B-Ds to Finra: Back off back-office registration

Broker-dealers, get ready. Your back-office operations are now officially on Finra's front burner

Broker-dealers, get ready. Your back-office operations are now officially on Finra’s front burner.

The Financial Industry Regulatory Authority Inc. has decided to move ahead with a controversial plan to require registration of a large number of back-office personnel. Historically, registration has been limited to individuals working in sales or trading. Finra this month filed the proposal with the Securities and Exchange Commission, which posted the rule for comment last week.

The proposal was roundly criticized by industry participants when Finra floated the idea last summer. In response, Finra made some minor changes, offering some clarity on exactly who would be required to obtain the registration. But the gist of the new program remains the same: creating an operations professional license, with its own qualification exam and continuing-education requirements.

As such, it marks a substantial and potentially onerous expansion of registration requirements — one that could force many lower-level employees and outsourcers to register.

“I expect that a receptionist [at a small firm] … would be covered” by the registration requirement, said Lisa Roth, chief executive of Keystone Capital Corp. and a member of Finra’s Small Firm Advisory Board.

Typically, administrative employees at smaller firms fill many roles, including entering trades and compiling financial data, Ms. Roth said.

In addition, many introducing firms share operational functions with their clearing firms. Industry participants fear confusion in deciding which employees will be covered under the rule.

“We didn’t get any additional clarity out of Finra about shared functions,” said David Bellaire, general counsel of the Financial Services Institute Inc.

In its filing, Finra noted that the operations professional registration would be restricted to senior managers, supervisors or anyone with significant control over a broker-dealer’s finances and engaged in a variety of back-office functions.

Those functions include new accounts and transfers, collections, receipt and delivery of assets, settlement, account statements, trading systems and security-related technology functions. Finra also added supplementary material in its most recent filing to clarify that individuals performing clerical or auditing functions wouldn’t be required to register.

Finra is downplaying the potential burden.

“The impact of the proposed rule change is expected to be minimal, as the majority of the [functions requiring an operations professional license] are generally performed by the carrying and clearing firm,” Finra said in its filing.

In reality, it isn’t known how many industry participants would be affected.

Those who already hold a Series 6 or 7 license, or have a supervisory license, would be exempt from taking the exam but would have to register separately as operations professionals if their job functions were covered under the new requirement. Finra said that it would not assess a separate registration fee for those already holding a securities license. Operations professionals also would be subject to Finra’s continuing-education requirements, including firm-element training.

But in a comment letter last summer, the Securities Industry and Financial Markets Association said that the rule would subject “thousands of member firm personnel to a securities-licensing regime for the first time.”

Andrew DeSouza, a spokesman for SIFMA, declined to comment further, other than to say that the Wall Street trade group will be filing another comment letter, this one with the Securities and Exchange Commission.

Given its earlier letter, it doesn’t seem likely that SIFMA will endorse the revised plan wholeheartedly. And Brian Smith, chief executive of RiverStone Wealth Management Inc., questions whether there is even a need for a new registration category.

“Currently, anyone doing operational work is required to be supervised by registered personnel,” he said.

Other observers remain fearful that the new licensing requirement could become a wide-reaching entanglement for people who really don’t need to be registered.

“Where [broker-dealers will] be hit hardest is in the IT department,” Mr. Bellaire said. “Those are not typically people who’ve been registered in the past.”

Nancy Kay, chief compliance officer at Wall Street Financial Group Inc., echoed that concern.

“In a small shop like mine, my IT guy comes to me and we talk about compliance,” she said.

A qualifying exam for such a person would not impart knowledge of regulations, Ms. Kay said.

“It would just be a test for the sake of a test,” she said.

Finra will allow individuals 12 months from the rule’s effective date to pass the qualifying examination. But the FSI last summer urged Finra to drop the exam entirely and address the supervision of operations professionals through written procedures and mandatory firm-element training.

Finra didn’t go for that idea.

Under existing guidance, outsourced consultants and others who do work that requires registration are considered to be registered representatives of the broker-dealer — and have to be supervised by the broker-dealer.

This doesn’t sit well with Ms. Roth. She pointed out that a wider registration net — one including technology providers — would present a sizable challenge for firms.

“It’s very difficult to enforce policies and procedures if someone doesn’t work for you,” Ms. Roth said.

E-mail Dan Jamieson at [email protected].