FINRA Firm Element: Writing an Annual Needs Analysis That Survives Review

Compliance officers often build the year's training twice, once as a continuing education plan and once as an anti-money laundering program. The understanding is that the 2 have to stay apart. FINRA Rule 1240(b)(2)(D) permits a member to count that work once.

Under that paragraph, participation in the firm's AML training under Rule 3310(e) may count toward a person's continuing education requirement. So may participation in the annual compliance training under Rule 3110(a)(7). Both are permissions, and neither is automatic.

The document that fails a review is usually the one that records purchases. An analysis that lists those purchases describes an outcome, and an outcome is the one thing a reviewer can already see from the invoices. Rule 1240(b)(2)(A) asks for the evaluation that produced it.

Take a broker-dealer with 140 registered persons, 12 of them permissively registered and 9 with supervisory responsibilities. A firm that size has every input the rule names and no obvious place to record them. Firms in banking and finance of that size run the analysis in a few weeks each autumn. The version that survives a later review is the one a reader can follow without asking the author what they were thinking.

So the test is whether a reviewer opening the plan a year later can see the evidence behind each priority in it. That is a question about the document itself, and it is settled long before anybody in the firm sits down to a course.

Where a Needs Analysis Usually Falls Short

Rule 1240(b)(2)(A) requires each member to maintain a continuing and current education program for its registered persons. The purpose is to enhance their securities knowledge, skill and professionalism. The paragraph also sets a minimum for how that program is arrived at. A firm must at least annually evaluate and prioritize its training needs and develop a written training plan.

Evaluating and prioritizing are 2 separate acts, and the second is the one that leaves a trace a reviewer can follow a year later. A prioritized list shows which needs the firm judged more urgent and why, which is the reasoning a reviewer follows.

Firms asked for the needs analysis often produce the year's course list. Rule 1240(b)(2)(A) asks a member to evaluate and prioritize its training needs and then develop a written plan, so the analysis is the reasoning and the plan follows from it. Administration of the program then has to follow both that evaluation and that plan, under 1240(b)(2)(C). A course list records what was bought without recording why.

The Document a Reviewer Opens First

A reviewer asking about continuing education starts with the written plan, and reads it against the considerations the rule names. Where the plan says a firm prioritized options training for its 14 registered options principals, the reviewer looks for what in the year's evidence pointed there. A lender's decision letter works the same way. Both depend on the reasoning being written down at the time.

That written reasoning is what a reviewer looks for, in 4 specific places:

• Show the size and organizational structure you built the plan from.
• Name the scope of business activities the topics follow.
• Cite the regulatory developments that moved the plan this year.
• Record how Regulatory Element performance changed the priorities.

The 5 Inputs 1240(b)(2)(A) Names

The rule names 5 considerations the plan must take into account. Each of them has a source inside the firm:

Where the analysis establishes the need for supervisory training for persons with supervisory responsibilities, Rule 1240(b)(2)(A) requires that training to be included in the plan. For the firm with 9 supervisors, that is a conditional duty triggered by the firm's own findings, which means the analysis has to record whether the condition was met.

The Input Most Firms Have No Process For

The fifth consideration is the one that changes how the analysis is scheduled. Regulatory Element performance data describes how registered persons did in the element FINRA sets, and a plan that takes it into consideration has to obtain that data before it is written. A firm drafting in October on the previous cycle's assumptions has named an input it did not consult. The plan is judged by whether the firm followed it.

Who the Plan Has to Cover

Scope is settled by Rule 1240(b)(1). The paragraph applies the Firm Element requirements to any person registered with a member. That includes any person permissively registered as a representative or principal under Rule 1210.02, whatever that person does for the firm from day to day.

That paragraph permits a member to apply for or maintain the registration of any associated person. It extends to any individual engaged in the investment banking or securities business of a foreign affiliate or subsidiary. Individuals maintaining such permissive registrations are considered registered persons and subject to all FINRA rules to the extent relevant to their activities.

Registration Is the Test

• The 12 permissively registered people at the firm are inside the population the plan has to cover, whatever their day-to-day function is.
• A registered person in an operations or analytical role is inside it on the same basis, since the test is registration.

Rule 1240(b)(3) places a duty on the individuals as well. Registered persons must take all appropriate and reasonable steps to participate in the programs the member requires of them, which makes non-attendance a matter for the individual as well. The firm sets the program and the person has to turn up to it.

The practical effect is that the roster used to build the plan is the registration roster itself. A population drawn from a customer-facing list covers fewer people than the rule requires. That gap stays invisible until somebody counts completions against the roster and finds names the plan never assigned anything to. Widening the population raises the next question, which is what the firm may count for each of those people.

Building the population from the registration roster takes 4 checks:

• Pull the roster from the registration system, since a sales list misses people.
• Include every permissively registered person.
• Mark those with supervisory responsibilities.
• Reconcile the roster the week before the plan is signed.

What the Firm May Count

Rule 1240(b)(2)(D) settles the question compliance officers most often answer conservatively, and it does so in the firm's favor. The paragraph grants 2 permissions:

• A member may consider a registered person's participation in the member's anti-money laundering compliance training under Rule 3310(e) toward satisfying that person's continuing education requirement under Rule 1240(b).
• A member may consider a registered person's participation in the member's annual compliance training under Rule 3110(a)(7) toward the same requirement.

Both are permissions the member exercises. A firm that wants to count them has to decide to, and then record that decision in the plan where a reviewer will find it a year later. The completion evidence then has to show which requirement each session was counted against.

The Duty at 3310(e) Stays Where It Is

Rule 3310(e) requires an AML compliance program to provide ongoing training for appropriate personnel, on its own terms. A firm still designs the AML training a firm already runs to meet the AML program's needs. 1240(b)(2)(D) then allows the participation to be recognized in the continuing education count. The 2 provisions describe the same session doing 2 jobs, and that session has to be recorded in a way that shows both.

The Records That Make the Plan Reviewable

That double recording is what Rule 1240(b)(2)(C) asks for, and the paragraph connects everything above. It requires a member to administer its continuing education programs in accordance with its annual evaluation and written plan. It also requires records documenting both the content of those programs and their completion by registered persons.

Rule 1240(b)(2)(B) has to be read alongside it. That paragraph requires programs to be appropriate for the business of the member. It also requires them to cover topics related to the role, activities or responsibilities of the registered person, and to professional responsibility:

• The dated annual evaluation, with the 5 considerations addressed and the priorities explained.
• The written training plan that followed from it, including supervisory training where the analysis established the need.
• The content of each program delivered, in enough detail to show it covered the role and professional responsibility topics the rule names.
• Completion by registered person, against the roster the plan defined.
• A record of any specific training FINRA required under Rule 1240(b)(4), which may stipulate the class of registered persons, the time period, and where appropriate the content itself.

A file assembled in that order answers a review in one pass. Firms discover where completion records stop being retrievable at the moment somebody asks for completion by named person across a 12 month window.

Where the Regulatory Element Ends and the Firm Element Begins

The other half of continuing education belongs to FINRA. Under Rule 1240(a)(1), a covered person completes the Regulatory Element for each registration category annually by December 31 of every year in which they remain registered. A member may require completion earlier in the calendar year.

Rule 1240(a)(2) makes the consequence of a lapse severe. A person whose registration is deemed inactive must cease all activities as a registered person. They cannot function in any capacity requiring registration until the outstanding Regulatory Element is completed, and that same element supplies the performance data the Firm Element plan relies on. Both run on the same annual cycle, so this year's file sets the starting point for next year's.

Registration is what both halves run on, so the file keeps 4 records:

• Keep the written plan with the date it was approved.
• Keep the content of each program you ran.
• Keep the completion for each registered person.
• Keep the December 31 Regulatory Element status for every covered person.

What the Next Cycle's Analysis Should Produce

An annual cycle is what the rule sets, so the useful question is what the next document should contain that the current one leaves out. A compliance training LMS turns that document into dated assignments, so the plan and the completions stop being 2 separate records.

• The evaluation is dated before the plan, and the plan references it, so the order of the 2 acts is visible.
• Regulatory Element performance data for the roster was obtained and is cited in the evaluation.
• The population is the registration roster, with permissively registered persons included and identified.
• The supervisory training question is answered in writing, whether or not the analysis established a need.
• Any AML or annual compliance training the firm counts is identified as counted, with the completion evidence attached.
• Program content is retained alongside completion, since Rule 1240(b)(2)(C) asks for both.

KC LMS covers the second half of that chain, turning the written plan into dated assignments by role and registration category. Completion is recorded against each named registered person, which is the evidence Rule 1240(b)(2)(C) asks a firm to maintain. The evaluation itself stays with the compliance department, and the value of the pairing is that the plan and the proof of it describe the same population.

One question is worth putting to your own plan before the next cycle. Does it name the Regulatory Element performance data it took into consideration? If the answer is no, the plan claims an input nobody obtained.

Frequently Asked Questions

1. What does the FINRA Firm Element needs analysis have to consider?

Rule 1240(b)(2)(A) requires the training plan to take into consideration the member's size, organizational structure, and scope of business activities, as well as regulatory developments and the performance of registered persons in the Regulatory Element. Where the member's analysis establishes the need for supervisory training for persons with supervisory responsibilities, that training must be included in the plan.

2. Who is covered by the Firm Element?

Rule 1240(b)(1) applies the Firm Element requirements to any person registered with a member, including any person who is permissively registered as a representative or principal pursuant to Rule 1210.02. Rule 1210.02 states that individuals maintaining permissive registrations are considered registered persons and subject to all FINRA rules to the extent relevant to their activities.

3. Can AML training count toward the Firm Element?

Yes. Rule 1240(b)(2)(D) permits a member to consider a registered person's participation in the member's anti-money laundering compliance training under Rule 3310(e), and participation in the member's annual compliance training under Rule 3110(a)(7), toward satisfying that person's continuing education requirement. Rule 3310(e) remains an independent requirement for the AML compliance program to provide ongoing training for appropriate personnel.

4. What records does the Firm Element require?

Rule 1240(b)(2)(C) requires a member to administer its continuing education programs in accordance with its annual evaluation and written plan, and to maintain records documenting the content of the programs and the completion of those programs by registered persons. Content and completion are both named, so a completion report on its own leaves half the requirement unevidenced.

5. How does the Firm Element differ from the Regulatory Element?

The Regulatory Element under Rule 1240(a)(1) is completed by a covered person for each registration category annually by December 31 of every year in which the person remains registered. Under Rule 1240(a)(2), a person who has not completed it within the prescribed calendar year has their registration deemed inactive and must cease all activities as a registered person. The Firm Element under Rule 1240(b) is the member's own program, built from an annual evaluation and a written training plan, and Regulatory Element performance is one of the considerations that plan takes into account.

References

1. FINRA. "Rule 1240(b)(1), persons subject to the Firm Element.". finra.org.
2. FINRA. "Rule 1240(b)(2)(A), the annual evaluation and the written training plan.". finra.org.
3. FINRA. "Rule 1240(b)(2)(B), minimum standards for training programs.". finra.org.
4. FINRA. "Rule 1240(b)(2)(C), administration and records.". finra.org.
5. FINRA. "Rule 1240(b)(2)(D), participation in other required training.". finra.org.
6. FINRA. "Rule 1240(a), the Regulatory Element and the consequence of a lapse.". finra.org.
7. FINRA. "Rule 1210.02, permissive registrations.". finra.org.
8. FINRA. "Rule 3310(e), ongoing training within the anti-money laundering compliance program.". finra.org.