FINRA Modernizes Examinations for New Brokers

By Dimitrije Canic

The Securities and Exchange Commission (SEC) recently approved changes to existing FINRA rules regarding new broker examination requirements. FINRA issued Regulatory Notice 17-30, which describes the changes to the current rules. The changes are due to take effect on October 1, 2018.

Under the modified rules, all new brokers will be required to pass a general knowledge examination, the Securities Industry Essentials, and a revised representative-level qualification examination such as the Series 7 examination. The representative-level examination must also be appropriate to the new broker’s job functions at the employing firm in order for the registration to become effective.

The purpose of these changes is to modernize the current examinations for incoming brokers to reduce bad practices. Although these modernized examinations eliminate repetitive and old concepts, it is unclear whether such a change in exam practices will be effective in reducing the number of allegations regarding broker misconduct.

It is important that new brokers understand the rules and regulations governing their trade and practice, but the larger picture may still elude FINRA. New brokers may spend time studying and preparing for these examinations – and pass them – but when they enter the workforce they may be exposed to existing practices that bend or skew FINRA rules. Moreover, the practical experience that a new broker will obtain when working as a licensed broker will seemingly carry more of an effect in his or her professional life than the preparations for these entry-level examinations.

Since 2012, FINRA has generally received an increase in complaints about brokers. Following this trend, the number of brokers suspended and expelled by FINRA has also increased during this time. Additionally, the number of firms suspended or expelled by FINRA during this period has usually been above 20 per year. This indicates that firms are also bringing new brokers into a negative firm culture that does not adhere to FINRA standards. The result may be that new brokers exposed to such a culture learn it and apply it in their professional lives, which affects that broker’s clients and the firm.

Perhaps FINRA should look into examinations for experienced brokers that have been the subject of a number of complaints. It is evident that when firms get penalized, it is not because of new brokers, rather the management and supervisory brokers that are at some degree of fault. Therefore, FINRA should consider similar examinations to refresh experienced brokers on FINRA rules and regulations.

FINRA has clearly noticed there is a problem, and modernizing entry level examinations is a good first step. But the overall effectiveness this has in reducing the number of FINRA rule violations remains to be seen.