# Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Adopt Consolidated FINRA Registration Rules, Restructure the Representative-Level Qualification Examination Program and Amend the Continuing Education Requirements

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A2017-07046

## Record

- **Collection:** Federal Register
- **Document type:** Notice
- **Published:** April 10, 2017
- **Citation:** 82 FR 17336

## Text

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80371; File No. SR-FINRA-2017-007]
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Adopt Consolidated FINRA Registration Rules, Restructure the Representative-Level Qualification Examination Program and Amend the Continuing Education Requirements
April 4, 2017.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
1

and Rule 19b-4 thereunder,
2

notice is hereby given that on March 28, 2017, Financial Industry Regulatory Authority, Inc. (“FINRA”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

1
15 U.S.C. 78s(b)(1).

2
17 CFR 240.19b-4.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

FINRA is proposing to adopt with amendments the NASD and Incorporated NYSE rules relating to qualification and registration requirements as FINRA rules in the Consolidated FINRA Rulebook.
3

The proposed rule change also restructures the current representative-level qualification examinations and creates a general knowledge examination and specialized knowledge examinations. In addition, the proposed rule change amends the Continuing Education (“CE”) requirements.

3
The current FINRA rulebook consists of: (1) FINRA rules; (2) NASD rules; and (3) Incorporated NYSE rules. While the NASD rules generally apply to all FINRA members, the Incorporated NYSE rules apply only to those members of FINRA that are also members of the NYSE (“dual members”). The FINRA rules apply to all FINRA members, unless such rules have a more limited application by their terms. For more information about the rulebook consolidation process,
see Information Notice,
March 12, 2008 (Rulebook Consolidation Process).

The text of the proposed rule change is available on FINRA's Web site at
http://www.finra.org,
at the principal office of FINRA and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, FINRA included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. FINRA has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

1. Purpose

Background

Section 15A(g)(3) of the Act authorizes FINRA to prescribe standards of training, experience and competence for persons associated with FINRA members. Accordingly, FINRA has adopted registration requirements to ensure that associated persons attain and maintain specified levels of competence and knowledge pertinent to their function. The current FINRA registration rules include both NASD rules and rules incorporated from the NYSE (“Incorporated NYSE rules”).

In general, the current rules: (1) Require that persons engaged in a member's investment banking or securities business who are to function as representatives or principals register with FINRA in each category of registration appropriate to their functions by passing one or more qualification examinations; (2) exempt specified associated persons from the registration requirements; and (3) provide for permissive registration of specified persons.

As part of the process of developing the Consolidated FINRA Rulebook, FINRA published
Regulatory Notice
09-70 (December 2009), seeking comment on a set of proposed consolidated registration rules.
4

The proposed rules, among other changes, allowed any associated person to obtain and maintain any registration permitted by the member. FINRA also proposed adopting a Retained Associate (“RA”) status in the Central Registration Depository (“CRD®”) system for individuals who would be working for a financial services industry affiliate of a member, and who would not be working in any capacity for the member. Under the proposal, RAs would be able to obtain and maintain any registration permitted by the member, subject to specific requirements. Further, the proposal created an “active” and “inactive” registration status in the CRD system to distinguish between required and permissive registrations, including the proposed RA status. In addition, the proposal included several other substantive changes, such as adoption of a Compliance Officer registration category for Chief Compliance Officers (“CCOs”), designation of a Principal Financial Officer and Principal Operations Officer, enhancement of the examination requirements for Research Principals, adoption of registration categories for Supervisory Analysts, Securities Lending Representatives and Securities Lending Supervisors, imposition of an experience requirement for representatives functioning as principals for a limited period before passing a principal examination and elimination of the Foreign Associate registration category.

4
In addition, FINRA had proposed to transfer NASD Rule 3010(e) relating to background checks on registration applicants into the Consolidated FINRA Rulebook as a FINRA rule. FINRA adopted NASD Rule 3010(e) as FINRA Rule 3110(e) as part of a separate proposed rule change.
See Regulatory Notice
15-05 (March 2015).

As discussed in Item II.C. below, commenters were concerned with the complexity and operational and cost burden of the RA proposal. FINRA also engaged in discussions with SEC staff regarding the impact of the RA proposal. As a result, FINRA has revised the proposal as published in
Regulatory Notice
09-70. Specifically, rather than allowing individuals to obtain and maintain their registrations based on an RA status, the proposed rule change establishes a process whereby individuals who would be working for a financial services industry affiliate of a member would terminate their registrations with that member and would be granted a waiver of their qualification requirements upon re-registering with a member, provided the firm that is requesting the waiver and the individual satisfy specified conditions. FINRA has also eliminated the proposal to create an “active” and “inactive” registration status in the CRD system to distinguish between required and permissive registrations. Further, FINRA is no longer proposing to establish registration categories for Securities Lending Representatives and Securities Lending Supervisors.

FINRA administers qualification examinations that are designed to establish that persons associated with FINRA members have attained specified levels of competence and knowledge. The first of these examinations was established in 1956. Over time, the

examination program has increased in complexity to address the introduction of new products and functions, and related regulatory concerns and requirements. As a result, today, there are a large number of examinations, considerable content overlap across the representative-level examinations and requirements for individuals in various segments of the industry to pass multiple examinations.

To address these issues, FINRA published
Regulatory Notice
15-20 (May 2015), seeking comment on a proposal to restructure the current representative-level qualification examination program
5

into a more efficient format whereby all potential representative-level registrants would take a general knowledge examination called the Securities Industry Essentials
TM
(“SIE
TM
”) and a tailored, specialized knowledge examination for their particular registered role. The proposal, among other things, eliminates duplicative testing of general securities knowledge on examinations. The proposal also eliminates several representative-level registration categories and associated examinations that have become outdated or have limited utility. As described in more detail in Item II.C. below, most of the commenters expressed overall support for the proposed approach.

5
FINRA is also evaluating the structure of the principal-level examinations and may propose to streamline this examination structure at a later time.

The proposed rule change combines the proposals set forth in
Regulatory Notices
09-70 and 15-20 with a few changes, including those made in response to comments.

Proposed Rules

A. Registration Requirements (Proposed FINRA Rule 1210)

NASD Rules 1021(a) and 1031(a) currently require that persons engaged, or to be engaged, in the investment banking or securities business of a member who are to function as representatives or principals register with FINRA in each category of registration appropriate to their functions as specified in NASD Rules 1022 and 1032.
6

FINRA is proposing to consolidate and streamline the provisions of NASD Rules 1021(a) and 1031(a) and adopt them as FINRA Rule 1210, subject to several changes.

6
In addition, NASD IM-1000-3 provides that the failure to register an individual as a registered representative may be deemed to be conduct inconsistent with just and equitable principles of trade and may be sufficient cause for appropriate disciplinary action.

Proposed FINRA Rule 1210 provides that each person engaged in the investment banking or securities business of a member must register with FINRA as a representative or principal in each category of registration appropriate to his or her functions and responsibilities as specified in proposed FINRA Rule 1220, unless exempt from registration pursuant to proposed FINRA Rule 1230. Proposed FINRA Rule 1210 also provides that such person is not qualified to function in any registered capacity other than that for which the person is registered, unless otherwise stated in the rules. This latter provision is a consolidation of similar provisions in the registration categories under the current NASD rules.
7

7

See
NASD Rules 1022(a)(6), (b)(3), (c)(4), (d)(2), (e)(3) and (f)(4) and NASD Rules 1032(b)(2), (c)(2), (d)(3), (e)(2), (f)(3), (g)(2), (h)(3) and (i)(4).

The original proposal in
Regulatory Notice
09-70 created an “active” and “inactive” registration status in the CRD system to distinguish between required and permissive registrations, and it required firms to notify FINRA of such status. The proposed rule change eliminates the distinction between an “active” and “inactive” status.
8

8
However, as is the case under the current rules, FINRA will continue to use the term “inactive” in the CRD system in reference to persons who have failed to satisfy the Regulatory Element of the CE requirements, persons who have failed to submit their fingerprint information within the required time period and persons who are in active duty in the Armed Forces of the United States.

Further, FINRA is proposing to delete NASD IM-1000-3 because it is superfluous. The failure to register a representative as required under current NASD Rule 1031(a) is in fact a violation of FINRA rules.

B. Minimum Number of Registered Principals (Proposed FINRA Rule 1210.01)

NASD Rule 1021(e)(1) currently requires that a member, except a sole proprietorship, have a minimum of two registered principals with respect to each aspect of the member's investment banking and securities business pursuant to the applicable provisions of NASD Rule 1022.
9

This requirement applies to applicants for membership and existing members.

9
In 2003, the rule was amended to replace the phrase “pursuant to the provisions of Rule 1022(a), (d) and (e), whichever are applicable” with the current phrase “pursuant to the applicable provisions of Rule 1022.”
See
Securities Exchange Act Release No. 47433 (March 3, 2003), 68 FR 11424 (March 10, 2003) (Notice of Filing and Immediate Effectiveness of Proposed Rule Change; File No. SR-NASD-2003-24). NASD Rules 1022(a), (d) and (e) are the registration categories of General Securities Principal, Investment Company and Variable Contracts Products Principal and Direct Participation Programs Principal, respectively. These principal registration categories, which depend on the scope of a firm's activities, are the only current principal categories that satisfy the two-principal requirement. The 2003 change was made for stylistic purposes and was part of other technical changes to the registration rules.

NASD Rule 1021(e)(2) provides that, pursuant to the FINRA Rule 9600 Series, FINRA may waive the two-principal requirement in situations that indicate conclusively that only one person associated with an applicant for membership should be required to register as a principal.

NASD Rule 1021(e)(3) provides that an applicant for membership, if the nature of its business so requires, must also have a Financial and Operations Principal (or an Introducing Broker-Dealer Financial and Operations Principal) and a Registered Options Principal.
10

10
NASD Rules 1022(b) and (c) require all firms to have a Financial and Operations Principal or an Introducing Broker-Dealer Financial and Operations Principal, as applicable. This requirement became effective on September 17, 2001. However, the requirement does not apply to members that were granted an exemption prior to September 17, 2001.
See Notice to Members
(“
NTM
”) 01-52 (August 2001).

FINRA is proposing to adopt NASD Rule 1021(e) as FINRA Rule 1210.01, subject to the changes below. FINRA is proposing to provide firms that limit the scope of their business with greater flexibility to satisfy the two-principal requirement. In particular, proposed FINRA Rule 1210.01 requires that a member have a minimum of two General Securities Principals, provided that a member that is limited in the scope of its activities may instead have two officers or partners who are registered in a principal category that corresponds to the scope of the member's activities.
11

For instance, if a firm's business is limited to securities trading, the firm may opt to have two Securities Trader Principals, instead of two General Securities Principals.

11
The principal registration categories are described in greater detail below.

Currently, a sole proprietor member (without any other associated persons) is not subject to the two-principal requirement because such member is operating as a one-person firm. Given that one-person firms may be organized in legal forms other than a sole proprietorship (such as a single-person limited liability company), proposed FINRA Rule 1210.01 provides that any member with only one associated person is excluded from the two-principal requirement.

In addition, proposed FINRA Rule 1210.01 clarifies that existing members as well as new applicants may request

a waiver of the two-principal requirement.

The proposed rule further provides that all members are required to have a Financial and Operations Principal (or an Introducing Broker-Dealer Financial and Operations Principal, as applicable), a Principal Financial Officer and a Principal Operations Officer.
12

Moreover, the proposed rule requires that: (1) A member engaged in investment banking activities have an Investment Banking Principal;
13

(2) a member engaged in research activities have a Research Principal; (3) a member engaged in securities trading activities have a Securities Trader Principal; and (4) a member engaged in options activities with the public have a Registered Options Principal. These requirements extend to existing members as well as new applicants.

12
Those members that are currently exempt from the requirement to have a Financial and Operations Principal or an Introducing Broker-Dealer Financial and Operations Principal based on an exemption granted to them prior to September 17, 2001 will continue to be exempt from this requirement. However, as noted below, such members will be subject to the requirement to designate a Principal Financial Officer and a Principal Operations Officer.

13
As described below, the Investment Banking Principal registration category is a newly proposed principal category that corresponds to the registration requirements of current NASD Rule 1022(a)(1)(B).

C. Permissive Registrations (Proposed FINRA Rule 1210.02)

NASD Rules 1021(a) and 1031(a) currently permit a member to register or maintain the registration(s) as a representative or principal of an individual performing legal, compliance, internal audit, back-office operations
14

or similar responsibilities for the member. NASD Rule 1031(a) also permits a member to register or maintain the registration as a representative of an individual performing administrative support functions for registered persons. In addition, NASD Rules 1021(a) and 1031(a) permit a member to register or maintain the registration(s) as a representative or principal of an individual engaged in the investment banking or securities business of a foreign securities affiliate or subsidiary of the member.

14
Back-office personnel that are functioning as Operations Professionals as set forth in FINRA Rule 1230(b)(6) are subject to the Operations Professional registration requirement.

FINRA is proposing to consolidate these provisions under FINRA Rule 1210.02. FINRA is also proposing to expand the scope of permissive registrations and clarify a member's obligations regarding individuals who are maintaining such registrations.
15

15
In 2007, FINRA filed with the SEC a similar proposed rule change. The proposed rule change was not published for comment in the
Federal Register
.
See
SR-FINRA-2007-004. FINRA withdrew SR-FINRA-2007-004 prior to filing this proposed rule change.

Specifically, proposed FINRA Rule 1210.02 allows any associated person to obtain and maintain any registration permitted by the member.
16

For instance, an associated person of a member working solely in a clerical or ministerial capacity, such as in an administrative capacity, would be able to obtain and maintain a General Securities Representative registration with the member. As another example, an associated person of a member who is registered, and functioning solely, as a General Securities Representative would be able to obtain and maintain a General Securities Principal registration with the member. Further, proposed FINRA Rule 1210.02 allows an individual engaged in the investment banking or securities business of a foreign securities affiliate or subsidiary of a member to obtain and maintain any registration permitted by the member.

16
In
Regulatory Notice
09-70, FINRA referred to such individuals as associated person engaged in a bona fide business purpose of a member.

FINRA is proposing to permit the registration of such individuals for several reasons. First, a member may foresee a need to move a former representative or principal who has not been registered for two or more years back into a position that would require such person to be registered. Currently, such persons are required to requalify (or obtain a waiver of the applicable qualification examinations) and reapply for registration. Second, the proposed rule change would allow members to develop a depth of associated persons with registrations in the event of unanticipated personnel changes. Third, allowing registration in additional categories encourages greater regulatory understanding. Finally, the proposed rule change would eliminate an inconsistency in the current rules, which permit some associated persons of a member to obtain permissive registrations, but not others who equally are engaged in the member's business.

Individuals maintaining a permissive registration under the proposed rule change would be considered registered persons and subject to all FINRA rules, to the extent relevant to their activities.
17

For instance, an individual working solely in an administrative capacity would be able to maintain a General Securities Representative registration and would be considered a registered person for purposes of FINRA Rule 3240 relating to borrowing from or lending to customers, but the rule would have no practical application to his or her conduct because he or she would not have any customers.

17
The original proposal included a subset of FINRA rules to which these individuals would be subject. FINRA believes that the revised approach, which is principle-based, provides firms the flexibility to tailor their supervisory systems to their business models and reduces the burden on FINRA of having to revise the subset of applicable rules each time FINRA adopts a new rule or amends an existing rule.

Consistent with the requirements of FINRA Rule 3110, members would be required to have adequate supervisory systems and procedures reasonably designed to ensure that individuals with permissive registrations do not act outside the scope of their assigned functions. With respect to an individual who solely maintains a permissive registration, such as an individual working exclusively in an administrative capacity, the individual's day-to-day supervisor may be a non-registered person. For purposes of compliance with FINRA Rule 3110(a)(5) (which requires the assignment of each registered person to an appropriately registered supervisor), members would be required to assign a registered supervisor to this person who would be responsible for periodically contacting such individual's day-to-day supervisor to verify that the individual is not acting outside the scope of his or her assigned functions. If such individual is permissively registered as a representative, the registered supervisor must be registered as a representative or principal. If the individual is permissively registered as a principal, the registered supervisor must be registered as a principal.
18

18
In either case, the registered supervisor of an individual who solely maintains a permissive registration would not be required to be registered in the same representative or principal registration category as the permissively-registered individual. For instance, for purposes of FINRA Rule 3110(a)(5), an Investment Company and Variable Contracts Products Principal would be able to function as the registered supervisor of an individual who is permissively maintaining a General Securities Principal registration.

FINRA is also considering enhancements to the CRD system and BrokerCheck, as part of a separate proposal, to identify whether a registered person is maintaining only a permissive registration and to disclose the significance of such permissive registration to the general public.

D. Qualification Examinations and Waivers of Examinations (Proposed FINRA Rule 1210.03)

NASD Rules 1021(a) and 1031(a) currently set forth general requirements

that an individual pass an appropriate qualification examination before his or her registration as a representative or principal can become effective. Incorporated NYSE Rule 345.15(1)(a) includes a substantially similar requirement. FINRA is proposing to consolidate these provisions and adopt them as FINRA Rule 1210.03.

In addition, as noted above, FINRA is proposing to adopt a restructured representative-level qualification examination program whereby representative-level registrants would be required to take a general knowledge examination (the SIE) and a specialized knowledge examination
19

appropriate to their job functions at the firm with which they are associating. Therefore, proposed FINRA Rule 1210.03 provides that before the registration of a person as a representative can become effective under proposed FINRA Rule 1210, such person must pass the SIE and an appropriate representative-level qualification examination as specified in proposed FINRA Rule 1220.
20

Proposed FINRA Rule 1210.03 also provides that before the registration of a person as a principal can become effective under proposed FINRA Rule 1210, such person must pass an appropriate principal-level qualification examination as specified in proposed FINRA Rule 1220.

19
The term “specialized” as used in the proposed rule change is only intended for discussion purposes to identify the proposed representative-level examinations and distinguish them from the current representative-level examinations. FINRA is not proposing to use the term “specialized” in the proposed rule text.

20
Proposed FINRA Rule 1220 sets forth each registration category and applicable qualification examination.

Further, proposed FINRA Rule 1210.03 provides that if a registered person's job functions change and he or she needs to become registered in another representative-level category, he or she would not need to pass the SIE again. Rather, the registered person would need to pass only the appropriate representative-level qualification examination.

Moreover, proposed FINRA Rule 1210.03 provides that all associated persons, such as associated persons whose functions are solely and exclusively clerical or ministerial, are eligible to take the SIE. Proposed FINRA Rule 1210.03 also provides that individuals who are not associated persons of firms, such as members of the general public, are eligible to take the SIE. FINRA believes that expanding the pool of individuals who are eligible to take the SIE would enable prospective securities industry professionals to demonstrate to prospective employers a basic level of knowledge prior to submitting a job application. Further, this approach would allow for more flexibility and career mobility within the securities industry. While all associated persons of firms as well as individuals who are not associated persons would be eligible to take the SIE pursuant to proposed FINRA Rule 1210.03, passing the SIE alone would not qualify them for registration with FINRA. Rather, to be eligible for registration with FINRA, an individual must pass an applicable representative or principal qualification examination and complete the other requirements of the registration process.

The SIE would assess basic product knowledge; the structure and function of the securities industry markets, regulatory agencies and their functions; and regulated and prohibited practices. In particular, the SIE will cover four major areas. The first, “Knowledge of Capital Markets,” focuses on topics such as types of markets and offerings, broker-dealers and depositories, and economic cycles. The second, “Understanding Products and Their Risks,” covers securities products at a high level as well as associated investment risks. The third, “Understanding Trading, Customer Accounts and Prohibited Activities,” focuses on accounts, orders, settlement and prohibited activities. The final area, “Overview of the Regulatory Framework,” encompasses topics such as SROs, registration requirements and specified conduct rules. FINRA is anticipating that the SIE would include 75 scored questions plus an additional 10 unscored pretest questions.
21

The passing score would be determined through methodologies compliant with testing industry standards used to develop examinations and set passing standards.

21
Pretest questions are designed to ensure that new examination items meet acceptable testing standards prior to use for scoring purposes. Consistent with FINRA's current practice, the SIE would include 10 additional, unidentified pretest questions that do not contribute towards the individual's score. Therefore, the SIE actually would consist of 85 questions, 75 of which would be scored. The 10 pretest questions would be randomly distributed throughout the examination.

The current FINRA representative-level examination program consists of 16 examinations (Series 6, 7, 11, 17, 22, 37, 38, 42, 57, 62, 72, 79, 82, 86, 87 and 99). As described in greater detail below, FINRA is proposing to eliminate the current registration categories of Order Processing Assistant Representative, United Kingdom Securities Representative, Canadian Securities Representative, Options Representative, Corporate Securities Representative and Government Securities Representative as well as the associated examinations, the Series 11, Series 17, Series 37, Series 38, Series 42, Series 62 and Series 72, respectively. In addition, FINRA is proposing to revise the remaining representative-level qualification examinations, which include the Series 6, Series 7, Series 22, Series 57, Series 79, Series 82, Series 86, Series 87 and Series 99, to develop specialized knowledge examinations.

FINRA is consulting with committees of industry subject matter experts to develop the content of the specialized knowledge examinations, which would exclude the content covered on the SIE. FINRA will file the SIE and the specialized knowledge examinations, including the content outlines for each examination, with the SEC separately.

The proposed rule change solely impacts the representative-level qualification requirements. The proposed rule change does not change the scope of the activities under the remaining representative categories. For instance, after the effective date of the proposed rule change, a previously unregistered individual registering as a Direct Participation Programs Representative for the first time would be required to pass the SIE and an appropriate specialized knowledge examination. However, such individual may engage only in those activities in which a current Direct Participation Programs Representative may engage under current NASD Rule 1032(c).

The table below illustrates the proposed changes to the representative-level examinations, including the anticipated number of questions
22

on each specialized knowledge examination, for those representative categories that would be retained under the proposed rule change.

22
The specified number of questions for each specialized knowledge examination are [sic] estimates. The final number of questions on each examination may slightly vary based on additional work with the respective examination committees. Further, the table does not include the number of pretest questions on each of the listed examinations.

Registration category
(and CRD system designation)

Current examination(s)
Proposed examination(s)

Investment Company and Variable Contracts Products Representative (IR)
Series 6 (100 questions)
SIE (75 questions) + Specialized Series 6 (50 questions).

General Securities Representative (GS)
Series 7 (250 questions)
SIE (75 questions) + Specialized Series 7 (125 questions).

Direct Participation Programs Representative (DR)
Series 22 (100 questions)
SIE (75 questions) + Specialized Series 22 (50 questions).

Securities Trader (TD)
Series 57 (125 questions)
SIE (75 questions) + Specialized Series 57 (50 questions).

Investment Banking Representative (IB)
Series 79 (175 questions)
SIE (75 questions) + Specialized Series 79 (75 questions).

Private Securities Offerings Representative (PR)
Series 82 (100 questions)
SIE (75 questions) + Specialized Series 82 (50 questions).

Research Analyst (RS)
Series 7 (250 questions) + Series 86 (Part I: Analysis) (100 questions) + Series 87 (Part II: Regulatory Administration and Best Practices) (50 questions)
SIE (75 questions) + Specialized Series 86 (Part I: Analysis) (100 questions) + Specialized Series 87 (Part II: Regulatory Administration and Best Practices) (50 questions).

Operations Professional (OS)
Series 99 (100 questions)
SIE (75 questions) + Specialized Series 99 (50 questions).

As noted in the table, FINRA is anticipating that the number of questions on each specialized knowledge examination would be equal to or shorter than the current qualification examination that it would replace. For example, the specialized Series 7 examination for General Securities Representatives would include 125 questions instead of the 250 questions on the current Series 7 examination, and the specialized Series 6 examination for Investment Company and Variable Contracts Products Representatives would include 50 questions instead of the 100 questions on the current Series 6 examination. However, the total number of questions on the SIE plus the applicable specialized knowledge examination could be fewer or greater than the number of questions on the current examinations.

As discussed below, FINRA is also proposing to eliminate the current prerequisite registration requirement for Research Analysts. An individual seeking registration as a Research Analyst would no longer be required to first register as a General Securities Representative as currently required. Instead, such individuals would need to pass the SIE and corresponding specialized knowledge examination for Research Analyst, which, as reflected in the table above, would decrease from 400 questions to 225 questions the total number of questions for individuals registering as Research Analysts.

Moreover, under the proposed rule change, individuals seeking registration in two or more representative-level categories would experience a net decrease in the total number of questions because the SIE content would be tested only once. For example, an individual who seeks registration as a General Securities Representative and an Investment Banking Representative today would take two examinations, the Series 7 and Series 79, totaling 425 questions. Under the proposed structure, an individual who seeks registration in the same categories would take the SIE, the specialized Series 7 examination and the specialized Series 79 examination, totaling 275 questions.

Individuals who are registered on the effective date of the proposed rule change would be eligible to maintain those registrations without being subject to any additional requirements. Individuals who had been registered within the past two years prior to the effective date of the proposed rule change would also be eligible to maintain those registrations without being subject to any additional requirements, provided that they re-register with FINRA within two years from the date of their last registration. Further, such individuals, with the exception of Order Processing Assistant Representatives and Foreign Associates, would be considered to have passed the SIE in the CRD system, and thus if they wish to register in any other representative category after the effective date of the proposed rule change, they could do so by taking only the appropriate specialized knowledge examination.
23

However, with respect to an individual who is not registered on the effective date of the proposed rule change but was registered within the past two years prior to the effective date of the proposed rule change, the individual's SIE status in the CRD system would be administratively terminated if such individual does not register with FINRA within four years from the date of the individual's last registration.
24

23
As noted above, FINRA is evaluating the structure of the principal-level examinations. Under the proposed rule change, only individuals who have passed an appropriate representative-level examination would be considered to have passed the SIE. Registered principals who do not hold an appropriate representative-level registration would not be considered to have passed the SIE. For example, an individual who is registered solely as a Financial and Operations Principal (Series 27) today would have to take the Series 7 to become registered as a General Securities Representative. Under the proposed rule change, in the future, this individual would have to pass the SIE and the specialized Series 7 examination to obtain registration as a General Securities Representative.

24
As discussed below, FINRA is proposing a four-year expiration period for the SIE.

In addition, individuals, with the exception of Order Processing Assistant Representatives and Foreign Associates, who had been registered as representatives two or more years, but less than four years, prior to the effective date of the proposed rule change would also be considered to have passed the SIE and designated as such in the CRD system. Moreover, if such individuals re-register with a firm after the effective date of the proposed rule change and within four years of having been previously registered, they would only need to pass the specialized knowledge examination associated with that registration position. However, if they do not register with FINRA within four years from the date of their last registration, their SIE status in the CRD system would be administratively terminated.

Subject to Commission approval and the timing of such approval, FINRA intends to implement the revised structure in March 2018. Similar to the current process for registration, firms would continue to use the CRD system to request registrations for representatives. An individual would be able to schedule both the SIE and

specialized knowledge examinations for the same day, provided the individual is able to reserve space at one of FINRA's designated testing centers.

Further, FINRA is proposing to create an enrollment system separate from the CRD system to allow individuals who are not associated persons of a firm, including members of the general public, to enroll and pay the SIE examination fee. This system would also be available to associated persons of firms who are not required to be registered with FINRA. The enrollment system would provide individuals using the system with documentation (either in paper or electronic format) of a passing or failing result.

A firm would be able to obtain SIE results for associated persons who are registering as representatives through the CRD system. In addition, a firm would be able to view the passing status of an associated person who is not registering as a representative and an individual seeking to associate with the firm using an interface within the CRD system. The CRD system would also automatically obtain an individual's SIE results once a firm submits a Form U4 (Uniform Application for Securities Industry Registration or Transfer) and requests a registration for that individual.

FINRA is currently conducting a pricing analysis to determine a reasonable fee for the SIE and the specialized knowledge examinations. FINRA will file the examination fees with the SEC separately.

Finally, paragraph (d) of NASD Rule 1070 currently permits FINRA, in exceptional cases and where good cause is shown, to waive the applicable qualification examination and accept other standards as evidence of an applicant's qualifications for registration. The Incorporated NYSE rules include substantially similar provisions.
25

FINRA is proposing to transfer the provisions of NASD Rule 1070(d) into proposed FINRA Rule 1210.03 with the following changes.
26

The proposed rule provides that FINRA will only consider examination waiver requests submitted by a firm for individuals associated with the firm who are seeking registration in a representative- or principal-level registration category. Moreover, proposed FINRA Rule 1210.03 states that FINRA will consider waivers of the SIE alone or the SIE and the representative- and principal-level examination(s) for such individuals. FINRA would not consider a waiver of the SIE for non-associated persons or for associated persons who are not registering as representatives or principals.

25

See
Incorporated NYSE Rule 345.15(1)(b) and NYSE Rule Interpretation 345.15/01.

26
NASD Rules 1070(a), (b) and (c) provide general information relating to the examination process. FINRA is proposing to delete these provisions given that they relate to the administration of the examination program rather than rule requirements.

E. Requirements for Registered Persons Functioning as Principals for a Limited Period (Proposed FINRA Rule 1210.04)

NASD Rule 1021(d) provides that a person who is currently registered with a member as a representative and whose duties are changed by the member so as to require registration as a principal may function as a principal for up to 90 calendar days before he or she is required to pass the appropriate qualification examination for principal. In addition, it allows a formerly registered representative who is required to register as a principal to function as a principal without passing the appropriate principal qualification examination for up to 90 calendar days, provided the person first satisfies all applicable prerequisite requirements. A person who has never been registered does not qualify for this exception.

FINRA is proposing to adopt NASD Rule 1021(d) as FINRA Rule 1210.04, subject to the following changes. Proposed FINRA Rule 1210.04 states that a member may designate any person currently registered, or who becomes registered, with the member as a representative to function as a principal for a limited period, provided that such person has at least 18 months of experience functioning as a registered representative within the five-year period immediately preceding the designation. This change is intended to ensure that representatives designated to function as principals for the limited period under the proposed rule have an appropriate level of registered representative experience. The proposed rule clarifies that the requirements of the rule apply to designations to any principal category, including those categories that are not subject to a prerequisite representative-level registration requirement, such as the Financial and Operations Principal registration category.
27

27
In this regard, FINRA notes that, as is currently the case, qualifying as a registered representative is a prerequisite to qualifying as a principal except with respect to the following principal-level registrations: (1) Compliance Official; (2) Supervisory Analyst; (3) Financial and Operations Principal; and (4) Introducing Broker-Dealer Financial and Operations Principal.

The proposed rule also clarifies that the individual must fulfill all applicable prerequisite registration, fee and examination requirements before his or her designation as a principal. Further, the proposed rule extends the limited period that such person may function as a principal before passing the applicable principal examination from 90 calendar days to 120 calendar days (because the current window in the CRD system for passing an examination is 120 calendar days). A person registered as an Order Processing Assistant Representative or a Foreign Associate would be prohibited from functioning as a principal for purposes of proposed FINRA Rule 1210.04 because of the very limited scope of his or her activities. The proposed rule also provides an exception to the experience requirement for principals who are designated by members to function in other principal categories for a limited period. Specifically, the proposed rule states that a member may designate any person currently registered, or who becomes registered, with the member as a principal to function in another principal category for 120 calendar days before passing any applicable examinations. Finally, the proposed rule clarifies that members that lose their sole Registered Options Principal are subject to separate requirements set forth in proposed FINRA Rule 1220.03.

F. Rules of Conduct for Taking Examinations and Confidentiality of Examinations (Proposed FINRA Rule 1210.05)

Before taking an examination, FINRA currently requires each candidate to agree to the Rules of Conduct for taking a qualification examination. Among other things, the examination Rules of Conduct require each candidate to attest that he or she is in fact the person who is taking the examination. These Rules of Conduct also require that each candidate agree that the examination content is the intellectual property of FINRA and that the content cannot be copied or redistributed by any means. If FINRA discovers that a candidate has violated the Rules of Conduct for taking a qualification examination, the candidate may forfeit the results of the examination and may be subject to disciplinary action by FINRA. For instance, for cheating on a qualifications examination, FINRA's Sanction Guidelines recommend a bar.
28

28

See
FINRA Sanction Guidelines at 40 (2013),
http://www.finra.org/sites/default/files/Sanctions_Guidelines.pdf.

FINRA is proposing to codify the requirements relating to the Rules of Conduct for examinations under FINRA Rule 1210.05. FINRA is also proposing

to adopt Rules of Conduct for taking the SIE for associated persons and non-associated persons who take the SIE. Specifically, proposed FINRA Rule 1210.05 states that associated persons taking the SIE would be subject to the SIE Rules of Conduct, and associated persons taking a representative or principal examination would be subject to the Rules of Conduct for representative and principal examinations. Pursuant to proposed FINRA Rule 1210.05, a violation of the SIE Rules of Conduct or the Rules of Conduct for representative and principal examinations by an associated person would be deemed to be a violation of FINRA Rule 2010. Moreover, if FINRA determines that an associated person has violated the SIE Rules of Conduct or the Rules of Conduct for representative and principal examinations, the associated person may forfeit the results of the examination and may be subject to disciplinary action by FINRA.

Further, the proposed rule states that individuals taking the SIE who are not associated persons must agree to be subject to the SIE Rules of Conduct. Among other things, the SIE Rules of Conduct would require individuals to attest that they are not qualified to engage in the investment banking or securities business based on passing the SIE and would prohibit individuals from cheating on the examination or misrepresenting their qualifications to the public subsequent to passing the SIE. Moreover, non-associated persons may forfeit their SIE results and may be prohibited from retaking the SIE if FINRA determines that they cheated on the SIE or that they misrepresented their qualifications to the public subsequent to passing the SIE. In addition, if FINRA discovers that non-associated persons who have passed the SIE have subsequently engaged in other types of misconduct, FINRA would refer the matter to the appropriate authorities or regulators.

NASD Rule 1080 currently requires that qualification examinations content be kept confidential and addresses the disciplinary implications of violating the confidentiality provision.
29

FINRA is proposing to transfer the provisions of NASD Rule 1080 with non-substantive changes into proposed FINRA Rule 1210.05.

29

See also
NYSE Information Memorandum 88-37 (November 1988).

G. Waiting Periods for Retaking a Failed Examination (Proposed FINRA Rule 1210.06)

NASD Rule 1070(e) currently sets forth waiting periods for retaking failed examinations.
30

The rule provides that a person who fails a qualification examination would be permitted to retake the examination after either a period of 30 calendar days has elapsed from the date of the prior examination or the next administration of an examination administered on a monthly basis. However, if the person fails an examination three or more times in succession, he or she would be prohibited from retaking the examination either until a period of 180 calendar days has elapsed from the date of his or her last attempt to pass the examination or until the sixth subsequent administration of an examination administered on a monthly basis. FINRA is proposing to adopt NASD Rule 1070(e) as FINRA Rule 1210.06, with the following changes.

30

See also
NYSE Information Memorandum 04-16 (March 2004).

Proposed FINRA Rule 1210.06 provides that a person who fails an examination may retake that examination after 30 calendar days from the date of the person's last attempt to pass that examination. The proposed rule deletes the reference to examinations administered on a monthly basis because examinations are no longer administered in such a manner.

Proposed FINRA Rule 1210.06 further provides that if a person fails an examination three or more times in succession within a two-year period, the person is prohibited from retaking that examination until 180 calendar days from the date of the person's last attempt to pass it. These waiting periods would apply to the SIE and the representative- and principal-level examinations. Moreover, the proposed rule provides that non-associated persons taking the SIE must agree to be subject to the same waiting periods for retaking the SIE.

H. CE Requirements (Proposed FINRA Rule 1210.07)

Pursuant to FINRA Rule 1250,
31

the CE requirements applicable to registered persons consist of a Regulatory Element
32

and a Firm Element.
33

The Regulatory Element applies to registered persons and must be completed within prescribed time frames.
34

For purposes of the Regulatory Element, a “registered person” is defined as any person registered with FINRA as a representative, principal, assistant representative or research analyst.
35

The Firm Element consists of annual, member-developed and administered training programs designed to keep covered registered persons current regarding securities products, services and strategies offered by the member. For purposes of the Firm Element, the term “covered registered persons” is defined as any registered person who has direct contact with customers in the conduct of the member's securities sales, trading and investment banking activities, any person registered as an Operations Professional pursuant to FINRA Rule 1230(b)(6) or as a Research Analyst pursuant to NASD Rule 1050, and the immediate supervisors of such persons.
36

31
As discussed below, FINRA is proposing to renumber FINRA Rule 1250 as FINRA Rule 1240 as part of this proposed rule change.

32

See
FINRA Rule 1250(a).

33

See
FINRA Rule 1250(b).

34
Pursuant to FINRA Rule 1250(a), each specified registered person is required to complete the Regulatory Element initially within 120 days after the person's second registration anniversary date and, thereafter, within 120 days after every third registration anniversary date. A registered person who has not completed the Regulatory Element program within the prescribed time frames will have his or her FINRA registrations deemed inactive and designated as “CE inactive” on the CRD system until such time as the requirements of the program have been satisfied. A CE inactive person is prohibited from performing, or being compensated for, any activities requiring registration, including supervision.
See also NTM
95-35 (May 1995). Moreover, if a registered person is CE inactive for a two-year period, FINRA will administratively terminate the person's registration status with FINRA. The two-year period would be calculated from the date the person becomes CE inactive. If a registered person becomes CE inactive but is not registered with a member when the two-year period ends, FINRA will nevertheless update the CRD system to reflect that the person did not satisfy the Regulatory Element program. In either case, such person must requalify (or obtain a waiver of the applicable qualification examination(s)) to be re-eligible for registration.

35

See
FINRA Rule 1250(a)(5).

36

See
FINRA Rule 1250(b)(1).

FINRA believes that all registered persons, regardless of their activities, should be subject to the Regulatory Element of the CE requirements so that they can keep their knowledge of the securities industry current. Therefore, FINRA is proposing to adopt FINRA Rule 1210.07 to clarify that all registered persons, including those who solely maintain a permissive registration, are required to satisfy the Regulatory Element, as specified in proposed FINRA Rule 1240. FINRA is making corresponding changes to proposed FINRA Rule 1240. FINRA is not proposing any changes to the Firm Element requirement at this time. Individuals who have passed the SIE but not a representative- or principal-

level examination and do not hold a registered position would not be subject to any CE requirements.

Consistent with current practice, proposed FINRA Rule 1210.07 also provides that a registered person of a member who becomes CE inactive would not be permitted to be registered in another registration category with that member or be registered in any registration category with another member, until the person has satisfied the Regulatory Element.

I. Lapse of Registration and Expiration of SIE (Proposed FINRA Rule 1210.08)

NASD Rule 1021(c) currently states that any person whose registration has been revoked pursuant to FINRA Rule 8310 or whose most recent registration as a principal has been terminated for a period of two or more years immediately preceding the date of receipt by FINRA of a new application is required to pass a qualification examination for principals appropriate to the category of registration as specified in NASD Rule 1022. Pursuant to NASD Rule 1031(c), any person whose registration has been revoked pursuant to FINRA Rule 8310 or whose most recent registration as a representative or principal has been terminated for a period of two or more years immediately preceding the date of receipt by FINRA of a new application is required to pass a qualification examination for representatives appropriate to the category of registration as specified in NASD Rule 1032.
37

The two years are calculated from the termination date stated on the individual's Form U5 (Uniform Termination Notice for Securities Industry Registration) and the date FINRA receives a new application for registration.

37
In addition, NASD Rule 1041(c) provides that if any person whose most recent registration as an Order Processing Assistant Representative has been terminated for a period of two or more years immediately preceding the date of receipt by FINRA of a new application is required to pass a qualification examination for Order Processing Assistant Representative. As discussed below, FINRA is proposing to eliminate NASD Rule 1041(c) as part of the elimination of the Order Processing Assistant Representative registration category.

FINRA is proposing to consolidate the requirements of NASD Rules 1021(c) and 1031(c) and adopt them as FINRA Rule 1210.08. Proposed FINRA Rule 1210.08 clarifies that, for purposes of the proposed rule, an application would not be considered to have been received by FINRA if that application does not result in a registration.

Proposed FINRA Rule 1210.08 also sets forth the expiration period of the SIE. Based on the content covered on the SIE, FINRA is proposing that a passing result on the SIE be valid for four years. Therefore, under the proposed rule change, an individual who passes the SIE and is an associated person of a firm at the time would have up to four years from the date he or she passes the SIE to pass a representative-level examination to register as a representative with that firm, or a subsequent firm, without having to retake the SIE. In addition, an individual who passes the SIE and is not an associated person at the time would have up to four years from the date he or she passes the SIE to become an associated person of a firm and pass a representative-level examination and register as a representative without having to retake the SIE.

Moreover, an individual holding a representative-level registration who leaves the industry after the effective date of the proposed rule change would have up to four years to reassociate with a firm and register as a representative without having to retake the SIE. However, the four-year expiration period in the proposed rule change extends only to the SIE, and not the representative- and principal-level registrations. The representative- and principal-level registrations would continue to be subject to a two-year expiration period as is the case today. However, in response to comments, FINRA will consider as part of a separate proposal the possibility of extending the two-year expiration period, provided that an individual can maintain specified levels of competence and knowledge of the industry and the related laws, rules and regulations through an alternative process, such as more frequent CE.

J. Waiver of Examinations for Individuals Working for a Financial Services Industry Affiliate of a Member (Proposed FINRA Rule 1210.09)

In
Regulatory Notice
09-70, FINRA had proposed to adopt an RA status in the CRD system for individuals who would be working for a financial services industry affiliate of a member, and who would not be working in any capacity for the member. Specifically, the original proposal permitted a member to register or maintain the registration(s) as a representative or principal of any individual engaged in the business of a financial services industry affiliate of the member that controls, is controlled by or is under common control with the member. The proposal defined the term “financial services industry” as any industry regulated by the SEC, Commodity Futures Trading Commission (“CFTC”), state securities authorities, federal or state banking authorities, state insurance authorities, or substantially equivalent foreign regulatory authorities.

The original proposal required members to notify FINRA of an individual's RA status and deemed an RA to have an inactive registration. Further, under the proposal, RAs were considered registered persons, but were subject only to a subset of FINRA rules. The proposal also required a member to supervise adequately RAs so that they did not act on behalf of the member and complied with the subset of rules applicable to them. The proposal provided that an individual could remain in an RA status for 10 non-consecutive years, which were tolled if the individual was working for the member or was outside the financial services industry. In addition, the proposal provided that a statutorily disqualified individual was not eligible for an RA status, and forfeited his or her status as a result of such disqualification. Moreover, under the proposal, the failure to comply with any of the RA requirements resulted in a forfeiture of an individual's RA status altogether.

The purpose of the RA proposal was to provide a firm greater flexibility to move personnel, including senior and middle management, between the firm and its financial services affiliate(s) so that they could gain organizational skills and better knowledge of products developed by the affiliate(s) without the individuals having to requalify by examination each time they returned to the firm.
38

38
As noted above, an individual must requalify by examination (or obtain a waiver of the applicable qualification examination(s)) if the individual re-registers with a firm two or more years after the individual's most recent registration as a representative or principal has been terminated.

Rather than allowing individuals to maintain their registrations based on an RA status, FINRA is proposing to adopt FINRA Rule 1210.09 to provide an alternative process whereby individuals who would be working for a financial services industry affiliate of a member
39

would terminate their registrations with the member and would be granted a waiver of their requalification requirements upon re-registering with a

member, provided the firm that is requesting the waiver and the individual satisfy the criteria for a Financial Services Affiliate (“FSA”) waiver.

39
Proposed FINRA Rule 1210.09 defines a “financial services industry affiliate of a member” as a legal entity that controls, is controlled by or is under common control with a member and is regulated by the SEC, CFTC, state securities authorities, federal or state banking authorities, state insurance authorities, or substantially equivalent foreign regulatory authorities, which is similar to the definition in
Regulatory Notice
09-70.

Under the proposed waiver process, the first time a registered person is designated as eligible for a waiver based on the FSA criteria, the member with which the individual is registered would notify FINRA of the FSA designation. The member would concurrently file a full Form U5 terminating the individual's registration with the firm, which would also terminate the individual's other SRO and state registrations. Further, BrokerCheck would reflect that the individual is no longer registered or associated with a member.

To be eligible for initial designation as an FSA-eligible person by a member, an individual must have been registered for a total of five years within the most recent 10-year period prior to the designation, including for the most recent year with that member. An individual would have to satisfy these preconditions only for purposes of his or her initial designation as an FSA-eligible person, and not for any subsequent FSA designation(s). Thereafter, the individual would be eligible for a waiver for up to seven years from the date of initial designation,
40

provided that the other conditions of the waiver, as described below, have been satisfied. Consequently, a member other than the member that initially designated an individual as an FSA-eligible person may request a waiver for the individual and more than one member may request a waiver for the individual during the seven-year period.
41

40
Individuals would be eligible for a single, fixed seven-year period from the date of initial designation, and the period would not be tolled or renewed.

41
The following examples illustrate this point:

Example 1.
Firm A designates an individual as an FSA-eligible person by notifying FINRA and files a Form U5. The individual joins Firm A's financial services affiliate. Firm A does not submit a waiver request for the individual. After working for Firm A's financial services affiliate for three years, the individual directly joins Firm B's financial services affiliate for three years. Firm B then submits a waiver request to register the individual.

Example 2.
Same as Example 1, but the individual directly joins Firm B after working for Firm A's financial services affiliate, and Firm B submits a waiver request to register the individual at that point in time.

Example 3.
Firm A designates an individual as an FSA-eligible person by notifying FINRA and files a Form U5. The individual joins Firm A's financial services affiliate for three years. Firm A then submits a waiver request to re-register the individual. After working for Firm A in a registered capacity for six months, Firm A re-designates the individual as an FSA-eligible person by notifying FINRA and files a Form U5. The individual rejoins Firm A's financial services affiliate for two years, after which the individual directly joins Firm B's financial services affiliate for one year. Firm B then submits a waiver request to register the individual.

Example 4.
Same as Example 3, but the individual directly joins Firm B after the second period of working for Firm A's financial services affiliate, and Firm B submits a waiver request to register the individual at that point in time.

An individual designated as an FSA-eligible person would be subject to the Regulatory Element of CE while working for a financial services industry affiliate of a member. The individual would be subject to a Regulatory Element program that correlates to his or her most recent registration category, and CE would be based on the same cycle had the individual remained registered. If the individual fails to complete the prescribed Regulatory Element during the 120-day window for taking the session, he or she would lose FSA eligibility (
i.e.,
the individual would have the standard two-year period after termination to re-register without having to retake an examination). FINRA is making corresponding changes to proposed FINRA Rule 1240.

Upon registering an FSA-eligible person, a firm would file a Form U4 and request the appropriate registration(s) for the individual. The firm would also submit an examination waiver request to FINRA,
42

similar to the process used today for waiver requests, and it would represent that the individual is eligible for an FSA waiver based on the conditions set forth below. FINRA would review the waiver request and make a determination of whether to grant the request within 30 calendar days of receiving the request. FINRA would summarily grant the request if the following conditions are met:

42
FINRA would consider a waiver of the representative-level qualification examination(s), the principal-level qualification examination(s) and the SIE, as applicable.

(1) Prior to the individual's initial designation as an FSA-eligible person, the individual was registered for a total of five years within the most recent 10-year period, including for the most recent year with the member that initially designated the individual as an FSA-eligible person;

(2) The waiver request is made within seven years of the individual's initial designation as an FSA-eligible person by a member;

(3) The initial designation and any subsequent designation(s) were made concurrently with the filing of the individual's related Form U5;

(4) The individual continuously worked for the financial services affiliate(s) of a member since the last Form U5 filing;

(5) The individual has complied with the Regulatory Element of CE; and

(6) The individual does not have any pending or adverse regulatory matters, or terminations, that are reportable on the Form U4, and has not otherwise been subject to a statutory disqualification while the individual was designated as an FSA-eligible person with a member.

Following the Form U5 filing, an individual could move between the financial services affiliates of a member so long as the individual is continuously working for an affiliate. Further, a member could submit multiple waiver requests for the individual, provided that the waiver requests are made during the course of the seven-year period.
43

An individual who has been designated as an FSA-eligible person by a member would not be able to take additional examinations to gain additional registrations while working for a financial services affiliate of a member.

43
For example, if a member submits a waiver request for an FSA-eligible person who has been working for a financial services affiliate of the member for three years and re-registers the individual, the member could subsequently file a Form U5 and re-designate the individual as an FSA-eligible person. Moreover, if the individual works with a financial services affiliate of the member for another three years, the member could submit a second waiver request and re-register the individual upon returning to the member.

K. Status of Persons Serving in the Armed Forces of the United States (Proposed FINRA Rule 1210.10)

NASD IM-1000-2(a) and (b) and Incorporated NYSE Rule Interpretation 345(a)/03, which is substantially similar, currently provide specific relief to registered persons serving in the Armed Forces of the United States. Among other things, these rules permit a registered person of a member who volunteers for or is called into active duty in the Armed Forces of the United States to be registered in an inactive status and remain eligible to receive ongoing transaction-related compensation. NASD IM-1000-2(c) also includes specific provisions regarding the deferment of the lapse of registration requirements in NASD Rules 1021(c), 1031(c) and 1041(c) for formerly registered persons serving in the Armed Forces of the United States.

FINRA is proposing to adopt NASD IM-1000-2 as FINRA Rule 1210.10 with the following changes. To enhance the efficiency of the current notification process for registered persons serving in the Armed Forces, proposed FINRA Rule 1210.10 requires that the member with which such person is registered promptly notify FINRA of such person's

return to employment with the member. A sole proprietor must similarly notify FINRA of his or her return to participation in the investment banking or securities business. Further, proposed FINRA Rule 1210.10 provides that FINRA would also defer the lapse of the SIE for formerly registered persons serving in the Armed Forces of the United States.

L. Impermissible Registrations (Proposed FINRA Rule 1210.11)

NASD Rules 1021(a) and 1031(a) currently prohibit a member from maintaining a representative or principal registration with FINRA for any person who is no longer active in the member's investment banking or securities business, who is no longer functioning as a representative or principal as defined under the rules or where the sole purpose is to avoid the requalification requirement applicable to persons who have not been registered for two or more years. These rules also prohibit a member from applying for the registration of a person as representative or principal where the member does not intend to employ the person in its investment banking or securities business. These prohibitions do not apply to the current permissive registration categories.

In light of proposed FINRA Rule 1210.02, FINRA is proposing to delete these provisions and instead adopt FINRA Rule 1210.11 prohibiting a member from registering or maintaining the registration of a person unless the registration is consistent with the requirements of proposed FINRA Rule 1210.

M. Registration Categories (Proposed FINRA Rule 1220)

FINRA is proposing to integrate the various registration categories and related definitions under the NASD rules into a single rule, FINRA Rule 1220,
44

subject to the changes described below.

44
FINRA is proposing to renumber FINRA Rule 1230 as FINRA Rule 1220 as part of the proposed rule change.

1. Definition of Principal (Proposed FINRA Rule 1220(a)(1))

NASD Rule 1021(b) currently defines the term “principal” to include sole proprietors, officers, partners, managers of offices of supervisory jurisdiction and directors who are actively engaged in the management of the member's investment banking or securities business, such as supervision, solicitation, conduct of business or the training of persons associated with a member for any of these functions. Incorporated NYSE Rule 311.17 defines the term “principal executive” to include associated persons designated to exercise senior principal executive responsibility over the various areas of the member's business, such as operations, compliance, finances and credit, sales, underwriting, research and administration.
45

45
Incorporated NYSE Rule Interpretation 311(b)(5)/01 requires that principal executives be appropriately qualified to perform their assigned functions.

FINRA believes that the definition of the term “principal” in NASD Rule 1021(b) generally captures principal executives as defined under Incorporated NYSE Rule 311.17. Thus, FINRA is proposing to streamline and adopt NASD Rule 1021(b) as FINRA Rule 1220(a)(1).

Proposed FINRA Rule 1220(a)(1) clarifies that a member's chief executive officer (“CEO”) and chief financial officer (“CFO”) (or equivalent officers) are considered principals based solely on their status. The proposed rule further clarifies that the term “principal” includes any other associated person who is performing functions or carrying out responsibilities that are required to be performed or carried out by a principal under FINRA rules. In addition, the proposed rule codifies existing guidance by providing that the phrase “actively engaged in the management of the member's investment banking or securities business” includes the management of, and the implementation of corporate policies related to, such business as well as managerial decision-making authority with respect to the member's business and management-level responsibilities for supervising any aspect of such business, such as serving as a voting member of the member's executive, management or operations committees.
46

46

See NTM
99-49 (June 1999).

2. General Securities Principal (Proposed FINRA Rule 1220(a)(2))

NASD Rule 1022(a)(1) currently requires that an associated person who meets the definition of “principal” under NASD Rule 1021 register as a General Securities Principal. A person registering as a General Securities Principal must pass the General Securities Principal examination. The rule, however, provides that a principal is not required to register as a General Securities Principal if the person's activities are so limited as to qualify such person for one or more of the limited principal categories specified in NASD Rule 1022, such as a Financial and Operations Principal, an Introducing Broker-Dealer Financial and Operations Principal, a Registered Options Principal, an Investment Company and Variable Contracts Products Principal, a Direct Participation Programs Principal, a General Securities Sales Supervisor or a Government Securities Principal. Further, the rule does not preclude individuals registered in a limited principal category from registering as General Securities Principals.

NASD Rule 1022(a)(1) also requires that a member's CCO designated on Schedule A of the member's Form BD (Uniform Application for Broker-Dealer Registration) register as a General Securities Principal.
47

NASD Rule 1022(a)(1)(C) provides that if a member's activities are limited to investment company and variable contracts products, direct participation program securities or government securities, the member's CCO may instead register as an Investment Company and Variable Contracts Principal, a Direct Participation Programs Principal or a Government Securities Principal, respectively. In addition, for purposes of the CCO requirement for dual members, FINRA recognizes the NYSE Compliance Official examination as an acceptable alternative to the principal examination requirements for General Securities Principal, Investment Company and Variable Contracts Principal and Direct Participation Programs Principal, as applicable.
48

NASD Rule 1022(a)(1)(C) also includes transitioning and grandfathering provisions for CCOs.

47

See also
FINRA Rule 3130(a).

48

See NTM
01-51 (August 2001).

NASD Rule 1022(a)(1)(A) provides that unless stated otherwise a person seeking to register as a General Securities Principal must satisfy the General Securities Representative or Corporate Securities Representative prerequisite registration. NASD Rule 1022(a)(2) qualifies this provision by providing that the Corporate Securities Representative prerequisite registration gives a General Securities Principal only limited supervisory authority.

NASD Rule 1022(a)(1)(B) requires that a General Securities Principal with responsibility over the investment banking activities specified in NASD Rule 1032(i) also satisfy the Investment Banking Representative registration requirement.

NASD Rule 1022(a)(3) includes a grandfathering provision for persons who were registered as principals before the adoption of the General Securities Principal registration category.

NASD Rule 1022(a)(4) provides that an associated person registered solely as a General Securities Principal is not qualified to function as a Financial and Operations Principal (or an Introducing Broker-Dealer Financial and Operations Principal, as applicable), Registered Options Principal, General Securities Sales Supervisor, Municipal Securities Principal or Municipal Fund Securities Limited Principal, unless the General Securities Principal is also registered in these other categories.

Pursuant to NASD Rule 1022(a)(5), a principal who is responsible for supervising the overall conduct of a Research Analyst or Supervisory Analyst engaged in equity research must be registered as a Research Principal.
49

In addition, existing rules and guidance provide that the content of a member's research reports on equity securities must be approved by a Research Principal or a Supervisory Analyst.
50

Existing guidance further provides that a General Securities Principal may review a member's research reports on equity securities for compliance with only the disclosure provisions of FINRA Rule 2241.
51

49

See also NTM
04-81 (November 2004) and
NTM
07-04 (January 2007) (collectively, “Research NTMs”).

50

See
FINRA Rule 2210(b)(1)(B) and Research NTMs. Further, an exemption from NASD Rule 1050 for specified foreign analysts includes a condition that the content of a globally branded research report prepared by such foreign research analyst that is published or otherwise distributed by a member must be approved by a Research Principal or Supervisory Analyst.
See
NASD Rule 1050(f)(3)(A).

51

See
Research NTMs.

NASD Rule 1022(a)(6) currently requires that each associated person who is included within the definition of “principal” in NASD Rule 1021 with supervisory responsibility over the securities trading activities described in NASD Rule 1032(f) register as a Securities Trader Principal. To qualify for registration as a Securities Trader Principal, an individual must be registered as a Securities Trader and pass the General Securities Principal qualification examination. The rule provides that a person qualified and registered as a Securities Trader Principal may only have supervisory responsibility over the activities specified in NASD Rule 1032(f), unless such person is separately registered in another appropriate principal registration category, such as the General Securities Principal registration category. The rule further provides that a person registered as a General Securities Principal is not qualified to supervise the trading activities described in NASD Rule 1032(f), unless he or she qualifies and registers as a Securities Trader (by passing the Series 57 examination) and affirmatively registers as a Securities Trader Principal.

FINRA is proposing to streamline the provisions of NASD Rule 1022(a) and adopt them as FINRA Rule 1220(a)(2) with the following changes.

FINRA is proposing to more clearly set forth the obligation to register as a General Securities Principal. Specifically, proposed FINRA Rule 1220(a)(2)(A) states that each principal as defined in proposed FINRA Rule 1220(a)(1) is required to register with FINRA as a General Securities Principal, subject to the following exceptions. The proposed rule provides that if a principal's activities include the functions of a Compliance Officer, a Financial and Operations Principal (or an Introducing Broker-Dealer Financial and Operations Principal, as applicable), a Principal Financial Officer, a Principal Operations Officer, an Investment Banking Principal, a Research Principal, a Securities Trader Principal or a Registered Options Principal, then the principal must appropriately register in one or more of these categories. Proposed FINRA Rule 1220(a)(2)(A) also provides that if a principal's activities are limited solely to the functions of a Government Securities Principal, an Investment Company and Variable Contracts Products Principal, a Direct Participation Programs Principal or a Private Securities Offerings Principal, then the principal may appropriately register in one or more of these categories in lieu of registering as a General Securities Principal.

Proposed FINRA Rule 1220(a)(2)(A) further provides that if a principal's activities are limited solely to the functions of a General Securities Sales Supervisor, then the principal may appropriately register in that category in lieu of registering as a General Securities Principal, provided that if the principal is engaged in options sales activities he or she must register as a General Securities Sales Supervisor or Registered Options Principal. In addition, proposed FINRA Rule 1220(a)(2)(A) states that if a principal's activities are limited solely to the functions of a Supervisory Analyst, then the principal may appropriately register in that category in lieu of registering as a General Securities Principal, provided that if the principal is responsible for approving the content of a member's research report on equity securities, he or she must register as a Research Principal or Supervisory Analyst.

Proposed FINRA Rule 1220(a)(2)(B) requires that an individual registering as a General Securities Principal satisfy the General Securities Representative prerequisite registration and pass the General Securities Principal qualification examination. Proposed FINRA Rule 1220(a)(2)(B) also clarifies that an individual may register as a General Securities Sales Supervisor and pass the General Securities Principal Sales Supervisor Module qualification examination in lieu of passing the General Securities Principal examination.

In conjunction with the elimination of the Corporate Securities Representative registration category, FINRA is proposing to delete the provision in NASD Rule 1022(a)(1)(A) permitting the Corporate Securities Representative prerequisite registration. However, the proposed rule provides that, subject to the lapse of registration provisions in proposed FINRA Rule 1210.08, General Securities Principals who obtained the Corporate Securities Representative prerequisite registration in lieu of the General Securities Representative prerequisite registration and individuals who had been registered as such within the past two years prior to the effective date of the proposed rule change, may continue to supervise corporate securities activities as currently permitted.

Moreover, as described in greater detail below, FINRA is proposing to adopt with some changes the requirements of NASD Rule 1022(a)(1) relating to the registration of CCOs, NASD Rule 1022(a)(1)(B) relating to the supervision of investment banking activities, NASD Rule 1022(a)(5) relating to the supervision of research activities and NASD Rule 1022(a)(6) relating to the supervision of securities trading activities as FINRA Rules 1220(a)(3), (a)(5), (a)(6) and (a)(7), respectively.

FINRA is also proposing to eliminate the grandfathering provision for individuals who were registered as principals prior to the adoption of the General Securities Principal registration category because it no longer has any practical application. Finally, FINRA is proposing to delete the provision that persons eligible for registration in other principal categories are not precluded from registering as General Securities Principals because it is superfluous.

3. Compliance Officer (Proposed FINRA Rule 1220(a)(3))

FINRA is proposing to adopt NASD Rule 1022(a)(1)'s CCO registration requirement as FINRA Rule 1220(a)(3), subject to the following changes.

Specifically, proposed FINRA Rule 1220(a)(3) establishes a Compliance Officer registration category and requires all persons designated as CCOs on Schedule A of Form BD to register as Compliance Officers, subject to an exception for members engaged in limited investment banking or securities business. The proposed rule only addresses the registration requirements for CCOs. However, consistent with proposed FINRA Rule 1210.02 relating to permissive registrations, a firm may allow other associated persons to register as Compliance Officers.

FINRA had originally proposed to also adopt a Compliance Officer qualification examination for CCOs and other individuals registering as Compliance Officers. However, FINRA is proposing to maintain the existing qualification requirements pending its evaluation of the structure of the principal-level examinations. In addition, FINRA is proposing to provide CCOs of firms that engage in limited investment banking or securities business with greater flexibility to satisfy the qualification requirements for CCOs. Specifically, proposed FINRA Rule 1220(a)(3) sets forth the following qualification requirements for Compliance Officer registration:

• Subject to the lapse of registration provisions in proposed FINRA Rule 1210.08, each person registered with FINRA as a General Securities Representative and a General Securities Principal on the effective date of the proposed rule change and each person who was registered with FINRA as a General Securities Representative and a General Securities Principal within two years prior to the effective date of the proposed rule change would be qualified to register as Compliance Officers without having to take any additional examinations. In addition, subject to the lapse of registration provisions in proposed FINRA Rule 1210.08, individuals registered as Compliance Officials in the CRD system on the effective date of the proposed rule change and individuals who were registered as such within two years prior to the effective date of the proposed rule change would also be qualified to register as Compliance Officers without having to take any additional examinations;
52

52
FINRA notes that the proposed rule gives firms the option of registering Compliance Officials who are not designated as CCOs as Compliance Officers when the proposed rule becomes effective.

• All other individuals registering as Compliance Officers after the effective date of the proposed rule change would have to: (1) Satisfy the General Securities Representative prerequisite registration and pass the General Securities Principal qualification examination; or (2) pass the Compliance Official qualification examination.

• An individual designated as a CCO on Schedule A of Form BD of a member that is engaged in limited investment banking or securities business may be registered in a principal category under proposed FINRA Rule 1220(a) that corresponds to the limited scope of the member's business.

4. Financial and Operations Principal, Introducing Broker-Dealer Financial and Operations Principal, Principal Financial Officer and Principal Operations Officer (Proposed FINRA Rule 1220(a)(4))

NASD Rule 1022(b) currently provides that a principal who is responsible for the financial and operational management of a member that has a minimum net capital requirement of $250,000 under SEA Rules 15c3-1(a)(1)(ii) and 15c3-1(a)(2)(i), or a member that has a minimum net capital requirement of $150,000 under SEA Rule 15c3-1(a)(8), must be designated and registered as a Financial and Operations Principal. Such members also are required to designate a CFO who is required to be registered as a Financial and Operations Principal. In addition, NASD Rule 1022(c) currently provides that a principal who is responsible for the financial and operational management of a member that is subject to the net capital requirements of SEA Rule 15c3-1, other than a member that is subject to the net capital requirements of SEA Rules 15c3-1(a)(1)(ii), (a)(2)(i) or (a)(8), must be designated and registered as either a Financial and Operations Principal or an Introducing Broker-Dealer Financial and Operations Principal. Such members also are required to designate a CFO who is required to be registered as a Financial and Operations Principal or an Introducing Broker-Dealer Financial and Operations Principal. Financial and Operations Principals and Introducing Broker-Dealer Financial and Operations Principals are not subject to a prerequisite representative registration, but they must pass the Financial and Operations Principal or Introducing Broker-Dealer Financial and Operations Principal examination, as applicable.

Incorporated NYSE Rule Interpretations 311(b)(5)/02 and/03 require that dual members designate a CFO and a COO and that the CFO and the COO register as Financial and Operations Principals if the member is a clearing firm, or as either Financial and Operations Principals or Introducing Broker-Dealer Financial and Operations Principals if the member is an introducing firm. If the member is an introducing firm, the same person may be designated as both the CFO and COO.

FINRA is proposing to merge the provisions in NASD Rules 1022(b) and 1022(c) regarding Financial and Operations Principals and Introducing Broker-Dealer Financial and Operations Principals and adopt them as FINRA Rule 1220(a)(4)(A). In addition, FINRA is proposing to revise the provisions in NASD Rules 1022(b) and (c) regarding the designation of CFOs and the provisions in Incorporated NYSE Rule Interpretations 311(b)(5)/02 and/03 regarding the designation of CFOs and COOs and adopt them as FINRA Rule 1220(a)(4)(B). FINRA does not believe it is necessary for an officer to have the title of CFO or COO for purposes of these provisions so long as the designated person performs the same functions. Therefore, proposed FINRA Rule 1220(a)(4)(B) requires members to instead designate: (1) A Principal Financial Officer with primary responsibility for financial filings and the related books and records; and (2) a Principal Operations Officer with primary responsibility for the day-to-day operations of the business, including overseeing the receipt and delivery of securities and funds, safeguarding customer and firm assets, calculation and collection of margin from customers and processing dividend receivables and payables and reorganization redemptions and those books and records related to such activities.

Consistent with the current qualification and registration requirements for CFOs and COOs, the proposed rule requires that a firm's Principal Financial Officer and Principal Operations Officer qualify and register as Financial and Operations Principals or Introducing Broker-Dealer Financial and Operations Principals, as applicable.
53

53
This requirement also applies to those members that are currently exempt from the requirement to have a Financial and Operations Principal or an Introducing Broker-Dealer Financial and Operations Principal.
See NTM
01-52 (August 2001).

Because the financial and operational activities of members that neither self-clear nor provide clearing services are more limited, such members may designate the same person as the Principal Financial Officer, Principal Operations Officer and Financial and Operations Principal or Introducing Broker-Dealer Financial and Operations Principal (that is, such members are not

required to designate different persons to function in these capacities).

Given the level of financial and operational responsibility at clearing and self-clearing members, FINRA believes that it is necessary for such members to designate separate persons to function as Principal Financial Officer and Principal Operations Officer. Such persons may also carry out the other responsibilities of a Financial and Operations Principal, such as supervision of individuals engaged in financial and operational activities. In addition, the proposed rule provides that a clearing or self-clearing member that is limited in size and resources may, pursuant to the FINRA Rule 9600 Series, request a waiver of the requirement to designate separate persons to function as Principal Financial Officer and Principal Operations Officer.

5. Investment Banking Principal (Proposed FINRA Rule 1220(a)(5))

FINRA is proposing to adopt NASD Rule 1022(a)(1)(B) regarding the qualification and registration requirements for principals with responsibility over specified investment banking activities as FINRA Rule 1220(a)(5). To further facilitate the registration of such individuals, proposed FINRA Rule 1220(a)(5) establishes a registration category for Investment Banking Principal and requires that a principal responsible for supervising the investment banking activities specified in proposed FINRA Rule 1220(b)(5) register as an Investment Banking Principal. The proposed rule provides that individuals registering as Investment Banking Principals must be registered as Investment Banking Representatives and pass the General Securities Principal qualification examination.

6. Research Principal (Proposed FINRA Rule 1220(a)(6))

FINRA is proposing to adopt NASD Rule 1022(a)(5) relating to the registration of Research Principals as FINRA Rule 1220(a)(6) with a few changes and clarifications.

First, proposed FINRA Rule 1220(a)(6) clarifies that a principal responsible for approving the content of a member's research reports on equity securities is required to register as a Research Principal, subject to the following exceptions: (1) A Supervisory Analyst may also approve the content of a member's research report on equity securities; and (2) a General Securities Principal may review a member's research report on equity securities only for compliance with the disclosure provisions of FINRA Rule 2241.

Second, the proposed rule clarifies that a Supervisory Analyst or General Securities Principal may approve the content of a member's research reports on debt securities
54

and the content of third-party research reports
55

in lieu of a Research Principal.

54
The proposed rule change maintains the current requirements, which are set forth in other FINRA rules, allowing a Supervisory Analyst to approve the content of debt research reports.
See
FINRA Rules 2210(b)(1)(A) and (B) (stating that a Supervisory Analyst may approve the content of research reports on debt securities).

55

See
FINRA Rule 2241(h)(1) and Research NTMs.

Third, the proposed rule modifies the examination requirements for Research Principals to require demonstrated competence in fundamental analysis and valuation of securities. By way of background, Research Analysts are required to pass the Series 86 and Series 87 examinations.
56

The Analysis (Series 86) portion of the Research Analyst examination tests knowledge of fundamental analysis and valuation of equity securities and the Regulatory Administration and Best Practices (Series 87) portion of the Research Analyst examination tests knowledge of applicable rules and regulations pertaining to research. The qualification examination for Supervisory Analysts, the Series 16 examination, tests both knowledge of applicable rules and regulations and fundamental analysis and valuation. Currently, a Research Principal is required to be registered as a General Securities Principal and pass either the Series 87 examination or the Series 16 examination.
57

FINRA believes that a Research Principal would be able to carry out his or her supervisory responsibilities more effectively by having a level of knowledge of fundamental analysis and valuation commensurate with the research analysts whose content they approve. Thus, proposed FINRA Rule 1220(a)(6) requires that individuals registering as Research Principals after the effective date of the proposed rule change, register as either Research Analysts or Supervisory Analysts and pass the General Securities Principal qualification examination.

56
Candidates are eligible for a waiver of the Series 86 examination, which tests knowledge of fundamental analysis and valuation of equity securities, if they have passed Levels I and II of the Chartered Financial Analyst (“CFA”) examination and meet other eligibility criteria.

57

See
Research NTMs.

7. Securities Trader Principal (Proposed FINRA Rule 1220(a)(7))

FINRA is proposing to adopt NASD Rule 1022(a)(6) relating to Securities Trader Principal registration as FINRA Rule 1220(a)(7). Similar to the current rule, proposed FINRA Rule 1220(a)(7) requires that a principal responsible for supervising the securities trading activities specified in proposed FINRA Rule 1220(b)(4) register as a Securities Trader Principal. The proposed rule requires that individuals registering as Securities Trader Principals must be registered as Securities Traders and pass the General Securities Principal qualification examination.

8. Registered Options Principal (Proposed FINRA Rules 1220(a)(8), .02 and .03)

NASD Rule 1022(f) currently requires that members engaged in options transactions with the public have at least one Registered Options Principal. A Registered Options Principal is required to satisfy the following prerequisite representative registration(s): (1) General Securities Representative; or (2) Options Representative and Corporate Securities Representative. An individual registering as a Registered Options Principal must also pass the Registered Options Principal examination. The rule includes additional requirements applicable to Registered Options Principals engaged in security futures activities.
58

NASD IM-1022-1 further requires that members that have one Registered Options Principal promptly notify FINRA and agree to specified conditions if such person is terminated, resigns, becomes incapacitated or is otherwise unable to perform his or her duties.

58
This provision provides that a Registered Options Principal who intends to engage in security futures activities must complete a Firm Element CE program that addresses security futures products before he or she can engage in such activities. There are similar provisions in NASD Rules 1022(g), 1032(a) and 1032(d).

FINRA is proposing to adopt NASD Rule 1022(f) as FINRA Rule 1220(a)(8) with the following changes. Consistent with FINRA Rule 2360, which allows a General Securities Sales Supervisor (in addition to a Registered Options Principal) to approve accounts engaged in specified options activities, the proposed rule provides that a General Securities Sales Supervisor may also supervise options activities as specified in FINRA Rule 2360.

Further, as discussed below, FINRA is proposing to eliminate the Options Representative and Corporate Securities Representative registration categories. In conjunction with these changes, FINRA is proposing to eliminate registration as an Options Representative and a Corporate Securities Representative

from the prerequisite choices in the current rule. Consequently, a person registering as a Registered Options Principal under proposed FINRA Rule 1220(a)(8) would be required to satisfy the General Securities Representative prerequisite registration.

FINRA is proposing to consolidate and adopt the provisions regarding security futures activities in NASD Rules 1022(f), 1022(g), 1032(a) and 1032(d) with non-substantive changes as Supplementary Material .02 of FINRA Rule 1220. Finally, FINRA is proposing to adopt NASD IM-1022-1 with non-substantive changes as Supplementary Material .03 of FINRA Rule 1220.

9. Government Securities Principal (Proposed FINRA Rule 1220(a)(9))

NASD Rule 1022(h) currently requires that associated persons functioning as principals with respect to members' government securities activities register as Government Securities Principals. Such persons are not subject to a principal qualification examination. However, a person registering as a Government Securities Principal is required to satisfy the General Securities Representative or Government Securities Representative prerequisite registration. Moreover, individuals registered as General Securities Principals who have the General Securities Representative or Government Securities Representative prerequisite registration are qualified to function as Government Securities Principals without having to register separately as such.

NASD Rule 1022(h) also includes a grandfathering provision for persons who were registered as principals before the 1988 adoption of the Government Securities Principal registration category, and it provides that a firm must notify FINRA via the Form U4 when a person not previously registered with the firm as a principal assumes the duties of a Government Securities Principal. FINRA is proposing to adopt NASD Rule 1022(h) as FINRA Rule 1220(a)(9) with a few changes.

As noted below, FINRA is proposing to eliminate the Government Securities Representative registration category. In conjunction with this change, FINRA is proposing to eliminate registration as a Government Securities Representative from the prerequisite registration choices in the current rule. Consequently, a person registering as a Government Securities Principal under proposed FINRA Rule 1220(a)(9) would be required to satisfy the General Securities Representative prerequisite registration. Alternatively, proposed FINRA Rule 1220(a)(9) provides that individuals registered as General Securities Principals are qualified to function as Government Securities Principals without having to register separately under the proposed rule.

Proposed FINRA Rule 1220(a)(9) also eliminates the grandfathering provision in the current rule because it no longer has any practical application, and it eliminates the Form U4 notification requirement because it is redundant of other Form U4 requirements.
59

59

See
Article V, section 2 of the FINRA By-Laws.

10. General Securities Sales Supervisor (Proposed FINRA Rules 1220(a)(10) and 1220.04)

Pursuant to NASD Rule 1022(g), each associated person of a member who is included within the definition of “principal” in NASD Rule 1021 may register as a General Securities Sales Supervisor, instead of separately registering in multiple principal registration categories,
60

if the individual's supervisory responsibilities are limited solely to securities sales activities. A person registering as a General Securities Sales Supervisor must satisfy the General Securities Representative prerequisite registration and pass the General Securities Sales Supervisor examinations.
61

Moreover, a General Securities Sales Supervisor is precluded from performing any of the following activities: (1) Supervision of the origination and structuring of underwritings; (2) supervision of market-making commitments; (3) supervision of the custody of firm or customer funds or securities for purposes of SEA Rule 15c3-3; or (4) supervision of overall compliance with financial responsibility rules. NASD IM-1022-2 explains the purpose of the General Securities Sales Supervisor registration category.

60
For instance, a principal supervising the sale of corporate securities and options must be registered as a General Securities Principal and a Registered Options Principal, unless the principal is registered as a General Securities Sales Supervisor.

61
An individual may also register as a General Securities Sales Supervisor by passing a combination of other principal-level examinations.

FINRA is proposing to adopt NASD Rule 1022(g) and NASD IM-1022-2 as FINRA Rule 1220(a)(10) and FINRA Rule 1220.04, respectively, with non-substantive changes.

11. Investment Company and Variable Contracts Products Principal and Direct Participation Programs Principal (Proposed FINRA Rules 1220(a)(11) and (a)(12))

Pursuant to NASD Rule 1022(d), each associated person of a member who is included within the definition of “principal” in NASD Rule 1021 may register as an Investment Company and Variable Contracts Products Principal, instead of registering as a General Securities Principal, if the individual's activities are limited solely to the solicitation, purchase or sale of redeemable securities of companies registered under the Investment Company Act of 1940 (“Investment Company Act”), securities of closed-end companies registered under the Investment Company Act during the period of original distribution and specified insurance contracts, such as variable contracts. A person registering as an Investment Company and Variable Contracts Products Principal must satisfy the General Securities Representative or Investment Company and Variable Contracts Products Representative prerequisite registration and pass the Investment Company and Variable Contracts Products Principal examination.

Pursuant to NASD Rule 1022(e), each associated person of a member who is included within the definition of “principal” in NASD Rule 1021 may register as a Direct Participation Programs Principal, instead of registering as a General Securities Principal, if the individual's activities are limited solely to direct participation program securities.
62

A person registering as a Direct Participation Programs Principal must satisfy the General Securities Representative or Direct Participation Programs Representative prerequisite registration and pass the Direct Participation Programs Principal examination.

62
For purposes of the registration rules, a direct participation program is defined as a program that provides for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution, including, but not limited to, oil and gas programs, cattle programs, condominium securities, Subchapter S corporate offerings and all other programs of a similar nature, regardless of the industry represented by the program, or any combination thereof. Among other things, a real estate investment trust is excluded from the definition of a direct participation program.
See
NASD Rule 1022(e)(2).

FINRA is proposing to adopt NASD Rules 1022(d) and (e) as FINRA Rules 1220(a)(11) and (a)(12), respectively, subject to the following changes. FINRA is proposing to eliminate the securities products listed under the Investment Company and Variable Contracts Products Principal registration category and instead list the products under the Investment Company and Variable Contracts Products Representative registration category. Specifically, proposed FINRA Rule 1220(a)(11) provides that a principal may register as an Investment Company and Variable

Contracts Products Principal if his or her activities in the investment banking or securities business of a member are limited to the activities specified in proposed FINRA Rule 1220(b)(7). Similarly, FINRA is proposing to transfer the definition of “direct participation program” from the Direct Participation Programs Principal registration category to the Direct Participation Programs Representative registration category. Therefore, proposed FINRA Rule 1220(a)(12) provides that a principal may register as a Direct Participation Programs Principal if his or her activities in the investment banking or securities business of a member are limited to the activities specified in proposed FINRA Rule 1220(b)(8).

12. Private Securities Offerings Principal (Proposed FINRA Rule 1220(a)(13))

To provide firms with greater flexibility in designing their supervisory structure, FINRA is proposing to create a limited principal registration category under FINRA Rule 1220(a)(13) for principals whose activities are limited solely to the supervision of the private securities offerings specified in proposed FINRA Rule 1220(b)(9) (current NASD Rule 1032(h)). The proposed change is consistent with the limited registration categories for Investment Company and Variable Contracts Products Principals and Direct Participation Programs Principals. Specifically, under proposed FINRA Rule 1220(a)(13), if a principal's activities are limited solely to the supervision of the private securities activities specified in proposed FINRA Rule 1220(b)(9), the principal may register as a Private Securities Offerings Principal instead of registering as a General Securities Principal. A person registering as a Private Securities Offerings Principal must satisfy the Private Securities Offerings Representative prerequisite registration and pass the General Securities Principal examination.

13. Supervisory Analyst (Proposed FINRA Rule 1220(a)(14))

The Incorporated NYSE rules currently require that an individual who is responsible for approving research reports register as a Supervisory Analyst.
63

Such person is required to present evidence of appropriate experience (at least three years prior experience within the immediately preceding six years involving securities or financial analysis) and pass the Supervisory Analyst qualification examination. Rather than passing the entire Supervisory Analyst qualification examination, such person may obtain a waiver from the securities analysis portion (Part II) of the Supervisory Analyst qualification examination upon verification that the person has passed Level I of the CFA examination. Incorporated NYSE Rule 472(a)(2) further provides that where a Supervisory Analyst lacks technical expertise in a particular product area that is the subject of a research report, the content in the report may be co-approved by a product specialist; if no such expertise resides within the member, the rule requires the member to arrange approval by a qualified outside Supervisory Analyst.

63

See
Incorporated NYSE Rules 344, 344.11 and 472(a)(2) and NYSE Rule Interpretations 344/03 and/04.

As noted above, pursuant to FINRA rules and existing guidance, a Supervisory Analyst is permitted to approve the content of a member's research report on equity or debt securities. A Supervisory Analyst is also permitted to approve the content of third-party research reports. However, a Research Principal must supervise the overall conduct of a Supervisory Analyst engaged in equity research.

FINRA is proposing to adopt the provisions in Incorporated NYSE Rule 344 and NYSE Rule Interpretations 344/03 and/04 regarding Supervisory Analysts as FINRA Rule 1220(a)(14) with the following changes. Consistent with existing FINRA rules and guidance, proposed FINRA Rule 1220(a)(14) provides that a principal whose activities are limited to approving the content of a member's research reports on equity or debt securities or the content of third-party research reports has the option of registering as a Supervisory Analyst instead of registering as a Research Principal or General Securities Principal, as applicable. The proposed rule clarifies that a Supervisory Analyst engaged in equity research must be supervised by a Research Principal. In addition, consistent with FINRA Rule 2210(b)(1)(B), a Supervisory Analyst may approve (1) retail communications as described in FINRA Rule 2241(a)(11)(A); and (2) other research communications that do not meet the definition of a “research report” under FINRA Rule 2241, provided that the Supervisory Analyst has technical expertise in the particular product area.

Unlike the NYSE requirements, proposed FINRA Rule 1220(a)(14) does not require evidence of appropriate experience. FINRA conducts job analysis activities for each examination program to identify the relevant rules and knowledge that need to be assessed. These activities involve subject matter experts from the industry as well as regulators and are conducted in compliance with testing industry standards for examination development. The resulting information is used to determine an appropriate content outline as well as to establish the appropriate way to assess the identified job, task and rule knowledge. In the case of the Supervisory Analyst examination, FINRA has determined that the requisite knowledge can be assessed adequately by the examination questions and that an experience requirement provides no material improvements to the qualification process. FINRA believes that passing the Supervisory Analyst qualification examination and completing the CE requirements adequately demonstrate the level of competence and knowledge required. This change is consistent with all other FINRA representative- and principal-level registration categories, which do not have an experience requirement. FINRA is also proposing to delete Incorporated NYSE Rule 472(a)(2), which requires that only Supervisory Analysts approve research reports. As described above, under FINRA rules, Supervisory Analysts are permitted to approve research reports, but they are not required to do so. For instance, a member may designate a Research Principal to approve its research reports.

14. Definition of Representative (Proposed FINRA Rule 1220(b)(1))

NASD Rule 1031(b) currently defines the term “representative” as an associated person, including an assistant officer other than a principal, who is engaged in the investment banking or securities business for the member, such as supervision, solicitation, conduct of business in securities or the training of persons associated with a member for any of these functions.

Incorporated NYSE Rule 10 defines the term “registered representative” as an employee of a member engaged in the solicitation or handling of accounts or orders for the purchase or sale of securities, or other similar instruments for the accounts of customers of his or her employer or in the solicitation or handling of business in connection with investment advisory or investment management services furnished on a fee basis by his or her employer.

FINRA believes that the definition of the term “representative” in NASD Rule 1031(b) is more consistent with the functions customarily performed by a registered representative. Therefore,

FINRA is proposing to adopt NASD Rule 1031(b) as FINRA Rule 1220(b)(1) with non-substantive changes.

15. General Securities Representative (Proposed FINRA Rule 1220(b)(2))

NASD Rule 1032(a)(1) currently requires that an associated person who meets the definition of “representative” under NASD Rule 1031 register as a General Securities Representative. A person registering as a General Securities Representative must pass the General Securities Representative examination.
64

The rule, however, provides that a representative is not required to register as a General Securities Representative if the person's activities are so limited as to qualify such person for one or more of the limited representative categories specified in NASD Rule 1032, such as an Investment Company and Variable Contracts Products Representative, a Direct Participation Programs Representative, an Options Representative, a Corporate Securities Representative, a Securities Trader, a Government Securities Representative, a Private Securities Offerings Representative or an Investment Banking Representative. Further, the rule does not preclude individuals registered in a limited representative category from registering as General Securities Representatives.

64
An individual may also register as a General Securities Representative by passing a combination of other representative-level examinations.

NASD Rule 1032(a)(2) provides that if a representative does not engage in municipal securities activities, registration as a United Kingdom Securities Representative or Canada Securities Representative is equivalent to registration as a General Securities Representative. These foreign registration categories were created in the 1990s as an alternative to General Securities Representative registration for individuals who do not engage in municipal securities activities and who are in good standing as a representative with the Financial Conduct Authority in the United Kingdom or with a Canadian stock exchange or securities regulator. To qualify for registration as a United Kingdom Securities Representative or Canada Securities Representative, an individual must pass the United Kingdom Securities Representative examination or Canada Securities Representative examinations, respectively. NASD Rule 1032(a)(2) also permits a person registered and in good standing as a representative with the Japanese securities regulators to become qualified to function as a General Securities Representative by passing the Japan Module of the General Securities Representative examination. The Japan Module, however, was never implemented.

NASD Rule 1032(a)(3) provides that an associated person registered solely as a General Securities Representative is not qualified to function as a Registered Options Representative, unless the General Securities Representative is separately qualified and registered as a Registered Options Representative.
65

65
This provision was adopted in 1980 at a time when an associated person had to separately qualify and register as a Registered Options Representative.
See
Securities Exchange Act Release No. 16936 (June 26, 1980), 45 FR 45441 (July 3, 1980) (Order Approving Proposed Rule Change; File No. SR-NASD-80-1). In 1997, NASD Rule 1032(d) was amended to no longer require associated persons to separately qualify and register as Registered Options Representatives, but there was no corresponding change to NASD Rule 1032(a).
See
Securities Exchange Act Release No. 38969 (August 25, 1997), 62 FR 46535 (September 3, 1997) (Order Approving Proposed Rule Change; File No. SR-NASD-97-23).

The Incorporated NYSE rules also require that a representative register as a General Securities Representative,
66

unless the representative's activities are so limited as to qualify him or her for one or more of the limited categories of representative registration, such as an Investment Company and Variable Contracts Products Representative or a Direct Participation Programs Representative.
67

The Incorporated NYSE rules further provide that registration as a United Kingdom Securities Representative or Canada Securities Representative is equivalent to registration as a General Securities Representative for those representatives who are not engaged in municipal securities activities.
68

FINRA is proposing to streamline the provisions of NASD Rule 1032(a) and adopt them as FINRA Rule 1220(b)(2) with the following changes.

66

See
Incorporated NYSE Rule 345.10 and .15(2) and NYSE Rule Interpretation 345.15/02.

67

See
Incorporated NYSE Rule 345.15(3) and NYSE Rule Interpretation 345.15/02.

68

See
NYSE
Information Memoranda
91-09 (March 1991) and 96-06 (March 1996).

Similar to the proposed changes to the General Securities Principal registration category, FINRA is proposing to more clearly set forth the obligation to register as a General Securities Representative. Specifically, proposed FINRA Rule 1220(b)(2)(A) states that each representative as defined in proposed FINRA Rule 1220(b)(1) is required to register with FINRA as a General Securities Representative, subject to the following exceptions. The proposed rule provides that if a representative's activities include the functions of an Operations Professional, a Securities Trader, an Investment Banking Representative or a Research Analyst, then the representative must appropriately register in one or more of these categories. Proposed FINRA Rule 1220(b)(2)(A) also provides that if a representative's activities are limited solely to the functions of an Investment Company and Variable Contracts Products Representative, a Direct Participation Programs Representative or a Private Securities Offerings Representative, then the representative may appropriately register in one or more of these categories in lieu of registering as a General Securities Representative.

Further, consistent with the proposed restructuring of the representative-level examinations, proposed FINRA Rule 1220(b)(2)(B) would require that individuals registering as General Securities Representatives pass the SIE and the General Securities Representative examination.

In addition, as part of the proposed restructuring of the representative-level examinations, FINRA is proposing to eliminate the United Kingdom Securities Representative and Canada Securities Representative registration categories, and associated Series 17, Series 37 and Series 38 examinations. Instead, FINRA is proposing to adopt FINRA Rule 1220.01 to provide individuals who are associated persons of firms and hold foreign registrations an alternative, more flexible, process to obtain a FINRA representative-level registration. Based on FINRA's analysis of the relevant United Kingdom and Canadian qualification requirements, FINRA believes that there is sufficient overlap between the SIE and these foreign qualification requirements to permit them to act as exemptions to the SIE. Under proposed FINRA Rule 1220.01, individuals who are in good standing as representatives with the Financial Conduct Authority in the United Kingdom or with a Canadian stock exchange or securities regulator would be exempt from the requirement to pass the SIE, and thus would be required only to pass a specialized knowledge examination to register with FINRA as a representative. The proposed approach would provide individuals with a United Kingdom or Canadian qualification more flexibili

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2017-07046. Public record. Not legal advice.