Registered representative rules

As Uncle Ben says in Spider-Man, “with great power comes great responsibility.” Registered representatives have to follow specific guidelines and protocols to stay compliant with FINRA rules. This section covers:

Outside brokerage accounts

Outside business activities

Private securities transactions

Gifts

Borrowing from or lending to customers

Sharing accounts with customers

Disputes with employers

Compensation for unregistered persons

Outside brokerage accounts

When you become registered with a FINRA member firm, you must disclose any brokerage accounts you hold outside the firm within 30 days. For example, assume David is hired as a registered representative at ABC Broker-Dealer. Before he was hired, David held brokerage accounts at XYZ Broker-Dealer. Within 30 days of associating with ABC Broker-Dealer, David must notify his firm about those outside brokerage accounts. This rule also applies to any accounts in which the representative has a beneficial interest, including accounts held by:

A spouse

Dependent children

Anyone the representative supports financially

In most cases, firms don’t allow representatives to maintain outside brokerage accounts. Firms are required to supervise their registered employees, and that supervision is harder when the firm doesn’t have direct access to the account. For example, it would be more difficult to determine whether a representative was placing personal trades based on insider information if the account wasn’t held at the employing firm. *Even though outside accounts are harder to supervise, a firm may allow them. In that case, the firm should obtain duplicate account statements and trade confirmations from the firm holding the account.

Outside business activities Registered representatives must inform their employer if they’re making money outside the firm. This is called an outside business activity (OBA). The purpose is to help the firm identify and manage potential conflicts of interest that could harm the firm or its customers.

The following are not considered OBAs:

Unpaid volunteer work

Lottery or casino winnings

Any other paid activity is generally treated as an OBA, including:

Working for a family member’s business

Being paid tips for creative work (e.g., playing in a band on weekends)

FINRA recently has been cracking down on enforcing OBA rules. Registered representatives must notify their firm in writing when engaging in a money-making opportunity outside the firm. If the employer believes the activity is detrimental to the firm, it can deny the OBA. Although firms have the right to deny an OBA, the representative isn’t technically asking for permission when providing written notice. The issue arises if the firm responds and denies the activity.

Private securities transactions Along similar lines, registered representatives must follow specific procedures if they plan to engage in a private securities transaction. Several scenarios can fall into this category when done outside the employing firm, including:

Helping a friend sell stock in their small business

Assisting a family member in purchasing unregistered stock Helping a client buy an investment product the firm doesn’t offer

A private securities transaction occurs when a registered representative facilitates a securities transaction outside their employing firm. The transaction is compliant with FINRA rules if these requirements are met:

Representative must notify firm in writing, identifying:

Their role in the transaction

The dynamics of the transaction

The securities involved

Compensation received (if any)

Firm must keep a record of transactions on its books

Representative must adhere to the firm’s requests and protocols Representative must be granted written approval if compensated*

*No written approval is required if the representative is not compensated. If the representative does not meet these obligations, they are selling away, which is a FINRA violation subject to penalties.

Gifts FINRA is concerned about “pay for play” in the financial industry, so it limits gifts given to business partners. For example, if your broker-dealer does business with a mutual fund company, the firms cannot give gifts worth more than $100 per person, per year to the other firm’s employees. However, business entertainment is not included in this gift limit. Business entertainment includes things like:

Tickets to sporting events

Dinners

The key idea is that the representative attends the activity with the other person. As long as the entertainment is not excessive, it can exceed $100.

Borrowing from or lending to customers Registered representatives face strict limits on borrowing from or lending to customers. In general, representatives are prohibited from entering into loan arrangements with most customers. Some exceptions apply. Representatives may borrow money from customers who are in the business of lending money (e.g., a bank). Representatives may also loan or borrow money from customers who are family members or individuals with whom they have a personal relationship (e.g., a partner or fiancé).

Sharing accounts with customers Similar to lending arrangements, FINRA generally prohibits representatives from sharing accounts with customers. An exception is allowed if the following protocols are followed:

The representative obtains written approval from their firm

The representative obtains written approval from the customer

Gains and/or losses are shared proportionately*

*Representatives must allocate gains and/or losses according to the contributions made to the account. For example, assume a representative opens a joint account with a customer and contributes 40% of the funds, with the customer contributing the other 60%. If a $10,000 capital gain is realized and withdrawn from the account, the representative should receive $4,000 (40%) and the customer should get the remaining $6,000 (60%). Any other allocation would be disproportionate and prohibited. Accounts can be shared with immediate family members without following the protocols above. This includes parents, parents-in-law, spouses, children, and any other family member a representative financially supports.

Disputes with employing firms Registered representatives must follow specific procedures when they have a dispute with their employing firm. Except for workplace discrimination or sexual harassment*, employees generally cannot sue their employing firms. Instead, they can bring disputes to binding arbitration facilitated by FINRA. Arbitration is similar to court, but it’s generally faster and more efficient. *Instances of workplace discrimination or sexual harassment are most likely to be handled by the US court system.

Continued compensation to ex-employees Many securities industry roles are compensated based on asset inflows (bringing new money to a firm) and product sales. In some cases, compensation is paid over long periods. For example, a representative might receive a portion of account fees charged annually to clients. Each year the clients remain in the accounts, the representative continues to receive compensation. If the representative leaves the firm, a key question is whether they can continue to collect those fees. The relevant FINRA rule allows former representatives to continue collecting compensation in some situations. If a representative retires or leaves the firm due to disability and has a written agreement with the former firm, they may continue to be paid. The same applies to a deceased representative, except the compensation is paid to the beneficiary. The written agreement must include certain stipulations. As long as payments continue, the former representative may not:

Solicit new business

Open new accounts

Service old accounts

In other words, the former representative must be retired from the securities industry.

Key points

Outside brokerage accounts

Must be disclosed to firm within 30 days of association

Includes accounts the representative maintains a “beneficial interest” in

Outside business activities

Agents must inform their employer if making money outside of the firm Firm can bar an employee from activity if a conflict of interest exists

Private securities transaction

Securities transaction facilitated by rep outside of employing firm

Requirements:

Must notify firm in writing

Firm must keep a record of the transaction

Written approval is required if the rep is compensated

Selling away

Performing a private securities transaction without notifying the firm

FINRA violation / prohibited action

Business gifts

Limited to $100 per person, per year

Business entertainment

Costs related to entertaining clients

May exceed the $100 gift limit

Cannot be excessive

Lending arrangements with customers

Reps generally cannot borrow from or lend money to customers

Does not apply to:

Clients in the business of lending money

Personal relationships

Sharing accounts with customers

Reps generally cannot share accounts with customers, unless:

Written approval granted by firm

Written approval granted by customers

Gains and/or losses are shared proportionately

Disputes with employing firms

Typically subject to arbitration

Workplace discrimination and sexual harassment may involve lawsuits

Payments to unregistered persons

Firms may continue to pay retired personnel

Written agreement must be in place

Former representative may not:

Solicit new business

Open new accounts

Service old accounts