Series 6 Study Guide Navigation
- Series 6 Study Guide Home
- 1.1 Reaching out to current and potential customers
- 1.2 Describing products/services and the market to customers
- 2.1 Provides information about the different account types
- 2.2 Secures customer information/documentation and looks out for suspicious activity
- 2.3 Tries to secure investment profile information regarding the customer
- 2.4 Opening accounts and the supervisory approval necessary to do so
- 3.1 Give customers details regarding strategies for investment
- 3.2 Studies and scrutinizes the investment profiles of customers to understand suitability standards and make recommendations
- 3.3 Highlights various disclosures to customers about investment products
- 3.4 Keeps customer records, provides them with information about their accounts
- 4.1 Gives current quotes
- 4.2 Confirmation for customer transactions in line with all regulatory requirements
- 4.3 Informs the appropriate supervisor and assists in resolutions
Customer complaints are something that registered representatives have to deal with.
There are procedures in place to help you in that regard as well as those to help spot discrepancies and fix errors.
It’s all about finding solutions that can help solve complaints and disagreements in a manner that’s fair to all the parties involved.
Of course, FINRA also ensures that when it comes to both member firms and the registered representatives that represent them, they employ ethical conduct at all times when dealing with customers.
CUSTOMER COMPLAINTS PROCEDURE
Let’s start this section by looking specifically at customer complaints.
Any written complaint that’s received by a member firm from one of their customers must be dealt with in a specific manner.
That also means bringing it to the attention of the correct people.
For example, should a written complaint be received, the principal of the member firm should see it as quickly as possible.
Even if they are involved in the complaint, it’s not the job of the registered representative to try and solve it.
That’s a task for the principal to carry out.
Note that these regulations don’t at any time cover a complaint that a customer gives orally.
Those need to be dealt with but most member firms will have their own procedures in place for dealing with customer complaints that are received orally or via telephone, for example.
Don’t expect to see any questions about the nature of oral complaints.
That’s because there are no set regulations in place that govern them and it’s up to each member firm to set its own rules in that regard.
Do remember that regulator standing is only for written complaints that cover anything from:
- Social media posts
- Text messages
- Emails
- Instant message
- Letters
Filing and record-keeping
Dealing with customer complaints is not only coming to the right solution but keeping a record of everything as well.
In fact, legislation requires that all written complaints must be kept for a specific period of time.
Yes, for four years after the complaint is resolved, the member firm must keep all the details regarding the complaint on file and readily available.
Only after that four-year period has passed can the records be destroyed.
FINRA also requires that four times a year (once a quarter), member firms submit reports regarding the written complaints that they have received.
This should include statistical and summary reports.
Complaint withdrawal
Sometimes customers might choose to withdraw a complaint after they’ve lodged it and then spoken to the principal of the member firm about it.
Should this be the case, even though the complaint is no longer valid or in effect, a record of it must still be kept as laid out in FINRA regulations.
It also should be recorded in the quarterly report that the member firm logs with FINRA regarding the complaints they have received.
Customer access to manuals
For various reasons, including as a way to educate customers as to their rights, FINRA requests that the rules that govern the securities industry are made available to those who would like to read them.
This means that copies of the FINRA procedures manual must always be available at each and every member firm should a customer enquire about various regulations.
Of course, this doesn’t only have to be a physical copy, so members who provide digital copies, either by emailing them to interested parties or having them available for download on their website will be complying with the regulations that govern this.
The term “customer” is defined in a very specific manner by FINRA.
It’s anyone that the member has engaged with other than a broker-dealer.
This applies to written complaints received as well.
Mediation
When a customer complaint becomes a dispute, it has to be dealt with.
Often the first step taken in this regard is the route of mediation.
One of the reasons for this is that it can often help provide a solution that both parties are happy with and it’s relatively inexpensive.
Mediation can only take place if both parties agree to it.
The start of the process includes a meeting between the parties as a way to try and work out a settlement to the issue with the mediator selected to facilitate everything.
The main aim here is to try to get the parties to come to their own solution with the mediator presiding over the whole procedure and offering assistance where needed.
Should a resolution come from mediation, then the complaint is resolved.
If not, however, the next step is an arbitration hearing.
Note that no mediator can move onto the arbitration stage and sit on the panel.
In some instances, mediation might solve some of the areas of dispute but not all of them.
Those that cannot be solved through mediation will move on to arbitration.
At the signing of a memorandum of understanding between the parties, the issue is deemed to have been settled.
RESOLUTION METHODS AND DISPUTE REPORTING REQUIREMENTS
We’ve already spoken about arbitration and given you some idea of how it works.
But let’s look at it in a little more detail.
The arbitration process will take place through FINRA.
In fact, they have a procedure that needs to be followed when arbitration is necessary.
This is called the Code of Arbitration Procedure, or sometimes just as the Code of Arbitration.
Code of Arbitration Procedure
The original idea behind this was to help member firms and others to find a solution to disputes within the securities industry that could not be resolved in other ways, for example, mediation.
Arbitration, however, was compulsory when:
- Two member firms in a dispute or a member firm and a registered clearing agency
- An associated person and a member firm were in a dispute
- Two associated persons were in a dispute
Nowadays, before a new client can open an account, the paperwork that they fill in includes a predispute arbitration clause.
By doing so, they agree to have any unresolved disputes, for example, those where moderation fails, resolved by arbitration.
And this means using the Code of Arbitration Procedure.
Should a customer request to see how the procedure works and request a copy of the signed agreement, the member firm has 10 business days in which to provide them with the details.
Note that if there isn’t a signed arbitration agreement, a member cannot take a customer to arbitration.
However, a customer can still take a member to arbitration if they so wish.
Some cases cannot be subject to arbitration, like class action claims, for example.
Unless parties are in agreement, then claims brought by employees against a member firm, including sexual harassment and employment discrimination won’t have to go to arbitration either.
When compared to taking the case to either a federal or state court, arbitration provides a number of advantages.
First and foremost, it saves money but the process is far quicker than a court case too.
While one party might not like the outcome of the arbitration, it’s binding and they won’t have any recourse to appeal the decision.
Initiation of proceedings
When a dispute has yet to be resolved, for example, mediation hasn’t worked, any party in that dispute may start the arbitration process.
They do this through the director of arbitration at FINRA and will file a claim to start proceedings.
This claim must contain specific information including:
- What the dispute is about
- Support documentation regarding the dispute
- What remedy the member firm/person filing the dispute is looking for. Usually, this is an actual dollar amount
A check for the required claim filing fee must also be included.
A copy of the claim will be sent to the respondent (the other party) by the director.
They now have a period of 45 days in which to respond.
That response is not only back to the FINRA director but to the party that initially submitted the dispute for arbitration in the first place.
The answer they send will need the following information:
- Their defense (this includes all the available ways in which they can defend themselves against the claim)
- Any counterclaims that they may have against the originator of the arbitration
Should the 45-day responding period pass without an answer being received from the respondent will still have to attend the arbitration hearing.
When they do, however, because they haven’t responded, the FINRA director can decree that they cannot present anything regarding the dispute or make any form of defense.
In some cases, a party might look for either an interim or permanent injunction, specifically if they believe they have suffered irreparable injury.
In this case, they will need to show that unless they get swift relief, they can suffer long-lasting damage.
Also, they need to be able to prove that the arbitration case is likely to succeed on their behalf.
Arbitrators’ selection
There are two types of arbitrations that can be selected: public and nonpublic.
It’s FINRA that will keep a list of both of these groups.
Let’s look at what nonpublic arbitrators are.
Well, first up, they would have worked in the financial industry at some point during their careers.
They could be people that are associated with:
- Mutual funds
- Hedge funds
- Investment advisers
That’s the first group, but there is a second one as well that qualifies as nonpublic arbitrators.
This group includes professionals who work with people in the financial industry.
For example, they could be accountants, attorneys, or others that serve investor parties in various ways and who receive revenue from doing so, like helping with disputes on accounts or transactions.
Note, however, that there is a five-year cooling-off period when the affiliation comes to an end associated with this group of nonpublic arbitrators based on their activities.
As for public arbitrators, well this group is far more simple.
It includes anyone that does not fall into the nonpublic arbitrator group.
Simple arbitration and thresholds for arbitration
There are a few threshold rules that apply to both the customer and industry when it comes to arbitration:
- Should the arbitration be for a dollar value of $50,000 or less: This is known as simplified arbitration and no meeting is required. One arbitrator is appointed with parties only needing to submit the required information needed to state their case in writing.
- Should the arbitration be for a dollar value of $50,000 to $100,000: Only one arbitrator is necessary but the parties can agree to have three.
- Should the arbitration be for a dollar value of $100,000 or more: Three arbitrators are the standard in this situation but only one can be appointed should both parties decide to.
Note that should a period of six years have passed from the time of the event that is now being disputed, there is no valid claim for submission to arbitration anymore.
Awards
Once a decision has been reached through arbitration, within the next 30 days, the monetary awards must be paid.
Interest will be accrued on the award amount should it not be paid in time.
This will be calculated from the decision date until the time it is eventually paid.
FINRA will publicly make all details of the arbitration as well as what was awarded as well.
Code of Procedure
When there are any alleged violations of regulations of federal securities laws or FINRA or MSRB rules, they will be dealt with through the Code of Procedure.
A formal complaint is issued by the Department of Enforcement following an investigation should FINRA think that either an associated person or a member firm themselves has broken any rules or laws.
The disciplinary hearing will be presided over by a hearing officer who FINRA names when filing the complaint.
There is a jury of panelists appointed as well and these will all be from the financial industry.
An answer has to be filed with the hearing officer by the respondent regarding the complaint.
They have 25 days in which to do this after first receiving it.
Their answer should be one of the following:
- Deny the allegations
- Admit to the allegations
- State that they don’t have enough information at their disposal to either deny or admit to the allegations
Note, should the respondent in question be a registered representative, due to the fact that there was a “failure to supervise”, their appointed supervisor might also be charged.
Hearings
Hearings are similar to the proceedings that take place in a courtroom (we’ve already mentioned that there is a jury).
To start the hearings, the Department of Enforcement will begin with their case and can call witnesses.
These can be cross-examined by the team for the member firm/registered representative.
During the hearing, the registered representative might have to give oral information as requested.
They might also be asked to testify under oath, while various records can be called upon as well, so these need to be ready.
Following the hearing, the jury/panelists have a period of 60 days in which to give a decision.
This decision can only be reached through a majority.
Sanctions
When found guilty, there are a variety of sanctions that can be brought against the member firm or registered representative.
These will be included in the written decision:
- Fine
- Censure
- Member firm suspension
- Suspension of the registered representative (but not longer than two years)
- Member firm expulsion, including having their membership canceled
- Registered representative barred from association with members
- Other sanctions that the panel see fit
Should the registered representative be suspended, they cannot go back to the member firm they worked at for the period of the suspension.
They cannot even be on the property of the member firm.
Appeals
When any one of the parties involved is not happy with the decision they have the right to appeal and they have 25 days in which to do so from the date of the decision.
This appeal must be addressed to the National Adjudicatory Council (NAC).
Should the appeal fail, the appeal can go to the SEC and even to the federal court system if the SEC turns it down.
Other than expulsion or bar, appealing will stay the sanctions’ effective date.
FORM U4 & U5: THE PROCESS OF JOINING AND LEAVING A FIRM
A registered representative will need to complete a U4 form when associating with a broker-dealer.
The member firm is tasked with sending that completed form to FINRA.
At the point that a registered representative wants to leave a member firm and terminate their association, it’s a U5 form that will need to be completed.
Again, it’s the member firm that is tasked with sending the completed form to FINRA.
The Series 6 exam will include some questions about both joining and leaving a member firm, so let’s look into the U4 and U5 forms in a little more detail.
Form U4
Registration of an associated person means that a Form U4 has to be filled in.
This can be done before that person has passed their Series 6 qualification exam but registration is only legitimate once they have passed.
If they fail the exam, they have to wait a period of 30 days before they are allowed to try again.
That becomes a 180-day wait should they fail for the third time.
So what information is required for the completion of a Form U4.
Here’s what you will need to provide:
- Name (and any aliases)
- Address
- Residency history for the last 5 years
- Employment history for the past 10 years
- Details of any investment business-related charges, arrests, or convictions
Should the person have been charged, arrested, or convicted, they will need to provide a full explanation of the circumstances surrounding them.
The Form U4 will include pages to report these disclosures on.
Note that registration is not only required through FINRA but the associated person must also meet various registration requirements as set out in the state in which they reside.
It must also be noted on the Form U4 if the member firm that the associated person works for is a member of the NYSE or any other exchanges.
While the full-time education of an associated person is required on a Form U4 and will be filled in on their 10-year employment history, no other personal information, like their marital status is necessary.
Form U4 filing requirements
Should a registered representative request an exam when filing a Form U4, they have a certain time frame in which to complete it.
And it’s not that long of a period either – just 120 days.
Should they not complete the exam in that time frame, a new U4 isn’t necessary but to reopen a window, they will have to pay again.
Note, that a registered representative will not only file one U4 form during their working life.
Every time they move jobs, say from one investment firm to another, they will be required to fill in a new U4 form.
Should there be any relevant changes while still working for the same company, their U4 will have to be amended.
This amended form must be completed within 30 days of the registered representative knowing of these changes.
The amended form will be sent with a CRD as well.
Note, however, with regard to these changes, there is no need to tell their employer about them, for example, if they move to a new residence.
Other than moving, for example, these changes cover standard events including new certifications.
A registered representative only has 10 days to file the amended U4 should the changes be related to statutory disqualification.
Associate persons: Fingerprint requirements
Most of the employees of a registered broker-dealer will need to be fingerprinted and records of this must be kept.
This also includes any directors, officers as well as partners of the member firm.
To identify and process these fingerprint records, they must be submitted to the U.S. attorney general.
When it comes to employees that must be fingerprinted it will be those that deal with customer securities, handle cash, or make sales.
Fingerprinting is not necessary for those who work in clerical positions.
These staff are often referred to as ministerial persons.
As soon as someone works with cash/securities, fingerprinting them will be necessary.
So here’s a quick test.
Do you think a secretary that handles incoming mail needs to be fingerprinted?
That’s clerical work, right?
You’d think that the answer to that would be no but in actual fact, they will need to be.
That’s because incoming mail may include checks or even cash that a client is sending to a firm.
Granted, in today’s day and age, there are other ways to transfer money but it’s bearing the above scenario in mind.
In some situations, employees that you think would need to be fingerprinted, don’t need to be.
This includes those selling:
- Mutual funds
- Variable annuities
- DPPs
Because these securities do not have any certificates, that’s the reason why fingerprints of the registered representatives that deal with them aren’t necessary.
Again, let’s remind ourselves about the employees of a broker-dealer that won’t need to be fingerprinted:
- Anyone that doesn’t take part in the sale of securities
- Anyone that doesn’t have the right to work with cash or securities
- Anyone that doesn’t work with books and records regarding cash or securities
- Anyone that’s not a supervisor to other employees that handle the above-mentioned activities
How to identify disqualifying events
FINRA’s eligibility standards must be met by anyone that wants to act as a registered representative.
These standards include competence, training, and experience.
As for statutory disqualifications of FINRA membership, that can come not only from disciplinary sanctions applied by the SEC but other SROs as well.
It also applies to foreign financial regulators, so if a registered representative has received a statutory disqualification in another country, it counts too.
There are many reasons why someone applying for registration may be rejected.
This includes:
- If another SRO or their foreign equivalent has either suspended or expelled them from participation or membership
- If they have been suspended or have had their registration revoked or have been barred from the broker-dealer association through either a foreign financial regulator or SEC order
- If their actions have caused the suspension or expulsion of another associated person or member firm by the SEC, other SROs, or a foreign financial regulator.
Applicants can be prohibited from registering for:
- Making wilful misstatements during their registration or application for membership
- In the past 10 years having either a foreign or domestic felony or misdemeanor conviction connected to money or securities
- Not being able to act in the capacity of an underwriter, broker-dealer, or investment adviser due to court injunctions against them
An example of someone who would be statutorily disqualified from registering as an associated person is if they had been convicted of running a Ponzi scheme.
That’s because that conviction was linked to fraud which is a definite default.
For anyone currently registered in the securities industry, a full disciplinary record (if any) is kept by the CRD.
Customers can easily find out about a registered representative if they would like to by using BrokerCheck from CRD.
To do this, they can either follow a link from a FINRA member firm website, where it must be displayed or they can phone a toll-free line.
Lastly in this section, it’s important to note that if a registered representative doesn’t disclose details of unsatisfied liens or bankruptcy, they might be disqualified.
Having suffered a bankruptcy, however, is not a disqualifying event.
Form U5
A Form U5 must be completed when a registered representative leaves a member firm.
This can either be a result of resignation or the termination of their contract.
Within 30 days of the end of their contract, the CRD must receive the Form U5 while in the same time period, they must send a copy to their former employee as well.
A late filing fee will be applicable should they not do so in the 30-day period given.
What is a Form U5 all about?
Well, it covers the reasons why the contract of the registered representative has come to an end.
It might be because they have found a new position, or it might be that the company terminated their contract.
Whatever the reason, it must be documented.
Also, it can be expanded upon on the Form U5 should it be necessary.
Disciplinary steps may be taken by FINRA if this form is not filled in accurately.
As to the reasons for the termination of their contract, the form provides five scenarios:
- The registered representative was discharged
- The registered representative was allowed to resign
- The registered representative died
- The contract termination of the registered representative was voluntary
- Other
Details surrounding the termination must be added if the representative selects one of those permitted to resign, other, or discharged.
Note that for “voluntary” it is assumed that this was due to no incident where their future eligibility for another position may be affected.
Form U5 filing requirements
Regulators, including FINRA, will keep jurisdiction for a period of two years once a Form U5 has been filed for termination.
That means during those 24 months, the registered representative might still need to answer any questions that the regulators have as well as provide any evidence that they ask for.
There is no need for a person to retake their exams and requalify during these two years, however, and they may work for another member firm.
They will need to take the qualifying exam again (and pass) should they not re-affiliate with a FINRA member firm during the 24-month period.
Note, for the SIE exam, this period is four years.
Service in the military
There is a special exemption should the registered representative join up for regular military service.
In that situation, their license receives a suspended status.
Once they leave the military, this status remains in effect for a period of 90 days (three months).
Following that period, the two-year time frame as we have described above comes into effect.
In effect, this means that they don’t have to retake any tests should they choose to serve in the military and then come back into the industry afterwards.
