SIFMA

GAO Claims SEC Oversight of FINRA is Insufficient; SRO Hearing is This Week

June 5, 2012 | Steve Parker

As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Government Accountability Office (GAO), a non-partisan investigative agency of Congress, conducted a study which criticized the Securities and Exchange Commission’s (SEC) oversight of the Financial Industry Regulatory Authority (FINRA). The purpose of the study was to determine how the SEC has conducted its oversight of FINRA, including the effectiveness of FINRA rules, and how the SEC plans to enhance its oversight.

The GAO found that both the SEC and FINRA do not conduct retrospective reviews of the impact of FINRA’s rules. As a result, the GAO believes that “FINRA may be missing an opportunity to systematically assess whether its rules are achieving their intended purpose and take appropriate action, such as maintaining rules that are effective and modifying or repealing rules that are ineffective or burdensome.” The GAO also noted that the SEC does not conduct sufficient oversight over FINRA’s governance and executive compensation. The SEC has responded to the survey by saying that it is focused primarily on oversight of FINRA’s regulatory departments, which the SEC claims has the biggest impact on investors.
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SIFMA To FINRA: Change Punishment for Unpaid Promissory Notes

January 30, 2012 | Steve Parker

In a letter sent to the Financial Industry Regulator Authority (FINRA) last November, the Securities Industry and Financial Market Association (SIFMA) wants FINRA to give harsher punishments to brokers who have failed to pay back promissory notes to firms. It specifically sought to prevent brokers from being able to plead poverty to escape arbitration payment orders. The purpose of the notes is to provide cash for recruiting and retention incentives. They are typically designed as forgivable loans as long as the broker stays at the firm for a specified amount of time. If the brokers choose to leave early, then they are required to pay back the note.

As a result of not paying the promissory note back, firms have gotten more aggressive in filing arbitration claims for repayment, and in most cases the firm wins. In 2011, there were 778 promissory note cases filed which is a decrease from 2010 during which 1,152 cases were filed. If a broker does not pay the promissory award, FINRA files an action against him/her that could lead to suspension. Once a monetary award has been issued in a FINRA arbitration proceeding, the broker has 30 days to pay the award. If the broker can show an inability to pay back the note; however, he/she will not be suspended and can continue to work for another firm.
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FINRA Amends Proposed Social Media Rule

January 26, 2012 | Steve Parker

In a previous blog, we discussed the Financial Industry Regulatory Authority’s (FINRA’s) proposed Rule 2210 regarding social media. FINRA responded to comments by amending the proposed rule, and filing it with the SEC for approval. The amended rule was designed to respond to concerns about whether certain types of communications should be considered correspondence or public appearances.

In the rule as originally proposed, interactive social media communications would be classified as public appearances such as television interviews, and would have to be filed with regulators. As a result of comments to the proposal, FINRA amended the rule to exclude messages on online interactive forums from a post-use filing requirement.

FINRA explains that the reasoning behind this change is due to the belief that participation in online forums occur in real-time, that it is not practical to require pre-use approval of such postings by a principal, and that these types of communications should be classified as retail communications. According to FINRA, “retail communication would include any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period. ‘Retail investor would include any person other than an institutional investor, regardless of whether the person has an account with the member.'” This means that the retail communication category would instead be supervised by broker-dealers in the same manner as correspondence.
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