By Steven M. Rice

If you’ve successfully completed the Securities Industry Essentials (SIE) exam, what’s the next step? Persons wanting to register as financial professionals with FINRA (like you) must submit a U4 form. What is a U4 form? It’s an application that securities industry professionals fill out and includes things like a ten-year employment history and a five-year residential history; if you’re registered with another firm, how you’re registering (Securities Trader, Financial and Operations Principal, General Securities Representative, and a slew more); states you want to be registered in; and so on. In addition, applicants must submit their fingerprints.

All U4 forms must be thoroughly reviewed by a principal of the firm. Background checks must be performed, and the applicant’s employers for the previous three years must be called to verify the applicant’s employment history. The calls must be made within 30 days of the firm receiving the U4 form. Special scrutiny of the applicant is required if the applicant has previously worked in the securities industry. Information contained in the U4 form must be complete and not misleading.

The U4 form also contains an arbitration disclosure, which states that disputes between the applicant and the member firm will be settled by arbitration.

Although there is a lot of information listed here that can disqualify a person, most of the information follows a common theme, which makes sense, and you shouldn’t have to memorize it all. However, you should be aware of the ten-year disqualification rule if an individual has been convicted of a felony or certain misdemeanors. In addition, if a registrant includes misleading information or omits information, her registration will be denied.

Note: Non-registered persons may not solicit customers or take orders. In addition, member firms are prohibited from paying commissions, fees, concessions, discounts, and so on to any person who is not registered. The failure of a member firm to register someone who should be registered will likely end in disciplinary action by FINRA.

Disqualification from membership from FINRA

A person will be statutorily disqualified from membership from FINRA under the following circumstances:

  • If he had a felony criminal conviction or certain misdemeanor convictions within the last ten years.
  • If he has had a temporary or permanent injunction (no matter what his age) issued by a court involving a long list of unlawful investment activities.
  • If he has been expelled, barred, or is currently suspended from membership or participation in another self-regulatory organization. This holds true even if the person has been barred with the right to reapply.
  • If he has been barred or current suspension orders are coming from the SEC (Securities and Exchange Commission), CFTC (Commodity Futures Trading Commission), or any other appropriate authority or regulatory agency. As with the preceding rule, this holds true even if the person has been barred with the right to reapply.
  • If he has been denied or had his registration revoked by the CFTC, SEC, or any other appropriate authority or regulatory agency.
  • If it has been found that a member or person has made certain false statements in his application, in reports, or in proceedings before the SEC, SROs, or any other appropriate regulatory authority or agency.
  • If any final order from a state securities commission (or from any agency or state officer performing similar functions), savings association, credit union, any state authority that examines or supervises banks, state insurance commission (or any office or agency performing similar functions), an appropriate federal banking agency, or the National Credit Union Administration
  • Bars said person from association with an entity (such as a broker-dealer, investment advisory firm, and so on) regulated by such commission, agency, authority, or officer, or from engaging in the business of banking, insurance, securities, savings association activities, or credit union activities
  • Constitutes a final order based on violations of any regulations or laws that prohibit manipulative, fraudulent, or deceptive conduct
  • If the SEC, CFTC, or any SRO finds that a person
    1. “Willfully” violated federal securities laws, “willfully” violated commodities laws, or “willfully” violated MSRB (Municipal Securities Rulemaking Board) rules
    2. “Willfully” aided, commanded, induced, abetted, counseled, or procured violations as set forth in the preceding rule
    3. Failed to supervise another person who committed violations as set forth in rule number one
  • If he has certain associations with disqualified persons.

Fingerprints required by FINRA

Under SEC Rule 17f-2 (you don’t have to remember the rule number), all employees of a brokerage firm are required to be fingerprinted if they are involved in any of the following activities:

  • Making sales
  • Handling assets (cash and/or certificates)
  • Accessing original books and records
  • Supervising any of the preceding activities

Fingerprints are always required when a person is applying for registration. The fingerprints must be submitted as well as the U4 form. If FINRA doesn’t receive the fingerprints within 30 days of the U4 being submitted, the applicant’s registration will be deemed inactive.

Your U4 form information is available from BrokerCheck

The information you provide and your investment professional history don’t remain in a bubble. The Central Registration Depository’s (CRD’s) BrokerCheck allows investors access to vital information that they may need to help them pick the right firm and the right professional, like you. Don’t worry; it won’t disclose your address, social security number, and the like. However, it will disclose complaints against you and your employer, where you and your employer are registered, exams you passed, if you were convicted or pled guilty to a crime, if you or your broker have been expelled from an SRO, and so on. If a member maintains a website, the site must provide a link to BrokerCheck.

Continuing education requirements for securities professionals

Yes, even after you’ve passed your securities exams like the SIE, you’re not done. You’re required to take continuing education programs as required by FINRA. There are two different elements to continuing education that are a requirement: the firm element and the regulatory element.

Firm element

Member firms must have annual meetings covering the services and strategies offered by the firm. In addition, the meeting must cover any recent regulatory developments, if any. The meetings must be interactive and allow people to ask questions. All registered persons who have direct contact with the public must attend the meeting. All firms must have continuing and current education programs for their covered employees.

Regulatory element

All registered persons are required to take a computer-based training session covering FINRA regulations within 120 days of the registered person’s second anniversary and every three years after that. In the event that the training isn’t taken within the required period, the person’s securities license(s) will be deactivated until it’s completed. If the registered person’s licenses have been deactivated for two years, the individual will be administratively terminated. If administratively terminated, the person must reapply for registration.

sie-continuing-education
©Shutterstock.com/ra2studio
Computer-based training is one of the continuing-education requirements for securities professionals.

Resignation and termination

If you leave your firm for whatever reason, the member firm you were working for has to file a U5 form with the CRD within 30 days of the date you resigned or were terminated. You will also receive a copy for your records. The U5 form requires the member firm to provide an explanation of why you left or why you were terminated. If you’re moving to a new member firm, your new employer must file a new U4 form and receive a copy of the U5 filed by your former employer.

Things sometimes change, so, if something on your U4 or U5 form is or becomes inaccurate, your firm must update the information on the CRD. This could be something as simple as an address change or some sort of violation or felony conviction.

Don’t wait too long going from one firm to another. After a U5 form has been filed on your behalf, you have up to two years to get registered with another firm or you’ll have to take your securities exams all over again. You certainly don’t want that to happen.

Associated persons exempt from FINRA registration

Certain individuals who work for a member firm are exempt from FINRA registration. These include

  • Persons whose functions are solely clerical or ministerial
  • Persons solely affecting transactions on the floor of a national securities exchange and who are registered with that exchange
  • Persons whose function is solely and exclusively involved in transactions of municipal securities
  • Persons whose function is solely and exclusively involved in transactions of commodities
  • Persons whose function is solely and exclusively involved in transactions in securities futures, as long as that person is registered with a registered futures association

FINRA reporting requirements

Under FINRA Rule 4530, member firms must report specified events, including quarterly statistical and summary information regarding customer complaints, and copies of certain civil and criminal actions. Members must report promptly (no later than 30 days after the member knows or should’ve known about the event) if the member or associated person of the member

  • Has been found to have violated any securities-related or non-securities-related investment laws or standards of conduct by a U.S. or foreign regulatory organization
  • Is the subject of a written customer complaint involving allegations of theft or misappropriation of funds or securities
  • Is the subject of a written customer complaint involving allegations of forgery
  • Has been named as a defendant or respondent in a proceeding brought by a U.S. or foreign regulatory body alleging a violation of rules
  • Has been denied registration, suspended, expelled, or disciplined by a U.S. or foreign regulatory organization
  • Is indicted, convicted of, or pleads guilty to any felony or certain misdemeanors in or outside of the United States

The preceding list includes firm reporting requirements under Rule 4530, but firms are required to report certain other events too. These include

  • Outside business activities (covered in the following section).
  • Private securities transactions, which are transactions outside the broker-dealer’s normal business. For argument’s sake, say that an associate of a firm has a client who wants to trade options, but his firm doesn’t trade options because it doesn’t have an options principal. In this case, with permission of his firm, he can accept the order from his client and do the trade through another firm.
  • Political contributions and consequences for exceeding dollar contribution thresholds (see “Avoiding violations” later in the chapter).
  • Felonies, financial-related misdemeanors, liens, bankruptcies.

Outside business activities

While you’re building your business and getting new clients, you may feel the need to make a few extra bucks working another job. If so, you must notify your brokerage firm in writing. However, you don’t need to receive written permission to work the other job. Your member firm may reject or restrict your outside work if it feels there is a conflict of interest.

Accounts at other broker-dealers and financial institutions

Although you probably won’t do this, persons associated with a member firm may open an account at another member firm (executing firm) with prior written permission from the employing firm. The associated person must also let the executing firm know that she is working for another member firm. Duplicate confirmations and statements must be sent to the employing firm if requested.