General Securities Principal Exam

Statutory disqualification occurs when a person is barred from association with a FINRA member firm due to certain disqualifying events. These include felony convictions (within the past 10 years), certain misdemeanor convictions involving securities, money, or dishonesty, SEC or SRO disciplinary actions, and court injunctions related to securities activities.

A firm that wishes to employ a statutorily disqualified person must file an application with FINRA under its eligibility proceedings process. The firm must demonstrate that it has adequate supervisory procedures to oversee the individual. Principals play a critical role in identifying disqualification events during the hiring process by reviewing Form U4 disclosures.

FINRA's continuing education program has two components. The Regulatory Element is a computer-based training session that must be completed annually by all registered persons. It covers compliance, regulatory, ethical, and sales practice standards.

The Firm Element is an annual training program developed by each firm, tailored to its business activities and the needs of its registered persons. Principals are responsible for developing, implementing, and administering the firm element program, including conducting a needs analysis and maintaining records of participation. Failure to complete the regulatory element results in an inactive registration status until the requirement is satisfied.

Written Supervisory Procedures (WSPs) are the detailed, written guidelines that a broker-dealer must establish and maintain under FINRA Rule 3110. They describe how the firm will supervise its registered representatives and associated persons in all areas of their business activities.

WSPs must designate a chief compliance officer, identify supervisory personnel for each business line, describe how the firm will review correspondence, transactions, and customer accounts, and outline procedures for handling customer complaints. Each office of supervisory jurisdiction (OSJ) must maintain a current copy, and the procedures must be reviewed and updated at least annually. The principal is responsible for ensuring WSPs are followed and that supervisory reviews are properly documented.

Under the Bank Secrecy Act and FINRA Rule 3310, every broker-dealer must establish and implement an AML compliance program. The program must include internal policies and procedures reasonably designed to detect and report suspicious activity, designation of an AML compliance officer, ongoing employee training, and independent testing of the program.

Firms must file Suspicious Activity Reports (SARs) with FinCEN for transactions of $5,000 or more that the firm knows, suspects, or has reason to suspect involve funds from illegal activity or are designed to evade reporting requirements. Currency Transaction Reports (CTRs) must be filed for cash transactions exceeding $10,000. Principals must ensure the AML program is properly implemented and that all personnel understand their reporting obligations.

Regulation Best Interest (Reg BI) requires broker-dealers and their associated persons to act in the best interest of retail customers when making securities recommendations. It goes beyond the traditional suitability standard by imposing four specific obligations.

The Disclosure Obligation requires delivery of Form CRS (Client Relationship Summary). The Care Obligation requires reasonable diligence to understand the product and ensure recommendations are in the customer's best interest. The Conflict of Interest Obligation requires policies to identify, disclose, and mitigate or eliminate conflicts. The Compliance Obligation requires written policies and procedures. Principals must ensure all representatives comply with Reg BI and must establish supervisory systems to monitor recommendations.

Under FINRA Rule 2210, communications are classified into three categories. Retail communications are any written or electronic communication distributed to more than 25 retail investors within a 30-day period and must be approved by a principal before first use. Correspondence is written communication to 25 or fewer retail investors and must be supervised but does not require pre-approval. Institutional communications are sent only to institutional investors and require supervisory review but not pre-approval.

Principals must ensure all communications are fair, balanced, not misleading, and provide a sound basis for evaluating the products discussed. Certain communications, such as those concerning options or new member firms, must be filed with FINRA within 10 business days of first use or prior to use.

Best execution under FINRA Rule 5310 requires broker-dealers to use reasonable diligence to ascertain the best market for a security and to buy or sell in that market so the resultant price to the customer is as favorable as possible under prevailing market conditions.

Factors to consider include the size and type of transaction, number of markets checked, accessibility of quotations, and the terms and conditions of the order. Firms must conduct a regular and rigorous review of execution quality on a quarterly basis, evaluating order routing practices and comparing execution quality across different venues. Principals are responsible for establishing and enforcing best execution policies and reviewing execution quality reports.

Regulation SHO governs short selling of securities and is designed to address concerns about persistent failures to deliver and abusive short selling practices. It imposes three key requirements on broker-dealers.

The locate requirement (Rule 203(b)(1)) requires broker-dealers to locate a source of borrowable shares before executing a short sale. The close-out requirement (Rule 204) mandates that failures to deliver must be closed out by purchasing or borrowing the securities by the beginning of regular trading hours on the settlement date following the settlement date (T+1 for most transactions). The threshold security list identifies securities with significant failures to deliver, triggering enhanced close-out obligations. Principals must ensure proper short sale marking and compliance with all Reg SHO requirements.

FINRA Rule 2241 addresses conflicts of interest related to research analysts and research reports. It requires firms to establish information barriers (sometimes called "Chinese walls") between the research department and the investment banking department to prevent investment banking personnel from influencing the content of research reports.

Research analyst compensation cannot be directly tied to specific investment banking transactions. There are quiet period restrictions that prevent firms from publishing research reports on companies they have recently taken public. Research reports must include required disclosures about the firm's relationship with the subject company, including any investment banking services provided in the past 12 months. Principals must supervise research activities to ensure objectivity and compliance with these conflict rules.

FINRA Rule 5130 prohibits the sale of new issues (IPOs) to restricted persons, including FINRA member firms and their associated persons, as well as immediate family members of restricted persons. This rule is designed to prevent industry insiders from "flipping" IPO shares for quick profits at the expense of public investors.

FINRA Rule 5131 addresses new issue allocation practices, prohibiting "spinning" (allocating IPO shares to executives of investment banking clients as an inducement for future business) and requiring objective, documented allocation criteria. Firms must ensure that IPO allocations are based on legitimate investment criteria and not used as a quid pro quo for investment banking business. Principals must establish and enforce procedures to ensure compliance with both rules.