Regulatory Notice

FINRA Invites Member Firms to Self-Report Potential Share Class Selection Violations

February 15, 2019 | Parker MacIntyre

FINRA has announced a new self-reporting initiative covering potential violations by its Member Firms of various rules governing share class recommendations relating to 529 Plans. See FINRA Regulatory Notice 19-04 (Jan. 28, 2019). Similar to the SEC’s recent self-reporting initiative regarding mutual fund share class selection in connection with 12b-1 marketing fees (which we have blogged about last month and in May of 2018), this new FINRA initiative (the “Initiative”) offers potential leniency in return for Member Firms coming forward to self-report likely violations pursuant to the terms of the Initiative.

529 Plans are tax-advantaged municipal securities that are structured to facilitate saving for the future educational needs of a designated beneficiary. While the sale of 529 Plans is governed by the rules of the Municipal Securities Rulemaking Board (“MSRB”), FINRA is responsible for enforcing the MSRB’s rules. These rules, in turn, require that recommendations of 529 Plans be suitable in light of the customer’s investment profile, and that Member Firms selling 529 Plans have a supervisory system in place to achieve compliance with the MSRB’s rules.

FINRA Seeks to Streamline and Strengthen Outside Business Activities and Private Securities Transactions Rules

April 2, 2018 | Steve Parker

The Financial Industry Regulatory Authority recently published a Regulatory Notice requesting comment regarding a proposed new rule pertaining to registered persons’ outside business activities. Among other things, the proposed rule would significantly alter a broker-dealer’s obligations with respect to a registered representative’s conduct of investment advisory business through an unaffiliated registered investment adviser.

FINRA decided to propose this new rule after a “retrospective review of FINRA’s rules governing outside business activities and private securities transactions, FINRA Rule 3270 (Outside Business Activities of Registered Persons) and FINRA Rule 3280 (Private Securities Transactions of an Associated Person).” FINRA determined that the rules “could benefit from changes to better align the investor protection goals with the current regulatory landscape and business practices.” As a result, FINRA proposed a new single rule that it claims will make registered persons’ duties in regards to outside business activities clearer and decrease nonessential obligations while enhancing investor protection.

If the proposed rule is adopted, it will replace Rules 3270 and 3280. The comment period ends on April 27, 2018. Continue reading ›

FINRA Requests Comments on Rule Amendment Permitting Use of Investment-Strategy Projections

March 15, 2017 | Elizabeth Dalziel

In February 2017, the Financial Industry Regulatory Authority Inc. (“FINRA”) published a Regulatory Notice asking for comment on proposed changes to FINRA Rule 2210, which governs communications with the public. Under current Rule 2210, broker-dealers are not allowed to make communications that “predict or project performance, imply that past performance will recur or make any exaggerated or unwarranted claim, opinion or forecast.” According to FINRA, the purpose of this rule is to prevent retail investors from relying on performance projections relating to individual investments, which tend to be deceptive.

However, FINRA has acknowledged that performance projections that are not based on how well an individual investment performed can be helpful to investors who are contemplating an investment strategy. Furthermore, investment advisers are permitted to use performance projections in choosing an investment strategy for their clients, provided that the projections do not violate the Investment Advisers Act of 1940’s antifraud rules. Therefore, FINRA proposed the amendments to Rule 2210 in order to allow broker-dealers to use projections in a way that benefits clients and to make the rules governing performance projections by broker-dealers and investment advisers more uniform. Continue reading ›

FINRA Publishes Regulatory Notice Clarifying its Capital Acquisition Broker Rules and Sets Effective Date for Implementation

November 11, 2016 | Parker MacIntyre

On October 17, 2016, FINRA published Regulatory Notice 16-37 setting an effective date for implementation of its new Capital Acquisition Broker (“CAB”) rules (“CAB Rules”). The CAB Rules, which codify the creation and regulation of a new FINRA Membership category designed for broker/dealers that restrict their activities to certain designated corporate finance transactions, are discussed in greater detail in a recent Parker MacIntyre blog post (see “SEC Approves FINRA’s Capital Acquisition Broker Rules (“CAB Rules”)”). Continue reading ›

FINRA Proposes Changes to Gifts and Gratuities Rule

August 25, 2016 | Steve Parker

Earlier this month, FINRA issued a regulatory notice advising that it has proposed various changes to the rules relating to gifts, gratuities and non-cash compensation. If adopted, the proposal would amend FINRA Rule 3220 (the “Gifts Rule”) and would create two new rules, Rule 3221 (“Non-Cash Compensation”) and Rule 3222 (“Business Entertainment”).

The current Gifts Rule prohibits any FINRA member or associated person from giving anything of value in excess of $100.00 per year to any person, if such payment is connected with the business of the recipient’s employer. Under the proposed revised Gifts Rule, the $100.00 limit would be increased to $175.00 per recipient per year. The proposed increase is designed to account for the rate of inflation since the adoption of the original Gifts Rule. The current requirements that all associated persons’ gifts must be consolidated with those of the member firm and that records be maintained with respect to all such gifts, will be continued in the new rule. Continue reading ›

New Registration Requirements for Developers & Supervisors of Algorithmic Trading Strategies

May 13, 2016 | Patricia Klusmeyer

The Securities and Exchange Commission (“SEC”) recently approved a proposed Financial Industry Regulatory Authority (“FINRA”) rule change which will require associated persons responsible for the design, development, and significant modification of algorithmic trading strategies, or the supervision of such activities, to register as Securities Traders. This development highlights the increasing regulatory and enforcement focus FINRA & the SEC are placing on the use of trading algorithms in the financial services industry.

Currently, associated persons are required to register as Securities Traders if they are engaged in proprietary trading, the execution of transactions on an agency basis, or the direct supervision of such activities with respect to off-exchange transactions in equity, preferred or convertible debt securities. FINRA is expanding this requirement to include associated persons who are: 1) primarily responsible for the design, development or significant modification of algorithmic trading strategies; or 2) responsible for the day to-day supervision or direction of such activities.

FINRA Amendments to Relax Filing Rules Governing Retail Communications

July 24, 2015 | Shay Virtue

FINRA has recently released Regulatory Notice 15-16 which contains proposed amendments to the rules currently governing public communications they will make reporting by FINRA member firms regarding public communications less onerous due to more lenient filing requirements. If the proposed amendments are adopted, the rules proposed to be amended are FINRA Rules 2210, 2214 and 2213.

FINRA Rule 2210 relates to communications of a firm with the public. Under the current regime new firms are required, at least 10 days prior to making any retail communications, to file such communications with FINRA for the first year of the firm’s membership. Under the proposed amendment, new firms would only be required to file their websites and any material changes thereto within 10 days of first use of the website for the first year of the firm’s membership. This proposed change was prompted by FINRA’s recognition that the primary form of retail communications is now done through the firm’s websites and that the 10-day waiting period served no significant investor protection function.
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FINRA Issues Regulatory Notice Clarifying New Suitability Rule

June 20, 2012 | Steve Parker

The Financial Industry Regulatory Authority (FINRA) released a Regulatory Notice in May clarifying its new suitability rule, Rule 2111. The rule, which was approved by the Securities and Exchange Commission (SEC) in November 2010, will be implemented on July 9, 2012. The Notice is intended to answer industry questions and provide guidance on the new rule.

According to FINRA, the new rule imposes the same obligations as the predecessor rule and related case law. It is intended to clarify and codify three main suitability obligations.

The first obligation is reasonable-basis suitability, which has two components: a broker must (1) perform reasonable diligence to understand the nature of the recommended security or investment strategy involving a security or securities, as well as the potential risks and rewards, and (2) determine whether the recommendation is suitable for at least some investors based on that understanding.

The second obligation is customer-specific suitability, in which the broker must have a reasonable basis to believe that a recommendation of a security or investment strategy is suitable for the particular customer based on the customer’s investment profile.
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FINRA Proposed Rule: Expungement Procedures for Unnamed Persons

May 8, 2012 | Steve Parker

The Financial Industry Regulatory Authority (FINRA) has proposed a rule which would allow individuals who are not named as parties to a customer-initiated arbitration case to seek expungement relief by initiating “In re” expungement proceedings. Currently, unnamed persons do not have a prescribed way to seek these types of expungements, and must seek relief by:

Asking their current or former firm that is a party to the arbitration to request expungement on their behalf;
Seeking to intervene in the arbitration filed by the customer; or
Initiating a new arbitration case in which the unnamed person requests expungement relief and names the customer or firm as respondent.

According to Regulatory Notice 12-8, “FINRA believes that the current options do not always adequately address a number of issues that can arise in connection with expungement requests.”
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FINRA Wants Heightened Supervision of Complex Products

February 8, 2012 | Steve Parker

In a move that signals the need for heightened due diligence and supervision among financial advisory firms, the Financial Industry Regulatory Authority (FINRA) released Regulatory Notice 12-03 in relation to complex products last month. It is intended to guide firms to increase their supervision of activity involving complex products such as structured notes, reverse convertibles, inverse or leveraged exchange traded funds, hedge funds and securitized products. FINRA has already brought a number of enforcement actions against firms relating to complex products, charging inadequate supervision, unsuitable recommendations and misleading price sales.

Among the problems noted by FINRA is the uncertainty of how these products will behave in the market, as opposed to theoretical projections. The notice states, “Regulators have expressed concern about complex products because the intricacy of these products can impair the ability of registered representatives or their customers to understand how the product will perform in a variety of time periods and market environments, and can lead to inappropriate recommendations and sales.”

FINRA chose not to define a complex product in the notice due to the ever changing innovation in the marketplace; however, the notice states that “any product with multiple features that affect its investment returns differently under various scenarios is potentially complex.” The notice goes on to give a non-exhaustive list of examples of complex products. FINRA advises firms that are unsure whether a product is complex to err on the side of applying their procedures for enhanced oversight to the product.
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