As Uncle Ben says in Spider-Man, “with great power comes great responsibility.” Registered representatives have to follow specific guidelines and protocols to stay compliant with FINRA rules. This section covers:
When you become registered with a FINRA member firm, you must disclose any brokerage accounts you hold outside the firm within 30 days.
For example, 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 about those outside brokerage accounts.
This rule also applies to any accounts in which the representative has a beneficial interest, including accounts held by:
In most cases, firms don’t allow representatives to maintain outside brokerage accounts. Firms are required to supervise their registered employees, and that supervision is harder when the firm doesn’t have direct access to the account.
For example, it would be more difficult to determine whether a representative was placing personal trades based on insider information if the account wasn’t held at the employing firm.
*Even though outside accounts are harder to supervise, a firm may allow them. In that case, the firm should obtain duplicate account statements and trade confirmations from the firm holding the account.
Registered representatives must inform their employer if they’re making money outside the firm. This is called an outside business activity (OBA).
The purpose is to help the firm identify and manage potential conflicts of interest that could harm the firm or its customers.
The following are not considered OBAs:
Any other paid activity is generally treated as an OBA, including:
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 believes the activity is detrimental to the firm, it can deny the OBA.
Although firms have the right to deny an OBA, the representative isn’t technically asking for permission when providing written notice. The issue arises if the firm responds and denies the activity.
Along similar lines, registered representatives must follow specific procedures if they plan to engage in a private securities transaction.
Several scenarios can fall into this category when done outside the employing firm, including:
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 these requirements are met:
*No written approval is required if the representative is not compensated.
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 cannot give gifts worth more than $100 per person, per year to the other firm’s employees.
However, business entertainment is not included in this gift limit. Business entertainment includes things like:
The key idea is that the representative attends the activity with the other person. As long as the entertainment is not excessive, it can exceed $100.
Registered representatives face strict limits on borrowing from or lending to customers. In general, representatives are prohibited from entering into loan arrangements with most customers.
Some exceptions apply. Representatives may borrow money from customers who are in the business of lending money (e.g., a bank). Representatives may also loan or borrow money from customers who are family members or individuals with whom they have a personal relationship (e.g., a partner or fiancé).
Similar to lending arrangements, FINRA generally prohibits representatives from sharing accounts with customers.
An exception is allowed if the following protocols are followed:
*Representatives must allocate gains and/or losses according to the contributions made to the account. For example, 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, parents-in-law, spouses, children, and any other family member a representative financially supports.
Registered representatives must follow specific procedures when they have a dispute with their employing firm.
Except for workplace discrimination or sexual harassment*, employees generally cannot sue their employing firms. Instead, they can bring disputes to binding arbitration facilitated by FINRA. Arbitration is similar to court, but it’s generally faster and more efficient.
*Instances of workplace discrimination or sexual harassment are most likely to be handled by the US court system.
Many securities industry roles are compensated based on asset inflows (bringing new money to a firm) and product sales. In some cases, compensation is paid over long periods.
For example, a representative might receive a portion of account fees charged annually to clients. Each year the clients remain in the accounts, the representative continues to receive compensation. If the representative leaves the firm, a key question is whether they can continue to collect those fees.
The relevant FINRA rule allows former representatives to continue collecting compensation in some situations. If a representative retires or leaves the firm due to disability and has a written agreement with the former firm, they may continue to be paid. The same applies to a deceased representative, except the compensation is paid to the beneficiary.
The written agreement must include certain stipulations. As long as payments continue, the former representative may not:
In other words, the former representative must be retired from the securities industry.
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