Document ID: SEC-2015-1715-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2015-10-23T04:00Z

[Federal Register Volume 80, Number 205 (Friday, October 23, 2015)]
[Notices]
[Pages 64465-64468]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-26913]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76189; File No. SR-FINRA-2015-038]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to the Series 27 Examination Program

October 19, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``SEA'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on October 13, 2015, 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 stated policy, practice, or interpretation with 
respect to the meaning, administration, or enforcement of an existing 
rule'' under Section 19(b)(3)(A)(i) of the Act \3\ and Rule 19b-4(f)(1) 
thereunder,\4\ which renders the proposal effective upon receipt of 
this filing by the Commission. The Commission is publishing this notice 
to solicit comments on the

[[Page 64466]]

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\ 15 U.S.C. 78s(b)(3)(A)(i).
    \4\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is filing revisions to the content outline and selection 
specifications for the Financial and Operations Principal (Series 27) 
examination program.\5\ The proposed revisions update the material to 
reflect changes to the laws, rules and regulations covered by the 
examination and to incorporate the functions and associated tasks 
currently performed by a Financial and Operations Principal. In 
addition, FINRA is proposing to make changes to the format of the 
content outline. FINRA is not proposing any textual changes to the By-
Laws, Schedules to the By-Laws or Rules of FINRA.
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    \5\ FINRA also is proposing corresponding revisions to the 
Series 27 question bank. FINRA is submitting this filing for 
immediate effectiveness pursuant to Section 19(b)(3)(A) of the Act 
and Rule 19b-4(f)(1) thereunder, and is not filing the question 
bank. See Letter to Alden S. Adkins, Senior Vice President and 
General Counsel, NASD Regulation, from Belinda Blaine, Associate 
Director, Division of Market Regulation, SEC, dated July 24, 2000. 
The question bank is available for SEC review.
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    The revised content outline is attached.\6\ The Series 27 selection 
specifications have been submitted to the Commission under separate 
cover with a request for confidential treatment pursuant to SEA Rule 
24b-2.\7\
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    \6\ The Commission notes that the content outline is attached to 
the filing, not to this Notice.
    \7\ 17 CFR 240.24b-2.
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    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
    Section 15A(g)(3) of the Act \8\ authorizes FINRA to prescribe 
standards of training, experience, and competence for persons 
associated with FINRA members. In accordance with that provision, FINRA 
has developed examinations that are designed to establish that persons 
associated with FINRA members have attained specified levels of 
competence and knowledge, consistent with applicable registration 
requirements under FINRA rules. FINRA periodically reviews the content 
of the examinations to determine whether revisions are necessary or 
appropriate in view of changes pertaining to the subject matter covered 
by the examinations.
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    \8\ 15 U.S.C. 78o-3(g)(3).
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    NASD Rule 1022(b)(1) requires that each member that operates 
pursuant to the provisions of SEA Rule 15c3-1(a)(1)(ii),\9\ SEA Rule 
15c3-1(a)(2)(i) \10\ or SEA Rule 15c3-1(a)(8) \11\ shall designate as 
Financial and Operations Principal \12\ those persons associated with 
it, at least one of whom shall be its chief financial officer, who 
perform the duties described in paragraph (b)(2) of the rule. The rule 
provides that each person associated with a member who performs such 
duties shall be required to register as a Financial and Operations 
Principal with FINRA and shall pass an appropriate qualification 
examination before such registration may become effective. Paragraph 
(b)(2) of the rule provides that the term Financial and Operations 
Principal shall mean a person associated with a member whose duties 
include:
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    \9\ 17 CFR 240.15c3-1(a)(1)(ii). SEA Rule 15c3-1(a)(1)(ii) 
addresses net capital requirements for brokers or dealers that elect 
not to be subject to the Aggregate Indebtedness Standard of 
paragraph (a)(1)(i) under Rule 15c3-1.
    \10\ 17 CFR 240.15c3-1(a)(2)(i). SEA Rule 15c3-1(a)(2)(i) 
addresses net capital requirements for brokers or dealers that carry 
customer accounts.
    \11\ 17 CFR 240.15c3-1(a)(8). SEA Rule 15c3-1(a)(8) addresses 
net capital requirements for municipal securities brokers' brokers, 
as defined under the rule.
    \12\ The term ``Limited Principal--Financial and Operations'' as 
set forth in NASD Rule 1022(b) is referred to as ``Financial and 
Operations Principal'' for purposes of this filing. The term 
``principal'' is defined in NASD Rule 1021(b) (Definition of 
Principal).
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     Final approval and responsibility for the accuracy of 
financial reports submitted to any duly established securities industry 
regulatory body;
     final preparation of such reports;
     supervision of individuals who assist in the preparation 
of such reports;
     supervision of and responsibility for individuals who are 
involved in the actual maintenance of the member's books and records 
from which such reports are derived;
     supervision and/or performance of the member's 
responsibilities under all financial responsibility rules promulgated 
pursuant to the provisions of the Act;
     overall supervision of and responsibility for the 
individuals who are involved in the administration and maintenance of 
the member's back office operations; or
     any other matter involving the financial and operational 
management of the member.
    NASD Rule 1022(b)(3) provides that a person registered solely as a 
Financial and Operations Principal shall not be qualified to function 
in a principal capacity with responsibility over any area of business 
activity not described in paragraph (b)(2) of the rule.
    In consultation with a committee of industry representatives, FINRA 
recently undertook a review of the Series 27 examination program. As a 
result of this review, FINRA is proposing to make revisions to the 
content outline to reflect changes to the laws, rules and regulations 
covered by the examination and to incorporate the functions and 
associated tasks currently performed by a Financial and Operations 
Principal. FINRA also is proposing to make changes to the format of the 
content outline.
Current Outline
    The current content outline is divided into seven sections. The 
following are the seven sections and the number of questions associated 
with each of the sections, denoted Section 1 through Section 7:
    1. Keeping And Preservation of Records and Broker-Dealer Financial 
Reporting Requirements, 15 questions;
    2. Net Capital Requirements, 44 questions;
    3. Customer Protection, 36 questions;
    4. Municipal Securities Rulemaking Board--Regulations, 9 questions;
    5. Extensions Of Credit In The Securities Industry, 8 questions;
    6. Procedural Rules, 12 questions; and
    7. Other Relevant Regulation and Interpretations, 21 questions.
    Each section also includes the applicable laws, rules and 
regulations associated with that section. The current outline also 
includes a preface (addressing, among other things, the purpose, 
administration and scoring of the examination), sample questions and 
reference materials.

[[Page 64467]]

Proposed Revisions
    To develop the revised outline, FINRA conducted a job analysis 
study of Financial and Operations Principals, which included the use of 
a survey. The study provided detailed information regarding the day-to-
day roles, responsibilities and job functions of Financial and 
Operations Principals. As a result, FINRA is proposing to revise the 
structure of the outline as described below to include functions and 
associated tasks that reflect the day-to-day activities of a Financial 
and Operations Principal.
    Specifically, FINRA is proposing to divide the content outline into 
five major job functions that are performed by a Financial and 
Operations Principal. The following are the five major job functions, 
denoted Function 1 through Function 5, with the associated number of 
questions:
    Function 1: Financial Reporting, 25 questions;
    Function 2: Operations, General Securities Industry Regulations, 
and Preservation of Books and Records, 42 questions;
    Function 3: Customer Protection, 24 questions;
    Function 4: Net Capital, 41 questions; and
    Function 5: Funding and Cash Management, 13 questions.
    As noted above, each major job function includes an assigned number 
of questions. FINRA determined the number of questions for each 
function based on the results of the job analysis study. Thus, compared 
to the existing outline, the allocation of questions in the revised 
outline more closely reflects the current day-to-day activities of a 
Financial and Operations Principal.
    Each function also includes specific tasks describing activities 
associated with performing that function. There are five tasks (1.1-
1.5) associated with Function 1; three tasks (2.1-2.3) associated with 
Function 2; five tasks (3.1-3.5) associated with Function 3; seven 
tasks (4.1-4.7) associated with Function 4; and two tasks (5.1-5.2) 
associated with Function 5.\13\ By way of example, one such task (Task 
2.2) is to prepare and preserve financial records to ensure accuracy 
and completeness of internal financial documents.\14\ Further, the 
outline lists the knowledge required to perform each function and 
associated tasks (e.g., general ledger and sub-ledgers).\15\ In 
addition, where applicable, the outline lists the laws, rules and 
regulations a candidate is expected to know to perform each function 
and associated tasks. These include the applicable FINRA Rules (e.g., 
FINRA Rule 4160), NASD Rules (e.g., NASD Rule 2340) and SEC rules 
(e.g., SEA Rule 17a-4).\16\
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    \13\ See Exhibit 3a, Outline Pages 6-20. The Commission notes 
that all references to Exhibit 3a refer to Exhibit 3a to the 
proposed rule change.
    \14\ See Exhibit 3a, Outline Page 10.
    \15\ See Exhibit 3a, Outline Page 10.
    \16\ See Exhibit 3a, Outline Page 10.
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    As noted above, FINRA also is proposing to revise the content 
outline to reflect changes to the laws, rules and regulations covered 
by the examination. Among other revisions, FINRA is proposing to revise 
the content outline to reflect the adoption of rules in the 
consolidated FINRA rulebook (e.g., NASD Rule 2430 (Charges for Services 
Performed) and NASD Rule 3110 (Books and Records) were adopted as FINRA 
Rule 2122 (Charges for Services Performed) and FINRA Rule 4510 Series 
(Books and Records Requirements), respectively).\17\ Further, based on 
the MSRB's elimination of the Financial and Operations Principal 
requirements in MSRB Rule G-3(d), the revised outline does not include 
any MSRB rules.\18\
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    \17\ See Rule Conversion Chart, available at http://www.finra.org/Industry/Regulation/FINRARules/p085560.
    \18\ See Securities Exchange Act Release No. 72743 (August 1, 
2014), 79 FR 46290 (August 7, 2014) (Order Approving File No. SR-
MSRB-2014-04).
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    FINRA is proposing similar changes to the Series 27 selection 
specifications and question bank.
    Finally, FINRA is proposing to make changes to the format of the 
content outline, including the preface, sample questions and reference 
materials. Among other changes, FINRA is proposing to: (1) Add a table 
of contents; \19\ (2) provide more details regarding the purpose of the 
examination; \20\ (3) provide more details on the application 
procedures; \21\ (4) provide more details on the development and 
maintenance of the content outline and examination; \22\ (5) explain 
that the passing scores are established by FINRA staff, in consultation 
with a committee of industry representatives, using a standard setting 
procedure and that the scores are an absolute standard independent of 
the performance of candidates taking the examination; \23\ and (6) note 
that each candidate will receive a score report at the end of the test 
session, which will indicate a pass or fail status and include a score 
profile listing the candidate's performance on each major content area 
covered on the examination.\24\
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    \19\ See Exhibit 3a, Outline Page 2.
    \20\ See Exhibit 3a, Outline Page 3.
    \21\ See Exhibit 3a, Outline Page 3.
    \22\ See Exhibit 3a, Outline Page 4.
    \23\ See Exhibit 3a, Outline Page 5.
    \24\ See Exhibit 3a, Outline Page 5.
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    The number of questions on the Series 27 examination will remain at 
145 scored multiple-choice questions,\25\ and candidates will continue 
to have 225 minutes to complete the examination. Currently, a score of 
70 percent is required to pass the examination. The passing score for 
the revised Series 27 examination will be 69 percent.
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    \25\ Consistent with FINRA's practice of including ``pre-test'' 
questions on certain qualification examinations, which is designed 
to ensure that new examination questions meet acceptable testing 
standards prior to use for scoring purposes, the examination 
includes ten additional, unidentified pre-test questions that do not 
contribute towards the candidate's score. Therefore, the examination 
actually consists of 155 questions, 145 of which are scored. The ten 
pre-test questions are randomly distributed throughout the 
examination.
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Availability of Content Outlines
    The current Series 27 content outline is available on FINRA's Web 
site, at http://www.finra.org/industry/qualification-exams. The revised 
Series 27 content outline will replace the current content outline on 
FINRA's Web site.
    FINRA is filing the proposed rule change for immediate 
effectiveness. FINRA proposes to implement the revised Series 27 
examination program on December 14, 2015. FINRA will announce the 
proposed rule change and the implementation date in a Regulatory 
Notice.
2. Statutory Basis
    FINRA believes that the proposed revisions to the Series 27 
examination program are consistent with the provisions of Section 
15A(b)(6) of the Act,\26\ 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, and 
Section 15A(g)(3) of the Act,\27\ which authorizes FINRA to prescribe 
standards of training, experience, and competence for persons 
associated with FINRA members. FINRA believes that the proposed 
revisions will further these purposes by updating the examination 
program to reflect changes to the laws, rules and regulations covered 
by the examination and to incorporate the functions and associated 
tasks currently performed by a Financial and Operations Principal.
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    \26\ 15 U.S.C. 78o-3(b)(6).
    \27\ 15 U.S.C. 78o-3(g)(3).

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[[Page 64468]]

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. The updated examination aligns 
with the functions and associated tasks currently performed by a 
Financial and Operations Principal and tests knowledge of the most 
current laws, rules, regulations and skills relevant to those functions 
and associated tasks. As such, the proposed revisions would make the 
examination more efficient and effective.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \28\ and paragraph (f)(1) of Rule 19b-4 
thereunder.\29\ 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.
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    \28\ 15 U.S.C. 78s(b)(3)(A).
    \29\ 17 CFR 240.19b-4(f)(1).
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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-2015-038 on the subject line.

Paper Comments

     Send paper comments in triplicate to Robert W. Errett, 
Deputy Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2015-038. 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 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-2015-038 and should be 
submitted on or before November 13, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-26913 Filed 10-22-15; 8:45 am]
 BILLING CODE 8011-01-P