Outsourcing Financials
To outsource, or to not outsource? That is the question. What is the answer?
Generally speaking, when it comes to outsourcing compliance functions for a FINRA Member Firm, the regulatory bodies, FINRA, the Securities and Exchange Commission ("SEC") and the state regulators say you cannot outsource the compliance function.
There is however, one notable exception when a Broker/Dealer can outsource a compliance function. And that is when it comes to the Books and Recordkeeping function. A securities firm can outsource its Books and Record Keeping requirements by engaging the services of an outside part time Finance and Operations Principal ("FINOP").
The FINOP license (FINRA Series 27 or 28) is a unique license in several respects. First, there are two versions of the exam that will grant FINOP status. The Series 28 version is limited to introducing fully disclosed broker dealers and B/D's that deal in private placements, mutual fund and variable products. The Series 27 version is considered the full service FINOP examination and covers all of the above functions as well as self clearing brokerage houses.
Secondly, the FINOP license is the only principal examination that does not require a prerequisite registered representative license prior to testing. For example, before you can sit for the General Securities Principal examination (FINRA Series 24), you must first have passed the Registered Representative examination (FINRA Series 7).
In addition, a Broker/Dealer can also outsource its Books and Record Keeping responsibilities by engaging a "Service Bureau" to compile its financial reports. The Service Bureau can also be engaged to file any and all financial filings for a securities firm through the FINRA Gateway. These reports include but are not limited to monthly and quarterly FOCUS filings, Custody filings, SSOI filings and SIS filings.
Why would a Broker/Dealer want to outsource some or all of its Books and Recordkeeping duties? The answers are simple and straightforward.
Securities firms can realize considerable cost savings by doing this. Also outsourcing can result in a higher standard of professional oversight than can be had by keeping the function "in house". Basically this is a win-win situation with a B/D saving money and getting a higher quality compliance product at the same time.
When a part-time FINOP is utilized, the Broker/Dealer does not need to employ a full-time employee to fill this function. This will result in greatly reduced labor expenses, since a full-time payroll is eliminated. Also eliminated are the related payroll costs of FICA, Medicare and insurance expenses. As the part-time FINOP is not an employee, they will be considered an Independent Contractor and will be paid only for their time in preparing/compiling and filing the financial reports.
By utilizing the right outside Service Bureau, a FINRA Member Firm can benefit from their years of compliance experience and expertise. A qualified Service Bureau will have seen many situations that even a B/D that has been in existence for decades has not seen. The Service Bureau can communicate directly with FINRA, on a securities firm's behalf, thereby eliminating miscommunications that often results in additional inquiries by the regulators. Like an independent contractor FINOP, the Service Bureau is only utilized on an "as needed" basis and this will result in considerable cost savings.
Why are a Broker/Dealer's Financials and Books and Records so important?
While there are literally thousands of securities rules, regulations and laws, there are only two areas that will require a Broker/Dealer to cease its securities operations immediately. These two areas are related. If a securities firm is in net capital violation, or if the brokerage operation is in Books and Record Keeping violation, it is incumbent that they notify FINRA and the SEC right away, and cease all securities business the moment they discover either violation.
Our company, Forest Brokerage Advisers, can assist Broker/Dealers in complying with these two very important requirements. We have served as a Service Bureau for numerous Broker/Dealers over the years. You will have the benefit of our decades of compliance and financial experience at your fingertips.
For those firms that need a FINOP, we also offer a FINOP outsourcing service. Our FINOP’s have clean disciplinary histories, as well as years of FINOP experience. They also hold the full service FINOP license, FINRA Series 27.
If you are interested in saving time and money AND want a superlative level of service from an experienced compliance consulting company, please don't hesitate to reach out to us.