About nine months after it floated the idea, the Financial Industry Regulatory Authority has just asked the Securities and Exchange Commission to approve a rule change to establish a new registration category and qualification exam for certain operations personnel to be called operations professionals.
This means most executives in senior-level positions in Wall Street will soon have to register with FINRA and pass a licensing exam to become operations professionals.
In its rule change request, FINRA in large part is carrying out what it proposed last year, without addressing many of the concerns of brokerage firms to heart. Their key beef: the registration requirement would affect far too many operations executives and be too costly to implement.
FINRA said that it will publish the effective date of the rule change in a regulatory notice after it wins SEC approval. The rule could go into effect before the end of the year.
“The proposed rule change would establish 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 member, a customer, the integrity of the marketplace, or the public,” wrote FINRA in its filing with the SEC on March 4.
Although FINRA made some minor changes in the language used to describe the 16 functions that would be covered by the licensing, the list remains pretty exhaustive.
This includes client onboarding (customer account data and account maintenance); collection maintenance; reinvestment and disbursement of funds; receipt and delivery of securities and funds and account transfers; bank, custody, depository and firm account management and reconciliation; settlement, fail control, buy-ins, segregation, possession and control; trade confirmation and account statements; margin; securities loan and securities lending; prime brokerage; approval of pricing models used for valuations; financial control including general ledger and treasury; contributing to the process of preparing and filing financial regulatory reports; defining and approving business requirements for sales and trading systems and any other systems related to the covered functions; defining and approving business security requirements and policies for information technology; defining and approving information entitlement policies in connection with the covered functions; and posting entries to a member’s books and records in connection with the covered functions.
FINRA rejected requests from some brokerage firms to clarify which top-ranking operations executives would be affected so that the scope – and potential costs – of implementing the rule could be reduced. Instead FINRA repeated its previous stance that senior management; supervisors, managers and other persons authorized responsible for approving or authorizing work; persons with the authority or discretion materially to commit a FINRA member’s capital.
“FINRA believes this provision is clear as originally proposed and while understands titles may differ between firms, members should be able to identify operations personnel that would be subject to the proposed rule based on their functions and responsibilities as senior managers overseeing the covered functions,” wrote FINRA. The agency went on to say that phrases such as “approve or authorize work” and “work of other persons” don’t require clarification.
In its proposal for a rule change, FINRA also disagreed with some brokerage firms that a rudimentary exam would be ineffective and too expensive to implement. “FINRA believes the qualification examination requirement is appropriate as proposed. Although the examination will not test for proficiency with respect to the specific covered functions, FINRA believes there is value in an examination that tests for general knowledge about the securities industry,” wrote FINRA.
The licensing exam, said FINRA, would cover three general issues: professional conduct and ethical considerations; essential product and market knowledge; and knowledge associated with operations activities. The professional conduct and ethical considerations section of the exam would include questions that address data integrity, escalation of regulatory red flags and separation of duties.
Within the essential product and market knowledge category the operations executive would need to have a basic understanding of the different assets classes such as equities and bonds. The knowledge associated with operations activities refers an understanding of functions such as customer account set-up; recordkeeping, and meeting settlement requirements.
Operations executives who have taken principal-level exams from FINRA and other exams to sell brokerage products would be exempt from the licensing exam but would be required to complete ongoing education requirements as is the case with registered operations executives. FINRA divided continuing education requirements into two categories: “regulatory element” and “firm element.”
In one of the few concessions to brokerage firms, FINRA agreed to extend the timetable for licensing of so-called “covered” operations executives who are currently employed to twelve months after the effective date of the rule change instead of six to nine months. New employees would still have to register as operations professionals and pass the exam before doing their jobs.