Federal Register / Vol. 83, No. 163 / Wednesday, August 22, 2018 / Notices 42535 

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

2 17 CFR 240.19b–4. 

3 17 CFR 240.19b–4(f)(6). 

4See Securities Exchange Act Release No. 81098 

(July 7, 2017), 82 FR 32419 (July 13, 2017) (Order 

Approving File No. SR–FINRA–2017–007). For ease 

of reference, FINRA revised the titles of some of the 

registration categories as part of SR–FINRA–2017– 

007. For instance, FINRA changed ‘‘Limited 

Principal—Financial and Operations’’ and ‘‘Limited 

Principal—Introducing Broker/Dealer Financial and 

Operations’’ to ‘‘Financial and Operations 

Principal’’ and ‘‘Introducing Broker-Dealer 

Financial and Operations Principal,’’ respectively. 

This proposed rule change refers to the titles that 

were approved as part of SR–FINRA–2017–007, 

though the changes are not yet effective. 

5Current NASD Rules 1022(b) (Limited 

Principal—Financial and Operations) and 1022(c) 

(Limited Principal—Introducing Broker/Dealer 

Financial and Operations) and Incorporated NYSE 

Rule Interpretations 311(b)(5)/02 (Examination 

Requirements for Chief Financial Officers (‘‘CFO’’) 

and Chief Operations Officers (‘‘COO®’’) and/03 

(Dual Designation of CFO and COO). 

6The current FINRA rulebook consists of: (1) 

FINRA rules; (2) NASD rules; and (3) Incorporated 

NYSE rules. While the NASD rules generally apply 

to all FINRA members, the Incorporated NYSE rules 

apply only to those members of FINRA that are also 

members of the NYSE (‘‘dual members’’). The 

FINRA rules apply to all FINRA members, unless 

such rules have a more limited application by their 

terms. For more information about the rulebook 

consolidation process, see Information Notice, 

March 12, 2008 (Rulebook Consolidation Process). 

7See Regulatory Notice 17–30 (SEC Approves 

Consolidated FINRA Registration Rules, 

Restructured Representative-Level Qualification 

Examinations and Changes to Continuing Education 

Requirements) (October 2017). 

8The determination of whether a firm is eligible 

to designate an Introducing FINOP, rather than a 

FINOP, depends on the firm’s minimum net capital 

requirements. 

9See Securities Exchange Act Release No. 44332 

(May 21, 2001), 66 FR 29196, 29197 (May 29, 2001) 

(Order Approving File No. SR–NASD–00–77). See 

also Notice to Members (‘‘NTM’’) 01–52 (SEC 

Approves NASD Rule Proposal Relating To 

Registration Requirements For Limited PrincipalsFinancial And Operations And Limited PrincipalsIntroducing Broker/Dealer Financial And 

Operations) (August 2001). 

10See Securities Exchange Act Release No. 80371 

(April 4, 2017), 82 FR 17336, 17338, n.12 (April 10, 

2017) (Notice of Filing of File No. SR–FINRA– 

2017–007) (stating that ‘‘[t]hose members that are 

currently exempt from the requirement to have a 

Financial and Operations Principal or an 

Introducing Broker-Dealer Financial and Operations 

Principal based on an exemption granted to them 

prior to September 17, 2001 will continue to be 

exempt from this requirement.’’). 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83863; File No. SR–FINRA– 

2018–031] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing and 

Immediate Effectiveness of a Proposed 

Rule Change To Amend FINRA Rule 

1220(a)(4), Financial and Operations 

Principal and Introducing BrokerDealer Financial and Operations 

Principal 

August 16, 2018. 

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 August 

15, 2018, Financial Industry Regulatory 

Authority, Inc. (‘‘FINRA’’) 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. FINRA has 

designated the proposed rule change as 

constituting a ‘‘non-controversial’’ rule 

change under paragraph (f)(6) of Rule 

19b–4 under the Act,3 which renders 

the proposal effective upon receipt of 

this filing by the Commission. 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 amend FINRA 

Rule 1220(a)(4) (Financial and 

Operations Principal and Introducing 

Broker-Dealer Financial and Operations 

Principal) to: (1) Reflect that certain 

firms remain exempt from the 

requirement to designate an individual 

as a Financial and Operations Principal 

(‘‘FINOP’’) or an Introducing BrokerDealer Financial and Operations 

Principal (‘‘Introducing FINOP’’); and 

(2) provide that the individual 

designated as Principal Financial 

Officer and Principal Operations Officer 

of these exempt firms is not required to 

be qualified and registered as a FINOP 

or an Introducing FINOP. 

The text of the proposed rule change 

is available on FINRA’s website 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 the 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

In July 2017, the SEC approved a 

proposed rule change to,4 among other 

things, adopt the NASD and 

Incorporated NYSE rules 5 relating to 

individuals responsible for a member’s 

financial and operational activities as 

FINRA Rule 1220(a)(4) in the 

Consolidated FINRA Rulebook.6 The 

rule change will become effective on 

October 1, 2018.7

Subparagraph (A) of FINRA Rule 

1220(a)(4) requires that each firm 

designate an individual as a FINOP or 

an Introducing FINOP to carry out 

specified financial and operational 

responsibilities,8 including, for 

example, supervision of individuals 

who assist in the preparation of 

financial reports. Such individuals must 

pass the FINOP examination (Series 27) 

or Introducing FINOP examination 

(Series 28), as applicable, or obtain a 

waiver of the examination. They must 

also register in the Central Registration 

Depository (‘‘CRD®’’) system with the 

designation FN (for FINOP) or FI (for 

Introducing FINOP). 

Certain members, hereinafter referred 

to as exempt firms, are exempt from the 

requirement in current NASD Rules 

1022(b) and 1022(c) to designate an 

individual as a FINOP or an Introducing 

FINOP to carry out specified financial 

and operational responsibilities, 

including from the requirement that 

such an individual pass the Series 27 or 

Series 28 examination (or obtain a 

waiver of the examination) and register 

in the CRD system with the designation 

FN or FI.9 FINRA preserved these 

exemptions when it proposed to adopt 

FINRA Rule 1220(a)(4)(A).10 However, 

these exemptions were not reflected in 

the rule text. 

Subparagraph (B) of FINRA Rule 

1220(a)(4) requires each firm to 

designate an individual as Principal 

Financial Officer with primary 

responsibility over the firm’s financial 

filings and the related books and records 

and an individual as Principal 

Operations Officer with primary 

responsibility over the firm’s day-to-day 

operations. Such individuals must also 

pass the Series 27 or Series 28 

examination, as applicable, or obtain a 

waiver of the examination. Further, they 

must register in the CRD system with 

the designation FN or FI. The 

responsibilities of a designated 

Principal Financial Officer and 

Principal Operations Officer intersect 

with the responsibilities of a designated 

FINOP or Introducing FINOP. However, 


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42536 Federal Register / Vol. 83, No. 163 / Wednesday, August 22, 2018 / Notices 

11 In addition, FINRA notes that individuals 

designated as Principal Financial Officers and 

Principal Operations Officers of exempt firms 

would likely be required to be qualified and 

registered as principals, such as General Securities 

Principals, given the scope of their responsibilities. 12 15 U.S.C. 78o–3(b)(6). 

the responsibilities of a designated 

FINOP or Introducing FINOP are more 

specific in nature (e.g., they are required 

to supervise individuals who assist in 

the preparation of financial reports). In 

addition, a member’s designated FINOP 

or Introducing FINOP is eligible to 

perform the responsibilities of a 

Principal Financial Officer and a 

Principal Operations Officer. 

As stated in Regulatory Notice 17–30, 

the requirement to designate a Principal 

Financial Officer and Principal 

Operations Officer applies to all firms, 

including exempt firms. As a result, by 

October 1, 2018, exempt firms would 

have been required to designate as 

Principal Financial Officer and 

Principal Operations Officer an 

individual who is qualified and 

registered as a FINOP or an Introducing 

FINOP (i.e., the individual must have 

passed the Series 27 or Series 28 

examination (or obtained a waiver of the 

examination) and registered in the CRD 

system with the designation FN or FI). 

Exempt firms have noted that the 

responsibilities of a Principal Financial 

Officer and a Principal Operations 

Officer are functional equivalents to the 

responsibilities that a designated FINOP 

or Introducing FINOP would carry out 

at their firms. Exempt firms have also 

noted that, given their exempt status, 

they do not have an individual 

designated as a FINOP or an Introducing 

FINOP to whom to assign the 

responsibilities of a Principal Financial 

Officer and Principal Operations 

Officer. Similarly, they do not have any 

other associated persons who are 

qualified and registered as a FINOP or 

an Introducing FINOP (e.g., individuals 

who have passed the Series 27 

examination and registered in the CRD 

system with the designation FN) to 

whom to assign the specified 

responsibilities. 

Therefore, exempt firms have stated 

that FINRA Rule 1220(a)(4)(B) would 

have the indirect impact of eliminating 

their FINOP and Introducing FINOP 

exemptions by requiring them to 

designate an individual who is qualified 

and registered as a FINOP or an 

Introducing FINOP to carry out 

responsibilities that are functionally 

equivalent to those responsibilities that 

would otherwise be carried out by a 

designated FINOP or Introducing 

FINOP. 

FINRA recognizes that the rule change 

would have the impact of eliminating 

longstanding exemptions that were 

granted to members, which was not the 

intended purpose of the rule change. 

The purpose of the rule change is to 

ensure that each member has designated 

individual(s) with primary 

responsibility for specified financial and 

operational functions carried out by the 

firm. 

Accordingly, FINRA is proposing to 

amend FINRA Rule 1220(a)(4)(A) to 

reflect that exempt firms remain exempt 

from the requirements of FINRA Rule 

1220(a)(4)(A). FINRA is also proposing 

to amend FINRA Rule 1220(a)(4)(B) to 

provide that individuals designated as 

Principal Financial Officers and 

Principal Operations Officers of exempt 

firms are not required to be qualified 

and registered as FINOPs or Introducing 

FINOPs. FINRA Rule 1220(a)(4)(B) 

would continue to require exempt firms 

to designate an individual as a Principal 

Financial Officer and Principal 

Operations Officer to carry out specified 

financial and operational 

responsibilities, but such individual 

would not be required to be qualified 

and registered as a FINOP or an 

Introducing FINOP.11

Finally, as indicated in NTM 01–52, 

FINRA reserves the right to require 

exempt firms to designate an individual 

as a FINOP or an Introducing FINOP to 

carry out specified financial and 

operational responsibilities if changes 

occur in the circumstances under which 

the original exemption was granted, 

such as a substantial increase in 

business or the addition of new lines of 

business. FINRA also may require 

exempt firms to designate an individual 

as a FINOP or an Introducing FINOP if 

FINRA determines that there is a 

material financial-related examination 

finding that would necessitate it. 

However, in the case of any of these 

events, the member would have the 

right to appeal such actions pursuant to 

FINRA Rule 9630 (Appeal). In addition, 

FINRA may impose a disciplinary 

sanction that would require exempt 

firms to designate an individual as a 

FINOP or an Introducing FINOP. In the 

event that a member is no longer exempt 

under the circumstances described 

above, the firm would also have to 

ensure that the individual designated as 

Principal Financial Officer and 

Principal Operations Officer is qualified 

and registered as a FINOP or an 

Introducing FINOP. 

FINRA is filing the proposed rule 

change for immediate effectiveness. The 

implementation date will be October 1, 

2018, to coincide with the 

implementation date of the consolidated 

registration rules. 

2. Statutory Basis 

FINRA believes that the proposed rule 

change is consistent with the provisions 

of Section 15A(b)(6) of the Act,12 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 it is 

appropriate to continue to provide an 

exemption under FINRA Rule 1220(a)(4) 

to those firms that were previously 

granted an exemption from the 

requirement to designate an individual 

as a FINOP or an Introducing FINOP to 

carry out specified financial and 

operational responsibilities. FINRA also 

believes the proposed rule change 

strikes an appropriate balance in that 

exempt firms would still be required to 

designate an individual as a Principal 

Financial Officer and Principal 

Operations Officer to carry out specified 

financial and operational 

responsibilities, though the individual 

would not have to be qualified and 

registered as a FINOP or an Introducing 

FINOP. 

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. 

Economic Impact Assessment 

FINRA has undertaken an economic 

impact assessment, as set forth below, to 

further analyze the regulatory need for 

the proposed rule change, the economic 

baseline of analysis, the economic 

impact and the alternatives considered. 

Regulatory Need 

Exempt firms are not required to 

designate an individual as a FINOP or 

an Introducing FINOP to carry out 

specified financial and operational 

responsibilities. The requirements 

under FINRA Rule 1220(a)(4)(B), which 

become operative on October 1, 2018, 

would effectively and unintentionally 

undo these exemptions. FINRA is 

therefore preserving these exemptions, 

while ensuring that each FINRA 

member, including exempt firms, has a 

designated Principal Financial Officer 

and Principal Operations Officer to 

carry out specified financial and 

operational responsibilities. 


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Federal Register / Vol. 83, No. 163 / Wednesday, August 22, 2018 / Notices 42537 

13 15 U.S.C. 78s(b)(3)(A). 

14 17 CFR 240.19b–4(f)(6). 15 17 CFR 200.30–3(a)(12). 

Economic Baseline 

The economic baseline for the 

proposed rule change relates to the 

activities and costs associated with 

financial and operational controls 

conducted by exempt firms. There are 

approximately 140 current exempt 

firms. 

Economic Impact 

For purposes of this discussion, 

FINRA has identified the potentially 

material impacts of the proposed rule 

change. 

Impact on Firms and Associated Persons 

The proposed rule change would 

preserve the ability of exempt firms to 

maintain financial and operational 

controls without the addition of a 

designated individual as FINOP or 

Introducing FINOP. Relative to current 

practices, the proposed rule change 

would not impose material costs on 

members or associated persons. 

However, the proposed rule change 

would eliminate, or significantly 

reduce, the operational, administrative 

and cost burden on exempt firms once 

FINRA Rule 1220(a)(4)(B) becomes 

effective. 

Among other benefits, exempt firms 

would not be required to employ, or 

otherwise associate with, an individual 

who is currently qualified and 

registered as a FINOP or an Introducing 

FINOP by October 1, 2018 to carry out 

the responsibilities of Principal 

Financial Officer and Principal 

Operations Officer. Alternatively, 

exempt firms would not be required to 

ensure that a current associated person 

is qualified and registered as a FINOP or 

an Introducing FINOP by October 1, 

2018 to carry out the responsibilities of 

Principal Financial Officer and 

Principal Operations Officer. The 

proposed rule change would also reduce 

the costs and burdens on current 

associated persons of exempt firms who 

will be designated as Principal 

Financial Officers and Principal 

Operations Officers because such 

individuals would not be required to 

qualify and register as FINOPs or 

Introducing FINOPs. 

The proposed rule change would not 

alter the obligations of members that are 

currently required to have a designated 

individual as FINOP or Introducing 

FINOP. As noted above, a firm’s 

designated FINOP or Introducing FINOP 

is eligible to perform the responsibilities 

of a Principal Financial Officer and a 

Principal Operations Officer. 

Impact on Customers of Exempt Firms 

The proposed rule change is not 

expected to materially alter the 

protections that customers of exempt 

firms currently receive. 

Alternatives Considered 

FINRA considered whether 

alternative qualifications and 

registrations would be appropriate for 

Principal Financial Officers and 

Principal Operations Officers, other 

than qualification and registration as a 

FINOP or an Introducing FINOP. 

However, FINRA determined not to 

adopt an alternative qualification and 

registration requirement pending its 

evaluation of the structure of its 

principal-level examinations. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

Written comments were neither 

solicited nor received. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Because the foregoing proposed rule 

change does not: (i) Significantly affect 

the protection of investors or the public 

interest; (ii) impose any significant 

burden on competition; and (iii) become 

operative for 30 days from the date on 

which it was filed, or such shorter time 

as the Commission may designate, it has 

become effective pursuant to Section 

19(b)(3)(A) of the Act 13 and Rule 19b– 

4(f)(6) thereunder.14

At any time within 60 days of the 

filing of the proposed rule change, the 

Commission summarily may 

temporarily suspend such rule change if 

it appears to the Commission that such 

action is necessary or appropriate in the 

public interest, for the protection of 

investors, or otherwise in furtherance of 

the purposes of the Act. If the 

Commission takes such action, the 

Commission shall institute proceedings 

to determine whether the proposed rule 

should be approved or 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 email to rule-comments@

sec.gov. Please include File Number SR– 

FINRA–2018–031 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–FINRA–2018–031. This file 

number should be included on the 

subject line if email 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 website (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 website 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 

10:00 a.m. and 3:00 p.m. Copies of the 

filing also will be available for 

inspection and copying at the principal 

office of FINRA. All comments received 

will be posted without change. Persons 

submitting comments are cautioned that 

we do not redact or edit personal 

identifying information from comment 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–FINRA– 

2018–031, and should be submitted on 

or before September 12, 2018. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.15

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–18065 Filed 8–21–18; 8:45 am] 

BILLING CODE 8011–01–P 


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