Rulemaking Items Discussed at the December 2011 Meeting
December 9, 2011
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, as approved by the Board, and next steps are included below.
As always, your thoughts and comments are welcome.
Richard G. Ketchum
Chairman and CEO
Rulemaking Items Discussed at the December 2011 Meeting
Debt Research Conflicts of Interest
The Board authorized FINRA to seek comment in a Regulatory Notice on a revised debt research conflicts of interest proposal that reflects changes based on comments to a concept proposal discussed in Regulatory Notice 11-11. The modified proposal maintains a tiered approach based on whether debt research is distributed to retail and institutional investors; however, institutions would need to opt in to the institutional framework.
In response to comments, the proposal most notably (1) excludes security-based swaps from the definition of debt security; (2) clarifies the permissible communications between debt research and sales and trading and principal trading personnel; (3) allows for certain input by sales and trading personnel, but not principal trading personnel, into debt research budget and compensation determinations; and (4) requires disclosure of firm debt or equity holdings in the subject company only where such positions present a material conflict of interest.
Expungement for Persons Not Named as Parties in Arbitration Claims
The Board authorized staff to issue a Regulatory Notice requesting comment on a rule proposal to amend the Codes of Arbitration Procedure for Customer and Industry Disputes to adopt new rules that would permit persons who are the "subject of" allegations of sales practice violations made in arbitration claims, but who are not named as parties to the arbitration, to seek expungement relief by initiating In re expungement proceedings. The proposed In re proceeding would eliminate the practice of naming public customers or brokerage firms as respondents in claims seeking expungement. However, unnamed persons would retain the ability to have their firm or former firm seek expungement in the underlying customer arbitration.
The proposal also clarifies that if an associated person is named as a respondent in a customer-initiated arbitration proceeding, that person may seek expungement of customer dispute information only during that customer case, and not later under the In re expungement rule.
Under the proposal, FINRA would create two new documents to facilitate the process: a Notice of Intent to File an In re Expungement Claim, and a Submission Agreement for In re Expungement Claims. An unnamed person must file a Notice of Intent to alert FINRA that the person is considering filing a claim for expungement relief. If an unnamed person determines to seek expungement relief, the person must file a Submission Agreement, which would confer jurisdiction on FINRA to arbitrate these types of cases.
Fee Adjustment Proposals
The Board authorized staff to file with the SEC proposed amendments to adjust the Trading Activity Fee (TAF) rate structure from $0.000090 per share for each sale of a covered equity security (with a cap of $4.50 per trade) to $0.000095 (with a cap of $4.75 per trade). The proposed rate adjustment is designed to ensure proper funding of FINRA's regulatory program given the continued decline in share volume and is based on a 2011 rule filing that outlined the future process for establishing the TAF rate.
The Board also authorized staff to file with the SEC proposed amendments to change the qualification examination fee structure to better align program fees with FINRA's operational costs to develop, administer and deliver examinations. FINRA's qualification examination fees, which are reviewed annually, have not been increased since 2008. The proposed fee increases average between $5 and $25 per examination.
The Board authorized staff to file with the SEC a proposed amendment to Rule 14107 of the Code of Mediation Procedure, to provide the Director of Mediation with discretion to determine whether parties to a FINRA mediation may select a mediator who is not on FINRA's mediator roster. Currently, the Mediation Code permits parties to select a mediator either from a FINRA-supplied list or from a list or other source of the parties' choosing.
Optional TRACE Data Delivery Services and Related Fees
The Board authorized staff to file with the SEC proposed amendments to FINRA Rule 7730 to establish new fees in connection with two new optional Trade Reporting and Compliance Engine (TRACE) data delivery services. Firms that opt to subscribe to the first service, the TRACE Data Delivery Plus service, would be able to request and download transaction data via the FINRA Automated Data Delivery System (FINRA ADDS) for dates prior to the last 30 days. (Currently, FINRA ADDS data is limited to asset-backed securities transaction data; as of February 6, 2012, FINRA ADDS data will include transaction data for all transactions reported to TRACE.) Firms that opt to subscribe to the second service, the TRACE Data Delivery Secure File Transfer Protocol (SFTP) service, would have an automated interface to retrieve the firm's daily TRACE trade journal files from FINRA ADDS. The fees would be payable per MPID subscriber.
Subpoenas and Orders of Production in Arbitrations
The Board authorized staff to file with the SEC proposed amendments to the Customer and Industry Codes of Arbitration Procedure (Rules 12512, 12513, 13512 and 13513) to standardize FINRA practices relating to arbitrator orders or subpoenas to non-party brokerage firms. The amendments provide that a brokerage firm party requesting the appearance of a witness or production of documents, either by subpoena or arbitrator order, would pay the reasonable costs of the appearance and/or production. In addition, the amendments would codify FINRA's current practice of allowing the non-party to raise objections to subpoenas or orders issued by arbitrators.
Threshold for Simplified Arbitration
The Board authorized staff to file with the SEC proposed amendments to Rules 12800 and 13800 of the Customer and Industry Codes of Arbitration Procedure, respectively, to raise the threshold for simplified arbitration from $25,000 to $50,000. Under simplified arbitration procedures, claims may be decided on the written submissions of the parties, and no hearing takes place.