FINRA Requests Comment on Proposed Registration Category, Qualification Examination and Continuing Education Requirements for Operations Professionals
The comment period was extended to July 30, 2010.
The comment period was extended to July 30, 2010.
Registration and Qualification Requirements for Certain Operations Personnel
| Regulatory Notice | |
| Notice Type Request for Comment |
Referenced Rules & Notices FINRA Rule 8310 NASD Rule 1021 NASD Rule 1031 NASD Rule 1120 Incorporated NYSE Rule 345.10 Information Notice 03/12/08 Information Notice 10/06/08 Regulatory Notice 08-57 |
| Suggested Routing Compliance Legal Operations Registration Senior Management |
Key Topics Continuing Education Examination Qualification Registration Representative |
Executive Summary
FINRA requests comment on a proposal to establish a registration category, qualification examination and continuing education requirements for certain operations personnel. The proposal would expand FINRA's registration requirements to include as qualified and registered persons certain individuals who are engaged in, or supervising, activities relating to sales and trading support and the handling of customer assets to enhance the regulatory structure surrounding a member firm's back-office operations. As further detailed in this Notice, the proposed Operations Professional registration category generally is aimed at capturing those persons with decision-making and/or oversight authority in direct furtherance of the covered operations functions. Persons required to register under this proposal also would be subject to FINRA's continuing education requirements.
The text of the proposed rules is set forth in Attachment A.
Questions regarding this Notice should be directed to:
Action Requested
FINRA encourages all interested parties to comment on the proposed rules. Comments must be received by July 12, 2010.
Firms and other interested parties can submit their comments using the following methods:
Marcia E. Asquith
Office of the Corporate Secretary
FINRA
1735 K Street, NW
Washington, DC 20006-1506
To help FINRA process and review comments more efficiently, persons should only use one method to comment on the proposal.
Important Notes: The only comments that FINRA will consider are those submitted pursuant to the methods described above. All comments received in response to this Notice will be made available to the public on the FINRA Web site. Generally, FINRA will post comments on its site one week after the end of the comment period.1
Before becoming effective, a proposed rule change must be authorized for filing with the SEC by the FINRA Board of Governors, and then must be approved by the SEC, following publication for public comment in the Federal Register.2
I. Background
Given the growing complexity of the financial services industry and the importance of services provided by a firm's so-called "back-office" personnel, FINRA has concerns about the potential for regulatory gaps in the area of licensing and education requirements for individuals performing operations functions. Historically, federal and state law and self-regulatory organization rules, including NASD Rules 1021 and 1031, have required that individuals engaged in or supervising the securities or investment banking business of a member firm be qualified and registered persons. These requirements generally have applied to, among others, individuals with customer contact providing advice (sales persons and investment bankers) or effecting securities transactions (traders), and their supervisors. However, unregistered individuals who perform operations functions within a member firm also play an integral role in the business of the firm, and their activities often have a meaningful connection to client funds, accounts and transactions.
II. Proposal
FINRA believes that licensing and education requirements for certain operations personnel are needed to help ensure that investor protection mechanisms are in place in all areas of a member firm's business that could harm a customer, a firm, the integrity of the marketplace or the public. Accordingly, FINRA proposes expanding its registration requirements to include as qualified and registered persons certain individuals (as further detailed in Section II.A. below) who are engaged in, or supervising, activities relating to sales and trading support and the handling of customer assets (Operations Professionals) to enhance the regulatory structure surrounding a firm's back-office operations.
Generally, the proposed registration category for Operations Professionals is aimed at capturing those persons with decision-making and/or oversight authority in direct furtherance of the covered operations functions, which are described in detail in Section II.B. below (the covered functions). Persons subject to the new registration category generally are those persons who are directly responsible for overseeing that tasks within the covered functions are performed correctly in accordance with industry rules, firm protocols, policies and procedures, and who are charged with protecting the functional and control integrity of the covered functions for the firm.
More specifically, the following persons would be required to register with FINRA as an Operations Professional (collectively, covered persons):
Importantly, those persons subject to the new Operations Professional registration category would be considered associated persons of a firm irrespective of their employing entity and would be subject to all FINRA rules applicable to associated persons and/or registered persons.3
To implement this proposal, FINRA is proposing amendments to proposed FINRA Rule 1230 (Registration Categories) to add a new representative registration category for Operations Professionals.4 Also, in light of the fact that the Operations Professional registration category would encompass individuals engaged in or supervising stock loan/securities lending activities, the proposed registration categories for a "Securities Lending Representative" and a "Securities Lending Supervisor" would be eliminated.5
The three categories of persons identified in Section II.A. above that conduct activities or functions for the firm in one or more of the following covered functions would be required to register as an Operations Professional:
FINRA proposes the establishment of a new qualification examination for Operations Professionals that would provide reasonable assurance that such individuals understand their professional responsibilities, including key regulatory and control themes, as well as the importance of identifying and escalating red flags that may harm a firm, its customers, the integrity of the marketplace or the public. The SEC staff has previously indicated its support for the establishment of a qualification examination for covered persons to heighten their awareness of operating in a regulated environment and to demonstrate a basic understanding of the securities industry.
In general, given the diversity of functions performed by covered persons, FINRA proposes the development of a single principles-based qualification examination with a regulatory focus to test for a broad understanding of a broker-dealer's business at a basic level; a basic understanding of the operations functions that support a broker-dealer's business; and the regulations designed to achieve investor protection and market integrity that drive the operations processes and procedures conducted at a broker-dealer. Any individual whose activities go beyond those proposed for the Operations Professional registration category would be required to separately qualify and register in the appropriate category or categories of registration attendant to such activities.
The proposed Operations Professional qualification examination is not intended to be a competency examination, but would test for general securities industry knowledge with a regulatory focus to alert such persons that they are functioning in a heavily regulated industry. The continuing education components associated with the Operations Professional registration category (described in detail in Section II.E. below) would provide competency training specific to the covered functions.
The breadth and depth of coverage of the qualification examination would be determined through the use of testing industry standards used to develop examinations, and would include input and advice from covered persons active in the securities industry.
The following are the three key content themes of the new Operations Professional qualification examination:
FINRA is proposing an exception to the Operations Professional qualification examination requirement for persons who currently hold certain registrations (each an eligible registration) or have held one during the two years immediately prior to registering as an Operations Professional. The proposed exception also would apply to persons who do not hold an eligible registration, but prefer an alternative to taking the Operations Professional examination. Such persons would be permitted to register in an eligible registration category (subject to passing the corresponding qualification examination or obtaining a waiver) and use such registration to qualify for Operations Professional registration.
A person who wishes to obtain Operations Professional registration under the proposed exception would not be automatically waived-in, but would have to opt-in by requesting Operations Professional registration via Form U4 (the Uniform Application for Securities Industry Registration or Transfer) in the Central Registration Depository (CRD®).6 If there are no other deficiencies (funds, fingerprints, etc.), the Operations Professional registration would be approved automatically at the time such request is made. (See also Section II.F. below regarding the transition period and implementation date.) FINRA would not assess a separate registration fee for persons relying on the proposed exception to register as Operations Professionals.
FINRA conducted a review of the content outlines for each qualification examination it recognizes and identified examinations with broad content coverage that would be eligible for an exception to the Operations Professional examination requirement.
Accordingly, persons that hold the following representative level registration categories, or who have held such registration categories within the two years immediately prior to registering as an Operations Professional, would be qualified to register as an Operations Professional without passing the Operations Professional qualification examination:
Accordingly, persons who hold the following principal-level registration categories, or who have held such registration categories within the two years immediately prior to registering as an Operations Professional, would be qualified to register as an Operations Professional without passing the Operations Professional qualification examination:
FINRA notes that operations personnel who would be subject to the Operations Professional registration requirements are generally acting in a supervisory position, so many persons will already hold one of the eligible registrations that would qualify for the exception to the Operations Professional examination requirement. As noted above, entry-level operations personnel would not typically be subject to the proposed requirements for Operations Professionals.
FINRA would require that individuals registered as Operations Professionals be subject to FINRA's Regulatory Element and Firm Element continuing education requirements as set forth in NASD Rule 1120 (Continuing Education Requirements). The continuing education elements for this registration category would provide learning materials appropriate for Operations Professionals, given the breadth of functions that are covered by this registration requirement.
The Regulatory Element program for Operations Professionals would provide instruction for Operations Professionals to:
Individuals who avail themselves of the proposed exception to the Operations Professional qualification examination requirement with an eligible registration (described in Section II.D. above) would be subject to the Regulatory Element program appropriate for such other registration category. For example, a person who registers as an Operations Professional by holding a General Securities Representative registration under the exception would be subject to the S101 continuing education program.
Operations Professionals would also be subject to Firm Element training. To implement this change, FINRA would expand NASD Rule 1120(b) to include Operations Professionals in the definition of "covered registered persons," and to require that firms deliver Firm Element training to Operations Professionals subject to the new registration and qualification requirements.7
FINRA is proposing a six- to nine-month transition period for existing personnel that meet the depth of personnel criteria and are engaged in the covered functions as of the effective date of the proposed registration category. During this six- to nine-month period (which would begin on the date the proposed registration category takes effect), covered persons would be required to register with FINRA as Operations Professionals. FINRA believes that a six- to nine-month transition period will provide firms with an opportunity to identify persons who would be subject to the Operations Professional requirements, and provide such covered persons an opportunity to register as an Operations Professional by doing one of the following, as applicable:
The six- to nine-month transition period would not apply to persons who meet the depth of coverage criteria and begin work in the covered functions following the effective date of the proposed registration category (i.e., new hires or existing associated persons who transition into the covered functions). Such persons would be required to register as an Operations Professional prior to engaging in any of the activities that would qualify them as covered persons, regardless of whether they begin work during the transition period or after it expires, and would be permitted to register as described in paragraphs (1)–(3) of Section II.F.1. above.
1 FINRA will not edit personal identifying information, such as names or email addresses, from submissions. Persons should submit only information that they wish to make publicly available. See Notice to Members 03-73 (November 2003) (NASD Announces Online Availability of Comments) for more information.
2 Section 19 of the Securities Exchange Act of 1934 (SEA or Exchange Act) permits certain limited types of proposed rule changes to take effect upon filing with the SEC. The SEC has the authority to summarily abrogate these types of rule changes within 60 days of filing. See SEA Section 19 and rules thereunder.
3See Notice to Members 05-48 (Members' Responsibilities When Outsourcing Activities to Third-Party Service Providers). The Notice reminds members that "in the absence of specific NASD [or FINRA] rules, MSRB rules, or federal securities laws or regulations that contemplate an arrangement between members and other registered broker-dealers with respect to such activities or functions (e.g., clearing agreements executed pursuant to NASD Rule 3230), any third-party service providers conducting activities or functions that require registration and qualification under NASD [or FINRA] rules will generally be considered associated persons of the member and be required to have all necessary registrations and qualifications."
4See Regulatory Notice 09-70 (FINRA Requests Comment on Proposed Consolidated FINRA Rules Governing Registration and Qualification Requirements). The proposed amendments discussed in this Notice would be included in proposed FINRA Rule 1230 (Registration Categories).
5See supra note 4. In Regulatory Notice 09-70, FINRA proposed generally adopting the NYSE registration requirement for securities lending representatives and securities lending supervisors (Incorporated NYSE Rule 345.10), which requires the registration of securities lending representatives and their direct supervisors. Under NYSE rules, such persons are not subject to any training or examination requirements; however, these individuals are required to file a Form U4 and sign a "code of ethics" agreement.
6 A person who qualifies for the proposed exception based on their having held an eligible registration within the two years immediately prior to registering as an Operations Professional would be required to first re-activate such eligible registration prior to requesting Operations Professional registration.
7 NASD Rule 1120 (Continuing Education Requirements) is limited to registered persons who have direct contact with customers in the conduct of the firm's securities sales, trading and investment banking activities, any person registered as a research analyst pursuant to Rule 1050, and to the immediate supervisors of such persons. The proposed amendments would be included in the new FINRA rule governing continuing education, FINRA Rule 1250, which would be filed concurrently with this proposal.
8See supra note 6.
9 This would include, for example, a person who takes and passes the Series 7 examination, or qualifies for a waiver of the requirement to take the examination, and registers in CRD as a General Securities Representative.
ATTACHMENT A
Below is the text of the proposed rule change. Proposed new language is underlined.
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Text of Proposed New FINRA Rule
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Each of the following persons shall be required to register with FINRA as an Operations Professional:
Subject to the exception in paragraph (b)(6)(D) of this Rule, any person who is required to register as an Operations Professional shall pass the Operations Professional qualification examination before such registration may become effective.
Any person who is registered with FINRA as an Investment Company Products/Variable Contracts Representative, General Securities Representative, United Kingdom Securities Representative or Canada Securities Representative, Registered Options Principal, General Securities Sales Supervisor, Compliance Officer, Supervisory Analyst, General Securities Principal—Sales Supervisor, General Securities Principal, Investment Company Products/Variable Products Principal, Financial and Operations Principal, Introducing Broker/Dealer Financial and Operations Principal, Municipal Fund Securities Limited Principal or Municipal Securities Principal, and any person who has been registered in one of these categories within the two years immediately prior to registering as an Operations Professional, shall be qualified to register as an Operations Professional without passing the Operations Professional qualification examination, provided that such registration has not been terminated or revoked pursuant to FINRA Rule 8310.
Any person who is required to register as an Operations Professional under this Rule as of [insert the effective date of the rule] shall register as an Operations Professional within the time period prescribed by FINRA for such persons. Any person who is not required to register as an Operations Professional under this Rule as of [insert the effective date of the rule] shall register as an Operations Professional prior to engaging in any activities that would require such registration.
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The requirements of this subparagraph shall apply to any person registered with a member who has direct contact with customers in the conduct of the member's securities sales, trading and investment banking activities, any person registered as an operations professional, any person registered as a research analyst or a supervisory analyst and 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.
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| Date | Commenter |
|---|---|
| Brian Marcotte Comments on Regulatory Notice 10-25 | |
| RBC Wealth Management Comments on Regulatory Notice 10-25 | |
| Navidar Group Comments on Regulatory Notice 10-25 | |
| M. Griffith Investment Services Comments on Regulatory Notice 10-25 | |
| Doug Schriner Comments on Regulatory Notice 10-25 | |
| Transcend Capital Comments on Regulatory Notice 10-25 | |
| Martin Nelson & Co., Inc. Comments on Regulatory Notice 10-25 | |
| RiverStone Wealth Management, Inc. Comments on Regulatory Notice 10-25 | |
| Zelman Partners LLC Comments on Regulatory Notice 10-25 | |
| United Planners Financial Services Comments on Regulatory Notice 10-25 | |
| Arnold & Porter LLP Comments on Regulatory Notice 10-25 | |
| Horace Mann Investors, Inc. Comments on Regulatory Notice 10-25 | |
| MWA Financial Services Inc. Comments on Regulatory Notice 10-25 | |
| Mutual Trust Co. Of America Securities Comments on Regulatory Notice 10-25 | |
| NPB Financial Group, LLC Comments on Regulatory Notice 10-25 | |
| Regional Municipal Operations Association Comments on Regulatory Notice 10-25 | |
| American Investors Company Comments on Regulatory Notice 10-25 | |
| NFP Securities, Inc Comments on Regulatory Notice 10-25 | |
| Equity Services Incorporated Comments on Regulatory Notice 10-25 | |
| Freestone Capital Management LLC Comments on Regulatory Notice 10-25 | |
| Wellington Shields & Co. LLC Comments on Regulatory Notice 10-25 | |
| Northwestern Mutual Investment Services LLC Comments on Regulatory Notice 10-25 | |
| Wall Street Financial Group Inc Comments on Regulatory Notice 10-25 | |
| Wells Fargo Advisors Comments on Regulatory Notice 10-25 | |
| Nationwide Comments on Regulatory Notice 10-25 | |
| FirstBank Puerto Rico Securities Corp Comments on Regulatory Notice 10-25 | |
| Quasar Distributors, LLC Comments on Regulatory Notice 10-25 | |
| T. Rowe Price Investment Services, Inc. Comments on Regulatory Notice 10-25 | |
| Morgan Stanley Comments on Regulatory Notice 10-25 | |
| Great National Investment Corporation Comments on Regulatory Notice 10-25 | |
| Rockfleet Financial Services, Inc. Comments on Regulatory Notice 10-25 | |
| CISI Comments on Regulatory Notice 10-25 | |
| ACLI Comments on Regulatory Notice 10-25 | |
| Charles Schwab Comments on Regulatory Notice 10-25 | |
| Pershing Comments on Regulatory Notice 10-25 | |
| Pacific Select Distributors Comments on Regulatory Notice 10-25 | |
| Sutherland Asbill& Brennan LLP Comments on Regulatory Notice 10-25 | |
| Commonwealth Financial Network Comments on Regulatory Notice 10-25 | |
| NASAA Comments on Regulatory Notice 10-25 | |
| Insured Retirement Institute Comments on Regulatory Notice 10-25 | |
| SIFMA Comments on Regulatory Notice 10-25 | |
| Investment Program Association Comments on Regulatory Notice 10-25 | |
| ARM Comments on Regulatory Notice 10-25 | |
| Bank of America Comments on Regulatory Notice 10-25 | |
| Crowell, Weedon & Co. Comments on Regulatory Notice 10-25 | |
| Financial Services Institute Comments on Regulatory Notice 10-25 | |
| NSCP Comments on Regulatory Notice 10-25 | |
| TIAA-CREF Comments on Regulatory Notice 10-25 | |
| Scottrade, Inc. Comments on Regulatory Notice 10-25 |