License to Operate: What May Be In Store (or Not)
June 7, 2010
It finally happened. Operations executives in the United States will be treated just like traders, brokers and other deal-making executives.
They will have to get a license, to operate every day and to meet continuing education standards. But those requirements may not be terribly strenuous.
For the first time, managers of reorganization departments, custody departments, securities lending and collateral management will be subject to licensing requirements imposed by the Financial Industry Regulatory Authority (FINRA), the regulatory agency for broker-dealers. Comments on FINRA's proposal are due by July 12.
The proposed licensing should "generate a lot more transparency in what the ground rules of conduct are, where the violations could occur and the penalties for such violations," says John Allan James, a professor of management and corporate governance at Pace University's Lubin School of Business in New York. "Current regulations do define errors of commission, but not errors of omission."
FINRA is working with the Securities Industry and Financial Markets Association and the Securities and Exchange Commission to come up with a licensing examination and continuing-education program for operations executives. The exam will cover professional conduct and ethical considerations, essential product and market knowledge and understanding of operations activities.
"We're aiming for a comprehensive regulatory exam that will be applicable to all operation professionals irrespective of function," says Nancy Condon, vice president of media relations at FINRA in Washington D.C.
Here are just a few of the categories of operational areas where licensing a wide swath of supervisors and managerial-level talent will be required, according to a statement issued by FINRA on May 26: trade confirmation, account statements, settlement and margin, securities lending, prime brokerage, customer account data, document maintenance, financial control, bank custody and financial regulatory reporting.
The licensing would apply to senior management as well as supervisors, managers or other persons responsible for authorizing operations work and those with the authority to commit the firm's capital.
But persons engaged "solely in clerical or ministerial activities" in operations would not be affected, nor would those performing "supporting or advisory roles," such as internal audit, legal or compliance personnel.
Currently-employed operations executives must pass a licensing exam within six to nine months of the new FINRA regulation, but new employees would need to register as operations professionals and pass an examination before doing their jobs.
Senior-ranking executives who have taken principal-level exams from FINRA or even Series 6 and Series 7 exams to sell investment funds and other brokerage products to investors would also be exempt from the licensing exam, but they would be still be required to complete ongoing education with "firm element training." That means internal onsite training, which is already commonplace among most brokerages.
As is often the case with new e licensing requirements, those affected aren't too thrilled with the prospect of attending required courses, let alone passing an exam.
"It's a way for the traders, quant analysts and risk managers to point the finger at operations executives for the financial crisis," one operations manager at a New York brokerage firm told Securities Industry News. Another said: "There is no way to design an exam that could encompass everything an operations manager should know," said another operations executive at a separate New York brokerage firm.
