Chapter 16: Self-Regulatory Organization (SRO) Rules

Section 1: FINRA Registration and Supervision

Who Needs to Register?

Not everyone at a broker-dealer needs to pass the Series 7. But more people than you might think require some registration. The following individuals must register as associated persons:

• Individuals who solicit orders
• Individuals who train others to solicit orders
• Supervisors of these activities
• Anyone responsible for supervising financial services offered by RRs
• Anyone with signature or approval authority for customer accounts

The Registration Process

Registration involves several key forms and deadlines:

FINRA prohibits firms from artificially extending this 2-year window by "parking" or "hanging" an individual's registration. However, the Maintaining Qualifications Program (MQP) allows extending the period from 2 to 5 years by completing annual continuing education—but only for those who've been registered for at least one year.

BrokerCheck: Your Public Record

BrokerCheck is FINRA's free public database where investors can research the background of firms and representatives. It includes employment history, exam results, and any disciplinary actions. Every year, member firms must provide customers with:

• The FINRA BrokerCheck hotline number
• A statement about the availability of the BrokerCheck investor brochure
• The FINRA website address

Office Structure and Supervision

Every broker-dealer must have a main office with a supervisory principal. Beyond that, firms operate through branch offices where customer securities activities occur.

Written Supervisory Procedures

Every firm must maintain written supervisory procedures (WSPs) that are:

• In effect at all times
• Kept at each location (subject matter appropriate to that office)
• Updated annually
• Accessible to all employees

Firms must also hold an Annual Compliance Meeting—every registered person must attend to review firm policies, regulatory updates, and training requirements.

Section 2: Additional Rules for Registered Persons

Outside Business Activities

Your employer needs to know about your side hustles. FINRA requires registered persons to provide prompt written notice of any outside business activities that involve compensation—including board memberships, family businesses, or part-time work.

The exception? Charitable work without compensation and passive investments (where you invest but play no active role, like being a limited partner in a DPP).

Fidelity Bond Coverage

Every member firm must maintain fidelity bond coverage on all employees. This protects against losses from employee theft or misappropriation of funds—because trust but verify is nice, but insurance is better.

Continuing Education Requirements

Registration isn't "one and done." FINRA mandates ongoing education through two elements:

Military Service Accommodations

FINRA provides special accommodations for registered persons entering active military service:

• Upon notification, the individual is placed on inactive status
• While inactive, the firm may allow continued commission payments on customer accounts
• The person cannot perform regular duties
• Continuing Education requirements are suspended
• The 2-year termination clock is tolled (paused) until 90 days after leaving military service

Packaged Product Compensation

Compensation for selling pooled products (variable annuities, mutual funds, DPPs) is strictly regulated. No associated person may accept compensation from anyone other than their employer unless:

• Their firm agrees to the arrangement
• Payments are made through the employing firm
• The firm follows SEC compensation rules
• The firm maintains records including names, amounts, and any non-cash compensation

Section 3: Customer Disputes and FINRA Violations

Customer Complaints

A customer complaint is any written statement from a customer alleging a grievance involving the firm's activities or representatives. Key rules:

• A principal must handle all complaints, no matter how minor
• Firms must report to FINRA within 30 days if aware of complaints involving:
  • Allegations of theft, forgery, or misappropriation of funds
  • Claims for damages over $15,000 (against associated person) or $25,000 (against firm)
• Statistical and summary information must be filed by the 15th day of the month following the calendar quarter

FINRA Code of Arbitration

When customer disputes over money can't be resolved informally, they go to arbitration. Most customers agree to this by signing an arbitration agreement when opening their account.

Mediation offers an alternative where both sides work with a neutral mediator. Unlike arbitration, either side can withdraw at any time, and the mediator's decision is not binding.

FINRA Code of Procedure

The Code of Procedure handles complaints alleging FINRA rule violations—these are disciplinary matters, not customer money disputes. The process:

1. Complaint filed with FINRA Department of Enforcement (DOE)
2. DOE investigates; if meritorious, forwards to Office of Hearing Officers (OHO)
3. OHO sends to respondent; response due within approximately one month
4. OHO determines if violation occurred and appropriate penalties

Appeal Process

• First appeal: National Adjudicatory Council (NAC) at FINRA headquarters in Maryland
• Second appeal: SEC
• Final appeal: Federal court

Penalties

FINRA can impose censure, suspension, expulsion, and fines proportionate to the offense. For criminal matters, cases are forwarded to the SEC and Department of Justice. FINRA cannot impose criminal penalties like jail time.

Section 4: Communications with the Public

Three Categories of Communications

FINRA classifies all communications into three buckets, each with different approval and filing requirements:

Institutional investors include banks, insurance companies, registered investment companies, broker-dealers, RIAs, entities with at least $50 million in assets, government entities, and employee benefit plans with at least 100 participants.

Content Standards for All Communications

Every communication must adhere to principles of fair dealing:

• Cannot omit material facts
• Cannot be misleading
• Cannot predict or project performance (with very limited exceptions)
• Must be fair and balanced—benefits must be accompanied by related risks
• Must disclose conflicts of interest
• Must include firm name and contact information

FINRA Filing Requirements

Filing requirements depend on how long the firm has been a FINRA member:

Required Customer Disclosures

• SIPC information: Display sign in office; provide written notice at account opening and annually
• BrokerCheck information: Provide hotline number, brochure availability, and FINRA website annually
• Options risk disclosure: "Characteristics and Risks of Standardized Options" must be provided before options approval

Section 5: FINRA Conduct Rules

Gifts and Gratuities

The $100 limit is one of the most tested rules: registered representatives are prohibited from giving or receiving gifts worth more than $100 per person per year to or from employees of another firm.

Borrowing and Lending

The general rule is simple: representatives cannot lend money to or borrow money from customers. The exceptions require written approval from the firm and a written agreement between the parties:

Sharing in Customer Accounts

Representatives generally cannot share in the profits or losses of customer accounts. However, sharing is permitted when:

• The customer provides prior written consent
• The firm provides prior written approval
• Sharing is proportionate to capital contribution
• Exception: Proportionality requirement waived for immediate family members

Private Securities Transactions ("Selling Away")

Selling away refers to trades that a registered representative executes outside the scope of their firm—essentially moonlighting in securities. The rule is straightforward:

• Must provide prior written notice to the firm
• All trading activity must go through or be supervised by the firm
• The firm may approve and supervise, disapprove, or take no action (default = disapproval)

Record Retention Summary

Section 6: MSRB Rules

The Municipal Securities Rulemaking Board (MSRB) creates rules for broker-dealers, underwriters, investment advisers, and their representatives who deal in municipal securities. Here's the twist: while the MSRB makes the rules, it doesn't enforce them. That job falls to FINRA, the SEC, and various banking regulators.

Comparing the Regulators

MSRB rules for broker-dealers are enforced by the SEC and FINRA. For non-broker-dealer banks, enforcement falls to the Federal Reserve, FDIC, and OCC.

MSRB Trading and Market Rules

Uniform Practice Code

• Regular way settlement: T+1 (Cash transactions settle same day)
• Good delivery: Securities must be in good physical condition and properly endorsed
• Published quotes: Must generally be firm bids or offers
• Transaction reporting: All trades reported to MSRB's Real-Time Transaction Reporting System (RTRS)

Fair Pricing

All quotes must represent the dealer's best judgment of fair market value. Factors include:

• Overall inventory position
• Inventory position in that specific security
• Anticipated market direction
• Known facts about the issue (called bonds, announced defaults, etc.)

EMMA (Electronic Municipal Market Access)

EMMA is the MSRB's free website for retail investors, providing access to:

• Official statements for most municipal bonds, notes, and 529 plans
• Details on pre-refunded bonds
• Ongoing issuer disclosures and financial information
• Real-time prices and yields via RTRS and SHORT systems
• Investor education resources

MSRB Advertising Rules

The MSRB definition of "advertising" includes any material for public media or promotional literature to be disseminated to the public. Internal memos are excluded.

Political Contributions (Rule G-37)

Here's where municipal finance gets interesting—and where careers can end quickly. A Municipal Finance Professional (MFP) is anyone who performs financial advisory work or underwriting for municipal issuers.

A registered representative who only deals with retail clients is not an MFP. But the moment they negotiate underwriting terms with a municipal issuer, they become one—and subject to the rule. The line can be surprisingly easy to cross.

MSRB Record Retention

Chapter 16 Key Terms Glossary

Chapter 16 covers the regulatory framework you'll operate within throughout your career. These aren't just exam topics—they're the rules that govern every customer interaction, every trade, and every piece of communication you produce. Master them once, apply them daily.