Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Establish a Registration Category, Qualification Examination and Continuing Education Requirements for Certain Operations Personnel, and Adopt FINRA Rule 1250 (Continuing Education Requirements) in the Consolidated FINRA Rulebook, 15012-15025 [2011-6315]

Download as PDF Emcdonald on DSK2BSOYB1PROD with NOTICES 15012 Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices availability of the month-end performance data in the advertisement. The rule also sets forth requirements regarding the prominence of certain disclosures, requirements regarding advertisements that make tax representations, requirements regarding advertisements used prior to the effectiveness of the fund’s registration statement, requirements regarding the timeliness of performance data, and certain required disclosures by money market funds. Rule 482 advertisements must be filed with the Commission or, in the alternative, with Financial Industry Regulatory Authority (‘‘FINRA’’).3 This information collection differs from many other federal information collections that are primarily for the use and benefit of the collecting agency. As discussed above, rule 482 contains requirements that are intended to encourage the provision to investors of information that is balanced and informative, particularly in the area of investment performance. The Commission is concerned that in the absence of such provisions fund investors may be misled by deceptive rule 482 performance advertisements and may rely on less-than-adequate information when determining in which funds they should invest their money. As a result, the Commission believes it is beneficial for funds to provide investors with balanced information in fund advertisements in order to allow investors to make better-informed decisions. The Commission estimates that 58,368 responses are filed annually pursuant to rule 482 by 3,540 investment companies offering approximately 16,225 portfolios, or approximately 3.6 responses per portfolio annually. Respondents consist of all the investment companies that take advantage of the safe harbor offered by the rule for their advertisements. The burden associated with rule 482 is presently estimated to be 5.16 hours per response. The hourly burden is therefore approximately 301,179 hours (58,368 responses × 5.16 hours per response). The estimate of average burden hours is made solely for the purposes of the Paperwork Reduction Act, and is not derived from a comprehensive or even a representative survey or study of the costs of Commission rules and forms. 3 See rule 24b–3 under the Investment Company Act (17 CFR 270.24b–3), which provides that any sales material, including rule 482 advertisements, shall be deemed filed with the Commission for purposes of Section 24(b) of the Investment Company Act upon filing with FINRA. VerDate Mar<15>2010 18:30 Mar 17, 2011 Jkt 223001 Cost burden is the cost of services purchased to comply with rule 482, such as for the services of computer programmers, outside counsel, financial printers, and advertising agencies. The Commission attributes no cost burden to rule 482. The provision of information under rule 482 is necessary to obtain the benefits of the safe harbor offered by the rule. The information provided is not kept confidential. An agency may not conduct or sponsor, and a person is not required to respond to a collection of information unless it displays a currently valid control number. The public may view the background documentation for this information collection at the following Web site, http://www.reginfo.gov. Comments should be directed to: (i) Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Office of Management and Budget, Room 10102, New Executive Office Building, Washington, DC 20503, or by sending an e-mail to: Shagufta_Ahmed@omb.eop.gov; and (ii) Thomas Bayer, Chief Information Officer, Securities and Exchange Commission, c/o Remi Pavlik-Simon, 6432 General Green Way, Alexandria, VA 22312 or send an e-mail to: PRA_Mailbox@sec.gov. Comments must be submitted to OMB within 30 days of this notice. Dated: March 14, 2011. Cathy H. Ahn, Deputy Secretary. [FR Doc. 2011–6320 Filed 3–17–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–64080; File No. SR–FINRA– 2011–013] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Establish a Registration Category, Qualification Examination and Continuing Education Requirements for Certain Operations Personnel, and Adopt FINRA Rule 1250 (Continuing Education Requirements) in the Consolidated FINRA Rulebook March 14, 2011. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b-4 thereunder,2 notice is hereby given that on March 4, 1 15 2 17 PO 00000 U.S.C. 78s(b)(1). CFR 240.19b–4. Frm 00119 Fmt 4703 Sfmt 4703 2011, Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) (f/k/a National Association of Securities Dealers, Inc. (‘‘NASD’’)) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to adopt FINRA Rule 1230(b)(6) to establish a registration category and qualification examination requirement for certain operations personnel. The proposed rule change also would adopt continuing education requirements for such operations personnel and adopt NASD Rule 1120 (Continuing Education Requirements) as FINRA Rule 1250 (Continuing Education Requirements) in the consolidated FINRA rulebook with minor changes. The text of the proposed rule change is available on FINRA’s Web site at http://www.finra.org, at the principal office of FINRA and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, FINRA included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. FINRA has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Background Given the growing complexity of the financial services industry and the importance of services provided by personnel in operations departments, FINRA is concerned about the potential for regulatory gaps in the area of registration and education requirements for individuals performing and overseeing member operations functions. Historically, federal and state law and self-regulatory organization E:\FR\FM\18MRN1.SGM 18MRN1 Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices Emcdonald on DSK2BSOYB1PROD with NOTICES (‘‘SRO’’) 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 and oversee member operations functions 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. FINRA believes registration 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’s business that could harm the member, a customer, the integrity of the marketplace, or the public. Proposal As described in detail below, FINRA is proposing to expand its registration provisions to require registration of certain individuals (‘‘covered persons’’) who are engaged in, responsible for or supervising certain member operations functions (‘‘covered functions’’) to enhance the regulatory structure surrounding these areas. The proposed rule change would amend proposed FINRA Rule 1230 (Registration Categories) to adopt a new representative registration category and qualification examination for such individuals (‘‘Operations Professionals’’) 3 and would expand FINRA’s continuing education requirements to require that Operations Professionals be subject to Regulatory Element and Firm Element training. Generally, covered persons would be 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 a member. Only persons who are both ‘‘covered persons’’ (i.e., meet the depth of personnel criteria as discussed in Section A. below) and 3 See Regulatory Notice 09–70 (December 2009) (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). VerDate Mar<15>2010 18:30 Mar 17, 2011 Jkt 223001 conduct activities or functions in one or more of the ‘‘covered functions’’ (discussed in Section B. below) would be subject to the new Operations Professional registration category. A. Covered Persons for Inclusion in the New Registration Category The proposed rule change would require the following covered persons to register with FINRA as an Operations Professional: (1) Senior management with responsibility over the covered functions; (2) Supervisors, managers or other persons responsible for approving or authorizing work, including work of other persons, in direct furtherance of the covered functions; and (3) Persons with the authority or discretion materially to commit a member’s capital in direct furtherance of the covered functions or to commit a member to any material contract or agreement (written or oral) in direct furtherance of the covered functions. Persons who perform a covered function, but whose responsibilities are below these specified levels, would not be required to register as Operations Professionals. Members must determine, based on a person’s activities and responsibilities, whether such person would be considered a covered person and subject to the proposed requirements for Operations Professionals. A person’s job title may not be clearly indicative of his or her obligation to register as an Operations Professional. For the purpose of the proposed third category of covered persons, any person who has the authority or discretion materially to commit firm capital in direct furtherance of the covered functions or commit a firm to a material contract or agreement in direct furtherance of the covered functions would be required to register as an Operations Professional. As proposed in supplementary material .06 (Scope of Operations Professional Requirement), the determination as to what constitutes ‘‘materially’’ or ‘‘material’’ would be based on a member’s pre-established spending guidelines and risk management policies. Generally, persons who do not have the authority or discretion to commit a member’s capital, or to commit a member to a contract or agreement, above such preestablished spending guidelines and risk management policies would not be subject to registration as an Operations Professional under this provision. Additionally, proposed supplementary material .06 would provide that any person whose activities PO 00000 Frm 00120 Fmt 4703 Sfmt 4703 15013 are limited to performing a function ancillary to a covered function, or whose function is to serve a role that can be viewed as supportive of or advisory to the performance of a covered function, or who engages solely in clerical or ministerial activities in a covered function would not be required to register as an Operations Professional pursuant to paragraph (b)(6)(A) of the proposed rule. For example, internal audit, legal or compliance personnel who review but do not have primary responsibility for any covered function would not be required to register as an Operations Professional. Consistent with FINRA guidance, persons subject to the new Operations Professional registration category would be considered associated persons of a member irrespective of their employing entity, and would be subject to all FINRA rules applicable to associated persons and/or registered persons.4 Moreover, any person who meets the depth of personnel criteria described above in Section A. and is engaged in one or more covered functions would be required to register as an Operations Professional. The proposed rule change does not alter the status of covered persons as associated persons of a member insofar as they are performing regulated broker-dealer functions on behalf of the member. Rather, the proposed rule change explicitly imposes registration, qualification examination and continuing education requirements on such persons. B. Covered Functions for Inclusion in the New Registration Category Any person who meets the threshold in one of the three categories of covered persons identified above in Section A. who conducts activities or functions for a member in one or more of the following covered functions would be required to register as an Operations Professional: (1) Client on-boarding (customer account data and document maintenance); 4 See Notice to Members 05–48 (July 2005) (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 thirdparty 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.’’ E:\FR\FM\18MRN1.SGM 18MRN1 15014 Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices Emcdonald on DSK2BSOYB1PROD with NOTICES (2) Collection, maintenance, reinvestment (i.e., sweeps) and disbursement of funds; (3) Receipt and delivery of securities and funds, account transfers; (4) Bank, custody, depository and firm account management and reconciliation; (5) Settlement, fail control, buy ins, segregation, possession and control; (6) Trade confirmation and account statements; (7) Margin; (8) Stock loan/securities lending; (9) Prime brokerage (services to other broker-dealers and financial institutions); (10) Approval of pricing models used for valuations; (11) Financial control, including general ledger and treasury; (12) Contributing to the process of preparing and filing financial regulatory reports; (13) Defining and approving 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; (14) Defining and approving business security requirements and policies for information technology, including, but not limited to, systems and data, in connection with the covered functions; (15) Defining and approving information entitlement policies in connection with the covered functions; and (16) Posting entries to a member’s books and records in connection with the covered functions to ensure integrity and compliance with the federal securities laws and regulations and FINRA rules. The proposed rule change would include persons engaged in or supervising stock loan/securities lending activities that meet the depth of personnel as a covered person in Section A. above. FINRA also is proposing separate registration categories for a ‘‘Securities Lending Representative’’ and a ‘‘Securities Lending Supervisor.’’ 5 5 In Regulatory Notice 09–70, FINRA generally proposes to adopt the NYSE registration requirements for Securities Lending Representatives and Securities Lending Supervisors, requiring an associated person who has discretion to commit a member to any contract or agreement (written or oral) involving securities lending or borrowing activities with any other person, and the direct supervisor of the associated person to register as a Securities Lending Representative and Securities Lending Supervisor, respectively. These individuals would be required to register as such for tracking and oversight purposes, regardless of whether they are registered in other categories. However, solely for purposes of registering as a Securities Lending Representative or Securities Lending Supervisor, an individual will not be subject to a qualification examination at this time. VerDate Mar<15>2010 18:30 Mar 17, 2011 Jkt 223001 C. Operations Professional Qualification Examination 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.6 So that applicants understand that they are functioning in a heavily regulated industry, the proposed Operations Professional qualification examination would test applicants on general securities industry knowledge and its associated regulations and rules. Subject to the proposed exception in Section D. below, any person required to register as an Operations Professional would be required to pass the Operations Professional qualification examination before such registration may become effective. In general, given the diversity of functions performed by covered persons, the proposed Operations Professional qualification examination would be a 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. As further detailed in Section E. below, the continuing education components associated with the Operations Professional registration category would provide competency training specific to the covered functions, as applicable. 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 proposed key content themes of the new Operations Professional qualification examination: • Professional Conduct and Ethical Considerations: This section of the 6 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. PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 examination would assess a candidate’s core knowledge addressed on other FINRA examinations that are appropriate for an Operations Professional. The questions would assess knowledge of what are considered serious violations of securities industry rules. This section would include ethics-based questions that address issues such as data integrity, escalation of regulatory red flags and separation of duties. • Essential Product and Market Knowledge for an Operations Professional: This section of the examination would assess a candidate’s basic product and market knowledge, including definitions and characteristics of major product categories (i.e., equities, debt, packaged securities, options and markets). An Operations Professional would not be expected to know the same level of detail about the products and markets as a product specialist or a representative selling products to customers. • Knowledge Associated with Operations Activities: This section of the examination would assess a candidate’s broad-based knowledge regarding the covered functions outlined above that support a brokerdealer’s business and the underlying rules that drive the processes associated with these activities (i.e., customer account set-up and transfers, recordkeeping requirements, rules associated with the protection of customer assets and transaction processing, uniform practices associated with making good delivery of securities, making payments for securities and meeting settlement requirements, and credit and margin rules). This section of the examination also would include ethics-based questions in the context of operations activities. D. Exception to Operations Professional Examination Requirement The proposed rule change would include 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. E:\FR\FM\18MRN1.SGM 18MRN1 Emcdonald on DSK2BSOYB1PROD with NOTICES Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices 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®’’).7 If there are no other deficiencies (e.g., fingerprints), the Operations Professional registration would be approved automatically at the time such request is made. Information regarding the proposed implementation period is discussed in detail in Section F. below. 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 who 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: • 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 would be qualified to register as an Operations Professional without passing the Operations Professional examination. Most principal-level qualification examinations have a prerequisite examination requirement that is satisfied with one of the representative qualification examinations listed above; however, FINRA also proposes to include principal-level qualification examinations that do not have a prerequisite, or have a prerequisite that can be met with a qualification 7 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. VerDate Mar<15>2010 18:30 Mar 17, 2011 Jkt 223001 examination not on the above list (e.g., Series 62), because it is likely such principals are familiar with the content to be covered in the Operations Professional qualification examination as a result of the requirements of their positions. Specifically, 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: • Registered Options Principal (Series 4) • General Securities Sales Supervisor (Series 9/10) • Compliance Officer (Series 14) • Supervisory Analyst (Series 16) • General Securities Principal (Series 24) • Investment Company Products/ Variable Products Principal (Series 26) • Financial and Operations Principal (Series 27) • Introducing Broker-Dealer Financial and Operations Principal (Series 28) • Municipal Fund Securities Limited Principal (Series 51) • Municipal Securities Principal (Series 53) The proposed exception would not apply to persons whose eligible registrations are revoked pursuant to FINRA Rules 8310 (Sanctions for Violation of the Rules) or 8320 (Payment of Fines, Other Monetary Sanctions, or Costs; Summary Action for Failure to Pay), suspended or otherwise deemed inactive.8 FINRA notes that covered persons 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 in Section A. above, entry-level operations personnel would not typically be subject to the proposed requirements for Operations Professionals. 8 If a person’s registration in an eligible registration category was revoked within the prior two years, but such person re-qualifies and reregisters in such eligible registration category, he or she may rely on this eligible registration to qualify for the exception to the Operations Professional qualification examination requirement. Further, a suspended registration may not be relied upon as an eligible registration during the suspension period. Similarly, a registration deemed inactive for any reason (e.g., failure to complete continuing education requirements) may not be relied upon as an eligible registration during such inactive period. See also FINRA Rule 8311 (Effect of a Suspension, Revocation, Cancellation, or Bar). PO 00000 Frm 00122 Fmt 4703 Sfmt 4703 15015 E. Continuing Education Requirements for Operations Professionals The proposed rule change 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 proposed FINRA Rule 1250 (Continuing Education Requirements).9 The continuing education elements for this registration category would provide more specific learning materials appropriate for an Operations Professional, 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: (1) Maintain and improve understanding of the regulatory and ethical aspects associated with the covered functions; (2) identify suspicious activities and/or red flags that could harm a customer, a firm, issuers of securities or the integrity of the marketplace; (3) maintain and improve knowledge and understanding of the covered functions; and (4) assist the Operations Professionals in keeping up with changes in the industry and regulations that impact their work. Operations Professionals would be required to complete scenario-based modules based on the key content themes of the Operations Professional qualification examination, as described in Section C. above. The breadth and depth of coverage of the modules would be determined through the use of existing industry standards currently used to develop continuing education content and would include input and advice from operations professionals active in the securities industry. Individuals would be expected to complete the Regulatory Element continuing education requirement two years after passing the qualification examination and then every three years thereafter. Individuals who avail themselves of the proposed exception to the Operations Professional qualification examination requirement with an eligible registration described 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 (Series 7) under the exception would be subject to the S101 continuing 9 See Section G. for further discussion of the adoption of NASD Rule 1120 (Continuing Education Requirements) as FINRA Rule 1250. E:\FR\FM\18MRN1.SGM 18MRN1 15016 Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices education program in lieu of the Operations Professional Regulatory Element training, and a person who registers by holding a General Securities Principal registration (Series 24) would be subject to the S201 continuing education program in lieu of the Operations Professional Regulatory Element training. Operations Professionals also would be subject to Firm Element training. To implement this change, as further discussed in Section G. below, the proposed rule change would include Operations Professionals in the definition of ‘‘covered registered persons’’ in proposed FINRA Rule 1250, and would require that firms deliver Firm Element training to Operations Professionals subject to the new registration and qualification requirements.10 Emcdonald on DSK2BSOYB1PROD with NOTICES F. Implementation of the Proposed Rule Change As noted above, any person who meets the depth of personnel criteria described in Section A. and is engaged in one or more covered functions described in Section B. would be required to register with FINRA as an Operations Professional. Such persons would be required to register by doing one of the following, as applicable: (1) Requesting Operations Professional registration via Form U4 in CRD and passing the Operations Professional qualification examination; (2) requesting Operations Professional registration via Form U4 in CRD and opting in to such registration based on their holding, or having held within the past two years, an eligible registration; 11 or (3) requesting Operations Professional registration via Form U4 in CRD, registering with FINRA in an eligible registration category and opting in to Operations Professional registration based on such eligible registration.12 10 NASD Rule 1120(b) (Continuing Education Requirements) is currently 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 NASD Rule 1050, and to the immediate supervisors of such persons. The proposed amendments are reflected in the new FINRA rule governing continuing education, FINRA Rule 1250, which is being proposed as part of this rule change. See Section G. below. 11 Persons with an active eligible registration who request Operations Professional registration will be automatically granted Operations Professional registration once they submit such request via Form U4 in CRD, regardless of when such persons apply for Operations Professional registration (provided there are no existing deficiencies). See also supra note 7. 12 If a person elects to register with FINRA as an Operations Professional by newly qualifying in an eligible registration (i.e., does not have an active VerDate Mar<15>2010 18:30 Mar 17, 2011 Jkt 223001 Members must identify persons required to register as an Operations Professional as of the effective date of the proposed rule change (‘‘Day-One Professionals’’) (i.e., persons who meet the depth of personnel criteria and are engaged in one or more covered functions as of the effective date of the proposed rule change). FINRA is proposing a 60-day identification period beginning on the effective date of the proposed rule change during which Day-One Professionals must request registration as an Operations Professional via Form U4 in CRD. During this 60-day period, a Day-One Professional may function in the capacity of an Operations Professional. Day-One Professionals who are identified during the 60-day period and must pass the Operations Professional examination (or an eligible qualification examination) to qualify (i.e., persons who do not hold, and have not within the past two years held, an eligible registration) would be granted 12 months beginning on the effective date of the proposed rule change to pass such qualifying examination, during which time such persons may function as an Operations Professional.13 To be eligible to function as an Operations Professional for the 12-month transition period, Day-One Professionals subject to an examination requirement must request Operations Professional registration via Form U4 in CRD during the 60-day identification period and pass the Operations Professional examination (or an eligible qualification examination) before the expiration of 12 months from the effective date of the proposed rule change.14 If a Day-One eligible registration when he or she requests Operations Professional registration via Form U4 in CRD), such person must contact FINRA upon passing the alternative examination to request that the eligible registration be applied to the request for Operations Professional registration. This would include, for example, a person who requests both the Operations Professional and General Securities Representative registrations via Form U4 in CRD and passes the Series 7 examination. Such person would be required to contact FINRA to alert FINRA staff that the General Securities Representative registration will be used as an eligible registration to qualify as an Operations Professional. 13 When a person requests Operations Professional registration via Form U4 in CRD during the 60-day identification period, an examination window for the Operations Professional qualification examination will open in CRD that expires 12 months from the effective date of the proposed rule change. After the 60-day identification period, the examination window for the Operations Professional qualification examination will open for the standard 120 days. 14 Members should note that the standard examination window in CRD applicable to a particular registration category will apply notwithstanding the 12-month examination window established for purposes of the transition period. The 12-month examination window is only PO 00000 Frm 00123 Fmt 4703 Sfmt 4703 Professional does not pass an acceptable examination by the expiration of the 12month transition period, such person must cease functioning as an Operations Professional. The 12-month transition period to pass a qualification examination would only apply to Day-One Professionals. Any person who is not subject to the registration requirements for Operations Professionals as of the effective date of the proposed rule change (i.e., a person who does not meet the depth of personnel criteria and/or is not engaged in one or more covered functions as of the effective date, or persons hired after the effective date of the proposed rule change who will be placed in such roles) (‘‘non-Day-One Professionals’’) would be required to register as an Operations Professional and, if applicable, pass the Operations Professional qualification examination (or an eligible qualification examination), prior to engaging in any activities that would require such registration. The 60-day identification period and the 12-month transition period do not affect the obligations of non-Day-One Professionals to register as an Operations Professional prior to engaging in functions that would require such registration. However, any non-Day-One Professional associated with a non-clearing member who must pass the Operations Professional qualification examination (or an eligible qualification examination) to obtain registration would be granted a grace period of 120 days beginning on the date such person requests Operations Professional registration via Form U4 in CRD to pass such qualifying examination, during which time such person may function as an Operations Professional. FINRA believes that allowing a person associated with a non-clearing member to function as an Operations Professional for a 120-day period will enable these firms to manage their more limited staffs to comply with the proposed registration requirements without disrupting those firms’ obligations to customers. Non-Day-One Professionals associated with a selfclearing or clearing member would not have the benefit of the 120-day grace period and would be required to register for the Operations Professional qualification examination. Thus, a person who elects to qualify, for example, by passing the Series 7 examination would have only 120 days to take and pass the Series 7 examination once the window for such examination is opened in CRD. Members should plan accordingly so that associated persons are prepared to take the requisite examination within the prescribed window for that registration category, and that any requisite examination is passed before the expiration of the 12-month transition period for Day-One Professionals. E:\FR\FM\18MRN1.SGM 18MRN1 Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices as an Operations Professional prior to engaging in activities that would require such registration. Members would be responsible for tracking and monitoring their associated persons to ensure that such persons are registered, and conducting their activities, in compliance with the time frames described above. G. FINRA Continuing Education Rule Emcdonald on DSK2BSOYB1PROD with NOTICES The proposed rule change would adopt NASD Rule 1120 (Continuing Education Requirements) as new FINRA Rule 1250 (Continuing Education Requirements). In addition to the proposed change noted in Section E., which would expand the scope of ‘‘covered registered persons’’ subject to the Firm Element to include persons registered as Operations Professionals, the proposed rule change would make additional minor changes to NASD Rule 1120 to update cross-references and reflect the conventions of the consolidated FINRA Rulebook. NASD Rule 1120 and Incorporated NYSE Rule 345A were adopted in 1995 in response to the recommendation of a task force, which subsequently became the Securities Industry Regulatory Council on Continuing Education (the ‘‘Council’’),15 to create uniform continuing education requirements in the securities industry. As advised by the Council, the continuing education requirements include a Regulatory Element and a Firm Element. The NASD and Incorporated NYSE rules are nearly identical in keeping with the goals of the Council to create uniform continuing education requirements.16 The Regulatory Element consists of periodic computer-based training on regulatory, compliance, ethical, supervisory subjects and sales practice standards. A registered person is required to participate and complete a designated Regulatory Element within a 120-day period that commences with the second anniversary of such person’s initial securities registration, and reoccurs every three years thereafter for as long as such person remains in the securities business. Failure to complete the Regulatory Element will result in a 15 The Council is comprised of up to 16 industry members from broker-dealers, representing a broad cross section of industry firms, and representatives from SROs as well as liaisons from the SEC and the North American Securities Administrators Association (‘‘NASAA’’). 16 The proposed rule change would not delete Incorporated NYSE Rule 345A (and its Interpretation). Rather, FINRA expects to address Incorporated NYSE Rule 345A (and its Interpretation) and propose additional changes to proposed FINRA Rule 1250 as part of the consolidated registration and qualification rules. See Regulatory Notice 09–70 (December 2009). VerDate Mar<15>2010 18:30 Mar 17, 2011 Jkt 223001 registered person’s registration becoming inactive and such person cannot conduct a securities business on behalf of the member until the requirement is met.17 The Firm Element requirements currently 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 a research analyst pursuant to NASD Rule 1050, and to the immediate supervisors of such persons (collectively, ‘‘covered registered persons’’). However, as noted above, the proposed rule change would expand the scope of ‘‘covered registered persons’’ subject to the Firm Element to include persons registered as Operations Professionals. The Firm Element consists of annual, member-developed and administered training programs designed to keep covered registered persons current regarding securities products, services and strategies offered by the member. The Firm Element requires members to annually evaluate and prioritize their training needs (i.e., conduct a Needs Analysis and develop a written plan). In planning, developing and implementing the Firm Element training, each member must take into consideration its size, organizational structure, scope of business, types of products and services it offers, as well as regulatory developments and the performance of its covered registered persons in the Regulatory Element. FINRA may require a member to provide specific training to a member’s covered registered persons as FINRA deems appropriate. Each member must administer its Firm Element Continuing Education Program in accordance with its annual Needs Analysis and written plan, and must maintain records documenting the content of the program and completion of the program by covered registered persons. FINRA will announce the implementation date of the proposed rule change in a Regulatory Notice to be published no later than 90 days following Commission approval. The implementation date will be no later than 240 days following Commission approval. 17 A registered person will be required to retake the Regulatory Element in the event such person is: (1) Subject to a statutory disqualification as defined by Section 3(a)(39) of the Exchange Act; (2) subject to a suspension or imposition of a fine of $5,000 or more by an SRO or other securities governmental agency; or (3) ordered to do so as a sanction in a disciplinary action by an SRO or other securities governmental agency. PO 00000 Frm 00124 Fmt 4703 Sfmt 4703 15017 2. Statutory Basis FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,18 which requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. FINRA believes the proposed rule change to expand FINRA’s registration and continuing education requirements to Operations Professionals will help ensure that investor protection mechanisms are in place in all areas of a member’s business that could harm the member, a customer, the integrity of the marketplace, or the public. B. Self-Regulatory Organization’s Statement on Burden on Competition FINRA does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The proposed rule change was published for comment in Regulatory Notice 10–25 (May 2010) (the ‘‘Notice’’). Forty-nine comment letters were received in response to the Notice.19 A copy of the Notice is attached as Exhibit 2a. A list of the comment letters received in response to the Notice is attached as Exhibit 2b. Copies of the comment letters received in response to the Notice are attached as Exhibit 2c. Below is a summary of the comments and FINRA’s responses. General Concerns Regarding the Scope of the New Registration Category Certain commenters generally opposed the proposed rule change stating that it is overly broad and ambiguous, poorly defined, imposes requirements that are unnecessary to meet FINRA’s stated objectives and may have unintended consequences.20 Other commenters argued that licensing requirements do not make people honest or increase their efficiency or proficiency21 and that no amount of 18 15 U.S.C. 78o–3(b)(6). references to the commenters under this Item are to the commenters as listed in Exhibit 2b. 20 ACLI, AIC, Bank of America, Crowell, ESI, Horace Mann, IPA, IRI, Modern Woodmen, Navidar, NSCP, PSD, Quasar, UPFS, Scottrade, SIFMA, Sutherland, TIAA, Wellington and Wells Fargo. 21 Mutual Trust. 19 All E:\FR\FM\18MRN1.SGM 18MRN1 Emcdonald on DSK2BSOYB1PROD with NOTICES 15018 Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices licensing will change failures of human character.22 Two commenters noted that frauds are almost always committed on the frontlines by individuals who are already licensed.23 Additionally, certain commenters opposed registration requirements for covered persons because their work is already supervised and approved by a firm principal24 and holding principals accountable for failures in these areas would be more cost effective.25 Numerous commenters proposed an alternative approach under which firms would delegate each of the covered functions to existing registered principals of the firm and reflect such assignments in the firm’s written supervisory procedures (‘‘WSPs’’).26 Other commenters noted the proposed rule change is unnecessary because people who handle customer funds go through background checks and fingerprinting.27 In response, FINRA notes that covered persons are performing regulated broker-dealer functions on behalf of a member, and believes such persons should be subject to registration, examination and continuing education requirements to ensure that they attain and maintain specified levels of competence and knowledge to properly carry out their responsibilities to the member and its customers. FINRA does not agree that principal approval or background checks and fingerprinting are sufficient safeguards to ensure members’ operations departments are functioning in a manner that will promote investor protection to the highest level possible. The proposed rule change is intended, among other things, to increase covered persons’ awareness and knowledge that they are operating in a regulated environment designed to protect investors’ interests and the integrity of the operations of a broker-dealer. In addition, the proposed rule will help to ensure that any fraudulent activity that may start in the front office of a firm cannot be processed without passing through a properly registered and trained Operations Professional. Requiring registration, testing and training for Operations Professionals should further strengthen members’ compliance with securities laws, rules and regulations. Certain commenters expressed concern that requiring registration of covered persons will dramatically limit the pool of candidates that may be and Wells Fargo. and PSD. 24 Crowell, IRI, M. Griffith, PSD and RiverStone. 25 Crowell and Wellington. 26 IRI, Nationwide, PSD and Sutherland. 27 PSD, RiverStone and Wells Fargo. considered for hiring when personnel changes occur in operations departments.28 As an initial matter, FINRA notes that it is always correct to state that conduct once regulated becomes constrained by that regulation, but that observation by itself is not a credible reason not to engage in the regulation. The proper test is whether that regulation is appropriately tailored and needed in furtherance of the interests of investors and the securities markets. The immediate prior paragraph restates those interests, and the depth of personnel as set forth in Section A. of the Purpose section demonstrates the appropriate tailoring of the proposed regulation. Finally, Section D. of the Purpose section indicates that many candidates for positions that would require registration may possess an eligible registration and qualify for an exception from the requirement to take the Operations Professional qualification examination. Two commenters suggested FINRA reduce the obligations for Operations Professionals and specify that not all of the rules applicable to associated persons apply to such persons since they are generally not customer-facing personnel.29 Certain other commenters sought clarification that the proposed rule change does not eliminate or limit the ability of a securities issuer and its associated persons to rely on the issuer exemption under Exchange Act Rule 3a4–1 30 to avoid broker-dealer registration requirements.31 Another commenter requested that FINRA provide guidance on the impact of the proposed rule change on FINRA Rule 2310 (Direct Participation Programs) and clearly state that the salaries of Operations Professionals be categorized as ‘‘non-transaction-basedcompensation’’ and that there is a blanket exception from ‘‘underwriting compensation’’ for Operations Professionals.32 FINRA does not agree that Operations Professionals should be subject to a limited set of rules. Covered persons are not only associated persons of a member but their activities are crucial enough to the business of a member to require registration with FINRA. The proposed rule change does not alter a person’s status as an associated person under Exchange Act Rule 3a4–1 or otherwise, nor does it address the definitions of certain types of compensation under FINRA rules. However, FINRA 22 AIC 23 AIC VerDate Mar<15>2010 18:30 Mar 17, 2011 Jkt 223001 28 NPB and RiverStone. 29 TIAA and Wells Fargo. 30 17 CFR 240.3a4–1. 31 PSD, Sutherland and TIAA. 32 IPA. PO 00000 Frm 00125 Fmt 4703 Sfmt 4703 recognizes that additional guidance may be needed following the adoption of the proposed rule change and will address interpretive questions as needed, similar to FINRA’s approach to other regulatory initiatives with wide-ranging and novel impacts. Covered Persons for Inclusion in the New Registration Category Certain commenters requested clarification with respect to proposed FINRA Rule 1230(b)(6)(A)(i) regarding scope of the term senior management and whether this provision applies beyond senior managers with primary or direct responsibility over the covered functions.33 Two commenters advocated limiting the depth of personnel for the proposed rule change to a single category for senior management with responsibility over the covered functions, and requiring firms to maintain policies and procedures reasonably designed to ensure that operations personnel have an awareness of investor protection mechanisms in place at a firm.34 FINRA believes this provision is clear as originally proposed and, while FINRA understands titles may differ between firms, members should be able to identify operations personnel that would be subject to proposed Rule 1230(b)(6)(A)(i) based on their functions and responsibilities as senior managers overseeing the covered functions. FINRA would consider any senior manager in the chain of command responsible for a covered function to be subject to the proposed rule, up to and including the Principal Operations Officer.35 FINRA does not agree that ‘‘covered persons’’ should be limited to senior management with responsibility over the covered functions because the proposed registration category is intended to include other individuals who exercise supervisory and discretionary authority in direct furtherance of the covered functions. Accordingly, FINRA has not proposed changes to proposed FINRA Rule 1230(b)(6)(A)(i). Proposed FINRA Rule 1230(b)(6)(A)(ii) would include as covered persons supervisors, managers or other persons responsible for approving or authorizing work, including work of other persons, in direct furtherance of the covered functions. One commenter suggested the proposed rule explicitly state that 33 IRI, Nationwide, NSCP and TIAA. and Wells Fargo. 35 See Regulatory Notice 09–70 (December 2009) for a discussion of the Principal Operations Officer registration category. See also infra note 61 and accompanying text. 34 Wellington E:\FR\FM\18MRN1.SGM 18MRN1 Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices Emcdonald on DSK2BSOYB1PROD with NOTICES covered persons are limited to those persons with decision-making and/or oversight authority.36 Certain commenters requested that FINRA clarify what is meant by the phrase ‘‘approve or authorize work.’’ 37 Other commenters stated that this provision is written too broadly; 38 creates potential for misinterpretation in determining how far up or down the reporting chain this registration requirement would apply; 39 could sweep in affiliate employees, mid or low level employees,40 third-party vendors 41 and margin clerks; 42 and that it should be limited to supervisors, managers or other persons responsible for primary oversight of covered functions, including managers for dual hat employees.43 One commenter suggested that FINRA revise this provision to clarify that supervisors and managers be senior members of their respective departments or units.44 Numerous commenters recommended deleting the phrase ‘‘work of other persons’’ because it is unclear.45 FINRA believes proposed FINRA Rule 1230(b)(6)(A)(ii) is clear as proposed and notes that it consulted with industry representatives in developing the proposed rule change, including the definition and appropriate depth of personnel to be subject to the Operations Professional registration category. As noted above, FINRA believes members will be able to identify supervisors, managers or other persons responsible for approving or authorizing work in direct furtherance of the covered functions based on their functions and responsibilities. The phrases ‘‘approve or authorize work’’ and ‘‘work of other persons’’ are not legal terms of art but, rather, comport with commercially understood operating terms and do not require clarification. Accordingly, FINRA has not revised this provision as suggested by the commenters; however, FINRA proposes a minor modification to the original proposal by re-locating the phrase ‘‘including the work of other persons’’ to streamline the provision, as reflected in Section A. of the Purpose section. As originally proposed in the Notice, FINRA Rule 1230(b)(6)(A)(iii) required registration as an Operations Professional for persons with the 36 Morgan Stanley. NFP, TIAA and UPFS. 38 ACLI, NSCP, Quasar and Wells Fargo. 39 ACLI. 40 Morgan Stanley. 41 Schwab. 42 Scottrade. 43 ARM, TIAA and Wells Fargo. 44 Bank of America. 45 Bank of America, IPA, SIFMA and Wells Fargo. 37 ESI, VerDate Mar<15>2010 18:30 Mar 17, 2011 Jkt 223001 authority or discretion to commit the member’s capital in direct furtherance of the covered functions or to commit the member to any contract or agreement (written or oral) in direct furtherance of the covered functions. Certain commenters stated this provision is unclear and too farreaching 46 and noted it would capture persons who perform routine, daily activities, or enter into agreements consistent with firm policies that have no material impact on firm operations (including margin clerks, who often have flexibility to obligate firm capital up to certain limits).47 Two commenters noted that the provision should only be triggered if the contracts are sufficiently material to the firm.48 One commenter noted that it may be so broad as to require registration of junior associates if they sign or approve contracts, retain vendors or make clerical postings to the books of a member.49 Another commenter noted that this provision is inconsistent with the first two categories of covered persons, which focus on senior managers, supervisors and those who approve work in the covered functions.50 Another commenter requested clarification with respect to the term ‘‘firm capital’’ because it could sweep in persons who approve the payment of vendor invoices for services related to some aspect of a covered function.51 Two commenters noted it is unclear what individuals, other than those engaged in or supervising securities lending activities, the proposed third category of covered persons intends to cover and suggested certain amendments to clarify the proposal with respect to such persons.52 Based on the comments, FINRA has revised the third category of covered persons from the original proposal in the Notice, as discussed in Section A of the Purpose section. Under the revised proposal, FINRA Rule 1230(b)(6)(A)(iii) would require persons with the authority or discretion materially to commit a member’s capital in direct furtherance of the covered functions or to commit a member to any material contract or agreement (written or oral) in direct furtherance of the covered functions to register as an Operations Professional. FINRA purposefully did not limit the third category of covered persons to supervisors and managers because the capacity to make material 46 Bank of America, TIAA and NSCP. Rowe Price and Wells Fargo. 48 Bank of America and TIAA. 49 Bank of America. 50 SIFMA. 51 Scottrade. 52 Morgan Stanley and SIFMA. 47 T. PO 00000 Frm 00126 Fmt 4703 Sfmt 4703 15019 discretionary decisions above a member’s pre-established spending guidelines and risk management policies under this provision is not confined to senior or supervisory personnel. Numerous commenters suggested that FINRA add language to the proposed rule to clarify, as stated in the Notice, that the proposed rule does not apply to persons who perform functions ancillary to a covered function or whose function is to serve a role that can be viewed as supportive of, or advisory to, the performance of a covered function, such as internal audit, legal or compliance personnel.53 One commenter further urged FINRA to add rule language to note that individuals performing quality assurance and quality control functions in direct furtherance of a covered function are similarly excluded.54 One commenter noted that registering clerical personnel only increases costs unnecessarily and creates hiring barriers for new applicants.55 One commenter requested that FINRA provide specific examples of activities it deems ministerial or clerical in nature, especially when such activities require Financial and Operations Principal review and control procedures.56 Based on the comments, and as noted in Section A. of the Purpose section of this rule filing, FINRA is proposing supplementary material .06 to the proposed rule to clarify that any person whose activities are limited to performing a function ancillary to a covered function, or whose function is to serve a role that can be viewed as supportive of or advisory to the performance of a covered function (e.g., internal audit, legal or compliance personnel who review but do not have primary responsibility for any covered function), or who engages solely in clerical or ministerial activities in a covered function would not be required to register as an Operations Professional. FINRA declines to provide examples of clerical and ministerial activities at this time, believing the term to be well understood in the industry;57 however, as noted above, FINRA will consider issuing additional guidance as needed regarding the categories of persons subject to the Operations Professional registration category. One commenter encouraged FINRA to clarify whether an Operations 53 Bank of America, FSI, NSCP, Scottrade, SIFMA and TIAA. 54 TIAA. 55 Martin Nelson. 56 Quasar. 57 See, e.g., NASD Rule 1060 (Persons Exempt from Registration). E:\FR\FM\18MRN1.SGM 18MRN1 Emcdonald on DSK2BSOYB1PROD with NOTICES 15020 Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices Professional must be supervised by a qualified supervisory principal.58 Another commenter requested clarification regarding whether a firm must assign or designate an Operations Professional and whether a person who is already a registered principal must register as an Operations Professional.59 As noted above, as registered persons, Operations Professionals will be subject to all FINRA rules applicable to associated persons and/or registered persons. Accordingly, pursuant to NASD Rule 3010(a)(5), each Operations Professional must be assigned to an appropriately registered representative(s) and/or principal(s) who shall be responsible for supervising that person’s activities. Additionally, FINRA expects that each member would have at least one registered Operations Professional, who often may be the member’s Financial and Operations Principal and/or the Principal Operations Officer. In this regard, neither principal registration, nor representative registration in another category, obviates the requirement for a covered person to register as an Operations Professional. As noted in Section D. of the Purpose section, there are numerous eligible registrations that would except such registered persons from the requirement to pass the Operations Professional qualification examination. Certain commenters inquired as to the proposed rule change’s relationship to, and consistency with, the proposals set forth in Regulatory Notice 09–70 60 and two commenters requested clarification regarding how the proposed requirement under Regulatory Notice 09–70 that firms appoint a distinct Principal Operations Officer and a distinct Principal Financial Officer intersects with the proposed Operations Professional designation.61 The proposed rule change does not conflict with the proposals set forth in Regulatory Notice 09–70. The proposed rule change should be read as a separate registration requirement that will be added to the consolidated FINRA registration rules. To note, the proposed rule change would include persons engaged in or supervising stock loan/ securities lending activities that meet the depth of personnel as a covered person in Section A. above. FINRA also is proposing separate registration requirements for a ‘‘Securities Lending Representative’’ and a ‘‘Securities Lending Supervisor’’ in Regulatory 58 Pershing. 59 Crowell. 60 PSD, 61 IRI Sutherland and Wells Fargo. and TIAA. VerDate Mar<15>2010 18:30 Mar 17, 2011 Jkt 223001 Notice 09–70; consequently, firms should be aware of both sets of proposed requirements.62 With respect to the proposed requirements in Regulatory Notice 09–70 for Principal Operations Officers and Principal Financial Officers, such persons likely would be required to register as an Operations Professional, depending on whether they meet the criteria of a covered person as described in Section A. of the Purpose section. The requirement for a covered person to register as an Operations Professional applies regardless of any other, separate registration requirements; however, such other registration may be used as an eligible registration to qualify a covered person for an exception from the requirement to take the Operations Professional qualification examination. One commenter noted the proposed rule change could have costly and burdensome implications regarding state registration and licensing so FINRA should be as clear as possible in defining who is covered under the proposed rule change.63 As noted above, FINRA believes the definitions of covered persons are sufficiently clear and will provide additional guidance as needed regarding the scope of persons subject to the new requirements. Covered Functions for Inclusion in the New Registration Category Numerous commenters stated that the covered functions as proposed in the Notice are too broad, unclear and inconsistent, and will incur unnecessary costs for firms.64 The commenters requested more precise descriptions of the covered functions.65 One commenter requested that FINRA clarify that the covered functions apply only to activities performed by or on behalf of a firm’s securities and investment banking business.66 Two commenters urged FINRA to group dependent technology-related covered functions into a single entry.67 Another commenter suggested that certain functions be deleted because they are roles that support other covered functions and are not stand-alone functions.68 62 See supra note 5. 63 NSCP. 64 Commonwealth, Crowell, ESI, FSI, IPA, IRI, Modern Woodmen, Morgan Stanley, NFP, Northwestern Mutual, NSCP, PSD, TIAA, SIFMA, Sutherland, UPFS and WSFG. 65 Commonwealth, Crowell, ESI, FSI, IPA, IRI, Modern Woodmen, Morgan Stanley, NFP, Northwestern Mutual, NSCP, PSD, TIAA, SIFMA, Sutherland, UPFS and WSFG. 66 TIAA. 67 Morgan Stanley and NSCP. 68 Schwab. PO 00000 Frm 00127 Fmt 4703 Sfmt 4703 Based on the comments, FINRA has made certain changes to the covered functions as originally proposed in the Notice to clarify and streamline the proposed rule. As a general matter, FINRA has revised the list of covered functions, as reflected in Section B. of the Purpose section, to group related functions together. Substantive revisions to the covered functions are described in detail below. To clarify the proposed rule change, FINRA has revised Rule 1230(b)(6)(B)(i) (as originally proposed in the Notice) by limiting this covered function to the ‘‘[a]pproval of pricing models used for valuations,’’ instead of the ‘‘[d]evelopment and approval of pricing models used for valuations.’’ FINRA also moved this provision to proposed Rule 1230(b)(6)(B)(x). Two commenters requested a definition for the term ‘‘client onboarding’’ in proposed FINRA Rule 1230(b)(6)(B)(v) (as originally proposed in the Notice).69 FINRA notes from its consultation with industry representatives in the rule development process that this is a term commonly used for this covered function and believes the proposed rule text provides sufficient clarity (i.e., ‘‘[c]lient onboarding (customer account data and document maintenance)’’). Numerous commenters requested clarification with respect to the scope of proposed FINRA Rule 1230(b)(6)(B)(vi) (as originally proposed in the Notice), the covered function addressing the ‘‘[c]apturing 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.’’ 70 One commenter noted that this provision should apply only to individuals who ‘‘define and approve’’ business requirements, rather than individuals who ‘‘capture’’ such requirements.71 Similarly, to reduce the likelihood of inadvertently capturing personnel who merely prepare initial drafts of business requirements documents and who perform routine quality assurance or quality control testing, two commenters suggested incorporating the concepts of ‘‘accepting’’ and ‘‘approving’’ in lieu of ‘‘capturing’’ and ‘‘defining’’ for the covered functions that include these terms.72 Based on the comments, FINRA has revised the original proposal to 69 PSD and Sutherland. FSI, Horace Mann, Modern Woodmen, NFP, Scottrade, TIAA and UPFS. 71 Northwestern Mutual. 72 Bank of America and SIFMA. 70 ESI, E:\FR\FM\18MRN1.SGM 18MRN1 Emcdonald on DSK2BSOYB1PROD with NOTICES Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices eliminate the concept of ‘‘capturing’’ in proposed FINRA Rule 1230(b)(6)(B)(vi). The proposed rule change renumbers this provision as proposed FINRA Rule 1230(b)(6)(B)(xiii) and includes as a covered function, ‘‘[d]efining and approving 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.’’ FINRA has not eliminated the concept of ‘‘defining’’ from the covered functions because it believes covered persons who are responsible for defining and approving business system requirements are professional level staff that should be subject to registration with FINRA. The covered functions generally would not include a person who engages in administrative responsibilities, such as an initial drafter or a code developer. However, a person who supervises or approves such activities generally would be required to register as an Operations Professional. Additionally, certain commenters requested clarification with respect to proposed Rule 1230(b)(6)(B)(vii) (as originally proposed in the Notice), which includes as a covered function, ‘‘[w]ith respect to the covered functions, defining and approving business security requirements and policies for information technology (including, but not limited to, systems and data).’’ 73 One commenter noted that this function should only require persons who ‘‘approve’’ business requirements for systems and information technology to register so that the final approvals for technology requirements are performed by licensed Operations Professionals.74 FINRA has made minor changes to the original proposal with respect to Rule 1230(b)(6)(B)(vii). The proposed rule change renumbers this provision as proposed FINRA Rule 1230(b)(6)(B)(xiv) and includes as a covered function, ‘‘[d]efining and approving business security requirements and policies for information technology, including, but not limited to, systems and data, in connection with the covered functions.’’ As noted above, FINRA believes that covered persons engaged in defining and approving business security requirements and policies for information technology should be registered as Operations Professionals. One commenter requested clarification with respect to proposed Rule 1230(b)(6)(B)(viii) (as originally proposed in the Notice), which includes as a covered function, ‘‘[d]efining information entitlement policy in connection with the covered functions.’’ 75 Based on the comments and in line with the changes noted above, FINRA has revised Rule 1230(b)(6)(B)(viii). The proposed rule change renumbers this provision as proposed FINRA Rule 1230(b)(6)(B)(xv) and includes as a covered function, ‘‘[d]efining and approving information entitlement policies in connection with the covered functions.’’ One commenter recommended that FINRA combine paragraphs (b)(6)(B)(vii) and (viii) (as originally proposed in the Notice) since both sections cover overlapping sets of supervisors in the Information Management area.76 Another commenter noted that proposed FINRA Rules 1230(b)(6)(B)(vi), (vii), (viii) and (xv) are not separate functions but are ancillary to other covered functions and may require managers from both the actual covered functions and these ancillary areas to register.77 One commenter requested clarification that FINRA Rules 1230(b)(6)(B)(vi), (vii) and (viii) (as originally proposed in the Notice) are limited to only those individuals directly employed by the FINRA member.78 Another commenter suggested limiting these provisions to individuals responsible for ensuring that systems related to sales and trading and to covered functions meet business and regulatory requirements and ‘‘information security’’ (firewalls, data access, and system entitlements in connection with the covered functions).79 FINRA believes that the proposed revisions to these provisions noted above clarify the proposed rule and is not proposing further changes at this time. FINRA notes that these covered functions should remain as separate items since they address different activities (e.g., defining, approving and validating business requirements for sales and trading systems or other systems relating to the covered functions vs. defining and approving entitlement policies in connection with the covered functions) and firms may have different internal reporting structures so that these activities are not part of the same area or subject to the same supervisory scheme. Certain commenters suggested deleting proposed Rule 76 Bank 73 ESI, FSI, Horace Mann, Modern Woodmen, NFP, Scottrade and UPFS. 74 Morgan Stanley. VerDate Mar<15>2010 18:30 Mar 17, 2011 Jkt 223001 1230(b)(6)(B)(xv) (as originally proposed in the Notice), which includes as a covered function, ‘‘[p]osting entries to the books and records of a member in connection with the covered functions,’’ because it is ambiguous, too broad 80 and may sweep in clerical staff.81 Another commenter requested clarification regarding the term ‘‘books and records’’ and requested that FINRA add a reference to Exchange Act Rule 17a–3 82 or MSRB Rule G–8.83 Two commenters recommended that FINRA revise this provision to tailor it to separate regulatory issues such as customer protection or financial responsibility concerns.84 FINRA has revised Rule 1230(b)(6)(B)(xv) to clarify this covered function. The proposed rule change renumbers this provision as FINRA Rule 1230(b)(6)(B)(xvi) and includes as a covered function, ‘‘[p]osting to a member’s books and records in connection with the covered functions to ensure integrity and compliance with the federal securities laws and regulations and FINRA rules.’’ One commenter noted that some of the covered functions may cause confusion with respect to other registration categories, including proposed FINRA Rules 1230(b)(6)(B)(ix) and (xiv) (as originally proposed in the Notice), the covered functions for ‘‘[f]inancial controller (including general ledger)’’ and ‘‘[f]inancial regulatory reporting,’’ respectively, and the functions supervised by the financial and operations principal, and may overlap with the proposed designation of the Principal Operations Officer under Regulatory Notice 09–70.85 Based on the comment, FINRA has revised these items. The proposed rule change renumbers these items as proposed FINRA Rules 1230(b)(6)(B)(xi) and (xii), respectively, and includes as covered functions, ‘‘[f]inancial control, including general ledger and treasury’’ and ‘‘[c]ontributing to the process of preparing and filing financial regulatory reports.’’ FINRA does not agree that the proposed rule change causes confusion with respect to other registration requirements. Members must determine whether the proposed registration requirements for Operations Professionals would apply to an associated person based on his or her functions and responsibilities 80 Bank of America and SIFMA. and SIFMA. 82 17 CFR 240.17a–3. 83 Rockfleet. 84 Morgan Stanley and SIFMA. 85 IRI. 75 Scottrade. 81 Crowell of America. 77 NSCP. 78 IPA. 79 SIFMA. PO 00000 Frm 00128 Fmt 4703 Sfmt 4703 15021 E:\FR\FM\18MRN1.SGM 18MRN1 15022 Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices notwithstanding any other, separate registration requirements. One commenter noted that the title of the proposed registration category is too narrow and not reflective of the covered functions. Alternatively, the commenter suggested that the registration category should be titled ‘‘Operations, Support or Securities Lending Professionals.’’ 86 FINRA believes that the proposed title for the new registration category, Operations Professionals, is appropriate and succinctly captures the individuals to which the proposed requirements would apply given the breadth of activities covered under the proposed rule change. Certain commenters requested clarification that ongoing insurance company functions relating to variable annuity contracts as well as other functions performed by insurance company staff are not included in the covered functions.87 FINRA does not intend to make any categorical exclusions from the covered functions. The proposed requirements will apply if a person meets the depth of personnel criteria and engages in one or more covered function on behalf of a member regardless of where they are employed. Emcdonald on DSK2BSOYB1PROD with NOTICES Operations Professional Qualification Examination One commenter noted that elements of the qualification examination and continuing education requirements have no relevance to the products and operations of limited purpose brokerdealers that comprise more than 50% of FINRA’s membership.88 Other commenters noted that the two areas of proposed examination coverage, ‘‘essential product and market knowledge for an Operations Professional’’ and ‘‘knowledge associated with operations activities,’’ should be eliminated from the examination curriculum because they undercut FINRA’s premise that it will not be a ‘‘competency’’ examination and render the test extremely challenging for many operations personnel since they lack the background and experience to pass the examination and have little testing experience.89 Another commenter similarly noted that the proposed examination requirement could result in well-qualified employees losing their jobs and firms’ operations departments could have compromised functionality, and supervision (i.e., a ‘‘brain drain’’) of qualified operations 86 SIFMA. 87 IRI, PSD and Sutherland. 88 ACLI. 89 NSCP and ACLI. VerDate Mar<15>2010 18:30 Mar 17, 2011 Jkt 223001 personnel, thus undermining the goals of the proposal.90 Numerous commenters stated that an examination is unnecessary because training and education for operations personnel should be addressed in a member’s WSPs 91 and registered principals are responsible for training operations personnel.92 To reduce cost burdens on firms, certain commenters recommended ongoing training requirements as an alternative to registration and testing of operations personnel.93 Certain other commenters noted that FINRA can address operations personnel through registration and continuing education 94 and an examination not based on competency serves no essential function.95 One commenter stated that the Series 27 and 28 examinations already test for the covered functions, so a new exam is a poor use of member firm fees and will unnecessarily delay implementation of the proposal.96 One commenter noted that based on the definition of a covered person, the Operations Professional qualification examination should be a principal-level examination with corresponding continuing education requirements.97 One commenter requested that FINRA publish a study outline for notice and comment prior to making the test effective.98 Another commenter recommended that FINRA offer the proposed examination as an optional test for people who want to learn about back-office, but not as a mandatory examination for Operations Professional registration.99 FINRA believes the qualification examination requirement is appropriate as proposed. The proposed examination is being tailored to test for basic securities industry knowledge and ethics. 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. The proposed examination will be appropriately tailored to individuals subject to the proposed registration requirements. It is crucial for covered persons to understand their professional 90 NSCP. 91 FSI, M. Griffith, Navidar and PSD. Woodmen and Martin Nelson. 93 Harrison, NSCP, RMOA and Wells Fargo. 94 Commonwealth, ESI, FSI, Horace Mann, NFP, UFPS and WSFG. 95 Horace Mann, JRCO, Modern Woodmen, NSCP, RMOA, Rockfleet, UPFS and WSFG. 96 Rockfleet. 97 Rockfleet. 98 NSCP. 99 M. Griffith. 92 Modern PO 00000 Frm 00129 Fmt 4703 Sfmt 4703 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. Additionally, FINRA believes a representative-level examination is appropriate for Operations Professionals because the proposed registration category is based on functions performed by operations personnel and is not limited to supervisory or managerial staff (e.g., persons who fall within proposed FINRA Rule 1230(b)(6)(A)(ii) and (iii)). One commenter suggested that FINRA modify the period for retaking the Operations Professional qualification examination if an applicant fails to 30 days like the Series 55.100 FINRA does not intend to change its policy regarding the re-taking of qualification examinations for the proposed Operations Professional examination at this time. FINRA will reconsider the policy if it finds it to be a necessary step when the qualification examination for Operations Professionals is administered. Exception to Operations Professional Examination Requirement One commenter noted that the proposed exceptions are so numerous that they dilute the regulatory intent of the proposed rule change; instead, FINRA should grant a limited number of exceptions to current operations employees.101 One commenter recommended FINRA incorporate an exception for certain small firms.102 One commenter suggested that registered principals should be completely exempt from the proposed Operations Professional requirements; 103 other commenters suggested that the proposed rule change should only apply to currently unregistered persons because the potential costs and burdens involved with tracking and monitoring multiple registrations outweigh the benefits.104 One commenter suggested FINRA permit firms to identify any relied upon registration for the proposed exception in their WSPs instead of a U4 amendment, as is required currently for any person in a supervisory role.105 Certain other commenters recommended a grandfather provision for experienced persons who have worked in operations areas for a certain 100 Schwab. 101 NASAA. 102 Freestone. 103 NSCP. 104 Northwestern 105 T. E:\FR\FM\18MRN1.SGM Mutual and T. Rowe Price. Rowe Price. 18MRN1 Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices time period (e.g., three 106 or five 107 years) prior to the implementation of the proposed rule.108 Two commenters requested that FINRA extend the proposed exception to registrations held beyond the two-year look back.109 One commenter noted that there are costs and burdens of a two-year look back without a concomitant benefit.110 Additionally, one commenter suggested that FINRA consider incorporating standards within its Qualification Examination Waiver Guidelines that will accommodate individuals that possessed an eligible registration within a reasonably recent time period and have been performing an Operations Professional role for a reasonable period of time.111 This commenter also suggested that FINRA finalize the permissive registration regime contemplated in Regulatory Notice 09– 70 prior to implementing a new Operations Professional designation, which would provide firms and their personnel with the option to maintain licenses while the registered person occupies a non-registered position.112 FINRA believes the proposed rule change clearly articulates the exception to the Operations Professional qualification examination requirement.113 A primary purpose of the proposed qualification examination is to assess a covered person’s basic understanding of the securities industry and the requirement to take a registration examination serves to alert such person of the role he or she plays in this highly regulated environment. Thus, FINRA believes the eligible registrations (and corresponding examinations) serve as a valid proxy for the Operations Professional examination requirement. FINRA believes the two-year look back for the eligible registrations is appropriate and has not revised the proposal to extend this time period. The proposed look back is based on the window during which an associated person remains eligible to re-activate his or her registration based on previously 106 Commonwealth. 107 FSI, Emcdonald on DSK2BSOYB1PROD with NOTICES 108 FSI, PSD and Sutherland. Modern Woodmen, NFP, UPFS and WSFG. 109 Nationwide and TIAA. 110 IRI. 111 TIAA. 112 TIAA. 113 The Notice included as an eligible registration the General Securities Principal—Sales Supervisor Module (Series 23). FINRA has removed this examination from the list of eligible registrations. A person who passes the Series 9/10 and the Series 23 may obtain the General Securities Principal (Series 24) registration, but a person who passes solely the Series 23 is not considered registered in any capacity. VerDate Mar<15>2010 18:30 Mar 17, 2011 Jkt 223001 qualifying for and holding such registration. 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.114 Under NASD Rules 1021 and 1031, members are permitted to maintain or make application for registration as a registered principal or registered representative for a person who performs back-office operations, among other things. As such, firms are not currently prohibited from carrying registrations for back-office personnel. FINRA has determined not to incorporate a grandfather provision for previously unregistered operations personnel. FINRA believes that all covered persons benefit from an examination requirement even if they have been working in the same position for an extended period. As noted above, the proposed Operations Professional examination will not test on specific job functions but will focus on general securities industry knowledge and key regulatory themes. Continuing Education Certain commenters encouraged FINRA to clarify whether the proposal requires currently registered principals to take both the S101 continuing education module and the S201 115 and requested that FINRA refine the continuing education requirements to reflect FINRA’s diverse membership.116 As stated in the Notice and Section E. of the Purpose section, individuals who avail themselves of the proposed exception to the Operations Professional qualification examination requirement with an eligible registration would be subject to the Regulatory Element program appropriate for such other registration category. FINRA believes the proposed continuing education requirements for Operations Professionals are clear and notes that such requirements will be appropriately suited for those subject to registration, similar to the continuing education training for other FINRA registration categories. Outsourced and Shared Functions One commenter requested confirmation that FINRA does not intend to alter indirectly the definition of ‘‘associated person’’ or the existing 114 See supra note 7. Nation. 116 ACLI. 115 Great PO 00000 Frm 00130 Fmt 4703 Sfmt 4703 15023 regulatory guidance on outsourcing arrangements with the proposed rule change.117 Numerous commenters requested clarification that covered persons are limited to persons who have been empowered by a broker-dealer to oversee the covered functions and would not include individuals who perform operations functions for affiliated entities, outsourced operations functions for a third-party service provider or supervisors within a large, diversified financial services organization who are far-removed from a member’s securities business.118 Certain commenters requested clarification with respect to who must register where clearing and introducing firms share responsibility for operations functions (‘‘shared functions’’) 119 and whether such persons would be considered associated persons of both the introducing and clearing firms.120 Several commenters suggested that an exemption be provided when covered functions are performed by another registered broker-dealer, bank, investment advisor, foreign entity 121 or affiliated insurance company.122 Given a member’s obligation to supervise any outsourced activity, numerous commenters stated that it should be sufficient for FINRA to confine application of the proposed registration and examination requirements to ‘‘employees’’ of the member.123 One commenter questioned the legal ramifications that would result from requiring the registration of vendor employees with more than one member.124 Certain commenters requested clarification with respect to how the proposed rule change affects Office of Supervisory Jurisdiction (‘‘OSJ’’) requirements relating to currently outsourced activities 125 and back-office and support locations.126 One commenter stated the proposed rule change would place an unfair burden on small firms that outsource many of the covered functions.127 As noted above, FINRA believes anyone who meets the criteria of a covered person and engages in one or more of the covered functions on behalf of a member must register as an 117 SIFMA. 118 ACLI, A&P, ARM, Bank of America, Horace Mann, IRI, Nationwide, PSD, Sutherland and TIAA. 119 ESI, FSI, NFP, UPFS, Wells Fargo and WSFG. 120 Northwestern Mutual, Pershing and Wells Fargo. 121 AIC and Pershing. 122 ACLI and AIC. 123 NSCP, Pershing, Schwab, Scottrade and TIAA. 124 Pershing. 125 IRI. 126 Scottrade and TIAA. 127 Zelman. E:\FR\FM\18MRN1.SGM 18MRN1 Emcdonald on DSK2BSOYB1PROD with NOTICES 15024 Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices Operations Professional, regardless of whether such person works internally at a member, an affiliate or third-party service provider. Also as previously noted, the proposed rule change does not alter the definition of an ‘‘associated person’’ but rather imposes registration, qualification examination and continuing education requirements on persons who meet the depth of personnel criteria and engage in one or more of the covered functions on behalf of a member. The proposed registration category is function-based so persons are not shielded from the requirements based on their job title or employment by an entity other than a member. Additionally, FINRA notes that the proposed rule change would apply to all members regardless of firm size. FINRA reminds members that the depth of personnel included as covered persons generally is focused on positions with higher-level responsibilities, so entry level staff will likely not be required to register. With respect to clearing arrangements and consistent with Notice to Members 05–48, a covered person would not be considered an associated person of both the introducing and clearing firms based solely on functions performed pursuant to a carrying agreement approved under FINRA Rule 4311 (Carrying Agreements),128 so FINRA would not expect dual registration as an Operations Professional in such cases. However, as noted above, FINRA expects each member will designate at least one Operations Professional, who often may be the Financial and Operations Principal and/or the Principal Operations Officer.129 One commenter suggested that treating persons that fall within the covered categories as associated persons of a member will impact state law prohibitions on dual registration and vendor agreements.130 FINRA has stated throughout this filing the need for this proposed rule change and its belief that the proposal is appropriately tailored to meet its stated objectives. FINRA believes it is, therefore, required additional regulation. That being the case, ill-defined collateral effects that can be avoided by a member do not serve as a reason to modify or negate such proposed rulemaking. Finally, FINRA already views the persons treated as covered persons in the 128 FINRA replaced NASD Rule 3230 (Clearing Agreements) and NYSE Rule 382 (Carrying Agreements) with new consolidated FINRA Rule 4311 (Carrying Agreements). See Securities Exchange Act Release No. 63999 (March 1, 2011) (Order Approving File No. SR–FINRA–2010–061). 129 See supra note 61 and accompanying text. 130 TIAA. VerDate Mar<15>2010 18:30 Mar 17, 2011 Jkt 223001 covered functions, and indeed all nonclerical persons reporting to such covered persons, as associated persons irrespective of this proposed rule. Small Firms Concerns Numerous commenters noted the proposed rule change places an undue burden on, unnecessarily increases costs for, and is anticompetitive for small firms with no apparent benefit to the public.131 One commenter noted the proposal is appropriate only in its application to personnel and brokerdealers that handle customer accounts, customer funds and/or securities.132 FINRA does not agree that small firms would be overly burdened by the proposed rule change since almost all other FINRA registration requirements apply to small firms and do not provide an exemption for personnel performing activities that would require registration based on a firm’s limited business. FINRA also anticipates that many persons who would be subject to the new Operations Professional registration category would qualify for the proposed exception from the qualification examination based on existing registrations, and, as noted above, FINRA would not assess a separate registration fee for persons relying on the proposed exception to register as Operations Professionals. Moreover, the impact of the proposed rule change is expected to be minimal as the majority of the covered functions are generally performed by the carrying and clearing firm and, as noted above, a covered person would not be considered an associated person of both the introducing and clearing firms based solely on functions performed pursuant to a carrying agreement approved under FINRA Rule 4311 (Carrying Agreements),133 so FINRA would not expect dual registration as an Operations Professional in such cases. However, as further detailed in Section F. above, in light of the limitations on personnel at certain smaller firms, FINRA is proposing a 120-day grace period for covered persons associated with a non-clearing member to transition into the proposed registration category. Implementation of the Proposed Rule Change Numerous commenters suggested that the proposed transition period of six to nine months for persons acting as Operations Professionals as of the 131 Crowell, Freestone, Martin Nelson, Mutual Trust, Navidar, RiverStone, Wellington and Zelman. 132 FirstBank PR. 133 See supra note 128 and accompanying text. PO 00000 Frm 00131 Fmt 4703 Sfmt 4703 effective date of the proposed rule change is insufficient for firms to fully comply because a significant number of personnel will need to become registered. The commenters noted that firms will likely need to phase-in such persons’ preparation for, and taking of, the qualification examination to mitigate the impact on customer service and operational functions.134 Also, certain commenters suggested that personnel may not pass the qualification examination on the first attempt since good test preparation services may not be available and certain operations personnel may not have test-taking skills.135 The commenters suggested extending the transition period to between 12 to 18 months 136 or up to 24 months.137 Other commenters noted that all persons should have the benefit of the transition period regardless of when they begin work in a covered function.138 Certain commenters suggested that persons who begin work as Operations Professionals following the effective date of the proposed rule change (i.e., new hires or associated persons who meet the depth of personnel and transfer into a covered function) should be granted a grace period to transition into the proposed registration category.139 According to one commenter, subjecting these persons to the proposed licensing regime immediately undercuts the purpose of the transition period and may chill hiring of operations personnel while the transition period is in effect.140 Numerous commenters recommended a 90-day grace period for new hires or those who transition into a covered function, consistent with current NASD Rule 1021(d), which generally allows a registered representative to act in a principal capacity for 90 days while preparing for an applicable exam.141 Two commenters suggested a 120-day grace period for personnel who transition into a covered function after the transition period has expired, conditioned on supervision by a licensed Operations Professional.142 134 ARM, Bank of America, Commonwealth, ESI, FSI, Horace Mann, Modern Woodmen, M. Griffith, Morgan Stanley, NFP, NSCP, Scottrade, SIFMA and WSFG. 135 Nationwide, UPFS and Wells Fargo. 136 ARM, Bank of America, Commonwealth, ESI, FSI, Horace Mann, Modern Woodmen, M. Griffith, Morgan Stanley, NFP, NSCP, Scottrade, SIFMA and WSFG. 137 Schwab. 138 Schwab, SIFMA and TIAA. 139 IRI, Nationwide, NSCP, Scottrade and Wells Fargo. 140 Morgan Stanley. 141 ARM, Bank of America, PSD, Schwab, Scottrade, Sutherland and Wells Fargo. 142 Morgan Stanley and SIFMA. E:\FR\FM\18MRN1.SGM 18MRN1 Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices Emcdonald on DSK2BSOYB1PROD with NOTICES One commenter suggested a 180-day grace period.143 Based on the comments, FINRA has amended the transition period that was proposed in the Notice. As further detailed in Section F. above, FINRA is proposing a 60-day identification period beginning on the effective date of the proposed rule change during which Day-One Professionals must request registration as an Operations Professional via Form U4 in CRD. DayOne Professionals who are identified during the 60-day period and must pass the Operations Professional examination (or an eligible qualification examination) would be granted 12 months beginning on the effective date of the proposed rule change to pass such qualifying examination, during which time such persons may function as an Operations Professional. With respect to non-Day-One Professionals, any person associated with a clearing or self-clearing member must register as an Operations Professional and, if applicable, pass the Operations Professional qualification examination (or an eligible qualification examination) prior to engaging in any activities that would require such registration. Any non-Day-One Professional associated with a nonclearing member who must pass the Operations Professional qualification examination (or an eligible qualification examination) to obtain registration would be granted a grace period of 120 days beginning on the date such person requests Operations Professional registration via Form U4 in CRD to pass such qualifying examination, during which time such person may function as an Operations Professional. Two commenters expressed sentiments regarding their general disagreement with FINRA spending 144 and the current regulatory structure for broker-dealers.145 These comments are outside the scope of the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: 143 Wells Fargo. Trust. 145 Wellington. 144 Mutual VerDate Mar<15>2010 18:30 Mar 17, 2011 Jkt 223001 15025 (A) By order approve or disapprove such proposed rule change, or (B) Institute proceedings to determine whether the proposed rule change should be disapproved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.146 Cathy H. Ahn, Deputy Secretary. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: [FR Doc. 2011–6315 Filed 3–17–11; 8:45 am] Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–FINRA–2011–013 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–FINRA–2011–013. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of FINRA. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–FINRA–2011–013 and should be submitted on or before April 8, 2011. PO 00000 Frm 00132 Fmt 4703 Sfmt 4703 BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–64070; File No. SR–CBOE– 2011–022] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated: Notice of Filing and Immediate Effectiveness of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Relating to PAR Official Fees March 11, 2011. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that, on March 1, 2011, Chicago Board Options Exchange, Incorporated (‘‘CBOE’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by CBOE. On March 9, 2011, CBOE filed Amendment No. 1 to the proposed rule change.3 The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Chicago Board Options Exchange, Incorporated (‘‘CBOE’’ or ‘‘Exchange’’) proposes to amend its Fees Schedule to (i) establish separate PAR Official Fees for Volatility Index Options that are consistent with the Floor Brokerage Fees assessed in Volatility Index Options, and (ii) waive PAR Official Fees for all classes except Volatility Index Options for March 2011. The text of the proposed rule change is available on the Exchange’s Web site (http:// www.cboe.org/legal), at the Exchange’s Office of the Secretary and at the Commission. 146 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 The purpose of Amendment No. 1 was to (i) remove the proposal to waive PAR Official Fees for February 2011 from the filing; and (ii) provide additional details for the statutory basis for waiving the fees in all classes except Volatility Index Options for March 2011. 1 15 E:\FR\FM\18MRN1.SGM 18MRN1

Agencies

[Federal Register Volume 76, Number 53 (Friday, March 18, 2011)]
[Notices]
[Pages 15012-15025]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-6315]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64080; File No. SR-FINRA-2011-013]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Establish 
a Registration Category, Qualification Examination and Continuing 
Education Requirements for Certain Operations Personnel, and Adopt 
FINRA Rule 1250 (Continuing Education Requirements) in the Consolidated 
FINRA Rulebook

March 14, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 4, 2011, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt FINRA Rule 1230(b)(6) to establish a 
registration category and qualification examination requirement for 
certain operations personnel. The proposed rule change also would adopt 
continuing education requirements for such operations personnel and 
adopt NASD Rule 1120 (Continuing Education Requirements) as FINRA Rule 
1250 (Continuing Education Requirements) in the consolidated FINRA 
rulebook with minor changes.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    Given the growing complexity of the financial services industry and 
the importance of services provided by personnel in operations 
departments, FINRA is concerned about the potential for regulatory gaps 
in the area of registration and education requirements for individuals 
performing and overseeing member operations functions. Historically, 
federal and state law and self-regulatory organization

[[Page 15013]]

(``SRO'') 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 and oversee 
member operations functions 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. FINRA believes registration 
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's business that could harm the member, a customer, 
the integrity of the marketplace, or the public.
Proposal
    As described in detail below, FINRA is proposing to expand its 
registration provisions to require registration of certain individuals 
(``covered persons'') who are engaged in, responsible for or 
supervising certain member operations functions (``covered functions'') 
to enhance the regulatory structure surrounding these areas. The 
proposed rule change would amend proposed FINRA Rule 1230 (Registration 
Categories) to adopt a new representative registration category and 
qualification examination for such individuals (``Operations 
Professionals'') \3\ and would expand FINRA's continuing education 
requirements to require that Operations Professionals be subject to 
Regulatory Element and Firm Element training.
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    \3\ See Regulatory Notice 09-70 (December 2009) (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).
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    Generally, covered persons would be 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 a member. 
Only persons who are both ``covered persons'' (i.e., meet the depth of 
personnel criteria as discussed in Section A. below) and conduct 
activities or functions in one or more of the ``covered functions'' 
(discussed in Section B. below) would be subject to the new Operations 
Professional registration category.
A. Covered Persons for Inclusion in the New Registration Category
    The proposed rule change would require the following covered 
persons to register with FINRA as an Operations Professional:
    (1) Senior management with responsibility over the covered 
functions;
    (2) Supervisors, managers or other persons responsible for 
approving or authorizing work, including work of other persons, in 
direct furtherance of the covered functions; and
    (3) Persons with the authority or discretion materially to commit a 
member's capital in direct furtherance of the covered functions or to 
commit a member to any material contract or agreement (written or oral) 
in direct furtherance of the covered functions.
    Persons who perform a covered function, but whose responsibilities 
are below these specified levels, would not be required to register as 
Operations Professionals. Members must determine, based on a person's 
activities and responsibilities, whether such person would be 
considered a covered person and subject to the proposed requirements 
for Operations Professionals. A person's job title may not be clearly 
indicative of his or her obligation to register as an Operations 
Professional.
    For the purpose of the proposed third category of covered persons, 
any person who has the authority or discretion materially to commit 
firm capital in direct furtherance of the covered functions or commit a 
firm to a material contract or agreement in direct furtherance of the 
covered functions would be required to register as an Operations 
Professional. As proposed in supplementary material .06 (Scope of 
Operations Professional Requirement), the determination as to what 
constitutes ``materially'' or ``material'' would be based on a member's 
pre-established spending guidelines and risk management policies. 
Generally, persons who do not have the authority or discretion to 
commit a member's capital, or to commit a member to a contract or 
agreement, above such pre-established spending guidelines and risk 
management policies would not be subject to registration as an 
Operations Professional under this provision.
    Additionally, proposed supplementary material .06 would provide 
that any person whose activities are limited to performing a function 
ancillary to a covered function, or whose function is to serve a role 
that can be viewed as supportive of or advisory to the performance of a 
covered function, or who engages solely in clerical or ministerial 
activities in a covered function would not be required to register as 
an Operations Professional pursuant to paragraph (b)(6)(A) of the 
proposed rule. For example, internal audit, legal or compliance 
personnel who review but do not have primary responsibility for any 
covered function would not be required to register as an Operations 
Professional.
    Consistent with FINRA guidance, persons subject to the new 
Operations Professional registration category would be considered 
associated persons of a member irrespective of their employing entity, 
and would be subject to all FINRA rules applicable to associated 
persons and/or registered persons.\4\ Moreover, any person who meets 
the depth of personnel criteria described above in Section A. and is 
engaged in one or more covered functions would be required to register 
as an Operations Professional. The proposed rule change does not alter 
the status of covered persons as associated persons of a member insofar 
as they are performing regulated broker-dealer functions on behalf of 
the member. Rather, the proposed rule change explicitly imposes 
registration, qualification examination and continuing education 
requirements on such persons.
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    \4\ See Notice to Members 05-48 (July 2005) (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.''
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B. Covered Functions for Inclusion in the New Registration Category
    Any person who meets the threshold in one of the three categories 
of covered persons identified above in Section A. who conducts 
activities or functions for a member in one or more of the following 
covered functions would be required to register as an Operations 
Professional:
    (1) Client on-boarding (customer account data and document 
maintenance);

[[Page 15014]]

    (2) Collection, maintenance, re-investment (i.e., sweeps) and 
disbursement of funds;
    (3) Receipt and delivery of securities and funds, account 
transfers;
    (4) Bank, custody, depository and firm account management and 
reconciliation;
    (5) Settlement, fail control, buy ins, segregation, possession and 
control;
    (6) Trade confirmation and account statements;
    (7) Margin;
    (8) Stock loan/securities lending;
    (9) Prime brokerage (services to other broker-dealers and financial 
institutions);
    (10) Approval of pricing models used for valuations;
    (11) Financial control, including general ledger and treasury;
    (12) Contributing to the process of preparing and filing financial 
regulatory reports;
    (13) Defining and approving 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;
    (14) Defining and approving business security requirements and 
policies for information technology, including, but not limited to, 
systems and data, in connection with the covered functions;
    (15) Defining and approving information entitlement policies in 
connection with the covered functions; and
    (16) Posting entries to a member's books and records in connection 
with the covered functions to ensure integrity and compliance with the 
federal securities laws and regulations and FINRA rules.
    The proposed rule change would include persons engaged in or 
supervising stock loan/securities lending activities that meet the 
depth of personnel as a covered person in Section A. above. FINRA also 
is proposing separate registration categories for a ``Securities 
Lending Representative'' and a ``Securities Lending Supervisor.'' \5\
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    \5\ In Regulatory Notice 09-70, FINRA generally proposes to 
adopt the NYSE registration requirements for Securities Lending 
Representatives and Securities Lending Supervisors, requiring an 
associated person who has discretion to commit a member to any 
contract or agreement (written or oral) involving securities lending 
or borrowing activities with any other person, and the direct 
supervisor of the associated person to register as a Securities 
Lending Representative and Securities Lending Supervisor, 
respectively. These individuals would be required to register as 
such for tracking and oversight purposes, regardless of whether they 
are registered in other categories. However, solely for purposes of 
registering as a Securities Lending Representative or Securities 
Lending Supervisor, an individual will not be subject to a 
qualification examination at this time.
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C. Operations Professional Qualification Examination
    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.\6\ So that applicants understand that they are functioning in a 
heavily regulated industry, the proposed Operations Professional 
qualification examination would test applicants on general securities 
industry knowledge and its associated regulations and rules. Subject to 
the proposed exception in Section D. below, any person required to 
register as an Operations Professional would be required to pass the 
Operations Professional qualification examination before such 
registration may become effective.
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    \6\ 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.
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    In general, given the diversity of functions performed by covered 
persons, the proposed Operations Professional qualification examination 
would be a 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. As 
further detailed in Section E. below, the continuing education 
components associated with the Operations Professional registration 
category would provide competency training specific to the covered 
functions, as applicable.
    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 proposed key content themes of the new Operations Professional 
qualification examination:
     Professional Conduct and Ethical Considerations: This 
section of the examination would assess a candidate's core knowledge 
addressed on other FINRA examinations that are appropriate for an 
Operations Professional. The questions would assess knowledge of what 
are considered serious violations of securities industry rules. This 
section would include ethics-based questions that address issues such 
as data integrity, escalation of regulatory red flags and separation of 
duties.
     Essential Product and Market Knowledge for an Operations 
Professional: This section of the examination would assess a 
candidate's basic product and market knowledge, including definitions 
and characteristics of major product categories (i.e., equities, debt, 
packaged securities, options and markets). An Operations Professional 
would not be expected to know the same level of detail about the 
products and markets as a product specialist or a representative 
selling products to customers.
     Knowledge Associated with Operations Activities: This 
section of the examination would assess a candidate's broad-based 
knowledge regarding the covered functions outlined above that support a 
broker-dealer's business and the underlying rules that drive the 
processes associated with these activities (i.e., customer account set-
up and transfers, recordkeeping requirements, rules associated with the 
protection of customer assets and transaction processing, uniform 
practices associated with making good delivery of securities, making 
payments for securities and meeting settlement requirements, and credit 
and margin rules). This section of the examination also would include 
ethics-based questions in the context of operations activities.
D. Exception to Operations Professional Examination Requirement
    The proposed rule change would include 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.

[[Page 15015]]

    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[supreg]'').\7\ If there are no other deficiencies (e.g., 
fingerprints), the Operations Professional registration would be 
approved automatically at the time such request is made. Information 
regarding the proposed implementation period is discussed in detail in 
Section F. below. FINRA would not assess a separate registration fee 
for persons relying on the proposed exception to register as Operations 
Professionals.
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    \7\ 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.
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    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 who 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:
     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 would be qualified to register as an 
Operations Professional without passing the Operations Professional 
examination. Most principal-level qualification examinations have a 
prerequisite examination requirement that is satisfied with one of the 
representative qualification examinations listed above; however, FINRA 
also proposes to include principal-level qualification examinations 
that do not have a prerequisite, or have a prerequisite that can be met 
with a qualification examination not on the above list (e.g., Series 
62), because it is likely such principals are familiar with the content 
to be covered in the Operations Professional qualification examination 
as a result of the requirements of their positions. Specifically, 
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:
     Registered Options Principal (Series 4)
     General Securities Sales Supervisor (Series 9/10)
     Compliance Officer (Series 14)
     Supervisory Analyst (Series 16)
     General Securities Principal (Series 24)
     Investment Company Products/Variable Products Principal 
(Series 26)
     Financial and Operations Principal (Series 27)
     Introducing Broker-Dealer Financial and Operations 
Principal (Series 28)
     Municipal Fund Securities Limited Principal (Series 51)
     Municipal Securities Principal (Series 53)
    The proposed exception would not apply to persons whose eligible 
registrations are revoked pursuant to FINRA Rules 8310 (Sanctions for 
Violation of the Rules) or 8320 (Payment of Fines, Other Monetary 
Sanctions, or Costs; Summary Action for Failure to Pay), suspended or 
otherwise deemed inactive.\8\
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    \8\ If a person's registration in an eligible registration 
category was revoked within the prior two years, but such person re-
qualifies and re-registers in such eligible registration category, 
he or she may rely on this eligible registration to qualify for the 
exception to the Operations Professional qualification examination 
requirement. Further, a suspended registration may not be relied 
upon as an eligible registration during the suspension period. 
Similarly, a registration deemed inactive for any reason (e.g., 
failure to complete continuing education requirements) may not be 
relied upon as an eligible registration during such inactive period. 
See also FINRA Rule 8311 (Effect of a Suspension, Revocation, 
Cancellation, or Bar).
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    FINRA notes that covered persons 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 in Section A. 
above, entry-level operations personnel would not typically be subject 
to the proposed requirements for Operations Professionals.
E. Continuing Education Requirements for Operations Professionals
    The proposed rule change 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 
proposed FINRA Rule 1250 (Continuing Education Requirements).\9\ The 
continuing education elements for this registration category would 
provide more specific learning materials appropriate for an Operations 
Professional, given the breadth of functions that are covered by this 
registration requirement.
---------------------------------------------------------------------------

    \9\ See Section G. for further discussion of the adoption of 
NASD Rule 1120 (Continuing Education Requirements) as FINRA Rule 
1250.
---------------------------------------------------------------------------

    The Regulatory Element program for Operations Professionals would 
provide instruction for Operations Professionals to: (1) Maintain and 
improve understanding of the regulatory and ethical aspects associated 
with the covered functions; (2) identify suspicious activities and/or 
red flags that could harm a customer, a firm, issuers of securities or 
the integrity of the marketplace; (3) maintain and improve knowledge 
and understanding of the covered functions; and (4) assist the 
Operations Professionals in keeping up with changes in the industry and 
regulations that impact their work.
    Operations Professionals would be required to complete scenario-
based modules based on the key content themes of the Operations 
Professional qualification examination, as described in Section C. 
above. The breadth and depth of coverage of the modules would be 
determined through the use of existing industry standards currently 
used to develop continuing education content and would include input 
and advice from operations professionals active in the securities 
industry. Individuals would be expected to complete the Regulatory 
Element continuing education requirement two years after passing the 
qualification examination and then every three years thereafter.
    Individuals who avail themselves of the proposed exception to the 
Operations Professional qualification examination requirement with an 
eligible registration described 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 (Series 7) under the exception would be subject to the 
S101 continuing

[[Page 15016]]

education program in lieu of the Operations Professional Regulatory 
Element training, and a person who registers by holding a General 
Securities Principal registration (Series 24) would be subject to the 
S201 continuing education program in lieu of the Operations 
Professional Regulatory Element training.
    Operations Professionals also would be subject to Firm Element 
training. To implement this change, as further discussed in Section G. 
below, the proposed rule change would include Operations Professionals 
in the definition of ``covered registered persons'' in proposed FINRA 
Rule 1250, and would require that firms deliver Firm Element training 
to Operations Professionals subject to the new registration and 
qualification requirements.\10\
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    \10\ NASD Rule 1120(b) (Continuing Education Requirements) is 
currently 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 NASD Rule 1050, and to the immediate supervisors 
of such persons. The proposed amendments are reflected in the new 
FINRA rule governing continuing education, FINRA Rule 1250, which is 
being proposed as part of this rule change. See Section G. below.
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F. Implementation of the Proposed Rule Change
    As noted above, any person who meets the depth of personnel 
criteria described in Section A. and is engaged in one or more covered 
functions described in Section B. would be required to register with 
FINRA as an Operations Professional. Such persons would be required to 
register by doing one of the following, as applicable: (1) Requesting 
Operations Professional registration via Form U4 in CRD and passing the 
Operations Professional qualification examination; (2) requesting 
Operations Professional registration via Form U4 in CRD and opting in 
to such registration based on their holding, or having held within the 
past two years, an eligible registration; \11\ or (3) requesting 
Operations Professional registration via Form U4 in CRD, registering 
with FINRA in an eligible registration category and opting in to 
Operations Professional registration based on such eligible 
registration.\12\
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    \11\ Persons with an active eligible registration who request 
Operations Professional registration will be automatically granted 
Operations Professional registration once they submit such request 
via Form U4 in CRD, regardless of when such persons apply for 
Operations Professional registration (provided there are no existing 
deficiencies). See also supra note 7.
    \12\ If a person elects to register with FINRA as an Operations 
Professional by newly qualifying in an eligible registration (i.e., 
does not have an active eligible registration when he or she 
requests Operations Professional registration via Form U4 in CRD), 
such person must contact FINRA upon passing the alternative 
examination to request that the eligible registration be applied to 
the request for Operations Professional registration. This would 
include, for example, a person who requests both the Operations 
Professional and General Securities Representative registrations via 
Form U4 in CRD and passes the Series 7 examination. Such person 
would be required to contact FINRA to alert FINRA staff that the 
General Securities Representative registration will be used as an 
eligible registration to qualify as an Operations Professional.
---------------------------------------------------------------------------

    Members must identify persons required to register as an Operations 
Professional as of the effective date of the proposed rule change 
(``Day-One Professionals'') (i.e., persons who meet the depth of 
personnel criteria and are engaged in one or more covered functions as 
of the effective date of the proposed rule change). FINRA is proposing 
a 60-day identification period beginning on the effective date of the 
proposed rule change during which Day-One Professionals must request 
registration as an Operations Professional via Form U4 in CRD. During 
this 60-day period, a Day-One Professional may function in the capacity 
of an Operations Professional. Day-One Professionals who are identified 
during the 60-day period and must pass the Operations Professional 
examination (or an eligible qualification examination) to qualify 
(i.e., persons who do not hold, and have not within the past two years 
held, an eligible registration) would be granted 12 months beginning on 
the effective date of the proposed rule change to pass such qualifying 
examination, during which time such persons may function as an 
Operations Professional.\13\ To be eligible to function as an 
Operations Professional for the 12-month transition period, Day-One 
Professionals subject to an examination requirement must request 
Operations Professional registration via Form U4 in CRD during the 60-
day identification period and pass the Operations Professional 
examination (or an eligible qualification examination) before the 
expiration of 12 months from the effective date of the proposed rule 
change.\14\ If a Day-One Professional does not pass an acceptable 
examination by the expiration of the 12-month transition period, such 
person must cease functioning as an Operations Professional.
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    \13\ When a person requests Operations Professional registration 
via Form U4 in CRD during the 60-day identification period, an 
examination window for the Operations Professional qualification 
examination will open in CRD that expires 12 months from the 
effective date of the proposed rule change. After the 60-day 
identification period, the examination window for the Operations 
Professional qualification examination will open for the standard 
120 days.
    \14\ Members should note that the standard examination window in 
CRD applicable to a particular registration category will apply 
notwithstanding the 12-month examination window established for 
purposes of the transition period. The 12-month examination window 
is only for the Operations Professional qualification examination. 
Thus, a person who elects to qualify, for example, by passing the 
Series 7 examination would have only 120 days to take and pass the 
Series 7 examination once the window for such examination is opened 
in CRD. Members should plan accordingly so that associated persons 
are prepared to take the requisite examination within the prescribed 
window for that registration category, and that any requisite 
examination is passed before the expiration of the 12-month 
transition period for Day-One Professionals.
---------------------------------------------------------------------------

    The 12-month transition period to pass a qualification examination 
would only apply to Day-One Professionals. Any person who is not 
subject to the registration requirements for Operations Professionals 
as of the effective date of the proposed rule change (i.e., a person 
who does not meet the depth of personnel criteria and/or is not engaged 
in one or more covered functions as of the effective date, or persons 
hired after the effective date of the proposed rule change who will be 
placed in such roles) (``non-Day-One Professionals'') would be required 
to register as an Operations Professional and, if applicable, pass the 
Operations Professional qualification examination (or an eligible 
qualification examination), prior to engaging in any activities that 
would require such registration. The 60-day identification period and 
the 12-month transition period do not affect the obligations of non-
Day-One Professionals to register as an Operations Professional prior 
to engaging in functions that would require such registration. However, 
any non-Day-One Professional associated with a non-clearing member who 
must pass the Operations Professional qualification examination (or an 
eligible qualification examination) to obtain registration would be 
granted a grace period of 120 days beginning on the date such person 
requests Operations Professional registration via Form U4 in CRD to 
pass such qualifying examination, during which time such person may 
function as an Operations Professional. FINRA believes that allowing a 
person associated with a non-clearing member to function as an 
Operations Professional for a 120-day period will enable these firms to 
manage their more limited staffs to comply with the proposed 
registration requirements without disrupting those firms' obligations 
to customers. Non-Day-One Professionals associated with a self-clearing 
or clearing member would not have the benefit of the 120-day grace 
period and would be required to register

[[Page 15017]]

as an Operations Professional prior to engaging in activities that 
would require such registration.
    Members would be responsible for tracking and monitoring their 
associated persons to ensure that such persons are registered, and 
conducting their activities, in compliance with the time frames 
described above.
G. FINRA Continuing Education Rule
    The proposed rule change would adopt NASD Rule 1120 (Continuing 
Education Requirements) as new FINRA Rule 1250 (Continuing Education 
Requirements). In addition to the proposed change noted in Section E., 
which would expand the scope of ``covered registered persons'' subject 
to the Firm Element to include persons registered as Operations 
Professionals, the proposed rule change would make additional minor 
changes to NASD Rule 1120 to update cross-references and reflect the 
conventions of the consolidated FINRA Rulebook.
    NASD Rule 1120 and Incorporated NYSE Rule 345A were adopted in 1995 
in response to the recommendation of a task force, which subsequently 
became the Securities Industry Regulatory Council on Continuing 
Education (the ``Council''),\15\ to create uniform continuing education 
requirements in the securities industry. As advised by the Council, the 
continuing education requirements include a Regulatory Element and a 
Firm Element. The NASD and Incorporated NYSE rules are nearly identical 
in keeping with the goals of the Council to create uniform continuing 
education requirements.\16\
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    \15\ The Council is comprised of up to 16 industry members from 
broker-dealers, representing a broad cross section of industry 
firms, and representatives from SROs as well as liaisons from the 
SEC and the North American Securities Administrators Association 
(``NASAA'').
    \16\ The proposed rule change would not delete Incorporated NYSE 
Rule 345A (and its Interpretation). Rather, FINRA expects to address 
Incorporated NYSE Rule 345A (and its Interpretation) and propose 
additional changes to proposed FINRA Rule 1250 as part of the 
consolidated registration and qualification rules. See Regulatory 
Notice 09-70 (December 2009).
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    The Regulatory Element consists of periodic computer-based training 
on regulatory, compliance, ethical, supervisory subjects and sales 
practice standards. A registered person is required to participate and 
complete a designated Regulatory Element within a 120-day period that 
commences with the second anniversary of such person's initial 
securities registration, and reoccurs every three years thereafter for 
as long as such person remains in the securities business. Failure to 
complete the Regulatory Element will result in a registered person's 
registration becoming inactive and such person cannot conduct a 
securities business on behalf of the member until the requirement is 
met.\17\
    The Firm Element requirements currently 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 a research analyst 
pursuant to NASD Rule 1050, and to the immediate supervisors of such 
persons (collectively, ``covered registered persons''). However, as 
noted above, the proposed rule change would expand the scope of 
``covered registered persons'' subject to the Firm Element to include 
persons registered as Operations Professionals. The Firm Element 
consists of annual, member-developed and administered training programs 
designed to keep covered registered persons current regarding 
securities products, services and strategies offered by the member. The 
Firm Element requires members to annually evaluate and prioritize their 
training needs (i.e., conduct a Needs Analysis and develop a written 
plan). In planning, developing and implementing the Firm Element 
training, each member must take into consideration its size, 
organizational structure, scope of business, types of products and 
services it offers, as well as regulatory developments and the 
performance of its covered registered persons in the Regulatory 
Element. FINRA may require a member to provide specific training to a 
member's covered registered persons as FINRA deems appropriate. Each 
member must administer its Firm Element Continuing Education Program in 
accordance with its annual Needs Analysis and written plan, and must 
maintain records documenting the content of the program and completion 
of the program by covered registered persons.
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    \17\ A registered person will be required to retake the 
Regulatory Element in the event such person is: (1) Subject to a 
statutory disqualification as defined by Section 3(a)(39) of the 
Exchange Act; (2) subject to a suspension or imposition of a fine of 
$5,000 or more by an SRO or other securities governmental agency; or 
(3) ordered to do so as a sanction in a disciplinary action by an 
SRO or other securities governmental agency.
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    FINRA will announce the implementation date of the proposed rule 
change in a Regulatory Notice to be published no later than 90 days 
following Commission approval. The implementation date will be no later 
than 240 days following Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\18\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes the proposed rule change to expand 
FINRA's registration and continuing education requirements to 
Operations Professionals will help ensure that investor protection 
mechanisms are in place in all areas of a member's business that could 
harm the member, a customer, the integrity of the marketplace, or the 
public.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The proposed rule change was published for comment in Regulatory 
Notice 10-25 (May 2010) (the ``Notice''). Forty-nine comment letters 
were received in response to the Notice.\19\ A copy of the Notice is 
attached as Exhibit 2a. A list of the comment letters received in 
response to the Notice is attached as Exhibit 2b. Copies of the comment 
letters received in response to the Notice are attached as Exhibit 2c. 
Below is a summary of the comments and FINRA's responses.
---------------------------------------------------------------------------

    \19\ All references to the commenters under this Item are to the 
commenters as listed in Exhibit 2b.
---------------------------------------------------------------------------

General Concerns Regarding the Scope of the New Registration Category
    Certain commenters generally opposed the proposed rule change 
stating that it is overly broad and ambiguous, poorly defined, imposes 
requirements that are unnecessary to meet FINRA's stated objectives and 
may have unintended consequences.\20\ Other commenters argued that 
licensing requirements do not make people honest or increase their 
efficiency or proficiency\21\ and that no amount of

[[Page 15018]]

licensing will change failures of human character.\22\ Two commenters 
noted that frauds are almost always committed on the frontlines by 
individuals who are already licensed.\23\ Additionally, certain 
commenters opposed registration requirements for covered persons 
because their work is already supervised and approved by a firm 
principal\24\ and holding principals accountable for failures in these 
areas would be more cost effective.\25\ Numerous commenters proposed an 
alternative approach under which firms would delegate each of the 
covered functions to existing registered principals of the firm and 
reflect such assignments in the firm's written supervisory procedures 
(``WSPs'').\26\ Other commenters noted the proposed rule change is 
unnecessary because people who handle customer funds go through 
background checks and fingerprinting.\27\
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    \20\ ACLI, AIC, Bank of America, Crowell, ESI, Horace Mann, IPA, 
IRI, Modern Woodmen, Navidar, NSCP, PSD, Quasar, UPFS, Scottrade, 
SIFMA, Sutherland, TIAA, Wellington and Wells Fargo.
    \21\ Mutual Trust.
    \22\ AIC and Wells Fargo.
    \23\ AIC and PSD.
    \24\ Crowell, IRI, M. Griffith, PSD and RiverStone.
    \25\ Crowell and Wellington.
    \26\ IRI, Nationwide, PSD and Sutherland.
    \27\ PSD, RiverStone and Wells Fargo.
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    In response, FINRA notes that covered persons are performing 
regulated broker-dealer functions on behalf of a member, and believes 
such persons should be subject to registration, examination and 
continuing education requirements to ensure that they attain and 
maintain specified levels of competence and knowledge to properly carry 
out their responsibilities to the member and its customers. FINRA does 
not agree that principal approval or background checks and 
fingerprinting are sufficient safeguards to ensure members' operations 
departments are functioning in a manner that will promote investor 
protection to the highest level possible. The proposed rule change is 
intended, among other things, to increase covered persons' awareness 
and knowledge that they are operating in a regulated environment 
designed to protect investors' interests and the integrity of the 
operations of a broker-dealer. In addition, the proposed rule will help 
to ensure that any fraudulent activity that may start in the front 
office of a firm cannot be processed without passing through a properly 
registered and trained Operations Professional. Requiring registration, 
testing and training for Operations Professionals should further 
strengthen members' compliance with securities laws, rules and 
regulations.
    Certain commenters expressed concern that requiring registration of 
covered persons will dramatically limit the pool of candidates that may 
be considered for hiring when personnel changes occur in operations 
departments.\28\ As an initial matter, FINRA notes that it is always 
correct to state that conduct once regulated becomes constrained by 
that regulation, but that observation by itself is not a credible 
reason not to engage in the regulation. The proper test is whether that 
regulation is appropriately tailored and needed in furtherance of the 
interests of investors and the securities markets. The immediate prior 
paragraph restates those interests, and the depth of personnel as set 
forth in Section A. of the Purpose section demonstrates the appropriate 
tailoring of the proposed regulation. Finally, Section D. of the 
Purpose section indicates that many candidates for positions that would 
require registration may possess an eligible registration and qualify 
for an exception from the requirement to take the Operations 
Professional qualification examination.
---------------------------------------------------------------------------

    \28\ NPB and RiverStone.
---------------------------------------------------------------------------

    Two commenters suggested FINRA reduce the obligations for 
Operations Professionals and specify that not all of the rules 
applicable to associated persons apply to such persons since they are 
generally not customer-facing personnel.\29\ Certain other commenters 
sought clarification that the proposed rule change does not eliminate 
or limit the ability of a securities issuer and its associated persons 
to rely on the issuer exemption under Exchange Act Rule 3a4-1 \30\ to 
avoid broker-dealer registration requirements.\31\ Another commenter 
requested that FINRA provide guidance on the impact of the proposed 
rule change on FINRA Rule 2310 (Direct Participation Programs) and 
clearly state that the salaries of Operations Professionals be 
categorized as ``non-transaction-based-compensation'' and that there is 
a blanket exception from ``underwriting compensation'' for Operations 
Professionals.\32\
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    \29\ TIAA and Wells Fargo.
    \30\ 17 CFR 240.3a4-1.
    \31\ PSD, Sutherland and TIAA.
    \32\ IPA.
---------------------------------------------------------------------------

    FINRA does not agree that Operations Professionals should be 
subject to a limited set of rules. Covered persons are not only 
associated persons of a member but their activities are crucial enough 
to the business of a member to require registration with FINRA. The 
proposed rule change does not alter a person's status as an associated 
person under Exchange Act Rule 3a4-1 or otherwise, nor does it address 
the definitions of certain types of compensation under FINRA rules. 
However, FINRA recognizes that additional guidance may be needed 
following the adoption of the proposed rule change and will address 
interpretive questions as needed, similar to FINRA's approach to other 
regulatory initiatives with wide-ranging and novel impacts.
Covered Persons for Inclusion in the New Registration Category
    Certain commenters requested clarification with respect to proposed 
FINRA Rule 1230(b)(6)(A)(i) regarding scope of the term senior 
management and whether this provision applies beyond senior managers 
with primary or direct responsibility over the covered functions.\33\ 
Two commenters advocated limiting the depth of personnel for the 
proposed rule change to a single category for senior management with 
responsibility over the covered functions, and requiring firms to 
maintain policies and procedures reasonably designed to ensure that 
operations personnel have an awareness of investor protection 
mechanisms in place at a firm.\34\
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    \33\ IRI, Nationwide, NSCP and TIAA.
    \34\ Wellington and Wells Fargo.
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    FINRA believes this provision is clear as originally proposed and, 
while FINRA understands titles may differ between firms, members should 
be able to identify operations personnel that would be subject to 
proposed Rule 1230(b)(6)(A)(i) based on their functions and 
responsibilities as senior managers overseeing the covered functions. 
FINRA would consider any senior manager in the chain of command 
responsible for a covered function to be subject to the proposed rule, 
up to and including the Principal Operations Officer.\35\ FINRA does 
not agree that ``covered persons'' should be limited to senior 
management with responsibility over the covered functions because the 
proposed registration category is intended to include other individuals 
who exercise supervisory and discretionary authority in direct 
furtherance of the covered functions. Accordingly, FINRA has not 
proposed changes to proposed FINRA Rule 1230(b)(6)(A)(i).
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    \35\ See Regulatory Notice 09-70 (December 2009) for a 
discussion of the Principal Operations Officer registration 
category. See also infra note 61 and accompanying text.
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    Proposed FINRA Rule 1230(b)(6)(A)(ii) would include as covered 
persons supervisors, managers or other persons responsible for 
approving or authorizing work, including work of other persons, in 
direct furtherance of the covered functions. One commenter suggested 
the proposed rule explicitly state that

[[Page 15019]]

covered persons are limited to those persons with decision-making and/
or oversight authority.\36\ Certain commenters requested that FINRA 
clarify what is meant by the phrase ``approve or authorize work.'' \37\ 
Other commenters stated that this provision is written too broadly; 
\38\ creates potential for misinterpretation in determining how far up 
or down the reporting chain this registration requirement would apply; 
\39\ could sweep in affiliate employees, mid or low level 
employees,\40\ third-party vendors \41\ and margin clerks; \42\ and 
that it should be limited to supervisors, managers or other persons 
responsible for primary oversight of covered functions, including 
managers for dual hat employees.\43\ One commenter suggested that FINRA 
revise this provision to clarify that supervisors and managers be 
senior members of their respective departments or units.\44\ Numerous 
commenters recommended deleting the phrase ``work of other persons'' 
because it is unclear.\45\
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    \36\ Morgan Stanley.
    \37\ ESI, NFP, TIAA and UPFS.
    \38\ ACLI, NSCP, Quasar and Wells Fargo.
    \39\ ACLI.
    \40\ Morgan Stanley.
    \41\ Schwab.
    \42\ Scottrade.
    \43\ ARM, TIAA and Wells Fargo.
    \44\ Bank of America.
    \45\ Bank of America, IPA, SIFMA and Wells Fargo.
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    FINRA believes proposed FINRA Rule 1230(b)(6)(A)(ii) is clear as 
proposed and notes that it consulted with industry representatives in 
developing the proposed rule change, including the definition and 
appropriate depth of personnel to be subject to the Operations 
Professional registration category. As noted above, FINRA believes 
members will be able to identify supervisors, managers or other persons 
responsible for approving or authorizing work in direct furtherance of 
the covered functions based on their functions and responsibilities. 
The phrases ``approve or authorize work'' and ``work of other persons'' 
are not legal terms of art but, rather, comport with commercially 
understood operating terms and do not require clarification. 
Accordingly, FINRA has not revised this provision as suggested by the 
commenters; however, FINRA proposes a minor modification to the 
original proposal by re-locating the phrase ``including the work of 
other persons'' to streamline the provision, as reflected in Section A. 
of the Purpose section.
    As originally proposed in the Notice, FINRA Rule 1230(b)(6)(A)(iii) 
required registration as an Operations Professional for persons with 
the authority or discretion to commit the member's capital in direct 
furtherance of the covered functions or to commit the member to any 
contract or agreement (written or oral) in direct furtherance of the 
covered functions. Certain commenters stated this provision is unclear 
and too far-reaching \46\ and noted it would capture persons who 
perform routine, daily activities, or enter into agreements consistent 
with firm policies that have no material impact on firm operations 
(including margin clerks, who often have flexibility to obligate firm 
capital up to certain limits).\47\ Two commenters noted that the 
provision should only be triggered if the contracts are sufficiently 
material to the firm.\48\ One commenter noted that it may be so broad 
as to require registration of junior associates if they sign or approve 
contracts, retain vendors or make clerical postings to the books of a 
member.\49\ Another commenter noted that this provision is inconsistent 
with the first two categories of covered persons, which focus on senior 
managers, supervisors and those who approve work in the covered 
functions.\50\ Another commenter requested clarification with respect 
to the term ``firm capital'' because it could sweep in persons who 
approve the payment of vendor invoices for services related to some 
aspect of a covered function.\51\ Two commenters noted it is unclear 
what individuals, other than those engaged in or supervising securities 
lending activities, the proposed third category of covered persons 
intends to cover and suggested certain amendments to clarify the 
proposal with respect to such persons.\52\
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    \46\ Bank of America, TIAA and NSCP.
    \47\ T. Rowe Price and Wells Fargo.
    \48\ Bank of America and TIAA.
    \49\ Bank of America.
    \50\ SIFMA.
    \51\ Scottrade.
    \52\ Morgan Stanley and SIFMA.
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    Based on the comments, FINRA has revised the third category of 
covered persons from the original proposal in the Notice, as discussed 
in Section A of the Purpose section. Under the revised proposal, FINRA 
Rule 1230(b)(6)(A)(iii) would require persons with the authority or 
discretion materially to commit a member's capital in direct 
furtherance of the covered functions or to commit a member to any 
material contract or agreement (written or oral) in direct furtherance 
of the covered functions to register as an Operations Professional. 
FINRA purposefully did not limit the third category of covered persons 
to supervisors and managers because the capacity to make material 
discretionary decisions above a member's pre-established spending 
guidelines and risk management policies under this provision is not 
confined to senior or supervisory personnel.
    Numerous commenters suggested that FINRA add language to the 
proposed rule to clarify, as stated in the Notice, that the proposed 
rule does not apply to persons who perform functions ancillary to a 
covered function or whose function is to serve a role that can be 
viewed as supportive of, or advisory to, the performance of a covered 
function, such as internal audit, legal or compliance personnel.\53\ 
One commenter further urged FINRA to add rule language to note that 
individuals performing quality assurance and quality control functions 
in direct furtherance of a covered function are similarly excluded.\54\ 
One commenter noted that registering clerical personnel only increases 
costs unnecessarily and creates hiring barriers for new applicants.\55\ 
One commenter requested that FINRA provide specific examples of 
activities it deems ministerial or clerical in nature, especially when 
such activities require Financial and Operations Principal review and 
control procedures.\56\
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    \53\ Bank of America, FSI, NSCP, Scottrade, SIFMA and TIAA.
    \54\ TIAA.
    \55\ Martin Nelson.
    \56\ Quasar.
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    Based on the comments, and as noted in Section A. of the Purpose 
section of this rule filing, FINRA is proposing supplementary material 
.06 to the proposed rule to clarify that any person whose activities 
are limited to performing a function ancillary to a covered function, 
or whose function is to serve a role that can be viewed as supportive 
of or advisory to the performance of a covered function (e.g., internal 
audit, legal or compliance personnel who review but do not have primary 
responsibility for any covered function), or who engages solely in 
clerical or ministerial activities in a covered function would not be 
required to register as an Operations Professional. FINRA declines to 
provide examples of clerical and ministerial activities at this time, 
believing the term to be well understood in the industry;\57\ however, 
as noted above, FINRA will consider issuing additional guidance as 
needed regarding the categories of persons subject to the Operations 
Professional registration category.
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    \57\ See, e.g., NASD Rule 1060 (Persons Exempt from 
Registration).
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    One commenter encouraged FINRA to clarify whether an Operations

[[Page 15020]]

Professional must be supervised by a qualified supervisory 
principal.\58\ Another commenter requested clarification regarding 
whether a firm must assign or designate an Operations Professional and 
whether a person who is already a registered principal must register as 
an Operations Professional.\59\
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    \58\ Pershing.
    \59\ Crowell.
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    As noted above, as registered persons, Operations Professionals 
will be subject to all FINRA rules applicable to associated persons 
and/or registered persons. Accordingly, pursuant to NASD Rule 
3010(a)(5), each Operations Professional must be assigned to an 
appropriately registered representative(s) and/or principal(s) who 
shall be responsible for supervising that person's activities. 
Additionally, FINRA expects that each member would have at least one 
registered Operations Professional, who often may be the member's 
Financial and Operations Principal and/or the Principal Operations 
Officer. In this regard, neither principal registration, nor 
representative registration in another category, obviates the 
requirement for a covered person to register as an Operations 
Professional. As noted in Section D. of the Purpose section, there are 
numerous eligible registrations that would except such registered 
persons from the requirement to pass the Operations Professional 
qualification examination.
    Certain commenters inquired as to the proposed rule change's 
relationship to, and consistency with, the proposals set forth in 
Regulatory Notice 09-70 \60\ and two commenters requested clarification 
regarding how the proposed requirement under Regulatory Notice 09-70 
that firms appoint a distinct Principal Operations Officer and a 
distinct Principal Financial Officer intersects with the proposed 
Operations Professional designation.\61\
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    \60\ PSD, Sutherland and Wells Fargo.
    \61\ IRI and TIAA.
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    The proposed rule change does not conflict with the proposals set 
forth in Regulatory Notice 09-70. The proposed rule change should be 
read as a separate registration requirement that will be added to the 
consolidated FINRA registration rules. To note, the proposed rule 
change would include persons engaged in or supervising stock loan/
securities lending activities that meet the depth of personnel as a 
covered person in Section A. above. FINRA also is proposing separate 
registration requirements for a ``Securities Lending Representative'' 
and a ``Securities Lending Supervisor'' in Regulatory Notice 09-70; 
consequently, firms should be aware of both sets of proposed 
requirements.\62\ With respect to the proposed requirements in 
Regulatory Notice 09-70 for Principal Operations Officers and Principal 
Financial Officers, such persons likely would be required to register 
as an Operations Professional, depending on whether they meet the 
criteria of a covered person as described in Section A. of the Purpose 
section. The requirement for a covered person to register as an 
Operations Professional applies regardless of any other, separate 
registration requirements; however, such other registration may be used 
as an eligible registration to qualify a covered person for an 
exception from the requirement to take the Operations Professional 
qualification examination.
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    \62\ See supra note 5.
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    One commenter noted the proposed rule change could have costly and 
burdensome implications regarding state registration and licensing so 
FINRA should be as clear as possible in defining who is covered under 
the proposed rule change.\63\ As noted above, FINRA believes the