Series 99

AAA

Chapter 6: Conduct Rules - C. FINRA and Communications

Becoming A Member of FINRA

FINRA sets strict qualification standards that all perspective members must meet, prior to being granted membership. Each firm will appoint an executive representative who is authorized to deal with the Association relating to the members business. The firm must review the appointment of the executive quarterly and must notify FINRA If the executive changes within 17 business days of the end of the quarter Any firm that engages in interstate securities transactions with public customers is required to become a member of FINRA. Additionally, any broker dealer who wishes to participate as a selling group member in the distribution of mutual fund shares must also be a member of FINRA. 

In order to become a member of FINRA, a firm must:

  • Meet net capital requirements (solvency)
  • Have at least two principals to supervise the firm
  • Have an acceptable business plan detailing its proposed business activities
  • Attend a pre-membership interview

Members must also agree to:

  • Abide by all of the associations rules
  • Abide by all federal and state laws
  • Pay dues, fees, and membership assessments as required by the association

The fees, which a FINRA member must pay, are:

  • Basic membership fee
  • Fee for each representative and principal
  • Fee based on the gross income of the firm
  • Fee for all branch offices

A member failing to pays fees may be suspended or have their membership canceled upon 15 days written notice from FINRA.

The following are not eligible for membership with FINRA:

  • Firms that have been expelled, barred, or suspended by a national securities association or exchange
  • Firms that are subject to a court injunction barring them from engaging in the securities business.
  • Firms deemed non qualified or unsuitable by the Board of Governors.
  • Firms that have been barred from association with members of a national securities association or exchange.

All members must deal with non-members as members of the general public and may not offer non-members selling concessions. All suspended or expelled members must also be treated as members of the general public. Exempt from this rule are transactions:

  • In government securities
  • In Municipal securities
  • Transactions executed on an exchange
  • Foreign broker dealers ineligible for registration with FINRA who have a correspondent relationship with a member or have agreed to treat non-members in the US as members of the general public.

Registration of Agents / Associated Persons

All individuals that engage in securities transactions with the public are required to be registered as an associated person. Failing to register people who engage in securities transactions can result in disciplinary charges being brought against the member. Prior to becoming registered as an associated person, all individuals must be sponsored by a member firm.  All sponsoring firms are required to ascertain the applicants:

  • Business character
  • Educational background
  • Professional background

Once a member has certified the above information regarding the applicant, they may formally submit the individual’s application for becoming an associated person known as a U-4. The employee must fill out the form completely and submit the form with a set of fingerprints. A principal of the member firm must sign the application and certify that they have reviewed the applicant’s background. All employees of the broker dealer who engage in any of the following activities must be fingerprinted:

  • Sale of securities
  • Has access to or contact with cash or securities
  • Has access to or prepare records of original entry
  • Individuals who supervise individuals engaged in any of the activities listed

 Note: The NYSE requires new agents to meet 120-day apprenticeship period before conducting business with the public and earning commissions.

State Registration

In addition to registering with FINRA, all broker dealers and agents must register in their home state as well as in any state in which they transact business.

Retail Communications / Communications with the Public

Member firms will seek to increase their business and exposure through the use of both retail and institutional communications.  There are strict regulations in place in order to ensure all communications with the public adhere to industry guidelines. Some communications with the  public are available to a general audience and include:

  • Television / radio
  • Publicly accessible websites
  • Motion Pictures
  • Newspapers / magazine
  • Telephone directory listings
  • Signs / billboards
  • Computer / internet postings
  • Video tape displays
  • Other public media
  • Recorded telemarketing messages

Other types of communications are offered to a targeted audience. These communications include:

  • Market reports
  • Password protected websites
  • Telemarketing scripts
  • Form letters or emails (sent to more than 25 people)
  • Circulars
  • Research reports
  • Printed materials for seminars
  • Option worksheets
  • Performance reports
  • Prepared scripts for TV or radio
  • Reprints of ads or sales literature

FINRA Rule 2210 Communications with the Public.

FINRA Rule 2210 replaces the advertising and sales literature rules previously used to regulate member communications with the public. FINRA Rule 2210 streamlines member communication rules and reduces the number of communication categories from six to three. The three categories of member communication are:

Retail communication is defined as any written communication distributed or made available to 25 or more retail investors in a 30 day period. The communication may be distributed in hard copy or in electronic formats. The definition of a retail investor is any investor who does not meet the definition of an institutional investor.  Retail communications now contain all components of advertising and sales literature. All retail communications must be approved by a registered principal prior to first use. The publication of a post in a chat room or other online forum will not require the prior approval of a principal so long as such post does not promote the business of the member firm and does not provide investment advice. Additionally generic advertising will also be exempt from the prior approval requirements.  All retail communication must be maintained by the member for three years. If the member firm is a new member firm which has been in existence for less than 12 months based on the firm’s approval date in the central registration depository or CRD the member must file all retail communications with FINRA 10 days prior to its first use unless the communication has been previously filed and contains no material changes or has been filed by another member such as investment company or ETF sponsor. Member firms who have been established for more than 12 months may file retail communications with FINRA 10 days after the communication is first used. Investment companies, ETF sponsors and retail communications regarding variable annuities must be filed 10 days prior to first use. If the communication contains non standardized performance rankings. Should FINRA determine that a member firm is making false or misleading statements in its retail communications with the public, FINRA may require the member to file all of its retail communication with the public with the association 10 days prior to its first use.

Institutional Communications

Intuitional communication is defined as any written communication distributed or made available exclusively to institutional investors. The communication may be distributed in hard copy or in electronic formats. Institutional communications do not have to be approved by a principal prior to first use so long as the member has established policies and procedures regarding the use of institutional communications and has trained its employees on the proper use of institutional communication. Institutional communication is also exempt from FINRA’s filing requirement but like retail communications it must be maintained by a member for three years.  If the member believes that the institutional communication or any part thereof may be seen by even a single retail investor the communication must be handled as all other retail communication and is subject to the approval and filing requirements as if it was retail communication. An institutional investor is a person or firm that trades securities for his or her own account or for the account of others. Institutional investors are generally limited to large financial companies. Because of their size and sophistication, fewer protective laws cover institutional investors. It is important to note that there is no minimum size for an institutional account. Institutional investors include:

  • Broker dealers
  • Investment advisers
  • Investment companies
  • Insurance companies
  • Banks
  • Trusts
  • Savings and loans
  • Government agencies
  • Employment benefit plans with more than 100 participants
  • Any non natural person with more than $50,000,000 in assets

Correspondence

Correspondence consists of electronic and written communications between the member and up to 25 retail investors in a 30 calendar day period. With the increase in acceptance of email as business communication, it would be impractical for a member to review all correspond­ence between the member and a customer. The member instead may set up procedures to review a sample of all correspondence, both electronic and hard copy. If the member reviews only a sample of the correspondence, the member must train their associated people on their firm’s procedures relating to correspondence and must document the training and ensure the procedures are followed. Even though the member is not required to review all correspondence, the member must still retain all correspondence. The member should, where practical, review all incoming hard copy correspondence. Letters received by the firm could contain cash, checks, securities, or complaints.

Broker Dealer Websites

A broker dealer will not be deemed to have a place of business in a state where it does not maintain an office simply by virtue of the fact that the publicly available website established by the firm or one of its agents is accessible from that state so long as the following conditions are met:

  • The website clearly states that the firm may only conduct business in states where it is properly registered to do so
  • The website only provides general information about the firm and does not provide specific investment advice
  • The firm or its agent may not respond to internet inquiries with the intent to solicit business without first meeting the registration requirements in the state of the prospective customer

The content of any website must be reviewed and approved by a principal prior to its first use and must be filed with FINRA with in 10 days of use. If the firm or its agent updates the website and the update materially changes the information contained on the website the updates must be re approved by a principal and refilled with FINRA. The website may use the FINRA logo so long as the use is only to demonstrate that the firm is a FINRA member and a hyperlink to the FINRA website is included in close proximity to the logo.

Generic Advertising

Generic advertising is generally designed to promote firm awareness and to advertise the products and services generally offered through the firm. Generic ads will generally include:

  • Securities products offered, i.e. stocks, bonds, mutual funds
  • Contact name, number and address
  • Types of accounts offered, i.e. individual, IRA, 401K

A Final Note

You have completed the series 99 exam review available on investopedia. This is only a portion of what you will need to know to for the test. The series 99 requires a significant time commitment of at least 50 hours in order to successfully pass the exam. It is highly recommended that you spend a significant amount of time reading your textbook and doing as many practice questions as you can  Each series 99 exam will have questions that focus on the following areas:

Basic Knowledge Associated with the Securities Industry 32 Questions
Basic Knowledge Associated with Broker Dealer Operations 48 Questions
Professional Conduct and Ethical Considerations 20 questions
Total 100 Questions

The Securities Institute is a John Wiley & Sons partner company and publishes world class series 99 textbooks and exam prep software. All of us at Investopedia, The Securities Institute & John Wiley & Sons wish you the best of luck on your series 99 exam. Click here For more series 99 exam training materials

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