FINRA Membership

FINRA Membership
If your firm wants to join FINRA, it must:
•    meet net capital requirements
•    have at least two principals to supervise the firm
•    have an acceptable business plan detailing its proposed activities
•    attend a pre-membership interview
If your firm becomes a member of FINRA, they must agree to:
•    abide by the rules of the "Association"
•    abide by all federal and state laws
•    pay dues, fees, and membership assessments
What are these fees the firm must pay?
•    Basic membership fee
•    Fee for each rep and principal
•    Fee based on gross income of the firm
•    Fee for all branch offices
Membership, Registration and Qualification Requirements
FINRiVs Central Registration Depository (CRD) is the electronic registration system for member firms, principals, and registered representatives. FINRA reminds their member firms not to file misleading information. As the FINRA Manual says:
•    • • • • • • • • • • • • •
•    Filing of Misleading Information as to Membership or    •
•    •
•    The filing with the Association of information with respect to    •
membership or registration as a Registered Representative which
•    is incomplete or inaccurate so as to be misleading or which could •
•    in any way tend to mislead, or the failure to correct such filing    •
•    after notice thereof may be deemed to be conduct inconsistent with
just and equitable principles of trade and when discovered may be
•    sufficient cause for appropriate disciplinary action.    •
•    • • • • • • • • • • • • •
Filing misleading information with FINRA is a major violation. Firms also must not use their association with FINRA in a way that is misleading, as we see with this rule:
Use of the FINRA Logo
Member firms may not use the FINRA logo in any manner; however, a firm may refer to itself as a "FINRA Member Firm" or "Member of FINRA." Also, if a firm refers to its FINRA membership on its website, it must provide a hyperlink to FINRA's website, which is
•    • • • • • • • • • • • • •
•    Failure to Register Personnel    •
•    The failure of any member to register an employee, who should    •
•    be so registered, as a Registered Representative may be deemed to •
•    be conduct inconsistent with just and equitable principles of trade
and when discovered may be sufficient cause for appropriate dis-
•    ciplinary action.    •
•    • • • • • • • • • • • • •
As we can see above, it is a violation to use an individual in a position that requires registration unless and until the individual is registered. Who "should be so regis-tered"?
• • • • • • • • • • • • • •
•    Definition of Representative    •
•    •Persons associated with a member, including assistant officers    •
•    other than principals, who are engaged in the investment banking •
or securities business for the member including the functions of
•    •
supervision, solicitation or conduct of business in securities or who
•    •
are engaged in the training of persons associated with a member •
•    for any of thesefinctions are designated as representatives.    •
•    • • • • • • • • • • • • •
There are different categories of "registered representative," too. A General Secur¬ities Representative has a Series 7 and can sell individual stocks, bonds, municipal securities, options...generally just about anything. A person with a Series 6 is called a Limited Representative—Investment Company and Variable Contracts Products. This allows the individual to sell only mutual funds and variable contracts.
So, if you fit the definition of "representative," you must be registered:
•    • • • • • •    • • • • • •
•    All Representatives Must Be Registered    •
•    All persons engaged or to be engaged in the investment banking or •
•    securities business of a member who are to function as represen- •
tatives shall be registered as such with FINRA in the category of
•    •registration appropriate to the function to be performed as specified •
•    in Rule 1032. Before their registration can become effectivy    •
•    they shall pass a Qualification Examination for Representatives
appropriate to the category of registration as specified by the Board
•    of Governors.    •
•    • • • • • • • • • • • • •
As basic as that rule seems, you might be surprised how often member firms try to use an unlicensed employee to function as a registered representative. Bad idea. Unless and until the individual is licensed by FINRA and the state securities regulators, he must not perform any of the functions of a registered representative.
As we said, firms, principals, and registered representatives submit their registration information to FINRNs Central Registration Depository (CRD). An individual trying to become a registered representative submits information to the CRD through
a Form U4, which asks questions about residential history and professional back¬ground, etc. A principal must sign the U4 application and certify that he or she has reviewed the information, which is why it's not a good idea to use a fictional work his¬tory—they check that stuff
The CRD system is used for many different purposes. FINRA uses the information to determine whether the applicant is subject to statutory disqualification or presents a risk for the firm and its customers. Member firms use the information to determine if a candidate is subject to statutory disqualification or special heightened supervision. Firms also use the information reported to check the backgrounds of candidates. Maybe most important, the information released to the public through BrokerCheck protects investors from serial offenders in the securities industry.
Candidates for registered representative and principal positions often try to conceal their criminal or regulatory problems when completing Form U4. When FINRA finds out, they usually bar the representative permanently from association with any member firm, because if the individual can't be trusted when applying, why let him meet with customers?
In a notice to members FINRA explains that firms have the responsibility to review the information their candidates submit on Form U4 and conduct thorough back¬ground checks. Member firms are not supposed to just run candidates through the CRD system and see which ones get past the regulators. FINRA requires that "each member firm ascertain by investigation the good character, business reputation, qualifications and experience of an applicant before the firm applies to register that applicant with FINRA and before making a representation to that effect on the appli¬cation for registration."
If the applicant has already been registered, member firms are required to review his most recent U5 information—the form filed when an associated person ends employ¬ment with a member firm—within 60 days of filing the candidate's U4.
When a principal or registered representative leaves a member firm or ceases to function as a principal or registered representative at the firm, a U5 must be submit¬ted to FINRA within 30 days. The firm the associated person is leaving completes
a U5, and the firm that is hiring him completes a U4. If the exam uses the phrase "termination for cause," that means the registered rep gave the firm a good reason to fire him, including:
•    Violating the firm's policies
•    Violating the rules of the NYSE, FINRA, SEC, or any other industry regulator
•    Violating state or federal securities laws
If the registered representative is the subject of an investigation by any securities industry regulator, the firm cannot terminate the rep until the investigation is completed.
FINRA requires firms to adopt written procedures on how they verify the informa¬tion on a candidate's U4, and to complete that verification process within 30 calendar days of filing the U4. If the member finds information that doesn't match what the candidate disclosed, the firm must file an amended U4 within 30 calendar days. While FINRA encourages firms to complete this process before filing the U4, the firm can also just pay the Late Disclosure Fee involved with filing the amended U4.
Not surprisingly, the filing of an amended U4 often leads to FINRA deciding they might need to deny this one. For example, an amended U4 is often where a "no" answer to felony convictions and charges becomes two very embarrassing "yes" answers, with detailed explanations and court records detailing the unfortunate incident.
It used to be that if a customer wanted to win an arbitration claim, it was sort of understood that they needed to name the firm—not the individual representative—in the claim. This way, when the customer got paid, the registered representative had nothing to report on a U4 or U5 form.
Now, the firm must add the arbitration or civil litigation (lawsuit) award to the regis¬tered representative's U4/U5 form even if he or she isn't specifically named in the arbitration award. But, the threshold is $15,000 for the firm to report the settlement. FINRA and the SEC are also especially concerned about "willful violations" of secur¬ities law, and the new questions under the disclosure section are specifically designed to find out about those.
As you might expect, if your U4 contains information about "willful violations" of securities law—maybe executing transactions that your customers don't even know about, or misleading people about the mutual funds you sold them—it can be very tough to stay in the business. FINRA uses "statutory disqualification," which means that by statute you are disqualified.
After becoming a registered representative, you will also need to put in some time earning continuing education requirements. Let's see what FINRA must say about that:
•    • • • • • • • • • • • • •
•    Continuing Education Requirements    •
•    This Rule prescribes requirements regarding the continuing    •
•    education of certain registered persons subsequent to their initial    •
•    qualification and registration with FINRA. The requirements
shall consist of a Regulatory Element and a Firm Element as set
•    forth below.    •
•    • • • • • • • • • • • • •
The Regulatory Element is described like so:
•    • • • • • • • • • • • • •
•    Each registered person shall complete the Regulatory Element on •
the occurrence of their second registration anniversary date and
•    •
every three years thereafter, or as otherwise prescribed by FINRA.
•    •On each occasion, the Regulatory Element must be completed    •
•    within 120 days after the person's registration anniversary date.    •
•    • • • • • • • • • • • • •
What if you don't complete the Regulatory Element in that time frame?

• • • • • • • • • • • • • •
•    Failure to Complete    •
•    Unless otherwise determined by the Association, any registered    •
•    persons who have not completed the Regulatory Element within the •
prescribed time frames will have their registrations deemed inactive
•    •until such time as the requirements of the program have been    •
•    satisfied. Any person whose registration has been deemed inactive •
•    under this Rule shall cease all activities as a registered person and •
is prohibited from performing any duties andfinctioning in any
•    capacity requiring registration.    •
•    • • • • • • • • • • • • •
The Firm Element is described like this by the FINRA Manual:
•    • • • • • • • • • • • • •
•    Standards for the Firm Element
•    (A) Each member must maintain a continuing and current edu- •
•    cation program for its covered registered persons to enhance their    •
•    securities knowledge, skill and professionalism. At a minimum,
each member shall at least annually evaluate and prioritize its
•    training needs and develop a written training plan.    •
•    • • • • • • • • • • • • •

Active Military Duty
What happens when a registered representative volunteers or is called into active military duty? FINRA and the SEC are accommodating when a registered represen¬tative or principal is called away from the firm to serve in the armed forces. Here are the basic facts:
•    license is placed on "inactive status"
•    continuing education requirements waived
•    dues, assessments waived
•    two-year expiration period does not apply—exam might refer to this as "tolling"
•    can earn commissions, usually by splitting them with another rep who will service the book of business
•    the "inactive" rep cannot perform any of the duties of a registered rep while on inactive status
For a "sole proprietor" called into active military duty the same bullet points above apply.
Investment Advisers
When you complete your Series 7 requirements, you will become licensed to sell securities. You will not, however, be automatically registered to provide investment advice for compensation. To open a financial planning business or manage portfolios for a percentage of assets, you must pass your Series 65 or 66 exam and register your firm as an investment adviser or associate with an investment adviser as an investment adviser representative. If an agent opened either type of sideline without informing her employer and/or getting registered, disciplinary action could be taken by FINRA and his or her state securities regulator.
As a securities agent/registered representative, some of your customers will be invest¬ment advisers entering trades on behalf of their customers. But you yourself can only work the advisory side of the financial services business if you are properly licensed.


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