in a similar role; anyone directly or indirectly controlling, controlled by, or under common control with the broker dealer; and any employee of the broker dealer. Registered representatives and principals are associated persons. Someone whose functions are solely clerical or ministerial is not treated as an associated person for registration purposes.
FINRA and the other SROs function like a membership organization: joining means agreeing to follow their rules, and those rules can change at any time. A firm that won’t follow the rules risks being refused membership, or losing membership it already has. Membership carries concrete benefits: member firms can buy securities below the public offering price and resell them at that price, keeping the difference. Associated persons benefit too, since only a properly registered, licensed person can receive commissions or other payment for securities business.
FINRA and other similar organizations won’t make rules based on discriminatory factors such as age, race, gender, or investment theories. They will establish rules and standards to follow all appropriate regulations and laws, and would certainly include things like the nature of the business of the person, the type of business, the lines of business, and things like that. They may have additional requirements for firms that deal with margin, options, and other more risky types of securities, than firms that only sell mutual funds, a relatively safe and hard to abuse instrument.
Most persons would be eligible to become members of an SRO or similar organization, or to become an associated person of a member firm, provided the corporate person seeking membership is not excluded, nor is the natural person seeking to become an associated person of a member. The primary exclusions are statutory disqualifications, covered on their own page.
Qualifications and continuing membership
There are basic qualification rules that FINRA, MSRB, and every other SRO and similar organization sets, that no registered broker, dealer, municipal securities broker or dealer, or government securities broker or dealer would be granted membership or allowed to continue membership if they don’t meet. Similarly, natural persons would be denied association if they fail to satisfy the qualification rules FINRA, or whatever SRO they are applying to work with, sets, most notable of which are exams, including the one you are currently studying. Every application for registration is filed electronically through the Central Registration Depository (CRD), which tracks registration, employment, and disciplinary history for firms and associated persons. Applicants must also be fingerprinted, and before applying to register them, the hiring firm must investigate the applicant’s good character, business reputation, qualifications, and experience. If the applicant was registered before, the firm must also review their most recent Form U5 within 60 days of filing the application. Some representatives must also register with individual states in addition to FINRA, a separate requirement layered on top of SRO membership.
FINRA, or any other SRO, may cancel membership - after notice and an opportunity for a hearing - if a firm becomes ineligible to continue, and it may suspend or bar a natural person from affiliation if that person becomes ineligible. If a member firm continues to associate with a suspended or barred person, the firm’s own membership can be canceled as a result, so firms have a strong incentive to terminate that person promptly.
Firms may appeal the decision to cancel their membership, or suspension of an associated person by filing with the board and application of relief. The member can file on its own or on behalf of the associated person. The board uses its discretion, can approve or not, if the board determines it is in the public interest.
Everyone who is applying, for membership themselves, or to be associated with a member, must sign the application and submit via the electronic process. The registrant is agreeing to comply with federal securities laws, the rules and regulations and any appropriate SRO or similar regulatory organization, and must provide reasonable information that FINRA requests. No one who is not eligible, by exclusion or other, will be approved. Every application must be kept current by amendment: within 30 days of learning of the facts that require the change, or within 10 days if the amendment involves a statutory disqualification.
The member firm terminating an associated person must file notice with FINRA no later than 30 days after the termination date; late filings bring fees. A termination can’t take effect while a complaint or action is pending against the person, or against the member in a matter where the person is also a respondent.
Any changes to the termination paperwork must also be submitted within 30 days. FINRA will maintain jurisdiction for 2 years after leaving the industry. This helps prevent people from doing bad things, quitting before being discovered, and assuming they are now home free. Any complaints against them, for conduct prior to leaving, would all still be investigated and punished if necessary.