Standards for Admission
FINRA will consider, as a whole, an applicant firm’s business plan, information and documents submitted by the Applicant under FINRA 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 FINRA Rule 1014.
- Standard 1: Complete and Accurate Application
- Standard 2: Licenses and Registrations Required by State and Federal Authorities and Self-Regulatory Organizations
- Standard 3: Applicant’s Capability to Comply with Industry Rules, Regulations, and Laws
- Standard 4: Contractual or Other Arrangements and Business Relationships
- Standard 5: Business Facilities
- Standard 6: Adequacy of Communications and Operational Systems
- Standard 7: Determining the Adequacy of an Applicant’s Capital
- Standard 8: Adequacy of Financial Controls
- Standard 9: Control Mechanisms Consistent with Industry Practices
- Standard 10: Adequate Supervisory System
- Standard 11: Recordkeeping System
- Standard 12: Continuing Education
- Standard 13: Other Information Possessed by FINRA
- Standard 14: Consistency with Federal Securities Laws
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.
- FINRA Registration Requirements
The requirements for FINRA registration are set out under the Rule 1010 Series. One prerequisite for registration is successful completion of each required qualification examination. Required examinations will be determined based upon the position in an Applicant’s business that the individual will occupy. Those individuals who wish to take a qualification examination can do so if "sponsored" by a current member firm or an Applicant for FINRA membership.
Where a person has previously passed a qualifications exam and has been registered with a member firm within the previous two years, additional qualification examinations would not be required in order to continue functioning in the same capacity. Where new or additional examinations are required in order for an individual to function as proposed at a new member firm, a new member application will need to have been filed so that there is a member firm through which the individual may become registered.
Applicants need to take into account the strict time frames governing new member applications under the FINRA Rule 1010 Series when contemplating the registration requirements necessary for the individuals who will operate/work at the firm and the need for additional qualification examinations. In this regard, an individual who will be associated with a new member Applicant may require a series of examinations that could exceed the timeframe within which an Applicant must submit information (see FINRA Rule 1012(b)(1)(A) and, thereby need to request in writing an extension of time in order to avoid a lapse of the application and meet the qualification requirements.
- Minimum FINRA Registration Requirements
The FINRA Rule 1010 Series outlines a requirement for each new Applicant for membership, except sole proprietorships, to have at least two registered principals and one Financial and Operations Principal (FinOp). The Applicant may, however, request, in writing, a waiver or exemption from the two principal requirement based on its proposed business in accordance with FINRA Rule 9610. The decision for granting such a waiver will be made by the MAP Department and Risk Monitoring staff.
- FINRA Registrations Based on Type of Business
An Applicant’s proposed business activities usually dictate the applicable registration requirements. For example, if the Applicant intends to conduct business in options or municipal securities, it will be required to have the appropriate individuals maintain the necessary options or municipal registrations.
- FINRA Principal Registrations
Principal registration is required for persons associated with a member who are actively involved in the management of the member's investment banking securities business. Principal registration may also be required where indications of control exist. Indications of control include participation in the management of the broker/dealer and assertion of authority over daily operations. Persons in managerial positions normally require principal registration. However, a registered representative may not automatically need principal registration, nor would an individual who is an officer of the corporation solely for ministerial purposes (e.g., a corporate secretary).
- Simultaneous or Multiple Securities Registrations with Separate FINRA Member Firms
FINRA does not preclude an individual from being simultaneously registered with more than one firm. This most often occurs in situations where the member firms are separate but otherwise related. Where simultaneous securities registrations at more than one firm exist, the Applicant should address any potential conflicts, supervision of the individual, and how the individual will allocate his or her time between each firm. The staff will consider the ability of the individual to adequately meet the various responsibilities assigned for each of the firms at which the individual is registered. Applicants should be aware, however, that some states do not allow simultaneous or multiple securities registrations.
- FINRA Executive Representative
The FINRA By-Laws, Article IV, Section 3, require that each Applicant designate a "FINRA executive representative" who will represent, vote, and act for the member in all affairs of FINRA. The executive representative is required to be a registered principal in the Applicant's senior management. Since all important membership communications, including votes, are directed to these individuals, it is critical that the designated representative is the appropriate person to ensure that important information is disseminated properly at the firm.
Each executive representative must have an e-mail account so as to facilitate timely member firm-related communications. For insurance company members, FINRA recognizes that the person designated as the executive representative may be a middle manager in the insurance company but act as senior management of the company’s securities activities. To accommodate these unique circumstances, the FINRA Risk Monitoring staff may, on review, permit an insurance company to appoint as executive representative a registered principal serving in an equivalent position to senior management in charge of the insurance company’s securities operations.
- Minimum FINRA Registration Requirements
- 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.
- SEC Registration Requirements
When an Applicant submits Part One of the application for membership with FINRA, registration with the SEC is initiated by the submission of the Form BD. There are no further documentation requirements for registration with the SEC.
- Problematic Issues Impacting Registration
Where a firm’s application, or that of any individual to be associated with the Applicant, reflects information of any kind of a disciplinary or enforcement action taken by FINRA or other regulatory authority, arbitrations, civil actions, or criminal matters, such information will be considered by the FINRA staff in its review of the application. The nature of the information reported, the time, nature and extent of any wrongdoing, and the remedial actions taken will be included in the FINRA staff’s consideration. Also, consideration will be given to the adequacy of the methods to be employed to preclude reoccurrence of any previous deficiencies.
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 MAP Department 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. As part of the application, the Applicant should provide rationale as to why these events should not impact the application and any steps taken to mitigate any risks as a result of these events.
At the time the application is submitted or shortly thereafter, the Applicant should be in a position to provide the staff with a draft or final agreements of any contractual or other arrangements and other business relationships that will allow the Applicant to operate in accordance with the business plan as submitted (e.g., third party vendor agreements, Letter of Intent with clearing firm, expense sharing agreements).
The MAP Department 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. This includes, but is not limited to, the Applicant demonstrating that they have appropriate firewalls in place in the event there are potential conflicts of interest arising from sharing office space with other entities.
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 MAP Department 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. All third-party agreements must be submitted as part of the application.
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 FINRA 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.
- Compliance with Net Capital Rule
The SEC’s net capital rule requires a minimum amount of net capital dictated by the type or method of business to be conducted, the securities products involved, and considerations of customer exposure. The statutory minimum amounts of net capital range from as low as $5,000 to over $1,000,000. Applicants should carefully review the SEC’s net capital rule, which can be found in the FINRA Manual under SEC Rule 15c3-1.
- Early Reporting Requirements
SEC SEC Rule 17a-11 requires broker/dealers to make accelerated financial reporting anytime net capital falls below 120 percent of its minimum capital level. In instances where the Applicant’s capital falls below the minimum capital required, the broker/dealer is required to immediately notify both FINRA and the SEC. Failure to make reports timely and accurately will normally result in formal disciplinary action. Filing requirements will continue at least until the Applicant’s capital is restored to an amount in excess of 120 percent of the minimum required.
- Adequate Funds to Meet Expenses
A key document reviewed by the MAP Department and the Risk Monitoring staff in connection with the application for membership is the Applicant’s business plan. Among other things, this plan must include a detailed description of projected revenues that will be generated by the business operation and the costs expended in pursuit of those revenues, as well as any forms of capital contributed including a basis for the projections.
To remain operational, a member’s capital will need to be sufficient to meet the projected expenses net of reliable revenues. If the member’s capital declines to amounts below minimum requirements, the member will have to cease operations. Such an event could jeopardize the member’s customers
The amount of capital necessary to meet the net expenses will depend on the forecast contained in the Applicant’s business plan.
- Adequate Funds to Meet Contractual Obligations, Including Market Making
In instances where a firm makes markets, it makes a commitment to buy or sell securities at stated prices. The Applicant’s capital must be adequate to meet such commitments. Thus, the required amount of capital will depend upon the number of markets to be made, the relative price range of such securities, and consideration for the historical volatility of these securities.
While not directly related to these risk factors, a broker/dealer will also be required to have capital of an amount of $1,000 to $2,500 based on each market made taking into consideration the price of each such security as referenced in the SEC’s net capital rule (SEC Rule 15c3-1(a)(4)).
Likewise, where a firm engages with some frequency in firm commitment underwritings, capital requirements will often exceed the SEC net capital rule’s minimum amounts in order to meet such contractual obligations. The amount of capital that will be considered adequate to meet these obligations will depend upon the size and frequency of the underwriting.
- Risks to Capital
If the Applicant will be engaged in underwritings or proprietary trading, the District Office staff may consider relative risk, volatility, degree of liquidity, and the speculative nature of the securities where applicable.
- Self-Clearing Firms
New firms may pose heightened financial risks to customer positions. All self-clearing firms are required to set aside moneys in a separate bank reserve account which is meant to protect customers who have positions at the firm in the event the firm were to fail.
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.
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; 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 that 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 ethical wall or firewall procedures bear the burden of demonstrating that substantially equivalent internal control procedures have been implemented.
FINRA Rule 3110 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 Procedures Checklist.)
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 FINRA 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 FINRA Rule 3110 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 FINRA Rule 2360 (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.
- The Number, Location, Experience, and Qualifications of Supervisory Personnel
An Applicant’s internal supervisory controls are the first line of defense for the protection of customers. The number of supervisory persons needed, as well as the level of their qualifications, depend on a number of factors, including the number of individuals or departments that the supervisory structure will be required to oversee. Generally, the more individuals or departments to be supervised, the more supervisory personnel are needed to be in place. Also considered, however, are the experience and qualifications of the supervisory personnel in carrying out this function, as well as whether the Applicant will employ methods, such as the use of technological techniques, to meet its supervisory responsibility. The experience level and disciplinary history of the employees being supervised also will be considered.
NOTE: FINRA Rule 1014(a)(10)(D) requires that each person identified in the Applicant’s business plan who will discharge a supervisory function should have at least one year of direct experience or two years of related experience in the subject area proposed to be supervised by such persons. FINRA will deny applications that fail to meet this requirement. Prior supervisory experience is helpful, but not required.
The various federal and state securities rules pertaining to the recordkeeping systems of a broker/dealer rarely specify a 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.
FINRA Rule 1240 defines the obligation of member firms to comply with the Securities Industry Continuing Education Program.
This standard requires the MAP Department 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 FINRA rules.1
This standard requires that the application and all supporting documents are consistent with federal securities laws, the rules and regulations thereunder and the FINRA rules.
1 Note: FINRA 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.