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Firm Element Practices - October 1997

How to Create a Training Plan
Sample Training Plans
Introduction

The Securities Industry Continuing Education Program

Foreword

Examples of Firm Element Practices and Council Commentary The securities industry achieved a milestone on July 1, 1995, when it implemented the Securities Industry Continuing Education (Program). The Program was the result of more than two years of cooperative effort among industry firms and self-regulatory organizations (SROs) represented by the Securities Industry/Regulatory Council on Continuing Education (the Council). The Council comprises 13 individuals from broker/dealers and six from SROs. Industry representatives are selected to maintain representation from a broad cross-section of firms. Both the Securities and Exchange Commission (SEC) and the North American Securities Administrators Association (NASAA) have staff liaisons assigned to the Council. The Council facilitates industry/regulatory coordination of the Program's administration and its future development.

The Securities Industry Continuing Education Program is designed to keep industry participants up to date on products, services, and rules through two components: the Regulatory Element and the Firm Element. The Regulatory Element is comprised of computer-based training dealing primarily with general compliance issues, regulations, and sales practices. Industry committees meet quarterly to develop and review the content of the Regulatory Element to ensure that it is relevant and current.

The Firm Element recognizes the need financial professionals have for continuing education regarding the specific products, services, and strategies offered by firms to investors as well as the rules related thereto. The Firm Element requires that firms conduct an annual analysis of continuing education training needs, formulate a written training plan to deliver programs that address those needs, implement the plan, and document that implementation. Although the Firm Element is specific about the required process, it allows each firm the flexibility to design a plan that meets its specific needs.

The Council published Guidelines For Firm Element Training1 in March 1995 and an update in October 1996 in order to help firms better understand how to meet the requirements of the Firm Element.

(1) See NASD Notice To Members 96-69, October 1996 or NYSE Information Memo 97-16, March 1997 for the latest edition of the Guidelines.

At this time, the Council believes it may be helpful to the industry to share work undertaken by a number of firms on Firm Element plans and, therefore, is publishing this first edition of Examples of Firm Element Practices and Council Commentary (Firm Element Practices). The Council's commentary, which is printed in boxes within the text of the plans, highlights both strong and weak aspects of the plans.

Because each firm has unique needs and characteristics, it is unlikely that any firm's needs analysis or training plan or one presented in Firm Element Practices could be directly and effectively implemented in another firm. Firm Element Practices includes examples of plans that may or may not meet the requirements of the Firm Element. These examples do not provide a "safe harbor" with respect to the Firm Element requirements. They are not models and should not be copied. Furthermore, these plan examples are presented "as is" with minimal editing in order to maintain the integrity and original form of the information. Therefore, style, grammar, and usage may vary among the plans.

The Council believes that a critical component of an effective Firm Element process and the transition through the needs analysis, written plan, implementation, evaluation, and feedback is the enthusiastic support and encouragement of a firm's senior management. Where a firm's senior management is solidly committed to continuing education, there is little doubt that appropriate resources will be committed, covered persons will participate in the firm's training programs, and the firm's training programs will improve year after year.

The documents included in Firm Element Practices are firms' initial efforts to address the Firm Element. As firms develop and enhance ideas and techniques to meet Firm Element requirements, the Council will issue updates of Firm Element Practices to share this information with firms.

THE REQUIREMENTS AND CHALLENGES OF THE FIRM ELEMENT

The language of the Firm Element requirements contained in the continuing education rules of the securities industry SROs is straightforward. The Firm Element rules require that individual securities firms "...maintain a continuing and current education program for its covered registered persons to enhance their securities knowledge, skill and professionalism."2 Covered registered persons are those who deal with customers in conducting the firm's securities sales, trading, and investment banking activities, and the immediate supervisors of these employees. An annual analysis of the firm's training needs in relation to its customer demographics and product lines must be undertaken to determine the subject areas and resulting content for the firm's continuing education program. Firms must also prepare a written training plan and document its execution by maintaining records of both the training content and participation by its covered persons. The Guidelines For Firm Element Training provides a "road map" towar d complying with the Firm Element, by identifying these milestones:

(2) NASD Membership and Registration Rule 1120, "Continuing Education Requirement," and NYSE Rule 345A, "Continuing Education For Registered Persons," typify the language of the continuing education rules of all other SROs.

The Needs Analysis

The first steps begin with an analysis of the firm's training needs. The needs analysis determines continuing education training issues for the firm and forms the basis for training priorities and the written training plan. The process includes gathering, then analyzing firm-specific information. Steps in the process are illustrated below with examples of components that could be considered in that step.

Step One — Gathering and Correlating Information

Identify:

  • Products and services the firm offers its customers.
  • Covered job functions at the firm.
  • Covered persons who perform those functions.

Step Two — Identifying Training Topics

Identify training needs by considering the following:

Legal and Regulatory Developments
New rules, regulations, significant enforcement actions or litigation, or new firm policies related to these events.

Complaints, Arbitration, and Litigation
Customer complaints or legal actions entered against the firm that may be indicative of recurring problems or trends.

Terminations for Cause and Internal Disciplinary Actions
Problems, trends, or significant issues.

New Products and Services
Additions to the firm's product lines or changes to a firm's agreement with an SRO that permits expansion of a firm's activities.

Marketing Strategies
Changes in sales or marketing strategies of existing products and services that may precipitate new suitability or regulatory issues.

Economic Conditions and Market Environment
Effects of changes in market conditions on products or services.

Regulatory Sources
Regulatory reviews, investigations, and disciplinary actions involving the firm and its agents.

Broad-based comments or findings by industry regulators, including any suggestions developed and disseminated.

Aggregate quarterly performance of the firm in the Regulatory Element.

Internal Input and Feedback
Feedback and evaluations from existing training programs and materials.

Input on issues from sources such as the firm's compliance, legal, internal audit, trading, and operations departments.

Input from management and registered personnel using surveys, interviews, focus groups, etc., as to perceived training needs.

Analyses of performance reviews, internal disciplinary actions, and business plans to identify training needs for individuals or groups within the firm.

Step Three — Determining Training Objectives

Prioritize:
Needs on the basis of business initiatives and primary regulatory and compliance issues in order to define specific training objectives.

Connect:
Training objectives and groups within the firm. Training objectives may be universal, i.e., applicable to the entire firm, or specific to certain groups or individuals.

Determine:
Specific training goals for each training objective.

Articulate:
The training goals in the written training plan.

The Written Training Plan

The written training plan:

  • Identifies the person(s) responsible for ensuring that the training plan is implemented in accordance with its stated scope and objectives.
  • Identifies the general objectives and the specific knowledge and skills to be imparted by the programs.
  • Addresses topics determined in the needs analysis.
  • States specific training needs and programs.
  • Links training programs to specific individuals/groups.
  • Describes the form or format in which training will be conducted.
  • Establishes a delivery timeframe for training.
  • Provides for and captures feedback for the next analysis/plan.
  • Is reviewed and updated at least annually.
Implementation of the Training Plan

Training materials used by the firm may be prepared by the firm or procured from outside sources. In either case, the training materials:

Must be appropriate for the firm's:

  • size
  • scope of business
  • method of operation

Must address the products, services, or strategies offered to customers, including :

  • general investment features of products, services, or strategies including

applicable fees and charges :

  • basic factors that determine the value of investment products, services, or strategies
  • associated risk factors, e.g., business risk, interest rate risk, inflation risk, market risk, political risk
  • features that may affect a product's liquidity, taxability, callability, convertibility, and legality for certain classes of investors
  • suitability for different types of investors, considering their investment objectives and constraints, financial status, experience, and level of sophistication
  • applicable regulatory requirements including communications with the public
Documentation of the Training Plan

Documentation of the Firm Element includes detailed records reflecting how the Firm Element plan was developed, implemented, administered, and monitored, including:

  • All components of the needs analysis, (data sources, participants, methods and materials used, results, conclusions)
  • The Written Training Plan
  • Actual training materials and outlines
  • Records of covered persons' participation in training programs
  • Feedback and evaluation. Training program evaluations are an important resource for the annual needs analysis

Rules 17a-3 and 17a-4 of the Securities Exchange Act of 1934 require that Firm Element books and records must be maintained as part of the firm's books and records.

EXAMPLES OF FIRM ELEMENT PRACTICES

Firm Element training plans from eight different broker/dealers are included in this publication to illustrate the different approaches various firms have taken to meet the challenges of the Firm Element. The plans are reproduced as they were written, but some are not reproduced in their entirety because of space constraints. The firms themselves are not identified, and some data may have been modified to respect the confidentiality and identity of the firm.

The Council considered a number of ways to make this compilation helpful to readers, and in the end determined that comments inserted directly in the text would be more valuable than summary analyses at the beginning or end of each plan. The interspersed commentaries do not address every strength or weakness of the individual plans, but have been designed to highlight a range of issues that have widespread relevance. Firms may find it useful to review the plans written by firms that most closely resemble theirs. However, the experience of Council members indicates that firms may find some of the most useful ideas in the plans of firms that are quite different in terms of business size and product mix.

Suggestions for an Effective Needs Analysis

Avoid being too general. The needs analysis should address the firm's specific business lines and demographics, analyzing the data collected and defining the training issues that will form the basis for the written training plan.

The experience of many firms to date is that a thorough needs analysis produces a list of needs that must be carefully prioritized in order to produce a workable training plan. The process of identifying training priorities should be carefully documented and should include who was involved in making the decisions, the basis for their judgments, and the covered persons (by position, business unit, or individual) for whom specific training is appropriate.

Suggestions for an Effective Written Plan

Develop a training plan, not a repetition of the needs analysis.

Consider the level of detail appropriate for your firm. A separate plan for each individual is not usually necessary. Individuals can be addressed as part of a group as well as individually.

Be flexible. Develop a process to review training objectives and modify when necessary.

Establish a clear link from the training needs identified in a firm's needs analysis to the resulting training plan.

The Council noted that many plans do not clearly identify the process by which some training needs were selected over others. To remedy this problem, a firm should document the decision-making process for determining the training topics in the firm's annual training plan. This allows a firm to more easily reassess and amend the training plan as circumstances within the firm or industry change. In developing a training plan, a firm should thoughtfully set priorities for those topics selected for inclusion and should carefully document the process and criteria for setting priorities.

Suggestions for Effective Implementation

Identify the individual(s) with overall responsibility for the firm's continuing education program(s) and others to whom responsibility is delegated.

Ensure the firm's written policies and procedures include the processes followed to meet continuing education requirements.

Make sure that training programs and materials meet standards for content stipulated in the rules.

When using outside vendors or externally developed training material, make certain the firm retains the overall responsibility to ensure that the content, delivery, and documentation are appropriate to its Firm Element needs. Please note that neither the NASD®, the NYSE, nor any other SRO approves any vendors or training material.

Educate covered persons and senior management about the importance and value of Firm Element training as well as the fact that it is mandatory.

Keep records and track progress of participation through your training programs.

Establish a regular schedule of training and monitor progress against the training schedule.

Ask that your firm's Internal Audit Department, Compliance Department, or Compliance Officer periodically review your firm's compliance with the Firm Element requirements in addition to conducting ongoing reviews of your Firm Element processes and programs.

Remember:

The annual compliance meeting required under Rule 3010 (a)(7) of the NASD Conduct Rules, while certainly a part of a firm's Firm Element training, is generally not sufficient to meet all of a firm's obligation under the Firm Element.

Training focused exclusively on selling skills or prospecting will not meet program requirements.

Some of the training offered in conjunction with the requirements of another industry (such as insurance and financial planning) may be used to meet Firm Element requirements if it is consistent with the topics identified in the firm's needs analysis and the specific job functions and training needs of the individual.