FINRA has proposed establishing a new broker-dealer registration
category, the Operations Professional.1 This proposal
(the "FINRA proposal") is one of the many regulatory
responses to the Madoff scandal.2 The addition of this
new registration category would expand examination and registration
requirements to personnel with decision-making and/or oversight
authority with regard to certain operations functions. The FINRA
proposal makes clear that 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. To
allow time for current operations personnel to comply with the new
requirements, the FINRA proposal includes a six- to nine-month
transition period beginning on the date any new registration
category takes effect. The proposal is out for comment until July
12, 2010.
Personnel Subject to New Requirement
The operations personnel covered by the proposal would be those who
are directly responsible for ensuring that tasks within the covered
operations functions, discussed below, are "performed
correctly and in accordance with industry rules, firm protocols,
and policies and procedures," as well as those personnel
"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 Operations Professionals:
(1) Senior management with responsibility over the covered
functions;
(2) Supervisors, managers or other persons responsible for
approving or authorizing work in direct furtherance of the covered
functions, including work of other persons in the covered
functions;
(3) Persons with the authority or discretion to commit the
firm's capital in direct furtherance of the covered functions
or to commit the firm to any contract or agreement (written or
oral) in direct furtherance of the covered functions (including,
e.g., a person who has the discretion to commit the firm to any
contract or agreement involving securities lending or borrowing
activities).
The new requirements would not apply to persons who perform a
covered function, but whose responsibilities are below these three
specified levels. Additionally, the proposed registration category
would not extend to persons who perform a function ancillary to a
covered function or whose role can be viewed as supportive of, or
advisory to, the performance of a covered function, such as
internal audit, legal or compliance personnel. The new requirements
also would not apply to persons who are engaged solely in
"clerical or ministerial" activities in any of the
covered functions.3
Covered Functions
The Covered Operations Functions would be:
- Development and approval of pricing models used for valuations;
- Trade confirmation, account statements, settlement, margin;
- Stock loan/securities lending;
- Prime brokerage (services to other broker-dealers and financial institutions);
- Client on-boarding (customer account data and document maintenance);
- Capturing of business requirements for sales and trading
systems and any other
systems related to the covered functions, and validation that these systems meet such business requirements; - With respect to the covered functions, defining and approving
business security
requirements and policies for information technology (including, but not limited
to, systems and data); - Defining information entitlement policy in connection with the covered functions;
- Financial Controller (including general ledger);
- Collection, maintenance, re-investment (i.e., sweeps) and disbursement of funds;
- Bank, custody, depository and firm account management and reconciliation;
- Segregation, possession and control, fail control, buy ins;
- Receipt and delivery of securities and funds, account transfers;
- Financial regulatory reporting; and
- Posting entries to the books and records of a firm in
connection with the covered
functions.
Qualification Examination and Continuing Education
Requirements
Unless covered by the exception discussed below, registered
Operations Professionals would have to pass a qualification
examination. FINRA has said that the proposed Operations
Professional qualification examination is not intended to be a
competency examination, but would test for general securities
industry knowledge with a focus on the regulatory environment. The
examination would include the following three topics: (1)
professional conduct and ethical considerations, (2) essential
product and market knowledge for an operations professional, and
(3) knowledge associated with operations activities. Those
personnel subject to the proposed registration category would also
be responsible for FINRA's continuing education requirements.
The continuing education components associated with the Operations
Professional registration category would provide competency
training specific to the covered functions.
Exception to Qualification Examination
Requirement
FINRA is proposing an exception to the Operations Professional
qualification examination requirement for 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: Investment
Company Products/Variable Contracts Representative (Series 6),
General Securities Representative (Series 7), United Kingdom
Securities Representative (Series 17) or Canada Securities
Representative (Series 37 or 38). Additionally, persons who hold
(or have held) certain principal-level registration categories,
which are outlined in the proposal, would be qualified to register
as Operations Professionals without passing the Operations
Professional examination.
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.
Considerations for Firms
If a new Operations Professional category is created, firms would
need to undertake a review of persons performing covered functions
and establish criteria to determine who needs to be registered. In
addition, pursuant to NASD Rule 3010, firms would need to review
and update their policies and procedures to reflect the new
registration requirements. If a firm is currently outsourcing any
of the covered functions (including to an affiliate), the firm
would need to evaluate the potential impact of the FINRA proposal,
if any, on such an arrangement.
Footnotes
1 You can view the full notice
here.
2 See
The Securities and Exchange Commission Post-Madoff
Reforms.
3 Section 3(a)(18) of the Securities Exchange Act of 1934
specifically excludes persons involved in solely clerical or
ministerial activities from SRO registration
requirements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.