Study guide
The Series 26 exam opens with the smallest of its three job functions, worth 16 of the 110 scored questions, but the material here underpins everything a principal does: getting the firm and its people properly registered and keeping them that way. This chapter walks through the registration forms, hiring diligence, disqualification rules, continuing education, and outside-activity oversight that a principal supervising Series 6 business must know cold.
Registering the Firm: Form BD, Form BR and Membership
A broker-dealer comes into existence, for regulatory purposes, through Form BD, the uniform application filed through FINRA's Central Registration Depository (CRD) system. Form BD registers the firm with the SEC, with FINRA, and with state regulators, and it discloses the firm's ownership, control persons, business lines, and disciplinary history. When any information on Form BD becomes inaccurate, the firm must file an amendment promptly. Joining FINRA also requires a new membership application, and once admitted, the firm operates under a membership agreement that describes its approved business. A material expansion, such as adding a new product line, a significant increase in the number of representatives, or a change in ownership or control, generally requires a continuing membership application under FINRA Rule 1017 before the change takes effect. Consider Crestbay Financial, a small firm approved to sell mutual funds and variable annuities through 20 representatives. If Crestbay wants to triple its sales force or add a general securities business, its principals must recognize that this is not just a staffing decision but a membership event requiring FINRA's blessing. Each office where the firm conducts securities business is registered on Form BR, which identifies the location, the types of activity conducted there, whether it is a branch office or an office of supervisory jurisdiction, and the supervisors responsible for it. A firm leaving the business files Form BDW to withdraw its registration.
Registering People: Forms U4 and U5 and Registration Categories
Individuals register through Form U4, filed via CRD, which discloses employment history, residential history, criminal and regulatory events, customer complaints, and financial matters such as bankruptcies and liens. The U4 is a living document: when a registered person learns of a reportable event, the firm must amend the form promptly, generally no later than 30 days after learning the facts. When a registered person leaves, the firm files Form U5 within 30 days of termination and provides a copy to the individual within that same window. The U5 states the reason for termination, and if the firm later learns facts that make it inaccurate, it must amend it. A hiring firm should obtain and review the candidate's most recent U5 as part of its diligence. Registration categories matter to a principal supervising Series 6 business. A representative selling mutual funds and variable contracts passes the Securities Industry Essentials (SIE) exam plus the Series 6; the principal supervising that business holds the Series 26, which requires the SIE plus either the Series 6 or Series 7 as a prerequisite. FINRA generally expects a member firm to have at least two registered principals, though very small firms may seek relief from that expectation. Firms may also permissively register individuals, such as back-office staff, who are not strictly required to register, provided those individuals are still subject to the firm's supervision and continuing education obligations.
Hiring, Background Investigations and Fingerprinting
Before a firm files a Form U4 for a candidate, FINRA Rule 3110(e) requires it to investigate the person's good character, business reputation, qualifications, and experience. After filing, the firm has 30 days to verify the accuracy and completeness of the U4, and that verification must include a search of reasonably available public records, such as court filings and bankruptcy records, to confirm what the candidate disclosed. Fingerprinting is a separate federal requirement under Securities Exchange Act Rule 17f-2: partners, officers, directors, and employees who sell securities, handle customer funds or securities, or supervise those who do must submit fingerprints, which are processed through the FBI to surface criminal history. Picture a hiring principal, Dana Okafor, evaluating a candidate named Jonas Pryor whose U4 discloses one settled customer complaint from four years ago. Dana cannot simply accept the disclosure at face value. She should review the prior firm's U5, examine the complaint's substance in CRD, run the required public records search, and document her conclusion about whether Jonas can be hired, and if so, whether he needs closer supervision at the outset. The hiring file becomes part of the firm's books and records, and regulators reviewing a later problem will ask what the firm knew at hiring and what it did about it. Sloppy hiring diligence is one of the most common findings in FINRA examinations of small firms.
Statutory Disqualification and Heightened Supervision
Some events legally disqualify a person, or a firm, from the securities industry. Under Section 3(a)(39) of the Securities Exchange Act, statutory disqualification includes any felony conviction within the past 10 years, certain securities-related or financial misdemeanors within 10 years, bars or expulsions imposed by a securities regulator, willful false statements on registration applications, and certain court injunctions involving investment activity. A statutorily disqualified person cannot associate with a member firm unless the firm sponsors the person through an eligibility proceeding, filed on Form MC-400, and FINRA (and in some cases the SEC) approves continued association, almost always subject to a strict, individually tailored supervision plan naming a responsible supervisor. Heightened supervision is a broader tool that principals use even when no statutory disqualification exists. A representative with a history of customer complaints, arbitrations, or internal discipline may be placed on a written heightened supervision plan: a designated principal reviews all of the rep's transactions before or shortly after execution, correspondence is reviewed more frequently, the rep may be restricted from certain products, and the plan is documented, acknowledged in writing by the rep, and periodically reevaluated. FINRA Rule 3170, the so-called taping rule, adds another layer: a firm that hires a high concentration of representatives from previously disciplined firms may be required to record its registered persons' telephone sales conversations and review the recordings. For exam purposes, know both the mechanics and the mindset: red flags in a person's history demand a documented supervisory response.
Continuing Education and Outside Activities
Registration is maintained, not just obtained. Under FINRA Rule 1240, every registered person must complete the Regulatory Element of continuing education each calendar year, by December 31, with content tailored to each registration held. A person who misses the deadline becomes CE inactive and may not act in any registered capacity or receive compensation requiring registration until the training is complete; a registration that remains inactive for two full years can be administratively terminated. The Firm Element is the firm's own annual training program: the firm conducts a needs analysis, writes a training plan, and delivers training relevant to its business, such as variable annuity suitability or anti-money laundering, to all registered persons. The Maintaining Qualifications Program allows individuals who leave the industry to keep an exam qualification current for up to five years by completing annual continuing education. Principals also police what representatives do outside the firm. Under FINRA Rule 3270, a registered person must give prior written notice before engaging in any outside business activity for compensation, and the firm evaluates whether the activity compromises responsibilities to the firm or could be confused with firm business. Under Rule 3280, private securities transactions, meaning securities transactions outside the scope of employment, sometimes called selling away, require prior written notice; if the rep will be compensated, the firm must approve the transaction in writing, record it on the firm's books, and supervise it as its own. FINRA has proposed consolidating these rules into a single outside activities rule, but until any change takes effect, Rules 3270 and 3280 govern.
Key terms
- Form BD
- — The uniform application a broker-dealer files through CRD to register with the SEC, FINRA, and the states; it must be amended promptly when information becomes inaccurate.
- Form BR
- — The uniform branch office registration form identifying each office location, its activities, its supervisors, and whether it is a branch or an office of supervisory jurisdiction.
- Form U4
- — The uniform application for individual registration, disclosing employment, disciplinary, criminal, and financial history; amendments are generally due within 30 days of learning a reportable fact.
- Form U5
- — The uniform termination notice a firm must file within 30 days of a registered person's departure, with a copy provided to the individual; it states the reason for termination.
- Central Registration Depository (CRD)
- — The online registration and licensing system through which broker-dealer and individual registration forms are filed and disciplinary histories are maintained.
- Statutory disqualification
- — A condition under Exchange Act Section 3(a)(39), such as a felony conviction within 10 years or a regulatory bar, that prevents association with a member firm absent regulatory approval.
- MC-400 application
- — The form a member firm files to sponsor a statutorily disqualified person's continued association, typically resulting in a strict supervision plan if approved.
- Regulatory Element
- — FINRA-prescribed continuing education that every registered person must complete each calendar year by December 31; missing it makes the person CE inactive.
- Firm Element
- — The firm's own annual training program, built from a documented needs analysis, covering topics relevant to the firm's business for its registered persons.
- Outside business activity (OBA)
- — Any business activity outside the scope of a registered person's relationship with the firm for compensation; Rule 3270 requires prior written notice to the firm.
- Private securities transaction (PST)
- — A securities transaction outside the regular course of a person's employment with the firm, often called selling away; compensated PSTs require written firm approval and supervision under Rule 3280.
- Heightened supervision plan
- — A written, individually tailored plan of intensified oversight, such as pre-approval of transactions and increased correspondence review, applied to a representative with a concerning history.
Exam tips
- Know the 30-day clocks: U4 amendments after learning a reportable fact, U5 filing after termination, U5 copy to the departing person, and post-filing verification of the U4 including a public records search.
- Distinguish OBA from PST treatment: an outside business activity requires prior written notice, while a compensated private securities transaction requires written approval, recording on the firm's books, and firm supervision.
- Statutory disqualification questions usually hinge on the 10-year lookback for felonies and securities-related misdemeanors and on the MC-400 sponsorship process.
- For continuing education, remember the Regulatory Element is annual with a December 31 deadline, CE-inactive persons cannot function or be paid in a registered capacity, and the Firm Element requires a documented needs analysis.
- This function is only 16 of 110 questions, so prioritize the high-yield facts: forms, deadlines, disqualification triggers, and the OBA/PST distinction.