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April 2011 Board Update

April 18, 2011

Dear Executive Representative:

The FINRA Board of Governors met last week to discuss a number of issues, including seven rulemaking items. We have included a summary of the rule proposals, as approved by the Board, and next steps below.

I also wanted to update you on our know-your-customer and suitability rules, which the SEC approved last November.

We've heard from many firms that the October 2011 implementation date for FINRA's new rules governing know-your-customer and suitability obligations did not allow sufficient time to create or update existing procedures, modify automated systems or educate associated persons regarding compliance with the new rules. 

Given the significance of these rules to both the industry and the public, we felt it was appropriate to provide a reasonable extension of the implementation date so that firms could properly prepare. Accordingly, we recently filed with the SEC to delay the rules' implementation date. This change is effective immediately, and firms now have until July 9, 2012, to comply with the new rules.

In response to feedback that firms are also seeking guidance on these new rules, we will issue a Regulatory Notice in the next few weeks. The guidance will focus on firms' obligations to show compliance with the rules, information-gathering requirements, the scope of the term "strategies" and the nature of the obligations created by a hold recommendation.

As always, I welcome your thoughts and comments.


Richard Ketchum Signature

Richard G. Ketchum
Chairman and CEO

Rulemaking Items for Discussion at the April 2011 Meeting

The FINRA Board of Governors took action regarding the following rulemaking items at its April 2011 meeting. Below are the Board's actions and next steps. 

Code of Procedure
The Board considered proposed amendments to improve the workability of the Code of Procedure. Among other changes, the proposed amendments would allow service of a complaint on counsel, permit the use of electronic mail for filing papers and require an attorney to file a motion rather than a notice when seeking to withdraw. The Board also considered a new provision that imposes a revolving-door restriction on former FINRA officers. Former FINRA officers whose employment has been terminated would be prohibited for one year from making a communication, appearing, or testifying as an expert witness on behalf of any respondent in a FINRA disciplinary proceeding or similar action. 

The Board authorized staff to file the rule proposal with the SEC.

Governmental Accounting Standards Board Support Fee
Section 978 of the Dodd-Frank Wall Street Reform and Consumer Protection Act gives the SEC the authority to require FINRA to establish an annual accounting support fee to fund the annual budget of GASB, and to draft the rules and procedures necessary to equitably assess the GASB Accounting Support Fee to member firms. Accordingly, the Board considered a proposed new rule to establish a fee to fund the annual budget of the Governmental Accounting Standards Board (GASB Accounting Support Fee), which would be assessed based on a firm's municipal securities transactions. The fee will be proposed only if the SEC orders FINRA to adopt such a fee.

The Board authorized staff to issue a Regulatory Notice requesting comment on the rule proposal if the SEC orders FINRA to adopt a GASB Accounting Support Fee.

Mid-Case Arbitration Referrals
The Board considered amendments to the pending mid-case referral proposal, which would provide that any arbitrator may:

  • make a mid-case referral only after the evidentiary hearing has commenced;
  • change the threshold of certainty that the arbitrators must have before making a mid-case referral;
  • remove the right for any party to require automatic withdrawal of the arbitrators, and, in its place, permit a party to ask the referring arbitrators to recuse themselves, but not require the recusal; and
  • consider waiting until the case concludes before making the referral if a case is nearing completion and, in the arbitrator's judgment, investor protection will not be compromised by this action.

The amendments would also insulate the referring arbitrator from the final referral determination by providing that the arbitrator would make the referral to the Director of Arbitration, who would evaluate it to determine whether to transmit it to other FINRA divisions.

The Board authorized staff to file the proposed amendments with the SEC.

MPIDs for Market Access Arrangements
The Board considered proposed new rules to require firms to have a unique market participant identifier (MPID) for each third-party broker-dealer that the firm allows to access a market using an MPID assigned to the firm. The proposed new rules also require that firms notify FINRA of the identity of the third-party broker-dealer using each MPID. Finally, the proposed new rules make the FINRA rules governing MPIDs permanent.

The Board authorized staff to file the rule proposal with the SEC.

Private Placement of Securities
The Board approved a staff recommendation to revise a previous proposal concerning broker-dealer private placement activity. The staff recommended substantial changes in light of comments received on Regulatory Notice 11-04 and the comments of the Small Firm Advisory Board. The revised proposal eliminates an earlier proposal to require that 85 percent of the proceeds be used for the intended business purposes, and instead requires disclosure about the intended uses of the proceeds and the offering expenses. The revised proposal also changes the proposed date of a "notice" filing requirement with FINRA, from before the offering to within 15 calendar days after the date of first sale. The filing requirement is not a prerequisite to participating in an offering; rather, the filing will provide FINRA with important information about members' private placement activities. 

The Board authorized staff to file the rule proposal with the SEC.

Qualification Examination and Continuing Education Fees
The Board considered amendments to Schedule A of the FINRA By-Laws to establish a fee for individuals who reschedule or cancel a qualification examination or continuing education session three to 10 business days prior to the appointment date. The proposal establishes a rescheduling/cancellation fee of one-half of the amount of the qualification examination or continuing education program that is being rescheduled or cancelled. The proposal helps offset the costs incurred by FINRA and its vendors when someone reschedules or cancels an examination or continuing education session. 

The Board authorized staff to file the rule proposal with the SEC.

Trading Activity Fee Rate Adjustment
The Board considered a proposal to adjust the Trading Activity Fee (TAF) rate on covered equity securities to compensate for regulatory revenue shortfalls due to materially reduced equity trading volumes. Assuming trading volume remains consistent with current levels, the proposed rate adjustment will result in annualized TAF revenues that remain lower than what was collected in 2010. And, since this rate increase is proposed for a July 2011 implementation, only a portion of the shortfall will be realized for the current year.

The Board authorized staff to file a rule proposal with the SEC adjusting the TAF rate on covered equity securities from $0.000075 per share for each sale of a covered equity security (with a cap of $3.75 per trade) to $0.000090 per share for each sale of a covered equity security (with a cap of $4.50 per trade).