Document ID: SEC-2011-0377-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2011-03-18T04:00Z

[Federal Register Volume 76, Number 53 (Friday, March 18, 2011)]
[Notices]
[Pages 15012-15025]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-6315]

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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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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

[[Page 15013]]

(``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.
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    \3\ See 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).
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    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 pre-established 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.
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    \4\ See 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 third-party 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.''
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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);

[[Page 15014]]

    (2) Collection, maintenance, re-investment (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\
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    \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.
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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.
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    \6\ Any 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.
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    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 
broker-dealer'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.

[[Page 15015]]

    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[supreg]'').\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.
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    \7\ 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.
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    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\
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    \8\ If a person's registration in an eligible registration 
category was revoked within the prior two years, but such person re-
qualifies and re-registers 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).
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    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.
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    \9\ See Section G. for further discussion of the adoption of 
NASD Rule 1120 (Continuing Education Requirements) as FINRA Rule 
1250.
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    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

[[Page 15016]]

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\
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    \10\ NASD 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.
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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\
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    \11\ Persons 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.
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    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.
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    \13\ When 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.
    \14\ Members 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.
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    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 self-clearing 
or clearing member would not have the benefit of the 120-day grace 
period and would be required to register

[[Page 15017]]

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\
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    \15\ The 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'').
    \16\ The 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).
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    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.
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    \17\ A 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.
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    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.
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    \18\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \19\ All references to the commenters under this Item are to the 
commenters as listed in Exhibit 2b.
---------------------------------------------------------------------------

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 proficiency\21\ and that no amount of

[[Page 15018]]

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 
principal\24\ 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\
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    \20\ ACLI, 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.
    \21\ Mutual Trust.
    \22\ AIC and Wells Fargo.
    \23\ AIC and PSD.
    \24\ Crowell, IRI, M. Griffith, PSD and RiverStone.
    \25\ Crowell and Wellington.
    \26\ IRI, Nationwide, PSD and Sutherland.
    \27\ PSD, RiverStone and Wells Fargo.
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    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.
---------------------------------------------------------------------------

    \28\ NPB and RiverStone.
---------------------------------------------------------------------------

    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-based-compensation'' and that there is 
a blanket exception from ``underwriting compensation'' for Operations 
Professionals.\32\
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    \29\ TIAA and Wells Fargo.
    \30\ 17 CFR 240.3a4-1.
    \31\ PSD, Sutherland and TIAA.
    \32\ IPA.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \33\ IRI, Nationwide, NSCP and TIAA.
    \34\ Wellington and Wells Fargo.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \35\ See Regulatory Notice 09-70 (December 2009) for a 
discussion of the Principal Operations Officer registration 
category. See also infra note 61 and accompanying text.
---------------------------------------------------------------------------

    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

[[Page 15019]]

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\
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    \36\ Morgan Stanley.
    \37\ ESI, NFP, TIAA and UPFS.
    \38\ ACLI, NSCP, Quasar and Wells Fargo.
    \39\ ACLI.
    \40\ Morgan Stanley.
    \41\ Schwab.
    \42\ Scottrade.
    \43\ ARM, TIAA and Wells Fargo.
    \44\ Bank of America.
    \45\ Bank of America, IPA, SIFMA and Wells Fargo.
---------------------------------------------------------------------------

    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 far-reaching \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\
---------------------------------------------------------------------------

    \46\ Bank of America, TIAA and NSCP.
    \47\ T. Rowe Price and Wells Fargo.
    \48\ Bank of America and TIAA.
    \49\ Bank of America.
    \50\ SIFMA.
    \51\ Scottrade.
    \52\ Morgan Stanley and SIFMA.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \53\ Bank of America, FSI, NSCP, Scottrade, SIFMA and TIAA.
    \54\ TIAA.
    \55\ Martin Nelson.
    \56\ Quasar.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \57\ See, e.g., NASD Rule 1060 (Persons Exempt from 
Registration).
---------------------------------------------------------------------------

    One commenter encouraged FINRA to clarify whether an Operations

[[Page 15020]]

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\
---------------------------------------------------------------------------

    \58\ Pershing.
    \59\ Crowell.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \60\ PSD, Sutherland and Wells Fargo.
    \61\ IRI and TIAA.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \62\ See supra note 5.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \63\ NSCP.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \64\ Commonwealth, Crowell, ESI, FSI, IPA, IRI, Modern Woodmen, 
Morgan Stanley, NFP, Northwestern Mutual, NSCP, PSD, TIAA, SIFMA, 
Sutherland, UPFS and WSFG.
    \65\ Commonwealth, Crowell, ESI, FSI, IPA, IRI, Modern Woodmen, 
Morgan Stanley, NFP, Northwestern Mutual, NSCP, PSD, TIAA, SIFMA, 
Sutherland, UPFS and WSFG.
    \66\ TIAA.
    \67\ Morgan Stanley and NSCP.
    \68\ Schwab.
---------------------------------------------------------------------------

    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 on-
boarding'' 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 on-boarding 
(customer account data and document maintenance)'').
---------------------------------------------------------------------------

    \69\ PSD and Sutherland.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \70\ ESI, FSI, Horace Mann, Modern Woodmen, NFP, Scottrade, TIAA 
and UPFS.
    \71\ Northwestern Mutual.
    \72\ Bank of America and SIFMA.
---------------------------------------------------------------------------

    Based on the comments, FINRA has revised the original proposal to

[[Page 15021]]

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\
---------------------------------------------------------------------------

    \73\ ESI, FSI, Horace Mann, Modern Woodmen, NFP, Scottrade and 
UPFS.
    \74\ Morgan Stanley.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \75\ Scottrade.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \76\ Bank of America.
    \77\ NSCP.
    \78\ IPA.
    \79\ SIFMA.
---------------------------------------------------------------------------

    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\
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    \80\ Bank of America and SIFMA.
    \81\ Crowell and SIFMA.
    \82\ 17 CFR 240.17a-3.
    \83\ Rockfleet.
    \84\ Morgan Stanley and SIFMA.
---------------------------------------------------------------------------

    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

[[Page 15022]]

notwithstanding any other, separate registration requirements.
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    \85\ IRI.
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    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.
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    \86\ SIFMA.
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    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.
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    \87\ IRI, PSD and Sutherland.
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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 broker-dealers 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\
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    \88\ ACLI.
    \89\ NSCP and ACLI.
    \90\ NSCP.
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    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\
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    \91\ FSI, M. Griffith, Navidar and PSD.
    \92\ Modern Woodmen and Martin Nelson.
    \93\ Harrison, NSCP, RMOA and Wells Fargo.
    \94\ Commonwealth, ESI, FSI, Horace Mann, NFP, UFPS and WSFG.
    \95\ Horace Mann, JRCO, Modern Woodmen, NSCP, RMOA, Rockfleet, 
UPFS and WSFG.
    \96\ Rockfleet.
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    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\
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    \97\ Rockfleet.
    \98\ NSCP.
    \99\ M. Griffith.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \100\ Schwab.
---------------------------------------------------------------------------

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\
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    \101\ NASAA.
    \102\ Freestone.
    \103\ NSCP.
    \104\ Northwestern Mutual and T. Rowe Price.
    \105\ T. Rowe Price.
---------------------------------------------------------------------------

    Certain other commenters recommended a grandfather provision for 
experienced persons who have worked in operations areas for a certain

[[Page 15023]]

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\
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    \106\ Commonwealth.
    \107\ FSI, PSD and Sutherland.
    \108\ FSI, Modern Woodmen, NFP, UPFS and WSFG.
    \109\ Nationwide and TIAA.
    \110\ IRI.
    \111\ TIAA.
    \112\ TIAA.
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    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.
---------------------------------------------------------------------------

    \113\ The 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \114\ See supra note 7.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \115\ Great Nation.
    \116\ ACLI.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \117\ SIFMA.
    \118\ ACLI, A&P, ARM, Bank of America, Horace Mann, IRI, 
Nationwide, PSD, Sutherland and TIAA.
    \119\ ESI, FSI, NFP, UPFS, Wells Fargo and WSFG.
    \120\ Northwestern Mutual, Pershing and Wells Fargo.
    \121\ AIC and Pershing.
    \122\ ACLI and AIC.
    \123\ NSCP, Pershing, Schwab, Scottrade and TIAA.
    \124\ Pershing.
    \125\ IRI.
    \126\ Scottrade and TIAA.
    \127\ Zelman.
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    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

[[Page 15024]]

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\
---------------------------------------------------------------------------

    \128\ FINRA 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).
    \129\ See supra note 61 and accompanying text.
---------------------------------------------------------------------------

    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 non-clerical persons reporting to such covered persons, as 
associated persons irrespective of this proposed rule.
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    \130\ TIAA.
---------------------------------------------------------------------------

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 broker-dealers that handle customer accounts, customer 
funds and/or securities.\132\
---------------------------------------------------------------------------

    \131\ Crowell, Freestone, Martin Nelson, Mutual Trust, Navidar, 
RiverStone, Wellington and Zelman.
    \132\ FirstBank PR.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \133\ See supra note 128 and accompanying text.
---------------------------------------------------------------------------

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\
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    \134\ ARM, Bank of America, Commonwealth, ESI, FSI, Horace Mann, 
Modern Woodmen, M. Griffith, Morgan Stanley, NFP, NSCP, Scottrade, 
SIFMA and WSFG.
    \135\ Nationwide, UPFS and Wells Fargo.
    \136\ ARM, Bank of America, Commonwealth, ESI, FSI, Horace Mann, 
Modern Woodmen, M. Griffith, Morgan Stanley, NFP, NSCP, Scottrade, 
SIFMA and WSFG.
    \137\ Schwab.
    \138\ Schwab, SIFMA and TIAA.
---------------------------------------------------------------------------

    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\

[[Page 15025]]

One commenter suggested a 180-day grace period.\143\
---------------------------------------------------------------------------

    \139\ IRI, Nationwide, NSCP, Scottrade and Wells Fargo.
    \140\ Morgan Stanley.
    \141\ ARM, Bank of America, PSD, Schwab, Scottrade, Sutherland 
and Wells Fargo.
    \142\ Morgan Stanley and SIFMA.
    \143\ Wells Fargo.
---------------------------------------------------------------------------

    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. Day-One 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 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.
    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.
---------------------------------------------------------------------------

    \144\ Mutual Trust.
    \145\ Wellington.
---------------------------------------------------------------------------

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 rule-comments@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\
---------------------------------------------------------------------------

    \146\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-6315 Filed 3-17-11; 8:45 am]
BILLING CODE 8011-01-P