Personnel Management

Associated Person Registration

One of the most important responsibilities of a General Securities Principal is ensuring that all individuals who perform securities-related functions are properly registered. Under the Securities Exchange Act of 1934 and FINRA rules, any person associated with a broker-dealer who engages in the firm's securities business must be registered in an appropriate category. The term "associated person" is broadly defined and includes any partner, officer, director, or branch manager of a member, any person directly or indirectly controlling or controlled by a member, and any employee of a member.

Registration is accomplished through the filing of Form U4 (Uniform Application for Securities Industry Registration or Transfer) through the Web CRD system. Form U4 collects detailed information about the individual, including personal background, employment history for the past 10 years, education, examinations passed, other business activities, and a comprehensive disclosure section covering criminal history, regulatory actions, civil judicial actions, customer complaints, terminations, and financial events such as bankruptcies, judgments, and liens.

Registration Categories

FINRA maintains multiple registration categories, each corresponding to specific business activities and requiring passage of specific qualification examinations. A principal must understand which registrations are required for various roles within the firm. The primary categories include:

• General Securities Representative (Series 7): Qualified to sell virtually all types of securities products including stocks, bonds, options, mutual funds, variable annuities, DPPs, and government securities.
• Investment Company/Variable Contracts Representative (Series 6): Qualified to sell mutual funds, variable annuities, variable life insurance, and unit investment trusts.
• General Securities Principal (Series 24): Qualified to supervise all aspects of a broker-dealer's securities business.
• Financial and Operations Principal (Series 27): Required to supervise the firm's financial and operational activities, including net capital compliance and financial reporting.
• Investment Banking Representative (Series 79): Qualified for advising on and facilitating mergers, acquisitions, tender offers, financial restructurings, and corporate debt and equity issuances.
• Securities Industry Essentials (SIE): A foundational prerequisite exam that must be passed before any representative-level registration can become effective.

The U4 Filing Process

When a firm hires a new associated person, the principal responsible for the hiring process must ensure that the individual's Form U4 is filed promptly and accurately. The firm has a responsibility to conduct a reasonable investigation into the individual's background before filing the U4. This includes verifying the information provided by the applicant, reviewing the individual's CRD record for any prior disclosures, checking for fingerprint processing results, and confirming the individual's employment history and qualifications.

Under FINRA Rule 3110(e), the firm must verify, within three years of the initial or transfer date, that the associated person is not subject to a statutory disqualification and that the information on the most recent Form U4 is accurate and complete. The firm must also have procedures in place for ongoing review of changes to employee circumstances that would require U4 amendments.

Qualification Examinations

FINRA administers a series of qualification examinations that individuals must pass to become registered in specific categories. The examination structure was reformed in October 2018 with the introduction of the SIE exam as a separate, standalone prerequisite. Under the current structure, candidates must pass the SIE exam and a top-off exam specific to their desired registration category.

Examination Windows and Waiting Periods

After filing Form U4, an individual has a 120-day window to pass the required qualification examination. If the individual does not pass within this window, the firm must file a new U4 to obtain an additional 120-day window. FINRA imposes waiting periods between exam attempts: 30 days after the first and second failed attempts, and 180 days after the third and each subsequent failed attempt.

Lapse of Registration

If an individual's registration lapses (the person is no longer associated with a member firm), the individual has a two-year grace period during which they can reactivate their registration without retaking the qualification exam. After two years, the individual must retake and pass the applicable exam. However, the SIE exam remains valid for four years from the passing date, even if the individual is not associated with a member firm.

Continuing Education Requirements

FINRA's Continuing Education (CE) program ensures that registered persons maintain current knowledge of securities laws, regulations, products, and industry practices. The CE program has two components: the Regulatory Element and the Firm Element. As a principal, you are responsible for ensuring that all registered persons at your firm comply with both components.

Regulatory Element

The Regulatory Element is administered by FINRA and is mandatory for all registered persons. Under the current system (reformed effective January 2023), registered persons must complete an annual Regulatory Element requirement. Previously, the Regulatory Element was required only at the second anniversary and then every three years. The new annual requirement uses a content-based approach, delivering training tailored to the individual's registration category and recent regulatory developments.

Key points about the Regulatory Element:

• Must be completed annually by the end of the calendar year
• Content is assigned based on the individual's specific registration categories
• Failure to complete the Regulatory Element results in the individual's registration becoming inactive (CE inactive status) until the requirement is satisfied
• An individual in CE inactive status may not perform any activities requiring registration, including soliciting or executing transactions
• If the Regulatory Element is not completed within two years of the initial due date, the individual's registration may be terminated

Firm Element

The Firm Element requires each member firm to develop and administer its own continuing education program. Under FINRA Rule 1240, the firm must conduct a needs analysis at least annually to determine the training needs of its covered registered persons. Covered registered persons include anyone who has direct contact with customers regarding investment banking or securities activities, including research and sales activities.

The Firm Element program must address the following at a minimum:

• General investment features and associated risk factors
• Suitability and sales practice considerations, including the obligation of Regulation Best Interest (Reg BI)
• Applicable regulatory requirements, including new and amended rules
• The firm's specific compliance issues identified through internal reviews, examination findings, or regulatory developments

Form U5 and Terminations

When an associated person leaves a member firm, the firm must file Form U5 (Uniform Termination Notice for Securities Industry Registration) within 30 days of the termination date. Form U5 is the counterpart to Form U4 and captures the reason for termination, any disclosable events that occurred during the association, and the date the individual ceased performing securities activities.

Termination Reasons

Form U5 requires the firm to identify the reason for termination. The categories include voluntary resignation, involuntary termination (discharged), permitted to resign, and deceased. For terminations involving allegations of misconduct, the firm must provide a detailed explanation on a Disclosure Reporting Page (DRP). The firm has an obligation to be truthful and complete in its Form U5 filings, even when the departure is contentious.

Amendments and Disputes

If additional disclosable events come to light after the initial U5 filing, the firm must amend the Form U5 within 30 days of learning of the new information. The departing individual has the right to challenge statements on the U5 through FINRA's dispute resolution process. However, while the dispute is pending, the U5 filing remains part of the individual's public CRD record as disclosed through FINRA BrokerCheck.

Outside Business Activities and Private Securities Transactions

Principals must monitor and approve outside business activities (OBAs) and private securities transactions (PSTs) of their firm's associated persons. These are distinct concepts with different regulatory requirements, but both require principal oversight to prevent conflicts of interest and ensure investor protection.

Outside Business Activities (FINRA Rule 3270)

Under FINRA Rule 3270, associated persons must provide prior written notice to their firm before engaging in any outside business activity. The firm must then evaluate the activity and determine whether to approve, restrict, or prohibit it. Factors the firm should consider include potential conflicts of interest with the firm's business, the time commitment involved, the nature of the compensation, and whether the activity could mislead customers into believing it is part of the firm's business.

Private Securities Transactions (FINRA Rule 3280)

A private securities transaction (commonly called "selling away") is any securities transaction outside the regular course or scope of an associated person's employment with a member firm. Under FINRA Rule 3280, before participating in any PST, the associated person must provide detailed written notice to the firm describing the proposed transaction and the person's role. If the person will receive compensation (selling compensation), the firm must either approve and supervise the transaction as if it were the firm's own, or disapprove the transaction entirely. If no compensation is involved, the firm must still evaluate whether it wants to impose any conditions.