[Federal Register Volume 82, Number 67 (Monday, April 10, 2017)]
[Notices]
[Pages 17336-17371]
[FR Doc No: 2017-07046]

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

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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

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

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

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.

------------------------------------------------------------------------
 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

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \28\ See FINRA Sanction Guidelines at 40 (2013), http://www.finra.org/sites/default/files/Sanctions_Guidelines.pdf.
---------------------------------------------------------------------------

    FINRA is proposing to codify the requirements relating to the Rules
of Conduct for examinations under FINRA Rule 1210.05. FINRA is also
proposing

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.
---------------------------------------------------------------------------

    \29\ See also NYSE Information Memorandum 88-37 (November 1988).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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-

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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

member, provided the firm that is requesting the waiver and the
individual satisfy the criteria for a Financial Services Affiliate
(``FSA'') waiver.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

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\
---------------------------------------------------------------------------

    \46\ See NTM 99-49 (June 1999).
---------------------------------------------------------------------------

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.

    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.

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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

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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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

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.
---------------------------------------------------------------------------

    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).
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    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

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

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