How To Understand The Role Of The Principal
All members are required to have a policy and procedures manual that outlines the supervisory structure of the firm and designates a principal to be responsible for each area of supervision. All firms are required to have a written policy and procedures manual 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 rules.
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 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 investment company 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 investment company principal of a FINRA member firm will usually take the Investment Company Limited Principal exam known as the Series 26. Series 26 principals may manage or supervise the firm’s dealings in the sale of investment company and variable contract products.
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. Addition-ally, 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.
As a member’s business grows, they will often wish to open new offices. The classification of the additional offices depends on the type of activity that is conducted. There are three types of offices that a member may open. They are:
- An office of supervisory jurisdiction
- A branch office
- A satellite office
Office of Supervisory Jurisdiction
A member firm must inform FINRA which offices it has identified as being an office of supervisory jurisdiction, or an OSJ. An OSJ is any office that conducts one or more of the following activities at that location:
- Has custody of customer funds or securities
- Has final approval for advertising or sales literature
- Has final approval of customer accounts
- Reviews and approves customer orders
- Executes orders or makes markets in securities
- Forms or structures offerings
- Supervises employees at other branch offices
At least one resident principal must mange the OSJ. The resident principal must enforce the policies and procedures of the firm, review all customer activity, and inspect the branch offices within their jurisdiction.