
[Federal Register Volume 82, Number 67 (Monday, April 10, 2017)]
[Notices]
[Pages 17336-17371]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-07046]



[[Page 17335]]

Vol. 82

Monday,

No. 67

April 10, 2017

Part II





Securities and Exchange Commission





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 Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Adopt 
Consolidated FINRA Registration Rules, Restructure the Representative-
Level Qualification Examination Program and Amend the Continuing 
Education Requirements; Notice

  Federal Register / Vol. 82 , No. 67 / Monday, April 10, 2017 / 
Notices  

[[Page 17336]]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80371; File No. SR-FINRA-2017-007]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Adopt 
Consolidated FINRA Registration Rules, Restructure the Representative-
Level Qualification Examination Program and Amend the Continuing 
Education Requirements

April 4, 2017.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 28, 2017, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by FINRA. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt with amendments the NASD and 
Incorporated NYSE rules relating to qualification and registration 
requirements as FINRA rules in the Consolidated FINRA Rulebook.\3\ The 
proposed rule change also restructures the current representative-level 
qualification examinations and creates a general knowledge examination 
and specialized knowledge examinations. In addition, the proposed rule 
change amends the Continuing Education (``CE'') requirements.
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    \3\ The current FINRA rulebook consists of: (1) FINRA rules; (2) 
NASD rules; and (3) Incorporated NYSE rules. While the NASD rules 
generally apply to all FINRA members, the Incorporated NYSE rules 
apply only to those members of FINRA that are also members of the 
NYSE (``dual members''). The FINRA rules apply to all FINRA members, 
unless such rules have a more limited application by their terms. 
For more information about the rulebook consolidation process, see 
Information Notice, March 12, 2008 (Rulebook Consolidation Process).
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    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    Section 15A(g)(3) of the Act authorizes FINRA to prescribe 
standards of training, experience and competence for persons associated 
with FINRA members. Accordingly, FINRA has adopted registration 
requirements to ensure that associated persons attain and maintain 
specified levels of competence and knowledge pertinent to their 
function. The current FINRA registration rules include both NASD rules 
and rules incorporated from the NYSE (``Incorporated NYSE rules'').
    In general, the current rules: (1) Require that persons engaged in 
a member's investment banking or securities business who are to 
function as representatives or principals register with FINRA in each 
category of registration appropriate to their functions by passing one 
or more qualification examinations; (2) exempt specified associated 
persons from the registration requirements; and (3) provide for 
permissive registration of specified persons.
    As part of the process of developing the Consolidated FINRA 
Rulebook, FINRA published Regulatory Notice 09-70 (December 2009), 
seeking comment on a set of proposed consolidated registration 
rules.\4\ The proposed rules, among other changes, allowed any 
associated person to obtain and maintain any registration permitted by 
the member. FINRA also proposed adopting a Retained Associate (``RA'') 
status in the Central Registration Depository (``CRD[supreg]'') system 
for individuals who would be working for a financial services industry 
affiliate of a member, and who would not be working in any capacity for 
the member. Under the proposal, RAs would be able to obtain and 
maintain any registration permitted by the member, subject to specific 
requirements. Further, the proposal created an ``active'' and 
``inactive'' registration status in the CRD system to distinguish 
between required and permissive registrations, including the proposed 
RA status. In addition, the proposal included several other substantive 
changes, such as adoption of a Compliance Officer registration category 
for Chief Compliance Officers (``CCOs''), designation of a Principal 
Financial Officer and Principal Operations Officer, enhancement of the 
examination requirements for Research Principals, adoption of 
registration categories for Supervisory Analysts, Securities Lending 
Representatives and Securities Lending Supervisors, imposition of an 
experience requirement for representatives functioning as principals 
for a limited period before passing a principal examination and 
elimination of the Foreign Associate registration category.
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    \4\ In addition, FINRA had proposed to transfer NASD Rule 
3010(e) relating to background checks on registration applicants 
into the Consolidated FINRA Rulebook as a FINRA rule. FINRA adopted 
NASD Rule 3010(e) as FINRA Rule 3110(e) as part of a separate 
proposed rule change. See Regulatory Notice 15-05 (March 2015).
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    As discussed in Item II.C. below, commenters were concerned with 
the complexity and operational and cost burden of the RA proposal. 
FINRA also engaged in discussions with SEC staff regarding the impact 
of the RA proposal. As a result, FINRA has revised the proposal as 
published in Regulatory Notice 09-70. Specifically, rather than 
allowing individuals to obtain and maintain their registrations based 
on an RA status, the proposed rule change establishes a process whereby 
individuals who would be working for a financial services industry 
affiliate of a member would terminate their registrations with that 
member and would be granted a waiver of their qualification 
requirements upon re-registering with a member, provided the firm that 
is requesting the waiver and the individual satisfy specified 
conditions. FINRA has also eliminated the proposal to create an 
``active'' and ``inactive'' registration status in the CRD system to 
distinguish between required and permissive registrations. Further, 
FINRA is no longer proposing to establish registration categories for 
Securities Lending Representatives and Securities Lending Supervisors.
    FINRA administers qualification examinations that are designed to 
establish that persons associated with FINRA members have attained 
specified levels of competence and knowledge. The first of these 
examinations was established in 1956. Over time, the

[[Page 17337]]

examination program has increased in complexity to address the 
introduction of new products and functions, and related regulatory 
concerns and requirements. As a result, today, there are a large number 
of examinations, considerable content overlap across the 
representative-level examinations and requirements for individuals in 
various segments of the industry to pass multiple examinations.
    To address these issues, FINRA published Regulatory Notice 15-20 
(May 2015), seeking comment on a proposal to restructure the current 
representative-level qualification examination program \5\ into a more 
efficient format whereby all potential representative-level registrants 
would take a general knowledge examination called the Securities 
Industry Essentials\TM\ (``SIE\TM\'') and a tailored, specialized 
knowledge examination for their particular registered role. The 
proposal, among other things, eliminates duplicative testing of general 
securities knowledge on examinations. The proposal also eliminates 
several representative-level registration categories and associated 
examinations that have become outdated or have limited utility. As 
described in more detail in Item II.C. below, most of the commenters 
expressed overall support for the proposed approach.
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    \5\ FINRA is also evaluating the structure of the principal-
level examinations and may propose to streamline this examination 
structure at a later time.
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    The proposed rule change combines the proposals set forth in 
Regulatory Notices 09-70 and 15-20 with a few changes, including those 
made in response to comments.
Proposed Rules
A. Registration Requirements (Proposed FINRA Rule 1210)
    NASD Rules 1021(a) and 1031(a) currently require that persons 
engaged, or to be engaged, in the investment banking or securities 
business of a member who are to function as representatives or 
principals register with FINRA in each category of registration 
appropriate to their functions as specified in NASD Rules 1022 and 
1032.\6\ FINRA is proposing to consolidate and streamline the 
provisions of NASD Rules 1021(a) and 1031(a) and adopt them as FINRA 
Rule 1210, subject to several changes.
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    \6\ In addition, NASD IM-1000-3 provides that the failure to 
register an individual as a registered representative may be deemed 
to be conduct inconsistent with just and equitable principles of 
trade and may be sufficient cause for appropriate disciplinary 
action.
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    Proposed FINRA Rule 1210 provides that each person engaged in the 
investment banking or securities business of a member must register 
with FINRA as a representative or principal in each category of 
registration appropriate to his or her functions and responsibilities 
as specified in proposed FINRA Rule 1220, unless exempt from 
registration pursuant to proposed FINRA Rule 1230. Proposed FINRA Rule 
1210 also provides that such person is not qualified to function in any 
registered capacity other than that for which the person is registered, 
unless otherwise stated in the rules. This latter provision is a 
consolidation of similar provisions in the registration categories 
under the current NASD rules.\7\
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    \7\ See NASD Rules 1022(a)(6), (b)(3), (c)(4), (d)(2), (e)(3) 
and (f)(4) and NASD Rules 1032(b)(2), (c)(2), (d)(3), (e)(2), 
(f)(3), (g)(2), (h)(3) and (i)(4).
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    The original proposal in Regulatory Notice 09-70 created an 
``active'' and ``inactive'' registration status in the CRD system to 
distinguish between required and permissive registrations, and it 
required firms to notify FINRA of such status. The proposed rule change 
eliminates the distinction between an ``active'' and ``inactive'' 
status.\8\
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    \8\ However, as is the case under the current rules, FINRA will 
continue to use the term ``inactive'' in the CRD system in reference 
to persons who have failed to satisfy the Regulatory Element of the 
CE requirements, persons who have failed to submit their fingerprint 
information within the required time period and persons who are in 
active duty in the Armed Forces of the United States.
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    Further, FINRA is proposing to delete NASD IM-1000-3 because it is 
superfluous. The failure to register a representative as required under 
current NASD Rule 1031(a) is in fact a violation of FINRA rules.
B. Minimum Number of Registered Principals (Proposed FINRA Rule 
1210.01)
    NASD Rule 1021(e)(1) currently requires that a member, except a 
sole proprietorship, have a minimum of two registered principals with 
respect to each aspect of the member's investment banking and 
securities business pursuant to the applicable provisions of NASD Rule 
1022.\9\ This requirement applies to applicants for membership and 
existing members.
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    \9\ In 2003, the rule was amended to replace the phrase 
``pursuant to the provisions of Rule 1022(a), (d) and (e), whichever 
are applicable'' with the current phrase ``pursuant to the 
applicable provisions of Rule 1022.'' See Securities Exchange Act 
Release No. 47433 (March 3, 2003), 68 FR 11424 (March 10, 2003) 
(Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change; File No. SR-NASD-2003-24). NASD Rules 1022(a), (d) and (e) 
are the registration categories of General Securities Principal, 
Investment Company and Variable Contracts Products Principal and 
Direct Participation Programs Principal, respectively. These 
principal registration categories, which depend on the scope of a 
firm's activities, are the only current principal categories that 
satisfy the two-principal requirement. The 2003 change was made for 
stylistic purposes and was part of other technical changes to the 
registration rules.
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    NASD Rule 1021(e)(2) provides that, pursuant to the FINRA Rule 9600 
Series, FINRA may waive the two-principal requirement in situations 
that indicate conclusively that only one person associated with an 
applicant for membership should be required to register as a principal.
    NASD Rule 1021(e)(3) provides that an applicant for membership, if 
the nature of its business so requires, must also have a Financial and 
Operations Principal (or an Introducing Broker-Dealer Financial and 
Operations Principal) and a Registered Options Principal.\10\
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    \10\ NASD Rules 1022(b) and (c) require all firms to have a 
Financial and Operations Principal or an Introducing Broker-Dealer 
Financial and Operations Principal, as applicable. This requirement 
became effective on September 17, 2001. However, the requirement 
does not apply to members that were granted an exemption prior to 
September 17, 2001. See Notice to Members (``NTM'') 01-52 (August 
2001).
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    FINRA is proposing to adopt NASD Rule 1021(e) as FINRA Rule 
1210.01, subject to the changes below. FINRA is proposing to provide 
firms that limit the scope of their business with greater flexibility 
to satisfy the two-principal requirement. In particular, proposed FINRA 
Rule 1210.01 requires that a member have a minimum of two General 
Securities Principals, provided that a member that is limited in the 
scope of its activities may instead have two officers or partners who 
are registered in a principal category that corresponds to the scope of 
the member's activities.\11\ For instance, if a firm's business is 
limited to securities trading, the firm may opt to have two Securities 
Trader Principals, instead of two General Securities Principals.
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    \11\ The principal registration categories are described in 
greater detail below.
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    Currently, a sole proprietor member (without any other associated 
persons) is not subject to the two-principal requirement because such 
member is operating as a one-person firm. Given that one-person firms 
may be organized in legal forms other than a sole proprietorship (such 
as a single-person limited liability company), proposed FINRA Rule 
1210.01 provides that any member with only one associated person is 
excluded from the two-principal requirement.
    In addition, proposed FINRA Rule 1210.01 clarifies that existing 
members as well as new applicants may request

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a waiver of the two-principal requirement.
    The proposed rule further provides that all members are required to 
have a Financial and Operations Principal (or an Introducing Broker-
Dealer Financial and Operations Principal, as applicable), a Principal 
Financial Officer and a Principal Operations Officer.\12\ Moreover, the 
proposed rule requires that: (1) A member engaged in investment banking 
activities have an Investment Banking Principal; \13\ (2) a member 
engaged in research activities have a Research Principal; (3) a member 
engaged in securities trading activities have a Securities Trader 
Principal; and (4) a member engaged in options activities with the 
public have a Registered Options Principal. These requirements extend 
to existing members as well as new applicants.
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    \12\ Those members that are currently exempt from the 
requirement to have a Financial and Operations Principal or an 
Introducing Broker-Dealer Financial and Operations Principal based 
on an exemption granted to them prior to September 17, 2001 will 
continue to be exempt from this requirement. However, as noted 
below, such members will be subject to the requirement to designate 
a Principal Financial Officer and a Principal Operations Officer.
    \13\ As described below, the Investment Banking Principal 
registration category is a newly proposed principal category that 
corresponds to the registration requirements of current NASD Rule 
1022(a)(1)(B).
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C. Permissive Registrations (Proposed FINRA Rule 1210.02)
    NASD Rules 1021(a) and 1031(a) currently permit a member to 
register or maintain the registration(s) as a representative or 
principal of an individual performing legal, compliance, internal 
audit, back-office operations \14\ or similar responsibilities for the 
member. NASD Rule 1031(a) also permits a member to register or maintain 
the registration as a representative of an individual performing 
administrative support functions for registered persons. In addition, 
NASD Rules 1021(a) and 1031(a) permit a member to register or maintain 
the registration(s) as a representative or principal of an individual 
engaged in the investment banking or securities business of a foreign 
securities affiliate or subsidiary of the member.
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    \14\ Back-office personnel that are functioning as Operations 
Professionals as set forth in FINRA Rule 1230(b)(6) are subject to 
the Operations Professional registration requirement.
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    FINRA is proposing to consolidate these provisions under FINRA Rule 
1210.02. FINRA is also proposing to expand the scope of permissive 
registrations and clarify a member's obligations regarding individuals 
who are maintaining such registrations.\15\
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    \15\ In 2007, FINRA filed with the SEC a similar proposed rule 
change. The proposed rule change was not published for comment in 
the Federal Register. See SR-FINRA-2007-004. FINRA withdrew SR-
FINRA-2007-004 prior to filing this proposed rule change.
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    Specifically, proposed FINRA Rule 1210.02 allows any associated 
person to obtain and maintain any registration permitted by the 
member.\16\ For instance, an associated person of a member working 
solely in a clerical or ministerial capacity, such as in an 
administrative capacity, would be able to obtain and maintain a General 
Securities Representative registration with the member. As another 
example, an associated person of a member who is registered, and 
functioning solely, as a General Securities Representative would be 
able to obtain and maintain a General Securities Principal registration 
with the member. Further, proposed FINRA Rule 1210.02 allows an 
individual engaged in the investment banking or securities business of 
a foreign securities affiliate or subsidiary of a member to obtain and 
maintain any registration permitted by the member.
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    \16\ In Regulatory Notice 09-70, FINRA referred to such 
individuals as associated person engaged in a bona fide business 
purpose of a member.
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    FINRA is proposing to permit the registration of such individuals 
for several reasons. First, a member may foresee a need to move a 
former representative or principal who has not been registered for two 
or more years back into a position that would require such person to be 
registered. Currently, such persons are required to requalify (or 
obtain a waiver of the applicable qualification examinations) and 
reapply for registration. Second, the proposed rule change would allow 
members to develop a depth of associated persons with registrations in 
the event of unanticipated personnel changes. Third, allowing 
registration in additional categories encourages greater regulatory 
understanding. Finally, the proposed rule change would eliminate an 
inconsistency in the current rules, which permit some associated 
persons of a member to obtain permissive registrations, but not others 
who equally are engaged in the member's business.
    Individuals maintaining a permissive registration under the 
proposed rule change would be considered registered persons and subject 
to all FINRA rules, to the extent relevant to their activities.\17\ For 
instance, an individual working solely in an administrative capacity 
would be able to maintain a General Securities Representative 
registration and would be considered a registered person for purposes 
of FINRA Rule 3240 relating to borrowing from or lending to customers, 
but the rule would have no practical application to his or her conduct 
because he or she would not have any customers.
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    \17\ The original proposal included a subset of FINRA rules to 
which these individuals would be subject. FINRA believes that the 
revised approach, which is principle-based, provides firms the 
flexibility to tailor their supervisory systems to their business 
models and reduces the burden on FINRA of having to revise the 
subset of applicable rules each time FINRA adopts a new rule or 
amends an existing rule.
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    Consistent with the requirements of FINRA Rule 3110, members would 
be required to have adequate supervisory systems and procedures 
reasonably designed to ensure that individuals with permissive 
registrations do not act outside the scope of their assigned functions. 
With respect to an individual who solely maintains a permissive 
registration, such as an individual working exclusively in an 
administrative capacity, the individual's day-to-day supervisor may be 
a non-registered person. For purposes of compliance with FINRA Rule 
3110(a)(5) (which requires the assignment of each registered person to 
an appropriately registered supervisor), members would be required to 
assign a registered supervisor to this person who would be responsible 
for periodically contacting such individual's day-to-day supervisor to 
verify that the individual is not acting outside the scope of his or 
her assigned functions. If such individual is permissively registered 
as a representative, the registered supervisor must be registered as a 
representative or principal. If the individual is permissively 
registered as a principal, the registered supervisor must be registered 
as a principal.\18\
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    \18\ In either case, the registered supervisor of an individual 
who solely maintains a permissive registration would not be required 
to be registered in the same representative or principal 
registration category as the permissively-registered individual. For 
instance, for purposes of FINRA Rule 3110(a)(5), an Investment 
Company and Variable Contracts Products Principal would be able to 
function as the registered supervisor of an individual who is 
permissively maintaining a General Securities Principal 
registration.
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    FINRA is also considering enhancements to the CRD system and 
BrokerCheck, as part of a separate proposal, to identify whether a 
registered person is maintaining only a permissive registration and to 
disclose the significance of such permissive registration to the 
general public.
D. Qualification Examinations and Waivers of Examinations (Proposed 
FINRA Rule 1210.03)
    NASD Rules 1021(a) and 1031(a) currently set forth general 
requirements

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that an individual pass an appropriate qualification examination before 
his or her registration as a representative or principal can become 
effective. Incorporated NYSE Rule 345.15(1)(a) includes a substantially 
similar requirement. FINRA is proposing to consolidate these provisions 
and adopt them as FINRA Rule 1210.03.
    In addition, as noted above, FINRA is proposing to adopt a 
restructured representative-level qualification examination program 
whereby representative-level registrants would be required to take a 
general knowledge examination (the SIE) and a specialized knowledge 
examination \19\ appropriate to their job functions at the firm with 
which they are associating. Therefore, proposed FINRA Rule 1210.03 
provides that before the registration of a person as a representative 
can become effective under proposed FINRA Rule 1210, such person must 
pass the SIE and an appropriate representative-level qualification 
examination as specified in proposed FINRA Rule 1220.\20\ Proposed 
FINRA Rule 1210.03 also provides that before the registration of a 
person as a principal can become effective under proposed FINRA Rule 
1210, such person must pass an appropriate principal-level 
qualification examination as specified in proposed FINRA Rule 1220.
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    \19\ The term ``specialized'' as used in the proposed rule 
change is only intended for discussion purposes to identify the 
proposed representative-level examinations and distinguish them from 
the current representative-level examinations. FINRA is not 
proposing to use the term ``specialized'' in the proposed rule text.
    \20\ Proposed FINRA Rule 1220 sets forth each registration 
category and applicable qualification examination.
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    Further, proposed FINRA Rule 1210.03 provides that if a registered 
person's job functions change and he or she needs to become registered 
in another representative-level category, he or she would not need to 
pass the SIE again. Rather, the registered person would need to pass 
only the appropriate representative-level qualification examination.
    Moreover, proposed FINRA Rule 1210.03 provides that all associated 
persons, such as associated persons whose functions are solely and 
exclusively clerical or ministerial, are eligible to take the SIE. 
Proposed FINRA Rule 1210.03 also provides that individuals who are not 
associated persons of firms, such as members of the general public, are 
eligible to take the SIE. FINRA believes that expanding the pool of 
individuals who are eligible to take the SIE would enable prospective 
securities industry professionals to demonstrate to prospective 
employers a basic level of knowledge prior to submitting a job 
application. Further, this approach would allow for more flexibility 
and career mobility within the securities industry. While all 
associated persons of firms as well as individuals who are not 
associated persons would be eligible to take the SIE pursuant to 
proposed FINRA Rule 1210.03, passing the SIE alone would not qualify 
them for registration with FINRA. Rather, to be eligible for 
registration with FINRA, an individual must pass an applicable 
representative or principal qualification examination and complete the 
other requirements of the registration process.
    The SIE would assess basic product knowledge; the structure and 
function of the securities industry markets, regulatory agencies and 
their functions; and regulated and prohibited practices. In particular, 
the SIE will cover four major areas. The first, ``Knowledge of Capital 
Markets,'' focuses on topics such as types of markets and offerings, 
broker-dealers and depositories, and economic cycles. The second, 
``Understanding Products and Their Risks,'' covers securities products 
at a high level as well as associated investment risks. The third, 
``Understanding Trading, Customer Accounts and Prohibited Activities,'' 
focuses on accounts, orders, settlement and prohibited activities. The 
final area, ``Overview of the Regulatory Framework,'' encompasses 
topics such as SROs, registration requirements and specified conduct 
rules. FINRA is anticipating that the SIE would include 75 scored 
questions plus an additional 10 unscored pretest questions.\21\ The 
passing score would be determined through methodologies compliant with 
testing industry standards used to develop examinations and set passing 
standards.
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    \21\ Pretest questions are designed to ensure that new 
examination items meet acceptable testing standards prior to use for 
scoring purposes. Consistent with FINRA's current practice, the SIE 
would include 10 additional, unidentified pretest questions that do 
not contribute towards the individual's score. Therefore, the SIE 
actually would consist of 85 questions, 75 of which would be scored. 
The 10 pretest questions would be randomly distributed throughout 
the examination.
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    The current FINRA representative-level examination program consists 
of 16 examinations (Series 6, 7, 11, 17, 22, 37, 38, 42, 57, 62, 72, 
79, 82, 86, 87 and 99). As described in greater detail below, FINRA is 
proposing to eliminate the current registration categories of Order 
Processing Assistant Representative, United Kingdom Securities 
Representative, Canadian Securities Representative, Options 
Representative, Corporate Securities Representative and Government 
Securities Representative as well as the associated examinations, the 
Series 11, Series 17, Series 37, Series 38, Series 42, Series 62 and 
Series 72, respectively. In addition, FINRA is proposing to revise the 
remaining representative-level qualification examinations, which 
include the Series 6, Series 7, Series 22, Series 57, Series 79, Series 
82, Series 86, Series 87 and Series 99, to develop specialized 
knowledge examinations.
    FINRA is consulting with committees of industry subject matter 
experts to develop the content of the specialized knowledge 
examinations, which would exclude the content covered on the SIE. FINRA 
will file the SIE and the specialized knowledge examinations, including 
the content outlines for each examination, with the SEC separately.
    The proposed rule change solely impacts the representative-level 
qualification requirements. The proposed rule change does not change 
the scope of the activities under the remaining representative 
categories. For instance, after the effective date of the proposed rule 
change, a previously unregistered individual registering as a Direct 
Participation Programs Representative for the first time would be 
required to pass the SIE and an appropriate specialized knowledge 
examination. However, such individual may engage only in those 
activities in which a current Direct Participation Programs 
Representative may engage under current NASD Rule 1032(c).
    The table below illustrates the proposed changes to the 
representative-level examinations, including the anticipated number of 
questions \22\ on each specialized knowledge examination, for those 
representative categories that would be retained under the proposed 
rule change.
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    \22\ The specified number of questions for each specialized 
knowledge examination are [sic] estimates. The final number of 
questions on each examination may slightly vary based on additional 
work with the respective examination committees. Further, the table 
does not include the number of pretest questions on each of the 
listed examinations.

[[Page 17340]]



------------------------------------------------------------------------
 Registration category  (and         Current              Proposed
   CRD system designation)       examination(s)        examination(s)
------------------------------------------------------------------------
Investment Company and        Series 6 (100         SIE (75 questions) +
 Variable Contracts Products   questions).           Specialized Series
 Representative (IR).                                6 (50 questions).
General Securities            Series 7 (250         SIE (75 questions) +
 Representative (GS).          questions).           Specialized Series
                                                     7 (125 questions).
Direct Participation          Series 22 (100        SIE (75 questions) +
 Programs Representative       questions).           Specialized Series
 (DR).                                               22 (50 questions).
Securities Trader (TD)......  Series 57 (125        SIE (75 questions) +
                               questions).           Specialized Series
                                                     57 (50 questions).
Investment Banking            Series 79 (175        SIE (75 questions) +
 Representative (IB).          questions).           Specialized Series
                                                     79 (75 questions).
Private Securities Offerings  Series 82 (100        SIE (75 questions) +
 Representative (PR).          questions).           Specialized Series
                                                     82 (50 questions).
Research Analyst (RS).......  Series 7 (250         SIE (75 questions) +
                               questions) + Series   Specialized Series
                               86 (Part I:           86 (Part I:
                               Analysis) (100        Analysis) (100
                               questions) + Series   questions) +
                               87 (Part II:          Specialized Series
                               Regulatory            87 (Part II:
                               Administration and    Regulatory
                               Best Practices) (50   Administration and
                               questions).           Best Practices) (50
                                                     questions).
Operations Professional (OS)  Series 99 (100        SIE (75 questions) +
                               questions).           Specialized Series
                                                     99 (50 questions).
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    As noted in the table, FINRA is anticipating that the number of 
questions on each specialized knowledge examination would be equal to 
or shorter than the current qualification examination that it would 
replace. For example, the specialized Series 7 examination for General 
Securities Representatives would include 125 questions instead of the 
250 questions on the current Series 7 examination, and the specialized 
Series 6 examination for Investment Company and Variable Contracts 
Products Representatives would include 50 questions instead of the 100 
questions on the current Series 6 examination. However, the total 
number of questions on the SIE plus the applicable specialized 
knowledge examination could be fewer or greater than the number of 
questions on the current examinations.
    As discussed below, FINRA is also proposing to eliminate the 
current prerequisite registration requirement for Research Analysts. An 
individual seeking registration as a Research Analyst would no longer 
be required to first register as a General Securities Representative as 
currently required. Instead, such individuals would need to pass the 
SIE and corresponding specialized knowledge examination for Research 
Analyst, which, as reflected in the table above, would decrease from 
400 questions to 225 questions the total number of questions for 
individuals registering as Research Analysts.
    Moreover, under the proposed rule change, individuals seeking 
registration in two or more representative-level categories would 
experience a net decrease in the total number of questions because the 
SIE content would be tested only once. For example, an individual who 
seeks registration as a General Securities Representative and an 
Investment Banking Representative today would take two examinations, 
the Series 7 and Series 79, totaling 425 questions. Under the proposed 
structure, an individual who seeks registration in the same categories 
would take the SIE, the specialized Series 7 examination and the 
specialized Series 79 examination, totaling 275 questions.
    Individuals who are registered on the effective date of the 
proposed rule change would be eligible to maintain those registrations 
without being subject to any additional requirements. Individuals who 
had been registered within the past two years prior to the effective 
date of the proposed rule change would also be eligible to maintain 
those registrations without being subject to any additional 
requirements, provided that they re-register with FINRA within two 
years from the date of their last registration. Further, such 
individuals, with the exception of Order Processing Assistant 
Representatives and Foreign Associates, would be considered to have 
passed the SIE in the CRD system, and thus if they wish to register in 
any other representative category after the effective date of the 
proposed rule change, they could do so by taking only the appropriate 
specialized knowledge examination.\23\ However, with respect to an 
individual who is not registered on the effective date of the proposed 
rule change but was registered within the past two years prior to the 
effective date of the proposed rule change, the individual's SIE status 
in the CRD system would be administratively terminated if such 
individual does not register with FINRA within four years from the date 
of the individual's last registration.\24\
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    \23\ As noted above, FINRA is evaluating the structure of the 
principal-level examinations. Under the proposed rule change, only 
individuals who have passed an appropriate representative-level 
examination would be considered to have passed the SIE. Registered 
principals who do not hold an appropriate representative-level 
registration would not be considered to have passed the SIE. For 
example, an individual who is registered solely as a Financial and 
Operations Principal (Series 27) today would have to take the Series 
7 to become registered as a General Securities Representative. Under 
the proposed rule change, in the future, this individual would have 
to pass the SIE and the specialized Series 7 examination to obtain 
registration as a General Securities Representative.
    \24\ As discussed below, FINRA is proposing a four-year 
expiration period for the SIE.
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    In addition, individuals, with the exception of Order Processing 
Assistant Representatives and Foreign Associates, who had been 
registered as representatives two or more years, but less than four 
years, prior to the effective date of the proposed rule change would 
also be considered to have passed the SIE and designated as such in the 
CRD system. Moreover, if such individuals re-register with a firm after 
the effective date of the proposed rule change and within four years of 
having been previously registered, they would only need to pass the 
specialized knowledge examination associated with that registration 
position. However, if they do not register with FINRA within four years 
from the date of their last registration, their SIE status in the CRD 
system would be administratively terminated.
    Subject to Commission approval and the timing of such approval, 
FINRA intends to implement the revised structure in March 2018. Similar 
to the current process for registration, firms would continue to use 
the CRD system to request registrations for representatives. An 
individual would be able to schedule both the SIE and

[[Page 17341]]

specialized knowledge examinations for the same day, provided the 
individual is able to reserve space at one of FINRA's designated 
testing centers.
    Further, FINRA is proposing to create an enrollment system separate 
from the CRD system to allow individuals who are not associated persons 
of a firm, including members of the general public, to enroll and pay 
the SIE examination fee. This system would also be available to 
associated persons of firms who are not required to be registered with 
FINRA. The enrollment system would provide individuals using the system 
with documentation (either in paper or electronic format) of a passing 
or failing result.
    A firm would be able to obtain SIE results for associated persons 
who are registering as representatives through the CRD system. In 
addition, a firm would be able to view the passing status of an 
associated person who is not registering as a representative and an 
individual seeking to associate with the firm using an interface within 
the CRD system. The CRD system would also automatically obtain an 
individual's SIE results once a firm submits a Form U4 (Uniform 
Application for Securities Industry Registration or Transfer) and 
requests a registration for that individual.
    FINRA is currently conducting a pricing analysis to determine a 
reasonable fee for the SIE and the specialized knowledge examinations. 
FINRA will file the examination fees with the SEC separately.
    Finally, paragraph (d) of NASD Rule 1070 currently permits FINRA, 
in exceptional cases and where good cause is shown, to waive the 
applicable qualification examination and accept other standards as 
evidence of an applicant's qualifications for registration. The 
Incorporated NYSE rules include substantially similar provisions.\25\ 
FINRA is proposing to transfer the provisions of NASD Rule 1070(d) into 
proposed FINRA Rule 1210.03 with the following changes.\26\ The 
proposed rule provides that FINRA will only consider examination waiver 
requests submitted by a firm for individuals associated with the firm 
who are seeking registration in a representative- or principal-level 
registration category. Moreover, proposed FINRA Rule 1210.03 states 
that FINRA will consider waivers of the SIE alone or the SIE and the 
representative- and principal-level examination(s) for such 
individuals. FINRA would not consider a waiver of the SIE for non-
associated persons or for associated persons who are not registering as 
representatives or principals.
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    \25\ See Incorporated NYSE Rule 345.15(1)(b) and NYSE Rule 
Interpretation 345.15/01.
    \26\ NASD Rules 1070(a), (b) and (c) provide general information 
relating to the examination process. FINRA is proposing to delete 
these provisions given that they relate to the administration of the 
examination program rather than rule requirements.
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E. Requirements for Registered Persons Functioning as Principals for a 
Limited Period (Proposed FINRA Rule 1210.04)
    NASD Rule 1021(d) provides that a person who is currently 
registered with a member as a representative and whose duties are 
changed by the member so as to require registration as a principal may 
function as a principal for up to 90 calendar days before he or she is 
required to pass the appropriate qualification examination for 
principal. In addition, it allows a formerly registered representative 
who is required to register as a principal to function as a principal 
without passing the appropriate principal qualification examination for 
up to 90 calendar days, provided the person first satisfies all 
applicable prerequisite requirements. A person who has never been 
registered does not qualify for this exception.
    FINRA is proposing to adopt NASD Rule 1021(d) as FINRA Rule 
1210.04, subject to the following changes. Proposed FINRA Rule 1210.04 
states that a member may designate any person currently registered, or 
who becomes registered, with the member as a representative to function 
as a principal for a limited period, provided that such person has at 
least 18 months of experience functioning as a registered 
representative within the five-year period immediately preceding the 
designation. This change is intended to ensure that representatives 
designated to function as principals for the limited period under the 
proposed rule have an appropriate level of registered representative 
experience. The proposed rule clarifies that the requirements of the 
rule apply to designations to any principal category, including those 
categories that are not subject to a prerequisite representative-level 
registration requirement, such as the Financial and Operations 
Principal registration category.\27\
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    \27\ In this regard, FINRA notes that, as is currently the case, 
qualifying as a registered representative is a prerequisite to 
qualifying as a principal except with respect to the following 
principal-level registrations: (1) Compliance Official; (2) 
Supervisory Analyst; (3) Financial and Operations Principal; and (4) 
Introducing Broker-Dealer Financial and Operations Principal.
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    The proposed rule also clarifies that the individual must fulfill 
all applicable prerequisite registration, fee and examination 
requirements before his or her designation as a principal. Further, the 
proposed rule extends the limited period that such person may function 
as a principal before passing the applicable principal examination from 
90 calendar days to 120 calendar days (because the current window in 
the CRD system for passing an examination is 120 calendar days). A 
person registered as an Order Processing Assistant Representative or a 
Foreign Associate would be prohibited from functioning as a principal 
for purposes of proposed FINRA Rule 1210.04 because of the very limited 
scope of his or her activities. The proposed rule also provides an 
exception to the experience requirement for principals who are 
designated by members to function in other principal categories for a 
limited period. Specifically, the proposed rule states that a member 
may designate any person currently registered, or who becomes 
registered, with the member as a principal to function in another 
principal category for 120 calendar days before passing any applicable 
examinations. Finally, the proposed rule clarifies that members that 
lose their sole Registered Options Principal are subject to separate 
requirements set forth in proposed FINRA Rule 1220.03.
F. Rules of Conduct for Taking Examinations and Confidentiality of 
Examinations (Proposed FINRA Rule 1210.05)
    Before taking an examination, FINRA currently requires each 
candidate to agree to the Rules of Conduct for taking a qualification 
examination. Among other things, the examination Rules of Conduct 
require each candidate to attest that he or she is in fact the person 
who is taking the examination. These Rules of Conduct also require that 
each candidate agree that the examination content is the intellectual 
property of FINRA and that the content cannot be copied or 
redistributed by any means. If FINRA discovers that a candidate has 
violated the Rules of Conduct for taking a qualification examination, 
the candidate may forfeit the results of the examination and may be 
subject to disciplinary action by FINRA. For instance, for cheating on 
a qualifications examination, FINRA's Sanction Guidelines recommend a 
bar.\28\
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    \28\ See FINRA Sanction Guidelines at 40 (2013), http://www.finra.org/sites/default/files/Sanctions_Guidelines.pdf.
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    FINRA is proposing to codify the requirements relating to the Rules 
of Conduct for examinations under FINRA Rule 1210.05. FINRA is also 
proposing

[[Page 17342]]

to adopt Rules of Conduct for taking the SIE for associated persons and 
non-associated persons who take the SIE. Specifically, proposed FINRA 
Rule 1210.05 states that associated persons taking the SIE would be 
subject to the SIE Rules of Conduct, and associated persons taking a 
representative or principal examination would be subject to the Rules 
of Conduct for representative and principal examinations. Pursuant to 
proposed FINRA Rule 1210.05, a violation of the SIE Rules of Conduct or 
the Rules of Conduct for representative and principal examinations by 
an associated person would be deemed to be a violation of FINRA Rule 
2010. Moreover, if FINRA determines that an associated person has 
violated the SIE Rules of Conduct or the Rules of Conduct for 
representative and principal examinations, the associated person may 
forfeit the results of the examination and may be subject to 
disciplinary action by FINRA.
    Further, the proposed rule states that individuals taking the SIE 
who are not associated persons must agree to be subject to the SIE 
Rules of Conduct. Among other things, the SIE Rules of Conduct would 
require individuals to attest that they are not qualified to engage in 
the investment banking or securities business based on passing the SIE 
and would prohibit individuals from cheating on the examination or 
misrepresenting their qualifications to the public subsequent to 
passing the SIE. Moreover, non-associated persons may forfeit their SIE 
results and may be prohibited from retaking the SIE if FINRA determines 
that they cheated on the SIE or that they misrepresented their 
qualifications to the public subsequent to passing the SIE. In 
addition, if FINRA discovers that non-associated persons who have 
passed the SIE have subsequently engaged in other types of misconduct, 
FINRA would refer the matter to the appropriate authorities or 
regulators.
    NASD Rule 1080 currently requires that qualification examinations 
content be kept confidential and addresses the disciplinary 
implications of violating the confidentiality provision.\29\ FINRA is 
proposing to transfer the provisions of NASD Rule 1080 with non-
substantive changes into proposed FINRA Rule 1210.05.
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    \29\ See also NYSE Information Memorandum 88-37 (November 1988).
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G. Waiting Periods for Retaking a Failed Examination (Proposed FINRA 
Rule 1210.06)
    NASD Rule 1070(e) currently sets forth waiting periods for retaking 
failed examinations.\30\ The rule provides that a person who fails a 
qualification examination would be permitted to retake the examination 
after either a period of 30 calendar days has elapsed from the date of 
the prior examination or the next administration of an examination 
administered on a monthly basis. However, if the person fails an 
examination three or more times in succession, he or she would be 
prohibited from retaking the examination either until a period of 180 
calendar days has elapsed from the date of his or her last attempt to 
pass the examination or until the sixth subsequent administration of an 
examination administered on a monthly basis. FINRA is proposing to 
adopt NASD Rule 1070(e) as FINRA Rule 1210.06, with the following 
changes.
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    \30\ See also NYSE Information Memorandum 04-16 (March 2004).
---------------------------------------------------------------------------

    Proposed FINRA Rule 1210.06 provides that a person who fails an 
examination may retake that examination after 30 calendar days from the 
date of the person's last attempt to pass that examination. The 
proposed rule deletes the reference to examinations administered on a 
monthly basis because examinations are no longer administered in such a 
manner.
    Proposed FINRA Rule 1210.06 further provides that if a person fails 
an examination three or more times in succession within a two-year 
period, the person is prohibited from retaking that examination until 
180 calendar days from the date of the person's last attempt to pass 
it. These waiting periods would apply to the SIE and the 
representative- and principal-level examinations. Moreover, the 
proposed rule provides that non-associated persons taking the SIE must 
agree to be subject to the same waiting periods for retaking the SIE.
H. CE Requirements (Proposed FINRA Rule 1210.07)
    Pursuant to FINRA Rule 1250,\31\ the CE requirements applicable to 
registered persons consist of a Regulatory Element \32\ and a Firm 
Element.\33\ The Regulatory Element applies to registered persons and 
must be completed within prescribed time frames.\34\ For purposes of 
the Regulatory Element, a ``registered person'' is defined as any 
person registered with FINRA as a representative, principal, assistant 
representative or research analyst.\35\ The Firm Element consists of 
annual, member-developed and administered training programs designed to 
keep covered registered persons current regarding securities products, 
services and strategies offered by the member. For purposes of the Firm 
Element, the term ``covered registered persons'' is defined as any 
registered person who has direct contact with customers in the conduct 
of the member's securities sales, trading and investment banking 
activities, any person registered as an Operations Professional 
pursuant to FINRA Rule 1230(b)(6) or as a Research Analyst pursuant to 
NASD Rule 1050, and the immediate supervisors of such persons.\36\
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    \31\ As discussed below, FINRA is proposing to renumber FINRA 
Rule 1250 as FINRA Rule 1240 as part of this proposed rule change.
    \32\ See FINRA Rule 1250(a).
    \33\ See FINRA Rule 1250(b).
    \34\ Pursuant to FINRA Rule 1250(a), each specified registered 
person is required to complete the Regulatory Element initially 
within 120 days after the person's second registration anniversary 
date and, thereafter, within 120 days after every third registration 
anniversary date. A registered person who has not completed the 
Regulatory Element program within the prescribed time frames will 
have his or her FINRA registrations deemed inactive and designated 
as ``CE inactive'' on the CRD system until such time as the 
requirements of the program have been satisfied. A CE inactive 
person is prohibited from performing, or being compensated for, any 
activities requiring registration, including supervision. See also 
NTM 95-35 (May 1995). Moreover, if a registered person is CE 
inactive for a two-year period, FINRA will administratively 
terminate the person's registration status with FINRA. The two-year 
period would be calculated from the date the person becomes CE 
inactive. If a registered person becomes CE inactive but is not 
registered with a member when the two-year period ends, FINRA will 
nevertheless update the CRD system to reflect that the person did 
not satisfy the Regulatory Element program. In either case, such 
person must requalify (or obtain a waiver of the applicable 
qualification examination(s)) to be re-eligible for registration.
    \35\ See FINRA Rule 1250(a)(5).
    \36\ See FINRA Rule 1250(b)(1).
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    FINRA believes that all registered persons, regardless of their 
activities, should be subject to the Regulatory Element of the CE 
requirements so that they can keep their knowledge of the securities 
industry current. Therefore, FINRA is proposing to adopt FINRA Rule 
1210.07 to clarify that all registered persons, including those who 
solely maintain a permissive registration, are required to satisfy the 
Regulatory Element, as specified in proposed FINRA Rule 1240. FINRA is 
making corresponding changes to proposed FINRA Rule 1240. FINRA is not 
proposing any changes to the Firm Element requirement at this time. 
Individuals who have passed the SIE but not a representative- or 
principal-

[[Page 17343]]

level examination and do not hold a registered position would not be 
subject to any CE requirements.
    Consistent with current practice, proposed FINRA Rule 1210.07 also 
provides that a registered person of a member who becomes CE inactive 
would not be permitted to be registered in another registration 
category with that member or be registered in any registration category 
with another member, until the person has satisfied the Regulatory 
Element.
I. Lapse of Registration and Expiration of SIE (Proposed FINRA Rule 
1210.08)
    NASD Rule 1021(c) currently states that any person whose 
registration has been revoked pursuant to FINRA Rule 8310 or whose most 
recent registration as a principal has been terminated for a period of 
two or more years immediately preceding the date of receipt by FINRA of 
a new application is required to pass a qualification examination for 
principals appropriate to the category of registration as specified in 
NASD Rule 1022. Pursuant to NASD Rule 1031(c), any person whose 
registration has been revoked pursuant to FINRA Rule 8310 or whose most 
recent registration as a representative or principal has been 
terminated for a period of two or more years immediately preceding the 
date of receipt by FINRA of a new application is required to pass a 
qualification examination for representatives appropriate to the 
category of registration as specified in NASD Rule 1032.\37\ The two 
years are calculated from the termination date stated on the 
individual's Form U5 (Uniform Termination Notice for Securities 
Industry Registration) and the date FINRA receives a new application 
for registration.
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    \37\ In addition, NASD Rule 1041(c) provides that if any person 
whose most recent registration as an Order Processing Assistant 
Representative has been terminated for a period of two or more years 
immediately preceding the date of receipt by FINRA of a new 
application is required to pass a qualification examination for 
Order Processing Assistant Representative. As discussed below, FINRA 
is proposing to eliminate NASD Rule 1041(c) as part of the 
elimination of the Order Processing Assistant Representative 
registration category.
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    FINRA is proposing to consolidate the requirements of NASD Rules 
1021(c) and 1031(c) and adopt them as FINRA Rule 1210.08. Proposed 
FINRA Rule 1210.08 clarifies that, for purposes of the proposed rule, 
an application would not be considered to have been received by FINRA 
if that application does not result in a registration.
    Proposed FINRA Rule 1210.08 also sets forth the expiration period 
of the SIE. Based on the content covered on the SIE, FINRA is proposing 
that a passing result on the SIE be valid for four years. Therefore, 
under the proposed rule change, an individual who passes the SIE and is 
an associated person of a firm at the time would have up to four years 
from the date he or she passes the SIE to pass a representative-level 
examination to register as a representative with that firm, or a 
subsequent firm, without having to retake the SIE. In addition, an 
individual who passes the SIE and is not an associated person at the 
time would have up to four years from the date he or she passes the SIE 
to become an associated person of a firm and pass a representative-
level examination and register as a representative without having to 
retake the SIE.
    Moreover, an individual holding a representative-level registration 
who leaves the industry after the effective date of the proposed rule 
change would have up to four years to reassociate with a firm and 
register as a representative without having to retake the SIE. However, 
the four-year expiration period in the proposed rule change extends 
only to the SIE, and not the representative- and principal-level 
registrations. The representative- and principal-level registrations 
would continue to be subject to a two-year expiration period as is the 
case today. However, in response to comments, FINRA will consider as 
part of a separate proposal the possibility of extending the two-year 
expiration period, provided that an individual can maintain specified 
levels of competence and knowledge of the industry and the related 
laws, rules and regulations through an alternative process, such as 
more frequent CE.
J. Waiver of Examinations for Individuals Working for a Financial 
Services Industry Affiliate of a Member (Proposed FINRA Rule 1210.09)
    In Regulatory Notice 09-70, FINRA had proposed to adopt an RA 
status in the CRD system for individuals who would be working for a 
financial services industry affiliate of a member, and who would not be 
working in any capacity for the member. Specifically, the original 
proposal permitted a member to register or maintain the registration(s) 
as a representative or principal of any individual engaged in the 
business of a financial services industry affiliate of the member that 
controls, is controlled by or is under common control with the member. 
The proposal defined the term ``financial services industry'' as any 
industry regulated by the SEC, Commodity Futures Trading Commission 
(``CFTC''), state securities authorities, federal or state banking 
authorities, state insurance authorities, or substantially equivalent 
foreign regulatory authorities.
    The original proposal required members to notify FINRA of an 
individual's RA status and deemed an RA to have an inactive 
registration. Further, under the proposal, RAs were considered 
registered persons, but were subject only to a subset of FINRA rules. 
The proposal also required a member to supervise adequately RAs so that 
they did not act on behalf of the member and complied with the subset 
of rules applicable to them. The proposal provided that an individual 
could remain in an RA status for 10 non-consecutive years, which were 
tolled if the individual was working for the member or was outside the 
financial services industry. In addition, the proposal provided that a 
statutorily disqualified individual was not eligible for an RA status, 
and forfeited his or her status as a result of such disqualification. 
Moreover, under the proposal, the failure to comply with any of the RA 
requirements resulted in a forfeiture of an individual's RA status 
altogether.
    The purpose of the RA proposal was to provide a firm greater 
flexibility to move personnel, including senior and middle management, 
between the firm and its financial services affiliate(s) so that they 
could gain organizational skills and better knowledge of products 
developed by the affiliate(s) without the individuals having to 
requalify by examination each time they returned to the firm.\38\
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    \38\ As noted above, an individual must requalify by examination 
(or obtain a waiver of the applicable qualification examination(s)) 
if the individual re-registers with a firm two or more years after 
the individual's most recent registration as a representative or 
principal has been terminated.
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    Rather than allowing individuals to maintain their registrations 
based on an RA status, FINRA is proposing to adopt FINRA Rule 1210.09 
to provide an alternative process whereby individuals who would be 
working for a financial services industry affiliate of a member \39\ 
would terminate their registrations with the member and would be 
granted a waiver of their requalification requirements upon re-
registering with a

[[Page 17344]]

member, provided the firm that is requesting the waiver and the 
individual satisfy the criteria for a Financial Services Affiliate 
(``FSA'') waiver.
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    \39\ Proposed FINRA Rule 1210.09 defines a ``financial services 
industry affiliate of a member'' as a legal entity that controls, is 
controlled by or is under common control with a member and is 
regulated by the SEC, CFTC, state securities authorities, federal or 
state banking authorities, state insurance authorities, or 
substantially equivalent foreign regulatory authorities, which is 
similar to the definition in Regulatory Notice 09-70.
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    Under the proposed waiver process, the first time a registered 
person is designated as eligible for a waiver based on the FSA 
criteria, the member with which the individual is registered would 
notify FINRA of the FSA designation. The member would concurrently file 
a full Form U5 terminating the individual's registration with the firm, 
which would also terminate the individual's other SRO and state 
registrations. Further, BrokerCheck would reflect that the individual 
is no longer registered or associated with a member.
    To be eligible for initial designation as an FSA-eligible person by 
a member, an individual must have been registered for a total of five 
years within the most recent 10-year period prior to the designation, 
including for the most recent year with that member. An individual 
would have to satisfy these preconditions only for purposes of his or 
her initial designation as an FSA-eligible person, and not for any 
subsequent FSA designation(s). Thereafter, the individual would be 
eligible for a waiver for up to seven years from the date of initial 
designation,\40\ provided that the other conditions of the waiver, as 
described below, have been satisfied. Consequently, a member other than 
the member that initially designated an individual as an FSA-eligible 
person may request a waiver for the individual and more than one member 
may request a waiver for the individual during the seven-year 
period.\41\
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    \40\ Individuals would be eligible for a single, fixed seven-
year period from the date of initial designation, and the period 
would not be tolled or renewed.
    \41\ The following examples illustrate this point:
    Example 1. Firm A designates an individual as an FSA-eligible 
person by notifying FINRA and files a Form U5. The individual joins 
Firm A's financial services affiliate. Firm A does not submit a 
waiver request for the individual. After working for Firm A's 
financial services affiliate for three years, the individual 
directly joins Firm B's financial services affiliate for three 
years. Firm B then submits a waiver request to register the 
individual.
    Example 2. Same as Example 1, but the individual directly joins 
Firm B after working for Firm A's financial services affiliate, and 
Firm B submits a waiver request to register the individual at that 
point in time.
    Example 3. Firm A designates an individual as an FSA-eligible 
person by notifying FINRA and files a Form U5. The individual joins 
Firm A's financial services affiliate for three years. Firm A then 
submits a waiver request to re-register the individual. After 
working for Firm A in a registered capacity for six months, Firm A 
re-designates the individual as an FSA-eligible person by notifying 
FINRA and files a Form U5. The individual rejoins Firm A's financial 
services affiliate for two years, after which the individual 
directly joins Firm B's financial services affiliate for one year. 
Firm B then submits a waiver request to register the individual.
    Example 4. Same as Example 3, but the individual directly joins 
Firm B after the second period of working for Firm A's financial 
services affiliate, and Firm B submits a waiver request to register 
the individual at that point in time.
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    An individual designated as an FSA-eligible person would be subject 
to the Regulatory Element of CE while working for a financial services 
industry affiliate of a member. The individual would be subject to a 
Regulatory Element program that correlates to his or her most recent 
registration category, and CE would be based on the same cycle had the 
individual remained registered. If the individual fails to complete the 
prescribed Regulatory Element during the 120-day window for taking the 
session, he or she would lose FSA eligibility (i.e., the individual 
would have the standard two-year period after termination to re-
register without having to retake an examination). FINRA is making 
corresponding changes to proposed FINRA Rule 1240.
    Upon registering an FSA-eligible person, a firm would file a Form 
U4 and request the appropriate registration(s) for the individual. The 
firm would also submit an examination waiver request to FINRA,\42\ 
similar to the process used today for waiver requests, and it would 
represent that the individual is eligible for an FSA waiver based on 
the conditions set forth below. FINRA would review the waiver request 
and make a determination of whether to grant the request within 30 
calendar days of receiving the request. FINRA would summarily grant the 
request if the following conditions are met:
---------------------------------------------------------------------------

    \42\ FINRA would consider a waiver of the representative-level 
qualification examination(s), the principal-level qualification 
examination(s) and the SIE, as applicable.
---------------------------------------------------------------------------

    (1) Prior to the individual's initial designation as an FSA-
eligible person, the individual was registered for a total of five 
years within the most recent 10-year period, including for the most 
recent year with the member that initially designated the individual as 
an FSA-eligible person;
    (2) The waiver request is made within seven years of the 
individual's initial designation as an FSA-eligible person by a member;
    (3) The initial designation and any subsequent designation(s) were 
made concurrently with the filing of the individual's related Form U5;
    (4) The individual continuously worked for the financial services 
affiliate(s) of a member since the last Form U5 filing;
    (5) The individual has complied with the Regulatory Element of CE; 
and
    (6) The individual does not have any pending or adverse regulatory 
matters, or terminations, that are reportable on the Form U4, and has 
not otherwise been subject to a statutory disqualification while the 
individual was designated as an FSA-eligible person with a member.
    Following the Form U5 filing, an individual could move between the 
financial services affiliates of a member so long as the individual is 
continuously working for an affiliate. Further, a member could submit 
multiple waiver requests for the individual, provided that the waiver 
requests are made during the course of the seven-year period.\43\ An 
individual who has been designated as an FSA-eligible person by a 
member would not be able to take additional examinations to gain 
additional registrations while working for a financial services 
affiliate of a member.
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    \43\ For example, if a member submits a waiver request for an 
FSA-eligible person who has been working for a financial services 
affiliate of the member for three years and re-registers the 
individual, the member could subsequently file a Form U5 and re-
designate the individual as an FSA-eligible person. Moreover, if the 
individual works with a financial services affiliate of the member 
for another three years, the member could submit a second waiver 
request and re-register the individual upon returning to the member.
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K. Status of Persons Serving in the Armed Forces of the United States 
(Proposed FINRA Rule 1210.10)
    NASD IM-1000-2(a) and (b) and Incorporated NYSE Rule Interpretation 
345(a)/03, which is substantially similar, currently provide specific 
relief to registered persons serving in the Armed Forces of the United 
States. Among other things, these rules permit a registered person of a 
member who volunteers for or is called into active duty in the Armed 
Forces of the United States to be registered in an inactive status and 
remain eligible to receive ongoing transaction-related compensation. 
NASD IM-1000-2(c) also includes specific provisions regarding the 
deferment of the lapse of registration requirements in NASD Rules 
1021(c), 1031(c) and 1041(c) for formerly registered persons serving in 
the Armed Forces of the United States.
    FINRA is proposing to adopt NASD IM-1000-2 as FINRA Rule 1210.10 
with the following changes. To enhance the efficiency of the current 
notification process for registered persons serving in the Armed 
Forces, proposed FINRA Rule 1210.10 requires that the member with which 
such person is registered promptly notify FINRA of such person's

[[Page 17345]]

return to employment with the member. A sole proprietor must similarly 
notify FINRA of his or her return to participation in the investment 
banking or securities business. Further, proposed FINRA Rule 1210.10 
provides that FINRA would also defer the lapse of the SIE for formerly 
registered persons serving in the Armed Forces of the United States.
L. Impermissible Registrations (Proposed FINRA Rule 1210.11)
    NASD Rules 1021(a) and 1031(a) currently prohibit a member from 
maintaining a representative or principal registration with FINRA for 
any person who is no longer active in the member's investment banking 
or securities business, who is no longer functioning as a 
representative or principal as defined under the rules or where the 
sole purpose is to avoid the requalification requirement applicable to 
persons who have not been registered for two or more years. These rules 
also prohibit a member from applying for the registration of a person 
as representative or principal where the member does not intend to 
employ the person in its investment banking or securities business. 
These prohibitions do not apply to the current permissive registration 
categories.
    In light of proposed FINRA Rule 1210.02, FINRA is proposing to 
delete these provisions and instead adopt FINRA Rule 1210.11 
prohibiting a member from registering or maintaining the registration 
of a person unless the registration is consistent with the requirements 
of proposed FINRA Rule 1210.
M. Registration Categories (Proposed FINRA Rule 1220)
    FINRA is proposing to integrate the various registration categories 
and related definitions under the NASD rules into a single rule, FINRA 
Rule 1220,\44\ subject to the changes described below.
---------------------------------------------------------------------------

    \44\ FINRA is proposing to renumber FINRA Rule 1230 as FINRA 
Rule 1220 as part of the proposed rule change.
---------------------------------------------------------------------------

1. Definition of Principal (Proposed FINRA Rule 1220(a)(1))
    NASD Rule 1021(b) currently defines the term ``principal'' to 
include sole proprietors, officers, partners, managers of offices of 
supervisory jurisdiction and directors who are actively engaged in the 
management of the member's investment banking or securities business, 
such as supervision, solicitation, conduct of business or the training 
of persons associated with a member for any of these functions. 
Incorporated NYSE Rule 311.17 defines the term ``principal executive'' 
to include associated persons designated to exercise senior principal 
executive responsibility over the various areas of the member's 
business, such as operations, compliance, finances and credit, sales, 
underwriting, research and administration.\45\
---------------------------------------------------------------------------

    \45\ Incorporated NYSE Rule Interpretation 311(b)(5)/01 requires 
that principal executives be appropriately qualified to perform 
their assigned functions.
---------------------------------------------------------------------------

    FINRA believes that the definition of the term ``principal'' in 
NASD Rule 1021(b) generally captures principal executives as defined 
under Incorporated NYSE Rule 311.17. Thus, FINRA is proposing to 
streamline and adopt NASD Rule 1021(b) as FINRA Rule 1220(a)(1).
    Proposed FINRA Rule 1220(a)(1) clarifies that a member's chief 
executive officer (``CEO'') and chief financial officer (``CFO'') (or 
equivalent officers) are considered principals based solely on their 
status. The proposed rule further clarifies that the term ``principal'' 
includes any other associated person who is performing functions or 
carrying out responsibilities that are required to be performed or 
carried out by a principal under FINRA rules. In addition, the proposed 
rule codifies existing guidance by providing that the phrase ``actively 
engaged in the management of the member's investment banking or 
securities business'' includes the management of, and the 
implementation of corporate policies related to, such business as well 
as managerial decision-making authority with respect to the member's 
business and management-level responsibilities for supervising any 
aspect of such business, such as serving as a voting member of the 
member's executive, management or operations committees.\46\
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    \46\ See NTM 99-49 (June 1999).
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2. General Securities Principal (Proposed FINRA Rule 1220(a)(2))
    NASD Rule 1022(a)(1) currently requires that an associated person 
who meets the definition of ``principal'' under NASD Rule 1021 register 
as a General Securities Principal. A person registering as a General 
Securities Principal must pass the General Securities Principal 
examination. The rule, however, provides that a principal is not 
required to register as a General Securities Principal if the person's 
activities are so limited as to qualify such person for one or more of 
the limited principal categories specified in NASD Rule 1022, such as a 
Financial and Operations Principal, an Introducing Broker-Dealer 
Financial and Operations Principal, a Registered Options Principal, an 
Investment Company and Variable Contracts Products Principal, a Direct 
Participation Programs Principal, a General Securities Sales Supervisor 
or a Government Securities Principal. Further, the rule does not 
preclude individuals registered in a limited principal category from 
registering as General Securities Principals.
    NASD Rule 1022(a)(1) also requires that a member's CCO designated 
on Schedule A of the member's Form BD (Uniform Application for Broker-
Dealer Registration) register as a General Securities Principal.\47\ 
NASD Rule 1022(a)(1)(C) provides that if a member's activities are 
limited to investment company and variable contracts products, direct 
participation program securities or government securities, the member's 
CCO may instead register as an Investment Company and Variable 
Contracts Principal, a Direct Participation Programs Principal or a 
Government Securities Principal, respectively. In addition, for 
purposes of the CCO requirement for dual members, FINRA recognizes the 
NYSE Compliance Official examination as an acceptable alternative to 
the principal examination requirements for General Securities 
Principal, Investment Company and Variable Contracts Principal and 
Direct Participation Programs Principal, as applicable.\48\ NASD Rule 
1022(a)(1)(C) also includes transitioning and grandfathering provisions 
for CCOs.
---------------------------------------------------------------------------

    \47\ See also FINRA Rule 3130(a).
    \48\ See NTM 01-51 (August 2001).
---------------------------------------------------------------------------

    NASD Rule 1022(a)(1)(A) provides that unless stated otherwise a 
person seeking to register as a General Securities Principal must 
satisfy the General Securities Representative or Corporate Securities 
Representative prerequisite registration. NASD Rule 1022(a)(2) 
qualifies this provision by providing that the Corporate Securities 
Representative prerequisite registration gives a General Securities 
Principal only limited supervisory authority.
    NASD Rule 1022(a)(1)(B) requires that a General Securities 
Principal with responsibility over the investment banking activities 
specified in NASD Rule 1032(i) also satisfy the Investment Banking 
Representative registration requirement.
    NASD Rule 1022(a)(3) includes a grandfathering provision for 
persons who were registered as principals before the adoption of the 
General Securities Principal registration category.

[[Page 17346]]

    NASD Rule 1022(a)(4) provides that an associated person registered 
solely as a General Securities Principal is not qualified to function 
as a Financial and Operations Principal (or an Introducing Broker-
Dealer Financial and Operations Principal, as applicable), Registered 
Options Principal, General Securities Sales Supervisor, Municipal 
Securities Principal or Municipal Fund Securities Limited Principal, 
unless the General Securities Principal is also registered in these 
other categories.
    Pursuant to NASD Rule 1022(a)(5), a principal who is responsible 
for supervising the overall conduct of a Research Analyst or 
Supervisory Analyst engaged in equity research must be registered as a 
Research Principal.\49\ In addition, existing rules and guidance 
provide that the content of a member's research reports on equity 
securities must be approved by a Research Principal or a Supervisory 
Analyst.\50\ Existing guidance further provides that a General 
Securities Principal may review a member's research reports on equity 
securities for compliance with only the disclosure provisions of FINRA 
Rule 2241.\51\
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    \49\ See also NTM 04-81 (November 2004) and NTM 07-04 (January 
2007) (collectively, ``Research NTMs'').
    \50\ See FINRA Rule 2210(b)(1)(B) and Research NTMs. Further, an 
exemption from NASD Rule 1050 for specified foreign analysts 
includes a condition that the content of a globally branded research 
report prepared by such foreign research analyst that is published 
or otherwise distributed by a member must be approved by a Research 
Principal or Supervisory Analyst. See NASD Rule 1050(f)(3)(A).
    \51\ See Research NTMs.
---------------------------------------------------------------------------

    NASD Rule 1022(a)(6) currently requires that each associated person 
who is included within the definition of ``principal'' in NASD Rule 
1021 with supervisory responsibility over the securities trading 
activities described in NASD Rule 1032(f) register as a Securities 
Trader Principal. To qualify for registration as a Securities Trader 
Principal, an individual must be registered as a Securities Trader and 
pass the General Securities Principal qualification examination. The 
rule provides that a person qualified and registered as a Securities 
Trader Principal may only have supervisory responsibility over the 
activities specified in NASD Rule 1032(f), unless such person is 
separately registered in another appropriate principal registration 
category, such as the General Securities Principal registration 
category. The rule further provides that a person registered as a 
General Securities Principal is not qualified to supervise the trading 
activities described in NASD Rule 1032(f), unless he or she qualifies 
and registers as a Securities Trader (by passing the Series 57 
examination) and affirmatively registers as a Securities Trader 
Principal.
    FINRA is proposing to streamline the provisions of NASD Rule 
1022(a) and adopt them as FINRA Rule 1220(a)(2) with the following 
changes.
    FINRA is proposing to more clearly set forth the obligation to 
register as a General Securities Principal. Specifically, proposed 
FINRA Rule 1220(a)(2)(A) states that each principal as defined in 
proposed FINRA Rule 1220(a)(1) is required to register with FINRA as a 
General Securities Principal, subject to the following exceptions. The 
proposed rule provides that if a principal's activities include the 
functions of a Compliance Officer, a Financial and Operations Principal 
(or an Introducing Broker-Dealer Financial and Operations Principal, as 
applicable), a Principal Financial Officer, a Principal Operations 
Officer, an Investment Banking Principal, a Research Principal, a 
Securities Trader Principal or a Registered Options Principal, then the 
principal must appropriately register in one or more of these 
categories. Proposed FINRA Rule 1220(a)(2)(A) also provides that if a 
principal's activities are limited solely to the functions of a 
Government Securities Principal, an Investment Company and Variable 
Contracts Products Principal, a Direct Participation Programs Principal 
or a Private Securities Offerings Principal, then the principal may 
appropriately register in one or more of these categories in lieu of 
registering as a General Securities Principal.
    Proposed FINRA Rule 1220(a)(2)(A) further provides that if a 
principal's activities are limited solely to the functions of a General 
Securities Sales Supervisor, then the principal may appropriately 
register in that category in lieu of registering as a General 
Securities Principal, provided that if the principal is engaged in 
options sales activities he or she must register as a General 
Securities Sales Supervisor or Registered Options Principal. In 
addition, proposed FINRA Rule 1220(a)(2)(A) states that if a 
principal's activities are limited solely to the functions of a 
Supervisory Analyst, then the principal may appropriately register in 
that category in lieu of registering as a General Securities Principal, 
provided that if the principal is responsible for approving the content 
of a member's research report on equity securities, he or she must 
register as a Research Principal or Supervisory Analyst.
    Proposed FINRA Rule 1220(a)(2)(B) requires that an individual 
registering as a General Securities Principal satisfy the General 
Securities Representative prerequisite registration and pass the 
General Securities Principal qualification examination. Proposed FINRA 
Rule 1220(a)(2)(B) also clarifies that an individual may register as a 
General Securities Sales Supervisor and pass the General Securities 
Principal Sales Supervisor Module qualification examination in lieu of 
passing the General Securities Principal examination.
    In conjunction with the elimination of the Corporate Securities 
Representative registration category, FINRA is proposing to delete the 
provision in NASD Rule 1022(a)(1)(A) permitting the Corporate 
Securities Representative prerequisite registration. However, the 
proposed rule provides that, subject to the lapse of registration 
provisions in proposed FINRA Rule 1210.08, General Securities 
Principals who obtained the Corporate Securities Representative 
prerequisite registration in lieu of the General Securities 
Representative prerequisite registration and individuals who had been 
registered as such within the past two years prior to the effective 
date of the proposed rule change, may continue to supervise corporate 
securities activities as currently permitted.
    Moreover, as described in greater detail below, FINRA is proposing 
to adopt with some changes the requirements of NASD Rule 1022(a)(1) 
relating to the registration of CCOs, NASD Rule 1022(a)(1)(B) relating 
to the supervision of investment banking activities, NASD Rule 
1022(a)(5) relating to the supervision of research activities and NASD 
Rule 1022(a)(6) relating to the supervision of securities trading 
activities as FINRA Rules 1220(a)(3), (a)(5), (a)(6) and (a)(7), 
respectively.
    FINRA is also proposing to eliminate the grandfathering provision 
for individuals who were registered as principals prior to the adoption 
of the General Securities Principal registration category because it no 
longer has any practical application. Finally, FINRA is proposing to 
delete the provision that persons eligible for registration in other 
principal categories are not precluded from registering as General 
Securities Principals because it is superfluous.
3. Compliance Officer (Proposed FINRA Rule 1220(a)(3))
    FINRA is proposing to adopt NASD Rule 1022(a)(1)'s CCO registration 
requirement as FINRA Rule 1220(a)(3), subject to the following changes.

[[Page 17347]]

    Specifically, proposed FINRA Rule 1220(a)(3) establishes a 
Compliance Officer registration category and requires all persons 
designated as CCOs on Schedule A of Form BD to register as Compliance 
Officers, subject to an exception for members engaged in limited 
investment banking or securities business. The proposed rule only 
addresses the registration requirements for CCOs. However, consistent 
with proposed FINRA Rule 1210.02 relating to permissive registrations, 
a firm may allow other associated persons to register as Compliance 
Officers.
    FINRA had originally proposed to also adopt a Compliance Officer 
qualification examination for CCOs and other individuals registering as 
Compliance Officers. However, FINRA is proposing to maintain the 
existing qualification requirements pending its evaluation of the 
structure of the principal-level examinations. In addition, FINRA is 
proposing to provide CCOs of firms that engage in limited investment 
banking or securities business with greater flexibility to satisfy the 
qualification requirements for CCOs. Specifically, proposed FINRA Rule 
1220(a)(3) sets forth the following qualification requirements for 
Compliance Officer registration:
     Subject to the lapse of registration provisions in 
proposed FINRA Rule 1210.08, each person registered with FINRA as a 
General Securities Representative and a General Securities Principal on 
the effective date of the proposed rule change and each person who was 
registered with FINRA as a General Securities Representative and a 
General Securities Principal within two years prior to the effective 
date of the proposed rule change would be qualified to register as 
Compliance Officers without having to take any additional examinations. 
In addition, subject to the lapse of registration provisions in 
proposed FINRA Rule 1210.08, individuals registered as Compliance 
Officials in the CRD system on the effective date of the proposed rule 
change and individuals who were registered as such within two years 
prior to the effective date of the proposed rule change would also be 
qualified to register as Compliance Officers without having to take any 
additional examinations; \52\
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    \52\ FINRA notes that the proposed rule gives firms the option 
of registering Compliance Officials who are not designated as CCOs 
as Compliance Officers when the proposed rule becomes effective.
---------------------------------------------------------------------------

     All other individuals registering as Compliance Officers 
after the effective date of the proposed rule change would have to: (1) 
Satisfy the General Securities Representative prerequisite registration 
and pass the General Securities Principal qualification examination; or 
(2) pass the Compliance Official qualification examination.
     An individual designated as a CCO on Schedule A of Form BD 
of a member that is engaged in limited investment banking or securities 
business may be registered in a principal category under proposed FINRA 
Rule 1220(a) that corresponds to the limited scope of the member's 
business.
4. Financial and Operations Principal, Introducing Broker-Dealer 
Financial and Operations Principal, Principal Financial Officer and 
Principal Operations Officer (Proposed FINRA Rule 1220(a)(4))
    NASD Rule 1022(b) currently provides that a principal who is 
responsible for the financial and operational management of a member 
that has a minimum net capital requirement of $250,000 under SEA Rules 
15c3-1(a)(1)(ii) and 15c3-1(a)(2)(i), or a member that has a minimum 
net capital requirement of $150,000 under SEA Rule 15c3-1(a)(8), must 
be designated and registered as a Financial and Operations Principal. 
Such members also are required to designate a CFO who is required to be 
registered as a Financial and Operations Principal. In addition, NASD 
Rule 1022(c) currently provides that a principal who is responsible for 
the financial and operational management of a member that is subject to 
the net capital requirements of SEA Rule 15c3-1, other than a member 
that is subject to the net capital requirements of SEA Rules 15c3-
1(a)(1)(ii), (a)(2)(i) or (a)(8), must be designated and registered as 
either a Financial and Operations Principal or an Introducing Broker-
Dealer Financial and Operations Principal. Such members also are 
required to designate a CFO who is required to be registered as a 
Financial and Operations Principal or an Introducing Broker-Dealer 
Financial and Operations Principal. Financial and Operations Principals 
and Introducing Broker-Dealer Financial and Operations Principals are 
not subject to a prerequisite representative registration, but they 
must pass the Financial and Operations Principal or Introducing Broker-
Dealer Financial and Operations Principal examination, as applicable.
    Incorporated NYSE Rule Interpretations 311(b)(5)/02 and/03 require 
that dual members designate a CFO and a COO and that the CFO and the 
COO register as Financial and Operations Principals if the member is a 
clearing firm, or as either Financial and Operations Principals or 
Introducing Broker-Dealer Financial and Operations Principals if the 
member is an introducing firm. If the member is an introducing firm, 
the same person may be designated as both the CFO and COO.
    FINRA is proposing to merge the provisions in NASD Rules 1022(b) 
and 1022(c) regarding Financial and Operations Principals and 
Introducing Broker-Dealer Financial and Operations Principals and adopt 
them as FINRA Rule 1220(a)(4)(A). In addition, FINRA is proposing to 
revise the provisions in NASD Rules 1022(b) and (c) regarding the 
designation of CFOs and the provisions in Incorporated NYSE Rule 
Interpretations 311(b)(5)/02 and/03 regarding the designation of CFOs 
and COOs and adopt them as FINRA Rule 1220(a)(4)(B). FINRA does not 
believe it is necessary for an officer to have the title of CFO or COO 
for purposes of these provisions so long as the designated person 
performs the same functions. Therefore, proposed FINRA Rule 
1220(a)(4)(B) requires members to instead designate: (1) A Principal 
Financial Officer with primary responsibility for financial filings and 
the related books and records; and (2) a Principal Operations Officer 
with primary responsibility for the day-to-day operations of the 
business, including overseeing the receipt and delivery of securities 
and funds, safeguarding customer and firm assets, calculation and 
collection of margin from customers and processing dividend receivables 
and payables and reorganization redemptions and those books and records 
related to such activities.
    Consistent with the current qualification and registration 
requirements for CFOs and COOs, the proposed rule requires that a 
firm's Principal Financial Officer and Principal Operations Officer 
qualify and register as Financial and Operations Principals or 
Introducing Broker-Dealer Financial and Operations Principals, as 
applicable.\53\
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    \53\ This requirement also applies to those members that are 
currently exempt from the requirement to have a Financial and 
Operations Principal or an Introducing Broker-Dealer Financial and 
Operations Principal. See NTM 01-52 (August 2001).
---------------------------------------------------------------------------

    Because the financial and operational activities of members that 
neither self-clear nor provide clearing services are more limited, such 
members may designate the same person as the Principal Financial 
Officer, Principal Operations Officer and Financial and Operations 
Principal or Introducing Broker-Dealer Financial and Operations 
Principal (that is, such members are not

[[Page 17348]]

required to designate different persons to function in these 
capacities).
    Given the level of financial and operational responsibility at 
clearing and self-clearing members, FINRA believes that it is necessary 
for such members to designate separate persons to function as Principal 
Financial Officer and Principal Operations Officer. Such persons may 
also carry out the other responsibilities of a Financial and Operations 
Principal, such as supervision of individuals engaged in financial and 
operational activities. In addition, the proposed rule provides that a 
clearing or self-clearing member that is limited in size and resources 
may, pursuant to the FINRA Rule 9600 Series, request a waiver of the 
requirement to designate separate persons to function as Principal 
Financial Officer and Principal Operations Officer.
5. Investment Banking Principal (Proposed FINRA Rule 1220(a)(5))
    FINRA is proposing to adopt NASD Rule 1022(a)(1)(B) regarding the 
qualification and registration requirements for principals with 
responsibility over specified investment banking activities as FINRA 
Rule 1220(a)(5). To further facilitate the registration of such 
individuals, proposed FINRA Rule 1220(a)(5) establishes a registration 
category for Investment Banking Principal and requires that a principal 
responsible for supervising the investment banking activities specified 
in proposed FINRA Rule 1220(b)(5) register as an Investment Banking 
Principal. The proposed rule provides that individuals registering as 
Investment Banking Principals must be registered as Investment Banking 
Representatives and pass the General Securities Principal qualification 
examination.
6. Research Principal (Proposed FINRA Rule 1220(a)(6))
    FINRA is proposing to adopt NASD Rule 1022(a)(5) relating to the 
registration of Research Principals as FINRA Rule 1220(a)(6) with a few 
changes and clarifications.
    First, proposed FINRA Rule 1220(a)(6) clarifies that a principal 
responsible for approving the content of a member's research reports on 
equity securities is required to register as a Research Principal, 
subject to the following exceptions: (1) A Supervisory Analyst may also 
approve the content of a member's research report on equity securities; 
and (2) a General Securities Principal may review a member's research 
report on equity securities only for compliance with the disclosure 
provisions of FINRA Rule 2241.
    Second, the proposed rule clarifies that a Supervisory Analyst or 
General Securities Principal may approve the content of a member's 
research reports on debt securities \54\ and the content of third-party 
research reports \55\ in lieu of a Research Principal.
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    \54\ The proposed rule change maintains the current 
requirements, which are set forth in other FINRA rules, allowing a 
Supervisory Analyst to approve the content of debt research reports. 
See FINRA Rules 2210(b)(1)(A) and (B) (stating that a Supervisory 
Analyst may approve the content of research reports on debt 
securities).
    \55\ See FINRA Rule 2241(h)(1) and Research NTMs.
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    Third, the proposed rule modifies the examination requirements for 
Research Principals to require demonstrated competence in fundamental 
analysis and valuation of securities. By way of background, Research 
Analysts are required to pass the Series 86 and Series 87 
examinations.\56\ The Analysis (Series 86) portion of the Research 
Analyst examination tests knowledge of fundamental analysis and 
valuation of equity securities and the Regulatory Administration and 
Best Practices (Series 87) portion of the Research Analyst examination 
tests knowledge of applicable rules and regulations pertaining to 
research. The qualification examination for Supervisory Analysts, the 
Series 16 examination, tests both knowledge of applicable rules and 
regulations and fundamental analysis and valuation. Currently, a 
Research Principal is required to be registered as a General Securities 
Principal and pass either the Series 87 examination or the Series 16 
examination.\57\ FINRA believes that a Research Principal would be able 
to carry out his or her supervisory responsibilities more effectively 
by having a level of knowledge of fundamental analysis and valuation 
commensurate with the research analysts whose content they approve. 
Thus, proposed FINRA Rule 1220(a)(6) requires that individuals 
registering as Research Principals after the effective date of the 
proposed rule change, register as either Research Analysts or 
Supervisory Analysts and pass the General Securities Principal 
qualification examination.
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    \56\ Candidates are eligible for a waiver of the Series 86 
examination, which tests knowledge of fundamental analysis and 
valuation of equity securities, if they have passed Levels I and II 
of the Chartered Financial Analyst (``CFA'') examination and meet 
other eligibility criteria.
    \57\ See Research NTMs.
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7. Securities Trader Principal (Proposed FINRA Rule 1220(a)(7))
    FINRA is proposing to adopt NASD Rule 1022(a)(6) relating to 
Securities Trader Principal registration as FINRA Rule 1220(a)(7). 
Similar to the current rule, proposed FINRA Rule 1220(a)(7) requires 
that a principal responsible for supervising the securities trading 
activities specified in proposed FINRA Rule 1220(b)(4) register as a 
Securities Trader Principal. The proposed rule requires that 
individuals registering as Securities Trader Principals must be 
registered as Securities Traders and pass the General Securities 
Principal qualification examination.
8. Registered Options Principal (Proposed FINRA Rules 1220(a)(8), .02 
and .03)
    NASD Rule 1022(f) currently requires that members engaged in 
options transactions with the public have at least one Registered 
Options Principal. A Registered Options Principal is required to 
satisfy the following prerequisite representative registration(s): (1) 
General Securities Representative; or (2) Options Representative and 
Corporate Securities Representative. An individual registering as a 
Registered Options Principal must also pass the Registered Options 
Principal examination. The rule includes additional requirements 
applicable to Registered Options Principals engaged in security futures 
activities.\58\ NASD IM-1022-1 further requires that members that have 
one Registered Options Principal promptly notify FINRA and agree to 
specified conditions if such person is terminated, resigns, becomes 
incapacitated or is otherwise unable to perform his or her duties.
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    \58\ This provision provides that a Registered Options Principal 
who intends to engage in security futures activities must complete a 
Firm Element CE program that addresses security futures products 
before he or she can engage in such activities. There are similar 
provisions in NASD Rules 1022(g), 1032(a) and 1032(d).
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    FINRA is proposing to adopt NASD Rule 1022(f) as FINRA Rule 
1220(a)(8) with the following changes. Consistent with FINRA Rule 2360, 
which allows a General Securities Sales Supervisor (in addition to a 
Registered Options Principal) to approve accounts engaged in specified 
options activities, the proposed rule provides that a General 
Securities Sales Supervisor may also supervise options activities as 
specified in FINRA Rule 2360.
    Further, as discussed below, FINRA is proposing to eliminate the 
Options Representative and Corporate Securities Representative 
registration categories. In conjunction with these changes, FINRA is 
proposing to eliminate registration as an Options Representative and a 
Corporate Securities Representative

[[Page 17349]]

from the prerequisite choices in the current rule. Consequently, a 
person registering as a Registered Options Principal under proposed 
FINRA Rule 1220(a)(8) would be required to satisfy the General 
Securities Representative prerequisite registration.
    FINRA is proposing to consolidate and adopt the provisions 
regarding security futures activities in NASD Rules 1022(f), 1022(g), 
1032(a) and 1032(d) with non-substantive changes as Supplementary 
Material .02 of FINRA Rule 1220. Finally, FINRA is proposing to adopt 
NASD IM-1022-1 with non-substantive changes as Supplementary Material 
.03 of FINRA Rule 1220.
9. Government Securities Principal (Proposed FINRA Rule 1220(a)(9))
    NASD Rule 1022(h) currently requires that associated persons 
functioning as principals with respect to members' government 
securities activities register as Government Securities Principals. 
Such persons are not subject to a principal qualification examination. 
However, a person registering as a Government Securities Principal is 
required to satisfy the General Securities Representative or Government 
Securities Representative prerequisite registration. Moreover, 
individuals registered as General Securities Principals who have the 
General Securities Representative or Government Securities 
Representative prerequisite registration are qualified to function as 
Government Securities Principals without having to register separately 
as such.
    NASD Rule 1022(h) also includes a grandfathering provision for 
persons who were registered as principals before the 1988 adoption of 
the Government Securities Principal registration category, and it 
provides that a firm must notify FINRA via the Form U4 when a person 
not previously registered with the firm as a principal assumes the 
duties of a Government Securities Principal. FINRA is proposing to 
adopt NASD Rule 1022(h) as FINRA Rule 1220(a)(9) with a few changes.
    As noted below, FINRA is proposing to eliminate the Government 
Securities Representative registration category. In conjunction with 
this change, FINRA is proposing to eliminate registration as a 
Government Securities Representative from the prerequisite registration 
choices in the current rule. Consequently, a person registering as a 
Government Securities Principal under proposed FINRA Rule 1220(a)(9) 
would be required to satisfy the General Securities Representative 
prerequisite registration. Alternatively, proposed FINRA Rule 
1220(a)(9) provides that individuals registered as General Securities 
Principals are qualified to function as Government Securities 
Principals without having to register separately under the proposed 
rule.
    Proposed FINRA Rule 1220(a)(9) also eliminates the grandfathering 
provision in the current rule because it no longer has any practical 
application, and it eliminates the Form U4 notification requirement 
because it is redundant of other Form U4 requirements.\59\
---------------------------------------------------------------------------

    \59\ See Article V, section 2 of the FINRA By-Laws.
---------------------------------------------------------------------------

10. General Securities Sales Supervisor (Proposed FINRA Rules 
1220(a)(10) and 1220.04)
    Pursuant to NASD Rule 1022(g), each associated person of a member 
who is included within the definition of ``principal'' in NASD Rule 
1021 may register as a General Securities Sales Supervisor, instead of 
separately registering in multiple principal registration 
categories,\60\ if the individual's supervisory responsibilities are 
limited solely to securities sales activities. A person registering as 
a General Securities Sales Supervisor must satisfy the General 
Securities Representative prerequisite registration and pass the 
General Securities Sales Supervisor examinations.\61\ Moreover, a 
General Securities Sales Supervisor is precluded from performing any of 
the following activities: (1) Supervision of the origination and 
structuring of underwritings; (2) supervision of market-making 
commitments; (3) supervision of the custody of firm or customer funds 
or securities for purposes of SEA Rule 15c3-3; or (4) supervision of 
overall compliance with financial responsibility rules. NASD IM-1022-2 
explains the purpose of the General Securities Sales Supervisor 
registration category.
---------------------------------------------------------------------------

    \60\ For instance, a principal supervising the sale of corporate 
securities and options must be registered as a General Securities 
Principal and a Registered Options Principal, unless the principal 
is registered as a General Securities Sales Supervisor.
    \61\ An individual may also register as a General Securities 
Sales Supervisor by passing a combination of other principal-level 
examinations.
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    FINRA is proposing to adopt NASD Rule 1022(g) and NASD IM-1022-2 as 
FINRA Rule 1220(a)(10) and FINRA Rule 1220.04, respectively, with non-
substantive changes.
11. Investment Company and Variable Contracts Products Principal and 
Direct Participation Programs Principal (Proposed FINRA Rules 
1220(a)(11) and (a)(12))
    Pursuant to NASD Rule 1022(d), each associated person of a member 
who is included within the definition of ``principal'' in NASD Rule 
1021 may register as an Investment Company and Variable Contracts 
Products Principal, instead of registering as a General Securities 
Principal, if the individual's activities are limited solely to the 
solicitation, purchase or sale of redeemable securities of companies 
registered under the Investment Company Act of 1940 (``Investment 
Company Act''), securities of closed-end companies registered under the 
Investment Company Act during the period of original distribution and 
specified insurance contracts, such as variable contracts. A person 
registering as an Investment Company and Variable Contracts Products 
Principal must satisfy the General Securities Representative or 
Investment Company and Variable Contracts Products Representative 
prerequisite registration and pass the Investment Company and Variable 
Contracts Products Principal examination.
    Pursuant to NASD Rule 1022(e), each associated person of a member 
who is included within the definition of ``principal'' in NASD Rule 
1021 may register as a Direct Participation Programs Principal, instead 
of registering as a General Securities Principal, if the individual's 
activities are limited solely to direct participation program 
securities.\62\ A person registering as a Direct Participation Programs 
Principal must satisfy the General Securities Representative or Direct 
Participation Programs Representative prerequisite registration and 
pass the Direct Participation Programs Principal examination.
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    \62\ For purposes of the registration rules, a direct 
participation program is defined as a program that provides for 
flow-through tax consequences regardless of the structure of the 
legal entity or vehicle for distribution, including, but not limited 
to, oil and gas programs, cattle programs, condominium securities, 
Subchapter S corporate offerings and all other programs of a similar 
nature, regardless of the industry represented by the program, or 
any combination thereof. Among other things, a real estate 
investment trust is excluded from the definition of a direct 
participation program. See NASD Rule 1022(e)(2).
---------------------------------------------------------------------------

    FINRA is proposing to adopt NASD Rules 1022(d) and (e) as FINRA 
Rules 1220(a)(11) and (a)(12), respectively, subject to the following 
changes. FINRA is proposing to eliminate the securities products listed 
under the Investment Company and Variable Contracts Products Principal 
registration category and instead list the products under the 
Investment Company and Variable Contracts Products Representative 
registration category. Specifically, proposed FINRA Rule 1220(a)(11) 
provides that a principal may register as an Investment Company and 
Variable

[[Page 17350]]

Contracts Products Principal if his or her activities in the investment 
banking or securities business of a member are limited to the 
activities specified in proposed FINRA Rule 1220(b)(7). Similarly, 
FINRA is proposing to transfer the definition of ``direct participation 
program'' from the Direct Participation Programs Principal registration 
category to the Direct Participation Programs Representative 
registration category. Therefore, proposed FINRA Rule 1220(a)(12) 
provides that a principal may register as a Direct Participation 
Programs Principal if his or her activities in the investment banking 
or securities business of a member are limited to the activities 
specified in proposed FINRA Rule 1220(b)(8).
12. Private Securities Offerings Principal (Proposed FINRA Rule 
1220(a)(13))
    To provide firms with greater flexibility in designing their 
supervisory structure, FINRA is proposing to create a limited principal 
registration category under FINRA Rule 1220(a)(13) for principals whose 
activities are limited solely to the supervision of the private 
securities offerings specified in proposed FINRA Rule 1220(b)(9) 
(current NASD Rule 1032(h)). The proposed change is consistent with the 
limited registration categories for Investment Company and Variable 
Contracts Products Principals and Direct Participation Programs 
Principals. Specifically, under proposed FINRA Rule 1220(a)(13), if a 
principal's activities are limited solely to the supervision of the 
private securities activities specified in proposed FINRA Rule 
1220(b)(9), the principal may register as a Private Securities 
Offerings Principal instead of registering as a General Securities 
Principal. A person registering as a Private Securities Offerings 
Principal must satisfy the Private Securities Offerings Representative 
prerequisite registration and pass the General Securities Principal 
examination.
13. Supervisory Analyst (Proposed FINRA Rule 1220(a)(14))
    The Incorporated NYSE rules currently require that an individual 
who is responsible for approving research reports register as a 
Supervisory Analyst.\63\ Such person is required to present evidence of 
appropriate experience (at least three years prior experience within 
the immediately preceding six years involving securities or financial 
analysis) and pass the Supervisory Analyst qualification examination. 
Rather than passing the entire Supervisory Analyst qualification 
examination, such person may obtain a waiver from the securities 
analysis portion (Part II) of the Supervisory Analyst qualification 
examination upon verification that the person has passed Level I of the 
CFA examination. Incorporated NYSE Rule 472(a)(2) further provides that 
where a Supervisory Analyst lacks technical expertise in a particular 
product area that is the subject of a research report, the content in 
the report may be co-approved by a product specialist; if no such 
expertise resides within the member, the rule requires the member to 
arrange approval by a qualified outside Supervisory Analyst.
---------------------------------------------------------------------------

    \63\ See Incorporated NYSE Rules 344, 344.11 and 472(a)(2) and 
NYSE Rule Interpretations 344/03 and/04.
---------------------------------------------------------------------------

    As noted above, pursuant to FINRA rules and existing guidance, a 
Supervisory Analyst is permitted to approve the content of a member's 
research report on equity or debt securities. A Supervisory Analyst is 
also permitted to approve the content of third-party research reports. 
However, a Research Principal must supervise the overall conduct of a 
Supervisory Analyst engaged in equity research.
    FINRA is proposing to adopt the provisions in Incorporated NYSE 
Rule 344 and NYSE Rule Interpretations 344/03 and/04 regarding 
Supervisory Analysts as FINRA Rule 1220(a)(14) with the following 
changes. Consistent with existing FINRA rules and guidance, proposed 
FINRA Rule 1220(a)(14) provides that a principal whose activities are 
limited to approving the content of a member's research reports on 
equity or debt securities or the content of third-party research 
reports has the option of registering as a Supervisory Analyst instead 
of registering as a Research Principal or General Securities Principal, 
as applicable. The proposed rule clarifies that a Supervisory Analyst 
engaged in equity research must be supervised by a Research Principal. 
In addition, consistent with FINRA Rule 2210(b)(1)(B), a Supervisory 
Analyst may approve (1) retail communications as described in FINRA 
Rule 2241(a)(11)(A); and (2) other research communications that do not 
meet the definition of a ``research report'' under FINRA Rule 2241, 
provided that the Supervisory Analyst has technical expertise in the 
particular product area.
    Unlike the NYSE requirements, proposed FINRA Rule 1220(a)(14) does 
not require evidence of appropriate experience. FINRA conducts job 
analysis activities for each examination program to identify the 
relevant rules and knowledge that need to be assessed. These activities 
involve subject matter experts from the industry as well as regulators 
and are conducted in compliance with testing industry standards for 
examination development. The resulting information is used to determine 
an appropriate content outline as well as to establish the appropriate 
way to assess the identified job, task and rule knowledge. In the case 
of the Supervisory Analyst examination, FINRA has determined that the 
requisite knowledge can be assessed adequately by the examination 
questions and that an experience requirement provides no material 
improvements to the qualification process. FINRA believes that passing 
the Supervisory Analyst qualification examination and completing the CE 
requirements adequately demonstrate the level of competence and 
knowledge required. This change is consistent with all other FINRA 
representative- and principal-level registration categories, which do 
not have an experience requirement. FINRA is also proposing to delete 
Incorporated NYSE Rule 472(a)(2), which requires that only Supervisory 
Analysts approve research reports. As described above, under FINRA 
rules, Supervisory Analysts are permitted to approve research reports, 
but they are not required to do so. For instance, a member may 
designate a Research Principal to approve its research reports.
14. Definition of Representative (Proposed FINRA Rule 1220(b)(1))
    NASD Rule 1031(b) currently defines the term ``representative'' as 
an associated person, including an assistant officer other than a 
principal, who is engaged in the investment banking or securities 
business for the member, such as supervision, solicitation, conduct of 
business in securities or the training of persons associated with a 
member for any of these functions.
    Incorporated NYSE Rule 10 defines the term ``registered 
representative'' as an employee of a member engaged in the solicitation 
or handling of accounts or orders for the purchase or sale of 
securities, or other similar instruments for the accounts of customers 
of his or her employer or in the solicitation or handling of business 
in connection with investment advisory or investment management 
services furnished on a fee basis by his or her employer.
    FINRA believes that the definition of the term ``representative'' 
in NASD Rule 1031(b) is more consistent with the functions customarily 
performed by a registered representative. Therefore,

[[Page 17351]]

FINRA is proposing to adopt NASD Rule 1031(b) as FINRA Rule 1220(b)(1) 
with non-substantive changes.
15. General Securities Representative (Proposed FINRA Rule 1220(b)(2))
    NASD Rule 1032(a)(1) currently requires that an associated person 
who meets the definition of ``representative'' under NASD Rule 1031 
register as a General Securities Representative. A person registering 
as a General Securities Representative must pass the General Securities 
Representative examination.\64\ The rule, however, provides that a 
representative is not required to register as a General Securities 
Representative if the person's activities are so limited as to qualify 
such person for one or more of the limited representative categories 
specified in NASD Rule 1032, such as an Investment Company and Variable 
Contracts Products Representative, a Direct Participation Programs 
Representative, an Options Representative, a Corporate Securities 
Representative, a Securities Trader, a Government Securities 
Representative, a Private Securities Offerings Representative or an 
Investment Banking Representative. Further, the rule does not preclude 
individuals registered in a limited representative category from 
registering as General Securities Representatives.
---------------------------------------------------------------------------

    \64\ An individual may also register as a General Securities 
Representative by passing a combination of other representative-
level examinations.
---------------------------------------------------------------------------

    NASD Rule 1032(a)(2) provides that if a representative does not 
engage in municipal securities activities, registration as a United 
Kingdom Securities Representative or Canada Securities Representative 
is equivalent to registration as a General Securities Representative. 
These foreign registration categories were created in the 1990s as an 
alternative to General Securities Representative registration for 
individuals who do not engage in municipal securities activities and 
who are in good standing as a representative with the Financial Conduct 
Authority in the United Kingdom or with a Canadian stock exchange or 
securities regulator. To qualify for registration as a United Kingdom 
Securities Representative or Canada Securities Representative, an 
individual must pass the United Kingdom Securities Representative 
examination or Canada Securities Representative examinations, 
respectively. NASD Rule 1032(a)(2) also permits a person registered and 
in good standing as a representative with the Japanese securities 
regulators to become qualified to function as a General Securities 
Representative by passing the Japan Module of the General Securities 
Representative examination. The Japan Module, however, was never 
implemented.
    NASD Rule 1032(a)(3) provides that an associated person registered 
solely as a General Securities Representative is not qualified to 
function as a Registered Options Representative, unless the General 
Securities Representative is separately qualified and registered as a 
Registered Options Representative.\65\
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    \65\ This provision was adopted in 1980 at a time when an 
associated person had to separately qualify and register as a 
Registered Options Representative. See Securities Exchange Act 
Release No. 16936 (June 26, 1980), 45 FR 45441 (July 3, 1980) (Order 
Approving Proposed Rule Change; File No. SR-NASD-80-1). In 1997, 
NASD Rule 1032(d) was amended to no longer require associated 
persons to separately qualify and register as Registered Options 
Representatives, but there was no corresponding change to NASD Rule 
1032(a). See Securities Exchange Act Release No. 38969 (August 25, 
1997), 62 FR 46535 (September 3, 1997) (Order Approving Proposed 
Rule Change; File No. SR-NASD-97-23).
---------------------------------------------------------------------------

    The Incorporated NYSE rules also require that a representative 
register as a General Securities Representative,\66\ unless the 
representative's activities are so limited as to qualify him or her for 
one or more of the limited categories of representative registration, 
such as an Investment Company and Variable Contracts Products 
Representative or a Direct Participation Programs Representative.\67\ 
The Incorporated NYSE rules further provide that registration as a 
United Kingdom Securities Representative or Canada Securities 
Representative is equivalent to registration as a General Securities 
Representative for those representatives who are not engaged in 
municipal securities activities.\68\
    FINRA is proposing to streamline the provisions of NASD Rule 
1032(a) and adopt them as FINRA Rule 1220(b)(2) with the following 
changes.
---------------------------------------------------------------------------

    \66\ See Incorporated NYSE Rule 345.10 and .15(2) and NYSE Rule 
Interpretation 345.15/02.
    \67\ See Incorporated NYSE Rule 345.15(3) and NYSE Rule 
Interpretation 345.15/02.
    \68\ See NYSE Information Memoranda 91-09 (March 1991) and 96-06 
(March 1996).
---------------------------------------------------------------------------

    Similar to the proposed changes to the General Securities Principal 
registration category, FINRA is proposing to more clearly set forth the 
obligation to register as a General Securities Representative. 
Specifically, proposed FINRA Rule 1220(b)(2)(A) states that each 
representative as defined in proposed FINRA Rule 1220(b)(1) is required 
to register with FINRA as a General Securities Representative, subject 
to the following exceptions. The proposed rule provides that if a 
representative's activities include the functions of an Operations 
Professional, a Securities Trader, an Investment Banking Representative 
or a Research Analyst, then the representative must appropriately 
register in one or more of these categories. Proposed FINRA Rule 
1220(b)(2)(A) also provides that if a representative's activities are 
limited solely to the functions of an Investment Company and Variable 
Contracts Products Representative, a Direct Participation Programs 
Representative or a Private Securities Offerings Representative, then 
the representative may appropriately register in one or more of these 
categories in lieu of registering as a General Securities 
Representative.
    Further, consistent with the proposed restructuring of the 
representative-level examinations, proposed FINRA Rule 1220(b)(2)(B) 
would require that individuals registering as General Securities 
Representatives pass the SIE and the General Securities Representative 
examination.
    In addition, as part of the proposed restructuring of the 
representative-level examinations, FINRA is proposing to eliminate the 
United Kingdom Securities Representative and Canada Securities 
Representative registration categories, and associated Series 17, 
Series 37 and Series 38 examinations. Instead, FINRA is proposing to 
adopt FINRA Rule 1220.01 to provide individuals who are associated 
persons of firms and hold foreign registrations an alternative, more 
flexible, process to obtain a FINRA representative-level registration. 
Based on FINRA's analysis of the relevant United Kingdom and Canadian 
qualification requirements, FINRA believes that there is sufficient 
overlap between the SIE and these foreign qualification requirements to 
permit them to act as exemptions to the SIE. Under proposed FINRA Rule 
1220.01, individuals who are in good standing as representatives with 
the Financial Conduct Authority in the United Kingdom or with a 
Canadian stock exchange or securities regulator would be exempt from 
the requirement to pass the SIE, and thus would be required only to 
pass a specialized knowledge examination to register with FINRA as a 
representative. The proposed approach would provide individuals with a 
United Kingdom or Canadian qualification more flexibility to obtain a 
FINRA representative-level registration. For instance, an individual 
with the appropriate United Kingdom qualification who seeks 
registration as an Investment Banking Representative today would take 
the Series 79 examination, totaling 175 questions. Under the proposed 
rule change, the

[[Page 17352]]

same individual would only take the specialized Series 79 examination, 
which FINRA is anticipating would have 75 questions.
    FINRA is also proposing to delete the provision regarding the Japan 
Module of the General Securities Representative examination because it 
was never implemented. Further, FINRA is proposing to delete the 
provision restricting a General Securities Representative from 
functioning as a Registered Options Representative as a corresponding 
change to the 1997 amendment of NASD Rule 1032(d). Finally, FINRA is 
proposing to delete the provision that persons eligible for 
registration in other representative categories are not precluded from 
registering as General Securities Representatives because it is 
superfluous.
16. Operations Professional, Securities Trader, Investment Banking 
Representative, Research Analyst, Investment Company and Variable 
Contracts Products Representative, Direct Participation Programs 
Representative and Private Securities Offerings Representative 
(Proposed FINRA Rules 1220(b)(3), 1220(b)(4), 1220(b)(5), 1220(b)(6), 
1220(b)(7), 1220(b)(8), 1220(b)(9) and 1220.05)
    FINRA Rule 1230(b)(6) currently requires that specified persons who 
are engaged in, responsible for or supervising specified covered 
functions relating to operations register as Operations Professionals. 
The specified persons are: (1) Senior management with direct 
responsibility over the covered functions; (2) any person designated by 
such senior management as a supervisor, manager or other person 
responsible for approving or authorizing work in direct furtherance of 
the covered functions; and (3) persons with the authority or discretion 
materially to commit a firm's capital in direct furtherance of the 
covered functions or to commit a firm to any material contract or 
agreement in direct furtherance of the covered functions. Individuals 
registering as Operations Professionals must pass the Operations 
Professional examination, unless they hold an eligible registration, 
such as a General Securities Representative registration. In addition, 
FINRA Rule 1230(b)(6) includes specified time frames relating to the 
initial implementation of the rule and allows individuals to function 
as Operations Professionals for a limited period before having to pass 
an appropriate qualification examination. FINRA Rule 1230.06 provides 
that the determination of what constitutes ``materially'' or 
``material'' in the third category of specified persons is based on a 
firm's pre-established spending guidelines and risk management 
policies. FINRA Rule 1230.06 also provides that any person whose 
activities are limited to performing a function ancillary to a covered 
function, or whose function is to serve a role that can be viewed as 
supportive of or advisory to the performance of a covered function, or 
who engages solely in clerical or ministerial activities in a covered 
function is not required to register as an Operations Professional. In 
addition, FINRA Rule 1230.06 provides an exception from the 
registration requirements for employees of a foreign broker-dealer who 
are engaged in specified limited activities.
    Pursuant to NASD Rule 1032(f), each associated person of a member 
who is included within the definition of ``representative'' in NASD 
Rule 1031 is required to register as a Securities Trader if, with 
respect to transactions in equity (including equity options), preferred 
or convertible debt securities effected otherwise than on a securities 
exchange, such person is engaged in proprietary trading, the execution 
of transactions on an agency basis or the direct supervision of such 
activities. The rule provides an exception from the registration 
requirement for any associated person of a member whose trading 
activities are conducted principally on behalf of an investment company 
that is registered with the SEC pursuant to the Investment Company Act 
and that controls, is controlled by, or is under common control with 
the member. The rule also requires that associated persons primarily 
responsible for the design, development or significant modification of 
algorithmic trading strategies (or responsible for the day-to-day 
supervision or direction of such activities) register as Securities 
Traders. Individuals registering as Securities Traders must pass the 
Securities Trader examination.
    NASD Rule 1032(i) currently requires that each associated person of 
a member who is included within the definition of ``representative'' in 
NASD Rule 1031 and engaged in specified investment banking activities, 
such as advising on or facilitating debt or equity securities offerings 
through a private placement or a public offering, register as an 
Investment Banking Representative. Individuals registering as 
Investment Banking Representatives must pass the Investment Banking 
Representative examination. Individuals engaged in investment banking 
activities relating to direct participation program securities or 
private securities offerings as well as individuals engaged in retail 
or institutional sales and trading activities are not required to 
register as Investment Banking Representatives. In addition, the rule 
provides a limited exception from the requirements of the rule for 
individuals participating in a specified employee training program. 
NASD Rule 1032(i) also includes an opt-in provision, which allowed 
General Securities Representatives, Corporate Securities 
Representatives, United Kingdom Securities Representatives and Canada 
Securities Representatives who were engaged in investment banking 
activities covered by the rule to have opted in to the Investment 
Banking Representative registration category by May 3, 2010.
    NASD Rule 1050 currently requires that an associated person whose 
primary job function is to provide investment research and who is 
primarily responsible for the preparation of the substance of a 
research report or whose name appears on a research report register as 
a Research Analyst.\69\ NASD Rule 1050 provides that a person 
registering as a Research Analyst must satisfy the General Securities 
Representative prerequisite registration and pass the Research Analyst 
examinations. The purpose of the current prerequisite registration is 
to ensure that Research Analysts have general securities knowledge. 
There is a corresponding requirement under the Incorporated NYSE 
rules.\70\
---------------------------------------------------------------------------

    \69\ NASD Rule 1050 applies only to an associated person whose 
primary job function is to provide investment research and who is 
primarily responsible for the preparation of the substance of an 
equity research report or whose name appears on an equity research 
report. It does not currently apply to persons who produce debt 
research reports. See Research Rules Frequently Asked Questions, 
http://www.finra.org/industry/faq-research-rules-frequently-asked-questions-faq.
    \70\ See Incorporated NYSE Rules 344, 344.10 and 344.12 and NYSE 
Rule Interpretations 344/01 and/02.
---------------------------------------------------------------------------

    Pursuant to NASD Rule 1032(b), each associated person of a member 
who is included within the definition of ``representative'' in NASD 
Rule 1031 may register as an Investment Company and Variable Contracts 
Products Representative, instead of registering as a General Securities 
Representative, if the individual's activities are limited solely to 
redeemable securities of companies registered under the Investment 
Company Act, securities of closed-end companies registered under the 
Investment Company Act during the period of original distribution and 
specified insurance contracts, such as variable contracts. Individuals

[[Page 17353]]

registering as Investment Company and Variable Contracts Products 
Representatives must pass the Investment Company and Variable Contracts 
Products Representative examination. Under NASD Rule 1032(c), each 
associated person of a member who is included within the definition of 
``representative'' in NASD Rule 1031 may register as a Direct 
Participation Programs Representative, instead of registering as a 
General Securities Representative, if the individual's activities are 
limited solely to direct participation program securities. Individuals 
registering as Direct Participation Programs Representatives must pass 
the Direct Participation Programs Representative examination. The 
Incorporated NYSE rules include similar limited registration 
categories.\71\
---------------------------------------------------------------------------

    \71\ See Incorporated NYSE Rule 345.15(3) and NYSE Rule 
Interpretation 345.15/02.
---------------------------------------------------------------------------

    Pursuant to NASD Rule 1032(h), each associated person of a member 
who is included within the definition of ``representative'' in NASD 
Rule 1031 may register as a Private Securities Offerings 
Representative, instead of registering as a General Securities 
Representative, if the individual's activities are limited solely to 
effecting sales of private placement securities, other than municipal, 
government or direct participation program securities, as part of a 
primary offering.\72\ Individuals registering as Private Securities 
Offerings Representatives must pass the Private Securities Offerings 
Representative examination. NASD Rule 1032(h) includes a grandfathering 
provision that provides that any person who engaged in effecting sales 
of private securities offerings as an employee of a bank from May 12, 
1999 to November 12, 1999, may register as a Private Securities 
Offerings Representative without having to pass the Private Securities 
Offerings Representative examination.
---------------------------------------------------------------------------

    \72\ Private Securities Offerings Representatives cannot effect 
resales of or secondary market transactions in private placement 
securities.
---------------------------------------------------------------------------

    FINRA is proposing to adopt FINRA Rule 1230(b)(6), NASD Rule 
1032(f), NASD Rule 1032(i), NASD Rule 1050, NASD Rule 1032(b), NASD 
Rule 1032(c) and NASD Rule 1032(h) with a few changes as FINRA Rules 
1220(b)(3), (b)(4), (b)(5), (b)(6), (b)(7), (b)(8) and (b)(9), 
respectively. In addition, FINRA is proposing to adopt FINRA Rule 
1230.06 as FINRA Rule 1220.05 with non-substantive changes.
    Specifically, consistent with the restructuring of the 
representative-level examinations, proposed FINRA Rules 1220(b)(3), 
(b)(4), (b)(5), (b)(6), (b)(7), (b)(8) and (b)(9) would require 
individuals registering in the respective registration categories to 
pass the SIE and the applicable representative-level examination(s). 
With respect to Research Analysts, given that general securities 
knowledge would be covered on the SIE, FINRA is proposing to replace 
the General Securities Representative prerequisite registration 
requirement with the SIE. Therefore, under proposed FINRA Rule 
1220(b)(6), individuals registering as Research Analysts would be 
required to pass the SIE and the Research Analyst examinations. 
Consistent with existing guidance, FINRA is also proposing to clarify 
that the scope of FINRA Rule 1220(b)(6) is limited to equity research 
reports.
    As noted above, FINRA is proposing to transfer the securities 
products listed under the Investment Company and Variable Contracts 
Products Principal registration category to the Investment Company and 
Variable Contracts Products Representative registration category. 
Further, consistent with the registration provisions of Municipal 
Securities Rulemaking Board (``MSRB'') Rule G-3(a), proposed FINRA Rule 
1220(b)(7) clarifies that Investment Company and Variable Contracts 
Products Representatives are permitted to engage in the solicitation, 
purchase or sale of municipal fund securities as defined under MSRB 
Rule D-12. FINRA is also proposing to eliminate the opt-in provision in 
current NASD Rule 1032(i) and the time frames relating to the initial 
implementation of the Operations Professional registration category 
because these periods have passed.
17. Eliminated Registration Categories (Proposed FINRA Rule 1220.06)
    Pursuant to NASD Rule 1041, an associated person is not required to 
register as a General Securities Representative or in one or more of 
the limited categories of representative registration if the person's 
activities are so limited as to qualify such person for registration as 
an Order Processing Assistant Representative. An Order Processing 
Assistant Representative is an associated person whose only function is 
to accept unsolicited customer orders (other than orders for municipal 
securities and direct participation program securities) \73\ from 
existing customers for submission for execution by the member. Pursuant 
to NASD Rule 1042, Order Processing Assistant Representatives are 
subject to specified restrictions regarding their activities and 
compensation and are subject to particular supervisory requirements. In 
addition, they may not be registered concurrently in any other 
capacity.
---------------------------------------------------------------------------

    \73\ See NTM 89-78 (December 1989).
---------------------------------------------------------------------------

    NASD Rule 1032(d) currently provides that each associated person of 
a member who is included within the definition of ``representative'' in 
NASD Rule 1031 may register as an Options Representative, instead of a 
General Securities Representative, if the individual's activities are 
limited solely to options, including option contracts on government 
securities. Individuals registering as Options Representatives must 
satisfy the Corporate Securities Representative or Government 
Securities Representative prerequisite registration and pass the 
Options Representative examination. The Incorporated NYSE rules require 
that a ``Registered Options Representative,'' a representative who 
transacts business with the public in option contracts, pass the 
General Securities Representative qualification examination.\74\
---------------------------------------------------------------------------

    \74\ See Incorporated NYSE Rules 345.10 and 345.15(4) and NYSE 
Rule Interpretation 345.15/02.
---------------------------------------------------------------------------

    NASD Rule 1032(e) currently provides that each associated person of 
a member who is included within the definition of ``representative'' in 
NASD Rule 1031 may register as a Corporate Securities Representative, 
instead of a General Securities Representative, if the individual's 
activities are limited solely to securities as defined under section 
3(a)(10) of the Act, other than municipal securities, options, mutual 
funds (except for money market funds), variable contracts and direct 
participation program securities. Individuals registering as Corporate 
Securities Representatives must pass the Corporate Securities 
Representative examination. NASD Rule 1032(g) provides that each 
associated person of a member who is included within the definition of 
``representative'' in NASD Rule 1031 may register as a Government 
Securities Representative, instead of a General Securities 
Representative, if the individual's activities are limited solely to 
government securities as defined in sections 3(a)(42)(A) through (C) of 
the Act. Individuals registering as Government Securities 
Representatives must pass the Government Securities Representative 
examination.
    Pursuant to NASD Rule 1100, associated persons registered as 
Foreign Associates \75\ may function as registered

[[Page 17354]]

representatives, including acting as traders or registered persons 
responsible for servicing the accounts of foreign nationals. However, 
they are exempt from the requirement to pass a qualification 
examination and are not subject to the Regulatory Element of CE 
requirements.
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    \75\ To qualify for registration as a Foreign Associate, an 
associated person: (1) Cannot be a citizen, national, or resident of 
the United States or any of its territories or possessions; (2) must 
conduct all of his or her securities activities in areas outside the 
jurisdiction of the United States; and (3) cannot engage in any 
securities activities with or for any citizen, national or resident 
of the United States. To register an associated person as a Foreign 
Associate, a member must: (1) File a Form U4 with FINRA and certify 
that the person meets the criteria for a Foreign Associate; (2) 
attest that the person is not disqualified from registration; and 
(3) certify that service of process for any proceeding by FINRA for 
such person may be sent to an address designated by the member. If 
the Foreign Associate is terminated, the member must notify FINRA 
immediately by filing a Form U5.
---------------------------------------------------------------------------

    The Incorporated NYSE rules currently require that any person who 
has discretion to commit his or her employer member to any contract or 
agreement, written or oral, involving securities lending or borrowing 
activities and the direct supervisor of such person register as a 
Securities Lending Representative or Securities Lending Supervisor, as 
applicable.\76\ Such individuals are also required to sign an agreement 
(representing a form of code of ethics) as an addendum to the Form U4. 
Such individuals are not required to pass a qualification examination, 
but they are required to complete the Regulatory Element of the CE 
requirements. NASD rules currently do not have a specific registration 
category for associated persons engaged in securities lending 
activities and in the direct supervision of such activities. Rather, 
securities lending is a covered function under the Operations 
Professional registration category.
---------------------------------------------------------------------------

    \76\ See Incorporated NYSE Rules 345(a) and .10 and NYSE Rule 
Interpretation 345.15/02.
---------------------------------------------------------------------------

    FINRA is proposing to eliminate the current registration categories 
of Order Processing Assistant Representative, Options Representative, 
Corporate Securities Representative, Government Securities 
Representative and Foreign Associate.\77\ FINRA believes that the 
utility of the Order Processing Assistant Representative registration 
category has diminished as technological advances and changes in 
industry practice have reduced the need for such representatives. As a 
result, the volume of candidates taking the Order Processing Assistant 
Representative examination has diminished and today less than 200 firms 
employ one or more Order Processing Assistant Representatives. The 
Options Representative, Corporate Securities Representative and 
Government Securities Representative registration categories were 
created over the years as subcategories of the General Securities 
Representative category. These subcategories currently allow an 
individual to sell a subset of the products (e.g., options, common 
stocks and corporate bonds, government securities) permitted to be sold 
by a General Securities Representative. In recent years, however, the 
utility of these subcategories has also diminished as a result of 
technological, regulatory and business practice changes. This is 
evidenced by the low annual volume for each of these examinations and 
the relatively low number of individuals who currently hold these 
registrations.
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    \77\ As discussed above, FINRA is also proposing to eliminate 
the United Kingdom Securities Representative and Canada Securities 
Representative registration categories.
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    In addition, considering the type of interaction that Foreign 
Associates may have with customers, FINRA believes that such persons 
should demonstrate the same level of competence and knowledge required 
of their counterparts in the United States. Therefore, FINRA is 
proposing to eliminate this registration category.
    Order Processing Assistant Representatives, United Kingdom 
Securities Representatives, Canada Securities Representatives, Options 
Representatives, Corporate Securities Representatives, Government 
Securities Representatives and Foreign Associates would be eligible to 
maintain their registrations with FINRA. Specifically, proposed FINRA 
Rule 1220.06 provides that, subject to the lapse of registration 
provisions in proposed FINRA Rule 1210.08, individuals who are 
registered as Order Processing Assistant Representatives, United 
Kingdom Securities Representatives, Canada Securities Representatives, 
Options Representatives, Corporate Securities Representatives or 
Government Securities Representatives on the effective date of the 
proposed rule change and individuals who had been registered in such 
categories within the past two years prior to the effective date of the 
proposed rule change would be eligible to maintain their registrations 
with FINRA. However, if individuals registered in these categories 
terminate their registration with FINRA and the registration remains 
terminated for two or more years, they would not be able to re-register 
in that category. With respect to Foreign Associates, proposed FINRA 
Rule 1220.06 provides that individuals registered as Foreign Associates 
on the effective date of the proposed rule change would also be 
eligible to maintain their registrations with FINRA. However, if 
Foreign Associates subsequently terminate their registrations with 
FINRA, they would not be able to re-register as Foreign Associates. 
Unlike the other eliminated categories, Foreign Associates would not be 
eligible to re-register in the same category within two years of 
terminating their registrations because the two-year lapse of 
registration provision is only applicable to those registration 
categories that have an associated qualification examination. In 
addition, proposed FINRA Rule 1220.06 would include the current 
restrictions to which Order Processing Assistant Representatives are 
subject as well as the current conditions to which Foreign Associates 
are subject.
    With respect to the NYSE registration categories for Securities 
Lending Representatives and Securities Lending Supervisors, FINRA had 
originally proposed to adopt these categories under a FINRA rule. 
However, given that securities lending activities are covered under the 
Operations Professional registration category, which is a more recent 
registration category, FINRA does not believe that it is necessary to 
adopt specific registration categories for individuals engaged in such 
activities. Moreover, FINRA is considering potential changes to the CRD 
system that would enable firms to identify registered persons engaged 
in securities lending activities through other functionalities.
18. Grandfathering Provisions
    In addition to the grandfathering provisions in proposed FINRA Rule 
1220(a)(2) (relating to General Securities Principals), proposed FINRA 
Rule 1220(a)(3) (relating to Compliance Officers) and proposed FINRA 
Rule 1220.06 (relating to the eliminated registration categories), 
FINRA is proposing to include grandfathering provisions in proposed 
FINRA Rules 1220(a)(5), (a)(6), (a)(8), (a)(9), (a)(13), (b)(2), 
(b)(3), (b)(4), (b)(5), (b)(6), (b)(7), (b)(8) and (b)(9). 
Specifically, the proposed grandfathering provisions provide that, 
subject to the lapse of registration provisions in proposed FINRA Rule 
1210.08, individuals who are registered with FINRA in specified 
registration categories on the effective date of the proposed rule 
change and individuals who had been registered in such categories 
within the past two years prior to the effective date of the proposed 
rule change would be qualified to register in the proposed 
corresponding registration categories without having to take any 
additional examinations.

[[Page 17355]]

N. Associated Persons Exempt From Registration (Proposed FINRA Rules 
1230 and 1230.01)
    NASD Rule 1060(a) currently provides that the following associated 
persons are not required to register: (1) Associated persons who are 
not actively engaged in the investment banking or securities business; 
(2) associated persons whose functions are related solely and 
exclusively to the member's need for nominal corporate officers or for 
capital participation; and (3) associated persons whose functions are 
related solely and exclusively to: effecting transactions on the floor 
of a national securities exchange and who are registered as floor 
members with such exchange, transactions in municipal securities, 
transactions in commodities or transactions in security futures 
(provided that any such person is registered with a registered futures 
association). In addition, both the NASD rules and the Incorporated 
NYSE rules provide an exemption from registration for associated 
persons whose functions are solely and exclusively clerical or 
ministerial.\78\ NASD Rule 1060(a) is not meant to provide an exclusive 
or exhaustive list of exemptions from registration. Associated persons 
may otherwise be exempt from registration based on their activities and 
functions.
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    \78\ See NASD Rule 1060(a)(1) and Incorporated NYSE Rule 
Interpretations 10/01 and 345(a)/01.
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    FINRA is proposing to adopt NASD Rule 1060(a) as FINRA Rule 1230 
subject to the following changes. As noted above, NASD Rule 1060(a) 
exempts from registration those associated persons who are not actively 
engaged in the investment banking or securities business. NASD Rule 
1060(a) also exempts from registration those associated persons whose 
functions are related solely and exclusively to a member's need for 
nominal corporate officers or for capital participation.\79\ FINRA 
believes that the determination of whether an associated person is 
required to register must be based on an analysis of the person's 
activities and functions in the context of the various registration 
categories. FINRA does not believe that categorical exemptions for 
associated persons who are not ``actively engaged'' in a member's 
investment banking or securities business, associated persons whose 
functions are related only to a member's need for nominal corporate 
officers or associated persons whose functions are related only to a 
member's need for capital participation is consistent with this 
analytical framework. FINRA therefore is proposing to delete these 
exemptions. NASD Rule 1060(a) further exempts from registration 
associated persons whose functions are related solely and exclusively 
to effecting transactions on the floor of a national securities 
exchange as long as they are registered as floor members with such 
exchange. Because exchanges have registration categories other than the 
floor member category, proposed FINRA Rule 1230 clarifies that the 
exemption applies to associated persons solely and exclusively 
effecting transactions on the floor of a national securities exchange, 
provided they are appropriately registered with such exchange.
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    \79\ These exemptions generally apply to associated persons who 
are corporate officers of a member in name only to meet specific 
corporate legal obligations or who only provide capital for a 
member, but have no other role in a member's business.
---------------------------------------------------------------------------

    In NTM 87-47 (July 1987), FINRA stated that unregistered 
administrative personnel may occasionally receive an unsolicited 
customer order at a time when appropriately qualified representatives 
or principals are unavailable. FINRA believes that to accept customer 
orders a person must be appropriately registered. Accordingly, FINRA is 
proposing to rescind the guidance provided in NTM 87-47 and instead 
adopt FINRA Rule 1230.01 to clarify that the function of accepting 
customer orders is not considered a clerical or ministerial function 
and that associated persons who accept customer orders under any 
circumstances are required to be appropriately registered. However, the 
proposed rule provides that an associated person is not accepting a 
customer order where occasionally, when an appropriately registered 
person is unavailable, the associated person transcribes the order 
details and the registered person contacts the customer to confirm the 
order details before entering the order.
O. Changes to CE Requirements (Proposed FINRA Rule 1240)
    As described above, FINRA Rule 1250 includes a Regulatory Element 
and a Firm Element. The Regulatory Element applies to registered 
persons and consists of periodic computer-based training on regulatory, 
compliance, ethical, supervisory subjects and sales practice standards. 
The Firm Element consists of at least annual, member-developed and 
administered training programs designed to keep covered registered 
persons current regarding securities products, services and strategies 
offered by the member. FINRA is proposing to renumber FINRA Rule 1250 
as FINRA Rule 1240 with the changes discussed below.
1. Regulatory Element
    FINRA is proposing to replace the term ``registered person'' under 
current FINRA Rule 1250(a) with the term ``covered person'' and make 
conforming changes to proposed FINRA Rule 1240(a). For purposes of the 
Regulatory Element, FINRA is proposing to define the term ``covered 
person'' under FINRA Rule 1240(a) as any person, other than a Foreign 
Associate, registered pursuant to proposed FINRA Rule 1210, including 
any person who is permissively registered pursuant to proposed FINRA 
Rule 1210.02, and any person who is designated as eligible for an FSA 
waiver pursuant to proposed FINRA Rule 1210.09. The purpose of this 
change is to ensure that all registered persons, including those with 
permissive registrations, keep their knowledge of the securities 
industry current. The inclusion of persons designated as eligible for 
an FSA waiver under the term ``covered persons'' corresponds to the 
requirements of proposed FINRA Rule 1210.09. In addition, consistent 
with proposed FINRA Rule 1210.09, proposed FINRA Rule 1240(a) provides 
that an FSA-eligible person would be subject to a Regulatory Element 
program that correlates to his or her most recent registration 
category, and CE would be based on the same cycle had the individual 
remained registered. The proposed rule also provides that if an FSA-
eligible person fails to complete the Regulatory Element during the 
prescribed time frames, he or she would lose FSA eligibility.
    Further, FINRA is proposing to codify existing FINRA guidance 
regarding the impact of failing to complete the Regulatory Element on a 
registered person's activities and compensation.\80\ Specifically, 
proposed FINRA Rule 1240(a)(2) provides that any person whose 
registration has been deemed inactive under the rule may not accept or 
solicit business or receive any compensation for the purchase or sale 
of securities. The proposed rule provides, however, that such person 
may receive trail or residual commissions resulting from transactions 
completed before the inactive status, unless the member with which the 
person is associated has a policy prohibiting such trail or residual 
commissions.
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    \80\ See, e.g., NTM 95-35 (May 1995).
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    FINRA is also proposing to remove superfluous language under 
current FINRA Rule 1250(a)(1) stating that FINRA shall determine the 
content of the Regulatory Element.

[[Page 17356]]

2. Firm Element
    Current FINRA Rule 1250(b)(2)(B) provides that with respect to 
Research Analysts and their immediate supervisors, the minimum 
standards for the Firm Element training programs must cover training in 
ethics, professional responsibility and the requirements of FINRA Rule 
2241.\81\ FINRA believes that training in ethics and professional 
responsibility should apply to all covered registered persons. 
Moreover, FINRA Rule 1250(a)(2)(A) currently requires that a member 
maintain a CE program that enhances a covered registered person's 
professionalism. Therefore, proposed FINRA Rule 1240(b)(2)(B) requires 
that a firm's training program cover training in ethics and 
professional responsibility. FINRA is also proposing to eliminate the 
specific requirement that Research Analysts receive training regarding 
FINRA Rule 2241. FINRA believes that this requirement is already 
addressed under current FINRA Rule 1250(b)(2)(B), which provides that 
the Firm Element training programs must cover applicable regulatory 
requirements.
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    \81\ See FINRA Rule 1250(b)(2)(B)(iv).
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P. Deletion of Incorporated NYSE Rules
    FINRA is proposing to delete the following Incorporated NYSE rules 
as they are substantially similar to the proposed consolidated 
registration rules, otherwise incorporated as described above, rendered 
obsolete by the proposed approach reflected in the consolidated 
registration rules, or addressed by other rules:
     Incorporated NYSE Rule 10 (definition of ``registered 
representative'');
     Incorporated NYSE Rule Interpretations 10/01 and 345(a)/01 
(clerical and ministerial exemption from registration);
     Incorporated NYSE Rule 311.17 (definition of ``principal 
executive'');
     Incorporated NYSE Rule Interpretation 311(b)(5)/01 
(qualification requirements for principal executives);
     Incorporated NYSE Rule Interpretations 311(b)(5)/02 and/03 
(relating to the designation and registration of a CFO and a COO);
     Incorporated NYSE Rule Interpretation 311(g)/01 
(requirement that members carrying customer accounts have at least two 
general partners); \82\
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    \82\ This is a conforming change. The corresponding rule 
incorporated from the NYSE, Incorporated NYSE Rule 311(h), was 
deleted as part of a prior proposed rule change. See Securities 
Exchange Act Release No. 58533 (September 12, 2008), 73 FR 54652 
(September 22, 2008) (Order Approving Proposed Rule Change; File No. 
SR-FINRA-2008-036).
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     Incorporated NYSE Rule 321.15 (registration of specified 
employees of a foreign subsidiary);
     Incorporated NYSE Rule 344 and its Interpretation 
(Research Analyst and Supervisory Analyst registration categories);
     Incorporated NYSE Rules 345(a), 345.10, 345.15(2) through 
345.15(4) and NYSE Rule Interpretation 345.15/02 (representative 
categories); \83\
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    \83\ FINRA is also proposing to delete the NYSE registration 
requirements relating to commodities solicitors (Incorporated NYSE 
Rule 345.15(5) (Commodities Solicitors)) and floor members and floor 
clerks (Incorporated NYSE Rule Interpretation 345.15/02) as these 
activities are not within the scope of the proposed FINRA 
registration rules.
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     Incorporated NYSE Rules 345.12, 345.13, 345.17 and 345.18 
and NYSE Rule Interpretations 345.12/01 and 345.18/01 (Forms U4 and U5 
filing requirements);
     Incorporated NYSE Rule 345.15(1)(a) (examination 
requirement);
     Incorporated NYSE Rule 345.15(1)(b) and NYSE Rule 
Interpretation 345.15/01 (examination waivers);
     Incorporated NYSE Rule Interpretation 345(a)/02 
(independent contractor status); \84\
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    \84\ Incorporated NYSE Rule Interpretation 345(a)/02 provides 
that an independent contractor is deemed an employee of a member for 
purposes of the NYSE rules and requires that the member comply with 
specified requirements when entering into an arrangement with any 
person asserting independent contractor status, including a 
requirement that the independent contractor execute a ``consent to 
jurisdiction'' form. The status of independent contractors as 
associated persons of a member under FINRA rules is well settled. 
See, e.g., Letter from Douglas Scarff, Director, Division of Market 
Regulation, SEC, to Gordon S. Macklin, President, NASD (June 18, 
1982).
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     Incorporated NYSE Rule Interpretation 345(a)/03 (status of 
persons serving in the Armed Forces);
     Incorporated NYSE Rule Interpretation 345(b) (provisions 
regarding officers); \85\
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    \85\ This is a conforming change. The corresponding NYSE rule, 
NYSE Rule 345(b), was deleted as part of a prior proposed rule 
change. See Securities Exchange Act Release No. 58533 (September 12, 
2008), 73 FR 54652 (September 22, 2008) (Order Approving Proposed 
Rule Change; File No. SR-FINRA-2008-036).
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     Incorporated NYSE Rule 345.16 (requirement to provide 
information regarding members' employees); and
     Incorporated NYSE Rule 472(a)(2) (requiring research 
reports to be approved by a Supervisory Analyst).
    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice to be published no later than 90 days following Commission 
approval. The effective date will be no later than 18 months following 
Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\86\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest, and section 15A(g)(3) of the Act,\87\ which authorizes 
FINRA to prescribe standards of training, experience and competence for 
persons associated with FINRA members.
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    \86\ 15 U.S.C. 78o-3(b)(6).
    \87\ 15 U.S.C. 78o-3(g)(3).
---------------------------------------------------------------------------

    FINRA believes that the proposed rule change will streamline, and 
bring consistency and uniformity to, the registration rules, which 
will, in turn, assist members and their associated persons in complying 
with these rules and improve regulatory efficiency. The proposed rule 
change will also improve the efficiency of the examination program, 
without compromising the qualification standards, by eliminating 
duplicative testing of general securities knowledge on examinations and 
by removing examinations that currently have limited utility.
    In addition, the proposed rule change will expand the scope of 
permissive registrations, which, among other things, will allow members 
to develop a depth of associated persons with registrations to respond 
to unanticipated personnel changes and will encourage greater 
regulatory understanding. Further, the proposed rule change will 
provide a more streamlined and effective waiver process for individuals 
working for a financial services industry affiliate of a member, and it 
will require such individuals to maintain specified levels of 
competence and knowledge while working in areas ancillary to the 
investment banking and securities business.
    The proposed rule change will improve the supervisory structure of 
firms by imposing an experience requirement for representatives that 
are designated by firms to function as principals for a 120-day period 
before having to pass an appropriate principal qualification 
examination. The proposed rule change will also prohibit unregistered 
persons from accepting customer orders under any circumstances, which 
will enhance investor protection.

[[Page 17357]]

    Finally, FINRA believes that, with the introduction of the SIE and 
expansion of the pool of individuals who are eligible to take the SIE, 
the proposed rule change has the potential of enhancing the pool of 
prospective securities industry professionals by introducing them to 
securities laws, rules and regulations and appropriate conduct before 
they join the industry in a registered capacity.

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
Economic Impact Assessment
    FINRA has undertaken an economic impact assessment, as set forth 
below, to further analyze the need for the proposed rulemaking, the 
regulatory objective of the rulemaking, the economic baseline of 
analysis, the economic impacts and the alternatives considered.
1. Need for the Rules
    The Act authorizes FINRA to prescribe standards of training, 
experience, and competence for persons associated with FINRA members. 
In accordance with that provision, FINRA has adopted registration 
requirements and developed qualification examinations that are designed 
to establish that persons associated with FINRA members have attained 
specified levels of competence and knowledge consistent with the 
applicable registration requirements.
    As part of the process of developing the Consolidated FINRA 
Rulebook, FINRA undertook a review of the NASD registration rules and 
the Incorporated NYSE rules relating to registration to streamline and 
update the rules and eliminate duplicative, obsolete or superfluous 
provisions. The proposed consolidated registration rules are the result 
of that process.
    FINRA also reviewed its representative-level examination program 
and determined to enhance the overall efficiency of the program by 
eliminating redundancy of subject matter content across examinations, 
retiring several outdated representative-level registrations and 
introducing a general knowledge examination that could be taken by all 
potential representative-level registrants and the general public.
2. Regulatory Objectives
    The proposed rule change would create a more effective and 
efficient qualification and registration process, without impacting the 
proficiency required to function as a representative or principal or 
reducing investor protection. In addition, the proposed rule change has 
the potential of enhancing the pool of prospective securities industry 
professionals by familiarizing them with securities laws, rules and 
regulations and appropriate conduct at an earlier stage of career 
development.
3. Economic Baseline
    The baseline for the economic impact assessment is the current 
structure of the registration rules and the examination program. As of 
October 2016, there were approximately 500,000 individuals holding 
representative level registrations and approximately 140,000 
individuals holding principal level registrations (approximately 
640,000 individuals total).\88\
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    \88\ The numbers provided in this economic impact assessment are 
rounded to reasonable approximations for ease of reference.
---------------------------------------------------------------------------

    The NASD rules relating to qualification and registration are a 
complex framework, which can result in compliance and operational 
challenges for firms. Moreover, dual members of FINRA and the NYSE are 
required to comply with the NASD rules and the Incorporated NYSE rules. 
As set forth in Regulatory Notice 09-70, the NASD and Incorporated NYSE 
rules include differences regarding the respective qualification and 
registration requirements, which create further compliance and 
operational challenges for dual members.
    The qualification examination program sets basic standards of 
competency for persons associated with FINRA members, and fosters 
compliance with FINRA rules through required examinations and 
continuing education. The examinations collectively cover a broad range 
of subjects on the markets, the securities industry and its regulatory 
structure. The content includes knowledge of FINRA rules as well as the 
rules of the SEC and other SROs.
    FINRA notes that in 2015, there were more than 90,000 exam 
candidates in 16 representative-level examinations. The Series 6, 7 and 
79 examinations were the three examinations with the highest volume in 
terms of candidates, constituting more than 90% of the total candidate 
volume. The examinations that are proposed to be eliminated (Series 11, 
17, 37, 38, 42, 62 and 72) constitute less than 1% of the total 
candidate volume in 2015.
    There is considerable overlap in the general securities knowledge 
content of the current representative-level examinations, which results 
in duplicative testing of such content for individuals who are required 
to pass multiple examinations.
    In addition, individuals generally must be associated with a member 
to be eligible to take a qualification examination, which, among other 
things, hinders the development of a pool of prospective securities 
industry professionals. In the absence of the proposed rule change, 
firms, associated persons and other impacted persons would continue to 
be subject to the complexities, challenges and inefficiencies of the 
current structure.
4. Economic Impacts
    FINRA notes that the proposed rule change includes a variety of 
changes, some of which may have a more significant impact. The 
following analysis will focus on those changes that are anticipated to 
have a material impact.
A. Minimum Number of Registered Principals (Proposed FINRA Rule 
1210.01)
    The proposed rule provides firms with greater flexibility to 
satisfy the two-principal requirement, as members can choose a 
principal registration category that better matches with the scope of 
the member's activities. For example, if a firm's activities are 
focused solely on investment banking, it may choose to have two 
Investment Banking Principals, instead of two General Securities 
Principals. This flexibility should benefit members that specialize in 
a single security or market or otherwise engage in more limited 
activities.
B. Permissive Registrations (Proposed FINRA Rule 1210.02)
    The proposed rule expands the scope of permissive registrations by 
allowing any associated person to obtain and maintain any registration 
permitted by the member. The proposed rule is expected to facilitate 
movement of registered personnel within and across firms and help firms 
better manage unanticipated needs for registered personnel by allowing 
them to maintain a roster of permissively registered persons available 
to meet those needs. The ability to permissively register associated 
persons may benefit such individuals and their firms by creating 
savings in examination fees,

[[Page 17358]]

examination preparation time and time spent in the examination centers.
    However, members that choose to permissively register associated 
persons would incur the cost of complying with the requirements of the 
proposed rule, including the cost of establishing adequate supervisory 
systems and procedures reasonably designed to ensure that such 
individuals do not act outside the scope of their assigned functions. 
FINRA believes that the proposed requirements are necessary to protect 
against the potential misuse of permissive registrations and any 
attendant costs are only borne at the discretion of the firm.
C. Qualification Examinations and Waivers of Examinations (Proposed 
FINRA Rule 1210.03)
    The proposed rule adopts a restructured representative-level 
qualification examination program whereby representative-level 
registrants would be required to take a general knowledge examination 
(the SIE) and a specialized knowledge examination. As noted above, 
FINRA is currently conducting a pricing analysis to determine a 
reasonable fee for the SIE and the specialized knowledge examinations. 
FINRA will file a separate proposed rule change to establish the fees 
for the SIE and the specialized knowledge examinations, which will 
include a pricing analysis. The focus of the economic impact assessment 
in this proposed rule change, therefore, is on the anticipated number 
of future candidates and the total number of examination questions that 
they would be required to answer as a proxy for the effort required to 
complete a qualification examination.
    As described in greater detail below, while some individuals would 
see an increase in examination questions, FINRA is anticipating that 
more than half of the individuals seeking a representative-level 
registration would see a reduction in the number of examination 
questions.
    Under the proposed rule, individuals seeking representative-level 
registrations must prepare and sit for the SIE and a separate 
specialized knowledge examination instead of prepare and sit for a 
single examination that covers both general and specialized knowledge 
of the securities industry as currently required. Some of these 
individuals would experience a net decrease in their total number of 
examination questions, and some would experience a net increase.
    Specifically, individuals seeking the General Securities 
Representative, Investment Banking Representative or Research Analyst 
registration would experience a net decrease in their total number of 
examination questions under the proposal.\89\ This accounts for 
approximately 54% of individuals seeking registration for the first 
time or after a lapse in registration of four or more years.\90\ 
Individuals seeking registration in other limited representative 
categories, including the Investment Company and Variable Contracts 
Products Representative, Direct Participation Programs Representative, 
Private Securities Offerings Representative or Operations Professional 
category, would experience a net increase in their total number of 
examination questions under the proposed rule. This accounts for 
approximately 44% of individuals seeking registration for the first 
time or after a lapse in registration of four or more years. In 2015, 
approximately 75,000 individuals took at least one of the 16 
representative-level examinations. Approximately 8% of these candidates 
took two or more distinct examinations that would be replaced by the 
SIE and the corresponding qualification examinations (e.g., Series 6, 7 
and 79).\91\ These individuals would experience a net decrease in their 
total number of examination questions under the proposed rule.
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    \89\ Individuals seeking registration as Research Analysts will 
experience a net decrease in the number of questions because such 
individuals would no longer be required to first register as General 
Securities Representatives.
    \90\ The reported percentages are calculated from estimated 
volumes based on five-year averages for all examinations except the 
Operations Professional examination (Series 99). Volumes for the 
Series 99 examination are based on three-year averages because the 
Series 99 examination was implemented more recently than the other 
examinations.
    \91\ This data is based on a three-year review period (2012-
2015).
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    Further, candidates who were registered as representatives two or 
more years, but less than four years, prior to reapplying for 
registration would experience a net decrease in their total number of 
examination questions if they re-registered because they would be 
considered to have passed the SIE or their SIE result would still be 
valid. Similarly, current registrants seeking an additional or 
alternative representative registration category would also experience 
a net decrease in their total number of examination questions because 
they would have already satisfied the SIE requirement, so they only 
have to take the appropriate specialized knowledge examination. These 
groups represent a relatively small percentage of individuals seeking 
registrations.\92\
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    \92\ These groups do not include Order Processing Assistant 
Representatives because they would not be considered to have passed 
the SIE.
---------------------------------------------------------------------------

    The cost of developing and implementing the new examination 
structure, including the development and maintenance of a management 
system to track SIE results, would primarily fall upon FINRA. Any 
individual, including the general public and investors, could take a 
general knowledge examination thereby enhancing the pool of prospective 
representatives. FINRA does not have estimates on the number of 
individuals who are not associated persons, or are associated persons 
who are not required to register, who would take the SIE. However, 
FINRA anticipates that the participation of these individuals would 
defray the cost of the program to some extent.
    Currently, individuals generally must be associated with a member 
to be eligible to take FINRA qualification exams. The new examination 
structure would permit the general public to take the SIE, enabling 
prospective securities industry professionals to demonstrate to 
prospective employers a basic level of knowledge prior to a job 
application. Further, individuals can use the SIE to assess their 
readiness to enter the securities industry.
    FINRA understands that currently some firms cover the examination 
fees for their representative-level registrants. Under the proposed 
rule, firms may choose to incur the cost of both the SIE and 
specialized knowledge examinations for their representative-level 
registrants. Alternatively, firms may require potential registrants to 
pass the SIE before they can be considered for a position, in which 
case the SIE fee may be incurred by the individual and the associated 
impact may be a shifting of some of the costs associated with 
qualification from the firm to the individual.
    The proposed rule continues to ensure that registered persons 
attain and maintain specified levels of competence and knowledge and, 
thus, it will continue to support investor protection. Moreover, FINRA 
expects the introduction of the SIE, which would reduce the complexity 
of the examination program and reduce content overlap, to increase the 
efficiency of the examination program and potentially create savings 
for members.

[[Page 17359]]

D. Registered Persons Functioning as Principals for a Limited Period 
(Proposed FINRA Rule 1210.04)
    The proposed rule requires that a representative designated by a 
member to function as a principal for a limited period before having to 
pass a principal-level examination have at least 18 months of 
experience functioning as a registered representative within the five-
year period immediately preceding the designation. FINRA believes that 
the proposed condition is necessary to ensure that such representatives 
have an appropriate level of registered representative experience. 
However, the proposed rule extends the limited period that such 
representatives may function as principals before having to pass the 
applicable principal examination from 90 calendar days to 120 calendar 
days. The proposed rule also allows an individual registered as a 
principal to function in another principal category for 120 calendar 
days before having to pass the applicable principal examination for 
that category, without having to satisfy the proposed experience 
requirement for representatives.
E. Lapse of Registration and Expiration of SIE (Proposed FINRA Rule 
1210.08)
    The proposed rule maintains a two-year lapse of registration 
period, but establishes a four-year expiration period for the SIE. 
Therefore, candidates who were registered as representatives two or 
more years, but less than four years, prior to reapplying for 
registration would only be required to take an appropriate specialized 
knowledge examination, and not the SIE. FINRA believes that 
establishing a four-year expiration period for the SIE will reduce the 
overall cost of registration, such as the SIE examination fee and test 
preparation costs, for individuals returning to the industry after two 
years, but less than four years, from the date of their last 
registration because they would not be required to retake the SIE.
F. Waiver of Examinations for Individuals Working for a Financial 
Services Industry Affiliate of a Member (Proposed FINRA Rule 1210.09)
    The proposed rule provides a waiver program for individuals 
registered with a member who move to a financial services industry 
affiliate of a member, subject to specified conditions. The proposed 
rule waives the requalification requirements upon reassociation with a 
member, and thus may reduce the costs associated with requalification. 
Approximately half of the persons who gained a registration in 2015 
held the same registration previously. Based on FINRA's experience with 
the examination waiver program, FINRA believes that a small percentage 
of these individuals had to terminate their registration(s) to work for 
a financial services industry affiliate of a member. These individuals 
and the firms with which they would associate would realize savings of 
the costs associated with examinations. However, there are costs 
associated with maintaining eligibility for the waiver, such as the 
cost of satisfying the Regulatory Element of CE.
G. Compliance Officer (Proposed FINRA Rule 1220(a)(3))
    The proposed rule allows the CCO of a member that is engaged in 
limited investment banking or securities business to register in a 
principal category that corresponds to the limited scope of the 
member's business. Similar to the proposed change to the two-principal 
requirement, the proposed rule has the potential to benefit members 
that engage in more limited activities, by providing flexibility in 
choosing a principal registration category that is tailored to the 
scope of the firm's business.
H. Principal Financial Officer and Principal Operations Officer 
(Proposed FINRA Rule 1220(a)(4))
    Under the proposed rule, members would be required to designate a 
Principal Financial Officer and a Principal Operations Officer. FINRA 
believes that the proposed rule would have a minimal impact on dual 
members of FINRA and the NYSE because they are currently required to 
designate a CFO and a COO under the Incorporated NYSE rules, which are 
analogous to a Principal Financial Officer and a Principal Operations 
Officer. Members that are not dual members are currently required to 
only designate a CFO, which is analogous to a Principal Financial 
Officer. There are approximately 4,000 members, 3,800 of which are not 
dual members of FINRA and the NYSE. The proposed rule requires members 
that are not dual members of FINRA and the NYSE to designate a 
Principal Operations Officer in addition to a Principal Financial 
Officer. Accordingly, such members would bear the cost of identifying 
and designating an associated person as Principal Operations Officer, 
including the potential costs associated with the qualification and 
registration of such a person (i.e., a Principal Operations Officer 
must be qualified and registered as a Financial and Operations 
Principals or an Introducing Broker-Dealer Financial and Operations 
Principals, as applicable). However, the proposed rule allows members 
that neither self-clear nor provide clearing services to designate the 
same person as the Principal Financial Officer and Principal Operations 
Officer. In addition, a clearing or self-clearing member that is 
limited in size and resources could request a waiver of the requirement 
to designate separate persons to function as Principal Financial 
Officer and Principal Operations Officer.
I. Research Principal (Proposed FINRA Rule 1220(a)(6))
    Currently, an individual who seeks registration as a Research 
Principal would take three examinations, the Series 7, 24 and 87, 
totaling 450 questions, or the Series 7, 16 and 24, totaling 500 
questions. Under the proposed rule, an individual who seeks 
registration in the same category would take either two or four 
examinations, the Series 16 and 24, totaling 250 questions, or the SIE, 
the Series 24, 86 and 87, totaling 375 questions. Therefore, while some 
individuals registering as Research Principals may be required to take 
an additional examination, all individuals seeking the Research 
Principal registration would experience a net decrease in their total 
number of examination questions under the proposed rule.
J. Eliminated Registration Categories (Proposed FINRA Rule 1220.06)
    As discussed above, FINRA is proposing to eliminate the current 
registration categories of Order Processing Assistant Representative, 
United Kingdom Securities Representative, Canada Securities 
Representative, Options Representative, Corporate Securities 
Representative and Government Securities Representative. FINRA believes 
that the utility of these examinations has diminished based on changes 
to the industry, as evidenced by the low annual volume for each of 
these examinations and the relatively low number of individuals who 
currently hold these registrations. For example, in 2015, the volume of 
candidates for each of the examinations associated with these 
registration categories was as follows: Series 11 (100); Series 17 
(20); Series 37 (50); Series 38 (20); Series 42 (2); Series 62 (300); 
and Series 72 (20). In addition, FINRA is proposing to eliminate the 
Foreign Associate registration category. There are approximately 500 
Foreign Associates currently registered in the CRD system, which is 
less than 1% of the total number of registered persons.

[[Page 17360]]

    While FINRA is proposing to eliminate these registration categories 
going forward, individuals registered in these categories would be 
eligible to maintain their registrations with FINRA, thus reducing the 
impact on them. Specifically, the proposed rule provides that 
individuals who are registered as Order Processing Assistant 
Representatives, United Kingdom Securities Representatives, Canada 
Securities Representatives, Options Representatives, Corporate 
Securities Representatives or Government Securities Representatives on 
the effective date of the proposed rule change and individuals who had 
been registered in such categories within the past two years prior to 
the effective date of the proposed rule change would be eligible to 
maintain their registrations with FINRA. However, if individuals 
registered in these categories terminate their registration with FINRA 
and the registration remains terminated for two or more years, they 
would not be able to re-register in that category. Individuals 
registered as Foreign Associates on the effective date of the proposed 
rule change would also be eligible to maintain their registrations with 
FINRA, provided that if they subsequently terminate their registrations 
with FINRA, they would not be able to re-register as Foreign 
Associates.
K. Registration Requirements for Associated Persons Who Accept Customer 
Orders (Proposed FINRA Rule 1230.01)
    The proposed rule rescinds existing guidance regarding the ability 
of unregistered persons to, on occasion and when a registered person is 
unavailable, accept an unsolicited customer order that is manually 
submitted. Moreover, the proposed rule prohibits unregistered persons 
from accepting customer orders under any circumstances. The proposed 
rule would impact firms that currently rely on unregistered persons to 
accept unsolicited manual orders from customers when a registered 
person is unavailable, unregistered persons who accept the orders and 
customers who place such orders with unregistered persons. Under the 
proposed rule, only appropriately registered persons can accept 
customer orders. Therefore, firms that accept unsolicited manual orders 
from customers must have appropriately registered persons available to 
accept such orders. If an appropriately registered person is 
unavailable to accept a customer order that is manually submitted, the 
proposed rule would allow an unregistered person to transcribe the 
order details, provided that an appropriately registered person 
subsequently contacts the customer to confirm the order details before 
entering the order. FINRA does not have data on how many firms, or how 
often firms, permit unregistered persons to accept unsolicited manual 
orders from customers based on the existing guidance. However, FINRA 
believes that investor protection concerns outweigh any additional 
burden on such firms.
Alternatives Considered
    The following are the most significant alternatives that were 
suggested by commenters or that FINRA considered on its own accord. 
Commenters also suggested other alternatives, which are discussed in 
Item II.C. below.
    FINRA originally considered whether individuals with permissive 
registrations should be subject to a subset of FINRA rules. FINRA 
determined to adopt an alternative approach that is principles-based 
and provides firms the flexibility to tailor their supervisory systems 
to their business models. Under the revised approach, individuals 
maintaining a permissive registration would be considered registered 
persons and subject to all FINRA rules, but only to the extent relevant 
to their activities.
    In addition, FINRA considered whether individuals who only maintain 
permissive registrations should be counted for purposes of a firm's 
number of registered persons. Currently, individuals who are 
permissively registered are counted for such purposes. FINRA determined 
that it is appropriate to continue to count such individuals for 
purposes of calculating the number of registered persons and assessing 
associated fees given that FINRA incurs costs for oversight and 
examinations relating to all registered persons.
    FINRA originally considered whether to create an ``active'' and 
``inactive'' registration status in the CRD system to distinguish 
between required and permissive registrations, and it determined not to 
do so. Rather, all individuals registered in the CRD system would be 
considered registered persons. Further, as noted above, FINRA will 
consider changes to the CRD system to require firms to identify whether 
a registered person is maintaining only a permissive registration, and 
it will consider changes to BrokerCheck to disclose the significance of 
such permissive registration.
    FINRA also considered alternative models for restructuring the 
examinations and found the proposed approach to be the most efficient 
for achieving the goals of the proposal, including the elimination of 
duplicative testing of general securities knowledge. For instance, 
among other models, FINRA considered retaining the current Series 7 
examination and revising the existing limited qualification 
examinations in addition to creating the SIE. FINRA also considered 
retaining the current limited qualification examinations and revising 
the existing Series 7 examination in addition to creating the SIE. 
Under both of these alternatives, an individual would be subject to 
duplicative testing of general securities knowledge if the individual 
registers in a limited category and later decides to register as a 
General Securities Representative.
    FINRA considered whether individuals who are not associated persons 
of firms should be allowed to take the SIE. FINRA determined that 
allowing individuals who are not associated persons of firms to take 
the SIE would enhance the pool of prospective securities industry 
professionals. FINRA also established appropriate safeguards that are 
intended to discourage such individuals from misrepresenting their 
qualifications to the public. Specifically, FINRA would require that 
such individuals attest that they are not qualified to engage in the 
investment banking or securities business based on passing the SIE and 
that they will not make any misrepresentations to the public as to 
their qualifications. In addition, if FINRA determines that non-
associated persons cheated on the SIE or that they misrepresented their 
qualifications to the public subsequent to passing the SIE, they may 
forfeit their SIE results and may be prohibited from retaking the SIE. 
Further, if FINRA discovers that non-associated persons who have passed 
the SIE have subsequently engaged in other types of misconduct, FINRA 
will refer the matter to the appropriate authorities or regulators.
    FINRA considered alternatives to the proposed experience 
requirement for representatives that are designated by firms to 
function as principals for a 120-day period before having to pass an 
appropriate principal qualification examination. FINRA determined to 
allow firms to designate a principal to function in another principal 
category for 120 calendar days before passing any applicable 
examinations, without having to satisfy the proposed experience 
requirement for representatives.
    Further, FINRA considered alternatives to the two-year period for 
lapse of registration and the four-year expiration period for the SIE. 
FINRA

[[Page 17361]]

determined that based on the content of the SIE, a passing result on 
the SIE would be valid for four years. With respect to the 
representative- and principal-level registrations, FINRA determined 
that the registrations would continue to be subject to a two-year 
expiration period. However, FINRA will explore the possibility of 
extending the two-year expiration period through the use of more 
frequent CE.
    With respect to the FSA waiver program, FINRA originally considered 
a proposal whereby individuals could maintain their registrations in an 
RA status, subject to complex tracking and tolling provisions. FINRA 
determined that the proposed FSA waiver program would significantly 
reduce the operational, administrative and cost burden on members, 
associated persons and FINRA, as compared to the original proposal.
    FINRA originally considered adopting a Compliance Officer 
qualification examination for CCOs and other individuals registering as 
Compliance Officers. However, FINRA determined not to adopt a separate 
qualification examination pending its evaluation of the structure of 
the principal-level examinations.
    FINRA also considered whether to retain some of the registration 
categories that it initially proposed to eliminate, including the 
registration categories of United Kingdom Securities Representative, 
Canada Securities Representative, Options Representative, Corporate 
Securities Representative and Foreign Associate. As described above, 
the overall utility of these registration categories has diminished 
over the years, which is why FINRA proposes to eliminate them.
    Finally, FINRA considered whether to revise the proposal regarding 
associated persons who accept customer orders to clarify its 
application to situations where an appropriately registered person is 
unavailable. FINRA determined to revise the proposal to clarify that an 
associated person is not accepting a customer order where occasionally, 
when an appropriately registered person is unavailable, the associated 
person transcribes the order details and the registered person contacts 
the customer to confirm the order details before entering the order.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

Comments Relating to Consolidated Registration Rules
    In December 2009, FINRA published Regulatory Notice 09-70, seeking 
comment on the proposed consolidated registration rules.\93\ FINRA 
received 22 comment letters in response to the Notice, which are 
discussed below. A copy of the Notice is attached as Exhibit 2a.\94\ A 
list of the comment letters received in response to the Notice is 
attached as Exhibit 2b.\95\ Copies of the comment letters received in 
response to the Notice are attached as Exhibit 2c.
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    \93\ Some of the proposed changes discussed in this filing were 
not part of the proposals set forth in Regulatory Notice 09-70, 
including the proposed FSA waiver program.
    \94\ The Commission notes that the exhibits referred to are 
attached to the filing, not to this Notice.
    \95\ All references to commenters are to the comment letters as 
listed in Exhibit 2b.
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1. Permissive Registrations (Proposed FINRA Rule 1210.02)
A. General Comments
    GWFS Equities appreciated the proposed provisions regarding 
permissive registrations, but stated that the costs associated with 
implementing the provisions, including tracking the status of 
individuals in an RA status, outweighed the benefits. FSI was concerned 
that the proposed requirements may result in the deregistration of 
individuals who are currently permissively registered. Nationwide was 
concerned with the feasibility of the RA status and the potential 
administrative and cost burdens. Nationwide also stated that the 
proposal would prevent some individuals from registering in an RA 
status because of the potential burdens.
    As discussed above, FINRA has replaced the RA proposal with the FSA 
waiver program, which would significantly reduce the operational, 
administrative and cost burden on firms and associated persons. 
Further, the proposed rule change would not require firms to maintain 
permissive registrations. Rather, it provides firms the flexibility to 
do so, subject to specified conditions. Each firm is free to determine 
whether to maintain any permissive registrations.
B. Tolling and Forfeiture Provisions Relating to RA status
    Several commenters stated that the tolling and forfeiture 
provisions for individuals in an RA status were too complicated and 
burdensome.\96\ ICI and USAA requested exceptions from the RA 
conditions for specified persons. T. Rowe, ARM and CAI asked that the 
time limitation for remaining in an RA status be eliminated. NSCP 
stated that the time limitation was arbitrary. In addition, SIFMA 
suggested that individuals in an RA status be permitted to restart a 
fresh time limit if they satisfied specified conditions. In light of 
these and other comments, FINRA has replaced the RA proposal with the 
FSA waiver program.
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    \96\ GWFS Equities, T. Rowe, ICI, ARM, FSI, USAA, Nationwide, 
NSCP, SIFMA and IMS-2.
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C. Other Comments Relating to Permissive Registrations
    AEC requested that individuals who only maintain permissive 
registrations not be counted for purposes of a firm's approved number 
of representatives. AEC also suggested that FINRA place time limits on 
permissive registrations. Currently, individuals who are permissively 
registered are counted for purposes of calculating the number of 
registered persons and assessing associated fees. FINRA believes that 
it is appropriate to continue to do so given that FINRA incurs costs 
for oversight and examinations relating to all registered persons. 
FINRA does not believe that individuals with a permissive registration 
should be subject to a time limitation because they would be subject to 
supervision by a member as described in the proposed rule change.
    T. Rowe requested that FINRA create an ``active'' category for all 
required registrations and a ``retained'' category for all permissive 
registrations. T. Rowe added that ``retained'' persons should be deemed 
associated persons, but subject only to a subset of FINRA rules. ARM 
similarly requested that FINRA create an ``active'' category for all 
required registrations and a ``permissive'' category for all permissive 
registrations. Edward Jones stated that there was no regulatory 
distinction between an active and inactive status and that the proposal 
should not create such a distinction. NSCP requested additional 
clarification regarding the inactive status and the provisions 
applicable to individuals who would maintain a permissive registration. 
T. Rowe and ARM stated that the term ``inactive'' should not be used 
because it may be confused with the term ``CE inactive.''
    FINRA has eliminated the distinction between an active and inactive 
status. Rather, all individuals registered in the CRD system would be 
considered registered persons. As noted above, FINRA will consider 
changes to the CRD

[[Page 17362]]

system to require firms to identify whether a registered person is 
maintaining only a permissive registration, and it will consider 
changes to BrokerCheck to disclose the significance of such permissive 
registration.
    Under the proposed rule change, any associated person of a member 
is eligible to obtain and maintain any registration permitted by the 
member. For instance, an associated person of a member working solely 
in a clerical or ministerial capacity, such as in an administrative 
capacity, could maintain a representative-level registration. Further, 
an associated person of a member who is registered, and functioning 
solely, as a representative could obtain and maintain a permissive 
principal-level registration with the member. In addition, the proposed 
rule change allows an individual engaged in the investment banking or 
securities business of a foreign securities affiliate or subsidiary of 
a member to obtain and maintain any registration permitted by the 
member.
    Individuals maintaining a permissive registration under the 
proposed rule change would be considered registered persons and subject 
to all FINRA rules, but only to the extent relevant to their 
activities. For instance, FINRA rules that relate to interactions with 
customers would have no practical application to the conduct of a 
permissively registered individual who does not have any customer 
contact. However, members would be required to have adequate 
supervisory systems and procedures reasonably designed to ensure that 
individuals with permissive registrations do not act outside the scope 
of their assigned functions. FINRA had originally proposed that 
individuals with permissive registrations be subject to a subset of 
FINRA rules. FINRA believes that the revised approach, which is 
principle-based, provides firms the flexibility to tailor their 
supervisory systems to their business models.
    SIFMA requested that the proposal more clearly define the different 
categories of required and permissive registrations, including the 
Compliance Officer registration category. FINRA had originally proposed 
to allow individuals registering as Compliance Officers, other than 
CCOs, a choice between an active or inactive status, subject to 
specified conditions. Under the revised proposal, there is no longer a 
distinction between an active and inactive status. CCOs would be 
required to register as Compliance Officers or in a more limited 
principal category as specified in proposed FINRA Rule 1220(a)(3), and 
other associated persons would be allowed to permissively register as 
Compliance Officers.
    Nationwide requested additional clarification regarding the 
supervision of individuals who maintain solely permissive 
registrations. Nationwide also noted that for purposes of compliance 
with FINRA Rule 3110(a)(5), the proposal should allow for risk-based 
supervision reasonably designed to ensure compliance, such as the use 
of periodic questionnaires and certifications to satisfy supervisory 
obligations.
    A firm's supervisory procedures must be reasonably designed to 
achieve compliance with the requirements of the proposed rule change. 
FINRA does not believe that it is necessary to discuss whether any 
particular methodology, such as risk-based supervision, satisfies the 
requirements of the proposed rule change. Moreover, with respect to an 
individual who solely maintains a permissive registration, such 
individual's day-to-day supervisor may be a non-registered person. 
Though, for purposes of compliance with FINRA Rule 3110(a)(5), members 
would be required to assign a registered supervisor who would be 
responsible for periodically contacting such individual's day-to-day 
supervisor to verify that the individual is not acting outside the 
scope of his or her assigned functions. If such individual is 
permissively registered as a representative, the registered supervisor 
must be registered as a representative or principal. If the individual 
is permissively registered as a principal, the registered supervisor 
must be registered as a principal. However, in either case, the 
registered supervisor of an individual who solely maintain [sic] a 
permissive registration would not be required to be registered in the 
same registration category as the permissively-registered individual.
    Cornell asked whether individuals who solely maintain permissive 
registrations would be able to contact customers because they would be 
considered registered persons for purposes of FINRA rules. Individuals 
who contact existing or prospective customers would have to be 
authorized to do so by a member and maintain a required registration, 
unless otherwise permitted under FINRA rules. For purposes of 
contacting existing or prospective customers, individuals who solely 
maintain permissive registrations would be subject to the same 
limitations as unregistered persons.
    SIFMA stated that assigning a registered supervisor to each 
individual in an RA status for purposes of FINRA Rule 3110(a)(5) would 
not be practical or effective in all cases. SIFMA suggested that the 
proposal be revised to require the assignment of a registered 
supervisor responsible for implementing a system of policies, 
procedures and controls reasonably designed to ensure that individuals 
in an RA status do not engage in activities that require registration. 
Alternatively, SIFMA suggested that the proposal be revised to require 
that individuals in an RA status be subject to the member's overall 
supervisory system, including written procedures designed to address 
compliance with the rules applicable to them and the requirement that 
they act within the limits of their status. GWFS Equities noted that 
maintaining registrations for individuals in an RA status while they 
are working for affiliated investment advisers could present potential 
conflicts between broker-dealer and advisory activities for firms that 
are not dually registered.
    As noted above, FINRA has replaced the RA proposal with the FSA 
waiver program, which would not require firms to assign a registered 
supervisor to individuals working for a financial services industry 
affiliate of a member. However, the proposed rule change would allow a 
member to permissively register an individual working for a foreign 
securities affiliate or subsidiary of the member, as currently 
permitted. If a member chooses to maintain such a permissive 
registration, it would be required to assign a registered supervisor to 
such permissively registered individuals, as described above.
    Nationwide asked that the proposal be amended to expressly allow a 
firm to determine the scope of its bona fide business purpose. Cornell 
requested that FINRA define the term ``bona fide business purpose.'' 
ACI stated that the term ``bona fide business purpose'' may be applied 
inconsistently across firms and that FINRA should recognize this when 
considering enforcement. FINRA had originally proposed to permit the 
registration of associated persons engaged in a bona fide business 
purpose of a member. The revised proposal would allow any associated 
person to obtain and maintain any registration permitted by the member. 
FINRA believes that associated persons by definition are engaged in a 
bona fide business purpose of a member.
    Edward Jones and SIFMA requested that a person who was registered 
within the past two years prior to the effective date of the proposal 
be eligible for permissive registration. Nothing in the proposed rule 
change would preclude a member from applying to register such

[[Page 17363]]

a person once the proposed rule change becomes effective.
    Edward Jones stated that individuals who had been registered two or 
more years, but less than four years, prior to the effective date of 
the proposal be eligible for permissive registration. FSI stated that 
individuals who had been registered two or more years, but less than 
five years, prior to the effective date of the proposal be eligible for 
permissive registration, subject to satisfying their CE requirements. 
Individuals who have been out of the brokerage industry for two or more 
years prior to the effective date of the proposed rule change would be 
eligible for permissive registration, provided that they pass the 
requisite qualification examination or obtain a waiver upon re-
registration. Moreover, individuals who had been registered as 
representatives two or more years, but less than four years, prior to 
the effective date of the proposed rule change would be considered to 
have passed the SIE and designated as such in the CRD system.
    SIFMA and ABA stated that section 3(a)(4) of the Act allows a 
nominal one-time referral fee to bank employees that are not associated 
persons. In addition, they noted that Rule 701 of SEC Regulation R 
allows more than the one-time referral fee to bank employees that are 
not registered for the referral of high net worth individuals or 
institutional customers. SIFMA and ABA requested that the proposal 
clarify that individuals in an RA status are not associated persons and 
not registered for purposes of these provisions. IMS asked whether the 
RA status should be limited to persons working at affiliates of a 
member. ABA requested that the proposal allow a member to maintain 
registrations for persons who work for an unaffiliated bank with which 
the member has contractually entered into a networking arrangement.
    As discussed above, FINRA has replaced the RA proposal with the FSA 
waiver program. Under the revised proposal, an FSA-eligible person who 
is working for a financial services industry affiliate of a member 
would not be considered an associated or registered person.
    NASAA stated that the proposal did not articulate a sound 
regulatory basis for expanding permissive registrations and that the 
current restrictions regarding the ``parking'' of registrations should 
stay in place. NASAA also stated that the waiver process was more 
appropriate to achieve the goals of the proposal, rather than an 
expansion of permissive registrations. NASAA further stated that the 
proposal did not comply with the Act's provision that requires FINRA to 
prescribe standards of training, experience and competence for 
associated persons of members. In addition, NASAA stated that CE cannot 
be a substitute for qualification examinations because CE is not 
tailored to address the eventual function of permissively registered 
individuals at the member. NASAA noted that, at the very least, the 
proposal should include enhancements to existing CE requirements. IMS 
asked whether it was necessary to revise the current requirements 
applicable to permissively registered persons.
    FINRA believes that there is a sound regulatory purpose for 
permitting permissive registrations for several reasons. First, the 
proposed rule change would in effect allow firms to maintain an 
individual's registration in a standby status in the event the firm has 
a foreseeable need to move the individual to a position that requires 
registration, without having to go through the registration process 
each time the individual moves between a firm's business units. FINRA 
believes that this would simplify compliance with registration 
requirements. Second, the proposed rule change would allow associated 
persons to gain greater regulatory literacy, which would, in turn, 
enhance a firm's culture of compliance. Third, the proposed rule change 
would eliminate a regulatory inconsistency in the current rules, which 
permit some associated persons of a member to maintain permissive 
registrations, but not others who equally are engaged in the member's 
business. For instance, an individual working in a firm's internal 
audit department may be permissively registered, whereas an individual 
working in the Corporate Secretary's office of a firm is currently not 
permitted to do so.
    The proposed rule change has other regulatory benefits. While all 
registered persons are subject to firm supervision under the current 
rules, the rules do not explicitly address the obligations of firms to 
supervise permissively registered persons, including individuals who 
are working in a non-registered capacity at the firm or who are working 
for a foreign securities affiliate or subsidiary of the firm. In 
conjunction with the expansion of permissive registrations, the 
proposed rule change expressly sets forth the obligation of firms to 
supervise permissively registered persons and specifies the manner in 
which firms must supervise such individuals, which will, in turn, 
improve regulatory compliance. Further, by replacing the RA proposal 
with the FSA waiver program, FINRA has limited the scope of permissive 
registrations.
    FINRA believes that the proposed rule change satisfies its 
obligation under the Act to prescribe standards of training, experience 
and competence for the following reasons. Foremost, individuals who 
maintain solely permissive registrations are subject to the same 
qualification examinations as individuals who are required to register. 
As such, the proposed rule change would not substitute CE requirements 
for qualification examinations; rather, CE remains a supplement to the 
examinations. Also, similar to individuals who are required to 
register, members would be required to conduct background 
investigations pursuant to FINRA Rule 3110(e) on individuals who 
maintain solely permissive registrations to establish, among other 
things, their qualifications and experience. Moreover, such individuals 
are equally subject to supervision by a member, including the 
requirement to participate in an annual compliance meeting. Further, as 
discussed above, such individuals would be subject to the Regulatory 
Element of the CE requirements. The required Regulatory Element would 
correspond to their registration status.\97\
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    \97\ The Regulatory Element of CE includes the following four 
programs: The S106 (for Investment Company and Variable Contracts 
Representatives), the S201 (for registered principals and 
supervisors), the S901 (for Operations Professionals) and the S101 
(for all other registered persons). FINRA recently enhanced the S101 
program by including personalized content that covers retail sales, 
institutional sales, trading, operations and investment banking and 
research.
---------------------------------------------------------------------------

    Several commenters requested more details regarding the 
notification and tracking process for individuals with permissive 
registrations.\98\ Edward Jones stated that the affirmative 
notification requirements of the proposal were too complicated and that 
the proposal should allow firms to maintain the required information 
regarding the status of such individuals and make it available upon 
request during the course of examinations. CAI asked whether the CRD 
system would be updated to track permissive registrations. CAI also 
requested that FINRA provide sufficient time for the implementation of 
the proposal. SIFMA requested that the CRD system and BrokerCheck be 
modified to accommodate and disclose permissive registrations. NSCP 
stated that the current CRD system would not be able to handle the 
workload, and it asked that the notification process be further 
developed before the proposal is filed

[[Page 17364]]

with the SEC. ARM requested that FINRA make the necessary system 
changes to accommodate the proposed tracking requirements.
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    \98\ T. Rowe, ARM, Edward Jones, NSCP, Cornell, SIFMA and CAI.
---------------------------------------------------------------------------

    The original proposal included a complex notification and tracking 
process that required firms to indicate to FINRA whether a registered 
person had an active or inactive status and whenever that status 
changed. FINRA has revised the proposal and simplified the overall 
process. Under the proposed rule change, all individuals who are 
registering with FINRA would go through the same process: There would 
be no distinction between an individual with a required registration 
and an individual with a permissive registration for purposes of the 
registration process. However, as noted above, FINRA will consider 
changes to the CRD system to require firms to identify whether a 
registered person is maintaining only a permissive registration, and it 
will consider changes to BrokerCheck to disclose the significance of 
such permissive registration to the general public. Moreover, FINRA 
will consider the need for firms to make procedural and systems changes 
in establishing an implementation date for the proposed rule change.
    Nationwide asked whether FINRA intends to assert jurisdiction for 
purposes of examining individuals in an RA status. CAI stated that 
FINRA's oversight of and authority over individuals who solely maintain 
permissive registrations should be limited to activities that directly 
involve the securities activities of the member. Individuals would not 
be permitted to register in an RA status under the revised proposal. 
Further, individuals who solely maintain a permissive registration 
under the proposed rule change would be subject to FINRA's jurisdiction 
by virtue of their status as associated persons.
    NSCP noted that the definition of ``financial services industry'' 
for purposes of the RA status appeared to be broad enough to encompass 
the range of activities in which financial service providers are 
engaged, but suggested that the definition be broadened to facilitate 
the inclusion of other regulatory bodies, such as the Consumer 
Financial Protection Bureau. NSCP suggested that this could be achieved 
by FINRA having the authority to recognize a particular entity or type 
of entity as being in the financial services industry for purposes of 
the proposal, without the need to go through future rulemaking. As 
noted above, while FINRA has replaced the RA proposal with the proposed 
FSA waiver program, the definition of the term ``financial services 
industry affiliate'' is similar to the definition under the RA 
proposal. Further, FINRA believes that the proposed definition is 
sufficiently broad and should not be revised in a manner that may 
extend the definition beyond financial services.
2. Requirements for Registered Persons Functioning as Principals for a 
Limited Period (Proposed FINRA Rule 1210.04)
    GWFS Equities, ARM and NSCP were concerned that the proposed 
experience requirement is an additional prerequisite requirement for 
registration as a principal. Proposed FINRA Rule 1210.04 does not 
impose an experience requirement for those persons designated to 
function as principals after passing an appropriate principal 
qualification examination. Rather, it creates an experience requirement 
for those representatives that are designated by firms to function as 
principals for a 120-day period before having to pass an appropriate 
principal qualification examination. Thus, the experience requirement 
is narrow in scope.
    T. Rowe stated that requiring an individual to satisfy all 
applicable prerequisites to be eligible to be designated as a principal 
under the proposal was unwarranted. T. Rowe was also concerned with the 
proposed experience requirement. NASD Rule 1021(d)(2) currently 
provides that persons not currently associated with a member as 
representatives are allowed to be designated as principals for 90 days 
prior to passing the applicable principal examination, but only after 
all applicable prerequisites have been fulfilled. Proposed FINRA Rule 
1210.04 simply clarifies that any person that is to be designated as 
principal for the proposed limited period must fulfill all applicable 
prerequisite registration, fee and examination requirements, such as 
passing the General Securities Representative examination, prior to his 
or her designation as a principal. In addition, the experience 
requirement is intended to ensure that a registered representative 
functioning as a principal for the 120-day time period before having to 
pass a principal examination has an appropriate level of experience to 
carry out such functions.
    ARM asked whether the experience requirement applies to all 
principal designations or only those that have a prerequisite 
representative registration requirement. The experience requirement 
applies to all principal designations, including those without a 
prerequisite representative registration requirement (e.g., Financial 
and Operations Principal). FINRA has revised the proposed rule to 
clarify this point.
    FSI stated that small firms may find it difficult to find an 
experienced representative and that small firms should be provided a 
limited size and resources exception. FINRA does not believe the 
experience requirement, which is only applicable in limited situations, 
imposes any undue burden on small firms. Moreover, as noted above, the 
requirement is intended to ensure that the representative has an 
appropriate level of experience to carry out the assigned principal 
functions. However, in light of the comment, FINRA has revised the 
proposed rule to allow firms to designate a principal to function in 
another principal category for 120 calendar days before passing any 
applicable examinations, without having to satisfy the proposed 
experience requirement.
3. Waiting Periods for Retaking a Failed Examination (Proposed FINRA 
Rule 1210.06)
    FSI asked whether the 180-day waiting period was triggered upon 
three successive examination failures within 30 calendar days of each 
other or three successive examination failures in any given period. In 
response, FINRA has revised the proposed rule to provide that the 180-
day waiting period is triggered upon three successive examination 
failures within a two-year period.
4. Compliance Officer (Proposed FINRA Rule 1220(a)(3))
    NSCP sought additional clarification regarding the Compliance 
Officer registration requirement and whether individuals could be 
permissively registered as Compliance Officers. Proposed FINRA Rule 
1220(a)(3) would only require that CCOs register as Compliance Officers 
or in a more limited principal category as specified in the rule. 
However, consistent with proposed FINRA Rule 1210.02 relating to 
permissive registrations, a firm may allow other associated persons to 
register as Compliance Officers.
    GWFS Equities stated that the requirement that CCOs pass the 
General Securities Principal qualification examination even if a firm's 
activities are limited to mutual funds and variable contracts seems 
unwarranted. As noted above, FINRA has revised the proposed rule to 
permit the CCO of a member that is engaged in limited investment 
banking or securities business to have a more limited principal-level 
qualification.
    NSCP asked whether the Compliance Officer registration category 
would be a

[[Page 17365]]

principal-level category. The Compliance Officer registration category 
would be a principal-level category.
    FINRA had originally proposed to permit firms to designate 
Compliance Officers who are permissively registered in an active 
status, provided they were engaged in compliance activities. FSI asked 
whether such Compliance Officers were required to forego their active 
status if they moved to another department within the firm. As 
discussed above, FINRA has eliminated the proposed active and inactive 
status.
    ARM, Pershing and SIFMA suggested that the proposal did not 
adequately explain whether the current NYSE Compliance Official 
category would be eliminated. The Incorporated NYSE rules relating to 
the Compliance Official registration requirement (former Incorporated 
NYSE Rule 342.13(b) and NYSE Rule Interpretation 342(a)(b)/02) were 
deleted as part of the proposed changes to the supervision rules. 
Subject to the lapse of registration provisions in proposed FINRA Rule 
1210.08, individuals registered as Compliance Officials in the CRD 
system on the effective date of the proposed rule change and 
individuals who were registered as such within two years prior to the 
effective date of the proposed rule change, would be qualified to 
register as Compliance Officers without having to take any additional 
examinations. FINRA understands that the NYSE will separately determine 
how to address the current Compliance Official requirement under its 
rules.
    NSCP suggested that registration as a Corporate Securities 
Representative or Private Securities Offerings Representative should 
also be acceptable to satisfy the prerequisite representative-level 
registration for Compliance Officers. CAI suggested that registration 
as an Investment Company and Variable Contracts Products Representative 
should also be acceptable to satisfy the prerequisite representative-
level registration for Compliance Officers of firms that are engaged 
solely in activities relating to investment company and variable 
contracts products. FINRA is proposing to eliminate the Corporate 
Securities Representative registration category. However, as discussed 
above, FINRA has revised proposed FINRA Rule 1220(a)(3) to allow the 
CCO of a member that is limited in the scope of its activities to have 
a more limited principal-level qualification, which would include a 
more limited representative-level prerequisite registration.
    CAI also asked whether a CCO who has been grandfathered as a 
Compliance Officer under the proposal could maintain that registration 
if the CCO changed firms. CCOs who are grandfathered as Compliance 
Officers under the proposed rule change would not lose those 
registrations, unless their registrations lapse under proposed FINRA 
Rule 1210.08.
    ACI suggested that the Compliance Officer grandfathering provision 
should allow for the grandfathering of unemployed compliance officers. 
For purposes of grandfathering and subject to the lapse of registration 
provisions in proposed FINRA Rule 1210.08, the proposed rule change 
would only recognize individuals who are registered in the CRD system 
on the effective date of the proposed rule change and individuals who 
were registered within two years prior to the effective date of the 
proposed rule change. FINRA would evaluate the status of other former 
compliance personnel on a case-by-case basis through the waiver 
process.
5. Principal Financial Officer and Principal Operations Officer 
(Proposed FINRA Rule 1220(a)(4)(B))
    Pershing asserted that larger clearing firms may need to designate 
multiple Principal Financial Officers and Principal Operations 
Officers, and it asked whether the proposed rule would allow multiple 
designations. In addition, Pershing asked whether the proposed rule 
would allow the Principal Financial Officer or Principal Operations 
Officer to delegate the day-to-day duties to other principals at the 
firm, such as a General Securities Principal or a Financial and 
Operations Principal. A member may designate multiple Principal 
Operations Officers, provided that the member precisely defines and 
documents the areas of primary responsibility and makes specific 
provision for which of the officers has primary responsibility in areas 
that can reasonably be expected to overlap. A member, however, may not 
designate multiple Principal Financial Officers, given the importance 
of having one principal who is responsible for the financial statements 
as a whole. The Principal Financial Officer and Principal Operations 
Officer may delegate the day-to-day duties to other principals at the 
firm with the understanding that ultimate responsibility for the 
function rests with the Principal Financial Officer and Principal 
Operations Officer.
    CAI stated that the Principal Operations Officer requirement should 
be limited to persons who are responsible for handling or processing 
customer funds or securities. CAI also stated that an officer 
responsible only for administrative and technical matters should not be 
subject to the requirement. FINRA believes that the proposed rule 
clearly articulates the functions that must be assigned to a Principal 
Operations Officer.
    T. Rowe stated that a firm's Principal Operations Officer should 
register as a General Securities Principal. FINRA continues to believe 
that the Financial and Operations Principal or Introducing Broker-
Dealer Financial and Operations Principal, as applicable, is the more 
appropriate registration for a person designated as a Principal 
Operations Officer. FINRA notes that a Principal Financial Officer and 
a Principal Operations Officer would also be subject to the Operations 
Professional registration requirement.
    IMS requested that the proposed rule exempt non-custodial clearing 
firms operating pursuant to SEA Rule 15a-6 from the requirement that 
clearing and self-clearing firms designate separate persons to function 
as Principal Financial Officer and Principal Operations Officer. The 
proposed rule provides that a clearing or self-clearing firm that is 
limited in size and resources may request a waiver of the requirement 
to designate separate persons to function as Principal Financial 
Officer and Principal Operations Officer. Consistent with the proposed 
rule, FINRA believes that it is more appropriate to consider waiver 
requests by firms on a case-by-case basis, rather than including a 
blanket exception in the proposed rule.
6. Elimination of Foreign Associate Registration Category (Proposed 
FINRA Rule 1220.06)
    ARM and Konig stated that the Foreign Associate registration 
category should be retained. FINRA had originally proposed to eliminate 
this registration category and to require that persons registered as 
Foreign Associates in the CRD system qualify and register in an 
appropriate registration category, such as the General Securities 
Representative category, within one year of the effective date of the 
proposed rule change. FINRA continues to believe that the category 
should be eliminated and that such persons should demonstrate the same 
level of competence and knowledge required of their counterparts in the 
United States. However, as described above, FINRA has revised the 
proposal to permit Foreign Associates registered with FINRA on the 
effective date of the proposed rule change to maintain their 
registrations with FINRA. FINRA

[[Page 17366]]

believes that the revised proposal reduces the impact on current 
Foreign Associates. As an alternative, Konig requested that 
examinations be made available in foreign languages. Konig also 
incorrectly stated that Foreign Associates are exempt from the 
requirements of U.S. securities laws and should continue to be exempt 
from such requirements. As explained above, a Foreign Associate is 
considered a registered representative and subject to all the 
requirements to which registered representatives are subject, with the 
exception of the requirement to pass a qualification examination and 
comply with the Regulatory Element of the CE requirements. In addition, 
FINRA does not believe that it is practical to develop examinations in 
foreign languages. However, consistent with current policy, an 
examination candidate for whom English is a second language may request 
up to 60 minutes of additional examination time depending on the time 
allotted for taking the examination.
7. Associated Persons Exempt From Registration (Proposed FINRA Rules 
1230 and 1230.01)
    The original proposal in Regulatory Notice 09-70 provided that the 
function of accepting customer orders is not considered a clerical or 
ministerial function and that associated persons who accept customer 
orders under any circumstances are required to be appropriately 
registered. This is a rescission of the guidance provided in NTM 87-47.
    NSCP stated that the existing guidance should remain intact. ACI 
believes that rescinding the guidance could cause significant 
disruption to firms' operations and that it requires further 
consideration. FINRA continues to believe that associated persons who 
accept customer orders under any circumstances should be appropriately 
registered and continues to propose the rescission of the guidance 
provided in NTM 87-47. However, FINRA has revised the proposal to 
clarify that an associated person is not accepting a customer order 
where occasionally, when an appropriately registered person is 
unavailable, the associated person transcribes the order details and 
the registered person contacts the customer to confirm the order 
details before entering the order.
8. Miscellaneous Comments
    Dresdner stated that the proposal should allow a member to maintain 
registrations of associated persons specifically required by an 
exchange even after the member has terminated its exchange membership. 
The proposed rule change would allow such members to maintain those 
registrations that are also recognized by FINRA as acceptable 
registrations (e.g., General Securities Sales Supervisor). FINRA is not 
in a position to opine on the status of registrations that are not 
recognized by FINRA upon a member's termination of its exchange 
membership.
    IMS requested that there be examination reciprocity between the 
SROs. Some examinations (e.g., the General Securities Sales Supervisor 
examinations) are recognized by most SROs. FINRA believes that it is 
more appropriate to evaluate examinations that are specific to an 
exchange on a case-by-case basis through the waiver process.
    IMS also suggested that FINRA consider alternatives to the current 
lapse of registration period. For instance, IMS recommended that the 
two-year period be extended by a year for each three years that a 
person is registered. IMS further recommended that the two-year period 
should be replaced with a CE requirement similar to other professions 
(e.g., attorneys and certified public accountants). As described above, 
FINRA is proposing that a passing result on the SIE be valid for four 
years, while the representative- and principal-level registrations 
would continue to be subject to a two-year expiration period. However, 
FINRA is considering the possibility of extending the two-year 
expiration period through the use of more frequent CE.
    ARM was concerned that some NYSE supervisory registrations, such as 
the Compliance Official registration, held by individuals associated 
with a member that is not a dual member of FINRA and the NYSE may not 
be recognized by the CRD system for grandfathering purposes. As 
discussed above, FINRA prefers to evaluate the status of a person who 
would not be recognized for grandfathering purposes on a case-by-case 
basis through the waiver process. ARM also asked whether the waiver 
guidelines for the analytical portion of the Research Analyst 
qualification examination (Series 86) would continue to be applicable. 
FINRA is not proposing any changes to the current provisions for 
obtaining a waiver from the analytical portion of the Research Analyst 
qualification examination.
    T. Rowe. asked whether its officers who have the authority to 
execute agreements with its clearing firm, including margin 
arrangements, and who also have the authority to allow specified 
securities lending and borrowing activities would be subject to the 
proposed registration requirements for Securities Lending 
Representatives and Securities Lending Supervisors. As noted above, 
FINRA is no longer proposing to adopt these registration categories. 
However, the individuals identified by T. Rowe may be required to 
register as Operations Professionals if they are functioning as 
Operations Professionals as set forth in proposed FINRA Rule 
1220(b)(3).
    The proposed rule change codifies existing guidance in NTM 99-49 
regarding active management of a member's business. NSCP noted that the 
NTM included other relevant guidance and asked whether the other 
guidance would remain in effect. FINRA emphasizes that existing 
guidance and interpretations regarding registration requirements would 
continue to apply to the extent that they are not inconsistent with the 
proposed rules.
    Further, NSCP asked that the proposal provide minimum requirements 
for personnel background investigations. In 2015, FINRA adopted FINRA 
Rule 3110(e), which sets forth the minimum requirements for background 
checks. NSCP also asked whether the proposal would impact referral 
fees. An associated person must be appropriately registered to be 
eligible to receive transaction-based compensation. Moreover, proposed 
FINRA Rule 1220.06 would expressly prohibit the payment of specific 
transaction-based compensation to Order Processing Assistant 
Representatives. In addition, NSCP requested further guidance regarding 
the supervision of unregistered persons. Unregistered persons engaged 
in a member's investment banking or securities business are considered 
associated persons. FINRA rules and Notices provide extensive guidance 
regarding supervisory requirements, including the supervision of 
associated persons that are not registered.
Comments Relating to Examination Restructuring
    In May 2015, FINRA published Regulatory Notice 15-20, seeking 
comment on a proposal to restructure the representative-level 
qualification examinations. FINRA received 20 comment letters in 
response to the Notice, which are discussed below. A copy of the Notice 
is attached as Exhibit 2d. A list of the comment letters received in 
response to the Notice is attached as Exhibit 2e.\99\ Copies of the 
comment letters received in response to the Notice are attached as 
Exhibit 2f.
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    \99\ All references to commenters are to the comment letters as 
listed in Exhibit 2e.

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[[Page 17367]]

A. Requirement and Eligibility To Take the SIE and Specialized 
Knowledge Examinations
    The majority of commenters supported creating the SIE and 
specialized knowledge examinations and streamlining the registration 
categories and associated qualification examinations as specified in 
the proposal.\100\ SUI similarly supported the proposal, but it 
questioned the elimination of the Options Representative and Canadian 
Securities Representative registration categories as well as the 
associated examinations. Eder was likewise supportive of the proposal, 
but suggested that FINRA also eliminate the Direct Participation 
Programs Representative, Securities Trader, Investment Banking 
Representative, Private Securities Offerings Representative, Research 
Analyst and Operations Professional registration categories as well as 
the associated examinations, and instead require individuals performing 
these functions to register as General Securities Representatives by 
taking the specialized Series 7 examination.
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    \100\ Monahan & Roth, Tessera, Arrow Investments, SIFMA, XT 
Capital, ICI, CFA, Edward Jones, FSI, PFS, Wells Fargo and ARM. 
Tessera, Arrow Investments and XT Capital also supported the other 
comments made by Monahan & Roth. Further, Wells Fargo and ARM 
supported the other comments made by SIFMA.
---------------------------------------------------------------------------

    Lincoln Financial and CAI supported the overall goals of the 
proposal, including eliminating the registration categories and 
qualification examinations specified in the proposal, but they 
questioned whether requiring individuals registering with FINRA as new 
representatives to take the SIE and a specialized knowledge examination 
would be the most efficient way of achieving the proposal's goals. 
Lincoln Financial noted that FINRA may be able to achieve its goals by 
revising only the current limited representative-level examinations, 
such as the Series 55, Series 79, Series 86 and Series 87, and Series 
99, rather than revising all the current representative-level 
examinations. Lincoln Financial suggested that, as an alternative, 
individuals who take more limited examinations today, such as the 
current Series 6 or Series 99 examination, should not be required to 
take the SIE. CAI is concerned that requiring a General Securities 
Representative or an Investment Company and Variable Contracts Products 
Representative to take the SIE and a specialized knowledge examination 
could impose additional burdens that may not necessarily achieve the 
regulatory objectives of the proposal.
    FINRA considered a variety of models for restructuring the 
examinations and found the proposed approach to be the most effective 
method in achieving the main goals of the proposal, which are to 
eliminate duplicative testing of general securities knowledge on 
examinations, provide prospective securities industry professionals the 
ability to demonstrate fundamental securities knowledge and to do so in 
an equitable and uniform manner. For instance, if FINRA were to exclude 
the General Securities Representative registration category from the 
scope of the proposal, an individual who registers in a limited 
registration category, by passing the SIE and a specialized knowledge 
examination, would be subject to duplicative testing of general 
securities knowledge if he or she later decides to register as a 
General Securities Representative. Similarly, if FINRA were to remove 
the limited registration categories from the scope of the proposal, an 
individual who registers in a limited category and later decides to 
register as a General Securities Representative would be subject to 
duplicative testing of general securities knowledge by having to pass 
the SIE and the specialized Series 7 examination.
    In addition, the majority of commenters were generally supportive 
of allowing associated persons who will not be performing a registered 
representative job function as well as individuals who are not 
associated persons of firms to take the SIE.\101\ ICI stated that FINRA 
should take steps to ensure that individuals who are permitted, but not 
required, to take the SIE do not make any misstatements to the public 
regarding their qualifications based on passing the SIE. ICI added that 
FINRA should clarify, either through an affirmation on the examination 
application or a new rule, that individuals who are not associated 
persons of firms are prohibited from holding themselves out to the 
public as having passed the SIE. In this regard, ICI also suggested 
that FINRA determine how to address any potential misconduct by 
individuals who are not associated persons of firms. FSI and Lincoln 
Financial similarly requested that FINRA address the potential risks of 
allowing individuals who are not associated persons of firms to take 
the SIE.
---------------------------------------------------------------------------

    \101\ Eder, SIFMA, ICI, CFA, Edward Jones, FSI, Lincoln 
Financial, DCI, CAI, PFS, Wells Fargo, SUI and ARM.
---------------------------------------------------------------------------

    Monahan & Roth opposed allowing individuals who are not associated 
persons of firms to take the SIE because the proposed SIE Rules of 
Conduct do not address restrictions on the manner in which an 
individual who has passed the examination might hold himself or herself 
out to the public and because there is no supervisory system to monitor 
non-compliance by such individuals. Monahan & Roth also stated that 
allowing such individuals to take the SIE may result in investor 
confusion and potential misrepresentations to the public. Monahan & 
Roth requested that FINRA address whether the status of such 
individuals would be reflected in BrokerCheck and specify the 
restrictions on the availability of information on them.
    FINRA believes that allowing individuals who are not associated 
persons of firms to take the SIE will enhance the pool of prospective 
securities industry professionals by, among other things, familiarizing 
them with securities regulation and appropriate conduct at an early 
stage of career development. The SIE Rules of Conduct would require 
individuals, including non-associated persons, to attest that they are 
not qualified to engage in the investment banking or securities 
business based on passing the SIE and that they will not make any 
misrepresentations to the public as to their qualifications. Further, 
FINRA will engage in a communications campaign to ensure that the 
public, including retail investors, are [sic] well-informed of the SIE 
and its limitations. In addition, if FINRA determines that non-
associated persons cheated on the SIE or that they misrepresented their 
qualifications to the public subsequent to passing the SIE, they may 
forfeit their SIE results and may be prohibited from retaking the SIE. 
Also, if FINRA discovers that non-associated persons who have passed 
the SIE have subsequently engaged in other types of misconduct, FINRA 
will refer the matter to the appropriate authorities or regulators.
    BrokerCheck would not publicly reflect the status of individuals 
who have only taken the SIE, including individuals who are not 
associated persons, because passing the SIE alone does not qualify them 
for registration with FINRA via the CRD system. With respect to the 
availability of information on individuals who have only taken the SIE, 
access to this information would be limited. A firm would be able to 
view the passing status of an associated person who is not registering 
as a representative and an individual seeking to associate with the 
firm using an interface within the CRD system. A firm would also be 
able to obtain SIE results for an individual if the firm

[[Page 17368]]

submits a Form U4 and requests a registration for that individual. In 
addition, FINRA and other SROs that recognize the SIE would be able to 
obtain an individual's SIE results.
    IMS agreed that individuals should not have to be associated with a 
FINRA member to take the SIE, but it disagreed with the rest of the 
proposal. IMS stated that professional proficiency can be maintained 
through the use of mandatory CE requirements and that an individual's 
qualification status should not expire so long as the individual 
completes his or her CE, regardless of whether the individual remains 
in the industry.
    FINRA is considering the possibility of whether more frequent CE 
could be used to ensure that individuals who leave the industry for a 
limited period maintain specified levels of competence and knowledge to 
carry out their job functions upon returning to the industry.
    N.I.S. opposed the proposal altogether. It stated, among other 
things, that its representatives are currently required to pass the 
Uniform State Law Examination (Series 63) and Series 6 examination, 
which provide them with the necessary knowledge to perform their 
functions, and that requiring its new representatives to also take the 
SIE would be time consuming and costly.
B. Scope and Content of the SIE and Specialized Knowledge Examinations
    Monahan & Roth suggested that FINRA add the following topics to the 
SIE outline: (1) Overview of other financial industry participants, 
such as advisers and portfolio managers; (2) requirements relating to 
communications with the public, including categories of communications 
and electronic communications; (3) discussion of confidentiality and 
privacy; and (4) restrictions relating to borrowing from or lending to 
customers. In addition, Monahan & Roth stated that content on the SIE 
outline related to customer accounts, such as account types, should be 
moved to a specialized knowledge examination relating to general sales 
because many firms do not open customer accounts.
    The purpose of the SIE is to establish that an individual has 
fundamental securities-related knowledge, including knowledge of the 
applicable laws, rules and regulations. Further, the SIE would likely 
be limited to 75 scored questions established through the use of 
testing industry standards in consultation with a committee of industry 
and SRO representatives. While knowledge of other financial industry 
participants has general educational value, FINRA does not believe that 
testing such knowledge is relevant to the purpose and scope of the SIE. 
FINRA expects that the SIE would cover the topic of communications with 
the public, confidentiality and privacy of consumer information and 
restrictions on borrowing from or lending to customers. FINRA does not 
believe that SIE content relating to customer accounts should be 
removed. The content relating to customer accounts is essential to 
understanding the different types of customers in the securities 
industry, such as retail and institutional customers, and a firm's 
related obligations.
    SIFMA considered the content of the SIE outline to cover 
fundamental securities industry knowledge. However, SIFMA noted that an 
individual taking the SIE should not be expected to have detailed 
knowledge of the rules listed in the outline, such as the SEC's net 
capital rule (SEA Rule 15c3-1), but rather be expected to have a 
general awareness of such rules. FSI and ARM had similar comments. Eder 
was concerned that the listing of broad rules and rule sets in the SIE 
outline, such as SEA Rule 15c3-1 and the MSRB rules, would be confusing 
to individuals preparing for the SIE and stated that FINRA should 
provide more direction on the scope of the covered topics. CFA 
considered the content of the SIE outline to be common knowledge. 
However, it recommended that FINRA add content on quantitative concepts 
(such as time value of money), how best to serve client investment 
needs, and risk management.
    In general, SIE content relating to professional conduct, 
characteristics of products and economic factors would be tested in 
more detail, whereas other content, such as the net capital rule, would 
be tested at a high level. FINRA believes that an understanding of 
quantitative concepts is more appropriate for individuals taking a 
specialized knowledge examination, such as the specialized Series 79 or 
specialized Series 86 examination. With respect to knowledge of client 
investment needs, the SIE would cover suitability requirements at a 
high level. In addition, FINRA believes that the concept of risk 
management is better suited for a representative- or principal-level 
examination.
    Lincoln Financial did not consider many of the topics covered in 
the SIE outline to be common knowledge to some representatives, 
including representatives that do not work at a full-service broker-
dealer. It asked that FINRA develop an outline that focuses on higher 
level topics common to all broker-dealers. DCI was concerned that the 
SIE covers complex content, such as options and municipal securities, 
that most representatives need not master today. SUI noted that the SIE 
outline does not cover Exchange-Traded Notes or derivatives in general 
(other than options). SIFMA and ARM asked that FINRA solicit comment on 
the content of the proposed specialized knowledge examinations through 
a Regulatory Notice. PFS noted that the number of questions on the SIE 
should be reduced and determined by testing industry standards.
    FINRA is developing the SIE with input from a committee that 
includes representatives from a broad spectrum of small, mid-sized and 
large firms. Based on the committee's feedback as well as the comments 
received from the other commenters, FINRA believes that the SIE 
content, including general coverage of options and municipal 
securities, represents broad-based knowledge of the securities 
industry. The SIE content would cover Exchange-Traded Notes. However, 
the content on derivatives would be limited to a general knowledge of 
options, which is the most common derivative. Consistent with testing 
industry standards, the specialized knowledge examinations would be 
developed with input from committees of industry representatives who 
have expertise on the covered subject matters based on their day-to-day 
roles, responsibilities and job functions. Further, consistent with 
FINRA's practice regarding examination-related filings, the specialized 
knowledge examinations would be filed with the SEC for immediate 
effectiveness. FINRA determined the number of questions on the SIE, 
which likely will be 75 questions, based on testing industry standards 
for establishing test reliability.
C. Expiration Period of the SIE and Specialized Knowledge Examinations
    Eder and CFA agreed with the proposed four-year expiration period 
for the SIE. CAI stated that a four-year or longer period may be 
appropriate if the SIE will test fundamental concepts, but if the 
content of the SIE is more likely to change or be updated a shorter 
period, such as three years, may be appropriate. SUI stated that four 
years is a reasonable length of time and that five years should be the 
absolute maximum period. SIFMA and Wells Fargo suggested that the SIE 
period be extended to five years. They also requested that the 
expiration period for the specialized knowledge examinations, which is 
two years as

[[Page 17369]]

proposed, be aligned with the SIE and extended to five years. SIFMA 
noted that if FINRA extends the time period to five years, individuals 
who are not associated with a member during the five-year period could 
satisfy a CE requirement to maintain their proficiency. ARM requested 
that FINRA consider a six-year period for the SIE and a five-year 
period for the specialized knowledge examinations.
    Based on the content covered on the SIE, FINRA continues to believe 
that a passing result on the SIE should be valid for four years. In 
addition, FINRA believes that the specialized knowledge examinations 
should be subject to a two-year expiration period similar to the 
current examinations. However, as noted above, FINRA is considering the 
possibility of extending the two-year expiration period through the use 
of more frequent CE.
D. Elimination of Registration Categories and Associated Examinations
    SUI recommended that FINRA maintain the Options Representative 
registration category and develop a specialized knowledge examination 
for individuals advising the public on options trading, similar to the 
Canadian model. SUI also stated that FINRA should retain the Canadian 
Securities Representative registration categories and the associated 
examinations so that individuals have an understanding of the different 
legal frameworks in which they operate. Alternatively, SUI asked that 
if FINRA grandfathers existing Canadian Securities Representatives, 
FINRA should allow individuals who terminate their registrations a 
period of four or five years to re-register as Canadian Securities 
Representatives. Further, DCI stated that its business is limited to 
activities in which a Corporate Securities Representative may engage, 
and it is concerned that the proposed elimination of the Corporate 
Securities Representative registration category and associated Series 
62 examination might dissuade prospective representatives from joining 
the firm if they have to take a more comprehensive examination, such as 
the specialized Series 7 examination.
    The overall utility of the Options Representative and Corporate 
Securities Representative registration categories has diminished over 
the years, which is why FINRA is proposing to eliminate them. For 
instance, fewer than five individuals registered as Options 
Representatives in 2014. FINRA believes that the Canadian Securities 
Representative registration categories should be eliminated and 
replaced with an alternative qualification process. Under the proposed 
rule change, an individual qualified in Canada would be exempt from 
taking the SIE and would be able to register in any registration 
category by taking and passing only the applicable specialized 
knowledge examination(s). FINRA believes that this alternative approach 
would provide individuals qualified in Canada more flexibility to 
obtain a FINRA representative-level registration. Further, as noted 
above, FINRA is considering the possibility of extending the current 
two-year expiration period for registrations.
    Eder suggested that FINRA only retain the Investment Company and 
Variable Contracts Products Representative and General Securities 
Representative registration categories. FINRA disagrees and notes that 
the limited registration categories that FINRA is proposing to retain 
continue to have a regulatory purpose. For instance, the Equity Trader 
registration category, the predecessor to the Securities Trader 
category, was created for individuals engaged in securities trading 
activities over-the-counter or on Nasdaq with the view that better 
training and qualification of such individuals was necessary. The 
Research Analyst registration category was created for associated 
persons engaged in research activities in conjunction with FINRA's 
research analyst rule, FINRA Rule 2241, addressing conflicts of 
interest.
E. Principal-Level Examinations and Other Qualification Examinations
    Several commenters asked that FINRA consider similar changes to the 
principal-level examinations.\102\ Tessera further asked that FINRA and 
the MSRB consider any duplicative content that may exist on a 
principal-level examination for supervisors of Municipal Advisors and 
on the current Series 24 examination.
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    \102\ Tessera, SIFMA, Edward Jones, FSI, Wells Fargo and ARM.
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    Monahan & Roth suggested that FINRA also adopt a similar structure 
(that is, general knowledge and specialized knowledge examinations) for 
the proposed Compliance Officer registration category. In addition, 
Monahan & Roth requested that FINRA work with the MSRB to: (1) Add the 
Municipal Advisor (Series 50) qualification examination to the list of 
proposed specialized knowledge examinations; \103\ (2) grandfather 
General Securities Representatives and Municipal Securities Principals 
from the requirement to take a specialized Series 50 examination; and 
(3) avoid redundancies in developing the content outline of a 
specialized Series 50 examination. SIFMA asked that FINRA and the MSRB 
align their examination structures consistent with the proposal.
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    \103\ Tessera made the same comment.
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    Tessera noted that the current Series 50 examination contains 
significant overlap with the current Series 7 examination and Municipal 
Advisors that have passed the Series 7 examination should not be 
retested on duplicative content that appears on the Series 50 
examination.
    Edward Jones encouraged FINRA and NASAA to consider whether the 
Uniform Investment Adviser Law Examination (Series 65) could be updated 
in conjunction with the specialized Series 7 examination so that 
individuals working for registered investment advisers could 
demonstrate the necessary knowledge required to work as a registered 
representative.
    FINRA is currently evaluating whether the principal-level 
examinations could be restructured in a similar manner. FINRA has also 
discussed with MSRB staff the possibility of their adoption of the SIE 
as a concurrent requirement for the MSRB representative-level 
examination, the Municipal Securities Representative (Series 52) 
examination, as part of the restructuring, and MSRB staff participate 
on the SIE committee. However, FINRA notes that the restructuring is 
limited to the representative-level examinations, and it does not 
extend to advisory-related examinations, such as the Series 50 or 
Series 65 examination.
F. Implementation and Administration
    SIFMA requested that FINRA set a fixed, maximum amount of seat time 
for candidates to complete the SIE plus specialized knowledge 
examinations. Each of the proposed examinations, including the SIE, 
will include a time limit, which will correlate to the number of 
questions on each examination. While the SIE will have a fixed time 
limit, the time limit on each specialized knowledge examination will 
vary because the number of questions on each will vary.
    PFS urged that FINRA continue the practice of allowing candidates 
to schedule and take multiple examinations on the same day. SIFMA and 
ARM asked that FINRA clarify whether an individual who fails the SIE 
would be permitted to take a specialized knowledge examination and the 
applicable fees in such situations. Further, with respect to 
individuals who schedule the SIE and a specialized knowledge 
examination for the same day, FSI suggested that FINRA allow

[[Page 17370]]

them to withdraw from taking the specialized knowledge examination 
without incurring a fee for the withdrawal.
    An individual who fails the SIE would be allowed to take a 
specialized knowledge examination. This would include an individual who 
schedules the examinations for the same day. However, such individual's 
registration would not be approved in the CRD system until he or she 
takes and passes the examinations required for that registration 
category. Moreover, if such individual determines not to take a 
scheduled specialized knowledge examination, the individual would be 
charged a fee for registering to take it.\104\ This process is similar 
to the current process for registration categories that allow for 
concurrent qualifications, such as the Research Analyst registration 
category.
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    \104\ See also FINRA Rescheduling and Cancellation Policy, 
http://www.finra.org/industry/reschedule-or-cancel-your-appointment.
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    CFA requested that FINRA consider granting waivers to individuals 
who are in the process of completing an appropriate professional 
qualification, such as the CFA Program. In addition, CFA suggested that 
FINRA determine whether foreign qualifications would exempt an 
individual from taking a specialized knowledge examination and stated 
that its programs have considerable recognition in the United Kingdom 
and Canada. CFA also asked that FINRA consider dividing the SIE content 
into investment-related content and content that covers the applicable 
laws, rules and regulations, and it suggested that FINRA consider 
offering a waiver of the investment-related content to individuals who 
have passed a college level investments course or have made sufficient 
progress towards earning an appropriate professional qualification. CFA 
further stated that FINRA may want to consider outsourcing the 
development and testing of the laws, rules and regulations content on 
the SIE for economic reasons. Moreover, it asked that FINRA recognize 
the CFA's programs in granting exemptions from the restructured 
representative-level examinations.
    Section 15A(g)(3) of the Act authorizes FINRA to prescribe 
standards of training, experience, and competence for persons 
associated with FINRA members. FINRA believes that FINRA's current 
process for developing examinations, which includes input from 
committees of industry and SRO subject matter experts, is an effective 
means of developing the content of FINRA examinations and consistent 
with FINRA's regulatory authority. Under the proposed rule change, 
FINRA would continue to accept requests for waivers of the applicable 
qualification examinations and accept, where appropriate, other 
standards as evidence of an applicant's qualifications for 
registration.\105\
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    \105\ For instance, as noted above, candidates are eligible for 
a waiver of the current Series 86 examination if they have passed 
Levels I and II of the CFA examination and meet other eligibility 
criteria. Moreover, future candidates would be eligible for similar 
waivers for the specialized Series 86 examination.
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    PFS suggested that FINRA shorten the waiting periods for retaking a 
failed examination and allow an individual who fails an examination to 
retest after seven days and allow an individual who has three 
successive examination failures to retest after three months. In 
addition, PFS asked that FINRA post and periodically update pass rate 
information for each examination, including the first time pass rate, 
overall pass rate and the success ratio. PFS also asked that FINRA 
delay the implementation date of the proposed rule change until the 
third quarter of 2017 to provide the industry adequate preparation 
time.
    Similar to the current waiting periods for failed examinations, an 
individual who fails the SIE or a specialized knowledge examination 
would have to wait 30 calendar days before retaking that particular 
examination. Further, pursuant to proposed FINRA Rule 1210.06, if an 
individual fails the SIE or a specialized knowledge examination in 
three successive attempts within a two-year period, the individual 
would have to wait 180 days before retaking that particular 
examination. These waiting periods are for test security purposes and 
to ensure an examination's effectiveness as a measure of ability. A 
firm would be able to obtain a report of examination results for its 
associated persons and for individuals seeking to associate with the 
firm.
    FINRA had originally proposed to implement the revised structure in 
two phases. The first phase would have included the SIE and the 
specialized knowledge examinations for the Investment Company and 
Variable Contracts Products Representative, the General Securities 
Representative and the Investment Banking Representative registration 
categories, which represent the highest volume representative-level 
examinations. The second phase would have included the remaining 
specialized knowledge examinations. As originally proposed, the first 
phase would have occurred in the fourth quarter of 2016, and the second 
phase during the first half of 2017. Rather than a phased 
implementation, FINRA intends to implement the entire revised structure 
in March 2018. FINRA believes that a single launch date in 2018 will 
provide greater uniformity to the implementation process and provide 
firms and examination applicants additional preparation time. In 
addition, FINRA will continue to seek industry feedback on the 
implementation process, and will consider extending the launch date to 
address any operational issues raised by the industry.
    ARM requested that FINRA clarify the application process, including 
the applicable form(s), for individuals taking the SIE and whether they 
would be subject to the type of disclosures required on the Form U4 and 
the process by which FINRA would validate any such information. ARM 
further requested that FINRA publish basic guidelines or high-level 
requirements so that firms can better manage the expectations of 
associated persons seeking waivers.
    Individuals taking the SIE, including associated persons of firms 
who are not registering as representatives, would be able to enroll for 
the SIE without the need to submit a Form U4, and they would not be 
subject to the type of disclosures required on the Form U4. FINRA is 
proposing to create an enrollment system that provides access through 
an interface in the CRD system to allow individuals who are not 
associated persons of a firm, including members of the general public, 
to enroll and pay the SIE examination fee. This system would also be 
available to associated persons of firms who are not required to 
register with FINRA. With respect to the waiver process, FINRA has 
published guidelines to assist firms and individuals with this process. 
Moreover, FINRA will consider reaching out to the industry on the need 
for additional guidelines.
G. Examination Fees and Other Costs
    ICI recommended that, to the extent practicable, the fees for the 
proposed examinations not exceed the fees for the current examinations. 
FSI noted that a high SIE fee may act as a potential barrier to entry 
into the securities industry. CAI also stated that the cost of the SIE 
cannot be prohibitive. PFS stated that candidates should not be 
required to pay more for examinations simply because the content will 
be split into separate examinations. FINRA is undertaking a pricing 
analysis to determine a reasonable fee for the SIE and the specialized 
knowledge examinations. The total examination

[[Page 17371]]

fees for individuals registering in each representative-level category 
may vary depending on the fee for the SIE.
    Lincoln Financial asked that FINRA evaluate the costs of additional 
study materials and courses resulting from having to take two 
examinations as well as technological changes to track the additional 
examination requirements. While FINRA does not have data on the costs 
of preparing for both the SIE and a specialized knowledge examination, 
FINRA believes that the proposed structure has the potential of 
lowering the examination preparation costs or keeping the costs the 
same as today, because examination applicants will be able to leverage 
their existing educational courses in preparing for the SIE and the 
specialized knowledge examinations will be shorter in length or the 
same length. The cost of developing and maintaining a management system 
to track SIE results would primarily fall upon FINRA. Further, a firm 
would be able to use the CRD system to track SIE results for its 
associated persons and for individuals seeking to associate with the 
firm.
    FINRA specifically requested comment on the restructuring 
proposal's impact on the allocation of examination fees between members 
and examination applicants. SIFMA noted that currently some firms pay 
for all of their employees' examination fees and that firms that have 
independent contractors generally require the independent contractor to 
cover such fees. SIFMA added that, at this stage of the proposal, many 
firms do not anticipate an impact on how they allocate examination 
fees. CFA observed that allowing individuals who are not associated 
persons of firms to take the SIE would likely result in some increase 
in the percentage of individuals paying their own fees compared to 
individuals whose employers are paying their fees. N.I.S. stated that 
its newly-hired representatives pay the current examination fees and 
that the proposal would increase the cost to those representatives.
H. Other Comments
    IMS suggested that BrokerCheck should display information on an 
individual's grandfathered registrations and waived examinations, and 
it should display the individual's professional degrees and 
designations on an optional basis. IMS also suggested that all 
regulators and auditors of FINRA members should be required to take and 
pass qualification examinations within a short period after they are 
hired, and that regulators should be allowed to hold such examinations 
permanently. FINRA considers these comments to be outside the scope of 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2017-007 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2017-007. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of FINRA. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2017-007 and should be 
submitted on or before May 1, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\106\
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    \106\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-07046 Filed 4-7-17; 8:45 am]
 BILLING CODE 8011-01-P


