Some (Very Recent) Background
Effective October 1, 2018, FINRA member broker-dealers are required to designate a Principal Financial Officer (“PFO”) and a Principal Operations Officer (“POO”). PFOs and POOs are now required at all broker-dealer firms.
FINRA expects that the PFO would have primary responsibility for financial filings and related books and records. The POO would have primary responsibility for the day-to-day operations of the business.
An individual designated as a PFO or POO must qualify and hold the Series 27 or Series 28 (Introducing Broker-Dealer FINOP) licenses. A Series 27 holder could satisfy either requirement as the Series 27 subsumes smaller Series 28.
The new PFO and POO requirement replaces the current FINRA requirement that BDs designate a CFO. If the individual designated as either the firm’s PFO or POO is already listed on Form BD, Schedule A, the firm is not required to add the PFO and POO titles to such schedule.
Some Things to Consider
In my opinion, transparency and good business practices would suggest that you do in fact list the titles of PFO and POO on Schedule A. Additionally, FINRA does state, in somewhat loose terms, that firms should “consider” recording this information internally at the very least. I would suggest then that the broker-dealer’s Written Supervisory Procedures clearly list the PFO and POO, and especially any delegation of POO duties.
FINRA allows a single individual to hold both PFO and POO positions unless the broker-dealer self-clears or provides clearing services to other firms, in which case the broker-dealer must designate separate individuals as PFO and POO. One or the other of the PFO and POO may also carry out the responsibilities of the FINOP. That is, be the FINOP or be subject to the FINOP’s supervision. If you’ve been wondering about the FINOP and how that individual title and position fits within this whole change schematic, so have I. I address this question below. Stay with me.
A Little More Background (just a little)
Small clearing firms (or self-clearing firms) that do not have the personnel resources to separate the PFO and POO duties among two or more individuals may request a waiver of the requirement. That there exist clearing firms so sparsely staffed as actually warranting a waiver is somewhat surprising.
A PFO or POO must also register as an Operations Professional. Luckily (can you use “luckily” when speaking about rules and regulations? It can’t hurt.) a PFO or POO is not required to pass the Operations Professional (Series 99) examination, because having one or the other FINOP license qualifies that individual for the Operations Professional registration.
FINRA has enhanced the CRD system whereby FINOPs who held the Series 27 and Series 28 licenses prior to October 1, 2018 would be automatically granted Operations Professional status (as of October 1, 2018).
A broker-dealer may designate multiple POOs, provided each individual’s duties are clearly defined.
A broker-dealer may not designate multiple PFOs.
A POO and PFO may designate their respective duties to other principals at the broker-dealer, but they cannot designate away their ultimate responsibility.
OK, Enough Background, Let’s Get to the FINOP Question
If FINRA sees the PFO and POO as having the ultimate responsibility for the broker-dealer’s financial statements, and day to day operations, respectively, then what has become of the FINOP?
And the Answer is…
Because the title of CFO (and for that matter COO: Chief Operating Officer) did not sit well with many FINRA member firms, as the title assumed (when looked at in the true “corporate governance” sense) that the FINOP would have much more of the “C” (as in Chief) level duties than he or she in fact actually had, many broker-dealer firms had been understandably uneasy about the CFO title all along, This could not be more true then at those firm’s where the FINOP is outsourced.
So where does this leave the FINOP? FINOPs are still tasked with the supervision of individuals preparing books and records, Take a look at Rule 1220(a)(4). When outsourced, it is most likely the FINOP that personally prepares the books and records. In larger firms with more abundant resources the FINOP may, indeed, have a staff discharging these duties, but at both small and large firms it is the FINOP who is ultimately responsible for such preparation.
To be clear, the PFO and POO sit at a higher level in the company hierarchy. Finally, for firms that do not clear for others or self-clear an individual can occupy all three positions. That is, PFO, POO, and FINOP. What I have found in this latter case is that certain POO related duties are then delegated to others at the firm.
While rules are rules, historically one would not be surprised to find out that the FINOP had little to do with the non-financial operations at a firm notwithstanding the “OP” in FINOP. Now it seems that FINRA has addressed this issue to the industry’s general satisfaction.
Another New Test on the Horizon?
Pure speculation on my part but I would not be surprised, and do expect at some point, that FINRA will create an alternative examination covering the current operational aspects of the FINOP examination. Then we can have this conversation again.
Before You Go
My posts are intentionally short and provided whenever I find a simple lack of clarity among some of my own clients or that I see more generally occurring in the larger financial services world. They are not written as a treatise on the subject, but rather to clear the air or otherwise provide some clarity.
Disclaimer:
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