ALERT - FINRA Establishes Qualification Rules for Investment Banking Professionals

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May 29, 2009
David E. Rosedahl

FINRA has adopted a new category for investment banking professionals – Limited Representative-Investment Banking.  A new Rule 1032(i) establishing the category will become effective 90 days after FINRA announces development of a Series 79 qualification examination.

Addressing concerns that current FINRA licensing qualification requirements represent a barrier for highly qualified professionals to become associated with securities firms to perform only investment banking services, FINRA has created a special limited license category.  Qualified professionals focusing exclusively on investment banking transactions will no longer be required to take a Series 7 examination that covers a broad range of industry activities in which investment banking professionals seldom, if ever, become engaged (e.g., retail customer solicitation and sales, trading, etc.).  To achieve the Limited Representative status, a candidate will be required to pass a qualification examination focusing on the job functions she or he is likely to perform.

Scope of Covered Activities.  The new rule represents FINRA’s initial effort to define “investment banking” and includes: (i) advising on or facilitating debt or equity securities offerings through a private placement or public offering; and (ii) advising on or facilitating mergers and acquisitions, tender offers, financial restructurings, asset sales, divestitures or other corporate reorganizations or business combination transactions.  “Investment banking” also includes rendering fairness, solvency and similar opinions.  The special registration will not be available to persons whose investment banking work is limited to public (municipal) finance offerings.

Six Month Grace Period  – New Employee Training.  Associated persons participating in a firm’s new employee training program will be allowed to perform investment banking services for up to six months from the time they first engage in those activities.  Firms must evidence the details of their training programs and identify eligible trainees.

Series 79 Qualification Exam.  FINRA is developing a qualification examination designed to “provide a more targeted assessment of the job functions performed by individuals, within” the Limited Representative category.  The SEC must approve the new Series 79 exam and corresponding fees before the new rule will become effective.  Thus, the rule will probably not become effective until late Fall 2009 or early in 2010.

General Principal Requirements.  General Principals supervising investment banking activities will be required to hold a Series 79 license.  Principals must qualify by taking the Series 79 examination or opting into registration under “grandfathering” provisions.

Transition and Grandfathering.  FINRA’s apparent goal is to establish a specific additional qualification requirement for investment banking staff members.  Following a transition time of six months after the new rule is implemented, all investment banking professionals will be required to successfully complete the Series 79 examination.  Currently, investment bankers need only pass the Series 7 exam to be fully qualified.  Once the new rule has been effective for six months, any individual holding a Series 7 registration that wishes to engage in the covered investment banking activities would be required to pass the Series 79 exam.  General principals supervising investment banking activities are currently required to satisfy Series 7 and 24 requirements.  They will be required to satisfy Series 79 requirements as well.  Both Series 7 RRs and Series 24 principals will be able to opt-in to Series 79 status during the six months following the rule’s effective date.

Further Information.  A more detailed discussion and analysis of the new investment banking category is available here.

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