Rulemaking Item Discussed at the February 2011 Meeting
February 4, 2011
Dear Executive Representative:
The FINRA Board of Governors met this week to discuss a number of issues, including one rulemaking item. We have included a summary of the rule proposal, as approved by the Board, and next steps below.
As you might imagine, the Board also spent considerable time discussing two of the Securities and Exchange Commission (SEC) studies mandated by the Dodd-Frank Act. The studies were released late last month.
Study on Enhancing Investment Adviser Examinations
On January 19, the SEC released its study on enhancing exams for investment advisers. The study clearly states that the SEC does not have the resources to examine investment advisers with adequate frequency and suggests that Congress consider several options to address this problem. Two of those options discuss authorizing an SRO to examine investment advisers.
We appreciate the SEC's recognition that SROs play an important role in protecting investors through the regulation of broker-dealers. We believe that customers of investment advisers would benefit from the additional protection afforded by SRO oversight.
Study on Investment Advisers and Broker-Dealers
In another study released on January 22, SEC staff recommended creating a uniform standard of care for brokers and investment advisers that provide personalized investment advice to retail investors.
FINRA has long stated that the standard of care for brokers should be a fiduciary duty to act in the best interests of the customer without regard to the professional's financial or other interests. Dodd-Frank and the SEC study both recognize that application of a fiduciary duty must reflect the nature of the broker-dealer business. Such a uniform standard of care would help to protect the customers of both investment advisers and broker-dealers.
Concept Proposal on Client Disclosure
On the topic of disclosure, we believe the time is right to step back and look at the way information is disclosed to customers. There is a clear need for more Web-based, plain-English disclosure about conflicts and fees, and range of products. It is a fundamental building block of single standard. As you may know, in October we issued a concept proposal about the appropriate needs for disclosure. We received many comments in response, and we will bring our recommendations related to the proposal to an upcoming Board meeting.
I appreciate our ongoing dialogue, and I will continue to update you on issues facing regulators and firms alike throughout the year.
Richard G. Ketchum
Chairman and CEO
Rulemaking Items Discussed at the February 2011 Meeting
The FINRA Board of Governors took action regarding the following rulemaking item at its February 3, 2011, meeting. Below are the Board's actions and next steps.
Third-Party Service Providers
The Board considered a new rule addressing member firms' use of third-party service providers, making clear that a firm which engages a third-party service provider to perform functions related to its business as a regulated broker-dealer remains obligated to comply with the federal securities laws and any FINRA and MSRB rules that are applicable to those functions. The proposed rule also requires a firm to have supervisory procedures, including due diligence procedures, for its third-party service provider arrangements.
In addition, the proposed rule requires a clearing or carrying member firm to comply with additional restrictions and obligations regarding its third-party service provider arrangements. The rule would not apply to ministerial functions performed by third-party service providers or to any carrying agreements approved pursuant to proposed FINRA Rule 4311 (Carrying Agreements).
The Board authorized staff to issue a Regulatory Notice requesting comment on the rule proposal.