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11-33 SEC Approves Operations Professional Registration Category and Consolidated FINRA Continuing Education Rule; Effective Date: October 17, 2011
Consolidated FINRA Rulebook
Referenced Rules & Notices
FINRA Rule 1230
FINRA Rule 1250
FINRA Rule 4311
FINRA Rule 8310
FINRA Rule 8311
FINRA Rule 8320
NASD Rule 1021
NASD Rule 1031
NASD Rule 1050
NASD Rule 1070
NASD Rule 1120
NASD Rule 3010
NYSE Rule 345A
Regulatory Notice 09-70
Regulatory Notice 11-14
Regulatory Notice 11-26
The SEC approved FINRA's proposal to establish a registration category and qualification examination requirement for certain operations personnel.1 The proposal also adopts continuing education requirements for such operations personnel and adopts NASD Rule 1120 (Continuing Education Requirements) as FINRA Rule 1250 (Continuing Education Requirements) in the consolidated FINRA rulebook2 with certain changes.3
The amended rule text is available at www.finra.org/notices/11-33. The rules become effective on October 17, 2011.
Questions regarding this Notice should be directed to:
Background & Discussion
FINRA Rule 1230(b)(6) establishes a new representative registration category and qualification examination for certain operations personnel (Operations Professionals).4 FINRA is expanding its registration provisions to require registration of certain individuals (covered persons) who are engaged in, responsible for or supervising certain member firm operations functions (covered functions) to enhance the regulatory structure surrounding these areas. Covered persons play an integral role in the business of the member firm, and their activities often have a meaningful connection to customer funds, accounts and transactions.
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 are also important to a member firm's ability to comply with its responsibilities under the federal securities laws and regulations, and the rules of FINRA. Moreover, FINRA believes registration, qualification and continuing education requirements for covered persons are needed to help ensure that investor protection mechanisms are in place in all areas of a member firm's business that could harm the firm, a customer, the integrity of the marketplace or the public. FINRA Rule 1230(b)(6) is intended, among other things, to increase covered persons' awareness and knowledge that they are operating in a regulated environment designed to protect investors' interests and the integrity of the operations of a broker-dealer.
In addition, NASD Rule 1120 (Continuing Education Requirements) has been adopted as FINRA Rule 1250 (Continuing Education Requirements) in the Consolidated FINRA Rulebook with certain changes, including a requirement that Operations Professionals be subject to both Regulatory Element and Firm Element Programs.
FINRA Rule 1230(b)(6)(A) sets forth three categories of persons who are subject to the registration, qualification and continuing education requirements as an Operations Professional. Persons who perform a covered function, but whose responsibilities are below these specified levels, are not required to register as Operations Professionals. Member firms must determine, based on a person's activities and responsibilities, whether such person would be considered a covered person and subject to the requirements for Operations Professionals. The three categories are:
Consistent with FINRA guidance, persons subject to the new Operations Professional registration category are considered associated persons of a member firm insofar as they are performing regulated broker-dealer functions on behalf of the member firm, irrespective of their employing entity, and are subject to all FINRA rules applicable to associated persons and/or registered persons.5 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 represent a part of that business of a firm. Moreover, FINRA notes that the scope of covered persons and covered functions set forth in FINRA Rule 1230(b)(6) is not exhaustive in terms of who may be considered an associated person of the member firm based on the nature of the operational activities being conducted on behalf of a member firm. Rather, FINRA has made a determination that the persons subject to the new requirements are engaged in members' operational activities of such significance to require registration, qualification and continuing education requirements.
FINRA notes that a person's job title and/or employer may not be clearly indicative of his or her obligation to register as an Operations Professional. Firms must view each person's responsibilities in connection with the covered functions described below in Section B independently to determine who must register. The Operations Professional registration category is function-based and, therefore, not conditioned upon an individual's relationship to a particular department within a firm.
Any person who meets the definition of a covered person in one of the three categories in FINRA Rule 1230(b)(6)(A) and engages in one or more of the following covered functions in FINRA Rule 1230(b)(6)(B) on behalf of a member firm (regardless of their employing entity, e.g., a member firm, an affiliate or a third-party service provider) must register as an Operations Professional:
As noted above, as registered persons, Operations Professionals will be subject to all FINRA rules applicable to associated persons and/or registered persons. Accordingly, pursuant to NASD Rule 3010(a)(5), each Operations Professional must be assigned to an appropriately registered representative(s) and/or principal(s) who shall be responsible for supervising that person's activities. Additionally, FINRA expects that each member firm will have at least one registered Operations Professional, who often may be the member firm's Financial and Operations Principal. In this regard, neither principal registration, nor representative registration in another category, obviates the requirement for a covered person to register as an Operations Professional.
With respect to small firms, the impact of FINRA Rule 1230(b)(6) 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. 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. Also, 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).7 FINRA would not expect dual registration as an Operations Professional in such cases.
FINRA Rule 1230(b)(6)(C), subject to the exceptions in subparagraph (D) (described in Section D below), requires any person who must register as an Operations Professional to pass a new Operations Professional qualification examination before the registration may become effective. The examination will provide reasonable assurance that the individuals understand their professional responsibilities, including key regulatory and control themes, as well as the importance of identifying and escalating red flags that may harm a member, a customer, the integrity of the marketplace or the public.9 The Operations Professional qualification examination will test applicants on general securities industry knowledge and its associated regulations and rules.
In general, given the diversity of functions performed by covered persons, the Operations Professional qualification examination is a principles-based qualification examination with a regulatory focus to test for a broad understanding of a broker-dealer's business at a basic level, a basic understanding of the operations functions that support a broker-dealer's business and the regulations designed to achieve investor protection and market integrity that drive the operations processes and procedures conducted at a broker-dealer. As further detailed in Section E, the continuing education components associated with the Operations Professional registration category will provide competency training specific to the covered functions, as applicable.
The key content themes of the Operations Professional qualification examination are:
FINRA Rule 1230(b)(6)(D)(i) sets forth 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.10 The exception also applies to persons who do not hold an eligible registration, but prefer an alternative to taking the Operations Professional examination. Such persons may register in an eligible registration category (subject to passing the corresponding qualification examination or obtaining a waiver) and use the registration to qualify for Operations Professional registration. FINRA believes the eligible registrations (and corresponding examinations based on their broad content coverage) serve as a valid proxy for the Operations Professional examination requirement.
Persons who hold the following representative-level registration categories, or who have held such registration categories within the two years immediately prior to registering as an Operations Professional, are qualified to register as an Operations Professional without passing the Operations Professional qualification examination:
The exception does not apply to persons whose eligible registrations are revoked pursuant to FINRA Rules 8310 (Sanctions for Violation of the Rules) or 8320 (Payment of Fines, Other Monetary Sanctions, or Costs; Summary Action for Failure to Pay), suspended or otherwise deemed inactive.13
FINRA anticipates that many persons subject to the new Operations Professional registration category may qualify for the exception from the qualification examination based on existing registrations, since they are generally acting in a supervisory position, and FINRA would not assess a separate registration fee for persons relying on the exception to register as Operations Professionals. As noted in Section A, entry-level operations personnel typically are not going to be subject to the requirements for Operations Professionals.
FINRA Rule 1230(b)(6)(D)(ii) provides that the staff may accept as an alternative to the Operations Professional qualification examination requirement any domestic or foreign qualification if it determines that acceptance of the alternative qualification is consistent with the purposes of the rule, the protection of investors and the public interest.
Individuals registered as Operations Professionals are subject to FINRA's Regulatory Element and Firm Element Continuing Education requirements as set forth in FINRA Rule 1250 (Continuing Education Requirements).14 The continuing education elements for this registration category provide more specific learning materials appropriate for an Operations Professional, given the diversity of covered functions.
The Regulatory Element Program for Operations Professionals, the S901, focuses on instruction to:
Individuals who avail themselves of the exception to the Operations Professional qualification examination requirement in FINRA Rule 1230(b)(6)(D)(i) with an eligible registration are subject to the Regulatory Element Program appropriate for the other registration category. For example, a person who registers as an Operations Professional by holding a General Securities Representative registration (Series 7) under the exception is subject to the S101 Regulatory Element Program in lieu of the S901 Regulatory Element Program, and a person who registers by holding a General Securities Principal registration (Series 24) is subject to the S201 Regulatory Element Program in lieu of the S901 Regulatory Element Program.
Operations Professionals also are subject to a Firm Element Continuing Education requirement. To implement this change, as further discussed in Section II, Operations Professionals have been added to the definition of "covered registered persons" in FINRA Rule 1250(b)(1), which requires member firms to deliver Firm Element training to such persons.15
As noted in Section B, any person who meets the definition of a covered person in one of the three categories in FINRA Rule 1230(b)(6)(A) and engages in one or more of the covered functions in FINRA Rule 1230(b)(6)(B) on behalf of a member firm must register as an Operations Professional. Such persons must register by requesting Operations Professional registration via Form U4 in the CRD system and doing one of the following, as applicable:
To be eligible to function as an Operations Professional for the 12-month transition period, Day-One Professionals subject to an examination requirement must request Operations Professional registration via Form U4 in the CRD system on or before December 16, 2011.20 If a Day-One Professional does not pass an acceptable examination on or before October 17, 2012, the individual must cease functioning as an Operations Professional on October 17, 2012.
The 60-day identification period and the 12-month transition period to pass a qualification examination only apply to Day-One Professionals. Any person who is not subject to the registration requirements for Operations Professionals as of October 17, 2011 (i.e., a person who does not meet the depth of personnel criteria and/or is not engaged in one or more covered functions as of the effective date, or persons hired after October 17, 2011, who will be subject to the registration requirements) (non-Day-One Professionals) must register as an Operations Professional and, if applicable, pass the Operations Professional qualification examination (or an eligible qualification examination), prior to engaging in any activities that require such registration. However, any such person who must pass the Operations Professional qualification examination (or an eligible qualification examination listed in Section D) to qualify for Operations Professional registration shall be allowed a period of 120 days beginning on the date such person requests Operations Professional registration via Form U4 in the CRD system to pass such qualifying examination, during which time such person may function as an Operations Professional.
Member firms are responsible for tracking and monitoring their associated persons to ensure that they are registered, and conducting their activities, in compliance with the time frames described above.
NASD Rule 1120 (Continuing Education Requirements) has been adopted as new FINRA Rule 1250 (Continuing Education Requirements). In addition to the change noted in Section E, which expands the scope of "covered registered persons" subject to the Firm Element Continuing Education requirement to include persons registered as Operations Professionals, FINRA made additional minor changes to NASD Rule 1120 to update cross-references and reflect the conventions of the Consolidated FINRA Rulebook.
NASD Rule 1120 and Incorporated NYSE Rule 345A were adopted in 1995 in response to the recommendation of a task force, which subsequently became the Securities Industry Regulatory Council on Continuing Education (Council),21 to create uniform continuing education requirements in the securities industry. As advised by the Council, the continuing education requirements include a Regulatory Element Program and a Firm Element Program. NASD and Incorporated NYSE rules are nearly identical in keeping with the goals of the Council to create uniform continuing education requirements.22
The Regulatory Element Program consists of periodic computer-based training on regulatory, compliance, ethical, supervisory subjects and sales practice standards. A registered person is required to participate and complete a designated Regulatory Element Program within a 120-day period that commences with the second anniversary of such person's initial securities registration, and recurs every three years thereafter for as long as such person remains in the securities business. Failure to complete the Regulatory Element Program will result in a registered person's registration becoming inactive and such person cannot conduct a securities business on behalf of the member firm until the requirement is met.23
The Firm Element Continuing Education requirement currently applies to any person registered with a member firm who has direct contact with customers in the conduct of the firm's securities sales, trading and investment banking activities, any person registered as a research analyst pursuant to NASD Rule 1050, and to the immediate supervisors of such persons (collectively, covered registered persons). However, as noted above, the scope of "covered registered persons" subject to the Firm Element requirement has been expanded to include persons registered as Operations Professionals. The Firm Element Program consists of annual, firm-developed and administered training programs designed to keep covered registered persons current regarding securities products, services and strategies offered by the member firm. The Firm Element Program requires member firms to annually evaluate and prioritize their training needs by conducting a Needs Analysis and developing a written plan.
In planning, developing and implementing the Firm Element Program, each member firm must take into consideration its size, organizational structure, scope of business, types of products and services it offers, as well as regulatory developments and the performance of its covered registered persons in the Regulatory Element Program. FINRA may require a member firm to provide specific training to its covered registered persons as FINRA deems appropriate. Each member firm must administer its Firm Element Program in accordance with its annual Needs Analysis and Written Plan, and must maintain records documenting the content of the program and completion of the program by covered registered persons.
FINRA Rule 1230(b)(6) and FINRA Rule 1250 take effect on October 17, 2011. FINRA reminds member firms that Day-One Professionals must request Operations Professional registration via Form U4 in the CRD system on or before December 16, 2011 (i.e., 60 days following the effective date of FINRA Rule 1230(b)(6)). Those Day-One Professionals must then pass any necessary examination on or before October 17, 2012.
1 See Securities Exchange Act Release No. 64687 (June 16, 2011), 76 FR 36586 (June 22, 2011) (Order Approving Proposed Rule Change; File No. SR-FINRA-2011-013).
2 The current FINRA rulebook consists of: (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE (Incorporated NYSE Rules) (together, the NASD Rules and Incorporated NYSE Rules are referred to as the Transitional Rulebook). While the NASD Rules generally apply to all FINRA member firms, the Incorporated NYSE Rules apply only to those members of FINRA that are also members of the NYSE (Dual Members). The FINRA Rules apply to all FINRA member firms, unless such rules have a more limited application by their terms. For more information about the rulebook consolidation process, see Information Notice 03/12/08 (Rulebook Consolidation Process).
4 The remainder of FINRA Rule 1230 (Registration Categories) is being addressed as part of a separate rule proposal. See Regulatory Notice 09-70 (December 2009) (FINRA Requests Comment on Proposed Consolidated FINRA Rules Governing Registration and Qualification Requirements).
5 See Notice to Members 05-48 (July 2005) (Members' Responsibilities When Outsourcing Activities to Third-Party Service Providers). The Notice reminds members that "in the absence of specific NASD [or FINRA] rules, MSRB rules, or federal securities laws or regulations that contemplate an arrangement between members and other registered broker-dealers with respect to such activities or functions (e.g., clearing agreements executed pursuant to NASD Rule 3230), any third-party service providers conducting activities or functions that require registration and qualification under NASD [or FINRA] rules will generally be considered associated persons of the member and be required to have all necessary registrations and qualifications."
6 Persons engaged in or supervising stock loan/securities lending activities that meet the depth of personnel as a covered person in Section A are required to register as Operations Professionals. FINRA also is proposing separate registration categories for a "Securities Lending Representative" and a "Securities Lending Supervisor." In Regulatory Notice 09-70, FINRA generally proposes to adopt the NYSE registration requirements for Securities Lending Representatives and Securities Lending Supervisors, requiring an associated person who has discretion to commit a member to any contract or agreement (written or oral) involving securities lending or borrowing activities with any other person, and the direct supervisor of the associated person to register as a Securities Lending Representative and Securities Lending Supervisor, respectively. These individuals would be required to register as such for tracking and oversight purposes, regardless of whether they are registered in other categories. However, solely for purposes of registering as a Securities Lending Representative or Securities Lending Supervisor, an individual will not be subject to a qualification examination at this time.
8 FINRA will issue a separate Regulatory Notice addressing the initial rollout of the Series 99 examination, the examination content outline and the fee associated with the examination.
9 Any individual whose activities go beyond those for the Operations Professional registration category is required to separately qualify and register in the appropriate category or categories of registration attendant to such activities.
10 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 apse of registration, applies to the Operations Professional qualification examination and registration category.
11 A person who qualifies for the exception based on having held an eligible registration within the two years immediately priorto registering as an Operations Professional must first re-activate such eligible registration priorto requesting Operations Professional registration.
12 CRD is a registered trademark of the Financial Industry Regulatory Authority, Inc.
13 If a person's registration in an eligible registration category was revoked within the prior two years, but such person re-qualifies and re-registers in such eligible registration category, he or she may rely on this eligible registration to qualify for the exception to the Operations Professional qualification examination requirement. Further, a suspended registration may not be relied upon as an eligible registration during the suspension period. Similarly, a registration deemed inactive for any reason (e.g., failure to complete continuing education requirements) may not be relied upon as an eligible registration during the inactive period. See also FINRA Rule 8311 (Effect of a Suspension, Revocation, Cancellation, or Bar).
15 NASD Rule 1120(b) (Continuing Education Requirements) is currently limited to registered persons who have direct contact with customers in the conduct of the firm's securities sales, trading and investment banking activities, any person registered as a research analyst pursuant to NASD Rule 1050, and to the immediate supervisors of such persons. The amendments are reflected in the new FINRA rule governing continuing education, FINRA Rule 1250. See Section II of this Notice.
16 Persons with an active eligible registration who request Operations Professional registration will be automatically granted Operations Professional registration once they submit the request via Form U4 in the CRD system, regardless of when they apply for Operations Professional registration (provided there are no existing deficiencies). See also supra note 11.
17 If a person elects to register with FINRA as an Operations Professional by newly qualifying in an eligible registration (i.e., the person wants to obtain an eligible registration and use the registration to qualify for Operations Professional registration), the individual must first submit a Form U4 to request the eligible registration. After the candidate has passed the qualification examination associated with the eligible registration, the individual may then submit an amended Form U4 to request the Operations Professional registration.
18 FINRA believes that the current Web-based Electronic File Transfer (Web EFT) functionality will enable subscribers to efficiently request Operations Professional registration via batch file uploads to the CRD system.
19 When a person requests Operations Professional registration via Form U4 in the CRD system during the 60-day identification period, an examination window for the Operations Professional qualification examination will open in the CRD system that expires on October 17, 2012. After the 60-day identification period, the examination window for the Operations Professional qualification examination will open for the standard 120 days.
20 Member firms should note that the standard examination window in the CRD system applicable to a particular registration category will apply not with standing the 12-month examination window established for purposes of the transition period. The 12-month examination window is only for the Operations Professional qualification examination. Thus, a person who elects to qualify, for example, by passing the Series 7 examination would have only 120 days to take and pass the Series 7 examination once the window for such examination is opened in the CRD system. Member firms should plan accordingly so that associated persons are prepared to take the requisite examination within the prescribed window for that registration category, and that the associated persons pass any requisite examination before the expiration of the 12-month transition period for Day-One Professionals.
21 The Council is comprised of up to 20 industry members from broker-dealers, representing a broad cross section of industry firms, and representatives from self-regulatory organizations (SROs) as well as liaisons from the SEC and the North American Securities Administrators Association (NASAA).
22 FINRA expects to address Incorporated NYSE Rule 345A (and its Interpretation) and propose additional changes to FINRA Rule 1250 as part of the consolidated registration and qualification rules. See Regulatory Notice 09-70 (December 2009).
23 A registered person will be required to retake the Regulatory Element Program in the event such person is: (1) subject to a statutory disqualification as defined by Section 3(a)(39) of the Exchange Act; (2) subject to a suspension or imposition of a fine of $5,000 or more by an SRO or other securities governmental agency; or (3) ordered to do so as a sanction in a disciplinary action by an SRO or other securities governmental agency.