After passing the appropriate licensing exams, filing the U-4, and after FINRA confirms the registration is effective, a person becomes a registered representative.
Working in the securities industry comes with specific rules and responsibilities. This section covers:
Registered representatives must complete continuing education (CE) to stay current on securities laws, regulations, and ethical obligations. CE is typically delivered through scenario-based modules that focus on compliance topics and prohibited conduct.
There are two types of continuing education:
Regulatory Element CE is administered by FINRA. Representatives can complete it on most internet-connected devices through FINRA’s Financial Professional Gateway (FinPro). FINRA designs this training around topics it considers essential (for example, recent rule changes or common unethical practices) and updates it periodically.
Registered representatives must complete Regulatory Element CE annually. If it isn’t completed on time, the representative’s registration becomes inactive, and they can’t perform registered representative functions. Until CE is completed, the person is treated as unregistered.
Firm Element CE is administered by FINRA member firms (brokerage and investment firms registered with FINRA - typically your employer). This training focuses on ethics and prohibited conduct as it relates to the specific products and services the representative offers. In FINRA’s words:
[CE] training must cover topics related to professional responsibility and to the role, activities, or responsibilities of the registered person.
Member firms are required to provide Firm Element CE annually.
A representative’s licenses become inactive when they leave the industry. If the person re-associates with another firm within 2 years, the licenses remain intact and become active again once the new registration is effective (after filing a new U-4).
If the person is out of the industry for 2 or more years, licenses begin to lapse. In that case, someone who was previously fully licensed may need to re-take one or more exams to re-enter the industry.
Specifically, any NASAA exam (like the Series 63) or FINRA exam other than the SIE exam will lapse after 2 years. The SIE does not lapse unless a person stays out of the industry for 4 or more years.
Also, firms can’t “park” the licenses of former employees. Once an individual leaves a firm, the countdown begins.
Registered representatives must inform their employer if they earn money outside the firm. This is called an outside business activity (OBA). The purpose is to help the firm identify and manage conflicts of interest that could harm the firm or its customers.
Unpaid volunteer work and lottery or casino winnings are not OBAs. Most other paid activities are OBAs, including:
FINRA has recently been cracking down on OBA enforcement.
To take a job or other paid opportunity outside the firm, representatives must notify the firm in writing. If the firm believes the activity is detrimental, it can deny the OBA. The representative isn’t technically asking for permission - but the activity becomes a problem if the firm denies it and the representative proceeds anyway.
Similar to OBAs, registered representatives must follow specific procedures if they plan to engage in a private securities transaction outside their employing firm. This can include situations such as:
In general, a private securities transaction occurs when a registered representative facilitates a securities transaction outside their employing firm. The transaction is compliant with FINRA rules if all of the following requirements are met:
*No written approval is required if the representative is not being paid to facilitate the transaction.
If the representative does not meet these obligations, they are selling away, which is a FINRA violation and can result in penalties.
FINRA is concerned about “pay for play” in the securities industry, so it limits gifts between business partners. For example, if your broker-dealer does business with a mutual fund company, the firms can’t give gifts worth more than $100 per person, per year to the other firm’s employees.
This limit does not include business entertainment, because entertainment isn’t considered a tangible gift. Business entertainment includes items like:
As long as it isn’t excessive, business entertainment can exceed $100.
Registered representatives face strict limits on borrowing from or lending to customers. In general, representatives are prohibited from entering into loans with most customers. This helps avoid conflicts of interest and situations where the representative’s financial obligations could interfere with their professional judgment.
There are exceptions. For example:
If a registered representative has a dispute with their employer, specific procedures apply. With the exception of workplace discrimination or sexual harassment, employees generally can’t sue the firms they work for. Instead, they can bring the dispute to binding arbitration facilitated by FINRA. Arbitration is similar to court, but it is typically faster and more efficient.
Broker-dealers often enter into “networking arrangements” with financial institutions (such as banks) to offer securities to the bank’s customers. For example, a broker-dealer may rent office space in a local bank and place a representative there to discuss securities investing with bank customers.
FINRA rules require strict protocols in this setting because banks typically offer products that are safe and virtually risk-free (for example, certificates of deposit that are FDIC insured). Securities offered by broker-dealers, however, always involve some form of risk.
FINRA sets three primary requirements for these networking arrangements. The member firm must:
Be clearly identified as providing broker-dealer services and distinguish its services from the services of the financial institution
The firm and the representative must be completely clear that their products and services are not bank offerings.
Conduct its broker-dealer services in an area that displays clearly the member’s name
The member firm’s name and the representative’s identification must be clearly visible. If the setup is hidden, customers are more likely to assume the representative works for the bank.
Maintain its broker-dealer services in a location physically separate from the routine retail deposit-taking activities of the financial institution
Keep broker-dealer activity away from the bank tellers and routine deposit-taking areas.
In addition to these general business practice requirements, FINRA requires specific disclosures for customers who engage the broker-dealer in the bank setting. This is known as the “not-not-may” rule. The disclosure must state that the products offered by the broker-dealer:
There are some circumstances where the “not-not-may” disclosure is not required:
Securities regulators generally assume firms and representatives act in good faith unless there’s evidence to the contrary. However, if a firm employs a significant number of registered representatives who previously worked for firms that were barred from the industry (had their registrations revoked), the firm may be required to tape (record) phone calls with clients.
One of the most serious penalties a firm or individual can face is revocation of registration. Revocation means the firm or person is no longer registered, which generally prevents professional participation in the securities industry. Revocation is typically reserved for particularly unethical or egregious violations. This topic is covered in more detail in a future chapter.
FINRA’s concern is that representatives from firms with revoked registrations may have been trained improperly and may be more likely to commit future violations. Firms that hire enough representatives from these “offending firms” must record their phone calls. The thresholds are:
| # of employed reps | # of reps from offending firms |
|---|---|
| 5 - 9 | 40% or more |
| 10 - 19 | 4 or more reps |
| 20 or more | 20% or more |
FINRA does not implement taping requirements for firms with 4 or fewer registered representatives.
To better understand this rule, let’s work through a few examples.
A member firm employs 8 registered representatives. Three of the representatives previously worked for a firm that had their registration revoked due to continually breaking FINRA rules. Is the firm required to record phone calls with clients?
What do you think?
Answer: no
Three out of eight (3/8) employees is 37.5% of the firm’s registered representatives. For firms with 5 - 9 registered representatives, calls must be recorded only if 40% or more previously worked for offending firms. Since 37.5% is below 40%, calls do not need to be recorded.
Let’s do another.
A member firm employs 18 registered representatives. Five of the representatives previously worked for a firm that had their registration revoked due to continually breaking FINRA rules. Is the firm required to record phone calls with clients?
What do you think?
Answer: yes
For firms with 10 - 19 registered representatives, calls must be recorded if 4 or more representatives previously worked for offending firms. Since 5 representatives meet that condition, calls must be recorded.
One last one.
A member firm employs 30 registered representatives. Six of the representatives previously worked for a firm that had their registration revoked due to continually breaking FINRA rules. Is the firm required to record phone calls with clients?
What do you think?
Answer: yes
Six out of 30 (6/30) employees is 20% of the firm’s registered representatives. For firms with 20 or more registered representatives, calls must be recorded if 20% or more previously worked for offending firms. Because the firm is exactly at 20%, calls must be recorded.
Firms required to tape calls must retain the recordings for at least three years. Recordings from the first two years must be readily available (meaning they can be quickly provided to FINRA if requested). FINRA doesn’t require firms to send recordings routinely, but it does require quarterly reports related to the taped calls. FINRA may also request access to recordings if it deems it necessary (often in response to a complaint).
If FINRA notifies a member firm that it meets the “taping firm” thresholds, the firm has 60 days to implement a recording system and written supervisory procedures. Once implemented, all phone calls with clients (current and prospective) must be recorded.
If the firm wants to avoid the taping requirement, it has 30 days to terminate the required number of representatives previously employed by offending firms. Any terminated representative can’t be rehired for 180 days.
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