Document ID: SEC-2018-1317-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2018-08-22T04:00Z

[Federal Register Volume 83, Number 163 (Wednesday, August 22, 2018)]
[Notices]
[Pages 42535-42537]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18065]

[[Page 42535]]

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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 Broker-Dealer 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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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 Broker-Dealer 
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\
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    \4\ See 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.
    \5\ Current 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[supreg]'') and/03 (Dual Designation of CFO and COO).
    \6\ The 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).
    \7\ See Regulatory Notice 17-30 (SEC Approves Consolidated FINRA 
Registration Rules, Restructured Representative-Level Qualification 
Examinations and Changes to Continuing Education Requirements) 
(October 2017).
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    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[supreg]'') 
system with the designation FN (for FINOP) or FI (for Introducing 
FINOP).
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    \8\ The 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.
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    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.
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    \9\ See 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 Principals-Financial And Operations And Limited 
Principals-Introducing Broker/Dealer Financial And Operations) 
(August 2001).
    \10\ See 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.'').
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    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,

[[Page 42536]]

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\
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    \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.
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    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.
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    \12\ 15 U.S.C. 78o-3(b)(6).
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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.

[[Page 42537]]

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\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
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    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 [email protected]. 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.
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    \15\ 17 CFR 200.30-3(a)(12).

    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