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FINRA Gives the Finger(print) to the SEC and FBI
October 2, 2023
There are times when things are so idiotically silly that the beauty of the absurdity is that it's based on reality. This is one of those times. On September 22, 2023, the Securities and Exchange Commission posted a release with this title "Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Declaration of Effectiveness of the Fingerprint Plan of the Financial Industry Regulatory Authority, Inc."
https://www.sec.gov/files/rules/sro/finra/2023/34-98488.pdf. I admit it: I live a somewhat pathetic life because I found the headline of the SEC Release somewhat interesting. FINRA has had a fingerprint plan for a few years; and, geez, why the hell would the self-regulatory-organization need a new one? Last I looked, fingerprints are still attached to the ends of our fingers.
https://www.sec.gov/files/rules/sro/finra/2023/34-98488.pdf. I admit it: I live a somewhat pathetic life because I found the headline of the SEC Release somewhat interesting. FINRA has had a fingerprint plan for a few years; and, geez, why the hell would the self-regulatory-organization need a new one? Last I looked, fingerprints are still attached to the ends of our fingers.
As I read through the SEC Release, my eyes rolled, then glazed over, then rolled back into my head. I'm not going to print the entire ten pages of the document but will give you an extract of the prose that conveys the gist of the matter:
[H]istorically FINRA has processed fingerprints submitted from registered transfer agent and registered clearing agency (hereinafter referred to as “transfer agents” and “clearing agencies”) personnel who are required to be fingerprinted using FINRA’s fingerprint processing platform.5 FINRA states that the new Plan is necessary because FINRA must retire its fingerprint processing platform, due to the termination of support of essential software used by the platform.6 Because its fingerprint processing platform will no longer be supported, FINRA states that there is an exigent need to provide an option for transfer agents and clearing agencies that are currently using FINRA to meet the Exchange Act fingerprinting requirement.7 Accordingly, FINRA is adopting a new Plan to reflect that it has arranged for its FBI-approved channeler (“FBI-Approved Channel Partner”)8 to serve, on an interim basis, as a fingerprinting option for transfer agents and clearing agencies that elect to use it. 9 FINRA states that it will continue to work with SEC and FBI staff to find a more permanent solution that does not involve FINRA acting in a channeler role for transfer agents and clearing agencies. 10 Importantly, FINRA explains that the new Plan will continue, without any changes, the processes established under the 2021 Fingerprint Plan for broker-dealer personnel,11 as well as FINRA’s officers, directors, employees and contractors, and will extend such processes to personnel of transfer agents and clearing agencies with respect to the use of its FBI-Approved Channel Partner. 12
For the reasons discussed below, the Commission finds that, pursuant to Rule 17f2(c) of the Exchange Act, the Plan is not inconsistent with the public interest and the protection of investors and, therefore, declares the Plan to be effective
= = =
6 See FINRA Letter at 1. FINRA states that, for over 20 years, it directly channeled fingerprints of transfer agent and clearing agency personnel to the Federal Bureau of Investigation (“FBI”) using a proprietary platform that used vendor-provided software and specialized communications equipment. Although FINRA continues to process fingerprints submitted by transfer agents and clearing agencies, it soon will no longer have the ability to directly channel fingerprints to the FBI as its fingerprint processing platform must be retired. Specifically, in addition to the vendor discontinuing the software used for the platform and ceasing to support the software, FINRA learned in late 2022 that other software (an unrelated server product) that is integral to the platform’s operation will no longer be supported after October 10, 2023. See id. at 1-2.
7 See id. at 1-4. FINRA states that it will continue to channel fingerprints for these personnel consistent with the 2021 Fingerprint Plan until the Plan is declared effective or September 29, 2023, whichever is earlier. See Exhibit A, at 1, n.1.
8 See Exhibit A at 1, n.3. See also 2021 Declaration at 2, n.6 (discussing the FBI’s conditional approval of FINRA using a specified FBI-Approved Channel Partner).
9 See FINRA Letter at 3-4.
10 See id. at 3. FINRA states that no additional action is needed by the FBI to implement this interim measure because the FBI’s 2021 approval of FINRA’s outsourcing of its fingerprint channeling responsibilities extends to all entities identified in Exchange Act Section 17(f)(2), including transfer agents and clearing agencies. See FINRA Letter at 3, n. 10 (citing letter from Chasity S. Anderson, FBI Compact Officer, National Crime Prevention and Privacy Compact Council Office, FBI, to Derek W. Linden, Executive Vice President, FINRA, dated September 28, 2021), https://www.sec.gov/files/rules/other/2021/fbi-compact-officer-approval-letter.pdf.
11 See id. at 1, 4. For purposes of the Plan, broker-dealer personnel includes personnel of FINRA members and other broker-dealers required to be fingerprinted pursuant to Exchange Act Section 17(f)(2) and Rule 17f-2 thereunder. The term “members,” as used in the Plan, includes Capital Acquisition Brokers, Funding Portals and applicants for FINRA membership. See Exhibit A at 1-2, n.2.
12 See id. at 1, 4. FINRA’s 2021 transition to the FBI-Approved Channel Partner provides broker-dealers an efficient option to comply with the fingerprinting requirements in Section 17(f)(2) and enables FINRA to fulfill its critical regulatory responsibilities for those entities. The 2021 transition similarly enables FINRA to efficiently fingerprint its officers, directors, employees and contractors consistent with New York General Business Law Section 359-e and Exchange Act Section 17(f)(2) and thereby safeguard against potential threats to FINRA personnel, facilities and records. As a result of the 2021 transition, the percentage of fingerprints processed through FINRA’s s fingerprint platform decreased by 97 percent. See id. at 1, n.3. See also 2021 Declaration at 4-6, 11-13.
at Pages 1 - 3 of the SEC Release
It is not just the bureaucratic surplusage necessitating ten pages of bureaucratic doublespeak festooned with 28 footnotes that makes this SEC Release laughable -- oh no, we got more, we have the tortured language and terminology that bureaucrats resort to when they intend to make something sound far more complex and important than it is.What happens when these folks decide to order lunch: Is that a 50-page proposal?
Footnote 6 explains that after some 20 years of having "directly channeled fingerprints" to the FBI "using a proprietary platform," FINRA seems to have been surprised -- caught off guard -- by the fact that "in addition to its vendor discontinuing the software used for the platform and ceasing to support the software, FINRA learned in late 2022 that other software (an unrelated server product) that is integral to the platform's operation will no longer be supported after October 10, 2023." Yeah, I think that we all can see how the discontinuing and the ceasing and the no longer be supported harbinger the end of the fingerprint channeling.
Moreover, after FINRA took someone's fingerprints, the self-regulator "directly channeled" those fingerprints to the FBI. Was there ever a way to indirectly channel the prints? What were the options by which FINRA could send fingerprints to the FBI other than that intriguing modality of "channeled"? Why say send or deliver or transmit when you can mystify the whole process by saying channel?
Apparently, FINRA knew (at some unspecified point in time) that the software vendor was discontinuing the software and its support. Thereafter, "in late 2022," FINRA found out that the support for the integral server software was ending on October 10, 2023. Sure as hell is cutting it close to the wire to have the SEC declare the new FINRA fingerprint plan effective on September 22nd when the whole shebang looks like it was going to come crashing down around October 10th. After all, it was sometime in late 2022, when FINRA found out that "other" software would no longer be supported as of October 10, 2023. That other software was "an unrelated server product," albeit one that is "integral to the platform's operation." I'm still trying to juxtapose the "unrelated" aspect with the "integral" aspect. Sort of like Jumbo Shrimp. The old oxymoron!
If we read everything in context, we realize that FINRA had hired a vendor to provide software and software support for its fingerprint channeling, and FINRA was not only surprised that the vendor had shut down the software and its support but also that the server on which the fingerprinting was supported was losing an unrelated server product that, unrelated as it may be, was integral to the operation of the platform. But, not to worry, because "FINRA states that it will continue to work with SEC and FBI staff to find a more permanent solution that does not involve FINRA acting in a channeler role for transfer agents and clearing agencies."
As such, the solution is for FINRA to continue to not do what it won't and/or can't continue to do while trying to find a more permanent solution so that it's not in the position of doing the channelling role that it can't do and soon won't be able to do; and, frankly, there isn't that much demand for the fingerprint platform these days; but, don't worry, because even though we're not doing what we can't do, we're still going to see if we can find a way to not do what we can't do on a more permanent basis. Further, Footnote 10 reassures us, in part, that "FINRA states that no additional action is needed by the FBI to implement this interim measure because the FBI's 2021 approval of FINRA's outsourcing of its fingerprint channeling responsibilities extends to all entities identified . . ."
For those of you who are really stumped by FINRA's fingerprint taking and channeling, watch this video for a detailed explanation that may answer all of your FINRA fingerprinting questions (or not):