July 2012 Board Update
July 13, 2012
Dear Executive Representative:
This week, the FINRA Board of Governors met to discuss a number of rulemaking items, among other issues. Below is a summary of the rule proposals approved by the Board.
I will continue to keep you updated on FINRA activities.
Richard G. Ketchum
Chairman and CEO
Rulemaking Items Discussed at the July 2012 Meeting
Application of Proposed Markup Rules to Government Securities
The Board approved a proposed amendment to FINRA Rule 0150 to apply proposed FINRA Rules 2121 and 2122 governing markups, markdowns and commissions (proposed markup rules) to transactions in government securities (except U.S. Treasury securities). We will solicit comments on the proposed markup rules and proposed FINRA Rule 2123, governing fees, via a Regulatory Notice.
Classification of Mediators Under Dispute Resolution By-Laws
The Board authorized FINRA to file a proposal with the Securities and Exchange Commission (SEC) that would amend the definitions of industry and public members under the By-Laws of FINRA Dispute Resolution, Inc. (By-Laws) so that revenue mediators earn while acting as a mediator, and not representing parties in mediation, would not result in their classification as industry members. The definition of public member would be amended to clarify that a mediator's service in the capacity as a mediator of disputes involving a broker or dealer and not representing any party in such mediations is not considered a material business relationship with a broker or dealer. The proposal also amends two subsections of the definition of industry member that address providing professional services to a broker or dealer or to a director, officer or employee of a broker or dealer. The amendments would ensure that mediators are not improperly classified as industry members under the By-Laws because of the revenue they earn as mediators, and thus, make them eligible to serve as public members of the National Arbitration and Mediation Committee.
Debt Research Conflicts of Interest
The Board considered an amendment to the debt research conflicts of interest proposal and will reconsider it at a future meeting.
Minor Rule Violation Plan
The Board authorized FINRA to file with the SEC proposed amendments to FINRA's Minor Rule Violation Plan (MRVP) to increase the number of eligible rules. The MRVP allows—but does not require—FINRA to impose a fine of up to $2,500 on any member firm or person associated with a member firm for a minor violation of an eligible rule and provides a mechanism to resolve matters where the conduct at issue does not warrant initiation of a formal disciplinary proceeding. The proposed additional rules generally involve non-willful technical violations that do not involve direct customer harm.
Records To Be Kept at Specially Designated Locations
The Board authorized FINRA to file a proposed new rule with the SEC that would require large carrying member firms to maintain and keep current certain records in specially designated locations so as to be readily accessible by regulatory staff in the event of the firm's financial difficulty. The proposal is a modified version of the proposed rule discussed in Regulatory Notice 11-48 and makes certain changes in response to comments. Among other things, the modified proposal tiers the rule so that it will only apply to member firms having total customer reserve formula credits exceeding $100 million as determined pursuant to SEA Rule 15c3-3 Exhibit A. Also, rather than keep the required records in a single location, firms subject to the rule would be permitted to keep the records in physical or electronic form in multiple locations as specially designated by the firm. Further, firms subject to the rule would only be required to obtain access agreements—providing generally for continued access to certain position and activity records and data in the event of the firm's financial difficulty—from custodian firms that are not FINRA member firms. FINRA staff would have authority to grant exceptions from the access agreement requirement.
Release of Disciplinary Complaints, Decisions and Other Information
The Board authorized FINRA to file with the SEC proposed amendments to FINRA Rule 8313, which governs the release of disciplinary information by FINRA to the public. The changes would adopt general standards for the release of disciplinary information, thereby promoting increased transparency of FINRA's disciplinary process.
The proposal eliminates the existing publicity thresholds for the release of disciplinary information and provides for the release of all disciplinary complaints and disciplinary decisions to the public. The changes would allow FINRA to release to the public certain disciplinary information that is already publicly available in BrokerCheck.
In addition, the proposal, among other things: (1) defines the scope of information subject to Rule 8313; (2) updates and streamlines the disclosure statements that accompany disciplinary information released to the public; and (3) eliminates provisions that do not relate to the release of information to the public or are matters better addressed by the SEC. All of the changes would apply prospectively beginning on the effective date of the proposed amendments.
The Board authorized FINRA to file with the SEC proposed amendments to FINRA Rule 4530 governing reporting requirements. The amendments would revise the rule to provide an exception for certain information disclosed on the Form U4, consistent with the requirements of that form. Member firms would be able to affirmatively request, through functionality on the Central Registration Depository, that the data reported on certain Form U4 disclosure reporting pages also be applied to satisfy a corresponding FINRA Rule 4530 reporting obligation. The amendments would also allow firms to file required documents with FINRA online, through the Firm Gateway. In addition, the amendments would provide that firms are not required to report findings and actions by FINRA for purposes of certain provisions of the rule.
TRACE Factor Reporting
The Board authorized FINRA to file with the SEC proposed amendments to FINRA Rule 6730(d)(2) to require a member firm to report to TRACE the factor used to determine size (volume) of transactions in an asset-backed security (except an asset-backed security traded To Be Announced) the firm executes as agent and for which it charges a commission.