This is the final page of our free SIE study guide. It’s an essential topic for individuals seeking a career in the securities industry. This study guide page covers essential employee conduct requirements and necessary reportable events. Approximately 2 to 3 questions come from this topic in the final SIE exam.
Employee Conduct
FINRA has assigned certain responsibilities and employee conduct of member firms and their associated persons to maintain transparency and integrity in securities market. If you’re a member firm or work as a broker-dealer, these are some employee conducts for you:
- Form U4: The member firms are are bound to keep the Form U4 up to date of their registered representatives or employee. If the associated person is involved in some lawsuit or changes in address, it’s firm’s responsibitly to amend the Form U4 immediately.
- Form U5: If a registered employee leaves or resigns from their position voluntarily or involuntarily, the member firm should fill a Form U5 to terminate the registration along with detailed reason for departure.
- Customer Complaints: A customer complaint is a written allegations of a committed fraud or violation of FINRA or SEC rules by clients against registered representatives or brokerage firms. FINRA has a specific procedures to handling such customer complaints. The member firm or registered representatives may face hearing in front of FINRA-appointed arbitrators. The arbitrators judgement are final and applies on all parties.
- Misleading or Omitted Information: FINRA Rules 2010 and 1122 ensures that no registered representative of a member firm will fill the false, misleading, and inaccurate information in the Form U4 and U5. In case, someone violate these rules, the member firm will face consequences such as monetary fines, suspensions, or other enforcement actions.
Reportable Events
Under FINRA Rule 4530, associated persons must quickly inform their firms about specific occurrences, including written customer complaints, breaches of securities laws, or other events necessitating updates to their Form U4s. Additionally, this rule obligates firms to report these events to FINRA, ensuring prompt regulatory oversight and compliance.
- Outside Business Activities — FINRA Rule 3270: Under FINRA Rule 3270, registered representatives must disclose and obtain prior approval from their firms before engaging in any outside business activities. This ensures that such activities do not conflict with their responsibilities to their firm or create potential conflicts of interest. The registered representatives are also bound to report their firm when engaging outside business activities (OBA) such as owning rental real estate, working as a reserve fire fighter, or playing music professionally on the weekends.
- Private Securities Transactions — FINRA Rule 3280: FINRA Rule 3280 requires registered representatives to obtain written approval from their firms before engaging in any private securities transactions, often called “selling away.” These transactions occur outside the scope of their regular employment with the firm. Once approved, the firm must supervise these activities as if they were part of its own business. This rule ensures that all securities transactions are conducted in compliance with regulatory standards, preventing conflicts of interest and protecting investors. Unauthorized private securities transactions can lead to significant penalties, including fines, suspension, or disqualification for the representative.
- Political Contributions: Political contributions by registered representatives can lead to conflicts of interest, particularly when they influence the awarding of municipal securities business. Rules like MSRB Rule G-37 are in place to prevent such “pay-to-play” practices. These rules limit the amount of political contributions representatives, and their firms can make to officials who can direct municipal securities business. Registered representatives must report their political contributions to their firms, which are responsible for maintaining records and ensuring compliance with these regulations. The members are allowed to contribute: (1) up to $350 to an official per election if they are entitled to vote for the official at the time of the contribution; and (2) up to $150 to an official per election if they are not entitled to vote for the official at the time of the contribution.
- Gifts and Gratuities: FINRA Rule 3220 limits gifts and gratuities given or received by registered representatives to $100 per individual per year to prevent conflicts of interest. The firm must disclose and approve all gifts, ensuring they do not improperly influence business decisions or compromise professional integrity.
- Non-cash Compensation: Non-cash compensation refers to benefits provided to registered representatives in forms other than money, such as travel, entertainment, or other perks from third parties. FINRA regulations require that non-cash compensation be properly documented and based on strict criteria to prevent conflicts of interest. Firms must monitor and approve these arrangements to ensure compliance with regulatory standards and maintain objectivity and ethical conduct in the securities industry.