Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Revise the Series 24 Examination Program
Federal Register, Volume 79 Issue 154 (Monday, August 11, 2014)
Federal Register Volume 79, Number 154 (Monday, August 11, 2014)
Notices
Pages 46887-46890
From the Federal Register Online via the Government Printing Office www.gpo.gov
FR Doc No: 2014-18881
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SECURITIES AND EXCHANGE COMMISSION
Release No. 34-72766; File No. SR-FINRA-2014-035
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Revise the Series 24 Examination Program
August 5, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or ``SEA'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on July 29, 2014, 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, II, and III below, which Items have been prepared by FINRA. FINRA has designated the proposed rule change as ``constituting a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing rule'' under Section 19(b)(3)(A)(i) of the Act \3\ and Rule 19b-4(f)(1) thereunder,\4\ which renders the proposal effective upon receipt of this filing by the Commission. 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.
\3\ 15 U.S.C. 78s(b)(3)(A)(i).
\4\ 17 CFR 240.19b-4(f)(1).
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Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
FINRA is filing revisions to the content outline and selection specifications for the General Securities Principal (Series 24) examination program.\5\ The proposed revisions update the material to reflect changes to the laws, rules and regulations covered by the examination and to incorporate the functions and associated tasks currently performed by a General Securities Principal. In addition, FINRA is proposing to make changes to the format of the content outline. FINRA is not proposing any textual changes to the By-Laws, Schedules to the By-Laws or Rules of FINRA.
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\5\ FINRA also is proposing corresponding revisions to the Series 24 question bank. Based on instruction from SEC staff, FINRA is submitting this filing for immediate effectiveness pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(1) thereunder, and is not filing the question bank for review. See Letter to Alden S. Adkins, Senior Vice President and General Counsel, NASD Regulation, from Belinda Blaine, Associate Director, Division of Market Regulation, SEC, dated July 24, 2000. The question bank is available for SEC review.
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The revised content outline is attached. The Series 24 selection specifications have been submitted to the Commission under separate cover with a request for confidential treatment pursuant to SEA Rule 24b-2.\6\
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\6\ 17 CFR 240.24b-2. The Commission notes that the content outline is an exhibit to the filing, not to this Notice.
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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.
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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.
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Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
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Purpose
Section 15A(g)(3) of the Act \7\ authorizes FINRA to prescribe standards of training, experience, and competence for persons associated with FINRA members. In accordance with that provision, FINRA has developed examinations that are designed to establish that persons associated with FINRA members have attained specified levels of competence and knowledge, consistent with applicable registration requirements under FINRA rules. FINRA periodically reviews the content of the examinations to determine whether revisions are necessary or appropriate in view of changes pertaining to the subject matter covered by the examinations.
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\7\ 15 U.S.C. 78o-3(g)(3).
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NASD Rule 1022(a) (General Securities Principal) requires that a ``principal'' register and qualify as a General Securities Principal,\8\ unless the person's activities are so limited as to qualify such person for one or more of the limited categories of principal registration, 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. The rule does not preclude individuals whose activities are so limited from registering and qualifying as General Securities Principals.
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\8\ The term ``principal'' is defined in NASD Rule 1021(b) (Definition of Principal).
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NASD Rule 1022(a) also requires that a member's chief compliance officer (``CCO'') designated on Schedule A of the member's Form BD (Uniform Application for Broker-Dealer Registration) be registered and qualified as a General Securities Principal. If a member's activities are limited to investment company and variable contracts products, direct participation programs or government securities, the member's CCO may instead be registered and qualified as an Investment Company and Variable Contracts Principal, Direct Participation Programs Principal or Government Securities Principal, respectively. In addition, for purposes of the CCO requirement for members of FINRA that are also members of the NYSE, FINRA recognizes the NYSE Compliance
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Official (Series 14) examination as an acceptable alternative to the principal examination requirements for General Securities Principal, Investment Company and Variable Contracts Principal or Direct Participation Programs Principal, as applicable.
Pursuant to NASD Rule 1022(a), a General Securities Principal is not qualified to function as a Financial and Operations Principal, an Introducing Broker-Dealer Financial and Operations Principal, a Registered Options Principal, a General Securities Sales Supervisor, a Municipal Securities Principal or a Municipal Fund Securities Limited Principal, unless the General Securities Principal is also registered and qualified in these other categories.
Further, a General Securities Principal is not qualified to supervise the conduct of a Research Analyst or Supervisory Analyst engaged in equity research, unless the General Securities Principal has passed the Regulatory Administration and Best Practices (Series 87) portion of the Research Analyst examination or the Supervisory Analyst (Series 16) examination and is registered as a Research Principal.
A person seeking to register as a General Securities Principal must satisfy the General Securities Representative prerequisite registration or another acceptable prerequisite registration.\9\ While registration as a Corporate Securities Representative, Private Securities Offerings Representative or Investment Banking Representative satisfies the prerequisite registration requirement for a General Securities Principal, such a principal will only have limited supervisory authority consistent with his or her representative category. In addition, NASD Rule 1022(a) requires that a General Securities Principal with responsibility over specific investment banking activities satisfy the Investment Banking Representative registration requirements, regardless of any other prerequisite registration. A person registering as a General Securities Principal must also pass the Series 24 qualification examination or an alternative examination.\10\
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\9\ The other acceptable prerequisite registrations are: United Kingdom Securities Representative; Canada Securities Representative; Investment Banking Representative; Corporate Securities Representative; or Private Securities Offerings Representative. See NASD Rule 1022(a)(1)(A); Regulatory Notice 09-41 (July 2009); and Securities Exchange Act Release No. 57073 (December 31, 2007), 73 FR 1382 (January 8, 2008) (Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-2007-028).
\10\ A person who is registered as a General Securities Sales Supervisor (Series 9/10) and passes the General Securities Principal Sales Supervisor Module (Series 23) examination is also qualified to function as a General Securities Principal. In conjunction with the proposed rule change, FINRA is filing revisions to the content outline and selection specifications for the Series 23 examination program. See SR-FINRA-2014-034 (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change to Revise the Series 23 Examination Program).
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In consultation with a committee of industry representatives, FINRA recently undertook a review of the Series 24 examination program. As a result of this review, FINRA is proposing to make revisions to the content outline to reflect changes to the laws, rules and regulations covered by the examination and to incorporate the functions and associated tasks currently performed by a General Securities Principal. FINRA also is proposing to make changes to the format of the content outline.
Current Outline
The current content outline is divided into five sections. The following are the five sections and the number of questions associated with each of the sections, denoted Section 1 through Section 5:
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Supervision of Investment Banking, Underwriting Activities and Research, 33 questions;
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Supervision of Trading and Market Making Activities, 31 questions;
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Supervision of Brokerage Office Operations, 29 questions;
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Sales Supervision and General Supervision of Employees, 43 questions; and
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Compliance with Financial Responsibility Rules, 14 questions.
Each section also includes the applicable laws, rules and regulations associated with that section. The current outline also includes a preface (addressing, among other things, the purpose, administration and scoring of the examination), sample questions and reference materials.
Proposed Revisions
FINRA is proposing to divide the content outline into five major job functions that are performed by a General Securities Principal. The following are the five major job functions, denoted Function 1 through Function 5, with the associated number of questions:
Function 1: Supervision of Registration of the Broker-Dealer and Personnel Management Activities, 9 questions;
Function 2: Supervision of General Broker-Dealer Activities, 45 questions;
Function 3: Supervision of Retail and Institutional Customer-
Related Activities, 32 questions;
Function 4: Supervision of Trading and Market Making Activities, 32 questions; and
Function 5: Supervision of Investment Banking and Research, 32 questions.
FINRA is also proposing to adjust the number of questions assigned to each major job function to ensure that the overall examination better reflects the key tasks performed by a General Securities Principal. The questions on the revised Series 24 examination will place greater emphasis on key tasks such as supervision of registered persons, sales practices and compliance.
Each function also includes specific tasks describing activities associated with performing that function. There are two tasks (1.1-1.2) associated with Function 1; seven tasks (2.1-2.7) associated with Function 2; three tasks (3.1-3.3) associated with Function 3; three tasks (4.1-4.3) associated with Function 4; and three tasks (5.1-5.3) associated with Function 5.\11\ By way of example, one such task (Task 2.1) is to develop, implement and update firm's policies, written supervisory procedures (WSP) and controls for applicable rules and regulations; and implement appropriate monitoring and testing.\12\ Further, the outline lists the knowledge required to perform each function and associated tasks (e.g., business and regulatory requirements for firm's systems and technologies).\13\ In addition, where applicable, the outline lists the laws, rules and regulations a candidate is expected to know to perform each function and associated tasks. These include the applicable FINRA Rules (e.g., FINRA Rule 2090), NASD Rules (e.g., NASD Rule 2510) and SEC rules (e.g., SEA Rule 15c1-7).\14\ FINRA conducted a job analysis study of General Securities Principals, which included the use of a survey, in developing each function and associated tasks and updating the required knowledge set forth in the revised outline. The functions and associated tasks, which appear in the revised outline for the first time, reflect the day-to-
day activities of a General Securities Principal.
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\11\ See Exhibit 3a, Outline Pages 6-29. The Commission notes that Exhibit 3a is an exhibit to the filing, not to this Notice.
\12\ See Exhibit 3a, Outline Page 9.
\13\ See Exhibit 3a, Outline Page 9.
\14\ See Exhibit 3a, Outline Page 19.
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As noted above, FINRA also is proposing to revise the content outline to reflect changes to the laws, rules and regulations covered by the examination.
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Among other revisions, FINRA is proposing to revise the content outline to reflect the adoption of rules in the consolidated FINRA rulebook (e.g., NASD Rule 2310 (Recommendations to Customers (Suitability), NASD Rule 2212 (Telemarketing) and NASD Rule 3110 (Books and Records) were adopted as FINRA Rule 2111 (Suitability), FINRA Rule 3230 (Telemarketing) and FINRA Rule 4510 Series (Books and Records Requirements), respectively)).\15\
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\15\ See Rule Conversion Chart, available at http://www.finra.org/Industry/Regulation/FINRARules/p085560.
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FINRA is proposing similar changes to the Series 24 selection specifications and question bank.
Finally, FINRA is proposing to make changes to the format of the content outline, including the preface, sample questions and reference materials. Among other changes, FINRA is proposing to: (1) Add a table of contents; \16\ (2) provide more details regarding the purpose of the examination; \17\ (3) provide more details on the application procedures; \18\ (4) provide more details on the development and maintenance of the content outline and examination; \19\ (5) explain that the passing scores are established by FINRA staff, in consultation with a committee of industry representatives, using a standard setting procedure and that the scores are an absolute standard independent of the performance of candidates taking the examination; \20\ and (6) note that each candidate will receive a score report at the end of the test session, which will indicate a pass or fail status and include a score profile listing the candidate's performance on each major content area covered on the examination.\21\
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\16\ See Exhibit 3a, Outline Page 2.
\17\ See Exhibit 3a, Outline Page 3.
\18\ See Exhibit 3a, Outline Page 3.
\19\ See Exhibit 3a, Outline Page 4.
\20\ See Exhibit 3a, Outline Page 5.
\21\ See Exhibit 3a, Outline Page 5.
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The number of questions on the Series 24 examination will remain at 150 multiple-choice questions,\22\ and candidates will continue to have 3 hours and 45 minutes to complete the examination. Currently, a score of 70 percent is required to pass the examination. The passing score will remain the same.
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\22\ Consistent with FINRA's practice of including ``pre-test'' questions on certain qualification examinations, which is designed to ensure that new examination questions meet acceptable testing standards prior to use for scoring purposes, the examination includes 10 additional, unidentified pre-test questions that do not contribute towards the candidate's score. Therefore, the examination actually consists of 160 questions, 150 of which are scored. The 10 pre-test questions are randomly distributed throughout the examination.
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Availability of Content Outlines
The current Series 24 content outline is available on FINRA's Web site, at www.finra.org/brokerqualifications/exams. The revised Series 24 content outline will replace the current content outline on FINRA's Web site.
FINRA is filing the proposed rule change for immediate effectiveness. FINRA proposes to implement the revised Series 24 examination program on October 13, 2014. FINRA will announce the proposed rule change and the implementation date in a Regulatory Notice.
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Statutory Basis
FINRA believes that the proposed revisions to the Series 24 examination program are consistent with the provisions of Section 15A(b)(6) of the Act,\23\ which requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest, and Section 15A(g)(3) of the Act,\24\ which authorizes FINRA to prescribe standards of training, experience, and competence for persons associated with FINRA members. FINRA believes that the proposed revisions will further these purposes by updating the examination program to reflect changes to the laws, rules and regulations covered by the examination and to incorporate the functions and associated tasks currently performed by a General Securities Principal.
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\23\ 15 U.S.C. 78o-3(b)(6).
\24\ 15 U.S.C. 78o-3(g)(3).
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Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The updated examination aligns with the functions and associated tasks currently performed by a General Securities Principal and tests knowledge of the most current laws, rules, regulations and skills relevant to those functions and associated tasks. As such, the proposed revisions would make the examination more efficient and effective.
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Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
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Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act \25\ and paragraph (f)(1) of Rule 19b-4 thereunder.\26\ At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved.
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\25\ 15 U.S.C. 78s(b)(3)(A).
\26\ 17 CFR 240.19b-4(f)(1).
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Solicitation of Comments
Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include File Number SR-FINRA-2014-035 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2014-035. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the
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Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of FINRA. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-FINRA-2014-035 and should be submitted on or before September 2, 2014.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
FR Doc. 2014-18881 Filed 8-8-14; 8:45 am
BILLING CODE 8011-01-P
