Registration Requirements for the RR

• A person’s registration is initiated by filing Form U4 (the Uniform Application for Securities Industry Registration or Transfer)
• Form U4 Disclosures
  • Personal information, including residential and business history
  • Information related to violations of laws or SRO rules
• Disclosure Reporting Page (DRP)
  • If a registrant answers “YES” to any legal or disciplinary questions, additional information is required on the DRP
• Predispute Arbitration Agreement
  • By signing Form U4, an applicant agrees to resolve disputes with his employer, other associated persons, or customers through arbitration
• Applications who file false, incomplete, or misleading information will have registration revoked

Arbitration Disclosures

• Before arbitration begins, firms are required to make the following disclosures to clients:
  • The right to sue or to a jury trial is waved with arbitration
  • Arbitration awards are generally final and binding
  • The ability to obtained documents may be more limited
  • Decisions made by arbitrators don’t require explanation
  • Arbitration panels may consist of either industry or public arbitrators
• For member firm employees, certain claims are not required to be arbitrated, including those related to:
  • Discrimination or sexual harassment
  • Disputes arising under a whistleblower statute

Form U5 and Form U6

• Form U5
  • If registration is terminated, Form U5 must be filed within 330 days
    • Copy provided to the RR
    • Changes to Form U5 must be made within 30 days
    • FINRA must be notified of written complaints that are received after the representative leaves the firm
    • Re-qualification is required if registration is terminated for more than two years (FINRA maintains jurisdiction for those two years)
      • If series 6,7, 79 registered, if you leave the firm and someone picks up your registration between the 2 years, you’re fine. If not, got to do it again
• Form U6
  • Used to report:
    • Disciplinary actions against representatives and firms, and
    • Final arbitration awards against representatives and firms

Matching

• Form U4
  • Business history of associated person
  • Predispute Arbitration Clause
• Form U5
  • Reasons for representative’s termination
• Form U6
  • Arbitration rewards
  • Disciplinary actions against RRs and firms

BrokerCheck

• Makes information about registered rep available to public
• This system allows investors to check the background and disciplinary history of their existing or prospective firm or RR, including:
  • The RR’s current employing firm, the last 10 years of employment history, and all approved registrations
  • Any felonies, certain misdemeanors and civil proceedings, and investment-related violations
  • Pending customer-initiated arbitrations and civil proceedings involving investment-related activities
  • Written customer complaints filed within the last 24 months alleging aisles practice violations of $5,000 or more
  • Terminations of employment after allegations involving violations of rules, fraud, theft, or failure to supervise 

FINRA Investor Education and Expungement

• Finra’s Investor Education Rules requires firms to provide customers with the following information on an annual basis
  • FINRA’s BrokerCheck hotline number
  • FINRA’s website address
  • A statement that an investor brochure is available which describes BrokerCheck
• Expungement is the process by which customer dispute information is removed from an RR’s CRD record
  • The claim must be factually impossible or erroneous
  • The registered person could not have been involved in the investment-related sales practice violation
  • The claim, allegation, or information is false

MSRB investor Education

• Annually, MSRB member firms must disclosure the following to their customers:
  • The MSRB’s website address
  • That they are registered with the MSRB and the SEC
  • A statement regarding the availability of a brochure (the Investor Brochure) on the MSRB’s website which describes the protections available to customers and the process by which a complaint may be filed with the appropriate regulatory authority 

Customer Complaint

• Defined as a grievance that’s delivered in any written form, including letters, e-mails, IMs, or text messages
  • Complaints must be forwarded to a supervisor for review/investigation
  • Complaint files, including copies, are maintained in an OSJ (Office of Supervisory Jurisdiction) along with a report to indicate the action taken the resolve the complaint
  • Records are retained for four years
  • Quarterly reports are sent to FINRA (not the SEC) to provide statistical and summary complaint information

Reporting Requirements

• FINRA requires firms to file information relating to certain customer complaints and other incidents involving RRs by no later than within 30 days of discovery. These events include:
  • Being subject to a customer complaint involving allegations of theft, misappropriation of funds or securities, or forgery
  • Having been indicted (charged) or convicted of (statutory disqualification event), or pleaded guilty or no contest to, any felony or misdemeanor involving securities violations 
  • Violating securities laws or regulations of the government, SRO, financial business or professional organization
  • Being the subject of a suspension, termination, withholding of commissions, or fines in excess of $2,500
  • Having been named as a defendant by a regulator alleging violation of any securities, insurance, or commodities regulation
  • Being a defendant or respondent in an award or settlement of more than $15,000

Red Flags

• Red Flags
  • SEC rules emphasize that firms must exhibit reasonable supervision and require supervisors to look for red flag situations
    • A Red Flag situation arises if there is any indication or real or potential violations of securities rules
• Red Flag Discovery
  • If an issue is discovered, the following steps must be taken
    • Investigate the situation – make a reasonable effort to ascertain all relevant facts
    • Document the investigation – records must be written
    • Pursue the investigation to a conclusion – the matter should be brought to some resolution which may be that no violation occurred 

Outside Business activities

• These outside activities include a registered person serving on a company’s board of directors, writing articles for a financial publication on a part-time basis, or bartending on the weekends; however, it does not include volunteer/charity work or hobbies
• Requirements
  • Written Notice
    • A registered person must provide prior written notice to her employer to be involved in outside activities if:
      • She is being compensated or has a reasonable expectation of being compensated
  • Update Form U4
    • Although firm approval is NOT required, the RR must update her Form U4 and the information is disclosed through BrokerCheck

Private Securities Transactions

• These are securities transactions that are executed by an associated person outside of her association with a member firm, including both public and private offerings
• There are different requirements based on whether compensation will be received
  • If compensation is to be received
    • An RR must obtain his employing firm’s written permission and the firm must record the transaction on its books
      • Compensation includes commissions, finder’s fees, tax benefits, securities, or the right to receive securities
  • If NOcompensation is to be received
    • An RR must provide his employing firm with written notice which details the trade and must obtain his firm’s written acknowledgement of receipt 
• Failure to comply with this rule is a violation that’s referred to as Selling Away

The Gift Limit

• Gifts that RRs make to employees who can direct business of their employer back to the RR’s firm are limited to $100 per person, per year
  • FINRA approval is NOT required
  • FINRA does consider the dollar value and number of intended recipients

• Not allowed / violation

• Allowed

The Gift limit

• Rule also applies to gifts and gratuities from mutual fund distributors or wholesalers to B/D salespersons
  • Limit may be exceeded for events involving family relationships (e.g., wedding, birth of child)
  • If attended by the gift giver, an occasional meal, sporting event, or theater production is exempt as an entertainment/business expense 
  • Gifts are value based on the greater of their cost of market value 

• This is good

• No good, attendee must attend

Other Compensation Related Rules

• Training and Education Exception
  • Permits training program offerors (product distributors) to pay or reimburse for meetings which are attended by RRs and serve as educational purpose, if:
    • RRs have their broker-dealer’s permission to attend
    • Attendance is not attached to a sales target
    • Location is appropriate
    • Payments and reimbursements are limited to the RRs (not guests)
• In-House Incentives
  • Non-cash incentives are permitted as long as they’re based on total sales, not on the sale of a specific product

Political Contribution Rule – MSRB Rule G-37

• “No Pay to Play Rule”
• This rule addresses political contributions that are made by municipal finance professionals (MFPs) to persons who can direct municipal debt underwriting business
  • MFPs include associated persons of a broker-dealer who are primarily engaged in the following activities related to municipal securities:
    • Underwriting
    • Sales
    • Financial advisory or consulting services
    • Research or investment advice
  • RRs who recommend municipal securities to retail customers are excluded

Rule G–37 – Maximum Contributions and Penalties

• The rule places a limitation on contributions (which could include any gift, subscription, loan, advance, or deposit)
• MFP Can Vote for Candidate
  • An MFP may contribute $250 per candidate, per election cycle, to candidates for whom he may vote
• MFP Cannot Vote for Candidate
  • An MFP may make NO contribution to candidates for whom he may NOT vote
• If a violation occurs, a two-year ban is imposed on negotiated underwriting business with the issuer 

Determine whether true/false

• Prior written notice must be provided if an RR is being compensated for a part-time job
  • true
• Firms are not required to maintain records of compensation that RRs receive for transactions executed outside of their firm
  • false
• A gift valued at $175 and given to two RRs is acceptable
  • True (175/2 < $100)
• A trip to a luxury resort awarded to the RR who sells the most shares of the firm’s proprietary mutual funds is acceptable
  • False (can’t be a specific fund, total mutual fund sales it must be)