FINRA Standards for Admission
FINRA will consider, as a whole, the Applicant’s business plan, information and documents submitted by the Applicant under NASD rule requirements, information provided during the Membership Interview, as well as information obtained by the staff, taking into account the following standards set forth in NASD Rule 1014:
I. Complete and Accurate Application
All aspects of the membership application must be complete and accurate, including all forms and agreements signed and executed by authorized personnel of the Applicant.
II. Licenses and Registrations Required by State and Federal Authorities and Self-Regulatory Organizations
Applicants must successfully complete all registrations required by FINRA, the SEC, and state regulatory authorities. Registrations are required for both the firm and the individuals associated with the firm.
State Securities Regulatory Agency Registration Requirements
For purposes of FINRA membership admission, the broker/dealer and its principals must be registered in the state in which the firm’s home office is located. However, under state law the broker/dealer, principals, and each registered representative must be registered in each and every state in which a securities business will be conducted. This is accomplished by checking off the appropriate states on the Form BD and the Form U-4. Some states require that the Series 63 qualification examination be completed for registration in the state.
III. Applicant’s Capability to Comply with Industry Rules, Regulations, and Laws
The Applicant’s capability to comply with industry rules, regulations, and laws includes observing high standards of commercial honor and just and equitable principles of trade. The FINRA District Office staff will also take into consideration whether any persons associated with the Applicant have any disciplinary actions taken against them by other industry authorities, customer complaints, adverse arbitrations, pending or unadjudicated matters, civil actions, remedial actions imposed, or other industry-related matters that could pose a threat to public investors.
IV. Contractual or Other Arrangements and Business Relationships
At the time the application is submitted or shortly thereafter, the Applicant should be in a position to describe the contractual or other arrangements and other business relationships that will allow the Applicant to operate in accordance with the business plan as submitted. The Applicant is also required to submit copies of all draft or final agreements for the proposed business, including those with banks, clearing entities, or service bureaus.
V. Business Facilities
The FINRA District Office staff’s consideration of the adequacy of the Applicant’s facilities or planned facilities will include not only the obvious ones, such as office space, computer equipment, etc., but will also take into account the location of such facilities to determine whether the Applicant’s business plan can be effected with adequate supervision for the public’s protection.
FINRA District Office staff will consider whether the Applicant’s facilities or planned facilities, taken as a whole, will be sufficient to effectively carry out the business plan and to allow for the operation of the Applicant’s proposed business activities in compliance with all relevant securities rules and regulations.
VI. Adequacy of Communications and Operational Systems
The communications and operational systems that the Applicant intends to employ for the purpose of conducting business with customers and other members must be adequate and provide reasonably for business continuity with respect to: system capacity to handle the anticipated level of usage; contingency plans in the event of systems or other technological or communications problems or failures that may impede customer usage or firm order entry or execution; system redundancies; disaster recovery plans; system security; disclosures to be made to potential and existing customers who may use such systems; and supervisory or customer protection measures that may apply to customer use of, or access to, such systems.
That Applicant will be required to review its communications and operational systems and certify to the FINRA District Office that these systems are adequate for the proposed business. The Applicant may, but is not required to, utilize the services of a third party to arrive at the determination of systems adequacy.
VII. Determining the Adequacy of an Applicant’s Capital
If determined to be necessary, FINRA has the right to impose higher net capital requirements beyond the minimum requirements.
To be approved for FINRA membership, Applicants must meet the provisions of SEC Rules 15c3-1 and 17a-11, the SEC’s net capital rule and early warning rule, respectively, which are reprinted in the NASD Manual. These are two of the key financial responsibility rules of the SEC, and FINRA members must strictly comply with these provisions at all times.
VIII. Adequacy of Financial Controls
There are extensive federal, state, and self-regulatory securities laws and regulations under which members must operate that place great emphasis on financial and operational responsibility. Well-defined supervisory procedures, internal accounting, and financial controls, as well as a clearly articulated chain of command in this area are necessary for firms to ensure compliance with such laws and regulations. Securities regulators also look at these factors to establish liability if these responsibilities are not carried out. It is, therefore, in the Applicant’s best interest to make certain that the financial and operational portions of the business are operated as efficiently as possible and in compliance with applicable rules.
The Applicant must demonstrate that it can prepare, in a thorough and accurate manner, all reports pertaining to the financial condition of the firm and meet the requisite deadlines and times for their submission.
The adequacy of the financial controls includes the ability of those employees of the Applicant who will perform such functions to meet these requirements.
IX. Control Mechanisms Consistent with Industry Practices
The Applicant must demonstrate that its compliance, supervisory, operational, and internal control practices and standards are consistent with practices and standards regularly employed in the investment banking or securities business in light of the Applicant's proposed business.
For example, the supervisory control practices and standards of a securities business should include, but not be limited to, the delegation to qualified principals or other registered employees responsibility and authority for supervision and control of each office, department or business activity, and the establishment of appropriate procedures for supervision and control; and implementation of a separate system of follow–up and review to verify that the delegated authority and responsibility is being properly exercised.
Similarly, an Applicant which proposes to engage in investment banking activities would be required to demonstrate that consistent with the practices and standards regularly employed by the industry, it has developed and implemented policies and procedures to establish effective internal control systems and procedures to prevent the trading department from utilizing advance knowledge of the issuance of a research report. Firms that choose not to develop "Chinese Wall" procedures bear the burden of demonstrating that substantially equivalent internal control procedures have been implemented.
X. Adequate Supervisory System
NASD Rule 3010 requires all members to establish, maintain, and enforce written supervisory procedures (WSPs). The establishment of appropriate and effective written supervisory procedures is left to each member firm in the context of its business mix and method of operation, among other factors. Every FINRA member firm has an obligation to establish procedures designed to reasonably detect and prevent rule violations. As such, no one set of procedures may be considered as the only correct approach; what works well for one firm may not necessarily be appropriate for another. A firm’s procedures must be tailored to its business and cover all aspects of its operations. Generally, each supervisory procedure should identify and describe the procedure required to be conducted, who the responsible supervisor is, how often the required supervisory procedure is conducted, and how the responsible supervisor is to evidence compliance. (General guidance on the composition of Written Supervisory Procedures may be obtained from the Written Supervisory Checklist (DOC 1485 KB).)
The written supervisory procedures should facilitate the Applicant’s ability to properly supervise its employees’ activities. The procedures should be designed to help Applicants comply with all applicable securities laws, rules, and regulations, including NASD rules. The procedures should set forth the designation of: appropriately registered principals for each type of business the firm is engaged in, any office meeting the definition of Office of Supervisory Jurisdiction (OSJ), at least one appropriately registered principal for each OSJ, and at least one registered representative or principal to be responsible for supervision in each non-OSJ branch office. Furthermore, each registered person must be assigned to a supervisor, and reasonable efforts must be made to ascertain that all supervisory personnel are properly qualified. (See NASD Rule 3010 for definitions of what type of office constitutes an OSJ office, as opposed to a branch office.)
The written supervisory procedures for Applicants that propose to engage in an options business must facilitate compliance with NASD Rule 2860 (Options Conduct Rule), and if the Applicant plans to conduct a municipal securities business, the procedures must cover steps to be followed by the firm to comply with MSRB rules.
XI. Recordkeeping System
The various federal and state securities rules pertaining to the recordkeeping systems of a broker/dealer rarely specify a particular format to maintain such information. Rather, the rules specify only that certain information must be created and maintained within the broker/dealer’s records. The methods employed by member firms vary widely depending on the size of the business, the specific products involved, and the volume of business conducted.
For example, a small retailer of mutual funds may employ the documents that are used in transmitting application-type mutual fund orders as the basis for the records themselves. Large firms with many customers and a substantial volume of transactions most often employ computers to record and maintain such information. Also, a large number of member firms contract with other broker/dealers to perform such services. The FINRA District Office staff’s determination of the adequacy of a particular Applicant’s recordkeeping system will be based upon the staff’s satisfaction that, whatever method is used, the required information is maintained and reasonably retrievable.
XII. Continuing Education
NASD Rule 1120 defines the obligation of member firms to comply with the Securities Industry Continuing Education Program. The Rule involves a two-part mandatory program that requires: periodic uniform training in regulatory matters (Regulatory Element), and ongoing programs by broker/dealers to keep employees up-to-date on job- and product-related subjects (Firm Element). For more information about the Securities Industry Continuing Education Program, please refer to the brochure, The Continuing Education Program For Securities Professionals, found in the FINRA Membership Kit.
XIII. Other Information Posessed by FINRA
This standard requires the District Office of FINRA to consider whether it possesses any information indicating that the applicant may circumvent, evade, or otherwise avoid compliance with the federal securities laws, the rules and regulations thereunder, or the Rules of the Association.1
XIV. Consistency with Federal Securities Laws
This standard requires that the application and all supporting documents are consistent with federal securities laws, the rules and regulations thereunder, and the Rules of the Association.
1 Note: NASD Rules require that where the Department has obtained from a source other than the Applicant information or documentation on which the Department intends to base its decisions, copies of such information or document must be provided to the Applicant.