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95-13 SEC Approves Amendments Relating To Continuing-Education Requirements

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Executive Summary

On February 8, 1995, the Securities and Exchange Commission (SEC) approved a new Part XII to Schedule C of the NASD By-Laws prescribing requirements for the continuing education of certain registered persons subsequent to their initial qualification and registration with the National Association of Securities Dealers, Inc. (NASD).

The Securities Industry Continuing Education Program (Program), which has been approved by the self-regulatory organizations (SROs) and the SEC, is a response to the challenges facing the securities industry. The Securities Industry/Regulatory Council on Continuing Education (Council), which is comprised of representatives from the securities industry and the SROs, recognized that the increasing complexity of the securities industry demands that professionals who deal with the public or who are in supervisory positions maintain minimum standards of competence and professionalism. The uniform Program now adopted will help ensure that registered persons stay current on products, markets, and rules to the ultimate benefit of the investing public.

* * *

The text of the new rules, which are amendments to Schedule C of the NASD By-Laws, follows this introduction. Reprinted with this Notice are:

  • Status Report On The Securities Industry Continuing Education Program, including a questions and answers section to help member firms further understand the Program.

  • Content Outline For The Regulatory Element.

  • Guidelines For Firm Element Training.

Questions about this Notice may be directed to John Linnehan, NASD Director of Continuing Education, at (301) 208–2932; Frank J. McAuliffe, Vice President, NASD Membership, at (301) 590–6694; or Daniel M. Sibears, Director, NASD Regulatory Policy, at (202) 728–6911.

Text Of New Amendment To Schedule C Of The NASD By-Laws

(Note: New language is underlined.)

Part XII

Continuing Education Requirements

This Part prescribes requirements regarding the continuing education of certain registered persons subsequent to their initial qualification and registration with the NASD. The requirements shall consist of a Regulatory Element and a Firm Element as set forth below.

(1) Regulatory Element
(a) Requirements—No member shall permit any registered person to continue to. and no registered person shall continue to. perform duties as a registered person unless such person has complied with the requirements of Section (1) hereof.
(i) Each registered person shall complete the Regulatory Element on three occasions, after the occurrence of their second, fifth and tenth registration anniversary dates, or as otherwise prescribed by the NASD. On each of three occasions, the Regulatory Element must be completed within 120 days after the person's registration anniversary date. The content of the Regulatory Element shall be prescribed by the NASD.
(ii) Registered persons who have been continuously registered for more than 10 years as of the effective date of this Part shall be exempt from participation in the Regulatory Element, provided such persons have not been subject to any disciplinary action within the last 10 years as enumerated in subsection (1)(c)(i)–(ii) of this Part. In the event of such disciplinary action, a person will be required to satisfy the requirements of the Regulatory Element by participation for the period from the effective date of this Part to 10 years after the occurrence of the disciplinary
(iii) Persons who have been currently registered for 10 years or less as of the effective date of this Part shall initially participate in the Regulatory Element within 120 days after the occurrence of the second, fifth or tenth registration anniversary date, whichever anniversary date first applies, and on the applicable registration anniversary date(s) thereafter. Such persons will have satisfied the requirements of the Regulatory Element after participation on the tenth registration anniversary.
(iv) All registered persons who have satisfied the requirements of the Regulatory Element shall be exempt from further participation in the Regulatory Element, subject to reentry into the program as set forth in subsection (1)(c) of this Part.
(b) Failure to Complete—Unless otherwise determined by the NASD, any registered persons who have not completed the Regulatory Element within the prescribed time frames will have their registrations deemed inactive until such time as the requirements of the program have been satisfied. Any person whose registration has been deemed inactive under this Part shall cease all activities as a registered person and is prohibited from performing any duties and functioning in any capacity requiring registration. A registration that is inactive for a period of two years will be administratively terminated. A person whose registration is so terminated may reactivate the registration only by reapplying for registration and meeting the qualification requirements of the applicable provisions of Parts II and III of Schedule C to the By-Laws. The NASD may. upon application and a showing of good cause, allow for additional time for a registered person to satisfy the program requirements.
(c) Re-entry into Program—Unless otherwise determined by the NASD, a registered person will be required to re-enter the Regulatory Element and satisfy all of its requirements in the event such person:
(i) becomes subject to any statutory disqualification as defined in Section 3(a)(39) of the Securities Exchange Act of 1934:
(ii) becomes subject to suspension or to the imposition of a fine of $5,000 or more for violation of any provision of any securities law or regulation, or any agreement with or rule or standard of conduct of any securities governmental agency, securities self-regulatory organization, or as imposed by any such regulatory or self-regulatory organization in connection with a disciplinary proceeding; or
(iii) is ordered as a sanction in a disciplinary action to re-enter the Continuing Education Program by any securities governmental agency or securities self-regulatory organization.
Re-entry shall commence with initial participation within 120 days of the registered person becoming subject to the statutory disqualification, in the case of (i) above, or the disciplinary action becoming final, in the case of (ii) and (iii) above, and on three additional occasions thereafter, at intervals of two, five, and 10 years after re-entry, notwithstanding that such person has completed all or part of the program requirements based on length of time as a registered person or completion of ten years of participation in the program.
(d) Any registered person who has terminated association with a member and who has, within two years of the date of termination, become reassociated in a registered capacity with a member shall participate in the Regulatory Element at such intervals (two, five and 10 years) that may apply based on the initial registration anniversary date rather than based on the date of reassociation in a registered capacity.
(e) Definition of registered person—For purposes of this Part, the term "registered person" means any person registered with the NASD as a representative, principal or assistant representative pursuant to Parts II, III or IV respectively of Schedule C to the By-Laws.
(2) Firm Element
(a) Persons Subject to the Firm Element—The requirements of this section shall apply to any person registered with a member who has direct contact with customers in the con duct of the member's securities sales, trading and investment banking activities, and to the immediate supervisors of such persons ("collectively, "covered registered persons"). "Customer" shall mean any natural person and any organization, other than another broker or dealer, executing securities transactions with or through or receiving investment banking services from a member.
(b) Standards for the Firm Element
(i) Each member must maintain a continuing and current education program for its covered registered persons to enhance their securities knowledge, skill, and professionalism. At a minimum, each member shall at least annually evaluate and prioritize its training needs and develop a written training plan. The plan must take into consideration the member's size, organizational structure, and scope of business activities, as well as regulatory developments and the performance of covered registered persons in the Regulatory
(ii) Minimum Standards for Training Programs —Programs used to implement a member's training plan must be appropriate for the business of the members and, at a minimum, must cover the following matters concerning securities products, services and strategies offered by the member:
a. General investment features and associated risk factors:
b. Suitability and sales practice considerations: and
c. Applicable regulatory requirements.
(iii) Administration of Continuing Education Program—A member must administer its continuing education programs in accordance with its annual evaluation and written plan and must maintain records documenting the content of the programs and completion of the programs by covered registered persons.
(c) Participation in the Firm Element—Covered registered persons included in a member's plan must take all appropriate and reasonable steps to participate in continuing education programs as required by the member.
(d) Specific Training Requirements—The NASD may require a member, individually or as part of a larger group, to provide specific training to its covered registered persons in such areas the NASD deems appropriate. Such a requirement may stipulate the class of covered registered persons for which it is applicable, the time period in which the requirement must be satisfied and, where appropriate, the actual training content.

Status Report On The Securities Industry Continuing Education Program

Background

In March 1993, six self-regulatory organizations (SROs)1 announced the formation of an industry task force to consider whether the industry should develop a uniform continuing education program for registered persons. The task force was comprised of experienced individuals with diverse backgrounds from a broad range of firms, thus ensuring consideration of the interests and needs of a wide cross section of the industry. The SROs noted that the increasing complexity of the securities industry demands that professionals who deal with the public or who are in supervisory positions maintain minimum standards of competence and professionalism. The SROs also said that a formal industry-wide continuing education program to keep professionals up to date on products, markets, and rules was needed. By initiating a broad-based industry effort, the SROs hoped to provide a unified industry-wide approach acceptable to all segments of the industry.

In September 1993, the industry task force issued a report calling for a formal two-part Securities Industry Continuing Education Program (the Program) for securities industry professionals that would require uniform periodic training in regulatory matters (the Regulatory Element) and ongoing programs by firms to keep employees up to date on job- and product-related subjects (the Firm Element). The report also recommended the creation of a permanent Securities Industry/ Regulatory Council on Continuing Education (the Council)2 to recommend to the SROs the specific content of the uniform Regulatory Element and the requirements for ongoing firm training programs undertaken to satisfy the requirements of the Firm Element. The task force recommended further that computer-based training be used as a primary delivery vehicle for the uniform Regulatory Element of the Program. In November 1993, the SROs endorsed, in concept, the recommendations of the industry task force.

Since November 1993, the Council has met at least monthly. Separate committees have worked on the Regulatory and Firm Elements. The Regulatory Element Committee developed the standardized subject matter for the computer-based training program. The Firm Element Committee developed standards for firms to follow in developing and implementing their training programs. The SROs adopted uniform rules to implement the Program based upon the Council's recommendations and filed them with the Securities and Exchange Commission (SEC) for approval in December 1994. The SEC approved the SRO rules on February 8, 1995, and the Securities Industry Continuing Education Program will be effective July 1, 1995.

Highlights Of The Securities Industry Continuing Education Program

The Regulatory Element

Who Is Covered

The Regulatory Element of the Securities Industry Continuing Education Program requires all registered persons to complete a prescribed computer-based training session within 120 days of the second, fifth, and tenth anniversary dates of their initial registration date. Persons who have been registered for more than 10 years and have not been the subject of a serious disciplinary action (as more fully described below) during the most recent 10 years are exempt from the Regulatory Element.

Any person who would otherwise be exempt from the Regulatory Element is required to re-enter the program for another 10 years when and if that person:

  • becomes subject to a statutory disqualification pursuant to the Securities Exchange Act of 1934, or

  • becomes subject to suspension or to the imposition of a fine of $5,000 or more for violation of any provision of any securities law or regulation, or any agreement with, or rule or standard of conduct of, any securities governmental agency, securities self-regulatory organization, or as imposed by any such regulatory or self-regulatory organization in connection with a disciplinary proceeding, or

  • is ordered to re-enter the Regulatory Element as a sanction in a disciplinary action by any securities governmental agency or securities self-regulatory organization.

Failure To Comply With The Regulatory Element

Failure to complete the required Regulatory Element computer-based training session during the prescribed time period will result in a person's registration becoming inactive. A person whose registration becomes inactive cannot conduct a securities business, perform any of the functions of a registered person, or receive compensation for activities that require registration until he or she meets the requirements of the Regulatory Element.

Regulatory Element Computer-Based Training

The Regulatory Element computer-based training program is designed to transmit information broadly applicable to all registered persons regardless of their job functions or registration status (such as Series 6 or Series 7). The Regulatory Element training focuses on compliance, regulatory, ethical, and sales-practice standards. Its content has been recommended by a group of industry and SRO representatives, reviewed by the Council, and approved by the SROs. The Content Outline For The Regulatory Element section more fully explains the subject matter covered by the Regulatory Element.

While there will be no grading of individual performance on the Regulatory Element, information feedback indicating whether responses are correct or incorrect will be provided to individuals throughout the computer-based training session. Firms will be provided with aggregated information on all their covered registered persons who take the computer-based training program in a given period. Firms will be expected to consider this information when formulating their training plans for the Firm Element, as more fully described below.

The Firm Element

Who Is Covered

Unlike the Regulatory Element, for which only those persons registered for 10 years or less are covered, the Firm Element has no exemptions. It is applicable to all persons who have direct contact with customers in the conduct of the firm's securities sales, trading, or investment banking business, and the immediate supervisors of such persons.

Annual Requirements

The Firm Element requires each member to establish a training plan and identifies certain minimum requirements associated with that plan. Each year the firm must prepare a written training plan after an analysis of its training needs. Firms must consider certain factors when conducting their analyses and in developing their training plans, such as the firm's size, organizational structure, scope and type of business activities, as well as regulatory developments and the aggregate performance of covered registered persons in the Regulatory Element. The training plan must be implemented and records must be kept that clearly demonstrate the content of its training programs and the completion of the programs by the persons or categories of persons identified in the firm's training plan. Persons who are subject to the training plan have an affirmative obligation to participate in the programs as required by the member.

Minimum Standards For The Firm Element Training Programs

The Firm Element also establishes certain minimum standards for the training programs that are used in a member's plan. For example, such programs, when dealing with investment products and services, must identify their investment features and associated risk factors, their suitability in various investment situations and applicable regulatory requirements that affect the products or services. The SROs have the authority to require members, individually or as part of a group, to provide specific training to covered registered persons in any area the SROs deem necessary. Depending on the issue of concern, these requirements could be directed at specific individuals or portions of a firm, a specific firm or group of firms, or across the entire industry.

Implementation

The Regulatory Element

Administration Of The Regulatory Element

The SROs will begin administration of the Regulatory Element on July 1, 1995. The Central Registration Depository (CRD) system will track persons subject to the requirement and notify members in advance of those individuals who, after July 1, 1995, are approaching their second, fifth, and tenth year anniversary dates of their initial securities registration and are required to participate in the Regulatory Element. These individuals will have 120 days to complete the Regulatory Element: computer-based training session at an NASD PROCTOR® Center. Follow-up notices will also be sent as these persons approach the end of the 120 days following their registration anniversary. In addition, the CRD system will generate reports listing those persons whose registrations have become inactive due to failure to complete the requirement within the specified time. Persons who have completed 10 years of registration before July 1, 1995, without serious disciplinary action, will be exempt.

A person's registration anniversary dates will be determined by his or her first registration, regardless of any subsequent firm changes or changes in registration category, provided that the person has continuously remained registered. Persons who, in the 10-year period before July 1, 1995, have incurred a covered disciplinary event that would require them to re-enter the program will have an initial registration date that coincides with the effective date of the final decision in the disciplinary action. Individuals who have ceased to be registered and are required to take an examination before becoming re-registered will be subject to anniversary dates based on their most recent re-registration date.

The NASD PROCTOR system will deliver the computer-based training program in any of the PROCTOR Centers located throughout the country. In 1995, the PROCTOR network will be expanded by adding an additional center in Manhattan, and at least two mobile centers. The mobile centers will meet the needs of members requesting on-site administration of the Regulatory Element computer-based training according to final procedures to be announced by the NASD once the mobile centers are available.

The Firm Element

The Firm Element will be implemented in two stages. By July 1, 1995, members are required to complete their training needs analyses and to develop written training plans that will be available for review upon request by the SROs, the: SEC, and state regulators. Members are expected to begin implementing their plans as soon as practicable but, in any event, no later than January 1, 1996. The SROs will develop a consistent approach for on-site reviews of the Firm Element requirements. Additionally, the SROs will coordinate their field inspection efforts to avoid any unnecessary regulatory overlap in the inspection process for firms that are members of two or more SROs.

Within the broad standards defined in the Continuing Education Rules, the Firm Element provides great flexibility to firms in designing training programs appropriate to their needs and consistent with their resources. The Firm Element framework is intended to be flexible enough to accommodate differences in the size, scope, and complexity of firm operations.

The Firm Element also requires that a member be responsible for assuring that training programs for investment products and services used in its training plan appropriately cover, at a minimum:

  • the investment characteristics and associated risk factors of the product or service;

  • their suitability for different investment situations; and

  • any regulatory requirements that affect the product or service.

The Council and the SROs realize that some firms will rely upon training material and programs provided by a variety of outside training and education vendors. Nevertheless, the proposed rules place the responsibility on each member to ensure that such training meets the broad content standards included in the rule as they relate to that particular firm. The SROs do not intend to pre-approve training materials and programs developed by members or vendors. They will, however, communicate regularly with members regarding their expectations for the content of training programs. As the program evolves, it is expected that some curricula content standards will be defined by the SROs for products and services where heightened regulatory concerns exist.

The Council has developed guidelines to help firms carry out their responsibilities under the Firm Element (see the Guidelines For Firm Element Training). It is likely that the Guidelines will be updated in the future to reflect experience gained during, and issues that arise from, the implementation of the Program.

Regulatory Consequences For Non-Compliance With Firm Element Requirements

Failure to comply with Firm Element requirements may subject the firm and individual to disciplinary action. Failure to attend training provided by his or her firm to comply with the Firm Element requirements may subject the "covered person" to disciplinary action.


1 The SROs include the American Stock Exchange, Inc. (AMEX), the Chicago Board Options Exchange, Incorporated (CBOE), the Municipal Securities Rulemaking Board (MSRB), the National Association of Securities Dealers, Inc. (NASD), the New York Stock Exchange, Inc. (NYSE), and the Philadelphia Stock Exchange. Inc. (PHLX).

2 The Council includes representatives from 13 broker/dealers and the six SROs. In addition, the Securities and Exchange Commission and the North American Securities Administrators Association (NASAA) have each assigned liaisons to the Council.


Members Of The Securities Industry/Regulatory Council On Continuing Education

William R. Simmons
Council Chairman
Executive Vice President and
Director
Dean Witter Reynolds, Inc.
New York, NY

Industry Representatives

Judith Belash
Vice President and Associate General Counsel
Goldman, Sachs & Co.
New York, NY

Mary Alice Brophy
Managing Director and Director of Compliance
Dain Bosworth Incorporated
Minneapolis, MN

Ronald E. Buesinger
Corporate Secretary and Senior Vice President (Retired)
A.G. Edwards & Sons, Inc.
St. Louis. MO

Elena Dasaro
Managing Director
H.C. Wainright & Co., Inc.
Boston, MA

David A. DeMuro
Senior Vice President Associate General Counsel
Lehman Brothers Inc.
New York, NY

John P. Gualtieri
Vice President and Insurance
Counsel (Retired)
Prudential Insurance Co. of
America
Newark, NJ

Therese M. Haberle
Associate General Counsel
Charles Schwab & Co., Inc.
San Francisco, CA

James Harrod
General Principal, Investment
Representative—Training
Edward D. Jones & Co.
St. Louis, MO

Todd A. Robinson
Chairman and CEO
Linsco/Private Ledger Corp.
Boston, MA

Richard C. Romano
President
Romano Brothers & Co.
Evanston, IL

Lois Towers
Director Institutional Compliance
Fidelity Investments
Boston, MA

O. Ray Vass
First Vice President
Merrill Lynch, Pierce, Fenner &
Smith, Inc.
New York, NY

SRO Representatives

Diane Anderson
Vice President of Examinations
Philadelphia Stock Exchange, Inc.
Philadelphia, PA

Howard A. Baker
Senior Vice President
American Stock Exchange. Inc.
New York, NY

Darrell Dragoo
Vice President of Compliance
Chicago Board Options Exchange,
Incorporated
Chicago, IL

Frank J. McAuliffe
Vice President
National Association of Securities
Dealers, Inc.
Rockville, MD

Loretta Rollins
Professional Qualifications
Administrator
Municipal Securities Rulemaking
Board
Alexandria, VA

Donald van Weezel
Managing Director, Regulatory
Affairs
New York Stock Exchange, Inc.
New York, NY

SRO Staff Participants

Joseph A. Bailey
Vice President, Member Firm
Regulation
New York Stock Exchange, Inc.
New York, NY

Cheryl "Charlie" Bush
Project Manager for Continuing
Education
National Association of Securities
Dealers, Inc.
Washington, DC

Jo Ellen Carlson
Director of Testing Standards
New York Stock Exchange, Inc.
New York, NY

Gerard F. Foley
Senior Vice President, Testing
Services
National Association of Securities
Dealers. Inc.
Washington, DC

P. William Hotchkiss
Director
National Association of Securities
Dealers, Inc.
Washington, DC

John Linnehan
Director, Continuing Education
National Association of Securities
Dealers, Inc.
Washington, DC

James P. O'Donnell
Executive Vice President, Member
Services
National Association of Securities
Dealers, Inc.
Washington, DC

Sal Pallante
Senior Vice President
New York Stock Exchange, Inc.
New York, NY

John E. Pinto
Executive Vice President,
Regulation
National Association of Securities
Dealers, Inc.
Washington, DC

Daniel M. Sibears
Director
National Association of Securities
Dealers, Inc.
Washington, DC

Gregg Tyler
Continuing Education Coordinator
New York Stock Exchange, Inc.
New York, NY

NASAA Liaisons

Ralph A. Lambiase
Director
Connecticut Department of
Banking
Division of Securities
Hartford, CT

Don B. Saxon
Director, Division of Securities
Florida Office of Comptroller
State of Florida
Department of Banking & Finance
Tallahassee, FL

SEC Liaisons

Mark D. Fitterman
Associate Director
Securities and Exchange Commission
Washington, DC

Michael E. Schlein
Counsel to the Chairman
Securities and Exchange Commission
Washington, DC

Holly H. Smith
Associate Director
Securities and Exchange Commission
Washington, DC

Questions And Answers Regarding The Securities Industry Continuing Education Program

Regulatory Element

1.
Q. Who is covered by the Regulatory Element?
A. Every person registered for 10 years or less will be covered by the Regulatory Element and will be required to take the regulatory computer-based training within 120 calendar days after his or her second, fifth, and tenth anniversaries of his or her initial registration date.
2.
Q. How does imposition of a serious disciplinary action affect a registered person's status in the Regulatory Element?
A. Within 120 days of imposition of the serious disciplinary action (fine of $5,000 or more for a rule violation, or as otherwise ordered pursuant to a disciplinary action), the person must participate in a Regulatory Element session followed by additional sessions within 120 days of the second, fifth, and tenth anniversaries of the date of the disciplinary action.
3.
Q. Will anyone be grandfathered or exempted?
A. Grandfathering applies to the Regulatory Element only. Those who have been registered more than 10 years and who have not been the subject of a serious disciplinary action (suspension, bar, fine of $5,000 or more, or a statutory disqualification) during the most recent 10 years will be grand-fathered from the Regulatory Element.
4.
Q. How will registered personnel be notified that they must take the Regulatory Element computer-based training session?
A. The CRD system will track persons subject to the requirement and notify members in advance of those individuals who, after July 1, 1995, are approaching their second, fifth, and tenth year anniversary dates of their initial securities registration and are required to participate in the Regulatory Element. These individuals will have 120 days to complete the Regulatory Element computer-based training session at an NASD PROCTOR" Center. Follow-up notices will also be sent as these persons approach the end of the 120 days following their registration anniversaries. CRD will also provide notices of completion of the Regulatory Element to firms.
5.
Q. If a person has multiple registrations (such as Series 6 in 1988 and Series 7 in 1991), what is the applicable date to determine whether participation in the Regulatory Element is required?
A. The date of the initial registration (1988) applies, provided that the person has remained continuously registered since that time and has had no serious disciplinary action.
6.
Q. What if an individual's registration temporarily lapses?
A. If the person ceases to be registered for less than two years, the person will maintain the original registration date but will have to participate in any Regulatory Element program that may have been missed during the lapse period. For example, if the registration lapses at four and a half years and the person wishes to reactivate at what would be the six-year anniversary, the person must complete the fifth-year Regulatory Element requirement before the registration can be reactivated.
7.
Q. What if a person ceases to be registered for two or more years?
A. That person would begin the entire registration process anew. The person must take the appropriate qualification examination(s) and would re-enter the Regulatory Element at the beginning of a new 10-year cycle.
8.
Q. Where will the computer-based training of the Regulatory Element be administered and how long will the training last?
A. The NASD PROCTOR system will deliver the computer-based training program in any of the PROCTOR Centers located throughout the country. In 1995, the 55-center PROCTOR network will be expanded by adding an additional center in Manhattan, and at least two mobile centers. The mobile centers will meet the needs of members requesting on-site administration of the Regulatory Element computer-based training according to final procedures to be announced by the NASD once the mobile centers are available.
9.
Q. What topics will the Regulatory Element cover?
A. The Regulatory Element will cover topics of general applicability to all registered persons in seven broad areas, called modules:
  • Registration And Reporting

  • Communications With The Public

  • Suitability

  • Handling Customer Accounts

  • Business Conduct

  • Customer Accounts, Trade And Settlement Practices

  • New And Secondary Offerings.
Please see the Content Outline For The Regulatory Element for more information about the subject matter encompassed by the Regulatory Element.
10.
Q. How will the material be presented in each module?
A. Participants will be led by an interactive computer program through scenarios involving a registered person and a customer and will be asked to choose the most appropriate response or responses to the facts in the story. The computer software will assess the participant's understanding of the topic and deliver tutorials about the subject if necessary. The computer program provides immediate feedback to the participant as he or she works through each module's subject matter.
11.
Q. Will the Regulatory Element computer-based training be the same for everyone?
A. The content of each training session will be the same for everyone, because each person taking the computer-based training must complete all seven modules. However, because there are five possible scenario sets in each of the seven modules and the scenario sets are selected at random, it is highly unlikely that any two people will see exactly the same stories during the course of his or her computer-based training session.
12.
Q. Will the individual receive a grade or any other kind of feedback from the computer-based training of the Regulatory Element?
A. The computer-based training is not graded. However, as described above, the interactive nature of the computer-based training provides immediate feedback as the person works through the scenarios and problems.
13.
Q. What type of feedback will firms receive about their employees?
A. Firms will receive aggregate feedback about the performance of their employees with respect to the subject areas in the Regulatory Element. Firms will be expected to use this feedback in the annual analysis of training needs and in the development of written training plans when complying with the Firm Element requirements. SROs will also review aggregate firm feedback to determine subject areas that may not be adequately covered in the firm programs.
14.
Q. How should an individual prepare for the Regulatory Element?
A. The Regulatory Element computer-based training program is designed to transmit information broadly applicable to all registered persons regardless of their job functions or registration status (such as Series 6 or Series 7). The Regulatory Element training focuses on compliance, regulatory, ethical, and sales-practice standards. Its content has been recommended by a group of industry representatives, reviewed by the Council, and approved by the SROs. The Content Outline For The Regulatory Element more fully explains the subject matter covered by the Regulatory Element.
15.
Q. If the computer-based training is not completed successfully, is there a waiting period before the computer-based training can be taken again?
A. The individual may schedule another appointment at the PROCTOR Center to take the computer-based training after a one-day waiting period, as long as the 120-day window is still open. If the person does not complete the computer-based training in the 120-day window, his or her registration will be deemed inactive until he or she can reschedule an appointment and successfully complete the Regulatory Element. It is important that computer-based training sessions at PROCTOR Centers be scheduled early in the 120-day period.
16.
Q. Is each sitting for the computer-based training of the Regulatory Element recorded in CRD?
A. Yes.
17.
Q. What will each Regulatory Element computer session cost?
A. The cost is $75, which is intended solely to recoup the costs incurred in developing, monitoring, updating, and administering the Regulatory Element program. This fee will be adjusted (up or down) periodically to reflect these costs.
18.
Q. What is the rationale behind discontinuing the Regulatory Element after 10 years?
A. Because information to be transmitted through the Regulatory Element is primarily of a compliance, regulatory, ethical, and sales-practice nature, individuals registered for more than 10 years without a significant disciplinary action presumably have adequately absorbed this material, and this understanding should be reflected in their manner of doing business. In addition, all registered individuals who are "covered persons" will continue to be subject to the requirements of the Firm Element throughout their careers.
19.
Q. What regulatory consequences will result when an individual does not complete the Regulatory Element?
A. Noncompliance with Regulatory Element requirements will result in an individual's registration being deemed inactive until the person fulfills all applicable elements. Firms will receive reports identifying persons whose registrations have become inactive and must ensure that they are not permitted to engage in activities requiring registration. SROs will also monitor individual and firm compliance with these prohibitions during routine or special inspections. It is important that computer-based training sessions at PROCTOR Centers be scheduled early in the 120-day period.
20.
Q. May persons deemed inactive receive commissions?
A. Because persons may not conduct business during inactive registration periods, no commissions may be paid on such business. Trail or residual commissions for business conducted before the inactive period may be paid.

Firm Element

21.
Q. What is the Firm Element implementation schedule?
A. For most firms, the Firm Element will be a two-tier process. Firms must complete an analysis of their training needs and prepare their first annual written training plan to address their needs by July 1. 1995. The actual implementation of a firm's plan must begin no later than January 1, 1996, which will allow firms time to develop and secure materials, plan budgeting needs, arrange scheduling, and develop record-keeping procedures. Regulatory examination for Firm Element compliance will also proceed in accordance with this schedule. For example, written training plans are subject to inspection on or after July 1, 1995, and firm records should demonstrate programs in progress as of January 1, 1996.
22.
Q. Who will be covered by the Firm Element?
A. The Firm Element requirements apply to all "covered persons" (registered salespeople, traders, sales assistants, investment company shareholder servicing agents, investment bankers, and others who have direct contact with customers in the conduct of a securities sales, trading, or investment tanking business, and their immediate supervisors) for as long as they are considered "covered persons." The term "customer" applies to retail, institutional, and investment banking customers, but does not apply to other broker/dealers.
23.
Q. Will anyone be grandfathered or exempted?
A. No "covered person" is grand-fathered or exempted from the Firm Element.
24.
Q. Are branch managers "covered persons" within the Firm Element?
A. Yes, because they directly supervise salespeople in the branch. If a branch manager also has customer accounts, then his or her immediate supervisor is a "covered person" as well.
25.
Q. Are registered research analysts "covered persons " within the Firm Element.'
A. Yes, if they engage in sales presentations to customers.
26.
Q. Are registered sales assistants or registered investment company shareholder servicing agents who handle service calls from customers "covered persons" within the Firm Element?
A. Yes, if their activities are construed as conducting a securities business in a sales context. The fact that the firm has decided to register such persons implies that there is enough potential for customer contact of the type prescribed by the rules for them to be considered a "covered person."
27.
Q. If a "covered person" has an insurance license and fulfills insurance continuing education obligations, can that substitute for the Firm Element?
A. Perhaps it may serve as a portion of the Firm Element requirements relating to insurance-related securities products. Whether broader training coverage would be required would depend upon whether the individual participated in a broader range of the firm's products and services.
28.
Q. What regulatory consequences will result when a covered person" does not comply with the requirements of the Firm Element?
A. Failure to attend training required by his or her firm to comply with the Firm Element may subject the "covered person" to disciplinary action.
29.
Q. What will be the content of the Firm Element?
A. It will vary. Each firm is required to analyze and evaluate its training needs at least annually. The firm's size, organizational structure, and scope of business, as well as regulatory developments and the Regulatory Element performance of its registered persons will need to be considered in determining training needs. Once its needs are identified, the firm will devise a written training plan to address those needs with training programs appropriate to its business.

Each firm must then administer its continuing education program in accordance with its annual evaluation and written plan, and must maintain records documenting the content of the programs and completion of the programs by covered persons or categories of covered persons. Covered persons must take all appropriate and reasonable steps to participate in continuing education programs as required by the firm.
30.
Q. Is there a fixed number of hours of continuing education that each "covered person" must take in the Firm Element?
A. There are no set schedules or required number of hours for the Firm Element, but coverage must be sufficient to meet the criteria established by SRO rules. For example, it may or may not be necessary to include every "covered person" within each calendar year if the firm can demonstrate a reasonable allocation of resources in a well-conceived and executed plan. Firms may need to give priority for specific time periods to those areas of their business in which the identified needs are greatest.
31.
Q. Will training materials be available?
A. The Securities Industry/ Regulatory Council on Continuing Education has prepared the Guidelines For Firm Element Training.

As indicated in the Guidelines, Firm Element training should be consistent with each firm's unique needs and areas of business. Thus, firms will need to develop their own material or obtain assistance from outside sources such as commercial vendors. Some industry organizations have indicated an intention to produce materials for widespread use. In any event, the responsibility for the content and appropriateness of the material rests with the firm.
32.
Q. Will SROs or the Council pre-approve training materials and/or programs developed by members or providers?
A. Neither the SROs nor the Council will pre-approve training materials or training programs. SROs will, however, continue to communicate with members regarding the expectations for the content of training programs. Also, as the program evolves, it is expected that some curricula content standards will be defined by the SROs for products and services where heightened regulatory concern exists.
33.
Q. Is the annual compliance meeting required under Article III, Section 27 of the NASD Rules of Fair Practice adequate to demonstrate compliance with the requirements of the Firm Element?
A. Probably not. It can certainly be used as an occasion on which to transmit information or conduct training. However, firms must address their own needs for sales practice and product training and carry out effective programs. In most instances, a significant expansion of material covered at the annual compliance meeting probably will be necessary. Also, it may be appropriate to conduct some training before waiting for scheduled annual compliance meetings.
34.
Q. Must each "covered person" meet personally with his or her supervisor annually to determine the training requirement for that person?
A. No. However, some firms may decide to meet to establish individual needs or to discuss training needs during regular performance reviews.
35.
Q. If a firm has significant internal training and education programs already in place, can these be used to meet the Firm Element requirements?
A. Probably, at least in part. For firms with comprehensive ongoing training programs in place, the requirements may result in expanded record keeping, more formalized planning, and the incorporation of any minimum criteria specified by the SROs. It is likely, however, that most firms will need to increase their education and training efforts substantially to meet the Program's requirements.
36.
Q. If a firm prescribes that a particular registered representative take part in the Firm Element training, must the representative do so?
A. Yes. The Program requires firms to implement a training program and to maintain records that clearly demonstrate its content and its completion by each person or groups of persons identified in the firm's training plan. Persons who are subject to the Program have an affirmative obligation to participate in training. Failure to do so could result in disciplinary action against the registered person by his or her firm or by a regulatory authority.
37.
Q. Must a firm develop supervisory procedures that address compliance with the Regulatory and Firm Elements of the Continuing Education Program?
A. Yes. Firms must develop written supervisory procedures designed to reasonably ensure compliance with the SRO rules governing the Continuing Education Program. No standardized procedures are mandated, however firms should consider, among other things:
  • designating an appropriate manager to oversee compliance with the Program;

  • ensuring no improper activities by persons with inactive registrations; and

  • processes for designing Firm Element programs.
38.
Q. Will firms that are members of two or more SROs be subject to redundant inspections for compliance with the continuing education requirements?
A. No. The SROs will coordinate their field inspection efforts to avoid any unnecessary regulatory overlap for joint members. The SROs are especially committed to developing a consistent approach to examining and enforcing the Firm Element requirements.

Content Outline For The Regulatory Element

Six self-regulatory organizations (SROs)—the American Stock Exchange, the Chicago Board Options Exchange, the Municipal Securities Rulemaking Board, the National Association of Securities Dealers, the New York Stock Exchange, and the Philadelphia Stock Exchange—have enacted rules establishing a continuing education program for the securities industry. The rules call for a formal, two-part program, comprising a Firm Element and a Regulatory Element.

The Firm Element requires broker/dealers to keep employees up to date on job- and product-related subjects by means of a formal, ongoing training program. Each broker/dealer is required to establish a training process meeting certain minimum criteria and standards. In developing and implementing the Firm Element, each broker/dealer must take into consideration its size, structure, scope of business, and regulatory concerns.

The Regulatory Element requires all registered persons to participate in a prescribed computer-based training session within 120 days of their second, fifth, and tenth registration anniversary dates. The Regulatory Element is designed to transmit information broadly applicable to all registered persons. The content was recommended by an industry committee representing a diverse range of broker/dealers, in conjunction with the Securities Industry/Regulatory Council on Continuing Education, industry regulatory agencies, and SROs.

The Securities Industry Continuing Education Program is intended to ensure that registered securities industry personnel are informed of issues important to performing their jobs appropriately. Any registered person who violates industry regulations is subject to disciplinary action, including censure, fines, suspension, and/or permanent loss of registration and license.

The Regulatory Element

The Regulatory Element focuses on compliance, regulatory, ethical, and sales-practice standards. Its content is derived from rules and regulations, and is based on standards and practices widely accepted within the industry. Although the specific requirements of certain rules may differ slightly among the different SROs, the program is based on standards and principles applicable to all. In certain instances, particular SRO requirements may be more restrictive than those represented in the program. Additionally, many broker/dealers limit the types of activities in which their registered employees may engage and/or the investment products they may represent, or they may require specific approvals for certain functions. Registered persons are responsible for ensuring that their activities are within the scope permitted by their employing broker/dealers and conducted in accordance with the rule requirements of all of the SROs and jurisdictions regulating them.

The Regulatory Element is delivered through a computer-based program in a series of realistic situations and interactive instruction related to those situations, organized in the following seven modules:

  • Registration and reporting issues;

  • Communications with the public;

  • Suitability;

  • Handling customer accounts;

  • Business conduct;

  • Customer accounts, trade and settlement practices; and

  • New and secondary offerings.

Each of these topics is covered thoroughly in its corresponding module, and some may be covered in more than one module. The content of these modules is outlined below.

A covered registered person must satisfactorily complete all seven modules contained in the program to satisfy the requirement to complete the Regulatory Element. The program is designed with the intent of providing ample time to complete all seven modules within the time allotted. Failure to complete the Regulatory Element within 120 days of the prescribed anniversary dates will result in a person's registration becoming inactive. Such person will be prohibited from performing any of the functions of a registered person until the person meets the requirement.

Content And Presentation Of The Regulatory Element

Each module is presented through a description of customer-related situations and fact patterns, combined with interactive questions, answers, and feedback. Unless otherwise specified, the topics are covered at basic levels of knowledge and understanding. In the process of interacting with the program, participants apply their existing knowledge and information presented in the modules.

Module 1: Registration And Reporting Issues

1.1 Registration/Licensing Requirements

Requirements of the SROs

State authority and jurisdiction, general requirements for registered representative (RR) and broker/dealer registration/licensing in states

Conditions, restrictions, and requirements for updating Form U-4

Restrictions on activities of RRs

General registration/licensing requirements for and limitations on activities of investment advisers

Restrictions on activities of non-registered persons

Consequences of violating registration/licensing requirements
1.2 Securities And Exchange Commission (SEC) And SRO Authority And Investigations

Jurisdiction of SEC, SROs, and state regulators

Obligations for response to regulatory inquiries

Definition and consequences of statutory disqualification [Section 3(a)(39) of the Securities Exchange Act of 1934]

Settlement of employer-employee disputes
1.3 Blue-Sky Laws, Registration Of Securities

Requirements for securities to be registered or exempt in states in which they are being sold Distinction between exempt, non-exempt securities General exemptions from registration

Module 2: Communications With The Public

2.1 Communications With The Public

Definitions, general standards, and required approvals for public communications:

Telephone solicitations, correspondence, advertisements, market letters, research reports, sales literature, educational material, electronic communications, communications in and with the press, seminars, lectures

Restrictions on telephone solicitations/cold calling
2.2 Customer Complaints And Inquiries

Requirements for reporting, investigation, and documentation

Handling of disputes with customers; arbitration procedures and awards

CRD toll-free number and type of information publicly disclosed in disciplinary records

Module 3: Suitability

3.1 Specific Elements In Evaluating Current Status Of Customer

Financial profile—Balance sheet, income statement, other financial considerations

Life profile—Non-financial investment considerations

Risk tolerance and investment experience

Investment objectives and considerations

Solicited versus unsolicited accounts and transactions

Tax considerations
3.2 Concepts And Implications Related To Risk

Diversification and risk reduction—Concepts and specific responsibilities of the RR

Definitions and examples of types of risk—Liquidity risk, interest rate risk, call risk, credit risk, legislative risk, purchasing power risk (inflation risk), reinvestment risk, principal risk

Risk characteristics of categories of investments (e.g., equity, debt, asset-backed, mutual funds)

Business cycle—Definition and effects

Effects of national and international events, interest rate fluctuations
3.3 Monitoring Customer Needs, Objectives, And Portfolio

Obligation and procedures for routine monitoring and updating of customer's financial and life profile, investment objectives, and portfolio

Module 4: Handling Customer Accounts

4.1 Prohibited/Fraudulent Practices

Definitions and examples of prohibited and improper activities such as insider trading, market manipulations, entering false orders, misappropriation of funds, stealing/conversion, forgery, unfair and excessive pricing, unauthorized trading, guarantees to customers, selling away, front running, free-riding, piggy-backing/shadowing, trading at the close/marking the close, selling dividends, commingling funds, parking, selling to breakpoints, and churning
4.2 Third-Party Orders And Instructions

Required instructions, requirements for third-party checks, requirements for written authorization for orders
4.3 Account Transfers And Customer Records

General requirements and procedures for transferring accounts

Confidentiality issues and responsibilities related to customer accounts and records: firm ownership of records
4.4 Gifts And Gratuities

Restrictions on giving and receiving; requirements for approvals
4.5 Sharing Profits And Losses

Restrictions on and allowable circumstances
4.6 "Prudent Man" Rule

Basic principle
4.7 "Chinese Wall" Requirements

General knowledge

Module 5: Business Conduct

5.1 Private Securities Transactions (Private Offerings)

Restrictions, required authorizations, legal risks
5.2 Outside Business Activities

Permitted and prohibited activities—Dual licensing, part-time employment, conflicts of interest Required notifications/approvals (regulatory and broker/dealer)
5.3 Compensation

Rules, regulations, and standards governing sharing commissions or part of compensation
5.4 Payment Of Referral Fees (To Non-Affiliated Persons)

Restrictions; approval and disclosure requirements
5.5 Restrictions On Loans To/From Customers
5.6 Conflicts Of Interest And Potentially Illegal Situations

RR awareness, things to watch for, recognition, prohibitions
5.7 Cash Transaction Reporting Requirements

Module 6: Customer Accounts, Trade, And Settlement Practices

6.1 Customer Accounts, Documents, Approvals, And Restrictions

Procedures for opening customer accounts, including required approvals, and record keeping Definitions and requirements related to:

Accounts For Clients Of Investment Advisers—Additional trading authorization required, written evidence of power of attorney

Discretionary Accounts—Requirements for written authorization and broker/dealer approval; prohibition by many broker/dealers

Option Accounts—Requirement to provide customer with options disclosure document Prohibited Accounts—Residents of states in which firm is not authorized (registered) to do business, margin accounts for fiduciaries

Legally Restricted Accounts—Restrictions/prohibitions on accounts for minors, persons incompetent, entities, death of customer

Custodial Accounts (UGMA/UTMA)—General requirements and characteristics Qualified Accounts [such as 401(k)]—Tax advantages, restrictions

Joint Accounts—Characteristics and purpose of accounts as joint tenants with right of survivorship, joint tenants in common

Broker/Dealer Employee Accounts—Approval of and disclosures, procedures for opening Obligations of and limits on fiduciaries, limits on the use of powers; of attorney
6.2 Regulation T, SRO Margin, And Short-Sale Rules

Distinctions between cash and margin accounts

Appropriate use of margin accounts and associated risks—initial and maintenance concepts Obligations for informing customers of risks and benefits
6.3 Payment And Delivery For Securities Transactions

General requirements, consequences of non-payment/non-delivery
6.4 Correction Of Errors

Procedures, approvals, and prohibitions

Module 7: New And Secondary Offerings

7.1 SEC Registration And Prospectus Requirements (Securities Act Of 1933)

General Requirements—Definition of offer; prospectus delivery requirements; limits on advertising and other written materials; prohibition of sales before effective date; use of preliminary prospectus (red herring); restrictions before, during, and after a distribution; exemptions from registration; restriction on hot issues

New Issues And Securities Trading—Registration requirements, restricted accounts, prospectus requirements, exemptions from registration
7.2 Securities Investor Protection Corporation (SIPC)

Purpose of SIPC, coverage limits and amounts, disclosures to customers
7.3 Penny-Stock Rules

General knowledge of written suitability and disclosure requirements

Guidelines For Firm Element Training

Introduction

The Securities Industry/Regulatory Council on Continuing Education (the Council) has developed a Securities Industry Continuing Education Program. Uniform rules were adopted by the securities industry self-regulatory organizations (SROs) mandating a two-part program which consists of a Firm Element and a Regulatory Element.

The Regulatory Element requires that registered persons complete a computer-based training program on compliance, regulatory, ethical, and sales-practice standards within four months of their second, fifth, and tenth registration anniversary dates.

The Firm Element requires that each firm, after assessing its own specific needs, develop and implement a plan for training its covered registered persons. The assessment and plan must be done annually with the initial assessment and plan completed by July 1, 1995, and implementation beginning no later than January 1, 1996.

To help broker/dealers meet the requirements of the Firm Element, the Council has developed these guidelines to assist in the planning, development, execution, and documentation of their training programs. Because the Continuing Education Program represents a major new initiative by the securities industry, it is likely that the guidelines will be updated in the future to reflect experience gained during, and issues that arise from, the implementation of the Program.

These guidelines recognize the varying size, scope, and nature of broker/dealers, and the unique and often diverse lines of business in which each may be engaged. A full-service broker, for instance, may have goals or concerns that are different from those of a small, limited-product firm, an investment banking or institutional firm, or even a discount broker. Recognizing these differences and the fact that the training needs of each firm are just as diverse, the Firm Element provides for each training program to be uniquely tailored to meet specific needs.

Firms engaged in diverse lines of business or with complex organizational structures may need multiple training programs. These may be separate plans coordinated to cover appropriate areas, or they may be incorporated in a single master plan. Likewise, broker/dealers that are separate from, but affiliated with, another firm must have separate training plans, though these plans may incorporate common elements for training on common products and/or services. In the case of small firms, those with limited product lines, and sole proprietorships, the specific needs are uniquely different from those of large or full-service firms, and may be significantly less complex and narrower in scope.

The purpose of these guidelines is not to establish a uniform program, but is, rather, to establish a common approach for the development and implementation of a firm-specific training program that meets the needs of all types and sizes of firms. These guidelines are not intended to have the effect of rules or regulations, but should be helpful in enabling firms to comply with SRO rules. However, firms should recognize that the suggested components or recommended approaches will not create a "safe harbor" and that each firm must consider for itself what continuing education measures should reasonably be taken.

Covered Persons And The Scope Of The Firm Element

The Firm Element imposes a formal requirement on securities firms to provide training for registered persons who have direct contact with customers in the conduct of securities sales, trading, or investment banking activities, and for the immediate supervisors of these persons. Under the rules that mandate the Continuing Education Program, "registered person" means any member, allied member, registered representative, or other person registered or required to be registered under SRO rules. However, this definition does not include any such person whose activities are limited solely to the transaction of business on an exchange floor with members or registered broker/dealers. "Customer" is defined to mean any natural person and any organization, other than another broker or dealer, executing securities transactions with, through, or receiving investment banking services from, a member.

Registered persons employed in areas such as research are "covered persons" if they personally engage in direct sales presentations to customers. For example, a research analyst whose work is limited to the preparation of written material for distribution to customers or potential customers would not be a covered person. However, if the analyst's role included personal participation in sales presentations, the analyst would be covered. Similarly, registered marketing personnel who prepare sales literature for mass distribution or use by sales personnel would not be covered if they had no personal involvement in sales presentations. Likewise, a trader dealing only with personnel at other registered broker/dealers would not be covered. However, a trader having direct contact with individual or institutional customers in a sales context would be covered. Registered investment banking employees are covered persons if they solicit new business (e.g., underwritings or mergers and acquisitions), contact customers or potential customers in an advisory capacity, or participate in sales presentations related to public offerings. Customer contacts or responses to customer inquiries on administrative, service, or operations matters do not constitute customer contact for purposes of determining covered person status.

The goal of the Firm Element is to foster high standards of ethical behavior, and just and equitable principles of trade, by ensuring that all covered persons are trained regularly and in acceptable depth on investments or services in which they deal. Covered persons included in a firm's training plan are required to take all appropriate and reasonable steps to participate as required by the firm.

The SROs periodically may identify issues or investment products that must be covered in the training programs of firms whose business encompasses those issues or products. In these instances, the SROs may mandate the coverage of specific areas of regulatory concern and may specify time frames by which those areas must be covered.

SRO rules do not require specific numbers of hours for Firm Element training; however, to achieve compliance, coverage must be sufficient to demonstrate good-faith efforts. For example, it may or may not be necessary to require continuing education for every covered person within each calendar year. In addition, it may or may not be necessary to conduct training annually relative to the entire range of a firm's products and services. Firms may need to give priority, for a specific time period, to those areas of their business in which the identified needs are greatest. In short, firms should be able to demonstrate that a reasonable allocation of resources in line with the firm's demographics and needs has been made to provide a well-conceived and executed plan.

Firms with pre-existing comprehensive training programs may be able to satisfy the requirements of the Firm Element primarily through more formalized planning, the incorporation of any subject matter periodically specified by the SROs, and expanded record keeping. Large firms engaged in diverse lines of business or with complex organizational structures may need to incorporate a variety of training approaches in their plans, delivering appropriate training to different groups of employees covering different subject areas. Specialized firms with limited product lines and small firms with only a few employees should be able to satisfy the requirements of the Firm Element with less elaborate training efforts that demonstrate a thoughtful, reasonable approach to meeting their identified training needs. Accordingly, in using this booklet, firms should be guided by that which is specifically applicable to their own identified needs, organizational structure, and nature of business.

Identification Of Training Needs And Development Of Training Plans

The firm should establish overall objectives for its training program in a statement of broad direction or general intent, arising from the process of defining and analyzing its specific training needs.

Analysis Of Training Needs

Each firm is required to conduct an analysis of its overall business annually to identify and target specific training needs. The results of this analysis should become the basis upon which firms can establish priorities and develop their own specific annual written training plans. In developing these plans, priority should be given to issues or products identified as subjects of general regulatory concern, or which have been the source of significant problems to the firm or elsewhere in the industry. At a minimum, firms should consider the following factors:

  • How economic and market conditions may affect investment products or services offered or to be offered by the firm;

  • Existing and planned business initiatives, especially new services, investment products, and strategies;

  • Specific product and service-related information appropriate for dissemination to covered persons;

  • Legal and regulatory developments (e.g., new rules, regulations, or related firm policies);

  • Customer complaints, arbitrations, litigations, or other actions involving the firm or its associated persons;

  • Feedback and input on critical issues from areas such as compliance and legal, internal audit, trading, and operations;

  • Consideration of sales and marketing strategies related to products and services, with attention to related suitability and other regulatory issues that reasonably may be anticipated;

  • Regulatory reviews, investigations, and disciplinary actions;

  • Review of previously used training materials, course critiques, or other training-related documentation that may reveal unaddressed needs or areas for enhancement;

  • Incorporation of applicable information from industry organizations;

  • Input from management and registered personnel in various capacities as to additional training that may be helpful;

  • Use of performance reviews and business plans to identify development needs of individuals or groups of persons within a firm; and

  • Aggregate performance of covered associated persons in the Regulatory Element as reported to the firm by the SROs.

Development Of Annual Training Plans

The information derived from the needs analysis should become the primary basis for the written training plan. In developing the training plan, areas to consider include the firm's products or services, available training technology and delivery mechanisms, the geographic location of individuals to be trained, and whether to deliver the training through internal personnel and facilities or through the use of outside vendors.

In developing a training plan, firms should:

  • Identify the general objectives of the specific training programs to be incorporated in the plan;

  • Identify the knowledge and skills to be imparted by the programs;

  • Identify which specific training programs or activities should apply to specific covered persons or categories of persons;

  • Identify the delivery mechanisms and resource requirements;

  • Establish specific time schedules for delivery; and

  • Provide for appropriate feedback to evaluate program effectiveness and for planning modifications to existing programs and developing future programs.

Information Standards And Delivery Of Training Programs

Minimum Standards For Training Material

A firm's training material must be appropriate for the firm's size, scope of business, and method of operation, and the securities products, services, and strategies it offers to customers or in which it conducts a trading or investment banking business. Training material developed by or for a firm to satisfy the requirements of the Firm Element should include coverage of the following, to the extent that they can be reasonably identified:

  • Descriptive information regarding the general investment features of the products, services, or strategies;

  • Basic techniques for pricing investment products, services, or strategies;

  • Associated risk factors such as business risk, interest rate risk, inflation risk, market risk, and political risk;

  • Features that may affect a product's liquidity, taxability, callability, convertibility, and legality for certain classes of investors;

  • Suitability of the products, services, or strategies for different types of investors, considering their investment objectives and constraints, financial status, and level of sophistication; and

  • Applicable regulatory requirements, including standards for communications with the public.

When these points are covered in training materials or presentations, the importance of clearly conveying appropriate information to customers or prospective customers in recommendations or sales presentations must be emphasized.

Annual Compliance Meeting

The annual compliance meeting required under Article III, Section 27 of the NASD's Rules of Fair Practice may be used to transmit information or conduct training. In most instances, however, a significant expansion of material covered at the annual compliance meeting will be necessary to comply with the Firm Element. Also, it may be appropriate to transmit some material in a manner more timely than waiting for a scheduled annual compliance meeting.

Timeliness And Flexibility

A firm's training plan must include the intended time schedule for development and delivery. While schedules may reflect both prioritized training needs and the availability of personnel and facilities, training plans should be sufficiently flexible to accommodate unforeseen needs. Information related to significant product developments, unforeseen problems, complaint patterns, or regulatory initiatives should be communicated in a timely manner.

Delivery Vehicles And Media

Firms have great flexibility in determining the most appropriate methods for the delivery of the training plan. Activities such as the following may be used alone or in combination, provided they are appropriate to the content and participants, and are reasonably designed to achieve the firm's training objectives:

  • Direct-participation sessions with instructors or discussion leaders (e.g., seminars or lectures);

  • Mentor relationships;

  • Supervised independent study, assigned reading, or internally generated written material;

  • Computer-based training;

  • Audiotapes, videotapes, or internal broadcasts; and

  • Meetings, video conferences, and telephone conference calls.

Regardless of whether a training presentation involves covered personnel attending a meeting or lecture, listening to an audiotape, viewing a videotape, or using a similar mechanism, the firm should create an appropriate training environment. Training to meet the requirements of the Firm Element may be accomplished in conjunction with meetings or programs with a different primary purpose, provided that the training itself is conducted in an appropriate setting and that a meaningful amount of time is devoted to it.

All materials and presentations must focus on the best interests of investors and be characterized by truthfulness, accuracy, and disclosure of material information. The information must, at a minimum, reflect regulatory and industry standards for communications with the public. Training focused exclusively on selling skills or prospecting will not meet program requirements. However, information on specific products, services, or investment strategies may be used, provided such information encompasses associated risks, suitability considerations, and applicable regulatory requirements.

Outside Programs And Vendors

A firm may produce or provide training internally, or may use external sources for some or all of its training needs, provided that programs and materials meet the firm's identified training needs and consequent plan. External sources may include institutions of higher education, professional associations and organizations, and other external vendors. If the firm chooses to use outside vendors or externally developed materials, the firm retains the overall responsibility to ensure that the content and delivery are appropriate to its identified needs and meet the requirements of the Firm Element. Likewise, the firm bears the responsibility for required planning and documentation.

Participation by a covered person in an educational program designed to meet the initial and/or ongoing requirements of a professional designation program in a field related to the securities industry may qualify as all or part of the firm's training plan for that person. In such instances, the firm must document and be prepared to demonstrate that the content is consistent with its training plan and meets the requirements of the Firm Element in the context of the individual's particular business.

Regulatory Review

Training plans, programs, and materials used to satisfy the requirements of the Firm Element are subject to review by the Securities and Exchange Commission, securities industry SROs, and state securities regulators. The responsibility for compliance with the requirements of the Firm Element must be clearly delineated within a firm. Failure to demonstrate compliance with the Firm Element or failure to make requested items available promptly for review may subject firms, individual registered persons, or their supervisors to regulatory action. Accordingly, documentation evidencing the conduct of reasonable needs analyses and the development and implementation of corresponding written training plans for appropriate participating personnel is extremely important.

Actual training materials and outlines, as well as detailed records reflecting how the Firm Element plan was developed, implemented, and administered, must be retained as part of the organization's books and records requirements under Rules 17a-3 and 17a-4 of the Securities Exchange Act of 1934. In addition, a firm must retain records documenting covered-person participation in training programs that are part of its Firm Element plan. The nature of such records will vary depending on the delivery mechanisms used by the firm.

The following are offered only as examples of the diverse methods that may be used and are not intended to suggest that any one of them should constitute the entirety of a firm's program. In fact, a program using multiple methods of delivery might best serve the needs of many firms, depending on the extent of their products and services, the geographic locations of their personnel, and their available technology.

Some firms may disseminate information of critical importance to all employees or specific groups of employees, and require written acknowledgment that the materials have been received and read. When classroom presentations and events such as annual compliance meetings are conducted, documentation as to the nature of material covered (with outlines or scripts) and attendance records must be retained. Likewise, delivery methods such as computer-based training lend themselves to maintenance of records relative to specific material covered and who participated in the program.

If information is transmitted through broad-based distributions of internal written communications, or through vehicles such as direct broadcasts to large numbers of employees, the firm must retain scripts, outlines, or recordings along with the date and extent of coverage. If this method is a component of the firm's formal Firm Element program but not the primary or majority part, the practice as described is acceptable. However, if this is the primary method of meeting the Firm Element Guidelines, appropriate documentation must be obtained from employees and retained to evidence receipt and understanding of the communications.


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