Proposed FINRA Rule 3190 may lead to "potential disruption," creates "regulatory redundancy," is "premature" as drafted, fails to adequately articulate a basis for implementation.  That's essentially how SIFMA views the new obligations and supervisory responsibilities FINRA would impose on member firms when dealing with third-party service providers. 

As proposed, FINRA Rule 3190 seeks to clarify a member firm’s obligations and supervisory responsibilities regarding outsourcing arrangements.  Yet, SIFMA believes the proposal may have a disruptive influence on industry outsourcing arrangements undertaken in conformity with FINRA’s existing regulatory guidance.  This would be unacceptable, because  outsourcing has been critical to improving the efficiency of the industry, enabling firms to provide improved customer service, while maintaining industry and firm competitiveness internationally.

FINRA Sees the Rewards, SIFMA Sees the Risks.   SIFMA believes that potential risks in implementing the rule far outweigh any rewards that may be derived.  So, while new FINRA Rule 3190 may respond to industry questions and address FINRA’s concerns regarding risks associated with outsourcing, SIFMA is nonetheless concerned over the rule's potential disruption on current industry outsourcing arrangements.

Depending on how FINRA applies the proposed Rule, clearing and carrying member firms could be required to either restructure existing arrangements or unwind and rebuild existing infrastructure around such arrangements.  This would create disruption in the industry and impact member firms’ ability to achieve scale and efficiency, and ultimately impact cost structure and competitiveness in the marketplace.  In addition, the intersection between the Proposal and FINRA’s Operations Professional Proposal creates regulatory redundancy and raises concerns with respect to associated person and registration requirements.

SIFMA also doesn't believe the Proposal adequately articulates a basis or risks that would justify the potentially dramatic regulatory changes proposed or how those risks are not adequately addressed by the current regulatory framework.  In fact, the regulatory framework under NtM 05-48 and related interpretive guidance has effectively served as the foundation for how member firms establish and oversee the covered support functions they have outsourced to 3rd-party service providers.

Firms have relied upon this guidance extensively for over 5 years and have continued to enhance their technology, control and supervisory control systems without material industry disruption due to the outsourcing of support for regulated businesses of member firms.  The result is an improved supervisory infrastructure that is interwoven into member firms’ 3rd-party service provider arrangements that largely has alleviated the concerns raised in NTM 05-48 and the 2004 industry survey that gave rise to it. 

SIFMA therefore disagrees with FINRA’s justification for proposed Rule 3190(c) in the Proposal that outsourcing under the current regulatory regime, involving the movement of assets, presents systematic risk or would “undermine investor confidence in the securities industry.”  SIFMA members have long utilized outsourced services to increase efficiency and reduce risk in accordance with NtM 05-48 and other applicable regulatory guidance.

For these reasons and others more fully described in its comment letter, SIFMA believes that the current Proposal, as drafted, is premature.  If FINRA nevertheless determines to move forward with the rulemaking instead of conducting additional research and analysis as well as soliciting further industry feedback, SIFMA recommends that FINRA amend the current proposal to more clearly codify existing guidance and not introduce additional restrictions and requirements without a clear factual justification.  SIFMA stands 'ready-willing-and-able' to engage in a constructive industry dialogue with FINRA to ensure that any regulatory response in the outsourcing area is consistent with established risks and known industry problems – to the extent they exist – with respect to current outsourcing arrangements in support of regulated functions of member firms.

For further details, go to:   SIFMA Comment Letter, 5/19/11, as signed by Ira Hammerman]