How To Understand Professional Conduct
The foundation of a firm’s supervisory system is its written supervisory manual, also known as the firm’s policy and procedures manual. All members are required to have a policy and procedures manual that outlines the supervisory structure of the firm and that designates a principal to be responsible for each business area of supervision. The policy and procedures manual must include the title, location, and registration status of all supervisors and a copy of the manual must be kept in each office of the firm where supervised activities are conducted. The purpose of the written policy and procedures manual is to ensure compliance with the firm’s rules, as well as the rules of the industry. The manual must be updated to reflect the adoption of new policies, a change in personnel, or new industry regulations. The manual must also clearly outline the way the periodic compliance examinations are conducted and documented. Both the SEC and FINRA can take action against a firm or principal for failing to supervise its operations and agents.
The Role of the Principal
Prior to any firm being admitted as a member of FINRA, they must have a least two principals to supervise the activities of the firm. At a minimum, one must be a principal to supervise employees and the other must be a financial operations principal, or FINOP, to supervise the financial and operational activities of the firm. It is the principal’s responsibility to ensure that all rules in the policy and procedures manual are followed by the firm’s employees. It is also the responsibility of the principal to review and approve all of the following:
- New accounts
- Sales literature
The principal reviews and approves the above listed items in writing by signing or initialing the item. In the case of transactions, a principal may initial each ticket or initial a daily trade run. This supervisor’s initials will evidence the fact that the trades have been reviewed and approved. There is no requirement that a principal approve a trade prior to its execution, but the trade must be reviewed and approved promptly. Each registered representative must be assigned to a specific supervisor. A principal of a member firm who fails to supervise the actions of the agents under their control may be subject to action by both FINRA and the SEC. A principal will not be subject to action if there are written procedures in place that are designed to detect and prevent violations. These procedures must have been enacted and the supervisor must not have reason to believe the system is not operating properly. Additionally, the principal will not be found to have failed to supervise if an agent has employed extreme measures to conceal their actions. Each member firm must designate a principal to review the firm’s supervisory system. This person is responsible for recommending changes in the system to the firm’s senior management and this person must be identified to FINRA as the principal in charge of reviewing the firm’s compliance systems.
Supervisor Qualifications and Prerequisites
People who supervise or train agents generally must register as a principal with FINRA and qualify by training or experience. Prior to taking a principal exam, the individual must have successfully completed the appropriate registered representative examination. A principal of an FINRA member firm will usually take the General Securities Principal exam known as the series 24. Series 24 general securities principals may manage or supervise the firm’s corporate securities business, including investment banking, direct participation programs, investment company products, and variable contracts. A Series 24 does not qualify an individual as a:
- Registered Options Principal
- General Securities Sales Supervisor for Options or Municipal Securities
- Municipal Securities Principal
- Financial and Operations Principal
- Introducing Broker/Dealer Financial and Operations Principal
All portions of FINRA administered exams are proprietary and to be held in the strictest of confidence. FINRA considers it a violation of its rules for any individual to:
- Disclose exam questions or content to anyone
- Reproduce exam questions
- Receive exam questions or content from anyone
- Compromise the content of any exam
- Remove any portion of an exam from the exam location
Most registered agents and principals are required to participate in industry mandated continuing education programs. The continuing education program consists of a firm element, which is administered by the broker dealer, and a regulatory element, which is administered by the regulators.
Firm Element Continuing Education
Every FINRA member firm at least annually must identify the training needs of its covered employees and develop a written training plan based on their employees’ needs. A covered employee is a registered person who engages in sales of securities to customers, trading, investment banking and their immediate supervisors. The firm, at a minimum, should institute a plan that increases the covered employees’ securities knowledge and should focus on the products offered by the firm. The plan should also highlight the risks and suitability requirements associated with the firm’s investment products and strategies. The firm is not required to file their continuing education plan with FINRA unless it is specifically requested to do so. However, firms who fail to adequately document their continuing education program, including their covered agents’ compliance with the program, may be subject to disciplinary action.
All registered agents who were not registered on or before July 1, 1988 must participate in the regulatory element of the continuing education requirement. Agents subject to the requirement must complete the computer based training at an approved facility on the second anniversary of their initial registration and every three years thereafter. The content of the exam is developed by The Securities Industry Regulatory Council on Continuing Education and is not the responsibility of the broker dealer. FINRA will notify the agent 30 days prior to their anniversary date. This notification provides the agent with 120-day window to complete the regulatory continuing education requirement. An Agent who fails to complete the requirement within that period will have their registration become inactive. Agents whose registrations have become inactive may not engage in any securities business that requires a license and may not receive commissions until their registration is reactivated. Registered representatives are subject to series 101 of the regulatory element, while registered principals are subject to series 201 of the requirement. Agents, who were exempt from the regulatory element as a result of having been registered for 10 years or more with a clean disciplinary history on July 1, 1998, who become the subject of a significant disciplinary action, will now be required to participate in the regulatory element of the continuing education requirement. Additionally, if an agent who was exempt from the regulatory element subsequently becomes registered as a principal, they will become subject to the series 201 requirement. The one-time exemption is only for the regulatory element; there is no exemption from the firm element of the continuing education program.
Information Obtained From an Issuer
If a broker dealer obtains information during the performance of duties to an issuer of securities it may not use that information to solicit business. A broker dealer may obtain information from an issuer while acting as:
- An underwriter
- A transfer agent
- A paying agent
- An investment banker
All written complaints received from a customer or from an individual acting on behalf of the customer must be reported promptly to the principal of the firm. The firm is required to:
- Maintain a copy of the complaint at a supervising office of supervisory jurisdiction
- Electronically report all complaints to FINRA within 15 days of the end of each calendar quarter. If no complaints were received, no report is due
- Report complaints within 10 days to FINRA, if the complaint alleges misappropriation of funds or securities or forgery
The firm must maintain a separate customer complaint folder, even if it has not received any written customer complaints. If the firm’s file contains complaints, the file must state what action was taken by the firm, if any, and it must disclose the location of the file containing any correspondence relating to the complaint.
A principal is required to review all written customer complaints but there is no required time frame to respond or take action.
All broker dealers that carry customer accounts must send its customer’s information detailing FINRA’s public disclosure program at least once per calendar year. The information must contain the program’s 800 number, FINRA’s website and a statement that an investor brochure includes the same information and is available.