The Financial Industry Regulatory Authority (Finra) has this month announced that it will be pushing ahead with its proposals to introduce registration requirements for back office operations execs within broker-dealer firms. But what will be the financial and practical impact on these back office functions, including data management and potentially outsourced operations roles, in the face of greater direct scrutiny from the regulatory community?
The Securities and Exchange Commission (SEC) published the Finra proposals, which have been on the table for almost a year, for comment last week. Finra is keen to introduce a new registration category and qualification examination requirement for certain operations personnel within broker-dealer firms. Currently, only sales and trading functions within these firms are required to register with the regulator, but this proposed change would extend the rule to cover functions that “have a meaningful connection to client funds, accounts and transactions,” including clearing and settlement, data management and other similar operations roles.
The registration requirement also extends beyond merely these firms’ internal senior management teams to those engaged in outsourcing and shared services, although exactly how this will be handled is something of a grey area at the moment. Finra also notes that a person’s job title may not be “clearly indicative” of whether they should register; no doubt a nod to the lack of standardised approaches to functions such as data management. Hence much more clarity will be needed from the regulator about the exact nature and level of the functions involved.
For now, Finra has listed execs engaged in the following functions as those required to register:
- client onboarding (customer account data and document maintenance);
- collection, maintenance, re-investment (including sweeps) and disbursement of funds;
- receipt and delivery of securities and funds, account transfers;
- bank, custody, depository and firm account management and reconciliation;
- settlement, fail control, buy ins, segregation, possession and control;
- trade confirmation and account statements;
- stock loan/securities lending;
- prime brokerage (services to other broker-dealers and financial institutions);
- approval of pricing models used for valuations;
- financial control, including general ledger and treasury;
- contributing to the process of preparing and filing financial regulatory reports;
- 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;
- 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;
- defining and approving information entitlement policies in connection with the covered functions; and
- 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.
In order to assess whether these individuals are fit for purpose, the regulator will require them to “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.” Accordingly, they will be tested on general securities industry knowledge such as regulatory requirements via a “principles-based” qualification exam. These registration requirements will also not be a one off because as well as passing an exam and getting an operations professional licence, these execs will need to meet “continuing education” requirements.
But exactly how much benefit will testing of a broad understanding of the financial markets ensure that these execs are fit to carry out specific functions such as data management? There is a large degree of concern within the industry that such registration requirements will prove costly and result in very few benefits. It appears to be the introduction of tests for testing’s sake, rather than a tailored and function specific assessment.
The data management industry has long bemoaned the lack of benchmarks and industry best practices for market participants to adhere to, but this is very unlikely to be any kind of solution to this challenge. Obviously, understanding how the industry fits together is beneficial, but such a broad brush approach is surely not the answer, especially as there is no real indication yet of how many execs will be required to register and how much all of this might cost.
Firms have less than 45 days to comment on the proposals. Those firms wishing to submit a response to the SEC on the subject can do so via the SEC website here.
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