As said in Spiderman, “with great power comes great responsibility.” Registered representatives must follow specific guidelines and protocols to comply with FINRA rules. We’ll discuss the following in this section:
When an individual becomes registered under a FINRA member firm, they must disclose any brokerage accounts held outside the firm within 30 days. For example, let’s assume David is hired as a registered representative at ABC Broker-Dealer. Before he was hired, David held brokerage accounts at XYZ Broker-Dealer. Within 30 days of associating with ABC Broker-Dealer, David must notify his firm of the outside brokerage accounts. The same rule applies to any accounts the representative has a “beneficial interest” in, including those held by spouses, dependent children, or anyone the representative supports financially.
In most circumstances, firms do not allow their representatives to maintain outside brokerage accounts. As you’ve learned throughout this material, firms must properly supervise their registered employees. It’s more difficult* to do so when the firm doesn’t have immediate access to their accounts. For example, it would be more difficult to determine if a representative was placing personal trades based on insider information if the account wasn’t held at the employing firm.
*While it is more difficult to supervise outside brokerage accounts, firms may allow their representatives to maintain them. To properly supervise the account, the firm should obtain duplicate statements and trade confirmations from the firm holding the account.
Registered representatives must inform their employer if they’re making money outside their firm, known as an outside business activity (OBA). This system ensures representatives are not engaging in conflicts of interest that may harm the firm or its customers. Unpaid volunteering efforts and lottery or casino winnings are not considered OBAs. Any other circumstance involving payment is regarded as an OBA, including working for a family member’s business or being paid tips for creative endeavors (e.g., playing in a band on the weekends). FINRA recently has been cracking down on enforcing OBA rules.
Registered representatives must notify their firm in writing when engaging in a money-making opportunity outside the firm. If the employer feels they’re engaging in activity detrimental to the firm, they can deny the OBA. Although firms maintain the right of denial (meaning they can tell an employee not to engage in the OBA), representatives are not technically asking for their permission when they notify their employer in writing. It’s only a problem if they hear back after submitting the OBA notice!
Along the same lines as OBAs, registered representatives must follow similar procedures if planning on performing a private securities transaction. Several different scenarios fall into this category if performed outside the employing firm, including:
A private securities transaction occurs when a registered representative facilitates a securities transaction outside 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 compensated.
The representative is selling away if they do not fulfill these obligations, which is a FINRA violation subject to penalties.
FINRA is concerned about “pay for play” within the financial industry, so they limit gifts made to business partners. For example, if your broker-dealer does business with a mutual fund company, the firms cannot give gifts worth more than $100 per person, per year to the other firm’s employees. However, business entertainment is not part of this rule. Business entertainment includes tickets to sporting events and dinners. Essentially, it’s an activity the representative engages in with another person (the representative must attend with the other person to be considered business entertainment). As long as it’s not excessive, these activities can exceed $100.
Registered representatives are subject to limitations when borrowing from or lending to customers. Generally speaking, representatives are prohibited from engaging in loans with most customers. This should make sense; do you want to owe your client money (or vice versa)?
Regardless, some exceptions exist. Representatives may borrow money from customers in the business of lending money (e.g., a bank). Additionally, representatives may loan or borrow money from customers who are family members or individuals in personal relationships (e.g., a partner or fiancé).
Similar to lending arrangements with customers, FINRA also prohibits representatives from sharing accounts with customers. However, an exception is granted if the following protocols are followed:
*Representatives must allocate gains and/or losses according to the contributions made to the account. For example, let’s assume a representative opens a joint account with a customer and contributes 40% of the funds, with the customer contributing the other 60%. If a $10,000 capital gain is realized and withdrawn from the account, the representative should receive $4,000 (40%) and the customer should get the remaining $6,000 (60%). Any other allocation would be disproportionate and prohibited.
Accounts can be shared with immediate family members without following the protocols above. This includes, parents, parent in-laws, spouses, children, and any other family member a representative financially supports.
Registered representatives must follow specific procedures when engaged in a dispute with their employing firm. Except for workplace discrimination or sexual harassment*, employees cannot sue their employing firms. However, they can bring them to binding arbitration facilitated by FINRA, which is similar to court (but generally more efficient and quick). Hopefully, this never happens!
*Instances of workplace discrimination or sexual harassment are most likely to be handled by the US court system.
Many positions in the securities industry are compensated based on asset inflows (bringing new money to a firm) and product sales. In some instances, compensation is made over long periods. For example, a representative receives a portion of account fees charged annually to clients. Every year the clients remain in the accounts, the representative continues to collect more. But what happens if the representative leaves the firm? Can they continue to collect these fees?
The relevant FINRA rule allows former representatives to continue collecting compensation in some instances. If a representative retires or leaves their firm due to disability and maintains a written agreement with their former firm, they may continue to be paid. The same applies to a deceased representative, except the compensation is diverted to their beneficiary.
There are a few stipulations the written agreement must contain. As long as payments continue to be received, the former representative may not:
Essentially, the former representative must be retired from the securities industry.
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