Update: FINRA Board of Governors Meeting
The FINRA Board of Governors met last week, and I am writing to share with you several updates from our discussions.
During the meeting, the Board approved FINRA’s 2018 budget and a set of updated Financial Guiding Principles. In early January, we will publish—for the first time—an overview of the 2018 budget, along with the updated Financial Guiding Principles, in an effort to increase transparency around our finances.
The Board also received an update on the progress around FINRA360, and approved several changes to FINRA’s Advisory Committee and District Committee structure in response to feedback we received from my ongoing listening tour and the FINRA360 Special Notice on Engagement. We plan to share more information with you in early January, detailing the specifics of those enhancements.
In addition, the Board approved advancing several rule proposals—listed below—and improving the technology supporting FINRA’s registration system.
And finally, we were honored to have Securities and Exchange Commission (SEC) Chairman Jay Clayton join us at the meeting to share some of his perspectives and to discuss the respective regulatory priorities of the SEC and FINRA—particularly our shared focus on the protection of retail investors.
For more information about the discussions that took place at the December 2017 Board of Governors meeting, watch the December 2017 Board Report Video. I look forward to continuing to update you on Board activities in the future.
Robert W. Cook
President and CEO
Rulemaking Items Discussed at the December 2017 Board Meeting
Enhancing the Reporting of Treasury Securities Transactions
The Board authorized staff to file with the SEC a proposed rule change to require alternative trading systems (ATSs) to identify certain subscribers when reporting transactions in U.S. Treasury securities to FINRA’s Transaction Reporting and Compliance Engine (TRACE). FINRA staff will continue to work with other regulators and the ATSs that trade U.S. Treasury securities to develop the final proposal.
Facilitating Capital Formation
As part of FINRA’s initiative to facilitate capital formation and following a FINRA360 review of related rules, the Board authorized publication of a Regulatory Notice seeking comment on rule amendments that would remove certain impediments to capital formation that are unnecessary to protect investors. Specifically, the proposal would amend Rules 5130 (Restrictions on the Purchase and Sale of Initial Equity Public Offerings) and 5131 (New Issue Allocations and Distributions) to exempt additional persons and types of transactions from the scope of the rules, modify current exemptions to enhance regulatory consistency, and address unintended operational issues.
Streamlining Rules on Outside Business Activities and Private Securities Transactions
Following a FINRA360 retrospective review of rules regarding registered representatives’ outside business activities and private securities transactions, the Board approved the publication of a Regulatory Notice seeking comment on a proposal that would reduce unnecessary burdens while maintaining strong investor protections. The proposal would require registered persons to provide their member firms with prior written notice of a broad range of outside activities, and would impose on firms a duty to reasonably assess a narrower set of activities that are investment-related, allowing firms to focus on outside activities that are more likely to raise potential investor-protection concerns. The proposal also would streamline the obligations by generally excluding from the rule a registered person’s personal investments and work performed on behalf of a firm’s affiliate, and it would eliminate supervisory obligations for non-broker-dealer outside activities, including investment advisory activities at an unaffiliated third-party adviser.
Strengthening Investor Protection in Suitability Rule
The Board authorized staff to publish a Regulatory Notice soliciting comment on proposed amendments to FINRA Rule 2111 (Suitability) to allow cases to be brought for churning of a customer account based on the broker’s recommendation of an excessive number of trades, without proving that the investor had no control over the account. The proposed amendments would still require proof that the recommended trading was clearly excessive for the customer.
Establishing Fee for New Securities Industry Essentials Examination
The Board authorized staff to file with the SEC a proposed rule change to establish a $60 fee for the new Securities Industry Essentials (SIE) examination and revise the fees for other representative-level examinations. The SIE is part of an initiative to streamline competency exams and facilitate opportunities for professionals seeking to enter or re-enter the securities industry. The new exam structure eliminates duplicative testing and barriers to demonstrating and maintaining qualifications. The changes would make it easier for an individual with no prior securities industry experience—whether an investor, a recent college graduate or a professional seeking a second career—to take a general-knowledge SIE exam as an important first step to entering the industry. Individuals who wish to enter the industry are also required to pass a second, specialized-knowledge exam, and must be associated with and sponsored by a firm. In addition, individuals who transfer to a financial-services affiliate of a firm may qualify for a waiver that allows their credentials to be reinstated, should they return to the industry within a seven-year period and meet the requirements of the waiver program.
Aligning Communications and Research Rules with FAIR Act
The Board authorized staff to publish proposed amendments to FINRA Rules 2210 (Communications with the Public) and 2241 (Research Analysts and Research Reports) to conform these rules with the requirements of the Fair Access to Investment Research Act of 2017 (FAIR Act). The FAIR Act eliminates restrictions and reduces burdens for broker-dealers issuing research reports on “covered investment funds” (such as investment companies registered under the Investment Company Act, business development companies and exchange-traded commodity and currency funds). Among other things, the FAIR Act requires the SEC to expand the scope of the safe harbor in Securities Act Rule 139 for covered investment fund research reports; prohibits FINRA from maintaining rules to prohibit publication of such reports (e.g., quiet periods); and eliminates requirements to file such reports with the SEC or FINRA.