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New FINRA Registration Requirement for Operations Professionals

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Salter Chris
Chris Salter

Partner

Washington, D.C.

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16 August 2011

In the wake of the Bernard Madoff scandal, FINRA recently announced approval of its new rule requiring certain "back office" operations personnel to obtain the newly created Series 99 securities license.

The new requirement is meant to address the need to regulate operations personnel who hold responsibilities that could impact the integrity of a firm's operations and cause investor harm without having the necessary qualifications.

Introduction

FINRA promulgated new Rules 1230(b)(6) and 1250 requiring back office operations personnel in certain areas of responsibility (Operations Professionals) to register with FINRA and engage in continuing education if: (i) their level of responsibility fits into any of three discrete categories of persons (Covered Persons); and (ii) they engage in or supervise one or more identified tasks, including handling customer funds, recordkeeping, trade confirmations and account statements, transaction settlement, margin or related functions (Covered Functions).

Who Must Register as Operations Professionals

Absent an available exception, individuals who meet the Covered Person definition and who engage in one or more Covered Function must register as a Series 99 Operations Professional.

Under FINRA Rule 1230(b)(6), Operations Professionals are Covered Persons if they are:

  1. senior management overseeing Covered Functions;
  2. supervisors, managers or any other persons that approve or authorize work in direct furtherance of Covered Functions; or
  3. persons with the authority or discretion to materially commit capital or commit the firm to material contracts or written or oral agreements in direct furtherance of the Covered Functions.

Covered Functions include the discrete tasks listed above, as well as, by way of example:

  • client on-boarding, including customer account data and document maintenance;
  • receipt and delivery of securities and funds;
  • bank, custody, depository and firm account management and reconciliation;
  • settlement, fail control, buy ins, segregation, possession and control;
  • prime brokerage;
  • stock loan or securities lending;
  • financial control, including general ledger and treasury;
  • contributing to the process of preparing and filing financial regulatory reports; and
  • 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.

Time Period for Compliance

Firms must determine which individuals must register as Operations Professionals as of October 17, 2011 (Day One Operations Professionals). While firms are expected to identify Day One Operations Professionals by October 17, 2011, they have until December 16, 2011 to file Forms U4 to request registration as Operations Professionals. Day One Operations Professionals who timely file their Forms U4 by December 16, 2011 will have until October 17, 2012 to successfully complete the Series 99 license examination and will be permitted to function as Operations Professionals until such time. All individuals who are identified as Covered Persons performing one or more Covered Function after October 17, 2011 (e.g., new hires) will have 120 days to complete the Series 99 examination, during which time they may function as Operations Professionals.

Examination Requirements

Operations Professionals fall into three categories with respect to examination requirements.

  1. Exception from Examination for Persons with Eligible Registrations: Individuals who currently hold, or have held during the past two years, certain representative and principal-level registrations (an Eligible Registration), would not be required to take the Series 99 examination in order to register as an Operations Professional. The Eligible Registration categories include, but are not limited to, the following: General Securities Representative (Series 7); Compliance Officer (Series 14); General Securities Principal (Series 24); Financial and Operations Principal (Series 27)
  2. Exception from Examination for Persons who Register in an Eligible Registration Category: Individuals who do not hold, or who have not in the past two years held, an Eligible Registration may register in an Eligible Registration category and upon successfully completing the relevant qualification examination, opt-in to register as an Operations Professional. For example, an individual could seek to register as a Series 7 General Securities Representative, and opt-in to register as an Operations Professional upon passing the Series 7 examination.
  3. Series 99 Examination: Individuals who do not fit into either of the above categories must take the Series 99 examination in order to be registered as an Operations Professional.

Exemptions

FINRA Rule 1230.06 does not require the following individuals to register as an Operations Professional:

  • personnel whose activities are limited to performing a function ancillary to a Covered Function;
  • personnel whose roles are supportive or advisory to the performance of a Covered Function, such as internal audit, legal or compliance personnel who review, but do not have primary responsibility for Covered Functions; or
  • personnel who serve solely in a clerical or ministerial function.

Regulatory Point

Firms should, in advance of the October 17, 2011 deadline, consider preparing a list of all individuals who perform back office functions, including a description of each person's responsibilities. This list can then be used to determine who should register as an Operations Professional, and will also provide documentation of such decisions for future reference.