15012 Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices 

3See rule 24b–3 under the Investment Company 

Act (17 CFR 270.24b–3), which provides that any 

sales material, including rule 482 advertisements, 

shall be deemed filed with the Commission for 

purposes of Section 24(b) of the Investment 

Company Act upon filing with FINRA. 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

availability of the month-end 

performance data in the advertisement. 

The rule also sets forth requirements 

regarding the prominence of certain 

disclosures, requirements regarding 

advertisements that make tax 

representations, requirements regarding 

advertisements used prior to the 

effectiveness of the fund’s registration 

statement, requirements regarding the 

timeliness of performance data, and 

certain required disclosures by money 

market funds. 

Rule 482 advertisements must be filed 

with the Commission or, in the 

alternative, with Financial Industry 

Regulatory Authority (‘‘FINRA’’).3 This 

information collection differs from 

many other federal information 

collections that are primarily for the use 

and benefit of the collecting agency. 

As discussed above, rule 482 contains 

requirements that are intended to 

encourage the provision to investors of 

information that is balanced and 

informative, particularly in the area of 

investment performance. The 

Commission is concerned that in the 

absence of such provisions fund 

investors may be misled by deceptive 

rule 482 performance advertisements 

and may rely on less-than-adequate 

information when determining in which 

funds they should invest their money. 

As a result, the Commission believes it 

is beneficial for funds to provide 

investors with balanced information in 

fund advertisements in order to allow 

investors to make better-informed 

decisions. 

The Commission estimates that 

58,368 responses are filed annually 

pursuant to rule 482 by 3,540 

investment companies offering 

approximately 16,225 portfolios, or 

approximately 3.6 responses per 

portfolio annually. Respondents consist 

of all the investment companies that 

take advantage of the safe harbor offered 

by the rule for their advertisements. The 

burden associated with rule 482 is 

presently estimated to be 5.16 hours per 

response. The hourly burden is 

therefore approximately 301,179 hours 

(58,368 responses × 5.16 hours per 

response). 

The estimate of average burden hours 

is made solely for the purposes of the 

Paperwork Reduction Act, and is not 

derived from a comprehensive or even 

a representative survey or study of the 

costs of Commission rules and forms. 

Cost burden is the cost of services 

purchased to comply with rule 482, 

such as for the services of computer 

programmers, outside counsel, financial 

printers, and advertising agencies. The 

Commission attributes no cost burden to 

rule 482. The provision of information 

under rule 482 is necessary to obtain the 

benefits of the safe harbor offered by the 

rule. The information provided is not 

kept confidential. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to a collection of information 

unless it displays a currently valid 

control number. 

The public may view the background 

documentation for this information 

collection at the following Web site, 

http://www.reginfo.gov. Comments 

should be directed to: (i) Desk Officer 

for the Securities and Exchange 

Commission, Office of Information and 

Regulatory Affairs, Office of 

Management and Budget, Room 10102, 

New Executive Office Building, 

Washington, DC 20503, or by sending an 

e-mail to: 

Shagufta_Ahmed@omb.eop.gov; and (ii) 

Thomas Bayer, Chief Information 

Officer, Securities and Exchange 

Commission, c/o Remi Pavlik-Simon, 

6432 General Green Way, Alexandria, 

VA 22312 or send an e-mail to: 

PRA_Mailbox@sec.gov. Comments must 

be submitted to OMB within 30 days of 

this notice. 

Dated: March 14, 2011. 

Cathy H. Ahn, 

Deputy Secretary. 

[FR Doc. 2011–6320 Filed 3–17–11; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–64080; File No. SR–FINRA– 

2011–013] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing of 

Proposed Rule Change To Establish a 

Registration Category, Qualification 

Examination and Continuing Education 

Requirements for Certain Operations 

Personnel, and Adopt FINRA Rule 1250 

(Continuing Education Requirements) 

in the Consolidated FINRA Rulebook 

March 14, 2011. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b-4 thereunder,2

notice is hereby given that on March 4, 

2011, Financial Industry Regulatory 

Authority, Inc. (‘‘FINRA’’) (f/k/a 

National Association of Securities 

Dealers, Inc. (‘‘NASD’’)) filed with the 

Securities and Exchange Commission 

(‘‘SEC’’ or ‘‘Commission’’) the proposed 

rule change as described in Items I, II, 

and III below, which Items have been 

prepared by FINRA. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

FINRA is proposing to adopt FINRA 

Rule 1230(b)(6) to establish a 

registration category and qualification 

examination requirement for certain 

operations personnel. The proposed rule 

change also would adopt continuing 

education requirements for such 

operations personnel and adopt NASD 

Rule 1120 (Continuing Education 

Requirements) as FINRA Rule 1250 

(Continuing Education Requirements) in 

the consolidated FINRA rulebook with 

minor changes. 

The text of the proposed rule change 

is available on FINRA’s Web site at 

http://www.finra.org, at the principal 

office of FINRA and at the 

Commission’s Public Reference Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

FINRA included statements concerning 

the purpose of and basis for the 

proposed rule change and discussed any 

comments it received on the proposed 

rule change. The text of these statements 

may be examined at the places specified 

in Item IV below. FINRA has prepared 

summaries, set forth in sections A, B, 

and C below, of the most significant 

aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

Background 

Given the growing complexity of the 

financial services industry and the 

importance of services provided by 

personnel in operations departments, 

FINRA is concerned about the potential 

for regulatory gaps in the area of 

registration and education requirements 

for individuals performing and 

overseeing member operations 

functions. Historically, federal and state 

law and self-regulatory organization 


Emcdonald on DSK2BSOYB1PROD with NOTICES
Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices 15013 

3See Regulatory Notice 09–70 (December 2009) 

(FINRA Requests Comment on Proposed 

Consolidated FINRA Rules Governing Registration 

and Qualification Requirements). The proposed 

amendments discussed in this Notice would be 

included in proposed FINRA Rule 1230 

(Registration Categories). 

4See Notice to Members 05–48 (July 2005) 

(Members’ Responsibilities When Outsourcing 

Activities to Third-Party Service Providers). The 

Notice reminds members that ‘‘in the absence of 

specific NASD [or FINRA] rules, MSRB rules, or 

federal securities laws or regulations that 

contemplate an arrangement between members and 

other registered broker-dealers with respect to such 

activities or functions (e.g., clearing agreements 

executed pursuant to NASD Rule 3230), any thirdparty service providers conducting activities or 

functions that require registration and qualification 

under NASD [or FINRA] rules will generally be 

considered associated persons of the member and 

be required to have all necessary registrations and 

qualifications.’’ 

(‘‘SRO’’) rules, including NASD Rules 

1021 and 1031, have required that 

individuals engaged in or supervising 

the securities or investment banking 

business of a member firm be qualified 

and registered persons. These 

requirements generally have applied to, 

among others, individuals with 

customer contact providing advice 

(sales persons and investment bankers) 

or effecting securities transactions 

(traders) and their supervisors. 

However, unregistered individuals who 

perform and oversee member operations 

functions also play an integral role in 

the business of the firm, and their 

activities often have a meaningful 

connection to client funds, accounts and 

transactions. FINRA believes 

registration and education requirements 

for certain operations personnel are 

needed to help ensure that investor 

protection mechanisms are in place in 

all areas of a member’s business that 

could harm the member, a customer, the 

integrity of the marketplace, or the 

public. 

Proposal 

As described in detail below, FINRA 

is proposing to expand its registration 

provisions to require registration of 

certain individuals (‘‘covered persons’’) 

who are engaged in, responsible for or 

supervising certain member operations 

functions (‘‘covered functions’’) to 

enhance the regulatory structure 

surrounding these areas. The proposed 

rule change would amend proposed 

FINRA Rule 1230 (Registration 

Categories) to adopt a new 

representative registration category and 

qualification examination for such 

individuals (‘‘Operations 

Professionals’’) 3 and would expand 

FINRA’s continuing education 

requirements to require that Operations 

Professionals be subject to Regulatory 

Element and Firm Element training. 

Generally, covered persons would be 

those persons who are directly 

responsible for overseeing that tasks 

within the covered functions are 

performed correctly in accordance with 

industry rules, firm protocols, policies 

and procedures, and who are charged 

with protecting the functional and 

control integrity of the covered 

functions for a member. Only persons 

who are both ‘‘covered persons’’ (i.e., 

meet the depth of personnel criteria as 

discussed in Section A. below) and 

conduct activities or functions in one or 

more of the ‘‘covered functions’’ 

(discussed in Section B. below) would 

be subject to the new Operations 

Professional registration category. 

A. Covered Persons for Inclusion in the 

New Registration Category 

The proposed rule change would 

require the following covered persons to 

register with FINRA as an Operations 

Professional: 

(1) Senior management with 

responsibility over the covered 

functions; 

(2) Supervisors, managers or other 

persons responsible for approving or 

authorizing work, including work of 

other persons, in direct furtherance of 

the covered functions; and 

(3) Persons with the authority or 

discretion materially to commit a 

member’s capital in direct furtherance 

of the covered functions or to commit a 

member to any material contract or 

agreement (written or oral) in direct 

furtherance of the covered functions. 

Persons who perform a covered 

function, but whose responsibilities are 

below these specified levels, would not 

be required to register as Operations 

Professionals. Members must determine, 

based on a person’s activities and 

responsibilities, whether such person 

would be considered a covered person 

and subject to the proposed 

requirements for Operations 

Professionals. A person’s job title may 

not be clearly indicative of his or her 

obligation to register as an Operations 

Professional. 

For the purpose of the proposed third 

category of covered persons, any person 

who has the authority or discretion 

materially to commit firm capital in 

direct furtherance of the covered 

functions or commit a firm to a material 

contract or agreement in direct 

furtherance of the covered functions 

would be required to register as an 

Operations Professional. As proposed in 

supplementary material .06 (Scope of 

Operations Professional Requirement), 

the determination as to what constitutes 

‘‘materially’’ or ‘‘material’’ would be 

based on a member’s pre-established 

spending guidelines and risk 

management policies. Generally, 

persons who do not have the authority 

or discretion to commit a member’s 

capital, or to commit a member to a 

contract or agreement, above such preestablished spending guidelines and 

risk management policies would not be 

subject to registration as an Operations 

Professional under this provision. 

Additionally, proposed 

supplementary material .06 would 

provide that any person whose activities 

are limited to performing a function 

ancillary to a covered function, or 

whose function is to serve a role that 

can be viewed as supportive of or 

advisory to the performance of a 

covered function, or who engages solely 

in clerical or ministerial activities in a 

covered function would not be required 

to register as an Operations Professional 

pursuant to paragraph (b)(6)(A) of the 

proposed rule. For example, internal 

audit, legal or compliance personnel 

who review but do not have primary 

responsibility for any covered function 

would not be required to register as an 

Operations Professional. 

Consistent with FINRA guidance, 

persons subject to the new Operations 

Professional registration category would 

be considered associated persons of a 

member irrespective of their employing 

entity, and would be subject to all 

FINRA rules applicable to associated 

persons and/or registered persons.4

Moreover, any person who meets the 

depth of personnel criteria described 

above in Section A. and is engaged in 

one or more covered functions would be 

required to register as an Operations 

Professional. The proposed rule change 

does not alter the status of covered 

persons as associated persons of a 

member insofar as they are performing 

regulated broker-dealer functions on 

behalf of the member. Rather, the 

proposed rule change explicitly imposes 

registration, qualification examination 

and continuing education requirements 

on such persons. 

B. Covered Functions for Inclusion in 

the New Registration Category 

Any person who meets the threshold 

in one of the three categories of covered 

persons identified above in Section A. 

who conducts activities or functions for 

a member in one or more of the 

following covered functions would be 

required to register as an Operations 

Professional: 

(1) Client on-boarding (customer 

account data and document 

maintenance); 


Emcdonald on DSK2BSOYB1PROD with NOTICES
15014 Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices 

5 In Regulatory Notice 09–70, FINRA generally 

proposes to adopt the NYSE registration 

requirements for Securities Lending Representatives 

and Securities Lending Supervisors, requiring an 

associated person who has discretion to commit a 

member to any contract or agreement (written or 

oral) involving securities lending or borrowing 

activities with any other person, and the direct 

supervisor of the associated person to register as a 

Securities Lending Representative and Securities 

Lending Supervisor, respectively. These individuals 

would be required to register as such for tracking 

and oversight purposes, regardless of whether they 

are registered in other categories. However, solely 

for purposes of registering as a Securities Lending 

Representative or Securities Lending Supervisor, an 

individual will not be subject to a qualification 

examination at this time. 

6Any individual whose activities go beyond 

those proposed for the Operations Professional 

registration category would be required to 

separately qualify and register in the appropriate 

category or categories of registration attendant to 

such activities. 

(2) Collection, maintenance, reinvestment (i.e., sweeps) and 

disbursement of funds; 

(3) Receipt and delivery of securities 

and funds, account transfers; 

(4) Bank, custody, depository and firm 

account management and reconciliation; 

(5) Settlement, fail control, buy ins, 

segregation, possession and control; 

(6) Trade confirmation and account 

statements; 

(7) Margin; 

(8) Stock loan/securities lending; 

(9) Prime brokerage (services to other 

broker-dealers and financial 

institutions); 

(10) Approval of pricing models used 

for valuations; 

(11) Financial control, including 

general ledger and treasury; 

(12) Contributing to the process of 

preparing and filing financial regulatory 

reports; 

(13) Defining and approving business 

requirements for sales and trading 

systems and any other systems related 

to the covered functions, and validation 

that these systems meet such business 

requirements; 

(14) Defining and approving business 

security requirements and policies for 

information technology, including, but 

not limited to, systems and data, in 

connection with the covered functions; 

(15) Defining and approving 

information entitlement policies in 

connection with the covered functions; 

and 

(16) Posting entries to a member’s 

books and records in connection with 

the covered functions to ensure integrity 

and compliance with the federal 

securities laws and regulations and 

FINRA rules. 

The proposed rule change would 

include persons engaged in or 

supervising stock loan/securities 

lending activities that meet the depth of 

personnel as a covered person in 

Section A. above. FINRA also is 

proposing separate registration 

categories for a ‘‘Securities Lending 

Representative’’ and a ‘‘Securities 

Lending Supervisor.’’ 5

C. Operations Professional Qualification 

Examination 

The proposed rule change would 

establish a new qualification 

examination for Operations 

Professionals that would provide 

reasonable assurance that such 

individuals understand their 

professional responsibilities, including 

key regulatory and control themes, as 

well as the importance of identifying 

and escalating red flags that may harm 

a member, a customer, the integrity of 

the marketplace, or the public.6 So that 

applicants understand that they are 

functioning in a heavily regulated 

industry, the proposed Operations 

Professional qualification examination 

would test applicants on general 

securities industry knowledge and its 

associated regulations and rules. Subject 

to the proposed exception in Section D. 

below, any person required to register as 

an Operations Professional would be 

required to pass the Operations 

Professional qualification examination 

before such registration may become 

effective. 

In general, given the diversity of 

functions performed by covered 

persons, the proposed Operations 

Professional qualification examination 

would be a principles-based 

qualification examination with a 

regulatory focus to test for a broad 

understanding of a broker-dealer’s 

business at a basic level, a basic 

understanding of the operations 

functions that support a broker-dealer’s 

business and the regulations designed to 

achieve investor protection and market 

integrity that drive the operations 

processes and procedures conducted at 

a broker-dealer. As further detailed in 

Section E. below, the continuing 

education components associated with 

the Operations Professional registration 

category would provide competency 

training specific to the covered 

functions, as applicable. 

The breadth and depth of coverage of 

the qualification examination would be 

determined through the use of testing 

industry standards used to develop 

examinations, and would include input 

and advice from covered persons active 

in the securities industry. The following 

are the proposed key content themes of 

the new Operations Professional 

qualification examination: 

• Professional Conduct and Ethical 

Considerations: This section of the 

examination would assess a candidate’s 

core knowledge addressed on other 

FINRA examinations that are 

appropriate for an Operations 

Professional. The questions would 

assess knowledge of what are 

considered serious violations of 

securities industry rules. This section 

would include ethics-based questions 

that address issues such as data 

integrity, escalation of regulatory red 

flags and separation of duties. 

• Essential Product and Market 

Knowledge for an Operations 

Professional: This section of the 

examination would assess a candidate’s 

basic product and market knowledge, 

including definitions and characteristics 

of major product categories (i.e., 

equities, debt, packaged securities, 

options and markets). An Operations 

Professional would not be expected to 

know the same level of detail about the 

products and markets as a product 

specialist or a representative selling 

products to customers. 

• Knowledge Associated with 

Operations Activities: This section of 

the examination would assess a 

candidate’s broad-based knowledge 

regarding the covered functions 

outlined above that support a brokerdealer’s business and the underlying 

rules that drive the processes associated 

with these activities (i.e., customer 

account set-up and transfers, 

recordkeeping requirements, rules 

associated with the protection of 

customer assets and transaction 

processing, uniform practices associated 

with making good delivery of securities, 

making payments for securities and 

meeting settlement requirements, and 

credit and margin rules). This section of 

the examination also would include 

ethics-based questions in the context of 

operations activities. 

D. Exception to Operations Professional 

Examination Requirement 

The proposed rule change would 

include an exception to the Operations 

Professional qualification examination 

requirement for persons who currently 

hold certain registrations (each an 

‘‘eligible registration’’) or have held one 

during the two years immediately prior 

to registering as an Operations 

Professional. The proposed exception 

also would apply to persons who do not 

hold an eligible registration, but prefer 

an alternative to taking the Operations 

Professional examination. Such persons 

would be permitted to register in an 

eligible registration category (subject to 

passing the corresponding qualification 

examination or obtaining a waiver) and 

use such registration to qualify for 

Operations Professional registration. 


Emcdonald on DSK2BSOYB1PROD with NOTICES
Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices 15015 

7A person who qualifies for the proposed 

exception based on their having held an eligible 

registration within the two years immediately prior 

to registering as an Operations Professional would 

be required to first re-activate such eligible 

registration prior to requesting Operations 

Professional registration. 

8 If a person’s registration in an eligible 

registration category was revoked within the prior 

two years, but such person re-qualifies and reregisters in such eligible registration category, he or 

she may rely on this eligible registration to qualify 

for the exception to the Operations Professional 

qualification examination requirement. Further, a 

suspended registration may not be relied upon as 

an eligible registration during the suspension 

period. Similarly, a registration deemed inactive for 

any reason (e.g., failure to complete continuing 

education requirements) may not be relied upon as 

an eligible registration during such inactive period. 

See also FINRA Rule 8311 (Effect of a Suspension, 

Revocation, Cancellation, or Bar). 

9See Section G. for further discussion of the 

adoption of NASD Rule 1120 (Continuing 

Education Requirements) as FINRA Rule 1250. 

A person who wishes to obtain 

Operations Professional registration 

under the proposed exception would 

not be automatically waived-in, but 

would have to opt-in by requesting 

Operations Professional registration via 

Form U4 (the Uniform Application for 

Securities Industry Registration or 

Transfer) in the Central Registration 

Depository (‘‘CRD®’’).7 If there are no 

other deficiencies (e.g., fingerprints), the 

Operations Professional registration 

would be approved automatically at the 

time such request is made. Information 

regarding the proposed implementation 

period is discussed in detail in Section 

F. below. FINRA would not assess a 

separate registration fee for persons 

relying on the proposed exception to 

register as Operations Professionals. 

FINRA conducted a review of the 

content outlines for each qualification 

examination it recognizes and identified 

examinations with broad content 

coverage that would be eligible for an 

exception to the Operations Professional 

examination requirement. Accordingly, 

persons who hold the following 

representative-level registration 

categories, or who have held such 

registration categories within the two 

years immediately prior to registering as 

an Operations Professional, would be 

qualified to register as an Operations 

Professional without passing the 

Operations Professional qualification 

examination: 

• Investment Company Products/ 

Variable Contracts Representative 

(Series 6) 

• General Securities Representative 

(Series 7) 

• United Kingdom Securities 

Representative (Series 17) or Canada 

Securities Representative (Series 37 or 

38) 

Additionally, persons who hold (or 

have held) certain principal-level 

registration categories would be 

qualified to register as an Operations 

Professional without passing the 

Operations Professional examination. 

Most principal-level qualification 

examinations have a prerequisite 

examination requirement that is 

satisfied with one of the representative 

qualification examinations listed above; 

however, FINRA also proposes to 

include principal-level qualification 

examinations that do not have a 

prerequisite, or have a prerequisite that 

can be met with a qualification 

examination not on the above list (e.g., 

Series 62), because it is likely such 

principals are familiar with the content 

to be covered in the Operations 

Professional qualification examination 

as a result of the requirements of their 

positions. Specifically, persons who 

hold the following principal-level 

registration categories, or who have held 

such registration categories within the 

two years immediately prior to 

registering as an Operations 

Professional, would be qualified to 

register as an Operations Professional 

without passing the Operations 

Professional qualification examination: 

• Registered Options Principal (Series 

4) 

• General Securities Sales Supervisor 

(Series 9/10) 

• Compliance Officer (Series 14) 

• Supervisory Analyst (Series 16) 

• General Securities Principal (Series 

24) 

• Investment Company Products/ 

Variable Products Principal (Series 26) 

• Financial and Operations Principal 

(Series 27) 

• Introducing Broker-Dealer Financial 

and Operations Principal (Series 28) 

• Municipal Fund Securities Limited 

Principal (Series 51) 

• Municipal Securities Principal 

(Series 53) 

The proposed exception would not 

apply to persons whose eligible 

registrations are revoked pursuant to 

FINRA Rules 8310 (Sanctions for 

Violation of the Rules) or 8320 (Payment 

of Fines, Other Monetary Sanctions, or 

Costs; Summary Action for Failure to 

Pay), suspended or otherwise deemed 

inactive.8

FINRA notes that covered persons are 

generally acting in a supervisory 

position, so many persons will already 

hold one of the eligible registrations that 

would qualify for the exception to the 

Operations Professional examination 

requirement. As noted in Section A. 

above, entry-level operations personnel 

would not typically be subject to the 

proposed requirements for Operations 

Professionals. 

E. Continuing Education Requirements 

for Operations Professionals 

The proposed rule change would 

require that individuals registered as 

Operations Professionals be subject to 

FINRA’s Regulatory Element and Firm 

Element continuing education 

requirements as set forth in proposed 

FINRA Rule 1250 (Continuing 

Education Requirements).9 The 

continuing education elements for this 

registration category would provide 

more specific learning materials 

appropriate for an Operations 

Professional, given the breadth of 

functions that are covered by this 

registration requirement. 

The Regulatory Element program for 

Operations Professionals would provide 

instruction for Operations Professionals 

to: (1) Maintain and improve 

understanding of the regulatory and 

ethical aspects associated with the 

covered functions; (2) identify 

suspicious activities and/or red flags 

that could harm a customer, a firm, 

issuers of securities or the integrity of 

the marketplace; (3) maintain and 

improve knowledge and understanding 

of the covered functions; and (4) assist 

the Operations Professionals in keeping 

up with changes in the industry and 

regulations that impact their work. 

Operations Professionals would be 

required to complete scenario-based 

modules based on the key content 

themes of the Operations Professional 

qualification examination, as described 

in Section C. above. The breadth and 

depth of coverage of the modules would 

be determined through the use of 

existing industry standards currently 

used to develop continuing education 

content and would include input and 

advice from operations professionals 

active in the securities industry. 

Individuals would be expected to 

complete the Regulatory Element 

continuing education requirement two 

years after passing the qualification 

examination and then every three years 

thereafter. 

Individuals who avail themselves of 

the proposed exception to the 

Operations Professional qualification 

examination requirement with an 

eligible registration described above 

would be subject to the Regulatory 

Element program appropriate for such 

other registration category. For example, 

a person who registers as an Operations 

Professional by holding a General 

Securities Representative registration 

(Series 7) under the exception would be 

subject to the S101 continuing 


Emcdonald on DSK2BSOYB1PROD with NOTICES
15016 Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices 

10NASD Rule 1120(b) (Continuing Education 

Requirements) is currently limited to registered 

persons who have direct contact with customers in 

the conduct of the firm’s securities sales, trading 

and investment banking activities, any person 

registered as a research analyst pursuant to NASD 

Rule 1050, and to the immediate supervisors of 

such persons. The proposed amendments are 

reflected in the new FINRA rule governing 

continuing education, FINRA Rule 1250, which is 

being proposed as part of this rule change. See 

Section G. below. 

11Persons with an active eligible registration who 

request Operations Professional registration will be 

automatically granted Operations Professional 

registration once they submit such request via Form 

U4 in CRD, regardless of when such persons apply 

for Operations Professional registration (provided 

there are no existing deficiencies). See also supra 

note 7. 

12 If a person elects to register with FINRA as an 

Operations Professional by newly qualifying in an 

eligible registration (i.e., does not have an active 

eligible registration when he or she requests 

Operations Professional registration via Form U4 in 

CRD), such person must contact FINRA upon 

passing the alternative examination to request that 

the eligible registration be applied to the request for 

Operations Professional registration. This would 

include, for example, a person who requests both 

the Operations Professional and General Securities 

Representative registrations via Form U4 in CRD 

and passes the Series 7 examination. Such person 

would be required to contact FINRA to alert FINRA 

staff that the General Securities Representative 

registration will be used as an eligible registration 

to qualify as an Operations Professional. 

13When a person requests Operations 

Professional registration via Form U4 in CRD during 

the 60-day identification period, an examination 

window for the Operations Professional 

qualification examination will open in CRD that 

expires 12 months from the effective date of the 

proposed rule change. After the 60-day 

identification period, the examination window for 

the Operations Professional qualification 

examination will open for the standard 120 days. 

14Members should note that the standard 

examination window in CRD applicable to a 

particular registration category will apply 

notwithstanding the 12-month examination 

window established for purposes of the transition 

period. The 12-month examination window is only 

for the Operations Professional qualification 

examination. Thus, a person who elects to qualify, 

for example, by passing the Series 7 examination 

would have only 120 days to take and pass the 

Series 7 examination once the window for such 

examination is opened in CRD. Members should 

plan accordingly so that associated persons are 

prepared to take the requisite examination within 

the prescribed window for that registration 

category, and that any requisite examination is 

passed before the expiration of the 12-month 

transition period for Day-One Professionals. 

education program in lieu of the 

Operations Professional Regulatory 

Element training, and a person who 

registers by holding a General Securities 

Principal registration (Series 24) would 

be subject to the S201 continuing 

education program in lieu of the 

Operations Professional Regulatory 

Element training. 

Operations Professionals also would 

be subject to Firm Element training. To 

implement this change, as further 

discussed in Section G. below, the 

proposed rule change would include 

Operations Professionals in the 

definition of ‘‘covered registered 

persons’’ in proposed FINRA Rule 1250, 

and would require that firms deliver 

Firm Element training to Operations 

Professionals subject to the new 

registration and qualification 

requirements.10

F. Implementation of the Proposed Rule 

Change 

As noted above, any person who 

meets the depth of personnel criteria 

described in Section A. and is engaged 

in one or more covered functions 

described in Section B. would be 

required to register with FINRA as an 

Operations Professional. Such persons 

would be required to register by doing 

one of the following, as applicable: (1) 

Requesting Operations Professional 

registration via Form U4 in CRD and 

passing the Operations Professional 

qualification examination; (2) requesting 

Operations Professional registration via 

Form U4 in CRD and opting in to such 

registration based on their holding, or 

having held within the past two years, 

an eligible registration; 11 or (3) 

requesting Operations Professional 

registration via Form U4 in CRD, 

registering with FINRA in an eligible 

registration category and opting in to 

Operations Professional registration 

based on such eligible registration.12

Members must identify persons 

required to register as an Operations 

Professional as of the effective date of 

the proposed rule change (‘‘Day-One 

Professionals’’) (i.e., persons who meet 

the depth of personnel criteria and are 

engaged in one or more covered 

functions as of the effective date of the 

proposed rule change). FINRA is 

proposing a 60-day identification period 

beginning on the effective date of the 

proposed rule change during which 

Day-One Professionals must request 

registration as an Operations 

Professional via Form U4 in CRD. 

During this 60-day period, a Day-One 

Professional may function in the 

capacity of an Operations Professional. 

Day-One Professionals who are 

identified during the 60-day period and 

must pass the Operations Professional 

examination (or an eligible qualification 

examination) to qualify (i.e., persons 

who do not hold, and have not within 

the past two years held, an eligible 

registration) would be granted 12 

months beginning on the effective date 

of the proposed rule change to pass such 

qualifying examination, during which 

time such persons may function as an 

Operations Professional.13 To be eligible 

to function as an Operations 

Professional for the 12-month transition 

period, Day-One Professionals subject to 

an examination requirement must 

request Operations Professional 

registration via Form U4 in CRD during 

the 60-day identification period and 

pass the Operations Professional 

examination (or an eligible qualification 

examination) before the expiration of 12 

months from the effective date of the 

proposed rule change.14 If a Day-One 

Professional does not pass an acceptable 

examination by the expiration of the 12- 

month transition period, such person 

must cease functioning as an Operations 

Professional. 

The 12-month transition period to 

pass a qualification examination would 

only apply to Day-One Professionals. 

Any person who is not subject to the 

registration requirements for Operations 

Professionals as of the effective date of 

the proposed rule change (i.e., a person 

who does not meet the depth of 

personnel criteria and/or is not engaged 

in one or more covered functions as of 

the effective date, or persons hired after 

the effective date of the proposed rule 

change who will be placed in such 

roles) (‘‘non-Day-One Professionals’’) 

would be required to register as an 

Operations Professional and, if 

applicable, pass the Operations 

Professional qualification examination 

(or an eligible qualification 

examination), prior to engaging in any 

activities that would require such 

registration. The 60-day identification 

period and the 12-month transition 

period do not affect the obligations of 

non-Day-One Professionals to register as 

an Operations Professional prior to 

engaging in functions that would 

require such registration. However, any 

non-Day-One Professional associated 

with a non-clearing member who must 

pass the Operations Professional 

qualification examination (or an eligible 

qualification examination) to obtain 

registration would be granted a grace 

period of 120 days beginning on the 

date such person requests Operations 

Professional registration via Form U4 in 

CRD to pass such qualifying 

examination, during which time such 

person may function as an Operations 

Professional. FINRA believes that 

allowing a person associated with a 

non-clearing member to function as an 

Operations Professional for a 120-day 

period will enable these firms to manage 

their more limited staffs to comply with 

the proposed registration requirements 

without disrupting those firms’ 

obligations to customers. Non-Day-One 

Professionals associated with a selfclearing or clearing member would not 

have the benefit of the 120-day grace 

period and would be required to register 


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15The Council is comprised of up to 16 industry 

members from broker-dealers, representing a broad 

cross section of industry firms, and representatives 

from SROs as well as liaisons from the SEC and the 

North American Securities Administrators 

Association (‘‘NASAA’’). 

16The proposed rule change would not delete 

Incorporated NYSE Rule 345A (and its 

Interpretation). Rather, FINRA expects to address 

Incorporated NYSE Rule 345A (and its 

Interpretation) and propose additional changes to 

proposed FINRA Rule 1250 as part of the 

consolidated registration and qualification rules. 

See Regulatory Notice 09–70 (December 2009). 

17A registered person will be required to retake 

the Regulatory Element in the event such person is: 

(1) Subject to a statutory disqualification as defined 

by Section 3(a)(39) of the Exchange Act; (2) subject 

to a suspension or imposition of a fine of $5,000 

or more by an SRO or other securities governmental 

agency; or (3) ordered to do so as a sanction in a 

disciplinary action by an SRO or other securities 

governmental agency. 

18 15 U.S.C. 78o–3(b)(6). 

19All references to the commenters under this 

Item are to the commenters as listed in Exhibit 2b. 

20ACLI, AIC, Bank of America, Crowell, ESI, 

Horace Mann, IPA, IRI, Modern Woodmen, Navidar, 

NSCP, PSD, Quasar, UPFS, Scottrade, SIFMA, 

Sutherland, TIAA, Wellington and Wells Fargo. 

21Mutual Trust. 

as an Operations Professional prior to 

engaging in activities that would require 

such registration. 

Members would be responsible for 

tracking and monitoring their associated 

persons to ensure that such persons are 

registered, and conducting their 

activities, in compliance with the time 

frames described above. 

G. FINRA Continuing Education Rule 

The proposed rule change would 

adopt NASD Rule 1120 (Continuing 

Education Requirements) as new FINRA 

Rule 1250 (Continuing Education 

Requirements). In addition to the 

proposed change noted in Section E., 

which would expand the scope of 

‘‘covered registered persons’’ subject to 

the Firm Element to include persons 

registered as Operations Professionals, 

the proposed rule change would make 

additional minor changes to NASD Rule 

1120 to update cross-references and 

reflect the conventions of the 

consolidated FINRA Rulebook. 

NASD Rule 1120 and Incorporated 

NYSE Rule 345A were adopted in 1995 

in response to the recommendation of a 

task force, which subsequently became 

the Securities Industry Regulatory 

Council on Continuing Education (the 

‘‘Council’’),15 to create uniform 

continuing education requirements in 

the securities industry. As advised by 

the Council, the continuing education 

requirements include a Regulatory 

Element and a Firm Element. The NASD 

and Incorporated NYSE rules are nearly 

identical in keeping with the goals of 

the Council to create uniform 

continuing education requirements.16

The Regulatory Element consists of 

periodic computer-based training on 

regulatory, compliance, ethical, 

supervisory subjects and sales practice 

standards. A registered person is 

required to participate and complete a 

designated Regulatory Element within a 

120-day period that commences with 

the second anniversary of such person’s 

initial securities registration, and 

reoccurs every three years thereafter for 

as long as such person remains in the 

securities business. Failure to complete 

the Regulatory Element will result in a 

registered person’s registration 

becoming inactive and such person 

cannot conduct a securities business on 

behalf of the member until the 

requirement is met.17

The Firm Element requirements 

currently apply to any person registered 

with a member who has direct contact 

with customers in the conduct of the 

member’s securities sales, trading and 

investment banking activities, any 

person registered as a research analyst 

pursuant to NASD Rule 1050, and to the 

immediate supervisors of such persons 

(collectively, ‘‘covered registered 

persons’’). However, as noted above, the 

proposed rule change would expand the 

scope of ‘‘covered registered persons’’ 

subject to the Firm Element to include 

persons registered as Operations 

Professionals. The Firm Element 

consists of annual, member-developed 

and administered training programs 

designed to keep covered registered 

persons current regarding securities 

products, services and strategies offered 

by the member. The Firm Element 

requires members to annually evaluate 

and prioritize their training needs (i.e., 

conduct a Needs Analysis and develop 

a written plan). In planning, developing 

and implementing the Firm Element 

training, each member must take into 

consideration its size, organizational 

structure, scope of business, types of 

products and services it offers, as well 

as regulatory developments and the 

performance of its covered registered 

persons in the Regulatory Element. 

FINRA may require a member to 

provide specific training to a member’s 

covered registered persons as FINRA 

deems appropriate. Each member must 

administer its Firm Element Continuing 

Education Program in accordance with 

its annual Needs Analysis and written 

plan, and must maintain records 

documenting the content of the program 

and completion of the program by 

covered registered persons. 

FINRA will announce the 

implementation date of the proposed 

rule change in a Regulatory Notice to be 

published no later than 90 days 

following Commission approval. The 

implementation date will be no later 

than 240 days following Commission 

approval. 

2. Statutory Basis 

FINRA believes that the proposed rule 

change is consistent with the provisions 

of Section 15A(b)(6) of the Act,18 which 

requires, among other things, that 

FINRA rules must be designed to 

prevent fraudulent and manipulative 

acts and practices, to promote just and 

equitable principles of trade, and, in 

general, to protect investors and the 

public interest. FINRA believes the 

proposed rule change to expand 

FINRA’s registration and continuing 

education requirements to Operations 

Professionals will help ensure that 

investor protection mechanisms are in 

place in all areas of a member’s business 

that could harm the member, a 

customer, the integrity of the 

marketplace, or the public. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

FINRA does not believe that the 

proposed rule change will result in any 

burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Act. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

The proposed rule change was 

published for comment in Regulatory 

Notice 10–25 (May 2010) (the ‘‘Notice’’). 

Forty-nine comment letters were 

received in response to the Notice.19 A 

copy of the Notice is attached as Exhibit 

2a. A list of the comment letters 

received in response to the Notice is 

attached as Exhibit 2b. Copies of the 

comment letters received in response to 

the Notice are attached as Exhibit 2c. 

Below is a summary of the comments 

and FINRA’s responses. 

General Concerns Regarding the Scope 

of the New Registration Category 

Certain commenters generally 

opposed the proposed rule change 

stating that it is overly broad and 

ambiguous, poorly defined, imposes 

requirements that are unnecessary to 

meet FINRA’s stated objectives and may 

have unintended consequences.20 Other 

commenters argued that licensing 

requirements do not make people 

honest or increase their efficiency or 

proficiency21 and that no amount of 


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22AIC and Wells Fargo. 

23AIC and PSD. 

24Crowell, IRI, M. Griffith, PSD and RiverStone. 

25Crowell and Wellington. 

26 IRI, Nationwide, PSD and Sutherland. 

27PSD, RiverStone and Wells Fargo. 

28NPB and RiverStone. 

29TIAA and Wells Fargo. 

30 17 CFR 240.3a4–1. 

31PSD, Sutherland and TIAA. 

32 IPA. 

33 IRI, Nationwide, NSCP and TIAA. 

34Wellington and Wells Fargo. 

35See Regulatory Notice 09–70 (December 2009) 

for a discussion of the Principal Operations Officer 

registration category. See also infra note 61 and 

accompanying text. 

licensing will change failures of human 

character.22 Two commenters noted that 

frauds are almost always committed on 

the frontlines by individuals who are 

already licensed.23 Additionally, certain 

commenters opposed registration 

requirements for covered persons 

because their work is already supervised 

and approved by a firm principal24 and 

holding principals accountable for 

failures in these areas would be more 

cost effective.25 Numerous commenters 

proposed an alternative approach under 

which firms would delegate each of the 

covered functions to existing registered 

principals of the firm and reflect such 

assignments in the firm’s written 

supervisory procedures (‘‘WSPs’’).26

Other commenters noted the proposed 

rule change is unnecessary because 

people who handle customer funds go 

through background checks and 

fingerprinting.27

In response, FINRA notes that covered 

persons are performing regulated 

broker-dealer functions on behalf of a 

member, and believes such persons 

should be subject to registration, 

examination and continuing education 

requirements to ensure that they attain 

and maintain specified levels of 

competence and knowledge to properly 

carry out their responsibilities to the 

member and its customers. FINRA does 

not agree that principal approval or 

background checks and fingerprinting 

are sufficient safeguards to ensure 

members’ operations departments are 

functioning in a manner that will 

promote investor protection to the 

highest level possible. The proposed 

rule change is intended, among other 

things, to increase covered persons’ 

awareness and knowledge that they are 

operating in a regulated environment 

designed to protect investors’ interests 

and the integrity of the operations of a 

broker-dealer. In addition, the proposed 

rule will help to ensure that any 

fraudulent activity that may start in the 

front office of a firm cannot be 

processed without passing through a 

properly registered and trained 

Operations Professional. Requiring 

registration, testing and training for 

Operations Professionals should further 

strengthen members’ compliance with 

securities laws, rules and regulations. 

Certain commenters expressed 

concern that requiring registration of 

covered persons will dramatically limit 

the pool of candidates that may be 

considered for hiring when personnel 

changes occur in operations 

departments.28 As an initial matter, 

FINRA notes that it is always correct to 

state that conduct once regulated 

becomes constrained by that regulation, 

but that observation by itself is not a 

credible reason not to engage in the 

regulation. The proper test is whether 

that regulation is appropriately tailored 

and needed in furtherance of the 

interests of investors and the securities 

markets. The immediate prior paragraph 

restates those interests, and the depth of 

personnel as set forth in Section A. of 

the Purpose section demonstrates the 

appropriate tailoring of the proposed 

regulation. Finally, Section D. of the 

Purpose section indicates that many 

candidates for positions that would 

require registration may possess an 

eligible registration and qualify for an 

exception from the requirement to take 

the Operations Professional 

qualification examination. 

Two commenters suggested FINRA 

reduce the obligations for Operations 

Professionals and specify that not all of 

the rules applicable to associated 

persons apply to such persons since 

they are generally not customer-facing 

personnel.29 Certain other commenters 

sought clarification that the proposed 

rule change does not eliminate or limit 

the ability of a securities issuer and its 

associated persons to rely on the issuer 

exemption under Exchange Act Rule 

3a4–1 30 to avoid broker-dealer 

registration requirements.31 Another 

commenter requested that FINRA 

provide guidance on the impact of the 

proposed rule change on FINRA Rule 

2310 (Direct Participation Programs) 

and clearly state that the salaries of 

Operations Professionals be categorized 

as ‘‘non-transaction-basedcompensation’’ and that there is a 

blanket exception from ‘‘underwriting 

compensation’’ for Operations 

Professionals.32

FINRA does not agree that Operations 

Professionals should be subject to a 

limited set of rules. Covered persons are 

not only associated persons of a member 

but their activities are crucial enough to 

the business of a member to require 

registration with FINRA. The proposed 

rule change does not alter a person’s 

status as an associated person under 

Exchange Act Rule 3a4–1 or otherwise, 

nor does it address the definitions of 

certain types of compensation under 

FINRA rules. However, FINRA 

recognizes that additional guidance may 

be needed following the adoption of the 

proposed rule change and will address 

interpretive questions as needed, similar 

to FINRA’s approach to other regulatory 

initiatives with wide-ranging and novel 

impacts. 

Covered Persons for Inclusion in the 

New Registration Category 

Certain commenters requested 

clarification with respect to proposed 

FINRA Rule 1230(b)(6)(A)(i) regarding 

scope of the term senior management 

and whether this provision applies 

beyond senior managers with primary or 

direct responsibility over the covered 

functions.33 Two commenters advocated 

limiting the depth of personnel for the 

proposed rule change to a single 

category for senior management with 

responsibility over the covered 

functions, and requiring firms to 

maintain policies and procedures 

reasonably designed to ensure that 

operations personnel have an awareness 

of investor protection mechanisms in 

place at a firm.34

FINRA believes this provision is clear 

as originally proposed and, while 

FINRA understands titles may differ 

between firms, members should be able 

to identify operations personnel that 

would be subject to proposed Rule 

1230(b)(6)(A)(i) based on their functions 

and responsibilities as senior managers 

overseeing the covered functions. 

FINRA would consider any senior 

manager in the chain of command 

responsible for a covered function to be 

subject to the proposed rule, up to and 

including the Principal Operations 

Officer.35 FINRA does not agree that 

‘‘covered persons’’ should be limited to 

senior management with responsibility 

over the covered functions because the 

proposed registration category is 

intended to include other individuals 

who exercise supervisory and 

discretionary authority in direct 

furtherance of the covered functions. 

Accordingly, FINRA has not proposed 

changes to proposed FINRA Rule 

1230(b)(6)(A)(i). 

Proposed FINRA Rule 

1230(b)(6)(A)(ii) would include as 

covered persons supervisors, managers 

or other persons responsible for 

approving or authorizing work, 

including work of other persons, in 

direct furtherance of the covered 

functions. One commenter suggested the 

proposed rule explicitly state that 


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36Morgan Stanley. 37ESI, NFP, TIAA and UPFS. 38ACLI, NSCP, Quasar and Wells Fargo. 39ACLI. 40Morgan Stanley. 

41Schwab. 

42Scottrade. 

43ARM, TIAA and Wells Fargo. 

44Bank of America. 

45Bank of America, IPA, SIFMA and Wells Fargo. 

46Bank of America, TIAA and NSCP. 

47T. Rowe Price and Wells Fargo. 

48Bank of America and TIAA. 

49Bank of America. 

50SIFMA. 

51Scottrade. 

52Morgan Stanley and SIFMA. 

53Bank of America, FSI, NSCP, Scottrade, SIFMA 

and TIAA. 54TIAA. 55Martin Nelson. 56Quasar. 57See, e.g., NASD Rule 1060 (Persons Exempt 

from Registration). 

covered persons are limited to those 

persons with decision-making and/or 

oversight authority.36 Certain 

commenters requested that FINRA 

clarify what is meant by the phrase 

‘‘approve or authorize work.’’ 37 Other 

commenters stated that this provision is 

written too broadly; 38 creates potential 

for misinterpretation in determining 

how far up or down the reporting chain 

this registration requirement would 

apply; 39 could sweep in affiliate 

employees, mid or low level 

employees,40 third-party vendors 41 and 

margin clerks; 42 and that it should be 

limited to supervisors, managers or 

other persons responsible for primary 

oversight of covered functions, 

including managers for dual hat 

employees.43 One commenter suggested 

that FINRA revise this provision to 

clarify that supervisors and managers be 

senior members of their respective 

departments or units.44 Numerous 

commenters recommended deleting the 

phrase ‘‘work of other persons’’ because 

it is unclear.45

FINRA believes proposed FINRA Rule 

1230(b)(6)(A)(ii) is clear as proposed 

and notes that it consulted with 

industry representatives in developing 

the proposed rule change, including the 

definition and appropriate depth of 

personnel to be subject to the 

Operations Professional registration 

category. As noted above, FINRA 

believes members will be able to 

identify supervisors, managers or other 

persons responsible for approving or 

authorizing work in direct furtherance 

of the covered functions based on their 

functions and responsibilities. The 

phrases ‘‘approve or authorize work’’ 

and ‘‘work of other persons’’ are not legal 

terms of art but, rather, comport with 

commercially understood operating 

terms and do not require clarification. 

Accordingly, FINRA has not revised this 

provision as suggested by the 

commenters; however, FINRA proposes 

a minor modification to the original 

proposal by re-locating the phrase 

‘‘including the work of other persons’’ to 

streamline the provision, as reflected in 

Section A. of the Purpose section. 

As originally proposed in the Notice, 

FINRA Rule 1230(b)(6)(A)(iii) required 

registration as an Operations 

Professional for persons with the 

authority or discretion to commit the 

member’s capital in direct furtherance 

of the covered functions or to commit 

the member to any contract or 

agreement (written or oral) in direct 

furtherance of the covered functions. 

Certain commenters stated this 

provision is unclear and too farreaching 46 and noted it would capture 

persons who perform routine, daily 

activities, or enter into agreements 

consistent with firm policies that have 

no material impact on firm operations 

(including margin clerks, who often 

have flexibility to obligate firm capital 

up to certain limits).47 Two commenters 

noted that the provision should only be 

triggered if the contracts are sufficiently 

material to the firm.48 One commenter 

noted that it may be so broad as to 

require registration of junior associates 

if they sign or approve contracts, retain 

vendors or make clerical postings to the 

books of a member.49 Another 

commenter noted that this provision is 

inconsistent with the first two categories 

of covered persons, which focus on 

senior managers, supervisors and those 

who approve work in the covered 

functions.50 Another commenter 

requested clarification with respect to 

the term ‘‘firm capital’’ because it could 

sweep in persons who approve the 

payment of vendor invoices for services 

related to some aspect of a covered 

function.51 Two commenters noted it is 

unclear what individuals, other than 

those engaged in or supervising 

securities lending activities, the 

proposed third category of covered 

persons intends to cover and suggested 

certain amendments to clarify the 

proposal with respect to such persons.52

Based on the comments, FINRA has 

revised the third category of covered 

persons from the original proposal in 

the Notice, as discussed in Section A of 

the Purpose section. Under the revised 

proposal, FINRA Rule 1230(b)(6)(A)(iii) 

would require persons with the 

authority or discretion materially to 

commit a member’s capital in direct 

furtherance of the covered functions or 

to commit a member to any material 

contract or agreement (written or oral) 

in direct furtherance of the covered 

functions to register as an Operations 

Professional. FINRA purposefully did 

not limit the third category of covered 

persons to supervisors and managers 

because the capacity to make material 

discretionary decisions above a 

member’s pre-established spending 

guidelines and risk management 

policies under this provision is not 

confined to senior or supervisory 

personnel. 

Numerous commenters suggested that 

FINRA add language to the proposed 

rule to clarify, as stated in the Notice, 

that the proposed rule does not apply to 

persons who perform functions 

ancillary to a covered function or whose 

function is to serve a role that can be 

viewed as supportive of, or advisory to, 

the performance of a covered function, 

such as internal audit, legal or 

compliance personnel.53 One 

commenter further urged FINRA to add 

rule language to note that individuals 

performing quality assurance and 

quality control functions in direct 

furtherance of a covered function are 

similarly excluded.54 One commenter 

noted that registering clerical personnel 

only increases costs unnecessarily and 

creates hiring barriers for new 

applicants.55 One commenter requested 

that FINRA provide specific examples of 

activities it deems ministerial or clerical 

in nature, especially when such 

activities require Financial and 

Operations Principal review and control 

procedures.56

Based on the comments, and as noted 

in Section A. of the Purpose section of 

this rule filing, FINRA is proposing 

supplementary material .06 to the 

proposed rule to clarify that any person 

whose activities are limited to 

performing a function ancillary to a 

covered function, or whose function is 

to serve a role that can be viewed as 

supportive of or advisory to the 

performance of a covered function (e.g., 

internal audit, legal or compliance 

personnel who review but do not have 

primary responsibility for any covered 

function), or who engages solely in 

clerical or ministerial activities in a 

covered function would not be required 

to register as an Operations Professional. 

FINRA declines to provide examples of 

clerical and ministerial activities at this 

time, believing the term to be well 

understood in the industry;57 however, 

as noted above, FINRA will consider 

issuing additional guidance as needed 

regarding the categories of persons 

subject to the Operations Professional 

registration category. 

One commenter encouraged FINRA to 

clarify whether an Operations 


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58Pershing. 

59Crowell. 

60PSD, Sutherland and Wells Fargo. 

61 IRI and TIAA. 

62See supra note 5. 

63NSCP. 

64Commonwealth, Crowell, ESI, FSI, IPA, IRI, 

Modern Woodmen, Morgan Stanley, NFP, 

Northwestern Mutual, NSCP, PSD, TIAA, SIFMA, 

Sutherland, UPFS and WSFG. 

65Commonwealth, Crowell, ESI, FSI, IPA, IRI, 

Modern Woodmen, Morgan Stanley, NFP, 

Northwestern Mutual, NSCP, PSD, TIAA, SIFMA, 

Sutherland, UPFS and WSFG. 

66TIAA. 

67Morgan Stanley and NSCP. 

68Schwab. 

69PSD and Sutherland. 

70ESI, FSI, Horace Mann, Modern Woodmen, 

NFP, Scottrade, TIAA and UPFS. 

71Northwestern Mutual. 

72Bank of America and SIFMA. 

Professional must be supervised by a 

qualified supervisory principal.58

Another commenter requested 

clarification regarding whether a firm 

must assign or designate an Operations 

Professional and whether a person who 

is already a registered principal must 

register as an Operations Professional.59

As noted above, as registered persons, 

Operations Professionals will be subject 

to all FINRA rules applicable to 

associated persons and/or registered 

persons. Accordingly, pursuant to 

NASD Rule 3010(a)(5), each Operations 

Professional must be assigned to an 

appropriately registered 

representative(s) and/or principal(s) 

who shall be responsible for supervising 

that person’s activities. Additionally, 

FINRA expects that each member would 

have at least one registered Operations 

Professional, who often may be the 

member’s Financial and Operations 

Principal and/or the Principal 

Operations Officer. In this regard, 

neither principal registration, nor 

representative registration in another 

category, obviates the requirement for a 

covered person to register as an 

Operations Professional. As noted in 

Section D. of the Purpose section, there 

are numerous eligible registrations that 

would except such registered persons 

from the requirement to pass the 

Operations Professional qualification 

examination. 

Certain commenters inquired as to the 

proposed rule change’s relationship to, 

and consistency with, the proposals set 

forth in Regulatory Notice 09–70 60 and 

two commenters requested clarification 

regarding how the proposed 

requirement under Regulatory Notice 

09–70 that firms appoint a distinct 

Principal Operations Officer and a 

distinct Principal Financial Officer 

intersects with the proposed Operations 

Professional designation.61

The proposed rule change does not 

conflict with the proposals set forth in 

Regulatory Notice 09–70. The proposed 

rule change should be read as a separate 

registration requirement that will be 

added to the consolidated FINRA 

registration rules. To note, the proposed 

rule change would include persons 

engaged in or supervising stock loan/ 

securities lending activities that meet 

the depth of personnel as a covered 

person in Section A. above. FINRA also 

is proposing separate registration 

requirements for a ‘‘Securities Lending 

Representative’’ and a ‘‘Securities 

Lending Supervisor’’ in Regulatory 

Notice 09–70; consequently, firms 

should be aware of both sets of 

proposed requirements.62 With respect 

to the proposed requirements in 

Regulatory Notice 09–70 for Principal 

Operations Officers and Principal 

Financial Officers, such persons likely 

would be required to register as an 

Operations Professional, depending on 

whether they meet the criteria of a 

covered person as described in Section 

A. of the Purpose section. The 

requirement for a covered person to 

register as an Operations Professional 

applies regardless of any other, separate 

registration requirements; however, 

such other registration may be used as 

an eligible registration to qualify a 

covered person for an exception from 

the requirement to take the Operations 

Professional qualification examination. 

One commenter noted the proposed 

rule change could have costly and 

burdensome implications regarding 

state registration and licensing so 

FINRA should be as clear as possible in 

defining who is covered under the 

proposed rule change.63 As noted above, 

FINRA believes the definitions of 

covered persons are sufficiently clear 

and will provide additional guidance as 

needed regarding the scope of persons 

subject to the new requirements. 

Covered Functions for Inclusion in the 

New Registration Category 

Numerous commenters stated that the 

covered functions as proposed in the 

Notice are too broad, unclear and 

inconsistent, and will incur unnecessary 

costs for firms.64 The commenters 

requested more precise descriptions of 

the covered functions.65 One 

commenter requested that FINRA clarify 

that the covered functions apply only to 

activities performed by or on behalf of 

a firm’s securities and investment 

banking business.66 Two commenters 

urged FINRA to group dependent 

technology-related covered functions 

into a single entry.67 Another 

commenter suggested that certain 

functions be deleted because they are 

roles that support other covered 

functions and are not stand-alone 

functions.68

Based on the comments, FINRA has 

made certain changes to the covered 

functions as originally proposed in the 

Notice to clarify and streamline the 

proposed rule. As a general matter, 

FINRA has revised the list of covered 

functions, as reflected in Section B. of 

the Purpose section, to group related 

functions together. Substantive 

revisions to the covered functions are 

described in detail below. 

To clarify the proposed rule change, 

FINRA has revised Rule 1230(b)(6)(B)(i) 

(as originally proposed in the Notice) by 

limiting this covered function to the 

‘‘[a]pproval of pricing models used for 

valuations,’’ instead of the 

‘‘[d]evelopment and approval of pricing 

models used for valuations.’’ FINRA also 

moved this provision to proposed Rule 

1230(b)(6)(B)(x). 

Two commenters requested a 

definition for the term ‘‘client onboarding’’ in proposed FINRA Rule 

1230(b)(6)(B)(v) (as originally proposed 

in the Notice).69 FINRA notes from its 

consultation with industry 

representatives in the rule development 

process that this is a term commonly 

used for this covered function and 

believes the proposed rule text provides 

sufficient clarity (i.e., ‘‘[c]lient onboarding (customer account data and 

document maintenance)’’). 

Numerous commenters requested 

clarification with respect to the scope of 

proposed FINRA Rule 1230(b)(6)(B)(vi) 

(as originally proposed in the Notice), 

the covered function addressing the 

‘‘[c]apturing of business requirements 

for sales and trading systems and any 

other systems related to the covered 

functions, and validation that these 

systems meet such business 

requirements.’’ 70 One commenter noted 

that this provision should apply only to 

individuals who ‘‘define and approve’’ 

business requirements, rather than 

individuals who ‘‘capture’’ such 

requirements.71 Similarly, to reduce the 

likelihood of inadvertently capturing 

personnel who merely prepare initial 

drafts of business requirements 

documents and who perform routine 

quality assurance or quality control 

testing, two commenters suggested 

incorporating the concepts of 

‘‘accepting’’ and ‘‘approving’’ in lieu of 

‘‘capturing’’ and ‘‘defining’’ for the 

covered functions that include these 

terms.72

Based on the comments, FINRA has 

revised the original proposal to 


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73ESI, FSI, Horace Mann, Modern Woodmen, 

NFP, Scottrade and UPFS. 

74Morgan Stanley. 

75Scottrade. 

76Bank of America. 

77NSCP. 

78 IPA. 

79SIFMA. 

80Bank of America and SIFMA. 

81Crowell and SIFMA. 

82 17 CFR 240.17a–3. 

83Rockfleet. 

84Morgan Stanley and SIFMA. 

85 IRI. 

eliminate the concept of ‘‘capturing’’ in 

proposed FINRA Rule 1230(b)(6)(B)(vi). 

The proposed rule change renumbers 

this provision as proposed FINRA Rule 

1230(b)(6)(B)(xiii) and includes as a 

covered function, ‘‘[d]efining and 

approving business requirements for 

sales and trading systems and any other 

systems related to the covered 

functions, and validation that these 

systems meet such business 

requirements.’’ FINRA has not 

eliminated the concept of ‘‘defining’’ 

from the covered functions because it 

believes covered persons who are 

responsible for defining and approving 

business system requirements are 

professional level staff that should be 

subject to registration with FINRA. The 

covered functions generally would not 

include a person who engages in 

administrative responsibilities, such as 

an initial drafter or a code developer. 

However, a person who supervises or 

approves such activities generally 

would be required to register as an 

Operations Professional. 

Additionally, certain commenters 

requested clarification with respect to 

proposed Rule 1230(b)(6)(B)(vii) (as 

originally proposed in the Notice), 

which includes as a covered function, 

‘‘[w]ith respect to the covered functions, 

defining and approving business 

security requirements and policies for 

information technology (including, but 

not limited to, systems and data).’’ 73

One commenter noted that this function 

should only require persons who 

‘‘approve’’ business requirements for 

systems and information technology to 

register so that the final approvals for 

technology requirements are performed 

by licensed Operations Professionals.74

FINRA has made minor changes to the 

original proposal with respect to Rule 

1230(b)(6)(B)(vii). The proposed rule 

change renumbers this provision as 

proposed FINRA Rule 1230(b)(6)(B)(xiv) 

and includes as a covered function, 

‘‘[d]efining and approving business 

security requirements and policies for 

information technology, including, but 

not limited to, systems and data, in 

connection with the covered functions.’’ 

As noted above, FINRA believes that 

covered persons engaged in defining 

and approving business security 

requirements and policies for 

information technology should be 

registered as Operations Professionals. 

One commenter requested 

clarification with respect to proposed 

Rule 1230(b)(6)(B)(viii) (as originally 

proposed in the Notice), which includes 

as a covered function, ‘‘[d]efining 

information entitlement policy in 

connection with the covered 

functions.’’ 75

Based on the comments and in line 

with the changes noted above, FINRA 

has revised Rule 1230(b)(6)(B)(viii). The 

proposed rule change renumbers this 

provision as proposed FINRA Rule 

1230(b)(6)(B)(xv) and includes as a 

covered function, ‘‘[d]efining and 

approving information entitlement 

policies in connection with the covered 

functions.’’ 

One commenter recommended that 

FINRA combine paragraphs (b)(6)(B)(vii) 

and (viii) (as originally proposed in the 

Notice) since both sections cover 

overlapping sets of supervisors in the 

Information Management area.76

Another commenter noted that 

proposed FINRA Rules 1230(b)(6)(B)(vi), 

(vii), (viii) and (xv) are not separate 

functions but are ancillary to other 

covered functions and may require 

managers from both the actual covered 

functions and these ancillary areas to 

register.77 One commenter requested 

clarification that FINRA Rules 

1230(b)(6)(B)(vi), (vii) and (viii) (as 

originally proposed in the Notice) are 

limited to only those individuals 

directly employed by the FINRA 

member.78 Another commenter 

suggested limiting these provisions to 

individuals responsible for ensuring 

that systems related to sales and trading 

and to covered functions meet business 

and regulatory requirements and 

‘‘information security’’ (firewalls, data 

access, and system entitlements in 

connection with the covered 

functions).79

FINRA believes that the proposed 

revisions to these provisions noted 

above clarify the proposed rule and is 

not proposing further changes at this 

time. FINRA notes that these covered 

functions should remain as separate 

items since they address different 

activities (e.g., defining, approving and 

validating business requirements for 

sales and trading systems or other 

systems relating to the covered 

functions vs. defining and approving 

entitlement policies in connection with 

the covered functions) and firms may 

have different internal reporting 

structures so that these activities are not 

part of the same area or subject to the 

same supervisory scheme. 

Certain commenters suggested 

deleting proposed Rule 

1230(b)(6)(B)(xv) (as originally proposed 

in the Notice), which includes as a 

covered function, ‘‘[p]osting entries to 

the books and records of a member in 

connection with the covered functions,’’ 

because it is ambiguous, too broad 80

and may sweep in clerical staff.81

Another commenter requested 

clarification regarding the term ‘‘books 

and records’’ and requested that FINRA 

add a reference to Exchange Act Rule 

17a–3 82 or MSRB Rule G–8.83 Two 

commenters recommended that FINRA 

revise this provision to tailor it to 

separate regulatory issues such as 

customer protection or financial 

responsibility concerns.84

FINRA has revised Rule 

1230(b)(6)(B)(xv) to clarify this covered 

function. The proposed rule change 

renumbers this provision as FINRA Rule 

1230(b)(6)(B)(xvi) and includes as a 

covered function, ‘‘[p]osting to a 

member’s books and records in 

connection with the covered functions 

to ensure integrity and compliance with 

the federal securities laws and 

regulations and FINRA rules.’’ 

One commenter noted that some of 

the covered functions may cause 

confusion with respect to other 

registration categories, including 

proposed FINRA Rules 1230(b)(6)(B)(ix) 

and (xiv) (as originally proposed in the 

Notice), the covered functions for 

‘‘[f]inancial controller (including general 

ledger)’’ and ‘‘[f]inancial regulatory 

reporting,’’ respectively, and the 

functions supervised by the financial 

and operations principal, and may 

overlap with the proposed designation 

of the Principal Operations Officer 

under Regulatory Notice 09–70.85 Based 

on the comment, FINRA has revised 

these items. The proposed rule change 

renumbers these items as proposed 

FINRA Rules 1230(b)(6)(B)(xi) and (xii), 

respectively, and includes as covered 

functions, ‘‘[f]inancial control, including 

general ledger and treasury’’ and 

‘‘[c]ontributing to the process of 

preparing and filing financial regulatory 

reports.’’ FINRA does not agree that the 

proposed rule change causes confusion 

with respect to other registration 

requirements. Members must determine 

whether the proposed registration 

requirements for Operations 

Professionals would apply to an 

associated person based on his or her 

functions and responsibilities 


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86SIFMA. 

87 IRI, PSD and Sutherland. 

88ACLI. 

89NSCP and ACLI. 

90NSCP. 

91FSI, M. Griffith, Navidar and PSD. 

92Modern Woodmen and Martin Nelson. 

93Harrison, NSCP, RMOA and Wells Fargo. 

94Commonwealth, ESI, FSI, Horace Mann, NFP, 

UFPS and WSFG. 

95Horace Mann, JRCO, Modern Woodmen, NSCP, 

RMOA, Rockfleet, UPFS and WSFG. 

96Rockfleet. 

97Rockfleet. 

98NSCP. 

99M. Griffith. 

100Schwab. 

101NASAA. 

102Freestone. 

103NSCP. 

104Northwestern Mutual and T. Rowe Price. 

105T. Rowe Price. 

notwithstanding any other, separate 

registration requirements. 

One commenter noted that the title of 

the proposed registration category is too 

narrow and not reflective of the covered 

functions. Alternatively, the commenter 

suggested that the registration category 

should be titled ‘‘Operations, Support or 

Securities Lending Professionals.’’ 86

FINRA believes that the proposed title 

for the new registration category, 

Operations Professionals, is appropriate 

and succinctly captures the individuals 

to which the proposed requirements 

would apply given the breadth of 

activities covered under the proposed 

rule change. 

Certain commenters requested 

clarification that ongoing insurance 

company functions relating to variable 

annuity contracts as well as other 

functions performed by insurance 

company staff are not included in the 

covered functions.87 FINRA does not 

intend to make any categorical 

exclusions from the covered functions. 

The proposed requirements will apply if 

a person meets the depth of personnel 

criteria and engages in one or more 

covered function on behalf of a member 

regardless of where they are employed. 

Operations Professional Qualification 

Examination 

One commenter noted that elements 

of the qualification examination and 

continuing education requirements have 

no relevance to the products and 

operations of limited purpose brokerdealers that comprise more than 50% of 

FINRA’s membership.88 Other 

commenters noted that the two areas of 

proposed examination coverage, 

‘‘essential product and market 

knowledge for an Operations 

Professional’’ and ‘‘knowledge 

associated with operations activities,’’ 

should be eliminated from the 

examination curriculum because they 

undercut FINRA’s premise that it will 

not be a ‘‘competency’’ examination and 

render the test extremely challenging for 

many operations personnel since they 

lack the background and experience to 

pass the examination and have little 

testing experience.89 Another 

commenter similarly noted that the 

proposed examination requirement 

could result in well-qualified employees 

losing their jobs and firms’ operations 

departments could have compromised 

functionality, and supervision (i.e., a 

‘‘brain drain’’) of qualified operations 

personnel, thus undermining the goals 

of the proposal.90

Numerous commenters stated that an 

examination is unnecessary because 

training and education for operations 

personnel should be addressed in a 

member’s WSPs 91 and registered 

principals are responsible for training 

operations personnel.92 To reduce cost 

burdens on firms, certain commenters 

recommended ongoing training 

requirements as an alternative to 

registration and testing of operations 

personnel.93 Certain other commenters 

noted that FINRA can address 

operations personnel through 

registration and continuing education 94

and an examination not based on 

competency serves no essential 

function.95 One commenter stated that 

the Series 27 and 28 examinations 

already test for the covered functions, so 

a new exam is a poor use of member 

firm fees and will unnecessarily delay 

implementation of the proposal.96

One commenter noted that based on 

the definition of a covered person, the 

Operations Professional qualification 

examination should be a principal-level 

examination with corresponding 

continuing education requirements.97

One commenter requested that FINRA 

publish a study outline for notice and 

comment prior to making the test 

effective.98 Another commenter 

recommended that FINRA offer the 

proposed examination as an optional 

test for people who want to learn about 

back-office, but not as a mandatory 

examination for Operations Professional 

registration.99

FINRA believes the qualification 

examination requirement is appropriate 

as proposed. The proposed examination 

is being tailored to test for basic 

securities industry knowledge and 

ethics. Although the examination will 

not test for proficiency with respect to 

the specific covered functions, FINRA 

believes there is value in an 

examination that tests for general 

knowledge about the securities industry. 

The proposed examination will be 

appropriately tailored to individuals 

subject to the proposed registration 

requirements. It is crucial for covered 

persons to understand their professional 

responsibilities, including key 

regulatory and control themes, as well 

as the importance of identifying and 

escalating red flags that may harm a 

firm, its customers, the integrity of the 

marketplace, or the public. 

Additionally, FINRA believes a 

representative-level examination is 

appropriate for Operations Professionals 

because the proposed registration 

category is based on functions 

performed by operations personnel and 

is not limited to supervisory or 

managerial staff (e.g., persons who fall 

within proposed FINRA Rule 

1230(b)(6)(A)(ii) and (iii)). 

One commenter suggested that FINRA 

modify the period for retaking the 

Operations Professional qualification 

examination if an applicant fails to 30 

days like the Series 55.100 FINRA does 

not intend to change its policy regarding 

the re-taking of qualification 

examinations for the proposed 

Operations Professional examination at 

this time. FINRA will reconsider the 

policy if it finds it to be a necessary step 

when the qualification examination for 

Operations Professionals is 

administered. 

Exception to Operations Professional 

Examination Requirement 

One commenter noted that the 

proposed exceptions are so numerous 

that they dilute the regulatory intent of 

the proposed rule change; instead, 

FINRA should grant a limited number of 

exceptions to current operations 

employees.101 One commenter 

recommended FINRA incorporate an 

exception for certain small firms.102 One 

commenter suggested that registered 

principals should be completely exempt 

from the proposed Operations 

Professional requirements; 103 other 

commenters suggested that the proposed 

rule change should only apply to 

currently unregistered persons because 

the potential costs and burdens 

involved with tracking and monitoring 

multiple registrations outweigh the 

benefits.104 One commenter suggested 

FINRA permit firms to identify any 

relied upon registration for the proposed 

exception in their WSPs instead of a U4 

amendment, as is required currently for 

any person in a supervisory role.105

Certain other commenters 

recommended a grandfather provision 

for experienced persons who have 

worked in operations areas for a certain 


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106Commonwealth. 

107FSI, PSD and Sutherland. 

108FSI, Modern Woodmen, NFP, UPFS and 

WSFG. 

109Nationwide and TIAA. 

110 IRI. 

111TIAA. 

112TIAA. 

113The Notice included as an eligible registration 

the General Securities Principal—Sales Supervisor 

Module (Series 23). FINRA has removed this 

examination from the list of eligible registrations. A 

person who passes the Series 9/10 and the Series 

23 may obtain the General Securities Principal 

(Series 24) registration, but a person who passes 

solely the Series 23 is not considered registered in 

any capacity. 

114See supra note 7. 

115 Great Nation. 

116ACLI. 

117SIFMA. 

118ACLI, A&P, ARM, Bank of America, Horace 

Mann, IRI, Nationwide, PSD, Sutherland and TIAA. 

119ESI, FSI, NFP, UPFS, Wells Fargo and WSFG. 

120Northwestern Mutual, Pershing and Wells 

Fargo. 

121AIC and Pershing. 

122ACLI and AIC. 

123NSCP, Pershing, Schwab, Scottrade and TIAA. 

124Pershing. 

125 IRI. 

126Scottrade and TIAA. 

127Zelman. 

time period (e.g., three 106 or five 107

years) prior to the implementation of the 

proposed rule.108 Two commenters 

requested that FINRA extend the 

proposed exception to registrations held 

beyond the two-year look back.109 One 

commenter noted that there are costs 

and burdens of a two-year look back 

without a concomitant benefit.110

Additionally, one commenter suggested 

that FINRA consider incorporating 

standards within its Qualification 

Examination Waiver Guidelines that 

will accommodate individuals that 

possessed an eligible registration within 

a reasonably recent time period and 

have been performing an Operations 

Professional role for a reasonable period 

of time.111 This commenter also 

suggested that FINRA finalize the 

permissive registration regime 

contemplated in Regulatory Notice 09– 

70 prior to implementing a new 

Operations Professional designation, 

which would provide firms and their 

personnel with the option to maintain 

licenses while the registered person 

occupies a non-registered position.112

FINRA believes the proposed rule 

change clearly articulates the exception 

to the Operations Professional 

qualification examination 

requirement.113 A primary purpose of 

the proposed qualification examination 

is to assess a covered person’s basic 

understanding of the securities industry 

and the requirement to take a 

registration examination serves to alert 

such person of the role he or she plays 

in this highly regulated environment. 

Thus, FINRA believes the eligible 

registrations (and corresponding 

examinations) serve as a valid proxy for 

the Operations Professional examination 

requirement. 

FINRA believes the two-year look 

back for the eligible registrations is 

appropriate and has not revised the 

proposal to extend this time period. The 

proposed look back is based on the 

window during which an associated 

person remains eligible to re-activate his 

or her registration based on previously 

qualifying for and holding such 

registration. A person who qualifies for 

the proposed exception based on their 

having held an eligible registration 

within the two years immediately prior 

to registering as an Operations 

Professional would be required to first 

re-activate such eligible registration 

prior to requesting Operations 

Professional registration.114 Under 

NASD Rules 1021 and 1031, members 

are permitted to maintain or make 

application for registration as a 

registered principal or registered 

representative for a person who 

performs back-office operations, among 

other things. As such, firms are not 

currently prohibited from carrying 

registrations for back-office personnel. 

FINRA has determined not to 

incorporate a grandfather provision for 

previously unregistered operations 

personnel. FINRA believes that all 

covered persons benefit from an 

examination requirement even if they 

have been working in the same position 

for an extended period. As noted above, 

the proposed Operations Professional 

examination will not test on specific job 

functions but will focus on general 

securities industry knowledge and key 

regulatory themes. 

Continuing Education 

Certain commenters encouraged 

FINRA to clarify whether the proposal 

requires currently registered principals 

to take both the S101 continuing 

education module and the S201 115 and 

requested that FINRA refine the 

continuing education requirements to 

reflect FINRA’s diverse membership.116

As stated in the Notice and Section E. 

of the Purpose section, individuals who 

avail themselves of the proposed 

exception to the Operations Professional 

qualification examination requirement 

with an eligible registration would be 

subject to the Regulatory Element 

program appropriate for such other 

registration category. FINRA believes 

the proposed continuing education 

requirements for Operations 

Professionals are clear and notes that 

such requirements will be appropriately 

suited for those subject to registration, 

similar to the continuing education 

training for other FINRA registration 

categories. 

Outsourced and Shared Functions 

One commenter requested 

confirmation that FINRA does not 

intend to alter indirectly the definition 

of ‘‘associated person’’ or the existing 

regulatory guidance on outsourcing 

arrangements with the proposed rule 

change.117 Numerous commenters 

requested clarification that covered 

persons are limited to persons who have 

been empowered by a broker-dealer to 

oversee the covered functions and 

would not include individuals who 

perform operations functions for 

affiliated entities, outsourced operations 

functions for a third-party service 

provider or supervisors within a large, 

diversified financial services 

organization who are far-removed from 

a member’s securities business.118

Certain commenters requested 

clarification with respect to who must 

register where clearing and introducing 

firms share responsibility for operations 

functions (‘‘shared functions’’) 119 and 

whether such persons would be 

considered associated persons of both 

the introducing and clearing firms.120

Several commenters suggested that an 

exemption be provided when covered 

functions are performed by another 

registered broker-dealer, bank, 

investment advisor, foreign entity 121 or 

affiliated insurance company.122 Given 

a member’s obligation to supervise any 

outsourced activity, numerous 

commenters stated that it should be 

sufficient for FINRA to confine 

application of the proposed registration 

and examination requirements to 

‘‘employees’’ of the member.123 One 

commenter questioned the legal 

ramifications that would result from 

requiring the registration of vendor 

employees with more than one 

member.124 Certain commenters 

requested clarification with respect to 

how the proposed rule change affects 

Office of Supervisory Jurisdiction 

(‘‘OSJ’’) requirements relating to 

currently outsourced activities 125 and 

back-office and support locations.126

One commenter stated the proposed 

rule change would place an unfair 

burden on small firms that outsource 

many of the covered functions.127

As noted above, FINRA believes 

anyone who meets the criteria of a 

covered person and engages in one or 

more of the covered functions on behalf 

of a member must register as an 


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128FINRA replaced NASD Rule 3230 (Clearing 

Agreements) and NYSE Rule 382 (Carrying 

Agreements) with new consolidated FINRA Rule 

4311 (Carrying Agreements). See Securities 

Exchange Act Release No. 63999 (March 1, 2011) 

(Order Approving File No. SR–FINRA–2010–061). 

129See supra note 61 and accompanying text. 

130TIAA. 

131Crowell, Freestone, Martin Nelson, Mutual 

Trust, Navidar, RiverStone, Wellington and Zelman. 

132FirstBank PR. 

133See supra note 128 and accompanying text. 

134ARM, Bank of America, Commonwealth, ESI, 

FSI, Horace Mann, Modern Woodmen, M. Griffith, 

Morgan Stanley, NFP, NSCP, Scottrade, SIFMA and 

WSFG. 

135Nationwide, UPFS and Wells Fargo. 

136ARM, Bank of America, Commonwealth, ESI, 

FSI, Horace Mann, Modern Woodmen, M. Griffith, 

Morgan Stanley, NFP, NSCP, Scottrade, SIFMA and 

WSFG. 

137Schwab. 

138Schwab, SIFMA and TIAA. 

139 IRI, Nationwide, NSCP, Scottrade and Wells 

Fargo. 

140Morgan Stanley. 

141ARM, Bank of America, PSD, Schwab, 

Scottrade, Sutherland and Wells Fargo. 

142Morgan Stanley and SIFMA. 

Operations Professional, regardless of 

whether such person works internally at 

a member, an affiliate or third-party 

service provider. Also as previously 

noted, the proposed rule change does 

not alter the definition of an ‘‘associated 

person’’ but rather imposes registration, 

qualification examination and 

continuing education requirements on 

persons who meet the depth of 

personnel criteria and engage in one or 

more of the covered functions on behalf 

of a member. The proposed registration 

category is function-based so persons 

are not shielded from the requirements 

based on their job title or employment 

by an entity other than a member. 

Additionally, FINRA notes that the 

proposed rule change would apply to all 

members regardless of firm size. FINRA 

reminds members that the depth of 

personnel included as covered persons 

generally is focused on positions with 

higher-level responsibilities, so entry 

level staff will likely not be required to 

register. 

With respect to clearing arrangements 

and consistent with Notice to Members 

05–48, a covered person would not be 

considered an associated person of both 

the introducing and clearing firms based 

solely on functions performed pursuant 

to a carrying agreement approved under 

FINRA Rule 4311 (Carrying 

Agreements),128 so FINRA would not 

expect dual registration as an 

Operations Professional in such cases. 

However, as noted above, FINRA 

expects each member will designate at 

least one Operations Professional, who 

often may be the Financial and 

Operations Principal and/or the 

Principal Operations Officer.129

One commenter suggested that 

treating persons that fall within the 

covered categories as associated persons 

of a member will impact state law 

prohibitions on dual registration and 

vendor agreements.130 FINRA has stated 

throughout this filing the need for this 

proposed rule change and its belief that 

the proposal is appropriately tailored to 

meet its stated objectives. FINRA 

believes it is, therefore, required 

additional regulation. That being the 

case, ill-defined collateral effects that 

can be avoided by a member do not 

serve as a reason to modify or negate 

such proposed rulemaking. Finally, 

FINRA already views the persons 

treated as covered persons in the 

covered functions, and indeed all nonclerical persons reporting to such 

covered persons, as associated persons 

irrespective of this proposed rule. 

Small Firms Concerns 

Numerous commenters noted the 

proposed rule change places an undue 

burden on, unnecessarily increases costs 

for, and is anticompetitive for small 

firms with no apparent benefit to the 

public.131 One commenter noted the 

proposal is appropriate only in its 

application to personnel and brokerdealers that handle customer accounts, 

customer funds and/or securities.132

FINRA does not agree that small firms 

would be overly burdened by the 

proposed rule change since almost all 

other FINRA registration requirements 

apply to small firms and do not provide 

an exemption for personnel performing 

activities that would require registration 

based on a firm’s limited business. 

FINRA also anticipates that many 

persons who would be subject to the 

new Operations Professional registration 

category would qualify for the proposed 

exception from the qualification 

examination based on existing 

registrations, and, as noted above, 

FINRA would not assess a separate 

registration fee for persons relying on 

the proposed exception to register as 

Operations Professionals. Moreover, the 

impact of the proposed rule change is 

expected to be minimal as the majority 

of the covered functions are generally 

performed by the carrying and clearing 

firm and, as noted above, a covered 

person would not be considered an 

associated person of both the 

introducing and clearing firms based 

solely on functions performed pursuant 

to a carrying agreement approved under 

FINRA Rule 4311 (Carrying 

Agreements),133 so FINRA would not 

expect dual registration as an 

Operations Professional in such cases. 

However, as further detailed in Section 

F. above, in light of the limitations on 

personnel at certain smaller firms, 

FINRA is proposing a 120-day grace 

period for covered persons associated 

with a non-clearing member to 

transition into the proposed registration 

category. 

Implementation of the Proposed Rule 

Change 

Numerous commenters suggested that 

the proposed transition period of six to 

nine months for persons acting as 

Operations Professionals as of the 

effective date of the proposed rule 

change is insufficient for firms to fully 

comply because a significant number of 

personnel will need to become 

registered. The commenters noted that 

firms will likely need to phase-in such 

persons’ preparation for, and taking of, 

the qualification examination to 

mitigate the impact on customer service 

and operational functions.134 Also, 

certain commenters suggested that 

personnel may not pass the qualification 

examination on the first attempt since 

good test preparation services may not 

be available and certain operations 

personnel may not have test-taking 

skills.135 The commenters suggested 

extending the transition period to 

between 12 to 18 months 136 or up to 24 

months.137 Other commenters noted 

that all persons should have the benefit 

of the transition period regardless of 

when they begin work in a covered 

function.138

Certain commenters suggested that 

persons who begin work as Operations 

Professionals following the effective 

date of the proposed rule change (i.e., 

new hires or associated persons who 

meet the depth of personnel and transfer 

into a covered function) should be 

granted a grace period to transition into 

the proposed registration category.139

According to one commenter, subjecting 

these persons to the proposed licensing 

regime immediately undercuts the 

purpose of the transition period and 

may chill hiring of operations personnel 

while the transition period is in 

effect.140 Numerous commenters 

recommended a 90-day grace period for 

new hires or those who transition into 

a covered function, consistent with 

current NASD Rule 1021(d), which 

generally allows a registered 

representative to act in a principal 

capacity for 90 days while preparing for 

an applicable exam.141 Two commenters 

suggested a 120-day grace period for 

personnel who transition into a covered 

function after the transition period has 

expired, conditioned on supervision by 

a licensed Operations Professional.142


Emcdonald on DSK2BSOYB1PROD with NOTICES
Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices 15025 

143Wells Fargo. 

144Mutual Trust. 

145Wellington. 

146 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3The purpose of Amendment No. 1 was to (i) 

remove the proposal to waive PAR Official Fees for 

February 2011 from the filing; and (ii) provide 

additional details for the statutory basis for waiving 

the fees in all classes except Volatility Index 

Options for March 2011. 

One commenter suggested a 180-day 

grace period.143

Based on the comments, FINRA has 

amended the transition period that was 

proposed in the Notice. As further 

detailed in Section F. above, FINRA is 

proposing a 60-day identification period 

beginning on the effective date of the 

proposed rule change during which 

Day-One Professionals must request 

registration as an Operations 

Professional via Form U4 in CRD. DayOne Professionals who are identified 

during the 60-day period and must pass 

the Operations Professional examination 

(or an eligible qualification 

examination) would be granted 12 

months beginning on the effective date 

of the proposed rule change to pass such 

qualifying examination, during which 

time such persons may function as an 

Operations Professional. 

With respect to non-Day-One 

Professionals, any person associated 

with a clearing or self-clearing member 

must register as an Operations 

Professional and, if applicable, pass the 

Operations Professional qualification 

examination (or an eligible qualification 

examination) prior to engaging in any 

activities that would require such 

registration. Any non-Day-One 

Professional associated with a nonclearing member who must pass the 

Operations Professional qualification 

examination (or an eligible qualification 

examination) to obtain registration 

would be granted a grace period of 120 

days beginning on the date such person 

requests Operations Professional 

registration via Form U4 in CRD to pass 

such qualifying examination, during 

which time such person may function as 

an Operations Professional. 

Two commenters expressed 

sentiments regarding their general 

disagreement with FINRA spending 144

and the current regulatory structure for 

broker-dealers.145 These comments are 

outside the scope of the proposed rule 

change. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 45 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

as the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding or 

(ii) as to which the self-regulatory 

organization consents, the Commission 

will: 

(A) By order approve or disapprove 

such proposed rule change, or 

(B) Institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–FINRA–2011–013 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–FINRA–2011–013. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549, on official 

business days between the hours of 10 

a.m. and 3 p.m. Copies of such filing 

also will be available for inspection and 

copying at the principal office of 

FINRA. All comments received will be 

posted without change; the Commission 

does not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–FINRA–2011–013 and 

should be submitted on or before April 

8, 2011. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.146

Cathy H. Ahn, 

Deputy Secretary. 

[FR Doc. 2011–6315 Filed 3–17–11; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–64070; File No. SR–CBOE– 

2011–022] 

Self-Regulatory Organizations; 

Chicago Board Options Exchange, 

Incorporated: Notice of Filing and 

Immediate Effectiveness of Proposed 

Rule Change, as Modified by 

Amendment No. 1 Thereto, Relating to 

PAR Official Fees 

March 11, 2011. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (the 

‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that, on March 1, 

2011, Chicago Board Options Exchange, 

Incorporated (‘‘CBOE’’ or the 

‘‘Exchange’’) filed with the Securities 

and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I and II 

below, which Items have been prepared 

by CBOE. On March 9, 2011, CBOE filed 

Amendment No. 1 to the proposed rule 

change.3 The Commission is publishing 

this notice to solicit comments on the 

proposed rule change from interested 

persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

Chicago Board Options Exchange, 

Incorporated (‘‘CBOE’’ or ‘‘Exchange’’) 

proposes to amend its Fees Schedule to 

(i) establish separate PAR Official Fees 

for Volatility Index Options that are 

consistent with the Floor Brokerage Fees 

assessed in Volatility Index Options, 

and (ii) waive PAR Official Fees for all 

classes except Volatility Index Options 

for March 2011. The text of the 

proposed rule change is available on the 

Exchange’s Web site (http:// 

www.cboe.org/legal), at the Exchange’s 

Office of the Secretary and at the 

Commission. 


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