After passing the appropriate licensing exams, filing the U-4, and FINRA confirming registration as effective, a person is considered a registered representative.
Working in the finance industry comes with many rules and responsibilities. This section covers:
A representative’s license becomes inactive when they leave the industry. If the person re-associates with another firm within 2 years, their licenses stay intact and become active again once the new registration is effective (after filing the new U-4).
If the person is out of the industry for 2 or more years, their licenses begin to lapse. In that case, a previously fully licensed individual 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 the firm, the countdown begins.
Registered representatives must inform their employer if they’re making money outside of their firm. This is called an outside business activity (OBA). The goal is to help the firm identify 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 money-making opportunity outside the firm, representatives must notify their firm in writing. If the firm believes the activity is detrimental (for example, it creates a conflict of interest), it can deny the OBA.
Even though the firm can deny the activity, the representative is not “asking permission” in the sense of requesting approval before disclosure. The key requirement is written notice to the firm, and then following the firm’s decision.
Similar to OBAs, registered representatives must follow specific procedures if they plan to participate in a private securities transaction.
A number of situations can fall into this category when done outside the employing firm, including:
In general, a private securities transaction occurs when a registered representative facilitates a securities transaction outside of their employing firm.
If these requirements are met, the transaction is compliant with FINRA rules:
*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 subject to penalties.
FINRA is concerned about “pay for play” in the financial industry, so it limits gifts given to 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 is not considered a tangible gift. Business entertainment includes dinners and tickets to sporting events. As long as it’s not excessive, 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 a representative’s personal finances could affect their professional judgment.
There are exceptions. For example:
A guaranteed security is a security backed by a third party with respect to interest, dividends, and/or principal. A security is considered guaranteed when a third party (usually an insurance company) pledges to cover any unpaid interest, dividends, and/or principal.
A guarantee does not mean an investor can’t lose money. The guarantee applies to the promised payments, not the security’s market value.
For example, assume an investor purchases a $1,000 principal (par) bond* for $1,200. If the bond defaults (meaning the issuer can’t repay the borrowed funds), the insurance would cover only the $1,000 principal and any unpaid interest up to that point. The $200 premium the investor paid above par would not be covered.
Outside of guaranteed securities, the word “guaranteed” is often associated with unethical conduct. Financial professionals must never guarantee that a security will perform in a certain way. This includes:
A defining feature of investing is the possibility of loss, so performance guarantees and securities don’t mix. Guarantees can also threaten the financial health of a firm, especially during major market declines (e.g., the Great Recession). For these reasons, financial professionals should avoid performance guarantees.
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, disputes are typically handled through binding arbitration facilitated by FINRA. Arbitration is similar to court, but it’s usually faster and more efficient.
Broker-dealers often set up “networking arrangements” with financial institutions (e.g., banks) to offer securities to the bank’s customers.
For example, a broker-dealer might rent office space inside a local bank and place a representative there to discuss securities with bank customers. FINRA rules require strict protocols in this setting because banks typically offer safe, virtually risk-free products (e.g., certificates of deposit that are FDIC insured). Securities offered by broker-dealers, however, always involve some form of risk.
FINRA sets three primary rules 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 offerings of the bank.
Conduct its broker-dealer services in an area that displays clearly the member’s name
The member firm’s name, and the representative’s name and identification, must be clearly visible.
Maintain its broker-dealer services in a location physically separate from the routine retail deposit-taking activities of the financial institution
In other words, keep broker-dealer activity away from the bank tellers and deposit-taking areas.
In addition to these general business practice requirements, FINRA requires specific disclosures to customers who engage the broker-dealer in the bank setting. Known as the “not-not-may” rule, the disclosure must clarify that the products offered by the broker-dealer:
There are some circumstances where the “not-not-may” disclosure is not required to be made:
“Fool me once, shame on you. Fool me twice, shame on me.” Securities regulators generally assume firms and their representatives act in good faith until proven otherwise. However, if a firm employs a significant number of registered representatives who previously worked for firms that have been barred from the industry (revoked registrations), the firm may be required to tape (record) phone calls with clients.
One of the most serious penalties a registered firm or person can face is revocation of their registration. This means they are no longer registered, which generally prevents professional participation in the securities industry. Revocation is typically reserved for particularly unethical or egregious rule violations.
FINRA’s concern is that representatives from firms with revoked registrations may have been trained improperly and may be more likely to commit future offenses. 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 see how this works, walk 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. Since the firm is exactly at 20%, calls must be recorded.
Firms required to tape their phone calls must retain these files for at least three years. Calls taped within the first two years must be readily available (meaning they can be quickly provided to FINRA if requested).
FINRA does not require taped calls to be sent in routinely, but it does require quarterly reports related to the taped calls. FINRA can also request access to taped conversations 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 along with 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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