Firms slam Finra’s proposal to register operations staff

Finra's proposal with the SEC to register operations staff has not gone over big in the adviser community. Here's why.

The debate over a controversial Finra proposal to register operations personnel is heating up, with critics claiming that the regulator’s plan crosses the line.

Some industry observers insist that the Financial Industry Regulatory Authority Inc.’s plan to create a license for back-office personnel would be an illegal expansion of its powers. Particularly troubling, interested industry parties said, is a proposed requirement that certain employees of outside vendors or parent companies of U.S. broker-dealers be registered.

“The proposed rule, as written, appears to exceed Finra’s statutory authority and jurisdictional boundaries,” Bari Havlik, chief compliance officer at Charles Schwab & Co. Inc., this month wrote in a comment letter to the Securities and Exchange Commission.

The rule would cover employees at third-party service providers who don’t engage in activities requiring registration, she wrote.

Ms. Havlik declined to discuss her comments.

Last month, Finra sent a revised version of the plan to the SEC for approval. The commission then posted the proposal as part of a comment period, which ended April 8.

Finra’s plan, first floated last summer, would create an op- erations professional license with its own qualification exam and continuing-education requirements.

Some in the industry think that the proposal is a reaction to the Bernard Madoff scandal. And in truth, Finra’s proposal states that registering back-office people is intended to “ensure that any fraudulent activity … be passed through a properly registered and trained operations professional.”

The question is whether such a proposal, as currently worded, contradicts existing court rulings and SEC rules.

A number of Canadian firms claim that the proposal would violate a 2010 Supreme Court decision. That ruling forbids U.S. securities law from being applied to foreign firms unless authorized by statute, said D. Grant Vingoe, an attorney at Arnold & Porter LLC, who represents a number of Canadian firms with U.S. broker-dealer affiliates.

The proposal could affect any foreign firm with a U.S. broker-dealer, he said. And the rule could contradict existing exemptions that the SEC grants foreign firms, as well as interfere with obligations that the United States has under the North American Free Trade Agreement, he said.

Finra’s rule is “extraterritorial overreach,” Mr. Vingoe said.

“I think [the rule] would be open” to a legal challenge if it isn’t changed, he said.

Others share that belief.

Pension fund titan TIAA-CREF thinks that SEC approval of the rule could be challenged on other grounds. In a comment letter written by Pam Lewis Marlborough, associate general counsel at TIAA-CREF, the firm claims that Finra has not done a “formal assessment of the burdens of the proposal on competition and efficiency” as called for under securities law. A TIAA-CREF spokesman declined to comment further.

Executives at other firms are worried about the number of back-office people who might have to be registered under the proposal.

In its rule filing, Finra noted that individuals performing clerical or auditing functions would not be required to register. But despite some clarification from Finra, it’s still hard to know who would be covered by the new registration regime.

Broker-dealers are worried that both supervisors and subordinates of operations professionals could be swept up into the new licensing registration.

DEAF EAR

Beyond saying that Finra would provide the SEC with a response to the comments, Finra spokeswoman Nancy Condon declined to comment on the proposal. Some observers object to what they say was Finra’s deaf ear in the crafting the proposal.

The rulemaking process suffered from a “lack of transparency [and] will lead to certain segments of the industry being disenfranchised from effectively voicing concerns,” said The Committee for Annuity Insurers, a group of insurance companies with broker-dealer affiliates.

In a comment letter, the committee complained that the rule was drafted with the stand-alone broker-dealer in mind. The insurance group is worried that staff members at insurance company home offices will be subject to the registration requirement.

CLEAR AS MUD

Finra indicated to the SEC that it had consulted with industry representatives in developing the proposal.

Andrew DeSouza, spokesman for the Securities Industry and Financial Markets Association, said SIFMA has had no informal discussions with Finra about the rule. But SIFMA’s comment letter from last summer, in response to the earlier version of the proposal, indicated that SIFMA had, in fact, had talks with Finra about the rule.

Either way, officials at TIAA-CREF didn’t seem overly thrilled by the entire process. In their comment letter, officials at the giant money manager complained: “Finra has not provided visibility into such discussions.”

E-mail Dan Jamieson at [email protected].