More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
The Financial Industry Regulatory Authority said today that it would issue a notice soon with information on how the industry should implement a rule approved by the SEC on June 16 that requires registration, testing and continuing education for some operations staff and supervisors.
“A notice should come out in two to three weeks,” said Nancy Condon, a FINRA spokesperson, in a brief interview.
On Thursday, the SEC approved FINRA Rule 1230(b)(6), which establishes a registration category and qualification examination requirement for certain operations personnel and adopts continuing-education requirements for them.
“FINRA believes the proposed rule change is necessary to help ensure that investor protection mechanisms of the highest level possible 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,” it said in a letter to the SEC supported its new regulation.
The SEC noted in its decision that it had received 17 critical comment letters on the proposed rule change, including input from Wells Fargo Advisors, Charles Schwab, Goldman Sachs, Janney Montgomery Scott and the Financial Services Institute (FSI). For instance, FSI’s letter asserted that “a qualification examination is unnecessary to meet the objectives of the proposal and recommends using firm written supervisory procedures and … training.”
According to FINRA, those required to register, take exams and go through continuing education are: “(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.”
The “covered functions” are defined as follows:
- Client on-boarding (customer account data and document maintenance);
- Collection, maintenance, re-investment (i.e., 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.
FINRA said that the rules include “exception to the operations-professional qualification examination requirement for persons who currently hold certain registrations or have held one during the two years immediately prior to registering as an operations professional.”
The exceptions should be those with Series 6 and 7, the organization says.
Also, FINRA explained that “an unregistered employee who gathers documentation and information in a purely clerical or ministerial capacity likely would not be required to register …”
In late May 2010, FINRA first began soliciting comments on the back-office rules. It stated at the time, “These employees perform an integral role inside the firms, and their actions can have meaningful connections to the safety of customer funds, accounts and transactions, and the overall integrity of firm books and records.”
According to the SEC, broker-dealers and other can comment on the recently approved rules over the next 21 days by using the online comment form or sending email to email@example.com. (File Number SR-FINRA-2011-013 should be noted on the subject line.)