FINRA Proposes New Registration And Examination Rules- Today is the first in a LawCast series discussing FINRA’s proposed changes to its examination process and the implementation of a new Securities Industry Essentials Exam. On March 8, 2017, the Financial Industry Regulatory Authority, known as FINRA, filed a proposed rule change with the SEC to adopt amended registration rules and restructure the entry-level qualification examination for registered representatives. The new rules would also eliminate certain examination categories. FINRA is planning to implement the changes in two phases, with full implementation completed during the first half of 2017.
As part of the proposed amendments, FINRA introduced a new beginning-level examination called the Security Industry Essentials (SIE), which can be taken by individuals without sponsorship by a broker-dealer. The SIE would be a general-knowledge examination including fundamentals such as basic product knowledge, structure and functioning of the securities industry markets, regulatory agencies and their functions, and regulated and prohibited practices.
Under the proposed new rules, anyone desiring to work in the securities industry for a member firm would need to take the SIE. The SIE would also be open to anyone who desires to take it. When becoming employed by a member firm, a person would then need to take an additional exam associated with their particular job function (for example, series 7, 79 or 24). The new SIE exam would not change the requirement to pass tests associated with those additional licenses, or that such licenses expire if a person is not associated with a member firm for a two-year period. However, as discussed below, the proposed new rules add the ability to extend this two-year period in certain instances.
Currently, in order to qualify to take a registered representative examination to become licensed in the securities industry, a person must be employed and sponsored by a FINRA member broker-dealer. The intent of the SIE is to prequalify potential job applicants, saving member firms time and expense on vetting registered representatives and putting them through the examination process. A member firm will be able to view the SIE passing status and score on FINRA’s CRD system.
The proposed SIE is broken down into four categories: (i) “Knowledge of Capital Markets,” which focuses on topics such as types of markets and offerings, broker-dealers and depositories, and economic cycles; (ii) “Understanding Products and Their Risks,” which covers securities products at a high level as well as associated investment risks; (iii) “Understanding Trading, Customer Accounts and Prohibited Activities,” which focuses on accounts, orders, settlement and prohibited activities; and (iv) “Overview of the Regulatory Framework,” which encompasses topics such as SRO’s, registration requirements and specified conduct rules.
Individuals that have passed the SIE but not yet taken a specialized knowledge examination, would not be subject to continuing education requirements.
Individuals that are already licensed as of the effective date of the new SIE, will not need to take the exam and will be deemed to have passed such exam. The SIE qualification will remain valid for four years without the person being registered with a firm. However, other licenses, such as a Series 7, may lapse if a person is not associated with a member firm for a two-year period.
Although not discussed by FINRA, I see an opportunity to use the SIE for multiple purposes going forward as the securities laws and regulations continue to evolve. In particular, the SIE could be a factor in considering whether a person is accredited. The SIE could also be a factor in considering exemptions from the registration requirements for finders, a topic that continues to be at the forefront for regulators and practitioners alike.