NASD Issues Guidance Regarding the Use of Part-Time FINOPS
On May 17, 2006, NASD issued Notice to Members 06-23 regarding members’ obligations with respect to registered financial and operations principals (FINOPs). NASD Rule 1022 requires member firms to designate a qualified FINOP and sets forth the specific duties a FINOP must perform. In 1999, NASD informed member firms that all designated FINOPs are responsible for each of the duties specified in Rule 1022, whether or not they are employed off-site, work only part-time or hold multiple registrations with different member firms (part-time FINOPs). NASD also indicated that members that employ a part-time FINOP must establish financial controls procedures that describe the FINOP’s duties, thoroughly outline the manner in which the part-time FINOP will perform those duties, and set forth a process for ensuring that the part-time FINOP understands and remains current with securities laws, regulations and SRO rules relating to financial and operational responsibility.
In Notice to Members 06-23, NASD voiced concern that a series of SEC examinations of members employing part-time FINOPs reflected that not all members have implemented the NASD’s prior guidance. Although NASD was clear that the use of a part-time FINOP does not create any per se violations or deficiencies, it urged members to examine their practices to ensure compliance with the 1999 guidance.
Additionally, NASD provided supplemental guidance on the use of part-time FINOPs, including the following:
- Part-time FINOPs should conduct a minimum number of on-site firm visits each calendar year to review the member’s books and records, and some or all of those visits should be on a surprise basis.
- A member using a part-time FINOP should provide the FINOP with complete access to all of the member’s books and records.
- A member using a part-time FINOP should conduct ongoing assessments of the FINOP’s ability to perform his or her duties.
Moreover, NASD informed members that it may take disciplinary action against both the part-time FINOP and the employing member if it finds violations of the federal securities laws or SRO rules relating to financial and operational responsibility. In this regard, NASD cautioned that a disciplinary action against a part-time FINOP for misconduct at one member could have serious consequences for other members that engage the same FINOP, particularly if the FINOP is barred, suspended or required to re-qualify by examination.
In addition to those raised in the NASD’s guidance, the use of part-time FINOPs may raise other issues, including:
- Whether the state blue sky laws within the jurisdictions where the part-time FINOP is or will be employed allow for registration with multiple unaffiliated firms.
- Whether the outside business activities of the part-time FINOP create conflicts of interest for your firm.
- Whether the engagement letter for the part-time FINOP requires periodic updates concerning the status of the FINOP’s registration, outside business activities and professional licenses.
Securities Industry FYI is a service of the Broker-Dealer Practice of Morgan Lewis. If you have any questions concerning these important legal developments, please contact any member of Morgan Lewis’s Broker-Dealer Practice, including:
Washington, D.C.
Beth Kiesewetter
202.739.5127
bkiesewetter@morganlewis.com
Theodore R. Lazo
202.739.5250
tlazo@morganlewis.com