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Licensing Ops Execs: Great Idea, Bad Execution?
May 4, 2011
A plan by the Financial Industry Regulatory Authority to register and license senior-ranking operations executives not only at the nation’s broker-dealers but also third-party service providers is meeting with plenty of resistance from compliance experts.
At issue is just how many operations executives will be affected at registered broker-dealers and how many more will need to be registered at the firms which provide front, middle and back-office functions for broker-dealers.
On March 4, FINRA issued its final proposal to the SEC for a rule change allowing senior-ranking operations executives to be licensed. Comments were due by April 8.
It all boils down to cost and administrative burden. The greater the number of employees registered with FINRA at the registered brokerage firm and its third-party service providers, the higher the expense for the brokerage firm. Not only will the brokerage firm need to fork over the money to pay for its own executives taking examinations and fulfilling continuing education programs but it might also have to do so for the third-party firms.
That’s just the tip of the iceberg. Broker-dealers and third-party firms must also figure out how to reallocate work for the executives which need to be trained.
“Broker-dealers are likely to need further clarification as to how far FINRA wants the licensing requirements to go if they are outsourcing operations a parent firm, a common unit of a parent firm or an external vendor,” says Edward Johnsen, a partner with the law firm of Winston & Strawn in New York who specializes in broker-dealer compliance matters.
FINRA’s goal is straight-forward: it wants to limit the operational risk – and cost – involved with either fraudulent conduct or unintentional errors.
The move, which FINRA first announced last year, is seen as a way to prevent Ponzi schemes such as the one orchestrated for decades by Bernie Madoff. Customers of Bernard L. Madoff Investment Securities received fraudulent statements made up of fake securities transactions from Madoff’s operations executives who apparently thought they could get away with it. That’s because they had no qualifications to do their jobs and they were not subject to any oversight.
Even the simplest mistakes can cost a brokerage firm plenty. Brokerage firms rarely – if ever—disclose just how much an operational error costs. But failing to settle a trade on time due to miscommunication with a fund manager or custodian bank could easily come to $1,000 to fix- in administrative time alone. That doesn’t even include any interest or other payments
However, FINRA’s list of functions which would require senior-ranking operations executive involvement is pretty exhaustive. They include customer account data and account maintenance; collection maintenance; reinvestment and disbursement of funds; receipt and delivery of securities and funds and 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; margin; securities loan and securities lending; prime brokerage; 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; defining and approving business security requirements and policies for information technology; 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.