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September 2013 Board Update

FINRA Chairman and CEO Rick Ketchum is joined by lead governor Jack Brennan to discuss rulemaking and other issues discussed at FINRA's September 19 Board of Governors meeting. In addition to the video, a summary of the board actions is also available.

September 19, 2013

Dear Executive Representative:

The FINRA Board of Governors met this week to discuss a number of issues, including several rulemaking items. We've included a list of those items below.

You can also get an update on the meeting by watching this brief video report. In the video, lead Governor Jack Brennan and I provide an overview of key areas discussed at the meeting. 

I wanted to bring to your attention a few issues of particular note. Today the Board authorized FINRA to file with the SEC a rule proposal involving recruitment compensation. We believe the revised proposal, which is detailed below, does a good job balancing input from the industry with our goal to provide investors with important information that can help them decide whether to transfer assets to their broker's new firm. 

Another issue that Jack and I discuss in the video is a proposal to develop an automated system to collect account information that firms maintain as part of their books and records. The proposal, which we're calling Compliance Automated Risk Data System (CARDS), will go out for comment in a Regulatory Notice in the coming months.

This initiative represents another significant step forward in FINRA's ability to fulfill our regulatory responsibilities by allowing us to run sophisticated, automated analytics on brokerage data to identify problematic sales practice activity. This proposal will result in increased efficiencies within our examination program and effectively eliminate costly periodic requests firms frequently receive from FINRA.

Finally, today we released details of our 

 and how it will apply to the rulemaking process. Under the new framework, FINRA's rule proposals will clearly present our analysis, including assumptions and risks, as to why the proposal is necessary and how it best achieves its stated goal(s). While we have historically tried to make the rulemaking process as transparent as possible, we believe the EIA will further enhance transparency and accountability.

As usual, we look forward to your comments.


Richard Ketchum Signature

Richard G. Ketchum
Chairman and CEO

Rulemaking Items Discussed at the September 2013 Board Meeting

Alternative Display Facility
The Board authorized FINRA to file with the SEC proposed amendments to the rules governing the ADF, which would, among other things, (1) update the ADF rules to reflect recent regulatory changes and new and revised ADF functionality as part of its migration to a new technology platform; (2) modify the ADF order reporting requirements to include additional information relating to ADF market participant quotations; and (3) implement an ADF Capacity Management Plan that would govern an ADF market participant's capacity usage of the ADF, including the imposition of certain capacity usage of the ADF. 

Alternative Trading System (ATS) Aggregate Volume Data Fee
The Board authorized FINRA to file with the SEC proposed fees to be applied to the dissemination of ATS aggregate volume data published by FINRA. The proposed fees for professionals would include a monthly subscription fee and a vendor enterprise license that would permit the redistribution of the data. Non-professionals would receive the data free of charge.

Disclosures Related to Recruitment Practices and Account Transfers
The Board authorized FINRA to file with the SEC a proposed rule change regarding recruitment compensation practices. The proposal has two components: disclosure to customers and reporting to FINRA.

The disclosure component would require a recruiting firm to make important disclosures to a registered representative's former customer who is contacted about following the representative to the recruiting firm or who decides to transfer assets to the new firm. Firms would be required to disclose ranges of compensation, beginning at $100,001. The ranges would apply to two categories of compensation: upfront payments (e.g., bonuses and loans guaranteed to a registered representative) and potential future payments (e.g., payments contingent upon satisfying performance criteria or special payments not ordinarily provided to similarly situated representatives). The basis for the potential future payments (e.g., trade-based or asset-based) also would need to be disclosed. The ranges would not cover higher payout ratios unless they were different than applied to similarly situated reps. The proposal also would require firms to disclose whether costs would accrue if a customer decides to transfer assets to the new firm and that certain assets may not be transferrable.

FINRA believes these disclosures will provide customers with key information to consider before they make a decision to follow their registered representative to a new firm. The disclosures are intended to encourage customers to make further inquiry to reach an informed decision by providing a framework to consider the impact to their accounts. 

The second component of the proposal would require a recruiting firm to report to FINRA when a representative is expected to receive an increase in total compensation over the prior year of 25 percent or $100,000, whichever is greater, in connection with the transfer to that firm. Such information will be used in risk-based examination targeting.  

Equity Trade Reporting
The Board authorized FINRA to file with the SEC proposed amendments to the FINRA trade reporting rules in connection with the migration of the FINRA equity reporting facilities to the multi-product platform. Among other things, the proposed amendments will require firms to (1) report an additional time field for certain transactions, (2) report execution time in milliseconds (if their systems currently capture time in milliseconds) and (3) provide information to identify the original trade in corrected reports.