Retrospective Rule Review

Background

FINRA believes that it is appropriate, after a reasonable period of time, to look back at its significant rulemakings to determine whether a FINRA rule or rule set is meeting its intended investor protection objectives by reasonably efficient means. These retrospective reviews look at the substance and application of a rule or rule set, including any unintended consequences, as well as FINRA's processes to administer the rules. The goals of our retrospective rule review program are fully aligned with the overall objectives of FINRA360, and thus advancing and accelerating this program have become key components of the organizational review.

The following rules are being reviewed as part of our retrospective review program.

Business Continuity Plans

FINRA is conducting a retrospective review of Rule 4370 (Business Continuity Plans and Emergency Contact Information), FINRA’s emergency preparedness rule. Rule 4370 requires a member firm to create, maintain, annually review and update upon any material change a written business continuity plan identifying procedures relating to an emergency or significant business disruption. The rule was adopted after the events of September 11, 2001, to help ensure that member firms would be able to continue their business operations in the event of such disruptions. FINRA began the assessment by seeking public comment in Regulatory Notice 19-06 on the effectiveness and efficiency of the rule.

Annual Compliance Meeting

FINRA initiated a retrospective review of Rule 3110 (Supervision) to assess its effectiveness and efficiency. Rule 3110 governs annual compliance meetings and requires each registered representative and registered principal to participate, at least once each year, in an interview or meeting at which compliance matters relevant to the particular representative or principal are discussed. FINRA began the assessment by seeking public comment in Regulatory Notice 18-14 on the effectiveness and efficiency of the rule and is in the process of evaluating the input received during the assessment from a broad range of stakeholders.

Outside Activities

In May 2017, FINRA launched a retrospective review of its outside business activities and private securities transactions rules to assess their effectiveness and efficiency. These rules serve important goals: They seek to protect the investing public when a member's registered or associated persons engage in potentially problematic activities that may be unknown to the member but could be perceived by the investing public as part of the member's business. An ancillary benefit is that the rules protect the member from resulting reputational and litigation risks.

The retrospective rule review confirmed the continuing importance of rules relating to outside activities, but also indicated that the current rules, as well as related guidance, could benefit from changes to better align their investor protection goals with the current regulatory landscape and business practices. In particular, FINRA received significant feedback on members' obligations with respect to the investment advisory activities of their registered persons.

Consistent with a number of recommendations by stakeholders during the retrospective review, FINRA issued Regulatory Notice 18-08 proposing a single streamlined rule to address the outside activities of registered persons. The proposed rule would clarify the obligations in this area and reduce unnecessary burdens while strengthening protections relating to activities that may pose a greater risk to the investing public.

Member Application Program (MAP) Rules

FINRA closely reviews applications to become a new member of FINRA, and to make material changes to an existing member's operations, through our Membership Application Program (MAP). The purpose of this review is to screen out firms that may present a serious threat to investors and to impose conditions on members to help protect their customers. The review also seeks to assure that new firms or firms making material changes to their operations are prepared to comply with our rules and the federal securities laws before they begin these operations.

Dedicated staff (MAP Group) reviews the applications and either approves or rejects each application to become a new member or change business operations. These MAP group determinations are subject to review and the firm may appeal adverse determinations to the National Adjudicatory Council (NAC), the SEC and the courts. While the membership application function represents a key self-regulatory function that provides important investor protections, it has generated a number of questions, which prompted our retrospective review of the MAP rules.

During the assessment phase of the retrospective review, commenters supported the core MAP function, while suggesting important changes to clarify the MAP rules and streamline the administrative process. These suggestions were consistent with enhancements to the MAP process that we have been implementing in recent years, including establishing a "fast track" review process, improved applicant outreach and better transparency between applicants and FINRA. In response to the latest comments, FINRA is considering additional changes to the MAP rules and processes.

In response to the issues raised by stakeholders during the assessment phase, FINRAs' Board of Governors approved a proposal that would, among other changes:

• restructure and streamline the MAP rules;
• codify current MAP practices to reduce the overall application review period from 180 days to 150 days; and
• modify the MAP process by, among other things:
  • clarifying the events that would require a continuing membership application (e.g., change in ownership or control);
  • clarifying the ability of the MAP Group to lapse and reject applications; and
  • eliminating the ability of the MAP Group to impose interim restrictions pending review.

Carrying Agreements

FINRA has launched a retrospective review of FINRA Rule 4311 (Carrying Agreements). Rule 4311 governs requirements applicable to members when entering into agreements for the carrying of customer accounts. The rule in its current form was approved by the SEC in 2011 and is the consolidated successor to former NASD and NYSE rules that had governed this area. Broadly, Rule 4311 prohibits a member, unless otherwise permitted by FINRA, from entering into an agreement for the carrying of any customer account in which securities transactions can be effected unless the agreement is with a carrying firm that is a FINRA member. Firms are permitted to allocate between themselves responsibility for functions as enumerated in the rule. For example, a smaller firm can maintain relationships with its customers and take responsibility for opening accounts and accepting orders from its customers, while the carrying firm takes responsibility for the extension of credit, the receipt and delivery of funds and securities and safeguarding funds and securities. Regulatory Notice 18-10 asks a series of questions regarding the implementation and impact of Rule 4311. This retrospective rule review may be of particular interest to smaller firms, most of which rely on carrying agreements to discharge core operational and compliance obligations.

Communications with the Public

FINRA engaged in a retrospective review of its communications with the public rules to assess their effectiveness and efficiency. The retrospective review led to significant changes to the advertising review program:

• In 2015, FINRA issued Regulatory Notice 15-17 that provided guidance to members on the communications with the public rules. Much of the guidance is derived from questions received in the retrospective review.
• In 2016, FINRA amended our communications with the public rules to eliminate filing requirements for various types of communications, including investment company shareholder reports, backup material for investment company rankings and comparisons, and generic investment company communications. As a result of these changes, the volume of filings with the Advertising Regulation Department has declined significantly.
• In October 2017, FINRA upgraded its Advertising Regulation Electronic Files (AREF) System, a web-based application available through the FINRA Firm Gateway that enables firms to electronically submit communications with the public for review by FINRA. The upgrade allows firms to file webpage and website communications in their native format (e.g., html).
• In April 2017, FINRA published Regulatory Notice 17-18, our third notice that provides guidance to members on their use of social media. FINRA continues to be in the forefront among regulators in providing guidance to firms on this increasingly important form of communication.
• In February 2017, FINRA published Regulatory Notice 17-06, seeking comment on a proposal to permit firms to distribute customized hypothetical planning illustrations that include projected performance of an asset allocation or other investment strategy, subject to specified conditions. FINRA staff continues to pursue the proposal, taking into consideration the comments received.

Payments for Market Making

FINRA has initiated a review of Rule 5250 (Payments for Market Making), which generally prohibits members or their associated persons from accepting any payment or other consideration from an issuer for engaging in market making and related activities. FINRA began the assessment by seeking public comment in Regulatory Notice 17-20 on the effectiveness and efficiency of the rule and is in the process of evaluating the input received from a broad range of stakeholders.

Capital Raising

FINRA also carefully examined its rules regarding capital raising. There have been significant developments recently in the mechanisms companies use to raise capital through securities offerings. FINRA believes it is essential that its oversight also evolve where appropriate to ensure that important investor protections are preserved without impeding capital formation. The results of FINRA's review of its capital raising regulations are discussed in greater detail in the broader "Capital Raising" section of this report below.

Remote Branch Office Inspections

Another issue we are studying through the lens of FINRA360 is branch office inspections. Over the last few years, and in comments we have recently received, firms have raised questions about the manner in which they must conduct internal inspections, particularly for those offices or locations with a limited number of associated persons or where only operational or limited supervisory functions take place. FINRA requested comment on a proposal in Regulatory Notice 17-38 that would give firms the option to fulfill their obligations under Rule 3110(c) by conducting a remote inspection of a "qualifying office," in lieu of a physical, on-site inspection of such office. FINRA staff is revising the proposal based on comments received and discussions with SEC staff.

Summary of Actions

• Published Regulatory Notice 19-06 reviewing Rule 4370 (Business Continuity Plans and Emergency Contact Information), FINRA’s emergency preparedness rule, to assess its effectiveness and efficiency.
• Published Regulatory Notice 18-14 reviewing Rule 3110 (Supervision), governing annual compliance meetings to assess its effectiveness and efficiency.
• Published Regulatory Notice 18-08 proposing a single streamlined rule to address the outside business activities of registered persons.
• Published Regulatory Notice 18-10 requesting comment on the effectiveness and efficiency of FINRA Rule 4311 (Carrying Agreements).
• Upgraded the AREF System to accept the submission of website or web page communications in their native format to FINRA for review.
• Published Regulatory Notice 17-18 to provide guidance regarding the application of FINRA's communications with the public rules to digital communications, in light of emerging technologies and communications innovations.
• Published Regulatory Notice 17-06 seeking comment on a proposal to permit a firm to distribute customized hypothetical planning illustrations that include the projected performance of an asset allocation or other investment strategy, subject to specified conditions.
• Published Regulatory Notice 17-41 seeking comment on the effectiveness and efficiency of Rule 5250 (Payments for Market Making).
• Published Regulatory Notice 17-14 requesting comment on the effectiveness and efficiency of the rules, operations and administrative processes governing broker-dealer activities related to the capital-raising process and their impact on capital formation.
• Issued Regulatory Notice 17-38 requesting comment on a proposal that would give firms the option to conduct a remote inspection of a "qualifying office."