SFAB Email to Small Firms

October 22, 2012

Dear Small Firm Executive Representative:

Below is a summary of some recent activity at FINRA that we think will be of interest to you.

Debt Research Analyst Conflicts of Interest. At its September meeting, the FINRA Board of Governors authorized staff to publish a Regulatory Notice seeking comment on a revised debt research proposal. The rule would apply generally to any firm communication involving analysis of a debt security that could reasonably form the basis for an investment decision. The new proposal contains revised exemptions for research distributed to institutional investors and for firms with limited investment-banking and for the first time an exemption for firms with limited principal debt trading activity (less than $15 million in principal debt trading revenues and fewer than 10 debt traders). We are pleased that FINRA recognized that the proposed rule provisions requiring separation of debt research analysts from principal trading activities should not apply to firms who do minimal principal debt business and to firms that are too small to be able to separate the functions. Based on the SFAB recommendation, FINRA released the proposal in a Regulatory Notice seeking comment rather than a filing directly with the SEC. Comments are due by December 10; we hope you will take advantage of this opportunity provide FINRA information to support inclusion of a small firm exemption to the rule.

BrokerCheck. The FINRA Board also recently approved a proposal to be filed with the SEC that would require firms to include a reference and a link to BrokerCheck on their websites, and to make certain settlements with foreign regulators and states permanently available on BrokerCheck. During recent years, as the amount of information available on BrokerCheck was expanded, the SFAB has argued forcefully for certain limits. For example, we argued that a registered representative's exam score is not material to an investor's evaluation of that representative. In the current version of the rule, there is no provision for disclosure of exam scores. We also think that FINRA should review its policies in connection with disclosing information about events that happened 20, 30—or even 40 years ago; at some point that information becomes largely irrelevant. While we understand that the SEC has directed FINRA to make BrokerCheck more accessible to investors and the public in general, we need to be vigilant in advocating for a balance between the appropriate level of disclosure and fairness to financial advisers.

Supplemental Statement of Income (SSOI). Firms will be required to provide FINRA with more granular revenue and expense data for the quarter ending September 30 through their eFOCUS filing, which is due by October 26, 2012. FINRA adopted new Rule 4524 because the information received on the current FOCUS report is often in the "Other" category, and FINRA frequently has to contact the firm after the FOCUS is filed or before an exam to request more financial information. To minimize burdens on small firms, we asked FINRA staff to provide more guidance, to which they responded by publishing a page dedicated to SSOI that includes practical guidance in a question-and-answer format. Should you have any questions on the new SSOI requirement after reviewing the guidance, please contact your regulatory coordinator.

Best Practices/Common Findings. Now that most of the FINRA consolidated rules are in effect, the industry is interested in receiving feedback on common deficiencies uncovered during exams so that they can make adjustments to their supervisory process before their next FINRA exam. Firms also want input from both FINRA and other firms about the best ways to comply with the new rules. To address these requests, FINRA hosted a free webinar on October 9, where industry panelists and senior FINRA staff discussed the Risk Control Assessment Survey (RCA) and how the results are impacting the examination program. Panelists also reviewed common deficiencies from recent exam findings and shared some effective industry compliance practices. The webinar is available for free on-demand on FINRA's website. FINRA plans to continue offering free webinars in 2013, so please email any of us your suggestions for possible topics.

Free Access to 2012 FINRA Annual Conference Panels. FINRA recorded many of the panel sessions at its 2012 Annual Conference, which are now available on-demand at no charge on FINRA's website. There are more than 24 hours of material you can use to train your staff or to learn about a new rule or process. Topics discussed include suitability, outside business activities, the new advertising rules, social media and many more, so please access the sessions that interest you and let us know if you find them helpful. This is the first year FINRA has offered recordings of the Annual Conference panels for free, and if small firms find them of value, we will ask FINRA to continue this practice.

SEC Rule Interpretation. We recently expressed our concerns to the SEC in connection with their 1988 interpretation on how firms must treat certain 12b-1 fees when computing net capital. The SEC listened to our reasoning about why the interpretation should be updated, but for now the interpretation still stands. We think many firms might be cited for inaccurate net capital computations because they don't know about the interpretation. In short, the interpretation provides that certain 12b-1 fees that are credited to your clearing firm account during a particular month are not allowable assets for purposes of computing net capital for that month. For more information, please refer to page 296 of the SEC's interpretations of financial and operational rules.

Continuing Member Application (CMA) Fees. Firms have commented that the new CMA fee structure, while tiered, is nevertheless burdensome, especially to very small firms. The SFAB asked FINRA to respond to these concerns. While FINRA is not making changes to the current structure, FINRA will separately consider adopting an exemption process for CMAs that do not require significant staff review.

Communication with the SFAB. If you have concerns or issues you would like the SFAB to consider, please let us know by sending a reply to this email or clicking on one of our names below. Our next meeting is on November 15, 2012, so if you have a topic you wish for us to raise, please let us know by November 1, 2012.


Mark Cresap
Chair, FINRA Small Firm Advisory Board

Small Firm Advisory Board Roster

Patricia S. Bartholomew
Craig-Hallum Capital Group LLC
Minneapolis, MN

Eric A. Bederman
Bernardi Securities, Inc.
Chicago, IL

Christopher Charles
Wulff, Hansen & Co.
San Francisco, CA

Mark Cresap
Cresap, Inc.
Radnor, PA

Tina B. Maloney
Winslow, Evans & Crocker, Inc.
Boston, MA

Daniel W. Roberts
Roberts & Ryan Investments, Inc.
San Francisco, CA

Joseph R.V. Romano
Romano Brothers & Co.
Evanston, IL

David V. Shields
Wellington Shields & Co.
New York, NY

David M. Sobel
Abel/Noser Corp.
New York, NY

David W. Wiley III
Wiley Bros. – Aintree Capital, LLC
Nashville, TN