Justia Agencies And Commissions Securities And Exchange Commission Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, Establishing 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, 36586-36596 [2011-15450]

Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, Establishing 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, 36586-36596 [2011-15450]

Download as PDF 36586 Federal Register / Vol. 76, No. 120 / Wednesday, June 22, 2011 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–64687; File No. SR–FINRA– 2011–013] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, Establishing 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 June 16, 2011. I. Introduction On March 4, 2011, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change 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 proposed rule change was published for comment in the Federal Register on March 18, 2011.3 The Commission received seventeen comment letters on the proposed rule change.4 On June 15, 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 64080 (March 14, 2011), 76 FR 15012 (March 18, 2011) (‘‘Notice’’). 4 See comment letters submitted by Corey N. Callaway, CEO, Callaway Financial Services, Inc., dated March 22, 2011 (‘‘Callaway’’); Jeffrey B. Williams, Vice President & Chief Compliance Officer, Northwestern Mutual Investment Services, LLC, dated March 25, 2011 (‘‘NMIS’’); Z. Jane Riley, Chief Compliance Officer, The Leaders Group, Inc./ TLG Advisors, Inc., dated April 6, 2011 (‘‘TLG’’); Matthew J. Gavaghan, Associate General Counsel, Janney Montgomery Scott LLC, dated April 8, 2011 (‘‘JMS’’); Pam Lewis Marlborough, Associate General Counsel, TIAA–CREF Individual & Institutional Services, LLC, dated April 8, 2011 (‘‘T–C Services—1’’); James Livingston, President/ Chief Executive Officer, National Planning Holdings, Inc., dated April 8, 2011 (‘‘NPH’’); D. Grant Vingoe, Partner, Arnold & Porter LLP, dated April 8, 2011 (‘‘A&P’’); David T. Bellaire, General Counsel and Director of Government Affairs, Financial Services Institute, dated April 8, 2011 mstockstill on DSK4VPTVN1PROD with NOTICES 2 17 VerDate Mar<15>2010 16:40 Jun 21, 2011 Jkt 223001 2011, the Commission received from FINRA a Response to Comments and Partial Amendment No. 1 to the proposed rule change.5 The Commission is publishing this notice and order to solicit comment on Amendment No. 1 and to approve the proposed rule change, as modified by Amendment No. 1, on an accelerated basis. II. Description of Proposed Rule Change and Summary of Comments As described in Exchange Act Release No. 64080,6 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. All of the commenters opposed the rule in whole or in part. FINRA’s responses to comments and explanation of the changes to the proposed rule change made by Amendment No. 1 are described below. A. Covered Persons Proposed FINRA Rule 1230(b)(6)(A) sets forth three categories of persons that would be subject to the proposed registration, qualification and continuing education requirements for an Operations Professional.7 These categories are: (‘‘FSI’’); Joan Hinchman, Executive Director, CEO and President, National Society of Compliance Professionals Inc., dated April 8, 2011 (‘‘NSCP’’); Ronald C. Long, Director of Regulatory Affairs, Wells Fargo Advisors, LLC, dated April 8, 2011 (‘‘WFA’’); Bari Havlik, SVP and Chief Compliance Officer, Charles Schwab & Co., Inc., dated April 8, 2011 (‘‘Schwab’’); Sutherland Asbill & Brennan LLP, on behalf of the Committee of Annuity Insurers, dated April 8, 2011 (‘‘Sutherland’’); Jesse D. Hill, Director of Regulatory Relations, Edward Jones, dated April 8, 2011 (‘‘Edward Jones’’); James T. McHale, Managing Director and Associate General Counsel, SIFMA, dated April 29, 2011 (‘‘SIFMA’’); David S. Massey, President, North American Securities Administrators Association, dated May 2, 2011 (‘‘NASAA’’); John W. Curtis, Managing Director, General Counsel—Global Compliance, Goldman, Sachs & Co., dated May 3, 2011 (‘‘Goldman’’); and Pam Lewis Marlborough, Associate General Counsel, TIAA–CREF Individual & Institutional Services, LLC, dated May 4, 2011 (‘‘T–C Services—2’’). 5 See letter from Erika A. Lazar, FINRA, to Elizabeth Murphy, Secretary, SEC, dated June 15, 2011 (‘‘Response Letter’’). The text of the proposed rule Amendment No. 1 and FINRA’s Response Letter are available on FINRA’s Web site at https:// www.finra.org, at the principal office of FINRA, on the Commission’s Web site at https://www.sec.gov, and at the Commission’s Public Reference Room. 6 See note 3 supra. 7 See Notice, note 3 supra. PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 (1) Senior management with responsibility over the covered functions;8 (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. One commenter supports limiting the scope of covered persons to supervisory personnel.9 Three commenters are concerned about the impact of the proposed rule change on arrangements between members and third-party service providers, and request that FINRA limit the proposal to ‘‘associated persons’’ of a member.10 One such commenter requests an analysis of FINRA rules, the Securities Exchange Act of 1934 (‘‘Exchange Act’’) and SEC rules to allay concerns of unexpected or unintended applications, interpretations and consequences with respect to sweeping employees of third-party service providers into the categories of associated and registered persons.11 Another commenter states that limiting the proposal to associated persons would assist members in interpreting the proposed rule and resolve complicated jurisdictional and practical issues, since requiring firms to license employees of third-parties raises many complex issues including contract negotiations with vendors determining which member firm should sponsor the registrations of a vendor’s employees and which firm should ‘‘supervise’’ such employees when a single vendor serves multiple members.12 Additionally, the commenter suggests changing the title of proposed Rule 1230(b)(6)(A) from ‘‘Requirement’’ to ‘‘Covered Persons’’ and limiting this provision to the following: ‘‘[e]ach of the following associated persons of a member, charged with responsibility for overseeing and protecting the functional and control integrity of the covered functions in paragraph (b)(6)(B) of this Rule, shall be required to register as an Operations Professional.’’ 13 The commenter notes that this language, in part, mirrors descriptive language used 8 Covered functions are discussed further in Part B below. 9 TLG. 10 NSCP, Schwab and SIFMA. 11 Schwab. 12 SIFMA. 13 SIFMA. E:\FR\FM\22JNN1.SGM 22JNN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 76, No. 120 / Wednesday, June 22, 2011 / Notices by FINRA in the Notice. The commenter believes that the proposed rule change significantly expands FINRA’s regulation of outsourced activities and requests that such authority be addressed as part of FINRA’s outsourcing proposal.14 Another commenter requests that FINRA limit covered persons to employees of a member, given that the current proposal would result in a great deal of subjectivity by members to identify covered persons, and in light of a member’s supervisory obligations for outsourced functions under current FINRA guidance.15 FINRA responded that, as stated in the Notice, it believes that any person who meets the definition of a covered person in proposed Rule 1230(b)(6)(A) and engages in one or more of the covered functions in proposed Rule 1230(b)(6)(B) on behalf of a member must register as an Operations Professional, regardless of whether such person works internally at a member, an affiliate or third-party service provider because they are performing regulated broker-dealer functions on behalf of a member.16 FINRA believes that covered persons interact in areas of a member that have a meaningful connection to client funds, accounts and transactions and are involved in significant decisions that can raise compliance issues for a firm.17 Also, FINRA states that, as noted in the Notice, the proposed rule change does not alter the definition of an associated person; rather, it 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.18 In its Response Letter, FINRA stated that the alternative rule text suggested by the commenter above 19 would not change the application of the proposed rule because, by virtue of their activities on behalf of the member, the covered persons have been and continue to be associated persons of such member.20 FINRA stated that Associated person status is not determined at the discretion of a member firm based on the location from which particular personnel are performing functions on behalf of the firm; associated person status attaches to persons who are involved in the securities and investment banking business of a member firm and the covered functions in the proposed rule represent a part of that business of a member firm.21 Moreover, FINRA notes that the scope of covered persons and covered functions set forth in proposed Rule 1230(b) is not exhaustive in terms of who may be considered an associated person of the member based on the nature of the operations activities being conducted on behalf of a member.22 Rather, FINRA has made a determination that the persons subject to the proposed rule change are engaged in members’ operations activities of such significance to require registration, qualification examination and continuing education requirements.23 FINRA, however, notes that it is proposing to amend the title of paragraph (b)(6)(A) to proposed Rule 1230 to ‘‘Covered Persons’’ from ‘‘Requirement’’ to better reflect the content of the paragraph.24 Two commenters note the prevalence of shared resources models, in which shared services are provided to different legal entities within a large financial company, and the challenges raised by the proposed rule for firms in determining whether certain individuals previously not identified as associated persons would now be subject to the rules applicable to associated and registered persons.25 One commenter requests clarification that only the Operations Professional and not his or her supervisors or subordinates would be considered associated persons of the member.26 The commenter also suggests that FINRA’s jurisdiction should not extend to any of the affiliated entities that may employ an Operations Professional.27 FINRA responds that members are free to use shared services models because associated person status does not turn on employment.28 FINRA notes that the proposed rule does not define associated persons; rather, it defines which associated persons involved in the operation of a member’s investment banking and securities business must register as an Operations Professional.29 FINRA says that firms must view each person’s responsibilities in connection with the covered functions independently to determine who must register.30 32 FSI. The SEC recently approved new FINRA Rule 4311. See Exchange Act Release No. 63999 (Mar. 1, 2011), 76 FR 12380 (Mar. 7, 2011). The rule becomes effective on August 1, 2011. See Regulatory Notice 11–26. 33 Response Letter. 34 Id. 35 Id. 36 Id. 37 Id. VerDate Mar<15>2010 16:40 Jun 21, 2011 Jkt 223001 23 Id. 24 Id. 25 NPH and Sutherland. 26 Sutherland. 27 Sutherland. 28 Response Letter. 29 Id. 30 Id. PO 00000 One commenter believes the proposed rule change is unfairly burdensome on small firms, since it will make it impossible to obtain and retain employees, in particular the potential registration of independent Information Technology (‘‘IT’’) personnel and other similarly outsourced functions.31 Another commenter states that rather than requiring individuals at both the introducing broker-dealer and clearing firm to register and test under the proposed rule, FINRA should amend FINRA Rule 4311 (Carrying Agreements) to require that parties to a clearing agreement specifically designate the party responsible for any shared functions in the clearing agreement to reduce the economic and resource burden of requiring all individuals who meet the criteria of a covered function to register under the proposal.32 As further discussed in the Notice, FINRA does not believe that small firms would be overly burdened by the proposed rule change.33 FINRA 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 FINRA would not assess a separate registration fee for persons relying on the proposed exception to register as Operations Professionals.34 FINRA says, moreover, that the impact of the proposed rule change is expected to be minimal as the majority of the covered functions are typically performed by a carrying and clearing firm pursuant to a clearing arrangement.35 In such cases, it may be possible for a small firm to rely on limited persons, perhaps the Financial and Operations Principal, to liaise with the carrying and clearing firm regarding those covered functions. FINRA stated that, as further discussed in the Notice, 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).36 FINRA indicated that it would not expect dual registration as an Operations Professional in such cases.37 31 Callaway. 21 Id. 22 Id. 14 SIFMA. See also Regulatory Notice 11–14 (Third-Party Service Providers). 15 NSCP. 16 Response Letter. 17 Id. 18 Id. 19 See supra note 13 and accompanying text. 20 Response Letter. 36587 Frm 00076 Fmt 4703 Sfmt 4703 E:\FR\FM\22JNN1.SGM 22JNN1 mstockstill on DSK4VPTVN1PROD with NOTICES 36588 Federal Register / Vol. 76, No. 120 / Wednesday, June 22, 2011 / Notices In addition, as further discussed in Section F below, the proposed rule change provides a 120-day grace period for non-Day-One Professionals associated with a non-clearing firm to pass a qualification examination.38 One commenter believes that the depth of personnel and covered functions are so loosely worded as to potentially capture activities performed in a number of areas of a member firm, including, but not limited to, Operations, Finance, Treasury, Information Technology (‘‘IT’’), Information Security (‘‘IS’’), Marketing and Sales.39 FINRA agrees with the commenter that covered persons may be designated in multiple areas of a member (or outside the member) depending on the business structure of the firm.40 FINRA stated that the proposed rule change is function-based and, therefore, not conditioned upon an individual’s relationship to a particular department within a firm.41 FINRA said that, in developing the proposed rule change and with the input of industry representatives, they identified operations functions that significantly impact a member’s business and have the potential to harm the member, a customer, the integrity of the marketplace or the public.42 Several commenters have concerns regarding the application of proposed Rule 1230(b)(6)(A)(i) (‘‘[s]enior management with responsibility over the covered functions’’) to senior management up the chain of command. One commenter questions how far up the chain of command this provision is intended to go (i.e., whether it is intended to reach the CEO) and recommends limiting it to persons with ‘‘direct’’ or ‘‘primary’’ responsibility for the covered functions.43 The commenter requests express guidance that a firm’s Chief Information Officer, Chief Technology Officer or other senior executives responsible for a firm’s overall IT function would not be required to register if not directly or primarily responsible for a covered function.44 Another commenter suggests the proposed rule be limited to ‘‘senior management directly responsible for supervising or overseeing the covered functions to ensure integrity and compliance with the Federal securities laws and regulations and FINRA 38 Id. 39 T–C Services—1. Letter. 40 Response 41 Id. 42 Id. 43 SIFMA. 44 SIFMA. VerDate Mar<15>2010 16:40 Jun 21, 2011 Jkt 223001 rules.’’ 45 The commenter notes that a firm’s Chief Technology Officer and other technology or information security executives may be deemed senior management responsible for a covered function, even though their roles are supportive in nature, and other executives who hold other licenses would also be required to register (i.e., Marketing and Sales executives who design customer confirms or assist in customer data collection at account opening).46 The commenter posits that if these executives are required to register, individuals down the chain of command would also be subject to the proposal, which the commenter finds unnecessary and redundant.47 The commenter also requests that the SEC not approve the proposed rule change unless FINRA limits covered persons to those individuals with ‘‘significant responsibilities or substantial decisionmaking authority regarding operational issues.’’ 48 To clarify proposed Rule 1230(b)(6)(A)(i), FINRA is amending the proposed rule change to provide that the first category of covered persons would include senior management with direct responsibility over the covered functions.49 FINRA states that it believes this proposed change will better enable members to identify who must register as an Operations Professional so that senior management with an indirect relationship to the covered functions are not subject to the proposed registration, qualification examination and continuing education requirements; however, members must ensure senior management that sign off on the covered functions and who are responsible for ensuring the covered functions are executed in compliance with the Federal securities laws and regulations and FINRA rules are properly registered.50 FINRA states that the proposal’s aim is not to require registration for personnel with an indirect connection to the covered functions.51 One commenter suggests that proposed Rule 1230(b)(6)(A)(ii) (‘‘[s]upervisors, managers or other persons responsible for approving or 45 T–C Services—1. Services—1. 47 T–C Services—1. 48 T–C Services—2 (referencing remarks made by Richard Ketchum, Chairman and CEO of FINRA). 49 Response Letter. 50 Id. 51 See also proposed FINRA Rule 1230.06 (Scope of Operations Professional Requirement) (excluding from registration those persons 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). 46 T–C PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 authorizing work, including work of other persons, in direct furtherance of the covered functions’’) is too broad and may include employees below the decision-making level and further suggests replacing this provision with language in the Notice: ‘‘[p]ersons 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.’’ 52 The commenter believes that this language also would make proposed Rule 1230(b)(6)(A)(iii) unnecessary.53 To clarify proposed Rule 1230(b)(6)(A)(ii), FINRA is proposing to amend the proposed rule to provide that the second category of covered persons would include any person designated by senior management specified in Rule 1230(b)(6)(A)(i) as a supervisor, manager or other person responsible for approving or authorizing work, including work of other persons, in direct furtherance of each of the covered functions, as applicable, provided that there is sufficient designation of such persons by senior management to address each of the applicable covered functions.54 FINRA believes the change to proposed Rule 1230(b)(6)(A)(ii) helps to clarify that senior management of a firm may designate the next tier of management or other persons responsible for approving or authorizing work in direct furtherance of the covered functions, in accordance with reasonable business practices.55 In addition, FINRA stated that any person who qualifies as a covered person is responsible for ensuring that the covered functions are performed correctly in accordance with industry rules, firm protocols, policies and procedures by virtue of their position.56 FINRA stated that it believes this concept, as introduced by FINRA in the Notice to elaborate generally on the role of covered persons, is implicit in each of the three categories of covered persons in proposed Rule 1230(b)(6)(A)(i) through (iii).57 One commenter requests that proposed Rule 1230(b)(6)(A)(iii) (‘‘[p]ersons with the authority or discretion materially to commit a member’s capital in direct furtherance of the covered functions or to commit a 52 WFA. 53 WFA. 54 Response Letter. 55 Id. 56 Id. 57 Id. E:\FR\FM\22JNN1.SGM 22JNN1 Federal Register / Vol. 76, No. 120 / Wednesday, June 22, 2011 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES member to any material contract or agreement (written or oral) in direct furtherance of the covered functions’’) be amended to state that only written contracts are within its scope to avoid confusion arising from interpreting when an oral contract may arise in the context of back-office operations.58 FINRA stated that it does not intend to amend the proposal as suggested by the commenter.59 FINRA said the parenthetical language that makes express that both written and oral contracts are included in the proposed rule derives from NYSE Rule 345.10 in the definition of a ‘‘securities lending representative.’’ 60 FINRA stated that it believes that any contract or agreement, written or oral, that materially commits a member in direct furtherance of the covered functions (not just in the context of a securities lending arrangement) is of a nature requiring the registration of the person making such commitment on behalf of the member.61 One commenter requests clarification regarding the statement in the Notice which provides ‘‘covered functions generally would not include a person who engages in administrative responsibilities, such as an initial drafter or code developer. A person who supervises or approves such activities, however, generally would be required to register as an Operations Professional.’’ 62 The commenter believes this statement runs counter to the proposed supplementary material excluding ancillary functions to a covered function since such supervisor or approver may not have primary responsibility for a covered function.63 FINRA notes that the proposed rule change does not require primary responsibility for a covered function to trigger registration.64 FINRA stated that a person who signs off on and/or supervises the activities or personnel involved in writing code to implement firm systems and business requirements is not performing a function that is ancillary to a covered function because their responsibility has a direct nexus to the execution of an activity covered by the proposed rule at a supervisory level.65 One commenter requests FINRA acknowledge that firms tailor their supervisory and supervisory control procedures to reflect their business size and organizational structure, and that as a result, the hierarchy of supervisors registered as Operations Professionals will vary depending on a particular firm’s system of supervision and the particular covered function.66 Additionally, the commenter requests FINRA acknowledge it is not a presumption that all ‘‘managers’’ with direct reports engaged in covered functions be registered if the responsibility for supervision of the activity, as contemplated by NASD Rule 3010, resides at a higher level of the organization.67 FINRA stated that it believes the comment regarding firm supervisory and supervisory control procedures is outside the scope of the proposed rule change.68 FINRA noted that the proposed rule does not include a requirement regarding a firm’s supervisory and supervisory control procedures.69 FINRA stated that members are responsible for ensuring that any person who meets the requirements to register as an Operations Professional is appropriately registered, regardless of the firm’s particular supervisory and supervisory control procedures.70 Additionally, FINRA stated that the proposed rule change creates a function-based registration requirement, so members must examine the activities of their operations personnel to determine who would be required to register.71 FINRA said it will not make categorical exclusions based on a person’s title or department.72 B. Covered Functions FINRA’s proposed rule would require a person to register as an Operations Professional if the person is a ‘‘covered person’’ (discussed in Part A above) with responsibility for one or more of 16 ‘‘covered functions.’’ Proposed Rule 1230(b)(6)(B) defines covered functions as: (i) Client on-boarding (customer account data and document maintenance); (ii) collection, maintenance, re-investment (i.e., sweeps) and disbursement of funds; (iii) receipt and delivery of securities and funds, account transfers; (iv) bank, custody, depository and firm account management and reconciliation; (v) settlement, fail control, buy ins, segregation, possession and control; (vi) trade confirmation and account 58 SIFMA. 59 Response Letter. 66 SIFMA. statements; (vii) margin; (viii) stock loan/securities lending; (ix) prime brokerage (services to other brokerdealers and financial institutions); (x) approval of pricing models used for valuations; (xi) financial control, including general ledger and treasury; (xii) contributing to the process of preparing and filing financial regulatory reports; (xiii) 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; (xiv) 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; (xv) defining and approving information entitlement policies in connection with the covered functions; and (xvi) 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. One commenter urges the SEC to direct FINRA to revise the proposed rule to remove and/or clarify certain covered functions not necessary to achieve the stated objectives of the rule.73 Another commenter finds certain covered functions unclear and notes firms will incur unnecessary costs by broadly interpreting the covered functions to include activities not intended to be covered by the proposed rule.74 Another commenter believes the proposed rule change may cause confusion with the use of the term ‘‘operations’’ since the proposed rule spans many different areas of a firm’s business and is not limited to ‘‘trading and operations,’’ which is a distinct area of a firm handling clearing, daily disbursements and account activity.75 One commenter requests clarification that the covered functions do not cover ‘‘client-facing’’ or ‘‘front-office’’ personnel who may have some involvement in a covered function (e.g., with respect to ‘‘client onboarding’’ in proposed Rule 1230(b)(6)(B)(i), the activities of unregistered employees who assist in gathering new account forms/ documentation and information from customers as part of clerical or administrative duties).76 The commenter requests this clarification 60 Id. 67 SIFMA. 61 Id. 68 Response 62 T–C 69 Id. 73 NSCP. 70 Id. 74 TLG. 71 Id. 75 NPH. 72 Id. 76 SIFMA. Services—1. 63 T–C Services—1. 64 Response Letter. 65 Id. VerDate Mar<15>2010 16:40 Jun 21, 2011 Jkt 223001 PO 00000 Letter. Frm 00078 Fmt 4703 Sfmt 4703 36589 E:\FR\FM\22JNN1.SGM 22JNN1 36590 Federal Register / Vol. 76, No. 120 / Wednesday, June 22, 2011 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES with respect to the other covered functions as well.77 FINRA notes that the proposed rule change would affect personnel who meet the depth of personnel in proposed Rule 1230(b)(6)(A) and are engaged in one or more covered functions in proposed Rule 1230(b)(6)(B), and does not distinguish on the basis of whether such persons are ‘‘client-facing’’ or ‘‘front-office’’ personnel.78 FINRA notes, however, that an unregistered employee who gathers documentation and information in a purely clerical or ministerial capacity likely would not be required to register as an Operations Professional based on the supplementary material in proposed Rule 1230.06.79 One commenter requests guidance regarding the term ‘‘client on-boarding’’ in proposed Rule 1230(b)(6)(B)(i) because certain terms commonplace in a general securities business brokerdealer practice are not readily transferable to variable annuity sales, and firms should not be faced with the risk of non-compliance due to unclear rule text.80 The commenter suggests it may be helpful to link each covered function to FINRA or SEC customer account and recordkeeping rules, similar to the text in proposed Rule 1230(b)(6)(B)(xvi).81 FINRA declines to amend the proposed rule change to link each of the covered functions to relevant FINRA or SEC rules as it is the responsibility of members to determine the regulatory requirements applicable to the firms’ operations based on their activities.82 FINRA notes that client onboarding would include, but is not limited to, account management activities such as customer account initiation and maintenance, related party account information and maintenance, maintaining client terms and conditions and maintaining contact information.83 FINRA reminded members to view the covered functions in the context of the depth of personnel in proposed Rule 1230(b)(6)(A).84 One commenter suggests the covered functions be revised to identify specific functions, responsibilities or activities related to the covered functions (e.g., the covered function ‘‘[t]rade confirmation and account statements’’ (proposed Rule 1230(b)(6)(B)(vi)) fails to provide guidance on what functions, 77 SIFMA. 78 Response responsibilities or activities related to the compilation and/or production of account statements would require registration).85 The commenter notes that many brokerage accounts include cash management features (e.g., linked accounts, online bill pay and payroll check deposit), which are provided via agreements with other financial institutions, and transactional information related to these cash management services is included in the brokerage account statements. The commenter notes that the proposed rule would appear to require the member to register not only the associated persons of the member firm but also the supervisors, managers and others employed by non-member financial institutions.86 Additionally, the commenter points out that brokerdealers use exchanges and third-party service providers for pricing and valuations under proposed Rule 1230(b)(6)(B)(x) (‘‘[a]pproval of pricing models used for valuations’’) and believes that the entire management chain of command at the exchanges or third-party service providers may be required to register as an Operations Professional with the member.87 FINRA stated that it views covered persons engaging in one or more of the covered functions on behalf of the member to be associated persons of the member, irrespective of their employing entity, and the proposed rule would require such persons to be registered with FINRA as an Operations Professional.88 However, FINRA recognizes the distinction between shared services models and arrangements in which another financial institution provides distinct cash management services in connection with a brokerage account.89 In the latter situation, FINRA states that it would not view the financial institution’s employees to be associated persons of the member.90 Moreover, with respect to proposed Rule 1230(b)(6)(B)(x), FINRA recognizes that certain data elements may be purchased by a member as part of its execution of certain covered functions, and would not view employees of such providers of data elements to be associated persons of the member based solely on these activities; however, FINRA notes that the proposed rule does not speak to the Letter. propriety of relying on one or more data elements provided by third parties.91 One commenter requests that FINRA delete the parenthetical language in FINRA Rule 1230(b)(6)(B)(ix) (‘‘[p]rime brokerage (services to other brokerdealers and financial institutions)’’) because the term ‘‘prime brokerage’’ is well understood in the industry and the term ‘‘financial institutions’’ creates ambiguity since it is not defined in the proposed rule.92 The commenter also recommends modifying proposed Rule 1230(b)(6)(B)(x) (‘‘[a]pproval of pricing models used for valuations’’) to ‘‘approval of pricing models used for the valuation of customer holdings’’ since, as proposed, it may sweep in firm risk management or credit functions, which the commenter believes are outside the intent of the proposed rule change.93 FINRA stated that it does not intend to amend these provisions and notes that the commenter did not provide details regarding the perceived ambiguity in proposed Rule 1230(b)(6)(B)(ix).94 With respect to the commenter’s concerns with proposed Rule 1230(b)(6)(B)(x), FINRA does not intend to regulate risk management practices of firms through the proposed rule.95 FINRA stated that nothing in the proposed rule is meant to reach the risk management function of modeling used by firms to calculate capital, margin or liquidity requirements.96 However, FINRA notes that this provision is not limited to valuations of customer holdings and would include firm holdings of inventory positions.97 Three commenters suggest FINRA refine proposed Rule 1230(b)(6)(B)(xii) (‘‘[c]ontributing to the process of preparing and filing financial regulatory reports’’) because the phrase ‘‘contributing to the process of’’ is overly broad, interjects unnecessary uncertainty as to who qualifies as a covered person and is inconsistent with the depth of staff concept in subparagraph (A) of the proposed rule.98 One commenter recommends refining this provision to focus more on the development, creation and maintenance of financial regulatory reports.99 Another commenter notes that as proposed the function may capture numerous areas that merely provide a support function, including IT, legal and compliance and any area of a 91 Response Letter. 92 SIFMA. 93 SIFMA. 79 Id. 85 Schwab. 94 Response 80 Sutherland. 86 Schwab. 95 Id. 81 Sutherland. 87 Schwab. 82 Response 88 Response Letter. Letter. 96 Id. Letter. 97 Response 83 Id. 89 Id. 98 SIFMA, 84 Id. 90 Id. Letter. T–C Services—1 and WFA. 99 WFA. VerDate Mar<15>2010 16:40 Jun 21, 2011 Jkt 223001 PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 E:\FR\FM\22JNN1.SGM 22JNN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 76, No. 120 / Wednesday, June 22, 2011 / Notices member firm that provides information included in the report.100 FINRA stated that it does not intend to amend proposed Rule 1230(b)(6)(B)(xii) because it believes this provision captures the appropriate spectrum of personnel as proposed.101 FINRA also reiterates that only persons who are both covered persons and conduct activities or functions in one or more of the covered functions would be subject to the new Operations Professional registration category, and that proposed FINRA Rule 1230.06 specifically excludes persons 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.102 One commenter urges FINRA to refine the scope and application of proposed FINRA Rule 1230(b)(6)(B)(xiv) (‘‘[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’’) because it could sweep in virtually all individuals who work in a firm’s IT department.103 Another commenter suggests the covered functions in proposed FINRA Rule 1230(b)(6)(B)(xiii), (xiv), and (xv) should specifically exclude persons executing technical requirements defined and approved by individuals who are supervised by one or more Operations Professionals since, as currently drafted, the proposed rule could sweep in senior management and other supervisors and managers in the IT and IS departments that merely execute the instructions of an area appropriately staffed by an Operations Professional chain of command.104 One commenter notes that the covered functions in proposed FINRA Rule 1230(b)(6)(B)(xiii) through (xv) are extraneous because personnel in technology do not define and approve business requirements or define and approve business security requirements autonomously without oversight and approval from personnel in the covered functions for which the systems are being designed, and any technology 100 T–C Services—1. 101 Response Letter. 102 Response Letter. 103 FSI. 104 T–C Services—1. VerDate Mar<15>2010 16:40 Jun 21, 2011 Jkt 223001 personnel working directly in a covered function would be subsumed by such covered function and do not require a separate provision.105 The commenter believes that subparagraphs (xiii) through (xv) are ambiguously worded and confusing, and suggests consolidating the technology covered functions into one function as follows: ‘‘information technology (including information security) supporting the other covered functions in paragraph (b)(6)(B) of this Rule.’’ 106 The commenter suggests supplementary material to the proposed rule to exclude junior technical experts leading a project team from registration as an Operations Professional.107 The commenter also requests a grace period for passing the examination for technology managers who move into a position requiring registration given that they move from area to area in a large firm and it may be disruptive to firms.108 Two commenters request clarification that the proposed rule applies only to those who sign off on requirements and perform testing to validate systems rather than those who build and implement the systems because a broader application of the rule would create significant challenges to the reallocation of technology resources as projects emerge across firms and could lead to challenges in recruiting technology professionals to work in the securities industry.109 One commenter requests that FINRA clarify language in the rule filing that may conflict with the proposed rule text in proposed Rule 1230(b)(6)(B)(xiii) because it creates ambiguity by suggesting that supervisors of IT development teams that do not define, approve or validate systems may have to register as an Operations Professional, while the proposed rule does not require it.110 FINRA stated that it does not intend to make the suggested changes to proposed Rule 1230(b)(6)(B)(xiii) through (xv) as suggested by the commenters because it believes these provisions are clear as proposed.111 FINRA notes that comments asserting that a covered function could sweep an entire IT department into the proposed 105 Goldman. 106 Goldman. 107 Goldman. 108 Goldman. 109 Edward Jones and SIFMA. The Proposing Release noted that ‘‘the covered functions generally would not include a person who engages in administrative responsibilities, such as an initial drafter or a code developer’’ but ‘‘a person who supervises or approves such activities generally would be required to register as an Operations Professional.’’ 111 Response Letter. registration category for Operations Professionals fail to consider the covered functions in the context of the depth of personnel set forth in proposed Rule 1230(b)(6)(A).112 FINRA stated that it does not agree that an entire IT or IS department is likely to meet such a threshold. Member firms are responsible for determining the personnel in IT and IS departments that are engaged in the covered functions at the depth of personnel set forth in proposed Rule 1230(b)(6)(A). One commenter requests that FINRA revise the language in proposed Rule 1230(b)(6)(B)(xvi) (‘‘[p]osting 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’’) to distinguish that only those who define that process, determine how the work is performed and approve the entries be required to register under this provision, akin to the covered functions in proposed Rule 1230(b)(6)(B)(xiii) and (xiv).113 One commenter recommends deleting proposed Rule 1230(b)(6)(B)(xvi) as redundant because part of the obligation of those performing the covered functions in subparagraphs (i) through (xv) is to comply with the regulatory requirements regarding books and records related to such covered functions.114 FINRA stated that it views the covered function relating to a member’s books and records in proposed Rule 1230(b)(6)(B)(xvi) as clearly distinguishable from the IT functions in proposed Rule 1230(b)(6)(B)(xiii) and (xiv), so does not intend to amend the proposed rule as recommended by the commenter.115 FINRA explains that it is addressing covered persons who define and approve IT systems in one context and covered persons responsible for the function of posting entries to the member’s books and records in the other.116 Additionally, FINRA states that it believes that the covered function in proposed Rule 1230(b)(6)(B)(xvi) is necessary to make clear that covered persons responsible for books and records posting activities in connection with the covered functions are subject to the proposed requirements.117 110 SIFMA. PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 36591 112 Id. 113 WFA. 114 SIFMA. 115 Response 116 Id. 117 Id. E:\FR\FM\22JNN1.SGM 22JNN1 Letter. 36592 Federal Register / Vol. 76, No. 120 / Wednesday, June 22, 2011 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES C. Extraterritorial Application of the Proposed Rule One commenter believes the proposed rule change imposes an extraterritorial application of U.S. laws.118 The commenter suggests that the proposed rule raises serious issues under the U.S. Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010) and its holding, according to the commenter, that the Exchange Act should be applied extraterritorially only when explicitly authorized by statute. The commenter posits that there is no plain wording in Exchange Act Section 15A(b)(6) allowing extraterritorial application of the proposed rule change to Canada or elsewhere. The commenter notes that Section 30(b) of the Exchange Act provides that the Exchange Act does not apply ‘‘to any person insofar as he transacts a business in securities without the jurisdiction of the United States,’’ unless he does so in violation of regulations promulgated by the SEC ‘‘to prevent the evasion of [the Act].’’ In addition, the commenter believes the proposed rule conflicts with Exchange Act Rule 15a–6, which, according to the commenter, specifically declines to authorize extraterritorial reach by providing exemptions to certain foreign broker-dealers. The commenter believes the proposed rule change would effectively undermine key exemptions provided by Rule 15a– 6 that are extensively relied upon by the international financial services community and could have implications with respect to whether foreign locations are deemed branch offices of a member. The commenter states that the proposed rule would require registration of employees of foreign broker-dealers that are exempt from registration as a U.S. broker-dealer under Rule 15a–6.119 The commenter states ‘‘Canadian employees performing covered functions involving transactions in securities on a Canadian exchange for registered U.S. brokerdealer affiliates would therefore be subject to all FINRA rules, even though their own Canadian employers are exempt from registration as brokerdealers in the U.S., in accordance with SEC Rule 15a–6.’’ The commenter notes that implicit in the Rule 15a–6 brokerto-broker exemption120 is the 118 A&P. 119 A&P. 120 The commenter represents firms operating under an exemption in Exchange Act Rule 15a– 6(a)(4)(i), 17 CFR 240.15a–6(a)(4)(i), known as the broker-to-broker exemption, which provides ‘‘[a] foreign broker or dealer shall be exempt from the registration requirements of sections 15(a)(1) or 15B(a)(1) of the Act to the extent that the foreign broker or dealer effects transactions in securities VerDate Mar<15>2010 16:40 Jun 21, 2011 Jkt 223001 determination that the U.S. brokerdealer will carefully select its foreign counterparts and supervise their performance as it is the U.S. brokerdealer’s responsibility for execution, clearance and settlement to its U.S. customers, even when transactions are executed abroad. The commenter also declares that the proposed rule change would violate the obligations of the U.S. under the North American Free Trade Agreement (‘‘NAFTA’’) because it would assert extraterritorial reach over cross-border financial activities that were allowed by the SEC at the time the U.S. became a party to NAFTA, and which have since been permitted by the SEC without registration of foreign personnel.121 The commenter notes that because FINRA’s rulemaking power derives from the SEC, its authority can extend no further than that of the SEC. Additionally, the commenter states that FINRA has issued examination deficiencies as if the proposed rule has already been approved and urges the SEC to disapprove the proposed rule change and to take immediate action to cease what it believes is FINRA’s de facto enforcement of the proposed requirements. Lastly, the commenter notes that FINRA has failed to consider reasonable alternatives such as evaluating the adequacy of the Canadian regulatory scheme to achieve the regulatory objectives of the proposal and encourages regulatory cooperation in lieu of imposing potentially duplicative requirements.122 The commenter’s concerns stem from clearing arrangements between a U.S. registered broker-dealer and Canadian firms operating under an exemption from broker-dealer registration in Exchange Act Rule 15a–6(a)(4)(i), in which the Canadian firms clear securities transactions in foreign securities for U.S. institutional investors. FINRA stated that it believes that the commenter’s statements with with or for, or induces or attempts to induce the purchase or sale of any security by a registered broker or dealer, whether the registered broker or dealer is acting as principal for its own account or as agent for others, or a bank acting pursuant to an exception or exemption from the definition of broker or dealer in sections 3(a)(4)(B), 3(a)(4)(E) or 3(a)(5)(C) of the Act.’’ 121 The commenter asserts that Article 1404(1) of NAFTA prohibits the U.S. from adopting any measure restricting any type of cross-border trade in financial services by cross-border financial services providers of another Party that the Party permits on the date of entry into force of NAFTA, except as provided in Section B of the Party’s Schedule to Annex VII. Under Section B, the U.S. reserves the right to adopt any measure relating to cross-border trade in securities services that derogates from Article 1404(1). 122 A&P. PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 respect to the proposed rule change make certain assumptions that are not requirements imposed by the proposal.123 FINRA stated that the proposed rule change does not aim to expand the jurisdiction of FINRA, diverge from Federal law, rules or regulations, U.S. Supreme Court precedent or violate the obligations of the U.S. under NAFTA.124 FINRA notes that it is a membership organization with jurisdiction over FINRA members and their associated persons by virtue of its By-Laws and membership agreements.125 FINRA stated that, without opining on the extraterritorial application of U.S. securities laws, it questions the relevance of the Morrison decision, which addressed the extraterritorial application of Section 10(b) of the Exchange Act and Exchange Act Rule 10b–5, and the obligations of the U.S. under NAFTA, to the proposed rule change.126 FINRA stated that the proposed rule change addresses the obligations of members under FINRA rules with respect to the registration and qualification of certain associated persons who are engaged in, responsible for or supervising certain member operations functions.127 As noted above, FINRA stated that its jurisdiction reaches associated persons of members and their activities, regardless of their employing entity.128 The Commission agrees with FINRA that the proposed rule does not expand FINRA’s jurisdiction. Furthermore, FINRA stated that it is not within its purview to interpret the Federal securities laws or SEC rules.129 Additionally, FINRA disagrees with the commenter’s assessment of an implied application of a proposed FINRA rule.130 As stated by the commenter,131 and without independent verification or comment, FINRA noted that the examination findings cited by the commenter relate to the firm’s outsourcing arrangements and compliance with Exchange Act Rule 15c3–3(k)(2)(i), and the comment is outside the scope of the proposed rule change.132 D. Examination Requirement One commenter states that an examination requirement provides no benefit to investors and FINRA is the 123 Response Letter. 124 Id. 125 Id. 126 Id. 127 Id. 128 Id. 129 Id. 130 Id. 131 A&P, at note 1. Letter. 132 Response E:\FR\FM\22JNN1.SGM 22JNN1 Federal Register / Vol. 76, No. 120 / Wednesday, June 22, 2011 / Notices true winner as it collects fees for testing, continuing education and other potential items it will generate.133 Another commenter asserts that a qualification examination is unnecessary to meet the objectives of the proposal and recommends using firm written supervisory procedures and Firm Element training.134 Two commenters state FINRA should carefully evaluate the objectives and consequences of a one-size-fits-all examination requirement on potential test takers and recommend internal firm element training to deliver the proposed product, market and operations knowledge portion of the required examination content.135 One commenter supports the original intent of the examination requirement, which was to establish a ‘‘spot-the-red-flags’’ examination that would train test takers to identify and escalate potential control problems, and believes that the scope should not be expanded to cover the details of different products, operations processes and rules and regulations given the breadth of the covered functions.136 Further, the commenter notes that a high failure rate will cause operational disruption at firms.137 One commenter notes that the examination will be overbroad and extremely challenging for many test takers, especially IT personnel who serve across the covered functions who may have particular difficulty given their minimal background or experience in industry issues.138 FINRA stated that it believes that the proposed qualification examination requirement for Operations Professionals is appropriate as proposed and does not agree that the objectives of the proposal can be attained without a testing requirement for unregistered personnel.139 As FINRA noted in the Notice, it believes there is value in an examination that tests for general securities knowledge about the securities industry and that ongoing continuing education will supplement this knowledge for Operations Professionals.140 FINRA stated that the 133 Callaway. 134 FSI. 135 NSCP and TLG. 136 SIFMA. 137 SIFMA. mstockstill on DSK4VPTVN1PROD with NOTICES 138 NSCP. 139 Response Letter. notes that NASD Rule 1070 (Qualification Examinations and Waiver of Requirements), as well as other applicable provisions regarding registration and qualification set forth in FINRA’s rulebook, such as NASD Rule 1031(c) regarding requirements for examination on lapse of registration, would apply to the Operations Professional qualification examination and registration category. 140 FINRA VerDate Mar<15>2010 16:40 Jun 21, 2011 Jkt 223001 draft content outline for the proposed Operations Professional examination was developed by FINRA staff in conjunction with industry subject matter expert volunteers.141 FINRA stated that its staff conducted several focus panels in mid-2010 with operations professionals working in one or more of the covered functions and from a wide range of FINRA member firms.142 FINRA said that it then convened an Operations Professional exam committee consisting of more than 40 operations professionals; such persons represent a broad range of FINRA members, including size, geographical location and business model.143 FINRA stated that both FINRA staff and committee members placed an emphasis on creating a content outline and questions that are appropriate across all the covered functions and test the appropriate level of knowledge for a person who meets the depth of personnel as an Operations Professional.144 E. Exception to Qualification Examination Requirement FINRA noted that 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.145 FINRA stated that 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.146 FINRA said 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.147 One commenter questions the value of an additional registration category with such a broad exception since the majority of individuals that would be subject to the proposed rule change would be eligible for the proposed exception.148 To provide a clearer indication that the proposed rule change is necessary, the commenter recommends FINRA engage in an 141 Response industry-wide survey to determine how many individuals would not qualify for the exception.149 Two commenters assert that the proposed exception is overly broad and will undermine the regulatory purpose of the proposal.150 One such commenter believes content overlap of the eligible registration qualification examinations with the proposed Operations Professional examination is not sufficient justification to accept one examination in lieu of another and finds it inappropriate to grant a waiver to an individual who has passed certain examinations that are limited in nature (e.g., Series 6).151 One commenter recommends exempting persons who qualify for the proposed exception from the requirement to separately register as an Operations Professional (noting that costs to make internal system changes to track and monitor dual registrations may be significant), since FINRA’s stated goal is to ensure that covered persons are registered with FINRA and trained on industry practices.152 Another commenter suggests FINRA specifically exempt supervisory personnel who hold the most senior supervisory qualifications (i.e., Series 24 and Series 27) from the requirement to register as an Operations Professional based on the same policy reasoning for exempting certain licensed individuals from the examination requirement.153 Another commenter recommends FINRA include as an eligible registration the UK FSA-approved Securities & Investment Level 3 Investment Operations Certificate (IOC) and the Investment Administration Qualification (IAQ), both widely recognized within the financial services industry in the UK.154 Given the significant functions performed by Operations Professionals, FINRA stated that it believes a separate registration category for such personnel is an appropriate measure to enhance the operational integrity of members.155 FINRA stated that, as noted in the Notice, 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 Letter. 142 Id. 149 NPH. 143 Id. 150 NASAA 144 Id. 151 NASAA. 145 Id. 152 NMIS. 147 Response 154 SIFMA. Letter. 148 NPH. PO 00000 Frm 00082 and NPH. 153 Goldman. 146 Id. 155 Response Fmt 4703 Sfmt 4703 36593 E:\FR\FM\22JNN1.SGM 22JNN1 Letter. 36594 Federal Register / Vol. 76, No. 120 / Wednesday, June 22, 2011 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES in this highly regulated environment.156 Thus, FINRA believes the eligible registrations (and corresponding examinations) serve as a valid proxy for the Operations Professional examination requirement.157 In addition, FINRA is proposing to add language to proposed Rule 1230(b)(6)(D) to provide that FINRA staff may accept as an alternative to the Operations Professional qualification examination requirement any domestic or foreign qualification if it determines that acceptance of such alternative qualification is consistent with the purposes of the rule, the protection of investors, and the public interest.158 FINRA stated that the proposed exception applies to the Operations Professional examination requirement only and not Firm Element training.159 FINRA noted that individuals who avail themselves of the proposed exception to the Operations Professional examination requirement with an eligible registration would be subject to the Regulatory Element program appropriate for such other registration category; however, Operations Professionals would be subject to Firm Element training based on their activities at the firm, which would include the activities in the covered functions that mandate their registration as an Operations Professional.160 F. Implementation Period and Grace Period for Non-Clearing Firms FINRA stated that in Regulatory Notice 10–25, it proposed a six- to ninemonth transition period for the proposed rule change.161 In the Notice, FINRA proposed to a 60-day identification period beginning on the effective date of the proposed rule change during which persons required to register as an Operations Professional as of the effective date of the proposed rule change (‘‘Day-One Professionals’’) must request registration as an Operations Professional via Form U4 in CRD. 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 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. The 12-month transition period to pass a qualification examination would only apply to DayOne Professionals so any person who is not subject to the registration requirements for Operations Professionals as of the effective date of the proposed rule change (‘‘non-DayOne 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. However, 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 to pass such qualifying examination, during which time such person may function as an Operations Professional. One commenter believes the proposed implementation period would place an undue burden on the industry and may cause serious disruptions as firms reallocate employee time and resources away from other critical areas.162 The commenter suggests a three-month identification period followed by a 12month period for such employees to pass a qualification examination, since the potential burdens and risks of the proposed timeframe far outweigh the minor benefit of the rule being fully effective a few months earlier.163 Another commenter recommends nonDay-One Professionals, regardless of when they become subject to the proposed registration requirements, be eligible for the 12-month transition period to pass a qualifying examination.164 FINRA stated that it does not intend to further extend the proposed implementation period as it believes that the proposed implementation period provides adequate time for members to comply with the proposed rule change.165 FINRA noted that Regulatory Notice 10–25 was published for comment in May 2010, and that the proposed rule change was filed in March 2011.166 FINRA stated that members have been aware of the proposed rule change for over a year.167 FINRA stated that it will announce an 156 Id. 163 SIFMA. 158 Id. 164 NSCP. 159 Id. 165 Response 160 Id. 166 Id. 161 Id. 167 Id. VerDate Mar<15>2010 16:40 Jun 21, 2011 Jkt 223001 PO 00000 Frm 00083 168 Id. 169 SIFMA. 162 SIFMA. 157 Id. effective date for the proposed rule change in a Regulatory Notice following Commission approval and firms will have 60 days following the effective date of the rule change to identify DayOne Professionals, in addition to the 12month transition period for those DayOne Professionals who must pass a qualification examination.168 One commenter suggests FINRA provide firms with the ability to upload a ‘‘batch’’ file of Form U4 registration requests to the CRD system at the conclusion of the initial identification period for Day-One Professionals, since the requirement to maintain dual registrations for such individuals will be administratively complex.169 FINRA believes that the current Web-based Electronic File Transfer functionality (Web EFT) will enable subscribers to efficiently batch file uploads to Web CRD following approval of the proposed rule change by the Commission.170 Numerous commenters suggest extending the 120-day grace period for non-Day-One Professionals associated with a non-clearing member to persons associated with a clearing member firm because similar disruptions to firm operations and client services also may occur at clearing members.171 Certain commenters believe that if an extension is granted, such individuals should report to a registered Operations Professional or another registered person during the 120-day grace period.172 One commenter maintains that limiting the 120-day grace period to non-clearing members will force clearing firms to place potentially inexperienced or unqualified employees in a supervisory role simply because they are Operations Professionals, and notes that FINRA should not expect that clearing firms have additional supervisory staff on standby for each department responsible for a covered function.173 Another commenter notes that without the grace period, a clearing firm may not be able to hire and train new staff on a timely basis or quickly replace staff in the event of a sudden departure, which may disrupt the member’s operations and present a significant business continuity risk.174 The commenter further asserts that the risk involved in extending the grace period to clearing firms is low given that there will be multiple registered persons in the covered areas, members have 170 Response 171 Edward and WFA. 172 Edward Jones, SIFMA and WFA. 173 JMS. 174 SIFMA. Letter. Fmt 4703 Letter. Jones, JMS, NSCP, Schwab, SIFMA Sfmt 4703 E:\FR\FM\22JNN1.SGM 22JNN1 Federal Register / Vol. 76, No. 120 / Wednesday, June 22, 2011 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES incentive to hire or promote persons qualified to fill vacancies that would require registration, newly hired or promoted persons will be supervised by a registered person and such persons will not be directly interacting with clients.175 Based on the comments, FINRA is proposing to extend the 120-day grace period to pass a qualification examination to non-Day-One Professionals associated with a clearing member firm, since clearing firms may experience similar resource challenges in finding qualified new hires and transitioning staff into roles in the covered functions that would require Operations Professional registration.176 G. Coordinate Proposed Rule Change With Other FINRA Rule Proposals Two commenters recommend FINRA coordinate the proposed rule change with other FINRA rule proposals. One commenter requests parallel implementation of the proposed rule change and the proposed registration rules for a coherent, non-duplicative, understandable framework for registration (including the issuance by FINRA of an integrated, comprehensive Notice addressing the comments received on both proposals) since ad hoc implementation of the new registration categories would cause significant burdens to members.177 Another commenter requests FINRA extend the action date for the proposed rule change so it coincides with the expiration of the comment period for Regulatory Notice 11–14 (Third-Party Service Providers) to allow members to consider these closely related proposals concurrently.178 FINRA stated that, while it appreciates the commenters’ concerns regarding coordination of related rule changes, it believes that the proposed rule change requiring registration of Operations Professionals can proceed now without overly burdening or confusing members.179 FINRA believes registration and education requirements for the specified operations personnel are needed to help ensure that investor protection mechanisms are in place for all areas of a member’s business that could harm the member, a customer, the integrity of the marketplace or the public.180 FINRA believes that such enhancements should not be unnecessarily postponed, and that it can work with members in implementing future proposed registration rules and requirements relating to third-party service providers separate and apart from the proposed rule change addressing Operations Professional registration.181 H. Rulemaking Process In the Notice, FINRA stated that additional guidance may be needed following the adoption of the proposed rule change and that it would address interpretive questions as needed, similar to its approach to other regulatory initiatives with wide-ranging and novel impacts.182 One commenter believes that a delay in providing guidance will create confusion and inconsistencies in compliance with the proposed rule, an increased burden on firms in their efforts to comply and hinder FINRA in meeting the objectives of the proposal by failing to provide a clear framework for the proposed requirements.183 The commenter requests FINRA provide more information regarding industry consultations that took place during the rulemaking process, as the commenter is concerned that a lack of transparency in the rulemaking process will lead to the disenfranchisement of certain segments of the industry.184 FINRA believes that it has provided ongoing guidance with respect to the proposed rule change.185 FINRA stated that it cannot address every specific interpretive issue that may arise in the rulemaking process but has attempted to provide guidance where necessary to assist members in understanding the proposed rule change.186 FINRA stated that, as with most significant rule proposals, FINRA engaged the industry in crafting the proposed rule change.187 FINRA said it consulted with industry groups, its advisory committees and panels with representatives from a cross-section of member firms that provided critical input into the depth of personnel for covered persons, the functions for inclusion in the covered functions in the proposed rule and the content of the proposed Operations Professional qualification examination.188 I. Costs One commenter suggests giving the industry flexible and less burdensome alternatives to a new costly registration 181 Id. 182 Response 175 SIFMA. 176 Response Letter. 183 Sutherland. Letter. See Regulatory Notice 09–70. 184 Sutherland. 177 Sutherland. 185 Response 178 JMS. 186 Id. 179 Response Letter. 187 Id. 180 Id. VerDate Mar<15>2010 188 Response 16:40 Jun 21, 2011 Letter. Jkt 223001 PO 00000 Frm 00084 Letter. Fmt 4703 Sfmt 4703 36595 requirement so they do not have to increase the costs of doing business, stating that FINRA does not justify why registration is the sole effective and cost-efficient means of accomplishing the objectives of the proposal.189 FINRA believes the proposed rule change is necessary to help ensure that investor protection mechanisms of the highest level possible 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.190 FINRA believes that the proposed registration, qualification examination and continuing education requirements for Operations Professionals will best achieve this result.191 III. Commission’s Findings After careful review of the proposed rule change, the comment letters and the FINRA Response Letter, the Commission finds that the proposed rule change, as modified by Amendment No. 1, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association.192 In particular, the Commission finds that the proposed rule change is consistent with Section 15A(b)(6) of the Act,193 which requires, among other things, that FINRA rules 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. Although FINRA’s registration regime historically has focused on ‘‘front office’’ personnel who have contact with customers or are otherwise directly involved in effecting securities transactions, persons who perform ‘‘back office’’ functions, such as recordkeeping, trade confirmation, transaction settlement, internal auditing, and securities lending operations 194 are also important to a FINRA member’s ability to comply with its responsibilities under the Federal securities laws and regulations, and the rules of FINRA. Given the growing complexity of the industry, and the 189 WFA. 190 Response Letter. 191 Id. 192 In approving this proposal, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 193 15 U.S.C. 78o–3(b)(6). 194 We note that Section 984 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203, 124 Stat. 1376 (2010), addresses securities lending by, among other things, giving the Commission express authority to regulate persons that ‘‘effect, accept, or facilitate a transaction involving the loan or borrowing of securities.’’ E:\FR\FM\22JNN1.SGM 22JNN1 36596 Federal Register / Vol. 76, No. 120 / Wednesday, June 22, 2011 / Notices importance of the services provided by the back-office personnel, the Commission believes that FINRA’s proposal to license and register Operations Professionals and to require members to provide Operations Professionals with continuing education, as amended by Amendment No. 1, will help to address regulatory gaps in this area. The Commission believes that FINRA carefully considered all the comments on the proposal and has responded appropriately. FINRA’s Amendment No 1 changes the proposed rule change in response to certain requests by commenters to clarify the categories of covered persons, accept certain alternative qualification examinations in lieu of the Operations Professional examination, and to extend the 120-day grace period for registration of non-DayOne Professionals to those who will be associated with a clearing member. FINRA has suitably explained its reasons for declining to amend the proposed rule in response to the remainder of the comments it received. mstockstill on DSK4VPTVN1PROD with NOTICES IV. Accelerated Approval The Commission finds good cause, pursuant to Section 19(b)(2) of the Exchange Act,195 for approving the proposed rule change, as modified by Amendment No. 1 thereto, prior to the 30th day after publication of notice of the filing of Amendment No. 1 in the Federal Register. The proposed rule change was informed by FINRA’s consideration of, and the incorporation of many suggestions made in, extensive comments on FINRA’s proposal to require the registration of Operations Professionals, and Amendment No. 1’s modifications to the proposed rule change add clarity to the proposed rule and provide additional guidance to members and their associated persons. Accordingly, the Commission finds that good cause exists to approve the proposal, as modified by Amendment No. 1, on an accelerated basis. V. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change, as modified by Amendment No. 1, is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://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 (https://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 July 13, 2011. VI. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,196 that the proposed rule change (SR–FINRA– 2011–013), as modified by Amendment No. 1, be, and hereby is, approved on an accelerated basis. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.197 Cathy H. Ahn, Deputy Secretary. [FR Doc. 2011–15450 Filed 6–21–11; 8:45 am] BILLING CODE 8011–01–P U.S.C. 78s(b)(2). VerDate Mar<15>2010 16:40 Jun 21, 2011 197 17 Jkt 223001 [Release No. 34–64686; File No. SR–CHX– 2011–07] Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Order Approving a Proposed Rule Change To Amend Minor Rule Plan June 16, 2011. I. Introduction On April 20, 2011, the Chicago Stock Exchange, Inc. (‘‘CHX’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change amending CHX Article 12, Rule 8 (Minor Rule Plan) (‘‘MRP’’) to incorporate additional violations into the MRP, increase the sanctions for certain violations, add censure authority to the MRP, eliminate the Minor Rule Violation Panel, clarify pleading requirements of a Respondent seeking to challenge a sanction by instituting a formal disciplinary proceeding, and make other minor changes. The proposed rule change was published for comment in the Federal Register on May 5, 2011.3 The Commission received no comment letters on the proposed rule change. This order approves the proposed rule change. II. Description The Exchange proposed to make additional rules subject to punishment under its MRP. These rules relate to: (1) Failure to notify the Exchange of a request to withdraw capital contribution (Article 3, Rule 6(b)); (2) failure to request Exchange approval of the transfer of equity securities of a participant firm (Article 3, Rule 11); (3) reporting of loans (Article 3, Rule 12); (4) failure to provide the Exchange with information (Article 6, Rule 7); (5) impeding or delaying an Exchange examination, inquiry, or investigation (Article 6, Rule 9); (6) designation of e-mail addresses (Article 3, Rule 13); (7) registration and approval of personnel (Article 6, Rule 2(a)); (8) written supervisory procedures (Article 6, Rule 5(b)); (9) failure to report short positions (Article 7, Rule 9); (10) furnishing of records (Article 11, Rule 1); (11) maintenance of books and records (Article 11, Rule 2); (12) participant 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 64370 (April 29, 2011); 76 FR 25727 (‘‘Notice’’). 2 17 196 15 195 15 SECURITIES AND EXCHANGE COMMISSION PO 00000 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). Frm 00085 Fmt 4703 Sfmt 4703 E:\FR\FM\22JNN1.SGM 22JNN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 76, Number 120 (Wednesday, June 22, 2011)]
[Notices]
[Pages 36586-36596]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-15450]



[[Page 36586]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64687; File No. SR-FINRA-2011-013]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1, Establishing 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

 June 16, 2011.

I. Introduction

    On March 4, 2011, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change 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 proposed rule change was published for 
comment in the Federal Register on March 18, 2011.\3\ The Commission 
received seventeen comment letters on the proposed rule change.\4\ On 
June 15, 2011, the Commission received from FINRA a Response to 
Comments and Partial Amendment No. 1 to the proposed rule change.\5\ 
The Commission is publishing this notice and order to solicit comment 
on Amendment No. 1 and to approve the proposed rule change, as modified 
by Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 64080 (March 14, 
2011), 76 FR 15012 (March 18, 2011) (``Notice'').
    \4\ See comment letters submitted by Corey N. Callaway, CEO, 
Callaway Financial Services, Inc., dated March 22, 2011 
(``Callaway''); Jeffrey B. Williams, Vice President & Chief 
Compliance Officer, Northwestern Mutual Investment Services, LLC, 
dated March 25, 2011 (``NMIS''); Z. Jane Riley, Chief Compliance 
Officer, The Leaders Group, Inc./TLG Advisors, Inc., dated April 6, 
2011 (``TLG''); Matthew J. Gavaghan, Associate General Counsel, 
Janney Montgomery Scott LLC, dated April 8, 2011 (``JMS''); Pam 
Lewis Marlborough, Associate General Counsel, TIAA-CREF Individual & 
Institutional Services, LLC, dated April 8, 2011 (``T-C Services--
1''); James Livingston, President/Chief Executive Officer, National 
Planning Holdings, Inc., dated April 8, 2011 (``NPH''); D. Grant 
Vingoe, Partner, Arnold & Porter LLP, dated April 8, 2011 (``A&P''); 
David T. Bellaire, General Counsel and Director of Government 
Affairs, Financial Services Institute, dated April 8, 2011 
(``FSI''); Joan Hinchman, Executive Director, CEO and President, 
National Society of Compliance Professionals Inc., dated April 8, 
2011 (``NSCP''); Ronald C. Long, Director of Regulatory Affairs, 
Wells Fargo Advisors, LLC, dated April 8, 2011 (``WFA''); Bari 
Havlik, SVP and Chief Compliance Officer, Charles Schwab & Co., 
Inc., dated April 8, 2011 (``Schwab''); Sutherland Asbill & Brennan 
LLP, on behalf of the Committee of Annuity Insurers, dated April 8, 
2011 (``Sutherland''); Jesse D. Hill, Director of Regulatory 
Relations, Edward Jones, dated April 8, 2011 (``Edward Jones''); 
James T. McHale, Managing Director and Associate General Counsel, 
SIFMA, dated April 29, 2011 (``SIFMA''); David S. Massey, President, 
North American Securities Administrators Association, dated May 2, 
2011 (``NASAA''); John W. Curtis, Managing Director, General 
Counsel--Global Compliance, Goldman, Sachs & Co., dated May 3, 2011 
(``Goldman''); and Pam Lewis Marlborough, Associate General Counsel, 
TIAA-CREF Individual & Institutional Services, LLC, dated May 4, 
2011 (``T-C Services--2'').
    \5\ See letter from Erika A. Lazar, FINRA, to Elizabeth Murphy, 
Secretary, SEC, dated June 15, 2011 (``Response Letter''). The text 
of the proposed rule Amendment No. 1 and FINRA's Response Letter are 
available on FINRA's Web site at http:[sol][sol]www.finra.org, at 
the principal office of FINRA, on the Commission's Web site at 
http:[sol][sol]www.sec.gov, and at the Commission's Public Reference 
Room.
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II. Description of Proposed Rule Change and Summary of Comments

    As described in Exchange Act Release No. 64080,\6\ 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. All of the commenters opposed the rule in 
whole or in part.
---------------------------------------------------------------------------

    \6\ See note 3 supra.
---------------------------------------------------------------------------

    FINRA's responses to comments and explanation of the changes to the 
proposed rule change made by Amendment No. 1 are described below.

A. Covered Persons

    Proposed FINRA Rule 1230(b)(6)(A) sets forth three categories of 
persons that would be subject to the proposed registration, 
qualification and continuing education requirements for an Operations 
Professional.\7\ These categories are:
---------------------------------------------------------------------------

    \7\ See Notice, note 3 supra.
---------------------------------------------------------------------------

    (1) Senior management with responsibility over the covered 
functions;\8\
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    \8\ Covered functions are discussed further in Part B below.
---------------------------------------------------------------------------

    (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.
    One commenter supports limiting the scope of covered persons to 
supervisory personnel.\9\ Three commenters are concerned about the 
impact of the proposed rule change on arrangements between members and 
third-party service providers, and request that FINRA limit the 
proposal to ``associated persons'' of a member.\10\ One such commenter 
requests an analysis of FINRA rules, the Securities Exchange Act of 
1934 (``Exchange Act'') and SEC rules to allay concerns of unexpected 
or unintended applications, interpretations and consequences with 
respect to sweeping employees of third-party service providers into the 
categories of associated and registered persons.\11\
---------------------------------------------------------------------------

    \9\ TLG.
    \10\ NSCP, Schwab and SIFMA.
    \11\ Schwab.
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    Another commenter states that limiting the proposal to associated 
persons would assist members in interpreting the proposed rule and 
resolve complicated jurisdictional and practical issues, since 
requiring firms to license employees of third-parties raises many 
complex issues including contract negotiations with vendors determining 
which member firm should sponsor the registrations of a vendor's 
employees and which firm should ``supervise'' such employees when a 
single vendor serves multiple members.\12\ Additionally, the commenter 
suggests changing the title of proposed Rule 1230(b)(6)(A) from 
``Requirement'' to ``Covered Persons'' and limiting this provision to 
the following: ``[e]ach of the following associated persons of a 
member, charged with responsibility for overseeing and protecting the 
functional and control integrity of the covered functions in paragraph 
(b)(6)(B) of this Rule, shall be required to register as an Operations 
Professional.'' \13\ The commenter notes that this language, in part, 
mirrors descriptive language used

[[Page 36587]]

by FINRA in the Notice. The commenter believes that the proposed rule 
change significantly expands FINRA's regulation of outsourced 
activities and requests that such authority be addressed as part of 
FINRA's outsourcing proposal.\14\ Another commenter requests that FINRA 
limit covered persons to employees of a member, given that the current 
proposal would result in a great deal of subjectivity by members to 
identify covered persons, and in light of a member's supervisory 
obligations for outsourced functions under current FINRA guidance.\15\
---------------------------------------------------------------------------

    \12\ SIFMA.
    \13\ SIFMA.
    \14\ SIFMA. See also Regulatory Notice 11-14 (Third-Party 
Service Providers).
    \15\ NSCP.
---------------------------------------------------------------------------

    FINRA responded that, as stated in the Notice, it believes that any 
person who meets the definition of a covered person in proposed Rule 
1230(b)(6)(A) and engages in one or more of the covered functions in 
proposed Rule 1230(b)(6)(B) on behalf of a member must register as an 
Operations Professional, regardless of whether such person works 
internally at a member, an affiliate or third-party service provider 
because they are performing regulated broker-dealer functions on behalf 
of a member.\16\ FINRA believes that covered persons interact in areas 
of a member that have a meaningful connection to client funds, accounts 
and transactions and are involved in significant decisions that can 
raise compliance issues for a firm.\17\ Also, FINRA states that, as 
noted in the Notice, the proposed rule change does not alter the 
definition of an associated person; rather, it 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.\18\
---------------------------------------------------------------------------

    \16\ Response Letter.
    \17\ Id.
    \18\ Id.
---------------------------------------------------------------------------

    In its Response Letter, FINRA stated that the alternative rule text 
suggested by the commenter above \19\ would not change the application 
of the proposed rule because, by virtue of their activities on behalf 
of the member, the covered persons have been and continue to be 
associated persons of such member.\20\ FINRA stated that Associated 
person status is not determined at the discretion of a member firm 
based on the location from which particular personnel are performing 
functions on behalf of the firm; associated person status attaches to 
persons who are involved in the securities and investment banking 
business of a member firm and the covered functions in the proposed 
rule represent a part of that business of a member firm.\21\ Moreover, 
FINRA notes that the scope of covered persons and covered functions set 
forth in proposed Rule 1230(b) is not exhaustive in terms of who may be 
considered an associated person of the member based on the nature of 
the operations activities being conducted on behalf of a member.\22\ 
Rather, FINRA has made a determination that the persons subject to the 
proposed rule change are engaged in members' operations activities of 
such significance to require registration, qualification examination 
and continuing education requirements.\23\ FINRA, however, notes that 
it is proposing to amend the title of paragraph (b)(6)(A) to proposed 
Rule 1230 to ``Covered Persons'' from ``Requirement'' to better reflect 
the content of the paragraph.\24\
---------------------------------------------------------------------------

    \19\ See supra note 13 and accompanying text.
    \20\ Response Letter.
    \21\ Id.
    \22\ Id.
    \23\ Id.
    \24\ Id.
---------------------------------------------------------------------------

    Two commenters note the prevalence of shared resources models, in 
which shared services are provided to different legal entities within a 
large financial company, and the challenges raised by the proposed rule 
for firms in determining whether certain individuals previously not 
identified as associated persons would now be subject to the rules 
applicable to associated and registered persons.\25\ One commenter 
requests clarification that only the Operations Professional and not 
his or her supervisors or subordinates would be considered associated 
persons of the member.\26\ The commenter also suggests that FINRA's 
jurisdiction should not extend to any of the affiliated entities that 
may employ an Operations Professional.\27\
---------------------------------------------------------------------------

    \25\ NPH and Sutherland.
    \26\ Sutherland.
    \27\ Sutherland.
---------------------------------------------------------------------------

    FINRA responds that members are free to use shared services models 
because associated person status does not turn on employment.\28\ FINRA 
notes that the proposed rule does not define associated persons; 
rather, it defines which associated persons involved in the operation 
of a member's investment banking and securities business must register 
as an Operations Professional.\29\ FINRA says that firms must view each 
person's responsibilities in connection with the covered functions 
independently to determine who must register.\30\
---------------------------------------------------------------------------

    \28\ Response Letter.
    \29\ Id.
    \30\ Id.
---------------------------------------------------------------------------

    One commenter believes the proposed rule change is unfairly 
burdensome on small firms, since it will make it impossible to obtain 
and retain employees, in particular the potential registration of 
independent Information Technology (``IT'') personnel and other 
similarly outsourced functions.\31\ Another commenter states that 
rather than requiring individuals at both the introducing broker-dealer 
and clearing firm to register and test under the proposed rule, FINRA 
should amend FINRA Rule 4311 (Carrying Agreements) to require that 
parties to a clearing agreement specifically designate the party 
responsible for any shared functions in the clearing agreement to 
reduce the economic and resource burden of requiring all individuals 
who meet the criteria of a covered function to register under the 
proposal.\32\
---------------------------------------------------------------------------

    \31\ Callaway.
    \32\ FSI. The SEC recently approved new FINRA Rule 4311. See 
Exchange Act Release No. 63999 (Mar. 1, 2011), 76 FR 12380 (Mar. 7, 
2011). The rule becomes effective on August 1, 2011. See Regulatory 
Notice 11-26.
---------------------------------------------------------------------------

    As further discussed in the Notice, FINRA does not believe that 
small firms would be overly burdened by the proposed rule change.\33\ 
FINRA 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 FINRA would not assess a separate registration fee 
for persons relying on the proposed exception to register as Operations 
Professionals.\34\ FINRA says, moreover, that the impact of the 
proposed rule change is expected to be minimal as the majority of the 
covered functions are typically performed by a carrying and clearing 
firm pursuant to a clearing arrangement.\35\ In such cases, it may be 
possible for a small firm to rely on limited persons, perhaps the 
Financial and Operations Principal, to liaise with the carrying and 
clearing firm regarding those covered functions. FINRA stated that, as 
further discussed in the Notice, 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).\36\ 
FINRA indicated that it would not expect dual registration as an 
Operations Professional in such cases.\37\

[[Page 36588]]

In addition, as further discussed in Section F below, the proposed rule 
change provides a 120-day grace period for non-Day-One Professionals 
associated with a non-clearing firm to pass a qualification 
examination.\38\
---------------------------------------------------------------------------

    \33\ Response Letter.
    \34\ Id.
    \35\ Id.
    \36\ Id.
    \37\ Id.
    \38\ Id.
---------------------------------------------------------------------------

    One commenter believes that the depth of personnel and covered 
functions are so loosely worded as to potentially capture activities 
performed in a number of areas of a member firm, including, but not 
limited to, Operations, Finance, Treasury, Information Technology 
(``IT''), Information Security (``IS''), Marketing and Sales.\39\ FINRA 
agrees with the commenter that covered persons may be designated in 
multiple areas of a member (or outside the member) depending on the 
business structure of the firm.\40\ FINRA stated that the proposed rule 
change is function-based and, therefore, not conditioned upon an 
individual's relationship to a particular department within a firm.\41\ 
FINRA said that, in developing the proposed rule change and with the 
input of industry representatives, they identified operations functions 
that significantly impact a member's business and have the potential to 
harm the member, a customer, the integrity of the marketplace or the 
public.\42\
---------------------------------------------------------------------------

    \39\ T-C Services--1.
    \40\ Response Letter.
    \41\ Id.
    \42\ Id.
---------------------------------------------------------------------------

    Several commenters have concerns regarding the application of 
proposed Rule 1230(b)(6)(A)(i) (``[s]enior management with 
responsibility over the covered functions'') to senior management up 
the chain of command. One commenter questions how far up the chain of 
command this provision is intended to go (i.e., whether it is intended 
to reach the CEO) and recommends limiting it to persons with ``direct'' 
or ``primary'' responsibility for the covered functions.\43\ The 
commenter requests express guidance that a firm's Chief Information 
Officer, Chief Technology Officer or other senior executives 
responsible for a firm's overall IT function would not be required to 
register if not directly or primarily responsible for a covered 
function.\44\ Another commenter suggests the proposed rule be limited 
to ``senior management directly responsible for supervising or 
overseeing the covered functions to ensure integrity and compliance 
with the Federal securities laws and regulations and FINRA rules.'' 
\45\ The commenter notes that a firm's Chief Technology Officer and 
other technology or information security executives may be deemed 
senior management responsible for a covered function, even though their 
roles are supportive in nature, and other executives who hold other 
licenses would also be required to register (i.e., Marketing and Sales 
executives who design customer confirms or assist in customer data 
collection at account opening).\46\ The commenter posits that if these 
executives are required to register, individuals down the chain of 
command would also be subject to the proposal, which the commenter 
finds unnecessary and redundant.\47\ The commenter also requests that 
the SEC not approve the proposed rule change unless FINRA limits 
covered persons to those individuals with ``significant 
responsibilities or substantial decision-making authority regarding 
operational issues.'' \48\
---------------------------------------------------------------------------

    \43\ SIFMA.
    \44\ SIFMA.
    \45\ T-C Services--1.
    \46\ T-C Services--1.
    \47\ T-C Services--1.
    \48\ T-C Services--2 (referencing remarks made by Richard 
Ketchum, Chairman and CEO of FINRA).
---------------------------------------------------------------------------

    To clarify proposed Rule 1230(b)(6)(A)(i), FINRA is amending the 
proposed rule change to provide that the first category of covered 
persons would include senior management with direct responsibility over 
the covered functions.\49\ FINRA states that it believes this proposed 
change will better enable members to identify who must register as an 
Operations Professional so that senior management with an indirect 
relationship to the covered functions are not subject to the proposed 
registration, qualification examination and continuing education 
requirements; however, members must ensure senior management that sign 
off on the covered functions and who are responsible for ensuring the 
covered functions are executed in compliance with the Federal 
securities laws and regulations and FINRA rules are properly 
registered.\50\ FINRA states that the proposal's aim is not to require 
registration for personnel with an indirect connection to the covered 
functions.\51\
---------------------------------------------------------------------------

    \49\ Response Letter.
    \50\ Id.
    \51\ See also proposed FINRA Rule 1230.06 (Scope of Operations 
Professional Requirement) (excluding from registration those persons 
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).
---------------------------------------------------------------------------

    One commenter suggests that proposed Rule 1230(b)(6)(A)(ii) 
(``[s]upervisors, managers or other persons responsible for approving 
or authorizing work, including work of other persons, in direct 
furtherance of the covered functions'') is too broad and may include 
employees below the decision-making level and further suggests 
replacing this provision with language in the Notice: ``[p]ersons 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.'' \52\ The commenter believes that this 
language also would make proposed Rule 1230(b)(6)(A)(iii) 
unnecessary.\53\
---------------------------------------------------------------------------

    \52\ WFA.
    \53\ WFA.
---------------------------------------------------------------------------

    To clarify proposed Rule 1230(b)(6)(A)(ii), FINRA is proposing to 
amend the proposed rule to provide that the second category of covered 
persons would include any person designated by senior management 
specified in Rule 1230(b)(6)(A)(i) as a supervisor, manager or other 
person responsible for approving or authorizing work, including work of 
other persons, in direct furtherance of each of the covered functions, 
as applicable, provided that there is sufficient designation of such 
persons by senior management to address each of the applicable covered 
functions.\54\ FINRA believes the change to proposed Rule 
1230(b)(6)(A)(ii) helps to clarify that senior management of a firm may 
designate the next tier of management or other persons responsible for 
approving or authorizing work in direct furtherance of the covered 
functions, in accordance with reasonable business practices.\55\ In 
addition, FINRA stated that any person who qualifies as a covered 
person is responsible for ensuring that the covered functions are 
performed correctly in accordance with industry rules, firm protocols, 
policies and procedures by virtue of their position.\56\ FINRA stated 
that it believes this concept, as introduced by FINRA in the Notice to 
elaborate generally on the role of covered persons, is implicit in each 
of the three categories of covered persons in proposed Rule 
1230(b)(6)(A)(i) through (iii).\57\
---------------------------------------------------------------------------

    \54\ Response Letter.
    \55\ Id.
    \56\ Id.
    \57\ Id.
---------------------------------------------------------------------------

    One commenter requests that proposed Rule 1230(b)(6)(A)(iii) 
(``[p]ersons with the authority or discretion materially to commit a 
member's capital in direct furtherance of the covered functions or to 
commit a

[[Page 36589]]

member to any material contract or agreement (written or oral) in 
direct furtherance of the covered functions'') be amended to state that 
only written contracts are within its scope to avoid confusion arising 
from interpreting when an oral contract may arise in the context of 
back-office operations.\58\ FINRA stated that it does not intend to 
amend the proposal as suggested by the commenter.\59\ FINRA said the 
parenthetical language that makes express that both written and oral 
contracts are included in the proposed rule derives from NYSE Rule 
345.10 in the definition of a ``securities lending representative.'' 
\60\ FINRA stated that it believes that any contract or agreement, 
written or oral, that materially commits a member in direct furtherance 
of the covered functions (not just in the context of a securities 
lending arrangement) is of a nature requiring the registration of the 
person making such commitment on behalf of the member.\61\
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    \58\ SIFMA.
    \59\ Response Letter.
    \60\ Id.
    \61\ Id.
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    One commenter requests clarification regarding the statement in the 
Notice which provides ``covered functions generally would not include a 
person who engages in administrative responsibilities, such as an 
initial drafter or code developer. A person who supervises or approves 
such activities, however, generally would be required to register as an 
Operations Professional.'' \62\ The commenter believes this statement 
runs counter to the proposed supplementary material excluding ancillary 
functions to a covered function since such supervisor or approver may 
not have primary responsibility for a covered function.\63\ FINRA notes 
that the proposed rule change does not require primary responsibility 
for a covered function to trigger registration.\64\ FINRA stated that a 
person who signs off on and/or supervises the activities or personnel 
involved in writing code to implement firm systems and business 
requirements is not performing a function that is ancillary to a 
covered function because their responsibility has a direct nexus to the 
execution of an activity covered by the proposed rule at a supervisory 
level.\65\
---------------------------------------------------------------------------

    \62\ T-C Services--1.
    \63\ T-C Services--1.
    \64\ Response Letter.
    \65\ Id.
---------------------------------------------------------------------------

    One commenter requests FINRA acknowledge that firms tailor their 
supervisory and supervisory control procedures to reflect their 
business size and organizational structure, and that as a result, the 
hierarchy of supervisors registered as Operations Professionals will 
vary depending on a particular firm's system of supervision and the 
particular covered function.\66\ Additionally, the commenter requests 
FINRA acknowledge it is not a presumption that all ``managers'' with 
direct reports engaged in covered functions be registered if the 
responsibility for supervision of the activity, as contemplated by NASD 
Rule 3010, resides at a higher level of the organization.\67\
---------------------------------------------------------------------------

    \66\ SIFMA.
    \67\ SIFMA.
---------------------------------------------------------------------------

    FINRA stated that it believes the comment regarding firm 
supervisory and supervisory control procedures is outside the scope of 
the proposed rule change.\68\ FINRA noted that the proposed rule does 
not include a requirement regarding a firm's supervisory and 
supervisory control procedures.\69\ FINRA stated that members are 
responsible for ensuring that any person who meets the requirements to 
register as an Operations Professional is appropriately registered, 
regardless of the firm's particular supervisory and supervisory control 
procedures.\70\ Additionally, FINRA stated that the proposed rule 
change creates a function-based registration requirement, so members 
must examine the activities of their operations personnel to determine 
who would be required to register.\71\ FINRA said it will not make 
categorical exclusions based on a person's title or department.\72\
---------------------------------------------------------------------------

    \68\ Response Letter.
    \69\ Id.
    \70\ Id.
    \71\ Id.
    \72\ Id.
---------------------------------------------------------------------------

B. Covered Functions

    FINRA's proposed rule would require a person to register as an 
Operations Professional if the person is a ``covered person'' 
(discussed in Part A above) with responsibility for one or more of 16 
``covered functions.'' Proposed Rule 1230(b)(6)(B) defines covered 
functions as: (i) Client on-boarding (customer account data and 
document maintenance); (ii) collection, maintenance, re-investment 
(i.e., sweeps) and disbursement of funds; (iii) receipt and delivery of 
securities and funds, account transfers; (iv) bank, custody, depository 
and firm account management and reconciliation; (v) settlement, fail 
control, buy ins, segregation, possession and control; (vi) trade 
confirmation and account statements; (vii) margin; (viii) stock loan/
securities lending; (ix) prime brokerage (services to other broker-
dealers and financial institutions); (x) approval of pricing models 
used for valuations; (xi) financial control, including general ledger 
and treasury; (xii) contributing to the process of preparing and filing 
financial regulatory reports; (xiii) 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; (xiv) 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; (xv) defining and approving information entitlement 
policies in connection with the covered functions; and (xvi) 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.
    One commenter urges the SEC to direct FINRA to revise the proposed 
rule to remove and/or clarify certain covered functions not necessary 
to achieve the stated objectives of the rule.\73\ Another commenter 
finds certain covered functions unclear and notes firms will incur 
unnecessary costs by broadly interpreting the covered functions to 
include activities not intended to be covered by the proposed rule.\74\ 
Another commenter believes the proposed rule change may cause confusion 
with the use of the term ``operations'' since the proposed rule spans 
many different areas of a firm's business and is not limited to 
``trading and operations,'' which is a distinct area of a firm handling 
clearing, daily disbursements and account activity.\75\ One commenter 
requests clarification that the covered functions do not cover 
``client-facing'' or ``front-office'' personnel who may have some 
involvement in a covered function (e.g., with respect to ``client on-
boarding'' in proposed Rule 1230(b)(6)(B)(i), the activities of 
unregistered employees who assist in gathering new account forms/
documentation and information from customers as part of clerical or 
administrative duties).\76\ The commenter requests this clarification

[[Page 36590]]

with respect to the other covered functions as well.\77\
---------------------------------------------------------------------------

    \73\ NSCP.
    \74\ TLG.
    \75\ NPH.
    \76\ SIFMA.
    \77\ SIFMA.
---------------------------------------------------------------------------

    FINRA notes that the proposed rule change would affect personnel 
who meet the depth of personnel in proposed Rule 1230(b)(6)(A) and are 
engaged in one or more covered functions in proposed Rule 
1230(b)(6)(B), and does not distinguish on the basis of whether such 
persons are ``client-facing'' or ``front-office'' personnel.\78\ FINRA 
notes, however, that an unregistered employee who gathers documentation 
and information in a purely clerical or ministerial capacity likely 
would not be required to register as an Operations Professional based 
on the supplementary material in proposed Rule 1230.06.\79\
---------------------------------------------------------------------------

    \78\ Response Letter.
    \79\ Id.
---------------------------------------------------------------------------

    One commenter requests guidance regarding the term ``client on-
boarding'' in proposed Rule 1230(b)(6)(B)(i) because certain terms 
commonplace in a general securities business broker-dealer practice are 
not readily transferable to variable annuity sales, and firms should 
not be faced with the risk of non-compliance due to unclear rule 
text.\80\ The commenter suggests it may be helpful to link each covered 
function to FINRA or SEC customer account and recordkeeping rules, 
similar to the text in proposed Rule 1230(b)(6)(B)(xvi).\81\ FINRA 
declines to amend the proposed rule change to link each of the covered 
functions to relevant FINRA or SEC rules as it is the responsibility of 
members to determine the regulatory requirements applicable to the 
firms' operations based on their activities.\82\ FINRA notes that 
client on-boarding would include, but is not limited to, account 
management activities such as customer account initiation and 
maintenance, related party account information and maintenance, 
maintaining client terms and conditions and maintaining contact 
information.\83\ FINRA reminded members to view the covered functions 
in the context of the depth of personnel in proposed Rule 
1230(b)(6)(A).\84\
---------------------------------------------------------------------------

    \80\ Sutherland.
    \81\ Sutherland.
    \82\ Response Letter.
    \83\ Id.
    \84\ Id.
---------------------------------------------------------------------------

    One commenter suggests the covered functions be revised to identify 
specific functions, responsibilities or activities related to the 
covered functions (e.g., the covered function ``[t]rade confirmation 
and account statements'' (proposed Rule 1230(b)(6)(B)(vi)) fails to 
provide guidance on what functions, responsibilities or activities 
related to the compilation and/or production of account statements 
would require registration).\85\ The commenter notes that many 
brokerage accounts include cash management features (e.g., linked 
accounts, online bill pay and payroll check deposit), which are 
provided via agreements with other financial institutions, and 
transactional information related to these cash management services is 
included in the brokerage account statements. The commenter notes that 
the proposed rule would appear to require the member to register not 
only the associated persons of the member firm but also the 
supervisors, managers and others employed by non-member financial 
institutions.\86\ Additionally, the commenter points out that broker-
dealers use exchanges and third-party service providers for pricing and 
valuations under proposed Rule 1230(b)(6)(B)(x) (``[a]pproval of 
pricing models used for valuations'') and believes that the entire 
management chain of command at the exchanges or third-party service 
providers may be required to register as an Operations Professional 
with the member.\87\
---------------------------------------------------------------------------

    \85\ Schwab.
    \86\ Schwab.
    \87\ Schwab.
---------------------------------------------------------------------------

    FINRA stated that it views covered persons engaging in one or more 
of the covered functions on behalf of the member to be associated 
persons of the member, irrespective of their employing entity, and the 
proposed rule would require such persons to be registered with FINRA as 
an Operations Professional.\88\ However, FINRA recognizes the 
distinction between shared services models and arrangements in which 
another financial institution provides distinct cash management 
services in connection with a brokerage account.\89\ In the latter 
situation, FINRA states that it would not view the financial 
institution's employees to be associated persons of the member.\90\ 
Moreover, with respect to proposed Rule 1230(b)(6)(B)(x), FINRA 
recognizes that certain data elements may be purchased by a member as 
part of its execution of certain covered functions, and would not view 
employees of such providers of data elements to be associated persons 
of the member based solely on these activities; however, FINRA notes 
that the proposed rule does not speak to the propriety of relying on 
one or more data elements provided by third parties.\91\
---------------------------------------------------------------------------

    \88\ Response Letter.
    \89\ Id.
    \90\ Id.
    \91\ Response Letter.
---------------------------------------------------------------------------

    One commenter requests that FINRA delete the parenthetical language 
in FINRA Rule 1230(b)(6)(B)(ix) (``[p]rime brokerage (services to other 
broker-dealers and financial institutions)'') because the term ``prime 
brokerage'' is well understood in the industry and the term ``financial 
institutions'' creates ambiguity since it is not defined in the 
proposed rule.\92\ The commenter also recommends modifying proposed 
Rule 1230(b)(6)(B)(x) (``[a]pproval of pricing models used for 
valuations'') to ``approval of pricing models used for the valuation of 
customer holdings'' since, as proposed, it may sweep in firm risk 
management or credit functions, which the commenter believes are 
outside the intent of the proposed rule change.\93\ FINRA stated that 
it does not intend to amend these provisions and notes that the 
commenter did not provide details regarding the perceived ambiguity in 
proposed Rule 1230(b)(6)(B)(ix).\94\ With respect to the commenter's 
concerns with proposed Rule 1230(b)(6)(B)(x), FINRA does not intend to 
regulate risk management practices of firms through the proposed 
rule.\95\ FINRA stated that nothing in the proposed rule is meant to 
reach the risk management function of modeling used by firms to 
calculate capital, margin or liquidity requirements.\96\ However, FINRA 
notes that this provision is not limited to valuations of customer 
holdings and would include firm holdings of inventory positions.\97\
---------------------------------------------------------------------------

    \92\ SIFMA.
    \93\ SIFMA.
    \94\ Response Letter.
    \95\ Id.
    \96\ Id.
    \97\ Response Letter.
---------------------------------------------------------------------------

    Three commenters suggest FINRA refine proposed Rule 
1230(b)(6)(B)(xii) (``[c]ontributing to the process of preparing and 
filing financial regulatory reports'') because the phrase 
``contributing to the process of'' is overly broad, interjects 
unnecessary uncertainty as to who qualifies as a covered person and is 
inconsistent with the depth of staff concept in subparagraph (A) of the 
proposed rule.\98\ One commenter recommends refining this provision to 
focus more on the development, creation and maintenance of financial 
regulatory reports.\99\ Another commenter notes that as proposed the 
function may capture numerous areas that merely provide a support 
function, including IT, legal and compliance and any area of a

[[Page 36591]]

member firm that provides information included in the report.\100\
---------------------------------------------------------------------------

    \98\ SIFMA, T-C Services--1 and WFA.
    \99\ WFA.
    \100\ T-C Services--1.
---------------------------------------------------------------------------

    FINRA stated that it does not intend to amend proposed Rule 
1230(b)(6)(B)(xii) because it believes this provision captures the 
appropriate spectrum of personnel as proposed.\101\ FINRA also 
reiterates that only persons who are both covered persons and conduct 
activities or functions in one or more of the covered functions would 
be subject to the new Operations Professional registration category, 
and that proposed FINRA Rule 1230.06 specifically excludes persons 
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.\102\
---------------------------------------------------------------------------

    \101\ Response Letter.
    \102\ Response Letter.
---------------------------------------------------------------------------

    One commenter urges FINRA to refine the scope and application of 
proposed FINRA Rule 1230(b)(6)(B)(xiv) (``[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'') because it could sweep in virtually all 
individuals who work in a firm's IT department.\103\ Another commenter 
suggests the covered functions in proposed FINRA Rule 
1230(b)(6)(B)(xiii), (xiv), and (xv) should specifically exclude 
persons executing technical requirements defined and approved by 
individuals who are supervised by one or more Operations Professionals 
since, as currently drafted, the proposed rule could sweep in senior 
management and other supervisors and managers in the IT and IS 
departments that merely execute the instructions of an area 
appropriately staffed by an Operations Professional chain of 
command.\104\ One commenter notes that the covered functions in 
proposed FINRA Rule 1230(b)(6)(B)(xiii) through (xv) are extraneous 
because personnel in technology do not define and approve business 
requirements or define and approve business security requirements 
autonomously without oversight and approval from personnel in the 
covered functions for which the systems are being designed, and any 
technology personnel working directly in a covered function would be 
subsumed by such covered function and do not require a separate 
provision.\105\ The commenter believes that subparagraphs (xiii) 
through (xv) are ambiguously worded and confusing, and suggests 
consolidating the technology covered functions into one function as 
follows: ``information technology (including information security) 
supporting the other covered functions in paragraph (b)(6)(B) of this 
Rule.'' \106\ The commenter suggests supplementary material to the 
proposed rule to exclude junior technical experts leading a project 
team from registration as an Operations Professional.\107\ The 
commenter also requests a grace period for passing the examination for 
technology managers who move into a position requiring registration 
given that they move from area to area in a large firm and it may be 
disruptive to firms.\108\
---------------------------------------------------------------------------

    \103\ FSI.
    \104\ T-C Services--1.
    \105\ Goldman.
    \106\ Goldman.
    \107\ Goldman.
    \108\ Goldman.
---------------------------------------------------------------------------

    Two commenters request clarification that the proposed rule applies 
only to those who sign off on requirements and perform testing to 
validate systems rather than those who build and implement the systems 
because a broader application of the rule would create significant 
challenges to the reallocation of technology resources as projects 
emerge across firms and could lead to challenges in recruiting 
technology professionals to work in the securities industry.\109\ One 
commenter requests that FINRA clarify language in the rule filing that 
may conflict with the proposed rule text in proposed Rule 
1230(b)(6)(B)(xiii) because it creates ambiguity by suggesting that 
supervisors of IT development teams that do not define, approve or 
validate systems may have to register as an Operations Professional, 
while the proposed rule does not require it.\110\
---------------------------------------------------------------------------

    \109\ Edward Jones and SIFMA.
    \110\ SIFMA. The Proposing Release noted that ``the covered 
functions generally would not include a person who engages in 
administrative responsibilities, such as an initial drafter or a 
code developer'' but ``a person who supervises or approves such 
activities generally would be required to register as an Operations 
Professional.''
---------------------------------------------------------------------------

    FINRA stated that it does not intend to make the suggested changes 
to proposed Rule 1230(b)(6)(B)(xiii) through (xv) as suggested by the 
commenters because it believes these provisions are clear as 
proposed.\111\ FINRA notes that comments asserting that a covered 
function could sweep an entire IT department into the proposed 
registration category for Operations Professionals fail to consider the 
covered functions in the context of the depth of personnel set forth in 
proposed Rule 1230(b)(6)(A).\112\ FINRA stated that it does not agree 
that an entire IT or IS department is likely to meet such a threshold. 
Member firms are responsible for determining the personnel in IT and IS 
departments that are engaged in the covered functions at the depth of 
personnel set forth in proposed Rule 1230(b)(6)(A).
---------------------------------------------------------------------------

    \111\ Response Letter.
    \112\ Id.
---------------------------------------------------------------------------

    One commenter requests that FINRA revise the language in proposed 
Rule 1230(b)(6)(B)(xvi) (``[p]osting 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'') to distinguish that only those who define that process, 
determine how the work is performed and approve the entries be required 
to register under this provision, akin to the covered functions in 
proposed Rule 1230(b)(6)(B)(xiii) and (xiv).\113\ One commenter 
recommends deleting proposed Rule 1230(b)(6)(B)(xvi) as redundant 
because part of the obligation of those performing the covered 
functions in subparagraphs (i) through (xv) is to comply with the 
regulatory requirements regarding books and records related to such 
covered functions.\114\
---------------------------------------------------------------------------

    \113\ WFA.
    \114\ SIFMA.
---------------------------------------------------------------------------

    FINRA stated that it views the covered function relating to a 
member's books and records in proposed Rule 1230(b)(6)(B)(xvi) as 
clearly distinguishable from the IT functions in proposed Rule 
1230(b)(6)(B)(xiii) and (xiv), so does not intend to amend the proposed 
rule as recommended by the commenter.\115\ FINRA explains that it is 
addressing covered persons who define and approve IT systems in one 
context and covered persons responsible for the function of posting 
entries to the member's books and records in the other.\116\ 
Additionally, FINRA states that it believes that the covered function 
in proposed Rule 1230(b)(6)(B)(xvi) is necessary to make clear that 
covered persons responsible for books and records posting activities in 
connection with the covered functions are subject to the proposed 
requirements.\117\
---------------------------------------------------------------------------

    \115\ Response Letter.
    \116\ Id.
    \117\ Id.

---------------------------------------------------------------------------

[[Page 36592]]

C. Extraterritorial Application of the Proposed Rule

    One commenter believes the proposed rule change imposes an 
extraterritorial application of U.S. laws.\118\ The commenter suggests 
that the proposed rule raises serious issues under the U.S. Supreme 
Court's decision in Morrison v. National Australia Bank Ltd., 130 S. 
Ct. 2869 (2010) and its holding, according to the commenter, that the 
Exchange Act should be applied extraterritorially only when explicitly 
authorized by statute. The commenter posits that there is no plain 
wording in Exchange Act Section 15A(b)(6) allowing extraterritorial 
application of the proposed rule change to Canada or elsewhere. The 
commenter notes that Section 30(b) of the Exchange Act provides that 
the Exchange Act does not apply ``to any person insofar as he transacts 
a business in securities without the jurisdiction of the United 
States,'' unless he does so in violation of regulations promulgated by 
the SEC ``to prevent the evasion of [the Act].''
---------------------------------------------------------------------------

    \118\ A&P.
---------------------------------------------------------------------------

    In addition, the commenter believes the proposed rule conflicts 
with Exchange Act Rule 15a-6, which, according to the commenter, 
specifically declines to authorize extraterritorial reach by providing 
exemptions to certain foreign broker-dealers. The commenter believes 
the proposed rule change would effectively undermine key exemptions 
provided by Rule 15a-6 that are extensively relied upon by the 
international financial services community and could have implications 
with respect to whether foreign locations are deemed branch offices of 
a member. The commenter states that the proposed rule would require 
registration of employees of foreign broker-dealers that are exempt 
from registration as a U.S. broker-dealer under Rule 15a-6.\119\ The 
commenter states ``Canadian employees performing covered functions 
involving transactions in securities on a Canadian exchange for 
registered U.S. broker-dealer affiliates would therefore be subject to 
all FINRA rules, even though their own Canadian employers are exempt 
from registration as broker-dealers in the U.S., in accordance with SEC 
Rule 15a-6.'' The commenter notes that implicit in the Rule 15a-6 
broker-to-broker exemption\120\ is the determination that the U.S. 
broker-dealer will carefully select its foreign counterparts and 
supervise their performance as it is the U.S. broker-dealer's 
responsibility for execution, clearance and settlement to its U.S. 
customers, even when transactions are executed abroad.
---------------------------------------------------------------------------

    \119\ A&P.
    \120\ The commenter represents firms operating under an 
exemption in Exchange Act Rule 15a-6(a)(4)(i), 17 CFR 240.15a-
6(a)(4)(i), known as the broker-to-broker exemption, which provides 
``[a] foreign broker or dealer shall be exempt from the registration 
requirements of sections 15(a)(1) or 15B(a)(1) of the Act to the 
extent that the foreign broker or dealer effects transactions in 
securities with or for, or induces or attempts to induce the 
purchase or sale of any security by a registered broker or dealer, 
whether the registered broker or dealer is acting as principal for 
its own account or as agent for others, or a bank acting pursuant to 
an exception or exemption from the definition of broker or dealer in 
sections 3(a)(4)(B), 3(a)(4)(E) or 3(a)(5)(C) of the Act.''
---------------------------------------------------------------------------

    The commenter also declares that the proposed rule change would 
violate the obligations of the U.S. under the North American Free Trade 
Agreement (``NAFTA'') because it would assert extraterritorial reach 
over cross-border financial activities that were allowed by the SEC at 
the time the U.S. became a party to NAFTA, and which have since been 
permitted by the SEC without registration of foreign personnel.\121\ 
The commenter notes that because FINRA's rulemaking power derives from 
the SEC, its authority can extend no further than that of the SEC. 
Additionally, the commenter states that FINRA has issued examination 
deficiencies as if the proposed rule has already been approved and 
urges the SEC to disapprove the proposed rule change and to take 
immediate action to cease what it believes is FINRA's de facto 
enforcement of the proposed requirements. Lastly, the commenter notes 
that FINRA has failed to consider reasonable alternatives such as 
evaluating the adequacy of the Canadian regulatory scheme to achieve 
the regulatory objectives of the proposal and encourages regulatory 
cooperation in lieu of imposing potentially duplicative 
requirements.\122\
---------------------------------------------------------------------------

    \121\ The commenter asserts that Article 1404(1) of NAFTA 
prohibits the U.S. from adopting any measure restricting any type of 
cross-border trade in financial services by cross-border financial 
services providers of another Party that the Party permits on the 
date of entry into force of NAFTA, except as provided in Section B 
of the Party's Schedule to Annex VII. Under Section B, the U.S. 
reserves the right to adopt any measure relating to cross-border 
trade in securities services that derogates from Article 1404(1).
    \122\ A&P.
---------------------------------------------------------------------------

    The commenter's concerns stem from clearing arrangements between a 
U.S. registered broker-dealer and Canadian firms operating under an 
exemption from broker-dealer registration in Exchange Act Rule 15a-
6(a)(4)(i), in which the Canadian firms clear securities transactions 
in foreign securities for U.S. institutional investors. FINRA stated 
that it believes that the commenter's statements with respect to the 
proposed rule change make certain assumptions that are not requirements 
imposed by the proposal.\123\ FINRA stated that the proposed rule 
change does not aim to expand the jurisdiction of FINRA, diverge from 
Federal law, rules or regulations, U.S. Supreme Court precedent or 
violate the obligations of the U.S. under NAFTA.\124\ FINRA notes that 
it is a membership organization with jurisdiction over FINRA members 
and their associated persons by virtue of its By-Laws and membership 
agreements.\125\ FINRA stated that, without opining on the 
extraterritorial application of U.S. securities laws, it questions the 
relevance of the Morrison decision, which addressed the 
extraterritorial application of Section 10(b) of the Exchange Act and 
Exchange Act Rule 10b-5, and the obligations of the U.S. under NAFTA, 
to the proposed rule change.\126\ FINRA stated that the proposed rule 
change addresses the obligations of members under FINRA rules with 
respect to the registration and qualification of certain associated 
persons who are engaged in, responsible for or supervising certain 
member operations functions.\127\ As noted above, FINRA stated that its 
jurisdiction reaches associated persons of members and their 
activities, regardless of their employing entity.\128\ The Commission 
agrees with FINRA that the proposed rule does not expand FINRA's 
jurisdiction. Furthermore, FINRA stated that it is not within its 
purview to interpret the Federal securities laws or SEC rules.\129\
---------------------------------------------------------------------------

    \123\ Response Letter.
    \124\ Id.
    \125\ Id.
    \126\ Id.
    \127\ Id.
    \128\ Id.
    \129\ Id.
---------------------------------------------------------------------------

    Additionally, FINRA disagrees with the commenter's assessment of an 
implied application of a proposed FINRA rule.\130\ As stated by the 
commenter,\131\ and without independent verification or comment, FINRA 
noted that the examination findings cited by the commenter relate to 
the firm's outsourcing arrangements and compliance with Exchange Act 
Rule 15c3-3(k)(2)(i), and the comment is outside the scope of the 
proposed rule change.\132\
---------------------------------------------------------------------------

    \130\ Id.
    \131\ A&P, at note 1.
    \132\ Response Letter.
---------------------------------------------------------------------------

D. Examination Requirement

    One commenter states that an examination requirement provides no 
benefit to investors and FINRA is the

[[Page 36593]]

true winner as it collects fees for testing, continuing education and 
other potential items it will generate.\133\ Another commenter asserts 
that a qualification examination is unnecessary to meet the objectives 
of the proposal and recommends using firm written supervisory 
procedures and Firm Element training.\134\ Two commenters state FINRA 
should carefully evaluate the objectives and consequences of a one-
size-fits-all examination requirement on potential test takers and 
recommend internal firm element training to deliver the proposed 
product, market and operations knowledge portion of the required 
examination content.\135\ One commenter supports the original intent of 
the examination requirement, which was to establish a ``spot-the-red-
flags'' examination that would train test takers to identify and 
escalate potential control problems, and believes that the scope should 
not be expanded to cover the details of different products, operations 
processes and rules and regulations given the breadth of the covered 
functions.\136\ Further, the commenter notes that a high failure rate 
will cause operational disruption at firms.\137\ One commenter notes 
that the examination will be overbroad and extremely challenging for 
many test takers, especially IT personnel who serve across the covered 
functions who may have particular difficulty given their minimal 
background or experience in industry issues.\138\
---------------------------------------------------------------------------

    \133\ Callaway.
    \134\ FSI.
    \135\ NSCP and TLG.
    \136\ SIFMA.
    \137\ SIFMA.
    \138\ NSCP.
---------------------------------------------------------------------------

    FINRA stated that it believes that the proposed qualification 
examination requirement for Operations Professionals is appropriate as 
proposed and does not agree that the objectives of the proposal can be 
attained without a testing requirement for unregistered personnel.\139\ 
As FINRA noted in the Notice, it believes there is value in an 
examination that tests for general securities knowledge about the 
securities industry and that ongoing continuing education will 
supplement this knowledge for Operations Professionals.\140\ FINRA 
stated that the draft content outline for the proposed Operations 
Professional examination was developed by FINRA staff in conjunction 
with industry subject matter expert volunteers.\141\ FINRA stated that 
its staff conducted several focus panels in mid-2010 with operations 
professionals working in one or more of the covered functions and from 
a wide range of FINRA member firms.\142\ FINRA said that it then 
convened an Operations Professional exam committee consisting of more 
than 40 operations professionals; such persons represent a broad range 
of FINRA members, including size, geographical location and business 
model.\143\ FINRA stated that both FINRA staff and committee members 
placed an emphasis on creating a content outline and questions that are 
appropriate across all the covered functions and test the appropriate 
level of knowledge for a person who meets the depth of personnel as an 
Operations Professional.\144\
---------------------------------------------------------------------------

    \139\ Response Letter.
    \140\ FINRA notes that NASD Rule 1070 (Qualification 
Examinations and Waiver of Requirements), as well as other 
applicable provisions regarding registration and qualification set 
forth in FINRA's rulebook, such as NASD Rule 1031(c) regarding 
requirements for examination on lapse of registration, would apply 
to the Operations Professional qualification examination and 
registration category.
    \141\ Response Letter.
    \142\ Id.
    \143\ Id.
    \144\ Id.
---------------------------------------------------------------------------

E. Exception to Qualification Examination Requirement

    FINRA noted that 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.\145\ 
FINRA stated that 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.\146\ FINRA said 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.\147\
---------------------------------------------------------------------------

    \145\ Id.
    \146\ Id.
    \147\ Response Letter.
---------------------------------------------------------------------------

    One commenter questions the value of an additional registration 
category with such a broad exception since the majority of individuals 
that would be subject to the proposed rule change would be eligible for 
the proposed exception.\148\ To provide a clearer indication that the 
proposed rule change is necessary, the commenter recommends FINRA 
engage in an industry-wide survey to determine how many individuals 
would not qualify for the exception.\149\ Two commenters assert that 
the proposed exception is overly broad and will undermine the 
regulatory purpose of the proposal.\150\ One such commenter believes 
content overlap of the eligible registration qualification examinations 
with the proposed Operations Professional examination is not sufficient 
justification to accept one examination in lieu of another and finds it 
inappropriate to grant a waiver to an individual who has passed certain 
examinations that are limited in nature (e.g., Series 6).\151\
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    \148\ NPH.
    \149\ NPH.
    \150\ NASAA and NPH.
    \151\ NASAA.
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    One commenter recommends exempting persons who qualify for the 
proposed exception from the requirement to separately register as an 
Operations Professional (noting that costs to make internal system 
changes to track and monitor dual registrations may be significant), 
since FINRA's stated goal is to ensure that covered persons are 
registered with FINRA and trained on industry practices.\152\ Another 
commenter suggests FINRA specifically exempt supervisory personnel who 
hold the most senior supervisory qualifications (i.e., Series 24 and 
Series 27) from the requirement to register as an Operations 
Professional based on the same policy reasoning for exempting certain 
licensed individuals from the examination requirement.\153\ Another 
commenter recommends FINRA include as

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