It’s official. Senior ranking Wall Street operations executives must be licensed as operations professionals. The Securities and Exchange Commission has approved the Financial Industry Regulatory Authority’s request to do so, albeit with some minor changes.
On March 4, FINRA issued its final proposal to the SEC for a rule change allowing senior-ranking operations executives to be licensed if they pass a qualifying exam and agree to continuing education.
The move, which FINRA floated last year, is seen as a way to prevent Ponzi schemes such as the one orchestrated for decades by Bernard Madoff. The operations executives would work in over a dozen “covered” areas such as client onboarding, collection and disbursement of funds; securities lending and margin maintenance.
“After careful review of 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,” wrote the SEC in its approval on June 16. “In particular, the Commission finds that the proposed rule change is consistent with Section 15A9(b)(6) of the Act, 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.”
Broker-dealers and FINRA have been at odds over just how many operations executives FINRA wants the licensing requirement to apply to. The greater the number of executives registered with FINRA at the registered brokerage firm and its third-party service providers, the higher the administrative burden and cost for the brokerage firm. A large brokerage already registered with FINRA could easily have several hundred employees affected.
Third party service providers are often not registered with FINRA and perform middle and back office services for more than one brokerage firm making it difficult to determine just who should be registered and who should fill out the paperwork for the third party firm.
Brokerage firms often outsource services such as post-trade clearing and settlement of transactions, valuations of non-exchange traded securities; client onboarding and storage of electronic and written communications to third party firms such as banks, clearing firms and non-financial institutions.
Despite industry concerns about overreaching its authority, FINRA is retaining the most controversial aspect of its new requirement. “associated persons” at companies to which the brokerage firm has outsourced operations also be licensed as long as they perform the same “covered functions” as the operations executive at the brokerage firm.
However, FINRA agreed to more carefully define the types of executives that would be affected by licensing. FINRA has changed one category of individuals covered to senior management with “direct responsibility” over the covered functions. “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,” wrote the SEC.
FINRA also agreed to limit another category of individuals affected to any person “designated by senior management” as a supervisor, manager or other person responsible for approving or authorizing the work of others in the covered functions.
In its initial proposal FINRA had categorized the executives covered by the licensing requirement in three buckets: senior management with “responsibility” over the covered functions and supervisors, managers or other persons responsible for approving or authorizing work of other persons doing the covered functions; or persons with the authority or discretion “materially to commit a member to any material contract or agreement (written or oral) in direct furtherance of the covered functions.
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