What is a Financial & Operations Principal (FINOP)?
The Financial and Operational Principal (FINOP) is a registered position mandated for all registered broker-dealers by the Financial Industry Regulatory Authority (FINRA) and Securities Exchange Commission (SEC) rules and regulations. The primary responsibility of a FINOP is to oversee the financial and operational aspects of the firm, ensuring compliance with regulatory requirements. The FINRA Rule 1010 Series requires each new Applicant for membership, except sole proprietorships, to have one Financial and Operations Principal (FinOp).
To qualify as a firms’ FINOP, individuals must pass FINRA’s Series 27 or Series 28 qualification examination. The Series 27 license qualifies an individual to be the FINOP of a full-service or introducing broker-dealer. The Series 28 license qualifies an individual to serve as the FINOP of an introducing firm only.
Once registered with a FINRA member firm, the FINOP becomes responsible for the maintenance of the broker-dealer’s books and records, the accuracy of the financial statements, compliance with applicable Net Capital Rules and Customer Protection Rules, timely submission of all financial regulatory reports and overall supervision of and responsibility for the individuals who are involved in the administration and maintenance of the firm’s back-office operations.
FINOP Responsibilities
A licensed FINOP requires comprehensive knowledge of the practices in these categories:
- Net Capital Compliance
- Financial Regulatory Reporting
- Review, Analysis and Preservation of Accurate Books and Records
- Securities Investor Protection
- Annual Audit and Regulatory Exam Support
Net Capital Computations
Pursuant to FINRA’s Net Capital Rule (Rule 15c3-1), firms are required to compute their net capital not less than monthly. The rules are written in such a way that requires firms to be in compliance on a moment-to-moment basis. Firms may need to compute net capital on a more frequent basis if the FINOP determines the need to do so in order to demonstrate net capital compliance.
In a simplistic way, Net Capital can be defined as a computation of a broker-dealer’s liquidity. In other words, what the firm would expect to receive if the firm converted its assets and liabilities to cash in the event of a liquidation event.
Preparing the required Net Capital Computations and understanding the complex requirements under the Net Capital Rule is a key role of the FINOP.
Regulatory Financial Reporting
FOCUS Reports. One FINRA reporting requirement is to file a Financial and Operational Combined Uniform Single (FOCUS) Report. The FINRA FOCUS report must be filed within 17 business days following the end of the month or quarter (the timing of the filing is dependent on the type of broker-dealer) and includes a balance sheet, income statement, net capital computation and equity reconciliation. A firm’s FINOP is responsible for the creation and submission of the FOCUS report on a monthly/quarterly basis.
Supplemental Schedule of Income (SSOI). In addition to the monthly/quarterly filing of the FOCUS report, firms are required to file the Supplemental Schedule of Income (SSOI) with FINRA on a quarterly basis. The SSOI provides FINRA with a more detailed, granular presentation of the FOCUS income statement. The FINOP is responsible for categorizing the various general ledger accounts to be included in the appropriate buckets on the SSOI.
Form Custody. Another required filing with FINRA is Form Custody. Form Custody was created in 2013 to provide FINRA with insight into the processes that are in place within a broker-dealer that accepts and/or holds customer funds and securities. The form is required to be completed and filed even if the firm does not accept and/or hold customer funds and securities. Form Custody also describes a broker-dealer’s activities acting as a dually registered RIA and the broker-dealer’s association with affiliated RIAs.
Review, Analysis and Preservation of Accurate Books and Records
FINOPs are responsible for ensuring that the firm is maintaining the right books and records in the correct manner for the appropriate amount of time, and that they’re easily accessible when they need to be.
Investor Protection – Securities Investor Protection Corporation (SIPC)
In the rare occurrence of a broker-dealer failure, SIPC provides the firm’s customers with coverage that protects the securities and cash in customer brokerage accounts up to $500,00 (subject to $250,000 maximum for cash). Broker-dealers are required to be members of SIPC and are assessed amounts that are paid to SIPC for that protection.
SIPC assessment computations are calculated twice per year and are filed with SIPC along with payments being made for those assessments. SIPC-6 is filed for the first six-month period of a firm’s fiscal period, and the SIPC-7 filing is filed for the 12-month period for the firm’s fiscal year.
Regulator Inquiries/Examination Support
As a registered broker-dealer, the firm will experience routine cycle examinations which is a formal process by FINRA that reviews prior filings, tests the accuracy of the firms net capital computation, and assesses the types of business activities and risk exposure of the firm under review. The broker-dealer can also expect routine questions from the firm’s assigned Risk Monitoring Analyst at FINRA that may arise as a result on fluctuations in business volume and other factors.
Annual Audit Support
All registered broker-dealers are required to obtain a certified financial audit of their financial statements on an annual basis, as of their fiscal year end. The audit must be conducted by an independent accounting firm that is registered with the Public Company Accounting Oversight Board (PCAOB).
Additional Resources:
FINOP Focus: Expense Sharing Agreements Best Practices
Net Capital and Complex Products – 4 Things You Need To Know
The Value of Outsourced FINOPs
The primary advantages of outsourcing the FINOP role are cost, knowledge, and experience. The bulk of FINRA-registered broker-dealers are small to mid-sized firms. At the time of registration, firms must have a FINOP in place; registering firms often decide to outsource the role until they can find a suitable candidate or until they are ready to accommodate a full-time FINOP.
Outsourced FINOPs can fill the position until your firm has found a suitable candidate, support a FINOP already in place by providing valuable knowledge and experience, or fill the position indefinitely.
Oyster Consulting has FINOPs with significant experience in Operations, general securities industry regulations and preservation of books and records. They will share their expertise, prepare net capital computations, financial regulatory reports, and provide support to your firm’s senior management.
