Module 13- Financial Services Regulation and Requirements
State Regulation of Securities
("Securities Act") and applicable state securities laws, unless an exemption from registration is available. This dual system of federal-state regulation has existed since the Securities Act was adopted. The first modern laws applicable to the regulation of securities offerings were passed by the state of Kansas in 1911. The nickname for state regulations is "Blue Sky Laws" because of a Kansas Supreme Court justice who wanted regulation to protect against "speculative schemes that have no more basis than so many feet of blue sky".
Gramm-Leach-Bliley Act
-The GLBA changed federal statutes governing the scope of permissible activities and the supervision of banks, bank holding companies, and their affiliates. The GLBA lowers (although does not altogether eliminate) barriers between the banking and securities industries erected by the Banking Act of 1933 (popularly known as the "Glass-Steagall Act") and between the banking and the insurance industries erected by the 1982 amendments to the Bank Holding Company Act of 1956 (the "Bank Holding Company Act"). As a result, banks are able to affiliate with securities firms and insurance companies within the same financial holding company. Some have described the GLBA as the most important piece of federal banking legislation since the Depression. -The GLBA clarified the concept of functional regulation -- that is, regulation of the same functions, or activities, by the same expert regulator, regardless of the type of entity engaging in those activities. Congress believed that, given the expansion of the activities and affiliations in the financial marketplace, functional regulation was important to building a coherent financial regulatory scheme. Accordingly, Title II of the GLBA amended the federal securities laws to provide for functional regulation of securities activities by eliminating the complete exception for banks from the definitions of "broker" and "dealer." As the legislative history noted, prior to the passage of the GLBA, the exception for banks from broker-dealer registration created a competitive disparity by permitting banks to engage in securities activities without being subject to the same regulatory requirements as broker-dealers. In the legislative history, Congress specifically expressed concern that the complete exception had permitted banks to engage in securities activities without being subject to the provisions of the federal securities laws that were designed to protect investors.
The Investment Advisers Act of 1940
-law that regulates investment advisers. It was created to "protect the public and investors against malpractice by persons paid for advising others about securities". -With certain exceptions, this Act requires that firms or sole practitioners compensated for advising others about securities investments must register with the SECand conform to regulations designed to protect investors. =Since the Act was amended in 1996, generally only advisers who have at least $110 million of assets under management or advise a registered investment company must register with the Commission.
SROs
-self-regulating organizations -The New York and American Stock Exchanges and the Financial Industry Regulatory Authority (FINRA) -SROs must create rules that allow for disciplining members for improper conduct and for establishing measures to ensure market integrity and investor protection. -SRO proposed rules are published for comment before final SEC review and approval. -· Most brokers and dealers must register with the SEC and join an SRO if they conduct business in more than one state. This means that, without SEC registration, a broker-dealer cannot participate in any transaction executed on a national securities exchange or Nasdaq.
FINRA
-the Financial Industry Regulatory Authority. -FINRA is a self-regulatory body that operates subject to Securities and Exchange Commission oversight, which oversees approximately 4,100 brokerage firms, 160,000 branch offices and more than 636,000 registered securities representatives. This membership includes virtually every broker/dealer in the nation that handles securities business with the public. · FINRA's dual objectives are to protect investors and the market's integrity through regulation and complementary compliance and technology-based services. FINRA is charged with: · constant surveillance of markets/ensure fair & orderly conduct of securities transactions · examining securities firms and their business activities · creating rules and regulations for the securities industry · enforcing rules, federal securities laws and regulations, and disciplining individuals or firms who violate them · registering individuals in the securities industry and administering computer-based training and continuing education · regulating trading on the NASDAQ Stock MarketSM, the American Stock Exchange, the International Securities Exchange, the Chicago Climate Exchange and in the OTC markets, and trades in New York Stock Exchange and Amex-listed securities reported to NASDAQ. · regulating trading in the corporate bond markets -FINRA administers the largest dispute resolution forum in the securities industry to resolve monetary and business disputes between and among investors, securities firms, and individual registered representatives.
To Require registration under this Investment Advisor Regulation Act, 3 prongs must be met:
1. The individual or firm is engaged in the business of advising others, by providing general or specific advice or issues reports about securities. -Engaged in the business means securities advice must be given on a frequent and regular basis. - Advice includes not only particular investment recommendations but also analyses or evaluation of securities or the security market in general. 2. The individual or firm advises as to the value of securities, or as to the advisability of investing in or selling securities, through publications or writings and, in fact, they hold themselves out to the general public as providing such advice. 3. The individual or firm receives compensation. -Compensation includes any economic benefit received for providing advisory services such as commissions, separate advisory fees and indirect economic benefits.
· An investment adviser does not include:
1. a bank, or any bank holding company as defined in the Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.) which is not an investment company 2. any lawyer, accountant, engineer, or teacher whose performance of such services is solely incidental to the practice of his or her profession 3. any broker or dealer whose performance of such services is solely incidental to the conduct of his or her business as a broker or dealer and who receives no special compensation therefore 4. the publisher of any bona fide newspaper, news magazine, or business or financial publication of general and regular circulation 5. any person whose advice, analyses, or reports relate to no securities other than securities which are direct obligations of or obligations guaranteed as to principal or interest by the United States, or securities issued or guaranteed by corporations in which the United States has a direct or indirect interest which shall have been designated by the Secretary of the Treasury, pursuant to section 3(a)(12) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(12)), as exempted securities for the purposes of that Act (15 U.S.C. 78a et seq.), or 6. such other persons not within the intent of this paragraph, as the Commission may designate by rules and regulations or order.
Only the following types of advisers are permitted to register with the SEC (and therefore must register with the Commission, unless exempt under Section 203(b)):
1. advisers that have "assets under management" of $110 million or more 2. advisers to registered investment companies 3. advisers that have their principal office and place of business in a state that has not enacted an investment adviser statute (currently, only Wyoming), or that have their principal office and place of business outside the United States, or 4. advisers that are exempted from the prohibition by Commission rule or order.
A person or firm that does not meet any of the criteria in Section 203A of the Advisers Act or Rule 203A-2 is prohibited from registering with the Securities and Exchange Commission. The SEC has adopted a rule exempting five categories of investment advisers:
1. nationally recognized statistical rating organizations ("NRSROs") (Rule 203A-2(a)) 2. pension consultants that provide investment advice with respect to $200 million or more of plan assets (Rule 203A-2(b)) 3. investment advisers sharing the same principal office and place of business with an affiliated investment adviser that is registered with the Commission (Rule 203A-2(c)) 4. newly-formed investment advisers that have a reasonable expectation of being eligible for Commission registration within 120 days of formation (Rule 203A-2(d)), and 5. investment advisers that would otherwise be required to register as investment advisers with the securities authorities of 15 or more states (Rule 203A-2(e)).
Blue Sky Laws
Every state has its own securities laws, commonly referred to as "Blue Sky Laws," that are designed to protect investors against fraudulent sales practices and activities. While these laws can vary from state to state, most laws typically require companies making small offerings to register those offerings before they can be sold. · The laws also license brokerage firms, their brokers, and investment adviser representatives. State-registered investment advisers are also subject to federal regulation in areas such as: o Insider trading o Performance fees o Fraudulent or deceptive practices, and o Assignment of advisory contracts.
Security Registration
In general, securities sold in the U.S. must be registered. The registration forms companies file provides essential facts while minimizing the burden and expense of complying with the law. In general, registration forms call for: o a description of the company's properties and business o a description of the security to be offered for sale o information about the management of the company, and o financial statements certified by independent accountants. Registration statements and prospectuses become public shortly after filing with the SEC.
State Exemptions from Registration
Like the Securities Act, state laws exempt certain securities and transactions from registration. Examples of exempt securities under the Uniform Act include: o securities issued by banks or savings institutions o securities listed or approved for listing on the New York Stock Exchange (the "NYSE"), the American Stock Exchange (the "AMEX"), or the Midwest Stock Exchange o securities issued by an organization formed for religious, charitable, or other purposes, if certain conditions are met, and o an investment contract issued in connection with an employee benefit plan if notice is provided to the state securities commission.
Securities Act of 1933
Often referred to as the "truth in securities law" or "the paper Act", the Securities Act of 1933 has two basic objectives: 1. Requires that investors receive financial and other significant information concerning securities being offered for public sale; and 2. Prohibits deceit, misrepresentations, and other fraud in the sale of securities. -The Act defines a security, determines when and how a security can be sold to the public, and what type of disclosure is necessary. -The purpose and goal of registering securities is the disclosure of important financial information. This information enables investors to make informed judgments about whether to purchase a company's securities. -The SEC requires that the information provided be accurate. Investors who purchase securities and suffer losses have important recovery rights if they can prove that there was incomplete or inaccurate disclosure of important information.
Registered Investment Advisors (RIA) Advisors
Registered Investment Advisors (RIAs) who have less than $100 million of assets under management must register with their state. Most states require that advisors pass a Series 65 test which verifies that they have read the Act and understand the law. The Act makes it unlawful for investments advisors to engage in practices that constitute fraud and deceit, whether or not the investor is registered with the SEC. -· RIAs under the Investment Advisors Act of 1940 are held to a fiduciary standard of conduct, which puts the client's interests first. Those advisors not registered under this Act who are merely licensed through FINRA for securities sales, are held to a suitability standard.
The following is a list of some of the practices that are considered dishonest or unethical for an investment adviser to perform
Suitability- An adviser may not recommend a transaction to a client without having a basis for believing the transaction is suitable for the client. Failure to make a reasonable inquiry about a customer's needs and objectives is unethical and prohibited. Discretionary Authority- An adviser must not effect discretionary transactions for or on behalf of a client without first obtaining written authority from the client. Third Party Authority- An adviser can only place trades by the account owner or by another party that has been granted trading authority by the client (or power of attorney). Excessive Trading (Churning)- An adviser cannot make excessive trades in a clients account just to increase or generate a commission. Commingling- An adviser may not commingle personal funds with a client's fund. Material Facts- An adviser cannot misrepresent or omit a material fact regarding the adviser's qualifications or fees. Non-disclosure Sources- An adviser must disclose if a report or recommendation was prepared by someone other than the investment adviser. Guarantees- An adviser may not make guarantees to their clients Confidentiality- An adviser may not discuss a client's business with family members, friends, or other parties. Market Manipulation- An adviser may not engage in any activity that illegally manipulates market values. Insider trading- An adviser may not trade a security while in possession of material, non-public information.
2B Requirements
The expectation is that additional information in the supplement will allow clients to compare the qualifications and conflicts of interest of the advisory firm and the personnel that will be providing investment advice to them, with others. Advisers are required to describe their practices, investment strategies, compensation arrangements, fees, conflicts of interest and disciplinary history to clients in "plain English" so that clients can easily understand and compare these services with other firms and advisers. · There are 6 items the supplement must address: · A cover page which lists identifying information for the Investment Advisor Representative · Disclosure of the adviser's educational background, and business background for the past 5 years. Any professional designations require an explanation of the minimum qualifications required to obtain the designation so that clients can understand the level of education and testing that is required. This will bring some questionable designations to the attention of the regulators. · Disclosure of disciplinary or legal actions against the adviser · Disclosure of other business activities that might create a material conflict of interest, including compensation related to the sale of securities or other investment products, and disclosure of other business activities that involves a substantial amount of time or pay. · Disclosure of additional compensation from someone other than the client, who provides the adviser with an economic benefit. For example, if an adviser receives discounts (soft dollars) from a vendor that must be disclosed. · Disclosure of how the firm supervises the advice given to clients, and the name and phone number of the supervisor.
Regulation Best Interest (BI
a 2019 Securities and Exchange Commission (SEC) rule that falls under the Securities and Exchange Act of 1934. It establishes a standard of conduct for broker-dealers and investment advisors (who are registered under section 203 of the Advisers Act) when recommending any securities transaction or investment strategy. It requires broker-dealers and investment advisors to only recommend financial products to their customers that are in their customers' best interests, and to clearly identify any potential conflicts of interest and financial incentives the broker-dealer or investment advisor may have with those products. This helps retail investors better understand and compare the services offered and make an informed choice of the relationship best suited to their needs and circumstances. -Reg BI states that financial professionals must make investment recommendations that serve the client first and foremost. Previously, brokers were only held to the "suitability standard." This meant that when brokers advised their clients, they only had to recommend investments that were suitable, but not necessarily in their clients' best interest.
trader
an individual who buys and sells securities for themselves and is therefore not a dealer.
dealer
any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise. Unlike a broker, who acts as agent, a dealer acts as principal.
Registered Representative
are individuals associated with a member firm, including assistant officers other than principals, who are engaged in: the investment banking or securities business for the member firm including the functions of supervision, and the training of persons associated with a member for any of these functions.
broker
as any person engaged in the business of effecting transactions in securities for the account of others. To determine whether an individual or a business is a broker, you must look at the activities that the person or business actually performs
The Sarbanes-Oxley Act of 2002
ave the SEC even more authority to regulate an even larger group of professionals, including overseeing the activities of the auditing profession and lawyers. The law mandates corporate responsibility and enhanced financial disclosures to combat corporate and accounting fraud.
Those who wish to participate in the buying and selling of securities on behalf of their clients must
become securities licensed through FINRA and adhere to their state securities requirements. FINRA, under SEC oversight, protects investors and market integrity, and administers exams and licenses for those who sell securities (Series 7), mutual funds, variable life insurance and variable annuities (Series 6), among others. States may require other exams such as the Series 63, 65 or 66.
Broker / Dealer Regulation
broker-dealer that conducts all of its business in one state does not have to register with the SEC. However, a broker/dealer, the registered representative, and the security must be registered in the state in which they want to sell. In order to sell securities in any of the states that require state-level representative registration, a registered representative must pass the Series 63 Uniform Securities Agent State Law Exam and be registered in that state. The typical blue sky laws have provisions for revoking the license of a broker/dealer or salesperson. · Each state where the broker/dealer wants to operate may have its own registration requirements.
Unethical Behavior of Investment Advisers. Investment advisers are prohibited from:
he anti-fraud provisions of the Investment Advisers Act of 1940 apply to all investment advisors, even those who may qualify under one of the three exemption provisions. Prohibited from: -employing any device or scheme to defraud a client -engaging in any fraudulent or deceitful practice or course of business -failing to disclose in writing the capacity in which the investment adviser is acting in a transaction for a client and obtaining written consent before completion of the transaction -making any untrue statement of material fact or omitting a material fact -presenting themselves as an Investment Counsel unless a substantial part of their business consists of rendering investment supervisory services, and -using RIA after their name (however, the SEC decided to permit advisers to spell out Registered Investment Adviser after their name).
Not all offerings of securities must be registered with the Securities and Exchange Commission. Some exemptions from the registration requirement include:
o private offerings to a limited number of persons or institutions o offerings of limited size o intrastate offerings, and o securities of municipal, state, and federal governments. · By exempting many small offerings from the registration process, the SEC seeks to foster capital formation by lowering the cost of offering securities to the public.
The National Securities Markets Improvement Act (NSMIA)
pre-empted state registration and review of specified securities and offerings. Offerings of these "covered securities" are for the most part subject only to federal regulation. Offerings of securities that are not "covered securities" continue to be subject to a dual system of federal-state regulation, including registration and review.
The Uniform Act
provides the following three methods for registering securities offerings with the states: · Registration by Notification. This method of registration requires only a notice filing with the state. Registration by notification generally is reserved for mature issuers, with a relatively sound earnings track record. · Registration by Coordination. This method of registration is available where there is registration under the Securities Act. The state registration is coordinated with review and effectiveness by the Securities and Exchange Commission. · Registration by Qualification. This method of registration requires a full review of the transaction by the state. Registration by qualification is required if an offering is not registered under the Securities Act, such as an offering exempt from registration under the Securities Act but not exempt from state registration requirements. · Forty-one states have adopted or substantially adopted with modifications the Uniform Securities Act of 1956 (the "Uniform Act"). Other states have adopted their own individualized securities laws. · Much like the federal system, the state registration process begins by filing the various registration statement forms, the disclosure document, and the requisite fee with the state securities commission of each state in which a proposed offering is to be conducted. The registration statement may or may not be reviewed, as determined by the particular state. If reviewed, the state will review and comment on the statement from a merit, full disclosure or combination merit and full disclosure perspective, depending on the state's approach to the registration statement review process.
Investment Company Act of 1940
regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. The regulation is designed to minimize conflicts of interest that arise in these complex operations. The Act requires these companies to disclose their financial condition and investment policies to investors when stock is initially sold and, subsequently, on a regular basis. The focus of this Act is on disclosure to the investing public of information about the fund and its investment objectives, as well as on investment company structure and operations. It is important to remember that the Act does not permit the SEC to directly supervise the investment decisions or activities of these companies or judge the merits of their investments.
Financial planners may fall under the enforcement powers of
state and federal regulators. They may also be subject to rules and regulations of SROs such as the New York Stock Exchange, Chicago Board Options Exchange, Municipal Securities Rulemaking Board, the Options Clearing Corporation and the National Futures Association. Brokers, dealers and registered representatives generally fall under the rules and regulations of FINRA.
Securities
stocks, bonds, and mutual funds, certificates of deposit, limited partnership ownership interests, variable life insurance policies, and variable annuity contracts.
Penalties for Insider Trading
§ An investment adviser must comply with the rules outlined in the Investment Advisers Act. The SEC will investigate and act upon any violations. There is a three-tiered system the SEC uses to categorize the violations. The following actions may be taken: penalty up to $100,000 for a natural person (a human being) $500,000 penalty for any other person (legal entity), or the amount of gain that resulted from the violation. If a violation cannot be classified in the three-tiered system, the SEC can impose a criminal penalty up to $10,000, imprisonment up to five years, or both.
Details of Regulation BI
§ Disclosure Obligation: Broker-dealers and investment advisors must disclose material facts about the relationship and recommendations of the products and services they provide. § Care Obligation: A broker-dealer and investment advisor must exercise reasonable diligence, care, and skill when making a recommendation to a retail customer. The broker-dealer and investment advisor must understand potential risks, rewards, and costs associated with the recommendation. § Conflict-of-Interest Obligation: The broker-dealer and investment advisor must establish, maintain, and enforce written policies and procedures reasonably designed to identify and—at a minimum—disclose or eliminate conflicts of interest. Policies and procedures must: o Mitigate conflicts that create an incentive for the firm's financial professionals to place their interest, or the interests of the firm, ahead of the retail customer's interest; o Prevent material limitations on offerings—such as a limited product menu or offering only proprietary products—from causing the firm or its financial professional to place his or her interest or the interests of the firm ahead of the retail customer's interest; and o Eliminate sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period of time. § Compliance Obligation: In an enhancement from the original proposal, broker-dealers and investment advisors must establish, maintain, and enforce policies and procedures reasonably designed to achieve compliance with Regulation Best Interest as a whole.
o The CFP Board Code and Standards goes further than the DOL's fiduciary rule in Standard A.1 and states that, "at all times when providing Financial Advice to a client, a CFP® professional must act as a fiduciary and therefore, act in the best interests of the client." The following duties must be fulfilled:
§ Duty of Loyalty § Duty of Care § Duty to Follow Client Instructions
Insider Trading
§ The SEC defines illegal insider trading as "generally buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information." The SEC has treated the detection and prosecution of insider trading violations as one of its enforcement priorities. § Examples of insider trading cases that have been brought by the SEC are cases against: Corporate officers, directors, and employees who traded the corporation's securities after learning of significant, confidential corporate developments; Friends, business associates, family members, and other "tippees" of such officers, directors, and employees, who traded the securities after receiving such information; Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded; Government employees who learned of such information because of their employment by the government; and Other persons who misappropriated, and took advantage of, confidential information from their employers Insider trading is also a violation of the CFP Board's Code of Ethics and Rule of Conduct and violates a CFP® professional's fiduciary duty to a client.
Amend form ADV
§ You must amend your Form ADV each year by filing an annual updating amendment within 90 days after the end of your fiscal year. When you submit your annual updating amendment, you must update your responses to all items in Part 1A, 1B, 2A and 2B (as applicable), including corresponding sections of Schedules A, B, C, and D and all sections of Schedule R for each relying adviser. You must submit your summary of material changes required by Item 2 of Part 2A either in the brochure (cover page or the page immediately thereafter) or as an exhibit to your brochure. You may, but are not required, to submit amended versions of the relationship summary required by Part 3 as part of your annual updating amendment. You must amend your brochure supplements (see Form ADV, Part 2B) promptly if any information in them becomes materially inaccurate. If you are registered with the SEC, you must amend Part 3 of your Form ADV within 30 days whenever any information in your relationship summary becomes materially inaccurate.
Advisers reporting eligibility for SEC registration
· Advisers are required to report their eligibility for Commission registration on Schedule I to Form ADV upon initial registration. Additionally, advisers are required to report their continuing eligibility for Commission registration annually by amending Schedule I to Form ADV within ninety days of the end of their fiscal year.
Fee-based vs Commission-based advisor registration requirements
· Financial planners who provide financial and investment advice for a fee are investment advisors who must register with the SEC or with their state securities enforcement office. · Financial planners who receive commissions from the sale of financial products or who transact trades as brokers, agents or registered representatives must first obtain a license issued by FINRA. Financial planners who sell insurance products must be licensed in those specific areas such as life and accident, health, fire and casualty, etc.
Brochure Rule
· Rule 204-3 under the Advisers Act, commonly referred to as the "brochure rule," generally requires every SEC registered investment adviser to deliver to each prospective advisory client a written disclosure statement, or "brochure", describing the adviser's business practices and educational and business background. -· An adviser must deliver this brochure either (i) at least forty-eight hours before entering into any written or oral contract with a client, or (ii) at the time of entering into the contract with a client, if the contract permits the client to terminate the contract without penalty within five business days after entering into it. The rule also requires an investment adviser to offer to deliver a brochure to existing clients, on an annual basis, without charge. If there are material changes in the brochure since the adviser's last annual update, either (i) a current brochure or (ii) a summary of material changes to the brochure must be delivered, without charge, to each client within 120 days after the end of the adviser's fiscal year. · The information required by the brochure rule is included as Form ADV, Part 2B, the registration form for investment advisers. To comply with the brochure rule, an investment adviser may deliver Form ADV, Part 2B or another document containing at least the information disclosed in Form ADV. · Advisers are not required to deliver a brochure to investment company clients or to clients for whom they provide only impersonal services for less than $200. An adviser entering into a contract for impersonal advisory services for $200 or more need only offer to deliver a brochure.
Securities Act of 1934
· With the Securities Act of 1934, Congress created the Securities and Exchange Commission (SEC). The Act empowers the SEC with broad authority over all aspects of the securities industry. This includes the power to register, regulate, and oversee: o brokerage firms- firms that charge a fee or commission for executing buy and sell orders submitted by another individual or firm, o transfer agents- person or company who maintains the records of registered securities, o clearing agencies- facilitate the validation, delivery and settlement of securities transactions, and o the nation's securities Self Regulatory Organizations (SRO) - An SRO is an organization accountable to the SEC for the enforcement of federal securities laws within an assigned area. The various stock exchanges, such as the New York Stock Exchange, American Stock Exchange, and the National Association of Securities Dealers (NASDAQ) are SROs. FINRA, the Financial Industry Regulatory Authority, formerly NASD, is also an SRO since it is the largest non-governmental regulator for all securities firms in the US. -The Act also identifies and prohibits certain types of conduct within the markets and provides the Commission with disciplinary powers over regulated entities and persons associated with them. -Act empowers SEC to require periodic reporting of info. by companies with publicly traded securities.
Examples of transactional exemptions under the Uniform Act include:
· an offer or sale of a security to specified purchasers, including banks, savings institutions, and institutional buyers · any transaction pursuant to an offer to not more than ten persons in the state during any twelve month period, if certain conditions are met, and any transaction pursuant to an offer to existing security holders of the issuer, if certain conditions are met, including advance notice to the state securities commission
What do SEC commissioners do?
· interpret federal securities laws · amend existing rules · propose new rules to address changing market conditions, and/or · enforce rules and laws.
Membership in the FINRA allows a firm to
· participate in the over-the-counter and investment banking securities business, to distribute shares of investment companies sponsored by FINRA members, and distribute new issues underwritten by FINRA members. o Securities professionals associated with a member firm who will engage in securities transactions must register with the FINRA as a registered representative or principal. Applicants participate in a thorough investigation to ensure that they have not violated any federal or state law or any exchange or FINRA rule that would prohibit them from entering the securities business. They are then required to pass a qualification exam to demonstrate their knowledge of the securities industry.
Form ADV Part 3
· requires all broker-dealers and investment advisors registered with the SEC "to prepare, deliver to retail investors, and file a relationship summary" (Form CRS). Form CRS provides succinct information about the relationships and services the firm offers to retail investors, fees and costs that retail investors will pay, potential or specified conflicts of interest and disclosures related to the products they sell and recommend to their customers. The form must include "whether or not the firm and its financial professionals have disciplinary history" and follow a standardized Q&A format.
