April 2013 Board Update
April 18, 2013
Dear Executive Representative:
The FINRA Board of Governors met this week to discuss a number of issues, including several rulemaking items. A summary of the rule proposals is included below and on our website.
I wanted to call your attention to one item that will have a significant impact on transparency in the bond market. The Board approved a proposal to publicly disseminate 144A transactions in TRACE-eligible securities for those asset types currently subject to dissemination. We are taking this step after reviewing the comments submitted in response to our September 2012 Regulatory Notice and in light of JOBS Act provisions. Overall, we believe that making this information publicly available will help market participants determine the quality of their executions and help firms comply with their regulatory obligations. FINRA will now submit a rule filing to the SEC for comment and approval.
In addition to these actions, the Board discussed a new initiative to enhance FINRA's communications with firms and the public. Beginning with the next Board meeting in July, our lead director and select committee chairs will join me to host a webcast immediately following the board meeting. Our goal with this initiative is to provide a timely report on important issues discussed at each Board meeting and to help explain the process and thinking behind certain Board actions.
Your comments and thoughts are welcome.
Richard G. Ketchum
Chairman and CEO
Rulemaking Items Discussed at the April 2013 Board Meeting
Dissemination of TRACE-Eligible Rule 144A Transactions
The Board authorized FINRA to file with the SEC proposed amendments to FINRA Rules 6750 and 7730 to provide for the dissemination of transactions in TRACE-eligible securities effected pursuant to Securities Act Rule 144A (Rule 144A transactions). FINRA would amend FINRA Rule 6750 and the TRACE dissemination protocols to disseminate Rule 144A transactions, provided that the asset type currently is subject to dissemination under FINRA Rule 6750, and apply the same dissemination caps for Rule 144A transactions that are currently in effect for non-Rule 144A transactions in similar securities. FINRA Rule 7730 also would be amended to establish an Historic Rule 144A Data Set, and extend fees currently in effect for similar real-time disseminated data and Historic TRACE Data to the respective Rule 144A Data Sets.
ADF Market Participant Requirements
The Board authorized FINRA to file with the SEC proposed amendments to the Rule 6270 Series (Quoting and Trading in ADF-Eligible Securities) to amend and clarify the requirements that a member firm must meet to register as an Alternative Display Facility (ADF) market participant, including completion of an ADF Market Participant application, Certification Record and executed Participant Agreement. The amendments also would require potential ADF market participants to pay upfront fees to offset costs associated with a new participant, with an ability to earn credits against those fees during the first two years that the ADF market participant quotes and reports trades to the ADF.
Arbitration Panel Composition
The Board authorized FINRA to file with the SEC proposed amendments to FINRA Rule 12403 to simplify the panel selection rules. Rather than requiring the customer to elect a panel selection method, parties in all customer cases with three arbitrators would have the same selection method. Under this method, all parties would see lists of 10 chair-qualified public arbitrators, 10 public arbitrators and 10 non-public arbitrators. The rules would permit four strikes on each of the public arbitrator lists. However, any party could select an all-public arbitration panel by striking all of the arbitrators on the non-public list. Alternatively, if the parties leave on the non-public list one or more of the same non-public arbitrators, the parties could have a majority public panel—that is two public and one non-public arbitrator.
Discovery Guide Used in Investor Arbitration Proceedings
The Board authorized FINRA to file with the SEC proposed amendments to the Discovery Guide used in customer arbitration proceedings to provide general guidance on e-discovery issues and product cases, and to clarify existing provisions relating to affirmations. Specifically, FINRA would amend the Discovery Guide introduction to:
- include guidelines for arbitrators to consider when deciding disputes relating to the form of e-discovery;
- add guidance on product cases to explain, among other matters, that these cases are different from other customer cases and that the Document Production Lists may not provide all of the documents parties usually request in a product case; and
- clarify that a party may request an affirmation when an opposing party makes a partial production.
FINRA is not proposing to amend the Document Production Lists, which specify documents that are presumptively discoverable in customer cases. The proposed amendments encourage arbitrators to consider the totality of the circumstances, including the costs and burdens of production, when resolving discovery disputes.
Customer Account Statements
The Board authorized FINRA to file with the SEC proposed amendments to NASD Rule 2340 (Customer Account Statements) and FINRA Rule 2310 (Direct Participation Programs) to modify the requirements relating to the per share estimated values for unlisted DPP and REIT securities included in customer account statements. The amendments to Rule 2340 generally would provide that no member firm is required to include a per share estimated value of an unlisted DPP or REIT security in a customer account statement. However, a firm could do so provided that the per-share estimated value has been developed in a manner reasonably designed to ensure that such estimate is reliable and the firm does not have a reason to believe that it is unreliable. The proposal provides three methods that are presumed to be so reasonably designed:
- for two years after breaking escrow, "net investment," consisting of gross offering price less any cash distributions to investors and "organization and offering expenses" (as defined by Rule 2310) that are funded through borrowing or offering proceeds (a firm may rely on the issuer's periodic reports for this information);
- at any time, a valuation performed by an independent valuation service, which (under a proposed amendment to Rule 2310) the issuer must commit to provide and must perform at least once every three years; and
- a periodic valuation by any program that provides them according to a methodology disclosed in the prospectus.